Tax treaty instruments inch toward ratification

Tax Hot Topics newsletter Senate Majority Leader Mitch McConnell (R-Ky.) filed cloture on four tax treaty protocols on July 11, likely clearing the way for a final vote on the measures as soon as this week.

The protocols, which would amend existing treaties with Japan, Luxembourg, Spain and Switzerland, are among seven tax treaty instruments that have been stuck in the Senate for nearly a decade. The Foreign Relations Committee approved the four protocols by voice vote on June 25. Three new treaties with Chile, Hungary and Poland remain held up over issues arising from the enactment of the Tax Cuts and Jobs Act (TCJA).

Senator Rand Paul (R-Ky.) has been the lone holdout on all seven treaty instruments over the past several years, preventing a unanimous consent agreement over concerns about information sharing provisions. Until now, Senate leaders had been unwilling to dedicate the valuable floor time needed to overcome Paul’s objections. Invoking cloture allows for limited debate on the four protocols before a final vote. The measures are expected to receive the 66 votes needed for final approval.

While ratification of the four protocols has been long awaited, many of the amendments are narrow in scope, relating to issues such as the exchange of information, dispute resolution and tax collection. The most significant changes are found in the treaty protocol with Spain, which includes provisions that:

  • Exempt certain direct dividends from source-country withholding
  • Limit source-country taxation on all the dividends and branch profits in a manner consistent with the 2006 U.S. Model Income Tax Convention
  • Exempt cross-border payments of interest, royalties and capital gains in a manner consistent with the 2006 U.S. Model Income Tax Convention

The outlook for the new treaties continues to be uncertain. Treasury has concluded all three require reservations to account for the base erosion and anti-abuse tax (BEAT) enacted by the Tax Cuts and Jobs Act. In addition, forthcoming digital taxation rules could significantly reshape global taxation, calling into question the viability of current treaties and possibly necessitating re-negotiation.

Dustin Stamper
Managing Director
Washington National Tax Office 
T +1 202 861 4144

David Sites
Washington National Tax Office  
T +1 202 861 4104

Omair Taher
Senior Associate
Washington National Tax Office 
T +1 202 861 4143

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