Academic journal article Southern Journal of Business and Ethics

The Professional Ethics of U.S. Tax Treaty Interpretation

Academic journal article Southern Journal of Business and Ethics

The Professional Ethics of U.S. Tax Treaty Interpretation

Article excerpt


I. Introduction.

a. Explanation of the term: Double Non-Taxation.

b. Ethical Implications when the Tax Lawyer "Switches Hats".

II. Background on Tax Treaty Interpretation.

a. P O OECD Model Treaty and Interpretational Norms.

b. Technical Analysis of Treaty-based Double Non-Taxation.

c. Non-Standard U.S. Methods of Tax Treaty Interpretation.

III> Ethical Considerations in Tax Treaty Planning by U.S. Tax Professionals.

a. The Ethics of U.S. Tax Treaty Planning in Light of Limitation-on-Benefit Clauses.

b. The Ethics of (Double-Exemption) Foreign Treaty Planning after BEPS.

IV. Conclusion.


The professional ethical standards for U.S. tax professionals engaged in foreign tax planning are often not well-understood by practitioners especially when it comes to the facilitation of aggressive tax avoidance by multinational firms. In particular, ethical considerations arise when in-house tax attorneys and accountants of U.S. multinationals engage in tax avoidance planning with respect to tax treaty interpretation. The practical reason for this is that the American Bar Association (ABA) Ethics Committee Opinion 855321 identified tax return preparation as an adversarial legal proceeding where the opposing party to tax avoidance is taken as the foreign taxing authority.2 And, this is true even where the tax return is accepted without audit or legal challenge. All tax avoidance planning is thereby effectively included as a preliminary aspect of the filing of the tax return. In the context of such an "adversarial" proceeding, the tax lawyer is not typically required to disclose aggressive tax avoidance planning to the opposing party.3 The ABA's identification of tax planning as an adversarial proceeding thus limits the potential for a tax practitioner acting on behalf of a multinational firm to run afoul of ethical requirements at least by failing to disclose aggressive tax planning or interpretations of laws. Yet tax practitioners still potentially face issues of ethical conduct in tax treaty interpretation.

Perhaps the quintessential example of aggressive tax planning via legal interpretation is the interpretation of tax treaties in ways that lead to Double Non-Taxation. The term "Double Non-Taxation" has many meanings (as explained in detail in the next section). The pertinent issue is where U.S. multinational firms use a tax treaty to achieve double exemption from taxation in the two countries party to the treaty. The term "tax treaties" includes both tax treaties concluded by the U.S. Treasury and approved by the Senate, and also foreign tax treaties that a multinational firm uses as part of its foreign tax planning designs. Assistance in aggressive tax avoidance on behalf of a multinational firm raises risks of a professional challenge from the Internal Revenue Service, although admittedly the risks are less than for aggressive tax planning on behalf of an individual.4

The U.S. tax professional is technically covered by the U.S. Treasury's rules of professional conduct when acting on behalf of a multinational. This is because "practice" is understood as including the preparations for the filing of a tax return (including foreign tax avoidance planning), even if a return is not filed with the Internal Revenue Service.5 The U.S. international tax system is designed to credit foreign taxes upon repatriation of foreign earnings back to the United States, Historically, the Internal Revenue Service was at times concerned with the overpayment (not the underpayment) of foreign tax by U.S. multinationals to foreign taxing authorities, because the foreign tax credit mechanism overpayment could result in a higher offsetting credit in the United States. Considering the historical situation where U.S. multinationals tended to repatriate foreign earnings, the avoidance of foreign tax could theoretically result in relatively higher tax remittances to the U. …

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