The Use of Tax Treaty Status in Legislation and the Impact on U.S. Tax Treaty Policy

Worldwide Tax Daily
04.26.10
In this article, Rocco Femia and Layla Asali discuss a novel feature of two pieces of international tax legislation enacted over the last 10 years, IRC sections 1(h)(11) and 457A, namely that they turn on whether a transaction or arrangement involves a resident of a U.S. tax treaty partner that is eligible for benefits under the treaty. Congress is considering a third legislative proposal with a similar feature: proposed section 894(d), which would deny tax treaty benefits for deductible payments to foreign affiliates unless the ultimate parent company of the payer and the payee also is eligible for some tax treaty benefits. Unlike traditional interactions between tax treaties and domestic law, these new provisions treat the existence of a U.S. tax treaty as the basis for favorable treatment under a statutory rule (or an exemption from otherwise generally applicable unfavorable treatment). These provisions raise technical and policy issues that stem largely from the fact that U.S. tax treaties were not intended by U.S. negotiators to serve the purposes to which legislators are putting them.
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