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  • Tag Archive: US tax

    1. FedEx Vs US Government’s ‘Haircut’ Argument – Deliver us from Tax

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      FedEx Vs US Government – Introduction

      FedEx Corporation, having previously succeeded in a significant legal battle concerning foreign tax credits, is now urging the US District Court for the Western District of Tennessee to confirm the refund amount due.

      This development follows after the government halted discussions on a joint judgment proposal, prompting FedEx to take legal action.

      Motion for Judgment

      On 8 March 2024, FedEx filed a motion for judgment to finalise the refund amount. This action was taken in response to the government’s withdrawal from negotiations and its indication that it would oppose FedEx’s motion with a novel argument based on the “Haircut Rule”.

      The Government’s “Haircut Rule” Argument

      The government’s new stance involves Treasury Regulation Section 1.965-5(c)(1)(i), which potentially limits foreign tax credits related to withholding taxes paid to foreign jurisdictions.

      FedEx contests this argument on several grounds, including the applicability of the rule when withholding taxes are not claimed, procedural deficiencies under the Administrative Procedure Act, and the belated introduction of this argument in the litigation process.

      FedEx Vs US Government – Practical Point

      The government’s late introduction of the “Haircut Rule” argument may face judicial resistance, especially considering the advanced stage of the litigation.

      The transparency of the government’s strategy during the litigation and its decision to withhold this argument until a critical juncture could impact the court’s receptivity to the new claim.

      Implications for Litigants

      The FedEx case underscores the importance of timely presenting arguments in legal disputes.

      Waiting until late in the litigation process to introduce new claims can lead to challenges in persuading the court to consider those arguments, with potential consequences including rejection due to delay.

      FedEx Vs US Government – Conclusion

      As FedEx moves forward with its motion for judgment, the legal community watches closely.

      The outcome may provide further guidance on the strategic considerations and challenges of introducing new arguments in ongoing litigation, particularly in complex tax law disputes.

      Final thoughts

      If you have any queries about this article on FedEx v US Government, or US tax matters in general, then please get in touch.

       

    2. The US-Chile Double Tax Treaty

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      US-Chile double tax treaty – Introduction

      A significant development occurred on 19 December  2023 with the US Treasury Department’s announcement of the activation of the US-Chile Tax Treaty.

      This Convention, formally known as the Convention Between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital – a bit of a mouthful! –  marks a milestone as the first new U.S. tax treaty in over a decade.

      The Journey to Ratification

      Initiated in 2010, the treaty faced an extensive delay in the U.S. Senate, primarily due to aligning it with the 2017 Tax Cuts and Jobs Act’s (“TCJA’s”) radical changes.

      Finally, in July 2023, the Senate gave it the nod, incorporating two crucial TCJA-related reservations.

      This ratification opened doors for Chile, positioning it as the first nation to establish a new tax treaty with the U.S. in this era.

      Decoding the Treaty’s Key Provisions

      The Treaty introduces significant reductions in withholding taxes across various domains:

      Dividends:

      For dividends issued by a U.S. corporation to a Chilean owner, the withholding rate is generally reduced to 15%.

      It further drops to 5% if the recipient is a company holding a minimum of 10% of the voting stock.

      Interest:

      Interest payments see a withholding tax cut to 15% for the first five years, post-Treaty enforcement, and 10% thereafter. Notably, for certain beneficiaries like banks and insurance companies, this rate is as low as 4%.

      Royalties:

      The Treaty caps the withholding tax on royalties at 10%, with specific exceptions.

      Capital Gains:

      Residents of either country selling shares in the other’s companies are taxable only in their resident nation, subject to meeting certain criteria.

      Additionally, the Treaty introduces a limitation-on-benefits provision to curtail treaty shopping, aligning with U.S. treaty practices.

      Reconciling with TCJA

      The Senate’s ratification came with two critical reservations, later approved by Chile’s National Congress, ensuring the Treaty’s compatibility with the TCJA:

      • The Treaty does not obstruct the imposition of the Base Erosion and Anti-Abuse Tax (BEAT) under Section 59A of the Internal Revenue Code.
      • Modifications to Article 23, aligning it with the TCJA’s alterations to the foreign tax credit mechanism, particularly reflecting the shift from Section 902 credit to Section 245A’s dividends-received deduction.

      Effective Date and Beyond

      The Treaty’s provisions on withholding taxes will be applicable to payments made or credited from 1 February 2024, onwards.

      Other tax provisions will be effective for tax years starting 1 January 2024.

      Additionally, the provisions for information exchange are effective immediately.

      US-Chile double tax treatyConclusion

      The US-Chile Tax Treaty is important as it potentially creates a template for future US tax treaties.

      For persons effected by the new treaty, understanding and potentially leveraging its benefits of will be key to optimising cross-border operations.

       

      Final thoughts

      If you have any queries regarding this article on the US-Chile double tax treaty, or US or Chile tax matters in general, then please get in touch.