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Senate Approves Tax Treaties with Major Trading Partners

10 min read
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The Senate recently approved four tax treaties with U.S. trading partners. The tax protocols with Japan, Luxembourg, Spain, and Switzerland update existing treaty provisions with these countries and contain important articles aimed at providing certainty to U.S. persons doing business abroad.

More specifically, the tax treaties lower withholding rates on cross border transactions. For example, the protocol with Japan will significantly reduce taxes on interest and certain dividends and the protocol with Spain will significantly reduce taxes on interest, royalties, certain direct dividends, and capital gains.

The treaties also contain provisions that mitigate double taxation and provide mechanisms for resolving disputes in a timely manner through mandatory binding arbitration.

The ratification of these documents by the Senate is significant because there hasn’t been action on U.S. tax treaties for nearly a decade. For the past several years, Senator Rand Paul (R-KY) has objected to provisions contained in tax treaties under consideration by the Senate because of privacy concerns related to intergovernmental information sharing of taxpayer data. Those concerns halted all treaty activity until now.

The process for approving tax treaties differs from the process of enacting new tax laws. The starting point for all tax legislation is the U.S. House of Representatives, while the starting point for the treaty process is the U.S. Treasury Department. In fact, the treaty process excludes the U.S. House of Representatives altogether.

All negotiations and discussions regarding treaty provisions are conducted by the Treasury Department and their counterpart in a foreign jurisdiction. The Treasury Department uses the U.S. Model treaty as a baseline for its discussions with another foreign government, but it is at liberty to make changes and modifications to the provisions in the U.S. Model treaty, which is often necessary, to achieve an equitable balance of treaty benefits between the two contracting countries.

Once an agreement is reached by the Treasury Department and the foreign jurisdiction, the tax treaty is considered by the Senate Foreign Relations Committee for approval. The treaty must be favorably reported out of the Senate Foreign Relations Committee before it can be voted on by the full Senate for ratification.

Because the tax treaty process starts with the Executive Branch (Treasury Department) instead of the Legislative Branch (Congress), and because the House of Representatives is excluded from the process altogether, the Senate has the power to block a treaty from being ratified. In this case, after years of inactivity, just two Republican senators, Rand Paul (R-KY) and Mike Lee (R-UT) voted against all four treaties.

In late August, the Treasury Department released a statement in which Secretary Steve Mnuchin said, “We are pleased to continue working with members of the U.S. Senate from both parties to achieve strong, bipartisan approval of modernized tax treaties and protocols to encourage investment and job growth in America.”

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About the author

Tara Fisher has been practicing international tax for more than 20 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PwC and American University in Washington D.C. During her time with Congress, Tara worked on the Senate Finance Committee's investigation of Enron Corporation and helped draft tax policies that were later adopted as part of the American Jobs Creation Act of 2004. She also assisted the Senate Foreign Relations Committee with the ratification of bilateral income tax treaties, including conventions with the United Kingdom, Japan and Australia. While working for PwC, Tara was stationed abroad in London, where she advised European companies investing in the United States. Tara is a Certified Public Accountant in the states of Pennsylvania and Virginia. She also holds both a Bachelors and Masters degree from the University of Virginia.EducationUniversity of VirginiaBAMACredentialsCPATeaching & instructionAmerican UniversityBecker CPEIntroduction to International Foreign Tax CreditForeign Derived Intangible Income RulesOverview of the Federal Tax SystemWhat do you love about Becker?"It's an opportunity to engage with current material in a flexible and fulfilling way."What would you tell an accounting student today?"Accounting is a career that provides endless opportunities. My career has included working abroad in London, working on Capital Hill in Washington DC, and working as professor on two different college campuses. It's a career that has given me an opportunity to pivot many times and allowed me to match my professional goals with the priorities in my personal life. I love it!"Becker fun fact"My career in international tax has fostered a love for travel. I've been to nearly every continent, and my favorite destination is London."

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