On May 20, 2015, the U.S. Treasury Department released proposed
changes to the U.S. model tax treaty, which has not been updated
The Treasury Department has departed from its usual process for
revising the U.S. model tax treaty by publishing drafts of certain
of the more meaningful proposed revisions and inviting comments
from practitioners. In addition, another unusual aspect of the
Treasury Department's handling of these revisions is that
previous revisions to the U.S. model tax treaty have generally
reflected developments originating in existing tax treaty
negotiations; in this case, however, the Treasury Department is
designing new provisions on a prospective basis. These departures
from the Treasury Department's historical process reflect a
fast-moving policy debate currently spearheaded by the OECD, which
has been developing a series of reports and proposals under its
base erosion and profit shifting (BEPS) initiative involving the
United States and other OECD and G20 nations. Treasury officials
have stated that the proposed changes to the U.S. model tax treaty
are intended to influence the debate concerning BEPS at the
The new provisions include the following:
Denying treaty benefits in certain
"triangular" permanent establishment situations. This
would occur when a resident of State A seeks to claim treaty
benefits under the State A–State B tax treaty in respect of
income earned from State B through a permanent establishment in
State C, and either: (i) that income is subject to a low combined
rate of tax in State A and State C; or (ii) State C does not have a
tax treaty with State B and the income is not includible in the tax
base of State A.
Imposing the full U.S. withholding tax
rate of 30% on dividends, interest, royalties and other amounts
paid by entities that have expatriated from the United States in an
Denying treaty benefits with respect to
the payment of interest, royalties and other income to a related
party that benefits from a "special tax regime". Special
tax regimes are tax rules that provide a preferential effective
rate of taxation with respect to a specified category of income.
Certain specified types of tax rules are exempt from the definition
of special tax regime, such as tax rules that do not
disproportionately benefit interest, royalty or other income; that
satisfy a "substantial activity requirement" with regard
to royalties; that apply to charitable organizations, pension plans
and retirement plans; or that apply to tax-favored investment
entities similar to REITs and RICs.
Revising the article on the limitation on
benefits to include the derivative benefits rule adopted in certain
recent U.S. tax treaties.
Allowing either country to "turn
off" treaty benefits if the other country changes its law to
either reduce the rate of tax on individuals or companies to less
than 15% or change its system for taxing companies to a
The Treasury Department expects to release the final updated
model tax treaty before the end of 2015.
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