The U.S. Treasury Department is not planning to extend or expand relief from tax residency and permanent establishment rules that it granted two months ago because of travel disruptions from the COVID-19 pandemic.
Announced April 21, Rev. Proc. 2020-20 allows an individual to claim a COVID-19 medical condition travel exception for purposes of the substantial presence test under section 7701(b)(3) if pandemic-related measures prevented the individual from leaving the United States during a selected COVID-19 emergency period. Individuals were allowed to select a period of up to 60 consecutive calendar days starting between February 1 and April 1, during which they were physically present in the United States.
At the same time, the IRS provided relief in an FAQ for nonresident aliens and foreign businesses with employees or agents temporarily in the United States who were facing travel restrictions because of the pandemic. Those persons could choose an uninterrupted period of up to 60 calendar days starting between February 1 and April 1 during which their U.S. activities won't be considered in determining whether they are engaged in a U.S. trade or business (USTB). The activities also won't be considered in determining whether the nonresident or foreign corporation has a permanent establishment. The IRS updated the FAQ in June.
“All that relief is premised on a certain state of the world, with certain kinds of travel disruptions. We see that travel disruptions are beginning to get better, although of course they still exist,” James Wang, attorney-adviser, Treasury Office of International Tax Counsel, said, adding that Treasury is still monitoring the situation. Wang spoke during a June 25 webinar sponsored by the District of Columbia Taxation Community.
In May the Florida Bar Tax Section requested that Treasury and the IRS extend the medical condition travel exception relief beyond 60 days, potentially to 150 days.
Under the standard substantial presence test, a taxpayer is considered a U.S. resident for tax purposes if they have been 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 the two immediately preceding years, subject to a weighted average basis formula prescribed by the IRS.
Wang said that while the 60-day relief period under Rev. Proc. 2020-20 applied to the substantial presence test, it was also meant to apply to the closer connection test. Under that test, a person in the United States for less than 183 days in the year will not be considered a U.S. resident if they have a closer connection to another country.
“Really, you end up getting eight months, as long as you have a closer connection to some other country, and we think eight months is a pretty good amount of time to exclude,” Wang said.
What’s in an FAQ?
Wang said there is a good reason the IRS chose to issue an FAQ on USTB, as opposed to a revenue procedure, as it did with the residency rules, which interpret section 7701’s medical condition exception.
"The FAQ is not interpreting any particular piece of . . . the code or even the regulations. It’s in fact a statement of the IRS’s enforcement discretion,” Wang said. “It’s not saying we’re doing this because the words of section 864 of the code allow that kind of thing.”
Wang also acknowledged that the initial FAQ release did not have a statement on fixed, determinable, annual, periodical (FDAP) income, and that clarity on the matter was needed.
“We got comments that people were not comfortable on whether or not [the income] was FDAP, and so in order to get people comfortable with the approach we were taking . . . we decided to amend the FAQ to basically say that you won’t be subject to FDAP just because you claim the relief under the FAQ,” Wang said. “The FAQ doesn’t push you into a worse situation of FDAP because you don’t have [effectively connected income]. Arguably, that was already the case.”
FDAP income that is not effectively connected income is taxed at a 30 percent rate unless a lower treaty rate applies.
Wang said that while the FAQ was related to enforcement, there is no push for more targeted enforcement relief in the area. He added, however, that the IRS’s People First Initiative, which suspends some examinations, stops the forwarding of delinquent accounts to debt collection agencies and relaxes offer in compromise procedures, which could still be relevant to residency or USTB cases.
While some thought had been given to updating the FAQ to address employment taxes, Wang said that given the difficulty of the area and the existence of totalization agreements, the government decided not to address it “for the sake of getting something out there . . . particularly on the FDAP.”
Wang added that the government still welcomes questions and comments about where guidance might be needed, including on outbound COVID-19 issues.