United States Income Tax Treaties For The Defense

1. Introduction

It seems strange that in 2026 United States income tax treaties – or more formally, United States conventions for the avoidance of double taxation of income – should stand in need of a defense. These are important agreements of a type that has been a staple of US tax policy since the 1930s. They govern the tax treatment of thousands of transactions on a regular basis. No-one overtly attacks them. No-one, at least no prominent voice in the United States, suggests they should be terminated or that the U.S. tax treaty program should be abandoned.

And yet, U.S. tax treaties have become stale. Only one complete treaty – with Chile – has entered into effect since 2010. A U.S. Model treaty was last issued in 2016. The treaties do not capture the imagination, or the attention, or an audience similar to those that hang on every word regarding the OECD’s pillars or the new international world tax order that the United Nations seems to have in mind. Congress usually forgets that treaties exist. Courts and commen- tators have difficulty coming to terms with the facts that U.S. treaties are the Supreme Law of the Land and that they are equal in status and authority to federal statutes.

Admittedly, the treaties are confusing. They operate in parallel to statutory law but with a variety of crossover points, where they refer to the statute or the statute refers to them. They obviously can override statutory law, but it is equally clear in the United States that statutory law can override and contradict the treaties.¹ They do not pass through anything resembling a normal legislation process. They employ unfamiliar – i.e., non statutory – language. They are difficult to amend. But it is also unclear when they can be altered without a formal amendment (protocol). Tax professionals inured to the ways of Congress and familiar with the relevance and interpretation of legislative history find it difficult to wrestle with treaty history, including tech- nical explanations, hearings of the Senate Foreign Relations Committee, competent authority agreements, and the testimony of treaty negotiators. It is almost as though U.S. tax treaties constitute an entirely separate, standalone, set of legal rules.²

Some foreign commentators have criticized tax treaties as revenue drains, surrenders to multinational corporations, gifts to treaty partners. And U.S. tax treaties do sometimes contain mistakes, which the ever alert tax bar is quick to identify and monetize. Furthermore, the U.S. treaty program has been paralyzed – or nearly so – by the whims of U.S. Senator Rand Paul, who has made it difficult to secure the advice and consent of the Senate that is required for a treaty to be ratified and pass into effect.³

Finally, the United States Model Income Tax Convention derives in large part from The Model Convention on Income and on Capital of the Organisation for Economic Cooperation and Development and may implicitly cede too much interpretive authority to that Paris-based international organization. It is true that U.S. tax officials have expended great effort in adjusting and supplementing the OECD Model to produce a different document that is more suited to the specific situation of the United States. But the staff in Paris who keep the OECD flame retain the ability to adjust OECD Commentary on core tax treaty text and thus potentially to effect important changes in the meaning of U.S. treaties, including treaties that have been in place for years.

What, it may be asked, can be said in defense of the treaties, given the many and various grounds for disparagement?

The purpose of the treaties

Let us begin with the purpose of U.S. tax treaties, which can be broken down into five distinct strands: mitigating international double taxation, impeding international tax evasion, reducing taxation at source by each of the treaty partners, making a positive statement regarding the U.S. economic relationship with its treaty partners, and providing a mechanism for resolving inter- national tax disputes. To this list might be added the general goal of promoting international trade and commerce, although this may be more of a summation of points enumerated above than a separate and distinct purpose.⁴

Tax treaties are not indispensable for the achievement of most of these purposes. The highly developed U.S. statutory rules for avoiding double taxation may not be entirely equal to the task of dealing with the tax laws of nearly two hundred foreign jurisdictions, but they come close – and they surely could be massaged to come closer. And although treaty provisions still have much in their favor when it comes to obtaining information for use in particular cases, the infor- mation exchange article in U.S. treaties has been superseded to a large extent by a panoply of statutory rules and a network of international agreements that are not treaties.⁵

Nor does the goal of reciprocally reducing taxation at source require a nudge from the trea- ties. Most countries have by now reconciled to their satisfaction the delicate balance between reducing taxation of foreign persons with a view to encouraging investment, on the one hand, and gaining revenue from persons who do not participate directly in the local political process, on the other. Countries are perfectly capable of calibrating that balance, or what they perceive to be that balance, and arriving at a resolution that suits their own circumstances, without the need to discuss the topic with a treaty partner. As for the advancement of political goals, it is surely possible to bestow an economic seal of approval on particular countries by means other than a tax treaty.

One of the purposes of U.S. tax treaties seems, however, to be different. This purpose cannot be so easily replaced or displaced by an act of Congress or by any other tool available to the United States acting on its own. The indispensable purpose lies in the dispute-resolution mechanism embodied in the Mutual Agreement Procedure of all U.S. tax treaties. If the treaties were to disappear, there would be no substitute, not even a partial and limited substitute, for the MAP. No international tax tribunal exists. The likelihood of one coming into existence in the foreseeable future is slim. The treaties create a means for treaty partners to meet in a non-public forum, with no fanfare, to discuss individual cases (and, if need be, issues of general application) with a view to serving the other purposes of the treaties.

The MAP has obviously grown in importance as the world of commerce has shrunk.

Without the treaties, U.S. taxpayers engaged in tax disputes with foreign countries would be entirely in the hands of the domestic dispute-resolution tools available in those countries or, in some cases, the United States. In some jurisdictions, these tools work well. In others, the four horsemen of nationalism, xenophobia, corruption and incompetence greatly reduce the value of the local dispute-resolution apparatus. The treaties can, and in many cases will, do better.

The point is best appreciated in a historical context. The treaties were originally intended to combat the perceived evil of double taxation, with both the country of source (of income) and the country of residence (of the taxpayer) legitimately asserting jurisdiction to tax. To that original purpose was added a purpose of preventing fiscal evasion, which might be effectuated through an article permitting the exchange of information when the statute did not allow any such exchange. The goal of reducing taxation at source stems from the widespread practice of countries (including the United States) of asserting taxation at source at a level they do not really intend to impose, with a view to trading down reciprocally with other countries. The goal of expressing our economic approval of certain countries seems to have been a U.S. invention, born of the perception that tax treaties have real consequences and therefore attract public notice.

These purposes have faded in importance over the years, at least in the United States.⁶ Awareness of international taxation and general sophistication in regard to international tax matters have grown exponentially throughout the world. If it did nothing else, the OECD’s BEPS project, commencing in 2014, brought the subject of international taxation into the mainstream press. Countries no longer assert taxation without some attention paid to the prospect of double taxation. They regularly exchange tax information under the authority of international agree- ments negotiated for that specific purpose or of multilateral compacts calling for cross-border information exchange. Most of them do not impose an excessively high tax on nonresidents just because they can.

None of these factors of obsolescence that have tended to undermine other purposes of U.S. tax treaties have seriously affected – or can seriously affect – the role of treaties in establishing a means of resolving cross-border tax disputes. Alternatives to the MAP range from unappealing to bleak. One that has achieved a degree of notoriety, the bilateral investment treaty, involves a process that is ridiculously lengthy, inordinately expensive, and susceptible to corruption. It cannot possibly substitute for the MAP.

3. Mandatory arbitration

It follows that the MAP, this irreplaceable contribution of the treaties, deserves recognition and support. If possible, it should be improved. For that reason, the United States has justifiably led the world in development of an inexpensive and efficient means of strengthening the MAP through mandatory arbitration. There is considerable opposition to mandatory arbitration, but it is not nearly so much of a threat as that opposition contends. Rather, it represents a workable means of ensuring that the promise of the treaties will be fulfilled in individual cases and there will be a resolution of cross-border disputes that the treaty partners are incapable of resolving on their own.

The opposition to mandatory arbitration stems from (at least) two quarters. On the one hand, there is the lawyerly view that every means of resolving disputes should be or become a judicial or quasi-judicial matter. Those who hold this view say what is needed is evidence, argument, written decisions, the creation of precedent. From a U.S. perspective, this is nonsense. The United States embraced mandatory arbitration in tax treaties in 2004, when provisions requiring such arbitration were first adopted in U.S. treaties with Germany and Belgium (followed the next year by similar provisions in treaties with France and Canada). Today the United States has in force seven tax treaties requiring mandatory arbitration. Twenty-some years of experience has amply demonstrated that mandatory arbitration in a tax treaty tends to encourage compromise. The availability of mandatory arbitration in a MAP actually renders arbitration unnecessary in most situations.

The other attack on mandatory arbitration comes from countries ostensibly concerned about sovereignty. Permitting a third party – and there is generally a third party in the presence of the chairperson of an arbitration panel, chosen from a country other than the treaty partners to control or at least influence a decision that binds a country (but not necessarily the taxpayer) is viewed by some countries as a trespass upon their inherent rights. Countries raising this sort of issue often point to their terrible experience with arbitrations under bilateral invest- ment treaties – and to cost considerations, capacity concerns, and other practical issues.

In my view, the positions of these countries are just as nonsensical as seeking to judicialize the MAP. Each country that enters into a tax treaty has, in essence, surrendered a piece of its sovereignty. It has chosen to do that for the sake of making clear to the world (i.e., to potential investors and its own taxpayers) that it is prepared to accept compromise solutions that will address the problem of double taxation and thus benefit taxpayers. This commitment to avoid double taxation, if necessary by accepting solutions that diverge from the rules of domestic law, reflects a trade-off that the country has found worthwhile. It is unfathomable to me why a country would accept this trade-off and yet balk at the opportunity to make it work.

If the concern is corruption or something of that ilk, better to decline to enter into the treaty in the first place. There is no sensible argument for signing an agreement with another country to mitigate international double taxation while refusing to allow that agreement to mitigate international double taxation in the real world. Furthermore, the reference to bilateral invest- ment treaty arbitration is a red herring. There is no comparison whatever between a MAP arbi- tration and an arbitration under a BIT.⁷ The costs of a MAP arbitration are trivial. If capacity is an issue, the OECD or United Nations should stand ready to provide assistance.

Even putting mandatory arbitration aside, the benefits of the MAP are clear. Those benefits, in and of themselves, constitute a powerful argument in favor of U.S. tax treaties and reinforce- ment of the U.S. tax treaty program. In fact, it is conceivable to think of a tax treaty as only the MAP, with a list of subsidiary instructions to the competent authorities regarding how to conduct their negotiations. This dispute-resolution tool is simply indispensable, regardless of what the substantive rules of international taxation may be.

Footnotes

1 An important legal question is ‘when do statutory overrides of treaties occur’. This is a complex question that, together with a co-author, I have endeavored to address on several occasions. See H. David Rosenbloom, and Fadi Shaheen, Treaty Override: The False Conflict Between Whitney and Cook, Florida Tax Review: Vol. 24: No. 2, Article 1(2021); H. David Rosenbloom & Fadi Shaheen, The TCJA and the Treaties, 95 Tax Notes Int’l, 1057 (2019); H. David Rosenbloom and Fadi Shaheen, The BEAT and the Treaties, Tax Notes Int’l, 1 (2018).

2 This, of course, is the case.

3 Precisely why Senator Paul has inveighed against tax treaties is something of a mystery. He seems to object to treaty provisions governing information exchange, though whether his objection is to giving, or receiving, information is not clear.

4 The purposes of U.S. tax treaties are distinct from the hallmarks of U.S. treaty policy – those aspects that distinguish U.S. tax treaties from the treaties of other countries. The United States follows a policy of favor- ing the country of residence over the country of source, at least in its treaties with developed countries, and this leads to a U.S. policy of opposing the practice of treaty shopping and aiming to protect the integrity of each treaty, taking a hostile attitude toward taxpayer efforts to ‘borrow’ treaties of countries with which they have no clear nexus. A further distinctly U.S. tax treaty policy lies in the U.S. insistence on maintaining the right to tax U.S. persons, individuals and corporations, and to maintain tight control over the circum- stances in which that right is limited or surrendered.

5 There is, of course, an interesting question why these international agreements are not treaties, and thus not subject to the constitutional process required of treaties.

6 The role and status of tax treaties in other countries may be a very different matter.

7 See generally Rosenbloom, Reflections on the “A” Word, in: Hans Mooij (ed.), International Tax Disputes: Arbitration, Mediation, and Dispute Management (Edward Elgar pub., 2024), at p. 63.

Originally published by Decem Lustra Essays and Personal Reflections in Honor of Kees van Raad