Senate Approves Tax Treaties with Major Trading Partners

10 min read

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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