As an expert in tax evasion history, I’ve seen the consequences of financial missteps and the importance of adhering to tax laws. One aspect that often goes unnoticed is the role of tax treaties in facilitating cross-border investments. These treaties are crucial in minimizing distortions and obstacles that can affect such investments. The United States, in particular, should focus on expanding its treaty network to minimize friction for U.S. companies earning profits abroad and to maintain attractiveness for foreign companies investing in the U.S.
Without a tax treaty, double taxation can occur, limiting returns to shareholders or profits that companies can invest either in the U.S. or abroad. According to the 2023 version of the International Tax Competitiveness Index, the average size of a tax treaty network is 74 countries, and the U.S. ranks 25th (out of 38 OECD countries) with 66 treaties. This is a clear indication that there is room for improvement.
A recent National Foreign Trade Council survey reveals that Brazil and Singapore are the top priorities for cross-border tax treaties. The U.S. doesn’t have a tax treaty with either. This is a significant oversight, considering the economic potential of these countries. Respondents also consider transfer pricing, permanent establishment, and royalties to be the top negotiation priorities for these countries.
Eliminating double taxation and other distortions can facilitate business activity and contribute to more efficient tax regimes. One example is the recent transfer pricing developments in Brazil, which has aligned its rules with OECD standards. In December 2022, the Brazilian government published measures introducing new transfer pricing rules, the result of a joint OECD-Brazil project launched in 2018 to align Brazil’s transfer pricing rules to the global transfer pricing standard set out in the OECD Transfer Pricing Framework. They were enacted in June 2023 and took effect January 1st, 2024.
Even without a tax treaty between the U.S. and Brazil, a common approach to calculating profits in cross-border transactions will reduce businesses’ challenges when determining the tax impact of profitable projects in Brazil. But pursuing tax treaty negotiations with Brazil would further facilitate business operations in both countries.
The absence of a tax treaty can increase complexity and distortions, such as double taxation. In 2023, the U.S.-Chile comprehensive income tax treaty successfully entered into force. This tax treaty reduces tax-related barriers to cross-border investments between the United States and Chile and ensures continued coherent and pro-growth tax regimes across the globe.
With the changes in Brazil and the recent tax treaty with Chile, policymakers have begun seizing the opportunity to maximize growth and simplify cross-border investment for economic actors, but much work remains to be done. The U.S. should focus on emulating these positive developments with Singapore, for instance. Removing barriers to cross-border investment is crucial, especially as international changes like the implementation of the global minimum tax undermine the long-term stability of tax rules.
As we continue to navigate the complexities of international tax laws, it’s clear that expanding the U.S. tax treaty network should be a priority. It’s time for the U.S. to step up its game and prioritize tax treaty negotiations with Brazil and Singapore. The economic benefits are too significant to ignore.