Pending before the United States Senate are a number of tax treaties. Seven of these are bilateral treaties between the U.S. and a foreign country, in this case Chile, Hungary, Japan, Luxembourg, Poland, Spain, and Switzerland. ATR urges all Senators to support these routine, yet important treaties that protect against double taxation and encourage investment.
Bilateral treaties establish a clear framework between two countries to reduce taxes on a reciprocal basis. This provides much needed certainty to American businesses operating abroad.
Our complex and out-of-date tax code makes tax treaties extremely important for American businesses. As it stands, our companies struggle to compete against foreign competitors. Inaction on tax treaties only intensifies this competitiveness problem.
Already, we subject our businesses to the highest tax rates in the world with a corporate rate of 39.1 percent and a rate on pass-through businesses approaching 50 percent. By comparison, the average rate in the developed world is just 25 percent leaving our businesses paying far higher rates. In addition, our tax system is one of six in the developed world that subjects income from our businesses to double taxation – once when earned overseas and again when brought back to the U.S.
While these problems should be fixed, tax reform that updated our code was last passed in 1986 and progress remains stalled because of a president that derides tax competition as a “race to the bottom.” In the meantime, lawmakers can take an important step to address the American competitiveness problem by passing bilateral tax treaties.
The importance of these treaties cannot be overstated. The seven countries involved in the bilateral treaties have invested more than $700 billion in the U.S. economy, according to the Chamber of Commerce. This means that hundreds of thousands of jobs are tied directly or indirectly to these investments.
Some have erroneously compared information sharing provisions in these treaties to information exchange provisions within the Foreign Account Tax Compliance Act (FATCA). But these issues are not linked – tax treaties are about cancelling out double taxation to encourage investment while FATCA is about creating a framework to tax Americans residing abroad.
These treaties contain provisions allowing sharing of taxpayer information under certain, clearly defined circumstances in a way that is consistent with the Fourth Amendment. Treaties contain stringent controls that explicitly prevent information sharing for non-tax purposes and safeguards against unlawful disclosure. The standards within the seven treaties are identical to 56 of 57 treaties that are currently in force and are also similar to U.S. domestic law. The one exception is the tax treaty with Switzerland, which contains a standard so impractical that it has been repudiated by the Swiss government.
The fact is, tax treaties are a key component in ensuring American businesses can compete by encouraging investment, reducing barriers and providing certainty. ATR urges all Senators to support all seven bilateral treaties awaiting action before the United States Senate.