Impact of COVID-19 on U.S.-India Tax Residency

Due to the disruption and lockdown, major economies have announced bailout packages and regulatory relaxations to support businesses with global operations.

In addition, the COVID-19 pandemic has disrupted travel between the United States (U.S.) and India which further complicates both immigration and tax residency issues for the individuals.

1.  As the coronavirus pandemic worsened in the U.S., the U.S. government had no choice but to mandate travel-related restrictions and close borders, which stranded many foreign travelers.

2.  The impact of travel restrictions can become financially and administratively burdensome for foreign travelers since they may be deemed resident aliens under the substantial presence test¹. To address the issue, the Internal Revenue Service (IRS) issued guidance on April 21, 2020, under Rev Proc. 2020-20 providing relief to eligible individuals² who were unable to leave the U.S. due to the lockdown. The regulation defines the COVID-19 Emergency Period:

• As a single period of up to 60 consecutive days.
• Starting on or after February 1, 2020 and on or before April 1, 2020.
• During which the individual is physically present in the U.S. each day.
• If an individual has applied or taken steps to become a lawful permanent resident of the U.S. on any day during the COVID-19 Emergency Period, then days spent during the COVID-19 Emergency Period will not be excluded in determining the residency status as the individual did not intend to leave the U.S.

3.  The COVID-19 crisis equally impacted India. To avoid genuine hardship for non-resident individuals who traveled to India during FY 2019-20 and intended to leave India before the end of the financial year to maintain their status as non-resident, the Central Board of Direct Taxes (“CBDT”) of India has decided that to determine the residential status of such individual under Section 6 of the Income-tax Act, 1961:

• Where he has been unable to leave India on or before March 31, 2020, his period of stay in India from March 22, 2020, to March 31, 2020, shall not be considered; or
• Where he was quarantined in India on account of COVID -19 on or after March 1, 2020, and has departed on an evacuation flight on or before March 31, 2020, or was unable to leave India on or before March 31, 2020, his period of stay from the beginning of his quarantine to his date of departure or March 31, 2020, as the case may be, shall not be considered; or
• Where he has departed on an evacuation flight on or before March 31, 2020, his period of stay in India from March 22, 2020, to his date of departure shall not be considered.

4.  The Organization for Economic Co-operation and Development (“OECD”) also issued guidance, highlighting global companies’ concerns regarding the cross-border workers stranded due to the lockdown. The guidance answers the cross-border workers question as well as other cross-border related issues such as permanent establishment (“PE”), tax residency that will trigger, tax liability and tax filing requirements due to the pandemic. The OECD guidance states:

a. Concern related to the creation of PEs – The OECD guidance proposes that the COVID-19 crisis will not create any changes to PE determination. The temporary change of the location where employees work from (not their regular place of work) due to COVID-19, such as working from home, should not create new PEs for the employer. The individuals are who are working remotely from their homes are doing so due to government directives and not for an enterprise’s requirements. Therefore, teleworking from home would not create PE for the business/employer.

b. Concern related to the residence status of a company – The COVID-19 crisis raised concerns about a potential change in the “place of effective management” as a result of the inability to travel of chief executive officers or senior executives. The concern is that such a consequence would change the company’s residence under the relevant domestic laws and regard the company as a resident of that country under the tax treaty purposes. The OECD’s position is that all relevant facts and circumstances should be examined to determine the usual and ordinary place of effective management, and not only those affected temporarily due to COVID-19.

c. Concern related to cross-border workers – The governments in countries have proposed stimulus package to the businesses in their country to keep workers on payroll during the COVID-19 crisis. The concern is regarding which country the income should be attributable to when received by the employee. The OECD refers to Article 15 (Income from Employment) under the tax treaty rules and explains that the income should be attributable to the place where the employment took place.

d. Concern related to a change to the residence status of individuals – The individuals are concerned that unforeseen COVID-19 situation might affect their tax residency status. The OECD states that it is unlikely that the pandemic will affect the treaty residence position of the individuals. They provided two possible situations where an individual’s domestic residence status might change due to COVID-19 crisis:

1) A person is temporarily stranded in the host country while on holidays or on work for a few weeks due to the coronavirus where he/she acquires domestic law residence there.

2) An individual was working in a country where he/she has attained residence status but temporarily returns to his/her “pervious home country” due to the COVID-19 situation. They may either never have lost their resident status or regain their return to the previous home country.

In both situations above, the OECD observes if a tax treaty is available, the treaty tie-breaker rules should solve the issue and keep the person resident of the country he/she was before the COVID-19 crisis. The OECD is working with countries to mitigate the unplanned tax implications and potential new burdens arising due to the effects of the COVID-19 crisis.

5.  Businesses from both countries should follow the strict measures taken by their respective governments to protect their citizens, economies and societies. As the lockdown is in place in both countries, businesses must put the safety of its employees and customers first. Businesses in both countries face an unprecedented situation where their employees are stranded and therefore raise many tax issues. These issues regard the right to tax between both countries, which the international tax treaty rules govern.

As discussed above, both U.S. and Indian tax agencies provided relief to foreign individuals/cross-border workers who are stranded in their country due to travel-related restrictions enforced by their respective governments. They have also provided stimulus packages to help businesses keep the employees on payroll during this unforeseen situation. However, raising tax residency issues between the countries required a closer look to prevent unnecessary filing requirements and tax obligations for businesses. At the request of the concerned countries, the OECD issued guidance for the application of tax residency issues, based on the careful analysis of the international tax treaty rules on the above-mentioned issues.

Authors: Rajesh Tripathi | rpatel@withum.com and Hiten Patel | hpatel@withum.com

¹An individual who is not a U.S. Citizen or a lawful permanent resident (a Green-Card holder) can be considered a U.S. resident for federal income tax purposes if that individual meets the Substantial Presence Test. To meet this test, an individual must be physically present in the U.S. on at least:

• 31 days during the current year, and
• 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year

²Under section 3.04 of the Rev. Proc. 2020-20 – An Eligible Individual is one who does not anticipate in meeting the “substantial presence test” under section 7701(b)(3) of the Internal Revenue Code to become residents of the United States for Federal Income Tax purposes during tax year 2020 and may impact an individual’s qualifications for certain treaty benefits.