Today the Treasury Department issued a newly revised U.S. Model Income Tax Convention and accompanying preamble (2016 Model), which is the baseline text the Treasury Department uses when it negotiates tax treaties. The U.S. Model Income Tax Convention was last updated in 2006. The 2016 Model reflects comments that the Treasury Department received in response to the proposed model treaty provisions it released on May 20, 2015.
While many of the updates reflect technical improvements rather than substantive changes to the prior model, the 2016 Model includes a number of new provisions intended to more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Among other things, the 2016 Model (i) does not reduce withholding taxes on payments of highly mobile income—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; (ii) 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; and (iii) denies reduced withholding taxes on U.S. source payments made by companies that engage in inversions to related foreign persons.