Tax treaty update: Proposed revisions to U.S. Model Tax Convention

Proposed revisions to U.S. Model Tax Convention

The Treasury Department today released drafts of the following five proposed revisions to the U.S. Model Tax Convention for public comment.

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According to a statement made by Treasury Deputy Assistant Secretary for International Tax Affairs Robert B. Stack:

 

The draft provisions … reflect the fact that the tax regimes of our treaty partners are more likely to change over time than they have in the past, and that they sometimes change in ways that encourage base erosion and profit shifting or BEPS, by multinational firms. Treaties exist to eliminate double taxation, not to create opportunities for BEPS, and today’s updates fully take account of the new international tax environment. The draft provisions also articulate steps that would help prevent our treaty network from encouraging inversion transactions….

 

As noted in a Treasury release:

  • The aims of these revisions are: (1) to determine that the United States is able to maintain the balance of benefits negotiated under its treaty network as the tax laws of treaty partners change over time; and (2) to deny treaty benefits to companies that change their tax residence in an inversion transaction.
  • One set of draft provisions addresses issues arising from “special tax regimes” that provide very low rates of taxation in certain countries—in particular to mobile income, such as royalties and interest. Consistent with the BEPS project, the proposals are intended to avoid instances of “stateless income” or double non-taxation, whereby a taxpayer uses provisions in the tax treaty, combined with special tax regimes, to pay no or very low tax in the treaty partner countries.
  • The second set of draft provisions is intended to reduce the tax benefits from a corporate inversion by imposing full withholding taxes on key payments such as dividends and base stripping payments, including interest and royalties, made by U.S. companies that are “expatriated entities” as defined under the Internal Revenue Code.
  • Also part of the effort to eliminate BEPS, proposed revisions are intended to prevent taxpayers from inappropriately obtaining the benefits of a tax treaty on income that escapes tax in their country of residence. These include: (1) more robust rules on the availability of treaty benefits for income that is not subject to tax by a treaty partner because it is attributable to a permanent establishment located outside the country of residence; and (2) the ability of a company to make excessive base eroding payments.
  • The revised limitation on benefits (LOB) article includes a reworked version of the existing “derivative benefits” rule, to provide the opportunity of qualifying for treaty benefits based on a broader concept of ownership that includes certain third-country ownership.

Treasury has invited comments on these proposed treaty rules.

While not among the draft treaty provisions released today, Treasury stated that it intends to include in the next U.S. Model Tax Convention a new article to resolve disputes between tax authorities through mandatory binding arbitration.

The U.S. Model Tax Convention was last updated in 2006.

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