On May 20, the Treasury Department released select proposed changes to the U.S. Model Income Tax Convention (frequently known as the U.S. Model Tax Treaty) addressing stateless income, corporate inversions and limitations on benefits. Specifically, the draft revisions include the following:
- Denial of certain treaty benefits when a resident of a contracting state earns income from another contracting state through a permanent establishment situated outside of the contracting state of residence, and the resident is subject to a significantly lower tax rate with respect to the income attributable to the permanent establishment
- Exceptions to reductions in dividend withholding and to exclusive residence taxation rule as applied to interest, royalties, and other income, where the paying company is an "expatriated entity" as defined under Section 7874(a)(2)(A)
- Denial of certain treaty benefits for "special tax regimes" where a resident benefits from a regime in the residence state with respect to certain categories of income that result in low or no taxation
- Creation of a provision that provides certain treaty benefits when a contracting state enacts certain changes to domestic law subsequent to the treaty being signed
- Changes to the limitation on benefits provision
Treasury has stated that a large impetus for the proposed changes was to address base erosion and profit shifting by multinational companies. Treasury also intends to include in the next Model Treaty a new article to resolve disputes between tax authorities through mandatory, binding arbitration. Treasury has requested comments on the proposed treaty rules.
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