Tax Notes Today Quotes David Rosenbloom on U.S. Model Tax Convention
Tax Notes Today spoke with H. David Rosenbloom concerning the new U.S. model income tax convention and its new policies which, if adopted, would make it difficult for certain business to qualify for treaty benefits. For the complete article, please visit Tax Notes Today's website (subscription required).
Excerpt taken from the article "News Analysis: Model Treaty Highlights Treasury's New International Policies" by Marie Sapirie for Tax Notes Today.
History of Model Treaty
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The JCT judged the degree of adherence to the OECD model and other U.S. treaties as ranging from "generally follows the approach" (in the case of the Iceland treaty) to "in virtually all respects" (the Philippines). The 1975 treaty with the United Kingdom replaced the 1945 treaty and represented a significant shift toward the OECD model, said H. David Rosenbloom of Caplin & Drysdale Chtd. "[The U.S.-U.K. treaty] adopted the model and picked up lots of the OECD's language. As a result, it accepted a lot of things, and we don't quite know what they mean because they are more familiar in the European context," he said. Most of those vestiges have persisted into the current model. One example is article 15 on directors' fees. "We don't need a separate article for directors' fees because it's not a separate item of income in the U.S., but once we have such an article in a treaty we have to interpret it in the U.S. context," Rosenbloom said.
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Whether the model treaty is just a checklist of matters to discussion negotiations, an interpretation to be used broadly, an expression of policy, or some combination of those is an increasingly important question as it becomes more specific, Rosenbloom said. "The model comes out of Treasury, but it is not a reviewed document, it is not law, it is not a regulation -- what is it?" he asked. "This model is more specific in a lot of ways and does certain things that I can envision an adjudicator looking at and saying, 'This is Treasury's position on existing treaties.'"
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Limitation on Benefits
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Rosenbloom said that the "LOB provision has been under refinement ever since we added it in the German treaty in 1992." In fact, each model treaty since 1996 has changed the LOB rules significantly. (See JCT, "Comparison of the U.S. Model Income Tax Convention of September 20, 1996 With the U.S. Model Income Tax Convention of November 15, 2006," JCX-27-07 (May 8, 2007) 2007 TNT 90-29: Congressional Joint Committee Prints.) The result is that no two LOB provisions in actual treaties look alike, Rosenbloom said. The addition of ever more specific rules for the LOB article may be unfortunate, he added. "My sense is that the more specific you make the LOB, the more you provide a roadmap for people to get around the rules," he said.
The inclusion of arbitration in article 25 (mutual agreement procedure) of the model treaty was not a surprise in light of the success of the trial run with Canada and last year's endorsement of the practice by the G-7, but it represents a big -- and positive -- policy shift. (Prior analysis: Tax Notes, July 6, 2015, p. 34 2015 TNT 128-3: News Stories.) "The U.S. is leading the world on this," Rosenbloom said. "The rest of the world is coming along slowly. It is significant that the U.S. put it in the model, because it is an invitation."
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Subsequent Changes in Law
New article 28 (subsequent changes in law) addresses situations when one treaty partner significantly changes its corporate tax system after signing the treaty. Rosenbloom said that "the new rule addressed a legitimate concern because the political process of approving treaties in the United States is paralyzed."