Treasury Official Explains Why U.S. Didn’t Sign OECD Super-Treaty

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Kevin A. Bell

The U.S. didn’t sign the groundbreaking tax treaty inked by 68 countries in Paris June 7 because the U.S. tax treaty network has a low degree of exposure to base erosion and profit shifting issues, a U.S. Department of Treasury official said.

“The bulk of the multilateral instrument is consistent with U.S. tax treaty policy that the Treasury Department has followed for decades,” deputy international tax counsel Henry Louie said June 8.

“I am referring to things like having a ‘savings clause’ in your income tax treaties,” Louie said at a transfer pricing conference co-sponsored by Bloomberg BNA and Baker McKenzie in Washington. In addition, he said, the U.S. has treaty rules that govern when a payment through a fiscally transparent entity is entitled to treaty benefits, and rules that prevent third-country investors from routing their investment through the treaty partner to get the benefits.

The Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting allows nations to quickly adopt recommendations from the OECD’s BEPS treaty initiatives, most of which are aimed at curbing tax avoidance by large multinational companies. One of the main provisions in the multilateral instrument, or MLI as it is often called, is the principal purpose test (PPT), which allows governments to disregard transactions whose principal purpose is tax avoidance.

U.S. LOB Provision

Article 7 of the Organization for Economic Cooperation and Development’s ground-breaking multilateral instrument, designed to enable multiple changes to the global tax system to be adopted at once, generally would allow governments to deny treaty benefits to companies under two types of provisions. The PPT would deny benefits when the main purpose of a transaction is tax avoidance, and a limitation-on-benefits (LOB) provision would allow or deny them based on a list of qualifying factors, such as the entity’s legal nature and ownership, and the general activities of residents in a jurisdiction.

“There has not been a U.S. tax treaty without a limitation-on-benefits provision probably since the late 80s or early 90s,” Louie said.

All of the BEPS treaty-related issues have been on Treasury’s radar screen for a very long time, Louie said. “As a consequence, its very safe to say that the U.S. treaty network does not have the degree of exposure to treaty shopping that I would say almost every other country in the world faces.”

The reduced risk to the U.S. tax treaties from being abused by base erosion and profit shifting was probably the biggest factor that led Treasury to conclude that at this time, the U.S. wouldn’t sign the MLI, Louie said. Another factor was the omission of a “robust” LOB provision.

Pascal Saint-Amans, who heads the Organization for Economic Cooperation and Development’s tax unit, told reporters ahead of the June 7 signing ceremony in Paris that even though the U.S. didn’t sign the MLI, it already has tough anti-abuse measures in its treaties, so it’s not a serious problem for the success of the multilateral treaty.


Louie said the Treasury Department has been very supportive of using mandatory binding arbitration in income tax treaties to facilitate the resolution of disputes.

The U.S. has binding arbitration “in force, signed, or agreed in principle” with eight of the countries that have signed on to arbitration provisions of the MLI. “That is a pretty big chunk of the willing countries.”

Treasury was concerned that under the MLI’s arbitration provisions, countries are allowed to enter “free-form reservations” to restrict the scope of the arbitration that they are willing to undertake, Louie said. “Even with respect to arbitration, the Treasury Department concluded that the potential benefits to the U.S. would be incremental.”

Ratifying U.S. Tax Treaties

Louie left open the possibility that the U.S. would sign the MLI in the future. Treasury has not yet made a decision “about whether we are going to sign or participate in the future.”

The Treasury official pointed to the difficulties the U.S. has in concluding bilateral tax treaties, including the need for the State Department to approve the treaty text negotiated by Treasury. “We have to explain to them every deviation from the U.S. model tax treaty provisions,” Louie said. The State Department doesn’t change the substance “but they scrutinize the language.”

Getting the State Department’s approval would have required a lot of heavy lifting, he said.

The U.S. Senate has to approve tax treaties negotiated by Treasury. Louie said the Senate would probably have wanted “some kind of assurance, at the very least, that all of our treaty partners share our interpretation of what the MLI has done to the bilateral treaties.”

That might mean needing to see an agreed consolidated text. “That puts you back into the question of ‘if you needed to do all these consolidated texts, maybe you could just have done them bilaterally to begin with,’” he said.

To contact the reporter on this story: Kevin A. Bell in Washington at

To contact the editor responsible for this story: Molly Moses at

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