On Aug. 6, 2019, President Donald Trump signed instruments of ratification of Protocols amending four bilateral tax double taxation treaties (DTTs) between the United States and each of Japan, Luxembourg, Spain and Switzerland. The four Protocols were negotiated nearly a decade ago under the Obama administration, but the U.S. Senate approved ratification only in late July of this year. The Protocols enter into force on the date on which the United States and the relevant Contracting State exchange instruments of ratification. However, in the United States, ratification wasn’t considered complete until the President signed the instrument of ratification, which was drafted after the U.S. Senate voted to ratify the Protocols.
The Protocols will modernize the treaties with Japan, Luxembourg, Spain and Switzerland in various areas but predominately in the mutual support and coordination of government efforts to address tax evasion. The Protocols also harmonize the treaties with the underlying international network of U.S. DTTs, as well as with the Organisation for Economic Co-operation and Development’s efforts to coordinate the reform of international taxation.
Impact on U.S. Taxpayers
U.S. taxpayers, including U.S. and other multinational corporations, have a significant interest in a number of specific issues addressed by the Protocols. However, the larger impact of the ratification of the Protocols may simply be that they have, in fact, been ratified. The earliest of these four Protocols had languished in the U.S. Senate for more than nine years, and the latest of these four Protocols had languished in the U.S. Senate for more than six years.
U.S. Sen. Rand Paul (R-KY) has been the primary impediment in the Senate, blocking ratification for years based on privacy concerns, according to U.S. Senate Majority Leader Mitch McConnell (R-KY). There’s been no clear path for any income tax treaty or Protocol to be ratified in the Senate, and the U.S. Treasury Department (Treasury) hasn’t, unsurprisingly, signed a treaty or Protocol since 2013. The ratification of these four Protocols would appear to alleviate this blockage. The U.S. Senate had hoped to take up three pending treaties with Chile, Hungary and Poland next. However, the latter three treaties may first need to be renegotiated after Treasury flagged issues that may need to be revised in light of U.S. tax reform. The ratification of the Protocols and treaties will also hopefully encourage Treasury to secure additional agreements (for example, with South American countries) in the near future.
Beyond the information exchange provisions that so concerned Sen. Paul, the Protocols resolve a number of issues that will have a positive impact on many U.S. taxpayers. For example, both the Spain Protocol and the Japan Protocol eliminate withholding taxes on interest (as well as royalties in the case of the Spain Protocol). In addition, the Japan Protocol, the Spain Protocol and the Switzerland Protocol each provide for mandatory binding arbitration of certain cases in which the competent authorities haven’t been able to reach agreement.
Slow but Steady Progress
Although it’s taken nearly a decade, the newly updated DTTs with Japan, Luxembourg, Spain and Switzerland indicate the United States' ongoing commitment to modernizing its network of international tax treaties. The changes these Protocols will bring are expected to encourage more bilateral investments, while generally bolstering the U.S. government’s efforts to identify and investigate taxpayers believed to be evading U.S. federal taxes.
Under the amended treaties, treaty partners Spain, Japan, Luxembourg and Switzerland will also be able to avail themselves of the updated provisions to investigate taxpayers that are based in the United States or have financial accounts in the United States. Meanwhile, treaties with Poland, Hungary and Chile, which have also been pending for nearly a decade, are still on hold. The Senate Foreign Relations Committee has deferred its consideration of these three treaties because ranking member Sen. Menendez raised concerns regarding Treasury's reservations that address the Base Erosion and Anti-Abuse Tax provisions of the Tax Cuts and Jobs Act. Treasury and Senate Foreign Relations are working together to find a resolution that would permit these three treaties to move forward. There’s currently no word on whether and when the Senate Foreign Relations Committee will consider the Protocol amending the Convention on Mutual Administrative Assistance in Tax Matters, which was agreed to on May 27, 2010, and first submitted to the Senate on May 17, 2012.
For more details of the changes brought about by the recently passed Protocols, read the full-length version of this article on Baker McKenzie’s website.