On July 1, 1957, the United States and Pakistan signed a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. Although, at that time, it was one of the few double taxation treaties that the United States had entered into with a developing country, it followed, for the most part, the template established by earlier tax treaties negotiated with the more developed nations. A major distinguishing factor, however, was the inclusion of a tax-sparing credit provision, by means of which the coverage of the foreign tax credit accorded U.S. taxpayers for certain foreign taxes paid or deemed to have been paid was extended to certain taxes that were ordinarily levied by Pakistan but which had been “spared” as part of the latter’s incentive program for the stimulation of economic development. Three other treaties—with India, Israel, and the United Arab Republic—presented to the Senate for ratification at approximately the same time also contained tax-sparing provisions. However, none of these tax-sparing provisions was ever put into effect. The Convention with Pakistan was approved with a reservation excluding the sparing provisions, on the basis that the Pakistani tax concession which was to be credited for “phantom” taxes deemed paid had expired. The other three treaties never received the assent of the Senate and were subsequently withdrawn from the Senate Committee on Foreign Relations in 1964. No other tax-sparing provisions have been negotiated by the United States, although other tax incentive schemes have been presented to the Senate. These, too, have failed to be approved. The failure to agree to any such provision utilizing tax incentives as a form of development assistance is often deemed to be the major reason for the notable dearth of tax conventions between the United States and the developing states, as the latter are particularly interested in the inclusion of tax-sparing credit provisions in the double taxation treaties that they agree to sign. This failure is, in turn, rooted in the severe and at times persuasive criticism levied against the principle of granting tax-sparing credits—especially in the form in which they were to be granted in the four aforementioned treaties—and in the consequent hostility of the Senate Committee on Foreign Relations, as perceived by those responsible for negotiating U.S. tax treaties, toward provisions of this sort.
The Origin of the United States Senate Committee on Foreign Relations