Final US Model Income Tax Treaty may reduce access to benefits

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February 2016


On February 17, 2016, the US Treasury issued a new US Model Income Tax Convention, which is the baseline text Treasury will use in negotiating tax treaties.  According to an accompanying press release, the 2016 Model “includes a number of new provisions intended to more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.”

The 2016 Model includes several novel provisions, including a new article denying treaty benefits for income subject to ’special’ (i.e., preferential) tax regimes; a rule eliminating benefits for income allocable to so-called ’exempt permanent establishments;’ a mechanism for partial termination of treaties where a treaty partner reduces its corporate income tax rate below a certain threshold; and new restrictions in the treaty’s Limitation on Benefits article.  The revised Model also includes rules denying treaty benefits for payments made by so-called inverted companies to connected persons, and provisions requiring disputes between the treaty partners to be resolved through mandatory binding arbitration.  Treasury has indicated that it intends to release its Technical Explanation of the Model later this year.

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Steve Nauheim

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