How Hard Can This Be? The Dearth of U.S. Tax Treaties with Latin

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How Hard Can This Be? The Dearth of U.S. Tax Treaties with Latin How Hard Can This Be? The Dearth of U.S. Tax Treaties with Latin

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Patricia A. Brown

University of Miami School of Law

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How Hard Can This Be? The Dearth of U.S. Tax Treaties with Latin America

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359

ARTICLES

How Hard Can This Be?

The Dearth of U.S. Tax Treaties with

Latin America

PATRICIA A. BROWN

The United States has fewer tax treaties with countries

in Latin America and the Caribbean than the United King-

dom, France, Germany, Spain and even China have with

such countries. After first describing ways in which tax trea-

ties reduce barriers to cross-border trade and investment,

this Article considers in turn various possible explanations

for this situation. It examines, and rejects, the hypothesis

that Latin American countries are reluctant to enter into tax

treaties in general. It then considers, and rejects, the possi-

bility that Latin American countries are opposed to in-

creased trade and investment from the United States in par-

ticular. It then considers the possibility that U.S. tax treaty

policy presents insurmountable difficulties to the conclusion

of tax treaties. It concludes that U.S. tax treaty policies may

present obstacles to successful negotiations with some, but

not all, Latin American countries, suggesting that the United

States might make more progress by negotiating with some

smaller countries if progress cannot be made with, for ex-

ample, Brazil or Argentina.

Patricia A. Brown is the Director of Graduate Programs in Taxation and

Taxation of Cross-Border Investment at the University of Miami School of Law.

360 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

INTRODUCTION .............................................................................361

I. WHY ARE BILATERAL TAX TREATIES NECESSARY? ..............362

II. ARE LATAM COUNTRIES RELUCTANT TO ENTER INTO

TAX TREATIES? ......................................................................373

III. THE U.S. PERSPECTIVE ON NEW TAX TREATIES. ...................378

A. Economic Factors Affecting U.S. Tax Treaty Policy .......378

B. Political Factors Affecting U.S. Tax Treaty Policy .........385

C. The Curated U.S. Tax Treaty Network.............................390

1. IN GENERAL ................................................................390

a. Issues that Need to be Resolved by Treaty ............392

b. Is There Sufficient Trade and Investment to

Justify a Tax Treaty? .............................................394

c. Are There Any Deal-Breakers? ...............................397

IV. HOW DIFFICULT CAN IT BE? ..................................................398

A. Is U.S. Tax Treaty Policy the Problem? (Reluctance

Revisited)..........................................................................399

B. Three Case Studies ...........................................................407

1. BRAZIL. .......................................................................407

2. VENEZUELA .................................................................410

3. CHILE ..........................................................................411

CONCLUSION ............................................................................414

2020] HOW HARD CAN THIS BE? 361

INTRODUCTION

The United States has fifty-eight comprehensive bilateral tax

treaties

covering sixty-six countries. However, only five

are with

countries in Latin America or the Caribbean (“LATAM”).

Tax trea-

ties have been described as “[t]he primary means for eliminating tax

See United States Income Tax Treaties – A to Z, INTERNAL REVENUE

SERV., https://www.irs.gov/businesses/international-businesses/united-states-in-

come-tax-treaties-a-to-z (last visited Jan. 20, 2020) (listing all of the countries

with which the United States has a tax treaty). Nine of those countries (Armenia,

Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan

and Uzbekistan) are described as “former Soviet Republics which are now cov-

ered by the treaty with the Commonwealth of Independent States (CIS), formerly

known as the Union of Soviet Socialist Republics” E.g., Belarus – Tax Treaty

Documents, I

NTERNAL REVENUE SERV., https://www.irs.gov/businesses/interna-

tional-businesses/belarus-tax-treaty-documents (last visited Jan. 20, 2020) (ac-

counting for the discrepancy between the number of treaties and the number of

countries covered). The site also includes links to several versions of the U.S.

Model Income Tax Convention. United States Income Tax Treaties – A to Z, su-

pra.

See Convention Between the Government of the United States of America

and the Government of Trinidad and Tobago for the Avoidance of Double Taxa-

tion, the Prevention of Fiscal Evasion with Respect to Taxes on Income, and the

Encouragement of International Trade and Investment, Trin. & Tobago-U.S., Jan.

9, 1970, 22 U.S.T. 164, T.I.A.S. No. 7047; Convention Between the Government

of the United States of America and the Government of Jamaica for the Avoidance

of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes

on Income, Jam.-U.S., May 21, 1980, 33 U.S.T. 2865, T.I.A.S. No. 10,206; Con-

vention Between Barbados and the United States of America for the Avoidance

of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes

on Income, Barb.-U.S., Dec. 31, 1984, T.I.A.S. No. 11,090; Convention Between

the Government of the United States of America and the Government of the

United Mexican States for the Avoidance of Double Taxation and the Prevention

of Fiscal Evasion with Respect to Taxes on Income, Together with a Related Pro-

tocol, Mex.-U.S., Sep. 18, 1992, S.

TREATY DOC. No. 103-7 (1992) [hereinafter

Mex.-U.S. Convention]; Convention Between the Government of the United

States of America and the Government of the Republic of Venezuela for the

Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect

to Taxes on Income and Capital, U.S.-Venez., Jan. 25, 1999, T.I.A.S. No. 13,020

[hereinafter U.S.-Venez. Convention].

The extension to the Netherlands Antilles of the Convention between the

United States of America and the Kingdom of the Netherlands for the Avoidance

of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on

Income and Certain Other Taxes was partially terminated, effective as of January

1, 1988, except with respect to interest and related articles. Convention Between

362 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

barriers to trade and investment.”

If the purpose of tax treaties is to

eliminate tax barriers to cross-border trade and investment, one

would expect the United States—one of the major investors in

LATAM

—to have more tax treaties with countries in the region.

This Article will explore the differences in tax treaty policy and

other circumstances that have created this situation.

Part I of this Article will describe, in general terms, the purpose

of tax treaties. Part II will examine the possibility that LATAM

countries are reluctant to enter into bilateral tax treaties. Part III will

discuss U.S. policies that may prevent the conclusion of treaties with

LATAM countries. Part IV will discuss several case studies regard-

ing both successful and less successful negotiations and how lessons

drawn from these negotiations may inform future negotiations with

LATAM treaty partners. This Article ends with some conclusions

about the prospects for additional tax treaties between the United

States and LATAM countries.

I. WHY ARE BILATERAL TAX TREATIES NECESSARY?

Tax treaties serve several purposes, including establishing

thresholds for taxation, reducing withholding tax rates on residents

the United States of America and the Netherlands with Respect to Taxes on In-

come and Certain Other Taxes, Neth.-U.S., Apr. 29, 1948, 62 Stat. 1757; U.S.

DEP’T OF STATE, PUB. NO. 9433, 8, at 162 (1988). The remaining articles were

effectively terminated by the Protocol between the Government of the United

State of America and the Government of the Kingdom of the Netherlands in re-

spect of the Netherlands Antilles Amending Article VIII of the 1948 Convention

with respect to Taxes on Income and Certain Other Taxes as Applicable to the

Netherlands Antilles, subject to a grandfather clause that protected certain bonds

that had been issued through Antilles subsidiaries of U.S. companies. Protocol

Between the Government of the United States of American and the Government

of the Kingdom of the Netherlands in Respect of the Netherlands Antilles Amend-

ing Article VIII of the 1948 Convention with Respect to Taxes on Income and

Certain Other Taxes as Applicable to the Netherlands Antilles, Neth.-U.S., Oct.

10, 1995, S.

TREATY DOC. No. 104-23 (1996).

Treaties: Hearing Before the S. Comm. on Foreign Relations, 108th Cong.

6 (2004) [hereinafter 2004 Treaties Hearing] (statement of Barbara M. Angus,

International Tax Counsel of the United States Treasury).

See U.N. Conference on Trade and Development, World Investment Report

2019, U.N. Doc. UNCTAD/WIR/2019, at 48 (2019), https://unctad.org/en/Publi-

cationsLibrary/wir2019_en.pdf.

2020] HOW HARD CAN THIS BE? 363

of the treaty countries so as to avoid “excessive” taxation, providing

a treaty mechanism for relief of double taxation, and establishing

some minimal protections against discriminatory treatment by one

treaty party of residents or nationals of the other.

To a great extent, most modern tax treaties follow the Organisa-

tion for Economic Co-operation and Development (“OECD”)

Model Tax Convention on Income and on Capital (“OECD

Model”)

or the United Nations Model Double Taxation Convention

between Developed and Developing Countries (“U.N. Model”),

which itself is based on the OECD Model. The distributive articles

of the OECD Model—starting with Income from Immovable Prop-

erty in Article 6 and ending around Article 21 with Other Income—

establish a series of rules that may allow one country (frequently

referred to as the “source” country, but sometimes the “host” or

“paying” country) to tax a resident of the other country if certain

thresholds are met.

In some cases, the non-resident country is pro-

vided an unlimited right to tax.

In other cases, the non-resident

country is prohibited from taxing.

And in others, the non-resident

country is permitted to tax but at a specified maximum rate or only

if certain thresholds are met regarding in-State activity.

In general, if the non-resident State is provided the right to tax,

then the resident State is required to relieve double taxation.

The

OECD Model specifies two methods for relieving double taxation.

Under Article 23A, the resident State will exempt from taxation the

Tax Treaties: Hearing Before the S. Comm. on Foreign Relations, 109th

Cong. 7–8 (2006) [hereinafter Tax Treaties Hearing] (statement of Patricia A.

Brown, Deputy International Tax Counsel (Treaty Affairs), U.S. Dep’t of the

Treasury).

OECD, MODEL TAX CONVENTION ON INCOME AND CAPITAL: CONDENSED

VERSION, intro., para. 13 (2017) [hereinafter OECD MODEL TAX CONVENTION].

Dep’t of Econ. & Social Affairs, United Nations, Model Double Taxation

Convention Between Developed and Developing Countries, U.N. Doc.

ST/ESA/PAD/SER.E/213, at iii, ¶¶ 2, 18 (2017) [hereinafter U.N. Model Tax

Convention].

OECD MODEL TAX CONVENTION, supra note 7, arts. 6–21.

Id. intro., ¶ 20.

Id.

Id. intro., ¶ 19.

Id.

364 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

income that may be taxed in the other State.

Alternatively, a “Con-

tracting State” may choose the credit method of Article 23B, reduc-

ing the resident State tax dollar-for-dollar for the taxes paid to the

other State.

The OECD Model provides that even countries that

generally use the exemption method for relieving double taxation

may choose to retain their taxing rights with respect to items of in-

come taxed on a withholding basis by the source State, by using the

credit method for withholding taxes.

Although the formal structure of these provisions is quite con-

sistent from treaty to treaty, the details can vary considerably.

Cap-

ital importing countries, whether developed or developing, fre-

quently argue for higher withholding rates on dividends, interest,

royalties, and so-called technical services

than the capital export-

ing countries, which are required to relieve double taxation, would

prefer.

Countries that import goods and services may argue to ex-

pand taxing rights by adopting different thresholds for taxation.

To the extent that these goals are achieved by limiting the source

country’s right to tax, they can be affected through standardized pro-

visions that are more or less the same across the more than three

thousand bilateral tax treaties currently in force around the world.

However, in order to effectively mesh one country’s tax system with

Id. art. 23A, ¶ 1. Article 23A allows for “exemption with progression” so

that the marginal rate applicable to other non-exempt income takes into account

the exempt income. Id. art. 23A, ¶ 3; see also id. cmt. 9. For example, Individual

X earns $100 from business activities in Country S and $100 from business activ-

ities in Country R, his State of residence. The marginal tax rate in Country R is

20% for the first $150 of income, but 30% for income in excess of $150. Under

the Country S-Country R tax treaty, Country R must exempt the $100 earned in

Country S from taxation, but it may apply the 30% rate to $50 of Individual X’s

income.

Id. art. 23B, ¶ 1.

Id. art. 23A, ¶ 2; see also id., cmt. ¶ 47.

See Martin Hearson, Measuring Tax Treaty Negotiation Outcomes: The

Action Aid Tax Treaties Dataset 10–11 (Int’l Ctr. for Tax & Dev., Working Paper

No. 47, 2016).

U.N. Model Tax Convention, supra note 8, art. 12A.

See Hearson, supra note 18, at 9, 11.

Compare, e.g., OECD MODEL TAX CONVENTION, supra note 7, arts. 5, 7

(providing more limited taxing rights), with U.N. Model Tax Convention, supra

note 8, arts. 5, 7 (providing more expansive taxing rights).

Yariv Brauner, Treaties in the Aftermath of BEPS, 41 BROOKLYN J. INT'L

L. 973, 975 (2016).

2020] HOW HARD CAN THIS BE? 365

another, so as to avoid double taxation

and double non-taxation

and to achieve the agreed-upon allocation of tax revenues, treaty ne-

gotiators must frequently modify the taxation of their own residents

through more customized provisions that deviate not only from the

standardized treaty provisions, but also from their own domestic tax

laws.

One of the most common ways in which U.S. treaties modify the

treatment of U.S. residents in order to alleviate double taxation is by

modifying source rules, which otherwise can limit the foreign tax

credit available under U.S. domestic law.

A version included in

many U.S. treaties provides that, if the treaty allows the other Con-

tracting State to tax an item of gross income, as defined under U.S.

See, e.g., Convention Between the Government of the United Kingdom of

Great Britain and Northern Ireland and the Government of the United States of

America for the Avoidance of Double Taxation and the Prevention of Fiscal Eva-

sion with Respect to Taxes on Income and on Capital Gains, U.K.-U.S., at 286–

87, July, 24, 2001, 2224 U.N.T.S. 247 [hereinafter U.K.-U.S. Convention) (ad-

dressing conflicts between the grantor trust rules of the United States and the set-

tlor trust rules of the United Kingdom).

See, e.g., Convention Between the Kingdom of the Netherlands and the

Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention

of Fiscal Evasion with Respect to Taxes on Income and on Capital, art. 18, Neth.-

Bel., June 5, 2001, 2205 U.N.T.S. 385 (allowing the source State to tax pension

income if the residence State does not tax such income fully).

See Income Tax Treaties: Hearing Before the H.R. Subcomm. on Oversight

of the Comm. on Ways and Means, 96th Cong. 115 (1980) [hereinafter Income

Tax Treaties] (statement of H. David Rosenbloom, Treasury International Tax

Counsel, Department of the Treasury) (“The code paints a broad picture for use

with all countries. The treaties, as I see it, provide the necessary refinement on a

country-by-country basis. I don’t think it is possible as a statutory matter to ad-

dress all the multitude of tax systems that we encounter throughout the world.”).

Many of these customized provisions are found in treaties with the United States’

most important treaty partners—the United Kingdom and Canada—because the

sheer volume of trade and investment highlights problems relatively quickly and

creates a significant incentive to solve them. See, e.g., U.K.-U.S. Convention, su-

pra note 23; Convention Between the United States of America and Canada With

Respect to Taxes on Income and on Capital, Can.-U.S., art. XXI, Sept. 26, 1980,

T.I.A.S. No. 11087 [hereinafter Can.-U.S. Convention].

DEP’T OF THE TREASURY, TECHNICAL EXPLANATION ACCOMPANYING THE

UNITED STATES MODEL INCOME TAX CONVENTION OF NOV. 15, 2006, at 74

(2006), https://www.treasury.gov/press-center/press-releases/Docu-

ments/hp16802.pdf; see also H. David Rosenbloom, U.S. Source Rules: Building

Blocks of Cross-Border Taxation, 60 B

ULL. INT’L TAX’N 386, 386–87 (2006).

366 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

law, derived by a resident of the U.S, the U.S. will treat that item of

gross income as gross income from sources within the other Con-

tracting State for U.S. foreign tax credit purposes.

This provision

is intended to ensure that a U.S. resident can obtain a U.S. foreign

tax credit for taxes paid to the other Contracting State when the

treaty assigns primary taxing rights over an item of gross income to

that State.

The importance of re-sourcing rules has occasionally been over-

looked.

However, the lack of such rules can frustrate the intentions

of the treaty negotiators. For example, Article 5(5) of the 1992 tax

treaty between the United States and Mexico provides that a foreign

enterprise could be taxed in the host country if a person in the host

country “habitually processes in the first-mentioned State on behalf

of the enterprise goods or merchandise maintained in that State by

that enterprise, provided that such processing is carried on using as-

sets furnished, directly or indirectly, by that enterprise or any asso-

ciated enterprise.”

The rule would allow Mexico to treat U.S. com-

panies that use Mexican assembly plants (“maquiladoras”)

as hav-

ing permanent establishments in Mexico.

However, under U.S. do-

See DEP’T OF THE TREASURY, UNITED STATES MODEL INCOME TAX

CONVENTION, art. 23 (2016) [hereinafter U.S. MODEL TAX CONVENTION].

See, e.g., DEP’T OF THE TREASURY, TECHNICAL EXPLANATION OF THE

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA

AND THE

GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND

NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE

PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON

CAPITAL GAINS 97–98 (2003), https://www.treasury.gov/resource-center/tax-pol-

icy/treaties/Documents/teus-uk.pdf (discussing paragraph 2 of article 24 of the

Convention).

See, e.g., Rosenbloom, supra note 26, at 389–90.

Mex.-U.S. Convention, supra note 2, art. 5, ¶ 5.

See James F. Smith & Chris Kraul, U.S., Mexico Reach Deal on Factory

Tax, L.A.

TIMES (Oct. 30, 1999, 12:00 AM), https://www.latimes.com/ar-

chives/la-xpm-1999-oct-30-mn-27797-story.html.

See DEP’T OF THE TREASURY, TECHNICAL EXPLANATION OF THE

CONVENTION AND PROTOCOL BETWEEN THE GOVERNMENT OF THE UNITED

STATES OF AMERICAN AND THE GOVERNMENT OF UNITED MEXICAN STATES FOR

THE

AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL

EVASION WITH RESPECT TO TAXES ON INCOME 10 (1994),

https://www.irs.gov/pub/irs-trty/mexicotech.pdf (discussing Paragraph 5 of Arti-

cle 5 of the Convention; “This subparagraph is meant to clarify that a dependent

2020] HOW HARD CAN THIS BE? 367

mestic rules, income earned through those permanent establish-

ments would have been treated as U.S.-source income, potentially

exposing the companies to double taxation.

Article 24(3) of the

Mexico-U.S. treaty was modified in 2002 to ensure that the United

States would provide relief from double taxation if Mexico taxed a

U.S. company in accordance with Article 5(5) of the treaty.

The U.S.-Venezuela treaty dealt with similar issues with source

rules.

At the time of the treaty negotiations, Venezuela had a ter-

ritorial system under which it taxed residents and non-residents only

on income arising from sources in Venezuela.

Because Venezuela

could tax only income from sources within Venezuela, there was an

obvious incentive for them to take a broad view of what constituted

Venezuelan-source income.

That resulted, for example, in Vene-

zuela imposing withholding taxes on payments for certain services

performed by U.S. persons in the United States.

Under U.S. do-

mestic law, the income earned from services performed in the

United States is from U.S. sources.

U.S. foreign tax credit limita-

tions are intended to ensure that foreign taxes do not reduce U.S.

taxation on U.S. source income.

Accordingly, unless the recipient

of such income also had low-taxed foreign source income from other

agent that processes inventory of its principal using assets of the principal (or a

related enterprise) without itself having ownership of either the inventory or the

assets used in the processing, represents a permanent establishment of the princi-

pal. This is the case whether or not the dependent agent is a subsidiary of the U.S.

enterprise. Because such an agent represents a permanent establishment, the in-

come and assets attributable to its activity are subject to income and assets tax in

Mexico.”).

See Smith & Kraul, supra note 31.

DEP’T OF THE TREASURY, TECHNICAL EXPLANATION OF THE PROTOCOL

BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE

GOVERNMENT OF THE UNITED MEXICAN STATES 15 (2002), https://www.treas-

ury.gov/resource-center/tax-policy/treaties/Documents/temexico.pdf.

See JESSE HELMS, S. COMM. ON FOREIGN RELATIONS, TAX CONVENTION

WITH

VENEZUELA, S. EXEC. REP. NO. 106-6, at 9 (1999), https://www.con-

gress.gov/106/crpt/erpt6/CRPT-106erpt6.pdf.

See id. at 8 (discussing the “Venezuelan Territorial Tax System”).

Id. at 9–10.

Id. at 9.

See id.

DEP’T OF THE TREASURY, PUB. 514, FOREIGN TAX CREDIT FOR

INDIVIDUALS, at 3 (2018), https://www.irs.gov/pub/irs-pdf/p514.pdf [hereinafter

PUB. 514] (discussing the U.S. foreign tax credit).

368 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

activities, those U.S. taxpayers could have been subject to double

taxation with respect to amounts received from Venezuela.

treaty can prevent double taxation in that case by providing that

Venezuela cannot tax income from “business profits” of the service

provider unless that service provider has a “permanent establish-

ment” in Venezuela.

Another area where domestic law may be too blunt an instru-

ment is in the treatment of pensions. The OECD Model provides that

pensions should be taxable in the state of residence of the recipient

of the pension.

For example, Individual R has worked all his life

for a company that is a resident of Australia, during which he con-

tributed to the company’s defined contribution retirement plan. Aus-

tralia taxes pensions under a “TTE” system—there is no tax deduc-

tion or exemption when contributions are made (“T”), the invest-

ment income of the fund is taxed (“T”) (albeit at a concessionary

rate) and distributions from the fund to the beneficiary are not taxed

at all (“E”).

Individual R would like to retire to the United States

where his children and grandchildren are living. However, the

United States generally taxes pensions under an EET system, pursu-

ant to which contributions to a pension fund are deductible (“E”),

investment income of the pension fund is not taxable (“E”), but dis-

tributions are taxed (“T”).

If Individual R moved to the United

States, he would be subject to the equivalent of double taxation be-

cause he would have been taxed in Australia, either on the value of

the contributions made by his employer or on the full value of his

compensation without deduction for contributions Individual R

See S. EXEC. REP. NO. 106-6, at 9.

See id. at 22. Alternatively, a treaty could provide for a source State taxing

right, but also include a re-sourcing rule for any gross income taxed by the source

State. See id. at 55.

OECD MODEL TAX CONVENTION, supra note 7, art. 18.

See OECD PROJECT ON FINANCIAL INCENTIVES & RETIREMENT SAVINGS,

THE TAX TREATMENT OF RETIREMENT SAVINGS IN PRIVATE PENSION PLANS 1–2

(2018), https://www.oecd.org/daf/fin/private-pensions/Tax-treatment-of-retire-

ment-savings-Policy-Brief-1.pdf; see also Rhys Cormick & John A. McLaren,

The Current Retirement System in Australia Needs to be More Attuned to a Mobile

International Workforce: A Case for Reform, 29 A

USTRALIAN TAX FORUM 493,

499–500 (2014).

McLaren, supra note 44, at 499–501.

2020] HOW HARD CAN THIS BE? 369

made, and taxed a second time in the United States on the distribu-

tions received from the pension fund.

In this case, the tax treaty

between Australia and the United States does not include a provision

that would prevent the United States from taxing any pension to the

extent that it would be exempt in the other country.

The provisions implicated in the preceding examples in this Sec-

tion are some of those that affect trade in goods and services, as op-

posed to investment. Early tax treaties were primarily about ensur-

ing the appropriate allocation of profits from business activities, par-

ticularly when defunct empires begat newly-independent coun-

tries.

Businesses selling goods into, or providing services in, an-

other country rely on Articles 5 and 7 of the OECD Model, which

generally provide that the business profits of an enterprise may be

subject to taxation in the host State only when the business has a

“permanent establishment” in that State.

Article 8 prevents a host

State from taxing profits that arise from the operation of ships or

aircraft in international traffic, even if the relevant enterprise has a

permanent establishment in the host State.

The “closed system”

of taxing income from employment is found in Articles 15 through

19.

The rule that ensures that business executives attending meet-

ings in another State are not subject to tax therein is in Article

15(2).

Articles 9 and 25 provide principles for the allocation of

Cf. id. (discussing taxation on pensions in Australia and the United States).

Compare Convention Between the Government of the United States of

America and the Government of Australia for the Avoidance of Double Taxation

and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Austl.-

U.S., arts. 18–19, Aug. 6, 1982, 35 U.S.T. 1999, T.I.A.S. No. 10,773, with U.S.

MODEL TAX CONVENTION, supra note 27, art. 17(1)(b).

See Convention for the Purpose of Avoiding Double Taxation Between

Austria, Hungary, Italy, Poland, Roumania and the Kingdom of the Serbs, Croats

and Slovenes, art. 2–4, April 6, 1922, reprinted in L

EAGUE OF NATIONS, DOUBLE

TAXATION AND FISCAL EVASION: COLLECTION OF INTERNATIONAL AGREEMENTS

AND

INTERNAL LEGAL PROVISIONS FOR THE PREVENTION OF DOUBLE TAXATION

AND

FISCAL EVASION 73, 73–74 (1928).

See OECD MODEL TAX CONVENTION, supra note 7, arts. 5, 7.

See id., art. 8.

See Frank P.G. Pötgens, The “Closed System” of the Provisions on Income

from Employment in the OECD Model, 41 E

UROPEAN TAX’N 252, 252 (2001).

OECD MODEL TAX CONVENTION, supra note 7, arts. 15–19.

Id., art. 15, ¶ 2.

370 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

income between jurisdictions and a mechanism to resolve disagree-

ments between the countries over such allocations.

Article 5, in its current form, allows an enterprise to sell into a

jurisdiction without becoming subject to taxation there, unless the

enterprise has a physical presence there or a person in the host juris-

diction with the authority to bind the enterprise.

Even if the enter-

prise has a physical presence or person with binding authority in the

host State, it will still not be subject to taxation in that State if its

activities in the host State fall within a category of “preparatory or

auxiliary” activities.

Treaties based on the U.N. Model expand

these rules somewhat, particularly to deal with the provision of ser-

vices.

Nevertheless, millions of cross-border transactions take

place every day under the protection of these provisions.

Imagine a world in which airlines and shipping companies were

subject to taxation in every jurisdiction in which they landed or

docked. The allocation of income between hundreds of jurisdictions

would be difficult, to say the least. For that reason, agreements allo-

cating taxation rights only to the State of residence or otherwise

denying taxing rights to the host State were entered into as early as

the 1920s.

Some might argue that the existence of such agreements

obviates the need for tax treaties with respect to transportation ac-

tivities. However, such agreements do not resolve all the issues aris-

ing from the operation of such enterprises in multiple jurisdictions.

For example, such enterprises may engage in activities beyond those

Id., arts. 9, 25.

Id., art. 5, ¶¶ 1–2, 4–6.

Id., art. 5, ¶ 4.

See, e.g., U.N. Model Tax Convention, supra note 8, art. 5, cmt. ¶ 9.

See ORG. FOR ECON. CO-OPERATION & DEV., OECD WORK ON TAXATION

14 (2018), https://www.oecd.org/tax/centre-for-tax-policy-and-administration-

brochure.pdf (“Today [the OECD Model] forms the basis of a network of around

3,000 tax treaties globally, reducing the tax barriers to cross-border trade and in-

vestment, as well as assisting in the prevention of tax avoidance and evasion.”).

See, e.g., Double Taxation: Shipping Profits, Swed.-U.S., Aug. 9, 1922, 11

Stat. 746; Reciprocal Exemption from Taxation of Air Transport Profits, U.K.-

Neth., Aug. 27, 1936, http://foto.archivalware.co.uk/data/Library2/pdf/1936-

TS0026.pdf.

2020] HOW HARD CAN THIS BE? 371

exempted under domestic law or such limited shipping agree-

ments.

Tax treaties may provide a broader exemption for such ac-

tivities.

Even if such enterprises are not subject to taxation on their own

profits in the host State, the situation may be different with respect

to the enterprises’ employees.

If the employees are subject to tax

in the host State, the employer may have withholding obligations.

In 2005, the trade association representing Latin American airlines

complained that the U.S. Internal Revenue Service was auditing the

airlines with respect to their flight crews’ income allocable to the

United States that exceeded the exemptions provided in U.S. domes-

tic law.

The version of Article 14 included in the U.S. Model In-

come Tax Convention would have prevented U.S. taxation of such

flight crew members if they were residents of countries with which

the United States had tax treaties.

Some of these problems may be obvious from the beginning of

discussions between potential treaty partners, while others may be-

come clear during negotiations, and some only appear once the

treaty relationship is established. The United States and Canada, for

For example, section 883 of the Internal Revenue Code applies to foreign

corporations that are “considered engaged in the international operation of ships

or aircraft.” I.R.C. § 883-1(c)(1) (2018). On the other hand, the U.S. Model Arti-

cle. 8(3) applies to stand-alone container leasing companies. See D

EP’T OF

TREASURY, TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE

GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF

THE

UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE

AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION

WITH

RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS 32 (2002),

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/teus-

uk.pdf

(noting, in respect to Article 8(3), that “[t]his result obtains under para-

graph 3 regardless of whether the recipient of the income is engaged in the oper-

ation of ships or aircraft in international traffic . . . .”).

See, e.g., Caroline Daniel, Airlines Fear U.S. Income Tax Claim,

INANCIAL TIMES, Feb. 16, 2005, at 7 (discussing how the IRS claims Latin Amer-

ican airlines may owe taxes for employees when flying over and conducting pre-

flight services in the United States).

See id.

See U.S. MODEL TAX CONVENTION, supra note 27, art. 14.

372 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

example, have entered into five protocols to the 1980 tax treaty be-

tween the two countries.

Having a treaty relationship already in

place allows for the resolution of emerging issues more quickly.

Because the rules affecting trade are generally more standard-

ized, more attention tends to be focused on the withholding rates

applicable to dividends, interest, and royalties, which affect cross-

border investment.

In particular, multinational corporations gener-

ally are concerned about the “excessive” taxation that they may suf-

fer because source countries impose gross-basis withholding

taxes.

A representative of U.S.-based multinationals testified:

In addition, the tax systems of most countries impose

withholding taxes, frequently at high rates, on pay-

ments of dividends, interest, and royalties to foreign-

ers, and treaties are the mechanism by which these

taxes are lowered on a bilateral basis. If U.S. enter-

prises earning such income abroad cannot enjoy the

reduced foreign withholding rates offered by a tax

treaty, they are liable to suffer excessive and non-

creditable levels of foreign tax and to be at a compet-

itive disadvantage relative to traders and investors

from other countries that do have such benefits. Tax

treaties serve to prevent this barrier to U.S. participa-

tion in international commerce.

Those sentiments were echoed by a representative of foreign-

based multinationals with U.S. subsidiaries:

Protocol Amending the Convention Between the United States of America

and Canada with Respect to Taxes on Income and on Capital, Can.-U.S., at V–

VI, Sept. 21, 2007, S.

TREATY DOC. No. 110-15 (2008) (listing the prior protocols

to the agreement).

See Tax Treaties Hearing, supra note 6, at 3 (statement of Patricia A.

Brown, Deputy International Tax Counsel (Treaty Affairs), U.S. Department of

the Treasury).

See The Japanese Tax Treaty (T. Doc. 108-14) and the Sri Lanka Tax Pro-

tocol (T. Doc. 108-9): Hearing Before the S, Comm. of Foreign Relations, 108

Cong. 31 (2004) (statement of Barbara M. Angus, International Tax Counsel,

United States Department of the Treasury).

See id. at 32.

Id. (statement of William A. Reinsch, President, National Foreign Trade

Council).

2020] HOW HARD CAN THIS BE? 373

Tax treaties help ensure that businesses are not taxed

twice on the same income while accounting for con-

cerns of tax avoidance. This is done in part by reduc-

ing or eliminating withholding taxes on cross-border

income flows between affiliated companies. By en-

suring that common business expenses like royalty

and interest payments are not subject to double taxa-

tion, tax treaties allow insourcing companies to in-

vest more in the very business activities that drive

economic growth in the United States.

A potential treaty partner that has shown a willingness to reduce

withholding taxes in its negotiations with other countries is, there-

fore, much more likely to succeed at convincing the United States

to enter into tax treaty negotiations than one that has not.

II. ARE LATAM COUNTRIES RELUCTANT TO ENTER INTO TAX

TREATIES?

There is a pervasive narrative that tax treaties are one-sided in-

struments of economic oppression foisted upon developing coun-

tries by developed countries.

Developing countries are urged to

decline to enter into tax treaties because (a) they are not necessary

to avoid double taxation and (b) they simply result in revenue trans-

fers from developing countries to developed countries.

It is neces-

sary, therefore, to consider whether the lack of tax treaties between

the United States and LATAM countries is attributable to a general

reluctance on the part of LATAM countries to enter into tax treaties.

Treaties: Hearing Before the S. Comm. on Foreign Relations, 113th Cong.

(2014) [hereinafter 2014 Treaties Hearing] (statement of Nancy L. McLernon,

President & CEO Organization for International Investment), https://www.for-

eign.senate.gov/imo/media/doc/022614AM_Hearing_Testimony%20-

%20Nancy_McLernon.pdf.

Tsilly Dagan, The Tax Treaties Myth, 32 N.Y.U. J. INT’L L. & POL. 939,

990–93 (2000).

See id. at 990–91.

374 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

In 2009, Sebastien Drevet and Victor Thuronyi compared the

treaty networks of UN member states with those of OECD mem-

bers.

They found that the average number of tax treaties entered

into by OECD members was seventy-two, while the average number

of tax treaties entered into by non-OECD members was seventeen.

At the time, the LATAM country with the highest number of tax

treaties was Mexico, ranked fifty-fifth (tied with Armenia and Vi-

etnam) with thirty-seven treaties.

Next was Brazil, ranked seventy-

third with twenty-eight treaties.

Barbados was seventy-fourth with

twenty-six.

Venezuela and Trinidad and Tobago were tied at eight-

ieth (with Algeria and Bosnia and Herzegovina) with twenty-four

treaties each.

Jamaica was eighty-fifth and Chile was eighty-

sixth.

At the time, Chile had twenty treaties and Argentina had

seventeen treaties.

Below the non-OECD member average were

Ecuador (14), Antigua and Barbuda (12), Guyana (12), St. Kitts and

Nevis (12), Dominica (12), St. Lucia (11), St. Vincent and the Gren-

adines (11), Bolivia (9), Cuba (7), Peru (5), Colombia (4), Uruguay

(2), the Dominican Republic (1), Panama (1), Paraguay (1), and Su-

riname (1).

The Bahamas, Costa Rica, El Salvador, Guatemala,

Honduras, and Nicaragua were all listed as having no tax treaties.

Drevet and Thuronyi compiled their tables using the tax treaty

database of the IBFD.

The database shows that, over the past dec-

ade, the number of treaties entered into by LATAM countries has

increased, in some cases significantly. Mexico now has sixty tax

treaties.

Chile now has thirty-three treaties, compared to twenty

See Sebastien A. Drevet & Victor Thuronyi, The Tax Treaty Network of

the U.N. Member States, 54 T

AX NOTES INT’L 783, 783–84 (2009).

Id.

Id. at 785.

Id.

Id. at 785–86.

Id. at 786.

Id. at 785–86.

Mexico - Treaty Withholding Rates Table, Int’l Bureau for Fiscal Docu-

mentation (accessed Jan. 20, 2020).

2020] HOW HARD CAN THIS BE? 375

in 2009.

Uruguay has twenty-one, compared to its previous two.

Colombia has treaty relationships with twelve countries, more than

twice its prior four.

Peru has treaty relationships with ten coun-

tries, an increase from its previous five.

Ecuador has twenty, an

increase of six.

Brazil increased the number of its treaties to thirty-

three from twenty-eight.

Argentina added three.

Bolivia contin-

ues to have nine.

Accordingly, the data does not seem to support

the idea of a general reluctance to enter into treaties as a significant

reason for the lack of tax treaties with the United States.

It is worth considering the treaty networks of these countries in

more depth. In many cases, a large proportion of a country’s treaty

network is made up of treaties with close neighbors and trading part-

Compare Chile - Treaty Withholding Rates Table, Int’l Bureau for Fiscal

Documentation (accessed Jan. 20, 2020), with Drevet & Thuronyi, supra note 73,

at 785. Chile currently has a treaty pending with the United States. See infra Sec-

tion IV.B.3.

Compare Uruguay - Treaty Withholding Rates Table, Int’l Bureau for Fis-

cal Documentation (accessed Jan. 20, 2020), with Drevet & Thuronyi, supra note

73, at 785. In addition, Uruguay has four treaties that are currently pending. See

Uruguay, D

ELOITTE INT’L TAX SOURCE, https://dits.deloitte.com/#Jurisdic-

tion/105 (last visited Jan. 20, 2020).

Compare Colombia - Treaty Withholding Rates Table, Int’l Bureau for Fis-

cal Documentation (accessed Jan. 20, 2020), and 2004 Andean Community In-

come and Capital Tax Convention, May 5, 2004, http://internationaltax-

treaty.com/download/bolivia/dtc/Andean%20Community-DTC-May-2004.pdf

(creating a tax treaty relationship among Bolivia, Colombia, Ecuador and Peru),

with Drevet & Thuronyi, supra note 73, at 786.

Compare Peru - Treaty Withholding Rates Table, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 20, 2020), with Drevet & Thuronyi, supra note 73,

at 786.

Compare Ecuador - Treaty Withholding Rates Table, Int’l Bureau for Fis-

cal Documentation, (accessed Jan. 20, 2020), with Drevet & Thuronyi, supra note

73, at 786.

Compare Brazil - Treaty Withholding Rates Table, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 20, 2020), with Drevet & Thuronyi, supra note 73,

at 785.

Compare Argentina - Treaty Withholding Rates Table, Int’l Bureau for Fis-

cal Documentation, (accessed Jan. 20, 2020), with Drevet & Thuronyi, supra note

73, at 785.

Compare Bolivia - Treaty Withholding Rates Table, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 20, 2020), with Drevet & Thuronyi, supra note 73,

at 786.

376 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

ners. Peru has treaty relationships with Bolivia, Brazil, Chile, Co-

lombia, Ecuador, and Mexico.

Its other treaties are with Canada,

Korea, Portugal, and Switzerland.

Peru’s primary trading partners

are China, the United States, Brazil, Switzerland, Korea, Spain,

Mexico, and India.

In the case of Ecuador, seven of its twenty trea-

ties are with other LATAM countries—Bolivia, Brazil, Chile, Co-

lombia, Mexico, Peru, and Uruguay.

Ecuador’s non-LATAM trea-

ties are with Belarus, Belgium, Canada, China, France, Germany,

Italy, Korea, Qatar, Romania, Russia, Singapore, Spain, and Swit-

zerland.

Ecuador’s primary export trading partners are the United

States, Vietnam, Peru, Chile, Panama, Russia, and China.

Its pri-

mary import trading partners are the United States, China, Colom-

bia, Panama, Brazil, and Peru.

Other treaties appear to be with

countries that are likely sources of investment capital.

100

It appears that a reasonable number of LATAM countries are

open to tax treaty negotiations and adept at choosing treaty partners

that are likely sources of trade or investment. LATAM countries are,

therefore, investing scarce negotiation resources on potential treaty

Peru - Treaty Withholding Rates Table, supra note 88.

Id.

World Factbook: Peru CENTRAL INTELLIGENCE AGENCY,

https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html (last

visited Jan. 20, 2020) (listing Peru’s import and export partners under “economy”

tab).

Ecuador - Treaty Withholding Rates Table, supra note 89.

Id.

World Factbook: Ecuador, CENTRAL INTELLIGENCE AGENCY

https://www.cia.gov/library/publications/the-world-factbook/geos/ec.html (last

visited Jan. 20, 2020) (listing Ecuador’s export partners under “economy” tab).

Id. (listing Ecuador’s import partners).

100

See, e.g., Table 1-o: Outward Direct Investment Positions, As of End-2018:

Reporting Economy: Germany, I

NT’L MONETARY FUND, http://data.imf.org/regu-

lar.aspx?key=61227424 (last visited Jan. 20, 2020) (listing Germany as having

invested $348 million in Ecuador); see also Ecuador, F

RANCE DIPLOMATIE:

MINISTRY FOR EUROPE & FOREIGN AFFAIRS, https://www.diplo-

matie.gouv.fr/en/country-files/ecuador/ (last updated June 6, 2017) (“with a stock

of about US $500 million, France has positioned itself as the third-largest Euro-

pean investor over the past 15 years . . . .”).

2020] HOW HARD CAN THIS BE? 377

partners from which they are likely to see the most benefit. It is sur-

prising, therefore, that the United States is not part of the treaty net-

work in those countries.

101

There does not seem to be any desire to rebuff trade and invest-

ment from the United States. Nine LATAM countries—Argentina,

Bolivia, Ecuador, Grenada, Honduras, Jamaica, Panama, Trinidad

and Tobago, and Uruguay—have entered into Bilateral Investment

Treaties (“BITs”) with the United States.

102

BITs are intended “to

protect private investment, to develop market-oriented policies in

partner countries, and to promote U.S. exports.”

103

The United

States also has Free Trade Agreements (“FTAs”) in place with a

number of LATAM countries.

104

FTAs generally include the inves-

tor-protection provisions of BITs, along with additional provisions

regarding trade in goods and services.

105

LATAM countries that are

party to an FTA with the United States are Chile, Colombia, Costa

Rica, the Dominican Republic, El Salvador, Guatemala, Honduras,

Mexico, Nicaragua, Panama, and Peru.

106

Income taxes generally

are carved out of the trade disciplines imposed by BITs and FTAs,

the thought being that income taxes should be covered by tax treaties

101

United States - Treaty Withholding Rates Table, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 20, 2020) (listing treaties only with those LATAM

countries listed in note 2, supra).

102

See Bilateral Investment Treaties Currently in Force, ENF’T &

COMPLIANCE, TRADE COMPLIANCE CTR., https://tcc.export.gov/Trade_Agree-

ments/Bilateral_Investment_Treaties/index.asp (last visited Dec. 26, 2019).

103

Bilateral Investment Treaties, OFFICE OF THE U.S. TRADE

REPRESENTATIVE, https://ustr.gov/trade-agreements/bilateral-investment-treaties

(last visited Dec. 16, 2019).

104

See Free Trade Agreements, ENF’T & COMPLIANCE, TRADE COMPLIANCE

CTR., https://tcc.export.gov/Trade_Agreements/Free_Trade_Agreements/in-

dex.asp (last visited Dec. 26, 2019).

105

Compare United States – Chile Free Trade Agreement ch. 10, June 6, 2003,

https://ustr.gov/sites/default/files/uploads/agreements/fta/chile/asset_up-

load_file1_4004.pdf, with the O

FFICE OF THE U.S. TRADE REPRESENTATIVE, 2012

U.S. MODEL BILATERAL INVESTMENT TREATY (2012), https://ustr.gov/sites/de-

fault/files/BIT%20text%20for%20ACIEP%20Meeting.pdf.

106

Free Trade Agreements, OFFICE OF THE U.S. TRADE REPRESENTATIVE,

https://ustr.gov/trade-agreements/free-trade-agreements (last visited Dec. 26,

2019) (listing all countries the United States has free trade agreements with).

378 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

and not trade agreements.

107

The problem is that the tax treaties have

not materialized.

III. THE U.S. PERSPECTIVE ON NEW TAX TREATIES.

A. Economic Factors Affecting U.S. Tax Treaty Policy

The United States has a long history with income tax treaties,

having entered into comprehensive treaties with France

108

and Swe-

den

109

as long ago as the 1930s. U.S. tax treaty policy historically

reflects a general institutional interest in having an open economy

that favors cross-border trade and investment.

110

To the layperson,

“[t]ax treaties are important to the overall international economic

policy of the United States because they serve to reduce tax barriers

to international trade and investment.”

111

Although the United States is a capital-importing country,

112

is a net aggregate capital-exporter of foreign direct investment

107

See Hugh J. Ault & Jacques Sasseville, Taxation and Non-Discrimination:

A Reconsideration, 22 W

ORLD TAX J. 101, 119 (2010).

108

See Convention and Protocol Between the United States of America and

France, Fr.-U.S., Apr. 27, 1932, 49. Stat. 1345.

109

See Convention and Protocol Between the United States of America and

Sweden Respecting Double Taxation, U.S.-Swed., Mar. 23, 1939, 54 Stat. 1759.

110

Conventions and Protocols on Avoidance of Double Taxation and the Pre-

vention of Fiscal Evasion with Respect to Taxes on Income and Capital; Treaty

Doc. 103-29, Sweden; Treaty Doc. 103-30, Ukraine; Treaty Doc. 103-31, Mexico;

Treaty Doc. 103-32, France; Treaty Doc. 103-33, Kazakhstan; Treaty Doc. 103-

34, Portugal; Treaty Doc. 104-4, Canada: Hearing Before the Comm. on Foreign

Relations U.S. S., 104th Cong. 114 (1995) [hereinafter 1995 Hearing] (statement

of Alan P. Larson, Principal Deputy Assistant Secretary for Economic and Busi-

ness Affairs) (“There is reason to believe that tax policy and tax treaties are be-

coming more important elements of our international economic infrastructure. As

the pace of globalization intensifies and formal barriers to trade and investment

recede, tax treatment becomes an even greater factor in making trade and invest-

ment decisions.”).

111

Press Release, U.S. Dep’t of Treasury, Treasury Secretary John W. Snow

Remarks at the US-Japan Income Tax Treaty Signing Ceremony (Nov. 6, 2003),

https://www.treasury.gov/press-center/press-releases/Pages/js975.aspx.

112

Steven Rattner, Unpacking the Trade Deficit, N.Y. TIMES (Oct. 17, 2019),

https://www.nytimes.com/2019/10/17/opinion/unpacking-the-trade-deficit.html

(“[C]apital can also be imported to make up for a lagging savings rate and even

to finance consumption. With the domestic savings rate low (in part because of a

2020] HOW HARD CAN THIS BE? 379

(“FDI”).

113

Portfolio debt, primarily corporate and government

bonds held by foreign investors, does not rely on treaty claims to

provide exemptions from U.S. withholding tax.

114

However, treaties

are generally necessary to provide exemptions from withholding tax

for related party debt and reductions or exemptions from withhold-

ing tax on dividends and royalties.

115

As of the end of 2017, the total

amount of foreign direct investment into the United States was just

over $4 trillion, $3.3 trillion of which was equity investment.

116

U.S.

outward foreign direct investment was just over $6 trillion, with $5.8

trillion as equity.

117

A significant amount of South American invest-

ment in United States in particular consists of real property,

118

which

also is not affected by tax treaties as treaties generally allow unlim-

ited taxation by the State of source.

119

Accordingly, with respect to

the income that tax treaties apply to, income flows generally favor

the United States.

federal budget deficit about to eclipse $1 trillion), we have — in most recent years

— been net borrowers.”).

113

Compare Table 1-o: Outward Direct Investment Positions, as of end-2017:

Reporting Economy: United States, I

NT’L MONETARY FUND, data.imf.org/regu-

lar.aspx?key=61227424 (last visited Dec. 26, 2019) [hereinafter Table 1-o:

United States], with Table 1-i: Inward Direct Investment Positions, as of end-

2017: Reporting Economy: United States, I

NT’L MONETARY FUND,

data.imf.org/regular.aspx?key=61227424 (last visited Dec. 26, 2019) [hereinafter

Table 1-i: United States].

114

See I.R.C. § 871(h), 881(c) (2018).

115

See id. § 882(c)(3); see also Jefferey L. Rubinger, Proposed U.S. Model

Treaty Provisions May Dramatically Alter International Tax Landscape, 89 F

LA.

B.J. 54, 54 (2015).

116

See Table 1-o: United States, supra note 113.

117

See Table 1-i: United States, supra note 113.

118

According to the National Association of Realtors, LATAM accounted for

22% of foreign purchases of U.S. residential real estate in 2019, second only to

Asia and Oceania at 27%. L

AWRENCE YUN & GAY CORORATON, NAT’L ASS’N OF

RELATORS, PROFILE OF INTERNATIONAL TRANSACTIONS IN U.S. RESIDENTIAL

REAL ESTATE 14 (2019), https://www.nar.realtor/sites/default/files/docu-

ments/2019-profile-of-international-activity-in-u-s-residential-real-estate-07-17-

2019.pdf.

119

See OECD MODEL TAX CONVENTION, supra note 7, art. 6

380 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

Because payment flows generally favor the United States,

120

the

goal has been to reduce withholding taxes and other source taxation

as much as possible.

121

However, because it is not always possible

to achieve everything desired in a negotiation, the priorities with re-

spect to reductions of withholding taxes have been royalties, inter-

est, and dividends.

122

There are a number of reasons for the focus on eliminating

source-State taxation of royalties. The theoretical justification is that

royalties are generated by marketing or industrial intangibles, which

require substantial expenditures, either for research and develop-

ment, in the case of industrial intangibles, or advertising and mar-

keting, in the case of marketing intangibles.

123

Accordingly, royal-

ties are more like business profits than a passive investment, such as

dividends or interest.

124

Perhaps even more important is the practical

reason that the United States encountered frequent disputes with

treaty partners over the definition of royalties and the source of roy-

alties.

125

Eliminating the withholding tax on royalties seems to have

120

See Matthew Higgins & Thomas Klitgaard, Income Flows from U.S. For-

eign Assets and Liabilities, L

IBERTY ST. ECON. (Nov. 14, 2012), https://liber-

tystreeteconomics.newyorkfed.org/2012/11/income-flows-from-us-foreign-as-

sets-and-liabilities.html.

121

See Tax Treaties Hearing, supra note 6, at 4 (statement of Patricia A.

Brown, Deputy International Tax Counsel (Treaty Affairs), U.S. Department of

the Treasury).

122

See U.S. MODEL TAX CONVENTION, supra note 27, arts. 10–12; see also

see also Pamela A. Fuller, The Japan-U.S. Income Tax Treaty: Signaling New

Norms, Inspiring Reforms, or Just Tweaking Anachronisms in International Tax

Policy?, 40 I

NT’L LAW. 773, 794 (2006) (“The U.S. Government’s objectives for

withholding rates, as reflected in the U.S. Model Tax Treaty, are zero percent on

royalties and most categories of interest, and 5 percent on dividends received by

corporate shareholders holding directly at least 10 percent of voting stock of the

payor.”).

123

See Fuller, supra note 122, at 794–95.

124

See id. at 796 (discussing the difficulty in distinguishing royalties from

business profits).

125

See id. at 795.

2020] HOW HARD CAN THIS BE? 381

eliminated those disputes.

126

Finally, the United States exports in-

tangibles;

127

royalty flows always favor the United States.

128

Ideally, the United States would also like to eliminate all with-

holding taxes on interest, subject to certain anti-abuse rules.

129

If it

cannot do so, the fallback position is to eliminate or at least reduce

the gross-basis taxation of types of interest that would constitute

business profits, such as interest received by financial institutions.

130

The United States also tries to eliminate withholding taxes on in-

vestment income earned by tax-exempt pension funds because such

taxes inevitably result in economic double taxation.

131

The U.S. position with respect to dividends changed about

twenty years ago.

132

Prior to that, the United States position was to

follow the OECD Model on dividends, providing for a five percent

direct dividend rate

133

and a fifteen percent portfolio dividend

rate.

134

The Treasury Department only reconsidered this position in

126

See id. at 794–95

127

See REUVEN S. AVI-YONAH, INTERNATIONAL TAX AS INTERNATIONAL

LAW: AN ANALYSIS OF THE INTERNATIONAL TAX REGIME 44 (2007) (“The place

of use rule is favorable to the source country which may be surprising because the

United States is a net exporter of intangible property”); Mariano Municoy, Allo-

cation of Jurisdiction on Patent Disputes in the Models Developed by Hague Con-

ference in Private International Law: Asymmetric Countries and the Relation-

ships of Private Parties, 4 C

HICAGO-KENT J. INTELL. PROP. 342, 376–77 (2005).

128

OLENA DUDAR ET. AL., CTR. FOR EUROPEAN ECON. RES., THE IMPACT OF

TAXES ON BILATERAL ROYALTY FLOWS 2 (2015).

129

See U.S. MODEL TAX CONVENTION, supra note 27, art. 11 ¶1; Fuller, supra

note 122, at 797–99; Tax Treaties Hearing, supra note 6, at 4, 10 (statement of

Patricia A. Brown, Deputy International Tax Counsel (Treaty Affairs), U.S. De-

partment of the Treasury).

130

See Fuller, supra note 122, at 797; Tax Treaties Hearing, supra note 6, at

13 (statement of Patricia Brown, Deputy International Tax Counsel (Treaty Af-

fairs), U.S. Department of the Treasury).

131

OECD MODEL TAX CONVENTION, supra note 7, art. 18 cmt. ¶ 69.

132

See generally ROBERT H. DILWORTH ET AL., PRICEWATERHOUSECOOPERS

LLP, ZERO WITHHOLDING ON DIRECT DIVIDENDS: POLICY ARGUMENTS FOR A

NEW U.S. TREATY MODEL 1113–31 (2000) (arguing for the U.S. to change its po-

sition with respect to dividends).

133

The United States preferred to apply the direct dividend rate at a ten percent

ownership threshold rather than the twenty-five percent threshold in the OECD

Model. Compare U.S.

MODEL TAX CONVENTION, supra note 27, art. 10, with

OECD

MODEL TAX CONVENTION, supra note 7, art. 10.

134

U.S. MODEL TAX CONVENTION, supra note 27, art. 10, ¶ 2; see also

ILWORTH ET AL., supra note 132.

382 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

order to conclude an agreement with the United Kingdom.

135

At the

time, the United Kingdom was in the process of reforming its cor-

porate tax system, including through the repeal of its advance cor-

poration tax (“ACT”).

136

The corporate reform would have two ma-

jor effects with respect to the United States. First, the ACT served

to prevent treaty-shopping into the United States through U.K. com-

panies, as the ACT was to be paid even if a U.K. company had no

mainstream corporate tax liability (for example, because the com-

pany could use foreign tax credits from foreign investment to offset

the U.K. corporate tax liability).

137

Second, the United States agreed

in 1975 to a complicated treaty provision that provided certain ben-

efits to U.S. shareholders with respect to the U.K.’s imputation sys-

tem for taxing corporate profits.

138

This provision, criticized by

Charles Kingson in his article “The Coherence of International Tax-

ation” as effectively a tax-sparing provision,

139

by 1999 required the

U.S. to provide a foreign tax credit for a tax that never was paid.

140

Accordingly, the United States wanted several things out of the re-

135

RICHARD LUGAR, TAX CONVENTION WITH THE UNITED KINGDOM, S.

EXEC. RPT. NO. 108-2, at 5 (2003).

136

See id. at 7 (discussing the repeal of ACT by the U.K. and the effect on

treaty negotiations between the U.S. and U.K.).

137

See Shawn Carson & Richard Blum, Changes to the U.K. Partial Imputa-

tion System, 20 I

NT’L TAX J. 47, 51–52 (1993) (describing how reliefs in the form

of foreign tax credits can be used to reduce the mainstream corporate tax).

138

Convention Between the Government of the United States of America and

the Government of the United Kingdom of Great Britain and Northern Ireland for

the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Re-

spect to Taxes on Income and Capital Gains, U.K.-U.S., arts. 10, 23, Dec. 31,

1975, 31 U.S.T. 5668.

139

Charles I. Kingson, The Coherence of International Taxation, 81 COLUM.

L. R

EV. 1151, 1215 (1981).

140

See Rev. Proc. 2000-13, § 3.02, 2000-1 C.B. 515 (“A portfolio investor

making this election will be treated as having received an additional dividend

equal to the gross amount of the tax credit (unreduced by amounts withheld), and

as having paid the withholding tax due under Article 10, on the date of the distri-

bution. Thus, the investor must include in income the gross payment deemed re-

ceived, and may claim a foreign tax credit under Article 23 for the withholding

tax treated as paid to the United Kingdom.”); see also S. E

XEC. REP. NO. 108-2,

at 7 (“However, in order to account for the recent repeal of the U.K. advance

corporation tax and related developments, the proposed treaty also eliminates a

provision of the present treaty requiring the United States to provide a foreign tax

credit with respect to certain dividends received from U.K. companies.”).

2020] HOW HARD CAN THIS BE? 383

negotiation of the tax treaty;

141

the U.K. wanted just one—the elim-

ination of the withholding tax on dividends paid by subsidiaries to

their parent companies.

142

The Treasury essentially concluded that there is no single “right”

rate when it comes to dividends.

143

This realization allows negotia-

tors to be very pragmatic in terms of dealing with other countries. In

addition, because the U.S. Model Income Tax Convention continued

to follow the OECD version of Article 10 with respect to the basic

treatment of direct and portfolio dividends,

144

the United States ef-

fectively acquired a new bargaining chip to be used in negotiations,

as other countries asked the United States to go to zero.

145

Although

it took some time to figure out why, it appears that governments

were influenced by their multinational corporations.

146

For many of

those multinationals, the United States is the most important foreign

market.

147

On the other hand, while U.S. companies favor zero div-

idends generally, no foreign market is as important to them as the

United States is to other countries.

148

By making this concession, the United States was able to

achieve a number of important goals over the next few years. In the

U.S.-U.K. Treaty, the United States was able to achieve a modern

treaty with a “limitation on benefits” provision,

149

override of the

141

See S. EXEC. REP. NO. 108-2, at 6–8 (discussing the benefits the U.S. would

receive from giving the U.K. a zero-withholding rate).

142

See id. at 5–8 (discussing the benefits of the treaty for the U.K.).

143

See id. at 8 (discussing how the zero-rate provision must be looked at on a

case-by-case basis before deciding on a proper rate for each future U.S. tax treaty).

144

Compare U.S. MODEL TAX CONVENTION, supra note 27, art. 10, with

OECD M

ODEL TAX CONVENTION, supra note 7, art. 10.

145

See Tax Treaties Hearing, supra note 6, at 3 (statement of Patricia A.

Brown, Deputy International Tax Counsel (Treaty Affairs), U.S. Department of

the Treasury) (“The provision dealing with inter-company dividends was very im-

portant to Sweden.”).

146

Cf. DILWORTH ET AL., supra note 132 (discussing how dividend rates allow

for multinational companies to be more competitive in the U.S. and foreign mar-

kets).

147

See Kingson, supra note 139, at 1172 (“[T]he United States has recently

become the ‘favorite site’ for investments from other industrialized coun-

tries . . .”).

148

See id.

149

Convention Between the Government of the United States of America and

the Government of the United Kingdom of Great Britain and Northern Ireland for

384 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

domestic tax interest requirement in the information exchange arti-

cle,

150

an anti-conduit rule applicable in particular to the waiver of

the insurance excise tax,

151

and a resolution of a dispute over the

proper way to allocate interest expense to permanent establishments

of foreign financial institutions.

152

In exchange for the elimination of withholding taxes on inter-

company dividends, Australia agreed to unprecedented reductions

in the withholding tax rates on interest and royalties,

153

which was

followed by Japan agreeing to reductions in withholding taxes on

interest and the elimination of the withholding tax on royalties.

154

The Netherlands, whose treaty with the United States already elim-

inated the withholding taxes on interest and royalties,

155

agreed to a

new limitation on benefits provision that included anti-inversion

the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Re-

spect to Taxes on Income and on Capital Gains, U.K.-U.S., art. 23, July 24, 2001,

T.I.A.S.

No. 13,161.

150

See id. art. 27.

151

Id. art. 7, ¶ 5.

152

Exchange of Letters Between the United Kingdom and United States, Con-

vention Between the Government of the United States of America and the Gov-

ernment of the United Kingdom of Great Britain and Northern Ireland for the

Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect

to Taxes on Income and on Capital Gains, U.K.-U.S., July 24, 2001, T.I.A.S.

No.

13,161.

153

Tax Convention with the United Kingdom (T. Doc. 107-10) and Protocols

Amending Tax Conventions with Australia (T. Doc. 107-20) and Mexico (T. Doc.

108-3): Hearing Before the S. Comm. on Foreign Relations, 108th Cong. 21

(2003) (statement of David Noren, Legislation Counsel, Joint Committee on Tax-

ation).

154

The Japanese Tax Treaty (T. Doc. 108-14) and the Sri Lanka Tax Protocol

(T. Doc. 108-9): Hearing before the S. Comm. on Foreign Relations, 108th Cong.

4 (2004) (statement of Barbara M. Angus, International Tax Counsel, United

States Department of the Treasury).

155

See Protocol Amending the Convention Between the United States of

America and the Kingdom of the Netherlands for the Avoidance of Double Tax-

ation and the Prevention of Double Taxation with Respect to Taxes on Income,

Neth.-U.S., art. 10, Mar. 8, 2004, S. T

REATY DOC. No. 108-25; see also 2004

Treaties Hearing, supra note 4, at 4 (statement of Barbara M. Angus, International

Tax Counsel, United States Department of the Treasury).

2020] HOW HARD CAN THIS BE? 385

rules.

156

And Belgium overrode its bank secrecy rules.

157

Although

this run of treaty re-negotiations no doubt provided significant ben-

efits to the United States, it also meant that few resources were avail-

able to expand the U.S. tax treaty network.

B. Political Factors Affecting U.S. Tax Treaty Policy

Tax treaties receive very little attention in the U.S. mainstream

press, particularly as compared to trade agreements, which are much

more controversial.

158

Tax treaties have also been negotiated by

both Democratic and Republican administrations in roughly equal

numbers.

159

If there is a difference between political parties, it is

largely a matter of nuance.

Traditionally, Republican administrations have placed an em-

phasis on the benefits of globalization, trade, and investment.

160

an effort to make U.S. multinationals more “competitive,” their do-

mestic tax policy has focused on providing lower corporate rates and

exempting foreign business profits from U.S. taxation.

161

In the tax

treaty context, this translates to reducing source country taxation by

lowering or eliminating gross-basis withholding taxes on passive in-

come and maintaining high thresholds for taxation of business in-

come. Anti-treaty-shopping provisions, primarily the U.S. limitation

on benefits provision, are therefore intended to create leverage to

lower withholding rates. After many years, Canada’s agreement to

156

2004 Treaties Hearing, supra note 4, at 4 (statement of Barbara M. Angus,

International Tax Counsel, United States Department of the Treasury).

157

Treaties: Hearing Before the S. Comm. on Foreign Relations, 110th Cong.

5 (2007) (statement of John Harrington, International Tax Counsel, Department

of the Treasury) (explaining the strengthening of the information exchange article

requiring Belgium to provide the U.S. with bank information).

158

See generally Patrick Driessen, Is There a Tax Treaty Insularity Complex?

AX NOTES TODAY INT’L 745, 745–54 (May 28, 2012).

159

See Jason R. Connery et al., Current Status of U.S. Tax Treaties and Inter-

national Tax Agreements, T

AX MGMT. INT’L J. (Nov. 29, 2019),

https://tax.kpmg.us/content/dam/tax/en/pdfs/2019/update-us-treaties-status-

tmij.pdf (listing the dates U.S. tax treaties were entered into).

160

See REPUBLICAN NAT’L COMM., 2016 REPUBLICATION PARTY PLATFORM

2 (2016), https://prod-cdn-static.gop.com/media/docu-

ments/DRAFT_12_FINAL[1]-ben_1468872234.pdf.

161

See id.

386 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

accept the elimination of source-country withholding taxes on inter-

est

162

can be seen as a validation of this policy.

On the other hand, Democratic administrations have shown

more concern about the dangers of globalization.

163

Democrats have

been much more concerned about tax arbitrage and tax evasion.

164

In the treaty context, these foci are reflected not so much in the terms

of agreements, which are fairly consistent with prior practice, but in

treaty negotiating priorities. For example, the Clinton Administra-

tion was very focused on re-negotiating old treaties to expand infor-

mation exchange on request and update anti-treaty-shopping provi-

sions.

165

The Obama Administration produced the 2016 U.S. Model

Income Tax Convention,

166

which was more focused on the risk of

double non-taxation than prior U.S. model treaties or actual U.S. tax

treaties.

167

The 2016 Model Income Tax Convention includes a

number of provisions, including rules on “special tax regimes,” that

162

Protocol Amending 1980 Tax Convention with Canada with Respect to

Taxes on Income and on Capital, Can.-U.S., art. 6, Sep. 21, 2007, S. T

REATY DOC.

No. 110-15 (2008) [hereinafter Protocol with Canada] (amending Article 11 of

the Convention).

163

See DEMOCRATIC NAT’L COMM., 2016 DEMOCRATIC PARTY PLATFORM 12

(2016), https://democrats.org/wp-content/up-

loads/2018/10/2016_DNC_Platform.pdf.

164

See id.

165

See Bilateral Tax Treaties and Protocol: Estonia–Treaty Doc. 105-55; Lat-

via–Treaty Doc. 105-57; Venezuela–Treaty Doc. 106-3; Denmark–Treaty Doc.

106-12; Lithuania–Treaty Doc. 105-56; Slovenia–Treaty Doc. 106-9; Italy–

Treaty Doc. 106-11; Germany–Treaty Doc. 106-13: Hearing Before the S. Comm.

on Foreign Relations, 106th Cong. 9, 16 (1999) [hereinafter 1999 Bilateral Tax

Treaties and Protocol] (statement of Philip R. West, International Tax Counsel,

Department of the Treasury).

166

See generally U.S. MODEL TAX CONVENTION, supra note 27.

167

Compare Preamble to the U.S. MODEL TAX CONVENTION, supra note 27,

(“The Government of the United States of America and the Government of

__________, intending to conclude a Convention for the elimination of double

taxation with respect to taxes on income without creating opportunities for non-

taxation or reduced taxation through tax evasion or avoidance (including through

treaty-shopping arrangements aimed at obtaining reliefs provided in this Conven-

tion for the indirect benefit of residents of third states), have agreed as follows”),

with Preamble to D

EP’T OF THE TREASURY, U.S. MODEL INCOME TAX

CONVENTION (2006) (“The Government of the United States of America and the

Government of -----, desiring to conclude a Convention for the avoidance of dou-

ble taxation and the prevention of fiscal evasion with respect to taxes on income,

have agreed as follows”).

2020] HOW HARD CAN THIS BE? 387

are aimed at flattening corporate structures by reducing the utility of

intermediary companies.

168

However, these provisions have not

been included in any signed U.S. tax treaty.

169

Treasury officials

have indicated that they are developing a new U.S. Model.

170

How-

ever, it remains unclear which of these provisions will be included

in that Model.

The Trump Administration’s international tax policy is a mix of

traditional Republican and Democratic policy goals. As in past Re-

publican administrations, there is a stated goal of making U.S. mul-

tinationals more “competitive,” by lowering rates and exempting

(some) foreign business profits.

171

However, an emphasis on repat-

riation of intangible property, profits, and runaway plants

172

is more

168

For a general description of the provisions of the 2016 U.S. Model, see

Reuven S. Avi-Yonah, Full Circle? The Single Tax Principle, BEPS and the New

U.S. Model, G

LOBAL TAX'N, May 2016, at 12, 17–20 (2016); U.S. MODEL TAX

CONVENTION, supra note 27, arts. 3, 10, 11, 12, 12, 21 and 28.

169

The most recent tax treaty signed by the United States is a proposed treaty

with Vietnam, which was signed in 2015. See Connery et al., supra note 159, at

4. It does not include the rules on “special tax regimes,” “expatriated entities” or

“subsequent changes in law.” See Agreement Between the Government of the

United States of America and the Government of the Socialist Republic of Viet

Nam for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion

with Respect to Taxes on Income arts. 3, 10, 11, 12 and 21, Viet.-U.S., July 7,

2015, https://www.treasury.gov/resource-center/tax-policy/treaties/Docu-

ments/Treaty-Vietnam-7-7-2015.pdf [hereinafter Viet.-U.S. Treaty].

170

Letter from David Kautter, Assistant Sec’y of the Treasury (Tax Policy),

Dep’t of the Treasury to Robert Menendez, U.S. Sen. (June 12, 2019) [hereinafter

Letter from Kautter to Menendez].

171

See REPUBLICAN NAT’L COMM., supra note 160, at 2.

172

See Press Release, Treasury Dep’t, Unified Framework for Fixing Our Bro-

ken Tax Code (Sept. 27, 2017), https://www.treasury.gov/press-center/press-re-

leases/Documents/Tax-Framework.pdf (press release from the Treasury Depart-

ment and Congressional Republicans laying out goals for tax reform, including

“[e]nding incentives to ship jobs, capital, and tax revenue overseas”); Press Re-

lease, U.S. Congressman Lloyd Doggett, Whitehouse, Doggett Call for Action on

Tax Haven Bill in Wake of Paradise Papers (Nov. 7, 2017), https://dog-

gett.house.gov/media-center/press-releases/whitehouse-doggett-call-action-tax-

haven-bill-wake-paradise-papers (describing proposed legislation that “would

limit the ways corporations can game the U.S. tax system by moving jobs and

assets abroad.”).

388 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

consistent with past Democratic concerns, as is a focus on base ero-

sion and tax arbitrage.

173

There is a continued desire to discourage

inversions while encouraging foreign investment in the United

States.

174

Because no tax treaty has been signed during the Trump Ad-

ministration,

175

any discussion of tax treaty policy is mostly conjec-

ture. In the absence of newly-signed agreements, the best indication

of the Trump Administration’s view may be the fact that it actively

supported the tax agreements that were pending before the Senate

when President Trump took office.

176

Those agreements were con-

sistent with U.S. tax treaty policy as developed over many years.

173

Compare U.S. DEP’T OF THE TREASURY, GENERAL EXPLANATIONS OF THE

ADMINISTRATION’S REVENUE PROPOSALS 144–46 (1998), https://www.treas-

ury.gov/resource-center/tax-policy/Documents/General-Explanations-

FY1999.pdf (explaining the Clinton Administration’s proposal to “address tax

avoidance through use of hybrids”), with Certain Related Party Amounts Paid or

Accrued in Hybrid Transactions or with Hybrid Entities 26 U.S.C. § 267A (2018)

(enacted in 2017 as part of the Tax Cuts and Jobs Act, Pub. L. 115-97).

174

CONG. RESEARCH SERVICE, ISSUES IN INTERNATIONAL CORPORATE

TAXATION: THE 2017 REVISION (P.L. 115-97), at 29 (2019),

https://fas.org/sgp/crs/misc/R45186.pdf.

175

The last bilateral tax treaty signed by the United States was with Vietnam

on July 7, 2015. See Connery et al., supra note 159, at 4. The United States has

not signed the Multilateral Convention to Implement Tax Treaty Related

Measures to Prevent Base Erosion and Profit Shifting, which first opened for sig-

nature on June 6, 2017. See Signatories and Parties to the Multilateral Convention

to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit

Shifting, O

RG. FOR ECON. CO-OPERATION AND DEV.,

https://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf (last up-

dated Jan. 23, 2020).

176

Because U.S. tax treaty policy has been relatively consistent over the years,

it is generally the case that an incoming administration, even of a different party,

supports tax treaties negotiated by prior administrations. That is not a foregone

conclusion, however. In 1981, the incoming Reagan Administration requested the

return of treaties with the British Virgin Islands and Cyprus over concerns about

treaty shopping. S. C

OMM. ON FOREIGN RELATIONS, RETURN OF TWO TAX

TREATIES, S. EXEC. REP. NO. 97-43, at 3 (1981).

2020] HOW HARD CAN THIS BE? 389

Two of those agreements—protocols with Switzerland

177

and Lux-

embourg

178

—primarily addressed information exchange for tax pur-

poses.

179

The pending treaties with Hungary

180

and Poland

181

would

add

182

anti-treaty-shopping provisions, a goal of multiple admin-

istrations. Two protocols, with Japan

183

and Spain,

184

were updates

of existing treaties with important treaty partners, resulting in im-

portant reductions in withholding rates.

185

Only one agreement, with

Chile, would represent a new tax treaty relationship.

186

The Treas-

ury Department’s support for these agreements suggests that the

Trump Administration’s tax treaty policy may be reasonably con-

ventional.

177

Protocol Amending Tax Convention with Swiss Confederation, Switz.-

U.S., Oct. 2, 1996, S.

TREATY DOC. No. 112-12 (2019).

178

Protocol Amending Tax Convention with Luxembourg, Lux.-U.S., May

20, 2009, S.

TREATY DOC. No. 111-8 (2019).

179

The protocols were approved by the Senate on July 17, 2019. Id.; Protocol

Amending Tax Convention with Swiss Confederation, supra note 177. They en-

tered into force on Sep. 20, 2019 and Sep. 9, 2019, respectively. See Press Release,

U.S. Dep’t of the Treasury, Treasury Welcomes Entry into Force of Tax Protocols

with Luxembourg and Switzerland (Sep. 20, 2019), https://home.treas-

ury.gov/news/press-releases/sm781.

180

Tax Convention with Hungary, Hug.-U.S., Feb. 4, 2010, S. TREATY DOC.

No. 111-7 (2017).

181

Tax Convention with Poland, Pol-U.S., Feb. 13, 2013, S. TREATY DOC. No.

113-5 (2017).

182

These treaties have not yet been approved by the Senate, as discussed infra

Section IV.B.3. See Annagabriella Colón, A Look Ahead: Prospects Unclear for

U.S. Tax Treaties in 2020, T

AX NOTES INT’L, Jan. 6, 2020, at 23, 23–24

183

Protocol Amending the Tax Convention with Japan, Japan-U.S., Jan. 24,

2013,

S. TREATY DOC. No. 114-1 (2019).

184

The Protocol Amending the Tax Convention with Spain, Spain-U.S., Jan.

14, 2013, S.

TREATY DOC. No. 113-4 (2019).

185

The protocol with Spain was approved by the Senate on July 16, 2019. Id.

The protocol with Japan was approved on July 17, 2019. Protocol Amending the

Tax Convention with Japan, supra note 183. The treaties entered into force on

Nov. 27, 2019 and Aug. 30, 2019, respectively. See Press Release, US. Dep’t of

the Treasury, Treasury Announces Action on Tax Protocols with Two Key Trad-

ing Partners (Aug. 30, 2019), https://home.treasury.gov/news/press-re-

leases/sm763.

186

Tax Convention with Chile, Chile-U.S., Jan. 24, 2013, S. TREATY DOC.

No. 112-8 (2017) [hereinafter Chile-U.S. Convention]. This treaty has not yet

been approved by the Senate, as discussed in Section IV.B.3.

390 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

C. The Curated U.S. Tax Treaty Network

1. IN GENERAL

As noted above, the United States has fifty-eight comprehensive

bilateral tax treaties in force.

187

Thirty-four of those treaties are with

OECD members and fewer than thirty are with non-OECD mem-

bers.

188

This is quite small for a developed country. By contrast,

both the United Kingdom

189

and France

190

have well over one hun-

dred treaties in force, while Germany

191

and Spain

192

each have over

ninety. Moreover, seventeen of Spain’s treaties are with LATAM

187

United States Income Tax Treaties – A to Z, supra note 1 (listing all coun-

tries with which the United States has tax treaties). In addition to the fifty-eight

comprehensive treaties, the United States has a limited tax treaty with Bermuda

that covers only insurance activities. Convention Between the Government of the

United States of America and the Government of the United Kingdom of Great

Britain and Northern Ireland (on Behalf of the Government of Bermuda) Relating

to the Taxation of Insurance Enterprises and Mutual Assistance in Tax Matters,

U.K.-U.S., July 11, 1986, T.I.A.S. No. 11,676. Its application has been further

limited by a Congressional override that reinstated the application of the federal

excise tax on insurance policies issued by Bermudan insurance companies with

respect to U.S.-situs risks, which had been waived by the treaty. Technical and

Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 6139, 102 Stat. 3342,

3724 (1988).

188

Compare List of OECD Member Countries – Ratifications of the Conven-

tion on the OECD, O

RG. FOR ECON. CO-OPERATION & DEV.,

https://www.oecd.org/about/document/list-oecd-member-countries.htm (last vis-

ited Dec. 27, 2019), with United States Income Tax Treaties – A to Z, supra note

1 (listing all countries with which the United States has tax treaties).

189

See United Kingdom - Treaty Withholding Rates Table, Int’l Bureau for

Fiscal Documentation, (accessed Jan. 15, 2020).

190

See France - Treaty Withholding Rates Table, Int’l Bureau for Fiscal Doc-

umentation, (accessed Jan. 15, 2020).

191

See Germany - Treaty Withholding Rates Table, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 15, 2020).

192

See Spain - Treaty Withholding Rates Table, Int’l Bureau for Fiscal Docu-

mentation, (accessed Jan. 15, 2020).

2020] HOW HARD CAN THIS BE? 391

countries

193

(even more than the United Kingdom)

194

despite

Spain’s significantly smaller treaty network. France has eleven trea-

ties

195

and Germany has nine

196

with LATAM countries. Interest-

ingly, China also has just over one hundred tax treaties, including

nine with LATAM countries.

197

It would be very easy for the United States to have a much larger

tax treaty network. The United States receives many requests from

other countries to negotiate tax treaties every year.

198

Most requests

go through an initial three-step evaluation:

(a) Is there double taxation or other issues that can

only be resolved through a treaty?

199

193

See id. Spain is a party to tax treaties with Argentina, Barbados, Bolivia,

Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Sal-

vador, Jamaica, Mexico, Panama, Trinidad and Tobago, Uruguay, and Venezuela.

Id.

194

The United Kingdom has tax treaties or tax treaty-like relationships with

Antigua and Barbuda, Argentina, Barbados, Belize, Bolivia, Chile, Grenada, Guy-

ana, Jamaica, Mexico, Panama, St. Kitts and Nevis, Trinidad and Tobago, Uru-

guay, and Venezuela. See United Kingdom - Treaty Withholding Rates Table, su-

pra note 189. The United Kingdom also has an income tax arrangement with the

Cayman Islands, which applies primarily to business profits and the income of

individuals, but does not affect treaty withholding rates. See Income Tax Treaty,

U.K.-Cayman Is., June 15, 2019, Int’l Bureau for Fiscal Documentation, (ac-

cessed Jan. 26, 2020).

195

See France - Treaty Withholding Rates Table, supra note 190. France has

tax treaties with Argentina, Bolivia, Brazil, Chile, Ecuador, Jamaica, Mexico,

Panama, St. Maarten, Trinidad and Tobago, and Venezuela. Id.

196

See Germany - Treaty Withholding Rates Table, supra note 191. Germany

is a party to tax treaties with Argentina, Bolivia, Costa Rica, Ecuador, Jamaica,

Mexico, Trinidad and Tobago, Uruguay, and Venezuela. Id.

197

See China Treaty Withholding Rates Table, Int’l Bureau for Fiscal Docu-

mentation, (accessed Jan. 15, 2020). China has tax treaties with Barbados, Brazil,

Chile, Cuba, Ecuador, Jamaica, Mexico, Trinidad and Tobago, and Venezuela. Id.

198

Bilateral Tax Treaties and Protocol: Hearing Before the S. Comm. on For-

eign Relations, 105th Cong. 8 (1993) (statement of Joseph H. Guttentag, Assistant

Secretary for International Tax Affairs, Department of the Treasury) (“The De-

partment of the Treasury receives regular and numerous requests to enter tax

treaty negotiations. As a result it has been necessary for us to establish priori-

ties.”).

199

See id. (“Another priority is to conclude treaties or protocols that are likely

to provide the greatest benefits to United States taxpayers, such as when economic

relations are hindered by tax obstacles.”).

392 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

(b) Is there sufficient trade and investment to justify

a treaty?

200

201

These are considered in more detail in the remainder of this Sec-

tion.

a. Issues that Need to be Resolved by Treaty

The preceding Sections described some of the reasons why a tax

treaty may be necessary even if each of the treaty partners includes

provisions in their domestic laws that relieve double taxation.

202

Differences in characterization and source can be resolved through

general or customized provisions,

203

although it is true that the

OECD Model does little to address those issues.

204

The primary in-

centive for a new tax treaty almost always will be the prospect of

reducing “excessive” withholding taxes—those gross basis with-

holding taxes that result in the recipient being taxed more heavily

than if it had paid tax on a net basis in either Contracting State.

205

The countries that do not satisfy this threshold typically are those

that do not have a generally applicable income tax. The United

States will not usually enter into a tax treaty if there is no possibility

200

See id. (“We also try to conclude treaties with countries that have the po-

tential to be significant trading partners.”).

201

See Bilateral Tax Treaties and Protocol: Hearing on Treaty Docs. 105-55,

105-57, 106-3, 106-12, 105-56, 106-9, 106-11, 106-13 Before the S. Comm. On

Foreign Relations, 106th Cong. 16 (1999) (statement of Philip R. West, Int’l Tax

Counsel, U.S. Dep’t of the Treasury) (“Information exchange is one of the handful

of issues that we discuss with the other country before beginning formal negotia-

tions because it is one of a very few issues that we consider non-negotiable . . . .

A second aspect of U.S. tax treaty policy to deal with avoidance and evasion is to

include in all treaties comprehensive provisions designed to prevent ‘treaty shop-

ping.’).

202

See supra Part II.

203

See DEP’T OF THE TREASURY, TECHNICAL EXPLANATION ACCOMPANYING

THE

UNITED STATES MODEL INCOME TAX CONVENTION OF SEPT. 20, 1996, at 1–2

(1996) (explaining that the Model is only a starting point and negotiations with

countries will lead to different, custom provisions).

204

See generally OECD MODEL TAX CONVENTION, supra note 7.

205

See Pending Bilateral Tax Treaties and OECD Tax Convention: Hearing

Before the S. Comm. on Foreign Relations, 101st Cong. 47 (1990) (statement of

Frank Kittredge, President, National Foreign Trade Council).

2020] HOW HARD CAN THIS BE? 393

of double taxation as between the two countries.

206

One effect of this

policy was the 1984 notice of termination of the extension of the

1945 U.K.-U.S. tax treaty to the United Kingdom’s overseas territo-

ries, many of them in the Caribbean, and the United States’ refusal

to enter into replacement treaties with many of those countries.

207

This policy also means that the United States does not have tax

treaties with countries in the Gulf Cooperation Council (“GCC”)—

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab

Emirates (“U.A.E.”)

208

—despite significant amounts of U.S. invest-

ment in those countries.

209

While some GCC countries now impose

corporate taxes, in several cases those taxes are imposed only on

foreign enterprises (Kuwait),

210

the oil and gas industry (Bah-

rain),

211

oil and gas and foreign banks (U.A.E.),

212

resident compa-

nies and permanent establishments of foreign enterprises (Saudi

206

Protocol Amending the Tax Convention with Spain: Hearing on Treaty

Doc. 113-4 Before the S. Comm. On Foreign Relations 113th Cong. (2014) (state-

ment of Robert Stack, Deputy Assistant Secretary (International Tax Affairs),

U.S. Dep’t of the Treasury) (“With certain countries there simply may not be the

type of cross-border tax issues that are best resolved by a treaty. For example, if

a country does not impose significant income taxes, or imposes tax on a strictly

territorial basis (that is, it exempts not only dividend income but all foreign source

income from taxation by reason of its foreign source), there is little possibility of

unresolved double taxation of cross-border income, given the fact that the United

States provides foreign tax credits to its citizens and residents regardless of the

existence of an income tax treaty. Under such a circumstance, it would not be

appropriate to enter into a comprehensive tax treaty with that particular country

because doing so would result in a unilateral concession of taxing rights by the

United States.”).

207

See Omri Marian, Unilateral Responses to Tax Treaty Abuse: A Func-

tional Approach, 41 Brook. J. Int'l L. 1157, 1171 (2016), available athttp://schol-

arship.law.ufl.edu/facultypub/765.

208

Cf. See United States Income Tax Treaties – A to Z, supra note 1 (listing

all of the countries with which United States has a tax treaty).

209

See Table 1-o: United States, supra note 113 (listing the United States as

investing $423 million in Bahrain, $296 million in Kuwait, $1.8 billion in Oman,

$8.2 billion in Qatar, $11.1 billion in Saudi Arabia, and $16.8 billion in U.A.E.).

210

Kuwait - Corporate Taxation - Country Tax Guides, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 15, 2020).

211

Bahrain - Corporate Taxation - Country Tax Guides, Int’l Bureau for Fis-

cal Documentation, (accessed Jan. 15, 2020).

212

Although there is a theoretical corporate tax on entities in all sectors, in

practice taxation is limited to the oil and gas and financial sector. See United Arab

394 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

Arabia),

213

or income arising in that country (Qatar).

214

Thus, a tax

treaty is unlikely to provide much relief from host State taxation in

those countries. The primary effect of such treaties would be to re-

duce U.S. withholding taxes on investment income earned by resi-

dents of the other States. While some countries will enter into tax

treaties to provide incentives for inward investment,

215

the United

States does not.

b. Is There Sufficient Trade and Investment to Justify a

Tax Treaty?

A much more difficult hurdle for most developing countries to

overcome is the issue of whether there is sufficient trade and invest-

ment to justify a treaty.

216

This consideration by itself disqualifies

many African countries, for example, where the amount of U.S. out-

ward investment is in the low millions.

217

It is hard to define how much trade and investment is “enough”

to justify a tax treaty. The United States signed a tax treaty with Vi-

etnam in 2015,

218

where the current stock of U.S. outward foreign

Emirates - Corporate Taxation - Country Tax Guides, Int’l Bureau for Fiscal Doc-

umentation, (accessed Jan. 15, 2020).

213

Saudi Arabia - Corporate Taxation - Country Tax Guides, Int’l Bureau for

Fiscal Documentation, (accessed Jan. 15, 2020).

214

Qatar - Corporate Taxation - Country Tax Guides, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 15, 2020).

215

France, for example, has entered into tax treaties that eliminate most

source-basis withholding taxes with all of the GCC countries. See France – Treaty

Withholding Rates Table, Int’l Bureau for Fiscal Documentation, (accessed Jan.

15, 2020). Because those countries do not impose withholding taxes or, generally,

tax their own residents on foreign source income, the treaties are not primarily to

prevent double taxation. It can be assumed, therefore, that the purpose is to en-

courage investment in France by GCC investors. See Eric M. Zolt, Tax Treaties

and Developing Countries 72 T

AX L. REV. (forthcoming) for a general discussion

of tax treaties as investment incentives.

216

See OECD MODEL TAX CONVENTION, supra note 7, art. 27 cmt. ¶ 1 (dis-

cussing what negotiating states need to consider before entering a treaty, including

the trade and investment flows).

217

See Table 1-o: United States, supra note 113 (listing outward investment

of the United States).

218

Viet.-U.S. Treaty, supra note 169; see also United States and Vietnam Sign

First Income Tax Treaty, E

RNST & YOUNG LLP (July 15, 2015),

https://www.ey.com/gl/en/services/tax/international-tax/alert--united-states-and-

vietnam-sign-first-income-tax-treaty.

2020] HOW HARD CAN THIS BE? 395

direct investment was about two billion dollars at the end of 2017.

219

Countries with the lowest amount of U.S. outward foreign direct in-

vestment with which the United States nevertheless has tax treaties

are Latvia ($71 million),

220

Estonia ($72 million),

221

and Lithuania

($154 million).

222

Those treaties represent a special circumstance,

however, as those countries took the position that they were not cov-

ered by the tax treaty between the Soviet Union and the United

States because they were occupied countries.

223

Accordingly, there

was some pressure to negotiate new agreements to cover invest-

ments in those countries that were made before the break-up of the

Soviet Union.

224

Moreover, the three countries negotiated treaties

together, as their treaty policies were quite similar.

225

Currently, the

real foreign direct investment position with respect to those coun-

tries is now close to three hundred million dollars.

226

After the Baltic States, the lowest in terms of stocks of invest-

ment from the United States are Jamaica ($167 million), Sri Lanka

219

See Table 1-o: United States, supra note 113 (listing the outward invest-

ment of the U.S. in Vietnam as two billion dollars).

220

See Convention Between the United States of America and the Republic of

Latvia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion

with Respect to Taxes on Income, Lat.-U.S., Jan. 15, 1998, S.

TREATY DOC. No.

105-57 (1998); Table 1-o: United States, supra note 113.

221

See Convention Between the United States of America and the Republic of

Estonia for the Avoidance of Double Taxation and the Prevention of Fiscal Eva-

sion with Respect to Taxes on Income, Est.-U.S., Jan. 15, 1998, S.

TREATY DOC.

No. 105-56 (1998); Table 1-o: United States, supra note 113.

222

See Convention Between the United States of America and the Republic of

Lithuania for the Avoidance of Double Taxation and the Prevention of Fiscal Eva-

sion with Respect to Taxes on Income, Lith.-U.S., Jan. 15, 1998, S.

TREATY DOC.

No. 105-55 (1998); Table 1-o: United States, supra note 113.

223

Lawrence Juda, United States’ Nonrecognition of the Soviet Union’s An-

nexation of the Baltic States: Politics and Law, 6 J.

BALTIC STUDIES 272, 274

(1975); Peep Kalamäe, Baltic States – United States Treaty Status, T

AX NEWS

SERVICE 344, 344 (1995).

224

See 1999 Bilateral Tax Treaties and Protocol, supra note 165, at 21 (state-

ment of Philip R. West, International Tax Counsel, Department of the Treasury)

(explaining the competitive disadvantage for U.S. buinesses in the Baltics due to

their competitors having tax treaties with them already, decreasing taxation on

their operations).

225

See id. at 35 (prepared statement of Lindy Paull, Chief of Staff of Joint

Comm. on Taxation).

226

See Table 1-o: United States, supra note 113 (totaling outward investment

between Estonia, Latvia, and Lithuania at $297 million).

396 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

($168 million), Tunisia ($279 million), Slovenia ($369 million),

Ukraine ($398 million), and Morocco ($412 million).

227

The other

U.S. tax treaty counterparts below $1 billion of U.S. outward invest-

ment are Bangladesh ($460 million), Pakistan ($518 million), Malta

($601 million)—however, Maltese FDI in the United States is al-

most $1.6 billion

228

—and Bulgaria ($848 million).

229

As a result, it can be assumed that the minimum amount of U.S.

foreign direct investment to be “sufficient” is no more than some-

where between $150 million and $300 million. If so, there are a

number of LATAM countries that currently do not have tax treaties

with the United States that would satisfy the threshold. These in-

clude Argentina ($14.9 billion), Aruba ($190 million), Bahamas

($23.3 billion), Bolivia ($598 million), Brazil ($68 billion), Cayman

Islands ($331 billion), Chile ($26 billion),

230

Colombia ($7.2 bil-

lion), Costa Rica ($2 billion), Dominican Republic ($2 billion), Ec-

uador ($981 million), El Salvador ($3 billion), Guatemala ($1 bil-

lion), Honduras ($1.4 billion), Nicaragua ($187 million), Panama

($4.7 billion), Paraguay ($179 million), Peru ($6.3 billion), St. Kitts

and Nevis ($612 million), St. Lucia ($357 million), and Uruguay

($1.6 billion).

231

Over the decades, the Treasury Department’s tax treaty efforts

in LATAM have focused on Brazil

232

and Argentina.

233

Tax treaty

negotiations with Colombia have taken place,

234

but it is unclear

where they stand. The Treasury Department perhaps should broaden

227

Table 1-o: United States, supra note 113.

228

Table 1-i: United States, supra note 113.

229

Table 1-o: United States, supra note 113.

230

See Chile-U.S. Convention, supra note 186; see also infra Part IV.B.3.

231

Table 1-o: United States, supra note 113.

232

See BRAZ.-U.S. BUS. COUNCIL, U.S. CHAMBER OF COMMERCE, A

ROADMAP TO A U.S.-BRAZIL TAX TREATY 1 (2019), https://www.brazilcoun-

cil.org/wp-content/uploads/2019/03/Roadmap-U.S.-Brazil-Tax-Treaty_1.pdf

(“For decades the U.S. and Brazil, the two largest economies and democracies in

the Western Hemisphere, have attempted to lay the groundwork for a bilateral tax

treaty (BTT)”).

233

See Press Release, U.S. Dep’t of the Treasury, Remarks by U.S. Treasury

Secretary Lew at Meeting with Argentine Finance Minister Prat-Gay (Sep. 26,

2016), https://www.treasury.gov/press-center/press-releases/Pages/jl5060.aspx.

234

See Sarah Carpenter, Colombia, U.S. Negotiating Tax Treaty, TAX NOTES

INT’L, Oct. 10, 2016, at 153, 153.

2020] HOW HARD CAN THIS BE? 397

its view. The six parties to the Dominican Republic-Central Ameri-

can Free Trade Agreement (Costa Rica, El Salvador, Guatemala,

Honduras, Nicaragua and the Dominican Republic)

235

together host

almost ten billion dollars of U.S. foreign direct investment,

236

sug-

gesting that a joint negotiation similar to that with the Baltics could

be a useful way forward. Peru, Ecuador, Bolivia, and even Paraguay

could also be considered.

c. Are There Any Deal-Breakers?

Once the Treasury Department determines that a new treaty re-

lationship will provide sufficient benefits, it then determines

whether there are any deal-breakers that would prevent the success-

ful conclusion of an agreement.

237

The primary issues that have pre-

vented negotiations with developing countries in the past have been

(1) the U.S.’s insistence on including a “limitation on benefits” pro-

vision to prevent treaty-shopping, (2) an information exchange pro-

vision that overrides both bank secrecy and “domestic tax interest”

requirements, and (3) the inability of the United States to agree to a

“tax-sparing” provision.

238

While the OECD has made significant

235

See CAFTA-DR (Dominican Republic-Central America FTA), OFFICE OF

THE

U.S. TRADE REPRESENTATIVE, https://ustr.gov/trade-agreements/free-trade-

agreements/cafta-dr-dominican-republic-central-america-fta (last visited Dec. 27,

2019).

236

See Table 1-o: United States, supra note 113.

237

See generally U.S. MODEL TAX CONVENTION, supra note 27, at 1 (discuss-

ing the polices behind the U.S. Model Income Tax Treaty).

238

See DEP’T OF THE TREASURY, EARNINGS STRIPPING, TRANSFER PRICING

AND

U.S. INCOME TAX TREATIES 73, 78–80 (2007), https://www.treasury.gov/re-

source-center/tax-policy/Documents/Report-Earnings-Stripping-Transfer-Pric-

ing-2007.pdf (explaining the need to prevent treaty-shopping through the inclu-

sion of limitations on benefits provisions); Reuven Avi-Yonah, If Not Now,

When? U.S. Tax Treaties with Latin America After TCJA, 2019 I

NT’L TAX J. 51,

51 (2019) (discussing how the United States refuses to grant tax sparing provi-

sions, leading countries to decline to enter treaties with the United States).

398 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

progress on the issues of treaty-shopping

239

and exchange of infor-

mation

240

for tax purposes, some countries, such as Brazil, may still

take the position that any reduction in source-State taxation must be

accompanied by a tax-sparing provision.

241

Unless these issues can

be resolved, the United States generally will not move forward.

IV. HOW DIFFICULT CAN IT BE?

Although the United States has a relatively small tax treaty net-

work,

242

the network includes a number of countries that are signif-

icantly less important to the U.S. economy than many of the coun-

tries of Latin America.

243

This Part will first discuss, as a general

matter, whether the U.S. policies create irreconcilable differences.

It will then focus on three case studies that may provide some les-

sons for the future in order to determine whether that limited treaty

network is inevitable.

239

See ORG. FOR ECON. CO-OPERATION AND DEV., PREVENTING THE

GRANTING OF TREATY BENEFITS IN INAPPROPRIATE CIRCUMSTANCES, ACTION 6

2015 FINAL REPORT 17–20 (2015), https://www.oecd-ili-

brary.org/docserver/9789264241695-en.pdf?expires=1577475586&id=id&ac-

cname=guest&checksum=66BE62630086EC0207E2D132B8EF1F22.

240

See OECD MODEL TAX CONVENTION, supra note 7, art. 26, ¶¶ 4–5.

241

See BRAZ.-U.S. BUS. COUNCIL, supra note 232, at 3 (noting that Brazil has

signed tax treaties with Singapore and Switzerland that do not include tax sparing

credits). However, those tax treaties with Singapore and Switzerland are not yet

in force. See Brazil - Treaty Withholding Rates Table, Int’l Bureau for Fiscal

Documentation, (accessed Jan. 8, 2020).

242

See United States Income Tax Treaties – A to Z, supra note 1 (listing all of

the countries with which United States has a tax treaty).

243

See, e.g., Top U.S. Trade Partners: Ranked by 2017 Total Import Value for

Goods (in Millions of U.S. Dollars), U.S.

DEP’T OF COMMERCE (2017),

https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/web-

content/tg_ian_003364.pdf (showing Chile, Colombia, Argentina, and Peru as be-

ing among the top trade partners of the U.S.).

2020] HOW HARD CAN THIS BE? 399

A. Is U.S. Tax Treaty Policy the Problem? (Reluctance

Revisited)

The most important recurring theme in this Article has been the

goal of the United States, particularly in treaties with other devel-

oped countries, to reduce withholding rates to the extent possible.

244

This desire is usually inconsistent with the goals of developing

countries.

245

It has been said that “[t]he developing country partners

often [have] conflicting objectives [which] are attracting U.S. capi-

tal and technology, while, at the same time, preserving scarce reve-

nues.”

246

To put it more bluntly: “Developing countries badly need

both to attract foreign capital and to raise revenue by taxing that

capital; but the more they tax, the less they attract.”

247

Eduardo Baistrocchi posits that developing countries resolve

this dilemma by signing tax treaties that look like the OECD and

U.N. Models because of strong network effects that allow for “com-

petition within a compatible standard.”

248

That is, once a basic tech-

nology is in place, competitors can differentiate themselves through

features that appeal to different customers.

249

The use of the OECD Model as a template for an actual treaty

provides for a common understanding of terms that are identical to

those in the OECD Model.

250

What seems less understood is that the

use of language that differs from the OECD Model clearly indicates

244

See 2014 Treaties Hearing, supra note 70 (statement of Nancy L.

McLernon, President & CEO Organization for International Investment).

245

See Kingson, supra note 139, at 1159–60 (discussing the goals of countries

like Brazil and how those goals tend to conflict with those of the United States).

246

Tax Conventions With: The Russian Federation, Treaty Doc. 102-39;

United Mexican States, Treaty Doc. 103-7; The Czech Republic, Treaty Doc. 103-

17; The Slovak Republic, Treaty Doc. 103-18; and the Netherlands, Treaty Doc.

103-6. Protocols Amending Tax Conventions With: Israel, Treaty Doc. 103-16;

The Netherlands, Treaty Doc. 103-19; and Barbados, Treaty Doc. 102-41: Hear-

ing Before the S. Comm. on Foreign Relations, 103th Cong. 19 (1993) (statement

of Leslie B. Samuels, Assistant Secretary for Tax Policy, Department of the Treas-

ury).

247

Kingson, supra note 139, at 1159.

248

Eduardo Baistrocchi, The Use and Interpretation of Tax Treaties in the

Emerging World: Theory and Implications, 2008 B

RIT. TAX REV. 356, 358–60

(2008).

249

See id. (explaining that a compatible standard allows competitors to focus

their efforts on “non-agreed dimensions”).

250

See OECD MODEL TAX CONVENTION, supra note 7, at I-1, ¶¶ 2–3.

400 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

that the parties reject the result that would be provided by the OECD

Model and, in some cases, also the U.N. Model. The use of the

OECD Model template facilitates the negotiation of treaties that de-

viate because the use of standard language for the majority of the

treaty, to which both parties agree,

251

allows the negotiators to

spend more time on the issues where their positions diverge.

252

Arguments that treaties based on the OECD Model are bad for

developing countries

253

therefore miss the point that most develop-

ing countries are not entering into treaties that are identical to the

OECD Model.

254

Wim Wijnen and Jan de Goede have directed a

research project that catalogs the prevalence of various provisions

found in the U.N. Model that occur in 1,811 treaties entered into

between 1997 and 2013.

255

Although some provisions occur more

often than others, their research suggests that developing countries

have a fair amount of bargaining strength to achieve results that are

important to them. For example, of the 1,811 treaties studied, 1,579

251

See id. at I-4 (discussing the purpose of the OECD Model Convention).

252

Of course, standard language has also developed with respect to some com-

mon deviations from the OECD Model, again because of the network benefits of

using standardized language.

253

See, e.g., Dagan, supra note 71, at 939 (“In this Article, I show that these

ubiquitous treaties are not necessary for preventing double taxation. Rather, they

serve much less heroic goals, such as easing bureaucratic hassles and coordinating

tax terms between the contracting countries, and much more cynical goals, par-

ticularly redistributing tax revenues from the poorer to the richer signatory coun-

tries.”). However, in contrast to Kingson’s article, supra note 139, at 1210–62,

which discusses specific provisions of specific tax treaties with which he disa-

greed, Dagan’s article, supra, cites to no actual tax treaties. In their discussion of

the model tax treaties and developing nations, Kim Brooks and Richard Krever

also cite only to secondary sources, although those sources occasionally cite to

actual treaties. See generally Kim Brooks & Richard Krever, The Troubling Role

of Tax Treaties, in 51 T

AX DESIGN ISSUES WORLDWIDE 159–78, (Geerten M. M.

Michielse & Victor Thuronyi eds., 2015).

254

Compare OECD MODEL TAX CONVENTION, supra note 7l, with Conven-

tion for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion

with Respect to Taxes on Income, Braz.-India, arts. 12–15, Apr. 26, 1988,

https://www.incometaxindia.gov.in/pages/international-taxation/dtaa.aspx

(1992) (differing from the OECD Model in the taxation of royalties and other

forms of income).

255

See Wim Wijnen & Jan de Goede, The UN Model in Practice 1997-2013,

BULL. INT’L TAX’N 118, 118 (2014); see also Willem F.G. Wijnen & Marco

Magenta, The UN Model in Practice, 51

BULL. INT’L FISCAL DOCUMENTATION

574, 574 (1997).

2020] HOW HARD CAN THIS BE? 401

(approximately 87%) allowed the source State to tax royalties.

256

the treaties between an OECD member and non-OECD member,

85% allowed for taxation of royalties by the source State.

257

As be-

tween two non-OECD members, 94% of treaties provide for taxa-

tion of royalties by the source State, while only 72% of treaties be-

tween two OECD members did so.

258

Moreover, 42% of the treaties

included a rule expanding the definition of a permanent establish-

ment to include the furnishing of services in a source State for a

specified period (most often six months, but sometimes as low as

one month).

259

Again, the adoption rate for this provision was high-

est (58%) among treaties between two non-OECD members, but still

significant (35%) in treaties between an OECD member and a non-

OECD member, and between two OECD members (17%).

260

Alt-

hough the percentage of treaties adopting other provisions is fre-

quently lower than for these examples, such alternative provisions

still occur in hundreds of treaties.

261

The fact that these provisions occur at relatively high rates both

in treaties between two OECD member countries and two non-

OECD member countries suggests that another common assumption

is flawed. Commentators frequently argue that treaties between

OECD members are “reciprocal” or “symmetric,”

262

which explains

why countries are willing to reduce source State taxation. On the

other hand, treaties between OECD members and non-OECD mem-

bers are “asymmetric.”

263

If things were that simple, one would not

256

Wijnen & de Goede, supra note 255, at 129–30.

257

Id.

258

Id.

259

Id. at 122.

260

Id.

261

For example, 1,234 treaties out of the sample include a modification to the

definition of “royalties” that allows the source State to tax rental payments relat-

ing to the leasing of equipment. Id. at 130.

262

See Baistrocchi, supra note 248, at 357 n.8 (“The symmetric tax treaty net-

work refers to tax treaties in which there are approximately equal investment

flows between contracting states. Tax treaties concluded between developed

countries (such as the US-UK tax treaty) or between developing countries (such

as the Argentina-Brazil tax treaty) are examples of symmetric tax treaties.”).

263

See id. at 353 (“The asymmetric tax treaty network consists of bilateral tax

treaties concluded between developed and developing countries. The word ‘asym-

402 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

expect 72% of treaties between two OECD members

264

to provide a

positive withholding rate on royalties.

Wijnen and de Goede note that they make a simplifying assump-

tion by distinguishing between OECD and non-OECD countries as

proxies for developed and developing countries.

265

There are “re-

source rich” countries that, while not members of the OECD, are

also not developing countries as defined by the World Bank.

266

Moreover, some “emerging market” countries are significant capital

exporters as well as capital importers.

267

Even those observations do not reflect the complexity of bilat-

eral economic relationships. Baistrocchi described the United States

as having thirty-four asymmetric treaties (those with non-OECD

countries) and twenty-nine symmetric treaties (those with other

OECD member States).

268

However, comparing stocks of inward

and outward foreign direct investment shows that even fewer U.S.

treaties are symmetric.

269

For example, France’s FDI in the United

States was close to three times the amount of U.S. FDI in France as

of the end of 2017.

270

The Japan-to-United States ratio was about

metric’ denotes unequal investment flows between contracting states: while de-

veloping countries normally are capital importers, developed countries habitually

are capital exporters.”).

264

See Wijnen & de Goede, supra note 255, at 129–30.

265

See id. at 119.

266

Id.

267

Id.

268

See Baistrocchi, supra note 248, at 356. Baistrocchi was writing in 2008,

before Estonia, Israel, Latvia, Lithuania, and Slovenia became members of the

OECD. See O

RG. FOR ECON. CO-OPERATION AND DEV., OECD ANNUAL REPORT

2008, at 115 (2008), https://www.oecd.org/newsroom/40556222.pdf (listing the

thirty member countries of the OECD in 2008); Where: Global Reach, O

RG. FOR

ECON. CO-OPERATION AND DEV., https://www.oecd.org/about/members-and-part-

ners/

(last visited Dec. 22, 2019) (listing all current OECD member countries and

the year joined, including Estonia, Israel, Latvia, Lithuania, and Slovenia). Pre-

sumably, U.S. tax treaties with those countries, which fell into the “asymmetric”

category at the time of his writing, became “symmetric” when they joined the

OECD, demonstrating the essential meaninglessness of this categorization.

269

Compare Table 1-i: United States, supra note 113, with Table 1-o: United

States, supra note 113.

270

Compare Table 1-i: United States, supra note 113, with Table 1-o: United

States, supra note 113.

2020] HOW HARD CAN THIS BE? 403

the same.

271

Both Germany and Spain had about twice the amount

of FDI in the United States as the amount of U.S. FDI into those

countries.

272

Eight other OECD member States—Australia, Austria,

Belgium, Canada, Denmark, Finland, Italy, and Sweden

273

—were

roughly symmetrical, frequently with the other OECD country’s

FDI in the United States exceeding U.S. FDI into that State.

274

The

bilateral FDI relationships with the other twenty-three OECD mem-

bers were asymmetric in favor of the United States, some to a strik-

ing degree.

275

Examining FDI stocks for some other OECD members provides

further evidence that the OECD/non-OECD assumption oversimpli-

fies. For example, Argentina’s stock of FDI in Mexico was $2.5 bil-

lion as of the end of 2017,

276

while Mexico’s reciprocal position in

Argentina was $661 million,

277

the opposite of what would be pre-

dicted. On the other hand, Brazil’s FDI position in Mexico was $906

million,

278

while Mexico’s position in Brazil was $9.5 billion,

279

line with the assumption. Similarly, Mexico’s FDI position in Co-

lombia was $4.9 billion,

280

almost five times that of Colombian FDI

in Mexico.

281

Mexico’s FDI position in Chile was $2.7 billion,

282

271

Compare Table 1-i: United States, supra note 113, with Table 1-o: United

States, supra note 113.

272

Compare Table 1-i: United States, supra note 113, with Table 1-o: United

States, supra note 113.

273

See Where: Global Reach, supra note _ (listing the current OECD mem-

bers and the year each country ratified the OECD Convention).

274

Compare Table 1-i: United States, supra note 113, with Table 1-o: United

States, supra note 113.

275

Compare Table 1-i: United States, supra note 113, with Table 1-o: United

States, supra note 113.

276

Table 1-i: Inward Direct Investment Positions, as of end-2017: Reporting

Economy: Mexico, I

NT’L MONETARY FUND, http://data.imf.org/regu-

lar.aspx?key=61227424 (last visited Dec. 22, 2019) [hereinafter Table 1-i: Mex-

ico].

277

Table 1-o: Outward Direct Investment Positions, as of end-2017: Report-

ing Economy: Mexico, I

NT’L MONETARY FUND, http://data.imf.org/regu-

lar.aspx?key=61227424 (last visited Dec. 22, 2019) [hereinafter Table 1-o: Mex-

ico].

278

Table 1-i: Mexico, supra note 276.

279

Table 1-o: Mexico, supra note 277.

280

Id.

281

Table 1-i: Mexico, supra note 276.

282

Table 1-o: Mexico, supra note 277.

404 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

almost twice that of fellow OECD-member Chile’s FDI position in

Mexico.

283

Almost all of Chile’s treaties

284

are asymmetric, but in opposite

directions.

285

In general, its treaties with other OECD member coun-

tries are asymmetric with Chile being the capital importer.

286

Its

treaties with non-OECD members generally are asymmetric with

Chile being the capital exporter.

287

Chile’s position as both capital

importer and capital exporter was foreseen by those who developed

Chile’s tax treaty policy in the 1990s.

288

It is likely that one of the “emerging market” economies to

which Wijnen and de Goede refer

289

is China, which has introduced

its “Belt and Road” initiative to develop infrastructure in both de-

veloping and developed countries.

290

Interestingly, the International

Monetary Fund’s country reports on China show only FDI into

China.

291

To discover where China is investing, it is necessary to

283

Table 1-i: Mexico, supra note 276.

284

See Chile - Treaty Withholding Rates Table, Int’l Bureau for Fiscal Docu-

mentation, (accessed Jan. 8, 2020).

285

Compare Table 1-o: Outward Direct Investment Positions, as of end-2017:

Reporting Economy: Chile, I

NT’L MONETARY FUND, http://data.imf.org/regu-

lar.aspx?key=61227424 (last visited Dec. 27, 2019) [hereinafter Table 1-i: Chile],

with Table 1-i: Inward Direct Investment Positions, as of end-2017: Reporting

Economy: Chile, I

NT’L MONETARY FUND, http://data.imf.org/regu-

lar.aspx?key=61227424 (last visited Dec. 27, 2019) [hereinafter Table 1-o:

Chile].

286

For example, Australia invests $772 million into Chile, but Chile only in-

vests $37 million into Australia. Compare Table 1-i: Chile, supra note 285, with

Table 1-o: Chile, supra note 285.

287

For example, Chile invests $13.3 billion into Brazil, whereas Brazil only

invests $5.1 billion in Chile. Compare Table 1-o: Chile, supra note 285, with Ta-

ble 1-i: Chile, supra note 285.

288

See Patricia Brown et al., Insiders’ View of Treaty Negotiations, in REPORT

PROCEEDINGS OF THE SIXTY-FIRST TAX CONFERENCE, at 25:5–25:6 (2009).

289

See Wijnen & de Goede, supra note 255, at 119 (“[T]here is an increasing

group of developing countries with emerging economics that have become signif-

icant capital exporters.”).

290

See Andrew Chatzky & James McBride, China’s Massive Belt and Road

Initiative,

COUNCIL ON FOREIGN RELATIONS (May 21, 2019),

https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative.

291

See Table 1-o: Outward Direct Investment Positions, as of end-2017: Re-

porting Economy: China, I

NT’L MONETARY FUND, http://data.imf.org/regu-

lar.aspx?key=61227424 (last visited Dec. 22, 2019) [hereinafter Table 1-o:

China].

2020] HOW HARD CAN THIS BE? 405

look at other countries’ inward investment charts.

292

For example,

Mexico’s charts show about $731 million of FDI from China into

Mexico,

293

with no Mexican FDI into China.

294

Likewise, Chile

shows no FDI from China,

295

and just over $100 million of Chilean

investment into China.

296

Martin Hearson is doing important empirical work that looks at

investment asymmetries to determine how they affect particular pro-

visions of treaties.

297

He determines “that neither investment asym-

metry nor power dynamics alone are sufficient to explain the out-

come of treaty negotiations.”

298

In fact, Hearson’s review of actual

treaties reveals the following:

much of the conventional wisdom about tax treaty

negotiations is partial at best. The clear trend towards

declining source taxing rights in WHT provisions is

counterbalanced by greater source taxing rights in

other areas. There is important variation across re-

gion, development status and type of treaty partner.

Longstanding OECD members are not necessarily

the toughest negotiators with developing countries,

in comparison to emerging economies.

299

A review of the actual terms of U.S. tax treaties is likely to bear

this out. Although the reduction of withholding rates is an important

goal of U.S. tax treaty policy, it is also true that the United States

does not achieve those goals in every tax treaty.

300

Rather, the “hall-

mark” of U.S. tax treaty policy is “achieving the best deal it [can]

with each treaty partner.”

301

In fact, the majority of U.S. tax treaties

292

See, e.g., Table 1-i: Mexico, supra note 276; Table 1-i: Chile, supra note

285.

293

See Table 1-i: Mexico, supra note 276.

294

See Table 1-o: Mexico, supra note 277.

295

See Table 1-i: Chile, supra note 285.

296

See Table 1-o: Chile, supra note 285.

297

See Hearson, supra note 18, at 20–25.

298

Id. at 24.

299

Id. at 25.

300

See Brown et al., supra note 288, at 25:8.

301

Id. at 25:7.

406 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

continue to provide for a positive withholding rate on royalties.

302

This is due in large part to the number of provisions that, from the

U.S. perspective, are non-negotiable.

303

If many provisions are non-

negotiable, concessions will have to be made with respect to other

provisions. While the Joint Committee on Taxation has mused about

whether “developing country concessions” were appropriate with

respect to particular tax treaties,

304

upward deviations from U.S. pre-

ferred withholding rates were not raised as issues during the Sen-

ate’s review of the U.S. treaties with Japan,

305

Bulgaria,

306

Chile.

307

302

See generally TABLE 1. TAX RATES ON INCOME OTHER THAN PERSONAL

SERVICES UNDER CHAPTER 3, INTERNAL REVENUE CODE, AND INCOME TAX

TREATIES, INTERNAL REVENUE SERV. (2019), https://www.irs.gov/pub/irs-

utl/Tax_Treaty_Table_1_2019_Feb.pdf. Close to forty U.S. treaties provide for

some level of source State taxation with respect to at least some categories of

royalties. Id.

303

See supra Part II.

304

See STAFF OF THE JOINT COMM. ON TAXATION, JCX-4-06, EXPLANATION

OF THE

PROPOSED INCOME TAX TREATY BETWEEN THE UNITED STATES AND THE

PEOPLE’S REPUBLIC OF BANGLADESH 61 (2006), http://www.jct.gov/x-4-06.pdf

(“An issue is whether these developing-country concessions represent appropriate

U.S. treaty policy, and if so, whether Bangladesh is an appropriate recipient of

these concessions.”).

305

See generally STAFF OF THE JOINT COMM. ON TAXATION, 108th CONG.,

EXPLANATION OF PROPOSED INCOME TAX TREATY BETWEEN THE UNITED STATE

AND

JAPAN (Comm. Print 2004) (discussing a large number of potential issues,

none of which was the 10% general withholding rate on interest).

306

See generally STAFF OF THE JOINT COMM. ON TAXATION, 110th CONG.,

EXPLANATION OF PROPOSED INCOME TAX TREATY BETWEEN THE UNITED STATES

AND

BULGARIA (Comm. Print 2008) (listing only two issues, the treatment of stu-

dents, trainees, teachers and researchers and whether the rule allowing the provi-

sion of services to constitute a permanent establishment was acceptable).

307

See generally STAFF OF THE JOINT COMM. ON TAXATION, 113th CONG.,

EXPLANATION OF PROPOSED INCOME TAX TREATY BETWEEN THE UNITED STATES

AND

CHILE (Comm. Print 2014) (listing two potential issues, treaty-shopping and

exchange of information and collection assistance, but accepting positive with-

holding rates on interest and royalties).

2020] HOW HARD CAN THIS BE? 407

B. Three Case Studies

1. BRAZIL.

Brazil and the United States signed a tax treaty in 1967.

308

It was

abandoned

309

after the Senate entered two reservations.

310

The sub-

ject of one—a deduction for charitable contributions made to enti-

ties in the other State

311

—might now be less controversial as it has

been included in treaties with Canada,

312

Israel,

313

and Mexico.

314

The other, relating to the extent to which tax treaties should provide

incentives for U.S. investment in Brazil,

315

is still relevant today, as

discussed below.

To understand the problem with the Brazilian treaty, it is neces-

sary to consider a little history. In 1957, the United States signed a

treaty with Pakistan that included a “tax-sparing credit.”

316

There

are several forms of such a credit; in this case, the United States

would have been obligated to give a foreign tax credit against U.S.

tax otherwise due for taxes that Pakistan had forgiven pursuant to an

308

Convention Between the Government of the United States of America and

the Government of the United States of Brazil for the Avoidance of Double Taxa-

tion with Respect to Taxes on Income, Mar. 13, 1967, Braz.-U.S. in 8 W

ALTER H.

DIAMOND & DOROTHY B. DIAMOND, INTERNATIONAL TAX TREATIES OF ALL

NATIONS 56, 56 (1976) [hereinafter Braz.-U.S. Convention].

309

Cf. TREATY AFFAIRS STAFF, OFFICE OF THE LEGAL ADVISER, U.S. DEP’T

STATE, A LIST OF TREATIES AND OTHER INTERNATIONAL AGREEMENTS OF THE

UNITED STATES IN FORCE ON JANUARY 1, 2019, at 49 (2019),

https://www.state.gov/wp-content/uploads/2019/06/2019-TIF-Bilaterals-

6.13.2019-web-version.pdf (listing current tax treaties the United States has with

Brazil).

310

S. EXEC. RPT. No. 5, at 1–3 (1968).

311

Id. at 3.

312

See Can.-U.S. Convention, supra note 25, art. XXI.

313

See Protocol Amending the Convention Between the Government of the

United States of America and the Government of the State of Israel with Respect

to Taxes on Income, Isr.-U.S., art. 15-A, May 30, 1980, S.

TREATY DOC. No. 96-

48 (1980).

314

See Mex.-U.S. Convention, supra note 2, art. 22.

315

S. EXEC. RPT. No. 5, at 2.

316

See Convention Between the Government of the United States of America

and the Government of Pakistan for the Avoidance of Double Taxation and the

Prevention of Fiscal Evasion with Respect to Taxes on Income art. XV, Pak.-U.S.,

July 1, 1957, 10 U.S.T. 984 (1957) [hereinafter Pak.-U.S. Convention].

408 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

investment incentive program.

317

Pakistan argued that, absent the

tax-sparing credit, the benefits of the incentive program would ac-

crue to the U.S. government, not to the U.S. investors.

318

While U.S.

business interests were, not surprisingly, in favor of the tax-sparing

credit, opposition was based on the fact that the foreign tax credit

was intended to place investment in the United States by U.S. tax-

payers on an equal footing with investment outside the United States

by U.S. taxpayers.

319

The tax-sparing credit would violate that prin-

ciple by favoring foreign investment.

320

As it turned out, Pakistan

abolished the incentive program so the Senate did not have to take a

firm position, but its discomfort with the provision was clear and it

entered a reservation to a provision that would have provided the

tax-sparing benefits retroactively to two companies.

321

The 1967 Brazil-U.S. treaty did not include a tax-sparing

credit.

322

Instead, the treaty included an investment credit that gave

eligible investors a credit equal to 7% of investments made in Brazil

by U.S. residents.

323

In exchange, Brazil agreed to reductions in its

otherwise-applicable withholding taxes on investment income.

324

317

See Pak.-U.S. Convention, supra note 316, art. XV(1) (“For the purposes

of this credit there shall be deemed to have been paid by a United States domestic

corporation the amount by which such Pakistan taxes (other than the business

profits tax) have been reduced . . . “).

318

Double Taxation Conventions: Hearing Before the S. Comm. on Foreign

Relations on Income Tax Convention with Austria; Supplementary Income Tax

Convention with Canada; Supplementary Income Tax Protocol with Japan; and

Income Tax Convention with Pakistan, 85th Cong. 13–14 (1957) (“[O]ther coun-

tries had a valid complaint that . . . what they forewent in the way of taxes merely

put something into the United States Treasury instead of encouraging economic

development there.”).

319

See Letter from Stanley S. Surrey, Professor of Law, Harvard Law Sch., to

Carl Marcy, Senator, Senate Comm. on Foreign Relations (Jan. 22, 1958).

320

James R. Hines Jr., Tax Sparing and Direct Investment in Developing

Countries in I

NTERNATIONAL TAXATION AND MULTINATIONAL ACTIVITY 39, 45–

46 (James R. Hines Jr. ed., 2001) (noting how the Pakistan treaty encouraged for-

eign investment by American investors at the expense of investment in the United

States).

321

See Mahesh C. Bijawat, Tax Sparing: An Instrument to Retain and Attract

Foreign Capital,

6 J. INDIAN L. INST. 236, 240.

322

See Braz.-U.S. Convention, supra note 308, art. 7.

323

Id.

324

See Technical Memorandum of Treasury Department Concerning United

States-Brazil Income Tax Convention, in Tax Conventions with Brazil, Canada,

2020] HOW HARD CAN THIS BE? 409

The Senate entered a reservation preventing the investment credit

from taking effect, which in turn would have allowed Brazil to revert

to its domestic withholding rates on dividends, interest, and royal-

ties.

325

Accordingly, the treaty would have allowed little in the way

of benefits, which led to its abandonment.

Brazil continues to see a linkage between tax-sparing credits and

reductions in withholding rates.

326

Because the United States cannot

agree to a tax-sparing credit, the possibility of meaningful reduc-

tions in withholding rates seems low.

In principle, a treaty that does not reduce withholding rates can

be justified by other benefits, such as establishing thresholds for tax-

ation by the host State.

327

This might be true, for example, in the

case of a country that has expansive domestic rules regarding the

taxation of business profits. However, because Brazil imposes with-

holding tax on most payments made by Brazilian companies

328

and

and Trinidad and Tobago: Hearing Before S. Comm. on Foreign Relations, 90th

Cong. 101, 106 (1967) ( (“If Brazil considers that any modification or amendment

as a result of this paragraph materially and adversely affects the credit allowed by

this article, Brazil may, by giving notice to the United States through diplomatic

channels, treat such modification or amendment as a suspension of the credit un-

der Article 29(6)(b) and suspend the reduced rates for dividends, interest, and

royalties (Articles 12, 13, and 14).”).

325

S. Exec. Rpt. No. 5, at 2 (“It would not be in the best interests of the United

States to encourage investments abroad by this device.”).

326

See Deborah Toaze, Tax Sparing: Good Intentions, Unintended Results, 49

ANADIAN TAX J. 879, 885 (2001) (noting Brazil’s continued insistence on the

inclusion of a tax-sparing provision as one of the major reasons why the U.S. and

Brazil do not have a tax treaty); but see B

RAZ.-U.S. BUS. COUNCIL, supra note

232, at 6 (noting that Brazil has recently signed two treaties that do not include

tax-sparing credits).

327

See generally, e.g., Arrangement Between the Government of the United

Kingdom of Great Britain and Northern Ireland and the Government of the Cay-

man Islands for the Avoidance of Double Taxation and the Prevention of Fiscal

Evasion, June 15, 2009, Int’l Bureau for Fiscal Documentation (including provi-

sions on the taxation of individuals and of business profits, but no reductions of

withholding taxes).

328

Brazil - Corporate Taxation - Country Tax Guides - 7.3.4 Withholding

Taxes, Int’l Bureau for Fiscal Documentation, (accessed Jan. 16, 2020).

410 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

limits deductions with respect to payments of interest

329

and royal-

ties,

330

it generally does not seek to expand the definition of “per-

manent establishment,” which could lead to more net basis taxation

rather than the gross-basis withholding taxes that Brazil prefers.

331

In addition, Brazil’s domestic transfer pricing rules do not conform

to the OECD’s arm’s length principle,

332

which is understood to

have been the reason that Germany terminated its treaty with Brazil

in 2005.

333

Accordingly, it is hard to see what benefits to taxpayers

would justify the effort to negotiate a treaty.

2. VENEZUELA

It might seem unlikely to the casual observer that the United

States’ only tax treaty with a South American country is with Ven-

ezuela. The explanation is relatively simple—Citgo. The acquisition

of Citgo, a major U.S. petroleum company, by the Venezuelan state

oil company between 1986 and 1990, made the relationship between

the United States and Venezuela less one-sided.

334

Moreover, gov-

ernments generally prefer not to pay taxes to other governments.

This created an incentive for Venezuela to reduce U.S. withholding

taxes on profit remittances from Citgo.

Still, negotiations had languished over other issues until 1998,

when it appeared that Hugo Chávez would become president of

329

Brazil - Corporate Taxation - Country Tax Guides - 1.4.5 Interest, Int’l

Bureau for Fiscal Documentation, (accessed Jan. 16, 2020).

330

Brazil - Corporate Taxation - Country Tax Guides - 1.4.6 Royalties, Int’l

Bureau for Fiscal Documentation, (accessed Jan. 16, 2020).

331

Sergio André Rocha, Agency Permanent Establishment ‘Brazilian Style’:

Taxation of Profits Earned Through Commission Merchants, Agents and Repre-

sentatives, 41 I

NTERTAX 444, 444 (2013) (“This matter is discussed much more

in the international forum and has never aroused much interest on the part of the

Brazilian revenue authorities.”).

332

See Napoleão Dagnese, Is Brazil ‘Developed’? Termination of the Brazil-

Germany Tax Treaty, 34 I

NTERTAX 195, 197 (2006).

333

See id. at 195.

334

See Katherine Blunt, Citgo Saga: How the Houston Refiner’s Future Be-

came So Uncertain, H

OUSTON CHRONICLE, https://www.houstonchroni-

cle.com/business/energy/article/CITGO-13261273.php (last updated Sept. 30,

2018) (“When Petróleos de Venezuela became the sole owner of Citgo Petroleum

in 1990, the state-owned oil company known as PDVSA was among the largest

and most profitable energy companies in the world.”).

2020] HOW HARD CAN THIS BE? 411

Venezuela.

335

Negotiations became more urgent, and the treaty was

signed a week before Chávez became president.

336

Although it was

initially unclear whether the new regime would embrace the agree-

ment, the economic arguments in its favor became even stronger af-

ter Venezuela announced plans to shift from a territorial to a world-

wide tax system starting in 2001.

337

3. CHILE

If the U.S.-Venezuela tax treaty is a story of successfully turning

deadlines into opportunities, the lack of a treaty with Chile can be

largely attributed to bad timing. Until the 1990s, Chile entered into

agreements directly with investors rather than tax treaties with gov-

ernments.

338

By the mid-1990s, Chile decided on a tax treaty policy

that balanced the reality that it was likely to be a destination for in-

bound investment by more developed countries with its belief that it

would also be an exporter of capital.

339

Chile’s first treaties after

establishing this policy were with Canada and Mexico in 1998, fol-

lowed by Ecuador in 1999.

340

That is, negotiations with the United

States were deferred in favor of negotiations with countries that do

not push hard for reductions in withholding rates. Chile affirma-

tively wished to have as uniform a set of agreements as possible, and

335

See S. EXEC. REP. No. 106-6, at 14–15 (1999) (discussing how the chang-

ing political situation in Venezuela was a factor in the U.S.’s willingness to nego-

tiate a treaty).

336

U.S.-Venez. Convention, supra note 2. Chávez became president in Feb-

ruary 1999. See Brian A. Nelson, Hugo Chávez: President of Venezuela,

NCYCLOPEDIA BRITANNICA, https://www.britannica.com/biography/Hugo-

Chavez (last visited Dec. 22, 2019).

337

See S. EXEC. REP. NO. 106-6, at 11 (“The Committee is encouraged that

Venezuela is moving from its current territorial tax system to a worldwide tax

system. The new worldwide tax system is expected to be more similar to that of

the United States and, thus, would be more consistent with one of the principal

purposes of the treaty—to avoid double taxation.”).

338

See Brown et al., supra note 288, at 25:5.

339

Id.

340

See OECD, THE REPUBLIC OF CHILE: STATUS OF LIST OF RESERVATIONS

AND

NOTIFICATIONS AT THE TIME OF SIGNATURE 2-4,

http://www.oecd.org/tax/treaties/beps-mli-position-chile.pdf (last visited Dec. 22,

2019).

412 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

so it offered to include most-favored nation provisions in its trea-

ties.

341

Even though negotiations began towards the end of the Clinton

Administration,

342

they could not be concluded until Chile’s laws

allowed for the exchange of bank information for tax purposes.

343

The treaty was signed on February 4, 2010.

344

Because of this delay

in completing negotiations, the Chile treaty fell into the Senate

limbo created by Senator Rand Paul’s hold on tax treaties.

345

The ability of a single U.S. Senator to cause the U.S. tax treaty

program to come to a halt is not intuitive. Under the U.S. Constitu-

tion, the Senate must give advice and consent to the ratification of

treaties, including tax treaties.

346

That approval must be by “two

thirds of the Senators present.”

347

In general, treaties are reviewed

by the Senate Foreign Relations Committee based on a technical

analysis done by the Staff of the Joint Committee on Taxation and

then voted on in a business meeting.

348

Senators are then asked if

they have any objections to the treaties being approved by “unani-

mous consent”—a process that avoids the need for debate on the

Senate floor.

349

This process had worked relatively smoothly for

decades.

350

However, it also allowed Rand Paul to hold up the tax

341

See Press Release, Chilean Tax Administration, Int’l Bureau for Fiscal

Documentation News, MFN Clauses in Chilean Tax Treaties with Argentina,

Australia, France, Sweden and Uruguay (July 11, 2019).

342

Robert Goulder, U.S. Enters Tax Treaty Negotiations with Chile, TAX

NOTES TODAY INT’L (Jan, 25, 2000), https://www.taxnotes.com/tax-notes-today-

international/treaties/us-enters-tax-treaty-negotiations-chile/2000/01/25/1bwjk.

343

These changes were made in December 2009. See ORG. FOR ECON. CO-

OPERATION & DEV., TAX CO-OPERATION 2010: TOWARDS A LEVEL PLAYING

FIELD 50 (2010), https://read.oecd-ilibrary.org/taxation/tax-co-operation-

2010_taxcoop-2010-en#page1.

344

See Chile-U.S. Convention, supra note 186.

345

Diane Ring, When International Tax Agreements Fail at Home: A U.S. Ex-

ample, 41 BROOK. J. INT’L L. 1185, 1198-99 (2016).

346

U.S. CONST. art. II, § 2, cl. 2.

347

Id.

348

See About Us: Other, JOINT COMM. ON TAX’N, https://www.jct.gov/about-

us/other.html (last visited Dec. 22, 2019).

349

Ring, supra note 345, at 1196–97.

350

Treaties: A Historical Overview, U.S. SENATE, https://www.senate.gov/ar-

tandhistory/history/common/briefing/Treaties.htm (last visited Nov. 8, 2019)

(“During its first 200 years, the Senate approved more than 1,500 treaties and

rejected only 21.”).

2020] HOW HARD CAN THIS BE? 413

treaties for a considerable period as Senate floor time is a scarce

commodity.

351

Finally, in the summer of 2019, Senate Majority Leader Mitch

McConnell decided to move forward a number of tax agreements

that had been pending for, in some cases, close to a decade.

352

How-

ever, in the second piece of bad timing for Chile, there was a new

wrinkle around changes that had been made to U.S. domestic law by

the 2017 Tax Cuts and Jobs Act.

353

This law included a number of

provisions that were potentially inconsistent with U.S. tax treaty ob-

ligations.

354

In particular, there were questions regarding the Base

Erosion Anti-Abuse Tax (“BEAT”).

355

Under the “later in time”

principle, a statute can override an earlier treaty, and vice versa.

356

There is debate over whether the BEAT overrides the non-discrimi-

nation provisions of existing treaties.

357

In any case, the Treasury

Department obviously was nervous about the possibility that treaties

that enter into force after the BEAT was enacted could override the

BEAT.

358

Accordingly, they asked Senate Democrats to enter a res-

ervation to pending treaties (including the treaty with Chile) to “clar-

ify” that the BEAT would apply under those treaties.

359

Instead,

Treasury’s request was made public.

360

Four protocols to existing

treaties that ostensibly do not present the issue moved forward and

351

See Ring, supra note 345, at 1197.

352

Jim Tankersley, Senate Approves Tax Treaties for First Time In Decade,

N.Y.

TIMES (July 17, 2019), https://www.nytimes.com/2019/07/17/business/tax-

treaties-vote.html.

353

Natalie Olivo, After Nearly 10 Years, Tax Treaties May Face More Delays,

AW360 (Aug. 2, 2019), https://www.law360.com/corporate/articles/1183525.

354

See H. David Rosenbloom & Fadi Shaheen, The TCJA and the Treaties,

TAX NOTES TODAY INT’L 1057, 1057–58 (Sept. 9, 2019).

355

See H. David Rosenbloom & Fadi Shaheen, The BEAT and the Treaties,

AX NOTES INT’L 53, 53, 56 (Oct. 1, 2018).

356

Id. at 56 (“When an irreconcilable conflict is found, the provision that is

later in time generally controls.”).

357

Id. at 59.

358

See Olivo, supra note 353.

359

See Letter from Robert Menendez, U.S. Senator, to Steven T. Mnuchin,

Sec’y of the Treasury, Dep’t of the Treasury (June 11, 2019) (“All we know at

this point is that the Department would like to see the reservation applied to the

treaties with Chile, Hungary, and Poland.”).

360

Id.

414 UNIVERSITY OF MIAMI LAW REVIEW [Vol. 74:359

were approved by the Senate.

361

Three full treaties, which squarely

present the issue, were consigned once again to limbo.

362

Press re-

ports indicate that Senator McConnell’s decision to allocate floor

time to the tax treaties might have been motivated by a potential

investment in Kentucky by a Spanish company, and therefore a de-

sire to approve the pending protocol with Spain.

363

This suggests

that (a) no tax treaty will move forward until the Treasury Depart-

ment addresses the issue directly, through treaty provisions or pro-

tocols, and (b) future treaties should be presented in bundles that

generate substantial interest in the business community (preferably

benefitting projects in Kentucky).

CONCLUSION

The world is a complicated place. Countries have very different

views of their national interests, and those views are more nuanced

than outside observers can begin to understand. It is therefore folly

to make general statements about what is in the interests of devel-

oping countries or of any subset of developing countries.

What is clear is that, even looking only at Latin America, coun-

tries have different reasons for not having tax treaties with the

United States. In relatively few cases has a treaty foundered solely

over a desire by one state to have higher withholding rates or a more

expansive host state exercise of taxing rights. In some cases, it has

just been a matter of bad timing for a treaty that generally was con-

sistent with U.S. treaty policies.

The good news is that it therefore should be possible for the

United States to reach agreements with a number of LATAM coun-

tries where there is a significant bilateral economic relationship.

However, it might be productive to focus on smaller countries that

have already shown an interest in encouraging investment from the

361

See Tankersley, supra note 352 (noting that the agreements with Switzer-

land, Japan, Luxembourg, and Spain were all approved by the U.S. Senate).

362

Olivo, supra note 353 (explaining that the treaties with Chile, Poland, and

Hungry are “unlikely to move through the Senate with the same relative ease” as

the four protocols).

363

See Tankersley, supra note 352 (detailing how Spain-based Acerinox em-

ploys 1,500 workers in Kentucky).

2020] HOW HARD CAN THIS BE? 415

United States rather than a “blockbuster” like Brazil, where substan-

tial barriers to an agreement remain.