July 15, 2019

Tax Treaties


Background: During the Obama administration, Treasury officials negotiated three new bilateral income tax treaties and a series of amendments (or “protocols”) to four existing bilateral income tax treaties and one multilateral agreement. All seven bilateral treaties and protocols were previously passed by the Foreign Relations Committee during the 115th Congress, but the full Senate did not act. Ratification has been delayed over taxpayer privacy concerns. Recently, the Foreign Relations Committee reported out the four protocols without any changes: updates to agreements with Spain, Switzerland, Japan, and Luxembourg. New treaties with Poland, Chile, and Hungary, as well as the multilateral agreement, are still pending in committee.


Floor Situation: On June 25, the Senate Foreign Relations Committee reported out updates to bilateral income tax treaties with Spain, Switzerland, Japan, and Luxembourg. The protocols were approved by voice vote after defeating an amendment offered to the protocol with Spain. All four treaty resolutions were approved with the support of the committee chairman, Senator Risch, and ranking member, Senator Menendez. On July 11, cloture was filed on:

  1. Treaty Doc. 113-4, Protocol Amending the Tax Convention with Spain;

  2. Treaty Doc. 112-1, Protocol Amending the Tax Convention with Swiss Confederation;

  3. Treaty Doc. 114-1, Protocol Amending the Tax Convention with Japan; and

  4. Treaty Doc. 111-8, Protocol Amending the Tax Convention with Luxembourg.

The Senate is expected to consider these agreements on the floor this week. The affirmative vote of two-thirds of Senators present and voting is required for a treaty resolution to be approved.


Executive Summary: When a person or corporation residing in the United States earns income in a foreign country, a dispute may arise over which country has the authority to tax the income earned. To reduce the incidence of double taxation and prevent tax avoidance or evasion, countries often enter into bilateral tax treaties. These treaties spell out which jurisdiction has taxing authority in certain circumstances and facilitate the exchange of taxpayer information between jurisdictions when improprieties are evident.


The current protocols are several years old and in the intervening years, the U.S. and its treaty partners have enacted major changes to their domestic tax laws. The Foreign Relations Committee believes the proposed protocols are important to modernize the treaties to operate in the current tax environment.


The United States has bilateral income tax treaties with multiple countries. The foundation for these agreements is the U.S. Model Income Tax Convention. In general, it limits the right of a foreign country to tax income earned in that country by U.S. residents, includes language to facilitate exchange of taxpayer information, and prevents treaty “shopping” by third parties hoping to benefit from the two-nation agreement.

Countries with a large number of treaty partners are more attractive to foreign investment and are more competitive globally. According to a letter from the U.S. Chamber of Commerce to the committee, companies from the seven bilateral treaty countries have invested more than $1.2 trillion in all 50 states, and hundreds of thousands of jobs benefit directly or indirectly from this investment.

A second industry letter expressed concern over another failure to ratify:

[The] protracted period of ratification could send a signal, inadvertently, that the U.S. does not value the benefits of tax treaties, and that the expansion, modernization, and improvement of the U.S. bilateral treaty network is not a priority. Given the unilateral actions that many foreign governments are considering as a consequence of the issues raised in the OECD Base Erosion and Profits Shifting Process, this sends the wrong signal at the wrong time.

—      Business consortium letter to Chairman Risch, April 11, 2019

Under a tax treaty, the IRS and other taxing authorities can request information connected to disputes with the partner nation or to carry out provisions of the treaty. This information is protected by privacy requirements written into the tax treaties. Language in the U.S. Model Income Tax Convention of 2006 allows taxing authorities to request information that is “relevant” to settling the tax dispute. This standard is substantially similar to the “may be relevant” standard under U.S. domestic law (see 26 U.S.C. 7602(a)(1)). 


Spain (from the JCT explanatory pamphlet)

  1. Clarifies the scope of the treaty and its applicability to payments received from certain entities (Article I).

  2. Establishes rules for the appropriate standard for defining an otherwise undefined term used in the treaty (Article II).

  3. Includes provisions under which the U.S. and Spain generally agree not to tax business income from the source country unless the earnings are substantial enough to constitute a permanent establishment (Article III).

  4. Reduces withholding on dividends, interest, and royalty income (Articles IV, V, and VI).

  5. Permits source country taxation of capital gains on the sale of real property (FIRPTA) (Article VII).

  6. Adopts the anti-treaty shopping provisions of the U.S. model treaty convention (Article IX).

  7. Stipulates that income earned by pensions may only be taxed when distributed (Article X).

  8. Adopts mandatory arbitration procedures for certain cases when disputes cannot be resolved within a specific time frame (Article XII).

  9. Adopts language pertaining to taxpayer information exchange and tax administration assistance that is more consistent with the U.S. Model Income Tax Convention. Authorizes collection assistance to ensure that the reduced withholding rates and exemptions in the treaty are not extended to people not entitled to such benefits (Article XIII).

Switzerland (from the JCT explanatory pamphlet)

  1. Prohibits source-country taxation of dividends paid to a pension plan or individual retirement savings vehicle that is set up in and owned by a resident of the other country (Article I).

  2. Adopts mandatory arbitration procedures for certain cases when disputes cannot be resolved within a specific time frame (Article II).

  3. Adopts language pertaining to information exchange that largely comports with the OECD model convention but with important exceptions (Articles III-IV):

    1. The two countries agree to exchange taxpayer information that “may be relevant” regarding taxes imposed by the treaty or subject to the treaty (i.e., no “fishing expeditions”).

    2. Information about third-party persons (neither U.S. nor Swiss) may be shared between tax administrators provided the matter concerns taxes imposed by the treaty or subject to the treaty.

    3. Prohibits bank secrecy laws from denying a request to disclose taxpayer information that “may be relevant.”

Japan (from the JCT explanatory pamphlet)

  1. Denies treaty benefits to companies that claim dual residency in Japan and the U.S. (Article II).

  2. Reduces source-country tax on dividends (Article III).

  3. Reduces source-country tax on certain interest payments (Article IV).

  4. Revises the definition of real property to conform more closely to the U.S. Model Convention (Article V).

  5. Repeals an outdated treaty provision pertaining to certain tax benefits provided to researchers and teachers from one country who are temporarily present in the other. This change is consistent with modern treaty policy of both the U.S. and Japan (Article VII).

  6. Revises rules pertaining to foreign tax credits to conform with Japan’s recent adoption of a participation exemption system (Article IX).

  7. Establishes mandatory arbitration procedures to assist in dispute resolution (Article XI).

  8. Modernizes the exchange of taxpayer information provisions to conform to recent standards of transparency (Article XII).

  9. Expands the scope of mutual collection assistance (Article XIII)

Luxembourg (from the JCT explanatory pamphlet)

  1. Updates information exchange provisions to more closely conform with the U.S. Model Income Tax Convention. Two competent authorities will exchange taxpayer information as “may be relevant” in carrying out domestic laws of the U.S. and Luxembourg concerning taxes that are imposed at the national level and are not contrary to the treaty (Article I).


During committee markup, the Senate Foreign Relations Committee rejected an amendment related to taxpayer privacy and information sharing. Similar amendments may be offered to each of the protocols on the floor. These changes would add a reservation stipulating that the U.S. shall not “request, accept, or share information unless a reasonable basis for believing” that a taxpayer may not have complied with the domestic tax laws of the partner country. According to the majority staff of the Foreign Relations Committee, this new standard is inconsistent with bilateral income tax treaties currently in force and, if adopted, would create a new and inconsistent standard.

A tax treaty is amendable on the floor by amending the resolution of consent to ratification. However, material changes to the underlying rights and obligations of the partner nation would have to be accepted by both the president of the United States and the partner nation, in the exact form, for ratification to occur. One or both parties could reject the Senate’s amendment, potentially re-opening negotiations and further delaying implementation.



At the time of this publication, the administration had not issued a Statement of Administration Policy.


The Congressional Budget Office does not score tax treaties or protocols.