No Match Found
Ratification of the pending US-Chile Treaty, along with other pending treaties, has been stalled — most recently, due to a potential conflict between certain provisions of US tax law enacted in 2017 and the nondiscrimination article and/or other articles of the treaty. Following recent input from the business community, the Senate Foreign Relations Committee (SFRC) considered the pending treaty at a hearing, and on March 29, 2022, approved it for full Senate consideration, with certain reservations (discussed below). If ultimately approved by the Senate, the reservations would require the approval of Chile in order for the treaty to progress toward ratification.
The takeaway: There is presently momentum behind consideration by the full Senate of the pending US-Chile Treaty. How the process moves forward has implications both for the progress of the US-Chile Treaty, as well as other pending treaties.
On February 4, 2010, the United States and Chile signed the Convention between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the US-Chile Treaty or the Treaty). See US Senate approves four treaty protocols for background. It was referred to the SFRC on May 17, 2012 and considered at SFRC hearings and reported out favorably in 2014 and 2015 but was not voted on by the full Senate.
In June 2019, the SFRC held a hearing on protocols to treaties with Switzerland, Luxembourg, Spain, and Japan), which were ratified and entered into force shortly thereafter. It had been reported at the time that pending treaties with Chile, Hungary, and Poland were not considered at the June 2019 hearing because of reservations requested by the US Treasury Department (Treasury).
The reservations were intended to make clear that the treaties did not conflict with the base erosion and anti-abuse tax (BEAT) rules enacted as part of the 2017 tax reform legislation (115 P.L. 97); that is, the treaties did not override BEAT. Some are of the view that the BEAT rules are in conflict with the nondiscrimination article of US tax treaties (e.g., Article 24(4) of the 2016 US Model Treaty) on the ground that the nondiscrimination principle requires that for the purpose of determining the taxable profits of an enterprise, deductions must be permitted under the same conditions to a resident and a nonresident. There also is a view that the BEAT rules are in conflict with the relief from double taxation article of US tax treaties (e.g., Article 23(2) of the 2016 US Model Treaty) because the BEAT’s denial of foreign tax credits in certain cases could be viewed as being inconsistent with the general principle of Article 23 to allow foreign tax credits in accordance with US law.
In general, under the US Constitution’s Supremacy Clause (Article VI, Sec. 2), US treaties have equal standing with the provisions of US domestic law. Section 894(a) provides that the provisions of the US tax code shall be applied with “due regard” to any treaty obligation of the United States. Section 7852(d)(1) provides that “neither the treaty nor the laws shall have preferential status by reason of its being a treaty or law.” Under the ‘later-in-time’ principle, if a treaty and US domestic law are interpreted as being in conflict, the most recent enactment of a provision of domestic law or a treaty generally controls. See Whitney v. Robertson, 124 US 190 (1888); Kappus v. Commissioner, 337 F.3d 1053, 1056 (DC Cir. 2003).
Observation: This later-in-time principle may be viewed as having implications for the interaction between the BEAT rules, enacted in 2017, and a treaty that enters into force at a later time.
Prior US law provided for an indirect foreign tax credit under Section 902 with respect to a dividend paid to a US company that owns 10% or more of the voting stock of the foreign subsidiary paying the dividend. The Section 902 credit has been repealed and replaced with a Section 245A deduction that fully offsets any US taxation on receipt of the foreign-source portion of the dividend received from such a 10%-owned foreign subsidiary. In addition, US law currently provides for a deemed paid credit under Section 960 for certain global intangible low-taxed income (GILTI) inclusions under Section 951A.
The Treaty was considered by the SFRC, and on March 29, 2022, the SFRC approved it, with the Text of Resolution of Advice and Consent to Ratification (the Resolution), for full Senate consideration. In order to advance toward ratification, the treaty must be approved by a two-thirds vote of the full Senate or, alternatively, by a unanimous consent resolution. The Resolution subjects the advice and consent of the Senate for approval of the Treaty to reservations (the Reservations), to be included in the instruments of ratification. The Reservations, if accepted by the US Senate, also must be agreed to by the Chilean government.
The Reservations address the BEAT concern by affirming that nothing in the Treaty “shall be construed as preventing the United States from imposing a tax under section 59A” (i.e., the BEAT rules) on a US tax-resident company or on the profits of a Chilean tax-resident company that are attributable to a US permanent establishment (PE).
The Reservations also would replace the first paragraph of the Relief from Double Taxation article of the Treaty with a modified provision. The language in the pending treaty provides that the United States shall allow a US resident or citizen a credit for income tax paid or accrued to Chile by or on behalf of such resident or citizen. It also provides that a US company that owns at least 10% of the voting stock of a Chilean company is entitled to an indirect foreign tax credit for taxes paid or accrued to Chile with respect to the profits out of which dividends are paid. The Reservations would remove the indirect foreign tax credit language (which equates to the prior-law indirect foreign tax credit under Section 902) and replace it with a provision that permits a US corporate shareholder owning at least 10% of the vote or value of a Chilean tax resident company to deduct the amount of dividends received from the Chilean subsidiary in computing its taxable income (which equates to the current-law dividends received deduction under Section 245A).
Observation: The removal of the indirect credit commitment from the treaty also would remove the question of whether a treaty’s indirect credit commitment (commonly found in US income tax treaties) applies not only to the now-repealed Section 902 credit, but also to the Section 960 indirect credit for underlying taxes relating to certain GILTI inclusions.
How the agreement with reservations advances may be a precursor to progress on the pending US tax treaties with Hungary and Poland. In the recent past, ratification of tax treaties and protocols by the Senate has been held up due to objections by Senator Rand Paul, who has expressed concerns about treaty provisions that allow foreign tax authorities access to information on US citizens. These objections have precluded the use of the unanimous consent ‘fast track’ procedure to ratify tax treaties in the Senate. Requiring a floor vote would cause concern because it would take up limited Senate floor time.
The treaty was ratified by the Chilean Congress in September 2015. However, as noted above, if the US Senate approves the treaty with the Reservations, the Reservations would have to be accepted by Chile. Assuming all the relevant procedures in the United States and Chile were completed and the Contracting States notified each other in writing (through diplomatic channels) that their respective applicable procedures have been satisfied, the treaty would enter into force on the date of the later of the notifications.
Once the treaty entered into force, the provisions with respect to taxes withheld at source would be effective for amounts paid or credited on or after the first day of the second month following the date of entry into force. The treaty would be effective in respect of other taxes for taxable periods beginning on or after January 1 of the calendar year immediately following the date of entry into force. Information exchange provisions would be effective from the date of entry into force.