The U.S. Department of the Treasury having announced on June 2, 2011 that it planned to begin formal negotiation of amendments to the existing bilateral income tax treaty with Japan, which Treaty was entered into force in 2004, commenced negotiations on June 8-10 in Washington, D.C. The amendments to the Treaty being discussed was the subject of some speculation in a tax publication, i.e., Tax Notes International, June 13, 2011. The topics for discussion should include, dividend exemption, mandatory arbitration procedures under the competent authority provision, and a more expansive exchange of information provision.
Zero Rate Withholding on Dividends
One area for discussion that reasonably should be on the agenda, at least that of Japan's agenda, is that the Japanese authorities want to lower the threshold for having a zero rate of withholding on dividends paid by a resident corporation of the other country. Under Article 10, ¶3(a), the current treaty provides an exemption from withholding tax where the beneficial owner of the dividend is a company that (i) is a resident of the other contracting state and has owned, directly or indirectly through one or more residents of either contracting state, more than 50% of the voting stock of the company paying the dividend for a period of 12 months, ending on the date in which the dividend is declared and (ii) such resident meets the special limitation on benefits provision under Article 22 of the Treaty.
Japan has recently been able to obtain a lower threshold for zero dividend withholding in other treaties such as the protocol it signed in 2010 with Switzerland and the new treaty it has with Netherlands, signed also in 2010 but both are not entered into forced as of yet. Under both the Swiss protocol and the new treaty with the Netherlands, the threshold is reduced to "more than 50% of the voting power" to "at least 50%" of the voting power, etc. ending on the date the dividend is declared. Thus, Japan wants a 50-50 joint venture company to qualify for zero rate withholding under the U.S. Treaty. The threshold in Japan’s treaty with Australia is "at least 80%" in contrast. Compare that result with the more liberal provision under the Japan-France income tax convention for zero withholding.
Mandatory Arbitration Procedures
The newswire also hinted that the Japanese negotiators want the adopt mandatory arbitration provisions into Article 25 of the Japan-U.S. Treaty. This was recently accomplished in the Netherlands treaty and in a "double tax agreement" recently signed by the Japanese government with Hong Kong in 2010, both of which are pending. This mandatory arbitration provision states that if under the competent authorities process there is no resolution of the case within 2 years of the presentation to the competent authority of the other contracting state, then any unresolved issues will go to arbitration is the petitioner requests but not if a decision on the issue(s) has already been rendered by a court or administrative body of either contracting state. Other special rules are incorporated in the proposals.
The U.S. model tax treaty of 2006 does not set forth a mandatory binding arbitration provision under the competent authority process. Still, the U.S. has MAP provisions with its treaties with Belgium, Canada and Germany. The Mexico and Netherlands treaties have adopted language that could establish a voluntary MAP approach. The Treasury’s approach to MAP can be said overall to be favorable and is viewed as a valuable aid in resolving competent authority disputes under tax treaties. Perhaps the current negotiations with Japan will include such an amendment for MAP.
Exhange of Information Amendment
It is further reported that the Japanese may want to update Article 26 of the Treaty, Competent Authorities, with respect to an evolving international standard on exchange of information. The thought it that one competent authority will have the right to request information from the other treaty country which the other may not use for its own tax purposes. The provision that Japan is believed to want in the Treaty by amendment is similar to if not identical with ¶¶4 and 5 of Article 26 of the 2006 U.S. Model Treaty.
Now, with respect to our country's "list" of amendments being sought, the Treasury did not, in its June 2 press release, issue such list of items for inclusion in the Treaty with Japan. It would be reasonable to assume, however, that differences between the Treaty and the 2006 U.S. Model Treaty could be the subject of proposals requested by the U.S. Treasury.
Given the importance of our trading relationships with Japan, it is important that the Treaty can be amended in a manner that conforms with the policies each government feels is important for the sound tax administration of its countries tax laws and in a manner which fosters greater trading and investment in capital among the countries.