Summary: GAO discussed Department of the Treasury and Internal Revenue Service efforts to prevent abuses of bilateral income tax treaties by non-U.S. residents. Previous studies indicated that Treasury may be losing hundreds of millions of dollar annually as a result of tax treaty abuse. GAO studied the withholding tax systems used by three nations and identified several alternatives to the present U.S. tax withholding system: (1) a withholding-at-source system with refunds granted only on receipt of a certification from the tax authorities of a treaty country; (2) a system which grants treaty benefits by reducing tax upon payment of the U.S.-source income; and (3) a country approach where Treasury would choose one of the two previous systems depending on the situation. In deciding how to amend the present system, Treasury must take into account the level of cooperation the United States can expect from its treaty partners and the effects that the system will have on international investment flows. GAO believes that the task could be facilitated by using a refund with certification system, because it provides the greater assurance that taxes due will be collected.
