The US Treasury and Internal Revenue Service (IRS) have rolled out an initiative to help foreign nationals who have been hit by the outbreak of coronavirus and cannot return home.
For up to 60 days, any individual who isn’t a US citizen or resident and business will be granted the opportunity to be treated as if they were not staying in the country, the two watchdogs said, but only if their travel plans have been delayed or disrupted by the pandemic.
The measure provides benefits under three different tax procedures, they said, which are:
Revenue Procedure 2020-20, which provides that, under certain circumstances, up to 60 consecutive calendar days of US presence that are presumed to arise from travel disruptions caused by the covid-19 emergency will not be counted for purposes of determining US tax residency and for purposes of determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the United States;
Revenue Procedure 2020-27, which provides that qualification for exclusions from gross income under the Internal Revenue Code (IRC) section 911 will not be impacted as a result of days spent away from a foreign country due to the covid-19 emergency based on certain departure dates; and,
An FAQ, which provides that certain US business activities conducted by a non–resident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a US trade or business, or has a US permanent establishment, but only if those activities would not have been conducted in the United States but for travel disruptions arising from the covid-19 emergency.
Emergency relief
According to global law firm Withers, prior to these measures; individuals who could no longer travel due to the illness or quarantine, or due to legal or practical travel restrictions, could unintentionally trip over the residence rules and find themselves fully tangled in the US tax system.
“The principle tests for US tax residency are contained in [the] IRC section 7701(b). This section was enacted in 1984 and obviously did not contemplate how an alien’s classification as a ‘resident’ or ‘non–resident’ might be impacted by the coronavirus or another global pandemic,” it added.
“Thus, the code provision and related regulations contain little guidance as to how they should apply in the face of the current global covid-19 pandemic.”
Determining tax residence
In order to understand what rules apply in which situation, there are two tests that a foreign national can go through to understand their tax status, the law firm said.
“Section 7701(b) provides that an individual will be treated as a resident alien for federal income tax purposes – there is a separate test of US tax residency for federal estate, gift and other transfer tax purposes – in a given calendar year only if such individual meets one of two tests.
“The first income tax residency test, often referred to informally as the ‘green card’ test, causes an individual who entered the United States on a US permanent resident visa to be a US resident for federal income tax purposes.
“These individuals are US tax residents under US internal tax law, but that status can be avoided if there is an overriding determination of foreign tax residency pursuant to a tax treaty that the alien’s home country has with the United States.
“The second of the two tests, referred to as the ‘substantial presence test’, is more relevant to the foreigner currently stuck in the United States with their departure delayed due to covid-19.
“The substantial presence test is applicable only to alien individuals who are not lawful permanent residents. The foreigner’s status under this test is what generally must carefully be monitored to avoid undesired US income tax resident status,” Withers added.
At this time, it is not clear what will happen at the expiration of the 60 calendar days, but both the US Treasury and IRS said they are monitoring the situation and any updates will be provided in due course.
