Undeniably, COVID-19 has taken its toll across the globe, regardless of a person’s economic standing. Governments implemented inbound and outbound travel restrictions with varying stringency to curb the spre ad of the virus. As with any other country, the US was confronted with stranded foreign nationals, whose residency status, which is generally affected by their actual physical presence in the US, dictates their tax.
Similar to the relief provided to stranded foreign nationals by the BIR, which disregarded the number of days they spent in the Philippines while stranded, the US Internal Revenue Service (IRS) issued Revenue Procedure (RP) 2020-20 targeted at nonresidents who were in the US during the height of the pandemic.
GENERAL RULE ON US TAX RESIDENCY
Foreign nationals in the US are taxed based on their residency status. Residents are taxed on their worldwide income while non-residents are taxed only on their US-sourced income.
Based on the US tax rules, unless an exception applies, a foreign national who is not a lawful permanent resident (i.e., not a green card holder) will be classified as a resident alien if he meets the substantial presence test (SPT) during the calendar year. SPT is met when (1) an individual has stayed in the US for at least 31 days during the current calendar year, and (2) has at least 183 days aggregate presence in the US computed using the two-year lookback rule, i.e., the sum of the following:
1. The actual number of days in the US during the current year;
2. 1/3 of the number of days in the US during the preceding calendar year; and
3. 1/6 of the number of days in the US during the second preceding calendar year.
With the travel disruptions caused by the pandemic, foreign nationals were at risk of breaching the 183-day threshold and becoming resident aliens in 2020, putting them at a disadvantage because they thereby become liable for tax on their worldwide income.
EXCEPTIONS TO SUBSTANTIAL PRESENCE TEST
A day of physical presence in the US is generally counted in applying SPT. However, foreign nationals may avail of exceptions in determining a day in the US, among which is the medical condition exception. This refers to the days when an individual was unable to leave the country because of a medical condition that arose while in the US.
Taking the basis of the medical condition exception, the IRS issued RP 2020-20 to allow eligible individuals to exclude their COVID-19 emergency period in determining their days of presence in the US. In this procedure, COVID-19 is treated as a medical condition that prevents the eligible individual from leaving the US on each day of his emergency period. It also presumes the eligible individual’s intent and inability to leave the US unless he has taken steps to be a lawful permanent resident. This relief shall also apply in determining the availability of US income tax treaty benefits concerning income from dependent personal services performed in the US.
Section 3 of the procedure defines an emergency period as a single period of up to 60 consecutive calendar days that are selected by an eligible individual beginning on or after February up to April 1, 2020. An eligible individual is characterized as follows:
• Not a US resident at the close of 2019;
• Not a lawful permanent resident at any point during 2020;
• Present in the US during each of the days of his COVID-19 emergency period; and
• Does not become a US resident in 2020 due to the number of days in the US after considering this procedure.
The IRS clarified that the emergency period will not be considered in determining whether a nonresident is engaged in US trade or business (USTB), provided that such services would not have been performed in the US if not for the travel disruptions. Inversely, services during an emergency period of a nonresident engaged in USTB will not be considered in determining a permanent establishment (PE) in the US if they would not have been rendered but for the travel disruptions.
ADMINISTRATIVE REQUIREMENTS
Eligible individuals, who are required to file an income tax return (Form 1040-NR), after taking into consideration RP 2020-20, must attach Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition) to claim the COVID-19 medical condition travel exception. There is no need to provide a physician statement. Instead, the start and end date of the individual’s emergency period must be indicated. In contrast, those who are not required to file Form 1040NR need not file Form 8843 to claim the exception. However, they are required to retain all relevant records to support their claim under this procedure and submit them to the IRS, when requested, along with the completed Form 8843.
In case of failure to file the statement, a required individual may be eligible for procedural relief if there is clear and convincing evidence that he took reasonable action to become aware of the filing requirements and significant steps to comply. Relief is also available if the Secretary of Treasury or his or her delegate in their sole discretion, for the benefit of the government, and based on all the facts and circumstances, disregard the individual’s failure to file the statement in a timely manner.
TAKEAWAY
The COVID-19 pandemic pressed foreign governments to aid travelers caught off guard by this emergency. This IRS procedure should leave foreign nationals, including Filipinos, relieved about long quarantine periods spent in the US. However, as in the BIR rules, while RP 2020-20 seeks to address residency issues of foreign nationals and provide relief from the pandemic, the procedure may not necessarily equate to income exemption earned during the period. Still, all is just. Considering that relief measures are issued on compassionate grounds, profiteers should not take advantage of the situation, all circumstances being fair.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Kimberly Anne Lavilla is a Senior Associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
kimberly.anne.lavilla@pwc.com