Quarterly tax developments - EY
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In this issue:
Tax developments ........................ 2
Other considerations .................... 7
Things we have our eyes on ........ 12
Quarterly tax
developments
Things to know about this quarter’s tax
developments and related US GAAP
accounting implications
June 2020
Welcome to our June 2020
Quarterly tax developments
publication.
Tax developments
Here we describe certain tax
developments previously
Legislation enacted in the second quarter
summarized in Tax Alerts or
other EY publications or Companies are required to account for the effects of changes in tax laws in the period the legislation is
identified by EY tax professionals enacted. These changes are included in a company’s estimate of its annual effective tax rate in the first
or EY foreign member firms. interim period that includes the effective date of the rate change, but not earlier than the period that
These developments may affect includes the enactment date.1 If an interim change is significant, temporary differences may need to be
your tax provision or estimated estimated as of the enactment date.
annual effective tax rate.
Federal, state and territories
We compile this information
because we recognize that, for Kentucky — On 15 April 2020, Kentucky enacted a temporary tax credit for eligible taxpayers producing
many companies, the most renewable chemicals. The credit is available for tax years beginning on or after 1 January 2021, and
challenging aspect of accounting sunsets on 31 December 2024. Other changes include:
for income taxes is identifying
changes in tax law and other • Limiting the state deduction for expensing under Internal Revenue Code (IRC) Section 179 for
events when they occur so the property placed in service on or after 1 January 2020 to the maximum IRC 179 deduction in effect on
accounting can be reflected in 31 December 2003, but without the investment limits
the appropriate period.
However, this publication is not
• Allowing lessors to exclude tax payments received from lessees under IRC Section 110 from the
lessor’s income and requiring the lessees to include the payments in their income
a comprehensive list of all
changes in tax law and other
Generally, the changes are retroactively effective to 1 January 2019. See the State and Local Tax
events that may affect income
Weekly for 5 June 2020.
tax accounting.
This edition covers certain Maryland — On 8 May 2020, Maryland enacted legislation broadening the definition of a ”worldwide
enacted and effective tax headquartered company” to permit a franchisor to qualify if it employed, from 1 July 2017 through 30
legislation, as well as regulatory June 2020, at least 400 full-time employees at the parent corporation’s principal executive office
developments, legislative located in Maryland. As a worldwide headquartered company, an eligible franchisor may elect a three-
proposals and other items factor apportionment formula instead of using a more heavily weighted sales factor apportionment
identified through 17 June formula. The change is effective 1 July 2020. See the State and Local Tax Weekly for 15 May 2020.
2020, except as noted.
New York — On 3 April 2020, New York enacted legislation decoupling from the Coronavirus Aid, Relief,
We list EY publications that and Economic Security Act (P.L. 116-136) (CARES Act) provision increasing the limit on IRC Section
you can access through our 163(j) interest expense deductions to 50% of adjusted taxable income from 30% for the 2019 and 2020
Tax News Update website, if
tax years. The change is effective upon enactment. See Tax Alert 2020-1092, dated 23 April 2020.
you are registered. Anyone
interested in registering should Puerto Rico — On 14 June 2020, Puerto Rico enacted legislation allowing eligible companies to carry back
contact Joan Osborne at tax year 2020 losses generated as a result of COVID-19 to tax years 2018 and 2019. The legislation also:
joan.osborne@ey.com.
See our previous editions for
• Eliminates the $500 minimum payment of alternative minimum tax (AMT) for tax year 2019
additional tax developments.
• Exempts certain aid, subsidies and incentives received through federal programs (i.e., the CARES Act)
and local incentives from Puerto Rican income tax
• Allows companies to claim deductions for expenses paid with federal and local incentives
The changes are generally effective upon enactment but may apply for a limited period. See Tax Alert
2020-1601, dated 17 June 2020.
1
Companies that have early adopted Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes, should reflect the effect of an enacted change in tax laws or rates in the annual effective
tax rate computation in the first interim period that includes the enactment date of the new legislation. This
amendment aligns the timing of recognition of the effects from enacted tax law changes on the effective tax rate with
the effects on deferred tax assets and liabilities by requiring both effects to be recognized in the interim period that
includes the enactment date.
2 | Quarterly tax developments June 2020
Wisconsin — On 15 April 2020, Wisconsin enacted legislation conforming to select provisions of the
CARES Act, including:
• Allowing companies to claim a 15-year recovery period for qualified improvement property (QIP)
• Exempting loans forgiven under the Paycheck Protection Program (PPP) from Wisconsin income tax
• Suspending limitations on certain corporate charitable contributions made in calendar year 2020 and
permitting disallowed contributions to be carried forward to future years
The changes are effective 16 April 2020. See Tax Alert 2020-1038, dated 20 April 2020.
International
Algeria — On 4 June 2020, Algeria enacted legislation repealing the 15% withholding tax on
undistributed profits and the 15% withholding tax on dividends paid to a related Algerian corporation.
Other changes include:
• Reducing the amount of income tax paid by companies operating in the Southern region of the
country by 50% for five years
• Increasing the withholding tax rate on revenue generated by foreign companies involved in service
contracts to 30% from 24%
The changes are effective upon enactment. See Tax Alert 2020-1566, dated 15 June 2020.
Australia* — On 25 May 2020, Australia enacted legislation broadening the definition of “significant
global entity” (SGE) to include members of large groups headed by private companies, trusts,
partnerships and investment funds. Entities that are classified as SGEs are subject to Australia’s diverted
profits tax and its multinational anti-avoidance law, among other things. The legislation is retroactively
effective to tax years beginning on or after 1 July 2019 (except for certain penalty provisions).
China* — On 7 April 2020, China enacted legislation extending, to 31 December 2023 from 31 December
2019, the expiration date of the 10% deduction that financial institutions may claim for interest income
from loans made to small farmers. The legislation also extends to 31 December 2023 the 10% income
reduction that insurance companies may claim for premiums paid by certain farmers and breeders.
Colombia — On 3 June 2020, Colombia enacted a decree permitting certain companies that enter into a
bankruptcy reorganization (similar to a Chapter 11 process) to treat reductions or discounts obtained
during the process in accounts payable, including penalties and interest, as capital gains and offset them
with ordinary accumulated net operating losses (NOLs) or current-year capital losses. A 10% (rather than
32%) rate will apply to these capital gains. The changes apply for tax years 2020 and 2021. See Tax
Alert 2020-1538, dated 11 June 2020.
On 4 June 2020, Colombia enacted a decree temporarily reducing withholding tax on domestic fees and
commissions for certain cultural and entertainment activities to 4% (usually, this withholding tax may be
up to 11%). The 4% withholding tax will apply from 1 July 2020 through 30 June 2021. No withholding
tax will apply from 4 June 2020 through 30 June 2021 on economic stimulus/allowances granted by the
Ministry of Culture. See Tax Alert 2020-1538, dated 11 June 2020.
Hong Kong* — On 19 June 2020, Hong Kong enacted legislation exempting certain profits of qualifying
ship lessors and qualifying ship leasing managers from tax. It also enacted an 8.25% concessionary tax
rate on certain profits derived by qualifying ship leasing managers. The changes apply retroactively to
profits derived on or after 1 April 2020.
Indonesia* — On 16 May 2020, Indonesia enacted legislation reducing its corporate income tax rate to
22% from 25% for tax years 2020 and 2021 and to 20% from 22% for tax year 2022 onward. For certain
public companies listed on the Indonesian stock exchange, a 19% rate applies for tax years 2020 and
2021 and a 17% rate applies for tax years 2022 and beyond. The changes are retroactively effective to
31 March 2020.
* A Tax Alert has not been published on this development.
3 | Quarterly tax developments June 2020
Italy * — On 19 May 2020, Italy enacted a tax credit for eligible businesses equal to 60% of commercial
rent paid in March, April and May 2020 (30% in certain cases). Eligible businesses may claim the credit
on either their 2019 or 2020 return or transfer it to their lessor in exchange for an equivalent discount
on rent. Businesses claiming this credit may not claim the rent-based credit for nonessential businesses.
Similarly, businesses carrying out “essential activities,” such as pharmacies and grocery stores, may not
claim the credit. The changes are effective 6 June 2020.
Japan — On 30 April 2020, Japan enacted legislation allowing more companies to carry back NOLs.
Under the new law, companies with common capital of up to JPY1 billion (US$10 million) may carry
NOLs incurred in fiscal years ending on 1 February 2020 through 31 January 2022, back one year if they
are not wholly owned, directly or indirectly, by companies whose common capital exceeds JPY1 billion.
Other changes include:
• Allowing all companies to carry COVID-19-related losses back two years and clarifying what expenses
are included in a COVID-19-related loss
• Allowing companies to claim 100% depreciation or a 7% to 10% tax credit (not to exceed 20% of
corporate income tax liability) for certain telework-related investments
See Tax Alert 2020-1213, dated May 5, 2020.
Kenya — On 25 April 2020, Kenya enacted legislation reducing its corporate income tax rate for resident
companies to 25% from 30% for the 2020 tax year. A 37.5% corporate rate still applies to permanent
establishments (PEs) and branch companies. Other changes include:
• Repealing reduced corporate income tax rates for companies listed on the Nairobi Securities
Exchange and companies operating a plastics recycling plant
• Imposing a 20% withholding tax on payments made to nonresidents for sales, promotion and
advertising services, as well as certain transportation services
• Imposing a 5% withholding tax on payments made to nonresidents for reinsurance premiums
• Increasing the withholding tax rate for dividends paid to nonresidents to 15% from 10%
• Repealed various income tax exemptions
• Modifying depreciation rates so certain assets will be capitalized over a longer period
The changes are effective upon enactment. See Tax Alert 2020-1138, dated 28 April 2020.
Mauritius — On 16 May 2020, Mauritius enacted legislation allowing companies to deduct contributions
made to the COVID-19 Solidarity Fund during the fiscal years ending 30 June 2020 and 2021. The changes
are retroactively effective as of 23 March 2020. See Tax Alert 2020-1358, dated 21 May 2020.
New Zealand — On 30 April 2020, New Zealand enacted legislation allowing certain companies with a tax
loss during the 2019-2020 or 2020-2021 tax year to carry back the loss to the immediately preceding
year to claim a refund. The legislation also permits businesses to use estimated tax losses for the current
year but requires them to repay the refund, plus interest, if the estimated losses exceed the amount of
losses actually realized. See Tax Alert 2020-1294, dated 14 May 2020.
Norway — On 19 June 2020, Norway enacted temporary changes to its petroleum tax regime. The
changes include:
• Limiting interest expense deductions for oil and gas companies for purposes of the 56% special tax
• Permitting oil and gas companies to temporarily depreciate 100% of 2020 and 2021 investments
against the special tax basis
* A Tax Alert has not been published on this development.
4 | Quarterly tax developments June 2020• Increasing the additional depreciation rate (i.e., uplift) that oil and gas companies apply when
calculating special taxes to 24% in the year of investment from 20.8% (5.2% per year over four years)
• Allowing oil and gas companies to receive a cash refund for losses incurred in 2020 and 2021
The changes are effective as of the 2020 tax year. See Tax Alerts 2020-1291, dated 14 May 2020, and
2020-1544, dated 11 June 2020.
Peru — On 8 May 2020, Peru enacted a decree extending the carryforward period for 2020 NOLs to five
years from four years for companies that opt to offset 100% of their profits. The change is effective
9 May 2020. See Tax Alert 2020-1257, dated 8 May 2020.
On 10 May 2020, Peru enacted a decree temporarily increasing various depreciation rates. The increased rates
will apply if certain conditions are met. The decree is effective 1 January 2021. See Tax Alert 2020-1287,
dated 14 May 2020.
Turkey — On 17 April 2020, Turkey enacted legislation temporarily allowing companies to perform research
and development (R&D) outside of a Turkish R&D center without losing related income tax benefits,
provided they receive permission from the Ministry of Industry and Technology. The change is retroactively
effective as of 10 March 2020. See Tax Alert 2020-1032, dated 17 April 2020.
Legislation effective in the second quarter
International
India — Effective 1 April 2020, a 20% withholding tax (plus applicable surcharges) on dividends paid to
foreign shareholders replaces the 20.56% dividend distribution tax paid by Indian companies. A lower
treaty rate may apply if certain conditions are met. Other changes include:
• Broadening the definition of royalties under Indian tax law to include income from the sale, distribution
or exhibition of cinematographic films
• Relaxing the requirements that certain investment funds must meet to qualify for an exemption from
Indian PE rules
• Exempting from taxation the profits of certain startup companies for any three consecutive years
out of 10 years from incorporation, provided the company’s annual revenue does not exceed
US$14.3 million (previously US$3.57 million)
• Reducing the withholding tax rate on certain technical service fees to 2% from 10%
• Allowing nonresidents with income from a business connection or a PE in India to qualify for a safe
harbor when determining how much of that income is taxable in India
The changes were enacted 27 March 2020. See Tax Alerts 2020-0835, dated 2 April 2020, and 2020-0908,
dated 8 April 2020.
Japan — Effective for tax years beginning 1 April 2020, companies may deduct 25% of investments made
in a venture company from 1 April 2020 to 31 March 2022, provided certain conditions are met. Other
changes include:
• Requiring a parent company to reduce its basis in a subsidiary’s shares if the subsidiary pays the
parent a dividend exceeding 10% of the parent’s tax basis in subsidiary’s shares and the parent claims
a dividends-received deduction for the dividend income (exceptions may apply)
• Tightening the requirements large companies must satisfy to qualify for certain tax incentives
• Disallowing deductions claimed by certain large companies for meal and entertainment expenses
The changes were enacted 27 March 2020. See Tax Alert 2020-0775, dated 30 March 2020.
United Kingdom — Effective 1 April 2020, the corporate income tax rate decreases to 17% from 19%.
There is pending legislation to revert the rate back to 19% retroactively effective to 1 April 2020. As of
30 June 2020, however, it has not received Royal Assent and, therefore, is not enacted for US GAAP
purposes. See the Quarterly tax developments publication, dated 28 September 2016.
5 | Quarterly tax developments June 2020Treaty changes
Tax treaties are agreements between countries that typically address withholding tax rates or
exemptions on dividends, interest and royalties paid in multiple jurisdictions. Exceptions may apply
based on tax treaty (for instance, reduced rates may apply to certain categories of investors, capital
gains from immovable property or property-rich companies may be taxable). All of the following tax
treaty changes were effective in the second calendar quarter, except where indicated.
Countries involved Summary of changes
Cambodia Hong Kong Provides general withholding tax rates of 10% on dividends,
interest, royalties and technical services fees; exempts capital
gains from tax. (Effective 1 January 2020 in Cambodia)
Colombia United Kingdom Provides general withholding tax rates of 15% on dividends
and 10% on interest and royalties; exempts capital gains from
tax. (Effective 1 January 2020 for withholding tax on
dividends, interest and royalties; capital gains provisions
apply only to the UK)
Estonia Hong Kong Provides general withholding tax rates of 10% on dividends
and interest and 5% on royalties; exempts capital gains from
tax. (Effective 1 January 2020 in Estonia)
Gibraltar United Kingdom Provides general withholding tax rates of 0% on dividends,
interest and royalties; exempts capital gains from tax
Israel United Kingdom Provides general withholding tax rates of 15% on dividends,
10% on interest and 0% on royalties; exempts capital gains
from tax. (Effective 1 January 2020 for withholding tax on
dividends, interest and royalties; capital gains provisions
apply only to the UK)
Ukraine United Kingdom Provides general withholding tax rates of 15% on dividends
and 5% on interest and royalties; exempts capital gains from
tax. (Effective 1 January 2020 for withholding tax on
dividends, interest and royalties; capital gains provisions
apply only to the UK)
6 | Quarterly tax developments June 2020Other considerations
Court decisions, regulations Federal, state and territories
issued by tax authorities and Federal — On 22 June 2020, the United States Supreme Court announced that it was denying the
other events may constitute petition for certiorari for Altera Corporation & Subsidiaries v. Commissioner, 926 F.3d.1061 (2019).
new information that could See Tax Alert 2020-1626, dated 22 June 2020.
trigger a change in judgment in
recognition, derecognition or In final regulations, the Government outlined how to apply the IRC Section 385 recharacterization rules
measurement of a tax position. to qualified short-term debt instruments, transactions involving controlled partnerships and transactions
These events also may affect involving consolidated groups. See Tax Alert 2020-1307, dated 15 May 2020.
your current or deferred
tax accounting. In final regulations, the Government implemented the hybrid mismatch rules under IRC Sections 245A(e) and
267A and modified the dual consolidated loss rules under IRC Section 1503(d). See Tax Alert 2020-0954,
dated 13 April 2020.
In a revenue procedure, the Government temporarily reduced the minimum amount of cash in cash-stock
distributions that public real estate investment trusts (REITS) and regulated investment companies (RICs)
must distribute to their shareholders. For cash-stock distributions declared from 1 April 2020 through
31 December 2020, REITs and RICs may offer shareholders at least 10% of the distribution in cash, rather
than 20%, without jeopardizing their REIT or RIC status. See Tax Alert 2020-1235, dated 7 May 2020.
In a separate revenue procedure, the Government allowed certain real estate and farming businesses to
withdraw, or make late, elections under IRC Section 163(j), based on provisions in the CARES Act, to the
limitation on business interest expenses. See Tax Alert 2020-0979, dated 14 April 2020.
In another revenue procedure, the Government established the timing and methods for making certain
elections for NOL carrybacks under IRC Section 172, as allowed by the CARES Act. See Tax Alert 2020-9019,
dated 10 April 2020.
In another revenue procedure, the Government permitted real estate mortgage investment conduits and
investment trusts to hold residential mortgage loans that were modified due to the COVID-19 emergency
without jeopardizing their tax status. See Tax Alert 2020-1007, dated 16 April 2020.
In a notice, the Government effectively extended by one year the deadline by which certain renewable
energy facilities must be placed in service in order to claim the IRC Section 45 production credit. See
Tax Alert 2020-1446, dated 2 June 2020.
In substantive corrections, the Government clarified aspects of the final qualified opportunity zone (OZ)
regulations, including the following:
• Applicability dates
• Effect of the alternative valuation method on the value of stock and partnership interests in a qualified
OZ business
• Sixty-two-month working capital safe harbor for startup companies
• Circumstances under which a qualified opportunity fund is deemed to contribute assets to its subsidiaries
See Tax Alert 2020-0992, 16 April 2020.
California — In a newsletter, the Government reiterated that California has not conformed to various
corporate provisions in the CARES Act, including changes to:
• NOL carryback rules
• The IRC Section 163(j) limitation on deductions for business interest expense
• Prior-year AMT rules
• The tax treatment of loans forgiven under the PPP
See the State and Local Tax Weekly for 15 May 2020.
7 | Quarterly tax developments June 2020Iowa — In a frequently asked questions document, the Government noted that Iowa income tax generally
does not apply to forgiven PPP loans, provided certain conditions are met. See the State and Local Tax
Weekly for 15 May 2020.
In other guidance, the Government noted that Iowa does not conform to certain provisions in the CARES
Act, to the extent they apply to tax years beginning before 1 January 2020. These provisions include
the following:
• The IRC Section 461(l) limitation on excess business losses (applies for 2019 for Iowa tax purposes,
but not 2018)
• The IRC Section 163(j) limitation on deductions for business interest expense
• Modifications to the depreciation of QIP
See the State and Local Tax Weekly for 5 June 2020.
New Jersey — The Government released, for state corporate income tax purposes, guidance under the
Tax Cuts and Jobs Act (TCJA) on global low-taxed intangible income, foreign-derived intangible income
and the treatment of previously taxed income. See Tax Alerts 2020-1131, dated 28 April 2020.
New York — The New York Tax Appeals Tribunal reversed an administrative ruling and held that a
corporation selling energy generated by a member of its combined group was only liable for $350,000 in
New York corporate franchise taxes in each of tax years 2010, 2011 and 2012 because it qualified as a
New York manufacturer. See the State and Local Tax Weekly for 15 May 2020
State — The following states announced that they will not treat (or will consider not treating) a business
as having physical nexus with the state for corporate income tax purposes solely because its employees
must temporarily work from home in that state due to COVID-19.
• Alabama
• District of Colombia
• Georgia
• Indiana
• Iowa
• Maryland
• Massachusetts
• Minnesota
• North Dakota
• Pennsylvania
• Rhode Island
• South Carolina
See Tax Alerts 2020-0966, dated 13 April 2020; 2020-0996, dated 16 April 2020; 2020-1027, dated
17 April 2020; 2020-1062, dated 21 April 2020; 2020-1067, dated 22 April 2020; 2020-1081, dated
22 April 2020; 2020-1274, dated 12 May 2020; 2020-1296, dated 14 May 2020; 2020-1380, dated
26 May 2020; 2020-1424, dated 29 May 2020; and 2020-1427, dated 29 May 2020; see also the
State and Local Tax Weekly for 24 April 2020.
Texas — The state Supreme Court affirmed a lower court holding that a heavy construction rental
company could not deduct expenses for equipment delivery and pick up as part of its cost of goods sold
(COGS). Similarly, the Court held that the company could not deduct the costs under the real property
construction provisions of the Texas Tax Code because the labor was not furnished to a project for the
construction or improvement of real property. See Tax Alert 2020-1006, dated 16 April 2020.
8 | Quarterly tax developments June 2020In a different case, the Texas Supreme Court held that a company could not include certain costs from its
repair of offshore oil and gas rigs in its COGS deduction because they did not qualify as construction or
repair of real property under Texas law. The company could, however, deduct payments to subcontractors
from its Texas franchise tax calculation because the payments were (1) contractually mandated and
(2) made in connection to real property construction or repair services. See Tax Alert 2020-1006,
dated 16 April 2020.
In a third separate case, the Texas Supreme Court reversed a lower court and held that a movie theater
chain could not include the cost of exhibiting films (including film acquisition costs and theater
auditorium costs) in its COGS deduction. The Court reasoned that film exhibition costs do not qualify as
COGS under Texas law. See Tax Alert 2020-1006, dated 16 April 2020.
The Texas Court of Appeals reversed a trial court and held that an out-of-state corporation must apportion
its revenue from satellite radio subscriptions to Texas based on the percentage of its subscribers in Texas,
not where it produced and distributed its programming for broadcast. See the State and Local Tax
Weekly for 5 June 2020.
International
Argentina — The Government published regulations that defined transfer pricing terms and outlined
requirements that intercompany transactions must satisfy. See Tax Alert 2020-1407, dated 28 May 2020.
Austria — The Government announced that it would not treat a foreign company as having a PE in Austria
based on its employees’ home offices in Austria, unless the home offices become the permanent place of
work. See Tax Alert 2020-1542, dated 11 June 2020.
Brazil — The first chamber of the Superior Court of Justice held that Brazilian withholding tax does not
apply to service income received by a French company that rendered technical services in Brazil but had
no PE in the country. The Court reasoned that the Brazil-France income tax treaty applies to income
from technical services, so withholding tax did not apply. See Tax Alert 2020-1470, dated 4 June 2020.
Canada — The Government indicated that it generally will not treat a company as resident in Canada
solely because one or more directors had to attend a board meeting in Canada as a result of COVID-19-
related travel restrictions. Similarly, the Government generally will not treat a company as carrying on
business in Canada or having a PE in Canada solely because its workers had to remain in Canada due to
COVID-19-related travel restrictions. See Tax Alert 2020-1343, dated 21 May 2020.
Colombia — In a decree, the Government outlined the requirements that companies must satisfy to be
eligible for Colombia’s holding company regime. Under the regime, certain revenue is exempt from
income tax. See Tax Alert 2020-1280, dated 13 May 2020.
In regulations, the Government implemented the thin capitalization rules enacted as part of the 2019 tax
reform law. See Tax Alert 2020-1524, dated 10 June 2020.
In an official tax opinion, the Government clarified that profits distributed from a Colombian branch to its
home office in Spain should not be considered “dividends” under the tax treaty between Colombia and
Spain. Instead, the distribution should be considered a “business profit,” covered by Article 7 of the tax
treaty, and generally not subject to taxation in Colombia. See Tax Alert 2020-1523, dated 10 June 2020.
Denmark — In a ruling, the Danish Tax Board concluded that a German company had a place of business in
Denmark because one employee worked from his home in Denmark. The Court noted that the employee’s
contract stipulated that his home office in Denmark would be his place of work and his activities were a
significant part of the company’s business. See Tax Alert 2020-1542, dated 11 June 2020.
EU — The Court of Justice of the European Union (EU) held that EU Member States are not required to
extend the dividend withholding tax exemption to Gibraltar parent companies, based on the provisions of
the Parent-Subsidiary Directive. See Tax Alert 2020-0927, dated 9 April 2020.
In a separate case, the EU Court of Justice held that Luxembourg violated EU law by prohibiting the
Luxembourg subsidiary of a French company from forming a fiscal unity (similar to a consolidated group)
with two other subsidiaries of the French parent. The Court also held that the Luxembourg subsidiary
was not required to dissolve its fiscal unity with its own subsidiaries before forming a fiscal unity with the
French parent’s other subsidiaries. See Tax Alert 2020-1375, dated 26 May 2020.
9 | Quarterly tax developments June 2020Germany * — The Government issued guidance allowing companies to apply to carry back a loss equal to 15%
of their 2019 taxable income, subject to the current €1 million cap on loss carrybacks. The guidance also
requires companies to adjust their 2020 taxable income for the carryback when they file their 2020 return.
Ghana — In a practice note, the Government outlined the circumstances under which a company may
claim a bad debt deduction. See Tax Alert 2020-1564, dated 15 June 2020.
India — The Supreme Court held that a foreign exchange company headquartered in the United Arab
Emirates (UAE) was not subject to Indian tax on account of services rendered by its Indian liaison office.
The Court reasoned that the liaison office did not meet the definition of a PE under the India-UAE income
tax treaty because its services were preparatory or auxiliary in nature. See Tax Alert 2020-1292, dated
14 May 2020.
The Government reinstituted a previously expired safe harbor for transfer pricing transactions for fiscal year
2019-2020. The safe harbor expired on 31 March 2020. See Tax Alert 2020-1393, dated 27 May 2020.
Israel — In a circular, the Government outlined the circumstances under which the burden of proof in a
transfer pricing audit would not shift from the taxpayer to the tax authorities. See Tax Alert 2020-1496,
dated 5 June 2020.
Malaysia — The Government issued guidance stating that it would not treat a foreign company as having
a PE in Malaysia based on its employees’ temporary presence in Malaysia due to COVID-19-related travel
restrictions. Separately, the Government outlined the examples under which a foreign company might
have a “place of business” in Malaysia. See Tax Alert 2020-1542, dated 11 June 2020.
Nigeria — In an order, the Government defined “significant economic presence” for purposes of determining
whether a foreign company’s income from digital services, and technical, professional, management or
consultancy services, is subject to Nigerian tax. See Tax Alert 2020-1452, dated 2 June 2020.
Norway — The Government issued contradictory statements about the applicability of Norway’s general
anti-avoidance rule (GAAR), which became effective 1 January 2020. The Ministry of Finance indicated that
the GAAR should apply to tax-free demerger sales, unless they involve real estate assets. The Parliamentary
Finance Committee, however, maintained the GAAR should continue not to apply to de-merger sales,
regardless of what type of asset or business is involved. See Tax Alerts 2020-1291, dated 14 May 2020
and 2020-1575, dated 16 June 2020.
OECD — The following countries deposited their multilateral instrument (MLI) ratification instruments
this quarter:
• Czech Republic — MLI enters into force 1 September 2020
• Portugal — MLI enters into force 1 June 2020
• Saudi Arabia — MLI enters into force 1 May 2020
• South Korea — MLI enters into force 1 September 2020
See Tax Alerts 2020-1054, dated 21 April 2020; 2020-1163, dated 30 April 2020; 2020-1389, dated
27 May 2020; and 2020-1479, dated 4 June 2020.
The following countries notified the Organisation for Economic Co-operation and Development (OECD)
that they have completed their internal procedures for the entry into effect of the MLI provisions for
specific income tax treaties:
• Russia (MLI will apply to 27 income tax treaties)
• Switzerland (MLI will apply to income tax treaty with Luxembourg)
See Tax Alerts 2020-1284, dated 13 May 2020, and 2020-1542, dated 11 June 2020.
* A Tax Alert has not been published on this development.
10 | Quarterly tax developments June 2020The OECD issued guidance addressing tax treaty issues created by the dislocation of cross-border
workers from their home country as a result of COVID-19. These issues include the following:
• Creation of PEs
• Residence status of companies (based on place of effective management)
See Tax Alert 2020-0946, dated 10 April 2020.
Separately, the OECD issued guidance on the taxation of offshore indirect transfers (e.g., when a
country seeks to tax gains on a foreign company’s sale of stock in a subsidiary with assets in that
country). See Tax Alert 2020-1509, dated 8 June 2020.
Peru — In a decree, the Government outlined the methods that companies must use to determine the
market value of shares that are indirectly transferred. The methods apply to indirect share transfers
between related and unrelated parties. See Tax Alert 2020-1133, dated 28 April 2020.
Tanzania — In regulations, the Government authorized tax administrators to waive penalties and interest
on outstanding tax liabilities, including corporate income tax liabilities, for eligible taxpayers. See
Tax Alert 2020-1308, dated 15 May 2020.
Turkey — In a presidential decision, the Government increased the withholding tax rate on the portfolio
income of certain foreign currency hedge funds (Serbest Döviz Fonlari) to 15% from 0%. See Tax Alert
2020-1511, dated 8 June 2020.
In a general income tax communiqué, the Government outlined the circumstances under which
nonresidents disposing of stock in a Turkish company may claim an income tax exemption for gains
resulting from differences in foreign exchange rates. See Tax Alert 2020-1512, dated 8 June 2020.
Uruguay — In a decree, the Government broadened the eligibility criteria for social-interest housing
(i.e., low-income housing), allowing more housing to qualify for related tax benefits. It also increased the
corporate income exemption (CIT) for income from rental homes to 60% from 40%, depending on the
location of the home. Similarly, for acquired homes that will be rented in the future, 60% (rather than
40%) CIT and nonresident income tax exemptions may apply to income from the leases, depending on
the location of the future rental home. See Tax Alert 2020-1478, dated 4 June 2020.
In another decree, the Government outlined the requirements that certain construction projects must
satisfy for their investors to qualify for a corporate income tax exemption. See Tax Alert 2020-1613,
dated 19 June 2020.
11 | Quarterly tax developments June 2020Things we have our eyes on
National, state and local Federal, state and territories
governments continue to seek
Modifying CARES Act — The House of Representatives passed the Health and Economic Recovery
to increase their revenues.
Omnibus Emergency Solutions (HEROES) bill, which would limit the NOL carrybacks permitted under the
Companies should continue to
CARES Act so that losses arising in 2018, 2019 and 2020 could not be carried back beyond 2018.
monitor developments in this
area. Some of these potential Companies that do not adhere to CARES Act restrictions on executive compensation, dividend payments
tax law changes are and stock buybacks could not carry NOLs back at all. Other proposed changes include repealing the
summarized here. excess business losses provision in the CARES Act, which extended NOL relief to pass-throughs and sole
proprietors. See Tax Alerts 2020-1277, dated 13 May 2020, and 2020-1319, dated 18 May 2020.
Conduit financing — The Government proposed regulations that would expand the conduit-financing
regulations under Treas. Reg. 1.881-3 to treat certain instruments characterized as equity for US tax
purposes but as debt for foreign law purposes as a financing arrangement that can result in a conduit-
financing arrangement subject to withholding tax. See Tax Alert 2020-0954, dated 13 April 2020.
Non-deductibility of certain payments —The Government issued proposed regulations on deductibility
limits under IRC Section 162(f) for fines, penalties and other amounts paid to, or at the direction of,
governmental entities (and other identified entities) for violating or possibly violating a law. The proposed
regulations also address the requirements that taxpayers must satisfy to deduct payments characterized
as restitution, remediation or an amount paid to comply with a law. See Tax Alert 2020-1315, dated
15 May 2020.
Rehabilitation tax credits — In proposed regulations, the Government adjusted the rules around the
claiming and recapture of the rehabilitation credits for historic buildings under IRC Section 47, as modified
by the TCJA, from a one-year to a five-year tax credit. See Tax Alert 2020-1402, dated 28 May 2020.
Like-kind exchanges — In proposed regulations, the Government defined “real property” for purposes of
the like-kind exchange rules. It also clarified that the receipt of certain incidental personal property in
an exchange will not jeopardize the exchange’s tax-free treatment. See Tax Alert 2020-1573, dated
16 July 2020.
California — The Government proposed temporarily suspending companies’ ability to use California
NOLs, while adding three years to the carryforward period. It also proposed capping the amount of
business incentive tax credits (e.g., research credits) companies can claim at $5 million. The changes
would apply to tax years 2020, 2021 and 2022. See Tax Alert 2020-1347, dated 21 May 2020.
New York — In draft regulations, the Government addressed the tax computation rules and definitions for
qualified New York manufacturers, corporate partners, REITs, RICs and domestic international sales
corporations. Comments on the draft regulations are due by 7 August 2020. See Tax Alert 2020-1476,
dated 4 June 2020.
International
Belgium — The Government proposed allowing eligible companies to deduct 2020 estimated losses from
the COVID-19 crisis from 2019 taxable profits. Companies that overestimate their losses by more than
10% could be subject to a special surtax. Other proposals include partially exempting companies’ profits
from income tax until the exempt income equals the 2020 loss. The exemption, which would operate
through a “recovery reserve,” would apply for tax years 2022, 2023 and 2024. To qualify for the exemption,
companies would have to satisfy certain requirements. See Tax Alert 2020-1491, dated 5 June 2020.
Germany — The Government proposed temporarily increasing the cap on carrybacks of 2020 and 2021
NOLs to €5 million from €1 million. The Government also proposed codifying its administrative guidance
on loss carrybacks (see the Other considerations section of the publication for further details) but would
increase the size of the loss to 30% (rather than 15%) of 2019 taxable income and cap the carryback
amount at €5 million.
12 | Quarterly tax developments June 2020Other proposals include:
• Temporarily allowing accelerated depreciation for tax years 2020 and 2021 at a 25% annual rate for
movable fixed assets (limited to 2.5 times the current linear depreciation rate)
• Doubling the eligible base amount for the R&D tax allowance to €4 million from 1 January 2020
through 31 December 2025, potentially increasing the maximum annual tax allowance for R&D
• Allowing extended depreciation of digital assets
See Tax Alert 2020-1494, dated 5 June 2020.
Israel — In a draft circular, the Government outlined the circumstances under which a recharge payment
from an Israeli subsidiary to its parent company for stock options issued by the parent to the subsidiary’s
employees will be classified as dividend distribution, which is taxable in Israel, vs. a debt repayment,
which should generally not trigger Israeli tax. See Tax Alert 2020-1201, dated 4 May 2020.
Italy — In a decree, the Government introduced a 20% income tax credit (capped at €400,000) for
eligible investors that contribute additional capital to certain Italian companies from 20 May 2020
through 31 December 2020. The credit also applies to eligible investors in Italian PEs of companies in
the EU or European Economic Area.
Following approval of their FY 2020 financial statement, recipients of this additional capital may claim a
credit effectively worth up to 50% of the losses exceeding the 10% net equity (i.e., up to 30% of the added
capital). Total available benefits provided by the decree (tax and nontax), however, are limited to €800,000.
Other changes include the following:
• An increase in the annual cap on claimed tax credits to €1 million from €700,000
• A larger R&D tax credit for certain companies located in specific areas of Italy
• An extension of the deadline for purchasing assets eligible for additional depreciation to 31 December
2020 from 30 June 2020
Though currently effective, these measures must be approved by the Italian Parliament within 60 days
from 19 May 2020 (i.e., by 18 July 2020) to be enacted for US GAAP purposes. See Tax Alert 2020-
1365, dated 26 May 2020.
Kenya — The Government proposed denying deductions for certain expenses from rating, authorizing
and issuing shares, debentures or similar securities for public purchase, as well as listing on the Nairobi
Securities Exchange. It would also deny deductions for certain dues that employers pay on their employees’
behalf. Other changes include offering a three-year amnesty, beginning 1 January 2021, for unpaid taxes,
including corporate income taxes. The rates at which interest and penalties would be waived would
depend on how soon a taxpayer applied for amnesty. See Tax Alert 2020-1249, dated 8 May 2020.
Netherlands — The Government proposed allowing Dutch corporate taxpayers to deduct estimated 2020
losses from the COVID-19 crisis from their 2019 taxable profits but requiring them to adjust their 2020
taxable income for that deduction when they file their 2020 return. They would also have to adjust 2020
taxable income for deducted losses that they overestimated or underestimated. See Tax Alert 2020-1139,
dated 28 April 2020.
An advisory committee to the Government recommended the following changes to the Dutch corporate
income tax:
• Limiting the ability to offset losses to 50%, rather than 100%, of taxable profits for profits over €1 million
• Allowing companies to carry losses forward indefinitely, rather than for six years
• Limiting the deductibility of shareholder/headquarter costs to a percentage of profits
• Making the current controlled foreign corporation rules more effective
13 | Quarterly tax developments June 2020• Limiting basis step-ups for certain transferred assets
• Tightening the earnings stripping rules to limit interest expense deductions to 25%, rather than 30%,
of earnings before interest, taxes, depreciation and amortization (EBITDA)
• Limit deductions for interest expense on loans used to acquire stock
• Denying deductions for payments made to companies in low-tax jurisdictions
• Imposing withholding tax on interest and royalties paid to related parties in low-tax jurisdictions
See Tax Alert 2020-1015, dated 17 April 2020.
New Zealand — The Government proposed allowing companies to carry back losses from tax years
2021-2022 and later to prior tax years. It also proposed relaxing the shareholder continuity rules so that
companies whose shareholder continuity falls below 49% after an ownership change could still carry
100% of their tax losses forward, as long as certain conditions were met. See Tax Alert 2020-1294,
dated 14 May 2020.
Norway — The Parliament approved a temporary increase of the first-year depreciation rate for certain
assets to 30% from 20%, provided certain conditions are met. The Parliament also approved a temporary
increase of the depreciation rate for certain ships acquired in 2020 to 20% from 14%. The changes will
be enacted upon approval by the King-in-Council. See Tax Alerts 2020-1291, dated 14 May 2020, and
2020-1544, dated 11 June 2020.
OECD — The OECD announced that Colombia and Costa Rica are its newest members. To join the OECD,
countries must have current legislation, policies and practices that align with OECD standards, and they
must consider OECD standards when changing their legislation, policies and practices. See Tax Alerts
2020-1223, dated 6 May 2020, and 2020-1326, dated 18 May 2020.
Russia — The Government notified Luxembourg and Malta that it wants to modify its income tax treaties
with them to increase withholding tax rates on dividends and interest. The dividend withholding rate
would increase to 15% from 5% for residents of both countries, while the withholding rate on interest
would increase to 15% from 5% for Malta residents and to 15% from 0% for Luxembourg residents.
See Tax Alert 2020-1021, dated 17 April 2020.
South Africa* — The Government proposed allowing companies to deduct cash or property donated to a
COVID-19 disaster relief organization from 1 April 2020 through 31 July 2020. Deductible donations
would be limited to 10% of taxable income. Additionally, the tax-deductible limit on corporate donations
to the COVID-19 Solidarity Fund would increase to 20% (from 10%) of taxable income for cash or property
donated from 1 April 2020 through 31 July 2020.
Thailand* — The Government proposed allowing eligible distressed companies to claim favorable tax
treatment for debts that were restructured from 1 January 2020 through 31 December 2021 (e.g., forgiven
debts would not be subject to income tax). Additionally, eligible creditors could deduct bad debts from
debt restructured from 1 January 2020 through 31 December 2021, even though the debts do not
meet the statutory criteria for deductibility.
* A Tax Alert has not been published on this development.
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