Kill-Switches in the New U.S. Model Tax Treaty

39 Pages Posted: 18 May 2016 Last revised: 19 Jun 2016

Allison Christians

McGill University - Faculty of Law

Alexander Ezenagu

McGill University, Faculty of Law, Students

Date Written: May 15, 2016

Abstract

The new US model income tax treaty contains an unusual addition: mechanisms for the parties to unilaterally override the negotiated treaty rates in specified circumstances. Previewed last year in proposed form — a first for Treasury — these new mechanisms work as kill-switches, partially terminating the treaty as to one or both treaty partners. The idea is to forestall a more problematic outcome, such as an enduring breach of one of the parties’ expectations, or the opposite, a complete termination of all the treaty terms in the face of such a breach. Yet embedding a kill-switch in a treaty creates distinct legal, procedural, and political pressures in the tax-treaty relationship that implicate treaty negotiation, ratification, interpretation, and dispute resolution. Kill-switches also communicate a defensive tenor in the tax treaty relationships among many countries. This Article analyzes the new kill-switch provisions and concludes that their introduction in the U.S. Model reflects the steady deterioration of tax treaties from essentially diplomatic documents premised on the good faith of the parties to detailed contracts drafted in anticipation of the opposite.

Keywords: taxation, treaties, international law, tax policy, treaty disputes

JEL Classification: E62, H2, K34, F02, F23, F42, H87, K33, D78

Suggested Citation

Christians, Allison and Ezenagu, Alexander, Kill-Switches in the New U.S. Model Tax Treaty (May 15, 2016). Brooklyn Journal of International Law, Vol. 41, 2016. Available at SSRN: https://ssrn.com/abstract=2780091 or http://dx.doi.org/10.2139/ssrn.2780091

Allison Christians (Contact Author)

McGill University - Faculty of Law ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Alexander Ezenagu

McGill University, Faculty of Law, Students ( email )

Montréal, Quebec
Canada

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