United States

Comprehensive tax reform could call into question US tax treaties


As the idea of comprehensive tax reform continues to move forward, the House Republican Blueprint has become a major topic of discussion, fueling both commentary and questions around this potentially far-reaching overhaul of the U.S. system of taxation. One such question is whether the tax outlined in the Blueprint, which combines elements of both consumption based and income based tax schemes, would fall under the purview of existing U.S. tax treaties.

U.S. double tax treaties are a staple of the U.S. international corporate system of taxation, allowing companies to do business abroad without the burden of double taxation. These treaties generally reduce or eliminate withholding taxes on cross-country payments and provide mechanisms for U.S. multinational corporations to use in the resolution of cross-border tax disputes. The treaties, however, generally apply to traditional corporate income taxes or substantially similar taxes.

The Blueprint proposal, in comparision, is a combination of both income and consumption based tax schemes. The Blueprint would impose both a reduced corporate income tax rate as well as apply so-called border adjustments and would tax imported goods and services with an exemption for exported goods and services.

Based on this combination of income and consumption based taxes, it is unclear as to how this hybrid system would be viewed under the treaties. If viewed as a comsumption based tax, there will likely be significant questions as to whether current U.S. treaties apply, or whether they would need to altered to accommodate such a tax. Even if the current U.S. treaties are found to apply, there may still be incentive to override significant provisions, such as the permanent establishment provisions, that would appear to be inconsistent with the move to a more consumption based tax system.

With the promise of a Presidential tax reform proposal in the near future, the final outcome of U.S. tax reform is still uncertain. Taxpayers should note, however, that the Blueprint could place many of the U.S. double tax treaties into a state of uncertainty, potentially leaving U.S. companies doing business abroad to find alternative mechanisms for resolving cross-border tax disputes. 

Kyle Brown


Kyle provides tax consulting and compliance services to middle market firms. Contact Kyle at kyle.brown@rsmus.com

Areas of focus: Federal Tax ConsultingTax Planning