Rosenbloom, H. David

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Current Status of U.S. Tax Treaties

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Canada-United States Law JournalVolume 4 | Issue Article 14January 1981Current Status of U.S. Tax TreatiesH. David RosenbloomFollow this and additional works at: https://scholarlycommons.law.case.edu/cusljPart of the Transnational Law CommonsThis Speech is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons.It has been accepted for inclusion in Canada-United States Law Journal by an authorized administrator of Case Western Reserve University School ofLaw Scholarly Commons.Recommended CitationH. David Rosenbloom, Current Status of U.S. Tax Treaties, 4 Can.-U.S. L.J. 130 (1981)Available at: https://scholarlycommons.law.case.edu/cuslj/vol4/iss/14Current Status of U.S. Tax Treatiesby H. David Rosenbloom*It is very difficult for me to think of a more timely conference be-cause, in my corner of the Treasury Department, we have Canada verymuch on our minds these days. After nearly a decade of negotiations,there is reason to believe that a new income tax convention between theUnited States and Canada may be in sight. Certainly, all the indicationsare there. The treaty negotiators are showing signs of fatigue. There havebeen frequent meetings, calls, and conferences between Canadian andU.S. officials. There have been more and more inquiries from outsidesources, including Congressional inquiries seeking information concerningExecutive Branch action in this area. In addition, U.S. Treasury Depart-ment representatives have emphasized publicly that there are indicationsthat a treaty may be agreed upon.If we do achieve a new treaty between the United States and Canada,it would very likely be one of the more important and sophisticated fiscaldocuments in the world. There are extraordinarily close relations betweenthe two countries. The number of persons affected by the treaty would belarger than the number affected by any other treaty in the world. Theamount of money affected would probably be larger as well.So too, the geography creates unusual issues. We spent a long time innegotiations adapting international transport principles to motor vehiclesand railroads, which we need not do with most other countries. Further-more, each of the tax systems in question is both complex and well knownto the negotiators of the other side, so that negotiations have assumed adegree of detail and complexity that, in my experience in the Treasury, Ihave not found elsewhere.If we do achieve a new treaty, the following will represent some kindof advanced warning. In light of my comments upon the unusual natureof the negotiations, I would not look for a document identical to theOECDt model. There are going to be some unorthodox provisions andsome complicated provisions.The negotiators will miss some things. There will be some provisionswhich will not work correctly. I think, however, there is general recogni-tion on both sides that the 1942 convention, under which we are presentlyoperating, is badly out of date and that there is a definite need for a freshstart in our fiscal relationship.* International Tax Counsel, U.S. Department of Treasury, Washington, D.C., 1978-1981.t Organization for Economic Cooperation and Development.1Rosenbloom: Current Status of U.S. Tax TreatiesPublished by Case Western Reserve University School of Law Scholarly Commons, 1981U.S. TAX TREATIESYears have been spent negotiating, and there is a recognition by bothsides that we should put together the best package that we can. At thesame time there is a dark side. The treaty will be controversial. It will bethe subject of intense political debate on both sides of the border. We arenot going to please everyone. Particularly on the U.S. side, the treaty pro-gram in general has been subject to increasing Congressional scrutiny.There is a suspicion, fed to a large extent by the debate over the newtreaty between the United States and the United Kingdom, that tax trea-ties are somehow illegitimate. Although treaties change U.S. law, they arenot drafted, as we all know the Internal Revenue Code is drafted, by thepeople's representatives in Congress. They are not even reviewed by thetax-writing committees.On Tuesday of next week, I and others will be testifying in regard tothe U.S. tax treaty program. My office has spent a good deal of time pre-paring for the testimony because we believe that a tax treaty program isessentially a very good thing which should be preserved-improved, ofcourse-but preserved.I believe it is in the interest of a group such as this to think carefullyabout what the world would look like in the absence of tax treaties or, forthat matter, if the achievement of a tax treaty were impeded to a signifi-cantly greater extent than it presently is. That is really the ax that I wantto grind here today: in favor of the tax treaty program which I thinkstands in jeopardy. Having ground that ax, albeit briefly, I can pass to thesubject that Henry King really wanted me to talk about, which has noth-ing to do specifically with the United States-Canada treaty or theproblems of the tax treaty program in general, but rather the specific taxtreaties negotiations that are currently in process.Essentially, there are three strands to the present management of theU.S. tax treaty program. The first, not necessarily the most important, isthe effort to update and improve existing treaties. I suppose the Canadiansituation is a good example of that effort, but there are a number ofothers. I will try to say a word about each of them.We have negotiations started with Austria for the purpose of revisingour existing income tax treaty with that country. Most of the treaties thatwere negotiated before the Foreign Investors Tax Act of 1966 are outmo-ded. The Austrian treaty is an example.We are negotiating with Belgium, largely at the instance of Americancompanies who seek a lower withholding tax. Belgium is interested in ob-taining concessions from the United States.We have been negotiating with Germany for some time and have is-sued a position paper outlining the reasons why we are negotiating. Wehave held several negotiating sessions with the Germans and another oneis planned for later in the year.We are now on the verge of signing a new income tax treaty withDenmark, which will be forwarded to the Senate in due course. We arealso on the verge of completing a protocol to our treaty with Norway. The1981]2Canada- nited States Law Journal, Vol. 4 [1981], Iss. , Art. 14https://scholarlycommons.law.case.edu/cuslj/vol4/iss/14CANADA-UNITED STATES LAW JOURNALprotocol deals largely with activities in the North Sea.We are in the process of renegotiating our treaty with Trinidad atthe request of the Trinidad Government, basically to cover matters of oiltaxation. There are, however, some other matters as well.We even have a protocol largely negotiated with the U.S.S.R.We have very advanced negotiations with two significant countrieswhere there is a substantial U.S. investment, Italy and Australia. In thecase of Australia, the treaty has been delayed for a substantial periodbecause of differences over the content of the nondiscrimination clause.In the case of Italy, the negotiations are being delayed by essentially ad-ministrative matters. We have experienced difficulty due to changes inpersonnel on both sides. But that treaty should and can be updated.Finally, in this category of the updating and improving of existingtreaties, I would mention virtually all the U.S. estate tax treaties, most ofwhich were largely made obsolete by the integration of the estate and gifttaxes undertaken in the United States in 1976.A second aspect of the tax treaty program concerns certain treatieswhich are causing serious problems for the U.S. tax system. These arebasically extensions of developed countries' treaties to former territoriesof the treaty partner, some of which have since become independent. Ithink it is no secret that the Treasury is desirous of renegotiating ourtreaty relationship with the Netherlands Antilles, for example. We alsowant to renegotiate or terminate our treaty relationships with a numberof former British territories. Perhaps the leading examples are the BritishVirgin Islands, Barbados, and Antigua.Nor is it only extensions of former treaties that fall into this cate-gory. The United States has recently instituted renegotiation of its treatywith Switzerland. We are concerned that that treaty is not functioningproperly, not only with respect to investment in the United States byresidents of Switzerland but also with respect to the fairly substantialU.S. direct investment in Switzerland.In addition, a country that is very much on our mind, but with whichwe have not yet instituted negotiations, is the Netherlands. It appearsthat, for some time now, the Netherlands treaty has been used to achieveresults that we probably would not countenance under present treatypolicy.A third strand of the treaty program is the effort to extend the U.S.treaty network to more countries of the developing world. If you put asidethe extension of treaties with developed countries to territories and for-mer territories of those countries, the United States has in existence onlya few treaties with developing countries: the treaty with Pakistan, whichdates from 1957; the treaty with Trinidad, from 1970; and the treaty withKorea, which only went into effect recently.It is fairly difficult to extend the treaty network to developing coun-tries. The consistent policy of the United States in recent years has beennot to use tax treaties to create incentives for U.S. investment in treaty[Vol. 4:1303Rosenbloom: Current Status of U.S. Tax TreatiesPublished by Case Western Reserve University School of Law Scholarly Commons, 1981U.S. TAX TREATIEScountries. As of the present, we are not contemplating changing this pol-icy. We are, however, trying as best we can to introduce into U.S. negotia-tions with developing countries a measure of flexibility. We emphasize thedesirability from the standpoint of those countries of having a treaty withthe United States and try to limit the revenue cost to such countries ofhaving a treaty relationship with the United States.There are a fair number of pending treaties in this category. ThePhilippines treaty has been in the Foreign Relations Committee since1976. That treaty has been objected to by U.S. airlines because of what itdoes not contain, an exemption for airline profits which, in our view, isprobably unobtainable. A very damaging precedent would be set by theidea that a single group of taxpayers can prevent a treaty from beingratified.A treaty with Morocco is also pending. Morocco is a significant coun-try to the United States from both a political and business standpoint.We are hopeful that that treaty will be taken up at an early date. Wehave just sent to the Foreign Relations Committee two long-standingtreaties, that is to say, treaties which date from many years back, whichwe have recently concluded with Cyprus and Malta. Neither treaty is ter-ribly significant from the standpoint of U.S. investment, but both add tothe treaty network and, generally speaking, it is helpful to have a greaternumber of treaties with developing countries.A more significant developing country treaty in process is the onewith Jamaica. The new treaty represents an effort to achieve a sort ofmodel for the developing world, at least the Caribbean world. That treatywill be signed on May 21, 1980.In addition, there are treaties in the works with Bangladesh, Argen-tina, Egypt, Israel, Indonesia, and Tunisia. Each of these treaties has itsown story and each of them, I suppose, has its own constituency.In the case of Bangladesh, the treaty diverges from the U.S. model byallowing a certain amount of taxation of shipping income in the state ofsource. In the case of Argentina, a very significant country from thestandpoint of the United States, the treaty seeks to mesh a source basissystem with the U.S. system; this has required some unusual provisions.The treaties with Egypt and Israel, which went to the Foreign RelationsCommittee in 1975, have been changed. A protocol to the treaty withIsrael has been negotiated and is being translated. A completely newtreaty with Egypt has been negotiated, but there is still one minorproblem.Apart from these treaties, we expect to have negotiations with Brazilin August. We have undertaken negotiations with Nigeria, which termi-nated a treaty with the United States last year, and we are hopeful thatthe day will come in the not too distant future when negotiations withMexico will be possible. In this category, as well, is a treaty with a devel-oped country that is nearly negotiated but has never quite been broughtto a conclusion-the treaty with Spain.1981]4Canada-United States Law Journal, Vol. 4 [1981], Iss. , Art. 14https://scholarlycommons.law.case.edu/cuslj/vol4/iss/14CANADA-UNITED STATES LA W JOURNALA further effort in regard to extending the U.S. treaty network is thegroup of estate and gift tax treaty negotiations that are under way. I men-tioned that most of the estate tax treaties are out of date. We are veryadvanced in estate and gift tax treaty negotiations with Germany, Aus-tria, and Denmark, all inheritance tax jurisdictions whose laws give rise toa number of clear problems of double taxation.In short, there is a lot going on with the U.S. tax treaty programtoday, and since it has been our experience that negotiations of this na-ture lead to further negotiations, I would expect the program to remainactive, with or without a new treaty with Canada, for several years tocome.It is, however, in the nature of the modern world that a tax treatycannot be negotiated and allowed to sit. Particularly where commercialrelations are substantial, the treaty partners must return periodically tothe product of their negotiations to ensure that what they have writtenworks well in practice. Therefore, I foresee that most of today's majortreaties will be reviewed on a more or less regular basis to ensure that theoriginal negotiations operate effectively and that terms of the treaty arechanged when and if events so require.In this regard, I think that it is a fact of some significance for thefield of tax treaties that the United States and the United Kingdom haverecently scheduled a meeting in July to review the treaty that goes intoeffect today and to discuss whether a fourth protocol to that treaty iswarranted.That is all I wanted to say about the treaty program. I would behappy to answer any questions about the treaties or any other interna-tional tax law subject that would be of interest to you.[Vol. 4:1305Rosenbloom: Current Status of U.S. Tax TreatiesPublished by Case Western Reserve University School of Law Scholarly Commons, 1981

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Current Status of U.S. Tax Treaties

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