United States: Revised US Model Income Tax Convention

On 17 February 2016, the US Treasury Department issued a newly revised US Model Income Tax Convention (the "2016 Model") and an accompanying preamble to the 2016 Model. The Treasury Department also issued a related Press Release on the same day.

The Treasury Department states in the Press Release that many of the 2016 Model updates reflect technical improvements developed in the context of bilateral tax treaty negotiations and do not represent substantive changes to the prior model.

The Treasury Department further states that the 2016 Model includes a number of new provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Such provisions include the following:
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• provisions that deny reduced withholding taxes on payments of highly mobile income (e.g. royalties and interest) that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime;
• a new article that requires the treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty's original balance of negotiated benefits and the need for the treaty to reduce double taxation;
• measures to reduce the tax benefits of corporate inversions, including the denial of reduced withholding taxes on US source payments made by companies that engage in inversions to related foreign persons; and
• rules that require that disputes between tax authorities regarding the application of tax treaties be resolved through mandatory binding arbitration, including the "last best offer" approach.

The Treasury Department also states that the 2016 Model reflects comments that have been received in response to the proposed model treaty provisions that were released on 20 May 2015 and that those comments resulted in a number of modifications to the proposed model treaty provisions. The Treasury Department notes that it plans to release a detailed technical explanation of the 2016 Model this spring.