U.S. INCOME TAX TREATIES:
RECENT DEVELOPMENTS
By:
Eduardo A. Cukier
New York
On August 11, 1995, the U.S. Senate finally ratified six treaties and protocols for the avoidance of double taxation between the United States and Canada, Mexico, France, Ukraine, Portugal and Sweden. A pending treaty between the United States and Kazakhstan has not yet been sent to the Senate for ratification because certain bank secrecy issues remain to be settled.
The Senate's vote and ratification of these treaties and protocols was delayed since November 1994 due to certain objections by Senator Byron Dorgan. Senator Dorgan disagrees with the U.S. Treasury Department's interpretation of the provision in the treaties that governs the allocation of income among related parties resulting from transactions between such related parties.
The Treasury Department interprets this provision as preventing the United States from doing away with the "arm's length" approach and replacing it with a formulary apportionment approach. The "arm's length" approach allocates income among related parties by establishing transfer pricing among related parties that is comparable to pricing among unrelated parties. The formulary apportionment approach allocates income among related parties based on the relative weight of certain factors (e.g., payroll, property and sales).
In order to avoid further delays in ratification, the Treasury Department agreed to formally conduct a joint conference and study with the state governments the amount of U.S. tax revenues lost due to transfer pricing abuses by foreign entities doing business in the United States. The Treasury Department will also analyze the issues involved in implementing a federal formulary apportionment system.
