Update To US Model Tax Convention

The US Treasury Department has issued a revised version of the US Model Income Tax Convention (the 2016 Model).

The Convention is used as a starting point in bilateral treaty negotiations with other countries and was last updated in 2006.

The 2016 MTC, which was released on February 17, includes new provisions aimed at eliminating double taxation without creating opportunities for non-taxation or reduced taxation through tax avoidance.

Treasury explained, for example, that the 2016 Model does not reduce withholding taxes on payments of highly mobile income – income that taxpayers can easily shift around the globe through deductible payments such as royalties and interest – that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime.

In addition, a new article obligates the treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty’s original balance of negotiated benefits and the need for the treaty to reduce double taxation. The 2016 Model also includes measures to reduce the tax benefits of corporate inversions. Specifically, it denies reduced withholding taxes on US-source payments made by companies that engage in inversions to related foreign persons.

Treasury said that it has also included rules requiring that disputes between countries on the application of a double tax agreement should be resolved through mandatory binding arbitration. It said the “last best offer” approach to arbitration in the 2016 Model is substantively the same as the arbitration provision in four US tax treaties in force and three US tax treaties that are awaiting the advice and consent of the Senate.

The Treasury Department is preparing a detailed technical explanation of the 2016 Model, which it said it plans to release this spring.