Peter Barnes and David Rosenbloom Discuss New Tax Law Undermining Treaties and International Policy

The Republicans’ sweeping tax legislation radically revised the treatment of overseas income in a way that undermines tax treaties at a time when U.S. multinational businesses will need them to resolve cross-border disputes that are on the horizon, specialists say.

Other countries are likely to focus more on trade problems than tax treaty questions, but there will still be plenty of confrontation, said David Rosenbloom, a professor at the New York University School of Law and a member of Caplin & Drysdale's Washington office. He noted that other nations may initiate litigation, enact retaliatory legislation or make diplomatic protests.

“Countries are not going to just say the legislation is a terrific idea that they readily accept,” Rosenbloom said.

In the context of anticipated pushback from other countries, Rosenbloom noted that while the tax legislation tries to promote investment in the U.S., the new rules leave multinationals “pretty much on their own” insofar as they are doing cross-border business.

“Once you undermine the treaties, which are the multinationals’ best friend in international disputes, the companies will have to find ways of resolving the disputes by other means,” he said.

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Whether Congress (Knowingly) Overrode Tax Treaties

In the case of the BEAT, Rosenbloom said Congress might well have intended to override tax treaties. He pointed out that the BEAT is an alternative minimum tax and that “Congress insisted on an override” when the AMT was in effect in the 1980s.

Congress has long shown antipathy toward the treaties, Rosenbloom said, but this legislation goes beyond anything tax practitioners have seen in the past.

“It takes a view of the world that is inconsistent with the historical approach to international double taxation and the need for cooperation and comity in international tax affairs,” Rosenbloom said. “This legislation says that the U.S. will go it alone. There is a strong isolationist flavor here.”

Peter Barnes, a senior fellow at Duke University School of Law and a former tax executive with General Electric Co., said it would be “too harsh” to say the legislation definitely violates U.S. treaties. [Mr. Barnes is also Of Counsel to Caplin & Drysdale’s International Tax practice group.]

Still, he added, “there are clear issues of potential discrimination that cannot be ignored.”

Barnes noted that while the U.S. government has the power to override treaties, it generally won’t do so without careful thought and discussion.

“In this case, the tax bill passed so quickly that the treaty risks, for both tax and trade, did not get a full airing,” Barnes said. “So we will have to deal with the concerns of treaty partners after the legislation takes effect, rather than before.”

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Back to the Negotiating Table

For instruction on what may happen with the new tax law, Barnes cited the last big tax reform in 1986. He noted that the legislation had a couple of provisions that severely impacted treaties, to which the Treasury responded by outlining its views and then holding discussions in multinational forums — especially the OECD — and one-on-one with treaty partners.

Barnes expected a similar experience this time, noting that Treasury first will need to articulate whether it believes any provisions in the bill override the treaties or create potential discrimination.

“If — and it is a big if — the legislation prompts some treaty renegotiation, and if the Senate begins approving U.S. tax treaties, the outcome could be positive,” Barnes said. “But, there will be several years of heated discussion and uncertainty.”

Rosenbloom didn’t think other countries would be eager to re-enter negotiations, noting that an era of cross-border disputes is on the horizon, even without regard to the new tax legislation.

He added that Sen. Rand Paul, R-Ky., had prevented treaties from proceeding through the Senate.

. . .

As Rosenbloom put it, however, countries likely won’t readily accept the new provisions.

“Other countries will not appreciate the ‘take it or leave it’ spirit that permeates the new rules,” Rosenbloom said. “I really do not know what will happen, but it will not be pretty.”

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Excerpt taken from the article “New Tax Law At Odds With Treaties, International Policy” by Natalie Olivo for Law360.