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US Senate Approves Changes To Four Double Tax Pacts

by Mike Godfrey, Tax-News.com, Washington

25 July 2019


The United States Senate has approved protocols to four existing bilateral double tax avoidance treaties that have been pending in the chamber for as much as a decade.

The Senate voted on July 16, 2019, to ratify the protocol to the tax treaty with Spain and on July 17 to ratify the protocols to the tax treaties with Japan, Luxembourg, and Switzerland.

According to the Republican Policy Committee, notable provisions in the protocol to the tax treaty with Spain, signed in 2013, include:

  • Clarification of the scope of the treaty and its applicability to payments received from certain entities (Article I).
  • Rules for the appropriate standard for defining an otherwise undefined term used in the treaty (Article II);
  • Rules under which the US and Spain generally agree not to tax business income from the source country unless the earnings are substantial enough to constitute a permanent establishment (Article III).
  • Reduced withholding on dividends, interest, and royalty income (Articles IV, V, and VI).
  • Source country taxation of capital gains on the sale of real property (Article VII).
  • Anti-treaty shopping provisions aligned with the US model treaty convention (Article IX).
  • The stipulation that income earned by pensions may only be taxed when distributed (Article X).
  • Mandatory arbitration procedures for certain cases when disputes cannot be resolved within a specific time frame (Article XII).
  • Language pertaining to taxpayer information exchange and tax administration assistance that is more consistent with the US Model Income Tax Convention.

Notable provisions in the protocol to the tax treaty with Japan, signed in 2013, include:

  • The denial of treaty benefits to companies that claim dual residency in Japan and the US (Article II).
  • The reduction of source-country tax on dividends (Article III).
  • The reduction of source-country tax on certain interest payments (Article IV).
  • The revision of the definition of real property to conform more closely to the US Model Convention (Article V).
  • The repeal of an outdated treaty provision pertaining to certain tax benefits provided to researchers and teachers from one country who are temporarily present in the other.
  • The revision of rules pertaining to foreign tax credits to conform with Japan's recent adoption of a participation exemption system (Article IX).
  • The establishment of mandatory arbitration procedures to assist in dispute resolution (Article XI).
  • Modernized exchange of taxpayer information provisions to conform to recent standards of transparency (Article XII).
  • The expansion of the scope of mutual collection assistance (Article XIII).

Notable provisions in the protocol to the tax treaty with Luxembourg, signed in 2009, include:

  • Updated information exchange provisions to more closely conform with the US Model Income Tax Convention, as a result of which two competent authorities will exchange taxpayer information as "may be relevant" in carrying out domestic laws of the US and Luxembourg concerning taxes that are imposed at the national level and are not contrary to the treaty (Article I).

Notable provisions in the protocol to the tax treaty with Switzerland, signed in 2009, include:

  • The prohibition of source-country taxation of dividends paid to a pension plan or individual retirement savings vehicle that is set up in and owned by a resident of the other country (Article I).
  • The adoption of mandatory arbitration procedures for certain cases when disputes cannot be resolved within a specific time frame (Article II).
  • The adoption of language pertaining to information exchange that largely comports with the OECD model convention but with important exceptions (Articles III-IV), as follows:
    • The two countries agree to exchange taxpayer information that "may be relevant" regarding taxes imposed by the treaty or subject to the treaty;
    • Information about third-party persons (neither US nor Swiss) may be shared between tax administrators provided the matter concerns taxes imposed by the treaty or subject to the treaty; and
    • Bank secrecy laws are prohibited from denying a request to disclose taxpayer information that "may be relevant."

New double tax avoidance treaties with Chile, Hungary, and Poland remain pending in the Senate.

TAGS: tax | business | pensions | Chile | Hungary | tax avoidance | interest | law | retirement | Luxembourg | tax credits | transfer pricing | Poland | Spain | Switzerland | United States | dividends | standards | Japan | Tax | BEPS

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