International Tax – New US Model TreatyMay 15, 2016 | By Erik Lincoln
The US Treasury Department (Treasury) on 17 February 2016 released a revised US Model Income Tax Convention (the 2016 Model Treaty). The Treasury will use the 2016 Model Treaty when it negotiates new international tax treaties with other countries. The US Model Treaty was last updated in 2006.
The 2016 Model Treaty was not accompanied by a technical explanation as most US Model Treaties are. But, in the preamble accompanying the release of the 2016 Model Treaty, Treasury stated that it plans to release the technical explanation to the 2016 Model Treaty by the end of May 2016.
The 2016 Model Treaty incorporates the new model treaty provisions that were released in proposed form on 20 May 2015, as well as making other significant international tax amendments and revisions to the prior US Model Treaty.
Significant provisions include:
- Denying treaty benefits for certain dividends and deductible payments made by a domestic corporation treated as an expatriated entity under Section 7874 during the 10 years following the completion of an inversion transaction
- Denying treaty benefits to certain income items benefiting from a “special tax regime” in the beneficial owner’s country of residence
- Denying treaty benefits for interest if the interest is beneficially owned by a related person that benefits from a notional interest deduction for equity
- Modifying the limitation-on-benefits (LOB) article, including adding a “derivative benefits test,” a base erosion prong to the “subsidiary of a publicly traded company” test and a “headquarters company test” that would allow treaty benefits for certain interest and dividends paid by members of a multinational corporation
- Enabling the US or a treaty partner to terminate some benefits if changes in domestic tax law affecting tax rates are made after a treaty is signed
- Modifying the Mutual Agreement Procedure of Article 25 to require mandatory binding arbitration to resolve certain disputes between tax authorities