The Treasury Department announced draft changes for the U.S. Model Income Tax Treaty — the baseline text used by the Treasury Department when it negotiates tax treaties. The current U.S. Model was last updated in 2006. The proposed changes in the draft provisions are intended to combat so-called Base Erosion or Profit Shifting (BEPS), which has been the subject of substantial debate in recent years. Treasury notes that treaties are designed to eliminate double taxation, but not to create opportunities for BEPS.
One set of draft provisions combats “special tax regimes” which provide low tax rates in certain countries, particularly to mobile income like royalties and interest. The second set of draft provisions is to combat corporate inversions by imposing full withholding taxes on key payments such as dividends and base stripping payments, including interest and royalties, made by U.S. companies that are “expatriated entities”. A third set of draft provisions makes revisions intended to prevent residents of third-countries from inappropriately obtaining the benefits of a bilateral tax treaty. The announcement also stated that Treasury intends to include in the next U.S. Model a new article to resolve disputes between tax authorities through mandatory binding arbitration.