New US Model Income Tax Treaty: Now With Kill-Switches!

Treasury issued the new US Model Tax Treaty, via press release: 

​WASHINGTON - Today, the Treasury Department issued a newly revised U.S. Model Income Tax Convention (the “2016 Model”), which is the baseline text the Treasury Department uses when it negotiates tax treaties.  The U.S. Model Income Tax Convention was last updated in 2006.   

“The 2016 Model is the result of a concerted effort by the Treasury Department to further our policy commitment to provide relief from double taxation and ensure certainty and stability in the tax treatment of treaty residents,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack.  “The 2016 Model includes a number of provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance,” he added. 

Many of the 2016 Model updates reflect technical improvements developed in the context of bilateral tax treaty negotiations and do not represent substantive changes to the prior model.  The 2016 Model also includes a number of new provisions intended to more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.  For example, the 2016 Model does not reduce withholding taxes on payments of highly mobile income—income that taxpayers can easily shift around the globe through deductible payments such as royalties and interest—that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime.  In addition, a new article obligates the treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty’s original balance of negotiated benefits and the need for the treaty to reduce double taxation.  The 2016 Model also includes measures to reduce the tax benefits of corporate inversions.  Specifically, it denies reduced withholding taxes on U.S. source payments made by companies that engage in inversions to related foreign persons.   

The Treasury Department has been a strong proponent of facilitating the resolution of disputes between tax authorities regarding the application of tax treaties.  Accordingly, the 2016 Model contains rules requiring that such disputes be resolved through mandatory binding arbitration.  The “last best offer” approach to arbitration in the 2016 Model is substantively the same as the arbitration provision in four U.S. tax treaties in force and three U.S. tax treaties that are awaiting the advice and consent of the Senate.  

The 2016 Model reflects comments that the Treasury Department received in response to the proposed model treaty provisions it released on May 20, 2015.  The Treasury Department carefully considered all the comments it received and made a number of modifications to the proposed model treaty provisions in response to those comments.
The Treasury Department is preparing a detailed technical explanation of the 2016 Model, which it plans to release this spring.  The preamble to the 2016 Model invites comments regarding certain situations that should be addressed in the technical explanation for the so-called “active trade or business” test of Article 22 (Limitation on Benefits).  See the preamble page 5.  The deadline for public comments on this subject is April 18, 2016.

Highlights mine. There is much to be discussed in this of course and I will make no attempt to be comprehensive here, but I made a quick comparison doc that might be useful; download here. Just at first glance: can you spot the BEPS? Action 6 is plainly at work, and probably others.

My current interest is in what I am calling the new "kill-switch" provisions, the special tax regime (art 3, 11, 12, 21, 22) and subsequent law changes (art 28) provisions alluded to in the bold highlighted text above. I'm working on a paper on this subject and will have more analysis soon.

Rocha on Balancing Rights and Power between State and Taxpayer

Sergio André Rocha recently posted a discussion on information, transparency, and the rights of taxpayer versus those of states, of interest. He argues that hard-fought rights needed to balance the unequal power between state and individual are being abandoned in the populist rush to protect the state against multinational tax dodging. Central to this argument is the claim that states are not hapless victims of ruthless tax managers and CEOs, rather they are the very architects of the system. He worries, I think, that suspending taxpayer rights to get at the big bad corporations will ultimately result in suspending rights for individuals, setting up the conditions for states to abuse their power. Here are a few excerpts (footnotes omitted):

There is no doubt that taxation is one of the areas where the balance between the legitimate exercise of Government power and the illegitimate violation of citizens’ rights is most challenging. 

...The transformation of the majority of modern States into Fiscal States – i.e., States that depend on tax collection to obtain the resources to fund all its activities – has changed the nature of the obligation to pay taxes. Some authors have begun to argue that there is a fundamental or constitutional obligation to pay taxes.

However, this line of thought, to which we subscribe, has been used to support an inversion of the whole structure of tax systems. Legal principles that are, at their core, protections of taxpayers against the State have been transformed into protections for the State against taxpayers. 

Let’s consider, for instance, the principle of transparency, which is at the center of modern constitutional, administrative, financial, and tax law. It is, first and foremost, a protection for the citizens against the State, establishing as a goal a state of affairs that guarantees full disclosure of a government’s actions to its citizens. 

The principle of transparency is not a one-way street. It also applies to citizens, requiring disclosure and combating opaque situations that prevent the due application of laws in general. Nevertheless, one should not forget: State and Government transparency come first. 

This maxim seems to have been forgotten by those now in charge of reshaping the international tax regime. 

...[OECD Director Pascal Saint-Amans recently] stated that, "Transparency, from my perspective, is transparency from the taxpayer to the Tax Administration, and maybe the other way around as well. ..."  

We should make no mistake: once legal principles have been mutilated and taxpayers’ rights overturned, effects will be felt by all taxpayers – individuals and legal entities alike. 

...Both the Global Forum’s and BEPS’ work share a common feature: they are aimed at optimizing States’ tax collection. The taxpayer – the citizen – is not in their focus. This is unacceptable. There is nothing more urgent than recovering the protagonist role of the taxpayer in taxation, where he rightfully belongs. This does not mean that their focus is completely misguided. It means that they need to find a way to achieve their rightful objectives without leaving taxpayers’ rights behind.

More at the link above; worth the read.

Parada: Legal Questions Surrounding FATCA-based Agreements in Europe

Leopoldo Parada has recently posted on SSRN an article published last summer in the World Tax Journal, entitled Intergovernmental Agreements and the Implementation of FATCA in Europe, of interest. Here is the abstract:

FATCA is a US domestic tax policy that requires Foreign Financial Institutions around the world to provide the IRS information regarding their US clients. Recognizing this extraterritorial characteristic and the troubles associated with it, the US Treasury Department developed the Intergovernmental Agreements (IGAs), which have served the double purpose of coordinating FATCA at an international level and influencing the new international standards on automatic exchange of information. Nevertheless, the IGAs are instruments that still need to be improved, at least in order to guarantee their successful implementation in Europe. The first part of this article explores the legal nature and the characteristic of the IGAs, concluding that they possess an asymmetriclegal nature that can lead to conflicts of interpretation. Likewise, it concludes that their contribution toward international transparency is incompatible with the existence of other instruments in Europe that seek the opposite goal of protecting bank secrecy, although it recognizes the importance of the most recent achievements at the European level in order to ensure a coherent and consistent system of automatic exchange of information. The second part of this article analyses three grey areas in the IGAs implementation process in Europe (i.e., “quoted Eurobonds” in the United Kingdom; group requests under the Switzerland-United States IGA, and the “coordination timing” provision of the IGA Model 1A), concluding that there is still work to be done in order for the IGAs to grant an acceptable level of reciprocity in practice.

I was not aware of this article when I wrote on a column last fall on this very same topic, in which I called the IGAs "Hybrid Tax Agreements" and pointed out the mess created by their unprecedented legal form as treaties to the rest of the world but administrative guidance in the United States. Parada's article goes further in the analysis and lays out a number of enduring difficulties. It seems to me that governments are simply ignoring these difficult issues as inconvenient barriers to desired outcomes and courts will face the same temptation. But I don't think these issues go away with time and gradual acceptance of FATCA as an institution. Instead, I think the issue will cause systemic problems going forward, both in terms of raising endless conflicts of law, and in terms of the precedent set for international tax relations by the failure of states to challenge US exceptionalism even as it tramples on law and legal process throughout the world.

Documenting the spread of OECD norms: Country by Country Reporting Map

Here is a world map showing status of implementation of the OECD's Country by Country Reporting regime; clicking on the flags gives a brief country status report. I'm not really sure how informative it is in that it is not all that useful to read simply that CBCR is being implemented but the implementation date is "unknown" in various countries, especially when the little flag masks real controversy surrounding the country's intentions.  Also I am not sure what to make of all the blank space--do the map's curators think these other countries are irrelevant to the inquiry? Even so, if the idea is that the map will one day be covered in green flags, and that the world with green flags is remarkably different than today's world with mostly red and yellow ones, watching the map evolve will be a fascinating study in the power of soft law.

Global Tax 50

I'm honoured to have a spot on the Global Tax 50 list this year--International Tax Review's list of people and organizations that have had a global impact or influence on tax. European Competition Commissioner Margrethe Vestager tops the list this year, a fitting choice given the importance of the fiscal state aid investigations to the pace and direction of global tax reform efforts.

EU Report: give fiscal state aid recoveries to tax competition victims; sanction the culprits

In an annual report to the European Parliament on EU Competition Policy, MEP Werner Langen has proposed that the fiscal state aid rules be changed so that other EU states receive any recoveries. Thus, if Ireland loses in its investigation by the EC, it will have to recover some billions from Apple as punishment, and Langen proposes that Ireland--the "culprit"--not be allowed to keep the money. The Report:

Calls on the Commission to modify the existing rules without delay, in order to allow the amounts recovered following an infringement of EU tax-related State aid rules to be returned to the Member States which have suffered from an erosion of their tax bases, or to the EU budget, and not to the Member State which granted the illegal tax-related State aid, as is currently the case, as this rule provides an additional incentive for tax dodging;

Even if the proposal goes nowhere, one can understand why the sentiment would arise. When I first started looking at the fiscal state aid investigations, this element struck me as counter-intuitive: where a state has foregone revenue in order to lure business in contravention of the antitrust rules in the TFEU, the punishment is then to collect the revenues foregone. The narrative thus is that the state successfully cheated its EU neighbours of an opportunity to attract foreign investment and the punishment is a cash windfall.

This looks more like a punishment if you think the collection of revenues by the state will cause the investment to flee to other jurisdictions because the targeted state is not competitive but for the state aid. That might not seem likely for Ireland, both because Ireland's general corporate tax rate is still lower than much of Europe even without the extra padding of the state aid, and because the successful luring of Apple arguably had its intended effect, creating spillover effects that gave Ireland a first-mover advantage which now extends its attractiveness beyond the favourable tax climate. In that case the MEP's position on the cash windfall is sympathetic.

Even if it is sympathetic, it is hard to imagine redistributing Apple's foregone tax revenue to other EU members, when it is at least debatable whether any of the recipients hold out clean hands. Tax competition is so ubiquitous, so multifaceted, every victim is a culprit, too.

In a potentially even more problematic move, the report "[c]alls on the Commission to consider the introduction of sanctions, either against the state or the company involved, for serious cases of illegal State aid". The array of issues involved in sorting out that kind of power structure is vast.

On a side note, the report contains a long list of tax harmonization goals, and it includes an interesting call for the EC to get in on the multilateral exchange of tax rulings, which, via the OECD BEPS initiative, are to be automatically shared among countries under conditions of confidentiality, including restrictions as to their use for non-tax purposes. The report "Emphasises that the Commission must, as a matter of course, have access to data exchanged between tax authorities which are relevant in the context of competition law." I am not sure whether sharing tax rulings with the EC would be compatible with the OECD confidentiality framework.

A very provocative report that signals a growing amount of frustration with ongoing tax competition, and an increasing desire of some to use the fiscal state aid rules to stop it. Will be interesting to see where this takes the field.