Friday, October 23, 2015

Reconsidering the Tax Treaty: Brooklyn Law Symposium

I'm very pleased to participate in Brooklyn Law School's annual international tax symposium today. This year's theme is Reconsidering the Tax Treaty: a timely topic given the OECD's release of the BEPS Reports, especially Action 6, and the US Treasury's release of proposed new Model Provisions.

My working paper looks at these developments, with a specific focus on the proposed "special tax regimes" and "subsequent changes in law" switch off clauses--in effect, two built-in mini-override provisions. Mine is truly a work in progress and not ready for distribution yet but here is the basic framework:

Seeing STRs: A New Vision for Tax Treaties?

The new US Model treaty contains several new provisions designed to address treaty abuses, in line with the ongoing OECD initiative to counter base erosion and profit shifting (BEPS). Among these are two dealing with foreign law. The first denies treaty withholding rates on interest, royalties, and other income to taxpayers eligible for “special tax regimes” (STRs) in the treaty partner country. The second completely switches off the treaty withholding rates for all recipients of passive income items in prescribed situations where the partner country reduces its tax rate below 15%. The STR provision is limited in scope to taxpayers who receive special deals, but the subsequent law provision partially terminates the treaty as to every taxpayer (ostensibly in both countries) even if they do not benefit from the targeted regime. Both provisions seem designed to enact a new central purpose for tax treaties, namely, as peer-monitoring devices to create a world in which cross border capital flows are subject to at least a single level of tax, at a minimum tax rate. This article examines the international precedents for the new provisions and their implications for international tax relations going forward. It concludes with a discussion about the role tax treaties can and should play in curtailing tax competition among nations.
As always I welcome comments; will post a draft when ready.

1 comment:

  1. A couple of thoughts on this:

    Many existing US Treaty partners not just Ireland, Switzerland, the Netherlands but also the UK and Canada come very close to "violating" these provisions if not already violating them. So my question is what is the US going to do about(short of the unlikely step of unilateral denunciation). Are we going to have even more of a "two tier" US Treaty system where "new" developing world treaty partners must comply while the Ireland's and Canada's do not. Notably I don't see any "carrot" to convince any existing treaty partner to sign on maybe other than very tax conscious France and Germany on reasons of "principle."