The importance of the U.S. tax treaty network to the business community may not be widely appreciated, but the U.S. Senate’s delayed ratification for the first such treaty between the United States and Chile deserves a closer look. COA Director of Government Relations Kezia McKeague provides an overview of the pending treaty and why it matters.
1. What are the purposes and benefits of tax treaties?
The United States has income tax treaties with 68 countries, covering the vast majority of foreign trade and investment of U.S. businesses and investors. These treaties establish clear ground rules to govern tax matters between party countries as well as mechanisms to resolve disputes. A primary function is relief from double taxation through the allocation of taxing rights. Just as tax treaties restrict the ability of the foreign treaty partner to tax the income of U.S. taxpayers, they also reciprocally reduce U.S. withholding taxes, encouraging foreign companies to invest in the United States. In addition, tax treaties include provisions to both protect cross-border investors from discrimination in the application of the other country’s tax laws and require information exchange to combat tax evasion.
As the U.S. Treasury Department noted in congressional testimony, bilateral tax treaties are a vital tool for eliminating barriers to trade and investment. The accords minimize uncertainty, advancing the economic interests of the United States in the global economy. They also promote economic growth by making the United States a more attractive destination for foreign investment.
2. What is the U.S.-Chile tax treaty?
The U.S. and Chilean governments signed their first bilateral tax treaty in 2010. Provisions include reductions in withholding taxes on a bilateral basis and rules to determine when an enterprise or an individual of one country is subject to tax on business activities in the other. As in other U.S. tax treaties, the principal purpose is to reduce or eliminate double taxation of income earned by residents of each country from sources within the other country.
Recent tax reform in Chile has reinforced the need to protect the interests of U.S. investors there. Chilean legislation passed in 2014 raised corporate rates for companies based in countries without a tax treaty, and rates will be raised further in 2017. Without ratification of the U.S.-Chile tax treaty, U.S. companies will pay a higher tax than their competitors.
The treaty’s ratification would represent an important milestone for the U.S. business community, which is keen to expand the U.S. tax treaty network in South America. In response to this interest, the Treasury Department is also engaged in bilateral tax treaty negotiations with Colombia. The only Latin American countries with which the United States currently has treaties in force are Mexico and Venezuela.
3. What’s the big picture for the United States and Chile?
In addition to averting a steep tax hike on U.S. companies operating in Chile, the treaty would promote closer economic cooperation between two like-minded trading partners. Chile’s open economy and strong institutions make it one of the most stable countries for doing business in the Americas. The United States is Chile’s largest foreign investor; its direct investment into Chile hit $27.6 billion in 2014, led by the mining, finance and insurance, and manufacturing sectors. Bilateral trade has more than doubled since the U.S.-Chile Free Trade Agreement entered into force in 2004, with two-way trade in goods totaling $31 billion in 2014.
The United States and Chile cooperate closely in multiple global fora based on their shared commitment to open markets and high standards for trade and investment. The two countries coordinate efforts in the Organization for Economic Cooperation and Development, which Chile joined in 2010 as the organization’s first South American country. Along with ten other countries, the United States and Chile concluded negotiations in 2015 on the Trans-Pacific Partnership, best known as TPP—a high-standard trade agreement embracing economies on both sides of the Pacific. They also cooperate to strengthen East-West economic integration through the Asia-Pacific Economic Cooperation forum.
4. What are the next steps?
The U.S. Senate Foreign Relations Committee first approved the U.S.-Chile tax treaty in 2011 and again in 2015, along with pending treaties with Hungary and Poland and protocols with Japan, Luxembourg, Spain, and Switzerland. Such treaties traditionally pass the Senate by unanimous consent, but these particular treaties have languished due a hold by Senator Rand Paul (R-KY) on account of his opposition to the provisions on exchange of information, which he views as an invasion of personal privacy.
As long as Paul’s hold remains in place, the pending treaties will only be ratified if the Senate leadership brings them to the floor for a vote. (Treaties require a supermajority of two-thirds of the full Senate.) Recent letters on behalf of the U.S. business community have urged Senate Majority Leader Mitch McConnell (R-KY) to find a path forward toward ratification. Senate Foreign Relations Committee Chairman Bob Corker (R-TN) is a vocal advocate for the tax treaties. However, there is little evidence of any movement to date.