Question

In 2016, after nearly 10 years without an update, the United States Treasury Department issued a newly revised U.S. Model Income Tax Convention (the “2016 Model”), which is the baseline text the Treasury Department uses when it negotiates tax treaties. What are some of the differences between the 2016 Model and the 2006 Model? Why were these changes needed?

Answer 1

The 2016 Model includes a number of new provisions intended to more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.

#Preferential Tax Regimes: The 2016 Model does not allow a reduction of withholding taxes on payments of highly mobile income—income that taxpayers can easily shift around the globe through deductible payments such as royalties and interest—that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime. To protect against treaty abuse, the 2016 Model contains rules that deny treaty benefits on deductible payments of highly mobile income that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime.

#Article 11 (Interest) includes a new rule that would allow a treaty partner to tax interest arising in that country in accordance with domestic law if the interest is beneficially owned by a related person that benefits from “notional interest deductions” (NID).

#New Article 28 (Subsequent Changes in Law) obligates the treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty’s original balance of negotiated benefits and the need for the treaty to reduce double taxation.

#Corporate Inversions: The 2016 Model also includes measures to reduce the tax benefits of corporate inversions. Specifically, it denies reduced withholding taxes on U.S. source payments made by companies that engage in inversions to related foreign persons.

#Required Arbitration: The 2016 Model contains rules requiring that such disputes be resolved through mandatory binding arbitration. The “last best offer” approach to arbitration in the 2016 Model is substantively the same as the arbitration provision in four U.S. tax treaties in force and three U.S. tax treaties that are awaiting the advice and consent of the Senate.

#Article 22 (Limitation on Benefits) has been updated to prevent so-called “treaty shopping” by third-country residents that are not intended beneficiaries of the treaty. The 2016 Model includes two new tests – a “derivative benefits” test and a “headquarters company” test. In addition, a number of the preexisting LOB tests have been tightened to prevent abuse by third-country residents.

#Triangular PEs: The 2016 Model also includes a rule (located in new paragraph 8 of Article 1 (General Scope)) that is a revised version of the “triangular permanent establishment” rule that has been included in some of the United States’ income treaties since the 1990s.

(Above are the differences in form of inclusions in the 2016 model in contrast to 2006 model)