U.S.-German Tax Treaty Deserves Senate Passage

Published December 12, 2007

For more than a year, the tax treaty between the United States and Germany has lingered in legislative limbo. The treaty was first approved by the two nations in 1989 and is up for renegotiation. Both countries have updated provisions in the current treaty to bring it in line with current policy. For example, provisions were enacted to eliminate income-tax withholding on subsidiary-parent dividends.

The treaty has the support of the German government, the U.S. State Department, and the Senate Foreign Relations Committee. But Sen. Russ Feingold (D-WI) has put a “hold” on the treaty, preventing it from getting a full Senate vote and giving it an uncertain future.

According to Feingold, at issue are provisions in the treaty that mandate arbitration of international tax disputes. The renegotiated treaty is the only such treaty that allows for arbitration.

In May 2006, Feingold, joined by Sens. Byron Dorgan (D-ND) and Carl Levin (D-MI), sent a letter to then-U.S. Treasury Secretary John Snowe opposing tax disputes being settled in what they called a “secret tax court.” They feared the arbitration would overstep U.S. authority or be used as a vehicle for companies to avoid paying taxes. Although binding arbitration is new to U.S. tax policy, it has been a part of tax policy in Germany for a number of years.

Strong trade relations between the U.S. and Germany are mutually beneficial:

  • Germany is the United States’ fifth-largest trading partner and ranks first among European countries. To date, the two countries’ total trade amounts to more than $106 billion.
  • German firms employ thousands of Americans in the automotive, medical, and communications industries. They include such firms as BMW, Siemens, and T-Mobile.
  • A recent study by the American Chamber of Commerce in Germany rated the country as a “good” investment in part because of the country’s well-trained workforce and excellent infrastructure. The study states 58 percent of American companies operating in Germany were able to increase revenue in 2004.
  • The International Herald-Tribune reported that American businesses are building more factories overseas to remain competitive in the global economy. According to the newspaper, the biggest exporter of German-made washing machines is not a German company, but Whirlpool.

To preserve America’s standing as an economic superpower, Washington should do everything possible to reduce government red tape and promote free and fair trade among its partners, particularly one as valuable as Germany. In doing so, the United States will maintain its competitive edge and increase the economic freedom of its citizens.

I invite you to read the following news articles on the U.S.-German tax treaty, American investment in Germany, and free trade in general.

Nick Baker ([email protected]) is a legislative specialist at The Heartland Institute.

For more information …

“Tax Facts: Arbitration Stalls Tax Treaty Withholding Break,” Dow Jones Newswires (November 2007) – http://www.nasdaq.net/publicpages/newsdetailpublic.aspx?symbol=&storyid=20071121acqdjon200711211511dowjonesdjonline000809.htm&loc=interstitialskip

“Pending U.S.-Germany Tax Protocol Makes Major Changes To Treaty,” McDermott Will & Emery (July 2006) – http://german.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/31e4cd67-7064-49ed-b2cf-1ca1320498b9.cfm

“Germany Remains Good Investment Option for U.S. Firms,” Business Facilities (April 2005) – http://www.businessfacilities.com/bf_05_04_news2.asp

“An American label: Made in Germany,” International Herald Tribune (June 2005) – http://www.iht.com/articles/2005/06/17/business/whirl.php

“Top 50 Ranking of German Firms in the U.S. 2006/07,” German American Chambers of Commerce, http://www.heartland.org/privatePDF/TopGerman.pdf

Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation: http://www.unclefed.com/ForTaxProfs/Treaties/germany.pdf

PriceWaterhouseCoopers, New protocol to US-German tax treaty drafted (May 2006): http://www.pwc.com/us/eng/tax/its/germany-052606.pdf

PriceWaterhouseCoopers, US-German Tax Treaty – Ratification Process in the US on Hold (August 2006): http://www.pwc.com/us/eng/tax/its/Germany-8-25-06.pdf

Breaking Down Barriers to Trade and Investment: The U.S.-Germany Income Tax Treaty Revisited, American Institute for Contemporary German Studies – http://www.aicgs.org/documents/polrep15.pdf

Do Bilateral Tax Treaties Promote Foreign Direct Investment? – https://scholarsbank.uoregon.edu/dspace/bitstream/1794/79/2/2001-12.pdf