Proposed updates to US model tax treaty address stateless income, corporate inversions, limitation on benefits

US Treasury on May 20 released for public comment draft proposals that would significantly modify the US Model Income Tax Convention. Included are proposals to address stateless income, discourage corporate inversions, and permit expanded use of the treaty through a derivatives benefits rule. The next US model would also include a provision requiring dispute resolution through binding mandatory arbitration.

The draft includes a new limitation on benefits provision, adding for the first time a derivative benefits rule that permits taxpayers to qualify for treaty benefits based on third-country ownership.

A new draft provision would deny tax treaty benefits for related party payments of royalties, interest, and other income or profit when the beneficial owner of the interest can take advantage of a special tax regime that provides a preferential effective rate of taxation on the income or profit. The preferential tax rate can be achieved through legislation, regulation, or administrative practice, such as a letter ruling practice.

Other draft provisions would prevent companies that have inverted from using treaty withholding tax benefits for dividends, interest, or royalties.

The draft also includes provisions designed to prevent residents of third-countries from using 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, seeking to limit excessive base eroding payments.

The Treasury Department also confirmed that it intends to include in the next US Model an article to resolve disputes between tax authorities through mandatory binding arbitration.

“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,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack.

The model treaty is designed to provide a starting point for US tax treaty negotiations and was last updated in 2006.

See:

• Proposed Treaty Rule Addressing So-Called “Exempt Permanent Establishments”

• Proposed Treasury Rules Addressing Payment by “Expatriated Entities”

• Proposed Treaty Rules Addressing “Special Tax Regimes”

• Proposed Limitation on Benefits Article

• Proposed Article Addressing Subsequent Changes in Law

• Treasury Releases Select Draft Provisions for Next US Model Income Tax Treaty