The United States has in place bilateral income tax treaties with more than 60 countries. The US government enters into such treaties for several reasons, including:
US income tax treaties typically cover various categories of income, including:
The categories of income covered vary from treaty to treaty, and no two treaties are the same. Appendix A summarizes the benefits (reduced rates of tax collected through withholding) resulting from US tax treaties.
To be eligible for treaty benefits, it is necessary to satisfy the conditions of the residency article as well as certain other requirements. These include, importantly, when applicable, the limitation on benefits (LOB) article (discussed below). In general, an individual is treated as a resident of the country in which the individual is subject to tax by reason of domicile, residence, or citizenship. A corporation generally is treated as resident in the country in which it is subject to tax by reason of its place of management, place of incorporation, or similar criteria. US domestic rules contain provisions that address the treatment of the availability of treaty benefits to income received by fiscally transparent entities; some US treaties also address fiscally transparent entities.
The vast majority of US tax treaties contain LOB articles. LOB articles are anti-‘treaty-shopping’ provisions that are designed to deny treaty benefits when the party seeking the benefits does not have sufficient connection to the jurisdiction in which it is resident to support the application of the treaty. In recent years, the US Treasury has made it a priority to renegotiate the more commonly used treaties that did not have LOB articles. Two of those treaties — with Hungary and Poland — have been renegotiated but not yet ratified.
LOB articles provide objective tests (e.g., ownership-base erosion test and publicly traded company test) to determine whether an entity is appropriately claiming treaty benefits or was created merely to obtain treaty benefits. As new treaties are negotiated, the United States has been adding more restrictive provisions to the LOB tests; as a result, a company that is not engaged in treaty shopping nonetheless may fail the tests. If objective tests are not met, a country’s competent authority may grant treaty benefits with respect to a specific item of income upon request by the taxpayer, if the competent authority determines that the establishment, acquisition, or maintenance of the entity and the conduct of its operations did not have as one of its principal purposes the obtaining of treaty benefits
The US tax treaty network includes treaties with most European countries and other major trading partners, including Mexico, Canada, Japan, China, Australia, and the former Soviet Union countries. There are many ‘gaps’ in the US tax treaty network, particularly in Africa, Asia, the Middle East, and South America. A new treaty with Chile was signed in 2010 but has yet to be ratified.
There are continued efforts to expand the network of countries that have adequate tax information exchange agreements with the United States. In addition to its bilateral income tax treaties, the United States currently is a party to over 30 tax information exchange agreements, which provide the legal basis for exchanges of information between tax administrations.
In addition, the US Treasury has signed many bilateral intergovernmental agreements (IGAs) related to the implementation of the FATCA information reporting and withholding provisions (discussed above).
On November 24, 2016, the OECD released the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). In brief, the MLI is an agreement among OECD member states to swiftly and cohesively amend each of their bilateral tax treaties to give effect to the OECD’s BEPS project. Although the United States participated in the discussion process, the United States has not signed the MLI.