A U.S. amendment effectively denying an FTC for Canadian taxes imposed on profits of a U.S. producer on sales into Canada may override the Treaty
Under the prior version of Code s. 863, the gross revenue of a U.S. person from goods produced by it in the U.S. and sold outside the U.S. could often be allocated partly to the other country for U.S. foreign tax credit (FTC) purposes. Revised s. 863 allocates all gross revenue from production and sales to the place of production (the U.S.) for FTC purposes. This has the effect of eliminating FTCs for any income tax that is imposed by the other country on the profits of the sales transaction, thereby triggering double taxation where such taxes are imposed in accordance with any applicable Treaty limitations (e.g., under Art. VII of the Canada-U.S. Treaty – in relation to which Canada and the U.S. have agreed to adopt the “Authorized OECD Approach” (AOA) to the attribution of profits to a Canadian permanent establishment of a qualified U.S. resident).
Such Canadian taxes should be allowed by the U.S. as an FTC under Code s. 901 - notwithstanding the amendment to s. 863 - by virtue of Arts. XXIV(1) and (3) of the Treaty. However, does this amendment override (to deny the credit) Art. XXIV, either because of the later in time rule in Code s. 7852(d)(1) (respecting conflict between a Code rule and Treaty provision) or because of language in the 1984 Treasury Technical Explanation contemplating that, to at least some extent, the U.S. would be able to amend its FTC rules? Respecting the later in time rule, it may be germane that application of this rule requires clear Congressional intent for a Treaty to be overridden, whereas Congressional expressions of intent do not evince any focus on this issue.
Neal Armstrong. Summaries of Nathan Boidman, “Will Revised Code Section 863 Be Constrained by the Canadian Treaty on Sales of Inventory into Canada,” Article for Tax Notes International, 3 February 2020 under Treaties – Income Tax Conventions – Art. 7, Art. 24, ITA s. 115(1)(a)(ii).