The Limits of Administrative Guidance in the Interpretation of Tax Treaties
Kirsch, Michael S., Texas Law Review
This Article addresses the increasingly important role of administrative guidance in interpreting the United States' international treaty obligations. The relationship between administrative guidance and treaties raises important issues at the intersection of international law, constitutional law, and administrative law.
These issues are explored in the context of the United States' extensive tax treaty network. Tax treaties play an important role in a global economy; they attempt to reconcile the complex and ever-changing internal tax laws of different countries. The Treasury Department is considering the increased use of administrative guidance to interpret the meaning and application of tax treaties, particularly in response to the increasingly sophisticated business structures and cross-border transactions utilized by multinational corporations.
This Article considers the weight that courts should give to unilateral administrative guidance when interpreting tax treaties. The Article concludes that the Treasury's traditional, ad hoc approach based on informal technical explanations is entitled to little, if any, deference in interpreting previously negotiated bilateral agreements between sovereign nations. However, the Article identifies certain limited circumstances where formal Treasury regulations might enable the Treasury Department to influence the application of previously negotiated tax treaties without violating the United States' obligations under these treaties.
With the significant expansion of cross-border economic activity in recent years, the international aspects of the U.S. tax system have become increasingly important.1 Numerous current and former government officials have suggested that these international tax issues will drive the next generation of significant tax reform in Congress.2 However, unilateral legislation enacted by one country cannot resolve many of the issues that arise when multiple countries have legitimate claims to tax income in a cross-border setting. Instead, countries increasingly rely on tax treaties to resolve these issues. These treaties serve a dual purpose - they eliminate or mitigate the potential double taxation that might otherwise arise when a resident of one country receives income that has a connection to another country, and they facilitate the sharing of information between the tax authorities of the treaty countries in order to limit opportunities for tax evasion.
Tax treaties are bilateral treaties that are negotiated directly between two countries.3 These treaties are not negotiated from scratch, but instead tend to be based on various model treaties - most often the model treaty developed by the Organization for Economic Co-operation and Development (OECD Model Treaty),4 as well as model treaties developed by the U.S. Treasury Department.5 As a result, each of the more than sixty U.S. tax treaties in force6 generally shares a common structure containing many similar or identical provisions. Nonetheless, each tax treaty is negotiated separately in order to address issues that arise from the specific interaction of the two countries' tax laws and to address particular tax policies that might be important to one of the countries.7 As a result, variations exist among actual U.S. tax treaties and between particular U.S. tax treaties and the OECD Model Treaty.8
This widespread U.S. tax treaty network raises significant issues in a world where cross-border transactions and business structures change rapidly, and where multinational corporate taxpayers increasingly rely on aggressive tax planning - including treaty-based planning - to reduce their overall tax costs.9 The OECD (with U.S. participation) frequently revises and updates the text of the OECD Model Treaty to reflect new global economic developments and increasingly sophisticated methods of tax avoidance and evasion.10 Less frequently, the U.S. Treasury Department updates the text of the U. …