Witnesses testifying before the US Senate Committee on Foreign Relations on October 29 urged the committee to recommend ratification of eight pending US tax treaties and protocols, highlighting key aspects of the agreements.
Proposed income tax treaties with Chile, Hungary, and Poland; proposed tax protocols with Japan, Luxembourg, Spain, and Switzerland; and a proposed protocol amending the multilateral mutual administrative assistance treaty, await committee approval. The Senate has not approved ratification of a tax treaty in over five years, though, because Republican Senator Rand Paul is blocking their progress. Rand opposes the treaties’ exchange of information provisions, concerned that through this mechanism the US will allow the privacy rights of US citizens to be violated.
During his testimony before the Committee, Treasury Deputy Assistant Secretary for International Tax Affairs Robert Stack attempted to respond to Paul’s concerns, stating that the standards in the pending treaties — which permit exchange of information that may be relevant or that is foreseeably relevant to administering tax laws — are not new.
The standard has been a part of the US Model Tax Treaty since 1996 and is included in 14 US tax treaties, Stack said. He noted that the only US tax treaty that permits exchange of information only in cases of tax fraud is the treaty with Switzerland. That provision “allowed Switzerland to become a haven for tax cheats,” Stack said, which is why the Swiss treaty must be updated. He said the pending protocol with Luxembourg also includes an updated provision on exchange of tax information.
Stack noted that the proposed tax treaties with Hungary and Poland feature limitation on benefits articles, which are needed because there is evidence that companies are using both countries for treaty shopping.
Stack said that the protocol with Japan has rules obligating tax authorities to assist in the collection of tax. The US usually does not agree to such provisions, Stack said, because of a desire to not overburden the IRS with the requirement to collect taxes of other counties. He said that in the case of Japan, though, an agreement to assist in tax collection would give the US a net revenue benefit.
Stack noted that the protocols with Japan and Spain significantly reduce source country taxation of cross-border payments of income and gain and provide for mandatory binding arbitration. He said that the pending protocol with Switzerland also provides for mandatory binding arbitration.
Thomas A. Barthold, Chief of Staff of the Joint Committee Taxation, noted that the provisions on mandatory and binding arbitration in the Japan protocol differ from arbitration provisions in other US tax treaties.
One difference, he said, is that the Japanese protocol does not require the taxpayer to file a tax return in both jurisdictions before taking advantage of arbitration. The agreement also departs from the US model treaty, Barthold said, by allowing taxpayers to submit a position paper directly to the arbitration panel.
Further, the Japanese protocol provides that a taxpayer that has a bilateral advance pricing agreement (APA) request that has been unresolved for over two years will be permitted arbitration within six months if a taxing authority that is a party to the APA seeks to adjust prices that are the subject of the APA, Barthold said.
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