Quarterly tax developments - EY
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In this issue:
Tax developments ........................ 2
Other considerations .................... 8
Things we have our eyes on ........ 11
Quarterly tax
developments
Things to know about this quarter’s tax
developments and related US GAAP
accounting implications
June 2021
Welcome to our June 2021
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 tax law changes on their deferred tax assets and liabilities
identified by EY tax professionals in the period the legislation is enacted. Similarly, companies must reflect the effects of an enacted change
or EY foreign member firms. in tax laws or rates in their annual effective tax rate computation in the period the changes are enacted.1
These developments may affect If an interim change is significant, temporary differences may need to be estimated as of the enactment.
your tax provision or estimated
annual effective tax rate. Federal, state and territories
California — On 29 April 2021, California enacted legislation allowing companies to exclude loans forgiven
We compile this information
because we recognize that, for under the Paycheck Protection Program (PPP) or advance grants of an Economic Injury Disaster Loan
many companies, the most (EIDL) from their gross income when computing California corporate income tax for tax years beginning
challenging aspect of accounting on or after 1 January 2019. Companies generally may also deduct business expenses paid with the
for income taxes is identifying proceeds of forgiven PPP loans or EIDL advance grants. See Tax Alert 2021-0903, dated 3 May 2021.
changes in tax law and other
District of Columbia — On 3 May 2021, the District of Columbia (DC) enacted temporary legislation
events when they occur so the
allowing multistate businesses to use 80% of an apportioned net operating loss (NOL) carryover to offset
accounting can be reflected in
their DC taxable income. The change is retroactively effective to tax years beginning after 31 December
the appropriate period.
However, this publication is not 2017 and will expire after 14 December 2021, unless approved by Congress. See the State and Local
a comprehensive list of all Tax Weekly for 26 May 2021.
changes in tax law and other
Idaho — On 10 May 2021, Idaho enacted legislation reducing the state’s corporate rate to 6.5% from 6.925%.
events that may affect income
The change is retroactively effective 1 January 2021. See the State and Local Tax Weekly for 4 June 2021.
tax accounting.
This edition covers certain Illinois — On 17 June 2021, Illinois enacted legislation decoupling Illinois tax law from the federal 100%
enacted and effective tax bonus depreciation rule under IRC Section 168(k), for tax years ending on or after 31 December 2021.
legislation, as well as regulatory The law also requires companies to add their federal deductions for GILTI, foreign-source dividends from
developments, legislative US companies and dividends from foreign companies to their Illinois state base. The change is effective
proposals and other items for tax years ending on or after 30 June 2021. Other changes include extending the expiration dates of
identified through 15 June certain tax credits and limiting net loss deductions to $100,000 for each tax year ending on or after
2021, except as noted. 31 December 2021 and before 31 December 2024. See the State and Local Tax Weekly for 18 June 2021.
We list EY publications that Iowa* — On 16 June 2021, Iowa enacted legislation allowing Iowa taxpayers to claim federal bonus
you can access through our depreciation for state tax purposes for qualified assets purchased on or after 1 January 2021. The
Tax News Update website, if legislation also decouples completely from federal limitations on interest deductions under IRC Section 163(j)
you are registered. Anyone for tax years beginning on or after 1 January 2021. Other changes include:
interested in registering should
contact Joan Osborne at
• Requiring companies to add back to Iowa net income any federal NOL deductions carried over from
a tax year beginning before 1 January 2023
joan.osborne@ey.com.
See our previous editions for • Redefining Iowa net income as taxable income properly computed for federal income tax purposes
additional tax developments. under IRC Section 63, beginning in tax year 2023
Kansas — On 3 May 2021, Kansas enacted legislation decoupling from the treatment of global intangible
low-tax income (GILTI) under the Tax Cuts and Jobs Act (TCJA), as well as the limitation on business
interest expense under Section 163(j) of the Internal Revenue Code (IRC), capital contributions under
IRC Section 118 and the limitation on deductions for meals under IRC Section 274. Other changes
include permitting Kansas NOLs generated after 31 December 2017 to be carried forward indefinitely
and clarifying that the term “dividends” includes repatriated dividends under IRC Section 965 for
purposes of Kansas’ dividends received deduction. The changes apply to tax years beginning after
31 December 2020. See Tax Alert 2021-0934, dated 7 May 2021.
1
Companies that have not adopted Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes, should reflect the effects of enacted changes in tax law or rates in estimates
of their annual effective tax rate in the first interim period in which the change is effective. For more information on
ASU 2019-12, see our Financial reporting developments publication on income taxes.
* A Tax Alert has not been published on this development.
2 | Quarterly tax developments June 2021
Maryland — On 30 May 2021, Maryland enacted legislation broadening the scope of a prior law requiring
the state to automotically decouple from IRC amendments that affect state revenue by $5 million or
more in the year of enactment. Under the revised law, Maryland will automatically decouple from IRC
amendments that alter the computation of taxable income for the year of enactment and tax years
preceding the year of enactment. This automatic decoupling will continue to apply only if the
amendment’s impact on state revenue is $5 million or more per fiscal year. The change applies to IRC
amendments enacted in tax year 2021 and onward. See the State and Local Tax Weekly for 4 June 2021.
Mississippi — On 6 April 2021, Mississippi enacted legislation allowing 100% bonus depreciation for new
or used aircraft, equipment, engines, or other parts and tools used for aviation. The change is effective 1
July 2021. See the State and Local Tax Weekly for 9 April 2021.
On 14 April 2021, Mississippi enacted legislation allowing companies to deduct business expenses paid
with PPP loans. This change is retroactively effective beginning 27 March 2020. See the State and Local
Tax Weekly for 23 April 2021.
Montana — On 11 May 2021, Montana enacted legislation changing the formula used by multistate
companies to apportion income to the state. Instead of using an equally weighted three-factor formula,
companies must use a double-weighted sales factor formula (i.e., property factor, plus the payroll factor,
plus two times the sales factor and a denominator of four). The new apportionment formula applies to
tax years beginning after 30 June 2021. See the State and Local Tax Weekly for 14 May 2021.
Nebraska — On 26 May 2021, Nebraska enacted legislation reducing its top corporate income tax rate.
For income over $100,000, the 7.81% rate decreases to 7.5% for tax year 2022 and to 7.25% for tax
year 2023. See the State and Local Tax Weekly dated 4 June 2021.
New Jersey — On 11 May 2021, New Jersey enacted legislation permitting businesses to deduct
expenses paid with forgiven PPP loans. The change applies retroactively to tax years beginning on or
after 1 January 2020. See the State and Local Tax Weekly dated 4 June 2021.
New Mexico — On 6 April 2021, New Mexico enacted legislation requiring multistate companies to apportion
their income using the three-factor apportionment formula (i.e., property, payroll and sales) from the
Multistate Tax Compact, rather than the state’s specified apportionment factor. The change applies to
tax years beginning on or after 1 January 2021. See the State and Local Tax Weekly for 9 April 2021.
New York — On 19 April 2021, New York enacted legislation temporarily increasing the business income
tax rate for certain general corporations and financial institutions to 7.25% from 6.5%. The change is
retroactively effective for tax years beginning on or after 1 January 2021 and before 1 January 2024.
The legislation also extends the business capital base tax for certain companies by an additional three
years, through 31 December 2024. The maximum tax remains $5 million, and a 0.1875% rate applies
for tax years beginning on or after 1 January 2021 and before 1 January 2024. Other changes include:
• Temporarily allowing employment-location requirements to be waived for businesses receiving tax
credits or other benefits under New York tax law if the recipients can demonstrate that they would
have met the requirements barring COVID-19-related restrictions (retroactively effective to 7 March
2020, until the sooner of the expiration of the state disaster emergency under Executive Order 202
of 2020 or 31 December 2021)
• Decoupling New York general corporate tax and business corporate tax law from federal opportunity
zone benefits under IRC Section 1400Z-2 (effective for tax years beginning on or after 1 January 2021)
• Extending the Empire State film production and post-production credits through 2026
See Tax Alert 2021-0806, dated 19 April 2021.
On 19 April 2021, New York enacted legislation extending the period for claiming brownfield credits that
expire on or after 20 March 2020 and before 31 December 2021 by two years if state tax authorities
determine that the credit requirements would have been met but for the state disaster emergency declared
in response to the COVID-19 pandemic. This change is effective upon enactment. See the State and Local
Tax Weekly for 23 April 2021.
3 | Quarterly tax developments June 2021
Oklahoma — On 11 May 2021, Oklahoma enacted legislation decreasing its corporate income tax rate to 4%
from 6% for tax years beginning on or after 1 January 2022. See Tax Alert 2021-1120, dated 4 June 2021.
Tennessee — On 14 April 2021, Tennessee enacted legislation effectively treating certain COVID-19-related
payments as exempt from Tennessee excise taxes if they were received from 1 March 2020 through
31 December 2021. The change is effective upon enactment. See the State and Local Tax Weekly for
16 April 2021.
Texas — On 8 May 2021, Texas enacted legislation exempting forgiven PPP loans and other COVID-19-related
relief from the Texas franchise tax if the payments are not subject to federal income tax. Companies may
also deduct eligible business expenses paid with the proceeds of forgiven PPP loans or other COVID-19-related
payments. See Tax Alert 2021-0945, dated 10 May 2021.
Vermont — On 17 April 2021, Vermont enacted legislation exempting PPP loans from the Vermont
income tax. Companies may also deduct eligible business expenses paid with the proceeds of forgiven
PPP loans. These changes apply to loans forgiven in 2020. Vermont income tax will apply to PPP loans
forgiven in 2021, but companies may still deduct business expenses paid with these forgiven PPP loans.
See the State and Local Tax Weekly for 23 April 2021.
West Virginia — On 9 April 2021, West Virginia enacted legislation modifying the state’s corporate
income apportionment and sourcing provisions. The changes include:
• Adopting a single sales factor formula
• Adopting market-based sourcing for sales of services and intangible property
• Repealing the “throw-out” rule, which previously excluded certain sales from a company’s
apportionment calculation
The changes are effective for tax years beginning on or after 1 January 2022. See Tax Alert 2021-0775,
dated 15 April 2021.
IRC conformity
The following chart lists the states that enacted legislation this quarter updating their date of conformity
to the US IRC. The chart also includes the dates on which the new conformity date was enacted and
became effective. Further information on a state’s IRC conformity can be found in the cited reference.
State Enactment date Date of conformity Effective date Reference
Arizona 14 April 2021 11 March 2021 For tax years State and Local Tax
beginning on or Weekly for 16 April
after 31 December 2021
2020
Indiana 29 April 2021 31 March 2021 (with Retroactively State and Local Tax
exceptions) effective for tax Weekly for 26 May
years beginning on 2021
or after 1 January
2021
South Carolina 18 May 2021 31 December 2020 18 May 2021 State and Local Tax
(with exceptions) Weekly for 26 May
2021
Vermont 17 April 2021 31 December 2020 For tax years State and Local Tax
beginning on or Weekly for 23 April
after 1 January 2021
2020
4 | Quarterly tax developments June 2021International
Argentina — On 16 June 2021, Argentina enacted legislation increasing corporate income tax rates. The
legislation replaces the current 25% fixed tax rate with a progressive tax scale for tax years beginning
1 January 2021 and onward. Under that scale, a 35% tax rate applies to accumulated net taxable income
over ARS50 million (approximately US$536,000). Other changes include permanently extending the 7%
withholding tax rate currently in force to dividends from profits accrued in tax years beginning on or
after 1 January 2021. See Tax Alert 2021-1203, dated 16 June 2021.
Denmark * — On 9 June 2021, Denmark enacted legislation implementing the Anti-Tax Avoidance
Directive (ATAD) of the European Union (EU) on taxation of controlled foreign corporations into Danish
law. The new rules apply for tax years beginning on or after 1 July 2021.
Germany* — On 30 June 2021, Germany enacted legislation implementing the EU’s ATADs, including the
anti-hybrid rules. The anti-hybrid rules apply retroactively to expenses accrued after 31 December 2019,
unless an exception applies. Other changes overhaul the German anti-treaty shopping rules to deny
withholding tax relief under German income tax treaties in certain cases and are effective immediately.
Greece — On 18 May 2021, Greece enacted legislation reducing its corporate income tax rate to 22%
from 24% for tax years 2021 and onward. A 29% rate continues to apply to certain banks. See Tax Alert
2021-1056, dated 26 May 2021.
Hong Kong — On 7 May 2021, Hong Kong enacted legislation exempting carried interest from income
tax, provided certain conditions are met. The exemption applies retroactively to eligible carried interest
received or accrued on or after 1 April 2020. See Tax Alert 2021-1028, dated 21 May 2021.
On 11 June 2021, Hong Kong enacted legislation on the tax treatment of stock, capital assets and losses
following certain mergers (i.e., court-free amalgamations). The changes, among others, are effective for
court-free amalgamations occurring on or after 11 June 2021. See Tax Alert 2021-5694, dated
22 June 2021.
Also on 11 June 2021, Hong Kong enacted legislation allowing a tax deduction for foreign taxes charged
on a gross-income basis. The legislation allows a Hong Kong resident person or a foreign company to
deduct foreign taxes paid on non-interest income to a jurisdiction with which Hong Kong does not have an
income tax treaty. Additionally, a foreign company may deduct foreign taxes paid on certain interest
income from a jurisdiction with which Hong Kong has an income tax treaty. The changes are effective for
tax years beginning on or after 1 April 2021. See Tax Alert 2021-5693, dated 22 June 2021.
Mexico — On 23 April 2021, Mexico enacted legislation denying income tax deductions for payments for
subcontracted services that relate to a corporation’s purpose or primary economic activity. Companies
may, however, deduct payments for subcontracted services that do not relate to their purpose or primary
economic activity (i.e., specialized services), provided certain requirements are met. The changes are
effective 1 August 2021. See Tax Alert 2021-0857, dated 26 April 2021.
Sri Lanka — On 13 May 2021, Sri Lanka enacted legislation modifying its definition of a permanent
establishment (PE). Under the new definition, a company has a PE in Sri Lanka if it has a business
connection or fixed place of business through which it wholly or partially conducts business in Sri Lanka.
The change is effective 21 May 2021.
For transfer pricing purposes, Sri Lanka uses the definition of a PE found in its tax treaty with the jurisdiction
in which the company with the agency, branch or establishment in Sri Lanka resides. The change is
retroactively effective from 1 April 2018 forward. See Tax Alert 2021-1155, dated 10 June 2021.
Turkey — On 22 April 2021, Turkey enacted legislation temporarily increasing the corporate income tax
rate to 25% from 20%. The 25% rate applies to 2021 income beginning 1 January 2021. The rate will
decrease to 23% for the 2022 tax year and is currently scheduled to return to 20% in 2023. See Tax Alert
2021-0835, dated 23 April 2021.
* A Tax Alert has not been published on this development.
5 | Quarterly tax developments June 2021United Kingdom * — On 10 June 2021, the United Kingdom enacted legislation increasing its corporate
income tax rate to 25%, beginning 1 April 2023.
Other changes include:
• Increasing the rate of the diverted profits tax to 31% from 25% for tax years beginning 1 April 2023
• Repealing withholding tax exemptions for interest and royalties paid by UK companies to related
companies in the EU (exemptions under an income tax treaty may still apply)
• Allowing businesses to deduct 130% of costs incurred on certain new plant and machinery assets
from 1 April 2021 through 31 March 2023
• Allowing businesses to immediately deduct 50% of costs incurred on new special-rate plant and
machinery assets from 1 April 2021 through 31 March 2023
• Allowing businesses to temporarily carry up to £2 million in certain trading losses back three years
rather than one year
• Suspending the applicability of certain anti-avoidance provisions affecting leases extended as a
result of COVID-19
• Changing the UK hybrid mismatch legislation, including retrospective relaxation of rules on dual-
inclusion income (election required by 31 December 2021) and other prospective changes
The changes have varying effective dates.
Legislation effective in the second quarter
International
India* — Effective 1 April 2021, a broader definition of “slump sale” applies, subjecting all types of business
transfers to Indian income tax (e.g., sales, exchanges, relinquishments of assets). Other changes include:
• Eliminating tax amortization for goodwill
• Exempting dividends paid to real estate investment trusts and infrastructure investment trusts from
withholding tax
• Permitting foreign portfolio investors to claim lower withholding tax rates under an applicable
income tax treaty on payments they receive, if they furnish a tax residency certificate to the payer
• Extending the date by which startup companies must be incorporated to be eligible for a tax holiday
to 31 March 2022 from 31 March 2021
• Shortening the deadlines by which Indian tax authorities must complete tax audits and transfer
pricing audits, as well as the deadline for tax re-audits (except in certain cases)
The changes were enacted 28 March 2021.
Effective 1 April 2021,* new laws apply that tax a foreign company’s income that is attributable to a
“significant economic presence” in India. The change was enacted on 27 March 2020. For discussion of
subsequent administrative guidance on the definition of “significant economic presence,” see the Other
considerations section of this publication.
Japan — Effective 1 April 2021, new incentives apply to encourage investment in digital transformation
(i.e., software, machinery and equipment that contributes to improved productivity and marketing
development) and carbon neutrality. Investors may also use eligible NOLs to offset taxable income “up to
the outstanding amount of accumulated qualified investment” for the applicable tax years (rather than
50% of taxable income). Other changes include:
• Reducing the minimum available research credit to 2% from 6%
* A Tax Alert has not been published on this development.
6 | Quarterly tax developments June 2021• Allowing companies to claim an additional 5% research credit under certain circumstances
• Treating stock exchanges as tax deferred under certain circumstances
The changes were enacted 26 March 2021. See Tax Alerts 2021-0670, dated 30 March 2021, and
2021-0773, dated 16 April 2021.
Philippines — Effective 11 April 2021, a fixed 15% tax rate applies to capital gains from the sale of shares
of stock not traded in the Philippine stock exchange. Previously, a 5% rate applied to the first US$2,000
and a 10% rate applied to amounts exceeding US$2,000. Other changes include:
• Exempting from income tax foreign-sourced dividends received by domestic corporations and
reinvested in the Philippines, subject to certain conditions
• Exempting the income of qualified, registered exporters (i.e., companies exporting at least 70% of
their total production or output) engaged in activities specified in the Strategic Investment Priority
Plan from income tax for four to seven years, followed by a choice between a 5% special corporate
income tax on gross income earned for 10 years or enhanced deductions for 10 years (e.g., a 150%
deduction for training expenses)
• Exempting the income of qualified, registered domestic companies (except exporters) engaged in
activities specified in the Strategic Investment Priority Plan from income tax for four to seven years,
followed by the ability to claim enhanced deductions for five years
• Limiting the applicability period of the 5% gross income tax to 10 years for existing registered
companies that already received this incentive
The changes were enacted 26 March 2021. See Tax Alert 2021-0679, dated 1 April 2021.
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 the 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
Belarus Spain Provides general withholding tax rates of 10% on dividends and
5% on interest and royalties; generally exempts capital gains.
China Spain Provides general withholding tax rates of 10% on dividends,
interest and royalties; generally exempts capital gains.
Hong Kong Macau Provides general withholding tax rates of 5% on dividends and
interest and 3% on royalties; generally exempts capital gains
(effective 1 January 2021 in Macau).
Hong Kong Serbia Provides general withholding tax rates of 10% on dividends,
interest and royalties; generally exempts capital gains
(effective 1 January 2021 in Serbia).
India Iran Provides general withholding tax rates of 10% on dividends,
interest, royalties and technical service fees; generally
exempts capital gains (effective 21 March 2021 in Iran).
7 | Quarterly tax developments June 2021Other considerations
Court decisions, regulations Federal, state and territories
issued by tax authorities and
Federal — In a notice, the Government clarified which expenses qualify for the temporary 100% deduction
other events may constitute
that businesses may claim for food or beverages “provided by a restaurant.” The Government also identified
new information that could
the types of businesses that do not qualify as restaurants. See Tax Alert 021-0739, dated 9 April 2021.
trigger a change in judgment in
recognition, derecognition or
In a revenue procedure, the Government established procedures under IRC Section 446(e) for certain
measurement of a tax position.
foreign corporations to obtain automatic consent to use the alternative depreciation system (ADS) when
These events also may affect
calculating GILTI to conform the earnings and profits and tested income components with the qualified
your current or deferred
business asset investment component. See Tax Alert 2021-1041, dated 21 May 2021.
tax accounting.
In a notice, the Government clarified that employers qualify for the Employee Retention Credit (ERC) for
one or both of the first two quarters of 2021 if their gross receipts are less than 80% of their gross
receipts for the same calendar quarter in 2019. Alternatively, for each of the first two quarters of 2021,
employers may elect to compare gross receipts for the previous quarter with gross receipts for the
corresponding calendar quarter in 2019 (e.g., fourth-quarter 2020 receipts can be compared with
fourth-quarter 2019 receipts to determine eligibility for the first quarter of 2021). The Government also
noted that the formula for computing the credit changed, effectively raising the maximum ERC to
$14,000 for the first two quarters of 2021, up from $5,000 for all of 2020. See Tax Alert 2021-0724,
dated 7 April 2021.
The US Tax Court held that a pharmaceutical company could immediately deduct legal expenses incurred
in defending itself in patent infringement lawsuits that arise after it files an abbreviated new drug
application (ANDA), but it must capitalize, for tax purposes, legal fees for preparing the notice letters
required to obtain Food and Drug Administration approval of the ANDA. See Tax Alert 2021-0991,
dated 14 May 2021.
District of Columbia — In a notice, the Government announced that DC income tax does not apply to
income from forgiven PPP loans. Additionally, businesses may deduct, for DC income tax purposes,
expenses paid with the proceeds of forgiven PPP loans. See State and Local Tax Weekly for 16 April 2021.
Georgia — The Government noted that taxpayers may deduct, for Georgia income tax purposes, wages
on which a claim for ERC credits is based. See the State and Local Tax Weekly for 4 June 2021.
Hawaii — The Government announced that businesses may not deduct expenses paid with forgiven PPP
loans. Businesses will need to file amended returns if they deducted these expenses on their returns.
See the State and Local Tax Weekly for 26 May 2021.
Maryland — In a tax alert, the Government concluded that Maryland conforms to all provisions of the
Consolidated Appropriations Act, 2021, unless the state enacted legislation decoupling from it.
Consequently, Maryland income tax does not apply to forgiven PPP loans, and businesses may deduct
expenses paid with those loans for Maryland income tax purposes. See State and Local Tax Weekly for
16 April 2021.
Michigan — The Government announced that Michigan income tax does not apply to forgiven PPP loans.
Additionally, businesses may deduct, for Michigan income tax purposes, expenses paid with forgiven PPP
loans. See the State and Local Tax Weekly for 23 April 2021.
South Carolina —The Government will continue, through 30 September 2021, to disregard the locations
of employees who are temporarily working in South Carolina due to COVID-19 for purposes of determining
a business’s nexus with the state or altering its income apportionment. The prior deadline was 30 June 2021.
See the State and Local Tax Weekly for 9 April 2021.
8 | Quarterly tax developments June 2021International
Argentina — In final regulations, the Government broadened eligibility for its incentive program for
biotech companies, permitting eligible companies to expense their assets in the first tax period in which
they are used or depreciate them over time in accordance with Argentina’s income tax law. See Tax
Alert 2021-1018, dated 19 May 2021.
Australia — The Government extended, through 31 December 2021, prior guidance disregarding the
presence of employees who are temporarily working in Australia due to COVID-19-related travel
restrictions for purposes of determining whether a foreign company has a PE in Australia. The guidance
previously applied through 30 June 2021. See Tax Alert 2021-1155, dated 10 June 2021.
Canada — In updated guidance, the Government reiterated that it will not treat a company as having a PE
in Canada solely because its workers had to remain there due to COVID-19-related travel restrictions
beginning 16 March 2020 through 30 September 2020 (the initial relief period). Following this period, the
Government expects that the application of the relevant treaty provisions to nonresident employers in
these situations will generally not result in the finding of a PE for the employer, as long as the travel
restrictions remain in place. See Tax Alert 2021-0712, dated 5 April 2021.
Chile — In a ruling, the Government concluded that a 35% withholding tax, and possible capital gains taxes,
applied to a profit distribution resulting from a Chilean PE’s allocation of its assets to its US-headquartered
parent company. The US parent planned to transfer the assets to a Swiss subsidiary as part of a corporate
restructuring, and the Swiss subsidiary, in turn, then planned to attribute the assets to a new PE in Chile at the
same value received by the parent company. The Government concluded that the stepped-up market value
deemed received by the US parent would be considered the tax basis in the new PE’s fixed assets for purposes
of depreciation and capital gains taxes. The PE’s contracts, however, would be considered intangible assets
not subject to amortization until their disposal. See Tax Alert 2021-1155, dated 10 June 2021.
Denmark — The Eastern High Court held that the US-Denmark income tax treaty applied to dividends
distributed by a Danish subsidiary to its US parent, so no withholding taxes applied, even though the
cash transfers went through intermediary companies in other countries within the related party chain.
Withholding taxes did apply, however, to dividends distributed from the same Danish subsidiary to a
Bermuda company within the chain, as they were not part of a contemplated distribution to the ultimate
US parent. See Tax Alert 2021-0987, dated 14 May 2021.
In a separate case, the Court held that Danish withholding tax applied to dividends that a Luxembourg
parent company received from its Danish subsidiary. The Court rejected the parent company’s argument
that it was the beneficial owner of the payment, noting that the company failed to disclose the identities
of the ultimate investors in its private equity fund owners and did not assert that those owners could
invoke benefits under Danish tax treaties. See Tax Alert 2021-0987, dated 14 May 2021.
In a binding ruling, the Danish Tax Board concluded that an employee would not create a PE for his UK
employer by permanently teleworking from his home in Denmark. The Board reasoned that the employer
had no interest in or benefit from the work being performed in Denmark, and the employee wanted to
live in Denmark for personal reasons. See Tax Alert 2021-0970, dated 13 May 2021.
EU — The General Court of the European Union held that Luxembourg did not grant illegal state aid by
allowing the Luxembourg subsidiary of a US company to use the transactional net margin (TNM) method
of transfer pricing when calculating the annual royalty paid to its intermediate Luxembourg parent. The
Court based its holding on the European Commission’s failure to prove that the TNM method unduly
reduced the subsidiary’s tax base in Luxembourg. See Tax Alert 2021-1055, dated 24 May 2021.
Finland — The Government stated that the presence of a foreign company’s employees or agents in
Finland due to COVID-19-related travel restrictions will not cause the company to have a PE in Finland.
Similarly, delays at a construction or installation site due to government restrictions (either in Finland or
another jurisdiction) generally will not be considered when determining whether a company has a
construction PE in Finland. See Tax Alert 2021-0970, dated 13 May 2021.
Greece — In a circular, the Government changed the tax treatment of losses incurred by foreign PEs so
that companies may now deduct losses incurred by foreign PEs located in the EU or European Economic
Area. Companies may deduct these losses in Greece provided the tax treaty between Greece and the
relevant treaty partner does not allow for the exemption of profits attributable to a PE. See Tax Alert
2021-1155, dated 10 June 2021.
9 | Quarterly tax developments June 2021India — The Delhi High Court held that a 5% (rather than 10%) withholding tax rate applied under the
India-Netherlands income tax treaty to dividends that a Dutch company received from its Indian
subsidiaries. The Court concluded that the treaty’s most-favored-nation clause dictated the application
of the lower rate, which appeared in treaties that India negotiated after the India-Netherlands treaty.
The Court rejected the Indian taxing authority’s argument that the most-favored-nation clause should
not apply because the parties to those subsequent treaties became members of the Organisation for
Economic Co-operation and Development (OECD) after the treaties became effective. See Tax Alert
2021-0881, dated 29 April 2021.
In a notification, the Government deemed nonresident companies to have a “significant economic
presence” in India if they sell more than INR20 million (US$280,000) of goods, services or property in
India, including the provision of data or software downloads, or solicit or interact with more than
300,000 Indian users. See Tax Alert 2021-0943, dated 11 May 2021.
The Indian Tax Tribunal held that the 5% withholding tax rate under the India-Malaysia income tax treaty
applied to dividends paid by an Indian company to its Malaysian shareholder in tax years 2012 through
2014, even though the dividend distribution tax (DDT) regime applied at the time. Although the Indian
company was responsible for paying the DDT, the Court reasoned, the dividends were income to the
shareholder, making the treaty rates applicable instead of the 15% rate specified under the DDT regime.
See Tax Alert 2021-0975, dated 13 May 2021.
Italy — In a decree, the Government increased Italy’s notional interest deduction (NID) for tax year 2021
to 15% (from 1.3%) of the increase in equity between tax year 2020 and tax year 2021. A maximum
increase of €5 million per company may be claimed, which results in a maximum NID deduction of
€750,000 per company. Companies may, however, be able to claim the 1.3% NID deduction for equity
increases over €5 million under the ordinary NID rules. In lieu of an increased NID deduction, companies
may claim an equivalent credit against any type of tax. The decree is currently effective but must be
approved by the Italian Parliament within 60 days of its publication in the Official Gazette on 25 May
2021 to be converted into law. See Tax Alert 2021-1096, dated 2 June 2021.
Kenya — The Tax Appeals Tribunal ruled that the Kenyan branch of a South African consulting company
did not owe withholding tax on professional services fees that it paid to another related company in South
Africa. The Tribunal concluded that the fees qualified as business profits under the Kenya-South Africa
income tax treaty, to which withholding tax does not apply. See Tax Alert 2021-0755, dated 13 April 2021.
Peru — The Tax Court concluded that income distributed by the active partner to the silent partner of a
partnership qualified as dividends, not business income. The Court also noted that a 5% withholding tax
applied to the dividend if the silent partner is not a Peruvian company (e.g., a nonresident company). See
Tax Alert 2021-0721, dated 7 April 2021.
Saudi Arabia — In a circular, the Government reiterated that foreign companies must pay 20% corporate
income tax on profits from direct sales in Saudi Arabia of goods or services that are identical or similar to
those sold in Saudi Arabia through the company’s PE (e.g., online sales through a website operated
outside Saudi Arabia) , if the applicable income tax treaty includes a “force of attraction” rule. Currently,
14 of Saudi Arabia’s 52 income tax treaties (i.e., treaties with Azerbaijan, Bangladesh, Ethiopia, Georgia,
Jordan, Kazakhstan, Macedonia, Mexico, Tunisia, Ukraine, United Arab Emirates, Uzbekistan, Venezuela
and Vietnam) include this rule. See Tax Alert 2021-0890, dated 30 April 2021.
Turkey — In a Communiqué, the Government explained how to apply the 10% restriction on deductions
for total financing expenses (e.g., interest), which applies when a company’s external liabilities exceed its
equity. The Government also explained how to apply the 15% withholding tax on gains from a Turkish
company’s buyback of its shares and the reduced corporate rate for new companies traded for the first
time on Borsa Istanbul. See Tax Alert 2021-1069, dated 26 May 2021.
Tax amnesties
This table shows tax amnesties that were announced or went into effect in the second quarter of 2021.
Jurisdiction Amnesty period Taxes covered Reference
Turkey Tax periods ending before Corporate income taxes Tax Alert 2021-1177,
30 April 2021 and withholding taxes, dated 14 June 2021
among others
10 | Quarterly tax developments June 2021Things we have our eyes on
National, state and local Federal, state and territories
governments continue to seek
Corporate tax —The Biden administration released its budget and explanation of its revenue proposals
to increase their revenues.
(the Green Book), which offers new details on the various proposals included in the President’s “Made in
Companies should continue to
America” tax plan. The significant US corporate income tax proposed changes include:
monitor developments in this
area. Some of these potential • Increasing the corporate tax rate to 28% from 21%
tax law changes are
summarized here. • Increased tax rates and other changes to the regime for GILTI
• Country-by-country limitations on foreign tax credits
• Repeal of the deduction for foreign-derived intangible income
• Replacement of the Base Erosion Anti-Abuse Tax (BEAT) with a newly proposed “SHIELD” (Stopping
Harmful Inversions and Ending Low-Tax Developments)
• Expanded rules targeting inversions
• A new 15% minimum tax on corporations based on “book income”
• Limits on interest deductions for disproportionate borrowing in the US
• Providing incentives for locating jobs in the US
• Eliminating tax preferences for fossil fuels
• Introducing new tax incentives for the production of clean energy
See Tax Alerts 2021-9010, dated 28 May 2021; 2021-9011, dated 28 May 2021; 2021-9012, dated
1 June 2021; 2021-1127, dated 4 June 2021; and 2021-1141, dated 8 June 2021.
Interest expense limitation — Senator Roy Blunt (R-MO) introduced a bill that would permanently include
allowances for depreciation, amortization and depletion in the calculation of the business interest expense
limitation under IRC Section 163(j). Under the TCJA, those allowances will be excluded from the calculation
of the IRC 163(j) limitation beginning in 2022. See Tax Alert 2021-0760, dated 14 April 2021.
California — In amended draft regulations, the Government proposed additional changes to its market-
based sourcing rules for services. These changes include:
• Sourcing revenue for certain large-volume providers of professional services based on customers’
billing addresses
• Pushing back the regulation’s applicable date to tax years beginning on or after 1 January 2023,
rather than tax years beginning on or after 1 January 2019
• Eliminating the election to apply the regulation’s new sourcing provisions to tax years beginning on
or after 1 January 2018
See Tax Alert 2021-1167, dated 11 June 2021.
Colorado — The state’s legislature passed a bill that would effectively source more income from
combined groups of corporations to Colorado. The bill would also exclude corporations located in “listed
jurisdictions” (i.e., tax havens) from Colorado combined returns. Other proposals include:
• Broadening the definition of “affiliated group”
• Modifying the definition of corporate net income for Colorado tax purposes for corporations not
incorporated in the US or included in a federal consolidated return
11 | Quarterly tax developments June 2021• Limiting the temporary 100% federal deduction under IRC Section 274(n)(2)(d) for food and beverage
expenses to 50% of the expense for income tax years beginning on or after 1 January 2022 but
before 1 January 2023
• Broadening taxation of capital gains
• Requiring certain captive insurance companies to pay corporate income taxes rather than gross
premiums tax
The Governor is expected to sign the bill into law. See Tax Alert 2021-1198, dated 16 June 2021.
Vermont — The U.S. Supreme Court declined to review a holding by the Vermont Supreme Court allowing
the state to tax capital gains from a Vermont company’s sale of federal telecommunications licenses to
broadcast in New York. See the State and Local Tax Weekly for 26 May 2021.
International
Australia — In Federal Budget 2021, the Government proposed reducing the corporate income tax rate to
17% (from the current 30% rate for large businesses) for income derived from medical and biotechnology
patents registered after the budget announcement. Other proposals include:
• Allowing companies with global revenue of less than AUS$5 billion or companies that meet the
alternative income test to expense certain assets used or installed through 30 June 2023 rather than
30 June 2022
• Allowing companies with global revenue of less than AUS$5 billion to carry back NOLs generated in
tax year 2023 to offset taxable income in tax years 2019 or later
• Allowing companies to determine the effective life of certain intangible assets (e.g., patents, copyrights,
in-house software) for depreciation purposes, beginning 1 July 2023
See Tax Alert 2021-0964, dated 12 May 2021.
Canada — As part of the federal budget for 2021–2022, the Government proposed temporarily reducing
the general corporate income tax rate to 7.5% from 15% on eligible income of qualifying manufacturers
of zero-emission technology. The Government also proposed broadening the types of clean-energy
equipment that are eligible for accelerated depreciation and removing some equipment from the
eligibility list. Other proposals include:
• Introducing a new tax credit for capital investments in carbon capture, utilization and storage projects
• Limiting deductions for net interest expense to 40% of tax EBITDA for tax year 2023 and 30% of tax
EBITDA for tax year 2024 and onward, with tax EBITDA generally defined as taxable income before
taking interest income and expense, income tax, and deductions for depreciation and amortization
into account
• Implementing the OECD’s recommendations for eliminating hybrid mismatches, which are outlined
in the Action 2 report under its Base Erosion and Profit Shifting (BEPS) plan
See Tax Alerts 2021-0807, dated 20 April 2021, and 2021-0808, dated 20 April 2021.
Colombia — The Government proposed introducing a 3% income surtax for 2022 and 2023 (in addition to
the applicable income tax rate) and eliminating certain income tax exemptions. See Tax Alert 2021-0849,
dated 23 April 2021.
EU —The European Commission announced that it plans to replace its proposed Common Consolidated
Corporate Tax Base with another proposed framework for business taxation in the EU. The “Business in
Europe: Framework for Income Taxation” (referred to as BEFIT), which will be proposed in 2023, would
consolidate the profits of a multinational group’s EU members into a single tax base, allocate those
profits to EU member states using a formula and apply national corporate income tax rates to the
allocated profits. Additionally, the Commission outlined its tax plans for the next two years, including
how it plans to implement Pillars One and Two of the OECD’s BEPS proposals. See Tax Alert 2021-1013,
dated 19 May 2021.
12 | Quarterly tax developments June 2021France — The Government proposed allowing companies to carry NOLs generated during a tax year ending
from 30 June 2020 through 30 June 2021 back three years and use them to offset 100% (rather than
€1 million or less) of taxable income, provided certain conditions are satisfied. Companies would then use a
25% corporate tax rate to determine the corresponding income tax credit (based on the losses actually carried
back) to be used to offset income tax liabilities over the following five years. See Tax Alert 2021-1139,
dated 8 June 2021.
G7 countries — In a communiqué, the Finance Ministers and Central Bank Governors of the G7 countries
expressed their support for a global minimum tax of “at least 15%” on a country-by-country basis. They
also pledged to fairly resolve the issue of allocating rights to tax the profits of the “largest and most
profitable multinational enterprises.” The ministers are expected to discuss these issues at the July
meeting of the G20 Finance Ministers. See Tax Alert 2021-1131, dated 7 June 2021.
In a separate communiqué, the leaders of the G7 countries affirmed their commitment to the global tax
changes previously endorsed by the G7 Finance Ministers. See Tax Alert 2021-1179, dated 14 June 2021.
Kenya — In Finance Bill, 2021, the Government proposed a new definition of “control” for purposes of
determining whether companies are related. It also proposed aligning its PE definition with the OECD’s.
Other proposals include:
• Allowing companies to carry losses forward indefinitely, rather than for 10 years
• Limiting interest expense deductions to 30% of EBITDA (defined as earnings before interest, taxes,
depreciation and amortization), rather than applying the limit to companies whose debt-to-equity
ratio exceeds 3:1
• Extending treaty benefits to corporations that own at least 50% of a company
• Amending the basis for claiming investment allowances to straight-line basis (as opposed to
reducing balance)
• Increasing the tax rate on service fees paid to a nonresident subcontractor by a contractor or
licensee to 10% from 5.625%
• Reducing the tax rate on management, training or professional fees to 10% from 12.5% for
taxpayers in the extractive sector
See Tax Alert 2021-1062, dated 26 May 2021.
Russia — The Government proposed legislation that would terminate Russia’s income tax treaty with the
Netherlands. Termination of the treaty would increase Russian withholding tax rates to 15% from 5% for
dividends and 20% for interest and royalties, which are currently exempt from tax. It would also increase
the Dutch withholding tax on dividends to 15% from 5%. Other possible effects include the inability to
credit payment of Russian withholding tax on interest and royalties against Dutch corporate income tax
and exposure to double taxation for companies with dual residency in Russia and the Netherlands. See
Tax Alert 2021-0798, dated 19 April 2021.
Switzerland — The Government proposed exempting interest income from Swiss-issued bonds from
withholding tax. See Tax Alert 2021-0961, dated 12 May 2021.
Taiwan — The Government proposed adding an anti-treaty shopping clause to its regulations governing
the application of tax treaties. Other proposals include:
• Adding criteria for determining where a corporation resides for treaty purposes if it is considered
resident in both Taiwan and the treaty partner
• Clarifying the circumstances under which a corporation is deemed to have a PE in Taiwan
See Tax Alert 2021-1106, dated 4 June 2021.
13 | Quarterly tax developments June 2021Uganda — The Government proposed broadening the scope of the income tax exemption for strategic
sectors to include income from the manufacture of certain industrial and consumer products. The
Government also proposed an income tax exemption for certain manufacturers. Other changes include:
• Reducing the classes of depreciable assets to three from four and placing most assets in the class
with the lowest depreciation rate
• Deferring the ability to claim annual depreciation deductions to the next year for assets that qualify
for initial depreciation
• Changing the cost basis of certain assets for purposes of computing capital gains tax
• Effectively exempting gains from the sale of an interest in a registered venture capital fund from
capital gains tax provided that at least 50% of the sale’s proceeds are reinvested within the tax year
See Tax Alert 2021-0784, dated 16 April 2021.
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