For the first time in many years, four income tax treaty protocols appear likely to receive a vote on the Senate floor. Protocols with Switzerland, Luxembourg, Japan and Spain were approved by the Senate Foreign Relations Committee on June 25 despite a late attempt to derail the process by Senator Rand Paul, R-Ky. Senator Paul has regularly blocked the advancement of treaty protocols through the Senate because of his concerns over a lack of privacy protections. Senator Paul proposed a series of amendments adding privacy protections to the four protocols, however the Committee broadly rejected them. Additional protocols with Chile, Hungary and Poland were held back due to concerns expressed by the U.S. Treasury officials with the base erosion and anti-abuse tax.
If passed, the protocols would offer tax relief and certainty to global companies. For almost a decade, U.S. companies have been forced to operate at a disadvantage to their global competitors. Under the new protocol with Spain certain dividends, interest, royalty and capital gain payments would be exempt from withholding tax. From a U.S. company’s perspective the current Spanish withholding taxes operate as a form of double taxation. The Japan protocol would exempt all cross-border interest payments.
U.S. companies will also gain tax certainty through the adoption of these protocols. The Spain, Japan and Switzerland protocols all contain binding arbitration clauses. When disputes arise between the two countries’ tax authorities with regard to a company’s tax obligations it is often the company that is harmed. Uncertain tax positions are kept on the company’s books for many years while the slow mutual agreement process contained in current income tax treates plays out with the tax authorities. The insertion of a binding arbitration clause should encourage prompt resolution of disputes. Binding arbitration should also ensure that stubborn positions by the tax authorities do not result in double taxation.
The passage of the protocols would also signal that the U.S. can be a reliable partner in the upcoming rewrite of the international tax rules by the Organization for Economic Cooperation and Development (OECD). The OECD has undertaken a project to address many countries’’ concerns that current tax rules do not adequately tax the way modern digital businesses operate. Any solutions that come from the OECD project would likely require participating member countries to pass changes to existing tax treaties. Clearing out the ten-year treaty backlog in the U.S. signals that the U.S. is at least capable of enacting the changes the U.S. may advocate at the OECD.
A final Senate vote has not been scheduled, however, Senate Majority Leader Mitch McConnell, R-Ky., has indicated his desire to bring the protocols to a vote before the August recess. Senator Paul’s continued opposition to the protocols will delay the process some as he will likely oppose any passage by unanimous consent. Ultimately, the protocols are expected to pass. Companies with operations in these countries should consult their tax advisers so that they may understand the potential impact of this new legislation.