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COVID-19 International Tax Considerations

April 3, 2020
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New tax law legislation, IRS guidance, and significant tax developments regarding the COVID-19 outbreak have been issued recently. Although the application is primarily targeted to the domestic sector, there are also far-reaching international tax consequences that should not be overlooked.

Filing and Payment Deadlines

The Treasury Department and the Internal Revenue Service ( Notice 2020- 18) announced that the 2019 federal income tax filing due date is automatically extended from April 15, 2020 to July 15, 2020, without any action required. This automatic extension also applies to payments due on April 15, 2020.

There was initial uncertainty as to whether the automatic payment extension also applied to the Sec. 965(a) transition installment tax payments .The IRS had announced on March 24th in Q&A format that the relief provided in Notice 2020-18 also applies to the Sec. 965(h) installment due April 15, 2020. Notwithstanding that the installment is generally made in respect of a taxpayer’s 2017 or 2018 tax year, Sec. 965(h)(2) provides that the due date of the installment payment associated with a 2019 tax return coincides with the due date of the taxpayer’s 2019 Federal income tax return.

The IRS concluded that the relief should apply and held that the due date of the taxpayer’s section 965 installment has also been postponed to July 15, 2020. Additionally, it is interpreted that such treatment applies to taxpayers whose tax return due date is automatically extended to June 15th because of having a tax home outside of the U.S.; as the tax would still have been due April 15th.

Notice 2020-18 relief only applies to federal income tax returns due April 15, 2020. Absent further guidance, relief should not apply for returns due June 15, 2020 pertaining to taxpayers residing abroad, nonresident aliens without Form W-2 wages subject to withholding tax, and foreign corporations with no U.S. office.

Notice 2020-18 relief also does not extend to Federal information returns. International reporting forms (such as forms 5471, 5472, 8865, etc.) that are to be attached to an income tax return would receive the extended benefit. However, there is ambiguity regarding certain information returns that are filed contemporaneously with income tax returns.

Specifically Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. The instructions to the Form link an extension to file the Form with the income tax return filing extension. There is no separate extension filing required. We believe that the July 15 extension relief should then also apply to Form 3520 because of the link to the April 15 income tax filing. HOWEVER, due to the potent significant penalties for delinquent filing and absent further guidance, we are advising taxpayers to either file Form 3520 or file an income tax return extension on or before April 15, 2020.

Individual Stimulus Payments- Added Hurdles for Expats

The CARES Act provided for recovery rebates to individuals in the following amounts

  • $1,200 per person/$2,400 to married couples, and
  • $500 per dependent child under age 17

The amounts will be phased out depending upon one’s adjusted gross income.

The refund checks do not apply to nonresident aliens. There was an initial concern that overseas income would bar expats from receiving the checks. However, that exclusion was removed in the final version of the bill.

The Treasury announced that economic impact payments would be distributed automatically, with no action required for most people, using direct deposit bank account information on file. If no bank information was provided, individuals will receive their payments in the mail. In order to avoid delays in distributing payments, the Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online.

U.S. citizens living abroad face challenges in getting their money, if no bank account information had been provided on their 2018 income tax return. It could take up to six months for a check to arrive at a foreign address. In some circumstances by that time, the check may no longer be valid. In addition, individuals with foreign phone numbers would be barred from remotely depositing the money into a U.S. bank.

Therefore, we are advising our Expat clients that had not provided proper bank account information on their 2018 tax returns to file their 2019 tax returns quickly, notwithstanding the IRS’s 90-day filing extension, including bank account information so that the government can more quickly deposit the funds.

IRS Approval to Accept Images of Signatures

The IRS announced it would temporarily accept images of signatures (scanned or photographed) and digital signatures on documents related to the determination or collection of a tax liability. This is a significant deviation from established Internal Revenue Memorandum (IRM) procedures. In addition, IRS employees may accept and transmit documents to/from taxpayers via Email using Secure Zip or other authorized secured messaging system.

This relief is part of the IRS response to the emergency declaration issued by the President on March 2020.Documents affected by the temporary procedures include: extensions of statute of limitations on assessment or collection, waivers of statutory notices of deficiency and consents to assessments, closing agreements, and other statements or forms ( such as a Power of Attorney ). It should apply to tax returns as well.

The memorandum expires on July 15, 2020.

Net Operating Losses (“NOLs”)

The CARES Act provides for two benefits regarding NOLs, that apply both to nonresident aliens and foreign corporations conducting U.S. trade or business activities.

TCJA disallowed any carryback of post-2017 losses and only allowed a carryforward of NOLs limited to 80% of taxable income. The new Bill allows taxpayers the ability to carryback NOLs arising in 2018, 2019, and 2020 to the prior carryback of 5 tax years. Losses carried over to 2019 and 2020 are now permitted to offset 100% of taxable income.

For any year wherein there is a Sec. 965(a) income inclusion, the taxpayer shall be treated as making a Sec. 965(n) election. This election disregards the Sec. 965(a) inclusion in terms of determining the NOL; In addition, the taxpayer may elect to exclude any Sec. 965(a) income year from the 5-year carryback period. However, taxpayers may not use the NOL carryback to directly reduce the amount of IRC Section 965 transition tax incurred in a transition year.

As a consequence, the carryback or carryforward of an NOL may affect a taxpayer's (1) allowable IRC Section 250 deduction (both against foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI)); (2) allowable foreign tax credits (FTCs); (3) base erosion anti-abuse tax (BEAT) liability, and (4) in some cases, the taxpayer's IRC Section 965 transition tax liability ( such as via increased FTC carryforwards to the Section 965 transition tax year).

Modifications of Limitations on Business Interest

The TCJA limits the deduction for business interest expense to business interest income plus 30% of adjusted taxable income. For 2019 and 2020, the Bill increases the 30% limitation amount to 50% of adjusted taxable income. In calculating this limitation for 2020, taxpayers can elect to use adjusted taxable income for 2019 in the calculation. The interest limitation also applies in the determination of GILTI and therefore could reduce any GILTI inclusions.

Stranded Foreigners

Many foreigners monitor their U.S. non-residency status by carefully counting their days of U.S. presence during the tax year. Foreign individuals stuck in the U.S. due to international travel restrictions, as a result of COVID-19, may face U.S. residency status exposure if their physical presence in the U.S. exceeds the 183-day threshold under the so-called “substantial presence test”. This could apply to a person that comes to the U.S. often in a year and using the 120-day count statutory mechanical rule per year fail the test., which could subject the individual to US tax on their worldwide income.

There are however several exceptions to the substantial presence test. Such as one can claim a closer connection to a foreign country if they spent less than 183 days in the U.S. during the taxable year, maintain a tax home, and can claim a closer connection( akin to a domicile inquiry) in/to the foreign country. Also, certain foreign nationals of a treaty jurisdiction may also claim non-resident status under the tiebreaker rules of a U.S. tax treaty, which principally refers to place of abode and center of vital interests.

U.S.-Source Income

Foreign individuals are generally only subject to U.S. tax on their U.S.-source income. In the case of compensation for personal services, only compensation for services performed in the U.S. is treated as U.S.-source income. For example, compensation received by a foreign individual for their participation in a video conference instead of travelling to the U.S. would not be treated as U.S.-source income and would therefore be exempt from U.S. tax. In the current environment, conferences/meetings that were contemplated to be held in the U.S. are now being rescheduled as virtual meetings and thus not result in taxation for the foreign individual as participating abroad.