The U.S. — as well as the rest of the world — experienced unprecedented international business disruption in the first part of 2020 due to the spread of the COVID-19 pandemic. The financial repercussions from the measures taken to limit the spread of the disease in turn led to U.S. stimulus legislation and other developments that have a bearing on U.S. international tax requirements.
CARES Act Income Tax Ramifications
The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted on March 27, 2020, ushered in several tax code changes that could affect U.S. federal income tax. Updates made to permit additional business deductions and net operating losses in particular may affect calculations for Global Intangible Low-Taxed Income (GILTI), Foreign-Derived Intangible Income (FDII), and Base Erosion Anti-Abuse Tax (BEAT). U.S. persons with controlled foreign corporations (CFCs), U.S. persons providing property or services to foreign persons, U.S. or foreign persons making international payments to related foreign entities, and U.S. persons subject to the Section 965 transition tax on pre-2018 accumulated foreign profits will want to take particular note of the CARES Act ramifications. See our earlier alert here for more details.
IRS Offers Temporary Relief for Non-U.S. Residents Affected by COVID-19 Travel Restrictions
The determination of whether a foreign citizen is deemed to be a U.S. resident depends on how many days the individual spends in the U.S. during the year (the substantial presence test). Wide-scale travel restrictions implemented to limit the spread of the COVID-19 pandemic may have prevented foreign residents from leaving the U.S, which could potentially affect these calculations used to determine tax treaty benefits and U.S. income tax treatment.
The IRS clarified in Rev. Proc. 2020-20 that anyone stranded by the pandemic would not be required to calculate days in the U.S. between Feb. 1, 2020, and April 1, 2020, as part of the substantial presence evaluation. To claim the exemption, qualifying individuals will be required to file Form 1040-NR with a Form 8843, “Statement for Exempt Individuals, and Individuals with Medical Condition” attached. Read the full proclamation on the IRS website here.
Relief Available for Foreign Earned Income and Housing Cost for Non-U.S. Residents
Due to the COVID-19 travel restrictions, the IRS also offered relief for qualified individuals to exclude from U.S. gross income their foreign earned income and housing cost amount. Rev. Proc. 2020-27 defines the COVID-19 pandemic as an adverse condition that disrupted business operations. Relief is available for individuals who left China on or before Dec. 1, 2019, and any other country on or after Feb. 1, 2020. The relief period will span until at least July 15, 2020, unless otherwise extended. Read the full proclamation on the IRS website here.
International Tax Compliance Campaign Update
On May 1, the IRS Large Business & International (LB&I) division announced a new compliance campaign related to the tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA) and the recent CARES Act changes. The campaign seeks to identify transactions, restructuring, and other issues that may be related to these tax law changes, and may involve examinations, soft letters, outreach, and new and improved practice units. Read the campaign announcement on the IRS website here. Click here for our previous discussion on how the IRS is pivoting its LB&I compliance approach.
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John Forry is Managing Director at CBIZ MHM, LLC. He leads the CBIZ Infrastructure and Project Advisory Group and also chairs the West Coast International Tax Practice. He can be reached at email@example.com or 646.345.0586.
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