Relief for Foreign Branch Reporting During COVID-19

| 5/14/2020
Relief for Foreign Branch Reporting During COVID-19

This is the fifth in a series of Tax News Highlights articles covering international taxes and what companies need to consider during and after the current global pandemic.

The coronavirus (COVID-19) pandemic has caused significant travel disruptions, in many cases delaying individuals from being able to return to the U.S. from overseas work assignments. The most recent article in this series addressed relief related to individuals on international assignments affected by COVID-19-related travel restrictions. This article focuses on the potentially adverse U.S. tax reporting consequences for U.S. companies when employees unable to return to the U.S. due to COVID-19 travel restrictions are required to perform business activities that otherwise might not have created separate foreign branch reporting obligations under the U.S. international tax reporting rules.

On May 7, the IRS released Revenue Procedure 2020-30 to address temporary activity conducted in foreign countries by individuals due to travel restrictions and interruptions caused by COVID-19. The revenue procedure is intended to provide relief and address such disruptions for purposes of the dual consolidated loss rules under Section 1503(d) and Form 8858, “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs),” filing obligations.

The guidance specifically provides that certain temporary activities do not create a foreign branch separate unit (as defined by Treasury Regulation Section 1.1503(d)-1(b)(4)) for purposes of the dual consolidated loss rules. The guidance also provides that these temporary activities do not create a Form 8858 filing obligation because they do not create a foreign branch (as defined in Treasury Regulation Section 1.367(a)-6T(g)(1)) or a qualified business unit (as defined in Treasury Regulation Section 1.989(a)-1(b)(2)(ii)). Temporary activities under the guidance also do not create an obligation to file a Form 8858 for employees’ activities related to a controlled foreign corporation or a controlled foreign partnership.

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What is a temporary activity?

Revenue Procedure 2020-30 provides that temporary activities are those conducted by one or more individuals in a foreign country during any single consecutive period of up to 60 calendar days, selected by the taxpayer, within calendar year 2020. Furthermore, the relief requires that the individual or individuals temporarily present in the foreign country and the activities conducted during the period would not otherwise have been conducted in the foreign country but for COVID-19-related travel disruptions.

In other words, under Revenue Procedure 2020-30, any activities conducted by an individual in a foreign country on behalf of a U.S. corporation during a consecutive 60-day period (or less) in 2020 due to COVID-19-related travel restrictions will not create a foreign branch for purposes of the dual consolidated loss rules or result in a Form 8858 filing obligation.

What action should taxpayers take?

The revenue procedure requires U.S. taxpayers to have contemporaneous documentation establishing the temporary nature of such activities and evidence they occurred during the prescribed period. Accordingly, U.S. corporate taxpayers with employees temporarily located in a foreign country due to COVID-19-related travel restrictions should take steps to document whether their employees’ time in such jurisdictions and the activities conducted are consistent with criteria described in the revenue procedure.

Want more insights on addressing coronavirus-related challenges?
Go to the Crowe COVID-19 resource center for more analysis and updates.

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John Kelleher - Large
John Kelleher
Partner, Tax