Nonresident Alien Tax Compliance ARCTIC INTERNATIONAL LLC Nonresident

Nonresident Alien Tax Compliance ARCTIC INTERNATIONAL LLC Nonresident Alien Tax Compliance UPDATE OACUBO Conference Spring 2021 Sara M. Mercer www. arcticintl. com © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance The Legal Stuff. . . The information contained in this document is copyrighted by Arctic International LLC 2021 and may not be copied or used for any purpose without the written permission of Arctic International LLC. The information contained in these slides is general in nature and cannot be relied upon to address a specific situation. Please consult your tax advisor. In preparing these materials, we are relying upon the relevant provisions of the Internal Revenue Code of 1986, as amended, the regulations thereunder, and judicial and administrative interpretations thereof. These authorities are subject to change or modification retroactively and/or prospectively and any such changes could affect the validity or correctness of our information. We will not update our materials for subsequent changes or modifications to the law and regulations or to the judicial and administrative interpretations thereof, unless you separately engage us to do so in writing after such subsequent modification or change. © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance An Overview of the Tax System Residency Status “U. S. Tax System” “Nonresident Alien Tax System” • U. S. Citizen/U. S. Entity • Lawful Permanent Resident • • Resident Alien for Tax Purposes Nonresident Alien Individual/ Entity for Tax Purposes © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance General Rule • ALL withholding agents MUST withhold federal income tax from ALL income payments made to or on behalf of a nonresident alien individual or entity (Section 1441 of Internal Revenue Code); • IF the withholding agent DOES NOT withhold the appropriate amount of tax at the time of payment, the withholding agent will be liable for the tax, plus any penalties and interest – regardless of whether the individual pays the tax on his or her tax return (Section 1461) © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Identification of NRA Population It is relatively simple to identify a U. S. citizen or Permanent Resident Alien; however, there is only one method that can be used to identify a Resident Alien for Tax Purposes or Nonresident Alien for Tax Purposes: The Substantial Presence Test © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance The Substantial Presence Test Based on the mathematical results of the substantial presence test, an individual is a: • Resident Alien for Tax Purposes if he or she has 183 days or more of U. S. presence; OR • Nonresident Alien for Tax Purposes if he or she has 182 days or less of U. S. presence. • There are several exceptions to how to the Substantial Presence Test is calculated. © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance “Exempt Individuals” • Foreign Government-Related Individuals and Diplomats (Generally “A” or “G” Visas) • Professional Athletes (Generally “P” Visas) • F, J, M or Q Students (for FIVE Calendar Years) • J or Q Non-Students (for TWO of the CURRENT and Past SIX Calendar Years) © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Determining U. S. Residency Status To Determine an Individual’s Residency Status, Four Facts about the Person are REQUIRED: • Current Immigration Status • Primary Purpose of Presence in the U. S. • Date of Arrival for Purposes of This Visit • Information About Prior Visits (including all of the facts above) © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance What Type of “Income” is Being Paid? Everything – EVERY THING – with respect to the taxation and reporting of a payment is dependent on: • Residency Status of the Payee; and • Category of Income Being Paid. © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance What Type “Income” is Being Paid? Although there are many categories or TYPES of income, an educational institution generally only pays a nonresident alien individual the following types: • Compensation • Dependent • Independent • Scholarship / Fellowship (Non-service) • Royalty (Copyright, Industrial, Motion Picture) • Prizes / Awards © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance STIPEND © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Travel Expenses The “Accountable Plan” Rules Apply to Travel Expense Reimbursements/Payments to Employees and Independent Contractors. The “Accountable Plan” Rules DO NOT Apply to Travel Expense Reimbursements/ Payments Associated with Non-Service Scholarships and Fellowships. © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance What Income is Taxable? Compensation Dependent Wages / Salary / Stipend Travel Reimbursement / Payment Independent Consulting /Honoraria /Guest Speaker Fee Travel Reimbursement / Payment Taxable / Treaty Exempt “Accountable Plan” Scholarships/Fellowships Tuition / Fees/ Book Allowance Room / Board Stipend / Per Diem/ Living Allowance Travel Reimbursement / Payment Royalties/License Fees Prizes or Awards Excluded under § 117 Taxable / Treaty Exempt Taxable / Treaty Rate Taxable © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Determining Taxable Income Remembering the GENERAL RULE under section 1441 -- All INCOME paid to a nonresident alien or to a third party on his or her behalf is TAXABLE unless otherwise excluded. There are only three ways to “exclude” income: • Foreign Source Income • Internal Revenue Code Exclusion • Income Tax Treaty Exemption © Arctic International LLC 2021. All Rights Reserved

Compensation is sourced at the location where the activity is performed. Compensation Sourcing Location of Activity Location of Payor U. S. Outside U. S. Nonresident Alien Tax Compliance Foreign Source Income U. S. Outside U. S. Source Income Foreign Source Income © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Foreign Source Income If compensation (dependent or independent) is paid to a nonresident alien for services performed OUTSIDE the U. S. , the institution should document the sourcing issues and obtain a statement to that effect. © Arctic International LLC 2021. All Rights Reserved

Scholarship/Fellowship Sourcing U. S. Location of Activity U. S. Outside U. S. Source Income Foreign Source Income Outside U. S. Scholarships/ fellowships are sourced at a combination of the location of the true payor and the location of the activity. Location of Payor Nonresident Alien Tax Compliance Foreign Source Income © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Section 117 Exclusion QUALIFIED NONQUALIFIED (Non-Taxable) (Taxable) • Tuition • Stipend • Required enrollment/ attendance fees • Board/Meals • Required books, supplies and equipment • Room/Housing • Travel • Cash / Per Diem • Non-required equipment • Etc. © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Income Tax Treaty Exemptions An income tax treaty serves to reduce or eliminate double taxation. The existence of an income tax treaty does not mean an individual will automatically qualify for exemption from taxation. The individual must: • meet the qualifications set forth in the treaty; and • complete all applicable tax treaty exemption forms. © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Tax Withholding Responsibilities All income payments made to a nonresident alien or to a third party on his or her behalf are either: EXEMPT OR • Foreign Source • Internal Revenue Code • Income Tax Treaty TAXABLE • Graduated Withholding (Employee Compensation) • 14% - (Scholarships/ Fellowships to F, J, M, & Q Immigration Status) • 30% - (Non-Employee Compensation & all Other Payments) © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Tax Withholding Requirement Current Form W- 4 • Must mark the “Single”/“Married Filing Separate” box • Write “Nonresident Alien” in Step 4(c) (not applicable to students from India) • Intended to mirror Form 1040 • No longer has “withholding allowance” concept • Not required to collect new redesigned Form W-4 for employees hired prior to January 1, 2020 • Publication 15 -T provides withholding adjustment tables for nonresident aliens © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Tax Withholding Requirement The statutory rate of tax withholding for payments made to nonresident aliens is 30%; however, there are several exceptions. © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance U. S. Tax Reporting Responsibilities Form 1042 -S Reports: • All Employee Compensation Payments That Are Exempt From Taxation Under an Income Tax Treaty and • All Income, Other Than Qualified Non-service Scholarships, Paid to a Nonresident Alien Regardless of Whether the Payment Is Taxable (Section 1441 regulations specifically exclude qualified portions of a scholarship from reporting) © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance U. S. Tax Reporting Responsibilities Form 1042 is the Tax Return Form 1042 -S Is the Reporting Statement © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Issues and Best Practices © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance 9 Major Tax Compliance Ï Understanding Basic Rules Ï Identifying Nonresident Alien Population Ï Determining the Type of Payment Ï Determining Taxable/Reportable Income Ï Determining/Deducting the Withholding Tax Ï Understanding Income Tax Treaties Ï Coordinating Payment Systems Ï Reporting Payments From All Payment Systems Ï Negative Effects on Students/Employees/Visitors © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Why Is This Important? • Are You Confident in Your Current Tax Compliance Posture? • Are You Keeping Track of Changes in the Law and in Your Programs. . . and Making Any Necessary Adjustments to Your Policies and Procedures? • When Was the Last Time You Did an Internal Review or “Mock Audit” – Just to Make Sure? • Are You Ready for an IRS Review? © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Conducting an Internal Review Policy • Written Policy Process • Written Procedures • Efficient “Paper Flow and People Flow” Process in place Control • Designated Responsible Person(s) Manage • Step-by-Step Review of Each Situation • Appropriate Tax Withholding and Reporting Educate / Inform • Internal Process Area Training • Departmental Training • Website Substantiate • Tax File with Appropriate Documentation © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance General Tax File Documentation Issues l Tax File Contents – What should (and should NOT) be in it. . . l Payee l Treaty Forms l Deposit l Tax Return (with Amendments) l Tax Statements l “Copy to File”. . . Final and Signed Version! l Certified, Return-Receipted Verifications l Correspondence and Resolutions © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Recent Developments © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance COVID-19 NRA Tax Issues • IRC Section 139 excludes qualified disaster relief payments from income (available to nonresident aliens) • Economic Stimulus Payments (not available to nonresident aliens; all recipients must have an SSN (not an ITIN)) • Nonresident aliens who erroneously filed Form 1040 and received a stimulus payment must (i) file an amended tax return, and (ii) return the payment to the IRS • More info about stimulus payments: IRS FAQ page https: //www. irs. gov/coronavirus/economic-impact-payment-information-center © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Nonresident Alien Tax Return Issues • Only one form - Form 1040 -NR (Form 1040 -NR-EZ discontinued) • Foreign source rules – significant issue with many nonresident aliens outside of the U. S. for 2020 • Challenges obtaining an SSN or ITIN for many foreign nationals • Newly announced tax due date May 17, 2021 © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance Open Discussion Questions and Answers, Closing Remarks © Arctic International LLC 2021. All Rights Reserved

Nonresident Alien Tax Compliance ARCTIC INTERNATIONAL LLC Nonresident Alien Tax Compliance UPDATE OACUBO Conference Spring 2021 Sara M. Mercer www. arcticintl. com © Arctic International LLC 2021. All Rights Reserved