US Treasury Official Urges Progress On Tax Treaties

by Glen Shapiro, LawAndTax-News.com, New York

13 November 2009

Manal Corwin, the US Treasury International Tax Council, appeared before the Senate Foreign Relations Committee on November 10 to argue the case for three new tax treaties and to update the panel on the Treasury's tax treaty priorities.

Corwin told the Committee, chaired by former Democrat presidential candidate John Kerry, that the three treaties to be considered by the Senate, which include new agreements with France, Malta and New Zealand, would "serve to further the goals of our tax treaty network." She also told the Committee that the Treasury has plans to further expand America's network of tax treaties, and is making progress in renegotiating others to close opportunities for 'treaty shopping' and to include provisions for tax information exchange, particularly with "secrecy jurisdictions."

"A key continuing priority for the Treasury Department is updating the few remaining US tax treaties that provide for significant withholding tax reductions but do not include the limitation on benefits provisions needed to protect against the possibility of treaty shopping. I am pleased to report that in this regard we have made significant progress," Corwin informed the Committee.

"Concluding agreements that provide for the full exchange of information, including information held by banks and other financial institutions, is another key priority of the Treasury Department," she added, continuing: "2009 has been a year of fundamental change in transparency, as many secrecy jurisdictions announced their intentions to comply with the international standard of full information exchange. In this changing environment, the Treasury has made many key achievements, including the conclusion of protocols of amendment to the US tax treaties with Switzerland and Luxembourg that provide for full exchange of information, including bank account information."

According to Corwin, the treaties with France and New Zealand would modify existing tax treaty relationships, to increase benefits in some instances and to eliminate inappropriate benefits in others. The tax treaty with Malta would re-establish
a tax treaty relationship that was interrupted when the United States terminated a prior tax treaty with Malta signed in 1980. "We urge the Committee and the Senate to take prompt and favorable action on all of these agreements," she said.

The most significant amendments proposed in the updated and new treaties include:

France (signed January 13, 2009)

• Eliminates the source-country withholding tax on many intercompany dividends.
• Updates the dividend article to incorporate policies reflected in the US Model provision, such as those regarding regulated investment companies (RICs) and real estate investment trusts (REITs).
• Eliminates source-country withholding on all royalty payments, bringing the Convention in line with the US Model treaty.
• Tightens the limitation on benefits rules applicable to publicly-traded companies and further tightens further tightens the limitation on benefits provision by including a so-called "triangular provision" adopted in many US tax treaties.
• Updates the provision in the current Convention that preserves the US right to tax certain former citizens also to cover certain former long-term residents to reflect changes in US law.
• Provides for mandatory arbitration of certain cases that have not been resolved by the competent authority within a specified period, generally two years from the commencement of the case.

Malta (signed August 8, 2008)

• Imposes withholding taxes on cross-border portfolio dividend payments at a maximum rate of 15 percent (reduced to a maximum of 5% when the beneficial owner of the dividend is a company that directly owns at least 10 percent of the stock of the company paying the dividend).
• Incorporates rules provided in the US Model tax treaty for certain classes of investment income. For example, dividends paid by RICs and REITs are subject to special rules to prevent the use of these entities to transform what is otherwise higher-taxed income into lower-taxed income.
• Limits withholding taxes on cross-border interest and royalty payments to a maximum rate of 10 percent.
• Includes a comprehensive limitation on benefits article, which takes into account "unique features" of Malta’s tax system and is designed to deny treaty shoppers the benefits of the Convention.
• Provides for the full exchange between the tax authorities of each country of information relevant to carrying out the provisions of the agreement or the domestic tax laws of either country.

New Zealand (signed December 1, 2008)

• Eliminates the source-country withholding tax on many intercompany dividends, subject to minimum holding requirements
• eliminates source-country withholding on these payments, provided, in the case of New Zealand, that the payer of the interest has paid New Zealand’s “approved issuer levy” with respect to the interest.
• Lowers that maximum withholding rate on royalties to five percent.
• Makes important changes to the taxation of individuals providing personal services.
• Tightens the limitation on benefits rules applicable to publicly-traded companies
• Includes other anti-abuse rules, such as preserving the right for the US to tax former citizens and certain long-term residents.
• Updates the exchange of information provisions to specify the obligation to obtain and provide information held by financial institutions

The United States currently has a network of 59 income tax treaties covering 67 countries. Corwin told the Committee that the Treasury has recently held formal treaty negotiations with Colombia and Korea, and later this month will open formal negotiations with Israel.

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