12 April 2020

U.S. International Tax This Week for April 10

Ernst & Young's U.S. International Tax This Week newsletter for the week ending April 10 is now available. Prepared by Ernst & Young's International Tax Services group, this weekly update summarizes important news, cases, and other developments in international taxation.

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Spotlight

The Treasury Department released final regulations (TD 9896) on 7 April, implementing the hybrid mismatch rules under IRC Sections 245A(e) and 267A, and making changes to the dual consolidated loss (DCL) rules under IRC Section 1503(d). The final regulations, which are primarily targeted at so-called “deduction - no inclusion” outcomes, retain the basic approach and structure of the proposed regulations issued in December 2018 with certain revisions. The Internal Revenue Service (IRS) also released proposed regulations (REG-106013-19) providing guidance on hybrid deduction accounts and conduit financing arrangements involving equity interests.

IRC Section 267A, DCL and anti-conduit provisions

The final IRC Section 267A regulations make the following significant changes:

  • Clarify that the rules can apply to interest-free loans and similar arrangements (applicable for tax years beginning on or after 20 December 2018)
  • Modify the “imported mismatch” rules (aimed at preventing the effects of an offshore hybrid arrangement from being imported into the US) and include a list of hybrid deductions limiting their scope
  • Narrow the definition of interest, which may foreshadow a similar approach in the final IRC Section 163(j) regulations, which have yet to be released

The final DCL regulations are largely unchanged from the proposed regulations. The Preamble notes that the IRS and Treasury continue to study structures involving payments from foreign disregarded entities to their domestic corporate owners and may issue guidance in the future.

The proposed regulations would expand the conduit financing rules under Reg. Section 1.881-3 to now capture certain hybrid instrument arrangements that permit deductions under foreign law.

IRC Section 245A(e) provisions

The final IRC Section 245A(e) regulations make the following significant changes:

  • Treat “notional interest deductions” allowed to a controlled foreign corporation (CFC) as hybrid deductions that are taken into account for this purpose only for foreign tax years beginning on or after 20 December 2018 (rather than on or after 31 December 2017, as in the proposed regulations)
  • Revise the applicability date so that the final regulations apply to distributions made after 31 December 2017, but only if the distributions occurred during tax years ending on or after 20 December 2018
  • Provide for a new anti-duplication rule that would reduce the amount of hybrid deductions of a lower-tier CFC by hybrid deductions of an upper-tier CFC in certain back-to-back financing transactions

The proposed regulations provide rules on adjustments to hybrid deduction accounts to reflect subpart F, global intangible low-taxed income (GILTI) and certain IRC Section 956 inclusions.

The proposed regulations (REG-106013-19) released 7 April under IRC Section 951A include a new rule that would effectively deny deductions for payments made directly or indirectly by a CFC during the period from 1 January 2018 through the effective date of the GILTI provisions for the recipient CFC (the GILTI “disqualified period”). The proposed rule is intended to apply if: (1) a payment is made during the disqualified period that would have given rise to tested income in the hands of the recipient CFC if the GILTI provisions had been effective for the recipient CFC; and (2) a deduction is taken in a later period when economic performance with respect to the earlier payment occurs.

The proposed regulations would apply to tax years of foreign corporations ending on or after the date of filing in the Federal Register and to US shareholders’ tax years in which or with which such years end.

The IRS on 9 April provided guidance under the CARES Act to taxpayers with net operating losses (NOLs). Revenue Procedure 2020-24 provides procedures for: (1) waiving the carryback period for an NOL arising in a tax year beginning after 31 December 2017, and before 1 January 2021; (2) excluding IRC Section 965 inclusion years from the carryback period for an NOL arising in a tax year beginning after 31 December 2017 and before 1 January 2021; and (3) waiving or reducing a carryback period or revoking an election to waive a carryback period for tax years that began before 1 January 2018 and ended after 31 December 2017.

Notice 2020-26 grants a six-month extension to corporations filing Form 1139, Corporation Application for Tentative Refund and individuals, trusts and estates filing Forms 1045, Application for Tentative Refund, in relation to NOL carrybacks that arose in a tax year beginning in 2018 and ending by 30 June 2019.

And, in Notice 2020-23, the IRS significantly broadened its tax return filing and payment relief in response to COVID-19. Generally, all taxpayers with a filing or payment deadline falling on or after 1 April 2020, and before 15 July 2020, have until 15 July 2020, to file returns and make payments without penalties or interest.

The IRS in Notice 2020-19 withdrew Notice 2004-20 this week, which identified as listed transactions so-called “Midco” transactions, in which an intermediary was used to facilitate the sale of non-US assets to take advantage of certain foreign tax credit provisions (and similar transactions). Notice 2020-19 indicates that the Treasury Department and the IRS have concluded that the enactment of IRC Section 901(m) “curtailed the use of these transactions because it effectively denies the foreign tax credits … under Section 901 or 902 (as in effect on 21 December 2017), as described in Notice 2004-20, or Section 960.” Final regulations under IRC Section 901(m) were published on 20 March.

The IRS this week released its annual Advance Pricing Agreement (APA) Report (Announcement 2020-2) for 2019. The IRS reports there were 120 APAs executed in 2019, with a total of 121 APA applications filed last year. The total number of APAs concluded increased from 107 to 120 and the median amount of time to finalize an APA slightly decreased from 40.2 months to 38.8 months. See EY Tax Alert 2020-0898 for details.

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EY Guides and Publications

EY Global Labor and Employment Law COVID-19 Tracker
In challenging times like these, many businesses are encountering questions that urgently need to be answered. Companies around the globe are now facing unprecedented challenges, not only financially but also in terms of human resources. This document provides a snapshot of the Labor and Employment Law regulations that operate in jurisdictions around the world.

EY's PAS Mobility Tracker | Impact of COVID-19 on Mobility Services
With the number of confirmed cases and fatalities worldwide rising rapidly every day, many government authorities are enacting emergency measures, including payroll, tax, and social security related measures, to address the economic and logistical challenges presented due to the spread of COVID-19 for individuals traveling within and outside of their countries. EY's PAS Mobility Tracker provides a snapshot of the changing tax, social security and residency rules for mobile employees affected by COVID-19, including business travelers.

Five tax moves businesses should consider as COVID-19 affects the global economy
This EY article discusses five steps businesses should consider to proactively prepare their tax function to help navigate these challenging economic conditions.

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Upcoming Webcasts

COVID-19: Recent tax and regulatory changes in the US, LATAM, Africa and Asia-Pacific (April 15)
During this Thought Center Webcast, Ernst & Young professionals from key jurisdictions will discuss key changes in tax and regulatory laws, and related opportunities in the US, Latin America, Africa and Asia-Pacific regions.

COVID-19: Payroll and employment tax considerations (April 20)
During this Thought Center Webcast, Ernst & Young professionals discuss the payroll and employment tax considerations of the COVID-19 national emergency.

Tax Policy and Controversy Outlook 2020: Asia-Pacific (April 23)
During this Thought Center Webcast, EY Asia-Pacific Tax Policy and Controversy leaders discuss the findings reported in the EY 2020 Tax Policy & Controversy Outlook, as well as explore the key tax measures in the economic stimulus packages put in place by governments in response to the COVID-19 outbreak.

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Recent Tax Alerts

Africa

Asia

Canada & Latin America

Europe

Middle East

Oceania

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Recent Newsletters

Washington Dispatch
   Highlights of this edition include:

Legislation

  • CARES Act stimulus package has international tax implications

IRS news

  • IRS expands 15 April tax relief and issues FAQs on extension of filing and payment deadlines, FATCA reporting
  • IRS issues final Section 901(m) regulations
  • TIGTA finds major FIRPTA withholding discrepancies

Transfer Pricing news

  • Alignment of transfer pricing regulations to TCJA provisions in relation to IP definition not expected before 2021

OECD news

  • OECD plans to continue BEPS 2.0 project virtually
  • OECD releases second annual peer review report on BEPS Action 6, prevention of treaty abuse
  • OECD issues IT-tools to support implementation of TRACE, wider exchange of tax information

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IRS Weekly Wrap-Up

Internal Revenue Bulletin

 2020-16Internal Revenue Bulletin of April 13, 2020
 2020-15Internal Revenue Bulletin of April 6, 2020

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Additional Resources

Ernst & Young Client Portal, the leading source for news, analysis, and reference materials for corporate tax professionals, has a variety of content of interest to international tax practitioners, including:

International Tax Online Reference Service. Key information about, and important tax developments from, 56 foreign jurisdictions, including information on tax rates, interest rates and penalties, withholding, and filing dates.

EY/Passport. EY/Passport is your guide to planning ventures in the global economy, offering a wealth of tax and business knowledge on more than 150 countries.

Because the matters covered herein are complicated, U.S. International Tax This Week should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.

Document ID: 2020-0936