Treasury Drafts Proposals for US Model Income Tax Treaty

On July 14, 2015 Robert Kiggins moderated a panel discussion in New York City sponsored by The International Business Structuring Association based in London, England on the Treasury Draft Proposals for the next US Model Income Tax Treaty which were released May 20, 2015.

The US Model was last updated in 2006 so this is a significant development.

Five basic areas are covered by the Proposals:

1. Limiting benefits from “special tax regimes” offering very low rates of taxation (generally below 15%) with regard to mobile income such as interest and royalties.
2. Reduction of benefits from a corporate inversion by imposing full U.S. withholding (currently at a rate of 30%)  on payments such as dividends, interest, and royalties made by certain companies that have engaged in inversions.
3. Prevention of use of permanent establishment concepts to achieve non-taxation or artificially low taxation.
4. Adoption of a broad “derivative benefits” test to permit companies to qualify for treaty benefits that previously could not.
5. A provision for subsequent changes in law of a treaty partner which would deny treaty benefits if the highest marginal rate of tax of the treaty partner falls below 15%.

The consensus of the panel was that, while it was far  from certain if a treaty would  be passed incorporating some or all of these model provisions as written, it could be expected that the model  provisions in some form would become part of the basis for negotiating future tax treaties.

The comment period for the Treasury Proposals is still open so the final form is still open.

Developments in this area bear watching for individuals or businesses who engage in cross border transactions.

Robert J. Kiggins is a member of our Corporate & General Business and Taxation groups. After 30 years of practice, he has gained extensive experience in corporate finance and tax matters involving securities broker-dealers, investment advisors, investment companies, life insurance companies, hedge funds, medical practice purchases and sales, insurance agencies and bank expansion into insurance and securities fields.