International Tax Advisory: America’s Next Tax Model

The Treasury recently released a revised U.S. Model Income Tax Convention (the “2016 Model”), the U.S. starting point for bilateral treaty negotiation, last updated a decade ago. In May 2015, the Treasury circulated several proposed changes in draft form. Those proposals generally survive in the 2016 Model, although the Treasury has made a number of modifications in response to comments on the draft provisions. (For more background on the 2015 proposed changes, see our previous advisory, “U.S. Treasury Proposes Changes to U.S. Model Income Tax Treaty.”) In addition to updated rules addressing “special tax regimes,” subsequent changes in law and inverted companies, the 2016 Model makes significant changes to Article 22 (Limitation on Benefits, or LOB) and adopts mandatory binding arbitration to resolve certain disputes between the tax authorities.

The Treasury’s continued focus on international tax evasion, particularly through anti-treaty abuse measures, is clear. Less clear is whether the 2016 Model’s provisions will find favor with treaty partners. The new model treaty has received praise for including a mandatory binding arbitration provision and reducing the complexity and scope of certain provisions proposed last May, but the 2016 Model is still fairly complicated. While policy concerns of the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit-shifting (BEPS) initiative pervade the model treaty, many fear that the 2016 Model’s intricacy (particularly LOB) may prevent its provisions from meaningfully informing the development of the multilateral instrument recommended by the BEPS initiative (much less having the U.S. provisions adopted).