Treasury Announcement Regarding Income Tax Treaty References to NAFTA in Light of the USMCA

Summary

On May 19, 2020, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) released Announcement 2020-06 that provides Treasury’s view on how to interpret references in U.S. income tax treaties to the North American Free Trade Agreement (NAFTA) once it is replaced by the United States-Mexico-Canada Agreement (USMCA).
 
Most U.S. bilateral income tax treaties contain limitation on benefits (LOB) articles, which set forth provisions designed to prevent entities resident in a treaty jurisdiction from inappropriately accessing tax treaty benefits. Most LOB articles in U.S. bilateral income tax treaties provide a series of objective tests pursuant to which a resident may qualify for a treaty benefit, provided such resident meets all other requirements specified in the treaty for claiming the benefit. A number of these LOB tests contain explicit references to NAFTA.
 
The announcement provides that once the USMCA goes into force, Treasury, including the U.S. Competent Authority, will interpret any references to NAFTA in a U.S. income tax treaty as a reference to the USMCA. The USMCA modernizes and replaces NAFTA, is entered into by the same parties, and governs the terms of trade among those parties.
 
Treasury also states in the announcement that it will reach out to countries that have an applicable tax treaty containing references to NAFTA to confirm that they agree with this interpretation. For additional details, see Announcement 2020-06.