Income Taxes

6 Months Ended

Jun. 30, 2020

Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.

The sources of income (loss) from continuing operations before income taxes and earnings of our unconsolidated equity method investments for the three and six months ended June 30, 2020 and 2019 were as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
U.S. operations	$	5,915		$	1,959	$	10,820		$	3,875
Non-U.S. operations	(192,983		)	32,658		(232,674		)	69,006
Income (loss) from continuing operations before income taxes and earnings (loss) of unconsolidated equity method investments	$	(187,068	)	$	34,617	$	(221,854	)	$	72,881

Our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are primarily non-U.S. corporations. These subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes. The aircraft owning subsidiaries resident in Ireland, Mauritius and the U.S. are subject to tax in those respective jurisdictions.

We have a U.S.-based subsidiary which provides management services to our subsidiaries and is subject to U.S. federal, state and local income taxes. We also have Ireland and Singapore based subsidiaries which provide management services to our non-U.S. subsidiaries and are subject to tax in those respective jurisdictions.

The consolidated income tax expense for the three and six months ended June 30, 2020 and 2019 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending December 31, 2020 and 2019, respectively.

The Company’s effective tax rates (“ETRs”) for the three and six months ended June 30, 2020 and 2019 were (2.5)% and (2.2)%, and 17.3% and 12.5%, respectively. The three and six months ended June 30, 2020, included discrete items totaling $3,973 and $950 in tax benefits, respectively. The second quarter of 2019 included a discrete item of $2,845 related to a fair value adjustment on an intercompany asset transfer. Excluding these discrete tax items, the ETR would have been (4.6)% and (2.6)% for the three and six months ended June 30, 2020, respectively, and for the three and six months ended June 30, 2019, 9.1% and 8.6%, respectively. Movements in the ETR are generally caused by changes in the proportion of

the Company’s pre-tax earnings in taxable and non-tax jurisdictions. During the six months ended June 30, 2020, we incurred net impairment charges of $206,744 in low tax jurisdictions and a significant decrease in Bermuda income primarily related to Merger expenses of $32,385. During the six months ended June 30, 2019, we reported a significant decrease in Bermuda income primarily related to Avianca Brazil and an increase in Irish income related to Jet Airways.

Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income (loss) from continuing operations consisted of the following:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Notional U.S. federal income tax expense (benefit) at the statutory rate	$	(39,284	)	$	7,270		$	(46,589	)	$	15,305
U.S. state and local income tax, net	390			181			1,979			390
Non-U.S. operations:
Bermuda	46,088			(2,910		)	48,594			(8,048		)
Ireland	1,017			2,093			(171		)	2,602
Singapore	59			(2		)	85			(4		)
Other low tax jurisdictions	412			(872		)	2,066			(1,724		)
Non-deductible expenses in the U.S.	140			232			3,420			569
Other	(4,151		)	—			(4,564		)	—

Income tax provision	$	4,671		$	5,992		$	4,820		$	9,090

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020. The CARES Act, among other things, includes provisions relating to net operating loss carrybacks, alternative minimum tax credit refunds, modification to the net interest expense deduction limitation and technical correction to the tax depreciation methods for qualified improvement property. While we continue to evaluate the potential application of the CARES Act provisions, the CARES Act did not materially impact the Company’s effective tax rate for the six months ended June 30, 2020.