USMCA and its Impact on Tax Treaties

The US-Mexico-Canada trade agreement (USMCA) replaced the North American Free Trade Agreement (NAFTA) and had collateral impacts on tax treaties. The derivative benefits test, an important test for multinational companies to qualify for treaty benefits, referred to EU and NAFTA countries. With the replacement of NAFTA by USMCA, there arose a question of whether EU countries and Canada would still qualify under this test. The US unilaterally announced that it would treat USMCA as the successor to NAFTA for tax treaty purposes. However, to ensure consistency, the US Treasury Department is entering into competent authority agreements with various countries to confirm the interpretation of the treaty references. As of now, Denmark, Luxembourg, Mexico, and Malta have agreed, while Austria, Belgium, Bulgaria, France, Germany, Iceland, Ireland, the Netherlands, Spain, Sweden, Switzerland, the UK, and Finland are still under negotiation.