David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: protocol progress. After nearly a decade, the U.S. Senate is making progress on ratifying updates to the tax treaty network. Here to talk to us about why this is taken so long and why things have changed now are Tax Notes Today reporters Kristen Parillo and Jad Chamseddine. Kristen, Jad, welcome back to the podcast
Kristen Parillo: Thanks for having me
Jad Chamseddine: Thank you.
David Stewart: Kristen, why don't we start off with a bit of background on what these tax treaties actually do?
Kristen Parillo: Well, the main point of having a tax treaty is to reduce double taxation for people and companies that reside in one country and invest or do business in another country. In a typical bilateral tax treaty, the two countries decide who have taxing rights over the income that's generated in their country. They generally follow either the OECD model treaty, which is what's used by the so-called rich countries, or they follow the UN model which gives more taxing rights to developing countries. Both versions have provisions covering how various categories of income will be taxed, who qualifies for treaty benefits, how the tax authority should handle any disputes and how they can exchange information needed to enforce their own tax laws.
David Stewart: Alright, so turning back to the U.S. itself. When's the last time a treaty or an update to a treaty was ratified?
Kristen Parillo: The last time was July 2010 and it was New Zealand and Malta.
David Stewart: So why has it been so long?
Kristen Parillo: Well, it's been a strange situation. I mean, usually there isn't much controversy around ratifying tax treaties, but Sen. Rand Paul, R-Ky., put a hold on them at the end of 2011, which is the year he joined the Senate. He says he doesn't like the information exchange provisions that are included in all U.S. and basically every tax treaty that anyone negotiates. He thinks the reasonably foreseeable standard for sharing taxpayer information with the treaty partner is too vague and raises privacy and due process concerns.
David Stewart: So how is it that one senator is preventing all these treaties from making progress?
Kristen Parillo: Well, normally the Senate approves tax treaties by unanimous consent, but Sen. Paul has said he would object to that process if he didn't get floor time to air his concerns over the information exchange provisions. And because floor time, as everyone knows, is a precious commodity, the Senate leadership until now just didn't prioritize it. So, these treaties have basically been in limbo for the last eight years.
David Stewart: Jad, what got the process moving this time?
Jad Chamseddine: Well, it emerged at the beginning of the year that Rand Paul was having discussions with Treasury to see if they can find a solution to the problem.
David Stewart: How did those discussions go?
Jad Chamseddine: Not well. I caught up with Sen. Paul and he told me that negotiations broke down with Treasury and at that point, I figured that treaties would be again going nowhere. But I spoke with a few sources afterwards and they told me that the majority leader, Mitch McConnell, was finally ready to put them on the floor and ratify them.
David Stewart: If there were seven treaties and protocols put on hold, how come only four made it to the floor?
Jad Chamseddine: Well, Treasury told lawmakers that some issues with one of the new international tax provisions of the Tax Cuts and Jobs Act in the treaties with Poland, Hungary, and Chile. The treaties with Poland and Hungary were new ones meant to replace older treaty signed with those two countries in the ‘70s and the treaty with Chile was a brand new one. Treasury’s problems caused a little backlash from Sen. Bob Menendez, D-N.J., who's the ranking member of the Senate Foreign Relations Committee, the committee in charge of overseeing the treaties. He was annoyed at the fact that Treasury didn't properly communicate with him the concerns.
David Stewart: Alright, so we have these four protocols with Switzerland, Luxembourg, Spain, and Japan that were finally approved on July 16th and 17th. Before they got there though, they had to go through the Senate Foreign Relations Committee. How did they do there?
Jad Chamseddine: They passed by a voice vote in the Senate Foreign Relations Committee. There was concern because Sen. Rand Paul had introduced amendments that would have sunk the treaties and a day before they were to take up the issue, Sen. Bob Menendez had signaled some support for the amendments because he was annoyed at the way Treasury went about dealing with him as a ranking member. The biggest concern from people familiar with the matter was the fact that Menendez, who's the ranking member, would get a lot of Democrats to also support the amendment from Paul, and thereby sink the treaties. I spoke with some of the aides and they told me that it will be only him and even if he got Democrats on board, it was unlikely that they would get enough to block the treaties.
David Stewart: What was this amendment that Rand Paul was proposing?
Jad Chamseddine: It was an amendment dealing with the privacy concerns for U.S. citizens living abroad, something that's been going on about for the past eight years.
David Stewart: Was Menendez able to get other Democrats to vote for it?
Jad Chamseddine: Just one: Tom Udall from New Mexico. The amendment ended up failing 17 to 5. Ted Cruz and Lindsey Graham ended up voting with Paul on the amendment.
David Stewart: So the treaties were then sent to the Senate. Did they have bipartisan support?
Jad Chamseddine: Yes, there was little opposition to the treaties on the floor. Paul spoke in favor of his amendment on the Senate floor, but again his efforts failed. He criticized McConnell as well, who didn't take the criticism from his fellow Kentucky senator too well and immediately hit back, and implied that Paul had tested his patience.
David Stewart: So that leaves just these three treaties that haven't been moved on yet, are we expecting to see something soon?
Jad Chamseddine: Yes. I've been told from both the Chair Risch and the ranking member Menendez that they should get done by the end of the year. I've had similar assurances from lobbyists that dealt with the matter.
David Stewart: Alright, well, as always is an issue that we're going to have to keep track of as we see more treaties get approved and hopefully see more treaties get negotiated, so we can talk about a lot more. Kristen, Jad, thank you for being here.
Kristen Parillo: Thanks for having us.
Jad Chamseddine: Thank you.
David Stewart: And now: coming attractions. Each week we preview commentary that'll be appearing in the next issue of the Tax Notes magazines. I'm joined by Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?
Jasper Smith: In Tax Notes Federal, Ross Riskin describes how different business entity structures can affect the tax and financial planning decisions of small business owners in light of the TCJA. Justin Miller and Martin Behn argue that the tax incentives for creating nongrantor trust have increased since passage of the TCJA, and explore whether a trust will be treated as a nongrantor trust if the assets can be distributed back to the grantor. In Tax Notes State, Robert Tannenwald discusses studies by the Institute on Taxation and Economic Policy’s examining the regressivity of state and local taxes. Paul Bogdanski, David Dorner, and Jeremy Gove discuss two revenue bills recently passed by the Illinois General Assembly that ease the compliance burden on remote retailers, but raise practical concerns and likely constitutional issues. And in Tax Notes International, Allison Christians considers the late economist Peggy Musgrave and her influence on modern day tax and public finance policy, especially regarding efforts to tax the digital economy. Also, Adrian Sawyer discusses New Zealand's proposed digital services tax.
David Stewart: You can read all that and a lot more in the August 12th editions of Tax Notes Federal, State and International. That's it for this week. You can follow me online at @TaxStew. That's S-T-E-W. If you have any comments, questions or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We will be back next week with another episode of Tax Notes Talk.
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