Effort to ratify U.S. - Chile treaty grows

Senate Majority Leader Chuck Schumer, D-N.Y., and key lobbying groups are ratcheting up pressure on the Senate to ratify the U.S. tax treaty with Chile. Schumer recently made a statement on the Senate floor urging ratification because Chile is a major producer of lithium and copper — key ingredients in electric vehicle batteries, solar cells, and wind turbines — all of which are a major focal point of various Green energy provisions passed as a part of last year’s Inflation Reduction Act.

Outside groups like the U.S. Chamber of Commerce are similarly urging ratification of the treaty, noting that a ratified treaty is necessary to avoid double taxation of American companies, and echoing Schumer’s statements on Chile’s production of key minerals and metals. Ratification also has the support of key Republicans such as Sen. Republican Leader Mitch McConnell, R-Ky.

The problem remains overcoming objections from key holdouts, and difference among Democrats and Republicans on where language is needed on foreign tax credits.

The U.S.-Chile treaty was originally signed in 2010 but languished for years unratified over objections from Sen. Rand Paul, R-Ky., along with tax treaties for Hungary and Poland and four tax treaty protocols. The Senate finally overcame Paul’s objections and ratified the four protocols in 2019, but the three treaties were held up due to complications arising from the enactment of the Tax Cuts and Jobs Act.

In March 2022, the treaty was approved by the Senate Foreign Relations Committee, but it did not receive a full Senate floor vote. The treaty may need to be reported out by the committee again in the new Congress. Complicating the process is the potential that the treaty may need reservations — text or statements addressing non-compliance on certain provisions — to account for the enactment of the base-erosion and anti-abuse tax since the treaty was originally written. Proposed reservation language has been drafted, however.

Further complicating the process is a disagreement over treaty language relating to foreign tax credits. Some Senate Republicans are seeking a clarification in the treaty’s language to ensure companies will not face double taxation in certain circumstances while other lawmakers, like many top Senate Democrats, are pushing to get the treaty to the Senate floor as quickly as possible.

Treaty ratification would require a two-thirds vote in the Senate, though the treaty has generally enjoyed broad bipartisan support in recent history. Eighteen Republican senators wrote a letter urging approval of the treaty last December — though that was largely before the double taxation language became an issue. The main question is whether Senate leadership is willing to dictate the floor time necessary to overcome objections from Paul and other Republicans, which could significantly drag out the process.

U.S.-headquartered businesses with operations in, or exposure to, Chile should consider engaging with policymakers to urge ratification of the treaty.