Wednesday, January 03, 2007

The update to the 2006 U.S. Tax Treaty Model and Technical Explanation: Is the U.S. setting or following the pace?

You may recall a recent post on the release of the new US Model. In the meantime, I found a bit of time to prepare and share with you a Draft Article on the novelties of the new US Model.

U.S. tax policy choices may be said to reflect not only on its tax legislation but also on the U.S. Model Income Tax Convention, which serves as a starting point in bilateral treaty negotiations.

In a 2006 testimony of before a U.S. Senate Committee, Patricia A. Brown, former International Tax Counsel to the Treasury Department reinforced the importance of the wide-ranging plan to revise and conclude tax treaties or protocols that would accordingly provide a “grater economic benefit to the United States and to U.S. taxpayers”. The recent treaties and protocols concluded with the UK , Australia , Japan , Netherlands , Denmark , Germany , Sweden , and others are a good reflection of such an effort designed to reinforce the competitiveness of U.S. multinationals in the international arena.

After a decade where the U.S. Treasury Department has revamped key treaties of its treaty network, it was therefore expected that the newly released 2006 update to the U.S. Model and Model Technical Explanation would take into account some of the tax treaty policies entrenched on those recently concluded treaties. That was the case in some instances, but surprisingly so some of the novelties were simply left out.

The following article addresses the principal changes to the 2006 U.S. Model and/or Technical Explanation, which include amongst others:
- Update of the treatment of flow-through entities, with an inclusion of specific examples addressing dividends paid to fiscally transparent and hybrid entities;
- Inclusion of a new article addressing pension funds;
- Update of the discussion on attribution of profits to a permanent establishment;
- Update of the dividend article;
- Update of interest article, including a new provision addressing "contingent interest; and
- Elimination of the independent personal services article; andRevised language of the limitation on benefits article.



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