How Reform-Friendly Are U.S. Tax Treaties?

Abstract

This paper — prepared for a symposium held at Brooklyn Law School on October 23, 2015 on Reconsidering the Tax Treaty — addresses the treaty compatibility aspect of proposals for reforming the U.S. international tax system. Finding that a reform proposal is treaty compatible obviates the need for renegotiating or overriding existing U.S. treaties to implement the proposal if enacted. After establishing that a U.S. move to an exemption system would be treaty compatible despite the literal reading of Article 23 of the U.S. model income tax treaty as requiring a credit system, the paper argues that any system that is or can be expressed as an outright fixed or floating combination of exemption and credit is treaty compatible regardless of how it is actually labeled or expressed. The paper also algebraically demonstrates by employing a uniform method that most recent proposals for reforming the U.S. international tax system are, or can be expressed as, perfect fixed or floating combinations of exemption and credit and therefore are treaty compatible. The paper then explains why it is unlikely that taxpayers or treaty partners would object to the enactment of any such proposals even if they were not treaty compatible.

Keywords: international tax, tax treaties, treaty compatibility, reform proposals, double taxation, credit, exemption, deduction

JEL Classification: H25, K33, K34