Enhancing the US Tax Treaty Network: Prioritizing Brazil and Singapore

Because taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
systems in countries differ, tax treaties can help minimize distortions and obstacles affecting cross-border investment. The United States should focus on expanding its treaty network to minimize friction for US companies earning profits abroad and maintaining attractiveness for foreign companies investing in the US.

In the absence of a tax treaty, double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income.
can occur, limiting returns to shareholders or profits that companies can invest either in the US 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 US ranks 25^th (out of 38 OECD countries) with 66 treaties.

A recent National Foreign Trade Council survey of large multinational companies reveals that Brazil and Singapore are the top priorities for cross-border tax treaties. The US doesn’t have a tax treaty with either.

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 1^st, 2024. The inclusion of the arm’s length principle (i.e., related companies should transact with each other as if they were unrelated) in Brazilian transfer pricing rules is a stepping stone for Brazil to become a member of the OECD.

Even without a tax treaty between the US 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 US-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.

Its provisions eliminate double taxation and facilitate the day-to-day activities and transactions of businesses in Chile and in the United States, which had previously been affected by the lack of a bilateral treaty.

The National Foreign Trade Council’s survey shows that the private sector recognizes the economic value of treaties as an instrument to increase tax certainty and decrease distortions.

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 US 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.

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