Neither snow, nor sleet, nor freezing rain slows TEI's advocacy efforts.

• Position: Tax Executives Institute

Focus on Washington Liaison Meetings, U.S.-Canada Treaty, Accounting Methods, Other Issues

As winter storms and icy weather battered much of North America, TEI's technical activities were anything but cold, ranging from comments on the technical explanation to the U.S.-Canada treaty protocol, to proposed revision of the accounting method consent process, to continued opposition to the codification of the economic substance doctrine. Additional submissions were filed on the OECD tax intermediaries project, the section 482 services regulations' safe harbor, and the Internal Revenue Service's recruitment and retention efforts. The Institute also devoted considerable attention to preparing for its annual liaison meetings with the IRS and the U.S. Department of the Treasury.

"The blizzard of activity this winter shows the depth and breadth of TEI's technical activities," TEI President Robert J. McDonough stated. "And our annual U.S. liaison meetings gave us an opportunity to discuss our concerns with top-level IRS and Treasury officials."

U.S.-Canada Treaty Protocol

In a first for TEI, the Institute made recommendations to the governments of the United States and Canada on issues to be addressed in the Technical Explanation to the Fifth Protocol to the U.S.-Canada Income Tax Treaty. Signed in September 2007, the new Protocol has already been approved by the Canadian Parliament and will become effective upon ratification by the U.S. Senate.

In its December 19, 2007, letter to the U.S. Department of Treasury, the Institute urged that the Protocol and accompanying explanation be referred to the U.S. Senate for ratification as soon as possible. (A similar letter was sent to the Canadian Department of Finance.) TEI commended the effort to eliminate barriers to trade and investment between the United States and Canada, confirming that the Protocol and Diplomatic Notes have much to offer U.S- and Canadian-based businesses, in particular:

* Elimination of withholding tax on certain cross-border interest payments;

* Reduction to five percent of the withholding tax on dividends paid to certain partnerships and limited liability companies (LLCs);

* Extension of treaty benefits to members of LLCs; and

* Introduction of mandatory and binding arbitration for issues such as transfer pricing.

TEI stated, however, that the Protocol raised several issues that should be addressed, most notably the treatment of hybrids and Canadian unlimited liability companies (ULCs).

Referring to new paragraph 6 of Article IV (Residence) of the treaty, the Institute recommended that the term "fiscally transparent" be defined and the classification of common legal entity forms used in Canada and the United States be delineated. "For example, it is not readily apparent," the organization said, "how U.S. Subchapter 'S' corporations or Canadian Mutual Fund Trusts subject to Canada's specified investment flow-through (SIFT) rules will be classified under paragraph 6."

In respect of ULCs, TEI explained that because the dividend payment is disregarded by the United States, treaty benefits need not be provided by Canada. "The policy rationale for subjecting the repatriation of business earnings to a 25-percent Canadian withholding tax is unclear.

"In TEI's view, this provision will unduly punish U.S. corporations operating in Canada, resulting in the ULC's paying an effective tax rate on its business earnings of 49 percent with no net tax benefit to the U.S. Treasury after the application of foreign tax credits." Terming the provision overreaching, TEI recommended that the issue--particularly in respect of dividends--be addressed before the provision becomes effective in 2010.

The Institute also discussed new paragraph 9 of Article V (Permanent Establishment), which creates a permanent establishment based on services provided in a State for "an aggregate of 183 days or more in any twelve-month period with respect to the same or connected project for customers who ate either residents of that other State or who maintain a...