Third-country use: Is time running out?;

              U.S. Tax Treaties
Third-Country Use:
Is Time
Running Out?
by STEVEN P. HANNES / Partner, Washington Service Center
The U.S. has had income tax
treaties with foreign nations
since 1939. The network of U.S.
income tax treaties has expanded
significantly since then, especially in
the last decade. With those that were
ratified by the Senate in 1981, the U.S.
now has 35 such treaties in force, with
two others awaiting ratification
overseas.
Now, however, this expansion is
threatened by claims that U.S. tax
treaties are being improperly used by
residents of "third"countries (not the
U.S. or its treaty partner) at times
with the blessing of the U.S. treaty
partner. Claims of such treaty abuse or
"treaty shopping" also threaten existing
treaty relationships with the Nether­lands,
the Netherlands Antilles, and
Switzerland.
What effect do income tax treaties
have on the U.S. economy? In 1978, $3.9
billion of income was paid to residents
of tax treaty countries who had U.S.
investments. This represented 87
percent of the income earned by
foreign persons on U.S. investments. If
one assumes a 10 percent return on
investment, this means U.S. investments
held by or through treaty country
residents totaled at least $39 billion in
1978. Thus, the treaties provide protec­tion
for significant amounts of cross-border
investments. Critics claim,
however, that some of these treaties are
being used improperly, thereby
depriving the U.S. of needed and
legitimate tax revenue.
Statistics published in 1981 in a widely
publicized U.S. government report, Tax
Havens and Their Use by United States
Taxpayers—An Overview, suggest that
certain jurisdictions with low tax rates
which have tax treaties with the United
States are vehicles for disproportion­ately
large amounts of both U.S. invest­ment
overseas and foreign investment
into the United States. According to the
report, U.S. gross dividends, interest,
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