Transcript slides

Tax Treaties
Tx 8300
Learning Objectives
You should be able to:
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 ________
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
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Negotiation
______ and consent
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Termination
Treaty Birth: Negotiation
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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
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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
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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: Example
Noah 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
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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:
– __________
– __________ agents
– ________ or business activities
• IRS __________ will not rule
Permanent Establishment Concept
No Treaty with U.S.
FC1
Which income can the U.S. tax?
FC2
Treaty with U.S.
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:
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No foreign ___________
No ________ tax return
No additional ______________
No foreign tax credit on ____ country return
PSI or PE: Example
NRA 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
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 Forco dividends all E&P to Domco, how much of the $1 million profit
does Domco receive?
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
Equity Investment
U.S. Corporation
Ping resides in
Mongolia.
Equity
Investment
Equity
Investment
Shell Corporation
in Treaty Country
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:
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_______ income and lottery winnings
_______ prizes
________ damages
Income from _________ not to compete
Administrative Provisions
Exchange of Information
Prevents tax ________ through _______
exchanges and special requests
______ Agreement
Assists taxpayers in settling disputes through
“_________ authority”
Administrative Assistance
Allows revenue agencies to assist in
____________ taxes
_____ into Force
Treaties “______ into force” following
ratification and “become _________” later
Termination
Requires __ months notice
Treaty Resources
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Tax Analysts’ _________ Tax Treaties
_____ Tax Treaties
______ U.S. Tax Treaties
RIA’s __________