This is the sixth post in the “Bonjour” tax treaty series. In the fifth post I discussed that the U.S. Treasury is appealing both the Bruyea and Christensen cases. The dispute in these cases was over the issue of whether foreign taxes paid on investment income could be used as a tax credit against the Net Investment Income Tax. The background has been discussed in previous posts (See the appendix to this post). The precise is whether:
The Canada/U.S. tax treaty and the France/U.S. tax treaty (and similar treaties) allow for a foreign tax credit that is separate and independent of the foreign tax credits allowed under the Internal Revenue Code.
A foreign tax credit against the 3.8% NIIT is NOT permitted under the U.S. Internal Revenue Code. This means that, most Americans abroad who are subject to the NIIT will pay tax separately to BOTH the United States and their country of residence on the same investment income!
To put it another way: for Americans abroad, the Internal Revenue Code guarantees double taxation.
Can the tax treaties be interpreted to allow a foreign tax credit against the NIIT?
What follows is the Amicus brief authored by Professors Rosenbloom and Shaheen.
For better understanding here is a podcast which explains the Rosenbloom Shaheen amicus brief.
In addition, I wrote a more expansive version of this post for the Isaac Brock Society.
Does The Canada U.S. Tax Treaty Allow A Foreign Tax Credit Against The Net Investment Income Tax?
John Richardson – Follow me on X.com @ExpatriationLaw
Appendix – The First five posts in the “Bonjour” series …
The four previous posts discussed the foreign tax credit rules in the context of the NIIT (“Net Investment Income Tax“). For a description of the first four posts, see the Appendix to this post.
The first post detailed the provisions of the U.S. France tax treaty which created the “three bite rule”. By creating the “three bite rule” the U.S. France treaty was used to create a treaty based foreign tax credit.
The second post (also based on the U.S. France tax treaty) described how the U.S. France tax treaty was used to create an independent treaty based foreign tax credit. The purpose was to allow for a foreign tax credit against the NIIT (“Net Investment Income Tax”). Although a major breakthrough, it’s important to note that this case (Christensen):
1. Found that the treaty should be interpreted to create an a foreign tax credit that was independent of the credits allowed under the Internal Revenue Code;
2. Specifically ruled that the language “subject to the limitations of the law of the United States” (found in the opening paragraph of the double taxation clause) should be interpreted to preclude a foreign tax credit for payment of foreign tax on foreign investment income.
The third post continued the “NIIT Tax Treaty Chronicles”. Specifically, this post detailed how Judge Solomson, in the case of Paul Bruyea, determined that (contrary to Judge Blank’s ruling in Christensen) that the “subject to the limitations of the law of the United States”clause in Article XXIV, Paragraph 1:
1. Does NOT preclude the use of a foreign tax credit to offset the NIIT; and
2. That Article XXIV, Paragraph 1 allows a U.S. citizen or U.S. resident living in Canada to use taxes paid to Canada as a credit against the U.S. NIIT!
Judge Blank in Christensen and Judge Solomson in Bruyea reached opposite conclusions with respect to whether the following clause (as represented in the 2016 U.S. Model Tax Treaty) can be used to create a foreign tax credit which is independent of the foreign tax credit rules in the Internal Revenue Code (Sections 27, 901 and 904).
Article 23
RELIEF FROM DOUBLE TAXATION
1. In the case of __________, double taxation will be relieved as follows:
2. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income applicable to residents and citizens:
a) the income tax paid or accrued to __________ by or on behalf of such resident or citizen; and
Therefore, I expect that this issue has NOT been fully resolved.
Judge Solomson’s decision in Bruyea is a very exciting decision. It goes FAR beyond the decision in Christensen and opens the door to arguing that many (if not all) U.S. treaties guarantee that the NIIT can be offset by foreign tax credits!!
The fourth post focused on Judge Solomson’s comments in Bruyea about when a later in time statute can override an earlier treaty. In general he was of the view that a later statute can override an earlier treaty only when Congress expresses a clear intent to overrule the treaty.
The fifth post reveals Treasury’s decision to appeal both the Bruyea and Christensen cases.
The sixth post introduces the Rosenbloom and Shaheen amicus brief in support of Bruyea and Christensen
Bonjour Part 6 – Rosenbloom and Shaheen Brief In Support Of Bruyea