Question

International Taxation Question

How is the 2016 Model Treaty consistent with OECD BEPS project?

Answer 1

Answer.

On 17 February 2016, the US Treasury Department (Treasury) released a revised US Model Income Tax Convention (the 2016 Model Treaty), which is the baseline text Treasury uses when it negotiates tax treaties. The US Model Treaty was last updated in 2006 (the 2006 Model Treaty). The 2016 Model Treaty was not accompanied by a technical explanation. In the preamble accompanying the release of the 2016 Model Treaty (the Preamble to 2016 Model Treaty), Treasury stated that it plans to release the technical explanation to the 2016 Model Treaty in the spring of 2016. The 2016 Model Treaty incorporates, with significant modifications, the new model treaty provisions that were released in proposed form on 20 May 2015 (the May 2015 draft), as well as making other amendments and revisions to the 2006 Model Treaty. Significant provisions include:

• Tightening the “triangular provision” and denying treaty benefits when certain income is attributable to a permanent establishment (PE) outside the beneficial owner’s country of residence (and so would take into account operations in the US, for example)

• Denying treaty benefits to certain income items benefiting from a “special tax regime” (an STR) in the beneficial owner’s country of residence

The 2016 Model Treaty provides that, under certain circumstances, preexisting US subsidiaries of the foreign acquirer (i.e., was a US subsidiary prior to the date of the acquisition) would not be considered expatriated entities for purposes of the treaty unless, subsequent to the date on which the acquisition of the domestic entity is completed, such entities join in filing a US consolidated return with the domestic entity or another entity connected to the domestic entity.

The preamble to the US Model Treaty includes a notable change that incorporates recommendations from the work on Action 6 of the OECD BEPS project. In particular, the change incorporates explicit language to clarify that, in entering into a tax treaty, the treaty partners intend to eliminate double taxation with respect to taxes on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance