For US citizens and residents and non-resident aliens, respectively, certain tax exclusions and the extent of US taxation depends on their physical whereabouts.

Changed circumstances, such as a return to the US, for citizens on assignment, or business visitors forced to remain in the United States, may limit the ability to qualify for certain tax benefits under US law or create an unexpected US tax residency status for an individual stranded in the US.

The IRS has recently provided guidance to address both these points.

US taxpayers who live and work abroad are entitled to exclude an amount of foreign earned income under one of two tests. A change in circumstances may result in disqualification. The IRS has accepted that, where an individual would otherwise reasonably expect to meet the requirements of the tests that he/she would have done so.

Under the Bona Fide Residence Test, an individual will be considered to have to have met the requirements for the period beginning on the date the individual began their period of absence from the relevant foreign country if the individual have established residency in the foreign country on or before certain dates (stated below). The period of excluded absence cannot extend beyond 15 July 2020. This date is subject to further extension.

• The People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of 1 December 2019; and
• Globally, as of 1 February 2020.

A similar exception applies to an individual seeking to qualify under the Physical Presence Test. If the individual was physically present in the foreign country on or before the dates specified above, and could reasonably have been expected to have been present in the foreign country or countries for 330 days in a 12-month period, but for the COVID-19 pandemic, they may use any 12-month period to meet the test. As with the Bona Fide Residence Test, the individual would only be eligible to claim the benefits of the exclusion related to the days of qualifying physical presence in the foreign country.

US Tax Residency

Under current US tax law, non-US taxpayers are classified as US tax residents if they meet the substantial presence test. The test is based on set ratios of US days over a 3-year period. US days, on which an individual intended to leave the US but was unable to do so because of a medical condition that arose while in the US are disregarded.
The IRS provides that, up to 60 consecutive days of presence may be excluded from the test for individuals who intended to leave the United States during the 60 days but were unable to do so due to COVID-19 travel disruptions. The consecutive 60-day period must begin on or after 1 February 2020 and on or before 1 April 2020. Other conditions apply that could limit this exception.

Deloitte’s View:

These Revenue Procedures provide much needed guidance for international employee. The IRS has provided clarifying guidance. Other income sourcing rules may still affect the overall tax liability. There is the question of consistency of treatment in the country of tax residence.
In addition, an extended work stay, in the US, could give rise to state income tax. Each state has its own tax legislation and some cases may result in a state tax liability.
This would result in added tax for taxpayers resident in countries, such as Switzerland, that do not allow a credit for state income taxes

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Key contacts

Geoffrey Leys - Director, Global Employer Services

Geoffrey is a Director in our Global Employer Services (GES) Practice and leads the Individual US Tax Services group in Switzerland. He has advised international organisations and their employees on the employment tax, personal tax and HR implications of global relocations and workforce mobility for almost 20 years, with particular focus on the complexities of taxation of US citizens working abroad and a strong understanding of the interactions with Swiss individual taxation. Geoff holds a Bachelor of Science degree in Business Finance and Economics from the University of East Anglia and holds qualifications in both UK and US taxation.

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Alexander Saluveer - Senior Manager, Global Employer Services

In a career spanning more than 20 years, Alex has worked in the field of international expatriate tax, reward consulting and global mobility in London, New York, Paris, Sao Paulo and Geneva. He has widespread experience in US individual taxation, having worked with US executives and high net worth individuals throughout his career. Alex has led global as well as country specific engagement teams within a varied client base providing advice in respect of individual tax matters as well as employer responsibilities. He has worked extensively in assisting organisations manage international incentive and deferred compensation plans. Alex holds a MA Degree from the University of Cambridge and is UK and US tax qualified.

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Andrew Morgan - Senior Manager, Global Employer Services

Andrew has over 15 years experience in working with US expatriates and high net worth individuals in Switzerland and the UK. He co-ordinates the US tax compliance for the local population of a global multi national organization headquartered in Switzerland. Andrew has significant experience in liaising with payroll, HR and Global Mobility contacts to ensure that the delivery of service considers all areas relevant to the international taxation faced.

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