Analyze the new 2016 US Treasury Model Tax Treaty – What does it mean for your country?

The post referenced in the above tweet appeared at the Isaac Brock Society. You can read the post directly on their site. I am (with their kind permission) reproducing the post here. The primary value of the post is in the comments. I strongly suggest that you read the comments and add to this “treasure chest” of thoughts.

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Yesterday, the U.S. Treasury released it’s 2016 Model Tax Treaty.

Treaty-US Model-2016

I suspect that people will interpret this in terms of how it affects their individual situations. This gives a huge clue with respect to information exchange and how the U.S. views “double taxation”, citizenship-based taxation and related issues.

In the past, Brokers have been tremendously resourceful in analyzing complex documents.

I invite you to read the model agreement and comment on whether you see any improvement in how it affects your situation in different countries. Common sense dictates, that the text of the model treaty can be used as an interpretive aid for interpreting the existing treaties.

I am particularly interested in whether you see anything in this which would affect: pensions, PFIC, foreign corporations, etc.

Is this about continuing double taxation or is it about ending double taxation?

Is this Treaty better suited to justifying the exchange of information under FATCA?

When (if) you comment, please make clear which country you live in.

I notice right at the beginning, in Article I it reads:

4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.

5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 3 of Article 7 (Business Profits), paragraph 2 of Article 9 (Associated Enterprises), paragraph 7 of Article 13 (Gains), subparagraph (b) of paragraph 1, paragraphs 2, 3 and 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support), paragraph 3 of Article 18 (Pension Funds), and Articles 23 (Relief From Double Taxation), 24 (Non-Discrimination) and 25 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under paragraph 1 of Article 18 (Pension Funds), and Articles 19 (Government Service), 20 (Students and Trainees) and 27 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that Contracting State.

I encourage you to read the comments to the original post.

Note in particular the second comment which refers to the possible expansion of the “savings clause”.

Article 1 4 is the “savings clause” which is that part of the tax treaty which gives teeth to CBT, since it is this paragraph that allows the US to tax “by reason of citizenship its citizens, as if this Convention had not come into effect” (present day words in the UK-US Convention). The new words are similar, “the Convention shall not affect the taxation by a Contracting State of its … citizens”.

But then there seems to be a new second sentence which is more fierce, ending “… a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.” On the face of it, this allows the US to tax people who have renounced and who are no longer US citizens. Perhaps FATCA will make it possible to enforce this, whereas previously it would not have been possible. Perhaps banks worldwide will need to ask “Are you – *or have you ever been* – a US citizen.” I hope I read this wrongly.

The pre-2008 expatriation regime allowed for a continued 10 year long US-taxation of covered expatriates. Perhaps this sentence is there for that, since its affect will not fully expire until 2017. The UK-US treaty has presently Article 1 6 which allows for taxation of an ex-citizen “whose loss of citizenship…had as one of its principal purposes the avoidance of tax …. but only for a period of 10 years.” A difference is that the new sentence in the model treaty does not restrict to 10 years.

Article 1 5 provides a few exceptions to the savings clause. These are not identical to the exceptions in present day UK-US treaty. Further study is needed to see if these exceptions are more generous or not. My first reading of this is that Boris Johnson would still have to pay US capital gains tax on sale of his London principal residence.