The U.S. Model Income Tax Treaty (the U.S. Model Treaty) generally represents the United States’ opening position in treaty negotiations. As a result, when changes to the treaty are proposed, international tax practitioners should be aware of the potential impact those changes can have on their existing inbound U.S. structures. On May 20, 2015, the Treasury Department released five proposed amendments (Proposals) to the U.S. Model Treaty, which if adopted in their current form will undoubtedly have a major impact on many existing structures. The proposals are intended to ameliorate the problem of so-called “stateless income” as well as influence the OECD’s work on the “Base Erosion and Profit Shifting” (BEPS) initiative.
One of the proposals, which already is included in the Limitation on Benefits (LOB) article of many of the recently enacted income tax treaties, would amend paragraph 7 of Article 1 to state when (i) a resident derives income from the other state; and (ii) the residence state’s domestic law attributes that income to a permanent establishment (PE) located outside the company’s country of residence, then the treaty benefits that would ordinarily apply are inapplicable if (i) the PE’s profits are subject to a combined aggregate effective tax rate of less than 60% of the generally-applicable corporate tax rate in the residence state, or (ii) the state in which the PE is situated does not have a comprehensive income tax treaty with the state from which the treaty benefits are being claimed (unless the residence state includes the PE’s income in its tax base). Continue Reading