Doug McHoney and Nils Cousin discuss tax treaties, mutual agreement procedures, competent authority, recent US tax treaty activities, treaty shopping, the USMCA Trade Agreement, and the future of tax treaties in the United States. Specific treaties discussed include those with Chile, Croatia, Hungary, Taiwan, and Russia.
The US unilaterally announced that it would treat the US-Mexico-Canada trade agreement (USMCA) as the successor to NAFTA for tax treaty purposes, but the US Treasury Department is entering into competent authority agreements with various countries to confirm the interpretation of the treaty references.
Russia passed a law to suspend certain provisions of the US-Russia tax treaty indefinitely, raising uncertainty on how taxpayers should handle the excess withholding taxes collected by Russia, with no official guidance provided yet by the US Treasury Department.
Deep dives
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.
US-Russia Tax Treaty Suspension
Russia passed a law to suspend certain provisions of the US-Russia tax treaty indefinitely. This suspension mainly affects the reduced withholding tax rates on cross-border flows. While the US announced that it would still consider the treaty in effect, it remains uncertain how taxpayers will handle the excess withholding taxes collected by Russia. The question arises whether taxpayers should seek a refund from Russia to establish the tax as compulsory, or if they can claim the excess tax as a foreign tax credit in the US. The US Treasury Department is yet to provide official guidance on this matter.
US-Hungary Tax Treaty Termination
The US Treasury Department terminated the US-Hungary tax treaty, which had been in operation since 1979. Termination of the treaty was due to Hungary lowering its corporate income tax rate significantly, combined with perceived challenges related to minimum taxes. The termination notice does not immediately end the treaty, and certain provisions providing reduced tax rates on cross-border flows will remain in effect until the end of 2023. However, from January 1, 2024, payments made from the US to Hungarian companies will no longer qualify for treaty benefits, resulting in the standard withholding tax rate of 30% being applied.
USMCA's Impact on Tax Agreements
The US-Mexico-Canada trade agreement (USMCA) replaced NAFTA and had implications for the qualification under certain limitations of benefits (LOB) provisions in tax treaties. Many tax treaties, particularly with Canada and Mexico, have LOB provisions that refer to EU or NAFTA countries. With the replacement of NAFTA, the question arose about the status of EU and NAFTA countries under these provisions. The US unilaterally announced that it would treat USMCA as a successor to NAFTA for treaty interpretation purposes. However, to ensure uniformity, the US Treasury Department is engaging in competent authority agreements with various countries to gain agreement on the interpretation. Some countries have agreed, while others are still under negotiation.
Doug McHoney (PwC’s International Tax Services Global Leader) is back in Westminster Studios in St. Louis, Missouri with Nils Cousin, a Washington, D.C. based International Tax Services Principal specializing in US inbound taxation. Together they discuss tax treaties, mutual agreement procedures, the concept of competent authority, the treaty process in the US, recent US tax treaty activities, treaty shopping, the USMCA Trade Agreement, and the future of tax treaties in the United States. Among the treaties and agreements discussed are US treaties and agreements with Chile, Croatia, Hungary, Taiwan, and Russia.
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