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  • Jun 03, 2020

    International Taxes and the Impact of COVID-19

    Patrick J. McCormick, JDBy Patrick J. McCormick, JD, LLM


    Tax considerations resulting from COVID-19 for multinationals (either U.S.-based taxpayers with foreign activities or foreign taxpayers with U.S. obligations), in some respects, mirror those of exclusively domestic taxpayers, such as whether or not tax return filing deadlines have changed. Other effects are more distinct, including whether relocated workers create permanent establishment concerns. This blog details how COVID-19 tax relief impacts multinational taxpayers, including special tax considerations. A note of caution: tax guidance related to COVID-19 is evolving, with continuous guidance from the IRS and foreign taxing authorities.

    Filing Requirements – On April 6, 2020, the IRS issued 2020-18 (superseding Notice 2020-17) announcing that taxpayers with federal income tax payments or returns originally due April 15, 2020, would receive an automatic postponement until July 15, 2020. For April 15 taxpayers who are required to file international information returns, Notice 2020-18 relief was largely curative, with most information return deadlines (i.e., any filed with a taxpayer’s income tax return) automatically extended as well. Significant 2019 tax filing gaps remained after Notice 2020-18 in the multinational context: nonresidents with June 15 deadlines were given no relief, and some information filing requirements (specifically, Forms 3520 and 3520-A) were unaffected by the notice’s terms.

    World map made of currenciesNotice 2020-18 was augmented significantly by Notice 2020-23 (released April 9, 2020). Per Notice 2020-23, any taxpayer (domestic or foreign) with a tax payment or tax filing obligation due between April 1, 2020, and July 15, 2020, are automatically postponed until July 15, 2020. Relief granted under Notice 2020-23 explicitly includes Form 3520. Taxpayers with installment payments due under Section 965(h) also receive an extension. Given their inclusion within the designated relief timeframe, June 15 filers are provided an extension (whether filing on June 15 based on residence outside the United States or by virtue of nonresident alien classification).

    Non-2019 Compliance Effects – Most compliance relief for multinationals comes from application of relief available for all taxpayers. As an example, nonresident individuals required to file U.S. tax returns generally are required to file by June 15. However, nonresidents with income subject to U.S. wage withholding (wages for personal services performed in the United States) must file by April 15. (See 26 C.F.R. Section 1.1441-4(b)(1); Rev. Rul. 92-106)

    Nonresidents are subject to the same rules for tax refunds as residents – claims for a refund must be filed by the later of three years from filing of the return or two years from tax payment. (26 U.S.C. Section 6511(a).) While nonresidents are not the only taxpayers who file amended returns to claim refunds, they nonetheless are more likely to amend their returns given the complexity of U.S. tax rules applicable to them and the likelihood that their returns will initially be completed suboptimally due to lack of familiarity with American tax practices.

    Notice 2020-23 provides relief to taxpayers whose Section 6511 filing deadlines fall within the April 1-July 15, 2020, covered period (primarily impacting taxpayers’ 2016 tax filings). Section III.C of Notice 2020-23 provides an automatic extension of time until July 15, 2020, for “specified time-sensitive actions” (amendments of tax returns, filing petitions with Tax Court, and associated taxpayer actions).

    Importantly, IRS notices have not to date addressed how individuals forced to stay within the United States involuntarily (i.e., through travel restrictions) will be treated for tax residency purposes. Statutorily, an individual may be classified as a U.S. resident for income tax purposes if she spends at least 31 days in the current year in the United States and the sum of days spent in the United States over the last three years exceeds 183. (See 26 U.S.C. Section 7701(b)(3)) Unanticipated extended stays in the United States increase the likelihood of the substantial presence test being met. Exceptions can be used to combat tax residency classification, which may ultimately be the most feasible option to avoid residency given the current COVID-19 crisis.

    Permanent Establishment Concerns – A much discussed consideration in the multinational context is the risk that displaced workers will create tax nexus in a new jurisdiction. As brief background, nonresident business entities are subject to U.S. tax on fixed or determinable income sourced to the United States (FDAP income) and income effectively connected to the nonresident’s “United States trade or business.” (See 26 U.S.C. Section 871; 26 U.S.C. Section 881) The latter is a more expansive category – incorporating both FDAP income and income items falling outside the FDAP category (capital gains associated with the trade or business, inventory items, and certain foreign-sourced income).

    U.S. trade or business assessment focuses on whether a nonresident is engaged in U. S. activities that are regular, continuous, and substantial. (See U.S. v. Balanovski, 236 F.2d 298 (2d Cir. 1956); U.S. v. Northumberland Insurance Company, 521 F.Supp. 70 (DNJ 1981)) Where a nonresident business is based in a country with which the United States maintains a tax treaty, evaluation shifts (typically) to whether business profits are attributable to a U.S. permanent establishment. (See United States Model Income Tax Convention, Arts. 5 and 7)

    Permanent establishments normally must have distinct physical aspects. Offices are explicitly included within the permanent establishment concept. (See United States Model Income Tax Convention, Art. 5; OECD Model Treaty Commentary) Permanent establishments can be mere space at the disposal of a nonresident business; however, some geographic location or place is required. Mere availability of physical space in a jurisdiction is normally insufficient for a permanent establishment; however, where physical space is used (directly or indirectly) to generate significant income for a business enterprise, risk of a permanent establishment results from that physical space.

    Risk of permanent establishment/trade or business creation from relocated employees centers upon use of new office space within the United States. Whether office space is sufficient to constitute a permanent establishment/trade or business is fact-specific, but where this level of connection exists, U.S. tax scope expands significantly. An office will not automatically create overarching tax; a U.S. office of a nonresident business enterprise will not create a permanent establishment where only auxiliary or preparatory activities occur in the United States. Elevation of standards in this context between a “trade or business” and “permanent establishment” are noteworthy, given the permanence requirement associated with the latter.


    Patrick J. McCormick, JD, LLM, is a partner with Culhane Meadows PLLC. He can be reached at pmccormick@cm.law.


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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.