The US Treasury has issued a newly revised US model income tax convention - the baseline text used to negotiate tax treaties – which contains a number of new provisions to more effectively eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance
The department says many of the updates reflect technical improvements developed in the context of bilateral tax treaty negotiations and do not represent substantive changes to the prior model, which was last updated in 2006
For example, the 2016 model does not reduce withholding taxes on payments of highly mobile income 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, such as the recent takeover of Dublin-based Allergan by Pfizer.
Specifically, it denies reduced withholding taxes on US source payments made by companies that engage in inversions to related foreign persons.
The updated model also contains rules requiring tax treaty dispute resolution through mandatory binding arbitration, taking the ‘last best offer’ approach, which the department says is substantively the same as the arbitration provision in four US tax treaties in force and three US tax treaties that are awaiting the advice and consent of the Senate.
Robert Stack, deputy assistant secretary for international tax affairs, said that 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.
‘It includes a number of provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance,’ said Stack.
The Treasury it plans to release the new model this spring, with a technical consultation on the so-called ‘active trade or business’ test running until April 18.
Details of the 2016 model are here