Unraveling the Hidden "Saving Clause" in Global Tax Treaties

This AI generated podcast is based on a paper written by Professor Leopoldo Parada. Although a “saving clause” has been a feature of U.S. tax treaties for years, the OECD Model Treaty did not have a “saving clause” before 2017. Interestingly, the OECD commentary suggests that the purpose of the “saving clause” was to allow for the taxation of controlled foreign corporations. The U.S. treaties exploit their version of he “saving clause” as a mechanism to employ U.S. citizenship taxation. The abstract of Dr. Parada’s paper includes:

“The 'OECD Saving Clause': An American-Tailored Provision Made to Measure the World

Rivista di Diritto Finanziario e Scienza delle Finanze, LXXVIII 1, I, 13-52 (2019)

41 Pages Posted: 18 Jul 2019

Leopoldo Parada

King's College London

Date Written: July 1, 2019

Abstract

This article argues that the “saving clause” provision introduced in the 2017 OECD Model conflicts with the entitlement to double taxation relief under Article 23 OECD Model, especially in cases involving the use of hybrid entities. Although this issue is pragmatically solved in the new paragraph 11.1 of the commentaries on Articles 23A and 23B OECD Model, which provides no obligation for the Contracting States to relieve double taxation to the extent that taxation is based exclusively on the residence of the taxpayer, it leaves the taxpayer in the residence state with a potential permanent double taxation status. The foregoing may be however avoided with an optional “reverse saving clause”. Such an option seems to be not only more coherent with the traditional object and purpose of tax treaties (double taxation relief), but it also reflects the tax treaty practice already in force in some countries around the world.”

AI generated commentary:

"In this episode, we delve into the intricacies of global tax agreements, focusing on a fascinating provision known as the 'saving clause.' Introduced in the 2017 OECD Model Tax Convention, this provision allows countries to maintain their right to tax their own residents, even in the presence of a tax treaty with another country. We explore the surprising conflicts it creates with the goal of double tax relief, especially in the context of hybrid entities.

Our discussion highlights the United States' historical use of the saving clause and its motivations rooted in unique taxation policies. We also contrast this with the 2017 OECD Model's approach and the issues it presents, particularly concerning hybrid entities that can lead to double taxation.

The episode offers insights into potential solutions, like the 'reverse saving clause,' which aims to mitigate double taxation and promote fairness. Join us as we navigate through these complex dynamics and consider the implications for global business and personal financial planning."