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U.S. Treasury Department Proposes Changes to the U.S. Model Income Tax Treaty

This week, the U.S. Treasury Department released five sets of draft revisions to the U.S. Model Income Tax Convention for public comment. The model tax conventions are not binding themselves, but they are very important because they provide the starting point for bilateral tax treaty negotiations between nations. The OECD (Organisation for Economic Cooperation and Development), United Nations, and the U.S. Model tax conventions are three main model tax conventions that are used, with the U.S. model being used by the United States in negotiating tax treaties with other nations. These drafts would make potentially substantial changes to the U.S. model tax convention and subsequently, to future bilateral tax treaties between the U.S. and other countries. Some of the changes to be made by the draft revisions include the following:
  • Discourage the use of corporate inversions to avoid tax by implementing full withholding on payments by "expatriated entities" such as dividends, interest, and royalties.
  • Target abuse stemming from "special tax regimes" that provide low tax rate for movable income such as royalties. The provisions would deny benefits if the "special tax regimes" are used in conjunction with particular provisions of a tax treaty to move such deductible income around.
  • Avoid allowing nonresidents (who reside outside of the two nations who have entered into a bilateral tax treaty) from improperly obtaining benefits  from the treaty.
  • Adds a "derivative benefits" rule to the provisions, that would widen the term "ownership" to include third country ownership.
The draft revisions along with the 2006 U.S. Model Tax Convention and technical explanations are now available on the Treasury Department's website.

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