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IRS Clarifies Tax Treaty References To NAFTA

by Mike Godfrey, Washington

28 May 2020

On May 19, 2020, the United States Treasury Department and the Internal Revenue Service issued an Announcement which clarifies the interpretation of references in US income tax treaties to the North American Free Trade Agreement (NAFTA) once it is replaced by the Agreement between the United States, Mexico and Canada (USMCA).

Announcement 2020-26 states that this clarification is necessary because limitation of benefits clauses in numerous US tax treaties contain explicit references to the NAFTA, which will be replaced by the USMCA when the latter enters into force.

By way of example, the Announcement cites the "derivative benefits test" in the US-Germany double tax treaty, under which a resident company not otherwise entitled to benefits may claim treaty benefits if it is at least 95 percent owned by seven or fewer "equivalent beneficiaries," who must be resident of a country that is a party to either the NAFTA, the European Union, or the European Economic Area.

The Announcement states that, upon the USMCA's entering into force, the Treasury Department, the IRS, and the US Competent Authority believe that any reference to the NAFTA in a US bilateral income tax treaty should be interpreted as a reference to the USMCA.

The Treasury Department and the IRS intend to reach out to countries that have an applicable tax treaty containing references to the NAFTA to confirm that they agree with this interpretation.

On April 24, 2020, US Trade Representative notified Congress that the USMCA will enter into force on July 1, 2020.

TAGS: tax | free trade agreement (FTA) | double tax agreement (DTA) | Mexico | transfer pricing | Canada | Germany | United States | trade | Europe | North America

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