2 Treaty Procedure & History

Topics

The U.S. Tax Treaty Network: Past and Present The Model Treaties: Blueprints for Global Tax CoordinationTechnical Application of Tax Treaties: Taxing ProfitsCritical Analysis and the Future of Tax Treaties

The U.S. Tax Treaty Network: Past and Present

How U.S. Tax Treaties are MadeHistorical Development of the U.S. Tax Treaty NetworkCurrent Developments

Step 1. Obtain Authority.

Treaties are entered into by the Executive Branch under Article II, Section 2, of the U.S. Constitution.

[The President] shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur.

Compare to Article I, Section 7, which gives the House of Representatives the lead role in domestic revenue matters.

“All Bills for raising Revenue shall originate in the House of Representatives.”

Step 1, continued

Congressional restraint on Executive power to make treaties is exercised by the Senate, traditionally through its Foreign Relations Committee.Most treaties are negotiated on behalf of the United States by the State Department.Tax Treaties are an exception: they are negotiated primarily by the Treasury Department.

However, the State Department is traditionally consulted before a treaty is signed.

Step 2. Initiate Negotiations.Various sectors of the Treasury Department are involved in negotiating treaties.

Primary responsibility is assigned to the Office of International Tax Counsel, a division of the Office of Tax Policy.Staff assistance is traditionally provided by the Internal Revenue Service.

The decision about what treaties to initiate or update is not made public.

Presumably, there is some form of unstated standard, whether written or unwritten, because U.S. treaty policy has been consistent over several decades.

Step 2, continued

In connection with new treaties with Japan and Sri Lanka, former ITC Barbara Angus hinted at some of this policy:

“In establishing our negotiating priorities, our primary objective is the conclusion of tax treaties or protocols that will provide the greatest economic benefit to the United States and to U.S. taxpayers.”To that end, “We communicate regularly with the U.S. business community, seeking input regarding the areas in which treaty network expansion and improvement efforts should be focused.”[Testimony of Barbara M. Angus, International Tax Counsel, United States Department of the Treasury before the Senate Committee on Foreign Relations on Pending Income Tax Agreements, FEBRUARY 25, 2004]

3. Negotiate.

The ITC negotiates the treaty with his or her foreign counterpartThis is done in secret, in the sense that there are no public meetings.

4. Initial.

• International Tax Counsel initials the treaty to sign off on the negotiations and move the treaty into ratification phase.

5. Submit to President.

International Tax Counsel presents the initialed treaty to the President or his delegate for signature.The Dept of State and Treasury prepare a report to the President recommending he transmit the treaty to Senate for advice abdconsent to ratification

President

Treasury Depttax treaties

State DeptState Deptmost treaties

Assistant Sec’y., Tax Policy

Office of International Tax Counsel

Senate Foreign Senate Foreign Relations Relations CommitteeCommittee

Senate Finance Senate Finance CommitteeCommittee

House Ways & House Ways & Means CommitteeMeans Committee

traditionally consults

with

negotiates with foreign countriesinitials the treatypresents to President or his delegate for signature

Congress

Summary: Delegation of Treaty Negotiation ResponsibilitiesSummary: Delegation of Treaty Negotiation Responsibilities

6. Sign.

If the President approves of the treaty, he signs it.

7. Transmit to Senate.

After it is signed by the President, the treaty is forwarded together with the Report to Senate under a letter of transmittal.Senate formally lifts the injunction of secrecy, and the signed treaty become public information.

While the Senate Finance Committee has jurisdiction over tax legislation, jurisdiction over tax treaties lies with the Senate Foreign RelationsCommitteeAfter receiving the signed treaty and the President’s transmittal letter, the Senate Foreign Relations Committee schedules public hearings

A representative of Treasury testifies at the hearing in support of ratificationTreasury also generally presents a Technical Explanation of the treaty

8. Transmit to Senate Foreign Relations Committee.

9. Obtain Advice and Consent from Senate.

“Advice” is not defined, and has been construed to mean that Senate can consent to a treaty with “reservations” with respect to particular provisionsProvisions subject to reservation are not enforceableFor example, some treaties (e.g. Pakistan) contains a reservation on tax sparing.The Senate must consent to the treaty by a 2/3 vote.

10. Transmit to the President.

11. Prepare and Sign Instruments of Ratification

12. Exchange Instruments of Ratification.

Summary: 12 Steps to a Tax Treaty1. Obtain Authority.2. Initiate Negotiations.3. Negotiate4. Initial5. Submit to the President6. Sign7. Transmit to Senate8. Transmit to Senate Foreign Relations Committee9. Obtain Advice and Consent from Senate10. Transmit to the President11. Prepare and Sign Instruments of Ratification12. Exchange Instruments of Ratification

That’s a long and complicated processaverage 5 years to completeoften requires protocols simultaneous with entry into force of main agreement, because laws have changed in the interim

So, with which countries has the U.S. completed this process?

1935: First Tax Treaty Concluded

France

Pre-WW II: Addition of Canada (1937) and Sweden (1939)

Canada

Sweden

France

1946 to 1951: After the War, Northern Europe and New Zealand, including Cook Islands

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

New Zealand

Cook Islands(NZ ext.)

U.K.Ireland

1952 to 1957: Random Patterns?

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

AustraliaSouth Africa

Aruba(NE ext.)

Netherlands Antilles(NE ext.)

Italy

Honduras Pakistan

Austria

New Zealand


Ireland

1958-1959: Afro-Caribbean Extensions

MontserratDominicaSt. LuciaBarbadosSt. Vincent & the GrenadinesGrenadaTrinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland


Aruba(NE ext.)


Italy

Honduras Pakistan

Austria

Sierra Leone(UK ext.)

Seychelles(UK ext.)

Falkland Islands

Cayman IslandsJamaica Anguilla

St. Kitts & Nevis Antigua & Barbuda

BVI

Zimbabwe(UK ext.)

Malawi (UK ext.)

Zambia(UK ext.)

Nigeria(UK ext.)

GambiaYemen(UK ext)

Belize(UK ext.)

Congo(Belg ext.)

RwandaBurundi

Cyprus (UK ext)

(Belg ext.)

All by UK ext.:

Ireland

New Zealand


1960 to 1974: 14 Quiet Years:Only Luxembourg is added in 1964…

Malawi (UK ext.)


Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland


Aruba(NE ext.)


Italy

Honduras Pakistan

Austria


Seychelles(UK ext.)

Falkland Islands

Cayman IslandsJamaica Anguilla


BVI

Zimbabwe(UK ext.)

Zambia(UK ext.)

Nigeria(UK ext.)

GambiaYemen(UK ext)

Belize(UK ext.)

Congo(Belg ext.)

Cyprus (UK ext)All by UK ext.:

RwandaBurundi (Belg ext.)

Luxembourg

Ireland

New Zealand


…but terminations begin in 1966.

Malawi (UK ext.)


Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland


Aruba(NE ext.)


Italy

Pakistan

Austria


Seychelles(UK ext.)

Falkland Islands

Jamaica Anguilla St. Kitts & Nevis Antigua & Barbuda

BVI

Zambia(UK ext.)

Nigeria(UK ext.)

GambiaYemen(UK ext)

Belize(UK ext.)

Congo(Belg ext.)

All by UK ext.:


Luxembourg

Honduras terminates in 1966.

Termination of UK extensions to Cyprus (1968),Cayman Islands (1969), and Zimbabwe (1974).

Ireland

New Zealand


X

X

X

X

1976: Five Additions

Malawi (UK ext.)

MontserratDominicaSt. LuciaBarbadosSt. Vincent & the GrenadinesGrenadaTrinidad & Tobago (new treaty)

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland


Aruba(NE ext.)


Italy

Pakistan

Austria


Seychelles(UK ext.)

Falkland Islands


BVI

Zambia(UK ext.)

Nigeria(UK ext.)

GambiaYemen(UK ext)

Belize(UK ext.)

Congo(Belg ext.)

All by UK ext.:


Luxembourg

Iceland

Poland U.S.S.R.Romania

New Zealand


Ireland

1979: Hungary and Korea added; Nigeria terminates.

Malawi (UK ext.)


Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland


Aruba(NE ext.)


Italy

Pakistan

Austria


Seychelles(UK ext.)

Falkland Islands


BVI

Zambia(UK ext.)

GambiaYemen(UK ext)

Belize(UK ext.)

Congo(Belg ext.)

All by UK ext.:


Luxembourg

Iceland


Hungary

Korea

Nigeria terminates UK extension (1979)

Ireland

New Zealand


X

Four Additions from 1981-1982

Malawi (UK ext.)


Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland


Aruba(NE ext.)


Italy

Pakistan

Austria


Seychelles(UK ext.)

Falkland Islands

Jamaica(new treaty) Anguilla


BVI

Zambia(UK ext.)

GambiaYemen(UK ext)

Belize(UK ext.)

Congo(Belg ext.)

All by UK ext.:


Luxembourg

Iceland


Hungary

Korea

Morocco

Egypt

Malta

Philippines

New Zealand


Ireland

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland


Aruba(NE ext.)


Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland


Hungary

Korea

Morocco

Egypt

Malta

Philippines

Ireland

New Zealand

1984: Termination of Extensions

(2) Termination of Belgium extensions to Burundi, Congo, and Rwanda.

(3) Termination of New Zealand extension to Cook Islands.

X

XXXX

X

X

XXXXXX

XXX XX

XX X

X

(1) Termination of UK extensionsto Anguilla,

Antigua & Barbuda, Barbados, Belize, British Virgin Islands, Dominica, Falkland Islands, Gambia, Grenada, Malawi, Montserrat, Seychelles, Sierra Leone, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Yemen, and Zambia; also to Trinidad & Tobago and Jamaica (but they had independent treaties as of 1970 and 1981, respectively).

1986: Barbados, China, Cyprus

Ireland

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

Aruba(NE ext.)


Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland


Hungary

Korea

Morocco

Egypt

Malta

Philippines

China

Cyprus

Barbados

New Zealand

1987: Termination of South Africa

Ireland

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

[Aruba(NE ext.)]

[Netherlands Antilles(NE ext.)]

Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland


Hungary

Korea

Morocco

Egypt

Malta

Philippines

China

Cyprus

Barbados

New Zealand

X

1988: Termination of Netherlands extensions, except as to Art. VIII (interest).

Ireland

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

[Aruba(NE ext.)]


Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland


Hungary

Korea

Morocco

Egypt

Malta

Philippines

China

Cyprus

Barbados

New Zealand

1990: Four additions

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

[Aruba(NE ext.)]


Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland


Hungary

Korea

Morocco

Egypt

Malta

Philippines

China

Cyprus

Barbados

Spain

India

Tunisia

Indonesia

Ireland

New Zealand

1993 to 1995: Six additions, final termination of Netherlands extensions

Ireland

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland

PolandRomania

Hungary

Korea

Morocco

Egypt

Malta

Philippines

China

Cyprus

Barbados

Spain

India

Tunisia

Indonesia

Portugal

Mexico

Final termination of Netherlands extensionsto Aruba and the Netherlands Antilles.

CzechRepublic

SlovakRepublic

Israel

New Zealand

XX

ArmeniaAzerbaijanBelarusEstoniaGeorgiaKazakhstanLatviaLithuaniaMoldovaRussiaTajikstanTurkmenistanUkraineUzbekistan

1997: Four additions, termination of Malta

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland

PolandRomania

Hungary

Korea

Morocco

Egypt

Philippines

China

Cyprus

Barbados

Spain

India

Tunisia

Indonesia

Portugal

Mexico

CzechRepublic

SlovakRepublic

Israel

South Africa

ThailandTurkey

New Zealand

Ireland

X


1999 to 2001: Six Additions

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland

PolandRomania

Hungary

Korea

Morocco

Egypt

Philippines

China

Cyprus

Barbados

Spain

India

Tunisia

Indonesia

Portugal

Mexico

CzechRepublic

SlovakRepublic

Israel

South Africa

ThailandTurkey

Slovenia

Venezuela

New Zealand

Ireland


2004: Sri Lanka

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland

PolandRomania

Hungary

Korea

Morocco

Egypt

Philippines

China

Cyprus

Barbados

Spain

India

Tunisia

Indonesia

Portugal

Mexico

CzechRepublic

SlovakRepublic

Israel

South Africa

ThailandTurkey

Slovenia

Venezuela

Sri Lanka

Ireland

New Zealand


2005: Bangladesh

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland

PolandRomania

Hungary

Korea

Morocco

Egypt

Philippines

China

Cyprus

Barbados

Spain

India

Tunisia

Indonesia

Portugal

Mexico

CzechRepublic

SlovakRepublic

Israel

South Africa

ThailandTurkey

Slovenia

Venezuela

Sri Lanka

Ireland

New Zealand


Bangladesh

2007 and on: What are our Priorities?

Trinidad & Tobago

Canada

Sweden

France

Norway

Switzerland

Denmark

NetherlandsBelgium

U.K.

Japan

Greece

Germany Finland

Australia

Italy

Pakistan

Austria

Jamaica

Luxembourg

Iceland

PolandRomania

Hungary

Korea

Morocco

Egypt

Philippines

China

Cyprus

Barbados

Spain

India

Tunisia

Indonesia

Portugal

Mexico

CzechRepublic

SlovakRepublic

Israel

South Africa

ThailandTurkey

Slovenia

Venezuela

Sri Lanka

Ireland

New Zealand


Bangladesh

Middle East?Malaysia?

Botswana?

Brazil?

Argentina?

Libya?

Chile?

2 Treaty Procedure & History

Documents

Transcript of 2 Treaty Procedure & History