US Tax treaties have been regarded as self-executing since the first treaty (with France) was ratified in 1932. Rebecca Kysar has argued this raises a doubt on whether the treaties are constitutional, because tax treaties (like other treaties) are negotiated by the executive branch and ratified by the Senate with no involvement by the House, and all tax-raising measures must originate in the House under the Origination Clause (U.S. Const. Art I, section 7, clause 7). Her preferred solution is to make tax treaties non-self executing, but that would reverse the universal practice since 1932, and is therefore unlikely. Moreover, tax treaties are generally precluded from raising revenue by the Saving Clause (Art. 1(4)). But Kysar’s argument raises another question in regard to the noncompulsory payment rule (Treas. Reg. 1.902-2(e)(5)). Under the noncompulsory payment rule, a US taxpayer who is entitled to a treaty benefit and does not avail itself of the benefit may not get a foreign tax credit for the excess of the withholding tax levied over the treaty rate (Treas. Reg. 1.902-2(e)(5), Example 6). But this means that the treaty raises the taxpayer’s US taxes over the amount it would pay in the absence of a treaty, which in turn raises the constitutional issue invoked by Kysar. The paper concludes by questioning whether the noncompulsory payment rule is worth the complexity it imposes on both taxpayers and the IRS.
Law and Economics | Public Law and Legal Theory | Tax Law
Date of this Version
Working Paper Citation
Avi-Yonah, Reuven S., "Tax Treaties, the Constitution, and the Noncompulsory Payment Rule" (2021). Law & Economics Working Papers. 178.