Presenting a live 90-minute webinar with interactive Q&A Income Tax Treaty Practice for Tax Counsel: Planning and Structuring Transactions to Maximize Treaty-Based Benefits Understanding and Applying Key Tax Treaty Provisions and the Coming Changes WEDNESDAY, APRIL 26, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Bryan H. Kelly, Counsel, Venable , Los Angeles Javier Salinas, JD, MBA, LLM, Managing Director, International Tax, BPM , San Francisco The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
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Income Tax Treaty Practice for Tax Counsel: Planning and Structuring Transactions to Maximize Treaty-Based Benefits l Understanding and Applying Key Tax Treaty Provisions and the Coming Changes April 26, 2017
Agenda Basic principles and objectives of income tax treaties Conditions to benefits under U.S. income tax treaties Treatment of personal services income Permanent establishment rules Taxation of dividends, interest, and royalties Recent developments o 2016 U.S. Model Tax Treaty new provisions o OECD BEPS Project and the multilateral instrument 5
Basic Principles and Objectives of Income Tax Treaties 6
Basic Principles and Objectives of Income Tax Treaties Taxable Presence – Taxation of Non-U.S. Persons Taxation differs depending on type of income earned o Non-business (passive) income • 30% tax on gross amount of certain U.S.-source income • Generally collected through withholding at source o U.S. trade/business income • Net basis tax on ECI (at the graduated rate) • U.S. branch profits tax application o Tax treaties may alter treatment of both types of income 7
Basic Principles and Objectives of Income Tax Treaties Objectives Facilitate international trade and investment by preventing double taxation of cross-border transactions o Achieved primarily by assigning primary taxing jurisdiction to residence country and by lowering or eliminating taxes levied by the source country (i.e., state where the relevant income arises) Avoid discriminatory treatment of nonresidents Prevent tax avoidance o Limitation on benefits provision o Exchange of information provision Permit reciprocal assistance in administering and enforcing tax laws 8
Basic Principles and Objectives of Income Tax Treaties Legal Basis for U.S. Tax Treaties U.S. Constitution, Article II, Section 2: o “[The President] shall have the Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur….” 9
Basic Principles and Objectives of Income Tax Treaties Treaty Enactment Process; Current Treaty Network How does a tax treaty become effective? o U.S. Treasury negotiates; administration official signs. o Hearing before Senate Foreign Relations Committee precedes consideration by full Senate. o Senate must "advise and consent" to ratification, by a two-thirds vote. o Senate may give conditional consent by means of a reservation or understanding. o President signs and instruments of ratification exchanged; treaty goes into force and becomes effective as specified. Amendments to existing treaties, called “protocols,” are subject to the same approval procedures as full treaties. U.S. has income tax treaties in force with nearly 70 other countries. Several treaties under negotiation or signed, but awaiting Senate approval. Some treaties currently in force are being renegotiated, or have been renegotiated and are awaiting ratification. 10
Basic Principles and Objectives of Income Tax Treaties Pending Tax Treaties and Protocols Treaty / Signed Status protocol Protocol amended and approved by the Senate Foreign Relations Luxembourg 20 May 09 Committee and referred to the full Senate for ratification on 1 April 2014 Protocol amended and approved by the Senate Foreign Relations Switzerland 23 Sept 09 Committee and referred to the full Senate for ratification on 1 April 2014 Treaty approved by the Senate Foreign Relations Committee and referred to the full Chile 4 Feb 10 Senate for ratification on 1 April 2014 Treaty approved by the Senate Foreign Relations Committee and referred to the full Hungary 4 Feb 10 Senate for ratification on 1 April 2014 Protocol approved by the Senate Foreign Relations Committee and referred to the full Spain 14 Jan 13 Senate for ratification on 16 July 2014 Japan 24 Jan 13 Transmitted to the U.S. Senate on 13 April 2015 for advice and consent to ratification Treaty approved by the Senate Foreign Relations Committee and referred to the full Poland 13 Feb 13 Senate for ratification on 16 July 2014 Vietnam 7 Jul 15 Awaiting transmission by the President to the U.S. Senate Norway Not signed Agreement on the text of the revisions to the treaty has been reached Romania Not signed Agreement on the text of the treaty has been reached 11
Basic Principles and Objectives of Income Tax Treaties U.S. Tax Treaty Network “Gaps” Asia/Pacific (no treaty in force with Hong Kong, Singapore, Taiwan, Malaysia, or Myanmar) Middle East (no treaty in force with Africa (no treaty in South America Saudi Arabia, force with Algeria, (no treaty in force Qatar, Jordan, Liberia, Kenya, Gabon, with Brazil, Kuwait, or UAE) or Nigeria) Argentina, Chile, or Peru) 12
Basic Principles and Objectives of Income Tax Treaties Model Treaties U.S. Model Income Tax Convention (“U.S. Model Treaty”) o Starting point for U.S. negotiations o Treasury technical explanation is official U.S. interpretation of provisions o Updated periodically; most recent model released in 2016 o 2016 U.S. Model Treaty is similar to the prior model (published in 2006) in many respects, but there are key differences (discussed subsequently) Organisation for Economic Cooperation and Development (OECD) o Very useful commentary for interpreting treaty provisions o Updated periodically; most recent model released in 2014 UN Model Treaty o Written from the perspective of developing nations o Last updated in 2011; update planned for 2017 Note: Except as otherwise indicated, references to treaty articles herein are to the articles of the 2006 U.S. Model Treaty. Caution: Though most tax treaties in force are based on the above models, each treaty is separately negotiated and is unique. 13
Basic Principles and Objectives of Income Tax Treaties Taxes Covered by Income Tax Treaties U.S. taxes o Federal income taxes o Federal excise taxes on private foundations o Not Social Security taxes o Not state and local taxes Foreign taxes o As enumerated in each treaty U.S. Model Treaty, Art. 2 14
Basic Principles and Objectives of Income Tax Treaties Interplay between Tax Treaties and U.S. Domestic Law IRC § 894(a) o Requires that due regard be given to treaty IRC § 7852(d)(1) o Provides that “neither the treaty nor the law shall have preferential status by reason of its being a treaty or law” Case law o Indicates that precedence is usually given to the most recently enacted authority (later-in-time rule) Treaties cannot create taxation, only reduce it Unless the context requires otherwise, terms not defined by a treaty are generally defined under the domestic laws of the source state 15
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