What Happens if H.R. 1 Conflicts with U.S. Tax Treaties?

What Happens if H.R. 1 Conflicts with U.S. Tax Treaties?

Legal Sidebari

What Happens if H.R. 1 Conflicts with U.S.
Tax Treaties?
December 19, 2017
When a provision in the Internal Revenue Code (IRC) conflicts with a U.S. tax treaty, which takes
precedence over the other? This question may be of interest to Congress as it considers the Tax Cuts and
Jobs Act (H.R. 1), amid reports discussing whether certain provisions in the bill may be inconsistent with
existing U.S. tax treaties. The United States has bilateral tax treaties with approximately 65 countries that
are intended to reduce the incidence of double taxation and prevent tax evasion. These treaties are
negotiated by the Treasury Department and ratified by the President with the advice and consent of the
Senate. As discussed below, Congress has the authority, if it so chooses, to address expressly the
relationship between the provisions in legislation and potentially conflicting tax treaties. In the absence of
such express language, if a provision in H.R. 1 was found to conflict with an existing tax treaty, it is likely
that a court would determine that H.R. 1 takes precedence over the treaty based on relevant Supreme
Court precedent. These issues are discussed below, followed by considerations for Congress as it
continues to debate H.R. 1.
Conflicts Between Tax Statutes and Tax Treaties, Generally
Conflicts between provisions in the Internal Revenue Code (IRC) and tax treaties are generally resolved
based on which is “last in time.” The U.S. Constitution provides that the Constitution, acts of Congress,
and treaties are “the supreme Law of the Land . . . .” When the Constitution conflicts with a federal law or
treaty, the Supreme Court has held that the Constitution is controlling. The issue is more complicated
when a federal statute and treaty are in conflict and Congress has not indicated that the statute should be
subject to the treaty. The Supreme Court has ruled that statutes and self-executing treaties that do not
require implementing legislation to be given effect (which generally include tax treaties) are on equal
footing under the Constitution so that “a treaty may supersede a prior act of Congress, and an act of
Congress may supersede a prior treaty.” In order to determine which controls, the Court has explained
that treaties and statutes should generally be construed to be harmonious, but when they do conflict, the
one that is last in date takes precedence over the earlier one. As discussed below, the IRC contains a
provision that reflects these principles regarding the equal relationship between IRC statutes and tax
treaties.
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Based on these principles, courts have held that tax statutes override inconsistent treaty provisions when
the statute was enacted after the treaty was in effect. While this issue is infrequently litigated, examples of
such holdings include: (1) the Supreme Court’s holding in an 1870 case that a federal statute imposing a
tax on alcohol and tobacco overrode an earlier treaty with the Cherokee nation; (2) two cases, in 2003 and
2009, by the U.S. Court of Appeals for the D.C. Circuit that held an IRC provision overrode a provision
in the U.S.-Canada income tax treaty because the statute was enacted after the treaty was ratified; and (3)
a 1992 case by the U.S. Tax Court which held that an IRC provision overrode a provision in an earlier tax
treaty with Switzerland.
Possible Considerations for Congress
While the later-in-time rule is firmly established in the tax context under the precedent discussed above,
Congress, if it so chooses, may expressly indicate whether a legislative provision is to override any
existing tax treaty, either by providing a general rule on the matter or by addressing it on a case-by-case
basis. H.R. 1 is generally silent as to how the bill’s provisions would interact with the existing bilateral
tax treaties. Accordingly, if the bill were enacted into law, a court would likely interpret its provisions to
override any conflicting treaties under the later-in-time rule. Congress might be interested in considering
whether this outcome is consistent with its intent, and, if not, whether to address the relationship between
tax statutes and treaties in general, or specifically as to H.R. 1, or whether to address the treatment of
treaty partners and taxpayers in the event of a treaty override. These options are discussed below.
First, Congress could legislatively address the relationship between tax statutes and treaties in general by,
for example, articulating the circumstances in which IRC amendments would take precedence over
existing treaties. Some commentators have argued that the later-in-time standard should be reexamined, in
part:
because taxation touches so directly matters of the basic commercial structure through which
international trade is conducted and because of the difficulty of revising such structures to adjust to
changes without incurring what are in effect retroactive financial penalties in the form of tax
liabilities . . . there is, if anything, greater need for long-term stability and predictability in the case
of international taxation than may be the case in other areas . . . .
On the other hand, it appears that Congress has rejected this concept in the past. Prior to 1988, the IRC
had expressly deferred to treaties when an IRC provision and treaty were in conflict. However, Congress
amended this language in 1988 to codify the later-in-time rule and recognize the equal relationship
between IRC provisions and tax treaties. A committee report accompanying the 1988 act explained the
reason for the change:
The committee does not believe that Congress can either actually or theoretically know in advance
all of the implications for each treaty, or the treaty system, of changes in domestic law, and therefore
Congress cannot at the time it passes each tax bill address all potential treaty conflict issues raised
by that bill. This complexity, and the resulting necessary gaps in Congressional foreknowledge
about treaty conflicts, make it difficult for the committee to be assured that its tax legislative policies
are given effect unless it is confident that where they conflict with existing treaties, they will
nevertheless prevail.
Secondly, Congress might consider, in lieu of amending the general interpretative rule codified in the
IRC, whether to address the interaction of specific provisions in H.R. 1 with the treaties. Congress has
occasionally expressed its intent with respect to the treatment of specific IRC amendments. For example,
the American Jobs Creation Act of 2004 imposes negative tax consequences on corporate inversions and
expressly states that no provision of law “shall be construed as permitting an exemption, by reason of any
treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this
section.” Congress could, if it so chose, expressly address how the provisions in H.R. 1 and the tax
treaties should interact in legislation. However, it might not be clear how such a provision would be

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interpreted to apply to future tax treaties. Such an interpretation might depend on a variety of factors,
including the provision’s specific language and whether a treaty stated that it superseded domestic law
requirements.
A third possible option for Congress might be to consider whether to address legislatively the remedies
available to treaty partners and taxpayers in the event that a particular provision in H.R. 1 is later found to
conflict with an existing treaty. While the case law discussed above indicates that interpreting an IRC
provision to override a provision in an existing tax treaty is permissible under U.S. law, such an override
may place the United States in the position of violating its treaty obligations. In response, a treaty partner
might take action such as unilaterally terminating the treaty (tax treaties generally allow either country to
terminate by giving notice through diplomatic channels); attempting to negotiate a modification to the
treaty with the United States; or amending its own tax laws to address or mitigate the effects for its
taxpayers. Taxpayers may be negatively affected by treaty overrides because they would no longer be able
to claim the benefits under the treaty and thus might have higher tax liability to one or both countries.
Congress could, if it so chose, legislatively address the remedies for treaty partners and taxpayers affected
by statutory overrides of treaty provisions. For example, Congress might propose transition rules to assist
affected taxpayers; encourage the executive branch to work with treaty partners to renegotiate the treaties;
allow taxpayers negatively affected by these conflicts to claim monetary damages (as at least one
commentator has argued); or take steps to develop some type of international dispute settlement
procedure to address tax treaty violations.

Author Information

Erika K. Lunder

Legislative Attorney

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