The TCJA and the Treaties
95 Tax Notes International 1057 (September 2019)
14 Pages Posted: 11 Oct 2019
Date Written: September 9, 2019
This article addresses the interaction of U.S. income tax treaties and certain changes made by the Tax Cuts and Jobs Act to the international provisions of the corporate income tax. The article makes four main points. First, it explains why the participation exemption, the global intangible low-taxed income (GILTI) regime, and the transition tax on deemed repatriations of deferred foreign earnings are compatible with provisions of U.S. treaties allowing for relief from international double taxation. Second, it explains why the disallowance of deductions for foreign related-party interest or royalty payments in hybrid transactions or with hybrid entities is compatible with treaty nondiscrimination provisions. Third, the article explains why the foreign-derived intangible income (FDII) regime, the (arguable) disallowance of a statutory foreign tax credit (FTC) with respect to hybrid dividends not benefiting from the participation exemption, and the repeal of IRC section 902 are inconsistent, but not in conflict, with U.S. treaty provisions on nondiscrimination and relief from double taxation, and therefore raise no treaty override questions. Finally, the article suggests that reconciling the inconsistencies means that: (1) U.S. permanent establishments of foreign corporations resident in treaty partner jurisdictions may claim a treaty-based FDII deduction; (2) a U.S. corporation may claim a treaty indirect FTC for both the U.S.-source portion of a dividend for which an FTC election is made and the foreign-source portion of a dividend not benefiting from the participation exemption by reason of failing to meet the one-year holding period requirement, provided the dividend is received from a foreign subsidiary that is resident in a treaty partner jurisdiction and at least 10 percent of the voting stock of that subsidiary is owned by the U.S. corporation; and (3) if there is no statutory FTC for a hybrid dividend and tiered hybrid dividend inclusion, a U.S. corporation may claim a treaty direct FTC for withholding tax paid to a treaty partner jurisdiction on a hybrid dividend received from a controlled foreign corporation or a treaty indirect FTC for income tax paid to a treaty partner jurisdiction by the receiving CFC in the transaction triggering the tiered hybrid dividend inclusion, provided at least 10 percent of the voting stock of the CFC is owned by the U.S. corporation.
Keywords: international tax, participation exemption, GILTI, transition tax, hybrid transactions, hybrid entities, FDII, income tax treaties, treaty override, treaty reconciliation, nondiscrimination, foreign tax credit
JEL Classification: K33, K34
Suggested Citation: Suggested Citation