Academic journal article Journal of Accountancy

Recent Tax Treaty Developments

Academic journal article Journal of Accountancy

Recent Tax Treaty Developments

Article excerpt

The U.S. Treasury Department recently completed negotiations on a number of tax treaties and protocols to treaties. The agreements currently are awaiting ratification, which includes U.S. Senate approval. Following is a brief discussion of significant provisions in the agreements reached with Canada, France and Sweden.

Canada: The U.S.-Canada Treaty protocol decreased the withholding tax rates on royalties from 10% to 0%, on intracorporate dividends from 10% to 5% and on interest payments from 15% to 10%. The branch tax was lowered from 10% to 5%. Reductions in the dividend withholding and branch tax rates now are subject to a phase-in of 7% from the effective date through the end of 1995, 6% in 1996 and 5% thereafter.

The protocol includes a revised article on limitations on benefits designed to prevent treaty shopping, which occurs when an entity forms a corporation in a country with a favorable tax treaty with the United States to take advantage of that treaty. The article adds objective qualification tests for the eligibility of treaty benefits for Canadian companies. A company must be publicly traded, substantially held by certain qualified shareholders or have income derived from the United States in connection with a business in Canada substantially related to U.S. activity. Canadian residents who fail objective qualification tests may request the U.S. Competent Authority to determine whether benefits should otherwise be granted.

The new treaty also revised estate tax provisions. Canadian residents may claim a unified credit for their portion of gross assets in the United States in proportion to those of their entire estates. A nonrefundable credit may be allowed when a marital deduction would have been received had the surviving spouse been a U.S. citizen. Credit for U.S. estate tax is allowed against Canadian income tax on non-U.S. property in the case of the individual's death or against Canadian income tax imposed on U. …

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