U.S. Internal Revenue Service Provides Travel Disruption Relief

Worldwide ERC® thanks U.S. Treasury for clarifying the tax implications for workers impacted by COVID-19 related travel restrictions and asks for other governments to follow lead.

On 21 April, in three related publications, the U.S. IRS relaxed residency rules for those displaced by the COVID-19 emergency. These changes were sought by Worldwide ERC®, which thanked the Treasury Department for them. Worldwide ERC® also sent a letter to Treasury Secretary Mnuchin and IRS Commissioner Rettig asking for the U.S. take the lead in efforts to resolve these issues worldwide.

Persons around the world have been impacted by travel disruptions, government-mandated lockdowns, cancelled flights, quarantines, and medical emergencies. As a result, many questions had arisen about the effect of unexpected physical presence on tax determinations, including whether an individual would inadvertently become taxable in a different country, whether the employer would be determined to be doing business there, and whether withholding and other tax requirements would be triggered. In addition, U.S. expats displaced from their normal overseas workplace might not meet the requirements to exclude foreign earned income under section 911. The IRS has responded to those concerns.

Rev. Proc. 2020-20 provides that up to 60 consecutive days of U.S. presence starting between 1 February 2020, and 1 April 2020, will not be counted in determining whether nonresident individuals inadvertently in the U.S. will meet the “substantial presence” test and be treated as residents for tax purposes. Nor will those days be counted in determining whether the individual is entitled to Treaty benefits related to performance of personal services in the U.S.

Rev. Proc. 2020-27 provides that certain periods of absence from foreign posts of duty will not be counted as absences in determining whether the individual meets the residency requirements for the section 911 exclusion. Any period after 1 December 2019 in China, or after 1 February 2020 in any other country, and ending 15 July 2020, during which an employee is absent from the country in which he is employed will be considered a period of presence in the post of duty, provided the individual had established residency or had been physically present in the foreign country on or before that date, and can reasonably have been expected to meet the section 911 residency requirement but for the COVID-19 emergency.

Finally, IRS provided an FAQ in which it said that the same 60-day period noted above that will not be counted for U.S. presence for nonresidents will also not be counted in determining whether a foreign company will be considered to have a U.S. business presence based on the presence of workers inadvertently stuck in the U.S. and working there.

It is expected that the IRS will eventually revisit and extend this relief if necessary.

The U.S. joins a number of other countries that have also acted to ameliorate the residency difficulties created by COVID-19, including the United Kingdom, France, Belgium, Australia, and Ireland.

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How This Impacts Mobility

Worldwide ERC® members can be assured that inadvertent presence of their employees in countries other than their ordinary place of work generally will not affect determinations of their own or their employees’ tax liability. However, companies should be prepared to document how inadvertent physical presence was caused by the COVID-19 emergency.

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