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By Philip D. Morrison, Esq.
Deloitte Tax LLP, Washington, DC
In addition to the normal procedures (though much-accelerated)
of making revisions to the Organisation for Economic Co-Operation
and Development (OECD) Transfer Pricing Guidelines and the OECD
Model Treaty Commentaries, the OECD's Base Erosion and Profit
Shifting (BEPS) Action Plan contemplates the development of -a
multilateral instrument designed to provide an innovative approach
to international tax matters, reflecting the rapidly evolving
nature of the global economy and the need to adapt quickly to this
The development and adoption of such an instrument faces some
significant hurdles, particularly in the United States.
Broad multilateral treaties in the income tax arena are not
common. Typically, if multilateral tax treaties are moderately
broad in scope, they will be concluded among only a regional group
of countries. The last 25 years have seen a limited number of
examples, such as the 2008 West African Economic and Monetary Union
(WAEMU) Income and Inheritance Tax Convention; the 2007
Ibero-American Social Security Convention; the 2005 SAARC (South
Asian Association for Regional Cooperation) Income Tax Agreement;
the 2004 Andean Community Income and Capital Tax Convention; the
1994 CARICOM (Caribbean) Income Tax Agreement; and the 1990 Arab
Maghreb Union Income Tax Convention.
In the income tax realm, only where the subject matter is very
narrowly focused have treaties among multiple countries outside a
single region been adopted widely. The primary example of such a
treaty entered into in the past 25 years is the 1988 OECD/Council
of Europe Convention on Mutual Administrative Assistance in Tax
Notwithstanding the scanty precedent for a multi-issue,
multilateral income tax treaty, the Action Plan suggests that such
a treaty might include - the introduction of an anti-treaty abuse
provision, changes to the definition of permanent establishment,
changes to transfer pricing provisions and the introduction of
treaty provisions in relation to hybrid mismatch arrangements.
Obtaining agreement on these subjects simply among the delegates
to the OECD's Committee on Fiscal Affairs and drafting a proposed
treaty, all by December 2015, is very ambitious. Actually getting
more than a few member governments to sign on to such a treaty may
prove even more difficult.
One of the impediments to accomplishing much through such a
treaty, at least for the United States, is the rule reflected in
Article 1(2) of the 2006 U.S. Model Treaty:2. This Convention shall
not restrict in any manner any benefit now or hereafter
a) by the laws of either Contracting State….
According to Peter Blessing's treatise on treaties, this
reflects a "fundamental principle of U.S. income tax treaties …
that the treaty can only add to, not detract from, the rights that
a taxpayer otherwise enjoys." One might call this a "first, do no
harm" rule - sort of a start to a Hippocratic Oath for treaty
negotiators. Virtually every tax treaty entered into by the United
States contains this or a very similar provision.2
While neither the OECD Model Treaty nor the Commentaries thereon
contain similar language, the Technical Explanation (TE) to the
U.S. Model Treaty (as well as TEs to bilateral U.S. treaties
containing it) claims that this provision "states the generally
accepted relationship between the Convention and domestic law."
Although, outside U.S. tax treaties and commentary thereon, this
commentator is unaware of clear and specific evidence of
international acceptance of this "generally accepted relationship,"
it is noteworthy that the OECD Model Treaty has various provisions
that say a Contracting State "may" tax something or "shall not" tax
something but apparently does not have provisions that provide that
a Contracting State "shall" tax something. So perhaps other
countries agree with the United States that this is a fundamental
principle but are just less specific in its statement.
In any event, it is clear that the United States could not
accept any provision of the proposed BEPS multilateral treaty that
restricted benefits granted under the Code and regulations.
So if the BEPS treaty attempted to do that, the United States could
never be a signatory. If other countries are similarly constrained,
either as a legal or constitutional matter or as a practical
political matter, that certainly would narrow the scope of any such
This could be a particular constraint with respect to dealing
with what is perhaps the thorniest, yet most critical, of the BEPS
issues: hybrid instruments, entities, and arrangements. The
drafters of the Action Plan seem to have taken the limitations of a
multilateral treaty somewhat into account in their description of
possible solutions. As one treaty-based approach, they suggest that
treaty benefits might be denied for hybrids.
The United States has already incorporated such a concept into
many of its treaties through the addition of special rules for
determining the residence of a hybrid entity. Presumably something
of this sort might be included in a multilateral treaty.
However, while the United States has been fairly consistent in its
more modern treaties by using the U.S. Model Treaty provision or a
close variation in most cases, there are important outliers, such
as the fifth protocol amendments to the Residence article of the
U.S.-Canada Income Tax Treaty.
Other possible solutions to hybrids mentioned in the Action Plan
are unsuitable for a multilateral treaty. Using treaties to deny
deductions for income items not included in income by the payee's
country, to deny double deductions, or to deny exemption or
non-recognition for payments deductible by the payor, for example,
would run afoul of the "first, do no harm" principle described
above. The Action Plan appears to recognize this by describing
these as requiring domestic law changes. The Action Plan quite
rightly also notes the likely need for co-ordination or tie-breaker
rules where two or more countries try to simultaneously apply such
rules. Without such rules, of course, where two countries
both simultaneously seek to prevent double non-taxation, the result
is likely to be double taxation. While, at first blush, double
taxation may appear to be a topic for treaties, it is difficult to
see how this could be accomplished without running afoul of the
"first, do no harm" rule. Coordinating the denial of reduced
withholding rates (treaty benefits) would be fine; coordinating the
denial of deductions or exemptions would not.
Another issue noted by the Action Plan as ripe for being
addressed by a multilateral treaty is the introduction of an
anti-treaty-abuse provision. Again, however, the inclusion of such
a provision is unlikely to be acceptable to the United
States. As readers know, virtually every U.S. tax treaty with
generous reductions in withholding tax has a comprehensive
Limitation on Benefits (LOB) article. LOB articles in recent
treaties with an exemption for certain dividends or with low-tax
countries tend to be quite strict. Other LOB articles, although
comprehensive, are slightly less constraining. Both
varieties, however, tend to be complex, are sometimes difficult to
apply (particularly since there is little to no published guidance
from the IRS), and have, over the years, garnered a fair amount of
criticism from foreign treaty academics.
It is unlikely that an OECD-approved multilateral treaty would
embrace the U.S. LOB article or even a U.S.-style LOB article.
Instead, one might expect something on the order of the "main
purpose test" that limits reduced withholding tax rates and is
included in some other countries' bilateral treaties.3 But this approach
was rejected by the U.S. Senate in 1999 during its consideration of
the then-pending U.S.-Italy and U.S.-Slovenia income tax
treaties. The Senate was concerned that such an approach was
overly subjective and unduly vague, represented a fundamental shift
in tax treaty policy about which it had not been consulted, was
unadministrable, and did not adequately distinguish between
legitimate business transactions and tax avoidance transactions.
Following the Senate's formal reservations with respect to these
provisions, the U.S. Treasury never again accepted a main purpose
anti-abuse rule except in very limited circumstances.4 Given the
Senate's concerns, it is unlikely that the United States would be
willing to accept a variation of a main purpose test in lieu of its
Other issues that the Action Plan suggests might be addressed by
a multilateral treaty include changes to the treaty definition of
"permanent establishment" (PE) and changes to transfer pricing
provisions. While the former issue is one that seems well-suited to
a multilateral treaty, it is far from clear that it is in the
United States' best interest to embrace the changes that are likely
to be proposed. As discussed in an earlier Commentary,5 Action 7 appears
aimed at expanding the PE concept to allow commissionaires to
constitute PEs and to allow commissionaires and other limited risk
commission agents to create a PE for their principals to which can
be attributed all the profits of a full-risk distributor. The
United States needs to be very cautious in this area. Ownership of
inventory and accounts receivable matter; each involves rewardable
risk that commission agents are unlikely to incur. It is also clear
that if the multilateral treaty's provisions expanded the PE
concept to be broader than a "U.S. trade or business" as defined by
case law, or expanded attributable income to be broader than
effectively connected income, the United States would either need
to reject the treaty or note that, to the extent it attempts to so
broaden U.S. domestic law, the treaty would have no effect.
Changes that the Action Plan outlines with respect to transfer
pricing could also include a combination of domestic law
recommendations together with possible provisions in a multilateral
treaty. This could be a fruitful area of exploration regarding the
appropriate language for a multilateral treaty. Any such broadening
of Article 9's application is unlikely to conflict with the
already-much-broader §482. As I will discuss in a later
Commentary, it might also, generally to taxpayers' detriment, end
the charade that current rules are always compliant with the
This commentary also will appear in the October 2013 issue
of the Tax Management International Journal.
For more information, in the Tax Management Portfolios,
see Daher and Aceves, 536 T.M., Interest Expense Deductions,
Maruca and Warner, 886 T.M., Transfer Pricing: The Code,
the Regulations, and Selected Case Law, and Nauheim and Scott,
938 T.M., U.S. Income Tax Treaties - Income Not Attributable
to a Permanent Establishment, and in Tax Practice Series,
see ¶2330, Interest Expense, ¶3600, Section 482 - Allocations of
Income and Deductions Between Related Taxpayers, and ¶7160, U.S.
Income Tax Treaties.
2 This provision may reflect the U.S.
Constitution's requirement that revenue legislation must originate
in the House of Representatives together with the Constitution's
provision that treaties need only be consented to by the
3 E.g., Convention Between The United
Kingdom Of Great Britain And Northern Ireland And The Republic Of
Hungary For The Avoidance Of Double Taxation And The Prevention Of
Fiscal Evasion With Respect To Taxes On Income And On Capital
Gains, September 7, 2011.
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