Strategizing Multinational Tax Risks

The US Dept. of Treasury has released drafts of its proposed revisions to the US model income tax convention, for which it has requested comments.  The new Model treaty will serve as a template for future US treaties and protocols. A PwC summary and US Treasury press release, which further reference the proposed changes, are included for reference: http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-us-treasury-proposes-changes-us-model-income-tax-convention.pdf http://www.treasury.gov/press-center/press-releases/Pages/jl10057.aspx Key observations:

• Exempt permanent establishment (PE) rule that will also apply to US branches
• Denial of treaty benefits re: articles 11 (Interest), 12 (Royalties), and 21 (Other income) for recipients in a “special tax regime.”  There are several exceptions applicable to the general rule.
• Disallowance of treaty benefits for payments of dividends, interest, royalties and other income for 10 years after a company expatriates.
• Changes to Limitation on Benefits (LOB) article: (i) New derivative benefits test which is inclusive of a base erosion test, (ii) a base erosion test to the subsidiary of a public company requirement, (iii) changes to base erosion requirements in the public company test, ownership base erosion test and derivative benefits test, and (iv) a change to the discretionary grant of relief clause inclusive of a principal purpose test.
•  Partial termination provisions for subsequent law changes exempting, or reducing the tax rate to less than 15% for dividends, interest, royalties and other income.

These significant changes represent acknowledgment of the OECD BEPS impact and its impact on the world’s tax treaties that will directly impact the taxation of a multinational company’s global structure.  Accordingly, these changes are required reading for international tax practitioners, as the rest of the world will be following along in measuring its respective treaties and new protocols. BEPS Action 6, Preventing treaty abuse, recognized the US Model Treaty’s LOB article, with an additional inclusion for a derivative benefits test.  The US proposal has now addressed that intent.