Global Tax Alert | 3 March 2014

US Senate Foreign Relations Committee holds hearing on proposed income tax treaties and protocols, including proposed US - Chile Treaty

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Executive summary

On 26 February 2014, the Senate Foreign Relations Committee (the Committee) held a hearing regarding five proposed income tax treaties and protocols, including considering for the first time the proposed US – Chile Income Tax Treaty and Protocol (which the two countries had signed on 4 February 2010) (the Chile Treaty)1 and a protocol to amend the Convention on Mutual Administrative Assistance in Tax Matters (signed on 27 May 2010) (the Multilateral Convention).2 The protocols to the income tax treaties with Luxembourg3 and Switzerland4 and the US – Hungary Income Tax Treaty,5 each of which were favorably voted out of the Committee in July 2011, but were never considered by the full Senate, were also under consideration.

Senator Benjamin L. Cardin (D-MD) presided over the hearing. With regard to the proposed treaties covered in the hearing, the Committee heard testimony from Robert Stack, Treasury Deputy Assistant Secretary for International Tax Affairs, and Thomas Barthold, Joint Committee on Taxation (JCT) Chief of Staff. In addition, the Committee heard testimony from a panel made up of members from the business community. All of the panelists urged the Senate to take swift and favorable action with respect to each of the treaties and protocols before the Committee.

In connection with the hearing, the Treasury Department released its Technical Explanation (the Treasury Explanation) of the Chile Treaty and the Multilateral Convention. The JCT released its Explanation of the Chile Treaty6 on 24 February 2014. The JCT also released its explanation of the Multilateral Convention on 21 February 2014.7 Treaty explanations serve as the official US guide to the treaties, stating the policies behind the provisions as well as understandings reached during negotiations regarding their application and interpretation.8 The Treasury Explanation provides a detailed analysis of the Chile Treaty provisions, including specifically:

  • Special rules for withholding tax rates on Chilean source dividends;
  • The allowance of withholding tax on certain sales of stock;
  • A permanent establishment (PE) provision that deems a PE to exist from the provision of services under certain circumstances;
  • A limitation on benefits (LOB) article that includes a “headquarters company test” and a triangular provision; and
  • Provisions providing for the full exchange of information between the tax authorities of the United States and Chile.

With the hearing complete, the Committee is expected to schedule a date to meet to report the treaties out of committee and send it to the Senate floor for consideration. Once that occurs, the Senate must give its advice and consent to ratification with a two-thirds majority vote. After the Senate takes action, the president must sign an instrument of ratification to complete the approval and ratification process in the United States. At present it is unclear how long the hearing and ratification process will take.

Implications

The Chile Treaty would be a significant development in the US tax treaty network, representing only the second income tax treaty with a South American country, and only the third with a country in Latin America (US – Mexico Treaty signed 1993). However, the concessions that the United States made to reach agreement with Chile, as reflected in some significant deviations from the US Model Treaty, may offer insight as to how the United States could reach agreement with other countries in Latin America.

The Chile Treaty contains several significant changes to the US Model Treaty, including unique language from particular provisions of the United Nations Model Treaty (e.g., requisite time periods before certain activities, such as a construction or installation project will create a PE). Additionally, the Chile Treaty includes some additional protections for source basis taxation, the inclusion of robust LOB provisions with a headquarters company test and triangular provision, as well as an updated exchange of information article. The commentary and examples included in the Treasury Explanation provide further guidance on these provisions.

Taxpayers should carefully review the Chile Treaty and Treasury Explanation language in determining whether and to what extent they may qualify for benefits once the Chile Treaty enters into force, with particular attention to whether the headquarters or active trade or business LOB provisions could provide access to the Treaty.9

The timing of when the Chile Treaty, and the other treaties under consideration by the Committee, will enter into force cannot be predicted. No new tax treaties or treaty updates have been approved since 2010 despite Committee hearings. With the hearing complete, the Committee is expected to schedule a date to meet to report the Treaty out of committee and send it to the Senate floor for consideration. It is uncertain when the full Senate will consider the Treaty.

Endnotes

1. Convention Between The Government Of The United States Of America And The Government Of The Republic Of Chile For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And Capital.

2. For a detailed discussion of the provisions of the Chile Treaty, see ITS Alert, US, Chile Sign First Income Tax Treaty, dated 12 February 2010.

3. For a detailed discussion of the protocol to the income tax treaty with Luxembourg, see ITS Alert, Senate committee holds hearing on protocol to treaty with Luxembourg: Treasury releases technical explanation of protocol, dated 13 June 2011.

4. For a detailed discussion of the protocol to the income tax treaty with Switzerland, see ITS Alert, Senate Committee holds hearing on protocol to treaty with Switzerland, dated 13 June 2011.

5. For a detailed discussion of US – Hungary Income Tax Treaty, please see ITS Alert, Senate committee hearing on proposed Hungary treaty and Treasury release of technical explanation, dated 13 June 2011.

6. Joint Committee on Taxation, Explanation of Proposed Income Tax Treaty Between the United States and Chile (JCX-10-14), 24 February 2014.

7. Joint Committee on Taxation, Explanation of Proposed Protocol Amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (JCX-09-14), 21 February 2014.

8. The Treasury Explanation of the Chile Treaty is available on the department’s website.

9. If ratified, the Chile Treaty’s withholding provisions would take effect for amounts paid or credited on or after the first day of the second month following the date on which the Treaty enters into force. For all other taxes, the provisions would take effect for tax periods beginning on or after the first day of January following the date on which the Treaty enters into force.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC
  • Peg O’Connor
    +1 202 327 6229
    margaret.oconnor@ey.com
  • Lilo A. Hester
    +1 202 327 5764
    lilo.hester@ey.com
  • Allen Stenger
    +1 202 327 6289
    allen.stenger@ey.com
  • Lisa Findlay
    +1 202 327 7180
    lisa.findlay@ey.com

EYG no. CM4221