The COVID-19 pandemic has raised tax residency concerns for individuals and businesses with employees who have been forced to remain in foreign countries and could face unforeseen tax obligations because of government-mandated lockdowns.
Many individuals frequently travel for work or regularly commute to neighboring member states within the EU. With people being asked to telework to prevent the spread of the coronavirus, the number of cross-border employees has spiked, which will have an effect on taxpayers’ physical presence.
Therefore, countries are relaxing tax residency rules for taxpayers who may be residing in another country for the foreseeable future as a result of a travel ban or lockdown. “It seems highly likely that all jurisdictions will need to consider these issues in the coming weeks and adopt similar responses,” Darren Oswick, head of tax at Simmons & Simmons LLP, told Tax Notes.
Jurisdictions are imposing lengthy lockdowns, with uncertainty over when they will be lifted. On March 24 Indian Prime Minister Narendra Modi called for a complete lockdown of his nation for 21 days and told people they cannot step outside of their homes during this period, with the anticipation that it may have to be extended.
Many countries have also implemented travel bans, which have directly affected individuals who must travel for work and left others stuck in foreign countries. In President Trump’s March 11 address, he unilaterally announced a 30-day travel ban from European countries to the United States. The EU followed with an announcement March 17 that it would ban all nonessential travel from third countries for 30 days. The Netherlands announced March 18 that it was imposing a nonessential travel ban from countries outside Europe.
U.K. Relaxes Statutory Residence Test: Is It Enough?
HM Revenue & Customs provided guidance March 19 in its Residence, Domicile and Remittance Basis Manual on the establishment of an individual’s residency status for tax purposes under “exceptional circumstances,” such as the COVID-19 pandemic. “The guidance released by HMRC makes it clear that as events resulting from the impact of the virus change, it may be necessary to update the guidance at short notice,” Oswick said.
Prime Minister Boris Johnson announced a three-week lockdown for U.K. residents on March 23, instructing individuals to stay at home unless they are shopping for necessities, exercising, seeking medical care, or traveling to work if they cannot work from home.
“The coronavirus (COVID-19) pandemic may impact your ability to move freely to and from the U.K. or, require you to remain unexpectedly in the U.K.,” HMRC said in a March 23 release. The guidance says that if time spent in the United Kingdom can be classified by HMRC as an exceptional circumstance, then those days are exempt from the traditional statutory residence test through the duration of the pandemic.
Under the statutory residence test, an individual is considered a U.K. tax resident if he has been in the country for 183 days in a tax year. HMRC set out a number of criteria and tests to determine the amount of time an individual has spent and worked in the United Kingdom for tax purposes, including the connections or “sufficient ties” an individual has in the country. An individual is a resident of the United Kingdom if the taxpayer does not meet one of the three automatic overseas tests or meets one of the automatic tests or has sufficient ties. HMRC includes a family tie, an accommodation tie, a work tie, and a 90-day tie when considering residency.
The guidance indicates that HMRC will consider a taxpayer's circumstance exceptional if the taxpayer is quarantined or advised by a health professional or in public health guidance to self-isolate in the United Kingdom as a result of the virus; advised in official government advice not to travel from the United Kingdom as a result of the virus; unable to leave the United Kingdom as a result of the closure of international borders; or asked by an employer to return to the United Kingdom temporarily as a result of the virus. It also notes that the tax authorities will have to consider each taxpayer's residency situation on a case-by-case basis.
“The situation must be outside the individual’s control,” Oswick said. He noted that the exceptional circumstances expanded on by HMRC are reserved for cases when an individual has the intention of leaving the United Kingdom as soon as circumstances permit. When looking at the taxpayers’ situation, HMRC will consider evidence of remaining in the United Kingdom after circumstances permit and may not allow for the statutory exclusion, he said.
HMRC did not expand the 60-day exemption limit, however. This cap on the number of days a taxpayer may reside in the United Kingdom without paying taxes in the country applies to short-term business visitor agreements and exemptions by virtue of a tax treaty. For the time being, any number of days above the 60-day limit will be counted toward an individuals’ residency for tax purposes, even amid the coronavirus pandemic.
“If travel restrictions stay in place for longer than that, then HMRC may come under pressure to provide further relief, but since this would go beyond the actual statutory provisions, there may be questions over whether taking such action would be within the scope of HMRC’s care and management powers,” Oswick said, noting that legislative action might be necessary.
Additional guidance on corporate residence and permanent establishment status, as well as fixed establishment status for VAT purposes, would also be welcome, Oswick said.
COVID-19 Declared 'Force Majeure'
Luxembourg’s labor market is highly dependent on individuals who commute to the country every day for work, including from Belgium and France. Luxembourg announced in a March 19 release that many French cross-border workers have been ordered to telework to combat the spread of the coronavirus. The French and Luxembourg authorities are calling the COVID-19 pandemic a case of force majeure.
Under the France-Luxembourg tax treaty, cross-border workers may telework from their home country for up to 29 days without being considered resident there for tax purposes. If they exceed that period, their income may be taxable in their home country. Given the current circumstances, the Luxembourg and French authorities announced that the “presence of a worker at his home to exercise his activity” will not be considered under the treaty's 29-day telework provision from March 14 until further notice.
"I very much welcome this agreement reached with our French partners, which is not only excellent news for the more than 100,000 French cross-border workers and our businesses, but also an important illustration of the solidarity between neighboring countries and member countries of the European Union in the face of the COVID-19 pandemic,” Luxembourg Finance Minister Pierre Gramegna said.
Belgium’s Ministry of Finance announced March 13 that the Belgian and French authorities will not take into account the presence of French cross-border workers at their residences in France when calculating residency for tax purposes. Belgium acknowledged in the announcement that the COVID-19 pandemic “meets all characteristics of a force majeure situation.” Belgium announced that this will apply until further notification from the government.
The Belgian government also said March 17 that the 24-day rule from the Belgium-Luxembourg tax treaty will not be enforced until further notice. That rule allows taxpayers to work up to 24 days per calendar year outside Luxembourg without being subject to taxation in Belgium.
Ireland, Australia Address Residency for Businesses
The Irish Revenue Commissioners published guidance March 23 that says the tax authorities will disregard for corporation tax purposes an individual's presence in Ireland due to COVID–19 travel restrictions, for a company for which the individual is an employee, director, service provider, or agent.
The tax authorities will also disregard for corporation tax purposes the number of days an individual who would have otherwise been present in Ireland is outside the country because of COVID-19 travel restrictions, for a company for which the taxpayer is an employee, director, service provider, or agent.
The Revenue Commissioners added that individuals and businesses should keep a record of the facts and circumstances of their bona fide presence in Ireland, or outside Ireland, to provide to tax authorities if requested.
The Australian Taxation Office announced March 24 that it had updated its website on COVID-19 tax information to make it easier for taxpayers to stay informed of compliance requirements and tax relief measures. The website includes a statement on PE status in an FAQ on international business.
The ATO attempted to ease foreign businesses’ concerns about potential tax implications by saying COVID-19's effects will not result in a change in a business's PE status if the business did not have a PE in Australia before the coronavirus, there are no changes in the business's circumstances, and the unplanned presence of employees in Australia is a direct result of COVID-19.
“We will continue to monitor the evolving effects on business and issue further guidance if there are developments as a result of COVID-19,” the ATO said.
Oswick said the United Kingdom should also address PE status for businesses, instead of simply providing guidance for individual income tax purposes. “It would be helpful for HMRC to provide similar guidance recognizing the exceptional circumstances and agreeing to disregard the unavoidable presence of an individual in the U.K. for tax purposes for a company in relation to which the individual is an employee, director, or agent,” he said.
U.S. Treasury Needs Push to Address Residency Issues
The IRS has yet to establish guidance on any updates to its income tax residency rules. Seth Entin of Holland & Knight LLP told Tax Notes that the “tax community has to push Treasury and the IRS because it is not necessarily high on their current list of priorities.” Entin emphasized that nonresidents do not have much of a lobby in Congress, so the government needs to be pushed to make any changes.
Under the standard substantial presence test, a taxpayer is considered a U.S. resident if she is physically present in the United States for 31 days during the current year and 183 days during the three-year period that includes the current year and two years immediately preceding that, which is subject to a weighted average basis formula prescribed by the IRS. However, there are two notable exceptions to this test.
According to the IRS, under the “closer connection” exception, the taxpayer can qualify under the substantial presence test but will still be treated as a nonresident if, for the current year, the taxpayer is present in the United States for less than 183 days in the year, has a tax home in another country, and has closer connections to that country.
For the medical exception, a taxpayer’s presence will not be counted under the substantial presence test if the taxpayer cannot leave the United States because of a medical condition that occurred while the taxpayer was in the United States, the IRS says.
From a regulatory standpoint, Entin said Treasury is in a good position to expand on regulations within the scope of the current statute — most notably, to expand the definition of medical condition to someone who may not have the coronavirus but may be affected because of travel restrictions related to the pandemic.
In a March 22 letter, Michael Karlin of Karlin & Peebles LLP, on behalf of the Los Angeles International Tax Club, called on the IRS to amend section 7701(b)’s definition of resident alien to permit the exclusion of days present in a country during a natural disaster or emergency, and to modify the medical condition exception so that it applies to individuals who cannot leave the United States because of the coronavirus.
“There is a good case to be made that Treasury has regulatory authority,” Entin said, adding that it is in the United States’ best interest to allow nonresidents to spend time in the country because it benefits the U.S. economy from a foreign investment perspective. The United States should not want to subject nonresidents to worldwide tax and reporting requirements and increase their compliance burden because of circumstances beyond their control, he said.
Entin said the individuals most likely to experience negative tax consequences are nonresidents who live in countries that do not have tax treaties with the United States or cannot apply the closer connection exception. “Nonresidents could potentially experience a serious situation unless authorities expand the exceptions,” he said. As a self-help measure, Entin recommended that taxpayers claiming the closer connection exception or a treaty exception should make sure they can objectively establish the necessary factors.
The U.S. Council for International Business (USCIB) urged Treasury Secretary Steven Mnuchin in a March 23 letter to adopt policies that would “treat employees as continuing to work in the location where they worked prior to COVID-19 for purposes of assessing corporate income tax liability; determining the existence of permanent establishments, nexus, or substance; determining employee individual tax liability; determining employer payroll tax liability; or determining sales tax/VAT on cross-border services.”
The USCIB’s reasoning for this policy is that the coronavirus pandemic has drastically altered where individuals are working because of travel restrictions, border closings, and government-mandated lockdowns. “In many cases, workers live across a border from their office,” the USCIB said in its letter.
Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD, told Tax Notes that the USCIB’s call for changes and clarification in assessing corporate income tax liability is “very valid” and that the OECD is working on it.
“We hope to come up urgently with some guidance on tax treaty implementation, the goal being to make it easy for all taxpayers and tax administration; [the] immediate goal is to facilitate, reduce costs of all kinds,” Saint-Amans said.
Other countries have already taking steps to prevent nonresident individuals and businesses from being taxed worldwide, and in the spirit of the OECD and multinational harmonization, the United States should extend some of the same considerations, Entin said.