Environmental Lawyer BLog

The U.S. has one of the most extensive tax treaty networks of any country in the world. We currently have tax treaties in force with 66 countries, including nearly every country in Europe and nearly every major economy. But there is one major gap in the U.S. treaty network: of the 20 countries in Latin America (excluding Caribbean islands), the U.S. has treaties with only two: Mexico and Venezuela. Although it is likely that Columbia will conclude a tax treaty with the U.S. soon, efforts to extent the U.S treaty network southward have generally met with failure. Given the level of commerce between the U.S. and its southern neighbors, one would expect there to be tax treaties almost everywhere. What accounts for this failure?

The U.S. has a model treaty form that it uses as a basis for our treaty negotiations. The Organization for Economic Cooperation and Development (OECD), headquartered in Paris and dominated by wealthy nations, has its own model treaty which is similar to our model. Although these models have many useful rules, they focus on two areas: limiting local taxes on investment income and information sharing between governments. Many countries, especially less developed ones, do not view these rules as particularly beneficial.

One focus of tax treaties is the tax treatment of investments by residents of one treaty partner (the country of residence) in the other treaty partner (the country of source). These rules severely limit the ability of the source country to tax income of residents of the treaty partner. In some cases, the tax on certain types of income, such as dividends, interest or royalties, is eliminated entirely. Since taxpayers are typically taxed in their home countries on their worldwide income, these rules have the effect of shifting tax revenues from the source country to the country of residence. These rules work well where investment flows both ways, as for example between the U.S. and Canada, but they don't work well for the source country when investment is one-sided.

One would think that information-sharing rules would benefit both treaty partners, but there are also problems here. Most countries don't have a tax collector as sophisticated as the IRS or Revenue Canada and so aren't in a position to request information, respond to information requests, or utilize any information that may be provided. Information sharing is seen by some as compromising sovereignty, which can be a prickly political issue. Finally, the political and financial elite may not be anxious to make it easier for either the IRS or their local tax authority to figure out what they're doing with their wealth.

In recent months, there has been much focus at the OECD and elsewhere on tax information sharing as the U.S. and European countries try to crack down on international tax avoidance schemes. Many countries have (reluctantly) signed limited information sharing agreements, rather than full tax treaties, to avoid being put on an OECD "black list" and risk economic sanctions. Time will tell whether these limited agreements have any teeth.

The Obama administration has given no indication that it intends to change our treaty negotiation posture. With the exception of Columbia, mentioned above, and possibly Peru, our southern neighbors don't seem to have changed their anti-treaty views either. In particular, the giants, Brazil, Argentina and Chile, are unlikely to join the U.S, tax treaty network anytime soon. So us tax lawyers will continue to spend a lot of time on the phone and email with our colleagues in Sao Paulo, Buenos Aires and Santiago.

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