International taxation relief provisions

The new net operating loss (NOL) carryback rules in the Coronavirus Aid, Relief, and Economic Security (CARES) Act can potentially affect numerous U.S. international tax provisions in relation to U.S. taxpayer’s tax filings on its overseas operations. Below, we discuss various issues involving the interaction of the CARES Act NOLs with the so-called “repatriation tax” of section 965(a); U.S. shareholders with controlled foreign corporations (CFCs) that generated global intangible low-tax income (GILTI) (potentially also taking advantage of foreign taxes paid by their CFCs as foreign tax credits and/or availing themselves of the GILTI section 250 deduction); foreign-derived intangible income (FDII); and taxpayers that were subject to the base erosion and anti-abuse tax (BEAT). 

In the case of the section 965(a) repatriation tax, the IRS issued guidance on the application of the changes to the NOL rules of section 172 brought about by the CARES Act. Understanding this guidance and modeling the impact of any NOL carryback is key for clients to optimize the intended tax result. 

Separately, the IRS also issued three revenue procedures that may provide relief from potential tax obligations resulting from COVID-19. Rev. Proc. 2020-20 applies to nonresident aliens stranded in the United States that, because of certain related travel restrictions, may become resident here. Rev. Proc. 2020-27 provides guidance to U.S. individuals seeking to qualify under section 911 that left their foreign residences during a certain period of time due to COVID-19. Rev. Proc. 2020-30 includes U.S. trade or business/permanent establishment issues and dual consolidated loss relief guidance due to travel restrictions. 

Guidance on the interaction of CARES Act NOL carryback rules and section 965 repatriation tax

Background

The CARES Act amended section 172(b)(1) to allow taxpayers to carry back any NOL arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021 (applicable NOLs), to each of the five taxable years preceding the taxable year in which the NOL arises (the carryback period). This is potentially taxpayer favorable in that applicable NOLs may offset income taxed at a higher marginal tax rate than is in effect today. However, the CARES Act also amended section 172(b)(1) to provide that if an applicable NOL is carried back to a repatriation tax year, the taxpayer will be treated as having made the election under section 965(n). As such, the taxpayer will be required to exclude the section 965(a) inclusion amount in determining its NOL deduction. In other words, applicable NOLs carried back to a repatriation tax year will not reduce any section 965(a) inclusion tax liability. Taxpayers can make certain elections in order to tailor the CARES Act’s NOL carryback provisions to provide the most tax-efficient result.