Worker Visas: Tax Advantages and Challenges

© 2020 Fox Rothschild

Worker Visas: Tax Advantages and Challenges

Alka Bahal

Partner & Co-Chair, Immigration Practice Group

Fox Rothschild LLP

Jerald August

Partner, Co-Chair, International Taxation and Wealth Planning

Fox Rothschild LLP

Topic Overview

• Immigration

–Topic 1: How to employ a foreign national

• Understanding Non-Immigrant Visas

–Topic 2: How to retain a foreign national

• Understanding Immigrant Visas

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U.S. Visa Scheme• Non-immigrant visas

–Temporary visas, more than 50 categories

– Examples: B-1/B-2 visitor, H-1B temporary worker, L-1 intracompany transferee

• Immigrant visas

–Employment based--140,000 per year

–Family based--Preference 226,000 per year, Immediate relatives--unlimited

–Diversity-50,000 per year

–Asylum/Refugee--not limited, but number of annual refugee admissions set by President

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Nonimmigrant Visas

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Nonimmigrant Visas (NIVs)

• Non-Immigrant Visa – as defined in section §101(a)(15) of the Immigration and Nationality Act and 8 CFR 214.2, etc.

–A time-limited permission to be in the U.S. and perform activities permitted by a non-immigrant visa, of which there are more than 50

• Each status is for a specific purpose and duration and has specific eligibility requirements

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Nonimmigrant Visas Options

• Common Visa Types:

–H-1B Temporary Workers

–E-3 Australian Temporary Worker (copy of H-1B)

–H-1B1 Chilean and Singaporean Temporary Worker (copy of H-1B)

–E-2 Treaty Investor

–TN Canadians and Mexicans under NAFTA

–L-1 Intracompany Transferee

–O-1 Aliens of Extraordinary Ability

–B Visitors

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H-1B Visa

• Highly Skilled: Position must require a Bachelor’s Degree

• Minimum Salary Requirement

–Based on position and location

• Annual Cap: 85,000 new visas issued each fiscal year

–20,000 for U.S. Master’s or Higher Degree

–65,000 for Bachelor’s Degree or Equivalent

–Random Selection Lottery

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H-1B Visa (Cont’d)

• Unique Considerations:

–Professional position

• Bachelor’s Degree required

• “Specialty occupation”

–Employer/Employee Relationship (employer’s petition and employer-specific)

–Employer’s must pay higher of “Prevailing Wage” or “Actual Wage”

• Employer must demonstrate financial ability

–Employer must carry all costs

–Limited: 6 years (with some exceptions)

–Work authorization for spouse only under specific circumstances


• If on an H-1B (with another employer)

–Portability

• Can work when petition filed (where conditions met)

• Definition of Filed: Timing

– Ideally, should wait until receipt notice arrives from USCIS

–Approval Notice

• Regular Processing: 5-7 months

• Premium Processing: 15 calendar days to adjudicate barring any requests for additional evidence

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• If in the U.S. on another visa (changing to H-1B)

– ONLY upon receipt of approval notice

– able to remain in U.S. if in valid visa status when H-1 petition filed (i.e. in compliance with all conditions of visa held)

• If not, must travel abroad to obtain visa stamp required prior to starting work

• If abroad:

–Must have a valid H-1B visa stamp in passport

• Except for few visa exempt countries (e.g. Canada)

• May use valid H-1B visa from another employer

• Apply in person at U.S. Consulate/Embassy in home country

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Country-Specific Professional Visas

• H-1B1 (Chile and Singapore)

–Same requirements as H-1B, except beneficiary must be Singaporean or Chilean

–Up to 6,800 visas set aside

• E-3s (Australia)

–Same requirements as H-1B, except beneficiary must be Australian AND no approval from USCIS required

• Can apply directly at U.S. Embassy/Consulate

–No quota/lottery

–Duration: Valid for 2 years, renewable indefinitely

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E-2 Visa

• Entrepreneurial Investor visa

• Must be a national of a listed treaty country

– Owned at least 50% by treaty national(s)

• Purpose of entry to U.S. as owner/investor OR manager/essential employee

• Investment in a real, active and operating entity

–Already invested or in process of investing

• Spouse is eligible to apply for work authorization

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E-2 Visa (Cont’d)

• May not be marginal

–May not be for purposes of only supporting investor and family

• Substantial investment (no minimum dollar amount)

–The lower the cost of the business, the higher the investment must be to meet substantiality requirements

• Validity Period

–Australia = 4 years; Mexico = 1 year ; New Zealand = 5 years; Colombia = 5 years; United Kingdom = 5 years; Switzerland = 4 years; Thailand = 6 months

–Each entry is limited to 2 years regardless

–Visa can be extended indefinitely

TN Visa

• TN visa created through NAFTA

– The United States-Mexico-Canada Agreement (USMCA)

• Mexican and Canadian nationals only

• Requirements:

–List of Specific Professional Occupations (accounts, engineers, lawyers, scientists, teachers, etc.)

–Full-time or part-time job with a U.S. employer – not self-employment

–Canadians travel visa free; Mexicans must obtain a visa stamp

–Valid for 3 years, renewable indefinitely

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L-1 Visa

• Intracompany Transferee

–Moving an employee from a related foreign company to the U.S. (any country)

–Employment Requirements:

• Must have worked for a qualified affiliated entity abroad for at least one continuous year in the three years before transfer

–Position requirements:

• Job abroad AND job in U.S. must be in a (1) executive, (2) managerial OR (3) specialized knowledge capacity

L-1 Visa (Cont’d)

• L-1A Role

–Executive or Managerial

• L-1B Role

–Specialized Knowledge

–Knowledge of company’s product, service, research, techniques, management, etc.

• Term Limits:

–L-1A: 7 years

–L-1B: 5 years

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L-1 Visa (Cont’d)

• New U.S. Office

– Initial visa will be only for 1 year

– Higher burden of proof – office space, business plan, etc.

– Must demonstrate that U.S. operations will support an executive or managerial position within 1 year

• U.S. and Foreign Operations must continue for duration of visa

L-1 Visa (Cont’d)

• Typically candidate is abroad

–L-1 visa stamp obtained in passport after USCIS approval of petition

–Starts working as soon as enters the U.S.

• Rarely can employee change to L-1 status

–Requirement of employment for one year abroad

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O-1 Visa• O-1B: Extraordinary ability in the arts or extraordinary achievement in motion

picture or television industry

• HIGH Standard: Only for individuals who have risen to the very top of their field

• Able to produce documents to confirm:

– “Distinction” or ”a high level of achievement”

– “Prominence”

– “Widespread acclaim”

– “International recognition” and

– Ability and achievements have been evaluated by peer group

• Typically receive high salaries, but no salary requirement

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O-1 Visa (Cont’d)

• Must show sustained national or international acclaim

• Must be coming to U.S. to continue work in area of extraordinary ability

• Must demonstrate expertise is such that beneficiary is one of the small % who has risen to very top of field of endeavor

• Duration: Initial visa issued for 3 years, renewable in 1 year increments indefinitely

• No work authorization for spouse

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Miscellaneous Visa Types• F-1 Student Visas

– Optional Practical Training (EAD card)

• Valid for 1 year (STEM students may extend for an additional 2 years)

• Must have card in hand to work

– Curricular Practical Training (Form DS-2019 and Form I-94 will show right to work with designated employer

• During course of education

• J-1 Trainees

– Limited to 18 months

– Form DS-2019 and Form I-94 will show right to work with designated employer

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Family Member Visas

• Family members (spouse and children) MUST have derivative visa of primary

–H-1B H-4

–O-1 O-3

–L-1 L-2

–F-1 F-2

–J-1 J-2

• Applications for family members usually have to be filed at same time as employee’s

• Some are permitted to apply for work authorization

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Immigrant Visas

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Immigrant Visas (IVs)

• U.S. Permanent Residence Lawful Permanent Resident or “Green Card”

–Employment-based

–Family-based

–Diversity

–Asylum/Refugee

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Immigrant Visas: Employment-Based

• EB-1:

–EB-1A – Alien of Extraordinary Ability

–EB-1B – Outstanding Professor or Researcher

–EB-1C – Multinational Manager or Executive

• EB-2:

–Advanced Degree (PERM)

–Exceptional Ability

–National Interest Waiver

• EB-3: Professionals and Skilled Workers (PERM)

• EB-5: Immigrant Investor (changes November 21, 2019)

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Immigrant Visas

• 140,000 total visas per fiscal year (10/1 – 9/30)

–40,000 for EB-1 priority workers

–40,000 for EB-2 advanced degree

–40,000 for EB-3 professional/skilled workers/other workers

–10,000 for EB-4 special immigrants – religious workers, abused spouses, etc.

–10,000 for EB-5 investors

• Most, but not all, require job offer

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EB-1A: Extraordinary Ability

• Highly accomplished individual, very high standard

• Intended only for the few at the top of the field

• Must show continuing work in the field and prospective contribution to the U.S.

• No job offer required, may self-petition

• Must have:

–Major award or prize (Nobel, Pulitzer, etc.); OR

–Documentation from 3 of 8 categories of documents specified in regulation; OR

–Other "comparable evidence" if above does not readily apply

EB-1C: Multinational Manager/Executive

• Similar Criteria as L-1 visa

–Employed at affiliated entity abroad for at least 1 year in the 3 years prior to transfer to the U.S.

–BOTH U.S. Role and Previous Foreign Role must be Managerial or Executive

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EB-2 and EB-3: PERM Labor Certification

• Program Electronic Review Management (PERM) is the system used for obtaining Labor Certification

• First of a Three step process to obtain permanent residence

• Test of the U.S. labor market for availability of qualified U.S. workers for a “permanent” position

• PERM reflects an offer of future employment

– “Future” – upon grant of green card

• Important to keep H-1B visa holders who are reaching their 6th year limit

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EB-2 and EB-3: PERM Labor Certification (Cont’d)• EB-2 vs EB-3

–Determined by requirements

• EB-3 = Bachelor’s level professionals, skilled & unskilled labor

• EB2 = Master’s level professionals

• 3-step process: PERM, Immigrant Visa Petition (I-140), and Adjustment of Status (I-485) or Consular Processing

• Adjustment of Status – employment and work authorization become available


U.S. Income Tax and Related Tax Impacts of Foreign Executives

Working In The U.S.

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Topic Overview

• Federal Income Taxation

–Tax Residence in the United States; dual residence issues

–Withholding and Social Security impacts

–Consequences of remote working

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General Rules for Foreign Nationals Rendering Services In Employment Capacity in the U.S.

– Non-Permanent Visa Workers. Substantial Presence Test • Could be subject to tax treaty tie-breaker based on country of residence

– Permanent Residence (U.S. Green Card) Test• Alien issued greed card becomes resident alien under the permanent resident test on the day the

alien enters or is in the U.S. and holds the green card until such green card is revoked or considered to have been abandoned administratively or by judicial order. Section 7701(b)(6)(B); Treas. Reg. Sec. 301.7701(b)-1(b)

• Once a foreign national’s permanent residence is obtained, such individual generally continues to be a lawful permanent resident until this status is either revoked or administratively or judicially determined to have been abandoned

• Abandonment. Abandonment of a green card will not terminate the alien's resident alien status for federal income tax purposes unless the abandonment is recognized by the U.S. immigration authorities by means of either an administrative or judicial determination

• Commissioner v. Topsnik 143 TC 240 (2014)(Tax Court rejected taxpayer’s “abandonment” of residence argument based on the facts; seven year period involved before “formal abandonment” recognized; treaty claim for non-residence in U.S. under U.S.-Germany Tax Convention rejected based on taxpayer’s non-filings as a resident in Germany)

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• Non-resident, Foreign National Individuals Rendering Services In an Employment Capacity in the U.S.

– Dependent Personal Services – Impact of Determining Foreign Worker’s Resident Status

• Impact on Individual’s U.S. income tax • Foreign Employee’s U.S. (and home country) filing obligations • Impact on other individuals and the employer; withholding of U.S. taxes on U.S. source income. FUTA/FICA

• Resident Alien Status under Section 7701(b) • Permanent resident test or “green card” test. Regardless of whether the worker lives in the U.S. or abroad• Substantial presence test. A foreign alien worker is a U.S. tax resident where he/she spends 183 days in the current

tax year or more than a weighted average of 122 days in the U.S. during the taxable year and two immediately preceding years

– Closer connection to home country exception– Regulations provide alien may not make the “first year election” until he meets the substantial presence test for

the following year• Aliens may qualify as “dual status” if they meet either the green card test or the substantial presence test for only part

of the year – Determination of “residency starting date” after January 1– Conversion from “resident” to “non-US resident” during the taxable year, the “residency termination date”

• Dual Resident Issues; year of migration to (and from) the U.S.. Can also pose expatriation tax issues for long term green card holders leaving the U.S.

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Substantial Presence Test– Taxpayer present in the U.S. on at least 31 days during the year and meets a 183-day test average

weighted three year test.

– Has not applied for green card

– Exception for Closer Connection to Home Country. An alien individual who meets both the 31-day test and the 183-day test is nevertheless a nonresident if she (1) is present in the U.S. for fewer than 183 days during the current year; (2) has a tax home in a foreign country during the year; and (3) has a closer connection to that country than to the U.S.

– Counting Days. Travel days count. Treas. Reg. §301.7701(b)-1(c)(1)

– Medical Emergency Exception

– Special Filing Requirements

– Form 8840 attached to tax return for each year exception is claimed

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Foreign Employee Qualifies for Tie-Breaker Relief

• Year of Residence Change– Green Card. Period of residence usually begins on first day taxpayer is present in the country with a green

card

– Substantial Presence Test. Residence usually beings with the first day during the year that the taxpayer is present in the U.S., excluding days allowed to be disregarded. This would occur for a commuter from Canada or Mexico and presence for less than 24 hours while in transit; ignored in determining residence starting date

– Where Foreign Employee Satisfies Each Resident Test. Residence begins on the first begins on green card issuance or, if earlier, first day of presence under the substantial presence test. IRS regards green card holders who commute to work in the U.S. but reside in Mexico or Canada are still U.S. residents for U.S. income tax purposes, subject to the treaty tie-breaker rule but only as to such matters that are controlled by the treaty tie-breaker. Formal abandonment required

– Election For Preceding Year. The law allows, in certain instances, an individual to elect U.S. residence status to begin in the year such individual moves to the U.S. even though the substantial presence test is not met until the succeeding year. Although the election accelerates the time when the alien becomes subject to U.S. tax on worldwide income, it may reduce tax if most of the alien's income is from U.S. sources (e.g., because some of the income would otherwise be taxed at the 30% rate often applied to nonbusiness income of nonresident aliens)

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Foreign Employee Qualifies for Tie-Breaker Relief (Cont’d)

• Year of Residence Change (period of residence and non-residence) – De Minimis Presence. An alien may be present in the U.S. for up to 10 days without triggering the residency

starting date (for purposes of the substantial presence test) or extending the residency termination date (for purposes of the substantial presence test). Treas. Reg. §301.7701(b)-4(c)

• Dual Resident: Tax Treaty– Passing Through Tie-Breaker Rules and Limitation of Benefits Hurdle. Taxed on U.S. source income and as

subject to applicable withholding rules

– Withholding. Where residence is determined under the substantial presence test the facts will not be known until the end of the year or even later. A treaty claim may affect the analysis or a first year election filed months after the close of the tax year

– Withholding Agents. Are allowed to rely on form W-8BEN for foreign persons claiming treaty benefit or nonresident status for withholding but not for backup withholding or when no valid taxpayer ID number is provided on W-9

– What if during the year the treaty benefit will no longer apply?

– Note Sections 6013(g) and 6013(h) Married Joint Return Elections. Individual is “resident” for income tax but not for purposes for withholding. The Section 6013(h) election will be made just once. The Section 6013(g) election is made based on a nonresident at the end of the year….still withholding is required for such year. The election can be accompanied by a treaty waiver Form W-8BEN to avoid backup withholding and information reporting

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Foreign Employee’s Claim of Treaty Tie-Breaker Protection

• Income Tax Treaties – Purpose: Mitigation of double taxation; non-discrimination; resolving residency questions; mutual exchange

of information and competent authority provisions. U.S. has approximately 60 tax treaties in place

• United Nations Model Treaty (provides greater preference to source-based taxation; emphasis on developing countries); OECD Model Treaty and U.S. Model Treaty

• Double taxation relieved by treaty by the residence country ceding taxing jurisdiction to the source country backed-up by a foreign tax credit or income exclusion

• Problems where worker migrating to the U.S. has resided in a non-treaty country. Double taxation trap

• Increasing aggressiveness by tax administrators of various G-20 countries to address ever-changing global economic developments

– OECD Commentaries

– U.S. Technical Explanations of treaties published by the Treasury Department. United States Model Technical Explanation Accompanying the United States Model Income Tax Convention of Nov.15, 2006, Done with respect to each actual treaty

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• Treaty Tie-Breaker Rules– 2016 U.S. Model Income Tax Treaty, Article 4.3. Similar to the “closer connection” test

Where… an individual is a resident of both Contracting States, then his status shall be determined as follows:

– (a) he shall be deemed to be a resident only of the Contracting State in which he has a permanent homeavailable to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident only of the Contracting State with which his personal and economic relations are closer (center of vital interests);

– (b) if the Contracting State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either Contracting State, he shall be deemed to be a resident only of the Contracting State in which he has an habitual abode;

– (c) if he has a habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident only of the Contracting State of which he is a national;

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General Rules for Foreign Nationals Rendering Services In Employment Capacity in the U.S. (Cont’d)

• Treaty Tie-Breaker Rules – (d) if he is a national of both Contracting States or of neither of them, the competent authorities of the

Contracting States shall endeavor to settle the question by mutual agreement

– Determined on the specific tax treaty involved and such determination overrides the U.S. permanent residence tests. See, e.g., Article 4(2) of the U.S.-UK Income Tax Treaty

– Claim. Filing Form 1040 NR with Form 8833 (treaty-based return position disclosure). See Sections 6114, 6712. Various penalty provisions potentially applicable. Treaty relief waived in certain instances, including with respect to salary of an employee, pensions and annuities. Treas. Reg. Sec. 301.6114-1(c)(1(iv)

– Must be able to prove entitlement to tax treatment. Limitation of benefits provision

– Important to Note the Treaty Does Not Override Everything. Despite bona-fide claim of non-residence in the U.S. based on a treaty-tie breaker, the individual is still classified as a resident alien for all other purposes of the U.S. income tax laws as well as in computing the U.S. tax liability of another person. H.R. Rep. No. 98-861. Option to still file as resident

• Option to claim treaty benefits under treaty tie-breaker determined annually. See Rev. Rul. 80-147

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• U.S. IRS Filing Requirements for U.S. Residents, Citizens and Possibly Non-residents Including Treaty Tie Breaker Non-residents

– Federal Income Tax Returns. Form 1040 or form 1040X; Form 1040NR

– Treaty Tie Breaker Filing. Must claim treaty benefit Form 8833. Waiver for dependent personal services in regulations

– Closer Connection Exception Statement. Form 8840

– Initial and Annual Expatriation Statement. Form 8854

– Statement of Specified Foreign Financial Assets. Form 8938

• Not required if non-resident under treaty tie-breaker

– Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Form 8471

– Return of U.S. Persons With Respect to Certain Foreign Partnerships. Form 8865

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• U.S. IRS Filing Requirements for U.S. Residents, Citizens and Possibly Non-residents Including Treaty Tie Breaker Non-residents

– Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520

– Annual Information Return of Foreign Trust With a U.S. Owner. Form 3520-A

– Filing Requirement for U.S. Transferors of Property to a Foreign Corporation (or partnership). Form 926

– Returns of Controlled Foreign Corporations. Form 8471

– Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Form 8621

– Report of Foreign Bank and Financial Accounts (FBAR) FinCEN Form 114 (FBAR). Residents under Section 7701(b) still required to file FBARs despite treaty tie-breaker relief. High penalties, including criminal charges, for non-compliance

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General Principles of International Income Taxation

– Residence of the Taxpayer • United States. Taxes worldwide income of its citizens, residents and domestic corporations. The source of

a U.S. resident’s or citizen’s income is relevant for purposes of mitigating double taxation such as through an applicable tax treaty with the source country and/or foreign tax credit allowable under U.S. tax law. U.S. citizens and residents must also comply with U.S. disclosure laws

• In contrast, all other countries impose worldwide income tax only on their residents. Residence is defined under applicable domestic tax law. Based on days and/or “center of life” test, etc.

• U.S. citizens working overseas. Allows limited “foreign earned income exclusion under Section 911 and housing cost allowance

• Non-resident, foreign nationals working in the U.S. Generally territorial regimes “at home”

– Source of the Income • United States. Taxes U.S. source income of foreign individuals and foreign corporations. Sections 861-

865

• Separate source rules for different species of income, including gains from the sale of property

• U.S. Model Treaty, Article 16 (OECD Model Treaty, Article 17). Requires source-based income taxation of artists and athletes regardless of the permanent establishment required in excess of a de minimis amount

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General Principles of International Income Taxation (Cont’d)

– Inbound or U.S. Source Based Income • Foreign person engaged in a trade or business within the U.S. is taxable on the income “effectively

connected” to that trade or business (“ECI”). Sections 864(b), 864(c)

• U.S. ECI is taxed on a “net basis” (net of allowable deductions) and subject to progressive marginal rate of tax

• The performance of personal services within the U.S. at any time within the taxable year constitutes such a trade or business

• Most foreign-source income of a non-resident other than compensation and U.S. situs passive income is not subject to U.S. income tax. Notably, foreign-source personal services income is not subject to U.S. tax

• U.S. source passive income is subject to a flat 30% tax and withholding

• Net investment income tax under Section 1411 (3.8% on NII) applies to U.S. citizens and resident aliens. NII does not include service income and distributions from foreign retirement plans. Section 1411(e)(not imposed on nonresident alien unless part year rule applicable; treaty tie-breaker overrides if resident of tax treaty country)

– Consideration of Foreign Executive’s Domestic Tax Law Based on His or Her Country of Residence

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Compensation for Personal Services Rendered Within the United States

• Actual Location of Where Services Are Rendered for U.S. Sourcing Purposes– Compensation for labor or personal services performed in the U.S. is U.S. source income while

compensation for labor or personal services performed without the U.S. is foreign source income

• Partly Within and Without the U.S.. The part of compensation attributable to labor or personal services performed within the U.S. is determined on the basis that most correctly reflects the proper source of that income based on all facts and circumstances. Treas. Reg. §1.861-1(b)(2)

– Time basis

– Relative value of the services performed in each location

– Other apportionment formula

– Section 864(b). “[T]he performance of personal services within the U.S. at any time within the taxable year” constitutes a trade or business within the U.S.

– De Minimus Exception of 90 days in the U.S. and compensation no greater than $3,000. Still subject to FICA/FUTA

– Spilit-status Payroll Periods

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Compensation for Personal Services Rendered Within the United States (Cont’d)

• Where U.S. Based Employment– Most likely employer will withhold income tax on all of alien’s salary but if the alien makes business trips

outside of the U.S., only the U.S. source portion of salary is reported on alien’s Form 1040NR and the alien would claim a refund for excess tax withheld. See generally §861(a)(3), §864(c)(3), and §864(c)(4). Too cumbersome to track U.S. and non-U.S. workdays from pay period to pay period

– Revised regulations on the attribution of compensation between U.S. and non-U.S. sources on basis of work days spent within and without the U.S. Treas. Reg. Sec. 1.861-4 (2005)

• Fringe benefits. Generally allocated entirely to country where employee has his “principal place of work”. Even if services partly performed outside of U.S.

– Compensation Elements of Foreign Worker’s Employment in the U.S.

• Moving expense reimbursements for cost of moving to U.S. at the commencement of employment in the U.S. and returning back home

– In general, regulations source moving expense reimbursements with employee’s new principal place of work. Some exceptions

– Generally excluded from gross income under Sections 132(a)(6) and 132(g) provided requirements of Section 217(b) are met

– Certain expenses, such as house-hunting trips which

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• Where U.S. Based Employment– Reimbursement of U.S. Housing Costs or Providing Rent Free Housing

• Generally fully taxable as U.S. source compensation income

– Exception. Temporary U.S. assignment of up to one year from foreign employment individual expects to return. May be deductible under Section 162(a) as an “away from home” business expense. An aggressive position would be a series of multiple year assignments with each assignment to last no more than one year

– Exception. Convenience of employer for employer provided housing exclusion under Section 119

– Temporary U.S. living expenses. One year or less employment term, may be able to deduct living expenses in the U.S. if reimbursed. See Rev. Proc. 2019-48. Section 62(a)(2)(A)

– Importance of establishing and documenting allocations of U.S. and non-US source reimbursements based on service income allocation

– Company Car. Fully taxable. If employee’s tax home is outside of the U.S., rental value allocable to commuting to and from U.S. worksite potentially deductible

– Home Visit Reimbursements. Taxable

– Tax Reimbursements under Equalization Clause. Employer tax reimbursement sourced to country that imposes the tax for which the employee is being reimbursed. If the higher tax is in the U.S., then it is U.S. source personal services income. If paid for increased home country tax it is treated as non-U.S. source. Treas. Reg. Sec. 1.861-4(b)(2)(ii)(D)(4)

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Compensation for Personal Services Rendered Without the United States (Cont’d)

– Home Country Pension Plan Contributions. Establishing foreign source income in allocating between U.S. and foreign source services rendered

• Where employee continues to receive contributions to a private pension plan maintained by employer in employee’s home country, since the plan is foreign it would be taxable to the foreign U.S. based employee even if no “charge over cost” made to the related U.S. employer. See Sections 402(b)(1), 83

• Where foreign funded plan violates the “top heavy” rules and is skewed to highly paid employees income earned within the fund may be taxed currently to U.S. citizens and resident aliens who have account s within the plan

• 2016 U.S. Model Income Tax Treaty, Article 18 (Pension Funds). Provides U.S. income tax exemption for a foreign employer’s contributions to a foreign pension plan and also for the income earned currently on the employee’s benefit provided the contributions into the foreign plan do not exceed the funding limitations that apply for similar plans under U.S. law

– Group Insurance Plans. Allocation between U.S. and foreign source income services

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Compensation for Personal Services Rendered Without the United States (Cont’d)

– Payments from Unfunded “Top-up” Retirement Plans (SERPS). Upon retirement, employer pays a retirement pension in addition to the company's tax-qualified plan(s) and may mirror the company’ defined contribution and defined benefit plans

• Sourcing or allocation of compensation, including earnings, may depend on the type of benefit and how it is computed. See Rev. Proc. 2004-37

• U.S. source payments taxable and subject to withholding under Section 3402

• Treaty country residents. The U.S. source portion may qualify for treaty exemption as a pension rather than income from “dependent personal services” which would not qualify for treaty exemption. See PLR 200416008 (US-Australia Income Tax Treaty, Article 18)

– U.S.-Ireland Income Tax Treaty, Article 18(1)(a), exempts “pensions and similar remuneration … in consideration of past employment.” The Technical Explanation of that treaty states that article 18 “is intended to encompass payments made by all private retirement plans and arrangements in consideration of past employment, regardless of whether they are qualified plans under U.S. law.”

– Still, may not be treated as pension payments only if the plan is nondiscriminatory” and covers a range of employees. 2006 U.S. Model Income Tax Treaty does not mention SERPS

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• Stock Options– Common for U.S. parent companies to provide NQSOs to nonresident employees of foreign subsidiaries.

– The extent to which foreign worker worked in the U.S. before exercising options could be in part or all U.S. source compensation income. See Treas. Reg. Sec. 1.861-4

• Rev. Rul. 69-118 (spread sourced based on workdays starting on date of grant and ending on vesting date”

• Wage withholding on NQSOs

• For Incentive Stock Options (qualified) under Section 422. No wage withholding on exercise and non-resident generally not subject to U.S. income tax on the spread unless he disposes of stock within two years of the grant date or one year of the exercise date. Where employee meets the Section 422 holding period, any gain on the eventual sale of stock will usually be exempt. The alien could be subject to alternative minimum tax on the U.S. source portion of the spread. Section 422(a)(1)

• Presumably outside of tax treaty benefits

• See Article 14 of US-UK Tax Treaty Technical Explanation, Preamble, Article 14, Para. 2

• Restricted Stock– Restricted stock under Section 83 issued at beginning of vesting period subject to forfeiture

• Multi-year arrangement for sourcing. Treas. Reg. Sec. 1.861-4

• U.S. source portion subject to withholding and U.S. income and generally will not qualify for treaty benefits

• Section 83(b) election made by foreign worker. Where the stock vests after the individual becomes a resident alien the value of the stock will not be taxed. However, most foreign countries will tax the immediate receipt of restricted stock despite the restrictions on the stock

• Same type of result for phantom stock plans

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• Deferred Compensation for Foreign Workers Rendering Services Within the U.S.– Various Forms. Deferred compensation, funded and unfunded pension arrangements, stock options,

restricted stock, phantoms stock plans

• Foreign source income. Exempt from withholding and U.S. income tax based on non-resident status and services rendered overseas

• Foreign employees working outside of the U.S. such as for a foreign subsidiary of a U.S. parent corporation to be covered by the U.S. company’s stock option plan and “top-up” retirement plans

– Three Applicable Principles

• Has the Foreign employee ever worked in the United States? Allocation of service income is important not only for sourcing but in determining the amount currently not taxable. Strong presumption on days worked within and without the U.S.; multi-year plans sourced within multi-year period and exercise of stock option rights, perhaps also multi-year arrangement. Treas. Reg. Sec. 1.861-1(b)(2)(ii). (single versus multi-year arrangements)

• Is the Foreign employee resident in a tax treaty county which may reduce or eliminate of U.S. tax that would otherwise be imposed

• U.S. withholding tax rules. What will the withholding agent do? If the agent withholds and foreign employee believes his liability is lower, he must file a return and claim a refund. Payments of deferred compensation subject to wage withholding under Section 3402 and at graduated rates Sections 864(c)(6) and 871(b)

• Employer approach? When in doubt, withhold and required foreign worker to file Form 1040NR and claim for refund

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Compensation for Personal Services Rendered Within the United States Deferred Compensation Arrangements

• Distributions from a U.S. Qualified Retirement Plan – Divided (distributions) into three segments: (i) earnings portion; (ii) pre-tax contributions by employer or

employee for services rendered within the U.S.; and (iii) portion of pre-tax contributions made by employer or employee for services rendered without the U.S.. Therefore (i) and (ii) would be taxable as U.S. source income

– Taxation of Non-Treaty Aliens. Complex calculations based on: (i) application of FDAP rule under Section 871 to the extent applicable; (ii) withholding rules under Section 1441 for pension distributions from U.S. pensions to non-resident aliens; and (iii) other rules applied by the IRS in this area that may vary from strict application of Section 871. The three categories are still applicable but how should the distribution be taxed, i.e., FDAP under Section 871(a)(1) at flat 30% withholding or ECI at graduated rates under Section 871(b). See Section 864(c)(6)

– Taxation of Treaty-Aliens. Most treaties exempt U.S. source pension payments from U.S. tax. Treaty benefit statement required to be presented to trustee of plan

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Compensation for Personal Services Rendered Within the United States Deferred Compensation Arrangements (Cont’d)

• Pension Distributions to Foreign Workers. Withholding Under Section 1441– Non-treaty country foreign workers

• Investment portion of pension distribution. Section 1441 withholding which would be creditable by the foreign worker in computing home country income tax

• What portion is ECI under Section 871(b) and taxed at graduated rates?

– IRS View. All of the investment earnings are taxed regardless of whether there are capital gains or portfolio interest if directly realized by the foreign worker

– IRS View. Once Section 864(c)(6) went into effect, the Section 871(b) portion is ECI. IRS instructions to Form 1040 NR and IRS Pub. 519 (U.S. tax guide for aliens) state that the entire U.S. source portion of a pension distribution is ECI. May result in lower tax rates than the 30% flat withholding under Section 871(a)(1)

• Portion of pension distribution that is sourced to foreign services rendered is foreign source income and exempt from tax under Section 871. The records on the proper allocation are critical whether on a separate year or multi-year basis. IRS has special rules for actuarially based benefits such as a defined benefit plan. See IRS Rev. Proc. 2004-37

• Section 871(f) provides exception that eliminates all U.S. tax on payments from certain qualified plans where the alien performed no services in the U.S. (other than services described in Section 864(b)(1)) and 90% of the plan participants are U.S. citizens or residents. If the 90% test I not met the payments may still be exempt if the alien’s country of residence grants an equivalent exemption or such country is a “beneficiary developing country” under the Trade Act of 1974

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Compensation for Services Rendered Without the United States

• Services Performed Through a Corporation. The corporation’s personal services income is source based on where the services are physically performed as with the individual employee’s income

– Where a foreign corporation sends its employees to the U.S. to perform services for the corporation’s U.S. based clients, both the foreign employees and the foreign corporation have U.S. source personal services income arising from that physical performance in the U.S.

– Withholding. If non-resident alien employees of a foreign corporation perform services while physically present in the U.S., no withholding is required on the payment by the U.S. company (service recipient) to the foreign corporation. See I.R.C. § 1442(b) (2006) (no withholding required on payments to foreign corporations engaged in a U.S. trade or business); see also Treas. Reg. § 1.1441-4(a) (same). Such foreign corporation is required to file U.S. tax return and pay any required tax on its net ECI with the U.S. trade or business. Treas. Reg. § 1.6012-2(g)

• Withholding by Foreign Corporation. Required to withhold tax from the salary or wages paid to the non-resident alien employees attributable to personal services performed while in the U.S.. Flat 30% withholding not applicable. See Treas. Reg. § 1.1441-4(b)(l)(i). Instead, withholding based on general rules applicable to employees. Treas. Reg. §31.3401 (a) (6)-1(a). The nonresident alien individual is expected to file a return at the end of the year that may show a tax liability less than the withheld amount (in which case a refund would be made) or more than the withheld amount (in which case the individual would be expected to pay the additional amount)

• Application to Employees of Foreign Based Affiliates or Subsidiaries

• Level of non-compliance. Imposes obligation or at least due diligence inquiry on whether the foreign corporation service provider is withholding

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Compensation for Services Rendered Within the United States

• Tax Treaties and Foreign Worker Employed by U.S. Company For Services – Example. UK-U.S. Income Tax Treaty (2001)

Income from employment

2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the taxable year or year of assessment concerned;

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and

(c) the remuneration is not borne by a permanent establishment which the employer has in the other State

Notwithstanding the preceding provisions of this Article, remuneration described in paragraph 1 of this Article that is derived by a resident of a Contracting State in respect of an employment as a member of the regular complement of a ship or aircraft operated in international traffic shall be taxable only in that State

[Dates counted: include date of arrival and departure, weekends, vacation days]. See Rev. Rul. 56-24, 1956-1 CB 851

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Compensation for Services Rendered Within the United States (Cont’d)

• Tax Treaties and Foreign Worker Employed by U.S. Company For Services

– Canada - United States Income and Capital Tax Treaty (1980)(as amended through 2007)

1. Subject to the provisions of Articles XVIII (Pensions and Annuities) and XIX (Government Service), salaries, wages and other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State

2.Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) Such remuneration does not exceed ten thousand dollars ($10,000) in the currency of that other State; or

(b) The recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and the remuneration is not paid by, or on behalf of, a person who is a resident of that other State and is not borne by a permanent establishment in that other State

3. Notwithstanding the provisions of paragraphs 1 and 2, remuneration derived by a resident of a Contracting State in respect of employment regularly exercised in more than one State on a ship, aircraft, motor vehicle or train operated by a resident of that Contracting State shall be taxable only in that State

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Compensation for Personal Services Render Without the United States: The “Accidental PE”

• Tax Treaties: Permanent Establishment Threshold– OECD Model Treaty, Article 7. Business profits attributable to a permanent establishment (PE) may be

taxed on the source country (“non-resident”). If no PE or profits are not attributable to PE in foreign country where service provider is rendering services the source country cannot tax the employer’s business profits

– Can a foreign based, individual (non-US citizen) service provider(s) constitute a PE in the treaty country by reason of such activities?

• Traditional Standard. Is there a “fixed place of business” at the taxpayer’s disposal in the foreign country? Examples, a place of management, branch, office, factory, workshop, mine and oil and gas wells. Based on geographical based theory of commerce. Is the foreign based employee working in an office rented by the U.S. employer or in her residence?

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Compensation for Personal Services Render Without the United States: The “Accidental PE”

• Tax Treaties: Permanent Establishment Threshold– Can a foreign based, individual (non-U.S. citizen) service provider(s) constitute a PE in the treaty country

by reason of such activities? (continued)

• Impact of Electronic Commerce. OECD Model Treaty provides incentives to conduct remote operations electronically through physical equipment owned by an independent enterprise

– Foreign Website. OECD Commentary notes that a website does not, per se, constitute … a “place of business”

– Foreign based server. The server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location which may constitute a “fixed place of business”. The focus turns next on whether physical computer server is owned by an independent person and one owned (or leased) by the foreign enterprise itself. (“at its disposal” based on physical access to the computer server)

• Services-based Standard (alternative)(2008). Services rendered, i.e., 183 days or more during tax years, and revenues derived within the source country. No “fixed place of business” required. Pertains with where an enterprise is carried on by one individual, such as a consultant. Or, it could apply if 5 different employees of the enterprise each spent 50 or more days in the source country working on a single project

• Dependent Agent in Foreign Country. Under Article 5(5) of the OECD Model Treaty, a foreign enterprise has a PE in the source country if a dependent agent, acting on behalf of the enterprise, “has, and habitually exercises [in the source country] an authority to conclude contracts in the name of the enterprise”

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Foreign Compensation Agreements for Rendering Services Within the United States

• Tax Equalization Provision. The objective of a tax equalization policy is to ensure that an expatriate’s tax burden is equal to what it would have been had the employee remained in the his or her country of residence (or the U.S. if a U.S. citizen/resident is employed overseas). Generally, the incoming foreign employee’s periodic pay is offset with a hypothetical tax he or she would have owed in the country of residence as if such person remained in the country. For a foreign employee working in the U.S., U.S. taxes are either paid by the U.S. employer or reimbursed to the foreign worker, and, accordingly are not part of the foreign employee’s total tax burden. The result of this method of tax reimbursement is that the foreigner employed and rendering services in the U.S. tax position is neither better nor worse than had such individual worked in their home country

• Mechanical Rule. U.S. employer withholds the “hypothetical tax”, i.e., approximately the same amount of income and social security taxes as the employee would have paid at home. Thus, the employee is charged with a hypothetical tax, and the employer is responsible for paying the actual amount of tax at the end of the tax period. Consequently, if the actual taxes during the assignment are higher than the withheld hypothetical tax, the employer pays the difference; if taxes are lower, the employer keeps all savings. In certain instances, a U.S. employer may allow a foreign worker assigned to work in the U.S. with the benefit of any economic windfall should the reimbursement exceed their taxes in their country of residence. Gross-up considerations and withholding

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Foreign Compensation Agreements for Rendering Services Within the United States (Cont’d)

• Factors Involved in Setting a Reimbursement Method for Foreign Workers– Promote fairness in taking on a employment in the U.S.

– Compared to a “laisse faire” or “ad hoc” model, the administrative costs of making the required calculations may be desirable to the employer

– Compare with “tax protection” model which reimburse foreign employees for higher tax costs but do not try to balance or equalize the tax burden

– Consideration of treatment of reimbursement costs from a project and financial accounting basis

– Favored for short term assignments, or even assignments from one to five years

– Consideration of Excise Tax under Section for excise tax on severance benefits to an executive. See Section 280G(b)(1)(“excess parachute payments”)

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Compensation for Services for Foreign Workers Employed by U.S. Based Employers

• Social Security Tax Contributions (FICA). Sections 3101 to 3126– Two Elements. Old age, survivors and disability insurance (OASDI) and hospital insurance (HI or Medicare)

– “Wages” per Section 3121(a) paid during calendar year. Old-age, survivors and disability benefits and add-on Medicare tax

– “Employment”: unless otherwise provided, “any service” performed: (i) within the U.S. by an employee for the person employing him, “irrespective of the citizenship or residence of either”; (ii) outside of the U.S. by a citizen or resident of the U.S. as an employee for an “American employer” defined in Section 3121(h); or (iii) either within our outside the U.S. by a U.S. individual, or a non-U..S individual, that is designated as employment or is equivalent to employment under Section 233 of the Social Security Act

– “Employee”. Section 3121(b) (common law rules)

• For Foreign Workers. Wages paid to a nonresident alien, resident or not, working in a covered industry for services performed within the U.S. are subject to FICA tax. Such wages generally would be subject to FICA tax withholding even though exempt from U.S. income tax under an income tax treaty

– Services rendered both within and without the U.S. The FICA tax for the calendar year is computed by excluding the wages for services performed outside of the U.S.

– May also extend to U.S. corporation for services performed without the U.S. by employees of a foreign subsidiary

– Wages received for employment by a totalization agreement would be potentially subject to FICA tax depending on the terms

– Income Tax Treaties. Do not apply to Social Security taxes. Therefore, earned income exempt from U.S. income tax by an applicable income tax treaty is still subject to U.S. Social Security tax. There is commentary on whether such laws are enforced

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Compensation for Services for Foreign Workers Employed by U.S. Based Employers (Cont’d)

• Social Security Totalization Agreements (SSTAs)– The U.S. has entered into SSTAs with approximately 30 countries for the purpose of eliminating duplicate

coverage (taxes) and provide for "totalized" benefits for individuals who cannot qualify for full social security benefits in one country or the other

– Not Tax Treaties Per Se

– Foreign nationals working in the U.S. Certain foreign nationals that are resident of a SSTA treaty country may be exempt from U.S. social security taxes. See Section 3111(c). These agreements provide for relief from double social security tax and for "totalized" benefits coverage in cases where an employee has accumulated periods of coverage in both the U.S. and home country systems, but not enough coverage in one or both of them. Except for Canada, and in many instances Germany and France, U.S. Social Security is generally less expensive than similar taxes in most foreign countries, and consideration should therefore be given to paying into the U.S. system during the assignment period

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Compensation for Services for Foreign Workers Employed by U.S. Based Employers (Cont’d)

• Social Security Totalization Agreements (SSTAs)– Limited Duration Assignments. The SSTAs, in general, permit relief from U.S. social security coverage

generally for individuals who are on a limited duration assignment, typically up to five years, in the United States. To qualify for the coverage provisions of such an agreement, an employee must be transferred by his or her employer from one country to the other. Direct hires in the host location do not qualify. Additionally, such individuals must continue coverage in the home country and obtain a "Certificate of Coverage" from the home country's social system as evidence. The IRS provides a website with a list of such jurisdictions, which is periodically updated. See Social Security Administration, "International Programs, Status of Totalization Agreements," available at: https://www.ssa.gov/international/status.html (last visited Feb. 4, 2019); IRS, " Totalization Agreements," available at: http://www.irs.gov/Individuals/International-Taxpayers/ Totalization-Agreements (last reviewed or updated: Feb. 26, 2019)

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Compensation for Services Rendered by Foreign Workers in the United States

• Withholding For Amounts Paid for Dependent Personal Services Under Section 3402, and for FICA and FUTA Purposes

– Employer. Required to withhold on wages of employees is imposed under Section 3402 regardless of the citizenship or residency of the employee and regardless of the place of organization or place of business of the employer. The definition of "employer" does not distinguish between a U.S. and a foreign employer

– “Wages”. “All remuneration…for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash"

• Extends to remuneration paid by a foreign employer to a U.S. citizen or resident whether or not the employer is engaged in a trade or business in the U.S.

• Foreign workers receiving wages for services performed within the U.S. are “wages” for withholding purposes under Section 3402. This rule preempts withholding under Section 1441. On the other hand, whether Section 3402 is not applicable to wages paid to a nonresident alien, the Section 1441 30% withholding may still apply

• Not included in “wages”: (i) remuneration paid to a non-resident foreign worker for services performed outside the U.S. (not subject to U.S. income tax); (ii) exemption by statute or treaty for remuneration to a non-resident alien; (iii) as to U.S. citizens, where services are performed in a foreign country where withholding must occur under the law of the jurisdiction in which the services are provided. Other special rules for certain remuneration paid to Canadian and Mexican residents engaged in the transportation industry

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Compensation for Services Rendered by Foreign Workers in the United States (Cont’d)

• Withholding For Amounts Paid for Dependent Personal Services Under Section 3402, and for FICA and FUTA Purposes

– Employer’s Failure to Withhold. Liable for payment of such tax

• For withholding tax under Section 3402, the employer may be excused if the employee paid the tax except that the employer is still liable for penalties or additions to tax. See Sections 3402(d), 6651, 6656, 6662, 6672, 6674, 7202-7204

– Employer Reporting on Forms 940, 941 and Forms W-2 and W-3

• Period deposits of the withholding tax with authorized bank required

• Employer’s Liability to Remit FICA Taxes – Penalties and additions to tax for the failure to timely withhold and remit

• Employer’s Liability to Remit FUTA Taxes. Sections 3301 through 3311– Excise tax on employer equal to 6% of total “wages” paid with respect to employment

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Compensation for Services Rendered by Foreign Workers in the United States (Cont’d)

• State Income Taxes– State law determination of residency based on state law. Section 7701(b) of the Code does not apply

– California. "resident" includes (1) every individual who is in CA for other than a temporary or transitory purpose, and (2) every individual domiciled in CA who is outside the state for a temporary or transitory purpose. There is a rebuttable presumption that an individual present in the state for nine months within a tax year is a resident. Cal. Rev. & Tax. Code sections 17614-6

– Massachusetts. A "resident" or "inhabitant" is (1) any MA domiciliary, or (2) any non-domiciliary who maintains a permanent place of abode in MA who spends in the aggregate more than 183 whole or partial days of the tax year there Mass. Ann. Laws ch. 62, section 1

– New York. A “resident” is (1) a New York domiciliary, unless he maintains no permanent place of abode in New York, maintains a permanent place of abode elsewhere, and spends in the aggregate not more than 30 days of the tax year in the state, or a non-domiciliary who maintains a permanent place of abode in New York and spends in the aggregate more than 183 days of the tax year. NY CLS Tax section 605

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Foreign Workers Employed in the United States: Impact of COVID-19 Work From Home Requirements

• COVID-19 (March, 2020) – Impact of the “New Normal”. Communication tools employed management and operating personnel, much

of which is located with the U.S. has allowed many multinationals (MNEs) to manage, direct, and conduct their worldwide businesses with little or no interruption

– Impact on Supply Chains. Supply chain management. U.S. personnel perform most or all production functions short of the physical manufacturing conducted by contract manufacturers, many of are located in Asia

– Services Can Be Performed in U.S. Throughout the World. Internet platforms in selling product or performing digital services. Again, many U.S. located personnel conduct development, enhancement, maintenance, protection, marketing and operational functions. Recent Apple decision of the General Court of the European Union

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Foreign Workers Employed in the United States: Impact of COVID-19 Work From Home Requirements (Cont’d)

• COVID-19 (March, 2020) – Remote Working; the potential tension between physical and economic location of labor for income tax

purposes

• The New Normal?

• International Tax Impacts

– Change in Residence? Predominately determined on number of days spent in a specific jurisdiction

» Stranded in host country

» Stranded in country of residence, i.e. the United States

» Stranded in place other than host country or country of residence

– Transfer pricing allocation revisions. Alteration of the “values” associated with the supply chain

– Risk of permanent establishment or carrying on trade or business

– OECD “Analysis of Tax Treaties and the Impact of the COVID-19 Crisis” (April, 2020). Employees temporarily working outside of employer’s country of operation due to COVID-19 related measures not likely to trigger new income tax obligations or create a PE for employer since remote working arrangements lack required degree of permanency and an employee concluding contracts on behalf of employer in home country for finite period should not be considered a dependent agent creating new economic nexus. Temporary change in location of senior executives and board members should not change company’s tax residency (“place of management”)

– But remote working may become the “new normal” after COVID measures end

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• Action Steps for Companies – Documentation of bona fide presence of displaced employees in and outside of states, countries, pre-

COVID-19 travel schedules

– Monitoring and documenting activities conducted by displaced employees and where and whether such activities are core business activities

– Avoiding change of place of effective management because of temporary measures caused by COVID-19

– Assess transfer pricing on group operations, supply and value changes and document reasons and effects of changes

– Monitor country-by-country situations

– Monitor jurisdictional guidelines on COVID-19

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• Countries Respond– United States. See Rev. Proc. 2020-20, 2020-20 IRB 801 (2020).

• PE Impact. Services performed by individuals temporarily present in U.S. will not be used to determine if nonresident or foreign corporation has a PE

• Tax Residency. For a non-resident at end of 2019, period of up to 60 days will be excluded for substantial presence test per medical condition travel exception. Such 60 day period to start on or after 2/1/2020 and on or before 4/1/2020

– Canada. See CRA and COVID-19 (updated 9/2/2020)

• PE Impact. Non-resident entities (resident in treaty countries) will not have PE in Canada solely because its employees must work in Canada due to travel restrictions

• Tax Residency. Will not count days present in Canada toward the 183 day limit for deemed residency or factual test solely due to travel restrictions

– Also India, United Kingdom, Australia

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State Income Tax Impacts: nonresident employees taxed on “source basis” or under “convenience of employer” test

• What is the source of the employee’s income associated with his or her work at home for personal income tax purposes when office of employee is in another state? Usually where the services are required to be performed

• Does the employee’s work at home create “substantial” nexus for the employer in the employee’s state of residence for corporate income tax purposes? It can. Complete Auto Trans. v. Brady 430 U.S. 274 (1977); Legal Op. No. 20200203 (Ark. Dept. Fin.& Admin. (2/20/2020)). For sales tax purposes? See South Dakota v. Wayfair, Inc. 585 U.S. __ (2018)

• Does the employee’s work at home affect the source of the employer’s income? See Telebright Corp. v. Director, NJ Div. of Tax’n, 38 A.3d 604 (N.J. Super. Ct. App. Div. 2012)(Maryland based corp. had nexus with NJ based on single employee who develops and writes software code and “telecommutes full-time from a laptop computer”

• Allocation of payroll factor for apportioning corporate income

• Employer Withholding Obligations continue to be required for employers whose employees work remotely in other states due to the pandemic

• Massachusetts. Continues to treat nonresident ordinarily working in that state but now working remotely for same employer as still generating in state income. 830 Mass. Code Regs. section 62.5A.3: Massachusetts Source Income of Non-Residents Telecommuting Due to COVID-19 (Emergency Regulation). Opposed by New Hampshire. NH Atty. Gen. Comment 830 CMR 62.5A.3 (8/21/2020)

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Tax Compliance Issues

• Departing Aliens – Section 6851(d). “No alien shall depart from the U.S. unless he first procures from the Secretary a

certificate that he has complied with all the obligations imposed upon him by the income tax laws”. A/R/A “the sailing permit”. Treas. Reg. Sec. 1.6851-2

– Rules require that most aliens with permission to work in the United States visit the IRS before they depart from the U.S., produce evidence of their expected taxable income for the year, complete an IRS form, and in many cases pay any unpaid tax on their income from the beginning of the year up to the expected date of departure

– Rules apply to permanent residents and all nonimmigrant aliens whether classified as resident aliens or non-resident aliens. Certain exemptions allowed such as foreign government employees, students, trainees and certain other aliens temporarily in the U.S.

– Consequence of not obtaining a “sailing permit”. Regulations provide: ““[a]n alien who presents himself at the point of departure without a certificate of compliance, or evidence establishing that such a certificate is not required, will be subject at such departure point to examination by an internal revenue officer or employee and to the completion of returns and statements and payment of taxes…”. Potential for a jeopardy assessment

– Unenforced?

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Hypotheticals for Discussion

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Hypothetical: 1

• Employee is an Indian national. Employer sponsors Employee for an H-1B visa and brings the Employee to the U.S. to work

• Employee works for Employer for 10 months (during which time he is solely and continuously present in the U.S.). During his 11th month of employment, Employee resigns and returns to India. Employee does not file nor pay U.S. taxes for the year he worked in the U.S.

–What visa considerations should the Employer account for here? The Employee?

–What are the tax consequences to the Employee? To the Employer?

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Hypothetical: 2

• Employee is a German national. Employer sponsors Employee for an L-1 visa and transfers the Employee from its affiliate in Sweden to work in the U.S. Employee does not wish to contribute into the U.S. Social Security system because he already pays into the German system

–What are the visa considerations for the Employer and Employee for such a transfer?

–How does the Employer handle the request to not withhold FICA? What does the Employee have to provide?

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Hypothetical: 2 – Alternative A

• The Employee worked in Sweden for 2 years before transferring to the U.S. and paid into that system and the German system for that period

–Does this impact the visa considerations or process?

–Does this impact the tax analysis and/or documentation?

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Hypothetical: 2 – Alternative B

• The Employee is an executive and only works in the U.S. approximately 5 days per month (i.e. between 60 – 90 days spent in the U.S. during the course of the year)

–Does this change the visa considerations or process?

–Does this impact the tax analysis? Employer’s obligations? Employee obligations?

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Hypothetical: 3

• Employee is a Canadian national. Employer sponsors Employee for a TN visa to work in the U.S. on a full time basis. Employee returns to Canada 3 weekends per month and all holidays/non-working days. Employee does not want any funds withheld from his paycheck for income taxes or FICA. Employee believes he has no obligation to file U.S. taxes because he will file in Canada. How does the Employer handle?

–What are the visa considerations and process here?

• Is the Employee correct? How does the Employer handle Income tax withholding? FICA?

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Hypothetical: 3 – Alternative A

• Employee lives in Canada and commutes to the U.S. on a daily basis instead of living/working in the U.S. full time

–Does this change the visa considerations and process?

–Does this change the analysis with regard to Employee’s U.S. tax filing obligations? Employer’s Federal withholdings?

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Hypothetical: 4

• Employee is a Indian national who works in the U.S. on an L-1 visa for 5 years and continues to work for the same employer for an additional 3 years after becoming a permanent resident (both based upon the employer’s sponsorship). During this time, Employee never filed nor payed U.S. taxes

– If Employee voluntarily discloses to the IRS and files/pays taxes owed, does this affect his immigration status?

–Can the IRS bring charges against him? Does that change the immigration consequences?

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Jerald David August215.299.3813

[email protected]

Alka Bahal973.994.7800

[email protected]

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mailto:[email protected]

mailto:[email protected]

Documents

Worker Visas: Tax Advantages and Challenges