COVID-19 tax considerations for global mobility professionals
In the early stages of the COVID-19 pandemic, those who manage global mobility programs rightfully focused their efforts on making sure that employees were safe and that those who needed to relocate were able to do so. As the dust settles and the picture gets a little bit clearer as to who’ll be where for the remainder of 2020, it’s a good time to start thinking about how employee locations might affect the obligations of businesses and their employees worldwide. Here are a few of the concerns that may need to be addressed.
Inadvertent permanent establishment: One of the most common ways that the pandemic has affected globally mobile professionals is the modification or cancellation of location-based plans. Some individuals who were scheduled to be seconded to an overseas assignment may now be working remotely from the United States or another subsidiary. Similarly, many non-U.S. workers who planned short visits to the States in the early stages of the pandemic have found themselves working remotely from within the United States for extended periods due to travel restrictions.
From a business standpoint, all functions need to understand that the physical location of the employee could have an impact on a country’s ability to tax both the employee and the employer. In extreme cases, an employee performing certain tasks within a jurisdiction for a long enough period of time could create a permanent establishment and trigger a corporate tax obligation on the employer. This should always be considered when sending someone abroad, but it’s of particular concern in the current environment where someone could wind up working in a jurisdiction for much longer than planned.
IRS FAQ guidance has suggested that some temporary relief from permanent establishment rules may apply for non-U.S. employees working within the United States for extended periods of time due to COVID-19 travel restrictions, but such relief can vary from country to country. It’s important for those who oversee global mobility assignments to coordinate with tax advisors to make sure that no one inadvertently triggers a country’s permanent establishment rules due to unplanned travel limitations or some other COVID-19 accommodation.
The physical location of the employee could have an impact on a country’s ability to tax both the employee and the employer.
Hypothetical tax issue: Employers who opt to tax-equalize U.S. employees who work overseas will typically implement “hypothetical tax.” Often referred to as “hypo tax,” this is a reduction in salary based on an estimate of the amount of tax the employee would have to pay if he hadn’t gone on assignment. While on assignment, employees often don’t have a tax obligation due to the foreign-earned income exclusion or foreign tax credits. If an employee now has returned to the United States due to COVID-19, employers must consider how an indefinite return to the United States could affect the tax calculation. The decision to switch from hypothetical tax back to appropriate federal and state tax withholding should be based on the expected duration of the return to the States and the likelihood of an eventual return to the foreign jurisdiction.
Days of presence: Tax rules that govern individual employees are typically driven by the rules that each country uses to determine residency for tax purposes. The number of days that an individual spends in a country will be a key criterion in that determination, and the spread of COVID-19 has caused a significant number of individuals to stay in unplanned locations for unexpectedly long periods. Here are some items to consider that may affect an employee’s tax obligations.
- U.S. residency of foreign nationals: Typically, a resident alien who meets the Substantial Presence Test will be considered a U.S. resident for tax purposes. To meet this test, an individual must be physically present in the United States for 183 days over a three-year period. The individual must have been physically present in the United States for at least 31 days in the year for which the tax return is being filed; and the total of (number of days present in the tax year) + (1/3)(number of days in the year before the tax year) + (1/6)(number of days in the year two years before the tax year) must be at least 183. There are exceptions under the U.S. tax code that could apply to someone who exceeds the 183 days. Tax treaties that have been established with the United States can be helpful, but the affected individual may need to file documents with the IRS to claim a nonresidency status. The IRS has also issued guidance allowing individuals who endured a “COVID-19 emergency travel disruption” to exclude from the 183-day count a single period of up to 60 days that began between Feb. 1, 2020 and April 1, 2020.
- Overseas residency of U.S. nationals: Similar rules will apply to U.S. employees who work in other countries, although the requirements will vary. Individuals need to understand the foreign tax filing obligations that apply to their situations.
- Foreign-earned income exclusion: U.S. taxpayers who spend 330 days in another country during a 12-month period may qualify for the Foreign-Earned Income Exclusion. The exclusion allows U.S. persons to exclude some of their foreign-earned income from U.S. taxation. IRS guidance permits many individuals to claim this benefit if they would otherwise qualify for the exclusion but failed the 330-day test because they returned to the United States due to COVID-19 concerns.
- State and local obligations of U.S. nationals: Individuals who return to the United States from overseas assignments may trigger state and local payroll tax obligations. Those who are brought back on a permanent basis will almost certainly become residents of the respective state. Those who return temporarily (and their employers) will need to review the obligations in the relevant jurisdictions to find out if their presence triggers a state or local tax obligation.
Social security: If an employee’s participation in a home country’s social system exempts him or her from taxation in the assignment country via a totalization agreement, the employer will need to consider how any change in that person’s location affects the exemption.
U.S. stimulus eligibility: Overseas employees have substantially higher taxable incomes due to living allowances and other taxable benefits being included in their U.S. W-2 wages. As part of an employer’s tax equalization policy, they may want to consider what an employee’s eligibility for the CARES Act stimulus payment would be without the compensation from the additional fringe benefits and compensate the employee accordingly.
Until a vaccine or cure for COVID-19 is widely available, the pandemic will pose a daily challenge to global mobility.
COVID-19-related tax filing deadline changes: The U.S. 1040 filing deadline has been changed to July 15, 2020. Extension to Oct. 15, 2020 is still available if the proper extension is filed. Most U.S. states have followed the federal guidelines and moved their filing deadline to July 15. Individuals who have filing obligations in a foreign country must be aware of any impactful changes to foreign tax filing deadlines.
Planning and logistics: Global mobility programs exist to get people on the ground in the locations where they’re most valuable to a business. Until a vaccine or cure for COVID-19 is widely available, the pandemic will pose a daily challenge to global mobility, and businesses will need to plan accordingly. Budgets and human resources policies should allow for appropriate living allowances and even hardship allowances where necessary. It may be a long time before national boundaries can be crossed with the ease to which we became accustomed before the pandemic, and global mobility professionals will need to navigate a host of new requirements to make sure an individual is settled on-site in time to perform the tasks assigned.
To learn more about how COVID-19 is changing the global mobility landscape and how we can help your business cope, please contact a Plante Moran professional.