Tax TreatiesTx 8300

Learning Objectives

1. Identify types of _____________ agreements,

2. Describe process of treaty ________,

3. Explain treaties’ authoritative ______,

4. State treaty __________,

5. _____ treaty provisions to fact scenarios, and

6. Conduct treaty ________

You should be able to:

International Agreement

• Agreement between nations establishing rules for taxing _________ of other nation

• Treaties– ______ tax– ______ and gift tax

• _________ agreements– ____________– ________ of information– International _____________

Treaty Birth and Death

• Negotiation

• ______ and consent

• ____________

• Termination

Treaty Birth: Negotiation

• Office of Tax ______

• Identify _______ ___ instances

• Start with _____ positions

• ______ hearings

• Secretary of State or U.S. ambassador ____

• State Department submits to _________

Treaty Birth: Advice and Consent

• President transmits to ______

• Senate publishes Treaty ________

• ________ Department and Joint Committee on ________ prepare explanations

• Senate _______ _________ Committee

• Requires ____ Senate support

Treaty Birth: Advice and Consent

• Support may be conditional.– _________: substantive change that, if not accepted,

requires __________– _________: rejection of some provisions that does not

necessarily preclude __________– _________: stated __________ that does not necessarily

preclude ratification

• _________ and supplementary treaties

Treaty Birth: Ratification

• President exchanges _____________ instruments

• Important dates:– Treaty “enters into _____”– Treaty “becomes __________”

• Treaties that are not ratified– _________: ratification expected– __________: probably dead

Treaty Birth: Termination

• Remain in force ____________

• Some treaties require __-year minimum existence

• ___ months notice often required

Who Cares?

• Judge likelihood treaty will become effective and _____

• Documentation:– Treasury Department _________ Explanation– Explanation of _____ Committee on Taxation– Senate Foreign _________ Committee Report

Authoritative Weight

• Supreme ___ of the land

• No ___________ status

• Later-in-____ rule

• Legislative ______

• ___ regard principle

• “Force of __________” override

• __________ of treaty-based return positions

Supremacy Clause

“This Constitution, and the laws of the United States which shall be made in pursuance thereof; and ____ _________ made, or which shall be made, under the authority of the United States, shall be the supreme law of the land….”

U.S. Constitution, article VI, clause 2

No Preferential Status

“For purposes of determining the relationship between a provision of a treaty and any law of the United States affecting revenue, neither the _______ nor the ____ shall have preferential status by reason of its being a treaty or a law.”

IRC §7852(d)(1)

Later-in-Time Rule

“By the Constitution, a treaty is placed on the same footing, and made of like obligation, with an act of legislation. Both are declared by that instrument to be the supreme law of the land…. The courts will always endeavor to construe them so as to give effect to both…; but if the two are inconsistent, the one _____ in date will ________ the other….”

Whitney v. Robertson (S.Ct., 1888)

Legislative Intent

“The ________ by statute to abrogate a treaty or any designated part of a treaty, or the purpose by treaty to supersede the whole or a part of an act of Congress, must not be lightly assumed, but must appear clearly and distinctly from the ______ _____ in the statute or in the treaty.”

U.S. v. Lee Yen Tai (S.Ct., 1902)

Due Regard Principle

“The provisions of this title shall be applied to any taxpayer with ____ _______ to any treaty obligation of the United States which applies to such taxpayer.”

IRC §894(a)(1)

“Force of Attraction” Override

“For purposes of applying any exemption from, or reduction of, any tax provided by any _______ to which the United States is a party with respect to income which is ____ ____________ connected with the conduct of a trade or business within the United States, a nonresident alien individual or a foreign corporation shall be deemed not to have a __________ ______________ in the United States at any time during the taxable year.”

IRC §894(b)

Treaty-Based Return Positions

“Each taxpayer who, with respect to any tax imposed by this title, takes the position that a treaty of the United States __________ (or otherwise modifies) an internal revenue law of the United States shall _________…such position….”

IRC §6114(a)

Treaty-Based Return Positions

“If a taxpayer fails to meet the requirements of section 6114, there is hereby imposed a penalty equal to $1,000 ($10,000 in the case of a C corporation) on _____ such failure.”

“The penalty imposed by this section shall be in _________ to any other penalty imposed by law.”

IRC §6712(a), (c)

Treaty Objectives

• Minimize _______ taxation

• ___________ between taxing authorities

• ________ progress

• Open ___ markets

Treaty Coverage: Persons

• _________ (individuals and entities)

• Entities must meet __________ ownership test

• ____ residents refer to tie-breaker rules

Tie-Breaker Rules: ExampleNoah Bode, a U.S. citizen, maintains homes in Atlanta and _______. As a Delta pilot, he spends about 4 weeks a year at each home. Noah’s family resides in _______, and he banks in _______. The U.S.-Jamaica treaty tie-breaker rules, in descending order, are based on:

(1) Permanent home

(2) Center of vital interests

(3) Habitual abode

(4) Citizenship

(5) Mutual agreement

Assuming Noah is a “dual resident,” where does he reside?

Treaty Coverage: Taxes

• Federal income tax

• Excise tax on insurance ________

• May indirectly affect _____ income tax

• Treaties with EU countries often cover _______ and ___ _____ taxes.

Taxation of Business Profits

• __________ establishment

• Transportation income

• ____ property income

Business Profits: Permanent Establishment

• Without a treaty, host countries can tax all ________ profits.

• Treaties exempt ________ profits unless attributable to a ___. To be taxable:– Company must engage in ________,– ___ must exist in ____ country, and– Profit must be attributable to ___.

Business Profits: PE Defined

• More substantive than _____ or ________

• Three forms:– __________

– ________ or business activities– __________ agents

• IRS __________ will not rule

Permanent Establishment Concept

FC1

No Treaty with U.S.

Treaty with U.S.

FC2

Which income can the U.S. tax?

e-Commerce per OECD

• Viewed ___ ____ is not a PE.

• Computer _______ – If treaty resident _________ server (whether

owned or leased), it’s a PE where _________.– Not PE if:

• ____ (non-agent of treaty resident) operates server or

• Server used only for __________ or auxiliary activities.

Business Profits: Transportation

• International transportation income is ______ in host country, PE or ___. Exceptions include:– “_________” transportation– “Cruises to _______”

• Some treaties exempt ______ transportation income if ____________ of international transportation.

Int’l Transportation: Example

Danish Airways flies from Copenhagen to New York to Atlanta. Of the passengers boarding in Copenhagen, some disembark in N.Y., and others fly to Atlanta. More passengers board in N.Y. and fly to Atlanta. The transportation article in the U.S.-Denmark Treaty is similar to the one in the U.S. Model Treaty. How does the U.S. treat business profit from each leg of the journey?

(1) Copenhagen to N.Y.

(2) Copenhagen to Atlanta

(3) New York to Atlanta

Business Profits: Real Estate

• ____ countries tax real property leasing income and ______ and _______ income, even when no PE.– “____ ___ ____” income taxed on gross basis– Some treaties allow election for ___ _____ tax

• Separate ________ gain article usually deals with taxation of gain from selling ______.

PSI: Dependent Services• “Commercial ________” article exempts

_____-term employees from ____ country tax.– No more than ____ days in ___-month period– Paid by ____ country employer

• Advantages:– No foreign ___________– No ________ tax return– No additional ______________– No foreign tax credit on ____ country return

PSI or PE: ExampleNRA from Spain forms a Spanish corporation. The corporation has no ___ in the U.S. The NRA is the corporation’s only employee and only source of income. This year, the NRA spends ___ days in the U.S. and earns $50,000 salary. The corporation’s profit is __________. How much can the U.S. tax?

PSI: Independent Services

• ____ country does not tax independent contractors unless they render services through regularly available “_____ place of business.”

• Length of stay and compensation amount often are __________.

PSI: Retirement Income

• Only country of current ________ can tax:– Investment _______ income– Private _______ income

• Only ____ country can tax:– __________ pension income– _______ Security benefits

PSI: Alimony

• Only country where recipient _________ can tax alimony.

• _____ support payments are not taxable.

PSI: Teachers, Students, and Government Employees

• ____ countries cannot tax:– _______ staying less than 2 years– _________ students and trainees– Government employees

• Foreign visits __ ____ days avoid host country tax.

PSI: Entertainers, Artists, and Athletes

• These individuals cannot avoid ____ country tax if compensation is too high.

• The dollar threshold ranges from _____ to ______.

• _______ of stay does not matter.

Investment Income: Dividends

• ____________ often are subject to ____ country withholding tax of __%.

• “________ shareholders” qualify for lower withholding rates.– _________ shareholder– Owning ≥ ___% interest

Investment Income: Interest

• Many treaties exempt interest income from ____ country withholding tax.

• Many treaties allow ____ countries to withhold __ to ___%.

Siphoning Profits: Example

If Forco dividends all E&P to Domco, how much of the $1 million profit does Domco receive?

Domco establishes Forco in Hitaxia, which has a ___% income tax rate, ___% dividend withholding tax, and ___% interest withholding tax. Forco expects to earn $1 million profit before interest and taxes.

If Domco loans capital to Forco and Forco pays $1 million interest to Domco, how much of the $1 million profit does Domco receive?

Investment Income: Royalty

• Many treaties exempt royalty income from ____ country withholding tax.

• Many treaties allow host countries to withhold __ to ___%.

Treaty Shopping: Issue

• “Treaty shopping” allows residents in _________ nations to obtain unintended benefits via _______ companies in treaty countries

U.S. CorporationPing resides in Mongolia.

Shell Corporationin Treaty Country

Equity Investment

Equity Investment

Equity Investment

Declares $100 dividends

Investment Income: Capital Gain

• Many treaties exempt capital gain from ____ country withholding tax unless from:– Real estate or– Royalty-yielding intangibles.

• Some treaties allow ____ countries to tax capital gain of individuals staying too long.

Investment Income: Branch Profit

• Most countries do not impose branch profits ___.

• Some treaties allow ____ countries to impose BPT on the “________ equivalent amount.”

Broad Scope: Savings Clause

• Allows country to tax its own residents and ________ as if treaty did ___ _____

• Prevents ____ persons from reducing ____ taxes through treaties

Broad Scope: Nondiscrimination

• Requires that a country not treat residents of its treaty partner more severely than its own residents, providing “fair ________ treatment”

• Some treaties provide “fair _____________ treatment”

Broad Scope: Preservation Clause

• Treaties _____ benefits, not take them away.

• Clause prevents treaties from inadvertently taking benefits away that ________ laws or _____________ agreements allow.

Broad Scope:Miscellaneous Income

• ________ article allowing only ____ country to tax income not covered elsewhere

• Examples:– _______ income and lottery winnings– _______ prizes– ________ damages– Income from _________ not to compete

Administrative Provisions

Exchange of Information Prevents tax ________ through _______ exchanges and special requests

______ Agreement

Administrative Assistance

_____ into Force

Termination

Assists taxpayers in settling disputes through “_________ authority”

Allows revenue agencies to assist in ____________ taxes

Treaties “______ into force” following ratification and “become _________” later

Requires __ months notice

Treaty Resources

• Tax Analysts’ _________ Tax Treaties

• _____ Tax Treaties

• ______ U.S. Tax Treaties

• RIA’s __________