On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (“CARES Act”) was signed into law. The CARES Act provides for roughly $2 trillion of economic relief to those impacted by the COVID-19 pandemic. The Act also includes certain modifications to the Internal Revenue Code (“IRC”), of which several key international provisions are highlighted:
Changes to NOL Rules
The CARES Act suspends on a temporary basis the 80 percent taxable income limitation on the use of net operating losses (“NOLs”) to offset taxable income, which was established under the Tax Cuts and Jobs Act of 2017 (“TCJA”). Th temporary suspension of the NOL limitation would apply for tax years beginning after December 31, 2017 and before January 1, 2021. Taxpayers may choose to:
These NOL changes could affect a number of possible international provisions for taxpayers, such as:
Section 250 Deduction
The CARES Act does not alter the taxable income limitation under Section 250, which reduces the allowable Section 250 deduction when a taxpayer's combined FDII and GILTI exceeds taxable income for the year (without regard to Section 250). Thus, the NOL tax rule changes could trigger the taxable income limitations of the deduction resulting in a taxpayer utilizing a 21 percent rate-valued tax attribute (NOL deduction) against certain income (e.g., GILTI or FDII) ordinarily subject to a lower rate of tax due to the Section 250 deduction (where a taxable income limitation otherwise wasn’t triggered).
Foreign Tax Credit Implications
Larger NOL deductions while providing potential cash tax refunds will generally reduce a taxpayer's FTC limitation, regardless of whether the NOL source is foreign or domestic. A taxpayer will likely have a greater FTC carryforward following an NOL carryback. Domestic-source NOLs may generate, or increase, an overall domestic loss (“ODL”) account. Foreign-source NOLs may generate, or increase, a separate limitation loss or an overall foreign loss account, which could be detrimental in a subsequent tax year, including in the IRC Section 965 transition tax year.
In addition, the tax rate differential between pre-TCJA and post-TCJA tax years should also be understood in contemplating the NOL carryback. Generally, FTCs carried to pre-TCJA years would be available to offset income taxed at 35 percent, while FTCs utilized in a post-TCJA year will only offset income taxed at a 21 percent rate.
Section 965 Transition Tax Liability
The NOL carryback rules under the CARES act do not allow the NOL carryback to be used against amounts included in gross income pursuant to Section 965. The taxpayer has the option of electing to exclude a transition tax year from the carryback period. This could be beneficial so as to avoid having the resulting overpayment being applied to future installments where the installment option under Section 965(h) had been elected.
That said, the NOL deduction claimed in that carryback year may increase the taxpayer's FTC carryover. FTC carryovers need to be taken into account for each successive tax year. Thus, increased FTC carryovers could be available in the applicable Section 965 transition tax year, which could have the impact of reducing the taxpayer's transition tax liability.
Expat Taxation Deadlines
Under Notice 2020-18, the due date of April 15, 2020 for all individual tax payments and returns for the 2019 tax year was automatically postponed until July 15, 2020.
However, for expatriates with a normally applicable June 15 filing due date, the postponement granted by Notice does not apply to the tax return filing. The payment due date associated with the return, originally April 15, is postponed by the Notice.
Partnership Section 1446 Withholding for Non-U.S. Partners
Generally, a foreign or domestic partnership that has effectively connected taxable income allocable to a Non-U.S. partner must pay in a withholding tax under Section 1446 on a quarterly basis, when applicable. For calendar year Partnership tax filers, Section 1446 for Quarter 1 (“Q1”) withholding is normally due April 15. It is plausible that this Q1 Section 1446 withholding was intended to be included in the extension relief under Notice 2020-18 as it relates to 2020 payment of estimated federal income taxes. However, no direct confirmation of this is available at the time of this writing.
Canada has unveiled a COVID-19 Economic Response Plan, which provides the following benefits for individuals, including but not limited to:
Business were also provided relief under the plan, for example:
In addition, the Atlantic Provinces (New Brunswick, Prince Edward Island, Newfoundland and Labrador and Nova Scotia) and related regional development agencies are in the process of implementing assistance to businesses and employees impacted by COVID-19 and the associated economic downturn.
Other Notable Provisions
If you have inquiries about this article or any COVID-19 related tax developments globally, please contact any member of the international team at FGMK.
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