This letter to the Department of the Treasury provides suggestions for future treaty negotiations and possible renegotiation priorities. It is the result of a member survey. The letter recommends treaties with Brazil, Singapore, Argentina, Chile, and Costa Rica, as well as Malaysia and Hong Kong. Colombia, Uruguay, the Dominican Republic, and Ecuador were also noted. The letter also suggests U.S. treaty renegotiations with the following countries: Canada, Japan, the Philippines, and the Netherlands. The letter states that the AICPA strongly supports the zero withholding rate on dividends in the new proposed U.S.-U.K. Treaty and the proposed protocol with Australia. The letter urges the Department to consider adopting the zero rate as a general U.S. treaty policy and broadening the ownership requirements.

Download Treaty Survey Results

December 16, 2002

The Honorable Pamela F. Olson
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Room 1330
Washington, D.C. 20220
Fax: (202) 622-0605

Ms. Barbara Angus
International Tax Counsel
Department of the Treasury
1500 Pennsylvania Avenue, NW
Room 1000 MT
Washington, D.C. 20220
Fax: (202) 622-0646

Re: Suggestions for Future Treaty Negotiations and Possible Renegotiations

Dear Ms. Olson and Ms. Angus:

The American Institute of Certified Public Accountants (AICPA) is pleased to provide you with the following suggestions for future treaty negotiations and renegotiations of existing treaties based on an informal survey of the AICPA's membership conducted this past summer and fall. Members interested in international tax were polled to identify the countries with which income tax treaty negotiations should be initiated or reinitiated. Respondents also commented on which treaties in force should be renegotiated.

Brazil was most frequently cited as the country with which a treaty is needed. Brazil is the largest economy in South America and a major trading partner of the United States. For historical reasons, Brazil's tax regime differs significantly from most countries' tax regimes; for example, it is the largest country with a non-OECD transfer-pricing method. As a result, U.S. companies with affiliates in Brazil are subject to two incompatible transfer-pricing regimes. Thus, the risk of double taxation is extremely high, and no mitigating competent authority mechanism exists to resolve these conflicts.

The next most identified country was Singapore. With its stable government, and favorable currency rules, labor laws, and taxation regimes, Singapore is an attractive site for regional headquarters, treasury centers, and manufacturing.

Argentina was named by a significant number of responding members. We believe this reflects the size of the country and its economy. Argentina has transformed its taxation regime to encompass the OECD transfer-pricing methodology and has replaced its territorial taxation regime. It is a major trading partner of the United States. U.S. investors are understandably concerned about the state of the economy and their ability to repatriate cash. The lack of a treaty further inhibits U.S. investment in the country.

Chile and Costa Rica were also mentioned, albeit by far fewer members. Chile has been extremely active in treaty negotiations, has a vibrant economy, is a significant exporter to the United States, and is looking outward to the rest of the world. A tax treaty with the U.S. would be timely, and would provide U.S. companies the same benefits now realized by Canadian and Mexican companies. Many U.S. multinationals use Costa Rica as a local processing center due to its low tax rate, low costs, and political stability. It makes an excellent Central American center of operations. Because Costa Rica has no treaties, a treaty with the U.S. would give U.S. companies an advantage over competitors from other nations.

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Treasury should also consider undertaking treaty negotiations with Malaysia because many high technology companies have substantial investments and manufacturing operations in Malaysia through joint ventures and foreign subsidiaries.

Members also mentioned Hong Kong as in need of a tax treaty; we understand that Hong Kong is considering entering into tax treaty negotiations. Members also mentioned Columbia, Uruguay, the Dominican Republic, and Ecuador as possible treaty partners.

Additionally, our members commented on several existing treaties, as detailed below. 

• The U.S.-Canada Treaty should be renegotiated for several reasons. First, withholding rates under the existing treaty remain too high. Next, the treaty does not apply to fiscally transparent entities, leaving check-the-box entities and limited liability companies without treaty protection. Finally, the treaty does not address the 15 percent withholding on payments made to nonresidents for services provided in Canada. This provision creates onerous Canadian filing requirements for U.S. service businesses. If such entities are not subject to tax, or are subject to tax at a rate of less than 15 percent, they must either file a Canadian return to reclaim the excess withholding, or prior to receiving payment, apply to Revenue Canada for a waiver that will reduce or eliminate the withholding tax.

• Members commented that the U.S.-Japan Treaty is outdated and should be replaced. The high withholding rates, in particular, are burdensome for U.S. taxpayers. In addition, an issue exists as to amounts paid to related parties as royalties. Under Japanese law, such royalties can be recharacterized as excessive and, therefore, nondeductible, but still subject to withholding at the full statutory rate. In such a situation, the lower, treaty rate for (non-deductible) dividends would be unavailable.

• The U.S.-Philippines Treaty language regarding royalty withholding tax is confusing. The treaty should clearly specify one withholding tax rate and avoid reference to the most-favored-nation rates.

• The "derivative benefits" provision in the Limitation on Benefits Article of the U.S.-Netherlands Treaty should be modernized to be consistent with more recent treaties with other E.U. members (i.e., the 30-percent Dutch ownership requirement should be eliminated). Several other treaties should be clarified to reflect that U.S. ownership qualifies under the derivative benefits provision.
  
• The AICPA strongly supports the zero withholding rate on dividends in the new proposed U.S.-U.K. Treaty and the proposed protocol with Australia. Treasury should consider adopting this zero rate as a general U.S. treaty policy and broadening the ownership requirements. 

We would be pleased to discuss these matters with you in more detail. Please contact us if you have any questions or if we can be of assistance to you. I can be reached at (202) 414-0705; or you may contact Andrew Mattson, Chair, AICPA International Tax Technical Resource Panel, at (408) 369-2566; or Eileen Sherr, AICPA Technical Manager, at (202) 434-9256.