Speakers
- Scott Semer
- David Rosenbloom
While international tax treaties allocate taxing authority between sovereign nations according to a taxpayer's place of residence, the cross-border nature of the digital economy raises a significant question for treaty negotiators: in a world where so much business is done in the cloud, does residence-based taxation still make sense?
In this podcast, renowned tax scholar and practitioner David Rosenbloom, former head of the National Tax Program at NYU and a negotiator in the Canada-U.S. tax treaty, joined New York tax partner Scott Semer for an incisive conversation about taxation in the digital age, touching on topics including the digital services tax, tax treatment for AI-based companies, and negotiating international tax treaties in 2025.
Transcript
Scott Semer (00:07): Hello, everybody, welcome to the Torys podcast. Thanks very much for joining us. We are delighted to be joined by David Rosenbloom, who is a member of Caplin & Drysdale in DC. He's a renowned tax scholar and tax practitioner, used to be the head of the international tax program at NYU, which is one of the top tax LLM programs in the world, and is also one of the people who was involved in negotiating in the U.S.-Canada tax treaty.
And so, he's able to bring us a very unique perspective on a lot of the issues that we're going to talk about, and we're really excited to have him here. Thanks very much for joining us, David.
David Rosenbloom (00:44): Very happy to do it, Scott.
Scott Semer (00:46): So let's, let's dive right in. One of the things that's on a lot of people's mind is, as part of the One Big Beautiful Bill, there was originally a plan to enact a new code provision called Section 899, which the press referred to as the "revenge tax", which would have imposed some onerous withholding taxes and some other tax requirements on residents in countries that had certain discriminatory taxes, such as the undertaxed profits rule, digital services tax, a lot of the things that the OECD and the BEPS project have been trying to implement, that the U.S. viewed as discriminatory. And one of the—ultimately, Section 899 was not included in the bill, but—in part because the G7 nations and a few other nations agreed that the U.S. would be exempt from these undertaxed profit rules—but it brings up an interesting question, which is: traditionally, tax treaties were designed to allocate taxing authority among sovereigns, kind of based on the residence of the taxpayers. And so if you have a person who is resident of the U.S., the primary ability to tax them would be with the U.S., and same thing with U.S. companies. The idea is that these, these rules were kind of beneficial to both countries, right?
So in the case of the U.S.-Canada tax treaty, Canada was given the primary right to tax Canadian companies and the U.S. was given the primary right to tax U.S. companies. And that's how most tax treaties followed. But what we've seen with the rise of kind of the digital economy, especially now potentially with AI, where you're going to have potentially business profits attributable to AI, which could be located anywhere, you know, there is an interesting question as to whether this idea of residence-based taxation still really works. And that's part of what led a lot of countries to try to enact digital services tax and to try to do things like the undertaxed profits rule. And so, curious, it's kind of a nebulous question, but curious to get your views on whether, you know, some of the norms that guided you when you were negotiating the Canada-U.S. tax treaty and that guided the negotiation of lots of other tax treaties, do those still make sense in today's economic environment?
David Rosenbloom (03:05): I, I think they, they do, Scott. I, I'm, you know—the treaties are based on almost a century of, of, learning and understanding about how the world works and unquestionably the digital economy has, has changed a great deal. But I, I've never been personally a fan of throwing the baby out with the bathwater here. I think those rules still make a certain amount of sense.
And the response to particularly the digital economy, and perhaps to some extent AI—although AI is a different story, I think a little bit—but digital economy has elicited a lot of these digital service taxes, which I'm somewhat familiar with throughout the world, and I am one person who never saw really the problem with digital service taxes.
I, I guess I must be in a small minority. I thought that was a pretty sensible thing for source countries to do. The problem with the digital service taxes is...two problems. Well, they would fall, for the most part, on U.S. companies, because those were the those were the companies that were engaged in the big business of digital services so they could be portrayed as discriminatory.
But, but the other problem with the digital service taxes is that the countries that levied them didn't want the cost to be passed on to their own consumers. And so, what they tried to do was to plug them into the U.S. foreign tax credit system, which they were not successful, at least so far, have not been successful at doing.
But I always thought a source-basis tax on digital services made a fair amount of sense, whether you call withholding tax or, or a digital service tax or a VAT. But something along those lines, rather than taking the whole income tax system and throwing it on its head. So, so my answer, that's a long-winded answer to your question, I, I don't see any reason to change the basic underlying concepts that animate tax treaties throughout the world. At least not yet.
Scott Semer (05:22): You bring up some interesting points going, you know, if we, if we look at the question of AI in particular, where, you know, potentially you could have a company that could set up anywhere, you know, if, if most of their sort of labour, if you will, is done by AI, hence they don't necessarily need to be in the U.S., they don't need to be in Europe, they could be set up anywhere but they're selling services into a country... Do you think something like a digital services tax maybe is sort of the wave of the future where that's really going to be how source countries try to tax a business that doesn't really have any geographic home?
David Rosenbloom (06:00): Yeah. I sort of do think that. I, I, I—you gleaned in your initial remarks, you said, or came close to saying that the, the digital economy and AI had undermined residence-basis taxation. But really what they undermine is source-basis taxation. I mean, they throw the whole traditional concept of what it means to say an item of income has its source to that country, and they throw that up in the air, and the reaction has been—from some countries, a prime example would be India—the prime, the reaction has been to say, "well, okay, we're a market country, so let's shift from source to market". And I, I would expect with AI—I don't see why in this, in this discussion, AI is any different from the digital services. It's basically a service that's being rendered in the cloud or somewhere that's hard to identify, but you can identify who the customers are.
And so you can impose a tax at source on the customers. The question then becomes, is it an income tax or is it simply a consumption tax? And that—my, my view is that it probably should be a consumption tax. But I don't see any of that as a reason for, for questioning the basic dichotomy between source-basis taxation and residence-basis taxation, which is at the heart of tax treaties. Indeed, it's at the heart of all international taxation.
Scott Semer (07:29): You bring up, it's, it's kind of an interesting point. And maybe turning a little bit to the, to the practical aspect of it, you know, having been involved in a negotiation of the U.S.-Canada treaty, how do you deal with a situation where you may have two different countries: for example, if you if you were negotiating a treaty between the U.S. and India, where they may have different views on what's appropriate for source and what's appropriate for residence and who should have taxing jurisdiction, how do you bridge those gaps? Both, both curious, both from a general sense and then in practice, how do you deal with a situation where the principals negotiating those treaties may have slightly different interests?
David Rosenbloom (08:12): Well, they always have different interests, I think. You know, that's a great question, by the way. I think the, the answer is, as a negotiator, you come to the table with a measure of flexibility. You're prepared to listen to what the other guy says and to, to respond in a, in a reasonable way. We have found over the years, in many of—not all, but in many of our negotiations ways of compromising that would give, the, the, the other country what it wants without necessarily undermining our own principles.
Now, there are some kinds of issues where there is just a, a firm debate about what's, what does "source" mean. For example, the, the leading example would be throughout Latin America, the source of services income is the place of residence of the payor. So then if you were, for example, in Brazil and you're paying a U.S. law firm to write an opinion for you, Brazil will say that's, that's U.S.—that's Brazil-source income, even though all the work is done in New York City or Washington or wherever.
And that's just something the U.S. has never been able to accept. But we did encounter issues like that, mostly with technical services, with the Indians and, and in our—I wasn't involved in that treaty, but in the Indian treaty does reach an uneasy but apparently workable compromise between the interests of the source country, the country that really emphasizes source taxation, and the residence country, which is the United States, it's the most residence-oriented country in the world. So, so that tension was there in the, in the, in the negotiations with Canada, because Canada—at the time and probably still today, to some extent—is much more of a source country than the United States.
But we, the idea is you work at it and you try to find a way of reaching a compromise. You don't get everything you want to get or everything's in your model. I mean, the last thing you want to do is to say, "okay, well, we can't reach agreement. Let's just pick up our papers and go home".
Yeah, you stick at it and you try to—if you're working with somebody who's of the same mind, as I was with Canada, you can get to an agreement. At least, I wouldn't say always, but, but many times when it's not obvious at first.
Scott Semer (10:44): Well, here's an interesting question on that level. You obviously dealt with a lot of interesting personalities over the years, both in negotiations and also, you know, in your private practice. You know, the question of the people always seem to ask is—specifically relevant for Canada, you know—how do you negotiate with this particular administration? You know, is there anything that you, if you were advising Canada, is there any particular advice that you would say that's different than you might give for a different administration, or is it really the same kind of tactics and skills that are required for any negotiation?
David Rosenbloom (11:22): Yeah. When you say this administration, I assume you mean the Trump administration?
Scott Semer (11:26): That's right.
David Rosenbloom (11:27): Yeah. Well, you know, I, I really can't speak to that. Remember, a tax treaty negotiation takes place at a, at a level in the government that's, that's way below the, the level that would attract much political attention. But the treaty with Canada, in fact, did attract a fair amount of attention, but nothing like, you know, full blast, you know, top—section A coverage of the of the treaty.
There's a lot of money that changes hands in tax treaties, but it's, it's handled at a reasonably low level. So I would have guessed, I—of course, I've, long since been in an administration, but I didn't get a heck of a lot of, of, interference, political interference. And I would doubt that treaty negotiators today are getting much interference.
But there's other problems that have come up with respect to tax treaties since I was doing it. And some of them are in the United States, I mean, and some of them are very serious. It's not just the, the administration, it's getting the treaties approved and through the system. That's, that's a huge problem with the U.S. today.
Scott Semer (12:41): Yeah. There's been, right, a hold-up on approval of a number of treaties. And there haven't really been that many, you know, new tax treaties negotiated. Do you, do you see a particular reason for that?
David Rosenbloom (12:52): Oh, there's one very clear reason for that [laughter]. Senator Rand Paul of Kentucky has refused to go along with unanimous consent. And, and I don't know what's going on in the Congress today, but, we, we've approved exactly one treaty since 2010. A full treaty. And that's the treaty with Chile. There are a number of other treaties that have been negotiated, although the pace of negotiations seems to me to have slowed. There is a treaty that was negotiated fully after the, the Tax Cuts and Jobs Act of 2017, that's the U.S. treaty with Croatia, but I, you know, the movement of those treaties through the Senate advice and consent process is, is impeded by Senator Paul. He objects to everything.
So when, when you have a senator refuses to go along with the normal way of getting treaties through it—let me, let me stop and explain what that is in the United States. Our treaties and orders, we don't have, like Canada, the idea of enacting treaties into law. Our treaties go into full force based on the treaty without the legislator doing legislation—sorry, legislature doing anything except that the Senate has to give advice and consent. That's all constitutional.
Advice and consent requires two-thirds of whenever quorum of the Senate is present. And the Senate historically has not viewed tax treaties as being hugely important. So, the way things have gone is that these treaties, which are referred not to the Finance Committee, interestingly enough, but to the Foreign Relations Committee of the Senate. Foreign Relations Committee does its job, reports out the treaty, sends it to the full Senate, and historically, they've been approved by voice vote, a bunch of them with a unanimous consent.
And Senator Paul has withheld his consent. So that means if you want to get a treaty through, you have to devote a full Senate day, a full day to debate the treaty. And the Senate has never wanted to do that, it's a lot of legislative time, in their view. And so these treaties just linger forever, right?
I mean, even the Chilean treaty, which would, which did go into effect, was waiting for, I think, more than ten years [inaudible]. So a problem is getting it through the Senate, and, and that problem is attributable to one person.
Scott Semer (15:22): Yeah, Interesting. And there is a lot of, a lot of debate, you know, with the One Big Beautiful Bill with Section 899, whether that was a treaty override and, and if so, you know, would that be allowed? I guess it might be useful just if you could talk briefly on your views on that, because I think it comes as somewhat of a surprise to some Canadians that the U.S. could just pass a law that would, you know, be contrary to the treaty, and there's not really much any, anybody could do about that.
David Rosenbloom (15:52): Well, that, of course, has been—that's part of our Constitution. Under the Constitution of the United States, treaties and statutes are both the supreme law of the land and that's been interpreted to mean that either can override the other. So, yes, Congress can pass a law that overrides treaties. But the, the issue of when a statute overrides a treaty is, is a very interesting subject on which I read quite a bit, actually, and on which there's a case pending right now that I find extremely interesting in the, in the Federal Court of Appeal. Actually, it involves Canada. It involves a U.S. citizen resident in Canada. And the underlying question is, what is, how do you define the relationship between a treaty and a statute when Congress is not, has not been very clear about what it wants to do?
So Congress can clearly say, "we're passing such and such law and we're overriding the treaty". There's no question they can do that. So, you're right, and there's nothing anybody can really do about it. And if you look at the U.S.-Canada treaty, the, the Canadian negotiators were concerned about that, way back in 1980 they were concerned about that.
And they put it in something—I don't have the treaty itself in front of me, but it's in the, it's in the revocation of the treaty rules, the termination of the treaty article toward the end, where it says that if, if something, I think it says "roughly", I could, I could get this wrong, but the idea was that if we would override a treaty they would have the right to immediately revoke and not wait the full five years of that, of that. Of course, the five years has long since gone. But the point is that people were concerned about exactly what your questioning had been concerned about that, and the Canadian negotiators of the treaty were particularly concerned about it.
All of that has come into much sharper focus with the Tax Cuts and Jobs Act 2017, which had a number of provisions in it which were pretty clearly in conflict with treaties. And Congress said nothing about what it wanted to do. So there's, there's an active debate about whether those provisions really do override the treaties. And this case that's in, that's in the Federal Circuit, it's called Chris—well there's two of them, actually, one of them, Christensen is French, but the other, the Canadian case is called Bruyea, B-R-U-Y-E-A. They're going to be argued together, I guess they'll be argued together sometime in the fall, would be my guess. And we'll probably, I'll probably put in an amicus brief on that. But it, it has to do with our net investment income tax and the question of whether this—this guy lives in Canada, whether the Canadian income tax can be used as a credit against the net investment income tax.
So it goes to the question of the relationship between treaties and code. And we don't have much law on that in the tax area. There's tons of law on treaty versus statute outside of taxation, but nobody's ever really made the jump from that pretty vast body of law into, into taxation. And that's coming into focus now.
Scott Semer (19:12): Yeah, that'll be fascinating. It'll be interesting to see how that develops. One question I had and that, and you wrote recently a fascinating article about the way in which treaties are interpreted, in particular, a provision of the U.S.-Canada treaty was interpreted in a way that was, in your, in your view, in the article, would have been surprising to the negotiators.
I'm curious how, you know, generally how you think people should go about, you know, practitioners in terms of interpreting treaty provisions, particularly under the U.S.-Canada treaty, you know, you have things like the technical explanation, you have things about what the negotiators might have intended. But the Court sometimes, you know, have seemed to adopt an entirely different approach.
And so, curious what do you think that means in practice where people have to look at the treaty and figure out what it means and how to advise clients?
David Rosenbloom (20:07): Well, there's, there's a bunch of issues that are subsumed at your, in your question. I mean, first of all, you got the problem of language. Language is... there's no controlling how a court is going to read language. That was my problem with the passage in the Canadian treaty that I wrote about in this, in this article. But it, it seems to me that the Canada treaty, in a way, stands apart from all other U.S. treaties because ever since the treaty that I negotiated in 1980, the Canadian tax authorities have played a role in the development of the technical explanation with the U.S.-Canada treaty.
And actually, your Department of Finance put out a press release. I'll say, in regard to the one I negotiated in 1980, saying that they agreed with the U.S. technical explanation. That's, that's a fantastic thing. There's no other U.S. treaty where we've had that kind of buy-in to the technical explanation. I do think that interpreting treaties is a little different than interpreting statutes, because statutes, you look to the legislative history and what the people who wrote the statute really intend.
But treaties are bilateral documents. And so, you really have to take a look at what the parties might have intended, looking at it from both sides. I have a lot of experience with this as a, as a witness testifying. If I go testify, for example, about a provision in the U.S.-Australia treaty in an Australian court, I'm not going to tell an Australian court what Australian law is, but I might tell an Australian court what a U.S. court, what I think a U.S. court would say in the converse situation. So the objective in, in interpreting a treaty is to try to take into account how the other side would see the issue if it were faced with a similar issue. I'm stating this in very abstract terms, but there's some real-world situations, in fact, many of them involving Canada that I've been involved in where, where you really are trying to take a look at something from both sides at the same time. That's—you don't do that with a statute. And there's a, there's a famous case of this, actually a Supreme Court case in the United States called Stuart involving exchange of information.
And there's a concurrence in that case by Justice Scalia. In my opinion, the best thing Scalia ever wrote. Nobody ever pays any attention to it because it's a concurrence and it's in this somewhat obscure exchange of information and tax law case. But it is a great piece of writing, I think, because he makes the point that you don't look to what the U.S. Senate thought it was doing or the U.S. negotiators thought they were doing any more than you would look to what one party to a contract thought it was doing. You're trying to get the, the shared expectations of the parties, which is not what you try to do with a statute. So I think it is a little bit different exercise.
Scott Semer (23:11): Yeah, absolutely. That's, that's quite interesting. Let me shift gears, it's been a fascinating discussion. Let me just shift gears quickly to, to finish it up. Given that you've spent a lot of time teaching, a lot of time, you know, dealing with a lot of different people, we have, you know, a lot of interesting developments with AI and, is it can eliminate, you know, a lot of jobs, are there going to be needs for lawyers and other things. Curious what, what would your advice be to a young person who's either thinking of going to law school or in law school and thinking of going into tax as to what, you know, what their prospects might look like in the next 10, 15, 20 years, and sort of your perspective having done, I mean, just having an outstanding and fascinating career, you know, if you were to, to encounter a new version of yourself at 25 or 26, knowing what you know about what happened in the past and what you think might happen in the future, what advice might you give him or her?
David Rosenbloom (24:14): Oh, so that's a good question. I would say there's two different directions I would go in. One, I would certainly say that in terms of international taxation—taxation in general, but international taxation in particular to me is a fascinating field. It's not going anywhere. I mean, we live in a world of nation states. We're going to have international tax issues as far as the eye can see. AI or no AI, there's nothing going to resolve, going to obviate the need for intelligence and, and sensitivity and, and some kind of a feel for what's going on in the world. That to me—we're just at the cusp of this stuff starting.
I mean, I've been doing work lately, for example, doing some work with Saudi Arabia and they're just starting to get into the international tax business. So I think for the next, as far as I can see, international tax is a great field. That's one thing I'd say. The other thing I tell every young person who asks me for advice is: don't try to plan your life, you know, step-by-step into the future.
Be alert as to what opportunities come your way and have some sense when a good opportunity comes along to jump on it and take advantage of it. My life has been made up of one serendipity after another, and maybe that's unique, but I can only speak from my experience. That has been a, that's been the, that's the key to everything I've done, is just, just waiting for things to come my way and, you know, raise my hand. Even by the way, and I emphasize this, being prepared to take a substantial pay cut to do something that I found more interesting.
Scott Semer (25:54): Yeah. That's a, that's a fascinating point, really interesting. Well, it's been a tremendous discussion. Really appreciate you joining. Obviously, we just touched the tip of the iceberg of a lot of these issues. But I think it's a fascinating area and gives a lot of insight to people who are listening, and really appreciate you taking the time and wish you, all the, all the best of luck in everything else that you're doing.
David Rosenbloom (26:17): Thank you very much, Scott! It's been a lot of fun.
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