International Tax – Tax Treaties 101May 30, 2016 | By Erik Lincoln
The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary amount countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Certain countries have executed favorable treaties with many countries. This often makes them a good country to locate a holding company when setting up operations overseas.
Income tax treaties exist to avoid double taxation. U.S. tax treaties have the same force as domestic law. If a treaty conflicts with federal law, generally, for domestic law purposes, the last-in-time rule prevails. The last-in-time rule states that a treaty can override previous acts of Congress and subsequent acts of Congress can override previously executed treatises. The basic principle behind this rule is that the last one adopted controls. This rule was first endorsed back in 1888 by the Supreme Court in Edye V Robertson.
Although the last-in-time rule could be applied by the courts whenever a conflict arises between a treaty and the Code, courts for the most part have stayed away from using it. Usually, courts refrain from unnecessarily invalidating prior laws or treaties. However, when two sources of law (Code and treaty) relate to the same subject, courts should attempt to interpret them to give effect to both, without violating the language of either. In Whitney v. Robertson, the Supreme Court stressed the importance of honoring both our foreign agreements and the legislative branch’s power to govern without making a policy decision about which is more important in any individual conflict.