The U.S. Senate approved updates of tax treaties with Switzerland, Japan and Luxembourg that had been stalled for years over taxpayer privacy concerns. The updates approved a day after ratifying a similar update of a treaty with Spain.
The treaties facilitate cross-border trade and investment by creating certainty for investors when they are making decisions about setting up new offices and factories in another country or deciding to build a manufacturing base in the U.S. Changes to the treaties are intended to prevent companies from facing double taxation if they do business in the United States and abroad, and to prevent taxpayers from avoiding taxes.
The treaties and supplemental protocols with those four countries reduce withholding taxes on transactions between U.S. companies and foreign corporations. The treaties spell out which country has the authority to tax which income to avoid having individual and corporate taxpayers from paying taxes both in the country where they are working and their home country.
The three other tax treaty agreements with Hungary, Chile, and Poland are still awaiting ratification votes while the business groups urged the Senate to take action on the treaties with these countries.
The prominent content of the ratified protocols is exchange of information (EOI). Prior to the ratification, the US senator objected the existence of EOI provision in the protocols that facilitates the exchange between tax authorities of financial account information. The senator argued, it would fail to protect the privacy rights of U.S. taxpayers. Due to these concerns, US has held up tax treaties in the Senate since 2010.
After the long debates, finally US ratified the long awaited protocols which include the exchange of information provision. Under the tax treaties, tax authorities (the IRS) can request information connected to disputes with the partner country in order to evaluate facts that are relevant to the case or to carry out other treaty provisions. The requested information is protected by secrecy requirements embedded in the tax treaties.
In general, the process of requesting the information by one tax authority to another is what sets apart the bilateral treaties from the multilateral Protocol. It is very different from a privacy standpoint to have an automatic exchange of information with other governments under the Protocol rather than standard bilateral requests for information.
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