Treaty Consistency | The Tax Lawyer
Updated: 5 days ago
This article was originally published in volume 66, no. 1 (Fall 2012) edition of The Tax Lawyer. The full pdf is linked below, and you can find it in JSTOR.
From time to time in my practice I get questions regarding the appropriate treatment of a transaction undertaken by a U.S. branch of a foreign bank. Often, the answer differs depending on whether the branch was eligible for, and claiming, benefits under a tax treaty with the United States. For example, a branch claiming treaty benefits can determine its interest expense by viewing itself as a separate entity and applying arm’s length pricing norms, and similarly can give effect to interbranch transactions that would otherwise be ignored by domestic U.S. tax law.
Normally, a taxpayer eligible to claim treaty benefits has the choice of whether to claim those benefits, or to rely instead on domestic law without regard to the treaty. But this choice may not be unfettered; and as a result, choosing to apply the treaty to one transaction may restrict one’s ability not to apply the treaty to another. As a result, it is impossible to advise on the tax treatment of any transaction that is potentially eligible for treaty benefits, without knowing what other transactions may have occurred, or may occur in the future, that might constrain the choice of whether to claim treaty benefits.
Questions of this type crop up in a broad variety of contexts, yet oddly very little had been written about the extent to which taxpayers are subject to a duty of consistency in applying tax treaties. This paper seeks to remedy that gap by providing a comprehensive study of the issue.
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