For almost a year, a friend and his wife who reside in New York, had been planning a trip to Peru, including a cruise around South America. Their scheduled departure date: March 12, 2020. With the COVID-19 news getting worse by the day, they debated whether they should go. Finally, they decided to take a chance and set off on what they hoped would be a memorable cruise.
On March 14, 2020, the Peruvian government, in an effort to prevent the spread of the virus, suspended the docking of all cruise ships at its ports. Expecting additional transport closures, our friends worked anxiously for two days and were finally able to pull strings and book a flight back to the U.S. on March 16. On March 17, 2020, the airport in Lima closed to the public. They came within less than 24 hours of being trapped in Peru. For days, maybe weeks or months. They were lucky. However, thousands of other Americans in Peru were not so lucky.
Due to the COVID-19 pandemic, countless individuals who not only travel abroad but hold job positions in locations outside their native country, as well as the businesses that employ them, have fallen into the not so lucky category. Because of border closings and mammoth, often countrywide shutdowns, cross-border employees have found themselves effectively trapped and unable to return home, with a return date impossible to predict.
While the first priority for companies is to keep their cross-border workers healthy until the pandemic subsides there are also international tax considerations that businesses must bear in mind, depending on their particular profile. For example:
Are foreign operations suspended by the pandemic? What is the U.S. and foreign tax impact of business losses and what is the best planning for utilization of such losses? Can operations abroad be restarted? If so, should they be restarted in the same locations, or should there be diversification of certain activities to reduce risk? Will some foreign activities or companies be shut down permanently and liquidated? If so, what are the tax consequences and what tax planning is available?
Many countries around the world are already working on tax relief initiatives to ease the impact that the economic shut down is having on workers and companies, including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) recently signed into law in the United States. The Act is the U.S.’s third stimulus plan in response to the COVID-19 pandemic, and follows an $8.3 billion public health funding bill passed on March 6, 2020, and the $100 billion Families First Coronavirus Response Act passed on March 19, 2020.
We will begin our examination of COVID-19’s impact on international taxation with considerations relevant for employees, then explore what companies and corporations should be considering during the virus crisis and beyond.
For cross-border workers, many of the compliance and immigration processes that they rely on to have a legitimate status in the country where they are working are essentially on hold. This hold has tax implications for those workers.
For example, if a cross-border employee intends to be taxed in the U.S. as a non-resident on only U.S. source income (i.e., as opposed to worldwide taxation for residents) by relying on presence in the U.S. for less than six months and satisfying the requirements under the U.S. substantial presence test, he or she could be in for a surprise. As a result of the coronavirus pandemic, they may find themselves stuck in the U.S. for more than six months and therefore subject to U.S. tax and reporting requirements. Such foreign individuals working in the U.S. should not only track their number of U.S. presence days carefully to prevent being caught in the U.S. tax net, they should also manage U.S. tax and reporting requirements if their extended stay makes them subject to U.S. tax on their worldwide income.
And for cross-border U.S. workers stuck abroad, an extended stay might have local tax implications as well, depending on their host country’s tax laws. Most U.S. tax treaties have a limited number of days that an employee can spend in that location before being subject to tax – often 183 days. One might wonder, is the IRS going to grant relief if nonresidents exceed the number of days due to the pandemic? Also, are foreign locations going to consider this an extenuating circumstance? That has yet to be seen, but the fact remains that cross-border individuals must quickly reassess their tax exposure before the end of the year.
COVID-19 has given organizations with globally mobile workforces some challenges. And let’s face it, the COVID-19 pandemic has exposed how global the world economy really is. Many will look to Global Mobility departments as a resource for key areas around people and safety, travel and mobility, tax compliance, immigration and legal, technology and even vendor management during this time.
Many U.S. organizations that send employees abroad (outside the U.S.) on assignment generally employ a tax equalization approach also known as a “balance sheet” approach. The concept of tax equalization is to have the employees pay approximately the same amount of U.S. tax they would have paid had they stayed and lived in the U.S. This is because the W-2s for these employees get inflated as a result of allowances included in their compensation as income such as cost of living allowances, housing amounts and foreign taxes to name a few.
Think for a moment of an employee with $100,000 in income working in New York. As a result of going on assignment to the UK for two years, this individual receives a cost of living allowance of $30,000, a housing allowance of $30,000 and his employer pays their UK tax of $50,000. Their W-2 would now state $210,000. Under the tax equalization principal, the individual is responsible to pay the U.S. tax on $100,000 and the employer is responsible to pay the U.S. tax on the allowances.
The recently passed CARES Act includes provisions to provide direct financial assistance to millions of Americans across the country. These payments, or rebates, will come from the IRS and for those who filed a federal income tax return in 2018 or 2019, Processing will be based on the payment and address information already on file. The payment for each adult is $1,200, or $2,400 for joint filers, and $500 for each qualifying citizen under the age of 17. These benefits start to phase down once an individual’s income reaches $75,000 or $150,000 for joint filers. The payment will be reduced by $5 for every $100 of additional income the individual or joint filers have over the limit. These rebates do not need to be repaid and they will be delivered automatically to most Americans.
This rebate is also available for U.S. citizens working abroad. Non-residents in the U.S. are not eligible to receive these rebates. One of the dilemmas facing employers is whether they would tax equalize this benefit. The individual in the example above would not be eligible to receive the rebate from the IRS based on the income thresholds. But, does the employer reimburse them under the tax equalization principle? Surely, if they do decide to tax equalize this benefit, this is a cost that the employer would have to incur, but are employers ready for this? Does the organizations cash flow allow for this? Have they updated their tax accruals? Communication will be key. Planning now is ever so important.
Employers and employees have some further challenges to address. Below are some examples:
- Do they need to recalculate the overall costs of assignments as a result?
- Is there a business continuity plan in place?
- Are international assignments necessary as a result of the lessons learned from remote workforce?
- What is being communicated by their HR and Global Mobility departments?
- Is tax and compliance leading the charge to limit business travel?
- Are there any tax planning opportunities/lessons to be learned from such a pandemic?
- Do we qualify for SBA loans?
- Is relief provided under the CARES Act available?
- Will the company provide hardship assistance to its workforce affected by the pandemic?
- Will the cost of assignments increase in the long run?
- What steps are being taken to address continuation of services across the assignment lifecycle?
- Will the company make individuals whole as a result of triggering unforeseen tax liabilities?
- How efficiently can they work with their tax consultants to become ready for the challenges?
- Are their technology tools effective to collaborate cross border?
- What are the long-term effects of loss of revenue (if any), loss of employees and employee morale?
Surely, Global Mobility departments have a lot to ponder in the coming days. Perhaps an approach where items of utmost importance should be addressed in chunks is more feasible while keeping a close eye on the items that can be handled down the road. The proactive planning around this could be the difference between coming out of this pandemic just surviving, or coming out of it thriving. The most important aspect is to take care of your most important asset – your human capital. The human element will help bring an organization back to its firm footing or perhaps even better once the dust settles. And as we all know, the dust will settle in due course!
All of that said, and keeping in mind our friends, the couple who almost did not make it home to the U.S. from Peru, employees getting stuck abroad during this pandemic is a real possibility. For example, U.S. Consulates and Embassies around the world have cancelled nonimmigrant and immigrant visa appointments until further notice. Once U.S. Consulates and Embassies resume normal operations, it is anticipated applicants will be able to reschedule their appointments. But for now, foreign nationals with upcoming U.S. visa appointments should monitor U.S. Consulate and Embassy websites for the most recent information on consular services here ( Click Here)
CROSS-BORDER COMPANIES & CORPORATIONS
Much is already being said about how different our world will look after the COVID-19 pandemic subsides. Businesses both large and small have quickly relearned the lesson of just how global and closely interlinked our local economies are.
As much as possible, companies have initiated business continuity planning to protect their staff and mitigate the impact of the pandemic on their business. While such response efforts are intended to ease the impact on employees and operations, they can also raise complicated tax considerations for both individuals and employers. Telecommuting, or working remotely, can trigger U.S. tax implications for both companies and workers, especially if the usual place of work is a different tax location from their temporary place of work.
This crisis has also shined a light on the fact that many U.S. companies have an outsized reliance on a single country for sourcing finished products and raw materials, as well as sales of their products. Our counsel would be to minimize future risks by diversifying procurement sources, manufacturing and sales so that disruptions in one country do not completely shut down your ability to do business.
On a macro level, governments around the world are already implementing tax relief measures to get their economies through the crisis. For businesses, here are some of the key things to remember.
Prepare for Tax Relief Measures Impacting International Companies
In order to help organizations, weather the cost of the crisis and with an eye toward stimulating the U.S. economy after the abrupt shutdown, the federal government is focused on business loans and tax relief measures. For example:
The CARES Act includes an NOL carryback provision that should permit many companies to access cash via refunds of taxes paid in prior years. Specifically, it provides that NOLs arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, shall be treated as a carryback to each of the 5 preceding taxable years unless the taxpayer elects to forego the carryback. Thus, NOLs arising in 2018, 2019 and 2020 could be carried back as far as 2013, 2014, and 2015, respectively. This carryback right can be valuable since the highest corporate tax rate applicable to tax years ending before 2018 was 35% rather than the current rate of 21%.
Before utilizing the carryback provision, companies operating internationally should carefully consider how carrying back losses to profitable years may impact their international tax planning profile, including the use of foreign tax credits. In many cases modeling will be necessary to determine the best strategy for utilizing the NOL carrybacks and foreign tax credits.
Other Tax Code Changes Across the Globe
In a March 19, 2020 overview of countries taking tax action outside the United States, the International Tax Review (ITR) commented that, “The number of tax incentives, relaxed tax compliance deadlines and possible stimulus measures will grow in the coming weeks.” Here is a quick snapshot of countries and tax efforts in the works cited by ITR:
China—as the virus crisis subsides, China’s State Taxation Administration is addressing measures for taxpayers “to manage the social and economic implications of the coronavirus.”
United Kingdom—While it seems that on the economic and taxation front the UK appears to be behind many other countries in Europe, after an admittedly tough first four weeks in his new role as Chancellor of the Exchequer, Rishi Sunak’s “first budget statement included tax measures to help struggling businesses.”
Italy—One of the hardest hit countries by COVID-19, Italy’s government has ceased all tax audits and emergency economic relief legislation “includes a number of tax incentives, tax holidays and financial injections, but mostly for individuals, families and small businesses.”
Other European Countries—Denmark has postponed tax payment deadlines, and other European nations that have taken similar actions include France, Germany, the Netherlands, Spain, Norway, Switzerland, Sweden. Many also extended tax-filing deadlines.
Asia-Pacific region—Australia, New Zealand, Japan and Malaysia are also attempting to ameliorate the tax impact of COVID-19 “with tax filing extensions and bespoke liaison teams.”
In sum, if there is any good news in all of this, for cross border workers and companies, it is that the global community has recognized and taken action to soften the tax blow of a health and economic crisis the likes of which the modern world has never seen.
Final Preparation: Get Ready for Post-Recovery Increases
Despite energetic focus on tax relief measure to bring the economies back to life, when they do come back, it will no doubt be time for taxpayers across the globe to pay the piper for increasing national debts with the various stimulus package. Be prepared then to engage in tax planning to mitigate the impact of rates going up. For more information on how we can make your world worth more, please contact the Prager Metis Global Mobility team