In this issue: 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 Tax developments publication. 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 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 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 is identifying changes in and other • Limiting the state deduction for expensing under Internal Code (IRC) Section 179 for events when they occur so the 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. Allowing lessors to exclude tax payments received from lessees under IRC Section 110 from the However, this publication is not • 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 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: [email protected]. Eliminates the $500 minimum payment of alternative minimum tax (AMT) for tax year 2019 See our previous editions for • additional tax developments. • Exempts certain aid, subsidies and incentives received through federal programs (i.e., the CARES Act) and local incentives from Puerto Rican

• 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, 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 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 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 2020 Treaty 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 (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 2020 Other 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 2020 Iowa — 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 2020

In 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 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 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 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 2020 Germany* — 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 2020

The 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 2020 Things 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 . 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.

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Other 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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14 | Quarterly tax developments June 2020