A Cure for Those Trapped in Jurisdictions during the COVID-19 Crisis
By Andre Benayoun, International Tax Partner
As many taxpayers are now aware, travelers and their travel plans have been largely disrupted in an effort to contain the coronavirus. As a collateral consequence, people are being trapped in jurisdictions for longer periods than originally intended, as they struggle through government regulation and airport shut downs. From a tax perspective, this can create tax residency issues for people and the companies they work for in jurisdictions if such trapped workers continue to work from remote locations. In response to this issue, many countries around the world are passing laws to ease these issues with respect to the time period in which the coronavirus precautions remain in effect. In particular, the U.S. recently passed Revenue Procedures (Rev. Proc.) 2020-20 and 2020-27.
Rev Proc. 2020-20
Rev. Proc. 2020-20 deals with issues for individuals who remain in the U.S. for a period long enough to create a “substantial presence,” or tax residency. While the calculation for substantial presence is beyond the scope of this article, individuals who spend more than four months in the U.S. per year are at risk of creating a U.S. tax nexus. Rev. Proc. 2020-20 states in pertinent part that individuals who intended to leave the U.S. between February 1, 2020, and April 1, 2020, but were unable to do so, may exclude up to 60 days of consecutive time spent in the U.S. from their tax nexus calculations. For foreign taxpayers who would otherwise have to file a U.S. tax return under Form 1040-NR (i.e., Non-Resident), such taxpayers will have to file additional compliance via Form 8843 (Statement for Exempt Individuals and Individuals With a Medical Condition) to exempt days under this Revenue Procedure. For other taxpayers who would not need to file Form 1040-NR, this Revenue Procedure will not otherwise require one to be filed.
Revenue Procedure 2020-20 may also be used to exempt up to 60 days of time in the U.S. for individuals performing services in the U.S. as an employee of a foreign entity, in cases where the income earned by the individual would otherwise be exempt from U.S. withholding tax due to an income tax treaty with the U.S.
Rev. Proc. 2020-27
Rev. Proc. 2020-27 deals with the foreign earned income exclusion available to U.S. taxpayers who are bona fide residents of other jurisdictions for at least a 1-year period or have spent at least 330 days of a 12-consecutive month period in a foreign jurisdiction. In short, this income exclusion allows U.S. nationals living abroad to exclude up to USD $105,900 (for 2019) and $107,600 (for 2020) of wage income from their U.S. tax return. As part of the requirements to earn this exclusion, U.S. taxpayers who could have left their particular foreign jurisdiction of residence due to COVID-19 related matters, but who otherwise intended to remain abroad, may still be treated as being resident in their local jurisdiction for purposes of qualifying for the income exclusion. The Revenue Procedure still requires a pro ration of the exclusion amount for days not in the local jurisdiction, but the U.S. taxpayer may still qualify for the exclusion in general. Note that the dates for inclusion under Rev. Proc. 2020-27 are different for China than other jurisdictions. U.S. taxpayers living in China must have left after December 1, 2019, and before July 15, 2020. For other jurisdictions, U.S. taxpayers must have left after February 1, 2020, and before July 15.
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