Double tax avoidance agreements rarely generate controversy. Indeed, dozens of them are approved by legislatures around the world on an almost weekly basis with few people actually noticing. In the United States however, the passage of five double tax agreements has ground to a halt and is proving to be yet another source of friction between Republicans and Democrats in a highly partisan Congress. This feature looks at the reason why.
The pending DTAs and protocols include a proposed tax treaty with Chile, signed in 2010, the ratification of which was said to represent an important milestone in lowering tax barriers to US companies operating in Latin America; a proposed DTA amendment with Hungary, also signed in 2010, which would close a "treaty shopping" loophole in the existing treaty; and Swiss and Luxembourg DTA protocols, both signed in 2009, which would, among other measures, update the existing information exchange provisions with those countries.
It has been pointed out that, in particular, "the Swiss DTA protocol would specifically protect against 'fishing expeditions' by either country, while enabling the US Government to collect US tax revenues from hidden offshore accounts of US tax evaders." The Swiss protocol was ratified by Switzerland on March 5, 2012.
However, the passage of these tax treaties through Congress has been blocked since 2011, largely through the efforts of one man: Senator Rand Paul, the Kentucky Republican.
Paul has cited privacy concerns surrounding the exchange of US taxpayer information within both the tax treaties and under the Foreign Account Tax Compliance Act (FATCA).
Back on February 26, 2014, at a United States Senate Committee on Foreign Relations hearing on tax treaties that have yet to be approved by Congress, the Treasury Deputy Assistant Secretary (International Tax Affairs) Robert Stack gave assurances that the Administration is "strongly committed to ensuring that information provided to treaty partners will be strictly protected and treated as confidential."
Stack pointed out to the Committee that "one of the critical principles under today's existing international standards for information exchange upon request is that the country receiving information must ensure that exchanged information is kept confidential and only used for legitimate tax administration purposes."
"Before entering into an agreement," he added, "Treasury and the IRS must be satisfied that the foreign jurisdiction has the necessary legal safeguards in place to protect exchanged information and that adequate penalties apply to any breach of that confidentiality. Even if an information exchange agreement is in effect, the IRS will not exchange information with a country if the IRS determines that the country is not complying with its obligations under the agreement to protect the confidentiality of information."
In addition, he concluded: "The IRS will not exchange any return information with a country that does not impose tax on the income being reported, because the information could not be used for the enforcement of taxes laws within that country."
Stack also emphasized that, in establishing the US's negotiating priorities, Treasury's primary objective is the conclusion of tax treaties that will provide the greatest benefit to the US and to US taxpayers, and that it actively pursues opportunities to establish new tax treaty relationships with countries in which US businesses encounter unrelieved double taxation with respect to their investments.
However, seemingly not reassured by Stack’s testimony, Paul continued to express his view in a May 7, 2014 letter to Senate Majority Leader Harry Reid (D – Nevada), that the five treaties would flout the privacy rights of US individuals and US expats, and that these concerns outweigh any economic benefits that might accrue as a result of the treaties. In the letter, he confirmed that he will continue to block the passage of the tax treaties in question.
Previous treaties, he wrote, "were more focused on information specific to suspicions of tax fraud, while requiring that serious allegations of wrongdoing were grounded in evidence. It appears these treaties may end up being the tool that implements FATCA," which requires foreign financial institutions to "send the Internal Revenue Service (IRS) the private records of overseas American bank account holders – no questions asked, and no reasonable suspicion, due process, or court order required."
While reiterating that he does not "condone tax cheats," he continued that he cannot "support a law that punishes every American in pursuit of a few tax cheats, … (and he will) object to any unanimous consent request, motion, or waiver of any rule in relation to these treaties or any related measure."
An extract of Paul’s letter follows below:
I write to express my opposition to the five tax treaties approved in April 2014 by the Senate Foreign Relations Committee (Treaty Docs 112-1, 111-8, 111-7, 112-8, and 112-5).
The American right to privacy is perpetually being diminished. Our government is monitoring our email and cell phones, and they’re increasingly monitoring our bank account records –among the most private of an individual’s possessions. An individual’s bank account is the epitome of who they are as a private citizen; a bank account reveals where someone is shopping, what foods they like, the medicines they’re taking, the doctors they’re visiting, and the places they’re traveling. At the very least, every American – whether at home or abroad – deserves to have their Fourth Amendment rights protected.
Previous tax treaties were more focused on information specific to suspicions of tax fraud while requiring that serious allegations of tax wrongdoing were grounded in evidence. However, these new bulk collection treaties demand Americans’ records under a vague standard that allows the government to access personal financial information that “may be relevant” through information exchanges between the U.S. and foreign governments – a standard extended to other governments, as well. This new, much lower and ambiguous threshold allows the government to access bank records for hardly any reason at all.
It also appears that these treaties may end up being the tool that implements a domestic law known as the Foreign Accounts Tax Compliance Act, or FATCA. In short, this law punishes every single overseas financial institution with a 30 percent withholding tax unless they send the IRS the private records of overseas American bank holders – no questions asked, and no reasonable suspicion, due process, or court order required. This law has forced many foreign banks to simply deny services to Americans rather than deal with the burdens and costs of compliance with FATCA, thus impeding foreign investment and risking economic harm.
To be clear, I certainly do not condone tax cheats, but I can’t support a law that endangers regular foreign investment and punishes every American in pursuit of a few tax cheats. Most importantly, I cannot support a bulk collection tax treaty that has complete disregard for the important protections provided to every American by the Fourth Amendment.
Accordingly, I will object to any unanimous consent request, motion, or waiver of any rule in relation to these treaties or any related measure. Thank you for protecting my rights in regards to this matter.
In her testimony before the Senate Foreign Relations Committee in February 2014, Nancy L. McLernon, President and CEO of the Organization for International Investment, pointed out that failure to approve agreements in an expeditious manner has a number of negative consequences for the United States economically.
“The failure of the Senate to ratify many of these agreements in the past few years has slowed the progress on tax treaties with other countries … (and) the lingering ratification process also scares away potential new investment from firms, based in proposed treaty countries,” she warned.
During the same hearing, William Reinsch, from the National Foreign Trade Council (NFTC) concurred, noting that, "if US enterprises cannot enjoy the reduced foreign withholding rates offered by a tax treaty, non-creditable high levels of foreign withholding tax leave them at a competitive disadvantage relative to traders and investors from other countries that do enjoy the treaty benefits."
"If US businesses are going to maintain a competitive position around the world, treaty policy should prevent multiple or excessive levels of foreign tax on cross border investments, particularly if their foreign competitors already enjoy that advantage," he added.
The NFTC has since emphasized that adoption of these DTAs “will ensure US competitiveness abroad and foreign direct investment into the US”, and that the tax treaties are critical to the US business community. A letter co-signed by a number of prominent US business organisation, including the Business Roundtable, Information Technology Industry Council, National Association of Manufacturers, Organization for International Investment, US Chamber of Commerce and United States Council for International Business says:
"For over eighty years, DTAs have played a critical role in fostering US bilateral trade and investment while protecting US businesses, large and small, from double taxation of the income they earn from selling goods and services in foreign markets. Tax treaties do so primarily by reducing foreign withholding taxes and otherwise restricting the ability of the foreign treaty partner to tax the income of US taxpayers."
"On a reciprocal basis," they add, "DTAs reduce US withholding taxes to encourage foreign companies to invest in the US. Tax treaties help the US economy by allowing US companies to more efficiently conduct their businesses abroad and by making the US more hospitable to foreign investment, which creates and sustains millions of American jobs."
In addition, the letter confirmed that "DTAs contain administrative procedures for US taxpayers, treaty-partner taxpayers, and the US and foreign taxing authorities themselves to resolve disagreements and to assist in the enforcement of the two countries' tax laws. In these and other ways, the US network of over sixty bilateral treaties plays a significant role in advancing the economic interests of the US in the global economy."
The letter also pointed out that DTAs and protocols such as these have routinely been approved by unanimous consent, and that they have already been reported out of the Senate Foreign Relations Committee without amendment or reservation.
On May 22, Paul objected to a request by Senate Foreign Relations Committee Chairman Bob Menendez (D – New Jersey) for a unanimous Senate vote to ratify the pending protocol to the tax treaty with Switzerland.
The Swiss protocol, which was originally negotiated in September 2009, would amend the existing 1996 double taxation agreement. It was sent to the Senate by President Barack Obama in 2011, and has been approved by the Foreign Relations Committee as part of the United States' domestic ratification procedures.
It has been said that the protocol would make it more difficult for Switzerland to refuse requests from the Internal Revenue Service (IRS) for tax information concerning the US customers of Swiss banks. However, Paul maintains that the protocol is too sweeping.
The Senate Foreign Relations Committee on June 19 reviewed a new bilateral income tax treaty between the US and Poland, which would replace the existing tax treaty that was signed in 1974, and also an amendment to the income tax treaty signed in 1990 with Spain. Ratification by the committee is not expected until-mid July, according to a staff member.
The committee's vote may be temporarily moot, however, due to Rand Paul’s opposition. Senate Foreign Relations Committee Chairman Robert Menendez said bringing each treaty to the Senate floor individually for full debate – as opposed to unanimous consent – is unlikely in 2014, due to "the time frame left before the Senate [has] to deal with the appropriation process."
"It is going to be very difficult to get time on the Senate floor to go through an elaborate process of a debate, where I'm sure virtually no one will come down to the floor to debate the treaties because there will be almost unanimity of opinion," said Menendez.
Menendez added that his committee has expended significant effort in recent months to obtain Senate confirmation of pending income tax treaties and protocols. In February, Senator Benjamin Cardin (D - Maryland) chaired a hearing together with Senator Mike Barrasso (R - Wyoming) on income tax treaties and protocols with Switzerland, Hungary, Luxembourg, Chile, and the Organisation for Economic Co-operation and Development. The committee approved the five treaties on April 1.
Menendez continued: "Over the last month, senators Cardin, Levin, and I have, on separate occasions, requested unanimous consent for the Swiss and Chile treaties."
"Traditionally tax treaties have enjoyed strong bipartisan support, and I'll continue to urge my colleagues in the Senate to ratify these crucial components of the United States trade and tax policy," he concluded.
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