The one treaty article that reaches state and local taxes

A rule against worse treatment, rather than a rule about who taxes what. Article 25 forbids each country from imposing taxation, or connected requirements, that is more burdensome on certain foreign-connected persons than on comparable domestic ones. So compare like with like.

So it polices the how rather than the whether. Other articles decide the taxing right, and this one governs the manner of exercising it. So it polices manner, not right. The text is short.

The first paragraph protects nationals of one country in the other. They must not face taxation, or any connected requirement, more burdensome than nationals of that other country in the same circumstances. Nationals, not residents. Read it once.

The article singles out one comparison. It names taxation on worldwide income specifically, which is where differences between nationals usually show up. That is where it bites. Scope is the point.

Note the qualifier. The comparison runs against nationals in the same circumstances, so it is not a licence to compare unlike situations. So check the level of government.

So the test turns on nationality rather than residence. Those are different things, and the paragraph means the first of them. Evidence wins.

This is the one most British businesses will meet. Tax on a permanent establishment that a company of one country has in the other must not fall less favourably than tax on local enterprises carrying on the same activities. Same work, same tax. Name the comparator.

The comparator is activity rather than form. You measure the branch against local businesses doing the same work, not against some abstract standard. So find the local comparator. Then show the gap.

Our guide to permanent establishment covers how a branch arises in the first place. So build the case.

So gather evidence about the local comparator early. You will need it to make the case at all. It is an argument.

The third paragraph deals with payments leaving the country. Interest, royalties and other disbursements paid to a resident of the other country must be deductible under the same conditions as if paid to a local resident. Distance is not a reason. Keep the workings.

So a country cannot deny a deduction simply because the recipient sits abroad. The expense stands or falls on its own merits. The expense stands on its merits. That is the whole test.

One important carve-out applies. The protection yields where the transfer pricing and special relationship provisions apply, so an excessive payment does not become deductible through this route. So start there.

Check that carve-out before relying on this. It is wide enough to catch most pricing disputes. Form follows activity.

The fourth paragraph looks at ownership. A company of one country, whose capital is wholly or partly owned or controlled directly or indirectly by residents of the other, must not face more burdensome taxation than other similar local companies. Burden counts too.

So an American subsidiary of a British parent is compared with other American companies. Its foreign ownership cannot itself justify harsher treatment. Ownership alone is not a reason.

That protection sits alongside the pricing rules rather than displacing them, as our guide to transfer pricing explains.

Ownership can be direct or indirect, and partial ownership counts. The paragraph says wholly or partly.

It can, through the nationals paragraph rather than through the business ones. An individual national of one country trading in the other is protected against taxation more burdensome than nationals of that other country face in the same circumstances.

Still, the comparison has to be a real one. Same circumstances does a great deal of work in that sentence, and a genuinely different situation is not discrimination. So test the comparison first.

Personal allowances, and the article says so directly. Nothing in it obliges either country to grant individuals who do not live there the allowances, reliefs and reductions it grants to residents.

So a non-resident cannot use this provision to claim a resident's personal allowance. That is a deliberate boundary rather than an oversight. That line is drawn firmly.

No, and the article removes any doubt by saying so. It expressly preserves the additional tax that the dividends article permits on a branch, so the charge survives the non-discrimination rule.

That makes sense once you see the design. The additional charge exists to put branches and subsidiaries on comparable footing, so striking it down would create the very mismatch the article guards against. So the charge survives.

Our guide to the branch profits tax covers how that charge works and what caps it.

A defined list, set out in its own article near the front of the convention. That list is what makes the extension in the non-discrimination article so striking by comparison.

So two different scopes operate inside one treaty. Most provisions work within the defined list, and this one steps deliberately outside it. Two scopes, one treaty.

Here is the part worth knowing. The article applies notwithstanding the taxes-covered provision, and it extends to taxes of every kind and description. Every kind, it says.

It names the levels of government too. The protection covers taxes imposed by each country and by its political subdivisions or local authorities. All levels of government.

So this article travels beyond the taxes the rest of the convention addresses. Most of the treaty is an agreement between two national governments about national taxes, and both publish it with its supporting documents.

Read it alongside the taxes-covered article. The contrast between the two is the whole point.

Because a great deal of American tax is not federal. A British company operating in the States meets taxes imposed below the federal level, while the federal withholding regime in Publication 515 addresses something else entirely. Much US tax is not federal.

This article does. Its own terms extend to taxes of every kind and description at those levels, which is a materially different scope from the convention's general one.

In our practice that distinction surprises people who had written off the treaty entirely once a state-level question appeared.

The article is not limited to the amount of tax. It catches any requirement connected with taxation that is more burdensome, which brings filing and administrative obligations inside it. Paperwork counts as well.

So a heavier reporting burden imposed only on foreign-connected businesses can engage the provision. The money is not the only measure.

So look at the compliance burden as well as the bill. The non-discrimination article covers both of them.

It is not a general fairness rule, and reading it as one leads nowhere. It compares specific categories against specific comparators, and outside those comparisons it says nothing. It is not a fairness rule.

Nor does it promise the best treatment available anywhere. The question is always whether the comparable domestic case is treated better, not whether some third country's residents do well.

So frame any argument as a direct comparison. An argument that simply says the outcome feels unfair will not engage the text.

As an argument rather than a box to tick, which is what makes it different from most of the convention. No form claims it, and no rate follows automatically from it. No form claims it.

You identify the comparator, show the worse treatment, and put the point to the authority or in the return. That is a reasoned position supported by the text rather than a mechanical election.

Expect to explain yourself. The non-discrimination article rewards a well-built comparison and ignores a vague complaint.

The two work together, and that pairing is deliberate. Where a country will not accept the argument, the treaty's dispute route exists to take it further. They work as a pair.

Our guide to the mutual agreement procedure covers how that works, including the deadline. A non-discrimination point is one of the few that survives even where a company has lost other treaty access.

Take an illustrative case. A British engineering company runs a US branch, and the branch faces a deduction restriction that local companies in the same industry do not.

The comparator is clear enough. Local enterprises carrying on the same activities get the deduction, and the branch does not. The comparator does the work.

So the second paragraph is engaged, and the restriction is the kind of less favourable treatment the article addresses. The company would make that argument on its Form 1120-F position rather than claim relief at a counter.

Notice what the argument needs. A named comparator, and evidence of how that comparator is actually treated.

The commonest is treating it as a general fairness argument. It works through defined comparisons, and nothing outside them. Comparisons, not feelings.

The second is assuming the treaty stops at national taxes. This article extends to taxes of every kind and description, including at subdivision and local level.

After those comes the attempt to use it for personal allowances. The article rules that out in terms.

A fourth is forgetting the connected-requirements limb. Administrative burdens count alongside the tax itself.

First we find the right comparator, because the argument stands or falls on that choice. Then we test whether the treatment really is more burdensome rather than merely different.

We also check which carve-outs apply before anybody commits to a position. Start with our treaty relief service, or reach us through our contact page.