U.S. Revises Model Tax Treaty | KPMG | CA

U.S. Revises Model Tax Treaty

U.S. Revises Model Tax Treaty

Global Tax Adviser, March 01, 2016. The U.S. Treasury Department has issued a revised model U.S. tax treaty that, among other changes, addresses "special tax regimes" and situations where a treaty partner imposes a significantly reduced level of tax after the treaty's original negotiation. As the U.S.-Canada treaty is not currently under negotiation, Canadian enterprises will likely only be affected by the model treaty once U.S. tax treaties are renegotiated with other countries where Canadian multinationals have interests and operations.

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Background

The model treaty, which was last revised in 2006, is the baseline that Treasury uses to negotiate actual treaties. The U.S. Treasury Department proposed changes to the model treaty in May 2015.

Changes to the model U.S. tax treaty do not automatically modify existing treaties that the U.S. and other countries have signed. Any such changes to existing treaties must be renegotiated.

Changes to the model treaty

Many of the changes to the model U.S. tax treaty address situations where non-taxation has occurred under the existing treaty network. Among other modifications, the revised treaty model denies treaty benefits to "special tax regimes" that impose low or no tax on highly mobile income (e.g., interest or royalties) in the resident country. Under these rules, payments to a related entity of deductible amounts of, for example, interest or royalties would not be eligible for reduced treaty withholding rates. These provisions would only be invoked after consultation and written public notification.

The model treaty also includes a provision that essentially could unilaterally deny treaty benefits through diplomatic means when there is a significant reduction in the level of tax imposed by a treaty partner after the original negotiation of the treaty. This provision would apply to deny the benefits of certain articles of the treaty, while the treaty itself would remain in force.

The new model treaty changes also:

  • Deter inversions by denying treaty benefits for base eroding payments made by expatriating U.S. entities following a corporate inversion transaction
  • Revise the limitation on benefits article, including the addition of a reworked version of the existing "derivative benefits" test
  • Prevent treaty benefits on income attributable to a permanent establishment located in either the state in which the income is derived (i.e., the source state) or a third jurisdiction (outside the residence state) if the income is subject to no or little tax in any jurisdiction.

KPMG observations

It appears that some of these changes address what could be a decrease in tax rates around the globe in response to the OECD's BEPS recommendations.

Additional details of these and other changes are outlined in the recent KPMG U.S. publication "KPMG report: Initial analysis of 2016 U.S. model treaty".

For more information, contact your KPMG adviser.

Disclaimer

Information is current to March 01, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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