Representatives of the governments of the United States, Canada, and Mexico during 2017 have been involved in re-negotiations of the North American Free Trade Agreement (NAFTA). The fourth round of the re-negotiations began in October 2017.
Much attention has been focused on the trade implications of the NAFTA re-negotiations. Read, for instance, a KPMG report following the third round of the re-negotiations.
Still, taxpayers need to consider what could be the possible tax implications of the NAFTA re-negotiations.
Under the network of U.S. bilateral income tax treaties, a signatory country generally grants treaty benefits (e.g., reduction of that country’s tax) only to the income of a company that is a resident of the other country, if that company is owned by defined residents of one of the two signatory countries. U.S. income tax treaties with many EU countries contain so-called "derivative benefits" provisions that generally expand this rule also to allow treaty benefits to a company that is a resident of the other country if that company is owned by a resident of a country that is a signatory of NAFTA (under the derivative benefits rule).
Thus, for example, if NAFTA were to be terminated, payments by Canadian-owned companies to their EU affiliates generally could no longer benefit for U.S. tax purposes from the derivative benefits rule as currently available under the network of U.S. income tax treaties.
© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor 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 on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.