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Why Does the United States Conclude Tax Treaties? Yariv Brauner University of Florida.

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Presentation on theme: "Why Does the United States Conclude Tax Treaties? Yariv Brauner University of Florida."— Presentation transcript:

1 Why Does the United States Conclude Tax Treaties? Yariv Brauner University of Florida

2 Introduction Legal status of tax treaties Background – the negotiation process Basic Policy Concise history The decision to negotiate / conclude a treaty The contents of tax treaties Policy conclusions

3 Legal Status (Tax) treaties and statutes are both “the law of the land” – i.e., no superior status to tax treaties – Treaty override possible and used in practice – The courts soften the conflict - possibly eliminating inexplicit/unintended override Treaty override controversial, yet little consequence in reality – Justified as mostly targeting domestic abuse – Other countries join the United States in practice

4 Background Long (several years) and non-standard process Secret and uncontrolled – Senate’s advice and consent being the sole effective control Doubts about the existence of clear treaty policy and a serious tax policy discourse generally within the Treasury department (executive branch) – General discomfort of Congress with tax treaties that are difficult to amend, while domestic law changes at least on an annual basis That depend on incomplete information about the treaty partner and lack of political control over the process – Experts: No serious and open discussion between Congress and the Treasury about the goals: what is “good” for the American people? – No evidence on coordination of statutory and treaty tax policy

5 Basic Policy Acceptance of the rules of the game, with some U.S. accents Negotiating team follows the published “U.S. Model, accompanied by a technical explanation Resembles the OECD Model – Saving clause – Effective management does not dominate the corporate residence rules – Limitation on benefits – More extensive exchange of information – No tax sparing

6 Concise History Active in the League of Nations’ work (1920s) First tax treaty concluded with France (1935) – Followed by Canada (1937) and Sweden (1939) Post WWII – first Northern Europe (and NZ) – Then – more Europe, Australia, S. Africa, others.. – End 1950s – Africa and Caribbean nations – 1960-1974 – only Luxemburg + terminations – End 1970s – More Europe + Korea 1980s-present – slow pace of additions / Africa and Caribbean terminations Very few in Latin America and Africa, otherwise almost complete coverage of important trade partners

7 The Decision to Negotiate / Conclude Foreign policy – Politics – Defense Economic policy – Major trade partners Relevance of actual trade relationship – Impact of lobbying / particular interest groups Investors prefer a “treaty in place” – Position The U.S. is now a net capital importer The U.S. is a less dominant capital exporter / price maker

8 The Content Rosenbloom: policy designed in the 1960s – Based on the choice of residence based taxation, compatible with the position of the U.S. as a large net capital exporter Maximal reduction of withholding tax rates Each treaty a separate, independent contract – no consistency or comprehensiveness concerns Focus on U.S. taxpayers – unwillingness to grant significant advantages via treaties [and primary worry from abuse of treaties by them – less worried about foreigners taking advantage of U.S. treaties – Y.B.] Recent policy

9 Clear, Coherent and Transparent Policy? Instinctively, we are attracted to it – especially academics - yet, maybe practically it is not desirable? Transparency dismissed as bad for negotiation – Yet, the U.S. Model is public – And, changes in policy may be referred from other treaties that are public Standardization

10 Conclusion Decision to negotiate Process standardized yet not studied Separate from decision to conclude – The Model – The international tax regime Senate oversight – Other political constraints Maintenance Personal aspects Resources Unclear goals

11 Brazil – United States Tax Treaty History – Mutual suspicion – Tax sparing But, nowadays, Brazil is left essentially alone among our most serious trade partners without a treaty Why? Traditional reasons to conclude – Foreign policy – Politics – MNEs interests – Economic policies

12 Brazil – United States Tax Treaty (cont.) Other reasons – Association of productive countries – Eliminate disincentives that we do not believe in anyway So, why not? – Insistence on tax sparing – Trust, cooperation Exchange of information Bank secrecy – Brazil’s independence from OECD hegemony

13 Tax Sparing and Matching Credits Goal: support tax incentives of a developing treaty partner Consistent U.S. policy Reasons – Tax treaties should not affect U.S. taxation of U.S. citizens and residents – Tax treaties inappropriate mechanism for economic assistance – Incompatible with CEN based FTC FTC as an extraordinary benefit Difficult to operate in compatibility to domestic tax law and third party treaties

14 Tax Sparing (cont.) Critique of the support of tax incentives – Theoretically weak story – Generally granted, cannot be fine-tuned – Opaque and unstudied policies – Device of tax competition – But, this critique may be viewed as paternalistic Indeed, opposition by international institution ineffective

15 Tax Sparing (cont.) Critique of the practice of tax sparing – Dependent on treaties with no reason – No coherent policy as for who gets it and who does not (arbitrary), but no “give and take” – No thought of realistic “triangular cases” – No reliable and honest data on effect No attempt to seriously study efficacy Similarly to the corollary of tax incentives, no mechanism of control, duration, etc.. Also, tax planning that achieves the same result is available – This goes against the important U.S. principle of anti treaty shopping despite LOB – May help the wrong taxpayers (e.g. MNEs with excess credits..) May be beneficial to developing countries (i.e. counterproductive..)

16 Tax Sparing (cont.) Realistically, the claim in support of tax sparing is a call for a reform of our international tax regime I am sympathetic to the desire to control a divided, agreed upon part of the relevant tax base – This is the heart of the formulary apportionment reform I support Considered radical, yet not legally impossible even in the particular context of one treaty only – Although this may be “too much” politically – I am not sure that the “exemption” solution is easier to implement politically And, is inferior from third treaties perspective

17 The downside of not having a treaty It is not so difficult to treaty shop – few pay full tax price – Wasteful – Goes against a principle that may be more important than not allowing tax sparing – the elimination of tax avoidance and treaty shopping

18 Conclusion Grim picture of stubborn conservatism – Demonstration of the harm of standardization and the model based approach In the current frame work Brazil’s insistence on tax sparing is misguided Brazil is in a unique situation to lead the developing world in negotiation of a treaty – Exemption solution Current appeal: calling the bluff – Exploring a margin for negotiations

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