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    LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION IN FOUR VOLUMES Volume 2 Income Tax Conventions Sevs. 12-25 U.S. GOVERNMENT PRINTING OFFICE 73=0 IBI WASHINGTON : 1962 For s"i by tbm Superintendent of Documents, U.S. Oovernment Printing Office Washlngton 25, D.C. Best Available Copy LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS SUMMARY OF CONTENTS VOLUME I PART I-, INcorU? TAX CONVENTIONNS Page (3)

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    LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION IN FOUR VOLUMES Volume 2 Income Tax Conventions Sevs. 12-25 U.S. GOVERNMENT PRINTING OFFICE 73=0 IBI WASHINGTON : 1962 For s"i by tbm Superintendent of Documents, U.S. Oovernment Printing Office Washlngton 25, D.C. Best Available Copy LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS SUMMARY OF CONTENTS VOLUME I PART I-, INcorU? TAX CONVENTIONNS Page (3)

    Copyright:

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    135 views1,463 pages

    JCT Legislative History of U.S. Tax Conventions (Tax Treaties) Part 2

    Uploaded by

    Tax History
    LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS PREPARED BY THE STAFF OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION IN FOUR VOLUMES Volume 2 Income Tax Conventions Sevs. 12-25 U.S. GOVERNMENT PRINTING OFFICE 73=0 IBI WASHINGTON : 1962 For s"i by tbm Superintendent of Documents, U.S. Oovernment Printing Office Washlngton 25, D.C. Best Available Copy LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS SUMMARY OF CONTENTS VOLUME I PART I-, INcorU? TAX CONVENTIONNS Page (3)

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    of 1463

    LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS

    PREPARED BY THI

    STAFF OF

    THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION

    IN FOUR VOLUMES

    Volume 2 Income Tax Conventions Sevs. 12-25

    U.S. GOVERNMENT PRINTING OFFICE

    73=0
    IBI

    WASHINGTON : 1962 For s"i by tbm Superintendent of Documents, U.S. Oovernment Printing Office Washlngton 25, D.C.

    Best Available Copy

    LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS SUMMARY OF CONTENTS


    VOLUME I
    PART I-, INcorU? TAX
    CONVENTIONNS

    Page

    (3) ........................ action I. General Information.. (65) Section 2. Australia ---------------.-----------------.----------Section 3. Austria -....................--- --------------------(151) .----------(239) actionn 4. Blelgium ----------.--.-------.------(413) . . ... ... ........... Section 5. (anada ...................... --------------- (681 ) Section 6. Denmark -----..-------------------.. (741) ...-----------.---------.--Section 7. Finland --------------..... (799) Section 8. France -----------------------------------------------Section 9. Germany -------.-------------------------------.---(1275) (1357) Section 10. Greece ------------..----------------------------------(1437) Section 11. Honduras --------------------------------------------Section 12. Section 13. Section 14. Section 15. Section 16. actionn 17. Section 18. Section 19. Section 20. Section 21. Section 22. Section 23. Section 24. Section 25.

    VOLUME 2 India ------------------------------------------------(1503) Ireland -------------------------------------(1579) Israel ---------. ..-------------------------------(16,31) Italy ------------------------------------------------(1651) Japan -----------------------------------------------(1723) (1889) Netherlands ------------------------------------------Now Zealand..---------------------------------------(2013) Norway ----------------------------------------------(2067) Pakistan ---------------------------------------------(2173) Sweden ----------------------------------------------(2319) Switzerland ------------------------------------------(2381) Union of South Africa ---------------------------------(2457) United Arab Republic ---------------------------------(2541) United Kingdom ....................................... (2565) VOLUME 3
    PART II-DNATit TAX CONVENTIONS

    Section Section Section Section Section Section Section Section Section Section Section Section Section
    Section

    1. General Information -----. ..--------------------------(2961) 2. Australia ---------------------------------------------(2967) 3. Belgium ---------------------------------------------(3007) 4. Canada ----------------------------------------------(3045) 5. Finland ---------------------------------------------(3257) 6. France -----------------------------------------------(3309) 8. Ireland ----------------------------------------------9. Italy ------------------------------------------------10. Japan -----------------------------------------------11.Norway----------------------------------------------12. Switzerland ------------------------------------------13. Union of South Africa ---------------------------------14. United Kingdom --------------------------------------PART

    7.

    Greece

    .----------------------------------------------(3409)

    (3485) (3529) (3587) (3687) (3745) (3791) (3885) (3956) (3961) (3993)

    III-Girr TAX CONVENTIONS Section 1. General Information .................................... Section 2. Australia ---------------------------------------------Section 3. Japan ................................................ 1Ill

    - !%

    Sec itII
    S'e'lt
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    i tlli.li (OECDI)

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    17M'i;

    IIVI

    SECTION 12 Convention With INDIA

    (1503)

    INCOME TAX CONVENTION BETWEEN THE UNITED STATES AND INDIA

    November 10, 1959 .... Signed at Washington. April 1, 1960 ---------- Date of Indian note to United States conApril 7, 1960 ----------

    note of April 1, 1960. May 6, 1960 ---------- Received by Senate; designated Executive H, 86th congresss, 2d Session; injunction of secrecy removed (106 Congressional Record 9710). June 28, 1960 --------- Senate Committee Hearings. [Convention pending before U.S. Senate as of date of preparation of this documents

    cerning basic convention. Date of United States note in reply to Indian

    (1504)

    CONTENTS OF SECTION 12
    I. Presidential Message of Transmittal to Senate (including text of convention and notes) -------------------------------------------2. Senate Committee Hearings -------------------------------------Page 1507 1525

    (1505)

    I'residentialMhessage of Transm ittal to Somite (including ?materials enclosed thereirith)

    (1507)

    Iif. ct~ox

    SE8NATE

    acuTJV

    AGREEMENT WITH INDIA FOR AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TA.XE ON INCOME

    MESSAGE
    FROM

    THE PRESIDENT OF THE UNITED STATES


    AN AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND INDIA FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON NtoVEMBER 10, 1959
    Mvr 6, 190.-Agreement ws read the first time and the injunction of serecy wa removed therefrom The apeement, the Preident's menage of trann, mrtral, and all accompanying papers were referred to the Committee on Foreip Relations and ordered to be printed for the use of the Senate

    To she &nSe o.f Iae I'Uiied StWa:

    THS WHITE Hot'sE, May 6, 1960.

    With a view to receiving the advice and consent of the Senate to rttification, I transmit herewith an agreement between the United States of America and India for the avoidance of double taxation
    witai n-spect to taxes on income, signed at Washington on November transmit also for the information of the Senate the report by

    .merican Embassy at New Delhi and the Ministry of Foreign Affairs of hldia with respect to the proposed agreement. The agreement has the approval of the Department of State and the Department of the Treasury.. Dw D EISIow.
    kEnclosures: ki) Report by the Acting Secretary of State;-(2 incometa. agreement with India, signed at Washington' November 10, 1959; (3V exchange of notes dated April I and 7, 1960.) (,s (9)

    the Acting Secretary of State and an exchange of notes between the

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    1:111 )

    AGREEMENT WITH INDIA CONCERNING TAXES ON INCOME

    wouhl be beneficial to both countries and to their respective citizens

    It is believed that the agreement with India, if brought into force, It has the approval of the Department of State DoUGLAsPIIJLON.

    and enterprises.

    and the Department of the Treasury.

    Respectfully submitted.

    (Enclosures: (1) Income-tax agreement with India, signed at Wash. ing November 10, 1959; (2) exchange of notes dated April I and 7,
    1900.)

    AGREEMENT BETWEEN TIHE GOVERNMENT OF THE UNITED STATES OF AMERICA AND TIHE GOVERNMENT OF INDIA FOR TIHE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME
    ment of Indi , desiring to conclude an Agreement for the avoidance

    The Government of the United States of America and the Govern.

    in good and due form, have agreed as follows: ARTICLE I

    of double taxation with respect to taxes on income, have appointed for that purpose as their respective IPlenipotcentiaries: The Government of the United States of America: Christian A. lierter, secretaryy of State of the United States of America, and The (Government of India: D. N. Chatterjee, Charge d'Affaires ad interim of India at Washington, who, having communicated to one another their full powers, found

    referred to as "United States tax"). (b) In India: the income tax, the super tax, the surcharge, imposed under the Indian Income-tax Act, 1922 (11 of 1922) hereinafter referred to as "Indian tax". (2) The present Agreement shall also apply to any other taxes of a substantially similar character imposed by tile Governments of the United States of America or India subsequent to the date of signature of the present Agreement.
    ARTICLE II

    (1) The taxes which are the subject of the present Agreement are: (a) In the United States of America The Federal income taxes, including surtaxes (hereinafter

    (1) In the present Agreement, unless the context otherwise requires: (a) The term "United States" means the United States of Anierica and when used in a geographical sense means the States thereof, and the District of Columbia. (b) Tile terms "India" and "the territory of India" shall have India.
    the meanings assigned to them in Article I of the Constitution of

    (1512)

    AGREEMENT WITH INDIA CONCERNING TAXES ON INCOME

    (c) The terms "one of the territories" and "the other territory" mean the United States or India as the context requires. (d) The term "person" includes natural persons, companies ani t other entities which are treated as taxable units under all (e) The terin "company" means any entity which is treated as a lbody corporate or as a company for tax purposes. (f) The term "tax" means the United States tax or Indian tax, as the context requires. (g) The term "resident, of the United States" means any individual or fiduciary who is resident in the United States for the purposes of the United States tax, and not resident in India for the purposes of the Indian tax, and any United States corporation or any partnership created or organized in the United States or under the laws of the United States, being a corporation or partnership which is not resident in India for the purposes of Indian tax. However, the term "resident of the United States" shall not. be construed to prevent India from taxing an Indian resident or company under its laws on all income irrespective of source. (h) The term "resident of India" imeans any person who is resident in India for the purposes of Indian tax sand not. resident in the United States for the purposes of the United States tax. A company is to be regarded as resident in India if its business is manaIgeml and controlled in In(lia. However, the term "resident of India" shall not be construed to prevent the United States from taxing a United States citizen or corporation under its laws on all income irrespective of source. (i) The terms "United States enter rise" and "Indian enterprise" mean, respectively, an industrial or commercial enterprise or undertaking carried on by a resident of the United States and an industrial or commercial enterprise or undertaking carried on by a resident of India; and the terms "enterprise of one of the territories" and "enterprise of the other territory" mean a United States enterprise or an Indian enterprise, as the context requires. 0j) The term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. (aa) The term "fixed place of business" shall include a place of management, a braiich, an office, a factory, a workshop, a warehouse, and a mine, quarry or other place of extraction of natural resources. (bb) An enterprise of one of the territories shall be deemed to have a fixed place of business in the other territory if it carries on in that other territory a construction, installation or assembly project or the like. (cc) The use of mere storage facilities or the maintenance of a place of business exclusively for the purchase of goods or merchandise and not for any processing of such goods or merchandise in the territory of purchase, shall not constitute a permanent establishment.
    the tax laws in force in the respective territories.

    (1513)

    A(;IfrINt, I'r

    WITan INIDIA CONC

    NIt' 'I'AXES ON INcoMr, I

    l'srie t' ) ' lt, ,it Ii l or It' it( (tltl) A p'Ir'so" | , il g I ht-, Il114 " 1111 0''rrletril 4'11rv hifor t4111t l Vl~l 1511 I ''.l I' (if ti l'll'4114 of'il p is. I.51 k 1'-I" . tw tol Ili- itI Jserllln~l it i.lhlitll~l IIIf ile ' -lillilt

    Ir'rilorrv if he h 41111d ltIIlt itlts' IRS imei ) i,\t' ii 'oi lit lirt-tt-n'rn. ill t tl'll t.)' (In' i tv 1) liti' ' liri.i ,. I,tiIl~rt I:4.)4 l t'tit.I' .1r t suti ult't.i 01 ln'' 'lr lit'.tili' lit , Io m (i'f fil eil erIris' . ) I4 1
    Ih ll lt 1 t11 40112 i(if ,gooIu"iEr 't'hll iti ' il rt forithe hit'

    2. ' he4 Ihu 'lim IIilliil 'llt.vs ill flit, lit'tltnillnt ,d ci k oiti gi ltni, Iizt(lill ' I)4tlhtllg ,'to ilitt l liI itt rr t l's4t fron t'ot'l r id'll'TIllle(t)1 tErito)I'ti llt'S tng It' erritory'' t l. ~)e tl'il is l dliv'4 till'I' ll'4'E ri.v from %lll hllit e1 , 'hll .goo st ot It I II tlut' lit, r tltilItit iff'I It't, l itit tlr e 44r iit I re II ig or Itiv tllt' :1. he hiltillut1%. se l ri lr o1er'. illthe

    Itl ilselfll IIr fol.r l ille,i,' f ise, and oli e minlerlprim-,.. rrilor'i .il(ifI I vil!lll p \this lsi ..iv',Ivt' ih 1' oftler. prlise. l'lr wvhi'li are, .- ilrolledI by~ it:`r have it. volirol~llllini interests m
    it. t Tl S0.' frvii tlll l (-ll ofl thel terlritorlies.' whot is prl'svi'll ill I~II1 other Iterlilon. fol.r Iii1~l mo rt, e111113lllIItlllh, o IIll the vvll, fil.r f'r . iI I rl . ll"f ,ott lll4ill -iN~' shall 11ol Ibe 44,4111.44l to kl h111hilutil l\." S41,11111r 0t.le,;'d' wil hin Ihlv Il'llilv l illng tis uhll-, lo .rll h of StllullII< a'llis o wei,) .A blitl'lk' ofl it p.'lllilleilv ilidept-11 4- l nltelyl i ,ltlv ti s I'till inl erme I MIT 6OWP'll lilt enlllelpri.ts l' oi"ltl.t lliti~l% ill
    o fil e ti'llrl'ilolles, 1111d ,1 pros wet'live' iel..lis llllr Ii the' other

    Ie'rril r*'vshlI lln t b l k lll- I iht) lilt-iii ill thatI other Ierlriltorv.

    it lipen lt 11411 l 4-slll~ l~l~ .. l ab'll -

    %, i (IF) Til., fact' I hat1 it co' pllyl~l mIhie'lls it r'esidhellf fill" ofll I1 'llel'ri'lloriv,, lilts, it wI illi~l'.\ 4I' lll)II\l , lbl \ 11.1 i ehll eihtr i 1%it, I'~itiviell olf I1 l iv llel' le~rlillo'Virv o l r11l'ieso itI~llrhli~ ll s ill dhw, other~l Iv~rrilor -y wlheler through it pei)lllll ltit'lll I l ils lIShtl.'t~ll 01l' 01114-r1614V Al.IM 11 (If it" Vf 'll, 1SlllitillP' 1th11 usllh iaryl'. co' lill)ll\Va it I l'lerillntilnt eslitllishmthll'l of its Ipnrmnl

    Pk

    'Ill, - fermt "ililillltrilI orl vollllelll


    grlplltllh flih.l,

    vltial Iplrolits"t'

    shllt

    II ol

    illl'llth.' illcl'lllt. ill file' forml'l

    fwi'rllls, Io(l'lllfic'., imlud'hl

    iigl I'ells or

    royaIlie~s fl.r c'ilivllll

    fees {fol Ivli''llicill se'r'\iv'eq, I

    eVI ll I Ifrllitill gullsin.l, Illl ,rillinfr Io.zoll. S.I illiel'est, diitivids.tl it, ivel,., oll in('collle fl'lilll II1 op l'illillll ofsi.'l ps'l.'Il lllllll Ii (I) T ilt.l eril'n "pl~l'siollns , Illetilll.s periodlic 11\ tll'lll1 Ill lll1ld Ill c'il klll tlsllilli ll '(1l0 ithd l'lllitlll fol. r.,tlvivets I-villd re~d o rl by~ w ~ty o 1f

    fl.r injturies. I'e'vive'll.


    ull ablel Ip 'riodi'IIl(le llls it fixed' Slit I T ill te~rnm "111nntlillel l t ll[ tillit.,; (ill-lri Ilift., oIr (1ilrint.g it slp'wili'd nullil1ber olf fo~lrl i' i t rlel. i l ake tilt, pay enti yeanl.i, undethr tilll oblligatlionl Ito Im Ill" lllell '.s' Worth. ill on''llll IlllnelllP lidt-41l1llllv Illl(l full considerati t Ife (11) lThe ill "co~~ lllp lll 1111lh1 t'il\' invl l,s ill ilhl c' .ls oif IIh ' lone ht.izl'l Ili,; Ioi United, stllll~t' the, Serel, arv' ofl Owl 'irelurv i of11 l(ill, I1l, (.', llll'll Govl-ll~l, elllt'l illllifVe' andl ill htil 'l" ill's I'Vl'le ell'' of ill lithe M\inlistry% Financel'l, Depar~tm'entll of iReVelllel ill'ils 11ull01m.. ized rwilm-sent'l t it i ve. (*2) Itl till' olplliv'alion oft t.I- Iprovisions. oft tlhi. Ag~reem enltl ill m~le (Ifl sll hall, ll die, territforivs any.% ferll iioll othlenv'ise' de'iull'e ill Ihliq .\grevl'l (ml)

    (-,lvIlly

    (151-1)

    AGREEMENTr WITH th, e t ttlt'ss I

    INDIA (CI)NCERNIN(G IAXES'.

    ON INwOMI

    flit-'a ig whichl it lilts Iqirs, hlivte e'. t lerwbst r te 1utl'er Ilit, laws il fo.'rce i. Ihliit terriltlrv relauig to the'lxe.s which orle tle' stibjelt of hiits Ag.reeutwt.
    AITIC'ILEt III

    I enlt i'rprise shalII tIt I.' stilljeu.l 1to 'giftd.Staltt'e hli 1) lit) Xi Iti. )riolits taiil..ss it iP etllgiaged titrl III\ li't'tsleel of it1, 'ot.illert'iiI or i.iti tIIrotugh it Iprmntlit'ttt e'stuiiiti's it-,littt'-, ilt the I'litfd St tohdr ill s lix iltel I ,rteiu . If it is soeI'tigagttl , I'tilt e Stilll'eS 111ii.v t l i- ttt'H tl ilt l
    bet llIm posed lpo ll tlbe e'lliIlre illvoille' of SuchI; I 'lllIltor l'ise' fromql solllll'4i'.

    f wilhi lh, I 'il.

    ,lle tlles..

    at Iltilt'ld St1114-4 .111t'itrpi.se SIliIll tIot be s.tloj,'et toI li1lh,. It.x (Ib ) ill re'spelt of its itlldistrial or 'oiilimerv'ilI prloliI. illns. it is 'lgilaged lli.ltitel'it iIi trade or lnishiit.ss in I ii lhotgi. a pertiiti t'sti

    -. ltited ilt hlreili. i


    litllitl

    If it isbso e ',,.

    It ,li

    I.. ttiiplsed't
    Inlill.

    lie ,,llit.' ico,'me of suclih ,'

    ritt,.se fronm siirt'l within

    of e's lto perni e nt a lit lltl' (2) There shall le atitributt' -i Stil.'iterprise of ot.I' of tit- leir'riloo's sit ti'ld ilt llhe other lerrilory hle intl..I inl tit vor'liititetel profits wlieh it tiiight lie exl.'petted ti) derive it thitht other Ierrilot'v if it were' lil ii ldej itlihlt entat rprise tll or 1'11tri't.ld i l 'i -11111t' sitiiil.r i'ltivilit's itIler til' sit t ,e ,t, suiiilr liet, lit 11 eititiliols 111 '.ilii.,.at tlin Ileuitlh with Ihit eiterlisi' of which whert' the 1- illIn lilt %iest Irilbillhit it is ai ptl'rtnnn,'uiiI ali.lishilelitt. it)itprmllzieli,' '. esilkl~i.lnt4ilel torrtc't 1111 Irolil.li OIIltf
    pilhe oif tieterg ii intiou or tlie uasi'tirlt iinit'i thereof liretits, e\n tte il iiritli 'li' li sis. Ill dheternlinli.,. t l islil it-l i We tt I.eliolliell itti.telil s.a tlht thfmliitr111IS-1 Inliv bestinlnled oln it relksoililihe bl-4i~i. %.
    t'

    Oir Vi'lllltli,,rt6ial prolils of ia perltllitetit


    11.Iio'A 1ll,,wvd its (Itdl'll.. il epiiie-,'

    wherever im,-.rr,,d, re,.soinlily

    t'stablilis-lieit'tI

    there shall be,

    alllbililt' to such pel-niliie'lt te'siliblishlietlt. iell

    ,litig emettItlive wntl

    Whe~n. (a) lai e'nt rlrisei of one if tifl irrtot'it.s t r iliilll. 11ii dit l.'IIp

    or iidireet Ilv ill lie IInoItIgetit'I prise of fil Oth'r t('rrilorv

    t, ('oltlrol or nlipi of till elliror

    (b) filt' sailt' lrsotls l)1it'ipilte dire'tlly or itldireetlly in Ilie irol cpliltl of nti etlt.'rprist.' of otlte of tlit' or herritor~t, and t'rlprist' if Olh ot1110 lilrtde or imlp)osed bet weeti lie two elttItrill vilther c'list' ('o:lit ions are
    enttt , tton intiui 1t1 til i t'rrit tits a i prise's, ill their colnnlerv~ild Or fllinni~ld rehaiolls, Which dlilffr from

    those which would It' liatleli between idiiellptiitell 'it'erprist. Ilivll it) alny p)rofits whichl but for those co'itlitions wotull have a'eried ton of t lie iilerptises blit by rt'ltsott of ituist' u'oiili itios have niot so a'e'rrlid Iiii.V lbe hit'hiclued in tlthe Prohits of Ihibt eliterprie attid it.d iatortlingl..
    tnvIIictI; V

    ,t Illlt'tolile derived bll" eiterprist' of oilt of thie territories from flit'


    Operator

    Hiol be titxed ini thil, oilier territory.


    73i095 , 42 Vol. 2 2

    n of aircraft registe.erd or dociuIt,. tntedittI ill thitl territory shall

    (15ml')

    AGREEMENT WITH INDIA CONCERNING TAXE8 ON INCOME ARTICLE VI

    Anioutits paid hy an entierprit, of one of the territories for t echticial services furnished hvy an ent erprise of tflie other Ierritory shalII not) Ix subject to tax by tlie first-meintioned territory except insofar as sc'h aniounts arc at triibitlheh to actlivitiv.s a1'liailly p)erformed ii( ithe firstl-intiomed territory. In contl)ut ig the iti1otne *4, Subject, to tax, there shall he allowed as deductions the expenses incurred in the -entioted territory itt comnection with lie acl ivil i.s lerfornted first
    in that. territory. ARTICLE Vil
    (1) (a) Salaries4, wages anid similar comupensaliol and penIsions or antnuit11s paid hv tflie rjnifd . ates or by anv of the poktlifil stubdivL4ion thereof to a cit izetn of the United States for services rendered to the united d States or to any of its political stihdilivisions in the di8charge of govornttnueal fuctitois, shall not li, taxed ili India. atd (b) Salaries, wages similar compensation auid kwiwions or annuities paid by Indiia or by a11V of the political mtlllivisions thereof to a citizen of Itntlia (other that al individilial who 1I1a utittgrtint status itt the Utnited States) for servi('es rendered to India or to any of its political suldiivisiots, in the discharge of governmental futet' tos, shall tot he taxed(l in the United States. (c) The provisions of sul)-paragraphs (a) and (h) of this Artidle shall also ap ply to payments made by the Reserve Batk of India atd tile Federal RKeserve systent of the United States. (M)The provisiotas of the foregoitg sub-paragraphs shall tot apply to payments in respect of services rendered in contiection with any t-rade'or busing., carried on for purposes of profit. (2) Pensions and annuities (whietier represnting employee or employer contribut ions or accretions thereto) frott funds administered by tile Governtmettt of one of the territories paid to individuals who reside in the other territory shall not he taxed in the first-ttettiotaed territory to the extent that such payments are allocable to services the rntuineration for which was not subject to tax in the first-men-

    tioned territory.
    ARTICLE VIII

    (I) An individual who is a resident of India shall not be taxed in the United States on remuneration for personal services, if(a) he is temporarily present in the United States for a period or periods not exceeding in the aggregate 180 days during the relevant taxable year, and (b) the services are rendered for or on1 behalf of a resident of India or for or on behalf of a permanent establishment in India of a United States enterprise, and (c) the remuneration as such is not deducted in computing the profits of an enterprise subject to United States tax. (2) An individual who is a resident of the United States shall not be taxed in India on remuneration for personal services, if(a) he is temporarily present in India for a period or periods not exceeding in the aggregate 180 days during the relevant "previous year", and (1516)

    AGREEMENT WITH INDIA CONCERNING TAXE8 ON INCOME

    (b) the service's are rendered for or on behalf of a rsident of the tfnited States or for or on It.hslf of a It.rniai-tit estal)lilnint in the United Stateis of an Indlial enterprise,, and (r) the renineratrion as szch is not deducted in voinplting the i)rofit.I of an enterprise clinlrgahle to I ilian I ax. (3) Where an individual l.,rnimentlv or predohninantly riideirs ,,rvices on ships or aircraft olrate'd by all enler sisb of oIe of the Itrritorie's such servivces shall be dee'ni-l 1el he rI1mird in that h4'rrie'rel
    tory.
    AR{TICLE.E IX

    (l) A resident of oelte(he, territories who, of lt the invitation of a wiiversitV, college, school or ottier recognized elthatlional institlttiion
    ifithe, ot her territory, visits smili other temrl sole lv. for the phirplete'. .

    sutch edtivlt ionil ilnstilnion for a Ix-ridl not, exce'eeding two Ve'srs,4 shull not be, l.ad in that ot her territory on his remuiineration f6r sulch tIehii.g E)I r,,,iarch. (2) This Article shall apply to an intlividiul e'n ragedl in re'sare'h only if the, nrsillts of sulch r'.w'blre'h are freely avaihlfl), to) the,' g'rne'ral
    Aic' i.ti; x

    of teaching or e'ngaPring in re.s.,arch ,ti

    (I) Aln individual from ofl' the te'rrlorie'i- who is te4lplllorarily elf pm'-'i lit tile other territory ole'lv (a) as a student at a re.e'ogiizel Uiiiersit. V, college or lhool in '

    an employee of, or under contract with, an enterprise of the former territory or an organization referred to in paragtraphl (1) stub-paragraph
    (e) above, solely to acquire technical, professional or business experience from a person other than such enterprise or organization, shall not be taxed in such other territory on remuneration for such period, unless the amount thereof exceeds 5,000 IT.S. dollars or it8 equivalent

    scientific or edlueational organizi tioll shall not Ibe taxed in such other territory inre'se,.o 41f ren.ittane'es from abroad for the purpose, of his maintie'nin'ce, ee Ihe.ation or training, or as remuneration for employment. (2) An individual from one of the territories who is temporarily present in the other territory for a period not exceeding one year, as

    such other territory, or l I (b) as a busin's aI)prt'itice. or (e) as fihe recipient of at grat, allowance' or award for tile primary purpose of study or res.,oireh from a religious, e'haritalhle,

    in Indian currency. (3) An individual from one of the territories temporarily present in the other territory under arrangements with the Government of such other territory solely for the purpose of training, research or study shaH not be taxed in such other territory on remuneration received in exceeds 10,000 U.S. dollars or its equivalent in Indian currency.
    ARTICLE XI

    respect of such training, research or study, unless the amount thereof

    (I) The laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where provision to the contrary ismade in this Agreement.

    (1517)

    10

    AGREEMENT WITH INDIA CONCEIINING TAXE8 ON INCOME


    ofl ~id, b% delilr pallhl'll{, . itl 6) t' hliai 1 I,,I of tl' o le, errit or

    (2) Foil Ih' pitirlw.se of Ihis Agreetliteiw (11) Inirllers till lally forirll of"
    MWn,, III, lerrilt6lo'5r. of
    fri',11,,

    its

    irlncom

    fromll

    it tI' it'l'1 6or

    sollillves.

    wilhin

    file

    liis,

    114,1-nlo'lledu,,

    I tir'ltorv'

    (h) hIllriit,, p)rolils or galills htruived front tlil' sill' by till% l6l'oll ill onie6' of hi' leri'itorit's o"f goods IIIiillifiit'til't;I or Illl,)(lllr,,d Ill Wh ole l.rI. lll a ' t Ill fihle oth e~rterrliltory by suclh pl Al'l. p il,
    goods we'' 1111111 IIIIII

    sliill be11rIllheti a den e'eill parl ill (hle terriloy ill whlich Suctlh I. rtllr'd or prodl iitedl, 111141 l' ill t lihe ill It.'l'iIr. ,v

    ril'olil. orl Y whlere lie, were so,l . I'tll Ihe 6'11t s.lri iiI(n1II16, , gains ilt' iaIIho'lilvhh iunii lthr on. 1 ot pirois'tioins1 of tthis Agr''iiieI ihi' .lia Isa a he 116)l1tl Ie't e'ell Ilie I wo)Im''rtlrit's Il1 alt'ol'tli ,e
    wilbl hllt relalive ide andh,.p.1lroliirly of .suc'h pls.oll Ill lilt. ''lr' I as iiIi~ h)' t'i'tors 1iipi l'li rilllt,. ntid S.ilih otller (c)} Incomelll f'rontl inmilvahle, property'l~ (inllellidlig galills dherived f'romtn he, .lkl or exl%('IIIIgei of .suclh piroperty) allld IroylIlifies, r.1'sl., oirallly mother inllcllit,-leriv'ed frmfle. pelril'll ioI of I111l14's, (IIlllrlnes,. Ih

    fit' Ivrri'itorit's

    or au'v other nei' rnui're.l

    til'ais-ing ve'4.ir.6s rt'lltedli. uille shildl bet is eu. ill I llt Itrril orv ill which suill lpri)'t,rlh is siltloI l 11 I , (di) Relmi IrIaIrllilln for p6l'5)lill .t'l'Vit' ss hail 'ble '1iea ttI inco'melll6' from Sollrvet' Illt ttrritorYv wlier'er. S.tl serve et's.a ir' wiltIin (etl' yllit's a1 .siillulihr i)lliyllvlllts for Iflil, ul, o1r for tlhI' right 141

    r S(t'i6'ithilit' io) ist.' ill om"' of the lt'l'rllries, iopyrigtls, arlist.it tlt'la rks, plans, .scer'il Wolks, patents. modls-, designs. I v slall heIr'a t11. inli'6olit' lllI )1'WOTSsil,, formi e aid like p)roptyl'

    i r,01ii s ltrees within sw'l tri tory to'anitit'.s miillt bv fi tll 'nterprist'of 0lli' of Ilit' (M) i'eliiiillo or iltl'ril fo)itt' tll individ ual \ Io is, a''reseitll oflit'h ot lt'i' rrilor lfile ilA-nieni illl,4 sha1ill he treatiitedf as5 inictomeil1, from slll'ls,, withi (
    (g/ ("iililill gains. if ally, dleriv'ed fronm alnl" v'oillfit lihitllli of 4r111lilil iln kind bI I1resident of one' of ilie tei'ritorit'i ti6)wartis lilt, iln folrmnt11iionl of ait,w com)ili)iili'"liri6or 'l ttlpril Itlt otiliter lrriloti'. territ ory. "ill ,shaill hbe I created ais arisingill" fit-111t'"l1
    A ITI('I, F XII

    li'lo'viionsl, (if Artlit'e (1) Subhjecr't to IhI, ut Ritv',('oitde r'egillridlitt aillowaille of Staillts aix for l(x payiihh il iiit1 ter'iit ory , 1ii1'itl' " Indiilli tax lilivailt, wli tltlht'r il,"v

    XI and161 the of

    Iinlellil'l

    a v'redit ligaillst I'littI sllidt'hi., United St litil, Il,


    in dthit'( Biillion, r'espec't tif as a ci'edit againiit.

    1h, allowed 'in'oil, fronti soul'ts withinli Indila -. i1all

    United Stallles Ili jliiylihh' ill I'esl't'tl of llhil ilnrolne. of dlu litx (o hbe iti t oi'(it' purposes f arriving ul (lit nlliull h allohwedla a t'rdlit: its lhave hllh (ai) Thler, tlih he dee d1h()iv ben paid ba ITUiinitd Stlill's ' h, ll donmest ic' l'6)lil'6ra ti ll i llt' jincm of which ol' inilu'de iltlliis, e(i lh'itfils of, Sol(.I'1.5 16n lt I h.t. which lilt\ i't'ti uf iitll, 10(2) (vih) of lih' Induiai Intoinri-tax At'l, ati almloilult ,(liiltl to hii (lie reduc(tion in tlax re'sulnlhg fi'ro t (11, al)plliit'iion of Suclh s'ttaken hino l reduction in tax ims, to lIn' , it, t ions. lhw lhl, ,811u1ll ulot 'xettld ie nniol1t which Woultl lhave'bell, availiill8il

    (llbi8'

    AGREEMENT WiTi

    INDIA (ONCEICNING

    TAXES ON INCOME I

    able 1111,Ier hl 111111ll'tv-tmeInx Act itsit vireei~f'' file tintt, of llt on


    oi~tth f li'Jrt'st'i Agree'nnt. (I) Where a I 6it 4t1 Sltlltes dloli-s irvorpolr-alion re4-ceives divi,ht'llsl fi'oi fil l lllii c.Oll lliill% i h il h ich i , t tlls I,' Ilii 111 io", of flit- v iig st tik, it still bhIIIii' 11't' Io ' I l 1 III Vt' ill t Wlit ll it re1ferencet I"( smuchihle 1IIldli~lv Il'onl,,-Ilax e.Ac.. fill 11lnl~lwl e'qill ilof to of di~it lld'n whiichli lii receivelet flli belenei ts 4 St v l'l signalitt

    lit' redij' ioul ill Ilux resulilt ing from IIf lt'tpphliclll ion of I his Sect iol. 111111 the Ill(lifil 'olpaic slI le,ill o"ihjll deilled hto plidl with refervle 4'hi't' to its iictioll'e I Ivit'li ht1., re'ceivd fite belltlits of Sectionl 1A i( andti I )(2)(viii) of tihe ituliat I llt olll'-l Ix A.cliltan tillloilut eqll to thel red ilioni ill Iax resultingg from tihle application of Itlhese sevIions. IHlowever. the' rednltions, ill t ax iiis, to be ikein into itcI lountl sl111l ii tt 'Xt't'tl Ibhe al 1141unt1S tlii tv wohld halve Ie avlitlieelln Ihe tidglihr the In1diall i iicomi'- Ial A4'1 it., inl etfecl oil the de(t (if sigill Ilre of I Ihe Ipl-'-set Agrelt'liellt (r) W eIt'll'ere is iilieidell ill lit,' iln'olle (if at I killedd States lolutliiC t'or 411rtllioln Illi ltn iolt le'ss i 11 0% otf Ilie voling stock in alt il lltipliv altv iintlei'Is paid by slu'll Intiallt t'tiullliv whicl is t'xt'mplt I, fi'tiill lax iu1ithtr sub1clhills' (iii) of Set't ollt .1(I)(xviibl) tif tl,' Ilitri ll Iliollhne-It x Act., S-1c- I'l itt'd ,l itlI .q 'ol'rporallioll shaill be, deh'lniel it) haIve' paidilIl lilt- l11llillll (if afix from which t'xtlnili ionl liis b't'iil griltill'l. lHowe'ver. the t'xt'ulpliiln 1 liiis Iulkt'll iil to be nito teuli shall iot t'xceetlle t' 1 flil~onll tthll 11 woldll halve' I'l'l a~vailableh 1111lhr the' I11(liti In,'oilY'-

    Ililt-ill. (2) Siilij't't I the provisions of ArtlivIl t I tillI lii' Ietlidii lIncomte'of Itix A.' (as1itl erect oil (lit ti"tt' of fit' silinttll'' of tlit-' rle('5('sii Agre'e'n11,n1), I'lliltt'tl Sta's lax paIy tl', whuu'tll er direttoly tr byv deduction, bI i rll residen' t in Itlliillt ill res'5p'ct of iiicomte' front stut',tre., w ithin the I I "ledtSaes shill bli' illowe'tl its t 'lt'tlit,gailtlsl lld liiitet'd to

    Ilhe Itdialtl tax pityabi' of" Inveitico11t'. ill 'p'l t l


    AR(TICLlE Xiii

    of fit preset Agrt'eenit 4nl !oit ie t'olsli'lled to )i'e nhall r'estrit't i ian lvnnt ltti'tliv tetexiemptlion, dth'lul'tioll, t'retitt or other ailIowalt'te to :ltit'lt at itt11'1 wtViiOtldi bei entitlted uiitit'ir flt' res'pectlyie laws of thelto territories, Iadttl tot ihis Agretm'ntntt comt int o t'fl'lt. .Airritci.: xiv

    '0tH, provisiotin

    (1) 'Thlt comipiet'nit athoritie, shall ex'ltlwnge such inlfoilittaf ion (being illfotrn loll whit'l is itt. their disposall Illtder their respective t taxtllion it ws in t lit Vti'nttl cotitlrt of ldllmitlistrlliol) its is lt'eessma'rv t for c'arry'intg ouw ithe IprmvisitOs of tlt i)reselt Agrte'iteni. Any inifortllitionl so t'xchllualgt sl1thb1 I' tire its .,t'rel aitd shall llot, bh -d dits'losed to 1itnv plhnol t'lieth Ihost, 'olt'i'trled with Ii .,sstssillii li, illnt't and t'olhit'tion of flit tItxts wh'li are tie subject of the pre'setnt Agrer,,tmentt. No informntiot aslia foresaid shall lit e'xc tlltlgetd which woild t disclose at rttlth, bisiitess, indulstril or pirof'essionial srt''r'tt or ittV any Iritlt' pro('ss. (2) Trhe conmpetentt autlihoritities of fite two territories shll kteep eat'h of hitr informed of signifticm llf alltgt's illie tafIx laws of Ihe'ir t'$l(f ive

    12

    AGREEMENT WITH INDIA CONCERNING TAXES ON INCOME

    territories; and in the event of appreciable modifications in such laws may communicate with each other to consider whether any amendments to the Agreement are desirable.
    ARTICLE XV

    Where a resident of one of the territories shows proof that the action of the taxation authorities of the other territory has resulted or will result in double taxation contrary to the provisions of the present Agreement, he shall be entitled to present his case to the competent authority of the territory of which he isa resident. Should his claim be deemed worthy of consideration, the competent authority to which the claim is made shall endeavor to come to an agreement with the competent authority of the other territory with a view to avoiding double taxation.
    ARTICLE XVI

    The citizens or nationals of one of the territories while resident in the other territory shall not be subject in the latter territory to more burdensome taxes than those to which the citizens or nationals of that latter territory are or may be subjected.
    ARTICLE XVII

    (1) The present Agreement shall be ratified and the instruments of ratification shall be exchanged at New Delhi as soon as possible. (2) The present Agreement shall come into force on the date of exchange of instruments of ratification and shall be applicable (a) in the United States, for the taxable years beginning on or after the first day of January of the calendar year in which such exchange takes place. (b) in India, in respect of the "previous years" beginning on or after the i.t day of January of the calendar year in which such exchange takes place. (3) The present Agreement shall continue in effect indefinitely but either of the contracting Governments may on or before the 30th day of June in any calendar year not earlier than three years from the date on which the present Agreement comes into force, give to the other contracting Government notice of termination and in such event the present Agreement shall cease to be effective (a) in the United States, for the taxable years beginning on or after the first day of January next following such notice of termination; and (b) in India, in respect of the "previous years" beginning on or after the first day of January next following such notice of termination. IN WITNESS WHEREOF, the undersigned Plenipotentiaries have signed the present Agreement. DONE at Washington in duplicate, in the English language, this 10th day of November, 1959. For the United States of America:
    [SEAL) CHRISTIAN

    A.

    HEATER.

    For the Union of India:


    [SEAL] DWARKA NATH CHATTERJEE.

    (1520)

    AGREEMENT WITH INDIA CONCERNING TAXES ON INCOME

    13

    No. F. fi4(13)AMS/59.

    MINISTRY OF EXTERNAL AFFAIRS, New Delhi, 1st April, 1960.

    Ambasador of the United States of America, American Embassy, New Delhi.


    EXCELLENCY,

    His Excellency Mr.

    ELLSWORtTH

    BUNKEt,

    I have the honour to refer to the agreement between the Governient of India and the Government of the United States of America for the avoidance of double taxation with respect to taxes on income, signed at Washington on November 10, 1959. Article XII of the agreement provides that each Government will allow, against the tax which it imposes on income from sources in the country of the other Government, a credit. for income taxes imposed by such other Government.. Paragraph (2) of Article XII obliges the Government of India to allow such a credit in accordance with the provisions of the Indian Income Tax Act as in effect on the date of signature of the agreement. Paragraph (1) of Article XII obliges the United States Government to allow a credit for Indian tax, subject to the provisions of the Internal Revenue Code of the United States, but without reference to the Code as in effect on any particular date. It is the understanding of the Government of India that a specific date was omitted from paragraph (1) in order that prospective legislation modifying the foreign tax credit provisions of the Internal Revenue Code, such as is currently under consideration by the Congress of the United States. shall apply to United States taxpayers claiming a credit for taxes paid to India. However, it is also the understanding of the Government of India that, in agreeing to Article XII, the United States Government undertakes not to adopt measures which would vitiate the basic principle of that Article that credit shall be allowed against United States tax for tax imposed by India on income from sources in India. Article XII, paragraph (1), provides further that in computing the credit to be allowed bythe United States against its tax on income from Indian sources, Indian tax paid shall be deemed, in certain prescribed cases, to include an amount equal to the reduction in tax resulting from the application of certain specified sections of the Indian Income Tax Act as in effect on the date of signature of the agreement. It is the understanding of the Govermnent of India that the amounts deemed to have been paid in pursuance of those provisions of paragraph (1) may not be allowed as a credit against United States tax in any taxable year in which there is not reported any income from sources within India which has qualified for the Indian tax benefits mentioned in paragraph (1). In other words, an unused "tax exemption" credit of one year will not be carried over to another year to be applied against the tax imposed by the United States on income which has not received the specified tax benefits granted under Indian law. If the Government of the United States of America is in accord with the above-mentioned understandings, the Government of India will consider that this letter and your letter in reply indicating the concurrence of your Government confirm those understandings between the two Governnments. (1521)

    14

    AGREEMENT WITH INDIA CONCERNING TAXES ON INCOME

    Please accept, Excellency, tile assurances tof moy highest Colnsiders. tion.

    S. D urr, lForeifn Secretary/

    (For Minister of External Atfairs).


    E.MBASY OF THE UNITED STATES OF AMEItICA,

    New Delhi, April 7, 1,960.

    Afinister of Erlernal A.jairs, New Delhi.


    EXCELLENCY:

    No. 654. His Excellency P.ANDIT JAWAHA.RLAL NEHRU,

    I have the honor to acknowledge the receipt of Ministry of External Affairs note dated Ist April, 1960, reading as follows:
    and the Government of the United States of America for the avoidance of double

    I have thf, honour to refer to the agreement I)etweien the Government of India

    taxation with respect to taxes on income, signed at Wa-shington on Novembler 10, 1959. Article XII of the agreement provides that each Goverinment will allow, agailust the t:,x which it i'npose4 on income from ,.ources in the country of the other Clovern'pelt, a credit for income taxes imposed by such other Governltlit. Paragraph (2) of Article XII obliges the Governmenit of India to allow such a credit in accordance with the provisions of the Indian Income Tax Act as In effect on the dete of siiuature of the avreenent. Paragraph (1) of Article XII obliges the United States Government to allow a credit for Indian tax, subject to the provisions of the Internal Revenue Code of the United States, but without reference to the Code as in effect on any particular date. It is the understanding of the Government of India that a specific date was omitted from paragraph (I) in order that prospective legislation modifying the foreign tax credit provisions of the InternalRevenue Code, such as is currently under consideration by the Congress of the United States, shall apply to United States taxpayers claiming a credit. for taxes paid to India. However, it Is also the understanding of the Government of India that, in agreeing to Article XII, the United States Government undertakes not to adopt measures which would vitiate the basic principle of that Article that credit shall be allowed against United States tax for tax imposed by India oin income from sources in India. Article XII, paragraph (i), provides further that In computing the credit to be allowed by the United States against its tax on income from Indian sources, Indian tax paid shall be deemed, in certain prescribed cases, to include an amount equal to the reduction in tax resulting from the application of certain specified sections of the Indian Income Tax Act as in effect on the date of signature of the agreement. It is the understanding of the Government of India that the amounts deemed to have been paid in pursuance of those provisions of paragraph (1) may not be allowed as a credit against United States tax in any taxable year in which there is not reported any income from sources within India which has qualified for the Indian tax benefits mentioned In paragraph (1). In other words, an unused "tax exemption" credit of one year will not be carried over to another year to be applied against the tax imposed by the United States on income which has not received the specified tax benefits granted under Indian law. If the Government of the United States of America is in accord with the abovementioned understandings, the Government of India will consider that this letter and your letter in reply indicating the concurrence of your Government confirm those understandings between the two Governments. Please accept, Excellency, the assurances of my highest consideration.

    (1522)

    AGREEMENT WITH INDIA CONCERNING TAXES ON INCOME 15 Th Government of th 'nIitel S1t1t4.8 of Amert'ic.a is il al ord withi le tillh lllilerslitlldlillgls 118 set fourth Iab)ove' and consideIrs hhll vollt' note and this note in reply confirm these 1hitlerst andingps bet wee',,thl, two governmentt. Accept, Excellency, the reine(wed asqui'ances of my highest considterat iBN. ELLHWOUtTH BUNKFER.

    (15'23)

    ssellate' C'mmilte,. Hearings


    oJuntn 28, woo10 Slith ('ougrem, 2d Semsiol
    St'itie Foreign Relit ious C'ommit toe

    (152r)

    V
    .4

    INDIA TAX CONVENTION

    HEARING
    BEFORE TIIE

    COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE


    EIGHTY-SIXTH CONGRESS
    SECOND SESSION ON

    EX. H, 86TH CONGRESS, 2D SESSION


    JUNE 28, 1960

    Printed for the use of the Committee on Foreign Relations

    UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON : 1960

    (15.27)

    COMMtIT IIC4ON FOlRlCIN lIILATIONS


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    JOHlN F. K'NNKIIV. N.seI'tll AL.PERV 001 1YIIE. i'mmo-wiioi


    ]PH A.NK J. I. %'.S'II F. Ohlo FRlAAINK (tl~l'lli'll, Idaaho

    I Chairman 111011110. it

    (15'.)8)

    CONTENTS
    stnl,'vinit of--Mill11., I111. 1)outtlis, IU'nder ,eeretary of ,li t,;,, aeomltuied, by . . te terl rtryof h, TIreasury . J (Izixaiiltli, :!,Aimmt ill to tit Iv Sluzjiro, Alivint,it, presidlt , Aimriea Mhercthuant ,Mirin;e I nstit utte,
    I Stea.mshilp Sulliva..1. ,Mmro,, vict, presidetit, h'iifiv Ant,rivitz A.s. 'eiat iou .... ............................................ Ilt, rtlil iii t re''ord: Ihe Tireeivoiry 1 ;'epartm'o ti, lmenuorzmelatl tit ... ........... . letter to the rhairi.i from Williatm . 8wiaegle, lort-sidet, Natimdal Floreig Traihe C'outiail, a ... ....-......

    Pag

    4t

    16
    43

    8Sumaary hhi-

    1 't ler to tMe elutirmata freom I.eo1i F. Iiii-ki" e'xeeutt' ,, dent, Ahlumiaa, t'o. of Atmerra.4...........................44
    ............ ........ ...
    --

    vice presi-

    ......

    47

    1b29)

    INDIA TAX CONVENTION


    TUESDAY, JUNE 28, 1960 UNITETD STATES SENATE, COwMITIEE ON FOREIGN RELATIONS, Wa8hington,, D.C. The committee met, pursuant to notice, at 10:15 a.m., in room F-53, U.S. Capitol Building, Senator J. W. Fulbright (chairman) presiding. Present: Senators Fulbright, Green, Sparkman, Humphrey, GOreT, III.Sehe, Ilickenlooper, Aiken, and Williams. The first item on the agenda today is Executive 11, 86th Congress, 2d session, an agreement between the United States of America and India for the avoidance of double taxation with respect to taxes on income, signed at Washington on November 10 1959. The first witness is the Honorable Douglas Dillon, Under Secretary of State, accoml)anied by Jay Glasmann, assistant to the Secretary of the Treasury. STATEMENT OF HON. DOUGLAS DILLON, UNDER SECRETARY OF STATE; ACCOMPANIED BY 1AY GLASMANN, ASSISTANT TO THE SECRETARY OF THE TREASURY Mr. DILLoN. Mr. Chairman, it is a pleasure to appear before you in support of the tax convention with India. In doing so, I wish to discuss the foreign policy considerations involved in this convention, particularly as they relate to the tax-sparing provision, article XII of the convention. The committee is fully aware of the importance the United States attaches to economic progress in the less developed countries of the free world and to the vital role which private capital can and does play, in that progress. Iou are also aware of our policy to stimulate further the flow of private capital to encourage the maximum of private participation in the development of less developed areas. We all recognize the fact that. Government funds, while still required in large measure, cannot do the developmental job alone. U.S. rnIvATE INVESTMENT ABROAD U.S. direct private investment abroad has tended to increase in recent years; however, the share of this investment in the less developed countries, particularly Asia and Africa, remains disappointingly low. The average annual flow of U.S. direct private investment in the general area including Africa, the Middle East, and Asia since 1953
    3
    t3oI3o-O2-ioI 2---,

    The

    'CuAIWMAN. The committee

    will come to order.

    (1531)

    INDIA TAX CONVENTION

    has amounted to about $158 million a year, a mere 13 percent of tile global amount. At least 60 percent of this investment has been in the petroleum in. dustry. Even the sharp spurt in our total foreign investment in 1956 and 1957 did not appreciably increase the flow to Asia and Africa. I shall not go into the reasons for the low level of our private invest. ments in the less developed countries. They are many and tile commit. tee has heard them before. But I would like to emphasize that an im. portant factor deterring an increased flow of private capital to less developed countries is the existence in many of those countries of an unfavorable investment climate. We are constantly seeking to encour. age and assist these countries to improve their investment climates in order to promote investment and development.
    INDIAN EFFORTS TO IMPROVE INVESTMENT CLIMATE

    The Government of India shares with us a recognition of tile importance of the private sector generally and of the need for foreign private investment to supplement India's own resources in its great developmental effort. In the past few years the Indian Government has taken concrete steps to improve the investment climate for do. mestic private enterprise and as a means of encouraging an inflow of foreign private capital. It as, for example, established a number of institutions to provide medium and long term credits to private firms. In addition to the successful government-owned Industrial Finance Corporation, a conipletely privately owned investment institution has been in operation since 1955, aided by a large interest-free loan from the Indian Government. That Government has also used various tax concessions to encourage private industrial development. Since 1949 all new industrial undertakings have been exempted, for 5 years from the start of manufacture, from the payment of corporation income tax on income up to 6 percent per annum of their invested capital. Since March 1954 all industrial enterprises have been granted a development tax rebate equal to 25 percent of the cost of new plant and machinery in addition to existing liberal depreciation allowances. The wealth tax introduced in 1957 was abolished this year. There have been other tax incentives as well, described more fully in the technical memorandum which I understand the Treasury Department has prepared for your committee's use. Of particular significance to U.S. investors was an invitation issued in 1957 by the Indian Government to foreign investors to construct fertilizer plants in India and the conclusion in 1957 and amendment in 1959 of an investment guaranty agreement with the United States. Under this agreement investment guarantees of $7 million have been issued and applications are being processed for an additional $77 million. In addition, the Indian Government has warmly welcomed the four U.S. trade missions which visited India over the past 18 months. The members of these missions were favorably Impressed by the prospects for expanded trade with and investment in India. These developments are of course, highly encouraging to the United States and the free worla. I am sure you will agree with me that (1532)

    INDIA TAX CONVENTION

    the relative efforts of India and Communist China. India is one of the few less developed countries in which conditions are particularly favorable for economic growth. We are supporting a greater concentration of effort in economic assistance for these countries and are seeking to supplement this governmental effort by private means wherever possible.
    ADVANTAGES OF TAX TREATIES

    the success of the Indian experiment,--an experiment toward economic progress ill a free and open society-is of vital concern to us, parl icufarly when many countries of Asia and Africa are watching closely

    One of the ways in which we hope to support the endeavor of the Indian Government to attract more private capital is by concluding the tax convention which is now before your committee. In the past we have found tax conventions extremely valuable in our economic relations with the more developed countries because they minimize or eliminate the extra tax burden which would otherwise exist. Tax treaties also create a favorable trade and investment atmosphere by bringing about a broad adjustment of two tax systenms in such a way that movements of trade and investment are fcilitated and conflicts of tax policy are greatly reduced or even eliminated. We now have tax treaties with 21 countries which place our economic relations with these countries under a clear and consistent tax regime. Our tax treaties are, with only two exceptions (Honduras and Paki. stan), with the more fully developed countries. Despite their obvious value to the United States and other developed countries the reciprocal advantages of the treaties have unfortunately been far less apparent to the less developed countries. Their general lack of interest inconcluding conventions with us in the past lias been due primarily to the fact that they are capital importers, not exporters, and their companies do not as a rule invest abroad. Accordingly, benefits appeared to be largely in our favor and revenue losses almost entirely on their side.
    TAX-SPARING PROVISION

    by means of a credit to tax incentives adopted by less developed


    vision in two other conventions which have been negotiated but not

    for attracting U.S. private investment. This is essentially because we have omi a number of occasions announced our willingness to introduce a new element in our conventions which would give recognition

    It is only recently that the less developed countries have begun to view with considerable interest the tax convention as a vehicle

    countries to attract new capital. I am referring here to the tax-sparing provision such as the one

    contained in the convention with India. W, have included this proe

    countries on tax conventions which would include a credit for tax sparing. '" As you know, such a provision was also contained in the convention originally negotiated with Pakistan. However, the expiration of Pa istan s incentive law before final ratification of the convention removed the basis for the tax-sparing provision and it was, therefore, excluded from the treaty by recommendation of your committee. In taking this action, you will recall that your committee made it clear (1533)

    yet signed. In addition, discussions have been held with six other

    INDIA TAX CONVENTION

    that it (lid so without prejudice to its future consideration of the tax-sparing principle. Tile tax-sparing provision in the Indian treaty is inherently reasonable, is in line with our treaty policy, and will acconmljlish our policy objectives. A few words about each one of these points will clarity our position. Tax sparing is inherently reasonable. We should make it polXible for underdeveloped countries to use tax incentives as it policy device for the encouragement of private investment in a given field. If a less developed country wishes to attract domestic and foreign capital into new industries, tax incentives are clearly among the techniques which that country may utilize. Such a country would be expected to welcome action by the United States which would recognize the special benefit which it is granting to an industry. Tax sparing is, further, an extension consistent with our treaty policy. Our basic principle of taxing all income of all U.S. nationals, residents, and corporations, no matter where such income originates, requires modification at many points. Its main corrective is the policy, confirmed in our treaties, of granting credit for foreign taxes--a policy by which we give foreign tax authorities a first claim on income arising under their jurisdiction. By the tax-sparing principle we concede to them the further power, not only to tax, but to forego taxes. The credit for tax exemption leaves the foreign tax authorities free to exempt new investments from taxation secure in the knowledge that these exemptions will not be nullified by the operation of the U.S. tax-credit mechanism. The tax-sparing principle will improve our relations with many less developed countries because they consider tax sparing a significant step toward a reconciliation of their and our tax philosophies. The tax-sparing device, almost alone among measures for the encouragement of private investment, permits us to extend tax benefits selectively to areas and under conditions which will directly further our economic policy. It is in the less developed areas that this device proves to be most useful, and it is our intention to continue to negotiate tax-sparing provisions only after careful examination of the local tax concessions and the way they are administered. Tax sparing is geared directly to the economic policy objectives of less developed countries. It operates only if and when new industries are actually established. Thus, the prospect of increased economic activity, and the prospect of a broader tax base, is tied directly to the temporary revenue concession offered. By enabling less developed countries to use this tool as far as American investors are concerned, we can hope to open up a broader field for the private sector in general. In conclusion, I wish to state that the tax treaty with India should make an important contribution to sound economic relationships between our two countries and, accordingly, on behalf of the Department of State, I urge its ratification. Mr. Jay Glasmann, the Assistant to the Secretary of the Treasury, is als here with me to speak on behalf of the Treasury Department, and he will be prepared to answer any technical questions in regard to the technical aspects of this treaty.

    The

    CHAMMAN.

    swer questionsI

    Do you wish to make a statement first or to an-

    (1534)

    INDIA TAX CONVENTION

    and you can summarize it and tell us what is in it that is not in the Secretal"y's statement.
    IMPORTANCE OF TilE CONVENTION

    Mr. GLASMNN. Mr. Chairman, I have a prepared statement that I would be ghld to read or submiit for the record, whichever you prefer. Tiho CnHAIRM.AN. We will put the whole statement in the record

    Mr. GLASMANN. Fine. First, I would like to say that the Treasury Department is glad to join with the State Deparlment in support of the income tax convention between the United States and India which isnow before you for consent to ratification. If approved by your committee and the Senate, this treaty will mark a significant advance in our tax treaty program and will provide an inlportant impetus to reaching agreements with many of the less developed countries throughout the world. In general, the pending convention with India is similar to the conventions which the Senate has previously approved.
    TAX-81ARINO PROVISION

    Mr. GLASMANN. This is the first treaty that has this credit for taxsparing provision in it. The Pakistan treaty which was before your committee in 1957 had such a provision, but the Pakistan law was changed before the treaty was ratified so the question became moot. The tax-sparing provision has never been passed upon by the committee or the Senate.
    MOST-FAVOED-NATION CLAUSE

    case I

    As Under Secretary Dillon has pointed out, there is one major exception to this, and that has to do with the allowance of a credit for income taxes which India gives up in an effort to promote capital investment and economic development. Before discussing this particular innovation, I would like to review very briefly Senator GmN. Are you emphasizing the fact that India is a unique

    extends this provision to all other countries that have these double taxation treaties?
    Senator HI1CKENLOOPER. SO the placing of this provision in the Indian treaty will not automatically extendit to PakistanI Mr. GLASMANN. We would think not.

    Senator HCKE;NLOOPEB. Is there a most-favored-nation clause that

    Mr. GLASHANN. No.

    Senator HICKENLOOPER. You would think not. I want to know. Mr. GLASMANN. What we are doing is recognizing the individual laws of a particular country and that would not be extended-

    Senator

    Mr. GLASMANN. Our view is that it does not.

    HICKENLOOPER.

    Are you sayingthat it does or it does not?

    Mr. GLAsMANN. The primary objective of our income tax conventions has been to eliminate double taxation and remove to the maxi(15315)
    .*%-4

    Mr. DILLON. It does not

    INDIA TAX CONVENTION

    mum extent feasible existing tax barriers to international trade inter. national investment, and international movement of personnel.
    PERMANENT ESTABLISIIMENT PROVISION

    In connection with the Indian treaty, the provision dealing wath so-called permanent establishments is of particular importance. Such provisions are in all of our 21 tax treaties. They make it possible for an enterprise of one country to undertake the sale of goods in another country without incurring tax liability in that other country unless the enterprise has a permanent place of business there; that is, a permanent establishment. Thus, an American firm may send its salesmen for brief periods to a foreign country, or it may utilize local, independent sales firms to try to establish a market for its goods without having to be concerned about incurring a tax in that country. Ultimately, if the business warrants it and the company finds it profitable to establish a branch or permanent establishment in the foreign country, it would then become subject to tax. The permanent establishment provisions of our treaties go further in the direction of stimulating international trade by describing circumstances under which a business enterprise can operate without incurring tax liability. Senator LAtSCHE. Incurring tax liability to whom I enterprise; and to the United States, in the case of the Indian enterprise. For example if a U.S. enterprise establishes an office to engage in the purchase of goods in a country with which we have a treaty, that purchasing office is not considered a permanent establishment and the American business would incur no tax liability in that country. As I mentioned, this permanent establishment provision is of particular importance in the pending convention with India. The tax laws of India are so all-embracing that the establishment and maintenance of a continuing business relationship between an American manufacturing company and an Indian enterprise may give rise to a tax in India on the manufacturing profits of the American firm even though it conducts no business activity in India. This has been a very disturbing feature in the trade relations between India and the United States but it would be eliminated to a large extent if the treaty now pending before your committee were approved. Senator WnIms. May I ask a question there? This tax-saving feature is not involved in that connection, though, isit? Mr. GLASMANN. No. I want to point out that there are many features of this treaty that have nothing to do with the tax-sparing but which are very helpful and very important from the standpoint of improving business relationships between India and the United States. Senator Wu.ims. But you were speaking of those other points. Mr. GLASMANN. I was trying to give a little background, Senator Williams, as to other provisions of the treaty that are of great importance.
    (1536) Mr. GLAsm.NN. To India in the case of the American business

    CAPITAL CONTRIBUTIONS

    0 While the treaty with India does not contain the usual provisions in most of our treaties that deal with reducing tax rates on investment income, the convention does contribute to an improved investment climate in that the Indians have agreed that contributions of capital by American firms to the formation of new Indian enterprises will not give rise to any tax in India. For example, if you were contributing appreciated assets to a firm

    would realize capital gain under Indian law at that point of time. This convention would make it clear that you do not.
    TAX-SPARIN0 PROVISION

    that isto operate inIndia, a question would arise as to whether you

    In the convention before your committee, the basic features of our or tax-sparing. This is a novel feature which has aroused considerable interest. As I mentioned, it was first considered by this committee in 1957 in

    existing tax treaties are supplemented by a credit for tax exemption

    connection GitEN. You compareconvention with Pakistan. with the income tax with what Senator situation similar to ours.
    Mr. GLASMANN. Yes, sir. Senator GlvEN. Thank you.

    we have elsewhere. You have not made any comparisons with what other nations do in a Mr. GLASMANN. I will come to that, Senator. Senator GREEN. You will later f

    Mr. GLASMANN. Under existing law a reduction in foreign tax as an incentive to induce new investment may result in a reduced for. eign tax credit and in a commensurate increase in U.S. tax. The tax incentive measures of less developed countries may thus be made ineffective by the provisions of our law. By giving recognition to such tax incentive laws, the tax treaty program may, within appropriate limitations, remove this consequence of existing law and help promote a desirable tax climate in other ways. Our experience thus far indicates that this policy has stimulated great interest among the less developed countries in tax treaties to eliminate double taxation and other tax obstacles to international trade and investment.
    STANDARDS TO BE MKET BY TAX INCENTIVE LAWS OF FOREIGN COUNTRIES

    Before discussing the particular Indian tax incentive laws I should like to sketch very briefly the standards which we feel should be met by the tax incentive laws of a foreign country if we are to give recognition to them in a treaty. First, there should be a willingness on the part of the other government to eliminate unnecessary and inequitatble tax barriers to the flow of private investment in accordance with sound rules of taxation, such as are generally embodied in our income tax convention. The permanent establishment provision, for example, in the Indian treaty is one that is designed to accomplish'this. (1537)

    INDIA TAX CONVENTION

    them aiqproxinmte this at least, n Mr. ILASMAUqx. We have certain guidelines, those which I am now staticjg, which we feel should apply in any case before tax-sparing would-be recognized by treaty. The second factor which we feel the tax incentive laws must con. so that maximum benefits will accrue to the economy of that country from the application of such legislation. In other words, the tax incentive laws cannot be restricted to Amer. ican firms. We believe they should be across-the-board tax incentive laws. T hinl, we feel the tax incentives should be embodied in a law already in existence with a clear statement of the conditions and terns under which the incentives are granted and objective tests for granting or withholding tax incentives.
    rFECT or TREATY ON V.s. LAWS tain is that recognition is to be given to investors from all countries

    Senator Gimpm. Have you any treaty standard that would make

    senator WILLIAMS. Does that mean they would not be subject to change after the treaty is ratified? Mr. GLASMANN. That is correct. They would be frozen, insofar as the allowance under the treaty, so that a later change would not increase the amount of the tax exemption that would be recognized. Senator IICKENLOOPER. Does that apply to our laws as well as theirsI Mr. GLAsMrANN. I am not sure I understand the question, Senator. Senator HICKENLOOPER. The Indian laws would be frozenI

    would not give tax credit. Senator I CKENIAX)PER. But does that apply to our laws? Mr. GLASMANN. No; our laws would not be frozen under this provision. Senator WV.LIAvi;. They would be frozen due to the fact we have no tax-sparing features. " Jrnder your second point, you said the tax incentives to which recognit ion is to be given should be available to investors from all countries. Are they under this treaty? Mr. aLAS,91ANN. Under the Indian tax laws the incentives are available to all investors who ineet the qualifications. Senator WILLIAMS. Of all countries?

    Mr. GLAsXAXN. Just with respect to this tax-sparing situation, insofar as increasing the amount of the spared taxes for which we would give credit. If they did. away with their tax sparing, of course, we

    firm, or an American firm would be qualifed if they met the tests of the Indian law. The fourth factor is that the tax incentives should be for a limited duration of time and preferably limited in amount. Finally, the tax from which exemption is granted should be a genuine part of the country's tax structure and not a tax created for the purpose of providing an exempt ion front it.

    Mr.

    GLASMANN.

    If they invest in India a British firm, a German

    (1538)

    INDIA TAX CONVENTION

    CORPor.ATION TAXES M INDIA


    suI)rL'ax'.

    Uunder Indian law, a corporation enlpgaged in trade or hIsitiess t here is subject to a 45-percent tax, at 2t-percent income tax, and it2-Iu''rvent

    J)ividends distributed by a,OrIorlat ion atre also subje,.t to tax ill tiht' hands of the recipient. The result of Ihe, pvisiosis of Indian law is that when an American company estallishes atn Indian subsidiary to engage in businte,, tile aggregmte Indian tax oil (list ribltted profits ranges from 56 to 70 percent, tel)pending on the type of investment. T . hus, Indian taxes are always higher than the tax applicable in the United States and many other capital-export ltig Count ries ont income fronm Indian sources.
    DEVKIMIP3lE'rx RElATE AND D)EP'RtECIATION I)EDUChION

    allowed. Senator WIIAmts. Do you like that principle? Mr. G.LASMANN. I dou'i know that it is appropriate for me to cornnient. on the wisdom of the Indian law.
    Senator WILLIAMS. I will put it this way: 1Would YoU enldrSe that as i principle that we should embrace in our law't Mr. (GI.AsMAN.N. Not at this time. We have always, as you know, had our depreciation deductions limited to tle recovery of costs. One of the questions that. will be, olwfore the Congress. the next Congress, is whether there should be some sort of replacement value depreciat ion. If I may comment., Senator, India being an underfr. Duci .oi.q developed country, there is probably logic in their giving greater incentives to tiew investment than nmay' thlrp is in this cuntitrv. Senator 11ILIIAM5. I recogitize the logic, buit I wonder if Wse could apply some of that logic in America.

    To overcome what. many regard as a tax obstacle to tile flow of .cpital from abroad, Ithe governmentt, hais adopted various ta,x liliall incentive ineasures. ()he of the, theevelopment natb4ue. fip This is, its Under Secretary Dillon has de.icrilkied, it dt~iuction front raceme, of '25 pe~rcent. of tile cost of new plant and nm'incllery, and is ill ati(dit~ion to any depreciation deiluction that would othieriwise be

    1Mr. GL.-s.tMAN.

    eiaiion. Most of the countries with which we comlete-Gertuany, Britain, Japan, other large industrial countries-have more favorable depreciation laws than we do. Selnitor l[IWcKEN .oAX.R. Perhaps one of the reasons why they are beat.in, our shirts and heads off in international competition is that our indusrial people cannot. replace bcau.se of the great. restrict ions.
    Mr. G(IIM.,MANN. I think that isan important factor.

    ably is as cmmnrvative as any country in the allowance for depre-

    I think it is also true that the United States pro-

    Sentator H'CKENLoOPER. This applies in obioleseence.


    Senator WiLLi.vss.

    I asked the Treasury because I wondered if it

    recommended extending that to this country. Mr. GLASMANrN. The revenue impact in our country would be quite significant, as you know.

    (1539)

    ! 0

    10

    INDIA TAX CONVENTION

    Senator AIKEN. The Indians depend very largely on customs duties, don't they, for financing of the Government I Mr. GLASMANN. 1 h-' ,ve they do, Senator. or contribute pay customs duties when they go into the country.
    TAX CREDITS FOR NEW INDUSTRIAL VENTURES

    Senator AiKE-. Even the commodities we sell for local currency

    Mr. GLAS.ifA.N.

    6 percent of the invested capital. Moreover, the dividends paid out of such tax-exempt profits would, in turn, be exempt from the Indian tax. Senator WILLIAMS. Would they be exempt when they come back into this country? Mr. GL.SM. NN. Under this treaty, to the extent that these amounts would qualify under the tax-sparing provision, you would have a tax credit for the spared taxes. Whether the dividend income would be exempt or not would depend upon the amount of the credit and the particular rate of our tax at the time the profits are brought back.
    QUESTION OF APPLICABILITY OF TAX CREDIT TO INDIVIDUALS

    ernment provides that during the first 5 years of a new industrial venture, no income tax or supertax will be levied on the profits up to

    A second tax incentive measure of the Indian Gov-

    * *

    tween the two?

    Seitator WILLIAMS. Would that tax credit be applicable to individuals as well as corporations in Xinerica? Mr. GLASMANN. I understand it would not be. Senator WILIJAMS. Suppoe a group of individuals, as individuals, build a plant in India and own it. Under this treaty, how could you avoid giving a tax credit to this :aine group of individuals when the income came back? Mr. GLASMANN. Under the treaty the credit for waived taxes applies only to corporations, so tljat while these individuals miight have their taxes waived by the Indian Government, there would be no credit for such waived taxes in this country under the treaty. Senator WILLIAMs. The waiver would only be applicable, then, in cases of corporations here or in India Mr. GLASMANN. It would be applicable to corporations that would pay tax in this country and they would have a credit against their U.S. tax on income derived from India for these waived taxes. Senator LAUSCLE. How do you logically justify the distinction be-

    Senator WILLIAMS. How could you apply that I Suppose just one individual built a million-dollar plant in India under this treaty, one

    American citizen, just an individual?

    order to benefit from it, he would have to form a corporation.

    conducted through corporations, particularly the foreign business, and the treaty is intended to foster such investment. It may well be that at an appropriate time it could be extended to individuals. Senator WILLIAMS. I understand that if a single individual wished to build a plant in India, that it would not be applicable; that in (1540)

    Mr. GLASMANN Senator Lausche, I am not entirely sure that there is any real justification for the distinction. Most of the business is

    a
    INDIA TAX CONVENTION

    Mr. GLASBIANN. You would be able to have the Indian tax incentive applied to the individual, but there would be no credit in this country for the taxes waived by India with respect to that.individual. EARNINGS OF CORPORATIONS IN INDIA Senator AIKEN. Are not the corporations doing business in India

    Mr. GiSmANN. I would suppose, Senator Aiken, that in order to induce a firm to invest in India, there would have to be an opportunity for a good profit because of the risks that would be taken, so that the answer to your question would be, I would think, a qualified es. YThe problem is there are not very many investing in India and the purpose of this tax-sparing provision is to try to induce more invest,mnent, moreprivate investment by American tirms in India. Senator AIKEN. What type of investment would that be? The

    2years ago testified that 50 percent earnings were made.

    making about as good earnings on their investment as in any part of the world? I recall witnesses appearing before the Committee on Agriculture

    ings, happened to be a textile plant, and they were here trying to borrow money to expand it. They did not get it, incidentally. Mr. DILLON. Senator, the figures show that net capital outflow from the United States to India over the last 5 years, 1953-58, has averaged only $3million a year. It has been negligible. Senator AIKEN. Capital outflow? Mr. DILLON. Yes investment from the United States. Senator AIKEN. I think the company that we had testimony about is an Indian company trying to borrow American capital with which toex pand. When we found what their earnings were, well, the chances of borrowing the $10 million that they asked for was rather negligible. The CHAIRMAN. It might help if Mr. Glasmann could complete his statement and then have everybody ask questions. Will it take very much longer to complete your statement? Mr. GLASMANK. No. Only 4 or 5 minutes.
    DISCUSSION OF TAX INCENTIVES

    case I have just referred to, where they would show 50 percent earn-

    I was discussing the second tax incentive measure and that is the one that provides that during the first 5 years of a new industrial venture, no income tax or supertax would be levied on the profits up to 6 percent of invested capital. This incentive is granted to an enterprise employing 10 or more workers in a manufacturing venture carried on with the aid of mechanical power. A third incentive is the tax exemption granted on interest to a nonresident in connection with a loan granted to an Indian enterprise for the purchase of equipment abroad where the terms of th. loan have been approved by the Indian Government in the absence of a treaty prove sion which gives recognition in some manner to these tax inducements. (1541)

    12

    INDIA TAX CONVENTION

    The taxes given up by the Indian Government in the case of Amer. ican investors would for the most part sooner or later be collected by the United States.
    TAX-SPARING PROVISION e' EFFECT ON EXISTING U.S. LAW Under our law a company operating abroad through a branch, or

    receiving dividends from a foreign subsidiary, is allowed a credit against its U.S. tax liability for the income taxes imposed abroad on its foreign income. If the foreign taxes are reduced, irrespective of the reason for it, the amount of the tax credit is also reduced, and with the reduction in the amount of the credit, tax liability to the United States is increased. In other words, U.S. law now operates in such a fashion as to nullify the tax incentive offered by India where the business is conducted as a branch of an American company or to the extent that profits earned in India by a foreign subsidiary are distributed to an American parent
    company.

    To offset this effect of existing law, the pending convention pro. vides that despite the tax exemption granted by India, the credit against U.S. tax for Indian taxes will remain unchanged. Th0 amount of tax credit that would be allowed would be the same as if no tax incentives were granted in India.
    TREASURY DEPARTMENT SUPPORTS TAX-SPARING PROVISION In our view, the credit for taxes spared in treaties with the less developed countries is a reasonable ingredient in the tax system for coping with . problem which is of great. importance and holds promise

    of promoting private investment abroad in these critical areas at a minimum cost for the results achieved. In assessing the desirability of this convention, we would urge you to keep in mind that the proposal to allow credit for taxes spared has generated an interest in our taxworld. program among many of the treaty less developed countries of the We have hitherto met with relatively little success in negotiating tax agreements with these countries. flowever, in the credit for tax sparifng, these countries see an opportunity to recapture for the welfare of their country through the promotion of investment considerI should like to stress that what we are here proposing is not unique among the capital exporting countries. Since it was proposed by the United States in 1954, the concept of allowing credit for tax exemption has attracted considerable attention among other capital exporting countries. The Federal Republic of Germany, for example, has already entered into a treaty with India which produces substantially the same result as this treaty. As the committee may recall from the hearings in connection with the convention with Pakistan, the proposal to allow, with appropriate safeguards, a credit for taxes spared by less developed countries has been subject to some criticism. We have carefully considered the
    views that have been expressed in opposition to it. ably more than they may lose in revenue.

    (1542)

    INDIA TAX CONVENTION

    13

    vision can make a contribution in this Government's efforts to promote the flow of American private capital to these important areas.

    However, I should like to reemphasize that the main issue is whether treaties with less developed countries which contain a tax-sparing pro-

    we urge early ratification of the tax treaty with India. Mr. Chairman, I should like also at this time to submit for the record a technical memorandum prepared by the Treasury which was intended to accompany the treaty when it was transmitted to the Senate by the President. The memorandum describes the main features of the Indian tax system and explains the individual articles of the convention. We should like to request that it be included with the treaty itself in the printed report of your committee, so that it may become available to the general public.
    The CHAIRMAN. Does that complete your statement?

    The administration firmly believes that it can, and for this reason

    (Mr. Glasmann's prepared statement and the attached Treasury Department memorandum follow:)
    STATEMENT OF JAY W. OLASMANN, ASSISTANT TO TIlE SECRETARY OF TIlE TRE.ASURY

    Mr. GLJAs.,ANN. Yes, sir.

    I am very glad to present to your committee the views of the Treasury Department in support of the Income tax convention between the United States all. India which Is now before you for consent to ratification. If approved by your committee and the Senate, this treaty will mark a significant advance in our tax treaty program and will provide an Important impetus to reaching agreements with many of the less developed countries throughout the world. At the present time we have in effect treaties with 21 foreign countries for the avoidance of double taxation of Income. In a number of Instances there are also companion treaties with respect to estate tax or death duties. These treaties now Involve principally the European countries and the countries in the British Commonwealth. In general the pending convention with India is similar to the conventions which the Senate previously has approved. However It does contain one major exception. I refer to the provision In the treaty that the United States will allow a credit for Income taxes which India gives up In an effort to promote capital investment and economic development. The principle involved In this provision-which has come to be called "a credit for tax sparing"-has been advanced by the administration as a means of facilitating the movement of private capital to the less developed countries of the world. Before discussing this innovation, I would like to review briefly the direct and Immediate advantages to both India and the United States and to citizens and corporations of this country Investing in India from the inclusion of the more customary provisions In the convention. The primary objective of our Income tax conventions has been to eliminate double taxation and remove to the maximum feasible extent existing tax barriers to International trade, international investment, and international movement of personnel.
    PERMANENT ESTABLISHMENT

    International trade is fostered by the so-called permanent establishment provisions of our conventions. These provisions make it possible for an enterprise of one country to undertake the sale of goods in another country without incurring tax liability In that other country unless it has a permanent place of business there-a permanent establishment. Thus an American firm may send its salesmen for brief periods to a foreign country, or It may utilize local, independent sales firms to try to establish a market for Its goods without having to be concerned about Incurring a tax in that country. Ultimately, If the business warrants it and the company finds it profitable to establish a branch or permanent establishment In the foreign country, it would then become subject to tax. And In that case, the treaties provide that the tax Imposed in the foreign country shall be based

    (1543)

    14

    INDIA TAX CONVENTION

    upon the net profits of the permanent establishment. To help assure this, our treaties specify that in computing the profits of a permanent establishment all costs, including overhead costs incurred outside the country, which are allhoable to the operations of a permanent establishment shall be allowed as deductions in computing its taxable profits. The permanent establishment provisions of our treaties go further in the direct. tion of stimulating international trade by describing circumstances under which a business enterprise can operate without incurring tax liability. For example, if a U.S. enterprise establishes an office to engage in the purchase of goods in a country with which we have a treaty, that office is not considered a permanent establishment and the American business would incur no tax liability in that country. These provisions are of particular importance in connection with the pending convention with India. The tax laws of India are so all-embracing that the establishment and maintenance of a continuing business relationship between an American manufacturing company and an Indian enterprise may give rise to a tax in India on the manufacturing profits of the American firm even though it conducts no business activity In India. This has been a very disturbing feature in the trade relations between India and the United States, but it would be eliminated to a large extent if the treaty now pending before your committee were approved. It should be noted that the language In this convention defining a permanent establishment is not quite as broad as the language to be found in most of our other treaties. However, in our view it represents an important step by India to promote trade with the United States.
    INVESTMENT INCOME

    To foster International investment, it is common for our tax conventions to contain reduced rates of tax on investment income, such as interest, dividends, and royalties, flowing from one country to recipients of the other. Most countries impose a ta:' similar to our 30 percent withholding on income paid to a recipient abroad. Since such taxes are ordinarily imposed on gross income, there is a danger that they may be equivalent to substantially higher tax on the net income of the taxpayer. By treaty these withholding taxes are often reduced on a reciprocal basis to 15 percent and, in some Instances, to 0. A reduction in the rate tends to produce an u matee tax liability more consistent with a tax on net Income. The convention with India does not contain a reduction In the taxes on these forms of income. The principal reason for this was that India took the view that it already was providing special tax incentives under Its law to attract foreign capital. The revenue loss of general rate reductions for such income, when added to the revenue loss resulting from the special tax incentives offered by India, was too much for it to bear.
    CONTRIBUTIONS OF CAPITAL

    Nevertheless, the convention does contribute to an Improved investment climate in that the Indians have agreed that contributions of capital by Amerlcan firms to the formation of new Indian enterprises will not give rise to any tax In India.
    TEACHERS, STUDENTS, ETC.

    The International movement of persons is promoted by provisions in income tax conventions which make It possible for teachers, students, and apprentices of one country to remain in the other country for temporary periods on attaxexempt basis In the host country. It is not uncommon to find that tax rates in other countries are substantially greater than our rates on incomes which are modest by our standards but which are very substantial when measured by foreign standards. The exemption provisions of the treaties thus help tm promote the exchange of special groups of persons which both countries want to encourage.
    CREDIT FOR TAXES SPARED

    In the convention before your committee, the basic features of our existing tax treaties are supplemented by a credit for tax exemption or tax sparing. This is a novel feature which has aroused considerable Interest. It was first considered by this committee in 1957 in connection with the Intome tax convention with Pakistan. As you will recall, the tax Incentives law in Pakistan expired before committee approval of that treaty. Consequently

    (1544)

    INDIA TAX CONVENTION

    15

    when your committee approved the Pakistan convention, it did so with a reservation on the tax-sparing credit provision. In reporting the treaty, however, this committee stated that Its action with respect to the credit for tax exemption wits without prejudice to future consideration of the provision when it again comes before your committee. Under existing law a reduction in foreign tax as an incentive to induce new investment may result in a reduced foreign tax credit and in a commensurate increase in U.S. tax. The tax incentive measures of less developed countries may thus be made ineffective by the provisions of our own law. By giving recognition to such tax incentive laws, the tax treaty program may, within appropriate limitations, remove this consequence of existing lawv and help promote a desirable tax climate in other ways. Our experience thus far indicates that this policy has stimulated great interest among the less developed countries in tax treaties to eliminate double taxation and other tax obstacles to international trade and investment. For example, in addition to the convention with India, there are tax treaties with two other countries approaching the point of signature which contain a credit for taxes spared. Negotiations are currently in an advanced stage with four other countries in Asia, Africa, and South America, and preliminary conversations have been held with several other countries. Before discussing the particular Indian tax incentive laws, I should like to sketch briefly the standards which we feel should he met by the tax incentive laws of a foreign country if we are to give recognition to them in a treaty. First, there should be a willingness on the part of the other government to eliminate unnecessary and inequitable tax barriers to the flow of private investment in accordance with sound rules of taxation, such as are generally embodied in our income tax convention. This would include agreement not to discriminate against American business enterprise. Second, the tax incentive law to which recognition is to be given should be available to investors from all countries so that maximum benefit will accrue to the economy of that country from the application of such legislation. Third, the tax incentives should be embodied in a law already in existence with a clear statement of the conditions and terms under which they are granted and with objective tests for granting or withholding the tax incentives. Fourth, the tax incentives should be for a limited duration of time and preferably limited in amount. Finally, the tax from which exemption is granted should be a genuine part of the country's tax structure and not a tax created for the purpose of providing an exemption from it. Under Indian law, a corporation engaged In trade or business there is subject to a 45-percent tax-a 20-percent income tax and a 25-percent supertax. Dividends distributed by a corporation are also subject to tax in the bands of the recipient. The result of these provisions of Indian law is that when an American company establishes an Indian subsidiary to engage in business the aggregate Indian tax on distributed profits ranges from 56 to 70 percent, depending upon the type of investment. Thus Indian taxes are always higher than the tax applicable in the United States and in other capital exporting countries on income from Indian sources. To overcome what many regard as a tax obstacle to the flow of capital from abroad, the Indians have adopted various tax incentive measures. One of these is the development rebate (see. 10(2) (vib) of the Indian Income Tax Act). This is a deduction from income of 25 percent of the cost of new plant and machinery, and is an addition to any depreciation deduction that would otherwise be allowed. In effect, Indian law permits deductions equal to 125 percent of the cost of depreciable plant and equipment. A second tax incentive measure (sec. 150) provides that during the first 5 years of a new Industrial venture no Income tax or supertax will be levied on the profits up to 6 percent of the invested capital. Moreover, the dividends paid out of such tax-exempt profits would in turn be exempt from tax. This incentive is granted to an enterprise employing 10 or more workers in a manufacturing Venture carried on with the aid of mechanical power. A third Incentive (sec. 4 (3) (xvlib)) is the tax exemption granted to interest paid to a nonresident In connection with a loan granted to an Indian enterprise for the purchase of equipment abroad where the terms of the loans have been approved by the Indian Government. In the absence of a treaty provision which gives recognition in some manner to these tax Inducements, the taxes thus given up by the Indian Government in the case of American Investors would, for the most part, sooner or later, be col-

    (1545)

    16

    INDIA TAX CONVENTION

    elected by the United States. Under our law a company operating abroad through a branch or receiving dividends from a foreign subsidiary Is allowed a credit against its U.S. tax liability for the income taxes imposed abroad on its foreign Income. If the foreign taxes are reduced, irrespective of the reason for It, the amount of the tax credit is also reduced, and with the reduction in the amount of the credit, tax liability to the United States is Increased. In other words, U.S. law now operates in such a fashion as to nullify the tax Incentive offered by India where the business Is conducted as a branch of an American company or to the extent that profits earned In India by a foreign subsidiary are die. tributed to an American parent company. To offset this effect of existing law, the pending convention provides that de. spite the tax exemption granted by India, the credit against U.S. tax for Indian taxes will remain unchanged. The amount of tax credit that would be allowed would he thle same as if no tax incentives were granted in India. In our view, the credit for taxes spared In treaties with the less developed countries Is a reasonable ingredient in the tax system for coping with a problem which is of great importance anti holds promise of promoting private Investment cost. for the results achieved. In nbrond In these critical areas at a minimunh assessing the desirability of this convention, we would urge you to keelp in mind that the pFrOlposal to allow credit for taxes spared has generated all Interest In our tax treaty program among many of the less developed countries of the world. We have hitherto met with relatively little success in negotiating tax agree. ments with these countries. However, In the credit for tax sparing, these countries see an opportunity to recapture for the welfare of their country through the promotion of investment considerably more than they may lose In revenue. I should like to stress tlant what we are here urolposing is not unique among the capital exporting countries. Since It was proposed by the United States In 111"4, the concept of allowing credit for tax exemption lias attracted considerable attention among other capital exporting countries. The Federal Republic of Germany, for example, has already entered Into a treaty with India which produces stiostantially the same result as this treaty. As the committee may recall from the hearings in connection with the conven. tion with Pakistan, the proposal to allow, with appropriate safeguards, a credit for taxes spared by less developed countries has been subject to some criticism. We have carefully considered the views that have been expressed in opposition to It. However, I should like to reemphasize that the main Issue is whether treaties with less developed countries which contain a tax sparing provision can make a contribution in this Government's efforts to promote the flow of American private capital to these important areas. The administration firmly helleves that it can, and for this reason we urge early ratification of the tax treaty with India. Mr. Chairman. I should like also at this time to submit for the record a technical memorandum prepared by the Treasury which was Intended to accompany the treaty when It was transmitted to the Senate by the President. The memorandum describes the main features of the Indian tax system and explains the Individual articles of the convention. We should like to request that it be Included with the treaty itself In thie printed report of your committee, so that it may become available to the general public. TahAsuiy DEPARTMENT MEMORANDUM To ACcOMPANY INCOME TAX CONVENTION
    BETWEEN T119 UNITED STATES AND INDIA

    In a press release issued July 18, 19,58, the Treasury Department announced that discussions would be held with a delegation from India on an Income tax convention, and Invited suggestions and comments from the public. Discussions were subsequently held in Washington and New Delhi, and the accompanying Income tax convention between India and the United States was prepared. Although similar In many respects to the U.S. Income tax conventions with 21 other countries now in effect, It has features that are not to be found In any of the others. The principal provision that marks the present convention apart Is one which provides that the United States will give recognition to certain tax. incentives offered by India to promote capital Investment and economic development. The recognition would be in the form of a credit against the U.S. tax Imposed on Income derived by an American corporation from Indian sources for the tax reduction which India has granted under Its Incentive laws. In the absence of

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    INDIA TAX CONVENTION

    17

    such a provision, thle credit allowed a 1R.&. corporation under exislhng law for the taxes paid to I4d1a would lit redu.e'd aIs thie Indianu tax is reduced and the tvalplllJll.Vs Ih11blli1t to file Uilfted Slh-4e wouldlhie commllensulrately l~icreased.
    t\oincessills This frust ration or nullltficatlion, us It has benit teritoed, of Indlai tax would liet precluded by tile credit rlivte oflitt, convnti'ln. A similar provision was Included in ith, Incomen, tax convention with Pakistan billt never because effective. In giving Its cousell to lite raltifhalion of that colventllon, the Stnoate entered it reservallim with rezpect to tilt' credit provisloll beause the P'akistan tax Incentive law Ihid been iertuittedl to expire a short little earlier tlum Illmaking that provision of thie (olivent ion moot. lit conllelnting onI its action, the Fioreignl Rtelations Cotlillittle of tle Senate so1d it"wilts to make It perfectly clear lhat this (the reservation] Is without prejtldlce evellt thile Pakistani tax-waiver law to future consideration of ile matter ih tli In reenacted and tl|e question agail cones before ihe comlllittee. There Is no Tile commnittee

    occasion for the &-notle at thisq tine to dlt-.hle file qulestion. reserves conlllote freedom of decision for tile future." THIR INDIAN INCOME TAX

    Tihe Indian Income Tax Act, 11922. Istile basic Income tax law, which Is
    sulieliented by annual flitance acts that commonly set tile tax rates for tile current fiscal year and otherwise modify the llillnoe Tax Act. The Indian hlconlt tllx derived its main outllines from tile British law, s8) that different types tit Incomte are treated separately, each having deductions auni allowances Ietcullar to tie category in which it falls. Nevertheless thiet Indian law has developed independentlly in accordance with challgilg neetlds, and otR a result of recent ltgislathio, It more nearly aplproaches thie United Slates than the British ucoin~e tax lit certain Inlio;rtanl respectss. Thilet Ind4ianl lax applies to tilt' total Income, Ilcluding capital gains. derived hy every resident Individual and eorlioratllon. There are severa'li alternative tests for determininng whether ain Inldividual Is resident lit India during at taxable year. One turns l willwhthr lie has been pIhysically present there for illore than 182 days. Anotilter test Is whether tilt' Individual Illah1ltanlus a dwelling inl India. for 1S2 days during tile year and Is physically preselnt at ainy litle dilrilng the year. A corwlkration Is resildlt lt hi 111dh1 if (a) till' control and Ililngelnlent of its affairs is il India, or th) if It is incoriporated ill Ildila. A nonresident of 1n1h1 Is subject It) tax only on nleolme from sollrces hi India. Tho taxes on income include fllt, Incolme tax proli'r, ia sulpertait (equivalent to tile U.S. sutllax) and a surcharges, which Is a percelltage of the ilicomle tax allt suilpertax. Tax liability for 1 year is determined by reference to the Income of lhe precede lng account Ilg yea r. The income lax rates applicable to individuals for the current fiscal year range up to 25 pertellt on income above 25,Mt) rupees. The supertax is Ilmposed at rates rangillg up to 45 percent on Income above 70,M) rupees. Tile taxes tils colmputed are subject to a 5p1tercent surcharge, o that the niaxliuiin combined tax rate Is over 73 li'reent. The income tax on a corporation Is at tlhe rate of 30 lerceent plus a surcharge of 5 liperent, making an effective rate of 31.5 percent. A corporation Is also subject 1t4i supertax at the basic rate of 50 pltrlent, but thil Is Ishirply reduced

    by a system of rebates varying with lhe type of corporation, the nature of Its Income, and the extent to which prolits art' retained. For example, with respect

    to that Iltrt of tile Income iof a corporation wrlich represents divihhnds from another Indian corporation, the slpertlax Is reduced front ,") to 10 licreent. 'tho Suptrtax tin trade or usiiness profits is reduced to 20 percent hi tilt cast of tin Indian. as contrasted with a foreign, corlporatlon. Capital gains art, exempt fromn supiertax. The aggregate taixes on tile business Income of all ordinary Indian corporation llthus collie lto 51.5 ltereent, excluding sileeial taxes such ilaiS that o1 net wealtll. If it Is owned by an Amlerilan corlhiratioh, thie tlax lmosed,41 on tfli dividends brings the aggregate up to about 58.5 lpereent. A foreign corporation oelerating ill India through a branch is taxed at tile rate of (11.5 percent, but Its dlvilends paid out of Indiln-source income ore not subject to further tax.

    Under existing law, which Is In the prowess of change, the Inconle tax on a corPoralion Is deetlled to be pild on behalf of the shat'iholder In the corporation and a credit Is allowed against his tax liability for flhe Income tax pahl by the corporation. However, the supertax Is not considered a tax on a sbarehotler and may not be claimed as a credit. 7.3095 0-462--vol. 2 --- 4

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    18

    INDIA TAX CONVENTION


    NONRESIDENT TAXPAYERS

    A nonresident individual receiving income from India is subject to income tax at the maximum rate, or 25 percent, and to supertax at the rate of 19 percent or, if higher, the rate which would apply if the recipient were a resident of India receiving the same aggregate income. However, a nonresident may elect, total income from all sources, including those outside India. This is designed as a relief measure for Iprsons with relatively small incomes, but the election, once made, is binding for subsequent years. Since the corporate income tax is considered paid on behalf of a stockholder, the nonresident individual receiving dividends front an Indian corporation is in practice subject only to the 19-percent supertax, which is withheld by the payer corporation. A nonresident corporation receiving dividends from an Indian corporation is also in effect subject only to supertax which, after giving effect to re. bates, would ordinarily be 10 percent where there is a parent-subsidiary relation. ship between the recipient and payer corporation. If the nonresident foreign corporation has no controlling interest in the Indian corporation, the supertax is at the rate of 30 percent. To determine the aggregate Indian taxes on the Income derived from an American Investment in an Indian corporation, these rates on nonresidents can. not be added to the tax rates previously indicated as applying to an Indian corporation. Adjustment has to be made because dividend distributions are made out of income after tax and because a dividend ts "grossed up" to include the Income tax that Is considered to have been imposed on the shareholder rather than the corporation which paid it. With these adjustments, the total taxes on the profit received by an American corporation operating through an Indian subsidiary amount to 58.5 percent, unless excess dividends are paid, in which case the aggregate taxes may be somewhat higher.
    PROSPECTIVE REVISIONS for his first taxable year, to be taxed at rates determined by reference to his

    The present tax treatment of corporate profits In India Is In the process of fundamental change. From a system in which a corporation and its shareholders are regarded more or less as one taxpayer, it Is being transformed into one where the corporation is considered a taxable entity separate and apart from Its shareholders. This transformation Is being achieved in two steps. For the current tax year, 1939-60, the existing system is being retained insofar as a taxpayer receives dividend income from prior years' profits of a corporation. In the taxable year 1000-61, however, the new system will be operative, and In anticipation of it, the p~repayment of tax by a corporation on Its current income and the withholding of tax on distributions out of such Income are at the rates which will be operative for the tax year beginning in 1900. The creation of two taxpayers where previously there was only one has Involved a reshuffling of tax rates to some extent, but the main objective of the revision is not an increase in revenue or a change in the distribution of tax burdens. It is rather a simplification of tax administration that Is being sought. This is to be achieved not only by a severance of the tie between corporation and stockholder income tax liabilities, but by eliminating the wealth tax on corporations and the varying supertax rebates with respect to excess dividend disWhen the revised system becomes fully effective, an Indian corporation will be subject to a 20-percent income tax and a 25-percent supertax, and the dividends paid out by the corporation will in turn be fully subject to tax in the hands of the shareholder. An individual shareholder will continue to be subject to the system of graduated rates but he will receive no credit for the corporate income tax. If the shareholder is an Indian corporation having only an investment Interest in the company (no parent-subsidiary relationship), and If no special exemptions are applicable, the dividends will also be subject to the 20-percent income tax and the 25-percent supertax. If there is a parent-subsidiary relationship, however, the supertax will be- reduced to 10 percent. This lower rate will apply without distinction as to whether the parent Is a domestic or a foreign corporation. If the payer corporation qualifies as a firm engaged in a basic Industry under section 56A of the Indian Income Tax Act, then only the 20-percent income tax will be Imposed on the dividends received by the corporate shareholder. Thus in the ordinary case of an American corporation Investing capital in an Indian corporation, over the longer run, and apart from the initial years
    tributions.

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    INDIA TAX CONVENTION

    19

    of its operation when tax incentive provisions may apply, the total Indian taxes imposed with respect to profits derived in India and received as dividends by the U.S. company will be 50, 61.5, or 69.75 percent. depending upon the extent of stock ownership and the nature of the Indian business. If an American firm invests in India by establishing a branch there, it will be subject to the 20-percent income tax aind to a supertax of 43 percent, or a total tax of 63 percent, approximately the rate now paid by a foreign branch. The high rate of supertax on a foreign branch is designed to compensate for the fact that a tax is imposed at only one stage when a foreign corporation does business in India through a branch. The dividends paid by such a corporation out of the profits of its Indian operations are not subject to Indian tax. In each of the cases mentioned, It is clear that the Indian tax rates are higher than those in the United States and, in the absence of mitigating factors, the full amount of U.S. tax on an American firm in business in India would be absorbed by the credit for Indian tax. In each case, moreover, a reduction in the Indian tax would in the first instance redound to the benefit of the taxpayer because it would not affect the amount of credit that would be available against U.S. tax until the Indian tax fell below the U.S. tax. Pointing out that the alternative use for U.S. capital, which India is seeking to attract, is not subject to such high tax rates elsewhere, the U.S. delegation sought to obtain a reciprocal reduction In tax rates on several types of income as many other tax conventions provide. However, the Indian delegation was unable to agree to such rate reductions, and stressed the various tax incentives which India has adopted on a unilateral basis. To be taxed as a corporate entity, a foreign enterprise must apply to the Central Board of Revenue and obtain a certification. Without such a certification, a corporation is taxable at the graduated rates that apply to individuals. This has been of concern to some U.S. interests seeking to promote investment in India, but assurances were given by the Indian authorities that the necessary certification to be taxed as a corporate entity is given routinely to an American corporation upon application. Nevertheless, they could not eliminate this procedural requirement by means of the convention. TAX INCENTIVES The effect of the tax rates previously described is substantially mitigated in the initial years of a business venture or its subsequent expansion, by several provisions of the Indian Income Tax Act to which recognition Is given In this convention through the credit mechanism. The first of these Is in section 10(2) (vib) of the act which provides for a "development rebate" of 25 percent of the cost of new machinery and plant. This Is a deduction from taxable income in the year in which the new installation is made and is in addition to any depreciation that would otherwise be allowed. If the income of one year is inadequate for the "development rebate" to be absorbed, it may be carried forward, like an ordinary business loss, for the following 8 years thus providing considerable assurance of full utilization of the special deduction. The second tax incentive measure is in section 150 of the act and provides during the first 5 years of a new industrial venture for suspension of the income tax and supertax on profits up to 0 percent of the capital invested in the enterprise. Dividends paid out of such profits are also exempt from income tax and supertax in the hands of the shareholder. To qualify for this exemption, a venture must be an industrial undertaking, employing at least 10 workers "in a manufacturing process carried on with the aid of power" or 20 workers if "carried on without the aid of power." As explained below, the tax convention provides that a U.S. taxpayer may claim a credit against U.S. tax for the amount of Indian tax that, but for these provisions, would have been paid to India. Still another tax concession offered by India is the exemption from tax of in. terest derived by nonresidents in connection with debts incurred by an Indian industrial enterprise for the purchase of plant and equipment abroad, provided the Indian Government has approved the terms of the loan or debt. This exemption, allowed under section 4 (xvilb) of the Indian act, is recognized for the tax credit purposes only to a limited degree, as Indicated below in the discmssion of article XII.

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    INDIA TAX CONVENTION


    ARTICLE I-TAXES COVERED

    This article describes the taxes to be covered by the convention. The Indian Income Tax Act, 1922 (11 of 1922) Is equivalent to the Internal Revenue Code and the references to income tax and supertax of India are equivalent to references to the Federal income tax and surtax of the United States. Under Indian law, an undistributed profits tax is also Imposed, but it does not apply to a foreign corporation operating a branch in India nor does it apply to a publicly owned Indian corporation. A publicly owned corporation Is one listed on a stock exchange, or owned by more than six persons. An Indian subsidiary of a publicly owned foreign corporation is considered to be a publicly owned corporation.
    ARTICLE I1-DEFINITIONS

    The definitions in article II are, for the most part, similar to those included in other conventions to which the United States Is a party. In the definition of a "resident of the United States," a U.S. corporation that Is "a resident of India" is excluded. However, this does not mean that a U.S. corporation doing business In India Is excluded from the benefits of the convention. To be a resident of India, it would have to be managed and controlled there, and that would generally not be true of a U.S. corporation. The definition Is designed to deal with the technical problem that arises from the fact that under Indian law a corporation created under the laws of another country may nevertheless be considered an Indian corporation. The defidiition of "permanent establishment" in article II differs to some extent from the definition typically found In our tax treaties In being more restrictive. However, containing a substantial departure from the "business connection" doctrine of Indian law, it constitutes a concession by India. Under the business connection principle, India may impose a tax on a foreign enterprise even though it has no place of business in India and deals at arms' length with Indian firms. A continuing business relationship between the foreign firm and the Indian firm may at present result in the Imposition of a tax on the foreign firm. However, the definition of a permanent establishment In the convention precludes the impoxsition of a tax in these circumstances, unless the foreign enterprise has a permanent establishment in India or has an agent in India with a general authority to negotiate and enter into contracts or who habitually fills orders for the enterprise, or habitually obtains orders exclusively or, almost exclusively, for the foreign enterprise or for a group of related foreign enterprises. The last proviso dealing with exclusive representation was considered a reasonable expansion of the concept of permanent establishment In the light of all the factors involved. It is recognized that the concept of "almost exclusively" may produce disputes, but the language was designed to foreclose efforts to avoid the intent of the provision through token, acts which do not in substance alter the "exclusive" nature of the relationship. The other provisions in article II are not significantly different from the typical definitions. The term "Central Government in the Ministry of Finance," found in para. graph (1) (n) of this article, is a technical term used In India with the same meaning that would be attached to "the Ministry of Finance of the Central Government."
    ARTICLE IlI-PERMANENT ESTABLISHMENT

    This article provides that neither country will impose a tax on an enterprise of the other country unless that enterprise is engaged in a trade or business within its Ibrders through a permanent establishment. If a permanent establishment does exist, then tax will attach to the entire income of the enterprise from sources within the taxing country. In the determination of the profits of the permanent establishment, its dealings with the enterprise of which It is a part will be treated as If they were at arms' length. Provision is also made for the deduction of overhead and general administrative expenses, wherever they may be Incurred, In computing taxable Income. The use of estimated profits in instances where a precise determination of profits Is exceptionallY difficult, which is provided for in this article, has previously been agreed to In other conventions.

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    INDIA TAX CONVENTION ARTICLE IV-RELATED ENTERPRISES

    21

    With respect to transactions between related enterprises, such as a parent andi subsidiary, this article provides that each country shall impose tax on the bisis of illncomle determnlneu osi an arins' length IIs;s. ili oliher words, the principles of article III, which apply with respect to dealings between units of the same enterprise, are to be applied under article IV' to separate but related enterprises. ARTICLE V-AIRCRAFT EXEMPTION This article provides for reciprocal exemption of profits derived from the operation of aircraft. Although an effort was nlaIde to blainita sinillar exemption with respect to the profits from shipping, it was found Impossible to reach agreement on this point. A.RICLE Vl-ROYALTIES AND T.cH.ICAL SERvIcES The present Indian tax rate on royalties paid to ani American licensor by an Indian licensee is 63 percent, which Is withheld at source and constitutes an inliportlint bia:rrier to licensing arrangenkenl.t with I '.S. fir|rm. Altlholugh a determined effort was made to obtain a reduction in the rate, in acneordiunce with arrangements unler other conventions, the Indian delegation wias unable to agree. ilowever. there tire prospiec.s that a reduction in the tax on royalties may be adopted in the near future, which would be applicable to recipients in countries with which India hats an income tax treaty. Nevertheless, agreement was reached with respect to income that is closely rehlted to royalties for patents, know-how, ete.-income derived by an enterprise of one country for technical services furnished to an enterprise of the other. It is the first such article ili our tax coniventiohnis :anud is de,'..unied ito preclude the imposition of tax on income for services which are rendered outside the taxing country. If anl American firm supplies technical know-how to an Indian firm, no tax would be appliciable In India except to the extent that the firm actually performs services in India. A distinction is thus drawn between income from technical services and Income front royalties. If a licensing arrangement provides for technical services as well its the use of a patent, and selmrate royalties are paid for the technical services and the patent license, the amounts paid for the technical services would fall within the scope of article VI. while the balance would be subject to tax In India in accordance with the source rules of article XI.
    ARTICLE VII--GOVERNM E.T SA.ARIFS AMI) PENSIONS.

    This article provides for the exemption by one government of salaries, wages, pensions, or annuities paid by the other government to its citizens who are III Its employ. Similar provisions are found in other convention. However, the article also contains alnew provision to the effect that pensions pahii by one government with respect to services rendered in the other country by residents of that country shall not be taxed by the first government if the earnings at the time of employment were not taxable by it. This provision in effect considers government pensions to be deferred wages and provides the same tax treatment to the pensions as the wages received. As a result of it, Indian nationals employed by the American Embassy in New I)elhi, for exanide, will lie exempt from U.S. tax on the pensions paid to then after their retirement, just as they are now exempt from IT.S. tax on the wages eari%,d by them.
    ARTICLE VIII-nUSINESS VISITORiS

    To help effectuate established policy to encourage the movement of technicians, businessmen and others between the two countries, article VIII contains a itodifled version of the 180-day clause found in most other conventions. An individual who Is resident In one country and spends no more than 6 months iti the other country would be exempt from tax in the latter country on his income earned during that period. In addition to the more customary conditions, there is a requirement that compensation paid to such all Individual shall not be deducted in computing the profits of an enterprise subject to tax In the host country. This proviso narrows the scope of the usual provision, but it is nevertheless considered

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    I
    `-

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    INDIA TAX CONVENTION

    useful. Despite the restriction, an official of a U.S. company may visit Iidifa to Inspect branch operations there or the oiwrations of an Indillit stulisilluary without being subject to tax and without altering normal bookkeeping. To tile extent that the official's salary is Included in the overhead costs of the houne of. flee and is properly allocable to the operations of the branch in india, the dedue. tion of his earnings would be possible, and he would also be exempt from Indian tax. However, if a specific proportion of his salary, representing his stay in India, is charged to the operations of the Indian branch, then the exemptiou would not apply. This article also differs from that of other conventions by providing, for the first time, that the source of Income for services renderetd by the members of a

    crew of a ship or aircraft shall be allocable to the country where the enterprise
    Itself is located. This should eliminate troublesome tax problems of crew me-n.

    bers of ships and aircraft.

    ARTICLE IX-VISITING TEACelERS

    Institution. It has been found difficult to distinguish at times between teaching activities and research activities, since the two frequently are combined, with one predominating over the other. The exemption for research scholars Is restricted to cases where the research Is to be of general public benefit, either through publication of the results or otherwise made readily available to the general public.
    ARTICLE X-APPRENTICES, STUDENTS, AND GRANTEES

    In accordance with long established policy, provision Is made for the reciprocal exemption for a 2-year period of teachers of one country who visit the other solely to teach at the invitation of a recognized educational Institution. This principle Is also extended for the first time to research scholars at an eJucational

    Like the preceding one, this article is also designed to facilitate the movement of personnel between India and the United States. It provides special tax treatment for three groups of persons. In the first group are persons of one country who temporarily come to the other for the sole purpose of study, research, or business training. Exemption is extended by the host country to such persons of one country who come to work in the other for periods up to a year to acquire technical, professional, or business experience and exemption Is granted them by the host country If their earnings do not exceed $5,000. The third group is comprised of Individuals of one country who are temporarily present In the other under governmental sponsorship for training, research, or study, and exemption Is granted to them by the host country If their earnings do not exceed $10,000. Provisions similar to these are to be found in the existing tax convention with Honduras. ARTICLE XI-SOURCE RULES This article contains rules for determining the source of various types of Income. They are Intended to indicate which country has the prior right to impose tax, for which the other country is expected to allow a credit against the tax It Imposes on the same Income. In general, these rules of source accord with those in the Internal Revenue Code and the regulations, and are the same as those Included In the Income tax conventions with Honduras and Japan. However, a new source rule dealing with capital gains In certain circumtstances has been Inserted to deal with a special problem. Potential Investors in when property other than cash Is contributed to the capital of a newly created Indian corporation. For example, if the cost of equipment to an Investor were $100 and Its value had risen to $1,000 at the time of the formation of the Indian company to which the equipment is contributed In exchange for stock, the transaction might be considered to give rise to a capital gain of $900 which would be subject to Indian tax. To prevent such a result, paragraph (2) (g) of this article provides that capital gains, If any, arising from such a transaction would be treated as Income In the country of which the contributor of the capital is a resident. This would effectively remove such transactions from the sweep of the Indian tax law.
    India have been concerned that a tax applies under Indian law on capital gains sons on their remittances from abroad. The second group Is comprised of per-

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    INDIA TAX CONVENTION


    ARTICLE XII-TAX CREDIT PROVISIONS

    23

    The customary provisions by which a credit Is allowed by one country for the
    tax imposed in the other country on income having a source within it are contained in article XII. However, this article deliarts from list conventions In that it als, provides for U.S. recognition of the tax Incentive laws enacted by

    allow a credit for the amount of tax reduction that may accrue to a taxpayer under section 15(C) (the 5-year exemption provision), and section 10(2) 1l b) of the India Income Tax Act, which have previously been describe(. Since the benefit of these sections may accrue to a U'.S. corporation operating either directly In India through a branch or indirectly through an Indian subsidiary corporation, the credit allowance is written so as to apply to both types of situations. A subsidiary for this purpose is considered to be a corlporation In which the U.S. company owns at least 10 percent of the voting stock. This follows the pattern In the Internal Revenue Code which allows a credit to a U.S. company for taxes imposed on a foreign corporation if it owns 10 percent of the stock in that foreign corporation. The article also provides for a credit, under certain limited circwnstances, for the tax exemption granted by India to interest paid by an Indian borrower to a nonresident in connection with the importation of capital equipment from abroad. The credit provided by the convention In such cases Is restricted to where the American corporation receiving the interest owns 10 percent or more of the Indian payer company. Where there are such close economic ties, profits may be withdrawn in the form of either interest or dividends and It was cousidered appropriate that if credit for tax exemption is given to one form of profit withdrawal It may appropriatelycredit be given In allAlthough the Indian delegation strongly urged that the apply to the other. cases where tihe Interest connected rejected. with the importation of capital goods was exempt from tax, this was
    ARTICLE XIII--TAX DEDUVTION8 NOT AFFEt'IED BY CONVENTION

    India to promote private Investment. It provides that the United States will

    This Is the usual article which assures that the treaty will not be construed to restrict any tax deductions, exemptions, or credits to which a taxpayer nimay be entitled under the laws of the country imposing tax.
    ARTICLE XIV-EXCIIANGE OF INFORMATION

    This article contains the authorization for the exchange of Inforrmation between the tax authorities of the two countries to carry out the provisions of the convention. Any information that Is exchanged is to be treated as secret, laws of India appear to be as strict in respect to the disclosure of tax information as those of the United States. A new provision is included In this article under which there is to be an exchange of Information concerning modifications in tax laws. This is designed to assure up-to-date information on the tax laws of the respective countries. It also authorizes consultations for possible modifications in the treaty.
    ARTICLE XV-TAXPAYER INITIATIVE

    not to be disclosed to any but those concerned with the collection of tax. The

    As in other treaties, this article establishes a procedure for a taxpayer to bring to the attention of the appropriate authorities the possibility of double tax. ation occurring, contrary to the provisions of the convention, and authorizes the authorities of the two countries to try to reach an agreement to avoid such a result.
    ARTICLE, XVI-NONDISCRIMINATION PROVISION

    This article provides that nationals of one country who are resident in the. other shall receive the same tax treatment as the nationals of the host country. The language In this article is not as broad as that to be found in other treaties to which the United States is a party. However, the Indian delegation was not prepared to go beyond the scope indicated, pri'narily on the ground that while the basic laws of India prohibit discriminatory treatment of foreigners, there

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    '~1'

    24

    INDIA TAX CONVENTION

    were constitutional barriers against the Natii'l (I divernment Imaking ai cola. mitment that would lie binding on Ihe States.
    ARTICLE XVII-EFFECTIV'E l)A'rT

    rhis article provides that the treaty shall be appllicable for taxable years be. ginning on or after January 1 of the year In which ratifications are exchanged and that it shall remain in force for a minimum of 3 years. INVESTMENT (WUAR.ANTY PliOGRil,MS

    Secretary, you mentioned at, the begin 1iig the You stat-eI ofTihe r('.u.ltAn.t Mr. fat'o 'alle investment climate or unfavorable investmneit climate. Wlhilo Ithink taxes are certailliv important, is it not it fact that, the fear of conliscation or ex)l)opriati;l on tHie part of these various forillore -erio(ls as iadeterrent , e4i11 v1llitries is far Sl. I)uLOX. 1 would say that, it. is .,nerally more important, but to st imillatlo private investment we. feel t itat. 3you have to move in every way possible, and certainly tax incentives are very iiportait. As far as Indiai is concerned, we have ti invesCtmenIt guaranty agrleemlent now with India which is fairly all-embracing, and that doe.; cover the question of expropriation. The CIA11DIA-N. In how many countries do we have investment gtlaranty progranis ? Mi. li) 4 ,ON. Ill variolls forms, about 40. '[he ('u.~1lt.\x. Do we have them with Mexico? Mr. 1)nrLo. I would have to get. that information for you. The CIIAII.MAN. What, disturbs me a bit about it is our officially elwoUr'.,inig our private citizens to go into these coulintries and then when they get into trouble d(tie to discriminatory treatment after they aitle ill, soued illies We seeeim to Ihe rellctanit to protect themt. I am perfectly ,;illihg to encourage them through taxation or otherOn the ohier hand, if we are going to do that, I think we ought to be extremely car',ful in following through to protect them. Mr. D)ILLON. Yes.
    iPOSSIInI,

    Tie ('I.\liIM.'.x. What I have in mind is a very well-known case

    EFFECTr Or ADMIINISTIRATIVE ACTION BY FOREIGN COUNTRY

    ilist with in thle last few months in Mexico in which by a simple device of refusing to give what we would certainly ('ouiside'r in tile business world a legitimate increase in their rates, a utility company was forced to sell. Since 1,I1: hall)liened, I have had coliie to il1y attention another case in which a counpany had been given contracts to develop resources. And as soon as one. is successful, the Government just squeezes him .otit. .do not do anything, except. refuse The,.- (1o not, expropriate. They fhe orIHi1 1.y administ rative )ermission which is necessary. So we flind ourselves, oil the one hand, saying: "Go in and invest your money in our national interest." On the other hand, they go in, in goo(l faith, and if they are successful, they are taken over; in this n':.,', iot even by expropiiatioP in the normal recognized sense. They '(1554)

    INDIA TAX CONVENTION

    25

    are just broken and destroyed by administrative action. It seems to mie this is a very serious matter. i hate to take the responsibility of urging our people to put their money in a country and then have it go down the drain with our being unable to protect them. MJr. DmLLON. That is just one of the reasons, Senator, why we favor the treaty approach in this tax-sparing arrangement, so that we can make these treaties with countries where we think tlhat the general climate is favorable, and where they are doing everything they can to make a favorable climate for foreign private investment. We do not have an investment guaranty agreement on Mexico concerning expropriation, I am certain, because Mexico has always been very difficult, as y'ou know, on this subject of expropriation, going back t, the beginning of the century. '1The CIHAIRMAN. This is a refinement on expropriation. It is not expropriation. Mr. DILLON. That is right. The CHAIRMAN. If they moved in, condemned the property in a court and paid what a reasonable court says is compensation, at least that is more or less according to precedent. But, as I understand it, they rst not do that. By these various devices, on the one hand, they 6 do the l)rocedure which is normal with every utility which we erfuse have every day in every one of our States; they just refuse to do it, and therefore it just squeezes them out. They just refuse administrative act ion. They do not expropriate. I do not know whether investment guaranty would apply to that. By extralegal means they are just squeezed out and I hate to encourage people to go in, if they are going to be treated in this way.
    THE CASE IN MEXICO

    Mr. DILLON. I think that is correct. In the case of Mexico, however, there was also involved a question which has come up in many countries, including our own, of the difference of opinion between public and private power, electric power, and that was involved in this case. The CHAIRMAN. I do not quarrel with that if they say: "Yes we want to own our own utilities and we will have an arbitrary condemnation and we will pay you"; but the procedure followed is different from this thing. In effect, they break you by reducing the value and then forcing you to sell. That is a forced sale. It is not really expropriation, and I do not suppose a guaranty would apply. This calls only for diplomatic action. The only thing you and the Department could say is that the Government treat them properly, or that we are not going to encourage our people to go in. I un derstand around $150 milhlon a year of private investment has been going into M[exico. If they do not appreciate that, then I think 6we ought to discourage it and say to our investors: "You should not invest unless you get what you would call reasonable treatment." The CMuR RAN. I just noticed this recently. I thought that 4 Mlexico, as one of our prize friends in this field, did appreciate the vast amount of private investment, as well as public. (1555)
    Mr. DILLON. I would agree with that.

    26

    INDIA TAX CONVENTION

    triue they Ilre ill good Shaple and Iave paid back on ilshedille. Blt whe'ln you mentioned i favorable investment cliniate, it seenis to 111o that. this is almost. fuldamenlal. Themi on top of that, if you

    'T'he Export-limport liank has loaned then $400 million and it is

    get reasonably good tax treatment, why, you get, a picture with all exeellent. fil tilre. Mr. l)nu,. Tat, is correct.

    against. this kind of attitude which happened in the case of Mexican Power Co. I would certainly agnree with you about Mexico in this situation. The (1,1urMAN.. I will yield to Senator Green. Do you have some I quest ions
    SI'ANI)AIMS MOR NPAI1orlATMNO TAX rT REA'ATIES

    nment. has taken very real steps to assure against. expropriation or

    Now, in India, which we are considering here, the Indian G'overnl-

    Senllator (im-],N. In general, do you have t' standard forlu-I know the ultimate result is dilrerfent in the different countries-butt do you have it standard treaty form with which you begin and then modify? Mr. DILL.ON. Yes, Slenator. Trhe negotiation of these treaties is lhndled by expert, teams which are headed by Treasury experts, and they start. off with a more or less basic form which we try to achieve. However, each one is unique because the tax laws of each country that we are dealing with are different. The situation is different in each country. Senator Gimmi. But they are substantially alike in form, then, when Senator GUjimm. There are certain fundamental conditions that am in all of themI Mr. Dli 4 .oN. That we attempt to get. into all of them, yes, sir. Senator Gm:%.. But no two are exactly alike? Mr. L),trmo. That is correct. Senator GR.EEN. And how are they negotiated ? I mean by that, how do you determine how far you will depart from the standard form? Mr. DirToo. They are negotiated, in general, by a team of negotiators headed by experts from the I)epartment of the Treasury who negotiate in motst eases in the foreign capital, and after this negotiation is completed, we get what benefits we can and we meet what we have to meet., what the other country desires. These treaties are then initialed. They come back to tile Treasury Department here where they are gone over with great care to be sure that they are fair. And after linal approval hero, they are then signed formally, which does not occur at the time they are first negotiated. Senator Gr.EE. Do you have a standard form which you could submit to the committee, and one from which I understand you depart from time to time? M r. Dmm.tq. We only have about 21 of these treaties. We could submit them all.

    they are completed? Mr. DiLIAN. Yes, the newer ones.

    (1bfP6)

    INDIA TAX CONVENTION


    I Nv.14-TiMENT (ItAIANTY 'IRO(1IAM NOT Ai'l'hA.
    lAJIi, FOiIIII(IN INT)

    27

    IsTRA,rIVEA, 1C'11o; ADMI N TheOCitAIMAN. I shouldhl like to clarify i1point. We do not have a treatly wilh Mexico. I )o you think this treitty will enable you towhat." shall I say--to influence t he o(hvernmelit to give our private i t investors IIIore elttil)iht ret menat t, apply to the

    Mr. D)ILLoN. No. The ()IAlniRMAN. The only way thal can be handled is by diplomatic inerot jit imli SI Cr. l)ImLo,o. That is (orrect. With Mexico we have a minimum of agreeiellts oln this subject, of investnient, from abroad because the Mexicans Ira(litionally do not like to make agreements. We do not uive either a tax trealy or an investment. guaranty agreement, with Mexico. The CnAIrMAN. And yet it is one of the sources of a great investment, is it not? Mf[r. l)iurm. That is correct. 'T1he CHAIRMAN. I think it, is around $150 million. Mr. I)nLLN. As a matter of principle, with a few exceptions, the

    'Tlhe (CII.All.N. Yo01r1 invest iin, giuanty would kiml of case I am speaking of, would it I

    Mr. I)II,ION. 'I ha1t is tor)l-i

    t.

    exceptions being land and this public power thing and the earlier excJp)t~ion of the oil uisimiess, thlietMexicans have been relatively reasomable in their treatment of American investments so American business has decided that the chances for a profit were adequate for the risk involved, and they have gone ahead on a private basis.
    SITUATION IN CUBA

    The CnAIRMAN. You could have said that about Cuba about a year ago, could you not? Mr. DILLON. We certainly did. The CnHARMAN. I am wondering whether tfi Cuban experience is hispiring some of their neighbors to do likewise. Do you think sot Mir. DnaLON. I would think if the Cubans are successful in the long run, that it would have a very dangerous effect. The CHAIRMAN. That is what disturbs me about. it. I have a letter here from Mr. William S. Swingle, president of the National Foreign Trade Council. lie raises a question. Are you familiar with the ques-

    tion lie raises, his objection to this treaty?

    Mir. DILLON. I have not seen Mr. Swingle's letter.


    r'ERMANMNT ESTABLISHMENT CONCEIT

    The CHAIRMAN. lie says:


    While the Council favors the conclusion of a treaty with India, there. are provisionjs in the proposed agreement that give serious concern to the Council. The Most Inportant of these provisions causing concern relate to the definition of the termn "permanent establishment." In the proposed agreement with India,
    the United States setins to have accepted a significantly broader concept of Permanent establishment than in prior treaties. In the proposed agreement with

    (11,57)

    28

    INDIA TAX CONVENTION

    India (as In tax treaties generally), the concept of permanent establishment is of key importinee because Indlin agrees not to levy Income tax on U.S. enterprises witit do not have it perimtent establishment in India. The princilpal (though not the only) expansion of the concept of permanent esthblinnhmet is: "llaliittally securing or(lers shall be deemed to create a permanent establish. inellt, provided that the presence in India of a person for not more IMhan 3 months for the purpose of securing orders 'shall not be deemed to be habitually securing orders' art icle 11 (1) (J) (dd)3."

    oil this point. If you would care to read the whole letter, you 11my. ]ulit I wonder if that is enough to give you the thought as to what

    They go on and propose that we ofter at reservation to this treaty

    they have in mindI Mr. l)nitoN. I would defer on the details to the representative from the Treasury Ilepart silent and only comment that this was a subject of negotiation with India, a11nd that the result is very greatly to our advantage compared to the present situation where there is no treaty at all, and where there are no rules at all on this permanent estab. lishnment. So that even if the treaty is not as tight as we might have liked in that connection, it. is a great advance over the situation that exists with no treaty at all, which is the alternative. As to the detailed differencesThe CHAIRMAN. 1 might just make it more specific. Mr. Swingle says:
    consideration to a reservation that would eliminate subpart 3 of article 11 (1) (J) (did).
    It Is suggested that the Committee on Foreign Relations aind the Senate give

    Does that identify what he means, Mr. Glasmanni Are you faiihiar wi Iti ol)jet ion of the Council? the Mr. GLAsMANN. Yes. They point to the fact that the Indian treaty permanent establishment provision is not the same as in many of our other treaties. The Indians would not agree to our usual permanent establishment provision. As Under Secretary D)illon has indicated, however, they nave moved a very great distance from this continuing business rela. tionship doctrine which they have where an American enterprise does sidered taxable by India. The CnAIRMAN. Now it would have to be there 3 months or longer to be permanent.; is that. right.? Mr. GJ,ASMANN. That. would be right.
    PERIMANENT &STAIILISIIMENT PROVISION NOT USED AS PRECEDENT not even have to have anyone premnt in India in order to be con-

    The CHATWMAN. What they are worried about, I think, is the precedent in other cases as to what lperntanent establishment is. Mr. GO.AsMANN. Each of these are matters of negotiation. I think the Indian law in particular is so dianmerically opposed to our own in the treaty is a very marked step forward. The ChAImRMAN. And it would not be used as a precedent? Mr. GLASMANN. We would not so consider it.
    in this source of income concept that we feel'this provision that is

    (1558)

    11

    1
    29

    INDI TAX CONVENTION

    The CHAIRMAN. Would it be proper for us in the report, assuming we vote on this, to say that we specifically do not regard this as a precedent for permanent establishment in any other circumstances? Mr. GLASMANN. I would hope you might do that. The CIIAImMAN. You would recommend that? Mr. GLiSMANN. Yes. The CHAIRMAN. Mr. Swingle says later in the letter that, in any event, the Council recommends that this provision should not be considered as creating a precedent. Air. DiLLON. Tlat would be very helpful to us.

    oERMAN RESTRIO2ONS ON IMPORTATION OF U.S. AGRICULTURAL


    COMMODITIES The CHAIRMAN. Before I leave this other subject, one other thing came to my attention in the last day or two with respect to Germany. By the manipulation of their foreign exchange regulations and allocations-they certainly have no reason to limit. their forei n exchange because they have an excess of foreign exchange, as you alfknow, even to the point of prepaying some of their debts and lending money to England-sonie of our industrie, specifically the poultry industry, which is endeavoring to gain it market there, are simply limited or prevented from having an entry into the market. This is a case where our industries are perfectly willing to pay the tariff and other fees. There is a tariff of 15 percent and 4 percent and something else. Bult in addit ion to that, the Germans allocate so little and then parcel it out in such small amounts that no one can afford to buy a commercial amount. This, it seems to me, is extremely arbitrary, especially in view of the fact that we let Volkswagens come in here by the shipload. This irritates me-the fact that you donAt get any reciprocity between the two countries. Here there is no question of ability to pay. It is just arbitrary internal regulations. Mr. DILLON. I can answer that. We get very real reciprocity from Germany. We have had some problems with Germany, as we have had with all European countries, on removing restrictions a1 inst U.S. imports, and because of German slowness in doing this-they had removed restrictions on all but about 5 percent of their imports-we took the matter a year ago to the GATT. As a result of hearings there, the Germans did agree to eliminate all future restrictions except on certain broad classes of agricultural products. This is being done over a 3-year period. One of the restrictions that will be removed is the restriction on the importation of poultry. The CHAIRMAN. When will it be removed I Mr. Diwo. The date, I think, for that removal is a year from this July 1. Tihe CHAIRMAN. Why are they so slow on that I It is the one agricultural commodity I know of that sells on a competitive basis without any Government subsidy. I mean, every time you sell a bushel of wheat, it is 8 cents; and every time you sell a bale of cotton, it is $50 or something; and yet, when there is one commodity in which case you do

    (1559)

    30

    INDIA TAX CONVENTION

    not have to give them anything, they refuse to take it. This makes no sense to me. Mr. DILLON. I think it is perfectly simple. They are trying to build up a poultry industry in Germany. The ChIAHUtMAN. I would hate to be forced to say we would do the
    same on Volkswagens because we want to try to reestablish Detroit.

    Mr. DILLON. However, we do do it on cheese. The CIIAIRMAN. Not with Germany. Switzerland is where we put a ration on it; the Swiss are much more fair. They do not do this. Swiss cheese was so much in the public eye and I tried my best to prevent our putting a ration on it when the bill was before us. I have tried to be a free trader so far as I can go, but this irritates me. This is not expropriation. It is not a tariff. I call it a rather devious internal administrative way of discriminating against our people.
    TRADE RESTRAINTS ON CERTAIN ITEMS

    Mr. DILLON. We have been continually pressing the Germans. As an indication of that, under the agreement which they had to make a year ago with the GATT-that would be liberated this year on the 31st of December-they have already liberated 6 months ahead of the agreed date. of foreign exchange. They certainly have no shortage of dollars. Mr. DILLON. The excuse for it is the same as is ours: damage to their domestic industry, which is not a good excuse.
    The CHAIRMAN. What is their excuse for it? They have no shortage

    I wis told just yesterday by representatives of the industry that the traders and the people want it very much. Mr. DILLON. That is correct. Mr. DILLoN. That is correct. The CHAIRMAN. The thing that impresses me is that it applies to only onp agricultural commodity I can think of offhand. Senator HiCKxELoPER. Soybeans. They like them only as beans; they do not want them as finished articles. But I must say it discourages me very much to hear about these instances when you are trying to promote trade, especially with a country that has no shortage of funds. I can sympathize with India or any of these others that have a deficit. Mr. DILLON. This is not a case of shortage of funds. It is just a case of agricultural protection and we have gotten them to agree to remove it a year from now. The CIAIMMAN. Once again, the poor farmer gets it in the neck. I don't like it at all. I am going to writeyou a letter about it. est in the agricultural commodities I The CHAMMAN. I think that is exactly right. There is no such allocation on a lot of hard goods and other things, but poultry seems to be about the only commodity now that is under this kind of restraint.
    Senator WILLIAMS. Could it be that the Department has less interThe CHAIMAN. Soybeans, too, mostly, though, in the raw stage. The CHAIMAN. And it is acceptable and it is competitive.

    The CHAIRMAN. I do not think they have a comparable industry.

    (1560)

    INDIA TAX CONVENTION GENERAL RESTRAINT ON FRUITS

    31

    Mr. DILLON. No, we have another agricultural commodity that is under general restraint in many countries abroad, although the Germnans have moved a little faster than others, which is equally important or probably more important than poultry, and that is the whole broad range of fruits. The CHAIRMAN. Fresh fruits? Mr. DILLON. Fresh and canned both, and we are working very hard with all the European countries to get those liberalized; and with some hope of gradual success. We kee moving a little bit each year. Senator WILLAMS. Suppose we held up some of the concessions; do you think there might be a little more rapid progress? Mr. DILLON. It is a question of what is considered to be a fair bargain. S-ure there might be more rapid progress, but most of these countries of Europe have come from a very low degree of liberalization up to a point where it is 95 percent or more in practically all cases. Ital is the one lagging in general. The CHmRmAN. Mostly in agriculture? Mr. DILLON. Of course in agriculture the general argument is that the United States is equally, if not more, protectionist than these other countries.
    GERMAN RESTRICTIONS ON IM'ORTATION OF U.S. AGRICULTURAL
    COMMODITIES

    this liberalization to July of next year was that they wanted to develop an industry within Germany. I fail to reconcile that point with the fact that if they are developing an industry in Germany, could they not relax these controls better this year before they get the industry fully developed than they t w can next year? p They apparently thought their industry next year would be strong enough toThe CHAIRMAN. Prevent any importation? Mr. DILLON. No, to hold up to competition. I think that there will be substantial imports when that is relaxed. The CHAIRMAN. It is very distressing to have that kind of internal situation-the same as here. I would like to go much further on this. I think it is sound in theory if you have fair treatment. Mr. DILLON. It is true, I think, to say objectively around the world that agricultural products are generally treated by all countries, ineluding the United States%in a somewhat different category from manufactured products, and the restrictions are greater on agricultural products.
    Mr. DILLON. Apparently that was not the way their mind worked.

    Senator WILLIAMS. You indicated the reason that they postponed

    on this?

    The CHAmIRN. Senator Hickenlooper, do you have some questions

    (1561)

    32

    INDIA TAX CONVENTION

    FIGHT OF CArrAL FXo

    THE UNrrT

    STATS

    Senator HIOKENLOOPER. What are these treaties going to do, Mr. Secretary, in the general field of the flight of capital from the United States and the creation of competition with American business abroad? I mean, the more we encourage American capital to go abroad, the less of it we have to invest in local expansion. I have generally supported in the past favorable climates for American capital investments abroad as a matter of helping in times of dis. tress where you are establishing permanent businesses, but will we not come to the time where they make it so attractive for American capital to go abroad that we will not have very much left here, or a reduced amount? Mr. DILLON. Senator, I think the answer to that is that it is extremely unlikely. It is because there is such a lack of private investment flowing into the less developed countries that it is our policy to pursue vigorously the negotiation of treaties with less developed countries where it is also our policy to help in their development, and where the Congress annually appropriates considerable sums of money fundamentally for that purpose. We think that this can be helpful and the strain on the Federal Treasury considerably lessened by stimulating private investment in those particular countries. The amount of capital that goes to those countries is very limited, as I said earlier, to the whole of Asia and Africa. The actual outflow has only averaged about $156 million, of which 60 percent has

    That compares with a total of about a billion and a quarter dollars average of straight outflow of capital in these preceding years. So it is only about 15 percent, and the great part of that has been in oil. Now, the types of things that we are hoping they would be interested in would be something like fertilizer in India. One of our chemical companies would put up a certain amount of funds for that, Yut in their know-how, join with the Indians in building a private fertilizer company in India, which would have no effect on business here in the United States. I do not think the amount of capital that would go for this sort of purpose would ever have any major effect on the amount of the availability of capital for investment here. Senator Hicx _moonR. At the present time I think it is minimal all right, but by the same token it is entirely possible for the underdeveloped countries to develop these skills and so on, which are in direct competition with us. I just think a great many things that our people are now having manufactured in Belgium, Switzerland, and other places are being shipped back here under their own names, and it is having a very definite effect on our industrial development here. Mr. Dmwzo. I certainly want to make it clear that it is not our purpose to promote the idea of American capital going abroad for the purpose of manufacturing over there for the primary purpose of selling back in the U.S. market.
    (1562)

    been over the last 5 or 6 years.

    INDIA TAX CONVENTION

    33

    Senator HICKENLOOPER. Of course, there are reasons for that. One is that, the wage scales are several times what they are abroad and if the sales are equal, they are going to do everything they can to meet that foreign competition in one way or another. Mr. iImLoN. The type of thinks that the Indian Government is interested in in the way of foreign investment is not that particular type of thing. Also, in this treaty, as in our other treaties, in case this provision should not work we do have--in case conditions should total y change in the future so that there would be difficulties, there is a provision for abrogation of the agreement.
    EFFECT OF TREATY ON U.S. DOMESTIC LAWS

    Senator HICKENLOOPER. With reference to the question that I asked a while ago on whether this treaty would prevent us from changing

    our laws, I understand there is a definite agreement that the Indian Government will not alter its laws with respect to these matters if this treaty goes into effect. Mr. GLASMANN. The Indian Government would be able to alter its laws. We would just not give effect to the change for tax credit purposes. It could increase the amount of taxes on American enterprises. Mr. DILLON. They could change their laws domestically but this would not affect our people, and, conversely, we agree that we will not take unilateral action to vitiate the treaty obligation which we undertake to allow this tax-sparing provision to operate. I refer to the note attached to the treaty from the Ministry of External Affairs, New Delhi, on the 1st of April 1960, headed at the top, No. F54 (13) AMS, to Ambassador Bunker, interpreting or setting out the views of India on this treaty. In the third paragraph of the last sentence, it says:
    However, it is also the understanding of the Government of India that, in agreeing to article XII, the United States Government undertakes not to adopt measures which would vitiate the basic principle of that article that credit shall be allowed against United States tax for tax imposed by India on income from sources in India.

    Senator HICKENLOOPER. Yes.

    Now, what does that mean that we can do or cannot do? Mr. DILLON. That, I do not think, means anything. It does not add an iota to the provision in the treaty which, if it is ratified by the Senate, becomes the supreme law of the land. Seniator HICKEJNLOOPER. I am not certain that it does not have something to do with the treaty. It is a document referring to the treaty. Mr. DILLON. What it states, Senator, is that the United States will not vitiate the principle of the article which is in the treaty, and the representative of the Treasury has some background on why the Indians thought it was necessary to have such a letter, which ordinarily
    would not seem to be necessary, because it could be assumed that once we adopt the treaty, we do not turn around immediately and vitiate it. Senator HICKENLOOPER. It is an interpretive statement accompany-

    ing the treaty and it has been agreed to by Ambassador Bunker in a


    73095 O-62--vol. 25 (1563)

    34

    INDIA TAX CONVENTION

    letter of April 7, which is also attached to the message of the President submitting the treaty?
    Mr. DILLON. That is correct.

    Senator 1-ICKENLOOPER. I am just wondering as to the effect of that. Mr. GLASMANN. Senator, there are a number of our treaties among the 21 treaties now in effect that contain a specific reference to our Internal Revenue Code in the provision to prevent double taxation wherein we agree to allow a tax credit for taxes imposed upon American enterprises in particular foreign countries. The provision in these treaties-and this is not the Indian treaty but our usual treaty-contains a specific reference to the Internal Revenue Code, for example, section 131 of the Internal Revenue Code of 1939, or the corresponding section in the 1954 Code. Recently the House Ways and Means Committee had hearings on H.R. 10859 which is a bill that would provide for what is known as
    the gross-up principle in connection with allowing tax credits with

    respect to dividends from foreign subsidiaries. In those hearings it was pointed out the provisions in the treaties that contain a specific reference to the Internal Revenue Code as of a specific date might have the effect. of preventing a change in the code with respect to the foreign tax credit provisions. The Indian treaty does not contain such a provision. This language in the letter is merely referring to the fact that there is no such specific reference to the Internal Revenue Code as of a particular date, but pointing out that we will continue to allow, in accordance with our laws, a credit for foreign taxes paid by American enterprise. Senator HICKENLOOPER. Of course, I presume, if we have any treaty that would prevent alteration of our laws, under the theory that laws should be of general application, that might affect every other country in addition to the one making the treaty ? Mfr. GLASMANN. The treaty, itself, does not prevent the U.S. Congress from changing the law. The question comes as to whether a change in the law will violate a particular treaty provision. could not repeal that portion of the treaty which gives credit for taxes that are not pait, Mr. DILLON. That is right. Senator WILUAMS. To that extent, once we approve this treaty, we have canceled the right of the Congress to further amend our tax laws and, in effect, the taxes would apply to investment of American capital in India; is that not correct ? Mr. DILLON'. That is correct, unless we wish to denounce the treaty. Senator WuLLuAMs. That is right, which we would not want to do.
    Senator WILLIAMS. If I could interrupt except at this point we

    Mr. DILLON. We could.

    EFFECT OF TREATY ON RIUHTS OF STATES TO TAX

    Senator HICKENLOOPR. Now does this treaty have any effect on the

    rights of the States to tax? In other words, an Indian corporation doing business in this country, I take it, has reciprocal rights f 'Mr. GLASMANN. This only has to do with the taxes imposed by the Federal Government.

    (1564)

    INDIA TAX CONVENTION

    35

    Senator HICKENLOOPER. I understand, but suppose some State wants to increase its taxes on corporations including Indian corporations? Mr. DILLON. That does not apply in the letter that we have sent up. It is stated the agreement applies so far as U.S. taxes are concerned, only to the Federal income taxes including surtaxes. It does not apply to the imposition and collection of taxes by the several States and the District of Columbia.

    VIEWS ON URGENCY OF ACTION ON TREATY The CHAIRMAN. Gentlemen, I only remind you there are two more witnesses on this treaty. And I do not wish to cut off the discussion. I wonder, Mr. Secretary, if you expect us to pass on this treaty in this session, or in the next few days? Is there any great urgency about it? We only received it in May. I wonder what tie attitude of the administration is? Mr. DILLON. We had very much hoped that it could be passed on favorably as soon as it was convenient for the Senate to act. I recognize that the press of business made this very difficult. The CHAIRMAN. As a practical matter, not that I know of any objection to it--I do not think I have any real objection to it-but I think there is a good deal of understanding to be achieved and I wondered if there is anything really urgent about it? Mr. DILLON. I do not think, as far as I know-there is no specific investment opportunity which would fail because of failure to act on this treaty at this time rather than 7 or 8 months from now. The CHAIRMAN. They are calling the calendar. Several of our people are upstairs. They have to be up there because there are bills that they are either sponsors of or are involved in. We have got some more business this morning. We have Mr. Brown here, whom we wish to talk to as the nominee as new Ambassador to Laos. Mr. DILLON. Who, incidentally came from India and is well aware of the importance of this treaty. Eut I would say one thing: If there was the decision not to act, I think it should be made very clear to the Indians that this is a question of time. Senator HICKENLOOPER. Have the Indians adopted or ratified this treaty yetI Mr. DiLLoN. No, because under the Indian procedure they do not have to ratify by parliamentary action. Their final ratification is merely the signature by their President, and they have informed us that will take place as soon as the treaty has been ratified by the United States. PRECEDENT TREATY WOULD ESTABLSH Senator WILuLms. Mr. Chairman, as one member of the committee, I would suggest that in view of the time that remains in this session, we just pass this over for consideration next year. I have several questions which are in my mind as to the advisability of entering into ris field, and I do not think it is a question of what we do just with India. Once we establish this precedent, there are many other countries. I notice here that the Treasury Department states they are currently negotiating with four countries in Asia Africa, and South America,
    (1565)

    36

    INDIA TAX CONVFNTION

    propriate that it be referred to the Ways and Means Committee, thle Finance Committee, or the Joint Committee on Internal Revenue Taxation, for retonuiniendat ion contcening what, they feel. I know there are many members who have the feeling-and I am one of them-that perhaps we should give consideration, if we are going to enter into this field, to doing it.by legislative process rather than by treaty, because if we do it legislatively and then Congress feels it is going too far inbeing abused, we can repeal the law. I do not like the idea that we can ratify a treaty and then, if we get. tired of it we can repudiate it. I believe once we sign at treaty, it is a sacred document. I think we should do it with full intentions of living upi) to it.. The CHAIRMAN. We have sent a copy of this to Mr. Colin Stam, of the Joint Committee on Income Taxation, and asked their advice, but we have not yet received the report. I agree with you; I think we ought to have their report on it before we take final action. What I was trying to do was to facilitate this-and we have these other witnesses. Secretary Dillon, we have heard your statement and Mr. Glasmann's statement. Maybe if we could hear the other two witnesses in a few minutes, it wou'ild leave us time then to do the other things which must be (lone.
    Wo have to hear Mr. Brown because he is here.

    and several other count ries are also hoping, according to preliminarY conversations; so what we are doing is establishing an entirely niew precedent. As I understand it, once we approve this treat , we as a Congress can no longer amend our tax laws or Revenue Code to cancel these arrangements which we have made. I think that before any action is taken concerning approval or rejection of this treaty, it is only ap.

    other two witnesses who are here could make very shot statements. Senator LAuSCjiE. I would like to ask a question', Mr. Chairman.

    I wondered if the

    The CHAIRMAN. You understand this is not the end of this at, all.
    Senator LAUSCIIE. If you will permit me to ask one question.
    The CHAIRMAN. Certainly.

    BILL TO o01E TAX EXEM3TIONS TO AMERICAN INVESTORS

    Senator LAUSCIIE. Several weeks ago we passed a tax measure giving tax exemptions to American investors in foreign countries on the theory that it will induce them to invest in underdeveloped countries. Are you familiar with that measure, Mr. DillonI Mr. DILJON. I am familiar in general with the principle of that
    measure, yes. Senator LAuscze. Is that not adequate to achieve the objectives

    difference is that through this treaty, by making available this taxsparing provision which the Indian Government feels will bring furftIer capital into India, the Indians have been willing to enter into a rather broad tax treaty similar to our other treaties, which gives us a whole series of benefits that we would not get if we took unilateral action.
    (1566,).

    which you have in mind in this treaty? Mr. N. That would certain help. I will tell you the great yTr

    INDIA TAX CONVENTION

    37

    That is the question that has to be weighed that Senator Williams raised. If we do this by unilateral changing of our laws, we do have the right to reverse ourselves at any time. That is a real advantage. On the other hand, we could not, expect to get the benefits of a bargain with the other country and get the other country to give us all the benefits of a double-tax treaty.

    Senator
    Senator

    may have reference to H.R. 5.


    LAtJSCIF.

    LAUsCIIE. May I have Mr. Glasmann's view on that? Mr. GLASMANN. I wanted to say, Senator Lausche, I believe you

    underdeveloped countries. Senator GUoi. Ile is referring to the tax averaging bill. Mr. G[aASMANN. Yes. These are two bills. One is H.R. 5, which isnow pending before the Senate Finance Committee. It would allow deferral of tax of income earned in the less developed countries by certain domestic corporations. but has not gone beyond that. The other, I believe, is H.R. 10087, which would provide for the u.e of either what is known as the overall limitation or the per country limitation in computing the foreign tax credit. I believe that probably is the bill that you have reference to. It has passed the House and has passed the Senate, with amendments, but has yet to go to conference. Senator L.tiscII. You do not believe that that will solve this problem of inducing American investors to settle in underdeveloped countries? Mr. GLASMWAN. I believe the primary purpose of that bill was to make certain that American investors abroad did not pay more than ,52-pereent tax on their foreign income viewed as one basket or as a whole. I (1o not think that it would have any significant effect upon getting investors into India, for example. assume bI that it included India. My position on that measure was that the argument was falsely made that* it would induce American dollars to go into underdeveloped countries. Mr. GLA8smAN. To the extent that the underdeveloped countryand India is one of them-has a tax rate that is higher than the UI.S. tax rate, the advantage of being able to average that higher rate with to counterbalance the higher hmidian tax rate, and thus provide sonmie
    inducement. a tax rate from another country that is lower might tend, certainly, Senator LAESCHIE. The argument was made, and primarily, that it was needed Io induce investors to go to underdeveloped countries, and I

    we gave tax benefits of about $30 million under the spurious claim, in my opinion, that it would induce American investors to settle in

    We passed about 2 or 3 weeks, ago a.bill in which

    nanee Committee. I think the committee did have public hearings

    Senator LAMM&scH. We passed this bill. Mr. GLASM.%FAWN. That one has not yet been considered by the Fi.

    Senator LAUSCII. The Treasury Department opposed that bill, did it not, the one of which I am speaking? " Mr. G0rAs3ANN. We did not, favor the bill as passed by the IHouse. A number of amendments added by the Senate Finance Committee
    (1567)
    ., " - ,' , , 1",.'*%11 V W ' 11 , t

    38

    NDWIA TAX COMMONTI

    resulted in the Treasury not objecting to the bill as it came out of the Finance Committee.
    Senator LAUSCHE. I see.

    That is all I have. Senator GoR,. Mr. Chairman, I would like to ask one question.

    The CHAIRMAN. Yes.

    RELATIONSIIlP OF II.R. 10087 TO TAX-SPARINO PROVISION

    Senator GORE. The bill to which Senator Lausche has referred had more for its purposes than that which you have stated, Mr. Glasinann. The averaging would not only in some cases perhaps prevent a foreign cor oration owned by U.S. citizens from paying more than 52 percent, but it would also operate to permit them to pay less than 52 percent in certain cases. The averaging principle was that which was provided by the bill. Now I want to ask you particularly with reference to this treaty: Supposo that H.R. 10087 becomes law. The bill would permit a cor. poration to average its foreign taxes: Would it permit them to aver. age two countries, one of which required taxes and the other of which spared taxes f In other words, would there be an averaging between something and zero? Mr. GLASMANN. The bill in its present form probably would. Cer. tainly, in our judgment there would have to be an amendment to that particular provision of the law consistent with the amendment that we suggested before the Finance Committee which prevents the differential in tax on Western Hemisphere trade corporations from bein used to offset tax on foreign income from other sources. .hat same type of amendment would have to be made, I would think, to prevent having spared taxes offset tax on income from other sources. That would be consistent with the amendments suggested by the Treasury before the Finance Committee on H.R. 10087. Senator GoRn. Mr. Chairman, I suggest that this is further reason to question the advisability of taking such rigid action in tax matters as a treaty provides. That is all.
    COMMIT1Z1 PROOURE

    Senator LAuscim. I do not think so either at this time. That is right. I thought, since Mr. Shapiro and Mr. Sullivan were here, that they would like to make short statements so that their views would be in the record for the benefit of the staff and the committee. We undoubtedly will have to let this treaty go over, not because we want to turn it down, but because it needs further study. Thank you, Mr. Secretary. We will have another hearThe CHAIRMAN.

    now.

    The CHAIRMAN. I do not think we can possibly act on this treaty

    ing on this later.

    point of view and then you will probably have a further opportunity later on.

    Vr. Shapiro, would you care to make a short statement. Mr. SHApm. I will restrict myself to 3 minutes. The CHAIRMA. Just so we can get your points. We will get your

    (1568)

    INDIA TAX CONVENTION

    39

    Mfr. Shapiro represents the American Merchant Marine Institute. STATEMENT OF ALVIN SHAPIRO, VICE PRESIDENT, AMERICAN MERCHANT MARINE INSTITUTE, INC. The CHARiII.AN. We can put your prepared statement in the record anti then you can just tell us very briefly what your point of view is.
    FAILURE TO INCLUDE 81111P'INO INDUSTRY AS BENEFICIARY OF TREATY

    Mr. SkIAPIRO. We are disappointed to note for the second time in the history of these valuable instruments there appears a glaring omission. In our agreement with Pakistan, ratified in July 1951, there initially appeared a failure for mutual exemption from the earnings from shipping. Again, there appears as in the case of the Pakistan convention a specific exemption from the earnings Qf aircraft but not shipping. Since these conventions are dedicated to stimulating international trade and investment, we are at a loss to-understand and disheartened by the failure to include the shipping industry among all other American businesses as beneficiaries of this double-taxation convention. Surely no American venture by its history, tradition, and daily. activities can be considered more truly international than our American maritime industry. Why, then, the deprivation of this segment of American busiress from the privilege of this convention? Since the earnings of aircraft of both countries are exempt under the convention before you, there is placed on our shipping industry i 4discriminatory disadvantage; as we all know, shipping and aviation amre in friendly competition for an overwhelming share of the international movement of passengers and high-value freight. It is quite clear that through the process of taxing a government may drive from its ports all but its national-flaq vessels. Thusly, may a national fleet grow to artificial proportions destroying the true traditions of the freedom of entry not only for American ships but for ships of all nonnationals. We hope, oi course, the Itidian Government has no such plan in mind, but we hasten to add that such a possibility does exist, and we, therefore, cannot see why our Govern. ment concluded a treaty with this obvious deficiency.
    RATIFICATION OF TREATY RECOMMENDED

    advantage and, therefore, we hope that it will be ratified with all possible dispatch. However, we urge that our Government immediately proceed to consult with the Government of India to make shipping of both countries entitled to the benefits contained herein. Moreover, our future negotiations with tax conventions will, we hoe be concluded in such fashion as to treat all American industries, including shipping, on the same basis. We feel very strongly, Mr. Chairman, that this cannot be accomplished unless it is the express desire of this committee. We have had very unfortunate experiences with both the Treasury Department and the State Department in this particular area. (1569)

    There is, however, contained in the treaty many provisions of grave

    40

    INDIA TAX CONVENTION

    The (2nAInRMN. Thank you very much.


    ItEASONS Wily SHIP'ING INDIUS'TRtY OT INCIAT'ED IN TREATY N

    Se'mttor Ilt'ifUMPl-il . I would like to know th0 reasons givel, 1r. Shapiro, for this type of discriiniualory treatment that. you aIt Igt' Mr. SiiAI mi. Senator IIumplhrey, we hIve inquired, and ill we are told--anld this, I must say, is as exasperating as finy other part of it-that the Indians did not want, it and, therefore, we wanted the treat y, so we just for_,ot alt)ollt t he issue.

    Now, this is terribly unsatisfactory to us. We cannot understand

    Senator SPARKMAN. Is it not true that in 20 of the 21 treaties that have been negotiated, shipping was included Mr. SAP11io. That is right, like all other industries. Senator SAnRKMAN. It was excluded only in Pakistan and now duplicated in the Indian one?
    Mr. Si .APtro. And we are very fearful that a pattern is beginning.
    Senator SPARKMAN. I tillf sympathetic with your viewpoint, unless

    '?

    there are other competitive reasons. The CilAIRMAN. Thank you very much. (Mr. Shapiro's prepared statement follows:)
    STATF:MENT OF AtLvIN SHAPIRO, VNIF PIIIESII)MNT, AMFRICAN MERCIIANT MARINE I N8-rrTu~ri, Ise t.

    My name is Alvin Shapiro. I am vice president of the American Merchant Marino Institute, Ine., the largest national association representing American shitpowvners and operators. Seaoin of our ieinber lines operate under subsidy and others do not. Together. they represent a substantial majority of our total Aintrican.tlag tl4et of freighters, passenger shill, and tankers operating o01all four coasts of the United Stlittes in our domestic and foreign trades. The (-olvenit ion that is now pending before the committee is one between the Government of the Unitp1,4 States and t lie governmentt of India for the avoidance of double taxation with respect to taxes on income. In general, this convention follows the general pattern of the 21 earlier instruments for the avoidance of double taxation. They are designed to eliminate onerous burdens on individuals and ulnhlinizo taxation obstacles, thus facilitating the international flow of trade and invest meant. Tile present convention contains cuMstoniary provisions relating to personal service iltcoMie. official salaries, pensions, annuities of individuals, and income from business and Investment of the citizens of both countries. They naturally contain provisions concerning administrative procedures and the exchange of information by which effect is given to the convention. We are disappointed to iote that for the secoiid time in the history of these valuable Instruments, there appears a glaring omission. In our agreement with Pakistan, ratified on July 9, 1958, there initially appeared a failure for nuituial exemption of the earnings fromn shipping. Yet. in the convention before you today, there alppars, as was the case In the Pakistan convention, a sxecific inlutUal exemption front taxation for the earnings of aircraft. Since these conventions are dedlieated to stimulating International trade and investment, we are at a loss- to understand, and disheartened by the failure to Include the shipping Industry among all other American businesses as bene. ficiaries of this double-taxation convention. Surely, no American venture by its history, tradition, anid daily activity can be considered more truly International privilege of the double-taxation convention? Since the earnings of aircraft of both countries are exeiipt under the convention before you for consideration, there is placed oii our shipping Industry a discriminatory disadvantage, as we

    than the American maritime industry. Why, then, the deprivation of this segment of American business from the

    all know shipilig and aviation are lit friendly competitionn for an overwhelming share of tie international mnovement of passengers and higlh-value freight.

    (1570)I

    INDIA TAX CONVENTION

    41

    It is quite clear that through the process of taxing, a government m:'y drive frouti its ports all but Its national-flag vessxls. Thusly inty ainational fleet grow to orti!, lhti prolxrtions, destroying the true traditions of the freedom of port entry not only for ships of Anmerhican thag but for all nonnational vessels. We hope, of course, that the Indian Government hal-s no such design i mind. But, we hasten to add that such a jossibility does exist, and we therefore cannot see why our Government concluded a treaty with this glaring deficiency. There is contained in the treaty, however, many provisions of mutual benefit to citizens of both countries, so that we recommend that it be ratilled by our Government and put into effect with all possible dispatch. We urge, however, that our Government inmeliately proceed to consult with the Government of India to make shipping of both countries entitled to the benefits contained herein. .Moreover, our future negotiations of tax conventions will, we hope, be concluded it suich fashion as to treat till American industries, Including shipping, on the
    8111141 bWasis.

    The ChI, 4 N. Mr. Sullivan rel)m1ents the Pacific American 1~u, Steatnship Association. I atsilno you liave sotmowhat the sameo point
    of view, Mr. Sullivan. STATEMENT OF 3. MONROE SULLIVAN, VICE PRESIDENT, PACIFIC AMERICAN STEAMSHIP ASSOCIATION Mr. SwtUI VAN. Yes, I do not think there is any point in reading our statement. We have a little more statistics. The CHA1IrMAN. We Will put your statement in the record. The reporter will include it so that we can have your point of view. Would you care to volunteer nitything additional? Mr. SULLIVAvN. Only that we are just as frustrated as Mr. Shapiro in trying to find out why. They just ignore us.
    The CHAIRMAN. You feel the s811e0 Way?
    The CHIhRMAN. STATEMENT
    OF

    Mr. SULIVAN. It is discrimination and it,is bad business. Thiank you very much.
    J. MONROE SUIJVAN, VICE PRESIDENT, PACIFIC AMERICAN STEAMs1ip ASSOCIATION

    My name is J. Monroe Sullivan. I am vice president of Pacifle American Steamship Association, a trade association representing a large majority of American-flag carriers serving world commerce from our Pacific coast. The Indian Tax Treaty currently being considered by this committee was negotiated to limit or eliminate double taxation and to promote international trade and economic growth. The reciprocal benefits of the Indian Tax Treaty are mutually desirable and ratification is supported by us, but. with reservations. The record should show that ratification of the Indian Tax Treaty will, for the second time within 2 years condone obvious discrimination against American-flag shipping and will be a radical departure front previously accepted reciprocal tax treaty concepts. Recent research of tax treaties between the United States and foreign governments (exhibit I) revealed that 20 out of 21 effective tax treaties provide steamship and aircraft exemption articles. The Pakistan Tax Treaty, ratified by the Senate with an effective date of January 1, 1959, is the only exception to the traditional practice of excluding both ships and aircraft from the provisions of reciprocal tax treaties. The Pakistan treaty excludes aircraft but not ships. A typical tax exclusion clause for water carriers IS quoted below from 3008 article V of the income tax treaty between Germany and the United States, signed July 22,1954: "Profits derived by an enterprise of one of the contracting states from the operation of ships or aircraft, shall be exempt from tax by the other state." The discrimination In the Indian Tax Treaty arise's In article V: "Income derived by an enterprise of one of the territories from the operation of aircraft registered or documented In that territory shall not be taxed in the other territory."

    (1571)

    42

    INDIA TAX CONVENTION

    Where no specific exclusion exists, ships automatically become subject to taxa. tion under India tax laws on moneys earned in Indian ports and territorial waters under the terms of the treaty now before this committee. In view of the many existing tax treaties which exempt ships and aircraft, we are deeply concerned that other nations will deem the India and Pakistan treaties as establishing a precedent which, If so construed, could be used as a powerful weapon by foreign governments in future tax treaty etegotiltionss. It may be well to note at this point that a tax treaty obviously transcends U.S. tax laws and that fact Is so stated in sections 894 and 7852(d) of the Internal Revenue Code, which provides that no sections of the IRC apply when contrary to treaty obligations of the United States. With limitations, tax credits are allowed by the Internal Revenue Service for the amount of taxes Imposed by foreign countries and, therefore, It follows that taxes paid to the Government of Pakistan or India could result In an income tax loss to the United States. Foreign governments with merchant fleets of substantially smaller size, ton. nage, and activity than the U.S. merchant fleet would probably benefit by not including ships within an exclusion article of a tax treaty. However, all nations that have tax treaties with the United States, with the exception of the United Kingdom. have active merchant fleets with less gross tonnage than the merchant fleet of the United States (exhibit II). Australia, Belgium, Canada, Honduras, Ireland, New Zealand, Switzerland, and the Union of South Africa have fleets of registered vessels of less gross tonnage than the Government of India, yet our tax treaties with each of these count ries excludes both aircraft and ships. Briefly, the history leading up to the current status of the India Tax Treaty is as follows: In middle February 1959, an Indian Government official advised steamship companies that effective February 23, 1959, they would be required to pay to the Indian Government Income tax on the seamen's wages that had accrued since 1922, and on wages which would accrue during the vessel's stay In Indian ports or territorial waters. This request was made under the provisions of Indian Income Tax Act of 192.2. Concurrent with this notification, tax teams were negotiating the United States/Indian Treaty now under consideration for ratification. This maneuver may have been made merely to give the Indian Tax Treaty negotiation team a superior bargaining power. Several communications from our State Department to the Government of India resulted In extensions of time for performance, and the treaty as now written contains an exemption for seamen's wages in article VIII (No. 3). Pacific American Steamship Association Is vigorously opposed to portions of both the Indian and Pakistan Treaties as now written, as they clearly discriminate against shipping. Our protest Is passive now because of the seamen's wage exemption article which is clearly desirable. Therefore, we will not actively protest Senate ratification. However, we contemplate proposing the eventual renegotiation of both the Pakistan and Indian treaties to Include the exemption of ships. It Is our understanding that a renegotiation of the Japanese Tax Treaty it being considered by our Government and that 15 other smaller nations may be involved In tax treaty negotiations with the United States in the near future. We want to make it clear that we do not consider the tax treaty with India and Pakistan as establishing any precedent wherein ships are not excluded from provisions of the treaty as has been traditional and as Is the case in the treaties with some 20 other nations with which we now have existing treaties. We urge that future tax treaty negotiations be considered on the basis of the firmly established principle of exemptions for shipping and that these conventions only be ratified by the Senate of the United States when shipping Is accorded traditional and proper exclusion from tax obligations to foreign government&. Thank you.

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    INDIA TAX CONVENTION

    43
    Aircraft Ships

    EXHIMT l.-E-Jcctive U.S. tao treatica-Excmptione for aircraft and ships


    Country Aircraft Ships Country
    Japun ..................

    Exempt: Exempt. Australia ........... 1)o. ... do.. Austria............. )o. ... do..... Belgium .......... Do. Canada .................. ... do..... Do. Denmark ................. do..... Do. Finland ................ .. do ..... Do. France .............. do ..... Do. ... do ... ......... Germany Do. ... do...:: Oreece ........... )o. Honduras ................. do ..... Do. Ireland .................... do..... source: Commerce" Clearinghouse Reports, 198".

    Italy ................... Exempt: Exempt. D)o. )o. Netherlands ................. )o. do..... New Zealand ......... Do. do..... Norway ............ do..... No exemption. ........ Pakistan .. do ..... Exempt. Sweden ............ Do. do..... Switzerland .......... Do. ..... Union of South Africa. ... (do Do. United Kingdom .......... do .....

    ExImrr IL--Information from She U.S. Department of Commerce, Maritime

    Administration's "The Handbook of Merchant Shipping Statistics Through 1958"--Merchantfleets of the world a# of Dec. S1,1958 Goe8# tonnage, 0raoe tonnage, thousand# Shoueand
    o1 to" Austria -----

    Country of registry:

    a-United States --------- 124,247 36 Australia ---------------------

    Country of registry--Con.

    0/ tons

    Belgium ----------------Canada -------------Denmark ---------------Finland -------------...

    615 253 1,024


    687

    4, 212 France -----------------8,866 Germany (West) ....... 1,776 Greece -----------.-Honduras --------------- 174 650 India -------------------IIncludes reserve fleet (15,422 tons).

    103 Ireland ---------------4,775 Italy ---------------- 5,282 Japan ------.-----4, 140 Netherlands --------218 New Zealand ............ 9, 503 ------Norway----.. - 150 Pakistan -----------276 Sweden -----------107 Switzerland .... 162 Union of South Africa.... United Kingdom --------- 18,655

    NoTr.-Figures rounded to nearest thousand.

    The CHAIRMAN. As you understand, we will not act on the treaty at this time. Gentlemen,

    without objection, then, this treaty will go over for


    LT SUBMM'ED FOR THE RECORD

    further study.

    Mr. Reporter, there are two letters--one from the National Foreign Trade CouncilInc., and one from the Aluminum Co. of Americabearing upon the treat which will be made a part of the record. (The letters referrelto follow:)
    New York, N.Y., June if, 1960. eon. 3. W. ?LDasRIO, Chairman, Committee on Foreign Relations, Senate of the United States, Washington, D.C. DrAm SnR: We acknowledge your telegram stating that public bearings will be held on June 16, 1960, with respect to an agreement with India for avoidance of double taxation with respect to taxes on income, Executive H, 86th Congress, 2d session, which has been referred to the Committee on Foreign Relations. It will not be feasible for a representative of the National Foreign Trade Council, Inc., to appear and present its views at the public hearings, but this letter state
    NATIONAL FlowoIG TMDE COUNCIL, IN0.,

    its views and it Is requested that it be Included in the official record.

    (1573)

    44

    INDIA TAX CONVENTION

    National Foreign Trade Council, Inc., has for a great many years strongly sup. portted the tax treaty program of the United States, and has favored streligthlenlng existing agreements an(d consummation of new agrielleents. As part of fhis program, and because of India's importance In the Asian economy, it is hiIghly desirable that an agreement be reached with India for avoidance of double taxation. While the Council favors the conclusion of a treaty with India, there are provisions in the proposed agreement that give serious concern to the Council. The most important of these provisions causing concern relate to the definition of the term "permanent establishment." In the proposed agreement with India, the United States seems to have accepted a significantly broader concept of permanent establishment than in prior treaties. In the proposed agreement with India (as in tax treaties generally), the concept of permanent establishment is of key importance because India agrees not to levy income tax on U.S. enterprises which do not have a permanent establishment in India. The principal (though not the only) expansion of the concept of Iwrtnnnent establishment is: Habitually securing orders shall be deemed to create a permanent establishment, provided that the presence in India of a person for not more than 3 months for the purpose of securing orders "shall not be deemed to be habitually securing orders" (art. 11 (1) (J) ((10d0). Under U.S. law Income derived front such transactions would frequently have a U.S. source. Under such circumstances, to the extent that India is permitted, by treaty, to levy income tax on such transactions, double taxation would result without any alleviation by the foreign tax credit. The provision with respect to habitually secui ing orders would be particularly onerous. This would seem to apply to subsidiaries as well as to Individuals. It Is suggested that the Committee on Foreign Relations and the Senate give consideration to a reservation that would eliminate subpart 3 of article 11(1) (J) (dd). In any event, It is recommended that this provision should not be considered as creating a precedent for other tax treaties whether now in existence or hereafter to be negotiated. Other provisions of the proposed agreement with India are not entirely satisfactory. It is unfortunate that American-flag shipping does not receive the exemption granted aircraft in article V. A broader exemption of business visitors would be desirable, and particularly the elimination of subsection (c) of article VIII (2). A specific date (signature of the agreement) would probably be desirable in paragraph (1) of article XII. The absence of a restriction on Indian income tax on dividends from subsidiaries In India and the absence of appropriate provisions with respect to interest and royalties is regretted. The allowance of a U.S. foreign tax credit by article XII for certain Income tax reductions granted by India is a desirable provision and in accordance with a policy advocated by the Council. The National Foreign Trade Council, Inc., recommends that the Senate consent to the ratification of the agreement with India, but believes that the treaty would be Improved if the reservation referred to above were incorporated in the agreement. Sincerely yours, WxLuAi S. SWINOLF., Presidenlt.
    ALUMINUM Co. oF AmERICA, Pittsburgh,Pa.,June 22, 1960.

    Hon. J. W. FUILBRIOnT, Chairman,Committee on ForeignRelations,

    support of the agreement with India for avoidance of double taxation with respect to taxes on income, signed in Washington on November 10, 1959, and submitted to the Senate on May 6, 1960 (commonly referred to as the "Double Taxation Convention with India"). The survival of India as a free nation is of vital, perhaps decisive, concern to the United States and the Western World. To remain free, India must succeed In its bold and dramatic program to Industrialize and to raise the standard of living of its people. Unless this democratically governed program makes real strides, there will be tremendous pressures on the Government of India to adopt the authoritarian techniques used by her Communist neighbor to the north. Communist China can be counted upon to exploit these pressures to the fullest.

    U.S. Senate, Washington, D.C. DEAR MR. CHAmuAN: I am writing on behalf of Aluminum Co. of America in

    (1574)

    INDIA TAX CONVENTION

    45

    We therefore favor both the direct programs of the U.S. Government for economic assistance to India and all efforts being made by this Government to encourage private investment in India. The proposed Double Taxation Convention with India can, we believe, be a major impetus to increase private Investmeut by American companies in India. For this reason, it has our wholehearted support. A great deal has been written and said about this double taxation convention. I do not propose in this letter to go into repetitious detail. However, I would like to emphasize particularly two provisions in the convention which, in our opinion, will be of particular value in encouraging American business to invest in India, The first and best known provision is, of course, article XII, the so-called tax-sparing provision in the convention, which is designed to make meaningful existing Indian tax incentives to new investment. Under present U.S. law, savings in Indian income taxes derived from Indian tax incentives provide no ultimate benefit to the U.S. taxpayer, since the credit allowed under existing U.S. law for taxes paid abroad decreases as the Indian tax decreases. Under the convention, however, the U.S. taxpayer is deemed to have paid certain Indian taxes which he would have paiu but for the Indian law which reduced taxes to spur new investment. We th;nk it worth noting that article XII of the convention takes a basically moderate approach to the problem of tax sparing in that it covers some, but not all, of the tax incentives now offered by the Indian Government to rivw investment, and explicitly excludes from coverage any future tax incentives which may be introduced in India. While the tax-sparing provisions of the convention have received the greatest publicity, there is an additional provision affecting taxation of new business investment which, in our opinion, may provide an equal and sometimes a greater incentive to U.S. private investment in India. I refer to paragraph (2) (g) of article XI, which provides that capital gains derived from any contribution of capital by a company in the United States toward the formation of a new business in India shall be treated as arising in the United States. Since Indian tax law does not include the concept of tax-free incorporation of a business, this technical provision can be of great significance to an American company contemplating a major contribution of capital at the time of setting up a new busi. ness in India. Without this provision in the convention, contributions of capital by an American company to a new Indian business would continue to be, as they are now, subject to very substantial rates of taxation in India. This would have the effect of increasing the initial cost of going into business in India and would tend to deter the flow of risk capital to India. Article XI(2) (g), of course, does not necessarily eliminate all taxation in India on the formation of a new company. It will still be necessary to decide whether a particular asset contributed to the new business in India constitutes capital under Indian law. If not, article XI (2) (g) will not protect that asset from Indian taxation. In summary, we believe ratification of the Double Taxation Convention with India will advance the interests and enhance the security of the United States by encouraging -. 'celerated growth of the industrial base in India through in) creased participation by private American capital. Participation in the industrial development of India is perhaps the most concrete way we can manifest our support for the continued development and growth of India as a free society. Yours very truly,
    LFoN R. HICKMAN, Eaeci live Vice President.

    (1575)

    INDEX
    (List of witnesses appear In contents)
    Advantages of tax treaties ----

    Pan

    Aiken, Senator George D: Examination of witnesses: Dillon, Hon. Douglas -------------------------------11 Glasmann, Jay ---------------------------------10,11 10 Applicability of tax credit to Individuals, question of----------------Bill to give tax exemptions to American investors ------------------86 7,14 ------------------------Capital contributions ----------Corporation taxes In India ----------------------------------9 7 ------------------------------------Cuba, situation In Description of India tax convention -------------------------20-24 Development rebate and depreciation deduction In India --9-.-----Earnings of corporations in India ----------------------------11 Effective (late of treaty -----------------------24 Effect of treaty on rights of States to tax -----------------------34 Effect of treaty on U.S. laws ----------------------------8, 12, 33 Flight of capital from United States ---------------------------82 Fulbright, Senator J. W: Examination of witnesses: Dillon, Hon. Douglas ---------------------------24-31,35 Glasmann, Jay -------------------------------11,28,29 Sullivan, J. Monroe -----------------------------------------41 German restrictions on importations of U.S. agricultural commodities .... 29,31 Gore, Senator Albert: Examination of witness: Glasmann, Jay ---------- 38 Green, Senator Theodore Francis: Examination of witnesses: Dillon, Hon. Douglas ---------------------26 Hickenlooper, Senator Bourke B: Examination of witnesses: Dillon, Hon. Douglas --------------------32-34, 35 59,34 Glasmann, Jay ---------------------------------Humphrey, Senator Hubert H: Examination of witness: Shapiro, Alvin-.40 Importance of India tax convention --------.........----------------5 Indian efforts to improve investment climate ---------------------2 17 -------------------------Indian income tax Nonresident taxpayers --------------------------------18 Tax incentives --------------------------------------19 India tax convention, description of -------------------------20-24 Investment guarantee programs --------------------------24,27 Investment income provision --------------------------------14 Lausche, Senator Frank J.: Examination of witnesses: Dillon, Hon. Douglas --- -----------------------------86 Glasmann, Jay ---------------------------6,8,10,87,,38 Mexican case ---------------------------------------25 Most-favored.nation clause ------------------------------5 Permanent establishment provision ------------------ 6,13,20,27-29,44 Possible effect of administrative action by foreign country -------------- 24 Precedent treaty would establish -----------------------------85 Ratification of treaty recommended ----------------------,44,45 47
    Prospective revisions .---------------------18 Glasmann, Jay

    ------------------------

    -----------------------

    5,7,8

    (1577)

    48

    INDEX

    Page Relationship of H.R. 10087 to tax-sparing provision -------------------38 Rights of States to tax, effects of treaty on ---------------------34 Shipping industry not Included In treaty ----------------------------39-43 Situation in Cuba --------------------------------------27 Sparkman, Senator John: Examination of witness: Shapiro, Alvin ------ 40 Standards for negotiating tax treaties -------------------------------26 Standards to be met by incentive laws of foreign countries --------7,15 Tax credits for new industrial ventures ------------------------------. 1) Tax incentives ------------------------------------11,15,19 Tax-sparing provisions ------------------------3, 5, 7, 12,14,23,45 Tax-sparing provisions' effect on existing U.S. law --v----------------8,12 Tax treaties, advantages of --------------------------------3 Te.ewhers, students, etc., provision --------------------------14,22 Trade restraints on certain items -------------------------30,31 Treasury Department supports tax-sparing provision --------------12 U.S. laws, effect of treaty on ----------------------------8,12, 33 U.S. private investment abroad ------------------------------1 Urgency of action on treaty, views on ---------------------------------35 Williams, Senator John J.: Examination of witnesses: Dillon, Hlon. Douglas -----------------------------31,34 Glasmann, Jay --------------------------------,8-10

    (1578)

    SECTION 13 Convention With IRELAND

    73095 0-62-vol. 2-

    (1579)

    INCOME TAX CONVENTION BETWEEN THE UNITED STATES AND IRELAND

    September 13, 1949...- . Signed at Dublin. January 18, 1950 ------ Received by Senate; designated Executive F, 81st congress, 2d Session; injunction of secrecy removed (96 Congressional Record 506). April 12 and 13, 1951.- Senate Committee Hearings. August 6, 1951 -------- Reported by Senate Foreign Relations Coni)

    Ratification by Senate of its advice and consent with reservations (97 Congressional Record 11434-11435, 11438-11441, 1145511458). December 10, 1951 Ratified by Ireland. December 13, 1951Ratified by United States President. December 20, 1951_. Instruments of ratification exchanged; convention entered into force effective January 1, 1951 (as to United States tax), and as of various dates (as to Irish tax). December 24, 1951 .... Proclaimed by United States President. Official Text ---------- TIAS 2356, 2 UST 2303.
    September 17, 1951
    -...

    Sess.).

    mittee (Ex. Rept. No. 1, 82d Cong., 1st

    (1580)

    CONTENTS OF SECTION 13
    Pace

    1. Presidential Message of Transmittal to Senate ---------------------1583 2. Senate Committee Hearings -------------------------------------1 585 3. Senate Committee Report ---------------------------------------1587 4. Senate Floor Debate and Action ---------------------------------1 589 5. Presidential Proclamation (including Official Text of Convention)--. --- 1605

    (1581)

    4t'

    PresidentialMessage of Transmittalto Senate (including materials enclosed thereuith)

    (1583)

    81ST CONGRESS 2d Session

    SENATE

    ExCvBm

    CONVENTION WITH IRELAND. FOR AVOIDANCE OF

    DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

    MESSAGE
    FROM

    THE PRESIDENT OF THE UNITED STATES


    TRANSMITTING

    THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND IRELAND, SIGNED AT DUBLIN ON SEPTEUXUIt IS, 1940, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

    JANUARY

    18, 1950.-The convention was read the first time and the injunction of secrecy was removed therefrom. The convention, the accompanying letter of transmittal, and the report by the Secretary of State were referred to the Committee on Foreign Relations, and were printed for the use of the Senate

    THE WHImT

    HOUSE, January 18, 1950.

    To the Senate of the United Stales:


    With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the convention between the United States of America and Ireland, signed at Dublin on September 13 1949, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. I also transmit for the information of the Senate the report of the Secretary of State with respect to the convention. The convention has the approval of the Department of State and the Treasury Department.
    HARRY S. TRUMAN.

    Enclosures: (1) Report of the Secretary of State, (2) income-tax convention between the United States and Ireland, signed September

    13, 1949.)

    (1584-A)

    2 AVOIDANCE OF DOUBLE TAXATION CONVENTION WITH IRELAND


    DEPARTMENT OF STATE, W4ashington, January17,f1950.

    The White House: The undersigned, the Secretary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if his Judgment approve thereof, a convention between the United States of America and Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Dublin on September 13, 1949. Th'is convention, together with another relating to taxes on estates of deceased persons, was formulated as a result of technical discussions between representatives of each of the two Governments. As in similar discussions with representatives of other governments, an double taxation might be avoided and certain procedures for mutual administrative assistance in relation to taxation might be established. The Department of State and the Treasury Department collaborated in the negotiation of the convention, after public announcement of the contemplated negotiations. It has the approval of
    both Departments'. effort was made to determine the conventional bases upon which

    The PRESIDENT,

    or training of students or business apprentices. The convention with Ireland may be compared in these respects and also in respect of the provisions relating to fiscal administrative cooperation, with existing income-tax conventions of the United States, as follows: With Sweden, March 23, 1939 (54 Stat., pt. 2, 1759); with France, #July 25, 1939 (59 Stat., pt. 2, 893). as modified by the convention of October 18, 1946 (S. Ex. A, 80th Cong., 1st sess.) and supplementary protocol of May 17, 1948 (S. Ex. G, 80th Cong., 2d sess.); with Canada, March 4, 1942 (56 Stat., pt. 2, 1399); with the United Kingdom, April 16,1945, with protocol of June 6, 1946 (60 Stat., pt. 2, 1377); with the Netherlands, be made with other income-tax conventions now pending in the Senate,

    Double taxation would be avoided by either or both of two methods, the exemption of items from taxation in one of the countries or the application of the credit principle whereby the taxpayer is allowed against his tax in one of the countries a credit for tax paid in the other country in respect of the same income. Embodied in the convention are provisions similar to, if not identical with, provisions in force between the United States and a number of other countries concerning such items as business income, dividends, interest, royalties, governmental wages and salaries, compensation for personal services, pensions and life annuities, compensat ion of visiting professors or teachers, and payments for the maintenance, education,

    between the United States and other countries, namely, the elimina. tion, as far as practicable, of double taxation with respect to income And the setting up of a system for the exchange of information.

    It is believed that the income-tax convention with Ireland, if and when brought into force, will establish in the mutual interest of the two countries and of considerable benefit to taxpayers of both countries, a satisfactory basis for the accomplishment of objectives essentially the same as those of income-tax conventions now in force

    April 29, 1948 (S. Ex. I, 80th Cong., 2d sess.); and with Denmark, May 6, 1948 (S. Ex. H, 80th Cong., 2d sess.). Also, comparison may (1584-B)

    AVOIDANCE OF DOUBLE TAXATION CONVENTION WITH IRELAND

    Kingdom that, to a major extent, the provisions of the tax convention of the United States with the United Kingdom become an essential ingredient in formulating such a convention with Ireland. Before the Irish Free State was created in 1922, the area comprising that Free State was within the jurisdiction of the United Kingdom income. tax system as an integral part of the United Kingdom. That system was maintained, with only minor variations respecting rates, appeals, and certain other matters, within the Irish Free State. Rates of taxation are lower in Ireland than those prevailing in the United Kingdom. Probably no further general comment is needed in order to explain why it has beenI found necessary, in,drawing up the convention with Ireland, to make it follow so closely the convention with the United Kingdom. It is a unique situation, not encountered heretofore and not anticipated in the future in negotiations with foreign countries for the conclusion ofthose conventions. IWith respect to tax provisions in the convention with Ireland which are identical with provisions in the convention with the Uniteed Kingdom, and that applies to the substantive provisions almost in their entirety, it is believed that a detailed analysis, article by article, of the convention with Ireland is not necessary'in the present report. The material printed in Senate Executive D'(79th Cong., 1st sess.) and in Senate Executive Report No. 4 (79th Cong., 2d sess.) with respect to the income-tax convention with the United Kingdom applies, in general, to the convention with Ireland, subject to the
    and related substitutions required by the context. A few specific comments regarding certain provisions of the convention with r'ehmnd are, however, presented here. As in other tax conventions of the United States, article I describes the taxes which are the subject of the convention. In the case of

    sews.); with New Zealand, March 16, 1948 (S. Ex. J, 80th Cong., 2d sess.); and with the Union of South Africa, December 13, 1946 (S. Ex. 0, 80th Cong., 1st sess.). As might well be expected, the income-tax convention with Ireland follows closely, in substance, terminology, and arrangement, the convention between the United States and the United Kingdom. In fact, through article XXI the numerical arrangement of thie articles as to subject matter is identical. Because of the intimate relation between Irish income-tax law and United Kingdom income-tax law it was inevitable that the Irish Government would consider it essential that its convention with the United States take into account the exemptions from, or credits against, United States tax accorded by the United States convention with the United Kingdom in respect of residents of the United Kingdom. Likewise, as expected, tile Irish Government considered it a matter of vital importance that its convention with the United States take into account the provisions of an existing arrangement between Ireland and the United Kingdom under which certain exemptions from United Kingdom tax are con. ferred upon residents of Ireland deriving income from United Kingdom sources. Although Ireland has established its complete independence as a republic, its economy remains so closely allied with that of the United

    as follows: With Belgium, October 28, 1948 (S.Ex. I, 81st Cong., 1st

    necessity, of course, of substituting "Ireland" for "United Kingdom"

    (1584-C)

    4 AVOIDANCE OF DOUBLE TAXATION CONVENTION WITH IRELAND

    Denmark, have the effect of applying the exem options to nonresident alien individuals who have no pernianent establishment within the United States even though such individuals, by reason of the performance of personal services, are deemed to be' engaged in trade or business in the U'nited States. Tile principle of the United States tax credit is adopted in article XIII. These provisions are similar in principle to provisions in all existing income-tax conventions of the United States. As pointed out hereinbefore, the Irish income-tax system is fundamentally like that of the United Kingdom. Accordingly, article X1II (1) contains as in the case of the United Kingdom convention, a clause which has the effect of neutralizing the decision in Biddle v. Cominisioner (302 (1584-I))

    the United States the convention applies only to the Federal income taxes, including surtaxes, and does not. apply to taxes imposed by the several States of the United States, tile District of Colunbia, or tlhe Territories or possessions of tihe United States, with one exception, namely, the "national treatment" provisions in article XXI giving expression, on a reciprocal basis, to the long-recognized principles relating to equality of treatment in respect of taxation of resident aliens as compared with the taxation of resident nationals. Article II gives definitions of various terms used in the convention. It will be noted that United States citizens, residents, and corpora. tions are excluded from the definition in (1) (g) of "resident of Ireland." By this means the right of the United States to tax its own citizens, residents, or corporations is reserved. The term "United States" is defined as meaning, in the political sense, the United States of America and, in the geographical sense, the States the Territories of Alaska and Hawaii, and the District of Columbia. The term "Ireland" is defined simply as meaning tlhe Republic of Ireland. Articles III, IV, and V relate to the principles affecting the determination of amount, and affecting the taxation, of business income derived by business enter rises of one country from sources within the other country. Article V contains the provisions relating to reciprocal exemption of profits derived from the operation of ships and aircraft. Article VI relates to the taxation of dividends. In its application to residents of Ireland entitled to exemption from or reduction of United States tax, it, is identical to the corresponding provisions in article VI of the convention with the United Kingdom as applied to United Kingdom residents. The relevant Irish law is the same, in principle, as Urnited Kingdom law, whereby the standard tax paid by the corporation is regarded as being paid on behalf of the shareholder. Thereby, no tax at, the standard rate is imposed on the dividend as such. )Basic differences between United States and United Kingdom tax concepts as applied to dividends, and related Imatrters, are discussed at some length in the Senate documents above-mentioned relating to the convention with the United Kingdom. Article VII relates to the reciprocal exemption from taxation of interest, derived by residents of one of tile countries from sources within the other country. Article VIII relates to the reciprocal exemption from taxation of royalties derived by residents of one of the countries from sources within the other country. Articles VI, VII, and VIII, like the corresponding provisions in the tax conventions of the United States with the United Kingdom, the Netherlands, and

    AVOIDANCE OF DOUBLE TAXATION CONVENTION WITH IRELAND

    U.S. 573), insofar as it would apply to a resident of the United States deriving dividends from an Irish corporation. Because, however, of the existence of the tax arrangement between the United Kingdom and Ireland, under which a resident of one of those countries not resident in the other country, but deriving income from such other country, is exempt from tax imposed by such other country, it has been necessary to add a provision in article XIII (I). If, for example, a citizen of tile United States who resides in Ireland but not in the United Kin doin derived dividends from United Kingdom sources, tihe Irish-Uniteg Kingdom convention leaves the taxation of that income to Ireland. No credit would be allowed by the United States under section 1:31 of the Internal Revenue Code. The third sentence of article XIII (1) of the United States convention with Ireland has been added in order to allow such credit by deeming the income in such a case to be income from sources in Ireland. To this extent the resident of Ireland is accorded a benefit no. enjoyed by a resident of the United Kingdom under the United States-United Kingdom convention. Article XIV contains the capital-gains provision which, by means of Senate reservations, -was removed from the conventions with the Netherlands XINV; Canada, Other existing art. II; and (United Kingdom, art. and Denmark. art. VIII; Fratine, conventions Sweden, art. IX) accord the exemption from United States tax when the alien has no permanent establishment within thle United States. The Irish authorities were insistent that a provision corresponding to that in article XIV of the convention with the United Kingdom be included. It was found necessary also to include article XV, corresponding to article XV in the convention with the United Kingdom, article X11 of tle convention with Canada, and article XII of the convention with tile Netherlands, although it. does not appear that. the presence of the provision, relating to exemption from United States tax on dividends and interest derived from corporations organized under Irish law by a nonresident alien or by a foreign corporation, would have any perceptible effect upon United States revenue. It is considered unlikely that an Irish corporation, a subsidiary of another Irish corporation, would have such an extensive business in the United States as to bring its income within the application of the provision. Article XVI, relating to United States tax on accumulated or undistributed earnings. profits, income, or surplus, provides in effect that an Irish corporation shall not be subject to tax under section 102 or section 500 of the Internal Revenue Code if, throughout the last half of the taxable year. thfe control of the corporation is in the hands of residents of Irelind other than a United States citizen, resident, or corporation. Considered in the light of the definition of "resident of Island' in artichl 11 (1) (g), it is considered that citizens, residents, In or corporations of the United States could not invoke article XVI to avoid the imposition of surtax. In view of stringent Irish law respecting.the transfer of funds or securities, it. is not at all likely, that l1Tnite(l States citizens, for example, would be inclined to turn over the control of their capital to aliens resident in Ireland in order to Avoid surtax under article XVI. The Irish authorities, although informed of the circumstances which led to the elimination from the (1584--E)

    AVOIDANCE OF DOUBLE TAXATION CONVENTION WITH IRELAND

    convention with the Netherlands of a similar provision, were insistent that it be retained in the convention, partly for the sake of conformity to tile United Kingdom convention. In the case of article XVII also, the Irish authorities expressed a keen desire that these provisions be included as in the United Kingdomn convention, although they were informed of the situation in regard to article XIV of the Netherlands convention and although it, is considered unlikely that there is outstanding any pre-1936 case involving a resident. of Ireland andl, in any event, the practical effect of the provisions in the convention wit]; Ireland would be insignificant. The provisions in article XVIII, relating to professors or teachers, and article XIX, relating to students or business apprentices, have their counterparts in existing tax conventions of the United States. Article XX contains the provisions relating to exchange of infornia. tion necessary for carrying out the provisions of the convention or for the prevention of fraud or for the administration of statutory provisions against, legal avoidance in relation to the taxes covered by the convention. Article XXII provides for ratification and prescribes that the convention shall, upon the exchange of instruments of ratification, become effective (a) as to United States tax, for thie taxable years beginning on or after January I in the calendar year in which the exchange takes place, and (b) as to Irish income tax, Irish surtax, and Irish corporation profits tax, for years of assessments beginning in accordance with the vor;',.spondimg Irish tax system. Under article XXIII the convention shall continue in effect indefinitely but may be terminated by either Government by the giving of a notice for' that purpose on or before June 30 in any calendar year following the year in which the instruments of ratification are exchanged. As to United States tax, the convention would cease to be effective for taxable years heginning on or after January 1 in the cale-adar year next following that in which the notice of termination is given. A separate formula is given for the date of termination with respect to each of the categories of Irish tax. Respectfully submitted.
    D E.,NACHE]SON.

    (Enclosure: Income-tax convention between the United States and Ireland, signed September 13, 1949.)

    (1584-F)

    Senate Committee Hearings


    April 12 and 13, 1951

    82d Congress, 1st Session Subcommittee of'the Senate (Committee on Foreign Relations
    IN[mYr: This document is printed in Volume I beginning at page 503.1

    (1585)

    Senate.Committee Report
    August 6, 1951 Executive Report No. 1 82d Congress, 1st Session Senate Foreign Relations Committee
    [Nomc: This document is printed in Volume 1 beginning at page 583.)

    (1587)

    Senate Floor Debate and Action


    September 17, 1951 82d Congress, 1st Session 97 Congressional Record 11434-11435, 11438-11441, 11455-1 1458

    73095 O--62-vol. 2-7

    (1589)

    IF

    'I.

    I.(

    LUTAI.N oNVI.NTIONS TIl)V (Jr" (OF

    llet on Foreiwn idlahls coisitlerertl the ,onle't'io" Iereiimiufwer listed aund hlii icosent to their lth Ihidth e Senite give' it- adviceaIu rand rI'iauu1111111h's uiiiderstanings which are nitd Ihlie ratitliuili ,!'. silijw,"l WE) riservitlions a The, treaties or rOliveliiilii'*tt ed ill the reiolut ions of ratlificatlioi. tiv)li tire its fOllOWS: I Fi:rm. (Conlventijogn with lhe V iion of %%outh.Afriit rIel-lit il 0 iltoillIIt' 1:1. tu\',. signedtiat Pretoria, I )De'eher 1941 E.4X'utive 0). Eightieth IlIt-I%

    'om \Jr (;E(ilI(UE..Mrr lresicidet, 1lhP ('ouii

    I'migress, first session.o

    an uhdersatailng relative e It) tIhe App)roval reci-tomli.hd with Ilt i-lhrlecion p)rovisiolnls of arltihe XV. mh Africa relulil14 to 'olld, Convention with lilt, I'ion (if ot Se no, Ap)ril 10, 1947 Emel'utive' FF, etl tle' IIXI'.S, signed alt (aprtu Eighlihti (ii otriress, first sies.ion. tledl with all uinderstanilding rehitive to Ile AI)i)rovai reolIelll r4lltiect u rrovisions of artic'l e I il. Third. ('oliveltioil with New ,iehltid relating it income t xt"xe, s.iic'ul iti W1ashinitgtoni, Mlarch 16, 194s Ex-cutive .1. Eighutieth
    (Co1igrss, !,elld t-eiOll.

    Approval recomimllellhi suhje'c to a reservation relative to ltxes colhet'tihle from public enterltaiers. Fourth. Convention with Norway relating to ilincome taxes, Siglild tit Waishingtoni, ,Jute 1:,1 1949 Executive Q, Eighly-first Congress.

    first session.
    Approval retolmmetdled subject to ani understanding relative to the collection provisios of article XVII. onveution with Norway relatingto estate taxes, sigIed at Fifth. Ci Waishington, June 131, 1949 Ex6cutive I, Eighty-first ('ont:0BS", first SeM1ol. Approval recouinendled sulject to ia rivervation respecting the Collection provisions of article IX. at taxes, signed atlate Sixth. ( onvention with Ireland relating to D)ublin, Septemher 13, 1949 Executive E, Eighty-first Congress, Second sessIon1. Approval revonllendei subhject to no reservations tor understandSeventII. convention n with Ireland relating to ilncom'e taxi, signed

    at D)ublin, September 13, 1949


    ScO~lid sessions.

    Executive 'P, EightY-firmt Congress,

    Approval recommended subject to reservations relative to the capital gaims provisions of article XIV and the ac.'uiulateld earnings provisions of article XVI. Eighth. Convention with Gretee relating to eslate taxes. signed at Athens, February 20, 19,154 -Executive K, Eighty-first Congress, Seoll session.

    (1691)

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    Foijol'l,'nlll (Coml vl'lim il with ,%ilz.*'l'h1l14l, rellitll! it) illcol. lel, 111\4-4. sill~ 'rIt'stt')iIit ill l~i m \ Il il.%24rfltjtir l'll IIr W ai..lh . , - Iow 5, , 1 9 1 E wrt,, llif E, h t .- se o n(Im ig v 'itrfrt I t.lri~l J,i lilt 'tu,,,,I ,,, ,,, itu lfor,rt IluiNlt'w r,.',rst v Ie k,-, r. Sltliihlul, ctlt'. .t' NI ( ,migress,, first sessionl. A )plroivaI re.,',,mem.ield ,silhjerl Ili ret..rVitimil regard'ligl Irfitl-4. of Ip lblif, I'll 14-11 M IN. Iill M.%IIPre,.i~henIi, p rlil flit, Ilo s lh tIIV ll t1 Ihem-ll IItreaties, its11 i i pil~ l-relit frrolll ,i rei.f,. ItttiIthe,l'tsf t'~u~u from, itt t' reselrvaimimill ii 411w' o)tt' lill ofl to t', t a 111'sill,. il r,',', ,iti'ti,l,, ,I Itt flit- tt' I h ist ~I i til%deihrslawl.v t i ut,' fiat t .ptqIsh~ %)I.',II Nor ti,',' titi i rt't''t' lu, lt ass.istl t'l

    imgs. im-lue,'l seeI.,k tit dimimile' dle~l~, lumlllim~l W'illi respect'l' to fhl, inlt't'dl'tIWO I4)1141' lt'.1v Il tiitiv st i d1 with iotlv rF t5'r'F. 11 rftt e Ewu respect,. to) laws, tilii n illroi.lle,. 1" il~lifvi llull.s wi11,ll rporl'limiilll,
    ,1,,,.,41,.I ' ,1411114-. Th irs Aoi. llel, Wh ol it-.S lili(,I 111440 1T 1l141 .1l11)lt l li l , c~hlirll im of 1" , (fltlllmlitteei (il Forl'eig ll hill fh '.. 1411141111 1 .'. ill-'
    lst WO
    I111

    i.stw.e ell fitl, wilill,.l..4,4 I bll, ll Mll ,illipiI I).% . Jlhl, listlill!g lli .h44l

    -1,lim.is*, flhl, Semllllor f'roml T1' as.I.lr. (',)%\ mi~.v] t conslll.ider I l,.w , seve~ral fi-I't - wlll p"1Irolv.'l,
    lllll0 1-4 ill

    its
    i1 ti l ll.hmo or

    1111111.lill~l ' t.illh 1`1111

    ommllell 11. e fll' fe-Ih i julniolr N'-mlotlr rroml Ilown I.lr. (;l~ll:rl':l flt svliiir Swim~lollr f'rom Nel w Jhrl.e I.v \I.r. S.MlTIIJl.ike Sl~lliolr S.-mlllllr rromll liowi 1lr. Ilv,:.\,,o.wm , 111141 ImI1\'.'{ 1 .1411111 illVilP 11I1l-lllil~ll 0111%' It) flims, rese lirvaionsill whii'h itr. colmlilllml 14) till Iivitlis, oir ill Ivasl vim'onlll ill dIeglree,. It will I. li% e'l Ihatl no fith, first rese.qrvaion sull gi sled, Willt respec)tl' tol .sivtsraIof th s tl~l'Ire~ittic , i iI ,"lper'idly S.lh Afrric.a, No(rwitV. iiii (1ri-.eve isl folr Iiiiiiiiiisi ivllle tll

    c mi ttiiii likei st.., eei11 .oml,,urr.eI if, 'rl.,siawmlh t'llll i.('l v'olli~ssti

    IhI,, c ni'lhliltlsim

    ill fh',.l,,lit-Iim f hitl -s. I 'IIty 4111e


    upeillrs

    sayI

    flhint tIlt similar rltlri-mifionl

    Ii ti ll- eivolll~lifiol Wil~li JrehliJi'lir inl Ow elxistlingll convent'lionsl Will ( '1111l1(lit .,ldI fill' Illitill Kingdomlll. '11" .I'l~lem o vlolllpiO~ ~ provide.' ' case A l'riv't, its 11l141114l1-4l hyv Ili(:. iroll co~ll, 1111 tl e ifl fI, i't,% or somll asisimceillll,, midl suppolrt 14) bis g~iveii hy% eacih vi'm~tril~lt{ 1llln shll Ioll tittae

    (1I592)

    ,gi' sflct iv

    I v% Ih re-o%!vo-1 il' viti iciv% al it t.or i.mai


    114--1111.llall, llv%*. Ijcl h vt lll/'l.1 tt , ll I

    r ,v~' lu 4 f ' Ill 111% ,t-.


    llmial;l oir o..iniv, tv

    It.%-I-l

    1 VI~llll III

    Illr, iI.'.l ll141tile*.e1f ill-e. i', Intig eim. iletim iu %% lv h rilolicllllldr' I v oi 4441t , t 'll ll-i. l tI t l r iltl ' 1111,41llllllel.1114 4.1I4th ii ih lcrtil irinhe, Ihlev rv.lnridiciwi f ht I'i~i h , .illi cuhe' ,Iellq 't,111' i 111i'r 111414~ali4lJlltl4 lift t lieii i4i Iw to i liet l 0ri.te iIt tin t i t1- I l oorwiI %"i if sit lII 1it Ill I i I i i I I tI t I! tll'e ,h lfll t'flolrl1 Ie' ' t 'l1411 11114.1 t,. % . 1-c l riii e'. 11int .4. forI 111110i c itt tle',,lt ,I 41% 1 he' P , 11 jii't,'ig ftor Ih,'ll 14. it 10il liltll11ie. tli 4ill tiel 4 i lre' I W ' .11
    vil
    *Ih'

    IhIl)

    f. ' i %,It h

    'l., ill '

    hu h .ir m li.lt' ,' t*s

    i. e Itits %

    , m'rlft, i'

    fl'er,'.

    ii wh.ich' hc it l illt ,til ieri'i It t ',e 4it4 i.n T he.rehill ligeh I% 114 Jll . ' rs ii icH110'e'l,'iitl 11141ii a rre.Ii ' Sma ll rt i'' lieil ItsliiiiIiI i tlIIi' Is ,1I)4* Ih'.ll Il rt' i4,l,.t I o1 ri1 'cb 114 e'le".flt 14)11 tin .'Icne oi i l i Afr. itiii l it' 4I) lit' . huti itelel lii of " l ilit' ctine'. l im Ii' ret ilre ' tt 1 44 and ful N l 11 -4 h liit it* ri "14thi ' mile.h flit,' c".t itt e mc'liec'1'Ie' hav li eii fli.. mo ice' %% r4'%114'c Ici flit ii' ' ci t dion 4 ti tct lilt 111111h4 ,, l,,it us lthi., .14f lwhiel l, filer ,. lt-411 shd In (if l' . r tiuvi, .1111 '1,4 4 it .1-41 4 rimmetn .,nrec i,m. A 11,tll m l. tcio it i li.W er trild .5fr l ftvv votir e mx. m llt , I' IPrc'4ich iit I it 1, r. It tliat I ht wis v Is ,ts fille' ve' take' 1w) thlke 414 It % sicsist e fercisiici. ith respect it) ti t commlilitt i wu sIiwil e I letie l l Ils l' i li l44 tive cu ellze'es i nl t fcrigli ctlu it se il.lji'l 'l141, It) flic' jr riial pr l heltirie If lhics'lc'l tn it's, and r aic i('ise it s i*V 1to u delu 'rtu.e fi-h c 'oln'rei'i~a l''iic'cf tIl~rh'1n cirnilr 4' ir iga ,Iit Wi litir 14114 *1n cciurls citlutxei's (II'hl Itlie foreign clilh i tes colenl r ft willlh e calr I hia, mtn il rst r ., ledth, ni %rit n I Ii t lcl' 1 h cIl. entltl4 to rv l or lliperhaps ill. ill, i'c'tim w oithlub cIll'dl tilflO e'nlfc her * hoirsl 'ivil pie'alt ices, willel it wits lieem w'' 1ise ou1 'ohrt1) o folr ts unertarke Illel'fitl 'xtlevi f'lit, 4 i

    th

    ilve itl'd tl

    It ii ' rpe lwi

    tlimi part i'uleir job. It will 11b4'e also hat ir not two Imor ortheeorll re teof thm t Ihlven ision oiidl Ameri'clan. I lic' 4ciiit iit) rovsc'rvat 1ions rcIin hrc' tiriis I he'rc' l 114' ('or)lntrii- withIi witoij, l c'it izens ii' Aucritn firnms or eniplol'er s
    Ihie, Ol)lmatter re'lats ton ric'iilint Weillihve' tier itite'I r lic-sit trenft penlsuitt ion for pc'rsiittil sevc'IV4es of Amel4r4ican cit izetis inl foreign ('0441In'sit. Evc'pt ion has b'c'i,. takei'n hcrcetofore, I nmaty say, in regard tro tihims (4-1411011 ill c'Orit1 , thc rohf.ilt liol tol 1 'hotfi treaties, her hil it wais cisrc'gertrdh'cl by tihoio who nre'gotiaeci wit ph respect hi.4)severea lintitd out that these of flie I rcatiic- lnow before' ith Slenite. It wats provisions were highly dnisc'rimhinat ory against ort ists,iniisi'ierlwl.

    n otihon-jic Wtire ahc'orsr, ii other wh went into foreign countries, hit who werelit work I he(re for Ame4ricanin plo.-'rs. atT temporarily resicled iII f114154 foreign c'fuittric's w-hile they Were c'arryinig (oi t heir 11(4141piI ed now it btsiness c'ttrprisc'5 thcre. It is i rule, wit has s Iior manIy yeIars tIhat 1h1 Amen'ricaiti I re'i whoi4'1hends at least 18r3 ta. -5in livas in a f4rtin countryy is to bie exemt'd front 41(lleI'i]on. 1 cIt 'r words, taiat iony bot hiltloun1tries. However, an effort was 11iacle to make a nmot invidious dist inctio s bc'twcepn art ists and 10) others who went into the(, foreign countries to inakt' mot ion pic'tutres or to give' perfornmances for Amneri'an employers. alled for a Anthce p)rovisionu in thle Canadian treaty which im ca icr hicsc'rvttioni~it; thce c'apital-ains provisionl of thie act. [p. 114301 of 1950. It will be, recalledl ha b 5(t iof 213: of thle Revenuep Ac't of 19.50, a I. capitail-gainq tax was imposed upon visitors from other countries who entcredl tilp nitedl States anl perhaps rented a room in one of the h (159:1)

    hotels In %ew York t'ytv and there engaged extensivelv in capiLalgaills operate ions jppii thie Aiie.rican xctiaiiges. Ii1 I9-540 ('oilgre uiidertiok to impost' it capital-gams tax utpmn iho.s resident alitlul Trh, ('aziadtiii treaty provides agausi * this provision, that is to say, III the 'allat'iallIa lVtI0ll d Ion thre i, It provision which abrogates tilis t proVibI0n. .tIeP It 10 a sutl-qun'it legislative de'claraton, it would have tihe effect, if permiaitted to stand, of repealingl th- cotigresloialij act 't erhelrefore. tlt' comlmllittee deemaaed it wie to offer a resrvation on that point in thet ('aadian treat . There- one other minit Ulin which a reserve at iol or undertimtaling

    ts Inserted in one of the ctnivelntions, I believe. It relat-es to acctumulated earailugs and proitss. Under art icle 1 h) of the nWW Coliveii oll

    with Canada,
    aliilliildaent

    Is made soeilv for the purpose of correctinag a 11is5take Ini the original treaty or at least clarifying the aneaniag of the original
    treaty. Under this article, at this time, when more than 51) percent of

    art at'

    1; of the origmal treaty is amended, and that

    the tautstanlding voting stock is owned directly or inhuectly during tlie


    last half of the taxable \ear 1)v individual residents of Canada, otlier than citizens of tile United -'states, it shall he exempt froia1an,1 taxes iiipo.sed by the Utnitled States with respect, to the. accumulated+or undistributetd earnings, profits, incolmec, or surplus of such eorporatiOns. M1r. President. I t hink the brief explaat lions I have Iniae v.ill suffice to indicate the nature of the reservations in each case and the nature of the understandings, wherever understandings are inserted in the resolutions of ratification. If there are no questions, I request that the treaties now be laid before the Senate. Mr. -SMITH of New Jersey. Mr. President, as a member of the subcommittee which was associated with the distinguished Seinator from Georgia [Mr. GEoRGE] in connection with studying these treaties, I rise to support the S4nator's position in requesting that the treaties be ratified. Many (lays were spent on them, and many witnesses before us during their consideration. We had the benefit of the wise judgment of Mr. Stain, who is the adviser of both the House and the Senate in connection with fiscal matters. We heard from numerous Govern-

    ment witnesses and numerous outside witnesses.


    I wish to pay the highest possible tribute to the distinguished chairman of the subcommittee, the Senator from Georgia [Mr. GEORGE), for the patience and skill with which lie handled all these In the Eightieth Congress I had the privilege of handling certain matters of this sort, and I believe the French treaty was included among them. I think that in these treaties we are providing for true uniformity, a point which I consider to be most important. Heretofore we have gained experience in these matters; and at this time, as a result of the further testimony received, I believe we now have reached a point where the committee is familiar with the possible pitfalls in connection with such proceedings, and we are zealously careful of Again I wish to commend the able Senator from Georgia for the fine work lie has done in this connection. The committee is unanimous in taking the position that these treaties protect our citizens and at the same time are just and fair to the countries participating in the conventions.

    matters.

    the rights of American citizens.

    (1594)

    Mr CA.";E. Mr President, will the %eiiator vielh" M1r (GEl)R6E I ant verv glad to Ytield, if the N-nat(or wiblies to
    addres- a que.timi tOlit*e.

    a \ir ('A.CI'E. I amn widhig to atddrtess m't.itestit either to tie iy .N~mt)tr fromt (Georgia ,r it) the N"it~itW from New Jerst .

    Mr. (GEO)RGiE. I shall Ie pleaumd to answer if I valn.

    aere to omte lip totiltY in conltection with the treatites. I have tbeen ilisturtd by reading at different, tines press reports to the effect that certain Greek nationals have been taking advantage of the opportwmiaty to purctha surplus Amertcan vessel. and in some way make very ar e profits, either hy placing the vestwls under Patianiiuman registry or liv ptItinig thenI under Greek registry. Wtule the matter may n*ot be exactly covered, I am womderiig whether there is any p(J"blly th I tlhe convention prope(ied between the U united Stat.s alnd G;reece the opportunity to make unusual profits by rvai.,son of living in New York ("Itr and retaining Greek nationality is enhanced in aniy aWav. Mr. (4EOR(GE. No; it is not. On the contrary, we have beeu m'rupulouslY careful to see that notflly In an v of these treaties would ha%-e the ef'fect of re paling or nullidying the provisions which we

    Mr. ('A.-E. I did not know that the'-, mattele

    mwt'on 213, which suljectd to capi tal-gains tax the profitshad no fixedtemporary aliens residingtile made by Place of'busilles" Within in tith" i'nitedl States. but who
    insrted in the 1950 Rewenue Ac,
    United States. We are offering in the case of the Canadian treaty a reservation which protects the revenue act of this country. However, I 'would say to the distinguished Senator that, in large part. the question which"he has in mind is not involved in these treaties at all, because the treaties relate primarily to a reciprocal arrangement between the two contracting countries, namely, between our country and country X, respecting income tax and collection of income tax, respecting estate taxes, and safeguarding against the double taxation of the citizens of the respective parties to the convention. It does not relate to the larger question which the Senator has asked, except in the way I have indicated. Mr. CASE. Mr. President, I wish to thank the Senator from Georgia for this assurance. As I said, I had no knowledge that this matter was coming up, and I was not prepared to ask a specific question relative to the problem I have mentioned, but in view of the fact that there was a convention between the United States and Greece included in the conventions for approval, and the fact that it related to the question of avoidance of double taxation, the question naturally occurred to me as to whether it might impinge on the situation to which I have referred. Mr. GEORGE. No. it does not. it does not. Mr. GEORGE. It does not. Mr. President, in order that the committee's action and in order that the resolutions of ratification may be better understood, and especially that the effective (butes of these conventions be clearly stated, I ask unanimous consent that there be included in the RECORD at this point the analysis of the pending conventions and committee recommendations, under title I, page 3, of the committee report, to the end thereof. (1595)

    Mr. CASE. I am glad to have the assurance of the Senator that

    Therel Iuliig lioluhjetv t hiltltu 1.' 111,


    ,JA i ( -j '( I li e lt ,.e Ietevt )Ii cIIIItIit cit)II.S I itI RL~t. kimlIV asfo~lhm,,+ ,

    .AUallyk'.of l>,iligti r ,of i il a e''i l tih lot, P

    (Cii v'dit ,tio


    Illl tcdI IIti the

    it ri-- ti etlt ii :te of tilt- vetieielliaiili ol Ihe l r tthe lillt otff .l0l i +il illt (i ii itllt Ie'. till ii t ll i 1(g %Ciif` e I II I \'ititit il It t. ci.I I -i i it iill-a i i i h. lc tu lf pre . iOWiie, O ho ' le'.iiikiii 1 i i,.elii i l -t r lh. er iitv f 4 tit.i.lt- iii her lic.e' I thetp)it.l'c ii for 1 hiti rIcpltill lit lit, O.itT !e liit, t l..I ti-.t ,t1 um ti ro % lill, 1iN'e'il.4" lii i i i l h4r tt.I le' Il1141,111i h ,'i lilt- lh-i1. tlism vitill% il Illl li ,iltl % I IiI i V -%IIei l aI ItillI I t Ii e iv lIf; ila r Priok. ii< Ifst f. tlvt lw, t~lilt li c m ulili\i-4 areP aii.wt'i.,v~tl ltigtlh, r flitr ill Imti iijim,". ifl t 'Aiil h It\I ti-ilo I t I, it'lit I hti-i
    te eit

    iiihIt' lvin I i t to n 'I It ii i Ii a r t. i I lt"Io a gtle' r j el 'r t 4 I Ihi 1 cltli % t-111 lolt + i t r' ,i~l it li il litv rtliw w air fromii I lie' xetlitv ill Isit l rttr , I i,.it p elilil
    i-eul-t 1
    The "m't.

    14ir

    1 li hti b .e icr lieitolti

    . tret ttor iei pro 14ltl


    ii hirh .er .il

    iit ih

    Afrieii

    'ire

    ti-t

    .cip

    - Allin cI

    .l if

    t. re l y iif

    etft+.a-. vit

    t tie, I u ti tit Sto t.- i* meiiite it- t, lilt, artiii.e% ld i- h liil utt liots.- re.ille otiil Ice hii. ieti I iiel ltc tiil I I . -tl\t-. of til t, ie.heral ( ; rit cieei it.. in it.e v it \ t, lo t tdil.t ;1t,4011tiei i lit e ik'. .-t il. 1 mv oi r icrli i ict. Ii\t- mh'il.i eiipttoc.d bv h villt tt.e. Tl',rrltr *\, Jie c.'c.'%'iil l I til or o t|iieeld Sltill . or ti c I )vi iet of ( 'olii iiill. %. i 1N %L\ I It IALL.1 \o. Yii L',TA 1F X41t

    I ti .'itii ;it

    IP

    Ii.timl

    P. t tLTIl\4

    iLL.LTINI;

    Tel

    NcoM& T. tie.

    primarily oil the doiicile of tihel tax aver anidtthe soirce of the income. In general, the coiiventiois avoid tdobihe taxation blv a syvticni or reciprocal eu+niptioius and by re'ciprocal adoption of the principle ;f the+United States tlixcredit system. The provisions reserving to each Stiite the, right to tlix its own citizemnl residents, and orplratiois without regard to thie convi'ntion.i are aiiiilugomii in principle to similar provisions fouid intall iucoine tax coiiveiitionis to which the Unitid State's is a party.

    -wliie. olf lthc rlpirt., ,-h.ils %it lhc heullitcel 'tion taex elill tiltolns "lilh tle Sitticie otl Si I: iti .f reia (mi l hititimg te ilt, lkipimiitit ),rvproitocteil, * .14' Z,.'-.1 titd, t N. cr14tv, Ire-ladil, ( iriv'ee.e, atied S1itzerlhiiel. tThe -ii leteh.llietill'irv Ccoli .eioli with (;'aiiadit is Irc'alt.41 sw.lxiratt'lv.) Siitlli.itaaict lv -niillir prciv.,itlliI., 3Ilijctir iii tlhee trciatii4. For that rt-.iMti tihlt ftollomtig ehsihUtl.osi Ls eii idtle ilito ct'iii.-imitrjliuli of ti lt mijur litem. de.tl ith ii tihl- cuniivvilt is, , andi t, il ' niot trc:mlt. Aint, ithl-i'ii.-t.'i toge'i mider e'ueeh of t hoe liv'acliitgs. tiher Dollelh tailtlull anil,-A. ill thi zil.ownieC, of reciprocal aigr'inliitt stlch iti. a re rellrsieted l)v tht-r i'vlntluin anidt protoclsb uider Conliodtratioil, fronm the' fact *h that tith' vaurioui goleruiiinttiltt. a.t-lmne :and tcxcreltw lbroad, aned frtii-uelitlv overlalillig, uluiig jiirl.i'ti.ii'.. lit getiinral, til'- Uiteid State. wm.mniiiii's tihl' right to tax it,. natlioniil., aild qloili'.-tIt" i'ortoratitioitti oiltlithir ililire Oticicieli 1ithtihot rgciard Io ,itiircc. It 1ikc14isi' ass+iltiest thbe right to tax its rhtciiittets, re-garin Iets of naiitiilialitvy. ol tllt saime lruad iuamis. Alin iioliresidegets. on the ttiher hand, are taxed onliy til iliCOilie from iirilrcs %ithin the U'niiited States, and foreign corporations t arfe taxed ouidy oil iilcuilie from Sot.utires ithin lthe 'liitctd Status. The I'iioli of *4outt h Africa iliit 's its t:itcvs primarily tilpit income delriveid from sourve.s within the I'llioll. Ne'w c.14 ditoes Ilit 1ile citun'ship Its a hit iihid lis of tax bilt lixtAs New ZYalailiil resjdihiitns oin their entlirt' itlcutime, rngaireless of tIhe shtirce fronl Awhich derivteI. With rezpict Ito tionrnsielits. it taxes' onily the income derivotd from .otires wliiii New Zealanil. Nor.y iniIjXeS tax oni tie 1 hcamllie bu.'cis ats New Z'ealandi, 't'le't that " ith re'gairdt to lieteir.ve'-iditts it olyi taxes the ilicienine from re'rtaiii specified sotire's :aind prujwtrif located ill Norway. Irlaind ge'i-railly applies the sime taxing rile as tiht- Ilnited Kinmgdomn--resideits onl their entire ilicolie and1 noml"iil il t oil their incomtel froimi soillrcts u it in Ireland. (Greece hat'e 1v ti i'iA'iilli' taet..,, o.fi'h hiCtili t ili Uit 14 oini . o ' iht differeiRt lfli. siiit Its Schedilar tax (applied et to intlixielhi lilid i torporatitlnlls) is geniierally imlipe'ted oilv tilt income from suilrces4 within (Greect,, lilthotugh ilieuonlle from abrodl (i.e., dividends) is4stihject to tax if -'t'iijoyedtl" ill ( rvece. The general tax (applied oill to niiatural wroin.s) is imiip.sed onltil-hentire incotmei of a (Greek naitionl. regardllc- of rc.'iltliice, and oi the eintirte income of a resideili of (Grece. Thos, thit ltii r tax is Similar to the I nited States income tax with rieswect to tlht,broad SClOIl- of its a1ppliclition. StI itze'rlaidu imii.se'si'leth federal and hial income'tta i\t'. of which the latter arn, ihc moust imiportaint. The Swiss taxes oil income are ibistd

    (1569)

    iI I I? #,isn ta I nrsb me
    Al1l -tI . .af ihIt vi lkt,%'iti a mAa vr lt taaili-l4hiia t io ian ola t tIi, jan ri -ipli hat ani

    111#;# '' 4

    Hs i1.l1*|1jig

    t hit, vo tr at'mth) %t lat,".-ht If g im . uic tilojctt It. it% lit tha alla,r i ina ti t IratiIt, .ar haIt-uatit",- a t It, it .11a h rlaagt. Ia A I a141IItIIt iI i.-.tiuaa Ii
    iem tOf e

    it. f .lvfllaaed it) it.ikit a I araa a.h, faictur%, Airk-ta.haj. c Aarv. wiw. .a. d tit her 'illair ti%1 l late'. ofta iiae.l aet lid ati o- nAioilvb'itile a n Iil,r. ;a i or tarsk. Tia 'r ah r g t as it Irat, tir ha a-aitsv-, Ihr. ia h il thit, \itlal Ihil -awtih a11 tetalI.rirli i- varr{ 11cirhlial, lit i'q ili. l it'l I 1' it) |)e' :l\ahivdv' )it thr" li~rt dl,. il dt,.r%\d froml ,w IaV 11111 hagiII t h i 1ai lit-, ae illart % Thla ijrii aa t illi\ ,t. ti rti, I 1,ldaili ri, Ito or a etata.Iah d friai I Iht fiatalr iih. o f jxiroial #-r% . ItVI.. l~r, .ltch .4 tie etolatactlii)1. j)llta. ialt tail i1()prItit -hall Iw 4li-vaatad to amrtwi iroiil liattlt r j ietrt hire of gootdA or ulitha,.dii . t 4 1 ' olIt iltil : : irtimI't t.a at1' iti appropriated laticst (or h a1itjiii-t I itt ilv I It hi' I il-t iii.'iai it ilaw, 'ta lra titiatli .t ime ;it'I'1ltall' O a hratich or other rMlat f t aaarat IA r17,414-t it-ill %thian aizauther cointrit ntg state lit order that lht. lhr~aidi at'.i ipriaftll -i. ietr~ail.l L' jlao~ihi,.a i.i~'
    \e-it a l| Ilatit iar* m

    \l~ar.!

    2) Di tid is utit/d i tiler.41 Thr Smli h African coIthttol originally pia ed art. XII) t hat dividendh, i. il Africana (-or ;iratiltn to Swititih Africr.n r'-i.dntis othleir .tth i.rtr-t ptaid liv S it 1Ialhatiti|ia Slialtt i'll te* :a- d to Souti h Africatn tarporalti lis woihld hbe ~ellpt (ranoi I iltei1 St:itii'' tax to thlhe ~tientlt taxe-d bY Soiatlh Afrlic. Thits pruvit-ioll l),bseq aiitlt it-T.rt. to rvrr-t-tiatvd it iailateral cotie('tv..iln y the Iiitied Sta.teiis. i tatiiisha\e' Souiti h Africa agree to a itiflihar provi-ion re,.x-cligtghe i111011t tril'td priths iax aaii ii,4 liatlrelsiadt-.n sthahiltler'-t tax having failed, the tiwo 4huo erlilanaaats hiave agreedd (art. V"of i he pending protocol) to delete article XII idI he colivntn I ion elirelv. *tai.(, Zealand cnvlltio provides (art. XII) that lhe e'w (iln a re'ciparocal corporation the ,IIltllnlids (wiiliout reference where the reciplient a New Zealand a re,.identi ofhalll he .,xenlapl from taix eclep~t to initeretl) paid hIy i.s a eitize'li or

    l'iiited State. or is a niited States corporation. The Norwegian convent ion snakes no reference to the paymieitn of dhiidendis but lrovidtes (art. VI) that interest on any form of indtiht-eltne.s derived from iurces within onie couatrv hy a reidttnt of the other includingg a corporation or other bu.-iness entity not having a permatient eslallishlhietit in the corner colititry) ,-hall hetexempt in ihe country from which derived. The Irish convention has a ,iinilar prov'i.-ion (art. VIi), but it does, not apply to interest paid by a corporation "-idciit in onte of the contracting countries to a corporation of the other country which controls, directly or indirectly, more than .50 Im'rcent of the entire voting power in the jpayor corporation. This provision is practically identical with article VI of the convention with Greece. More-over, with re.p-et to both interest aid dividends, article XV of the convention with Ireland provides that such paynflhlit Inade I)y a corporation of onel the contract irg states after a (alte specifie-d of "hall he exelrPtst front [P. 114391 tax biy the other state uIlc.-s the recipient is a citizen 6r.resi(heiet (Wn.tle case of the I'raited States) or a resident (in the case of Ireland) of that other state. The treaty with Greece contains a unilateral provision (art. IX) to the effect that dividends and interest paid by a Greek corporation shall be exempt from United States tax except where the'recipient is a citizen, resident, or corporation of the United States. Under the Internal Revenue Code, interest and dividends *d by a foreign corporation may, tinder certain conditions, constitute income 6rmsources within the United State-s and consequently subject to United States tax in the hands of the nonresident alien recipient of such items. In practice, it is only in rare instances that it is practicable to ascertain whether a foreign corporation derives more than the requisite percentage of its gross income from United States sources so as to constitute its interest and dividends income from Sources within the United States. Article VI of both the Irish and New 7Zaland conventions provides, unlike the other pe-nding conventions, that the rate of United States tax on dividends derived from sources within the United States by a resident of those two countries not engaged in a trade or business within the United States through a pernmanent establishment therein shall not exceed 15 percent. Ifi the case of a dividend moving from a subsidiary to a parent, the rate, subject to certain limitations, is not to exceed 5 percent. The effect of these provisions is to reduce the p resent United States withholding rate from 30 percent to 15 or 5 percent, as thle case may be. This reduction is likewise provided in the existing conventions with the United Kingdom, Canada, Denmark, and the Netherlands.

    (1597)

    Neither Irish nor New Zaiand law at the present time subjects to tax the divitdetds of Irish or New Zealand (respectivelv) corporations. The corporation alone is taied, and the tax paid by the corporation is regarded as being paid on behalf of the shart-holders t herein (Of eour.-, the reduction of the United States withholding rate does not affect United States citizens re-sident in Ireland or New Zealand as such persons are not subject in any event to such withholding tax. The conventions with Greece, Ireland, and Norway exempt on a reciprocal basis interest derived from sources within one country by residents of the other. Neither the South African or the New Zealand conventions contain such an exemption. However. the existing conventions with the United Kingdom, Denmark, and the Netherlands do provide for such a reciprocal exemption. Under article VI of the convention with Switzerland there would be a reciprocal reduction in each country from 30 percent to 15 percent in the tax rate on dividends derived from sources within such country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the dividends are derived. There would be a reduction. subject to certain qualifications, to 5 percent in the tax rates with respect to -such dividends if the shareholder is a corporation which controls, directly or indirectly, at least 95 percent of the voting power in the corporation paying the dividends and if not more than 25 percent of the gross income of such paying corporation is derived from interest and dividends other than interest and dividends received from its own subsidiary corporations. The reduced rate of 15 percent would not apply to Swim tax on dividends derived from Swiss sources by a Swiss citizen who is resident in the United States and who is not alo a citizen of the United States. Switzerland wishes to place no limitation on the imposition of its dividend taxes with respect to its own citizens, except as to those having dual nationality. No corresponding provision is found in any other treaty to which the United States is a party, but it has no effect upon United States taxation. The Swiss tax of 30 percent would be withheld at the source and a refund to reduce it in accordance with the provisions of article VI would be made upon a claim duly filed therefor by the recipient in the United States. Such claims for refund are necessitated by the difficulty in identifying the owner of shares which arises from the fact that the standard'form of stock certificate in Switzerland is the bearer share. The Swiss convention provides that, with respect to Interest on any form of indebtedness, the rate of tax shall be reduced to 5 percent on interest derived from sources within one country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the interest is derived. In the case of the convention with Switzerland a tax of 5 percent is retained because of the fact that in Switzerland there is imposed on interest, in addition to the income tax, a 5-percent coupon or stamp tax. The special features explained above with respect to the reduction of tax on dividends apply also in regard to the reduction of tax on interest. Article XIV of the Swiss convention provides that dividends and interest paid by any foreign corporation to a nonresident alien resident in Switzerland or to a S;wiss'corporation, not having a permanent establishment in the United States, shall I* exempt from United States tax. Reciprocally, dividends and interest paid by a corporation other than a Swiss corporation to a resident or corporation of the United States not having a permanent establishment in Switzerland shall be exempt from Swiss tax. As thus drawn, the article is narrower than the corresponding articles of other conventions in that the exemption granted is confined to nonresident aliens residing in Switzerland and to Swiss corporations, whereas other conventions extend the exemption to nonresident aliens and foreign corporations qenerally (for example, art. XV, United Kingdom; art. XII, Netherlands and New Zealand; art. IX, Greece; art. XII, Canada). It is broader in that the exemption thus restricted extends to dividends and interest paid by any foreign corporation, whereas other conventions have confined the principle to dividends and interest paid by a corporation of the particular country with which the convention was entered into. I (8) Compensdlion for personal aerwcea

    under that heading.)

    (A discussion of the treatment of pensions and annuities will be found below

    IX; Norway-art. X; Ireland-art. XI; Greece; Switzerland-art. X) all adopt the principle of reciprocal exemption for compensation for personal services per-

    The six conventions (South Africa-art. II of the protocol[ New Zealand-art.

    (1598)

    taxiijg state for a period or periots not to exceed 183 days if the services are performed for aresidents or corporation of the state who are temporarilyis within the by resident of one contracting State of which the person a resident. In the case of Norway, (reece, and Switzerland there is also granted a limited exemption where the services anr rendered for an employer domestic as to the taxing state. However, the conventions with New Zealand, South Africa, and Switzerland contain an exception to the rule. Specifically excepted from the scope of the exemption are tlie profits or remuneration of public entertainers such as stage,

    exception isfound in the Swiss convention, where the income received isless than $l000) ($5,000 in the case of the Canadian convention discussed separately).
    The committee believes that these exceptions constitute a discrimination against that the Senate not accept par&graph (4), of article IX of thle New Zealand inenlds this particular occupational group. Therefore, the committee recomconvention, paragraph (3) of article llof the South African protocol, and paragraph (4) of article X of the Swiss convention. (4) Gorernment salaries

    motion picture or radio artists, musicians, and athletes. Amodification of such

    Each of the conventions adopts the general principle of the reciprocal exemption by each state of salaries and wages paid by the other state, or by political subdiiisioiis or territories or poessions thereof. This, of course, still permits the United States to tax its own citizens. This is true of all tax conventions to which the United States is a party. In the case of Norway, Ireland, Greece, and Switzerland this agreement specifically embraces the payment of pensions by the governments concerned. The agreement with New Zealand, on the other hand, does not apply to such pensions. The provision of the South African convention makes no specific reference to government pensions. However, the uniform rule of the South African convention will apply with respect to both government and private pensions to the effect that they will be exempt from tax in the state where received. The conventiohs with New Zealand and Ireland contain a further limitation upon the scope of the exemption to the effect that it shall not apply to services performed In connection with a profit-making activity of one of the contracting states. (This is likewise true of the Canadian convention discussed se:. rarely.) (5) Pritmate pensions and annuities The convention with New Zealand makes no provision with respect to the treatment of private pensions and annuities. The general rule is stated in the conventions with Norway, Greece, and Switzerland (art. XI in each case) and in that with Ireland (art. XII) which provide that such pensions and annuities shall be exempt In the country of source. (6) Professors, teachers, students, and business apprentices

    A similar exemption is provided, without time limitation, for students and business apprentices in the taxing state who receive remittances from the other State. (South Africa-art. X; New Zealand-art. XV; Norway-art. XIII; Ireland-art. XIX; Greece; Switzerland--art. XIII.)
    (7) Religious, charitable, and similar organiuaions

    shall be exempt from tax by the latter state." (South Africa-art. IX; New Zealand-art. XIV- Norway-art. XII; Ireland-art. XVIII; Greece; Switzerland-art. XII.) T his provision is standard in all later tax conventions to which the United States is a party.

    the other state for the purpose of teaching, for a period not to exceed 2 years,

    Each convention contains a substantially identical article which provides that the income of professors or teachers from one of the contracting states who visit

    The convention with South Africa (art. XI) provides for the reciprocal exemption of income derived from sources within one of the contracting states by a religious1 scientific, literary, educational, or charitable organization of the other contracting state under certain conditions, from tax by the state from which the income is derived. A similar provision is found in the existing convention with Canada. The other conventions contain no similar provision.

    (1599)

    (P. 111"of

    (8) Shipsanod airrrqft

    Erach treaty prosies- for the' retiprot.al extemption lay e'ach state of the iiae'uiia th'ri\,ed hv byan v'iit.'rpri-4, of the' oat her stae from the oj.'r:ttlon of shlps ar atrerdt This erlla.iplA' laa'i eaaema'lateli ini the Internal |'vei'taeae C'otied for many i' ro. has aa A r-iNjIel hlticatat olt h131 t'a'tti w*rtltta u I I oh' Scattlli .African prtl ision i)o thei e'frert t hat the 'xeimanpt fromt Irwa Smth Africati fitdts not apply to "r,'idv.laa" ax of Sotitmli Africa. Tlhu. tihe i'xelitpt iota will taot apiply t) a Uniiteld State's ,orporra. t1i01, if atev, tle' n1aatzkeg'tiae'nt aMd conttrol of which is inll the Union. Thie term tnalllalali''llint ala control" ats :applied to a cor|lrataieaa is ititetuded to iieiln the dtirectiota of the loolicivs of such corpmrittiota as determnilie'd through the mita'etigllp of its board of directors or other mi iaa euentt group.

    (9) Rental. anti royalties

    South Africa
    pritciplh's, fouid in several oth cons e'titiot.s, where, Ier a i r..sideent of ou' contarait. ing state dle'rivinig rentals fromia rv'al jurojk'rt y or roy;lties from tiatural re.soeirce'. located iii theie other couti try ttamav elect for any taixahhe . ar to hie subject to t-x ill that other conaitry on t lit i .

    The S'mutlth African convention votntaiita, no provision with respect to industrial and like' royalties. hlowtver, article' IIll of theiprotocol is dlesignae'd to a)iy

    New Zealand
    The conv'eit iota w~ith New 7.'4-alaan provides (art. VII) thiatit a president of ti1e conatractilg state receiving reltatls froml real l)rolitrty or royalties from natural re.oaurce's or royalties fromti thei ui., or riKht to u-i- copyrights, patentits, etc.,

    uelrived froti sources withaina the other state' may elect to lx, subjtect to tax ott a tact basis ili the coutntrv fromia which derived mLs lithwere entagaged ii a tr:iade or if hbliti .!'s tthat cotutry through it ixrtia 'netestablish lii1'lit. iii Article' VIII provides', on at reciproe'al basis, that Inotion-piitutr re'aitals derived front olt' oecoutrv by i president of the other country tIot e'tgagedl trade or in business t hrougha a pertnzitelt e'stablishmntnt in tile 1irst coutatry shall loe e'xemnapt front tax 1y thei first coutitry. (The exemption (dos not apply to the New Zealanad "firm Itire" tax.) Norway Articleh VII of the convention with Norway provides that royalties and other atmtouatts received for the right to u.se cop)yrighats, patents, etc. (iacludintg tmotionpictture rentals) shall lix exenmpt from tax by tle state of source. Thus, the recipient is not aaffordehd n ehle'ctiona as in the New Ze'aladl convention. There is a special provision, moreover, to the' effect that tile accountts of the payor mllay be adjusted (by disallowing at deduction of the antioutts paid) if the royalty or other amount paid is not considered to le' a "reasonaable' considerationt" for the use' of the property. It has lbeet mutuaitllv agreed by the' re'venute' authorities' of the respective countries (it) that siuch proviso will be' construed in the adianinistration of the coltaetation as not conferring power oln such authorities to finally determine whether all or portion of the p)aytiae'nt referred to above should be denied as a deduction to the payor thereof and (h) that satch payor has the right to appeal the issue to the appropriate judicial tribunal of the' country that, revenue authorities of which undertake to deny as a deduction such pataiyment or portion thereof. The' cotmmlaiittet' recOlnae'aaels cetotit e eif the provision il re'liatce upon this nlintual agreement. Article Vill provid(-e, as to incotlle front real p)ropxerty (liot including interest from ionds or mortgages se'cure!d by re'al proix'rty) atad rovaltit's front th'e opertiota of niinlt, quarries or natural rt'esources, derived by a re.sideltt or corporation eof one (cottlntry front sotarce's itl the other cot`uitry, that snich ai pelrsoln niay elect, to ix' subject to the tax of the country of source, ol a niett I)ais as tholigh such pirsoll we're entigaged it) ia trade or btIsiness through ia permanalaent e'stablishlmenta therein. The effect of this provision (ms it the' ctae of the New ZealanId and South Africatn conventioas) is to allow, for exmnpleh, thie' Norwegian taxpayer to e'lect either the United States withholding rate of :0 percent otil the gross amount of such royalties or rentals, or to have' the tax (letermineil oit tat bIasis, after deductions; and credits, respecting his entire gross intcomie' frona sources within the United Stat(e.s, Itncluding gross rentals or royalties4.

    (1600)

    Ireland I',hdr the conveilitiotn with Ireland (aert. VIII), rovallt ic and rental front
    ell ttre,,), are to w,exelimpt ropvyri.hts, piteat.,, tci. tinrludlifg reittalk of nioti at .ir . lR.vdltivs fr.om natural rosoltrcv. adl rent al from real lproixrtv which are hl ,l il(in Itnited States are to Im,sulhjeet vilther to i withhlding tax limited the

    it) 15 l-ercvte
    1hW ht.it,'d

    or Ireahed amif the recipient were engaged in attrade or buIie,.s iII

    States. The effect of this optioti is (li.mU.,,ed abtve' with r.'lj''ct to a i ,tlltb.sr provisioii in the' Norwegian andl SmOllth Africani c'vcletiotis. If tht ropert v troit hcleh tihe' retitai or rovalltis are, received is lohuated in Ircland and I1)the' recipi'l it it resiletnt of tihe Unlited States, (2) tht income is subject to Ui'te'd States tax, and (3) the recipiient is nIot eitgageet in a trade or biusine-ss in lrehuild. thei il(couine shall ie' exemtplnt from Irish sulrta:x. Greece

    The provisions of the convention with (reece (art. VII) with reIpect to the talt loll (of royalties provide a-i lth.s thlt Norwegian culotvent io)tl t hat such in(cotme ijtll I-v~'\tjlt at .otlrre. lIHe'ttals front tnotiiinot ie't tire fililns are sl'Nvifically ,'thed tromt theiol rat lhll of themse, p)rovisionlis. IUmler artric'l VIII rentats from real toropt atl lwtt ilral resollrce royalties mIlay be takeii ait sellrce on a net basis. Switzerland
    Articel VIII of tilhe Swis convention provides for exemption from tax ill either country of various royalties, including film rentals, derived from r-ourc' within that country by a r.iilehnt, corporationn, or other ewtity of the, other country ttot having a Iwrnlialicllt estaiblisilltlettt ill the colintry front which the royalt ie's are

    dierived. Article IX provihes (hat income fromn real pro wrty (inchlditig gains from the .Nalh or exchange of mich property lbut not incluling'interest front tnortgages or Ibonls secured by such )rowprty) and royalties from tilhe operation of inines, quarrit-s, or otheIr natural resources shall b4, taxable only ill the country were,
    such property or s-tch lines, quarries, or other latuiral resources are situatedl. LikMe corresponding provisions ill other tax convelntiolls describt'd above, article IX wou ld prmnit the' tax liability to be determined upon it net bi)sis.

    (10) Capilal gains


    The conventions with South Africa, New Zeiland, Norway, Greece, and Switzerland contain no provision for exemption from tax on1 capital gains. Article XIV of the Irish convention provideh4 that a resident of Ireland not engaged in a trade or business itt tile' United States shall be exeti)t from tile United States tax ott gains from the sale or exchange of capital assets. It will bxe recalled that section 213 of the Revenue Act of 1950 impo.ed at tax upon tile' net atltount of capital gailns derived froin sourceA wit hil the United States by a nonresident alien individual not engaged ill trade or 1)usinesm ill tite United States but tentporarily preset therein. Article XIV of the pelndinlg convention would, of course, override the latter antendltnet with resipect to residents of

    Ireland. A lprovIsion sinilair to that of th't Irish convetntiolt wis originally contained in the conventtions with the Netherlands and D)enmlark, but ott the reconilnendation of the Contmittee out Foreign Rtelations, was stricken out of each convention by the Senate. Those conventions, in each caw, sulbject to the re.strvationl here noted, were accepted by the Settate on June 17, 1948. The convention with Ireland was signed ott &ptember 13, 1949. The insistence of Ireland upon the exemption of its residents from the United States tax on capital gains ifs based on the fact that such aln exeml)tion is contained in the convention between the United States and the United Kingdotn. However, it should be' toted that the convention with the United Kingdom was ratified prior to the enactntent of the Ilevennue Act of 1950)and prior to the ratification of the conventions with Denmark and the Netherlands. Blecattse of the strong objections which have be'e raised previously ill the Congress'to the exemption of nonresident aliens from tax on their capital gains from the transactions entered into in the United States, the conlmittee recommends that article XIV of the convention with Ireland relating to income taxes be eliminated and proposes a reservation to that effect.

    (1601)

    (I1) Accumulated earnings and profit Article XVI of the convention with Ireland provides that an Irish corporation shall be exempt from United States tax on its accumulated or undistributed earnings, profits, income, or surplus, if individuals who are residents of Ireland control, directly or indirectly, throughout the later half of the taxable year, more than 50 percent of the entire voting power in the corporation. A similar article in the Netherlands convention was stricken out by the Senate. Similar articles are found only in the United Kingdom and Canadian conventions. In view of the fact that this article would give Irish corporations doing business In the United States a competitive advantage over domestic corporations, the committee recommends that the article be eliminated from the convention and proposes a reservation to that effect.

    (12) Credit for foreign taxes


    Under the credit provisions of the various conventions, the United States' while continuing to tax its citizens and corporations and residents as though the conventions had not come into effect, will during the lives of the respective conventions continue to credit against its income taxes for income taxes paid the other contracting states. This credit will be applied in accordance with section 131 of the Internal Revenue Code. The credit system is reciprocal. South Africa agrees (art. IV) to exclude from its income and excesis-profits tax base income from sources within the United States. This satisfies the similar credit requirement of section 131(a)(3) of the code. New Zealand, onl its-part, in effect adopts (art. XIII) the principle of the Internal Revenu Code. Norway and Ireland likewise adopt this principle. The Irish convention contains a spi-cial provision to the effect that income derived from sources in the United Kingdom by an individual who is resident in Ireland shall be deemed to be income from sources in Ireland if such income is not subject to United Kingdom income tax. This provision is necessitated by the existence of a tax arrangement between the United Kingdom and Ireland, dlated April 14, 1926. Under that arrangement, a resident of one of the countries not resident in the other country but deriving income from such other country is exempt from tax imposed by such other country. Thus, no credit for Irish tax [p. 114411 would be provided were it not for the special provision included in the pending convention with Ireland. Greece and Switzerland (art. XIV) have agreed to credit provisions substantially similar to those found in section 131 of the Internal Revenue Code. (18) Extension to other territories Article XX of the convention with New Zealand provides that either contracting state may, upon giving notice to the other, extend the application of the convention to all overseas territories or other territories over which it has international responsibility. (14.) EBchange of information Each of the six conventions provides for the exchange of information between the taxation authorities of the respective countries for the purposes of carrying on the provisions of the conventions, the prevention of fraud, and for other related purposes. (15) Mutual assistance in collection With the exception of the convention with Ireland, each of the conventions provides for mutual assistance and support in the collection of the taxes which are the subject of the convention concerned, together with interest, costs, and additions to taxes and fines not being of a penal character. Like provisions are, found in the French, Netherlands, Danish, and Swedish conventions but not in the treaties with the United Kingdom and Canada. As in the case of the estate-tax conventions discussed earlier in this report, the committee believes that the collection provisions of the South African, Greek, and

    Norwegian income-tax conventions are too broad, and it repeats that, as a general rule, it is riot believed wise to have one government collect the taxes which are due to another government. The New Zealand and Swiss conventions contain 5 more limited provision, and the committee recommends that the other conventions be similarly limited. Thus, the committee recommends the acceptance of the collection provisions of the South African, Greek, and Norwegian income-tax conventions subject to the understanding that each of the governments may collect the other s tax solely in order to Insure that the exemptions or reduced

    (1602)

    rates of tax provided under the respective conventions will not be enjoyed by ersons not entitled to such benefits. (It) E'ffectsve dates The conventions with Norway and Greece shall be effective for taxable years beginning on or after the Ist day of January of the year in which the exchange of inst runents of ratification occurs. The conveition with South Africa is made effective on the Ist day of July 1916, and is applicalble to income arising on or after that date The convention with New Zealand shall be effective, with respect to United States taxes, for taxable years beginning on or after Jmnuary I of the calendar year in which the exchange of instruments of ratification occurs, and, with respect to New Zealand taxes, for the year of asst-ssment beginning on the Ist day of April next following the calendar year in which such exchange occurs. The effective date of the convention with Ireland is substantially the samne as that of the New Zealand convention. However, inasmuch as tire are sniall differences with respect to thlie Irish income tax, the Irish surtax, and the Irish corporation-profits tax, attention is invited to the convention proper for the details of their respective effective dates. The Swiss convention provides that the convention shall have effect for taxable years beginning on or after January 1 of the year in which the exchange of instruments of ratification takes place, except that, if such exchange takes place on or after October 1, paragraphs (I) and (3) of article VI and article VII shall have effect only for taxable years beginning on or after January I of tile year next following the year in which such exchange takes place. It is provided also that the convention shall continue effective for 5 years beginning with the calendar year in which the exchange of instruments of ratification takts place and indefinitely thereafter, but may be terminated by either country at the end of that 5year period or at any time thereafter by giving at least 6 months' prior notice of termination, in which event the convention shall cease to be effective for taxable years beginning on or after January I next following the expiration of the 6-month period. [P. 114-56 IRELAND-CONVENTION FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT

    TO TAXES ON INCOME The Senate, as in Committee of the Whole, proceeded to consider


    the convention (Executive F, 81st Cong., 2d sess.), a convention be-

    tween the United States of America and Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to
    taxes on income, signed at Dublin, Ireland, on September 13, 1949,

    which was read the second time, as follows: (Text of convention) [P. 114581 The PRESIDING OFFICER. The convention is before the Senate and open to amendment. If there be no amendment to be proposed, the convention will be reported to the Senate. I[he convention was reported to the Senate without amendment. The PRESIDING OFFICER. The resolution of ratification with the reservations will be read. The Chief Clerk read as follows:
    Resolved (two-thirds of the Senators present concurringtherein), That the Senate advise and consent to the ratification of executive F Eighty-first Congres, second session, the convention between the United States and Ireland, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on Income, subject to the following reservations: The Government of the United States of America does not accept article XIV of the convention, relating to the exemption of residents of Ireland from United States tax on capital gains.

    (1603)

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    TSOJWO 42 tI,2- - N 2

    (Imr))

    TI3ATIRS AND OTHEI

    INTERNATIONAL ACTS

    EMRIES 2880

    DOUBLE TAXATION
    Taxes on Income Convention between the
    UNITED STATES OF AMERICA

    and IRELAND
    * Signed at Dublin September 13, 1949 * Ratification advised by the Senate of the United States of America September 17, 1951, with reservations * Ratified by Ireland December 10, 1951 * Ratified by the United States of America December 13, 1951, subject to the said reservations * Ratifications exchanged at Washington December 20, 1951 * Proclaimed by the President of the VJnited States of America December 24, 1951 * Entered into force December 20, 1951

    and
    Protocol of Exchange
    * Signed at Washington December 20, 1951

    (1607)

    DEPARTMENT OF STATE
    PV5ucATvor 4475

    [Literal print]

    (1608)

    By Tnz PREsizNT or FTu- UmTED STATES or AMERICa

    A PROCLAMATION Wmmuis a convention between the United States of America and Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income was signed at Dublin on September 18, 1949, the original of the said convention being word for word as follows:

    (1) (1609)

    CONVENTION
    between

    THE GOVERNMENT OF THE UNITED STATES OF AMERICA and THE GOVERNMENT OF IRELAND for THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

    (8)
    (1611)

    CONVENTION between THE GOVERNMENT OF THE UNITED STATES OF AMERICA and THE GOVERNMENT OF IRELAND for THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME The Government of the United States of America and the Government of Ireland, Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, Have appointed for that purpose as their Plenipotentiaries: The Government of the United States of America: George A. Garrett, Envoy Extraordinary and Minister Pleni. potentiary of the United States of America at Dublin; The Government of Ireland: Patrick McGilligan, Minister for Finance; Sefn MacBride, Minister for External Affairs; Who, having exhibited their respective full powers, found in good and due form, have agreed as follows :ARiTCL I

    (1) The taxes which are the subject of the present Convention are :(a) In the United States of America: The Federal income taxes, including surtaxes (hereinafter referred to as United States tax).
    (5)

    (16131

    TIAS 35

    (b) In Ireland:
    The income tax (including surtax) and the corporation profits
    tax (hereinafter referred to as Irish tax). (2) The present Convention shall also apply to any other taxes of a substantially similar character imposed by either Contracting Party subsequently to the date of signature of the present Convention.
    ARICLrE II

    (1) In the present Convention, unless the context otherwise requires (a) The term "United States" means the United States of America, and when used in a geographical sense means the States, the Territories of Alaska and of Hawaii, and the District of Columbia. (b) The term "Ireland" means the Republic of Ireland and the term "Irish" has a corresponding meaning. (c) The terms "territory of one of the Contracting Parties" and "territory of the other Contracting Party" mean the United

    States or Ireland as the context requires. (d) The term "United States corporation" means a corporation,
    association or other like entity created or organised in or under the laws of the United States. (e) The term "Irish corporation" means any kind of juridical
    person created under the laws of Ireland. (f) The terms "corporation of one Contracting Party" and "corporation of the other Contracting Party" mean a United States corporation or an Irish corporation as the context requires. (g) The term "resident of Ireland" means any person (other than a citizen of the United States or a United States corporation) who is resident in Ireland for the purposes of Irish tax and not resident in the United States for the purposes of United States tax. A corporation is to be regarded as resident in Ireland if its business is managed and controlled in Ireland. (h) The term "resident of the United States" means any individual who is resident in the United States for the purposes of United States tax and not resident in Ireland for the purposes of Irish tax, and any United States corporation and any partnership created or organised in or under the laws of the United States, being a corporation or partnership which is not resident in Ireland for the purposes of Irish tax. (i) The term "Irish enterprise" means an industrial or commercial enterprise or undertaking carried on by a resident of Ireland. (1614)

    TIAS 8H

    (j) The term "United States enterprise" means an industrial or commercial enterprise or undertaking carried on by a resident of the United States. (k) The terms "enterprise of one of the Contracting Parties" and "enterprise of the other Contracting Party" mean a United States enterprise or an Irish enterprise, as the context requires. (1) The term "permanent establishment" when used with respect to an enterprise of one of the Contracting Parties means a branch, management, factory or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. An enterprise of one of the Contracting Parties shall not be deemed to have a permanent establishment in the territory of the other Contracting Party merely because it carries on business dealings in the territory of such other Contracting Party through a bona fide commission agent or broker acting in the ordinary course of his business as such. The fact that an enterprise of one of the Contracting Parties maintains in the territory of the other Contracting Party a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute such fixed place of business a permanent establishment of such enterprise. The fact that a corporation of one Contracting Party has a subsidiary corporation which is a corporation of the other Contracting Party or which is engaged in trade or business in the territory of such other Contracting Party (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary corporation a permanent establishment of its parent corporation. (2) For the purposes of Article VI, VII, VIII, IX and XIV a resident of Ireland shall not be deemed to be engaged in trade or business in the United States in any taxable year unless such resident has a permanent establishment situated therein in such taxable year. The same principle shall be applied, mutatie mutandii, by Ireland in the case of a resident of the United States. (8) In the application of the provisions of the present Convention by one of the Contracting Parties any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting Party relating to the taxes which are the subject of the present Convention.

    (1615)

    TIAS 23&58

    8
    ARwTi.rlE III

    (1) An Irish enterprise shall not be subject to United States tax in ivsptct of its indistrial or commercial profits unless it is engaged in trade or business in the United States through a permanent establishment situated therein. If it is so engaged, United States tax may be imposed upon the entire income of such enterprise from all sources within the United States. (2) A United States enterprise shall not be subject to Irish tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Ireland through a permanent establishment situated therein. If it is so engaged, Irish tax may be imposed upon the entire income of such enterprise from all sources within Ireland. (3) Where an enterprise of one of the Contracting Parties is engaged in trade or business in the territory of the other Contracting Party through a permanent establishment situated therein, there shall he attributed to such permanent establishment the industrial or conimercial profits which it might be expected to derive if it were ail independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment, and tlhe profits so attributed shall. subject to the law of such otber Contracting Party, be deemed to be income front sources within the territory of such other Contracting Party. (4) In determining the industrial or commercial profits froui Sources within the territory of one of the Contracting Parties of an enterprise of the other Contracting Party, no profits shall I6,
    deemed fo arise from the mere purchase of goods or merchandise,

    within the territory of the former Contracting Party by such enterprise.


    ARTICLE IV

    Where an enterprise of one of the Contracting Parties, by reason (f its participation in the management, control or capital of an enterprisze of the other Contracting Party, makes with or imposes on the
    latter, in their commercial or financial relations, conditions different from those which would be made with an independent enterprise,

    any profits which would normally have accrued to one of the enterprises but by reason of those conditions have not so accrued, may be

    included in the profits of that enterprise and taxed accordingly.

    (1616)

    9
    Awricij V

    TIAS 285

    1934. [1]

    (1) Notwithstanding the provisions of Articles III and IV of the present Convention, profits which an individual resident of Ireland or an Irish corporation derives from operating ships documented or aircraft registered under the laws of Ireland, shall be exempt from United States tax. (2) Notwithstanding the provisions of Articles III and IV of the present Convention, profits which a citizen of the United States not resident in Ireland or a United States corporation derives from operating ships documented or aircraft registered under the laws of the United States, shall be exempt from Irish tax. (3) This Article shall not be deemed to affect the arrangement between Ireland and the United States, providing for reciprocal exemption of shipping profits from income tax, effected between the Government of the United States and the Goverrunent of Ireland by exchange of Notes dated August 24, 1933, and January 8,
    AJinTCL VI

    (1) The rate of United States tax on dividends derived from a United States corporation by a resident of Ireland who is subject to Irish tax on such dividends and not engaged in trade or business in the United States shall not exceed 15 per cent: provided that such rate of tax shall not exceed five per cent if such resident is a corporation controlling, directly or indirectly, at least 95 per cent of the entire voting power in the corporation paying the dividend, and not more than 25 per cent of the gross income of such paying corporation is derived from interest and dividends, other than interest *and dividends received from its own subsidiary corporations. Such reduction of the rate to five per cent shall not apply if the relationship of the two corporations has been arranged or is maintained primarily with the intention of securing such reduced rate. (2) Dividends derived from sources within Ireland by an individual who is (a) a resident of the United States, (b) subject to United States tax with respect to such dividends, and (c) not engaged in trade or business in Ireland, shall be exempt from Irish surtax. (3) Either of the Contracting Parties may terminate this Article by giving written notice of termination to the other Contracting Party, through diplomatic channels, on or before the thirtieth day of June in any calendar year after the calendar year in which the
    'Executive Agreement Series 56; 48 Stat. 1842.

    (1617)

    TIAS 2e1

    10

    exchange of the instruments of ratification takes place and in such event paragraph (1) hereof shall cease to be effective as to United States tax ou and after the first day of January, and paragraph (2) hereof shall cease to be effective as to Irish tax on and after the 6th day of April, in the calendar year next following that in which such notice is given.
    A~rncLE VII

    (1) Interest (on bonds, securities, notes, debentures, or on any other form of indebtedness) derived from sources within the United Stato by a resident of Ireland who is subject to Irish tax on such interest and not engaged in trade or business in the United States, shall be exempt from United States tax; but such exemption shall not apply to such interest paid by a United States corporation to a corporation resident in Ireland controlling, directly or indirectly, more than 50 per cent of the entire voting power in the paying corporation. (2) Interest (on bonds, securities, notes, debentures, or on any other form of indebtedness) derived from sources within Ireland by a resi. dent of the United States who is subject to United States tax on such interest and not engaged in trade or business in Ireland, shall be exempt from Irish tax; but such exemption shall not apply to such interest paid by a corporation resident in Ireland to a United States corporation controlling, directly or indirectly, more than 50 per cent of the entire voting power in the paying corporation. AirricLz VIII (1) Royalties and other amounts paid as consideration for the use of, or for the privilege of using, copyrights, patents, designs, secret processes and formulae, trademarks, and other like property, and derived from sources within the United States by a resident of Ire. land who is subject to Irish tax on such royalties or other amounts and not engaged in trade or business in the United States, shall be exempt from United States tax. (2) Royalties and other amounts paid as consideration for the use of, or for the privilege of using, copyrights, patents, designs, secret processes and formulae, trademarks, and other like property, and derived from sources within Ireland by a resident of the United States who is subject to United States tax on such royalties or other amounts and not engaged in trade or business in Ireland shall be exempt from Irish tax. (3) For the purposes of this Article, the term "royalties" shall be deemed to include rentals in respect of motion picture films.

    (1618)
    '.4

    11 Amroi IX

    TIA8 28M

    (1) The rate of United States tax on royalties in respect of the operation of mines or quarries or of other extraction of natural resources, and on rentals from real property or from an interest in such property, derived from sources within the United States by a resident of Ireland who is subject to Irish tax with respect to such royalties or rentals and not engaged in trade or business in the United States, shall not exceed 15 per cent: provided that any such resident may elect for any taxable year to be subject to United States tax as if such resident were engaged in trade or business in the United States. (2) Royalties in respect of the operation of mines or quarries or of other extraction of natural resources, and rentals from real property or from an interest in such property, derived from sources within Ireland by an individual who is (a) a resident of the United States, (b) subject to United States tax with respect to such royalties and rentals, and (c) not engaged in trade or business in Ireland, shall be exempt from Irish surtax.
    Arznoz X

    (1) Any salary, wage, similar remuneration, or pension, paid by the Government of the United States to an individual (other than a citizen of Ireland who is not also a citizen of the United States) inrespect of services rendered to the United States in the discharge of governmental functions, shall be exempt from Irish tax. (2) Any salary, wage, similar remuneration, or pension, paid by the Government of Ireland to an individual (other than a citizen of the United States who is not also a citizen of Ireland) in respect of -ervices rendered to Ireland in the discharge of governmental functions, shall be exempt from United States tax. (3) The provisions of this Article shall not apply to payments in respect of services rendered in connection with any trade or business carried on by either of the Contracting Parties for purposes of profit.
    ARTIcLE XI

    (1) An individual who is a resident of Ireland shall be exempt from United States tax upon compensation for personal (including professional) services performed during the taxable year within the United States if (a) he is present within the United States for a period or periods not exceeding in the aggregate 183 days during such taxable year, and (b) such services are performed for or on behalf of a person resident in Ireland.

    (1619)

    TIAS 23H

    12

    (2) An individual lho is a resident of the United Stath.s shall bw exempt from Irish tax upon profits, emoluments or other remuneration in reswect of lpersonal (including j)rofessional) services performed within Ireland in uny year of asse-%snent. if (it) he is present within Ireland for a period or Ixrioils not exceeding in the aggregate 183 days during that year, and (b) such services are lierformed for or on behalf of a plerson resident in the United States. Awrcia XII (1) Any pension (other thall a pension to which Article X applies), and any life annuity, derived from sources within the United States by an individual who is a resident of Ireland shall be exempt front United States tax. (2) Any pension (other than a pension to which Article X applies), and any life annuity, deriveAi from sources within Ireland by ain individual who is at resident of the United States shall be exempt from Irish tax. (3) The terin "life annuity" means a stated sum payable periodically at 4t4tated times, during life or during a specified or ascertaiinable period of time, under an obligation to make the payments in consideration of money paid. ArTcLE XIII (1) Subject to section 131 of the United States Internal Revenue Code [1] as in effect on tOle day on which this Convention shall have come into effect, Irish tax shall be allowed as a credit against United States tax. For this purlo)se, the recipient of a dividend paid by a corporation which is a resident of Ireland shall be deemed to have paid the Irish income tax ajpjropriate to such dividend if such recipient elects to include in his gross income for the purl)oses of United States tax the amount of such Irish income tax. For the purposes only of this Article, income derived from sources in the United Kingdom by an individual who is resident, in Ireland shall be deemed to be income from sources in Ireland if such income is not subject to United Kingdom income tax. (2) Subject to such provisions (which shall not affect the general principle hereof) as may be enacted in Ireland, United States tax payable in respect of income from sources within the United States shall be allowed as a crel.dit against any Irish tax payable in respect of that income. Where such income is an ordinary dividend paid by
    '21 U.S. C. 1131.

    (1620))

    13

    TIAS 235W

    a United States corporation, such credit slhall take into account (ii

    addition to any United States income tax deducted from or imposed


    oo stich dividend) the United States income tax imposed oil such

    corporation in reSlect of its profits, and where it is a dividend paid on

    participating preference shares and representing both a dividend at the fixed rate to which the shares are entitled and an additional larticipation in profits, such tax on profits shall likewise be taken into account in so far as the dividend exceeds such fixed rate. (3) For the purposes of this Article, compensation, profits, emolumemits and other remtneration for personal (including professional) services shall be deenied to 1) income from sources within the territory of the Contracting Party where such services are performed.
    AwrIcmr XIV A resident of Ireland not engaged in trade or business in the United States shall be exempt from United States tax on gains from the sale or exchange of capital assets.
    Ajt-ICLV, XV

    (1) Dividends and interest paid, on or after the first day of January in the calendar year in which the exchange of instruments of ratification takes place, by an Irish corporation shall be exempt from United States tax except where the recipient is at citizen of or a resident in the United States or a United States corporation. (2) Dividends and interest paid, on or after the 6th day of April of the first year of assessment specified in Article XXII (2) (b) (i) of this Convention, by a United States corporation shall be exempt from Irish tax except where the recipient is a resident of Ireland. ARicuy XVI An Irish corporation shall be exempt from United States tax on its accumulated or undistributed earnings, profits, income or surplus, if individuals who are residents of I reland control, directly or indirectly,

    throughout the latter half of the taxable year, more than 50 per cent of the entire voting power in such s'orporation.
    ARTICLE, XVII

    (1) The United States income tax liability for any taxable year bWginning prior to January 1, 1936, of any individual (other than a citizen of the United States) resident in Ireland, or of any Irish corporation, remaining unpaid on the date of signature of the present

    730)5 0-62 -vol. 2- -

    ( (1621,)

    TIJA82

    14

    Convention, may be adjusted on a basis satisfactory to the United States Commissioner of Internal Revenue: provided that the amount to be paid in settlement of such liability shall not exceed the amount of the liability which would have been determined if (a) the United States Revenue Act of 1936 [1] (except in the case of an Irish corporation in which more than 50 per cent of the entire voting power was controlled, directly or indirectly, throughout the latter half of the taxable year, by citizens or residents of the United States), and (b) Articles XV and XVI of the present Convention, had been in effect for such year. If the taxpayer was not, within the meaning of such Revenue Act, engaged in trade or business in the United States and had no office or place of business therein during the taxable year, the amount of interest and penalties shall not exceed 50 per cent of the amount of the tax with respect to which such interest and penalties have been computed. (2) The United States income tax unpaid on the date of signature of the present Convention for any taxable year beginning after the thirty-first day of December, 1935, and prior to the first day of January in the calendar year in which the exchange of instruments of ratification takes place in the case of an individual resident of Ireland, or in the case of any Irish corporation shall be determined as if the provisions of Article XV and XVI of the present Convention had been in effect for such taxable year. (3) The provisions of paragraph (1) of this Article shall not
    apply -

    (a) unless the taxpayer files with the Commissioner of Internal Revenue on or before the thirty-first day of December of the second calendar year following the calendar year in which the exchange of the instruments of ratification takes place a request that such tax liability be so adjusted and furnishes such information as the Commissioner may require; or (b) in any case in which the Commissioner is satisfied that any deficiency in tax is due to fraud with intent to evade the tax.
    Airricja. XVIII

    A professor or teacher from the territory of one of the Contracting


    Parties who visits the territory of the other Contracting Party for the purpose of teaching, for a period not exceeding two years, at a 149 Stat. 1648.

    (1622)

    15

    TIAS 2856

    university, college, school or other educational institution in the territory of such other Contracting Party shall be exempted by such other Contracting Party from tax on his remuneration for such teaching for such period. AR'ICLE. XIX A student or business apprentice from the territory of one of the Contracting Parties who is receiving full-time education or training in the territory of the other Contracting Party shall be exempted by such other Contracting Party from tax on payments made to him by persons within the territory of the former Contracting Party for the purposes of his maintenance, education or training.
    ARTICLE XX

    (1) The taxation authorities of the Contracting Parties shall exchange such information (being information available under the respective taxation laws of the Contracting Parties) as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any person other than those concerned with the assessment and collection of the taxes which are the subject of the present Convention. No information shall be exchanged which would disclose any trade secret or trade process. * (2) As used in this Article, the term "taxation authorities" means, in the case of the United States, the Commissioner of Internal Revenue or his authorised representative and, in the case of Ireland, the Revenue Commissioners or their authorised representative.
    ARTICLE XXI

    (1) The nationals of one of the Contracting Parties shall not, while resident in the territory of the other Contracting Party, be subjected therein to other or more burdensome taxes than are the nationals of such other Contracting Party resident in its territory. (2) The term "nationals" as used in this Article means (a) in relation to Ireland, all citizens of Ireland; and (b) in relation to the United States, United States citizens; and includes all legal persons, partnerships and associations deriving their status as such from, or created or organized under, the laws in force in any territory of the Contracting Parties to which the present Convention applies.

    (1623)

    TIAS 2356

    16
    AmRToLz XXII

    (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged at Washington, District of Columbia, as soon as possible. (2) Upon exchange of ratifications, the present Convention shall
    have effect -

    (a) as respects United States tax, for the taxable years beginning on or after the first day of January in the calendar year in which the exchange of instruments of ratification takes place; (b) (i) as respects Irish income tax, for the year of assessment beginning on the 6th day of April in the calendar year in which the exchange of instruments of ratification takes place and subsequent years; (ii) as respects Irish surtax, for the year of as. sessment beginning on the 6th day of April immediately preceding the calendar year in which the exchange of instruments of ratification takes place, and subsequent years; and (iii) as respects Irish corporation profits tax, for any chargeable accounting period beginning on or after the first day of April in the calendar year in which the exchange of instruments of ratification takes place, and for the unexpired portion of any chargeable accounting period current at that date.
    AmTCLE XXIII

    (1) The present Convention shall continue in effect indefinitely but either of the Contracting Parties may, on or before the 30th day of June in any calendar year following the calendar year in which the exchange of instruments of ratification takes place, give to the other Contracting Party, through diplomatic channels, notice of termination and, in such event, the present Convention shall cease to be
    effective -

    (a) as respects United States tax, for the taxable years beginning on or after the first day of January in the calendar year next following that in which such notice is given; (b) (i) as respects Irish incotne tax, for any year of assessment beginning on or after the 6th day of April in the calendar year next following that in which such notice is given; (ii) as respects Irish surtax, for any year of assessment beginning on or after the 6th day of April in the calendar year in whichsuch notice is given; and (iii) as respects Irish corporation profits tax, for any chargeable accounting period beginning on or after the first day of April in the calendar year next following that

    (1624)

    17

    TIAS 2856

    in which such notice is given and for the unexpired portion of any chargeable accounting period current at that date. (2) The termination of the present Convention or of any Article thereof shall not have the effect of reviving any treaty or arrangement abrogated by the present Convention or by treaties previously con. eluded between the Contracting Parties. Nh WITNESS WHEREOF the above-named Plenipotentiaries have signed the present Convention and have affixed thereto their seals. Done at Dublin, in duplicate, this 13th day of September, 1949. For the Government of the United States of America:
    GEOROE A. GARRELTT

    For the Government of Ireland: P. MoGILLIOAN. SEA"N MAcBmDia

    [SEAL]

    [SEAL]

    (1625)

    TIAS 2356

    18

    AND WHEREAS the Senate of the United States of America by their

    resolution of September 17, 1951, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid convention subject to reservations as follows: "The Government of the United States of America does not ac. cept Article XIV of the convention, relating to the exemption of residents of Ireland from United States tax on capital gains. "The Government of the United States of America does not accept Article XVI of the convention, relating to the exemption of Irish corporations from United States tax on accumulated or undistributed earnings, profits, income or surplus.";
    AND WIIEREAS the texts of the aforesaid reservations were commiu-

    nicated by the Government of the United States of America to the Government of Ireland and the aforesaid reservations were accepted by the Government of Ireland; AND WHEREAS the aforesaid convention was duly ratified by the President of the United States of America on December 13, 1951, in pursuance of the aforesaid advice and consent of the Senate and subject to the aforesaid reservations, and the aforesaid convention was duly ratified on the part of Ireland; AND WHEREAS the respective instruments of ratification of the aforesaid convention were duly exchanged at Washington on December 20, 1951, and a protocol of exchange was signed at that place and on that date by the respective Plenipotentiaries of the United States of America and Ireland, the said protocol containing a statement that it is understood by the two Governments that the aforesaid convention, upon entry into force in accordance with its provisions, is modified in accordance with the aforesaid reservations, so that, in effect, Article XIV and Article XVI of the aforesaid convention are deemed to be deleted; AND WHEREAS it is provided in Article XXII of the aforesaid convention that, upon the exchange of ratifications, the convention shall have effect (a) as respects United States tax, for the taxable years beginning on or after the first day of January in the calendar year in which the exchange of instruments of ratification takes place, and (b) (i) as respects Irish income tax, for the year of assessment beginning on the 6th day of April in the calendar year in which the ex*change of instruments of ratification takes place and subsequent years; (ii) as respects Irish surtax, for the year of assessment beginning on the 6th day of April immediately preceding the calendar year in which the exchange of instruments of ratification takes place,

    (1626)

    19

    TIAS 2=5

    and subsequent years; and (iii) as respects Irish corporation profits tax, for any chargeable accounting period beginning on or after the first day of April in the calendar year in which the exchange of instruments of ratification takes place, and for the unexpired portion of any chargeable accounting period current at that date; Now, THORE, be it known that I, Harry S. Truman, President of the United States of America, do hereby proclaim and make public the aforesaid convention to the end that the said convention and each and every article and clause thereof, subject to the aforesaid reservations, may be observed and fulfilled with good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. IN TESTMONY WHEREOF, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. DONE at the city of Washington this twenty-fourth day of December in the year of our Lord one thousand nine hundred [SEAL] fifty-one and of the Independence of the United States of America the one hundred seventy-sixth. HARRY S TRUMAN By the President: DurN Acil.soN Secretary of State

    (1627)

    PROTOCOL OF EXCHANGE The undersigned, Dean Acheson, Secretary of State of the United States of America, and John Joseph Hearne, Ambassador Extraor. dinary and Plenipotentiary of Ireland to the United States of America, being duly authorized thereto by their respective Governments, have met for the purpose of exchanging the instruments of ratification by their respective Governments of the convention between the United States of America and Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Dublin on September 13, 1949, and, the respective instruments of ratification of the convention aforesaid having been compared and found to be in due form, the exchange took place this day. The Senate of the United States of America, in its resolution of September 17, 1951, advising and consenting to the ratification of the convention aforesaid, expressed certain reservations with respect thereto, as follows: "The Government of the United States of America does not accept Article XIV of the convention, relating to the exemption of residents of Ireland from United States tax on capital gains. "The Government of the United States of America does not accept Article XVI of the convention, relating to the exemption of Irish corporations from United States tax on accumulated or undistributed earnings, profits, income or surplus." The texts of the said reservations were communicated by the Government of the United States of America to the Government of Ireland. The Government of Ireland has accepted the said reservations. Accordingly, it is understood by the two Governments that the said convention, upon entry into force in accordance with its provisions, is modified in accordance with the said reservations, so that, in effect, Article XIV and Article XVI of the convention aforesaid are deemed to be deleted.

    (20)

    (1628)

    21
    IN wmNESm wHEzoE,

    TIAS 238

    the respective Plenipotentiaries have signed

    the present Protocol of Exchange. DoNE in duplicate at Washington this twentieth day of December, 1951.
    FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA: DEAN AcHESON FOR THE GOVERNMENT OF IRELAND:

    JOHN J. HEANz.

    (1629)

    ~Aq

    SECTION 14 Convention With ISRAEL

    (1631)

    INCOME TAX CONVENTION BETWEEN THE UNITED STATES AND ISRAEL

    September 30, 1960..-.. Signed at Washington. January 10, 1961 ------ Received by Senate; designated Executive B, 87th Congress, 1st Session (107 Congressional Record 440 (daily edition)). January 11, 1961 ------ Injunction of secrecy removed (107 Congressional Record 543-544 (daily edition)). [Convention pending before United States Senate as of date of preparation of this document]

    (1632)

    CONTENTS OF' SECTION 14


    I. Presidential Message of Transmittal to Senate (including text of
    convention) ...------------------------------------------------

    Page
    1635

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    PresidentialMessage of Transmittal to Senate (including materials enclosed therewith)

    (1635)

    87Tu1

    CONGRESS

    SENATE

    EXECUTmIY

    14t 8exgion

    jB

    CONVENTION WITH ISRAEL

    MESSAGE
    nOM

    THE PRESIDENT OF THE UNITED STATES


    TRANSMITMINO

    A CONVENTION BETWEEN TIlE UNITED STATES OF AMERICA AND ISRAEL FOR THE AVOIDANCE OF DOUBLE TAXATION OF INCOME AND FOR TIHE ENCOURAGEMENT OF INTERNATIONAL TRADE AND INVESTMENT, SIGNED AT WASHINGTON ON SEPTEMBER 30, 1960 JANUARY I1, 1961.-Convention was read the first time and the injunction of secrecy was removed therefrom. The treaty, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    ratification, I transmit herewith a convention between the United States of America and Israel for the avoidance of double taxation of
    income and for the encouragement of international trade and invest-

    January 10, 1961. States: To the Senate of the United With a view to receiving the advice and consent of the Senate to

    THE

    WHITE HousE,

    memit., signed at Washington on September 30, 1960. I transmit adso for the information of the Senate the report by the Secretary of State with respect to the proposed convention. The convention has the approval of the Department of State and the Department of the Treasury. DWIGHT D. EISENHOWER. (Enclosures: (1) Report by the Secretary of State; (2) income tax convention with Israel, signed September 30, 1960.)
    78095 0-42--vol. f-t 10

    (1687)

    CONVENTION WITH ISRAEL

    DEPARTMENT OF STATE, llashiigton, January 6, 1961. The PRESIDENT,

    The While lHo use; The undersigned, the Secretary of State, has the honor to submit, to the lPresident, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the President approve thereof, a convention between the United States of America and Israel for the avoidance of double taxation of income and for the encouragement, of international trade and, invest, nent, signed at Washington on September 30, 1960. The convention was formulated as a result of technical discussions between representatives of this Government. and representatives of the

    determine the lmses upon which agreement might be reached for the purpose of eliminating double taxation, removing impediments to
    international trade and investment, and establishing certain procedures for mutual administrative assistance, in regard to taxes on

    Government of Israel, in the course of which an effort was made to

    States and other countries. Income tax conventions are now in force between the United States and Australia, Austria, Belgium,

    income. The convention with Israel follows closely the pattern of most of the income tax conventions presently in force between the United

    Canada, D)enmark, Finland, France, Federal Republic of Germany, Greece, londuras, Ireland, Italy, Japan, Netherlands, New Zealadl, Norway, Pakistan, Sweden, Switzerland, Union of South Africa, and United Kingdom. An income tax agreement. with India is now under
    conlsideration in the Senate.

    provision in the convention witvi Israel not found in other income tax conventions is a provision under which the United States wouhl take a limited but, important. step toward avoiding nullification of the efforts of a foreign (ountry to encourage industrial development through its tax law. This is the so-called tax-sparing provision, under which the IUnited States, in the ease of income derived by American enterprises from operations in Israel, would give recognition to certain tax incentives offered by Israel to promote capital investment and economic development. The provision, contained in article XV, would allow a credit, against United States tax for certain tax exenm ptin tions or reductions granted by Israel to attract new investment. the absence of such a provision the credit allowed under existing United States law for taxes paid by an American enterprise to Israel would he diminished as the Israeli tax is reduced and the tax liability of the enterprise to the United States would be increased commensurately. Tlhis amounts to a nullification of the Israeli tax concessions. The tax-sparing provision in the convention would remedy this sit nation within reasonable limits.

    As in the cases of similar conventions, the convention with Israel contains provisions relating to business and investment income, personal service (including p)rofemsional) income, official salaries, pensions and annuities, remuneration received by teachers, and remittances or grants to students and apprentices. It also contains, as is customary, provisions regarding administrative procedures, including exchange of information, for giving effect to the convention. As in the case of the pending agreement with India, the principal

    (1688)

    CONVENTION WITH ISRAEL3

    Article I specifies tile taxes which are the subject. of the convention, namely, the Federal income taxes, including surtaxes, imposed inl the
    UnitedI States and the corresponding taxes imposed in Israel. Article It contains definitions of terms found in tile convention, including a definition of "''erian(ent establishlncnt" along the lies

    of the definition contained in other income tax conventions. Articles IlI and IV contain provisions relating to the taxation of industrial or commercial profits. Article V applies the principle of reciprocal exemption of profits derived from the operation of ships or aircraft. Article VI, applying in effect the principle of reciprocity, contains provisions relating to exemption of divide end income from tax on specified conditions. Article VII, relating to taxes on interest, is restricted in its application to interest derived front sources within one of the countries by banks and other financial institutions in the other country. Article VIII contains provisions relating to taxation of royalties. The rate of tax at the source on industrial and similar royalties is reduced to 15 percent. There is at reciprocal tax exemption with
    respect to royalties for the use of copyrightts or the right, to produce or reproduce literary, dramatic, Musical or artistic works (not inciluding rentals in respect of motion picture fihls). The reduction in the case of industrial and similar royalties and the exemption in the case of cultural royalties are conditioned upon the nonexistence in the country of source of a permanent. establishment of the recipient of the royalty. Article IX'contains tile provisions with respect. to income from real property and income front natural resource royalties, granting the right of election illthe case of iaresident or corporation of one of tlie countries deriving such income front the other country to be taxed by such other country on a net basis. "Article X contains provisions, similar to those found in other tax coivellitionls to which tile United States is a party, relating to earned

    income, granting upon certain conditions exemption from tax upon


    compensation for personal (including professional) services. Article XI contains the provisions relating to exemption from tax on (a) salaries, wages, and similar compensation, and pensions paid by the Governments and (b) private pensions ntitd annuities. Article XII, relating to the exemption on certain conditions front income arising from research as well as income from teaching. Article XIII contains the provisions relating to exemption front tax on remittances or grants to students and apprentices. Paragraph (1) provides that a resident of one country may go to the other country its a student at, a recognized college or "other institution of learning, or as a business apprentice or recipient, of a grant, allowance, or award and be exempt. as to the grant, allowance, or award and as to remuneration for employment, if any. Paragraph (2) provides a reciprocal exemption for individuals seeking to acquire technical or business experience, subject to certain limitations. Paragraph (3) provides that a resident of one country who goes to the other country temporarily under arrangements with the Government of such other country solely for the purpose of training, research, or study shall be exempit from tax in such other country on remuneration (up to $8,000

    tax on the remuneration of teachers, extends the exemption to earned

    (1639)

    CONVENTION WITH ISRAEL

    or its equivalent in Israeli currency) received in respect of such training, research, or study. This has practical application only as applied to residents of Israel who are invited to the United States by this Government for such purposes. Article XIV contains rules with respect to sources as applied to interest, merchandising, and manufacturing profits, income from real property, earned income,. and industrial and similar royalties. The counterpart of these provisions is found only in the conventions with Honduras and Japan. The provisions are designed to harmonize the laws of the two countries in such important fields as purchase, production, and manufacturing and the sale of goods. Article XV contains the credit provisions, including the so-called tax-sparing provision, mentioned hereinbefore. Articles XVI, XVII, XVIII, and XIX contain administrative provisions, corresponding closely to such provisions in other tax conventions to which the United States is a party. Article XX provides for ratification and for exchange of instruments of ratification. It prescribes that, upon such exchange, the conven. tion shall have effect (a) as respects United States tax, for taxable years beginning on or after January I of the year in which the exchange occurs and (b) as respects Israeli tax, for the tax years beginning on or after April 1 of the year in which the exchange occurs. Article XXI provides that either party may terminate the convention at any time after a period of 5 years has elapsed from the date of entry into force, such party to give to the other party a notice for that purpose on or before June 30, in which event the convention shall cease to be effective for taxable years beginning on or after January I of the calendar year next following that in which the notice is given. The convention does not apply to the imposition or collection of taxes by the several States or the District of Columbia except with respect to the traditional "national treatment" provisions in article It is understood that the Department of the Treasury is prepared to make such further explanations as may be found desirable regarding the technical aspects and application of the convention with Israel. Respectfully submitted.
    CHRISTIAN

    A. HERTER.

    (Enclosure: Income-tax convention with Israel, signed September 30, 1960.)

    (1640)

    CONVENTION WITH ISRAEL CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND ISRAEL FOR THE AVOIDANCE OF DOUBLE TAXATION OF INCOME AND FOR THE ENCOURAGEMENT OF INTERNATIONAL TRADE AND INVESTMENT The Government of the United States of America and the Governrnent of Israel, desiring to conclude a Convention for the avoidance of double taxation of income and the encouragement of international trade and investment, have appointed for that purpose as their respective Plenipotentiaries: The Government of the United States of America: Christian A. Herter, Secretary of State of the United States of America, and The Government of Israel: Avrahain Harman, Ambassador Extraordinary and Plenipotentiary of Israel to the United States of America, who, having communicated to one another their respective full powers, found in good and due form, have agreed upon the following Articles:
    ARTICLE I

    (1) The taxes which are the subject of the present Convention are: (a) In the United States of America: The Federal income taxes, including surtaxes (hereinafter referred to as "United States tax'). (b) In Israel: The income tax the company profits tax, and the tax on gains from the sale of land under the Land Value Improvement Tax Law (hereinafter referred to as "Israeli tax"). (2) The present Convention shall also apply to any other taxes of a substantially similar character imposed by either contracting State subsequently to the date of signature of the present Convention.
    ARTICLE

    II

    (1) In the present Convention, unless the context otherwise requires: (a) The term "United States" means the United States of America, and when used in a geogaphical sense means the States thereof and the District of Columbia. (b) The term "Israel" meazis the State of Israel. (c) The terms "one of the contracting States" and "the other contracting State" mean the United States or Israel as the context requires. (d) The term "United States corporation" means a corporation, association or other like entity created or organized in or under the laws of the United States. (e) The term "Israeli corporation" means any kind of juridical person (other than a partnership) created or organized in or under the laws of Israel (f) The terms "corporation of one contracting State" and "corporation of the other contracting State" mean a United States corporation or an Israeli corporation as the context requires. (1641)

    CONVENTION WITH ISRAEL (g) The term "resident of Israel" means any person who is resident in Israel for the purpose of Israeli tax and not resident in the United States for the purposes of United States tax. A corporation is to be regarded as a resident of Israel if its business is managed and controlled in Israel. Aln Israeli corporation shall not be deemed to be resident in the United States even though that corporation is engaged in trade or business within the United States. (h) The term "resident of the United States" means any individual or fiduciary, who is resident in the United States for the purposes of United'States tax and not resident in Israel for the purposes of Israeli tax, and any United States corporation and any- partnership created or organized in or under the laws of the United States, being a corporation or partnership which is not. resident in Israel for the purposes of Israeli tax. (i) The term "Israeli enterprise" means an industrial, agricultural or commercial enterprise or undertaking carried on in Israel by a resident of Israel. ") The term "United States enterprise" means an industrial, agricultural or commercial enterprise or undertaking carried on in the United States by a resident of the United States. (k) The terms "enterprise of one of the contracting States" and "enterprise of the other contracting State" mean a United States enterprise or an Israeli enterprise, as the context requires. (1) The term "permanent establishment", when used with respect to an enterprise of one of the contracting States, means a branch, factory or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which lie regularly fil orders on its behalf. An enterprise of one of the contracting States shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business dealings in the other contracting State through a bonafide commission agent, broker or custodian, or other independent agent, acting in the ordinary course of his business as such. The fact that an enterprise of one of the contracting States maintains in the other contracting State a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute such fixed place of business a permanent establishment of such enterprise. The fact that a corporation of one contracting State has a subsidiary corporation which is a corporation of the other contracting State or which is engaged in trade or business in the other contracting State (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary corporation a

    substantial equipment or machinery within one of the contracting States for a period of at least six months by an enterprise of the other contracting State shall constitute a permanent establishment of such enterprise in the former State, as shall a construction or assembly project or the like, the duration of which exceeds or will exceed six months.

    permanent establishment of its parent corporation.

    The use of

    (1642)

    CONVENTION WITH ISRAEL (m) The term "taxation authorities" means, in the case of the United States, the Secretary of the Treasury or his delegate and, in the case of Israel, the Minister of Finance or his delegate. (2) In the application of the provisions of the present Convention by one of the contracting States, any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of the contracting State relating to the taxes which are the subject of the present Convention.
    ARTICLE III

    (1) An Israeli enterprise shall not be subject to United States tax in respect of its industrial or commercial profits unless it is engaged in trade or business in the United States through a permanent establishment. situated therein. If it is so engaged, United States tax may be imposed upon the entire income of such enterprise from sources within the United States. (2) A United States enterprise shall not be subject to Israeli tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Israel through a permanent establishment situated therein. If it is so engaged, Israeli tax may be imposed upon the entire income of such enterprise from sources within Israel. (3) Where an enterprise of one of the contracting States is engaged intrade or business in the other contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive if it were an independent enterprise engagedin the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment, and the profits so attributed may be deemed to be income from sources within the other contracting "State. (4) In determining the industrial or commercial profits from sources within one of the contracting States of an enterprise of the other contracting State, no profits shall be deemed to arise to such enterprise from the mere purchase of goods or merchandise within the territory of the former contracting State. (5) In the determination of the net industrial or commercial profits of the permanent establishment there shall be allowed as deduce tions all expenses, wherever incurred, reasonably allocable to the permanent establishment, including executive and general administrative expenses so allocable. (6) The competent authorities of both contracting States may, consistent with other provisions of the present Convention arrange details for the apportionment of industrial or commercial profits.
    ARTICLE IV

    Where an enterprise of one of the contracting States by reason of its participation in the management control or capital of an enterprise of the other contracting State, makes with or imposes on the latter enterprise, in their commercial or financial relations, conditions different fiom those which would be made with an independent enterprise, any profits which would have accrued to one of the enterprises but by reason of these conditions have not so accrued may be included in the profits of that enterprise and taxed accordingly. (1643)

    CONVENTION WITH ISRAEL ARTICLE V

    (1) Notwithstanding the provisions of Articles III and IV of the present Convention, profits which an Israeli enterrise derives from operating ships or aircraft shall be exempt from United States tax. (2) Notwithstanding the provisions of Articles III and IV of the present Convention, profits which a United States enterprise derives from operating ships or aircraft shall be exempt from Israeli tax.
    ARTICLE VI

    (1) The rate of United States tax on dividends derived from sources within the United States by a resident of Israel not engaged in trade or business in the United States through a permanent establishment situated therein shall not exceed 15 percent. However, such rate shall not exceed 5 percent on dividends received by an Israeli corporation if (a) during the whole of the taxable year of the payer corporation more than 50 percent of the voting stock of such corporation was beneficially owned by the recipient corporation either alone or in association with not more than three other corporations of Israel, but each such recipient corporation must own at least 10 percent of the voting stock of the payer corporation; and (b) not more than onefourth of the gross income of the payer corporation (other than a corporation the chief business of which is the making of loans) is derived from interest and dividends other than interest and dividends received from subsidiary corporations. Such reduction of the rate to 5 percent shall not apply if the relationship of the two corporations has been arranged or is maintained primarily with the intention of securing such reduced rate. (2) Dividends paid by an Israeli corporation to a resident of the United States not engaged in trade or business in Israel through a permanent establishment situated therein, out of income which has een subject to income tax in Israel, shall be exempt from further tax. Where such income has not been subject to income tax in Israel, the dividend (other than a dividend exempt from tax by Section 47(b) of the Encouragement of Capital Investments Law, 5719-1959) may be subject to income tax at a rate not exceeding the rate of income tax imposed on the income of an Israeli corporation for the year in which the dividend is paid.
    ARTICLE VII

    (1) Interest received by the Export-Import Bank of Washington or the Development Loan Fund from sources within Israel shall be exempt from tax by Israel; and interest received by the Bank of Israel from sources within the United. States shall be exempt from tax by the United States. (2) The rate of tax imposed by Israel on interest received from sources within Israel by a bank or other financial institution of the United States (other than the institutions referred to in paragraph (1) of this Article) not having a permanent establishment in Israel shall not exceed 15 percent.

    (1644)

    CONVENTION WITH ISRAEL


    ARTICLE VIII

    (1) The rate of tax imposed by one of the contracting States on royalties and other amounts received as consideration for the right to use scientific works patents, designs, secret processes and formulas trade-marks and other like property (including in such royalties and other amounts, rentals and like payments for the use of industrial, commercial or scientific equipment) from sources within such State by a resident or corporation or other entity of the other contracting State not having a permanent establishment in the former State shall not exceed 15 percent. (2) Royalties for the right to use copyrights or in respect of the right to produce or reproduce any literary, dramatic, musical or artistic work (but not inclusive of rentals in respect of motion picture films) derived from sources within one of the contracting States by a resident or corporation or other entity of the other contracting State not having a permanent establishment in the former State shall be exempt from tax imposed by such former State.
    ARTICLE IX

    A resident or corporation or other entity of one of the contracting States deriving (a) income from real property (including gains derived from the sale or exchange of such property, but not including interest from mortgages or bonds secured by real property), or (b) royalties in respect of the operation of mines, quarries or other natural resources situated within the other contracting State, may elect with respect to such income for any taxable year to be subject to the tax of such other State on a net basis as if such resident or corporation or other entity had a permanent establishment in such other State during such taxable year.
    ARTICLE X

    (1) A resident of Israel shall be exempt from United States tax upon compensation for personal (including professional) services performed during the taxable year within the United States if he is present therein for a period or periods not exceeding a total of 180 days during the taxable year and either of the following conditions is met: (a) his compensation is received for such personal services performed as an officer or employee of a resident, corporation or other entity of Israel or for or on behalf of a permanent establishment situated in Israel of an enterprise of the United States, or (b) his compensation received for such personal services does not exceed 6,000 dollars. (2) The provisions of paragraph (1) of this Article shall apply mudatie mutndis, to a resident of the United States with respect to compensation for such personal services performed in Israel.
    ARTICLE XI

    (1) (a) Salaries, wages and similar compensation, and pensions paid by the United States or by any of the political subdivisions thereof to a citizen of the United States, who is not a citizen of Israel, for services

    (1645)

    10

    CONVENTION WITH ISRAEL

    rendered to the United States or to any of its political subdivisions in the discharge of governmental functions shall be exempt from tax by Israel. (b) Salaries, wages and similar compensation, and pensions paid by Israel or by any local authority thereof to a citizen of Israel (other than an individual who is a United States citizen or has immigrant status in the United States) for services rendered to Israel or to any of its local authorities in the discharge of governmental functions shall be exempt from tax by the United States. (c) The provisions of this paragraph shall not apply to wages or similar compensation paid in respect of services rendered in connec. tion with any trade or business carried on by either of the contracting States for purposes of profit. (d) For the purposes of paragraph t1) of this Article the terni "pensions" shall be deemed to include annuities paid to a retired civilian government employee. (2) Private pensions and annuities from sources within one of the contracting States paid to individuals who re;Ido in the other contracting State shall be exempt from tax by the former State. (3) Public pensions and annuities (whether representing employee or employer contributions or accretions iheeto) from sources within wiho one of the contracting States paid to divide alO are residents of the other contracting State shall be exempt from tax by the former State to the extent that such payments are allocablo to services, the remuneration for which was exempt from tax by the former State.
    ARTICLE XII

    (1) A resident of one of the contracting States wi o, at the invitation of a university, college, school or other recognized educational institution in the other State, visits such other State solely for the purpose of teaching or engaging in research at such equcationqi institution for a period not exceecing two years shall not, aetaxed by such other State on his remuneration for such teach gptr Mesearch. (2) This Article shall apply to an in 1Xd ual jgqgej in research only if the results of such research ate freely ,Valfle to the general public.
    ARTICLE XJ11

    (1) A resident of one of thle count tactipg States who is temporarily present in the other cop tr~icing Stle splely (a) as 4 tuden t 4 recognized university, college or school in such other State, (b) as I business appritotive, or (e) as the recipient of , grant, allow tit, or ward for the nt primary purposes of study or research from religious, charitable, scintific or recognized educatiopltO organization shall not be taxed in such other State in respect of remittances from abroad as remuneration for employment or for the purposes of his maintenance, education or training. (2) A resident of one of the contracting States who is temporarily present in the other State for a period not exceeding one yearI' as ail employee of, or under contract with, an enterprise of lthe ioriner State or an organization referred to in paragraph (1) subparagr-aphi (1646)

    CONVENTION WITH ISRAEL

    11

    (c)above, solely to acquire technical, professional or business experience from a person other than such enterprise or organization, shall not be taxed in such other State on remuneration for such period, unless the amount thereof exceeds 5,000 dollars or its equivalent in Israeli currency. (3) A resident of one of the contracting States temporarily present in the other State under arrangements with the Government of such other State solely for the purpose of training, research or study shall not be taxed in such other State on remuneration received in respect of such training, research or study, unless the amount thereof exceeds 8,000 dollars or its equivalent in Israeli currency.
    ARTICLE XIV

    For the purpose of the present Convention (including Article XV): (at) Interest paid by one of the contracting States including a local Government thereof or by a resident of one of the contracting States shall be treated as income from sources within sulch State. (b) Gains, profits and income derived from the purchase and sale of movable property shall be treated as derived from the country in which such property is sold. (c) Gains, profits and income derived from the sale by a taxpayer in one of the contracting States of goods manufactured in the other contracting State in whole or in part by such taxpayer shall be treated as derived in part from the country in which manufactured and in part from the country in which sold. (d) Income from real property (including gains derived from the sale or exchange of such property, but not including interest from mortgages or bonds secured by real property) and royalties in respect of the operation of mines, quarries, or other natural resources shall be treated as income derived from the country in which such real property, mines, quarries or other natural resources are situated. (e) Compensation for labor or personal services (including the practice of liberal professions) shall be treated as income from sources within the country where are rendered the services for which such compensation is paid. (0) Royalties for using, or for the right to use, in one of the contracting States, patents, copyrights, designs, trademarks and like property shall be treated as income from sources within such State.
    ARTICLE XV

    It is agreed that double taxation shall be avoided in the following manner: (a) The United States, in determining the tax of its citizens, residents, or corporations, or other entities may, regardless of any other provisions of the present Convention include in the basis upon which such tax is imposed all items of income taxable under the revenue laws of the United States as if the present Convention had not come into effect. The United States shall, however, deduct from its tax the amount of the tax of Israel. Except as otherwise provided in this Convention, the amount of

    (1647)

    12

    CONVENTION WITH ISRAEL

    the tax thus to be deducted shall be determined in accordance with the revenue laws of the United States. For the purposes of determining this deduction (I) a United States corporation shall be deeined to have paid the Israeli tax which it, would have paid but, for the tax reduction granted by Section 47(a) of the Encouragement of Capital Investments Law -15719-1959, and (2) where a United States corporation receives dividends froom a corporation (other talan a United States corporation), which is a resident of Israel, in which it owns not less than 10 percent, of the voting stock, such United States corporation shall be deemed to have paid the Israeli tax which it would have paid with respect to such dividends but for the tax reduction granted by Section 47(b) of such Law and such corporation which is a resideiit of

    10 percent of the voting stock, it, shall be deemed to have paid the Israeli tax which it would have paid with respect to such interest but for the tax reduction granted by Section 46(b) of such Law. However, the amount of tax so deemed to have been paid shall not exceed the amount determined under the provisions
    of Israeli law as in effect oni the d(ate of signature of the present

    Israel shall be deemed to have paid the Israeli tax which it.would have paid but, for the tax reduction granted by Section 47(a) of such Law, and (3) where a United States corporation receives interest from a corporation (other than a United States corporation), which is a resident of Israel, in which it owns not less titan

    Convention. (b) Israel, in determining the tax of its residents or corporations or other entities may, regardless of any other provisions of the present Convention, include in the blasis'upo10 which such tax is imposed all items of income taxable under thIe tax laws of Israel as if the present. Convention had not come into effect. Israel shall however, deduct from its tax so calculated the amount of tile tax of the United States upon inconie from sources within the United States and included for the taxes of both contracting States, but in an amount not exceeding that proportion of the tax of Israel which such income bears to the entire income subject to tile tax of Israel. (c) The provisions of this Article shall not be construed to deny the benefits conferred by Article XII and Article XIII.
    ARTICLE XVI

    (1) The nationals of one of the contracting States shall not, while resident, in the other contracting State, be subject, therein to other or more burdensome taxes than are the nationals of such other contracting State resident in its territory. (2) The term "nationals" as used in this Article means (a) in relation to Israel, all Israeli citizens and persons entitled to the protection of Israel; (b) in relation to the United States, United States citizens and
    persons under the protection of the United States; and includes all legal persons, partnerships and associations deriving their status as such from, or created or organized under, the laws in force in the respective contracting State.
    (3) In this Article the word "taxes" means taxes of every kind or

    description', whether national, Federal, State or municipal.

    (1648)

    CONVENTION WITH ISRAEL ARTICLE XVII

    13

    The provisions of the present Convention shall not be construed to restrict in any manner any exemption, deduction, credit or other allowance now or hereafter accorded by the laws of either contracting State in determining the tax of such State.
    ARTICLE XVIII

    (1) The taxation authorities of the contracting States shall exchange such information (being information which is available under their respective taxation laws in the normal course of administration) as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or for the administration of statutory provisions in relation to tie taxes which arm the subject of the present Convention. Any information so exclianged shall be treated as secret and shall not be disclosed to ainy persons other than those concerned with the assessment and collection of the taxes which are the subject of the present Convention. No information shall be exchanged which would disclose any trade, business, industrial or professional secret or trade process. (2) Each of the contracting States may collect the tax imposed by the other contracting State (as though such tax were the tax of the former State) as will ensure that, the exemptions, reduced rates of tax or any other benefit granted under the present Convention by such other State shall not be enjoyed by persons not entitled to such benefits. (3) The taxation authorities of the two contracting States may prescribe regulations necessary to carry into effect the present Convention within the respective States. (4) The taxation authorities of the two contracting States may communicate with each other directly for the purpose of giving effect to the provisions of this Convention. (5) The taxation authorities of the two contracting States shall keep each other informed of significant changes in the tax laws of their respective States, and in the event of appreciable modifications in such laws shall consult together to determine whether amendments to this Convention are desirable.
    ARTICLE XIX

    (1) Where a taxpayer shows proof that the action of the taxation authorities of either contracting State has resulted, or will result, in double taxation contrary to the provisions of the present Convention, he shall be entitled to present the facts to the taxation authorities of the contracting State of which he is a national or a resident, or, if the taxpayer is a corporation or other entity, to those of the contracting State under the laws of which it is created or organized. Should the taxpayer's claim be deemed worthy of consideration, the taxation authorities of such State to which the facts are so presented shall undertake to come to an agreement with the taxation authorities of the other contracting State with a view to equitable avoidance of the double taxation in question. (1649)

    14

    CONVENTION WITH ISRAEL

    (2) Should any difficulty or doubt arise as to the interpretation or application of the present Convention or its relationship to Conventions of the contracting States with third States the taxation authorities of the contracting States may settle the question by mutual agreement.
    ARTICLE XX

    (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible. (2) Upon exchange of ratifications, the present Convention shall have effect (a) as respects United States tax for taxable years beginning on or after the first day of January of the year m which occurs the exchange of the instruments of ratification; (b) as respects Israeli tax for the tax years beginning on or after the first day of April of the year in which occurs the exchange of the instruments of ratification.
    ARTICLE XXI

    Either of the contracting States may terminate the present Convention at any time after a period of five years shall have expired from the date on which the present Convention enters into force, by giving to the other contracting State notice of termination, provided that such notice is given on or before the 30th day of June and, in such event, the present Convention shall cease to be effective for the taxable years beginning on or after the first day of January of the calendar year next following that in which such notice is given. IN WITNESS WHEREOF, the undersigned Plenipotentiaries have signed the present Convention. DONE at Washington, in duplicate in the English and Hebrew languages, each text having equal authenticity, this thirtieth day of September, 1960. For the Government of the United States of America: CHRISTIAN A. HERTER For the Government of Israel:
    AVRAHAM HARMAN

    (16o0)

    SECTION 15 Convention With ITALY

    (1651)

    INCOME TAX CONVENTION BETWEEN THE UNITED STATES AND ITALY March 30, 1955----- Signed at Washington. April 25, 1955 6-------- Received by Senate; designated Executive C, 84th Congress, 1st Session; injunction of secrecy removed (101 Congressional Record 4961). Reported by Senate Foreign Relations ComJuly 27, 1955-----mittee (Ex. Rept. No. 12, 84th Cong., 1st Sess.). Ratification by Senate of its advice and con1955-----July 29, sent (101 Congressional Record 1201912025). Ratified by United States President. August 22, 1955 Ratified by Italy. July 25, 1956-----October 26, 1956 ------ Instruments of ratification exchanged; convention entered into force effective January 1, 1956. November 2, 1956 ..... Proaimed by United States President. Official Text....... TIAS 3679; 7 UST 2999.

    '(1652)

    CONTENTS OF SECTION 15
    1. Presidential Message of Transmittal to Senate ---------------------1655 2. Senate CommitteeHearings (none held) ..-------------------------1661 3. Senate Committee Report ---------------------------------------1663 4. Senate Floor Debate and Action ------------------------1675 5. Presidential Proclamation (including Official Text of Convention)-----1683
    Page

    78005 0-42--vol. 2-- 11

    (1658)

    PresidentialMessage of Transmittal to Senate (including materials enclosed therewith)

    (1655)

    84TlI CONGRESSt
    I1st &Seion

    SENATE

    EXECUTIVE C

    CONVENTION WITH THE ITALIAN REPUBLIC RELATING TO TAXES ON INCOME

    MESSAGE
    FROM

    THE PRESIDENT OF THE UNITED STATES


    TRANSOM ITTINO

    A CONVENTION BETWEEN THE UNITE!) STATES OF AMERICA AND TIlE ITALIAN REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH! RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON MARCH 30, 1955
    APRIL, 25, 1955.-Convention was read the first time and the injunction of secrecy was removed therefrom. The convention, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    To the Senate of the United States:

    THE WHITE HousE, April 25, 1955.

    With a view to receiving the advice and consent of the Senate to ratification, I transmit the convention between the United States of and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on March 30, 1955.

    America and the Italian Republic for the avoidance of double taxation

    I also transmit for the information of the Senate the report by the Secretary of State with respect to the convention.
    DWIGHT D. EISENHowEiR.

    (Enclosures: (1) Report of the Secretary of State; (2) convention with Italy, signed March 30, 1955, relating to taxes on income.) (1657)

    CONVENTION WITH ITALY RELATING TO TAXES ON INCOME DEPARTMENT OF STATE,

    The PRESIFDENT,

    Washington, April 18, 1955.

    The White House: The undersigned, the Secretary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification if the President approve thereof, a convention between the United States of America and the Italian Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on March 30, 1955. This convention, to ether with one relatin to taxes on estates and inheritances, was formulated as a result of technical discussions between representatives of this Government and representatives of the Italian Government. An effort was made to determine the bases upon which conventions between the two Governments might be concluded for the purpose of avoiding double taxation, as far as practicable, and establishing certain procedures for mutual administrative assistance in relation to taxation. The imposition and collection of taxes upon the same income by both the United States and a foreign country may, and often do, result in double taxation of a severe character. So far as they serve to eliminate double taxation, income-tax conventions are an important step toward the removal of one of the impediments to international trade and investment. In matters of principle and substance, the provisions of the income. tax convention with Italy are consistent, if not identical, with provisions in one or more of the existing income-tax conventions between the United States and numerous foreign countries, namely, Australia, Belgium, Canada, Denmark, Finland, France, the Federal Republic of Germany, Greece, Ireland, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the Union of South Africa, and the United Kingdom. The pattern for such conventions is now fairly well established. The convention with Italy is believed to be in harmony with policies expressed by the Senate in approving tax conventions. If the Senat should desire information regardmg the more technical aspects of particular provisions of the convention, and their application in particular circumstances, the Department of the Treasury is prepared supply such information. For the purposes of the present report, to it seems adequate to summarize the major features of the convention as follows: (1) The convention applies so far as the United States taxes are concerned, only to the Feder income tax. It does not apply to the imposition or collection of taxes by the several States, the District of Columbia, or the Territories or possessions of the United States. On the part of Italy, the convention relates to national taxes affecting income. Article I describes taxes to which the convention relates. (2) Article I defines various terms or expressions found in the convention, with a provison that in applying the convention any term not otherwise defined shall unless the context otherwise requires, have the meaning which such term has under the laws of the country imposing the tax. (3) Principles affecting the determination of amount, and the taxation, of business income derived by enterprises of one of the countries

    (1658)

    CONVENTION WITH ITALY RELATING TO TAXES ON INCOME

    from sources within the other country are established (arts. III fnd IV). (4) Articles V through XIV deal with reciprocal exemnptions, in whole or in part, from taxation of various items of income. Article V contains the usual provisions, in harmony with the principle expressed in sections 872 and 883 of the Internal Revenue Code of 1954, for exemptions with respect to tax on income derived from the operation of ships or aircraft. Article VI relates to partial exemption in the case of a tax based on property and income; although expressed in reciprocal terms, this provision actually has effect only as to Italian law because the United States does not impose a tax on property. Article VII relates to taxation of dividends received from sources in one country by a resident or corporation of the other country not having a permanent establishment in the country of source; these provisions, the principal feature of which is the placing of a limit of 15 percent on the tax, correspond most nearly to provisions in the conventions with Canada, Denmark, the Netherlands, Sweden, and the United Kingdom. Article VIII grants reciprocal exemption with respect to copyright royalties and other industrial property royalties, including rentals from the use of motion-picture films. Article IX royalties in respect of the operation of mines, quarries, or other natural resources. Article X grants reciprocal exemption with respect to Government wages, salaries, and pensions and to private pensions and life annuities. Article XI contains provisions regarding exemption, upon specified conditions, from taxation in respect of earned income derived as compensation for labor or personal services, including the practice of the liberal professions. Article XII grants reciprocal exemption with respect to remittances received by students or business apprentices. Article XIII grants reciprocal exemption with respect to remuneration of professors or teachers. Article XIV provides that dividends and interest paid by a corporation of one of t9e countries to a recipient, except a citizen, residewit, corporation, or other entity of the other country, shall be exempt from income taxes imposed by such other country. (5) The principle of the United States tax credit, as expressed in sections 901 to 905, inclusive, of the Interni Revenue Code of 1954, is embodied in article XV, somewhat restricted in the case of Italy. Each country retains its right to tax its own citizens, residents, or corporations as though the convention "had not come into effect." (6) Articles XVI through XX deal with administrative matters. Article XVI relates to the right of taxpayers to lodge claims when they can show that double taxation has resulted or will result contrary to the terms of the convention. Article XVII contains the provisions regarding reciprocal exchange of information. Article XVIII provides, in harmony with the policy expressed by the Senate, for reciprocal assistance in collection of taxes to ensure that exemptions or reduced rates of taxes granted under the convention "shall not be enjoyed by persons not entitled to such benefits." Article XIX provides (a) that the convention shall not affect the right of diploinatic and consular officers to other or additional exemptions; (b) that the convention shall not restrict any exemption, deduction, credit, or other allowance accorded by the laws of either country in determining its tax; and (c) that the competent authorities may settle by mutual (1659)

    provides for taxation on anet basis of income from real property and

    CONVENTION WITH ITALY RELATING TO TAXES ON INCOME

    competent authorities may preserti)e regulations and may coinimnuicate directly with each other for the purpose of giving effect to the convention. Article XXI provides for ratification and for exchange of instru. ments of ratification. It prescribes that, upon such exchange, the convention shall become effective as of January I of the year in which the exchange takes place. It is provided further that the convention shall continue effective for a period of 5 years, but may be terminated at the end of that period or thereafter by the giving of a 6-mon:ij notice by one of the parties to the other party, in which event t[ convention would cease to be effective on January 1 next following the expiration of the 6-month period. rhe Department of State and the Department of the Treasury cooperated in the negotiation of the convention. It has the approval of both Departments. Respectfully submitted. JOilN FOSIEJI DULLES. to taxes on income.)
    (Enclosure: Convention with Italy, signed March 30, 1955, relating

    agreement any difficulty or doubt which may arise as to the interpret. tation or applijation of the convent ion. Article XXprovides that the

    [Text of convention]

    (1660)

    Senate Committee Hearings


    [No hearings held]

    (1661)

    Senate Committee Report


    July 27, 1955 Executive Report No. 12 84th Congress, 1st Session Senate Foreign Relations Committee

    (1683)

    84TI Session 1st CoNGoEs

    SENATE

    No. Rzpr. Exwurvz12

    DOUBLE TAXATION CONVENTIONS WITh! ITALY AND THE NETHERLANDS

    WEDNESDAY, JULY

    27, 1955.-Ordered to be printed

    Mr. GEORGE, from the Committee on Foreign Relations, submitted the following

    REPORT
    [To accompany Executive I, 83d Congress, 2d session, Executives I, C, and D,
    84th Congress, 1st session]

    The Committee on Foreign Relations has had under consideration the conventions listed below and recommends that the Senate give its advice and consent to their ratification: 1. Notification embodied in a note from the Netherlands Ambassador in Washington to the Secretary of State, dated June 24, 1952, with a view to extending the operation of the convention of April 29, 1948, between the United States and the Netherlands, to the Netherlands Antilles (Ex. I, 83d Cong., 2d sess.). 2. Protocol signed June 15, 1955, supplementing the convention between the United States of America and the Kingdom of the Netherlands with respect to taxes on income and certain other taxes for the purpose of facilitating extension of the convention to the Netherlands Antilles (Ex. I, 84th Cong., 1st sess.). 3. Convention between the United States of America and the Italian Republic for the avoidance of double taxation with respect to taxes on income, signed at Washington on March 30, 1955 (Ex. C, 84th Cong., 1st sess.). 4. Convention between the United States of America and the Italian Republic for the avoidance of double taxation with respect to taxes on estates and inheritances, signed at Washington on March 30, 1955 (Ex. D, 84th Cong., 1st sess.).
    GENERAL PURPOSE OF CONVENTIONS

    Over a period of years the Department of the Treasury, in cooperation with the Department of State, has negotiated a series of conventions with foreign governments designed to relieve American nationals, on a reciprocal basis, from paying taxes in the United States on

    (1665)

    DOUBLE TAXATION CONVENTIONS

    incomes, inlieritances, and gifts upon which they have been taxed in a foreign country. Tile two pending conventions with, the Italian Republic and the notification and protocol with respect to the convention of April 29, 1948, with the Netherlands, are a continuation of this program to relieve nationals of the burdens of double taxation.
    COMMITTEE ACTION Relations sou,,lt the advice of the Joint Committee on Internal

    As has been customary in the past, the Committee on Foriegn

    Revenue Taxau.ion with respect to the terns of these conventions and their consistency witli the Federal tax laws of the United States. On July 27, 1955, the Committee on Foreign Relations, after receiving the testimony of Mr. Colin F. Siam, chief of staff of the Joint Comnmittee on Internal Revenue Taxation, voted to recommend that the Senate give its and advice and consent to the ratification of thie above-mentioned agreements.
    ANALYSt8 OF PENDING CONVENTIONS

    The communication of the chief of staff of the joint committee analyzing the pending conventions is as follows:
    CON(IRESS OF TIlM ITNITEI) STATES, JOINT COMMITTIrEE ON INTERNAL REVE'r.T: TAXATION,

    lWashinglton, Julyf 1955. 2, 110n. WALTER.: F. GEoMEl, Chairman, Senate Foreign Relations Coin nmittee, United States Senate, Wl'ashinqton, 1). C. I..AR SENATOR (:Ot'.E: A( your reque.i the (l::4 of te ,h ciut Coirnittc,, on Internal Revenue Taxation has reviewed the provisions of the following tax treaties now pending before the Senate Foreign Relations Committee: Extension of income-tax convention with the Netherlands to the Nethorlands Antilles (Ex. 1, 83d (,ong, 2d sess.). Protocol sipl)lementing Netierlands income-tax convention with respect to the Netherlands Antilles (Ex. I, 84th Cong., Ist sevs.). Income-tax convention with Italy (Ex. C, 84,1i Cong., 1st se&s.). ])eath-dutv convention with Italy (Ex. 1), 8 Ith Cong., Ist sess.). In general, these tax treaties follow, the provisions of existing tax conventions which the Senate ha, I)revioulslv approved. In an earlier consideration of the extension of the income-tax convention with the Netherlands to the Netherlands Antilles, certain questions were raked in the executive report. and in a letter to the chairman from the National Foreign Trade Coumcil. The supploenentary protocol which wa, subsequentlv negotiated reiolvei one of the questions previouslv raised. The other quet ion may I)e appropriately resolved byv language expressiing the Senate's understanding that. the collectioni article in the Netherlandl(s convention when applied to tMe Netherlands Antilles will be construed in the restricted manner which the Senate has previously approved in other tax convent ions. Memnorandum froin this office stmmniarizing the principal provisions of the four treaty matters referred to above are enclosed. Sincerely yours, COLIN F. 8'TAM,

    Chief of Staff.
    EXTENSION OF THE INCOMfE TAX CONVENTION WITH TilE NETHERLANDS TO TilE NETI1ERLANDs ANTILLES (Ex. I, 83 Cong., 2d se..) Pursuant to the procedure prescribed in the convention between the United State%and the Netherlands (convention of October 28, 1948, S. Ex. 1, 81st Cong., lot sess.), regarding taxes on income and certain other taxes, the Netherlands

    (1666)

    DOUBLE TAXATION CONVENTIONS

    Government has Ian{1s,.AntUiles. declared its desire that the convent ion be extended to the Nether. Arficlo XXVII of the Netherlands convention authorizes its provisions to be extended, either in whole or in part, to an overseas area or territory of the country seeking extension by written notification of extension. The convention becomes effective, however, only after the acceptance of the notification by the other contracting country. In accordance with the procedure followed with regard to reque.sts for extension to territories or possessions of other tax conventions, the executive branch has indicated that it will not recommend any formal declaration of acceptance of the notification for an extension of the Netherlands convention until the Senate has Indicated its advice and consent to the acceptance. that include Aruba, Bonaire, Curacao. Saba, St. Eustalius, and St. Martin (Netherlands portion). It does not include Dutch Guiana (Surinam). All of the Netherlands Antilles appear to come within the scope of one Income-tax law referred to as the ordinance of Curacao. The convention between the United States and the Netherlands extended to certain property taxes imposed by the Netherlands. Since these taxes are not imposed in the Netherlands Antilles, the convention, as extended to that. territory, is applicable only to income taxes and profits taxes. Thus, article XX and article VI (2) and (3) are excluded from the operation of the convention with respect to the Netherlands Antilles under the proposed extension. In approving the convention with the Netherlands in 1948, the Senate did so with certain reservations which had the effect of deleting articles XI and XIII and of eliminating from article XIV all references to article XIII, as well as any language which might prevent taxation by the United States of capital gains where taxable under the revenue laws of the United States when realized. These articles will thus not be applicable In the extension of the convention to the Netherlands Antilles. Also, in the request for extension the Netherlands Government has Indicated that the tenr "competent authority" contained in the definitions in article II of the convention shall be construed to mean the "Administrateur van Financien" of the Netherlands Antilles in the application of the convention to that territory. In the consideration of the extension, account should be taken of several important modifications contained in protocol to the Netherlands convention (Ex. 1,84th Cong 1st sms.) which wouldbe effective with respect to the Nether. lands Antilles. This protocol is presently pending before the Senate and is described below.
    PROTrocoL
    WITH TiHE NETItERLANDS SUPPLIEMENTING INcOME TAX CONVENTION WITH RESPECT TO THE NETHERLANDS ANTILLES

    The Netherlands Antilles consist of agroup of islands off the coast of Venezuela

    (Ex. I, 84th Cong., Ist sess.)

    When the proposed extension of the Netherlands income-tax convention to the Netherlands Antilles (iRx. I, 83d Cong., 2d sess.) was first considered by the Senate Foreign Relations Committee, certain problems in connection with the extension were called to the committee's attention. For example, the executive report on the notification by the Netherlands for extension pointed out that a United States citizen resident in the Antilles would receive no credit against his Antilles income tax with respect to United States income tax on United States source income, such as dividends from the United States. Double taxation with respect to that income would occur because the Antilles law does not provide a credit in such a case. The executive report on the proposed extension likewise specifically called to the committee's at tntion the fact that the Netherlands convention contains a broad provision for mutual assistance in the collection of taxes. In certain conventions subsequent to the Netherlands convention, the Senate expressed an interpretative understanding that each of the Governments would assist in collecting the other's taxes only to the extent necessary to insure that the provisions of the convention would not be enjoyed by persons not entitled to its b,,efits. This limited form of the collection provision was adopted in a number of subsequent conventions. In the absence of any reservation or modification, the collection provision of the Netherlands income-tax convention would thus be extended to the Antilles in the broad form which the Senate has previously questioned.

    (16T7)

    DOUBLE TAXATION CONVENTIONS

    The National Foreige Tradt- Couil'il in n letter to the chairrplm of the Seate Foreign Relations Committee called attention to the above problems and recom. mended approval of the extension only if steps were taken to meet them. To facilitate the extension, a supplementary protocol was negotiated and signed by the respective Governmens subsequent to the Initial consideration by the Foreign Relations Committee of the notification for extension. The SUan elementary protocol contains three articles. Article I modifies the credit provision of the Netherlands convention with respect to its application to the Netherlands Antilles. The modification provides that the Netherlands Antillus will allow a deduction (or its equivalent) from Its Income tax for Federal income taxes paid by United States citizens resident in Antilles on income derived from United States sources. The deduction may not exceed that proportion of the Antilles tax which that income bears to the entire income subject to Antilles tax. The effect of article I of the protocol is thus to allow a limited tax credit against Antilles tax similar in principle to the foreign tax credit allowed by the United States under the internal revenue laws and tinder the convention. Article I of the protocol modifies the effective date provisions of the article of the convention governing territorial extensions (art. XXVII of the convention). Under the convention, extensions take effect on the Ist day of January following the date of notification of acceptance of the request for extension. Under the protocol the convention will beconie effective, with respect to the Netherlands Antilles, on Januarv 1 inmmediaoly preceding the date of notification of acceptance. Thus, if the Senate"gives its advice and consent to the protocol and approves tile extension during the 1st session of the 84th Congress, the notification of acceptance could be accomplished so as to make the extension effective as of January 1, 1955. Article III of the protocol provl'es that the above-described provisions are to be deemed an integral part of the Netherlands convention and that the protocol is to become effective on the date of exchange of instruments of notification which is to take place in Washington, D. C. The protocol does not make any provision for limitation of the collection provision of the convention to the restricted form that the Senate has approved in other treaties. It is understood that this restric-tion can be accomplished by an appropriate expression by the Senate of its understanding that the collection article will be construed as granting authority to collect the other government's taxes only to the extent necessary to insure*that benefits under the convention will not be enjoyed by persons not entitled thereto. In view of thie interrelationship of the protocol (Ex. 1, 84th Cong., 1st sess.) and the proposal for extension (Ex. 1, 83d Cong., 2d sess.), it would appear appropriate for the Senate to consider both at the same time. IqcOMz TAX CONvENTION WITH ITALY (Memoranvi'n from the Joint Committee on Internal Revenue Taxation) The pending income-tax convention with Italy follows the pattern of prior income-tax conventions which the Senate has previously approved. There are no unusual provisions in the proposed treaty. The provisions follow in sulbtance, and generally also in form, the provisions of the existing income-tax treaties between the United States and the following countries: Australia Belgium, Canada, Denmark Finland, France Germany, Greece, Ireland, Japan, the Netherlands, New iealand, Norway, dweden, Switzerland, Union of South Africa, and the United Kingdom. In the case of the United States, the pending convention relates only to the Federal income tax. In the ea.se of Italy, the convention relates to the following taxes: (1) Tax on land, (2) tax on buildings, (3) tax on movable wealth, (4) tax on agricultural income, and (5) complementary tax. The treaty does not include the Italian turnover tax. The enumeration of the Italian taxes included *ithin the treaty is necessary because Italy employs a schedular system of taxation, I e in addition to a progressive surtax applicable to aggregate Income, a nongraduated tax is imposed on certain classes of income at varying rates depending upon the nature of the income. Although the above categories of Italian taxes are included within the terms of the convention, only those taxes which come within section 901 of the 1954 code are eligible for the credit against the United States income tax provided in sections 901 through 905 of the code.

    (See art. XV.)

    (1668)

    DOUBLE TAXATION CONVENTIONS

    Under article III of the convention, an enterprise of one of the contracting states is not subject to tax by the other state on its industrial and commercial establishment there. This provision adopts the uniform principle of "permanent establishment" found in all existing income-tax conventions. Tile definition of "permanent establishment" is contained in article I1. This definition corresponds to a similar definition contained in the present tax conventions with Canada, Denmark, France, and the Netherlands. Under the definition, a fixed place of business which is maintained exclusively for the purchase of goods or merchandise will not, of itself, constitute a permanent establishment. The effect of the definition and the exemption contained in articles II and III is to exempt certain activities which would otlherwi,:, be sibject, to tax on thl ground that tile income wa:s derived from sources within the tax-imposing country. Under article V, one contracting state will reciprocally exempt from its tax the income of an enterprise of the other contracting state which is derived from the
    With regard to

    profits unless It engages in trade or business in the other state through a permanent

    operation of ships or aircraft registered In such other state.

    income derived from shipping operations, thb exemption conforms to a reciprocal agreement already in effect between the United States and Italy. The principle a nm ber of existing income-tax treaties. Article V1, while nominally reciprocal, would operate to grant an exemption

    cf reciprocal exemption of shipping and aircraft operating profits is contained in to certain United States enterlprises from Italian tax siace the article applies only to a tax which is "based on property and income." The tax to which article VI

    applies is the Italian tax on corporations similar to the former United States capital stock and declared value excess-profits tax. Under the Italian tax, a corporation is required to pay three-fourths of 1 percent of the value of its capital plus 15 percent of its income in excess of 6 percent of the value of the declared capital. Under Italian law, the tax applies to United States corporations with respect to any property employed in Italy and the income derived from Itilian sources. Umider the convention,, exemption is provided with respect to that portion of the Italian tax based upon income If the United States enterprise is exempt by reason of having no permanent establishment in Italy (art. 1i1) or is exempt on its shipping and aircraft profits, whether or not it has a permanent establishment in Italy (art. V). The convention also expressly limits, on a reciprocal basis, that portion of the tax which is based upon property to property of a United States enterprise used or employed in Italy. .Areciprocal reduction of the rate of tax on outgoing dividen'id* to a maxini.mn of 15 percent is provided unler article VII. The withholding tax on di',idends is further reduced to 5 percent where the dividends go to a parent corporation cortrolling at least 95 percent of the stock of the payor if not more than 25 percent interest or dividends from its own subsidiary corporations'. The treaty pros ides, however, that the above rates of tax may be increased, amtd, if such increase occurs, the other state may terminate this provision of this con%~etion. This pro- ision is very similar to pro-. isions of existing income-tax treaties, si'ch as the tax treaties with l)enmark, New Zealand, the Netherlands, and other countries. Rey tats a,.d roya'60es
    .Ii

    of the gross income of the payor is derived from interest or di-, ideiids (other thau

    exe'uptioi is provided ini a ntutmber of existing income-tax treaties. I 'oie from real property (other than interest from reol estate, mortgages, and bonds) and natural resource royalties are made taxable omily in the country in which the property is situated trider article iX. Also, under this article a resideat or corporation of one of the countries deriving income from real property or natural resource royalties from the other country may elect to be taxed on a net basis by the other country as though he were engaged in trade or bu-i-e~s through a permanent establishment within the other country. Similar provisions are contained in the income-tax treaties with Denmark, the United Kingdorn, and other coutitries. Earned-income provisions

    payments for the use of copyrights, patents. secret processes, and similar property. The exemption trider this provision specifically includes film rentals. A similar

    reciprocal exemption is provided under article VIII for royalties and similar

    Article X provides for a reciprocal exemption of Government compensation &aid pensions unless the individual is a citizen or has permanent resident status in the country which otherwise would impose tax. Thus, under this provision the United States will exempt, on a reciprocal basis, compensation and pensions 73095 0-42-vol. 2-12

    (1669)

    DOUBLE TAXATION CONVENTIONS

    paid by the Italian Government or its political subdivisions to individuals who would otherwise be subject to United States tax on such income, unless the individual is a citizen of the United States or has permanent resident status in the United States. In addition, this provision also exempts private pensions and life annuities at the source on a reciprocal basis. Similar provisions are contained in a number of existing income-tax conventions. Under article Xl, an exemption is provided, on a reciprocal basis, for com. pensation for labor or personal services by a resident of one of the contracting countries who is temporarily present in the other country for a period or periods not exceeding 90 days during the taxable year. If the compensation is received from other than a resident or corporation ot the country of which lie is resident, the exemption applies only if the compensation does not exceed $2,000 in the aggregate. Related exemption provisions are contained in existing income-tax treaties. The article also provides that compensation for labor or personal services is to be taxable only in the contracting state where rendered.
    Students and business apprentices

    Under article XII, a student or business apprentice of one of the contracting countries who is temporarily present in tihe other country exclusively for the purposes of study or training is granted an exemption by the country of temporary sojourn for paymiients for his maintenance, education, and training received from persons resident in the country of which he is a resident. This provision does not apply however, if the student or business apprentice is a citizer of the country in whic6 he is temporarily present for study or training. Comparable provisions are contained in other income-tax conventions; as. for example, the conventions with Sweden, Canada, and the Netherlands. Remuneration front teaching received by a resident of one of the countries who temporarily visits the other country for purposes of teaching for a period not exceeding 2 years at an educational institution therein is exempt froiii tax by the country in which the educational institution is situated. The exemption applies for the 2-year period if on date of arrival in the other country it appears that the individual will be present therein for a period not in excess of 2 years. Similar provisions are contained in a number of existing income-tax conventions; for example, in the conventions with Norway and Canada.
    Tax credit provisions

    Under article XV, the United States agrees to continue its foreign tax credit for Italian income tax subject to the provisions of sections 901 through 905 of the 1954 code. The article also provides that regardless of any other provision of the convention (other than art. XII, relating to students and business apprentices, and art. XIII, relating to teachers) the United States may continue to apply its income taxes to citizens, residents, or corporations of the United States as though the convention had not come into effect. The United States nevertheless, reserves the right to tax its citizens despite the exemptions provided in articles XII and XIII. Similarly, Italy reserves the right to tax its citizens, residents, or corporations as though the convention had not come into effect (except insofar as arts. XII and XIII provide exemption for residents). Under this article, .taly also agrees to allow against its income taxes a proportionate credit for United States income taxes on the same income (other than dividends). With respect to dividends, the article provides that the Italian tax credit for United States income taxes withheld on such dividends may not exceed 8 percent of the amount of the dividend. Thus, with respect to dividends from United States corporations, a ULnite'l States citizen subject to Italian tax on the dividends would be doubly taxed on that income to the extent that the United States tax on V'e dih i.'ends , xce I,. I an v Tecti c rate of 8 pi'rcent; however, under existing Italian law he receives no credit against tile Italian tax for the United States tax which he pays.
    Other provisions

    In addition to the above principal provisions, the convention also contains the usual articles providing for appeal from double taxation, for exchange of information, for safeguarding of the diplomatic exemption, and for regulations to carry out the provisions of the convention. The provision for collection by one of the countries of the taxes of thQ other is restricted to the collection necessary to insure that exemptions or reduced rates of tax granted under the convention may not be enjoyed by persons not entitled thereto. The collection provision is thus in the restricted form previously approved by the Senate. The convention

    (1670)

    DOUBLE TAXATION CONVENTIONS

    also provides that none of its provisions are to be construed to restrict in any manner any exemption, deduction, credit, or other allowance provided under the laws of the respective countries. The convention becomes effective on January 1 of the calendar year in which the exchange of instruments of ratification take place. The convention may not be terminated for the first 5 years and thereafter may be terminated by either of the countries provided that at least 6 months' prior notice of termination is given.
    DEATH-DUTY CONVENTION WITH ITALY

    The pending death-duty convention between the United States and Italy is substantially similar to death-duty conventions previously approved by the Senate which are now in effect between the United States and Australia, Canada, Finland, France, Greece, Ireland, Norway, Switzerland, the Union of South Africa, and the United Kingdom. In the case of the United States the pending convention relates only to the Federal estate tax. In the case of Italy, the convention is applicable to two death duties, i. e., an inheritance tax imposed upon each beneficiary's share of property received from the decetwed person, and an estate tax similar to the Federal estate tax imposed by the United States upon the entire net estate of the deceased. The convention is made applicable to substantially similar taxes which may be subsequently Imposed by the United States or Italy. It does not apply to, and has no effect upon, death taxes imposed by any State, Territory, or possession of the United States or by the District of Columbia. The stted purpo-e of the convention is to avoid double taxation and to prevent fiscal evasion. Under the Internal Revenue Code, the Federal estate tax applies to the entire estate of a citizen of the United States or a noncitizen domiciled in the United States at the time of his death, regardless of where the property is situated, with the one exception that it does not apply to real estate located outside the United States. In the case of a noncitizen not domiciled in the United States at the time of his death the Federal estate tax applies to all property of the decedent situated within the United States. Under Italian law, however, the death duties imposed by Italy apply only to property situated in Italy at the time of the decedent's* death. As a result, the circumstances under which estates suffer double taxation because of the simultaneous imposition of death taxes by the two countries are more limited than the situations involving double taxation which arise between the United States and most other countries. Double taxation by the United States and Italy is already eliminated to a considerable degree in the case of decedents who were citizens of or domiciled in the United States in view of section 2014 of the Internal Revenue Code of 1954, which provides a credit for the amount of any estate or inheritance tai paid to a foreign country on property situated in the foreign country but included in the gross estate. In addition, Italy provides by statute for an exemption in the case of stocks and bonds issued by foreign corporations and bonds issued by foreign governments in case such securities are subject to a death tax by the foreign government. There are a number of circumstances, however where double taxation is not eliminated either by the credit authorized by the United States or by the exemption authorized by Italy. Double taxation will result, for example, where the situs rules of Italy differ from the situs rules of the United States, such as in the case of debts constituting assets of an estate. Under Italian law debts are considered as situated in Italy if (1) collectible in Italy, (2) secured by property located in Italy, (3) collectible on contracts on realty located in Italy, or (4) collectible on contracts entered into between Italian citizens in Italy. In addition, bonds issued by foreign governments or foreign corporations are regarded as situated in Italy6 if the certificates are physically located in Italy. For Federal estate tax purposes, bonds, negotiable promissory notes, and bills of exchange are regarded as situated within the United States ff the written evidence of indebtedness is physically located in the United States. Double taxation would result, for example, in the case of a decedent, who at the time of his death was a national of and domiciled in Italy, and who owned a bond of an Italian corporation, the certificate of which was located in the United States. Without the treaty the United States would tax the bond on the basis of situs of property within the United States because the certificate was located in this country. Italy would tax the bond under the theory that the bond was situated in Italy because the proceeds are collectible in Italy or because the bond is secured

    (1671)

    DOUBLE TAXATION CONVENTIONS

    In the case of decedents who were citizens of the United States or noncitizens domiciled in the United States at the date of death, there are also instances in Which double taxation will result despite the credit authorized by section 2014 of the 1954 code. For example in the case of a United States citizen decedent who owned a bond issued by an italian corporation or by the Italian Government, the certificate of which at the time of his death located in the United States, credit would not be allowed under section 2014 of the 1054 code since under the situs rule applicab)le thereto the bond would not be regarded as situated in Italy because the certificate was located in the United States. There would be no exemption under the Italian statute since the bond was not issued by a foreign government or a foreign corporation. Article V eliminates double taxation in such a situation by providing that the contractig state imposing a tax in the cast, of a deceased person, who at the time of death was domiciled in or a national of such state, shall allow against its tax a credit for the amount of tax imposed by the other contracting state. Although this article is nominally reciprocal, under the present circumstances it applies only to the United States, becalse, tinder Italian law, death taxes are not imposed oil the basis of :rationality or domicile. As in other conventions entered into by the t'nited States, the credit cannot. exceed the tax of the crediting state which is attrilbtable to the prol)erty. taxed by the other state. It is specifically J provided that any refund of tax re.sulting fromn the allowance of the credit. will ie made withoutt the payment of interest on the ainount refunded. Under tile terminall Rlevenue Code a specific exemption of $60,000 is allowed in casts of decedents who were citizens of or domiciled in the United States at the time of death, whereas an exemption of only $2,000 is allowed the estates of nomiresident alien decedents. Article IV of th'e pending convention liberalizes the exemption allowable iln the case of nonresident alien decedents by providing, in effect, that th:. estates of decedents not miatioisals of nor domiciled in the taxing state shall bw allowed an exeimntion not less than the proportion of the exemption allowed in tile case of decedents domiciled in that state which the value of the property situated in the taxing state bears to the value of the property in the entire gross estate. This article is similar to articles contained in conventions now in effect with Australia, Canada, Finland, France, Switzerland, Norway, and Greece. The effect of this article is to exempt. from the Federal estate tax those cases in which the gro&s estate of a nonresident alien does not exceed $60,000 and to provide a proportionately increased exemption in the case of a larger estate. Although re-

    by property located in Italy. Under these circumstances relief would not be afforded either by the credit provided by section 2011 of the 1954 code or by the Italian statutory exemption previously mentioned. The pending convention eliminates double taxation in these instances by providing in article III that debts constituting assets of the estate (including oilds, promLissory notes, and bills of exchange) are deemed to be situated where the debtor resides or, if the debtor is a corporation, at the place where the corporation was created or organized. A similar rule is contained in conventio'is new in effect with countries other than the United Kingdom, France, Greece, and South Afr!ca. Conventions with these latter countries have adopted a situs rule placing debts in the country in which the decedent was domiciled at the date of death. Under Italian law the situs rules with respect to shares of corporate stock are the same as the rules under the 1939 code, that is, the stock is considered to be situated in the taxing country (1)if the corporation was created or organized under the laws of such country, or (2) if the certificate was physically located therein. The seco'.d rule has been eliminated by section 2014 (a) of the 1954 code. Under the con%mention the second rule has also been eliminated and the first rule has been adopted exclusively. Other sits rules for specifically described property are contained in article I1I, which are substantially the same as in the previously mentioned death tax con. ventions. As to any other property not specifically covered, it is provided that such property shall be deemed to be situated in the country in which the deceased person was domiciled at the time of death.

    ciprocal in form, this article will have no effect. on the application of the Italian death tax because, under Italian law, no distinction is made with respect ta exemp-. tions on the basis of nationality or domicile. In addition to the above principal provisions, the convention also contains articles providing that the representative of an estate or the beneficiary of an estate may appeal to his own government when it appears that action by the rev-

    (1672)

    DOUBLE TAXATION CONVENTIONS enie authorities of the other state has res-ulted or will result in double taxation. These artielhs also provide for exchange of fiscal inforniatimn, for safeguardimui of the diplomatic exciiption, and for the issuance of regulations necessary to carry out the provision of the convention. The provision for collection by one of the countries of the taxes of the other is restricted to the collection necessary to insure that the credit or other benefit granted under the convention will not be enjoyed by persons not entitled to these benefits. The convention becomes effective on the day of exchange of instruments of ratification and it will apply only to estates and inheritances in the case of decceents who die on or after that (lay. The convention will remain in force for 5 years but it may be terminated after that time by either country, provided such country gives at least 6 months' notice to the other. COMMITTEE RECOMMENDATION

    In light of the testimony received from Mr. Stain and his analysis

    of the pending conventions, the Committee on Foreign Relations felt

    which will be (extended to the Netherlands Antilles should be clarified.

    that article XXII of the Netherlands convention relating to collections

    In recommending approval of the pending conventions, therefore, the committee does so with the understanding thatin extending the Netherlands convention to the Netherlands Antille.3 the collection provision in article XXII will be restricted in its application so that each of the Governments may assist in collecting the other's taxes only to the extent necessary to insure that the provisions of the convention shall not be enjoyed by persons not entitled to its benefits.

    which they are approved, and in light of the fact that no objections to the conventions have been filed with the committee, it is recommended that the Senate give its early approval to the pending conventions.

    Inasmuch as these conventions become effective in the year during

    (1673)

    Wl,

    Iq I

    Senate Floor Debate and Action


    July 29, 1955 84th Congress, lst Session 101 Congressional Record 12019-12025

    (1675)

    [i'. 120191 CONVENTIONS RELATING TO TAXATION, ETC.


    Mr. CLEiMENTS. Mr. President, I move that. the Senate proceed ask inanimous consent that a yea-and -nay vote be taken on the 83d Congress, 2d session, and that the respective resolutions advising and consenting to the ratification of Executive 1, 84th Congress, 1st session, Executive C, s4th Congress, 1st session, and Executive I), s4th Congress, Ist session, be deemed to have been agreed to by the
    to consider the remaining treaties on the Exectitive Calendar, and 1 question of agreeing to the resolution of ratification of Executive I,

    I should like to withhold consent to having a single yea-and-nay vote suffice for all until an explanation has been made. If it. develops that there will be no opposition--and I think there will be no opposition-then I shall have no objection to consenting
    to the unanimous-consent request.

    Saiilo vote. Mr. KNOWLAND. Mr. President, I have no objection to the several treaties being explained at, the same time. I do not believe there will be any objection raised to the subsequent ones which would notlbe raised to the first one. I do not anticipate any objection, but

    Mr. CjIEM\IENTrS. On the basis of the statement made by the


    Senator from California, I will withdraw the unanimous-consent request. and renew it, later. Mr. GEORGE. Mr. President, if I may have the attention of the Senate for from 3 to 5 minutes, I think ati explanatory statement. can lIe made covering all the treaties. They are called treaties; in fact, ithey are tax conventions. They are simply agreements between the United States and other nations with respect, to taxes on profits or income, and on inheritances or estates. The sole purpose of the treaties or conventions is to prevent the doihble taxation of Americam citizens who mity live in the other country whitc is a party to the convention and May have derived profits in Ihie other country. Th'lere is at reciprocal ol)ligat ion o0 the part of both governments to assist. in facilitating the collection of taxes due either contrary. That, is all that these treaties or conventions will accomplish. *iThey are exactly the kind of conventions we have had ivith it 1 1111)her of other countries. f shield like to make a brief statement for the record in order recorded as to each convention. 'Phie four conventions favorably reported by the ('ommiitee on Foreign Relations concern relief from double taxation on incomes aWid

    to give the background. Then I think we may be able to vote on all the treaties or conventions by one vote, but tihe vote to be separately

    estates and inheritances. Two of the treaties are with Italy and two of them are related to extending the provision of the 1948 treaty to
    thie Netherlands Antilles. In other words, we already have treaties with The Netherlands, and with Italy, and these conventions merely extend the treaty association so as to cover the citizens of the Uniited States who may be

    living in any of the possessions of the Netherlands Government or the Italian Gov'ernment.
    (1677)

    A treaty with the Netherlands is already in effect; this convention will extend it to an additional territory or area in which United States citizens may be subject to double taxation unless the convention becomes effective. The two treaties with Italy relate entirely to the double taxation of income and the double taxation of property held by the citizens of one country in the other country which is itparty to the convention. These conventions have been subject to the careful analysis of Mr. Stain, Chief of Staff of the Joint Committee on Internal Revenue Taxation, who has examined then in the light. of the revenue laws of the United States. They have been considered by the Committee on Foreign Relations which has received no objections to their approval but has, on the other hand, received many communications urging their approval.
    THE NETHERLANDS ANTILLES TREATIES

    The two agreements relative to extending the Netherlands Treaty of 1948 to the Netherlands Antilles relate only to income taxes and profits taxes. The agreement which was referred to the Senate during the 83d Congress came to us because the Executive has undertaken
    not to extend conventions such as this to territories of one of the parties without concurrence of the Senate.

    [P. 10201 In extending this treaty to the Netherlands Antilles the committee does so with an understanding related to the collection provisions of the Netherlands Treaty. That understanding appears
    on page 9 of the committee report. THE ITALIAN TREATIES

    The pending income tax convention with Italy follows the pattern proved. There are no unusual provisions in the proposed treaty which follows in substance similar treaties with Australia, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the Union of South Africa, and the United Kingdom. The Death Duty Convention with Italy has no unusual provisions. It is similar to conventions with Australia, Canada, Finland, Greece, Ireland, Norway, Switzerland, the Union of South Africa, and the United Kingdom. As a matter of fact, the conventions have been negotiated primarily by the Treasury Department, in conjunction with the State Department. In response to a resolution which was passed by Congress conventions, in order to avoid the double taxation of our citizens and to facilitate the collection of taxes due our own Government or due the Government of Italy or the Government of The Netherlands, as the case might be. Conclusion of these conventions is a part of a long-range program undertaken by the executive branch of the Government at the request of the Congress for the purpose of relieving American nationals, on a reciprocal basis, from paying taxes in the United States on income or inheritances upon which taxes have been levied abroad. In view of the fact that these conventions are retroactive with respect to the relief they offer to the first of the year in which they
    of prior income tax conventions which the Senate has previously ap-

    many years ago, asking for the conclusion of precisely these types of

    (1678)

    are approved, I hope that the Senate will approve them before adjournment. I see no objection in the world to voting on all four conventions by one vote, but the vote to be separately recorded as to each of the conventions. I again renew the request for that purpose. Mr. KNOWLAND. Nlr. President, with the explanation by the chairman of the Committee on Foreign Relations, I have no objection to the vote being taken on Executive I of the 83d Congress, and then to have that vote considered as a vote of ratification on the subsequent conventions, but the vote to be recorded separately as to each of them. objection, the conventions will be considered en bloc. The Senate, as in the Committee of the Whole, proceeded to consider the following:
    NOTIFICATION BY THE NETHERLANDS GOVERNMENT WITH RESPECT TO THE NETHERLANDS ANTILLES

    The PRESIDING OFFICER (Mr. ALLOTT in the chair). Without

    Executive I, 83d Congress, 2d session, a notification given by the Government of the Netherlands, in accordance with article XXVII of the convention of April 29, 1948, between the United States of America and the Netherlands, for the avoidance of double taxation dated June 24, 1952, which was read the second time, as follows:
    [Text of notification)
    PROTOCOL WITH THE KINGDOM OP THE NETHERLANDS SUPPLEMENTING THE CONVENTION RELATING TO TAXES ON INCOME AND CERTAIN OTHER TAXES WITH RESPECT TO THE NETHERLANDS ANTILLES

    and the prevention of fiscal evasion with respect to taxes on income and certain other taxes, with a view to extending the operation of the convention, with certain limitations, to the Netherlands Antilles,

    15, 1955, supplementing the convention between the United States of American and the Kingdom of the Netherlands with respect to taxes on income and certain other taxes for the purpose of faci itating extension to the Netherlands Antilles, which was read the second time, as follows: [Text of protocol]
    CONVENTION WITH THE ITALIAN REPUBLIC RELATING TO TAXES ON INCOME

    Executive 1, 84th Congress, 1st session, a protocol, signed on June

    United States of America and the Italian Republic for [p. 12021] the
    avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on March 30, 1955, which was read the second time, as follows: [Text of convention]
    [P. 12080] CONVENTION WITH THE ITALIAN REPUBLIC RELATING TO TAXES ON ESTATES AND INHERITANCES

    Executive C, 84th Congress, 1st session, a convention between the

    Executive D, 84th Congress, 1st session a convention between the United States of America and the Italian Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect (1679)

    to taxes on estates and inheritances, signed at Washington, on (p. 12023] March 30, 1955, which was read the second time, as follows:

    [Text of convention]
    (P. 120241 The PRESIDING OFFICER. Without objection, tlhe pending conventions will be considered as hI:aving passed through their various parliamentary stages uip to the point of consideration of the resolutions of ratification.
    NOTIFICATION BY THE NETHIIILANDS GOVERNMENT WITtH RESPECT TO THIE NETHERLANI)8 ANTILIE8

    The Clerk will read the resolution of ratification of Executive I, 83d Congress, 2d session, the notification by the Netherlands Govern. mnent with respect to the Netherlands Antilles.

    Tihe legislative clerk read as follows:

    Resolved (two-thirds of the Senators present concurringtherein), That the Senate advise and consent to the ratification of lExecutive 1, 83d Congress, 2d session, a notification given by the Goveraiment of the Netherlands, in accordance with article XXVII of the convention of April 29, 1948, between the United States of America and the Netherlands, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and certain other taxes, with a view to extending the operation of the convention, with certain

    limitations, to the Netherlands Antilles, dated June 24, 1952. Mr. GEORGE. Mr. President, in connection with the tax conventions with the Netherlands Government, I ask unanimous consent Colin F. Stain, chief of staff or the Joint Committee on Internal Revenue Taxation. There being no objection, the statement was ordered to be printed

    to have printed in the Ricoria statement furnished to tie by Mr.

    in the REcoRD, as follows:

    EXTENSION OF T"lE NETHER LANDS INcOmt TAX CONVENTION TO THE NETHERLANDS ANTILLES; SUPPLEMENTARY PROTOCOL

    The Netherlands income tax convention provides that it may be extended to territories of the contracting governments upon notification and acceptance by the respective governments In accordance with the procedure outlined in the convention. The Netherlands Government has notified the United States that it desires to extend the convention to the Netherlands Antilles. In accordance with procedures previously adopted for other tax conventions the executive branch lhas brought. this request for extension before the Senate for its advise and consent. The Foreign Relations Committee has considered the proposed extension of the Netherlands treaty and believes it desirable to extend the convention to the Netherlahds Antilles with certain modifications. These modifications are set forth in the executive report on the request for extension as well as In the sipplementary protocol which has been negotiated by the two governments. Under the request for extension, certain provisions of the Netherh:nds convention which have no application in the Netherlands Antilles are excluded from operation of the convention when extended to the Antilles. Hinder the protocol, the Netherlands Antilles agrees to take a further st'l) i, eliminating the burden of double taxation. It will allow a deduction from its income tax for Federal income taxes paid by United States citizens resident in the Antilles on income derived front Uunited "States sources. Such it credit is not available under the Antilles' tax laws. 'rhe protocol also modifies the effective date provisions which would otherwise govern the extension to the Antilles. 'mider the protocol, the convention Hilly become effective as of Janutry 1, 1955, If the Senate gives its advice and consent to the protocol and to the extension, and the necessary instruments of ratification are exchanged during the current year.

    (1680)

    It is understood that in extending the Netherlands convention to the Antilles the provisions for mutual assistance between thie respective governments in the collection of the other's taxes is to be applied in the limited manner which the Senate has previously approved in other tax conventions. Thus, each of the govertinelts will assist In collecting the other's taxes only to the extent necessary to insure that the provisions of the convention are not enjoyed by persons not entitled to its benefits. With the modifications which I have described, it is believed that the pending extension and supplementary protocol carry out the desired objectives of avoiding double taxation and preventing fiscal evasion. The Foreign Relations Committee, therefore, recommends to the Senate that this extension and supplementary protocol be approved. INCOME AND DEATH DUTY TAX
    CONVENTIONS

    WITH ITALT

    The income tax convention and death duty conventions with Italy which are now pending before the Senate follow the pattern of prior tax conventions which the Senate has approved. These conventions with Italy carry out the dual objective of mitigating the burden of double taxation and'of preventing fiscal evasion. There are no unusual provisions in the Italian treaties which constitute sigTificant departures from prior treaties. In the case of the income tax convention, the treaty provides a limited Italian tax credit for United States income taxes withheld on dividends. Under the treaty, the Italian tax credit for United States income taxes withheld on dividends may not exceed 8 percent of the amount of the dividend. Thus the burden of dotible taxation is not eliminated with respect to dividends. However, under existing Italian law, there is no provision for a tax credit against Italian tax for United States tax paid on dividends received by United States citizens. Our treaty negotiators informed the committee that the 8-percent credit was the most that could be obtained under the circumstances of the negotiations. Our citizens will, in any case, be placed in a more favorable position under the treaty than they are under existing Italian law. The Italian tax laws include a tax on corporations which is similar to the capital stock and declared value exces,-profits tax formerly contained in our own tax laws. This tax is, in effect, based on both property and income. Under the convention, a Utnited States corporation is exempt with respect to that portion of the tax which is based on income if it has no permanent establishment in Italy. With respect to the portion of the tax which is based on property, the convention limits the tax to property used or employed in Italy by a United States corporation. Except for these two provisions of the income tax treaty which I have described both the income tax treaty and the death duty treaty 'follow in substance, and generally also in form, tax treaties which the Senate has previously approved. The Foreign Relations Committee has favorably reported the conventions with Italy and recommends that the Senate give its advise and consent to these treaties.

    The PRESIDING OFFICER. The question is, Will the Senate advise and consent to the resolution of ratification? Mr. KNOWLAND. Mr. President, on that question I ask for the yeas and nays. The yeas and nays were ordered. The PRESIDING OFFICER. The yeas and nays having been ordered, the Secretary will call the roll. The legislative clerk called the roll. Mr. CLEMENTS. I announce that the Senator from Delaware [(Mr. FREARJ, the Senator from Massachusetts [Mr. KENNEDY), and the Senator from Virginia [Mr. RonEuTsoNJ are absent on official business. The Senator from Texas [Mr. JOHNSON] is absent by leave of the Senate because of illness. I further announce that, if present and voting, the Senator from Delaware [Mr. FREAR], the Senator from Texas [Mr. JOHNSON], the
    Senator from Massachusetts [Mr. KENNEDY), and the Senator from Virginia [Mr. RoBERTSON] would each vote "yea."

    (1681)

    Mr. SALTONSTALL. I announce that the Senator from Wyoming [Mr. BARRETT] is absent because of illness in his family. The Senator from Vermont [Mr. FLANDERS] and the Senator from Kansas [Mr. SCHOEPPEL] are necessarily absent. The Senator from Iowa [Mr. HICKENLOOPER] is absent by leave of the Senate. The Senator from Pennsylvania [Mr. DUFF] and the Senator from Nevada [Mr. MALONE] are detained on official business. If present and voting, the Senator from Pennsylvania [Mr. DUFF], the Senator from Wyoming [Mr. BARRETT], the Senator from Vermont (Mr. FLANDERS], the Senator from Iowa [Mr. HICKENLOOPER], the Senator from Nevada [Mr. MALoNE], and the Senator from Kansas [Mr. SCHOEPPEL] would each vote "yea." The yeas and nays resulted-yeas 86, nays 0, as follows:
    YEAS-80 Aiken Allott Anderson Barkley Beall Bender Bennett Bible Bricker Bridges Bush Butler Byrd Capehart Carlson Case, N. J. Case, S. Dak. Chavez Clements Cotton Curtis Daniel Dirksen Douglas Dworshak Eastland Ellender Ervin Fulbright George Goldwater Gore Green Hayden Hennings Hill Holland Hruska Humphrey Ives Jackson Jenner Johnston, B.C. Kefauver Kerr Kilgore Knowland Kuchel Langer Lehman Long Magnuson Mansfield Martin, Iowa Martin, Pa. McCarthy McClellan McNamara NAYS--O Millikin Monroney Morse Mundt Murray Neely Neuberger O'Mahoney Pastore Payne Potter Purtell Russell Saltonstall Scott Smathers Smith, Maine Smith, N.J. Sparkman Stennis urmond Thye Watkins Welker Wiley Williams Young

    T P12025) Symington

    NOT VOTING--1
    Barrett Duff Flanders Frear Hickenlooper Johnson, Tex. Kennedy Malone Robertson Schoeppel

    ratification of the other three treaties are deemed to have been agreed
    to by the same vote. Without objection, the President of the United States will be notified

    The PRESIDING OFFICER. Two-thirds of the Senators present having voted in the affirmative, the resolution of ratification is agreed to, and, under the unanimous-consent agreement, the resolutions of

    of the ratification by the Senate this afternoon of each of the treaties.

    (1682)

    Presidential Proclamation (Including Official Text of Convention)


    [Reprint of TIAS 36791

    (1683)

    TREATIES AND OTRER INTERNATIONAL ACTS

    SERIES 8679

    DOUBLE TAXATION
    Taxes on Income

    Convention Between the


    UNITED STATES OF AMERICA

    and

    ITALY

    Signed at Washington March 30, 1955

    (1685)
    78095 0--2-voI. 218

    DEPARTMENT OF STATE

    (Literal print)

    (1686)

    r.
    ITALY
    Double Taxation: Income
    Conention signed at Washington March 30, 1955;

    Ratiacion advised by the Senate of the United States of


    America July 29, 1955;
    Ratyied by the Presidentof the United States of America August 22, 1955; Ratified by Italy July 25, 1956; Ratogctions exchanged at Rome October 26, 1956: Proclaimed by the President of the United States of America Nomnber 2, 1956; Entered into force October 26, 1956; Operative reroactively January1, )956.

    BY THE PRESIDENT OF THE UNITED STATES OF AMERICA

    A PROCLAMATION convention between the United States of America and the Italian Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income was signed at Washington on March 30, 1055, the original of which convention, in the English and Italian languages, is word for word as follows:
    WHEREAS a

    (1)

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    (1687)

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    artome i

    ts.st ;'tsri'..mss annti h il

    rwispe. two revole.

    mige rerst1ims .f"tiw


    .. '..,

    voittoe.I itatai .-- MArIemt r

    M1108tp, Ulal'e.rotarly)of 3t1lto of t~lo

    UntIe-t States ofr Ameres.;

    a&Wi 11

    tis ITeeat.l'I it or I tio It at Iltal hoeskil.l Jaeldeh, Maistimt', mtottsl o" tlhi Itatllass 1101141t1'Ik

    osr Pro'etol if Arratra

    .1w', havloKt ,'.'lsIale,|

    Ito m'ow asmisistr teIr

    Se'lvetsvp rme

    ?IAw

    i.4et

    sitim tit A4ti maou rHir'.

    imave alrood ursm I It* NIt o.'w

    Iiag Artts'elv:

    TIAll SOTO

    (1688)

    3
    n+o taxes rooferrlJ to it this
    1.)
    It) t is* Poderalltso

    Vgltl~n is-el

    li theI;&#@ of the VO 'Wtoa isa,. toK'n


    In the case or Itslyi 1)

    oell

    ias.I4iu4 sai taiise

    Tom

    on hueal (Wip'osta *#At re4,Jiis

    %tottor.

    rood ),-

    (J) T" oItr W11411416~s (1,Io&'vsts Sul rc.J41'


    robbreictt). ())
    (

    jet

    Tal

    .ovable wealth (I'ltanopo1t mIs plublel).

    cut ro44Itt

    di r%:ohoual

    a) ona ltrioultural Inc%**. ,.

    'i1msweis

    uti

    re4Jitili grart). prols-siv#lvo wit r14d0t1).


    A~ltTLI.5 II

    (11)

    40 'tid III

    this C.'onentiol's

    (4) me tore "tteel9 Xt1040 man# tht United Stales ofr Amrica, and when 'e#4 In a igo@orlhica4l soote*
    InoluJoe only the Uotost, the Torrttortse of 11p'.tblle. I mooni tnrenich, d1ikeo and lowell, and the District of Co)tat-Is. (b) The tom' *Itly"maps the Itsoill (e) The er" *peonot l 'frioe, business, but tdo Js ieI it

    factory, werheousO or otbor Tiido place of taosIe the eOsual and

    teawrory us@ of orlyI stores factlittes, nKor

    TIAM HIB?

    (1080)

    4
    does it itociude an agency unless thte aitet has ant exrrstsea 4

    geoteral authority t,. negotiate

    and conecude contracts on behalf t'f enteras prise or has 4 stock af merchandise from which he regularly fills orders on Its behalf. An

    enterprise of one or the contracting States shell rnt be deemed to nave a permanent establishment In the other State merely because It carries on busliess deaolnis ien such other Stats through 4 fide coimmssion agent, bo#&A broker or custudian

    actlitv In the orditnary courtie of hfles tvusits as

    such.

    The fact that an enterprise of one or the

    eontractlng States maint4tins In the other 3tate

    a fised place of Ouslness exclusively for the purctnase of goods or mer(.ha4tuise shall not of itself cunstitute such fIxet place of busitess a permanent estatdislment of such enterprise. The

    fact that a corporation of one contracting State has a subsidiary corporation which is a corporation of the other State or which is engaged In trade or business In the other State shall not of Itself constitute that subsidiary c.,rporation a permanent establishsent of Its parent corporatIon.

    1d)

    The term "enterprise of one of the contracting States" means, as the case may be, "United States

    TIAS 679

    (1690)

    a)

    enterprise" or "Italian enterprise". (e) The tens "enterprise" includes every raem o.r

    by undertaring whether carrie4 o'n an tidividual. partnership, corporation, or any other entity. (M) The term "United Stotes enterprise" means an enterprise carried an In the United states by a resident of the United States Qr Oy a Un'ted States corporation or other er.tity; the term "United States corporation or other entity" means a corporation or other entity created or organized In the United States or under the law of the United States or of any State or TerrItory of the United States. (d) The term "Italian enterprise" means in enterprise carried on In Italy by a resident of Italy or by an Itaitan corporation or other entity; the tens "Italian corporation or other entity" mean a corporation or other entity created or organized In Italy or under Italian laws. or a partnership so created or organized. (h) The term "competent authorities" means, In tte

    case of the United States, the Commissioner of Internal Revenue as authorized by the Secretary

    or the Treasury. and In the case of Italy, the


    ' Mi""-ry of Finance. Genera) Directorship for Direct Taxation.

    TIA8 3679

    (1801)

    6
    (.1
    In the applicationi of the provisions of the present

    kXonventiom by one of the contracting States any term riot other wise derined shall, unless the context otherwise requires, have the Ieilnng which such term has under the tax laws of such State.
    ARTICLE Il l

    (I)

    An enterprise of one of the co'ntractling States shall

    noet ore subject to tax by the other contracting State in res;,eot

    of Its Itjustrial and

    comrmeetal profits

    11le0s

    it is engaged

    in trade .or business in such other State through a permanent establishment situated tlirelin. engaged such other Ir it is st,

    Stato, may Impose Its tax upon the entire Income of such enterprise from sources withinsuch other State.

    (.&' In dletermining the Industrial

    or c,m.ercla

    , profits

    rrom sources within one of the contracting States or" in enterprise or the other ccrntractineg State, no profits shall tLe deemed to arise rrom the were purchase of goods or aerchanrlise within the former contracting StaLe by such enterprise. (3) where an enterprise or one or the contracting States

    is engaged In trade or business in the other contracting State through a permanent establIstment situated therein, there snail be attributed to such penranent establishment the Industrial or commercial profits which It might be expected to derive If It were an Independent enterprise engaged In the sae or similar activities under the same or similar conditions and dealinS at arm's length with the enterprise of which It is a permanent

    TIAS 1679

    (1692)

    7
    esta#0lihosnt, and the prorite so attrlluted shall, subject to the law of such other contracting 3tate, De deemed to be Income rrom sources within such other contracting State and shall be assessed according to the law of such other contracting State. (4) The coapetent authorities of the two contracting

    States may lay down rules by agreement (or the apportionment or Industrial and coercial profits. (5) in the determination of the net Industrial and cumertlal profits or the permanent establistwent there shall te Allowed as deductions all expenses, wherever Incurred, roasonably
    allucable to the permAnent establishment,

    Including executive

    anid general admjnistrative experses so allocable. ARTICLE IV Where an enterprise of one of the contracting States, by reason of its participation In the management or the financial structure of an enterprise of the other contracting State, makes with or imposes on the latter, In their commercial or financial relaticna, conditions different from those which would be made with an Independent enterprise, any profits which would normally have accrued to one of the enterprises but by reason of those conditions have not so accrued, may be included In the profits

    of that enterprise and taxed accordingly.


    ARTICLE V (1) Income which an enterprise of one of the contracting

    States derives from the operation of ships or aircraft registered

    TIAB 3679

    (1698)

    In that State shall be exempt from taxation In the other contracting State. (2) The present Convention shall be deemed to suspend the

    arrangement between the United States and Italy providing for relief from double income taxation on shipping profits, effected EA.$ '013911 It 41 Motl. by exchange of notes dated March 10, ARTICLE VI If one of the contraCting States Imposes a tax based on property and income, an enterprise or the other contracting State (1) sh0ll be subJect to such tax for the part which is based on property only with respect to property tised or employed in the former State in the activity of such enterprise, and (2) shall be exempt from such tax for the part based on Income, if the enterprise is exempt from tax on 1)?6 and May 5, 1926.

    income according to Article III or Article V of this Convent ion. ARTICLE VII (1) The rate of tax Imposed by one of the contracting

    States upon dividends received from sources within such State by a resident or corporation or other entity of the otiaor .oen tracting State not having a permanent establishment in the former State shall not exceed 15 percent (2) It Is agreed, however, that the rate or tax Imposed

    at the source on dividends shall not exceed five percent it the

    TIAB 3679

    (1694)

    9
    shareholderr Is a corporation controlIling. directly or Indirect!y, at least 9,5 percent of the entire voting; power In the corporation paying the dividend, and It not more than 2 percent
    o)rthe gross income or such paying corporitlon is derived from

    Interest and dividends, other ' than. interest andI dividertJs received from Its own subsidiary corporations. Such reduction

    of the rate to five percent shall not apply If the relationshuil the two corporations has beeli arranged or In maintained of primarily with the intention or securing such reduced rate.

    (3) Bach of the contracting States reserves the right


    to Increase the rates or tax provided In this Article and, If either State so Increases such rates In the case of residents or corporations or other entities of the other .tte. either

    State may terminate this Article by giving written notice of termination to the other State, through diplomatic channels, on or before the thirtieth day of June of any calendar year, and In such event this Article shall cease to be effective on and after the first day of January In the year next following that In which notice is given. AATICLE VIll

    Royalties and other amounts received as consideration for the right to use copyrights, prtenta, designs, secret processes and formulas, trade-marks and other like property (including in such royalties and other amounts rentals and like payments In respect of motion picture films or for the use of Industrial, commercial, or scientific equipment) from sources within one

    TIAS 3679

    (1606)

    10
    oa the contracting States by q resident or corporation or other entity of the other contracting State not having a permanent establishment In the former State in Such totmer State.
    ARTICLE IX

    hall bb exempt from taxation

    (1)

    Income from real property (not including interest

    derived from mortgages and bonds secured by real property) and royalties In respect or the operation of mines, quarries, or other natural resources, shall be taxable only In the contracttris State In which such property, mines, quarries, or other natural resources are situated.

    (a)

    A resident or corporation or other entity at one of

    the contracting Stated deriving any such Income trom sources within the other contracting State may, for any taxable year, elect to be subject to the tax of such other contracting State, on a net basic, as if such resident or corporation or other entity were engaged ihtrade or buiihees within such other contracting State through a permanent establishment situated thereIn during sudh taxable year. ARIICLk I (1) (a) Wages, salaries and similar componSation, and pensions paid by the United States or by A political SubdiviAion o0 territory thereof to an Individual (other than a citizen or Italy or an Individual who has permanent residence statue therein) shall be exempt from tax by Italy.

    TIAU 5079

    (1896)

    11
    (b) Wages, salaries and similar compensation, and penslons paid by Italy or by a political. subdivision or territory thesof to an lndlvl4ual (other than a citizen of the United States or an Individual who has permanent residence status therein) hall be exempt from tax by the United States. (2) Private pensions and life annuitte received from

    sources within one of the contracting States by individuals residing in the other contracting State shall be exempt from taxatton In the former State.

    (3) The term "pensions", as used In this Article, means


    periodic payments made In consideration for past services rendered or by way of compensation for injuries received. (4) The term "life annuities", as used in this Article, means a stated sum payable periodically at stated times during life, or during a specified number or years, under an obligation to make the payments In return for adequate and full consideration In money or money's worth.

    ART'CLS 11
    (1) Compensation for labor or personal services, includIng the practice of the liberal professions, shall be taxable only in the contracting State In which such services are

    rendered.
    (2) The provisions of paragraph (1) are, however, subject to the following exceptions: (a) A resident of Italy shall be exempt from United States tax upon such compensation it he Is

    TIAS 8679

    (1697)

    12
    temporarily present In the United States for a
    period or periods not exceeding a tutal or ninety days during& the taxable year and the compensation received for such services does not exceed #2,000 in the aggregate. If, however, such compensation

    Is received for labor or personal services performed as an employee of, or under contract with, a resident or corporation or other entity of Italy, he shall be exempt from United States tax if his stay In the United States does not exceed a total of ninety days during the taxable year. (b) The provisions of paragraph (2) (a) or this to a resi-

    Article shall apply, mutatis mutandls,

    dent of the United States with respect to compensation for personal services otherwise subject to income tax In Italy. (3) The provisions of this Article shall have no applica-

    tion to the income to which Article X (1) relates. ARTICLS XII A student or business apprentice who is a resident of one of the contracting States (other than a citizen of the otner contracting State) but who Is temporarily present In the other contracting State exclusively for the purpose of study or training snail be exempt by such other State from tax on payments made to him by persons resident in the former State for the purpose of his maintenance, education and training.

    TIAS 1679

    (1698)

    13
    ARTICLE XlII A resident of one or the contracting States (other than a citizen of the other contracting State), who temporarily visits the other contracting State for the purpose of teaching for a period not exceeding two years at a university, college, school, or other educational Institution In the other contracting State, shall be exempt In such other contracting State from tax on his remuneration for such teaching for such period.

    ARTICLE XIV
    (1) Dividends and Interest paid by an Italian corporation to a recipient, other than a citizen or resident of the United States or a United States corporation or other entity, shall be exempt from all income taxes Imposed by the United States. (2) Dividends and Interest paid by a United States corporation to a recipient, other thin a citizen or resident of Italy or an Italian corporation or other entity, shall be exempt from all income taxes Imposed by Italy. ARTICLE XV (1) It Is agreed that double tamation shall be avoided (a) Tte United States In detemining Its Income taee specified In Article I of this Convention In the case of Its citisene, residents or corporations my,, regardless of arq other provision of this Convention, include In the basis upon which such In the following manner:

    TIAB WO

    (1699)

    14
    taxes are Imposed all Items of Income taxable

    under the revenue laws of the United States as If this Convention had not come Into effect. The United States shall, however, subject to the provisions of sections WQ1, 902, 903, 904, and
    68A Mtot. 210# - .w5.

    905, Internal Revenue Code of 19:0, deduct from Its taxes the amount of Italian Income taxes. (b) Italy In determinin Its Income taxes specified In Article I of this Convention In the case of its citizens, residents or corporations or other entities may, regardless of any other provision of this Convention, Include In the basis upon which such taxes are Imposed all Itoms of Income as If this Convention had not come Into effect. Italy shall, however, deduct from the taxes so calculated the United States tax on Income from sources In the United States (not exempt from United States tax under this Convention), other than dividends, but In an amount not exceeding that proportion of the Italian taese which such income (other than such dividends) War* to the entire income (other than such dlvidends) of the taxpayer. With respect to dividends from sources within the United States andtaxes therein, Italy shall allow as a credit 8 percent of the amount of such dividends.

    TIAS 3679

    (1700)

    15
    (2) I'we provisions or tnis Article sndal not be con-

    stru-u to de:Iy the exemptloos from United States tax or Italian tax, do the case may be, granted by Articles XII ant XIII or this Conventivn. M PICLE&XVI Where a taxpayer shows proof that the actlkn .f toe revenue autoritles or the contractitg States Wea resulted, or will result. In double taxation contrary t. toe provisions or the present Convention. he @hall be entitled to lodge a claim with the State of which he Is a citizen or, If he Is not a citizen or either or the contracting States, with the State or whicn he Is a resident, or, if the taxpayer is a corporation or otber entity, with the State In which It Is created or organized. Should the claim be upheld, the competent authority

    or such State will come to an agreement with the competent authority or the other State withl a view to euota&L;e avoidanze or the double taxation In question.

    ARTICLE XVII The copetent authorities or the contracting Statmahall


    exchange such infaorution (being Information available under the respective taxation laws of the contracting States) as to

    necessary for carrying out the provisions of the present Convention or for the prevention of fraud or for the a"ministration or statutory provisions against tax avoidance In relation to the taxes which are the subject of the present Convention. Any

    TIA8 We

    T80O

    0-

    -vol.

    2----14

    (1701)

    16
    information so exchanged ali4ll be treated as secret and shll nut be disclosed to any persons other than those (including a cotirt) concerted with the assessment and collection or the taxes which are the subject of the present Convention or the determin4tion or appeals In relation thereto. No Innformtion

    shall be exchanged which would disclose any trade secret or trade process. ARTICLE XVIII Bach of the contracting States may collect such taxes, which are the subject of this Convention, Imposed by the other contracting State (as though such taxes were taxes Imoosed by the former State), as will ensure that the exemptions or reduced rates of taxes granted under the present Convention by such other State shell not be enjoyed by persons not entitled to such benefits. ARTICLE III (1) The provisions of this Convention shall not be con-

    strued to deny or affect In any manner the right of diplomatic

    and consular officers to othor or additional exemptions now enjoyed by, or which may hereafter be granted to, such officers. (') The provisions of the present Convention shell not be
    construed to restrict in any manner ay exemption, deduction, credit or other allowance now or hereafter accorded by tht, laws or one of the contracting Ststes In the determination of the tax Imposed by such State.

    TIAS 3079

    (1702)

    17
    (3) 3hvuld any difficulty or doubt arise as tu the interpretation or application of the present Cunvention, or its relationship to convention between uon or the contracting

    States and any other State, the competent authorities of the contracting States may settle the question by mutual agreement. ARTICLE XX The competent authorities of the two contracting States may prescribe regulations necessary to interpret and carry out the provisions of this Convention and may communicate with each other directly for the purpose of giving effect to the provisions of this Convention.

    ARTICLE
    (1)

    XXI

    The present Convention shall be ratified and the

    instruments of ratificntion shall be exchanged at Rome as sown

    as possible.
    (2) The present Convention shall become effective on the first day of January of the calendar year in which such exchange takes place. It shall continue to be effective for a

    period of five years beginning with such first day of January and indefinitely after that period, but may be terminated by either of the contracting States at the end of the five-year period or at any time thereafter, provided that at least six months' prior notice of terminatloio has been given and, In

    such event, the present Convention shall cease to be effective on the first day or January following the expiration or the six-month period.

    TIASi 3670

    (1708)

    18

    CORVOZ101K TIRA GLI STATI UPITJ D'AMNDICA K L.AWItIblLI'A ITALIANA l'Klt KVTAIK IX 1VOIT11 K INUtIZIONI a pI' PIViIhO.VEIs IVASIO)NI rP1Z&AI.l l)'llTO I1 HAIKhA U'IHI'tMK 8U1.ISU

    11 President# doti1 Stott UnIti d'Amerln ed 11 Ireusidente dell& 14.pubbllce Italian., deuldrando dl concludere wuas Conreddito, hauno, a tale venston. allow seopo dl ovltarp le dopple Imlosislohnl * I. eveeionefltscll Its meterle dl Imposo st. ucops,,

    n.oloato come loro reppresentant~to 11 Presidents degll St~tl Unitl d'AmsrJeat John Foster Dulles, 8egretorlo dl Stato

    degli Stott UnIti d'Amerlcal ed


    11 Proosldonte dells hepubblica Itallanas

    atorl deitano Martino, Ntnistro delgil Aiffrl dellsIRIpubbilce Itallaial I quell, eogues ssondosl seableto Is rnlpottlve crdeonslall ad ave-. dole trovete In buona i dovuta formal, hanno convynuto quanto

    TIAS 3670

    (1704)

    II)
    ARTIU:LO I 14
    SOno$

    aiposte cut lI

    presented Convensione at riferlse Stott Unitit

    (a) Per quanto riluards Il pratasses (b) Per quento riguarad (1) (2)

    lOposta federal mul reddito, inclus. Is sotellslls

    L'tmposts mut reddito dot torrent. LtImposte mut reddito del fobbraieti. eagrart.

    (3) Limpoote out redditi di richessa mobile.


    (4) L'imposta out rudItt

    (5)

    L'Imposts complemntare progressiva sul redtIto. AICOL.O I!

    (1)

    At tint d4 quests ConvenaSones ( I1 1) termino *Stott UWitt signiftica Ii Stott usato In seotmo Unttl di America e, quando e

    geografico, include soltanto #ItStatt, I Tearritort dell'Alaska e dells HaNew e4t1 Distretto d4 Columbia. (b) (c) I1 termine 6ItaliO Is'ignifis Im Repubbltcm Italiten. It termin, "organtaseslone permanent' de 1. esucursell, #Itufflcl, I eoamprenit stabblltaentlt

    gassitni o oltri luoghl etabtll 41 effari,

    TIAU 3670

    (1705)
    9
    -I

    - ,

    20 ma
    non couprende Pu o occasional.e t esporanto dl un seomplice luogo 41 depoeito, no' use agenstl, salvo che V'sarnte abbia ed esercttl un potore general* di negoalare s concludere contrattt per conto dell'iupresa o obbie un deposito di mere1 per I& rejolare eseouulons degli ordini per conto dell'Iaprese. Non ci considers @he uns Inprose d4 urne del due Statt contreenti abbia unsa orgentsxelione permanent nell'ltro Stato per ii solo fotto ohe l'lspresa couple effort In questo socondo Statl per moe di urn comisslonarlo boas Mide, di un mediator. o di un curatore the operino nell'sublto della loro normal* attivita'. I1 montonluento di un luogo stabile di fotert nel territorio di uno dell StaLl contraentl do perte di una ispresa dell'lstro Stato, esclusivamente per l'1cquisto d1 mere o prodotti, non cootitulsee, In so' s per se', urnorgaalssesione permenent* dl tale Impress. 11 fetto ohe ums society' di. de4li Statl contreenti wu abbli urnsoclots' sussldieris, the si urns societa'dell'altro Stat. o oh. ovolga unoattlvital commercial o Industriale nmll'altro Stato,,non puo', In so' * per "o'I considerate Is sofor cltae' susitdtirie cone uns organitzesone poresnents dell& oloteta' madre.

    TIAS 2679

    (1706)

    21
    (d) 1! tormilo "impross di uno doeli Stott contrsontil sIgnitlcs, A seconds del cast, Un'ispress doIlI Stott WUitt e) U1terwine
    0 un'impress Itallans.

    Impresos Include ognl forms dt stti-

    vita' $volta do Uns Persons fises, do uns sociste' di qualunquo tips o do qualuaque altro onto. Mt) I1 tWel.. 'iapress dq011 Stott 0tii unsimpros signifiee gostita nogli Stati Usiti d4 un resiII termin. asocieeatl co-

    dent. 00gli Statt Ubiti 0 d4 uns society' o ltro ento deoll Stat Otttl u to' o altro onto d4qliStot Uniti' compronde I# soctete' di qualunque tips o011 altrs stituitl o organlsatil negui Sttt Until o socondo Is leogge degli Stati Uniti 0o1 qualun. quo

    Stato o Terrltorlo dogli Stati U0Ul.

    (g) II tormino "Impress italians' signifies untmlpress geotits in Italia do un residents in Itails o a& Uns society' 0 altro oate lisliano; i tormins societye' o sitro onto italiano" con0

    pronde 10 society' d1 qualunque tipo onti costituiti o orgeniussat do Is legso sitlilns.

    lii altri

    In Italls 0 seconper

    (h) I1 tormlne 'Outorits' competenti' osinlflca qusato riguarda gil Stote Unitii, 1I

    Comiseilonor

    of Internal Rovenuoe come autorissato 4Iel egre-

    TIAS 8679

    (1707)

    22
    UrIlo di Stato per U1 Tosorol e, per quanto riguarda ltalia, 11 Ninistero dolls Finaese, Diresions Ooenrale dell* Impost* Diretto. (2) gell'applicasione dells clausole della presents Convensiono di part* di uno degli Stati contraenti I tetmini non esplletsemente deflnlti conservano, a mono che 11 conteato non richlida altrimentl, 11 sii lgalsto che slasion" fiscal di questo Stats. ARTICOLO II! (1) h'limprosa dl urn dogli Stati eontraenti non o0 saoontrasente per I sueo profitocoinorciali, a mono hoe sea avolga una attib essay svolge gotta ad Imposta noll'altro Stato. ti Iuduotriali
    @os3 hanno

    nolle legi-

    vital' oomoretale o Industrials in tale altro Stato per masso dI un'organissialone permanents lvi situate, tao attivita', ditto altro Stato pus applicare 1o proprie Imposts sull'intoro rodilto oho sUaimpresa derive ds tonti situate nol suo territorlo. (2) Vol determinare I profitti industrial o coumerciali deriventi do fosti situate In uso degll Stati contraenti ad Una lpresa dell altro Stat. oontraente, sl stabIllsee the non sorgano profittl per 1I soemplce acquisto dI morel o prodotti eel prim. 8tato contreente do part di tale Impress. (3) Quaido unOmlpress di tracot. per
    ian

    degli Stati contraseti svol-

    ge unlattivita' eammerciale o industrial nell'ltroe Stat0 conasse 6i unsa orgasissasione peranents lvi situeta, sono attribulti a tale organisassione permanent I protittl in-

    TIAB 3679

    (1708)

    dustralsl o cooarclall che al rities potrebbero sisera steti da ease ricaveti so tossed state un' Ipress lndlpendent* operanto selle stos$e o In s812l1 alone porasentt. ettliLta'o salo sto*$e o 8l2all condlialoni, sense sAlun 1olae eon l'lmprese dl eul o' organlasao I profitti coal attrlbultl sono eonslderstl, to contormite' dolls legge di tale altroe Stto contraente, come reddito derivante da fonts situate ine estro Stat contreon*oo toe sone aecortstl second Is logge ivl Vitente. (4) Lo sutorits' compotentl del due Steti antraentl possone stebIlire d'eccordo I eritero fitti luduatrlall o comercisll. per Is ripertlslone del pro-

    (5)

    dlle doteralnaslono del protittl nettl isdustrlAll

    o eomerelall doLl'eorgsLasalione pemanonte sono assmse Is

    deduslons tutte le spese, ovusque soateaute, regieaevolmente


    imputablll a tale organissaalone pormesnte, Inclue Is 1pese slinistrative, esecutlve jenerell coal' imputabill. ARTICOLO IV Quando m'laprosa di une degli Gtatl contrasetl, per 1. tetto doll& sue partetlpealose all& dlresIsue o allay etrutture tlnensalrlsd6 un' lpresa dell'altro State contrsente, ft o Impose a questultlms Impress, nolle lor1 roluleonl coswerelIt o tinanslerle, coilalosl diverse de quele che sarobboro state tette ad unaimpreas Iadlpondente, I protitl, ceh noimalsente svrobbero Inermseatato 1i reddlto di una dells Ispres* Ia manensus dl tall condlslonl, possono easer* Incluil nel protlttl dl tale Impress e tasetil In conseguesas.

    TIAB 1679

    (1709)

    24
    AIn COLO V
    (1) 11 reddlto ohe unlimproes d1 uno illq Stati contreanti tree dolls jostione dl nail o dl aeromobIll lametri. coleti In tale Steto eono esenti ds lapOlaSlone nellIaltro Stat. contracted. (2) Con Is present* Convenslone reots soapeso ieAorcaeisaIloao marits do tre III Steat Uniti 1'ItalIi per olalanere le dopple isposialons out protittl roletVIl all megglo 1926. AIRICOLO VI to uwa do|i Statit contreanti applies un'ipoeta CONesureate &i petrimonio ea Stats contreente (1) e' soogetta a quest& Impoete per Is parts ohe e0 comslureta &Ipatrimouto soltanto riepetto al reddito, unmlmpreos dellealtro t~es, concluso con boamblo di note In data 10 musrao o

    patrisonlo destinesto o implegeto nel priml


    per 1o evolgloento dells (2) mue attlvita', .

    Stat.

    *1 esents do quests lapoet, per I& parts comnlsrate &I reddito, so Iluapoe, e' oeaste dall'amposte eul reddlto In bases e1'artloolo III o artl-

    solo V dells present* Convensaos.

    TIAS 3679

    (1710)

    25
    ARTICOW viI (1) L'aliquots dliaposta applicata 4s Uno d01li Staot contreentl out dividendl provonlenti ds fonti situate In tile Stato ad un resident*, ad una societal o astro ante dell'altro Mtato controente, ohs non abbli (2) 21 convenuto, tuttavia, ohe wmns organissasioae 'aliquots dell'iaposta perasente nol prior Stato, non dove oco4re 11 15 per canto. applicats alls (onto aut divIdendl non dove oceedere It 5 per cento quando Ilasionists ale sism societe' Ceorporation) che controlls, direttemente o Indlrottamente, almono per It 95 pr cento 11 namere totals del voti dells societa' lbe pap 11 dividendo, a quando non oltre 11 25 per cento del reddito lordo di quests sociota' proveyga di Interossl e divldendl diveral dagli interesal o dlvldondt rieevuti dell* proprle societal sues eidiarle. Tale riduslone dt aliquota al I per canto non 91 applies se I& relaslone tre le due societal e' stats coatitvla o a' conservats essensialmonte @on lVintenslone di baneticiier doll'sliquota ridotta. (3) Ciescuno dogl 8tstl ceontraonti st -lsoro, 11 diritto di ausontare 1. sllquoto doll'Iuposta previts toin quest ertico1o o, so uno dot due Stati sunonta tall aliquote not sontrontlt deL reetdentl o society' a attri anti dtli'altro State, eiascuno del due Itati puo' far venire woo loeffleels di quest orticolo eol dame notifies sertte ell'altro

    Stato,

    attraverso

    I. vie diplomtiebe, entro 11 30 glugno dl elseaun anne aolsrel in I tat easo quests artiaolo ceeom dl aver. effetto can 11 pri.

    TIAS 8679

    (1711)

    26
    so onnalo doll'anno sucasselvo a quell In cul
    tifleoatis depuncla. LATICOLO VI11 I coman ed I proventi ohs derivano0 It corrospettivo della concessions del dirltto all'useo d dirittl di autore, di brevettio disegni, process o formula
    $I

    state no-

    egrets,

    marohl di

    fabbrica o simil1 (Inolusl In tall canonm O proventl I OSnont analoghi pagamenti relative a peilloolo oinematolra. fihoe o all'uso dl attrossaturs industriall, @oimeircili 0 scientificho), do fontl situate in uwo dogli Stati oontraepti a ravore di un residents o sociotal od aitro onto dell'i-

    tir Utato oontraonto, ohs non abbla wia orgentuislone permanente nel primo Steto sono oxnti do lmposisiono to tale primo Stato.
    ARTICOLO IX (1) I redditi derIvantl d4 benl lumobill (esclual 81i

    Interectl di credit lpotecarl o dl obbligaalonl gorentito su beal immobIll) ed I canonl rlscossi per lo truittamento dl ulniere, dl cave o dl litre risorse aturall sona In.
    ponlbill solo nollo Stato oontraento in oul dotti beat, a$* nlere, cave o alitre risorse natural oone sltuatt. (2) Ii residents, la societa' o eaitr onto di4ne doio

    IIStatt oontraontl *he ricavi

    quilslsel

    del reddItS 5o-

    pro indicate do oentO situate nell'altro Stato coptraente0 puo' obledere d4 *ssere assoggetteto, per quaigsque ino in-

    TIAS 3079

    (1712)

    27
    silo lposto di dotto sltro Statoe s0 Nsa bass eito, sosetoe' aliteo onto svoisosse t nott& sofo Usc ls
    poulibllo durante detto easne lpoalbllo ui'ettIvIlm bluseslons pslsnsrnto stute. al eomorolalo
    0

    *n-

    duStrials ln dotto oltro State oontrsonto medlanto urs or$*-

    ARTICOLO I
    (l) (a) Salawe stipends 0 sills rotrlbuslon, * pensions pMaati deli Btsti eittedino htsllno e tlnb1 ode urns loro suddivlslom ale urn

    as politics o torwltolials ad uns porsom (bes

    Ro obbla ls resideasa pormnsaomn

    to It talis) lone osoati dells posts eppliosto Io Italia.


    (b) Salari, stipend a sflails rotribuslonim, mu suddlilslonos po. penslonI pgatl dall'talisa * da un oittedlno dolls Stato

    lities o atrrltorliso ad una persons (oh. mon alanis UnitI 0 es norn abbla l& resldens

    to poraneonto n1 Iteti bAiti) IcWo *sOnti delis ISposto applicato dol11 Stott tiltl. (2) 1* pensiosl private ad I vitalist provonlentl ds tonti sItuate In uno doeli 8tatl contraentl a tavro di rin. dividul rosidents nell 'ltro (3)

    Stato contreento sono esenti


    di quest artl-

    done laposts del prim Stat..


    I1 toruno "pensionl', &I swens e0loj comprodo I Mamemntl porlodlel tattl In correspot.

    tivo dl forvlsl rest In paesato o qualo ompenso per Islions riportate.

    TIAS 3679

    (1718)

    (i4) ti toamino Ovitatlo, Wt *ast 41 quauto arttoolo, aooprende In, sco flaea pegabill perlo4dieento a date &ta. bilute vita natural durante, oppuro durate un detenlnato nu. "ero dl anl, il dIlS4denca dll'obbllgo contratto 41 effettucre tall p04asontl In cosponso pot' un adoguato 4 piano correspettivo In danaro o lo bent valutabill In danaro.
    AATICQLO 11

    (1)

    I coepenil per lavoro o per servlli personal,

    OOa-

    prnao l'eseroslco delle professtoal libern, aono teacabll solo hollo Stato cotracate In cut til aervtal vengono prectati. (2) Le diSposistal del peragrato (1) sono, tuttavis, cosgette aIle seeuentl eccecloulo (a) II president In Italia e' egente dall'imposts de6it stati Unit sul ooepeiwi scettt se ola Lornas teaporanamentn neql Iatlm UItl per un perlode o per period d, twpo nmi suporto-

    At Incoeplecso a otants glorn. per cuno I&poulbibo a 11 @o=penio proepito non 6upera un total d1 2.000 dollars. Tuttavia0 so 11 suO componso *I peroeplto per 1axorl 0 per setvLIi personal ptestatl Isquelita d~moplegato oppure in virtu' dmun contratto stipulate *on un president in Italia o con uan so-

    cleta' o altro eoto italtano, olli *' eaente dall'iWpoat& d6li tsti Uniti qualora 11 auo

    TIAS 5679

    (1714)

    29
    sogglorno aillt Stati Uniti non superi, In cooplsso, I novants glornt duranto la6nno Ipontbile. (b) l dlsposlatonl del peragrato (2) (a) del presento articolo itapplicano, nutatis nutandis, al residento negllt SttI Unitt per I oempensl reletivi

    a1 servisi personal ohe sarobbero altrimenti colpiti In Italia dall'imposta sul reddito. (3) Lo disposistont del presents articolo non a1 applilcano &I reddlti IMIcati noll'srticolo 1 (1). ARTICOLO III Umo student* o apprendleta ohe e# residents In uno deli Soatt controenti (ohs non sia oittadino dell'altro Stato con* trashte) as hes *' temporaneoaente residents nell'altro contraente

    Stato

    sccluslvaneate s1lo seopo di studio o di Istruslo.

    no o' esente In tale altro Stato do Imposts sulle some che ri-

    cove do person& residents nil prison Stato a soopo di mantenisento, educasidne o Istruslone. ARTIC(LO XIII Ii residents In uno delli Stitt contreenti (oh. non Sic elttadino doll'altro Stato costreonte) ohs solglornl tomporeneaaento nell'altro Stato contreente a scops di Irsqnamento# per un perlodo non superior. a due asi, In uns unlversits', una scuola 0o&tro Istituto d'lstruslone nellaltro Stato contraente, 0' osente d4 Imposts In tale altro Stato contraento per i1 compenso di dotto lnsolnaesnto durante 11 periodo sopra indicato.

    TIAS 8679

    (1715)

    s0
    ARTICOLO XIV

    I dividends * gIl interests pagat! do ung society' (corporation) italians ad un perciplento che non Ste no' cit. tadIno, no' residents neoli Stoti Unit!, no' una society' od altro onto norlt Stato Unit!, sono esenti do ogni Impost& sul reddito do parts dogli Stott UnitI. (2) I dividend! s gli interossi paogti do una society' (corporation) degli Statt Unit! ad un percipient* che non Ste no' un cittadino, no' un rosidento italiano, no' uns soclets' od altro onto italiano, sono esoenti do ogni intosta sul roddito do part dell'Italia.
    ARMICOWO XV

    (1)

    (1) S1 convisns che Iadoppl to nol modo soauontes

    imposisiono sara' ovita-

    (a) Olt Stat! Unit!, nol calcolare l proprti I.posts sul roddtto specificats noll'articolo I della presents Convensions noi confront dol prepri cittadini, residents o society' o altri Wntig possono, prescindondo do ogni altra Dorme provista nella Convenzhone stessa, includers noIs base sulla quals tall imposts vengono dotorminote tutti I cespiti di reddito imponibile secondo lo leggi fiscal! degli Statt Unit!, cown so quosto Convontinne non fosse entrata in vigoro. Ol Staot Uniti devono, tuttavia, in conformita' doll@ norms dell. sezioni 901, 902, 903, 904 0

    TIAS 3679

    (1716)

    81
    905 del Codice fiscal del 19549 dedurre dolls proprie Imposts laumontaro dell. Impost@ Itslien. sul roddito. (b) L'Italia, nel calcolaro l proprle Imposts sul rodditt spocificato noll'articolo I dell& presento Convenzione neeconfront doe propri cittadini, residents, sociotao o altri entl, puo', prescinderdo do ogni altra norma provista nella Conveotlono stessa, includere nella base sulla quald tall

    Impostor vengono determinate tutti I cospiti di reddIto, come so quests Convenuione non foes* entrata in vigor*. L'Italta dove, tuttavia, dodurre dall. Impoat@ cosi' determinato l1imposta dogli Stats UnitI sul reddito derlivante da fontI situate negli Statt Units (non esenti dall'impost& neoll Statl Units Invirtu' della resento Convenzlone), non costitulto da dividendi, ma per un emontare non eccedente Isquota dells Impost* Italians attrlbulbile a tale roddlto diverseo deo dividend!) nolla proporslone In cut il detto reddito ha concorso a formare 1i roddito complessivo diverseo dat dilvidendi) del contribuente. Per I dividends che provengono do font! situate neg1l Stat! Uniti a lv! tassati, 1italia concede una detrasione dell'S per conto dell'amontare di tall dividend.

    TIAS 3679

    3095 0-04--vol. 1--- 15

    (1717)

    82
    (2)

    Le norm dt quest articolo non posso5 o *goera

    In-

    terpretste In moneor& do far venlr mno le asenioni dell* Imposts Itallan* o degli Stati Uniti, a second& del cast, concease dagel artlcoll X1I e XII1 dl quests Convenslone. ARTICOW XV1

    12 contrIbuente 11 quale dimostrl che leazion. dells autoritas fiscal dt uno degil Stott contreenti obbie data o

    dare' luogo ad una doppla Imposiluons in contrast con le norms dolls presents Convengioneo ha dirltto dl presentre u,, ricorso ilo Stato dl cui eli *' cittadino o, so eglt non ealcittadino dl nessuno dell Stati contraenti, aslo Stato In cui egl! e' residents, o, so 11 contrlbuente a' uns oceta' o sltro ento, silo Stato in cui o' costitulto o organlaeats. .o11 ricorso *I ritenuto fondato, la competent* autorita' dl tale Stats pronders' accord con Is competent* autorita' dell'altro Steto, llo scopo dl evitare equamente Is doppla impositions in questions.
    RTICOLO VII

    1A competentl autoritas degil Statl contraentl ci scanbleranno b inforuesionl (in quanta dlsponlbill In virtue' dolls rispettive loggi flscall) nacessarle per eseguire I1 clausole dells present. Conventlone o per provenire frodi a per epplicere is disposialonl logall contro lo evesonl alley imposte di cui la prescnto Conventione si rlterisce, Le Intormauiota cost' scambiate saranno tanuto segret. e potrsmao

    TIAS 8079

    (1718)

    33
    essers pertast a conosconsa osclusivemente dt color (coupresi

    ill organic glurisdlstonalt) oh. sono Interessatl all8'ocrtasanto * ella riscosslone dellse Impost cul 1 present. Convensione ol applies, o al rlcors! conconeonti 10 Imposte SteseH. Mon saranno soamblate Is tnforuaslonl che porterebbero ells rivelaslone di um segreto o dl um process Industrials o comer. stale. ARTICOLO XVI11 Clascuno degli Stati oontrasentl puo' riscuotere I Im. posts, chae sono oggetto di quest Convenzlone, applicate dell'altro Stato contraente (Cooe so dette imposts flssero applicate da easa stesso) in moda do impedire che 1s esenzlont o rfduzioni di aliquot& coneesso in bass alla non abblano dlrItto a tell beneticl. ARTICOLO XKU (1) Le norm. di quests Convenslone non possono @ssers Interpretate In noda di negare o monomer* In qualsisel motors 11 diritto del personal diplomtlco e consolare ad altre magglorl seensionl di cu ore benetole In future. (2) Le norms dl quest& Convensione non possono easser Inoomunque qualslasi Osensicn, terpretate in mentors ds restringere o oh. possano essergli accordats presents Convenzions da tale altro Stato contraents vadano a vantagglo di person* che

    detrasloue dall'iponpblle o dell'imposta, o sitri abbuoni ore o in avvenire accordatl delle leggi dl uno dogli Stati contraonti nolle deterumnasions della proprie Imposts.

    TIAS 8679

    (1719)

    34
    (3) Owe sorgecsero dubbi o diffiolta' gira i'lnter.
    pretaslone o I'appllieslone dell& presents Coanvensloane Is cue conneatlone con I* Convensionl conlusce doano delit Statt contreenti con qualsiesi altro State, Is autorlts' com. petentl deGli Statt contreenti poscone rleolvere 11 problems di autuo accord. ARtICOLO U Le competenti autorita' del due Statl contreentl poecoma owners I regolment/ secessarl per interpretare ad atturere Is sorme deli& present* Convenslome e poasonm corrlcpondere direttamente tre lora per render* effettlve Is clausole di eoe. ARTICOLO UI (1) La presents Convenslone sare' ratificate e #Ilstrusenti 61 ratlflce caranno scamblatl a Rona appena poccibtle. (2) La presents Conveysions avra' effetto del 1h 0snnaeo dellhanne solar* in cul tale scamblo avra' Avuto luogo, Bose contimuera, ad aver vlsors per un perloda di elue an 6 a partlre del 1 gsnneslo copra Lidlcate ed indetnluitaente dope tale periods, u puo' easer" tetta eossare do clasouns deil1 Stati contreentil ell fine del quinquennio a in quaelia1 momnento succesivo, purche' iat state denunsiata almeno set meat prima; In tale ipotest, is presents Coanvensione cossers' dl aver offlceacia del 10 Jennalo successive ella acadensa del auddetto periods d1 mal eel.

    TIAS 3679

    (1720)

    35
    DOIe at Washington, in
    duplicate, n the Engllsh

    FATTA a Washington, in dopplo esemplare, In lingua Inglese e Itallanag avendo I due test eguale valore,
    addl' 30 narso, 1955.

    and Italian languages, the two texts having equal


    authenticity, this 30th day of March, 1955.

    FOR THE PRESIDENT OP THE UNITlD STATE OF AI4MtZA: PER IL PRUIDITI DVGLI STATIC UNITI D'AMIRICAt

    [egAL)

    FOR THE PRUIDENT OF THE ITALIAN RiPUBLIC: PER IL PRIBIDERTI D U RVLrBLICA ITALIANA:

    4"

    [SEAL]

    TIAN 3079

    (1721)

    341 AN, WHI:IIKASI Illa' Spnste of the U'inited State's of America. by


    their restiolution of Jhuly '29, 19.55, two-thirds of the senators presconsent' to fhe ratifatalion 'ilt concurring therein, did advise mill

    Of thie- afforesid convention; AN) wHEIaKA5i ithe aforesaid convention was duly ralified iiv I he I'rsidelnt oif tle Urnited States of America on August 22, 19.5.0. ill pursuanle ll(f the aforesaid advice and consent oif fle .the leate, midi wast duly ratified oni tlie part of tfite Italian Republic;
    AND WH,.KKV.4 lite respei-tive instruments of ratification of the'

    aforesaid convention were duly exchanged at Rome ot ()October


    1l.!.1; 19 6

    ANm) WHEIAS it is provided in Article XXI of the afore'said

    conventionn that th0e convention shall bec4'omle effective on the( first daiy of JIanuary of the-calendar year in which the exchange, of instrulllln, d1 ratification take's place; AND W,, :ei:.s, accordingly, ulion tile exchange of instruments oif ratification of tflit aforesaid convention, the convention becalle efrfectlivie retroactively beginning January 1, 19.,5; Now, THERrFoK:, be it known that I, l)wight I). Eisenhower. o t, President of the U'nited Statels of America. do hereby proclaim sukitl make' public the' aforesaid convention to the end that the said convent ion and each asnet every article and clause thereof may 1b4 observed antll fulfilled with good faith by the Urnited Stat'sll of America anidl by the citizens of the' United States of America and all other persious subject to lte' juridlictioui thereof. INTESTIMONY WHim:Kor, I have heretunltose t my han ad .aus-d the Sit,al of thue 'Unite'd States of America to bie affixed. I)oN, at tite city of Washington this second day of Novellllhe'r in the year of our IArd one thousand nine hundred I:AtLJ fifty-six alid of tile Indelpendence' of the United State's o(f Amuerica the one hundred eighty-first. I)WIoiIrr I) EINI1WEII liB the Pre'sident: IIERBERT Iloovcit ,Jr
    AIding &Verrtarytif Stat

    TIAS 3079

    (1722)

    SECTION 16 Convention With JAPAN

    (1723)

    I.-COME TAX CONVENTIO'- BETWEEN THE UNITED STATi8 AND JAPAN


    Basic Convention (and related Exchange of Notes): April 10, 1954 ------- Signed at Washington. April 10, 1954 ------- Exchange of notes concerning basic convention. May 7, 1954 ------- R Received by Senate; designated Executive 1). S3d Congres,'2d Se-sion; injunction of secrecy removed (100 Congressional Record 6225). August 6, 1954-......-Rerted by Senate Foreign Relations Cowmittee (Ex. Itept. No. 6, 83d Cong., 2d Sess.). August 20, 1954-... - Postponement by Senate of further floor action (100 Congressional Record 15365-15300, 15380, 1538315387, 15394-15395). February 9, 1955-...-- Reported again by Senate Foreign Relations ('Cnn. mittee (Ex. Rept. No. 3, 84th Cong., 1st Sess.). February 25, 1955... Ratification by Senate of its advice and consent (101 Congressional Record 2132-2140). March 7, 1955 ------ Ratified by United States President. March 25, 1955-.... Ratified by Japan. April 1, 1955-nstrumemts ........ of ratification exchanged; convention entered into force btfective ,January 1, 1955. April 8, 1955 ........ Proclaimed by United Statel President. Official Text ------- TIAS 3170; 0 UST 149 (basic convention) 0 UST 200 (exchange of notes). First Suptlementarv Protocol: March 23, 195t-S. Signed at Tokyo. April 29, 1957 ------- Received by senate; designated Executive K, 85th Congrs-s, 1st Scmion; injunction of secrecy removed (103 Congrwtsional Record 6095). July 30, 1957 -- -Senate Committee Hearings. A.ugust 0, 1957------ Reported by Senate Foreign Relations Committee (Ex. Rept. No. 12, 85th Coug., Ist Ses.). August 8, 1957 ------ Ratification by Senate of its advice and consent (103 Congresional Record 14009-14013). August 19, 1957-. Ratified by united States President. September 9, 1957... Ratified by Japan. September 9, 1957-. nstrum ents of ratification exchanged; supplementary protocol entered into force effective January I, 1957. 8September 19, 1957.. Proclaimed by United States President. Official Text -------- TIAS 3901; 8 UST' 1445. Second Supplementary Protocol: May 7, 1960 -------- Signed at Tokyo. August 17, 1960 ----- Received by Senate; designated Executive K, 86th Congress, 2d Session; injunction of secrecy removed (100 Congressional Record 16606). ISecond supplementary protocol pending before United States Senate as of date of preparation of this document.)
    -

    (1724)

    CONTENTS OF SECTION 16
    Page Basic Convention: 1. Presidential Message of Transmittal to Senate. (1729) 2. Senate CommitteIl,/earings (none held) ..-------(1739) :1. Seate Committee Rleport of August 6, 1954 ..... - -............. (1741) 4. Senate Floor Debate atWd Action of August 20, 1954 ------------ (1753) 5. Senate Committee Rheport of February 9, 1955----------------- (1769) 6. Senate Floor 1)ebate and Action of February 25, 1955---------(1783) 7. Presidential Proclamation (including O(ficial' Text of Convention and Notes) ---------------------------------------------(1791) First Supplementary Protocol Sig ned March 23,, 1957: 1. 1Prtesidential Message of Transmittal to Senate .............. (1851) 2. Senate Committee hearings --------------------------------(1857) 3. Senate Committee Report ---------------------.. ... -----(1859) 4. Senate Floor D)ebate and Action -------------------.-------- (1801) 5. Presidential Proclamation (including Official Text of Protocol)..... (1867) Second Supplementary Protocol Signed May 7, 1960: I. Presidential Message of Transimittal to Senate .--.------------ (1881)

    (1725)

    II

    BASIC CONVENTION

    (1727)

    Message of Transmittal to Senate (Including Materials Enclosed Therewith)

    (1729)

    4A

    mIp ("waln 2.'i ,%.'f1.


    *,

    SNA'JI ;

    "I)

    ExSctrrlVE

    ('N) \'ENTION W1TI[ JAPAN iREIA'r'N(G TO TAXES ON INCO()M E

    MESSAGE

    THE PRESIDENT OF TIlE UNITED STATES


    TRANSMITTINfl A CONVENTION IIBETWEEN TIlE UNITIE'D sTATES OF AMEIIICA AND JAPAN FOR TilE AVOIDANCE OF DOUBLE TAXATION AXI) Til. PIIEIVENTION OF FICAL EVAHIO.N WITH RtESPECT TO TAXES ON
    INCOME, SIGNED AT WASIiNGTON OX APRIL 16, 1954

    FROM

    MAY

    7, 1954.-Convetition was read the first time and the injunction of secrecy was removed therefrom. The convent ion, the P'resident's message of trans. mitatal and all accompanying papers were nrferred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    THE WHITE HoUsE, May 7, 1954.

    To the Senate of the United States:


    With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the convention between the United the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16, 1954. I also transmit for the information of the Senate the report by the Acting Secretary of State with respect to the convention and the copy of each of the notes and the memoranlum referred to in and enclosed

    States of America and Japan for the avoidance of double taxation and

    with that report. The convention has the approval of the Department of State and the Department of tho Treasury. DWIGHT D. EiSENIIOWER. (Enclosures: (1) Report by the Acting Secretary of State; (2) convention between the United States and Japan relating to taxes on
    income; (3) copy of each of two notes, within accompanying memorandum.)

    (1731)

    2p

    CONVENTION WIT,! JAPAN IRIEATING To TAXES ON INCOME;

    rI ,:I1.:RtTtAT or
    e '' 'TI.

    ISVIT
    /ly.

    II'l , hI..

    IF shIII1m,

    thel Thl' itlit le'i'se.'.l . fite Atillg S.'eret l,.ry (if Stille, hinfl thholi,." to I nY lI. ,1",. fl -,IPr ,s id eh. , wilhi i v i e w14) it.-I f ri'. iswil iss ol 1 41 fi l e , lle '. ,
    Vt'Itle nilti- a4I 'ivll ', t otisei (if u Int lyl fit 1.11tilien'llionii if IIIh ll l r'i'if'. i I'resihilt'i Ill) w i' llill fo r Ilh t v'llve'i tll ItI tl 'en file I'nlitfel StIllis of .\ lnierit'1l 1ini114l1 e liv oii ll iv.e . 1' do u bleh l ix allio ll 11114 111( PIT%I'l.l I loll ( if li c,aI e, a sh io mt h r i -s e ct I o I a~ws i l t il i t, 01 14,(lt,tl , v v i l l l, lj. s
    to1 ti

    al WIWVIl"Ihiti,,.lm tl Aplril 16, 195-.1. 'l hl. r e i s ,, l .h ,,, ll , o f',s r lll'f o l' ll t I . i,\elt:i elti ll Aplril It1.

    olll It c'o p) I ,

    of 4.11 -1h(if I m ol Ili ol e'. 4

    1i5-1. betl wt''l flie A lliiibnssilor o(if ,lpa im ll

    Wiisi1httollt 111i1 fili' A ingfI~l' e voll vllPI llI. .'l, St't'l'talry of StaIte, rellinting to Itlie lipliqdilitioll (if 4.',,rlaill Iprovisio:tls
    i.% . ,,l ii' iti'llit . ile i l i '11,, h ilug ti IioI'as oil ivshile.i t reinI \01nrs I If T wri 1 Si" Iof 'iees.a:111 il 'fs. \%Is fitrll hl,,eI'l (W'Ir H 1 01 t tf ii istl isiolls Itet w I'eltirltrt' vi i'i. i la Its hi.4 i. i I'Tr01l (if t.e'ltir164il ii. The IC iv's (tf fle' ovIerlIIIItll Ia1 itnldliolll. \11s Ilbe vitlllm ititilioln o till' of .Ia1. Ili dhelerI'prtsvell tll (Git ,irttt':ti efnfrol. S*:..lllll.r4 . rll~ cof 4.I11 ll for i11i1l4, the, Ifllsv.- o1f li r vl~lvl~ll~ fh ill- l'lrpose (if 4-i~iliiiii i .gdho ld le
    ('r1 ,

    illtleltlw

    for

    Inmiilttll. as, frill. I1s jtrzetnabli'.,


    il ln nl tIII.

    ra11 coopI~il'lltlioIn. -1Iiv'e l

    uini vs'htildishiitg itirt

    imprtwt'oltdres

    The l)elarlli'il if t
    ioot'rillillI
    tliiiittiitititl'tI. T he' ilvollellll-Illx

    St ate tI1 flh' I)etlarlnellfn of lie 'l'reasur' iincltsosed c'oIIvi'Ition, after public ill ili' nI'git li ion of flit,' )t' It has Itiv apiproval of hoIi D ,irllntls.
    convelitllh n wvilh .!l m ,if 11n! w hen Ibrougzht, into

    al ftrc'e, u ill estallish, il flut nthe interest. of file ft voiullilt rits atid of .ollsill1'lthi' bltel'nt'u it tIaxpaYers., it salisfvltf ol'Y basis for utlivitiig obj'.t ivi's t.ssen tliflly h sill'e 11s fhoste of initinot-f II 'itIIVit ne litsi t'e nowil for hlwelIn fit' Unifoted Stiles aitd nuime'rouls ofhier toitlthe thli'tprovisions off e Irivs. lit iiiittlt'IS (if prilni'iple andisllstiets, iOlisi|eint, etttivtIItion w\ilh hpin ihalinfig to taxes on inci'OmllO. Of (it,ci'( Will, if liol idlentica.l lo, ipl'o\'isiols Ii onie o1r Imore' exislhF,
    ililtlli'-Ii X i'tlV'ltiollts of lthe I'elit eti Slilles, inciluing those ;\Alrm-Ilill. I"I'!g.illill., ('1111114111, DvIIllllllllk, FIilad~m , Francel(,, (4vr

    witIl
    v,i',

    Irelalnd. tilt Nviliiirhinds, .New Zealtind, Norway, Swt'lede, Switzt'rhlnil, fit' Ibeoion otf Soltiti Africa, atld Itlhe ItiledI Kingdom. TIe, itn tosil oll 1t nd'olhiletion of flaxes uipon Iflie sullne inlloiui' bt nay, 1ofh th nilifl Slates aid it foreign countryy m aiy d often i6o, I1'suti1 ill Iotible t axitlioI) or iI seiv're chiarait t'r." Ali incomeon-taux ion iIt1 illanimportanfit,and jtniacivif'al sil!) towaid remtovinig this ionventiIi Ulldhsh'ilblell impedimenlt'n to inlternallionid tradlte alnii e 'onIomlic dhevelop'I'li 11tgofiIIlion and 'oiiehtlsion of ionve'nli ions to give Irt'lif lth front slit-it fit tle ii tion hliave i' b'n st rongl-v supported by blth l-itiis. 'flhe provisions of tlhe cointil- uaxpaivirs aind fll it' \fillIut VPitliOln wiltilnTIlPnn tin' beIlieved to be in llniton; With tile l)olivivs (lt'wssf'-d4 l'11' lv litefeattrites mnd1l)rwovihig tax the li'rint'ilml Sttllallllv inl Ejet ives of t'oItveiiI tOIs.ax convet'ttt ion int'onle-t wilh t ni 1pine summarized lit follows: i' Ah, I thscrilt's ithe ftxes whichh iire the sublject. of dhe convention. ilde In the ,.I'st of tile I'.iled Sltiits flil' colivelition atpliies oily to fIlt' Fieli',iIt itoitit' Ilixes. intluding surtaxes, and dot's ioit alpplv to) laxes impos)e.d by thIte si'i'vral States of the U.nitiedl States, thle IDistrict of
    IInIlI.

    tl(

    (1782)

    CONVENTION WITH JAPAN RELATING TO TAXES ON' INCOME

    foil tlll ill Ilfhe 414' 4'4ll t Ilo " fr It 4it , ll, 'r,.iiol .iii,im'inet'l-4vilig tihe pr' thit ill 1, 111 ovislolli.or awt111-otl~liven im ,,il. termll no|I,Hll i ,'st shllill, ulelhss, filllii

    (',1111 iii. ,or lil' 'T'erritories or pss$4',ssiills- Ef 1114' 1'llif',l stl lts. In , fil e '114 'oflt tif ll , v1 etllfi) i a(4lis. 't, IiT4r pill Iilligy 14) tlu, i il' l ll pt1 s ,it " 1414' Ili.x 11114 ti 1 ll i )1 1.1." .1r1h1eV i'.. ill S 14 il' til4ilt (ifti, I it 4. 'lAs to tll 111 4' tii I l i't f ti I\J tSI -si H
    .1it,

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    Iili

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    wh

    h11'1111 14ill111 )ich .

    l%"i(j.Ill iol t

    1 t4'1 Stel fill' Ilh, Ai 1.1si' llpr Isle il i l he re isl a vollpretlnli i'lt 11 ve'4)h1'l i ry. 'fileill ("ro 'iflllir',
    It'sIII
    orlll him ilrf .

    I)t" lh',

    l ,I
    (if tlinpi

    oIns i

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    eviii

    1iI tile

    ermill, for

    A0111S I,1141% \% hill Itlli-' lt ofr 4i'I'it1 r. *. it t.r. l'ee, IIn prl vhloei, I htili11ntl's, ilroviln I1 sis, hu 1 h, l't' 1 lit illll t ilS,,tf Nll it ,littrill,,se ,,lllrl's.l Will li, ofltitse ("inlldls4 ril or 14)l r'iiilil" the' h'il,,dofSlates.. only if' slich enterprises Sub~jecteld to, 11I.XIlioI byV

    ell l, prise.. ofI' 41l11v f'rom i l( *l

    , ilh l'. ,'nl( iI11,oIIt' to ' l t

    sing,..

    oiw' derived bo

    l111,4 it prmlla n,, ,,stablishlneW,, ill this .,uin rYv. 'The, prvi.-ions 11111,,

    i d e1(hstIke,theIvorri',,SpltINlid Ir('siuls riolther irtv'laingx co4venlit(o' of4th,'lnii fod alis. 'onh,, hetain I)o alplitca)i5 , frir xrinipe W V, rll ing14)l.t or inomefront li)iris rlneition of inep fro f personall sprvic,,i..
    'respect.

    Arontie 11' iouathorizes toil,, allir'cation of Itsintss itncome 114jItweell the Internal lh,vetine cmieh taremt'iun( aht,h) aljustinlen, i4'n'tion 45 od couellri'et i,wo i2 It 't'orilnt', millh p)linci'pIli'rnal of accounts its rthe
    l eelwinterloc(king lsines onl s, o rdein o , a reasonatl), tix basis ihan r may big allocated to en,.h of de , lmtris.o rf r'inhs Irotow XrV, incusie are on.rned, t i sion s rtanrosnins hitting 0i reci)rcal exempt ion frrt. taxalion, oi ',,rdain 1tatstlitiol'4, (of Sp'ecified ielnrA of incopderae r oi' sour.ei s within no ,ounry by . resident or corI rt4lions of the other com inlr.'. Areipc.i V, relatingrI I',,iV4procl e oxemptsio from 1'taxiong prolit t of fromt the Oln4'rlion of ships or aircraft,is donsistnt, with e prilltiplo tha emtolishmet section 212 (r)) iyl321 (d).of die Internal Revnue ode, in of.4 'rellth', arplies tnly to bultsines fiior 15 'uld e froIht'h s'r o usir't tioilts, flrtvint nIo lllicinatiol to rorks, p1 diviehnds.i Sofar its airnrdiftopIrnl.e, prolit rke aondirnted the, provisions rtpresetid llg importaInt ren1t,,sion 'elpl't of to dihe 'l'il' sialm's.or fo t his time tripal, lAicle eo'lnierial air(raf. , talithing Ito tlniled States errioory whilo f Amndriotn aircraft, oinerpt., exthesivpe ion Jofpins rr. Artieh \esI renla'tes to ieml)r lion froi taxatitn in.excess of 15 Iperoef nt wifh rtspet.l to ine(er,,s, received frorn sources within tho, rxing Coihntry, provided the recilpien of fleh inter s-jc does not ofve trhmenr, lt, estalblishmeWn, inl such countryy. ,Article V11 relattes to recilprocal exemlption front taxiltion ill ,,xve,.,. of 151 ipere,,nt, with reslpeet. to royalties four Ilh, right, to its(%vol~yrigzht4, artistic and sc.ient-ific works. Ipatints, designs, Secre'tt, prloce(sses arnd forlulle,, t rad,,-iarks and sinlilar prolperty, including roplti,,s mid rentniq~ ill rteslpet, of 11ofio1| liiturre finlms o'r for tielit% ueof"industrial, commulercial, or Sc.ientific equipllmen,.. Article Vill relittes I~o the, taxation of income, from real lpropert~y find rovillties ill respect, of tile. operation of mines, qua~rries or other natu11ral re(source~ts; it is provided that, a resident, or corp~orattion of one of flhip countries dherivingz such involue or rovalfies frmil Sources Within tile other counhry mtky eleeto Il subject, to tlhe tax of such oliher W 73095 O-42-vol. 2-16

    (1733)

    CONVENTION WITH JAPAN RIELATING TO TAXES ON INCOME

    eXemliption frojti UTIited States tax extends to JatJpalnese nationals

    country ott a net basis as if hIe or it hadl pIermanent establisiunent' a therein. ('orresponding provisions are in tax conventions of thes 'nited States with other countries. Article IX provides that, an individual wiho is a residents of ontt of the countries slall be exemptt from the tax of thie other country upon conmlensation for labor or personal services, including practice of liberal professions, performed in such other country in any taxalod year if lie is temporarily presentt in such other country (a) for not over 180 days during suclh taxable year and the services are performed as an o0li4er or enpllhOve of a resident or corporation of the country of the individual's residence, or (b) for not over 90 days during such taxable year and the conpl)entation does not exceed $3,000 or the ,Ialanese equivalent thereof. Theso provisions tare particularly advati. tageous to American business interests. Article X contains thei provisions regarding exemption from taxation of government salaries, wages, and siniiar compiensation. The

    atud (lie exemption from Japanese tax extends to United 'States


    citizens. rhe exemption extends to individuals having dual nation. alitv, but does not extend ont tile United States side to the immigrant within tile United States while hie occupies that status, conforming in this respect to the intent of the McCarran Act. If such ininigrant becomes a United States citizen, but retains dual nationality, a rare situation, (lie exemption will extend to that individual. "Oiln thie Japanese side, the termi "admitted to) Japan for permanent residence therein" has a specific ineaning unnder Japanese law, but, has little practical elrectt since all except a very snall tutnber of united States citizens in Japan are in the category ()f individuals who will be entitled in ,Japlan employed by or in the service of the United States. Article XI eontaijis the provisions relating to exemption from taxation, on certain conditions, with respect to the remuneration of professors and teachers of one country temporarily visiting the other eumntry for the purpose of teaching. Article III contains (lie provisions relating to exemption from taxation with respect to (a) remittances received by students, (b) grants, allowances, or awards, not including compensation for personal services, received by a resident of one country from a religious, charitable, scientific, literary, or educational organization of such country while temporarily present in the other country, and (c) cotlp)ensatton, if not over $6,000 or the Japanese equivalent thereof, paid to a resident of one country who is temporarily present in the other country for tiot. over 1 year solely to acquire technical, professional, or buIsiness experience from a person other than the enterprise or organization paying such compensation. This article is a liberalized version of the *provision regarding students and business apprentices found in all tax conventions to which the United States is a party. It is designed to minimize an administrative robldemn which has caused considerable embarrassment to the United states. Article XIII does not relate to specific exemptions but lays down rules for the determination of the sources of certain types of income

    to tile exemption from Japanese tax. There are many Americans

    including dividends, interest, income frontits purchase and sale of personal property and from the sole of goods manufactured in whole

    (1784)

    CONVENTION WITH JAPAN RELATING TO TAXES ON INCOME

    or in part. by tlie taxpayer, income front real property aid royalties in rnpect ot the operation of mines, quarries, or other natural resources, compensation for labor or personal services, and royalties for usinr or for the right, to use patents, cop 'rights, designs, tradein the casm of United States banks with branches in Japlan. For the most part, the provisions are consistent. with the principles reflected in section 119 of t(ie Internal Revenue Code. Article XV relates to the tax exemption of organizations operated exclusively for religious, charitable, scientific, literary, or educational iuirposes. It does not change the tax laws in this respect. It is provided that such organizations organized under lapanese laws shiall be exempt from UTn1ited, States tax "%) thi, extenlt andl subject to condiis a reciprocal provision in regard to Japanese taxation of such organizations organized under thte laws of the 1l'nited States. Articles XIV and XVI contain provisions regarding allowance of credits for foreign, taxes paid. Article XIV embodies, in general, the principle of the United States tax credit as expresmed in setion 131 of the Internal Revenue Code. Substantial reciprmoity is accorded by ithe two countries ill the allowanc, of credits. Bv virtue of the enh-dit provisions, double taxation may be eliatmated in cases where no sjmicific exemption front tax is

    nlarks, and like property. 'I'hie provisions of this article will be especially helpful in coping with certain problems arising primarily

    tions provided in tihe Inited States Internal Revenue Code."

    There

    allowable under tihe, convention. Article XIV includes provisions ,silent, or nrgarning taxation of dividends received by a citizen,
    taplmnese corporation so far corl)oration of the tUnited States front a as the ,Jal)anese tax iip)osed on profits of a corporation oit of which a dividend is paid is deemed under Japantese tax laws to have been iml)osed on a recipient of the dividend. Article XIV has two unusual featunires: (1) A shar,,hohldr in a Japanese corl)oration would be allowed a credit against United States tax for 25 percent of tile amnoiunit of any' dividend received b1 him from such corporation; (2) interest paid by an American corporation having a branch in tlapan to another

    cOnventionl had tiot come into effect.. Article XVI provides, in thie case of a resident of Japan who is a nonresident of the United States, other than all officer or employee of the Japanese Government, for an additional credit against net income, subject, to conditions prescribed in section 25 of the Internal Revenue (ode as in effect on January 1, 1954, for the spouse and each child with thie taxpayer in thie Uniited States at. any time during the taxable year. In orler words, this article allows, ini tie case of a resident, of Japan who is living in the United States performing personal services in this country-, a credit against United States tax for each of his dependents living with him, subject to certain limitations and exceptions. For purposes of Japanese tax, on the other hand, Article XVI provides that in the case of a United States citizen who

    American corporation (probably a bank) with respect to a loan Pmployed in the business of thie brunch in Japamn would be regarded as interest arising front sources hi Japan. Article XIV reserves the right of each country to continue to tax its own residents and corporations (also citizens, so far as the United States is colcrned(l) as though the

    is a resident. of Japan the same exemptions for dependents shall be allowed as those granted to a Japanese national who is a resident of
    Japan. (1735)

    CONVENTION WITIT JAPAN RELATING TO TAXES ON INCOME

    Article XVII estal)ishes a system of reciprocal administrative cooperation between the comnetent. authorities of the two voitnlries, specifying thie conditions under whhic information may be exclungied to facilitate administration in cases involving taxes to which Ithe conwnvenion relates. It. is provided that the infornintion exchanged shall heI disclosed only to those who are on('ncernd with the assessinient and collection of the. tax, or the determination of appeals in relation thereto. Furthermnore, no information shall l)e exchanged which It is provided iii paragraph (2) that each country may assist. in the collection of taxes imposed hy the other country to the extent. necessary to ensure that the credit, or any other be*it granted unde(lr the convention shall not. he enjoyed by persons not
    any trade process.

    would disclose any trade, business, industrial or professional secret. or

    tions; (b) that the convention shall not restrict any exemption, deduc. tion, credit or other allowance accorded by the laws of either country in determining its tax; (c) that the competent authorities of the two countries may settle by mutual agreement any difficulty or doubt as to interpretation or application of the convention; and (d) that the competent authorities may prescribe appropriate regulations and communicate directly with each other for the purpose of giving effect to the provisions of the convention. Article XX provides for ratification and for exchange of instruments of ratification and prescribes that, upon such exchange, the convention shall be applicable to income or profits derived during taxable years beginning on or after January 1 of the year in which the exchange takes place. It is provided further thlat the convention shall remain in fore, for a minimum period of 5 years, but may be terminated at tile end of that period or thereafter by the giving of written notice by one of the contracting States to the other, in which event the convention would terminate as to taxable years beginning on or after January I of the year next, following that in which the notice is given. On the occasion of the signing of the income-tax convention with Japan there was an exchange of notes, a copy of each of which is enclosed herewith for the information of the Senate, relating to an understanding with respect to application of article XIV in relation to articles X (1), XI, and XIII. Article XIV provides (1) that the United States, in determining in (let ermining the tax of its residents or corporations, "may, regardless of any other provision of the present convention, include in the basis
    the tax of its citizens, residents, or corporations; and (2) that Jal)an,

    right of diplomatic and consular officers to other or additional exemp-

    entitled to such lbenelits. Article XVIII contains the provisions regarding action to be taken respecting claims lodged by taxpayers. Where it appears that action of the tax authorities of either country has resulted or will result in double taxation contrary to the provisions of the convention, the taxpayer may appeal to'the government of the country of which he is a national or resident or, if a corporation, the country in which created or organized. If the contention is upheld, the Competent authority of the country to which the appeal is addressed will undertake to come to an agreement with the competent authorities of the other country in order to correct the situation. Article XIX provides (a) that thle convention shall not afrect the

    (1786)

    CONVENTION WITH JAPAN RELATING TO TAXES ON INCOM

    uppoll whichl s8i0 tax is inipose(I ill iteleis of inlo(e ltaxable, under" the revenue lows of the United states or the tax laws of Japann, as tie flas be,, "as if tlle present ('onventio h011l( not (.o01,14 iito etrPe(.t," 3ay ]1 will I'W observed that, in article X (0) spe'ilie find reeiproell exeniption is grinlted with respect to g(wvrnilent. salaries, wages. find similar i ('ohlnelnsation, wierebV a t nited States (ilizen (other thant on% ad-. resid'nce) shall Ib, (x'nilJte 4 front witled to ,Japlan fo' j)ernlflelt. I Japalese tax as to such income and a *Japitnese national (other than 0MW lidiiitel to tie United Starts for permanent residtenve, i. e., one laivinig imnmigranut Stat iMts) shall bI exenipted from United Slates tax

    It was fully understood Iby the negotiators of tlhe convention that, in adilhinlistering its rl'ovisions, in(ill(illg artic'e XI\, neither ('oulntry %vothld deny tie exception slviliv('ally ac('orded int art ide X (1). Such exe('IiJtion is oftell preserved bv* insertillg ill t.i text. of the ('0elltiou an up) )rrilte s(iafeguar(iin(l clause. ]n this case, however it lvls (h4en( a4Visallhtt. titthe understanling oil this Ipoint shohlid be ,,onhfiriel in all exchange of note.'. Ac(cordingly, till' nnmrolandum a('omJ)llyillg the notes the 11h(fr~stunding, o(('asioll of Ilie signing of tilt conwveiltion vomllirils exchangred on thIie of the reslpeetiw, au~nthorities of the two (countries that the permissive provision ill artic'e XIV will not Ii, ('onstrued( to denly the exeml)tions granted reciprocally by art )iee (1). X "SinilarIlv,the notes confirmed diat article XlV will not be (constr'lld to)deny exempt ions granted by Article XI, relat ing to rel(mlneratliol of lroft'ssors find teachers of one country t IllI)oral'ily visiting the other country for the purpose of teaching, or rit.Ie Xli, relating to verltain reinittanc'es, grants, allowances, awards, or compensation rvce',ived by students or business at)prenti('ces. ]]owever, the further u1ld,'tsantilling is set forth that n'ithor country shall be pre('luded from aix;,' it.ts own nationals or citizens with respect to income coming within arli('le XI or article XII. The pJit icval effect of theso latter understandings is to leave un1 changed the existing practice under1United States laws an(d regulations while giving to Americans who go to Japan assurance of benefits which, without t fie convention, they would not have. If, for example, a resident of the United States goes to Japan oil a teaching assignment covered bv article X1 he would ordinarily, under ,Japaneso law, become a i'esident. of Japan after I year's pr'esece in Jalpan and !or tihait reason, in tile absence of speeihie provision to the contrary', would , lose at that time exemiptioni from Japanese tax with resl)e(et to the earned income derived from such teaching. Clause (1) of the memoralduin accompanying the exchange( of not,'s conf'ims the uinderstaidilinr that such" Ulnited States citizen's (xemlntion from ,Japanese tax under article XI will be recognized. On the other hand, if a resident of Japan (other than a UInited States citizen) came to the
    Would, under the basic principle's of residence applicable to United States tax, be regarded as a nonresident of this country during the 2 -year exemption period. A United States citizen resident in Japan Who cones to the United States on such a teaching assignment would reliaill subject to United States tax with respect to his compensation

    05 to such in('onlle.

    United States on a teaching assignment. covered b)y article XI he

    1,

    ! ." , .

    ",--

    11, -

    40t I*-

    I-

    I *,v

    11

    11

    1 1

    CONVENTION WITH JAPAN RELATING TO TAXES ON INCOME

    for such teaching. This would be in accord with the customary understanding in such cases, as confirmed in clause (2) of the memo. randujn. The same principles apply with respect to students and business apprentices under article XIfI. Respectfldly submitted ROBERT MURPHY, Acting Secretary. (Enclosures: (1) Convention between the United States and Japan relating to taxes on income; (2) copy of each of two notes, with accom. panying memorandum.)

    [Text of conventions and notes]

    (1788)

    Senate Committee Hearings

    [No hearings held]

    (1789)

    Senate Committee Report


    August 6, 1954 Exc(,utwive Report No. 6
    83d congresss , 2d Session

    Senate Foreign Relations (Committee

    (1741)

    #, 4"

    b3D CoNOREMa d Session

    SENATE

    j EXECUTIVE REPr. No. 6

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND TIIE UNITED KINGDOM

    FRIDAY, AuOUST

    6, 1954.-Ordered to be printed

    Mr. WILEY, from the Committee on Foreign Relations, submitted the following

    REPORT
    ITo accompany Executive D, 83d Cong., 2d sess.; Executive E, 83d Cong.. 2d sews.; and Executive H, 83d Cong., 2d sess.l

    1. COMMITTEE RECOMMENDATION
    The Committee on Foreign Relations has had under consideration the conventions listed below and recommends that the Senate give its advice and consent to their ratification: 1. Convention with Japan relating to taxes on income (Ex. D, 83d Cong., 2d sess.) 2. Convention with Japan relating to taxes on estates, in. heritances, and gifts (Ex. E, 83d Cong., 2(1 sess.) 3. Supplementary protocol with the United Kingdom of Great Britain and Northern Ireland relating to taxes on income (Ex. H, 83d Cong., 2d sess.)
    2. COMMITTEE ACTION

    Over a period of years the Department of the Treasury, in cooperation with the Department of State, has negotiated a series of double taxation conventions with certain foreign governments. 'These
    conventions have been negotiated in order to relieve American naon incomes, inheritances, and gifts upon which they have been taxed in a foreign country. In addition to the double taxation conventions listed above, the committee also has pending before it the following conventions: 1. Convention with Belgium relating to taxes on estates

    tionals, on a reciprocal basis, from paying taxes in the United Stites

    and successions (Ex. G, 83d Cong., 2d seass.). 2. Notification from the Netherlands to extend, with certain limitations, the convention of April 29, 1948, relating to taxes (1743)

    9~

    .*1

    )4

    DOUIBI,E TAXATION CONVENTIONS

    On incomei and certain other taxes, to the Net lierlanrds Antilles 3. Convention on double taxation with the Federal Republic of OGernialy (Fix. of, 83d Vong., 2(1 se,..). Thet'olnniit tee ha1ts not. acted 11ll)n these conventions beailli Ihey were received ilate in lie session and it. was felt tlat tiere should lie olpplortunity for interested parties to sudy thieni before tlie ('olnlilitteo
    acts upolln iheln. The (oniv entionis with lapliin alid ihe United Kingdom, upon which favorable action is now recO IInIinended, were referred by the ('hiiiriinan

    (Ex. 1, 83d Cong., 2(l sess.).

    to Mr. Colin F. Stain, chief of stafi of tihiJoint, Conimnitiee onl Internal Rweillulel Taxat ion. Tlie comnmnittee felt. (lit, these (conlvent.ionsshould be examined hearing in inliud the rdationaitl which they have to lhe Lax law of lit Ullnited States. these con('onsideration wias given tIo ihe holding of hearings, o0l1 ventions. III view of the report, from Mr. Stant, which noted fliat, with two except ions, (lie coI, e1)tlioliS here re'onilnenided for ratilica.tion, are similar to past. conveiit.iois, and noting that the 'olinniit.lee files contain several het.t ers in support, of the pending conventiions and indicatti iio opposition thereto, t'e coninintte decided thati
    hearings weret' uIlne(t''ssary. It. will be observed liitt the coinuniilat ion front Ihe #Joint. (onmIlilt tee on internal Revellue Taxatiion calls attelition to (lie follow. ing new eliiieiits if) these coivenltiolis: 1. The provision in tlie Japanese inconle tax convention (art. X1V) which provides a credit, against, tax of 25 lpercelnlt. to the Amnericai recipient, of dividends from ,Japanese. corlporationis.

    2. T'rl liberalization of the student aid business aJppre'ntice lprovisions with resliect to income in (lie Jaipanie'se incomlie tax
    conVliteioi).

    3. The increased plersoilli exemnption for Japanese residents in the United St~ites. 4. The inclusion of gift. tax provisions in the cOnlveIilion with ,jpallii relating to taxes oil estates and inheritancets. Consideration was given to these new provisions, and the corninittee believes that they should 1)e approved.
    3. ANALYSIS OF PENDING CONVENTIONS

    mittee on Internal Revenue Taxation isl s follows:

    The coninilunicat ion from the Chief of Staff of the Joint Com(IONhIuRKS OF TINK UNITED STATES, JOINT ComMIrnK. ON INTERNAl, REVENUE TAXATION,

    Il'aahingt'on, A ugust 3, 1954.

    lOio.

    AIEXANiI)r

    WIL.RY,

    Saenaite Office, Buiilding, Washington, D. V.

    tax couiventions whieh tire now penidilig ixfore your conumittee: Convention with Japan relating to taxes oil ilCOiUe (Ex. I), 83d Cong., 2d se'ss.) Conivenition with .,apan relating to taxes on estates, inheritances, alM gifts (Ex. E, 83dl (long., 2d sems.) S1lIjplehientary protocol with the United Kingdom of G(reat Britain and North hern Irelandit relating to taxes on income (Ex. It, 83d Cong., 2(t sess ) estate and gift tax convention with ,Japan closelv parallels estate tax Thelii eonvenitionis which the Senato has pmviously approved with othor countries.

    DiAR SENATOR WVr.KY: At your request, I have examined the following inoomne

    (1744)

    DOUBLE TAXATION CONVENTIONS The pending Income tax convention with Japan contains the same objectives as other incolio tax conventions already in effect; namely, the elimination, insofar as pos.iblo, of double taxation with respect to income, oiti~er by exemption in one of the countries or by the application of the credit principle, or both, and the establishment of i systeon of reciprocal administrative assistance between the tax authorities of the two countries. The prol)oosed Jap)aniese ilncome tax convention, however, contains several features which are not contained in other eolnventions now iII force. While these provisions will he discussed iII detail iII a supplemenltary memorandum, It is decided desirable to bring several of these featurer, which may he controversial, specifically to the attention of your committee. For example, the convention provides 'for a credit against tax of 25 percent to the American recipient of dividends from Japamese corporations. The rationale of this credit is that the Anierivan shareholder has borne the tax burden of the Japanese corporate income tax imposed oil the earnings and profits out of which the dividend is paid. (Under thiet convention, Japan also agrTes not to impose any wit liholding tax on dividends going to American shareholders other than the Japanese corporate tax; at the present time, Japan imposes a 20-percent withlholding tax oin outgoing dividends which is reduced to 10 percent if the investment tends to further the Japanese

    economyy)

    will he available to the American recipient only if he includes in income the atiount of the credit, i. e., 25 percent of tile dividends received, as well as including in income the amount. of tile dividends received. It should be pointed out that this credit to alleviate the, burdens of double taxation of corporate earnings is considerably larger than the 4-percent dividends received credit granted to individuals for dividends received from domestic corporations which is contained in Ii. It. 8300 (as passed by the Senate oil July 29, 1954). It should also be pointed out that the credit is granted untder tie pro)posvcd treaty at a fixed pIercentage of 25 percent without regard to possible future variations il the Japanese corporate tax rate. Thus, if the ,Japanese corporate tax rate were reduced in the future to less than 25 percent, tile American recipient of dividends from a Japanese corporation would still he entitled to receive the 25 percent-credit against his United States income tax. The other umnsual features of the proposed convention which should be called specifically to your committee's attention relate to (1) the IlIeralization of the student asld business apprentices rule, and (2) allowance of all increased personal exemption for Japanese residents (other than officers or employees of tile Japanese CGoverniment) who are temlporarily present in the United States. The first of these provisions permits a ,lapanese student who is temporarily present in the United States to be exempt front UJnited States tax oil ally remittances from abroad, Including payments by his Japanese employer. Under other conventions now in effect, this type of provision is usually limited to an exemption of remittances to cover tile maintenance anld support of tie student and does not extend to wage or salary payments received from a foreign employer. Also, under the business apprentice provision, a Japanese employee of a Japanese corporation who is temporarily present in the I'nited States for a period not to exceed 1 year will be exempt fromn tax on ans compimsation-roceived from his Japanese employer if the total compensat ion oil ant annual basis does not exceed $6,000. In contrast, the usual business apprentice provision in other treaties only exempts remittances received from abroad for purposes of maintenance of the business apprentice, rather than exempting his total wages. The convention also will give to a Japanese nonresident alien (other than all officer or employee of the Japanese Government) a limited increase il personal exemptions for his spouse and children who are present and living with himn in the United States for any part of his taxable year. There are no similar provisions for increased personal exemptions for nonresident aliens in other tax conventions. In general, a nonresident alien is entitled only to a personal exemption for himself under the internal revenue laws. The sllpplementary protocol with the Umiited Kingdom is intended to modify tie provisions containetd in the income tax convention with the United Kingdonm for extending the provisions of the convention to the colonies, overseas territories, rotect4)rates, or mandated territories of the contracting countries. This inodication is deenied necessary so that the provisions of the present convention may W extended with certain lillitations on the application of the convention to the territnries to which extended. These modifications are necessary to reflect the POlicies expressed by the Senate in approving tax conventions with other countries subsequent to its approval in 1945 of the tax convention with the United Kingdom.

    'hie 25-percent tax credit oil dividends from Japansce corporations

    (1745)

    DOUBLEo TAXATION CONVENTIONS A t.einoraudi.in set.litg forth a detailed anmlysl of the provisions of the albove

    will he miiimiltted to yvotr (,oltilittee. This iireiiio. rantlthn will give partieuiar ellhiasii to those pr)ovisiotis which tdepIart, fronIi the cuistomiary pIrovisitms of other tax conventIions IIOW ill force. Sil'rerly yours, COtL~IN F, prolpjoseld tax eniventitoi S'rAM,

    Chief of 81131jT.
    4. INCOME TAX INVENTIONTION WITH JAPAN

    (Menuorandutl

    front

    Ithe .Joint (ComUltmittee on Internal ievei.t

    e 'iTaxttioiu)

    iloseIC talx liability tillt rtre' bases. di t It iltso est abilies jirolietlltires for iilititii|l adiiiiiistrat ie assistailtl bet weetii tho li.eal a hltiniti s of1. IIhe two voillllries. h The eovetNTillV inll does not conta i tany iI It jiruisiolls whiit fillte RmIt.t Ieti1s lit' mr' buslhy (leetledl objiel in,.atde, iil t etisiderIttion of ot her Iax treatll s. 'l'Tlus, the earnings of lhublie
    lith ,Jallle,e involltie tax elt1liiol dloes ll, ne
    euiterltittiers, tir

    Tne it.i'olle t elielit llti wit h .hll It, tht' getieratl litirlmii iof llirorliiiig relief front double taxait (tion resultI ilug frol t hie fAct I hint IhetI ax Itw of IhetI wel tio1t ritai

    dtoe's ilde foir .enllhlit li it proiv

    tlitin anlly distrilitait lin ageilst % front I'itotd

    Slttles tax of ('tipit ill ge llflm r avemlhtitlte rilmngs. 'ish irin io11n collehtill 1 'i for uf t\tif'n lhy oIne of flith crt rtl.t itigt satles 1i",r I he, ,t her is. liuielitsd tIth ile(f',ry ht to insure that. fliet henelilt provihhed ill 1ithe ,,uivetit ion will out eaij.i.%v(I hie lu y jcFrsmilis iiot l'l tret. tout Ihrel

    ( 'uirrrei.uliiig tot lie' Ipriucijith's her file m (if tit

    oliter at1'.le. Thus, tere sahlh' I.* it .latpim -ese titi-Flrriise lrdthlteli t ofi its ill ' UIiit'itl alites will nIt silloeett lile .haiut.-se ctimtierit ti t)x fi hilite ils fromi such prti t salle litilessmt lithe conel'rli in, perlnmtl'iit tslitsilllm int lile I'iiltvdl 8tate. iit i A reeijroll et'filijit shiljijitig tumid irt'r:itl't ilir'titilig JiFrotilt I, pIrov'iil't iof i1itllh'r arlieh, " where flit', i the lhis or :tirrr:l'lttIf rt l ,l.Ishred iii 'r'f 1llt11.fI lit v'titnlelulg dillliti's fir a1ref rtmgisttertl' in allIird t'leillltrV " hirhl e'\f'llts111 fromin its tt\ I 1sippijiig
    mid aircraft toljt'rattig piroftits ltf Iloh iiJapiai atitsf If'llited States-t. ThisL Littertyptsem-I'.llltioll ki t netw ollte which i.s tool 'tolll~nille, ill tolher invoe-.tll(-i;x IllVtn'lii 1ltlls no11W ii f'lf'l'tt. At tilt jir-i'siit 10', till' f'\f'llill fii ll'tf of liviig'4 froliti he opelratioln or"airvraf1. will Uliralet al,tio,41 i,\m-hi.iveIY ill fa1volr of"this Unlilted Stle.lh Vmc onf inhrcst

    tIIit ill t't.t erprise fir if1ti lie I(,t lrt ling ft'ilit ries will mit I' sllijt't to tax ( of. i tI by ldie ether mti its busiltiess jirtiilts taih it has it perlllmtentl iv.lalistlinivitt iii thes less ll

    Iix t c muen tiios, it is prof lied

    A rvel'roeal rehlit'i l Ifi .S j ilrt lit thi Flt of fi t i hiler,,.,st is j.rtoviidtl' mhier trtli'h, VI whilFre IIIt' interest Is recl'ivi'ldt frim stiulrvl' wilthinlio f flit he l'fitiraetlig states Ii\ a ra,.-oFhSlit. (,ori'ralut't , oFr oitier ft'ilt of tilt' otier 'ml1 Freltilg states' hotliavt Ivia.g la iitwril'ttit l' tt(liisliti1'iit ii tlle 'fortIil'er. At tile Ipre.still. tim1e the, J|alneusi- \vilhhioldillig ta!x oil ti~lgolilg imlern.st is 13} petrcent

    exl'llt. w1hrefli lhiIoai tl ts tO fiirthlhr li Inp)unnll'se f'oliitiv iii which tl't15 t.he o)ll. withhohlding tax is It) ierel'mt '.Thls. ilnlirest oli ilit. Imos iietled St ate's loatis to Japanese enterlrises will hut Ie t'l't'lsll at, lit' iresetit. hti' by this irovi.io11.

    A simihlar rteriproeal rtehleliuu to a lax rate of" 15 lprceut is prov"hhed iII the rasiss.

    lrltil sources milt1hii one, (f thll' conit byv hi's a resident'., corpliratios, or other eitity (if thit hte ('othroittry hiaving tiermanelt. eshthlishmeni o t. in tie former

    of royalties from copyrights, artistic. ailfd scieltitlh works, pIatents, tldsigiis, se1r'(,'l, r tes,rthade-niarks, anid similar pirolrlitls where the roya'liyt iI. are driv'eed count rv.

    a wiltlholding tax (if 20) lIlreeu't lUlier flhf' .JalhUinne inlcoe tax. As in ill, e.l,-ve of tmost, other incotme-tax t.(uh~elivitmO.is, it is pirovidedl that a residlent. (, f'frplltOll, ori other entity deriving Ihcomie frontm real property (other thmnt interest fronm ri'l-

    'rhis provilioi sl,(,eificallv iiel(his filmi reitials which are sihijlt. to

    e'state miiort gages or real-estatle bltll(s) or income froni royaltlIhs deIrivedi from11 natural resoitrees miaty elect to be allhijelt. to tax uijion1 a tiet hasis rat her t lanai iapo1 It'(, gross ilcitti.' fromt s11ch sfttrl'ls. Where, such atm ll,(l'titln is iimade1, It i i11mposed! as t hollgh th t'i(le . cotioralition, or otlit'i'r entity t l l rid i l a itpFirtllttiltt establlishitmient In the other comitiilry.

    Iiolrerd income Reeiproral e'xlem tion( of e'aueI init'oume (co11p'tsuatsiot for labor or pein !iii services, Itehliditg professionalti(rvices) is provid'ed iii article I X if alt individulla rt'ilehmt of oiiie of the Counitries ja temporarily present ili tie other. Where hliS compeniijiisaltionti is.f detrivedlI front services jisr.forllled| as ani officer or elil)loyce for 11

    (1748)

    1OU)1li,: 'rAXA'riON CONVENTIONS corlporirion, nrsidnt, ,. or

    C her pitl if y of his oimilt r,,.itle Iic, I he Iv( iwlt'lalt iol ti ry of is xemplt without regard io amitif provided his Iprr'es'e ii it'e ofhter comitry does not txt'i'' 10)ditys during Ilie t ixhlt year. In oitlhr aivts (fir ,xa-imillh. an4iiits rt'cim'ed by ltuehli erttiHariliers of filet 'niitel Sltites from shows performe'd ii ,hilJpn) flit' exitipt itii k limilld t I-t itimxinat amtiint of $3.000f lor the ,laliatnse equivall'll thereof) iiid to i iimxiuiiii period of 901 daYs iii lihe taxithh, Year. A reciprocal exelmption(f ci n -iiijesa paid Is. tome li, ioit of gstverii'r it sh its vifizeniS who are ofli'rwi-t. silljecftI l1\hI liet tier g-0w,411,1i4-il is pioi ithd in art i'lt, X. ThIe c'xnm-it bin dovs ittuf 'y, h.,ho 'vver, if It .e ii,,s lire- l'rrforied apll sin. in conitiieion with it raihe or liviness varriet l on I*v fthe goierihtieti for prolti. This lallhfr limitation is similar tit) tite,ttmu nItt bimf i ii fv I. nit' ax jti. withIIth Unitled Klingdomn, I, rliti, imit N(,i Zeahu.l. 'hii exmilttit i ip kxpnrssly lalde iialitlival. Its eit ii ei, of c1',oif I ethilyl ri'es whoiti ha l,een le Iit a lIe, fed tit lleiotiwr cottlnllry ftor pri omlil r.,iith'i. l' r iTus, mis, leit,)illilt c\iIs of atoll ietli i'iW'li f Iest' lrov i.,,il cifs the et itlt 'tnmeitio %it t -t-clioji 2 of file- Ib ii rgotitionu alit Nat liillttlity Art (1l11dic' LIw .11w1. 8,2d1 ('tig.). Fo''r I,,llnpll. .i anllllf e IiIi 11tV wolt d lii t(bet erui tuu'ii i11 1 I from |'id , jil t' p(trt ietiie' Iifit' li ,tllir \ i paijll tol him byv the ,hllq11iles (lovmiividrlU~l for sne.,l' I.rf,rinvl pit''
    iii the J'liiml,'

    Stam -'4 if li' leh I1' h s t11 ifttdl fit ' I nit-tiJ Stell f ofttr flit lttrntui uit' re.iten t'.c l)it , Ile tht liiild, if slh Jitl ivlii1111l hivc'aic'nit U'ijeI SIti ti vit izi'll.l wouiildI eltiirle li'r hei ld

    ixn ti'ii trolt I iiifd Sfitt .t lfix oil (olltiit lt't ioll t ilt fit him io m jtIv fit' l11 1 LiUi',tl' (stve'rnllt'lit;: iIwtveIer. siili elt'is c iihl Iiilmllilf i y wutiltl i -ilatelr bte I'hurt'. Ito Thik e'xtmpiojit lun In\ iti of l'aii i pi'tl Id1 tll Its I nidled*low fit v!i, ti vi f 1lte' t,lrattlilig gitve'rnim-i ~nldivlyel it, vi~llp
    ments1,, ,shouldh prolve, lprlietlltirl ' impoliamlllt

    techilitll yeili,'l it' Ih it e'Std ( o vil'ritiiieit fcrll-lrfrmnirjug e.t'rvic.,.4 wiltill Slitats Japlan wher't, lIheir ttplll1itvYIiii'll is lit1t.-. 0hi at iat ti'r ait,Io lritig Ilnivi wit hinI th of
    doillamt! it' illulmilllit \'. J0IN4,lllliliml of" cmtisal'l.llimII rvvvivcvJ by visiting lirofv,;sors or teatchers- is

    provided mniehr arlich' XI o itre tciprial hasi.m in elLsc,, whein flit' tb'ation of Il, vijif dcoes not 'xecicl 21t'hiI liyle Ite'.' flt' f 'Jelit'r or Itrofis:,r is prlsri'cl' ml 'i in fli taxiig eon ttlry fitheri clr n icilltig, program to ill-it iii\ , lir ilitith tito the, Ia\iiog gtvi'mueilil o r ota i liii mihllt'litnlil titlalihlitih l fihrei ii. 'Te littleIr limits litsion is similar Io Ilnt llf llil,'ll ill fillt illvttlllt fm eollxItthllt wilt Iifi a Niet hierllt.I las is soiewlitil .1 itd Arit'tr f lii simihlr pirovisiollis emitolnhicd inl oIithr tax I ret' it'.s. Sftudrets (tIud b,sihess it lpprlTtice's 'li' provvi.'ii colitaiied hi iei' t N II tlt'li llig Iflit xsif cxcmpliou of c'crllll iitilnts rt'e'ive'd hY stuideletils Illi llt alllttnff litiss rI'eJpresc'fls a ItJltirolizi'd Vursimii of similar pnovisitin, i'etolfllilt'cl ini olitr inct'o ftlie tio iont ax \ s. 'h'l.s, Areside,nt of one, of I cm'eifrl 'fiiig 'tltl rin'.s who is fitillilrlrily r',creset in lIh' flt' ofher voilintrv solely a-4 it sfiln is ,emtilit fromn fiax by flit' . other i'olllliry oil aiutv renlifflin.,ileestcti lifrtmiroal, including all\. paymeniiitts rnetivcd from his vi'nliover abriatd. inlitmostiother iiicinic lix i'olni'flltions, lilt, stiltli'f wotlld oillh l*' exeitlnf (ll rcvitif Iflievs.lliIt, l, i gift nr iiitudl Slpecifically 1oi)rovidpl ir hiso It, fltilltliliiil'i'. Arlilch XI Ialso p0rovidhtes tlit fllt' re,,ipiii'ntgrlantf fronm it of it rharilabhh, 'e., orglantiza.tin citf ciiilc of flit' iiitrlat'thiltg c'iiiiifsrit' while temporarily Present i Ith'lcitt'tillilry will it' olhir v\ ' rIilt.froi itel l faxhv y otlhr c'oilifrv on fit' (lilesh4 flit' is i flit'lf ir' ifttvettillil.t iuin lpellrsonlal sl'i'i't's). grhiitt grt k ii for This provisitti iiiake's no eltatige' in f lic U.itlt ateiti. ilccic'fllll taxrt'lit bill llittt, 'loluI lidrt'c't trtliflnient miller fwlt' iniest.' illtolll f llveS il l-e ,llltliiesv illtOillt lnl the! tax e'xfel'lils to giff s. r'l'ii provisions is simiiilar to I elsc contuitcti in lllc'r Irtaeti's itt II0W iin elre Ithichr J)lpragralplt 3 ot lireide' N II ait cxemlption luot foilct Ili ollher iitoollieCot.ll vet lIt lls provided. fax is ITdl'r this I)roivishiol,n exc'tiiptitiik xflllc on a reeiprot.al habs to a rtsicehi'it c'mplhvet', ot anl enterprise' (or 'hlnrilfble', Pcl'.. orgallizaliilli) of tine' c flit it n' ioiuth llh nlrit'- who is lire'stif for not miore' flhan I viear iii tic' ot ic'r c'iinOt rv ito ht'clliri, feehnical, Iprot' ,ssionll or business t'xjterii'tet'l ill tfi' oflihr etoulitry. Thle i'litptioi isxIpi i lintilctd flL cases wlitr'c it' amltllnial comintpi'nlf cliii paihi lgthi' iby iililhtycr telttis Itdet t'xeeed .t4,0)00), tfit ,JA lllti( i'tvivilltllf or nt. ' hi prov isitn, Jeltt'e'alt ci Ie of thedlollar Jhtlflitittol, vouhili liltar Io el of newrt I)pnielfil to 0ljpiillpt's pilltliylte.s tempnollurlarily prtesiitl flit ll Utnitcd Stalifs thall to 1Tn1fc'c States eillplhyves temuiiporarily pri't,.sv iniiiJalin. Stiurcri of jillromi vid'c.

    i's r'slptelfing lie' source'e of jinttlte'o an' slN'cilitieully protIn g'thitrll, Irlust' source ruth's are cderivcch tfroml flilt 5tlirct ruies c'uuifainl't li the' Ilitield State s hitc'rnal Jte veliie C'odec. Whilh Sli'viilic provisitit for totrce,

    Under artcl'he N II!llI

    (1747)

    DOUBLE TAXATION CONVENTIONS

    rules has become a familiar part of (,state tax conventions, this treaty is theifirst income tax convention to provide detailed source rules. The only departures al ,tate s itA4'rin rnwelvlle laws and from the source rules conltained in til, IUnitd1 regulations are found in the rules relating to dividends anld interest.. Tie de. partures here anr of a technical nature and are intended lrinicipally to liberalize the foreign tax credit, provisions contained ini article XIV. For exami)le, it is provided that intehrst! paiil by one' of the cont raet jg countries (including a local government. or enterprise not. having a le'riniaient. establishment iln tle other count ry) is to be treated as income fromn sources within the country wht-re the interest. Is paid. Thus, interest paid on l1nited States Governmenvit securities would he regarded as income from sources within the United States, even though under Japaniest, law sucht interest. might. be regarded as (derived from sources within Japan where the s'curities result. front investments made from deposits in banks located( within ,Japan. Tax credit provisions The principal method for preventing double taxation, other than the exetil)t ions or reduction in tax rates provided in other articles of the, treitty, Is eoniainid ill artichl XI V. This provision. gives recognit ion by treaty to thli foreign tax credit provisions of the tax laws of the resl)eeltve countries. Ill thi- respect, it is similar to provisions of income tax conventions now lin force. The article contains. however, two novel provisions. The first of these l)rovisions relates to the foreign tax credit under tel Internal Revenue Code of the United States for interest received from a United States enterprise with a lpernmaneit, estalhishimnt in Japan. It is provided that interest received from such aim enterprise, (arising from a (debt connected with the business of tlie plernianent estallishmeunt) will he treated as income from sources within Jal)apa to the extent it Is so treated Under .apalinse law. Thuus., where a Unite'd States enterprise has a branch ii hlapaii and [)aY' interest on loans (the l)ro('ew'(ls of which are employed in tlhe operations of theN branch), the interest. t i)aid will be deemneld interest from sources within lapall to the extent that tlit, proceeds of the loan are utilized iii operating the Japaimnese b~ranich. As a result., anmy Japanese tax iumipomsed onl such interest would be ent itled to foreign tax credit unde-r United States tax laws; whereas, without this provision of the treaty, such intitrest would be deenied derive'd froni sources within the United States and would thus not be entitled to a foreign tax credit for ally Japanise, income tax iiimposed thereon.

    Taz on dividends
    The other unique feature of article XIV is the provision that the Uuniied States recipient (includinig a citizen, resident, corporation or other entity of tihe! United States) of a divithid from a Japanese corl)oration shall be dheenie'l to have Iaid Japanese income tax in amount equal to 25 percent of sulcil dividend and will he entitled to a foreigii tax credit under the pertinent provisions of the Internal Revenue Code ill respect of such tax, provided that the recipient also includes in grosti income the amount of the tax thins deemed to have been paid. To furnish a simple illustration of the effect of this provision, assmUne that a United States citizen receives a dividend of $100 from a Japanese corporation. Under the treaty provision, he will be deemed to have paid Japanese income tax of $25 on this dividend (reprsenting, in effect, the corporate tax burden borne by the cariings out of which Ctlo dividend is paid). Ile will then be entitled to a foreign tax credit rif $25 against his United States income tax provided that. lie includes $25 as well as the amount of the dividend in his qross income. Thus, assuuming from that his (ffective United States tax is 50 percent, mu respect of the (dividend.! the japaiese corporation, he would include $125 in gross income, pay tax thereomi of $62.50 against which lie would apply a foreign tax credit of $25. 'This provision

    is somewhat similar to article XIII of the income tax convention with the United Kingdom except that under that convention, credit is permitted (on a sitiiilar "grossing ip" basis) for the United Kingdom tax deemed under its laws attributable to the dividend; whereas, under this provision of the proposed Japanese conventiont the credit. is established at a fixed percentage of 25 percent. The basis for setting the credit at 25 percent is that 25 percent approximates the amount necessary to equalize time tax burden between inconie which has been taxed at both the corporate and shareholder levels and income whieh has been taxed at only the individual level under the prevailing Japanese individual aiid corporate income tax rates. Article XIV further provides that Japan will impose no tax on the United States recipient (unless the recipient is a Japanese resident or has a permanent establishment in Japan) with respect to dividends other than the corporate tax

    (1748)

    DOUBLE TAXATION CONVENTIONS

    7'

    a complete exolli)tion from the .Japatiese tax at, time shareholder level. I Kreen ltion for charitableorganizations Clinritahle, et c., organizat ions of omie of the cmnt rntc ing comli rivs are sx',cifically texemped in the thier coullntry lender article X" to the extent. provided from tax Wder tlie laws of the ot her eomitry. This provision corresponds to prov isions contained in the iticomne-tax Collventiolis with Canadal and with thie U'nion of Fouth Africa. T'lhils, a charitable foiltidtlion orgalized in .ii.an would be exenipt fron United States income tax oit its income froni United States sources, except to the extent it, would Ixm denied exemption under tie internal revenue laws, such as the unrelated business ittconme provisions. This p)rovisiot should prove of rt esl,a, benefit to lnlited States charities opel, ing in ,aipaIli if t lie ,JapIl),tW laws are ;taIiilcdd to provide anl exemption in accord with thIne spirit of this treaty provision. Under exist ing Japanese tax laws, a charitable organization is deemed to derive taxable income from contributions made to it. l.E.rc,iiplions for .hn p prse tionr'side t aliens T'lhe provisions of article XVI are not, found ill other tax conventions now in elreet. Tihis article allows to at Jatijtitese thoeiesidemit alien living iln thIe United States (other thlin tan ollicer or emph)lovee of the Japaniese governn, ent) an :additional personal exelmption for his spouse and for each of his children p~ro% ided thait tley tire present. ill tihle United States mid rtsilding withi him at. any tlimne duritig tile taxableh year. The credit maisy not. 'x emed, however, that part, of the credit otherwise allowable which his gross income from sources within the United States for thlie tixablih yea-r hears to his entire gross ii'come for tlie year. Under the ilnter|:al reveIn laws, a Japaneise nonresident alien would be allowed only one pcrson-nl exemiption. Thtus, this provision liberalizes the present. exemplltioln provisions but, does not. accord the Japatinese nonresident. alien all of tile possible personal exemtptioins to which it United States citizenI might. be entitled. Oin tlhe cittier Iand, tile treaty provision grants to at ITIited States citizens who is resident in Jllanll lile saitle exemptions for deempeniets ais are granted to it notional inl ,apaii who is resident there. 01hrr prorisioPs The prov ision for exclhanging of information between the fiscal authorities of the contracting states is limited to that necessary to carry out the provisions of the convent ioi and to prevent fraud or tax avoidance. Ill addition to the above-described provisions, the convention contains articles siiiilar to those of other conventions, such as the article describiltg tile taxes which tire subject toI(thi convention, tin article containing dlefilition of teris, articles setting forth Ihiited provisions for collection of taxes of the other coiltracting state, appeal from double taxation, safeguarding of tile diplomalt ic exe'niptiois anid t general provision th:t. the convent ion shall not, restrict. any exempt ion, deduct ion, or credit. otherwise accorded by( the laws of tihe conltractiltgt countries. As ili ot ier convelit ions, it.provided that the convention shall ble is effect ive wit hI l')iect to taxable years beginning on or after the lIt day of January of the calendar year in which -the exchange of the instruments of rattification tA0,kes JlaCe. It is also provided that either of tile contracting countries mnay terminate tho conventtion after a period of 5 years with termlination to be effective not earlier than 6 Mlont his after the giving of notices of such termuinat ion. The nnemoralndum which accolipatnites the convention is intended to resolve qulestiolis of interpretation as to tile interrelation of certain of the provisions. Without. the Inemnorandum, article XIV mIight, be construed to defeat the exenmption provided in articles X (1), XI, and XII. Thus, article XIV provides that each of the countries in deterimining tax on its residents may tax all ilincom subct to tax under its laws without regard to the other provision of this convention. The planner in which this proviso could be. construed to deny the exelIjIPt iot provided in other articles caln be shown by the following exauiple: Under Japanese talx law, an individual lx'Volmes at Japan ese resident, after t lie expiration of I year. lience, unl(her article XIV Japan could tax a Uniited Sates professor who taught in Japalt under all exchange programt for more tlnan 1 year (but not mnoro tian 2 years) evelt though the Jrofessor's renmuneration from teaching ill Japan would be

    imposed oil the earllligs i1td prolits out, of which the dividends are paid. This provisions is t unilateral conce'ssioin on the pairt. of .Jhpai, and, iil effeet, grants to tlie United States recipient, (except its noted above). .vith respm-et to dividends,

    0Xelxpt under article XI.

    Tile effect of the nlenorandun) is to resolve this conflict by making tile provio 0118 of the oxenmpting article (art. X in tile examnplo) paramount in such cases.

    73005 O--62-vol. 2-

    17

    (1749)

    DOUBLE TAXATION CONVENTIONS

    However the mteorandunm specifically provides that neither country is to be precludeA front taxing its own nationals or citizens by reason of the exemptions provided in articles XI and XII. Thus, in the example, the professor's salary would still be subject to United States income tax (but not Japanese income tax) unless s, ecifically exempted by provisions of the internal revenue laws of the United states. 6. ESTATE AND GIFT TAX CONVENTION WITH JAPAN (Memorandum front the Joint Committee on Internal Revenue Taxation) The estate and gift tax convention with Japan is a new type of treaty since it combines for the first time a gift tax and an estate tax convention. The tUnited States has estate tax conventions ii effect with Canada, United Kingdom, France, Norway, South Africa, Switzerland, Finland, Ireland, Greece, and Australi,. A gift-tax convention is now in effect. between the United States and Australia. This convention, however, is the first. dual estate and gift-tax convention. There appear to bv, no significant departures in this convention front the usual type of provisions which the Senate has approved in estate tax treaties now in effect. Differences in United S'tates and Japanese tax laws As in the came of other estate tax conventions, the proposed convention is intended to alleviate the burden of double taxation and to prevent fiscal evasion with respect to taxes on estates, inheritances, and gifts. The proposed e:;tate and gift, convention with ,Japan is of special importance in carrying out these o0)jectives because the differences in jurisdictional application of t he death dtittis and gift taxes of the two countries are more likely to result. in double taxation than in the ca.emi of most other countries. The jurisdiction to tax und-r th) Japanese inheritance and gift taxes is based upon (6)the domicile in Japan of tile heir, devisee, legatee, or donee, or (2) thi situs of prolrrty in Japan. This jiurisdictional application arises front the fact that the Japanese inlheritance tax i. levied against the hlir, devise, or legatee and is imposed upon the receipt of the inheritance, devise, or bequest. This differs front the United States estate tax which is levied against the decedent's estate and is Imposed generally upon the prope:rtv transferred at death. Similarly, the Japanse gift tax is a tax levied against the donee anid is imposed upon the, total gifts received by the donee during the taxable year, whether front one or more donors. This differs front the U'nited States gift tax which is imposed upon the, donor and which takes into account gifts received in prior years in the computation of the taxable base. On the other hand, jurisdiction to tax under the United States estate and gift taxes is based upoln (1) the United States citizenship of the deIcedent or donor, (2) domicile in the United States of the decedent or donor, or (3) situs of property in the United States. These differences in jurisdiction to tax between the two countries cail result in both countries imposing death duties or gift taxes on thle saute transfer of property. Credit provisions The principal niethod of achieving relief from the burden of double taxation is provided by allowance of credits under article V. This provision is similar to provisions contained in other estate-tax conventions now in effect. It provides for a credit to be allowed by the country which imposes tax on property situated outside that country for the tax inmposetl by the other country with reslpct to the property situated ih stich other country. The amount of credit may not exceed the portion of the tax imposed by the crediting country which is attribltable to such property. Credit is also provided where each of the countries imposes tax by reason of the nationality or domicile of the decedent, donor, or beneficiary with respect to property which is situated at the time of the transfer outside of toth countries. n suc h cases, credit is allowed for t ite lesser of the two taxes imposed wit hi respect to such property, the credit being apportioned between the two countries on the basis of the portion of such tax which the tax of the crediting country (attributaltle to such property) bears to the suitiof the taxes of both countries (attributable to such property). A similar allocation of credit for the lesser tax is also allowed with respect to property taxed by both countries when tlte proeerty is deemed (I) by each country to be situated in its owit territory, or (2) by onet country to be situated in either country and by the other to be situated outside both countries. or (3) by each country to be situated in the other country. The second of the above situations is a provision which has not been contained in other estate tax

    (1750)

    DOUBLE TAXATION CONVENTIONS

    collveiitions now in effect. This situation could arise, for exani )o, where the prol.,rtv, d(,eemeI sil)ject to tax by both countries would be consiloted tinder the United States estate of gift tax laws to be sit iialed in Japan but tax would be iIllOsetd because the (lecedent or donor was domiciled in or a citizen of tile United Stmahs. ,lalpan,,on the other hand. might construe the property to be situated oiitsilte b)oth ,i*J)anand thel U'nit.hd States but would imi)oso tax because of the (tiliclite of the Ibeneliciary wit hin Japan. Artiehv V also p)rovi(des for the relationship of credits authorized by the convenition aind eredits amtlhorized by the stataites of the contractbing coUntlries. It, is.sjimeilieally provided that credit may be taken tit her tinder the stat tite or under the conventlion, whichever is greater, but that a double ere(lit miay not le taken. It is also provi(ded that thie credit unleler the convention is to be couinpited after aMllolanee lilts beell inalhe for of her ere(iitIs aainxt,tax miller the respective staluttes of ttie contracting countries. For examt)le, the credit under the cotiveititon for ,hJpallmese inheritance taxes would he applied against the t'nilted St ates estate tax I onl' after allo" anice of aii- credit for state death (Ilt lies. ('redit against the death duties imposed by one of the countries is allowable only for death duties by the other country (within tile limitations imposed )3y the credit p)rovisiolns) aiid no credit may thus be taken against the death duties imiiposed by one cotllitry for allny gift taxes inml)ose(d by the other couiitry. Sinilarly, credit, may not t)c taken against. one country's gift tax for estate or InheriA lilmitation period of 5 years front the (ltie date of tile tax is also provided III article V for t lie allowance of any credit thelireunder. Flinal allowance of the credit. is denied until the tax for whicl; tile credit is claimed has been paid. Payment of intr(rest on any refund resulting front the allowance of the credit is denied under the comivent ioll unless specifically authorized under tile law of thie crediting country. Prorated allowances Where one of the contracting countries imposes tax solely by reason of the situs of prol)ert.v within the coountry, article IV provides for a' prorated allowance of any specific exeml)tion which would otherwi-e be allowable under Its laws if tile decedent. or donor (in the case of the United States) or the beneficiary (in the case of Japani) had been a national of or domiciled in the country so imposing the tax. This prov'ision Is similar to provisions contained in other estate tax conventions now in effect. It liberalizes the specific exemption of $2,000 which is provided under the United States estate tax laws for estates of nondomniciliary alien decedents. It also grants a limited exemption to a nondomiciliary alien donor where exemption is l)reseintly permittted under the United States gift, tax. no The amount. of the specific exemlption is limited to the proportion of the exemption which the value of the property situated in the country imposing tax (and which is subject to the tax of both countries or would be so subject except. for a specific exeml)tion) be-ars to the value of the total property which would be subject to the tax of such country if the decedent, donor or beneficiary had been a national of or domiciled in such country. Sitls The rules for determining sits of property which are contained in article III correspond to similar provisions contained in other estate tax conventions. The situs rules are useful in ascertainiing the property that muay be included for purposes of tax where jurisdiction to tax is based upoin the situs of property within tho taxiiIg eoutntry. The sit its rules also have significance for purposes of ascertaining the credit allowed under Arlicle V. As in other estate tax conventions, it is provided that, situs of shares of stock of corporations shall be deemed situated at tile place where the corporation was created or organized. Similarly, it is P)rovidedl that. debts includingg bonds, promissory notes, bills of exchange, bank (leliosits and insurai.ee, except bonds or other negotiable Instruments in bearer forni) are deemned situated at, thle I)laee of residence of tile debtor. In tile Case of bonds or ot her negot iable iist rumnents in hearer form, the situs of such property is d(eterinined in accordance with the laws of the contractiig country imposing tax oil tile basis of sittus of prol rty; where neither of the contracting countries imposes tax on that basis, it, is deen;ed situated under the app)lical)le laws of each Country. Other provisions In addition to the above provisions, the convention contains the customary l)rovisions dealing with (1) definition of tlie taxes suil)ject to the convention; (2) definit Ion of terms used in the convention; (3) provision for reciprocal exchange
    tance taxes

    paid to the other country.

    (1751)

    10

    DOUBLE TAXATION CONVENTIONS

    of information between the fiscal authorities of the two countries; and (4) pro. visions for facilitating appeals for relief front double taxation. The provision for collection of the taxes of the other country is limited to those measures necessary to insure that the credit or other benefits provided tinder the convention will n6ot be enjoyed by persons not entitled thereto. This collection provision is in the form which hab been previously approved by the Senate in other treaties. It is also specifically provided that the right of diplomatic officials to other exemptions is not to be affected and that the provisions of the convention are not to be construed so as to increase the tax imposed by either country. The effective date of the convention Is the day of the exchange of the instru. merts of ratification; the convention will apply to estates and inheritances of persons dying on or after that date and to gifts made on or after that date. The convention is to remain in effect for a period of 5 years but may be sooner term. nated upon the giving of at least 6 months' notice. 6. SUPPLEMENTARY PROTOCOL WITH TIHE UNITED KINGDOM (Memorandum from the Joint Committee on Internal Revenue Taxation) The supplementary protocol with the United Kingdomn would permit either the United States or the United Kingdom to extend the income tax convention between the two countries to all or any of its territories for whose international relations it is responsible. The income tax convention now in effect between the two countries was signed on April 16, 1945, and was modified by a supplementary protocol signed on June 6, 1940. Subsequently, in its consideration of the income tax conventions with Dennmrk and Ireland, the Senate expressed its disapproval of certain provisions in those treaties which would have provided exemption from United States tax of capital gains and of the tax on accumulated earnings. Provisions of this nature are contained in the United Kingdom treaty. The pending supplementary protocol is intended to make possible the extension of the United Kingdom treaty to various territories of the United Kingdom but in a modified form so that provisions which the Senate has indicated that it found objectionable in subsequent treaties can be omitted from the extension. Thus, the supplementary protocol would amend paragraph (1) of article XXII of the 1945 convention which set forth a procedure for extenjsfon of the treaty to overseas territories of the contracting countries. Under that p)rocedure, the country seeking extension of the treaty to all or any of its overseas territories is required to give notice of its desire for such extension. In the absence of a specific rejection by the other country within 60 days following such notification, the treaty in its entirety would be automatically 'extended. The pending protocol (1) eliminates any specific time limitation for acting upon a notification of extension; (2) provides that any provisions of the treaty may be modified or deleted in the extension; and (3) provides that no extension is effective until formally accepted by the country receiving the request for extension. In a letter addressed to the President of the United States from the Acting Secretary of State, dated June 12, 1954 (see Ex. 1H, 83d Cong., 2d sess.), it is stated of the that if the pending protocol is adopted, any request thereunder for extension to the treaty to any of the British colonies or territories will be communicated of Senate for its consideration and approval and that formal notification the acceptSenate ance of the request for extension will not be made unless and until gives its approval of the request.

    (152

    Senctte Floor Debate and Action


    August 20, 1954 83d Congress, 2d Session 100 Congressional Record 15365-15366, 15380, 15383-15387, 15394-15395.

    (1758)

    - 4',

    -i

    [P. l5S65] Mr. KNOWLAND. Mr. President, we have on the executive ,'alendar a series of treaties. The distinguished Senator from (Georgia [,Mr. GE:oRGE,:] is handling them on behalf of the Foreign Relations Committee. The reason it is necessary to bring then up has been in effect for some time at yea-alnd-nay 'vote required on is treaties. Therefore it is important that the treaties be taken up at, this time when there is no question as to there being iaquorum present. in the Senate. SiUPPLEMENTARY PROTOCOL WITH TIlE UNITED KINGI)OM OF GREAT BRITAIN AND NORTHERN IRELAND RELATING TO TAXES ON INCOME The Senate, as in Committee of the Whole, proceeded to consider the supplementary" protocol (Ex. II. 83d Cong., 2d sess.) between the United States of America and the United Kingdom of Great Britain and Northern Ireland, signed at Washington on May 25, 1954, amendiig the convention for the avoidance of double'taxation and the
    prevention of fiscal evasion with respect to taxes on income signed second time, as follows: [Text, of protocol] at this tithe is that. under the general procedure of the Senate whiieh

    at Washington onl April 16, 1945, as modified by the supplementary protocol signed at. 11ashington on #June 6, 1946, which was read the [I'. 15866] Mr. GEORGE. Mr. President, the protocol gives to the parties signatory to the treaty the right to extend the existing treaty relating to taxation to t0h possessions or to the areas over wlich thWe Theo protocol merely permits the United States and Great Britain to deal with certain possessions in the Pacific as they do now under the treaty. It. is wholly for the purpose of avoiding double taxation. So far as I know, there is no objection to the protocol. I believe it must. be ratified by a yea-and-nay vote. The VICE PRSI1DENT. If there be no objection, the supplemientarv protocol will be considered as having passed through its various parliamentary stages, up to the presentation of the resolution
    of ratification. parties have administrative jurisdiction. It. is not. a new treaty.

    Mr. MALONE. Mr. President, will the Senator yield? Mr. GEORGE. I yield. Mr. MALONE. I should like to ask the distinguished Senator from Georgia if the protocol under discussion has anything to do with the Japanese treaty. Mr. GEORGE. Nothing whatever. It does not, write new treaties. It merely permits the signatory powers to treaties already in existence to apply the treaties to the possessions tfhat Iave come under their administrative jurisdiction since the treaties were entered into. It
    has nothing to do with the Japanese treaty. trade treaties or the General Agreement on Tariffs and Trade, and

    Mr. MALONE. This protocol has nothing whatever to do with

    (1755)

    t'he general, iill-iirouiid etvonionit, st I'iet ('tI is tiring wovtnii al'ouaml 0 thit lhe Unitled tltt'es? MIr. GEOR(IE. No; it lils nothing wialtevtwr to do withl those subjetstts. The Wtiot purpose of the tiax convention is to avoid douilhe taxatiol antitd to t'elim-e thle citizens of olne country whlo iin1y be ill c lithot hero('ltt rv froim doubl)h taxation onil income tlalxes, t9 at1h. laxes. l, 1(girt taxes. 'It does Iot(a)ply to liuIy other sul)ject. MIr..NI AI,)N E. 'IliT lllellle)sl, and itS(:mutor from Georgia is oie of (list inguihtied fII Illelllller, theill os infts luetialhl llnt o)f tile Svl'lltt+
    ('ommnlit tee oll FIillncie.

    finto11' hea rd thet conlcessions dig~s.ellssenl lid t(. Ilolg wiilh tlhe l

    juiniior Senator from Nevdada, tins tleard I' explanation. gienll tilt tihe relsoll we lci'vel'e lit) taxes fiii n1innyv of thtie fore'igen operationiS is, for' exaniple, (tflit'll thi middle Enast, w.tre talix allowilneliret IViit+e ill ti l' production of a1 aini product, t lts tlixes ill tiOw forcignlltilliiolls cert are oftt'n set to conform with Ialmost tilt exact aniotunt which woulhl otllit'rwiSe tw (ille the United Statles. MIr. GEORGE. Thiiat is true. However, tllise treaties have tirothilig to dol withl (hill problems. Mir. NALONE. Does this treaty extend alny authority to do that piailti('ulr t lling? MrI'. (,O()I E. No. Th'at problem arises wi'Ven ai Amtlei'ai n cilizell is teititletdloll tax e'et'tit. If the tax ill tt' for'i .ui (o[itr" is so ndjustedtt a to detlrive himii of tlit' credit, lit us lt) 1 to ltike. iiig Thtiese treaties art tddr'essed wholl'" to thel)ro)per rt' ief and( liroper )rolttttion of our cilizeons resitling ill (rel't Brituin. It,lIs saiy, and lh'itish(1u1hv taxationl. c livoid subjects residing in tlhis (')isnt'ry. rhe whiollt'puiio';oe is to Mr'. MALONE. I have not had an o)pportliiity to st.ud1l till ttit' trenttites which arte being extendled, t1tint, is, to tlit'exteI,t0t1t thltey I shall tak, the stllatemlent of the (listiinguishted to the eo'fet-. that. there is nothing derogatory ill till, and that t('l I. united States o1a1not be injured in aniy way by" tItist agreements. I wish to ask if tin Seiato' froni GetOlgil initniill to bring before the Senate thiet 'onvetltionl between the Ulliteti States of Anierica and Japian for the avoidan'e of double taxation nit tlihe p)revenltion of fisca(evasion with respect to taxes oi income, siglt'd ait Wastiinton ol April 16, 1954. Mr. GEORGIE. ILater I expect to subniit it, to tlhe Senate,. Of coursese, it will be etbatable. It is a new treaty, containing some nlew featurtes. That, is not involved now. I wish to take up tlhoseagret'nilents o'onc'erming which there is no 'ontlroversv. Mh'r. .AION E. Mfr. President, I serve not iie int the junior St'll ator fromn Nevada intends to dtlebatthe treirty. I ask ttie Senator from Georgia whether iii that, partleilnhr treaty a special concessioll of 25 percent. is made to Amnericans who have it'vested ollney ill ,haplii, giving thenm tlit' right to bring the miioe" back to this country. Nir'. GEORGE. 'fThe Senator is ('orre't. to study t~htn now.
    Senator froni (eorg'ia,

    art et,,xtdolet withttspect, tt,) ,..,,.Iit.s o,)1 taxes, ,,,d ther' isno timi e

    Mr. MAIONE. I think that is a vetry unfair provision. It carried with it the incentive to take Amiericani umonoey out, of this country and
    Xir. GEORGE. That question is not involved in this treaty. This treaty and the later one with the Republic of Germany do not involve that question at all. These t, reaties follow a pattern, which was (1756)
    invest it in foreipin countries.

    jfiniliate( ()It lihet adtvice and request, of the Setnate Iltiiny years ago.
    Th'le Selnatltere(` tested Ihe Treasu-ry and Stati, Departments to negoliate Ilhtse ax ('oivonventions, and tIhev havey been ntegoti ate(d( with |many vo ilf ri es. ()he of lit' h)eurp)Oses is to avoid (lo I)Ihe t axat ion of American itilizals residing in a foreign countrY. Of course, reciprocal rights air, 1irlordld to s5bj(,.cts of the other (l' ountlv ryvsi(ling in ot1ir eount ry. \It. MALONE. Since there is no time for thle junior Sena`tor froM NeVvadal to stuId t hese plrovisions, I should like to say I that th(e senior Senator from Geoorgia is fully awa'`re of tile fact that ini the Committee on Finance it was proposed to wi ite into tihe tax bill a provision to favor by 14 )(e`'.ent Amneri('an in estments in foreign nations, permitting invest ors to bring the mtone.\y into this country andl that provision was (hefeited inl thie eonotmitttee.

    I wish to ask tlie distinguished Senator front Georgia whether he reniemubers such ia )rovision. .MIr. GEORGE. Oh, yes; indeed I do. Mr. MALONE. I should like to ask one final question of the distinguishedd Se;nator from Georgia. Is there any provision of that hntiurl( whatever in these agreements which have b(een made and are Weing extended? .Mlr. GEORGE. No; I tdo not I)elieve so. If so, I would call it, to tihe attention of tile Senate. I shall nmake a brief statement regarding the Japanese treaty, but first I should like to have at vote upon tlie pending treaty. It merely
    permits the United Kingdom of Great Britain, Northern" Ireland, andil theiUnited States Government to apply existing treaties in new areas that have come within the jurisdiction of the signatories to the treaty. fPhie Senate proceeded with disposition of Executive 11, the pro-

    tocol with the United Kingdom, and Executive J, the convention with Germany.] [P. 1,53801 CONVENTION WITH JAPAN TAXES RELATING

    TO

    Mr. GEORGE. Mr. President, I ask unanimous consent that Calendar Order No. 4 and Calendar Order No. 5, both being trreaties tion, one with income tax and the other with gift, and estate taxes, that the vote be taken on both treaties. The PRESIDING OFFICER. Is there objection to the unanimousconsent agreement for both matters to be considered together and voted on together? The Chair hears none, and it, is so ordered.
    CONVENTION WITH JAPAN RELATING TO TAXES ON INCOME The Senate, as in Committee of the-Whole, proceeded to consider the conven-

    between tlile United States and Japan, and both dealing with taxabe coonsolidated for the purposes of this presentation and vote, and

    tion (Executive D, 83d Cong., 2d sess.) between the United States of America and Ja0)an for the avoidance of double taxation and the prevention of fiscal
    evasion with respect to taxes on income, signed at Washington on April 16, 1954,

    which was read the second time, as follows:

    (1767)
    , "., 0 , otro-- " ,, -4 - I- , , , , , 1; +,1-1'1 , 1. ,,, . I,

    Il/

    1,58S.11'

    [T'ext of ('oulveltionj CO(NViE;NTI()N WITIH J.i\

    III:''l(

    1(

    'r;\

    ON ()S I,S'1'A'1'1-],

    IN III,]III'I'AN(C'ES. ANDI) (CllrS

    TheV ,%,II.VI s ill (omlllitlte of tw hoe t, \:hh, proceededl to v'l.sider. it'e 'oliventlion1 (Exeuti'ive E, 83d (C't)1ig., 2d stss.) bItwe'1ii Ilt' I hitted Statles of Amerii' fili.' avoidil('(e of dtoubhl lt llxioll Ititd aIv Ille prevention of fis'il evasil, witon rest Wili I ) It xliX's oil efllts, inlhrifill'es, andgifts, siglied lt Muisligltno oil April I16, 11954, w~l'lih was r'ead Ihe st'oild ilite, lis follows: rl'ext of rOivetitioilj Il). 3I,'JS/1 .\lr.(GE'OiRGE obtainled tilt, floor.

    OldI~ %,I 111lels, allld Inot lllel'l'hlllldise Inllfleirs. taxl

    \Nr. NIAYBANK. NMr. President 'Thie I'Ill)EIN(N OFFICER. D)oes the Semlor frtom (h'orgili l Yvied l to thi Se natollllr f'ront Soutlh ( 'arolizlil'. Mr. (IA)II(O E. I vield. .Nl\..NIAt YBAINKNI.'As I iider,'stl nut t ItIies wit Ill, rest #ialn itt,'e tex.

    NIlr. (iEOR(IE. Yes; notlliuiig but taxes. .r.\i .AMIAYAN IK.There is nothing in tlit% ea'tlies which fre tr t iles'.?

    .\Il-. CEFOI{(]E. No. Trhe *v ]1tre no efrev'l except onl l.xes., but, fllere ar'e certain Ifetlm-les whi'dh I shouldd like it) explliul.

    .\itr. IAYBANIK. I shall listen ittliteiw'lv. As- I uutdeistaild, do I ll) 11ftet t l textii t busilitss witlli tli' Orient. .Nlr. (GEOIROE. T'lhev aIply only to hinol)l taxes, iid estiiv e telliiun girt taixe's.

    Ilev

    to tihe treaties which should ib, liolrd by tille Sei'llille' 1111 which will lb, discu.ssed, of roil.-se, ill the( Senlllle. 'hese trelies are Wilh ll , tuiti dof 'ourse, it is desirable tE stitt, bilize (lith e'lOlUiUV Of .111l )n1 so)r l)0ssilte, if it mnut. ib' done without fls

    Mir. G(EORGE. Mr. President, I shall speak very briefly oi ihe (I rellies. There are 'elitur'es

    .\Ir. .NIAYANK. I thank tlhe Senator.

    hlti

    Ibecomet st ronig anid militant site World WMr II. I wish to v'Ill 11ie'ntiou lo it'e p)rini'ipial lhiiigs Which thest tretities dho which irt, i.ost fa'vorallhe to the I Tulted States. First is tile' r,''ilroe-all t'X'li titolllof shlipping 111mid iiirerrft op1e'latintg ' of first % lpl",filEs. This lprovision., rlitlh 5' lit' tretly, o 'l.tperates prillti1mIl. liu favorof th,, l'.iled ,Stlates. Al the present I imue, thle ulhipa ese 111rt it( Itirliues il olpration1 between ,lal)m mid lilt- [Uniltd Silaes.. lT' 'x'iliptii of l'tiled Slttles iir'raft profits derived Wmiii operaI )1us in.lll pan1this is 1'spl'rilly fivorabhl il) this c1.111 rv. Siuilllrl.y, lh,, 'itlld Sltale.' also liI li'lrg lryirep ltdermli'(' of shiip)ping oplerls lionls bet'we nthel [Sie ~ th-A 111141 offlhI) . SO) IhPe xeuiptiol Of 'li h-t' pritlits from shii)pinig 11. l,.i185i is u1) mitrt, ftlvoribhl to lit' E I'iited Stalitl th1n to ,l1)1plin111 l t' lrl'rese 1 Illit,'. 1s SevtolllyV. it'e ionl)15 pterct'ent of the' rale on rt"etl I illtlti royollies This lprvisimi rt'suls illit rrtditrion of lthe Jlallel'st ilil'l' tax On fili r1't11l1ls 1141gOilig to f lit' uiled Satt'a te lilt linteir present wiltlhldingl lax of 20 ilt're.tit) l) Itx of 1.5 percent undt'r this rouvlulit 11.

    lTh.ese trlentil'es unqutestinitalbly give very great advalliltg'e El) lie Uiitt'ed Slates, for1' tit, reason that ,lilpall's iiidustry, of eourle, ills 1it0

    El) tlit,

    Itt1ile:d States.

    (17s)

    Since 'pra'tiallv till of the film reltilals flow from to lhei tlJili I'llitetl States, alild hIt ill the reverse or opposite direction, this lprovisioni is

    ald vIll ageous Io lIh(e'hilited Stlatles. lXellplitioll of .itjVlelisa t ion pilid bY (le Ih,eldts. Stits ( lovel-riieiit :I a.1 liir 11 tilll,nattlition to tlhis liovisioli of Ith treallt, to he foulndl ill ellelI0. ('oill wisisttilln paiti by the U'nitled Staltes (overtnilielt to its eit izens Whto are residenlit Ill .11ilill is e1xen 1 it f(romi ,Jalipalei'se inicmie tiax, bill is subject', of v'OilrlS', to the ['lite'( States ilit'Olliet lix. This t'xemptltjtion is or l'il'li illtoilili' mpltailc to Ithe Jill110,01t IUiilted Stiltes citizens who aire eniployed ais lechnlieial experts in ,Jlpatiiiy tlit IUniited Stilltes overnilineti, bill wlio enlpvilieilt li, is iit of sutih ntliture ias to bring it within the, iliploiillti, inilnlnitv.
    Wlhihle this ('xelxemption is 1i rt'eil'roval mlie, itOe'ilotes jpredollillilliltIN

    Til, source illes whieh ilre illnpollriitted in tlie cnivelition aire l dlerive'd Iiiios witlhoutl e.,eeliilln frolltliti' Uiited States trnal in r,011t'lll laws and reguat lfiols. Thus, the source' rules in t eonvelili lion iilhot ht lile United Stailtes 'onlep'lts of sources of incoloe rather thiin Ihle *apilillles' colleepts.
    I liw (.a11l aitteniition to it V'ery ilmpijortauint provisions ill this trealti. illii li IIl is t lt' proisioll for e'tlit for ,lljiatese ('orporite tlivideilids. Tlie volent iollill provides tIiit aiI'hitied Stlates rei, )ienill of ividlhi(1ds fromi a ,Jaijiiliest ('orjloratliil will fi'll'iv(' a credit of .5 pl'relit oftlile antloull ill Ihe dividends aIs ia credit igaist his Unlited Stiates iniconme tiax if lie also includes lih(' aniloltnlt of this crtititll in his gross ilivolle. Ili order to obt ain this credit, which is simiilir to lit' credit provided illii iletr'at )tetween t lit' iited Stlleles an Ih. I t 'TiIled it'In Kinigdoii, t(e ,Jiiaiilese' ilgrt'te' implillose ia nIot to withholdiiig t x il

    in favor of Ilil( Ulited Sttilles ill the pre.elslt timie.

    ouitgoliing dividtenlls.

    Ni1. LAN(EIRl. Mir. i'P'esident , will thio' Sltiiator yield for ia(question? Mir. (GEORlIIE. 1 vihld. .\Ir. IANGIEIR. Will tlh' Senator giv' s iu lixpthlital alise? ha

    .\ir. (EORtGE. I shliall

    inli imoment.

    At li-e present tiliie, a aii m poses a 20-p1erceiit withholding tax Oil Olltgoillg dividends, although this tiix is reducedtIo t0 Jpercenlt if the iivmestnintnt lends to further t lit' tilpatest, tevoollliiv. Ulilfer this convention, ,11iiiil will not illipose ailly withholding taix it hite individual h,'vel oildividetnds from a .,iiptliitse corjxoraiion lrilitl io it I'iiitedl Stties slockholher or recipient This provisioll iln Ihit coiivelnt ion is notilotariciprocaiil basis. 'rlius, tliht I'ite'd Stat'es witlhholdllin tax oIf :oifpierce'tnt will cnitiltue to allhllv li til ividel'nds ililill b% 'itied States t'ororiltions to nonire'sidlet i TI aigilils who are resilh lits,eiapall. of I shlill Irv to explain wha till, trtat v iieainsv In this connect ion, t' . thl, llortign lRelatiotis Coitiitllet' iait (het adviet't of the Chiitef of Still'of theloiii ('omnniit tee olh Internal Rtevetiiueo I'altitllon. The Iteiihl Itates shairehlihldr. ltt uI say, recemivos $100 odividehnlds frotm it ,Japitntse 'orpooratio101n. Ifthe Uniieti Statesi shiareholder were taxed tili lihi inlomie manefre'tiio' tilX rmilet 50 percent, lht us sialu lt aii of h' WOult o'miputt'e hlim Unliteod Statles tax aitnd cr'redlt oil he dividend Ias t follows: (tro income, $iO. ililt. it, I litvi(imi. To atili gross ilhlomii, is ildded 25 Iert't'nt, or $25, find t flilat atioutt is includeolh il tlht gross intitomi of tit i~nitiit'd Shaitlt rtilPientii ie' ilust inelutlh dilnt tIIx C'hit ill orler to get' the bent'fit oft this lprov'isioln of tit' treaty. 'The 1v,, at lth elltltivet ritte of 50 itricelil, oil $125 is ll $62.50. 'Tilt tCretdit

    (1 I-9)

    alit nist (his tax, 2A)5 pl'reent of $100, or $25, leaves a habalante of ilie I nliteld Sttlet's tlk x 1ilti ith 1)14Io filal patliese dividenid of $37.110. ( Of oilrse, it is obvious that IIe, higher tIl) in IkIe imi'oi,-tax hrack like litxlaiytr gotes, I. th lesser atvlit age he will receive thiider Ilhis provision ;If ltie treaty. li fiktl, if Itt get s l keyotl 80) ler'eit tl, lle will ret'tivt, l)ritIically to Itd; nittagi'ifige irov.,ision in l Ittrea lv. under Ilhis 'l'ukitig IIke sa me Xmlt jle a 4o1isiltriiig thit1 recil)ienlt of ifwe lie divided is in the 8O-p'rcenlt bracket -that is to Say, his ltax is limited to ilhlt lie will lhivie a1gross ill('o, of $1llt), to which will he added it gross nilnt'oie of' ')5 percent , or $25, making it t)a of $125. Il 'flt' lax, Itt XS-p'ir'clit lilte ratllt, $100), wilt Ii crVtdit o1i this of $25, leaves a Ii on IIlt, thilpatse dividend of $75,t lull Iti would x

    t1rPectVive

    I hlve' jutst rt'fterred to thei'jpt'rson who is int Ithe 8)-p)ercet bratckti. Now I shoutl likte to re'ftr to ith' I 'nittd Stlles dividend. Tltert' i, a 4 plr4t'nt lax credit givtet under the lax bill which was retiltly uItsst't by (it congressss , and I believe only this week signed bY lth', )resiteInti. W\ith I gross intmnoille of $10. 11, i1id a tatx Of 80 pe4rv', or $0, and a credit of $4, tlthe tax ot the itild Stattes dividend, il liel Ih e caits I it'- SIO t're'nI dividend recipienI, is $71. of It other words, 1li4, iixpayer IIi 80 per'enii brackel. unthter our the owti tutx laws, wouhl I)lky tuttly $1 more tlhan 1!I,would piy if Itretct'tivt'I lite dividtltl froli it foreign corporatton ill 1Jitpaitt. Of counrs, our 4-p1'rcent credit i aIplites to dividt'ndls eatIit4(iil liet Tnilt t'tl Stlitte r intl ret'ivtl, from, I nittled Stlltes corporations. So ifou' ill till' '0 it'rc't'ni I irt'rktt , or e'v'il inllI it' 2 p)e'rcent brtckt',t had dividtmils from corporations il ihtat p till, i1tl1I r'elit'f would lit Iit' less IhanI if Ite h11id rct'4lvttd likte sa8it1 diviolthits in filt ITItiled Sltites front IUnilt It States corporations, and had the 4 percent tatx credit give,'n to him. T'lhait is al tintusutiii ftittrt' in itlx convention, aid for Ihal reason I wish to bring it expressly to likt ailtnle4ion of Ithe Sthaltt,. .Mlr. NI.AYlRANK. NIr. I'residtnt, will the Monttlor vit':? Mr. (CEOIIR E. I am glad to yiehl to the Se'ior fron South ('arlinil.
    Mir. MI.Yl A NK. I cotingtulath
    11l1d tioeS tarect t;irilf's,

    hiaive to l)iy.

    the distinguished senior Steniator

    front (G'orgia, ftrmiier chitainnan of liith committee, aind now ranking Dtentocratlit miettbter, for txplatillig 14 liit, Senate tlt tatx proIdtlilns involved intlit' Itrt'aytv, which, its I understand, involves piurtely taxo's,
    t,)I

    NItr. (GEO()1G(E,. It doe0s Iiott atl'edt tatritrs: it applies only to ltls. Mr. NIt AYI.ANK. I tliatnk tit' Senator. rIr. (GORG(E. One' Ilr'ttly appllie's ItoItslte ititd gift taxes, 11nd ilt' troller at plits Ito itl'tllt' IIIx's. MIr. MI . BVIANK. lhlt ntIit'her alt'cts tarilts. Is hItl corrtcl ? MIr. ( E()lt( E. Neither haIs ayiiv e'tect otitlatrits. It may Iht' thought, aind lno dotlut will be thought, tlhat, oi it' fatet' of it, tlit' trntlit which would It' given to thet Amterican investor ill ,Jatjllal would induct ilvtslinelit of Amnerican money in ,Japanesti torponflltitns. I 4'raips that is true, but, so) fair as the iuveslor with largh MUllis, or likt one who is in file, 10-penteriti tax bracket, is conierntd, [lit' dividtmid lit' wouil receive front lit' ipaptleSit' ormration wtuitld alctiatlly Ibettome less, at aluoiut ,I percent, thi1in hit' would gt from til' t SiteII' tlt'1tuilt' fromt i iitted Stailt's t'rori ttitiiO to which tile 4-1jt'rtt'li
    tax credit would apply.

    (1760)

    Obviollsiv, of (')limte, ,hil)tin y,'llJHt's It Jul'('liliir siIllitioit . .pati . iW i t 'ltlt', slheit'llist rt,,ivt let'r (.1)1tili issts 111141 .ItitI ' aisistaill(v slit, dlos just ofut hl shores of R{tedI friti ofIt., ve'rv lilt ( I'l ly'lltight sbilll 1111her Co(mmun~ist influene,,s if we, iter coutlllries. Lyiing C'hilil,
    dlid hot tlo wlitf wt, t'ollI dohlegifi11 tely to .ssist ,Iaj)liI ald silrenglit'hll hmr t'eOlItlilV. Oillvioyllk, lprovi ing foi- it Iix reit wouldbeil 4, 0or10 tc l hl'lpfuul to tleh lnilntld Stllie., or li1ore a( lit igtols to (fli' I 'ni,1ed Ilv' Staiet I, thn would Ib.' hit'ilgown of imaniy l ilrit ntictonls, to lie hIrm of American lett rtst So I hinkl, NIr. lI.4sidltt. wifh ihalt epla lthi tory sfi tteillent, anid with my pufftinlg Ily fIlhger uI)o0l (ithone feiftart ill thle tfx tonve'nlion 1 1h,1 i1% .alit (li onhfetlurt wh.iih mightf in.vifte t.riti.isl n,.less it 111w, e ft',

    conventonis arte flow ''l i lb'fore the st"1111.,Ime 11-ill (Commllittee of tille Whole, .ll .lr, olpenl to .I, mlmelilet. If (lhr,n be. no olbject'ion, the spending conventionss will Ibe .onsidered its lhaiving passed lhr1muglh its various plirlimni.itary stIagt's, IIl) to tlt' presl'lillt ioul of flit rt,otlhio of ltitlit'iot!. t t Ii

    k t,.1',f1lly 1VtiilithI, I vield flit' floor. 'Tlie lPlI ESI I) N(C ()lelel('.E 1. 'r

    .\Ir. MIAIO)NE. NIr. Presidthtit 'I'llt, lII{ESI1)IN1 ( FOFFICEIR. Will flt' Stiaor fmm Ntvatdi wit hlthl hins s.ltllilt'lit so thalt tflt rts4llitolis of raltiif.ation fuiiy ht rt'por'lt td? 'l'ht, clerk will r'al the rtsolu tiltns of rat ifitcat tion. 'l'ht' l'gishltivt' letrk rt'eaid a1 follows:
    the .outm enit iol IRl-tweett tlit' Sftahtes of Amtericatl Itlitted andhJita for tlilt avoidance of dottile ftiition mid fheIpreVtlittiOn Of fiSCII V'vaSiott with rt'sp't'f to taxes ol inco'm., signed tit Washlngtoni ol April 1W1, 1954. It'. 3.;,316; lU'r.tred'l (lro-Ihords of th," Senators pro-sent 'oicrrinoI tij herein), Thiat te' S-'titll,, ah'ist' 1itu4 vonstt ito tithe ratcitivat ion of lE'evtiv, F'., ('ontgrs., 2d 81d -w'.t.i 111, cov,'itlltiota itlweell t'he U'itled St ctle. of Amaneriec atud Japan for tIlt' the' :iuoiW:1,e' of 11o01lle1' 1ixat olt mid t'l prt-,ventiot of tistuIl e'Yva,,ioi with respec,.t to t3xe ot14t IMll1 itnherilatcees, aind gifts, signed tit Washinglotn oil April 11, 1i54.1.
    NEW TRE~ATIErS IN SENATE CLOSINt's RUSH1 Iha.'t'El re(t',o-lhirl. of th"e S'aulorsr lriuetl reelacurring Ithereon), That flt' Se'tnate advise' mid em'tnce'itt tilth ratittlafiotl of l:wct.tive D), 83d Coigres, 2d1 s'.essioni,

    .fr. IAOIN)NE. Nr. Prsiteidt, first, I should like to t'all lheitttenlion1 of fit St,'ntlo, to flt' fait t hat ill this vas'e we aire presented with til .l'l rtiv ntew re'aifV with ntirt I iienw provisions, with which tilt
    ',iitt.',is ill waIv familir.r It

    atid there

    64 no time to study them.

    havit hinl otily it short filmit' Io) read Ole .li'rit.v, ainitd I doubtit whether f I lhtre will I.lt eiluetiaft little' to tlhebate t theatrety between now ant to
    .mI. ILANG.EiI.Nir
    lil.t?

    'lThis imat.er is it very imolilortaint oti.

    . l'rPesid.entl, will tlilt Seliamor frolli Netvaidam vield It was btefore tfle

    Fort'gii l

    ittli OIIIiliCmmttet' I;hut wais not dii.s.ett very greatly. i Would the Sv.iiator frolii Nevadtia l re to lhivt' lilt- suigges. tilit

    Illmeniie of it quorlii?

    NMr. \IAIA)N,. I pri'efer to hiavt, that donet a little hitter. A little Ilattr, tflt, allh.mi,1' at t(ritti will )te suggested. of Mr. KNOWIAND. Mr. President, will the Senator from Nevada to II,.?
    Yvield,

    I amn very glaid to vitld to lite Imajority lteadtr. Mr. KNO)WLANDI). Mir. 'Pretsident,. we have taIken uip anid ratified l'EXt'Cllti,'e I!, Exeittive (', and Executive J1; find fliesenatorr fromi Georgia I[ir. Gt,:ouo;l. tilt' ranking minority memititer of tile Foreign
    i

    Mr. .IAII)NE.

    (1761)

    Relations ('ollimiittee lis a11ld very ,illy, I believe shown Ilie impl -fllrlve,( of1"1114l liva rel.solls. for the( tax treaties Wilit ,Ja1pan, whlith

    are Exec.ulive 1)arid |Exeulive R. I unhders-tnd 1l11t ir the Senator' from Nevada is not iii Op)position hits t) toht'tese t'ea tis, IatI least fherels t lintg'e iOt lntbeen stllict'ient timt e for himn ii st umllv thIem . Th'lierefore, I should like to Ilsk lhim Whether llie litsi a*y ideta as to Ilhe tiite ihe thinks would h)e, required in order to
    lisi.iss their tit this point.. iprogriiii of tlie Senalte and I a111 asking this question beeslie oli' lions which Ilie respolnsibilities I have in tIrying to answer tlihe quetf Senaiitors aire asking nile in regard to the possil)ities of adjourlm, ent, antd whether we shall have a session tomorrow onr next week, tit(d so

    ortihe

    forth.
    Mr. MALONE. I will say to the distiniguished majority leader that I think it very unwise to triy to ratify these two treaties at i tlie t enat ,eiiiitor wito underwlti there is* not on thet' floor of tlimt' S stanids them. I include ill tlh11t still eietlit, I ay say, t ile uttajority

    either. leader; in my opinion litt does not uiderstaid thtthni, Il other words, we would be setting a precedent with tin entirely new nation, with two treaties dealing with li t, taxes of Antericaim Cit izens, ind permitting our citizens to move to t0lit count ry and install l)lnts there, for filt, purpose of taking advantage of latxts anid is to give the avowed l)urpose -1 believe it is ver'y well ulnerstloodt .Japan advantages in our markets and advantages ill seeurinig inv'estilletnts fronii thit' United Stlates, anttd to liiake income-tax arraingt'nttents which will make it p)rofitabhl for Americans to make investmients iii ,Japan, and unlprohtal)he for Aniericans to make investments in the a lTnlit e d States, ill t(ie salme business --- s ill tle case of the crockery business, formerly an atiftive one in Ohio, bltif now shut down titre because of tfle imports of crockery, principally from Japan. At this moment Iam not expressing any opinlionl, except to say that I htelieve it, is an unwise thing to jam through the Senate treaties' whieh are not undthrstootl by any Senators onl this floor. So I do not know hiow long it will be necessary to debate these treaties, but for (lit' majority leader I will say tlhat it will be some little. benelit of flit' Mr. KNOW],AND. I assure the Stnator from Nevada that I have nto desire to jam anything through thie Senate. The treaty has been reported by tilt%Foreign Relations Committee. M\Ir. MALONE. But the chairman of the Foreign Relations Committee is in another country, tit the monit'nt. Mr. KNOWLAND. No, ihat is not correct. Mr. MALONE. Well, the chairnian of tihe committee has gone. Mr. KNOWLAND. That is correct, but lie is not the only member of the e'omlittee. Although lhe Senator from Nevada is entitled to his own judgment, since lie has stated that in his opinion no Member of the Senate mihdrstiimls these treaties, although ain frank to state hlihl I am not an attorney, I wish to say I believe thait from the report of the Foreign Relations Comniittee and fromn the explanation of the treaty given by the Senator fromt (leorgia, I have knowledge of wluil these treaties purport to do. However, in view of the fitet that there is certain proposed legislation yet to be htindled, I ain trying to find out what the prograin is likely
    to be.

    (1782)

    nation of some 84 million people.' Front the Communist point of

    I wish to say to the Senator from Nevada that, conditions in tile Far East are, as he well knows, very critical at this time. Japan is a

    view, as was pointed out sometime ago by Stalin, tile Conmnmunists feel thal if they could bring Japan into the Communist orbit, the
    Communists then would be invincible.

    be to our interest to have Japan move into the Communist orbit. #11Japai has many critical economic problems, as do the United States and other nations, in various fields of endeavor. But if we are to reach a point, where the Government of the United States is not going to have to give, out of appropriated funds, considerable sustenance to the economy of Japan, the only alternative, I believe, is to encourage private investment in Japan. Ihe ,Senatorfrom Nevada may or may not agree with the wisdom of that point, of view or with the desirability of getting out, of a government-to-government relationship, and encouraging the investment of private capital. But, being an engineer, as the Senator from Nevada is, and having been fully acquainted with the history of the United States, syarticularlv the history of the West, I am sure he knows that if it hat not been for foreign investments in our railroad systems and inour industrial systems, they would not have been built, or certainly would not have been built at the time when they were. I merely wish to point that out, because I do not know how crucial
    with Japan are. I do know they are concerned, das are the people in Japan, over a program to get the country on a sound economic base and keep the country out of the ('omuniunist orbit. There are only three choices available to the majority leader. One would be to hold up the resolution of adljournnent, until the -Senate disposed of the treaty. I do not believe, with the heavy program we have, I would be justified in recommending that course of
    action at this particular time in the session, when we have some pending legislation to consider, and the social-security confercimce (ie President and the Department of State may feel these two treaties

    I kmio% that those in the Government of the United States and, I am sure, those in the Colngress, as well, recognize that it wioiil not

    relprt will soon be coming to us front the House. The second choice would be to consider this treaty"if and when the Senate recesses and co1mmis nack into session under the resolution.
    ,Since this is. of course, in the field of treatymaking, the Senate alone

    and Senators, including the Senator froit Nevada, with ali opportunity to go into the report adid the facts which were dtisired to be developed, could spend more time on the treaty. That may be the
    desirable method.

    cailt take action, and therefore the House could le in adjournment sine die and the Senate itself could meet when the Senate had more time,

    On the other hand, it has not Iwen unusual in the history of our country for a President of the United States, if lie felt that a treaty was of sufficient importance or that the inatter of contfirmitation of certain appointments was of sufficient importance, to call the Senate back into special session alone in what is known as a treaty session. If,as I say, this treaty is deemed important enough or if conditions should take such a turn that that course of action would be justified, that would be the third choice.

    Mr. MAYBANK. Mr. President, will the Senator yield? Mr. KNOWIAND. I will yield in a moment.

    (1763)

    I made thie inquiry because I wish to schedule the business of tihe We tdo not expect to send back to the House the resolution of adjoillrimielnt which the House has sent to the Senate, as Itnlendled, until after we receive from tihe House fith, social security conference report. IHowever, if this discussion is to be rather substantial aniol dhe Senator has indicated it will he I wonder if, under all the circullstances, the Senattor would object to the majority leader moving that the SSenate resume legislative session andl proceed with tdhe p)enIding busi-11. I,387]ness of the Senate, which is the bill dealing with {the uper(1(olor(IdoRiver. MALONE. If the distinguished majority leader is making that MAl'. suggestion merely to postpone the inevitable, I'see no reason to dodge Ite issue now. Mr. KNOWIAND. The Senator has said he feels lie wants more tilie. Mr. MALONE. I do not, know what time would be necessary. That will develop as we go along. If we are going back to the regular business of thie Senate merely ill order to dispose of soime of tlit' regular business and then returning to consideration of tile treaities, with insistence upon) action --Mr. KNOWIAND. I did not say that. I said miy recommnendat iotn under theicircumstances would benot, tto take ll) these treaties prior to the recess of the Senate ill the present session. That is what I was tryitag to mitake clear to dhie Senator from Nevada. Ilr. MALONE. I understand. Mr. KNOWIANI). If the Senator will yield to limte I shall move that tlie Senate resume legislative session, with the assuranice to tile Senator that I do not expect to take up these treaties prior to the r'ecss of the Senate. Mr. MAYBANK. Mr. President, will tile Senator yield? Mr. KNOWLAND. I do not, have the floor. Mr. MALONE. Mr. President, I have the floor. Mr. IAYBANK. Mr. President, will the distinguished Senator from Nevada yield? The PRESI)ING OFFICER. The Senator from Nevada has the floor. Does the Senator from Nevada vield? Mr. MALONE. I will yield in a moment. Mr. President, if the distinguished Senator from California will inake at definite statement tihat he will not bring up these treaties unless some other Senator should move to bring then tip and outvote hinm, the junior Senator froni Nevada will not object to hiis proposed motion. Mr. KNOWLAND. I wish to make sure the Sentator understands. I ex Lwct that tiht, losee, ait least, will adjourn sine die tonight or, if riot by tonight, by tomorrow. I expect that the Senate will recess pursuint to the aljournimnenit resolution to some date in the future hdo not mean tomorrow or the next dlay or next week anmd return at a later time. I am prepared to give t'he Senator assananice that I shall ,iot move to return to executive ,.'ssion for this present sssiioli, which I expect will end today or tomorrow. However, if the"' Seniaite does return, either pursuant to (lie resolution of censure or by call of the President of the Unite(d States for a special treaty session, 1 (10 not wish to have the Senator feel that I shall not at that point move to take up thie treaties. I can give the Senator assurance, so far as concerns the present
    Senate.

    (1784)

    Session, which it; rapidly comiing to tilt that 1 do not expect to end, treaties at this tite. take iip) th e Mr. MALONE. 'Do I correctly understni(l that they will not be taIiken ti) at this titte, at this session? \Mln. IXOWW.IAND. 'I'he Snator refers to the session of (Congress. ido Itot wish to lhlave any iiiisiUderstaitdiig of tily position. .Mr. MAI,(ONE. Mr. President, no one is iniistli(Ierstiiltding anything. All I ain trying to get the Senator from ('aliforiiia to say is that lie will not i)ring them ill) until tithe recess and tien returns. S Senate Mr. KNO) LAXI). That is (orrect. N MALONE. Is that what the Senator is saying? Ir. MIr. KNOWLAND. That is what I now say, and what I have been trying to silv.

    MIlr. MA'VIBANK. Mr. President, will the Senator yield?


    Mr. KNOWAND. Yes.

    Mr. MAYBANK. I wish to make the record crystal clear insofar as iliv own mind is ('on'erned.
    I itdei'rstood froim the resolution propose(l by the S,"enator from Xew Jersey and the Senator from California thait we were about to a(ljourn, not sine (lie, l)ut with the exl)ectation that we are to return wish to ('all it. Does the Senator from ('alifornia say that when tt(.e Senate returns to take up the censure resolution, or whatever we wish to etill it, relating to the Senator front Wiseonsin, we tire to take up)treaties? M1r. KNOWJAND. I do not know what the Senate, in its own judgment and after consultation with thelt,adershtip oit both sides of the aisle, will decide to do, but we shall then have a determination of what we should or could tltke up tit time. that Mr.MAYBANK. I anl not suggesting that we (doso. Mr. KNOW(lAND. V, while the Senate is in session, at least, it is master of its own destiny. Insofar as treaties and nominations of the President are concerned, we are authorized to function without the Ilouse being in session.

    to take up the so-called .Mc('arthy censure hearing, or whatever we

    M\r. MAYBANK. The Senator from Califonia has always been fair. As I understand the Senator, he has advised me that wihen the
    senatee takes a recess and later returns to listen to a report. which several Senators are to file with respect to the Senator from Wisconsin .Mr. MCCARTHYJ, we can then bring up, under the Senate's rules, any thing the majority leader desires to bring up, such its nominations, treaties, and all the other things with which the touse has nothing

    not is another question. Mr. MAYBANK. I wish to make sure my own mind is perfectly clear on this question. We are not to have a meeting about censuring or not ,'ensuring the junior Senator from Wisconsin. We are to have transact, provided the House does not have to concur.

    to do. Mr. KNOWIAND. The Senate has tile power to do that. Mr.MAYBANK. Iso recoitZe. Mr. KNOWIAND. Whether the Senate will decide it is wise or

    a meeting oit treaties: we are going to have a meeting on bills, and we are to have a meeting on whatever business the Senate wishes to
    power to take up anything it can handle without House concurrence.

    Mr. KNOWLAND. The Senate, when it is in session, has the

    Mr. MAYBANK. Absolutely.

    73096 -3-vol. 2---18

    (1765)

    Mr. KNOWLAND. The Senate itself may decide to take up nothiing but the censure resolution. Mir. MAYBANIV. I doubt if the Senate decides that. I appreciate the comments of the majority leader. LEGISLATIVE SESSION Mr. KNOWLAND. Mr. President, I move that the Senate resumne the consideration of legislative business. The motion was agreed to: and the Senate resumed the consideration of legislative business.
    * * * * * * *

    [P. 153.941 CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND JAPAN FOR THE AVOIDANCE OF DOUBLE TAXATION Mr. MIALONE. Mr. President, I wish, first, to thank the distinguished majority leader for dlelaying action on the treaties with Japan which deal with income taxes annd, indirectly, with foreign trade. I wish to saw, very briefly, that these treaties deal with special concessions with reference to income taxes of American investors in forei(g nations, that is, dealing with residents of this Nation, making it advantageous to them to invest their money in foreign nations-in #Japan under this particular treaty-and more profitable to them than investing it in this Nation. In Japan they also have the advantage of using low-cost sweatshop labor, paying 12, 15, or 20 cents an hour, ats compared with the $1.50 and $2 per hour wage rates in this country. TIhen bringing the profits into this country tt a lower income tax than would be paid on profits on American investments. Wi'hen a treaty is presented as a fair treaty for the United States there arises a difference in philosophy. There are apparently good, honest people in the administration who believe tile thing to do is to divide the markets of the United States with foreign nations, in the interest of perpetuad peace. 'rlee a parently believe that, when we get the markets divided with t2le low-wage nations of the world through the free-trade policy that we are buymn friendship. It would seen that the events of tile last few months would disabuse their minds of any such conclusion. They want to bring in products of the, lowcost sweatshop labor front foreign countries and then write dowli the amount of income tax which would be charged to investors in foreign nations who live in this country and who bring back to this country the money they have made abroad. Thus they can circumvent the entire economic and revenue structure of our country. Then it is only a question of lower wages in this country or going out of business in favor of foreign nations.
    AUTOMAKER BUILDS CARS--JAPAN CUTS WAGES OF AUTOWORKERS HERE

    Mr. President, our well-known friend and foreign investor by the name of Paul Ifoffnian is building a plant in Japan to construct Studebaker automobiles. It may be he thinks it would be better to build Studebakers in Japan than to build them in the United States.

    (1788)

    Afew days ago I saw ti(e news that he had lowered the wages of his ei1iJ)loyees in 0111 of Iris fa('tories here in tilet UtTited States. I Sulppose that is necessary. Mr. Ilofrman will be remembered its the mriani who started the distriilmtion of American capital throughout the world, in other words, exporting American dollars. lie made a business of it. Up to that lime it had been sort of a hat hazard thing through lend-lease, UNIRA, and loans to Britain. Butl Hoffman made a business Mr. out of exporting cash capital front the United States. Apparently, he ha(1d gotten so in the hal)it of it that when he went back to his buisimess the sarmne thing occurred; that is to say, he did not keep etiough capital in his organization to compete with the other car nitanufacturers to mrrake a success. So he is apparently doing the same thing for the Studebaker Co. as he did for trhe United States of America. But it (foes not work very well. TREATY FOLLOWS HOFFMAN THEORIES This treaty makes it advantageous to follow the policy of the Hoff,ials and the other citizens of this country who believe, they should utilize the sweatshop labor of the world anti( bring their products here, mid the money they make, with a reduced income tax. I have said several times otr the floor of the Senate that Mr. Ford Ias 2(6 foreign plants. I saw a fine-looking English Ford advertised iii the Herald Tribune a few days ago for $1,300 in contrast with the $2,SO( or $3,,00, or whatever amount it is t(tat a Ford built in Detroit would cost. That must be a very fine achievement. But I wish to say again, Mr. lPresident, that I (10 not blame the Paul llolrmans, the llenry Ford II's, the Colemans, and the rest of the tribe who want to utilize sweatshop labor and then bring here tlre money they make without an income tax or with a re(luced income tax. Ildo'not blame them for it, but I do )lamne the Senate of the United States for making such an operation profitable. The Hoffmarts and the Fords are smart businessmen anid take advantage of what tire Senate (foes. For 22 years the Senate has been making it profitable for them to do so.
    TREATIES MERIT CLOSE SENATE STUDY

    Mr. President, I believe it is an injustice to the Senate of the United States to bring treaties and proposed legislation before it which have liot been properly digested by ,SenateMembers. It is an injustice to do this when ithe Members have had no time either to read them amid to understand them, or to study the ultimate effect of such trea ties. So, again I wish to thank the (list inguished Senator front California, our majority leader, for giving us his word that lie will not bring these treaties agaiin before tile Senate at this particular session. If the

    Senate takes a recess and has to come back on soie special occasion,

    11. 1539o\ President, I wish to turn to the discussion of another Mr. subject. The PRESIDING OFFICER. The Senator from Nevada [uais the
    floor.

    tile majority leader says he may bring up the treaties.

    (1767)

    Senate Committee Report


    February 9, 1955 Executive Report No. 3 84th Congress, 1st Session Senate Foreign Relations Committee

    (1769)

    4T'I CNGM t81WiTEE

    EINO. 3

    stSessionNo3

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELGIUM

    WEDNESAY, FEBlvARY

    9, 1955.-Ordered to be printed

    Mr. GEORGE, from the Committee on Foreign Relations, submitted the following

    REPORT
    [To accompany Executive D, 83d Congress, 2d session; Executive E, 83d Congress, 2d session; and Executive G, 83d Congress, 2d session]
    1. COMMITTEE RECOMMENDATION

    The Committee on Foreign Relations has had under consideration the conventions listed below and recommends that the Senate give its advice and consent to their ratification: 1. Convention with Japan relating to taxes on income (Ex. D,

    83d Cong., 2d sess.)

    heritances, and gifts (Ex. E, 83d Cong., 2d sess.)

    2. Convention with Japan relating to taxes on estates, in.

    3. Convention with Belgium relating to taxes on estates and successions (Ex. G, 83d Cong., 2d seas.) 2. COMMITTEE ACTION Over a period of years the Department of the Treasury, in cooperation with the Department of State, has negotiated a series of double taxation conventions with certain foreign governments. These conventions have been negotiated in order to alleviate the burden of double taxation on incomes, inheritances, and gifts upon which both the United States and the other country impose tax because of differing concepts of jurisdiction to tax. The conventions with Japan, upon which favorable action is now recommended, were referred by the chairman to Mr. Colin F. Stam, chief of staff of the Joint Committee on Internal Revenue Taxation late in the 83d Congress. The committee in Executive Report No. 6, 83d Congress, 2d session, indicated that itfelt that these conventions should be examined bearing in mind the relationship which they have to the tax law of the United States.

    (1771)
    1 41,
    . 1 1 tA

    D2IOUBLE TAXATION CONVENTIONS WITII JAPAN AND BELGIUM


    Coti-ideration m~vru to tilt- ludol(iiig of lw.:rlikgs. ou Ihf.ee Coll VV~lt iots. Ini 6s,. view Of' ftle relport fnrot Mr. -|tailit. 11thich 11,1. Ilhlu t. Wiih t'tertiin excelptiolIu. stoi t'ln| iotill . to pl if .n' i lli lLwt hien tit' olI, t'li ltIllirt' rt'(u )tuilart Id for r(.41t1%ollt h f hat Ihtc t'. lillilt ee lilt'-s coltain .w'ct'ral httl'r. inl support ortihe ultl tittilg It

    l.it-itlligrmcnlitoilil, :1114l imlih'.1ti,

    11) oo...itioll t he~re't,

    tile

    tcomillitive |ll

    hdecde

    tihit hit'wariii&w" %'rt' itiiit',-.atryv. hatitn fr i I hle Joint ( 'oltillii lltt' n ti It VI ill l,4 o.ilwr%',l 1i:tl lldIt'i, iii a Iit' jg it li, ic I litt'rlil it' tlillie iil'Ta a i calk atIclllioll 1i1 the t ,llwi liew 'It'Llill'i ill hv,-. ,vo11ltil t t1 oll{ . tax couentiliti tart. XI Vl u hirh 1. 'T'heprtvi. tfl in t hit'.hJapant"t' inctlit'o
    provvide.' ai cre.lit iwaiiist tax: of 25IS ,livi, hiflA from .ipaltv,'e vorloorationq.. u i!
    tf ftlie stuidtt 2. The hlitralititn ill the' ,ain'v'.-wi ri n-lp'ct to ir m-m,,

    'rs'i(,lt to the Amtiericaln recipienlt of


    imroe'tun

    ind bli.iun,.s aprl'nitite juri1.i-1in :i roliel~tliol, . re'.itdciik in thy Ieii t'I

    :1.The i'er.:ia,-d le'romid 'emiuliin for Japamit',

    htnveiimot wilth Jlapman rIating iof gift tam prtviu-ioitmn inh, .i. v"ih itichulit 11(Iihtlit'rimiie',. th laws t n estate .ill ( tuziairltrat it i a gi '.e i, lit'.' li'w linm-ki oi- s, alui li- t'tiiiiiiitt Itt's' ,lsIt'iei' t hIll I hti'.v hlilhi IN' aplprovied.

    Action wais not taken during ilhe last session of the Cougrcss on ()n Fleruarv 9, 1955. il, 'ommltit'e vo'led to) report dhise co'nvent'fios ontfin ito ill(' Senllat' and rect'ommentld their

    tlt.se two cotl~lenftiolmls. it' All 1111lsi ,,f thf


    a'und

    convention with Bhelgium relating to tax,,s on II is e I-'t't'iv,'d flroln Ni%'. S1t1ai. lIe a) i 1'hl't't'4Sisill indicated in thkis report that the' pending Belgiagln conventllion k sIll)st.11iali v similar to other estate-tax 'o11ventf1tions which the Se'nafe has lr'evismii'lv aipptrove'd. The commlitt f ee. tIherefore. votediotn I'slltrl" 9, 19!)s5. to repor)iu tlht' elgial 'olnVt'lition fo the Sena I' anid reotiliii.'lid ilq appol'n~vl.
    t'stllfte

    3. ANALYSIS Or PENDING CONVENTIONNS

    The .'ollliwtli.'ations frtnil the s'iciet' of stafr of it'e Joint ('COemillift tt' il Internal Revmiit,ul Taxation art' as follows:
    .NITFDI STATE;S, CONGiRF'SS OF TilE JouiNr (Coui'itn'rl.I.: ON IRETVENU.I IIEV1;NUE TAXATION,

    iug lion..qn11,m 01he,.r


    ta,

    W s nglon, .A
    IH,,b/inh
    I+t :

    l ., I

    , II;ashin,lton, A. (.
    .At mxir rl'tll1'f-4 ! I1:1','q. xaml~itd lI he

    room W 14F % St. \ k'~l li

    follotoing ilenem,

    c.

    titi 11 llit '

    l',,,i~r

    lllilll 2N for' yolur colll ilh.i'' t it l'h rt' ntcw jN'ow -l 1 (L~X. t)(0 llh .llalla n~ tlaliz1to1 (A\,A tnil %%I,,

    I).

    O f( (',lg.,

    (',tliVttit itll tiitil Jap-mli rhlatmig to taxt's ton cutatcs, ihilicriiancs,


    * * * *

    gild

    V (o'iil t'it llls hl'h

    'l,,tl'v parallels 4i13tt' tili Japan The s'.4tait, aid Rift tax civetvritiIn %"ith i" itrhe hot'hiiolitt cloeo y ilirtt', mitilt vit tle S-'iiate 'has prwvhosi c'tlamtllit the+.+aI, oIll|,p
    t Th11 111*1dlighm Invollt,'o , x com slll\,lllill tmilhl Jalum

    Ih-t418f , ; itaumlt'y, thi tIllilliaiit ta Ini\ o tc,, it- alrt itliv ill tT'i, ltt i as ,i, h,'r p '., p|)I+,I Ill lb a lo,41--1i1he. 4of ,litiblei lma\ llioll %% ro m,,v.t' Iii in,,,,,,++, c++fthr by cw w,'

    Ithi alil! t' Ih,' iclp;litaiin if thie cre.diht p il ipleh or it Ih,' v'hie tt riti i)r lit th t an.imtst#t&Il' l t% n fli A%l t it,'rt rat i,' 'r al & s ,t"ifl ,s riAi( roc'i mli t'tabll-hill,'rit is', ( th It( ct isIt ric. ie tuo wit h trll ll imuh er,,. Conta.IJins -,.(,trA T1;,f lprtlo.,.v. Jaffa,,,'>, llic'tsilic tip\ t'~l!ll, e LI ii ti r alr n". iciis sl,, lit iii e f r. tn i l|t, it I| , f t i .';Ir'+- ichl.'h .laja + , if, " i i''l i,'l s iii fllt)tla'e be l i,, |Pr0 i%", is %it are ,l t i-,,-, i Itl I,
    ,flli' #,) t

    ,It.,.,,ttI it -Iraa l

    itt '. tii lit ft 0 r '.s.'fat tiri '., Aiiii'll ,' tomlrlilg -'',% ralfl d t1. I lt it' , tiu tI'S elell lFior v\aitli ti . i N ii'mi of ,, itr f's t -'pe, Ihfitac l to the irmid - f an cr,'ilil i'h,' a In\ ,of '5 hitrittit to, ths \,'rlt .1,w ro t1 'li-1 4

    ,it%i~lt,,is frmi ./ lm~m..-

    vo ,,rloorali,,t,

    i, it,' r~it Iit i al,

    I -, re,+ f .. ,7i7t')

    141,7721

    DOUBLE TAXATION CONVENTIONS WiTTH JAPAN AND BELGfUM

    American shlmareholder has borne the tax burden of tile Japanese corporate income
    tax imnxto, d on tith, eari:tigs and profits out of which tile divided is paid. (U'nder

    tithe'0oivenition, Japan also agrees not to impose any withholding tax on dividends going to American shareholders other than the Japanite corporate tax; at the pro..'nt t .me, Japan imposes a 20-1wrctnt withholding tax ott olutgoinig dividends W hich is r'dudcedto I0 p percent if the investment tends to further the Japanese e,'ti1,1ty.) The 25-percent tax credit on dividends from Japtanese corporations will Ie,available to the Ametrican recipient only iVlie includes in income the amount of the credit, I. e., 25 percent of the dividends received, ms well as including in ince'nu' the aniount of the dividends received. It should be point out that this crvdlit to alleviate the burdens of double taxation of corlprate earnings is con:-idlerablv larger than t he 4-pereent dividends received credit granted to individuals for 41;vidt,,tds received from domestic corporations which is contained in II. It. 8.30W (as pa.ed by the Suniate on July 29, 1954). It should also he pointed out that the k ere'e;t is granted tinder the proposed treaty at a fixed percentao.e' of 25 percent without regard to p)OS.Sible future variations in tile Japanese corporate tax rate. Th., if the Japanese corporate tax r tt' were reduced in the future to less than 25 pet-rcent, the American recipient of dividends froti a Japanese corporation wuhld still be entitled to receive the 25 percent-credit against his United States
    inclillle tax.

    'Tl'e other unusual features of the Irottsed convention which should be called ep-citically to your conmitlee's attention relate to (1) the lihemliiation of the student and husinices apprenttices rule. and (2) allowance of anl increased personal exemption for Japanese residents (other than officers or employees of the Japanese Government) who are tenmporrilv present in tile United States. The filst of thes provisions permits a Japanese student who is tetlporarily present in the United States to be exempt from United States tax on ally renittancrs front abroad, iclhdilg pvniecits by his Japanese employer. 'Ulder other conventions now ill effect, this type of provis-ion is usually limited to anl exemp.,ion of relmitlanle's to couer the maintenance and .iuptort of the student am!d doems liot ,xte d to wage or salary payllmentis received from a foreign employer. Als, iniider the business apprentice provision, a Japanese employee of a ,Jhaiise corporation who is telliorarily present ill U united States for a peri. inilot to exceed 1 year the will be exemtipt from tax ont a!ny COllitk',l*iatioli receivedA from his .lapaie.se eliillyer if thie total coillpenllsat ion on an atlnual Iless does niot exceed ' $6,000. In contrast, the usual !wslulless apprentice provision ini other treaties only exentpts remittances received from abroad for purposs of una:Iitelialice of the businiess alpprentice, ralier than exenlpting liis total cages. The coiivenitioni also uill give to a Japaneme tionresidetit alien tot her tihan ail officer or eitilohee or t lie Japanese Governltlilel a limited itlireA.e ill persial eenillptiolls for ht;s SlXbusealnd eili ldn, n who are pretwnt and living withi him iin tle Iniled States for aiy Ipart. of his taxable ve'ar. There are niotsimilar provisions for increased personal exemlptiolns for Ilolirtsidelht aliens in other tax conventitins. In general, a thonresident alien is
    tlii it led only to a personal exemption for himself under the internal revenue laws.

    mtcruoraittduin Atting forth a detailed analyis of the provisioii4 of the ashve Th1114is itieltlOraidiim will give Particil.ir emlpham.is to those lr)vi.-iolu.s %hlich depart from the iitomlllary prix%isions of tither t ax convention's now in fore.,

    lpr0opo,'(d tax clVt'llit idlis Will LW' SitilnitI44l to )your Ce-tilnititl.


    Sincerely youllrsa,

    ('ClArr F. STAM, ('hArf Of Staff. 4. INCOME TAX CONVENTION WITH JAPAN Mlemuorandutm fromii the Joint (ColtlmiLtw on Iitt4'rnal tevriiue Taxationi)

    Ilie itie'rtte tax eOil\ enlioi w itih Japan hatl tile Keniral llilrpurm ,of affording reiitt from dmille taxh\.it t restiltlig fromt the fact ti la tIht'ax lati s isf the,tuo celiltries imltposee tax iiailihl v on ditferrint lIea,'. It asim).etablilshet prnedtirets for niutuaI Itilt11lIst rative smltltalaee beut.een tl e fiscal atilo,,ritiesq 4f t he two ce-lintrie's. Th,, tit l,a',rtl tiect eetitsiit titiy if tihe prmiolslltems hilch tile 44-tiisio hm l',hen pro-\ uisily di'nilei objt4'tiahille lin itIS eiSlIderlt tot other (a%trealil,. Thus, -,f ,h1, .Jatitio income ta ('etillmtn dlt'ms nit', an (t:a i dinertillali titllailinst i , htit, rarig of public etii14,rIlstierm, iieer dibee it pr1ie,iih feir e,\e,:it'lion fromn Ualied l Sltaxl11 Ja t f i, ti a| l At11itis o(r tae-Untlaiated eSristiio. The ttrOl itlti ftor coi, llkitU of lta.i' ltiv oe of the' rt'i! racttilix mates fer the (,thir i3 litiuitei to ttat ltiecet'iy

    ( 177;#,

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELGIUM

    to itistire that the hotnmfiet provided in the convention will not lm- vijuiyvt lhy wrot)is not entitled thereto. ('orresponutdinig to Ihe principle's of other income tax conventiis, it is prno illed that :in enterprise of ,iti of thiecontractingg countries will not I' suibject Ito tax by t he ollhr on it%btisiness profits unless it has A iwrnianent establishment in tilt other state. Thits, the mere sale by a Jalpanese enterprise o(f its product, in the : United Statl's will not subject the JalallaM'.. concern to tax on Itih pnofits from suhI sale uiless the concern Uas a pIrnatient estullihnwnt in the U,,itcd tah.s.

    A reciprocal exempt ion of shipping and aircraft joiera: ing profits to alt liter. nihler article % where thtie ?hips or aircraft are registered in one of the contracting comitries or anr regi.-telrd in a third country which exempts front its tax shipping and aircraft operating irothils of rhe latter-type exemption is a new 0til both Japaln and the United States. which is not contained in ot her income-tax convent ions now iln effect. At tei present time, the exemption of eat nings fromn the operation of aircraft will opramle
    prie of the other state is provided almost exclusively in fa or of the Untite States.

    Tau on initfest A reciprocal reduction to 15 pereent of the rate of tax onl interest is pIrovideldi tinder article VI where the interest is received from soltre-s within one' of the contracting states by a residh'nt, corporation. or other entity of the ot her coli. eit fracting state not having a permanent establi..imnt in the former. At lie Japatne withholdinig tax oit outgoing interest is 20 percent pre%,--nt time thilt .except where the loan tends to further the Japanese economy in which case thie t withholding tax is 10 percent. Thus. inten.'ret on mo1 tlntfhed states loan1 to
    Japanese elirtrip'.e.'m u+ill not Iw affected at tht leurcs'lt time by this prov'iSi*.

    flip A similar reciprocal retdtetion ito a tax rate of 15 in'rcellt is provided in the mm' of royalties front 'olnyrighlts, artistic and sviemttlifie works, patnlts, designs. secre froe.ssms. tratle-marks. aid similar t)rolH'rtlie, where thte royaltiei' are dririvl
    ront soutrees within oe of the countries' hb' it re.,ident, corporations. or other

    entity of tle other cotitry hauvintg In permanent establishmentit in the former lThis lprOvi-iOlt Specifically imtltudis tilm rentals wIhich are subject to cotlni r%. . a iithhIolditg tax of 21) percent mit her flhe .1al|muz|-e incomne tax. As in tilh,' m of Imolst other ilncomlte'-tax cohivlttiull4, it is providedI lh:l t a residehent,t'orporlitll, vt|ther than ilterelt, front ralor other entity derivinig income frotlt real property ort.gage,,4 or real-evltate hvotils) or iicoltme front royalties derived from Vtate1 r ttimlral re,,iulrvi's l:ttay elect to he, stthijeit to tax upon A tit fllasi5 ratther tlimn ltupti~ lthe gri-o incoml front sucih soturee's. Where stich aill ,lecttion is made.tli ta1x t imposed a t. lhouigh the r'sidi'it. corporation. or other 'ltity had a perimmetit establishment in the other country. Earnl income
    R,'eciplrical ixezmptio n of earneil income (comtnpensation for labor or Im-rs.ilal ildivitdual services, including professional s,,rvices) is provided in article IX if &at r'iui'lent of ont of the countrieses is temlpoorarily presen'ht in the other. We're his COmlwti!titjon is deriveil front services ii'rforlned as ati olficer or employee for a corporate ion, nrsidint. or ot her eitity of his count ry of residi'tee, the conpe'nsat ilt is u'xi'llht %itiout regardl to mmmlohlit provided his Iri'sceae in the other country dm,, not exveed ISO) delays during thte taxable year. lit other case's (for example, atimmits reeeviwd lhy Imp lic elitertainters of the United States from shows perforitued ill Jlapan) Itlt- cv-,+ollitn is gralted only if the earnings do not t'xrttd $3.00N1 and the indhvidiual is present Itot more than 90 (days, A reetiproval x\cltipt ion of (')llNllmti*+aition paid byv ilte of the governntiiett tC iled hIo its cit iz'e- %% an' ottherm ie subject to tax by the other goverlntment is pro% inl art ile. X. Th,' exemlpt ion dth's not. apply, however, if the smrvices an' perforamtd goverltnmelnt for profit. ithe carrietd ily ill t'hlliet'tiltniwith a trma.' or hitliss' Tlits latt4-r limitati, ionis siilar to ,)le colItanied in the incolne tax colnvenllitons with the niitotl Kingdlomtn, Ir.latid, and New /.,alatid. This exemptions v is %xpre'siy made illal)Iiwable' to a cit zeit (of one of the counitriest who hlia lt'en AdmhitThus. these provisions of te'd to tilt' otbhor c,,itn ry for lperttiarlnltt, residlt'tt. the ct'lltllt are ill larnltnv %illh ',ec.tton 217 of the lInmigrathion Wll Natiomaltty d Act. t Public Laaw 411, S2d (C'uaiz.). For example', a Japaa'-se tatliolla8 hltoine ott -alary paid to hum l+v tax R01il tit b.e cm,,\it fromu hVatcd Slatcs i ,til ftor -,'r\i.'o- tl;'rfrnited ill t 'it% l'(, taltes if he 1Im, vni the+.J1iujalm-m. (;, ,,mm'rt (O)Ithi other hawd. f'otall fur l1''rluiviii'll i"'lidenlte. h lt't'll ai1111it4 to) ile {illt.d ' Al ii AS AiIs, l lit Itoijali %ohid Ito,vellnpt, as mideler other I reallit4 an litulliil ii' t hias i'xi'llittl1011 Of( tLax o1il 4itttpi'aliit 11 iji liy o1e of i he ol.. noiw it) vitit.
    tra!oiig izur i'it"
    -

    hlould pite1'

    flrialvdrly

    liilpootailiti

    I)Ulttn41'd

    Sila

    (177)4

    i)OUBILE TAXATION CONVENTIONal WITH JAPAN AND RELIfTUM

    as4 briiit them within tihe diplomatic immunity." to

    citizens emfl)hyel as technical rxpiorts by tie U'hited States (Governm.ent for iwrforuin~g services within Japan where their emplovment is not of such a nature E'Ixepll)tiot of cOlillm-'Isatio, received bIy vi.siting profe"&sors or teachers (if the

    other than 2 is provided tinder article XI on a reciprocal basis for a perimi not. more sltatw years where the teacher or profe,,or is pr,.srIt inl th taxi.n'coutry either indter an exchange program or at the invitation of the taxing government or of an (edieationial establishment therein. The latter limitation is similar to thait containrd ini the income tax convention *Aith the Netherland.s and is some. what stricter than similar provisions. contained in other tax treaties.
    Studh'nts and business apprentices

    The provision contained in article XII dealing with the exemption of certain amounts received by students and bt.viit-% alp)rentices represents a liberalized ver-ion of similar provtsio.is contained in other income tax conventions. Thus, a nrsident of onme of tile contracting countries who is temporarily present In the other comnitry solely as a student at a recognized college or school is exempt from tax by the tiher country on any remittances frotm abroad, including any pay. n,e'nt., received froii his employer abroad. In most other income tax conventions, the students would only lie exempt onl remnittant'es madult as a gift or made slpecificall" to provide for his study or ntaintenmance. Article XII also provides that the
    r'vilpiitt of a rant front a charitable', etc., organization of one of the contracting cotttries while teulitp. rarily present in, the other coun try will be exempt from tax b.iv rich other cotnttry oil tfit( grant (unless the grant is in the attire of coilnensation for ;isrsonal service). This provision imakes no h(liage in the United States iriconte tax treatmtlent, biut would affect treatment tinder the Japanese income

    tax .Aitce tilted Japalaese income tax exteti.s to gifts. This provision is similar to timne containe.d ii. other treatie, .ow in effect. Under paragraph 3 of article XI1 alt exemption not found in other income tax conventions Is provided. Under this provision, exenmiption is extended ott a reciprocal iba.i. to compensation rereived fromt abroad by ait employee of an enterprise of one of the cottractling romitrics who is pIrese~it for not more thaan I year In the other country solely to ac'qtire technical, Itrofessioial, or business experience in tile other country from a I.,r.oii other than such enterprise or organization. The exemption is limlited to er-'im where the annual cominplsat ion paid by tile eimploye'r abroad do(ms not "weeIAd $6W,0N), or the Japanese equivalent in yen. This provision, because of the dollar limitatiot, would aplpear to H.e lmore of l)eiietit to Japanemse emploVeeS temlporarily pre.seiit iii the United State's than to I'.ited 6"t1t4.t's e(ip)loyese tielnporarily present in Japan.
    %ourca# qf income

    I'dlehr article XII'I riles rt'sipecling the source of income are six'cifically provided. Iln gi'neral, these, satire, rules are derived from the source rules contained in the Unite-d Statws Internal Revenue ('ode. While specific provision for source rui's has iteonte a familiar part. of estate tax conventions, this treaty is the first iliconii tax convention to provide detailed source rides. The only departures front tihe source rules contained in the Un.ited States internal reverie laws and rc'gtlatiots are foumd in the rules relating to dividellds and ititert-st. The departmtins here are of a technical natilre and are intended principally to liberalize the' foreign tax cnrelit provisions contaiuted in article XIV. As a result of the )lmrm. rul,,s "rhich Japan u ill mno recognize by treaty, it is prove idehd that interest aiid by one of the contractinipg countries (inlthtding a local government or enterpri.e not having a pe'rinatn'nt establishment, ii the other couitrry) i%to be tr,'ated msincome fmrn sore-4 within tihe country where the, intru.t i.- paid. Thtiw, interest paid on U'nited State. (tv.ernim.it swecurities would Ibe rea'garh as income fru .4wnwtire.' within tile U'nited State's, even tboulzh tthde'r Japanese law sulch interest might Ix' regardehd aV derived from sources within Japlan when- the sec.uritie restilt front investments talee from depos its in iamk, (other than a INrnanvn: establishment of a United States enterprise) hated within Japan, Tar creelit prti'.aions The' i)ril'ipal nt hlud for pnrvent ing double taxat ion. ot he'r t han the. e'xepn|t ions wrrediition iii tax rate's provided in it her artirlei the treaty, is 'ontainv'l in of artieh, XI%. This% iP.stt gives r.-,votit ion by treat v to the foruigo tax credit proA provisoos tof the' tax laws of the rv-,px-etive. countries'. In thi- resjrt, it iu qmrlar to proi isiotus eaf income' tax collve'nt iols now iii force'. Thie, 1rti('le (tt ils,
    however. two tevel provisiott'. The tirst of thhe'se provivionYo rvlat-4" to the. foreign tEx credit uteler tIe' I rtitrnal Ivemen ('ile' of the lttite'd States ter inwtv'rest

    (1775)

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELOrUM

    received from a United States enterprise with a permanent etablishment in Jsapn. It is provided that interest received from such an enterprise (arising fret" a debt connected with the bIusiness of the permanent ePstalishmihent) will tw treated as income from sources within Japan to the extent it is so treated under Japanest. law. Thus, where a LUnite(d States enterprise has a branch in Japsn and PAys inte'rest'on loans (the proceeds of which are employed in the operation o( the branch), the interest so paid will b, deemed interest from sources within Japan to the extent that the proceeds of the loan are utilized in operating the Japanese branch. A- a ret:ult, any Japatnste tax imposed on such interest would be entitled tc foreign tax credit under United States tax laws; whereas, without this provision of the treaty. such interest would lb deemed derived from sources within the United States and wouldthus not be entitled to a foreign tax credit for any Japanesm income tax imposed thereon. Vu on diridrnJs The other unique feature of article XIV is the provision that the United States recipient (including a citizen, resident, corporation or other entity of the United 8tate: of a divideild front a Japanese corporation shall lie deemed to have paid Japanese income tax In amount equal to 25 percent of such dividend and will be entitled to a foreign tax credit tinder the pertinent provisions of the hIternal Reverose (rode in respect of ttuch tax, provided that tho recipient also includes in gross inco ne the amount of the tax thus deemed to have been paid. To furnish a simple illu.-tration of the effect of this provision, assume that a United States citizen receives a dividend of $100 from a Japanese corporation. Under the treaty provision, he will be deemed to have paid Japanese income tax of $25 on this ulividend (representing, in effect, the corporate tax burden borne by the earn. ings out of which the dividend is paid). lie will then be entitled to a foreign tax credit of $25 against his United States income tax provided that he includes $25 as well as the amount of the dividend in his gross income. Thus, assuming that his effective United States tax is 50 percent, in respect of the dividend from the Japanese corporation, he would include $125 in gross income, pay tax thereon of $62.50 against which lie would apply a foreign tax credit of $25. This provision is somewhat similar to article XIII of the income trx convention with the United Kingdom except that under that convention, credit is permitted (on a similar "grossing tap" baisk) for the United Kingdom tax deemed under its laws attributable to the divid.:d: whereas, under this provision of the proposed Japaitese convention, the credit is established at a fixed percentage of 25 percent. The bNis for setting the credit at 25 percent is that 25 percent approximates the amount necessary to equalize the tax burden between income which has been taxed at both the corporate and shareholder levels and income which has been taxed at only the individual level under the Jaminese individual and corporate income tax rates prevailing when the credit percentage was fixed. Article XIV further provides that Japan will impose no tax on the United States recipient (unless the recipient is a Japanese resident or has a pernionent establishment in Japan) with respect to dividends other than the corporate tax imposed on the earnings and profits out of which the dividends are paid. This provision is a unilateral concession on the part of Japan, and, in effect, grants to the United Statei recipient (except as noted above), with respect to dividends, atcomplete exemption from the Japanese tax at the shareholder level. e'ire:ptlio for charitable organizations Charitable, etc., organizations of one of the contracting countries anr specifically exempted from tax in the other country tinder article XV to the extent provided under the laws of the other country. This provision corresponds to provisions contained in the income-tax conventions with Canada and with the Union of South Africa. Thus, a charitable foundation organiz4d in Japan would be exempt from United States income tax on its income from Unitedl Sates sources, except to the extent it would be denied exemption tinder th: internal revenue laws, such wa unrilat,.d business income provisions. Under existing Japanese tax laws, the a charitable orcanization is deemed to (derive taxable income front contributions made' to it: h!'nee, thi.sq provision is beneficial to United States charities operating in Jalan. Faemptions for Japanese nonres:dnt ahlt ris The provisions of article XVI are not found in other tax conventions now In effect. This article allows to a Japanese nonresident alien living in the United ahi $t'tes other than an oricer or employee of the Japanese (ovenimenti asliti,,mial perw4mas rxemptotn ftor hist spouse and for each of his children provided

    (1776)

    i1

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELGIUM

    the taxable year. The credit may not exceed, however, that part of the credit otherwise allowable which hishis entire gross income for the year. United the infor the taxable year beam to grows income from sources within the Under states terual revenue laws, a Japa:tese nonresident alien would be allowed only one
    personal exemption. perwMal exemptions to which a United States citizen might be entitled. On the other hand, the treaty provision grants to a United States citizen who is resident in Japan the same exemptions for dependents as are granted to a national in Japan

    that they are present in the United States and residing with him at any time during

    virnoII but doue not accord tih Japanese nonresident alien all of the possible

    Thus, this provision liberalizeA the present exemption pro-

    who is resident there.

    the convention and to prevent fraud or tax avoidance. In addition to the above-described provisions, the convention contains articles similar to those of other conventions, such as the article describing the taxes which are subject to the convention, an article containing definition of terms, articles mstting forth limited provisions for collection of taxes of the other contracting state, appeal froni double taxation, safeguarding of the diplomatic exempAs in other conventions, it is provided that the convention shall be effective with respect to taxable years beginning on or after the lt day of January of the calendar year in which the exchange of the instruments of ratification takes place. It is also provided that either of the contracting- countries may terminate the convention after a period of 5 years provided that notice is given on or before a geineral proviion that the convention shall not restrict any exemption, deduction, or credit otherwise accorded by the laws of the contracting countries.
    tions.l 101d

    Otner pros iiona The provision for exchanging of information between the fiscal authorities of the contracting states is limited to that necessary to carry out the provisions of

    each of the countries in determining tax on its residents may tax allincome subject to tax under its laws without regard to the other provision of this convention. The manner in which this proviso could be construed to deny the exemption provided in other articles can be shown by the following example: Under Japanese tax law, an individual becomes a Japanese resident after the expiration of I year. Hence, under article XIV Japan could tax a United Sates professor who tau ht in Japan under an exchange program for more than 1 year (but not more than 2 years) even though the professor's remuneration from teaching in Japan would be exempt under article XI. The effect of the memorandum is to resolve this conflict by making the provisions of the exempting article (art. XI in the example) paramount in such cases. However the memorandum specifically provides that neither country is to be precluded from taxing its own nationals or citizens by reason of the exemptions provided in articles XI and XII. Thus, in the example, the professor's salary would still be subject to United States income tax (but not Japanese income tax) unless specifically exempted by provisions of the internal revenue laws of the United States. 5. ESTATE AND GIFT TAX CONVENTION WITH JAPAN (Memorandum from the Joint Committee on Internal Revenue Taxation) The estate and gift tax convention with Japan is a new type of treaty since it conibines for the first time a gift tux and an estate tax convention. The United 8tate" has estate tax conventions in effect with Canada, United Kingdom, France, Norway. South Africa, Switzerland. Finland, Ireland, Greece, and Australia. A ift-tax convention is now in effect between the United States and Australia. Tis convention, however, is the first dual estate and gift-tax convention. There appear to be no significant departures in this convention from the usual type of
    provisions which the Senate has approved in estate tax treaties now in effect. DIJrrencee iN UtWd StaIe avnd Japane se tax la w A. in the cas of other estate tax conventions, the proposed convention is ittei~ded to alleviate the burden of double taxation and to prevent fiscal evasion with ren ct to taxes on estates, inheritances, and gifts. The proposed estate

    tion provided in articles X (1), XI, and XII.

    June 30. The memorandum which accompanies the convention is intended to resolve questions of interpretation as to the interrelation of certain of the provision. Without the memorandumn, article XIV mifht be construed to defeat the exemp.
    Thus, article XIV provides that

    (1777)

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELGIUM

    importance in carrying out them. 0I1jeetiv,,s Ibecause the d iflh'n-iwc in juri.sdlictional application of the death dtitti4 and41 gift taxs of the two countries are more likely to result in double thxutioti ihan in the ia&,e of muost other comutries. The jurisdiction to tax unde-r the. Japan'.-,' inheritautt,, and gift taxes is baed uponll (1) the. domicile in Japan of the heir, de, imt,, legatee,, or ione.', or (2Tth,, situs of propertyy in Japan. This jir*,. (lictiontal application arises front the fact that the Japanese inheritance tax i.( levied agaius.t the heir, devise, or legatee anid is imposdl 'pu" the receipt of thie iniheritam'e. devise, or betwqlst. This differs front the United States estate tax % hich is le, led against tit- dhcetldnt'ts estate and ik imposed generally tuponi the prt':l,,rty transferred at death. Similarly, the Jap.mese, gift tax is a tax h'vied ags llumt thel1 dorie a1d is inipiml-1d upon thhe total gifts received 4by the duri,,,, t.iring the' taxablel year, whether from one or more donors. This differs from the, United StAt,.s gift tax which is imlpOSed ulpon the(donor and which takes into accomit gifts reiv,,l in prior years in the conlipitat ion of the taxable Ia.e. ()n fth, other hand. juriAdietion'to tax under the Uniited State's estate and gift taxes is IbseMd uipon (I) the United States 'itizenship of the dhecedent or donor, (2) donticile in the ['nite(l States of the decedent or (Ioiior, or (3) situis of property in the U[nitet States. These ditterences in jurisdiction to tax betwePn thile two countries can result in both countries imposing death duties or gift taxes on the same transfer of property. Credit provisions The principal method of achieving relief from the biurden of double taxation is provided by allowance of credits under article V. This provision is siitilar to Provisions contained in other estate-tax conventions now in effect. It provides for a credit to be allowed by the country which Imposes tax on property situated outside that country for thi; tax impose., by the other country with respect to the property situated ini such other country. *The amount of credit may not exceed the portion of the tax imposed by ,the crediting country which is attributable to such property. Credit is also provided where each of the countries Imposes tax by reason of the nationality or domicile of the decedent, donor, or beneficiary with respect to property which is situated at the tile of the transfer outside of both countries. Itn suhI cases, credit is allowed for it( lesser of the two taxes imposed wit h respect to such property, the credit being apportioned between the two countries on the bais of the portion of such tax which the tax of the crediting count ry attributablee to such property) hears to the sun of the taxes of both countries (attributable to such property). A similar allocation of credit for the lesser tax is also allowed with respect to prolerty taxed by both countries when the property is deented (1) by each country to lbe sit utiated in its own territory, or (2) by one country to be sittiated in eithr country and by the other to be situated outside both countries. or (3) by each country to be situated in the other country. The second of the above situations is a provision which has not been contained in other estate tax conventions noW in effect. This situation could arise, for example, where the property deemed subject to tax by botfh countries would be considered under the !nited'States estate of gift tax laws t,, be sititated in Japan but( tax would ie ilml)ose(l because thit deedelit. or donor 'as domiciled in or a citizen of the United States. Japan, onl the other hand, might construe the property to be situated outside both Japan and the n'lited States hiut would impost' tax because of the domicile of t hle beneficiary wit hin .Japan. Article V also provides for the relationship of credits authorized by the Collvenition and credits atlithorized by the statuites of the contracting countries. It is specifically provided that credit for the saame tax may be taken either under the statute or ,uner the convention, whichever is greater, but that a double credit may not be taken. It is also provided that the credit tinder the convention is to be computed after allowance has been made for other credits against tax umider the respective statutes of the contracting countries. For example. the credit under the convention for Japanese inheritance taxes would l)e applied against the United States estate tax only after allowance of any credit for state death duties. Credit against the death duties imposed by one of the countries is allowable only for death duties by the other country (within the limitations imposed by the credit provisions) and no credit may thus be taken against the death duties imposed by one country for any gift taxes imposed by the other country. Silnilarly, credit may not be taken against one country's gift tax for estate or inherit tanc tAxe-s paid to the other country. A limitation period of 5 years from the due date of the tax is also provided in article V for the allowance of any credit thereunder. Final allowance of the credit

    and gift convention with Japan is of special

    (1778)j

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELGIUM

    is denied un t il the tax for which the credit is claimed has been paid. Payment of interest on any refund resulting from the allowance of the credit is denied under the convention unless specifically authorized under the law of the crediting country.
    Prorided sllcuwances Where one of the contracting countries imposes tax solely by reason of the situs of prjowrty within the country, article IV provides for a prorated allowance of

    any specific exemption which would otherwise be allowable under its laiWs if the decedent or donor (in the case of the United States) or the beneficiary (in the case of Jaltan) had been a national of or domiciled in the country so imposing the tax. This provision is similar to provisions contained in other estate tax conventions now in effect. It liberalizes the specific exemption of $2,000 which is provided under the United States estate tax laws for estates of nondomiciliary alien demlents. It also grants a limited exemption to a nondomiciliary alien donor where no exemption Is presently permitted under the United States gift tax. The ainount of the specific exemption is limited to the proportion of the exemption which the value of the property situated in the country imposing tax (and which is subject to the tax of both countries or would be so subject except for a specific exemption) bears to the value of the total property which would be subject to the tax of such country if the decedent, donor or beneficlary had been a national of or domiciled in such country.
    Sirras

    Tite rules for determining situs of property which are contained in article III correspond to similar provisions contained in"other estate tax conventions. Tho sits rules are useful in ascertaining the property that may be included for purposes of tax where jurisdiction to tax is biased upon the sits of property within the taxing country. The sit us rules also have significance for purposes of ascertaining the credit allowed under Article V. As in other estate tax conventions, it is provided that sits of shares of stock of corporations shall be deemed situated at the place where the corporation was created or organized. Similarly, it is provided that debts (including bonds, promissory notes, bills of exchange, bank deposits and Insurance, except binds or other negotiable instruments in bearer form) are deemed situated at, the place of residence of the debtor. In the ease of bonds or other negot able instruments lit bearer form, the situs of seich property Isdetermined in accordance with the laws of the contracting country imposing tax on the basis of sits of property; where neither of the contracting countries imposes tax on that basis, it is deenied situated under the applicable laws of each country.
    Other proviaions

    in addition to the above provisions, the convention contains the customary provisions dealing with (i) definition of the taxes subject to the convention; M2) definition of ternis i8self in the convention; (3) provision for reciprocal exchange of information between the fiscal authorities of the two countries; and (4) provisions for facilitating a appeals for relief from double taxation. The provision for collection of the taxes of the other country is limited to those measures necessary to insure that the credit or other benefits provided under the convention will not be enjoye(l by persons not entitled thereto. This collection. provision is in the form which has been previously approved by the Senate in other treaties. It is also specifically provided that the right of diplomatic officials to other exemptions is not to be affected and that the provisions of the convention are not to be construed so as to increase the tax imposed by either country. The effective date of the convention is the day of the exchange of the instruments of ratification; the convention will apply to estates and inheritances of Persons dying on or after that date and to gifts made on or after that date. The convention is to remain in effect for a period of 5 years but may be sooner terminated upon the giving of at least 6 months' notice. 6. CONVENTION WITH BELGIUM RELATING TO TAXES ON STATES AND
    SUCCESSIONS

    (Memorandum from the Joint Committee on Internal Revenue Taxation) The pending convention with Belgium regarding taxes on estates and succes.sio'' is generally similar to other death-duty conventions which are now In effect, b_,,,'n the United States and the following countries: The United Kingdom, Cama.ada, France. Australia, Norway, Ireland, Union of South Africa, Switzerland, Greece, and Finland,
    I

    (1779)

    10 DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELGIUM


    The proposed convention with Belgium does not contain any significant departures from the usual type of provisions which the Senate has approved in the death-duty conventions with the above countries. The pending convention has the dual objective of avoiding double taxation and of preventing fi:cal evasion
    with respect to taxes on estates and suCcessions. Differences in jiriacdictionto tax

    The principal instances in which double taxation may result, and which the proposed convention is designed to prevent, arise in cases in which both countries claim domicile of the decedent and cases involving personal property of the United States citizens who are domiciled in Belgium at the time of their death. These cases of double taxation arise from the fact that the jurisdictional application of the death duties of the two countries have different bases. Jurisdiction to tax under the United States estate tax is based upon (1) United States citizenship of the decedent, (2) domicile of the decedent in the United States, and (3) situs of property in the United States. The jurisdictional application of the death duties imposed by Belgium, on the other hand, is based only upon (1) habitation of the decedent In Belgium, and (2) situs of real property in Belgium. The two death duties imposed by Belgium are a succession duty which is applicable to a decedent who was an inhabitant of Belgium at the time of his death and the duty on transfer by death which Is applicable to a decedent who I.4iot an inhabitant of Belgium at the date of his death. The succession ditty includes all property belomuving to the estate, real or personal, whether or not situated in Belgium; the duty on transfer by death is limited to real property situated In Belgium. The conivention is thus limited to the above taxes and to any other death duties of a sub. stantially similar character which may be imposed by either of the contracting countries hereafter. It does not apply to death duties imposed by any State, Territory, or possession of the United States,. or by the District of Columbia. There are no death duties imposed by local governmental subdivisions in Belgium. Credit provisions The principal means for achieving relief from the burden of double taxation are, as in the easm of other death duty conventions, the allowance of credits against tax (art. V). Thus, where the'United States imposes tax on the basis of domicile or citizenship and Belgium imposes tax on the same property based on its determination that the decedent was an inhabitant of Belgium at the time of death, it is provided that each country is to allow a credit for tax imposed by the other country with respect to property situated in the other country which is included for tax purposes by both. The amount of the credit however, may not exceed the portion of the tax imposed by the other country which is attributable to that property. Where property is situated outside both of the contracting countries, and both countries impose tax on the property, a credit is allowable equal to the tax imposed with respect to the property by the country imposing the smaller amount of tax, the credit being shared by the two countries in proportion to the amount of tax imposed by each with respect to the property. The convention provides that the credit is to be the statutory credit or the credit provided by the convention, whichever is greater. The credit provided in the convention'is ascertained bv first taking into account any other credits against tax authorized b1y statute with respect to the same property. Also, if credit for tax imposed by a third country is allowable with respect to the same property, either by statute or by a convention, the total of the credits allowable with respect to the property may not exceed the amount of the tax of the crediting state attributable to the property computed before allowance of the credit. Any claim for credit or refund resulting from application of this provision must be filed within a period of 6 years from the date of death of the decedent. No interest is allowed in regard to any amount so refunded. Also, a credit will not be finally allowed under this provision until the tax imposed by the colttracting state (reduced by the credit allowable under this provision) has been paid. In the case of a decedent who at the time of his death was not a United States citizen or domiciliary but was an inhabitant of Belgium, the convention liberalizes the specific statutory exemption of $2,000 granted generally to estates of nonresident alien decedents.(art. IV). The United States tax in this case is imposed on property situated in the United States. The convention provides that in such a case the United States will allow a proportionate amount of the specific exemption which would be allowable if the decedent had been domiciled in the
    Proratedexemption

    (1780)

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND BELGIUM

    1I

    ar The specific exemption so allowable IS.. a,nount not hess than United Statte. dh pr)roIrtion of tlhe statutory exemption which the value of property subjected to I united States tax Iwars to tl.' value of the property which would have tmeen suhjec'ted to tax if the decedent had 6e.in doTitoile4l in the United States. This qrolsortiorate increase ill tfhe so.cific exemptions is granted on a reciprocal basis. hTis provision also insures that the contracting country which imlw,,es tax on the a.,Ais of sit us of property does not take into account property situated outside that coitltry in determininng the amount or rate of tax. Situs rules A.s in the case of other death duty conventions, the proposed convention also pre,ribes rules for determining the situs of property (art. III). These rules determine the property which may be- included for tax where jurisdiction to tax i4 based upon situs of property within the taxing country. They also have effect in determining the credit authorized by the convention for purposts of eliminating double taxation (art. V). The situs rules which are contail.ed in article Ill of the convention arte substantially the samne as those in conventions which the Seieate has previously approved. The situs rules s,cifically pertain to real property; tangible personal property; debts; bills of exchange and checks; stock in corporations; patents, trade-marks, and designs; copyrights, franchises and licenses; rights of action; goodwill: and ships and aircraft. The situs of any property not specifically covered in the convention is deemed to be situated In the state in which the decedent was domniciled at the time of his death. Other provisions Provision is made for the reciprocal exchange of information between the contracting countries for purposes of facilitating the administration of tile convention (art. VI). As in other conventions, it is provided that the information furnished is to be disclosed only to proper authorities and is not to include any information which would disclose any trade secret or procewses. The representative or beneficiary of an estate Is authorized to appeal to his own government in any case in which the administration of taxes in the other contracting country has brought about double taxation contrary to the provisions of the convention tart. VII). It is specifically provided 'that the provisions of the convention are not to be construed so as to increase the taxes imposed by the contracting countries. Customary provisions for settling disputes by mutual agreement between the authorities of the contracting countries with authorization to communicate directly for all purposes relating to the convention are likewise provided (art. VIII). Water the convention comes into effect, either of the contracting countries may request that the convention be extended either in whole or in applicable part to any of its colonies or overseas territories which impose taxes substantially similar to those described in the convention. After notification of the request for such an extension, the convention will be extended only if tile other contracting state agrees to the extension (art. IX). The convention is to become effective on the (lay of exchange of the instruments of ratification and is to apply only to the estates or successions of persons dying on or after that date (art. X). "l'he convention is to remain in force for a Ixriod of 5 years and indefinitely thereafter but to be terminated at the end of the 5-year period (or any time thereafter) by either of the contracting countries provided that 6 months' prior notice of termination is given.

    S 73

    0-42-vol. 2--19

    (1781)

    SENATE FLOOR DEBATE AND ACTION


    February 25, 1955 84th Congress, Ist Session 101 Congressional Record 2132-2140

    (1783)

    IP. 21321 CONVENTIONS WITH JAPAN AND BELGIUM


    RELATING TO TAXES ON INCOME, ESTATES, INHERITANCES, GIFTS, AND SUCCESSION Mr. CILEMENTS. 1fr. President, I ask unanimous consent that the Senate as in Committee of the Whole, proceed to the consideration

    Japan and Executive G isitconvention with Belgium. They are all similar, and I ask unanimous consent that they be considered en bloc. Mr. KNOWLAND. Mr. President, I have no objection to having the three treaties considered and discussed together, inasmuch as they all deal with the general subject of double taxation, and so forth. However, in conformity with our prior understanding in the Senate, I believe, so far as the actual ratification of the treaties is concerned, there should be a separate yea-and-nay vote on each convention. With that understanding, I have no objection to their being considered and discussed at the same time. Mr. CLEMENTS. My unanimous-consent request was only that they be considered en bloc. The PRESIDING OFFICER (Mr. PASTORE ill the chair). Is there objection to the request of the Senator from Kentucky? There being no objection, the Senate as in Committee of the Whole, proceeded to consider the following conventions:
    CONVENTION WITH JAPAN RELATING TO TAXES ON INCOME

    of Executive D,Executive E,and Executive G,83d Congress, 2d session. The first two are conventions with

    Executive D, 83 Congress, 2d session, convention with Japan relating to taxes on income, signed at Washington on April 16, 1954, which was read the second time, as follows:
    IP. f136] CONVENTION WITH JAPAN RELATING TO TAXES ON ESTATES, INHERITANCES,.AND GIrIS

    Executive E, 83d Congress, 2d session, Convention with Japan relating to taxes on estates, inheritances, and gifts, which was read the second time, as follows:
    IP. 21.i8 CONVENTION WITH BELGIUM RELATING TO TAXES ON ESTATES, AND SUCCESSIONS

    Executive G, 83d Congress. 2d session, convention with Belgium. relating to taxes onl estates and successiolls, signed at Washington onl May 27, 1954, which was read the second time, its follows: (P. 21381 Mr. GEORGE. Mr. President, the Senate hlas before it Executive Report No. 3 dealing with three separate tax conventions,

    (1785)

    including an income tax convention with Japan-Executive D, 83d Congress, 2d session; an estate and gift tax convention with JapanExecutive E, 83d Congress, 2d session; and( an estate tax convention with Belgium-Executive G, 83d Congress, 2d session. The two con. mentions with Japan were reported favorably by the Committee on Foreign Relations in the last session of Congress: These conventions were again reported favorably by the Committee on Foreign Relations on February 9, 1955, along with the convention with Belgium which was considered by the Committee for the first time in this session.
    ESTATE TAX CONVENTION WITH BELGIUM

    ESTATE AND GIFT TAX CONVENTION WITH JAPAN

    INCOME TAX CONVENTION WITH JAPAN

    In the case of the income tax convention with Japan, there are several noteworthy features which should be called to the attention of the Senate. It was for the purpose of permitting a fuller discussion of these features that the Senate did not take action upon either of the Japanese tax treaties in the closing (lays of the last session of the Congress. Attention should be called first to the principal provisions in the Japanese income tax convention which are particularly favorable to the United States. For example, there is provided a reciprocal exemption of shipping and aircraft operating profits. This provision which was contained in article V of the convention operates primarily in favor of the United States since the Japanese at the present time have no airlines in operation between Japan and the United States. Thus, the exemption of United States aircraft profits derived from operations in Japan is especially favorable to this country. The United States also has the greater preponderance of shipping operations between Japan and the United States so that exemption of the profits derived from shipping benefits the United States more than Japan at the present time. In article VII of the convention there is provided a reciprocal limitation on the tax on outgoing royalties. The tax on such royalties may not exceed 15 percent. This provision results in a reduction of the"Japanese withholding tax on film rentals from the present tax of 20 percent to the 15-percent maximum tax under this convention. At the present time most film rentals flow from Japan to the United States rather than in the reverse direction, so that this provision tends to be particularly advantageous to the United States. In article X of the convention there is provided an exemption from Japanese tax of compensation paid by the United States Government to a citizen of the United States who is resident in Japan, unless the United States citizen has been admitted to Japan for permanent residence. This exemption is of particular importance to a number of United States citizens who are employed as technical experts in Japan by the United States but whose employment is not of such a nature as to bring it within the diplomatic immunity from tax. The exemption is a reciprocal one but it operates predominately in favor of the United States at the present time.

    (1786)

    In article XIII of the convention there are provided certain rules for determining the source of income. These source rules are derived from the United States internal-revenue laws and regulations. Thus, it is significant that the rules for determining sources of income are those with which the United States taxpayers are generally familiar rather than Japanese concepts. In article XJV of the convention there is a very important provision dealing with the credit for Japanese corporate dividends paid to United States citizens, corporations, or residents. This provision is not a reciprocal exemption. Thus, the United States withholding, tax of 30 percent on dividends from United States corporations going abroad to Japanese citizens remains unaffected by the provision. Under the convention, Japan agrees not to impose any withholding tax on dividends paid to a United States stockholder-unless the recipient is a resident of Japan or has a permanent establishment in Japan. At the present time Japan imposes a 20 percent withholding tax on outgoing dividends. This tax, however, is reduced to 10 percent if the investment tends to further the Japanese economy. Under the provisions of the convention described previously, itapan agrees to impose no withholding tax on outgoing dividends paid to United States recipients. The convention also provides that with respect to United States recipients of dividends from Jopanese corporations, the United States will gran4 a credit against its tax of 25 percent of the [p. 139] amount of the dividend but only op the grossing-up principle, to borrow an English term. This'provision is generally similar to provisions contained in tax treaties now in effect between the United States and Ireland and between the United States and the United Kingdom. To illustrate the grossing-up principle, assume that a United States shareholder receives $100 of dividends from a Japanese corporation. If it is assumed that the United States shareholder is taxed on his income at an effective rate of 50 percent, he would compute his United States tax and the allowable credit for. the dividend in the following manner: He would include the dividend of $100 in gross income;he would also then include in gross income 25 percent of the amount of the dividend, or $25. Thus, he would include in gross income a total of $125 with respect to the dividend; or more than the actual amount of the diVidend. He must incdudd this extra amount in order to get the benefit of the tax- credit provided for in the treaty. The tax on this $125, at the effective rate of 50 percent, is $62.50. Against this tax the United States stockholder would receive a credit of-25 percent of $100, or $25. Thus, the United States tax attributable to the $100 Japanese dividend would be $37.50. This grossing-up principle has the effect of decreasing the advantage of the tax credit as the taxpayer goes into a higher bracket of tax liability. Thus, assume that the United States recipient of the $100 Japanese dividend is in a higher bracket so that he might be taxed, for, example, at an effective rate of 85 ercent. In this case, he would again have gross income of $125 but his United States tax attributable to the Japanese dividend would be $106.25. Against this tax he woftld receive a credit of $25, so that he would pay a total United States tax with respect to a Japanese dividend of $81.25. Thus, out of the $100 Japanese dividends he would have left, after paying United States taxes, only $18.75.

    (1787)

    This latter example may be comnlpared with a United States citizen who receives a (idi(iend from iti(lotiest ic(corp)oratjiot). With respeet to a $100 dividend froma domestic corporation A-leaving out of considleratio0 tit(, dividend exclusio) ..thel'e wouli hle imposed at an effective tax rite of 85 percent a tax of $.18,5. Against this tax the imdividual would receive a tax credit of 4 percent of the atiloutnt of the dividend, or $4. Thus, the tax attributable to the 11'nited States dividend at th14' 85 percent effective rate would ln, $81i. The individual would thus have $19 renlainitig oil his $100 I lited States dividedll as compared with $18.75 if the divideml had beene received fromit a ,aipallese c'orlotationU. As iid(icateld earlier, this grossitng-ul principle is similar to that e11lpoy'e,1 ill Other tax co(nvetitiollS witll respect to diidvelide s received byi Uliled Stales rectijiellts fi'oni corl)O'tlllOIlS whiieh alr elitities of t ie other contlt'llt etung (01111tr\'. 0)n bllaince, Mir'. Presidienlt it sees very cleiir that thne ietil" V Or tax con vent iont with ,JoliJn is more faivOI'ill le, or alt least equally flivoi'rale, to the I Ilitedl Stiales thin it is to tilhseJapanes(' (itizenI whll is sinilihrl'
    lifetiq edl.

    Tie whole purpose of t-he first treaty with ahipian, which I described briefly, alnd of tile Belgium treaty, is 'really to avoid double taxation in tlhe case of estate and death tlaixes. I believe it is agreed that these conventions may be coisidered to vether, but iaseparate vote is desired o01 ea(eh one of t hen. Tie PRIESII)ING OFFICER. Without objection, ihe . enidilng conventionis will be considered its having passed through their various parliamientary stages tip to the point of the consideration of the resolutiois of ratifi'catio'i.
    CONVENTION WITH JAPAN IIELATING TO TAXES ON INCOME

    Tile clerk will first read the resolution of ratification of Executive D, the convention with Japian relating to taxes oni iicomne. The legislative clerk read as follows:
    Resolved (two-thirds of the Senators present concurring therein), ThJalt the l'natv advise and consent, to the ratification of Ixectifelie 1), 83d (,oign'ss, 2(d s'ssiOll, it coavenition between thetYnited States of Anerica and Japaiin for t,h- avoidance of double taxation and the lrthvention of fiscal evasion with respect to taxes on inconi, sgiiged ait Washington April 16, 1954.

    The PRESIDING OFFICER. The (question is, Will the Seiinat advise and coimSenti to the resolution of ratification? Mr. KNOWILAND. Mklr. President., on that question I ask for thel yeas and nays. The yeas and iavs were ordered. Mr. kNOWIAND. Mr. ]President, I suggest the absence, of a quorum.
    The legislative clerk proceeded to call the roll.

    The PRESIDING OFFICER. The clerk will call the roll.

    Mr. KNOWLAND. Kir. President,, I ask uianimous consent tliat the order for the quoruim call be rescinded. The PRESIDING OFFICER. Is there objection? The Chair hears none, and it is so ordered. The question is, Will the Senate advise and consent to the resolution of ratification? The yeas and nays having been ordered, the clerk will call the roll. The legislative clerk called the roll.

    (1788)

    Mr. (CLE.MENTS. I announce that tile Senator from Nevada (NIr. lhil1, E.l, tihe Se; nator from Mlinmsota IMr. 1lumrimuin.vJ, tlhe Selmittr frmn Tennessee (.Mr. KEvFAUVER, the' SeIator from Michigain ,Mr. NcNmmmufl, th Sentor fi'OIli VVyomuitg Ir. (O'NlA:nOxNE'],
    1111d the, Sentoiiiro from Virginia lNlr. Jloltoitrso.j ar'e aiselit olit offitil

    The Seniaitor fr'oimi New M hexico ANXDEIRSO.NJ is' li)stl leyahNive, [.\I. I of the Senate to iatlend the atomic energy tests ili Nevada. Thel Seillator from Rhode Island I.Mr. Iis abset byilleave of thhe Senite to atitendl the inauguration of the Presidlent of ('uia. The, Sentiior from Texas [MI r. ,Joil.NS.] and the Senator from Mlassachusetts IJlr. KENNEDYI] are'I' t bl leave of thel Sellate illts because of ilMUFs. T'he Senator froii Washingtoti [MIr. .t.\INITSNJ. is 11i)slilt by lelaVe of tlhe Senate to attend his 2,501i ii!llniversary celebrate ion in thel State of Washington. I further announce that oil this vote the Senator from New Mexiho (,Mr. ANDERSONo], the Senliltor from Nevada (MI r. BimimmY, the Senator fro illihod, Island [Mri'. ,uE:Nl, the Senator from Minnesota (.Nr. HIUMI'ill EYI, tile Setilior frolmi 'lxas Nilr. Jo!NN1o., the Senator flrOllm Telnessee(1Mr'. KEF:\U'vEuj1, the Selliltor froni NRlasSi0huSPtts (Nir. l N ED YJ1, Senator from Washington I(Mr. \IA-Nl-.;oN\, t lie N thel Senator fromii Mlichigan [Mlr. ,IcN:M.MARAi, the, Senator fronll Wyomiillg (NItr. ('MAi.ONEY1, and tlie Senator from Virginia [NiMr. HoililT,oN, and voting, would vote "yea.'' if prSelist1 (,MIr. ALLOTr], the Senators from Ohio [,%r. BENDER and Mr. BRICKERi], ihe Senator from Norti Dakota (N, LANOERI, thle Senator from r. Nevada [Mr. MALONEl and the Senator from lowa [NiMr. MARTIN] are absent, on official business. I also announce tiat tihe Seliator fromn Iowa !IJr. ItICKENiooPEii] is ablsenti by leave of the Senate to attendl the Inaugural cerettloilies of tile Presidentl of Cuba. T're Senator fromn Maine [IIrS. SMITH] is Al)SetlA by lea of the Senate. The Senator from Wisconsin [Mr. WIIEYJ is necessarily absent. The Senator from New H-Ianmpshire [NMr. BmiaUEsI, the Senator from Indiana [Mr. CAPEHAIRT], the Senator from Nebraska [NMr. HRUSKAJ and the Senattor from Wisconsin [Mlr. MCCARTHiltare detained on official business. If present and voting, the Senator fromn Colorado (NMh'. AmaoTrr, tile Senators from Ohio IMlr. BENDER an1ld Mr. BRICKER], tile Senator from New llanmpshire [Mr. BIlDGES], the Senator fromn Nebraska (Mr. HlISKA], the Senator fromi lowa (Mr. MARTINi a1nd the Senator from Maine [MIrs. SMITHli] would eachI Vote "yea."

    .Iir. SAITONSTALb. I announce that the Senator from Colorado

    (1789)

    T'ie yeas and nays resulted: Yeas 72, nays 0, as follows:


    YEAS-72 Aiken Barklev Barrett Ball llennett Bush
    -

    IByrd Carlson Case, N.J. Case, S. l)ak. Chavez Clements Cotton Curtis D)aniel l)irksen l)ouglas
    l)uff

    Butler

    I)worshak l"',astlaind lllender Ervin Flanders

    Frear Fulbright (George Goldtwater (lore Haylen Ilenmings Hill Holland Ives Jackson Jenner Johnston, S.C. Kerr Kilgore Knowland Kuchel Lehman Long Mansfield Martin, Pa. McClellan Millikin Monroney NOT VOTING-24

    Morse Mundt Murray Neelv Neulwrgcr Pastore Payne Potter Purtell ltussell Saltonstall Schloe)pel Suott Sinathers Smith, N.J. Sp)arkmnan Stennttis Symington Thuirmond Thye Watkins Welker W'lli ns 'cliI g

    Allott Anderson Bender Bible Bricker Bridges Capehart Green

    Hickenlooper Hruska Humphrey Johnson, T'ex. Kefauver Kennedy Langer Magnuson

    Malone Martin, Iowa McCarthy McNamara 0('Mahoney Robertson Smith, Maine Wiley

    [P. 2140] The PRESIDING OFFICER. 'Two-thirds of the Senators present having voted in the affirmative, the resolution of ratification is agreed to.

    (1790)

    PresidentialProclamation (Including Qlicial Text of Convention and Notes)


    [Reprint of 'rIAS 31761

    (1791)

    TREATIES AND OTMER INTERNATIONAL ACTS SER1S5 3176

    DOUBLE TAXATION
    Taxes on Income

    Convention Between the


    UNITED STATES OF AMERICA

    and

    JAPAN
    Signed at Washington April 16, 1954

    and

    Exchange of Notes
    Signed at Washington April 16, 1954

    (1793)

    DEPARTMENT OF STATE PUBUCATION 5W58 [Literal print]

    (1 794)

    JAPAN
    DOUBLE TAXATION: INCOME
    Convention signed at 'ashington April 16, 195S.T Ratification advised b. the Senate of the [Vnited States of America February 25, 1955; Ratified b the Presidentof the I Inited Stiates of America March 7, 1955; Ratified 1. Japan Atarch 25. 1955: Ratfications exchanged at Tokyo April 1, 19,55; Prtwuimed by the President of the United States of America April 8. 1955; Entered into for"e April 1, 19.55. And exchange of notes signed at Wlashington April 16, 1954. TIIAS 3176 Apr. 18, 1954

    (1)

    (17 9)

    BY THE PRE31DENT OF THE UNITED STATES or AMtRICA

    A PROCIAMATION
    WHEREAS. convention between the United States of America and Japan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income was signed at Washington on April 16, 1954, the original of which convention, in the English and Japanese languages, is word for word as follows:

    CONVENTION BLTErN THE UNITED STATES OF AMERICA AND JAPAN

    FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION


    OP FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

    The Government of the United States of America and the

    Government or Japan, desiring to conclude a Convention tar the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on Income, have appointed for ipomntwies that purpose as their respective Plenipotentiarles: The government at the United States oa America: Mr. Walter Bedell Smith, Acting Socretary of State oa the United States of America, and
    The Government ot Japan:

    Mr. Sadao Iguchi, Ambassador Extraordinary and Plenipotentiary oa Japan to the United States oa America, who, having commuicated to one another their respective full powers, found In good and due torm, have agreed upon the following Articles:

    TIAS 3176

    (1796)

    3
    ARTICLE I (1) The taxes referred to In the presert Convention aret (a) In the case of the United States of America: The Federal Income taxes, Including surtaxes. (b) (2) in the case or Japan: The Income tax and the corporation tax. The present Convention shall also apply to any other tax on income or profits which has a character substantially similar to those referred to In paragraph (1) of this Article and which may be Imposed by either contracting State after the date of signature or the present Convention. ARTICLE II (1) As used In the present Convention: (a) The term "United States" means the United States of America, and when used in a geographical sense mans the States, the Territories or Alaska and Hawaii, and the District of Columbia. (b) The term "Japan", when used in a geographical sense, mans all the territory In which the laws relating to the taxes referred to in paragraph (l)(b) of Article I are enforced. (o) The term "permanent establishment" means an office, factory, workshop, branch, warehouse or other fixed place of business, but does not include the casual and temporary use oF merely storage facllities. It also Includes an agency iF the agent has and habitually exercises a general authority Orflu,

    TIAH 3176

    73095 O-42-vol.

    -- 20

    (1797)

    4
    to negotiate and conclude contracts on behalf of an enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. An enterprise of one of the contracting States
    shall not be deemed to have a permanent establish-

    mint In the other contracting State merely because It carried on business dealings in such other State through a bona fide commission agent, broker, custodian or other Indepenhdent agent acting in the ordinary course of his business as such. The fact that an enterprise or one or the contracting States maintains in the other contracting State a fixed place or business exclusively for the purchase for such enterprise or goods or merchandise shall not of itself constitute such fixed place of business a permanent establishment of such enterprise. States has a subsidiary corporation which is a corporation of the other contracting State or which is engaged In trade or business In the other contracting State shall not of Itself constitute that subsidiary corporation a permanent establishment of Its parent corporation. (d) The tarm "enterprise of one or the contracting States" means, as the case may be, United States enterprise or Japanese enterprise. The term "United States enterprise" means an industrial or commercial enterprise or undertaking (e) The fact that a corporation of one of the contracting

    TIA

    31716

    (179)8)

    5
    carried on In the United States by a resident

    (including an individual, a fiduciary and partnership) or the United States or by a United States corporation or other entity; and the term "United State* corporation or other entity" means a corporation or other entity created or organized under the law of the United States or of any State or Territory of the United States. (r) The term "Japanese enterprise' means an Industrial or commercial enterprise or undertaking carried on In Japan by an Individual resident In Japan or by a Japanese corporation or other entity; and the term "Japanese corporation or other entity" means a corporation or other association havingw Juridical personality, or a partnership or other association without Juridical personality, created or organized under the laws of Japan. (g) The term "tax" means those taxes referred to in paragraph (I)(a) or (b) of Article I, as the context requires. (h) The term "competent authorities" mans, in the case of the United States, the Commissioner of Internal Revenue as authorized by the Secretary of the Treasury; and, in the case of Japan, the Minister of Finance or his authorized representative. (1) The term "Industrial or commercial profits" Includes manufacturing, mercantile, agricultural,

    fishing, mining, financial and insurance profits,

    TIA S 31711

    (1799))

    6
    but does not include income in the form of dividends, Interest, rents or royalties, or remuneration for personal services. (2) In the application of the provisions of the present Convention by either contracting itate any term not otherwise deroned shall, unless the context otherwise requires, have the meaning which such term has under the laws or such State relating to the tax.
    ARTICLE III
    I'm is prifl%. re,' MW1l6111ll

    (1) An enterprise or one or thv contracting States shall not be subject to the tax of the other contracting State in respect of its industrial or commercial profits unless it has a permanent establishment situated in such other State. If it has such permanent establishment such other State miy impose its tax upon the entire income or such enterprise from sources within such other State. (2) In determining the tax or one or the contracting States no account shall be taken of the mere purchase of merchandise therein by an enterprise or the other contractIng State. (3) Where an enterprise of one of the contracting States has a permanent establishment situated in the other contracting State, there shall be attributed to such permanent establishment the Industrial or commercial profits which it might be expected to derive If it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing on an independent

    TIAM 3t1l1

    ( IXSO0)

    basis with the enterprise or which It is a permanent establishment. (4) In determining the industrial or commercial profits

    of a permanent establishment there shall be allowed as deductions all expenses wherever incurred, reasonably allocable to such permanent establishment, Including executive and general administrative expenses so allocable.

    (5)

    The competent authorities of both contracting States

    Ajiorli.tnrnt of

    may, consistent with other provisions of the present Convention, arrange details for the apportionment of industrial or

    commercial profits. ARTICLE IV Where an enterprise or one or the contracting States, by reason of its participation in the management or the financial structure of an enterprise or the other contracting State, makes with or imposes on the latter enterprise, in their commercial or financial relations, conditions different from those which would be made with an independent enterprise, any

    profits which would normally have been allocable to one or the enterprises, but by reason of such conditions have not been so allocated, may be included In the profits or such enterprise and taxed accordingly.
    ARTICLE V (1) Notwithstanding the provisions or Article III and

    Inco.
    or sirt'ra*I.

    from shilm

    Article IV or the present Convention, income which an enterprise or one of the contracting States derives from the operation of ships or aircraft registered

    1801)

    8
    (a) (b) in such State, or In a third country which exempts (A) such enterprise and (B) an enterprise of the other contracting State, from its tax on earnings derived from the operation of ships or aircraft, as the case may be, registered in the respective States shall be exempt from the tax of such other contracting State. (2) The present Convention shall not be construed to affect the arrangement between the Government of the United States and the Government of Japan providing for relief from double taxation on shipping profits effected by the exchange
    47 Atat. 2SP7
    VAH 3.

    of notes at Washington dated March 31, 1926 and June 8, 1926. ARTICLE VI

    Ir thteIi.4sq. n~sUrktku

    Hate

    tu

    tae un in.

    The rate or tax imposed by one of the contracting States on interest on bonds, securities, notes, debentures or any other form of indebtedness (including mortgages or bonds secured by real property) received from sources within such

    State by a resident or corporation or other entity of the other contracting State not having a permanent establishment In the former State shall not exceed 15 percent. ARTICLE VII
    Royait. frt. The rate of tax imposed by one of the contracting States

    on royalties and other amounts received as consideration for the right to use copyrights, artistic and scientific works, patents, designs, secret processes and formulae, trade-marks

    TIAB 3176

    (1802) ( 1('

    9
    and other like property (including in such royalties and other amounts, rentals and like payments In respect of motion picture films or for the use of industrial, commercial, or scientific equipment) from sources within such State by a resident or corporation or other entity of the other contractIng State not having a permanent establishment In the former State shall not exceed 15 percent. ARTICLE VIII A resident r, corporation or other entity or one or the contracting States deriving (a) income from real property (including gains derived from the sale or exchange of such property, but not Including interest from mortgages or bonds secured by real property), or (b) royalties in respect of the operation of mines, quarries or other natural resources situated within the other contracting State may elect, for any taxable year, to be subject to the tax of such other State on a net basis as If such resident or corporation or other entity had a permanent establishment in such other State during sitch taxable year. ARTICLE IX
    An individual resident of one of the contracting States
    lbor,. tz exemption. Income from real lI)perly, operation of mines. etc.

    Personalservices.

    shall be exempt from the tax of the other contracting State upon compensation for labor or personal services (Including

    TIAH 8176

    )0:I)

    10
    the practice or liberal professions) performed In such other State In any taxable year If such resident Is temporarily present In such other State: (a) far a period or periods not exceeding a total at 180 days during such taxable year and his compensation Is received for such labor or personal services performed as an officer or employee of a resident or corporation or other entity of the former State, or (b) for a period or periods not exceeding a total oa 90 days during such taxable year and his compensation received for such labor or personal services does not exceed 3,000 United States dollars, or the equivalent sum In yen as computed at the official basic rate or exchange In effect at the time such compensation Is paid. ARTICLB X $Sia. wAM. W
    exemption. P/i.p. M4

    salaries, wages and similar compensation paid by the United States to an Individual who Is a citizen of (1)(a) the United States (other than an Individual who has been admitted to Japan for permanent residence therein) shall be exempt from tax by Japan. (b) Salaries, wages and similar compensation paid by Japan to an Individual who is a national of Japan (other than an individual who has been admitted to the United States for permanent residence therein) shall be exempt from tax by the United States. (2) The provisions at this article shall not apply to

    zxoeption.

    salaries, wages or similar compensation paid In respect or

    TIAH 3176

    (1804)

    11
    services rendered in connection with any trade or business carried on by either of the contracting States for purposes or profit. ARTICLE XI
    A resident of one of the contracting States, who, in Trutr,,.
    I p 3. 52

    accordance with agreements between the Governments or the contracting States or between educational establishments In the contracting States for the exchange of professors and teachers, or at the invitation of the Government of the other contracting State or of an educational establishment in such other State, temporarily visits such other State for the purpose of teaching for a period not exceeding two years at a university, college, school or other educational institution In such other State, shall be exempt from the tax of such other State on his remuneration for such teaching for such period. ARTICLE XII (1) A resident of one of the contracting states who Is Studen. temporarily present In the other contracting State solely as a student at a recognized university, college or school in such other State, shall be exempt from the tax of such other State with respect to remittances from abroad (including payments, if any, by his employer abroad).
    (2) A resident of one of the contracting States who Is
    etc.

    PM. P.52

    Recipienlsof.W&

    a recipient of a grant, allowance or award from a religious, charitable, scientific, literary or educational organization of such State and who is temporarily present In the other

    TIAS 8176

    (18011)

    12
    contracting State, shall be exempt from the tax of such other State on such grant, allowance or award remitted from abroad (other than compensation for personal services). CompoOs6aioo of (3) A resident of one of the contracting States who Is an employee of, or under contract with, an enterprise of such State or an organization referred to In paragraph (2) of this Article, and who Is temporarily present In the other contracting State for a period not exceeding one year solely to acquire technical, professional or business experience from a person other than such enterprise or organization, shall be exempt from the tax of such other State on compensation from abroad paid by such enterprise or organization for his services rendered during such period, If the amount of compensation paid by such enterprise or organization for his services during such period, when computed on the annual basis, does not exceed 6,000 United States dollars, or the equivalent sun in yen as computed at the official basic rate of exchange In effect at the time such compensation is paid.
    ARTICLE XKII

    Por the purpose of the present Convention:


    Dividends.

    (a)

    Dividends paid by a corporation of one of the con-

    tracting States shall be treated as Income from sources withIn such State. Intmt. (b) Interest paid by one of the contracting States including local Oovernment thereof or by an enterprise of one of the contracting States not having a permanent estab11shment In the other contracting State shell be treated as

    TIAS 8176

    (18(0)()

    13
    income from sources within the former State. (a) Gains, profits and income derived from the purchase and sale of personal property shall be treated as derived from the country in which such property Is sold.
    (d)
    PtrEts,rc..,,sleli of [WroaI lerulm.rty.

    Oains, profits and income derived from the sale by

    ldi'A. etc.,rfrMS&L-

    a taxpayer in one of the contracting States of goods manufactured In the other contracting State In whole or in part by such taxpayer shall be treated as derived in part from the country in which manufactured and in part from the country in which sold, and to the extent such gains, profits and income are not allocable under other provisions of the present Convention they shall be allocated between both contracting States in accordance with such taxpayer's relative sales and property in the respective countries. (e)
    Income from real property (including gains derived
    prolwrty. e'tc

    Inco.me frrm real

    from the sale or exchange of such property, but not including interest from mortgages or bonds secured by real property) and royalties in respect of the operation of mines, quarries, or other natural resources shall be treated as income derived from the country In which such real property, mines, quarries or other natural resources are situated. Compensation for labor or personal services (including the practice of liberal professions) shall be treated as income from sources within the country where are rendered the services for which such compensation is paid. (g) Royalties for using, or for the right to use, In one
    Royaltis.

    (f)

    Compensation for latew or personal Mv. ices.

    of the contracting States, patents, copyrights, designs, trademarks and like property shall be treated as income from sources

    TIAS 31711

    (1807)

    IV
    14
    within such State. ARTICLE XIV
    Manner for avoiding double tiatlon.

    It is agreed that double taxation shall be avoided in the following inner: (a) The United States, In determining the tax of its

    PON, P.n

    citizens, residents or corporations or other entities may, regardless of any other provision of the present Convention, include in the basis upon which such tax is imposed all items of income taxable under the revenue laws of the United States as If the present Convention had not come into effect. The United States shall, however, subject to the provisions of section 131 of the Internal Revenue Code as In effect on the first day of January 195,1' deduct from its tax the amount of the tax or Japan. In determining the credit under the said section 131 of the Internal Revenue Code, any interest received from an enterprise of the United States with a permanent establishment In Japan shall be treated as income from sources within Japan to the extent so treated under the laws or Japan, If the debt with respect to which such interest is paid Is (b) ode connection with the business of such permaIn Japan, in determining the tax of its residents or nent establishment of such enterprise. corporations or other entities may, regardless of any other provision of the present Convention, include in the basis upon which such tax is imposed all items of income taxable under the tax laws of Japan as if the present Convention had '53 Stat. 56; 26 U.S.C. 1131 (changed, effective Jan. 1, 1954, to 26 U.S.C.

    1901).

    TIAS 8176

    (1808)

    15
    not coame into effect. Japan shall, however, deduct from its tax so calculated the amount of the tax of the United States upon income from sources within the United States and included for the taxes of both contracting States, but In an amount not exceeding that proportion of the tax of Japan which such income bears to the entire Income subject to the tax of Japan. (o) In determining the taxes of the contracting States of a recipient, who is a citizen, resident or corporation or other entity of the United States, of a dividend from a Japanese corporation, in so far as the tax of Japan Imposed on income or profits of a corporation out of which a dividend Is paid is deemed under the tax laws of Japan to have been imposed on a recipient of such dividend: (i) The United States shall deem that such recipient has paid with respect to such dividend the tax of Japan in an amount equal to 25 percent of the amount of such dividend, and deduct, under the provisions of paragraph (a) of this Article, from its tax the amount of the tax of Japan so deemed to have been paid provided the recipient includes in gross income the amount of tax thus deemed to have been paid, and (11) Japan shall Impose with respect to such dividend received by such recipient (except as such recipient is a resident of or has a permanent establishment in Japan) no tax other than the tax imposed on income or profits of the corporation

    TIAS 8176

    (1809)

    16
    out of' which such dividend is paid. ARTICLE XV
    uttgW edumUWon ,, Ott., orgwdisthomw

    (1)

    Organizationa organized under the laws of Japan

    and operated exclusively for religious, charitable, scientific$ literary or educational purposes shall, to the extent and subject to conditions provided In the Un5ted States Internal Revenue Code, be exempt from the tax or the United States. (2) Organizations organized under the laws of the Unltec States and operated exclusively for religious, charitable, scientific, literary or educational purposes shall, to the extent and subject to conditions provided In the tax laws of Japan, be exempt from the tax of Japan. ARTICLE XVI CrMdits, MtrstIon. (1) There shall be allowed, for the purposes of the tax of the United States, In the case of a resident of Japan who is a nonresident of the United States (other than an officer or employee of the Governmnt of Japan), In addition to the exemption provided In section 21l of' the United States Internal Revenue Code as In effect on the first day of January 1954,['J a credit against net Income, subject to the condltions prescribed in section 25 of the Internal Revenue Code as In affect on the sald date,,M for the spouse of the taxpayer and for each child of' the taxpayer who are present In the United States and residing with him In the United States at any tim during the taxable year, but such additional credit shall not exceed that proportion thereof which the taxpayer's gross Income frcm sources within the United States for the '53 Stat. 77; 26 U.S.C. 1214 (changed, effective Jan. 1, 1954, to 26 U.S.C.

    1873 (d). '53 Stat. 17; 26 U.S.C. 125 (changed, effective Jan. 1, 1954, to 26 U.S.C.

    13s).

    TIAS 8176

    (1810)

    17
    taxpayer's taxable year bears to his entire Income from all sources for the fiscal or calendar year In which ends such taxable year. (2) For the purposes of the tax of Japan, there shall be allowed in the case of a citizen of the United States who is a resident of Japan the same exemptions for a dependent or dependents as those granted to a national of Japan who is a resident of Japan. ARTICLE XVII (1) The competent authorities of both contracting States shell exchange such Information available under the respective tax laws of both contracting States as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or for the administration of statutory provisions against tax avoidance In relation to the tax. Any information so exchanged shall be treated as secret and shell flot be disclosed to any person other than those, Including a court, concerned with the assessment and collection of the tax or the determination of appeals in relation thereto. No information shall be exchanged which would disclose any trade, business, Industrial or professional secret or any trade process. (2) Bach of the contracting States may collect the tax
    ColK o 01 WiCm.

    imposed by the other contracting State (as though such tax were the tax of the former State) as will ensure that the exemptions, reduced rates or tax or any other benefit granted under the present Convention by such other State shall not be enjoyed by persons not entitled to such benefits.

    TIAB 8176

    (1811)

    18
    ARTICLE XMIT V'WFM. Where a taxpayer shows proof that the action of the tax authorities or either contracting State has resulted, or will result, In double taxation contrary to the provisions or the present Convention, he shall be entitled to present the facts to the competent authorities or the contracting State of which he is a national or a resident, or, If the taxpayer is a corporation or other entity, to those or the contracting State under the laws of which It Is created or organized. Should the taxpayer's claim be deemed worthy or consideration, the competent authorities of such State to which the facts are so presented shall undertake to come to an agreement with the competent authorities of the other contracting State with a view to equitable avoidance of the double taxation In question. ARTICLE XIX (1) The provisions of the present Convention shall not be construed to deny or affect In any manner the right of diplomatic and consular officers to other or additional exemptions now enjoyed or which may hereafter be granted to such officers. (2) The provisions of the present Convention shall not be construed to restrict In any manner any exemption, deduction, credit or other allowance now or hereafter accorded by the laws of one or the contracting Stat9s In determining the tax of such State. (3) Should any difficulty or doubt arise as to the interpretation or application of the present Convention, or Its relationship to Conventions between one of the contracting

    TIAB 8176

    (1812)

    19
    States and any other State, the competent authorities of the contracting Stat.s my settle the question by mutual agreemnt; It being understood, however, that this provision shall not be construed to preclude the contracting States from settling by negotiation any dispute arising under the present Convention. (4) The ompetent authorities of both contracting States may prescribe regulations necessary to interpret and carry out the provisions of the present Convention and may coimunicate with each other directly for the purpose of giving effect to the provisions of the present Convention.
    ARTICLE XX

    e.juiti.uo

    (1) The present Convention shall be ratified and the Instruments of ratification shall be exchanged at Tokyo as soon as possible. (2) The present Convention shall enter Into force on

    OW~.. 31 p.

    ataifitlion

    Entry into force. edective date.

    the date of exchange of Instruments of ratification and shall be applicable to Income or profits derived during the taxable years beginning on or after the first day of January or the calendar year In which such exchange takes place. (3) Either of the contracting States may terminate the present Convention at any time after a period of five years shall have expired from the date on which the present Convention enters Into force, by giving to the other contracting State notice of termination, provided that such notice Is given on or before the 30th day of June and, In such event, the present Convention shall cease to be effective for the
    TermhnaUon.

    TIAS 31TS

    7T.'.0M

    -1i2

    ol. 2

    21

    (1IS1M)

    20
    taxable years beginning on or after the first day of January of the calendar year next following that In which such notice Is given. IN WITNESS WWEREOF, the undersigned Plenipotentiaries have signed the present Convention. DONE at Washington, In duplicate, In the English and Japanese languages, each text having equal authenticity, this sixteenth day of April, 1954. FOR THE UNITED STATES OF AMERICA:

    FOR JAPAN:

    TIAS 81T6

    (1814)

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    51
    AND WHEREAS the Senate of the United States of America, by their resolution of February 25, 1955, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid convention; AND WHEREAS the aforesaid convention was duly ratified by the President of the United States of America on March 7, 1955, in pursuance of the aforesaid advice and consent of the Senate, and was duly ratified on the part of Japan; AND WHEREAS the respective instruments of ratification of the aforesaid convention were duly exchanged at Tokyo on April 1, 1955, and a protocol of exchange was signed at that place and on that date by the respective Plenipotentiaries of the United States of America and Japan; AND WHEREAS it is provided in Article XX of the aforesaid convention that the convention shall enter into force on the date of exchange of instruments of ratification and shall be applicable to income or profits derived during the taxable years beginning on or after the first day of January of the calendar year in which such exchange takes place; AND WHEREAS, accordingly, upon the exchange of instruments of ratification of the aforesaid convention, the convention became applicable to income or profits derived during the taxable years beginning on or after Januaryv 1, 1955; NOW, THEREFORE, be it known that I, Dwight D. Eisenhower, President of the United States of America, do hereby proclaim and make public the aforesaid convention to the end that the said convention and each and every article and clause thereof may be observed and fulfilled with good faith by the United States of America, and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. IN TESTIMONY WHEREOF, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. DONE at the city of Washington this eighth day of April in the year of our Lord one thousand nine hundred fifty(EAL] five and of the Independence of the United States of

    Aap. 19.

    America the one hundred seventy-ninth.

    DWIGHT D EISENHOWER By the President:


    JOHN FoSTER DULLES

    Secretary of State

    TIAS 8176

    73095 O-42-vol. 2--23

    (1845)

    52

    The Japanese Ambassador to the Acting Secretary of State


    EMBASSY OF JAPAN WASHINOTON, V. C.

    APRIL 16, 1954.

    In proceeding today to the signature of the Convention between Japan and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, I have the honor to enclose herewith, for the purpose of future reference, a memorandum confirming an understanding in regard to the interpretation of certain provisions of that Convention. I shall appreciate receiving from you an acknowledgment and confirmation of this statement of the understanding. Accept, Sir, the assurances of my highest consideration. S. IGUCHI Enclosure:
    Memorandum.

    The Honorable
    WALTER BEDELL SMITH,

    Acting Secretary qf State, Washington, D. C.

    MEMORANDUM
    Ank. pp. 1., 14.

    Ant, p. 10.

    It is understood that in the application of Article XIV and Articles XI and XII of the C~onvention between Japan and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (1) the provisions of Article XIV shall not be construed to deny the exemptions from the Japanese tax or the United States tax, as the case may be, granted by Article X (1), Article XI and Article XII; (2) neither of the contracting States shall be precluded from taxing its own nationals or citizens with respect to income coming within Article XI or Article XII.

    TIAS 8176

    (1846)

    53

    The Acting Secretary of State to the Japanese Ambassador


    DEPARTMENT OF STATE WASHINGTON

    Apil, 16,1954
    EXCELLENCY:

    I have the honor to acknowledge the receipt of your note dated today and to confirm the understanding, as set forth in the memorandum enclosed with that note, in regard to an interpretation of certain provisions of the Convention between the United States of America and Japan for the Avoidance of Double Tax. ation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed today. Accept, Excellency, the assurances of my highest consideration.
    WALTER BEDELL SMITH

    Acting Secretary of Sta" His Excellency


    SADAO IGUCHI,

    Ambasador of Japan.

    TIAS $176

    (1847)

    FIRST SUPPLEMENTARY PROTOCOL, SIGNED MARCH 23, 1957

    (1849)

    Presidential Message of Transmittal to Senate (Including Materials Enclosed Therewith)

    (1851)

    85TH CoNORESs 18t a8ion

    SENATE

    EXIgCUTIVB

    PROTOCOL WITI! JAPAN SUPPLEMENTING THE CONMENTION OF APRIL 16, 1954, RELATING TO TAXES ON INCOME

    MESSAGE
    UM

    THE PRESIDENT OF THE UNITED STATES


    TUANSUMTTINO

    THE PROTOCOL BEW'rwEEN THE UNITED STATES AND JAPAN, SIGNED AT TOKYO ON MARCH 23, 1957, SUPPLEMENTING THE CONVENTION OF APRIL 16, 1954, FOR TIlE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

    APRIL 29, 1957.-Protocol was read the first time and the injunction of secrecy was removed therefrom. The protocol, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    THE WHITE HouSE, April 19,1957.

    To the Senate of the United States: With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the protocol between the United States and Japan signed at Tokyo on March 23, 1957, supplementing the convention of April 16, 1954, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. I transmit also, for the information of the Senate, the report by the Secretary of State with respect to the protocol. DWIGHT D. EISENHOWER. (Enclosures: (1) Report by the Secretary of State; (2) supplementary income-tax protocol with Japan, signed March 23, 1957.)

    (1853)

    PROTOCOL WITH JAPAN-RELATING TO TAXES ON INCOME DEPARTMENT OF STATE,

    ThePRESIDENT

    Washington, April 18, 1b57.

    The White House: The undersigned, the Secretary of State, has the honor to submit to the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the President approve thereof, the protocol between the United States and Japan, signed at Tokyo on March 23, 1957, supplementing the convention of April 16, 1954,. for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. As in the case of the income-tax convention of 1954 (S. Ex. D, 83d Cong., 2d sess.; Treaties and Other International Acts Series 3176; 6 U. S. T. 149), the supplementary protocol was formulated as a result of technical discussions between officials of this Government and officials of the Government of Japan. The Department of State and the Department of the Treasury cooperated in the negotiation of the supplementary protocol. It has the approval of both Departments. The protocol has a single substantive article of two paragraphs. It is provided in paragraph (1) that the Export-Import Bank of Japan shall be exempt from United States tax with respect to interest on Export-Import Bank of Washington shall be exempt from Japanese tax with respect to interest on loans or investments received by such bank from sources within Japan. . The Department of the Treasury, in recommending that the sent to ratification, submitted a memorandum presenting pertinent background information. That memorandum reads as follows:
    protocol be signed and transmitted to the Senate for advice and conloans or investments received by such bank from sources within the United States. It is provided reciprocally in paragraph (2) that the

    The Japanese Government has created an Export-Import Bank of Japan to promote the purchase of Japanese goods which is patterned after the ExportImport Bank of Washington. Under the existing Federal income-tax law, the Export-Import Bank of Japan, although wholly owned by the Japanese Government, is subject to tax on any income that it may derive from sources within the United States. Under the income-tax law of Japan, the Export-Import Bank of Washington is exempt from tax, but only on the basis of reciprocity. Accordcordingly, the failure of the United States to grant exemption to the Japanese bank threatens to interfere with the functioning of the Export-Import Bank of Washton. The imposition of a Japanese tax on the interest it derives from Japanese borrowers would either diminish the yield to the Export-Import Bank on its loans to the buyers of American products, or it would increase the interest cost of such foreign borrowers. Either result would reduce the effectiveness of the Export, Import Bank of Washington in achieving the objectives for which it was created. The proposed protocol to the existing income-tax convention between Japan and the United States is designed to remedy this situation by providing that each country shall grant tax exemption to the Export-Import Ban of the other country. It is understood that no loans have been made by the Export-Import Bank of Japan to United States importers of Japanese goods and, hence, adoption of the proposed agreement would not have any adverse effect on Un!ted States revenues. On the other hand, substantial purchases by Japanese firms from United States producers have been held in abeyance because of the absence of reciprocal tax exemption on the Interest earnings of the two banks.

    force on the date on which the two Governments exchange written notifications of ratification or approval thereof, and shall be effective with respect to interest received on and after January I of the calendar year in which the protocol enters into force. It is provided further

    Article II of the protocol provides that the protocol shall enter into

    (1854)

    PROTOCOL WITH JAPAN-RELATING TO TAXES ON INCOME

    that the protocol shall continue in force as long as the aforesaid convention of April 16, 1954, remains effective unless the protocol is terminated earlier by a 6 months' written notice of termination given by either Government to the other Government. Respectfully submitted.
    JoHIN FOSTER DULLES.

    (Enclosure: Supplementary income-tax protocol with Japan, signed March 23, 1957.)

    [Text of protocol]

    (1855)

    Senate (CommitteeHearingl.s
    July :10, 19.57 851h ('ongress, Ist stll'ji
    niltte' ign Ign Rtltfiont. SenTate Co mm'Ou ion IN.'vrr: This d~wuoent is printed in Volume I Ix-ghimnl tit page 16:1.1

    (1857)

    Senate Committee Report


    August 6, 1957 Executive Report No. 12 85th Congress, 1st Session Senate Foreign Relations (Committee
    [NoTrE: This document is printed in Volume I beginning at page 193.1

    (1859)

    Senate Floor Debate and Action


    August 8, 1957 85t0 congresss , Ist Session 10:3 ('ongressional Revord 14009-14013

    T3095 0-42--vol. 2-

    24

    (1861)

    [P. 1.;0091 CONVENTION BETWEEN UNITED STATES OF AMERICA AND THE REPtBlIC( OF AUSTRIA--('ONVENTION BETWEEN UNITED STATES OF AMERICA AND CANADA-PROTOCOIJ WITH JAPAN, SUPPLEMENTING TIlE CONVENTION OF APRIL 16, 1954, RELATING TO TAXES ON INCOME
    Mtr. JOHNSON of Texas. Mr. President, I ask unanimous consent that Calendar Nos. 11, 12 and 13, respectively, Executive A, Executive 13, and Executive K, all of the 85tth Congress, 1st session, relating to conventions avoiding double taxation, be considered en bloc. The PRESIDING OFFICER. Is th'r,, objection to the request of the Senator front Texas? There being no objection, the Senate, as in Committee of the Whole, proceeded to consider, en bloc, the following conventions and protocol, which were severally read the second time:

    (P. 140121 'Mr. GREEN. 'Mr. President, the pending treaties with Canada, Japan and Austria give further application to what has beome tle established policV oftle UTnited States in relieving its citizens of the burdens of double taxation upon income. They follow, in general, the pattern of numerous previous such agreements whose purpose is to prevent American citizens who live in a foreign country, from being taxed by both the United States and the other party to the agreement., on profits made abroad. The agreements, of course, are reciprocal, with. respect to the subjects of both countries. The convention with Canada supplements the arrangement concluded in 1942 with respect to double taxation. It modifies that agreement in a number of respects, so as to extend the protection which the earlier convention provided for shipping and aircraft operations, to income derived front motor trucking; it amends the provisions relating to taxation of income from personal services in protecting against double taxation an employee in a Canadian branch of an American enterprise; and it reduces front 15 percent to 5 percent the tax which a subsidiary corporation pays on dividends to the parent coml)any, provided that the latter either alone, or in association with three or'her companies, holds at least 51 percent of the voting stock of the subsidiary. Then, is only one substantive provision in the pending protocol with Japan, which supplements the convention of 1954. The protocol exempts the Export-Inport Bank of each country from taxation with respect to interest [p. 140131 received by the bank on loans or investmnents made by it in the other country. The remaining convention, Mr..President, that with the Republic of Austria, has substantially the same objectives as those which resuited in income tax conventions between the United States and some 17 other countries. It is drawn along much the sante lines as the (1863)

    earlier conventions providing for reciprocal exemption from taxation of various items of income. Its provisions are discussed in detail in
    thie committee report, and there is no need for nie to review thein here. I should like to say, Mlr. President, that these conventions were the

    subject of a most careful analysis by Mr. Stain, Chief of Staff of the Joint Committee on Internal'Revenue Taxation who has examined

    Mr. JoHNsoN' of Texas. Mr. President, on the question of the ratification of Executive A, Executiive B, and Executive K, I ask for the The PRESIDING OFFICER. The yeas and nays have been requested. Is there a sufficient second? The yeas and nays were ordered. The 'RESIDIN.G OFFICER. If there be no objection, the treaties will be considered as having passed through their various parliamentary stages up to and including the presentation of the respective resolutions of ratification. The resolutions of ratification of Executive A, Executive B, and Executive K will be read.

    winch concluded that the agreements are wholly in harmony with the policies which the Senate has expressed in approving prior tax conventions. I believe there would be no objection to voting on all three of these treaties by one vote if the vote were separately accorded as to each of the conventions. I should therefore like to request that this be done.

    them from the standpoint of United States revenue laws. They were also carefully considered by the Committee on Foreign Relitions,

    yeas and nays.

    The resolutions of ratification of Executive A, Executive B, and

    Executive K were read, as follows:


    Rfisoired (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of Executive A, 85th Congress, 1st session, The convention between the United States of America and the Republic of Austria for the avoidance of double taxation with resjxct to taxes on income, signed at Washington on Octolber 25, 1956. IResolrrd (two-third, of the Senators present concurring therin), That the Senate advise and consent to the ratification of Executive B, 85th Congress, Ist session, The convention between the United States of America and Canada, signed at Ottawa on August 8, 1956, further modifying and supplementing the income-tax convention and protocol of March 4, 1942, as modified by the supplementary convention of Junie 12, 1950. Resolved (two-thirds of the Senators present concurring therein, That the Senate advise and consent to the ratification of Executive K, 85th Congress, 1st session, the protocol between the United States of America and Japan, signed at Tokyo on March 23, 1957, supplementing the convention of April 16, 1954, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on illmc0lle.

    The PRESIDING OFFICER. The question is, Will the Senate advise and consent to the respective resolutions of ratification. The yeas and nays have been ordered. The clerk will call the roll. The Chiei Clerk called the roll. Mr. MIANSFIELD. I announce that the Senator from New Mexico fMr. CHAVEZJ, the Senator from Delaware [Mr. FREAR,, the Senator from Ohio [M.Nr. LAUsCHEJ, and the Senator from West Virginia [Mr. NEELltare absent on official business. The Senator from Missouri [Mr. HE.NNI'(]GS) is absent by leave of the Senate because of illness. I further announce that if present and voting, the Senator from New Mexico [Mir. CHAVEZJ, the Senator from Delaware [Mr. FREAKI, the Senator from Missouri [Mr. HENNIxxNS, the Senator from Ohio (1864)

    Mr. DIRKSEN. I announce that the Senator from New Hampshire [Mr. B tIDGEsi and the Senator from Maine [Mr. PAMN,] are absent because of illness. The Senator from Nevada [Mr. MIALONE] is necessarily absent. The Senator from Pennsylvania [Mr. MARTIN] is detained on official business, and if present and voting, he would vote "yea." On this vote, the Senator from Nevada [Mr. MIALONEJ is paired with the Senator from Maine [Mr. PAYNEJ. If present and voting, the Senator from Nevada would vote "nay," and the Senator from Maine would vote "yea." The yeas and nays resulted-yeas 86, nays 0, as follows:
    YEAS-86
    Aiken Allott Anderson Barrett Beall Bennett Bible Bricker Butler Byrd Capehart Carlson Green Hayden Hickenlooper Hill Holland Hruska Humphrey Ives Jackson Javits Jenner Johnson, Tex. Johnston, S.C. Kefau ver Kennedy Kerr Knowland Kuchel Langer

    each vote "yeafe."f

    [Mr.

    LAUSCHI;J,

    and the Senator from West Virginia [Mr.

    NEELY]

    Gore

    Goldwater

    Morton Mundt Pastore Purtell


    Potter

    Neuberger 0'Mahoney Revercomb Robertson Saltonstall Schoeppel


    Russell

    Murray

    Bush

    Carroll

    Case, S. l)ak. Church Clark Cooper Curt is l)irkseti


    Cotton D)ouglas

    Case, N.J.

    Scott

    Smith, Maine Smith, N.J.

    Smaters

    Eymington
    Talmadge

    Sparkman Stennis

    Long

    I)worshak Eastland Ellender

    Magnuson
    Mansfield

    Martin, Iowa

    Thurmond Thve Watkins Young

    Ervin

    Flanders Fulbright

    McNamara
    Monroney

    McClellan

    Wiley Williams Yarborough

    Morse

    NOT VOTING-9
    Bridges Chavez

    Frear

    Hennings Lausche Malone

    Martin, Ila.
    Neely Payne

    The PRESIDING OFFICER. Two-thirds of the Senators present


    having voted in the affirmative, the resolutions of nrtification of Executive A, Executive B, and Executive K an- deenied to have been agreed to by the same vote. X r. JOHNSON of Texas. Mr. President, I ask that the President be notified that the Senate has today agreed to the resolutions of ratification of the treaties on the Executive Calendar today. The PRESIDING OFFICER. Without objection, the President of the United States will be notified of the ratification by the Senute this afternoon of each of the treaties.

    (1865)

    Presidential Proclamation(including Official text of protocol)


    [Reprint of TIAS 3901]

    (1867)

    TREATIES

    AND

    OTHER INTERNATIONAL

    ACTS SERIES 3901

    DOUBLE TAXATION
    Taxes on Income

    Protocol Between the


    UNITED STATES OF AMERICA

    and JAPAN Supplementing Convention of April 16, 1954

    Signed at Tokyo Match 23, 1957

    (1869)

    DEPARTMENT OF STATE [Literal print)

    (1870)

    JAPAN
    Double Taxation: Taxes on Income
    Protocol supplementing the convewtron of April 16, 1954.

    Signed at Tokyo Mari 23, 195 7;


    Ratification advised by the Senate of the United Stan of Amerc August 8, 1957; Ratified by the President of the United States of America August 19, 1957; Notification of approval by JapanSeptember 9. 1957;

    Pro 'med by the Pirsident of the United State of America Septe. ber 19, 1957;
    Entered intoforce Septanmbe 9, 1957.

    Notifications of ratification and approval changed Septwe&r 9, 1957;

    BY THE PRESIDENT OP THE UNITED STATES OF AMERICA

    A PROCLAMATION
    WHEREAS a protocol between the United States of America and Japan supplementing the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at Washington on April 16, 1954 was signed at Tokyo on March 23, 1957 by their respective Plenipotentiaries, the original of which protocol, in the English and Japanese languages, is word for word as follows:

    .*

    (1)

    TIAS 3901

    (171)

    4)

    PROTOCOl, St'Pll'%Iw.NTING TIIlE 'ONVENTIO)N BE. T'FEEN TIlE |'NITED STATES . AMERICA AND JAPAN .'$ FgOR TIlE AVOIIDANCE 0'F 1)OI'BI.E TAXATION AND TIlE
    PREVENTION OF FISCAl EVASION WITH RESPECT To

    TAXES ON INCOME
    The Government of the United States of Anmerica and the Government of Japan, Desiring to conclude a Protocol supplementing the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes oni income signed at Washington, on April 16, 1954, 94 1Have accordingly appointed their respective representatives for this purpose, who have agreed as follows: I (1) The Export-Import Bank of Japan shall be exempt from tax by the United States with respect. to interest on loans or investnments received by such Bank from sources within the United States. (2) The Export-Import Bank of Washington shall be exempt from tax by Japan with respect to interest on loans or investments received by such Bank from sources within Japan. II (I) The present Protocol shall enter into force on the date of an exchange between the two Governments of written notifications of ratification or approval thereof, and shall be effective with respect to interest received on and after the first day of January of the calendar year in which it. enters into force. (2) The present Protocol shall continue in force as long as the aforesaid Convention of April 16, 1954 remains effective, unless it is terminated earlier by a six months' written notice of termination given by either Government to the other Government.

    6 UST 149.1(,

    TIAS 3I1.

    TIAS 3901

    UI ,7

    3
    Dotv. in duplicate, in the English and ,lapanese languages, at

    Trokyo this twenty-third day of March, 1957.


    FOR THE G(oERINMENT 0F 9 TilE UNITDI) STATES OF A.MERIICA: FOtR THE (;WERN.EIINT 0iF JAPAN:

    I!
    [II

    (SEAL)

    [SLALJ

    a I)iglas MacArthur
    2 Nobustuke

    11.

    K'hi.

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    7
    WHEE:AS the Se-nate of tle- t'nited States of America, by their resolution of August M,1957, two-thirds of the Senators present concurring therein, did advi.s and co.01M.1t to the ratification of the aforesauid protowol; Wimt;:.s the aforesaid protocol was duly ratified by the President of the United States of America on August 19, 1957, in pursuance of the aforesaid advice and consent of the Senate, and was duly approved oi the part of Japan; WHEREAS it is provi(led in Article i1 of the aforesaid protocol that the protocol shall enter into force on the (late of an exchange between the two Governments of written notifications of ratification or approval thereof; WHEREAS the notification of ratification of the aforesaid protocol by the United States of America and the notification of approval of the aforesaid protocol by Japan were duly exchanged between the Governments of the two countries on September 9, 1957; WHEREAS it is provided in Article II of the aforesaid protocol that the protocol shall be effective with respect to interest received on and after the first (lay of January of t(fe calendar year in which the protocol enters into force; AND
    WHEREAS,

    accordingly, upon the exchange of written

    notifications of ratification or approval as aforesaid, the aforesaid protocol became effective with respect to interest received on and after January 1, 1957; Now, THEREFORE, be it known that I, Dwight D. Eisenhower, President of the United States of America, do hereby proclaim and make public the aforesaid protocol of March 23, 1957 to tile end that the said protocol and each and every article and clause thereof may be observed and fulfilled with good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. IN TESTIMON V WHEREOF, I have hereunto set my hand and cautwd the Seal of the United States of America to be affixed. DoNz at the city of Washington this nineteenth day of September in the year of our Lord one thousand nine [SEAL) hundred fifty-seven and of the Independence of the United States of America the one hundred eightysecond.

    DWIGHT D EISENHOWER
    By the President: ROBERT MUR'PHV
    Acting Secretary of -Sate TIAS 3901

    If 111.'1 4

    - 62

    %101 2 -

    SECOND SUPPLEMENTARY PROTOCOL. SIGNED MAY 7. 1960

    Presidential Message of Transmittalto Senate (including materials enclosed therewith)

    I I' %t )

    86Ta CoNianu

    Ed Sesion

    SENATE

    EicuTnvn

    PROTOCOL BETWEEN THE UNITED STATES OF AMERICA AND JAPAN

    MESSAGE
    FROM

    )TRAMNSMI'TTNG
    A PROTOCOL BETWEEN THE UNITED STATES OF AMERICA AND JAPAN, SIGNED AT TOKYO ON MAY 7, 1960, MODIFYING AND SUPPLEMENTING THE CONVENTION OF APRIL 16, 1954, FOR THE AVOIDANCE OF DOUBLE TAXATION AND TIlE PREVENTION OF FISCAL EVASION WITH! RESPECT TO TAXES ON INCOME
    AufVoT 17, 1960.-Protocol was read the first time and the injunction of secrecy was removed therefrom. The convention, the Prepident's message of tranomittal, and all accompanying papers were referred to the Committee on Foreign Relations and orden-d to be printed for the ude of the Senate

    THE PRESIDENT OF THE UNITED STATES

    To WhSenate of t& Un ited Statesq:


    With a view to receiving tile advice find consent of the Senate to

    ratification, I transit herewith the protocol between the United States of prterica and Japan, the convention o4 April May 19}54, for nmodifvinF and supplementing signed at Tokyo on 16, 7, 1960,

    the A02iance of double taxation and the Prevention of fitwal evasionl with respect to taxes on inconie. Secretary of State with .espect to the protocol.

    I transmnit also for the information of the Senate the report by the
    DWIGHIT DA EmENIIOWn.

    Enclosur'e: (I) Report by the Secretary of State: (2) Supplementary nzWme-tax Protocol withttapan. signed May 7,. 1960. THIS WHITE HotUS,: WAS'HINGTON, A1JyU-Wl 17, [:1960.
    i IPt 4)

    AO

    PROTOCOL BETWEEN THEL UNWI)T

    STATES5 AND JAPAN

    11'TA w:

    ]i'A.IA'IT.Ii:dr

    Tlhe WIhite HoieDt,:

    Sevretir" of State,. Ims ithe honor to submit ihe Viiew ti, its lun.minizii n 1it the liettate to ioillti, if lt1' reviv' til' advice and olnsenlt of t1hat hody to atl' eat President approve thereof. tiht, protocol bet ween lt, eitniled Staels of America atil. f)ilt.l, signi'd it 'I okyo onlMay 7. 19 l60, modifying midl for I' avoidlaice of I iI t I.. t.April Iulti of su1ph Ileiietit itlg titte ioi dolh taxation 1ad thute pre vent1ion of fisc.al i'vaision with respect to )I. taxes oil income. it'lnme-t ax convention of I954 k". Ex. I), S,1d eias' of tilt% As in1 tilt% Series w, (ong., 2fd sess. ; Treaties mtit (Other InltermiontIal Actlt'prot ocol3t"#(; as 6 1'.51. 14)1 t litaoyi-meltlioled supplemhietry formulated ais ia result of tei'chnica'l lisi'ussiomus lviet eetI ollicials of this (1overnmint and otlicials of lite tiovernmnent of .lapin. 'rhle 't'Treaisury coojpi'rated l),eparment of Sltate and the, )epartiwenl of lt% ItI h -hi, approval ts inl the nlegotialtion of (lite sulpplementarYl rotoi'ol'. of both Oppr'prt ments. A ain pplemenitar protocol signed ait Tokyo oil Mtarh 23. 19)57. is Ist sess. 'l'reaties and it her prim'en :lv in force t$. Ex. K, Shlt ('ont, international Acts Series 3901 ; S V.S. 1'. 14t'. As indivated hereinnhi utindirsignlti,t
    to the I'ri'5identt wi ihiI
    ,

    after. tihl' '19.7 pritocol would tnnirintei, when the new protocol meters

    into efedt.. In general,


    in
    tIh,,

    Liti iltoditinaltioivat
    tliventioti

    iis i whih tli'tenw protocol would nuake


    irt'
    such

    prei,lt,

    with ,lapati

    its to

    bring that

    von-

    vmntion into confonrity with other imiointi'-tax i'on'eitions to which i the Utnited S'tates is a partv. 'T'he protocol contains eight articles. rnil "comiupetent authorities" to inean, in Article 1 rIxefldtnes ti' thle, eais' of tilt I'lUiteld States. the Sevretary of tih'e lTreasury or his h alithorizt'd rijlrt'siittivi', thus making iit. lonforni with t(ie ledsiguation used in itl, Internal lRovelien e'ode of I95-1. Artide 11 expands ti oxemniplioi fronm U.S. incomei' tax nlow grailit'di to interest received by ti't, xport-Inuport Bank oif ,la1pani from solirc.es within the UTnited States so its to lrovideia similar exemption to the IBank of Japan, whieh pt'rforms -in' functions of a central bank ill Japan. Likewise. tilt', fxllMption fronm Japanese income tax now grautie to iitortst received by thit, Export-import Bank of Washington is isxtendtt to tih l,dral Reserve banks otf tilt%UTIlited Sgtat.. Articil 11I is intended to clarify iaprovision ill the existing conveltion relating to taxation of certaiin rental income, Linlder tih i'counvelitioll. ia fliltilnes recipient of rental income fronU real property owned inl thlt I' tuited States uttav' elect to be' taxed onl such income on at net basis instead of a gross basitis. Tilt' exercise' of this election tinder the' convention was not intended to alter thie tax status otherwise sotulrc aPplicablh, to other inconno derived by sUch a recipient frontll within the United Statet. Sonme taxpayers, however, have sought to 1l8e the election under other tnvoine-tax conventions to redluce their tax liability with respect to other income. It is bIelieved that the proposed modification charitits thlie intent. Article IV dt'lhs with thle tax status of Government employees, anti exn hands thle present memeitipions so that the scope is sintilar to that of otlier income-tax conventions to which the United States is a party.

    PRO)TOV'OL BETWEEN THE UNITED STATES AND JAPAN

    I'ider the prolxsed ,,wi language, ,lapati will not tax civil service atiilt Wes paid it) rettiri I'.S. tGiovernment employees itho are resident iti Japan. VI'der the existing convent ion, petisiont are exempt froumt tax but annuities are not. By virtue of the new lalguafe. tle U'nited States would not tax its dviil service annuities paut to Japanese ni tionlals who wtere emnploved abroad by the U..S. governmentt and ha\te retired from such eipi loyulvn t. Artice V expattnds the existing ,iurce :ule inl the convention with NIespect to interest. The bIsic principle is that interest paid by an enterprise of one of the ctuultries is deemed to have a source inlthat count ry. lHowever, interest paid tin ihdebt edess incurred for the use of a perna,,nllent establishtnlent broatid ofti an enterprise of one of tile countries is deetmed to have its source il the country where the lerm1anent establishilleilt Is sit nated. This principles is incorporated in tit, inrtvisions of the existing convention. but tilt' protocol expands its applitcatiou. Article V also deals with a special problem arising out of 1'.S. law under which interest paid 1y a resident foreign corporation Is Considered to have its source in the tVnited States if that corporation derives 20 percent orr nuorte of its income from sources within thiet I'nited states. Article V of the pritocol would assign the qourve in such a case to Japan if tilt, interest is paid in connection with the purchase of ships or aircraft. Article VI niodithes the credit provisions ill article XIV(a) of the conventtiotn, under which tile tUnited States agrees to allow a credit for JapalneSt iltueie tax ill accordance with th'e Intertal Revtenue Code "as ill effect tilt, the st day of January !954.'" This would preclude stubsequent moditicatiols ill tile oth'd froln applying to taxpayers derivin- inconit' fron Japan even though the modifications do noti alter tilt' basit principle of allowing credit for Japanese tax. Article Vi of tilt, lrotocol removes the reference to a particular date but retaitns the existing conutitmuent to allow a credit for Japanese tax. Article VIi provides that tile supplementary protocol of March 23, 1957'. shall tertuiuate whein the provisions of article VI of the 1954 convention, as inoditied and supplenleutted by article II of the new protocol. enter into effect. Article \'Ii provides for ratification and provides further that tile protocol shall enter into force on the date of the exchatnge of
    itistrumtents of ratification and shall be applicable to income or profits

    derived during the taxable years beginning on or after the 1st day of January of the cAeudar year in which such exchatnge takes place,. Tile protocol would continue in force while the 1954 convention renmains effective.
    Uc. pectfuliy subluit ted. CHR 1.MAs A. HEATER. Eicldosuire: Supplementary inconie-tax protocol with Japan, signed

    May' 7, 1960.)

    1s. Is

    " , ,,- ,1,-,Ij,, - I~.

    PROTOCOL BETWEEN THE UNITED STATES AND JAPAN VENTI(ON IIE'r1VEI;N THIE UNITEI) STATES OF AIERI('.

    PlYOTOCOI ,MIOI)IFY! N( ANI) SDI'I',ENIENTIIN(t TIlE CONAND) JAPAN FOR TIHE AVOll)ANCE OF I)DOlUlBLE TAXATION AND THE PIEVEXTION OF FISCAL EVASION WITHI RESPECT TO TAXES ON INCOME The Government of tie United States of Amnerica and thl, Govern. znent of Japan, Desiring to conhehde a further Protocol modifying and suipplet(le Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes oit iit-oliie siglicd lit lWashinlgtoli ol April Il, 1954, its Supp)1hlemenited by the Protocol signed at Tokyo on Mi\arch 23, 1957, ]lave at.cordingly a6)pirinted their respjective represltitat ives for this purpose, who have agreed as follows:
    nienting

    ARTICLE I Paragraph (1)(h) of Article 1 sihall be leleteld and replaced by the following: " h) The term 'eomipetent atlthorities' ellans, inl tho ease, of
    the unitedd States, the' Sc(retatry of thle 'I'rcasuiry or his ant hi,)rized

    represents it and, in the case of Jalpan, the Minister of Finaiite ive; or his authorized rej)resentative."
    ARTICLE

    II

    Article V1 shall be deleted and replaced by the following: ARTICLEE VI

    "(1) The ra:e of tax imposed by one of the contracting States on interest re#'eived from sources within such State by a resident or corporation or other entity of the other contracting State not having a permanent establisliient, in the former State shall not exceed 15 percent. "(2) Notwithstanding the provisions of paragraph (1), "(a) The Bank of Japan and the Export-lmport Bank of
    Japan shldl be exempt from tax by the United States on

    interest received by such Banks from sources within the United States; and "(b) The Federal Reserve Banks of the United States and the Export-Inport Bank of Washington shall be exempt from tax by.Japan on interest received by such Banks from sources within Japan. "(3) The teri 'interest' as used in this Article, means interest on bonds, securities notes, debentures, or any other form of indebtedness (including mortgages or bonds secured by real
    property)."

    ARTICLE III
    In Article VIII, the words "with respect to such income" shall be inserted immediately before the words , for any taxable year".

    ( ISl)

    PIIOTOCOIE TlEIWEEAN Tilt. UNITED STATES AND JAPAN

    .Attriciti,; IV Art icle X shall he deleted adil replaced by thli folhlo ilg: ''ARTItI.K X "(1)(a) Saliries, wages, or similitir ctIlpcitl ioln, 11ll(1 |)ti=iolks or aitlillitits paid by, or paid out of fundIs c'rattI by, t11n (verlmtittt of tlh tit',I itdttes to till itldividill wli, Is a viti.,eli of tle ['It1i4ed Stti'u5s (othel.r 1h1 till i, idivhii.l who hals eelt adwith respect to hut ted to ,h1iptit for' pelrtatl1lealt rt'side,e, threi) sirvltes remhereti as tin ethl)ovet', (if tilt- ( ovel,iielt tf the .ll be Initetd States in thl discharge ot govelrilltaaetat Il fiuitoti Vxt'ipjt fromt tax 1l *lv or slililiir compellmi~i'ai,| ,ljtaltl. 44(b) .hifillhls, witge..s loll, 1111pllsimis
    tiI;t heiloveuI'iIIenItI of ,!a:ll)l, oi" paid out of funds

    LIllillitie'l paid

    or

    whlo is it 1111til..l (ifllll

    towilieitlitl

    i Gvt'rmitlt'it of 0J111)111t

    itilat rihit es, to tilt illdividutil (ode. 11111thi.ll indivi, l.ld wl hos I,11,bei

    tdiatitted to tlh t' tiled Slates fjur per'iuinelt re.-itLi,'ue there-iua) j)l With respect to s'ervices rtvult'rt, its till p,,IV ,, of (he GoVe I ,lte.l, of ,.l 1n inl tihlt dishlatrgt, of gove'rnmlenttal ftittitions slihll I be txell t from tKix lV tihlt U1itt1t4 StaItes. lhalt apply to not ( e) lt' %-p4isoS of this airagrapqhl 'h' salaries, wages, or simtitlar ('1o peiesahmion, will Ipensionts or tionuities
    paid with respet't to services retthered ill cOmlitietionl with any

    trade or business carried oit by the (ioverimeilt. of eit huer contraeitiig Stiale for purposes of j mlit. (2) Ielisiotis or ailtillitit's (whe her represenltinjg employee or intlov'r tloit ribuitiotis or seclrettiolns t henrto) p)aid by the (1o;wern. , ment of one of ilt-eoitraetitig 'Sates,or paid out of iihe respective fumids referred to inl (it) or (b) of pIragrapht (1), to til individual who is it resi(dent of thei other coilttraeiing State shall be exempt frotm tax bv the former State to the exlenti that sucih paytmeas aire ailocible to services thle rehlltleratlion for whiich was exemllit. from tax by the former State."
    ARTICLE V

    Paragraph (h) of Article XI11 shtll Ie deleted and replaet.d by hll'

    following: "(b) Interest pt)id h,)out' of the couitratitig States, hiiluding


    lot , gov'eritlelets thereof, or by tin enterprise of one of the
    contractiiig States sliall be treated
    tis

    iticot from sources within

    such Statl, except. tlat ihntrtst (other than tihat paid ott ihdebtedness in coniectioi with thtle purcllse of ships or aircraft) pIid g "(i) by till enterprise oJ onu of the coot racing plates with a permatenlit establisltmeitt outside both contratciog Sttltl to at resident or corlxritiol or other entity of the other contracting State, or "(ii) by nit enterprise of one of the contracting States with a permanent establishment in the other contracting State on indebtedness incurred for the use of, or on bankitt g deposits Imido with, tho peIrmanenit establishment itt the cootli Ct of its trade or busittess shall be treated its income from sources within the State where the permanent establishment is situated."

    (18ST)

    PROTOCOL BETWEEN THE UNITED STATES AND JAPAN

    AmrwLE VI Tl'he second and third Alntenvll( of paragraph (a) of Article XIV shall he deleted und replaced by the following: "TI'lie l'Tnit,,d States shall, however, deduct from its tax so cih'uilhited the aniount of the tax of ,Japtin. Except ias otherwime provided in this (C'onvention, the amount of the tax of ,apall thus to be deducted shall he determined in accordance with the

    revenue laws of the United States."

    ARTICLE VII

    The provisions of the supplementary Protocol between the United States of Anwriva il ,apliis igned at'Tokyo on March 23, 1957, sh1ll terminate when the provisions of ArticloeVI of the ('onvention of April 16, 19,54, ats modified mi(ad supplemented by Article 11 of the present Protocol, enter into effect.
    ARTICLE VII[

    (1) The present Protocol shall he ratified and the instruments of rat ificat1ion shall be ex'htaiged at Washington as soon as possible. (2) The present Protocol shall enter into force on the date of exchoinge of instrulients of ratification and shall be applicable to income or profits derived during the taxable years beginnlin-gl on or after the first (lay of #Januaryof the calendar year in which suci exchange taikes phlce. (:3) The present Protocol shall continue in force ats long as the aforesaid Convention of April 16, 1954 remains effective. ,1)oNt in duplicate, in the English and Japanese languages, at Tokyo, this seventh day of May, 1960. For the Government of the United States of America:
    [SCALI
    [SEAL)

    DOUoGAS MACARTHuR 2nd.


    AIuCmnRo FUjIYAMA.

    For the Government of Japan:

    (1888)

    SECTION 17 Convention Witb NETHERLANDS

    (1889)

    IN1%4414E T.%%

    vNa4

    111:W FN TIM U\IUaD STATPS A\11 till: M-T1I lot %\IPA

    It.v.ic ('onvention l.trll ., I'41P . . May 19, I9%IUct


    jilleic

    '1l' .....

    I') l 44| .St .'48s'lahlll til. 'it , l lt I. 'tl 1 4 ll4,rt . 2, " %)4IJ. II1,UlII 41,h',11n.1hMl f'I v~lli.'. - viT',d If) t11i40 " of1 .'yfe renov,,4. 4 ('4ilgr4-ia,, l ltcoril 10*41 iF%, 16, 111'No I, . 1.*,41h R( ),rlvdl by Sw,,llute F.ort.ign l10lallols C'olml~lllllh H-..ifltiol.n by SeII.'ll' of4itS t..

    June It',

    l90W

    .44,ICe

    .III im mW4,III l

    .llh res14

    %r\.lilIl. ,4 (o,#Cn-

    Nove4mber 2, 1949.. Htliflied by the N\'th4ri'ul.4, Novenl|tir 19 I94. . . Ratlitfiedl by nlitch'l S.itah l'r,.i'Ient. 1) ,venim-'r I, I9NK.. . 1lltrullents o1fr.mlidhction c\'%4'Llgt'cL; (Nillnno,flll nl1rcd into8 fore 41.4i, J:intiiiry I. 1W47. l),vllznbvr 4. 1 ... l'roclmie4il Iqy t'nlht(l $.ates l'restIldnt. (oiJffl!.. ."tt ...... Ti. IAS.%.M. 1757. 62 SaIt. Not.es ano Lttl, etcd Sup54|)lh,1'ntJry lProtocol Relatinh to)Territorial \ %l:'isiaon Julln I'52 24. Mi. of D)ulth note to U1nited1 l).te Slatets conltaining nl4t1h'aitlOtil 4f tIi's for vocnl. slon of conventltion to Nelhirln11q Antills, . Iugust 2... 7. 1... l.Date ofr United Stat;hs note in rciply to I)ulch note of June 24, I952, t11,.l 1. %Ml July 24, 19I ....... Duhnoe' of bium 24, 1952. rt-vi,%rd hy %4n.a&te: dc.4m4(h'tcl )1%4h ('Congre.s,s A. .'siOn: injunction of secr'ecy renmovedl 41lM) ('0lCongre'mi4ll. Rec'ordl I Kl*4-IIMI49). Jline 15. 19.3 8 ........ S)upplhementa.ry protocol signed at Washington. June A2.1Mm5.. Supp)lemenlary protocol received by Senazte: diesiniated MI ,etvle 1. lth ( onegre.-S, Ist 4,ssion; injunction of ,ecrecy renmoetd (101 ('ougrv,.ssonal RIecord '4914). Jiuly 27. 1,.8's....... Supple,mentary protocl atmi note reported (avor:ah4y by Se'ntate' F.)orrign IRk.lions ('omnmiltte (the note liingtreported favorably suhji.-et to an indi,'r. standinw, however) (Ev. Kept. No. 12, 94th Cong.. Ist ,ess.). July NJ,15.84....... itatificaltion by S'nate of its ativic5 and n)l%'l-t (without any" restrvati.)i tot tunderstandling) to supphlt) ,ntairy Iwotocol and note (1i ('ongrin-miol Record 120I19-12tr2.84). Auiu-tt 21,5.5 .W . Protocol ratified by United Statest President. September US,195.8M D. of Vnited States note in further reply to I)utch note of Julne 24, 10,52. . t)ate October 14,, 1955 .. Supple,nttiry l)rot,)tvI ratifled by thee NetherlIands. Novenbhe r I. 195..5. I)Date of Dutch note In reply to Vnited S4ates note of Se'ptembel, r 13. I,,,4. November 10. 103 ... 1nstrumenti of ratliflettion of sipplh'nlentary prototol e,'ehangeol,h protocol entered Into force. Nuvelnler 10, 195M.... I)ate of United States note' zjCc'ldittg lw4.51lI in earlter I-tuti 1441 t,4t,10I 44 convention to NttherlahnIs Antilles: agreement re'lalingl to territorial eitetnsion entered Into force, effective :w,of January I. 195.M. Noveniber 1, iW5.84.... Sup1p)Penmentary protocol proclairmd by Inited S1lates President. OlflcialText . . luph lementar PIlrotood: TIrAS 3MA; 6 U,4lT 3696. Exchange of Notes: 'I'[AS 3367; 6 i'sT 3703.

    (1890)

    CONTENTS OF SECTION 17
    :isic Convention: Page 1. Presidential .Message of Traismittal to Se&iatet.- ........... (189:1) 2. ,Snate,('ommittve /hearings (noie eld) . ..............(1903) 3. Senate 7Committce Reiport------------------------------(1905) 41.Senate Floor D1ehate and Action ... . ........ (191!) 5. Presidential Proclamation (iwhludiig Official Text of Coni'ention). (19)15) S11 lphniltar3' Protocol and Excluhage of Notes Re, lating to Territorial Extelision: I. Presidential Message of Transmittal to Stnate of Note Relating to Territorial Ex1tension................................ (1165) 2. Presidenti.jl Messtage of Traismittia to Semnte of Supplehnintary Protocol..---------------------------... . . . . .-- (1973) 3. Semnte ('omnnittee Iharings (nome he-ld) (1979) 1. Senate Comniittee Rhiport .... - ..- .- ...... . (1!81) 5. Senate Floor I)ebate and Action... . . . (1983) (1. Presidential Proclamation (Including Official Trext of Protocol and Notes) ------------------------.------------------------- (1991)
    .......--...-

    (1891)

    BASIC CONVENTION

    Presidential Message of Transmittal to Senate (Including

    Materials Enclosed Therewith)

    (1893)

    73095 0-62-vol. 2-26

    Skrn CONGREio
    .,9d Sem8ion

    SENATE

    EXECUTIVE

    CONVENTION WITH TIlE KINGDOM OF THE NETHERLANDS RELATING TO AVOIDANCE OF DOUBLE TAXATION

    MESSAGE
    PROM

    THE PRESIDENT OF THE UNITED STATES


    TRANSMIrrING

    TilE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND T'HE KINGDOM OF Til11: NETIIANDS FOR TIlE AVOIDANCE OF DOUBLE TAXATION AND TIHE PIIEVENTION OF FISCAL EVASION WITH HESPE('T TO TAXES ON INCOME AND CERTAIN ,0711ER TAXES, SIGNIE:D AT WASlINGTON ON APRIL 29, 1948

    MIAY

    19, 1948.-Convention was read the first time and the injunction of secrecy was removed therefrom. The treaty, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    THE WHITE HousE,

    May 19,1948. To the Senate of the United States: With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the convention between the United States of America and the Kingdom of the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and certain other taxes, signed at WashI also transmit for the information of the Senate the report by the Secretary of State with respect to the convention. The convention has the approval of the Department of State and the Treasury Department. HARRY S. TRUMAN. (Enclosures: (1) Report of the Secretary of State, (2) convention between the United States and the Netherlands relating to taxes on income and certain other taxes, signed April 29, 1048.)
    ington on April 29 1948.

    (1895)

    CONVENTION WITH KINGDOM OF TIlE NETHERILANDS


    D)AEP.\ ItT:NT OF ST.rTE,

    The ll'h ie llk u-r: The indersigned, the ."'eeretary of Slate, hats the honor to Ily before llismissio0I to the Sellate to receive the President. with a view to its tra the advice and consent of that body to ratification, if hkis jidinent approved tiheieof, a vonvetitiou Ieltw;en the I unitedd States () Ailelrica and the Kingdont of tihe Netlelhelatids. for the avoidha uwe of double the taxation and1( prevention of lis.al evaisiotn with Irespect to taxes on i1erla income a111( (ittd other taxes, signed at Washini.gton oil Aplil 29,

    it Ji) N'Fr, T he P :s

    The convention is (designed to accoomplish esseit ially tIl. same objectives as income-tax conventions of the United States now in force with Sweden (March 231, 1939), F~rance (Jliy 25, 1939), ('autada (March 4, 1042), and the I'nilted Kingdom (Alpril It). 1945),1ald inmon.el tax conventionts concluded witi the nion of South Africa (l)'venler 13, 1946), and New Zealand (March 16, 1948). Those, objectives include the elimination, so far as possible, of double taxation with respect to income, either byv exel)ltion in one of the (oinlitlrs or by the application of the credit. principle, or both, and the establislhnent of a system of reciprocal administrative assistance between the tax authorities of the two countries for the greater effectiveness of the provisions of the convention. The provisions by which double taxation is avoided are comprehensive in scope, following closely in important respects the pattern of the income-tax convention between the United States and the United Kingdom, including provisions such as those relating to exemption, upon certain conditions, from taxes on income derived front dividends and interest, exemption from certain United States " taxes said to lie extraterr'itorial in character, and claims for adjustment, of certain pre-1936 cases. The convention also includes provisions, similar in general to provisions in existing income-tax conventions of the U'nited States, concerning business incomeol, permanent, establishment, intercorporate relationship, invoome from real property, taxes onl the remuneration of or payinents made to teachers and students, wages and salaries, pensions and annuities, labor and personal services shipping and aircraft profits, and administrative assistance. It will be observed that the preamble of the convention refers. to "taxes oil income and certain other taxes." The words "certain other taxes" were added because of the inclusion of special provisions (art. XX), representing a unilateral concession ott the part of file Netherlands, relating to the Netherlands capital-aceretions tax and Netherlands extraor(linary-,al)ital tax ald granting substantial benefits to American citizens anm certain other Ipersons who were formerly Netrherlands residents. The principles of the United, States tax-credit system is adopted in the convention on a reciprocal basis (art. XIX). The provisions relating to reservations by each of the two countries of the right to tax its own citizens, resideents, or corporations as though the convention had not come into effect, as well as granting certain credits against the taxes of one of the countries for taxes paid the other country, are comparable to provisions in existing tax conventions of the United States.

    1948.

    (1896)

    ('ONVENTION WITH KINGDOM OF THE NETHERLANDS

    poses with respect to dividends by the reduction of the United States tax oni dividends, in specified cases, from (30to 15 percent and, in certain other c.ases, to 5 percent, while in ill such cases the Netheriadls waives entirely its tax of 15 percent; (2) those in article VIII, whereby double taxation ill the case of interest on bonds, se(urities, Inotes, (lebenitires, or other fomn's of inldlebte(dmless, other than interest, referred to in article V, is eliminated through agreement that, within ,ertaill limitations, interest having, its source in one country is exempt from taxation in that country and sul)ject onily to tax ill thle other countryry; and (3) those ill arltidip IX, ill which tile l)rhit('iJle o)f specific exemption at source atid taxation att residemnce is i10olptedi withl resl)epct, to certain types (of royalties, including royalties for the right to use copyriglhts, patents, trade-marks, and analogous property, amtil royalties iln respect to niotion-picture films or for the use of industrial, com mier'i'ill I, or scientific equip)ment. 'T'hrough liberal aml recij)roval emhloymient of thle method of eliminating double taxation through exempl)tioiI at source and taxation at residence tile convention with the Netherlands conformis closely to the method employed il the convention with the United Kingdom. In further explanation of the provisions, in the order in which they appear in the convention: Article I iilicates the taxes which are hlie subject of tile convention. For the United States tihe convention is made applical)le to Federal income taxes and does tiot al)l)lv to taxes iiil)osed by the several States of the United States, with t'he sole exception of article XXV (3). For the Netherlands the convention is made applicable to a number of taxes which, in the aggregate, correspond closely to the Federal income taxes of the United States. In addition, a. indhivated hereinbefore, the convention applies in the case of the Netherlands, within suitable as a rule for coverage in an income-tax convention. Article II contains def initions of numerous terms found in tile cone vention, together with a provision that aniy ter not defined shall, unless tile context otherwise requires, have the meaning in each

    Among the more important p~rovisions in the convention, from tile standpoint of elioilrragilig investment and enterprise, tre (1) those ill article VII, under which dotible taxittion is eliminated for most pu,-

    specified limitations, to certain Netherlands taxes (see arts. 1 (1)(b) (ii) and XX) which are more commonly (designated as property taxes, not

    existing income-tax conventions of the United States, whereby earn-

    country which it has under the laws of such country relating to tho taxes which are the subject of the convention. Articles Ill and IV deal with the subject of business income as affecting an enterprise of on( country having a permanent establishmient in the other country, and the relationship between enterprises, particularly the intercorporate relationship. Certain rules are prescribed under which the accounts inci(lent to these relationships may be aadjusted. Article V provides that income from real property and interest from mortgages secured by real i)roperty shall )e taxable only in tile country y in wl uch the real property is situated. This provision, as is true with respect to various otheryprovisions in tile convention, must be read together with article XIX under which each country is left free to tax its own citizens, residents, and corporations. Article VI contains provisions, similar to those in a number of

    (1897)

    CONVENTION WITH KINGDOM OF THE NETHERLANDS

    ings derived by enterprises of one of the countries from the operation of ships and aircraft registered in that country shall be exempt from tax in the other country on a reciprocal basis. As to shipping profits, these provisions merely give effect to sections 212 (b) and 231 (d) of the Internal Revenue Code. Article VI does not apply to profits arising from dividends but only to business income. Articles VII, VIII, and IX deal with movable capital items, such as dividends and the more important forms of interest and royalties. The effects of article VII with respect to the reciprocal reduction of tax on dividends, article VIllI with respect to the taxation of certain types of interest., and article IX with respect to the taxation of certain types of royalties have been the subject of comment hereinbefore. Particular attention may well be given to the fact that in the case of article VII it is provided that either country may terminate the provisions by written notice given before June 30 of any year after the first year of the convention's operation; that the exemption provided in article VIII (lops not apply to interest paid by a corporation of one country to a corporation of the other country which controls more than 50 percent of the voting power of the corporation making the payment; and that the royalty exemptions provided in article IX are subject to specified conditions in regard to residence or incorporation and deals with to permanent natural-resource Article X in regard income from establishment. royalties and rentals from real property, providing that a resident or corporation of one country deriving such income from sources in the other country may elect for any taxable year to be subject to the tax of the country of source, on a net basis, as though engaged in trade or business in the latter country through a permanent establishment therein. No specific tax reduction by either country is provided. In this respect t le provisions of article X differ from the corresponding provisions of the convention with the United Kingdom (art. IX) under which tihe rate of United States tax is reduced to 15 percent with an exemption from United Kingdom surtax. Article XI relates to tax on capital transactions, basing the exemption omi the engaged-in-trade-or-business principle rather than permanent establishment. The exemption will not apply with respect to gains from stock or security transactions of a Netherlands resident who is temporarily in the United States for personal services, during the taxable year in which the personal services were performed, despite the fact that the person does not have a permanent establishment in this country and despite the fact that his compensation for personal services nmay be exempt from United States tax under article XVI. Articles XII, XIII, ,nd XIV are comparable to articles XV, XVI, and XVII, respectively, of the income-tax convention with the United Kingdom, and articles XII, XIII, and XIV, respectively, of the income-tax convention with Canada. Articles XII and XIII of the convention with the Netherlands are intended to overcome objections against alleged extraterritorial taxation by the United States, while article XIV relates to the settlement of pending claims for adjustment of certain pre-1936 cases involving taxation of capital gains and application of the principles adopted in articles XII and XIII, (1898)

    CONVENTION WITH KINGDOM OF THE NETHERLANDS

    noteworthy also that the Netherlands agrees that these provisions shall be deemed to be in effect as though the convention had come

    Article XV relates, in paragraph (1), to government wages, salaries, pensions, and life annuities and, in paragraph (2), to private pensions and life annuities. Paragraphs (3) and (4), respectively, define "pensions" and "life annuities." The expression "funds created by" is used in article XV (1) primarily to cover funds such as the Netherlan(is public fund for the payment of teachers' pensions. Article XVI, relating to reciprocal exemption, upon certain con-litions, from taxation of compensation for labor or personal services performed by a resident of one of the countries while temporarily resident within the other country, is comparable to provisions in existing income-tax conventions of the United States, including those with the United Kingdom (art. XV), Canada (art. VII), and Sweden (art. XI). The provisions in the convention with the Netherlands cover professional services and services of public entertainers as well as other per.-onal services. Articles XVII, relating to exemptions of professors or teachers, and article XVIII, relating to exemptions of students or business apprentices, conform generally to principles adopted in other income-tax conventions to which the United States is a party. Article XVII varies in one respect, however, from the formula previously adopted, in that it establishes as one of the conditions that the services of the professor or teacher must be in pursuance of an agreement either between the two countries or between teaching establishments in the two countries for the exchange of professors or teachers. The exemption allpwed by article XVIII covers remittances received by the students or business apprentices from "abroad" for maintenance or study, whereas the formula heretofore adopted has covered only remi'ttances from the country from which the individual came. Article XIX contains the reciprocal credit provisions and also the reservation by each of the two countries with respect to the taxation of their own citizens, residents, or corporations. These provisions have been mentioned hereinbefore. An exception to the reservation isprovided for cases covered by article XV (I) when applicable to an. individual deemed by each country to be a citizen thereof, that is, in a case of dual nationality. Article XV (1), it will be recalled, relates to government wages, salaries, pensions, and life annuities paid by one of the countries to an individual for services in the other country. Article XX, also referred to hereinlbefore, effects stibstantial adjustments with respect to the Netherlands' capital accretions tax and similar adjustments with respect to any extraordinary capital tax which the Netherlands may impose. The benefits accorded by these provisions are, from the Netherlands' standpoint, a notable concession. It was essential, in order to obtain this concession, to coordinate these provisions with article XXII, so that the United States could be called upon to assist, in the enforcement of the Netherlands' taxes against the former resident of the Netherlands who came to the United States without becoming a resident thereof. It is

    into force on the effective date or dates of the applicable Netherlands law. Article XXI. relating to reciprocal administrative assistance through the exchange of information between the competent authorities of the (1899)

    I 1-.0 '41

    CONVENTION WITHl KINGDOM or TIlE Ni.rI'n

    II.ANIS

    tWO t'olntries to ) carry olt tiit- p))visions of til tOlnventiot to I. p)evelit. fraud or administer statulttrly prosionis ligiiilist lega1 avoidant'o' of the taxes covered by tdhe convent llion, and for eerti -I1,t'r pIIrpOsts, 4,0,1'Io spotidls itst'lv to Irovisiolis in ill the exisl ing ili'ointe-tax eoliventions of thit' I mutetI Stautes. Artlide XXII, relating to 'oioirJti'at ol i oll.letion, i.s eoiniparilule to art ileh XVII of the convelition with IiSwvded' lnti art ide 23 of tilie convention n ith lFrance. It provides it basis for u' muaI assstiallev it il tihe eollect'ion of taxes' covered Iwv lilt conventi on andIlte etfort.e. lilt-iit of ree.'e daims. It shlouhli b observed Ilint hit liind pllIt..graph p)rovitdes spetilially thatI assist aie shlIIl not, e' aiorde'd mhitl'r this articlt wit h re 'e tho eji iell.m, erorat iols, or ot her tnt i i,'s ,t(I tlni of thit e noilntry.vo whilit alpplit'ationll for' as.sitlinet' is mde,. t'.i'lv t to tle extent. lit'eessltY to illr'e that Ilthe exemtliipt on or reduieed Ia tt' of tax granted by Ilhi conventiion shall 1) be etnijoyed Iby pI"'rotlis lot. elititit led t4) suhI, belits. 13v artice XXIII the pr'inciple is rtecognized t1at hI.ithel'r country" is ob)liged herr to out,ildi inhistrilrtive ,llel.sill'is varille, uitIi thie lit re.,ulations lit wiletites of either country or t) sup)ply' inforniltitm id !lot p)rocurableh' 1mher its owni laws or tt O o1f the otllii c'unltry. It is r'TOgilize'd allso that eitleir olluitry 11111.y refuse to %.;iuAly itl a request for assistance for I'enlSos of pI~illit' 4tli,'V or for thit' Iul'1tt'ctioll of tradllet, busllitss, illhustlrilmd, or prof'essitn I still'crtts or Itrade pIt' 'ctsso's. I ; Artit'h XXIV r',lithti's to the right of taxpvyers to appeld from lic ioln of th' l't'Vt'llille iuthoritits ill east's whei're (hllblt tliatioll hlilts 4jTesltt'tI or will result contlrlllry to tlh' p)r'ovisions1i of the colnvenltion. Articl' XXV provides (I) that exemlpio)tols, i'hmflihtins, e',dits-, or other lillowillieis, iet'i'rdi'd I)v hi' laws of hut' ollillr, shall Itt ho b h restri(tl by3 tlt,e coniivtlltion'; (2) that. tle iolpeltt'l i iit horitlivs of the two ('ounltrivs shall5undertake to st'tt It' ls," lbityll lnigI'u'tliagre iny iet question its to) tihe iltter'lretl t ioll or apphliention) of til' eolivt'iilt)ll; alld (3) thit tit' ellitiOllllls and viitl'ill'l)OlltOlIis of onlle of the iltullltlrit's tto I)4', . tbhjttle taxi's :oI sh.ll tot, while residt-le in tlit' other v tll v, be l hut than tlit thxes ilIj)ojl os t4)1 1at llfil.1l bitt)urd.esoml other or
    and

    corpolratiislls of Such otheri'ouintry.

    It will be nlted lthlt. ilhe

    Movisill hlst-Illeitllt1ed, giving elre.t to the nlt ional-t rellt Ilelit I )lllleiph,, t'xtends to 'taxes of every kind or description whether nionali ftet'rlI, State', proviniial o1' municipal," thlus making pll)lit'alh' to taxes in ftdditioll ) tho x ,'' tit referred to in article I It' ho.-g-e't'j)ti'td gienel'ral ruthie against dis'riiilllltioln. 'his4 is the only revisionn ill i lie COInve'nt ion which rest ict s iii 113 %%.ify t ilt hit i'oof St i'tes or other orit politfienl subldivisions ill tile I'lited Staltes with re,lsptect to tllxllation. Article XXV\I, a('4ordinlg to p)rovisions ill the invoile-tlx colvlltions,of the U[lite(l States with Swedent, Fr'ance, and Climhlil, pl'ovides that, the alithliorit's of etlth ('coulltry MV, ill (eTordi'(iee with the prac'tiees of that country, presecril)b reglulalttiol4s to c'ulrry oil the proVisionIS of the ( oliVelti(;l). it is provided Iso tllt wihi r's)pet to (l111 tle p)rovisionis ehlliitnig to emxt'hiillge of intforlnlliat iol 1iii1 Illult 1il assistp
    Iall(e tll!e completent, inithoritie. otr tle two Counties',

    Illlll,

    Iky ,ommllonl

    agree'entiet, pre'scr'ibe al)proil)rialt, rile's.

    Article XXVII, like XXII of the convention with the United King(lo0t, e.stabllishes a basis for Ilt' extelsionll of the ('olnventlion to 1111tV" overseti llt'l'rtto,'. of eitlheir coulltry. It is ,uide possil)he, onl sl'e'ilie'd eontliltons, for the p)rovisions to le So) extenldehd without the t'et'ssity (roueduire which tlt extel'lsiotl by for it selrlate conventionn, The l

    (1900)

    (coNVENTION WIrTHl KINGIDOMIOF TIMl NEilIE1.ULANI)D

    1111y be, 1,,a1h, effective ill 111y prIv,'li,'ll, cust., is set s forth,h iinlv,,vilig' l t s .sl ij t , I iii~o l l ll l i i ll l l l ili l I ~ I Wl l l l lile giv iligo of l iit! iwritlZtenl itotitieiltl loll. , Tlihell rov i.,io l l ( Il l i~~ilje

    in the conIventlion with lilth Netheirilunds ,lilfrer front those, in fo4'i' With Ite I 'iled Kingdoni ill Iwo major respects, naieillly. (I) thlie
    extell.ioln biy either ouiiltry diloes tiot ill tll\-i vase' lievo)l1('t Is'erl4tive tllit iiexjires.ly acicepitehl lie"lk 4)l her ((lillltlry, ailthollh glh it is expect ed O hlIt 11a1t its it 11111it er of pliwli're ('i'ell il the aiseo' lf U tnilted Klingdohnl the iot ilira ll k, not11 likely t4, be given litilt it is knowl thrill the extension is aireptliable. IIand (2) the li.xteliolli 11111y lipply eit her to tle .411 I lull ill itsl eifiliits Vis) vetl t1 tSiiuch triovis-ioilillS t herof 1i1s 1111V he

    uheeitiri1I1 0 I i eSP4eeiai apphlhication Poision is- itiatie for,' thle , 1). 1141 illi i, i', it ii, ill i' of stili * if Satich t)llr pil It s Siira hltI 4'rllinllilti4i hereof itsl1a1' linve beeti 11111l' pld iabIde 111144-h' lelll it ltirIe XXVII, a.s t4) am.1 oif elii' \'IN'IsllS t rrii'h.1.1 . Altiri'h XXV Ill loi'rvideh for ratilication alld for thIe e-xehatItge of
    illsittilul,,its. of rail ilirati, 111 1l prlerscribes5 the ,ll',tIeiv, (ilti,, of the
    ill It is plrovide1'dl 11t the coli',e'llion shall relllaiil ill force for ii lliiti lll period of 5 years, but llia li be termlinat liill lite end of th1l peIriodl or ll oif t ' yi oatn tde (GoV'l'hlliwii I(4t therllfleaftf" by iI 6i-tilitil lii'll the other (GoVeliil.lh,1 the l, n tellilitti o l)ieroile, el'e.thi ti allllo aon I followinhllt the expliirallion of the' l-1111 llh lfriod. 'T'hie I)Depilrltlitit, of St ll1' and thlie T'reailtry I)epa.rtll4,ll coilabOl'il ted in the ilegotiat.ion0l of the conv'eionili ll. Rels pe cfully st linilit ted.
    ( ' ,lovellioll, linelv, .Jar1111111lv I ill till, year last jre'editig tlhe 1 whii,'h tle (,x,.hnlillgOf, of illtiulin raOilii oniii takes plla.,e.

    (14loilsilre: ('llonlin lilbet ween Ihl', 'nited Stateils and the Nether111 rela hllig I4) 1iNeS Oil illoillie 111141 iert rtill other IliX,,, signiied April 29, 1948.)
    1l11s

    [Text of convention]

    (1901)

    4*1 ,, I

    Senate Committee Hearings


    [No hestrings held]

    (1903)

    vie,.ate Committee Ieeport


    thInIe II, 1948

    Executive Iteport No. I I


    80 111 (C'otgress, 2dI Smsioi

    -Senale Foreign Relations committeeee

    (190)5)

    80rii CoNuutEss
    "d&8sion

    SENATE

    j ExE ICUTIVz: REPT. 1 No. 11

    CONVENTION BETWEEN TIlE UNITED STATES AND THE NETHERLANDS FOR THE AVOIDANCE OF DOUBLE TAXATION
    WKDI)NN8sDAY, JrNF.16, 1948.-Ordered to be printed

    Mr. SMITH, from the Committee on Foreign Relations, submitted the

    following

    REPORT
    ITo accompany Executive

    1, Eightieth

    Congress, second sessioul

    The Committee on Foreign Relations, having had under consideration a convention (Executive 1, 80th Cong., 2d seas.) between the United States of America and the Netherlands, signed at Washington on April 29, 1048, for the avoidance of double taxation and the prevention of evasion in the case of taxes on income, report the convention favorably with certain reservations and recommend that the Senate advise and consent to its ratification.
    1. COMMITTEE ACTION

    On May 22, 1948, Senator Smith, Senator White, and Senator Hatch were designated by the chairman of the committee to serve as members of a subcommittee to study the convention with the Netherlands and the related convention with Denmark. The subcommittee met in executive session on June 10 and 14 and after a consideration of the basic issues involved submitted its report to the commit tee on June 15. The committee approved the subcommittee's recommendations and voted unanimously to report the convention favorably to the Senate.

    2. SUMMARY OF THE CONVENTION


    The convention is designed to accomplish essentially the, same objctives as income-tax conventions now in force with Sweden, France, Canada. annd the United Kingdom. It should prove effective in the elimination of double taxation with respect to income, either by exemption in one of the countries or by granting appropriate credit for taxes paid, or both. It also establishes a system of reciprocal

    administrative assistance between the tax authorities of the Netherlands and the UTnited States to facilitate the effectiveness of the

    (1907)

    CONVENTION BETIWEEM UNITED STATES AND THE NETHERLANDS

    convention. Tile convention includes provisions concerning business income, permanent business establishments, intercorlorate relation. ship, income from real property, taxes on the remuneration of teachers aMI students, wages and salaries, pensions and annuities, labor and personal strviices, anl shipping and aircraft profits. The provisions of the convention will remain in force for a minimum period of 5 years.
    3. SUPPORT FOIl THE CONVENTION

    Council; of the Committee on Taxation, United States Associates, of the International Chamber of Commerce; and of other AInerican business interests concerned that the groups they represent unani. mously approve the convention as being in the interests of American trade "and generally advantageous to American business. In this regard the (lispositions recently reached before the subcommittee with respect to the tax convention and( protocol between the United States and France, and the reciprocal adlministrrative cooperation provisions thereof, have facilitated agreement by the persons interested in the convention with the Netherlands. The committee has had the benefit of views of the staff of the Joint Committee on Internal Revenue Taxation as well as of the Treasury Department on tile convention. The proposed convention as well as that with Denmark commends itself also because of its contribution to the European recovery program and its tendency toward stimulation of American foreign trade.
    4. TAXATION OF CAPITAL GAINS

    In the course of its consideration of the convention the subcommittee has been advised by representatives of the Nation al Foreign Trade

    of the Netherlands and Netherlands corporations, if such alien or corporation is not engaged in trade or business within the United States. The committee feels that it is untimely to freeze by tax conventions thie provisions of existing law in that respect, pending further legislative consideration of the question.
    5. UNDISTRIBUTED SURPLUS

    enue Code relating to the taxation of capital gains, derivedl by nonresidentt aliens or by foreign corporations from sources within the United States, and of the effect thiereon of provisions of existing tax conventions containing articles relating to capital gains. The proposed convention, in article XT, would exempt from United States income tax the capital gains of nonresident aliens who are residents

    With respect, however, to article XI, the committee, in its consideration of the convention, has been aware of the pendencv in Congress of the question of amending existing provisions of the Internal iRev-

    Article XIII of the convention would exempt certain Netherlands corporations from United States tax under section 102 and section 500 of the Internal Revenue Code. Pending further legislative consideration, of either or both such sections, the retention of this article in the convention is open to sonic ojections. The committee is, therefore, of the view that the article should be eliminated from the convention.

    (1908)

    ,CONVENTION BETWEEN UNITED STATES AND THE NETHERLANDS


    6. ADJUSTMENT OF RtETIROACTIVE PItOVISIONS

    States of capital gains, if any, taxable under the revenue laws of the United States for the respective years in which such gaitns were realized.
    7. RESERVATIONS APPROVED I1Y TIIE COMMITTEE

    and XIII, as set forth a1l)ovI,, the committee further iecommends that article XIV be modified (a) so as to eliminate reference therein to article XIII and (b) so as not to prevent the taxation by the United

    Itesulting front the decisions reached with respect to articles XI

    The committee has, therefore, agreed upon tile following reservatiols, which meet with thie approval of the executive branches r

    of the convention relating to United States taxation of the undistributed earnings, profits, income, or surplus of a Net herlands corporation.
    3

    The Government of the United States of America does not accept article XI of the convention relating to gains fromt the sale or exchange of capital assets. 2 The Government of the United States of America does not accept, article XIII

    The Government of the United States of America (t.es not accept article XIV of the convention relating to settlement of unpaid United States income-tax

    liability unless there be eliminated therefrom (a) references now appearing therein to article XIII and (b) any language which ni'ght prevent the taxation by the United States of capital gains, if any, taxable under the revenue law. of the
    United States for the respective years in which such gains were realized.

    It will, therefore, be necessary for the Guvernment of the United States, before ratifying the convention, to approach the Government
    of the Netherlands in order to obtain the acquiescence of that Gov-

    ernment in such reservations.

    8. POLICY ON EXTENSION TO OVERSEAS TEIIITORtIES

    With respect to article XXVII of the convention, relating to its extension to overseas colonies and territories, it is the understanding of the committee that the policy and practice in this respect were laid down in the course of consideration of the United States-United Kingdom income-tax convention of April 16, 1945, in accordance with which any formal declaration under any such article would be transnuitted to the Senate for its advice and consent before admitting such colony or territory within the framework of the convention. (See Ex. Rept. No. 4, pp. 9 and 10, 79th Cong., 2(1 sess., on the United States-UIited Kingdom income-tax convention.) The committee views this policy as entirely satisfactory as applied to the instant situation.
    CONCLUSION

    The conmmittee believes that, the terms of the convention are advantageous to the United States and that the convention should be ratified subject to the reservations( described.

    (1909)
    73098 0-42-vol. 2-27

    Senate Floor Debate and Action


    June 17, 1948 80th Congress, 2d Session 94 Congressional Record 8619, 8622-8625

    (1911)

    >4
    4

    [P. 86191 The PRESIDENT pro tempore. The clerk will proceed to call the Executive Calendar. The first treaty will be passed over.
    The clerk will state the second order of business.
    CONVENTION WITH DENMARK RELATING TO DOUBLE TAXATION

    jP. 86221 The PRESIDENT pro tempore. If the Chair may be permitted to make a brief statement, both the treaties, Executive H and Executive I, are routine treaties to protect against double taxation. They follow the form which has been established in connection with treaties with other countries on the same subject. The text of the treaty as originally submitted did include other matters which proved io be controversial, and the other matters have been eliminated by reservation. Both treaties were in charge of the able junior Senator from New Jersey IMr. SMITH], and the Chair will recognize the Senator from New Jersey if he feels that there is anything that should be said on the subject. .Mr. SMITH. Mr. President, there is very little that need be said. The controversy over these treaties was taken care of under the French treaty which was ratified at the last executive session, as I recall. We provided the same protection to our interests we voted into the French treaty. There were one or two controversial paragraphs in the treaties, and because it was important that the treaties should be reported and ratified at this session, we eliminated the controversial features and put them to one side, and we are sub-

    mitting the treaties with the controversial features omitted.

    [The Senate then proceeded with consideration of Executive H.]

    CONVENTION WITH THE KINGDOM OF THE NETHERLANDS RELATING TO AVOIDANCE OF DOUBLE TAXATION

    'Pihe Senate, as in Conumittee of the Whole, proceeded to consider the Convention, Executive I (80th Cong., 2d sess.), a convention between the United States of Amierica and the Kingdonm of the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income andl certain other taxes, signed at Washington on April 29, 1948, which had been reported front the Connmittee on Foreign Relations with reservations. The convention was read the second time, as follows:
    [Text of convention] [P. 8625] The PRESIDENT pro tempore. The convention is

    open to amendment. If there be no amendment to be proposed, the convention will be reported to the Senate.

    The convention was reported to the Senate without amendment. The PRESIDENT pro tempore. The resolution of ratification, with the reservations, will be read.

    (1918)

    Tite legislative .lerk read as follows:


    Resolved (two-thirds of the Senators present conwurring therein), That the Senato advise and consent to the ratification of Executive 1, Eightieth Congres, second session, the convention between the United States of America and the Kingdom of the Netherlands for the avoidance of doultle taxation and the prevention of fiscal evasion with respect to taxes on Income and certain other taxes, signeId at Washington on April 29, 1948, subject to the following reservations: (1) The ;overnmeiu t of the United States of America (does not accept article.

    earnings, profits, Income or surplus of a Netherlands corpxration. (3) The Government of the United States of America does not accept article XIV of the convention relating to settlement of unpaid United States income tax liability unless there be eliminated therefrom (a) references now appearing therein to article X1II and (b) any language wlich might prevent the taxation by the United States of capital gainms, if any, taxable under the revenue laws of thie United States for the respective years itn which such gains were realized.

    Xl of the convention relating to gains front the sale or exchange of capital assets. (2) The (Government of the United States of America does not accept article X11I of the convention relating to United States taxation of the undistributed

    The PRESIDENT pro temnpore. Tite question is on agreeing to the reservations to the resolution of ratification. The reservations were agreed to. T'ie PRESIDENT pro tempore. Tihe question is on agreeing to the resolution of ratification with the reservations. [Putting the question.) Two-thirds of the Senators present. coucurring therein, thie resolution of ratification, with the reservations, is agreed to, and the convention is ratified.

    (1914)

    I I
    -

    A ,"

    PresidentialProclamation(Including Official Text of

    Convention)
    (Reprint of TIAS 1855)

    (19165)

    TRE1ATIES AND OTHER INTERNATIONAL ACTM

    SERIES 1863

    DOUBLE TAXATION
    Taxes on Income

    Convention between the


    UNITED STATES OF AMERICA

    and the NETHERLANDS

    * Signed at Washington April 29, 19418 * Ratification advised by the Senate of the United States of America June 17, 19.18, with reservations 0 Ratified by the President of the United States of America November 19, 19,18 9 Ratified by the Netherlands Novenmber 2, 1948 0 Ratifications exchanged at Washington December 1, 1948 SProclaimed by the President of the United States of America December 8, 19418 (1917)

    DEPARTMENT OF STATE PusuucATo 3397


    [LiterWl print)

    UNITED STATU GOVERNMENT PRINTING OFFICE WASHINGTON s 1949

    (1918)

    CONTENTS
    1Pa

    Esllsh la nue text.


    Dutch

    .. t

    to .........
    o. ........
    tlll)

    . .....
    .

    .. ,...1....
    ... .* . .,.

    lakupage

    text ..........

    16

    (1919)

    BY TIIZ PRESENT OF THE UNITED STATE

    OF AtFRICA

    A PROCLAMATION
    WHEREAS a convention between the United States of America and Ithe Kingdom of the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and certain other taxes was signed by their respective Plenipotentiaries at Washington on April 29, 1948, the original of which convention in the English and Dutch languages, is word for word as follows: (1)

    (1921)

    CONVENTION BETWEEN THE UNITED STATES OF AMER. ICA AND THE KINGDOM OF THE NETHERLANDS WITH RESPECT TO TAXES ON INCOME AND CERTAIN OTHER TAXES The Government of the United States of America and the Govern. ment of the Kingdom of the Netherlands, desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and certain other taxes, have appointed for that purpose as their respective Plenipotentiaries: The Government of the United States of America: Mr. George C. Marshall, Secretary of State, and The Government of the Kingdom of the Netherlands: Mr. E. N. van Kleffens, Ambassador Extraordinary and Plenipotentiary of the Kingdom of the Netherlands, who, having communicated to each other their full powers, found in good and due form, have agreed upon the following Articles:
    ABTIr I

    (1) The taxes .which are the subject of the present Convention are: (a) In the case of the United States: the Federal income taxes. (b) In the case of the Netherlands: (1) for the application of the provisions of the Convention other than Article XX, the income tax and the Netherlands taxes credited against it, the corporation tax and the Netherlands taxes credited against it, the property tax, and the tax on fees of directors and managers of corporations; and (ii) for the application of Articles XX to XXVIII inclusive (except Articles XXIV and XXVII), the capital accretions tax and the extraordinary capital tax. (2) The present Convention shall apply also to any other taxes of a substantially similar character imposed by either Contracting State subsequently to the date of signature of the present Convention, or, by the government of any overseas part of the Kingdom (in the case of the Netherlands) or overseas territory (in the case of the United
    (2)
    (1922)

    [No. 1855]

    States) to which the present Convention is extended under Article XXVII, subsequently to the date of the notification of extension. (8) In the event of appreciable changes in the fiscal laws of either of the Contracting States the competent authorities of the Contracting States will consult together.
    ATcIC II

    (1) In the present Convention, unless the context otherwise requires: (a) The term "United States" means the United States of America, and when used in a geographical sense means the States, the Territories of Alaska and of Hawaii, and the District of Columbia. (b) The term "Netherlands"' means only the Kingdom of the Netherlands in Europe. (c) The term "United States corporation" means a corporation, association or other organization or juridical entity created in the United States or under the laws of the United States or of any State or territory of the United States. (d) The term "Netherlands corporation" means a corporation, association or other organization or juridical entity created in the Netherlands or under the laws of the Netherlands. (e) The terms "corporation of one Contracting State" and "corporation of the other Contracting State" mean a United States corporation or a Netherlands corporation, as the context requires. (f) The term "United States enterprise" means an industrial or commercial enterprise or undertaking carried on in the United States by a citizen or resident of the United States or by a United States corporation. (g) The term "Netherlands enterprise" means an industrial or commercial enterprise or undertaking carried on in the Netherlands by a citizen or resident of the Netherlands or by a Netherlands corporation. (h) The terms "enterprise of one of the Contracting States" and "enterprise of the other Contracting State" mean a United States enterprise or a Netherlands enterprise, as the context requires. (i) The term "permanent establishment", when used with re. spect to an enterprise of one of the Contracting States, means a branch, factory, or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regularly fills orders on behalf of such enterprise. An enterprise of one of (1923)

    (No. Ml]

    4,

    the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because it car. ries on business dealings in such other Contracting State through a bona flde commission agent, broker or custodian acting in the ordi. nary course of his business as such. The fact that an enterprise of one of the Contracting States maintains in the other Contracting State a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute such fixed place of business a permanent establishment of such enterprise. When a corporation of one Contracting State has a subsidiary corporation which is a corporation of the other Contracting State or which is engaged in trade or business in such other Contracting State, such subsidiary corporation shall not, merely because of that fact, be deemed to be a permanent establishment of its parent corporation. (j) The term "competent authority" or "competent authorities" means, in the case of the United States, the Commissioner of Internal Revenue or his duly authorized representative; in the case of the Netherlands, the Directeur-Generaal der Belastingen or his duly authorized representative; and, in the case of any part or territory to which provisions of the present Convention are extended under Article XXVII, the competent authority for the administration in such part or territory of the taxes to which such provisions apply. (2) In the application of the provisions of the present Convention by either of the Contracting States, any term which is not defined in the present Convention shall, unless the context otherwise requires, have the meaning which that term has under the laws of such Contracting State relating to the taxes which are the subject of the present Convention. Amtci III (1) An enterprise of one of the Contracting States shall not be subject to taxation by the other Contracting State in respect of its industrial or commercial profits unless it is engaged in trade or business in the other Contracting State through a permanent establishment situated therein. If it is so engaged the other Contracting State may impose the tax only upon the income of such enterprise from sources within such other State. (2) Where an enterprise of one of the Contracting States is engaged in trade or business in the other Contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar con(1924)
    L

    [No. 18P5

    ditions and dealing at arm's length with the enterprise of which it is a permanent establishment, and the profits so attributed shall, subject to the law of such other Contracting State, be deemed to be income from sources within such other Contracting Sato.te (3) In determining the industrial or commercial profits from sources within one of the Contracting States of an enterprise of the other Contracting State, no profits shall be deemed to arise from the mere purchase of goods or merchandise within the former Contracting State by such enterprise. (4) The competent authorities of the Contracting States may lay down rules by agreement for the apportionment of industrial or commercial profits.

    ARTICLE IV
    Whore an enterprise of one of the Contracting States, by reason of its participation in the management, control or capital of an enterprise of the other Contracting State, makes with or imposes on the latter enterprise, in their commercial or financial relations, conditions different from those which would be made with an independent enterprise, any profits which would, but for those conditions, have accrued to one of the enterprises, may be included in the taxable profits of that enterprise.

    ARTICrL V
    Income of whatever nature derived from real property and interest from mortgages secured by real property shall be taxable only in the Contracting State in which the real property is situated.
    ARnTICLE VI

    (1) Income which an enterprise of one of the Contracting States derives from the operation of ships or aircraft registered in that State shall be taxable only in the State in which such ships or aircraft are registered. Income derived by such an enterprise from the operation of ships or aircraft not so registered shall be subject to the provisions of Article III. (2) The present Convention shall be deemed to suspend, for the duration of the Convention as between the parties to which this Article applies, the provisions of the arrangement effected by exchange of notes between the United States and the Netherlands, dated September 13, October 19, and November 27, 1926, [1] providing for relief from double income taxation on shipping profits.
    'Executive Agreement Series 11; 47 Stat. 2001.

    78095 O--2--vol. 2-

    28

    (1925)

    (No. 18551

    (8) In the event that the application of this Article is extended to the Netherland Indies in accordance with Article XXVII, the ex. change of notes between the United States and the Netherlands, dated March 8, May 23, and November 8, 1939, [1] relating to the applica. tions to the Netherland Indies of the arrangement referred to in paragraph (2) of this Article, shall be deemed to be suspended for so long as this Article continues to be applicable with respect to the Netherland Indies.
    AimoLs VII

    (1) The rate of United States tax on dividends derived from a United States corporation by a resident or corporation of the Netherlands not engaged in trade or business in the United States through a permanent establishment shall not exceed 15 percent: Provided that such rate of tax shall not exceed 5 percent if such Netherlands corporation controls, directly or indirectly, at least 95 percent of the entire voting power in the corporation paying the dividend, and not more than 25 percent of the gross income of such paying corporation is derived from interest and dividends, other than interest and dividends from its own subsidiary corporation. Such reduction of the rate to 5 percent shall not apply if the relationship of the two corporations has been arranged or is maintained primarily with the intention of securing such reduced rate. (2) Dividends derived from sources within the Netherlands by a resident or corporation of the United States not engaged in trade or business in the Netherlands through a permanent establishment shall be exempt from Netherlands tax. (8) Either of the Contracting States may terminate this Article, by giving written notice of termination to the other Contracting State through diplomatic channels, on or before the thirtieth day of June
    in any year after the first year for which the present Convention

    becomes effective. In such event this Article shall cease to be effective on and after the first day of January in the year next following that in which such notice is given.
    ArnToL VIII

    (1) Interest (on bonds, securities, notes, debentures, or on any other form of indebtedness), other than interest referred to in Article V of the present Convention, derived from sources within the United States by a resident or corporation of the Netherlands not engaged in trade or business in the United States through a permanent estabINot prlnted. (1926)

    [No. 18MI

    lishment, shall be exempt from United States tax; but such exemption shall not apply to such interest paid by a United States corporation to a Netherlands corporation controlling, directly or indirectly, more than 50 percent of the entire voting power in the paying corporation. (2) Interest (on bonds, securities, notes, debentures, or on any other form of indebtedness), other than interest referred to in Article V of the present Convention, derived from sources within the Netherlands by a resident or corporation of the United States not engaged in trade or business in the Netherlands through a permanent establishment, shall be exempt from Netherlands tax; but such exemption shall not apply to such interest paid by a Netherlands corporation to a United States corporation controlling, directly or indirectly, more than 50 percent of the entire voting power in the paying corporation.
    AmcLz IX

    Royalties for the right to use copyrights, patents, designs, secret processes and formulae, trade marks, and other analogous property, and royalties, including rentals, in respect of motion picture films or for the use of industrial, commercial or scientific equipment, derived from sources within one of the Contracting States by a resident or corporation of the other Contracting State not engaged in trade or business in the former State through a permanent establishment, shall be exempt from tax imposed by the former State.
    AraTCL X

    A resident or corporation of one of the Contracting States, deriving from sources within the other Contracting State royalties in respect of the operation of mines, quarries, or natural resources, or rental. from real property, may elect for any taxable year to be subject to the tax of such other Contracting State, on a net basis, as if such resident or corporation were engaged in trade or business within such other Contracting State through a permanent establishment therein during such taxable year.

    A cL XI []
    A resident or corporation of one of the Contracting States not engaged in trade or business in the other Contracting State shall be exempt from tax in such other State on gains from the sale or exchange of capital assets
    'With respect to reservations, see p. 40.

    (1927)

    [No. M351

    8 A =rc XII

    Dividends and interest paid by a Netherlands corporation shall be exempt from United States tax except where the recipient is a citizen, resident, or corporation of the United States. ARTICLE XIII ['] A Netherlands corporation shall be exempt from United States tax on its accumulated or undistributed earnings, profits, income or surplus if it can prove to the satisfaction of the competent authorities of the United States that individuals who are residents of the Nether. lands (other than citizens of the United States) control, directly or indirectly, throughout the last half of the taxable year, more than I6O percent of the entire voting power in such corporation. ARTICLE XIV ['1] (1) The United States income tax liability for any taxable year beginning prior to January 1, 1930 of any individual (other than a citizen of the United States) resident in tlhe Netherlands, or of any Netherlands corporation, remaining unpaid on the effective (late of the present Convention, may be adjusted on a basis satisfactory to the United States Commissioner of Internal Revenue: Provided that the amount to be paid in settlement of such liability shall not exceed the amount of the liability which would have been determined if (a) the United States Revenue Act of 19:10 (except in the case of a Netherlands corporation in which more than 50 percent of the entire voting power was controlled, directly or indirectly, throughout the latter half of the taxable year, by citizens or residents of the United States), and (b) Articles XII and XIII of the present Convention, had been in effect for such year. If the taxpayer was not, within the meaning of such Revenue Act, engaged in trade or business in the United States and had no office or place of business therein during the taxable year, the amount of interest and penalties shall not exceed 50 percent of the amount of the tax with respect to which such interest and penalties have been computed. (2) The United States income tax unpaid on the effective date of the present Convention for any taxable year beginning after December 31, 1935 and prior to the effective date of the present Convention in the case of an individual (other than a citizen of the United States) resident of the Netherlands, or in the case of any Netherlands corporation, shall be determined as if the provisions of Articles XII
    IWith respect to reservations, see p. 40.

    (1928)

    (No. 18501

    and XIII of tile present Convention had been in effect for such taxable year. (3) The provisions of paragraph (1) of this Article shall not apply (a) unless the taxpayer files with the Commissioner of Internal Revenue within a period of two years following the effective date of the present Convention a request that such tax liability be so adjusted and furnishes such information as the Commissioner may require; or

    (b) in any case in which the Commissioner is satisfied that any deficiency in tax is due to fraud with intent to evade the tax.
    Airrici.F XV

    (1) Wages, salaries and similar compensation, and pensions and life annuities, paid either directly by, or from funds created by, one of the Contracting States or the political subdivisions or territories thereof to individuals in the other Contracting State shall be exempt from taxation in the latter State. (2) Private pensions and life annuities derived from within one of the Contracting States and paid to individuals in the other Contracting State shall be exempt from taxation in the former State. (3) The term "pensions" as used in this Article means periodic payments made in consideration for services rendered or by way of
    compensation for injuries received.

    (4) The term "life annuities" as used in this Article means a stated sum payable periodically at stated times during life, or during a specitied number of years, under an obligation to make the payments in return for adequate and full consideration in money or money's worth.
    ARTICLE XVI

    (1) A resident of the Netherlands shall be exempt from United States tax upon compensation for labor or personal services performed within the United States if he is temporarily present within the United States for a period or periods not exceeding a total of one hundred eighty-three days during the taxable year and his compen sation is received for labor or personal services performed as a worker or employee of, or under contract with, a resident of the Netherlands, or a Nethurlands corporation, carrying the actual burden of the reullnerat ion. (2) The provisions of paragraph (1) of this Article shall apply, ind tatls mnutandis, to a resident of the United States deriving compen. sation for labor or personal services performed within the Netherlands.

    (1920)

    [No. 18550

    10
    ARTICLE XVII

    Professors or teachers, residents of one of the Contracting States, who, in accordance with agreements between the Contracting States or between teaching establishments in the Contracting States for the exchange of professors and teachers, visit the other Contracting State to teach, for a maximum period of two years, in a university, college or other teaching establishment in such other Contracting State, shall not be taxed by such other State with respect to the remuneration which they receive for such teaching.
    AsnCL XVIII

    Students or business apprentices of one Contracting State residing In the other Contracting State exclusively for purposes of study or for acquiring business experience shall not be taxable by the latter State in respect of remittances received by them from abroad for the purpose of their maintenance or studies. Arncxz XIX (1) Notwithstanding any provisions of the present Convention (other than paragraph (1) of Article XV when applicable in the case of an individual who is deemed by each Contracting State to be a citizen thereof), each of the two Contracting States, in determining the taxes, including all surtaxes, of its citizens or residents or corporations, may include in the basis upon which such taxes are imposed all items of income taxable under its own revenue laws as though this Convention had not come into effect. (2) As far as may be in accordance with the provisions of the United States Internal Revenue Code, the United States agrees to allow as a deduction from the income taxes imposed by the United States the appropriate amount of taxes paid to the Netherlands, whether paid directly by the taxpayer or by withholding at the source. (8) As far as may be in accordance with the provisions of Netherlands law, the Netherlands agrees to allow a deduction from Nether. lands tax with respect to income from sources within the United States, in order to take into account the Federal income taxes paid to the United States, whether paid directly by the taxpayer or by withholding at the source.
    Aimaa XX

    (1) All persons who left the Netherlands between April 80, 1939 and December 31, 1945, inclusive (other than persons who were citizens of the United States at the time of leaving the Netherlands or

    (1930)

    11

    [No. 18M]

    Netherlands subjects who by reason of their function as governmental officials in established service reside abroad and the members of their family living with them), and who are deemed to be taxpayers under the provisions of Netherlands law relating to the capital accretions tax or the extraordinary capital tax, and who became residents of the United States (according to the income tax law of the United States) during that period, and who did not return to the Netherlands on or before December 81, 1945 to resume residence in the Netherlands (according to the income tax law of the Netherlands), shall be taxable by the Netherlands: (a) under the law relating to the capital accretions tax, only in respect of accretions arising from their property situated in the Netherlands (as defined in that law in the case of nonresident) and from their activities in the Netherlands; (b) under the law relating to the extraordinary capital tax, only in respect of their property situated in the Netherlands (as defined in that law in the case of nonresidents. (2) All persons who left the Netherlands between April 80, 1939 and December 81,1945, inclusive, and who were citizens of the United States at the time of leaving the Netherlands, and who are deemed to be taxpayers under the provisions of Netherlands law relating to the capital accretions tax or the extraordinary capital tax, and who became residents of the United States (according to the income tax law of the United States) on or before December 81, 1945, shall be taxable by the Netherlands: (a) under the law relating to the capital accretions tax, only in respect of accretions arising from their property situated in the Netherlands (as defined in that law in the case of nonresident) and from their activities in the Netherlands; (b) under the law relating to the extraordinary capital tax, only in respect of their property situated in the Netherlands (as defined in that law in the case of nonresidents. (8) The provisions of this Article shall be deemed to be effective as though the present Convention had entered into force on the effective date of the Netherlands law relating to the capital accretions tax or the extraordinary capital tax, as the case may be. ARnoTm XXI The competent authorities of the Contracting States shall exchange such information (being information which such authorities have in proper order at their disposal) as is necessary for carrying * (1981)

    (No. IM]1

    12

    out tile provisions of the present Convention or for the prevention of fraut, or the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any person other than those concerned with the assessment and collection of the taxes which are the subject of the present Convention. No information as aforesaid shall be exchanged which would disclose any trade, business, industrial or profesional secret or trade process.
    ARTicu XXIl

    (1) The Contracting States undertake to lend assistance and sup. port to each other in the collection of the taxes which are the subject of the present Convention, together with interest, costs, and additions to the taxes and fines not being of a penal character. (2) In the case of applications for enforcement of taxei, revenue claims of each of the Contracting States which have been finally determined may be accepted for enforcement by the other Contracting State and collected in that State in accordance with the laws applicable to the enforcement and collection of its own taxes. The State to which application is made shall not be required to enforte executory measures for which there is no provision in the law of the State making the application. (8) Any application shall be accompanied by documents establishing that under the laws of the State making the application the taxes have been finally determined. (4) The assistance provided for inthis Article shall not be accorded with respect to the citizens, corporations, or other entities of the State to which application is made, except as is necessary to insure that the exemption or reduced rate of tax granted under the convention to such citizens, corporations or other entities shall not be enjoyed by persons not entitled to such benefits.
    AwrncL XXIII

    (1) In no case shall the provisions of Article XXI and XXII be construed so as to impose upon either of the Contracting States the obligation (a) to carry out administrative measures at variance with the regulations and practice of either Contracting State, or (b) to supply particulars which are not procurable under its own legislation or that of the State making application.

    (1932)

    13

    [No. IM!

    (2) The State to which application is made for information or assistance shall comply as soon as possible wit h the request addressed to it. Nevertheless, such State may refuse to comply with the re. quest for reasons of public policy or if compliance would involve violation of a trade, business, industrial or professional secret or trade process. In such case it shall inform, as soon as possible, the State making the application. ARic.r. XXIV Where the action of the revenue authorities of the Contracting States has rebulted or will result in double taxation contrary to the provisions of the present( Conveintion, the taxpayer shall be entitled to lodge a claim with the State of which he is a citizen or subject or, if lie is not a citizen or subject. of either of the Contracting States, with the State of which lie is a rteident, or, if the taxpayer is a corporation, with tile State in which it is created or organized. Should the claim be upheld, the competent authority of such State shall undertake to come to an agreement with the competent authority of the other State with a view to equitalile avoidance of the double taxation in question. A Rmcivr. XXV (1) The provisions of the present Convention shall not be construed to restrict in any manner any exemption, deduction, credit or other allowance accorded by the laws of one of the Contracting States in the determination of the tax imposed by such State. (2) Should any difficulty or doubt arise as to the interpretation or application of the present Convention, the competent authorities of the Contracting States shall undertake to settle the question by mutual agreement. (3) The citizens or subjects of one of the Contracting States shall not, while resident in the other Contracting State, be subjected therein to other or more burdensome taxes than are the citizens or subjects of such other Contracting State residing in its territory. The term "citizens" or "subjects" as used in this Article includes all legal persons, partnehiips and associations deriving their status from, or created or organized under the laws in force in, the respwctive Contracting States. In this Article the word "taxes" means taxes of every kind or description whether national, federal, state, provincial or municipal.

    (1933)

    (No. 1M]

    14

    AmcLZ XXVI
    (1) The authorities of each of the Contracting States, in accordance with the practices of that State, may prescribe regulations necessary to carry out the provisions of the present Convention. (2) With respect to the provisions of the present Convention relating to exchange of information and mutual assistance in the collection of taxes, the competent authorities may, by common agree. ment, prescribe rules concerning matters of procedure, forms of appli. cation and replies thereto, conversion of currency, disposition of amounts collected, minimum amounts subject to collection, and related matters.

    ArricLz XXVII (1) Either of the Contracting States may, at the time of exchange
    of instruments of ratification or thereafter while the present Convention continues in force, by a written notification of extension given to the other Contracting State through diplomatic channels, declare the desire of the government of any overseas part of the Kingdom (in the case of the Netherlands) or overseas territory (in the case of the United States), which imposes taxes substantially similar in character to those which are the subject of the present Convention, that the opera. tion of the present Convention, either in whole or as to such provisions thereof as may be deemed to have special application, shall extend to such part or territory. (2) In the event that a notification is given by one of the Contracting States in accordance with paragraph (1) of this Article, the present Convention, or such provisions thereof as may be specified in the notification, shall apply to any part or territory named in such notification on and after the first day of January following the date of a written communication through diplomatic channels addressed to such Contracting State by the other Contracting State, after such action by .the latter State as may be necessary in accordance with its own procedures, stating that such notification is accepted in respect of such part or territory. In the absence of such acceptance, none of the provisions of the present Convention shall apply to such part or territory. (8) At any time aftPr the expiration of one year from the effective date of an extension made by virtue of paragraphs (1) and (2) of Wies Article, either of the Contracting States may, by a written notice of termination given to the. other Contracting State through diplomatic channels, terminate the application of the present Convention to any part or territory to which the Convention, or any of

    (1984)

    15

    [No. 18M]

    its provisions, has been extended. In that case, the present Conven. tion, or the provisions thereof specified in the notice of termination, shall cease to be applicable to the part or territory named in such no. tice of termination on and after the first day of January following the expiration of a period of six months after the date of such notice; provided, however, that this shall not affect the continued applica. tion of the Convention, or any of the provisions thereof, to the United States, to the Netherlands, or to any part or territory (not named in the notice of termination) to which the Convention, or such pro. vision thereof, applies. (4) For the application of the present Convention in relation to any part or territory to which it is extended by notification given by the United States or the Netherlands, references to "the United States" or to "the Netherlands" or to one or the other Contracting State, as the case may be, shall be construed to refer to such part or territory. AITciL XXVIII (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible.['] (2) The present Convention shall become effective on the first day of January in the year last preceding the year in which the exchange of instruments of ratification takes place. [1] It shall continue effective for a period of five years beginning with that date and indefinitely after that period, but may be terminated by either of the Contract. ing States at the end of the five-year period or at any time thereafter, provided that at least six months' prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six.month period. Do~s at Washington, in duplicate, in the English and Dutch lan. guages, the two texts having equal authenticity, this 29th day of April, 1948.
    FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA:

    G C MALuwILL
    [BEAL] FOR THE GOVERNMENT OF THE KINGDOM OF THE NETHERLANDS: E. N. VAN KLEMNS

    [SEAL]

    'Dec. 1, 1048, post, p. 40.

    (1935)

    DEMASINM0GI VAN IN:OM4TEI Ef BEPAAD AIDER BDASTIJ(MN

    YVPJRAT ?USSEN DM VYEOIID STATENIAN AXMaUI EN HINE KONINKtJX DER JED)EILM DEN MET BETEKXING TOT

    Do Repring van do Vorengedo Staten van Amorika en do Reoering vYn hot Koninkrljk der .ederlanden, do wons koeoterendo eon vordrag to slulten tor voorkoming van dubbole belasting on tor vormiJding van hot ontgaan van belastinS net botrokkinr tot belastlndpn van inkomsten on bopsaldo mdere belastlnpng hebbon to dion sinde tot hun Gevolmaohtledon bonoeado Do RegeoJnh van do Verenisdo Staten van Amerikas

    do Hear Oeorps 0. arsoball, Seoretaris van $taat on


    Do Repring van hot Koninkrwjk der Kederlandent do Hoeor B If. van leffoeno, Bultenpwoon on Govolmuhtlgd Aaboaoadeur van hot Koninkrijk der Nederlandon, die, na elkander mededeling to hobbon pedaan van hun volmaohten, welks in behoorlijke vorw warden bevonden, over do volgendo artikelen tot overoenstomming sijn gekomene AITUm r (1) Do belastingen welke hot onderworp van dit Vordrag vormen siJn: (a) Voor soveol do Verenigde Staten betrefti do Federal income taxes (do inkomstenbelastingan van do Pederatis). (b)Vyer zoveel Nederland betreftt (i)veer do toopassing van do bepalingen van

    (16)

    (19:36)

    17

    (NO$ 1855

    hot Vordrag set uitsondering van Artikel XX, do in.

    komotonbelasting met inbeOirp van do voorhoffingen, do vennootaohapsbolasting met inbeprip van do voorhof. flnen, do vormogensbolastin6 en do oommtsearlesenoelasttngt en (ii) voor .de toepassing van do Artikelon XX tot on not XVIII (net ultsonderlng van do Artikelen XXIV on XXV)I), do vermogensaaawasbolastinj en do vermogens. hefting ilneons. (2) Verdras sal ook van toopaseing sijn op elks andero Dit belasting van in woson gslijksoortlp award, door eon der Vordrag. uluitande Staten geheven na do dagtekening van ondertekening van dit Vordras, of (voor soveel Nederland boeeft) door do Regering van onig oversees deal van hot Konlnkrijk of (voor soveel do Ver. oanigde Staten betreft) eniS oversees ebiododeol waartoo dit Vordrag volgons Artikel XXTI is uitgebrold na do dagtekoening van do ken. nisvyins van dose ultbreidlng. (3) In geval van belanprijke versadoringen in de bolastingwetten van eon der Vordma8luitende Staten suflen do bevoogde autorltolten van do Vordrasslultonde Staten met olkander in ovorleg trodon. ARTMIIG II (1) In dit Vordrag betekent, tensij hot Sineverband ieta
    anders veroistt (a) Do ultdrukkins OVerenigde Staten' do Verenigde Staten

    van Amerika, on wanneer dose uitdrukking in aardrijkskundip sin wordt pbesigdt do Staten, do Oobiedsdelon Alaska on Hawaii on hot District Columbia. (b) Do uitdrukkinsg ederland': alleon hot Ri1k In Europa.

    (1937)

    [,No.

    185)1
    to) Do ultdrukkins mean lioh"a der Voronlgde Staten's

    eon vennootoohap, vereniging of andere organisatue of reohtu.


    kundige eonhoed - &I dan niet roohtupersobnlljkhold besittendo - opprioht In do Veroenide Staten of naa hot reoht van do Veronigdo Staten of van eon Staat of gebiedadeel van do Yor-

    onigdo Staten.
    (d)Do ultdrukking Vederlands liohaam'a eon vonnootoohap, veroniging of andere organluatle of roqhtskundigo sonhoid al dan niet roohtspersoonliJkheid bosittende - opsrloht In Nederland of naar Noderlands rooht. to) Do ultdrukking Olohaam van oon Vordragoluitendo Stoat* on "llohasa van do andere Verdragaluitende Staat* eon 1lohaam der Verenigdo Staten of eon Nederlanis liohaam, al naar hot sinoverband vereist.

    CM) Do ultdrukclng 'onderneming der Yerenigdo Staten's


    eon ondernoming op hot gebied van nijverhoid of handel, gedrevon in do Vorenigde Staten door eon burger of inoner van do Vernigdoe Staten of door eon lioha tier dVerenigdo Staten.

    C() uitdrukking 'Nederlandse onderneming': son onderDo


    noming op hot gpbled van nljverhoid of hondelp gedreven In Nederland door eon burger of inwoner van Nederland of. door eon Noderlanda liohaam. (hM Do uitdrukklns "onderneming van eon der Verdragoluitende Staten' on "onderneming van do andero Verdraga3uitende Mtut": eon onderneming der Verenigdo Staten of eon Nederlandse onderneoing al near hot sinsverband vereist. (I) Do ultdrukkina vasto inriohtineg ingeval dese ultdrukking wordt gobesigd met betrokking tot eon onderneming van eon der Verdrapsluitende Statent eon fillal fabriok of

    (1938)

    19

    (No. 1851

    andere vaste bedri jfsinrichting, daaronder niot begropen son vertepnwoordlsingt tenalj de vertegenwoordiger seon mlgomene naohtlglng heoft om to onderhandelen on overoenkomuten at to slulten ten behoove van seon ondornoming ale bovon bedoold an dose dit reoht cewoonllak ultoefent, dan wel seon gooderenvoorraad hooft waarult hlJ. rgelmnattG bestelllngen ultvoort ten behoeve van bodoolde ondernemlngo Eon onderneming van son von do Vordrakplultende Staten zal niet geaoht worden eon vast lnriohting In do andero Verdraplultende aat to hebben onkel op grond, dat sij sakenrelatlee onderhoudt in ale andere Vordra~oluttende Stoat door seon bona tide coamlsslonnalr, makelaar of beheorderp handelonde In do normale ultoefening van zlJn bedrljf al8 sodanig. Not felt, dat seon ondernoming van seon van do Yerdragulultendo Staten in do andere Verdragslultende Staat son vaste bedr1jfuinrlchting aanhoudt ultalultend voor hot aankopen van warren of andere koopmanagooderent sal op slohself sulk son vaste bodrtjfsinrlohtlng niot atempelon tot seon vast lnrlohtlng van sulk seon ondernoming. Indlon eon llohaam van eon der Vordraguluitonde 3taten eon doohteronderneming hoeft, welke eon llohaam van do andere Verdragslultende Staat In,of welke haar bodrijf In bodoolde andere Vordragslultende Mtaat ultoofent, sal eon der~clijke doohterondernomlng niet enkel op grond van dat felt geaoht worden eon vaste lnrlohting van hot aandeolhoudende liohasm

    to sijn. (J) Do ultdrukklng "bevoesde autoritelt" of "bovoogdo


    autoriteltenw, voor soveol betroft do Veronlgdo Staten: do *Commlssloner of Internal Revenue" of sljn bevoeogde

    (1939)

    [No. 1855]

    20
    Nederland betrefts do

    vertegenwoordiger on voor zoveoe

    Directeur-Generaal der Belastingen of zijn bevoegdo ver. tegenwoordiger; en met betrekking tot enig (gebiods) deel, waartoo bepalingen van dit Verdrag ziari uitgebreid ilnevolge Artikel XXVII, do bevoegdo autoriteit voor do uitvoerin5 in zulk (gebieds) deel van do belastingen, waarop de be.
    doolde bepalingen van toepassing zijn.

    (2) Voor do toepassing van de bepalingen van dit Verdrag door ieder van do Verdragsluitende Staten zal elke niet nader in dit Verdrag omschreven uitdrukking, tenzia het zinaverband iota anders vereist, do betekenis hobbeno welke die uitdrukking heeft volgens do wetten van die Verdragsluitende Staat met betrekking tot do belastingen, welke het onderwerp zijn van dit Verdrag. AIKEL III ,(I) Een onderneming van een der Verdragsluitende Staten zal niet aan belastingheffing door do andere Verdragaluitendo Staat met betrekking tot haar nijverheids- of handelavoordelen onderworpen zijn, tenzij zij in do andere Verdra~sluitende Staat haar bedrijf uitoefent door eon aldaar gevestigdo vast* Inrichting. Indien uitoefening aldus plants vindt mag do Mndere
    Verdragaluitende Staat do blasting slechts leogen op do inkomsten van zulk eon onderneming uit bronnen in die andere Staat. (2) Indien een onderneming van eon der Vordragaluitendo Staten in do andere Verdragsluitende Staat haar bedrijf uitoefent door middel van eon aldaar gevestigdo vaste inrichting, zullen

    aan zodanige vaste inrichting worden toegerekend do nijverheidsof handelsvoordelen, die zij geacht zou kunnen worden to behalen, indien zij eon onafhankelijke onderneming ware# die dezelfdo of

    (1,94)

    21

    [No. 1855]

    soortgelijke werkzaamheden uitoefende onder deoelldo of soortoo. like omstandighedent on die ale willekeurig derdo tranhaoties aanging met do onderneming waarvan zij een vast inrichting is. Do aldua toeoerekende voordelen zullent met inachtneming van do wotgeving van die andere Verdragsluitende Staat, geaoht worden inkomaten to zijn ult bronnen in die andere Verdragsluitende Staat. (3) Bij hot bepalon van de nijverheids- of handelsvoordolen ult bronnen in eon van do Verdragsluitende Staten, van eon onderneming van de andere Verdragsluitende btaat sullen geen voordelen geaoht worden op to komen uit de enkele aankoop door die ondero naming van waren of andere kooptpansgoederen in do eerstbedoelde Verdragsluitende Staat. (4) Do bevoegde autoriteiten van ae Verdragsluitende Staten kunnen bij overeenkomst regelen vaststellen voor do verdeling van nijverhoide- on handelevoordelon. AIRTIKEL IV Indien eon onderneming van eon der Vordragsluttende Staten, ult hoofdo van haar deelneming in de lbiding vanp of in het toeo ztcht op, dan wel in het kapitaal van eon onderneming van do andere Vardragsluitendo Staatt met do laatatbodoolde onderneming in hare handelso of ftinanoille relaties voorwaarden maakt, of am laatetbedoolde onderneming voorwaarden oplegt, afwijkend van die, welke souden sijn gemaakt met eon onafhankelijke ondero naming, mogen voordelen walke wonder doze voorwaarden souden zsin opgekomen aan eon van do ondernemingent begrepon worden in do belastbare voordelen van die onderneming.

    73095 0--2-vol. 2-29

    (1941) (

    [No. 18M]

    22
    ARTIKIL V

    Inkomsten van welke aard ook, vorkregen uit onroorendo sakent en interest van vorderin~en, vereokerd door hypotheek op onroerendo saken, sullen ultaluitend belastbaar siJn in de Vordragpluitende Staat waar do onroerende saken sijn gel0e1n of gevestl6d. ARTI1GEL VI (1) Inkomsten welke eon onderneming van eon der Verdragsluitende Staten verwerft met do exploitatie van sohepen of luchtvaartuigen, welke in die Staat siJn ingeschreven, sijn sleoc8t belastbaar in do Staat waar zodanige schepen of luchtvaartulgen ziJn inceschreven. Inkomsten welke eon dergelijko onderneming verwerft met do explvitatie van nist aldus inGoschroven schepen of luchtvaartuigen sullen vallen onder do bepalingen van Artikel III. (2) Zolang dit Vordrag van kraoht is tuasen do partijen waarop dit Artikel van toepassing is,sal het geaoftt worden do bepalingen van do regeling op to shorten, welke getroffen is door uitwisseling van nota's tussen do Verenlgdo Staten en Nederland, gedagtekend 13 September, 19 October en 27 November 1926P houdende eon voorsiening tot voorkoming van dubbelo inkometenbelasting op soheepvaartwinsten.

    (3) Ingeval do toepaseelijkheid van dit Artikel 13 uitgebreid tot gederlandsoh-Indif overeenkoastig Artikel XCYII, sal do uitwisseling van nota's tuseen do Verenigde Staten en Nederland, goedagtekend 8 Maart, 23 Mel en 8 November 1939, betreffende do toepassellJkheid van de In het tweede ld van

    (1942)

    23[No.
    dit Artikel bedoolde regaling op lederlandeoh-Indif, goaoht

    1850)

    worden to slJn oppeohort voor solang &le dit Artikel van toopassing blijft net betrokking tot Nederlandsoh-Induf, ARTUIM V11

    (1) got twist van do blasting van do Voronigde Staten op


    dividendent vorkroeen van eon liohaam der Vorenigde Staten door eon inwonor van Nederland of eon Nederlands liohaame In do Voernigdo Staten goon bodrijf ultoofenende door middoel van eon

    vast Lurlohting, sal niot moor bodragon dan 15 percent; behoudens dat bodoeld tareef 5 percent neit sal to boven ganm
    Indian sulk eon Noderlands 1iohasm middellijk of onsiddelliji tonminste 95 percent beheeret van heo &*hole stomreoht in hot liohas dat hot dividend betaalt, mit$ bovendlon niet moor dan 25 peroont van do brut* inkomaten van dat betalendo 1iohawm in verworven in do vorm van interest on dividenden, niet afkomstig van sIJn elgen onderhorige liohamen. Bodooldo tariofvermindering tot 5 percent sal niet golden ingeval do verhouding tusson do twos liohamen in hot leven is geroepen of wordt gehandhaafd in do Berate pleats met hot doel, hot bodoelde verlaagde tarite doelaohtig to worden. (2) Dividenden ult Nederlandse bronnen vorkrogen door eon inwoner of oen liohaa-dter Vorenigde Staten, In Nederland goon bodrijf ultoefenende door middel van eon vaeste nriohting, sullen vrijgesteld zijn van Nederlandes belaeting. (3)Elk van do Verdragsluitendo Staten is bevoegd dit Artikel op to seggen door eon eohriftoliake kennesgeving van opsogging langs diplomatieke weg tot do andere Verdragelultondo Mtaat to riohten voor of op do dertigrto Juni van onig Jaws volgende op hot eerate Jaar wamrvoor dit Vordrag van kraoht

    (1943)

    (No. 18553

    24

    word. in dat poval sal, dt Artikel ophoudep van kraht to saijn met In5gSn van do soroto Januari van hot jaaw na dote waarln do kenniegoving 1I vorstrokl.
    ARTIM VIII

    (1) Interest (op oblipatiost pwidbriovonp sohuldbowljson of torsako van snio andero vorm van sohuldonaarsohap)t andere dan Interest, wasrop Artikol V van dt Vordrag botrokking hooft# verkrogsen ult bronnon In do Vorenigdo Otiaen door eon inwoner Ilohaaa In do Vorenlaie Staten van Noderland of oon
    -foderlande

    peon bedrljf ultoofenonde door middel van son vast Inrlobtlng, sal sijn vrijoateld van belasting in do Vorenigde Staten; dose vrIJetolling sal oohtee nMet golden voow do Intoeoest wolke door eon loha der Verenldoe Staten word botaald an eson Noder lands lelohaa dat, middollIjk of onmiddollljk, moor dan 50 peooent beheorst van hot gohele atemrooht In hot 11ehasm dat do betaling doet. (2) Interest Cop oblIalosti, pandbrleven, sohuldbowljson of tersake van snip andere vora van sohuldonaaraohap)p andero dan Interest waarop Artikel Vvan dlt Vordrag betr]kklng hooft, vorkrogen ult in Nederland plogen bronnon door son lavoner of eon liohasm der Verenigdo 8taten, In oederland goon bedrljf ultoofenonds door middol van oon vast* Inrobhtlng, sal sItn vrIJpotold van belasting In Noderlondl dose vritotellIng sal sohter niet golden voor do Interest, welke door eon Nederland# 11oham word betd aan eon 1lohaam der Vonengde Staten datt ulddelltlj of onmlddollljk, moor dan 50 peroent behoorot van hot gehele steareoht In hot 11ohaca dat do betallng doeot.

    (1944)

    25
    A,DOL IX

    (No. 18]

    Royalties voor hot reoht tot hot sbruikmaken van autours. rocbten, ootrooien, modollen, pheime prooodi's on rooptoen, handoeloemorken on anders soortplijke saken, alomodo royalties, dasivnder boepaen huren, met betrokking tot films of torsake van hot pbruik van nijvorhoids., handels. of wotonsohappolifke installaties of uitrusting, vorkrogen uit bronjei in eon van do Tordragsluitende Staten door eon immnor of 11oham van do anders Vordraupluitende Mtato in do eerstbedoeldo staat Soon bodritjf ultootenende door middel van oen vast* inrlohting, sullen sijn vriagstold van blasting, gehoven door do oeratbedoolde Mtast. ARTIKEL X eon invoner of eon lioham van eon van do Verdragsluitendo Staton, uit bronnon In do Andero Verdragoluitendo Stat royalties Snietendo torsake van do exploitatis van mijnen, stoongrooven of natuurlljke hulpbronnen, of huren van onroerend sood, Is bovoegd to verklesen voor onig belastingjaa" san do bolasting van die Andoer Staat to worden onderworpen naar do suiveor opbrenpt aloof sulk eon inwoner of liohaam in do Andere Verdrauluitende Stet godurende hot bodoolde belastingjaar eon beri;jf door middel van son vast inriohtin ultoefendo. AIITUIM XI Eon inmnoer of eon liohaam van eon der Vordroagluitende Staten, in do anders Verdragsluitonde SUt pen bedrijf ultoefenendo, sal in die anders Vordrageluitende 8taat sUin vr-Jsetold van blasting op winsten voortapruitendo ult do vorkoop of vorm wiseeling van vomogensbestanddelen.

    (1945)

    two. '18001

    AITIKEL X11 Dividondon on Interest welke betauld worden door eon Nederlods liohasa sullen sijn vrijspstold van blasting van do Vereligdo Staten, behalve indion do genister Is seon buraor, eon
    inwonor of son lioham dor Veronido Statono 0 ANIUIK. XIII

    eon Nederlands liohaau sal sijn vrljgostold van blasting van do Yorenlgde Staten op sijn onverdeelde of nMot uitgokeerde verdionsten, winsten, inkomaton of reserves, indion hot ton ainoesen van do bevoeole autoritelten der Verenigde Staten kan aantonen, dat natuurlijke personen (anderen din burper van do Yoronigdo Staten) die inwoner van Nederland siJn, gedurendo do lasteto helft van hot belaetingjaatr middellitjk of onaiddellifk, onafgebroken moor dan 50 percent van hot 8ehele steareoht in bodoeld liohas hobben beheeret. ARI)E XIV (1) Do inkometenbelasting over eon belastingjaar aanp. vanden v66r I Januari 1936, aan do Verenide Staten vereohuldigd door eon natuurlljk porsoon (niot sijndo eon burger dir Yorenido Staten) wonendo in Nederland of door *e Noderlands liohaam, welke onbetaald is pbleven op hot tiadstip van hot in working trodon van dit Vordrag, kan worden gerogeld naar eon grondslag ton pmnoop van do Commissioner of Internal Revenue der Vorenigdo statenl behoudens dat hot tor afdooninS van do bodoelde verpliohting to botalen bedrag net to oven sal aun hot bodrag van do verpllohting dat sou sijn vastgesteld indien (a) do Revenue Aot van 1936 dir VeroniSdo Staten (behalve in hot goval van eon Nederlands liohaam waarvan

    (1946)

    27
    der Yerencdse Staten), en (b) do Artikelen X11 en X1I1 van dit Verdrao

    27 ieooj (tuG.

    seer Uan 50 percent van hot pehele stemrecht, gedurende do lasate helft van hot belastine#3aar, middellIjk of onmiddelljk, onafgobroken word beheeret door burgere of Inwonere

    veer bodoeld jaar van craoht waren goweest. Indion do belastingplichtig nMtO Indo sin der bodoolde Aevenue Ato, eon bedrijt in do Verenigde Staten ultoefende en aldaar gedurende hot belaatingJaar Seen kantoor ot bedrijfeinrlohting heeft ehadp sal hot bodrag van interest en booten niet meer belopen dan 50 percent van hot belastingbodraS ten aansien waarvan bedo elder Interest en booten siJn berokend. (2) lnkomstenbelastins der Verenlgde Staton over enis Do bolastingjaar, aangevanaen na 31 December 1935 en voor hot tijdetip van hot in working treden van dit Verdrsg, welke onbetaead is gobleven op hot tijdstlp van hot In working treden van dit Verdrag on welke betrekking had op eon natuurltjk persoont inwoner van Nederland (niest xijde @en burger der Yerenigdo Staten) dan wel betrokkinS had op eon Nederlando lichaasm sal worden vastgoeteld elso do bepalingen van do Artikelen XII. en XIII van dit Verdrag veer dot belastlngjaar reed* Begolden
    hadden.

    (3) Do bepalingen van hot eerste lid van dit Artikel sullen nMet van toepassing sien (a) toenazj de belastingplichtie bij do Oommiuuioner of Internal novenue binnen twee Jaren na do datum van hot in working treden van dit Vordrag schriftelitJ hot verseok indient, dat sain bolastingverplichting in vorenbodoelde sin sal worden vastgesteld# en hij daarbij sodanige

    (1947)

    [NA. 18M53

    28

    lnllohtinon verstrekt aIs do Comiuussoner nodig oordeelt, of (b) In elk Seval, warin do Comilofsionr do sokorhold beeft dat anlg versuim Insake belasting Is te wijten aan bodrog oet hot oopork do belastinS to ontdulken. AMIKML XV (1) Lonon, oslarlesen on soortgolljko belonlngen, &amede ponlooen on enlljfrenten, welko hotsij reohtetreeke door son van do Vordrasltattend* Staten, hetij door Inetelllngen In hot loven groopen door eon van do Vordragslultende Utaten of door do stUakundlge onderdelon of gubieden dairvan, botald morden aan natuurlljke personen In do anders Vordraslultende 8Ott, suflon slJn vrzijgsteld van bolatlUg in do laatotbodoelde Staat. (2) Partlouliers ponaloenen en lljfronten, gonoten ult eon der Verdragelultendo Staton on betald au natuurllJke personen In do andere Vordraplultende 8tat sullen sIan wrlseteld van belasting In do eerstbodooldo 8toat. (3) Do ultdrukkng "ponuloenon" In dit Artikel botokent perlodloke botalingen odan toU sake van bowosen dienaten of als vergoodlng voor bekomon letsel. (4) Do ultdrukkigns mljfrenteo In dit Artlkol betekent oen vaatO soon, perlodlok betaalbar op vasto tljdatlppen, hotsI;j godurende hot levont hetslj gedurende eon bepald antal jarn, Ingovolp eon verbnteonls tot hot doon van betallngen, wolke taat teUsnover eon voldoonde en volledIe topnprestatle in ge1d of peldwaardfe.
    ARTIJGEL XV1

    (1) Ren Inwoner van Nederland sal sijn vrljgoeteld va

    (1948)

    A9

    (No. 1895J

    bolaating van do Vereniso Staten op boloning voee arbold of persoonlijko dionsten, in do Toreonlo Staten vorrlohts, Indion hiL tI3dellJk In do Verenigdo Staten verblIJf houdt voor seon tlJdvak of tidvalkken, welke In het blatlnsgaw seon tota van honderd dried on taohti8 dapn Miet to boves pan, ite die beloning word* ontvangen voor arboid of perooonlljks dionsten, verrloht ale werknemor van of krsohtens eon oversenkome mle eon Inwoner ym Nederland ten lasts van wis, of sen lederlands liohas ton last* van hetwelk do beloning werkolljk kont. (2) Do boalingen van hot serste lid van dit Artikel sullen autatis mutan1 van toopaseing slan op seon Inwoner van do Verenigdo Staten die seon beloning geniet voor werksamhedoen of persoonlijko dienaten, verrlSt In Nederland*

    IMoogloeraen on andere docentnt die# Inwoner eljnde van on van do Vordrspluitendo Staten, overeonkonstig tuasen do Vordrapluitende Staten of tussen onderwel~inatellingen in do Vordrasluitonds Staten bosetande reslingen insako do uitwisee. ling van hoogleraron on andoer dooonton, do anders Verdragaluitendo Staat besoeken voor hot Veven van onderwias gudurende ten hoogato tweo jaren "n son universitit, hogesohool of andere ondesrw1jinetelllng in do aWdere Verdraseluitonde dtaat, sullen door die Stmat Mnet belast worden tersake van do boloning welke sij voor dat onderwias ontvangen. ACMIX XVIII Studenten of voor hot bedrijfsloven opgoleid wordende pereonen (volontairs) van de one Yordragsluitende otaat, die in do andors Verdragsluitendo Otat vsrbll jven ulteluitond voor

    (1949)

    (No. 1601

    80

    etudiedoeleinden of tot hot verkrilpn van bedrigtere"rng, sullen in laatstpnoemde Mtast nMet belstbiar sijn ter sake van door hen ult hot buitenland ontvangen uitkerinen ten dienste van hun onderhoud of hun studio.
    AJXWGL XII

    (1) Niettepnstaande enigs bepaling van dit Vordreg (afeesien van Artikel XV, eerate lid, wenneer het toepsesellk Is In hot gaeal van eon natuurlijk person die door bolde Verdragsluitende Staten alMe 81ataburger wordt bosohouwd), is elk der bold Verdrpaluitende Staten bevoee3, biJ hot vast. stollen van do belastinen, opoenten on andere verhogingen daaronder begropen - van slin Staiatburers, thinners of liehamen In do g3rondelag wearnaar dose belstngen worden Sehoven, alle bestanddelon van hot Inkomen to beop'gpenp welke beleatbair sijn volgens sijn elgen belastingwetgovingp al& ware dit Vordrag niet JA working getreden. (2) Voorsover sulks in overeensteming is met do beplingen van de Internal Revenue Code der Verenigde Staten, stemmen do Vorenigde Staten or med. in ale eon vermindering van do door de Verenlgde Staten geheven Income taxes toe to stian hot dairvoor in aamerklng komende bedrag ian belastingen ian Nederland betaild, hetalj reohtatreeks door de belastingpliohtis, hotsij door inhouding blJ de bron. (3) Voorsover sulks In overeenstemuin is net do bopallngen Van de Nederlandse belistingwotgeving, ateut Nederland or mode in eon vermindering van de Noderlandse belasting toe to st"in met betrekking tot Inkometon uit bronnen In de Verenigde Staten, teneinde rekening te houden met de Federal Income taxes aan do

    (1950)

    81

    [NO. 1M55

    Voronigdo Staten betualdt hetzij roohtstroeks door do bolastingpliohtIep hotsij door inhouding bij do bron,

    (1) Alls pornonon (behalve desulken, die burger van do Voreniado Staten warn op hot tIjdotip van hun vertrek ult Nederland alseedo do Noderlanderst die ult hoofdo van hun dienotbetrokkinS Ale riksaabtenaar In vasts dionst button hot Koninkrift verblijt houden on do bij hen inwonendo leden van hun gesin) die Nederland hobbon verlaten tussen 30 April 1939 en 31 Deoember 1941 (demo dog inboropen)p on die boeohouwd worden belasttinpliohtig to sijn volgens do bopalingen van do Nodorlandso wet betroftonde do vemopnsaanmabelastin of botreffondo do vormogonaheffing In eona, on die tijdons dat tijdvak inwonet worden van do Voreniloa Staten (overoenkomstig do wet op do Inkoimetnbelasting der Verenigd. Staten) en dio niet vd6r of op 31 Deoember 1945 naar Nederland torugkoordon om hun woonplaata in Nederland, in 4o sin van do wotgsving op do inkometenbelating to heakrijent sullen In Nederland belastbaar sijns (a) ingevolge do wet op do vemogenaamwasboeating
    uitsluttend voor do veorogensaanwas, voortvloeiende uit hun in Nedorland gelegen veruogen (ale omschroven in doze wetoin hot geval van nitei-nwoners) on uit hun worksaam. hoden In Noderland; (b) ingevolpo do wet op do vermogensheffing in eons uituluitend voor hun in Nederland gleogen vormogen (ale

    omohroven In dose wet inhot peval van niet-inwoners).

    (1951)

    [No. 18553

    82

    (2) All* peroonen die Noderland verlieten tuson 30 April 1939 on 31 Deoeuber 1945 (dose das inbegropen) on die ton til1de van hun vertrok uit lederland burger van do Verenfldo Staten warren, on die besohouwd worden belastingpliohtig to slJn volgens do bepalingen van do Nederlandee wet betreffendo do vermogena. aanwaabolastlng of betreffende do verogoeneheffing In son## on die Inwoner van do Verenigde Staten warden (overoenkoutiS do wet op do inkoastenbelasting der Voronigdo Staten) v6Wr of op 31 Deooember 1945P sullen in Nederland belaatbaar silos (a) ingevolge do wet op do vermogenaaanwaabelasting ultalultend voor do vermogensaanwasp voortvloelonde uit hun in Nederland gelegen vereogen (ale omeo'.xeven in dose wet in hot guvat van niet-invoners) en ult hun worksaamhoden In Nederlandl (b) ingevolge do wet op do vormogensheffing In sons ultuluitend van hun In Nederland gelegen vermopn (ale omsolrovan In doe wet In hot Seval van niet-inwonors). (3) Do bepalingen van dit Artikel sullen perekend worden van kraoht to sin aloof dit Vordrag in working was setroden op

    do datum van in working treden van do Nederlandse wet betreffende do vermogenseaanwasbelasting, of vermogenshaffing ineeasp al naar gelang van hot goval. ARIW sullen sodanige l MCI

    Do bevoegde autoriteiton van do Verdrageluitende Staten inliohtingen ultwitselen (sijnde inliohttngen welke dem autoritoeten geordend voorhanden hebben) ale nodig on aan do bepalingen van dit Vordrag ultvoering to Seven of on fraud to voorkomen of om uitvoering to Seven aan wetteliJke

    (1952)

    83
    lastingen welke hot onderwerp van dit Verdra8 ultmaken.

    (No. 18M)

    voorsioningen tepn wetsontduikin8 met betrekking tot do beElke aldus uittpwiaeslde Inliohting sal ale geheim behandeld wordon on sal niet ter kennia worden gebrsoht van en1g persoon, andera dan die blast met do aanalagreplln8 en do inning van do belastingen, welke hot onderwerp van dit Verdrag uitmaken. Gonerlel inliohting ale hiervoor In bedoeld, welke eon handele-, bedrijfa-, niaverheids- of beroopageheol of eon handworks- of handelewerkwijse sou onthullon, sal worden uitgewiseeld. ATIIKEL XXII (1) Do Verdragaluitende Staten nomen op sioh elkander hulp on bijatand to vorlenon bij do inning van do belastingen welke hot onderwerp van dit Vordrag siJan, met inbegrip van interest, van koaten, van verhogingen van belasting en van boeten van nietatrafreohtolijko aard. (2)In geval van vorzoeken tot invordering van belastingen kunnen onherroepolljk vaatgestolde belaetingvorderingen van seon der Verdragoluitende Staten door do andere Vordrasseluitendo Stoat tar invordering worden aanvaar4 en In die Staat worden goInd overeenkomatig de wetten welke van toopasaing sijn voor do invordering on inning van sijn osien belastinsen. Do aangesoohte Staat sal niet gehouden sijn over to gaan tot naatreoelen van ozeoutie waarvoor do wet van do versookende Mtaat geon voorsioning inhoudt. (3)Elk versook sal vorgoseld paen van bosoheiden waarult blijkt dat volgena do wetten van do versookende Stast do beleatingen onherroepolijk sltn komn vast to ataan.

    (1958)

    (No. 1M]

    84

    (4) Do hulp, bodoold in dit Artikol sal nit verleond worden ten aaazien van do burors, liohamen of andere sonhodon van do aenezoahte Stoat, behave voor zover siJ nodlB is on to verzekerenp dat do vrijstellluS of hot verlsaade tareof van do belasting volpens dit Verdrag eon sodanige buroerst liohamen on andere aenheden toogekendp nfit sal worden ponoton door porsonon die niot tot sodanfie gunsten gereohtlgd zsjn* ARTIDZ XXIII (1) In peen geval sullen do bepalingen van do Artlkelon XXI on XXII duadanig worden ultgolosd, dat slj oon doe Tordrasslultende Staten do verpllohtin8 opleggen (a) administratlevo eaatregelon to noeent welke in strijd slJn met do voorohriften on hot gebruik van eon van beode der Verdragslultendo Staten, of (b) bijzonderhoden to verstrokken, welke niet verkrijgboar slJn volgens sljn eogen wetgoving of die van do versoekende Stoat. (2) Do Stoat aan welke eon versoek on inliohtingen of bijetand is gedaan zal so spoodig mogolijk aan hot gedano" versoek gevolg Seven. Noohtans ken do bodoolde Stoat weigeren aan oen dorgelift versook to voldoon on rodenen van openbaor boloid of indien inwilliging sou modebrengen do sohending van eon handolo-, bodrijfs-p niaverheids- of beroopageheim of van eon handwerkaof handelswerkwazse. In eon dergeliak geval zal dose Stoat do vorsoekende Stoat so spoodig mogelljk inliohten. AnhaIv XXIV Ingeval do handeling von do bolastingautoriteiton van do

    (1964)

    a5

    [No. 18M)

    Vordragsluitende Staten hooft pleaid of sal leiden tot dubbelo belstinghefflng In strijd met do bepalingen van dit Vordrq, sal do belastinpliohtise hot reoht hebben eon klaoht in to dienen bij do Staat waarvan hij Staatsburger of onderdaan Is, of Indien hij niet Staatsburpr of onderdaan van eon van do beide Yerdraguluiten4a Staten is, tot do Stoat wasr hij sijn woonplaats heft, ofp Indien do belastingpliohtige eon liohaam is, tot do 8toat waar dit Is opserioht of peorganiseord. Zou

    do klaoht pprond worden saoht, dan sal do bevoegdo autorilteit van die Stoat or nar stroven met do bevoeodo autoriteit van do andere St~at tot overeonstemlni to komon tonsinde tot son billifkeiveraijding van do be iolde dubbelq belastinheffing t

    AAT1K1' XZY (1) kn do bapalinpn vaz dit Vordrag sal pon ultlog worden gepgven welko op enigtrlel wijso beperkt snipe vrijstolling, aftrokj vernindering of andere togemoetkoalng, door do wetten van eon der Verdrageluitendo Staton toookond, met betrekking tot hot vastatellen van de door die Staat goheven

    blasting.
    (2) Ingovel enigo zuoeillakheid of tUijfel rijst iet betrekking tot do uitlegging of do toopassing van dit Verdrag, sullen do bevoegdo autoritelten van do Yerdrapsluttende Stateo or naar streven do aangelegenheid In onderl~ng overleg to roeoleno

    (3) Do burgers of onderdanon van eon der Verdragsluitendo


    Staten sullen, solang zsj inwoner van do andere Verdragsluitendo Staat sian, daarin nlet onderworyen M.iJn aan andere of san drukkender belastingen dan die waaraan do burgers of ondordanen

    (1955)

    (No.

    36

    van die andere Vsrdragoluitende Stoat onderworpen sign, die in sijln gbied wonen. Do uitdrukking "burgers" of "onderdanonm gebesigd In dit Artikel omvat mode alley reohtepersonen, vennootsohappen on vereni~gngen die haar reohtspositle ontlenen aan of opgerioht sijn volgens do wet van kraoht in do ondersoheidene Verdragaluitende Staten. In dit Artikel betekent hot woord eon staatsObelastingen" elks belasting van elks soort of benaming, ongeaoht of het eon Ritksbelasting, eon federal blasting, belasting, eon provinolale of ean gemeentelijke belasting betrefte AlTIICEL XXVI (1) Do autoritelten van elk der Verdragsluitende Staten kunnen in overeenstenming met het gebrulk in die Staat, uitvooringsbepalingen vastatellen, nodig om de bepalingen van dit Verdrag uit to voeren. (2) Ten aanzien van do bepalingen van dit Verdrag met betrekkin8 tot do uitwieseling van inliohtingen en de wederkeroge bijstand bij do inning der belastingen, kunnen do bevoegde autoriteiten in gemeensohappelijk overleg regelen vastatellen betreffende do to volgen gedragalijnp do formulieren voor aanuvragen en voor antwoorden daarop, do herleiding van do jount, do besohikking over do goeInde bedragent de minima der voor Invordering in aanaerking komende bedragen, en dergelijke saken. AIIKM XXVII (1) Elk der Verdrageluitende Staten is bevoegdt ten tijde van do uitwisaeling van de bekraohtigingsoorkonden of daarna tiJdons do geldigheidsduur van dit Verdrag, door middel van eon sohriftelifke kennisgeving van ultbreiding aan de andere Verdragsluitende Staat verstrekt langs diplomatieke wog, do

    (1956)

    37

    [No. 1M1,

    wens kenbaar to maken van do Regering van eon oversees deol van hot Koninkrijk (ingoval hot Noderland betreft) of van oon over. coos gebiodsdoel (ingoval het de Veronigdo Staten betreft) hetwelk belastingen van in wozen gelijksoortige aard heft als die, wolko het onderwerp van dit Verdrag zijno dat do working van dit Vordrag, hetzij in zijn geheol, hetzij ten aenzien van sodanige bepalingen ala geaoht kunnen worden in hot bijzonder van toepasaing to zijn, uitgebreid sal worden tot eon (gobieds) deal ala evonbodoeld. (2) Ingoval eon kenniageving door eon van de Vordragsluitonde Staten isverstrekt overeenkomstig het oerste lid van dit Artikel, sullen dit Vordrag, of die bepalingen daarvant wolks in do kennisgeving moohten aijn vermold, toopassolijk sijn op elk in do bedoelde kennisgeving genoemd (gebieds) deel, sulks met ingang van do eerste Januari volgendo op de dagtekening van eon sohriftelijke mededeling langs diplomatieke weg, gerioht tot do bedoelds Verdragsluitendo Staat door de andere Verdragsluitonde Staat inhoudende, dat na sodanigo handeling door de laatstbodoolde Staat als vereist wordt door zijn eigen voorschriften, do bedoelde kennisgeving met betrekking tot hot onderwerpolifke (gebieds) deal wordt aanvaard. Bij gebreke van sulk eon aanvaarding sullen geen van do bepalingen van dit Vordrag toepasselijk zijn op dat (gebieds) d.l. (3)Te allen tilde na vorloop van eon jaar sinds hot tijdstip van in werking treden van eon uitbreidingg tot stand gebracht krachtens hot eerste on het tweeds lid van dit Artikelf. Is elk dor Verdragsluitende Staten bevoegd om, door eon sohriftelitke, son do andero Staat langs diplomatieke weg vor= strokto kennisgoving van opzoging, seon einde to maken aan do

    78095 0-42-vol. 2-80

    (1957)

    (No. 18551

    88

    toopasoeliJkhoid van dit Vordrag $on aansion van elk deal of pbiod, waartoe hot Verdrag, of walke slzner bepalingen ookp was uitgebreid. In dat goval sullen dit Ve.rdrag of sodanige bepalingen daarvan ale in do kenniageving van opSogging ioohten sijn vermeldp voor het deol of gobied in bedoolde kennisgoving van opegging vermeld, ophouden van toopassing to szin met ingang van do aerate JAnuari na hot verstrifken van eon termian van zes maanden na de dagtokening der kennisagving; met dien verstande echter, dat dit niet do voortduronde toopassing sal aantasten van het Verdiag of van wolko van stin bepalingen ook, op do Verenigde Staten, op oederland, of op welk deol of gabied ook (niet vermeld in do kennisgoving van opegging) waarvoor hot Verdrag of bodoelde bepaling daarvan geldt. (4) Voor do eoopassing van dit Verdrag ton aansien van eon deal of gabled, waartoe hot is uitgebroid ingevolge eon kennis. giving door do Vereni~de Staten of Noderland, sal aan vorwiasingen naar do "Verenigdo Staten" of naar "Nederland*, of naar de ene of do andere Verdragslultende Staatp al naar gelang van hot geval, do ultleg worden sgeoven, dat uij betrekking hebben op sulk eon deal of gobied.
    ANTI=E XXVIII

    (1) Dit Verdrag sal worden bekraohtigd on do bekraohtigings. oorkonden sullen so apoedig mogelijk worden uitgewisseld to Washington. (2)Dit Verdrag treedt in werking do aerste Januari voorafSande aan het jaar waarin do uitwissellng van do bekraohtigins. oorkonden plants vindt. Hot blift van kracht gedurende eon tijdvak van vijf jaren to beginen met gemelde datum e* voow

    (1958)

    39

    (No. 1855]

    onbepsalde tIJd duma, doob kan door elks Vordraplultende 8toat worden opgesogd san hot einde van hot tijdvak van vlJf jaren of op Ieier tidstip daarna, mite tonminsto sea maanden order eon kennisgeving van opzesgOng Is afgegovens tredonde do pvolgon der opseoging in working op do aerate Januarl na hot verstriken van hot tijdvak van see .vaandeno OEDAAZ to Washington# in tweevoud, in do Dgelsoe en in do Nederlandes teal, hobbende beld. tokaten gelIJke rechtso kraohto op hodon do 290 April 1948.

    I3 STATEN VAN ANE REU& G VAN DE VEw vOO DE G C M&w.i

    ,A

    [MAL]
    VOOR D RB .ING E VAN HET KONINM8K DM NEDLNDNs

    E. v~ix Kumme~ N.
    [BEAL]

    (1959)

    (No.

    8M34

    40
    S the Senate of the United States of America, by their

    AND WIin

    resolution of June 17, 1948, two-thirds of the Senators present con. curing therein, did advise and consent to the ratification of the aforesaid convention subject to certain reservations, as follows: "(1) The Government of the United States of America does not accept Article XI of the convention relating to gains from the sale or exchange of capital assets. "(2) The Government of the United States of America does not accept Article XIII of the convention relating to United States taxation of the undistributed earnings, profits, income or surplus of a Netherlands corporation. "(3) The Government of the United States of America does not accept Article XIV of the convention relating to settlement of unpaid United States income tax liability unless there be eliminated therefrom, (a) references now appearing therein to Article XIII and (b) any language which might prevent the taxation by United States of capital gains, if any, taxable under the revenue laws of the United States for the respective years in which such gains were realized." AND WJIEMES the texts of the aforesaid reservations were communicated by the Government of the United States of America to the Government of the Kingdom of the Netherlands and thereafter the Government of the Kingdom of the Netherlands gave notice of its acceptance of the aforesaid reservations; AND WHEREAS the aforesaid convention was duly ratified by the President of the United States of America on November 19, 1948, in pursuance of the aforesaid advice and consent of the Senate and subject to the aforesaid reservations, and was duly ratified on the part of the Kingdom of the Netherlands; AND WHMREAS the respective instruments of ratification of the aforesaid convention were duly exchanged at Washington on December 1, 1948, and a protocol of exchange of instruments of ratification, in the English and Dutch languages, was signed on that date by the respective Plenipotentiaries of the United States of America and the Kingdom of the Netherlands, the English text of which protocol reads in part as follows: "The ratification by the Government of the United States of America of the convention aforesaid recites in their entirety the reservations contained in the resolution of June 17, 1948 of the Senate of the United States of America advising and consenting to ratification of the convention aforesaid, the texts of which reserva-

    (1960)

    41

    (NO.

    =3

    tions were communicated by the Government of the United State. of America to the Government of the Kingdom of the Netherlands. The Government of the Kingdom of the Netherlands has accepted the reservations aforesaid. Accordingly, it is the understanding of both Governments that Article XI and Article XIII of the convention aforesaid shall be deemed to be deleted and of no effect and further that, with respect to Article XIV, there shall be deemed to be deleted therefrom and of no effect (a) all references therein to Article XIII and (b) any language which might prevent the taxation of capital gains, if any, taxable under the revenue laws of either of the two Governments for the respective years in which such gains were realized."; AND WHEREAS it is provided in Article XXVIII of the aforesaid convention that the convention shall become effective on the first day of January in the year last preceding the year in which the exchange of instruments of ratification takes place; Now, THEREFORE, be it known that I, Harry S. Truman, President of the United States of America, do hereby proclaim and make public the aforesaid convention to the end that the said convention and each and every article and clause thereof, subject to the aforesaid reserva. tions, may be observed and fulfilled with good faith, on and from the first day of January, one thousand nine hundred forty-seven, by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. IN TE8TimoNy wHEREor, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. DONE at the city of Washington this eighth day of December in the year of our Lord one thousand nine hundred fortyeight and of the Independence of the United States of [SEAL] the one hundred seventy-third. America HARRY S TRUMAN By the President:
    ROBERT

    A LovTrl

    Acting Secretary of State

    (1961)

    SUPPLEMENTARY PROTOCOL (SIGNED JUNE 15, 1955) AND EXCHANGE OF NOTES RELATING TO TERRITORIAL EXTENSION.

    (1963)

    PresidentialMe8sage of Transmittalto Senate of Note Relating to TerritorialExtenmion

    (1965)

    83t) CONGRESS

    2d, ASe/s~ieon

    SENATE

    EXECUTIVE

    NOTIFICATION BY THE NETHERLANDS GOVERNMENT WITH RESPECT TO THE NETHERLANDS ANTILLES

    MESSAGE
    FROM

    TIE PRESIDENT OF THE UNITED STATES


    TRANSMITTI NG

    A NOTIFICATION EMBODIED IN A NOTE FROM THE NETHERLANDS AMBASSADOR IN WASHINGTON TO THE SECRETARY OF STATE, DATED JUNE 24, 1952, WITH A VIEW TO EXTENDING THE OPERATION OF THE CONVENTION OF APRIL 29, 1948, RESPECTING TAXES ON INCOME AND CERTAIN OTHER TAXES, TO THE NETHERLANDS ANTILLES, WITH CERTAIN LIMITATIONS BY THE NETHERLANDS GOVERNMENT

    JULY 24, 1954.-The Notification was read the first time and the injunction of secrecy was removed therefrom and together with the President's message and all accompanying papers, was referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    report by the Secretary of State-in regard to the proposed extension.


    (1967)

    THE WHITE HOUSE, July 4, 1954. To the Senate of the United States: With reference to the convention of April 29, 1948, between the United States of America and the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and certain other taxes, I transmit herewith, for consideration and approval by the Senate, a notification given by the Government of the Netherlands, in accordance with article XXVII of that convention, with a view to extending the operation of the convention, with certain limitations, to the Netherlands Antilles. The notification is embodied in a note dated June 24, 1952, addressed by the. Netherlands Ambassador in Washington to the Secretary of State, a copy of which is transmitted herewith together with the

    NOTIFICATION WITH RESPECT TO MHE NETHERLANDS ANTILLES

    Upon the recommendation of the Department of State and the Department of the Treasury, it is urged that the Senate approve the

    extension to the Netherlands Antilles, as proposed, of provisions of the con mention of 1948 with the Netherlands. DWIGHT D. ElsE:owl.R.
    (Enclosures: (1) Report by the Svecretary of State; (2) copy of note of June 24, 1952, from the Netherlands Ambassador.)
    DEPARTMENT OF STATE,

    The PatEsIDI;N,,T,

    TEa8hington, July 20, 1,954.

    in a note dated June 24, 1952, addressed by the Netherlands Ambassador in Washington to the Secretary of State, a copy of which is enclosed for transmission to the Senate. The convention of 1948 with the Netherlands (Treaties and Other International Acts Series 1855; 62 Stat., pt. 2, 1757; S. Ex. I, 80th Cong., 2d sess. ;S. Ex. Rept. No. 11, 80th Cong., 2d sess.) was approved by tle Senate on June 17, 1948, subject to certain reservations which had the effect of dleleting articles XI and XIII thereof and of eliminating from article Xi-(a) references now appearing therein to article XIII and (b) any language which might prevent the taxation by United States of capital gains, If any, taxable tinder the revenue laws of the United states for the respective years in which such gains were realized.

    The WJ'hite !Iouse. Tim, IPRESIDENT: The undersigned, the Secretary of State, has the honor to submit herewith, for transmission to the Senate to receive the approval of that body, a notification given by the Government of the Netherlands, in accordance with article XXVII of the convention of April 29, 1948, between the United States of America and the 1Ntherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and certain other taxes, with a view to extending the operation of the convention, with certain limitations, to the Netherlands Antilles. T'ie notification is embodied

    On November 19, 1948. after the Senate reservations had been communicated to and accepted by the Government of the Netherlands, the convention of 1948 was ratified by the President, subject to those reservations, by the exchange of instruments of ratification on I)e.einher 1, 1948, at which time there was signed by the respective plenipotentiaries of the two countries a protocol of exchange in which the aforesaid reservations were textually set forth. Article XXVII of the convention of 1948 contains provisions in paragraph (1) whereby either party may, by a written notification to the other party through diplomatic channelsdeclare the desire of the government of any overseas part of the Kingdom (in the ea.sAe of the Net herlands) or overseas territory (in the case of the United States), which imposes taxes substantially similar in character to those which are the subject of the present Convention, that the operation of the present Convention, either hii whole or as to such provisions thereof as may be deemed to have special applicat ion, shall extend to such part or territory.

    It is provided in paragraph (2) that, in the event a notification is given by one of the parties in accordance with that procedure(1968)

    NOTIFICATION WITH RESPECT' TO THE NETHERLANDS ANTILLES

    the present Convention, or such provisions thereof as may be specified in the notification, shall apply to any part or territory named in such notification on and after the first (lay of January following the date of a written communication through diplomatic channels addressed to such Contracting State by the other Contracting State, after such action by the latter State as may be necessary in accordance with its own procedures, stating that such notification is accepted in respect of such part or territory. In the absence of such acceptance, none of the provisions of the present Convention shall apply to such part or territory.

    The notification by the Government of the Netherlands proposing that tile operation of the convention be extended to the Netherland Antilles was given in accordance with article XXVII (1). Shortly after receipt of that notification, a copy of the note from the Netherlands Ambassador was sent by the Department of State to the Department of the Treasury, together with the material referred to therein relating to pertinent regulations operative in the Netherlands Antilles. In the letter of transmittal it was stated:
    For the purpose of making necessary preparations for seeking the approval of the Senate to the proposed extension of the-convention of 1948 to the Netherlands Antilles, the Department of State would appreciate being informed whether, in accordance with Article XXVII (1) of the convention of 1948, the pertinent laws of the Netherlands Antilles are deemed to he "substantially similar in character" to those which are the subject of the convention and whether, in the view of the Department of the Treasury, the proposed extension is acceptable.

    The Department of State informed the Netherlands Embassy, in a note of acknowledgment, that the question of extending the operation of the convention to the Netherlands Antilles would be given study by the appropriate authorities of this Government, that it would be necessary to receive the approval of the Senate before the proposed extension could be accepted, and that it did not appear possible for the extension to be made effective on January 1, 1953, the date mentioned in the Ambassador's note. In accordance with article XXVII (2) of the convention, the extension would become effective on January 1 following the date of a note from this Government to the Netherlands Government accepting the proposed extension. It will be observed that, according to the note from the Ambassador, the Government of the Netherlands is aware of certain necessary limitations on the application of the convention to the Netherlands Antilles, if and when the extension is made effective. Those limitations are as follows: 1. Article I (1) would have application in the Netherlands Antilles only in respect of income taxes and profits taxes, since no property tax is levied in that jurisdiction. 2. Paragraphs (2) and (3) of article VI would have no application in the Netherlands Antilles, since the agreements of 1926 and 1939 referred to have no application in the Netherlands Antilles. 3. Articles XI and XIII would be deemed to be deleted and of no effect, and article XIV would be modified, in accordance with the reservations above-mentioned. 4. Article XX would have no application in the Netherlands Antilles, since the provisions thereof relating to certain Netherlands propertv taxes have no bearing on Netherlands Antilles taxes. In the application of article 11 (1) (j) of the convention, the term "competent authority" would be taken to mean, in the case of the Netherlands Antilles; the Administrateur van Financien or his duly
    authorized representative.

    The Department of State has now received from the Department of the Treasury a communication indicating that the detailed study of

    (1969)

    NOTIFICATION WITH RESPECT TO THE NETHERLANDS ANTILLES

    the income-tax laws of the Netherlands Antilles has been completed. The Department of the Treasury states that the extension to the Netherlands Antilles proposed in the note of Juno 24, 1952, from the Netherlands Ambassador is acceptable. Without undertaking to review all of the technical aspects of the question which have been considered by the Department of the Tieasury in reaching this decision, some of the pertinent facts are outlined below. The Netherlands Antilles are a group of islands off the coast of Venezuela, including Aruba, Bonaire, Curacao, Saba, St. Eustalius, and St. Martin (Netherlands part). They do not include Dutch Guiana (Surinam). It appears that all of the islands of the group come within the scope of one income-tax law generally referred to as an Ordinance of Curacao and that the latter gives its name to the Government of the Dutch West Indies which consists of a governor and a council having jurisdiction over the entire group. There are various administrative aspects of the proposed extension. In the light of the Netherlands Antilles system of income taxation, the Department of the Treasury has considered those aspects as ap. plied to the taxation of corporations and of both resident and nonresident individuals. If necessary in connection with Senate consideration of the proposed extension, the Department of the Treasury is prepared to furnish data covering the technical details and a statement concerning the article-by-article study which it has made with respect to this matter. For present purposes, reference will be made to a few of the more important points. In the application of articles III and IV of the convention, the United States wotld, on a reciprocal basis, subject to its taxation the business income of an enterprise of the Netherlands Antilles only if that enterprise has a permanent establishment in the United States. These provisions have application only to "industrial and commercial profits," that is, the field of business income. With reference to article VI of the convention, which provides for reciprocal exemption of shipping and aircraft profits, it should be pointed out that the Netherlands Antilles do not impose any income tax on nonresident entities deriving income from the operation of ships and aircraft to and from the islands. With reference to article VII of the convention, it should be mentioned that the Antilles do not impose any income tax on dividends derived from sources therein to nonresidents thereof. The article provides for a reduction of United States tax on outgoing dividends to 15 percent and, in the case of recipients of dividends from wholly owned subsidiaries, a reduction to 5 percent. Article VIII provides for reciprocal exemption of outgoing interest payments. The Antilles impose -a tax only on outgoing interest situated exemption of outgoing from debts secured by real 'estate reciprocal therein. Article IX, which provides for royalties, would have effect only in the United States. The Antilles d( not impose a tax on outgoing royalties. Article XVI, which provides for reciprocal exemption of earned income of individuals within prescribed limitations, would have the effect of modifying the laws of both the United States and the Antilles. Articles XVII and XVIII provide for reciprocal exemption of teacher income and student or apprentice remittances. Article XIX provides that one country will allow a credit against its tax for taxes imposed by the other country to the extent provided (1970)

    NOTIFICATION WITH RESPECT TO THE NETHERLANDS ANTILLES

    by its laws. As in the case of the Netherlands, the Antilles law does not provide for a credit to an individual who receives income, such as (tividenlds, from the United States. As a result, United States citizens resident in the Antilles, as well as Antilles citizens, would receive no credit with respect to taxes on such income. American employees of the United States interests which operate a refinery on Aruba would be among those atfected by this provision. Although it was not considered advisable, in connection with the request of the Netherlands for an extension of the existing convention to the Antilles, to propose a renegotiation of or an amendment to the credit article, it is considere(l advisable to call the matter to the special attention of the Senate for such action as it may desire to take with respect thereto. The administrative cooperation provisions in articles XXI to XXVI, inclusive, would facilitate operation of the convention, as modified. between the United States and the Antilles. Article XXII provides for mutual assistance in collection of taxes. So far as this provision is concerned, special mention is made as this provision is similar to a provision which the Senate, in considering certain other incometax conventions (for example, those with Greece, Norway, and the Union of South Africa), expressed an interpretative understanding that each of the Governments might collect the other's tax solely in order to insure that the exemptions or reduced rates of tax provided under the convention would not be enjoyed by persons not entitled to such benefits. It is considered advisable to call the special attention of the Senate to the provision for such action as the Senate may desire to take with respect thereto. In accordance with established policy (see S. Ex. Rept. No. II 80th Cong., 2d sess.), any proposal for extension, before being accepted by the United States is to be submitted to the Senate for approval. It is considered that the proposed extension to the Netherlands Antilles of the convention of 1948 with the Netherlands, modified as indicated hereinbefore, merits favorable consideration by the Senate. If and when the Senate has expresssed its approval of such extension, the Government of the Netherlands will be notified through diplomatic channels of the acceptance by this Government of the proposal, in which event the extension, subject to the limitations specified, would become effective on January I following the date of such notification of acceptance. Respectfully submitted. JOHN FOSTER DULLES.
    (Enclosure: Copy of note of June 24, 1952, from the Netherlands Ambassador.)

    [Text of note]

    (1971)

    PresidentialMessage of Transmittalto Senate of Supplementary Protocol (including materialsenclosed therewith)

    (1978)

    NQTU CONGRESS

    10t Sesuton

    JI

    SENATE

    EXECUTivE

    PROTOCOL WITH THE KINGDOM OF THE NETHERLANDS SUPPLEMENTING THE CONVENTION RELATING TO TAXES ON INCOME AND CERTAIN OTHER TAXES WITH RESPECT TO THE NETHER-

    LANDS ANTILLES

    f Ej 8 S A G1 1'

    THE PRESIDENT OF THE UNITED STATES


    TRANSMITTINO

    THE PROTOCOL, SIGNED JUNE 15, 1055, SUPPLEMENTING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM OF THE NETHERLANDS WITH RESPECT TO TAXES ON INCOME AND CERTAIN OTHER TAXES FOR THE PURPOSE OF FACILITATING EXTENTION TO THE NETHERLANDS ANTILLES

    JuNE 22,

    1955.-The protocol was read the first time and the injunction of secrecy was removed therefrom, and together with all accompanying papers was referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    To the Senatp. of the United aStoae: ratification, I transmit the protocol, signed on Jte 1-5), 1955, supplementing the convention between the United States of America and

    With a view to receiving the advice and consent of the ,e('nIiI(, to

    the Kingdom of the Netherlands with respect to taxes on income an(d certain other taxes for tfhe purpose of facilitating extension to the Netherlands Antilles. I also transmit for the information of the Senate the report i)y the The protocol has the approval of the Department of State mid the Department of the. Treasury. I)w uIrr D. lEISENIIoWE:R.
    THE WHITE HOUSE, June 22, 1955.

    Secretary of State with respect to the protocol.

    (E'nlosures: (1) Report of the Acting Secrettary of State; (2) prolocol sup)phlementing the income-tax convention wiih the Netherlands.)

    (1975)

    PROTOCOL WITH THE KINGDOM OF THE NETHERLANDS DEPARTMENT OF STATE,

    Washington, June 00, .1955. The PRESIDENT, The White House: The undersigned, the Acting Secretary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the President approve thereof, a protocol supplementing the convention between the United States of America and the Kingdom of the Nether. lands with respect to taxes on income and certain other taxes for the purpose of facilitating extension to the Netherlands Antilles. The protocol was signed at Washington on June 15, 1955. It is desired that the protocol be considered in conjunction with the proposal, presently under consideration in the Committee on Foreign Relations, for extending the operation of the convention, with certain limitations, to the Netherlands Antilles. The proposal for such extension was embodied in a notification given by the Government of the Netherlands in accordance with provisions of the convention and communicated to the Senate with the President's message of July 24, 1954 (S. Ex. I, 83d Cong., 2d sess.). The basic convention, commonly referred to as an income-tax convention, was signed at Washington on April 29, 1948, was sub. mitted to the Senate with the President's message of May 19, 1948 (S. Ex. 1, 80th Cong., 2d sess.), and was brought into force on December 1, 1948, subject to certain reservations as set forth in the Senate's resolution of advice and consent to ratification (62 Stat., pt. 2, 1757). Article XXVII of the income-tax convention with the N'etherlands contains provisions in paragraph (1) whereby either party may, by a written notification to the other party through diplomatic channels-

    declare the desire of the government of any overseas part of the Kingdom (inthe
    case of the Netherlands) or overseas territory (in the case of the United States),

    subject of the present Convention, that the operation of the present Convention, Article XXVII (2) of the convention provides that, in the event a notification is given by one of the parties in accordance with such procedurethe present Convention, or such provisions thereof as may be specified in the notification, shall apply to any )art or territory named in such notification on and after the first day of January following the date of a written communication through diplomatic channels addressed to such Contracting State by the other Contracting State, after such action by the latter State as may be necessary In accordance with its own procedures, stating that such notification is accepted in respect of such part or territory. In the absence of such acceptance, none of the provisions of the present Convention shall apply to such part or territory.

    which imposes taxes substantially similar in character to those which are the

    either in whole or as to such provisions thereof as may be deemed to have special application, shall extend to such part or territory.

    The notification by the Government of the Netherlands proposing that the operation of the convention be extended to the Netherlands Antilles was given in accordance. with article XXVII (1). The Department of the Treasury made a detailed study of the incometax laws of the Netherlands Antilles and informed the Department of. State that the proposed extension to the Netherlands Antilles is acceptable. The proposal was then communicated to the Senate, as indicated above, in accordance with established policy whereby any proposal for extension, before being accepted by the United States, is to be submitted to the Senate for approval.
    (1978)

    PROTOCOL WITH THE KINGDOM OF THE NETHERLANDS

    In connection with the consideration by the Committee on Foreign Relations of the proposed extension to the Netherlands Antilles, questions have arisen which make it appear desirable to effect certain modifications in the convention, so far as application to the Netherlands Antilles is concerned, in order to facilitate action with a view to extending the operation of the convention to that overseas area. For that purpose the supplementary protocol submitted herewith has been negotiated and signed. Article I of the. protocol would have the effect of modifying paragraph (3) of the credit article in the convention so as to spell out precisely, in its application to the Netherlands Antilles, the deduction or credit which the Netherlands Antilles shall allow against its tax for income tax paid to the United States by United States citizens resident in the Antilles with respect to inconle they receive from sources within the United States. This involves a special benefit to United States citizens which can be effected only through application of the convention so modified. Article II would have the effect, as applied to the Netherlands Antilles, of making the extension effective "on and after the first (lay of January immediately preceding the (late of a written communication" ad(dressed by the United States Government to the Netherlands Government, stating that the Netherlands notification is accepted in respect of the Netherlands Antilloe. Article III of the protocol provides that it shall be regarded as an integral part of the convention, that it shall be ratified and the instruments of ratification shall be exchanged at Washington, and that the protocol shall enter into force on the date of such exchange. Although the protocol would become an effective part of the convention upon the exchange of instruments of ratification, the extension to the Netherlands Antilles will not thereby be effected. It will remain necessary to follow the procedure in article XXVII of the convention as modified by article II of the protocol. The extension will not become effective until the United States Government notifies the Netherlands Government formally of acceptance of the proposed extension. That notification of acceptance will not be given unless and until the Senate has given its approval. In view of the desirabilht of taking final action to give effect to the extension as soon as possibTe after the entry into force of the supplementary protocol, it is hoped that the Senate willgive its approval to the proposal for extension (S. Ex. I, 83d Cong., 2d sess.) at the same time the Senate gives its advice and consent to ratification of the protocol. The protocol, as well as the proposal for extension to the Netherlands Antilles, has the approval of the Department of State and the Department of the Treasury. Respectfully submitted. HEBEJIT HOOVER, Jr., Acting Secretary. (Enclosure: Protocol supplementing the income-tax convention with the Netherlands.)

    [Text of protocol]
    (1977)

    -r

    - 4~-'

    1 ., 1., i i,,

    *"

    Senate Committee Hearing8


    '[No hearings held]

    (1979)

    Senate Committee Report


    July 27, 1955 Executive Report No. 12 84th Congress, 1st Session Senate Foreign Relations Committee
    [NorT: This document is printed in Volume 2 beginning at page (1663).)

    (1981)

    &,nak Floor I)bate and Action


    ,luly 2419t !985 84th ('on"t'm, Ist Session 101 ('ogngrcional ItRecord 12019-12025

    11983)

    IP. 10011) CONVENTIONS RELATING TO TAXATION, ETC. Mr. ('lE.llEN'r' .\Mr. IPrisidi-si, I mo.ve' that ithe Seouelt prn.ed it ronsadcir thi, ritiluliiig trt'lnties on the I'xei'etive' ( 'ahmiur. amnl I
    e'a-amit-imY vote' be taken on the i atl r ask UlmtliImimmsl rolwo'dlit iof greeing to t lt- ri-4blIullon of ratificatlonll of Ex'caltive' I, iof qullest" ti o s,im, #1111 that tiw ri-slio''live rm'W)hitlil e vijllig S341 ('41gris, 2e11 a4n4l 4101l:41l11iingJ) ote' ratifiatitulil of Ix'c'utivi' 1, 84th (C'oligre-", Ilt I tx-'rlutive (', m4th ('olllgrt' s4,It sltsimli, antd Exp'eritVe D, olollwl, 84th (C'ongre'ss, islt seslon, lip de',',el to have' betIi agre't-'I to by the mlt11' Vote'.

    Mr. KN()WIANDI). Mr. IPreidipiltt, I have' no ohji-'etion to the sveral tre'aetits Ie'iiig i'xplaiie'el at the' .alle linie. I do not Iblieve there will bp' anlyV objt'tlion ruis'il t lit suIlhm-istl'liilt iiios which would t not [ite ruistel it; tile first tiC'. I fio t anlticipalle einy obji-'etioi, bill I shouild like' to withlold commns'n to having a Sinlgle vt'll-allld-III.V Vote beIi suffic't for all until an ',xplah tiioin hams nIatlie. no If it del'%'lops thut Iithre' will Ie' It- ol..ilmis1n mi.I I hhink there' io 'tollsi-itillg will Ie' it.. opll itiohla. thi, I shilh1 hatv' 11o e)I.j,'t'tl to the' iIIlllllillliS-C0Ii54 ll Ii'jiiest, Mr. C'LIEM.ENTS. ()tt tile' Immsi of the statele'tlt maiie bwy the, Senator from ('alifornia, I will wiltliraw the' iIie llilllmniS-i'OilSlent
    reqsli'st and re'neW it later.

    Mr. OGEORGE. Mr. Pri'sidelent, if I mtay have thle attention of the Senate for from :3 to 5 minutes, I think ani explanatory t1attemietnt can he made covering all tilt' treaties. 'T1hey are called treaties; in fact, they are tax conventional. 'rhev are simpil)Iy agreemiels between tile United States and otlir nations with re-spect to taxes on profits or income, and on inhieritanies or estates. Tile sole purpxoe' of tile treaties or conventions is to prevent tile double taxation of American v'itizeus who mnay lives ill the oltler ceolintrv is whichit a Imrty to thie convention and may have derived profits in It lt the other 'ountry. hliere is a re'iprol'al ohligat i.1 oll tIe part of hot governments to assist in facilitating the roile''tion of taxes' due either colltfry. That is all that thiese treaties or conventions will areomplish. *They are exactly tile kind of conventions we have. had with a number of otiler eulntries. I should like to mnake a brief statement for the Ri.ccimw in order to give tile backgr)udI. Then I think we may he able to vote on all the treaties or conventions by one vote, hut tile vote to be separately recorded as to each convention. The four conventions favorably report' by the ('onuittee ol Foreign Relations con'ern relief from double taxation on incomes and Two of tile tre'aties are with Italy and two estates and Wiheritat,ep. of them are related to extending the provision of the 19.4t treaty to thie Netherlands Antilles. In other words, we already iiave treaties with The Netherlands, and with Italy, and these conventions merely -xtend the treaty asso-

    (198i)

    will extenil it to tit additional territory or area il which IU'nited Satelis citizens tila li. stiliji't, to doulle taxation unless (lie rolvelitioli
    b~ecomes ereetlive.

    nation so as to over the citizens of the United States who may be living in any of flip ptiostsi(Is of the Netherlands Governimitentt or tie' Italian (hoverninent. A treaty with thei Netherlands is already in efflct: this (conventioni

    The two treaties with Italv relate entirely to ltie double taxationi
    of i'.('ilti and thlte double tXat kioll of property ldhbl 1y thie (.iiels n of one vo:.thtr" inlthe olier countryy which is a plart%- to tie,coiivention. 'I'hiese ('onlvtlitjlls have Iben stilhject Io I lhe eareftil analysis (If Mr. atiat, chief f of Staill of tlhe .loiti (C'oiiitte, on In eternal Jteveiiut,

    'lallxat ion, who has exaillined Ithet in the light of the, revell4e laws of the U'nited StIat. 'T'levt have been considterpi by the ('onlilliti ee of) FIoreign RHelations which hasi received o) objet'tions to their alplproval niut hs, onithe other haud, received inani'y voinOinicaltions urging
    their app)roval.
    THE NETHIEIRLANIDS ANTIL.LES TREATINE8

    The two agreeientits relative, to extending the Netherlands Treaty of 1948.i to the Ne.thierlhiis Antilles relate olly to iticoli ltaxts and profits ltxi.s. 'T'heagr'eiiitenit whiv'h wis referred to the Sliat.e during the M.l (',iongr.s cliie to uis because tfle Executive hlas undertaking not to extend ct'onventioiis such as thlis to territories of one of the parties without coniicurrenice of the Senaite.
    the roitnittillee tt'oes so will ti l untlerstandiiig related Io the t'ollectiotn provisiotis (If the Ntlhierhlnds Treaty. That understading appears (oll page 9) If the cotimittee report.
    TlHE ITAI6AN TRIEATIES

    [(I. I4#i2(

    Inl extending this treaty"It the Netherlands Antilles

    Tlio' pendhinig incoluixt t

    cnx e'(niitiiotn with [tai, follows the patterns

    oif prior itn'olme tax 'oll veit ios which the ,lSeiate hits previously appnoved. There are lito unusuatl p)rovisionts in tlie pro osed treaty which follows in substance similar treaties with Australia, Bel(giUmll, ('anada, I)enmnark, Filihind, 'raince, Germany, Grepee, Ireland, Jaio

    pan, the Nelierhlands, New Zealanld, Norway, SwedetI, Switzerland

    tle Union

    It is similar to contve'itltions with Australia, (C'antada, Fitnland, Greece, Irelitt, Norway, Switzerland, (ile ttiloni of South Africa, aittl t"e United Kingdom. As iamatter of fadt, tihe conleltntionIs have bee'i negotiated primarily by the Treasury DVelpuirtltttt, iin c(tljnlcittinl with the State Departnient. Iin response to at resotlion which waits passed by Congress many yetars atgo, asking for ite(-lconclusion(if precisely these types of ('(liveltiolls, in order to avoid(lie double taxation of oiur (,iti7.ets and to fao'ilitate (lie collect of taxes (lilue our owin (lovernitnent or otile , tion tihte Government (If Italy or the (Government of The Netherlanids, as the'' t'aspit ight be. ('Concllsion of these roinvepltions is part (If at long-range program i tinldertaketi by the executive bruniclih ofthe Government, ati tile re(qliest of flie (otoigress for the purpose of relieving American nationals,
    (1986)

    (If South Africta, and (th(e Untited Kpingdoin. The I)eaIth I)itv ('Coveintion with Italy has no unusual provisions.

    ,,. a nr'ipnw'.l ba.is, fnrii paying taxes ill ilte United States i011 iIIntime or i rheritunr' llpln which taxes have be'n levied abroad. In view of file" fart Ithat Ities%(, cinventlit1ts, are retroactive with re.slwpect t Il e relief ihey offer 14i thei lhst of ilt,' year ill which t hey aire approved, I hoipe Ihtat the Senalte will approve theill before, aditournmnent. I sme no objection

    ionveilll iislll. I again reew tlihe request for that purpose. Mr. K.N4WLAND. Mr. President, with t1le explanation by the hllairhalve that Vote considered ais atvote (if rattifiatlion oilt thie subselelelilt bul the voite Io' Ile riordtlld separately 1 i'teach It hefn. vits Th.it PRIESID)IN( ()IFFI(C'El (.Ilr. AL.0TT ill the chair). Without 4hjtectioi, tile rllivelitiois will bI roInsiderl eui bloc. The Senat ', its ill th (die Comlittee of tile Whole, p)roce'eded 1(o consider Ihe4 following:
    i'llvtlluells,.

    lie Vole', but tile vote ito hi

    ill the world to voliug tilt all four c'o)nVetliilpits by separately recorded as to eac-h of the

    liiiali of tilt' (C'olmmliitteeon ltoreign Rlelations, I have lioobjec'tio)l it) the voile' laing tIken oil Executive 1 of the 81 ('3dongress, alld thell to

    NOTIFIC'ATION BY Tilt,' NKTIIIIILANI)4 4IOVEKNMF;NT WITH IRESPECT TO TIIE NETHIERLANDIS ANTII.LLS

    Ixe'Iuivye I, 83d1 (C'oigress, 2d 54'ssiOII, it Illtiivirat Iou givtll ly tile (Gove'rnmenlt of tilth Netherlaids, ill accordance with article XXVII of the conventiOn of April 21), 1948, between the Illiled States of
    America and the Netherhlads, for the avoidance of double taxation anlld tlt' prevelntion of fiscal evasionl with rtepectt to taxes o1n income anl4d certaini other taxes, with a view to extelitlinig the operation of the convention, with certaiin limitationis, to the Nethlerlands Antiles,

    dlaited June 24, 1952, which was readl the second time, as follows:

    IText of notification]
    I'IIOTO(',)l WITH THE KINGDI)OM OF TIHE NETHEIILANIDS SUPPLEMENTING THE CONVENTION ltELATIN( TI) TAXES ON INCOME AND CERTAIN OTHER TAXES WITH RESPECT TO THE NETHERLANDS ANTILLES

    Faxeiltive 1, 84th C('ogress, Ist session, a protocol, sinled on June 1,5, 1955, sulpplementing the convention between the United States of America anl tile Kingdom of the Netherlands with respect to taxes on income and certain other taxes for the purpose of facilitating extesllsion to tile Netherlanlds Antilles, which was read the se(olld time. as follows:

    [Text of protocol]
    CONVENTION WITH TilE ITALIAN REPUBLIC KIELATINU TO TAXES ON I NCOME

    United States of America and tile Italian Republic for [p. 10211 the avoidancte of double taxation anid tilt, prevention of fiscal evasion with respect to taxes oil income, signed at Washingtoln Onl March 3s0, 195A. which was read tlie second timne, its follows:
    [Text of convention)

    Executive (', 84th ogressss, Ist session, a convention between the

    (1987)

    (P. IA*RU

    TAXESO)N o1'TA'I I'S ANI) INHERITI'AN(ieFs REoLATIN(W 1'X

    C'ONVENTION WITI

    'riii ITAMIAN REIPIUIIIC('

    lntill Stallss oif Am,,rivih I thi' Itelism Re'publi, for thil avohdlil('4 ' of dloual.l, taXillatiol ill thidIeprveiltmmi of lisvil" e'vsion withi respect H4ifi'll iII Washliigloill, oil dl inherit lia'l'5l. to ltxes onil eISltles
    (Ip.120231 .lardli :11, I9i96, whit'h waw realdIit seiolln
    iilie, as follows:

    Exi'eutliv' 1). 840h ( 'onlgrss. 1It ssiohll,, at'oiVe'lltitoil 1I)twet(-Il tih'

    IPI. I.AY)il

    rl'ext of volcllltoilj Th,, IIESID)INO ()FFI('ER. Without objectionll, the

    pe'lidng 'onv4nt olliols will Ih, i'oiisidre'd its hlivii pllassed',I Ihrolugh their various llaltlilllellltrv. tsages' Ill) to the' point of conlsilderation of Ithe rsltoint ols raillh'lia lon. if
    NOTII'FICATIONII" Tilts' NETiIEIIIlANIIS G;OVElINMK'NT WITII TIE 4METIIEIIIALANIS ANTILILE

    10,8t1Ei' TOl

    h'rhe (iehrk will read tilt' ri'aolut ionll (If ralifivalhIoll of Exeicutiv' 1, ioi bytl n lh, Net he'rlillds (Govern8;3d ( oigrss. 2d se'mion, Ilit- not if nds AnItilles. t4Nelti'lh llle'llt wilh rspec't it tlth,

    The' Ie'gislhd ve derk read ais follows:


    I,.soh'ivld wt.ithrds of thr Stw'lora pro-sont cmicrurring tAhrrra), That the te'lialt' l'sgiuI, mid cos it) tolt' ratitivatiuan of Exct'uItiv' 1.8341 Congrenss. 2:1I 'iml tilte by Ihlv''rrll l ofil Neltherlands, il accordanlce with a ioltifical jun givilI Ililt -ates of 11141 I'llittw . l art ide' XXV I I of I1w rooll~eolliolI fpril 21t. Il Ihc Ame.rica mid the' Neihe'rlandI. for IhIt avoidmiow. of double tamietionid tlt ,l e'rtai other Isll Ito taxes tilt iiiiome' 111111 pnIvelllioll of fiscal evasion wills rith convention, %ith rcertain o'rosl 4 h tilf lh eXn'liiig taxes, %I a Vitv'i t) ehthe Iinitulaiiots. Ito tit- Nl hetrlallnds Ant0ilh's, d4ath14 Jui. 24, I1!Fh2.

    advhi'

    ill c 1i''t toll with Ill, tlx e'Ouln Mr. (EORGE. Mr. Prestidi, 1 v'lltlntl wit Iithe Nethlehrhlads (hrvemrlunvl, I usk u,,li110us 'ous4i111't Il(tK lio1) it satemlmi'll t furnished toIl11i1. b1' Mr. to luaVe prinll linh tlhe' Jolillt ('oillllitlle'e oI Initernal t ('olit F. St11111, 4'hltef of stiff

    Re'Vi'IIe' Tlaxation.

    in tilr R,' 'ol),

    'Ilerehbeing Ilo .Ihjitli'i

    . the stlatemenllt wil ordire'd to be printed


    m-

    it follows:

    EXTIXNIION OF THic NrTHKIil.ANDIS INcoMMi TAx (ONVIKNTI4N TiO TIM Nrm I.AVNin ANTILLIIS; ITPPIKeMNTARV 1'rrotl('t.

    IlrO'id Iihat it 111av I' i'xtI'liended( to The' Netlhelhands illclloti lax conventi onlllit anLd Htrtpluce' by IIlitfltioll telrritoritPoiIf the' collitrliactillg giovernme'ts moo111n1 otlined1A ill thO the Vn-ier'tivi, governlmienlts ili C'eorilaul' lilth tllh, liroMlln,01 ColI v'eIlitioIl.

    that. it d'sires to (lstlte The Nethe'rlands (tovirlriililt ha$ IIotifiedl tht' tIilIth'd convention to tilt' Netlhe'rhlnds Antill's. In llC'tirlolltce' with pruextend thilthe' redunres prI'vioullsly adopted for other tax rollnVy'ltionls tilte e'xe'utiivPe branch has on, he' eate for its .dvi.e' and consent brotilhtIthis n'u4ei-2st for exhtesion oIII it TIlt' Foreign Relations ('onnmittet has considered lilt- propoekd extension of the Netherluads treaty and 1I'tlie'ves it desirable to iextendi tilt, cilvetioun to the

    Netherlands Antillis with certain modiflca'tions. These' monlificationls are eet forth in the executive report oil the ltrequest for extension as well as the suppleh-

    mentary protocol which has leen negotialted by the two gove'rnmleintse.

    uit

    I Uder
    which

    have' no I)pllication in the Netherlands Antilles anr excluded fronim operation of the cOnvel'ltion whim'i i'xite'lllh! to the Antilles.
    Under the Irtoeol, the Netherlands Antilles agree 1t take' i further step In elitlllaltilln the burden of (Iouble taxation. It will allow a hdel'ductions from its illcoie tax for Federal incosiume taxes paid by United States cilisens nrsilent in the Antilles on ilIncoe' derived fromt United States mellurct. available under the Antilles' tax laws. Such a credit is not

    the ri'qiiest for 'xte'lisioll, certain plrovisionls of the Nethierliends conlvenlliion0

    (10918)

    TIn protocol alm nmodifies the effective date provimioelp which would otherwise litocol, the' convention may 1the Antilles. l'Uler t pro governl tihe e'xtenisioni to kiccce it? ,flivi''' am of Jsitiiiiry I. 19155, if tih, Atuilte' gives its itulvise anIi colnsent oljartocol sndl to thle ixtelisNionl, anidl the nIc.mairy instrumnencts of ratification (0 thil 3`re ,xethsimrcdl ihsrilfg the curre'nlt tsevr. It is sinslirnloid I uti its extet'diiig tfit- Netherlands cesnv',ltiosi to the Acltilhes In the wiwsi 111rincellts. II.' reslW4t ivi' ti.Ie provim.ioscs for isceulmil assistanc,'et coll'ectlion of tIh'lstother's taxes Is to ie aplplied ins lith lililetd lkllsuser which tile *na.'l, has lin'viiollnly Ilppresv'(d in other tax convientions. rhis, it.ch (if thie sov. Itit.l slcee.ry to i'rninvss4 will sisitl its volll'etig tillhe ot heir's taxes onIly to tillnot eln. iot enjoyed i-coniventlin art Is1rmocas by ilsiUl thatthe provisions of the titled to) its hit.'ilts. Wilti till' llodtiftlittills which I have des.eril.-i, It is' believed that ithe ImuIitn v41it'toll 1111(lllh'lll.'lstary protocol carry out the d1'sir,'d obhje'tives of avoiding a 1 dolible axilatulill aind i)ivrivitiig fiscal vIaLsionll. The. Filreignll litiolns ('C0llllnlitt i tee, therefore, rre'Oc celds to(lit,heSrllte tfiat this extruslitoni and stlllp'lellentary pIrotocol be ap~lproved(I. IDrTH INOMlC ANDI I)TuI D TY X ('rsNVIINTIiINS WITH ITALY uind tl'l sth ilty Coli' eilitioll" with Itf;lly which wre e "rhse isleoice tilx c t'lltto gitfore, the, Sate follow the pattern of Jprior tax convs,.iticoles which llow -IMwndisl 0he N-eete ilas a;sllsrvl.'d. 'rhe'.', convi't oes with Ilt ily varry out the' dual obit jecttive' of sniligatiig the bcIrdi'sc osf dlhcbl, taxationl seesel lrn'v,,litilag fiscl evairs'r are no Uiilstsuill pirovisiosns in the' Italiain treatties which constitute sios. .-gniflicimtl deplsartusre's frons prior tratie's. i In fII' cls' of teile inloille tax conventi' oniti,hee' treaty provide's a limited Italian tlIx er,'dit for Un'ited Sttles incooe tuxe's withheld oil (dieidelds. Under the linhim Irrstv. t1h Ithe tax credit for 'lliteed States inecomuIe laxe's withheld oil dividelldii Il1tv Iiot exeIed 8 INrrcrllt of ihe aisiosint of tel' dlividencd. Thust, the burden of olihhle' taxation is not elimlltrilst'd with respect to dividenids. However, under existillIt alian Ilaw, there is no provision for a tax credil lagaillns Italiain tiax for Our I,1116,t/lsels tax paid oil dividends received by Unite( tales citimelis. treaty negotliaors iciforinel the eoninsiltt. thiat the 8-Ipercent credit was thie ilmost ()lir citizens that could hie obtained uider the ciriti'ssstalnves of the negotiations. will, its sIssy came,, h-' placed in a more favorable lititilon under the trileay than they sire cinder existing Italian law. The Italiai tax laws include aitax oil corporations which is siisilhar to the capital stock adci declared value ixcess-profits tax formerly conctainced in our own tix Under the con. laws. This tax is, In effect, based oil both proiperty and income. mention, a United tatems corporations is exempt with resipect to that portion of the tax which is hased oln income if it has no lewrnsaitent r'stablishnselt in Italy. With re.ml' it) toite xirtiols of the tax which is iskwd on prollerty., the convention linsits lice tax to propxerty timse-i or employed in Italy by a I united States corporation. IE:xcept for thset two provisionms of the income tax treaty which I have described deah diuty treaty follow in sucibstance, and botlh the income tax treaty asd (tlihe Generally ailso in foruc, tax treaties' which the Senate lhats previously approved. Thie Foreign Relations (C.'ullilitlte, hilms favorably reported the conventions with Itily lnd reconlinenll dIthat the Senate give Its advice and conisesnt to these treaties.

    The PRESID)ING OFFI('El. Tile question is, Will tile SeIate advise aid Itinisetl to the resolution of ratifil'tion? Mr. KNOWILANI). Mr. President, onlthat qujeion I ask for the yeas alnd naysv. The 'eas aind titvs were ordered. ordered, the Seltretar" will call the roll. Ilthe roll. The legislativ,. clerK (.adled Mr. ('CLEMENTS. I innottn'e tlhat the Senator from D)elaware (Mr. FKAIt, the Setitutr front*01 Massachmsetts jMr. Ki:NNipv], and the Seatiltr fromti Virgini [(Mr. IIOIU:nT$INi are albellt oit official business. Tihe enatir fronm Texats (Mr. JOHNSoJ is itbellnt by leave of thi8 Senate be'autse of illnm. voting, the mentorr fronm I further aitnunce that, if present nidll ,I..INoNI, tlhe TeIs Delaware (Mr. FKR:EAn, the lSotator t'fromn eiMr.
    73M09 O-43--voL 21---3(2

    T'i~t' PIsII1)I;( OFFI('El.

    The yens asdll nays having been

    (198o)

    awhusetts .Mr. KjsNxt:)vI, and the Senalor from, Senator froml. li. Virginia IWr. Rooi.wriosl Iwould eavii'hthIII' lhN'itattihr (roill 1V{uliuiilg .\lr. .'AITit)iTALIdi. annlwI e Iliwt 'vote ."
    famlily. heittie of illir,'itt i stis f(nl 4ht .f.lituator The ,t ijitor from Vermotl [.Mr. FL,.N.Ikil 41I ." 'Piit&!.tLI are nere.taurily abseniit. Kaius IMr. i4 hrike 'eliuhtor from Iowa (Mr. H|tCKnLNUL. IIs 1*hn ty t'leave of lihe Senator from Tlhe S'etlltor from, IPenlsvivania I .ir. Ihrvrj and ilo Nevada I.Mr. M1tx &;I tire d'tUi, 4 On ffivil husihlisa. if present and1(1 voting, Ithe ,t'lhlitor from Peeli.sylvilila (Mr. l)i'wr. , tie Senator fromt W-omitig [Mr. Bmitu]. the Senlator fromnl Verlltoilon thel (I.r. FIL.\Kt~S, tie Stenator frot. Iowa i.Mr. HIUiNLOOEee., (Mr. MALONLI, HId the Senalor frolm. Kansas Senator from Neviada ".yea."' (Mlr. SC. IOEPPELI Iw. Ihl et,'ll Vile etais Nifi, Ilays 0, "8f-liows: Thi yeas and lidst%@ resulted is INIr. II %itit.ri albsetl
    YEAS 86 Aik,,iit A.llul
    .llIlltripli

    ( ;4IdIIIh'
    .(;tir-o

    Millikin
    M.\r!-e

    Ilarkley hit-ll Ihli iitar


    IIIlliti, I Ilihh'

    (;o lui .
    Iti) 1lrii Hill

    Ne'..ly

    Muirray

    Blricker BIridges hu1sh Mlyrd Carlbn c'am., .- J. ('a-', S. Dak. ('haves


    ("OtIoll ('ilttio,,
    C'urtis (at;KwIart

    Hollanitd Ilrilka II mmphn-v

    ( )V M lholniy

    Plasitl or.

    Pot I,,r
    Pu~rtril PRirtell 8allonsil, Salloutall Seot t

    Jackson
    Johnston, S.(.

    Kefauver Ke'rr Kilgore Knowlantd

    Kuholhl L~anger

    Smith, ".J. Slarkmin Stennlis1

    Smith, Malih

    )mat hers

    lialliel

    q/P ll!OS61 Syminglton hIlrmolnd"


    Malglil.-ill

    l)irksci, l)wor-'hak :astl hild


    141htiidt, r

    Mansfivi

    Martin, Iowa Martin, PIa.

    Thye Watkinit Welker

    Mc('arthy

    Ervin hitllhriglht

    McClelhla Mce 'amalira

    Wiley Williams. Yotluig

    NAY8--O NOT VOTIN(--O


    BIarrtl I

    Duff

    Fhlndersr Fr-ear

    Hickeknlooper Johnsonll, Tex. KeiniiCdy Malone

    Robertson Schoeppel

    The PRE-SII)INO(FFI('ER. Two-thirds of the Senators present having voted in the atfirmnative, the resolution of ratification is agreed
    to, aSid, unuher the lnanjiilnioiS-cOlselnt agreeimieint, the resolutions of ratification of the other three treaties are deemed to have been agreed to bv the same vote. Without objection, the President of tile United States will be notified of the ratification by the S!elnate this afternoon of each of the treaties.

    (1990)

    Presidential Proclamation (including Official Protocol and Notes)


    (Reprint of TIAS 3366 and TIAS 33671

    Text

    of

    (1991)

    TV 65516. A43

    oT@n1543 #X1S334T!5@NAS

    ACT$ 011n011

    8306

    I)DOUBIIE 'I'AXATION
    iaxes on Income Facilitating Extension to the Netcherlands Antilles

    Protocol Between the


    UNITED STATUS oir

    Am.ancA

    and the NrTiou.ANms

    Supplementing Convention of April 29. 1948

    Siaatti W hiungton June IS, 19SS

    (19M9)

    IDEI'ARTMIET OF STATE
    PIu OWATS4

    6133

    I l.Irral lnutIl

    (1994)

    NETHERLANDS
    DOUBLlE TAXATION: INCOME
    FIrililnig Extem&utm of (trnrvntion to the

    Netherlands Antilles

    I'ri~~~mui Mep~~wu q/ .4,wil 29. 1948. 4 usonams -sipudof Uwhimaesm Jww IS, 1I5M;

    TI AS 3.3Mt J11,, IM,11165

    Jely 29, 19'5.;


    1955; Rat~Aed he by #~.ads (khiibw 14, 9.5 ls,,icusiss. .N~,,,d I W.ahu.Ims Nm.
    Rm#O iy she Pnwdasid

    of &h Ca&Sieam a(of

    .4upau 24,

    10 155

    19$;
    Eutemd i"wwsf Nmwmbw 10, 193S.

    BY TUB PumRUsasNT OF THU UNITED STATUS OW AMKItCA

    A PROCLAMATION
    Wusa5." a protocol supplementing the convention between the United States of America and the Kingdom of the Netherlands with respect to taxes on income and certain other taxe. for the purpose od failitating extension to the Netherlands Antilles was signed at Washington on June 15, 1968, the original of the said protocol, in the English and Dutch languages, bring word for

    word as follows:

    (1995)

    a)

    PROTOCOL SUPPLEI4ETTIN3 THE CONVENTION BFTW.N THE UNITED STATES OP AMERICA AND THE KIN(IDOO OP THE NETHERLANDS WITH RESPECT TO TAXES )N INCOME AND CERTAIN OTHER TAXES FOR THE PURPOSE OF FACILITATINO EXTENSION TO THE NETHERLANDS ANTILLES The Government or the United Stdtes of America and the Government of the Kingdom of the Net, ,-lands, being de-

    PROTOCOL TER AA1NVULLIN0 VAN HET VERDOAO TU.JSSI D9 VERENIODE STATEN VAN AKEUIKA EN W KONINiKRIJK DER NE)ERLANDIN NET BRTREKKINO TOT BELASTIN(3N OP INKONSTEN EN BIPAA1.DE ANDERE BELASTINOEN TON VEiOSEAKXELIJKINO VAN DR UITRfEIDINO TOT D2 NSDIRLAND3S ANYILLIN De Regering van de

    Verenlgde Staten van Amerlka en de RegerIng van het J(oninkrijk der Nederlanden, de wean koesterende de ultbreidlng to
    vergemakkelijken tot de Neder-

    sirous of facilitating the extension to the NeLher~ands Antilles or the operation of the convention between the United States of America and the Kingdom or the Netherlands for the avoidance of double taxation and the prevention or fiscal evasion with respect

    land#e Antillen van de working van hot Verdral tuseen de Verenlgde Staten van Amerlka en het Koninkrijk der Nederlanden ter voorkomIng van dubbele belasting en ter vermlJdtng van het mntgaan van

    TIAS :533Mt

    (199)

    3
    to taxes on Income and certain other taxs, signed at
    Washington on April 2), 19b.

    lasting met betroki~ng tot tolastingen op inkometen en bepaalde andere belastingen, gete~end te Washington op de 2)ste April 1946, hebben besloten sen aanvullend protocol te dien sInde to slulten en hebben als hun respectlevelljke gevolmtachtIgden benoead: De Regering van de Verenligde Staten van Amerlka: John Poster Dulles, Secretaris van Stast van de Veron!gde Staten van AmerIka, en De Reporlng van het KonlnkrlJk der Nederlanden: J. H. van RoIjen, ulutengewoon en Oevolmachtigd Ambassadeur van het KonlnkrlJk der Nederlanden, die, na elkaar mededelIng te hebben gedaan van hun volmachten, welke In behoorlijke vorm warden bvonden, over do volgende artlkelen tot overeenstemming ziJn gekomen: TIAI 1%M

    have decided to conclude a supplementary protocol for that purpose and have appointed as their respective Plenipotentiarles: The Government or the United States of America: John Poster Dulles, Secretary or State of the United States of America, and The Government of the Kingdom of the Netherlands: J. H. van Roijen, Ambassador Kztraordlnary and Plenipotentlary or the Kingdom of the Netheriands. who, having communicated to each other their full powers, found in good and due form, have agreed upon the following ArtlCles:

    62 AM, 1.I2. p 37R

    TIAS 3366

    (1997)

    4
    AR'ICLS I In the appl Ihat lon by the. Nether.lasds Antilles or Artiele A)?IKKi. I liIJ tietoepassihel door dti Nedterlastut' Ant II lon van Art ilkel XII vain het Verdrag van die ',)ste April 9)II11 tel vervan

    xII or

    the

    convention or

    April .14), 19111l1,paragraph (I)

    theroor shall be replaced by the rot I owlnl paragraph:

    I Id (I) dsarvan wordne

    gen door het volgeoide I d: "(N) Use Nederlands.

    "i)

    flre Netlerlands

    Antilles shall allow a deduction (or the equivalent thereor) rn.o Its tax or the Pederal linoome tax pald to the thLlted States by citizens of the United States real dent In the Netherlands Antilles with respect to Incmw of such citizens t'rn. sources within the

    *en Anti Ien tlt ltets vormindering (or do togenwarde duarvan) vail hun belastilng toeastan van do Pederale Inhomstenbelastling betrald sant do Verenigdte StAten door burIgers van de Verentide Staten In idtNederlandeae Anti I llen woonachtlg wet betrokkling tot heinmen vast zotaige burgers tilt broillin In tie Vereilgdo Staten. duch tot *en bedrag nMet holer dan dot gedeelte van de totale belastlng van de Nederlaislee Antillen hetwelk ztodanlgi Ink~len vumt

    United States. but In an asmount not In excess or that pro)mrtion or the entire Netherlands Antilles tax which such Income bears to the entire Income subject to such Netherlands Antilles tax."

    van hat totale &an zodantige

    TIAM 33"

    (1998)
    A

    bWlasting van do Nider. lande Anttllen onderwnrpen Inkolun." ANFTICLI II In the application to the Netherlands Antilles of Artiale 11VII or the convention of April "*, l0,i. the word trolARTIKIL It DIJ de toepaosing voor de Nederland*e AntIllen van Arts

    kol UVII van het Verdrag van de ?9ste April iq9t4 sullen Ic woorden *volgondo op" soals opgeonuen In lid (.') vast goiintsol Art Ikel UVII worden vervais &en door de woorden "ostmiddel I IJk vooraflgade a"it". ARTIKRI. IlI (1) Dlt sanvullesd protocol. dat sal worden beachouwd als eat Integrereuil deel vant genloud Verdrag, worien bkracht tgd on de b'k raeht IgI Igtgtorkondtdel dearvan sullen worden Washington. alttetlaeeild to tal

    lowing%,as It appears In paregraph (2) or the sold Arti-

    cle ]IVII, shill be replaced by the words "liedlatoly precedingl. ARTICLE III (1) ibis sulpplesentary

    Protocol, which shall be regardeod as an Integral part ot the said convention, shall be retified aid the instruments of rat ificatlon thereof shaii exchanged at Washington. be

    (P)

    The present Proto-

    P,))

    Dit protocol

    Wl van

    aol shall enter Into roreo on the date of exchange or Instruments of ratification.

    kracht worden op' Ie datum van ultwlIssling van de bekrauht iglngoorkonden.

    TIA$ W6

    (1M)

    6
    DONS In duplicate, in the English and Dutch languages,
    the two texts having equal

    OUSAAM, in tweovoud, In do Engelse on In do Nederland** taall hebbende bold* tokoten golijke rechtskracht, to Washington op heden de 15 do Juni 1955.

    authenticity, at Washington this 15th day of June, 1)55.

    FOR THE GOVRNRNEN OP THlE UNITED STATES OP ANDICA: VOOR DR REODINO VAN DR VIMRNIQD T VAN AMIIKA:

    INNALI

    FOR THE OOV NlV OP THE KINGDOM OP THl NETHEILANDS: VOOR DR RIOERINC VAN HIT KONINMRIJK DER IEDERLANDEN:

    INIAL1

    TIAB 33M

    (2000)

    7
    AND WHERltE.AS the Senate of the I'nited States of America by their resolution of -ily 29, 19.55, two-thirds of tIhe Seialors present concurring therein, did advise mid etmonsent to the ratification of the aforesaid protocol; ANo WHIEREAS the aforesaid proltovol was duly ratified by tihe President of the United States of America on August 24, 19505, in pursuanice of the aforesaid advice aml consent of the Senate, and the aforesaid protocol was duly ratified oil the part of the
    Kingdom of the Netherlaiils; AND WiIKKKAS tlhe respective instruments of ratification of the aforesaid protocol were duly exchanged at Washington own

    November 10, 1955;


    AND WHE,kAS it is provided in Article III of the aforesaid protocol that the protocol shall enter into force on thie date of exchange of instruments of ratification; Now, TUK,'Froim, be it known that I, Dwight D. Eisenhower, President of the Unitedi States of America, do hereby proclaim and make public the aforesaid protocol to the edl that the said protocol anld eachtand every article and clause thereof may be observed and fulfilled with good faith bly the United States of America and bky the citizens of the United States of America and aill other persons subject to the jurisdiction thereof. IN TI;8TIMONT wilmiR:or, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. DONK at the city of Wuhington this fourteenth (lay of NovemhIr in the year of our lAird one thousand nine hundred (SKALl fifty-five and of the Independence of the United States of America the one hundred eightieth.

    DWIGHT D. EISENHOWER
    By the President: HEaRmET Hoovai Jr Acting &creterV of Stak
    I

    TIAN 33415

    (2001)

    TREATIES AX* OTERl INTERNATIONAL ACTM

    StMIIS 556?

    DOUBLE TAXATION
    Taxes on Income Extension to Netherlands Antilles of Operation of Convention of April 29, 1948, as Supplemented

    Agreement Between the Unnir STATES or AnlancA and the Ncrsuaism

    Enfeted by Eichbange of Notes Dated at Washington June 24 and August 7, 1952, September 15 mid November 4 and 10, 1955

    (2003)

    DEPANTMENT OF ITATE P1sUCATUoN 6139 JIuIt pritl

    0.

    (2004)

    NETHERLANDS
    LM)UBLE TAXATION: INCOME Extension to Netherlands Antilles of Operation of Convention of April 29, 1948. as Suplemented
    .4pmArmm

    ef

    be ernan e uwes

    Junw 24 arm

    TI AS 3367

    Psip at Waskin~un June #218 and .August 7. 1952. Sepemwul 15 and Aug 7 9 Sept. 4, 0w 4 Nm bw and 10, 1955; he r eei y Ju oy. Nov 4,1s0, EnImr4 in& fnwt Naomb, 10. 19,;.- ,,w,u

    1. 1955.
    TA NeAtherlands Ambasador to the Seeretary of State
    NETKKBRLA-LM4IMI24ASSY

    WAsH1NOTo. ,I).C.
    t" IIM

    Tile Nettherlards Ambassador presents his coanplmnents to the Honorable the Scretary of State and has the honor to refer to tihe Convention between the Kingdom of the Netherlands and tile United States of America with respect to taxes on income and
    certain other taxes, siipged at Washington on April 29, 1948, and to the Protocol of Exchange of lautruments of Ratification relating to that Convention and signed at Washington on Decenmber 1,
    0 ,fat., pu , I ,57
    TIAS 1666.

    1948.1'1

    Article XXVII (1) of the Convention provides, inter alia, that either of the Contracting States may by a written notification of extension declare the desire of thie government of any overseas part of tile Kingdom (in the case of the Netherlands) or overseas territory (in the case of the United States) that the operation of the Convention in whole or in part shall extend to such part or
    territory.

    In accordance with the provisions of this Article, the Netherlands Government wishes to notify the United States Government of the (isire of the Govermnent of the Netherlands Antilles that
    the operation of the Convention and of the Protocol of Exchange of Instruments of Ratification relating thereto shall, with tile limitations specified below, extend to the Netherlands Antilles.
    I Not printed.

    (1) 780W O-4-2-.vol. 20-(mOO)

    2 Sinee no property Itx is bheig le'vh'ei in the Netherlani Aiitillet, tlhe (C'onventlion as extended to tlhat territory is to ap)ply to illncolme taxt-m alld prnuits taxes mnly. Ali Englisi tramlation of the Rlegulatacitis gove'ruilg liv*.- two types of taxes ill the Xettherflaunds Alitlis is e'ilow-.l'I Thie tariff of fhe profit tax is e'olll~iilled ill Article 13 of the Ieguiliai1oi4 Ol the lproists tax. rhe tariff of the ilcotne tax is e't forth il the' i'eltme'tl schedule entitled "Tarief Slikoinstenbe'last ing 1950)". .Arti'le XX anIl Art ihe, VI, (2) and (3) should be excludedl froml the olmrat )io1of the C'onventlion with respect to the Netherllleans r Antilles. in additonI, tIhe provisions contained in the Proto,.ol (of D)e'cemblueir 1, 1948 are .aisuiinedl to exclude' the apl)licability ,lf Arilhes XI and XIII. The tenr "competent authority" referredI to ill Articel If (1) (j) should lie taken to mean, iii the case of the Netherlanlds Aintilles, the Adnimistrateur van inancie'n of tle Net herlanids Antilles. The Netheriands l(overneut't supports the request of tile (Government of tile Netherlanels Antilles for the extension of tile operation of the ('onvention to its territory. Dr. van Roijein thereforef wishes to suggest that the U'nite" States Governmuiie'nt accept this notification in accordanace with Article XXVII (2) elf the conventionn . In case of such acceptance the provisions of the Convention anid of the Protocol, with the limitations speified above, will apply to the Netherlauds, Antilles as of January 1, 19531. WASMINOTON, D.C. Jun4 24, 196*. The *erretary of Mtate to the VetherlamiIs ('A d'Af4aires ad intrrim

    The Secretary of State pn's'l-t-A his 'ompliminents to the Chargei

    d'.,l'airt.4 a(dinterim of the Ne'therlanlds and acknowledges the receipt of the A:mbastador's note No. FAil 1561 datetl Junae 24.

    19.52 notifying the (ioverninient of tie Unitel States of tile desire


    of thie' (Overniaent of tile Nethierlanlds Antilles that the operations of thie convention betweeil tile I n'iteei States of .Aiueriva andt the Kingdoln of the Netherlandi s with respect to taxes Onl iilOe ulnd
    certain other tales. signed at Waihiington o11 April 29, 11148. be exleudel I. with ve.rtlin liliitatiens, t14thie' \Nethe'rhlm.k Antilles.

    The receipt is also ae'knowleeg'ld of all Englilhl tiranslat ion of tile regulatihhs gmivernllhg income laxe-, andl pnroit tlls in tile territory of the Netherlaneds A;\iilhie.
    l Not printed.

    TIAS 336?

    (2006)

    3 The question of extending tile operation of the aforesaid convention to the Netherlands Antilles will be, given study by the appropriate authorities of the Government of the Inited States and will be tile subject of a further communication to the Etuhasv

    at a later date. Under the provisions of Arti.le, XXVII (2) of tle convention the application of the convention to thle Netherlands Antilles
    WoUld bemo;IW effective on the first day of Jnutary following the

    date of a onmnmulication ahlr,.sedl by the United States to tlie


    Netherlands indicating its accepltance of tile said application. Befoio such acceptance van le given, however, it should be noted that, in accordance with assurances given to the United States Senate at tile timte the convention was pwenlding before that body for approval, it will be necessary to receive the approval of the Senate to the projWsed extension of the convention to the Netherlands Antilles. As the Senate recently adjourned and iill not convene again until January :, 19.53, mitlels called back in special session by the lPreid.ntt of the Iniitid Stats. it does not appear possible that tile extension of the operation of time convention to the Netherlands Antilles can take place on January I, 1953, thie date mentioned in the Ambassador's note under reference.
    C. I. B. DEPARTMENT OF STATE,

    1'athinglon, August 7 1.56*

    The Acting Seeretary of ,tale to the Netherlands Chargi d'Affaires ad islerim The Acting Secretary of State presents his compliments to the Chbar d'Affaires ad interim of the Netherlands anti refers to note No. FA./ 156 dated June 24, 1952, addressed by the Ambassador

    of the Netherlands to the Svcretary of State, notifying the Government of the United States of America of the desire of the Government of the Netherlands Antilles that the operation of the Con-

    vention Between the United States of America and tile Kingdom


    of the Netherlands Wit h Respect to Taxes on Inconme and Certain Other Taxes, signed ut Washington oil April 29, 1948, be extended, with certain limitations, to the Netherlands Anitilles. It is stated in the Ambassaidor's note that the Netherlands Government supports the request of the Government of the Netherlands Antilles for the extension of the operation of the Convention to its territory.

    TEARS33

    (2007)

    4
    As pointed out in the Anilmwsador's note, there are certain nlecesary limitations and understundings in extending to the Netherlands Antilles the operation of the 1948 Convention, modified as set forth in the I1nitocoI of Exchange of Instruments of Hilt ificat ion sige'd tit Washiiglon On I)ele.nber 1, 1948. It is 1114IersitmAil by ltie (lovernnient of the United States of America that those limitations and understandings are as follows: 1. Article 1 (1) of the ('onvention shall have application in the Netherlands Antilles only in respect of income taxes and profits taxes, since no property tax is levied in that jurisdiction. 2. In the application of Article If (1) (j) of the Convention, the tenn "competent authority" shall be understood to mean, in the rase of thie Xetherlands Antilles, the Administrateur van Financien or his duly authorized represntative. :1. Paragraphs (2) and (3) of Article VI of the Convention shall have no application in the Notherlands Antilles, since the agreements of 1926 and 1939 I'1 referred to therein have no application to the Netherlands Antilles. 4. Articles XI and XIII of the ('onvention shall he deemed to be deleted and of no effect, and Article XIV is modified, in accord. allce with the modifications set forth in the Prtmocol of Exchange of Instruments of Ratification sigpnd at Washington on D)ecember 1, 1948. 5. Article XX of the convention n shall have no application in the Netherlands Antilles. since the provisions thereof relating to certain Nethe, rlands property taxes have no hearing on Netherlands Antilles taxes. As a result of the consideration of various questtions in connection with the prolm)pdl extension, there was signed at Washington on June 15, 1955, a Protocol Suplplemnenting the Convention Between the U.niiteld States of America and the Kingdom of the Xetherlands With Respect to Taxes on Income and Certain Other Taxes for the Purpose or Facilitating Extension to the Netherlands Amtilles. On July 29, 1955 the Senate of the United States of America gave its advice laid consent to the ratification of tithe Protocol of June 15, 1955 and on Auigust 24, 195.5 the President of the United States of America ratifield that Protocol. The instruments of ratification have not been exchanged, and therefore the Protocol is not vet in force. []

    n: $11411AM

    IM TIASm

    I Entered
    TIAS 3361T

    I Not printed.
    into force NOV tO. 1905.

    (2008)

    a
    Also on July 29, 1955 the Senate of tile United States of America specificallv approved the propomal for extentding to tihe Netherlands Antilhls tle operation of tlie ('o01vetit ion of 1948, with certan limitations. It will not bo posIiible to coiphllete thlt.action to make such extension efftrtive, in accordance with Arti,,le 'XXVII of the conventiono, until the entry into force of the ProtMcol. Meanwhile, however, the (Governrieut of the Netlt.rlands is infonned that, by reason of the policy established by the Senate in regard to provisions for asswtance in tax collection, it is necessary to set forth a further understanding as follows: "In extending to the Nethierlands Antilles the application of the C(onvention of April 29, 1948, as supplemented by the Protocol of June 15, 1955. the collection provision in Article XXII will be restricted in its application so that each of the Oovertunents may assist in collweting the other's taxes only to the extent neceessary to insure that the provisions of the Convention shall not be enjoyed by persons not entitled to its benefits." It would he appreciatel if the Government of the Netherlands would inform the Government of the United States of America whether the understanding as quoted in the last preceding paragraph is acceptable and also whether the Government of the Netherlands concurs with respect to the statement of limitations and understandings as enunmerated elsewhere in this note. After receipt of a communication indicating the concurrence of the Government of the Netherlands in these respects and after the entry into force of the Protocol of June 15, 1955, tile Govern. ment of the United States of America will be in a position to send to the Government of the Netherlands a notice of acceptance in accordance with Article XXVII (2) of the Convention, thereby completing the action necessary to make the Convention, as modified and supplemented, effective with respect to the Netherlands Antilles.
    W.V. W.

    DEPARTMENT OF STATE,

    11'".a!inglon, September 16 1955

    TIA8 8367

    (2009)

    6
    T'1e Netherlands Ambassador to the Acting Secretary of State
    WASH:il!I.N TON., D.C'.

    The Ainhaulador of the Netherlanids prestelis his comnpiinientC to the Acting Secretary of Slate and ihas the honor to refer to the note from the department of State, dated September 15, 1955, colinerninii certain limitations and understand1ings which are liCeiirSiy in extending to the Netherlands Antilles the operation of the convention n Between the Kingdom of the Netherlands and the United Stitles of America With Respect to Taxes on Income 83id( certain n Other 'raxes, signed at Washington on April 29, 1948, ilodjified as set forth in the Protocol of Exchange of Instrunients of Ratification signed at Washington on December 1, 1048, an8( to he modified as set forth in the Protocol Supplementing the Conventiion Betwh the Kingdom of the Netherlands and the United een
    States of America With Respect to Taxes on Income and Certain

    Other Taxes for the Purpose of Facilitating Extension to the Netherlands Antilles, signed at Washington on June 15, 1955. Tile necessary limitations and understandings are as follows: 1. Article 1 (1) of the Convention shall have application in the Netherlan(ds Antilles only in respect of income taxes and profits taxes, since no property tax is levied in that jurisdiction. 2. In the application of Article Il (1) (j) of the Convention, the termn "competent authority" shall be understood to mean, in the case of the Netherlands Antilles, the Administrateur van Financien or his duly authorized representative. 3. Paragraphs (2) and (3) of Article VI of the Convention shall have no application in the Netherlands Antilles, since the agreeenents of 1926 and 1939 referred to therein have no application to the Netherlands Antilles. 4. Articles XI and XIII of the Convention shall be deemed to be deleted and of no effect, and Article XIV is modified, in accordance with' the modifications set forth in the Protocol of Exchange of Instruments of Ratification signed at Washington on December 1. 1948. 5. Article XX of the Convention shall have no application in the Netherlands Antilles, since the provisions thereof relating to certain Netherlands property taxes have no bearing on Netherlands Antilles taxes. In the Department's note referred to above it is also stated that, by reason of the policy established by the Senate in regard to pro-

    TIAS 8337

    (2010)

    7
    visions for assistance in tax collection, it is neemary to mst forth a further understanding as follows: "In extending to the Netherlands Antilles the applications of the Convention of April 29, 1948, as supplemented by the Protacol of June 15, 1955, the collection provision in Article XXII wili be restricted in its application so that each of the Governments may assist in collecting the other's taxes only to the extent necessary to insure that the provisions of the Convention shall not be enjoyed by persons not entitled to its benefits." Dr. Van Roijen wishes to inform the Govertnent of the United States of America that the Govermnent of the Netherlands, after having consulted the Governnent of the Netherlands Antilles, accepts the understanding as quoted in the last preceding paragraph and concurs with respect to the statement of limitations and understandings as enumerated elsewhere in this note.

    WASHINGTON,

    D.C.

    NAaember 4, 1955.

    The Acting Secretary of Ytate to the Netherlands Ambao.ador


    The Acitng Seeretary of State presents his compliments to His Ex.elleiiy the Ambassador of the Netherlauds and lhas the hioior to refer to tlie Anibassador's iote No. FA11 156 dated Jiine 24, 1952. the iote of August 7. 1952 front thlie Secret -"r of State to the (C'haarg d'Airaires ald iilterim, lie no!,, of SeptelmbIer I;, 1955 t froim Ile Acting Secretary of St.ate to thle ('harg- 1'A.ril irITs fil
    it erini. 1ind tih leot' of November 4, 1955 from tlw Amla.-salor to tilt' Act ing Stcrea't il'y of St illt', relt ing to the proposed ,\ IelsiOll

    to the Net.herlnlds Antlilhl of flih, o)eraltioi of the tax ',v,',it t vedIi of April 29. 1948 bt,tweei the L'ited Stales itid thlie Netherlalnds. le Iniasilluch as tle protocol of .|1iui4' 15, 1955 suppleilhlitlitg lihe 1948 coniventliot was brought into force oii November it), 1055 by thlie excnipge of iist rulileits of ratification, it is iow possible to take tile filial action, in a,',.dlanme. with tlbe provistiolls of

    TIARA :MO4T

    (2011)

    8
    Article XXVII of the 1948 convention, to make effective the

    propoi, d extension to the Netherlands Antilles.


    Accordingly, the Government of the Kingdom of the Nether-

    latls is hereby notified that the Government of the United States of Amierica accepts the proposal and understands that, by this action, the operation of the 1948 convention, as modified and aupplemented by the protocol of June 15, 1955, is extended to the Netherlands Antilles subject to the limitations and understandings
    as set forth in the above-mentioned noles of September 15 and

    November 4, 1955. effective retroactively on and after Talnuary 1, 1955.


    C.I.B.
    DEPARTMENT OF STATE,

    'ashington. Xormniber 10 195J

    T! AS 33037

    (2012)

    SECTION 18 Convention With NEW ZEALAND


    I

    (2018)

    INCOME TAX CONVENTION BETWEEN THE UNITED STATES AND NEW


    ZEALAND

    March 16, 1948 ------- Signed at Washington. May 19, 1948...... Received by Senate; designated Executive secrecy removed (94 Congressional Record 6084). April 5, 1951 .......... Ratified by New Zealand. April 12 and 13, 1951 - Senate Committee Hearings. August 6, 1951 -------- Reprted by Senate Foreign Relations Committee (Ex. Rept. No. 1, 82d Cong., 1st Ratification by Senate of its advice and consent wit 1 reservation (97 Congressional Record 11434-11435, 11438-11441, 11447-11450). Ratified by United States President. December 10, 1951 ... Instruments of ratification exchanged; conDecember 18, 1951 vention entered into force effective January 1, 1951 (as to United States), April 1, 1952 (as to New Zealand). December 20, 1951.... Proclaimed by United States President. Official Text ---------- TIAS 2360; 2 UST 2378. September 17, 1951....
    -..

    J, 80th Congress, 2d Session; injunction of

    Sess.).

    (2014)

    CONTENTS OF SECTION 18
    Pap

    I. Presidential Message of Transmittal to Senate --------------------2. Senate Committee Hearings -----------------------------------3. Senate Committee Report -------------------------------------4. Senate Floor Debate and Action --------------------------------

    5. Presidential Proclamation (including Official Text of Convention)- .-

    (2017) (2025) (2027) (2029)


    (2045)

    (2015)

    PresidentialMessage of Trnamittal to Senate (including materials enclosed therewith)

    (2017)

    6ftHo CoNolaeso

    SENATE

    JExECUTIVZ

    2d &a8ion

    I 1

    CONVENTION WITH NEW ZEALAND RELATING TO AVOIDANCE OF DOUBLE TAXATION

    MESSAGE
    FUoM

    THE PRESIDENT OF THE UNITED STATES


    TIANSMITTING

    THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND NEW ZEALAND, SIGNED AT WA8HINGTON ON MARCH 16, 1948, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
    MAy 19, 1948.-Convention was read the first time and the injunction of secrecy

    was removed therefrom. The treaty, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate
    THrn

    WHITE HIOt'sE,

    To the Senate of the United States:

    19,19$8.

    With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the convention between the United States of America and New Zealand, signed at Washington on March 16, 1948, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. I also transmit, for the information of the Senate the report by the Secretary of State with respect to the convention. The convention has the approval of the Department of State and the Treasury Department.
    HARRY S. TRUMAN.

    (Enclosures: (1) Report of the Secretary of State, (2) convention between the United States and New Zealand, signed March 16, 1948. relating to taxes on income.) (2019)

    COXVENTION WITH NEW ZEALAND RELATING TO TAXATION

    Washington, D. C., May 18,1948. The Pl?:.siDopqr, Mouse: The WhI'e I The undersigned, the Secretary of State,, has the honor to lay before the President, with a view to itsitransmission to the Senate to receive the advice and conent of that body to ratification, if his judgment apprwe thereof, a inventionn between the United States of America anti New Zt-aland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Woshington on March 16, 1948. The convention was signed for the United States of Amrica by the Secretary of State and for New Zealand by the Minister of Finance and Minister of Customs. The objectives of the convention are, in general, the same as those of the income-tax conventions now in force between the United States and certain other countries, including the convention and protocol of March 23, 1939, with 6weden, the convention and protocol of March 4, 1942, with Canada, the convention and protocol of July 25, 1939, with France. and the convention of April 16, 1945, with "the United Kingdom, and also tke income-tax convention of December 13, 1946, with the Union of South Africa now pending in the Senate Committee on Foreign Relations. Any reference hereinafter to a convention with any of the countries above-mentioned will be a reference to the income-tax convention with that country. The convention with New Zealand is designed to establish a reciprocal system of tax exemptions and tax credits, as between the United States and New Zealand, for the elimination, so far as possible, of double taxation, and to establish a system of reciprocal administrative assistance between the competent authorities of the two countries in, order to facilitate the operation of the convention. The Department of State and the Treasury Department collaborated in the negotiation of the convention. The major features and objectives of the convention may be summarized as follows: (1) Specific reference to the taxes to which the convention relates (art. I) and extensive definition of terms found in the convention (art. II). By article I the convention is made applicable, in respect of the United States, only to Federal income taxes. Consequently, it does not apply to taxes imposed by the several States of the United States. It is provided in article II, in addition to the specific definitions, that any term not defined in the convention shall, unless the context otherwise requires, have the meaning in each country which it has under the law of that country relating to the taxes which are the subject of the convention. (2) Adoption of principles affecting the determination of amount, and affecting the taxation, of business income derived by enterprise" of one country from sources within the other country (arts. III, IV, and V). Under article I, upon a reciprocal basis, the business income of a New Zealand enterprise will be subjected to taxation by the United States only if such enterprise is engaged in trade or business through a permanent establishment in the UMited States, permanent establishment" being defined in article H. Article IV authorizes the allocation of business income as between the two countries, in consonance with the principle in section 45 of the Internal Revenue Code

    DEPARTMENT OF STATE,

    (220)

    CONVENTION WITH NEW ZEALAND RELATING TO TAXATION

    affecting the adjustment of accounts as between intrlocking businesses, in order that a reasonable tax basis may be allocated to each of the two countries. Article V, resting to the reciprocal exemption from tax of profits from the operation of ships or aircraftC, is consistent wit h the principle embodied in sections 212 (b) and 231 (d) of the Internal Revenue Code. Articles III, IB, and V correspond in principle to provisions in the conventions with the United Kingdom (III, ITV, V), Canada (I, III, IV, V), France (3, 5, 6), Sweden (II, Il, IV), and, as to articles III and IV, to the convention with the Union of South Africa (V, VI, VII). (3) Reduction in the United States rate of tax at the wource from 30 to 15 percent in the case of dividends moving from the United States to a resident of New Zealand other than a United States citizen, with a provision, subject to certain limitations, for reduction of the rate to 5 percent in the case of dividends moving from a subsidiary to a parent corporation (art. VI). Dividends of New Zealand corporations are not at present subjected to tax under New Zealand law. Provision is made for the possible termination of article VI, in certain eventualities, by a written notification from either Government to the other Government. Article VI corresponds to provisions in the conventions with the United Kingdom (VI), Canada (XI), and Sweden (VII). (4) Reciprocal exemption from taxation, upon certain conditions, of specified items of income derived from sources within one country by residents or corporations of the other country, as follows: (a) Rentals and royalties (arts. VII and VIII): Article VII deals with income from rentals of real property and with income from royalties, including royalties from natural resources, and provides that a resident of one of the countries deriving such income from sources within the other country may elect to be subject to the tax of such other country on a net basis as if he were engaged in trade or business therein through a permanent establishment. Under article VIII each country exempts from tax the motion-picture rentals derived from that country by a resident of the other country who is not engged in trade or business through a permanent establishment in the country first-mentioned; however, this article does not apply to the New Zealand film-hire tax, which has the character under New Zealand law of a customs duty, or to the New Zealand tax on income derived from the business of renting motion-picture films, that tax being of a purely local character. These two articles, based on reciprocity, may be compared with provisions in the conventions with the United Kingdom (VIII, IX), France (7), and Sweden (V, VI). (b) Compensation for personal services (art. IX): This article provides reciprocal exemptions from taxation with respect to compensation for personal services performed by persons temporarily present within the territory of the taxing government for a period or periods not exceeding 183 days during the taxable year, where the services are performed on behalf of a person resident in the other country. It is provided that these exemptions do not extend to profits or remuneration of public entertainers. In the light of experience in connection with Senate consideration in 1945 and 1946 of the income-tax convention with the United Kingdom, every reasonable effort was made to avoid the inclusion in the convention with New Zealand of the excep?8098 0-42-vol. 0--4

    (2021)

    CONVENTION WITH NEW ZEALAND RELATING TO TAXATION

    tion with respect to public entertainers. However, when it became clear that the New Zealand authorities would not, under any circumstances, agree to provisions exempting compensation for personal services from taxation without the exception in regard to public entertainers, the fullest possible benefits were gined by adopting article IX as it now appears in the convention. Nevertheless, public entertainers will have the full benefit of the credit provisions in article XIII, effectively avoiding double taxation in cases where no specific exemption is granted by the convention. Article IX corresponds in principle to provisions in the conventions with the United Kingdom (XI), Canada (VII), and Sweden (XI). (e) Government salaries and wages (art. X): This article provides that government remunerations, salaries and wages (other than pensions) for personal services in the discharge of governmental functions are subject to tax only by the government making the payments. Payments made to a citizen of the United States remain subject to United States tax. These provisions may be compared with provisions in the conventions with the United Kingdom (X), Canada (VI (1)), France (8), and Sweder (X). (5) Unilateral concessions by New Zealand with respect to the application of its tax laws affecting income (other than dividends paid by a company resident in New Zealand) which is exempt from New Zealand tax under any provision of the convention and is derived by a resident of the United States (art. XI). Such income is not to be included in the taxpayer's total income for purposes of determining the amount of New Zealand tax payable, despite the fact that New Zealand law requires a person who receives both taxable and nontaxable income to group all such income for the purpose of determining the rate of tax on the taxable income. (6) Alleviation, with respect to residents of New Zealand, of taxation by the United States of nonresident aliens and foreign corporations in the case of certain taxes which have been the subject of criticism as being extraterritorial in character (art. XII). On a reciprocal basis, dividends paid by a New Zealand corporation shall be exempt from United States tax except where the recipient is a citizen of, or is resident in the United States or is a United States corporation. Article XII corresponds to provisions in the conventions with the United Kingdom (XV), Canada (XII), and the Union of South Africa (XII). (7) Allowance of credits for foreign taxes paid (art. XIII). The United States, for its part, subject to section 131 of the Internal Revenue Code as in effect on the date of signature of the convention, agrees that the taxes paid to New Zealand shall be allowed as a credit against United States tax. There are reciprocal provisions applying to the allowance as a credit against New Zealand tax of the taxes paid to the United. States. Article XIII corresponds to provisions in the conventions with the United Kingdom (XIII), Canada (XV, XVII), France (14A), Sweden (XIV), and the Union of South Africa (IV). (8) Exemption upon certain conditions, of professors or teachers (art. XIV) and of students or business or trade apprentices (art. XV) from taxes on their remuneration or on payments made to them. Corresponding provisions are in the conventions with the United Kingdom (XVIII, XIX), Canada (XII), France (12), Sweden (XII), an the Union of South Africa (IX, X). (2022)

    CONVENTION WITH NEW ZEALAND RELATING TO TAXATION

    (9) Establishment of a system of administrative cooperation between the competent authorities of the two countries (arts. XVI, XVII, and XVIII), involving exchange of information, assistance in collection in certain cases, and consultation, together with provisions regarding action to be taken respecting claims lodged by taxpayers (art. XVIII), and a provision that nothing in the convention shall restrict any exemption, deduction, credit, or other allowance accorded under the tax laws of either country (art. XIX). Except for article XVII, the provisions of all of these articles correspond in principle to provisions in conventions with the other countries mentioned. Article XVII has no exact counterpart in other conventions of the United States, but embodies what has been found to be a necessary safeguard in order to assure that exemptions or reduced rates of tax accorded by the convention shall not be enjoyed by persons who are not entitled to such benefits. Article XVII provides that each Government mav collect such tax imposed by the other Government as for that purpose. As I may be necessary in the case of dividends an example of the operation of this provision: derived from sources within the United States by a resident of New Zealand, the United States withholding rate on the dividends iq reduced from 30 to 15 percent by article VI; when it is found that the ultimate recipient of the dividends is a person resident in a country other than New Zealand who is not entitled to the benefits of article VI, and that the addressee in New Zealand is merely an intermediary for the transmission of the dividends to such person, the additional 15 percent of the withholding tax. the difference between the reduced rate and the full rate, may be collected by New Zealand for the United States. (10) Establishment of a basis for the extension of the convention to apply to any overseas territory of either country (art. XX). This is similar to article XXII of the convention with the United Kingdom. It does not of itself extend the provisions of the convention to such overseas territories, but makes it possible, on the conditions specified, for the provisions to be so extended without the necessity for entering into a separate convention for that purpose. As stated in connection with the submission to the Senate of the convention with the United Kingdom, the United States revenue laws do not extend to overseas possessions, such as Puerto Rico. Under article XX such possessions may elect to have the convention apply to them, subject to the requirement for the giving of a notification to that effect by the United States Government to the New Zealand Government and the right of the latter to give notice that it does not accept such notification. Provision is made also for the separate termination of the convention as to any of the overseas territories to which it may have become applicable under article XX. Article XXI provides for ratification and for the exchange of instruments of ratification and prescribes the effective dates of the convention, namely) (1) as to the United States, for taxable years beginning on or after January 1 of the calendar year in which the instruments of ratification are exchanged, and (2) as to New Zealand, for the year of assessment beginning on April 1 next following the calendar year in which the instruments of ratification are exchanged. Article XXII provides that the convention shall remain in force for a minimum of 2 years but may be terminated at the end of that period or thereafter by dhe giving of written notice by one of the

    (2028)

    CONVENTION WITH NEW ZEALAND RELATING TO TAXATION

    Governments to the other Government, according to the procedure

    and with the efrect specified. Respectfully submitted.


    Zealand,

    UL.. %./,. ,L

    noLAI AJL$ g

    Uniited States and New (Enclosure: Convention between the to taxes on income.) signed March 16, 1948, relating

    [Text of convention]

    (2024)

    Senate Committee Hearings


    April 12 and 13, 1951 82d Congress, 1st Session Subcommittee of the Senate Committee on Foreign Relations
    INOTE: This document is printed in Volume

    I lbginning at page (503).]

    (2025)

    Senate Committee Report


    August 6, 1951 Executive Report No. 1 82d Congress, 1st Session Senate Foreign Relations Committee
    INOTE: This document is printed in Volume I beginning at page (583).1

    (2027)

    Senate Floor Debate and Action


    September 17, 1951

    82d Congress, I s( Session


    97 congressionall Record 114:34-114:35, 114:18-11441, 11447-11450

    (2029)

    I
    1/-. 114,141
    RATIFI('ATION OF CIIRTAIN CONVENTIONS

    Approval recoinuninded with an understanding relative to tihe collection provisions of article XV. Second. Convention with tihe Union of -South Africa relating to estate tixes, signed at. Cap~etowln, April 10, 1947--Executive FF, Eightieth Congress, first session. Approval recommended with an understanding relative to tihe collection provisions of article VIII. Third. Convention with New Zealand relating to income taxes, signed at Washington, March 16, 1948--Executive J, Eightieth Congress, second session. Approval recommended subject to a reservation relative to taxes collectible from public entertainers. Fourth. Convention with Norway relating to income taxes, signed at. Washington, June 13, 1949--Executive Q, Eighty-finst Congress, first session.

    Congress, first, session.

    Mr. GEORGE. Mr. President,, the Committee on Foreign Relations has considered the conventions hereinaftr listed and has recomndnethld that the tk,.ate give its advice awnd consenti to their rI' li'afhtion, 511ljietl to the reservations and understandings which tire itidicllt Id illiii' ',(i ll44he~ tat ihiiition. 'rie treaties or colnvenIt'f tions are ais follows: First. ('onventtion wit Itthe inion of Soutuh Africat rehiting to ilon e taxes, signed att Pretoria, D)ecemnber 13, 1946 .. 4xecutiive 0, 4ilghtict hI

    second session. Approval recommended subject to no reservations or understandings. Seventh. Convention with Ireland relating to income taxes, signed second session. Approval recommended subject, to reservations relative to the capital gains provisions of art-icle XIV and the accumulated earnings provisions of article XVI. Eighth. Convention with Greece relating to estate taxes, signed at Athens, February 20, 1950--Executivo K, Eighty-first Congress, second session. collection provisions of article IX.
    Approval recommended subject to a reservation regarding the

    collection provisions of article XVII. Fifth. Convention with Norway relating to estate taxes, signed at, Washington, Jute 13, 1949-Executive R, Eighty-first Coigress, first session. Approval recommended subject to a reservation respecting the collection provisions of article IX. Sixth. Convention with Ireland relating to estate taxes, signed at Dublin, September 13, 1949-Executive E, Eighty-first. Congress,

    Approval recommended subject to an understanding relative to the

    at Dublin, September 13, 1949--Executifve F, Eighky-first Congress,

    (2081)

    Ninth. Convention with Greece relating to income taxes, signed at Athens, February 20, 1950 -Executive L, Eighty-first ('ongess, second session. Approval recommended subject to an understanding with respect to tile collection provisions of article XIX. Tenth. Convention withl Canada relatingr to income taxes, signed , Eighty-first Congress, at Ottawa, thune 12, 1950-.Execllltive
    second Session.

    Approval recommended subject to a reservation relating to the professional earnings of public entertainers. Eleventh. Convention with Canada relating to estate taxes, signed at Ottawa, June 12, 1950-Executive S, Eighty-first Congress, second session. Approval recommended subject to no reservations or understand. m welfth. Protocol with the Union of South Africa, relating to estate taxes, signed at Pretoria, July 14, 1950--Executive T, Eighty-first Congress, second session. Approval recommended subject. to an understanding relative to the collection provision referred to above under Executive FF. Thirteenth. Protocol with the Union of South Africa, relating to income taxes, signed at Pretoria, July 14, 1950-Executive U, Eightyfirst Congress, second session. Approval recommended subject to a reservation relating to the profits of public entertainers and the understanding referred to under Executive 0 above. Fourteenth. Convention with Switzerland, relating to income taxes signed at Washington, May 24, 1951-Executive N, Eighty-second Congress, first session. Approval recommended subject to reservation regarding profits of public entertainers. Mr. President, permit me to say that all these treaties, as is apparent from a reading of the titles, and from the reservations and understand. ings included, seek to eliminate double taxation with respect to the incomes of individuals and corporations and with respect to taxes on decedents' estates. There was some difference between the witnesses who testified before the subcommittee appointed by the distinguished chairman of the Committee on Foreign Relationsw, the Senator from Texas [Mr. CONNALLY] to consider these several treaties and protocols but tie subcommittee was unanimous in its conclusions, and tie full committee likewise concurred in thie conclusions of the subcommittee. The subcommittee consisted of the junior Senator from Iowa [Mlr. GILLrTTE, the senior Senator from New Jersey [Mr. SMITH], the I shall invite attention only to those reservations which are common to all treaties, or at least common in degree. It will be noted that the first reservation suggested with respect to several of these treaties, .South Africa, Norway, and Greece is for mutual assistance especially in the collection of taxes. I may say that no similar reservation appears in the convention with Ireland or in the existing conventions with Canada and the United Kingdom. These conventions provide, in the case of South Africa, as amended by the protocol, Utat tie assistance and support to be given by each contracting state shall not be accorded with respect of citizens or nationals or estates of citizens or nationals of the contracting state to which application is made for (2082)

    senior Senator from Iowa [Mr.

    HICKENLOOPERJ,

    and myself.

    the provision of the pending estate and income conventions are too broad. As a general rule it, is not believed wise to have one govern. ment collect the taxes which are due to another government. There. fore the committee recomnmends that these provisions be eliminated from the pending conventions; with the exception of the South Arrican Convention, as amended bythat the provision the protocol, be accepted, subject to the understanding that tihe application will be limited to those cases in which the estate of a decedent claims a credit under article 5 of the convention. The committee recommenids this limited exception in the case of South Africa in view of the fact that. the convention is retroactive to 1944 and the fact that since that time the estates concerned have been on notice wit h respect to the collection provision. Mr. President, I may say that this was the view taken by the committee with respect to all these assistance provisions. It, was simply deemed unwise to have our citizens in foreign countries subjected to the judicial procedures of those countries, and likewise it was deemed unwise to obligate our country to undertake the collection in our own courts of taxes due to the foreign countries dealt with in these conventions. It, will be recalled that in nmaniy instances, or perhaps all, the courts would be called upon to enforce very harsh civil penalties, and it was not deemied wise for our courts to undertake that, particular job. It will be noted also that in two or three or more of these conventions there are reservations relating to tihe con sensation paid American citizens by Anmerican firms or employers in the countries with whom we have negotiated these treaties. That matter relates to the conpensation for personal services of American citizens in foreign countries. Exception has been taken heretofore, I may say, in regard to this question in connection with the negtiation of other treaties, but. it was disregarded by those who negotiated with respect to several of the treaties now before the Senate. It was pointed out that these provisions were highly discriminatory against artists, musicians, motion-picture actors, and others who went. into foreign countries, but, who were at work there for American employers, and temporarily resided in those foreign countries while they were carrying on their business enterprises there. It is a rule, which has been'ado pted now for many years, that aui American citizen who spends at least 183 days in a foreign country is to be exempted front double taxation-in other words, taxation by both countries. However, an effort was made to make a most invidious distinction as between artists and others who went into the foreign countries to make motion pictures or to give performances for American employers. Another provision in the Canadian treaty which has called for a reservation is the capital-gains provision of the act Ip. 114365 of 1950. It will be recalled that by section 213 of the Revenue Act of 1950 a capital-gains tax was imposed upon visitors from other countries who entered tile United States and perhaps rented a room in one of the hotels in New York City and there engaged extensively in capitalgains operations upon the American exchanges. In 1950 Congress (2088)

    is the opinion of the subcommnittee and of the whole (onulilittee that

    assistance in collection, unless such citizen or national or estate is entitled to the allowance and credit under the applicable convention. In tile case of tile existing convention with France, thie restriction ujpoll assistance to such nationals is proposed without limitation. It

    undertook to impose a capital-gains tax upon those resident aliens. The Canadian treaty provides against this provision; that is to say, in thie Canadian convention there is a provision which abrogates this provision. Since it is a subsequent legislative declaration, it would have the effect, if permitted to stand, of repealing the congressional act. Therefore, the committee deemed it wise to offer a reservittion on that point in the Canadian treaty. There is one other point upon which a reservation or understanding is inserted in one of the conventions, I believe. It relates to accumulated earnings and profits. Under article I (It) of the new convention with Canada, article 13 of the original treaty is amended, and that amendment is made solely for the purpose of correcting a mistake in the original treaty or at .least clarifying the meaning of the original treaty. Under this article, at this time when more than 50 percent of the outstanding voting stock is owned directly or indirectly during the last half of the taxable year by individual residents of Canada, other than citizens of the United States, it shall be exempt from an1 taxes imposed by the United States with respect to the accumulated or un. distribut-d earnings, profits, income, or surplus of such corporations. Mr. President, I think the brief explanations I have made will suffice to indicate the nature of the reservations in each case and the nature of the understandings, wherever understandings are inserted in the resolutions of ratification. If there are no questions, I request that the treaties now be laid before the Senate. Mr. SMITH of New Jersey. Mr. President, as a member of the subcommittee which was associated with the distinguished Senator from Georgia (Mr. GEORGE) in connection with studying these treaties, I rise to support the Senator's position in requesting that the treaties be ratified. Many days were. spent on them, and many witnesses before ts during their consideration. We had the benefit of the wise judgment of Mr. Stam, who is the adviser of both the House and the Senate in connection with fiscal matters. We heard from numerous Government witnesses and numerous outside witnesses. I wish to pay the highest possible tribute to the distinguished chairman of the subcommittee, the Senator from Georgia [Mr. GEORGE], for the patience and skill with which he handled all these matters. In the Eightieth Congress I had the privilege of handling certain matters of this sort, and I believe the French treaty was-included among them. I think that in these treaties we are providing for true uniformity, a point which I consider to be most important. Heretofore we have gained experience in these matters; and at this time, as a result of the further testimony received, I believe we now have reached a point where the committee is familiar with the possible pitfalls in connection with such proceedings, and we are zealously careful of the rights of American citizens. Again I wish to commend the able Senator from Georgia for the fine work he has done in this connection. The committee is unaninious in taking the position that these treaties protect our citizens and at the same time are just and fair to the countries participating in the conventions. Mr. CASE. Mr. President, will the Senator yield? (2084)
    j 4

    Mr. GEORGE. I am very glad to yield, if the Senator wishes to Mr. CASE. I am willing to address my question either to the Senator from Georgia or to the Senator fromt New Jersey. Mr. GEORGE. I shall be pleased to answer if I can. Mr. CASE. I did not know that these matters were to come tip today in connection with the treaties. I have been disturbed by reading att different times press reports to the effect that certain. Greek nationals have been taking advantage of the opportunity to purchase surplus American vessels, and in some way !nake very large profits, eIther by placing the vessels under Panamanian registry or by placing them under Greek registry. While the matter may not wondering whether there is any possibility be exactly covered, I amb that in the convention proposed between tile United States and Greece the opportunity to make unusual profits by reason of living in New York City and retaining Greek nationality is enhanced in any way. Mr. GEORGE. No; it is not. On the contrary, we have been scrupulously careful to see that nothing in any' of these treaties would have the effect of repealing or nullifying the provisions which we inserted in the 1950 Revenue Act, section 213, which subjected to capital-gains tax the profits made by temporary aliens residing in the United States, but who had no fi.xed place of business within the United States. We are offering in the case of the Canadian treaty a reservation which protects the revenue act of this countr.. However, I would say to the distinguished Senator that, in large part the question which lie has in mind is not involved in these treaties at all, because the treaties relate primarily to a reciprocal arrangement between the two contracting countries, namely, between our country and country X, respecting income tax and collection of income tax, respecting estate taxes, and safeguarding against the double taxation of the citizens of the respective parties to the convention. It does not relate to the larger question which the Senator has asked, except in the way I have indicated. Mr. CASE. Mr. President I wish to thank the Senator from Georgia for this assurance. As I said, I had no knowledge that this matter was coming up, and I was not prepared to ask a specific question relative to the problem I have mentioned, but in view of the fact that there was a convention between the United States and Greece included in the conventions for approval, and the fact that it related to the question of avoidance of double taxation, the question naturally occurred to me as to whether it might impinge on the situation to which I have referred. Mr. GEORGE. No. it does not. Mr. CASE. I am glad to have the assurance of the Senator that it does not. Mr. GEORGE. It does not. Mr. President, in order that the committee's action and in order that the resolutions of ratification may be better understood, and especially that the effective dates of these conventions be clearly stated, I ask unanimous consent that there be included in the RECORD at this point the analysis of the pending conventions and committee recommendations, under title TII, page 3, of the committee report, to the end thereof.
    address a question to ile.

    (WU35)

    0
    There being no objection, title 11, Analysis of Pending Conventions and Committee Recommendations, was ordered to be printed in the RECORD, as follows:
    III. ANALYSIS OF PENDING CONVENTIONS AND COMMIrrFE RECOMMENDATION In response to a request of the chairman of the subcommittee, the staff of the Joint Committee on Internal Revenue Taxation prepared an analysis of the pro. visions of the pending conventions for the use of the committee, giving particular attention to the effect of the provisions upon the revenue laws of the United States. Inasmuch as the pending conventions have many substantially similar prove. visions, those dealing with income taxes are discussed together for the purpose of this report and those relating to estate taxation are discussed together. To the extent that a convention departs In any particular from the general pattern, that fact will be brought out. The two protocols with South Africa are discussed together with the pending South African conventions which they supplement. The two conventions with Canada are discussed separately inasmuch as they supplement or modify conventions which are already in effect. Insofar as the United States is concerned, the various conventions relate only to the income and estate taxes of the Federal Government and they have no effect upon the income estate, or Inheritance taxes imposed 6y any State, Terri. tory, or possession of the United States or the District of Columbia.
    A. CONVENTIONS RELATING TO ESTATE TAXES R. CONVENTIONS RELATING TO INCOME TAXES

    1P. 114J

    This section of the reports deals with the income tax conventions with the Union of South Africa (including the supplementary protocol), New Zealand, Norway, Ireland, Greece, and Switzerland. (The supplementary convention sith Canada is treated separately.) Substantially similar provisions appear in these treaties. For that reason the following discussion is divided into consideraith tion of the major items dealt % in the conventions, and the various treaties are discussed together tinder each of those headings. Double taxation arises, in the absence of reciprocal agreements such as are represented by the conventions and protocols under consideration, from the fact that the various governments assume and exercise broad, and frequently over. lapping, taxing jurisdictions. In general, the United States assumes the right to tax its natiQnals and domestic corporations on their entire income Rwithout regard to source. It like%ise assumes the right to tax its residents, regardless of nationality, on the same broad basis. Alien nonresidents, on the other hand, are taxed only on incomt. from sources within the United States, and foreign corporations are taxed only on income from sources within the United States. The Union of South Africa imposes Its taxes primarily upon income derived from sources within the Union. New Zealand does not use citizenship as a basis of tax but taxes New Zealand residents on their entire income, regardless of the source from which derived. With respect to nonresident, it taxes only the income derived from sources within New Zealand.. Norway imposes tax on the same basis as New Zealand, except that with regard to nonresidenits it only taxes the income from certain specified sources and property located in Norway. Ireland generally applies the same taxing rule as the United Kingdom-residents on their entire income and nonresidents on their income from sources within Ireland. Greece has two income taxes, each of which it imposes on a somewhat different basis. Its schedular tax (applied both to individual and corporations) is generally imposed only on income from sources within Greece, although income from abroad (i.e., dividends) is subject to tax if "enjoyed" in Greece. The general tax (applied only to natural persons) is imposed on the entire income of a Greek national, regardless of residence, and on the entire income of a resident of Greece. Thus. the latter tax Issimilar to the United States income tax Aith respect to the broad scope of its application. Switzerland imposes both federal and local income taxes, of which the latter are the most important. The Swiss taxes on income are based primarily on the domicile of the taxpayer and the source of the income. In general, the conventions avoid double taxation by a system of reciprocal exemptions and by reciprocal adoption of the principle of the United States taxcredit system. The provisions reserving to each State the right to tax its own citizens, residents, and corporations without regard to the conventions are analogous in principle to similar provisions found in all income tax conventions to which the United States is a party.

    (2036)

    (1) Business income All six of the conventions under consideration adopt the principle that an enterprise of one of the contracting states shall not be subject to tax in the other contracting state unless it is engaged in a trade or business in that state through a "permanent establishment" situated therein. A "permanent establishment" is generally defined to mean a branch, factory, workshop, warehouse and other similar fixed places of business and does not include a mere agent or broker. To the extent that such an enterprise is carrying on a trade or business through a permanent establishment, it is to be taxable only on the profits derived from sources within the taxing country. This provision does not extend to mere investment income or income derived from the furnishing of personal services. Moreover, each of the conventions provide that no profit shall be deemed to arise from the mere purchase of goods or merchandise. The conventions provide in appropriate instances for the adjustment of the accounts of a branch or other related business entity of one contracting state in order that the branch accounts will reflect its profits as accurately as possible. (9) Dividends and interest The South African convention originally provided (art. XII) that dividends and interest paid by a South African corporation to South African residents other than United States citizens and to South African corporations would be exempt from United States tax to the extent taxed by South Africa. This provision represented a unilateral concession by the United States. Subsequent efforts to have South Africa agree to a similar provision respecting the Union's undistributed profits tax and its nonresident shareholder's tax having failed, the two Governments have agreed (art. V of the pending protocol) to delete article XII of the convention entirely. On a reciprocal basis, the New Zealand convention provides (art. XII) that dividends (without reference to interest) paid by a New Zealand corporation shall be exempt from tax except where the recipient is a citizen or a resident of the United States or is a United States corporation. The Norwegian convention makes no reference to the payment of dividends but provides (art. VI) that interest on any form of indebtedness derived from sources within one country by a resident of the other (including a corporation or other business entity not having a permanent establishment in the former country) shall be exempt in the country from which derived. The Irish convention has a similar provision (art. VII), but it does not apply to interest paid by a corporation resident in one of the contracting countries to a corporation of the other country which controls, directly or indirectly, more than 50 percent of the entire voting power in the payor corporation. This provision is practically identical with article VI of the convention with Greece. Moreover, with respect to both interest and dividends, article XV of the convention with Ireland provides that such payments made by a corporation of one of the contracting states after a date specified shall be exempt from [p. 114391 tax by the other state unless the recipient is a citizen or resident (in the case of the United States) or a resident (in the case of Ireland) of that other state. The treaty with Greece contains a unilateral provision (art. IX) to the effect that dividends and interest paid by a Greek corporation shall be exempt from United States tax except where the recipient is a citizen, resident, or corporation of the United States. Under the Internal Revenue Code, interest and dividends paid by a foreign corporation may, under certain conditions, constitute income from sources within the United States and consequently subject to United States tax in the hands of the nonresident alien recipient of such items. In practice, it is only in rare instances that it is practicable to ascertain whether a foreign corporation derives more than the requisite percentage of its gross income from United States sources so as to constitute its interest and dividends income from sources within the United States. Article VI of both the Irish and New Zealand conventions provides, unlike the other pending conventions, that the rate of United States tax on dividends derived from sources within the United States by a resident of those two countries not engaged in a trade or business within the United States through a permanent establishment therein shall not exceed 15 percent. In the case of a dividend moving from a subsidiary to a parent, the rate, subject to certain limitations, is not to exceed 5 percent. The effect of these provisions is to reduce the present United States withholding rate from 30 percent to 15 or 5 percent, as the case may be. This reduction is likewise provided in the existing conventions with the United Kingdom, Canada, Denmark, and the Netherlands.

    7305 0-42-vol. 2- 35

    (2037)

    Neither Irish nor N'ew Zealatnd law at the present limue silljects to tax tile
    dividendis of Irish or New Zealand (respecltively) vorjporations. The corporations alone is taxed, and the tatx pIaidI)y thle corporation is re'gardhed as living paid oin behalf of the shareholders threiti. Of course, tile reduictioII of fllt, United Stath's witholloiding rate does not. af1ect UInited States cilizetls resident in Irelati1d or New Zealand ats such Iersous 1are not willhloldilig tax. sillhject ill anly eventit to su1c'h1 'T'he votivnlo'iot s withi (Grece, Irelantd, aid Norway exempt on ia reciprocal basis interest derived fronl sources within otie co1111ry by ro'sidetlts of the other. Neit hter ltl Sotitlh Africati or tlite New Zealanid conventions contain suhtiI an exemlllltion. ilowever, tlle existing conventions wilt ille Ulnited Kingdom, l)elnnlark, mid the NM'therlannds do )provide for such it retiprocal exemptnioln. Under arlicle VI of Ite, conlvention withi Swit zerlatnd there would be it reciproval redtutiot ill eta t'cll Olllltry from :10 eirvn11t to 1,5 percent iln tlt( tax rale oln dividends derived from source's with1ini such coullltry iy it resident, corporation, or other e'nttity of t ile other counltry not having at prtl111e,lt, estaklishlnlwllt in tile countitrv from which tile, dividends aire derived. There would be a irehlictioll, subject to ertlailtn (pulalitwatiols, to 5 plrv'eltit ill thle tax rates with respect to sluch dlividenids if lilth shareholder is t corporation which controls, directly or indirettctly, at hl'ast 95 perenlt (of the,votiig power in tih (( corporation payilig till' dividenlds aitd if not. ti1(m. thant 25 peretnt of the gross income of such; pa 1ying corporations is derived frotn ilterest and dividends other than inlterest anld(1 dlivi. dItlnds received from its owln stllbsidialry corporations. The' rcdivcid rate of 15 i'reenlt would not appIlY to Swism tax oill dividetmih s T deriveld from Swiss soltrres iby a Swiss citizens who' ,s resident in tihe U niitedo States antdivwho is not also it citizen' Of the Itniute'd States. Switzerlahd wishes to place Ito lintiltlol 01l t itlilpisitioit of its dividend taxes withireslect to its own citi. lie zeils, exteltt It5s tI t host' havmltg dual n1tiotnalitv. No corresponmiding jlrovisioit is fomid ill ativ other treaty to % which lhl, Utnited States is atparty, lult it has tio effect 11upon0 Ti SwissVilited States ltaxatilln. Iell tax of :10 Ioperetvi be withheld at the source and at refund to would

    re'(hlt'e it ill accordance with the provisiotns of article VI would he made' il)0oi It claim dulv tiled tlherefor by tllh recipient ill thel. United States. Stich chitims for refund are ltuecessitated by tihe, difficulty in ideitifying llte owlier of shares -'which arises from lilt' fact, that tl standard formn of stock certificate in Switzerland is ht li' hear,,r share. The, Swiss cotiventiton provides that, with respect, to interest onl any form of itindebtedtiess, the rate' of tax shall be re'dutci'ed to 5 plerce'lnt dlii iliti'rest derived from soIuIrce's within oitlt country by a residientt, corlporalion, or other entily of the other cotnt rv lilt having Ia perllmallellnt esta)lishlne'llt ill thecountllitry fromi which hlie' iltieresi is (hirivi'd. li th' case of thi(' convention with Switzerlaidit a tax of 5 l percelit is retaiaied because of lilte fact that ill Switzerlal'd there is imposed otil tinteri'st, ill addlitlion to the incolmoe tax, ia 5-percent( cOullol (io stamp1I tax. The . special f'at tires explhilled allyove with respect to the reduction of tax 0)11 (livi(dedls applv also ill regard to thi' reduction( of tax oil interest. Articlh XIV of ltlh, Swiss contiVon Irolvides that dividends and interest. paid illp by any foreigit corplrat ion to ai nollresidelhnt alien resident, ill Switzerlaw d or to ai Swiss corporal11ion, ioti htlvinlt a permanent estllalishlenlt itt the Unite'd Stat'e,. slhtall hie iXelllm)t frot Unliittt State's tax. Reciprocally, dividends and intet'rest paid bv a1 corlorat ionl ot her th111 Swiss c.orjporatiOll to a president or (orpluirat ion ait Oif l th tliite/ St1ate$ IlOt h11viligI 1a erllnatlltl estalllishment, it' Switzerland shall he e'xtemnpt from Swiss tax. As thits drawln, tlit, article is llarrower th1t1 the correspondilng articles of otltlur Coll Venlit ills ill that. the exe'mptlt iOln grateted is confiniO'd to lnOulresidelt. aliens resitlitg ill Switzerlallnd and to Swiss eorporatioms, whereas other conventions x'telld lilt eixemnption to nonresident aliens and foreign corlorations generally (for exalelph', art. XV, United Kingdom; art. XII, Netherlands and New Zealand; arl. IX, Greecoe; art. XIl, Canada). It is b)roadehr il that the exemption thus rest rictod iextemns to dividendls a1nd interest paid by atiy foreign corl)oration, whereas other coIlve'ltillils have confined tho', principle ito divideinds tand interest. Iald I)v atcorpxlratioti of thie particular country with which the convention was enteretr
    into.

    (8) ('ompensztuion for personal services


    (A disctisstin of the treatlnetnt of Ielisions and atitinities will be found below under that h,,1a1litig.) Tile six conventions (South Africa 1art,. If of the protocol; Niw Zealatad-art.. IX; Norway art. X; Ireland .-art. XI; (reece; Swat zerlanoi--art. X) all adopt the' principle of reciprocalo exemtption for colnpellsatioll for personal services ierforln,,d by presidents (If oll' contracting state whoi are temlp)olrarily within tlilt

    (2038)

    ltaxiiig state for it )eriod or periods tiot to exceed 183 dtlLs if tho services are perforoaed for a resident. or corporation of the State' of which li th person is a resident. In tei case of Norway, (;reeve, and Switzerhtid there is also gratitedia limited e'xetii)tiot, where flth! services are retihered for an employer (hlotic as to thite
    ions llowever, flhi' wtiton with New Zealand, oulith Africa, and Switzerland contain an exception to the rule. Spec'ificallv exempted front thle ,s4ope' of the exe'sltioln are tl4, lroftits or rennitneration of lamllie enttrtainvrs suichit stage, as of S1ch A tiaodffi(c:athll nel jioen lpirtoire or radio artists, llillcisiails, and athhlt ,,s. except ioli is found ill the Swiss vonventliota, where lie' income' reeive'd is iess thlain ill of $1(ot0 ($5.00,() Ihle caus the, (',aiitiaa coInvenItion dist-lsse. se'paratllly). 'The' Coltautiitltet' Iaelieve's that tlhest, v'xc'el)t ious c'Ollstitoh a elitdscrilmiilnaltionl againils, this paarticuhlar o.('t-lliti ional grouipa. Tluhrefore,, tlit, colniimitte recomnmends that the Senate not, ate.t pt, l)uragrahl)h (4) of artice I X of f lit New Zealand Cotivent ioln, paragraph (3) of art lel Irof the' South Afriean aprolt 0 l, and panragraph (4) of article, X of the Swiss convention. laxing state.

    (4) (G'ov'ernmetntsalaries l'Ea'h of h Conventions adopts I lIe general principle of the reciprocal e'Xe'mpiltt ionl lle' f salaries auad wagts paid by thei other state, or b)y .olitic4l sabdivisions or 4e'rritorie's or posse-:4sions 4h'reotf. This, of course, still permits the ITnited States to tax its own citizens. This is trite of 1ll tax convieitions to which the lUnited States is it party. Iln the ease of Norway, Ireland, Greec'e, and Swit ze'rlhtd this agreeinetat slievifieally hin'ir.c's the' l)t.Itylli'lt, of ensisiots b)y the governlie'nts contcerneld. rh'le' agree'nletit, with New Zealand, o t hi other haand, does not apply to such peansiots. a( 'l'lit' provision of the &aut h African tonventiotn itakis no specific reference to governiie'nt pensions. flowever, the unifortn rule'of tle'. South Africaan co,ventitni will apply with re'spe'et to bitth govertniit' and private' liettsions to the elrI'et

    lav 'achh state'

    Che' ,otventit ions with Ni Zeahlland atid frelaettel (cotitaita a further liimaitation tw ItIItll t(liet' co'pI)e of thel'xt'itnl)t jo ta tihe effect that it satll not apply toa services performed ill cotttnec'tiota with a jarofit.-tinakitig activity oaf otte of the contracting states. ('T'his is likewise trite' of thi, (aitadiani conve'aitiotn discussed separatt'ly.) (0) P'rivate prnsions and annuities

    Ihlit they will hI tXl,nti)t frotn tax in lthe' state where r'ce'ivd.

    The coiventitio with New Zealatid tiakes no provision with resl)ect to ltit' rent tltt-e! 4f private pensions ttand atiutit it's. The gette'ral rule is stated in t4li, cottv'tktions with Norway, Gretce, and Switzerland (art. XI in each case) and itt that with Ireland (art. XII) which exemplat ill the counttry of source. provided, ihat silch pIensions and anntitites shall Ihe
    (8) Professors, teachers, students, and business apprentices
    Each convention contains a sutbstantially identical article which provides that, the Itacotine of professors ear teaeliers front Olit of t4he' contracting states who visit ti(e' other state for theI purpose' of teachliung, for it period t1ot. to excited 2 years, shall ie, exettpt from tax lay the latter state. (Soulth Afriea.--art. IX" New Zealand --art. XIV; Norway- -art. XII; Irelaid - art. XViII; (Greece; Switzerlaud --art. XII.) This provision is standard lit all later tax contvientloios to which the United States is a party. A situilar exentiption i provided, without tMie litmitation, for students and l)business apprenticies ii1 thit taxing stitte who receive renlittnaiees frotn the other a state. (Soutth Africt art. X; New Zealand- art,. XV; Norway -- rt. XIII; Ireland - art. X I X; Greece; Switrlanttd - -art. X III.)

    (7) Religious, charitable, and similar organizations ThItt contith'in with Soutth Africa (art. XI) provide's fer the reciprocal xi'llt)ption of incoine derived froti sotires within one of thai' contracting states by a religious, sciptitilic, literary, edocat ional, or charitahle organization of flite ot her contracting state' under certain conditions, frottn tax by the state from which the itcitte is derivedl. A sitailar provision is folltld in the' existing Convention with (Canatdt. The other cotiventiotns coatitii to similar provision. IP. 114401 (8) Ships and aircraft Each treaty provide's for the reciprocal exemaiption by each state of the incotame dhvrived by an at1terprise of the other state from the olii'ratiot of ships or aircraft.

    (2039)

    This principle has been enunciated In the Internal Revenue Code for many years. A special limitation hits been written into the South African provision to the effect that the exemption from South African tax does not apply to "residents" of South Africa. Thus, the exemption will not apply to at United States corporation, if any, the management and control of which is in the Union. The terni managementt and control" as applied to a corporation is intended to mnean the direction of the policies of such corporation its determitned through the meetings of its board of directors or other management group. (9) Rentals and royalties South Africa The South African convention contains no provision with respect to industrial and like royalties. However, article III of the protocol is designed to apply principles, found in several other conventions, whereby it resident of one contracthig state deriving rentals from real property or royalties from natural resources located in the other country may elect for any taxable year to be subject to tax in that, other country on it net basis. New eahlald The convention with New Zealand provides (art. VII) that a resident of oile contracting state receiving rentals front real property or royalties from natural resources or royalties from theitse or right to use copyrights, patents, etc., derived from sources within the other state may elect to be subject to tax on a net basis in the country from which derived its if lie were engaged in a trade or business in that, country througha permanent establishment. Article VIII provides, on a reciprocal basis, that motion-picture rentals derived from one country by it i'sident of the other country not engaged in trade or business through a permanent establishmnut tit the first country shall be exempt from tax by the first country. (The exemption does not apply to the New Zealand "filimn hire" tax.) Norway Article VII of the convention with Norway provides that, royalties and other amounts received for the right to use copyrights, patents, etc. (including imiotionpicture rentals) shall be exempt. front tax by thle state of source. Thus,1itihe recipient is not. afforded all election its in the New 7ealand convention. There is a special provision, moreover, to the effect that the accounts of the payor may be adjusted (by disallowing a deduction of the amounts paid) if the royalty or other amount paid is not considered to be it "reasonable consideration" for the use of the property. It has been mutually agreed by the revenue authorities of the respective countries (a) that such proviso will be construed in the admninistration of the convention as not. conferring power oln such authorities to finally determine whether all or portion of the payment referred to above should he denied its a deduction to the payor thereof and (b) that such payor has the right to appeal the issue to the appropriate judicial tribunal of the country the revenue authorities of which undertake to denv as a deduction such payment or portion thereof. The committee recommends icceptance of the provisioii in reliance upon this mutual agreement. Article VIII provides, ias to income from real property (not Including interest from bonds or mortgages secured by real prop rty) and royalties from the operation of mines, quaries or natural resources, derived by a resident or corporation of one country from sources in the other country, thatt such a person may elect to be subject to the tax of the country of source, oln a net basis as though such person were engaged in a trade or business through a permanent establishment therein. The effect of this provision (as In the case of the New Zealand and South African conventions) is to allow, for example, the Norwegian taxpayer to elect either the United States withholding rate of 30 percent on the gross amount of such royalties or rentals, or to have the tax determined on a net basis, after deductions and credits, respecting his entire grosts income front sources within the United States, including gross rentals or royalties. Ireland Under the convention with Ireland (art. VIII), royalties and rentals from copyrights, patent,,, etc. (including rentals of motion pictures), are to be exempt ait, source. Royalties front natural resources and rentals from real property which are located in the United States are to be subject either to a withholding tax limited

    (2040)

    to 15 percent or treated as if the recipient were engaged in a trade or business in the United States. The effect of this option is discussed above with respect to a similar provision in the Norwegian and South African conventions. If the property from which the rentals or royalties are received is located in Ireland and (I) the recipient is a resident of the United States, (2) the income is subject to ['ltited States tax, and (3) the recipient is not engaged in a trade or business ii i Ireland, tile income shall be exempt front Irish surtax. Greece The provisions of the convention with Greece (art. VII) with respect to the taxation of royalties provides as does the Norwegian convention that such income shall be, exempt at source. Rentals from motion-picture flinis are specifically excluded from the operation of these provisions. Under article VIII rentals from real property and natural resource royalties may be taken at source on a net basis. Switzerland Article VIII of the Swiss convention provides for exemption from tax in either country of various royalties, including flin rentals, derived from sources within that country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the royalties are derived. Article IX provides that income from real property (including gains from the sale or exchange of such property but not including interest from mortgages or
    bonds secured by such Property) and royalties from the operation of mines, quaries, or other natural resources shall be taxable only in the country where

    Switzerland contain no provision for exemption from tax on capital gains. Article XIV of the Irish convention provides that a resident of Ireland not Ie engaged in a trade or business, in the United States shall be, exempt from the United States tax on gains front the sale or exchange of capital assets. It will be recalled that section 213 of the Revenue Act of 1950 imposed a tax upon the net am1oulnt of capital gains derived front sources within the United States by a nonresident alien individual not engaged in trade or business in the United States but temporarily present therein. Article XIV of the pending convention would, of course, override the latter amendment with respect to residents of Ireland. A provision similar to that of the Irish convention was originally contained in the conventions with the Netherlands and Denmark, but oni the recommendation of the Committee on Foreign Relations, was stricken out of each convention by

    such property' or such mines, quarries, or other natural resources are situated. Like corresponding provisions in other tax conventions described above, article I X wouhl permit the tax liability to be determined upon a net basis. (10) Capital gains The conventions with South Africa, New Zealand, Norway, Greece, and

    in the convention between the United States and the United Kinqdom. However, it should be noted that the convention with the United Kingdom was ratified prior to the enactment of the Revenue Act of 1950 and prior to tile ratification of the conventions mith Denmark and the Netherlands. Because of the strong objections %%lhich have been raised previously in the Congress to the exemption of nonresident aliens front tax on their capital gains from transactions entered into iii the United States, the committee recoinmends that article XIV of the convention u ith Ireland relating to income taxes Ve elimniinated and proposes at reservation to that effect. (I I) :tccumulatcd earnings and profits

    the Senate. Those conventions, in each case subject to the reservation here noted, were accepted by the Senate on June 17, 1948. The convention with Ireland was signed on September 13, 1049. The insistence of Ireland upon the exemption of its residents front the United States tax on capital gains is based on the fact that such an exemption is contained

    Article XVI of the convention with Ireland provides that an Irish corporation shall be exempt front United States tax on its accumulated or undistributed earnings, profits, income, or surplus, if individuals who are residents of Ireland

    control, directly or ihdrectlv, throughout the later halt of the taxable year, more than 50 percent of thl- entire voting power in the corporation. A similar article in the Netherlands convention was stricken out by tile Senatte. Similar articles are found only in the UTnited Kingdom and Canadian conventions.

    (2041)

    In view of the fact that this article would give Irish corporations doing business in the United States a competitive advantage over domestic corporations, the committee recommends that the article be eliminated from the convention and proposes a reservation to that effect. (12) Creditfor foreign tqxes Under the credit provisions of the various conventions, the, United 8tattes. while continuing to tax its citizens and corporations and residents as though the conventions had not come into effect, will during the lives of the respectivls conventions continue to credit against its income taxes for income taxes paldt the other contracting states. This credit will be applied in accordance with section 131 of the Internal Revenue Code. The credit system is reciprocal. South Africa agrees (art. IV) to exclude from its income and excess-profits tax base income from sources within the United States. This satisfies the similar credit requirement of section 131(a)(3) of the code. New Zealand, on its part, in effect adopts (art. XIII) the principle of the Internal Revenue Code. Norway and Ireland likewise adopt this principle. The Irish convention contains a special provision to the effect that income derived from sources in the United Kingdom by an individual who is resident in Ireland shall be deemed to be income from sources in Ireland if such income is not subject to United Kingdom income tax. This provision is necessitated by the existence of a tax arrangement between the United Kingdom and Ireland, dated April 14, 1926. Under that arrangement, a resident of one of the countries not resident in the other country but deriving income from such other country is exempt from tax imposed by such other country. Thus, no credit for Irish tax [p. 114 411 would be provided were it not for the special provision included in the pending convention with Ireland. Greece and Switzerland (art. XIV) have agreed to credit provisions substantially similar to those found In section 131 of the Internal Revenue Code. (13) Extension to other territories Article XX of the convention with New Zealand provides that either contracting state may, upon giving notice to the other, extend the application of the convention to all overseas territories or other territories over which it has international responsibility. (14) Exchange of information Each of the six conventions provides for the exchange of information between the taxation authorities of the respective countries for the purposes of carrying on the provisions of the conventions, the prevention of fraud, and for other related purposes. (15) Mutual assistance in collection With the exception of the convention with Ireland, each of the conventions provides for mutual assistance and support in the collection of the taxes which are the subject of the convention concerned, together with interest, costs, and additions to taxes and fines not being of a penal character. Like provisions are found in the French, Netherlands, Danish, and Swedish conventions but not in the treaties with the United Kingdom and Canada. As in the case of the estate-tax conventions discussed earlier in this report, the committee believes that the collection provisions of the South African, Greek, and Norwegian income-tax conventions are too broad, and it repeats that, as a general rule, it is not believed wise to have one government collect the taxes which are due to another government. The New Zealand and Swiss conventions contain a more limited provision, and the committee recommends that the other conventions be similarly limited. Thus, the committee recommends the acceptance of the collection provisions of the South African, Greek, and Norwegian income-tax conventions subject to the understanding that each of the governments may collect the others tax solely in order to insure that the exemptions or reduced rates of tax provided under the respective conventions will not be enjoyed by persons not entitled to such benefits. (16) Effective dates The conventions with Norway and Greece shall be effective for taxable years beginning on or after the 1st day of January of the year in which the exchange of instruments of ratification occurs.

    (2042)

    awd is applicable towith South Africa is made effective on the lst day of July 1946, The convention income arising on or after that date. The convention with New Zealand shall be effective, with respect to United States taxes, for taxable years beginning on or after January I of the calendar year in which the exchange of instruments of ratification occurs, and, with respect to New Zealand taxes, for the year of assessment beginning on the 1st day of April next following the calendar year in which such exchange occurs. The effective date of the convention with Ireland is substantially the same as that of the New Zealand convention. However, inasmuch as there are small differencess with respect to the Irish inco'ne tax, the Irish surtax, and the Irish corporation-profits tax, attention is invited to the convention proper for the detailss of their respective effective dates. The Swiks convention provides that the convention shall have effect for taxable years beginning on or after January I of tit(h year in which the exchange of instruments of ratification takes place, except that, if such exchange takes place on or after October 1, paragraphs (1) and (3) of article VI and article VII shall have effect only for taxable years beginning on or after January I of the year next following the year in which such exchange takes place. It is provided also that tihe convention shall continue effective for 5 years beginning with the calendar year in which the exchange of instrunents of ratification takes place and indefinitely thereafter, but may be terminated by either country at the end of that 5year period or at any t.ine thereafter by giving at least 6 months' prior notice of termnination, in which event the convention shall cease to be effective for taxable years beginning on or after January 1 next following the expiration of the 6-month period.

    [P. 11447]

    NEW ZEALAND-CONVENTION RELATING TO

    TAXES ON INCOME

    The Senate, as in Committee of the Whole, proceeded to consider the convention (Executive J, 80th Cong., 2d sess.), a convention between the United States of America and New Zealand, relating to taxes oni income, signed at Washington on March 16, 1948, which was read the second time, as follows: [Text of convention]
    [P. 11450] The PRESIDING OFFICER. The convention is before

    the Senate and open to amendment. If there be no amendment to be proposed, the convention will be reported to the Senate. The convention was reported to the Senate without amendment. The PRESIDING OFFICER. The resolution of ratification with the reservation will be read. The Chief Clerk read as follows:
    advise and consent to the ratification of Executive J, Eightieth Congress, second sesion, the convention between the United States and New Zealand, for the avoidacne of double taxation and the prevention of fiscal evasion with respect to taxes on income, subject to the following reservation: The Government of the United States of America does not accept paragraph (4) of article IX of the convention, relating to the profits or remuneration of public entertainers.
    Resolved (two-thirds of the Senators present concurring therein), That the Senate

    The PRESIDING OFFICER. The question is on agreeing to the reservation to the resolution of ratification. The reservation was agreed to. The PRESIDING OFFICER. The question is on agreeing to the resolution of ratification with the reservation. [Putting the question.] Two-thirds of the Senators present concurring therein, the resolution of ratification, with the reservation, is agreed to, and the convention is ratified.

    (2043)

    Presidential Proclamation (Including Official Text of Convention)


    [Reprint of TIAS 23601

    (2045)

    TREATIES AND OTHER INTERNATIONAL ACTS SERIES 2360

    DOUBLE TAXATION
    Taxes on Income
    Convention between the
    UNITED STATES OF AMERICA and NEW ZEALAND

    0 Signed at Washington March 16, 1948


    0 Ratification advised by the Senate of

    the United States of America, with reservation, September 17, 1951 * Ratified by New Zealand April 5,1951 0 Ratified by the President of the United States of America, subject to said reservation, December 10, 1951 * Ratifications exchanged at Washington December 18, 1951 0 Proclaimed by the President of the United States of America December 20, 1951 0 Entered into force December 18, 1951

    and
    Protocol of Exchange * Signed at Washington December 18, 1951

    (2047)

    DEPARTMENT OF STATE
    PUBUCATIoN

    4T77

    [Literal print)

    (2048)

    BY THE PRESIDENOI 01'P T7I, UNITED STATES Or AMERICA"

    A PROCLAMATION the convention between the United States of America and New Zealand for the avoidance of double taxation and the pre. vention of fiscal evasion with respect to taxes on income was signed at Washington on March 16, 1948, the original of the said convention being word for word as follows:
    WHEREAS

    (1)

    (24049)

    The Government of the United States of America and the Govern. ment of New Zealand, Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, Have appointed for that purpose as their Plenipotentiaries: The Government of the United States of America: Mr. George C. Marshall, Secretary of State of the United States of America, and The Government of New Zealand: The Right Honorable Walter Nash, P.C., Minister of Finance and Minister of Customs for New Zealand, Who, having communicated to each other their respective full powers, found in good and due form, have agreed as follows: Article I (1) The taxes which are the subject of the present Convention
    are -

    (a) In New Zealand: The income-tax and social security charge (hereinafter referred to as New Zealand tax). (b) In the United States of America: The Federal income taxes, including surtaxes (hereinafter referred to as United States tax). (2) The present Convention shall also apply to any other taxes of a substantially similar character imposed by either Contracting Government subsequently to the date of signature of the present Convention or by the Government of any territory to which the present Convention is extended under Article XX. Article II (1) In the present Convention, unless the context otherwise
    requires -

    (a) The term "United States" means the United States of America, and when used in a geographical sense means the States, the Territories of Alaska and of Hawaii, and the District of Columbia.
    (8)
    (2051)

    .300 TIAS 2

    (b) For the purposes of this Convention New Zealand includes all islands and territories within the limits thereof for the time being including the (Cook Islands. (c) The ternis "territory of one of the Contracting Governments" and "territory of the other Contracting Government"' mean the United States or New Zealand, as the context, requires. (d) The term "tax" means ITnited States tax or New Zealand tax, as the context requires. (e) The term "person" includes any body of persons, corporate or not corporate. (f) The termn "company" means any body corporate. (g) The term "United States corporation" means a corporation, association or other like entity created or organized in, or under the laws of, the United States. (h) The term "New Zealand corporation" means any kind of juridical person created tinder the laws of New Zealand. (i) The ternis "corlporation of one Contracting Government" and "corporation of the other Contracting Government" mean a UTnited States corporation or a Now Zealand corporation, as the context requires. (j) The term "resident of New Zealand" means any person (other than a citizen of the U1nited States or a United States corporation) who is resident in New Zealand for the purposes of New Vealand tax and not resident. in the United States for the purposes of United States tax. A corporation is to be regarded as resident in New Zealand if it is incorporated tinder the laws of, or if its business is managed and controlled in, New Zealand. (k) The term "resident. of tile United States" means any individual who is resident, in the United States for the purposes of United States tax and not resident in New Zealand for the purposes of Now Zealand tax, and any United States corporation and any partnership created or organized in, or under the laws of, the United States, being a corporation or partnership which is not resident in New Zealand for the purposes of New Zealand tax. (I) The terms "resident of the territory of one of the Contracting Governments" and "resident of the territory of the other Contracting Government" mean a resident of the United States or a resident of New Zealand, as the context requires. (m) The terms "United States enterprise" and "New Zealand enterprise" mean, respectively, an industrial or commercial enterprise or undertaking carried on by a resident of the United States and an industrial or commercial enterprise or under-

    (2A)2

    TIAS !!360

    taking carried on by a resident of New Zealand; and the terms "enterprise of one of the Contracting Glovernmnents" and enterprisee of the other Contracting Goverunment" mean a United States enterprise or a New Zealand enterprise, as the context requires. (n) The term "industrial or commercial profits" includes mnnufacturing, mercantile, Rining, financial and farming profits, but does not, include income in the form of dividends, interest, rents or royalties, insurance premiums, management. charges, or remuneration for pert'sonal services. (o) The term "permanent, establishment", when used with respect to an enterprise of one of the Contructing Governments, means a branch, managenment, factory, mine, farm, or other fixed place of business, but, does not include an agency unless the agent, has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or regularly fills orders on its behalf from a stock of goods or
    merchandise.

    An enterprise of one of the Contracting Governments shall not be deemed to have a permanent establishment in the territory of the other Contracting Government merely because it carries on business dealings in that territory through a bona fide broker or general commission agent. acting in the ordinary course of his business as such. The fact that. an enterprise of one of the Contracting Governments maintains a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute that fixed place of business a permanent establishment of the enterprise. The fact. that a corporation of one Contracting Government has a subsidiary corporation which is a corporation of the other Contracting Government or which is engaged in trade or business in the territory of such other Contracting Government (whether through a permanent establishment or otherwise) shall not. of itself constitute that subsidiary corporation a permanent establishment, of its parent corporation. The maintenance within the territory of one of the Contracting Governments by an enterprise of the other Contracting Government of a warehouse for convenience of delivery and not for purposes of display shall not of itself constitute a permanent establishment within that territory even though offers of purchase have been obtained by an agent of the enterprise iii that territory and transmitted by him to the enterprise for acceptance.
    730M 0-42 -2-vol. - 36 2-

    (20o53')

    TIAS 236000

    (2) In the application of the provisions of the present Convention by one of the Contracting Governments any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting Government relating to the

    taxes which are the subject of the present Convention. Article II[ (I) The industrial or commercial profits of a United States enterprise shall not be subject to New Zealand tax unless the enterprise is engaged in trade or business in New Zealand through a pernianellt establishlinent situated therein. If it isso engaged, New Zealand tax nmay be imposed on the entire income of such enterprise from sources within New Zealand. Nothing in this paragraph shall affect any provisions of the law of New Zealand regarding liho taxation of income
    from the business of hisurance.

    (2) The industrial or commercial profits of a New Zealand enterprise shall not be subject to United States tax unless the enterprise is
    engaged in trade or business in the United States through a permanent

    establishment situated therein. If it isso engaged, United States tax may be imposed on the entire income of such enterprise from sources within the United States. (3) Where an enterprise of one of the Contracting Governments is engaged in trade or business in the territory of the other Contracting
    Government through a permanent establishment situated therein, there shall be attributed to that permanent establislhment the industrial or commercial profits which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities and dealing at arm's length with the enterprise of which it is a permanent establishment, and the profits so attributed shall be deemed to be income derived from sources within the territory of such other Contracting Government. (4) In determining the industrial or commercial profits from sources within the territory of one of the Contracting Governments of an enterprise of the other Contracting Government no profits shall be deemed to arise from the mero purchase of goods or merchandise within the territory of the former Contracting Government by such enterprise. (5) In the determination of the industrial or commercial profits of the permanent establishment there shall be allowed as deductions all expenses of a type allowed as a deduction by the Contracting Government in whose territory the permanent establishment is situated and which are reasonably applicable to the permanent establishment, including executive and general administrative expenses so applicable. (6) If the information available to the taxation authority con-

    (2054)

    TIAS 2380

    cerned is inadequate to determine the profits to be attributed to the permanent establishment, nothing hi this paragraph shall affect the application of the law of either territory in relation to the liability of the permanent establishment to pay tax on an amount determined by the exercise of a discretion or the making of an estimate by the taxation authority of that territory: Provided that such discretion shall be exercised or such estimate shall be made, so far as the information available to the taxation authority permits. in accordance with the principle stated in this paragraph. Article IV (1) Where (a) an enterprise of one of the Contracting Governments participates directly or indirectly in the inana'gement, control or capital of an enterprise of the other Contracting Government, or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of one of the Contracting Governments and an enterprise of the other Contracting Government, and (c) in either case conditions are made or imposed between the two enterprises, in their commercial or financial relations, which differ from those which would be made between independent enterprises, then any profits which would but for those conditions have accrued to one of the enterprises but by reason of these conditions have not so accrued may be included in the profits of that enterprise and taxed accordingly. (2) If the information available to the taxation authority concerned is inadequate to determine, for the purposes of paragraph (1) of this Article, the profits which might be expected to accrue to an enterprise, nothing in -that paragraph shall affect the application of the law of either territory in relation to the liability of that enterprise to pay tax on an amount determined by the exercise of a discretion or the making of an estimate by the taxation authority of that territory: lProvided that such discretion shall be exercised or such estimate shall be made, so far as tihe information available to the taxation authority permits, in accordance with the principle stated in this paragraph. (3) For the purpose of this Article an industrial or commercial enterprise or undertaking carried on by a United States citizen resident in New Zealand or by a United States corporation managed and controlled in New Zealand shall be deemed to be a New Zealand enterprise. (25.5 )

    TIAS 2360

    Article V (1) Notwithstanding the provisions of Articles III and IV of the present Convention, profits which an individual resident of Now Zealand or a New Zealand corporation derives from operating ships or aircraft shall be exempt from United States tax. (2) Notwithstanding the provisions of Articles III and IV of the present Convention, profits which a citizen of the United States not resident in New Zealand or a United States corporation not resident in New Zealand derives from operating ships or aircraft shall be exempt from New Zealand tax. Article VI (1) The rate of United States tax on dividends derived from sources within the United Atates by a resident of New Zealand not engaged in trade or business within the United States through a permanent establishment therein shall not exceed 15 percent: Provided that such rate of tax shall not exceed 5 percent if such resident is a corporation controlling, directly or indirectly, at least 95 percent of the entire voting power in the corporation paying the dividend, and not more than 25 percent of the gross income of such paying corporation is derived from interest and dividends, other than interest and dividends received from its own subsidiary corporations. Such reduction of the rate to 5 percent shall not apply if the relationship of the two corporations has been arranged or is maintained primarily with the intention of securing such reduced rate. (2) In the event that New Zealand should impose at any time tax on dividends derived from sources within New Zealand by a nonresident thereof, including a resident of the United States, not engaged in trade or business within New Zealand through a permanent establishment therein at a rate in excess of 15 percent (or 5 percent in cases corresponding to those within the scope of the proviso in paragraph (1) of this Article), either, of the Contracting Governments may terminate this Article provided that notice of termination is given in writing, and, in such event, this Article shall cease to be effective as respects United States tax for the taxable years beginning on or after the first day of January next following the date on which such notice is given. Article VII (1) A resident of the territory of one of the Contracting Governments deriving from sources within the territory of the other Contracting Government
    -

    (a)royalties in respect of the operation of mines, quarries or


    natural Aresources, or

    (2056)

    TIAS 230

    (b)rentals from real property, or


    (c) royalties or other amounts paid as consideration for the use of, or for the privilege of using, any copyright, patent, design, secret process or formula, trademark or other like property, may elect for any taxable year to be subject to the tax of such other Contracting Government, on a net basis, as if such resident were engaged in trade or business within the territory of such other Contracting Government through a permanent establishment therein during such taxable year. (2) The provisions of this Article shall not apply to income falling within the scope of Article VIII of the present Converstion. Article VIII (1) Rentals in respect of motion picture films derived from sources within the territory of one of the Contracting Governments by a resident of the territory of the other Contracting Government who is not engaged in trade or business through a permanent establishment in the former territory shall be exempt from tax by the former Government. (2) The provisions of this Article shall not be construed to affect the New Zealand film hire tax or the income-tax imposed by New Zealand on income which is taxable under New Zealand law and which is derived by any person from the business of renting motion picture films. Article IX (1) An individual who is a resident of the United States shall be exempt from New Zealand tax on profits or remuneration in respect of personal (including professional) services performed within New Zealand in any income year if (a) he is present within New Zealand for a period or periods not exceeding in the aggregate 183 days during that year, and (b) the services are performed for or on behalf of a person resident in the United States. (2) An individual who is a resident of New Zealand shall be exempt from United States tax on profits or remuneration in respect of personal (including professional) services performed within the United States in any taxable year if (a) he is present within the United States for a period or periods not exceeding in the aggregate 183 days during that year, and (b) the services are performed for or on behalf of a person resident in New Zealand.

    (2057)

    TIAS 23=0

    10

    (3) For the purposes of this Article a corporation of one Contracting Government shall not be deemed to be a resident of the territory of the other Contracting Government even though it has a perma. nent establishment in that territory. (4) The provisions of this Article shall not apply to the profits or remuneration of public entertainers such as stage, motion picture or radio artists, musicians and athletes. Article X (1) Remuneration, wages or salary (other than pensions) paid by the Government of the United States for services rendered to the United States in the discharge of governmental functions to an individual who is a citizen of the United States or dho is ordinarily resident in New Zealand solely for the purpose of rendering such services shall be exempt from New Zealand tax. (2) Remuneration, salary and wages (other than pensions) paid by the Government. of New Zealand to an individual (other than a citizen of the United States) for services rendered to New Zealand in the discharge of governmental functions shall be exempt from United States tax. (3) The provisions of this Article shall not apply to payments in respect of services rendered in connection with any trade or business carried on by either of the Contracting Governments for purposes of profit. Article XI Income (other than dividends paid by a company resident in New Zealand) of a person who is a resident of the United States which is exempt from New Zealand tax under any provision of the present Convention shall not be included in that person's total income for the purpose of determining the amount of any New Zealand tax payable in respect of income of that person which is assessable to New Zealand tax. Article XII (1) Dividends paid by a New Zealand corporation shall be exempt from United States tax except where the recipient is a citizen of, or resident in, the United States or a United States corporation. (2) Dividends paid by a United States corporation shall be exempt from New Zealand tax except where the recipient is resident in New Zealand. Article XIII (1) Subject to section 131 of the United States Internal Revenue Code [il as in effect on the date of signature of this Convention, New
    126 U.S. C. 1131.

    (2058)

    11

    TIAS 2360

    Zealand tax shall be allowed as a credit against United States tax. (2) If, under the law in force in New Zealand at any time while the present Convention is in effect, New Zealand tax is payable in respect of income from sources within the United States in respect of which United States tax is payable, the United States tax payable (whether directly or by deduction) in respect of any such income shall, subject to such provisions (which shall not affect the general principle hereof) as may be enacted in New Zealand, be allowed as a credit against any New Zealand tax payable in respect of that income. For the purposes of this paragraph the terms "United States tax" and "New Zealand tax" do not include any penalty imposed under the laws of the United States or New Zealand relating to the taxes which are the subject of the present Convention and the term "New Zealand tax" does not include social security charge. (3) For the purposes of this Article, profits or remuneration for personal (including professional) services performed in the territory of one of the Contracting Governments shall be deemed to be income from sources within that territory. Article XIV A professor or teacher who is normally a resident of the territory of one of the Contracting Governments and who receives remuneration for teaching, during a period of temporary residence not exceeding two years, at a university, college, school or other educational institution in the territory of the other Contracting Government, shall be exempt from tax by such other Government in respect of such remuneration. Article XV A student or business or trade apprentice who is normally resident in the territory of one of the Contracting Governments and who is receiving full-time education or training in the territory of the otherContracting Govenment shall be exempt from tax by such other Government on payments made to him by persons in the territory of the former Government for the purpose of his maintenance, edu-. cation or training. Article XVI (1) The taxation authorities of the Contracting Governments shall exchange such information (being information available under the. respective taxation laws of the Contracting Governments) as is necessary for carrying out the provisions of the present Convention orfor the prevention of fraud or for the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any person

    (2)59)

    TIAS 2300

    12

    other than persons (including a court) concerned with the assessment or collection of the taxes which are the subject of the present Convention or the determination of appeals in relation thereto. No information shall be exchanged which would disclose any trade secret or trade process. (2) The term "taxation authorities" means, in the case of New Zealand, the Commissioner of Taxes or his authorized representative; in the case of the United States, the Commissioner of Internal Revenue or his authorized representative. Article XVII Each of the Contracting Governments may collect such tax imposed by the other Contracting Government as will ensure that the exemption or reduced rate of tax granted under the present Convention by such other Government shall not be enjoyed by persons not entitled to such benefits. Article XVIII (1) Where a person shows proof that the action of the revenue authorities of the Contracting Governments has resulted or may result in double taxation in his ease (including for this purpose a(Ijustments as between taxpayers affected by Article IV) in respect of any of tlhe taxes to which the present Convention relates, he shall be entitled to lodge a claim with the Government of which he is a citizen or in whose territory he is resident. If the claim should be deemed worthy of consideration, the taxation authorities of such Government may consult with the taxation authorities of the other Government to determine whether the double taxation in question may be avoided. (2) The taxation authorities of the two Contracting Governments may prescribe regulations to carry into effect the present Convention within the respective States and rules with respect to the exchange of information. (3) Tihe taxation authorities of the two Contracting Governments may comnmunicate with each other directly for the purpose of giving effect to the provisions of the. present Convention. Article XIX The provisions of the present Convention shall not be construed to restrict in any manner any exemption, deduction, credit or other allowance accorded by the laws of one of the Contracting Governments in the determination of the tax imposed by such Government. Article XX (1) Either of the Contracting Governments may, on the coming into force of the present Convention or at any time while it continues

    (206o)

    13

    TIAS 2360

    in force, by a written notification of extension given to the other Contracting Government declare its desire that the operation of the

    present Convention shall extend to all or any of its overseas territories or other territories for which it has international responsibility which impose taxes substantially similar in character to those which are thfe subject of the present Convention. The present Convention slhll apply to the territory or territories named in such notification on the date or dates specified in the notification (not being less than sixty days from the date of the notification) or, if no (late is specified in respect of any such territory, on the sixtieth day after the (late of the notification, mnless prior to the date on which the present, Convention would otherwise become applicable to a particular territory, the Contracting Government to whom notification is given shall have informed the other Contracting Government in writing that it does not accept the notification as to that territory. In the absence of such an extension, the present Convention shall not apply to any such territory. (2) At any time after the expiration of one year from the entry into force of an extension under paragraph (1) of this Article, either of the Contracting Governments may, by written notice of termination given to the other Contracting Government, terminate the application of the present Convention to any territory to which it has been extended under paragraph (1), and in that event the present Convention shall cease to apply, as from the date or dates specified in the notice, which shall not be less than sixty clays after tile date on which such notice is given, or, if no date is specified, at the expiration of six months after the date of the notice, to the territory or territories named therein, but without affecting its continued application to New Zealand, the United States or to any other territory to which it has been extended under paragraph (1) hereof. (3) In the application of the present Convention in relation to any territory to which it is extended by notification by the United States or New Zealand, references to the "United States" or, as the case may be, "New Zealand" shall be construed as references to that territory. (4) The termination in respect of the United States or New Zealand of the present Convention under Article XXII shall, unless otherwise expressly agreed by both Contracting Governments, terminate the application of the present Convention to any territory to which the present Convention has been extended by New Zealand or the United States. Article XXI (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible. (-20(I1)

    TIAS 2360

    14

    (2) Upon exchange of instruments of ratification, the present Convention shall have effect (a) as respects United States tax, for the taxable years beginning on or after the first day of January in the calendar year in which occurs the exchange of the instruments of ratification, (b) as respects New Zealand tax, for the year of assessment beginning on the first day of April next following the calendar year in which occurs the exchange of the instruments of ratification. Article XXII The present Convention shall continue effective for a period of two years and indefinitely after that period, but may be terminated by either Contracting Government at the end of such period or at any time thereafter, provided that at least six months' prior notice of termination has been given in writing and, in such event, the present Convention shall cease to be effective (a) as respects United States tax, for the taxable years beginning on or after the first day of January next following the expiration of the six-month period, (b) as respects New Zealand tax, for the years of assessment beginning on or after the first day of April in the second year following the expiration of the six-month period. DoNz at Washington, in duplicate, this 16th day of March, 1948.
    FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA:

    G C MARSHALL &cretary of &ate of the United &ates of America

    [SEAL]

    FOR THE GOVERNMENT OF NEW ZEALAND:

    W. NASH
    -Minister of Finance and ni.er of Ougom for New Zealand

    [sE-L]

    (2062)

    15

    TIAS 2360

    AND WHEREAS the Senate of the United States of America, by their resolution of September 17, 1951, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid convention subject to a reservation as follows: "The Government of the United States of America does not accept paragraph (4) of Article IX of the convention, relating to the profits or remuneration of public entertainers.";

    AND WHEREAS the text of the aforesaid reservation was communi-

    cated by the Government of the United States of America to the Government of New Zealand and the aforesaid reservation was accepted by the Government of New Zealand; AND WHEREAS the aforesaid convention was duly ratified by the President of the United States of America on December 10, 1951, in pursuance of the aforesaid advice and consent of the Senate and subject to the aforesaid reservation, and the aforesaid convention was duly ratified on the part of New Zealand; AND WHEREAS the respective instruments of ratification of the aforesaid convention were duly exchanged at Washington on December 18, 1951, and a protocol of exchange was signed at that place and on that date by the respective Plenipotentiaries of the United States of America and New Zealand, the said protocol containing a statement that it is understood by the two Governments that the aforesaid convention, upon entry into foree in accordance with its provisions, is modified in accordance with the aforesaid reservation, so that, in effect, paragraph (4) of Article IX of the aforesaid convention is deemed to be deleted; AND WHEREAS it is provided in Article XXI of the aforesaid convention that, upon exchange of the instruments of ratification, the convention shall have effect (a) as respects United States tax, for the taxable years beginning on or after the first day of January in the calendar year in which occurs the exchange of the instruments of ratification, and, (b) as respects New Zealand tax, for the year of assessment beginning on the first day of April next following the calendar year in which occurs the exchange of the instruments of ratification; NOW, THEREFORE, be it known that I, Harry S. Truman, President of the United States of America, do hereby proclaim and make public the aforesaid convention to the end that the said convention and each and every article and clause thereof, subject to the aforesaid reservation, may be observed and fulfilled with good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof.

    (2063)

    TIAS 2860

    16

    IN TESTIMONY WHEREOF, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. DONE at the city of Washington this twentieth day of December in the year of our Lord one thousand nine hundred fifty[SEAL] one and of the Independence of the United States of Amer. ica the one hundred seventy-sixth. HARRY S TRUMAN By the President:
    DEAN ACHESON

    Secretary of State

    (2064)

    PROTOCOL OF EXCHANGE The undersigned, Dean Acheson, Secretary of State of the United States of America, and Carl Berendsen, Ambassador Extraordinary and Plenipotentiary of New Zealand to the United States of America, being duly authorized thereto by their respective Governments, have met for the purpose of exchanging the instruments of ratification by their respective Governments of the convention between the United States of America and New Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on March 16, 1948, and, the respective instruments of ratification of the convention aforesaid having been compared and found to be in due form, the exchange took place this day. As recited in the ratification on the part of the United States of America, the Senate of the United States of America, in its resolution of September 17, 1951, advising and consenting to the ratification of the convention aforesaid, expressed it certain reservation with respect thereto, as follows: "The Government of the United States of America does not accept paragraph (4) of Article IX of the convention, relating to the profits or remuneration of public entertainers." The text of the said reservation was communicated by the Govern. ment of the United States of America to the Government of New Zealand. The Government of New Zealand has accepted the said reservation. Accordingly, it is understood by the two Governments that the convention aforesaid, upon entry into force in accordance with its provisions, is modified in accordance with the said reservation, so that, in effect, paragraph (4) of Article IX of the convention aforesaid is deemed to be deleted. IN WITNESS WHEREOF, the respective Plenipotentiaries have signed
    the present Protocol of Exchange.
    DONE in duplicate at Washington this eighteenth day of December,

    1951.
    EOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA: DEAm ACHESON FOR THE GOVERNMENT OF NEW ZEALAND:
    CARL BERENDSEN

    (17) (2065)

    + t

    SECTION 19 Convention With NORWAY

    ( .o67 )

    INCOME TAX CONVENTION BETWEEN THE UNITED STATES AND NoRWAY

    Basic Convention: June 13, 1949.. July 28, 1949..

    -Signed at Washington. _Received by Senate; (designalted(Executive Q,

    81st Congress, 1st Session; injunction of secrecy removed (95 Congressional Record

    10322). August 12, 1949_- _ Ratified by Norway. April 12 and 13, Senate Committee Hearings. 1951. August 6, 1951__ . Reported by Senate Foreign Relations Coinmittee (Px. Rept. No. 1, 82d Cong., 1st September 17, 1951 _Ratification by Senate of its advice and con. sent with an understanding (97 Congressional Record 11434-11435, 11438-11441, 11450-11452). November 26,1951. - Ratified by United States President. December 11, 1951 - Instruments of ratification exchanged; convention entered into force effective January~l, 1951. December 13,1951. SProclaimed by United States President. Official Text ------ TIAS 2357; 2 UST 2323. Supplementary Convention: Signed at Oslo. July 10, 1958 - -. August 14, 1958..- Received by Senate; designated Executive D, 85th Congress, 2d Session; injunction of secrecy removed (104 Congressional Record 17621). January 2, 1959.. - Ratified by Norway. August 11, 1959.- Senate Committee Hearings. August 11, 1959--_ Reported by Senate Foreign Relations Coinmittee (Ex. Rept. No. 10, 86th Cong., Ist

    Sess.).

    Sess.).

    Ratification by Senate of its advice and consent (105 Congressional Record 1564615647). September 4, 1959. Ratified by United States President. October 21, 1959_ _ Instruments of ratification exchanged; convention entered into force effective January 1, 1960. November 23,1959_ Proclaimed by United States President. TIAS 4360; 10 UST 1924. Official Text -......

    August 12, 1959_.-

    (2068)

    CONTENTS OF SECTION 19
    Basic Conventionj: Page

    I. Presidential Message of Transmittal to Senate ----------------- (2073) . ..---------------- (2081) 2. Senate Committee Hearings ------------. (2083) 3. Senate Committee Report ---------------------------------4. Senate Floor Debate and Action -----------------------------

    (2085)

    5. Presidential Proclamation (including Official Text of Convention).. .Supplementary Convention: 1. Presidential Message of Tranmmittal to Senate -.-.-----------.2. Senate Committee Hearings -------------------------------3. Senate Committee Report ----------------------------------4. Senate Floor Debate and Action --------------------------5. Presidential Proclamation (Including Official Text of Convention)..

    (2139) (145) (2153)

    (219)
    (2163)

    73096 0-42--vol. 2-

    -37

    (2069)

    BASIC CONVENTION

    (2071)

    P.

    PresidentialMessage of Transmittal to Senate (includingmaterials enclosed therewith)

    (2073)

    ~ij 11

    818T CON91EnS 14t Session

    SENATE

    EXECUTIVE

    CONVENTION WITH NORWAY RELATING TO DOUBLE TAXATION ON INCOME

    MESSAGE
    FRO%

    THE PRESIDENT OF THE UNITED STATES


    THANSMITTINro

    Till" "ON','I"NT'X 1TWV"N T'IE UXITED) STATES OF AMERICA .%N;) N0:U;WA:' Fo0: TI?:,. AVOIDANCE OF DOUBLE TAXATION AND TIlE PlIEVAENTION OF FISC'AIL EVASION WITH RESPECT TO TAXES ON INCOMI.SIINEI) AT WASIIINGTON, 3UNE.13, 1949

    Jui.v 28, 1949.-C('onvention was read the first time and the injunction of secrecy was removed therefrom. The convention, the IPresident's message of transmittal, and the report by the Secretary of State, with memorandum attached,

    were referred to t.ie (Committee omi Foreign Relations and ordered to be printed
    for the use of the Senate

    ratification, I transmit

    Timi WHITE MousE, July 28, 19149. To the Senate Yf the United States: With a view to receiving the advice and consent of the Senate to
    ierewith tlwe convention betweell thei United

    signed at Washington on June 13, 1949. I also transmit for the information of tile Senate the report by the Secretary of State with respect to the convention, together with the explanatory memorandum enclosed tllerewitil. Tile convention has the approval of tht, Department of State and the Treasury& Deportment. H AHR S. T tm NIAN. Y (Enclosures: (1) Report of the Secretary of State, within enclosed memorandum; (2) convention with Norway, signed June 13, 1949. relating to taxes oil income.)

    States of America and Norway for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income,

    (2075)

    CONVENTION WITH NORWAY-INCOME TAX


    ])EPARTIMNTr OF" STA'I'F,

    The II1llite !I.,'ii'e: The unler(signedl, the Sec'rtarIy of State, has thet honor tol.ay before the President, with a view to its transminission to the Senate to receive the advice 1111(d constent of that )odv to ratifrletioll, if his jludiglnent
    approve thereof, a convention between thlt IUnited ""tates of America and Norway for the avoidafe(s of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Wishing.

    xT The Pim-s rDit .

    II

    (1

    .49 t, I .J uly 27 , 1.9 . 1..ing

    ton on Jume 13, 1949. This convention, together with one re'lating to taxes on estates and

    inheritances, was formulated its a result of teclhnical discussions he. teen representatives of this Government and representatives of the

    Norwegian Government in which an effort was made to determine the


    bases upotl which conventions between the two Governments might be concluded for the purpose of avoiding double taxation, as farias practicable, and establishing certain Procedures for mutual admmm.

    istrative assistance in relation to taxation. The objectives and provisions of the convention are summarized and explained briefly in the enclosed memorandum. The Department of State and the Treasury Department collaborated in the negotiation of the convention, after public announcement of tile contemplated negotiations. It has the approval of both Departments. Respectfully submitted. DEAN AcHEsoN.
    (Enclosures: (1) .Memorandum regarding tile income-tax collvention with Norway; (2) convention with Norway, signed June 13, 1949, relating to taxes oil income.) MEMORANDutm REGARDING THlE INCOME-TAX CONVENTION WITH NORWAY The income-tax convention between the United States of America and Norway (for the avoidance of double taxation and the prevention similar conventions which have been entered into by the United The pattern for such conventions is becoming fairly well established, so that in sending them to the Senate for advice and consent to ratification the explanatory comments which are made with respect to them are in large measure a repetition of comments which have been

    of fiscal evasion with respect to taxes on income), which was signed in Washington on June 13, 1949, has the same basic objectives as States with certain other countries.

    made in regard to conventions previously sent to the Senate. For the sake of the record, however, the principles and provisions should
    be summarized so far as they are pertinent to the convention with

    Norway.

    collection of taxes upon the same income by both the United States stitute an important step toward the removal of one of the most (2076)

    As stated on other occasions, it is realized that the imposition and

    and a foreign country may, and often do, result in double taxation of a severe character. It is believed that income-tax conventions con-

    CONVENTION WITH NORWAY-INCOME TAX

    labor or personal services (art. X), government wages, salaries, and

    In matters of principle and substance, the provisions of the convention with Norway relating to taxes on income are consistent, if not identical, with provisions in one or more of the existing income-tax conventions between the United States and foreign countries, namely, the convention and protocol of IMarch 23, 1939, with Sweden (54 Stat., pt. 2, 1759), the convention and protocol of July 25, 1939, with France (59 Stat., pt. 2, 893), the convention and protocol of March 4, 1942, with Canada (56 Stat., pt. 2, 1399), the convention of April 16, 1945, and protocol of June 0, 1946, with the United Kingdom (60 Stat., pt. 2, 1377), the convention of April 29, 1948, with the Netherlands (S. Executive I, 80th Cong., 2d sess.), and the convention of May 6, 1948, with Denmark (S. Executive H, 80th Cong., 2d sess.). Income-tax conventions now pending in the Senate, namely, with Belgium of October 28, 1948 (S. Executive 1, 81st Cong., 1st sess.), New Zealand of March 16, 1948 (S. Executive J, 80th Cong., 2d seas.), and the Union of South Africa of December 13, 1946 (S. Exccu tive O, 80th Cong., 1st, sess.), contain provisions along similar lines. 'Thie major features of the convention with Norway may be summarized as follows: (1) Adoption of principles affecting the determination of amount, and affectring the taxation, of business income derived by enterprises t of one of the countries from sources within the other country (arts. III and IV). (2) Reciprocal exemption from taxation of certain items of income, itiiluding income derived from the operation of ships or aircraft (art. V), interest (art. 1I), copyright, and other industrial property royalties (art. 11II), real property, natural resource royalties, and gains from the sale or exchange of real property (arts. VIII and IX), earned income derived under specified conditions as compensation for

    Undesirable iml)edimi'nts to international trade and economic developinent, namely, that which results from the double taxation of incomes. The convention with Norway establishes a satisfactory basis for thIe accomplishmnent of this objective in the mutual interIest. of the two (,ounmries and of direct benefit to the taxpayers of both countries.

    residents, or corporationss as though the convention "had not come (4) Provisions for reciprocal exchange of information and assistance in collhection, subject to certain limitations, including the proviso that assistance in collection shall not be accorded with respect to the citizeMs, corporations, .or other entities of the country to whiili application
    is 11nade and the pl(viso that! ili(, country to -wlhich til)lliction for information or assistance is iiade may. refuse to comply with the request for reasons of public policy or if compliance would involve a violation of a trade, business, industrial, or professional secret (arts. XV, XVI, XVII, and X1iII).

    pQnsions and private pensions and annuities (art. XI), remuneration of professors or teachers (art. XII), and remittances received by students or business apprentices (art. XIII). There is no provision for exemption from taxation of income from dividends. (3) Retention by each country of its right to tax its own citizens,

    into effect," together with adoption of the principles of the United States tax system respecting credit for taxes paid to a foreign government (art. XIV).

    (2077)

    CONVENTION WITH NORWAY-INCOME TAX


    (5) Provisions assuring taxpaVyers a right to lodge a claim wheln

    they (a11 show that loulbhe lixuiiti1 hlis resulted or will result, conltraryA to the terms of ihle olvenlt iol, as to any of the taxes to which

    the

    ('onlventiotl

    relates (art. X IX), a11d4 provisions slafeguliar-ding tlax-

    ally exe,'ltiol, (ldeution, credit, or other allowance accorded by the laws of tlit' rsJ)e'etive cOlulltries (par. (2) of art. XX). Article I desc'ribes the taxes which are the subject of thei convention. In the case of the United States the convention applies only to tilt, Federal inlcoie tax, including surtaxes. Consequently, the conventioll does not apply to taxes imposed by the several States of the Uinited States, theiDistrict of Columbia, or the Territories or possessions of the Ulnited States. In thie case of Noivway the convention applies to the nattionlai and the comnm unal income taxes, including the old-age-pension tax, the wlr-j'peision tax, thetax on I)ank deposits, and the seamen s tax. Numerous terms or expressions found in the convention are defined in article II, with a concluding provision to the effect, that, in applying tile provisions of the convention any term not, otherwise defined shall, unless the context otherwise requires, have the meaning which that term has under the tax laws of the country imposing the tax. A comprehensive definition of "permanent establilshment" is included, along the lines of the definition included in othel income-tax conventions, with variations in phraseology but alike in substance. The provision in article V, whereby income derived by an enter-. prise of one of the countries from tile operation of ships or aircraft shall be exempt from taxation in the other country, is in conformity to sections 212 (b) and 231 (d) of the Internal Revenue Code. In article VII, relating to the exemption from taxation of royalties anti other amounts derived as consideration for the right to use copyrights, artistic and scientific works, patents, designs, secret processes and formulas, trade-niarks, and other like property (including rentals and like payments in respect of motion-picture filns), there is a proviso which, although not expressed in similar royalty-exemption provisions in other income-tax conl entions, is understood to be implicit in tile application of those provisions. This proviso confirms and reserves tlie right of each country, consistently with the principles of article IV, to prevent the payor of the royalty from receiving any deduction for such royalty or any portion thereof not considered by that country's revenue authorities to be reasonable consideration for the right to use the property in respect of which the royalty is paid. It will be noted t hat tile exemption in article X with respect to, earned income is extended expressly to the practice of the liberal and artistic professions, and there is no question as to the application of the provisions to income derived from the services of public' entertainer. Article XX in addition to the provisions mentioned above confirming that the cmvenl ion does not restrict any exemption, deduletion, credit., or other allowance accorded by the laws of the respective countries, contains also tith, following provisions: (1) ili paragraph (1), relating to the right of diplomatic and consular officers to exemptions,

    payers against ally constilctioll of the conlvelltioll that would restrict

    (2078)

    CONVENTION WITH NORWAY-INCOME TAX

    other tian or additional to those accorded by the convention, which thev now or may hereafter e('njOy, a prOviSiOl) that thP ,.IIVw(ItiOnl shall not be construed to dtbliv or affect aly such right; and (2) in paragraph (3) a provision redating to the settlement by nitutual agreemelit between thie competent authorities of thet two countries of qiestiols as to the interpretation or application of the, convention. lUnder article XXI the compejtelnt authorities of (eacll country may prescribe regulations for carrying out the provisions of the, convention and may, by common agreement, prescribe rules concerning matters of procedure, forms of application and replies thereto, conversion of 'urrey, disposition of amounts collected , costs of collection, miniMUM amounts sllbject to collection, and related matters. Article XXII provides for ratification and prescribes that the convenition shall become effective for the taxable years beginning on or after Janutary I of the year in which the exchange of instruments of ratification takeu place. It is provided also that the coonvention shall continue effective for 5 years and indefinitely thereafter, but may 1)e terminated by either party at the end of the 5-year period or at any time thereafter by a 6-month prior notice of termination, such termination to become effective for the taxable years beginning on or after hanuary I next following the exPiration of the 6-month period.

    [Text of convention]

    (2079)

    Senate Committee Hear'nga


    April 12 and 13, 1951 82d Congress, let Session, Subcommittee of the Senate Committee on Foreign Relations (NoTs: This document is printed in Volume i beginning/at page (50).

    /0'

    (2081)

    Senate Committee Report


    August 6, 1051 Executive Report No. 1 82d Congress, 1st Session Senate Foreign Relations Committee
    [Noris: This document is printed in Volume I beginning at page (583).]

    (2083)

    Senate Floor Debate and Action


    SepUemhber 17, 1951

    82d ("ongreo,

    Ist Se.sion

    17 ('ongmreuional Reieord 11434-11435, 11438-11441, 11450-1 1452

    TSO 0--2--vol. 2---.-Iit

    (,2o85)

    I1,Iv 144

    I'4It

    TtolN CMTIVl O) CMITI, tVI Ol.NTItONs

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    s14hj1'+4 1i) flit, rssrv slilis nlisl millil'rsluilitii wlhic.h are relies trutivs sr iolIVels'Iitliiredi'il its lit' reisitiosu oif r.lifirislittio. 6jies irs' its (sillsms: ilrvolles' with telit I 'ieioee of SsiIesti Afri's. re'ilitll" Io5 First. ( 'olVemlll 1114i; Fox1'tllliVb' X. Heiehte'ill 13. ,er 111ii . Aigsesl llt Prentoria., 1),.,'ss'
    ruliti'islimi,

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    e414lii

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    ilegs. r-'sisrveetiolns or lileeeeisstssmisi.

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    eirlirlll

    'igitih. (o'nvsliet ose wills tvrw.se re.issling Ito s'ihtsles txivx'. A1s's914i 20. 11M) KPxeneletive K, KEIgiet-firsnt ('oegrs's. sll Atielns, l"Febr ry
    "t Al)l)nsl rsnsot-oeelee'ihss subeije'ct its ro'm-rvalite r'n-gsrsilng tihes erlish, IX. il provisions osi ssJJis'slit

    (6.4"47 )

    #itAliseis. FeIbruar.
    1,0 the' tl.'cmlimn
    atI

    "ith. (4'"Ouvimsion witi (;retwe rilaim io ncome, fa.xes. sigivil 14) X4,.tiv.l I., R:i!iI.-firt C'mIgrr,. 20. i1154) 6 with r,.l,,I.,.

    provisimsn o,,srtlhe. XI .\. Telith. 4'mivie'ntlaion with I'sadisteel re'ttl;4


    0 ia~. ,June'
    12.195

    ApprvaI rl',oi-t.,om ,ehe.Isuidj,'ect it) m ,odenrtieishing

    1ieI I3;4 E.milliv' It. EgI uII.%-ir (

    tot hii,m'-

    lie's,

    "%igiie !gr.o.',

    the .6ljOroval re1i4i114ne-h,1le41 1%libjel Ito it reiertmllts reltinig It) otf pu e' llts rtia ilier1. ul profesv."ifolt earniligs a l ,imlnlI with ('tsenudls relatititg tot esta' Iti '-Ae, Elev'enthi. Os'oirentliel .lullm' 12, 19-1) 1-'cllive,' S, igig~hty-firsl ( 'alllrr t. simil iat )Ottawa
    Aptprein.l re,,'cillngne'lihi -41llej1't- tli it reo.ervstli..iet or midelrmati.l. o-stsitis r,. ,ruvimlh lProtlo'ol w'ilht fit ii' ii,,01 iof seutli Afrieil, i ts tl.axes, sigrned'l .ut i'reltrha, .ilul% 14. l1950) 1 %,h.'ijtiv, T'. Hi".ty-.irst iesetll. e'., ,' I11 ( 'sllr in totlihnerslautlitng relate Ivittohle A.ppr."val rt'4ilotlle'imell .'IIIlj't' to 4.4lhe.ctimii prosvisimil referr4,l tIt.abve tinder Ev.uti,v FF. Afrih'.i. relaiilit3 to 'oi Thirteentlh. Protlocol utih Ilt-iiol f it( inco'm I1n%. sietli'el aet Prel'toril. Iillv 14. 113543 I.t-lllive ' i. lh.yfirst ( 't.tlgre s, ,ee'e'eeiieI t't'.tii4 11. eniililg refe'rreil lt mider f lroil is o4 public iie'rtainers a lu'lit- le'mIt .Nteillive'0) himn.e. Piie! Its 11c,111 s4Ins rlnilaI, re' s i'n withlSwih r and.it Fourltm'nlh. I('ml
    .qirttval A rev'oiittiileiil,'l stilrljt,, ti) it re,ervtllion rel'inge lit lite

    Sigieiel III Wthiw ito. I'.'gress. first se'-mimlll. plultlrit ente'rtainers.

    Miay. 14., I4.,iI

    Eox;.eetile' K'.

    nighley-s.t'voaI

    .Appr,,veal rt one'!

    eitlel suiejit lit riervationl

    regardlinIg profile ti

    MIr. Pri.sidlenilt 3)trnlitille' ti'ely tuil fill tll,'se' tre'auti.'. sea is .epptireat 161 fromil tI%r,'rvalliole$ an1d illl'lrstaeii, tlie) elnliinlte oileuble taxation will$ rlespec't to lhe ilij.?g ilihiiulsI, k ililn'cmes or iillna iiuiiv uiili, ivorl)Ornltiolls uianl wiltl rivpe'wt It. taxes' on ilme dehehle n ' ta leltts. 'IIe're wats 'me irere'n.' ito'Iwe'l fIIIe Witnelsse's. h Niejtoililt441 11y t.fe liutillgllith4lee ilt o mii, l W1140 testhifiel lbeforee' 4113ll-o milllliml lite .tilsetor fritmm ig n l chlairlmllaillo th,' 'llliitle' Oo l"otre'lgul C luioito. lt (Mr.'4..-Nma.y..1 to)elotihji thi4,e t'verel treaties'. 114l ItrIotoiIs I re'xss tllll net1ti in its coll'lll1iollsl, 1Ie1 tie (hill uie'onlillille'e wilts 1ut l t be'4)illllit te'. til ' lite 44llIl101141 1f l64 et, 4'Olllill 1Ill likewimt roilclrrtn llntte'' 4'-Iil4iIt644i Of the julier Seniiletor frolil lowa INir. SllbC4tl' TheS'i mirsI. the' O0maLLIfrr~:. tlits senior Senator fF011 New eJerstey ,I~r. S4

    from aireadlinig of tile idle's, all11

    I.(lr. IIC.K IAt.114.:rj, ftlI My-self. oily i4 thitoe' rirVtiouls whiih are rommi.llm )iOl il in dhe'gree,. It will I noteI Ithat to all tr.eatie's, or at least
    .tllior Senatllotr from hlw, I shl1 iainvile lttlein t l

    tlits first rese4rvltionl slllIwes141 witht re'spec't it s've'ril of fliii's treaties. islalillt'l ,'Ipe'eifilly .1-umlh1 Africa., Norwas'. andI (iree','e is for mulllll say 3h1l l110 similar re,t54riloilll I llmllV ill lhei 4'ltlie'tiolitofi txe'. existing n'onlYVelI ll01i5 r tilt% asppeaers il tlhe 'Ooin'vletionl with!. Ire'lomtle 1

    l by tlit, prot-col. tlint tlie' ill lite cest' of S'ollh Afr'ia, as altlenilt ' shlll 101 tSi. ttiine' ainid suppl)ort to ihe giv'eii ly eachii t41inra'ctingstllleet iatioil* or estates of c'ilizels heI acordedl witht respect of eiiztil4lu F Male to wlicrh applirction its Inmlae for 1ing t (ifl iterci'otr or Iltionllsl oti' (2(08)

    will, ('n114siullahi 1itiel uiillgelo

    i,

    . 'rmlmleon veohiVIlloinsl,1 plroile.

    umtA61kie ill rol!v'ii, uh'les Ouch cu'irize0 ttionii or relate IS or ,.tihtledl to tih allaman''r modie cre, lit under this mppli'1l4 convention.. Ill lite'.* uh ti f i'lin!g Ilevlltdioe with riance, thie' rnotriction r 1 IImilt astistalller 14) 6i15r 11t11411 0 6propmeal without 1ililiatioll. It lst i i 1whe opillil o!( thIhr llitlhte' M.d Of tile' whOle rOl011itte41' that e fhe Irovioloie, .4 1 l It ilisgluesltte . mid inlcllme' coliventionis a1re tIoo i!riel. A. it r.'ie'rml rule' it in lict twfirei'l %wi*. have ouie' goveirIto 1..ut Voll44t1 he' eie which, anr due to another o)vr.rullllllI. Thenr. t fort. thle rOIS0llRlilCt

    civil penalties, mod it was not ihe.ined wise for ounr courts to Wuilertake that particular jou. It will be ioted also thtat ill two or tihr.e or more of them eolnvel.tions themr are r.r'se'tis relating to lite cOnlieatiol paid merican citizeln by Airimifii lnis or emiplovers in t1e countries wiill whon we have' leguti*tl4 he'sme ire'aies. aI matter relates to the coiiit peimatiou for pe'reial services of Ameri'can citizensi in fon'in COu.frnes. Exceplion hims [we'il taken heretofore, I may say, in regard to this question ill v'ollaesction with the ne'0otiation* of other treaties, but it was disrepninlel b" those' who uiegotmlatex wilh respect to several of tle treaties luow fto0r the 1Senhate. It was pointed out that these
    piovisiolis were hlglaly discriminatory against artists, musicians, l11otiol-pictuins ad'o.,I hod others whlo went into foreigln countries, 1 but who were' at wrk there for Amuerican employers, aTiltemporarilv resided in hluM' font rigo countries while the' were carrying on their busihems enterprises' there. It is a rule. which Ihs b'en adopted now for many years, t1mt ol Amnericra citizen who saemls alt least 183 clays in a forvigia cotiltry is to be exempted from double taxationl-hin olther words, tilatioil Gv Imth countries. llowever, an effort was maisde to make a hmost invidious ilistinction as between artists and others who wclt ilito flih foreign. muitries to miiake notion pictures

    provision. Mr. Pre.ide'st. I imtay"y that thio. was thie vle'w taken by tie cuiiiilittr.e witlli n'spel to el1 the',e4' ee~slti provilio.ls. 1I was SimllI det,-1li ,lSwlse, to have our 4'itize'tel in foreig, coulitries glib)i t-O'4.4lo the Iimlivial provelureg of 1hem' eeultriers, anl likewse it wao delete wlowiek, it) dligalte our co'nlirv to ulnelrta1ke the c'olhlelion in our owrn t-lilrts elf lafe'as clue' to the fo irelgcountries deall with inllI hes. 'illies. It will Ib' -''alled that ill im141v ilitaiwe'e, or pe'rthapu all, lhie courts woull Iv c'alcld upon to e'foree very- harsh

    fruiti lie pelelI'lg e'litiui; wilh i1e ex'eption thatil prw o)vilsion of thelp Soull Mrsatll (C'olVelltionl, as 4in11iel'lh4, by) tie protocol, Ih. ACCI'ptled, subjtel to thel uindervimadditog that the appliNalibon will lw lilaliICd to ti1' C'*&% ill whii'li tie eeetateV of a dIC'4e'eleit Cl~iliMl a credit .ihile'r arti'le & of lite I'lnveIIe . rile commiittete rev'oiiiielsld this limited eXCltr|lIl il! I lis cmiwe of Sol frh iin view of the fac;t that ric'a tihe 41OllVe'llal i mmrmtert to 1944 and lithee' fact that sinic' that time1r live lite' estates oi'llrt'eril Imvp IW'el oil .1oliv'e Willh i'Slt'l to tile collee'tio.

    ra-vWIllIVIII'lelM that tihmi, prtirismis IN, eliminiiiate'd

    or to give perforliac.stis for Ameirican emlployers. Another 'OVldiO in tipe ('simldia treaty which lis called for a reservation ir tile capi til-gails proviston of Ile act tp. 114361 of 1950. It will be recailfil thalt by section 213 of ite Revenue Act of 1950, a capital-gaiis, s was iluposM upon visitors froni other countries who entered tlie Unitecl States amid perhaps rented a room in one of die hIotelt iln Ne'w Tork C'ityv and there' engaged extelisivel6 iii capital. gains operations trpoti the Amiterican exchanges. It 1950 Congress

    (M90i)

    Tile ('"anelias Trr . liv irei, agaimiul this plrw iin; that is to inv, in llr ('assialiais ('osi''ntI41ii tihre s it ; 0ro~viotiiailrtogails tii. Wicsih l rovLotiol1. s5llr'e it i* a 1'Ui4;1U.IItelt h'lsslisat' oelevrhlaratioi, it wo1ibi 1o.VP ti.1 0ir4-.. ilf I-lr'tiletthl lit ttntll. o( reiwilihg tlist rinsgrr-i-imal m-1. '1fi.ere'for,. tite rotntlijtee, oeetnelll itei t totire'r a rt'6'S4'i'%limt1 ol thilet Point in tihe 'anailian Trealv. There iwoutre other oint1iI 1I wnit1:' alirteorvatlion or .lndlerlslalinlg is ins.rtrl in one ofi' fli 1onvntious.. I bellie.',.. It rMlt.i, acruutml. t) listed e'airllil!g, attl prreit.. t7itler article I (it) orfile new e, veniiiion

    luit ldtrttouk 11TitNt

    i a va iaie-ail tallx u14I"1 thisov rei;qlrlit Aiiet,. ai s

    wi111 'a i,l artic le 13 of rl. Ilse original Irertol ius anendel.ei ul 1inta ame1nltlsnt is ile .'t ley list purpose 4o( nors'rrcing a nti lake' in i for i Ihe' origillal Ireol Isor at 'le'iat clarifying ll' liln'lallilg of the originally Ire'at'. I'ueller t1s arlitcle'. at this tilinii, wet' irl titan U)prec'ntl tit lsre'
    touring litp vear hiv telivitlual rt'tistlti'tt (Of atll. other ui 111it 'il'usm of f.ip 1Uls clll slollot. it Ahall be e'xe'mtspt fromn aiy llaxe inipociv l yli lit* nithtel .lott* wills roesict to) the' art-tr ulatlimi or lill. dls~tribut'el e'artsings. prolils. ilt-teoa', oir sutirlUitist oof suds v'orgosrtimuv, MIr. I're'silem'l, I ltlinik lin' lorie,,f elxpphaaustio- I live, maci'e will sutiie' 1to indicate' h tilure of( lil. r's,'rvalios ill el| easoe' and file ntlliure lise' of( the utl'ria.rli ,sg, where'er 'rsaeili atli, iunsilerlte in Ilit re
    41t14lIit4l4lillbg

    lia1t hall of Itll ltxahie

    tile

    v111iy

    sltock is own'uil elire'ctlv or itclir,.ettlv

    If tihre tare iso .Iltliouss, I requetl that ite treatit now I'e laiil before .tei Senate. Mr. SMITH oif Ne"w ,,enr'v. Mr. Presitilent. as a inettihwr of lilt s!bco'tnlltilIe', which WOs asesoe.iateil willh the elsstinlguashr'i Senatorir front ('georgia I.Mr. (4:entl;, ] in rotUnee-ioit with slo l.ling tlihse treaties, I rim, to Pupporl tfli Se'naoiir's Ipsilion ins reluetis fsilet lin' trealie's lie ratifiedl. Mativ uInls. were s)lveta on theml, and l1ilany wi litn te before uo during ths'ir cousidh'raion. We has lip befi of tlite wits judgtmlentU n efit of Mr. Slain, who is flit a1viser of lotIs the Ilotieuan tfipe Stenate in colnntectlionl willh fiscal l 1atterst. We heardl from numerous (Gnvern. mld"t wilnl'iiu e Aind tiuallerous outtiele Pwitne"ae. I wish to pay the highest pxosible tribute to lthe distisguishe'd chairmanas of l lt,' sttblomlittee.l thie ,ktator frotn (Georgia Mr. Ia (tcoskI:j. for the patience and skill with which lie htitllh'.l all thl','
    (C.tngrc'an, I had ihe privilegs of handlhitg rertlin nlatterm of thuis sort. I i,'ieve ist' I Ciltretsehwas ineludled treaty among 1hei,n. I think thiat i tlilt-' tre'aiaties we are' pnrovliting for true ulnifornitv, ai Ioiutl which I consider to be mist in, portant. Iferetofore wt hiave' gained'e ex'iprripelre ill tlhe'.. natter's: an at, tisis time, a a result of the further tlc'timol|v t'eivrfl, I believe we stow have re'ac'hedl A point where lilt%committee is familiar with the loihWh)lt, pitfalls in connection with stuc proleetl'dinpic, and we' a re eialouslyv careful or tile rights of Americaln c'ilizenis. Again I wisht to coni de tile nlihh,frontI (Georgia for the alltor lisne work lie has dlote is thisxconnection. TThe lominnit tee ito uttasi. Ittou1 ilt hikis.g 1hit Imp that tileset treaties prntec't outr citizenss andl ition at the s e iame an' juist attdl fair to lite oituntrie, p)articil)ipting itt .i' I
    fiat

    rvotolutiotss iof ratiliration.

    In tihe Eighttiethi

    tlt'111

    the conventions.

    Mr. ('ASE. Mr. l~rraident. will the Senator yi,'el? (20M0)

    44llrM a 11440ill

    Mir. (GO)K(1I. Ito lilte. am verv

    ,lad yield, if lit Senatur wi.,o to to my ,ustl,.tioul t'iher to til,.

    *.iiatotrfrom Georgia or 1t) til* Sten frlall %New tor ,l.'ryw. Mr. (!O,(K(;,: '1441l Ioo pl,,ed to aniiswer if I ran.

    .%ir. (V.AK. I si willing toa addrne,

    Mr. ('CAS.

    IWAlyII t'tilitt1 inll il

    I dlid not know tliut fll*.*,, mltlern were it) roinue tp wll&h Ihle trreltiv. I have. teis .!sturlaed by
    tlilln.t pre"s rrgstirls to

    (irerk Isalsianalsl havei oreih t taking advantage of litil opportuistily to uircihasm aurpl!s A.nerican vesm-6L.c, anti is isome' way make, .rr large piroits. either ly placing liise vth'u.liusn.ler Il'anasainillas riog{itry tor t plv uaig thet'I Umiler (,e.'k regltry. While' tie Mnatter noay not ly i lIe e.xnaly rovred. I itss w4utlering whether then, in soy posibility thal ill the. etolivelslioi proptaeIt. t%,,wvtn lhe Uni tedl ,ifelt-% and (r.ret' tih toiallrlhanli vIto its)ake misluuiul pgrlits lby rea,.i , of living in New York V'itv anti reltaining (Greek liatiolio tjy is tilielnand in aity way*. Mr, (,OK(,i. No; it i6 neat. (In tile ,'estrarv, we have' blen 'aersliasalah"~l rcareul to *et flint nothinia in any of thli.4 treaties would
    hava'

    reiding

    at dliflerret

    lite e'ffet that ee'sriain

    ,icrltid ill list 194,A) vime'',sw Ait, sw -tioan 213. which miulject'od to Cs'aital-guimss ltax tie lroalitt matit' lay imlprary mlucus riosidingill lht- 1'siteei Stales$. 11it1 wiht 1114 Ilto liel ple', ta 1i.i44i411ss withlln lit,' It'it4tl States. 'W, e are olreing ill the case of tie aniadimLl treaty a r,%,ervation wiidwI)rotects.lite re.vene at of tihs country. Ilowever, I would say to til% dislilsguiieil Senoluor uhi1t, its large prt Ithe,question whirh lie lwas in mind i unot Iivolvetoinilt e treaties' the at all, lx u.s the treatiets rMlate primarily to a reciprocal arrange. Ix. Iimist lae'tweesn lite Iwo rolltrartiiig rolulritwe. nssaely. Iketweel our country andll country X, respectig Income tax Sinu collection of iitmlt1' tax. respectinsg estate taxes, ntil %afet'guanrilg against the double taxations of tlwe ritircits of tile respective' parties to tile coinvenstion. It tloe Iot rnla tle to iht'i larger qluestiw which tle Sensator his aske. except in tihe way I have inidcated. Mr. (.ASE'. Alr. lPri-itlent I wish to thank the Sesator from ('seorgia for this assssranc'e. Ase I said, I had iso ksowledige toilet ltis mialtt er was. comsinlg sip. antd I wao Inot prepared to mask a specifir elllealiois relative to the prolae'm I have mentioned, but in view of tles1 that there was it rOnvrenitionl letwet'ss thie Itnittl State anid fart (recte inhludsid in list cotveullions for approval, and -lil'e that fiet it relat4htlo 111( t'stiOll Of a1voidlnIce Of 4o0lahe taxa0tiSonl, the questions 1lst naturally oreurr'ld to lie nit to whether it msigiht impinge on tile isiluialion to whicls I have referrmd. Mr. (UEOfEl. Nio it flot's iot. Mr. C'ASE. I ai glad Ito have titet assururc, of tlie Sentor that it 1dos I1ot. Mr. ItM(('R(e. It does Isot. Mr. President. in order thalnt file tonnittee's action find in order tflit list resoluliosm of ratificuitionS m ,,ayht unlderstoodlJ, aill letter 'spt'c'ially that the eflectivt' clhtess of thei, ronlvenltiolns Is clearly slatetl, I ask IIaiissiosus cronlsent flint there lit, included in ile ist':rolI alt this point the, anlaly-Sis o1f the Iensling conivenlioslt isisel dcoislllit,e retonmst'lllidations. Ilnder tltle III. page 3, of lilt' ,commsllittee report.
    to lite endu t herecof.

    list- ,tiet'i ,of regjaealinig

    (lor ttyilliing tlt-e

    lrotviions which we

    ' III.eAtumveimaf i'e.uaiua.( '.vse,'lioit itsrv ing not i.tien. i so' I.'.r.iu..elaiesges. wits rl're4'dlot INS, lritltel ill tih. steed (Committee Kwooetts. "is fesllee'ae
    III Ams,,
    J4411

    seiu; C'sowwcrIiNr So' ,,'erft Po'mstitIiTle5%'

    %%iisg1mmls S

    i R&I-

    . Ow T I iCh.slieelesst t .lusi I'14tof i11 fhe ISO r iII rwl41u 'lllW a rese'-l 'rf I ice'. 144`0 .4 OWe listsrnfai ite'1eis'cr TIOU100*en pore'are-tI au eea' ('sltics"nte.' #,,#I Ct '4Iy' ii.. eeeeiil,', 100l60 isarleiie.jr 'ss %u0014 4 the' eshiIaI -'es.ls-14utise (4sr thes'r 1s MaI M a 41 hI It'lUiste la oo e h twallll I loits' ft.%. 'iuhe th is( t Ats 1e*11401010 11Wrt tai~~sllikilly' -.44lii1ar lINiO. h 114,~ll~lio ov l b lummimrit m fll# lotlsolthq
    eet Ilserlm",' *( a sear elI'~elein1e l141iel h 61Ie' diulitijug with illt'sellW t 1"1' 141'0i. 4.1ilh'.re t Ihi 1 thill ' tI'latcuLlia ie0 4'e01s11r 1111:11es0 are' e'xtiltll that a riulves'i-ltiesel erttsrivs its allityrt'lijiar (frsln tlif 04arul limillm.ttr. that $ th Arcllo art hii"e-tl Afrve stwotib4oi I foci 1li1 1W' lsnrsoeiel 6114 The loss 0141.1ugJ ".i14'1m rm,11sslcctselss' alceh the'i lhst lsuiehlisg $estath Afrw.eemot tlegieui'r oithe &% .',% Illu' illetc a Ie owu Tls' ltis nosuliclleess with ('aeiah, asre' i4toesi ,eer.1'he

    ieseeu;'s. the' Ihe NOrilutll

    s liese vlhihh orn- airrairIan effect -A#v siti'lsWtvtl 4r uei f 'esss,'us m'illI,'llie'tl's relate, oemeit ite StaIisvi's u'ss1k1't'rlsrel. the' varestoo the 11 lM,(ar Al1.' . e 4 4' tlieu' Fs'serraI t;s ilc e'clrlll ulciel tilw " lhla .' ites ' tee tie lo ollsei4114l 4'-Siele' ila% . i se $taie 1'blrSa or, ittli ii tnlr, e'I44'e'l 1104011 leic" i-'lsete'.
    leSrO, it? 44ls4rsets 'I tihl' 1*1sIcte4 $altsl"r fthil lt' .iir't
    e4f ('t41timiaca.

    It.

    eitj

    CTo Y'TtrAXV1 W ees%'ei%,Ttss%0 19F.I.Ne Yeti~l iMieK TCt~b's Ia. eetK%.tiTlt5~ IKkl.srlxase.q Ires

    Thlu'e, owe'Iolsi tf the' rrlxsrt. eleal's seth tlie imcone' lo% mien5'htueeion with tli.s I leun ,tf rcstlh Africa uijc'iemichss tie escisluit'lsselntry lor-loco'Il. .'w 7,4-414ue4d ar" rsCIItill mhe'lmue eesaie',enceI Nesroop. Ireiasl, tre'r.'. nuilsl o titserimiut. iiStatlit hiler ;cr-lviSiulto alimiar in) W sn Inale'i w'elarte' liy l sills ( alcse.IA I*r llividetl inlto rssceide'ra' ilive',-ios ie Fistr tlhnt rtamoss the' (s4ltmilll's the'.' Itrealtiss. t the' lion 'i4 fil. nlajear ilte'nts deall wsith iWs shuereitions. and lhie v'arlousa' Ir'naliete are lit usmel lortietlsr ellie'r e'iech 44 Ofise l.amlislp'. lots IXi)ul4e taiation ardi. iii the' aieoeee'nr'e of riteliresi.i lcgrv'see'lc PIch a's are' Sill 1 anI eroleetsm;s i er 5il ,rattiml. Wtllt tie' (act riorereules'ttl icy the' e'ssictcilsct. cn. fre'que'nliy tove'r. id ir gove'rnlewolot' aoillw uAnd exe'rci l that the1varimles l' lIc ge'me'cal lsthe t'citl,' $ala'e, amilleilseo, the' rkllht t4) laimpilig, laxilii j11rioei.loi'iupe. e11a1 4loluvltic mrorlisrailtmua ole their entlirre innllsee' without regard tax its csatiescceIN 4 listatismIt like'isl' maounws timu right to tax its rcelislints. rt'gaills tee aPtonrv. the idity, on the' 's..' iriml lopip. Alien lesceride'nts, s11i other h1411u. anr.taxed . O|nly to" iti'ssne (nilts sonivrrt witlhiln tfil l'nite'ei M$lhta AnI feosrigli rsrlsratliollc The' |TI10n eos terse taxed lseily sins Ilnvosne (rneo lotbrst.s within lthe' 'siltei M414-0ale. ceecurc".a within lsislth Afiric hoimesl.s its tlasm." lri..ail ulapic inrouse' derive' Wronl a t'4 ltiv lI'litill. New Yrh'ald d1".0 114olis . iti'illl a1Wliaioe of tax Itl taxes on which their tictire' incoelos'. r'ganrdiuhu of thee' ou frr trt Ne.w Zel'anial re'itelnte lots till fle'rive'l. With rsliert to Ilolln-rideli'ts, it t14.". onlyfi ile'lmlle' slerlie'l'l frolic ew s Norway Iminml-'t ltax ie the' Psner Immiu Ne.' .otrcs" within N.ew ZmIand.. it o nly taxss the ilrleline front e',aaloud, sxru'.s that withh r'garni to 11onriluinxtil And Ims'rty lvrated Its N.rway. Ire'land ge'ne'raliy .nvI cesrtailn Ijori liedvsl mriussr re'iesle'nts on their t'setirp' th'eilsed Kilmicdsoc Applies's the' "an taiccat ruhle as lice t iis'esree and llstr'iiid'll ,nls their inlccelte froml| miurv, within Irm'iind. (Greec''t' Its has two iecoue tax.. each of(which It imclcxo',s en a menwht uidiffe.re'nt basis. ,cc'sleedlar tax (41st1leiiu ixthe to individual aned csrpornatioes) is gte'raliy icnix.e'ed ti.r. although icelsel' fruits abrmo ce' froic 'sour.'. uaithin (|r'tr's, eseli' oil l toey ieria tax (appliv d diviei'-icsb) i's . je''t to tax If "'rjoye'ul iGe ece 11.im 'n sel tles stilly t10 Misntrai IWMre111) 1ls n1111141'11 u'1clirn icllcellscse' of as ; k niationlal rs" . esn ,luls''slad the u'tinlr' icIrnce (coa e.tW'nt tf (Orittrer ThI.I. gardlte of r"4't the laltt'r ina its ulllir to tih. Unhcitsll 8l*1hems inmcocut tax with r'lee't 14 the' bhreadl e laic lesrld acce1 local liccllic' t axe" %mifO'it's aiejdiiaiu.. $whtsrieluiud iccl Of sef which he' las ter aret Iheutout illccortali.t. The $Wiiw tax%"l 111c llllc are' l ,ased Isrlnsarily on the dolinile sof the' thxlea'myer tillctfic' tess.c' s( ile' iccvollue. cieli' tazauton ift"a syeitern of r-eciprcal I.: imsiltarla. the' conv'entiosnces alel t'xensptleece mud Iby r''lproai atloitienc of the' Ielrilde ;( Ishe' I'nlleeI States taxle rs'v T1I"',prs ,iosIk.m , llrvIIcs 'va'c$fail' ilce right ite tax Ilts Owl Crseiit 'syost'cll. t riti'c.lls, reeiuiecltu. tanc'orisoratioule' willitioe rearil to tlip coot 'cclt itsIes are' accal" e udpus ill rlnciple' to incilar eroe'isis)I1 foccnI In ill 1n4t11,' tax 'iolnVe'lntillc. Ile

    which life VisitedI State is a Iparty.

    (29)

    .1% 44 th, .tis. 1.1ai,-r i-to.l lsiratioln )It|o the' 1wirici"le tha4 an ,'r;.rie ad4 , ,,o.w .4 the c.i'stria'tiot Stale..1.4hall aut h"allpjtl 1) ta% sitetither its & .~e,, 'tiall~i 'l.sl, it iA,'llpop-,1 sitsa itrmit,,' ,i.hs'saar'-f its that state thrwulh .4 jililitsaaaie o'-l, td iihll t' 'bit rti.&', 4L" lhwr,'rllu. A -'Ilicltallaulia 4-t.1144411ts1411" i ,.# 1101.11iv #h-invia l tou ii..aui * lorzstaci,, fAt'W-). U4410) aAuaaiup ac.5&',ntith1elr N111111,tr ti ih.4-a's o4 lit ,elii si smIs,i11 iort itisr.leA ta ll4ia' g.a1 talt tiflfstr Tit

    %iII

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    aaefeI

    h .toil v

    that stich ait

    te.rp.ris a*c'sarr)ilii: .e st

    traIl.' 4sr lill'sttse'sj thruo i1 a

    *g:dNhAd01iha allt.it 1,4It# NeItIN1.te 414% ir i Ihi t6 e rtiil l.driveId trolls siti llianlt h ta4 4'u4str. Tr TIi' .hi- et' al tatle , a.plK it-tut -'O It iaster'r all. %4t-!!11sttla istivie&w itir elt'airrl. tl fris tite' birislishisl .4 .'rmst.al o.r ivei.. lt %liorttive'r. .- 'h to( lIt.' t'lula A nsa." t ocko Ile that ItacIorulit 4isal) itke.ierso'isl to aril". Is*ttriallk'1lt
    ,, list, .s4ijtil-llil'it .4 ish.e MaVuctitl ,4 'tirzatids hor ,ailhir rolateil laetssise,si ilItsty .4 411. f .-.asatr~setllal ',tate' within ;esutihr 4',,dra'dtro i lt ,114,1 tie.r hst lite' lsrat1h iits .''IU iil ra'lle'e't it's l'rlstit,' :i's. ;i-'.'sst-teil)' .'s l'ss,'siI.. I
    cti~',Istiut,,l.i,a hart'S

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    11,1 1'4 ,1 ifa.r# or .fQ5Wi~I. ilsltaar',- for Iih, .ui.jill'st~i.'s itt 3Pir. a,'r .l11,,t.he'. ;a15l7

    (')lll~,J~lll ,

    114 lktrklbf-

    Ir"seai I'llits-4 8lat,.s Itsnlhi

    Tihe' Swtuith .fria'an als.'asts tiortsotialiil isrtiosil larl. X I ) that elivos,tsieis And IIi ssit o' 1a 4 8011th Vfrl'all rofrikor.1 s$$o 8to1tth Afrtcauil r-,sieh.it'.s tithe' i1 4 Ih.ttll I'nll.I *' tat."s e'il, i6t11 . .iit 1 I All$th h .frit.,, .'tkrllO t's wanslel h's I.'0.'uaspl

    4It.%hs*lll I3%0'41 lav Stais:

    ar1ovi'd'es (art. VI) that iite'rv.l :III Rtly fotrll of islt'llt,.lelelms dehrivied (ronll ho' It rs.sil leat of tii't tla. tita.lastitig a hr is.or;ratiln Or tithe.r loawe.ll'mse tint 'tlK a lrt 'illlill islplisatis alalsshetl.cat It fornmer r'oatilllr') the 'IMsll Ine t'e'n t is list' c'iosntry froist which dierieel. 'TIe Irish convention hAat" 'sisnilar Isrwo'iaias (tnrl. V1 I). 1Ibt it dIes tatal apply to Ilnte'rest paid lby a V.orlwaralioln rtmitihlr itoisOn o'4 the r'otrswisiiiX usititeltrst' to a torpratlillon oif the Other coasstlry lshich 'ioleslrahs, tIlnr'ly or htodir.h''tiy, nior' than SO Ioerc'st of Ih.' enlre' v%'lilttl Ilrwer in tilr Iay.or corporations. *thist piruviatitll s prs ietcally idlelitais witli1 rt iHle V! of lthe rconventloon with (rroe't. .ihrr'o'.'er. with rlael't to Isth tl're'st aidi divid.Iends. article XV Of thi, Conventtuioln with Ire'lansd prosvidtis that sucl'h Imy. aIattal Il1114i.' h :1 s.rlisralions of stile the' .OtriocliltitK latits Afteriet a ifllael slrailted a O. .%hall hl' erenlliap rolls 1p. I14 1tx v1 the other state uittlee 1th'reciplietto : ta is ritlte!! or resident (in tait eisra of the. I'tulitel State's) tt a reside'hat (it t is' as of Ir'ian.I) of that Otlhe'r stale. flit' irnlaly wills (rre'.' raulitailas it Ullinaitrail prov'.'ison (art. IX) tlo the. sher' thust tli'vid.'l;ite and itetre'st piaid lay ia (t'.'k 'rlaralltontl shall IN'e'i..'s111t froaln 'ti!te.l Staties taxe t"%rett wh'n.' tht' rr's'ipie'nt is a itlitrns, r't.iellt'n, or corjioratin olf that I'uliltell iltsli. I'lltlt'r tlise internal vlal'tor, ('h.k'. inltenre'st aun di'vidt'l1ds raiui lhy a foin.ign corllatrsrtioua alsy%. sUlttisr .etrltainh conlitlinas. 's tittt.' Illasollue ruilln P .iures within Ihs I'llill Slt;le' 14u141 contse'untl'hy subject to I'llited State's. fm. in tih. Ihanids of title lutor.'sltivid' ali'it rs'ciplt'lnt eolucih itehts III practic'm. it is oill' III rare inlislal.lss that it is iraclirable' to asc'rtaistll Wihtlaetr a foreign reirl;oraltitl l.'rlses nIstre' thas ltitl. re'tqeilt' 1'rM'llitsKIna of itit rlt'10 ilstlis'fr (Wasll tsl.tti Stlte staeurces 1%a Ish ollplntltltle' it lr Itt'est An dil'iti' to stie'ncome frouit osrc.'s %itinthte I'lte'.i1 State's. Artvirl' V1 of bloth the' Irish land New ?.'ali.i cotss'etiotss Iarnviik's. uintlike tihle otiller Itellt n i e ns, that the ratof Ui'ite.d Stateis tax tia dividllnds 1 at. 'ri've'df(reen1! Metrce's within the' te'llted State's lay atra.sitent of thwes. two coulltr-t'o e.iKalKe' ldaI trades or lllsillsess within hit'T'iltt'ti States through at i'nltr'ant it IN-li t'setallishlll.'llt ta.'r'ill shall tiot e'xe.''t'il IS ile'rc'lat. 11 1h' rast.' of aliv.idt'nd u4
    irs.ri'. withitul otI.' C'401str" molvilng frunt a sutllidiary toia pareit, tihe rate. stiliji.t to certain limitations, Is 1101 te) eu.4e''d .5 lac'r.i'ett. Thiat 'Ifert taf teit. larnviislts as re'dae'ftile Iarra'lt s. to I'tsltt'd States withhohldiung rtitl' (fint :11) Irie'mit to IA or A Io'rr'e'aa, its tie cam,' litya I.n. This re'eialloClit is likewiss, ari'.ied its existing coavettioni ; willh liIlth tihe Unlited Kigtsdo Cansadas. i)'n.ausrk. andbi the' N'tawnt:sdi. n.

    lust

    re.iore'u.'tle'.l a unilateral c'.atse't'Lltit by it'h Ilailt;ll ta t."'1. lhSO".(itl'tt effort Ito ha.ve .. llth Africsa Mlr'se luo a '.1ll1ilar ilWmrta rfewiw'.'t the Villl.'I , 1's 'tuil tth Untils.. tralaiuilel lorolsl in atndi its iwaort'irleiotkt 'hiar,,lit, tar lsi h'tll (fileih. the twit t rll'lltusttit'ti have astretl vart. V Of the It' os.lig iroiiott'i5t) 14 sit'4ite' artirile \ilI 4 ithe' la-'roitiit ot'ai enirt'iv. t )It re'tilwr.aI laasio. Ilt-' New Z4.'141at14.'otase'ntnuhl jrrovhisie (art. XlI) that Ia tia' itleni (wit hoit rfir.'tlit.', to iaiter'a)IU by X'New Ze.alasl l 'orlsoratioll I'llall I14aa I .''cllpts (rfrelsmt *ts'e'lt where. tist rev.ilmeit i- ai,'ilitiau oor aw idtstIl Of the ra t'sited S4Ntat.' or is saI'llilol lxstate 'urralioll. Tito. ttw'Kiis ct'onve'nitkl Ition no rl.if)rr'cll". it) the' pis 'ssll'tof divitldils akea

    % frlc:..

    1'lhig !artn'i'as)a

    Neither Irish nor New Zealand law at the present time subjects to tax the dividends of Irish or New Zealand (respectively) corporations. The corporation alone is taxed, and the tax paid by the corporation is regarded as being paid on behalf of the shareholders therein. Of course, the reduction of the United States withholding rate does not affect United States citizens resident in Ireland or New Zealand as such persons are not subject in any event to such withholding tax. The conventions with Greece, Ireland, and Norway exempt on a reciprocal basis interest derived from sources within one country by residents of the other. Neither the South African or the New Zealand conventions contain such an exemption. However, the existing conventions with the United Kingdom, Denmark, and the Netherlands do provide for such a reciprocal exemption. Under article VI of the convention with Switzerland there would be a reciprocal reduction in each country from 30 percent to 15 percent in the tax rate on divi. dends derived from sources within such country by a resident corporation, or other entity of the other country not having a permanent estabUshment in the country from which the dividends are derived. There would be a reduction, sub ect to certain qualifications, to 5 percent in the tax rates with respect to such dividends if the shareholder is a corporation which controls, directly or indirectly, at least 95 percent of the voting power in the corporation paying the dividends and if not more than 25 percent of the gross income of such paving corporation is derived from interest and dividends other than interest and aivi. dends received from its own subsidiary corporations. The reduced rate of 15 percent would not apply to Swiss tax on dividends derived from Swiss sources by a Swiss citizen who Is resident in the United States and who is not ".iso a citizen of the United States. Switzerland wishes to place no limitation on the imposition of its dividend taxes with respect to its own citizens, except as to those having dual nationality. No corresponding provision is found in any other treaty to which the United States is a party, but it has no effect upon United States taxation. The Swiss tax of 30 percent would be withheld at the source and a refund to reduce it in accordance with the provisions of article VI would be made upon a claim duly filed therefor by the recipient In the United States. Such claims for refund are necessitated by the difficulty in identifying the owner of shares which arises from the fact that the standard form of stock certificate in Switzerland Is the bearer share. The Swiss convention provides that, with respect to interest on any form of indebtedness, the rate of tax shall be reduced to 5 percent on interest derived from sources within one country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the interest is derived. In the case of the convention with Switzerland a tax of a percent is retained because of the fact that in Switzerland there is imposed on interest, in addition to the income tax, a 5-percent coupon or stamp tax. The special features explained above with respect to the reduction of tax on dividends apply also in regard to the reduction of tax on interest. Article XIV of the Swiss convention provides that dividends and interest paid by any foreign corporation to a nonresident alien resident in Switzerland or to a Swiss corporation, not having a permanent establishment in the United States, shall be exempt from United States tax. Reciprocally, dividends and interest paid by a corporation other than a Swiss corporation to a resident or corporation of the United States not having a permanent establishment in Switzerland shall be exempt from Swiss tax. As thus drawn, the article is narrower than the corresponding articles of other conventions in that the exemption granted is confined to nonresident aliens residing in Switzerland and to Swiss corporations, whereas other conventions extend the exemption to nonresident aliens and foreign corporations generally (for example art, XV, United Kingdom; art. XII, Netherlands and New Zealand; art. IX, dreece; art. XII, Canada). It is broader in that the exemption thus restricted extends to dividends and interest paid by any foreign corpo ration, whereas other conventions have confined the principle to dividends an interest paid by a corporation of the particular country with which the convention was entered into. (3) Compensationfor personal services (A discussion of the treatment of pensions and annuities will be found below under that heading.) The six conventions (South Africa-art. II of the protocol- New Zealand-art. IX; Norway-art. X; Ireland-art. XI; Greece; Switzerlana-art. X) all adopt the principle of reciprocal exemption for compensation for personal services per-

    (2094)

    formed by residents of one contracting state who are temporarily within the taxing state for a period or periods not to exceed 183 days if the services are per. formed for a resident or corporation of the State of which the person Is a resident. In the case of Norway, Greece, and Switzerland there is also granted a limited exemption where the services are rendered for an employer domestic as to the taxing state. However, the conventions with New Zealand, South Africa, and Switzerland contain an exception to the rule. Specifically excepted from the scope of the exemption are the profits or remuneration of public entertainers such as stage, motion picture or radio artists, musicians, and athletes. A modification of such exception is found in the Swiss convention, where the income received is less than $10 000 ($5,000 in the case of the Canadian convention discussed separately). The committee believes that these exceptions constitute a discrimination against this particular occupational group. Therefore, the committee recomlinenliiiI that In. 8nate niot accept paragraph (4)of article IX of the New Zealand he co\.'n,,ion, lollaragrapl !'o! :urtile If of thi' South African protocol, and paragraph (4) of article .X -1 i ,i ('onve'iti' .
    (4) Goternment salaries

    Each of the conventions adopts the general principle of the reciprocal exemption by each state of salaries And wages paid by the other state, or by political subdivisions or territories or posse sions thereof. This, of course, still permits the United States to tax its own citizens. This is tree of all tax conventions to which the United States is a party. In the case of Norway, Wreand, Greece, and Switzerland this agreement specifically embraces the payment of pensions by the governments concerned. The agreement with New Zealand, on the other hand, does not apply to such pensions. The provision of the South African convention makes no specific reference to government pensions. However, the uniform rule of the South African convention will apply with respect to both govornjnent and private pensions to the effect that they will be exempt from tax in the state where received. The conventions with New Zealand and Ireland contain a further limitation upon the scope of the exemption to the effect that it shall not apply to services performed In connection with a profit-making activity of one of the contracting states. (This is likewise true of the Canadian convention discussed separately. (8) Private pensions and annuities The convention with New Zealand makes no provision with respect to the treatment of private pensions and annuities. The general rule is stated in the conventions with Norway, Greece, and Switzerland (art. XI in each case) and in that with Ireland (art. XII) which provide that such pensions and annuities shall be exempt in the country of source. (6), Professors, teachers, students, and business apprentices Each convention contains a substantially identical article which provides that the income of professors or teachers from one of the contracting states who visit the other state for the purpose of teaching, for a period not to exceed 2 years, shall be exempt from tax by the latter state." (South Africa-art. IX; New Zealand-art. XIV; Norway-art. XII; Ireland-art. XVIII; Greece; Switzerland-art. XII.) This provision is standard in all later tax conventions to which the United States is a party. A similar exemption is provided, without time limitation, for students and business apprentices in the taxing state who receive remittances from the other State. (South Africa-art. X; New Zealand-art. XV; Norway-art. XIII; Ireland-art. XIX; Greece; Switzerland-art. XIII.) (7) Religious, charitable, and similarorganizations The convention with South Africa (art. XI) provides for the reciprocal exemption of income derived from sources within one of the contracting states by a religious, scientific, literary, educational, or charitable organization of the other contracting state under certain conditions, from tax by the state from which the Income is derived. A similar provision is found in the existing convention with Canada. The other conventions contain no similar provision.

    (2095)

    [P. 1,1440l

    (8)A iju and aircrf

    Each treaty provides for the reciprocal exemption by each state of the income derived by an enterprise of the other state from the operation of ships or aircraft. This principle has been enunciated in the Internal Revenue Code for many years. A special limitation has been written into the South African provision to the effect that the exemption from South African tax does not apply to "resident,%" of South Africa. Thus, the exemption will not apply to a United States corporation, if any, the management an d control of which is in the Union. The term "management and control" as applied to a corporation Is intended to mean the direction of the policies of such corporation as determined through the meetings of its board of directors or other management group.

    (9) Rentals and royalties


    South Africa The South African convention contains no provision with respect to industrial and like royalties. However, article III of the protocol is designed to apply principles, found in several other conventions, whereb a resident of one contractIng state deriving rentals from real property or royalties from natural resources located in the other country may elect for any taxable year to be subject to tax in that other country on a net basis. New Zealand The convention with New Zealand provides (art. VII) that a resident of one contracting state receiving rentals from real property or royalties from natural resources or royalties from the use or right to use copyrights, patents, etc., derived from sources within the other state may elect to be subject to tax on a net basis in the country from which derived as if he were engaged in a trade or business in that country through a permanent establishment. Article VIII provides, on a reciprocal basis, that motion-picture rentals derived from one country by a resident of the other country not engaged in trade or business through a permanent establishment In the first country shall be exempt from tax by the first country. (The exemption does not apply to the New Zealand "film hire" tax.) Norway Article VII of the convention with Norway provides that royalties and other amounts received for the right to use copyrights, patents, etc. (including motionpicture rentals) shall be exempt from tax by the state of source. Thus the recipient is not afforded an election as In the New Zealand convention. There is a special provision, moreover, to the effect that the accounts of the payor may be adjusted (by disallowing a deduction of the amounts paid) If the royalty or other amount paid is not considered to be a "reasonable consideration" for the use of the property. It has been mutually agreed by the revenue authorities of the respective countries (a) that such proviso will be construed In the administration of the convention as not conferring power on such authorities to finally determine whether all or portion of the payment referred to above should be denied as a deduction to the payor thereof and (b) that such payor has the right to appeal the issue to the appropriate judicial tribunal of the country the revenue authorities of which undertake to deny as a deduction such payment or portion the, eof. The committee recommends acceptance of the provision in reliance upon this mutual agreement. Article VIII provides, as to income from real property (not including interest from bonds or mortgages secured by real property) and royalties from the operation of mines, quarries or natural resources, derived by a resident or corporation of cne country from sources in the other country, that such a person may elect to lie subject to the tax of the country of source, on a net basis as though such person were engaged in a trade or business through a permanent establishment therein. The effect of this provision (as in the case of the Now Zealand and South African conventions) is to allow, for example, the Norwegian taxpayer to elect either the United States withholding rate of 30 percent on the gross amount of such royalties or rentals, or to have the tax determined on a net basis, after deductions and credits, respecting his entire gross income from sources within the United States, including gross rentals or royalties.

    (2096)

    Iroland Under the convention with Ireland (art. VIII), royalties and rentals from copyrights, patents, etc. (including rentals of motion pictures), are to be exempt Royalties from natural resources and rentals from real property which are located in the United States are to be subject either to a withholding tax limited to 15 percent or treated as if the recipient were engaged in a trade or business in the United States. The effect of this option is discussed above with respect to a similar provision in the Norwegian and South African conventions. If the prop. erty from which the rentals or royalties are received is located in Ireland and (I) the recipient is a resident of the United States, (2) the income is subject to nited States tax, and (3) the recipient is not engaged in a trade or business in Ireland, the income shall be exempt from Irish surtax.

    at source.

    Greece
    The provisions of the convention with Greece (art. VII) with respect to the taxation of royalties provides as does the Norwegian convention that such income shall be exempt at source. Rentals from motion-picture films are specifically excluded from the operation of these provisions. Under article VIII rentals from real property and natural resource royalties may be taken at source on a net basis. Swilserland Article VIII of the Swiss convention provides for exemption from tax in either country of various royalties, including film rentals, derived from sources within that country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the royalties are derived. Article IX provides that income from real property (including gains from the sale or exchange of such property but not including interest from mortgages or bonds secured by such property) and royalties from the operation of mines, quarries, or other natural resources shall be taxable only in the country where such property or such mines, quarries, or other natural resources are situated. Like corresponding provisions in other tax conventions described above, article IX would permit the tax liability to be determined upon a net basis.

    (10) Capitalgain.
    The conventions with South Africa, New Zealand, Norway, Greece, and Switzerland contain no provision for exemption from tax of capital gains. Article XIV of the Irish convention provides that a resident of Ireland ,ot engaged In a trade or business in the United States shall be exempt from the United States tax on gains from the sale or exchange of capital assets. It will be recalled that section 213 of the Revenue Act of 1950 imposed a tax upon the net amount of capital gains derived from sources within the United State by a nonresident alien individual not engaged in trade or business in the United States but temporarily present therein. Article XIV of the pending convention would, of course, override the latter amendment with respect to residents of Ireland. A provision similar to that of the Irish convention was originally contained in the conventions with the Netherlands and Denmark, but on the recommendation of the Committee on Foreign Relations, was stricken out of each convention by the Senate. Those conventions, in each case subject to the reservation here noted, were accepted by the Senate on June 17, 1948. The convention with Ireland was signed on September 13, 1949. The insistence of Ireland upon the exemption of its residents from the United States tax on capital gains is based on the fact that such an exemption is contained in the convention between the United States and the United Kingdom. How. ever it should be noted that the convention with the United Kingdom was ratified prior to the enactment of the Revenue Act of 1950 and prior to the ratification of the conventions with Denmark and the Netherlands. Because of the strong objections which have been raised previously in the Congress to the exemption of nonresident aliens from tax on their capital gains from transactions entered into in the United States, the committee recommends that article XIV of the convention with Ireland relating to income taxes be eliminated and proposes a reservation to that effect.

    (209)

    (II) Arleemilated earnings and profits

    earnings, profits, Income, or surplus, if individuals who are residents of Ireland control, directly or indirectly, throughout the later half of the taxablIh year, mtiore thall 50 percent of the entire*voting power in tile corporation. A similar article in the Netherlands ronvetition wis strielken out by the Se.nate. Similar articles are found onh' in the United Kingdom an(d TCanadian 'Collventot is. In view of the fact that this'article would give Irish corporations doing l)miine,,s in the unitedd States a comnpetitive advantage over do'nestic corporations, the committee recommends that the article be eli'ninated from the convention anm proposes a reservation to that effect.
    (11) ('redit for foreign taxrs

    shall be exempt from United States tax on its accumulated or imdistrihuted

    Article XVI of the convention with Ireland provides that an Irish eorporlaiomi

    lnder the credit provisions of the various conventions, the, Uliited States though while continuing to tax its citizens and corporations and residents a.sI the convention., had not come into effect, will during the lives of the respective conventions continue to credit against its Income taxes for income taxes paid the other contracting states. Thi, credit will be applied in accordance with section 131 of the Internal Revenue Code. The credit system is reciprocal. South Africa agrees (art. IV) to exclude- from its income and excess-profits tax base income from sources, within the Unmited States. This satisfies the similar credit requirement of section 131(a)(3) of the code. New Zealand, on its part, in effect adopts (art. XIII) the principle of the Internal Revenue Code. Norwav and Ireland likewise adopt this principle. The Irish convention contains a special provision to the effect that income derived from sources in the United Kingdom by an individual who is resident in Ireland shall be deemed to be income from sources iii Ireland if such income is not subject to United Kingdom income tax. This provision is necessitated by the existence of a tax arrangement between the United Kingdom and Ireland, dnted April 14, 1926. Under that arrangement, a resident of one of the countries not resident in the other country but deriving income from such other country is exempt from tax imposed by such other country. Thus, no credit for Irish tax [p. 114411 would be provided were it not for the special provision included in the pending convention with Ireland. Greece and Switzerland (art. XIV) have agreed to credit provisions substan. tially similar to those found in section 131 of the Internal Revenue Code.
    (13) Ertension to other territories Article XX of the convention with New Zealand provides that either contracting state may, upon giving notice to the other, extend the application of the convene. tion to all overseas territories or other territories over which it has international responsibility. (14) Exchange of information Each of the six conventions provides for the exchange of information between the taxation authorities of the respective countries for the purposes of carrying on the provisions of the conventions, the prevention of fraud, and for other related purposes. (15) Alutual assistance in collection With the exception of the convention with Ireland, each of the conventions provides for mutual assistance and support in the collection of the taxes which are concerned, together with Interest, costs, and addithe subject of the convent tions tO taxes and fines not being Of a penal character. Like provisions are found in the French, Netherlands, Danish, amd Swedish conventions but not in the treaties with the United Kingdom and Canada. As in the case of the estate-tax conventions discussed earlier in this report, the committee believes that the collection provisions of the South African, Greek, and Norwegian income-tax conventions are too broad, and it repeats that, as a general rule, it is not believed wise to have one government collect the taxes which are due to another government. The New Zealand and Swiss conventions contain a more limited provision, and the committee recommends that the other conventions be similarly limited. Thus, the committee recommends the acceptance of the collection provisions of the South African Greek sand Norwegian income-tax conventions subject to the understanding that each of the governments may collect the other s tax solely in order to insure that the exemptions or reduced

    (2098)

    persons nit ieitittled to under ben'flts. rates of tax provided such the respective convenitions will not Imb enjoyed by (16) ifertire dulat TIhe conventions with Norway aned Greece shall ib ellfective for taxallee Years I6gioning on or after the. 1st day of January of the ye'-er in which the exchalige of int r.lrunients of ratification occurs. The, convention with South Africa is made effective' on tihe, Ist day of July 111411, aiedl is applicable to income arising on or after that dato-. The convention with New Zealand shall be' effe'teive, with reispect to U'nieted tatde's taxes, for taxable years sI'ginning on or after Jainuieary I of the calendar year in which tOhe exchange of istruniits of ratificat ion ovceirs, and, with respxct to New Zealand taxis, for the year of ais.'ssmel'llt beginninig oni the, 1st daiy of April ne'xt following the calendar year iln which suclh e'xchlcamge occurs. Thee' effective date (if the convention with Ireland is sulbtacmtially the sanei,as tliat of tihe, New Zealand convention. However, inasunch ats thie-re' are sinall differences with respect to the Irish income tax, thel Irish surtax, and the Irish corporation-profits tax, attention is invited to the colnventionli prolmsr for the ,letalls of their respctive effective, dates. The SwIss convention p)rovides thait the( con vention .huiall have- effect for taxable' ears lxginning on or after Januiary I of the year in which thee exchange of Instruilno'itsof ratification takes phlce, exe,, telint, if stlch exchange take's, plac'v on or lt after Octobe'r I, paragraphs (I) aned (3) of artice VI amid article VII shall hlave e'liict only for taxable years Ih'ii-minnieg on or aft or Jaenuarv I of the year neext following thee year lit whieh such exchlangt takes place'. It is providle'also thai Ihe convention shall contlinu.' effective' for 5 years Ibeginning with the aleceldar h year in which the exchange' of instrunwi'mlts of ratification take-s place and inedefinitely thereafter, but miay bi te'runieate~d by either country at thle eulnd of thait 5year period or ait any tint(' t hereaft er by givileg ait least (i Inoecths' prior not i'e of terininatiome, lie wAeich e'venlt the' colmve'ntoell shall cease to bI effective for e taxable vears beginning on or after Januclary I next following the expiration of the 6-iionth pe-riod.
    41. HI'PPLUMI}NTAL ('ONVENTI(iN5 WITH (ANAiRA

    IP. 1148I NORWAY

    CONVENTION REIATICV; ON INCOME E

    To

    D)OUBLEI

    T.AXATIeN

    'The Senate, ats in ('omIIImiittee of lhe Whole,, proC'e'el.4h to C'ontsidler lie ('OliVentio (Exeectitve Q, 8lst ('wOg., Ist se.".), atcOllnvention between ti'e Inited Sttates or'Aeiieriea anid Norway for the atviihidie, of double taxattion and theit prevention of fiscal evasionwith respect to taxes onl in('Olnie, sigeced tit *ueshingtonl. ,file 13, 1949, which wias re'ad tile seolld tillue', ais follows:

    IText of 'onventiolij
    IP. 11451 The PRESIDINGX OF(FlE('ER. The c'OnlVelition is lbefore the Selllate atndl open to aimiendment. If there he no amii'lndmeilnt to be proposed, thi ('OltVelIjIol uill be reportedly to the S(,lilte. lie (coenvention was reported to the itiSenae without atiRendhlent. The PRE-SII)ING OFFI('R. The resolution of ratification sAith the uinlerstanding n ill be read. The Chief ('lerk read its follos :
    Resolred (two-lhirda of the Senators present conrurring therein), That the Senate advise and consent to the ratification of Executive Q, Eighty-first CAOigretss, first session, the convention between the United 8tates ated Norwiy, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes oil Income, subject to the following understanding: It is understood that the applecation of article XVII of the convention shall be confined and limited as granting authority to each contracting 8tate to collect

    (2099)

    ,iliei l jKIWI IaJu Iiml.Wid I)% tihe jthIier r('UBtrftilK State' v will Insure that the 1:xpliluitio iior n 'durnitrts of tax granthed aulder the lIrn-m-ilt crveliit'tll hby 91101 i tther State shalll niot Ixh iajthyed Ity Iwrmiimiot entitlehd to .noh hlx'ltmllmt.

    I1P F.SI1)I , ()FFl( 'Elt. TIh'Ie qiulest ion is on eegreeing to the M resoltiliol oif raetili'.etion with Its, llmihderstuttlting. Ill ulthing thli (1te'St litm.. Twoatl-hin!d cl Ithe' 4e'attrs4 lIre'sintl eoneltlrring t I Pren,I, li, O resolution or neit ri tiht)el|, Wilhl thl, e'titherrsftamlilng, is negree'eI lo, tnet
    thit' cnIClV'i'IttlOml is reetili.eI.

    iahiadrtinidig to ilua rsolulion or rotiiitionm. Thee tlndihrstmaidinjg wits tgreeI it).

    This

    IIhK DI1)IN(, ()14'I( 'IC1I. This getitsion is onit agreeing to ft,

    rhe

    (lOO)

    Presidential i'riw animation including official text of convention) h


    [IlIprint (if TIIAS '23.571

    (2101)

    TISATIUS AX* OTSINU

    INTERNATIONAL ACTS 681335 381?

    DOUBLE TAXATION
    Taxes on Income

    Convention between the UNITED STATES Or AMERICA


    and NORWAy e Signed at Washington June 13, 1949 * Ratification advised by the Senate of the United States of America, with an understanding, September 17, 1951 * Ratified by the President of the United States of America, subject to the said understanding, November 26, 1951 o Ratified by Norway August 12, 1949 * Ratifications exchanged at Washington December 11, 1951 o Proclaimed by the President of the United States of America December 13, 1951 o Entered into force December 11, 1951

    and Protocol of Exchange


    o Signed at Washington December 11, 1951

    (2108)

    DEPARTMENT OF STATE P[tucAlporn418 (Literal printi

    (2104)

    BV

    TIU PRESIDENT (O TiEl UNITIW SrATz or

    ARNICA

    A PROCLAMATION Wimitt-m a convention between the United States of America and dhe Kingdom of Norway for the avoidance of double taxation and
    the prevention of fiscal evasion with respect to taxes on income was signt-d at Washington on June 18,1949, in the English and Norwegian

    Ianguages, the original of the said convention being word for word as follows:

    (i)

    (2105)

    CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND NORWAY FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME The President of the United States of America and His Majesty the King of Norway, desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have appointed for that purpose as their respective Plenipotentiaries: The President of the United States of America: James E. Webb, Acting Secretary of State of the United States of America, and His Majesty the King of Norway: Wilhelm Munthe Morgenstierne, Ambassador Extraordinary and Plenipotentiary of Norway at Washington, who, having communicated to one another their full powers, found in good and due form, have agreed upon the following Articles: Article I (1) The taxes referred to in this Convention are: (a) In the case of the United States of America: The Federal income tax, including surtaxes. (b) In the case of Norway; The national and the communal income taxes, including the old age pension tax, the war pension tax, the tax on bank deposits and the seamen's tax. (2) The present Convention shall also apply to any other income taxes of a substantially similar character imposed by either contracting State subsequently to the date of signature of the present Convention. Article II (1) As used in this Convention: (a) The term "United States" means the United States of America, and when used in a geographical sense includes only the
    (8)

    (2101')

    TIAS 2357

    States, the Territories of Alaska and Hawaii, and the District of Columbia. (b) The term "Norway" means the Kingdom of Norway; the provisions of the Convention shall not, however, extend to Svalbard and Jan Mayen, nor do they apply to the Norwegian dependencies outside Europe. (c) The term "permanent establishment" means a branch office, factory, workshop, warehouse or other fixed place of business, but does not include the casual and temporary use of merely storage facilities, nor does it include an agency unless the agent has and exercises a general authority to negotiate and conclude contracts on behalf of an enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. An enterprise of one of the contracting States shall not be deemed to have a permanent establishment in the other State merely because it carries on business dealings in such other State through a boa Pde commission agent, broker or custodian acting in the ordinary course of his business as such. The fact that an enterprise of one of the contracting States maintains in the other State a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute such fixed place of business a permanent establishment of such enterprise. The fact that a corporation of one contracting State has a subsidiary corporation which is a corporation of the other State or which is engaged in trade or business in the other State shall not of itself constitute that subsidiary corporation a permanent establishment of its parent corporation. (d) The term "enterprise of one of the contracting States" means, as the case may be, "United States enterprise" or "Norwegian enterprise. (e) The term "enterprise" includes every form of undertaking whether carried on by an individual, partnership, corporation, or any other entity. (f) The term "United States enterprise" means an enterprise carried on in the United States by a resident of the United States or by a United States corporation or other entity; the term "United States corporation or other entity" means a partnership, corporation or other entity created or organized in the United States or under the law of the United States or of any State or Territory of the United States. (g) The term "Norwegian enterprise" means an enterprise carried on in Norway by a resident of Norway or by a Norwegian corporation or other entity; the term "Norwegian corporation or

    (2108)

    TIAS 2857

    other entity" means a partnership, corporation or other entity created or organized in Norway or under Norwegian laws. (h) The term "competent authorities" means, in the case of the United States, the Commissioner of Internal Revenue or his authorized representative; and in the case of Norway, the Ministry of Finance and Customs. (2) In the application of the provisions of the present Convention by one of the contracting States any term not otherwise defined shall, unless the context otherwise requires, have the meaning which such term has under its own tax laws. Article III (1) An enterprise of one of the contracting States shall not be subject to taxation in the other contracting State in respect of its industrial and commercial profits unless it is engaged in trade or business in such other State through a permanent establishment situ. ated therein. If it is so engaged such other State may impose its tax upon such profits of the enterprise from sources within such other State. (2) In determining the industrial or commercial profits from sources within the territory of one of the contracting States of an enterprise of the other contracting State, no profits shall be deemed to arise from the mere purchase of goods or merchandise within the territory of the former contracting State by such enterprise. (3) Where an enterprise of one of the contracting States is engaged in trade or business in the territory of the other contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment and the profits so attributed shall, subject to the law of such other contracting State, be deemed to be income from sources within the territory of such other contracting State. (4) The competent authorities of the two contracting States may lay down rules by agreement for the apportionment of industrial and commercial profits. Article IV Where an enterprise of one of the contracting States, by reason of its participation in the management or the financial structure of an

    (2109)

    TIAS 2351

    enterprise of the other contracting State, makes with or imposes on the latter, in their commercial or financial relations, conditions different from those which would be made with an independent enterprise, any profits which would normally have accrued to one of the enterprises, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly. Article V (1) Income which an enterprise of one of the contracting States derives from the operation of ships or aircraft shall be exempt from taxation in the other contracting State. (2) The provisions of this Article shall be deemed to suspend the arrangement between the United States and Norway providing for relief from double income taxation on shipping profits, effected by exchanges of notes dated November 26, 1924, January 23, 1925, and
    March 24, 1925.(']

    Article VI Interest on bonds, securities, notes, debentures, or on any other form of indebtedness derived from sources within one of the contracting States by a resident or corporation or other entity of the other contracting State not having a permanent establishment in the former State shall be exempt from taxation in such former State. Article VII Royalties and other amounts derived, as consideration for the right to use copyrights, artistic and scientific works, patents, designs, secret processes and formulas, trade-marks and other like property (including rentals and like payments in respect of motion picture films), from sources within one of the contracting States by a resident or corporation or other entity of the other contracting State not having a permanent establishment in the former State shall ba exempt from taxation in such former State: Provided, That each of the contracting States reserves the right according to the principles of Article IV to deny a deduction to the payor thereof for such royalty or any portion thereof as is not considered by the revenue authorities of such State to be reasonable consideration for the right to use the property referred to in this Article. Article VIII (1) Income from real property (not including interest derived from mortgages and bonds secured by real property) and royalties in respect of the operation of mines, quarries, or other natural resources,
    'Executive Agreement Series 15; 47 Stat. 2617.

    (2110)

    TIA 8 235'

    shall be taxable only in the contracting State in which such property, mines, quarries, or other natural resources are situated. (2) A resident or corporation of one of the contracting States deriving any such income from sources within the other contracting State may, for any taxable year, elect to be subject to the tax of such other contracting State, on a net basis, as if such resident or corporation were engaged in trade or business within such other con. tracting State through a permanent establishment therein during such taxable year. Article IX Gains derived from the sale or exchange of real property shall be taxable only in the contracting State in which such property is situated. Article X (1) A resident of Norway shall be exempt from United States tax upon compensation for labor or personal services (including the practice of the liberal and artistic professions) if he is temporarily present in the United States for a period or periods not exceeding a total of 183 days during the taxable year and either of the following conditions is met: (a) his compensation is received for labor or personal services performed as an employee, or under contract with, a resident, or corporation or other entity of Norway, or (b) his compensation received for labor or personal services does
    not exceed $10,000.

    (2) The provisions of paragraph (1) of this Article shall apply mWatis mutandis, to a resident of the United States with respect to compensation for such labor or personal services performed in Norway. (8) The provisions of paragraphs (1) and (2) of this Article shall have application to directors' fees representing reasonable compensation for services rendered whether or not the recipient of such fees has been present at any time during the taxable year in the contracting State from which payment of such fees has been made. (4) The provisions of this Article shall have no application to the income to which Article XI (1) relates. Article XI (1) (a) Wages, salaries and similar compensation, and pensions paid by the United States or by the political subdivisions or territories thereof to an individual (other than a Norwegian citizen who is not also a citizen of the United States) shall be exempt from Norwegian tax.
    (2111)

    TIAS 2857

    (b) Wages, salaries and similar compensation, and pensions paid either directly by, or from funds or institutions created by, Norway or Norwegian communities or counties (fylker) to an individual (other than a United States citizen who is not also a citizen of Nor. way) shall be exempt from United States tax. (2) Private pensions and life annuities derived from within one of the contracting States and paid to individuals residing in the other contracting State shall be exempt from taxation in the former State. (8) The term "pensions", as used in this Article, means periodic payments made in consideration for services rendered or by way of compensation for injuries received. (4) The term "life annuities" as used in this Article means a stated sum payable periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration in money or money's worth. Article XII A professor or teacher, a resident of one of the contracting States, who temporarily visits the other contracting State for the purpose of teaching for a period not exceeding two years at a university, college, school or other educational institution in the other contracting State, shall be exempted in such other contracting State from tax on his remuneration for such teaching for such period. Article XIII A student or apprentice, a resident of one of the contracting States, who temporarily visits the other contracting State exclusively for the purposes of study or for acquiring business or technical experience shall not be taxable in the latter State in respect of remittances received by him from abroad for the purposes of his maintenance or studies. Article XIV (1) It is agreed that double taxation shall be avoided in the following manner: (a) The United States in determining its taxes specified in Article I of this Convention in the case of its citizens, residents or corporations may, regardless of any other provision of this Con. vention, include in the basis upon which such taxes are imposed all items of income taxable under the revenue laws of the United States as if this Convention had not come into effect. The United States shall, however, subject to the provisions of section 181, Internal Revenue Code, (1] as in effect on the date of the entry into force of
    '20 U.S.('. 1131.

    (2112)

    TIAI 2851r

    this Convention, deduct from its taxes the amount of Norwegian taxes specified in Article I of this Convention. (b) Norway in determining its taxes specified in Article I of this Convention in the case of its residents or corporations may, regardless of any other provision of this Convention, include in the
    basis upon which such taxes are implosed all items of income taxable

    under the revenue laws of Norway as if the Convention had not come into effect. Norway shall, however, deduct from the taxes so calculated that portion of such tax liability which the taxpayer's income from sources in the United States (not exempt from United States tax under this Convention) bears to his entire income. The competent authority of Norway may, however, decide that the deduc. tion shall not exceed the United States tax on income taxable in the United States. (2) The provisions of this Article shall not be construed to deny the exemptions from United States tax or Norwegian tax, as the case may be, granted by Article XI (1) of this Convention. Article XV With a view to the more effective imposition of the taxes to which the present Convention relates, each of the contracting States undertakes, subject to reciprocity, to furnish such information in the matter of taxation, which the authorities of the State concerned have at their disposal or are in a position to obtain under their own law, as may be of use to the authorities of the other State in the assessment of the taxes in question and to lend assistance in the service of documents in connection therewith. Any information so exchanged shall be treated as secret and shall only be disclosed to persons (including a court) concerned with the assessment, determination and collection of the taxes which are the subject of the present Convention, or the determination of appeals in relation thereto. No information shall be exchanged which would disclose a trade, business, industrial or professional secret. Information and correspondence relating to the subject matter of this Article shall be exchanged between the competent authorities of the contracting States in the ordinary course or on request. Article XVI In accordance with the preceding Article and insofar as may be found to be practicable, the competent authorities of each contracting State shall forward to the competent authorities of the other contracting State as soon as practicable after the close of each calendar year the following information relating to such calendar year:

    (2118)

    TIA

    23517

    10

    The names and addresses of all addressees within such other State deriving from sources within the former State dividends, interest, royalties, pensions, annuities, wages, salaries, rents, or other fixed or determinable annual or periodical income, showing the amount of such income with respect to each addressee. Article XVII (1) The contracting States undertake to lend assistance and support to each other in the collection of the taxes which are the subject of the present Convention, together with interest, costs, and additions to the taxes. (2) In the case of applications for enforcement of taxes, revenue claims of each of the contracting States which have been finally determined may be accepted for enforcement by the other contracting State and may be collected in that State in accordance with the laws applicable to the enforcement and collection of its own taxes. (3) Any application shall include a certification that under the laws of the State making the application the taxes have been finally determined. (4) The assistance provided for in this Article shall not be accorded with respect to the citizens, corporations, or other entities of the State to which application is made. Article XVIII The State to which application is made for information or assistance shall comply as soon as possible with the request addressed to it except that such State may refuse to comply with the reqtvest for reasons of public policy or if compliance would involve violation of a trade, business, industrial or professional secret. Article XIX Where a taxpayer shows proof that the action of the revenue authorities of the contracting States has resulted, or will result, in double taxation contrary to the provisions of the present Convention, he shall be entitled to lodge a claim with the State of which he is a citizen or, if he is not a citizen of either of the contracting States, with the State of which he is a resident, or, if the taxpayer is a corporation or other entity, with the State in which it is created or organized. Should the claim be upheld, the competent authority of such State shall undertake to come to an agreement with the competent authority of the other State with a view to equitable avoidance of the double taxation in question.

    (2114)

    11

    TIAS M?

    Article XIX
    (1) The provisions of this Convention shall not be construed to deny or affect in any manner the right of diplomatic and consular officers to other or additional exemptions now enjoyed or which may
    hereafter be granted to such officers. (2) The provisions of the present Convention shall not be construed to restrict. in any manner any exemption, deduction, credit or other allowance now or hereafter accorded by the laws of one of the contracting States in the determination of the tax imposed by such State. (8) Should any difficulty or doubt arise as to the interpretation or application of the present Convention, or its relationship to Convenitions Ietween one of the contractilg States and any other State, the competent authorities of the contracting States may settle the question by mutual agreement. Article XXI (1) The competent authorities of the two contracting States may prescribe regulations necessary to carry into effect the present Convention within the respective States. With respect to the provisions of this Convention relating to exchange of information, service of documents, and mutual assistance in the collection of taxes, such authorities may, by common agreement, prescribe rules concerning matters of procedure, forms of application and replies thereto, conversion of currency, disposition of amounts collected, costs of collection, minimum amounts subject to collection and related matters. (2) The competent authorities of the two contracting States may communicate with each other directly for the purpose of giving effect to the provisions of this Convention. Article XXII (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible. It shall have effect for the taxable years beginning on or after the first day of January of the year in which such exchange takes place. (2) The present Convention shall continue effective for a period of five years and indefinitely after that period, but may be terminated by either of the contracting States at the end of the five-year period or at any time thereafter, provided that at least six nionths' prior notice of termination has been given and, in such event, the present Convention shall cease to be effective for the taxable years beginning on or after the first day of January next following the expiration of the six-month period.

    (2115)

    TIAS 2805?

    12

    DONN at Washington, in duplicate, in the English and Norwegian languages, the two texts having equal authenticity, this thirteenth day of June, 190.
    FOR TE PRESIDENT O TUB UNITED STATES OF AMRIOA:

    [$.%L]
    [SUL]

    JAam E. Wiam
    WnIuMu MUNT8n MoXovQZm.,u

    FOR RIB MAJESTY TUR KINO OF NORWAY:

    (2118)

    OVEMBSIONST XULO AMERIKA5 rCRENTS STATES OG KORGZ ?IL UNNOAZSIt A0 DOBBELTOESKATHING CO FOROY3OGIG HV 5KATVZUNDRAGZLS RED HIZNSXN TIL INNTEKK51KATTER Presidenten for Amerikas Forente Stater ol Hans ajoseete Xongen av Norge, sos ensker I inn#& en overenskonst til unndgelee a, dobbeltbeskatning og forebygging av skaettndragoelse mod hensyn til inntektoskatter, htr L dette yezoed oppnevnt son sine respsktive befullmektig;oe: Presidenten for Amerikaes Forente Staer: Jases E. Vebb, Fungerende Utenri:s.lnister for Azerikas Forento State'r, Hans Najostot eongen av Norgoe Wilhelm Kunthe ?VorgenstLorne, Norgas EUstreordinure oa Defullnektigede Ambassador I Vashington, som otter Aha soddelt hverandree sine fullakter, son or funnet A vwo I god og gy1dIg form, or blitt enlge on felgendo artiklorl Artlkkei I (1) De scatter sos oehandles I denne overenskoest or: (a) Forslvidt angr& Amerikas lerente Stater: 'The Federal inoome tax# mod tlleggaskatter. (b) Forohvdt &nMAP tIorgoe

    (18)
    TWO 0-62-voL 2-40

    (9UT7)

    TIA4 =7

    14

    Inntektaskatt til state og ko=mune, herunder alderstrygdav-

    tift, krijspensJoneringsavgift, skatt av bankinnr.udd og


    sjemanneskatt. (2) Denne overenokorst skal ogae gJelde enhver annon Inntektoekatt av vesent1ii underakrovet. Artikkel 11 (1)Anvendt I donne overenskomst skal: (a)uttrykket 'Do Forento Stater' bety Amerikas Forento Stater, og n~r dot brukes I feografisk eveningg skal det bare oxfatte enkeltstatene, terrItoriene Alaska og Hawaii og Distriktot Colutla; (b) uttrykket *Norge$ bety kongeriket N;orge# og Jan 1.:ayen. he.)r ikice sor utenfor &-iropa; (0) uttrykket 'fast driftasted' oety et avdelir.tfs;:ontor, en fabrlkk, et vorksted, en lFer'byynlni, olier annot fast forretningocted, men skal lIkke or..ptte or. tilfeldig og midlertidig bruk av op lrgplnass alene, heller likke skal dot ocratte ot agen:ur, mod rordre gemnten her oa utOver on alminnelig rullrakt til A forhnndle ox og inr.WC kontraxter pA vegne av et foretakerde oiler har et varelnger fra hvilket han regielessig effe.tuerer ordrer pA dats veino, Et foretakende I on av do kor.nraherende St3ter ekal Ikke anses for A ha fast driftasted I don annen Stat bare ford dot utover forretnirgsvirksonhet I den a'nnen Stat gJe.-nom en uavheorig provisjonrsirnnet agent, u.,eklcr olier forvclter som opptrer Deteor.relsoeno I overenukon.sten skal ilkevel i-ke omWatte Svalbard eiselder de for de norske besittellignende kardeor, so. blir p~lagt av noen

    av do kontraherende Stater otter den dag da denne overenhkomot or

    ('118)

    15
    Innnfeor rawrenn av sin alainnfelle virksoohet sorn Wo~dn.

    ?Au5r

    Det forhold at st toretakende I on av de kontraherende Starter I don annen Stat opprettholder st fast rorretnlngostod utelukkend, til Innkjop aw varer eller andre ting, ekal Ikke av eel eilv oedfore at at ellkt fast foretningested blir I ee sorn ot teat drittestod tor dette toretaDot forhold at ot selokap I on ay do kontraherende Stater her ot datterselckap son horer hJomme I den annon kende. Stat, eoler eaoutover handele- oller torretningsvlrkoonhot I den annen Stat, ekal Ikke av si eolv oedfore at dette dattoreelokap tl'r A ov..cc tor et fact drittsete4 tor modoroelskapet; (d) uttrykket 'foretakendo I on av de kontraherendo Stateru bet)y henholdevis 'foretakendc I Do Torento Stater" ollr bnoras ftoretakende'; (e) uttrykket Otoretakendeo ostatte enhver sloeg virke soahot hva enten don utives av on onkeitperoon, et Inter. essentskap, et eelskap eller an hvliken corn helst annon semonelutnlng;

    CW) uttrykket Otoretakende I Do Forente Stater$ bety


    ot toretakende son drives I Do Porento Stater av on person eon er booatt I Do Toronto Stater eller av et selskap ollor annen oarAenlutning &, Forente Stater; uttrykkot 'eloskap eller annen samenlutnlng I De Forente Stater' ekul bet), ot Intereosentskap, osollap eller onnen sermenelutring, otittot oller organlaert I Do Forento Stater eller I henhold til

    lovgivnir.gen I Do Foronte 8tater ellor I noon onkeltatat ollor torrltorlua son horer tIl to oroent, Stat8er; (c) uttrykket 'norok foretakendeo bety ot foretakendo

    (2119)

    TIAS =T

    16

    sow drives I Morse av en person sto er bosatt I Norse oiler AT et norsk eelkep iler ennen eamenelutnlng; uttarkket 'Oorek seeskop oiler annen searenelutngnl skal oety et in. tereseentskep, eselkap ol1er ennon seomenulutnlng, etlftet @iler organisert I Norge slier under norek lby; (h) uttrykket 'kompetentse myndlgheter' bety, for Norge@ vedkouzende, FInanse og To.ldepartementets og for Do Forente Steoters vedkouzende, 'The Commiessoner of Internel Revenue' eoler en etedtortreder so. her tuUmkt tre hea. (2) Ved anvendolsen xv beetecmelsene I denne overenekomst ev en av de kontraherende Stater skal ethvert uttrykk son Ikke er detlnert pi annen site, med mlndre no* annet fremgAr &v $at* menhengen, ha den betydnlng son uttrykket her I henhold til vedkomende Stets eo-en skattelovgivning. Artikkel III (1) 9t foretekende I en av de kontraherende Stater skel Ikke vore undergitt besketning I den annen kontraherende kSat zed hensyn til tortjenoste ved Industrl og handel, med mlndre det utsver handelse- oler torretnlngevlrkcomhe: I Genne annen Rtat ved et test drittested son bIgger der. Hvye det utover slik vlrkeooahet, ken den annen Stat beskatte slik fortjeneste saotoretakendet ervsrver tre kiler Innenfor donne Stat. (2) Ved festsettelsen av den tortjeneste ved Industrl o0 handel con et ftretakende I en av de kontraherende Stater erverver fro kilder Irnentor onrrdet tlldn ennon kontreherende Statt skal Inaen tortjeneete nsee oppetl ved e!t slkt tore*I takendes biotte Innkjep av varer elter andre tlng Innenfor den elstnevnte State oiiride,

    (212())

    17

    TEAS OW

    (3) Hvor et forctakende tdon one kontraherends Stat utsver h n"elo- oller forretnlnesvlrksomhot pA den annen kontrahorendo Stats ourLide ved ot 'aut drltt8sted son bigger der, skal til dottefbete driftasted henfgres den tortjenesto ved Industri eller handcl co. dot vente1li vylle erverve vwis dot hadde wort
    et uavhenlrLp, foretAkende soe

    utovet don samme oller lignonde

    vl'rksowhot under sanme elier linende vilkir, og torhandlet pA like tot med dot toretakende hvis tastedrittastea dot or; og den nevnte rortr'enesto skal, I den utstrokning dette folger av lov~ivningen I den kontraherende Stat hvor dot tsete drittsted liger, #nees for A Yore Inntokt frs kilder Innontor denne Stats omrAdeo. (4) Do konpeternte myndlgheoer Id to kontraherende Stater kan ved avtale fastsette reoler om tordelingen av tortJeneste ved Industri og handel. Artikkol IV Hvor et toretakende I on av do kontroherende Stater, I kratt av *indeltakelse I ledelson eller ftnanslerlngen av ot torstakende I den annon kontrpherende Stat, I deres Innbyrdes ko"mersicele oller finenslelle seskvom, avtaler mod eoler pAlegger dot slitnevnte vilkAr so. ovvlkerba don son ville ha vawt anvendt overtor et uavhcnrig foretakende, skal enhver tortJeneste son normalt wills ha tiltalt ott mv toretakendene, men sot I kratt sv do nomte vilkzr Ikke or tiltalt det,.kunne medregnes I voe. koumende foretakendes fortJeneete o0 beoskatteo 1 sa ayr horsed. Artlkkel V (1) Inntekt sem ot toretakende I on av do kontraherende Starter oppelurer ved driften av skip eller luftfart)yer, skal vore unntatt frtbeakatning I don annen kontrahorende Stat,

    (2121)

    WAS 2357

    18

    (2)Doetemmelsone I denno artikkel skal v.idlertidig sette ut sv kraft don ordnlng til avbetning av dobbelt lnntektsbeokatning av sklpefartafortjeneote so. or truffet rollop Do forente State og Norge ved notevokelinger av 28. november 1924, 23 Januar 1925 og 24 mare 1925. Art lkkel VI Renter av obligasloner, verdipapirer, gJeldeforskrivninger, skylderklarlnger eller av en hvllken soar helt annen #rJeld som oppebaree fra kilder innenfor en av de kontraherende Stater av on person som er tosatt I den annen Xontra).ere:'de Stat eiler av et selskap oiler annen safr.enslutning so. horer hjemme der skal vare unntatt fra beekating I den forstnevnte Stat, forutoatt at vodkommende ikke har feet driftested I donne Stat. Artikkel VII Royalties og andre belop, son utgJur vederlag for rotten til A utnytte forfatterrettigheter, kunatneriske og vitenskepe lige arboider, patenter, monstre, hommelige froestlllingomAter og former, vorenorker og annen llknende elendom (herunder leoi og llknenda betading for kinerratograt-film), og eos oppebores fra kilder Innenfor en av de kontraherende Stater av an person soe er bosatt i don annen kontraherende Stat eller av at selskap eller onnen sanmrenalutning soe horer hJewre der, eked vare unntatt frn benkntnlng I den forstnevnte Stat, foruteatt at vedkomtenod Ikke har ftat drlftested I denne Stat: Likevel forbeholder hVer av de kontrahcrre.de Stater seg rett til, I samavar med prinseppcne I artlkkcl IV,A nekte utbetalercn fradrag for silk royalty oiler noen del av sar.re, seo ar skattemyndlghotene I utbetalirgslandet ikke anse searn ot rimelig vederlag for rotten t1l utnytto don slags leendom soadenne .rtIkkl handler oa.

    (212)

    19
    Artlkkel VIII

    TIAS U.r

    (1) Inntekt av fast elendom (herunder lkke Innbefattet ronter' av pantebrev og oblignsjoner med *ikkerhet I fast elendom) of royalties corn akriver seg fra driften av pruver, stenbrudd eller andre naturforekomrter, skal bare kunne beakatte8 I den kontraherends Stnt der silk fast elendom, gruve, stenbrudd eller andre nnturforekomnter ligger. (2) En person som er boeatt, elles' et selskap sorn horer hjernme I en av do kontraherende Stater, og sorn oppebzrer lnntekt sorn nevnt fra kilder Innenfor den annen kontraherende Stat, kan, for et hvllket sorn helst lnntektsAr, velge A bil undergiltt beAkntnlng I s18tnevnte Stat pA grunnlag av nottolnntekten, sorn om vedkommende person ellerealokap I angJeldcnde InntektsAr hadde utovet handels- eller forretnir.gsvlrksomhet i denne Stat gjennom et fast driftested der, Artlkkel IX Gevinet ved salg elier bytte av fast elendom skal bare kunno beskattes I den kontraherende Stat der den faste elendom ligger. Artikkel X (1) En person sor er boseatt i Nore, skAl vmre unntatt fra skatt I De Forente Stater av vederlae for arbeld eller personlige tJenester (herunder utevelsen av do libe'rale og kunstnerlske yrker) na/r han oppholder eog mldlertidig I De Forente Stater I ett eller fleer tidsrom Innenfor inntektvAret, con tlisamwen ikke overstiLer 183 dager, forutsatt at ett av fOlendc vilkAr er opprylt: (a) vederlatet or rottatt for arbeld elier peraonlilge tjenester, utfort com funksJonwr eller arbelder hoe, eller otter kontrakt med, en person com er bosatt I Norge eller

    (2123)

    TIAS 2357

    20

    mod ot eelskapi eler annon sammenslutnlng sor horer hJeme


    der, eller

    (b) vedorlaget for arbold oller personligo tjonpeter


    overstiger Ikke O0OO00.

    (2) Bestemmelsene I avsnitt (1) I donne artlkkel skal, !utatJi rutandis, ft anvendelee pA on person son or bosatt I Do Torento Sister for a&vidt angAr vederlag for sllkt arbold oilor peosonitre tjenester utfort I Norge. (3) Besteomelsone I avsnltt (1) og (2) 1 donne artlikel skal ft anvendeles p& godtgjirolso til dlrektorer nAr godtgjgrelson betegner etdriell, vederlag for ytte tjenester, uten hensyn til on mottakeren av silk godtgJoroeso I noe tldsrom lnnonfor InntoktsAret her oppholdt ceg I don kontraherende Stat hvorfra betaling ayv sik godtgjjroese or ckjodd. (4) Bestomeelsone I denne artlkkel skal lkke fA anvendelso pA Inntekt som omhandlet I artikkel XI (1). ArtIkkel XI (1) (a) Oasjo, ionn og llgnendo vederlag cnrft pensjoner son utbotales av Do Torento Stater eller deres poiltiske underavdellnger eller terrltorler til onkeltpersoner (andre onn norske borgere som Ikke samtldlg or borders av Do Foronto Stater) skal vare unntatt fra skatt I Norge. (b) GseJe, lonn og lignende vederlag caat pensJoner son utbetales enten dlrekte av don noreke state, norske kozcuner eoler fylker, olier av fonds eller Innretningor opprettet ay til deru, enkeltpersoner (andre enn borgere av Do Forento Stater son lkke santidig or norske borgere) skal vYoe unntatt fra skatt I Do Torente Stater, (2) Private ponsjoner og llvronter so. ckrlver ceg fra den

    (2124)

    21

    TIAS 285

    ene av do kontraherende Staters omrAde of betales til personer


    som or bos6tt 1den annen kontraherende Stat, skal vwre unntatt fra beskatning I don f~rstnevnte Stat, (3) Uttrykket OpensJoner" I donne artlkkel betyr perlodloke betalinger orlagt som vederlag for ytte tjenester eller son erstatnirg for pAdratte skader, (4) Uttrykket OllvrenterO I donne artlkkel betyr on fasteatt sum, son or perlodlek betalbar til fasteatte tider pa livetid eller I lopet av ot beetemt antall Lr I henhold til on forpllktoles t0l & orlegge betalingen son vederleg for on fullt tilsvarende motytelve I penger eller pengers vord. Artlkkel XirZn professor eller lrer son or boeatt I on avde kontrahorondo Stater, men midlertidig beeoker don annon kontraheronde Stat for i et tlderom av Ikke over to &rA undervise ved ot universitet, hoyekole oller annon undervienlngsanstalt I don annon kontraherendo Stat, skal vure unntatt fra ekatt Iden sletnevnto Stat av vederlaget for silk undervlsning i dot neonte tideron. Artlkkel XIII Studeronde eller lurllnger son or bosatt I on av do kontraherende Stater, men aldlertldlr beeoker don annon kontraherende Rtat utolukkendo I otudleyened ellor for A vinne forretnlngenessig eoler htknlnk orfaring, skal Mkke kunne beekattee I don slotnevnte Stat ay belop son do mortar twa utlandet til stt underhold eller sine studler. Artlkel XIV

    (1) Dot or onighet on at dobbeltbeskatnlng skal unng~s pa


    folgende nAto:

    (2125)

    TIAS 2357

    22

    (a) Uansett hva som sellers er toreskrovet I donne overenskomst, skal Do Forente Stater ved fastsettelsen av d6 av sine skatter som or angitt i denno overenskomsts artikkel I, I forhold til sine statsborgere, personer bosatt I Do Foronto Stater og selskaper som horer hjemme der, kunne medregne I det grunnlsg pA hvilket dtsse skatter blir utlignet, enhver slags inntekt som er skattepliktig I henhold til Do Forente States skattelovgivning som om denne overenskomst Ikke hadde vart gJeldende. Do 'orente Stater skel, likevel, i amsvar med bestemelsene I section 131, Internal Revenue Code, s1ik so, de lyder pA den deg da donne overenskomst trer i kraft, gjcre fradrag I sine skatter for det belop som utgjeres av norske sketter avden art sor or angitt I denne overenskomsts artikkel I. (b) Uansett hva sor sellers er foreskrovet I denne overenfkomst, skal Norge ved fastsetteleen av do av sine skatter som er angltt I denne overenskomsts artikkel I, I forhold til personer som er bosatt I tNorge olier selskaper so. horer hjeffoe der, kunne medregne I del grunnlag pA hvliket 45sse skatter blir utlignet, enhver slags inntekt som or skattepliktig I henhold -t1 Norges skattelovgivnitng som om denne overenskomst ikke hadde vart gjeldende, Norge skel, likovel, I do pA donne mte beregnede skatter, gjure fisdrog:,for et belop svarende til den del av skatteplikton som ekatteyterens InnW tekt fra kilder I Do Forente Stater, (som Ikke or unntatt fra skatt I Do Forento Stater I henhold til denne, overenskomat), utgJ~r av hans sa:lede inntekt. Den kompetente myndighet I Norge kan likevel bestenae at fradrsget ikke skal overstige skatten i De Torente Stater pA inntekt so. or skattbar I Do Forente Stater.

    (2128)

    23

    TIAS 2857

    (2) Bestommelsene I denne artikkel or lkke slik A torst& at isoppheverden fritakelso for skatt henholdevis I Do Forento State og Norge, sore or lnnrow.ot Yed artlkkel XI (1) 1 donne overenskomet. Artlkkel XV For I oppn& on mere effektlv gjennomforlng av den beskatnlng soe denne overenrkomst handler om, pAtar hver av do kontraherende Stater seg * under vIlk~r av gjonsidighet - A gi like opplysninger I skattesaker som myndighoteno I vodkowaendo Stat sitter Inns med eller ken skaffe seg I hen.old tll sin lovgivning, og som ken vare til nytte for myndighetene I den annen Stat ved utligningen av do skatter dot gjelder, - seamt A'yto bistand ved torkynnelsor og woddelelser I forblndelso hoered. Alle opplyaninger sow utvokeloo p& denne =Ate skal behandles so6 hemmellge og skal bare Apenbares for personer (herunder dometoler) som er beskjottiget :od utllgnlngen, fasteettelsen eller oppkrevningen avd skatter so, denne overenskomat gjelder, eller avgjorelson av appelleaker I forblndelse hoemed. Tngen opplysninger skal utveksloe sow v13o Opplysninger og korresponl &penbaro handels- eller torretningshommelighoter eller industrielle eller ftglige hoemelighoter. dense sow angAr forhold sow omhandlet I donne artikkel skal utvokeles mellow do kompetente myndighoter I do kontraherendo Stater, enten uten videre eller etter anir.odnlng. Artlkkel XVI I eawevar wed foregAendo artlkkel o0 I den utstrekning dot m~tte anses praktlsk, skal do kompotente myndighoter I hver av do kontraherendo Stater tiletllle do kompotento myndligheter I den annen kontraherende Stat, eA snart soe det or praktlsk mulig otter

    (2127)

    TIAU

    235?

    2A

    utgangen WV hvert kaleaderb, ftlgende opplysninger vedkonende dot nevnte kalender&r: Navn og adresse til all@ adreosater I den annen

    Stat

    son

    fra Milder Innenfor den tfrcte Stat mottar dividender, renter, royalties, peneJoner, llvrenter, gasje, lonn, eise elleor annen fast eller tlseerbar Wrlig eller perlodisk lnntekt, a sed anglvolse av lnntektens belop for sA vidt angir hver adzessat. Artlkkel XVII (1) Do kontraherende Stater pAtar ceg & yto hverandro ble stand og stotte ved oppkrevnlngen av do skatter son donne overonskomet gjelder, tillikemed renter, omkostnlnger og tillleg til skattene. (2) I tilfelle av henvendelse om inndrlvnlng av skatter kan endelig tastuatte skattekrav tra hver av de kontraherendo Stater godtas til lnndrivnlng av don annen kontraherende Stat og oppkreves 3 denne Stat I samsvar mod don lovgivnlng sorn Cjoldor Inndrlvnlng og oppkrevnlng av dens egne skatter. (3) Enhver henvendelse skal inneholde en bekrettelse av at skattene or endelog fasteatt I henhold til loveivnlne.en I don SMat so. har gjort henvendelsen. (4) Den bistand s8m or omhandlet I denne artlkkel skal lkke ytes n&r det gjelder statsborgere, selskaper elleor andre samnon slutnlnger I don Stat som henvendelsen er rettet til. Artlkkel XVIII mon rettee henvendelso til angdende opplysnlndot

    Don Stat

    ger eller bistand, skal snarest sulg otterkonme ant.dnlngen likevel sik at denne Stat kan avsla & otterkonme anwodnlngen ut fra almenpolltiske hensyn, elelr hvis dot vylle Innebre en krenko

    (2m28)

    as

    TIAS 285?

    else oiler tagllge heoeligheter on anrodningen ble etterkommet.

    else av handels- olier torretningsr.horelIdheter oiler InduetriArt Ikkel XIX Hvor et skatteyter phviser at tUltak fra skattemynd~lhetons I do kontraherende Stater har oedftrt eller vil medfore dobbeltbeskatning I strid red beste~elseno I denne overnokomst, skal han ha rett til A klsge til den Stat han er border sv, oiler, hble ban Ikke er statsborgeriv noon av do kontraherende Stateo', t0l den Stat hvor ban or bosatt, oiler hvls skatteyteren or st selskpp oiler en annen eaazenelutnlng, til den Stat hvorden or stiftet oiler organlsert. Finnes klneen berettiget, skaldn koapetente myndighot I vedkommendo Stat aike A konme tli enlnhet zed din kompetente myndlehet I den annen Stat on en rimelig unngAelss av don dobbeltbeskatning dot gJelder. Artlkkel XX (1) Beetem-elsene I denr.e overenskoumst er lkWe sllk A forstA at do pA noon son helit dte opphever eller inne?-renker den rett til andre oiler vlderegAende skattefrltakelser som dlplomatiske og koneulars tjenestemenn for tiden nyter eller som i frectiden mAtte bli ytot silke tJenestemenn. (2) Bestemmelsene i denne overenskomot er lkke sl9k A for*tA at do pA noon som helst mAte lnnskrenker unntakelser, fradragsrett, godskrlvning eller annen lerpnlng som nA eller I fremtiden lnnromes henhold til lovglvnlngen I noon av de kontraherends Stater ved fastsettelsen av den skatt som utlignes i vedkormende Stat. (3) Skulls det oppstA noon vanakelighet eller tvill meda hensyn ttl tolknlngen eller anvendelsen av denne overenekomet, oiler

    (2129)

    TIAS 235T
    on dens torhold til overenskomster metlom en sv do kontrat.erendo Stater og en annen S3tt, kan de karpotente myndle~heter I do kontraherende Stater ordne sporsmAlet ved tJonsidl Artlkoel XXI (1) Do kompetento f.dlheter I do to kontranerendo Stater kan festsettede forskrifter som er nodvendige for A settr donne overenskor.st I verk I de respektlve Strter. For sA vidt ang.r de testev-olrer I overenskomsten son handler on utvekslnlg aY opplysnir.rer, forkynnelser og meddelelser og gJonsidig blstand ved oppkrevnlng av scatter, kRn do nevnte ryndigheter Ved Innbyrdes avtale fastsette regler om freomangsmAten, torten for henvendelser og svar pA sa.e, omregning avaluta, forfoynln.rer over oppkrovde telop, orkostninger ved oppkrivnlnj, minstebelop som skal vzro, Jenstand for oppkrevninh og linende forhold. (2) Do kompvtento wyndigheter Ids to kontrah..rende Stater kan ko-.mun=seredlrekte red hverandre nAr dot e.elder eJennottorlngen aY besteorelsere I donne overenskonat. Artlkkel XXXX (1) Denne overensko.st skal ratlfleeres oo ratlfikasjonsdokumentene skal utveksles I Washington snerest null. January I dot Ar da utveksllngen flnnor sted. (2) Denne overenskomst sknl vwre VrJolder.e I ot tldsrom ay fen Ar og deretter uten tidsbegrensninr, men kin brinres til opp.ior

    nvtnle.

    Don skal

    fA vlrknlng for do Innektstr so. begynr.er pA clier otter 1.

    av enhver av do kontrahoernde Stater ved utgangen av tem-Ars-

    perioden eoler ved hvllket som helst senere tldepunkt, forutsatt at det or gitt minst seks mAneders forutgAende vnrsel, og, I sA fall, skal denne overenskomest opph~re A lh.a gyldighet tor do Inn-

    (2180)

    27
    Test otter utlpeot av don nevnto &eke-rbnoders periods.

    TIAB 285T

    tekstAr son begynner pi oller otter don 1. Januar son ftlger nrer

    UTFER)IGET I Washington I to okesoplarer, pa ongelek og norek, sIlk &t beggo tokster hMr like gyldlghot, donno trettendo dog av juni 1949. FOR PRESIDENTEN FOR AMERKAS FORENTE STARTER:

    IVR WANS VAJESTET ONGEN AV NORUE:

    1S/0L]

    (2181)

    TIAB =3i

    257 28

    AND wuaaH.M the Senate of the United States of America, by their resolution of September 17, 1951, two-thirds of the Senators presetit concurring therein, did advise and consent to the ratification of the aforesaid convention subject to an understanding as follows: "It is understood that the application of Article XVII of the convention shall be confined and limited as granting authority to each Contracting State to collect only such taxes imposed by the other Contracting State as will insure that the exemption or reduced rate of tax granted under the present convention by such other State, shall not be enjoyed by persons not entitled to such benefits.":
    AND wniz.As

    the text of the aforesaid understanding was coin.

    municated by the Government of the United States of America to the Government of the Kingdom of Norway and the aforesaid under. standing was accepted by the Government of the Kingdom of Norway; AND WHF.RZAs the aforesaid convention was duly ratified by the President of the United States of America on November 26, 1951, in pursuance of the aforesaid advice and consent of the Senate and subject to the aforesaid understanding, and the aforesaid convention was duly ratified on the part of the Kingdom of Norway; AND WnzIBAs the respective instruments of ratification of the afore. said convention were duly exchanged at Washington on December 11, 1951, and a protocol of exchange was signed at that place and on that date by the respective Plenipotentiaries of the United States of America and the Kingdom of Norway, the said protocol containing a statement that it is understood by the two Governments that, upon entry into force of the aforesaid convention in accordance with its provisions, Article XVII thereof shall be applied in accordance with the aforesaid understanding; .
    ANxD Wll.S it is provided in Article XXII of the aforesaid con-

    vention that the convention shall have effect for the taxable years beginning on or after the first day of January of the year in which the exchange of instruments of ratification takes place; Now, TnRFuroPu, be it known that I, Harry S. Truman, President of the United States of America, do hereby proclaim and make public the aforesaid convention to the end that the said convention and each and every article and clause thereof, subject to the aforesaid understanding, may be observed and fulfilled with good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof.

    (2182)

    29
    IN TUSTIMONT WHE:or, I

    TIA 8 5?

    have hereunto set my hand aild caused the Seal of the United States of America to be affixed. DoNs at the city of Washington this thirteenth day of December in the year of our Lord one thousand nine hundred fifty-one [SEAL] and of the Independence of the United States of America the one hundred seventy-sixth.

    HARRY 8 TRUMAN
    By the President: JAKE B WNWs

    AOS

    mg

    Soate oect

    78095 0--62--vol. 2-41

    .(2133)

    PROTOCOL

    PROTOKOLI,

    The undersigned, James E. Do undertegnede, James E. Webb, Acting Secretary of State Webb, fungerende utenriksminis. of the United States of America, ter for Amerikas Forente Stater, and Wilhelm Munthe dte Morgen- og Wilhelm Munthe do Morgen. stierne, Ambassador Extraordi- stierne, Kongeriket Norges over. nary and Plenilptentiary of the ordentlige og befullmektigede Kingdom of Norway to the United ambassador i Amerikas Forente States of America, being duly Stater, som er behorig bemyndiget authorized thereto by their re- dertil av sine respektive Regjerin. spective Governments, have met ger, er kommet sammen for i for the purpose of exchanging the utveksle sine Regjeringers ratill. instruments of ratification by their kasjonsdokumenter vedr~rende respective Governments of the con- overenskomsten mellow Amerika vention between the United States Forente Stater og Kongeriket of America and the Kingdom of Norge til unnglelse av dobbeltI Norway for the avoidance of beskatning og forebygging &v double taxation and the preven- skatteunndragelse med hensyn til tion of fiscal evasion with respect inntektsskatter, undertegnet i to taxes on income, signed at Washington den 13. juni 1949, o& Washington on June 13,1949, and, better at do respektive ratifika. the respective instruments of rati- sjonsdokumenter vedrorende for. fication of the convention afore- annevnte overenskomst var blits said having been compared and sammenliknet og funnel Avere i found to be in due form, the gyldig form, fant utvekslingen exchange took place this day. sted denne dag. As recited in the ratification on Som nevnt i ratifikasjonen pi the part of the United States of vegne av Amerikas Forente Statet America, the Senate of the United ga Amerikas Forente Staten States of America, in its resolution Senat i sin resolusjon av 17. sep of September 17, 1951, advising Imember 1951, hvori det tilrir q# and consenting to the ratification samtykker i ratifikasjon av den of the convention aforesaid, ex- Iforannevnte overenskomst, ut. pressed a certain understanding I ;rykk for en bestemt forstAelm with respect thereto, as follows: rned hensyn dertil, som folger:

    (30)

    (2134)

    31 "It is understood that the application of Article XVII of the convention shall be confined and limited as granting authority to each Contracting State to coliect only such taxes imposed by the other Contracting State as will insure that the exemption or reduced rate of tax granted under the present convention by such other State, shall not be enjoyed by persons not entitled to such benefits." The text of the said understanding was communicated by the Government of the United States of America to the Government of Norway. The Government of Norway has accepted the said understanding. Accordingly, it isunderstood by the two Governments that, upon entry into force of the convention aforesaid in accordance with its provisions, Article XVII thereof shall be applied in accordance with the said understanding.
    Ii wrrITrESS wzREr, the respec-

    TIAS 2357

    "Det er forutsetningen at
    anivendelsen av Artikkel XVII

    i overenskomsten skal innskrenkes og begrenses slik at hver av de kontraherende Stater fir myndighet til A oppkreve bare sAdanne skatter som er pAlagt av den annen kontraherende Stat for & sikre at fritagelse eller nedsatte skattesatser innr0mmet i henhold til uiaervwrende overenskomst av slik annen Stat, ikke skal komme personer tilgode som ikke er berettiget til slike fordeler." Ordlyden til nevwte forstAelse ble meddelt Norges Regjering av Amerikas Forente Staters Regje. ring. Norges Regjering har ak. septert nevnte forstielse. Det or folgelig enighet mellom de to Re. gjeringer oin at nAr forannevnte overenskomst trer ikraft i sanisvar med dens bestemmelser, skal Ar. tikkel XVII i overenskomsten anvendes i samovar med nevnte forstAelse.

    TiL IIrErmREI L

    uB biar v

    do

    tive Plenipotentiaries have signed respektive befullmektigede under. the present Protocol of Exchange. I tegnet n~ervierende utvekslingsprotokoll. DovN in duplicate, in the Eng- UmPiorr i to eksemplarer, pi lish and Norwegian languages, at engelsk og norsk, i Washington Washington this eleventh day of lenne ellevte dag av desember December 1951. L951.
    FOR THE PRESIDENT OF THE UNITED STATES OF AMERICA: FOR PRESIDENTEN FOR AMERIKAS FORENTE STATER:

    JAMES E. WEBB
    FOR HIS MAJESTY THE KING OF NORWAY: FOR HANS MAJESTET KONGEN AV NORGE:

    WnnnML MuWM M0ROENSTIERNE


    (~2135)

    SUPPLEMENTARY CONVENTION, SIGNED JULY 10, 1958

    1(2187)

    presidential AMesfage of Transmittal,to naWt (including materials enclosed therewtith)

    (2189)

    8.15TH CONURESS

    td 8ession

    SENATE

    Exirrrvn
    D

    CONVENTION WITH NORWAY MODIFYING AND SUPPLEMENTING THE CONVENTION OF ,JUNE 13, 1949,

    RELATING TO DOUTBIE TAXATION

    MESSAGE
    FROM

    THE PRESIDENT OF THE UNITED STATES


    TRANSMITTING

    THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA


    AND NORWAY, SIGNED AT OSLO ON JULY 10, 1958, MODIFYING AND SUPPLEMENTING THE CONVENTION OF JUNE 13, 1949, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION

    OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

    AVoUsT 14, 1958.-Convention was read the first time and the Injunction of secrecy was removed therefrom. The convention, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    THE WHITE HOUSE,

    August 14, 1958. To the Senate of the United States: With a view to receiving the advice and consent of the Senate to ratification, I transmit the convention between the United States of America and Norway, signed at Oslo on July 10, 1958 modifying and supplementing the convention of June 13, 1049, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes oi income. The supplementary convention would modify the 1949 convention by adding a now article under which tax treatment with respect to dividends would be accorded along the lines of such treatment accorded under provisions in income-tax conventions presently in force between the United States and other countries.
    (2141)

    2 CONVENTION WITH NORWAY RELATING TO DOUBLE TAXATION

    I transmit also for the information of the Senate the report by the Acting Secretary of State with respect to the supplementary convention. The supplementary convention has the approval of the Department of State and the Department of the Treasury.
    DWiGHT D. EIsENHOwEt.

    (Enclosures: (1) Report by the Acting Secretary of State; (2) con. vention of July 10 1958 supplementing income-tax convention of 1949 between the United States and Norway.)
    DEPARTMENT OF STATE,

    Thle PREtSIDENT,

    Washington, August 6, 1958.

    The White House:


    The undersigned, the Acting Secretary of State, has the honor to submit to the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the President approve thereof, a convention between the United States of America and Norway modifying and supplementing the conven. tion of June 13, 1949, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The convention of June 13, 1949 (S. Ex. Q, 81st Cong., 1st sess.; 2 U. S. T., pt. 2, 2323), follows in general the pattern of income-tax conventions presently in force between the United States and a number of foreign countries, except that it does not provide for a reduction of withholding tax on dividends. The supplementary con. vention would modify the 1949 convention by adding a new article VI-A to accord tax treatment with respect to dividends along the lints of such treatment accorded under provisions in conventions of the United States with other countries. This would be accomplished by article I of the supplementary convention. Article II of the supplementary convention contains the procedural provisions, providing for ratification and for exchange of instruments of ratification. The supplementary convention would become effective with respect to taxable years beginning on or after January 1 following the calendar Iear in which the exchange of instruments of ratification takes place. t would continue in effect as though it were an integral part of the 1949 convention, subject to the provisions of article XXII of that convention with respect to termination. The new article added by the supplementary convention would provide for a maximum withholding rate of 15 percent on dividends paid by a corporation of one of the countries to recipients in the other country. This reduced rate would not apply to a recipient of dividends engaged in business through a permanent establishment in the country from which the dividends are paid, the term "permanent establishment" being defined in the 1949 convention. With certain limitations, the supplementary convention would provide that the withholding tax shall not exceed 5 percent on divigends paid by a corporation in one of the countries to a corporation in the other countify. Moreover, each of the countries would exempt from its tax dividends paid to persons, other than its own citizens, residents, or corporations, by a corporation of the other country.

    (2142)

    CONVENTION WITH NORWAY RELATING TO DOUBLE TAXATION

    The supplementary convention has the approval of the Department of State and the Department of the Treasury. Respectfully submitted. CnnJ8TIAN A. HE:rm't, (Enclosure: Convention of July 10 1958, supplementing incometWx convention of 1949 between the United States and Norway.)
    Acting Secretary.

    [Text of convention]

    (2143)

    Senate Committee Hearing8


    i

    August 11, 1959 86th Congress, 1st Session Semite Committee on Foreign Relations [Print of excerpt from previously unprinted transcript of public hearings]

    (,S145)

    clearing held before Senate Committee on Foreign Relations on

    NOMINATION OF ELBERT G.MATHEWS, OF CALIFORNIA, PRESENTLY DEPUTY ASSISTANT SECRETARY OF STATE FOR POLICY PLANNING, TO BE AMBASSADOR TO LIBERIA CONVENTION WITH NORWAY MODIFYING THE CONVENTION OF JUNE 13, 1949, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION ON INCOME
    TUESDAY, AUGUST 11, 1959

    U.S. SENATE COMMITTEEEE ON FOREIGN RELATIONS,

    Washington, D.C. The committee met, pursuant to call, at 10:40 a.m., in the committee room, room 4221, New Senate Office Building, Senator J. William Fulbright (chairman) presiding. Present: Senators Fulbright (presiding), Green, Sparkman, Huln.phrey, Mansfield, lausche, Wiley Hickenlooper, Aiken, and Carlson.

    Also present: Mr. Marcy, Mr: holt, Mr. St. (Ilair, Mr. Henderson, Mr. Kuhl and \Miss Hanseni, of the committee staff.
    Senator GREEN. The committee will please come to order.

    The first business is the nomination of Elberi G. Mathews, of (California, presently Deputy Assistant Secretary of State for Policy Planning, to be Ambassador to Liberia.

    CONVENTION WITH NORWAY MODIFYING THE CON. VENTION OF JUNE 13, 1949, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION ON INCOME (EX. D, 85TH CONG., 2D

    SESS.)

    Senator GREEN. Is Mr. Mitchell ('arroll here? Mr. CARIOLL. Present, sir. STATEMENT OF MITCHELL CARROLL, NATIONAL FOREIGN TRADE COUNCIL, NEW YORK, N.Y.
    Senator GREEN. We have asked you to be here in order that you miight give us some information about the proposed convention with Norway modifying the convention of June 13, 1949, for the Avoidance

    of Double Taxation and the Prevention of Fiscal Evasion on Income. (2147)

    Will you kindly explain that to us? ,Mr. CARRoLL. Sir, I would like to first offer for the record a letter signed June 3, 1959, urging your committee to give its favorable advice and consent to ratify this to the Senate. This letter states that:
    It is believed that this supplementary convention is advantageous to U.S. business. Accordingly, the National Foreign Trade Council urges that your committee report favorably on this convention and that the Senate give its advice and consent to ratification in the comparatively near future

    and supplementing the convention of June 1:3, 1949, for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes. When the earlier convention was negotiated for some reason or other the convention did not incorporate a clause concerning the limitation of taxes on dividends of foreign companies that had been incorporated in many of our foreign income tax conventions, and after the date of the conclusion of that convention, a clause was incorporated in our convention with Canada which provides for at reduction in rate generally to 15 percent on both sides, and in the case of a corporation owning more than 50 percent of the stock of a corporation of the other country, the rate is reduced to 5 percent, and that is becoming more and more a fairly standard clause in tax treaties. From the viewpoint of the U.S. Treasury, it generally has an advantage because if you can prevail upon the other government to reduce its rate of tax withheld and dividends, and lower the effective sury collects the difference between the effective rate of the foreign government and our rate. That is what happens in a case of that conventionSenator LAUSCHE. Will you please illustrate that, if you can? Mr. CARROLL. Yes, sir. For example, Senator, tax in Norway-well, as it is, is 30 percent
    rate of tax to something below our rate of 52 percent, then our Trea-

    United States of America andgorway signed July 10 1958, modifying

    I offer this letter for the record. [The letter referred to is not available for reprinting.] Mr. CARROLL. This is a supplement to a convention between the

    and there is a withholding tax from dividends of 25 percent; the

    illustrate. Mr. CARROLL. To start off, let's say-a fortunate thing is that thing like this. We will assume that the income of the Norwegian company is 100, to make it simple, and the Norwegians have a corporation tax of 30 percent. Senator LAUSCHE. On iahundred?

    percent. Now, that convention provides, in the case of an American corporation with a subsidiary in Norway, the 25-percent rate is reduced to 5 percent with a result that the tax paid by the Norwegian corporation, plus the tax withheld from dividends, 5 percent, is lower than the U.S. rate of 32 percent. Senator LAUSCHE. Let's take a figure of $10,000 in dividends, to

    effective rate on the dividend income can exceed the U.S. rate of 52

    going over this very question with a Treasury official and it goes some-

    before I came here, I guess the paper's in my briefcase, but I was

    (2148)

    Mr. CARROLL. On a hundred dollars of income, so that is 30,000, and we have an undistributed income tax of 4 percent, and the tax on distributed income is 25 percent.

    out of a dividend of $50,000, receives the $50,000 less the 25 percent on the $50,000 but when you take the credit to foreign taxes, you offset against tile U.S. tax not only this 20 percent on 50, or $12,500, but also the proportion of the other taxes that correspond to the dividend income; in other words, this basically, this tax of 30 percent-you see that has been borne on dividend income, and event the tax of 4 percent on undistributed income spills over on the distributed income in the computation of credit, and that Treasury officialnow I'm not a master at mathematics, but he figured out the effective rate on the dividend income came to about 57 percent, the total burden of taxes related, or relating to the distributed income, and what this treaty does is to reduce that 57 percent down below our rate of 52, with the result that the shareholder does not have to pay a premium of the excess of the foreign rate over our rate on his investthat the foreign tax is lower than the U.S. tax, the Treasury picks it up. percentage of the tax?
    Senator LAusCem. It doesn't pick up every dollar, but picks up its nuent in Norway, and the Treasury_ profits because for every dollar

    Senator LAUSCHE. That leaves $20,000 undistributed. Mr. CARROLL. That leaves $20,000 undistributed, yes, and that is subject to 4 percent. Senator LAUSCHE. All right. Mr. CARROLL. Now, the American corporation-in other words,

    Mr. CARROLL. That applies to undistributed income. For example, we will assume that the Norwegian corporation has its income of 100 and it pays $30,000 on it, or we'll say a hundred thousand dollars and pays $30,000 in taxes, and then we will suppose that it pays out a dividend of $50,000, and from that $50,000 it withholds a tax of 25 percent.

    Senator IjAUsCI.

    What does the 4 percent apply to?

    Mr. CARROLL. And the offset against it is lowered below 52 percent, and for every dollar that the treaty reduces the rate of foreign tax below our rate, the Treasury benefits. So, the treaty is definitely advantageous both from the viewpoint of the Treasury and the viewpoint of the taxpayers, and naturally we are speaking from the viewpoint of taxpayers, but we are delighted that tile Treasury is getting an advantage out of this also. Senator LAUSCHIE. That's all, and thank you.
    Senator GREEN. Any other questions?

    Senator LAUSCHE. I see.

    Mr. CARROLL. It collects our rate of 52 percent.

    Senator CARLSON. Yes, Mr. Chairman. Mr. Carroll, as I understand it we have a number of these conventions with various countries at t&e present time, and this one differs only in that it does not provide for a reduction of withholding tax on dividends, and that is what this convention would correct; is that right? Mr. CARROLL. That is it. I understand that when the Norwegian delegation came over originally, the man who was in charge of it just didn't know too much about the matter, so it was passed up. In the meantime, other negotiations went on and clauses concerning dividends were incorporated in them, and this gap in the convention 78095 0-42--vol. a.--42
    (2149)

    witli Norway was pointed out by interested taxpayers and th(e Treas. tiry carried on negotiations and, to a large extent. by just, writing letters t.hey are very persuasive letter writers--.and the Norwegians agrrreed and got into line because, they are interested in encouraging American investments in Norway. liallv, thle aNtluies('ed by aecepfing the recent model adopted betweelln('analdl11a nti the United States, and here we have it. Senator (int,:.Ev. Does the National Foreign Trade Council, whom you represent here, have anything to (0 wilh ithe negotiations, the exchangess? Mr. ('.ClAmto,,. No, sir, not at all. All we do is, we bring it to til'

    Senator ( .,iox. That's all, Mr. (Chairman.

    reported out favorabiv. ,'enalor fli.:i:t. Anv other questions?

    Then, in future vorresp)onldenee, thie State l)epartment and Treasury get together and arrange negotiations, and lite 'rrensurv officials arie appointed and State D)epartment officials are appointed to meet and talk with the officials of tilet ot her country. Senator (Gi.:I.m. The Council siunply wishes to approve it? Mr. ( C.AROmLL. Ytes, sir. We are here to say that we think this is a tine thing. and should te approved by your comnlit tee, and should be
    Senatfor I,.tsci r:. f would like to ask another one. 'entalor (iul:.:'. Senator lIauselle. Senator ,L'sevquu:. Am I to understand correctly that under the

    laws. anid suggest Ihings 'lhat might he done.

    at entlion or the 'T'reasury- -that is, tile unfair features of foreign tax

    ,xisting formula of taxation in certain instances tife Norwegian tax runs up to 57 percent plus? Mr. ( '.ktI,. Yes, onl distributed income. Senator ,Lmscim. 'rhat is in excess of our taxes? Mr. ('ARoRLL. 52 percent is ours. Senator IA smuu,:. Therefore, with their formula requiring the 57 peret'nt paymneunt and ours requiring only 52'!. we eolle't no taxes? Mr. (.'rr, ll.,.. is right. Ihat Senator l,.At'ScnC:. On that item. Mr. ('ARROLL. That's right. Senator I,.i'scui:. And this trealy will reduce that rate so that there will be some incomne, some itemIs onl which our tax will apply? Mr. ('.4kaoLu.. That is right. This only relates to dividend " but brings it downi. Setinator I,.ftscimw. And our tax will apply to every dollar reflecting the difference bet ween what their aggregate is and our .52!j perent? Mr. ('.CrAro... That is right, as 1 said. Senator LI,.,SvC':. All right. Thank you vervy much. Senator MAvsvL ).KI. Mr. chairmann . -Senator(,I.NEr. Senator Mansfield. Senator .Xl.Il.o. I wonder if it would be possible to get a brief statement from \lr. Stam. representing the Finance (omimittep, oil Itis nrcord. S'ntator (GBF::.N. Are there any other witnesses, other than iMr. Sltam? Senator MANSniL,:. ,Just the one. Senator (GimmI. Thank you very wmieh, Mr. ('arroll. Is Mr. ('olin F. Stain here? Mr. Stam. Henm, sir.

    (2150)

    STATEMENT OF COLIN F. STAMP, CHIEF OF STAFF, JOINT COMMITTEE ON INTERNAL REVENUE TAXATION, ACCOMPANIED BY ARNOLD C. JOHNSON, STAFF ATTORNEY
    Mr. STAM. Mr. (hairman, I have here with tue this morning, Mr. Johnson, an attorney on the staff. This is Mr. Johnson. We have examined this Norwegian treaty and we sent to the cotlmtittee a tnetuorandutu indicating that, in; general, it follows the of her con vetit ions. There were one or two modifications that 1 want to call to the attention of tile committee, too. As Mr. ('arroll has pointed out, this is a supplemental convention and applies only to dividends. It reduces the rate otn dividends. At th(e,present t'ite we have a withholding rate of :30 percent on the dividends going out. Iln most of thie conventions that we have entered into, that rate has been reduced and this convention reduces the general rate to 15 percent. Ill (lhe casse of corporations where one corporation owns more titan 50 percent of the stock of another corporation, the rate is reduced to 5 percent, but in order to get tflat 5 percent, the corporation must own at least 50 percent of the stock oft the other corporation. That is in lite with tile other conventions that committee has adopted. Now, there is another provision in the treaty which deals with a very Itnls111util situation, Ittid that is: You night have it corporation which is deriving a certain part of its income front U.S. sources, and tinder the statutes lintt we lnave written, when that corporation does derive more than 50 percent of its income front U.,. sources, the statute provides in general that we not only tax the dividentids ,halt are paid by that corporation to American Ahareholders, if any, but also to shareholders of foreign countries. And, in tite with other conventions, tihe treaty provides that as far as (lie dividends paid to shareholders of the foretigt countries are concerned, that we will not collect a tax. They are foreign shareholders in at foreign corporation antd the mnere fact that it is doing a certait amount of 41tsiis ill tile [United States is not indicated its suflicient hasis to levy a tax oil tile shareholders of t(le foreign country. Apart from thait we feel that tihe convention is in line with the oiher conventions. Now, there was one ominssion which I might call to the attention of th1 conmititee, which wits in the (anadian Treaty,, butt is not in this treaty, and that provision, speaking about this 5-percent rate which is what vyo tiniht call the intercomtpany dividen-d rate, atid the ('anadian Treaty is to t(le effect that tile 6rduiction of rates to 5 percent shall not apply if the relationship of the two corporations has Ween arranged or is maintained primarily with the intention of securing such reduced rate. Now, I understand (has when they considered this particular convention, they felt that particular clause was unnecessary to put in this convention because they had a limitation in the terms of the convention that in order to qualify for t(le 5 percent, not more than 25 percent of thegross income must come from interest or dividends, and they felt that that limitation would be sufficient to prevent a holding company being set up, because most holding companies could not meet that test of 25 percent, more titan 25 percent would come from interest anti dividends, so they didn't feel that that particular limitation,

    (2151)

    which was in the Canadian Treaty, and which was insisted on by the Canadians themselves, was necessary. It has been omitted from several other conventions. I just wanted to call the attention of the committee to that fact. I might say that on this question of the foreign tax credit, that Mr. Carroll did speak about, it is certainly true that the way the foreign tax credit works, the U.S. Government has to bear the burden of the increased tax imposed by the foreign country. We had that very well illustrated in this Aramco situation in the Middle East, where the king over there imposed a much higher tax in place of a royalty, and the result was that it didn't cost the company very much, but it did cost the U.S. Government. That, of course, is the effect, of the foreign tax credit and doesn't have anything to do with this convention. On the whole, the staff has examined this convention very carefully and we see nothing in there that would set any precedent different from the other conventions. (SenatorFulbright assumed the chair.) Te CHAIRMAN. You see no reason why it should not be ratified? Mr. STAM. We know of no reason why it should not be. The CHAIRMAN. Are there any questions? Senator AIKEN. I'd like to know how extensive are the operations of American corporations in Norway, or, conversely, Norway corporations in the United States. Mr. STAM. We didn't have any information on that, but there is a representative here who participated in the convention and lie might be able to answer that question if you would like to have it answered. Mr. Gordon, do you want to answer that question? STATEMENT OF NATHAN N. GORDON, CHIEF, INTERNATIONAL TAX STAFF, TREASURY DEPARTMENT Mr. GORDON. I regret that I do not have the information with which to supply you at this moment, but we will be glad to supply it for the record. The CHAMIRMAN. Could you estimate or guess about the matter; is it very large, or small? Mr. OORDON. I think it is quite small. I think the income flowing between the two countries probably does not exceed something in the neighborhood of $10 million a year. Senator AIKEN,. $10 million? Mr. GORDON. Yes, sir. Senator AIKEN. Would the result of this new amendment to the convention mean more or less income to the United States? Mr. GoRDON. On balance, I think it would probably mean a slight increase in revenue to the United States. Senator AIKE.v. A slight increase? Mr. GORDON. Yes, sir. The CHAIRMAN. Are there any further questions? No CHAIRMAN. le response.) Thank you very much, Mr. Stam, and thank you, Mr. Gordon. The committee will now go into executive session, and we will ask our guests to leave the room, please. (At this point, the committee went into executive session.)

    (9162)

    Senate Committee Report


    August 11, 1959 Executive Report No. 10 86th Congress, 1st Session Senate Foreign Relations Committee

    (2153)

    86TH CONGREI8

    l8t seion

    SENATE

    Exwutmvz RhM.

    No. 10

    TAX CONVENTION WITH NORWAY

    TUMSDA,

    Avaust 11, 1959.-Ordered to be printed

    Mr. FLarUHT, from the Committee on Foreign Relations, submitted

    the following

    REPORT
    [To accompany Ex. D, 85th Con&g 2d sewi

    The Committee on Foreign Relations, having had under consider. ation Executive D, 85th ongress, 2d .semion,a convention -with Norway modifying a 1949 double taxation convention, with that country, repo.lrt te convention favorably and recommends that the Senate give its advice and consent to ratification.
    BACKGROUND

    The pen" convention was transmitted to the Senate by the Present on August 14, 1958. In July 1959, tb. chairman of the Foreign Relations Committee asked the staff of the Joint Committee on Internal Revenue Taxation to analyze and report on the con. vention. On August 10, the chief of staff of that committee, Mr. Colin F. Starn, reported that in general the convention isInaccord with the principles underlying the provisions of existing tax conventions which the Senate has previoMly approved.

    On the following day the Committee on Foreign Relations held a ;pub hearing at which time supporting testimony was received from Nationalreg Trade CounclTand the Department of the Treasury. No oppostion to the convention has been brought to the committee's attentao. The convention would add to the 1949 convention between the treatment of dividends. It appeaus that although the sums of money involved under the modifying provisions willbe small the net effect will be a slight increase in the revenue of the U.S. Treasury. (2155)
    United States and Norway a new article relating to the income-tax

    TAX CONVENTION WITH NORWAY

    ANALYSIS OF CONVENTION

    There follows the- text of the letter which the chairman of the committee received fromm Mr. Stain reviewing the provisions of the convention:
    CONGRESS OF THE UNITED STATES,
    JOINT COMMITTEE ON INTERNAi, REVENUx TAXATION,

    Washington, Ron. J. W. FUIBRIcmHT, Chairman, Committee on Foreign Relations,

    August 10, 1950.

    Committee on Internal Revenue Tixation has reviewed the provisions of the convention between the United Sttes of America and Norway, modifying and supplementing the convention of June 13, 1949, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (Exec. DI 85th Cona. 2d sees.). This supplementary convention was signed at OsNo on July 10, 1958. It would modify the convention of June 13 1949 (S. Ex..Q, 81st Cong., 1st sews.) by adding to it a new article relating to the income-tax treatment of dividends. On September 17, 1951, the Senate advised and consented to the ratification of the 1949 convention, subject to an understanding relative to the collection provisions of article XVII. The convention between the United Stest of America and Norway 81st of June 13, 1949 (8. Ex. Q1 Cong.,let ams.), makes no reference to the payment of dividends. Article VI of that convention, relating solely to interest, provides that interest on bonds, securities, notes, debentures, or on 4ny other form of indebtedness derived from sources within one country by a resident or corporation or other entity of the other country not having a permanent establishment in the former country shall be exempt from taxation in the country from which derived. The supplementary convention would modify the 1949 convention by adding a new article VI-A dealing with the tax treatment of divi. dends. The new article VI-A will modify the present tax treatment of dividend payments in two respects: (1) it would provide for reduced rates of tax on dividends, and (2) it would provide that each country would exempt from tax dividends paid to persons, other than its own citizens, residents, or corporations, by a corporation of the other country. Under paragraphs (1) and (2) of the new article VI-A which would bo added to the supplementary convention, each country is limited to a maximum rate of tax of 15 percent on dividends paid by a corporation of it to a resident or corporation or other entity of the other country. (At the present time, a tax at the rate of 25 percent of the gross amount of dividends is withheld by Norway on dividends paid by a Norwegian corporation to recipients outside of Norway and, in the case of a U.S. corporation paying dividends to recipients outside the United States, a U.S. tax of 30 percent is withheld.) This reduced rate would not apply to a recipient of dividends engaged in business through a permanent establishment in the country from which the dividends are paid. (The term "permasuent establishment" is defined in article II(l)(c) of the 1949 convention.) Limitations on the rate

    U.S. Senate, Washington, D.C. DEAR SENATOR FULBJIGHT: At your request the staff of the Joint

    (2156)

    TAX CONVENTION WITM NORWAY

    limitations similar to the one in the proposed supplementary convention are contained in the U.S. income tax conventions with Canada, Denmark, Finland, Italy, and Switzerland. Paragraphs (1) and (2) of the new article VI-A which would be added by the supplementary convention also provide that the tar on dividends shall not exceed 5 percent in the case of dividends paid by a corporation in one of the countries to a corporation in the other country, provided that the corporate shareholder receiving the dividend owns, either alone or in conjunction with not more than three other corporations (each of which owns at least 10 percent of the voting stock of the dividend-paring corporation), more than 50 percent of the voting stock of the dividend-paying corporation and provided that not more than 25 percent of the gross income of the dividend-paying corporation is derived from interest and dividends from sources other than its subsidiary corporations. A similar reciprocal 5 percent rate on intercorporate dividends is to be found in a number of other U.S. income tax conventions, including all of those listed in the immediately preceding paragraph. However, it appears that in the other income tax conventions, with one exception, the 5 percent, rate applies only where the recipient corporation owns 95 percent or more of the stock of the payor corporation. The sole exception to this rule is the income tax convention with Canada, under which the 5 percent rate is applicable where a majority interest is owned by up to four corporations. The Canadian provision, and the provision contained in the supplementary convention with Norway permit substantial local participation in a foreign venture without making the 15 percent maximum rate applicable and also facilitate joint undertakings abroad by several corporations in the same country. In addition to the difference in the stowkownership requirement in the 5 percent reciprocal rate provision in this supplementary convention, it should also be noted that it omits a proviso which is to be found in most if not all of the other conventions providing a 5 percent rate. This proviso is to the effect that the reduction of rate to 5 percent shall not apply if the relationship of the two corporations has been arranged or is maintained primarily with the intention of securing such reduced rate. Under paragraphs (3) and (4) of the new. article VI-A which would be added by the supplementary convention, each country agrees to exempt from tax the dividends paid by a corporation of the other

    of tax on with other are found inmany of the reciprocal 15 tax condividends countries. For example, U.S. income percent ventions

    country to persons other than its citizens, residents, or corporations. For example, where

    a Norwegian corporation pays a dividend to a resident of Sweden, paragraph (3) provides that the dividend shall (see. 861(a)(2)(B)), a dividend received by a nonresident alien (e.g., a resident of Sweden) from a foreign corporation which derives more than 50 percent of its gross income from sources within the United States, is subject in whole or in part to U.S. tax. Accordingly, this provision of the suppleo.entary convention modifies existing law. A similar exemption from tax is found in a number of other U.S. income tax conventions, including those with Austria and Canada. and exchange of instruments of ratification and provides that it shall become effective upon exchange of instruments of ratification with
    Article II of the supplementary convention relates to the ratification be exempt from U.S. tax. Under the Internal Revenue Code of 1954

    (2157)

    TAX CONMV

    ON WITH NORWAY

    respect to taxable years beginning on or after January 1 following the calendar year in which the exchange of instruments of ratification takes place. If ratifications are exchanged in 1959, the supplementary convention would apply to taxable years beginning on or after January 1, 1960. Except for the minor omission noted above, the provisions of the supplementary convention are in accord with the principles underlying the provisions of existing tax conventions which the Senate has previously apj roved. iicere~y yours, COLIN F. STAM,

    Ckif Of &4#/l.

    (2158)

    Senate Floor Debate and Action


    August 12, 1959 86th Congress, 1st Session 105 Congressional Record 15646-15647

    (2159)

    [P. 16646J

    TAX CONVENTION WITH NORWAY

    The PRESIDING OFFICER. The Senate will now proceed to the consideration of Executive D (85th Cong., 1st sess.). The Senate, as in Committee of the Whole, proceeded to consider Executive D, 85th Congress, 1st session, the convention between the United States of America and Norway signed at Oslo on July 10, 1958, modifying and supplementing the convention of June 13, 1949, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, which was read the second time, as follows: [Text of convention] Mr. JOHNSON of Texas. Mr. President the pending convention was transmitted to the Senate by the President on August 14, 1958. InJuly 1959, the chairman of the Foreign Relations Committee asked the staff of the Joint Committee on Internal Revenue Taxation to analyze and report on the convention. On August 10, the chief of staff of that committee, Mr. Colin F. Stam, reported that in general the convention is-"in accord with the principles underlying the provisions of existing tax conventions which the Senate has previously approved." On the following day the Committee on Foreign Relations held a public hearing at which time supporting testimony was received from National Foreign Trade Council and the Department of the Treasury. No opposition to the convention has been brought to the committee's attention. The convention would add to the 1949 convention between the United States and Norway a new article relating to the income-tax treatment of dividends. It appears that although the sums of money involved under the modifying provisions will be small, the net effect will be a slight increase in the revenue of the U.S. Treasury. The PRESIDING OFFICER. Without objection, Executive D (85th Cong., 1st seas.), will be considered as having passed through its various parliamentary stages up to the point of the consideration of the resolution of ratification, which the clerk will read. The legislative clerk read as follows:

    Resolved, two thirds of the Senators present concurring therein, That the Senate advise and consent to the ratification of Executive D 85th Congress, 2d session, the Convention between the United States of America and Norway signed at Oslo on July 10, 1958, modifying and supplementing the [p. 16647) Convention of June 13, 1949, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on Income.

    The PRESIDING OFFICER. The question is on agreeing to the respective resolutions of ratification, as amended. On this question, the yeas and nays have been ordered, and the clerk wiln call the roll. The legislative clerk called the roll. Mr. MANSFIELD. I announce that the Senator from Louisiana [Mr. EUENDERJ and the Senator from Montana [Mr. MuRRAY] are absent on official business. I also announce that the Senator from Wyoming [Mr. O'MAHONEYJ is absent because of illness. I further announce that, if present and voting, the Senator from Louisiana [Mr. EENDER], the Senator from Montana (Mr. MuRRAY],

    (2161)

    and the Senator from Wyoming [Mr. O'MAHoNEY] would each vote
    yea. [Mr. LANGER) is absent because of death in his family. Tile Senator from Arizona [Mr. GOLDWATER) is detained on official YEAS-93
    Aiken Allott Anderson Bartlett Beall Bennett Bible Bridges Bush Butler Byrd, Va. Byrd, W. Va. Cannon Capehart Carlson Carroll Case, N.J. Case, S. Dak. Chavez Church
    Clark

    Mr. KUCHEL. I announce that the Senator from North Dakota

    business, and, if present and voting, would vote "yea." The result was announced-yeas 93, nays 0, as follows: Frear
    Fulbright Mansfield Martin Monroney Morse Morton Moss Mundt Muskie Neuberger Pastore Prouty Proxmire Randolph Robertson Russell Saltonstall Schoeppel Scott Smathers Smith Sparkman Stennis Image Thurmond

    Gore Green

    Gruening Hart Hartke

    Hayden
    Hill Holland Hruska
    Jackson

    Hennings Hickenlooper

    Humphrey

    Cooper Cotton Dodd

    Curtis Dirksen Eastland Engle Ervin


    Douglas Dworshak

    Lon McCarthy
    McClellan

    Jchnson, Tex. Johnston, S.C. Jordan Keating Kefauver Kennedy Kerr Kuchel Lausche

    Javits

    McGee McNamara Magnuson NAY"-0 NOT VOTING-5


    Langer

    Wiley Williams, N.J. Williams, Del.

    Yarborough Young, N. Dak. Young, Ohio

    Goldwater

    Ellender

    Murray

    O'Mahoney

    concurring therein, the resolutions of ratification of Executives G and D are deemed to have been agreed to by the same vote. Mr. JOHNSON of Texas. Mr. President, I ask that the President be notified that the Senate has today agreed to the resolutions of ratification of the treaties on the Executive Calendar today. The PRESIDING OFFICER. Without objection, the President of the United States will be notified forthwith of the approval by the Senate this afternoon of the resolution of ratification of each of the treaties. Mr. JOHNSON of Texas. Mr. President, I move to reconsider the vote by which the resolutions of ratification of the treaties were agreed to. Mr. KUCHEL. Mr. President, I move to lay that motion on the table. The motion to lay on the table was agreed to.

    The PRESIDING OFFICER. Two-thirds of the Senators present

    (2162)

    PresidentialProclamation

    (including official tat of convention)


    [Reprint of TIAS 43601

    (2168)

    ..k i

    IIAN *

    A .Ij I

    1 I IIIIII III

    I1

    RUBLE TAXATION
    aes on Income

    Convention Between the


    UNITED STATES OF AMERICA

    and

    NORWAY

    Modifying and Supplementing Convention of June 13, 1949

    Signed at Oslo July 10t 1958

    TN" O--4a--v.L

    Z--43

    (2166)

    DEPARTMENT OF STATE (Literal print)

    (2166)

    NORWAY
    Double Taxation: Taxes on Income Convention modIying and supplmwnting ihe convention of June 13, 1949. Signed at Oslo July 10, 1958;
    RaIlcation advised by the Senate of the United S&ate of Ameria August

    12, 1959;
    Ratliedby the Presidentof the United &ates of America September.4, 1959; Rattied by Noncay January2, 1959; Ratifications exchanged at Washington October 21, 1959; Proclaimedby the President of dw United &ates of America November 22, 1959; Entered intoforce October 21, 1959.

    By Tnz PRESIDENT OF THE UNITED STATES Or Axawc,%

    A PROCLAMATION
    WVHIEREAS a convention between the ITnited States of America and Norway modifying and supplementing the convention of June 13, 1949 for the avoidance of double taxation and the prevent ion of fiscal evasion with respect. to taxes on income was signed at Oslo on July 10, 1958 by their respective Pleripotentiaries, the original of which supplementary convention, in the English and Norwegian languages, is word for word as follows:

    (1)

    TIAS 436W

    (2167)

    CONVENTION BETWEEN TIlE UNITED STATES OF AMERICA AND NORWAY MODIFYING AND SUPPLEMENTING THE CONVENTION OF JUNE 13, 1949 FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME The President of the United States of America and His Majesty the King of Norway, desiring to modify and supplement in certain respects the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at Washington on June 13, 1949,['] have decided to conclude a supplementary Convention for that purpose and have appointed as their Plenipotentiaries: The President of the United States of America: Frances E. Willis. Ambassador extraordinary and plenipotentiary of the United States of America to Norway, and His Majesty the King of Norway: Halyard Lange, Minister of Foreign Affairs, who, having communicated to one another their full powers, found in good and due form, have agreed as follows: ArTILI I The Provisions of the Convention of June 13, 1949, are modified and supplemented by inserting immediately after Article V1 thereof the following new Article: Awncuz VI-A (1) The rate of United States tax on dividends received from a United States corporation by a resident or corporation or other entity of Norway, not engaged in trade or business in the United States through a permanent establishment therein at any time during the taxable year, shall not exceed 15 percent. The rate shall, how ever, not exceed 5percent in the case of such dividends received by a Norwegian corporation if (a) during the part of the United States corporation's taxable year preceding the payment of the dividend and during the whole of the prior taxable year, such Norwegian

    'TIAS 2357; 2 UST 282& TIA8 43W

    (2188)

    3 corporation either alone or in association with not more than three other Norwegian corporations owned more than 50 percent of the voting stock of the United States corporation, provided each Norwegian corporation owned at least 10 percent of the voting stock of the United States corporation, and (b) not more than 25 percent of the gross income of the United States corporation for the taxable year immediately preceding the payment of the dividend is derived from interest and dividends other than interest and dividends received from its subsidiary corporations. (2) The provisions of the preceding paragraph shall apply, mutatis mutandie, in the case of dividends received from a Norwegian corporation by a resident or corporation or other entity of the United States. (8) Dividends paid by a Norwegian corporation shall be exempt from United States tax except where the recipient is a citizen, resident or corporation of the United States. (4) Dividends paid by a United States corporation shall be exempt from Norwegian tax except where the recipient is a resident or corporation of Norway.
    Arnom II

    (1) The present supplementary Convention shall be ratified and the instruments of ratification shall be exchanged at Washington as soon as possible. (2) The present supplementary Convention shall, upon exchange of instruments of ratification, become effective with respect to taxable years beginning on or after the first day of January following the calendar year in which such exchange takes place. It shall continue effective indefinitely as though it wfte an integral part of the Convention of June 13, 1949, subject to the provisions of Article XXII of that Convention with respect to termination. DoNw at Oslo, in duplicate, in the English and Norwegian languages, the two texts having equal authenticity, this tenth day of July, 1958.
    POR TRE PRESIDENT OF THE UNITED STATES O1 AMERICA:

    FRANC

    E. Wnus
    (MEAL]

    FOR HIS MAJESTY THE KING OF NORWAT:

    HALVA1I LANGE
    (SEAL]

    (2169)

    TIAS 4360

    4 OVERENSKOMST MELLOM AMERIKAS FORENTE STATER OG NORGE ONI ENDING I OG TILLEGG TIL OVERENS.

    KONIST AV 13. JUNI 1949 TIf, UNNGAEISE AV DOBBEIT. BESKATNING OG FOREBYGGING AV SKATTEUNNDRA. GELSE MED IIENSYN TIL INNTEKTSSKATTER
    Presidenten for Amerikas Forente Stater og Hans Majestet Kongpn xv Norge, sore *insker A endre og supplere i visse henseender den overenskonst til unngilelse av dobbeltbeskatning og fotrbygging Itv skatteunndragelse reed hensyn til inntektsskatter, som hie undertegnet i Washington den 13. juni 1949, har besluttet A hingA en tilleggs. overenskomst i den anledning og har oppnevnt som sine befullmektigede: Presidenten for Anmerikas Forente Stater: Frances E. Willis, Amerikas Forente Stateos Ekstraordinvere og Befullmektigede Amhassadclr i Norge, og
    Hans Majestet Kongen av Norge:

    Halyard lAnge, Utenriksminister, sont etter A ha meddelt hiverandre sine fullnakter, som er funnel A varo i god og g3'yldig form, er blitt enige om f0lgende: AWFRKEt, I Bestenmielsene i overenskonst av 13. junl 1949 endres og suppleres ved at det umiddelbart otter antikkel VI i overenskomsten skytes inn folgende nyo artikkel:
    AR'iKKEI, VI-A

    (1) Skattesatsen i De Forente Stater pi aksjeutbytter, mottatt fra et amerikansk selskap at en person bosatt i Norge oiler nv et norsk selskap eller annen samwenslutning, som ikke pa noe tidspunkt i lopet av inntektsfiret liar utcvet handels- oiler forretningsvirksoinhet i Do Forente Stater ved et fast. driftested der, skal ikke overstige 15%. Skattesatsen skal likevel ikke overstige 5%i tilfelle hvor slikt utbytte oppebleres av et norsk selskap, dersomr (a) det norske slskap i den del itv det amerikanske selskaps inntektsftr som bigger forut. for ttbytteutdelingen saint i hele det forutgiiende

    inntektsir enten alene eller sammen med hoyst tre andre norske sels-

    kaper liar eiet mer enn 50% av do stemmeberettigede aksjer i (let amerikanske Melskap, og livert av de norske selskaper liar eiet minst 10'4 av d( stemnmeherett igede aksjer i dot. amerikanske selskap, og (b) ikke iner enn 25% av bruttoinntekten til det anmerikanske selskap for inntoktsiiret umiddelbart fort for utbytteutdelingen hitrorer fra renter og aksjeutbytter, utenom renter og aksjeutbytter mottatt fra dets datterselskaper.
    TIAS 4340

    1 (2170)

    6 anvendelse i tilfelle hvor aksjeutbyuor er oppebAret fra et norsk selskap av en person sow er bosatt i De Fomnte Stater eller av et amerikansk selskap eller annen sanimenslutning. (3) Akojeutbytter fra et norsk selskap skal vere unntatt fra skatt i De Forente Stater, unutagen hvor mottakeren er awerikansk statsborger, en person bosatt i De Forente Stater eller et amerilansk selskap. (4) Akjeutbytter fra et amerikimsk selskap skil vaeiv nnntatt flit skatt, i Norge nuntgen hvor mottakoren er en person boIatt i Norge eller et norsk selskap.
    Azxlrru II

    (2)Bestemmelsene under punkt 1skal, mulatis mutandi*, fA

    (1) Denne tilleggsoverenskomst skal ratifiseres og ratiflkasjons. dokumentene skal utveksles i Washiogton snarest mulig. (2) Etter utvekslingen av ratiflkasjoiisdokumentene skal denne tilleggsoverenskonst fA virkning for do inntektsAr sore begynner pA eller better 1. januar i det Ar som folger better det kalenderAr hvori slik utvelmling finner sted. Den skal vere gjeldende uten tidslwgreuesing sor om don var en integrerende del av overenskomsten av 13. juni 1949, og viere underkastet besteminelsene i denno overenskooists artikkel XXII med hensyn til opphlr.
    UTFERDIGET i Oslo i to eksemplarer, pi engelsk og norsk, slik at begged tekster liar lik gyldighet: den tiende dog i juli 1958.

    FOR PRESIDRNTEN FOR AMERIKAS FORME STATE: FRANCES E. WILLIS


    (BEAL]

    FOR HANS MAJESTET KONOEN AV NOROIH: HALvY.AD LANoz


    (SEAL]

    resolution of August 12, 1959, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid supplementary convention; WHEREAS the aforesaid supplementary convention was d(ily ratifled by the President of the United States of America on September 4, 1959, in ur-stuance of the aforesaid advice and consent of the Sell:i1', 11i14 was duly ratified on the part of Norway;

    IVIIEEAS the Senate of the United States of America by their

    (217'1)

    TIAS 4,3W

    6 WuxEa the respective instruments of ratification of the aforesaid supplementary convention were duly exchanged at Washington on October 21, 1959; AN" wnunRs it is provided in Article II of the aforesaid supple. mentary convention that, upon exchange of instruments of ratification, the said convention shall become effective with respect to taxable years beginning on or after the first day of January following the calendar year in which such exchange takes place; Now, Tuzroa, be it known that, I, Dwight D. Eisenhower, Presi. dent of the United States of America, do hereby proclaim and make public the aforesaid supplementary convention to the end that the said convention and every article and clause thereof may be observed and fulfilled with good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. INr TE=TMONY WHEREOr, I have hereunto set my hand and caused the seal of the United States of America to be affixed. DoN: at the city of Washington this twenty-third day of November in the year of our Lord one thousand nine hundred fifty. (saLL] nine and of the Independence of the United States of America the one hundred eighty-fourth. DWIGHT D. EISENHOWER By the President:
    CmusnAN A. Hmner

    Seoretar of State

    TIAS 43M0

    (2172)

    SECTION 20 Convention With PAKISTAN

    (2178)

    INCOMs

    TAX CONVENTION BETWEEN THE UNITED STATES AND

    July 1, 1957. July 12, 1957.

    July 30 and August 9, 1957.......... Senate Committee Hearings. July 7, 1958....... Reported by Senate Foreign Relations Comnmittee (Ex. Rept. No. 1, 85th Cong;, 2d Ratification by Senate of its advice and consent with reservation (104 Congressional Record 13238-13244). November 6, 1958 ----- Ratified by United States President. May 2,1959. Ratified by Pakistan. May 21, 1959 --------- Instruments of ratification exchanged; convention entered into force effective Januay I, 1959. Proclaimed by United States President. Mgyx 28t1959. officialTe. TIAS 4232; 10 UST 984.
    July 9, 1958.

    PAKISTAN Signed at Washington. Received by Senate; designated Executive N 85th Congress, 1st Session; injunction of secrecy removed (103 Congressional Rec. ord 11444).

    Sens.).

    (2174)

    CONTENTS OF SECTION 20
    Pag

    1. Presidential Message of Transmittal to Senate ...................... 2. Senate Committee Hearings ......................... 3. Senate Committee Report-........................................ 4. Senate Floor Debate and Action .................................. 5. Presidential Proclamation (including Official Text of Convention) ..... 6. Text of Unpublished Protocol of Exchange .........................

    (2177) (2183) (2283) (2291) (2297) (2315)

    (2175)

    PresidentialMe88age of Transmital to Senate (Including

    MaterialsEnclosed Therewith)

    (2177)

    85TH CONORs

    18t seee8ion

    SENATE

    E~uv

    TAXATION CONVENTION WITH PAKISTAN

    IMESSA GEf

    PRESIDENT OF TE UNITED STATES'


    ACONVENTIONk BETWEEN THE UNITED STATES OF-AMIICA AND ON INCOME, SIGNED AT WASHINGTON ON JULY (1957
    PAKISTAN FOR THE AVOIDANCE OF*. DOUBLE TAXATION ANb THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TA7ES

    JuLY 12, 1957.-Convention Wat read the first time and the InJutnotton of secrecy was removed therefrom. The convention, the Presidenpya-iesmage of trans. mittal, and all accompanying papers wererefernd to th&Commlttee on Foreign Relations and ordered to be printed for the use of the Senate

    United States: To tU Senate Iof With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith a convention between the United States of America and Pakistan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on Juy 1, 1957. Transmit also for the information of the Senate the report by the Secretary of State with respect to the proposed convention. The convention has the approval of the Department of State and D the Department of the Treasury. D. EisvrviowmR. ~DwMOH (Enclosures: (1) Report by the Secretary of State; (2) income-tax convention with Pakistan.) (2179)

    Houss, TUB WHITi J~~ 12, 1967.

    TAXATION CONVENTION WITH PAKISTAN DEPARTMENT OF STATE,

    The PRESIDENT,

    Washington, July 8,1967.

    through its tax law. Pakistan tax law, in order to attract capitaland encourage investment for the development of Pakistan's economy and natural resources, offers an incentive for establishment of approved new enterprises. Pakistan accords certain tax exemptions as to profits of such enterprises and also as to dividends paid out of such profits. More specifically, under the income-tax law of Pakistan a business qualifying as a new enterprise may. obtain tax exemption for a 5-year period on profits up to 5 percent of invested capital, and dividends paid from such profits may be tax exempt. At present an
    American corporation qualifying or such treatment under Pakistan law may find that United States taxes will be increased and thus offset

    The White House: The undersigned, the Secretary of State, has the honor to submit to the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the President approve thereof, a convention between the United States of America and Pakistan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on July 1, 1957. The convention was formulated as a result of technical discussions between representatives of this Government and representatives of the Pakistan Government, in the course of which an effort was made to determine the bases upon which agreement might be reached for the purpose of avoiding double taxation, and establishing certain procedures for mutual administrative assistance, in regard to income taxation. Elimination of such double taxation is an important step toward removing one of the impediments to international trade and investment. The convention with Pakistan follows in general the pattern of income-tax conventions presently in force between the United States and a number of foreign countries, namely, Australia Belgium, Canada, Denmark, Finland, France, the Federal Republic of Germany, Greece, Honduras, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the Union of South Africa, and the United Kingdom. As in the cases of similar conventions, the one with Pakistan is designed to eliminate obstacles to the international flow of trade and investment. It contains provisions relating to business income, investment income, personal service (including professional) income, official salaries, pensions and annuities, remuneration received by teachers, remittances or grants to students and apprentices, and interest received by the State Bank of Pakistan and the Federal Reserve banks of the United States from sources in the other country. The convention also contains, as is customary, provisions regarding administrative procedures, including exchange of information, for giving effect to the convention. . . The convention contains certain provisions, unlike those in incometax conventions with other countries, under which the United States would take an important step toward avoiding nullification of the efforts of a foreign country to encourage industrial development

    the effects of the Pakistan tax law. The concession by Pakistan,

    (2180)

    TAXATION CONVENTION WITH PAKISTAN

    therefore, is no special attraction to the United States investor. Under article XV (1) of the proposed convention this situation would be remedied within limits and on certain conditions l)y treating, as though paid for foreign-tax-credit purposes, the amount of income tax and supertax by which the American taxpayer's Pakistan tax is reduced. It is understood that the Department of the Treasury is prepared to make such further explanations as may be found desirable regard. ing the technical aspects and application of the proposed convention. Tire convention a plies, so far as United States taxes are concerned, only to the Federal income taxes, including surtaxes. It does not apply to tile imposition or collection of taxes by the several States, the District of Columbia, or the Territories or possessions of the United States, although it contains a broad national-treatment provision similar to a provision customarily found in treaties of friendship, commerce, and navigation. In Pakistan the convention would be applicable to the income tax, supertax and business-profits tax. It is believed that the convention with Pakistan, if brought into force, would be beneficial to both countries and to their respective citizens and enterprises. It has the approval of the Department of State and the Department of the Treasury. Article XIX provides for ratification and for exchange of instruments of ratification. It prescribes that, upon such exchange, the convention shall have effect in the United States for taxable years beginning on or after January 1 of the year in which the exchange takes place and shall have effect in Pakistan for "previous years" or "chargeable accounting periods," as defined in Pakistan law, beginning on or after January I of the year in which the exchange takes place. It is provided in article XX that the convention shall continue in effect indefinitely but may be terminated at the end of a period of 3 years or thereafter by the giving of a notice by one of the parties to the other party on or before June 30 of any year, in which event the convention would cease to be effective (a) in the United States, for the taxable years beginning on or after January 1 next following the notice of termination, and (b)in Pakistan, in respect of tile "previous years" or the "chargeable accounting periods," as defined in Pakistan law, beginning on or after January 1 next following the notice of termination. Respectfully submitted. FOSTERDLLES. (Enclosure: Income-tax convention with Pakistan.)

    [Text of convention]

    IM8006

    o2-1. 2-.-44

    (2181)

    j
    Senate Committee Hearings
    July 30, 1957, and August 9, 1957
    85th Congress, lst Session

    Senate Committee on Foreign Relations

    (2188)

    )OUBLE TAXATION LUN,,NlIY..l6 HEARING


    BEFORN TED

    COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE


    EIGHTY-FIFTH CONGRESS
    FIRST SESSION ON INCOME TAX CONVENTION WIT!! AUSTRIA (EX. A, 85TH CONG., IST BESS.); SUPPLEMENTARY INCOME TAX CONVENTION WITH CANADA (EX. o, 85TII CONG., 18T BESS.); SUPPLEMENTARY INCOME TAX PROTOCOL WITH JAPAN (EX. K, 85TH CONG., 1ST BESS.); AND INCOME TAX CONVENTION WITH PAKISTAN (EX. N, 85TH CONG., 1ST

    BUSS.)
    JULY 80, 195?

    Printed for the use of the Committee on Foreign Relations

    UNITED 8TATUS GOVERNMENT PRINTING OMIICE WASHINGTON: 195T

    (2185)

    COMMITTEE ON FOREIGN RELATIONS


    THEODORE FRANCIS OREEN, Rhode Island, CUairman 1.W. FULDRIOHT, Arkansas ALEXANDER WILEY, WLioonsin JOHN SPARKMAN, Alabama H. ALEXANDER kMITH, New Jersey BOt7RKF B. IIICKENLOOPP.R. Iowa HUBERT 11. HUMPHREY, Minnefota WILLIAM LANCER, North Dakota MIKE MANSFIELD, Montana WAYNE MORSE, Oregon WILLIAM F. KNOWLAND, California GEORGE D. AIKEN, Vermont RUSSELL B. LONG. Louisiana JOHN F. KENNEDY, Massachusetts HOMER E. CAPElIART, Indiana

    OAUL MARCY, ChItlf Sol 0.0. OO'DAT, 014


    (NOTx: After hol:ilng this hearing the ColmnittC3) o0 Fo'ciln Relitlowis voted to report fiworbly the )iiVentlIons with Austria, Canada, Japan, and Pakistin. t8ubse.tuethls, the committee received evidence o!o a 't~i opposition to some portions of the Pakistan Treaty and agreed to reopen hearings on that con. vention.]

    it

    (2186)

    CONTENTS
    Statements byTaxation,; and Dan Throop Smith, Deputy to the Secretary of the Trasury, accompanied by Nathan Gordon, Chief, International Tax Staff, D)epartment of the Treasury ........................ Statements submittcd for the record byAlvord, ElIsworth C., chairman, Committee on Taxation, Unihed States Council of the International Chamber of Commerco ...... . eKeating, Hon. Kenneth It., Member of Congress from New York ...... Swingle, Williamn S., president, National Foreign Trade Council, Inc... mu

    Stare, Colin F., Chief of Staff, Joint Committee on Internal Revenue

    Pag I 21 23 20

    (2187)

    DOUBLE TAXATION CONVENTIONS


    TUSDAY, MLY 80, 1957

    UNITED STATES SENATE,

    COMMITTEE ON FoREIoNWaskington, RELATIONS

    i. o.

    The committee met, pursuant to call, at 10:10 a. In., in the comr mittee room, United States Capitol, Senator Theodore Francis Green (chairman) presiding. Present: Senators Green, Fulbright, Mansfield, Kennedy, Smith of New Jersey, and Aiken. Thie ChTAIMAN. The meeting will please come to order. I might say in advance we are having several hearings this morning. This is a public hearing with which we begin. After that we will have a meeting in executive session. At this public meeting the subject is double taxation conventions with four countries, Austria, Canada, Japan and Pakistan. We are meeting this morning to give Consideration to the four conventions between the United States and other governments, the purpose of which is, in general, the avoidance of double taxation and the prevention of income tax evasion. The convention with Canada modifies previous agreements on taxation with that country. The protocol with Japan supplements the 1954 convention now in force, and, as I understand, it I's limited to providing reciprocal tan exemptions on the interest earnings of the United States and Japanese Export-Import Banks within the territory of the other party. 'The convention with Austria and that with Pakistan follow the pattern which has been established in earlier agreements on income taxation between the United States and many other countries. However, it appears that the Pakistan convention introduces a new feature into these agreements. Members of the committee will doubtless have questions they wish to ask concerning this provision and pro. visions in the other conventions. Our first witness will be Mr. Colin F. Stain, Chief of Staff of the Joint Committee on Internal Revenue Taxation, who, in appearing before this committee in the past, has been most helpful in dealing with these double taxation conventions. We will now hear from Mr. Stain.

    STATEMENTS OF COLIN F. STAN, CHIEF OF STAFF, JOINT COXEITTlE ON INTERNAL REVENUE TAXATION; AND DAN THROOP SMITH, DEPUTY TO THE SECRETARY OF THE TREASURY, ACCOMPANIED BY NATHAN GORDON, CHIEF, INTERNATIONAL TAX STAFF, TREASURY DEPARTMENT

    all of these four conventions and we have made a short statement.


    The CHAIRMAN. You mean yoUr staff?
    1

    Mr. STAM. Mr. Chairman, at your request the staff has examined

    (2189)

    DOUBLE TAXATION CONVENTIONS

    Mr. STAM. Our staff, and we have made a short statement to you which I would like to read at this point if it is all right with the chairman. Committee on Internal Revenue 'taxation has reviewed the provisions of the following tax treaties now pending before the Senate Foreign Relations Committee: "Supplementary protocol witb Japan "Supplementary convention with Canada "Convention with the Republic of Austria "Convention with Pakistan "In general, these conventions follow the provisions of existing tax conventions which the Senate has previously approved. However certain features of the pending conventions, which are not contained in other conventions now in force, are specifically called to the atten. tion of the committee.
    PROTOCOL WITH JAPAN

    The CHAIhMAN. Please proceed. Mr. STAM (reading): "DEAR SENATOR GREEN: At your request, the staff of the Joint

    "Tbis protocol contains only one substantive article which provides that the Export-Import Bank of Japan will be exempt from tax by the United States on interest from sources within the United States. Reciprocally the Export-Import Bank of Washington will be exempt from tax by Japan on interest from sources within Japan. Under this provision a Japanese borrower, for example, will be permitted to pay interest to the Export-Import Bank of Washington without being subject to Japanese withholding tax on the interest payments." This question came up originally where there were some companies in Japan that wanted to buy some electrical equipment for use in Japan, and they borrowed the mdney from the Export-Import Bank of Washington, and the interest that was paid on that was regarded as being subject to the Japanese tax, and it was quite a little tax irritant, and so this reciprocal arrangement was worked out. I might say in that respect that we have had on several occasions, before the Joint Committee in connection with refund cases, the question of where some foreign countries have set up independent corporations to do business in the country. All of the stock of the corporation was owned by the foreign government. The committee has, on several occasions, refused to treat that income as being exempt be. cause the corporation was separate from the foreign government. But in this situation there is no competitive problem. This is merely a question of regarding the interest on money borrowed as being subject to the American tax, and in view of the fact that there is no competitive element involved, this treaty is in line with the general principle that the Joint Committee has adopted on those occasions. The CHAIRMAN. Excuse the interruption. You are making the point that the competitive element makes it a different problem. Mr. STAM. A different problem, that's right. The CHAIRMAN. How do you justify that? Mr. STAM. Well, because for example if a foreign corporation starts doing business in this country andis competing with an Ameri-

    "SuVplementary protocol ttith Japan.

    (2190)

    DOUBLE TAXATION CONVENTIONS

    can corporation doing business in this country, they have a great competitive advantage over American companies by being exempt from our tax. This treaty doesn't interfere with that at all. It deals with a bank organized under the laws of Japan. The CHAIRMAN. My point is not the legal justification. It is the moral justification.
    Mr. STAM. That's right. The CHAIRMAN. Have you any legal authority in making the dis-

    tinction? Mr. STAM. We do have. For instance when Justice Hughes was Secretary of State, he had the problem up in connection with Nicaragua. Nicaragua set up a corporation which was incorporated under the laws of the State of New York and all the stock was owned by the Nicaraguan Government. That Nicaraguan corporation which was operating under the laws of the State of New York, the Nicaraguan Government, attempted to claim that all its income was exempt, and in view of the fact that it was engaged in a commercial enterprise in this country, the Joint Committee took the position that, it being a separate entity from the Government itself, it was a separate corporation, that the provisions of the tax law which exempted income of foreign governments did not exempt a separate corporation. Justice Hughes, who was then Secretary of State, wrote an opinion on that matter, in which he said that the only time you would disregard the corporate entity was generally in the case of fraud. That being the case, his opinion justified the action of the committee, that you couldn't go behind the corporation itself and look to the stoclkholder, which happened in that case to be the Nicaragnan Gov',nmnt.. I understand that Mr. Smith of the Treasury agrees with me on this particular problem. They have been very careful not to open the door in these treaties to exempt commercial transactions by American corporations doing business in this country even though the stock of the corporation is owned by a foreign government. The CHAIRMAN. Then this present position is taken based on the opinion of Mr. Justice Hughes? Mr. STAM. That's right. The CHAIRMAN. Rather than on legislation? Mr. STAM. That's right. The CHAIRMAN. Thank you. Now the only point involved in the Japanese convention is the matter of the interest being taxed when it is paid by a borrower in one country to the Export-Import Bank in the other country. As I say, it isjust a tax irritant, and we have all agreed that the best approach is to do this by convention and remove this tax irritant. It is on a reciprocal basis, too. Senator SMITH. That applies to the Japanese Export-Import Bank and also to our Export-Import Bank? Senator SMITH. Are they mentioned by name in the convention? Mr. STAM. I believe they are, yes. Senator SMITH. They are definitely identified. Mr. STAM. That's right. The problem really arose in connection

    Mr.

    STAM.

    That's right. It is solved that way.

    with our own Bank in this country, but they expect it to arise in the case of the Japanese Bank later on. They set up a Bank for that purpose which corresponds to our Export-Import Bank. We are just
    treating them both alike. I

    (2191)

    4DOUNL"

    TAXATION 'CONVEfTIOIB

    United States? Mr. STAM. This convention only concerns this one point, that is the only point involved. Now you did have the Japanese Treaty which this committee passed several years ago. Senator AIKEN. But are there substantial Japanese investments in the United States, either by the Export-Import Bank with Japan or private citizens? with Japan but there are private investments of Japanese firms here. There are some banking interests.
    Mr. SMITH. Nothing very large I think, Senator Aiken. The CHAIRMAN. Mr. Stain, wiil you proceed? Mr. GORDON. There are no investments by the Export-Import Bank

    The CHAIRMAN. Yes, Senator Aiken. Senator AiUEN. Are there material Japanese investments in the

    Senator AIKEN. Mr. Chairman?

    CONVENTION WITH CANADA-INTERCORPORATE DIVIDENDS


    Mr. STAM (reading):

    "Supplementary convention with Canada "This convention amends and supplements the presently existing Canadian treaty. Under the existing convention a reduced rate of 5 percent is applied at source on dividends paid by a subsidiary corporation in one country to its parent corporation in the other country, if the parent corporation owns at least 95 percent of the voting stock of the subsidiary. Under the pending convention the reduced rate of 5 percent will apply if at least 51 percent of the voting stock of the subsidiary is held by the parent corporation alone or in association with not more than three other corporations, each of which owns at least 10 percent of the voting stock. This provision is more liberal than the corresponding provisions of other conventions." On that point, they are giving them a chance to do business by spreading the ownership out among 3 or 4 corporations instead of just I as under the existing convention where the parent has to own at least 95 percent of the voting stock. That is reduced now to 51 percent under the convention. about these other 3 or 4 corporations? Are there conditions as to how they shall be constituted? made up by three other corporations and they would have to own altogether 51 percent. TRe CHAIRMAN. That's what I mean. Mr. STAM. And at least each of those corporationsThe CHAIRMAN. Each of them separately? Mr. STAM. Would have to own at least 10 percent in arriving at that 51 percent total. The CHAIRMAN. Only 10 percent. Mr. STAM. Yes. We have done somewhat the same thing in this country when we permitted 3 or 4 corporations to operate abroad and get the foreign tax credit on dividends. We used to have a 95 percent rule there, and we permit 3 or 4 corporations in arriving at the total to own at least 10 percent of the stock.
    Mr. STAM. They are the subsidiaries. The 51 percent must be The CHAIRMAN. Does this discrimination go down further? How

    DOUBUI TAXATION CO

    WONO

    dion of corporations? Mr. STAM. That's right. The CHAIRMAN. IS that a good Government policy? Mr. STAM. Well, it is a good Government policy in the sense of encouraging investments abroad. The CRAIMAN. It is vice .versa; we are considering it the other. way around now. *Mr. STAM. That's right. The CHAIRMAN. Do you say it is a good policy? Mr. STAM. It is the policy that the Government has adopted in the past. The CHAIRMAN. I was juot asking your approval or disapproval of it. Mr. STAM. All I can say on that is it is in line with what we have done in the past. The CHAIRMAN. As I take it, you prefer not to express a personal opinion; is that right? Mr. STAM. That's right. It is no departure from existing policy.
    CONVENTION WITH CANADA-EXEMPTION FOR TRUCK TRANSPORTATION. PROFITS

    The CHAIRMAN. Which is just one way of encouraging the combina..

    In addition, the pending convention provides a reciprocal exemp. tion for truck transportation profits-this merely relates to the income tax. For example, if you have a United States trucking company that is crossing the border and doing business in Canada, this would prevent the trucking company from having to pay a tax on its profits to the Canadian Government. It still pays the full American tax but it prevents double taxation by removing the tax on the profits it has in Canada. You see, it is transporting goods from the United States to Canada, and at the present time double taxation results because we tax those profits and Canada taxes them. This convention would remove the tax on the truckers' profits by the Canadian Government, and in the same way a Canadian company doing business in the United States, transporting goods from Canada to the United States. This eliminates the necessity of allocating income. Canadians would levy their tax on the profits, but the United States would not tax the profits of the Canadian company in this country. It is a reciprocal arrangement. Senator SMITH. Mr. Chairman, I would like to ask a question there if I may. I can't quite see why just the trucking industry is picked out and somewhat of a special exemption made for it. Mr. STAM. Because double taxation is involved. You see they are doing business between the two countries. Senator SMITH. Aren't there other areas, too, where there is double taxation? Mr. STAM. I don't think so. Are there any other areas do you know? This just applies to the trucking industry. It doesn't apply to the railroads or other groups. They don't as I understand it have the saue problem. Mr. SMITH. I am Mr. Dan T. Smith, Deputy to the Secretary of the Treasury, for identification, Mr. Chairman.

    (2198)

    DOUBLE TAXATION VONVKNTIONB

    'rhe [reatt already provides at similar provision is do mni y other treatit* in theo calie of shipping mil aircraft.. Now trucking is elearly

    this thing. here is at basis of allovatioll suech that nlo) probloi' exists, Wo did consult. with lte railrmad people on lhat., but twhy have found another waly of dealing with it. Senior KF.NI:t)Y. Mr. Smith, on thi return t rip of at Ameriean trucker from Camada, do you consider that. a ('iatndian tax aea? Mr. Smirru. I think It. applies on the basis of the ownership of I-hl company, but just, let tie check that, Senator KIe'nnedy. Is thaitt. correct,. Nr. Cordon? Mr. (loultloN. YOs. Mr. SMIT1. It.is related to the ownershipi of the company so if the l Amerivan (Oiupl)aiiY I)ilk up at lond from there and brinlg it bWak that is still amnon;u attributable to United Stlates tax ill thel 11uite1d States and reciprocally if the Canadian company picks tip it load hemr and carries it.. The IIet eirect, of it, all is that. the incollo ila axed ill full by one country or the o1,hor, but. weo avoid fluh complex problems two of either alloeatiou ias between thel countries or even more seriolusly, the problem of double taxation with ia discriminatory burdell against. this sort of income.
    CONVioNTION WITH (!ANAl)A--ClAiitl'AuiIJ4' tii1l'$

    Senator Si-rru. You say that. reciprocal rrangement already existed with rerml to aircraft. MI r. Shi'm. Aircraft and shipping. Smnatar SMITI. How about, railroads that ee tile boundary? Mr. Sirrul. Apparently the railroads have worked out a Itiodus opomtdi with the Candiams sulch that. they wore not interested in

    is any appreciable amount. of trucking g flowing buick anld forth froul oneo cotnltry to) the other. In the a sencu' of this provision, .'ach 'ounttll'ry taxes tlhe income arising front the trucking frolml points and originhtting ill Chlo United iStatsu going to ('athnda or origilliatill it Callada anld going into Ihlle |llnited States, it very compliat4iml Iwohl(11 h lbetweetn the IBOW exissq for shlpiiljitg and treaLty provuhis for4trwiikill its oct th' santle as8 two countitries. VWhtat the aire'raft.. Th'bt. is to. tdhu. that (Canadawill not tax the nleomo from shipmeints fromtie Ilnited States into4) Canada carried by Amterican trucking co1mpanim. The alon1 will tAx that. ilm.0110 United Stae11 Canada alono will tax the income arising front shipments from Canada to thle iUnited Statts.

    hre I Slllique situation ill (ldaw a bcalse it is ithe only country where i,

    --it Mr. STAM. The other'novel poit... is not really novel, but it is a little different -is thit qeqsl ion of ehaitriablu gifts. Under the American income tax law you et. it deduction for a gift to charitable organizations only if the organization is organized under h the laws of the I nitted States. This convention will pernuit. a cluritable deduction to a Calldian charitable organization, but there arte certain limitations, only to the extent. that it. is p'rtuitLtced in the caso of a gift to an Americni charitable organization. That is, we havo tho 2)0 ald 3o percent. limits of the incomi, aml there is another limitation tlhat insofair as this Iarticublr (loduction is coneorned, it is limited to

    You have to have incoite from Camnaian sources and t ehuritkao deduction cannot exceed tit, Ani'eican limits, lnd also it calmlot exceed
    (2194)

    the income arising in (amhada.

    DOUBLE TAXATION CONVINTIONS itati., atlid the $litlo thing would apply to (Canuaialin making gifts to

    the itiuolin from sources within Canada. 'This is a reciprocal arrangoiotii. American org/aizat emtlutor SMITHi. Are you reounmendilg that?
    Mr. Su'rAm. Yes.

    I might, B.ay that this provision as well as the ote which we just went over abo.ult the trucking profits, similar provisions are cotat~inted ill thile existing cotnvetntions with 11ondurat. We have those already 1onduras convention. th adopted in1to senator A1Kt.N. Mr. Chairman, inay I ask if this would result in raising the( limit, oi deductible gifts? Nir. S'&i. It. would tot. Senattor AIK iN. Itl. wohld Hot? XIr. STAIr. It, would keep the atme limits. Senator AIKIN. That. is to siay, the cotmillttany couhl make gifts amounting to 20 pervel1t. of thle profits caeled in tlie United States, 1and also give, 20 lperce11t. of their profits in 01anl1da to ( ldiall ilstlitlutionlom? rhir. STAM. WOe have, of coutIo-you amr now talking about. idividtuals. Tou Hoe, wit have it s peial liiti otlcorjorate gifts. It is 1 only 5 iperet1t. But, whatever limitation, it. wolith still apply in cao of iltese gifts to these charitable Canadian corporations. I ..etor AtKI,.N. It.would not. increase tfhe overall deductionus? r NIr. STAM. That's right.. And I understand that, in addition, if there are nt'lt limits inl ( cau1da, they would als1o pply in this sit.11t11ion tllt, if lihe*Atterican limit, is less, then the Anewiiitl limit. would aJ)jly instead of the C'anuadian limit. We would never give theIll 11n1V IIIore tihan we give for our own chariltalhe orgltl7ations. Tl1h ('CHAIR.MAN. Inllsteald of beilng 4u1ute 1tlXationl, this is doule0 h exemptlI ioll? N1'. ST'rA. 'That's right.

    I'CONVErNTION WITtI AISTIIIA

    -- MOTION-I'I('TIUIt.

    FILM RIENTAI.

    Now the next, oie is the convetntiotn with tlie Itelpublie of Austria. "Tlhr are ieo novel features in thie Austrian treaty. Hhowever, thle following provisions difer in certain respetes front tite provisions of other treaties." There are sonei that, do have the IrovtsUons. "lF'irst tiotion-pictimure flhn rentals tire explresly excludeul front the reciprOcal exe11pt ion1 of royalties provided by article VIll (I). In the Case of film rentals, article ViII (2) j)rovides it reduction in tax to AI0 pl~ercentl of the statutory rate of tax otherwise imposed ott sueh rentals, with thie' mIaximnum tax not to exeeded 10 percent. of the rentlds. I understand that iin effort was iiade to trt to work for it complete exemtlptioni of these rentals, bitt the lehrotiators were olnly aile to work out with the Austrian (loverlnmelint this lintited 10 pereent nIaximuitmi tax. That was ill that, the Austrians were willitlg to agree to, so that this is 11ot a eellll)hletu exemiptionl, as in the ease of it lot of other treaties, but it is iareduced rate of tax which can't exceed tO percent. on these rentals. Statlor SMtT1t. Mr. Chairman, could I ask at question there? The CIIAIIMAN, Senator Smith? Senator SMITrI. I mitusIIno that that sort, of an exchange woulld be a lot more, to the advantage of the United States and that that is why the Autstrians wished to go a little easy on it. Is that right? (2195)

    DOUBLE TAXATION CONVENTIONS

    Mr. STAm. That's right. Senator SMITH. But we have the big bulge on that. Mr. STAM. That's right.
    CONVENTION WITH AUSTRIA-PROFITS ATTRIBUTED TO PURCHASES

    "This provision differs from corresponding provisions of a number of other tax treaties which provide a complete exemption for film rentals. Second, the pending convention, unlike other recent tax conventions does not contain a provision preventing profits from beinx attributed to a mere purchase." Our negotiators tried to get the Austrians to agree to that provision, but they didn't, so that still may result in some double taxation. Do you want to discuss your point on that, the difficulty you had in trying to eliminate that problem among the ne otiators? Mr. GORDON. I think the main problem there was that the Austrians felt that, under their law there was some profit to be attributed from purchasing, and we couldn't persuade them to give up the tax there. Again, it was much the same sort of thing as in the case of motion. picture royalties. The flow was principally in this direction, and they wouldn't agree to give up completely the tax on such activities. Mr. STAM. And so, an American enterprise making purchases in Austria and sales in the United States, because they wouldn't give that up, may still be subject to a double tax. BUSINESS APPRENTICES "Third article XIII, which provides an exemption for foreign stu. dents and business apprentices, is somewhat broader than corresponding articles of existing conventions, in that"-you will recall that this committee on several occasions has gone into the question of student apprentices who come over to this country for a limited period, to learn a technical trade or something of that sort. At the present time there is a 30 percent withholding tax on the amount that is paid them, and they have difficulty in obtaining suitable living conditions when the United States Government takes 30 percent of their small amount away. Senator Fulbright called that to the attention of several members of the Foreign Relations Committee, and I recall that you had a meeting on it at one time, and Mr. Smith, from the Treasury, was there. This treaty provides an exemption for foreign students and business apprentices somewhat broader than corresponding articles of existing conventions, in that it exempts salaries received by professional or business trainees from their foreign employers, if the period of training does not exceed 1 year and the annual salary does not exceed $10,000. That meets the problem that has caused quite a lot of controversy in the past. When we had that 30 percent withholding, you see, that was on the gross amount that they received, and they complained bitterly that they didn't have enough to live on in this country, and it was acting as a real deterrent toward getting these trainees over in this country. Of course, we were subject to somewhat the same problem when we had trainees abroad.
    Senator SMITH. Does this, then, make total exemption?
    CONVENTION WITH AUSTRIA-EXEMPTION FOR FOREIGN STUDENTS AND

    (i196)

    DOUBLE TAXATION CONVENTIONS

    Mr. STAM. Up to $10,000. Senator SMITH. And year. Mr. STAM. And it is only for 1 year; that's right. Senator SMITH. That ought to take care of the younger people that come over.

    foreign employer, not a domestic employer but a foreign employer who-has an employee in this country to learn a technical trade, and they are paying a salary while he is over here.
    CONVENTION WITH PAKISTAN

    Mr. STAM. That's right. And it has to be paid, of course, by a

    The next is the convention with Pakistan. "This convention, like the ending convention with Austria, does not provide an exemption for film rentals, nor does it contain a provision preventing profits from being attributed to purchases in Pakistan. Article A-now, this is r ealy the most important change in all of these treaties, this article VI that I am going to comment on now. This is the one novel change in the Pakistan convention. "Article VI, relating to a reduction in tax at source on outgoing dividends, although similar in principle, is considerably more limited than related articles of other conventions." That is not the point I was going to make. This is the next one.
    CONVENTION WITH PAKISTAN-NOVEL TAX CREDIT FEATURE

    "In addition to the above, article XV contains an important provision not contained in any other tax convention. Under this pro' vision, the United States, for tax credit purposes, will treat as tax paid to Pakistan the amount of tax concessions made by Pakistan to encourage the development of its economy and natural resources. In the case of United States enterprises, the effect of these concessions has been partially or completely nullified by existing law, because the decrease in the credit allowed For taxes paid to Pakistan has resulted in a corresponding increase in the United States tax liability." Let me give you an illustration of that. Suppose, for example, that a foreign country wants to encourage American capital to come within the country. They will offer a concession from their tax for a period of so many years. In this case it is for a period of 5 years. Of course, our company that goes into that country does not really get any benefit out of the concessions because it has to pay the full American tax on all of its income and we have had complaints from time to time-for example, I recafi the same problem some years ago when Cuba was offering some sort of a moratorium to an American company to come down there and do business. Most of those concessions run over 2, 3, or 5 years. Under this Pakistan Treaty even though the tax is not paid, for foreign tax credit purposes, we deem it to have been paid during this moratorium that can't exceed 5years, so that the taxpayer will get a credit, a foreign tax credit, for the tax that would have been paid in Pakistan if they hadn't offered the moratorium. That, of course, is to enable Pakistan to get full advantage of the concession it has made to encourage companies to do business in that country.
    78095 0-62-vol. 245

    (2197)

    10

    DOUBLE TAXATION CONVENT1ONS

    It is limited to a 5-year period, and it is limited to not more thaii 5 percent of the capital invested in that country. I would like to nave Mr. Smith comment on that, because it isa i, novel provision. We have had so much criticism in the past about American companies not being able to take advantage of these con. cessions that I think it ought to be considered very carefully by the committee. Mr. Smith, do you want to say anything on that? The CnAIRMAN. Are you going to call on Mr. Smith? Mr. STAM. Yes. The CHAIRMAN. Have you finished? Mr. STAM. Yes. The CAIRMAN. I will find out if there are any questions. Do you have any questions, Senator Smith? to cover more fully. I am interested in that point because we ae trying to work out in our mutual security program the opportunities for private business to go to these countries and tJhey want to get whatever tax benefits they can from that process. We ought tot prepared to help on that. Senator AIKEN. May I ask one question? In your opinion, Mr. Stain, will the benefitsprovided in the Pakistan Convention be likely to lead to a demand for an expansion Of these benefits to other countries? Mr. STAM. I think in a way that they will. On this particular point I think that where other countries grant these tax moratoriums over a limited period that they will like to have some provision like this in their conventions. I think that would probably be true. This is the first time that this has come up. Now the Secretary of the Treasury, I think in a speech some tinie ago, mentioned the fact that he thought this might be a practical way of dealing with this problem. Mr. STAM. He wasn't speaking about Pakistan. He was speaking about the general problem. This is the first time that it has been included in a tax convention. It is better to handle it by a convention than by legislation because there would be some concessions involved as far as the United States is concerned. The CHAIRMAN. Senator Mansfield, any questions? Senator MANSFIELD. No questions. The CHAIRMAN. Senator Kennedy? Senator KENNEDY. No. The CHAIRMAN. Then that concludes your testimony. We will call on Mr. Smith. Thank you very much, Mr. Stam. Mr. Dan Throop Smith, Deputy to the Secretary of the Treasury? Mr. SMITH. Mr. Chairman, I have a very brief four paragraph statement on the subject of all of the conventions. May I read that first and then go on to the more detailed aspects of the Pakistan Convention? The CAIRMAN. Very well. PENDING TAX CONVENTIONS Mr. SmITH. I am pleased to have this opportunity to express the Treasury's views on the income tax conventions pending before thi committee. (2198)
    Senator AIKU\'. In Pakistan? Senator SMITH. Just on that last point, which Mr. Smith is going

    DOUBLE TAXATION CONVENTIONS

    11

    I represent the position of the administration as well as the Treasury

    Department on this. There are before you conventions with four countries: Austria, Canada, Japan, and Pakistan. The Canadian and Japanese Conventions are relatively brief. They amend the full-scale income tax conventions with those two countries that are now in effect. The Japanese Cohvention merely provides for exemp-. tion on a reciprocal basis of the interest received by the ExportImport Bank of each country from sources in the other country. Japanese law now exempts such interest on the basis of reciprocity, and approval of the convention would bring into operation the Japanese exemption. The Canadian Convention contains one major modification and several minor ones. Principally, it would modify the convention provision now in effect which limits to 5 percent the withholding tax applied in each country to dividends flowing from a domestic corporation to a parent corporation in the other country which owns at least 95 percent of the stock of the subsidiary. It is proposed in the convention to reduce tius ownership require,. ment to 51 percent (by I to 4 corporations). This will make possible greater participation of Canadians in American-owned corporations created in Canada. Similarly it will make possible more American participation in Canadian-owned corporations created in the United States. The Austrian Convention is similar in all significant respects to the income tax conventions which are now in effect with most Western European countries. It presents no novel issues and would place our trade and investment relations with Austria, so far as income taxes are concerned, on the same plane as with other European countries.
    CONV;.N*TIOX" WITH PAKISTAN--NOVEL TAX CREDIT FEATURE

    It is the Pakistan Income Tax Convention which, though in most respects similar to our other conventions, contains a new provision. The Pakistan Corvention provides that the United States will give credit for income taxes imposed on profits derived in Pakistan by an American taxpayer engaged- in business operations there. This is the usual provision corresponding to domestic law. But it also provides that the United States will give a credit to corporations for the income tax which Pakistan gives up in an effort to induce new capital investment in industrial ventures. The exemption granted under Pakistan law is for a maximum duration of 5 years and applies
    to profits up to 5 percent of. capital invested in the now venture.

    . As you know, at the 1resent time the credit allowed under our income tax law for foreign taxes operates in such a manner that the exemption granted by Pakistan is, for all practical purposes, nullified. To the extent thadt Pakistan reduces its taxes on a United States corporation engaged in business there through this device, the United States tax on that corporation is increased. The convention before you would help effectuate Pakistan's efforts to attract investment by limiting its high taxes in certain instances. I and my associates from the Treasury will be glad to answer such further questions as you have, but might I just elaborate because of the questions that have already come up on this Pakistan provision. It is a new and distinctive provision. A suggestion that we would give sympathetic. consideration to something of this sort was first

    (2199)

    12

    DOUBLE TAXATION CONVENTIONS

    made by Secretary Humphrey at the Rio conference in the winter of 1954-55. Reference to it has been repeated at various times in messages of the President to the Congress, the economic messages and I think in some instances the budget message. The situation simply is this. Let me perhaps oversimplify by giving an illustration. Assume that another country has thie same tax rate that we have, 52 percent, assume further that the other country decides in order to induce new private investment to waive part of ita tax for a period of years, let's say 5 years. Again for pur. poses of simplicity let's say it cuts its rate in half to 26 percent. The effect of that insofar as an American company is concerned is that instead of having the full foreign tax paid to the foreign country as an offset to the United States tax, in which case there would be no United States tax, the foreign tax being cut in half, the foreign tax credit is cut in half and the-United States picks up every dollar, the United States Treasury picks up every dollar of tax that the other country has waived. That is what is meant by sang that operation of the present law in effect nullifies the tax concessions that foreign countries make and foreign countries have understandably said that what they d&to encourage both domestic investment and foreign investment in their countries in developing their private enterprise systems is, to repeat, nullified insofar as American companies operating down there are concerned. Senator MANSFIELD. Mr. Smith, does that apply to oil companies too? Mr. SMITH. That would appl to any and all companies. Senator MANSFIELD. Does that apply to the investments in the Middle East? Mr. SMITH. There are no treaty provisions of this sort, in fact there are no treaties with any of the Middle Eastern countries, Senator Mansfield.
    Senator MANSFIELD. Are there any executive agreements?
    Mr. SMITH. No.

    Arabia which was entered into about 1940 dealing with friendship, commerce, and navigation matters? best of my knowledge. ventions? entirely.
    Senator MANSFIELD. What you mean is there are no tax conMr. SMITH. Tax conventions, I was referring to tax conventions

    Senator MANSFIELD. Are you sure? Mr. SMITH. I don't believe there are any executive agreements. Senator MANSFIELD. Isn't there an executive agreement with Saudi Mr. SMITH. There may well be. That has no tax provisions to the

    Senator MANSFIELD. But in relation to the comparison you made, the big American oil companies in the Middle East are allowed their depletion allowance.

    depletion allowance regardless of where they operate. Senator MANSFIELD. Regardless of where they operate?

    Mr. SMITH. By statute all American oil companies are allowed the

    these American companies would be given a privilege in the form of

    Mr. SMITH. That's right. Senator MANSFIELD. And with reference to the example you gave

    (2200)

    DOUBLI TAXATION C0NVINTIONS

    13

    a tax reduction which would place them in a favorable comparison with the local corporations. Mr. SMITH. To the best of my knowledge, Senator Mansfield, there are no tax concessions in the Middle East. Senator MANSFIELD. No, I am back to the country of Pakistan.
    Mr. SMITH. Yes.

    Senator MANSFIELD. They would be given a favorable position vis-a-vis the local corporations through a tax reduction. Mr. SMITH. They would be given the same position that other companies operating in Pakistan would be given. Senator MANSFIELD. Other foreign companies? Mr. SMITH. Other foreign companies or other Pakistan companies. Now the President's statements have always indicated that the taxsparing laws should be recognized subject to appropriate safeguards and restrictions, and in our negotiations we approach t his, I might say, with healthy skepticism, to make sure that the taxes that we recognize, the spared taxes that we recognize, are bona fide taxes, that they are not taxes that are artificially imposed in a legalistic war just for the sake of being waived. For instance, as sometimes in eirect happens, a foreign country might: work out a particular form of income tax that in effect applied only to American companies operating in a certain type of industry or operating at a certain level (and in certain of the smaller countries there may be only 1 or 2 companies that have an income of let's say more than a million dollars a year or $10 million a year) or they could so schedule their rates that the tax would appear to apply generally, but in effect apply only to American companies, and then waive that tax. Now if that is the sort of situation we are confronted with, we would not recognize that in any subsequent rm,',otiations. But in the Pakistan situation, their concession is an over.ill concession available to all investment in certain types of industries that they desire to develop to further their own economic development. As Mr. Stain has indicated, as he appraises it, this is something that should be approached from. the stand point of negotiation and not by statute. I heartily concur in that. We would be greatly concerned about a statutory provision. because it might be possible to create legalistic taxes that were never really expected to apply, and then waive them. Also, mid of at least as much importance, we think this should be done only by treaty, because it is a significant bargaining point, a basis for concessions, getting concessions from the other coun-tries. Now as Senator Smith has indicated in connection with the movie royalties from Austria, the flow is largely one way. With countries that are still in the relttively early stages of economic development, the income is generally and overwhelmingly all in one direction, and we have not been able to get, thus far, any significant tax conventions with those countries. As we explored the possibilities of what sort of reciprocal concessions might be made, it occurred to us in the Treasury something over 2% years ago that this was the most significant one, and in consultation with the State Department and with the various other groups in the executive branch of the Government, it seemed to us that this was one that we properly could concede because the other countries had a valid complaint that we were-I am repeating myself again-nullifv(2201)

    14

    TAXAUTOW COVI DOUBIv

    ONS

    ing their tax concessions, what they forewent in the way of taxe merely put something into the United States Treasury instead of encouraging the economic development there. PAKISTANI CONCESSIONS IN CONVENTION WITH PAKISTAN

    Furthermore it was the basis for other concessions. In the Pakistan Treaty let me list six concessions. These are on a reciprocal bass, but the flow is so overwhelmingly from Pakistan to us. I might say the total amount of income is very small but proportionately it is virtually all from them to us. These are the concessions which we think will make Pakistan a much more attractive place for private investment. First Pakistan reduced its tax on corporate income by 6 percentage points, from about 59 percent to about 53 percent. hat is on income from United States companies operating there. It gets it down to where there is not a very strong tax deterrent, to investment in Pakistan. They eliminate a tax on something like our undistributed profits tax on publicly hold companies when the income is invested in Pakistan. Mr. STAM. We don't have an undistributed profits tax. Mr. SMITH. That is right. I am very glad to say that that went out in 1938. I should use the more technically correct term, the tax on unreasonable accumulation of surplus. The Pakistan law pro. vides a tax on income that is retained in the corporation. They want it paid out so it would be subject to tax in the hands of the indi. vidual stockholders in Pakistan. That would not seem a particularly reasonable provision from the standpoint of foreign companies operating there that are using their earnings to expand the business there, and Pakistan agreed on a reciprocal provision of that sort. There is reciprocal exemption on air traffic similar to what we have which has already come up in other treaties. Now they did not concede reciprocal exemption on shipping, because there is an appreciable amount of United States shipping going out of Pakistan ports. There is no Pakistan shipping coining into United States ports. That was a source of income that they were not willing to forego. We regret that we do not have that usual provision, but it is understandable why from their standpoint their are not willing to concede it, and it is part of the give and take of all of these negotiations, and we did not insist upon it. Furthermore the Pakistan treaty adopts the concept that is basic in all of the treaties of a so-called permanent establishment. That is, the foreign country will tax income only if the American company. operates through a permanent establishment, and reciprocally we will tax Pakistan business here only if it operates through a permanent establishment. That is as I say a basic provision in the treaties, and it is really a necessary provision to avoid having double taxation, c because without that the foreign country may tax income arising from c casual transactions there. Under our law if there is no permanent establishment over there, no real situs of business , we would say that there is no source of income there. So even though the income is taxed there we would not allow a credit against our tax for the tax in that country, because we say the t income is derived here.

    (2202)

    DOUBLE TAXATION CONVENTIONS

    15

    Senator KENNEDY. Mr. Smith, these various points are all part of the convention with Pakistan. Senator KENNEDY. Are most of these concessions made as the result of pressure from Pakistan or as a result of pressure from the United States? Mr. SMITH. No, these concessions are the concessions-I don't know that I'd use the word "pressure" but it is part of the negotiation. These were things that we typically have in tax conventions with other countries that have reached about the same stage of economic development that we have. In the countries that have not reached that stage, since the flow of income is from them to us, they are disposed not to Five up the right to tax any way in which they can assert a source of income in that country.
    UNITED STATES CONCESSIONS IN CONVENTION WITH PAKISTAN Mr. SMITH. Yes.

    so Is, I,

    38 V.

    Now it was our concession on the tax sparing provision in the negotiations that served as the balancing item for their concession on these other points that I mentioned. There was another one by %hich they will recognize, in determining the amount of income subject to tax in Pakistan, certain home office expenses. That is a common provision
    intreaties.
    MUTUAL BENEFITS IN CONVENTION WITH PAKISTAN

    substantial American assistance, I want to be sure that the negotiations and the concessions are arrived at just because of the economic trading, tax trading as in this case, and not as a result of the fact that tie United States might, have an advantageous position over all of the relationship v ith. the second country. Do you feel that in this case the benefits derived were mutual? Mr. SMITH. Oh, yes; I think very definitely so. I think both the nego.iators on the side of both countries felt this was a matter of clearly mutual advantage that would encourage, by removing present tax deoerrnts to the flow of investment and the flow of income in the future.
    CONVENTION WITH PAKISTAN-NOVEL TAX CREDIT FEATURE

    which i3 the recipient-any country, not necessarily Pakistan-of

    Senator KENNEDY. Mr. Smith, the only point was that in a country

    Senator KENNEDY. IS it the plan of the administration to attempt to arrange a similar plan witJi other countries on this question of fore-

    going our tax collection? Mr. SmITH. Yes. Well, it depends entirely upon the situation and circumstances in the particular countries. Senator KENNEDY. As I understand it, you say this is unique in the case of Pakis.an. Mr. SMITH. This is unique. Senator KENNEDY. Don't you anticipate that the sanie advantages will be claimed by a great many other countries? Mr. SMITH. Yes, and I also am sure that we will claim the same advantages to the United States as part of the reciprocal arrangements with any other countries.

    (2203)

    16

    DOUBLI TAXATION CONVENTIONS

    The CHAIRMAN. Then would you foresee a general renegotiation of existing conventions? Mr. SMITH. I put it this way, Senator Green. With existing treaties, no, because thus far our treaties have been with countries that have about the same stage of economic development that we have. They have tax rates approximating ours. They do not jive tax con. cessions so there simply would not be any basis for renegotiation of any significant number of such treaties. 'the only one that I think of, and I would like to be corrected by Mr. Gordon, is Honduras, the treaty with Honduras which was signed last year and approved last year. they.develop If a tax sparing convention, they would be in a some. what similar position. Now we do with many of the Latin American countries anticipate that this same point wiltcome up in connection with the bargaining on tax treaties, and there are several Latin Amnerican' countries that have now asked for negotiations. The CHAIRMAN. Have you made any lines of demarcation between the countries where you would grant it and countries where you wouldn't?. Mr. SMITH. I would say only, Senator Green, that these negotia. tions-each country is unique. The CHAIRMAN. You have no general principles to apply? Mr. SMITH. Our general principle isThe CHAIRMAN. I want to know the general principle as to the line of demarcation, if you have any. Mr. SMITH. The general principle is that where a country in the course of its domestic policy, in trying to develop new investment, domestic and foreign in private enterprise gives a tax concession for a new investment which is a bona fide, aboveboard one available to ill countries, and where we, and we alone by our low are nullifying that tax conees.ion, then we will give very sympathetic consideration from the st-indpoint of the executive branch of the Government in attempting to negotiate treaties, giving recognition to that tax sparing, if in the course of those negotiations the other countries wil also make concessions which are clearly to the advantage of this coua try. That is a long sentence, but in general I might say this applies to what has boen referred to as underdeveloped countries. That has certain connotations. The CHAIRMAN. Senator Smith? Senator SMITH. Mr. Smith, I want to ask you this question. We in this committee are very much interested, of course, in the encouragement of private enterprise. Mr. SMITH. Right.. Senator SMITH. Especially now since we have a new approach to underdeveloped countries. Mr. SMITH. Right. Senator SMITH. What I am asking you is whether this Pakistan formula you have here is looking forward to the setting up of a policy for development along this line.

    Senator SMITH. That is what I wanted to know. In other words, while you say it is unique, it is unique only in the sense that you haven't had exactly the same problem before, and you are starting (2204)

    Mr. SMITH. Yes.

    DOUM TAXATION CO MMTONs

    17

    on a new trail along the line of our wanting to encourage private enterprise to take the place of the taxpayers' money in these countries.
    Mr. SMITH. That's right, and it is of significance to underdeveloped countries and we think can be of great importance. Senator SMITH. Do you regard it as a desirable precedent to establish? Mr. SMITH. We regard it as a desirable precedent, and I want it to be perfectly clear that it is a precedent and not sui generis. Mr. STAM. I might say, Mr. Chairman, if I could interrupt there, in all of these treaties there are certain things that the committee from time to time has raised questions about. For example, the question of capital gains realized by foreigners in this country. This treaty doesn't attempt to deal with that subject. Then, on the other question that we had up in connection with, I think it was the French treaty, this question of permitting a foreign corporation to engage in business in this country without being subject to the tax on unreasonable accumulations of profits. We haven't attempted to permit that under this Pakistan Treaty, as I understand it, so that in framing all of these conventions, there are certain things that the negotiators have felt they just could not concede.
    TAX CONVENTION NEGOTIATIONS

    is Mr. first. the SMITa. That's right exactly. This is unique only because it Senator SMITH. That's what I want to bring out.

    you always will insist on as a matter of principle, and others about which you can negotiate? Mr. SMITH. I really think, Senator Green, that each negotiation does in a sense stand by itself. Certain countries have very great insistence upon provisions. I suppose as basic as any is the permanent establishment concept. The CHAIRMAN. I am not asking that. I am just asking the general items, and then we will go into particulars later. Mr. STAM. I would think that this is something that would motivate the negotiators, that is, they don't want to enter into any agreement which would have a tendency to create an unfair competitive advantage in this country, where foreign corporations could come into this country and do business to the disadvantage of American corporations engaged in business in this country. I think that is the general guiding principle. Mr. SMITH. That's right. principles which you are following? Mr. STAM. I don't know that it has been reduced to writing, but there are certain principles of that sort which I think do influence the negotiators. Don't you think so, Mr. Smith? Mr. SMITH. Yes. them to writing? Mr. STAM. I would think so. The CHAIRMAN. Will you favor the committee with some such statement? (2205)
    The CHAIRMAN. Don't you think it would be worthwhile to reduce The CHAIRMAN. I wonder if you have reduced to writing the general

    The CHAIRMAN. Have you any tables showing the general things

    18
    The CHAIRMAN.

    DOUBLE TAXATION CONVENTIONS

    Mr. STAM. Surely.

    (The information requested had not been received at the time these hearings went to print.)
    The CHAIMAN. Thank you. Any other questions?
    CONVENTION WITH PAKISTAN-NOVEL TAX CREDIT FEATURE

    Mr. STAM. All right.

    General principles that are as specific as possible.

    Senator KENZDY. I understand that a Prof. Stanley Surrey of Harvard has some objections to one of these conventions or some of them and that he has had some conversations with you. I don't know Professor Surrey and I don't know if you would care to state what his objections are.

    I am not acquainted. I understand there are some objections and I understood lie discussed them with Mr. Smith and I don't know if Mr. Smith can state them or not. Mr. SMITH. I am afraid I can't recite them very specifically. I know Professor Surrey very well. In fact when I had a little bit more time at Harvard than I now have he and I gave a joint seminar and we have argued with each other and with students there as wed as in other situations. He told me some months ago that it was his impression that there was no need to make a concession of this sort, that we could get treaties otherwise. Senator KENNEDY. You mean on the tax? Mr. SMITH. The income tax concession. I told him two things. I said in the first place I thought it was a fair and reasonable thing to have, because without it we were-and I can only repeat my phrasenullifying the tax concessions that other countries did give, nullifying it only for American companies. Secondly, that in the give and take of negotiation, we were not able to get treaties. I don't want to put Professor Surrey in the position of being in the academic cloisters saying what ought to be done. But those of us who are trying to do things find that what he might theoretically like is not in fact practical. But I think I am inclined to do that in this instance and say also that this concept is one that has had very full and very high level discussion over many months in the executive branch. We think it is a matter of mutual and reciprocal advantage. We think the concession is a reasonable one on our part. We think that the treaty that comes out of it is a good treaty, good for both countries, and we think the principle is a desirable one to apply with other underdeveloped countries. I don't know what his specific objections are other than he said he thought we could get the treaty without it and I said I thought it was a reasonable thing, and secondly I didn't think we could get the treaty without it, and I still stand on both of those points. Senator KENNEDY. 1 think that in the case of Pakistan it may be worthwhile to do this, and it may be generally, but I think that we should proceed with a good deal of caution. Mr. S6MITH. I assure you we have proceeded with a very great caution in the course of the negotiations.

    Senator SMITH. Who is that, Senator? Senator KENNEDY. A Prof. Stanley Surrey of Harvard with whom

    (2206)

    IL

    DOUBLE TAXATION CONVENTIONS

    19

    Senator KENNEDY. We want to help Pakistan but we don't want

    to give a bonus to a lot of American companies who are doing this as a tax dodge. I understand that in some of these countries which have f had this tax encouragement, after the period of time has passed they are liquidated and then they start all over again in a new corporate entity, so that I think we should certainly concern ourselves with how this is carried out. Mr. SMITH. I assure-you that exactly that, situation is one that we are concerned with. Senator KnNNEDY. Mr. Chairman, may I ask another question? Mr. Strat, I think was going to comment on that. Mr. STAM. The Finance Committee has requested the staff to make a report on this Arabian problem and we expect to have a report to the committee very shortly on that, the oil problem in the Far East. Senator MAN^SFIELD. I have asked the Senator to yield. I am going to ask one question. Is the Finance Committee looking into the charge made by Senator Williams on the Senate floor about the use of funds by American corporations overseas in the form of bribes? Mr. STAM. Frankly, that hasn't been called to my attention, Senator. They may be looking into it but that has not been referred to the staff, but this D Senator Smith, you go ahead the report.we will Senator KENN E other has and we are working on and then Y. come back to that. Senator SAnTH. My question is this, Have you been working this out with the State Department?
    Mr. SMITH. Oh, yes.

    Senator SMITH. And with those who will be advising on the setup of the ICA for next year? Mr. SMITH. Oh, yes. Senator SMITH. Because I can see the possibility of approach between your Department, the Treasury Department, and the ICA Administrator, whoever he may be after Mr. Hollister leaves, in dealing with these underdeveloped countries. Is that going to be worked out jointly? MNlr. SMITH. Very definitely so, and "this particulhw provision has been discussed-I 'forget the exact namie of the body--with the interdepartmental group headed by Mr. Clarence Randall that brings together the State, Treasury and the various other groups. As a matter of fact, I spent on 2 different occasions half an hour or so discussing this tax sparing concept with that group, and have received not only approval but hearty encouragemient from all of them to try to use it. Senator SMITH. Deputy Under Secretary Dillon from the State Department, I assume lhas been in on these conferences? Mr. SMITH. I have discussed this specifically with Secretary Dillon and Secretary Herter. Senator KENNEDY. Going back to what Mr. Stain said, what is it that the Finance Committee is going to look into in connection with Saudi Arabia? Mr. STAM. The problem came up you know as to whether the particular tax which was allowed as a foreign tax credit was really a tax. They started out you know by paying a royalty and then later on part of it was converted into a tax paid to the Saudi Arabian Government. The committee has asked us to look into that question

    (2207)

    20

    DOUBLE TAXATION CONVENTIONS

    very thoroughly and make a report. In doing that we are also under instructions to consider the whole field of the foreign tLax credit, just how it is working, and whether we have any suggestions for improving the situation.

    percent, then do they say that that is a royalty or do they say it isa tax Itnld therefore attempt to dedtict that froin their Anierican tax? Mr. STAM. You see, if that happens to be a tax, then it would he subject to the foreign tax credit, and the foreign tax credit is worth a lot more than a mere tax deduction for the royalty paid. Senator KvNNEtDY. How have we treated this inl the past? Mr. STAM. As far as royalties, generally speaking they are
    deductible. Senator IMANSFIM1:k. Deduct,ible? Mir. STAM. Are deductible as a business expenlse, and taxes imposed by a foreign country are allowed as a credit against the United St ates ttx within certain limitations. It is iore to their ttdva ttage of cotiw

    Senator KENNEDY. When they pay thte Saudi Government 50

    to claim thiis as attax credit thian it is to claim it, as a royalty. Now they are still paying a royalty to the Saudi Arabian Government, but part of the amount they pay now is also in tHie form of a tax levied by the Saudi Arabian Government. The question that we have been asked to look into, to get all the material and the fatets on, is to determnine whether it is in efrect, tax, and whether it. is imposed generally like a tax or whether these oil companies are just singled out for si)ecial treatment. We are getting material on that. for tie co(ntmittee. Int connection witl that studly, it is very interesting it seems to mie because there has been| it charge made that tme foreign taxes, that is the foreign tax credit, to somie extent is an indu(emnent ott the part of these foreign countries to raise their rates because the United States will bear part of tite burden, and we are looking into that angle of it. too. The CHAIRMAN. Thank you very much. I want to put into th00 record at this point a letter bearing on this subject. It is a letter from the National Foreign Trade Council, Inc., addressed to me as chairman of this committee and dated July 20. I will put tho wholo letter in the record. (rhe letter referred to follows:)

    DMAR SIR: Reference is made to the convention between the Iftited States of America and Pakistan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on July 1, 1957 (S. Ex. N, 85th Cong., 1st sews.), which is now pending before your comn- I mittee. I The National Foreign Trade Council's tax committee has considered this convention and urges that the Senate give its advice and consent to ratification of the convention during the current session of Congress. It is noted that the convention has certain limitations and omissions which, it is respectfully urged, should not constitute precedents for future conventions. The pertinent matters to which reference is made are as follows: 1. It is believed that the provision described as "an important step toward avoiding nullification of the efforts of a foreign country to encourage industrial development through its tax law" -isset forth in article XV (1) of the convention should be implemented more broadly in future treaties. 2. The provisions concerning exemption from tax by Pakistan of pensions and annuities from the United States do not apply, in part, "to a pension or annuity from a fund, under an employees' pension or annuity plan, contributions to which under the tax law of the United States are deductitile in determining the taxable

    income of the employer" (art. X (3)). This limitation does not appear in other

    recent conventions, e. g., article X of the Tax Convention with the Republic of

    (2208)

    DOULE TAXATION CONV0 NS N

    21

    Ilonduras Relating to Double Taxation (S. Ex. K, 84th Cong., 2d seas.), article XI of the Convention on Double Taxation with the Federal Itepublio of Germany (8. Ex. J, 8&l Cong., 2d sew.). It is believed thlat this lindtation could constitute an undesirable precedent because It fails to remove one of tile specific instances of double taxation. 3. The convention contains no provision for the allocation of executive and general administrative expenses attributable to permanent establishments. Such a provision is contained in other recent conventions, e. g., article III (2) of tihe Tax Convention with the Rtepublie of flonduras Relating to Double Taxation (8. Ex. K, 84th Cong., 2d sess.) and article II1 (4) of the Convention on Double Taxation with the Federal Repul)lic of Germany (S. Ex. J, 83d Cong., 2d sess.). Stich a provLyion Is very important to business and its omission from this con. vendion should not, be considered as it precedent for future conventions. It is believed that from an overall point of view the convention concerning income taxation with Pakistan will be of considerable assistance to American companies engaged in international business in Pakistan, or in trade with Pakistan companies, and accordingly should be ratified. It is requested that this letter be made part of the record of any consideration ef the convention. Very truly yours, W~mIJ~AII S. SwIN(ul,, President.

    There is one other witness who I think came in a provisional capacity, in that lie might be called on if needed. Mr. Eldon B. King, Office of International Tax Relations, Bureau of Internal Revenue, Department of the Treasury. Unless lie can advance some information which lie thinks can help the conunittee, we won't call on him. Mr. KING. No, Mr. Chairman, I haven't anything to add. I think the subj ect has been very fully covered. The CAIMMAN. If so' and if there are no other questions to be asked, Ithe meeting stmids adjourned. 'Tlhank you very much, gentlemen. (Whereupon, at 11:20 a. m. the hearbig was adjourned, and the committee proceeded to executive session.) (The following letters were received for inclusion hi the record:)
    At-voRD & ALVORD, Washington, D. C., July 80, 1957. lion. Timononr, FRtANCIS GREENq, Chairvnan, Senate Comminttee on Foreign Relations, notee Office Ituilding, Washington, D. C. MY DEAR SHNATOR CGHIEN: I am writing in my capacity as chairman of the conminittee on taxation of the United States Council of tile International Chamber of Commerce with regard to the Income-tax conventions pending before the Senate Committee on Foreign lkelations. You are respectfully requested to include this letter in the record of the July 30, 1057, hearings on these conventions. The Committee on Taxation of the United States Council endorses the income. tax conventions pending before your committee and recommends their ratification. It has been the consistent position of our committee that the program of bilateral treaties for the elimination of double taxation of income is a desirable

    While we recommend ratification of the tax treaty with Pakistan, we oppose broadening of the provision for exchange of Information beyond that necessary to carry out the provisions of the treaty and prevent fraud and avoidance. The Pakistan treaty would extend the scope of the exchange-of-information provisions beyond that contained in present treaties so as to cover administration of all statutory provisions relating to taxes subject to the treaty. With respect to this matter, we respectfully refer you to the points developed in the hearings conducted by a subcommittee of this committee on the French convention in 1947. We would like to discuss a novel provision which makes Its first appearance in the Pakistan treaty. This is tile so-called tax-sparing provision. Briefly, the tax-sparing provision permits United States taxpayers to take a foreign tax credit against their tentative hnited States income-tax liability for taxes which would normally have been Imposed by Pakistan, but which Pakistan has spared them from paying by special exemption or tax reduction.

    o01e.

    (2209)

    22

    DOUBLE TAXATION CONVENTIONS

    Pakistan normally imposes an Income tax on corporations at the rate of 31. percent, plus a profits tax at the rate of 16% percent, and plus a supertax at rati varying between 12.5 and 25 percent. Pakistan law provides an exemption from all three of the forepoing taxes for certain now establishments commenced between August 15, 1947. and k[arch 31, 1958. This exemption is for 5 years after the year in which the establishment is set up, and the amolmt of income eligible for the exemption is limited to 5 percent of the capital Invested in the establishment, Dividends paid out of exempt income are themselves exempt. The Pakistan' tax treaty wo'ild permit the amount of the corporate income ta and supertax, payment of which is excused (or spared) under the exemption, to credit )No be credited against tentative United States Income-tax liability. would be allowed under the treaty by reason of exemption from the Pakistu profits tax. We commend the firat recognition by our Government of the basic ditliciulty with our system for the tax treatment of foreign income as that system is applied to underdeveloped countries. We are forced, however, to express our diappoint. meat that the State Department and the Treasiry have chosen sich as inadeq'iAt# device as tax sparing to cope with this difficulty. The difficulty is that uider. developed countries which need and want American private capital are thwarted in their attempts to reduce the tax barriers to swch investment by the operation of our own tax system. Under our tax system, as it has previously l:een applied, United States taxpayers would receive no benefits from either Sl ecial exemptions or tax reductions offered them by underdeveloped countries or by consistently moderate levels of income 'taxation in such coutatries. Instead, the nmargin between the foreign tax rate and our own income-tax rate has simply been swallowed by o-or Tre.aury. This result is, of course, inconsistent with our avowed policy of encouraging the development of friendly, underdeveloped countries through the investment of Tilhe tax-sparing concept private American capital. used in the Pakistan treaty attempts to solve thi difficulty by giving American taxpayers the benefit of certain special concessions allowed from the general rates of Pakistan tax. While considerably better t(Ian nothing, as a long-range program it. leaves much to be desired. The tax-sparing concept offers no solution in the case of underdeveloped countries which hift adopted a general policy of low or moderate levels of income taxation applicable to all businesses. Vet, in all probability, potential private Investors are much more likely to be Interested in Investing in countries which have adopted such policies than in countries which have estal;lished high rattl of Income tax and then introduced short-run devices for exemptioiis, rebates, and rate reductions In special cases. This is probably the biggest objection to the tax-sparing ideas as a solution for friendly, underdeveloped countries in general. The tax-sparing concept is incapable of coping with a low tax rate system. Instead, the lower the tentative, or ostensible, tax rates imposed by the foreign country, the smaller the foreign tax credit against United States taxes for tax remitted or exempted can be. The benefits of the tax-sparing provision In the Pakistan treaty will, fortunately, be available to sumc American businesses which have already been established, but it will benefit only those which were established after the effective date of the Pakistan exemption provision. It is unfort mate that the I'lakistt'.n Iast did not make its benefits available to existing businesses, and, in re-oilelldg ratifice.tion of this treaty, we respectfilly sugge;t that this committee mnif-oe it clear that the tax-sparing provision in the Pakistan treaty should not bl considered a precedent that discrimination against existing 'businesses should be accepted as a part of the foreign policies of the United States. Likewise, we assume that ratification of the Pakistan treaty containing the tax-sparing provision will not be construed as acceptance by t~he Senate of the principle that it is desirable that any relief from foreign taxes (and correhltive relief from United States taxes) should be keyed to a fixed rate on return of capital and restricted to the tax-sparing principle. The exemption of 5 percent of Invested capital was fixed by the Pak stan Government for reasons best known to it, and osir treaty negotiators, presumably, merely took the Pakistun law ai they found it, without approval or disapproval of his device and witheoat the establishment of any precedent affecting the negotiation of fbtmre treaties. In principle, the best solution to the difficulty which is giving rise to the tay sparing provision in this treaty is recognition of the exclusive right to taxation by 1 the country in which Income originates. This is the position of the Internil ion, of Commerce. We fully recognize, however that this p-inciple IS Chamber contrary to the historic policy of this country of taXing Its taxpayers on income wherever originating, andwe realize that a change in this policy would be beyond

    (2210)

    DOUBLE TAXATION CONVENTIONS

    23

    To thlu end we urge an energetic program of bilateral investment treaties with those friendly and underdeveloped countries which need and want private Americaln Investment. Such treaties offer an opportunity (as yet unrealized) to encourage the flow of private capital from the United States into the development of such countries by removing, so far as ispossible, the impediments to private investviients exiitlng in the foreign countries. For example, if serious problems nationalization, nonconvertibility of currencies, freezing of capital or earnings, discriminatory local laws and practices, restrictions on im ports of raw materials or machinery, prohibitive taxation, etc. In addition, they could attempt to remove the barriers existing under our laws and their laws by providing, where appropriate, reciprocal freedom front taxes for a period of tinm., reducing our tax rates so as to make lower tax rates in the underdeveloped countries effective and restove the incentive under our tax law for foreign countries to increase their taxes, permitting the deferral of our taxes on earnings reinvested in such countries, making certain of the underdeveloped countries' taxes specifically subject to our foreign tax credit, treating dividends of corporations organized to carry on business or invest in the underdeveloped countries like dividends of domestic corporatiors, exeml)ting earnings brought back from such countries from treatment as personal holding company income or as income of corporate ions improperly accu "uleting surplus, treatltig funds brought back as return of capital until the investment it recovered, making losses deductible from United States Income, preserving the special status of capital gains brought home, and by other similar and applicablee policies. We believe that only through treaties of this type, negotiated with the aid of persons falriliar with the problems, together wiltplans, where necessary, for developing and providing skilled personnel, can the flow of goods, services, and private, cainj)tal from the United States into the les.er developed countries be encourage . Respectfully, ELLSWORTH C. ALVORD.
    H1oUsE or REPRESENTATIVES, eAik In any particular country,, such treaties could provide protection against

    tax.sp),,ring device.

    the responsibility of this committee. I suggest, however, that the bilateral-treaty device offers an opportunity for us to make low tax rates in underdeveloped countries effective without the limitations and complications inherent in the

    Ron. THEononE F. GREEN,


    United States Senate, Washington, D. C.
    DEAR SENATOR GREEN:

    )Washington, D. C., July 29, 1057.

    It has come to my attention that the Foreign Relations Coinivittee will soon consider in executive session the Canada-United States tax convention. The president of the University of Rochester, who is a constituent of wine, has written me concerning a matter involved in the convention which is of great concern to a number of American colleges and universities. This is the fact. that, under the provisions of the convention, a Canadian who wishes to contribute to an Amtriean u.i'versiy can deduct, for tax purposes only inconre earned in the United States. Thi;, of course, works a real hardship in the many instances where th,- Canadi'in who wishes to contribute .- rns all his noney from Canadian a S0onrces and, as a result, can only give in a limited fashion. The president of the university inform's me that lie understands the Canadian Governivent itself i-; willing to liberalize the provision to the extent of allowing tax deductions based on contributions made to clinitable organiizations from the entire Incone of Canaditin citizens. This concession would, of course, be contingent upon an equivalent concts:ion made on the part of the United States. Espci-lly in view of the close bonds which now exist between this country and Canad% and the growing interest among our educational institutions in studying the C'naditn econo'Ic and political systems, it would scene that the possibility of encouraging contributions by means of an amended tax convention should bW givwn close study. I would app-4iate very much if you would keep this matter in mind during consideration of the tax convention, and would bting it to the attention of the committee, if you deem it appropriate. With all good wivlhes, I am Very sincerely yours, KENNETH B. KEATING.

    (2211)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    HEARING
    IBFEFORE TUIB

    COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE


    EIGHTY-FIFTH CONGRESS
    FIRST SESSION ON INCOME TAX CONVENTION WITH PAKISTAN (EX. N, 85TII CONG., 1ST SIESS.)

    AUGUST 9, 1957
    .....Nol

    Printed for the use of the Committee on Foreign Relations

    UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1957 (2213) 78095 0-62-vol. --- 6

    OOMMITTEDE

    ON FOREIGN RELATIONS

    TIIVODORK FRANOIS GREEN, Rhode Whand, Cloirnam J. W. )tIII1IIIOIIT. Arkmanas ALKXANI),;R WILKY. WiLsnoin JOHN 8I'AKKM AN, Alilwuia II. ALEXANI)ER $M ITll, Now Jersey flu IIMI1T It. HU M I'll ii Y, Mijwota BOURIKE H. It'ICHKKNLOOPKII, Iowa MIKE MAN8FI.lI), Montman WIL.IAM IANOKR, North Dakota w AYNE MOWSE:. Oregon WILLIAM F. KNOWLAND, Cadlfornia R1vS.KIIo 11. IONO, ILAtibkm O(OROX 1). AIKICN, Vermont JOhIN F. KKNNF.IY, M1sumhtuiU IIOMKR H.CA1'KIIART, Indiman CARL MAR, Ctl,o/Mal' C. C. O'Dav, Cyetk I1

    ( 2014 )

    CONTENTS
    Statements bv. Ah'ord, tllsworth C., attorney at law, Washington, 1). C Carroll, Mitchell II., counsel to the tax committee, National Foreign Trade Council, Ine., New York, N. Y-, Kalljarvi, lion. '1horsten V., Assistmat Secretary of State for Economic "-.................... Affairsm Smith, lion. Dan Throop, Deputy to the secretaryy of the Treawury . Stain, Colin F., chief of staff, Joint Committee on Internal Revenue Taxation -4 ................................................... Surrey, Prof. Stanley, Harvard University Law School .............
    -...

    page

    50

    35
    62

    52 I

    Lu

    ('2215)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN


    UIDMAY, AUGUST 9, 1957

    UNITED STATES SENATE, Wa8hington, b. 0. to call, at 10:10 a. m. in the comThe committee met, pursuant mittee room, United States Capitol, Senator Theodore rancis Green (chairman) presiding. Present: Senators Green (chairman), Wiley, Smith, Hickenlooper, Aiken, Humphrey, Morse, and Long. The CHAIRMAN. The meeting will please come to order. The Committee on Foreign Relations on July 30, after a public hearing on several double taxation conventions, agreed to report them all favorably to the Senate. Subsequently, however, several members of the committee received objections to early action on the Pakistan convention which had been pending before the committee only since July 12. At a meeting on August 1, a suggestion was made that the chairman proceed with the filing of the reports on the double taxation conventions with Austria, Canada, and Japan but that he defer filing a report on the Pakistan convention. In the light of that situation, I propose, if there is no objection to reopen thehearing on the Pakistan treaty with the thought that after we have completed our hearing today, the committee may wish either to reaffirm its action of July 30 or to reconsider its action of that date with respect to this convention. Our first witness today is Prof. Stanley Surrey, of the School of Law at Harvard University, who, I understand, desires to comment on wome aspects of the Pakistan convention which may not have been fully explored by the committee at its meeting on July 30. Professor Surrey, we will be glad to hear from you. STATEMENT OF PROF. STANLEY SURREY, HARVARD UNIVERSITY LAW SCHOOL
    Mr. SURREY. Thank you, Mr. Chairman. I appreciate the opportunity to be here. I am professor of law at Harvard Law School, formerly tax legislative counsel of the Treasuy Department and formerly a special counsel to the House Ways and Means Subcommittee To Investigate the Internal Revenue Service. I have submitted, at the request of Mr. Marcy, a short statement on the Pakistan treaty and I would like to read from parts of that statement and then add a few matters not in the statement, if that is satisfactory. The CHAIRMAN. Proceed as you prefer.
    1 COMMITTEE ON FOREIGN RELATIONS

    (2217)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN RADICAL DEPARTURE FROM PRIOR TAX TREATIES

    a radical departure from prior tax treaties. This is the first tax treaty which directly reduces United States income taxes applicable to American corporations. All prior treaties simply reduced the United States income taxes payable by foreigners. They did not affect the United States taxes applicable to Americans. But the proposed Pakistan treaty in article XV, paragraph (1) for the first time m our treaty experience adopts the policy of using the treaty procedure to reduce directly United States taxes on Americans.
    CONVENTIONS TITLE A MISNOMER

    Mr. SURREY. The proposed taxation convention with Pakistan is

    The proposed treaty is entitled a convention for "the avoidance of double taxation and the prevention of fiscal evasion." This is obviously not an appropriate title since the treaty goes far beyond the avoidance of double taxation. Under certain circumstances the treaty eliminates all taxation of income from Pakistan, double or single. Under other circumstances the treaty reduces the combined amount of taxes paid below the reglar United States rate. Consequently, an appropriate title would" be "A treaty to eliminate or reduce the United States corporate income tax otherwise applicable to United St teo corporations operating in Pakistan." CONTRARY TO GENERAL TAX POLICY In recent years, the Congress has been urged by the Treasury Department and others to reduce the rate of United States corporation income t&x applicable to income from foreign sources. Generally this rate is 52 percent. Thus, it has been forcefully suggested that Congress reduce this 52-percent rate to 38 percent. In 1954, this proposal was considered at length and then rejected by the tax committees of Congress and by the Congress. Since 1954 the tax committees House Ways and Means and Senate Finance, have not given approval to similar proposals. As the record therefore stands respecting direct tax legislation, the Congress opposes the grant of any preferential corporate tax rate on foreign income. The proposed treaty, which would grant a preferential tax rate to foreign income, is thus, as far as one can judge from the public record, directly in contrast to a

    general tax policy recently expressed against such a preferential rate-

    and in this particular instance the treaty can go far beyond the reduction to 38 percent already rejected by the Congress, for it can reduce the effective rate to zero on United States corporations. PaThis policy conflict and the consequent importance of the issue,
    adopted, is thus the forerunner of what will amount to a genera! tax

    granted to income from Pakistan, it will have to be extended to a great many other countries of the world. The Pakistan treaty, if reduction respecting foreign income-a result directly opposite to that arrived at in the formulation of our legislative tax policy.
    CONVENTION'S EFFECT ON FOREIGN TAX CREDIT PROCEDURE

    are not limited to the Pakistan treaty. Once this preference is

    This treaty distorts the whole foreign tax credit procedure. Under the foreign tax credit procedure the United States in order to eliminate (2218)

    DOUBLE TAXATION CONVENTION W

    PAKISTAN

    countries. This credit is an accommodation to our investors abroad who are subject to tax both in a foreign jurisdiction and in the United States. The credit insures that the investor abroad is not adverse!. treated as compared with the investor at home. Under this credit the burden of double taxation is borne by the Treasury Department. The foreign tax credit was directly designed to meet the added tax burden of foreign investors. It was not intended to-and until this treaty did not operate to--reduce the tax burden on the foreign investor below that of the domestic investor. This treaty distorts the whole foreign tax credit procedure. It ves a credit for a foreign tax not paid. In effect this is what has ]appened. BMfore the treaty an American corporation with income from Pakistan initially would have to actually pay a 52-percent tax to the United States. But the Pakistan tax could also amount to at least 52 percent. Our foreign tax credit steps in and says to the corporation: "You need only pay the Pakistan tax since that leaves you with a 52-percent tax burden on your profits. The United States, therefore, under this situation, will forego actual collection of the United States tax. You are thus left like any other American corporation with a 52-percent tax rate." Now, for reasons of its own, Pakistan waives its tax. At that point, since there is no foreign tax burden there is no reason for the foreign tax credit mechanism to operate. The actual collection of the 52-percent United States tax, previously suspended, can now be resumed. But this treaty will come along and say that although the reason for suspending actual collection of the 52-percent United States tax is no longer present, there being no foreign tax, still we will not collect that United States tax. In effect, the treaty simply reduces the United States tax sometimes to zero and this particular corporation is relieved of its tax burden compared with other American investors-both those who invest at home and those who invest in countries other than Pakistan. Recently there was considerable discussion in the Senate regarding the Aramco situation in Saudi Arabia. Concern was expressed over the fact that Aramco did not pay any tax to the United States. Whatever may be the ultimate merits of that situation, Aramco at least paid a tax of about 52 percent to Saudi Arabia and it was the credit of this tax paid to Saudi Arabia which eliminated the United States tax. At least Aramco had a tax burden of 52 percent on its profits because of the tax paid to Saudi Arabia. But under the proposed treaty the credit is given for a tax not paid at all and there can, therefore, be no tax burden at all. If the Aramco situation is troublesome although the explanation for nonpayment of the United States tax is that a foreign tax was paid, how much more troublesome is the case where the explanation for nonpayment of the United States tax is that no foreign tax was paid. For that is what the treaty does-it treats a United States tax obligation as having been met if the corporation shows a receipt for a foreign tax never paid. The proposal thus has been aptly dubbed as a device to credit "ghost taxes." If such a proposal were adopted and were to spread to other countries, then the results would be one United States tax rate applicable to United States corporations in Pakistan, another rate applicable to (2219)

    double taxation has liven a credit for foreign taxes paid to other

    DOUBLE

    TAXATION CONVENTION WITH PAKISTANI

    United States corporations in country X, another in country Y, and so on. The United States tax rate would in effect be set by the finance minister of each foreign country, in the light of that country's overall domestic policies. This would be a far cry from the 52 percent. United States rate applicable today, whether operations are in Pakistan or India or elsewhere. It is true today that changes in foreign tax rates affect the actual amount of tax dollars collected from a United States corporation. But these changes affect only the relative size of the two components of the corporation's overall tax burden-the United States component and the of loss suffered by the They, therefore, really affect only the amount foreign component. United States Treasury Departmentthey do not affect the tax burden on the United States corporation. If the foreign tax rises, our Treasury loses and the foreign treasury gains. If the foreign rate falls, our Treasury gains and the foreign treasury loses. But the United States corporation investing abroad still would have its overall 52 percent burden-just as does the domestic corporation. Our Treasury is willing to take this loss under the foreign credit system to prevent a burden higher than 52 percent falling on our investors abroad because they ot-herwise would be subject to two taxes. The foreign tax credit is an accommodation to the fact that we live in one world with many taxing jurisdictions. But accommodation to one world does not require that tile actual tax burden on a United States corporation should actually fall below a 52-percent burdenwhich under our fiscal policies is the burden Congress believes all United States corporations should bear on their profits-because of the tax policies of a foreign country. Congress has recently and consistently refused to reduce the tax burden on United States tax corporations abroad as a matter of policy although urged to do so in the interests of foreign investors. One reason perhaps for this congressional refusal, in addition to the very significant arguments against the advisability and efficacy of using tax reduction as an incentive to foreign investment, is that the consequent reduction in tax burden wouldin the main go only to the larger United States corporations. This is because only the larger corporations are able to invest abroad to any significant extent. Congress and the Executive have firmly stated that this is not the time to reduce taxes on American taxpayers. The President has recently applied this view even as respects small business. It would, therefore, seem inappropriate at such a time to reduce taxes by treaty on one class of American taxpayers-those corporations which invest abroad-especially when that class as a whole is best able to bear its share of our heavy tax burdens. I just wanted to add one or two other matters. What I have said here deals in general way with the basic policy issue involved in this treaty. I tried to indicate that this is a serious issue because for the first time by treaty the Congress would be reducing taxes on American citizens-and in particular the American citizens involved are American corporations and by and large the largest and wealthiest American corporations.

    (2220)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN5 t" IRRATIONAL DEVICE IN THIS CONVENTION

    That is the basic issue. One CnI look at a moment at the particular device that is being used to accomplish this. This device is essentially it highly irrational and one might say an almost fantastic particularly device. In a sense, to the average layman, it would be almost fantastic to say that we will give a credit against the United States tax for a foreign tax not ever paid. In effect, the Congress would be saying to the American people, one reason why, say, General Motors or any other corporation is not paying the same United States tax as other corporations, is because it can show a receipt for a foreign tax that has not been paid. Now, it does seem to me almost fantastic that the Congress would put itself in the position of trying to explain that to the American public. Their taxes are not being reduced but the taxes on American corporations are being reduced simply because the American corporation can hand the United States Treasury Department a statement saying, "You did not pay any Pakistan tax, therefore, your United States tax is reduced." Now, it has been said that this is necessary because otherwise American corporations could not get the advantage of foreign tax conventions. A somewhat short and direct answer has been given to this by Professor Smith in a recent comment. I am quoting from his recent paper before the National Foreign Trade Council in 1956. The CHAIRMAN. Can you be a little more definitive? Mr. SURREY. Prof. Dan Throop Smith, with the Treasury Department. The CHAIRMAN. Your reference to Professor Smith was rather vague. SURREY. I am soiTy. He is well known to me and others in Mr.
    the profession. The CHAIRMAN. How are we to know which Professor Smith you have

    in mind? Mr. SURREY. That is correct. To quote from Professor Smith's paper:
    It is asserted that our tax system nullifies the tax advantages which other countries attempt to offer because the taxes which they forego, by reducing the tax credits which we allow, simply increase the tax in this country by the same amount.

    That is in a sense the argument advanced for the Pakistan Treaty. To continue the quote:
    This criticism is greatly exaggerated; it is valid only when foreign operations are conducted directly rather than through foreign subsidiaries or through for. eign subsidiaries from which all Income is currently withdrawn. Where foreign subsidiaries are used, the common expectation is that early earnings will be retained indefinitely and used for expansion. Typically the period of retention for expansion will equal or exceed the period of tax concessions; and, when this is the fact, the foreign tax concessions are fully effective.

    By and large, the overwhelming amount of United States foreign investment is in foreign subsidiary form; and, consequently, under the foreign subsidiary form foreign tax concessions are effective. Consequently the need for this treaty is really very limited. The question, therefore, is why such an irrational device was picked? (2221)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN-

    Further with respect to the irrationality of this particular device, if you really examine it, it tends to favor those foreign tax systems which are poorly conceived, unrealistic, and unstable, as compared with the more realistic and stable foreign tax systems. Yet, in the interest of American foreign investment, it would be to our interest to encourage realistic and stable foreign tax systems. Yet this treaty device has just the opposite effect. I might illus. trate that in this fashion. Suppose country A has a 35-percent corporate tax rate. It decides after examining its tax policy that it will keep that rate of tax; it will improve its administration; it will develop a stable and reasonable corporate income tax. Country B also has a 35-percent tax rate. It decides it needs revenue. It raises its tax rates up to 55 or 60 percent. This is what some underdeveloped countries do. It puts on excess profit taxes and so on. Then it begins to realize that this may discourage investment and then it is faced with a dilemma. So, what the country does is to grant a lot of tax concessions. The treaty device would favor this country B as against country A, although the same net tax result has been achieved in both countries. But the first country has kept a low and stable rate, whereas the second country has got a very erratic tax structure. And this is not fanciful. Japan has reduced its corporate rate from 55 percent to 40 percent and 35 percent in the interest of a stable tax system and in the interest of encouraging investment. This treaty device would not do anything in the case of a country like Japan. But in the case of some underdeveloped countries which have unstable tax structures, this treaty device would favor those countries, which is just the opposite of what it seems to me our policy should be. Pakistan itself is not satisfied with its tax system. It has recently appointed a tax inquiry commission to consider revision of the entire Pa'istan system as not being adapted to private, domestic, or foreign investment. If Pakistan were to decide that it would be sensible to have a low and stable corporate rate, say 35 percent, then, they would get no concessions under a treaty of this character. The result is that this treaty really injects United States policy into the policies of these foreign countries, their tax policies, and favors countries with unstable and erratic tax systems.
    EFFECT OF CONVENTION ON UNITED STATES TAX RETURN

    One other point. Under this treaty, the United States tax return is really placed at the mercy of foreign tax administration because under this treaty the question will be how much foreign tax was not paid. That has to be determined by foreign tax administrators. The administration of taxes in underdeveloped countries is by and large very weak, and one might say in many cases corrupt. That is unfortunate but it is true. They are trying to improve their systems but they do so slowly. Up 'to now, foreign tax administration has not directly affected United States taxes. Consequently, the weakness of an audit of an American concern in Pakistan does not affect the United States tax. (2222)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    Under the treaty device, the United States tax directly depends upon the effectivenesss of an audit by a Pakistan tax administrator. If he makes a mistake, if he decides that this exemption that Pakistan gives is applicable when it should not be applicable, if he makes any mistake at all, the United States tax is reduced. In other words, we place our taxes at the complete risk of foreign tax administration. In many countries, taxes are arrived at by a bargaining process, negotiation between the company and the tax administrator. They do not like this in these foreign countries and they are trying to improve their tax administration. This takes a long time. Under this particular treaty and this proposal, the bargaining that goes on is not only bargaining about foreign. taxes. It is bargaining about the United States tax. The bargaining that goes on between the American corporations and the foreign tax administrator is a bargaining which affects the taxes in this country and yet we by and large have nothing to say about it. Our tax agents cannot police all the foreign countries, they cannot know the laws of all these foreign countries, they cannot be expected to. Yet, under this treaty proposal, our taxes for the first time are being placed at the risk ana at the mercy of foreign tax administration.
    HISTORY OF PROVISION IN CONVENTION

    One or two other points. This particular device has a very interesting history. As far as I can tell, it was first suggested in a British Royal Commission report in 1953. That Commission was interested in examining into the question of aiding British investment abroad through tax policy. The very interesting thing about itThe CHAIRMAN. Where was it suggested? Mr. SURREY. A British Royal Commission report published in 1953. This British Royal Commission was charged by the Chancellor of the Exchequer to investigate the British tax system as it affected British investment abroad. The Royal Commission came up with exactly this device that has been suggested in the Pakistan treaty, and it recommended to the Chancellor of the Exchequer and to the British Parliament that the British adopt this device as a method of meeting the problem. It was debated in Parliament in 1953 and the Chancellor of the Exchequer asked for more time to study it. It was debated in 1956, the same proposal that you have before you now, debated in the country where it was originated. The Chancellor of the Exchequer said he still wanted to look into the question. In 1957, the Chancellor of the Exchequer rejected this proposal and offered another solution which brings the British up to our present treatment of foreign investors. Up to now, the British have been less favorable to treating the foreign investmentThe CHAIRMAN. Favorable to whom? Mr. SURREY. The British. The interesting thing is that the device which their royal commission suggested was disapproved by the British. This device is not in the British tax treaty with Pakistan. You would not find it there. Yet, the device originally, as faras I can see, saw the light of day in a proposal of a British royal commission.

    (2223)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    It indicates that they had second thoughts about the device. What I am in a sense suggesting to this committee is that it have second thoughts about this particular device.
    CONFRONTING CONGRESS WITH CHOICE AMONG TAXPAYERS

    Now, there are other things-if time would permit-I would like to point out. This device injects some very interesting congressional choices among American taxpayers that this committee will have to make for the first time. Pakistan exempts the salaries of foreign technicians if they go to Pakistan for 2 years. The American individual who goes to Pakistan does not get any tax relief under this treaty, even though there is a Pakistan concession. Under this treaty the tax concession given to United States corporations in Pakistan does result in a reduction of the tax on American corporations. Also, the committee is being asked really to pick and choose among American corporations for the first time in its history. Pakistan, in this treaty, reduces the rate of Pakistan tax to zero on royalties going from Pakistan to the United States royalties on patents, "know-how", and so on and so forth. This does not, by and large, help American investors. They would still pay their American 52-percent tax rate on these royalties. But the tax concessions that Pakistan gives to manufacturing companies, will under this treaty reduce the United States tax rate on manufacturing companies or oil refineries and so on, but not on companies which simply invest in Pakistan through patents. It is not that patent investment is unimportant. Patents are important in Paki. stan. But this committee is asked to choose-in effect to decidewhich American taxpayers get their taxes teduced. This is the first time this committee has been asked to do this. Once this process starts, it cannot be /stopped. This committee will not have any rules or any standards by which to discriminate among foreign countries in the end. Tax concessions are pretty much the same thing in most of the countries. It would be hard put to choose between Pakistan and Cuba and the other Latin American countries. And, by no means, have the impression that the tax concessions given by Pakistan are highly selective concessions. They are not. Pakistan grants this tax concession to any industrial undertaking that employs 20 persons or lessThe CHAIRMAN. From any country?
    REASONS FOR OPPOSITION TO CONVENTION

    uses power. That is hardly a selective process. In conclusion, what I have tried to indicate is that this is a basic matter of policy; that this new approach is one which for the first time reduces taxes on American corporations and can reduce the tax rate on Amerian corporations to zero; that it is contrarVy to recently established tax policies; that it uses a highly irrational devicee which in a sense favors the wrong countries abroad and will inject the United States much more than it ever has been involved in the tax policies of foreign countries; that it subjects the taxes which Americans pay.to the mercy and the risk of foreign tax administration and the bargaining of foreign (2224)

    Mr. SURREY. From any country or employs 10 persons or less and

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    tax administrators. Consequently, it seems to me a highly unwise policy for this committee to initiate.
    ,HISTORY OF PROVISION IN CONVENTION

    The CHAIRMAN. Do I understand, to sum it up, that this provision, in your opinion, as a result of your studies, is unique, and that a similar provision has never been made in any place at any time before? Mr. SURREY. It is always a risky statement to answer yes, Mr. Chairman, to such a question but as far as I can tell that is true. The persons who originated it have now apparently disapproved it. The CHAIRMAN. Did this originate in England first? Mr. SURREY. As far as I can tell that is the first time I have come across it in any serious form. For all I know, it may have been suggested by some Americans before that, but its first serious form was in England.
    The CHAIRMAN. That has never been put in anywhere? Mr. SURREY. As far as I know that has not.

    METHODS OF AIDING UNDERDEVELOPED COUNTRIES

    Senator SMITH. I would like to ask a question. Mr. Surrey, are you familiar with the work we have been doing for a year to revise and think through generally, our so-called foreign aid program? Are you familiar with the studies undertaken for the Special Committee to Study the Foreign Aid Program? Mr. SURREY. Senatok, only in a general way. I am a tax man. I
    do not profess to be an expert in foreign policy. Senator SMITH. You are focusing on a small part of an enormous

    The CHAIRMAN. Any questions?

    we do not approve,.or making loans which we want to limit as much as we can, or inducing private investment to go into these countries. Apparently you have no interest at all in the fact that inducements. cated subject, but it seems to me that you are limiting your statement to simply the tax part of it which is an infinitesimal part of the
    to the tax part is because when all is said and done, the matter before this committee is a tax.proposition. That is what it is. I am addressag myself to a clause in a tax treaty. Therefore, it seems to me that it might be of some assistance to the committee to discuss how this particular tax device works. Senator SMITH. Very valuable. Mr. SURREY. That is why I address myself to taxation.
    whole thing. Mr. SURREY. I think I might say one reason I am addressing myself

    to save our taxpayers by inducing private investment to go into these countries. There'are a number of underdeveloped countries and our chief emphasis is on helping them to build their economies. We have a choice of making grants as we have had before, of whicir

    our new thinking, in our revolving loan program concept, our attempts

    policy. This Pakistan treaty is presented to us as one of the first in

    are necessa~ to help American business people to move investments into underdeveloped countries. We have to have that incentive or we will not be helped in our overall program. This is a very compli-

    (2225)

    10

    DOUBLE TAXATION CONM TON WITH PAKITAN

    Senator SMITH. We are seeking to find a sound formula for the socalled underdeveloped countries where it is not attractive for American capital to go in because of the risks. We want to induce American capital to go into those countries in order that our taxpayers may be relieved from continuing the kind of aid they have given in the past. So we have to make an inducement to our people taxwise or otherwise. Perhaps you have another formula to induce business to go into Pakistan? Mr. Suitumv. I might indicate that I thought this was a particularly unsound way of approaching this. Senator SMITH. Do you have an alternative? What do you suggest we do in Pakistan, Iran, Iraq, and a lot of underdeveloped countries when we want to help their economics and we want to induce our American businessmen to go in. What do you suggest we do in lieu of this plan? Mr. SURREY. That, of course, is a very major question. I think I would tend to say--and this is in part the experience of tax history, that tax concessions are probably not the most effective way .o do it. Even in the tax field, there are better things to do than this. Mr. SURREY. No, I do i.ot think so. That, of course, would have to be decided independently in each case and you would know at least whether the subsidy went to a country that needed it. Senator SMITH. You argue as though we were exempting United States Steel from all taxes abroad? Mr. SURREY. That is exactly what this treaty does in some cases. Senator SMITa. What part of the United States Steel income comes from that? American corporations who invest in Pakistan and under certain conditionsSenator SMITH. Only to the extent that their business is in Pakistan. That may be a very infinitesimal part of their total income. It might be right to let them do that, to encourage United States Steel to help Pakistan. It would be a wonderful thing if we could get United States Steel to help these underdeveloped countries and relieve our taxpayers from putting up money for that purpose.
    AMOUNT OF FOREIGN INVESTMENT IN PAKISTAN

    Senator SMITH. Should we subsidize these countries?

    Mr. SunREY. This treaty will exempt from American tax those

    Mr. SURREY. As a matter of fact, as the statement I read from Professor Smith indicated, by and large, Americans can take advantage of the Pakistan tax concessionsSenator SMITH. You mean Mr. Smith of the Treasury Department? Mr. SURREY. Yes; without this treaty concession. Pakistan has had this tax concession since 1948. American corporations with subsidiaries in Pakistan can take advantage of this tax concession. The amount of foreign investment in Pakistan since 1948, my impression is, is probably not above $20 million, using figures from the recent Pakistan 5-year plan report. That report goes on to say that the amount of foreign investment expected in Pakistan over the next 5 years under their estimate from all countries is $100 million and they expect to get it largely from oil. That is their hope. Senator SMITH. You are bringing the oil question into this? (2226)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    11

    Senator SMITH. The oil question is a separate issue. I realize the Mr. SURREY. problem in oil. No I am indicating foreign investmentMr. SURREY. I am trying to indicate what Pakistan's own estimate of the situation is, from hle Pakistan 5-year plan recently issued. Their estimates are realistic. The per capita income in Pakistan is about $50 a person. You cannot expect much foreign investment in a country like that. Senator SMITII. That is our problem. Mr. SURREY. That is right. Senator SMITH. We want to encourage it, however. Mr. SURREY. The country itself realizes that it will take 5 to 10 years and then, without tax concessions, people may invest in Pakistan. Senator SMITH. Those are all the points I wanted to bring out.
    EbFECT OF TREATY ON DOMESTIC TAX LAW

    here and for the fact that he alerted me to what was in this very unusual convention or treaty. As I understand your statement, Professor Surrey, if we approve and ratify this particular convention, it is your view, is it not, that this will establish a precedent and a pattern which will possibly open up other treaties for similar tax concession rights? Mr. SURREY. Yes, sir. Senator HUMPHREY. Do I understand you to say that you feel that article XV of this treaty really governs American tax law relating to foreign investments in Pakistan? Mr. SURREY. Yes, sir; and under that article for the first time in any treaty the Congress is being asked to reduce taxes on American corporations. It has never done so in any previous treaty. through the treaty mechanism? Mr. SURREY. That is correct. Senator HUMPHREY. And writing tax law through the Foreign Relations Committee in a sense and through the State Department rather than doing it through the Finance Committee or the House Ways and Means Committee? Mr. SURREY. Writing tax law of a most. peculiar type. The double taxation treaties up to now which this committee has considered have reduced United States taxes only on foreign persons. They have not reduced United States taxes on American citizens or corporations. This treaty for the first time injects this committee into that process and injects it right into American tax policy.
    TAX CONCESSIONS AS INCENTIVE TO FOREIGN INVESTMENT

    The CHAIRMAN. Senator Humphrey. Senator HUMPHREY. I want to, first, thank Dr. Surrey for coming

    Senator HUMPHREY. In other words, it would be affecting tax law

    Senator HUMPHREY. Professor Surrey I am sure you would agree with what Senator Smith said about the desirability of promoting American investment abroad as a means of supplementing and strengthening and broadening our foreign economic program. Do you agree with that general objective?

    (2227)

    12

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    Senator HUMPHREY. IS it your view that this type of unusual treaty or the provisions of this treaty are not necessary in order to encourage foreign investment? Mr. SURREY. That, Senator, is my view. I want to say you can get on endlessly debatable ground when you consider the extent to which tax incentives will encourage or not encourage anybody to do anything. You generally find that when persons are faced with prob. lems in this world, or their industry is in bad straits, the first thing they do is to ask for a tax concession and no one has any way of prove. ing what would have happened with or without that concession if they get it. Basically, it is dangerous to offer tax concessions to anyone. Con. gress is finding that out and is withdrawing 5-year tax amortization from American corporations. That was a general device but they found difficulty with that. As a particular device this treaty proposal is one of the most unsound incentive devices that could have been thought of.

    Mfr. SURREY. Ycs, sir.

    Senator HUMPHREY. Under present treaties, we allow a tax credit

    only for actual taxes paid abroad; is that right? Mr. SURREY. That is correct. Senator HUMPHREY. That permits the American corporation to deduct that amount from its tax payments here in the United States; is that right? Mr. SURREY. That is correct. They can credit the foreign tax against their American tax so they do not have a double burden. Senator HUMPHREY. Provided they have paid it. Mr. SURREY. That is right. Senator HUMPHREY. What does this do that is different from that? Mr. SURREY. This one says to the American corporation, you can reduce your tax and sometimes in some cases you can reduce your tax to zero by showing a receipt for a Pakistan tax not paid. the way you reduce the American tax is simply to show that you did not pay a tax in Pakistan and, therefore, you do not have to pay a tax in the United States. Senator HUMPHREY. I wanted to bring this point out.. This is almost unbelievable. I do not know who concocted this particular convention but this is the most unusual type of a treaty that I have ever seen. I frankly did not understand its full implications when I first heard about it. I am very grateful for the memorandum you sent to us. It opened my eyes to the possibilities of a whole chain reaction of tax treaties that could get us into serious trouble.
    AMERICAN CORPORATIONS INVESTING IN PAKISTAN

    Who are the beneficiaries in interest under the proposed convention; do you have any idea? MKr. SURREY. That is a hard question to answer, Senator. Any American corporation who would have investments in Pakistan will have its United States tax reduced, could have its United States tax reduced under this treaty. I am not directly familiar with which American corporations are or are not investing in Pakistan. J (2228)

    I might say that obviously as this spreads around the world, the largest

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    is

    beneficiaries are bound to be the biggest American corporations, because by and large it is only the larger American corporations that. have the capital, the manpower, the management resources and the know-how to go abroad. Senator HUMPHREY. This is, in fact, another what we call "tax loophole." Mr. SURREY. You see here the beginning of what 5 or 10 years from now will be described as a distinct loophole in the United States tax law. This is exactly how loopholes start from innocuous clauses.
    CONVENTION AS A PRECEDENT

    Senator HUMPHREY. I want the record to note, and I believe I have the transcript of the hearings of July 30, which I have examined, that the administration spokesmen, the people from the executive departments who were here frankly said that this convention was to be used as a precedent, that it would be the beginning of an entirely new program on tax conventions. Mr. SURREY. That is right. Senator HUMPHREY. So, my question was directed to the point, namely, that if you start with this one, once those who have presented it, to us have stated frankly and candidly that it is to be used as a precedent, you do in fact permit foreign countries to alter domestic American tax schedules? Mr. SURREY. That is correct. Senator HUMPHREY. We do it through a convention-

    Senator HUMPHREY. Which establishes for the first time, as I understand it-you say "in your knowledge," and you are a tax expertsuch a precedent where a foreign country really determines our tax scheduleMr. SURREY. As far as I knowSenator HUMPHREY. Insofar as that income is earned in a foreign country. Mr. SURREY. As far as I can tell, that is so. I have not seen it in any other tax treaty.
    UNITED STATES INVESTMENT ABROAD

    Mr. SURREY.

    That is correct.

    Senator HUMPHREY. I will not take any more of your time except to say again, there is such a thing as encouraging foreign investment. I believe in it quite strongly. We had a discussion here yesterday about additional guaranties. We have already made guaranties for loss from insurrection, rebellion, confiscation and I imagine a couple of other categories. Yesterday we put some additional guaranties in a conference report on mutual security, for losses that might come from operating capital loans where there was something that went wrong, practically taking the risk out of the entire capitalistic System, underwriting to great lengths, I do not say all the way. This is a further underwriting for the purpose of encouraging business. Is this not another way of sayin to American business that in order to get you to do what you oughit to do anyhow, if it is a sound
    78095 0-43--4'ol. 0-47-(222)

    (2229)

    1.4

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    biisiilem., proposition, Ihe (sovernineiit of Ithe Unliled Stlates is willing indire('tly to give you olmo.illt Sot'l. of bribe? it Mir. S,'itirKy. I tlttli U.ollloms down' to Savintg, "We will give vyo t ses Vl ('lum it distinct. tIx windfall forodlo;itg Something thall voui i (tily would hl e dranvwa i."' 'aTI I.is exil,'tlv whet tthis cotltes dowt t1o. Seluator II,'mluri :v. 'I doinot. believe business ouglh. to invesl, for II andll Ie itlv,'sors Ilre eu. prilelite. I Ibelieve, in It1' profit. sYstl IleI'e iliti-Stllll'itt Ilet tieClP tre . titleId t)o i very. goold prolift ill oVel-SI'I the ( env eltl dt.ioes hove fill oli. i'iskls involved. I believe tiltlt 1 do itotl tliitk the (1ovetrn11l11t of gettlounl fot' overseas'.1 itivestlule,11. States Il1ts ill obligat ion to teke outotill risks. If you art the allieded tlit, nOt you ought to do ito. oi h bafi o ' f'avotilis-. goitlg to do thilt, do Oitl ought t( il'l it t public policy for' big ,td litle rthlleier thlnt hy 1 oIIn tlis t'tlrl of th1t selective i'IO('esses which represettl i selemion tiaI le individual 1 nllompllny. ''llhe 1itu1h is Ihot o1lY It hll'-gel' coinljiteSr.' nents. going to nlllke these invest Mr. S1r1t.:v. 'h'llt is co'irect ; by aid I'age, Atteri'eii iveslmenlt elbroitd is conlelt It'll led ill t.' lh'gest Aiumel'itiI corporations. i Sein lor Ill1 it,1mirv. Thlanik vo, ver.v t1tu,'h. lit %lsions? ThVe ('CHAtR MAN. SM1itto" Wil('ey, ll1tve vo ainy Mir'. WmiIY. Not, at his tilti.
    FORIEIIN TAX CtEIDIT P'iROV'Kll)' iEK

    MIr. S,'ul.Tv. Yes, sir. tli.s proi'vision. goo. SeI!IIor IltK.mimOOi'l.t. As I uittderstanlld it. in your view, it straight credit aIgatinlst taxes Ioid to the he,yotd, tttriell co''po'itlolln for thte tllloulnt fIIIei'cll Un'tit l Stall es (iov'rttlllten I t\ tilllv pIa iln h'ekistln oil Iusintess getnerauted ill of taxes which tlhey el to
    Pakista11? ,MIr. Stliltu. TIoli is correct.

    KINI.0)I'PEi(. YeS, I Woit to get this ,str'light. Senlato' III('o osorry I wets ntot here Wileie you stutl'led your t'estnlony mtid I I lil oilnd Wiont to clai:. ill Il ' (11 Il lii SoIIte of these p)Ointts.

    Tl'he (C'ItINItAN. Senator Ilickelloopt'r.

    StUitor It'ICK1,0Iu:1.

    post; Iave we not.? yv. Mr. S'itu No, sir. Seltetor 11 i'K.;xi.mot'.it. Not in tr''elties, biut in domestic law. Mr. ,ItililKY. In domestic ltkw--. Settntor IIIcK KNI.OOi'KtI. By "'coiteessions,'" I iietuti "credits." Mr. SuIilltiy. Yes. I minlght say, Semattor, that. the United States Ituus been in the forefromit of aiiding!A niericein investors abroad and h.as it. (1o01, through ouir tIx credit S\'stemll. We plrevent. I doubling 1ii) of taxes by living a credit agnitst'llie United Stiltes tax for lthe foreigil tax at!ia lf paIid. t Setiltor I I[VIN.,ENIto, l. IThr is whnit 1 mean. Mr. SuKrm.Y. yes. Senator lth'licKrNoom:it. So there it not)hing unique it that. Mr. Sl'rrity. That has been dtone by stntuite Inot by trelity. Ihe c(uItumxm. Sorry to interrupt butt I have word that there is a l(oor', and I Stuggest thtft tll being asked for ott thle Senate live ltlorti i8 liioiltte bock here at pIst the lhout'. we, titjo1ri1 and

    II Celpt thAI it is ini treelty provision.

    about tt1111, exThere is notlhingIg uI1uiuAtl1 We hlave houd ctllcessiolts in the

    (2230)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    15
    qi orum.

    Seamior

    1NkooI'~t

    1 wett IIlK

    ie ( tl)ud swarn ted I and

    Setutior SMTIu. I have ani A itweI tt. * ,Senior 1,(%.~*(; WTity lnot 3 nllitilltes? Senator Aiken. ie. The ('11AI.MAMN. Yi ('fill go tip olloe tit I th Seltittor AmK 1N. I will be back. Thi-(IIAI(IMAN. oul call proceed, Senator lieknhmlooper. You iuve J i' lreadllv Jeeli tij). Selltllor JI('I) .NI,oi)'EII. ITllfol't1lirlt t:iv, I wais not iwre when tiio heitriing was held aiW"eek or so ago oil t1his treaty. ARTIClE XV O,' TIM,: CONVFNTIOIN

    Mr. St, UtttA. This tmretky is imihte in one sense-- this is really whalt it,eotnm's down to ill olle, sentenet'. Il otte sentence this t relaty gives t credlit. figflitst United States taxes for it Pakist-at tax not paid. Senator IIcKy..mmo0I'i.. Does IItl, tcome it p arlgralhi 2? Mr. S'mumrr:v. 'l'hat. comes in---if I call get ai(.Ipy of the treaty here. Senattor Smi't. Articie XV*. Mr. Siv'linw.v. Article stecOltdl sentientt,. Senat.or lq.,JOi:X.V, Yes; the(sev'o,.l. pa~ragralph. Mr. SI'mi.:v. It is that sentence, that It li direc'ittg my remarks
    Seilator lil 'Ktl,' t.. So frf1'its p)artagrapihIl I of article X\' is t'tti'erl'l'l, flt'ol o raisitng sithstItttlltttl objection to th01t? Mlr. S(ut:v. No. 'l'liat is inerelY it ntstahtelent. of what is in [United States law t% .yway. Without thlt sentence the result would ie the .u,,. Setitor Illiciiw.'a.ot':tt. Sot, you a'Me directing voi' clriticisill of this treaty !it thilitaiii, to tlits tax i')lthtst in Irlartaraph 2? ' MIt,. SuI'lv. No; I atim sorry, to lit' senotent',ce of paralgriph I1. Tile first. sentence merely states tlit, getieral p)ro posiio itlltht, under the United Statews tax law, a credit will 'be allowed against the United States for Pakistan tax paid. Thanhas; been prite since 1018. Tho language beginning "For the purposes of this credit-Senatlor I icKmimiK .tt (refdting): ol,) there shall be deemed to hlive been Iplid by it Itilted Stites doltinesue corporation thit' 11l1Otlltt 11w which such Pakistain taxes (other thani the business profit tax) have been redutetd under the provisions of setitlon 15--Ai of tihe Ineomne T'ax Act, 1)22 (.XI of 1922) ais in efrtet on the date of the signature of the (present ('onvention: [Iroridcd, That any extension tmahe, by law of the period within which al indtustril underhtkintg sta" be set tip or com'meneed in order to obtain tho rtmthtlott provided itn vi'etion 15-11 shall )e deemed to be in effect on the ditto of the signature of the present ('omtventiomt.

    to.

    not pay thatie er0ent. but gets credit otl its Amerietm taxation for (, t(ie 50 percent reduction whieit is itot paid? Mr. Sviuti:Y. That is 'ot'rect. ,4%nator I'ICKENLooPE:Rt. 1 wanted to be sure that was what you wd.

    Mr. StitEmY. That, is correct. Senator IICKENL , Ett0H.H lit other words, if they reduce taxes against, a corporation doing business in Pakistain by 50 percent, let. us say, Over there, theni, your position is that the operating corporation does

    (04.) 411)

    16

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    article XV to which you direct, criticism?

    Mr. SURREY. That is correct. Senator HICKESLOOPER. Now, so is it that sentence-the rest of

    Mr. SURREY. Just'that sentence. Senator HICK HNLOOPER. That provision.

    Mr. SURREY. Just that one sentence, Senator, is the sentence that is involved,. This is the sentence that causes thie trouble.
    OPERATION OF FOREIGN TAX CREDIT

    Senator HICKENLOOPER. Let me ask you tfils: If an American cor. oration paid its full taxes on its domestic income, under certain cir. cuinstances in the past the situation has been that this double taxa. tion charge applied where they also had to pay ricome taxes on what they generated in some foreign country and that piled up the taxes oil them? Mr. SURREY. That is right. For exactly that reason as far back as 1918, the Congress adopted the foreign tax credit. That says, if you can show you have paid a foreign tax, the United States Treasury will forego collectionn of its tax from you up to that amount. Senator HIKENLOOPER. We do tihat with income taxes, too, in many States which have a reciprocal credit basis. Mr. StrrY:v. I do not. recall that the States permitted a credit where the tax is not paid. Senator HICRENLOOPER. I do not recall that. Mr. S'RREY. That keeps the burden at a constant level and the burden does not. go up if the corporation has invested abroad. Senator HICKENLOOPER. Would you have the same objection-let me put it another way or maybe I can simplify it by putting it the way I started to-if an American corporation would pay a full tax on 'business done in the United States and then if it had a very favorable tax concession, let us say, in Pakistan, it would get credit for that, not on its American taxes, but then they would not be charged in Pakistan, that is, as income for tax purposes. Mr. SURREY. In Pakistan? Senator HICKENLOOPER. No. Maybe I am not making myself clear because I do not quite understand what I am trying to got at myself. That always makes it difficult. It really makes it worse for the questioner than the person who is answering the question. What I am trying to get at is this. Let us say the original idea was that a corporation m this country does business here in the main but it also does business in Pakistan. Actually, its tax structure is set up on its overall business, profits, what it makes in Pakistan and what it makes here. But it gets a credit normally for the dollars or the amount paid in Pakistan on Pakistan-generated business income tax. It gets credit on that overall total of income taxes. That is roughly correct; is it not? income from Pakistan. The United States taxes income worldwide when the income comes to the United States taxpayer. If Americans invest abroad in foreign subsidiaries we do not collect any tax until the money comes back to the United States in dividends. When it comes back to the United States, we then say. it is like the dollars (2232)
    Mr. SURREY. The credit is limited against United States tax on

    DOUBLE -TAXATION CONVENTION WITH PAKISTAN

    17

    Of

    that any United say, if on those dollars which should pay from abroad, tax. But we do States corporation earns, it have come a 52-percent those dollars come with a tax charged abroad, we do not want a double burden, so we give a tax credit. Senator HICKENLOOPEJ. We try to equalize it. Mr. SuRREY. Yes. So you are not prevented from going abroad. Senator IIKENLOOPEi. The total income from this corporation here and in Pakistan being the broad general base in taxation-I mean, if the money comes back here-if they pay the tax in Pakistan, they get a credit. Mr. SuRtRY. That is right.
    INVESTMENT INDUCEMENTS

    Senator IICKENLOOPER. If Pakistan gives them an inducement by reducing the burden of that tax in Pakistan by 25 percent from wiiat it would ordinarily be, then, you object to the fact. that the corporations pick up in the nature of profit, as I understand it, that 25 percent which is the amount of the reduction of what ordinarily or otherwise would have been the tax? That amounts to a profit to them; does it not? Mr. SURREY. Well, you say it amounts to a profit to them. It amounts to reduced tax in Pakistan. Suppose the corporation earns $100. Normally, that corporation pays a United States tax of 52 percent. Now, you look at the Pakistan situation and Pakistan has a tax of 52 percent, let us say. We say to the American corporation we do not want you to have the double burden of paying the 52 percent in Pakistan and another 52 percent in the United States. We will forego collecting the United States tax as long as you have the burden of the Pakistan tax. But when we forego the collection of the United States tax it leaves this corporation burdened with a 52-percent tax just like any other American corporation. Therefore, the investor abroad is not favored as agamst the investor at home. Now, Pakistan comes along and says for certain reasons they will reduce their tax to zero. At that point there is no reason for us to forego collection of the United States tax because the only reason collection was foregone up to that point was because if we had pressed for collection of the United States tax we would have increased the burden on this corporation above 52 percent. This treaty says under these circumstances, although the reason for foregoing collection of the tax is no longer present, there being no double burden, still we should not collect the tax. Senator HICKENLOOPER. It gets right back to this point in this treaty, which I assume at least represents the support made for this sentence, that whatever that reduction was1 it would be by way of an inducement or a specially favored concession for whatever hazards or difficulties of going into a foreign country and establishing a businessrepresented, whatever they might be, so it would be an inducement, and the local property, while It would get no favored treatment regarding its business so far as the United States is concerned, would get a lower reduced tax burden by the Pakistan tax. So they would be favored to that extent and, as I mentioned a moment ago, that would be in the nature of additional profits there.

    (2238)

    18

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    So, if it could be justified at all, it would be justified on tile policy of inducements, that is, making it more worthwhile by way of dollar or profit inducement. Mr. SuRREy. Which as recently as 1954, as a matter of general tax policy, the tax committees in Coigress decided was unwise. Senator HICK ENLOOPEIt. Thank you. I understand your position.
    REFERItRAL OF CONVENTION TO SENATE FINANCE COMMN1rTEN

    Sem,\. M -orse. ater Senator MOURSE. I have only one or two questions. First, I want to serve notice that I shall make a motion before the committee that any final determination of this treaty shall be post-

    'rle CH.AIRMA.

    the Senate Finance Committee for action or recommendations by it, because if I have ever seen anything that involved the jurisdiction of two committees, this does, and I do not think that the Foreign Relations Committee ought to proceed to take action on a treaty that has such a terrific efre t on ti e tax structure of the United States without our own tax comnmittee, our own Finance Committee, living at least an opportunity, if it so desires, to present to us its reaction to this section of the treaty. Mt the proper time, I shall make that motion, for postponement" of .action until the Finance Commnittee of the Senate considers this tax matter. Professor Surrey, I want you to know that I appreciate very much the seminar I have attended this morning. It was not my good| fortune to be at the meeting of the Senate Foreign Relations C'ommittee when this matter was taken up because otf a conflict with_ another committee of the Senate meeting, which is a practice we find , ourselves in so frequently. So, this is all new to me. I shall reserve final judgment until I hear the representatives of the Treasury Department, but I have tried enough cases and sat in judgment enough to know when I have listened to a prima facie case, and you have made one and a strong one.
    EFFECT OF CONVENTION ON AMERICAN TAXPAYEH8

    poned by the eominJittee until the tax phases of it are submitted to

    amount to is the payment of a subsidy by'all the American taxpayers to an American corporation investing in Pakistan that comes within the terms of the treaty? Mr. SunmEs. Yes, Senator, you ('an say that. That is the effect overall foreign aid economic program from the standpoint of national policy. Of course, may I say respectfully that there are some of us who were not quite as enthusiastic about some phases of this loan just such sort of gimmicks as f think are involved in this giveaway. But as a matter of national policy, Professor, do you think it is a wise policy to have a foreign loan program that is based upon discriminatory advantages given to some American corporations, large advantages, which are not shared by other American corporations? Mr. SURREY. No, sir. program for a conIsiderably long period in advance. Some of us fear in this case. Senator MoRsE,. A question has been asked you in regard to our

    Professoil, would you say that in a very real sense what this does

    Senator MoRioS.

    That may be small?


    (:N834)

    I
    'F

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    19

    unsound device and it has elements of windfall to a great many investois who would invest without this particular device and who simply get the benefit of the windfall.
    AMERICAN INVESTORS ABROAD

    Mr. SuRREY. No, sir. I think that this particular device isan

    Senator MORSE. One last question. The Senator from Minnesota, Mr. Humphrey, was talking about the protections that we have given to American investors abroad-protections against insurrections, riots, nationalization of industry, and so forth. Does it follow that when an American corporation invests abroad, it operates abroad without any costs to the American taxpayer at home? Senator MORSE. Let me make it more specific. When an American corporation invests and operates abroad, it invests and operates under America's foreign policy abroad; does it not? Senator MORSE. It operates under the canopy of a great deal of American protection abroad; does it not? Mr. SURREY. That is correct. Senator MORSE. That protection is not costless to the American taxpayer? Mr. SURREY. No, I might say as a matter of fact as to the basic foreign tax credit itself, that is a cost to the United States because the United States Treasury foregoes collection in favor of the foreign treasury so as not to subject the American corporation to two taxes but it does that at least only when a tax is paid.
    PRINCIPLE OF EQUALITY OF TAX OBLIGATION

    Mr. SURREY. I am not sure I understand.

    Mr. SunREY. That is correct, Senator.

    Senator MoRsE. I recognize from the logical standpoint that generalities are dangerous in their use, unless you qualify them a great deal, but nevertheless they are good for definite purposes. 0Wouhl agree with me that one of the general tax principles that vou we claimn as the basis of our tax structure is the principle of equality of tax obligation? Senator MoRsE. Am I to understand that in your opinion this particular provision produces not equality of treatment but inequality of treatment on the part of the American Government toward some taxpayers to the disadvantage of other taxpayers that stand on the same tax footing? Mr. SURREY. Yes sir Senator MORSE. I think that is another reason Mr. Chairman, why it is so important we have the )udgment of the Finance ComnIttee, rather than to have the Foreign Relations Committee of the Senate proceed to take action by way of recommendation to the full Senate in a field that is not limited to foreign affairs alone. I want to thank you, Professor, for your answers to my questions and for your statement.
    Mr. SURREY. Thank you. Mr. SuitREY. Yes, sir.

    (2235)

    20

    DOUBLE TAXATION CONVENTION WITH PAKISTAN AMERICAN INVESTMENTS ABROAD

    Senator AIKEN. Yes; Mr. Chairman. Althouy1i I realize the necessity for helping develop the industries of foreign countries, I am getting rather disturbed, for every move we are asked to make is apparently inten(Led to encourage the flight of capital from the United States to foreign countries, and this is going on at a time when the cost of money in the United States is steadily increasing and virtually I every country bank is so short of capital that it cannot meet the needs of its own communities. If this trend continues, I can only see the United States going into the banking business in a big way, and most of us will have to vote to put it in that business. I have heard some reports about rather fantastic earnings of American investments abroad. I do not know whether they are true or not. If they are true, we should certainly require the people who are benefiting from those earnings to pay their proper share of taxes to the .United States, which is tihe place where the capital originated. So. if Senator Morse had not said what he did about referring this convention to the Finance Committee for its examination and advice, I had intended to make that similar suggestion, because I have a feeling-it is almost a certain feeling-that this convention will never be approved by the Senate unless it has been examined by people better qualified to pass on it than I am. The C11AIJIMAN. At present the legislation is before us and we have an opportunity of hearing experts testify. We ought to take advan. tage of that opport-unity. Have you any questions to ask the witness? Senator AIKE. Yes; I have one question to ask the witness. Senator MoitsF. Would the Senator yield on that point of this matter of reference? Senator AIKEN. I yield. Senator MoRsk,. Ifwant the Senator from Louisiana to share with me in my motion, because my suggestion grew out of a conversation I had with him. At least he'will agree with me that we ought to get the judgment of the Finance Committee. Senator AIK.:N,. I will ask the witness this: Do you think it is possible to encourage the investment of American capital abroad to such an extent that our own economic position may be impaired at home? Mr. SunntEY. Senator, that is a very large question to answer. I would say that, as far as possible, we should not inject discrimination between 'domestic and foreign investments so as to give a preference to one against the other. Let the investor have its choice. This treaty proposed injects a preference, and tax preferences are, basically, unwise.
    Senator AIKEN. I have no further questions.

    The CHAIRMAN. Senator Aiken, do you have any questions?

    The CHAIRMAN. Senator Long.

    TAXES COLLECTED BY UNITED STATES ON OVERSEAS INVESTMENTS

    Senator LoNG. My first impression was against this treaty, but I would like to reserve judgment on it until I know more facts about this whole problem. One thing that does interest -me would be to know how much tax this Government actually collects orf invest(2236)

    UUui.V "AAATI-u

    V YAVwiNTIU1

    WIr'k FAU1T'A1z

    n9

    ments overseas. I do not, believe you have that information available; do you? Mr. SURREY. No. Obviouslv, Senator, the amount that we collect is, of course, less than the amount we collect from investment ii the United States because of the foreign tax credit. ' Senator LONG. In other words, it seems to me that it would be interesting to know how much taxable income is derived from American corporations doing business overseas and how much income tax this Nation derives from those investments. Is that available? Mr. SMITH. I have been trying for some time to get an accurate figure. I have had a study going on in the fieldThe C.AInMAN. Will yoNu give your ntame? Mr. SMITH. Senator Long looked directly at me, so I spoke up. I am Dan Smith, Deputy Secretary of the Treasury. We have an inquiry going on which I hope witliin a few months will give us a more solid figure than the past estimates which have been made. Senator Loxo. The answer will have to be that, with regard to the income of American corporations doing business overseas, the American tax collected is very small, indeed. Mr. SMITH. Because of the operation of the foreign tax credit. Senator LoNo. When we do business in foreign countries, the foreign country has a first shot at any American investments? Mr. SURREY. That is the accommodation that our Government has Senator LONG. If an American corporation established a subsidiary in Pakistan, it is within the power of Pakistan to tax all income, in which event there would be no tax we could collect, which would amount to virtual confiscation of the property. That is possible, is it not, in a foreign country? Not likely, but possible? Mr. SURREY. That is correct. Senator LONG. The foreign tax credit has operated in such a waya way that, I believe, you recognize yourself-that the income we are Mr. SURREY. That is because foreign tax ratesSenator LONG. I am referring not to the income we are deriving from foreign tax credit but the income we are deriving from American corporations doing business in foreign nations as being very, very small. Mr. SURREY. That is correct. As you point out, that is because taxpayer is concerned. We will let the foreign government, where the source of the income is derived, have the first crack at the income. We take our place in line only if they forego it. This treaty says no one takes any place in line.
    RISKS INVOLVED IN INVESTING OVERSEAS

    made to the fact that the taxpayer is subject to two taxes.

    deriving from it is very, very small.

    we have said we stand second in line as far as hitting the particular

    Senator LoNG. In dealing in all these foreign countries, the governments are less stable than ours. They reserve the right to confiscate the entire investment when they see fit. In the event of a revolution or change of government or in the event the Communists should take charge of those countries, those people who go there are subject to their entire investment being confiscated or are subject to discrimina-

    (2237)

    22

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    tion, or having their taxes vastly increased at the whim of a local potentate or dictator. Mr. SURREY. In some countries-I am not an expert on all these countries. Senator LoNG. It is true, is it not., that in new countries that have little experience in self-government, particularly in countries where the rate of illiteracy is high, if there is no guaranty on the part of this Government that the person investing his money there will be pro. tected from confiscation, then, that is a speculative investment indeed, and yet the taxation against that investment, insofar as the money brought back to this country, is at the same rate as in this country where there is all the protection of the American Constitution and a government more than 175 years old. Mr. SuRREy. I am not quite sure what the point of the question is, whether the point of the question is: There are great risks in foreign investniLnts. There may or may not be troubles attendant upon the instabilities of a foreign government. I would say, generally speaking, I would suppose one of the great handicaps to foreign investments are the instabilities of economic conditions in foreign countries and the basic instabilities of the governments and the instabilities of their eco. nomic policies; yes. Senator LoNG. That is the point that troubles me about. the whole matter. When an Ainericaii corJporation sees a possibility, of (Iev('lopinig resources in a country like Pakistan or India or any of tihe other countries, it has this danger that if it goes there to make an investii(ent, although the investment may be more economically efficient than the investment in this country, it may incur such great risks that it would be a much better investment to stay home and keep its money at home rather than take at chance there. For that reason, a case call be made for a more favorable tax setul) than a person would have otherwise. I think people fail to realize when they look at the foreign tax credit. if it works out the way it was intendled )y Congress, a foreign corporation does not get by better by( doing business overseas thian in this country; that is, taxwise, lie does not get by any better. Mr. SURREY. Yes; except, of course, under ihis treaty. Senator LONG. Yes. Mr. SURREY. That is right. Senator LONG. This, of course, is intended. There is no doubt but that it is a deliberate undertaking to make it possible for this foreign country to give the investor a better break than he would got otherwise. I am frank to say that the thought has occurred to me that our foreign tax credit is entirely unrealistic, that we ought to adopt some completely different standard than that which we have. It requires that the foreign country tax up to 52 percent. And most of them do. They would be foolish not to. Mr. SURREY. I think, Senator, that is a very major question. I think there are qualifications to what you say.
    FOREIGN TAX RATES

    Senator LONG. Do you know how many foreign countries tax


    American corporations at 50 percent or better?

    Mr. SURREY. You have a distinction-take Pakistan or take India. Those are very high-rate countries. But the tax rates are not high (2238)

    I because Americans are operating there and the foreign tax credit

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    23

    exists. Their rates are high because of their peculiar tax systems. They are not high because of the foreign tax credit. If you take the case of Saudi Arabia or if you take the case of oil, then, the foreign taxes are high because probably the foreign tax credits exist. Senator Loxon. Let us try to see a little more of this problem. You say that in Pakistan and India, the tax rates are above 50 percent, without any reference to foreign tax credit at all, that that is not the reason for it., but thlat, they are above 550 percent to begin with. Assmen they collect it., not, as they do in France, where they have it on the books and the tax collector goes by and has a cup of coffee with the man who owes the tax anil collects about 2 percent of what he owes, but instead they collect that, tax in those countries. With that assumption, should not our policy be directed, if possible, toward encouraging those countries to have a somewhat reasonable rate of tax if we want capitalism to succeed in areas where capitalism is presently trying to gain a foothold against socialism and communism? Mr. SuniRiy. I am sorry you were not here earlier. I think I made the same statement. Butt I pointed out that this treaty device has exactly the opposite effect. It encourages unstable, high rate taxes. Ifa country followed your policy and said, now lc.t us see-these very high corporate taxes are completely unrealistic, like Japan has done, for example. It has brought its tax rate down from 55 percent to 40 percent and 35 percent. This kind of a treaty concession does not help in that country. But you take a country like Pakistan with a
    very unstable tax structure which they recognize is unwise. They

    pet the rates up high and then they find they do not have corporate investments so they grant tax concessions. Senator LoNG. Some time ago, it seemed to me it would be a better approach to reduce American taxes on investments overseas. You would simply cut the taxes down to maybe 38 percent and I believe the administration had some suggestion along that line. It was called the 14-point advantage but. what it meant. was that you taxed the inconic derived from the foreign country at 38 percent rather than 52 percent. That seemed to me to be a'better suggestion than the one before us at the present time. Where you discriminate between corporations, one corporation goes to one country and it is able to get influence in that government and gets a high tax on the one hand and gets a complete tax concession on the other, so it pays no taxes to either government. In another country, the company does not have that influence and has to pay the 52 percent or more thain that. I do not see that this particularly device meets our problem. But I am frank to say that something is needed to encourage investment.
    OPERATION OF FOREIGN TAX CREDIT

    But I would like to know how Professor Surrey would tax American corporations on the income, say, earned abroad. Senator LONG. How would you do that? I will ask the question. Do you have any suggestions as to how you would do it, Mr. Surrey? Mr. Su.uiEv. This is a very major problem. I think what we are experiencing is the fact that when you start to try to affect a person's actions by taxes you are on very dangerous and difficult grounds and it is very hard to devise anly tax concession in this country which
    (2239)

    Senator AIKEN. I am far from being an expert in this business.

    24

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    would have any proper effect.. I think by and large the foreign tax credit is an appropriate device. I have not seen anything essentially that would improve on it. The United States goes a long waysSenator Loo. I do not. know whether we are accomplishing any. thing bi taxing foreign investments abroad at all. That is why I would like to get the figures from the Treasury to see how much'we are collecting. I would not be surprised to find that on billions of dollars of income overseas we are collecting less than a hundred million. Mr. SURREY. I do not think it, is in a sense so much what we are collecting. That does not seem to me to be the effect of the foreign tax credit. The foreign tax credit says in its policy so far as the domestic and foreign investors are concerned, there will not be dis. crimination. That is its virtue. If you remove the foreign tax credit, you make the burden very high on foreign investment. If, on the other hand vou grant exemptions for foreign taxes, you make the burden less on the foreign investment. Senator LoNG. Out of all the proposals I have soon to handle this problem, this present proposal seems to me at the moment.-and my mind is open-to be the worst of them all. Mr. SURREY. I will rest there. Senator LoNG. It seems to me to mean you have a tax credit that in effect compels people to raise their taxes or otherwise their country fails to collect money that would be paid to Uncle Sam. They could say: "If we do not tax this oil company 52 percent, they will pay it to the United States, anyway. So we will tax only American corpora. So they could pass a law that any American corporation pays 52 percent, gets a 27.5 percent depreciation allowance, and they collect all the taxes paid to this Government. There is no reason why they should not. It is a matter of one government getting it rather than the other. Then, the company has to pay no tax to this country. Then say another company has a 10 percent rate in a different country, and that there is no law Mithat country like we have in ours that says you cannot discriminate between corporations. They could tax them whatever is necessary in order to pick up the money that. would be otherwise paid to the United States Government. If we are achieving anything with this tax credit, I would say perhaps leave it that way. But here is a case where, we will say, the foreign country will raise its tax to 52 percent and then proceed to give a 52 percent exemption; that being the case, there would be no tax whatever on the income derived by the company doing business in the overseas country. Mr. SURREY. That is the Aramco situation. That has some elements that are fantastic to you. Let me say how much more so is this particular treaty clause. At least Aramco-I do not want to debate the Aramco. situation-at least Aramco paid something, paid 52 percent to Saudi Arabia. This proposal says that Aramco would not pay any United States taxes because the company showed it paid nothing to Saudi Arabia.
    OPERATION OF THE CONVENTION

    tions at the rate of 52 percent of their incomes."

    Senator LoNG. In the State of Louisiana we have a device that operates so that if someone will bring a new industry down there we will give him 10 years' exemption from ad valorem taxation but the

    (2240)

    I Federal Government does not reduce his taxes or give him a reduction
    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    25

    for those 10 years thiat he is not paying taxes on ad valorem. He pys the Federal Government on his net income. Mr. SURREY. That is right. Senator LONG. The analogy to this treaty would be where he would not pay taxes to the State or the Federal Government.
    Mr. SURREY. The analogy here is that the Congress should be

    asked to grant a tax deduction for State property taxes not paid to Louisiana. That is exactly what this treaty does. Senator LONG. That is right. We are grateful to you for this discussion. Mr. SURREY. Thank you for listening to me. The CHAIRMAN. We are very grateful to you for your testimony. Senator HICKEN-LOOPER. MayI ask one question on the last answer? over an hour and a half on one. Senator HICKENLOOPER. This is a rather important subject. The CHAIRMAN. Go ahead. He is a very good witness. Senator HICKENLOOPER. I cannot quite follow the argument-I do not say it is not sound and good. Suppose Pakistan had no taxes at all on a corporation, so there are no taxes. What yardstick would be used under your theory that the United States corporation would pay no taxes here?
    Mr. SURREY. You mean under this trepay? The CHAIRMAN. We have six witnesses and we have already taken The CHAIRMAN. Thank you very much.

    Senator HICKENLOOPER. Yes. Mr. SURREY. Under this treaty, when Pakistan grants a concession and reduces its rate from about 56 percent to zeroMr. SURREY. It has a rate, that is the point of this whole treaty. If it did not have any rate, this would not operate. If Pakistan had a low rate of income tax oir a zero rate, then the United States corporation would pay 52 percent here. Under this treaty when Pakistan makes a concession, then the United States taxpayer figures his American tax, 52 percent; credit Pakistan tax not paid, 52 percent; American tax zero. Senator LONG. That is the thing I do not follow. The credit would only be 52 percent not paid on Pakistan business? Mr. SURREY. I am talking about United States tax on income from Pakistan. Senator LONG. That is what I understood your answer to be, that the 52 percent would apply to all. Mr. SURREY. Only on income from Pakistan. Suppose it is only doing business in Pakistan. Senator LONG. I am straightened out. (Mr. Surrey's prepared statement and a supplementary memorandum subsequently submitted for the record, are as follows:)
    MEMORANDUM REMARDINa EXECUTIVE N, UNITED STATES SENATE TAXATION

    Mr. SURREY. Under this treaty? Senator HICKENLOOPER. Yes.

    Senator HICKENLOOPER. Suppose it does not have a rate.

    CONVENTION WITH PAKISTAN

    The proposed taxation convention with Pakistan is a radical departure from prior tax treaties. This is the first tax treaty which directly reduces United tates income taxes applicable to American corporations. All prior treaties

    (2241)

    26

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    simply reduce the United States income taxes payable by foreigners-they did not affect the United States taxes applicable to Americans. But the proposed Pakistan treaty in article XV for the first time in our treaty experience adopts the policy of using the treaty procedure to reduce directly United States taxes on Americans. The proposed treat), is entitled as a convention for "the avoidance of double taxation and the prevention of fiscal evasion." This is obviously not an appro. private title since the treaty goes far beyond the avoidance of double taxation. Under certain circumstances the treaty eliminates all taxation of income from Pakistan, double or single. Under other circumstances the treaty reduces the combined amount of taxes paid below the regular United States rate. Conse. quently, an appropriate title would be "A treaty to eliminate or reduce the United States corporate income tax otherwise applicable to United States cor. porations operating in Pakistan." In recent years, the Congress has been urged by the VI'reasury Department and others to reduce the rate of United States corporation income tax applicable to income from foreign sources. Generally this rate is 52 percent (with the exception of certain Western Hemisphere operations). Thus, it has been forcefully sug. gested that Congess reduce this 52 percent rate to 38 percent. In 1954 tA proposal was considered at length and then rejected by the tax committees of Congress and by the Congres.s. Since 1954 the tax committees, House Ways and Meatis and Senate Finance, have not given approval to similar proposals. As the record therefore sto-,ds respecting direct tax legislation, the Congress opposes the grant of any prefer,intial corporate tax rate on foreign income. The proposed treaty, which would grant a preferential tax rate to foreign income, is thus, as far as one can judge from the public record, directly in contrast to a general tax policy recently expressed against such a preferential rate, and in this particular instance the treaty can go far beyond the reduction to 38 percent already rejected by the Congres-for it can reduce the effective rate to zero.* This policy conflict, and the consequent importance of the issue, are not limited to the Pa' istan treaty. Once this preference is granted to income from Pakistan, it will have to he extended to a great many other countries of the world. The Pakistan treaty, if adopted, is thus the forerunner of what will amount to a general tax reduction respecting foreign income-a result directly opposite to that arrived at in the formulation of our legislative tax policy. The full effect of the treaty can be realized only by placing it in perspective with our foreign tax credit. Congress for years in the internal revenue laws has permitted American corporations to credit foreign taxes paid against their United States tax. This credit is an acconimodation to our investors abroad who are subject to tax both in a foreign jurisdiction and in the United States. The credit insures that the Investor abroad Is not adversely treated as compared with the investor at home-the United States Treasury simply accepts payment of the foreign tax as payment pro tanto of the United States tax bill. The burden of double taxation is thus borne by our Treasury Department. But the important fact is that the actual tax burden on the investor abroad is not lessened as compared with the investor at home. Both pay 52 percent-but one pays it all to the United States Treasury and the other pays part to the United States Treasury and part to a foreign government. The credit was thus directly designed to meet the added tax burden of foreign Investment. It is not intended to-and until this treaty did not operate toreduce the tax burden on the foreign investor below that of the domestic Investor. This treaty thus distorts the whole foreign tax credit procedure. Under it a credit is given for a foreign tax not paid. The lessened United States tax bill is thus not balanced by the payment of a foreign tax, as in the usual case-and therefore there Is a direct reduction in the tax rate applicable to the foreign investor as compared with the domestic investor. Under this treaty, the reduction can amount to 52 percentage points-or the entire United States tax. In effect, this is what is happening. Before the treaty an American corporation with income from Pakistan initially would have to actually pay a 52-percent tax to the United States. But the Pakistan tax could amount to at least 52 percent Our foreign tax credit steps in and says to the corporation: "You need only ay the Pakistan tax since that leaves you with a 52-percent tax burden. TC United States therefore, under this situation, will forego actual collection of the United States tax. You are thus left like any other American corporation." Pakistan then waives its 52-percent tax. At that point, since there is no foreign tax burden there is no reason for the foreign tax credit mechanism to operate The actual collection of the 52-percent United States tax, previously suspended, can now be resumed. But the treaty would come along and say--although the

    (2242)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    27

    reason for suspending actual collection of the 52-percent United States tax is no longer present, there being no foreign tax, still we will not collect that United States tax. In effect, the treaty simply reduces the United States tax sometimes to zero and this particular corporation is relieved of its tax burden compared with other American Investors-both those who invest at home and those who Invest in countries other than Pakistan. Recently there was considerable discussion in thle Senate regarding the Aramco situation in Saudi Arabia. Concern was expressed over the fact that Aramco did not pay any tax to the United States. Whatever may be the ultimate merits of that situation, Aramco at least paid a tax of about 52 percent to Saudi Arabia and it was the credit of this tax paid to Saudi Arabia which eliminated its United States tax. At least Arainco had a tax burden of 52 percent on its profits. But under the proposed treaty the credit is given for a tax not paid and there can be no tax burden at all. If the Aramco situation is troublesome although the explanation for nonpayment of the United States tax is that a foreign tax was paid, how much more troublesome is the case where the explanation for nonpayment of the United States tax is that no foreign tax was paid. For that is what the treaty does-it treats a United States tax obligation as having been met if the corporation shows a receipt for a foreign tax never paid. The proposal thus hlts been aptly dubbed as a device to credit "ghost taxes." If such a proposal were adopted and were to spread to other countries, then the results would be one United States tax rate applicable to United States corporations in Pakistan, another rate applicable to United Statel corporations in country X, another in country Y, and so on. The United States rate would in effect be set by the finance minister of each foreign country, in the light of that country's overall domestic policies. This would be a far cry front the 52 percent United States rate applicable today, whether operations are in Pakistan or India or elsewhere. It is true today that changes in foreign tax rates affect the actual amount of tax dollars collected from a United States corporation. But these changes affect only the relative size of the two components of the corporation's overall tax burden-the United States component and the foreign component. They therefore really affect only the amount of loss suffered by the United States Treasury Department-they do not affect the tax burden on the United States corporation. If the foreign tax rises our Treasury loses and the foreign treasury gains. If the foreign rate falls, our Treasury gains and the foreign treasury loses. But the United States corporation investing abroad still has its overall 52 percent burden-just as does the domestic investor. As stated earlier, our Treasury is willing to take this loss to prevent a burden higher than 52 percent falling on our investors abroad. It is an accommodation to the fact that we live in one world with many taxing jurisdictions. But aic6mmodation to one world does not require that the actual tax burden on a United States corporation should actually fall below a 52 percent burden-which under our fiscal policies is the burden Congress believes all United States corporations should bear on their profits-because of the tax policies of a foreign country. And the Congress has recently and consistently refused to do exactly this as a matter of tax policy though urged to do so in the interests of foreign investment. One reason perhaps for this congressional refusal, in addition to the very significant arguments against the advisability and efficacy of using tax reduction As an incentive to foreign investment, is "that the consequent reduction in tax burden would in the main go only to the larger United States corporations. This isbecause only the larger corporations are able to invest abroad to any significant extent. Congress and-the Executive have firmly stated that this is not the time to reduce taxes on American taxpayers. The President has recently applied this view even as respects small business. It would therefore seem inappropriate at such a time to reduce taxes by treaty on one class of American taxpayers-those corporations which invest abroad-especially when that class as a whole is best able to bear its share of our heavy tax burdens. All this does not mean that appropriate steps, even in the tax field, should not be taken in aid of foreign investment. It does mean that this particular approach, which runs directly contrary to our prior treaty procedure, which runs directly contrary to our basic legislative tax policy respecting the taxation of foreign income, which distorts the entire operation of the foreign tax credit mechan .4m, which grants a preferential United States tax rate to certain American corpetrations and could even eliminate all income tax entirely in some cases, is not a desirable step. Nor is this a matter of unfavorable United States tax treatment as compared with investors from foreign countries. Basically, most foreign countries, as does the United States, tax income from foreign sources. In fact, through the foreign tax credit device and the tax treatment given to foreign subsidiaries

    (224:3)

    28

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    owned by American corporations the United States goes further than some capital-exporting countries in meettig these tax problems and even in giving effect to taxes waived by capital-Importing countries. Rather, it is a question of fund. mental United States tax policy. And on this question the proposed treaty is directly contrary to the most recent expressions of congressional policy in the
    taxSTANLEY

    S. SURREY
    Harvard Law School, Cambridge, haa..

    SUPPLEMENTARY

    MEMORANDUM

    ON EXECUTIVE N,

    TAx CONVENTION

    Wrr

    PAKISTAN

    1. At the hearing on August 9, 1957, it was asserted repeatedly by the Treasury and State Departments and by others (with reference to art. XV, par. (1), second sentence) that the United States tax laws "nullify" and "frustrate" the tax concessions which some underdeveloped countries grant under their tax laws and that therefore these tax-sparing treaties are necessary. This assertion Is essentially the basic argument offered in support of the proposal. However, and to put the point directly, this assertion is "greatly exaggerated" to use the characterization given to this assertion by Prof. Dan T. Smith, Ieputy to the Secretary of the Treasury, in a speech on this subject before the National Foreign Trade Council, November 28, 1956. To quote Professor Smith: "It is asserted that our tax system nullifies the tax advantages which other countries attempt to offer because the taxes which they forego, by reducing the tax credits which we allow, simply Increase the tax in this country by the same amount. This criticism is greatly exaggerated; it is valid only when foreign operations are conducted directly rather than through foreign subsidiaries or through foreign subsidiaries from which all income is currently withdrawn. Where foreign subsidiaries are used the common expectation is that early earnings will be retained indefinitely and used for expansion. Typically the period of retention for expansion will equal to exceed the period of tax concessions, and when this is the fact, the foreign tax concessions are fully effective." Thus, the basic argument asserted on behalf of this treaty proposal rests on a great exaggeration. When American business invests abroad in foreign subsidiarv form, these foreign tax concessions are effective. Only the foreign tax is applicable to a foreign subsidiary, and the United States tax does not apply until dividends are paid to the United States parent. Moreover, in the overwhelming majority of cases when our industrial concerns operate abroad they do so in foreign sub. sidiary form. Branch operations abroad-the situation in which the foreign tax concession may 'not be fully effective-are found generally (aside from certain Western Hemisphere operations which already enjoy a favored status) only in the case of oil and other natural-resource industries. But In these naturalresource activities the investment follows the resource and not the tax concession. Thus, the basic reason advanced for this treaty proposal, that of nullification of foreign tax concessions, simply cannot be supported. 2. The statements on behalf of this treaty, proposal speak of a tax-sparing principle and a tax-sparing device, without ever directly indicating that this tax-sparing really involves a direct reduction In the United States tax applicable to certain United States corporations Investing abroad. This direct reduction in tax on United States taxpayers In a tax treaty is at variance with all our other tax conventions, has nothing to do with the prevention of double taxation, is a renunciation of our basic tax policy to tax income from foreign sources in order that such income will bear the same burden as does Income earned at home, and is thus contrary to previous congressional tax policy decisions. The Issue must be discussed in these terms and a tax-sparing device must be recognized for what it is-a tax reduction granted by the United States to certain United States corporations as a result of which they will thereby enjoy a preferential status under our laws. Further, it must be recognized that this tax reduction which the "tax-sparing device" Involves can result in windfilis to these United States corporations. The Pakistan Treaty is applicable to United States corporations already Investing in Pakistan. Thus, though they have Invested without any stimulus from or reliance upon the tax reduction now to be granted, they nevertheless receive that tax reduction. Indeed, the letter from the United States Council of the International Chamber of Commerce, inserted in the record of the July 30, 1057, hearing on this treaty, stresses that these retroactive benefits are Just and proper: "The (2M4)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    29

    benefits ofto some American businesses which haveTreaty will, fortunately, be available the tax-sparing provision in the Pakistan already been established * * * "(p. 22). (In fact, the chamber serves notice in this letter that it will push for even greater retroactivity if the principle is adopted.) But the "windfall" aspects of this retroactive application of the treaty-tax reduction are obvious. To quote again from Professor Smith's address earlier mentioned: "If credit is given for all concessions outstanding, there will be windfall gains to companies which had no reason to expect credit against domestic taxes for foreign taxes foregone." Yet It is Just those "windfall gains" which are sent In this particular treaty, and the precedent it would thereby establish,.rseti Moreover, advantages which are Ineffect "windfall gains" are also present even in the case of future investment. Most sound American investment abroad is predicated on the long-range situation, and is planned to last long beyond the tax concession period of foreign tax laws. Consequently, the real inducement to this investment Is the long-range investment climate and not the short-range tax concession. Hence, the United States tax reduction granted under this treaty proposal when effective for the initial period of investment, as it would be in the case of a branch or a foreign subsidiary distributing some profits to the United States parent is in effect a windfall benefit-bestowed for engaging in an activity which would have been engaged in without that benefit. On the other hand, this tax reduction could encourage operators to seek a quick profit--to operate for the period of the tax concession, obtain a United States tax reduction, and then end their operations. This has been the case in some underdeveloped countries. Such a situation is hardly beneficial to the underdeveloped country and this is hardly the kind of activity which the United States should induce and favor with a United States tax reduction. The treaty proposal isthus really an incentive to a quick repatriation of foreign profits rather than to a continued reinvestment abroad of these foreign profits-whereas one would think that Just the opposite effect would be desired. Moreover, as Senator Kennedy pointed out at page 19 in the earlier hearings, what is to prevent the activity from being liquidated and then started over again in somewhat variant form with a new tax concession. The treaty itself, and hence the United States tax law, does not prevent this. The question is simply one of Pakistan tax law-what is a "new undertaking" under that law. Thus the scope of the tax reduction in the United States tax depends on the interpretations, effectiveness of audit scrutiny, ability-and even honesty-of the foreign tax administrators. They and not we become essentially the policemen of United States tax reductions for United States taxpayers. Parenthetically, one of the witnesses presented an example to show that not very much United States tax reduction is involved. Aside from some inaccuracies in the example given (thus its application of Pakistan law differs from that in the examples presented by the Treasury Department), the example is not very helpful. The Pakistan tax concession involved is an exemption from income and super tax of profits up to 5 percent of capital invested. (The Pakistan business-profits tax Is not covered by the tax-sparing clause. However, that tax does not ap ply as to profits up to 6 percent on capital invested as respects any type of activitY, and hence ishere not involved.) Any tax so saved is then credited-though It has not been paid-against any United States tax on the profits, and this credit produces the United States tax reduction. The extent of that reduction thus depends on two factors--the amount of capital invested and the rate of return. If the initial capital invested is large and the-initial rate of return relatively modest so that the initial profits are less than 5 percent of the capital invested, then the exemption and credit can wipe out all taxes, both Pakistan and United States, as to the Pakistan income. (The 5 percent return exempted, moreover, is after depreciation allowable.) As the rate of return rises then some tax becomes payable. But even at a 20 percent rate of return, the exemption and United states tax reduction can amount to about one-fourth of the United States tax. This would in effect mean a reduction in United States tax of about 13 percentage points-from 52 to 39 percent-just 1 percentage point away from the tax reduction on foreign income proposed by the Treasury in 1954 and not approved by Congress. Further, the amount of capital invested is determined under Pakistan law, and not United States law. This amount is not an easy matter to determine, as experience in a somewhat similar situation in United States excess-profits tax history shows. Not only must the capital invested be determined precisely, but also the amount of capital allocable to the exempt activity. Where some exempt and some nonexempt activities are involved, this allocation can be quite complex.
    73095 O-42--vol. 2-48

    (2245)

    30

    DOUBLE TAXATION CONVENTION WITH PAKISTAN-

    Here again the policeman of the United States tax reduction is the foreign tax administrator, for his decisions on these difficult legal, accounting and factual questions decide the point.' 3. Reference was made in other statements presented that through the foreign tax credit we modify our basic principle of taxing all income of United States corporations, no matter where the income originates, by recognizing the tax claims of the foreign jurisdiction to tax that income at source. This reference is appro. priate, for that is the effect of the foreign tax credit. But the point of the modifl. cation-and its under ing principle-sshould not be glossed over. The foreign tax credit recognizes foreign taxes paid, and by that recognition prevents a doubling up of tax on the United States taxpayers. It is the United States method-and we pioneered in it.-of meetin% the problems of double taxation. It insures, as far as we can, that the United tates Investor abroad is not taxed more than the investor at home. It thus achieves tax neutrality, as far as we can, between the two forms of Investment. But by giving credit to a foreign tax paid, it leaves the investor abroad with a tax burden on his profits not less than the tax burden which is borne by profits at home. As far as the investor is concerned, the United States tax principle that all income, foreign or domestic, of a United States corporation, bear the ,,amo tax burden, is maintained. But it is precisely because this point is glossed over that the statements presented slip so easily to the next assertion: Since we concede the power of the foreign jurLsdiction *to tax, we can just as well through tax-sparing concede then the power to forego taxes. Thus far, of course, the assertion is meaningless for we do not in any way tell a foreign country that it cannot reduce its taxes if it so desires. Hence, ite assertion must be made even more strongly: We must recog. nize the right of the source country to forego some of its tax without our "stepping in" and "nullifying" their action. The phrase regarding our "stepping it is a curious one. Vor what this assertion comes down to is that we must recognize the right of the source country to forego taxes even though to do so requires that we stole)lev ing United States taxes on United States corporation on profits subject to United states tax and in turn even though this means that these corporations end ip with tax burdens less than those of other United States corporations. So stated, it is obvious that the recognition granted under the foreign tax credit to the jurisdiction of the foreign country to tax at source hardly carries with it the corollary that we must also accommodate our tax laws to waiver or absence of tax in the foreign country. What the proponejkts of this treaty device are really asserting is that the United States should give uip its basic principle of equality of tax burden on United States taxpayers. For this principle can only be maintained by adherence-as we have done from the start of the income tax-to the concept that the United States can tax its citizens and corporations on their worldwide income. Yet it is this basic and longstanding concept which the proponents of the tax-sparing device are asking the Congress to abandon. The same issue is raised by the references in the statements presented regarding the resentment of underdeveloped countries against the nullification of their tax concessions. Of course, as pointed out above, through our tax rule regarding foreign subsidiaries the asserted nullification is greatly exaggerated. In fact, it is just the other way around-by adhering to this rule regarding foreign subsidiaries and therefore not taxing foreign subsidiary Income if itNs reinvested in the foreign
    I The wording of article XV Issuch as to raise the question whether this particular application of the tatsparhig device is not technically defective. The first sentcnee of paragraph (I) states that Pakistan tax able in respect of Ineomefrom sources within Pakistan shall be credited against United States tax. The Italicized phrase does not appear In other tax treaties and Is not a limitation on the foreign tax credit given under the basic Internal Revenue Code for foreign taxes paid. (Indeed, without art. XVI (4), this sentence because of this phrase wouk, narrow the scope of the present foreign tax credit for laxes paid.) The second sentence then mays that for the purpose of this credit-i. e., of Pakistan tax payable In reped of Income from sources within Pakistan-aUnited States corporation Is deemed to have paid the amount by which Pakistan tax is reduced under Pakistan law, see. 15B. This sentence thus means that only that Pakistan tax that otherwise would have been paid (but for the Pakistan tax concession) on income from sources within Pakistan Is after the tvx concession by Pakistan deemed nevertheless to have been pild. Hence It Is not enough to know the amount of the tax reduction- It Is necessary also to know what portion of this reduction is attributable to sources within Pakistan. But the Pakistan tax return will not gihs us this Information and there presumably Is no rule which will supply the answer. The Pakistan tat concession does not depend. on any such breakdown under Its law. Moreover, attribution to source. within Pakistan depends on United States source concepts and not Pakistan source rules-yet how Isa Pakistiai Official to be expected to know our source rules? For exa'nple. If an American Jute manufacturer produces jute In Pakistan and both sells in Pakistan and exports abroad from Pakistan, he Is taxed by Pakistan on all his profits and he gets a tax conces,',on on all these profits up to 6percent of Invested capital if he qualifies as a new undertaking. But the treaty treats the Pakis.tan tax reduction as a tax paid only as respects that portion of the reduction attributable a to profits front Pakistan. But how is that portion to be determined? Does it turn one ratio of proflto, or of capital employed, or what? And how can a United States agent tell, when the Pakistan return pMesumably does not and naed not go Into the matter?

    Fa

    ('2246)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    31

    under certain circumstances because of the formulas now followed but probably inadvertently adopted at the beginning, Inthe calculation of tax credits in the case of subsidiary operation. Thus, where operation isInforeign subsidiary form given a foreign tax rate of 26 percent, the effective combined tax rate of foreign and United States tax is 0.4025 percent under the foreign tax credit formulas Instead of the expected 52 percent. Where operation is the form of a chain of a parent and 2 foreign subsidiaries, the bottom corporation being in a country with a tax rate of 25 percent and the Intermediate one Ina country with a tax rate of 20 Percent, the effective overall tax for the chain Is 0.4045 instead of 52 percent.

    country, the United States insures that recognition will be given to tax waivers abroad ill most situations. As long as we permit this deferral and assert our juris(diction to tax only when income is received by the United States parent corporation itself, we have permitted these foreign tax concessions to be effectiveas Professor Smith's address earlier quoted Id icates. But passing even thisin the few situations remaining where a problem is present-the references to resentment and our stepping in to interfere with foreign tax concessions are, to repeat, quite curious. 'This is what they come down to: Many underdeveloped countries have started with low tax rates. Under the pressures of revenue needs and domestic policies, these rates have risen. The United States Investor faced with a United States tax on foreign profits if it operates abroad in branch form or receives dividends from a foreign subsidiary, is not bothered when foreign income taxes are nonexistent or low. His investment abroad is here not deterred by tax considerations. But as foreign Income tax rates rise, the double burden could be too heavy, and foreign investment would be handicapped as against United States domestic investment. So the foreign countries assert that the United States should do something to ease that burden. The United States does so and waives collection of its tax to the extent foreign tax is paid-I. e., grants at foreign tax credit. Suppose the foreign tax rises to 52 percent. (This rise is not caused by the foreign tax credit except in unique situations, perhaps limited to oil or natural resources, where the only corporation present is a large Anierican corporation. But In most underdeveloped coti.tries, there are many more local investors involved than American investors and the foreign corporate tax rate is fixed under fiscal policies applicable to these local Investors.) At this point United States tax collection is waived entirely tinder the foreign tax credit, since the investor Is subject to the same 52. percent burden as the investor at home in the United States. Now the underdeveloped country comes to realize that under the conditions p)revailing in the country a 52-percent rate discourages private capital formation and industrial activity. So It starts to grant tax concessions. As Its tax rate lowers because of these concessions the need for the foreign tax credit is removed and United States tax collection Is commenced. But at this point the effect of the foreign tax credit-whose very existence was demanded by the foreign country-is said to be a stepping In and an action which takes away the benefits of the concession. Not only was the existence of the foreign tax credit demanded by the foreign countries-its very continuation is necessary to the long range effect of their concessions. For once the exemption period of the concession is ended and the foreign high rate of 52 percent or more is resumed, the United States investor could not survive without the foreign tax credit. It is thus seen that what is really being urged on the Congress in this treaty proposal is the principle that the tax burden on United States corporations should be fixed by the fiscal policies and the finance ministers of the foreign countries. When their taxes are high, they want us to waive collection of the United States tax. When their taxes are low, they also want us to waive collection of the United States tax. Whatt is overlooked by these foreign countries and in tldF. treaty proposal is how far the United States has already gone to permit foreign investment to be undertaken despite the presence of two taxing jurisdictions anct to permit accommodatioe to foreign tax policies, without at the same time destroying the basic principle that United States investors abroad should not bear in the end a lesser tax burden than United States investors at home and should not be given a preferential status. The foreign tax credit and the tax rule regarding foreign subsidiaries go much further than do many capital exporting countries in meeting the tax problems of foreign investment.' It is pertinent to note at this point that England has concluded a tax treaty with Pakistan and this tax treaty does not have any tax-sparing provision in it. In fact, though the British originally suggested in 1953 that consideration be given to the tax-sparing device, they have not adopted it and instead have sought other solutions. The solution adopted this year in England embodies the tax deferral approach inherent in our tax rule regarding foreign subsidiaries. Under that solution, a special class of English corporations known as overseas trading Corporations may engage in foreign operations, under certain conditions, free of IAnd even this fails to take Into account the significant tax preferences granted to foreign Investment

    (2247)

    32

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    tax until distribution is made to shareholders. This has almost the same tax effect, though it is not quite as beneficial, as where British investment operates abroad through a foreign subsidiary. (On liquidation, tax is paid in the case of the overseas trading corporation; it is not paid in the case of a foreign sub. sidiary. Further, the problem of living within the conditions presented does not obtain for a foreign subsidiary.) ieowever, operation in foreign subsidiary form is very difficult under the British law since a corporation, though foreign, is treated as a British corporation if managed in Britain. (The United States rule is much more liberal sinco a foreign corporation is still a foreign subsidiary though managed in the unitedd States.) The overseas trading corporation pro. posal gets over this difficulty, and permits deferral of tax. This new English provision is not a tax exemption, as some witnesses have stated. It is only a tax deferral, of the type inherent in our foreign subsidiary rule. While the overseas trading corporation is relieved of profits tax, so is a foreign subsidiary under British law. -And this relief is in large part theoretical in the case of the overseas trading corporation, since to meet the conditions established a British concern operating at home and abroad would have to place its foreign operations in a subsidiary to qualify for the overseas trading corpora. tion deferral. But this In turn subjects the dividends of the subsidiary to profits tax. (See in general Harvard Law School World Tax Series, Taxation In the United Kingdom, Supplement Covering 1657 Budget Message.) In effect, at best the British in this 1957 solution have gone no further than where we in the United States have always been as respects our foreign subsidiary rule, except that actual foreign incorporation is not required. 4. Reference was made in statements submitted to the need for mutual con. cessions to obtain the objectives desired by the United States in these tax treaties and to the tax-sparing device as an appropriate concession. Yet the example chosen, in the memorandum submitte by the Department of State, not only does not appear convincing but also raises questions as to the objectives pursued. It is said that the United States must insist in a tax treaty that the country of source, here the underdeveloped country, must give up its tax on royalties paid to United States licensors of patents, know-how, and the like. Yet by and large, as a result of our foreign tax credit, taxation at the source is not a basic obstacle to licensing abroad. At the same time, as a result of the increasing desire of United States corporations to license abroad and of the desire of underdeveloped countries to receive such technological aid, our insistence that underdeveloped countries yield their tax on outgoing royalties can deprive them of needed revenues. In view of the foreign tax credit, moreover, this insistence does not benefit the United States taxpayer but only the United States Treasury. This insistence, therefore, is hardly in keeping with the arguments earlier advanced that tax sparing is necessary because otherwise the United States Treasury would benefit from the tax concessions in the foreign country. This is but one example of the contradictions involved in insisting that underdeveloped countries yield their general source taxes and at the same time insisting that we should aid their economic well-being. Taxation at the source on Income flowing to the United States is onerous to the United States taxpayer If it brings his effective tax burden above the United States rate. But unless it does this the effect of the foreign tax is not felt, and the real loss is to the foreign country It it must yield beyond this point. There is therefore little reason to insist, as the State Department memorandum urges we must, on any sacrifice in revenue by these countries. [I Once having decided to eliminate double taxation through the foreign tax credit device, there is no reason for us to insist on eliminating it all over again in another way by making the underdeveloped country sacrifice its revenue source. M Even as respects the tax-sparing device, a searching question exists whether a resort on our part to this device would not in the end be basically injurious to the economies of underdeveloped countries. This device favors a country with an unstable and unrealistic high rate tax system shot through with tax concessions, many of which are contradictory and self-defeating. As such it tends to postpone intelligent revision of foreign tax systems. Moreover, these countries desperately need revenue for public projects. Encouragement on our part to pressures for tax concessions by these countries-an encouragement inherent in the tax-sparing device since the tax concession means reduction in United States tax-may well result in depriving them of revenues they could just us readily obtain. The rash of incentives and concessions might well pass more quickly and be followed by stable and realistic laws but for a treaty device which encourages our investors abroad to bring pressures on foreign countries to grant tax concessions. (2248)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    33

    These countries are beginning to see that these tax concessions in their present form may well be injurious to them. The following is quoted from the May 1956 draft of the first 5.year plan, 1955-60, Government of Pakistan Planning Board: 4It is generally known that several textile and other industrial concerns have made tremendous profits. Due to scarcity of Imported consumer goods, large incentives have in fact been available to investors and promoters of industries. Considering both the large profits earned openly and clandestinely and the sub. stantial concessions granted on these swollen profits, it appears to be a fair conclusion that the public revenues. have not obtained a fair share of the betterment and prosperity which have attended the development of these industries" (163). The Department of State has previously taken a different view. In 1949 Under Secretary of State Webb said before the House Banking and Currency Committee: "We consider that the private investor has an obligation * * * to contribute his fair share of taxes to the local community." This view has much to commend it. It and the issues considered above raise a basic question of long-run principle whether it is not really self-defeating for the United States to implement its program for the development of backward countries by a device which focuses pressures on them to grant tax concessions, to reduce their revenues, and to retard if not undermine sound and equitable taxation in those areas. Finally even in the area of tax concessions, the tax-sparing device inevitably involves the United States in a choice among alternative tax concessions and brings pressures to bear on the use of the exemption-type concession. For this device to be effective requires the type of concession that permits ready identification and calculation of the "tax saved," so as to make administration of the device at all possible. After all, to credit a tax not paid one must be able to identify accurately what was not paid. The exemption concession is of this type though as earlier observed it is not without its many problems. Yet many underdeveloped countries are finding that other concessions such as increased depreciation or an investment allowance, are more desirable. India, for example, is moving to restrict its exemption concession in favor of the depreciation allowance. The taxsparing device, with the pressures it exerts in one direction, can be more of an interference with foreign tax laws than anything yet suggested in this field. 5. It is clear that a very significant precedent would be involved in the adoption of this tax-sparing device. It Is not just a little clause in the Pakistan convention. It presents to the committee a very fundamental question of tax policy, involving ail of the issues and problems described above in testimony presented at the hearing. Once adopted, this will be a precedent which cannot be withdrawn. This is recognized by the Government representatives, and they even stress this precedent aspect. But once this path is taken the committee is involved in endless choices among foreign countries, among different tax concessions, and among different United States taxpayers. Moreover, it is thrown into these prob. lems without any general rules or standards to guide it. It was urged before the committee by other witnesses, and in a sense this was stressed perhaps most strongly, that the tax-sparing device has a "symbolic value" and that it is Justified by its "emotional appeal." But symbols and emotions will hardly be of aid to the committee when it must decide the questions that lie ahead and when it must face the pressures that this precedent will inevitably bring. Already warning has been served by American investors that these pressures are to come: The National Foreign Trade Council, at page 20 in the earlier hearing, has said that the tax-sparing device in the Pakistan treaty "should be Implemented more broadly in future treaties." The United States Council of the International Chamber of Commerce, at page 22, has critized the restriction of the Pakistan law to new undertakings. It therefore urges that the committee make it clear that this treaty is not a precedent that discrimination by foreign countries against existing businesses should be accepted by the United States. Moreover, it points out that the Pakistan tax concession is keyed to a fixed rate of return on invested capital and urges that application of the taxsparing device to this concession not be considered as limiting use of the device in future treaties to this one type of concession. It is clear that strong presiuree are in the making for a wider and wider application of the tax-sparing device and its accompanying reduction in United States taxes once the precedent is set. And, judging from our experience in tax legislation and tax treaties, one can hardly be sanguine about any attempts to confine a tax reduction proposal once it has been adopted and pressures such as the above set in motion. Certainly "symbolic value" and "emotional appeal" will not furnish strong guidance to the committee. Tax history is replete with examples of the fact that major loopholes develop from preferences that initially appear to be quite limited. (MO4)

    34

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    6. There was some discussion in the hearings of the need of a tax incentive to encourage United States private capital to invest abroad. The wisdom of using tax incentives for this purpose is very debatable, and full discussion of that issue is not possible in this memorandum. 3 But whatever the outcome of this issue, it would certainly appear that the particular device hero suggested, the "tax. sparing device," is fundamentally'an unsound one to offer as a worthwhile tax incentive. It does not begin to answer any of the problems that must be faced when a tax incentive is to be used. Thus, is there any evidence as to how one can tell in usinq this tax-sparing device just how much tax relief is needed for an effective incentive? If the effect of the incentive is insignificant-and an experi. enced witness stated to the committee that no serious amount of capital would be attracted because of this device in the Pakistan Treaty-then a tax windfall has resulted and our Treasury has lost revenue for no real purpose. Further how do we recognize which are the countries to which American investment should be directed by tax incentives? Certainly the test cannot be simply those countries which offer tax concessions, yet this appears to be the sole criterion under the tax-sparing device. Further, how do we recognize which are the types of activities to which American investment should be directed and how do we devise methods which would channel the tax incentive so as to draw forth new investment? The tax-sparing device, if it answers these latter problems at all, does so really by relegating all these problems to the policy decisions and rulings of foreign finance ministers and foreign officials. Yet these are exceedingly difficult problems to solve and it is certainly a curious solution that says the course and application of United States tax incentives basically should be decided not by us but by foreign officials, especially when these very foreign officials recognize their own limitations and even failures in meeting these problems. It is not enough to say In response that all of this is a matter of treaty negotiation. For the very Insistence on negotiation indicates the inherent weakness of the tax-sparing device as a method of developing a clear-cut policy for granting a tax incentive for United States investment abroad. While the absence of any guiding standards to solve the basic questions enumerated above undoubtedly means that the tax-sparing device can only be applied through ad hoe negotiations in treaties, this absence of standards hardly thereby becomes a virtue. 7. The Pakistan Treaty thus involves a very basic issue of tax policy in the field of foreign income-an issue as important and far reaching as any that Congress has faced on this subject. On the technical side, it involves a consideration of the foreign tax credit approach, already under examination by the tax committees of the Congress. It also involves a consideration of suggestions elsewhere advanced which would give effectiveness to 4foreign tax concessions in the limited areas in which they are not effective today. Then, there are all the broad and difficult policy issues presented to the committee in these hearings. Certainly a proposal as important and far reaching as this one merits extended study and discussion by the Congress. It is respectfully suggested that at the very least this course be taken with regard to the Pakistan Convention. This committee, together with the Senate Finance Committee and the house Ways and Means Committee, at the very least should give extended study to these basic problems in the taxation of foreign income befor any decision is taken on this particular clause in the treaty.
    STANLEY 8. SURREY

    Harvard Law School, Cambridge, Alas. AuoUsT 10, 1957.

    The CHAIRMAN. Thank you very much. The next witness is Mr. Mitchell B. Carroll, counsel to the tax committee of the National Foreign Trade Council of New York. Mr. Carroll, we are very glad to see you here.
    Investment, 36 Columbia Law Review 815 (June 1958).

    I For a consideration of some aspects, see Surrey,

    Current Ises in the Taxtion of Corporate Foreig

    4Thus, elimination of the per-country limitation in favor of the overall limitation, adoption ofa carryback and wrryiorward of unused credits, permission to defer tax on foreign income in the ame ofa United States corporation operating Inbranch form perhaps along the path the British have chosen or the similar sugr* tima In Barlow and Wender, Foreign investment and Taxation (1955), are all possbilitles consistent with our base tag policies and involving far fewer pitfalls than the tas4parngt devlie. There has as yet DO been any public consideration by the Congrm of the suggeMtions.

    (2250)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    STATEMENT OF MITCIELL B. CARROLL, COUNSEL TO THE TAX COMMITTEE OF TL.4- NATIONAL FOREIGN TRADE COUNCIL OF NEW YORK

    plauded what you have done because it has been definitely beneficial to American business and investments abroad to have the tax rules clearly set forth in a convention that both the United States and the foreign country have agreed to. Usually the foreign tax laws are written in a foreign language, in this case it would be Pakistani, which few Americans could read. This treaty is beneficial in that it clearly sets forth the rules.
    ARTICLE XV OF THE CONVENTION

    stand? I can talk more easily. The CHAIRMAN. No. Perhaps you will be heard better. Mr. CARROLL. I represent the' tax committee of the National Foreign Trade Council which as you know is a trade association in New York composed of practically all the American corporations and individuals that are interested in trading and investing abroad, and we have appeared before your committee before, sir, to support previous tax conventions that have been concluded and submitted to your committee to determine whether or not it should recommend that the Senate give its advice and consent to ratification and we have ap-

    Mr.

    CARROLl.

    Mr. Chairman and Senators, do you mind if I

    gives up $6,000.

    Let's cut down what we are talking about to size. We are talking about one part of an article in this treaty, article XV, which involves the credit for foreign taxes, and it is true that the article first says that you get credit. for the taxes paid in Pakistan and then you will also get credit for a tax that you are deemed to have paid in Pakistan. What is this tax that you are deemed to have paid in Pakistan? Yesterday in anticipation of coming down here a tax man put down some figures on a piece of paper which shows just what we are talking about. Let us assume that your investment in Pakistan is a million dollars and that your return on that is $200,000. All that you are getting as a reduction under this treaty is what. is provided 'in section 15B, namely exemption from income tax and supertax, income equal to 5 percent of your investment. In this case 5 percent would be merely $50,000. So it means that your income of $200,000 would be reduced to $150,000 and without ioing into all the computations, you find that the United States tax would be $104,000, that the credit for taxes paid in Pakistan-and incidentally the total effect of rate of taxes is 64 percent, higher than the United States rate, after this allowance the taxes paid in Pakistan would be $98,000 and without the treaty you would be paving $6,000 to the United States. Now all this treaty means that in'this particular example the United States
    The CHAIRMAN. You mean taxes paid or taxes levied. There has

    been that distinction made here this morning. Mr. CARROLL. All it has given up in this case is what corresponds to the reduction of tax in Pakistan due to this allowance of 5 percent of your investment the CHAIRMAN. Which is it, taxes paid or taxes levied?
    (2251)

    36

    DOUBLE TAXATION CONVENTION WITH PAKISTAN-

    Mr. CARROLL. It means-all this does is give a reduction in the taxes in the credit for taxes paid in Pakistan which corresponds to the allowance. Senator HUMPHREY. I believe I see your point. You are saying that the Pakistan law permits you to receive a 5 percent return on your investment tax free? Mr. CARROLL. That's right. Senator HUMPHREY. After that you pay a 64 percent tax on every. thing you make above that? Mr. CARROLL. That's right, sir. And the total effective rate in Pakistan comes to about 64 percent. What this does is cut down the burden of the Pakistan tax so it is nearer to the rate of the United States. It doesn't mean a complete exemption as has been repre. sented to you. Senator HVMPHREY. Pakistan could change the law. Mr. CARROLL. We are talking about the present law. The CHAIRMAN. What is proposed. Senator LoNG. What the treaty says. Mr. CARROLL. Let us address ourselves if we may to this provision in the treaty. Senator LoNG. You are addressing yourself to facts that are a limited situation but the treaty goes for beyond those facts. So you are addressing yourself to thie facts of Pakistan rather than the
    language in this treaty. Mr. CAROLL. No, sir. I am addressing myself to the effect of

    this treaty on the United States insofar as it concerns the credit allowed an American corporation which qualifies under section 15B of Pakistan law, which means that (luring a period of 5 years, it will get a reduction in its tax base equal to 5 percent of its capital. In other words, it is a very limited allowance and it is only allowed for 5 years. In my opinion, there has been much ado about very little. The principle of the thing is important, and getting (town to principle, in the first place-Senator WILEY. Have they any oil in Pakistan? Does this apply
    to oil? Mr. CARROLL. This would apply to any industry that meets the requirements of section 1511. 1h aven't got that. section with me

    but it applies to any industry. I suppose it would apply to an oil industry too. I don't know whether they have explored for oil in Pakistan or not. Senator WILEY. Can anyone tell us whether it has application to companies doing oil business? Mr. KALIJARVI. I believe it does. Senator WILEY. What company in America is operating there? Mr. KALIJARVI. I don't know, Senator. Senator WILEY. Of course you have the 27.5 percent depletion
    allowance which is not understood by most people for the simple reason that they get their oil cheaply and 27.5 percent is the gross sales. Mr. STAM. I just wanted to point out that the law they-have over there says "To stimulate economic development certain exemptions

    from income and su pertax"-that is the surtax--"are allowed in the case of new industrial corporations. Specifically the exemptions apply to any industrial undertaking which was commenced in Pakistan
    between August 15, 1947, and"March 31, 1958, for the manufacture (2252)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    37

    or processinlg of goo0is, shipblil(ling andi ntavigation, tile production of ele(trie power, the exportation of mineral and oil deposits, or any other purpose whieh is declared by tax authorities as qualified for the exemption. Such aln enterprise will qualify for exemption regardless . of the form il which it is operated provided that at least 10 persons art, eiflployed. For the first. 5 years of operations the profits of a (jtildifying enterprise eqtal to 5 percent of invested capital are exempt front 1oth income t'ax anti supertax." That is the provision that is in the convention. Senator WVLEy. And the figure for the tax in Pakistan is 615 percent. Mr. STAM. It is alolit th1at. Senator WILEY. That is the present tax in Pakistan. Mr. SWAM. In Pakistan. Senator HicKE,%,OOP.EBi. You said that, is in the convention. You mean convention or Pakistani law? Mr1'. STAM. What I meant to say is that the convention is predicated on this law. Senator HICKEN LOOPER. The provisions you have been reading are in Pakistani law. ' Mr. ,rM. That's right. M\r. CARROLJ. They are in section 15B of this law to which allusion is made in this article XV of the convention. If I may resume, as Mr. Stam has pointed out., it merely means reduction in the tax base of income and supertax equal to 5 percent of the capital employed. In this example where we had an investment of a million dollars and a presumed income of 20 percent of the capital, of $200,000 which was reduced to $150,000 by this allowance of $50,000, 5 percent of tit'e capital, you have a foregoing by the United States of only $6,000. Now, getting back to the principle of the thing. In the first place, my predecessor has stated tiat the Congress rejected the proposal of the President.

    I think-you of the Senate know the rteord better than I-but according to what was stated in the Senate Finance Committee report, that committee postponed consideration. The following year the same provisions that had been considered and had been post-. poned were brought out in H. R. 7725, but the President then took a position against. any reduction in taxes because of the budgetary situation and so the consideration of H. R. 7725 was postponed. Congress was giving further considerat ion to the question of the treatmeut of tax requiring income and presumably next year we will have the question before us.
    REASONS FOR TREATY APPROACH

    Just, yesterday in the Wall Street Journal it was announced that the

    Senator HIcKENLOOPER. Mr. Carroll, I am going to have to leave in just a few minutes but I would like your observation on this particular point. Is there any question but that the Congress of the United States can pass a law granting the same kind of a concession

    lar kind of concessions.

    to foreign investment as is contained in this treaty? Mr. CARROLL. That's right. Senator HICKENLOOPER. We could allow that or a"iy other particu(to6)

    38

    DOUBLE TAXATION CONVENTION WITH PAKISTAN'

    Mr. CARroRL. Yes. Senator HICK.:ENI',oPE.:n. Then, from your standpoint, why is it included ill a treaty? In other words, there is the I)raetieal lperna. henee, at, least, of a treaty for a long period of time. Doesn't it, in effect, take the tax regulatory power out of the Congres4 and freeze it into at treaty which Congress can't touch unless we denounce, the
    treaty? Mr. CARIHOLII. Well, sir, Mr. Smith and others will follow-Senator HICKENIA)OPfR1. I am not alleging that. I want to get

    Mr. CAtROIljJ. Yes. Senator HICKhmt ooIIt1o. We have the power.

    your view on it. Mr. (C.uoiu We have officials here that can answer that officially 4,. l)ut if 1 can give the layman's view. I think the reason is this. Mir. Ilumphrev, the Secretary of the 'Treasury, really exj)lailil all this templating emIoldying in tax treaties a recognition of the eon'essions granted by other countries to attract American investment; and the recognition would only he given for tenil)oral'y ('olees8ions. So I think the reason why the treaty approach has been adopted is that it is very dillicult to draft in the Internal Revenue Code a pro. vision that metetls all the situations. It is easier to do a,1has l)een done in this treaty with Pakistan to give the concession with reference to a specific provision of law of the other country, so that your concession is tyIhereby limited in scope and in time. The law of Pakistan when he Imehe his announcement before "the financial conference in Rio de Janeiro in Octol)er 1954. the said that thi Treasury was (.oil.

    savs this is only given for certain enterprises. 'In other words, you limit the scope of tile allowance under the treaty to what that particular country wants and it makes it easier credit in return for concessions that the other country will offer. I think that is the reason, sir. It would be very difficult to draft legislation that would meet all the different types of allowances granted by other countries. I suppose it could bie done because Mr. Stam is vwrv adaptable and adept in legislation and he can answer better than [Cwhether he thinks the
    Tative, approach is better than the treaty ap roach. It is easier to tailor the treaty to the particular concession by reference to tile language in the foreign law. Senator HICKEN-LooPeI. Thank you. Mr. CARROLL. ThenSenator WILK:. -Just one other question there. 'Taking the figures you used and assuming that half of the corporation's income was paid to American stockholders in dividends I assume they would have to pay an income tax on it if they were in tile United States. Mr. CARROLL. That's right, sir. Senator WILEY. I am trying to get the balance against this $6,000 which you said is all that the Government would lose? Do you see l in the l)argainilig in concluding tax treaties to give our Government representatives the power to grant this concession against our tax

    I think that is the reason.

    my point?

    Mr. CARROLL. I don't know. It is awfully difficult presunmably. In the first place you don't get this credit until the income returns to the United States, because this is a crteit against the tax paid to the

    f W)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    39

    ITUnited States on the income that comies into the United States and will he distributed to the shareholders. Senator WiJLI.Y. Or kept ill the corporation. 1. Mr. CARRol I But the advaltiage is, I stipposI', inI 1ihe case of the Aineritan corporation ill this case, it Inealls it retluetion in lite Pakistan Jjix which ordinarily has an effective hurden of allut i14 peree'nt and( it brings it dowin niearer to the United States rate of 52 percent. In ni1ny Casts it will leave a higher rate in Pakistan than you pay in the United Stlates. Whenever %-o pay a higher rate ill the foreign country than yiio pity ill thti' lTItmled'Stittes, you hiave to hear in efleett a penalty for inlvestinlg in that coutintry. But the peoit I was trying to make is that the importance of this

    provision in the Pakistan treaty has been gro,.ly exaggerated by my


    predecessor.
    COMPUTING TAXAIILE INCOME IN PAKISTAN

    Senator HUNIIuiRIEy. First of all I want to tell you I appreciate yoor testimony. It is very ]elpfui. When you say that 65 percent rate in Pakistan, now we have in the tax schedule 2 rates. You are taxed up to $30,000, and then you have your surtax on top.

    How many exeniphave? How many little ways do you have of not really tions does iti making the 65 percent? Sixty-live percent on what? This is really what it gets down to. You ('an have 65 percent on nothing, you know. Or 65 percent on what. is determined as net in,1,,n0. flow do you determine net income tinder Pakistan latw: Mr. CARROLL. That was gen to me as the net income thai results. Senator HUMPHREY. Net income is a big catch phrase. It depends on how you determine net income. Mr. CARROLL. Well, it is substantially the samn-this is a business
    corporation and the result is substantially the same. Senator HuMPHREY. Not necessarily. In determining net income

    Mr. CARROLL. Yes. senatorr HTMPnRF.y. What is this 65 percent?

    in Pakistan, you may not be able to charge off advertising. Maybe that is not a business deductible expense. I don't know. Net income is a very, very loose phrase. Net income for my brother is entirely different than for me. He is in business and I am not. In business he gets concessions that an ordinary, person does not get if he is not in business. If I want to run an ad in a newspaper as a citizen I can't deduct it as a business expense. If Humphrey Drug, Inc., wants to do it, it can deduct it as a business expense. One gets a deduction and the other does not for doing the same thing. What is net income in Pakistan? Net income in the United States is a very clever device. Mr. (CARROLL. I understand it is the same for a business enterprise.
    Senator HItMPHRE. Maybe Mr. Stam knows.

    taxable income of a company is computed on a net basis after deduetions from gross income similar to those allowed under United States
    Federal income tax.

    Mr. STAN. I can make a statement from a diget I have.

    It says

    Senator HVi, muPHR.

    Under our Federal income tax.

    Mr. STAN. Yes. Senator HvmpHREY. That helps. ("22m5)

    40

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    Mr. STAM. Depending upon the amount of its income a company may be subject to the following rates of tax. Income tax imposed at a flat rate of 31% percent. Supertax imposed at, a flat, rate of 25 percent. but subject to a system of rebates, and business profits tax imposed at a rate of 16% percent on profits in excess of 100 rupees or 6 percent of invested capital whichever is greater and the business. profit, tax as I understand it is not in this concession at all. It, is just the income tax and supertax. Senator Ilv.%tPHitnpY. When you say 65 percent effective rate, you like to know effective on what ? Senator 14omX. flow much (1o they have to make before the supertax rate goes into effect? Mr. STAM. I don't know. Does anyone have that? Before the supertax goes into effect. Mr. CAIRoLL. I think it is on the same income. progression by tie very name but it does not in fact have that sig. nificance in Pakistan. Senator LONG. You tax them at. 31 percent and then out of what they have left you then tax them 25 percent.. Sir. SMITH. You deduct the business-profits tax which is 16%
    percent, I think.

    business, profits tax. It hs the connotation of having an element of

    Mr. SMITH. It is on all of the income after the deductions of the

    high tax rate. Obviously an American corporation bearing 52 percent is not going to be tempted to go into a country where they will
    $6,000.

    Mr. STAM. That is the one I read. Senator LoNG. You tax them 16 percent; then you tax them 31 percent; then what is left over you tax at 25 percent. Mr. SMITH. No: the 25 percent applies after what is left over, after the first dilduction. I have an exhibit which describes the Pakistan tax system in detail. Mr. CARROL. After the company gets through paying these taxes it withholds a supertax on the income it distributes to the shareholders. It is the burden of these altogether that comes to 62.5 percent or something like that. Senator LONG. If Pakistan is collecting those taxes I shouldn't imagine they are having much success in getting any investment over there. Mr. CARROLL. That is the amazing thing. Here they have this

    Mr. SMITH. On net income with the exception of'the first hundred thousand rupees or 6 percent on invested capital.

    Senator HIMPHREV. On net.

    have to pay 62 percent or 63 percent or 64 percent, or whatever it is. So they give this little concession, which amounts to very little when you compute it out. In this example it only makes a dlifference of

    AMERICAN CORPORATIONS OPERATING IN PAKISTAN


    consequence at the present time in Pakistan? Mr. (CAIUOLL. I guess there are a number of corporations. noitiing of aaty great size, because it is just too burdensome.
    Senator Loxe. None of amy considerable size. What size do you have in mind? Do you have any knowledge of what companies ars -Senator Loso. Is there any American businem over there of any

    DOUBLE TAXATION CONVENTION WITH PAKIBTAN

    41

    over there doing business? Do you have any knowledge of who might be interested in this? Mr. CARnnOu 4 . I guess the Treasury probably knows. Mr. SMITH. The conipnjy I have heard froni most is onile General Mills. Senatr HvUMHIxv. A fertilizer plant. Mr. SMIrlH. Not only fertilizer but it is so.ie sort of nuts that are grown only in Pakistani that are useful in a variety of ways or extract therefrom. I forget the particular form. Senator lIft'sarnJ:v. I -heard almut it. Mr. SMITH. General Motors has somie assembly activities there on a very small stale. The General Mills is the one I have heard from. Senator WiiLIIY. Is that credit of 5 percent on the total capital of the American rorlmration or the total capital invested in Pakistan? Mr. SMITH. 0n1y thie capital invested ill Pakistan. Given all the
    risks I doubt if any coeompanv would go into Pakistan if they didn't expect' to get suhl)stantinily iaove the .5 penrent which is the only amount that gets the partial tax concession.
    KNCOI'BAfINO I'IIVAT)h INVUSTME.T ABROAD

    Senator Wutu:Y. On the one hand, Profesmor Surrey alarmed us, and now the present witness say,.s this desnll't amount to ver- ImuClh,

    asld yet tile purpose of the tax concession is to make it so that Ankerican capital will invest. If it is such a little inducement, what is tile good of it? Now I

    begin to think this convention is no good at all. If the real purpose of this convention is to encourage American capital to invest, why should any American company want to go to Pakistan and pay 62

    percent, or why should it want to go and pay 52 peret:nt, when the best markets are here in the United States?
    Why should they want to pay 40 percent? Mr. CARROLL. "hat is a fine question. There is another provision in the conventionSenator WIILEY.. Maybe now we will find out. Mr. ('ARROLL. That*reduces tile rate on dividends, that cuts the rate on dividends paid by a corporation entitled to the benefits of this provision, the rate that is paid by the shareholder as distinguished

    from the company itself. Senator 1'ILEr. I feel as Senator Long did, without necessarily going into tile details of what he hal in mind, when lie was talking
    about the point differential. I think you (1o need inducements for foreign capital to go abroad. Particulardv this is true in countries where the economic and political situation is indefinite and unstable. I aan prepared as a Sknator to vote for that kind of concession. On the one -hand, I got the feeling that this convention was wide open for abuse and then now, I get the feeling that, well, it really doesn't amount to very much, and therefore if that is the case, it doesn't seem to add up to much help. Mr. CARROLL. It is beneficial because it makes the situation not quite as bad as it was.

    Senator WILKY. I

    Wee.

    Go ahead.
    (V.510)

    42

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    Mr. CARROLL. I think you can be sure, Senator, that Mr. Dar Throop Smith and his colleagues in the Treasury are death on loop. holes, as you know, didn't create a loophole in this provision. Senator WILEY. I have great regard for Mr. Smith. Mr. CARROLL. It is a very narrowly construed thing in the cowven. tion and I am sure that it will be just as tight in the re ulations. I bet you even as small as this is that any corporation that wants to benefit from it will have to expose all Its figures to the Treaimury Department and they won't get it unless they are entitled to it. All this business about the Treasury exposing itself to the foreign adinin. istration isn't so. It is the poor taxpayer that has to come in and justify the allowance of this. You know our revenue agent,4. It isn't going to be easy. There can't be any monkey business. They will first have to work to get the allowance from the Pakistan Govern. ment and then they will have to work twice as hard to get its recogni. tion from the Treasury. But we are in favor of the principle of the thing. Senator SMITH. What inducements will this really give to the business people that you know to go to Pakistan? That is what those of us on this committee want to know. Mr. CARROLL. Pakistan itself has given rids inducement. Senator SMITH. Is it adequate inducement, in your judgment, to get American firms to go over there with all the risk in order to help carry out our foreign policy to help foreign countries? Mr. CARROLL. It remains to be seem. Up to now the inducement has been ineffective because the United States Government has killed its inducement through its own tax law. Senator StaTU. Then we ask our taxpayers to help Pakistan. We want to get private business to help them.' Mr. CARROLL. Exactly. Up to now, what was the use of an Anierican corporation getting a reduction in its Pakistan tax if the United States picked up whatever it saved in Pakistin by an increased United States tax? In other words, the operation of the American tax law nullified the concession given by Pakistan. It was tantamount to an unfriendly act vis-a-vis another country, and it was contrary to all the pronouncements of our administration about encouraging private capital to go abroad.
    HISTORY OF PROPOSAL IN CONVENTION

    I would like to go on to another point, and that is what was done in England. As you know, the English adopted the income tax to help in the wars against NapoleonThe CHAIRMAN. Our time is getting short. What is the purpose of your b ringing in England's experience? Mr. CARROLL. The reason is, sir, that mention was made that England had adopted this proposal and rejected it. The CHAIRMAN. You want to contradict that statement. Mr. CARROLL. I want togive something in controversion of that.
    The CHAIRMAN. All right.'

    Mr. CARROLL. It is true that they did reject this particular credit for a tax, but in the pending finance act in England there isa provision that is much broader than that and much more liberal. The En" gave up a little thing for something that is big and important andiwill give English companies a definite money incentive.

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    43

    The CHAIRMAN. What is tile provision to which you are referring? Mr. C.AttROLL. That is what I am getting at. Let me quote from the "bible" hereSenator HUMPHREY. Where? Mr. CARROLL. This is supposed to be the report. Senator HUMPHREY. When people read this testimony, they read it literally. Mr. CARROLL. I stand corrected-I am reading from the report of the Royal Commission to the taxation of profits and income, the final report rendered in June 1955, and this report made certain recommendations that have been incorporated in the finance bill now being considered by the British Parliament and, according to our latest information, these particular provisions to which I allude will be adoptred.6 ahe interesting thing, Mr. Chairman, is that in England they are concerned with exactly the same problem that you are concerned here with. England has the same type of tax system. We copied ours after the English. An English corporation is taxable in England on its entire income wherever it is concerned, now in Pakistan or wherever it may be. The grant a credit for foreign taxes and they recognize that if one of there po ssions, for example, like Trinidad, grants a 5-year tax holiday-they have used the term-it is no inducement to an English enterprise, because England gets the full, tax that Trinidad has given up. and they consider that an unfriendly act toward Trinidad. And the same would be true vis-a-vis Pak~istan or vis-a-vis any other country that offenrd a tax incentive to attract British capital or American capital. It is the same incentive that is being onered to attract American capital. This is what the Royal Commiion says, and it is just one senterneOur twit report made it clear how undesirable is the situation that arises when a tax or some portion of tax is deliberately foregone as a matter of policy by the country where profits are made, with the only cousequence that a larger measure of tax accrues to the United Kingdom exchequer.

    out of his mouth, or vice versa. It is exactly the samw problem. Let me turn over to the brief description of this new provision that is being enacted in England. They propose to solve the problem by authoring the creation of a corporation that would trade exclusively abroad and would exempt from the British income tax and profits tax the trading profits of that corporation subject to certain conditions. One, that the corponition-

    If you rad Mr. Dan Throop Smitl,'s testimony. it almost seems as if t6e numbers of the British Royal Commission had taken the words

    The CaAmirU.

    I don't think we can go into these details.

    Mr. CARROLL. All I wanted to say, sir--

    The CHAIRMAI . I would like to have it all in detail, but it is a quarter past 12 now, and we have been here since 10 o'clock. I don't lnow
    whether we can sit this afternoon. contemplate this very situation you have in Pakistan, wo that when the
    Mr. CARROLL. All I want to say is that in this legislation they

    British finance act sm puased, a British corporation would have the very advantage that is contemplated in this treaty, and if you don't give it in this treaty you are going to allow the British corporation
    jtan9)

    44

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    earnings are taxed at a much higher rate than Iiey are taxed in this country? Mr. -CA UR()J.LL. rhat's right. Senator LoxN. But there is a situation in Pakistan law that some. what compensates for that. Mr. CARRtOLL. Permits a reduction in the burden. Senator Loxo. What you are saying is that Congress; should look at this particular situation, this particular provision in law. Senator loxo. Which might make it desirable for American itvetst. ments to go to Pakistan, where otherwise it,is completely indesirable.
    .Mr. C(ARROLL,. That's right.

    operating in Pakistan to have a definite dollars-and-cents competitive advantage over the American corporation. Senator Loxo. Whlat you are saying is that, in Pakistan, corporate

    Senator LIoxo. That's your argument? Mr. (C.,RROLL. Right, sir. centerr I~xo. You sy- this particular provision should not be u1,,e1d as a prneedent for a general thing, but, looking at tile specific situation, you think the committee and the executive branch should approve it?
    .Mlr. ('.CARROiL. Exactly.

    Mr. C.ARtROLL. That's right.

    would have the power to exaimne that. It is not a general thing that will cost a great deal of money. This is a SIlcifh' thing. Senator Loxu. This won't cost the Federal Government any money, if I understand it.
    Government has pending and is just about to enact a provision that accompnish,.u thie ismne Plux)Ms, as this treaty provision ahout which

    If any other opportunities arose, you

    Senator LoxNG. Yes. *The wiJit von are making is that the Britis1

    .r. CARRO.LL.

    lave you finiishedl?

    we are speakingi, and if we don't adopt tiis treaty provision we will give thie British corlxration that is there conipetinI#g with the American eorporatinm a definlt'e dollar-and-cents advantage .
    Tihe ('HAImntIAX. That is a very interesting Iloint. I thank you for your testimonv. Senator I|t:Mt'ti,;Rtv. I realize the time factor. I set Dr. Surnrev constantly shake his head in protestation. While we don't have tile time, I would like to ask Dr. Suirrv, if he haq some thoughts on this, to furnish a memoramdum for insertion in tile record. I am interested in this subject mnd I don't wanit to be prejudice. " might have Ibeen ill tile beginning. I want to know what title facts are. The C'iI.,,IAt.N.. Professor Surrey will hear that ill mind a(l1 van comply or not as he sees fit. Mr. CARROLL. May I put my thoughts in writing for the record? Senator Humi',tlEY. Yes. (Mr. Carroll subsequently submnitt ,d the following memorandum for insertion in the record:)
    The NFTC appreciates the opportunity df submitting a further statement in support of its recommendation that the Senate approve and consent to the ratification of the proposed tax convention with Pakistan (Ex. N., 85th Cong., lst sets.). The purpose of this supplementary memorandum is to clarify certain points which were presented in the hearing on August 9, 1957. The council io in complete agreement with the position taken by the Department of State and by the Treasury Department represented by Mr. Kalijarvl

    (2'280)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN

    45

    more, but this sum is really taken from what the Pakistan bGovernment has It is understandable that such a result arouses resentment quite diproportionate to the insignificant amounts Involved. The usefulness of the treaty approach in devising a cure for this frustration of foreign incentives should be apparent from the preceding discussion. The stipulation in the Pakistan treaty is addressed precisely to the situation there. Its application is transitory since by 1963, under present Pakistan law, the local incentive wil have no edect.
    offered as an incentive to economic progress. 1306 O--42--voL 2-49

    and I)r. Smith and supported by Colin F. Stain, Esq., counsel of tile joint committee. The testimony of the.le gentlemen presented the circumstances and cons-iderations of policy relevant to the proposed treaty in what we consider a fair and proper manner. The testimony offered it opposition to the treaty by Mr. Sturrev, on the other hand, contanis certain inaccutracies in interpreting the Pakistan tax law, and in developing the effect of the proposed treaty, which we feel it is necessary to correct: otherwise the inenlhers of the committee may not evaluate precisely the merits of the prol)osal before them. Mr. Surrey asserts early' in his statement: "Under certain circumstances the treaty eliminates all taxation of income from Plakistan, double or single." The only circunmstances in which all taxations would 1x- eliininated are those (1) in which the taxpayer was eligible for the allowance provided for in section 1511 of thie Pakistan law, and (2) in which the income ot herwise subject to tax (fill not exeetd a 5 percent return oln the investment. This allowance is explicitly limited to: enterprises such as extractive and inanufacturint, established duirign a period ending in 1958, under present Pakistan law, and to these in only the first 5 years of their operation. In other words, the inducement is offered olly to new ventures essential to Pakistan's economic development, and is available only during the hazardous early life of each venture. Iy early 1963, neither thel allowance nor the treaty stipulation will be of any fiscal significance. It is only by a severe stretch of the imagination that any "windfall" to established ventures would be involved, and even this would fIll clearly within the narrow limits of the intended incentive, as for example, if ani established trading venture went into manufacturing in Pakistan. To illustrate the effect of the treaty stipulation, we have comlputed the tax ri tion of a branch of a United States corporation, iasiuning all investment in akistan of $1 million, and an operating profit of $225,000. This coniiltation is attached as exhibit 1. The asstmption as to profit is certainly libe-ral for any of the fir-;t 5 years of operation, and the restults are somewhat different from the raises referred to in earlier testimony. It will be seen that in case 1, where the income is derived wholly from trading, neither the Pakistan law, nor the treaty stipulation has any effect upon the tax burden borne by the enterprise, which is at the rate of 62.84 percent, aind consists wholly of local income taxes. In such a case, it might be observed, the tax burden of ain American branch is the same as that borne in identical circumstances by a Pakistani concern or one owned anywhere abroad. If as in case 2, the income is derived wholly from manufacturing, and the concern qualifies under section 151, the Pakistan tax burden is reduced to 43.7 percent. However, without the benefit of the treaty stipulation, our Trea.ury will collect the differential between 43.7 percent arid our prevailing rate of .52 recent, or 8.3 percent. Thus the American venture's aggregate tax burden will 52 percent, or 8.3 percent higher than that of a Pakistani concern, or of a concern organized in any one of the foreign countries which exempt foreign income from their tax. Since these concerns are those with which the American venture i,; in direct competition, the economic impact of our tax is not neutral but places our investor at a distinct disadvantage. The precise intent, and effect, of the treaty stipulation under discussion is shown in case 3. The Pakistan tax, reduced to 43.7 percent by their incentive provision, is the same as that payable by any other enterprise wherever owned. but if, under the treaty, our (Iovernment foregoes its tax, two constructive results are attained. Not only is the incentive permitted to have its intended effect, of stimulating productive investment in Pakistan, but the fiscal disadvantage under which our enterprises labor as compared with local or foreign-owned enterprises, is corrected. Since the whole burden consits of Pakistani tax, to which all concerns are uniformly subject, a true tax neutrality is achieved. If the proposed treaty stipulation comes into force, in the particular case which we have assumed, the cost in terms of revenue to the United States is $18,600, as compared with revenue sacrificed by the Pakistan treasury of $28,100. If the treaty does not come into force, this Government will obviously pocket $18,600

    (2261)

    48

    DOUBLE TAXATION CONVEN'IO.1 WITH PAKI8TAN

    The council finds itself in agreement with Messrs. Alvord ar.d Surrey that tW device of recognizing taxes spared for credit purposes is not an adequate substituk for a generalized liberalization of our regime with regard to income from foreip sources. This is true whether the result is accomplished by treaty negotiatift with underdeveloped nations, one by one, or by legislation effective globally, blt practically significant only in those areas where new investment incentives 0 being resorted to, namely underdeveloped and prsumably capital-poor countri4, These new investment incentives commonly take the form of lower rates or exempt. tion from tux, over an initial limited period. Hence, any recognition of them by this Government is essentially a short-term commitment on a specialized set d facts. Mr. Alvord is quite consistent in favoring the treaty as a short-term remedy for a special situation. Any future similar treaty provisions should he evals. ated on the same ad hoc basis. Prof.-s.or Surrey, on the other hand, has argued that the tax-sparing device encourages other "nations to adopt unrealLtically high rates generally appli~i~ble, Imcause they can nevertheless attract new inves. ineit capital by special inducements. The inconsistency in this position is tat Professor Surrey advocates his version of tax neutrality on the part of this Cotr. ernment, which practically compels the foreign government, in defensw of its revenues, to adopt at least a 52-percent rate on corporate income, which is is many cases unrealistically high. Of course, this Government makes no statutory provision for relief of the Ame rican investor when the foreign tax rate is apprm. ciably higher than our own, as it is in many foreign countries. We do not, u he suggests, "prevent a burden higher than 52 percent falling on our investor." In such a situation, tax "neutrality," as he defines it, is a pure abstraction wit& out meaning. When the foreign tax rate is equal to or higher than our own., it is quite true that the foreign government has set our actual tax rate at zero, aml even when the foreign rate is less than 52 percent, it is entirely within the *ot. ereign right of the foreign government to fix a rate of tax which, by operation O our credit system, controls the effective rate of tax imposed and actually collected by this Government. As Dr. Smith has pointed out, the trend of higher rat abroad is so definite as to indicate a progressive closing of what gaps do exist, and a corresponding steady evaporation of the revenue collected on foreign source income, as tax-rate differentials decrease asid disappear. Mr. Surrey is correet in using 52 percent as a reference point in discussing the implications of the treaty with Pakistan. However, it must be recognized that the decreased rate of 38 percent, which is applicable to Western Hemisphere trading corporations under the 1942 statute could conceivably apply to approximately two-thirds, by etimated value, of our aggregate of private overseas investment, or possibly to a even larger percentage of the income these investments produce. So, to lean the impreason with the committee that a uniform 62-percent rate is the burden borne by the American foreign investor, is wrong on 2 counts. In many cas it is substantially higher, by reason of the exactions of foreign governments, and is some cases it is substantially lower, and may not exceed 38 percent; but uidW our credit system, averaging these rates is not common. Mr. Surrey in conclusion makes another statement which requires correction. He saya: "Basically, meet foreign countries, as does the United States, tax income from foreip sources." The truth is that the United States is one of a Small onicity of natisj& which adhere to the theory of taxing income o( its nationals, fr0s w atever source derived, and regardless of its nature, and that most capital/ exporting js.tmos either exempt business income from foreign sources, or provide much more substantial fiscal inducements for foreign investment by its nationshi than doozs thio country. A recent publication of the Harvard Law School inter, national program on taxation, entitled "Tax Factors in Baing International Business Abroad" by William J. Gibbons (Harvard University Jfutins (ABiA Cambridge 1967) opens with the following statement: "More thua 40 eountums either grant preferential tai treatment to forealI income earned by compaas organized under their laws or levy no income Lax of foreign or domestic inoe.I The footnote gives a hot of the 40 comwtrie., and micludlt such important sourS. of capitals Australa, Ilelpum, Canada, France, Italy, Netherlands, Spain, and $witaerlaad. Othen an lsed - potential tax havems. The book is documentW by digest. of the tax laws of soveraJ of thtse countries which support to tbst extet, the statement quoted. The Natioual Foreign Trade council l had sub, united to the Conniuttee oa Ways and Means, summary list of countries whs either exempt foreia iwome or make substantal onceamous in its favor-i
    5 e (Jmm uKvw ,Unvin, ,,wt-a SL the Cuoamuh a Wep wd Moim, lloamao 100 i $MUM"$ p.,, p., 1414, i4M Aui X UM

    AN DOUBLE TAXATION CONVENTION wITH PAKIST


    1w -1 X0 00

    47

    M1 of the (.irm.nt Finance Act, 1957, elalbrate provision is made for outright exemp.

    It is probable that, had the Harvard Law School publication not gone to press when it did, the United Kingdom would have been added to the list referred to. Under the law prior to the passage of the Finance Act, 1957, on July 31, 1957, a United Kingdom company having its center of management abroad was subjected to tax oily on that portion of its earnings brought home to England. In part IV

    tion of trading income to use the words of the act, "as if It (the trade) were being carried on wholly outside the United Kingdom by a person not resident in the United Kingdom." It is provided that an overseas trading corporation, on declaring a dividend to resident shareholders, nmust accept a charge for Income tax, but such taxes are recouped from the shareholders and they have in turn a T credit against their tax. This does not change the character of the arrangement from exemption to deferral, as we have understood the distinction over here. This is clear from the further provision that in the case of nonresident shareale in the first Instance fy the company, will be 7 holder, the tax, although payn refunded to the shareholder upon proof of nonresidence. The system is moreover elective, as any company which would be considered an overseas trading corporal. tion may elect not to be so treated. We accordingly suggest that, in order to bring the record up to date, the United Kingdom be added to the list of countries which grant preferential tax I treatment to overseas business Income. This may prove of specific interest In * Pakistan, as affecting the existing and potential competition which faces United States enterprises operating there. The foregoing may serve to correct some of the inaccuracies of background which might affect the consideration of this treaty, and clear up its precise effect. Assuming this has been accomplished, we should go on to the possibly more interesting question of policy, and implements it In one of the ways with United States foreign ereiiomit, whether or not the proposal is consistent intended by the Congress.
    TIlE CREDIT FOR TAXES SPARED IS NOT CONTRARY TO UNITED STATES POLICY

    liberabiation, but rather it wa- the result as stated by the conferees, of a desire to ,, the. matter Iner, .tdv. The matter is reo.,iving study in various quarters. andthe proposal to $0-1ra0i,.e the 14-point reduction haI received widavpread endorsement. (ppowion. to thi, atdd other proposals, for liberalization Centers a round the concept of tax "neutrality" which, despite its theoretical plausibility, i fAr from beilg a reality, adl is noi proe.utly accepted policy. What is reallV if)Volved is the unfavorable economic impact of our tax nrgime, operating beyond our bord&ra to reduce the capacity of our invetors to accumulate reinvest earningw-an absolutely essential process if our major economic policy lien other governuiuts try to facilitate sucK objectivis are to be promoted, reiavestuwut by exemption* from tax or moderation in rates, the le. t this Government should do is to allow such nmasures to have the effect intended. That is precisely what tho tax-sparing stipulation is designed to (10, within the linuts of secific circumstances set tip by thle Pakistan tax law. It ip a substantial point that this stipulation ukay *Tffe.ct the United States tax hlailduty itf a UnIted tittu nation. * It is, however, rmiL.AAdnlig to elty that this A the first tax treaty to reduce United States taxes applicable to Ameriecan cur-

    offered? On the contrary, the policy of this Government is to encourage foreign investment by its nationals. To implement this policy, or even to be consistent with it, requires an intelligent and liberal approach to problems of taxing foreignsource income of our nationals. Certainly it requires a regime which does not nullify the inducements offered by foreign governments, and one which does not encourage them to adopt income tax rate.s comparable to our own. In 1942, the (ongrCss adopted a more liberal regime for companies operating in the Western Hemisphere, then as now, the area principally favored for overseas investment by our nation.mL, comprising roughly two thirds of the total. The statutory tax rate on income so derived, if requirements are met, is reduced by 14 percentage point.. The Cnrgr's has given serious consideration in the lit 2 years to extending this conc.-,-ion rate globally: that the proposed legislation did :mttnibuted to disinclination to recognize the need for not pas cannot honestly IN,

    foreign government is moderate in its exactions, particularly with respect to new ventures, can it be the policy of this Government to nullify the inducements

    United States policy with respect to the taxation of income from foreign sources is not, as asmumed by Mr. Surrey, that all investors abroad will pay 52 percent tax upon their taxable income. It is obvious that an enterprise operating in Pakistan may have to pay 63 percent if that Government requires it. But if the

    (22)

    48

    DOUBLE TAXATION CONVENTION WITH PAKI8TAN

    tuccessive versiols of the Mutal .,rScurity Act. Congress, and spe-cilically it* committee, has wisely nreognized tlit to the extent private investitient can be persuadled to assist inl econontie dke-velopenut, demands for public funds are likely to be less large andI less insistent. The, discussion by the reiri-sentative of the State Departutent has einplhaiwed the funct ion of tax treat its, al imlplemllnilt iug his Nat ioll's foreignl ecoalonlic ptolicy. over t he, years (wit lItIh except ion of a few which conltaiied conitlinit lltlt; to coiledt foreign taxes which this commit te agnred were unwise). The consualifination d tax tnrat its wil it a scort' of foreign tait ions, including niany wit h whom our trade relations are cltsest amid most significant, has proved a grnat contributions to the orde-rly conduct of business abroad. They have introduced clarity and certainty into the ilte'rluutional tax field, where IIuch obscurity and uncertainty existed. consik'drablh, quite apirt froni any reductions it aggl. Their bitlnelits have buvni

    porations. It would be idle to negotiate a tax treaty which might not so operate. For example', all our tax trnaties (including that under consideration) contil almost uniform stipulations as to the allocation of income anld its reallcat.us in cases requiringeorret ion. Obviously, the reallocation oiadditioloal income to Pakistan in the case of associated enterprises, would correspondingly reduce tbe incunte taxable here, and hence would reduce United States taxes on the t,nited States couipaly. Congress has, moreover, recognized such situations in the inoa general terus. etion 214 of the 1950 act, for example, rovides "No atend. uncut nmade by this act Phall apply in any cas, where its application would be coa. trary to any treaty oblipation of the United States." In the 1954 Code, we 6n in section 8)4--hIconme Exemlpt Unde'r Trenaty "Incolme of any kind, to the extent required by any treaty obligation of the United States, shall not be Iii. eluded in gross income ald shall be extxempt from taxation under this subtitle." 'Ite Departments of State andtIreasury have endorsed the tax.sparing stil)a. tion intinder, with as a device earnings within Pakistan. (,e app elix 1.) This labor this treaty, rtepett to to mit tigate a fiscal disadvantage which our inlvesto" is specifically a matter of foreign ec,lonomiC policy, as to which the executive attitude should in general li' accorded full respect. There are no laic concept of policy defined by (Congress withI which it conflicts. Rather th[at it gives plrowf play to all il(luct'neiit offered to AIerican private investellntll ill thltr country, it is a practical iull eleneutatiou of a policy enuinciated by the Congress in weveran

    The National Fore-ign TIrade Council hlas firmly supported tihe tax treatyv program

    gati lax burdens which ilaay have resulted. It is our sincere bIlief tlhat tlhe tax treaty with Pakistan will be of advaitage to thl United States investor, and miay reasonably be expected to be of advantage in
    promtot ing tihe objectives of our for-igii economic policy. We do Riot feel that the objections missed are of sutlkient significance to require withholding the approval anid conselt of thle senate to its ratificatioll.

    t*04)

    DOUBLE TAXATION CONVENTION WITH PAKISTAN as


    S uassionitl iurrde-d capJdltl $1,040,EM)

    49

    EXHiNir I.--la,rnpIe of brunch of I "ltreI States, Corporatio.n operaling in Pak islon,

    I
    i-,r

    ad .h

    NManufacturing brisueb under W. 1511 qualify) UJli


    CA-a.A It

    bt I'vis

    trr4ty in

    9d AUmImi Ploerlting p1rofit


    $21,U ) to0 ....

    amount subhpt to iail beftwe

    percentt ofe.1pita1 Irnllhd riusines profits tahs Allowmiwsft .. ......... Bu" profits tha (162i lerceliat) Allowaner under kv. 131, 5 Ipriat of capittil Inaartl
    () tecmI

    t %.aI
    21.1ill)
    ...

    tZAu $vim 0

    V." 0

    .eai

    01)..

    beIo)

    ..........

    14% lInoeo (3It, Iwrnil) and sulitaix (A3 Ipercent) Ptkistun lates: llusitim profits tax ral flalone lii st14 ,
    Total lNklsln tirxm+.

    Incoul, Vnd slerlaA. ntbed toei

    ... 107. (,.il i. 401 ..


    lw49 W7102.

    n~I_

    3.... WI~s

    4e1 $14.Utl

    ... 1.13 37.,3 Wm W

    ......

    I$7.43n 40

    4... i.Ij,

    584100

    l 7]

    M.

    RWte of I'aklstan lates. pereot............ itconle tat: t'lted $Staes tlit iW pervert of$15,tllJ) Foreign tax eritt
    -

    Net inlcl S:It0%tat iller crilltt L-ts United %a,ta" wiviSiunder proplafti treaty 313 it SVlIiA tinder *Wdi. (si.2.% pirr (0) i'akithila

    7 117.1

    1~$ f
    X 1 ,481.M1 1

    A37Its I, ale

    INot allowable is edlit against tnlled At:1t4 Inomne lts. cev Alkawab io extent requirtul ss ltit agshst Inlail .talet flitusilt.

    ArI'srivix I
    .ECK'TAkY O41Tile Tkl.%tk1'i or Timl I1Pi ROaxIiT H. ANsDium)w, IEVollI TIME FIRSuT ia ISNAKV $R.sa.ellN O THE CCION4)MIl .rAU tkICAN STATEs, lit-t,xNt AtpsA, 1. ('oEkrKNmeI Or TIIC Oe.ANIIATI4N o UARKt

    UNITED STATI*4,

    ARGENTINA. MoNDAY, Art-tT 19, w.57

    The pro-ess Of private capital invveltntitit can of toure e farilitated. As you lIot :.rd I hip end, govetrntlt'tis doliad remove know, my Coovw,'rnment itlieves hat tax olstaI'les that lk, in thw way of ciaitlal fornation and private, investiment.

    This can IRe done lioth through unilathra itit, urs, which would ri'move unsound aid tax policies and administrative practic",sl through international tax agreeInenits.

    We, have lien engaged ill the lilgot istl iOll of bro)a3d tax agr'mentills

    of ('OUnltrivs'.

    In addition to ieItabldi~Aiitig rulel.

    in thea'.'

    with a numllier

    nanrt-'enhlits by which to

    tiuot fur limited periols of tim. The executive d-riilrtlliutil (io out GCoviarntnsnt tire trying to tli.vise a formula by which a enrdit would he allowed undt-r uhr laws for the taxep given uip by a eoultr' aWekilag to attract capital, il the salue aay as a cruodi it giaivl) for l'tt's actually eiilleited by that country. tielt' ITti, 1t hA44-11 Tax agrt-vi,'lttit are, 4f iourne, a inalttr frW fitugiiatiaIg 101e overlntiirltts, like all tnraaiies, they must. in the Uitvd Sltaltlorll' o tlw of he tf 1ayeltr ,hths of Ui in malny utl it coniruitns, obtain the uapproval d the Icatidla ftwerlllllolt. before thfiy can laeawvw ufelh-iv'. %%'ellow IShae several! prapeilve tratie's in larylig stalget of the pro.ealure. Oille. althh im'ludtu s a ,r-dt ftir tax inpaUitig. if ifow Ullader review lay the leI'uAative 11udh14- U tlh e.ilalatory r . * eom.li(ri",. Tihe CHAIIIMAN. Next isi MXr. Ellsworth Alvord.

    lisure fair tax treatment, we have iouight to give Ievotwllitiin to so-called tax,'arig laiwo which ssek to etwournee the inllow u( calpitad by granting tax reduc-

    (*M)

    50

    DOUBLE TAXATION CONV

    TION WITH PAKISTAN

    STATIMINT Of ILLSWORTI C. ALVOID, WASHINGTON. D. C


    and members of the ceimmet ti, I Mr. AIimm.m ir. ('Chuirman shall attempt, to be very Iorief. I filed a Ihtter which appears in the original hearings, which *ft, forth nmy views. Th'l'e ra,,at, I am
    ilthe recoril. No. I. 1 don't wisais tfle' it-Treullr I)epuartme'nt of lit' Untitehd Sttas 1 tit 'Xi'4ItIVe del)iartnietlt of the ' or

    Mir. A.LVOIDi

    The ('II

    thit It l1N'.We will Ieavfin

    re

    tlhin'ei'1li.

    1'lmttel States' to think thtn they have found a solution for the prohlms' that exist. Noo. 1. 1 don't wlant ns, foreign Country, particularly Pakiptati I sani called upon to ldvit , them but if they. read the not letter they will te it *pl li4p 1t) tllh'ell tO think this will all net an' w-rious dnitoislt of ,sslpitaI front the Unitel States. No. 3, I think It would be, excet-diiily, unfortunate if this ,,onunlitte' or the- ,e'naitl should refuse t) respe'c't Mild cotilrir it is virtually of itc)- department hails done in this ratify eve'l) through what the executive
    TAX TKt:.vTY PROG.,iA

    Se'nator Smi-rs. You favor the convention, thie'n? Mr. AI.voIt). Yes., I favor tile' colnven'ltion. I asufilin it still is. as it ailwarvs Alioats n, a basic for'eiga policy that of the Uniied Slates u- you have to get out of tax policy before you ad can consider matters like this to promote' the' lltw of gooels fromas he United States and to encourage the' flow of private capital from the United States. A provision was written by this ('0lltillitte'e, ilito the Mutual Seurit %Act of 1954 which direet'ed the executive department to negotiate' tre'atis, inul'ditlg tax treaties, to proinot*4 the free flow of private' capital into 1ashdenheveho ld countries. What I sin savill now applies only to underdevelopel countries. Pakistan, India, aid virtually every .outhi Americai couniatrv aY they wantl private capital. I think v'e should apply a t'st an) finl ouft whether they want it. Sciiatoir Lonig andl Senator llumnphre' and S'enatoir Smith have' all referred to file' cihlf'cuslties which tt' fa-e aJi'en we arse going to consider putting1 n'w ollne nto a foreign (ounitry. l i You have' the*nial ter of %-arand flit, ireat of war. I understan1id vl t will permit us to insure' against flint. It might ie ef'f'ctive sliad ay niot. We have the matter of conlil' ittion. We cais insure against that ailh respect to inive'stmients ill any -ouniry eJshwh ]as entered into oine of our investment guaranty insurance' alfmt'nt.s. Tb.e prtgrans is not too gokti, it ti hei'ug aic'epti1: tne tuait Itl hlo in the past. It has bWen in fore' for quite a while'. You have ait convertible currency pnole'm saId tlie' depreciatingif curnqmy problem. You have local dicrimintsaionus. You have lamk d aie.quale pernituem over there. I agreed' wtumHunrey it as 4iilouiJaIahg thal t)., Sejiater 61 1% ill ilt-' caSes alie'-,' otU arve 1t, a.4sailng to) put 1 . ,'I,'p lmu 'A suluiteaataal aumonlil of monlev into ai fore'agCvs country. And I "itae downi ts tht final test offer all ltit-*' other risks are' ,us~ielred saun either rim.tognimia-d and peeesll mit er or re'oignizedl asid kept tit thea' balaialt-'. it ouse'slI a410as pmoit after taxts. d rlaw ei Senatasor tli murfastm. Itala.tth Mr AL.ve'sa \fm. ouir forerigi tiw credit systenl aUp dc'sa-,mse'l ant rem'alaanslaiII. ltie hAieeeeWqallV for" the llar.r coainuzr'ial i'oniiLes. It et'titlit 00 %V hIase'rl' ',n i rlin)Igha tIh hatIIef ev lr e %e I sa 1ince'

    DOUBL#' TAXATION CONVENTION WrM ,AVTAN

    51

    here a year after, almott the swule tfine. We have Ieen through the fore'i. tax ,'redit hattie many years. We have Weel through treaty beitiltis many year. Smsator (Georgeraid .Senator Smith us.ed to hw tlhe smllwnomnit le'e of thin t-4)llllitiree to coniwider all of your variout; tax treat,&lh. The tIx &%tsreftgy pr ralg ridli begaut ill about 1921. That was deifiged, as Mr. ('arroll hati said, to do two things: First, to agree Upon allole'a-tion of the income bietseen tile I'United $t'Alates slid tile for5'ign .ountry. Where dles income arise? lHow are you going to cotiniu4e it? l1ow nichiincmiie are vols going t41o attribute to the * ttiliti.s ill the United Slatese and how mucah *ill vou attribute to thle fitivities in tile foenignet country? Your double tax trnaty lays down rules for allocation slid next it laWt down rules as to local tax. It j'ust happen that tie purlpoe of lite double tax treaty istnot to set t6e tax rates, and gentlemen, your basie problem here 's that the tax rate's both in the foreign countries in monst a.e alid in the United Staftf are' just too high. (ontu.'lquently. nily when I have to go biroAdI to Wei something will I make a slulbtantial investment. I set forth ill the inemorauidutn which I filed with the committee the Various problems. some of which may exist, or all may exist, or virtually none may exist with respect to a fon'ril country. It is highly important. I think. if dte executive branch is to carw" out the inistnictionlls of this commit tee And of the (ongrest, to negotiate special treaties with each country which really wants our money. I wouldn't influence them in tie slightest inl reaching that dthcision. If they really want it, the first thing they do is to change thle attitude of tl;eir country. India today is seeking money from the United Slott-% and the'attitude of thie Indian (oveninielit is such that I don't think they will get any mole.y except cspital !hat has to go
    India has ,ome things we want. As a matter of fact there are many thilns we need in foreign countries. Thie next objective is to avoid discrimination. rhat we lhave done in large part through treaties of friendship, commerce. and nlavigati1On and the State Department says Ihofe are the treaties, which it has negotiated pursuant to the Muitual Art. It biaa nothinll to do with the purpose of the mutual secunuty. All it loes is afhret discrimination. All the one approved yesterday with Korea does is Say you don't discriminate against Americans. It doesn't met the problem that is involved if vim are going to encourage the free flow of capital from the UnitAd states. fwil be happy to atnswer questions but that is mYy sermon. Senator H PA?Tas. Mr. Alvord. I agr&ee mmch with what you have had to say about getting at tlwhw pnrAum of inviting. nmakhig it hospitable fir American capital to invest, but I don't thank we ane r,ttwg at it I dtl fast N ALVORD. Very lit thk so. taltiler. M1814tor lltPgeuayr. I flare that feeling. I am 1.ef Poing to stlalld in tie way of any treaty or Itr to ob1e(t to anvy treaty p,*)iltafy if I think it is gollig to blw helpful. f am dubious wilither we *Are appresallag the puillen.m by any metldi4l tlast is elpfIul at all. You
    *44'uritv

    there.

    mlletlhoeled the Koremn, Trelv.* Whum I was in -spoilt. I fouled out ritA'rw bUlteiuses is Iavlig a hbek 4if a tIII' oe'r tlhetr I mihtl sl if .lr Kahujarri to hert tliat that is a gonud prnkjept ftee our
    shit .

    (itS)

    52

    DOU(IR5 TAXATION CONVENTION WITH PASTAN

    own State Dv part nent to undertake so our busititss people over ther get a little friendly treatment.
    Any other question, Senator Smith? The C'u.%mikM~. Senator SuiTn. May"I ask this one question, please, Mr. ('hairnman The ('CHAIRMAN. ('ertUidyv, SWnator Simith. Setialor SMITU. Mr. Avord. I gather you favor the convention bu ' .ou didn't indicate that the convettioi as fow preSented Mould be an indu'eweit for American capital to go to eakittan, or to some otha

    underdel.'loped. countries if we have provisions like that in treating with them. Mr. ALVoHD. I favor favorable action by this ('olhiitee and the Senate on this treaty Ibcause unfavorable action would have a very bad result. But I want you gentlemen to know and anyone else whe wants to know. including the executive departments ind Pakista, that in nii humble opinion virtually no capital from the United Steat will be attracted to Pakistan under the present Pakistan regime and under this treaty. S,-nator SMITH. Even udiler this treaty? Mr. ALWOUD. Even under the treaty. Senator SMITIH, Thank vou. ,Senator IIIt.MPHimy. You feel the pycitological repercussions d nonmapproval would he Iad'
    Senator SMITH. That statenient applies to the riot of the world, nm only to Pakistan? Mir. ALvoiw. That's right. I hope the executive branch will nat continue to rely only on this tax-spauing dei ice with respect to othr .iunt rieg. Senator HrMpHimey. Thank you. The ('.CH.mx. The next witness is Dr. Dan Throop Smith, Leput v to the .ecretarv of the Treasury. Mr. SMITH. I have a brief statement that will take me about S minutes.. May I do that and then I will comment on some of the other points tfht have been raised earlier. The ('N5.A1SAN. Very well.

    Mr. ALvowD. Very bad. -Saator.

    5T&TUX T Of1 DAN TIIOAMP SITI DINT? TO TIS CUCUTAI? OF T22 T1UAS T Mr. SMITS. I am glad to have this opportunity to reaffirm tie re~mm'endattion for approval of th Pakistan tax treaty. Ths treaty wIatailm a '4,4.t1on whwih would give wome recognition of tiw tax-spoirng law (d Paktltatn, Such recognition is in accordance with niu:,daower in tiw ecnomw', report d the policy ,tat,4h by Prei'dent thie Preoident for Ja'nuary 1950- when he sad thai we should continueto ex$ore with othe.r eountrim tiw tpe 41 tlw tax treaty as a method t( ftim-n

    a narhr,

    e 1oreiun m'untry for a igieried ,nsnuj period, juA as we ,ow grant erlit ifu taw that awr imnimow.aTito changewivssd Rasve flaalnMum efoesl to tI' lsWsr ftif utb
    coiintrimS dmigned tO erac.nreuw new enterpri.

    we sokmid 1e prrpared to

    favv.rsal'

    |tlinate fiw international investnwt.


    gtivp

    full croodis for inoe~ taxes that are waived Ivya

    boiler propr

    iteguarwk.

    Tito recunmendalimi hlaw been repeated in various inesagesei mus that time Seuatkwr SmT. Dues that eovr adl ,.reeimta

    DOUBLE TAXATION COIVETION WITl(t PAXTAX

    53

    Mr. SMITH. Under proper saft uards we should he prepared to rive


    crtlil for the taxes now ,saiv4 ditv foreign 4'*untri.s. I hesitate here became I am thinkiing of the bomly of the quotation. The thought was entirely with reference to underdevelopwd countries.
    TAX-SPAhINo PROVISION AS PRACLDE.NT FOR OTHLK (:ONVLNTZONS

    senator SMITH. I have understood thi Pakistan treaty wa going

    to be sort of a model for other underdeveloped countries, but with each country" treated separately, dependent on lcal conditions, but that it wouldn't be a new step toward revising our tax treatits with France and Englad, for example. Mr. SMTU. It would not be a step toward revising the tax treaties with thtse countries. senator SMITH. Then we would have to have a clear policy as W to the definition of a kind of a nation that would have this tax treaty. right. Mr. SMITH. That's Senator Huunniar. Doesn't the most-avored-nation clause apply to a tax treaty ? Mr. SwTs. I think not. Several of the so-called underdeveloped countries have waived somne parts of their taxes on new companies in particular industries which they consider especially important for their own ,onomic developmneat. This is an understandable policy to foster economic development through private enterprise and initiative. It is also understandable that countries with such provisions in their tax laws resent a situation in which the taxes they waive and forego are in some way auto. matically picked up by the government of another country, in this Case the United States. Accordingly, some consideration of the Pakistan tcx-sparing laws was included in the negotiations with this country. this country being Pakistan, ad section 15b of the treaty embodies lthe results. ft seems to to a reamrnable and desirable part of a coanpkte treaty. It I consiste.nt with the policy of rehicing tax determrnts to private investment and economic development abroad.
    TAX SPAlUOG IRCOMMENDUD AS KATTIL OQV T&AT? NIAGIrt&IIOII Xour rTATOrU T IAW

    As the statements in the Pr-idential messages referred to above have always indicated, reMnMition of tax spring must lehdone carefully and *with proper safeguards and lWittauons. I stated in my previous appearamne before this cotaiinttre that we %ould not favor a %tatutirvprovistion for r.'e'ittioa of forrigrn ta Rs1 d. There are VIa' two remains fow this position. Fin'. only in a detailed treaty analysis and neWgtiation to it postiale to work out approprmte limitations and resiat,10ons to prevent abuse' throuidah the creation of what night be called artiticial or fictional taxes w nelc were b.rioht into ex!it,4'nce onuly for the purlpo of 6,ang mavyeil. I referred to this KMMilAe , dati;er in my earlier appearance be-fore the eouiuttee aid nrepeat at 0411",- W. Iant to Ite iwAir,,l. as V an- thle ease..f re In 4'akistan. that thd. oax,5 which are waived are g,.ewral ta-M" . upphralsle'(t all ,dustrv-. and thit ihe aavinu oithe taw4 aim) doneton a general basis for all +s queahirt rmripaines mi partieular indstrnes.
    f aetm

    54

    900U

    TAXA2TON CONVrIA DN Wf

    Senator LONI.May I suggest that we read the statement oW6 selves and save time? Senator Humaazy. I would like to get Mr. Smith to make a, comment he wishes to on other testimony that has been made i* giving us the Department of Treasury evaluation of the testimony. The

    Mr. SmiT. I should be glad to try to u


    You may summaYUze it now.

    our genuf

    bad or wise or unwise from their point of view, but I certainly rcon the rights of other countries to develop their tax systems as the= to do it. A situation has developed, a situation exists, under ow law such that when they make a taxcohesion, the net effect may i and frequently is, usually is.,that there is just that much more ta picked up by the United Stats Treasury. In other words what t* waive for their purposes for their economic development insofar a United State companies are concerned, means more money into t6' United States Treasury. Now there is a resentment of that fact. The CnAlaUw. In that cas what do they take as the bais? Suppose the taxes vary up and down over a series of years. WMick sum will the Utited States choose? Mr. SKMTy. Well. as I stated in my prepared statement here, it are sympathetic to this only as a matter of treaty ngtiation not a a matter of statutory law. As a matter of statutory law it might b, subject to abuse and maneuver. We are interested only in situatim where we can work something out on the basis of their particular lsw, and this treaty provides for reoition of the tax concemion undr the Pakistan law in effect as c the date of the signature of the trety. Senator Smmx. X country would do the same thing. You woud look at those laws and the convention would be bosd on the pecuw

    operating there. I don't presume to say whether that is good.o

    Mr. StIaT. Our basic proposition is that the foreign countim have chosn for reasons that they regard as good and sufficient i make certain tax concessions within their countries for bums.

    conditions Of those laws.

    NOT ALL PAirTAX TAX CONCIMJOIXs ZUCOGNIsE

    Mr. SuTor. Yes. And as my statement alsW indicates hee tW concesin in the treaty recognizes only a part, from some standpona

    only a smail part, of the tax concessions whh Pakistan itself isgiviu nepuotiaon, a ba
    'rate.

    The last pape of my prepared statement indicates several tax concw mans which they have given and which they urged us to recognis a the treaty, which we decline to reeonize. In other words it wo a

    , on certain thing that nsmed to of apPW

    The only thlig that is regned bere, Senator Green, is their *. empton of the first 3 percent of return on invest capital for the frn 8 vyea from 3 of the 4 taxes they have. They have not just the norni tax amd a surtax. They have' business profits tax and then an & come tax and then a supertax on the company and then anodo suprtax on the parent company that receive the inme. And w

    repognise only part of those unter the treaty.

    1
    I.

    DOUNL TAXATION 0031MNION WI

    ASWAM

    55

    SYMIOUC VALUE O0 CONTZINTIOQ

    certainly agree with that. In my .concludingparagraph of the statemeat I refer to this a a significant item for such development. I do not say a major item. But it has symbolic value. It has overtones in terms of international attitudes toward invtestments. In the article that Professr Surrey earlier quoted which I had written on this subject-rather it was a speeh that I maoe. and I made it not as a professor, but shaking as the Deputy to the Secretary of the Trea&ury-I indicated that ta. sparing of this sort in many instances did not actually go much further than was already possible under our law insofar as operation through subsidiarie are involved. It nonetheless has a s igificant symbolic value. regard to Pakistan, if you take the gross Senator Loo. amount of tax that would be paid under the Pakistan laws, in most istancs the foreign tax credit provision would mean that Pakistan would not owe the United States any taxes anyway. Mr. StaT5. You mean the companies operating in Pakistan? Senator L(;o. Yes. Mr. Surrni. That is correct because their taxes are higher than ours. Senator Lo.-G. But it is only because of the particular way in which the Pakistan law is drawn that the first 5 percent of return on invested capital would not get the benefit of the American tax credit unless you put this provision in this uatrnational agreement. Senator LONo. And you fee that without that you are just not gou to make any headway in getting any investment in Pakistan. You-are saying that you feel that we should, where we can make an agreement with a country that will make possible the development the flow of some capital to that country., use a treaty device to reconise certain tax concessions made in that country in order that it might be beneficial and profitable for eoupaaies to go into that Particular underdevelop country.
    Mr. SmauI.
    Mr. SHMIT.

    oing to revolutionize the flow of capital to furnish countries. I

    One of the previous witntese indicated that he felt this was not

    That's right.

    refr. to fully devoped countries? I Suarn. No, sar. Them countries don't have tax-spari4g It i inconceivable to me that they would have it. Senator Loma. What you are suggesmti is that looking toward the

    Senator LoNe. You

    That's

    't advocate this particular policy with

    sMeCi underdeveloped country you t

    it more m akeht desinral for hkirei capital to p t that ,h country.


    oakng other c sessions, to us, s it does in this instance.

    1 tUM to make an agreement where we would coxgnie that the g igtg 5ieaarelating to station of overea investamta law A ina the law of that country Moff into some particu premvem Mr. Sines. As part of a geeal trty where the other country is

    we o* tto Le in a pusi-

    a set its rates that the America company would be exempt from Payingth in both countrim. M Stan. Not so far as any tre-ts neotiat under thi admintreaty iSation are concerned became, as I hav slated before, it (Za1)

    Senator Loma. This does not, you say, as I assumed erroneouy in the 6ginning. create a loophole by which the foreign country Could

    66

    DOUBI3 TAXATION CONVKflON Wrm PAFarANr

    we provide oily for the tax-sparing provisions in effect at the tilue the treaty was sinIaed. Senator HMurauEH r. I noticed that language there. Mr. SMITH. We sPelit months in negotiatiou with Pakitan trying to understand in full detail the intricacies of their law-it is a very saying.
    OPERATIONS OF FOREIGN TAX CREDIT

    intricate one, much more complicated than ours. We do not want this as a wide open blank check if I may use the colloquial type 0( Senator LoxG. I question whether we are aceomplishiity anything at all with our program of taxing overseas investments. would be

    a look be taken to see how much anybody doing business overseas wm paving to the United States Tresury. it is very, very small isn't it? Mr. SMITH. I fully agree both with our statement of fact and what I believeIttoisbe statutory provision, and operation of Ithe foreign ta credit. a your concern about thle opidentally thinkefrig it on the record so I have to be very careful-You have enough witnesses so you see there is no use putting it off the record.
    Mr. SMITH. It might well have been desirable to have our tax credit proraIms a matter of negotiation by treaty rather than a sattutory Senator Loso. Perhaps you might as well put it on the re.ord

    very interested to see how much income this country is deriving from taxes on American corporations doing business overseas. I know those invistigtng the oil companies were astounded how little money those oil companies were paying to the United State Treasury. My suggestion to the chairman of the committee was that

    provision. But it is a statutory provision. The CHAMIIMAX. If we now can confine ourselves to this propo

    it

    would be better because I would like to emphlasi. again that it is very late. Senator Loxo. I would like for the witness to complete that sta&'

    ment and then I will not ask any further questions. Mr. SMITH. I was going to say we have had concern because the tax cnedit provision as a statutory device does constitute almost an

    our tax rates and asa matter of fact-and this I think ia germane, Mr. Chairman. and I would like to say it: In 19M3, shortly aIter co-

    inducement to other countries to rams their tax rates to the level a(

    record under a previous administration indicating that the foreign tax


    credit had a good incident effec-t because it induced other coutit to conforni their tax %votemsto ours.

    ing to the Treasury. assuming my present responsibilities, I took occasion as the repmentative o( the dnte States before a United Nations fiscal commission to reverse A position which was on the

    I stated on behalf of the executive branch then that we ]ad no

    great fohwdnsa for our tax system. pehad no great fondmna for our lvel of rates antd * e did not, cons(der our tax syst em a desirable thu61 to ey.port to the other countries. If other countries in the press econom-c development found a btter way to tax, we saw no reami why awe should try to force our system on' them, This trneaty provision. sad this appnmuah through tlw tre;v. a
    ('oliIll,

    l tilt tihe' bsir con',ce'pt of let ling otiler rotiutries operate i0

    they choose in thiir wisdom, wlUich may be few or greater than omrs,

    (br, 2

    DOUDLZ TAXATION CONVENTION WITH PALSTAl

    57

    Upteed States law step in and abrogate, theiu-s. Tlhis is a much more limited thing than has lien propoowl to us by

    to try to bring about economic development without having the


    roVup have id we should not tax foreign income at all.

    various busju0s0 grupM laid by va-ious foreign countries.

    Various

    We have

    thus far not, agreed with that because tiht is a more basic change. In England. Profeswor $urrey referred to somethiug there tuit brought the British law something in line with ours. The British proposal goes far beyond that. It completely exempts it fromn Brit6h taxes the income denied abroad by forei, traling compaties that operate abrosl, that is .iu'h further t!lan we go. In vast the British companies get, the full tmnefit of foreign tax eae
    concet-iios.

    Senator lurxepasr. Were.nt you once a professor? Mr. SMITH. I sAn still & profesaWw. -- nistor HUl PHlTr. There is another professor back here and he saoy Iou are % rong. Mr.. SMITH. I might say that these two professors. Senator Hum. phrey, Professor Surrey and Professor Smith. both of Harvard, have written joint articles and conducted joint seminars aml we disagree so fundanientallv on matters of tax policy sometimes it is a bit hard for tlie students to get in and argue ith each other because the professors are arguing with eamh other. I had not ever expected that my college. Professor Surrey, and I would be arguing before this illu&.trious body but it seems we are.
    EFFECT Of OPERATION O7 CON!ZN`VTION ON TEASURT IREVENUE

    -senatorSMITH. I have one question I would like to ask the witness. Could you give us the estimated tax loss involved in this Pakistan treaty and, in addition, ftr the record your estimate of what would be the iaix loss to the United States if we had sintilar treaties with the so-called underdeveloped countries. Is it serious? Mr. SMITH. I have examined that through the Internal Revenue -'eice far as possible, and we are not sure that there is any comas pany that would get any net tax saving out of this. There is one cwipany which has beef operating there which indicates that in 1 yew it tight have about saved &$tM9). , in another %ear might have saved nothing. and in another Year might have savedl $.(0.M(0) if thoi treaty hal been in operation. A#to what would happen if this were getieraliY.d to other countries, it all +.'ludsoon whiot particular prove isioni was %orkcd out with th|,se eoiitt'ie, I nrpeat thlut this is not sonw.iuiulg in terms iof atwlleral fuorula that is uinver.s.d. tiatt %.% I prlo., to aL)ke wuiin'ersl-ly . would avtdal,],. It is a matter ef give will take. 6-t mie %,aV 1:lso that ill 1164ill,-ih: thi, peisi!e loss to fte Tmusury, tler, are vu'rious6 g6lils tu, thie Tr.usuirv 4f t, ('filted Stati-., ,*uuat-or Sxitl. Tihts i,4 what a treaty! grt at. W*ill the Trma'nrv of I wawit to smdT#r terriltlv (r.,hi thi kiLitd Mr. SM!ITf. (hi the ,oiitrarv, in IIiv re,4'1jwts the Tre-iur- rmav aeir, I don't know what the niet elect A hrim titv. for .'xiaple,
    II1idJ4t11id'i a r#41i.rwical exialptltili of ti.' ucuikll fiiiif-'nliaft compllanlielii tll+peratiimg in etich other's countries. There are Alteriian s.ll.ntilliei o09e'rawilg In liaksU,6i. -w#far as I know there, is lit) Pksti.i conl -

    Pltay -perawuig here. They irive up their rilht to t#% thire.


    t ihOll)

    There-

    58

    DOUML3 TAXATION COMNVMaON WIPM IAX

    ,WNr

    fore, there will be no Pakistan tax. Therefore there will be no credit aganst the United States tax. Therefore, there will be more na TL6WdStates tax from that sort of business. I have not tried to ru that down to see how much for the various companies concerned That provision is a basic provision in tax treaties and without t6 reaty with Pakistan we would not get that. They would tax. Them would be that much more credit against the United States tax. It i quite possible on balance there would even be a gain.

    SYMBOLIC VALUR o0 TAX-SARING PROVISION The final point I want to make. This provision has great symbolic value. That is, I think it has great emotional appeal to tboee couw. tries which have chosen as a matter of their national policy to try to use differential tax treatment to develop their economies. All this does is to recognize, subject to what we regard as great limitations and safeguards, their right to do that without having the United States law, and the United States as a country, arroate to itself the position that we are going to nullify whatever they &Wo, ad on that basis on behalf of the Treaiury Department and the adnmini tration I strongly urge the ratificstion of this treaty. ANALYSIS OF TAX LAWS 01 OTUEN COUNToIZO, Senator Hvu sazr. Dr. Smith, will you be kind enough in the am future to give me an analysis of the tax laws of Britain, Germany, France, Japan and other major capital cotmtries relating to or cow par" those with the United States on this matter of foreign investMr. STnn. That is quite a 6W order, but I will get itas soon a Ican. Senator HuMpHUiy. I am not asking for it for this paticular bes ing. If we are ing to be in into treaties like this on ta eo. ventions and I gather we are, I w take an interest in it and I wnt to know what it is all about. Mr. Snes. It is a fascinating and complex subject. Senator HvaxnsxT. Complexity is no reason why one should not be involved in it. Senator HuxnuiZy. A fellow ought not to be involved at al or be in it altogether. I want to know what it is about. The Catawo. Thank you. (Mr. Smith's prep"ar e t is as olwsd)
    FrAmnNMT5

    Mr. Su.. I don't mean to imply that.

    4 the Tu Treaty. Thii trea" contain a uetaw which would si, astr amin rcopitno the two-as4P law of Suwb B reeogl ism il edaw With the polky tc by Prde FAtmmhower in the Ecommn Ieptwt offr Jaaemry 1965, whom head thea we should wouw "to empkve with 0ber mmanh she aof the t%" truty m a method 4d fe"m. a awe favgage climate for Witaorial mveaanet Under r1 r Vaeg we shoud be pepare to ive fugl redt for hnwoem t&am that ma waived i e
    Avemsumey MW a ePeld~li sheame i Tub ee
    ea =0em pee

    Dii T. SunM, Dwvvv 1o "m5SwCmrrAEY or Tms T=A"za, w Suromt or Tan TAX CoXvvmMoN Wrs PAueAS B AS TUS SmUaw Comurms on Fonsion Xsanuou% Avout to, 1907 I apd to be"tho .pmisty to m fim the mommnmudatio1 for

    we M- ON"m we&e taw fur


    AM " e dawmw oio

    (t74)

    DODD3Im

    TAXATION

    TWVWia PAKWAN 03IN ,,I

    59

    included in the negotiations with this country, and section 151b of the treaty embodies the results. It seems to us a reasonable and desirable Part o( a complete treaty. It is consistent with the policy of reducing tax deterrents to private investment and economic development abroad. As the statements in the Presidential messages referred to above have always Indicated, recognition of tax sparing must be done carefully and with proper sfeguards and limitations. I stated In my previous appearance before this committee that we would not favor a statutory provision for recognition of foreign taxes waived. There are two reasons for this position. First, only in a detailed treaty analysis and negotiation is it possible to york out apprpt limitations and restrictions to prevent abuse through the crqtion of what might be called artifcial or fictional tax which were brought into existence only for the purpose of being waived.' I referred to this possible dan&r in my earlier appearance before tie comunie and repeat It now. We want 1o be assured, as we are in the em of Pakistan, th#t the taxes which are waived are general taxes, applHable to al qua ompanies n par indlar industries. Thi second reason for avoiding a statutory provision for tax sparing is to keep it available for neotiation purposes in developing treaties with countries with

    Sttes. Accordingly, some consideration of the Pakistin tax-sparing laws was

    aestries designed to encourage new enterprise." This recommendation has been created in various messages since that time. Several do the so-called underdeveloped countries have waived some parts of their taxes on new companies in particular industries which they consider es. tillly important for their own economic development. This is an understandable 11-y to foster economic development through private enterprise and initiative. t i alslo understandable that countries with such pgovisions in their tax laws resent a situation in which the taxes they waive and forego are In some way auto. matically picked up by the government of another country, in this case the United

    aI industry Sd that the wavinof the taxes is

    done on gene bai for

    which, thus far, it ha not been possible to secure Veaties. Our treaties in the
    wuntries which are at a differeut stag of econonce development than our own, with the flow of current business income largely from them to us, typically have different eousepte of income which gives them a maximum source of revenue and which they are lothe to forego. We, on the other hand, une our cnetdo 004 reonise*their Prior right to tax some of these sources of income adhence, do not gve atax credit under our statute for the takes which they collect. Thus, with both countries taxing the sume income without a fully operative tax creit, the international income is subject to a higher tax than it would be in either 00ntry alone. A tax treaty, by Platual sonossio 0 on both sides, can remove thi dimcrimination against lntmtloal income. It is here that tax sparing enters, a one of the element for inI deve , mutual coeemons that will

    dtos of International Inacme thus have mutual and reciprocal advantage.

    have been with eountje which have a somewhat similar stage of economic development to our own. Ordinary rueciprocal agrements to avoid double taxa.

    But

    frte the Sow of private cpt and fote

    To indicAe precisely how this tax sparing would work under the Pakista Tax Treaty, and the itatiomn on our -s tha of the tax oemncsson which they make, I should lke to call attention to exhibit A. This describes in some deti the rather complexsyse of Ionoe and protis tax"s levied on corporate Weomm in Pakistan. Thus, tn the treaty we give rcgiinto some, but by no means all of the tax renounce our bask right to tax income from all sources, foreign as s dometic, which we have been u to do tims and time apin by bus"h. meup is this country and by other governments in International confernes. We have dused to take any action toward renoni that right, Mecause to do so would be icostent with one of our basi cWepteo tax policy. TI, refusal has benstrongly objected to ia various places amrad We d, ever, recogniae the primary, though no the exclusive, right of the ountres in which income is earned to tax that income. In this treaty we wil %wrerogpise the right of Pakistan to forago some of its tax without stepping in "Wo~ss which they forego. We thinJk t I far and reasonable that we do m. We think it Is in thentonma mteres as well as the world interest to foste Ishaethat"deeomn mad. by ps. economic development abroad and .hus ,, . el the*

    whch is so greatly needed in these countries.

    private economic development

    which Pakstan hasdevelod to foster Its economic devlopment This

    "an Au*Uying their tax sparing by absorbWg inte the United States Treasury the

    at o

    to the greatest extent psble.

    1)II(Ltl1I TAXATION 0UNVKWrIID)N WrrIl PA!IW'AIK


    hi,'I.'-s' lIt 1'4. is milllii'itl livill Gor %11n.1hsl.lg.iiss'isI. tolllIlws $4 hi 'lI'amrr ist, ),lisarl lill;ll| lsil thie, 411ilii6.41 ral sti,, I "4rsplIglyv uirge its rutiliallisoll

    E'Xiiipu? A hIlrlls'h tl jSuihj1s't sI! 1,.0- Iltl 4S, Ito %1it fh Ts' .i1, 1 1t41fils fill tositsll h s. 14 h'#I
    6 Iw'rsi atss's.s,s' ltstl: suti siU -sutli Itrs liit sIsol'ut Itii IIt1 Iwrsi'lil. 'l'hlg' Till11114i :til4 1 1i tt. %1jirss'i

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    hillsh S ugilh
    s t'utllill t lIo

    ro'sllr!itcl h~y hlasl,sill.

    Iarstils linl

    t.rl

    to( It Git ilf'ltl111illt is' l 4.ti


    .1

    'Itl, -tIN,% 'rtl1114 fil t s f ill ' .it loiil rins'ced hyII Itmls'mNI lAtsilits t 4tlaims tit I ,.i Ins'rvisll!. r4'4014o4 sit4 011114s OIff Ill# 11l1r- t1, 10c'kr. li gK[tstlrIv lito ) issioml y 1` ' 41%. im lll lI'tlisg uIssissIIIS-4t l'ei'laIslle. ill aIrrslsig !1 44,.11nlrs 1i11011i111 itl slivillsus is Ilhiv,, lif s'll a'h s.uilialmlt,' I Is- sitlrlttia is '2 mmlliltaN sit I '2',? loi'ri',itl W A rr-loie, sd I ims.. 'I Krt l istgso 1st aI.sihhs o'vijssv ailld imhslII if ilieu'' Issit lrrs-asls' Ito shsts'ilsr, iii'. lslssss sI , 4, 441LtIs! , h10ls4.s' it,- 1M.lll'!ise is .1 itiIIsis sir I4 ;u'isl'ls' t', 1,s1sn is i.a4s hte1t1 (fir it Illisle, , ss.;ssiilv .le'll flows's sotl sirrl i' Iol jsyel. ihsl45isiii lslt!shm. A eli' !ssiisivllls.slsIss' i tN us Oti ose ism'.'t a-ltr'it'r trlstl.4rlil, till it Atess'k ',h'hilsissg stul l 11i'rcs'sl lsi'-s visillt sto %% Ism ris's ism by fiti fi,,er I lul6l4 life v |w'r-mtiis. A i'eliiiiuitlv s'titrisl'sh ii" l lby s' s'r1igM4slllv is 1i0,1 1114.114,4', jit iit uilll' t'sttilslill. %if4'ueiigoip

    *wll.1s,

    11ijshllSltsI

    lle's filtial 1111i ollnirsht' fesils11w: %i rissllrislill, listl 4,ts 1i,.lsl I'sshl.luil, ill
    l ,hi
    sl~ql 41 lss'r'.rsi sif n

    u'llhi'h Illg'ltesg ill hill.sillem 1,.1hNt , INN4


    241N1,4NN

    ill t'sukisftlls

    Isrrosi, I' t

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    lhlostxs.i' s'n.s'siiptr oii Iofr t ,it vi(itr f l

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    1,21141, INN) 2N, 1NNI m.INN) 4, 1, .'1141, INN1 24141 It 114)1(0 2m. INK)

    1iiI's1l1it' tax s r) 11i, t it t I vIrrmill i ,uwrlax iiisM 14 141i Ph '111 , Mrrtill. 4 $1wrtl ax3 aisima sir 1tpe (it is s miel Illttl Iflul s'st4rmiratlills 41 1hN.i Ill, at y flivishs'liss li, I'kilstall Al14t thast It (1ta6lls0las a.at 'l hilic tcInqtseiy.1

    I1'Iilt

    M114'irIn li'si lt

    tax

    I, 243N

    h INN)

    I, '241,41NN, lI 2211,4)110

    'T'olttsl tlaxn Imaid by I lit, e',rlirntistm Iis'rsiitss~lo (f 141181 Ills.iIh inits'. A7.1 la'rsllt. f The lucomnsis frsun all o.in'um of a I'suan evsornqmiv, I. ni., a s'otipmny iall~lssrd in Pakilslalt wiItII lhu Smallutir shl',,tsre AUni piny siivsll'uiths ttwlriu, insPtjilvti to s4l Its 9be lS ns 3 t5Rtuz, but ill t1ii11i,1.4 it) is 2 Imuln rntsa, susoll l Ullerltx so that 101 111llow* tis Is v saiuw or 12,04 immrri1& lusstasad of 3 atllila or MIw msllt. Ali evalsupil of Its stolal wls hurnion fllolows: A Pakioe~n rt hvih t'osmipiy, wbwollsiltry of a UMtitl 14a1ts uorlIsttiaUmI:

    (20~6)

    11031111,11 TAXATION VOWVSW?11ION W3TU PAEJRAN Tuuit taitxhle I101 t'i,,ttl)iitt (year Jliwetwie jrdttha* 'l. titi 1
    tI1.siwtv prIditos II
    T
    1

    61

    Udt

    I wrrteel

    (It e'iljittl

    + .

    I, 4Im), INN) 2A1N. INN)J


    21. I, *1. I Iill,lMN InN) 211|, I11111 111111 "NN)

    I%

    wr"','lt 4iNN
    faN)

    .+

    -h0*11w' 11 11 11e'l, l indtlWat

    Inemoie~' ,4t 'jot lo buies I+.v" iut... lirtililm lsi.. teete Ior if nsttt hje1e't rill. 1t:l. fIt III% Illr11llo, tax $4l , 11111111s, *tor:1144 l14-n-41111 Ilrtl~lw sillj44l fit bull.,rlia .. ..
    $ttilm.rla-x .t' 2 amwllexl* sor 121: lwrewmnt (It i 11i111l s i11111-1 Oi rtltqillll ly W ilivitilhi.l ilt Iltkiieta'.)

    I, 2111' INN)
    . .. lllinr .
    -

    37h'I. 11M)0

    1 11111 41,
    -

    4 atlil l1i4ym ........... ...

    Icrul, I0)o

    TWO timt*tf litO l'itLtit, sltibthliusrv P'rvet'tllte fit tot)al rrulils: 41. 11!.'rent.
    T hllilt 11iy t wiltl py otividhe'io

    2, INN)

    'The allo., titakwistai rd'ilttnitly may tvi thei aitlmitilaryuof as Ifittiee Mtaime viortwp. In its lotit-it tit ll ltuttery ufin it hlitI he' rti lloodiary 11111A lW1tth, 1 witile IeIl li Iils ntI fihtt iide ttlw, gro.s Ultthir III I. h ,t leti ht eiItt l hh, t fillthiihtite II 11 ji F lltt l rll!aL It lm, l rtin f sutmtim tiry stll Jusrrll is illutI'lrlrte ' Ieillt.' (ttui tll eNinlltl, m I .4hd 141811I011t rtiIt'itett Jin-litl ci rpii.rt lot whieIt I ultiiflhi t" I11leie 44141111 liity mitdl r''t, vi cliv ilt. f imt t!lidom lli r ei tv- t ion t tt)llRtlil reieltiv t itt 'akislinc: 1

    liullwiutiatry's Iqhal taxale' prulits


    1i.

    ... ..

    ..

    ......

    I, .1K), INN)
    724, 1XI

    taxes' poid hi I'aklmla . I

    ......

    Avau k' fewr ih tltittetit~ .... ... ...... .. . .. 1lit hl,,1 i.I,'i'h tlrr. .i I)ivoidtellh itadl III) lil iwldillnt sit 314+j plrettll, illwI uhy lax) .... . .. . Supertax fillby) amulbsklhry 3. atmsm, ..... Imir'volp at 1*4 .or . lIxuw laul diviti.lui.r .... ................
    -

    (175, MX) (
    ........
    -

    1 075, OWN) 1144, 11184 725,000M


    11, i010 VtI df the

    ..

    VoSlt81

    Wiliilitl l I t111116 r,half Oll l.ortala, Ni tat ahl ot ttjltrtix llelulttWS 2 ntwuums, oir 124, lerI,,ltt lnaet'ml lf lnottre'ettt. At thi roll,'tetax totli' itits i*wtil tI1 ivui'illl of1111241 rillott4.u w.lull I., 122,727 rupleme. '17t10 1i1i4n1, R4.1e111 4At (he taxim 4it 721,(NMI rutlm,4 paidiby the s1ttlemlliliry elll' ll y lilt Itsi 4lWtt town ',llllutt iiveo aitotal tax htrllet df 8117,721 ruli., whieriit atlit liver lt0 i.mrmeltt 0f to lio
    I'Iltttlltly) till

    prililntud tretly P'akistarn tign

    'TIuIa l.tme lo14 hy litlwituary atnd imitnt .. . Pom!ttta of W taxah', prIolits: 614.2 lemmil. hooil Whilt, Ott, alh lve tlllmtriution foltow thl I'akittatt law, by7 artiti

    to ivit Ito th Itt11lled tit4t4 parlm'it (if al e poille

    Itltklatan sll imflt4tye l Itnew e htidtirtt ths hltu'shum pirolitif tax1witt linw lli tml Itn1111 ie' tt141tt1t, bit III) eril'ti4 to4tt, or wuttlhl hb Riveti hly 1-he4lint )4111441 treatty eilr that. lakistan alotla Plsuamls thie hlrte mul ii me'rtx, litIteldilthlit i ilntlertax oin tile 'uuidillt,nitylo I ln Iit l)Ill ft11111 rolUt h) Ilnettltil of eallpitl timltllvetlI "jiwl in1 utlt'rpryIie tWiu!I fir a year. thiel Thitiw' tire thei 'pareil txtx whliph are rocogliuied
    1. Aln tinividital who eltlti'y fpr (toeand Imolmme o lemw n ainew appnlvl ta r1tie110 cultllallly of l11kimian Islay etu'llte frilit the biale for Jlltlst nti lllrtax lt't 114,01110 44 tl hil thist tivotiulmi Wi.t fil, toveyr 20) I-e'reet elf the fnit IM0 lr ftlwlee I)f inem, or It) lINremt 4 11100e1t1e allo)vO ltl1(,14,K. relsp.'ee. iThe satlary of a foretmn te11btichiit .'tltumul for work InIlhkiislan with tipllrilvtd of the C(utra)l {thvertullnt Ite !ipt, ex fron tax foy year of arrival anal followill (ofr S." Income from niwly conostruotmd btlUdlnp Is tax-oexempt tip to 3,1M)0 anitias
    fnro years. e1(I1lt)ttlIltax itivem in takieet (for utimtltn ieeliehllt is t'oyevi. fir Afeittod by the tr'lyt, ain':
    hby tli trwat.

    pritiitti

    itstt,

    onto'

    of whiloh

    of building) ib granted on new builditp for thve firt year foter erctionl. deducUouis above the normal adlowatce.
    1P1m 0--4U-

    4. In extro deiproviation deduction of 10,1 11, 25 poarvet (eorolitg to type or 'this Vol. S--- 40

    (2977)

    IM111!0IRI.K TAXAlON

    tXINVKWV!IOIN wMt PAiMiSAl K ihe


    i~lot fourl 41414%'l It'w l!!lt'haie'il'i $ilt

    l it4 * '1lia llilf iOic-O ti4'htllIlst'e ,l s tls , k.$A'Iii'lii


    The,1 'If IIAlm % The, x.

    list is Ill his nhimralolhl for Stt%Iit. Eii'Xeueswll '11101-Hi41 V' , K.ll l1i111. Assllill *,,rl.'t ar ' Alraeir, IsIt un i It, re srlit'r mut l hotft is 'A i i1i1'll li'n10111 h e4i11 4luli' 8 1441 t vl let' wgill phiti.' lit, slIIti oii'Istt iI tihte ri'.irdl ati lhi- liiitil. , No.%I litlihjurvi's lre',uleirl slaimoii, Is l att fili~iGllowsl
    $t,4r1i;RM4Nr liv TIIi4hrl4N V, Il tI.IJ tItl,

    11,%1 w'iiii-m

    4.ttNfilile Avvnmu..s

    iltirIN r

    clMrtr:r.tut fio sr.tru Filul

    sltili itIi t'uuli04tr rt-M-11 h fi y.r ,'t l 'I h I i i gla ir I 'hlu rl I tllelr d fI Iiivt Ith u fI! ilt i tt41( hi,'lllt, str v I tf I llsll, , lf$1144l lihtet' ,l0i (iuh , ail'fI tl tvi' l 'uul il e . fil ' I ulwuih T 1'r l 41 1'flluhw '04-4-111-i'li 0 dl the fi ll')l l Ith Mullt'.i ry 11Y -thn Ihlvflll Mi|llll~,t %4ulltlr oiiiv 11 1',111,11.4n ll, ,d llI is(F 0o-r tt, 4

    I h'111ll .lull. l iotvit .il, ti nri'lrl t 'iitrht hi r list, ,ie ls,,,l Ilti m v sitll e'lllg l sit esll, Iri isit ".ilt' ,in 1u tit vi it 6ilt ,it ' 1lult ll il-,l4 1, lg ll Il l ' hli I 11,14 iItvle 1ll-llts[ll h 04 I'llil at l itst l ll 1tt11 iitll 1h1,itt iIi t' h ii ltlh. t' t'. I t 'A4ti0i It 4I t1vI . i ti'is hilsf t a s unt vs li'11111, o ll' Il 141ll-lly rt -wli'.?iu hill' Iitv,, hli ti ll, It.' lti ' 8t1t1t4 I )i'1liUlt111411l Its give :iM(1111 I)itIi it'r ti1hl1I"'W II,-w'd l,l III 1ri Ii,-l tlI r' ,r inty11 0y.
    1

    Ito-lu

    Alli. l''lih iii ll t'll ii iteilei.iitt'htiltit l fort flit l ltivo t d ll'il't litultigilt.tu Is' l l tidti ls ituuua fitlui III wirhl nii, tl ih i i h out Whichttis,'i'ii th irii llt' a t g ii ltliiili' "l ai !Itio rlloU iliilt t'4 .u111i't tinI liii' l'I1e' tfn rIlit ' t, , ,vlifi I * I i il t ieI' lil ver it i itet ltt sii oitwllr III lr '
    lt llllrl,.4 airis ' 11rii0Ilt 1h44 ra1 ' w11unv ll-'ll4 elfilh4 h 1 ll ii4 Il l il 4sr'i1 i lit0l1 tha t ,0 l ui'it o% Au111.1 lillu Ipri te',0 ill itI ,it. lh i's'siluinn11.isliuitt1111 flt hnw.i~l vittilli slIrihii ohiiii'rsi'hi i'ttllUgii ,t 'trtnitisair ,iswi 11,01inlt llllih, l It' Ihu isugirlllul' il flo rl.ul fi uut- lit ' ii u, liitf ar It hr iiiioitfll iw1e'1ha1e'|ii Islltllt tilp T hin' r,'1u1I tt ilr I i wahl hIr'uetlis iuulive i,4t'llmllr 'si fitirii ilorlyitrlta'iiii i1 1 eiiit'( fiier hlstroisail tistlut Irtlir t, alultaih flint il MlMtt lilltii,4t I i ni tliuthi ulitrilurtli tII I I11 titi'trs tvir.n w'iilchtt iunr,, t'tliltlia riltl-

    'Iun

    Tihe, i lt I1I111 %'vi I1l111 iiu Wi llih Wit liutn'ne I4

    i 1 r ii. i tllllt l hih %%tli Mti,4llllllw illl i l.t4 gerhk'hylt1 lis 't14 'ly trtst11 it is p rll, tutun i t l4Sthe '. iotwvtIvr, boih' muelettli lr'ititigilt rv It IIlist (netl Iivi hin" i rof i.n4-irl I,lt!gilt I titl ' utiih it ta%#, li% "'141141Iil l"i'r. N ilsu t l 11'r highly 1itlttli'! Il M11 iirlug' s g," Iei i lNt1t11, Aiii Itaitli'l and nlllut. il r
    V 1s11 ill, Iiiniit llh'1 I ith iu e'it lw
    vall,lX, itlllt

    1l141ll'11 601t1l,! 1111'1411lh f~ii ,rle4t l fpi, l

    l giv e'ouumsolt ol wit leavte , '. , vll it'l.tlfw ,r, llit~lll

    ri'thiilllg
    it1 ,111*

    410411hieuIt' h t ltru' llh


    Ili1ll'

    t Ac. nV1111111i llitlu 'h !1111181 lUlt ill' lurill hlil le t I hl,ir -tn 'e'ilth lu1ur 4 ve ist ( lUss rcgloie V iery !liri I vihhiirt, Itu Ih,IluistIio thtg letl1tt iti1lut).' iutosl , 4'sui . g i ill'l'lil 1i41i19 t 1ii l IN'itholl' it ,liti hll# ort, i till ui poetI ittiaisih l h ltha Wittl-eay fur s itgir u lltigu i 4iu 41t $i it .tltt ' lot' is h t' 41111' 40'ii4t' l tiisl iklt all oIh tt' l e.'i' it( sh rr. viptl ll Wii

    tth' iit , it i o 'rde. ' l

    tll ul 'u hs11 4 l t ri 4

    i ll,

    Ihl li t ' l i tilll it et a ,uuh IA4 lho llllll4 voi i ThIlg hu littlerlir111t1unlllrol!rlillll, ef wo u l,e sti fo14ritvtiHiut'luits 411'Ir t 1'1iuuihh isI lirn e it' I l i i~lll hw o hi~llt. 4.114114, 11l141 I)f`

    iiu'trl tluli'rl ii iiit. illl lut aut I~hlilWt'[Ir' uul.'rl Ilsiriiut Iluusi iii whuu',llu I ,lts" lsull'lii rti ilt'hii

    I' 4yilil0o-11t IiI1li. 011t,411l1w 1". 4-%411111114-411"111 1r".14114,14 Irlvi,,f.l~, v. g , flhletl co-Ol'll im's Isitllitill liv fihle, r Ill whilu l it,h iiietilli, tollrilginnivs, ml~lt fetl ls~il,, tooy itslltI, h tiWa I jsl .yVS. M A J14411114%illlI 'lhill Im fitlr ,itstltio~ Wh14111 i4114111 ri,rl101,,lll 6,411ll1irv llt 'l'!',l!* rov linlry linsl ot W, itl II't~il 'lll ' i llo.W ro'er,. ii'l M1 1 it mI-im'elt f~lintlU Il% I l I'lil -, silly I'tM tllillisilitI1'1 ill li, 1114l l I 111 "1u1U1u11bl illidll'r ell|l~ lli''lill wilic it' Ine i~id i k v ,inkii m 1 l tp'lll'rl Ilitit lt I~lih|lll*'l Tit give,' Y411 011 %i'Ill hllt I'Allii 11811114-1 I11kll~ I11114101 *1111i0 elf |I114i4l I1"tV'l141ll". oill i~tlll lly rn l,ilty .ll llli,liltt its tli lii"M161 1 44 *ll $ 41 flilll 4111tl v%1111111111, fit$ ilnl l it ititool,,rohIli.vil ol, ,, vi l m lp ,oluv I'o illoi~ loltI 141 h ,fil ,#, Ii ito11 ,1 ll Ivl h ml iog y teth le~n l, U it inilt il.I h, ri111 l~ 4 141 1,111 l ,tife,141 i l~i n h il te,i q-r p u!lV"Ilrimim tir it( !lm I rvl~llivie. tul4h01,,11164's, 0114llllri1 4l. 111till Jimr 40ld I Wll ih Ilitinirol orl t tIhitt, itax twalitl ill Ilitlite oiinmlqlqllid. fluellimalt, ftir tr:, .,s t.ight IntNt11 It 141llminol vi"11flintll hlse

    III#, ll)ul'ii illnla launill lllvretl1shin lll, h441 h intlt,'o saintr tr tuwitl lus' , l I llllr}t'i t 11 t This' fivIm,* '1J78 lite,hiatlv 4 sititrot4-4imi sI, nl mitts ls ilittir 1timlitls illilh Iv" Itorl ( ill f 1illt- tr , II',v IOIlto ugt.It~t'lll iut~lt ,),heu t stltll tutittirltitt IIli-s. I lllrh ,lite ti lawlt~ril r'|illwnl llt iluau'. , r sil lluu .u'r t'' itrvllt llr I las' t'a liii. to( l~t

    ~lullry

    vo!ll,if Ilths,, iorltiviittsrll-l lulld hili -sitllietli 'tI 141110l 11111119 |lltVP I101, IN4111 14111t Oi 4ovliliro Wit

    ('t a sarriilim tof myr'itil. olIfr


    ine tl!
    llhp nlllll~t

    At. t~w

    nbillta~tlivii tit

    It1t,,,'

    TARArIIN IvNomcwrlt

    wrN l I'AKIS'AN

    113

    te i' hl uiltWli se fit leetih4I Is e'rst l e4t'slll1tl'0 (o pis t s litt-er,1,1 Im*i.*'IIeseiil. 'ri sil . le' I#.O t4isitl ot 11:1c teK1 il list, leel l, lowteglellil lot e' ieelll m e| f eie'll I I cTl lksei .e h'te ,'e 'tcl l 1 I uue Cl.4lc Iho5t I 0leer lcle lee :i4KVi! til 1,11"11le1 '4 I1 Itl I~ iit 1,,1kti o*II,*IIIv. M lt I!ltltlllll,4.4611111111-4o lS ftlt it% o-l AM I. MI 1h'r ii;;1ee.tl t % !e'se ie.'fss.llli ill Ihut l it'll ti ,le'll tlte'let' eel Z*lt'l tee !lCIill, 11% iiiiuute'eltee'4tll eel e;ltoI -Ilt

    llell'4 Ill Ihe' I Itea tv .l4ofitl4 rlI I list e':elllt14l Itee i tl 1 4 lov It 14n':ele ' Ihe .4 Ioit l 04it stI I |ose vl l' *i It l 4 llsttoIll Ii t ro , II ee-'1'1hl.4r 1 c . 113 1 lIe'S do' tee 11 1tic il0 'it'l eItl 1 Ottill Ill I is 1h l4'. 11eel j114l s11t f l i ll- '1l 6"14 t1 c. 144 lo 1 o cete' M~te tia'e t', l~Ice'. eciele'tlsce ehl,tr :,ee itlh'l'. Igeellse .tse' 'eisetlll Ii t he eel her Ihi+tt fetlhl i' Iileesse' ltiii',' leh le% teleith ilitterle lhitllglih |lelthlile' I I 11.Inl.l 'st1 e'Stlt I lilhe eit4tew , ilif I0 1" I Ii 11A'.Ic l ' nelchhe'',eI 14lt4lle'1itia le' I '40I h lelh 'edouo. et141 'tl14 (1eg le cl e +'e ls Alecil' Itit I n r .rli leeoll 'I t m. ' 'laI Ilt I"is' w tiseih' 11% ill ( 4.40. t1eellttlh il hel t ll0 t Icci rA 0ltllgll. ctisillte W fsille".elee1e1 l 'e1 lllt I heW'll '' lll111 ih ltl-,tl+ ltt0 iK . ' I hrlt feiit 1111111i setl I ,ltetlt ' lit tvci' .'
    l Ilclell is's heele 10i I oe' fecl:et is olu~ r~v ,l.nIo ,l I fl fiv llil I iha li W sal.w111f ,111{i e 1I,i ao111111,414-1 l ll O ll mott 441 1111 4illt 4%!

    tls:4t tlie' In%' :, tlttsg llese.lols l it I t IIi I lt ete11 Ii'c1eei11tll', tio lot t I' ,el1it A It,* al eIs.I Itolle"v, mtie ll I''eiltlell V eelije'e'. e'r, lii. willt t lir IIrc'11t '-11 1 111if "ItiT 01114 I 'llt :ileeesll 1)l %%41i111- e'e'lh e11ttie' th 'm. Ieli401',4cll 1:A1% 'lltrileg v4 1tUllees1'n'n1l v Wv. 'I11e0le4h I. it 1ee",0ilel4 (eer tiitefer111t 4tie'. ele -111e- Sllllo, 5it114' le ii' iei'iill- ie11 em , a eeltce fleo.i , elot l 4le li'e it w t I s 1. te44g4 1'lee1'iet tisll t I 11%e .111te Iel it rl. ll 111h6 ''I it'. .11 ,111 i II ellf 11sseI h' si e l e el elll I %% 'v'1o I le'' ti t14 :51111i:s0'1ee '-ee1-iI t le' u1led4 11i 411s1t 1111t 1t Il14 Ie' t elestli',1ll.%% ite'eei tee' I' stte' jfi Ii glI, 1111e1l1K I eit' te'elsielleiet' mblese11'l Itt'ell rl stll'. Ilu % i1 I" I'leleIre' r-,eit ler isetIsleo1, I 1s11t lmi s 41411slllM U111116ite t it llode h iseet 141 tee If$ lhi l tV e. 'sstto'el Sim 11111t." I iht %4,1hsle4take.' ti. v Iit.' ..1l'e,411l IIlee ie %% ' t lll it 'e grilltll sieglie till Ileeleit g1t Ilel Ih1t

    eeeuelhl (relltastlh' I1+'. ilsv It 4'll~,.1-4 +l~1111%Ih v liva u+% 1w liltr Tn -11\ '!:11m I ,r 6l6t'. liis 1 lll6, 'rllhfill tv1-w1, 001111|'l'Ieh l lctIt 1,111 i 1 -1104. to( .1111 till eiii iilo . 11 cecil M' liltIit e,11i4er i l ".nt Ililt ci'e letw l esli tt '.iieg1 sull 'sle' eefcell I'it l sl h :sll , 1114411'1'4e Si IAIs's d"llll eeih4111 1i4-1 , Il ie1e111 I"1ll11%I e .' , it-, 1e'1 '4.l'e'liw I540' 1 t is" eetil l p ie ll il t h4e. le : lst el ctl siet t4
    Iseec.lll iiii 1 It % lili t %%-e't I'. 1'') e.1.I %11111 1 i-sn I l .l' 1 i 't e it heoel r l ella e e'l m' , lit I Ii) , lt taI 1 "fiig lcrts'lli II, l ig 1itellr lh Ilr iesi l ic',*esi ' I l4, Its.' lsr Ilmse l1' tjeteIecet 114s1 t el In%., Iceitst lesereee1 lit ee'k l411is%'. liteeel' t1t. el lrt I) hitu 1111t IIstsilsllHisel ltlttee14iN t it141ellt ''e l h lla.4 ees I,4 h ite

    h ll'iegs'elI Ilt I%$t lll . ' $$ll" jut . r 'JOnr% it~ei! s'c ie l4 Ist lI % t 'it v 41 l 1I4tilt lto fit lit' In-~iil y 114'%ei i ~llt Uieete last i61 %1114'164111l1 41'tes 1isstte W..e' 11411e tev 4tele4rtinike d I h lat' Inaill)' Iegoolithit leie Wilh It Inttge' illleseixr tl ntaletit fellti a i tittilehfe l'.elelie l
    4. mIlll r .4 i'i CAJ The 81 -lotarII'II10 11114 illa ilh ill !lolitltliot. 4t1ir rltl1O61Ir %%i1111 1 y 111lli 414,1".'l 1,l1,1,luli,-s lustilll4-i11.1oly 1h1i'v Ill 1Naili Amll!mli't N-4-sllm wt flhiev viwl e~~hr IMII'II fi4% +slott illt iti ..1gillifivl'llf A1.h0limh artrl as nlltwime ilailis oil their willl milr W%1

    (,I)

    Tl t-l

    fi,lrm

    + itmovivie lvsira lll v 411,11

    In Silai

    li

    N111.

    tlli,

    It%-l fi e 114111111.I ii

    II, Ill. l rlm shvViP*, ' llt lnll~is hI eeilt irr {Ittisoigl, lit'.601ccsrhtltlf a t 44 gsliiti,'11 shtt ~t'Ihl Iallismi, Mtoats, '''ei tt',s iiisvs ee I i 6 e'. titel,,l it Is tlrllllf4se l l it h las l Inio Ilo'llei tli illet ,t tit t ss' e 's lilt'Ill Ill| IlorlviIle ilV'S % ilel e , N'l i )t I1itsti' 1111 l, ile-' 1i4e111at1 Ie11 l-I illt il 1 s i' li

    r lI,'ite es11"t itle lllllt It'. ll iust tii~ 'A 141 ill e't ii't Ie'1 , aw"14t~

    i1s) '1 .' toat't lltoiieiK eh11'lrel' l miee'etioii % I ll il Islsttls'e ii vI ,w t'e,'l I it' Is eet or thlle'ltt ci l l~f''alt'illl 'e'a. I ittest,rll l tli isc e'!1. te ht,'ii I1siltll~lllitf eeeei.uel''I.'etee ese'telll it01 4,1til'11 fit e'eet ll ilit '. t itel sl eh e't,tiert 1 r l 1 eintt ' itswtte ttilMt.ti' lIIm tit Ile 'tl i'lll this e 1i Iierie il 'los ehl I hutIt.'I its I)1`th t it .1 e hicte' hml lie tciltseli, nsslot ro-1" ilr tt 1111fll ccit'. 1 tre aiIstt411selcc e'rs'eI les1111t8tINceelse'eN"Iceit 1 ht4te'tl1ii lltttic l 'ge tlle"t t.It elsl hllt,t Ii'ee i'i e I4 i lvl c'at i n shitl, ti''4,h14 t Iecttl l ea. jt etl'1 (ifit

    Iiit l e

    hlrmill' m b . a srllc d reetlv let 1111Vie'Siseltt re'vou4 sis Ise eelll'seie' litlli ielue. Iv c'ficetaiteit emli iv tist I ic sto llisiol I-is thl ' eitit Ahu i vait e. i tiily frelatIlllilh il l lti eecl I'l ee'e't eel,-,1 t l e lill 1 tthl' ie' f ot'it ie-till t ''l , ( llt,cr Jilele

    ccl1a11Ireil' l ecteci' itil sieI l',tt IN lt1' ki let-lgeecs 'r loe' ire'is". loss e iw1'c'eecietre' a I 'l., Ili W's lillje e'lI ".iIlte'av , il 11111K1 -4.1ilt I 11s141 c4 U $tIrn h iellelt'11i'414'i ' I44-1141 0 eeli. o Ill t h slir stuI I olt E'eeg Al.s 'Iiet ,i v l iesh, te.t, tIlil mi lalli'cltt c'it e't ieel it- Ieeclt'it
    .1141Welolll rlt.101,4! to itlt'l'! h NlOll't * ilf!v l a hII y U, v+l | 1141) tl,r, tiitii' the 1114-111K 41l1Vh t

    lel I hei 4it4111111 I Nl so-ill V Ilel, iig Vi 'iI. ft't Jill'%'i$ I f l Itei 'l41 g sr'11 e'lllic l 'I,, lt, llec e lil I llct' Will% I' 111i 1 sit. 4'it loI)Igii ti it rlatitl o llv si'ill htei tele (tie' ,lahled llilsvi't ll'e lr lsll IUs ell. d The 11l1111' Illtl tit-illy Wi "cslt i1 illt I lll e' ihc' lilldl e i ites killtl ht441 1s t lnt Al ee i u *trhl. I I s ite1.lel 1, ' e111111c111411siv'e 1ihl11, Itecgs fill I I ' ,tl4-11 I II'nksce Ill isi l t1e1isi lll 11illke. it mull utlilptl ltila ll 6111 tf wilt Il a dll ilA li l tisue" eel litl. Lsttl lelt lIostltt4ll liUi el l hnri el W ltee l e
    (01079)I~ 'tow e'

    AA

    DOUIUJ TAXATION CONVSNTIrON WITH PAKrLVAK 4 .A. Now our last witness is Mr. (Colin P. Siam, Chief

    of Staff, Joillt. Coullit let' oil Internal Reveniue Taxation.

    The ('u.IA

    I si.t'el tlihat Profei.or *Surreysubmit for the record the l)p heil of sy trlitaislis or suggestions concerning whit hats beeni said hemr Mr. SUI1TII.lay I h1ve, thell same,: privilege,? Tilt- (Cl.i.ll{IAA. NW, Mr. St1ln, il you will let us hinve tihe benefit front you as the llimax ito this discussion? STATEMENT OF OOLIN F, STA*, OCIEF OF STAFF, JOINT CON. LITTZI ON INTERNAL REVINUE TAXATION
    gnihtl mentin this fim.t thirl 'itih, early days, senator (le,,,rge tlip s aior of Iate joint olnullllittee to '0xaIilie Itreaties for these the belnefil of llh Foreign itlt iolns (11omiit tike. l' 'rhle (CIlmIal.Ix. Iem. N\fr. S,r.m. We have been over these e'onIventlion11 from ltime to liunf, in soille instances we liave point eul ou 'ertai thiutigs whivih lhe coanumtllee felt olghi tbllihanlliiged. It this panrliiulr. situation, we e

    uskid

    .Nir. ST.AM.

    I Won't take veryI

    ll'uof tie litme of lIle, vlolltuiti te.

    objectionable in" Otis particular Plakislan convent ion.


    I did tell the Commllnittee thl

    wetil thoroughly into lhe convention anid we didn't ilfild ayliglig


    TAX 81'ARING(i DEVICE A$ A I'IIEII)ENT

    as Ithe suggest ion of allowing at cr'd. for ti x which waw not. pid uits inlividunl convention lit([ ahliould not he taken as it pre.ednthll for
    wlhlethr

    other day when I appeared that. as far

    Vonernet, , we llhought[ it sltould ho considered in the lighl of each

    other conventions. Wo will continue in the future as in the pa1st to examine all of ltllese tax conventions Its they come ull)regrlleh. of

    forlly and in return for which tlihp niled States would not obtain any cOlone-sion fro lithe foreign country. Tlhe IAI.A.N. Shouhlnt wie formuhale general princilpes which yoit up l' in nilkinig these diirfer'ntiations? Mr. Sm.l. In colnlnectioti with lim -Senator (reen, you asked thit! tt, other day thal we prepare in conjunct ion with tilhe TrIeasury I)epirl!ent a111n;d tile State D)epartmrent it stIItemnt of the general pritipilees Mr. SA1.11. 1 would not think that in that stittemeit whilh we are preparing for youl, this device should lit! regariedil .genal at l)altttrtiI. 'I heP (nIIAgIItA. I (,liIn undeirstand1 that but thtit isonlie of t generld lIe principles you want to apiiply. Mlr. Sm'r.-M. Only in this situation. Thile (lpCHAIRhN. Ye1s. be automatically adolptl in other (.onventiotis. As I Say, we have exaniniedl this tax-tsparinig(ledviee,. It is a very small part, o;f the wholo convention and we didi, in otur statement before the C4)ittitteo the other (lily, call the committee's attention to this principle. It is such (Whotm)
    that govern. 'I'll,.e ( ni.lrn. Ye..

    I feel thit. fthe real inprit of these conventions delpends uIpoll negoltiaions between the parlicular .ounlry and tnille Stlillt1es alnd tlhat is onlie of Ille big advalltages you gel out of nlegoliallS ss io compared with a Provision ill tile ltx law whidc would apply tiUii

    Because

    it rovision has

    bleen adopted eul

    it

    *priorconvention or not.

    Mr. STAU. But, it should not be considered ai principle or guide to

    DOURI 4 TAU.AION OONV3I4TION WRTU PAZJUrNS

    6 65

    al p411 of the wholti ,.onveition, it, is like the tail Wagl)itIK the jart dog rather thtim thildog wagging the tail, and we ouhl see nit) iojec-tion to it so far as P'akistan is concernedd. 'Iliats all I have i) ilky. The (CHAIRM.N. 1,Iha.k you very ouu'h indeed.
    VIRWH, l) WAYS AN.l) M3ANS AND lINAN'r.

    *,i0ii'T].T'

    Comnnittee of the IHlouse IetIds e tlo ask this question. My own feeling is that1. I will join with Senator Mlorse aiul others here in reeloitlltllidiiig t hat we sullulit this Convention tl Wio ll those collInittees: I um just, sugge-tdilg that they givrt Ius their advice on these ponls that have liven raiseit. The 0im.llcM.c.N. I thIhk it wlId ha,.'t, -. 411114 ('lre on delaying tihe treaty. We have examitined the tr'laty very H'1os'iy and it, seemlis to follow closely the upproaeh in the itfier treaties. If you submllit it. to tile Wilays and .las nd the hnmdtdi nce (Fn lnil.les. I don't Ihink they wo.Id probably want. to lake the resilonsibility that belongs to this committee so it would delay action. Senator LoN(. Mr. Stain, you serve onl the Jloint (Comlmittee on internal liovelnlue ''aXilltrion anill I believe about. 3 or 4 or 5 membners of the Finance Colmmittee serve on the joint coillettee? Mr. STAM. We have I10 members of tie joint, committee and 11' are from the Senate and 5 from the Hlouse. Senator ILONU. The live Senalt nmebers are all members of the Finanee (oimmit tee; are they Iot? Mr. STA.. Yes. eneator lomi. So one-third of the members on the Finance ('ommitteo servo oil thie joint. conimittee. Do those five members know about, this piarticunhir measure? Mr. STA'U. 1 4101 h. believe llty (10. T lnaVen't disenU.beId it with them. Senator Ueore used to ibe a member of the joint commitl we as well wthe l'Finane ( olmil teailnd this cOltulliitlte. Senator l.oN(;. Thatl's correct.. I just w.o)ler about tle itlitude of the meltmrs on ilthie irnn ('iConuittee. My guess is-tand l serve oil that lonliuttee, ats you know ,that. those members l Would feel that. they Were enltitled to ialook al particularly this first pireedeinIt. before it wit; esiablisieI. IThey might. not feel thath,iey entilhed aire to look iat anything but. this prnvision. The ('imt.m.N. It seems to me the Filnlane, Commit tee isas 110Immh interested its we are. Senator S1IrTII. l"enator Jolhml lViillilims is on your 'omimlit tee. lie lnas requested thatthat 'lolilt te , phre le itnelldt'o look over this. Senator Ihoxi. I think ia very good case lIs been made for this particular sit ualion here, not uitit general proposition, bitl a specific as proposil ioll. Mr. M'rA.i. Tha's ri.pfitollf ,'enator Lx(l. I1nt feelh o mitiee whol)ass, ol tih.e snhbject of this fon'eigil taX redliilht, ithe ,ole general field of it, would feel that11 before th1e leolrign lit'hiollns (C'olliit teei, mIighl str lra.oiffr i'ng exect ive agree, 1il t; a nie, tndrea i.'s Ithat. dleal witi ltaxition oif foreign c'orp~orationms they woihi watll to know wdhat. we are (dIing here. (um I )

    Se:inator Si::lrii. Mlay I ask one question? Your ('011144t1i10n with the lFinance Co'olmmttit'e of the sellate atld with tilhe Wivs atlld Meani

    68

    DOUVES

    TAUTION COV

    WITH FAVIMAN

    to Mr. SrAM. It is such a broad subject andbring is ama part of the them. This would be unfortunate to tIs one particular point a whole program. Senator-LoNiG. You could offer them this a a good example of what you have in mind for the future, as the first example. I think this makes one of the best cases you can make for it.
    ARAMqO SITUATION

    Mr. &zAM. I might mention one point that hasn't been developed. We are looking into the Aramco situation for the Finance Committee. As far as our investigation discloses up to the present time, this particular tax that was imposed by Arm-co, which some are arguing an additional royalty, was imposed with the foreign tax credit i mind. Mr. STAM. It was poinlt out by American advisers to the King that the additional tax would not put any extra burden on the com. pany. I believe that some foreign countries do raise their tax rats because of the foreign tax credit we have in this country. Senator LoNG. Tbt ro is one thing about this foreign tax credit that doesn't appear. When Aramco is doing business in Saudi Arabia and pays a credit that would amount to the same tax that they would pay to this Federal Government, if those same corporations are pro. ducing oil in Louisiana, they have to pay State taxes in louisiana for which they get only a deduction and no credit. That being the case, taxwise they are at a disadvantage doing business in Louiiiana as a rinst, Ioh u in Saudi Arabia. Ml. S&AM. Except for the risk involved. Senator LoNs. Except for the risk involved and they have ati economy operation over there. Oil is in shallow depth and is in fantastic quantities. Nevertheless even taxwise they are at a dis. advantage at that stage. There is a tariff on oil and it does tend to equalize it but it doesn't make up completely for the State actions that we have. Mr. STAu. That's all I had to say. The CHAIRMAN. Thank you very much for appearing. You were of great help. The hearing will be adlourned now. That concludes this hearing. Thank you very much, gentlemen. (Whereupon, at 1 p. m. the hearing was adjourned.)
    Senator LONG. Yes.

    (:wma)

    Senate ('Committee Reprt


    .July 7,195,%
    I'nxt'cutivi, R.eport No. I solth Conmgress. 2d! ."t.ssion .", lla, Foreign Re~lations (Committee,

    (2283)

    H idm 8b80 wiouns

    ENAT'S

    RAMTIJTVA

    No.1IRaw.

    l)OI'111,E TAX CONVENTIONS

    MoNDAY, JVLT

    ', 1951.-Ordored to be printed

    Mfr. ("Mtix, froin the Committee on Foreign Relations, sultmitted tie following

    REPORT
    [To soompauy Ex. N, 865th Cong., lot an.; Ex. 1, 85th Cong., 2d smu.; and Ex. C, 6th Cong., 2d sem.) The Commitntee oil Foreign Relationms has had under consideration the conventions listed 5elow and reominmetids that the Senate give

    its advice and consent to their ratification: 1. Taxation convention with Pakistai, snged at Washington July 1 1957 (Ex. N, 85th Cong., Wt se.), with a reservation. 2. Notiflcation by the Government of Great Britain and Northern Ireland with a view to extending to certain British overseas territories die application of the convention on taxes on income, as modified, signed on April 16, 1945 (notification received August 10, 1957, Ex. C 85th Cong., 2d sess.), with a reservation. 3. convention n with Belgium supplementing the convention of October 28, 1948 relating to double taxation, signed at Washington August 22, 1957 1&~x. B, 85th Cong., 2d sea.), widtout a reservation. In connection with this convention, the committee also recommends that the Senate give it. advice and consent to acceptance by the United States of a notification given April 2 1954, by the Belgian Government with a view to extending to the belgian Congo and the Trust Territory of Ruaida-Urundl the operation of the 1948 convention with Beutim, as modified.
    1. MAIN PUaRos o81T8U1 CoNvUwroNr

    The taxation convention with Pakistan is designed to avoid double taxation and to prevent fiscal evasion with respect to income taxes. As modified by the committee reservation. if follows the general pattern of other double tax conventions of this type. The notification by the British Government when accepted by the United States, will extend the coverage of the 1945 convention to 30 British overseas territoie. The .o.nittee reservation, which is (2285)

    DOUBLE TAX CONVENIONS

    of i technical nature, deletes a reference to a protocol which would supplement the 1945 convention but which has not been ratified. The supplementary convention with Belgium makes certain changes which are necessary In the 1948 convention to facilitate the extension of that convention to the Belgian Congo and Ruanda-Urundi. The extension can then be accomplished byUnited States acceptance (for which the advice and consent of the Senate is necessary) of a notify. cation of such extension given this Government by the Belgian Government in 1954.

    tI

    2. CoMmuirru AcrioN
    The convention with Pakistan was signed July 1, 1957, and sent to the Senate July 12. It was the subject of committee hearings July 30 and August 9, 1957. The convention was considered in executive session August 13, after which further information was sought from the Departments of State and the Treasury. Thi notification from the United Kingdom and the suppy convention with Belgium were received by the senatee January 30, 1958. Throe matters were the subject of hearings before the com. mittee July 1, after which the committee considered them in executive session and voted to report them favorably to the Senate. At the same session, the committee further considered the Pakistan conven. tion and likewise approved it with a reservation.
    3. Tna CONVENTION WITH PAKISTAN

    As noted above, the Pakistan convention, as modified by the com. mitte. reservations, follows generally the pattern established by earlier tax conventions which are now in force with Australia, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Honduras, Ireland, Italy, Japan the Netherlands, New Zealand, Norway, Sweden, Switzerland Routh Africa and the United Kingdom. The convention eliminate double taxation by granting tax exemption in one country to income which would otherwise be subject to tax in both countries. It is reciprocal in nature, and covers income from businesses, investments, personal services, and pensions and annuities. Remittances or grants to students or trainees are also exempt, as is interest received by the State Bank of Pakistan from sources in the United States or by the Federal Reserve banks of the United States from sources in Pakistan. The convention also provides for administrative coopertion, in. eluding the exchange of information, between the tax authorities of the two countries inorder to give.effect to its provisions and to prevent tax evasion. All of these provisions have become standard in tax conventions and have been approved by the Senate many times. Committee consideration of the Pakistan convention hinged around the tax-sparing provisions of article XV (1), and it is to t is section that the reservation applies. The paragraph provides, in effect, that the United States will allow as a foreign tax credit Pakistani taxes which are waived. Under Pakistan law at the time the treaty was negotiated, earnings up to 5 percent on certain types of invested capital, were tax exempt for the first 5 years after the investment was made. Without a provision (286)

    I such as that in article XV (1), United States tax laws would have8
    DOUBLE TAX CONVUNTIONG

    effectively nullified this concession on the part of Pakistan in an effort to attract foreign invymtpent. This would have been ms, because tihe U1nitoed States tax would have been increased to the extent that the Pakistan tax was reduced. Tax sparing, a incorporated in article XV (1), is a new principle in United wtatos tax treaties. Its application requires carefulconsnderalion on a countrv-by-country basis. During the period when the Pakistan convention was pending in the committee and before the committee came to any conclusion regarding the tax-sparing article, the Pakistan law providing a waiver of taxes expired. The question of tax sparing in this ease, therefore, becomes moot. The committee accordingly recommends a reservation excepting the second sentence of the first paragraph of article XV from the resolution of advice and consent. This [a the sentence which provides tile United States credit for taxes waived by Pakistan. Because Pakistan has terminated its tax waiver, this provision would be inoperative for the present and future even without a reservation. If approved, it wouldoperate to the retroactive benefit of two United States corporations. The ritcipal argument for tax sparing is that it is a means of encouraging foreign investment and this argument loas validity when made retroactively. In recommending a reservation to article XV (1), the committee wants to make it perfectly clear that this is without prejudice to future considerat ion of the matter in the event the Pakistani tax-waiver law is reenacted and the question again comes before the committee. There isno occasion for the Senate at this time to decide the question. The committee reserves complete freedom of decision for the future.
    4. ExTEsNSoN of UMwnD KINonoM TAX CoNvEwrMoN

    The 1945 double tax convention with the United Kingdom, s modified, provides that the convention may be extended to the overseas territories of either party by notification to the other party and acceptanee by that party of the' notification. On August 19, 1967, in a note to the Secretary of State, the British Ambassador gave notification of the desire of his Government to extend the convention to certain British overseas territories. The Senate is now called upon to give its advice and consent to the President to accept the notification, and the committee recommends that this be done. The territories In question are Aden Antigua, Barbados British Honduras Cyprus, Dominica, Falkland Islands, Gambia, Grenada, Jamaica Montserrat, Nigeria, Rhodesia and Nyasaland, St. Chris. topher, kevis and Anguilla, St. Lucia, St. Vincent, Seychelles, Sierra Leone, Trinidad and Tobago, and Virgin Islands. When action to give effect to the notification has been completed, the extension will be effective from the Ist of the following January in the United States and in all the territories except Aden, Nigria, Rhodesia, mad Nyasaland, and Sierra Loeone where it will be el'ective from the 1st of the following April. For the territories other than Rhodesia and Nyasaland, thie extension will not apply to taxation of interest on bonds, securities, notes, debentures, or other forms of indebtedness. For Rhodesia and Nyasa. land the extension will not apply to United States taxes on gains from (2287)

    DOUBLE TAX CONI'ENTIONB

    the sale or exchange of capital assets or on accumulated or undistrib. uted earnings, profits income, or surplus. The convention will apply to the income tax in all of the territories, In addition, it wilt apply to the surtax in British Honduras, Orenads, and Jamaica; to the supertax and undistributed-profits tax in Rhodesia and Nyasaland; and to the duty on profit, the diamond-industry. profits tax, and the iron-ore-concessions tax in Sierra Leone. The notification from the British Government expresses the desire of that Government to extend the 1948 convention as modified by the supplementary protocols of 1946, 1954, and 1957. The protocols of 1946 and 1954 have been ratified and are in effect as a part of the basic convention. The 1957 protocol, which deals with the taxation of royalties, is still pending. -The committee feels it should not be fur. ther considered until final action is taken on H. R. 4952, a bill dealing with the same subject matter which is now pending before the Finance Committee. Consequently, the extension of the 1945 convention with the United Kingdom should include only the 1946 and 1954 protof cols and should exclude the 1957 protocol. This would be accomplished by the reservation proposed by the committee.
    5. SUPPLEMENTARY CONVEMrr[ON WITH BELGIUM

    This convention is uesighad to remove certain difficulties in the way of extension of the 1948 convention with Belgium to the Belgian Congo and to the Trust Territory of litanda-Urundi. The 1948 convention with Belkium, like the 1945 convention with the United Kingdom, discussed above, provides that it may be extended to the overseas territories of either party by notification to the other party and acceptance by the other party of that notification. The Belgian Government gave such notification in 1954. The pending convention has been negotiated since that time in order to..modify the 1948 convention in ways to make it acceptable as applied to the Congo and Ruanda-Urundi. The following changes are made in the 1948 convention: The definition of "Belgian enterprise" is extended to includeany corporation organized or created under the laws of Belgium or of the Belgian Congo and subject to tax under the Belgian fiscal law of June 21, 1927.

    In the 1948 convention, the definition is limited toan Industrial or commercial enterprise or undertaking carried on in Belagum by a citizen or resident of Belgium or by a corporation or other Juridical person created or organized in Belgium or under the taws of Belgium.

    The 1948 convention provides, in article XXII 2), that extensions to overseas territories will be effective .on the 1st of january following acceptance of the notification of extension. This is changed, in article III of the pending supplementary convention, to the 1st of January immediately preceding acceptance of the notification so far as the Congo and Ruanda-Urundi are concerned. It is further prvided, in article IV of the pending supplementary convention, that for the purposes of the 1948 convention, the term

    (2288)

    DOUBLE TAX CONVENTIONS

    "overseas territories" applies to any such territory for the foreign relations of which either contracting state is responsible. This interpretation is necessary to make it possible to extend the 1948 convention to Ruanda-Urundi, which Belgium administers under a United Nations trusteeship agreement and which is not, strictly speaking, a Belgian territory. Finally, article II of the pending convention, when taken in conjunction with the existing convention will provide a 15-percent tax in the Congo and Ruanda-Urundi on the one hand, and in the United States on the other hand, on dividends from, sources within one area pad to a resident of the other. Tn the case of the Congo and Ruanda. Urundi the present tax rate is 15 percent and will be frozen at that level. In the case of the United States the present rate of 30 percent will be reduced to 15 percent. In order to extend the 1948 convention to the Congo and RuandaUrundi, it is necessary for the Senate to approve not only the supple. mentary convention but also acceptance by the President of the Belgian notification of 1954 informing the United States of Belgium's desire to extend the convention.
    6. CONCLUSION AND RECOMMENDATION

    The three international tax matters covered in this report are a part of the continuing effort of the United States to encourage private foreign investment and thereby promote economic development and world trade. Among the many ways in which this goal can be pursued, the elimination of double taxation is among the more important. Tax treaties not only provide relief for American investment overseas; they also provide to foreign governments and territories an earnest of American good faith in our frequently expressed desire to encourage foreign investment. The instant treaties and modifications follow well-established practice. The committee recommends that the Senate give its advice and consent to ratification.

    (2289)

    Senate Floor Debate and Action


    fJuly 9, 1958

    85th Congress, 2d Smssion 104 Congressional Record 13238-13244

    (2291)

    I1'. I.di

    OI)( Kll0, CON)VENIO:I'INS l TAX

    Mir. MANSFIKI,I). Mr. President, mity we' Iiave murder so that [le. -m'ltolm will Ie,awires of fhI, anlelltls ietol l lit i etith'? This lIll'1.1)1.N(I )I.'l'l( 'l'it. T'his Senatle will Ihe ill order. .Itr. Ill IIII".. ir. Presidetnit, I ask llliltniiios eliiseIt'iil lhtll (Caleihlillr No. I. (Ole'ndar No. 2i, 1111d (C'aihelahr No. :3 heing, resple't ivelv, P'Necutive, N. 8,1oI (I'tiigres. sessili an111 Kx0'UliVe' It11 14l I "e.st on; Iulive' (CO I (C'olngresl , 2041 5tSsitll lit, ollltisitlt'e'tl I'll htiw'; 1t11 it vt'il-itllil-IimV v'hi'lto tlakl iii tet, iol of aI~'iilg eil e.olistnn ingl ito Kxvui'IV.' N of t( 85ts ('thCongrelss, Isess.it, ad that fhlit re'sof' 1 t lui imilhs, Witii O h'.t 1onip1Vilg r'sri ioimns, al'ising ntid tvonnt igl ito tihl rat ilifalion of tlhe otliter two, convenltlins. hlit tdeemiedl to) havt' liv'e'i11 grulitoIto hl' sanhe t s. t ' Vol Tle' lP'RItlI)tN( ()FFI('Kit. Is th,,re obljectioioe it thes reqn',st of lit' ,lSenaltor front Ne.vada? Iht'rhbIeiln lit je ioln , no ih,, S4at,, ais ill ( 'ollnit litsi of Owhe ile Whole,. prItit'-'udil to conlsidler, en blot', tli' following coinvetimiIns, whie'h wer, sevi'rally read flie, second lt ime.
    ',51

    j,1e'xts of t'onive'nt jotusi 1/'. 1,14144-1 Mr. MA.NSFIELDJ..'Mr. ]Prsie,lit will flts, S,,nitfr yit-ld?0 Mr. III IIIK. I vitld i tlo thlinginiih'id -Semiatlr fronm Nonttlal. flit Mr. MANSFI AI:I). I)o I correctly unidle'rstanI front tlits' aclign nitjeirilt lehiehr that Iht, I vote' will Ihi el'ilt lster'l of ,t p -alid-Iiny voltt84i far iat litshes i'xe'en ivi' agrelietit ar countered oils ,e .Mr. Ill111K. Th'lite ,inltor froni Montana is hbsolutetly co.rrtect Mr. President, I suggestsIhi.aibseneifi' ot' if quiorili. i The' l'IIKSI N)I(I (FFI( 'CKit.'rlh, e.htrk will .all the roll. Tl'his legishllive clerk I)rotest li'sth (-tll tlies roll. to N.I r. ItlIIALK. Mr. Presielent , I ask llllinitintis consent that fllit' order for IhIke (Ilior ulll c alli h reel, tledl . .i The I liIt O)FFICE'Rl. Witlhoitl ohj'ct ion, it is st ordered. N.Ir. (I1RE . ir. Pre'sitdli, thl thrte ltax convent ions pendingig t' before Ihe' Senalt' Cantll be, ,xIliiltied veryv hrie'flv and elisp10t44l of 'tol blew. Thes first one' is Kxetitlive N. flit' c.ion vnti willti 1 pakistan. which tIhows Iht le' gtna l I ea saint' I Its It) t9 ve'n ns witlli holler countries llem Iowhicehh the U'nited State,s is iaparty mi which art' designeduI to ehlimillillatt dolble' txattolln antil to lt'otlvit fiscal evasion. TIhis is dlone, Ii io r','illn'cal bass, bn . rlntllillg ltax ..11impti1on ill one cout'ntry to |iie'omIIe' which would tt herwist' lie% sbje,'e, to tax inh Ilh conit ries:. P'rovisiom isailso nadtle for adniinist(rtive' coopteorat iin ltt we,,n tlit' authority ie' tax ill hot Ii lount ries. Ihie' F'oreign Ielat ions ('onimiit tie reollnit'lids it t'ese'trVtllioei to the portion of tliit Pakistali tre'aty unel'r whih iaU'nited'e State's foreign tax e'ru'tlitPakistanhave, ht''n greenld for for the waiver which were waived. e Thl would law wh1it'i pIro 'vilel hikitttin ltxet of t'certain taxes htas
    73095 0--.2-vol. 2-61

    (26410 93 )

    xlpin'od, nid c'ti,1sit'iitl. Ilit, provisions (if ill, Inttlty h11114,41 flit 1hu4 ltw woi11lhl bit ilopipr.et ivit isv'.' if rrt iliid. s l ih' Thit' i4,-'tl io tllt'liolll is ,X16t't'I ivi,' It, whioli imo flilil' o' i gstilK t' 441gimi l it t'. s'ilds it ItI fhi' ll l h'li4i0 1 (*IliIg lti. v'ollv' 'lioinll witl lt'l ontl t s' Ti1,st lorritorv oif HllillThO-| rialitli. Thit Iieitliili on m lhit' elt'nia1tt .4shult'l (4) fo'ijtlifltl'i li ltI-Xto'oSi mn t 114ath u0' Igait flet lr he' blii io,lOruts oif lit' 1vo'tii litli. 1 1"i.alll , hoit hirol ini..e, is K'tIt,, it' ( ', whio'lii o'xte'ls ho' Pi .uii g tI. t'uliI'ilo Will lit' |'nitosol Khiiugtou it)( l4rilt ish ,rrilori's. Thei with i110i11uitt, ro'imanmu ds 1t ro'S.'rvtliion t In iko it o'h,'r il llhat xlet'a. lIh
    4i0llm ttijies

    't I1'1' th , N.lI r . 'rh'silo rlt Forisign Iti lit Iiti lls( i I1in lns liroldl 2 01n% s tlf hoIe'ori lls lPlairkis n e 'o'nt in mid I olny on tlhoil ollr fo'ly rI. it' io'tl o.ils .jot s. Wit Iillt '1 ii llrallittjins Wii'h o 111-141 r,'t'oi 1 ro' h (liltVP nuit',ido'l l' fleo' ino list' I knoiw ri tip losit oin to flil', 'oillnllitinls. On t ho'o. otInlulit rsutlolr l lilt' Amiricii ilisillhi 44l1i. Ih h wio'p..ir.' I niry. fim- ,.i' 1 aniIt . They air ls. rec'tti'u ' i ly flit,' tit' Iopaortmont andoi Ihu . e Is)o'giart mid h so' bo lho lh.n 1(Il1'4l1v tith iily flit' 1r'IosIAr 4111 oi'ltill,Jo int ' l iiiai Ill flit ( 'igr'ss tin Intrnol tt've'ih o'. ( tt'o' l41 of , l I 'sk I ht tlt' 't hl Ioi lit' aprio'ed by thle' S'lnato'.lil. that s i io't ilh or is Mt'r. WIL Lh.I rM. Ir. Ih'lo'lit will tilie Stinaittr %

    to flit't,'t. i ,n

    i i tlimi its it ji's'lit 13 xit s. h ,',

    Mir. (IlTK

    N. I v'lth.

    o il nto', it pnii;lt'o lint Pakistan wits origmInll jrIst'u.duto tI .liign tlIaI trIlit wouldl litl alowe'lot Alrio'ili co'litkliits loinirg through thliey hiad tlio'i piin rat ior Own11 l11ili-sii'.'t ill 1lint t'olilliyit 0 r rllliwili rt'ri'ilit oili t lit' ll hihsil whila lax it:ailly was jiil. NMr. (fIlKN. Th'lat is 'oirre'c.t. tinlll isahim still ill tlit, t r'itY. IL1L1IAtS. Is thlai NIMr. W N\r. (1IKTN. Noi: it is mitl. n,l't i rhidt o'tiiillt' strike' it tlilt! Is MIr. WILILIAMIS. Did rtso'rsotittin which'l would pirohibalit thln? ia is stiehl r.st'rvotiol. MIr. ( IIIKKN. I reso'nt for prolioullhiig (lit' tuestitn is I1lint MIr. WILIANMSI.
    flit, 1I1113i

    .NIt. WILL.IA.I.S. It is it lih'rstniilg l w 41Ih-l iolll ,l' ,1l 11 hh'lltliri*i-I l. rll thrnts I flit' .ttv't"y with h h

    kRKKN. That is t'oirre'' ' . NIMr. I'r'sido'ii NMr. NIA NS I MIr. (IKKKN. Ivit'o.
    1 ho' isitlrnI minhol' ll o l'.ri oflil' , , 'iiilitw
    , ( 'l'ie''

    NIr.

    tll' (ti ,triki'

    it

    out is

    w, hli iay it" orf rirt

    ition.

    will flit' St'imbor Yi'.ld?

    NIr.

    llANlFIlKlI). Is it noat tr.'e tiha inoll conne'tioiii withl the ' tli.' i. I o, l ixS t'0liiiii 44 14fiat 'lh h (lit'

    .Cm'm.tilt 'o'ronternial 1 hiint NMr. Colin Smi ofi' tilt' all ioin. alldh offile ,inancre. l, vin.h ho'ins, or, oi 4-,mlri ofilth, h IN114,11 oflilt ritat is co'irre'r'. .NIr. ( ,IE IN. ajllyrt'.llitr, wotill original. r reaty NMr. WILLIA.MS.4lI. As OI tnlh wo ti1 lilth la hald ntt actually t hirt'i ahlltehit'ttla 1'rodit in 4.11t'8 ili osl t hrinipihle' sti far ats otirlirtal t'' iituhI p hi4t't'l pail, w5hlichWult'islll 110 ttirio't' and' onint whict'h liltis no'vt'r bit'on apjirovso lby tlhe' lt hisan%, cin'
    ,St'lobr is c'o'rre'c't N r..NI A.N5I'II .1'r. h,,mt M~r. WILLIIAMNS, As I uindlerstandl flit' ro'st'rvat iti 1

    ri'stouro'

    t1lt

    tri i1111uo sit tllIn ionl?

    flir.N IANSVIE3K11). mhat' Sibnator is o'orro't't


    1212I4)

    tie' 1)IN( DItE$1 OF(F'ICEI. If tlhin lilt Ill) ohli..,iI, pol. 'rlit I ,e'iiio4 til 4 ific.t t titn will lhp v.w iflerel 1.ii hllaving lism.'i4 t hromgh tlhiir virius. plrlihiiiire'It : lvtge' Inges s int to fl Ifi., colsiele'irtin if Ithe re'ahlioni iof ralihfialion. T'I., r,'.lut1ieon of ralilivlimi. will 1141W reaid fur fhl' iptformilini of tits Spitie. lit, This I,'lgish.livp' i'lerk mild lits, retpll..'liv,' rpm' tlitns (if ralitiealiml.
    Msdh'ruI (iort.i.hrdl tof thr Sromloors prexci! r.oc'urra.c IA. thm,-), Thit tiit- t'inlet, a't' e~and iisen tthe' ratiticatioln of Feti N, :ivt.'3lth (Cllgnl's. ll -'ovi.1t, a reiiventill litweeill lihe' I~lit'd Stiates tf Ameerie'a mied l'akimlait (tor tih- av..iihane', . .,f doliblehI tliillAitill1dt till' lri'eiic of 11,11 eIva1illi.1c wilh. nh'l''.t it) taxevi 4#i it'eite', migtce'el at WeIwieicgite till ,hely 1, 11167. t11jeelt tl lilt !nl-m'rvatlel whltldh hall li, l 1e',' Ii- h4'y tit either lilh e'11ntreticeg Imalry Isfure' riilltirivtilise are' Mi0el4194e'l, that tile' .1e4100111l 4e'tiltetcr' of iaragrlphi I eit article X'V mhiall ntee he' raleifit'el /I,'.Ir (limti,-arda ouf thr Sn, f boCr pre'a* lloncf'rriil/ thrrm'sl), ihat the' $e'IIeII' aldlvim' 111141 ('ilwt1t ellilth, ratificationil of KE'xe'itli'e, It. SAM ('lllIre'II, 2.

    M,"14111, IIhe convention Ilselwivime' site'tl Stat.'ies of Amicerica wilnl Belgium.cc, I eilt A1gicet 22, 11157, sIllIp eilltilitg te' eOw uiilvi'll ltoll ,if olleeler 2K, 11148, for tihe aivoidan'e, oif temeihle taxationl tlll tihll' rnrvenitlin elf tiee:1l 1.vaioill wilt ifl'ge''t I lzi~itil inollM1., as lit. I,?-;,fl t11olliitie'eley Ctl' lhsetIIi,, tltee'ttrv eloolivillolhe of 'le'j1'ichee,'r II. 12,52: lild a nelotiti l on Riivell il IhI', Illtitll ele l1;iovrtetel.'mcl llteeter trlie'll X XII (if Ihe, reivlitiMl ell .ihtollr2K. II IA. wilhita viewi of Ite e,\IetlinIa lilt- loolrtitiml (if that iou'etlletitll, its ttcexelilivel, Ite tieItIlgieell (C'olltgel mu.u 'I ruislt 'Ierriltrv of ltituodla-Unritinll. flIi e-soll-f'r-d (uto.hirdIs (if tr Srteellirs pr.'ier~,tinrl lrrinlj thrrtn), That the' A-e'ate' alvime' atilleI u'ell11t Ilt tse' railliciiimt o(f I ve'CIlvi' ('ucgrermu. 241 me'uieen, C, Kill is tIetitiratollt gi'e't biv,the' (levi'rlclt,'ll oef thie Itlitheil Kingdtomsof eelnireat Itriniic stell Nrtlhern inrlatcef with a view tite i0h'lndiilg to e', rliin IBritioih e'evr-a te'rrit 'ri flh ii ietcatiotn of` le e'leetcit-tmient o.f April Ill, I114S, (er flit- Av'oidhanee, eef 'lieeeie'll tiellnlstll tihe cihevel'tllieI of fils'cil e'agie n With wll rt!.eI'l taxi's eill il'el.li', as tlllclitle' hv lleihdllle'lttlar' miIti by a crvell, l of ' 11,19146, Mniv 2,. 11194, stiel Aeniut1t III, 1157, 1ehilje',t Ile lilt, rfmrvatiit1 that the'illa1plicatioii elf the14111) . IlitOntary lerhlweul of Aulgus III, 1I187, shall not, lop u,ele'tileId.
    sigmce'el at Wal.hiltti

    Thie I'llKSlIN)I(I ()OFFI('ERI. 'li.h ve'. citil ii ay having beeli, l ,re1lered elti tlie', jue',liin elf 1igre'e'iiig toi le' r,,ilhiitlto elf ril ifi'al.ion, 1tlgell ier wilh t he ri,-,'evalioien1ia with retslleet Iei Ex.br'uliv.' N, 8,511

    lie' ,'llirk will (-till I he, roll. The' l'-gi.ehilive. ,lerk eaie'eII roll. liet
    FAX

    Ctlillg.r e,,l. I s1

    st,,os.io n, lilld

    E*.x, c'lliv e C, 8 51h (111Congr ess, 2dI se m ol, 11

    UI~etTVI

    Mir. MSANSeFIEID). I annI uni1'' that thle Sl4enalcr fromt Te'n iee Ifip fe'iiateir frllMiitmouiri INIr. Hl KNiNutI, tihe ellatllr Writll Ntiice,'olit INIr. II m m'yl, lht' Spenator from Washingltlo l, I-Ir. .O'I lIe Se'ior frioiml aehh'usllls.'tts I.ir. r tle' fl:,NnII, Senatollr rrblli ~1'oashilnglllc I.jir. i.%I@,\esi.,I th' fl ,iit,t front FlHrieI, fr I.Ir. SM.AI'Ig 1:8sl, the S.',ltltcir front .iismse ri INlr. SiIINeITelNI, 111141 the', ,4'nallr front Te'xas I.lIr. iAtIOIIItI0l0II tire' tillie'ldt fill oi'icil

    IMr. (immlI,

    hllil~ine's.

    I further tinlilu1e'1, thal, if pIresentiI and Voting, tlite' & ltlor Wmill d T,.es.ne'iae Ilr. (iecnKj, f lit' Semuler from Mii.limiori Iir. Him.4II U.I, litp' Se4tmilor from1 itiltlie'sota INIr. IlrMi'itlltvjI, lit%' Se'fielr from Wlalhingltn I.Mlr. !.e'-KSON1. tile' -&,'itfoer fromtM litiue'llst Is I.Mr. I ;,.:1M1. lI te Selellor fromt W1ltshiiligolll I.lr. N.IO'sugoNI. thie .'llor fronm Fleridlt IIr. Smv.vv"it":sIu, th the' ,lllilor fron1 Niw*ltiri I.Mr. SV'hINITelNj, Mill tle' Sh'Iisltll from Te'ixia I.Ir. ' RHtIIonui1'oIIii r wenile1 e'lth l'l)el' "pill "

    (t2'1 )

    Mr. DIRKSEN. I announce that the Senator from Kansas (Mr. ScxoRIO'i-i.j isl aIl)bset oin oflf'ial business, anid, if preselnt and voting 'riTl. Senior front New York (Mr. Ivical, and would vOte *yl. the Senator troil Indiana .Mr. JINNuER are deltailled Oil o|lii4d
    Julllille55, aind, if present and voting would each 'vote "yea."

    Thie yeas tu., nays resulted[ -yeas 84, nays 0, as follows:


    YEAS--84
    Hrvin Flauderi Frear Fulbright (Goldwater
    (ireen llayden ItllklllKr Bcyk'enilooIier

    Alken Allott Anderson Bible Bricker Bridge; Hush Butler Byrd Capehart Carlson

    IBall Betnett

    Barrett

    McNamtara Monroney Morse

    Morton

    OBMahUlley l'astoru'

    Mundt Murray Neuberger

    Xoblitsell Iholland Itruska Javits Johnson, Tex. Johnston, S.C. Jordan Kerr Knowland Kuchel Lan1lger Ihllg ,%alone Mansfield Martin, Iowa Martin, uIa.
    IdIItilSIch , Kiefiauver

    Payne Potter 1'roxmire

    Carroll Case, N.J.

    Caw, 8. Dak. Clhave Church Clark


    Coopr

    Smith, Mailne Smith, N.J. Sparkman Talmnadge Thunnond Thye Watkins Wilely Williams
    Youngl

    Haltoistall

    Ih'rtell Revercomb Robertaon Russell

    Cotton

    Curtis Dirksen

    Douglas

    Dworshak Eastland

    Eilender

    McClellan

    Gore htentiittg Humamnphrey Ives

    NAYS-O NOT VOTINO-12 Jackson Jenner Kennedy MlaglitUmOn

    I
    Schoeppel Smathers
    ymlnigton iarborough

    The PRESIDING OFFI('ER. Two-thirds of the Senators present Concurring therein, the resolution of ratification of Executive N, together with the reservation, is agreed to.
    EXECUTIVE 8
    *
    4,

    EXECUTIVE C wP.I 1344] Without. objection, the President of tile United States i he i...lediately notified.

    (2,96)

    PresidentialProclamation(Including Official Tet of Convention)


    IReprint of TIAS 42:12]

    (2297)

    ,InATIES

    AND *TUBS

    I3IrRIATIONAL ACT$ 81U1533

    4383

    DOUBLE TAXATION
    Taxes on Income

    Convention Between the


    UNITED STATES or AMERICA and PAKISTAN

    Signed at Washington July 1. 1957

    (2M9)

    DEPARTMENT OF STATE (Utoral print

    (2800)

    PAKISTAN
    Double Taxation: Taxes on Income
    Conwnten si4 Ra4 at Washgoo July 1, 1957;

    ,Rae~uwtion advised by de Senate! tAe United Seas. QI Amerko, WAs


    theie 4A Unit.) State of Anierico, subjecetetusid by w? 6, 1958; reswvon,Noember Ratd by Pakistan May 2, 1959;

    a revaen,July 9, 19W;

    uc d at KaraciMay 21, 1959; Raticdof.n8 ProainWei by Ah Preidena of the Unied States qf Amewic May 28, 1959;
    Etee jnt forc May 21, 1959.

    Br =z PmSwUNT or

    =z

    UNTE

    TATzs or AMUIGA

    A PROCLAMATION WwAs a convention between the United States of America and Pakistan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income was signed at Washington on July 1, 1957 by their respective Plenipotentiaries, the originalof which convention is word for word as follows:

    (1)

    TIAS 4232

    (2801)

    CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF PAKISTAN FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME The Government of the United States of America and the Govern. ment of Pakistan, desiring to conclude a Convention for the avoid. ance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have appointed for that purpose as their respective Plenipotentiaries: The Government of the United States of America: John Foster Dulles, Secretary of State of the United States of America, and The Government of Pakistan: Mohammed All, Ambassador Extraordinary and Plenipotentiary of Pakistan to the United States of America, and Syed Amjad Ali, Minister of Finance of Pakistan, who, having communicated to one another their full powers, found in good and due form, have agreed as follows: Ammnciz I (1) The taxes which are the subject of the present Convention are: (a) In the United States of America: The Federal income taxes, including surtaxes (hereinafter referred toas United States tax). (b) In Pakistan: The income tax, super-tax and the business profits tax (hereinafter referred to as Pakistan tax). (2) The present Convention shall also apply to any other taxes of a substtatially similar character (including excess profits tax) imposed by either contracting State after the date of signature of the present Convention, or by the Government of any territory to which the present Convention is extended under Article XVIII.

    TIAS 4232

    (2302)

    Airriax~ 11 (1) In the present Convention, unless the context otherwise requires: (a) The term "United States" means the United States of Amer. ica and when used in a geographical sense means the States thereof, the Territories of Alaska and Hawaii and the District of Columbia; (b) The term "Pakistan" means the Provinces of Pakistan and the Capital of the Federation; (c) The terms "one of the contracting States" and "the other con. tracing State" mean the United States or Pakistan, as the context requires; (d) The term "tax" means United States tax, or Pakistan tax, as context requires; the (e) The term "person" includes any body of persons, corporate or not corporate; (f) The term "company" means any body corporate or not corporate, assessed is a company under Pakistan law relating to Pakistan tax; (g) The term "United States corporation" means a corporation, association or other like entity created or organized in the United States or under the law of the United States or of any State or Territory of the United States; (h) The term "resident of the United States" means any individual or fiduciary who is resident in the United States for the purposes of the United States tax, and not resident in Pakistan for the purposes of the Pakistan tax, and any United States corporation or any partnership created or organized in the United States or under the laws of the United States, being a corporation or partnership which is not resident in Pakistan for the purposes of Pakistan tax; (i) The term "resident of Pakistan" means any person (other than a citizen of the United States or a United States corporation) who is resident in Pakistan for the purposes of Pakistan tax and not resident in the United States for the purposes of the United States tax. A company is to be regarded as a resident of Pakistan if its business is managed and controlled in Pakistan; (j) The terms "resident of one of the contracting States" and resident of the other contracting State" mean a person who is a resident of the United States or a person who is a resident of Pakistan, as the context requires; (k) The terms "United States enterprise" and "Pakistan enterprise" mean, respectively, an industrial or commercial enterprise or undertaking carried on in the United States by a resident of the United States and an industrial or commercial enterprise or under. taking carried on in Pakistan by a resident of Pakistan; and the terms "enterprise of one of the contracting States" and "enterprise of the other contracting State" mean a United States enterprise or a Pakistan enterprise, as the context requires;
    ('2303)
    TIAS 4=32

    4 (I) The term "industrial or commercial profits" does not include rents or royalties in respect of motion picture films or of oil wAlls, mines and quarries, or income in the form of dividends, interest rents, or royalties, or fees or other remuneration derived by an enter. prise from the management, control or supervision of the trade, busi. ness, or other activity of another enterprise or concern, or remuneration for labor or personal services, or income from the operation of ships; (m) The term "permanent establishment", when used with re. spect to an enterprise of one of the contracting States, means a branch, management, factory or other fixed place of business, but doe not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regu. larly fills orderson its behalf. In this connection(i) An enterprise of one of the contracting States shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business dealings in that other contracting State through a bona fe broker or general commission agent acting in the ordinary course of his business as such; and (ii) The fact that a corporation or company which is a resident of one of the contracting States has a subsidiary corporal. tion or company which is a resident of the other contracting State or which is engaged in trade or business in such other contracting State (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary corporation or company a permanent establishment of its parent corporation or company; (n) The term "taxation authorities" means, in the case of the United States, the Commissioner of Internal Revenue as authorized by the Secretary of the Treasury and, in the case of Pakistan, the Central Board of Revenue or their authorized representatives; and, in the case of any territory to which the present Convention is eatended under Article XVIII, the competent authority for the administration in such territory of the taxes to which the present Convention applies. (2) In the application of the provisions of the present Convention by one of the contracting States, any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that contracting State relating to the taxes which are the subject of the present Convention. Arnmca M (1) A United States enterprise shall not be subject to Pakistan tax in respect of its industrial or commercial profits unless it isengaged in trade or business in Pakistan through a permanent establishment sitTIAN 4Z22

    (2304)

    a uated therein. If it is so engaged, Pakistan tax may be imposed upon the entire income of such enterprise from sources within Pskistan. (2) A Pakistan enterprise shall not be subject to United Ste tax in respect of its industrial or commercial profits unless it is engaged in trade or business in the United States through a permanent establishiment situated therein. If it is so engaged, United States tax may be imposed upon the entire income of such enterprise from sources within the United States. (8) Where an enterprise of one of the contracting States is engaged in trade or business in the other contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive in such other contracting State if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment, and the profits so attributed shall be deemed to be income of that permanent establishment and shall be taxed accordingly. ArrcLz IV Where(a) an enterprise of one of the contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other contracting State, or (b) the same persons participate directly or indirectly in the management, control or capital of an enterprise. of one of the contracting States and an enterprise of the other contracting

    State, and

    (c) in either case, conditions are made or imposed between the two enterprises, in their commercial or financial relations, which differ from those which would be made between independent enterprises, any profits, which would but for those conditions have accrued to one of the enterprises but by reason of those conditions have not so acw crued, may be included in the profits of that enterprise and taxed accordingly. A~rcLu V Profits derived by an enterprise of one of the contracting States from the operation of aircraft registered in such State shall be exempted from tax by the other contracting State, unless the aircraft is operated wholly or mainly between places within such other contract. ingSt&. Amcza VI (1) The rate of United States tax on dividends paid by a United States corporation to a Pakistan company

    (2305)

    TIAS 4233

    6 (i) not having a permanent establishment in the United States and (ii) owning shares carrying more than 50 percent of the voting power in the corporation paying such dividends shall not exceed fifteen percent. (2) Where a United States corporation (i) has no pennanent establishment in Pakistan, and (ii) is a public company as defined in paragraph (4) of this Article, and (iii) owns shares carrying more than 50 percent of the voting power of a company which is a resident of Pakistan and is engaged in an industrial undertaking of the classes specified in section 15B of the Income Tax Act, 1922 (XI of 1922), the rate of Pakistan super-tax otherwise payable with respect to dividends paid by such company to such corporation shall be reduced by 1anna in the rupee. (3) The provisions of section 23A of the Income Tax Act, 1922 (XI of 1922) (relating to the distribution of company profits) shall not apply to the income of a company in which shares carrying more than 50 percent of the voting power are owned by a United States corporation constituting a public company, as defined in paragraph (4) of this Article, if the company is engaged in an industrial undertaking of the classes specified in section 1511 of the Income Tax Act, 19022 (XI of 1922) and its profits are retained for the purpose of its industrial development and expansion in Pakistan. (4) In paragraphs (2) and (8) of this Article, the term "public company" means, in relation to any year of assessment,(a) A corporation which does not restrict the right to transfer its shares, which does not prohibit the issue of its shares or debentures to the public or the sale of its shares on a stowk exchange and of which shares carrying more than 50 percent of the voting power were not at any time during the previous year held by less than six persons; or (b) A corporation all of whose shares were held at the end of the previous year by one or more public companies as defined in clause (a) of this paragraph. AmTcm VIT (1) Dividends paid by a company which is a resident of Pakistan shall be exempt from United States tax except where the recipient thereof is a citizen or resident or corporation of the United States. (2) Dividends paid by a United States corporation shall be exempt from Pakistan tax except where the recipient thereof is resident in Pakistan.
    TIAP 4.2(2

    ) (21")

    7
    AnrnCLI VIII

    (1) Any royalty (other than royalties or rentals from motion picture films) paid as consideration for the use of, or for the privilege of using, any copyright, patent, design, 4t room or formula, trade. mark, or other like property, and derived from sources in one of the contracting States by a resident of the other contracting State not having a permanent establishment in the former State shall be exempt from tax by such former State. (2) Where any royalty exceeds a fair and reasonable consideration in respect of the rights for which it is paid, the exemption provided by the present Article shall apply only to so much of the royalty as repramnts such fair and reasonable consideration. Airm= IX (1) Remunerat ion, including pensionm and annuities, paid by or or behalf of the Government of the United States or its political sub. divisions to an individual who is a citizen of the United States, not ordinarily resident in Pakistan, for services rendered to that Government in the discharge of governmental functions shall be exempt from Pakistan tax. (2) Remuneration, including pensions and annuities, paid by or on behalf of the Government of Pakistan or the Government of a Prow. inee in Pakistan or any local authority thereof to any individual who is a citizen of Pakistan not having immigrant status in the United States, for services rendered in the discharge of functions of that Government or of local authority, as the case may be, shall he exempt from United States tax. (3) The provisions of this Article shall not apply to payments in respect of services rendered in connection with any trade or business carried on for purposes of profit. ArmcL X (I) A pension or annuity (other than a pension or annuity of the kind referred to in paragraphs (1) and (2) of Article IX) derived from sources within one of the contracting States by a resident of the other contracting State shall be exempted from tax by the former Stat. (2) The term "annuity." for the purposes of this Article, means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or money's worth. (8) This Article shall not apply to a pension or annuity payable fom a superannuation fund approved or recognized under the tax law * of Pakistan nor to a pension or annuity from a fund, under an employees' pension or annuity plan, contributions to which under the tax law of the United States are deductible in determining the taxable income of the employer.

    (230o7)

    TIA84282

    8 ArricLE XI (1) An individual, who is a resident of the United States, shall be exempt from Pakistan tax on profits or remuneration in respect of personal (including professional) services performed within Pakistan n any financial year if(a) he is present within Pakistan on a temporary visit for a period or periods not exceeding in the aggregate 183 days during that year, and (b) the services are performed for or on behalf of a resident of the United States, and (e) the profits or remuneration are subject to United States tax. (2) An individual, who is a resident of Pakistan, shall be exempt from United States tax on profits or remuneration in respect of personal (including professional) services performed within the United States inany taxable year if(a) he is present within the United States on a temporary visit for a period or periods not exceeding in the aggreCate 188 days during that year, and (b) the services are performed for or on behalf of a resident of Pakistan, and (c) the profits or remuneration are subject to Pakistan tax. AnnL= XII A professor or teacher, resident in one of the contracting States, who temporarily visits the other contracting State for the purpose of teaching for a period not exceeding two years at a university, college, school or other educational institution in the other contracting State, shall be exempted from tax by such other contracting State in respect of remuneration for such teaching.
    ARncLz XIII

    (1) A resident of one of the contracting States who is temporarily present in the other contracting State solely (a) as a student at a recognized university, college or school in such other State, or (b) as the recipient of a grant, allowance or award for the pri. mary purpose of study or research from a religious, chaitable, scientific" or educational organization of the former

    State

    shall be exempted from tax by such other State (i) on all remittances from abroad for the purposes of his maintenance, education or training, and (ii) with resm t to an amount not in excess of 5,000 United
    TWAS 4282 (2808)
    I

    9 States dollars for any taxable year, representing compensation for personal services (9) A resident of one of the contracting States who is temporarily present in the other contracting State for a period not exceeding one year, as an employee of, or under contract with, an enterprise of the former State or an organization referred to in paragraph (1), solely to acquire technical, professional or business experience from a person other than such enterprise or organization, shall be exempted from tax by such other State on compensation for such period in in amount not in excess of 6,000 United States dollars (including remuneration from such person inthe other contracting State). (3) A resident of one of the contracting States temporarily present in the other contracting State under arrangements with such other State or any agency or instrumentality thereof solely for the purpose of training, study or orientation shall be exempted from tax by such other State with rpect,to compensation not exceeding 10,000 United States dollars for the rendition of services directly related to such training, study or orientation (including emoluments and remuneration, if any, from the employer abroad of such resident). ArwncL XIV (1) Effective January 1, 1950 the State Bank of Pakistan shall be exempted from United States tax with respect to interest from sources within the United States. (2) Effective January 1, 1950 the Federal Reserve Banks of the United States shall be exempted from Pakistan tax with respect to interest from sources within Pakistan. Arnmta XV (1) Subject to the provisions of the Internal Revenue Code (as in effect on the date of signature of the present Convention) regarding the allowance of a credit against United States tax for tax payable in a territory outside the United States, Pakistan tax payable, whether directly or by deduction, in respect of income from sources within Pakistan shall be allowed as a credit against United States tax payable in respect of that income. For the purposes of this credit then shall be deemed to have been paid by a United States domestic corporation the amount by which such Pakistan taxes (other than the business profits tax) have been reduced under the provisions of sec. tion 15B of the Income Tax Act, 192 (XI of 1922) as in effect on the date of the signature of the present Convention: Provided, That any extension made by law of the period within which an industrial undertaking may be set up or commenced in order to obtain the re. duction provided in section 15B shall be deemed to be in effect on the date of the signature of the present Convention. (9) Subject to the provisions of Pakistan income tax law (as in effect on the date of signature of the present Conventionh), United
    T7S98 0-42--vol. 2---82

    (2309)

    TIA8 43

    10
    States tax payable, whether directly or by deduction, by a person resident in l'aki-tan. in reSlKct of income from sources within the United States (including income accruing or arising in the United States but deemed, under the provisions of tde law of Pakistan, to accrue or arise in Pakistan) shall be allowed as a credit against any Pakistan tax payable in epect of that income. (3) For the purposes of this Article, profits or remuneration for personal (including professional) services performed in one of the contracting States shall be treated as income from sources within that State.

    Arncu XVI
    (1) The taxation authorities of the contracting States shall exchangge such informat ion (being information which is available under their respctive taxation laws in the normal course of administration) as is necessary for carrying out the provisions of the present Con. vent ion or for the prevention of fraud or for the administration of statutory provisions in relation to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those concerned with the aessmnent and collection of the taxes which are the subject of the present. Convention. No information shall be exchanged which would disclose any trade, business, industrial or prlfes-sional secret or trade process. (2) The taxation authorities of the contracting States may consult together, as may bit necessary, for the purpose of carrying out the provisions of the plre'Ivnt Convention and in particular the provisions of Articles III and IV. Where a taxpayer claims that he has been or may Ib subjected to double taxation contrary to the provisions of the present COnvention, he may present the facts to the taxation authorities of either contracting State. Should tite taxpayer's claim

    be deened worthy of consideration, the taxation authorities shall endeavor to come to ui agreement with a view to avoidance of the double taxat ion inquest ion. (3) The taxation authorities of both contracting States may prescribe regulations necemary to interpret and carry out the provisions of the presnt Convention and may communicate with each other directly for the purpose of giving effect to the provisions of the present Convention. (4) The provisions of the present Convention shall not be construed to restrict in any manner any exemption, deduction, credit or other allowance now or hereafter accorded by the laws of either contracting State indetermining the tax of such State.

    Ammcr.F. XVII
    not, while resident in the other contracting State, be subjected in

    (1) The citizens or nationals of one of the contracting States shall

    such other State to taxes or any requirement connected therewith


    TIAR 4282

    (231o)

    11 which is other, higher or more burdensome than the taxes and connected requirements to which the citizens or nationals of such other State resident t herein are or may be subjected. (2) The term "citizens" or "nationals", as used in this Article, in. eludes all legal persons, partnerships and associations deriving their status from, or created or organized under, the laws in force in the respective contracting States. (3) Nothing contained in this Article shall be construed(a) as obliging either of the contracting States to grant to persons not resident in its territory those personal allowances, reliefs and reductions for tax purposes which are by law available only to persons who are so resident; or
    (b) as affecting any provisions of the law of Pakistan regarding

    the imposition of tax on a non-resident or the grant of rebate of tax to companies fulfilling specified requirements regarding the declaration and payment of dividends, unless those requirements are fulfilled. Arcamu XVIII (1) The present Convention may be extended, either in its entirety or with modifications, to any territory for who4.s international relations either of the contracting States is responsible and which
    imposes taxes substantially similar in character to those which are the subject of the present Convention and any such extension shall take effect from such date and subject to such modifications and conditions (including conditions as to termination) as may be specified and agreed between the contracting States in notes to be exchanged

    for this purpose.

    (2) The termination in respect of Pakistan or the United States

    of the present Convention under Article XX shall, unlem otherwico expressly agreed by both contracting States, terminrate the applicatiofi of the present, Convention to any territory to which the Convention hias been extended under this Article.
    AiCLE XIX

    The present Convention shall come into force on the date when the last of all such things shall have been done in the United States and Pakistan as are necesary to give the Convention the force of law in

    the United States and Pakistan, respectively, and shall thereupon have effect,(a) In the United States, for the taxable years beginning on or after the first. (lay of January of the year in which the instrutments of ratification are exchanged; (b) In Pakistan, in respect of the "previous years" or the "chargeable accounting periods" (as defined by the tax laws of Pakistan) beginning on or after the first day of January of the
    year in which the instruments of ratification are exchanged.

    (2811)

    TIAS 4:1.2

    12 Ara=L XX The present Convention shall continue in effect indefinitely but either of the contracting States may, on or before the 80th day of June in any calendar year not earlier than three years from the date of signature of the present Convention, give to the other contracting State written notice of termination and, in such event the present Convention shall cease to be effective(a) in the United States, for the taxable years beginning on or after the first day of January next following such written notice of termination; and (b) in Pakistan, in respect of the "previous years" or the "charge. able accounting periods" (as defined by the tax laws of Paki. stan) beginning on or after the first day of January next follow. ing such written notice of termination. It wrrumss wmuzuor, the respective Plenipotentiaries have signed this Convention and have affixed thereto their seals DONE in duplicate at Washington this first day of July, 1957.
    FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA:

    JoHN Foam Durm


    FOR THE GOVERNMENT OF PAKISTAN:

    [OPAL]

    MoHAMmmU Au
    S. AMJAD Au

    rs".
    [8zAL]

    TIAS 4232

    (2812)

    1i
    Arn wnuitL the Senate of the United States of America by their resolution of July 9, 1958, two-third& of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid convention "subject to the reservation, which shall be agreed to by the other high contracting party before ratifications are exchanged, that the second sentence of paragraph 1 of Article XV shall not be ratified"; ANn WHEzEAS the text of the aforesaid reservation was communicated by the Government of the United States of America to the Government of Pakistan and was agreed to by the Government of Pakistan; AND WHER the aforesaid convention was duly ratified by the President of the United States of America on November 6, 1958, in pursuance of the aforesaid advice and consent of the Senate and subject to the aforesaid reservation, and was duly ratified on the part of the Government of Pakistan;
    A"N wHEREs the respective instruments of ratification of the

    aforesaid convention were duly exchanged at Karachi on May 21,1959, and a protocol of exchange was signed at that place and on that date by the respective Plenipotentiaries of the United States of America and Pakistan; AND wHEREoS it is provided in Article XIX of the aforesaid convention that the convention shall have effect (a) in the United States of America, for the taxable years beginning on or after the first day of January of the year in which the instruments of ratification are exchanged, and (b) in Pakistan, in respect of the "previous years" or the "chargeable accounting periods" (as defined by the tax laws of Pakistan) beginning on or after the first day of January of the year inwhich the instruments of ratification are exchanged; Now, THEREFoRE, be it known that I, Dwight D. Eisenhower, President of the United States of America, do hereby proclaim and make public the aforesaid convention to the end that the said convention and each and every article and clause thereof, subject to the aforesaid reservation, may be observed and fulfilled with good faith, with respect to taxable years beginning on or after January 1, 1959, by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. IN TunsTMoxy wHEREo, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. DONE at the city of Washington this twenty-eighth day of May in the year of our Lord one thousand nine hundred fifty. [szAL] nine and of the Independence of the United States of America the one hundred eighty-third. DWIGHT D EISENHOWER By the President: DouoLAs DinLOw

    Acting Secretailf State

    TIAB 4232

    (2318)

    Text of Previously Unpublished Protocol of Exchange

    (2315)

    PROTOCOL OF EXCHANGE [*] The undersiglled, Janes M. Langley, Ambassador Extraordinary, aind Plenipotentiary of the United States of America in Pakistan, and Manzur Qadir, Minister for Foreign Affairs and Commonwealth Relations Government of the Republic of Pakistan, being duly ttuthorized by their respective Governments, have met for the purpose of exchanging the Instruments of Ratification by their respective Governments of the Convention between the United States of America ,lnd Pakistan for the Avoidance of Double Taxation and thie Prevention of Fiscal Evasion with respect to tNxes on Income, signed at Washington on July I, 1957. The respective Instruments of Ratification of the aforesaid Con. vention having been examined and found to be in due form, the exhange thereof took place this day. IN WITN&SQ WHEREOF, the respective Plenipotentiaries have signed the present Protocol of Exchanie. Done in duplicate, in the English language, at Karachi this twentyfirt day of Mity in the year one thousand, nine hundred and fiftyMine. JAMES M. LANGLEY, (For the Government of the United States of America).
    MANZIYt QADIR,

    (For the Government of the Republic of Pakistan).


    l99ditor's Note: Although the protocol ofeoxhange does not reite aseeptance by Pakistan of the reservay lion subject to which the Ynltl Ctates ratilled the convention, Pakistani acceptance of the rwervation Is evidenced In two unpublished documents, as follows: (I) a note, dated October 1?. 19M8, the Pakistan from Ministry of Forelgn Affairs and Commonwealth Relations to the nlnited States EmbewY In Karachi, In which It Istsated that"the Govemment of Pakistan .0 Ihasjnoohjeetlon to the provision of the reserva. Iloic In the convention 0 6 0"; (2)the Pakistani Instrument of ratification. dated Uat 1909, In which It Is s2. slated that. "The Government of the Republic of Pakistan having considered the Con vention aforesaid, hereby confirm and ratify the same and undertake to perform anti caffy out all the stIpulattlons then-in contained subject to the reservation that the second sentence of paragraph one of Article XV has not been ratified andi Isexcepted from the operation of the Convention with the same effect as though that sentence we~re elekled."J

    (2317)

    3,
    A

    4,

    (4

    SECTION 21 Convention With SWEDEN

    (2319)

    INCOME TAX (CONVENTION

    B1,Wr,,N

    THY. UNITHI) STATY. AND

    March 23, 1939April 20, 1939 .Ie'eived

    May 11, 1939 .


    .July 20, 193:119 .Ieorted -

    August I and 2, I1)31).


    August 21, 11311) ....... September 8, 131)3. .

    November 14, 1931)

    December 12, 11)319 . Ofllc.id Text .

    Signed at, W1whington. by SelilIe; designated ExeelItive K, 70th (0ongres, 1st, Sesion. Ijunfleion of secrecy removed (84 ('ongre'ssionl Reeord A442, P5444-5447). by Senate Foreign Relations ('om. mittwe (Rox. lRept. No. 18, 70th ('onug., Ist Ses(.). Raltificatio1 I)y Sesalt' of its advice a1lld consent. (84 ('ongrmsional Record 107013, 10811-10814). Ratified by Sweden. iatt ified bly United Statll President.. 1Instrrumients of ratification exch.ange+d; t.venttiol (ntr(d into force elfecive ,lam. uary 1, 11)40. Prochilned lby tUlnitlld Stattes 1'rlidenlt. '---LS-958; A4 Stat.. 1751).

    (2320)

    CONTENTS OF SECTION 21
    Pastr

    I. Presidential Mteasge of 'TIratlwiiittil to ,mil.te.-------------2. &,aite ('ommillt, lHearin~gs (tione held) ......................... 3. 8,nte (o mt m tlnttitteI l rt ........ ................................ 4. Imit*, Floor lkIItt4, ind Action ................................... l 5. presidential iProclamation includingg Official Text of Convention and
    Accompanying Protocol).....

    (2331)

    (2323) (2329)

    (23411)
    (2353)

    (2821)

    Presidential Message of Transmittal to Senate (Including

    Materials Enclosed Therewith)

    (2323)

    76Th| Co(stNxus

    SENATE

    EXECVTIT|V.

    14A%'sWf

    4WF,I)EN-I)OUB1E, TAXATION

    M E S8S A 0 E
    PSOM

    THE PRESIDENT OF THE UNITED STATES


    A C'ONVE'NTION BETWEEN TI 1'NITEI) STATES OF AMERICA ANI) SWEI)EN IlORl TlE AVOI)AN('I,: OF I)OUBILE TAXATION AND T"Ill EI'AISTAlI,1811 MENT 01'OF RUITLES OF RECIPROCAL AI)MINISTRA. TIV A-81STAN('E IN THE CASE" OF INCOME AN) OT rIiEll TAXA.
    TION, SIGNED AT WASHINGTON ON MARCH 23, 1939

    Amin, 20, 1939.-Conwventiou read the first time and together with the message and accompanying papers was referred to the Committee on Foreign Relations and was ordered to Ixe printed in confidence for the use of the Senate

    To thr Senate of the I 'ited States:

    attached thereto and made an integral part of the convention, which


    defines certain terms used in the convention and contains provisions

    establishment of rules of reciprocal administrative assistance in the ease of income and other taxation, signed at Washington on March 23 1939. Trhe convention was negotiated and signed under fullpowers issu64 by re. It has the approval of the Department of State and the Treasury Department. It also has my approval, and I ask the advice and consent of the Senate to its ratification, together with the protocol

    I transmnit herewith a convention between the United States of America and Sweden for the avoidance of double taxation and the

    to govern the administration of the convention. I enclose for the information of the Senate a copy of the report of the Secretary of State laying the convention before me, in which its provisions are reviewed. FRANKLIN D. ROOSEVELT. THE WHITE HoUsE, April sd, 1989. (Enclosurea: (1) Convention and protocol; (2) Report of the Secretary of State.)
    MM -2-Tol-094 2----15.

    (2325)

    8WHI)EN--DOU1II,

    TAXATION

    I):rAIMI.:NT OF' STATE, II'ashiy:!on, April 19, 19.19.

    The l'IN sni:NT: '11ie undersigned, thle, ,4cretmryof State, has the honor to lay before the President, with t view to its transmission to thei Senate to receive tfei advice and consent of that bod%' to ratification, it convention between the Irnited States of America and Sweden for the avojiholae of doutbhl taxation and flip es(t..bliSltthmen( of rules of reci'rocal admin. istrative asistuiioc' in the case of iicOmieI aond other taxes. The I)epartnment of State and the Treasury D)epartment collaborated in the negotiation of the Oitlcvention. It has the approval of both Departments, the Acting Secretary of the 'T'reasury onl *Inu|ary 3, 1939, having recolmlended that tihe draft agreed on by Il'two Departments he transmitted to the Swetdish governmentt.'for accept. once. The convention was signed at Washington on Marclh 2:3, 1939. In explanation of this convention tile following statement, is Illade: tion, (b) exchange of information, aind (c) mulltual COoperation in eliforcement. of the taxes to which tIel convenltio relates. The (doulde taxation provisions of the convention are in accord with our existing revenue 'laws except in incidental resj)ects for which coi-. pensatimg concessions have been made by Sweden. The provisions relating to exchange of informationland other measures of fiscal cooiveration constitule desirable features calculated to prevent fiscal eValSion ,and thum subserve administrativey tile best interests of tile
    revenue. Articles 11 to XIV, inclusive, detl with avoidance of double taxation; articles XV, XVI, and XVIII with exchange of information; article XVII with enforcement and collection of the taxes. Articles The convention has three aspects, (a) avoidtaii'e of double taxa.

    XIX, XX, and XXI tire generally administrative in character. Article XXII contains provisions relating to ratification, coming into force, duration, anld termination. Appended to the convention, a11d forming an integral part thereof, is a protocol consisting generally of
    dlefinitionls of terms found in the body of tile convention or of provisions incident to the admninistrat4on of the convention. Tihe articles of the convention dealing with avoidance of double taxation cover t(le whole field of taxable income, each specific item of income being made subject to tax in one or the other of the two

    countries but. not, in both. Articles within this group which differ in some substantive way from corresponding provisiolns in the existing convention relative to double taxation between the nUnited States and France signed on A)ril 27, 1932, or in existing revenue laws are briefly discussed heremuder. Oith respect to dividends, article VII provides that such income shall be taxed only in tile contracting State in which the shareholder has his residence, or if the shareholder is a corporation, ini the country ilt which it. is oiganized each coumnry being permitted to deduct a tax of 10 percent with!i'ld at the source. Thereby the United Stat4's will undertake to conutiii'e for a period of 2 years" tle existing rate of i) percent withheld at the source by tihe Uilited States on dividends from sources within the Unitedt Statls paid to residents or corporations of Sweden while Sweden will reduce the Swedish national income and property tax on dividends payable to American citizens,n(d corporations frolmn the existing rate of about. 13 percent. to 10 percent. Tile article contains a special clause by which it. be terminated by may either oUnt.ry at. tie end of 2 years fromn the effective date of the ( %)m26)

    swFt)F.N--iiotiiir,,rAXATIO.N*

    convntion or at the end of atny 'eur thereafter on at, least 0 months' notice. In the event the art'ilee is terminated, certain other pr. visions favorable to the United States will likewise terminate. Ono of such Irovisions, in article XlII (2), which would thus be simultaneously terminated is a waiver by Sweden of its property tax on American holders of Swedish securities who are nonremi(ents of Sweden. 'rhis Swedish property tax amounts to 2 percent in the case of individual holders and from 3 percent to 5 percent in the Case of corporate holders. Since a large percentage of American trade with Sweden is carried( on by Swedtish subsidiaries of American companies, this article represents atmaterial concesion by Sweden. Article Xl concedes a sMight liberalization of existing United States nationals visiting the United revemtue law with respect. to Swedishm states for business purposes. It. is believed that this concession from provisioins of our law, which is of slight revenue importance, but which Sweden values as relaxing a bothersome impediment. to commercial intercourse, will be found to be fully justified in view of the reciprocal Swedish undertaking and of the extensive exchange of information and mutual assistance in the field of income taxation to which Sweden has agreed in other articles. The effect of articles 11 to XIV, both inclusive is that each country will avoid double taxation as to income arising in the other country, although the methods employed by (Ite countries to accomplish this objective will differ. The United States, in effect, will avoid double taxation by employing our existing systemn of allowing credit for for. eign taxes which, insofar as concerns income derived from Swedish soirees by United States citizemis, residents, and corporations, will thus be retained in force for the life of teie convention. The revenue laws of Sweden do not contain any provision for credits for foreign income taxes. However, by the convention Sweden agrees, in imposing income taxes ati graduated rates, to allow' to Swedish nationals and corporations a deduction for -United States income tax onl income they derive from United States sources, corresponding substantially to ihe credit. allowed by the United States under its existing law as above outlined. With respect to Swedish taxes imposed at, a fLat, rate, Sweden will exclude from the income subject to such tax tih income derived front United States sources. Thus Sweden in effect agrees by the convention to adopt our system of credit for foreign taxes insofar as concerns the United States tax inmosed upon income derived front the United States by Swedish residents and corporations. Articles XV, X\VI. XVII, XVI I, and XIX constitute an adoption of the principles of (I) exchange of information and mutual assistance in the service of documents and (2) cooperation in enforcement of the taxes willt which the convention is concerned. Pursuant to tile former principle, as developed in article XV and its coinplomentary article XVI, the I'nitled States revenue authorities will obtain from Sweden certain inrorniattion relatitig to investment and other income derived from Swedish sources by United States residents atnd corporations its well as supplementary i6formnalion relating to certain financial activities of Americans in Sweden. Similarly, the United States will furnish the Swedish authorities willhi information with respect. to ilconle derived front United States sources by Swedish nationals. Under article XVIII, each contracting state undertakes to furnish to the other state information in specific cases relating to taxpayers whose identity is known'and whose property, for exatnple, in whole

    (2:127)

    SWEDEN-DO'BLE TAXATION

    or in part is situated in the other contracting state. Article XVII deals with mutual assistance in the collection of taxes to which the convention relates. Provisions of paragraphs 10, 11, and 12 of the protocol should be read in connection with this article and other articles relating to exchange of information and mutual assistance. The value of such provisions as a precedent looking to similar agree. ments with other countries is apparent. The convention represents the most comprehensive agreement yet achieved by this Government in the field of conventions looking to avoidance of double taxation and its related problem of fiscal cooper. tion. The terms of the convention constitute a distinct step for. ward inorganized avoidance of double taxation, and thereby contribute toward removal of an important impediment to international trade. With respect to fiscal cooperation, the view is entertained that through this convention there will be established broad principles of fiscal cooperation, facilitating negotiations looking to similar conventions with other countries. It is believed that the provisions of the con. vention are satisfactory in this regard and establish a basis for tile ulti. mate accomplishment of these desired objectives. The convention will become effective on the first (lay of January following the exchange of the instruments of ratification, and, subject to the provision in article VII with respect to the termination of that article at the end of 2 years, will remain in effect for a period of 5 years. It is terminable on 6 months' notice at the end of the 5-year period or thereafter onl the first day of January of any year following the expiration of a 6-month notice. Respectfully submitted.
    CoRDELL HULL.

    (Enclosure: Convention for the avoidance of double taxation be. tween the United States and Sweden, signed March 23, 1939.)

    [Text of convention]

    (2828)

    Senate Committee Hearing8


    [No hearings held]

    (2329)

    Senate Committee Report


    July 20, 1939 Executive Report No. 18 76th Congress, Ist Session Senate Foreign Relations Committee

    (2331)

    76Tm CONORESS

    14 Sexion

    SENATE

    JExE CUTIVE RETr.

    No. 18

    SWE)IEN-DOtILhE TAXATION

    TuVIwsNAy, JuLy

    20 (legislative (lay, JuLY 18), 1939.-Ordered to be printed

    Mr. HARRISON, from the Committee on Foreign Relations, submitted the following

    REPORT
    (To accompany Executive K, Seventy-sixth Congress, first sessioul The Senate Committee on Foreign Relations, having had under consideration Executive K, Seventy-sixth Congress, first session, a convention between the United States of America and Sweden for the avoidance of double taxation and the establishment of rules of reciprocal administrative assistance in the case of income and other taxation, signed at Washington on March 23, 1939, hereby report the same favorably to the Senate without amendment and recommend that it advise and consent to its ratification. For the information of the Senate, there is appended hereto, and made a part of this report, the report of the subcommittee under date of July 19, 1939, as follows:
    UNITED STATES SENATE, COMMITTEE ON FOREIGN RELATIONS,

    Wa8hington, D. C., July 19, 1989.

    REPORT OF SUBCOMMITTEE ON EXECUTIvs K, SEVENTY-SIXTH CONORESS, FIRST SESSION (A CONVENTION BETWEEN THE UNITED STATES AND SWEDEN FOR THE AVOIDANCE or DOUBLE TAXATION,

    ETC.)

    Hon. KEY PITTMAN,

    Chairman, Committe on Foreign Relations, United States Senate. DEAR SENATOR: Tihe subcommittee appointed to study and report

    between the United States of America and Sweden for the avoidance of double taxation and the establishment of rules of reciprocal administrative assistance in the case of income and other taxation, signed at Washington on March 23, 1939), hereby report back to the full committee with a recommendation. (2333)

    on Executive K, Seventy-sixth Congress, first Session (a convention

    ,W I I)l ;/N-,

    'llol' AX ATIlON

    10iittee oil We havet 1hd titheh, i, lit, of reports from 1the ,Jliit (Co Internal evt'ntii roxittion its well as thel Treasury I Department and

    For (he iformat ion of flie t--oniiittee, (.li, reports abovet referred to are attachled hereto and mudeIt port, of the report (f the siil.om. 1iit tee. Res,.pet,
    fully .subilitled.PA IH N PATr Il.IIIISON, R

    the Utnitetd LSltes, 11d tInt flit, vonvient.ioi shiouild li rnitilied.

    liltie glive.I these reports careful sltudv. We helieve that. the ternis of the convention tire adv1ntageou1

    to

    .1AMEE:

    . NI.IIII.AY, IhnlI tM. LA FO,.L M

    TT':, #itr.

    NIM lMOIANDIINI '1"o: lion. Pat lihlrrisoi, United States Slnate. ,'roi): IColnl F. Stain, (lhitf of Wtair, Joint Committee onl 1t11terial iteve11 i''axia. t ion. 1)ate: MNay 25,1939. 8ubjeet: Irollost tax conventioll between thle T Iilted Stat e's and Sweden. Pursuant to your request, this oflfce ham examined tle,1 ptroptosed tax conlvelntiolI Ibtwet''u tlith lited Si States Aud ftwedet1. fi flditiot, we lhave onferred with relirestittatives of the treasuryy ),epartlent, who were instru1!ental in bringing about this agrtmeIntit. 'T'hern, is enclosed a copy of the proposed convention, along with theIllessage of tle Presidentl of the United States with reslet.t thereto and the report of thie Secretary of State, Mr. Cordell Hull, setthug forth iu brief outline Aln analysis of tile provisions of tho convention. III audition thler is enclosed a memorandum, written by otlieials of the Treasury D)epartmient1 n"1il edited by this otilee, that sets out in rather minute detail all explanation of the There are thriv, major aspcts tA tile Convention: (1) (articlell I through IV) the avoidance of double taxation; (2)(articles XV, XVI, and XVIII) theex xcllange of Information; and (3) (article XVII), the cooperation of tile contracting nations in the enforcement. of the taxes to which the cOli1l'otioul relates. With respect to the United States, the convention ha1 to do with (1) the s Federal Income tax, Including surtaxes and oxces-protits taxes, and (2) tho Federal capital-stock tax. 11 tile ease of Sweden, the convention applies to (1) the Swedish national Income alid property tax, including surtax, (2) thle Swcdishl national special property tax, and (3) tile colmlunal Income tax. While the Swedish portion of tile convention applies to the communal or provincial income tax, the United States makes Ino agreement resplecting any of our State or local taxes. The following brief exlplailation of the Swedish taxes involved laiy be of Interest: Trhe Swedish national income tax IiiI)I).,s upon corporations in detective flat rata of 12 percent. 1llpbn Individuals the normial tax rate graduates from f1i3 to 73 percent and it surtax is imposed ranging from 2 pereent (at $2,000) to 28 perceIint (at $150,000). Ill addition, the national special Iproperty tax, which is com. putted b)y adding I pIerent of the value of the assets from whllch the Income arose to the Ineomno to be taxed, has the effect of raising the average elleetivu, rate of corporate tax to from 13 to 14 percent, anhtiii Increasing tlt% mnaxinum comlblined normal and surtax applicable to individuals to aln average of posilbly 40 percent. Dissimilarity in the general jurisdictional concepts of the two countries llllkes exact comparisons dilflcult. Under the Swedish tax systems residence, the source of Income an (lie location of prolerly ar, the jlirl.dtietlonal criterions of taxability. In addition to these factors, the0 United States mineasures by still another, to wit: Citisetship. The Swedes have no similar tax concept. There follows a short sununiary of our mietlhods of treating foreign income flowIng to our citizens and residents, and of lUnited States income going to recipients abroad. As you know, we tax our citisens no matter where they reside, or regardless of the soulro of their ill(ncome; excel)t that their earned income Isexempt if it does not collie from Ullitedl States -.ources aind thle Individual resides abroad or more thani 0
    jprovisiolls

    of the agreement.

    (2334)

    IWEDEN-P-IOltfl,

    TANXATrON3

    Ilmltlls during the taxable year. 8imuilarly, we tax resident alleits illpo their illn'olie from till so.urces. JWitli regard to notiresidelit. allies, the Ilited Shatt. dIvides thlt-II ilt.O two tl classes, etach treated dilferentily for incoto-ntax purposese. First., stich idlenis its are' etigg1ed iu a trade oir Illtsil.es withill the I nitited States, or whilo have a pltce of lisi411ies here are tatxedt it1 the regular mianter with respect to their im Otne frutn s.urce,4 withiui tiet I Tlted States. h eco slch lld, allllen its do Iloa lihot a pahce of to ve hilsilness here, r who art, not, engaged iln trade or business within tle Unlted Sltites tinr taxed only till their fixed or deti'rltilttalhle periodical income, such as rents, dividends, interest, royalties, etc., arising in the United(l States. Sthl alienlls Wilth ailt aggreftn te gross illolllt from sitlr smitrert'smthimti $21,60tt). piy ii of less lat 10 percent thereof, this tax imcollected by withhl1lding atiisoir(ce. and the 'Iliuise will such Income Il excess of $21.1100 pay ai t he regular normal aid surtax rates although 10 prerce1lt Is withheld at. thilsouiree in their ease also. Our domestic corpor:t ios are treated exactly ias oulr ct lizets. T'hlat. is, exist lig law taxes theit Ili (till regardless of their hoittiomi or lhe smirte of their inlrlcU. 'l'There, tre tio exceptions to this rlde (Cllhla Trade Act cor iaratiot.s, and corl),rajiols operating hti our possessions) but, t 'hey iot iuitterlal here. Foreign cortrin iorittl hls that. do not, have it place of b'isl..ss here, or which are not eiigaged ill trade or bmshinss lnttihe United States, pity a flat tax of 15 pIeremit. (10 pIreent, Ilu )0h dividetlds) u)pon fixed or determihlable ,re~e. incomeie Such corl.orat Sttes sotrce.. lphte of fromh I tited i1)11 liutvitug ft rhil s tax is r'olh~leet' Ily withhohlding at thelut Under present law, double taxation hits bteenI avoided to a coslideraledo extent, by the al llowaice of credits against United tilttes Ilixes for taxes paid to foreign countries. With res wltr to I'Uited States riiizt,lm or doimtestic eorliortitioha tlit'ex credits are always allowed. lii the ease of resident ,uliems, however, stulch credits are, allowed ollyv if the alliell's matlivye country allows :t .iluihar credit to our citizens. With this brief sunniaryv of our existting methlil. (if treating these matters in mind, the p~rovisiolns of the r convention may be moore clearly analyzed. residents, or of otur loni stick corporations. This provision is imade by art ice e XIwwhich should be reaad with each of the other articles having to do with double taxation as it qualities the provisiotns of each of theml. The most Important cotcessiots uiponi the part of thle United States seem, to tills otlice, to be: (I) The allowance, by thie second p)aragral)h of article VI, of royalties from tho use of trade-marksu, copyrights, patents, setcrt Iroveias alnd formiulas, idti other similar rights, arising within the United States aunicl goiig to iaresiidlt of Snweden, to go out tax free. Such royalties goingi to Ulited States cltizetim ill Swedeln, however, will remain subject to tax under thie provisions of article XIV. Iti addition, 8wedeti makes the concession relative to much royalties Arising thero and Ilowitig to residents of thie UTtited States. This provision marks a challgO frotil existing I.%la. (2) Article XI also makes ait extetsiotn In the scoj~ of our exist itg law, which subjects the alilct to three tests before hIo may b t n'Xtikjlt reSpect to colli. I with pensation for personal services performed it the Unlited states . Our plresentl low reqtulires that for such alien to be so exempt, with respect to such cot1p1enisationi (I) ho m1utst be temporarily preselit tit the United States for tot exceedtinig 90 days during the taxable year; (2) tlhe compensation for such service nust niot exceed $3,000; atid (3) the comimniation must be received from a foreign employer who is ot engaged in a trade or bsitiess within the Utilted States. These provisions have been softetied under the convention so aq to allow exemption to a Swede if (I) lie is teiporarily present iu the United States for titt nmore thiaoi 180 dayA (twice the 90 days allowed by existing law) duringr the taxable year, no latterthow great his conipemiation tnay be so long as it is received from a Swedish employer; or (2) if lie is tempilorarily present iti the United States for Itot more thanl 00 days during t.ho taxable year amid hils cOiompenusatioli from all sources fur that period doesi exceed $3,000 in the not fla regat'. 'l'ut"s under the convonitiom a Swede working or a Swedish employer tnay stay it thle tlnlted States as lotg as 180 dlays aid miay draw all tillilited atiount of Colipelisatiol frolm! li SWe(dishIit 0llov free from our income tax. Or lie may r tay here 00 days or less and draw $,0l~ in comp3)ensiationl from all sources, ilichludin"American, tree from our income tax, However, the provisions of this article fire reciprocal amnd the Untited States citizeli is accorded a similar treatment by
    8weden. It nilgiht be pointed out that this provision will greatly facilitate tho
    Frotm the l)oilt. of view of the United Altates. tlht, adoltiol of this conivelntioll will not change inallny degree our pro1"ut trenltent, oil Uinted States citizens,

    business i, or being engaged lit trade or bhili.ess il, th1ie Staits tire taxed V 'iited oil fill of their income from United States sources just, aIs ai , donit ie corporations.

    (2335)

    SWEDEN-DOUBLE TAXATION

    Iepatture of nationals of either country from the shores of the other contracting nation with the least possible inconvenience. The most important advantages to be gained by the United States from the adoption of this convention seem to this office to be: (l) The relief of Amorican stockholders, under article XIII, from the national sposial property tax of Sweden which is imposed upon their shares under existing law, is a major advantage. This tax now applies to shares In Swedish corpora. tions held by Americans at rates of from I to 2 percent of the value of such shares, and to such shares held by American corporations at rates of from 3 to 5 percent. Since almost all American corporate business is carried on in Sweden through the use of Swedish subsidiaries, the stock thereof being held by the American parent corporations the relief from this substantial tax amounts to a consider. able concession by Sweden. (2) Under article VII, Sweden is making a substantial concession. Under existing law Sweden imposes upon dividends declared by Swedish corporations to American stockholders, the national income and property tax which on the average, is about 13 to 14 percent. By the convention, this rate Is reduced to 10 percent so as to equal the present American tax of 10 percent which Is with. held at the source. In other words, Sweden, through article VII, brings her rate down to equal our 10-percent rate. It will be noted, however, that while the other provisions of the convention are to be.effective for at least 5 years before they may be terminated, this article may be terminated at the end of 2 years after adoption. Articles XV, XVI, and XVIII, deal with the exchange of information, relative to the taxes which to the convention applies, between the contracting countries. These provisions should materially aid in the prevention of tax evasion by tax. payers who have interests in both countries. Article XVII provides for the aid of one contracting nation in the collection of taxes due the other. Articles XIX, XX, and XXI are generally administrative in character and article XXII relates to the ratification, duration, and termination of the convention. The protocol, which will be found in the enclosed document following the con. vention itself, defines generally the terms used in the body of the instrument. In addition, it contains provisions incidental to the administration of the convention. In general, it seems to this office that the terms of the convention are distinctly advantageous to the United States. To a considerable extent annoying and unnecessary double taxation will be avoided without the relinquishment by either contracting nation of any fundamental rights. It is not believed that there will be any appreciable loss in tax revenue to the United States. On the other hand, it seems certain that American business in Sweden will be able to bring home a greater net return, after tax, than is possible under existing law. Reference is made to the enclosed technical memorandum for a detailed explanation of the provisions of the convention. Respectfully yours, COLIK F.8TA, Chief of &al.

    TECHNICAL MEMORANDUM OF THE TREASURY DEPARTMENT SLIGHTLY EDITED By THE STAnPF OF TH JOINT COMMITTEE ON INTERNAL RieVENUE TAXATION-IN Rz PROPOszD TAX CONVENTION BETWEEN THE UNITED STATES AND SWZDEN There iLtransmitted herewith for your consideration the draft of a proposed tax convention between the United 9tates and Sweden. Such convention had Its inception in letter dated March 3, 1938, from the Treasury Department to the ate Department suggesting, as a result of inquiry made at Geneva by the representative of this Department and of a survey of existing tax conventions, that invitations b3 extended to the Netherlands, Sweden, anf Belgium with a view to inaugurating discussions looking to bilateral conventions between the United State3 and such countries. Such invitations wore extended and accepted by the Netherlands and Sweden, with the result that there has been transmitted to the Government of the Netherlands a draft of a convention developed in the course of discussions which took place at Washington in June asid July 1938. The discussions with the Swedish delegation began at Washington on September 12, 1938, and extended to October 11, 1938, resulting In the draft herewith submitted. Before entering upon a detailed analysis of the various provisions of the draft it is Eelieved advisable to set forth the reasons underlying the language and the arrangement thereof, and to note the principles it was necessary to follow in

    (2336)

    5 1 order that the systems of taxation of the two countries could be reconciled without
    infringing to any appreciable extent upon the provisions of the existing revenue acts. At the outset it was evident that Sweden desired reciprocal provisions aimed primarily at the avoidance of double taxation. This priieiple pervades all of the tax conventions to which Sweden is a party. Thus the provisions of the draft dealing with so-called "industrial and commercial profits," royalties (both mineral and industrial royalties), dividends, interest, gains from the sale or exchange of capital assets, compensation for labor and personal services, pensions and life annuities are reciprocal in character in that sujeh item.q of income are taxable only where the recipient resides (as in the case of royalties), %%here the property is located (as in the case of income from real property), or where the taxpayer has a permanent establishment (as in the case of Industrial and commercial profits). Such provisions, while keeping with the taxation laws of Sweden (which, like in practically' all foreign countries, taxes only upon the baqes of source of Income or of the residence of the taxpayer), are hardly parallel with the taxation system of the United States which, in addition to such basees, impaes taxes upon a third basis, namely, that of citizenship. Thus,, In the absence of restrictive provisions, a United States citizen residing in Sweden and deriving, for example, dividends from United State. sources would he taxable only in Sweden and exempt from United State- tax on such Income. Notwithstanding these provisions, however, article XIV of the convention authorizes the United States to tax such a citizen upon all his income which is taxable under the revenue laws of the United States. Double taxation it in effect avoided through the medium of the credit for foreign taxes found in existing law and embodied in the convention. The principle underlying article XIV should, therefore, be clearly kept in mind in the examination of all the articles which precede it. Sweden,* on the other hand, avoids double taxation bv excluding from her taxable Income subject only to a fiat rate of tax all items of iinconme which are taxable, under the convention, only fi. the United States, and, in the case of her graduated taxes, by allowing a credit against such taxes for the amount of Swedish tax imposed upon Income from United States sources. Thus the ground work is laid for the substantial concesjons made by Sweden in extending to income from United States sources relief from Swedish tax. The approach to avoidance of double taxation thus adopted differs from that employed in the Netherlands convention in that in the latter convention outright exemption from taxation in one or the other of the two contracting States was provided with respect to items of income such as royalties, Income from real property, Government salaries and compensations, private pensions, and life annuities. The United States system of taxation, to the extent that it is based on citizenship in the case of individuals and on place of organization In the cuse of corporations, contrasts sharply with taxation on the basis of fiscal domicile with respect to both individuals and corporations used by other countries. Considerable difficulty arising from this fact was encountered in the course of the Netherlands discussions and to a lesser degree in those with Sweden. Countries other than the United States subject the business Income of corporations to taxation on the basis of fiscal domicile and not on the basis of the country of organization, the latter being dependent upon the place where there is found the real center of management. In the instant convention Sweden accepts the American concept of place of organization. In framing the provisions of the convention difficulty was encountered arising out of differences in terminology employed in the revenue acts of the respective countries. Although the American delegation constantly sought the use of terms familiar to internal revenue laws some concessions to Sweden in that respect were found to be necessary in order to allow the use of words more susceptible of translation from one language Into the other. The general plan of this memorandum is to analyze the articles of the convention and related paragraphs of the protocol thereto, to discuss their relationship to the existing revenue laws and to refer to corresponding provisions of the proposed Netherlands convention.
    PREAMDBLU

    SWEDEN-DOUBLE TAXATION

    The objective of reciprocal administrative assistance Is stated In the preamble. This principle is highly desirable from the standpoint of the United States and is acceptable to Sweden. The reference to "income and other taxes" Is in keeping with the views of the Department.

    (2387).

    M4wi.,i)EN,,-l )oL'iUIi~ TAXATI)N


    ARTICLE I

    Article I of the im.itant draft etimnerates the taxes with which tile convention 6 concerned. A brief aiuill sis of the Swedi-h"l taxes involved is desirable ill order better to unidtrsltind thel p)rovisions presently to be discussed. r'he Swedish national silicone antld property tax is oile iml;osed upon Income generally phis (beginnlinng lt.ary 1,1039) 1percentt of thie value of the a-sets front which iconme arose. 'rliis iat ler item is con)si(derCd bIy Swdteni to 1)e a conmponlent part of tlaxalble Income. IBeginihim'g ,Janulary 1, 1939,* corporations, both foreign and donestice, are subjtet to a flat tax of 10 percent of taxable income, to which is applied a factor of 120 percent, making thie effective rate about 12 percent. Foroigii corporathons as well as other Ipe(rsons, not residents of Sweden, are not, however, subject to tax upJoni interest front sources within Sweden whether such interest aris.-s from secured or ulsec'mred deblt or fromn governmnemltol or private debt. In the case of Individuals, both resident and nonresident, there is imposed a slightly graduated tax ranging from 4' to 61j percent, to whiehl Is also applied a factor'of 120 percent. rhus the effective rate is about 5, to 7%percent. Begin. ning at 8,000 crowns (approximately $2,000) there is Imposed a surtax, forming an integral part of the income and property tax, ranging from 2 to 28 percent. No factor is applied to such surtax. The communal tax is an income tax, applicable to individuals and corporations generally, oil the income base upon which tho income asid property tax is iml)osed except that the dividends of Swedish corporations are not stubject to such tax. The rate of such tax varies as between the provinces or communes. The rate at percent. Only one return Stockholm for 1937, for example, is approximately 0% is filed for both national and communal Income taxes. The national authorities at Stockholm furnish the communes with lists of taxpayers subject to tax and also the income upon which the varying rate of communal tax Is to be Imposed by the local authorities. The national special property tax Imposed upon both real and personal property ranges from 1 to 2 percent in the case of individuals and from 3 to 5 percent in the case of foreign corporations. Domestic (Swedish) corporations are exempt from the tax. It is, therefore, apparent that such tax is an appreciable burden upon, for example, nonresident holders of Swedish securities. However, as will be seen in the treatment of Article XIII, Sweden relinquishes such tax in the case of United States citizens, residents, and corporations.
    ARTICLE It

    of permanent establishment in the field of business income. ]n accordance with this l)rinciple one of the contracting state agrees not to subject to tax the business income of taxable entities of the other contracting state except such profits as are allocable to a permanent establishment located within the former state. The article extends to the ordinary industrial and commercial profits arising from the operation of a business. It does not extend to Investment income or income arising from the rendition of personal services to which separate rules under the proposed convention are applicable. The investment income and personal service income items are thus excluded from the concept of industrial and commercial profits. Article It also provides that the industrial and commercial profits taxed to the permanent establishment located in one of the contracting states shall be exempt front taxation in the other contracting state. This further illustrates the adherence to the Swedish method approach, in avoiding double taxation in the field of both income and property taxes. In the pursuit of such principle, it was necessary to provide that an item of income was to be subjected to tax in either one or the other, but not in both, of the contracting states. Attention is aqain directed to article XIV of the convention in which the United States retains its right to subJect to tax its citizens, residents and corporations upon all items of income taxable under its revenue laws. The reference in the second paragraph of article II to purchases is not applicable to the United States since under our revenue laws gain cannot arise from the mere purchase of merchandise. The last paragraph of article II provides that rules for the allocation of industrial and commercial *profits may be framed by agreement. By reason of the detailed character of such article, considerable difficulty arose as to its language when applied to Swed n. To settle such phraseology would require considerably more time than the subject appeared to deserve. Consequently It was finally

    Article 11, like article I of the existing French convention, follows the principle

    (2A38)

    SWEDEN-DOUBLE TAXATION

    decided to insert in the article the last paragraph thereof which is substantially identical with provisions found in two existing conventions to which Sweden isWa party, namely, those with tile Netherlands and with Germany. In practice, however, no different treatment will result because tinder either version the pril%eples of section, 119 andtthe regulntaions thereut ider will be applicable. (See (1937) T. 1). .746, 1937-2 Cume. Bull. 64, relating to the tax convention between the United States and France.) Paragraph I of the protocol defines the term "permanent establishment" in terms substantially identical with those found in the existing tax convention with France. The reference to "storage facilities" owes Its origin to the fact that Swedish paper pull) manufacturers occasionallyv store their goods lit the United States for short periods prior to actual sale of such products through a local commission agent. Obviously such facilities so used should not constitute a permanent establishment. Tlhie definition of the Swedish enterprise in the instant convention follows the definition of the United States enterprise, namely, place of organization. The principle of taxation of hi'siucs-i income thus recoguied and followed in the existing tax convention with France is in substantial harmo,,y with our existing law. 1Under sections 211 and 231 of the Revenue Acts of 1930 and 1938 a nonresident alien or foreign corporation is subject to tax only upon his or Its fixed or determinable annual or periodical income front United States sources (and not ujpn business Income) unless he or it is engaged in trade or business within the I united States or has anl office or place of business therein. The meaning of the term "office or place of business" as found in section 211 (b) of those revenue acts is substantially identical with the definition of permanent establishment in this convention. 11ence, the samne tests for liability to tax on business income apply tinder both the law and the proposed conventIon.
    ARTICLE III

    Article III is of material importance, in that it recognizes the principle of rectification of accounts as between a corporation in one ofthe contracting states and Its related, but not necessarily its subsidiary, company operating in the other contracting state. While a subsidiary company is considered a separate and distinct entity for the purposes of the permanent establishment theory, it is included within the scope of article III which, like section 45 of the Revenue Act of 1938 recognizes the necessity of adjustments as between interlocking businesses. Front the combined effects of articles II and III, it is contemplated that there shall be complete power of rectification in the field of business income.
    ARTICLE IV

    Article IV covers the field of maritime and aerial navigation. So far as it concerns maritime shipping it conforms to present reciprocal arrangements between the two countries in accordance with sections 212 (b) and 231 (d) of the Revenue Act of 1938 and corresponding provisions of prior revenue acts. (See (1937) I. T. 3083, 1937-1 Cum. Bull. 120.) Thus such earnings are, in effect, taxed only in the domicile of the recipient. Owing to the fact, however, that some Swedish shipping is registered in countries other than Sweden, it was necessary to insert the last sentence in the article so as to apply the permanent establishment principle to the earnings of such shipping. This rule likewise is in accord with our existing law, since in order to be exempt the foreign shipping must be "documented under the laws of a foreign country' granting reciprocal exemption to United States shipping.
    ARTICLE V

    Article V Is the first of a series of articles dealing with various items of income, other than business income, arising within one of the contracting states which are taxable only in one or the other of the two contracting states subject, however, to the provisions of article XIV. This article dealing with income from real property provides that such income shall be taxable only In the contracting state in which the real property is located. It does not include interest, which is here covered by a separate article (VIlI). While article V and related articles render income taxable only in one or the other ,contracting State, nevertheless article XIV, as has already been stated, leaves the United States free to tax income without regard to the terms of this convention. From the standpoint of the United States the substantive relief from double taxation takes place through the instrumentality of the credit for foreign taxes and

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    80

    SWEDEN-DOUBLE3 TAXATION

    thus these credit provisions, found in article XIV, dovetail into the framework of our existing law. The combined effect of articles V and XIV of the proposed convention leaves such income taxable under our existing law and implements our credit for foreign taxes to avoid double taxation on such Income.
    ARTICLE VI

    Article VI relates to both mineral and industrial royalties with the important qualification set forth in article XIV of this convention. Whe exemption from taxation of such income is subject to the provisions of article XIV by means of which a United States citizen resident in Sweden is taxable despite article VI, on Industrial royalties arising from United States sources. Under this article the United States will not tax industrial copyright, or like royalties derived from United States sources bv residents of Aweden (other than United States citizens). Thus it departs from existing law under which such Income is subject to tax at the source.
    ARTICLE Vii

    Article VII contemplates the freezing of existing rates of taxation on dividends from United States sources maid to residents of Sweden, Reciprocally, Swveden by this convention will reduce to 10 percent the national income and property tax imposed upon dividends paid by Swedish corporations to their United States stockholders. Owing to the fact that several other provisions of this convention Involving concessions by Sweden are dependent upon the acceptance or rejection of this article as now drawn, it is believed advisable In the interest of orderly presentation, to reserve this article for special treatment toward the close of this memorandum. It is believed that a proper perspective of the article and of its related provisions can be obtained only after the convention as a whole has been surveyed.
    ARTICLE Vill

    Article VIII nominally adopts the principle of taxation of interest in the country of residence of the recipient but allows the tax to be imposed at the source. Since Sweden, as already explained, does not tax interest derived from sources therein by a nonresident of that country it follows that the article has but little interest for that country. It leaves the United State3 free as to that item of income to Increse or decrease existing rates of taxation upon nonresident aliens and, of course, does not interfere with existing rates of taxation imposed upon such income. No corresponding provision is found in the Netherlands convention except insofar as concerns article VIII thereof dealing with income from real property including interest on mortgages secured thereon which interest is under that article taxable only in the country in which the real property is situated. It should be observed that under the provisions of this article and article VII the United States Is limited as to the taxation of dividends and interest to the tax deducted at the source, and hence section 211 (c)of the Revenue Act of 1932 will not be applicable to nonresident alien individuals of Sweden. In practice it will be found that rarely, if ever will one foreign individual in Sweden derive in excess of $21,600 from United states sources. This Is apparent because of the facility with which a nonresident alien may hold American securities in the name# of members of his Immediate family and 'the impracticability of proving in such cases actual ownership as distinguished from record ownership of such securities. Generally speaking it is only where the income of the alien arises from a domestic estate qr trust over which the beneficiary has no control that the provisions of section 211 (c) of the Revenue Act of 1938 can be fully effective. (See message from the President In hearings before the Joint Committee on Tax Evasion and Avoidance, 75th Cong., p. 6.)
    ARTICLE IX

    Article IX, as already noticed, ties the taxation of capital gains to a permanent establishment. If, for example, a Swedish corporation has no permanent establishment in the United States and sells securities on the New York Stock Exchange, the resulting gains, if any, are not taxable under the provisions of this article. This principle Is In accord with our existing law under which a corporation falling within the provisions of section 231 (a) or a nonresident alien falling within the provisions of section 211 (a), Is not subject to tax on the gain derived from the sale or exchange of securities through a resident broker, commission agent, or custodian.

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    SWEDEN-DOUBLE TAXATION

    Under tile Swedish law, unlike that of other foreign countries, gains from the sale or exchange of capital assets held for less than 5 years are subject to Income and property tax. Such gains being therefore a distinct and separate ingredient of income were accorded separate treatment in the proposed draft.
    ARTICLE X

    Article X adopts a p)rinciple found in practically all double taxation conventions under which Government salaries, pensions, and the like are subject to tax only by the Government paying such items. The second paragraph of the article, dealing with private pensions and life annuities follows the principle of taxation only at residence. The article embodies provisions found in articles VI1, VIII, and IX of the existing tax convention with France. Here again it may be well to observe that even though a United States citizen derives salary, government pension, or the like from Sweden and is nominally exempt under this article he is nevertheless subject to United States tax under the provisions of article XI4.
    RtSUMA OF ARTICLES VI AND X DEALING WITH RECIPROCAL EXEMPTION FROM INCOME TAXATION

    It has been seen from the preceding discussions of articles VI and X that the United States will on a reciprocal basis exempt from its income tax Industrial royalties, private pensions, and life annuities from United States sources paid to alien residents or corporations of Sweden. No data are available from which it can be ascertained with a high degree of accuracy what is the approximate amount of such Items flowing to Sweden each year. However, there have been compiled under the provisions relating to withholding at the source in the case of fixed or determinable annual or periodical income paid to nonresident aliens and nonresident foreign corporations, practically complete statistics for the calendar year 1937, that is, the first full calendar year ili which the provisions of the Revenue Act of 1936 were in force. Such figures disclose that of a total of approximately $287,000,000 paid to such taxpayers there are included royalties of about $8,860,000 and annuities of $390,000 on which the approximate tax collected was $1,100,000 and $30,000, respectively. The amount of private pensions Is not shown. but such item is of necessity relatively insignificant. When such amounts are ailo. cated among the various countries it is obvious that but a trifling proportion thereof can reasonably be attributed to Sweden. The extent, therefore, to which
    the revenue Isaffected by these provisions is quite negligible especially when it is considered that the exemption of such items from Swedish income tax reduces the

    amount of foreign tax credit allowed in the case of United States citizens and
    taxpayers.

    domestic corporations, thus Increasing the United States tax liability of such

    seal cooperation while the primary purpose of Sweden is the avoidance of double taxation. Since each sovereign state seeks to promote Its fundamental purpose by means of such conventions, it is obvious that the United States, In securing fiscal cooperation of desirable scope, found it necessary to enter the field of double taxation. As already indicated, the extent to which concessions in this field have been made to Sweden is relatively insignificant when compared with the results which it is anticipated will flow from the broad fiscal cooperation extended by Sweden.
    ARTICLE Xt

    purpose of the United States in the formulation of tax conventions is to achieve

    In the consideration of those articles of the convention dealing with royalties, private pensions and life annuities it should be borne in mind that the basic

    picture actor, the professional athlete, or like individuals to escape tax upon earned Income from United States sources. In keeping with the principle of reciprocal avoidance of double taxation, this article adopts the basic principle that compensation for labor or personal services Istaxable only in the state Inwhich such services are rendered. To this principle two exceptions are provided:
    78095 0-42-vol. 2-5---

    The subject matter of this article was of particular Interest to the Swedish delegation. The objective was one primarily of facilitating the departure of their nationals with the least possible Inconvenience rather than one of relief from United States tax, though the former was dependent largely upon the latter. With this view the United States representatives were in substantial agreement but maintained the position, acquiesced IDsomewhat unwillingly by the Swedish delegation, that the provision should be framed so as not to permit the moving!

    (2341) (44.

    SWEDEN-DOUBLE TAXATION 10 A Swedish subject may be temporarily present in the United States-

    without being subject to United States tax. The basic principle is retained In the case of actors, artists, musicians, and professional athletes and the exceptions noted above do not apply to such Indi. viduals. This article, it will be noticed, extends somewhat the scope of our existing law in that under such law in order to be exempt from United States tax three tests must be met by an alien performing services in the United States: (1) He must be temporarily present in the United States for a period or periods not exceeding 90 days during the taxable year; (2) The compensation received for such services must not exceed $3,000; and (3) The comp)ensation must be received as an employee of, or under contract with, a nonresident alien, foreign partnership, or foreign corporation not engaged in trade or business within the United States. The provisions of this article are, of course, reciprocal. Under Swedish law a United States citizen, for example a hydroelectric engineer surveying a water. power site in Sweden, is liable or Swedish Income and property taxes upon his pay and allowances. It he meets the tests provided in this article ho will no longer be subject to such tax and thus the credit for foreign tax, allowed by our existing law, will be eliminated as to such income. It is believed that the amount of revenue involved in the operation of this article, is trifling and that this article will have a beneAcial effect upon the com. mercial intercourse between the two countries. The slight liberalization of existing law reflected in the article is counterbalanced by the extensive disclosure and mutual assistance in the field of income taxation generally to which Sweden has agreed.
    ARTICLE XII

    sources or not-

    (a) For not more than 180 days during the taxable year and derive his compensation from a resident or corporation or other entity of Sweden without regard to the amount of compensation for such period, or (b) For 90 days during the taxable year, provided hIls compensation does not exceed $3,0W0, regardless of whether he is paid from United States

    This article exempts from taxation in the state of temporary residence remittances received from abroad by students or business apprentices where such residence Is expressly for the purpose of study or for acquiring business experience. It corresponds to provisions frequently encountered in international tax conventions except that its extension to business apprentices is somewhat novel. Such extension arises from the increasing practice of sending technician apprentices to the United States for training, especially in the electrical field. This provision tends to encourage commercial intercourse between the two countries.
    ARTICLE ,XII

    This article deals with (1) taxation by SWLeden of property as such and (2) United States carital stock tax. Its mo;t important aspect from the standpoint of the United Sta'es is thlet under its provisions Sweden gives up her special property tax inl:osed upon stock and securities of Swedish corporations held by United States eiti ens, residents, asld corporations. The provisions of the first subparagraph dealing with taxation of real property and property of commercial and industrial enterprises are of little interest from our standpoint because of the fact that Ameriean business interests in Sweden are almost invariably represented by Swedish subsidiary companies and not by branch establislhments. The f rovision relating to the taxation of other property is, however, of distinct interest. t has been pointed out early in this memorandum under article I that Sweden imposes upon nIonresident holders of Swedish securities a special property tax ranging from I to 2 percent in the case of individual holders, and front 3 to 5 percent in the case of corporate holders, of an assumed fair market value. Hence, if, example, a United States corporation holds shares of stock in a Swedish for corporation it is required to pay an annual special property tax amounting to approximately 3 percent of the value of such stock. Since, as pointed out above, American business in Sweden is represented almost Invariably by Swedish sub. sidiary companies it is apparent that this article represents a material concession by Sweden. The last paragraph relating to United States capital stock tax represents no departure from our existing provisions of law. Under section 601 (b) of the Revenue Act of 1938 a Swedish corporation doing business in the United States

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    SWEDEN-DOUBLE TAXATION

    11

    issubject to capital stock tax measured by the amount of "adjusted declared value of capital employed In the transaction of Its business In the United States." Since the income from Uni~ted States sources of such Swedish corp oration Is, under tile provisions of article 1, subject to United States tax it follows that under article XII the United States may continue to Impose Its capital stock tax upon such corporation. ARTICLE XIV This article represents the key provisions. by means of which most of those provisions dealing with avoldanc of double taxation with respect to specific items of Income were rendered possi lte. Thus, while article II provides that business income of the Swedish I'ranch of a United States corporation is exempt front tax. ation in the United States, the provisions of article XIV permit the United States to take into account such income and all other items of income ta.alle under the revenue laws without regard to the provisions of the convention. The same treatment is accorded the dividends, interest, and other income derived from United States sources which, though nominally taxable only where the recipient resides, are nevertheless subject to United States tax in thie hands of a United States citizen. This mode of approach though not employed in any of our prior conventions, developed from the Swedish desire for reci rocal provisions as to each item of income whereby such Item would 1'e taxable in one or the other, hut tiot in both, of the two contracting Sltates. Such principles, without the existence of article XIV, could scarcely he acceptable to the United States. For example, a United States citizen residing in Sweden derives $100.000 interest from United States sources. Reading article VIII alone such citizen would not be subject to t'nited States tax upon such income because of the fact that its recipient resides
    ill Sweden and no tax is withheld at the source In the United States. (See see.

    Sweden as though the conventionn had not been adopted. It also permits the 1'nited States to take into accoutt Items of income from sources within Sweden In determining the classification of personal-holding companies and of foreign personal-holding companies. The language of the paragraph was rained with these purposes in mind and also in order to avoid tile necessity of including a special provision in this convention as is found in paragraph 9 of the protocol of

    143 (b), Revenue Act of 1939, and corresponding provisions of prior revenue acts.) Such result might well create a convenient avenue of tax avoidance. Article XIV, however, gives the United States the right to subject to tax its citizens living in

    tite Net herlands convent ion.

    property taxes, extends a credit to its residents for that proportion of the Swedish tax which the Americana income bears to the entire Income; which formula, except as to the ropertv ingredient therein, is substantially equivalent to the United States limltat oil 'upon the credit for foreign taxes provided in section 131 (b). In this connection it will be noticed that paragraph 6 of the protocol provides that dends and interest, except as provided in article XIV (b) (2). Such subparagraph

    not extend to excess-profits tax or to personal holding company surtax and that tile Swedish so.called fee4 tax is recognized as asl income tax for credit purposes. Article XIV (b) (1) requires Sweden to relieve Income from United States sources front the Swedish income and property tax and communal tax. It will be noticed that suchparagraph does not allow Swveden to subject to its flat tax items of income from United States sources and taxable, under the provisions of this convention, solely in the United States. For example, business income derived from United States sources by a Swedish corporation or oil royalties derived from United States sources are noi subject to the Swedish income "atdproperty tax in the hands of Swedish conr)orations. Such tax beginniing with 1939 is neota graduated tax, as has already been set forth it the explanation of the Swedish tax system. Thus, such items of Income are relieved from the co unlital income tax anld the national income and property tax (both flat taxes) where the recipient is a Swedish corporation. However, all such items of Income are taken into account In ascertaining the graduated ilneote and property tax Ilmlposed upon individuals residing in Sweden. Sweden, having thus computed its graduated Income atid

    gati.on recognized the extent to which double taxation is avoided through the medium of tile credit for foreign taxes. By reference to paragraph 0 of tile protocol it will be seen that dividends and Interest are accorded separate treatments, that the credit for foreign taxes does

    The framing of those provisions of the convention was facilitated by the provisions of section 131 of the Revenue Act of 1938, and corresponding p1rovisionis of prior revenue acts, relating to credit for foreign taxes. Hence, the Swedish dele-

    article XIV has no application to taxes deducted at the source in the case of divi-

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    12

    SWEDEN.-DOUBLE TAXATION

    provides that a resident of Sweden is allowed a credit for only 5 percent of tile amount of dividends received from United States sources and no credit is allowed to such resident for United States tax on interest received front 'nited States sources. ThI reason for these provisions relating to dividends and l1t1ilv'ct lie# in the following facts: (1) The Swedish national income and )rop)ert( tax on (ividietds received front abroad l)y residents of Sweden, averages about. 5 percent, and heniee Sweden (lid not want! to allow a greater credit than such average tax. (2) Sweden does not subject to tax interest front we(lish sources paid to a nonresident of that country. With a rigid adherence to reciprocal principle's Sweden does not recognize any foreign tax Imrposed ulipn interest front another country and paid to residents of Swedent. l'1he aspect of the problem touching divideiids will l)e treated in inore detail In the discussion of article I'II below.
    ARTICLE XV

    This article adopts the principle of exchange of Information and mutual assist. antce it the service of documents relating to tile taxes with which the convention is concerned and provides that such information and correspondence relating thereto shall be exchanged directly between the competent authorities of tie two contracting states. Paragraph 3 of the protocol defines competent authorities in tile case of the United States as the Secretary of the Treasury, and iln the case of Sweden as the Finance Ministry. This article, together with' articles XVI, XVII and XV11[, is of primary importance in that it covers tile field of exchange of information and nmtual'cooperation in tax enforcement. Sweden tentatively conditioned tihe exchange of information with respect to dividends upon the unitedd States, reducing the rates of taxation to 5 percent upon such income, and after such suggestion was denied, insisted that such exchange be coul)lleid with the retention of the existing United States rate of 10 percent. As will later appear when article VII is considered such principle was found to be unavoidable. Aside from this difficulty tile probleti was one of framing provisions expressing the kind of information which was available to the Swedish .tuthoritics and thus which could be made the subject of exchange and of correa ending provisions setting forth the type of information to he furnished by the United States to Sweden and considered to represent a fair halence to that furnished by Sweden.
    ARTICLE XVI

    Except in occasional instanices in which decedents' estates are concerned with debts existing in Sweden, practically all of the information furnished by tihe United States under this article falls within time scope of article XVI (0) (a). Time source of such information is found iii the annual Form 1042 which shows items of dividends, interest, and other fixed or determinable annual or periodical income from United States sources paid to nonresident alieis. Such form also disclosed tile names and addresses of the foreign recipients, the amount and, generally, the nature of tile income. Ownership certificate. in the ease of coupon bond interest also constitute another source of Information. From an administrative standpoint no material difficulty Is anticipated in abstracting front such forms all of the names, addresses, and amounts in the case of residents of Sweden. The information to be furnished by Sweden to the United States is patterned after the provisions of article I of the existing France-Swedish convention. Paragraph 2 (a) of article XVI is confined to dividends and interest for the reason that such items constitute the only items of investment income upon which the Swedish authorities secure information. Information with respect to annuitles, pensions and the like iq also available and is covered by subparagraph (f). Under tile Swedish practice permits are required by foreigners before the latter can legally acquire real property itn Sweden. The issuance of permits to United States citizens and corporations ,'ounli he reported tinder paragraph 2 (b). The Swedish authorities in the imposition of death duties on its decdent residents require Inforniation as to the assets of decedents located in the United States. Such information will be furnished tinder paragraph 2 (b). Similarly under the Swedish practice of registration of aliens who own property in or derive income front Sweden, the names of United States citizens thus obtained will be furnished the United States. It will thus be seen that the United States will obtain tinder article XVI a considerable amount of information relating to persons whose addresses are in the United States and who derive income front, or own property in, Sweden. Such

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    SWEDEN-)-OUBI,E TAXATION

    13

    information is in addition to the information to he obtained In specific cases pursttant to the provisions of article XVIII presently to be discussed. Front a study of the existing conventions in the field of fiscal assistance which Sweden hax entered into with France and Germany severally, and as, a result of dipcussions at Gei'eva with the $wedigh representative at the ineeting- of the fiscal comnmlittee of tile I.(ague of Nations, our Government entertained the view that through a convention with Sweden there would be establli-!ed broad principles of adininistrative cooperation thus facilitating negotiations looking to similar conventions with other countries. It. is believed the provisions of the convention here under d(iseussioi are quite satisfactory in this regard and hence establish a ba.is for the ultimate accomplishment of these desirable objectives.
    ARTICLE XVII

    Article XVII deals with the mutual assi.-tance in the collection of the taxes to which the convention related. The provisions of paragraphs 10, 11, and 12 of the protocol should be read it connection with this article and the other articles relating to exchange of information and mutual assistance, since such p- ragraplis set forth the administrative rules having a practical bearing on ti e application! of these articles. It should be here ei nlilasized that the degree to which detail anid definition have been carried in this field is due to the tendency of the Swedish delegation to be as specific as possible. It was with some difficulty that there was eliminated from the protocol a number of additional rules dealing with this aspect of tile convention and which are found in the so-called second protocol to the existing France-Swediah tax convention. These latter rules will, it is antici. pated, be ultimately incorporated in the regulations which It is expected will be ssiued in the event the instant convention is ratified.
    ARTICLE XI'III

    While article XVII deals with exchange of information and mutual assistance in the normal course, article XVIII provides for the furnishing of information to one of the contracting States in specific cases relating to taxpayers whose identity is known and whose property, in whole or in part, is situatedi in the other con. treating State. The value of such provisions as a precedent looking to similar agreements with other countries is apparent. It will be observed that the definite requirement extends only to citizens and domestic corporations. This illustrates the reluctance on the part of Sweden to extend, on paper, a definite promise of assistance in the case of aliens. In practice, however it is anticipated that should such occasion arise the "consideration') promised in the second sentence will prove as effective as, for example, the opera. tions of a Swedish subsidiary of an American corporation or of a wedish enter. prise having a permanent establishment in the United States.
    ARTICLE XIX

    This article represents provisions generally found in taxation conventions extending into the field of mutual assistance. Under its lIovisions there will be supplied only information which is procurable or there will be employed only measures of "assistance which are available, under the laws of both contracting Statee. For example, Sweden, lwing unable to furnish data with respect to securities transactions, is siot in a position to apply for like information from the United States with respect to Swedish residents. 'The limitations with respect to information and assistance imposed by public policy or by trade secrets of prac. ties is quite generally encountered in those tax conventions extending into the field of fiscal assistance. It is obvious such article is a useful aid to ratification in both countries. It should be emphasized, however, that the article expresses considerations of national policy and does not create a means of avoiding exchange of Information.
    ARTICLE XX

    This article, it is believed, will have but little practical application. Is presence in the convention is traceable to the Swedish desires for avoidance of double taxation and hence the inclusion of a general "catch-all" provision geared to that objective. Its greatest practical value is that it lays the ground work for reaching a solution in those cases which will inevitably arise as is shown by our experience tinder the existing tax convention between'the United States and France.

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    14

    VWDF)EN--I)OUI 4LI,] TAXATION


    ARTICLE XXI

    to exehlunire of information and intitutal assistance would be exchanged betweeii tile competent authorities of the two States prior to the settlement of the filal
    drafts of such regulations. ARTICLE XXII This article provides for the ratification and states the effective period of the

    This article, providing for the promulgation of regulations generally under the convention tind Inore specifically the rules governing the exchange of information anld mutual assistance, represents the outcome of efforts on the part of the United States deh(gation to exclude from the convention) atid protocol nierely adininis. trative rules. However, it was agreed that tentative drafts of regulations relaitig

    convention.

    tax convention with France. The convention as a whole will remain ill effect for a, l)clod of 5 years (ad( thereafter li)e subject to termination 1)pon notice duly given. '1'his provisions is subject to the important qualification that article VII relating t{( dividends presently to be discurred is subject to termnination at the end of 2 years from the (late the convention becomes effective. ARTICLE VII Article VII of the convention relates to rates of taxation) ihmo )sed upon divi. dends and shows the relationship thereto of other piov'sions ol the convention concerning exchange of information, the Swedish special property tax upon stocks and securities In Swedish corporations, and the credit against the Swedish tax for United States tax imnlposed upon dividends. The article provides that for

    It follows in substance the provisions of Article X of our existing

    a period of 2 years the rate of tax Imposed upon dividends received from United States sources by alien residents of Sweden and by Swedish corporations shall not exceed 10 percent. Thus for such period the united States rate of tax will continue as under the Revenue Act of 1938 while Sweden will reduce to 10 percent her national income and property tax imposed upon dividends from Swedish sources paid to United States citizens, residents, and corporations. This article represents a tentative agreement affecting other provisions of the convention anid was reached after denIing the plea of the Swedish delegation for a reduction in

    the effective rate of tax will continue substantially asunder preexisting law. Thus the iestriction to 10 percent represents a redt1ction in the Swedish tax as applied to dividends paid to United States shareholders of Swedish corporations and also involves the elimination from the tax base of I percent of the value of the stock froni which such dividends ate derived, as get forth Ahove under article I. The Swedish tax is not deducted at the sotirce. It is collected, based upom returns (duly filed with the appropriate Swedish revenue authorities. In order, therefore, to allow Sweden to tax dividends from Swedish sources And payable to residents or corporations of tlte United States, it, was essential to provide that the Sewdish national income and property tax shall, for the purpose of the article, be deemed to be a tax deducted at the source. In this connection It was urged

    accord on as ninny other issues as possible the issue was deferred to the closing days of the discus;iomis. It was then pointed out to the Swedish delegation that the United States could not yield on the question of reduction In the rates of tax onl dividends. 'T'hereupon the Swedish delegation stated that unless some satisfactory provision could be framed with respect to dividends, those provisions of the convention already tenatively agreed upon with respect to: (1) Exchange of inforniation with reslptet to dividends; (2) relief front Swedish special property tax of the shares held In Swedish corporations by United States taxpayers: and (3) allowance by Sweden of the 5 percent credit aiainst tax imposed ulpon dividends at the source in the United States, would be withdrawn. With the line of conflict thus clearly drawn article VII was drafted in Its present form. Sweden Imposed for 1938 and prior years five different taxes upon dividends derived by nonresidents of Swe(Icl front S~vedish soutces. 'I he effective aggie ate rate of such taxes amounted approxiniately to 15 percent of such dividends it the case of individual shareholders, and to approximately 20 percent in the case of corporate shareholders. While smch five taxes have been reduced beginning January 1, 1939, to three taxes,

    our existing rate of taxation to 5 percent as has been done in the case of Canada. It was apparent, from the outset of the negotiations that the Swedish delegation contemplated a strentious effort toward securing the lower rate of tax upon such Income. Owing to the nature of the question and the desire to teach a tentative

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    SWEDEN-DOUBLE TAXATION

    15

    on elhalf of the United States that Sweden waive her right to tax dividends as was done by her in the convention with Germany. This was refused on the grounds that at the time the German convention was ratified Sweden contentplated setting up withholding at the source but such step has been abandoned, with the result that a modification of that convention in this regard is now being sought. In paragraph 2 of article VII it is provided that either contracting state may terminate the provisions of that article at the end of 2 years from the date upon which the convention becomes effective, or at any time thereafter upon giving at least 6 months' notice of such intention. Suchi provision was deemed to be desirable so that the Treasuiry would not be bound with respect to rates of tax upon dividends for a longer period than 2 years. In the event, however, that the provision as now written In the convention is not sanctioned or, if sanctioned, is later terminated in accordance with its provisions, the following provisions of the convention will simultaneously terminate: 1. Article XIII (2) whereby Sweden abandons its special property tax upon shares held by United States residents and citizens generally and corporations; 2. Article XIV (b) (2) under which Sweden agrees to allow against her national income and property tax a credit of 5 percent of the amount of the dividends derl'ved from United States sources as taxed therein; 3. Article XVI (2) (a) under which Sweden agrees to furnish the United States in the ordinary course information relating to dividends derived from Swedish sources by persons whose addresses are within the United States. The enumerated provisions which will be eliminated from the convention In the event that article VII is eliminated or terminated represent concessions by Sweden which from the standpoint of the United States appear highly desirable. From the data secured relating to deductions of taxes at the source it is evident that dividends constitute by far the most important single item of Investment income flowing from the United States to foreign countries. When it Is considered that American investments abroad exceed foreign investments in the United States, it would appear to follow that dividends flowing to the United States would constitute the most important item of such investment income. This is especially true in the case of Sweden where American business interests are represented exclusively by subsidiary Swedish corporations. Therefore, relief from the Swedish special property tax, reduction in the amount of the national income and property tax upon dividends, and information at the source with respect to such dividends constitute a matter of distinct interest to the United States. In view of the brief initial period for which article VII is effective, it is ap parent that such article does not offer any serious deterrent to increasing the tax imposed upon nonresident aliens and foreign corporations should Congress see fit to enact such increase. It is also suggested that the fact that capital gains are taxable in Sweden and that information at the source will be supplied under this convention would effectively discourage any tendency on the part of aliens to establish residence in Sweden in the event the rate of tax are increased during the period this article is in effect. For the reasons stated it is concluded that the undesirable results, if any, which from the standpoint of the United State- flow from article VII are outweighed by thle provisions which are dependent upon It and which are of distinct value to the United States.
    PROTOCOL

    Paragraphs 2, 5, 13, and 15 of the protocol, dealing with definitions of terms found in the convention, as well as paragraph 9, appear to require no specific comment. Paragraph 3 was designed to extend the benefits of the convention to citizens of either contracting State residing in a third State. For example, a United States citizen residing in England is entitled tinder the provisions of the paragraph to exception from Swedish tax upon royalties derived from Swedish sources. fli this connection the United States representatives, in view of the fact that Sweden imposes tax oii the basis of resideice only while the United States imposes tax on the bases of residence and citizenship, sought to apply the principle found in the Netherlands convention. The second paragraph ii merely procedural in anticipation of unusual cases arisiiig.

    (2347)

    16

    SWEDEN--DOUBLE TAXATION

    Paragraph 4 has application solely to Sweden and arises from the provis!ou in Swedish taxationi laws that if the beneficiary of a Swedish estate or trust is liable to United States income tax for income flowing to such person the estate or trust from which it so flows is exenipt. in Sweden with relpect to stch income. Paragraph 7 has application only to the taxation by one of the contracting States of citizens of the other contracting State residing in the former State. Under our existing law residents of the United States are subject to the same taxa. tion as are Unied States citizens. Paragraph 8 owes Its existence to a doubt which apparently exists as to tle right o Sweden to lay a tax Ullxm the income representing governiment salaries and the like. See discussion of article X, supra. Peragraph 15 is entirely lproce(uiral; it springs from the Swedish practice of providing, as far as possible, for every contingency (Including cases in which the tWo countries have convent ins wit!' it tl'ird ,ouftry) snd for leaving thfi ground work for a solution of such contingency through the exchange of views between the two Governments. Paragraph 16 notes the existence of the reciprocity now existing between the two countries with respect to maritime profits. The exchange of notes referred to confirmed, under the Rlevenue Act of 1936, the preexisting reciprocal arrange. ments with respect to such profits. It may be appropriate to conclude this memorandum with a brief reference to subjects discussed with the Netherlands delegation but which (lid not arise in the Swedish discussions. They are as follows: (I) Estate asld death duties upon movable capital on fite basis of fiscal domicile of decedent; (2) joint arbitrage accounts relating to stock exchange transactions; (3) taxation of capital gains under the revenue acts prior to that of 1936; (4) exemption from our local taxation of real property owned or leased by the Netherlands Government or by a private Netherlands corporation performilng semigovernnental functions. Consequently such subjects played no part in the framing of the convention, draft of which is transmitted herewith.

    For the further information of the Senate, there are also hereto and made a part of this report, a communication President to the Senate(dated April 20,1039, a report by the of State to the President under date of April 19, 1939, and the convention, reading respectively as follows:

    appended from the Secretary it copy of

    [Text of materials referred to are omitted at this point, since they have been reprinted as part of Presidential message of transmittal.]

    (234s)

    Senate Floor Debate and Action


    August 1 a1nd 2, 1939 76th Congress, 1st Session 84 ('ongressiouial Record 10703, 10811-10814

    (2349)

    SWEDEN-DOUBLE TAXATION Mr. PITTMAN. Mr. President, there are three other treaties which I am not going to ask to take up at this time. The next treaty is Executive K, a convention between the United States of America and Sweden for the avoidance of double taxation and the establishment of rules of reciprocal administrative assistance in the case of income and other taxation, signed at Washington on March 23, 1939. I may say that the Foreign Relations Committee appointed the Senator from Mississippi (Mr. HARRsoN] as. a subcommittee to deal with that matter, because the Finance Committee has been considering the subject matter of the treaty for a long time. He finally made a favorable report to the Committee on Foreign Relations with regard to it. But I would not ask that it be taken up until lie could make an explanation of it to the Senate. I know generally what the treaty touching it much better than I, and, therefore, I will not ask that it be taken up for ratification, [P. 10811]
    CONVENTION WITH SWEDEN-DOUBLE TAXATION moans, but the Senator from Mississippi could answer any questions

    (P.107081

    Mr. AUSTIN. Mr. President, will the Senator please explain the treaty? Mr. PITTMAN. It is similar to treaties which exist between other countries. For illustration, Great Britain has an agreement with Sweden with respect to British companies which do business both in Great Britain and Sweden and earn incomes both in Great Britain
    and Sweden to the effect that the income earned in one country which is taxable in that country may be deducted from income in the other country. That is all. Mr. AUSTIN. Is that a reciprocal arrangement? Mr. PITTMAN. It is a reciprocal arrangement with regard to time manner in which each country shall treat companies doing business in both countries. Mr. AUSTIN. And it is equal in its treatment on both sides? Mr. PITTMAN. It is equal in its treatment on both sides. Mr. (ONNALLY. Mr. President, will the Senator yield? Mr. PITTMAN. I yield. Mr. CONNALLY. Has time Senator from Nevada considered the possibility that since this treaty deals with matters having to do with

    Mr. BARKLEY. Mr. President, yesterday the Senator from Nevada IMr. PITUM.iN] referred to a treaty on the calendar, and deferred it until the Senator from Mississippi [Mr. HARRISON] could be present. The Senator from Mississippi has advised me that lie has no objection to the ratification of that treaty. If there is no objection to it, we might dispose of it now. Mr. PITTMAN. If there be no objection, I shall ask that the treaty be considered.

    (2851)

    taxation, that it may have to be ratified by the House of Reprtenta. ties in order to be vahid? Mr. PITTMAN. I do not think treaties of such a nature conie with. in the jurisdiction of the mouse of Representatives. The PRESIDING OFFI('CEII. Is there objection to the present consideration of the convention? There being no objection, the Slenate, as in (:onunittee of the Whole, proceeded to consider the convention, Executive K (76th ('ong., 1st ses.), a convention between the United States of America and Swedenl for the avoidance of double taxation and the establishment of rules of reciprocal administrative' assistance in the case of income and other taxation, signed at. Washington on March 23, 1939, which was read the second time, as follows: [Text of convention the Senate and open to amendment. If there be no amendment to he proposed, the convention will be reported to the Senate. The convention was reported to the Senate without amendment. The PRESIDING OFICER. The resolution of ratification will lie read. The legislative clerk read as follows:
    Resohed (two-thirds of the Senators present concurring therein), That the Seuabe adviaoe and consent to the ratification of Executive K, Seventy-sixth Congress, first scion, a convention between the United States of Americi and Sweden for the avoidance of double taxation and the establishment of rules of reciprocal administrative stance in the casw of income and other taxation, signed at Washitngton on March 23, 1959.

    IP. 108141 The PRESIDING OFFICER. The convention is before

    The PRESIDING OFFICER. The question is on agreeing to the resolution of ratification. (Putting the question.) Two-thirds of the Senators present, concurring therein, the resolution of ratification is agreed to, anti the convention is ratified.

    (2mg)

    PresidetiaWProclamation (Iwluding Official Text, of Convention'and Accompatiying

    Protmol)

    [Reprint of TS 9581

    (2m)

    TREATY SERIES No. 958

    DOUBLE TAXATION
    CONVENTION AND PROTOCOL BETWEEN THE UNITED STATES OF AMERICA

    AND SWEDEN
    Signed at Wuhington March 23, 1939. Ratification advised by the Senate of the United State August 2, 1989. Ratified by the President of the United States September 8,1939. Ratified.by Sweden August 21, 1989. Ratifications exchanged at Stockholm November 14, 1939. Proclaimed by the President of the United States December 12, 1939.

    UNITED STATES GOVERNMENT PRINTLVG OFFICE WASHINGTON: 1940

    (2355)

    BY THE PRESIDENT OF THE UNITED STATES OF AMERICA.

    A PROCLAMATION. WHEREAS a convention between the United States of America and Sweden for the avoidance of double taxation and the establishment of rules of reciprocal administrative assistance in the case of income and other taxes, and a protocol forming an integral part of the said convention, were concluded and signed by their respective Plenipoten. diaries at Washington on the twenty-third day of March, one thousand nine hundred and thirty-nine, the original of which convention and protocol being in the English and Swedish languages, are word for word as follows: The President of the United Amerikas Farenta Staters PresiStates of America and His Majesty dent saint Hans Majestit Konunthe King of Sweden, being desirous gen av Sverige have, foranledda of avoiding double taxation and of av onskan att undvika dubbelbeestablishing rules of reciprocal skattning och att faststAlla beadministrative assistance in the stimmelser angkende Omsesidig case of income and other taxes, handrAckningbetrtffande inkomsthave decided to conclude a Con- och andra skatter, beslutit ing& vention aid for that purpose have ett avtal och for detta AndamAl appointed as their respective Plen- utsett sbom sina befullm/nktigade ipotentiaries:ombud: The President of the United Amerikas F6renta Staten Presi. States of America: dent: Sumner Welles, Acting Secre- Sumner Welles, Amerikas tary of State of the United States F6renta Staters tillf6rordnade of America; and Statssekreterare; och His Majesty the King, of Hans MajestAt Konungen ar Sweden: Sverige: W. Bostrom, Envoy Extraordi- W. Bostr6m, Dess Envoyis exnary and Minister Plenipoten- traordinaire och Ministre pleni. tiary at Washington; potentinire i Washingion; who, having communicated to one vilka, efter att hava weddelat another their full powers found in varandra sina fullmakter, soni begood and due fonn, have agreed Irunnits i god och betorig form. upon the following Articles: 5verenskominit om (fjtande bestlinmelser:
    (1)
    T809 0-42--vol. 2-58

    (2367)

    2 Articde I The taxes referred to in this Convention are: (a) In the case of the United States of .Aumerica: (1) The Federal income taxes including surtaxes and execs.profits taxes. (2) The Federal capital stock tax. (b) In the case of Sweden: (1) The National income and property tax, including surtax, Artikel I Do skatter, som avses i detta avt Aro: (a) sivitt angir Amerikas Fdrenta Stater: (1) "The Federal income taxes", tilllggsskatter och skatter A"excess profits" inbe. gripna;l k) " h Federal capital stock tax", () sivitt angAr Sverige: (1) statlig Inkomst. och flirm6genhetsskatt, tillAggsskatt inbegnripen; (2) sirskild skatt I f8rmogenhet till staten (3) kommunal inkomstskatt.

    (2) The National special property tax. (3) The communal income tax. It is mutually agreed that the Det bar 6msesidigt Overenskompresent Convention shall also apply mits att foreliggande avtal ocks& to any other or additional taxes skall tillimpas A alla andra imposed by either contracting skatter och tilldggsskatter, som State, subsequent to the date of av nfgon av de tv&avtalslutande signature of this Convention, upon staterna efter undertecknandet av substantially the same bases as the detta avtal piliggas enligt i huvudsak samma grunder som hir taxes enumerated herein. uppriknade skatter. The benefits of this Convention I detta avtal tillfarsAkrade f6rshall accrue only to citizens and miner skola tillkomma endast residents of the United States of medborgare i Ftrenta Staterna America, to citizens and resi- och i F~renta Staterna boende dents of Sweden and to United personer saint svenska medborStates or Swedish corporations gare och i Sverige boende personer, s& ock amerikanska och svenska and other entities. bolag eller andra juridiska personer. Artikd II Article II An enterprise of one of the con- Ett.foretag hemmaharande i en tracting States is not subject to av de avtalslutande staterna, Ir taxation by the other contracting ej foremAl fMr beskattning i den State in respect of its industrial andra avtalslutande staten far

    (2358)

    and commercial profits except in inkomster av industri och handel, respect of such profits allocab]le utom sivitt angbr vinster, vilka to its permanent establihhment in hisfsra sig till n~got foretaget the latter Stato. The income tiih6rigt fast driftstille i sist. e ntmn(la stat. Inkomst, som sAthus taxed in the latter State sha HI be exempt from taxation in th e lunda beskattats av den senare former State. staten, skall vara undantagen friAn beskattning i den f6rra staten. No account shall be taken, i ri Vid faststtllande av skatt i en determining the tax in one of the av de avtaWutande staterna skall contracting States, of the mer e hAnsyn ej tagas till enbart inkdp purchase of merchandise effecte(I av varor, som dtr verkstiillts av therein by an enterprise of thia ett fSretag i den andra sta ten. other State. The competent authorities of Beh~riga myndigheter i de bAda the two contracting States maj r avtalslutande staterna mi genom lay down rules by agreement foi r Overenskommelse faststilla regthe apportionment of industrialI ler for uppdelning av inkomster and commercial profits. frin industri och handel.

    Article III Artikd III When an enterprise of one ol NAr ett foretag, hemmah6rande the contracting States, by reason i en av de avtalslutande staterna, of its participation in the manage- pi ground av sin delaktighet i led. ment or capital of ai enterprise ningen av ett i den andra staten of the other contracting State, hemmah~rande foretag eller i ett makes or imposes on the latter in sidant faretags kapital, i handelstheir commercial or financial rela- eller andra ekonomiska f6rbindeltions conditions different from ser mellan f6retagen tillAmpar those- which would be made with eller bestlzImer andra villkor An an independent enterprise, any dem, som skulle ha tillimpats i profits which should normally forhAllande till ett oberoende f6rehave appeared in the balance sheet tag, skola alla vinster, som nor. of the latter enterprise but which malt bort ingi i det senare farehave been in this manner diverted tagets balansrlkning. men som to the former enterprise, may, sub- pi detta sltt 8verforts till det ject to applicable measures of ap- form foretaget, kunna inrdiknas peal, be incorporated in the tax- i det senate faretagets beskattable profits of the latter enterprise. ningsbara inkomst, med mnjlighet In such case consequent rectifica- likvtl att begagna den klaroritt tions may be made in the accounts somr mA stft till buds. I dylikt of the former enterprise. fall kan erforderlig justering vidtagas i frip om det forrs fare. tagets inkomstberikning. (2859)

    4
    AMtikd IV Artidc IV Income which an enterprise Inikomst, som ett foretag hem. of one of the contracting States maharande I en av do avtalslut. derives from the operation of and. staterna erhiller genom utO. ships or ;-ircraft registered in that vande av verksamhet medeit State ir taxable only in the State dArstiles registrerade fartyg eller in which registered. Income de- luftfartyg, skall beskattas endut rived by such an enterprise from i den state dAr fartygen registrerats. the operation of ships or aircraft Inkomst, som Ott sidant f6retag not so registered shall be subject Atnjutit genom utavande av verk. to the provisions of Article Ii. samhet medelst fartyg eller lufIt. fartyg, vilka icke s~lunda register. rats, skall behandlas enligt regler. rt i artikel II. Artice V Income of whatever nature de. rived from real property, including gains derived from the sale of such property, but not including interest from mortgages or bonds secured by real property, shall be taxable only in the contracting State in which the real property is situated. Artikel V Inkomst av al&a slag hirrOrande frin fast egendom, inbegripet vinster pA grund av f6rslljning ev sidan egendom, men icke inbegri. pet rAnta & hypotekelAn eoler obligationer med sAkerhet i fast egendom, skall beskattas endast i den av do avtalslutande staterns, dAr den fast& egendomen Ar

    beligen.

    Aikel VI Artice VI Royalties from real property Royalty frin fast egendom eller or in respect of the operation of for utnyttjande av gruvor, sten. mines, quarries, or other natural brott eller andra naturtllgiUngar resources shall be taxable only skill beskattas endast i den av in the contracting State in which do avtallutande staterna, i viken such property, mines, quarries, sldan egendom eller sAdana gru. or other natural resources are vor, stenbrott eller andra naturtillgAngar Aro beligna. situated. Other royalties and amounts Ovriga royalties eoler andra bederived from within one of the lopp, som Utnjutits frAn den ena contracting States by a resident av do avtalslutande statemus om. or by a corporation or other rAde av person boende i den entity of the other contracting andra avtalslutande staten, oler State as consideration for the av bolag olier annan juridisk right to use copyrights, patents, person hemmahdrande i sistaimm-

    (2360)

    5 secret processes and formula s, da state, sbom vederlag for rotten trade-marks and other analogot is att ut~va forfattarrittigheter, pacrights, shall be exempt 'from taw tent, hemliga feabrikationametoder och recept, varumirken och andra ation in the former State. lilmande rittigheter skola, undantags frAn beskattning i den form staten.

    Artie VII

    AMUikeJ VII

    I. Dividends shall be taxable (1)Utdelning ski beskattas e only in the contracting State hi endast i den av de avt.Ilslutande which the shareholder is residen t staterna, dAr den som uppbir or, if the shareholder is a corpora - utdelngen bor eller, om den tion or other entity, in the con - sore uppbir utdelningen Ar ett tracting State in which such cor - bolag eller amian juridisl person, portion or other entity is create( I i den av de avtalslutaade state=n or organized; provided, however dAr bolaget eller den juridkska that each contracting State re- personen bildats eller orgniserats. serves the right to collect and re- En var av de avtalslutande statain (subject to applicable pro.* terna forbehAliler sig likvAl rotten visions of its revenue laws) thei att, i den mAn des skattelag. taxes which, under its revenue stiftning sm fOreskriver, uttaga och laws, are deductible at the source, inehilla skatt sore eligt deeo but not in excess of 10 per centum egen skattelagetiftaing avdrage of the amount of such dividends. vid kWlan, dock ej mer in 10 For the purposes of this Article procent av utnigenw belopp. the National income and property Vid tillkmpning mv dewia artikel tax imposed by Sweden shall be skall statlig inkomst- och fOrm&O deemed to be a tax deducted at geuhetsskatt i Sverige asem utthe source. gore en skatt avdragen vid killan. 2. Notwithstanding the provi- (2) Oavsett vad i artikel XXII sions of Article XXII of this Con. av detta avtal stadgas, kiuan vention, the provisions of this besomnelseea i denna artikel Article may be terminated by av endera av de avtalslutande either of the contracting States staterna uppsigas att upphora at the end of two years from the tvi Ar efter avtalets ikrafttridate upon which this Convention dande eller vid senate tidpunkt, enters into force or at any time fOrutaatt att en uppsAgningstid thereafter, provided at least six av minet sex mnnader iakttasit., months' prior notice of terminal. och skall avtalet upphora att tion is given, such termination to tillunpas den 1 januari efter utbecome effective on the first day gIngen av dylik uppeigingstid. of January following the expira- I sfdant fall skola jimviil fo.

    (2361)

    6
    tion of such six-month period(L.Ijande bestamnelser upphbra alt In the event the provisions of thiis galls, ninligen:

    Article are terminated, the prc visions of(1) Article XIII (2), in so fa (1) fdreskrifterna i artikel as they relate to the specieJ XIII (2) i sivitt dessa avsei Sverige utg~ende sitrskldd skatt prolerty tax imposed by Swe A f6rmogenhet bestiende av den upon shares in a corpora aktier; tion: (2) f6reskriltema i artikel (2) Article XIV (b) (2), relat ing to the allowance of an addi - XIV (b) (2), innefattande med. tional deduction from taxes oi givande av ett ti.lggsavdrag i frL skatten &utdelnin jr; saint dividends; and s (3) foreskrifterna i' artikel (3) Article XVI, in so far w they relate to exchange of infor - XVI, sWvitt desamma avse utmation with respect to divi - byte av upplysningar betrif. fande utdelnuigar. dends, will likewise terminate. Artikel VIII Adicle VIII Interest on bonds, notes, oi Riinta &obligationer, skuldsed. loans shall be taxable only in thi lar eHer andra linef~rbindelser contracting State in which the re.. skall beskattas endast i den av de cipient of such interest is a resi.. avtalalutande staterna dir bor-dent or, in the case of a corpora.. genAren bor, eller, om denne Ar ett tion or other entity, in the State in bolag eller annan juridisk person, which the corporation or other en. den stat dtr bolaget eller den juri. tity is created or organized; pro. disk& personen bildats eller organvided, however, that each con.. iserats. En var av de avtalslutracting State reserves the right to tande statenna. fnrbehiloler sig uikcollect and retain (subject to apWvii rAtten att, i den min dess plicable provisions of its revenue skattelagstiftning sh foreskriver, laws) the taxes which, under its uttaga och innehilla skatt som enrevenue laws, are deductible at the ligt dess skattelagstlftning avdragee vid killan. source.
    -.

    Article IX

    ArtikM

    IX

    Gains derived in one of the con- Vinster k farsiljning eoler 6yte tracting States from the sale or ex- av kapitaltillgungar, som i en av change of capital assets by a resi- de avtalslutande staterna &tnjudent or a corporation or other en- tits av i den' andra staten boende tity of the other contracting State person eller dir hemmaharande shall be exempt from taxation in bolag eller annan juridisk person, the former State, provided such skall undantagas frin beskattning resident or corporation or other i den fOrra staten, forsivitt ej den entity has no permanent estab- fysiska eller juridiska persone hbar lishbment in the former State. fast driftstille dirstAdes. (2362)

    7 Artide X

    Atikd X

    Wages, ,ilaries and similar com-. Lon, arvode eller annan liknande pensation and pensions paid b)r ersittning eller pension, som en av one of the contracting States or b3 der avtalslutande staterna eoler the political subdivisions or terri.. dirunder lydande statlig och kom. tries or possessions thereof toImunal enhet, territorium eoler individuals residing in the other* besittnn utgiver till person State shall be exempt from tam bosatt inom den andra staten, ir undantagen frAn beskattuing I den tdon in the latter State, Snare staten. Private pensions and life annul. Enskild pension eller livrAnta, ties derived from within one of the somr frAn en av do avtalslutande contracting States and paid to In. staterna utgtr till nigon som bor dividuals residing in the other con- I den andre staten, skall undant.tracting State shall be exempt gas frAn beekattning I den f6rra from taxation in the former State. staten.

    Mrlide X1

    Artikel XI

    (a) Compensation for labor or (a) Ersltttning for peronligt personal services, Including the arbete, utOvning av fria yrken practice of the liberal professions, inbegripen, skall beskattas allenast shall be taxable only in the con. i den av de avtalslutande staterna, tracting State in which such ser. d(tr arbetet utf~rts. vices are rendered. (b) The provisions of paragraph (b) FrAn bestlmmelsema I (a) (a) are, however, subject to the skola emellertid gills f1ijande following exceptions: undantag: A resident of Sweden shall be I Sverige boende person skall exempt from United States tax vam fritagen frAn skatt till Ameriupon compensation for labor or kas F~renta Stater vad angAr personal services performed within ersAttning f6r personlig arbete, the United States of America if he sore utforts inom FOrenta Stafalls within either of the following tema, sAvitt nAgon ar faljande classifications: f6ruteAttningar foreligger: I. He is temporarily present (1) om hen tillfilli"tM vistas within the United States of I Amerikas Forenta Stater under America for a period or period. tidrymd ener tidrymder, not exceeding a total of one sammanlagt icke Overstgando hundred eighty days during the 180 dagar under beskattingstaxable year and his compensa- Aet, och ersAttningen upption is received for labor or per. burits pA grund av ansttlbung sonal services performed as an hoe eller avtal med fysisk eller employee of, or under contract juridisk person I Sverige, eller with. a resident or corporation or other entity of Sweden; or
    (263)

    8 2. He is temporarily present (2) om han tillf/illigtvis vistas in the United States of America i Forenta Staterna under for a period or periods not ex- tidrymd eller tidrymder, ceeding a total of ninety days sammanlagt icke Overstigande during the taxable year and the 90 dagar under beskattnngs. compensation received for such Aret, och ersutttningen samman. services does not exceed lagt icko 6vorstiger 3.000 dollars. $3,100.00 in the aggregate. In such cases Sweden reserves thepI anf6rda fall f6rbehbfler sig tight to the taxation of such Sverige ratt till beskattning av income. inkomsten. (e) The provisions of para. (e) I (b) av denna artikel graph (b) of this Article shall angivna regler skola, mutatis mu. apply, mutatis mutandis, to a tandis, gilla &ven f6r i F6renta resident of the United States of Staterna boende person, som Amerkit deriving compensation Atnjuter ersitttning f6r i Sverige for personal services performed utf6rt personligt arbete. within Sweden. (d) The provisions of para. (d) Fdreskrifterna i (b) och graphs (b) and (c) of this Article (c) av denna artikel skola icke Aigs shall have no application to the tillni~pning A skAdespelare, or. professional earnings of such indi- tister, musiker eller professionella viduals as actors, artists, musi- idrottsm/in fdr inkomster som de cians and professional athletes. Atnjutit i utdvning av sitt yrke. provisions of this Arti- (e) Bestiimelserna i denna (e) The cle shall have no application to the artikel skola icke tillampas A income to which Article X relates. inkomst som avses i artikel X. Article XII Artikel XII Students or business appren- Studerande eller affArepraktices from one contracting State tikanter frin en av-de avtalslutresiding in the other contracting ande staterna, vilka uppehfilla State exclusively for purposes of sig i den andra avtalslutande study or for acquiring business staten allenast fdr studieAndam~l experience shall not be taxable by eller fdr att farvirva affirserarenthe latter State inrespect of remit- het, skola icke beskattas i den tances received by them from senare staten fdr belopp som av within the former State for the dem mottagits frAn den andra purposes of their maintenance or statens omrAde till bestridande av studies. uppehfllle eller studier. Artikel XIII Article XIII In the case of taxes on property Om skatt &f6rmogenhet eller or increment of property the fol- f6rm6genhetstillvixt forekomnner, lowing provisions shall be skola fdljnnde bestlmmelser iga applicable: tilflpning: (2364)

    9 (1) Direst formfgenheten. bestir av (a) Immovable property aiid (a) fast egendom med till. accessories appertaming theret o; behOr, oiler (b) foretag fOr utivande av (b) Commercial or induIstrial enterprises, including mai&i. handel eller industri, foretag time shipping and air transport for sjifart och luftfart inbeundertakings; gripna, the tax may be levied only in th,at utgAr skatten allenast i den av de contracting State which is ent 1. avtalslutande staterna, somr entied under the preceding 'Articli es ligt fOregAende artilWar Ar berittito tax the income from suc!h gad till skatt Ainkomst av sWian f(rmOgenhet. property. (2) In the case of all other forntis (2) For alla andra slag av fOrof property, the tax may be levie d mogenhet pifores skatt allenast i only in that contracting State den av do avtalslutande staterna, where the taxpayer has his resii- dir den skattskyldige bor eller, om dence or, in the case of a corporalt. denne Ar ett bolag eller annan jurition or other entity, in the disk person, i den av de avtolslutcontracting State where the cot - ande staterna dir bolaget eller poration or other entity has beeia den juridiska personen, ildats created or organized. eller organiserats. The same principles shall applir Motsvarande regler skola gAlla to the United States capital stoci 1 i avseende A den i FOrenta Statax with respect to corporations oI terna utgAende "capital stock tax" Sweden having capital or otheir sivitt angir svenska bolag med property 'in the United States ol kapital eller egendom i FOrenta f America. Staterna. ArtMile XIV Mike XIV (1) If the property consists of:

    It is agreed that double taxa- Det Ar Overenskommet, att tion shall be avoided in the follow- dubbelbeskattuing skall undvikas ing manner: genom foljande forfaringssttt: (a) Notwithstanding any other (a) Oavsett vad som eljest stadprovision of this Convention, the gas i detta avtal Aga Amerikas United States of America in deter- FOrenta Stateratt vid faststillande rmining the income and excess- av skatt A inkomst och "excessprofits taxes, including alisurtaxes, profits", tilliggsskatter inbegripna, of its citizens or residents or for sina medborgare eller i Forenta corporations, may include in the Staterna boende fysiska personer basis upon which such taxes are eller dir hemmahOrande juridiska imposed all items of income tax- personer, i det belopp ph vilket able under the revenue laws of skatten pifOres innrkna enligt

    (2365)

    10 the United States of America as a m e r i ka ns k skattelagstiftning though this Convention had not skattepliktig inkomst av all&slag, come into effect. The United sore om detta avtal icke gtilt. States of America shall, however, Emellertid skola Forenta Staterna deduct the amount of the taxes frin silunda bertlknad inkomst. specifit d in Article I (b) (1) and skatt avdraga beloppet av de i (3) of this Convention or other artikel I (b) (1) och (3) av detta like tuxes from the income tax avtal angivna eller andra liknande thus computed but not in excess skatter, dock hogst motsvarande of that portion of the income tax sA stor andel av den berrknade liability which the taxpayer's net inkomatakatten, som den skatt. income taxable in Sweden bears skyldiges i Sverige skattepliktiga to his entire net income. inkomst utg6r i forhAllande till hans hela nettoinkomst. (b) (1) Notwithstanding any (b) (1) Oavsett vad som eljest other provision of this Convention, stadgas i detta avtal iger Sverige Sweden, in determining the grad- att vid faststailande av progressiv uated tax on income and property skatt Ainkomst och f6rmigenhet, of its residents or corporations or sAvitt angAr dItr boende fysiska other entities, may include in the personer olier dir hemlnahbrande basis upon which such tax is im- juridiska personer, i det belopp posed all items of income and pA vilket sAdan skatt pifores, property subject to such tax under inr'kna inkomst eller farmagen. the taxation laws of Sweden. bet av alla slag, for vilken skatt. Sweden shall, however, deduct skyldighet fdreligger enligt svensk from the tax so calculated that por- skattelagstiftning. Emellertid tion of such tax liability which the skall Sverige frAn den pi dylikt taxpayer's income and property sittt utrtknade skatten avdraga exempt from taxation in Sweden 4& andel sore skattebetalarens stor under the provisions of this Con- i Sverige icke skattepliktiga in. vention bears to his entire income ]komst eller fIIrmgenhet utgor i and property. 16rh6llande till hans hela inkomst Mier f6rm6genhet. (2) There shall also be allowed (2) Sverige skall dessutom frAn by Sweden from its National sin statliga inkomnst- och formnincome and property tax a deduc- ,enhetsskatt medgiva ett avdrag tion offsetting the tax deducted evarande mot den vid kMllan i at the source in the United States Umerikas Forenta Stater avdragof America, amounting to not less r a skatten, ej understigande 5 than 6 per centum of the dividends F )rocent av sidana utdelningar frn from within the United States of I'6renta Staterna, sore Iro f6reAmerica and subject to such tax rnIM Or dylik beskattning i Svein Sweden. It is agreed that the rige. Det tr 6verenskommet, att United States of America shall I'6renta Staterna skola medgiva allow a similar credit against the dfir boende svenska medborgare (2366)
    ,

    11 United.States income tax liability ett liknande avdrag A deras of citizens of Sweden residing in federal inkornstskatt. the United States of America. Article XV Artikd XV With a view to the more effec- FOr att Astadkomma stdrre eftive imposition of the taxes to fektivitet i den beskattning som which the present Convention re- avses i detta avtal forbinder sig lates, each of the contracting en var av do avtalslutande staStates undertakes, subject to rec- terna att, under fOrutsittning av iprocity, to furnish such informa- amsesidighet, tilihandahAlla sAtion in the matter of taxation, dana upplysningar i beskattningswhich the authorities of the State avseende, som myndigheterna haconcerned have at their disposal va tillgAng till eller enligt sin egen or are in a position to obtain under lagstiftning kunna anskaffa, och their own law, as may be of use to vilka kunna vara av v9trde for the authorities of the other State myndigheterna i den andra staten in the assessment of the taxes in vid pifOrande av nfmnda skatter, question and to lend assistance in se ock att bitrilda med delgivning the service of documents in con- av handlingar i samband dirmed. nection therewith. Such infor- Utbyte av upplysningar och skriftmation and correspondence re- vyaring som avses i denna artikel lating to the subject matter of sker mellan behariga myndigheter this Article shall be exchanged be- i do avtalslutande staterna utan tween the competent authorities sirskild begiran eller pi grund av of the contracting States in the sirskild framstgilning. ordinary course or on demand. Artick XVI

    Artk XVI

    1. In accordance with the pre- (1) PA sttt i nist foreg~ende ceding Article, the competent au- artikel angives skola behariga thorities of the United States of myndigheter i FOrenta Staterna America shall forward to the com- st snart som mOjligt efter utpetent authorities of Sweden as gAngen av varje kalenderAr tillsoon as practicable after the close handahfilla behOriga myndigheter of each calendar year the following i Sverige fOijande upplysningar information relating to such cal- hinforande sig till kalenderAret: endar year: (a) namn och adress far alia (a The names and addresses fysiska och juridiska personer i of addressees within Sweden deriving from sources within the Sverige, vilka frin killor inom United States of America divi- Farenta Statema erhAllit utdends, interest, royalties, pen- delning, r1inta, royalty, pensions, annuities, or other fixed sion, iiviAnta eUer apnan be-

    (2367)

    12
    stlamd eller till beloppet berk. nelig &rligeller periodisk intikt, med angiwande av beloppet.& sidan int/kt i frAga om varle adressat; (b)upplysningar som myndig. (b) .nv particulats which the competent United States au- heter i FOrenta Staterna even. thor ties may obtain from banks, tuellt m&erhJ&la frin banker, savings banks or other similar sparbanker eller andra liknaude institutions concerning assets institutioner r6rande tillgodo. belonging to individuals resident havanden tillhariga personer bo. in Sweden or to Swedish cor- ende i Sverige eller svenska bo. lag eller andra svenska juridiska porations or other entities; personer; (c) upplysmngar sore veder. (c) Any particulars which the competent United States au- b6rande mvndigheter i F6renta thorities may obtain from inven- Staterna eventuellt mi erhAlla tories in the case of property frAn. bouppteckningar i anled. passing on death concerning ning av dadsfall ang&ende debts contracted with individ-[ skulder till personer ,boende i uals resident in Sweden or Sverige elle svenska bolag eller Swedish corporations or other andra svcnska juridiska per. entities. soner; or determinable annual or periodical income, showing the amount of such income with respect to each addressee; 2. The competent authorities (2) Behariga myndigheter i of Sweden shall forward to the com- Sverige skola sA snart som m~jligt petent authorities of the United efter utgAngen av varje kalenStates of America as soon as derAr tillhandahAlla behoriga practicable after the close of each myndigheter i Amerikas FOrenta calendar year the following in- State fOljande upplysningar hAnformation relating to such cal- forande sig till kalenderAret: endar year: f6re(a) (a) The particulars contained ligga iupplysningar, vilka 6verdo uppgifter, sore in the forms delivered to the Swedish authorities in connec- limnats till svenska myndig tion with the payment to individ- heter i samband med utbetal. uals or corporations or other ning till fysiska personer, bolag entities whose addresses are eller andra junidiska personer within the United States of med adress i Fdrenta Staterna America of dividends on shares av utdelningar t aktier och anin a corporation or participa- delsbevis eller av riintor A obliationer eller andra dylika vmrtion certificates in cooperative epapper; societies, and hIterest on bonds or other similar securities(b) upplysningar i beslut om (b) Tlhe particulars contained in permits accorded to indi- tillstAnd for personer boende i viduals resident in the United Ftrenta Staterna eller for din States of America or to United hemnmahlirande bolag eller andStates corporations or other en- ra juridiska permoner att for tities to enable them to acquire affitrslndamAl f6rvArva i Sve. for business purposes immovable rige belAgen fast egendom; property situated in Sweden;

    (2Ms)

    13 (c) Any particulars which the* . (c) upply nhgar sow veder. central Swedish authorities maly barande svenska myndigheter obtain from banks, saving s eventuellt mA erhAlla frb ban. banks or other similar institu - ker, sparbanker eller andra liknande institutioner rorande till. tions concerning assets.belongini to individuals resident in thi6 godolavanden tillhori)a perUnited States of America o0 soner boende i Forenta Staterna r to United States corporation s eller dar hemmahorande bolag or other entities; eller andra juridisks personer; id) Any particulars which thi ,(d) upplysningar so d cencentral Swedish authorities msqF trala myndiglheterna i Sverige obtain from inventories in thi eventuellt mA erbAllafrin bouppcase of property passing or teckinngar i anledning av dads. death, concerning debts con-* fall angAende skulder till pertracted with individuals resi. soner boende i Forenta Staterna dent in the United States ol eller dir hemmah6rande bolag t America, or United States cor.- eller andra juridiska personer; porations or other entities; '(e) A list of the names and (e) on f6rteckning upptaganaddresses of all United Statesi do namn och adresser A alla citizens resident in the United amerikanska medborgare med States of Amerita who have hemvist i F~renta Staterna made declarations to the Cen. vilka till den central taxetral Committee in Stockholm rinninmden i Stockholm, in charge of the taxation of som har att verkstilla taxering taxpayers not resident in Swe- av skattskyldiga utom riket den for purposes of the Swedish hava avgivit declaration till tax on income and property; ledning for svensk taxering till inkomst- och formngenhetsskatt; (f) Particulars concerning an(f) upplysningar rarande livnuities and pensions, pubbo or rAntor, Avensom pensioner pA private, paid to individuals res*- ground av allmin elier enskild dent in the United States of tjitnst till personer med hemvist i Forenta Staterna. America. Article XVII Artikel XVII

    Each contracting State under. Envar av do avtalslutande statakes, in the case of citizens or terna farbinder sig att,skvitt angir corporations or other entities of medborgare eller bolag eller andra the other contracting State, to juridiska personer tillhorande den lend assistance and support in the andra avtalshitande staten, collection of the taxes to which the lhina bitride och handrickning present Convention relates, to- f6r indrivning av sidana skatter gether with interest, costs, and som f6religgande artal avser,.tilli. additions to the taxes and fines ka med rAnta, koetnader, saint not being of a penal character. tillAggsbelopp till skatterna och The contracting State making such viten utan straffrittslig karaktr. collection shall be responsible to Den av do avtalslutande sta-

    (M389)
    i

    14
    the other contracting State for tlic terna, sore verkstailler indriv. ningen, skall gentemot den andra swim thus collected. avtalslutande staten vara an. svarig for de pi dylikt sttt indriv. na beloppen. In tl o case of applications ft)r DAr friga hr om framstAllning enforcement of taxes, revenuLOrorande indrivning av skatter, claims of each of the contraetin g skola sidana skatteausprhk frain States which have been finally d( o-en av do avtalslutande staterna ir termined shall be accepted fe som vunnit laga kraft orkiinnas ienforcement by the other coin sAsoni exigibla av den andra avtal. tracting State and collected in iha,t slutande staten och indrivas dlr State in accordance with the lawa i enlighet med dess lagstiftning applicable to the enforcement an i betriffande indrivning av egna collection of its own taxes. Th e skatter. Den stat, till vilken State to which alication is madiB framsthillningen gjorts, skall icke B shail not be required to enforce vara pliktig att tillgripa verk. executory measures for whici i stidlighetsitghirder, som ej Aro i there is no provision in the layr 6verensstimnielse med lagstiftof the State making the appli.. ningen i den stat som gjort framsttillningen. ration. Framstitilningarna skola Atf6ljas The applications shall be accom panied by such documents as ar( av sAdana handlingar som enligt required by the laws of the Statki lagstiftningen i den state som g6r making the application to estab.. framstifllningen erfordras fisr att lish that the taxes have been Adagaldlgga att skatteansprAken vunnit laga kraft. finally determined. If the revenue claim has not Om skatteanspriket icke vunnit been finally determined the State laga kraft, mA den state, till vilken to which application is made may, framsttllning gjorts, pA anniodan at the request of the other con. av den andra staten vidtaga sA. tracting State, take such measures dana &tgltrder for aneprikets st.of conservancy as are authorized kersthtlande somr 6verensstimnia by the revenue laws of the former med den f6rstnninda statens skat. telagstiftning. State.

    Article XVIII

    Artike? XVII!

    The competent authority of Beh6rig myndighet i on var av each of the contracting States de avtaWutande staterna At berntshall be entitled to obtain, through tigad att Adiplomatisk vig frAn diplomatic channels, from thecom- motavarande myndighet i den andpetent authority of the other con- ra staten erhilla upplysningar i tracting State, particulars in con- sitrakilda fall i och f6r taxering till crete cases relative to the applies- i detta avtal angivna skatter av
    (2370)

    15
    ns tion to citizens or to corporation or other entities of the former State, of the taxes to which tihe present Convention relates. Wiith respect to particulars in othiPr cases, the competent authority iAf il each of the contracting States wi give consideration to requests froin the competent authority of ti ie other contracting State. niedborgare, bolng eller andra ju-

    ridiska personer, heammah6rande i den f6rra staten. Betriffande upplysningar i andra fall skall behorig myndighet i en var av de avtalslutandestaterna beaktaframstill. ningar fr~n motsvarande myndig. het i den andra staten.

    Article XIX

    Artikd XI"

    F6reskrifterna i artikel XVII In no case shall the provision of Article XVII, relating to mutued r6rande 6msesidig handrAckning f assistance in the collection o for skatteindrivning eller i artikel g taxes, or of Article XVIII,relatin XVlllr6randemeddelandeav uppto particulars in concrete cases i, lysningar i setrskilda fall skola be construed so as to impose upoin icke anses medf6ra skyldighet for either of the contracting States nAgon av de avtalslutande staterna the obligation (1) to carry out administrativee (1) att vidtaga f6rvaltningsitmeasures at variance with the reg - gltrder, som avvika fran endera av ulations and practice of either con,- de avtalslutande staternas lagtracting State, or stiftning eller praxis, eller (2) to supply particulars whickk (2)att limna upplysningar, som are not procurable tinder its owEiicke kunno erhAllas enligt dess legislation or that of the State egen lagatiftning eller lagstiftmaking application. ningen iden state,somgarframstillningen. The State to which application Den state, till vilken framstillis made for information or assist. ning om erhfllande avupplysningance shall comply as soon as ar eller handrkc)ning gjorts, skall possible with the request addressed sA snart sig g6ra lAter efterkomma t) it. Nevertheless, such State den gjorda framsttllningen. Dock may refuse to comply with the mi ifrigavarande state vAgra att request for reasons of public policy efterkomma frainstAllningen pi or if compliance would involve grund av allmAnna hAnsyn eller violation of a business,, industrial om bifall till framstlningen skulle or trade secret or practice. In inneb"ra krinkning av en indusuch case it shall inform, as soon striell hemlighet elier affirshemas possible, the State making the lighet eller affirskutym. I dylikt application. fall skall nimnda stat sA snart som mdjligt Underritta den stat, som gjort framstiliningen;

    (2371)

    18 Adide XX
    Where a taxpayer shows pm Af Artikd XX PAvisar skattskyldig, att it. that the action of the revenue ati- gitrder som vidtagits av de avtal. slutande staternas myndigheter thoritie, 4f the contracting Stat(%s has resisted in double taxation in for honom medf~rt dubbelbeskatt. his ca.er in respect of any of tl ie ning betraffande skatter sor asem taxes to) which the present Cori- i detta avtal, skall ban var berAtv vention relates, he shall be entitled tigad att hiremot gora erinran if to lodge a claim with the State c hos den state vars medborgare hau which lie is a citizen or, if he is noit ir, eller, om han icke ir medbor. a citizen of either of the contract . gare i.nAgondera av de avtalsluting States, with the State of whicl[ ande staterna, hos den stat, dir lie is a resident, or, if the taxpayer han Ar boende, eller, i frAga om is a corporation or other entity , bolag eller annan juridisk person, with the State in which it is ere- den stat dir denna bildats eller orated or organized. Should thie ganiserats. Anses erinran grun. claim be upheld, the compete t dad, kan behOrig myndighet i slat. authority of such State may comic nitmnda state trAffa 6verenskom. e to an agreement with the compel* melse med beharig myndighet i tent authority of the other Stat( den andra staten far att ph skftligt with a view to equitable avoidanc( sttt undvika dubbelbeskattningen of the double taxation in question . I friga. Aricle XXI Artikel XXI

    The competent authorities ot Behoriga myndigheter I de bida the two contracting States may avtalslutande staterna Aga medprescribe regulations necessary to dela foreskrifter erforderliga far interpret and carry out the pro- tolkning och tillAmpning av forevisions of this Convention. With varande avtal. Vad angir detta respect to the provisions of this avtals ,fdrekrifter om utbyte av Convention relating to exchange upplysningar, delgivning av handof information, service of docu- lingar och Omsesidig handrickning ments and mutual assistance in the for skatteindrinizig mA nimnda collection of taxes, such authori- myndigheter overenskomma om ties may, by common agreement, regler avseende fdrfaringssatt, forprescribe rules concerning matters men for framstillaingar och avar & of procedure, forms of application desamma, omrikning av valuta, and replies thereto, conversion of disposition av indrivna imedel, currency, disposition of amounts minsta belopp wmm framstlning collected, minimum amounts sub- om indrivning mA avse samt .ndre ject to collection and related mat. likartade spormmul. ters. (2372)

    17 Article XXII Artikd XXII

    The present Convention shl ill Detts avtal skall ratificeras be ratified, in the case of tIte sivitt angAr Amerikas Forenta is med United Staws of America, by td Stater, av Presidentenr sena*e the advice tens rAd ocb godkinnande och for President, by and with and consent of the Senate, and in Sveriges del av Hans Maj:t Kothe case of Sweden, by His MA nungen med riksdagens samtycke. . jesty the King, with the consentt Ratifikationshandlingarna skola of the Riksdag. The ratification a utvtxlas i Stockholm. shall be exchanged at StockholmL. This Convention shall becom e Avtalet skaff trida i kraft den 1 januari nurmast efter utbyte av effective on the first day of Jan 10 uary following the exchange of ratifikationsinstrumenten och skail the instruments of ratiflcatiom tillimpas Ainkomnst som Atnjutits i and shall apply to income realize I och formdgenhet som innehafts and property held on or after thait A ileer oftot nimnda dag. Avtalet date. The Convention shall re- skail f6rbliva i kraft under en tidsmain in force for a period of fivei period av fem Ar, och dArefter years and indefinitely thereafter * utan tidsbegrilnsning, med rAtt but may be terminated by either dock for en var av de avtalslutande contracting State at the end of thei staterna att uppspga detsamnma five-year period or at any time till utgAngen av femirsperioden thereafter, provided at least six eiler till varje tidpunkt direfter molfths' prior notice of termina. under f6rutsettning att mint sex tion has been given, the termina- miAnaders foregiende upps~ging tion to become effective on the iakttagits. Urkrafttrfdandet skall first day of January following the ip rum den I januari efterutgAngexpiration of the six-month period. en av dylik sexnainadersperiod. In witness whereof the respec- Till bekrAftelse htrA hava do tive Plenipotentiaries have signed bida statemas befullmiktigade this Convention and have affixed ombud undertecknat detta artal their seals hereto. och forsett detsamma med nina Done in duplicate, in the Eng. Som skedde i tv& exempt. -'pAt lish and Swedish languages, both engelska och svenska spriken, authentic, at Washington, this vilka bAdi Agp !Ra vitsord, i twenty-third day' of March, nine- Washington den tjugsotredje man teen hundred and thirty-nine. nittonhundra tretv 'nio. For the President of the United State. of Anerieca:

    sigiw.

    SuVZR Wiux.

    [nAI

    For His Majesty the King of Swede: W. BOmTxO [$Aw (2373) (27

    ?NS O---,L a

    18 PRoTOCoL At ihe mument of Jigning the Convention for the avoidance of double taxation, and the establishment of rules of reciprocal administreti, e assistance in the case of income and other taxes, this day concluded between the United States of America and Sweden, the undersigned Plenipotentiuias have agreed that the following provisions shall form an integral part of the Convention: 1. As used in this Convention: (a) The term "permanent esfactories, workshops, warehouses, offices, agencies installations, and other fixed places of business of an enterprise but does not include the casual or temporary use of merely store facilities. A permanent estalishment of a Subsidiary corporation shall not be deemed to be a permanent establishmeut of the parent corporation. When an enterprise of one of the contracting States carries on buslnes in the other State through en employee or agent, star lished there, who has general authority to contract or hi be deemed to have a permanent establishment in the latter State. But the fact that an enterprise of one of the contracting States has business dealings in the other State through a bone fide commiswion agent, broker or custodian shall not be held to mean that such enterpise has a permanent establishmat in the letter State. (b) The term "enterprise" includes every form of undertablishment" includes branches, mines and oil wells, plantations

    ProTuoKLL Vid underteckoandet deoisa dag av avtal mellan Am"erik FOrenta Stater och Sverige far undvikande av dubbelbeskattning och fast. stllande av bestimmelser angi. ended 6m :XWdig headrickning be. triffnde inkomst- och andre skat, ter have undertecknade befull. mAktigade ombud 6vernskommit att f6ljande bestimmelser skola utgora en integrerande del av av. talent: 1. I detta avtas mening skall: (a) begreppet "fast drift. stille" innefatta filialer, gruvor och oljekillor. plantager, feb. riker, vorkstAder, cmagasn, konw tor, agenturer, anligpin och andre ett f6retag tilh.reande fasta afflirstillen, men icke in. begrips en alhenast tillftllig ellr kortfristig anvindning av upp. Is plates. fastEtt dotterfaret driftat~llls ;kQ tilhrigt icke Anses utoa ett fast drift. stll.e for moerOretaget. Om ett foretag hemmahOrande i en av do avtalslutande staterne bedriver dffrr i den andre staten genom en drstiAde stabo atti havr olier lead agent, som her En enerell fullmakt art avaluta kontrakt fOr skall det eases have ott fast driftetille tI estnaunda state. Men den omstlndigheten att eta fOretag hemmahorande I en Av de avtalslutande statems uppritthiller affitefOrbindelser tat nom far, Oi$ ndreo.tn Ie

    employer or principal, it shall

    sin arbetaivare olhlr hvudman,

    medling av fristlene kommissionir, mkie eller eunv.'g staten;

    fOrvaltarn akail icke nses innobIra, att ett dylikt fOretag htr feet driftetille i den andre (b) uttrycket "fOretag" in. begrnpa varye slag cv fore-

    (2874)

    uking whether carried on b, tapterksamuht, van ag den Ty aninvidual, partnership, cot b- ut6va av enskild person, kom. b,, bt, lerli a ponaion, or any odter entityr. P,. (e) The term "enterprm. a (e) uttrycket "faretag hem. one of the contacting Stat"e' mahnrande a en av do avtal. moans, as the cae my be slutande statema" betyda allt "United efto, "Swedish States enterprise" ar tag i-omtsndigheterna "foreenterprise". F6cnta Statewra" eer ".venskt WOWS (d) The term "United Stato I (d) uttrycket 'ioretag i F6rentwprse" means as enterpra4 anta Statorna" betyds ett fe. carried on in the United State tg, uom i Forenta $iaterna of America by a resident oW bedrives av dir boende person the United States of America eliot av bolag eller annan jurior by a United States corpora. disk person i Forenta Staterna; tion or other entity; the term t utycket "bolas elier anan ternas Netyda kompanjonakap" bolag eller annan jitssk percreated or organized in the son, som biidats oiler orgimio United States of America or serats i Amerikas F6renta under the law of the United Stater oiler enligt lagstiftniDgen Statesof America or of any i F~rentio Staterna edler ni on State or Teritory of the United des. deIstat eler nigot dm Stats of Amrica.. teritorium; (e) The te* "Swedish enter(e) uttrycket "svenskt f~re. prie" is definid in the same tag" definieras p& samma sott, manner, mutate mutandis, as mutatis mutandis, somuvIf~roother entity" moan a partner ship, corporation or other entity

    "United State. co

    a 0s

    ,person i k6renta StsSjtuik,

    the term "United statfs enterprim".

    ta i Jfrenta Staterna".

    term "corporation" 2. Uttrycket ,'bolag" inbegriper includes associations, jointt- frniagarr- aktiebolag och f6rstock companies, and insurance sikringpbolag. compaes. 3. A citizen of one of the 3. En medborgare i en ar de contracting States not riding avtasiutande staterna, iom. ej in either shall be deemed, for the bor i nigon a, dessa stater, purpose of this Convention, to be skall vid tillitmping Av detta a resident of the contracting avtal ansm bo i den stat, var 8tate of which he * acitizen. medborgrehan Ar. When doubt arises with respect I hindelse av tvivelsml r6rande to residence or with respect to the fritan om var en person skill taxable status of corporations or mses vara boende "elier om var other entities, the competent bolag eller andra juridiska *perauthorities of the two contracting moner i beskattdinpavseende skoStates may mettle the question Is anim hOa hemma, mi vederby mutual Agreement. barande myndigheter i de bid& avtalslutande staterna trais a&vgO2. ThE

    (2875)

    rawie genom skommelse.


    4. The provisions of Swedish

    6veren. *m.,iig

    the undivided estates of deceased oekifta d6dabon skola ej Aga till. persons shall not apply whore limpning dar d6dobodelaprna the bentificiaries are directly liable iro direkit skattakyldiga i to taxation in the United States Amerikas Foruita Stater. of America. 5. The term "life annuities" M S. Uttrycket "livrinta" i artikel -fored to in Article X of this Con- X ave viia fatatslld summn, vention means a stated sum pay- mm enlist given f6rbindelse utbe. able periodically at stated times Was priodiakt pi bestmda tidduring life, or during a specified punkter under livatid eoler visat number of years, under an obliga- angivet antal Ar Asom vederlag tion to make the payments in con- f6r giorda inbetalningar. sideration of a gross sum paid for such obligation. 6. The Swedish soc-taed "fees 6. Do avenaka bevillningsargif. tax" (bevillningsavgift for vires of- terns for viusa offentlip f6rstall. fentliga fOrestlllningar) based on ningar, utgiende &bruttoinkonist groes income in so far as it affects fOr artistes, musiker och profte. such individuals as actors, artists, sionella idrottsmin, mr.f, skols vid musicians and professional ath- tillimpuing av artikel XIV (a) letes shall be deemed to be an in- mass varn skatter Ainkomst. come tax for the purposes of Article XIV (a). The credit for taxes provided in Avdragpt f6r skatter onligt artiArticle XIV shall have no applica-. kl XIV skal icke Ipg tillimpaing tion to taxes deducted at the J sidan skatt &utdelning eller rAnk source from dividends and interest ttA, mom avdragits vid kWlian, i viexcept to the extent provided in c mAn In mom stimdgui (b) (2) lare paragraph (b) (2) of that Article. a samma artikel. tv In the application of the pro- Vid tillampning av detta avtal vimons of this Convention the ben-. kola do fOrminer, som inbegripa efits of section 131 of the United i Section 131 av FOment Staternh. States Revenue Act of 1938, relat. rikomstskattelag av 1938 betrlfing to credits for foreign taxes, f ad. avdrsg f6r utlAndaka skatshall be accorded, but the credit ter, medgivas, men avdraget jAmprovided for in Article XIV (a) 11 artikol XIV (a) skall icke utkt shall not extend to United States a' trckas att galla skatt i F6renta excess-profits taxes nor to the sur. Staterna a "excess-profita" eller tax imposed on personal holding tiMlIggskatt som plfrts "personal companies. hholding companies .

    law concerning the taxation of stiftning r6rande beskattning av

    4. F6reskrifternsa i vensk lag.

    (2376)

    21
    7. Citiens of tah of the con. 7. Modborga i a av d4 vtaltractUIR Statw residing within the slutwnd. staterna, vilka Artboother contract StatS ahall not Patta i den auwirs avtolalututde be subjected in the latter State staten, skola ej i den fwnare to other or higtwr taxes than are staten van fo6reml fwr anl, etler implied upon the citizens of such higrve skatwr A diem, mm plfra latter State. dem egia erdborgare. 8. The provisions of this Con- x. Vad i detta antal stadgas vention shall not be construed to skall icie wo pA uAgot sAtt deny or affect in any manner the inkrkta pi tiler berra diplo. right of diplomatic and insular matiska orh konsulara befatttnubwa. officers to other or additional ex- havares rutt till andra eller linp emptios now enjoyed or which gkmde undantag, som nu Atnjutax may hereafter be gpanted to such eller framdeles mA beviljas, eiler officers, nor to deny to either of betaga nigondera av de avtalthe cmtracting States the right to slutande staterna rotten att besubject to taxation its own diplo- skatta sim egna diplomatiska och matie and consular officers. konsuliras befattxivngshavare. 9. The provisions of the present 9. Vad i detta artal 6vertnConvention shall not be construed skommit. skall icke anves pi nup)t to restrict in any manner any ex- sitt inkrikta pA imdantag, avdrag eruption, deduction, credit or other lier andra lIttnader som med. allowance accorded by the laws of Ovita enligt laptiftingen i en av one of the contractingtates in the Ie avtalslutamde staterna rid fast. determination of the tax imposed stillande av dew skatter. 10. Vid tillimpning av avtaleti meatmmelacr r6rande utbyte av provisions of this Convention m. I lating to exchange of information, ' applysniugar, delgivwng av handservice of documents, and mutual Iingar och 8ansesidig handrickling assistance, in collection of taxes, etriffande skatteindrivnbig skola I fees and costs incurred in the ordi. I wgifter och kostnader, son f6re. nary course shall be borne by the I omma vid sedvanligt ftrfarande, State to which applcation is made Amat av den stat, till vilken frame but extraordinary costs incident to stidlning akett, men extmordinira special forms of procedure shall be k;ostnader pi ground ar anriviborne by the applying State. dLande av speciella forfaringsuatt L=s av den stat, son gjort from-

    by such State. 10. In the administration of the

    tlilnhgen.
    11. Documents and other communications or information congained there, , transmitted under the provisions of this Convention by one of the contracting States to the other contracting State 1I. ltandlingar och andra n eddelanden eller dniri forekommande upplysningar, vilka ei nligt foreskrifterna i detta a%*tul 6'verlimnats frAn en ar de avtalelutande staterna till don andra

    (2177)

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    N

    WI'll -SWITZERI.AND) RE.GARDING TIlE ('tN VEX'rtN'O AVOID)AN('E OF IMAtI'I.E TAXATION ON INCOME

    Al E 8 S A GE

    TiHE PRESIDENT OF THi, UNITED STATES


    TftANIt ilTI tiC

    TIll (CONVENTION 1IETWE.. TIlE I'ITI.:D ,TATEM OF AMERICA "wiTZril..INi).l(;xlI) AT WlASlHINGTON ON MAY 24, 1951, ANi) FORI TIHE AVOII)ANC'E OF i[('III.E TAXATION WITHIN RESPECT TO TAXES ON INCOME

    Jrssi 14. 1951.-The convention was read the first time and the injunction of wecrecy was removed therefromn, aund together with all accompanying papers was referred to the Committee on Furvign Relations and ordered to be printed for the use of the Senate

    Ifl('onI.

    Slates: To IA# senatee of the United Withi a view to receiving the advice and conmnt of the &mate to n, mtificatll I trantonit herewith the eonvelition beLweeii the United States of America and Switzerland, signed at Washington on May 24, 19.,51, for the avoidance of diouible taxation with respect to taxes on I almo transmit for the information of thie Senthe thi report by the

    THE WHITE HotsE,1951. JUNE 14,

    has IIIe approval of tihe Deplartenut. of State and the Treasury Dipartnment. Particular attention is invited to the concludingg two paragraphs of in the nrport bv the .1,rentary of State, indieating uhat view of the provisions ot article XX (1) of the convention it is hoped that the convention can be brought into force prior to Otobler 1, 1951. This, (I2387)

    Scrirary' of State' with nrspect to the cOnvention. The convention

    CONVENTION WITH SWITZERLAND

    of course, would entail the making of arrangements between the Governments of the two countries for the exchange of instruments of ratification.
    HARRY S. TRUMA.,.

    (Enclosures: (1) Report by the Secretary of State; (2) convention of ,May 24, 1951, with Switzerland with respect to taxes on income.)
    DEPARTMENT OF STATE,

    The PRE-SIDENTr,

    TWa8hington, June 18, 1951.

    Te WhAite HIowue: The undersigned, the Secretary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the President approve thereof, a convention between the United States of America and Switzerland for the avoidance of double taxation with respect to taxes on income, signed at Washington on.May 24,1951. The convention is designed to eliminate, so far as possible, double taxation with respect to income, either by exemption in one of the countries or by tle application of the credit principle, or both. It would also establish, within appropriate limitations, a system of reciprocal administrative assistance. The convention is, therefore, intended to accomplish essentially the same objectives as income-tax conventions of the United States now in force with Canada, Denmark, France, the Netherlands, Sweden, and the United Kingdom, and also income-tax conventions which have been concluded but are not yet in force with Belgium, Greece, Ireland, New Zealand, Norway, and the Union of South Africa. The convention is made applicable, in respect of the United States, to the Federal income taxes, including surtaxes*nd excess profits taxes. It does not apply to taxes imposed by the several States of the United States, with the sole exception of paragraph (3) of article XVIII, wherein the familiar national-treatment principle is expressed. The convention is made applicable, in respect of Switzerland, to the federal, cantonal, and communal taxes on income, "income" being described for this purpose as including "total income, earned income, income from property, industrial and commercial profits, etc." (art. I). The Swiss tax system involves a considerable measure of integration as applied to the imposition of taxes by the Swiss Confederation, by the canton governments, and by the municipal governments. In general, direct taxes are imposed by the cantons and municipalities, indirect taxes being levied for the most part by the Confederation. To meet extraordinary expenses, however, the Confederation has for some time imposed direct taxes, sharing the proceeds thereof with the cantons. The Swiss taxes on income are based primarily on the domicile of the taxpayer and the source of the income. Business income from sources outside Switzerland is excluded from the tax base when such income is derived from another country in which the taxpayer maintains a branch or permanent establishment. Real property situated outside Switzerland is also excluded from the tax base. For the purposes of the present report, it is believed unnecessary to give details regarding rates of tax, methods of computation, and related matters.

    (2388)

    CONVENTION WITH SWITZERLAND

    The convention with Switzerland contains provisions similar to, if not identical with, provisions in force between the United States and certain other countries, named hereinbefore, with respect to such items as (a) business income, including earnings from the operation of ships and aircraft: (b) permanent establishment: (c) intercorporate relationship; (d) dividends; (e) interest; (f) royalties; (g) income from real property; (A)governmental wages, salaries, and pensions; (i' private pensions and life annuities; (j) compensation for personal services; (k) compensation of visiting professors or teachers; (1)payments for the maintenance, education, or training of students or apprentices, and (m) the exchange of information. The convention has been negotiated as a part of the broad program inaugurated many years ago by this Government for the negotiation of conventions (treaties) for the elimination of international double taxation. The double taxation of incomes is an undesirable impediment to international trade and, subject to reasonable limitations, the removal of such double taxation is desirable. It is believed that the convention with Switzerland, if brought into force, will result in many benefits for United States citizens, residents, and corporations. The convention contains a preamble and 20 articles. Article I specifies the taxes to which the convention applies, as referred to above. Considering that the convention is not made applicable to income taxes levied by the several States of the United States (except for th0 national-treatment provision), it is important to note that the Swiss have, although with soine.reluctance, included the Swiss canton and communal taxes. Article II contains definitions of terms found in the convention. Article III provides that, on a reciprocal basis, the business income or "industrial and commercial profits" of a Swiss enterprise will be subjected to United States tax only if such enterprise has a permanent establishment in the United States. This does not apply to such items of income as investment income or compensation for personal services, which are dealt with elsewhere in the convention. Article IV expresses the principle (see sec. 45 of the Internal Revenue Code) of adjustment of accounts as between interlocking businesses and provides for the allocation, in certain cases, of business income as between tile two countries. Article V, relating to the reciprocal exemption from.taxation of earnings from the operation of ships or aircraft registered in the respective countries, is consistent with the principle embodied in sections 212 (b) and 231 (d) of the Internal Revenue Code, as amended, and applies only to business income from such operations, with no applica. tion to corporate dividends. Switzerland, of course, does not have a seacoast, but for nearly 20 years it has been recognized that Switzerland satisfies the equivalent-exemption requirements of the United States law. Article V will be particularly important in its application to income derived from the operation of aircraft, with consequent advantages to American enterprises operating aircraft within or through Switzerland. Articles VI, VII, and VIII deal with movable capital items such as dividends, interest, and certain types of royalties. Article V1, relatig to dividends corresponds in general to article VI of the convention with the United Kingdom, article VI of that with Denmark, article VII of that with Sweden, article VII of that with the Netherlands, and (2,389)
    78095 0-42-vol. 2-47

    CONVENTION WITH SWITZERLAND

    article XI of that with Canada. It corresponds also to provisions in the pending conventions with Ireland and New Zealand, article VI in each case. Under article VI of the convention with Switzerland there would be a reciprocal reduction in each country from 30 percent to 15 percent in the tax rate on dividends derived from sources within such country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the dividends are derived. There would be a reduction to 5 percent in the tax rates with respect to such dividends if the shareholder is a corporation which controls, directly or indirectly, at least 95 percent of the voting power in the corporation paying the dividends and if not more than 25 percent of the gross income of such paying corporal. tion is derived from interest and dividends other than interest and dividends received from its own.subsidiary corporations. Such reduction to 5 percent would not apply, however, if the relationship of the two corporations (the shareholder and the payer of the dividends) has been arranged primarily with the intention of securing such reduced rate. Moreover, the reduction to 5 percent would not apply, for exnmple, to a dividend paid by a United States domestic corporation to a Swiss partnership or other noncorporate Swiss entity. Article VI involves two special features which should be explained: (a) Neither of the reduced rates would apply to Swiss tax on dividends derived from Swiss sources by a Swiss citizen who is resident in the United Stateq and who is not also a citizen of the United States. Switzerland wishes to place no limitation on the imposition of its dividend taxes with respect to its own citizens, except as to those having dual nationality. (b)-The Swiss tax of 30 percent would be withheld at the source and a refund to reduce it in accordance with the provisions of article VI would be made upon a claim duly filed therefor by the recipient in the United States. Difficulty in identifying the owner of shares arises from the fact that the standard form of stock certificate in Switzerland is the bearer share. Consequently, it would be necessary for the owner of Swiss corporate stock who is entitled to tax reduction under article VI to file a claim for refund of the amount in excess of 15 or 5 percent, as the case may be. Article VII provides that, with respect to interest on bonds, securities, notes, debentures, or any other form of indebtedness, includingg mortgages or bonds secured by real property, the rate of tax shall be reduced to 5percent on interest derived from sources within one country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the in. terest isderived. In other tax conventions a complete exemption from tax on interest has been accorded, upon certain conditions. In the case of the convention with Switzerland a tax of 5 percent is retained because of the fact that in Switzerland there is imposed on interest in addition to the income tax a 5-percent coupon or stamp tax. The special features explained above with respect to the reduction of tax on dividends apply also in regard to the reduction of tax on interest. Article VII would allow the reduction of tax in the case of interest paid by a subsidiary corporation of one country to its parent corporation in the other country. In this respect the provisions differ from corresponding provisions in the conventions in force with the United King-

    (2390)

    CONVENTION WITH SWITZERLAND

    tax liability to be determined upon a net basis. In the application of United States tax in the case of a nonresident alien who is a resident of Switzerland deriving from sources within the United States income of the kind to which article IX refers, such alien may elect for any taxable year to be subject to tax upon a net basis instead of a tax upon the gross amount of such income and, if he so elects, his entire income from United States sources will be thus taxed. Article X contains what has come to be called the commercial traveler provisions. Exemption from taxation is provided with respect to compensation for labor or personal services performed by any person a resident of one of the countries, who is temporarily present within the other country during the taxable year for a period or periods not exceeding 183 days, provided he meets either of two conditions; namely, either he is employed by a resident or corporation or other entity of the country of which he is a resident or, regardless of the status of the employer, his compensation allocable to his services in the country which he is visiting does not exceed $10,000 during the taxable year. The application of these provisions extends to compensation derived from the practice of a liberal profession and from the rormance of services as a director. Pursuant to paragraph (3), the exemptions would not apply as to governmental wages, salaries, or pensions, which are covered by article XI (1). Pursuant to paragraph (4), the exemptions would not apply to compensation or other remuneration of public entertainers such as stage, motion(2891)

    conventions, both existing and pending, article IX would permit the

    dom and the Netherlands and the conventions with Ireland and Greece now under consideration in the Senate. Article VIII provides for exemption from tax in either country of various royalties derived from sources within that country by. a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the royalties are derived. The provisions extend to royalties and other amounts received as consideration for the right to use copyrights, artist;- and scientific works, patents, designs, plans, trade-marks, secret processes and formulae, and other like property and rights (including rentals and like payments in respect of motion-picture films or for the use ofi ndustnal, commercial, or scientific equipment). Switzerland does not at this time tax such royalties leaving Switzerland because they are consider, to be business income in the foreign country. It is understood, however, that consideration is being given in Switzerland to legislation which would impose tax on outgoing royalties of the kinds above-mentioned. Article IX provides that income from real property (including gains from the sale or exchange of such property but not including interest from mortgages or bonds secured by such property) and royalties from the operation of mines, quarries, or other naturid resources shall be taxable only in the country where such property or such mines, quarries, or other natural resources are situated. Article IX, like many of the other provisions of the convention, must be read in conjunction with article XV, wherein the right Of the United States to tax its citizens, residents, and corporations is reserved and wherein it is provided that Switzerland, while excluding certain types of income from its tax base, may take such income into account in determining the rate of Swiss tax. Like corresponding provisions in other tax

    C'N VE'NTION WITII SWITZIERLAND

    |iclur te,or radio ariists, miusitilii!, tillilhie's. l',il,

    rldeier

    %41leht, Of eI' l. 11441i11114,' I h,' le'nl'lil s ofi arivit.' .%', the'. 'r.'hh1 lit' 4 14i, Irvip-lolhs. TI4.ie e'c,'lull eof I1aluiei,' I'll t.er1alleirs 6re4111 lie' ci-4 ,if lt-hl 1 i*'l.41s , 111i111 Ite S1 N-i'elit' 4w iilll ie.I iii rct l ,'lt ci- c,',il nsa. clice it n t( fiir Iji'I.ir or Iue'lide, *,t'i.t %%Ihtii. i.tlljc'l o(1 tititli lii.i''iti.. hll ill co-l. wits

    IIe'1'i, icll %lilt it-' ,'llo ,-i'-ia 4,41 ml1,,l1% ililt 1l'i ii tl , l- iii t' , K illg lll i stllu it aa llu,'c",v r,- illcit rdler 1t eulttti S .e'1 11 il i il i cl if it Io a11t1 (elll'iti .it'll. i) have' anr an,.i I a .lit ilh. 41 lilt.11 -14, 4A 1 g1igllllt Ini 9ist I ,ll. \ierthlie'irs. int ih.t iei.1hll, r its ilt,.hlizc I h', ,,ln it Isralsrll l ,rh' .. 1'h' 'r.. tilll dirlili .'l'le.'c lie'r,'14ilhi is

    uh 114 1inr

    t1 IN, a a e.-Iiaillit 'lve ilnstrUlln'ltl, llcie'r %hiic'I ile' Sizhes re'sielens, mle ireliontliis acii, l dlerive l t'iiiaii' livle'il . Ii is r'grllre I1' i .4 t10 -%lu'rilie' e'tllti i itn h i ii141 4 1lc,,S,'ld litv ar.fide X, it waRs neil Imuilble' teo re'ads tn'.'eigicillltit II 1, SA i.S f"111ie' V'%h'ii-iill of liul ,'1'11 tdliciithtll ,iiIhI.. ,'111'rllailn'rs. 1 A.rl i'h . I ,ilitains I lit, ustitalrylurl' isrious ne'rtrill):a0%1 rells ,eiij1t411
    16141%
    e'itiz,'.e'in.

    frm .iittion oif gcn'rnmintal %llga'.s, l Private' I1'1,%iis11 14et life' atnui1itlic's.

    salaries, mid INsu llnillns ii1,1 tlef

    Arli'h X.11 contains Ille lie'slot llatrv preivisitlls rls I ing tol e'xempt1i tionl frmIit i ieln, ciii e'e'ntull 'oeiillms, with re'sclrtl to re'iiaiit'rs,ertin tiell f iiflrlit."scrl4 eor le'a'li,'rs. . VXIII 'cm'ialliii.I' eite' 'rlic ltimlry prolisioins re'lat inig lit .e'itllijiticili fromill tal. i 'eraiui t rii litieht iin i ri',k-0 141't l lt ill'ilit'ls

    itte'i l't ' Iit h.a 114m, . foIreigi. t'tirlei 1) tl'uriside'it aIlid ie' Ihrlas s h lll ill i it enl land. elr ite) a Saiss coerpetiraiticu, nout lits ing is hc'riiai'nt 'idaihuasll unen141 illi lie I'lliledt Sllte's, Shalt be it' ,llp' 'i illt Iiii'eI St1t1411c1'Iu%,. . lt I )i i. de'nt!s aned inte'rel Imid It.- a coirpeiraliol the,'r th aSith*%l e'eucra4. i i4.s * hinll Io) a h'lttet State's rt'sidle'iit or coretorllitilt hell halivtii i Inga rlaill,'iit tialhlihine'iit ill Siil/t.'rlail Ij t1,1 lIt , xemptiflrlll tnuii .im lax. ThIew' pleltiielos a-re desigiied'to alevtiate a sit ithll thicli. in iIIl' wllt e'onlpetrativel'yl fe'w' ast' ill whic'lh it Ihas ariv'i. Ihas c'ai. 1 irrialtlotll. ('riltli.s..ilD,4i1 aIdiiiiimilral ,e' eilliv'ulli's. hldler e,.'itiug I'lte', Slated's tax luaw. clipicle'ntls I1. u oegn bIyuie tlrc'is tc'rtratieillsl itlilt' ill'l0llne' fromll hitei,'dt Stale's sclll't'sAif 541 pe'rcenlt or moeire' el ius4 gle04 o incto'mIle is ref'''ive'd fromllikl I ilt'e State's. Iiilcri'-.t idiI itI a re'%iuletllt 1 foirei'gn v'lr irliol is iltc'tlllle' frelill 'iiitedl Sitate's soure's it' 210 i',r,.c'lik fr or moire' of ilt gre).. inco'meini is frolmll U'nited' State's s.,imre'e'. ( 'ei.i.'que'ntlly'.,su'h inc'olme' dehrivd' b'Illnllresidlc't litaits, inie'ciutliig rc iill,'ns of Switze'rhautet, is Slliiet' ll I)i(ite'et StaleStItX. Artile' XIV viuildl

    rece'ivedI liv st iuel'nts 'r iplliorei ices. Arli'hle' XlV iirideh that deividetnl .wi

    admhnii.srtl ira lillie'ellli '4 ill e'tllllll't'tlitll %till 'a1'h C'U.-S,. t l'itile' States'? tax ik e'rinl't'rne'el, tile e'ii mill "eitldl Iwe limnitedeI to notir.ihetlu ulile.s r'sidin ing liittzerlant I land ItI S%%i.-.
    Iinimizt %4) far ias corlmiralIellll. Article' XV ('cllitaills the' c'redit )rt'isitliis i1into l'nite'eI Swlltes tax alli, as to Swim. tax, prelvisitis Itlr lilllintit'l e'xi'hlieill frills i1e' tax bae'. The' I|'lile'eI State' rt.'scrv'tn its right tol tax its owl ci'ititz'lns. reIsi' 'nts.. eireixralicins, exept a It)s14) mutll gei'rnnll'tal wage' s.aslari,'s.

    or pl'tlisiolnl% imdI by1 Swilze'rlnlI or Iiv oly"Swiss lieltical suheli'i.ui4, or other Swiss liihilhi' autthoiritl I)l|iiiiic4l State' e'iliz.ts lr lir'll ri'esitlltits elfI Itlilt-ld Stle' liit ) arte 141 Swiss v'itizns. 4'tvIion 1:11 who l '. of tiii' Iiite'rliah he nt' UlePe'l is .tll~ieiet to nll1lwa e'rtllit against ii. l 'tei

    (*jt.xif..'lW\,

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    sW-'tIMAIIANID

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    it,.ll4IN in t01 'll' i ,et'ivi Iv ,',l

    m m,l ll\ fio lilt- Ito\ Ipati. l- ',it .11/4-,1111I list-411 . (r-lll*t if, m-t,111'rh tr :S% loll 1 Til.l, 'i' lit i t'svl'l ell 1,hIi' 114iiemjt,.'1i IIo .St It /4-'i-liell l. AI ,'1114.' X V li lit ccIdei. f .' itrl I ii ifiS.'ii i-;iIIlI\ It . t . tour r"eil iaiiie.% i
    .

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    Arti de~i'l Nl,,l ,tulit lit- III le ' illol l h,.ii ,ide ,.al i ,ilo~i ti o',, elf i Ii. lsti -411iliTrnA 4 t r11 rsm iil li lligbiiwrl 11 mlidll 4 etl riu l 1i4ii41111,.11 ril4 ilrb ... i dOzil e.irhi'. tlllin i tu hi i i evi a lr.ik.i,.h riie,.iui l ilgrbg4ll, g 4 dll, cit ll Ill l riil, s1 rll eli'll 1, *11, iiiiucr 'gi cli- ili. '- I' II 1.4 iti btaltet,, I - a'dlii il% wiib it ie Is pr iibiei th.aI sutit lri Xt' isIi... lotiiin1. Ille oil111oil l.c hi

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    zliIt, l tih, d1"lll b liCia Ii,\1.'l i i' I l ithi ll n 1 e ur ri llo'll ioln r t Iiit c I lilt, llsv sit i oi fill, cawit 1 41. tii li iisal t '4irI liib itl ,l P4r'' ilt ct- ,irti hi't d hlir hel ct ai N. fur ,si, '4 iie'ilgu lit v\1l1i1e14 Ito(i' Arntier ic liit isb II VI III ~ lit | i l1ii'ii'gll,;'lliell- i ltie* ts1 Ilailt i, g liuoilllt .crli t c t t li.I ,,\, I ifec tih *b 'i lgb rigirl l u'lliglr%s iiiit h~li ct41atie l- tllic i~lli I ll IIilItI hilcetoil,, ifall itr f %" h' r tilla 11,ii,1' t t ir r clug1ursii'l s ll iil'ri 111il tIer ii. ii llii' re',.jc It ~i-rho',sh ill-4', 411', lhait lib ,.ihe4' 1 l1l11%, ,4111it41' i lit 'i l ltl Int uitj,,'1hllr It v tuiil' wit 1i1i1 -4.l l11h1tll -le 4l\ 11011111tite,li | i 1111, XIt ;,, 411111" l l rilui,',il rills, grl'lltittwl mIll esr lirtl-1h,1' %1, V'11.V, . 1
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    g,, g l
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    tlt1ll fir the 'iltll ill

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    fir tlwll cit'-

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    IlI,. hin

    ; ,if owl

    rI'ii.' I firo ,, ll ' ize (4I'lltltl-v, 14- '11)

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    1-4-1441 lllI'Vlt,,ill 141 411111'r i!l" lia-,111. 1 tI rllt

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    1 ,14i. .,i'l 111141

    8.CONV".ETION

    WITII SWITZERLAND

    i.-defineld as exteilding to toxes of every kind or d.e.scripltion. %hi.'tohr Federal, State. t'illtjiitl,

    lawst of the respictive cou1iiritA and 'xs"


    lunicipalI. or ,111111ullal.

    teuits of ratification aund l~rvrilmws that tIlt, convention halll hate effect for taxable vr..a beginning fill or after Januaryy I of tilht, ear in which tile exlluuage of instrument of niili,.fiin takes pIce, exrI pt ItIa,.if lIch exchmanle takes place, fi fir after O(tolier I, pIra. graplnl (1) and (:) of arti"he VI and article III shall have drerr onlh for taxable years beginning onl or after ,lanUmry I of tilhe .var next following the year in which such exhanouge to2kes 1)Ipce. It is p"dile. il.o that the convention shall comitinue ,'rectlive for .5 '.ars

    Article XIX prinvides tlhatt Ilse' r'ohhIlktilent auttlhoriliei Of tile' Iwo count ri,.s nIty prrscrilw. regular Iioll$ lctQ*,Ilr" to matttke' lth onlmit lon h uIettive' lnd'that thle 1II4V viU" lluuirlh, with tacih tither drinrtly for tlil puirJ),4' giviingd'er to tile iolventloll. of it) Artile, XX pjrvidt.4 for ratification andtd tilt-' ixhatige of imm.trmm.

    [4egt.illiming with tilt' calendar year in which the exchange of instrmlllluls of ratifiration takes place and indefinitely Iherneafter. butt may Iw tenrinnatetiv e, ither country at thiet end of that 5-.year period r at onu timie thereafter by- giving at least 0I nmontlhs' prior notice of termination. ill which event. ilte convention shall -ease toIb efrective for taxable yearm beginning on or itfter .January I next following the expiration olf tie 41-nonth period. in view of the provisiolls of article XX (1) it is hopdtl that tile con. ventioll call he rouglht into force prior Ito October 1, 1951. Respectfully submitted. DNAX Acm.iso.
    (Enclosure: (Convenution of M1tay 24, 1951, with Switzrlalnd with
    respect to taxes otn incomee)

    [Text of convention]

    (0~94)

    .Senale ('omm.itee Hearings


    I.NS hI'atringl. heldl

    (2:11)6

    ,sen(Ircommittee e Report
    Auguim 6l, 1951 Executive HeIlmm No. I
    ss.d (Conurms, Isi Som.ion

    .'inate Foreeign Relations ('Committe he


    IN,,rr.: This ioiwunnit ik printedf in %uoliame I IN-Kiunill ittt Page (.583J).

    (23917)

    &onale Floor De&ate and Action


    01)l,4spnoilmr 17, 19.5I h2d ('ongrmo. Ist Smsion

    917 (C'owrisionIl Kvcnrd I14:14 I1413.5. 114:I8 11441, i14144 114117

    (2:t111))

    1IATIFI.CTIoN OF' CHTAIN CtONVENTIONS Nr. (EOR(IE. Mr. President, tile (C'ommitte'e on Foreign Riehi. lions8 has 'onsidered the cOliVelntiolls hereinafter listed old has 1 1re,'ollliilleided that the !Seuite gve its advice anld tconsent to their ni i t'iatlion, subject, to the remrval ions and understandings which are illJ'ih(atd in thie resolutions of ratification. Tilh, treaties or convenFirst. ('ConVention wilh the U'nion or SkOtllh Africai reltiling to illo'tte0t taxes,, signed at Pretoria, D.)eeuiber 13, 19401 -Executive (0,Rightiellh (Congress, first session. Approval l recooumiended with till Unnderstandiiig relative to the collect iOn provisions of article XV. Second. Convention with tile Union of South Afric'ia relating to estate taxes, signed lit ('apetown, April 10, 1947 --Exec.utive FF. Eightieth C'ongress, first sessOin. Approvat recomlmended w'tIi ailn unlderstanditig relative to tihe l collection provisions of article V III. Thiri. C'olnvenltioni with New Zealand relating to incOmeU' taxes,
    lions aire its follows:

    IP.11s434

    signed lat Washington, M.-farch 16, IN4S -- xecutive J, Eightieth E congresss , second season. Approval recoinineldetl subject to atremmrvuitioi relative to taxes collectible from public entertainers. Fourth. ('onvention with Norway relating to ino'Olme taxes, signed at WAashiington, elune 13, 1949-1) *ecutive Q, Eighty-first Congress,
    first se8Imi1.
    collect

    collection provisions of article TX. Sixth. ( convention with Ireland relating to estate taxes, signed ait Dublin, September 13, 1949--Executitve E, Eighty-first congresss , W'oolld Session. Approval recommended subject to no reservations or understandilIgS.
    Seventh. Convention with Ireland relating to income taxes, signed st Dublin, September 13, 1949 -Executive F, Eighty-first Congress,
    Wecond session.

    first session. Approval recommended subject to ia reservation respecting the

    Approval recommended subject to an understanding relative to the ion provisions of article XVII. Fifth. (Convention with Norway relating to estate taxes, signed at Washinglon, Junie 13, 1949- -E-xecuitive R, Eighty-first congresss ,

    Second session. Approval recommnen(led subject to a reservation regarding the collection provisions of article IX.

    Approval recommended subject to reservations relative to the capihlJ gains provisions of article XIV and the accumulated earnings provisions of article XVI. Eighth. Convention with Greece relating to estate taxes, signed at Athens, February 20, 1950--Executive K, Eighty-first congresss ,

    (2401)

    Ninth. Convention with Greece relating to income taxes, signed at Athens, February 20, 1950--Executive L, Eighty first Congress, second session.
    to the collection provisions of article XIX. Tenth. Convention with Canada relating to income taxes, signed

    Approval recommended subject to an understanding with respect

    at Ottawa, Jute 12, 1950-Executive Eighty-first Congress, second session. Approval recommended subject to a reservation relating to the professional earnings of public entertainers. Eleventh. Convention with Canada relating to estate taxes, signed at Ottawa, June 12, 1950-Executive S, Eighty-first Congress, second session. Approval recommended subject to no reservations or understandi wvelfth. Protocol with the Union of South Africa, relating to estate taxes, signed at Pretoria, July 14, 1950-Executive T, Eighty-first Congress, second session. Approval recommended subject to an understanding relative to the collection provision referred to above under Executive FF. Thirteenth. Protocol with the Union of South Africa, relating to income taxes, signed at Pretoria, July 14, 1050-Executive U, Ei ghtvfirst Congress, second session. Approval recommended subject to a reservation relating to the profits of public entertainers and the understanding referred to under Executive 0 above. Fourteenth. Convention with Switzerland, relating to income taxes signed at Washington, May 24, 1951-Executive N, Eighty-second Congress, first session. A proval recommended subject to reservation regarding profits of public entertainers. Mr. President, permit me to say that all these treaties, as is apparent from a reading of the titles, and from the reservations and understandings included, seek to eliminate double taxation with respect to the incomes of individuals and corporations and with respect to taxes on decedents' estates. There was some difference between the witnesses who testified before the subcommittee appointed by the distinguished chairman of the Committee on Foreign Relations, the Senator from Texas [Mr. CONxALLY] to consider these several treaties and protocols but the subcommittee was unanimous in its conclusions, and the full committee likewise concurred in the conclusions of the subcommittee. The subcommittee consisted of the junior Senator from Iowa [Mr. GILLErrE], the senior Senator from New Jersey [Mr. SMtITH], the senior Senator from Iowa [Mr. HICKENxLOOPER], and myself. I shall invite attention only to those reservations which are common to all treaties, or at least common in degree. It will be noted that the first reservation suggested with respect to several of these treaties, especially South Africa, Norway, and Greece is for mutual assistance in the collection of taxes. I 'may say that no similar reservation appears in the convention with Ireland' or in the existing conventions with Canada and the United Kingdom. These conventions provide, in the case of South Africa, as amended by the protocol, that the assistance and support to be Oiven by each contracting state shall not be accorded with respect of citizens or nationals or estates of citizens or nationals of the contracting state to which application is made for

    (2402)

    assistance in collection, unless such citizen or national or estate is entitled to the allowance and credit under the applicable convention. In the came of the existing convention with France, the restriction upon assistance to such nationals is proposed without limitation. It is the opinion of the subcommittee and of the whole committee that the provision of the pending estate and income conventions are too broad. As a general rule it is not believed wise to have one pvernment collect the taxes which are due to another government. Therefore the committee recommends that these provisions be eliminated from the pending conventions; with the exception that the provision of the South African Convention, as amended by the protocol be accepted, subject to the understanding that the application will be limited to those cases in which the estate of a decedent claims a credit under article 5 of the convention. The committee recommends this limited exception in the case of South Africa in view of the fact that the convention is retroactive to 1944 and the fact that since that time the estates concerned have been on notice with respect to the collection provision. Mr. President, I may say that this was the view taken by the committee with respect to all these assistance provisions. It was simply deemed unwise to have our citizens in foreign countries sub. jected to the judicial procedures of those countries, and likewise it was deemed unwise to obligLte our country to undertake the collection in our own courts of taxes due to the foreign countries dealt with in these conventions. It will be recalled that in many instances, or perhaps all, the courts would be called upon to enforce very harsh civil penalties, and it was not deemed wise for our courts to undertake that particular job. It will be noted also that in two or three or more of these conventions there are reservations relating to the compensation paid American citizens by American firms or employers in the countries with whom we have negotiated these treaties. That matter relates to the compensation for personal services of American citizens in foreign countries. Exception has been taken heretofore, I may say, in regard to this question in connection with the negotiation of other treaties but it was disregarded by those who negotiated with respect to several of the treaties now before the Senate. It was pointed out that these provisions were highly discriminatory against artists, musicians, motion-picture actors, and others who went into foreign countries, but who were at work there for American employers, and temporarily resided in those foreign countries while they were carrying on their business enterprises there. It is a rule, which has been adopted now for many years, that an American citizen who spends at least 183 days in a foreign country is to be exempted from double taxation-in other words, taxation by both countries. However, an effort was made to make a most invidious distinction as between artists and others who went into the foreign countries to make motion pictures or to give performances for American employers. Another provision in the Canadian treaty which has called for a reservation is the capital-gains provision of the act [p. 114dJ) of 1950. It-will be recalled that by section 213 of the Revenue Act of 1950 a capital-gains tax was imposed upon visitors from other countries who entered the United States and perhaps rented a room in one of the hotels in New York City and there engaged extensively in capitalgains operations upon the American exchanges. In 1950 Congress

    (2408)

    undertook to impose a capital-gains tax upon those resident aliens. The Canadian treaty provides against this provision; that is to say, in the Canadian convention there is a provision which abrogates this provision. Since it is a subsequent legislative declaration, it would Iave the effect, if permitted to stand, of repealing the congressional act. Therefore, the committee deemed it Wise to offer a reservation on that point in the Canadian treaty. There is one other point upon which a reservation or understanding is inserted in one of the conventions, I believe. It relates to accumu. lated earnings and profits. Under article 1(h) of the new convention with Canada, article 13 of the original treaty is amended, and that amendment is made solely for the purpose of correcting a mistake in the original treaty or at least clarifying the meaning of the original treaty. Under this article, at this time, when more than 50 percent of the outstanding voting stock is owned directly or indirectly during the last half of the taxable year by individual residents of Canada, other than citizens of the United States, it shall be exempt from any taxes imposed by the United States with respect to the accumulated or undistributed earnings, profits, income, or surplus of such corporations. Mr. President, I think the brief explanations I have made will suffice to indicate the nature of the reservations in each case and the nature of the understandings, wherever understandings are inserted in the resolutions of ratification. If there are no questions, I request that the treaties now be laid before the Senate. Mr. SMITH of New Jersey. Mr. President, as a member of the subcommittee which was associated with the distinguished Senator from Georgia [Mr. GioitoE] in connection with studying these treaties, I rise to support tho Senator's position in requesting that the treaties be ratified. Many days were spent on them, and many witnesses before us during their consideration. We had the benefit of the wise judgment of Mr. Stam, who is the adviser of both the House and the Senate in connection with fiscal matters. We heard from numerous Government witnesses and numerous outside witnesses. I wish to pay the highest possible tribute to the distinguished chairman of the subcommittee, the Senator from Georgia, [Mr. GEoRGoi], for the patience amd skill with which he handled all these matters. In the Eightieth Congress I had the privilege of handling certain matters of this sort, and I believe the French treaty was included among them. I think that in these treaties we are providing for true uniformity, a point which I consider to be most important. Heretofore we have gained experience in these matters; and at this time, as a result of the further testimony received, I believe we now have reached a point, where the committee is familiar with the possible pitfalls in the rights of American citizens. Again I wish to commend the able Senator from Georgia for the fine work he has done in this connection. The committee is unanimous in taking the position that. these treaties protect our citizens and at the same time are just and fair to the countries participating in the conventions. Mr. CASE. Mr. President, will the Senator yield? (24(4)
    connection with such proceedings, and we are zealously careful of

    Mr. GEORGE. I am very glad to yield, if the Senator wishes to address a question to me. Mr. CASE. I am willing to address my question either to the Senator from Georgia or to the Senator from New Jersey. .Mr. GEORGE.I shall be pleased to answer if I can. Mr. CASE. I (lid not kinow that these matters were to come up today in connection with the treaties. I have been disturbed by reading at different times press reports to the effect, that certain Greek nationals have been taking advantage of the opportunity to purchase surplus American vessels, and in some way make very large profits, either by placing the vessels under Panamanian registry or by placing them under Greek registry. While the matter may not be exactly covered I am wondering whether there is any possibility that in the convention proposed between the United States and Greece the opportunity to make unusual profits by reason of living in New York City and retaining Greek nationality is enhanced in an11 way. Mr. GEORGE. No; it is not. Oil the contrary, we have been scrupulously careful to see that nothing in any of these treaties would have the effect of repealing or nullifying the provisions which we inserted in the 1950 Revenue Act, section 213, which subjected to capital-gains tax the profits made by temporary aliens residing in the United States but who had no fixed place of'business within the United States. We are offering in the case of the Canadian treaty a reservation which protects the revenue act of this country. However, I would say to the distinguished Senator that, in large part the question which he has in mind is not involved in these treaties at all, because the treaties relate primarily to a reciprocal arrangement. between the two contractin~g countries, namely, between our country and country X, respecting income tax an'd collection of income tax, respecting estate taxes, and safeguarding against the double taxation of the citizens of the respective parties to the convention. It does not relate to the larger question which the Senator has asked, except in the way I have indicated. Mr. CASE. Mr. President I wish to thank the Senator from Georgia for this assurance. As I said, I had no knowledge that this matter wits coming up, and I wits not prepared to ask. a specific questions relative to the problem I have mentioned, but in view of the fact that there was a convention between the United States and Greece included in the conventions for approval, and the fact that it related to the question of avoidance of double taxation, the question naturally occurred to me as to whether it might impinge on the situation to which I have referred. Mr. GEORGE. No it (foes not. Mr. CASE. I am gand to have the assurance of the Senator that it.does not.. Mr. GEORGE. It does not. Mr. President, in order that the committee's action and in order that the resolutions of ratification may be better understood, and especially that the effective dates of these conventions he clearly stated, I ask unanimous consent that there be included in the RECORD at this point .the analysis of the pending conventions and committee recommendations, under title III, page 3, of the committee report, to the end thereof. There being no objection, title 1II, Analysis of Pending Conventions and Committee Recommendations, was ordered to be printed in the REcomD, as follows:
    78093 o-62--.ol. 2588

    (2405)

    1I1. ANALYSIS or l'NDiNK (NOxONVC1TIOtNs ('ommImrK ItKt'LfUIIINI)Ay i 1 N TION tltat of tite of thileticommattlle''. the lIe reslionr.' to it request of thie chairitim ti *i16i'4 0f tfill$1r11'ar$'1i j. Joinit ('ommittee' oil Interlal Ilme'se'iiue 'ill'axatioiil ,th rot'illohi . !ell ilag I)art irulhar visions of fiIll' II.liing llie'ntiolls or the' use' of Uill1 the rmemle'e IlwA Of the' I "lle'ed Saltes. aIdIttent4 ion ) 1t' e'trectc ofIithe' pro%i-ions if vsimilahr lirtiv. lasiichlitas the' Ij'lltliiig roiit litimf ii:.lve miaiiy seislltaiilally' ft Iir~im-w of %fill e' Itate' rt' die'tiss'ei l 't!icllle'r r' t ,he li vioieolls, those dee'aliug ctith this renlort and flu mel relating 'stale' tana lioI anr,e'tisei~e'Alv ftol-ge't r. I'o liet1 g to l f itartticulair fromt the' gei'er'il patle'rll, Ithat e'xtel't Iliat ilt'c OIIo det rli iillt Iw Ae.1t Ai.i-.'u'v'ar i itfra acre' fact, will lieIbrotughl ottO. 'le itwo prote'olo together with the' Iel'ding Sotitlh Afri,'at ntent!lenions which tlihy -,"i dl0le'lie'1il. a; TIhe two 'onvientilos willh (C'ali:uiadi tire' dist-imme',I s.'lIrtarte'lv inass viiul'i tlheyv sulpplemlhenlt or motlifv colvtiolOs whiclh arep idlreaiy leIIetir'.I nIsufar uis the I'nied lStates is c'oncere',d, the' various colltve'tiolts relate' onIk to the' 111io!11Ico 'st.tlt ItaXes of the Fele'ral ({oce'rnuie'it, anidtelim' IIte' n4e 111til e ee'rc, iiomill the' illlole', eit :lle', or ilhe'ritaiaee'e tt5xe,. illmll)hI.el Iby a0ny ullse', T'erri. thrry, or pIosspe'sion of the' I'iluted Stath'. or the' I)Istrict of ('olmllhbia.
    A. C'ON;VENTIO)NS II.IATINOi TO IESTATI TAXK'. (P. 11;88 It. CONVENTIONS itEIlANQ TO INCOME TAXES ,

    TThis section of the' relports deals with ithe ilncome Intx convelntiolts with Ilit, Union of Soulth Africa (including Ithe silli1lemelituary protocol), Ne'w Zeallnd.l, olite 1lqde'ii'iit Comet' iry Norway, Ireland, Oree'ce, anmd Swiltzerlanid. (*I'lh su with ('Caunah is treated separately.) Sihi.staitititlly sit laihr Iirotisiiuilavple'ar iii these rtt'aties. For that reason lhit following dlieitssili is dliv,'ided Intto ooisideretr. bs, tion of tlhe Itajor litemIs dealt wit Iin tilet, nrltllo aimid t lie various I re'ail i's aire' (liscitset'el toget he'r ullnder each o those hie'adings. D)oublh taxastioII arise's, ill lilt' absell't' of rel-'ilrocal agre'e'elents such as are co tfef't repltre'selnte'd by the conve'ntio, s and pro los in ler eonsideletrationi, froni liit, freeue'ntly cmterthat ithe various gove'rniments assume' anil e'xe'reise' breaoal, ltnd u Unte ltate's ill's lie't right to lapping, taxing jurisdictioes. it general, ithe' U~eihe'l tIhir tl ire iiicoitieuiit hotel regairl tax Its tlat iolds and elolest ic corporal oloOil I to soulre. It likewie assltie's the' right to Iax its re'sidlentits, regardhle's of natio.ality, oil flie, same' broad Illusis. Alien nonre'sidelnts, oil Ile' other hliandil, alre' lIxeed o011' oil Ilconic' fromn sources witlhiln lie' llilte'el State's, emil foreign rorlioratiotns ilncoliet from -mouirce's within thie Unitedei State's. The |lotihto of are taxed oiilv Soul IhAfrica IIihlmees ts taxes iprimatirily upon Income' dhrived1 from soure'e's wit hiin i tit(', 17niOlt. New Z'aeltemhel el10's lolot use(' itifIlle'ltsl as a It ol~iOf hx IhtII tl;e''S New Zealanidl re'iitle'nts Oi their euit ire ilncomle', r'tgardlle.'5 oft lihe' source I'frni whieh derivedI. With rI's,)(ect to iollar'siel'tae, it taxes' only INhe, Iilolite dehrive'dl froi sources witlhiin New Ze'alanid. Norway inlloseid tax onl flie' stie' basis as NeW frotm Ze'alanld, I'xel'pt 11i1at with regulrd to Ionre'st s it 11oly3 taxes the liet'i llomi' certain specifle'ild souirces'tui iprol)e'rt$vIociat'd ili Norway. Ire'hlind ge'pierally vidire applies the' sasiie' taxing rule' is the, I~mite'lI Kingdom resulhe'nts onl liteirt 'iits oniitheir inicomue' fromt sources within Irehlanld. (re'e'e income anti nonire hils two tincolle taxes, e'achi of which it inllpose0s o011 ,somle'wt dlirfere'nt basis. Its schedeilar tax (aipplie'dl hoth to inelivieluIl and corporations) is generally illiose'ld aie'. oetilv oh Inicomle' from seoulrces' within (re'e,'ce, tilt holigh in'omiie' fronm tibroacl dividelne1ds) i.s slbj'ct to tax if "'e'njoye'd' il (t're'c'. The' genrlte'al tax (lip)lielJ only' to nmiatural Il'rsons) is imlllsed onl tle emitire' Income o(f ia(Grek naillenmi , regarlt'ss of residhenice', and onl the entire incomeI of ia resident of (Ir0,'c'. Thus, 'l the letter tax is similar to tle Viiited Sate's incomiie taux with resle',r't to the broadl scope' (ifts appl)hicaotioni. SwitzerhlmiI inipotee's hol It federal aiid local hliceltlie' taxes,. of which the later aire the' most ipil rtant. The Swiss taxes on iIncome' liare haste1 primarily' oil tfhe domicile of the taxptiyer and the source of tihe inco)lle. In general, the eolfl(tiOiis avoid dioluble taxation by a eystell of rveilrn)ocll OWVilteil Staitet' Itaxie'xeptioili anid by reciprocal adoption of the p)rillcil)he oilhe Thep 1rov'isions re.se'rviing Iot elach State thle right to tax its ownt credlit y ete.lip citizenlls, residents, aund corp)orastions withotif re'gairdl to thle cOnlvenlttionlS aire' iilogous ln p)rilnciple to slinilar provisions found hi all Income' tax con'e'nt ions to which the nited Slte's is it party.

    (2406)

    (I) Business~g imeoms, m.nlerprime' cit( 411'.oit t c.'mmtrzu'titjg ttte*,' simdl fi' Ismiot lmstlji'clt lo tac in the' Olt her rimlitraic'tig state' tilcliRS it In e'Ilig'l III at Ifratlf.' for loimlo,. ill 11t16 Stall' .lihriigh ae'ile'irliIl'lli'l'l tihlll'z it simrnhm,'im, {Ivlol'h-ici'thrii."rlsutmljm, A -plmr lmliheilnt" its go-mn-rrllyv olt-int. Its mIean11 llr:11.,ll, it.V irl,
    a1hol,.

    %ll fi.x of

    htil rqvaliveiilm 11..,,r ro.i.nstrtim

    nolop .I-I

    athlproipid. mhat ms

    viarthitmlm,,mi

    ollltl dlr

    imtlu.Um i allHI 4h14N% imm'lmd.1h H ime'en, zige'u mr lirtmker. 'Tio ilt . to thie e'.'it fhlin stih am1 lm etthrlmrimi is v'mrrfl iig oin ist rade' omr tm-itess t hrnimigih it Imerimemamumt 'shtalishnme'ma,. it iiit t Is'Isuat- o ly iifiv lmremtits ialemIv h h,, ilel, l (r fiI'r ma ri''is withil' the Imig 'inmiittnry. Tislits ilcmem1 4.0h.l1t ) 1I1ti'. iIl nrovnsitilu it S."51 mllmt'liimc'nllle' sir iltl*'lmllt denrivedl from the' fillumisuilg cit lN'rsomilll s.rvit.es. O .lOrle' rite c' h, of IlN' c'cititiO'lmtiot 1r111em I 11' h 1131t ls nimlt 11h111 Itsw' 4le',mit,.'l tio risr' frriuuIth' ilitrs, lirehistc (cit giotml ir mmerimuhatiil.lse'. Ti'llt v'oll velltimmll, Iprovidel il silnpemralth' iimmitctmnc',i for thi' ildjomwlltnmm'imt f ltie 14ieljtiliiilit ofih, lh'enlimttcll cit iI I1ranal'im Oir either rMiated'l iusuhnimes 'mtitr of mnt', lit t it m'liltlrac'tinig stale vi' hiit aut lliother c'imimt nuracic1t slfal ii ilonli'r tihat the, branctih av'oillIlir ii%1'cl 11114.4-11l

    moe11tsm will Mlth'it it

    rolitslits ui'iura liy i1

    .lhiSldli.

    (1s) Dirlja'de'ausu andinterest


    ihteretst paidtl hb it l.outll Africim c'orlwmrattioi it) lctith Atriunim riuidc,,mts oitlher h1:111 t N 1 illeims1 t it Un Ih'd 1411-c tt 8114 nh African 'orl.oratiemims oldIIN,-' A4o t'lmt irout lnith'd State's ht% Io flits ild t .It\e'd by14lli Aflrivl,. This Iiniul r'lrim-rs.'iitc'l ateill ali c'onme,bsioi int lithe I'nith'cl t4h111s. SI1,lW , ,iri to L torls hatve tioutht Afruica agitn' tio it sitmilair provmisuion resi'm'itiimgtie IN tnitim'i ittmilisIrihiatit prflofits ta. and Its ou,sihIent shmarhohlhr'' tin hVilg flihl,,th tmO 1 tilt' u;mt.'rliliit.ts11 have' agnr'cl (art. V oif tMe jnI'diiig pIrotoc'ol) to delh't, artic'le XII

    Tle outIh Africant convetltion orllginally"lmrO%'idi'cl (nrt. XII) that

    ilivilils

    andI

    (it IMhe c'oIve'ntioitl itlllirvl'h'. Oll it ri'i'llrrv.ill basis. lilt' Ne',w Ziililaml c'oIoveiticmi Irotdli's (art. XII) that dlividelndls withoutt rc'tm'ri'ni',' to intter'est) ImuipIl bm N.w /.it'ulhuiml i.orlioraltiniml mhall it be' ixltlllt frot tIlll ex I'% twhen-' the ni''imiellt is it c'itiz,' orit rm,id'tt citfitt .'ciml 1'ihit taitet's or is ai i l'llftli Statis 'orlmiramtioln.
    Tihe' Nmorwitegai rovelimit makes nIo ri'ru'rt'li mltet tm tle paymIiill'tll cit dividenilas

    h11t prvilhes (alrl. 'VI) IlhIt itlihrst mOini torm cit ilhllhe'acs derived from. amit. O mtri'i,,, within tite', toumit br ti 'sii y leidem oim imt (illmm'hliimg i 'orlormtlimmim er t1he her tit her hbuinless entlit nlmi't Ihtiimg ai;Isrm'muntimit i'sta lishhmietl ini't It I lll- c'mtr r3) ,imit $111hi Ist v.i' t ill ilate C'ounmltrv fromll whitith cliri'.il. Ihi, irishi irimicov tlittio has I h siilamihr provisionl tart. VII), hbi it deot-' ikimailmhm' 1t iihten-'t idii y it i'morlrmatioll resimleilt it ilmm, the' c'imlltl'tli i'olllntrics t it'mmAorloratiimimiOfim' ihOtr 'oulnltry of which Co1tmtrols, (lirl''llty mmr iimilr.',Ih'y ilme, Ilthati50IINre.'i'ilt mt Ihn' eilltire' Vtltimeg Isluior itl tihe iwla'or corlsmrumtioll. "*his limtisiov ils mniti'it'lvlh- ihdieltI Witi trlit,'lh' VI f tIhe' i'collv ti'tlton wit11 (Iri'im'm'. AOr11ri`uvr, with ritii' i to ill ieth rltti t and dividil'ci, arlie'he XV of thi mlt i'Ollltimll vithI InI'tiicl lipr thimt sm'I.h pay. ' 11ti'11t4 IaIlilde hit' i'triorporal ioln (itf onle' Of the'I'cilot rai't ing statti' aftt'hr it date' slpc'i'ilil $1 hihi'Xi'ItI pt111111 .empt t31 ' trex f ,*ro Iinx tit%-iitheO smtatei' limic's the rs'i'ilmii'tl is it 'r v'iizIen or n-maidi'n t. (in titi' i ot tihie "'lith'lI Stfi;cS) or it resid'ntil tInthi'dc of (i,
    Irn'l-iiill) o tihlat othl'r states'. TI'll Imitrm' With ;n'i'i'' moi1dmit tiillt itm iat rovtisioinit ('tnrl. I.N) tim tle e'ffc't,| that milt'lhletd anidil iitte'rnme paid by it (; i''ik i'emrlrmiratlioll $111 Its' i,,ellit frommn I'llthl htites Omt. i'imt whii'neh. 'ilmipitit is it .ilim.l.Ini e ntl,'i r i'inrliiratllimol tli li'. ci tilt' nliteI Slltac's. I'itlnder tiii hiih'r Iiali' lii ( 'imCh,. inltsnm'st anild divide',d.m i smaid hby it tmoreigii i'rorlrationll ima. miidi, i'i'rlleil L'imllcit io.s, i'mlmitit tm, illnollme' le, Iromll soLurcesI within| the l'oh d States anIId 'om-w.(lul" Itth"Sillhje to I (|'lliht' S1tal~lit' tilx lt IK' itutimil moi itll'i'$ii'hlit utlietll nii'tijll,(ll mit1s1'h ilt'illat lit thle f irnlt'li', it 1it oll.m rurtn ilmstulni't's thatt it ii pmract ii'lelh' it) 1lsc'.i'rtiill tJill't lir it [imneigit iil m'orlirmttliomi de'rive'I ore hill tlht h'chtlishitc I(n.rf'll te' cits iM)rs ili'4iiiit1. friomti it UnitedStatlts simtslls' o tsi) ic'o llsti Its its n.s ultui Iivicttllds illi'omli' (from is ile antd soIurci'st, withill thet U'nmite'I Stati's.

    Articl'e VI of Iboth IIi' Irish m1idI Netw' Z,,uInI la i'75a l'ionventhionmsprvicd's, tilike' thi' otilr I/N'-ilillg 'cm'tliis. thait then ahtihcfUit e Nlattis IIt tlm livithi'niia t il' eld tx dlriv'eitl dtoll um ir'oc's wtlililn Ith I'ltedil Nlti'h litit. r'ciditt ofthm.' twtm ' Collis. Icri's limit eligaaged'ft t natchi mir hittrte'sil,'tst ila wtilt thei lUmitih'i $tltis I hrIt i tiai J'lnt-i-.
    Unitltd Stat's witlhohhlinrg ras' tromt :1 isr'n'nt toh or 5 sI.'ni'.'lt, its tilt- Vas' i) , utmav lie. This nr'tedctiont in likewise pwrovilhlit tin' i'xisting con vti'l)iols with il tIlN: I'tti'd Kinhgdomittl,aait ID'mmark, tndI the 't hiltrhlnd. ih'

    lient e hstau 1ishentm therein shahilit i'xi'i.'I IhA ihtill no l iIc'nirl. I lII il- NI rit , f iltlVidtclld Imov'intg froim1 a slhiillr3' t Iii it el, the' nal'he resii'lije't to qrtaiii littitatlihoi., ini , niot to e.xeeed A ll-reemll." ri, ~llle ,,1' mse i of irovittion is ith) mittivl ahte Inprlt,

    (2407)

    ,lhiily,'uilI, o' Irish 41r \.,.,t /.,'lhuad ar,'-!.'t s,.%l' *',srlsrZl ,.,-. ThI, rtrlwr:,tlhitl I1,411,r tI tul. t414 h 14.tI \ |:l hlllit lhr.i 1l' rlotsr lit'll 1.ro'vi'lrtlt'c a 4i' iilUI u . Is h l li
    bll,'h ll tf(ih
    1i'ilIt,

    Xeilhter Irislh tio r New.i

    75:lhilul hlaw aIl the Io,'lll lilu, lil 11jet-.rl

    lot 1:1\ lim,,

    . Al aw I l,o;on t em ltr- 1-1.ri1ii

    I Ilr 4-ilrw. Ili' I


    Nllllj4.4.I ill a11

    rtti,' -'

    Stte%'lri llr, .

    eve ,'~ll

    centlit n

    It liilt I i'itlh'tS I laI I#II ri.nhl tl Inwrihi'iitr \..-% I hv ih twilhllllhlifllg IHv llts toiskI

    lnt IitthIit
    ,,.:lhwlll as

    r't ell 1I,. i it II ri.ItsvI le -r.l. i'aw itil 1 i ,

    illl 4;1t0r t,414. Inlhail. ' mi ll tsii r i olr li t'rrl :i n'ril. 'l, .'l . toll(l I ll i r s fill, Isr I rmi. li eIeiid l ti'rf.l t i IO till,4 m i'd (rlesi il r , Itlrit hams mlt vtill Ii'iillltr till- Smith %frit aii oi ir - v ,t \dmw z4.:1l:41r rtt l it;ll s r, ll ill sitrt0t 4 mIl. i'M(usnl 4ll1:ill. I tther. I ri'cmt ti-iii mg In' 1 it'llSt 10 %it til I eIr I'iy , l it ll ltill. . I tlitl vtrlsl e'\tliilelll.lhlt. ict :t lI it' hn I\' horlirl'ti hi' trrisvidis , til rie'lmice'rk.i itmi :lillw, tiltr I hit'i t I,.#hI I *c . airh iriVi'tir Ith, lie r'cii %'th winrt' tc it rly 1 Wrisi illl ti't l l cit ir ' ta irillhi il !it lt 'irr5itii':tte ti r t1% tf i if ill 1 :lh l iI 'rit 'r lectr i .tiii l mmir,. fri' mll,'h vismllr% b% n r.," 1ll, irlmiralitow ,or 4 hinr ,1i IN i' l ,t hlrllt- i t's Ii, l it titt mil It l'tri't ai" t alilt lh l ll, l ill i lt, i'rll' t rt 'lt11l % fri ' i is ill , liti . lii' thhiulk ain dlii'i t t .tl. T hell atii d lot a: iltml tl hh -11hji.ti' It, ,tit rllltlu imihirlltlmntti,. its 5 ' iNtl ll i Inl rilltt , tin l ri' l lnti' ', t: I l 1it kiii l livi' i nlr -hItt,'h" '. l l i ki am rrili' tlu ll tit n it lir'rntIll %#-r ih I the i'n ittit'l lid if .t-I uitr,'ove w ( tilt' c ititlh liIsomill Ow ill' t titll, irlkiii'rit .,li t'ilm' O'w i t i r i. 't ll, , isr lt.-w ,,0111 tlividltmi- mu motl t|1tl 251ir''ll, o i'ir 141`412414t 1' -11111:1%li!!

    ThI i'sglliiillritii e

    . froo tlh 1 t sr1 illhitna.t alll,hl 11%I' i erked l illht'nir'l IttlielI114i'r'Ii, rri.e ,vl (or , t.wit -mbiirv rttrlworatims. The, rmbilvet.d rate tlr,.,,- lew . it irtSl etuiitl :1lalyre,.4idoil%*. filh,- 11i dividllhls , in l,'15 , 'lit derived, hrou S%"i,- si. 1% II . i , rkil l,,tt %%-list k ill 'lnit,, Stmesh, I111141 wht~l i,4 I1 11-l,it I-ItIli/4-ll lit'fl t h'its, , ik d l:illo-. Sw1iltzerhu11aim l ., ll- ph ,' is) ill) limlll Iiml ll ,1 h .illt ti, l i t(l tr liv ide1,111 t'l\,. u~i11 rt'.ll,'el its wI toii' rilii il/rll.S. ,1\j1,1lI ,I-..i~ts Iltl. h vl ig ll 11:1 lialievtall ilty. \to ,erres,. milii~ iprisvi..,tl I~i a itl k I'mmlll, ill :,ll% ,tither tro:la t , t lirh tits- I'uiiirvi Slult'v& itiZ Inlrty, Imll it I1:1. lilt ti vtrt-el l11ilt, 111 vI' 81,t1,'.,4 l.mil; ll l,' ,I. "1.1' l - l:o\ ,t{ :111 iscrroll %%itld fil I ll, wIilthll,+h at flit., %ulrrv, mid aI ret tld tit reitivhr, itl il alrvtordthv uthfll-, Irm,'ito4,, l11 Iht ai lrlr, VI' witulh Ise iltatl,, itlilt! :t e clalium ,tlly flvih, thtertf, rh. I h,,lit r,,rilti,.v i l litltts- I'uied Stl e-1t,.. SItilleli law tftr v ro-iml'll arlr, I14rr,'.-.1ilr.I' Is.%fiht- illir-11ll v ill il1,e11if,viii the 4iItr so' .41mrv& u hirh I . -- 4fri, m ti't,ulfact thatr fhliht, -,l:111dhrd t'orml ofl stm-k vrt'riliv'le ill Sitell I an'dl1i,, Ih,lt- l r,,r --haire. Thel, Suli..-, i-mmelt m ltllliirividh.m tholl, with rt,p,,rt Ill illh'l','Alt ill :111V fotrum ,f iltdldtlt...I hi- ratel tisft '4:114-"reduedhlti' .5l Is,'retill tllt illlert.st deiIived, fr, mu -11a Wtllrrr4- Wvilhill 'l eit" tlllllr % Itl a ret 614,t.l , vitlrlwitratl im,ti itr ill hlvr emll it y tif I lit, itlhe~r % r,,lllilr.Y 11411tl:10ig :% li,-rlim llmle i.nt ld..hll'l i li the vitillltlr.% t'rttl whiehli tilt i111114,%.1 ik ,hrixvl. Ill lithe ivawto' lilt, emtwo-tIiluml with .Swil,,trhllal -i la\ ,of 5 I 1w!rr,,!l k. rrlamedlrIii-vti' l.,,ilt (ham t,1 d hal ill Swilmt-rhitIl there. k iutlt,--,' tll i1i,,lte .,it, ill atdldiliml III till- ilwlt',lllt im t\ 5I.-Iwrto,'llt !j*mlloml ior stamp11 um1\ i Th'I' -Ili'rlill t',:11r. , o-qlhim Mtj tiv ilh reslN'rt lit fill- rrjlelItimil tift m tl% ,iv'idlr l,I .il l,.,I o illl a111l.Y all-, Ill tvrt'g lr Ilo tilt, rvilmll mi l 'f ImI onl itlltre,.q tt Art icle M V" 4it{I tit- i..s rt~mve,' it l itnw!, S t,'il th,i t !,livithle l-t will Jht trest ll:tik hIt" till%- (tlrtrtvl 1eorltisrallitili lt14a Iitm r,.,idJel alliiu rt,-,itletil l Swli/,rhln l 4%rlto .i SI.-si ,.torlptiratim~l. I~llit havillig il loo-rimlmlliil telabllishult'l ill fiht- ituilvl Slalti-4 shalll Iot. ,v\rmpll ('room I'1i e t',1 n l - ut"1, Iltevllormu'llIy, divid,'lml, w111ill lterr-11 v! oolhlralitol ill ilr lmt alllSIlti,% viorliltrallownl Ili it rte.-idel,'l tir toritraltrlli~ll izlml, 11" ,I sit 4t Ithe I'hlih', Stallt-, 1i1t halVIlg a1 11,'r111=imt1111 ,iilahli~shlmloil ill ,%%iielrhla l, Ahalll vtorieeoIali'r isslJ i in
    ,iliit

    ar

    ,.% Ihll-, dlrawlst. I I, a1rl iv,, is ,tirrimer I Iimu th lorrrt,,itmilhiug tirl ielv.4 4il t~ither r, viio tl llitillvA ill I11.11 fill,. ,I-,lllillimln g'ralllit l I1'4 tlltiulle l ft 1Iililirt'ji~ltlll illivt'll ri11 %illiligill S%%it .to--rh 14 I l! Ii Sul i-..4 ,'ir'it~rilt imllim,. wh rvl it lihtr et,111',.11 illl, wdt. ,id lu, l t'l,,. fiht, t'\ mllll lit tl mitllroq eto ffl,.l:11i111 f,1111 tl rrlitiratlimolt. !gtm ralllY {tf,,r ,.\i ttri a,.i111:rt. mt1111dt. art". XV'. Uiuit,,, Kingisltwll alrt. XlI, ,No'111,r1111111. ,1111 Xpw I.X. (1ro.-eve: a1rt. X11, Canada)1,1. It k i Irts.:tle~r ia hall III't-i ,\t llilitt11 lhll, r,.ill'ieleliI ,Phltt-1l1411Ifiivitl,.lld. intler,,-l Indilt by lit%-V ureign e'torportlit (lll, a ,r~ tithe~r ctl,.im-4-M imis hae ' (aistillm,'tiliht- princliplelhi ,li'videt.,, il11 hite-tmil mill~ld 11Y" lion1 w as, milteretl it vr ptotl' i mrl 4d file Ipartirllhar ei,,llllr .y w ith w hich the t i s mtll~~ it ilittv.

    mid,

    14IMil A~ ilbiv.iv,,uim tif flit, t n.,ttlmll f lit( .Ni1114. 11111u1liti,.4 Will lIt- i01111d 1l4-141%, millher t hadIt.lhlL The, 4.i%[ vllliv,,llll411, 01141lith Africa lirt. II,(111of llt r,11ov'd; New' Z.ettlhlul alrt alrt.. X)tlll 11410)11 I.X: ,Xtiruay art..X; Irelhund a1rt..X1; (;~rvlei,; ,witz,,rhul the lprilnvilph of rueilir.lwi.{lllll exemtio Airllll~l.ihl for ltt.ritimid .wrvives. It'ro

    (sorti , Ilv ro'ido'ts ol aitt '(stidroteilig stallate whoia ire' titi1liaratrily within flit, 4 t.llll.; .Ial (tar :I lh'riotil tor lwrital. im11 bal '\t'o'.',il I S3 i:'l if I ho' w.rvile.- ;M,, Ik'r. :10 toarlmsil (tar tort'milttlle tar i.,,rlaorl it' 4 ,, loon ito' tat, 4t elf hrl'h ii ' s'rtnit i, at r,-lioli'ii.
    4A4,'ll111l41ll U!li'r,' fihtS:tl~lli "tast11'.

    It

    t ih,' 'hs.- oatf.Xoriav.

    wrvull,. arits

    ;r','t'o,

    r,,ldol,r,.,

    iaitl

    sior as

    I Ownh 1h4'r' i l

    oitlllliovo-r dsmilt--olw a1g itluhit*

    izrtiit'.l it hlit hmit'

    hllomever. flt-lt-t'l,tlilt 1' tiltl Xw Z/,M'agh l. %talt it Afric'a. mittl Swit lu' imi , il/terltlan 4140111:1111 t' 'tgi l ft fht, rihl't' a11$ , n Sp .'llir lt':eiit'footll,',I Iro atilit flit- wooloo, 4 filt* 1. l61' 6t'll :lrt' tile' ;lirtai sar ri'lnl liot'r:tlltil , o i l li , t it' rali l: irf ' 1i " iu a', l: 1 111411 It plttin' terlli'' oar asriil . ilallliiallinw. aut wtihlt",l. A ui alili':slilt sl( smli'h t't'';titlll i'o ttito1 1,ll flit- Sii1"-.' o',,l'ltf ,,al. wthe're tlhe' imi'ltllott r,.'t.,it'i jk lt* I1 h1111
    lli~~~ilIXIO Il4 fht:- rat's.ll 1 he 'f "lllliitll 4.4111%,Illliill 41,401-414,., I %,Oloalratl vlv

    o'talIIIIIIt'o' hl h,'i~' f" l fi that 1141%.4' 1111t' 1611 o'talat il lilfe' a tli'II t'lililllt 1 t l St:a111 till1 aaIrl Ieslair at',ttimlit imt i gr,alll. 'rh',tr,.,srt'. Itsle',t' lliotllt'.' r'oc'sltlals',i' ti:t I 1lit' S4.'I:1t4. 1l14I ,'''f iaSt iaairatgrasilhl I ,o :1 i'h I \ if Ih,' rl lit, Zct.sth olh 'utlm'iit'll,. iaaraus~ratlhI tal :lrl t'( II ti I hit' S1oath t O p s o rli':nii iaratiowtl. a1titi Io:ratwialob I I %at it drir''\ oil t it', S1%%c',l'tlt itmll I.-

    rh,.~

    It;{ah ll to

    fill, 4.4111.4.116111 ilslgl jll~lo

    f lit, Atl-lmlral Iprimloelll

    ,f flIit, reclilprovls .

    ,olit m-

    jim

    It, 4.11 1 ilit i

    I llil,'l S121114'.. too fIm Wl,1

    tale4 ilrsni v :t I 11 .misg* lt ti11101 p ii I hIv ,tiit'r stallt. it bvitaliti',dll '0i1a. flit, ,r ft'rril,,riat" sir l ost'oa. 'it-ii I ho'rt-'o h 'i'ii, tif i',l1rm-,,. 4till gk'rnito I tlit
    rflu sl l vtiet. 'lhli, i%Irm- t ,k :ll w;\ v~i'ivi.llimi-A tl %%hic it

    I1' I'ilst.':lll

    1 Stfito'

    i-.

    lit fhe' ot:lt' oil Xirio . , I orihlltl, I rt't't'', ui1, S-t. it 'il.rhlIth asgret,ino'llt oa.ritii hi t'llllrmst'ta he It l llo'mltl tat Ii.ll.'i, -4 hby I lit' goavl'rlltillat iso'lltio'rlie,. '1rh,. :ogro'to'lit % it It Neut tt ti-Atid. stillh. I llt'n heilitl, 4itt4. 1141t a111a1t' fei -'i'llia Io'1,.61it'l. Ihlt isriatiii- ii 4 I hl'lh ;sti ,'lll tls l t iit'll rrit tin ik i "l.itcill' r,'lrto'li.,t tit fl lIo as,,',.rltl l it ,ot'lt ,lI. Ilhoti v''r, flit- iIifai, rl ' oti Ilite AtaitI it rivoaii c'o'llt'vitltitill %%ill at till%, %%lilt toja11t't' l b hatal at't'Fllil tt t il rivatlo' Iliil l s it ftlo' ,Io t. ls' tI 11h:11lie %l. lit- t'\,inli p uill rt n from lax lit the -411t,%%hre r,,r,,iv',.l s
    t N1'tl /.at'.lllwlouItol Irnlaulo o'oaltail1 htrtht'r linlittllisit it ll l liit ll fit flt 44rt 4 tlhli iit '11:1 111 h . i t tt aii4 i'tallt ru.rvi'tao iwrlfitrllm,.d ill ,.imll.io i %%lilt srisli-lnaIki.ik, 'r111 I ntllivitv 4 tl elf e, Ieisirtileif 'ft'~ o'all'lt ita4 liklt im*Nrti, 4u fiithe i liusk' 00 rvemitlsia tlirwiti r eparat'lrt ytI.)

    Ilairlt

    "I'lu' t,%t'%lltlls lt ,
    htilt SAll

    1al'rl

    '.altiO 't' tI 1

    (r'
    "l'hto 49t'ta'rll

    a i a' mat t

    iliuhtox ant1', llmlict woll

    nuif'l i

    %,stateoI% nI it' illkestit'tas lolsvi.imi Nilt

    roisill'l lit llt'

    lli trintl. Ibto StIt zt'ralfl

    :itll1*
    tf d l iilt ll,

    ltitr'iit1111iialtl1lifitt'

    Thtaoio'

    iti'u

    ih

    itrulsi, i

    it's s1iiaii lt''%lst lit flit.' v'riltty 4oafirtent'

    (Mi Prtife.,istars, IeeiIca#rx,'Iid,

    t and*a.tioiei* bime

    1ajoare'ithte'.s

    ilat'inll 4.t11%.11161 4t1ah t'tls 11111at s iallv ihti'ti i'at artint eI t st s whi'h that aratoioe' litri silit'at ofh lmna'h Is'uior' or ttl'ltl'ilt'rs imtall a tolt' 'll raoit't m14lstall-g itho t'ioit 1111' itl' at ito'r %lati ' ttar I it,' irlt swtat I,-:l ithllll4. loanr it jltritil ioat lit ,t's,, 2I.',r,., ' %halll hi,- ewitilllt frisll t:1. by flit- hllltr sflims (Swillli Aftrical itrf. M \ i-.%%

    arl. .IV; \41ruit i irft 11: Irt',id atrt. .VIII; I r,.,t.': S-itilt r. I:mlti trt. \ .11. 'l'ihi-i lgrtaiv'itil is%,limilairil i tll iitter tIn\ t'oatlt'IIfitlilto iit'h I tlit, I'iltitol fS-aitis itluirf y.
    .A simihlar exelmpllitl| k lirtihhded. uilllisll litte, limliltali,,n. (tir sollde,l4f mull

    Zt'aslhuld

    luIlil.-s
    14alell.

    IrO'hiuo

    alalnrollli'.'es itt lit, taxiist{ stalto'lit Itlo r,,'.'tive, reO'tifIalito't froatl Iho' at-oir fl {lAmtlh Afrivtl alrt.. \:No% Zenlamhlll Sort.. \%; .Ntsrmay arl..\111, -art. .I1. ; (iroet',': ,%iit .t'riagl airt. Xiii\ . J:) Irlihaoaao, e'htlrtlhilo'.
    0inl

    at vailndlr

    gi'tlimi :elts
    milfsati Isy ia

    ''he' t'Ultio.
    IWtonl tat

    itin %itlt halitllh Atrl'it tairt..

    ilim' dit'rit-'tl freatl

    11 larovid's.- fiotrhe niartecilarai et'po' -

    r'rli~i1-ti. v'iollfilil. lito'rasr%', tluratitlli, ter chalritaliet tsirlstllisiasti,'i iso tith other 'maltiraio'lilntg ataile, ilti'lha'orlaiitl oain c tuiitioin, troml tit-,hby i'h- slatlt troatll whi'h f ile ilnt'aite is tihrivedti. A sitilalr lartaiikits is ttitlnio ill lit't'.Is\lill4 'lk i'to'lktitilt with i T'llll. 411l1'r citlliel~llOlsll J-411tijill HO{Sinlihilr llrl)VL'4jl1. 'rlle,

    s.alt'l',o wiiilt tilmt oat fliho i'omtlraciiil't

    t 244011)

    IP, 114401

    (8) Sqhips aznd aircraft

    Each treaty provides for the reciprocal ,'.e.ption by each state of the income rhiis principle his lbeen emiiciated in t he Ioternad l14'venut Code for mnanty years. I A slwc-vial liiitatimi has Ie,,ii wri t'tl itato the South Africatu provisioi to the effect that the exempt ion fromt South Africatn tax do's not apply to 11residettts" of Smuth Africa. Thus, the exemption will inot apply to a I ,'tti ted States corJOrat. tiota, it atlly, lthe nttagn'tttint control of which fit ill the Union. The, term "iagfli~*'iuiettta cotitai l" as applied to a corlporation is intentded to mean the the t a direct iont of thes pIolicits of soich cororat loll si dettrminled t hotigir 0 tneIt1ilitg of its bloird of directors or other nanageenett group.
    derived by all etterprlriM of the other staite( frot the operation of ,hilw or aircraft.

    (9) Rentals and royalfties


    South Africa The o Afrienti conventt ion coutnilus no p)rovisionl with respect to llidiitrial ultl amil liki' reivtlties. However, article III of the protocol iN desigiedi to apply ti wh'ilriphs, fiouldlI se'v.'ral ot itr co'tvent intis, whereby it residetht of oine cotit act. nItg stale derivinig rental, from real ProlM'rly or royalties front aituttral resourete' located ill the other comititry may elect for aity taxable year to bie subject to tax in that other country oil a tet basis. New Zealand The convenltiotn with New Zealand provides (art. V'I1) that a resident of one eonntra'etitg state mrceivitig rentitll from real prilwrt3' or royalti.s (rfont natluri.l risollret's or royaltites from the its.' or right it) use 'ol)yrigllts, platetits, ete., derived from soirce's witllin the other state tnay elect to lbe subject Ito tax ott a it niet ,ibtsis ittlthi comttit ry from which iierived *a he wer engaged in a trade or lIsittims in t hat t'otiit ry t through iaix'rttilelt e'stabii lishlititit. Article VIII provide;, oil aireciprocal basis, that tlotiintl.picture renttals dlerived lbyo a resident of the other couttrutmy inot itgagedl it. trade or frmin ie oi tti m husiliss through i lI'rtnanl'rlt estitb.slltiiu nt il thie first country shall Ix, exettllt frott tax by the first o.eOtitry. (Til'e e'xemlptlion (loes 1tint ipply to the New Zealaind ''ln htire" tax.)

    .Norway

    Article VII of the, eolvenitiotl with Norwa' provides thnt roa ties alnd other its melive'.I for Itlhi right to use cop)yriglts, piutetlts, etsc. (moaltditag ilolOil. pict tire renttals) shall Im'e'xemtpt from ltax yv thile state of source. Thus, the recipient is tnot afforded soi ilectiot its in thi' New Zealantd convetit ioni. There is a Special provi.%iom, moreover, to tile' effect that the accounts of thp payor tllly be, slidj.liel (hbv dli.ll-wiin g it elitductiottn of till' atmtoitits INliaiI) if tlte royalty or it hir Utinit paid i4nmt considered to io'l t reasonablee cosihi'ratrloll"i fttr tIh i i,,.' of t his I)rolNry. it Isits Ieetait i111Utillly agreed by tll' re'.t'tiil ttithorill's of Ithi rie'hl vlive comlilries (a) tilhlt s 1ch proviso will betconistrue(d in the ndutiitiisirat iollof thi'lllvotillet u 1tnot cnifl'rrhiig power tilsicit aiuthorities to finally dI'termimi whlthler all or portion iof the paynlett referred to nlbove shoudi bl ' ,,llie'dl its :j di,'dltit t to li' payor thItere-t atid (b) thiat such Inyor hlas the right, It) to alis'ltl Ihie issile to the apl)pro)riatle judicial tribuniala of the cotiiitry lihe r lvenuti nlilyti deduictioi such paylmeiti' or portloti as atithoritii's of which miderlike to hIeilreof. Thl' ('0111111i tee recot ietnds lier'l)ptiuce of t he I)rovisioil in reliutice tiItll t his 11111llll Iursl'lillrll.
    loi

    llow. for lexleUli', the Norwegitln tax)payer to withholing rtim- of .3( iM're('i'tt it thes gross altllioiilt tof s-lh roviylli,..t or retitails, or to hlae hlis tax lh't-trnttti,'d oIt aitet basis, after de,,dhe'tioni anu ('redits. r,.'slp.ting his etitin' gross inticomei from siir'i's within hO1 il- 11ited1 illhllimig gross re'utlils or royalties. Stt1e's, Ao1th Afriett cntventionis) iq It
    thit. U'nit1'd

    Artice' VI I/ provides, ts to inicomne from real prolN'rty (inot including lititn-st frout lIotntl or iitortigages si'.'irt'ul by real i)rolixrty) iii1(1 royalties front the olpera. tiit oif miies,. uailrries, or tuttlrail rsourets. dei'li'ed by rsidetit or corlpratlioit ia oIt o ntl' cont ry from .souirves lit this otlh'r (,i)lulitry, tiuitt slch it lI'rsouI IIIlt' ili'elt Io It' .iilij'ctt tie tix of this country of sooirei,, on itt ne Imsis its ImIo1igli seu'h It) Iotrsm u4,ro ien' i'lgi'd in it trails' or bIihii,'ss through It pienrlittett e-stsilihlit , thenrin. rIt i'ffee't of thin p)rovisioit(s fiti tlis case (f this New ZealanId aiel
    Stattt's

    elect 'it,li,'r

    A-1iO)

    Ireland
    tlnier the l'ciniv''istioi
    cnjiyrights. iiteits., (stc. (includiiig rrlnttals of motions pictures), are it

    with Ireh,,id (art. VIII), ruyslti.,s mwil rentals from Im'exempt,

    I{oyallie's fromii numltieal rioirrv, anl rentll fron re.al prolsrty ahich itri' 1 lis't-,hA ill iltl-' mi'lleted ?tltelllte to I' sublject Oithir to ii witl i S Liu,1 hrild to 15 lixrt'mitm or treated as if tilhe rerillhmt were i11ngedl in a Itrude or Wihiehli.- ill te' Iiti- hl rates. Tit-' elre, t of this op!tion11 (lIt('i.t."tsiv, %lilt r e'h'c' to a edSt i l iimihlr prolvisionli i tilt Norwegmi. t ?ol il Africani c(iveiitiuii%. If tlh.0 )ropmo rv froii whliich this renttais or rovalliets arts received is jlocate.d in Irelai I nulll tl Ills reipitih isit sidar of hi Viited Stalttr. (2) the illomill, is SulIjec't to t5U llt " IUnilted States tex, an1id (3) tle. rt'eijlintii im not ('iigagetl i tait trade' or business lit Ire'land, til' hincole shall Ix' exe'rlllit frout Irish suirtax.
    Oreeee

    Tit(, provixionis of tilt, convention with (lre'e' (art. VII) with reslct to tihl' taxtitioli of roynllitiit provide as( dlot's ilth Norwegian conveintlloi that suh iicoine

    shall hI' ,xl'llll'l lit sotil'ti. Itemitll from tilot ioinip'etlun- filhns art' sperificlly ,x'liitl',d from11 tilhe olsratioii of the'me' provisit-is. I ' ider art il'h' VIII rIIt ls fromi nreal pr.lojrltv mid lnntiralremtrc(' royalties nmay Ie' taken tit soulrce (ill it It'r Imis.
    Switzerland Article VIll of the Swiss convention provides for exemption from tax Il either voInFtry of vairlouts royalties', hiialiiilg filhm rentals, derived froml sourrets withlini.

    de4rived. Article IX poI de's that inciiime from real hIrOlM,rty (irislmlilig gains from this. .'ilh' or t'xchuniige o(f such prolirly bNt not clud ing'iiterest from mIort gage's or in .1.10Is MstClirl-'I i1V 411Ch I)roMl'irt) antl royalties f(rim till' olperatiium of iilles, quarries, or others natural risilr'ccs sllniil I&'taxahbl' oily ihi tilt' comllrv whenMi'l Irol(trty or suhi iiiiiies, qutrahus. o .rIt lr l" re'sorc'.' tire Astuitcl. lut' Like c.rrcilspoiliig plrovisiolsl i ol her taiX c .'iiv'itioiis (ti tlt'cribedll'd albt)ove, art icle I X wtVitl llt'riiit this tax liability to hit' (I'terminiiiid iois a iiet lbasis. (10) hit'
    ('tiivt'littiois

    thalt country bly it r.esi.rlit, corlioratioh, or other eiilty of tilt' other cotilatry ieot having ai imrilti, lit establishint lit il the colimitry frol which the royalties Orn-

    iOlpill #011108

    States butt mporarily pre-'lnt therein. Article XIV of the slvidilag convetlioni would, of colors, override tile litler amelnldleitilt with r'esie,t to residents of Ireland. A Iprovisioll Siiiiihir to thlit of tihe- Iri.-h coiivetl'oii witi origimilillv COlithllied in ile conveiit itos wit tilt et'therlands amid D)einiark, bill oill tith' rccoinliiieii ie laitn of the ('omlmit tee Oll Foreigln lielatioms, wias strick'ei out of rvach convenltie hy' 1" the lenite. rhTose colnveiltioms, li. eiach catse subject to ilie reservation heie minted, were accepted by tile tSemite oil June 17, 1948. The conveiitiloi with Irelnld wats sigmied onl Aeptemnlxr 13, 1949. Til' liisistenice of Irelanid upon the exeiptioi of Its residelhts froni the Ullited Mates tlax oil capilitl gaiis is blaed ol th act that such anll iexeipt ion is Lolltmailed Ilt ill tile coivenitioi betweell tlie IUnihted Stttes mimid the United Kitingdnt. flow. ever it should Ie' isoled hatil the ctonlvetntioni witlh the Umilted KilldoIn waas ritiied prior to Ihe eiialt eiit if thie Ievenue Act of 1950 tand prior to thle ratificiatiomi of the conventions with I)elilnark anll the Netherlauids. eIlctause oIf tihe- stromi ol)jecoiUns which have been raised pnrviously imithe Coiigreaes to tlhe exempitlon (If normireident, aliens froin tax oilitheir capital gains front the tranmsactilos entered imito in the United $tttes, the cumillittee recommnemids thhlt article XIV of the convention with Ireland relating to illcomle taxes be eliminated asid proposes a reservation to that effect.

    witlh omb Alt i ii . N, New'ri~tw'aliid, N.orwa'r (Or4ece, mind . oimotain n IroIvisitin for t'xt'mlption froin tax If ('til)ital gaits. lt) Article XI V of Ihn' Irish clnlvelnitli prIo(videls t hltit a resident of Irelanad lint 'aiigged ll it trade' or business ill Ill,e t ilted States Shall M.e IeXtlllpi (roill thli tI'ite.d 4 tutl, tsax tli gainhs fro m lit, milet (r .'xc.'higt' of capil iasslts. It will Ix- recalled that section '213 of the IReveaiie Act of 1950 i!pon:sd a tax Ilioltin ille lit ltllllmtll If capital gains delrived fromi s(our(ces witllil their tilt-"led St'ate byv it Iliresidh'lt alllie Idiilvidid . nIot I glted in trade or business ill thilt, 'ell(
    S%%itim.t'rlilid

    (2411)

    SI. .v'ut,'e1, iblhrd rdlrhF itnpian proAls ith IIir'hisi prvitiuts 1t a11ri,'h a'iri6orlumatic m,' (h,' a'ero u, Art icle XVI sot t 0l1all Itsi 4,Ne'legitl from llil4til tltllti lta% fiii Ip, tiae'tt.lattllh ter ali|iIrilalteed . itr r,.e ,idett of Irtrlttted c'aerlllis, iriolits. ill'utal'. tor ,metrpllitt. if itliviatihats %%lo tlit- tIter huiff ,,4 tlhit ltaixhh,' Vyear, imert' lirthraghtlh r.iiiril. ifiretlyl' itr itullirct lov., vilirig ar ill fli't'-orlorlat ion. itme eAl flit, elr 1)wrewt'r., h hiall 11ut 'itiate'. t' st ricken All bvl fl eas flitn \ettlrhmits a'onento A simti lair tjt.rlih' . eans e'I'niteil KitKheina tdllt (m':elacid, 1.Ol Similar tirl i'-ts irf. (eUttd eill ill lflin h. flt - (.l' lhtt l liitisartliteh umtleh give, Irish etorlmorat aios oltisilK lil.sil,.e's Ili %ii( t s',lllk' it ivt'e adilvaii:aKge tlev'r otiiaest ito' atortwioralimis. lita. ill ill. I 'lliled St t. tolo'bi from .c 'i.ollillw.re'iiu.;;,t.lods that t hl tirlit ahe I, e i l' hIitiited fritl-. 'ollVi'llljlt ;aiad | e tca that e',eea. ita i'tl liriot e sl r,.t r
    it !)t C'r 1,i ffer foreign Ifit.. lor,,i.-6io%- 4, tits- virimu,

    l'mithr flit- v'ro.lit


    fil

    i t.l~~l Uhnlmli'l States.' ts-

    Ity till imlivihlial wlhl) is re'ident ill Inrt'thatt if sucth inc'e is wit suliljt'elt in j'clt'le tIa. 'T'his p)rovisioun is nis'et'ssitiatedi Isy thie c'xihet'tie It) I'ailll Kitt InhlaneI, etalchu Apiril 14, ' lwt''tt the I'll-Uited Kitagelelttt andt t i of it tx arraatimemlna'ltid ti' I1)211. I'nchtr thhat uarruinget'ltt011, ia rue.ietAl'hatf .tae the a'aiittrti' meat rne'sidetlnt it fhie it he'r 'aiatallry' bill tlariviilg iltc'aitna' frolim stia'ltc othtr cctitlitlry is e'xemlpt tratl, tax ill l)kcstl iv *su'h other 'iittatnrv. Thtus. nao ervr'lit teir Irish tax Ip. I I;11 t weathlct ti' I wiuta'et were it i14it fair ill,' suariviaIprovision ittletel'd iii ttta Ifttulit, 'citec'ttiuilt nit, Irhelnd. (4444e4' HteiM wit/e'olhml iantl.XIV) have axrvial tie a'r'utlf pIriisiaollts "llstallt. tialll. simihlr tit ttaisa' fioattll ill seaction 131 tat tin' Intertlal IReva'entue' Codut'.
    lliln' trfto a' cha.'a1ectl toa ic' ioe slhill I1w
    frtteit.

    iit ltmithh atirliar:alitn tteiieid whileh e.'lilt illlilil Ifi tiex itfiviti Uoils lcomne intol elret. uill dlulhriK tit- lives 4f tite' rts'tetlive hua1t 114t eel1vuile'it It ;waid taxes for ilncometa xes sa ts n vomiiti'tl la olalt' loim v'r'etit uagaiiis itsi ina'.ei, flit- other rimt rmna'lj in lates. 'This ererlil will I' applitiedl ill ,ia'eirrdiutae, with swt''iill I:11 toft lie- ItInterital Itf'v'tettl' (C'ctle. stitth Afrieia sigra'a'; (art. IV) tha extrhalue froml The' Crreudit s. Stehg1 its raiti 11rcicatl. its it.lllt'ttl4' 1at4l ae''ts--Iarc,1tlt 1.t Imaba'. illef'lle' (rein, siotlre'c' silhill Ihe I'tait'lt i :1l,)t3) cif ilt.' I rai'rcgiai-1n'11 Alf Stlio tallt.s. Trhis tlli.ilie.s tihll Simihlarr e'ra'cnil t'oitI'. New Zeitlaua, till its !.art, ill etfrf'cIt iathopit (art. XtII tthe Inrinlille1 t ' fitle Ilithortial IRvei',atie (C'odle. Niorwayv tand Ire'hlati likewise itetigt this tric'ilah. lt' iittiathi ii sjtcital lirvisidmi it th crtl'tt that intc'eitll' dehri,ed llt The Irish c'citt'it midtel resi,viihiit

    siutrees ill flih, Il'titheI Kilnitlmtl

    seioilr;'as ill Ire'lhan

    ( M3) E'xltrusio Its uttlher I'rrilorite state' i1a11y, tillait givitei ittai'e' tc Iha' either, a'xtatlla the i)tli'utitim a(t the' toliven' l'vrs.'uia territioric's or athtr territories tilevr which it haim ilttcrtiittioutl tiot tit til ci ralspolsilliiity. (I l) Aa'rho,'n.je ,I' jnf',r,,u/.,ier
    jlies I'a'lh clathfe six 'oitltve'ltio provide's f'ir thi a'ehhaais' t iti tifotrmiatiilon I'lAwa't' i treAr thle, taxiatiaonl atuthoriitiesa cit thlt're'sle'fiva' a'cotttttnu thta' purposes cli atarryitlg t(i UratlI,attnlI faor aiother relahtedt liteill thil' piroevisiens e tha' a'titllvc'nt is, he rv'ntieia

    Article XX etf tlie eonvetntlaiot with Nc'w Zealand provile's that eithe-r contracting

    pulrl)u11.S.

    (1-tt1 .1111114

    iasaner in Collection

    health caf tile Coll'lltitelit.-I ithIt I a trlhltl, WitI tiha' axeeltitit ci the c'll v'callt et t taxes whiiht aire inilttiual assitoetunee atilct suigtcrl ill the colleltion cthel' tirirviees (itor it ihc iitventiit ceiletilcrla'c, toisatehc'r with interest., eastc, and actleiflits stuiject 4cflit o:! viie'tl ahltariaa't.'r. t.ike pcroviisionts ari feotulnd ileat titint tit tia'stal titta, 111 ng cillot Ilt' hiatt niotl i tll m in tlt' IFreit'h., Ne't lndls, D)iaiiislt,ilatidSwedlish ai.va'ntcll tre-atlic' with filha It'inite' Kingdlotima i1t ('anduiald. tile ill Ase tfl iciase ota' eitate-tax c'ltitVc'itt olisa'tmnst'c earlier in this r'llotrt. the l t ct' t llertii r'cmnitijithtee Ih'lii've-' that the a'caIle ,riviximm 4 lth Amh African, (ire'ek, altt Natrwa'itinit it et'.-x cclit vitt itetits anr hfc Itr,ed, antdt it rel'iatp thuat, as a geitnleral rill., it ilk etIt'liev'e'dl wise tca have clfta' gciv.'rli't coellect the taxes which arc' eottaitll a die' tit anotlther lioverntinc'it. Tile New &.4c'hinct at1ct Swilss cll it itntitle the torin lilliitdlirtrvisiOll, a1114d ('0innlit1h'4' r1`1i1401c1tl4S`ll, l1 that thte ,cther e',ive'allci 1 tioisle silgilarlyv iiHit0'4l. Thuis, th l'ea'ciniinittce re4'claottWialaels the t4eiteRCt't'-10, hfal' ihltItAfri'ait. ('reek, atndet Nirwgiai iltaaotat'-tha\ it thl the 'olhe'ieiii ptroavisio itlnatt 'rtatndinjtg tIhat ea'ch cit thae gaovelrnmetst'l th l reaitalcntitsits stlija' t tita' iteeun 12412')

    iile't lthe tither's ta% mileI in iordler tim litmure Iltat tlh e'eiptillcms or relthec'cd ranh'oct it% lnrevided'lil,,r the, rrNile'Hivie i'eiitVe'lileitmi will Illo hi, eiinj43'rl Ihi'
    III

    ;me.r.,imie imit eitlillk'cl Its mcellh hrni'lile" s.


    iluI I

    -it ad
    14'

    '.'jfhrti oloe Il t's 1

    rhlim. v'simcioiiUn iuilh

    immiii.mii Itio-r :iftior the' It1


    cult

    .sorustv ande (h;cc''evv' -haIll 1' 1'.efctiive' fir imailmde, 'l,'ir, l.4 it .laiiti( m ir.i I1e' %:rill " hir' Ilhle e'mliallie' itf h ,e

    TIe.' i ' - iim '.oi tlsIills :tll mie Iilldm' 1' Ici ei'v,l ilIh-, N.e mI. l Iet IIIli, ri i% ei I ifl. i-; tlioli.L'Milm' il imimei'eiO,, Irkiiig tmiifor .tir rthtlli i nt'. l', ,'mmil I mill i c'llm Uilll NOm'w '/,4:l11i14 Sli ll elie e'Irc'e'i ', It m mlm,,. to) I i'loihe' ' Sti. Iitm",, (tor ila\:ltlh' %,,:iri liliitg eitr :mmi tlllr.F I ofl liti- vilihliundur '%,itr elF d erier at, %hi.ch I tim', ev'lt:iiigo ,' it.mir4tinitr.imi tl' r;litit mmii tem'ctotor, andiel. jilth r' im Iii ts',i \Vs% Ac'aitliul Ii:&c'-, (fmr Ihlie' .%v':i c . .i,.".s.liteito lof'filmiiiiiK cmi lit-I I1%1 itm Aliril dai 11,,\1 f,,ll. limt lie a le'il:r car in %% h ' hicl ichelth 'lletee e,. mm'l re'e'ilr. i'I4 4'rt'ie.,li ii.' cit Il'he c,,mtl~ e'limii wih Itlrlhitil i.4 '0ii% tli ii:ellh I tl' solime' :1'. t11.1iofI ll-e' .c'%% Zc':elzeiiml retll4'-.1ii limit. I lmei r, iiie omiit'h as lil e'rt, icr, .small cv' ,hlr,'rem'iiim %,tiltl ri,'%mm'l'i fI Iriml l ii'eiiu', I lie Ih lirirtzex, lle' 6 1 o imoMidteti lri.ih ooerlmirali mim-lircmlii- li iiire'imi i. h i'll i fli Its t' 'mi'emimilprosper farfliht mm ,hit :ell% cit i Ieii're'%i'c'!it c'ir'i't iii' elitch's. li' Ior aIt lhl$ I v, IIII ll I Ic',,e'r4'c'T limr v Thli,' S,%% citi via' iti nlI v ise' I hit I lie, mt 'IliIlimit i-." ir , l,.:tr%1 'l-ilmllit emll ailie'r ,Iztltlir.%I to( iliet %,,r t mmr ill I; flie' e'%e'hi e cift( ilisimri11'tit-' 1m4 r:tili.-':a i imita i i ',hike,lm c'lm hlimi, it 'lii'lt 'i'clh 'e. m , :ilt' :Iik's lmhe'' emto mir ;liel'r 0li'icmli'r I, lmzerustraplilis itl aitel :id of artlic'le VI zliil Ci and Imide--lall Iivie,' %A ,41e'i'i rml% (ler Imablilmh, %c'ars Il.il'ljiiillt lemit ftie'r hJtalltir" I cit ilit' iear Itr'l or billcmvinit t he' ic':er in wiiliic' -hlt.Ii,'\l'le'mitige' Ia:ke-c pIlac'.'. It i"altrilsvileo{'mllem lioit t1'im iliilimi ..hall c1. litiue' e'ffet'livi' (fr A yeirs Nm'gilliniii , ii lilt It-e' .'mIle',l'ir ,.m:ir %huih i, liii l-ll''gi' omf rilnimiti (if ralititt iitl liaki's Iit'e' an inirl'iitsimmi p iel nilmi', thlec'rilte'r, hueafter layt'riiriitimitl li i' t hi'r 'ounlitry met l io fli' Ih 'id o i liit 5tv.,ir Ie'rieml r 1 ztit tmy thltreafetti'r l% itivittl t I:ht 0 ittlmit lih' liri limte l lielie' ver 4l iterimimirmiijn, in whii,'h e'veint lie' cemlitiemli "hall 'c':,se' it) I.e'c'I'ir i. flie' ti t:htiilh' vertcr.& Iw" if %iitilt tlimm r itt e'r Jimliiit iry I itxtImfolloulliiit I htt' el iiniriti lmitici I lie' fi-Illailtll pe~riod.l
    ,'. SiP'I'I'IoKEMEINTAL rIiN iTI WITII ViN %I)%

    {1r. 11oo,;;

    SWI1"ZElI,%)i(X':II

    |i.IIII.%'t

    TIlE .AVoIIII.M

    E OF1,

    io'i'II.

    'r.%.x, A'rlitN ON I.e'ee.tI:

    Th1I1'1 Se'Itmt1t, 1114 (C'ommtiltitte'i'(f'Whole, pro'eedeid it) c'itiuer inl the' .N, (ig.l., Co, I.s1 ses.s.) it !ilvo 'lieltill lm,'wei'in the I 'lit id St lltt itor Aitte'i'i'imel n I lnie' Swks (C'onfe'de'i'mtlimo fitr ll. n'oie'll'lli', orlet it ditihh, t .tlalmll Wit h r'li'pet to liti't- till ilti'olll', igiti'I titt W thlitgltoi on NN1.Y 24, 1115l, which w .sreaitd Ihi' .,c'olitl 1I'1'e. IIOr fll'w.': I'l'l'X l o flc 'o l'vlilioilll
    fiht- vi'-mI~'lion (Em-t'l'lifive

    I/). I I I6;71 'rhe I'lll: ll.( ()1,DI1We Thee ivent.qlionl is hislforn 1('1,:1{. tlie st'ltmtt ' 1IIII olieoell tlo te'it'llttl'lt t. If there he i' ) tmimte'itilttte'itt to t iNe itreleosedl . l.the e'onventloimt will hbe relorlti'd Ito Ole Sem'ittt1e'. 'Miii'elt, ci Iot'e'jlii I'llurlId to tlihe,' 'nt' without iiIIte'ltll'ttt. Wit 'I'The' I'11 01'1"1( '1i1. Thie r'solutliOn of rlttili'ilion with OFIF1)1C(E hle' Ir''sel'vitlltolt will ie' I''uild. 'T'he' ('lhie (C'lrk reml1a11s follows:
    icvimls'

    Art se.-.ioi,

    Itct.ulh'qc'I (Imo).thinridsett tr Sei'ermlsrs ime'ttt meite flit- li rIti limsitt

    Itl ( 'c i'mitlitl LI1,1, M.gi,'ll-me W llithogiitmii Malyv L14, I Ill m151, for I lie' meilitmiitc cit eihlllh', ' iith r.-cli't toa tie% illtim', mlthje't'i |1 I li' thillowing re'secrvat'iol: emit
    4

    rrrn'ar-ll cml-lrirri.y the'rri n), That I ltoSe'al -, cit Exetiiivi' N. E':igltihy,vloe' d ('mt~rum.'. INmit'twe'iI the I'ftlte'e hltlrsof A.inttrir'mmitel $i, it witSil'r.

    Iminut iut

    elm! ericitelraie.
    !

    'Thie (mve'rtiu im'io( itt , i' l'e'l l irm it Aoiioerieit im. hit loe llm ltlIrir rlalpl it'no I cit)inrle' .t s. Ilie ('emll%'elilell, r,'latl i1g timIng ie'lfltl em iiierretlimit oit1 Iulie rc'llit

    (2413)

    The reservatr ion was agreed to. The I'RKII O) FICE'('ER. The question is on agreeing to the, resolution of roti if'iat ion withl h, resrvation. IPut ting the qIuest1ioi6.1 Two.- hirds of I1he .selttors Itrpt occurringg therein, Ithe reasolulion pret of ralt ifialt ion, with tlie rewsrvation, is aretied to, and the (ollotieution is ratified.

    reservat ion to the resolution of ratilicat ion.

    The PIRSII)IN(i (OFFI('CER. The question is on agreeing to, tl,,

    t2414)

    IPrsidtenti Ir'i m'ha1titn (including officil ta,t of e'on #I'lltholl


    iRelprint of TIAS '23161;

    (2415)

    TIRBATIES AND

    OTHER INTERNATIONAL ACTS SERIES 2313

    DOUBLE TAXATION
    Taxes on Income

    Convention between the UNITED STATES OF AmERICA and SWITZERLAND


    * Signed at Washington May 24, 1951 * Ratified by the President of the I

    United States of America September 20, 1951 * Ratified by the Swiss Confederation September 22, 1951 * Ratification exchanged at Bern September 27, 1951
    * Proclaimed by tho President of the United States of America October 1, 1951

    * Entered into force September 27, 1951

    (241?)

    DEPARTMENT OF STATE PuucAuuo 4407 [Literal print)

    (2418)

    CONTENTS
    Presdent'e proelad ation .............. Convention plap

    erzmanlanguagtext..........
    Protocol of Exchange of Instruments of ratification
    English Inguo text . .

    18 3.....

    French language text ....

    . . .. ....... .
    (Im

    ..

    .. 0.

    . .

    . ....

    84

    (2419)

    Br m Puzsm ov ms Uinmo SmTs or AMWoA A PROCLAMATION Whhus a convention between the United States of America and the Swiss Confederation for the avoidance of double taxation with respect to taxes on income was signed at Washington on May 24,1951, in the English and German languages the original of which convention is word for word as follows:

    (1) (2~421)
    T300 0-62--vol. 2 -.- 39

    CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE SWISS CONFEDERATION FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME The President of the United States of America and The Swim Federal Council, desiring to conclude a convention for the avoidance of double taxation with respect to taxes on income, have appointed for that purpose as their respective Plenipotentiaries: The President of the United States of America: Dean Acheson, Secretary of State of the United States of Amer. ica, and The Swiss Federal Council: Charles Bruggmann, Envoy Extraordinary and Minister Pleni. potentiary of the Swiss Confederation, who, having communicated to one another their full powers, found in good and due form, have agreed as follows:
    ARcLi I

    (1) The taxes referred to in this Convention are: (a) In the case of the United States of America: The Federal Income taxes, including surtaxes and excess profits taxes. (b) In the case of The Swiss Confederation: The federal, cantonal and communal taxes on income (total income, earned income, income from property, industrial and

    commercial profits, etc.).


    (2) The present Convention shall also apply to any other income or profits tax of a substantially similar character imposed by either contracting State subsequently to the date of signature of the present

    Convention.

    Arnwiu II (1) As used in this Convention: America, and when used in a geographical sense means the States, the Territories of Alskas and Hawaii, and the District of Columbia,
    (8)

    (a) The term "United States" means the United States of

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    lTJIA 210

    (b) The term "Switzerland" means The Swim Confederation. (c) The term permanent establislunent" means a branch, of. fice, factory, workshop, warehouse or other fixed place of business but does not include the casual and temporary use of merely storage facilities, nor does it include an agency union the agent has and habitually exercises a general authority to negotiate and conclude contracts on behalf of an enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. An enterprise of one of the cont rating States shall not be deemed to have a permna. nent establishment in the other State merely because it carries on business dealings in such other State through a commission agent, broker or custodian or other independent agent acting in the ordinary course of his business as such. The fact that an enterprise of one of the contracting States maintains in the other State a fixed place of business exclusively for the purchase of goods or merchant. dise shall not of itself constitute such fixed place of business a pernia. nent establishment of such enterprise. The fact that a corporation of one contracting State has a subsidiary corporation which is a corporation of the other State or which is engaged in trade or business in the other State shall not of itself constitute that subsidiary corporation a permanent establishment of its parent corporation. The maintenance within the territory of one of the contracting States by an enterprise of the other contracting State of a warehouse for convenience of delivery and not for purposes of display shall not of itself constitute a permanent establishment within that territory even though offers of purchase have been obtained by an agent of the enterprise in that territory and transmitted by him to the enterprise for acceptance. (d) The term "enterprise of one of the contracting States" means, as the case may beo "United States enterprise" or "Swiss enterprise (p) The term "United States enterprise" means an industrial or commercial enterprise or undertaking carried on in the United states by a resident (including an individual, fiduciary and part.nership) of the United States or by a United States corporation or other entity; the term "United States corporation or other entity" means a corporation or other entity created or organized under the law of the United States or of any State or Territory of the United States. (f) The term "Swiss enterprise" means an industrial or commercial enterprise or undertaking carried on in Switzerland by an individual resident in Switzerland or by a Swiss corporation or other entity; the term "Swism corporation or other entity" means a cor(-.4-.4)

    TIAS 2816

    poration or institution or foundation having juridical personality, or a partnership (amociation "en nom collectif" or "en commandite"), or other association without juridical personality, created or organized under Swiss laws. (g) The term "competent authorities" means, in the case of the United States, the Commissioner of Internal Revenue as authorized by the Secretary of the Treasury; and inthe case of Switzerland, the Director of the Federal Tax Administration as authorized by the Federal Department of Finances and Customs. (h) The term "industrial or commercial profits" includes man. ufacturing, mercantile, mining, financial and insurance profits, but does not include income in the form of dividends, interest, rents or royalties, or remuneration for personal services: Provided, however, that such excepted items of income shall, subject to the provisions of this Convention, be taxed separately or together with industrial or commercial profits in accordance with the laws of the contracting States. (2) In the application of the provisions of the present Convention by one of the contracting States any term not otherwise defined shall, unless the context otherwise requires, have the meaning which such term has under its own tax laws.

    Arrwcna III (1) (a) A Swiss enterprise shall not be subject to taxation by the United States in respect of its industrial and commercial profits unless it is engaged in trade or business in the United States through a permanent establishment situated therein. If it is so engaged the United States may impose its tax upon the entire income of such enterprise from sources within the United States. (b) A United States enterprise shall not be subject to taxation by Switzerland in respect of its industrial and commercial profits except as to such profits allocable to its permanent establishment situated in Switzerland. (2) No account shall be taken in determining the tax in one of the contracting States of the mere purchase of merchandise therein by an enterprise of the other State. (8) Where an enterprise of one of the contracting States is engaged In trade or business in the territory of the other contracting State through a permanent establishment situated therein, there shall be attributed to such permanent establishment the industrial or commercial profits which it might be expected to derive if it were an inde. pendent enterprise engaged in the same or similar activities under the

    (2425,)

    TWASI 281

    same or similar conditions and dealing at arm's length with the enter. prise of which it is a permanent establishment. (4) In the determination of the industrial or commercial profits of the permanent establishment there shall be allowed as deductions all expenses which are reasonably applicable to the permanent estab. lishment, including executive and general administrative expenses so applicable. (5) The competent authorities of the two contracting States may lay down rules by agreement for the apportionment of industrial and commercial profits. AMncLs IV Where an enterprise of one of the contracting States, by reason of its participation in the management or the financial structure of an enterprise of the other contracting State, makes with or imposes on the latter, in their commercial or financial relations, conditions different from those which would be made with an independent enterprise, any profits which would normally have accrued to one of the enterprises, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly. ARnccL V Income which an enterprise of one of the contracting States derives from the operation of ships or aircraft registered in that State shall be taxable only in the State in which such ships or aircraft are registered. ARncLa VI (1) The rate of tax imposed by one of the contracting States upon dividends derived from sources within such State by a resident or corporation or other entity of the other contracting State not having a permanent establishment in the former State shall not exceed 15 percent: Provided, however, that this paragraph shall have no application to Swiss tax in the case of dividends derived from Switzerland by a Swiss citizen (who is not also a citizen of the United States) resident in the United States. (2) It is agreed, however, that such rate of tax shall not exceed five percent if the shareholder is a corporation controlling, directly or indirectly, at least 95 percent of the entire voting power in the corporation paying the dividend, and if not more than 25 percent of the gross income of such paying corporation is derived from interest and dividends, other than interest and dividends received from its own subsidiary corporations. Such reduction of the rate to five percent shall not apply if the relationship of the two corporations has

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    97

    TUi" Mel

    been arranged or is maintained primarily with the intention of ecuring such reduced rate. (8) Switzerland may collect its tax without regard to paragraphs (1) and (2) of this Article but will make refund of the tax so col. lected in excess of the tax computed at the reduced rates provided in such paragraphs. AmcnLs VII (1) The rate of tax imposed by one of the contracting States on interest on bonds, securities, notes, debentures or on any other form of indebtedness (including mortgages or bonds secured by real property) derived from sources within such contracting State by a resident or corporation or other entity of the other contracting State not having a permanent establishment in the former State shall not exceed five percent: Provided, however, that this paragraph shall have no appli. cation to Swim tax in the case of Interest derived from Switzerland by a Swims citizen (who is not also a citizen of the United States) resident In the United States. (2) Switzerland may collect its tax without regard to paragraph (1) of this Article but will make refund of the tax so collected in excess of the tax computed at the reduced rate provided in such

    paragraph.

    Arnma V111 Royalties and other amounts derived, as consideration for the right to use copyrights, artistic and scientific works, patents, designs, plans, secret processes and formulae, trade-marks, and other like property and rights (including rentals and like payments in respect to motion picture films or for the use of Industrial, commercial or scientific equip. ment), from sources within one of the contracting States by a resident or corporation or other entity of the other contracting State not having a permanent establishment in the former State shall be exempt from taxation in such former State. Ancja IX (1) Income from real property (including gains derived from the sale or exchange of such property but not including interest from mortgages or bonds secured by real property) and royalties in respect of the operation of mines, quarries, or other natural resources, shall be taxable only in the contracting State in which such property, mines, quarries, or other natural resources are situated. (2) A resident or corporation or other entity of one of the con. tracing States deriving any such income from such property within the other contracting State may, for any taxable year, elect to be sub. ject to the tax of such other contracting State, on a net basis, as if
    (2427)

    TUSan

    such resident or corporation or entity wern engaged in trade or busi. sees within such other contracting State through a permanent estab. lishment therein during such taxable year.

    AtmTW

    (1) An individual resident of Switzerland shall be exempt from United States tax upon compensation for labor or personal services performed in the United States (including the practice of the liberal professions and rendition of services as director) if he is temporarily present in the United States for a period or periods not exceeding a total of 183 days during the taxable year and either of the following conditions is met: (a) his compensation is received for such labor or personal serve. ices performed as an employee of, or under contract with, a resident or corporation or other entity of Switzerland, or (b) his compensation received for such labor or personal services does not exceed $10,000. (2) The provisions of paragraph (1) of this Article shall apply mutati. mutandia, to an individual resident of the United States with respect to compensation for such labor or personal services performed in Switzerland. (3) The provisions of this Article shall have no application to the income to which Article XI (1) relates. (4) The provisions of paragraph (1) (a) of this Article shall not apply to the compensation, profits, emoluments or other remuneration of public entertainers such as stage, motion picture or radio artists, musicians and athlete& ArmaLu XI (1) (a) Wages, salaries and similar compensation, and pensions paid by the United States or by the political subdivisions or territories thereof to an individual (other than a Swiss citizen who is not also a citizen of the United States) shall be exempt from Swiss tax. (b) Wages, salaries and similar compensation and pensions paid by Switzerland or by any agency or instrumentality thereof or by any political subdivisions or other public authorities thereof to an individual (other than a United States citizen -whois not also a citizen of Switzerland) shall be exempt from United States tax. (2) Private pensions and life annuities derived from within one of the contracting States and paid td individuals residing in the other contracting State shall be exempt from taxation in the former State.

    (24-28)

    TIAS 2810

    (8) The term "pensions", as used in this Article, means periodic payments made in consideration for services rendered or by way of compensation for injuries received. (4) The term "life annuities" as used in this Article, means a stated sum payable periodically at stated times during life, or during a spec. ified number of years, under an obligation to make the payments in return for adequate and full consideration in money or money's worth.

    AreoLa XII
    A professor or teacher, a resident of one of the contracting States, who temporarily visits the other contracting State for the purpose of teaching for a period not exceeding two years at a university, college, school or other educational institution in the other contracting State, shall be exempted in such other contracting State from tax on his remuneration for such teaching for such period.
    AmcTLa XIII

    who temporarily visits the other contracting State exclusively for the purposes of study or for acquiring business or technical experience shall not be taxable in the latter State in respect of remittances received by him from abroad for the purposes of his maintenance or studies.

    Astudent or apprentice, a resident of one of the contracting States,

    ATCLa XIV
    (1) Dividends and interest paid by a corporation other than a United States domestic corporation shall be exempt from United States tax where the recipient is a nonresident alien as to the United States resident in Switzerland or a Swim corporation, not having a permanent establishment in the United States. (2) Dividends and interest paid by a corporation other than a Swiss corporation shall be exempt from Swiss tax where the recipient is a resident or corporation of the United States, not having a permanent establishment in Switzerland.

    Aeoas XV (1) It is agreed that double taxation shall be avoided in the following manner: (a) The United States indetermining its taxes specified inArticle I of this Convention in the case of its citizens, residents or corpora. tions may, regardless of any other provision of this Convention, include inthe basis upon which such taxes are imposed all items of income taxable under the revenue laws of the United States as if this Convention had not come into effect. The United States shall,

    (2429)

    TZAB 2816

    10

    however, subject to the provisions of section 181, Internal Revenue Cbde,['] as in effect on the date of the entry into force of this Con. vention, deduct from its taxes the amount of Swiss taxes specified in Article I of this Convention. It is agreed that by virtue of the pro. visions of subparagraph (b) of this paragraph, Switzerland satis. files the similar credit requirement set forth in section 121 (a) (8), Internal Revenue Code. (b) Switzerland, in determining its taxes specified in Article I of this Convention in the case of its residents, corporations or other entities, shall exclude from the basis upon which such taxes are im. posed such items of income as are dealt with in this Convention, derived from the United States and not exempt from, and not en. titled to the reduced rate of, United States tax under this Conven. tion; but in the case of a citizen of the United States resident in Switzerland there shall be excluded all items of income derived from the United States. Switzerland, however, reserves the right to take into account in the determination of the rate of its taxes also the income excluded as provided in this paragraph. (2) The provisions of this Article shall not be construed to deny the exemptions from United States tax or Swiss tax, as the case may be, granted by Article XI (1) of this Convention. Ai .cL XVI (1) The competent authorities of the contracting States shall ex. change such information (being information available under the respective taxation laws of the contracting States) as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or the like in relations to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any person other than those concerned with the assessment and collection of the tazex which are the subject of the present Convention. No information shall be exchanged which would disclose any trade, business, industrial or professional secret or any trade process. (2) Each of the contracting States may collect such taxes imposed by the other contracting State as though such taxes were the taxes of the former State as will ensure that the exemption or reduced rate of tax granted under Articles VI, VII, VIII and XI(2) of the present Convention by such other State shag not be enjoyed by persons not entitled to such benefits.
    120 U.S. Code 118L

    (2430)

    11

    TIAS 2816

    (8) In no case shall the provisions of this Article be construed so as to impose upon either of the contracting States the obligation to carry out administrative measures at variance with the regulations and practice of either contracting State or which would be contrary to its sovereignty, security or public policy or to supply particulars which are not procurable under its own legislation or that of the State making application. AmToLU XVII (1) Where a taxpayer shows proof that the action of the tax au. thorities of the contracting States has resulted, or will result, in double taxation contrary to the provisions of the present Convention, he shall be entitled to present the facts to the State of which he is a citizen or a resident, or, if the taxpayer is a corporation or other entity, to the State in which it is created or organized. Should the taxpayer's claim be deemed worthy of consideration, the competent authority of such State shall undertake to come to an agreement with the competent authority of the other State with a view to equitable avoidance of the double taxation in question. (2) Should any difficulty or doubt arise as to the interpretation or application of the present Convention, or its relationship to Conventions between one of the contracting States and any other State, the competent authorities of the contracting States may settle the question by mutual agreement.

    Arncm XVII
    (1) The provisions of this Convention shaU not be construed to deny or affect in any manner the right of diplomatic and consular officers to other or additional exemptions now enjoyed or which may hereafter be granted to such officers. (9) The provisions of the present Convention shall not be con. strued to restrict in any manner any exemption, deduction, credit or other allowance now or hereafter accorded by the laws of one of the contracting States in the determination of the tax imposed by such State. (8) The citizens of one of the contracting States shall not, while resident in the other contracting State, be subjected therein to other or more burdensome taxes than are the citizens of such other con. tracting State residing in its territory. The term "citizens" as used in this Article includes all legal persons, partnerships and associa. tions created or organized under the laws in force in the respective contracting States. In this Article the word "taxes" means taxes of every kind or description, whether Federal, State, cantonal, municipal or communal.
    (2431)

    TIAIS U816

    12

    AcLu XIX (1) The competent authorities of the two contracting States may prescribe regulations necessary to carry into effect the present Con. vention within the respective States. (2) The competent authorities of the two contracting States may communicate with each other directly for the purpose of giving effect to the provisions of this Convention. AR:iciz XX (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged at Berne as soon as possible.['] It shall have effect for the taxable years beginning on or after the first day of January of the year in which such exchange takes place: Pro. -vided, however, that if such exchange takes place on or after October I of such year, Article VI (except pnragraph (2) thereof) and Article VII of the Convention shall have effect only for taxable years begin. ning on or after the first day of January of the year immediately following the year in which such exchange takes place. (2) The present Convention shall continue effective for a period of five years beginning with the calendar year in which the exchange of the instruments of ratification takes place and indefinitely after that period, but may be terminated by either of the contracting States at the end of the five-year period or at any time thereafter, provided that at least six months' prior notice of termination has been given and, in such event, the present Convention shall cease to be effective forethe taxable years beginning on or after the first day of January next following the expiration of the six-month period. Do"a at Washington, in duplicate, in the English and German languages, the two texts having equal authenticity, this 24th day of May, 1951.
    FOR THE PRESIDENT OF THE UNITED STATES OF AMERICA:

    Am ACIERBoN FOR THE SWISS FEDERAL COUNCIL:

    (swA.]

    Cumwu BNuGMANu
    Sept. 27,1051; see poet, p.82.

    (s

    (M432)

    ABKOMMW ZWISCHEN DEN VEREINIOTEI STAATEU VON AMERMI UND DER SCHWEIZZRISCIEN EIDGENOSSENSCHAPM ZUR VERMEIDUWO DER DOPPELDESTEORRUNG AU? DEM ODISTE DEN STNUERN VON ZINKOMUM Der Praesident der Vereinigten Staaten Yon Amerika unG der 8ohweizerisehe Bundesratp von Wunsohe geleitet# e*n Abkotmen sur Veroiedung der Doppelbesteuerung auf den Oebiete der Steuern Yom Sinkmen abausohllessen, habon zu dieses Zweoke zu ihren Devollneehtigten ewnannts Der Praesldent der VereinlSten Staaten von Amerikat Herm Dean Acheson# Btaatssekretaer der Vereinigttn Btaaton von Amerika, und Der 8chweizerische Bundesrat: Herm Dr, Charles Bruggann ausserordentlichen Gesandten und bevollUnaechtiten Minister der sohweizerisohen Eidgenossensohaft In Washington# die, naohdeo sle sich lhre Vollmaohten mitgetellt und diesel In Suter und gehoeriger Form befundenp folgendes vereinbart haboen ARTIMU I aut die sich dieses Abkomen beslehi, sind:

    1 Die Bteueom

    (a) Auf Belten der Vereinigten 8taaten von Amerlia: Die Bundeseinkomenssteuemn nit linsohluss der Zuschlagssteuemn (surtaxes) unwder Ueboregwinnsteuomg

    (18) (2433)

    TIAS 2310

    14

    (b) Auf selton der Schweozerischen Eidgenossonschaft: Die Von Bund, Kantonen und Oemoinden erhobenen Steuern vom Sinkommen (Oesaamtolnkomwen, Erwerbselnkommen, Ver-

    moogensertragp 0owinne aus gowerblioher odor kaufmaennischer Taetlgkeit uuw.), 2 Dan vorlieoende Abkommen solid auoh aut Jede andero ihrom Wesen nach aehnliohe Einkommens- odor Oewlnnsteuer Anwendung ftindon, die nach seiner Unterzolchnung von sines der Vertragsstaaten erhoben wird. ARTIKE II In dbesem Abkommen bodoutet: (a) Der Ausdruck "Verslnlgte Staaten" die Vereinigten Staaten von Amerika; in geographischom Sinne verwendet, umtasst or die Oliedstaateng die Torritorion Alaska und Hawaii sowis don Distrlkt Columbia; (b) Der Ausdruck "Schweiz" die Schweizerische Eidgenossenschaft; Der (c) Ausdruck "Betriebsmtaette" *ins Zweognioderlassung, Geschaeftsstelle (office), Fabrlk* Werkstastte, Lagerhaus odor sine andore staondigo Oeschaeftselnrichtung; or sohloesst aber weder die gologentliche und zsitlich beschraonkte Benuetzung blosser Stapelgelegenheiten sin, noeh sine Vertretung (agency)# em meI donn, der Vortroter bositze sine Oeneralvollmacht su Vertragsverhanlungon und Vortragsabschluesson fuer sin Unternehmen und usbe dies* Volluaaht gswoohnllch auch aus, odor or verfuole ueber eln Waronlager, von welohoe or regoluaesslg Bestellungen fuor daas Unternohmen ausfuehrt, Sine Betriebostaotte inandern taate

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    15

    TIAS 2316

    wird nioht sohon deshalb angenomen, well sin Unternehmon des oenen Vertragsstaates iJ andorn Staate Oeschaeftsbetiehungen.duroh einen Komisslonaewr Maeklerp Sachwalter odor ofnen ander unabhaengigen Vertreter unterhaelt, der imRahmen seiner ordentlichen Oeschaeftstaetigkelt handelt, Die Tatsachep daos sin Unternehsen sines der Vertragsstaaten 2. andern Btaate *ine staendige OesohaeftseinrichtunS ausschliesslich fuer den Zinkaut von Ouetern und Waren unterhaelt# saoht fuer sich allein sine solche itaendige Oesohaeftseinlichtung nioht sur Betriebsstaette des Unternemhens, Der Uustandp dais eine Oesellichaft sines der Vertragsstaaten isandern Staate eine Tochtergeselliehaft besitxtt die sine Oesellsohaft dieses andem Mtaates lit odor in diesem andern Stoate Oesehaeftsbeziehungen unterhaeltv .acht tuer sich allein die Tochtergesellschaft nitht zur Betriebsstaette ihrer Uuttergesellsechaft. Unterhaelt ein Unternehmen ,des elnen Vertragsstaates In Oeblete des andern Vertragistaates sin Lagerhaus su Auslieferungs-p nicht aber zu Ausstellungssweokenp so begruendet dies fuer sich allein keine Betriebsstaette is andern Staatep und zwar such dana notht, wenn von sInes Vertreter des Unternehsens In dieses State Sestellungen entgoegngenomen' und von lhs sur Annahus an das Untemeheno weitergeleitet wordon sind; (d) Der Ausdruok "Unternehsen sines dew Vertragsstaaten" Jo nach den Zusamenhang sin Namerikanisohesu odor "sohweizerisohes UntsmehsenvI (e) Der Ausdruck "aNerikanisohes UntemebMen" sine In den Vereiigtsn Staaten von einer Person (natuerliohe Personen, Treuhaender und Personeneseslliohatten mitinbsgritften) it

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    rlA8 "W10

    16

    Wohnsitt in don Vereinigten Staaten odor von olner ameerkanisohen Oesellsohaft odor e*nem andern amerikanisohen Rechtstraeger betriebene gowerbloche odor kautmaennisohe Unternehmungl der Ausdruck "amerikanisohe Oesellsohatt odor *in anderer amerikanisoher Roohtstraeger" umfasst die nach don Recht der Vereinigton Staaton, der Oliedstaaten odor Torritorion orriohteten odor organisierten Koorperschaften odor andern Rechtstraeger; (f) Der Ausdruck "sohweosorisches Unternohmen" sine in dor
    Schweiz von einer natuorliohen Person mit Wohnsits in der

    Schweiz odor von elner schwelserisohen d)esellsohaft odor elneo andern sohweizerisohen Reehtstraeger betriobene gowerbliche odor kaufmaennisohe Untornehmung der Ausdruck "schweizerisehe Oesellschatt odor emn anderer schweizerischer Rechtstraeger" umzfasst die nach schweizerisohoz Rooht orriohteten odor organisiertens mit Juristisoher Persoonhi hkeit ausgestatteten Koerporsehaften, Anstalton odor Stiftungen sowle die Kollektiv- und tommanditgosellschaften und andere Personeagosamtheiten ohne Juristische Persoon.lichkoit; (g) Der Ausdruok "zustaondige Behoorde" auf Seiton der Voroinigton Otaaton don Commissioner of Internal Revenue im Rahuen der ihs yom Sokrotaor des Schatzamteo orteilten Vollmachten und auf Belton der 8Shweis don Diroktor der oedgenoessisohon Stouerverwaltung ImRahmen der uhin Yo oidgenoessisohen Finanz- und Zolldeparteoent erteilton Vollnachton; (h) Der Ausdruok "Oewinne aus gowerblicher odor kautmaenniseher Taotigkeit" die Oowinno aus dem Betrieb eines

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    17
    Fabrlkatlonso-

    TIAS 2816

    Handels-0 Bergwerks-p Finanz- odor Versiohe-

    rungsunternehmens, dagegen nicht Einkuenfte In Form von Dividendenp ZiAnson Mietertraegnissen sowie Verguetungen fuer Lizenzen (royalties) und fuer persoenliche Dienstleistungen; derartige Binkuenfte und Verguetungen koennen indessen, vorbehaeltlich der Bestimmungen dieses Abkommensp nach Masagabe der Oesetze der vertragschliessenden Staaten gesondert odor zusammen mit Oewinnen aus gewerblicher odor kaufmaennisoher Taotigkeit besteuert worden, 2 Bel Anwendung der Bestimungen dieses Abkommens wird Jeder Vertragsstaat# sofern sich aus dem Zusammenhang nlcht etwas andseoe *rgibt# Jedem nicht anders umschriebenen Begriff den Sinn beilegen, der ihm unter der eigenen Steuergesetzgebung zukommt, ARTIKEL III ! (a) Bin schweizerisohes Unternehmen dart von den Vereinigten Staaten fuer seine Goewinne aus gewerblicher odor kaufmaennisoher Taetigkeit keiner Besteuerung unterworfen warden, es sei denn, es unterhalte in don Vereinigten Staaten Oesohaeftsbeziehungen durch eine dort gelegene Betriebsstaette. Unterhaelt es solche Oeschaeftsbeziehungen, so koennen die Vereinigten Staaten das gesamte aus amerikanischen Quellen fliessende Binkommen dieses Unternehmens besteuern, (b) Bin amerikanisches Unternehmen dart zu schweizerischen Steuern nur fuer solohe oewinne aus gewerblioher odor kautoennisocher Taetig~eit herangezogen warden, die seiner In der Sohweiz gelegenon Betriebsstaette sugerechnet werden koennen, 2 Bel der Festsetzung der Steuer durch einen der Vertragsitaaten dart der blosse Binkauf von Waren in diesem Staate dutch

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    TIAS 2810

    18

    ein Unternehmen des andern Staates nlcht borueokslchtigt warden. 3 Unterhaelt sin Unternehmen elbes der Vertragastaaten 1m

    Oebiete des andern Mtaates Oeschaettsbezlehungen durch eine dort


    gelegene Betriebsstaette, so sollen dieser Betriebsstaette dieJenigen Goewinne aua gewerbllcher odor kaufmaennisoher Taetlgkeit zugerechnet werdens die ale ala aelbstaendlges Unternehmen mit gleichen odor aehnllchen Oeschaeftszwelgen, unter denselben odor aehnllchen Bedingungen und ohne Jede Abhaenglgkelt vom Unternehmenp dessen Betriebsstaette sle 1stp haette eralelen koonmon. 4 Bel der Festsetzung der Oewinne aus gewerbllcher odor kautuaennischer Taetigkeit elner Betriebastaette sollon alley bllllgerwelae der Betriebsataette zurechenbaren Auslagenp mit Elnschluss von Oeschaeftsfuehrungs- und allgemelnen Verwaltungsunkostenp tum Abzuge zugelassen warden. 3 Die zustaendigen Behoerden der beiden Vertragastaaten koennen sich ueber die Aufatellungvon Richtlinien zur richtigen Vertellung der Goewinne aus gewerblicher odor kaufmaennischer Taetlgkeit verstaendigen. ABTIL IV

    Wenn emn Unternehmen des eonen Vertragsstnates vermoege selner Betelliguni an der Oeachaeftsfuehrung odor am flnanziellen Aufbau elner Unternehmung des andern Vertragsstaates mit dieser In bezug auf ihre kaufmaennlschen odor finanzlellen Beziehungen Bedingungen vereinbart odor ihr solche auferlegtp die abweichen von denjenigen, die mit eInem selbstaendigen Unternehmen vereinbert wuerden, so duerfen Oewinne# die esnes der belden Untermehmen normalerwelse erzlelt haettep aber wegen dieser BedingunSen nicht erzlelt hat, den Oewinnen dieaer Unternehmung tugs-

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    19
    rechnet und entaprechend besteuert worden.

    TIAS 2310

    ARTIKEL V Einkuenfttp die sin Unternehmen sines der Vortragsstaaten aus des Betrieb Yon In dissom Staate registrierten ohitfLen odor Luftfahrzeugen boeieht# sollon nur in dew Staste bosteuert warden, in welohem diesel Schifte odor Luftfahrzouge registriert sind. ARTIKEL VI 1 Der Bats der Steuerp die siner der Vertragsstaaten aut Dividenden orhebtp die aus in seine Oebiote gelegenen Queslen fliessonp soll 15 Prozent nicht usbersteigen, sofern der Dividendonempfaenger sine Person sit Wohnsitt i1 andern Stoote odor sine Oesellachaft odor sin anderer Rechtstraeoer dieses andern $tastes lot und is steuererhobsnden Steats koine Betriebsstaette besitzt: Diess Bestimmung sol1 Jedoch keine Anwendung Linden out die sohweizerische Steuor auf Dividendenp die sinew Schweizerbuorger (deo nicht zugleoih such Buerger der Versinigton Btaaten ist) wit Wohnsits in don Vereinigten Staaten aus der Sohweiz sufliessen. 2 Ist indessen der Aktionaer sine Oesellschaft, die unsittol-. bar oder mittelbar usbor mindestens 95 Prozent der Stimwrochte in der dividendenzahlenden Oesellschaft vorfuegtp und stamwen nicht mehr als 25 Prozent des Bruttoeinkommens der dividendenzahlsnden Oesellechaft von andorn Zinsen und Dividenden als den von ihrsn sigenen Tochtergssellschatten ausgsrichteten, so soll der Bteuersat: 5 Prozent nicht usbersteigen, Diessf Herabsetsung des Steuersatses auf 5 Prozent soil Jedoch nioht Plats greifenp wenn die Verbindung dew heldsn Oesellschaften In orater Linie in der Absicht hsrgestollt worden lst odor boibehalten wirdp us sich die-

    (2439)

    TIAS 2816

    20

    son Vortell zu sichern,


    3 Die Schweis kann Mres 5teuer ohne Rueokslcht aut die Bbstimungen in Absats (1) wnd (2) dieses Artikels orheben; sis wird indessen die so erhobene Steuer turueokerstatten, soweit sie don Betrag uebersteigt, der sich bel Berochnung zu den In den genannten Absaetxen testgesetsten Bteuersaetsen ergibt. ABTIK VU1 Der'Sats der Steuer, die elner der Vertragsstnaten aut Zinson Yon Obligationenp Vlertpapierenp Kassensoheinens Schuldverschrelbungen odor irgend elner andern Schuldverpflichtung (mit Elnschluss grundpfaendlich gesicherter Forderungen) erhebtp die aus In selnem Oeblet gelegenen Quellen fliessons soll 5 Prosent nicht uebersteigenp sofern der Zinseopfaenger sine Person wit Wohnsitz in andern Staate oder eine Oesellschaft odor es anderer Rechtstraeger dieses andern 8taates 1st und imsteuererhebenden Mtaate keine B6triebsstaette besitzt: Diese Bestimmung soll Jedoch keilne Anwendung Linden aut die schweizerische Steuer aut Zinsen, die elnes Schweizerbuerger (der nicht zugleich Buerger der ?erelnigten Btaaten 1st) mit Wohnsitz in don Vereinigten Staaten aus dcr Schweiz sutliessen. 2 Die Schwel kann hre Steuier ohne Ruecksicht auf die Bestimmungen in Absats (1) dieses Artikels erheben; sle wird indesson die so erhobene Steuer xurueekerstattenp soweit sic den Betrag uebersteigtt der sich bel Berechnung su des in gonannten Absatz festgesetsten Steuersats ergibt. ARTIKEL VIII Lisenzgebuehren (royalties) und andere Verguetungen fuer die Ueberlassurg des Oebrauohsreohtes an literarischen Urheberrech-

    (2440)

    21

    TIAS 2816

    ten, kuonstlerischon odor wissenschattlichen Werken, Patenton,

    Mustern, Plaenenp gehoimen Verfohron und Foroln, Markenreohten und aehnlichen Vermoogenswerten und Roohten (mit Einsohluss der Mietgebuehron und aehnlichor Vorguetungen fuer die Ueborlassung von kinematographibohen Filnon odor fuer die Benuetzung der goworblichon, kaufmaennisohen odor wissenschattllchen Ausruestung), die eine Person mit Wohnsits in sines Vertragsstaate odor sine Oesellsohelt odor ein anderer Rechtstraeeer des oenen Vertragsstaates aus im andern Vertragsstaato golegonen Quellon bosiehtp sollon in diesom andorn Vortragestaato von der Besteuerung ausgenomen sein, worm der Emptaonger der Vorguetungen dort koino Detriebsstaotte unterhaelt. ARTIKL IX Binkuonfto aus unboweglichom Vermoogen (einschliesslioh der Oewinne aus dom Vorkaut odor Tausbh solohon Vormoegons, abor unter Aussohluss der Zinsen grundpfaendlich gosichorter Fordsrungen) sowie Verguetungen (royalties) fuer die AusboutunS von Bergworkon# Steinbruechen odor andern Bodenschaetsen sol3on nur in dom Vertragsstaate besteuert warden, in welchom dieses Vermoogon, die Bergwerkop Steinbrusehe odor andern Bodensohaetze liegen. 2 Beoioht eine Person mit Wohnsits in oinem der Vertragsstaaton odor *in* Gesellsohaft odor esn anderer Rechtstraeger einee der Vertragsstaaton soloho Einkuenfte aus derartigem Vormoeson# das Is andern Vertragsstaato golegen 1st# so kann der Sinkommensempfaonger fuer Jodes Stouerjahr verlangenp in diesem andern Vertragsstaato out Orund des Nottoeinkozmmens d.h. so besteuort su worden, wie wonn or waohrond des Bteuerjahres in die-

    (2441)

    TIAS 2816 staotte tnterhalten haette.

    22

    sea andern 8taate Oeschaertsbeuiehungen durch sine Detriebs.

    ARTIKEL X Haelt soch sine natuerliohe Person sLt Wohnsits in der Schweis Ia Laufe sines Steuerjahres washrend insgosast nicht mehr ale 183 Tagen voruebergehend in den Vereinigten Staaten aufp so 1st sle hier von der Stouer auf VerguetunSon fuer in don Vereinig. ten Staaten goleistete Arbeit odor persoenliohe Dienste (esnsohliesslich dot Ausuebung freer Beruto und dot Dienstleistungon als VerwaltungSrat) befreit, sofern sine der beidou folgendon Be. dingungen erfuellt 1sts (a) Wonn der ]mptaengor die fuer solohe Arboit odor persoonliohe Dionste ausgerichtete Verguetunj auf Orund sines Dionstverhaeltnisses oder sines Vertrages sit siner Person sit Wohnsits in der Sohweis oder sit erner sohweizerisohen Oosellsohatt odor eines andem sohweiserisboen Bechtstraeger beoiehtj odor (b) Wonn die Verguetung fuer solohe Arbeit odor per-

    soonliche Dienste 10 000 Dollar nioht uoberstesigt.


    2 Die Dostimmilng von Absats (1) dieses Artikels tindet

    OtA&II mzUAW Anwondung aut oine natuorliohe Person sit Wohno


    sits in don Versinigten Btaatenp die Vergustungen tuer In deo Sohweis goloistoto Arboit odor persoenlioho Dienste beoioht. 3 Die Vorsohriften diesos Artikels Linden keine Anwondung aut die in Artikel X1# Absats (1)$ beooihneten Einkuonfte, 4 Die Vorschrift von Absats (1) (a) dieses Artikels tindet auf Verguetungenp Oswinns, Bezuege und andore Entschaodigungen von Buehnon-p Film. odor Radioschauspielern, Musikern, Athleten

    (2442)

    23
    und dgl. keire Anvondung.

    TIAS 2810

    1 (a) Lofhnes Desoldugen wid aehnllohe Verguetwung

    0sol

    Pensionen, die die Vorelnigten Staatenp 1hre politisohon Unterabteilugeon odor Territorion an natuorliche Personen (ausgenofmen schwelterisohe Staateangehoerlgep die nioht glelhseittg daas amerikanisohe Buorgerneoht besltson) ausriohten# sind von der Destouerung durch die Schweis ausgonomoun. (b) Loohne# Besoldungen und aehnliehe Vorguetungen sowle Ponsionen, die die Sehweioerisehe Bldgenossensohaftp ihre Anslalten (agencies) und Ziniobtungen (instmuentlities) odor itbe politisohen Unterabteilungen odor andere oeffoentliche Behoordon an natuorliohe Personon (ausgenomen amorikaniuohe Staats. argehoerigo, die nioht giieobsoitig Sohweizerbuorger sAnd) ausriohton, sind von der Bestouerung durob die Vereinigton Staaton ausgenomont 2 Private Pensionen und Loibreflton, die e.ne natuerlioho Person mit Wohnsits In olnen Vertragsstaate aus des ander Staat. bezleht, sInG In dGssom andem Staats von der Bestouerung ausgeno.3 Unter des In diesom Artikel verwoedeten Ausdruck "PensioneoN sind periodisohe Verguetungen su verstehen, die In Hinbilok aut fruohere Dienstloestungen odor sum Ausgioloh orlittener koorporlicher Naohteile ausgeriobtet worden.

    4 Unter dos In dioses Artikel verwendeten Ausdruok "Leib.


    renton' lit esne bostimte, periodtsch an festen Terminen auf Lobenszoet odor waohrond elner bestimuten Anzahl von Jahren ala Oogenloistu=g fuer ein* angesossone wnd voile Vorguetung in Oeld odor Geldeswert sahlbare Suma* zu verstehon.

    (2443)

    TIAS 23164

    24
    ARTIKEL XUI

    Bin Professor odor Lehrer sit Wohnsuts in oenem der Voetragsstaaton# dot sich voruoborgehend fuer hoechstens zwel Jahre zu Unterrichtxwoo3ken an olner Universitaotp *inoa Kolloglump oiner Sehule odor andern Lahranstalt des andeon Vertragsstaates authaolt, 1st hior von der Stouer aut don Blnkuontten aus seiner Lehrtaotigkeot washrond des Sonamnton Zoitraums betroet. ARTIM XIII Bin Student odor Lehrllng sat Wohnlits in einea der Voe. tragsstaaton# der uach voruebergehend lediglich zu 8tudon.m zwooken odor zur Ausbildung In geschaeftlichon odor teohnechen Bolangen ia andern Vertragostaato aufhaelt, 1st bloe kenow Steuer

    aut soinen Studlon- und Unterhaltugeldernp dio or von ausserhalb


    seines Aufenthaltsortes bosleht, unterworten. ARTIKL XIV oesesllehaft der Vero Wngton Von olner andem als einer Station ausgerowhtete Dividenden trd Zinson and von der Besteueoung dutch die Voroenigton 8taaton ausuonomen, wonn W Zmptaengor in don Vereoington Staatsn koino Betriobastaotto unterhaelt urd wean or gogenuebor don Veeoington Btaaten ale Auslaondor ohno Iohnsits in don Vereoington Otaaton Slt und soinen Wohnsits in deo Schweis hat odor eine schweoserlsoho Oesellsohaft let. 2 Von oiner andom ale elner sohweizerlsohon Oeselleohaft ausgerlbhtoto Dividendon und Zinson sind von der Besteuorung dutch die Schwelz auengenomen, wenn 1hr bptaerager in der Schweis koine Betrlebsstaotte unteohaelt und in den Voeelnigton Staaten Wohn-

    (2444)

    25
    sits hat odor eine amerikanisohe Oesellschaft lst.

    TEAS 2816

    ARTI XV imne Doppelbesteuerung soll In der tolgenden Weise vermioden warden : (a) Bel der Festeetzung ibrer in Artikeol I dieses Ab. kommens bezeolhneten Steuern duerfen die Vereinigten Staaten goeaohtet anderer Bestimugoen dieses Abkommensp sowelt ihre Staatsangehoerigen, Personen mit Wohnsits ib den Vereintgton Staaten odor Oesellschaften der Vereinlgten Stasten In Frtge stehens alle Binkoimensteile In die Domessungegrundlage einbesiehen, die nach der 8touergesetzgebung der Verefnigten Staaton steuerbar warren, wenn ds Mbkonen nicht in Kratt stuende, Oemaess Section 131 des Internal Revenue Codep In der am Tage des Inkrafttretens dieses Abkommens masageblichen Fassungp warden indessen die Vereinigten Staaten von iWren Bteuern den Betrag der in Artikel I dieses Abkommens beselchnoten-schweizerlschen Steuesn absiehen, Dabel besteht Eltngkeit darueberp dass die Sohwels aut Orund der Litera (b) dieses Absatzes die in Section 131 (a) (9) Internal Revenue Code geforderte Voraussetzung des des Oegenrechts (similar credit requirement) erfuellt. (b) Bel der Festsetmung ihrer InArtikel I dieses Abkommens beseichneten Steuern wird die Schwels, soweit Personon mit Wohnsits in dow Sohweis odor schweizerische Gesellschaften odor andere sohweizerische Reohtstraeger in Fraige stohen, diejonigen aus don Verelnigten Staaten stammenden Rinkommensteilop mit denen sich dieses Abkommen befasst vnd die nach diesem Abknwmen weder von der Steuse der

    (2445)

    TIAS 216

    26

    Vereinogton Staaton befrolt noch 13 Oonusse olnow Iiuessigung des Batzes dlqsor Steuer utooen, Von der Boessungs. grundlago ausnehmen; darueber hinaus w1rd doe Sohwseiz sowelt Angehoorige der Veroinigten Staaton slit Wohnsits In der Schweis In Frage stehonp alls aue. don Veroinigttn Staaton stammenden Einkomenstelle von der Stouerbeoossunpgruhdlsg ausnohmen. Die Schweiz behaelt dagogen bet der Festsetzung does anwendbaren Steuersatsos das Reocht, such die gaemsss diesem Aboats von der Demessnugsgrundlagso ausgeoomonon Einkommenstelle In RochnunS zu stellon. 2 Die Bostimmungen diooes Artikels bohewuern In kolner Welsos die in Artikel XI# Absats (1)# deses AbMomons gowaehrleisteten

    Befrolmnen von don Stouem der Voreingten Staaten odor deo'


    Sohweis. ARIMB XVt Die zustaendigen Dehoerden der Vertrasgstaaten warden hunter slob diejenigen (geaess don Steuergesetzgebungen der belden Vertrapstaaten erhaeltllohen) Auskuenfte austausehon, die notwendig sind tubr die Durchfuehrung der Bestisbungen dieses Abksaons odor fuer die VerhOetung von Betrugsdelikten und dgl., die sine unter dieses Abkomnen fallende 8teuer, sum Gegenstands haben. Jede auf dtese Weiss ausgetausohte Auskunft moll gaehel gehalten und nieandem uugaenglich gmaoht warden, der slob bcht .it der Veranlagung odor dn Denug der unter dieses Abkomen fallenden Steuern befasst. Auskuenfte, die Irgendein Handels- odor Goeschaefts-, gewerblbches odor Bewufageheinnis odor sIn GOeshaeftsverfahren offenbaren wuerden, duerfen nicht ausgotauscht werden. 2 Jeder der beiden Vertragsstaaten darf Steuern des andern

    (2446)

    27

    TIAS 281i

    Mtaates wIe seine elgenen Steuern Insowelt sinsiehen, als dalt verhindert wird, da83 die in den Artikein VUp VIIp VIII und XIj Absatz (2)s dieses Abkommens vorgesehenen Bteuerbefrelungen odor Steueraatzermaessigungen Personen zugute kommen, die aut diesel Verguenstigungen keinen Anspruch haben. 3 Die Bestizmungen dieses Artikels duerfen auf keinen Fall dahin ausgelegt werdenp dass ale einem der Vortragsataaten die Verpflichtung auferlegen, Verwaltungomasanahmen durohzufuehren, die von semnen Vorschriften odor von seiner Verwaltungspraxis ab= wechenp odor die seiner Souveraenltaet, Sioherhelt odeo den Ordr* publio wldersprechen, odor Angaben su veormtteln, die weder auf Orund seiner elgenen noch auf Orund der Oesetsgebung des ersuchenden Mtaates besohafft warden koennen. ARTIKEL XVII Legt ein Stouerpflichtlger darp dasa die Massnahmen der Steuerbehoorden der Vertragsstaaten die Wirkung irner don Bestimungen dieses Abkommens widersprechenden Doppelbesteuerung haben odor haben warden, so kann or soinen Fall dom Mtaates den or angehoert odor In dea or Wohnsuts hat# odor, s0fern es sich un sine Oesellschaft odor oethn andern Rechtstraeger handelt, den Staate, in welthem die Oesellschaft odor der Rechtstraeger errichtet odor organisiert 1st, unterbreiteno Wird der Einspruch des Bteuerpflichtigen als begruendet erachtet, so wird die zustaendige Behoerde des angerufenen Staates anstreben, sich mit der zuataendigen Behoerde dos andern Mtates ueber sine angemessene Vermeidung der In Frage stehenden Doppelbesteuerung zu verstaendigen. 2 Zur Beseitigung von Schwierigkceten odor Zweifeln bel der Auslegung odor Anwendung dieses Abkommens odor bezueglich der Be-

    (2447)

    TIAB 2810

    28

    ziohwigen des Abkommens zu Abkomoen der Vertragsstaaten mit drit. ten Staaten koennen sich die sustaendigen Dohoerden der Vertrags. steaten gegenheltig verstaendigen ARTIKEL XVIII Die Bestimmungen dieses Abkomens beruehren in keiner Weiss aas Recht auf den Oenuss andorer odor susaetzlicher Befrelungen, die den diplomatischon wud konsularischen Beamten derzeit zustehen odor ihnen Inskuenftig eingeraoumt warden koennten. 2 Durch die Bestimmungen dieses Abkommons warden die An. sprueche auf Defrelungen, Absuegop Btouergutsohriften odor andere Verguenstigungenp die derzeit odor inskuenftlg durch die Bteuergesetue eines der Vertragsstaatsn beo der Steuerfestsetzung singorasumt wordenp in keiner Weiss besohraonkt. 3 Die Angehoerigen eines der Vertragsstaatens die imandem Staate Wohnsits haben, duerfen dort nicht zur Entrichtung anderer odor hoeherer Steuern verhalten warden ala die Angehoerigen dieses andern 8taatea, die dort Wohnsits haben. Der in diesem Ar. tikel verwondete Ausdruok "Angehoerige" unfasst auch alley nach deon is omen odor andern Vertragsstaate in Kraft stehenden Recht erriohtetsn odor o0ganiselrten Reohtspersonens Personengesellsohaften (partnerships) und Vereinigungen. In diesom Artikel
    m warden unter den Ausdruck "Steuern Abgaben jeder Art odor De-

    zeiehnung verstanden, seien ale solihe des Bundees der Oliedstaaten, Kantone oder Oemeinden. ARTIKEL XIX 1 Die zustaendigen Behoerden der beiden Vertragsstaaten koennon die Ausfuehrungsbostimmungen erlassen, die fuer die Durchfuehrung dieses Abkomnens in ihrem Staatsgebiet orforderlich sind,

    (2448)

    29

    TJAUS 316

    Zum Zwecke der Austuehrung dieses Abkomiwna koennen die zustaendigen Behoerden der beiden Vertrapstaaten unmlttelbar mito Winander vorkehren. ARTEM XX I Dieses Abkommen soll ratifltlrt und die Ratii'kationeurkunden sollen baldmoegliohat in Bern ausgetlusoht warden. Daes Ab-

    komwn soll auf die Steuerjahre AnMwendung findenp die am odor nach dam orsten Januar des Kalenderjahres beginnen, in welohem der Austausoh der Ratitlkationsurkunden stattftindet: Findet dieser Austausoh indessen am odor naoh dem ersten Oktober statt, so solIon die Artikel VI (ausgenommen Aboatz (2)) und VII des Abkommuns erat auf Steuerjahre Anwendung finden, die am odor nach dem ersten Januar deojenigen Jahres beginnen, das unmittelbar aut das Jahr folgt, in welohem dieser Austausoh stattfindet. 2 Dieses Abkommn soll sunaeohat fuer oinen Zeitraum von tuent Jahr6n, beglnnend mit des Kalenderjahre, in wlohem der Austausoh der Ratlilkationsurkunden statttindet und naoh Ablaut diesel. Zeltraums unbesohraenkt in Kraft bleibenp kann aber am

    Ends der FuenfJahreaperlode odor Jaderseit hernaoh von Jades der beiden Vertragsstaaten hunter linhaltung einer IrIst von mindestens meohe Nonaten gokuendigt warden* Brtolgt eine solohe Kuendigung, so tritt das Abkommn tewr die 8teuerJahrie ausser Kraft# die am odor naah den aut don Ablaut der seohemonatigen Kuendlgungpfrlst tolgenden ersten Januar beginnen. OGERTIOT In Washington, im Doppel$ in englisoher und deutsoher Ursohrift, wobei beide Ursohritten gleocherwise authenttsoh sind, am 24. Mai 1951. MUR DEN PRASSIDIMTEI DER VEMINIOTUN STAATBW VON ANRiLKAI

    MUR DEW SCHWHIZERISCHIN DUNDESRAT: (SEAL

    (2449)

    Me8 2810

    on

    AND wnuD s the Senate of the United States of America, by their

    resolution of September 17, 1951, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid convention, subject to a reservation, as. follows: "The Government of the United States of America does not accept paragraph (4) of Article X of the Convention, relating to the profits or remuneration of public entertainers." Am)wmzums the text of the aforesaid reservation was communi. cated by the Government of the United States of America to the Government of the Swiss Confederation and the aforesaid reservation was accepted by the Government of the Swim Confederation; AND wmmuts the aforesaid convention was duly ratified by the President of the United States of America on September 20, 1981, in pursuance of the aforesaid advice and consent of the Senate and subject to the aforesaid reservation, and the aforesaid convention was duly ratified on the part of the Swiss Confederation; Az;D wmaps the respective instruments of ratification of the aforesaid convention were duly exchanged at Bern on September 22, 1951, and a protocol of exchange of instruments of ratification, in the English and French languages, was signed at that place and on that date by the respective Plenipotentiaries of the United States of America and the Swiss Confederation, the said protocol containing a statement that it is understood by the two Governments that the convention aforesaid, upon entry into force in accordance with its pro. visions, is modified in accordance with the aforesaid reservation, so that, in effect, paragraph (4) of Article X of the convention is deemed to be deleted; AND wmazcs so far as appertains to an exchange of Instruments of ratification prior to October 1 of any year, it is provided in Article XX of the aforesaid convention that upon the exchange of instru. ments of ratification the convention shall have effect for the taxable years beginning or or after the first day of January of the year in which such exchange takes place; Now, mmroum, be it known that I, Harry S. Truman, President of the United States of America, do hereby proclaim and make public the aforesaid convention to the end that the said convention and each ard every article and clause thereof, subject to the aforesaid reservation, may be observed and fulfilled with good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. 1w 2;iwosir w=nuzo?, I have hereunto set my hand and caused the Seal of the United States of America to be affixed.

    (2450)

    31

    TIAff 2816

    Dows at the city of Washington this first day of October in the yeir of our Lord one thousand nine hundred fifty-one and [sub] of the Independence of the United States of America the one hundred seventy-sixth. HARRY S TRUMAN By the President: H. J" Es WNW

    Adouin &cretar of Btae

    (2451)

    PROTOCOL OF EXCHANGE of the instruments of ratification of the convention between the United States of America and the Swim Confederation for the avoidance of
    double taxation with respect to taxes on income.

    The undersigned, R. Borden Reams, Chargi d'affaires of the Lega. Confederation, being duly authorized thereto by their respective Governments, have met for the purpose of exchanging the instruments of ratification of the convention between the United States of America and the Swiss Confederation for the avoidance of double taxation with respect to taxes on income, signed at Washington on May 24, 1951. The respective instruments of ratification of the convention aforesaid having been compared and found to be in due form, the exchange.took place this day. As recited in the ratification on the part of the United States of America, the Senate of the United States of America, in its resolution of September 17, 1951, advising and consenting to the ratification of the convention, aforesaid, expressed a certain reservation with respect thereto, a follows: "The Government of the United States of America does not accept paragraph (4) of Article X of the convention, relating to the profits or remuneration of public entertainers." The text of the aid reservation was communicated by the Government of the United States of America to the Swiss Federal Council. The Swiss Federal Council has accepted the said reservation. Accordingly, it is understood by the two Governments that the convention aforesaid, upon entry into force in accordance with its provisions, is modified in accordance with the aid reservation, so that, in edect, paragraph (4) of Article X of the convention aforesaid Is deemed to be deleted. Iw w:m=s wmw,. the undersigned have drown up and signed the present Protocol of Exchaga
    ,(U)
    (2452)

    tion of the United States of America in Berne, and Max Petitpierre, Federal Counselor, Head of the Political Department of the Swiss

    00 00

    TIA 8160

    DonI in duplicate, in the English and French languages, at Berne this 27th day of September, 1951.

    JOR THE GOVERNMENT

    OF THE UNITED STATES OF AMERICA:

    FOR THU SWiss FEDERAL COUNCIL:

    B. Bomw

    RvAjM

    MAX P

    Tm

    (2453)
    73005 0-62--vol. 261

    Protocolo do 'Nebango des instruments do ratification do Is Convention entree Is Confiidraron Suisse et lee Etats.Unis d'Amrique en vue d'6viter lee doubles impositions dana I. domains des lmpits sur 1s rovenu. Les soussign6is, Max Petitpierre, Conawiller f6dral, Chef du DIpartement Politique do la Confid6ration Suisse, ot R. Borden Reams, Charg6 d'affaires de Ja Lgation deo Etats-Unis d'Am6rique & Borne, dfiment autoris par lousy Gouvernemente respectiff, so sont runis pour procder h l'6change des instuments do ratification do Is Convention entre IaConfi6dration Suisse ot les Etats-Unis d'Amdrlque en vue d'6viter lea doubles impositions danm 1. domains des imp8ts mar Ie revenu, sign6e i Washington 1e 24 mai 1951. Les instruments do ratification ont 6td produits et, ayant Atd trouvis concordant. et en bonne et due forme, l'6change en a 6th opM ce jour. Podr co qui a trait aux Etats-Unis d'Am6rique, a"nsi quo Is mentionne P'acto do ratification, 10 Shnat des Etats-Unis d'Am6rique, en donnant son consentement, &Ia ratification do ladite Convention, par une resolution du 17 septembre 1951, a formula Isa rserve quo voich: "The Government of the United States of America does not acw coept paragraph (4) of Article X of the convention, relating to the profits or remuneration of public entertainers." Le texte do cette reserve a Mth communiqu6 par IoGouvernement des Etats-Unis d'Am6rique au Conseil F16dral Suisse. U4 Conseil Fid6ral Suisse a accept ]adite reserve. Ls deux Gouvernements sont done convenus do modifier Ia Convention conformiment &ladite reserve, en sorte quo Io paragraphe 4 do P'article X est cens6 annual dis l'entr6e en vigueur do Ia Convention, tell. que la stipulent lee dispositions y relatives. En foi do quoi les soussignds ont dress ot sign6 Iopresent protocols d'hchange.

    (84)

    (2454)

    85

    TIA8 2816

    Fait et donnd k Berne, en double exemplaire, en langues franaise et anglaise, le 27 septembre 1951.
    POUR LE CONSEIL FEDERAL SUISSE: POUR LE GOUVWRNEMENT DEB XTATS-UNIS D'AMERIQUE:

    MAx PTmmTnERR.

    It Boiwz; Rums

    (2455)

    SECTION 28 Convention With UNION OF SOUTH AFRICA

    (2457)

    INcoME TAX

    CONVENTION BETWEEN THE UNITED STATES AND THE

    Basic Convention: April 24, 1947- -

    UNION OF SOUTH AFRICA

    December 13,1946. Signed at Pretoria.

    Received by Senate; designated Executive 0, 80th Congress, 1st Session; injunction of secrecy removed (93 Congressional Record
    3036-3939).

    Supplementary Proto
    col:

    July 14, 1950 -- -- Signed at Pretoria. August 11, 1950..- Received by Senate; designated Executive U 81st Congress, 2d Session; injunction of secrecy removed (96 Congressional Record 12282). Convention and Basic Supplementary Protocol: April 12 and 13, Senate Committee Hearings. 1951. August 6, 1951 -..Reported by Senate Foreign Relations Committee (9x. Rept. No. 1, 82d Cong., 1st September 17, 1951. December 14,1951 June 18, 1952July 15, 1952 -- -Ratification by Senate of its advice and consent with reservation and understanding (97 Congressional Record 11434-11435, 11438-11441, 11442-11445). Ratified by United States President. Ratified by Union of South Africa. Instruments of ratification exchanged; convention entered into force effective July 1 1946, and supplementary protocol entered into force effective July 1, 1946, subject to certain exceptions. Proclaimed by United States President. TIAS 2510; 3 UST 3821 (basic convention) 3 UST 3841 (supplementary protocol).

    Sess.).

    August 19, 1952... Official Text ------

    (2458)

    CONTENTS OF SECTION 23
    Page 1. Presidential Message of Transmittal to Senate of Basic Convention... (2461) 2. Presidential Message of Transmittal to Senate of Supplementary Pro(2469) tocol -------------------------------------------------------(2479) 4. Senate Committee Report ---------------------------------------(2481) 5. Senate Floor Debate and Action --------------------------------6. Presidential Proclamation (including Official Text of Convention and (2497) Protocol) ---------------------------------------------------3. senate Committee Hearings -------------------------------------(2477)

    (2459)

    PresidentialAMessage of Transmittal to Senate of Basic Convention (including materials enclosed therewith)

    (2461)

    80'ru CoNGRM

    l8t Beasion

    SENATE

    JEIUc RBv t 0

    CONVENTION WITH UNION OF SOUTH AFRICA RELATING TO TAXATION

    MESSAGE
    PROM

    THE PRESIDENT OF THE UNITED STATES


    THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE UNION OF SOUTH AFRICA, SIGNED AT PRETORIA ON DECEMBER IS, 1946, IN THE, ENGLISH AND AFRIKAANS LAN. GUAGES, FOR THE AVOIDANCE OF DOUBLE TAXATION AND FOR ESTABLISHING RULES OF RECIPROCAL ADMINISTRATIVE ASSISTANCE WITH RESPECT TO TAXES OF INCOME

    APRIL

    24, 1947.-Convention was read the first time and the Injunction of secrecy was removed therefrom. The convention was referred to the Com. mittee on Foreign Relations and, together with the message of transmittal and the accompanying report, was ordered to be printed for the use of the Senate

    Tax Warts House, April 24, 1947. To the &nate of the United fea: With a view to receiving the advice afid consent of the Senate to ratification, I transmit herewith the convention between the United States of America and the Union of South Africa, signed at Pretoria on December 13, 1946, in the English and Afrikaans languages, for the avoidance of double taxation and for establishing rules of reciprocal administrative assistance with respect to. taxes on income. I also transmit for the information of the Senate the report by the Acting Secretary of State with respect to the convention. The convention has the approval of the Department of State and
    the Treasury Department.
    HARRY

    S.TRUMANi

    (Enclosures: (1) Report of the Acting Secretary of State; (2) convention of December 13, 1946, between the United States and the Union of South Africa with respect to taxes on income.)

    (94s3)

    2
    The

    CONVENTION WITH UNION OF SOUTH AFRICA ON TAXATION DEPAItTMENT OF STATE, Washington, April 23,19.47.
    PRESIDENT,

    Tle While llouse: The undersigned, thy Acting Screstary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if Ili$ judgment approve thereof, the convention between the United States of America and tile Union of South Africa, signed at Pretoria on December 13, 1940, in the English and Afrikaans languages, for the avoidance of double taxation and for estal)ishing, rules of reciprocal administrative assistance with respect to taxes on income. The Department of State and the Treasury Department collabo. rated in the negotiation of the convention, which was formulated as a result of technical discussions in 1944 between representatives of this Government and representatives of the Union Government and sub. sequent communications between the appropriate authorities of the two Governments. As set forth in article I, the convention is made applicable, in re. spect of the United States, only to Federal income taxes, including surtaxes and excess-profits taxes and does not apply to taxes imposed by the several States of tile Pnited States. (orrespondingly, the convention is maide applicable in tile case of the Union of South Africa to taxes, as specihfed, imposed under the income-tax laws of the Union, including normal and super taxes, undistributed-profits tax, nonresilent shareholders' tax, excess-profits duty, and trade profits special levy. The purposes of the convention are, in general, the prevention of double taxation, the reciprocal exchange of information relating to income taxation, and reciprocal assistance in the collection of taxes to which the convention relates. The convention, when it enters into force, will afford a basis for the settlement of tax problems comparable to the bases established by the conventions now in force between tile United States and certain other countries. These include the convention and protocol of March 23, 1939, with Sweden, which became effective on January 1, 1940; the convention and protocol of March 4,. 1942, with Canada, which was made effective as of January 1, 1941' the convention and protocol of July 25, 1939, with France, whicii became effective on January 1, 1945; and the convention of April 16, 1945, with the United Kingdom of Great Britain and Northern Ireland, which became effective on July 25,1946, as to United States taxes imposed with respect to taxable years beginning on or after January 1, 1945, and as to United Kingdom taxes imposed with respect to years of assessment beginning in accordance with the corresponding British tax system. The convention with the Union of South Africa has been negotiated as a part of the broad program which began nearly 20 years ago for the negotiation of conventions for the elimination, insofar as possible, of international double taxation. It is believed that the convention constitutes a further step toward the removal of an undesirable impediment to international trade which results from the double taxation of incomes.

    (2464)

    CONVENTION WITH UNION OF SOUTH AFRICA ON TAXATION

    It appears that the Union imposes its taxes primarily on the basis of income from sources within the Union. Conflict was found to exist with respect to the determination as to whether certain income is from Union sources or United States sources, because of divergent theories oi taxation in the application of the revenue laws of the respective countries, not only in regard to the imposition of the tax but also the amount of credit to be allowed in one of the countries for taxes imposed by or paid to the other country. The convention lays down certin rules by which the settlement of such questions may be facilitated. The provisions relating to administrative assistance are intended, and in fact are essential, to make fully effective the substalntiveprovisions regarding exemptions and credits. Insofar as the United States is concerned, it is expected that the administrative provisions of the convention will have an immediate and salutary effect in their application to United States citizens who may have failed to file United States income-tax returns since taking up residence in the Union of South Africa. The convention contains a preamble and 18 articles, Article I specifies the taxes to which the convention applies, as referred to above, while article II contains definitions of terms found in the convention. Article III has three paragraphs; the first making applicable to this convention the principle of national treatment found in a large number of treaties of the United States, the second being an expression of the principle, applied in any event, that exemptions, deductions, credits, or other allowances accorded by the laws of either country shall not be restricted in determining the tax imposed by such country, and the third being the general provision which permits consultation in the event of appreciable changes in the fiscal laws of either country. Article IV corresponds with article XIV of the convention with Sweden, article XVII of the convention with Canada, article 14 of the convention with France, and article XIII of the convention with tile United Kingdom. The United States while continuing to tax its citizens, corporations, and residents as thou I the convention had not, come into effect, would continue to allow, for the duration of the convention, a credit against. its income taxes for income tax paid to the Union of South Africa. The credit would be applied in accordance with the applicable United States revenue laws. The Union, reciprocally, would exclude from its tax-base income from sources within the United States, thus satisfying the "similar credit." requirements of section 131 (a) (3) of the Internal Revenue Code. Article V corresponds v ith article It of the convention with Sweden, article I of the conveiiion with Canada, article 3 of the convention with France, and a part of article III of the convention with the United Kingdom. It embodies the principle of permanent establishmnent in the field of business income, whereby each country agrees not to subject to tax the business income of taxable entities of the other country except as to profits which are allocable to a permanent establishment within the taxing country. The provisions extend only to the ordinary industrial and commercial profits arising from the operation of a business. If, for example, a Union enterprise has a permanent establishment within the United States the entire business income from United States sources is subject to United States tax.

    (2465)

    CONVENTIONf WITH UNION OF SOUTH ARNICA ON TAXATION

    Article VI corresponds with article III of the convention with Canada and part of article III of the convention with the.United Kingdom and also, in principle, with the third paragraph of article II of the convention with Sweden and article 4 of the convention with France. It arises from the necessity in appropriate cases of adjust. ing the accounts of a branch within one of the countries of an epter. prise of the other country, in order to assure that theaccounts of the branch will reflect its profits as accurately q possible. It is intended that article VI, together with article VII, will give all necessary authority for the adjustment of accounts with respect to business income. Article VII relates to the adjustment of accounts as between a corporation of one of the countries and it. related company, not necessarily a subsidiary, operating in the other country. A sub. sidia'ry company is considered, as far as the permanent establishment principle is concerned, to be a separate and distinct entity, but comes within the scope of article VII relating to interlocking businesses. Article VIII embodies the principle, as do provisions in existing income-tax conventions of the United States, Whereby salaries and wages paid by one of the Governments or by political subdivisions or territories or possessions thereof for services performed in. territory of the other Government shall be exempt from taxation by such other Government. As ta pensions and life annuities, paragraph (2) of article VIII follows thSe prnciple of taxation at the source. This article does not affect the taxation of United States citizens by the United States. Articles IX and X, like corresponding provisions in existing income. tax conventions of the United States such as articles XVIII and XIX of the convention with the United kingdom, grant exemption, upon certain conditions, to professors or teachers (art..IX) and students or business apprentices (art. X) from taxes on their remuneration or on payments made to them. Article XI, which corresponds with article X of the convention with Canada, provides on a reciprocal basis that income derived from United States sources by religious, scientific, literary, educational, or charitable organiztions of the Union of South Africa shall be exempt, on certain conditions from United States income tax. This is in accord with existing United States law. Article XII, which corresponds with provisions in the existing conventions with Canada (art. XII)-and the United Kingdom (art. XV), provides that dividends and interest paid by a-Union corporation to individual residents of the Union, other than United States citizens, or to Unioil corporations, shall be exempt from United States income tax to the extent that such dividends and interest are taxed by the Article XIII corresponds with article XX of the convention with Sweden, article XVI of the convention with Canada and article 25 of the convention with France and relates to the right of taxpayers to lodge claims with a view to having action taken toward the avoid. ance of double taxation. Articles XIV, XV, XVI, and XVII contain provisions relating to administrative cooperation for the exchange of information and for assistance in collection.' These provisions are substantially similar to provisions on the same subject in one or more of the existing income-tax conventions of the United States. (2466)

    Union.

    CONVENTION WITH UNION OF SOUTH AFRICA ON TAXATION

    Article XVJII provides for ratification and for -the exchange of instrufllents of ratification. It prescribes that the convention shallupon the exchange of instruments of ratification, become effective as of July 1, 1946, and except in matters of administrative assistance shall first be applied in respect of income arising on or after that date. It is provided also that the convention shall continue effective for a period of 3 years, but may be terminated, according to the procedure and with the effect specified, by the giving of a written notice to that effect by one of the Governments to the other Government. Apart from the delay incident to the receipt from Pretoria of the orginal document, the delay in completing the arrangements for transmittal of the convention to the Senate has resulted from the desire to receive assurances that the Union authorities are prepared to continue discussions with, a view to. the conclusion of a supplementary instrument which would contain provisions dealing with certain matters not covered specifically in the convention. Such assurances have been received. The provisions which are under consideration, for possible inclusion in an instrument supplementing the convention, relate to (a) the elimination of double taxation in respect of shippin. and aircraft profits, substantially similar to provisions in arti e of the convention of April 16, 1945, between the United States and the United Kingdom, relating to income taxation; and (b)the granting by the Union of South Africa, upon certain conditions, of exemptions from the Union nonresident shareholders' tax and the Union undistributed profits tax, with consequent benefits to United States corporations. Although it is hoped that it will be possible to conclude with the Union of South Africa in the near future a supplementary instrument along the lines mentioned, it may be well to point out that the benefits under the convention enclosed herewith are not in any way dependent upon the conclusion of such a supplementary instrument and it appears to the Department of State and the Treasury Department desirable to bring the convention into effect as soon as practicable, particularly to avoid needless administrative inconvenience in connection with the retroactive effectiveness of the convention. Respectfully submitted. DEAN AcHEBSON. (Enclosure: Convention of December 13, 1946, between the United States and the Union of South Africa with respect to taxes on income.)

    [Text of convention]

    (2467)

    PresidentialMessage of Transmittal to Senate of Supplementary Protocol (including material enclosed therewith)

    78095 0--2--voI. 2--42

    (2409)

    91s'r Cor.cmR I 2d &Auion

    SENATE

    E'vVCtrTIlV

    luloc'ro(t)l, WITII l'IIl u'NION (w, sou'rll AFIRICA lHFl,',rlING To 'IrAXIS ON IN(COMEIl

    MESSAGE
    FROM

    THE PRESIDENT OF THE UNITED STATES


    TIRANKII ITIN

    THlE PIR(OTOCOL, I E'M"MYEEN TI'lEL'X ITEI) STATE'S OF AMERICA AND)

    TIlE UNION OF 01"I'il AFRICA, SIG;NE:) AT PRIETORIA ON JI'LY 14, 19,50, 81'PPLEMFXTIN( I'IlE ('COXV'ENTION FOIu TIlE AVOID. ANC'E OF DOU'BILE TA ATION AND I.'t)It I.:sTAII1lISfiNt( 11i1;11"S
    OF iR ECEIPROCAIL AD).MINISTRATIVA'rE ASSISTANCE Wini iIi.ESPI.CT TO TAXES ON INCOME WIMUCII WAS 81(INED) AT PRETORIA ON DECIEMIE-M 13, 146 AhoTasir Ill 1950.-7T1o protocol was read the first t(ine and the injunction of secrecy was removed therefrom. The prot(,ol, the accunopanying letter of transmittal, and the report by the ticretury of State were refernrd to the Committee on Foreign Relations. and were ordered to Ito printed for the use of the Senate

    I also transmit for lhe information of the Senate the report by Ilio SRecrelary of State with respect to tli protocol. The protocol has tile al)provail of the I)eplrtnient of State and tho Treasury Department. IIAtRr1 S. Tru.Ax. (Enclosures: (1) Report, of the Secretary of State; (2) protocol supplehwenting the imcomr-tax convention 'with the Uunion of Southl Africa.) (2471)
    X4 .

    on December 13, 1946.

    To the Senate Yf the UTnited Stairs: With a view to receiving the advice and (consent. of tfh Senate to ratiticalion, I transinit lierewilth tle protocol between fi ll% united States of America and the niT.on of South Africa, signed at Pretoria on July 14, 1950, slup)lemlenlting ftht, convention for tlte avoidaince of double taxation and for establishing rules of reciprocal administrative assistance within respect to taxes on1 invoWin which wits signed at lPretoria

    Taim WHIT:i Hobusc, August 11, 1950.

    2
    The

    PROTOCOL WITH SOUTH AFRICA-TAXES ON INCOME DEPARTMENT OF STATE, PRESIDENT,

    Wlashington, August 10, 1950.

    The White House: The undersigned, the Secretary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice ind consent of that body to ratification, if his judgment approve thereof, a protocol between the United States of America and the Union of South Africa, signed at Pretoria on July 14, 1950, supplementing the convention for the avoidance of double taxation and for establishing rules of reciprocal administrative assistance with respect to taxes on income which was signed at Pretoria on December 13, 1940. The convention of 1946 is under consideration at the present time in the Senate Committee on Foreign Relations (S. Ex. 0, 80th Cong., 1st sess.). The convention of 1946 does not contain provisions relating to (a) the elimination of double taxation in respect of shipping and aircraft profits, (b) the taxation of earned income, (e) the nonresident shareholders tax imposed by the Union of South Africa, or (d) the undistributed profits tax imposed by the Union. After the signing of the convention, and as a result of communications between the authorities of the two Governments, it was agreed that certain revisions should be made in the convention. The protocol transmitted here. with has been concluded in order to effect those revisions. Items (a) and (b) above-mentioned are dealt with in articles I and II, respectively. Provisions are not included in the protocol with respect to items (c)and (d). Further reference will be made to the latter subject in connection with the statements regarding article V of the protocol. The rovisions of the protocol may be summarized as follows: Article I contains provisions relating to the exemption from taxation of income derived from the operation of ships and aircraft. The discussions on this subject which were begun during the negotiation of the convention of 1946 continued after the conclusion of that convention. The provisions which have been incorporated in the protocol, so far as shipping and aircraft profits are concerned, are not all that this Government had desired but they go as far as was found to be practicable at this time. The Union of South Africa took the position that these provisions must adhere as closely as possible to the principles underlying the corresponding provisions in its tax convention of October 1946 with the United Kingdom. Also, the Union Govermnent insisted that the exemption from Union tax not be extended to "residents." Article I (1), therefore, contains a proviso to the effect that the exemption from Union tax is not applicable as to a United States enterprise (which means, in practice, a United States corporation) the management and control of which is in the Union. Although, theoretically, the provisions are not entirely reciprocal, since the United States corporation is exempted from the Union tax only if it does not have its management and control in the Union, while a corporation organized under South African laws is exempted from United States tax regardless of the place of management or control, it is considered that for all practical purposes reciprocity is achieved and the provisions will operate to the considerable advantage of United States shipping and aircraft enterprises. (2472)

    PROTOCOL WITH SOUTH AFRICA-TAXES ON INCOME

    Article It contains the provisions regarding exemptions from taxa. tion, on certain conditions, of earned income for personal services (including professional services) performed bi one of the countries by individuals who are residents of the other country. Unlike the United States, where the income tax may be imposed on a variety of bases (citizenship, source of the income, etc.), the Union of South income and the tax applies only to income having its source in the

    Africa imposes its income tax solely on the basis of the source of Union. Because of the previous resistance of the Union to any treaty provision which would exempt earned income at the source, it was not possible to reach an agreement on earned-income provisions for inclusion in the convention of. 146 -.Article II of the protocol fills this gap. The Union haadilopted, for the purposes of this protocol, the rinciples expressed in article XI of the income-tax convention of 45 between the United States and the United Kingdom (60 Stat. 1377). Oft a reciprocal basis; a resident of the United States is exempted from the Union tax upon his earned income' from Union

    that th14 exemption shall tot extendd to, profits or remuneration of public entertainers. It oasfdeclared by tiw Union Govern.nent, as a matter of fixed, policy, that 'paragraph (3) must be retained otherwise thd entire paragraph (3) article Ibd stricken out tq. the Union. Accordlingly, cannot is,unacceptable without losing the earnedIncome provisions in their entirety, thereby depriving other individuali of the e.wemption which artiolo II would otherwise grant. Article' III relates to the taxation of royalties derived from the real property. There arq applied 'in these respects the' principles expressed in article IX of the income-tax convention between the United States and the United Kindgom and in a number of other income-tax conventions of the United States. On a reciprocal basis, a nonresident alieii (for application of the United Staites tax) who is a resident of the Unioni; or a Union corporationf 'deriving income from such royalties or rentals fiom sources within the United States may elect for any taxable year to be subject tO United States tax as though having a permanent establishment in the United States. Such income is now taxed in the Union on a net basis. Article IV would amend article V (1) of the convention of 1946, relating to the taxation of industrial and commercial profits, by insertoperation f mines, quarriibs, or natural resources and of rentals from

    sources if (a) he is present in the Union for not more than 183 (lays during the year of assessment, (b) his services are performed for an American employer, and (c) he is subject to United States tax on such income. It will be noted that paragraph (3) of article II states

    ing a proviso indicating the intention that nothing in the paragraph

    shall affect provisions of Union law regarding the imposition upon shareholders of a private company having a permanent establishment' There is no intention to change the meaning and real application of
    article V (1) of the convention. The proviso is inserted, as urged by in the Union of the taxes payable in respect of that company's income.

    the Union Government, in order to make tire provisions correspond to and the United Kingdom. In any event, if a United States enterprise has a permanent establishment in'the Union, there would be no exemption from Union tax either as to business income or other income, and
    if such enterprise were a private company, under Union law, the provisions on the same subject in the convention between the Union

    (2478)

    PROTOCOlo WITH SOUTH AFRICA-TAXER ON INCOME

    Income of the enterprise, would be applorLtioned bv the lUnion among the conlpanv ' shareholders. Article V provides for tlhe deletion of arlhtie XII of tihe convention of 1946, relating to exemption from I iiteid Slates tax of dividends and inltert, paid bly a Union corporation io individual residents of ihle Union, other thia [Uniled Stales v'ilizets, or to Union corpolrations. Those provisions are being deleted in orler to achieve wlha is eon. sidered ht a more acceptable balaunc' in toe,provisions of ihe con. ele vention alnd j)rotowol, Ilaken as n whole., It wll lRe recalled that ile undistriblted profits tax or to hlie nonresident shiareholders' t. imposMd lM the Un1ion. Both of those laxes are applied toIt b inlmle dernved front Soulh Africa by a nonrtsidrent. ('orlporllions are cla.,ified by thi Union as private and plublic c.mpai s. In general private companies are not directly liable it the tax. mTe incom 0I Mie private comnpaics is deemed it) be apporl ioned among Ithe stockholders or shareholders and is mubjectel in their Ihads to normal lax and stir. tax. The Union undiatributed profile tax isimposed only wit h Irspect. to so-called public c'ompallies registered or doing business in tile Union. T'he nonresidetnt shareholders' lax a pllic's to dividends paid I)v public compallniaies to nonresidentas IN also lo income of private'companies apporliouml amon0lg the shareholders. As to livideinhr of public companies the rate is seven and ia percent, half withheld id the source. As to the lp)portioned inm,'Otte of private at companies the normal tax and surtax ar, ialplied andtliheoretlically the 4t4x is payable bhy the shareholders, whether resident in the Union, the IInitted Aaltes, or elsewhere. Klverv reasonable ellort was made to encourage the IUnion (lovernlnlent tol inhlude in the suplheliletary prolotol provisions dealing with Iilthese tiam. The Union Gove'rn. mIent could iot, ais a matter oif policy, see its way clear to the inclusion of such provisions. Thi, (lovernmnent proposed, tlierefore, and tile Union (Gov'rnment agreed, that article GII of lhie convention should be deletedM. Article' VI would ametil article XIV of the convention, relating to the exchange of information, by adding ia provision, similar to a provisions ill illomt, of the existing lilld proposed illcolmie-tax Colnvet ions withi other countries, thalt no informatlion shall be exchanged which would disclose any, tradei secret or trade process. Article VI I wold amendarticle X\' of 11P th Ilconetioln by deleting parigrialph (1), relahtilg it) the takinr (f measures of conservancy, and substiluling therefor a l)ara graptnil stiplahting that asistance in collection shall not be accortded ill respect, of a citizens or national or corporation of liii, Stlte to whi'hI app iication for assistance is made. As pointed out, hereinlbefore, fithe income tax is imposed only Union ulII ioninome from sources within the Union, so thal, evel a residetl Ihe t Union isnot subject, to thIe tax upon income from sources within the United States. That. principle is stabilized by article IV of the convent ion of 194fl insofar its the taxation of il-onlcme from United States sources is concerned. The income subjtected to tax (including inconie from busiimns activity, securities, services resulling in earned income, etc.) is, therefore, income arising within and ittuated within thie Union. (Consequentlv, it, is not expected that", under Such ciremllltSaict('e', the Union will Ifild it ilteessary to make application to the United States for collection of any part of ilth Union tax.
    c.alventioi dJoes not cotallin ia provision relating Ito the Union's

    (2474)

    PROTOCOL WITH SOUTH AFRICA--TAXN8 ON INCOME

    Artlide VIII provides for ratification of the protocol and for the Ixthtilge of instrnunents of ratilivation. It prescribes that thelprotoil sihu|l hbe rgatrdte a an integral part of thi ('onvention of 1946 is 1111 8hlI 1 becomtie etrl(.(tive .il (,onltiuw effective in ac'cordance with article XVIII (2) of tho ('onvOetion, excel)t that the jprovisips of art ides 1, II, and III of the protocol shIll be effective and applied in rilspect of income arising on or after ,fuly I, 1948. It is provided further that., in thes event of termination of the convention, tho protocol shall teriionte simultantouslv with the convention. The D)epiartment of Sitate and the T'reasury D)epartment collabortt4ed in thei negotiation of the siu1)ppliemntary p)rotocol. It has tho p1) l of Ioth D, Jepartmients. )"lpr Itespec frilly submit ted. I) KiAN Ac.:SON. Eidrlosires: Protocol slplemiiientinig tho inconlo-tax convention with the | TheUion of SAouth Africa.)

    [Text of protocol]

    (2475)

    Asellate' ( olmitille Hea.rings


    April 12 anuud l:1 1951
    84dd ('oIngr,, Ist ,Stion Sibr'ouliiltee of the S,'utte ('ommiitlce on Forcign Relations
    INitrv.: This dth'umetit is printed in V'olume I heginuiuieg at page (.03).I

    (24177)

    Senate Committee Report


    August 6, 1951 Execulive Report No. I 82d Congress, Ist Session Senate Foreign Relations Committee INous: This document Isprinted in Volume I beginning at pep (W83).

    (2479)

    Senate Floor Debate and Action


    September 17, 1951 82d Congress, 1st Session
    97 Congressional Record 11434-11435, 11438-11441, 11442-11445

    (2481)

    1P. 11434,

    RATIFICATION OF CERTAIN CONVENTION

    Mr. GEORGE. Mr. President, the Committee on Foreign Rela. tions has considered the conventions hereinafter listed and has recommended that the Senate give its advice and consent to their ratification, subject to the reservations and understandings which are indicated in the resolutions of ratification. The treaties or convenFirst. Convention with the Union of South Africa relating to income taxes, signed at Pretoria, December 13, 1946-Executive 0, Eightieth Congress, first session. Approval recommended with an understanding relative to the collection provisions of article XV. Second. Convention with the Union of South Africa relating to estate taxes, signed at Capetown, April 10, 1947-Executive FF, Eightieth Congress, first session. Approval recommended with an understanding relative to the collection provisions of article VIII. Third. Convention with New Zealand relating to income taxes, signed at Washington, March 16, 1948-Executive J, Eightieth Congress, second session. Approval recommended subject to a reservation relative to taxes collectible from public entertainers. Fourth. Convention with Norway relating to income taxes, signed at Washington, June 13, 1949--Executive Q, Eighty-first Congress, first session. Approval recommended subject to an understanding relative to the collection provisions of article XVII. Fifth. Convention with Norway relating to estate taxes, signed at Washington, June 13, 1949--Executive R, Eightypfirst Congress, first session. Approval recommended subject to a reservation respecting the collection provisions of article IX Sixth. Convention with Ireland relating to estate taxes, signed at Dublin, September 13, 1949--Executive E, Eighty-first Congress, second session. . Approval recommended subject to no reservations or understandLeventh. Convention with Ireland relating to income taxes, signed at Dublin, September 13, 1949-Executive F, Eighty-first Congress, second session. Approval recommended subject to reservations relative to the capital aims provisions of article XIV and the accumulated earnings provisions of article XVI. Eighth. Convention with Greece relating to estate taxes, signed at Athens, February 20, 1950-Executive K, Eighty-first Congress, second session. Approval recommended subject to a reservation regarding the collection provisions of article IX.

    tions are as follows:

    (2483)

    Ninth. convention n with Greece relating to income taxes, signeu at Athelns, February 20, 1950- Executive L., Eighty.first ('ongress, second session. Approval recomniendmd sul)ject to an understanding with respect to tfle collection provisions of article XIX Tenth. ('onventtio with (C'atlada rMating to income taxes, signed at Ottawa, June 12, 1950 -Executive R, Eighty.first congresss , Approval recommended subject to a reservation relating to tile professional earnings of public entertainers. Eleventh. Convention with Canada relating to estate taxes, sigeld at Ottawa, June 12, 1950-Executive S, Eighty-first Congres, second session. Approval recommended subject to no reservations or understand. Twelfth. Protocol with tie Union of South Africa, relating to estate taxes, signed at Pretoria, July 14, 1950-Executive T, Eighty-first Approval recommended subject to an understanding relative to the collection provision referred to above under Executive FF. Thirteenth. Protocol with thle Union of South Africa, relating to income taxes, signed at Pretoria, July 14, 1950-Executive Uy, Eighty. first Congress, second( session. Approval recommended subject to a reservation relating to the profits of public entertainers and the understandinlg referred to under Executive 0 above. Fourteenth. Convention with Switzerland, relating to inconie taxes signed at Washington, May 24, 1951-Executive N, Eighty-second Congress, first session. Approval recommended subject to reservation regarding profits of public entertainers. Mr. President, permit me to say that all these treaties, as is apparent front a reading of the titles, and front tile reservations amid understandings included, seek to eliminate double taxation with respect to the incomes of individuals and corporations and with respect to taxes oil decedents' estates. There was-some difference between the witnesses who testified before the subcommittee appointed by the distinguishedd chairman of the Committee oil Foreign Relations, the Senator from Texas [Mr. CoNNALLv1 to consider these several treaties and protocols but the subcommittee was unanimous in its conclusions, and the full committee likewise concurred in the conclusions of the subcommittee. The subcommittee consisted of the junior Senator front Iowa (Mr. GILLErrEJ, the senior Senator from .New Jersey [Mr. SMITH], the senior Senator from Iowa (Mr. HIcKENLOoPErK, aidl myself. I shall invite attention only to those reservations which are commoO to all treaties, or at least common in degree. It will be noted that the first reservation suggested with respect to several of these treaties, especially South Africa, Norway, and Greece is for mutual assistance in the collection of taxes. I may say that no similar reservation appears in the convention with Ireland or in the existing conventions with Canada and the United Kingdom. These conventions provide, in the case of South Africa, as amkended by the protocol, that the assistance and support to be @iven by each contracting state shall not be accorded with respect of citizens or nationals or estates of citizens or nationals of the contracting state to which application is made for
    (2484) Congress, second session.

    second session.

    Assistance in collection, unless such citizen or national or estate is entitled to the allowai,.e and credit under the .applicable convention. In the case of the existing convention with France, the restriction upon Assistance to such nationals is proposed without limitation. It 6 the opinion of the subXointnittee and of the whole committee that the provision of the pending estate and income conventions are too broad. As a general rule it is not believed wise to have one government collect t he taxes which tire due to another government. Therefore the committee recommends that these provisions be eliminated from the pending conventions; with tile exception that the provision of the South African Convention, its amended by the protocol be accepted, subject to the understanding that the application will be limited to those cases in which tile estate of a decedent claims a credit, under article 5 of the convention. The committee recommends this limited exception in the case of South Africa in view of the fact that the convention is retroactive to 1944 and the fact that since that time the estates concerned have been on notice with respect to the collection provision. Mr. President, I may say that this was the view taken by the committee with respect to all these assistance provisions. It was simply deemed unwise to have our citizens in foreign countries subjectedlto tlhe judicial procedures of those countries, and likewise it was deemed unwise to obligate our country to undertake the collection in our own courts of taxes due to the foreign countries dealt with in these conventions. It will be recalled that in many instances, or perhaps all, the courts would be called upon to enforce very harsh eivil penalties, and it was not deemed wise for our courts to undertake that particular job. It will be noted also that in two or three or more of these conventions there are reservations relating to the compensation paid American citizens by American firms or employers in the countries with whom we have negotiated these treaties. That matter relates to the compensation for personal services of American citizens in foreign countries. Exception ham been taken heretofore, I may say, in regard to this question in connection with the negotiation of other treaties but it was disregarded by those who negotiated with respect to several of the treaties now before the Senate. It was pointed out that these provisions were highly discriminatory against artists. musicians. motion-picture actors,'and others who went into foreign countries, but who were at work there for American employers, and temporarily) resided in those foreign countries while they were carrying on their business enterprises there. It is a rule, which has been ado ted now for many years, that an American citizen who spends at least 183 days in 'aforeign country is to be exempted from double taxation-in other words, taxation by both countries. However, an effort was made to make a most invidious distinction as between artists and others who went into the foreign countries to make motion pictures or to give performances for American employers. Another provision in tile ('anadian treaty which has called for a reservation is the capital-gains provision of the act [p. 11435] of 1950. [t will be recalled that by section 213 of the Revenue Act of 1950 a Capital-gailis tax was imposed upon visitors fromn other countries who entered the United States and perhaps rented a rooui in one of thie hotels in New York (City and there engage(I extensively in capitalgains operations upon the American exchanges. In 1950 Congress

    M80M5 0--2-vol. 2-(

    (2485)

    of thle uinderstandings, wherevir underst findings air.' inserted ill ithe rtsolthl ions of rit iricttitl. If there aire nio limestiois, I request thatltihe( treaties now bet Ilaid before tlie MSltate. rIr. M1I1'1'l of New thJrsey,. Ntr. Presidenth , ais a membellr of the I subhonnllllit,te whilellwas assoviated Wilh li tlt.' ilstimlguisledl Mlintor from ('lworgial INIr. (O:ommaw ill c'onlmt0n't Witlli st udying' Illese tretllie.s, I rise itstUl)port tihe Mlat or's posit ion ill requmlstim;g tlat t he tre'atiets
    hi' raitifleti.

    hlted earnings winl irolils. Under nrliteh I(h) of the' new 'oltv'isitI io wilIi (C'an0dh, artrlle 1:. of the oiiginil treaty is uiintdled, iltl thai i0111n111111ent is maIl solelhfor hl,e ptrposet ofi'orre't'ling a it0ist1ki' ill iv hlie origimnl Irelay or ait hlemst hlarifylig0 tlile 011ean100ilng of the origill0, IrealtIV. I mhder t hist .,rdle, ait this ilit, wheI' nimore thtn 51 Ipntre.nt of lite oI0tslt ling volltlla. srolck is owlii'd ulirelotly or indirect Isell 1il ringtlw last hlalf of t Iie Ixlth vet'tr hi intlividulI residellts of ('llnldhl., ot her t hn1it r/o'in of tile I tnitli'd Mlallts, it shalll be exeitll fronmwli n1it taxes imposed I1 lile I Unite'd MtSltes wit Ii respi't, to lilt, ael.' l10t11latel oir linthe listl ribltitA earnings., profits,ninomo. s41lurplus11 of sli'h lorpOrat iions. , or XMr. Presttildn, I think Ih' brief explhnat ions I liav' nitailde will stilhet, to inditile 'll, IlatUre of tlhe reservations itn (-lth th' % l il flit Il nlaure

    undertook it imptos ii eatiltal-ginism In uIpo those rtsidiit alihnm. 'l'he ('anitlian Ititly provhi.les uigpan Ilhis provision; that is Itlo sa, il tlilt ('anadianli ,',ll vi'i,.lit1 Ilhere is aipI'ovision whii.h lbrogalles I his I provision . Sinc,'' itisa midisejiimitl.lgisltli iv , delaratiOi. itwould h'h hll'i' the ilriit , if I.'rmillt ted it) atol, of'l 'm ,repelihtg ongrt.-sionial ilt% h ii'l . tlh t', ihitlfon iee dihitm'itlI it wise to offi'rittservatliot llitt a oiln poIlin inll thl ('anlad11lilln retilly. that1 'flier.'Is lthi,'r poitlI upon whi.'lh i reservatiom or util.'rstaninhg 0lt' is rit . inl oneo til'Ie 'tll'litlll0115, I bhtli've. It itis, rellaes t0 a.'euanti'-

    ill ana Naiiny day were spent on tlni, al iny witnesses before uis duhriang t heir eonsiderat ion. Wet hadul t ell " O'f thel judgllnitll nli. wise of NI r. lMtan, who is aiviser of hoItth till Ifoluis inil tll, ellnate ill tihe conti'0lioini wilti liscal mnat ters. We ltairdl fro)lit Iialttll, s (Ulo)irnt mtllnt witlnmess and l1lun1T(eronls llttmiih wilnesses. I wish to pay the higher, possible thribhti to the distiatguislt'd ehiairmatin of tfit, stoll u ntnoiltet,, ti SleMenator froi (leorgill I r. (moutiawl, for tli' palitiellnee d skill wilh which lilt handled aill IIthe init tens. In Ilil, digttilh ('oltgress I laid the I)rivileg' (Of hiondlliig certain ntaittiers of lhis sort, mnd I believe the +retr tre a nli'h T included Itilong flihtm. I think thint itt these Iritlies we air.' p)rovidling for true% uniformity, iapoint which I cotsidetr Ito hle most, ialtr)irtalit. I[reetofor.' wi' haimve gailit'l expelnri.,'ai, li.'m it t tens; mll this luteli, it i resullt d atla of thei furanhir lestinionv received, I bl.,iev', we now halvet reeili'd a familiar with thi' lpossiblie l)ilrlflal ill point whern tihe eomnmtltte is emonnlletlion wi lli suchi proe.t'editn.r, aniid wet are ztallously IaireftIl of
    Ili' rights of Anme.'ricanttleiltls. Agatti I wish to i'lonmtid(td lift' abhh' Mleor from (leorgia for fipt fit.e work lie hlos done' ill this eotlleltioll, Ths eO1 ottlillttee isUllailintioiu i tkintg tiii' position hitat treaties proleet our eiti'zlens aind ni Itlie ait, Ithe samei tint are just anid fair tO ilt.' eouantlries participating ill ioryl. IMr CASE. Mil Prm~idelltA, wlthSnao yield? hmil Mr. Mr. will fJlip Sonmlllor

    (2486)

    Mr. (]OlE]l(

    . I hain vry glad to yieldl if flit, Senator wishes to

    Mr. (ASE#. I an1t willing it) addre' amy ojuestion either to Oihl Sealtor rroull New ,Jersev. Senlaor Iroln (Geor'gia or to lhe \I r. ((s)!(|,. I shall he pleased to i,~swter ir I van. Mr. ('ASE. I did not know that these ataltters were to ('Oll1e upi tfdlav" ill t'oliltt'lioI, wilt the treaties. I have heetn disturbed by t, rWldilg ait dilrerolt limes press reports to Ithe etret that verlil, (|reek inationals have [t)et, taking idvantige o)1 the opportunity to
    dlare irilfs, eithiert by )hlat'icng hthe vessels uldier Panantantai, regist ry or by plti'ing Ithetm iiIttler (Greek registrv . While the matter may niol be exactly. 'overeull I anm wondering whether there is any possibility ITniled thal I convention proposedd between lilt, Statle; and (reeee ill

    address it qinestion to I1e.

    Iurehase surplus Almeriean vessels, and i ii

    W AnMakoe very way11P

    the opporluinily to, u iikiiuusUl, I)roliIls by reason of living ill New tork ('itv ad retainingi (Creek nalionaility i enhllattlled ill filly way. No; at aoL. Oil ti, contrary , we have beet, ais Sir. (,1M).I. oill%, Ilhit, ltreatie's would sc'ruplously 'are'ul to see tht nol hing in h liave tihe, t't't't of re'i eling or- 1titllilying tilt' provisions which we inserted inthe 19.50) Wevenue AMl , settioll 213, whliell subjeeled to I'lll)ilt-gatlS tax the profits ,utadoh by temporary alieuls residilig inI hl' niTllled Slates. hui who hadt no flixed p)la' of bhusilnle wilhhtl tlhe f se United States. W' aire offering inthe alp of the Canadian treaty It try. reservalioti which p)rotels ithe revento aite or this t.otico However, I woulItl say to the (listinguishied Senator that, ill large not ipart the question whi'h el liehs in mntid ish involved in these treaties at till. because tihe treaties relate primarily to it reciprocal arrangeitent between lif' two otmitlratring countries, tltnely, between our colullry tiiid cot tlry X, resplectting income tax and .olle(tlion of iltcOlnie taix, respecttng estalt' taxes, alu 1 snfegtiardiaig against lhie double taxation of thile ilizels of the resl)ecliv, tarlit'es to ilhe voltventionI. It does not relate to tile larger question which fthlSenator ains asked, excetA ill hle way I have ihldicat'd. Mr. ('ASK. Nilr. 1'residenti I wish to thatnk Ile Senailor fronit (Georgia,for this asluratice. As I said, I had no knowledge that hiis atia.ter was t'oming ulp, ind I wats tot. prel)ared to ask ia specific question relative to the problem I have luellonll'd, butill Vinaw of lthe fact that there wais it aiolventio, between the United States and fctlhat (Oree h'u included in lip cilvenlioas for ap)proval, antd IteIftt' it related to thlie quest ion of aIvoitlance o)f doult' taxitioill, lie ttllestliOll holl itsth litturally occurred to mte as to whet her it might inmpinge lion to which I have rft'erred. Mr. (t1,1(11. No; it does4 not. Mr.(CASE. I atm glad to have tihe asuraltee of (tle Setator thal it does not. Mr. (OE(Olt(iK. It loes tolt. Mr. Pretsidtle it orler that th.' committee's action and itt order that tlte rmsoluitiots of ratification many be Ilelter understood and Ito ('s)p(iely It t11 efft'ctive da(llt of ihese OIlnVelntiOltta 60' tharly slated. I ask tltianiniouts onIsein that t hort, he' inlhhded ittI hit, RI:ewomw niont 11titt11 collttlittlp at this poinlt Ith alnillysis of I It )P'tllithg tvllvtl rietollntlttltiS illiutlder tIlte IIl, pago' :, of thei comtmuittee report, to the mid thereol.

    (2487)

    There being io objection, title 11[, Aunlysis of Pending Conventions and Committee Recommendations, wis ordered to be printed in the RfcorD, its follows:

    IMI.

    ANAI.YSIS

    or P

    mNI)IN(I CONVENTIONS

    AND COMMITTEEs HICOMMUINIATIgN5

    In response to a request of the chairnitan of the subcommittee, the staff of the Joint COlnunittee on Internal Revenue Taxation prepared ani analysis of thiie pro. visions of the p'endinlg conventions for tle rise of the committee, giving partietilar attention to the effect of thie p)rovisions upon the revenue laws of the United States. Inasmuch as tile pending conventions have many substantially similar pro. visions, those dealing with income taxt-s are discussed together for tle purpose of this report and those relating to estate taxation are discussedd together. To the extent that a convention departs in any particular from the general pattern, that fact will be brought out. The two protocols with South Africa tire discussed together with the pending South African conventions which they supplement. The two conventions with Canada tire discussed separately Inasmuch "as they supplemented or modify conventions which tire heady in effect. Insofar as the United States is concerned, the various conventions relate only to the Income and estate taxes of the Federal Government, and they have no effect upon the income, estate, or Inheritance taxes imposed by any State, Terr. tory, or possession of the United States o' the District of Colhiubia. A. CONVENTIONS REI.ATINO TO ESTATE TAXES
    * 1 * . *, *, *

    1148*1 D. CONVENTIONS RELATING TO INCOME TAXES This section of the reports deals with the income tax conventions with the Union of South Africa includingq the su'pplementary protocol), New Zealand, Norway, Ireland, Greece, and Switzerland. (Tile "sip)phlelnetary convention with Canada is treated separately.) Substantially similar provisions appear in these treaties. For that reason the following diseussion is divided into considera. tion of the major items dealt with in the conventions, aind the various treaties are discussed together under each of those headings. Double taxation arises, in the absence of reciprocal agreements such as are represented by the conventions and protocols under consideration, from the fact that the various governments assume and exercise broad, and frequently overlapping, taxing jurisdictions. In general, the United States assumies the right to tax its nationals and domestic orporations on their entire incomne without regard to source. It likewise assumes the right to tax its residents, regar(dltss of nation. ality, on the Same broad basis. Alien nonresidents, on the other hand, are taxed only on income from sources within the United States, and foreign corporations are taxed only on Income from sources within the United States. The Union of South Africa Imposes its taxes primarily upon income derived from sources within the Union. New Zealand does not uis citizenship as a basis of tax but taxes New Zealand residents on their entire Income, regardless of the source from which derived. With respect to nonresidents, it taxes only the income derived from sources within New Zealand. Norway imposes tax "on the same basis as New Zealand, except that with regard to nonresidents it only taxes the income from certain specified sources and property located in Norwav. Ireland generally applies the same taxing rule as the tfnlted Kingdoin-resilents on their entire Income and nonresidents on their income from sources within Ireland. Greec has two Income taxes, each of which it imposes on a somewhat different basis. Its schedular tax (applied both to individual and corporations) is generally Imposed only on income from sources within Greece, although income from abroad (i.e., dividends) is subject to tax if "enjoyed" in Greece. The general tax (applied only to natural persons) is imposed on the entire income of a Greek national, regardless of residence, and on the entire Income of a resident of Greece. Thus, the latter tax is similar to the United States income tax with respect to the broad scope of its application. Switzerland imposes Ioth federal and local income taxes, of which the hitter are the most important. The Swiss taxes oln income are based primarily on the diomicile of the tax ayer amd the source of the Income. Ill general, the Conventionls avoid double taxation b)v a syste'ut of reciprocal exemptions and by reciprocal adoption of the principle ;f the United States taxcredit systeinm. Tie provisions reserving to each State the right to tax its own citizens, residents, and corporations without rewrd to the conventions are una1 ogous in principle to similar provisions found in all income tax conventions to which the United States is a party.

    fr.

    (2488)

    (1) Businee imnolne All six of the conventions under consideration adopt the principle that anl enterprise of one of tile contracting States shall not be subject to tax In the other contracting state unless it is engaged In a trade or business ir that state through a "permnanent establishment" situated therein. A "permianent .establishmenti' is generally defined to mean a branch, factory, workshop, warehouse, and other similar ftxed places of business and does not Include a inere agent or broker. To the extent that such anl elnterprise is carrying onra trade or business through a permanent establishment, It is to be taxable only on the profits derived from sources within the taxing country. This provisions does not extend to mere investmnient Income or income derived from the furnishing of personal services. Moreover, each of the conventions provide that no profit shlall be deemed to arise from the mere purchase of goods or merchandise. The conventions provide in appropriate Instances for the adjustment of tile accounts of a branch or other related business entity of one coittracting state within another contracting state in order that the branch accounts will reflect its profits as accurately as possible.

    (5) Dividends and inleresd The South African convention originally provided (art. XII) that dividends and interest paid by a South African corporation to South African residents other than United States citizens and to South African corporations would be exempt from United States tax to the extent taxed by South Africa. This provision represented a unilateral concession by the United States. Subls.quent efforts to have South Africa agree to a similar provision respecting the Union's undis. tributed profits tax and Its nonresident shareholder's tax having failed, the two (Governments have agreed (art. V of the pending protocol) to delete article XII of the convention entirely. On a reciprocal basis, the New Zealand convention provides (art. XII) that dividends (without reference to interest) paid by a New Zealand corporation shall he exempt from tax except where the recipient is a citizen or a resident of the United States or is a United States corporation. The Norwegian convention makes no reference to the payment of divinends but provides (art. VI) that interest on any form of Indebtedness derived from sources within one country bv a resident of the other (Including it corporation or other business entity not hiavinig a permanent establishment In the former country) shall be eXelnlt in the country from which derived. The Irish convention hits a similar provision (art. VII), btie it does not apply to interest paid by a corporation resident in one of the contracting countries to a corporation of the other country which controls, directly or Indirectly, more than 80 percent of the entire voting power in the payor corporation. *This provision Is practically identical with article VI of the convention with Greece. Moreover, with respect to both interest and dividends, article XV of the convention with Ireland provides that such pIayments made by a corporation of one of the contracting states after a date tspecfed shall be exempt from [P. 11489) tax by the other state unless the recipient is it citizen or resident (in the case of the United States) or a resident (in the case of Ireland) of that other state. The treaty with Greece contains a unilateral provision (art. IX) to tile effect that dividends and interest paid by a (.reek corporation shall be exempt from United States tax except where the'recipient is a citipn, resident, or corporation of tihe united States. Under the hInternal Rtevenue Code, hiterest and dividends paid by a foreign corporation mna, under certain conditions, constitute income from sources within the United States and consequently subject to United States tax in the hands of the nonresident alien recipient of such items. In practice, it is only in rare instances that it is practicable to ascertain whether a foreign corporation derives more than the requisite percentage of its gross Income from United States sources so as to constitute its interest and dividends income from sources within the United States. Article VI of both the Irish and New Zealand conventions provides, unlike the other pending conventions, that the rate of United States tax on dividends (derived from sources within tile United States by, a resident of those two countries not engagedin a trade or business within the'United States through a permanent establishment therein shall not exceed 15 percent. In the case of a dividend moving from a subsidiary to a parent, tihe rate, subject to certain limitations, is not to exceed 5 percent. The effect of these provisions is to reduce the present United States withholding rate from 30 percent to 15 or 5 percent, its trie case may be. This reduction is likewise provided In the existing conventions with the tLited Kingdom, Canada, Denmark, and the Netherlands.

    (2489)

    Neither Irish nor New &-aland law at the present time subjects to tax the dividends of Irish or New Zealand (respclively) corporations. The corporation Waont is taxed, and the tax paid hy the. corporation is regarded as being paid on behalf of the shareholders therein. Of course, the reduction of thle United States withholding rate (lots not affect United States citizens resident lit Inrland or New Zealand as Pich persons are not subject in any event to Such withholding tax. The conventions with Greece, Ireland, and Norway exempt on a reciprocal, basis interest derived from sources within one country by residents of the other. Neither the South African or the New Zealand conventions contain stuch an exemption. However, the existing conventions with the United Kingdom Denunark, and the Netherlands do provide for such a reciprocal exemption. Under article VI of the convention with Switzerland there would be a nrciprocal reduction in each country from :30 percent to 15 percent in tile tax rate on divi. dends derived from sourctes within such country by a resident corporation, or other entity of the other country not having a permlanaent establishment In the country from which the dividends are derived. There would be a reduction, subject to certain qualifications, to 8 percent in the tax rates with respect to such dividends if the shareholder is a corporation which controls, directly or indirectly, at least 05 percent of the voting power in the corporation paying the dividends and if not more than 25 percent of the gross income of such paying corporation is derived from interest and dividends other than Interest and dlvi. dends received from its own subsidiary corporations. The reduced rate of 15 percent would not apply to Swim tax on dividends derived from Swiss sources by a Swiss citizen who is resident in the United States and who is not also a citizen; of the United States. Switzerland wishes to place no limitation on the imposition of its divildend taxes with respect to its own citi. sens, except as to those having dual nationality. No corresponding provision is found in any other treaty to which the UnitedStates is a party, but It has no effect upon United States taxation. The Swiss tax of 30 percent would be withheld at the source and a refund to reduce it in accordance with he provisions of article VI would be made upon a claim duly filed therefor by the recipient hi tile United States. Such claims for refund are necessitated by the difficulty in identifying the owner of shares which arises from the fact that the standard form of stock certificate In Switzerland is the bearer share. The Swiss convention provides that with respect to Interest on any form of Indebtedness, the rate of tax shall be reduced to 8 percent on interest derived from sources within one country by a resident, corporation, or other entity of the other country not having a permanent establishment in the country from which the interest is derived. In the ease of tile convention with Switzerland a tax of 8 percent is retained because of the fact that in Switzerland there is imposed on Interest in addition to the Income tax, a 5-percent coupon or stamp tax. The special Ieatures explained above with respect to the reduction of tax on dividends apply also in regard to the reduction of tax on interest. Article XIV of the Swiss convention provides that dividends and interest paid by any foreign corporation to a nonresident alien resident in Switzerland or to a Swiss corporation, not having a permanent establishment in the United States, shall be exempt from United States tax. Reciprocally, dividends and interest paid by a corporation other than a Swiss corporation to a resident or corporation of the United States not having a permanent establishment in Switzerland shall be exempt from Swiss tax. As thus drawn, the article Is narrower than the corresponding articles of other conventions in that the exemption granted is confined to nonresident aliens re siding In Switzerland and to Swiss corporations, whereas other conventions extend the exemption to nonresident aliens and foreign corporations generally (for ex. ample art XV United Kingdom; art. XII, Netherlands and New Zealand; art. IX dreece art XI1 Canada). It Is broader In that the exemption thus re. strieted extends to dividends and Interest paid by any foreign corporation, whereas other conventions have confined the principle to dividends and interest paid by a corporation of the particular country with which the convention was entered (8) Compensalion for personal services (A discussion of the treatment of pensions and annuities will be found below under that heading.) The six conventions (8outh Africa-art. I1 of the protocol- New Zealand-art. IX; Norway-art. X; Ireland-art. XI; Greece; Switzerlan--art. X) all adopt

    into.

    the principle of reciprocal exemption for compensation for personal services per(2490)

    formed by residents of one contracting state who are temporarily within the taxing state for a period or period. not to exceed 183 days if the services are per. formed for a resident or corporation of the 8tate of which the person Ina resident. Its the cae of Norway, Greece, and Switserland there is also granted a limited exemption where the services are rendered for an employer domestic as to the taxing state. However, the conventions with New Zealand, South Africa, and Switzerland contain an exxception to the rule. 8pecifically excepted from the scope of the exemption are the profits or remuneration of public entertainers -uch as stage, motion picture or radio artists, musicians, and athletes. A modification of such exception Is found In the Swiss convention, where the Income received is less than $10,000 ($3W000 in the case of the Canadian convention discussed separately). The committee believes that these exceptions constitute a discrimination against this particular occupational group. Therefore, the committee recom. nwnads that thetSeiate not accept paragraph (4) of article IX of the New Zealand convention, paragraph (3) of article IIof the South African protocol, and para. graph (4) of article X of the Swiss convention. (4) GOIcrnmeCl Salaries Each of the conventions adopts the general principle of the reciprocal exemption by each state of salarles and wages paid by the other state, or by political sub. I division or territories or possessions thereof. This, of course, sill permits the United States to tax its own citizens. This Istrute of all tax conventions to which the United States Isa party. In the ease of Norway, Ireland, Greece, and Switzerland this agreement specific. call embraces the payment of pensions by the governments concerned. The agreniemnt with New Zealand, on tlhe other hand, does not apply to such pensions. The provision of the South African convention makes no specific reference to government penisions. However, the uniform rule of the South African convention will apply with respect to both govQrnmnent and private pensions to the effect that they will be exernit from tax in the state where received. The conventions with New A-aland and Ireland contain a further limitation upon the scope of the exemption to the effect that it shall not apply to services performed In connection with a profit-making activity of one of the contracting states. (This is likewise true of the Canadian convention discussed separately.) (8) Prihale pensions and annuities The convention with New Zealand makes no provision with respect to the treatment of private pensions and annuities. The general rule Is stated in the conventions with Norway, Greece, and Switserland (art. XI in each case) and in that with Ireland (art. XII) which provide that such pensions and annuities shall be exempt in the country of source. (6) ProIe/sore, Ieacera,students, and business apprentices Each convention contains a substantially identical article which provides that the income of professors or teachers from one of the contracting states who visit the other state for the purpose of teaching, for a period not to exceed 2 years, shall be exempt from tax by the latter state. (South Africa-art. IX; New Zealand-art. XIV; Norway-art. XII: Ireland-art. XVIII; Greece; Switzer. land-art. XII.) This provision Is standard in all later tax conventions to which the United States Is a party. A similar exemption is provided, without time limitation, for students and business apprentices in the taxing state who receive remittances from the other State. (South Africa-art. X; New Zealand-art. XV; Norway-art. XIII; Ireland-art. XIX; Greece; Switserland-art. XIII.) (7) Religious, charitable,ahd similar organisaliots The convention with South Africa (art. XI) provides for the reciprocal exempt. tion of Income derived from source within one of the contracting states by a religious, scientific, literary, educational, or charitable organization of the other contracting state under certain conditions, from tax by the state from which the Income Is derived. A similar provision is found in the existing convention with Canada. The other conventionm contain no similar provision.

    (2491)

    (8) Mips and ai'rcraf lEach trnaty provide's fur itie nrciprocal exet'nipt io by earh State of tile income' derivvd by ain ellterpri' of Ilh' uloher State, from tihe o|;ralull hilm or aircraft. onof This ljrinciple has been e'ntU iat',d in the Itermil itevelnue ('ode fur many yea". A spec't'ial illmtation has been wrille'n ilnto the 'Uuth Aftricnl provision to ithe " eli'cf t that the exrll1pliuln froln South African tax 4witsn apply to -,midenit%" lot of SoUith Africa. Thus, thit- exemllll)tiull will not apply to a Uit(l Ste litteS cOrplralion, if ally, the lliltlligeltellt unit1 conttrol of whirhis Ito tile U'nioll. Tile term 66nla lllitit'nllent alnd control" as applied to a corporation is ilte'nletd to mean ihe

    lit114401;

    direction of fit- Iolicies Of Stich corporatioll aw determnllled through the llleetiigi

    of Its board of din'clurs or other linanage'nlit group.

    (9.) krnealm and royalfiee South Africa


    Theil iouth African conlvenltin roiltaiis It) provision with resiect to industrial alod like roydllieS. lHowever, article III of the' protocol I, dul,1ile*'d to al)Illv prilcplep's, found lit ,ev'ral other Collvelt iu111, wilerf, by S reilellt of u11e coiltract. ing State' deriviitg reititis fromt real property or royalties' front lnatulral resources located in the other collltry Iay elect for any taxable year to be' Subject to tax in tlhat other comlllry oil a lil b6is. New Zealand The' conventlioU with New Zealand provide (art. VII) that a resi(lellt of one contralctillg State reeivillg recitals front real property or royalties froun natural re'n4urce's or royalties froml the llise or right to use copyrights, patents, etc., derived front source's within lite other statei ll1a13 elect to 6e Sub)ject to tax oil a net basis In the countlry fronm which derived as if lie' were e'llgagid ill a trade or buslane's In that cotllltry through a perllmanlelnt etahllhnleltt. Article VIII provide;,, 01 it reciprocal bahais, that moItlon.l)ieture rentals derived' fruoi ol1e counlltry by a ri'sieltt of tile other country not ellngaged ill trade or busilnaes through'a permanu e'nt e'stall in the first country shall be exempt illt fromln tax by the first cumntry. (The exe'nption( doeti not apply to the New Zealand "film hire" tax.) Norway Article I'll of the' conlveiliun with Norway l)rovides that royalties and other antelunts re'.'ived for tlhe right to ose, col)yrlghtts, Imte'nts, etc. (includIlnl Illuth1ll picture' retlials) hall be' eXe'lxept frouit) tx by tihe Stat of souret.,. Thus, tfle' reell)Ieltt is Ilot afforded asi election ats itt tile' New Zealand colnetlolnll. There is a special provision, moreover, to the effeet that the accouinti of the' payor may be adjusted (by disallowing a deduction of the alnouults paid) If' the' rvaltv or other aioulilt paid Is nut considered to bxe a "reasoutable conslderation'? for the lisp of the property. It him be'en niutually agre-ed by the revenue authorities of the re'speetlve countries (a) that Such provims will he conistrued in the admnitstration of the convention as not conlferrillg power on such authorities to finally determine whether all or portion of the Iayme't referred to above should Ie denied as a deduction to the pavor thereof and (b) that such payor hils tile right to appeal the Isue to the appropriate judicial tribunal of the coulitry tile revenue

    authorities of which undertake to denv yas a dedicillon such payment or portion thereof. The conmnmittee reconmends acceptanlce of the provision in reliance upoll thisa muttial agre'elment. front bonds or tnortlgage' $seuredby real property) and royaltie' from the operation of minl's, quarrie. or natural rIesorces, derived by a resident or corporation of one comlltry fronm ourcet In the other country, that such a person maiy ele't to be subject to the tax of the ,oouiltry of source, on a net Ibais as though Stich person were engaged in a trade or bi.siness throtigh a Ipernlanent establishment therein. Tile effet of this provision (its in the ease of the New Ze'aland lid South African conventions) is to allow, for example, the Norwegian taxpayer to elect either the Unite'd State's withholding rale of :R0 perc oil the gross alnotlll oit of such royalties or rental., or to have the tax determined o01 nte't Ibti, after a dedtllCtiol and edlits, respecting his entire gros Income from source" within ui the United States, including gross rental* or royalties.
    Article VIll provides, 1Wt ineomne fronm real property (not including Interest to

    (2492)

    Ireland Under the convention with Ireland (art. VIII), royalties and rentals from cetiyrigltot, ullt'iatn, etc. includingg reitals ouf Iiotionl p)iCtiirtr), are to be exempt at source'. Itovaltie.s (roull inatutral re4'ourc and reiltalo fromt real prolierty which are lcat,,de iln the Unilted Staees iire to he subject either to a withholding tax limited to lI Ix'rceeat or treated ais if the n-'cipie'iat we're eniagaged in a trade or busine. inl iil.' United W'aites, The' effect of this option is discusmsd above with rt.ptct to a sliatilar proveSio1 ili the Norwegiani and South African conventions. If the proP" eity front which the rentaltt or royalties are received is located in Irelandc atd (1) the rt'cipie'nt is a eside'nt of the United States, (2) the income is subject to 'nitedl States tax, and (3) the recipient is not engaged in a trade or busilaifs in Ireland, the income shall be exempt front Irish surtax. Oreece The provisloin of the convention with Oreece (art. VII) with respect to the taxation of rovaltie's provided' as does thei' Norwegian convention that such incomne shall be exel'npt at source. Rentals from inotion-pictutire films are specifically excluded from thie operation of these provisious. ULnder article VIII renatals froui real property ani natural resource royalties may be taken at source on a tnet basis. Switserland Article VIII of the Swims convention provides for exemption front tax in either country of various royalties, including film rentals, derived from sources within that country by a reiide'nt, corporation, or other entity of the other country not having a permanent establinnhnat in the country from which the royalties are derived. Article IX provided that ilconte front real prol erty (including gain's fromec the %aleor techanige' of such property but not includliig interest fromn inort gagte' or bonds secured by such property) and rovalties front the operation of mnites, quarrieso, or other natural rvsotercs shall ibe taxable only ill the country where such property or such Iailies, iquarries, or other natural resources tire Situated. Like corresonldinag provisionsl ieother tax conavntioits described above, article IX would permit thei tax liability to be determined upon a net basis. (10) Capital gaina The conventions with South Africa, New Zealaned, Norway, Greece, and Switsaerlaid contain no provision for exemption from tax on capital gains, Article XIV of the Irish convention provide' that a resident of Ireland not elugaged lit aitrade or bacltiminem In thee t'laite'd State's shall be exempt front the nlited States tax on gains fronm the sale or exchange of ca)ital aW4e'. It will be recalled that section 213 of the Revenue Art of 1960 imfpoed i tax apont thae tat anlou11t of capital gains derived from sources within the Lnite'd State by a iauomresiele'lt alieui individual atot engaged in trade or business in the unitedd Site's but temporarily pri.et tlaerein. Article XIV of the pendingcl Cwtventetioni would, of course, override the latter aiendmeint with respect to residents of Ireland. A provision siiioar to thiat of the Irish convention was originally contaiiaed in the conve'ntionis with the Netherlands amid Delaniark, but oil the recoinunelidatioll of the Collntitte onlForeign Rielatlons, wao stricken out of each convention by the Seniate. Those coliveiatioaas, in each case' subject to the reservation here sioted, were accepted by the Menate oil June 17, 1948. The colnventtion with Ireland wts sigiud oil Septemnber 13, 1949. The litnlstenace of Ireland upon the exemptions of its residents, from the United State tax oal capital gains based on the fact that such an exean pion is contained i in the coanveantioan bNtwe'en the tTnitod States aaid the United Kinadom1. However, it should be noted that the convention with the United Killndom was ratified prior to the enaactneilt of the Ikeveinue Act of 190iM acid prior to thie ratifica. tion of the conventionas with I)eatmark atnd the Netherlands. Because of the stroIta objectionis which have been raised previously il the Coalgre'es to the exemnptiont of ononresidentt alleals fromt tax oat their capital gains froat tranesactionas entered into in the United 8tattv, the committee recoin. mie'ids that article XIV of the convention with Ireland relating to ilncoite taxes be elimiinated acid proposed a reservation to that effect.

    (9493)

    (11) 4eCUMulalcd Oarni.p 61id prOfik Article XVI of the convention with Ireland provides that an Irish corporation shall be exemnpt front United Statts tax on its accumulated or undistributed earnings, profits, income, or surplus, if individual$ who are residents of Ireland control, dinrctly or indirectly, throughout the later half of the taxable year, more than W0 pierctl' of the entire voting power in the corporation. A similar article in the Netherlands convention was stricken out by the Senate, Similar arn ictes are found onlv in the United Kingdom and Canadian conventions. In view of the fact that this'article would give Irish corporations doing business in the Unitte States a competitive advantage over domestic corporations, the committee recolmimends that the article be eliminated from the convention and proposes a reservation to that effect.

    ('rWtlifforfreigim 1a4rt (141)


    Under the credit provisions of the various conventions, the United States, while continuing to tax its citiseiw and corporations and residents a though the conventions had not come into effect, will during the lives of the respective conventilus continue to credit against its income taxes for Income taxes paid the other contracting states. This credit will be applied in accordance with section 131 of the Internal Revenue Code. The credit oyste.i is rciprocal. South Africa agrees (art. IV) to exclude front en-profits tax lbaw income from sources within the United Its income' aidnxceaw states. This satisfies the similar credit requirement of section 131(a)(3) of the code. New Zealanid, on its ptrt, in effect adopts (art. XIII) the principle of the Internal Revenue ('ode. Norway and Ireland likewise adopt this principle. The Irish convention contains a special provision to the effect that Income derived front sources in the UVited Kingdom by an Individual who Isresident I.t Ireland shall he d,e'ted to be incoite front sources it Ireiand If such income is not subject to United Kingdom Income tax. This provisLiot is necessitated by the existence of a tax arrangement between the United Kingdom and Ireland, dated April 14, 1926. Under that arrangement, a resident of ovie of the countries iot resident in the other country but deriving income fromt such other country is exempt from tax imposed by such other country. Thus, no credit for Irish tax [p. 114411 would be provided were it not for 1he special provision included in the pending convention with Irelaid. Oreece and 8witserlamd (art. XIV) have agreed to credit provisions subtat. tianly slitilar to those found lit section 131 of the Internal Revenue ('ode. (13) ztensiioa to olAit terrilerwe Article XX o( the convention with New Zealacd provides that either contracting state may, upon giving notice to the other, extend the application of the convey. tiun to all overseas territories or other territories over which It has international

    responsibility.

    of information 01f(14) mne

    Fach of the six conveitions provides for the exchange of information between the taxation authorities of the respective countries for the purposes of carrying on the provisions of the conventions, the prevention of fraud, and for other related ion p urposes. (18) M ulual a sismance in co lectl

    With the exception of the convention with Ireland, each of the convention$ provides for mutual assistance and support in the collection of the taxes which are the subject of the convention comicerned, together sith Interest, costs, acid additions to taxts anid fines not being of a peal character. Like provisions are found in the French Netherlands, I)anish, and Swedish conventions but niot in the treaties with tte United Kingdom and ('anada. As in the caew of the estate-tax conventions discussed earlier in this report, the committee believes that the collection provisions of the South African, Greek, and Norwegian Income-tax conventions are too broad, and It repeats that, as a general rule, it is not believed wise to have one government collect the taxes which are due to another government. The New Zealand and Swim conventions contain a more limited provision, and the committee recommends that the other conventions be similarly limited. Thus, the committee recommends the acceptance of the collection provisions of the South African (ireek and Norwegian income-tax conventions subject to the understanding that eac(; of the governments may collect the other's tax solely In order to Insure that the exemptions or reduced

    (2494)

    rates of tax provided under the respective conventions will not be enjoyed by persons not entitled to such benefta.

    (16) Rj0ediw daks


    The conventions with Norway and Greece shall be effective for taxable years beginning on or after the lot day of January of the year iW which the exchange of Instruments of ratification occurs. The convention with 8outh Africa is made effective on the lst day of July 1946, and Is applicable to income ariing on or after that date. The convention with New Zealand shall be effective, with respect to United S4 tatms taxes, for taxable years beginning on or after January I of the calendar year in which the exchange of instrumenta of ratification occurs, and, with respect to New Zealand taxes, for the year of assessment beginning on the lst day of April next following the calendar year in which such exchange occurs. The effective date of the convention with Ireland is substantially the same as that of the New Zealand convention. However, inasmuch as there are small differences with respect to the Irish income tax, the Irish surtax, and the Irish corporation-profits tax, attention is invited to the convention proper for the details of their respective effective dates. The wiss convention provides that the convention shall have effect for taxable years beginning on or after January I of the year in which the exchange of instru. ments of ratification takes place, except that, if such exchange takes ilace on or after October 1, paragraphs (1) and (3) of article VI and article VII shall have effect only for taxable years beginning on or after January I of the year next following the year in which such exchange takes place. It Is provided also that the convention shall continue effective for 6 years beginning with the calendar year in which the exchange of instruments of ratification takes place and indeS' nltely thereafter, but may be terminated by either country at the end of that &year period or at any time thereafter by giving at least 6 months' prior notice of termination, in which event the convention shall ceasm to be effective for taxable years beginning on or after January I next following the expiration of the 6-month period.
    C.BUMPLSVIdNTAIL

    CONVENTIONS WIng CANADA

    [P. 1144*J

    UNION OF SOUTH AFRICA--CONVENTION AND PROTOCOL

    RELATING TO DOUBLE TAXATION AND TAXES ON INCOME

    The Senate, as in committee e of the Whole proceeded to consider the convention (Executive 0 80th ('ong., 1st sm.), a convention between the United States of America and the Union of South Africa for the avoidance of double taxation and for establishing rules of

    signed at Pretoria on December 13, 1946, and a protocol (Executive U, 81st ('ong., 2d sees.) aprotocol supplementing the said convention signed at Pretoria on December 13, 1946, which were read the second time, as follows: [Text of convention]
    HUNT in the chair). te convention anld protocol are before the Senate and open to amendment. If there be no amendment to be proposed, theconven. tion and protocol will be reported to the Senate. The convention and protocol were reported to the Senate without amendment. The PI4ESIDING OFFICER. The resolution of ratification, with the reservation and understanding, will be read.

    reciprocal administrative assistance with respect to taxes on income,

    qP 11441 The PRESIDING OFFICER (Mr.

    (2495)

    The ('hief h'lirk read as follows:


    keralmd (tImonlAirdus of/ O aSiws prewal eoaeur'inf threin), That the Senate advise and coinselt to the ratification of Executive (3, Eightleth Congress, first session, the convention hetwteen the United States and the Union of South Africa, for the avoidance of double taxation and for establishing rules of reciprocal administrative asistance with retqpect to taxes on income, and Executive V, Eighty.firt ('oigres,, second ssion, the protocol supplementing the said con. vention, subject to the following reservation and understanding: The Governmwnt of the United states of America does not accept paragraph (3) of article 11 of the protocol, relating to the profits or remuneration of public entertainers. It is undertood that the application of article XV of the convention, as amended by article VII of the protocol, shall be confined and limited as granting authority to each contracting state to collect only such taxes imposed by the other contract. rate of tax granted under Ing state as will insure that the exemption or reducedbe enjoyed by persons not the present convention by such other state shall not entitled to such benefits.

    resolution of ratification with the reservation and understanding. (Putting the question.] Two-thirds of the Senators present concurring therein, the resolution of ratification, with tihe reservation and under. standing, is agreed to, and the convention and protocol are ratified.

    The PRESIDING OFFICER. The question is on agreeing to the reservation and understanding to the resolution of ratification. The reservation an(r untlerstand(ing were agreed to. The PRESIDING OFFICER. The question is on agreeing to the

    (2496)

    PresidentialProclamation (including official text of convention)


    [Reprint of TIAS 25101

    (2497)

    TIRMATIIS AND OTUIHR INRITrNATIO@AL ACTS 53313M 2510

    DOUBLE TAXATION
    Taxes on Income
    Convention and Supplementary Protocol
    between the UNITED STATES OF AMEuRCA

    and the UNioN oF SoUTH AFRICA


    0 Convention signed at Pretoria December 13, 1946; Supplementary Protocol signed at Pretoria July 14,1950 * Ratification advised by the Senate of the United States of America, with a reservation and an understanding, September 17,1951 * Ratified by the President of the United States of America, subject to the said reservation and understanding, December 14,1951 * Ratified by the Union of South Africa

    June 18, 1952


    * Ratification exchanged at Washington July 15, 1952 * Proclaimed by the President of the United States of America August 19, 1952 * Entered into force July 15, 1952

    and Protocol of Exchange * Signed at Washington July 15, 1952

    (
    (2499)

    DEPARTMENT OF STATE
    PUBLICATION 4702

    [Literal print)

    A1

    BY THE PRESIDENT OF THE UNITED STATES or AuMERICA

    A PROCLAMATION a convention between the United States of America and the Union of South Africa for the avoidance of double taxation and for establishing rules of reciprocal administrative assistance with respect to taxes on income was signed at Pretoria on December 13, 1946, in the English and Afrikaans languages; AND WHEREAS a protocol supplementing in certain respects the aforesaid convention was signed at Pretoria on July 14, 1950, in the English and Afrikaans languages; AND WHEREAS the original of the aforesaid convention and the original of the aforesaid supplementary protocol are word for word as follows:
    WHEREAS

    (I) 18096 O-62-vol. 2--

    (2501) (20

    CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNION OF SOUTH AFRICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND FOR ESTABLISHING RULES OF RECIPRO. CAL ADMINISTRATIVE ASSISTANCE WITH RESPECT TO TAXES ON INCOME.

    (2503)

    CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNION OF SOUTH AFRICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND FOR ESTABLISHING RULES OF RECIP. ROCAL ADMINISTRATIVE ASSISTANCE WITH RESPECT TO TAXES ON INCOME. The Government of the United States of America and the Government of the Union of South Africa, being desirous of avoiding double taxation and of establishing rules of reciprocal administrative assistance in the case of income taxes, have decided to conclude a Cons vention and for that purpose have appointed as their respective Plenipotentiaries: The Government of the United States of America: General Thomas Holcomb, Envoy Extraordinary and Minister Plenipotentiary of the United States of America, and The Government of the Union of South Africa: the Right Honourable Jan Hendrik Hofmeyr, Acting Prime Minister and Acting Minister of External Affairs of the Union of South Africa, who, giving communicated to one another their ful powers found in good and due form, have agreed upon the following Articles: ARTICLE I. (1) The taxes referred to in this Convention are: (a) In the case of the United States of America: The Federal income taxes, including surtaxes and excess-profits taxes. (b) In the ease of the Union of South Africa the following taxes imposed tinder the income tax laws of the Union: Normal and Super Taxes, Undistributed Profits Tax, Non-resident Shareholders' Tax, Excess Profits Duty and Trade Profits Special Levy. (2) It is mutually agreed that the present Convention shall also apply to any other or additional income taxes imposed by either contracting State, subsequent to the date of signature of this Convention, upon substantially the same bases as the taxes enumerated therein.
    (5)

    (Mb5)

    TIA$ T1O

    0
    AIRTICT It.

    As tused in this Convention: (a) The terms "person", "individual" and "corporation" shall have the same leanings, respectively, as they have under the revenue laws of the taxing State or the State furnishing thie information, as the case may be, provided that the term "corporation" when used in relation to the Union of South Africa shall be regarded as the equivalent of the term "company" as used in the revenue laws of that State. (b) The term "enterprise" includes every form of undertaking, whether carried on by an individual, partnership, corporation or any other entity. (e) The term "enterprise of one of tile contracting States" means, in respect, of each contracting State, an individual resident therein or a corporation, partnership or other entity created or organized in or under the laws of that State, or the laws of any of its States, Territories or provinces, as the caeo may be, engaged in the carrying on of an enterprise in the territory of that State. (d) The term "pernianent, establishment" includes branches, mines and oil wells, farms, timber lands, plantations, factories, workshops, warehoiuses, offices, agencies and other fixed places of businen of an enterprise, but does not include a subsidiary corporation. When an enterprise of one of the contracting States carries on business in the other contracting State whether personally, directly or through a nominee or through an employee or agent there who has authority to contract for his employer or principal or has a stock of merchandise from which he regularly fille orden which he receives, such enterprise slall be deemed to have a permanent ostablislunent in the latter State. The fact that an enterprise of one of the contracting States has business dealings in the other contracting State through a conunission agent, broker or other independent agenk shall not be held to mean that such enterprise has a permanent establishment in the latter State. (e) The term "Commissioner for Inland Revenue" means the Commissioner for Inland Revenue of the Union of South Africa or his duly authorized representative, (f) The term "Commissioner of Internal Revenue" means the Commissioner of Internal Revenue of the United States of .America or his duly authorized representative.

    (M50)

    TIAU 2510

    (g) The term "competent, authority" means the Commisioneor for Inland Revenue or the Commiioner of Internal Revenue and their duly authorized representatives. (h) The term "United States of America", when used in the geographical sense, includes only the states, the territories of Alaska and Hawaii, and the District of Columbia. (i) The term "industrial and commercial profits" means industrial and commercial income but shall not include income from or in the form of rentals, royalties, Interest, dividends, Management charges, compensation for labour or personal services, or Income from the operation of ships or aircraft, or gains derived from the sale or exchange of capital assets, and the terms "profit" and profitss"' mean income. Wj) The terms "rentals" and "royalties" shall include rentals or royalties arising front leasing real or immovablo or personal or movable property or from any interest in such property, includ. ing rentals or royalties for the use of, or for the privilege of using, patents, copyrights, secret processes and formulae, goodwill, trademarks, trade brands, franchises and other like property. (k) The term "interest" shall include income arising from interestbearing securities, public obligations, govertunent or municipal securities, mortgages, corporate or debenture bonds, loans, deposits and current accounts. (I) The term "dividends" shall include all distributions of the earnings or profits of corporations.
    ARTICTL III.

    (1) The citizens of one of the contracting States residing within the other contracting State shall not be subjected to the payment of more burdensome taxes than the citizenjs of such other State. (2) The provisions of this Convention shall not be construed to restrict in any manner any exemption, deduction, credit or other allowance now or hereafter accorded by the laws of either of the contracting States in the determination of the tax imposed by such State. (3) Following any appreciable changes made in the fiscal laws of either of the contracting States, the competent authorities of the two contracting States may consult together.
    ARTICLE IV.

    (1) Notwithstanding any other provision of this Convention, the United States of America in determining the taxes of its citizens, or

    (2807)

    TIAS 2510

    residents, or corporations, inay include ini the basis upon which such taxes are imposed, all items of income taxable under the Revenue Laws of the United States of America, as though this Convention had not come into effect. The United States of America shall, however, deduct from the taxes thus computed the amount of Union income tax paid. This deduction shall be made in accordance with the benefits and limitations of Section 131 of the United States Internal Reventie Code 11) as in effect on the day of the entry into force of this Con. vention. It is agreed that by virtue of the provisions of paragraph (2) of this Article the Union of South Africa satisfies the "similar credit" requirement set forth in sub-section (a) (3) of that section. (2) Tihe Union of South Africa in imposing its taxes shell exempt from such taxes and shall not take into account in the determinttion of such taxes income derived front sources within the United States of America in accordance with the income tax laws of the Union in effect on the (lay of entry into force of this Convention.
    AHTICLX V.

    (1) An enterprise of one of the contracting States is not subject to taxation by the other contracting State in respect of its industrial and commercial profits except in respect of such profits allocable to its permanent establishment in the latter State. (2) No account shall be taken in determining the tax in one of the contracting States, of the mere purchase of merchandise effected therein by an enterprise of the other State. (3) For the purposes of this Convention, the term "industrial and commercial profits" shall not include lthe items of income excluded from the definition of that termn in paragraph (i) of Article II. Subject to the provisions of this Convention such items of income shall be taxed separately or together with industrial and commercial profits in accordance with the laws of the contracting States. ARTICLE Vy. (1) If an enterprise of one of the contracting States has a permanent establishment hi the other State, there shall be attributed to such permanent establishment the net industrial and commercial profits which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the sane or similar conditions. Such net profits will, in principle, be determined on the basis of dte separate accounts pertaining to such establishment. (2) The competent authority of the taxing State may, when necessary, in execution of paragraph (1) of this Article, rectify the accounts producel, notably to correct errors and omissions or to
    1 26 U. S. C. 1131.

    (2o8)

    TIAS 2510

    reestablish the prices or remunerat ions entered ill the xooks at the value which would prevail between independent persons dealing at ann's length. (3) If (i) an establiglhent does not produce an accounting showing its own operations, or (b) the account ing produced does not correslond
    to the normal usages of the trade in the country where the establish.

    ment is situated, or (e) the rectifications provided for in paragraph (2) of this Article cannot be effected the competent authority of the taxing State may determine the net industrial and commercial profits by applying such methods or formulae to the operations of the estab. lishment, as may be fair asld reasonable. (4) To facilitate the determination of lndustrial and commenrial profIts allocable to the permanent establishment, the couilptentt authorities of the contracting States may consult together with a vitot to the adoption of uniform rules of allocation of such profits.
    ARTIC,.I VII.

    When an enterprise of either of the contraiming States, by reason


    of its participation in the management or capital of nit enterprise of the

    other contracting State, makes with or impost* on the latter in their commercial or financial relations conditions different from those which would be made with or imposed on ant independent enterprise, any profits which should normally have appeared in the accounts of die latter enterprise, but which have been in this manner diverted to the former enterprise may, subject to applicable measures of appeal, be incorporated in the taxable profits of the latter enterprise. To facilitate such rectifications as may appear fair and reasonable the competent authorities of the two contracting States may consult together. ARTICLE VIII. (1) Compensation, other than pensions, for labour or personal services performed in one of the contracting States, paid by the other contracting State or by the political subdivisions or territories or possessions thereof to individuals who are not ordinarily resident in
    the former State, shall be exempt front taxation by such former State.

    (2) Pensions and life annuities derived from sources within one of the contracting States and paid to individuals in the other State shall be exempt from taxation by the latter State.
    ARTICLE- IX.

    A professor or teacher from one of the contracting States who visits the other contracting State for the purpose of teaching, for a

    (2509)

    TIAS 2510

    to

    period not exceeding two years, at a university, college, school or other educational institution in such other contracting State shall be exempted by such other contracting State from tax on his re. muneration for such teaching for such period.
    ARTIcLe X.

    Students or business apprentices from one of the contracting States residing in the other contracting State for purposes of study or for acquiring business experience shall not be taxable by the latter State in respect of remittances received by them from within the former State for the purposes of their maintenance or studies.
    ARTICL XI.

    Income derived from sources within one of the contracting States by a religious, scientific, literary, educational, or charitable organiza. tion of the other contracting State shall be exempt from taxation by the State from which the income is derived if, within the meaning of the laws of that State such organization would, if established in that State be exempt in respect of such income, and if within the meaning of the laws of the other State it would he exempt in respect of income derived from sources within such other State.
    ARTICLE XII.

    Dividends and interest paid on or after the effective date of this Convention by a corporation created or organized under the laws of the Union of South Africa to individual residents of the Union of South Africa other than citizens of the United States of America, or to corporations created or organized under laws of the Union of South Africa shall, to the extent that such dividends and interest are taxed by the Union of South Africa, be exempt from the taxes imposed by the United States of America.
    ARTICLE XIII.

    Where a taxpayer shows proof that the action of the revenue authorities of the contracting States has resulted in double taxation in his case in respect of any of the ,taxes to which this Convention relates, he shall be entitled to lodge a claim with the State of which he is a citizen or resident or, if the taxpayer is a corporation or other entity, with the State in which it was created or organized. If the claim should be deemed worthy of consideration, the competent authority of such State may consult with the competent authority of the other State to determine whether the double taxation in question may be avoided in accordance with the terms of this Convention.

    (2510)

    11 ARTICLE XIV.

    TIAS 2510

    Witlh a view to the more effective imposition of the taxes to which

    this Convention relates, each of the contracting States undertakes to furnish to the other contracting State such information in the matter of taxation, which the competent authority of the former contracting State have at their disposal or are in a position to obtain under their own law, as may be of use to the competent authority of such other State in the assessment of the taxes to which this Convention relates and to lend assistance in the service of documents in connection there. with. Such information and correspondence relating to the subject matter of this Article shall be exchanged between the competent authorities of the contracting States in the ordinary course or on request.
    ARTICLE XV.

    (1) Each contracting State undertakes to lend assistance and support in the collection of the taxes to which this Convention relates, together with interest, costs and additions to the taxes and fines not being of a penal character. Tie contracting State making such collections shall be responsible to the other contracting State for the sums 1h1s collected. (2) In the case of applications for enforcement of taxes, revenue claims of each of the contracting States which have been finally determined shall be accepted for enforcement by the other contracting State and collected in that State in accordance with the laws applicable to the enforcement and collection of its own taxes. (3) The applications shall be accompanied by such documents as are required by the laws of the State making the application to establish that the taxes have been finally determined. (4) If the revenue claim has not been finally determined the State to which application is made may, at the request of the other contracting State, take such measures of conservancy as are authorized by the revenue laws of the former State in relation to ita own taxes.
    ARTICLE XVI.

    (1) In the administration of the provisions of this Convention relating to exchange of information, service of documents and mutual assistance incollection of taxes, fees and costs incurred in the ordinary course shall be borne by the State to which application is made but extraordinary costs incident to special forms of procedure shall be borne by the applying State. (2) Docunents and other communications or information contained therein, transmitted under the provisions of this Convention by one of the competent authorities to the competent authority of the other

    (2511)

    TIAS 2510

    12

    contracting State shall not be used by the latter authority except in the performance of their duties in the determination, assessment and collection of the taxes. ARTICLE XVIL (1) Such regulations as may be necessary to interpret and carry out the provisions of this Convention may be prescribed in each of the contracting States. With respect to the provisions of this Convention relating to exchange of information, service of documents and mutual assistance in the collection of taxes, the competent authorities may, by common agreement, prescribe rules concerning matters of procedure, forms of application and replies thereto, con. version of currency, disposition of amounts collected, minimum amounts subject to collection and related matters. (2) The competent authorities of the two contracting States may communicate with each other directly for the purpose of giving effect to the provisions of this Convention. ARTICLE XVIII. (1) This Convention shall be ratified and the instruments of ratification shall be exchaniged at Washington as soon as possible. (2) This Convention shall become effective on the first day of July, 1946, and except in matters of administrative assistance shall first be applied in respect of income arising on or after that date. It shall continue effective for a period of three years from that date and indefinitely after that period, but may be terminated by either of the contracting States at the end of the three-year period or at any time thereafter provided that at least six months prior notice of termination has been given, the termination to become effective the first day of July following the expiration of the six-month period. IN WITNESS WHEREOF, the respective Plenipotentiaries have signed this Convention and have affixed thereto their seals. Done in duplicate in English and Afrikaans texts at Pretoria this thirteenth day of December, 1946.
    THOMAS HOLCOMB FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA:
    JAN H. HOFMEYR

    FOR THE GOVERNMENT OF THE UNION OF SOUTH AFRICA:

    [SEAL)

    [SZAL)
    (2512)

    KONVENSIE TUSSEN DIE REGERING VAN DIE VERENIGDE STATE VAN AMERIKA EN DIE REGERING VAN DIE UNIE VAN SUID.AFRIKA MET DIE OOG OP DIE VERMYDING VAN DUBBELE BELASTING EN DIE OPSTELLING VAN REELS BETREFFENDE WEDERSYDSE ADMINISTRATIEWE HULP MET BETREKKING TOT BELASTINGS OP INKOMSTE.

    (2518)

    KONVENSIE TUSSEN DIE REGERING VAN DIE VERENIGDE STATE 'VAN AMERIKA" EN DIE REGERING VAN DIE UNIE VAN SUID.AFRIKA MET DIE OOG OP DIE VERMYDING VAN DUBBELE BELASTING EN DIE OPSTELLING VAN RERLS BETREFFENDE WEDERSYDSE ADMINISTRATIEWE HULP MET BETREKKING TOT BELASTINGS OP INKOMSTE. Die Regering van die Verenigde State van Amerika on die Regoring van die Unie van Suld-Afrika hot uit 'n begeerte om dubbele belasting t vermy en om reals betreffende wedersydee admninistratiewe hulp indie geval van inkomstebelastings op te stel besluit om 'n konvensis san to pan en het met die oog daarop die volgende as hul ondermkeje gevolmagtigdes benoem: Die Regering van die Verenigde State van Amerika: Generaal Thomas Holcomb, Buitengewone Gesant en Gevolmag. tigde Minister van die Verenigde State van Amerika, en Die Regering van die Unie van Suid-Afrika: die Hoogedele Jan Hendrik Hofmeyr, Waarnemende Eeste Min. ister en Waarnemende Minister van Buitelandse Sake van die Unie van Suid-Afrika, wat, na voorlegging aan mekaar van hul voUe bevoegdhede wat in goeie en behoorlike vorm bevind is, oor onderstaande artikels ooreenge kom het:
    ARTIKEL I.

    (1) Die belastings waarna in hierdie konvensie verwys word, is: (a) in die geval van die Verenigde State van Amerika: die Federal. inkomstobelastings met inbegrip van "surtaz" en oorwinsbelastings; (b) in die geval van die Unie van Suid-Afrika die volgende beasetinge opge16 kragtens die inkomstebelastingwette van die Unie: Normal en superbelastings, die blasting op onuitgekeerde wins, die belasting van buitelandse aandeelhouers, oorwinsbelasting en die spesiale hefFng op handelswins. (2) Daar word onderling ooreengekom dat die huidige konvensie ook van toepassing is op enige ander of addisionele inkomstebolastinge wat dour enigeen van die kontraktorende State na die datum van ondertekeniz van hiordie konvensie opgel6 word op wesontlik dieulfde gondslae as die belasting wat daarin opgenoem is.
    (15)

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    TIAS 2510

    16
    ARTIKst, II.

    In hierdie konveiote: (a) hot "pewoon', "individu~" en "korporsaie" onderakeidelik dleselfde betekenisse as wit hull het volgens die inkomstOwett. van- die Staat wat die. belting opl6 of die Steat Wat die in. listing veratrek, na gelang van die geval, met dien verstande dat die uitdrukking "korporasie" wanneer dit met betrekking tot die Unie van Suid-Afriks gelwuik word, beskou word as die ekwivalent van die uitdrukking "maatskappy" woos in die inkomstewette van daardie Stat gebruik; (b) omvat "onderneming" elke vorm van onderneming, afgesien daarvan of dit deur 'n individu, vennootakap, korporasie of 'n ander entiteit gedryt word; (c) betoken "onderneming van een van die kontrakterende State" ten opsigte van elke kontrakterende Staat 'n individu wat daarin woonagtig is of 'n korporasie, vennootakap, of ander entiteit geskep of goorganisoer in of kragtens die wette van deardie Stoat of die wette van enigeen van sy State, gebiode of provinsios, na gelang van die geval, wat 'n ondernoming in die gebied van daardie Stoat dryf; (d) omvat "pormanente saak" takke, myne en oliobronno, plase, houtgebiode, plantasios, fabrieke, werkwinkels, pakhuiso, kan. tore, agentakappe en ander vaste besigheidsplekke van 'a onderneming, maar sluit dit nie 'n onderkorporasio in nie. Wanneer 'n onderneming van een van die kontrakterende State in die ander kontraktorendo StaLt sake doen hetsy persoonlik, direk of dour bemiddeling van 'n benoemde person of dour bomiddeling van 'n werknomer of agent aldaar wat die be. voegdbeid besit om namens sy werkgewer of prinsipaal kontrakte aan to gaan of 'n voorraad handelsware he&waaruit hy goreeld bestellings wat hy ontvang uitvoer, word beskou dat die onderneming 'n permanent saak in laasgenoomde Staat het. Die feit dat 'n ondernoming van eon van die kontrakterende State handelstransaksics in die ander kontrakterende Staat het dour bemniddeling van 'n kommissie-agent, makelaar of ander onaflanklike agent beteken hie dat die onderneming 'n permanente saek in laasgenoemde staet bet nie. ,e) beteken ""Konumissaris van Binnelandso Inkoniste"'die Kommissaris van Binnelandse Inkonuto van die Unie van SuidAfrika. of sy behoorlik gemagtigdo verteonwoordiger; (f) betaken "Komminris van lIterne Inkornste" die Kommimaris

    (2516)

    17

    17TU 1 0O

    van Interne Inkomste van die Verenigdo State van Amerika of sy behoorlik gomagtigdo vorteenwoordiger; (g) betoken "bevoogde owerheid" die Kommissaris van Binnelandse Inkomste of die Kommissaris van Interne Inkomute en hull behoorlik gomagtigde verteenwoordigerm; (b) omvat "Verenigde State van Amerika", wanneer in geografiose sin gebruik, slegs die state, die gebiede Alaska en Hawaii en die distrik Columbia; (i) beteken "nywerheids. en bandelslinsto" nywerheids- en han* delsinkomste maar omvat dit nie inkomste uit of in die vorm van huurgeld, tantieme, rente, dividende, bestuurskoste, vorgoeding vir work of persoonlike dionste, of inkomsto uit die in bedryf hou van skepo of vliegtuie, of wins verkry uit die verkoop of ruil van kapitaalbate nie, on betoken "wins" en "winste" inkomste; (J)omvat "huurgeld" en "tantiemo" huurgeld of tantieme wat voortapruit uit die verhuur van vaste of onroerendo of persoonlike of roerende oiendom of uit 'n belang by sulke eiendom, met inbegrip van huurgeld of tantieme vir die gebruik van of vir die voorreg van die gebruik van patented, kopiercgte, geheimo prosesse en formulas, klandisiewaarde, handelsmerke, handel. stempels, oktrooircgto en ander soortgelyke eiendom; (k) onivat rented " inkomsto wat voortspruit uit rentedraende effokto, oponbare obligasios, munisipale of staatseffekto, verbande, korporasie of andor obligasies, linings, deposit's en lopende rekenings; () omvat "dividendo" alle uitkerings van die verdienstes of winste van korporasies. ARTIKEL III. (1) Die burgers van een van die kontrakterende State wat binne die ander kontraktorende Staat woonagtig is, moot Wie swaarder belstings as die burgers van die ander Staat betaa nie. (2) Die bepalings van hierdie konvensie beperk op generlel wyse enige vrystoiling, aftrekking, kmodiet of ander korting wat nou of hierna deur die wette van een of ander van die kontrakterende State toe. gestaan word by die vasetelling van die belasting wat deur sodanigo Stsat opgel6 word nie. (3) Na aansienlike veranderings in die Mikale wette van enigeen van die kontrakterende State kan die bevoogde oworhede van die twee kontrakterende State met mekaar oorleg pleeg.

    7808 0.-62--ol. 2--8

    (2517)

    TIAS 2510

    18

    Anvicu IV. (1) Ondanks enige ander bepaling van hierdie konvensie kan die Veronigde State van Ainorika by die vasstelling van die bolastings vas sy burgers of inwonors of korporasies, alle inkomste-.items wat kragteu die inkomstowetto van die Vorenigde State van Amerika belabaar is insluit by die basis wasrop die bolastings opgol6 word, sof hiordi. konvonsie nie van krag geword hot nie. Die Verenigde State vu Amerika trek egter die bodrag van Unioinkonstebolasting wat betail is af van die aldus berokende bolastings. Hierdie aftrokking goskied oorenkonstig die voordele en beperkings van artikol 131 van die "United States internal Revenue Code" soos van krag op die dq wasrop hierdie konvensio in working tree. Dar word ooroengekom dat die Unie van Suid-Afrika uit hoofde van die bopalings van pars. pasf (2) van hierdie artikel voldoen "andie "soortgolyko krodiet" vereisto in subartikel (a) (3) van daardie artikel uitoongesit. (2) Wanneer die Unie van Suid-Afrika sy bolastings op16, stel hy dasrvmn vry en la"t hy by die vastelling van dM6 belastings buit. rokening inkomste vorkry uit bronne binno die Vorenigde State va Ameriks ooreeukomstig die inkomstebolastingwette van die Unie van krag op die dag wasrop hiordie konvensie in working tree. ARTIxEL V. (1) 'n Ondernoming van eon van die kontraktoronde State is ni1 onderhowig &an blasting dour die ander kontraktoronde Staot ten opsigte van sy nyworhoids. on handelswinste nie, behalwe ton opsigle van winste wat "ansy pormanente seek In laasgenoomdo Staat toegowys kan word. (2) By die vasstelling van die belasting in eon van die kontraktorende State word goon rokening gehou met enkol die a"nkoop van handelaware daarin dour 'n ondorneming van die ander 8taat nio. (3) Vir die toopassing van hierdie konvensio omvat die uitdrukking "nyworhoids. on handolswinste" nie die inkomste-itoms wat uit die onskrywing van daardio uitdrukking in paragrast (I) van artikel II uitgesluit is nie. Sulke inkomsto-items word, ondorworpe san die bepalings van hierdie konvensio, afsondorlik of tosame mot nyweis hoids. en handelswinste belas ooreonkonstig die wetto van die kentraktorende State. ARTIKsts VI. (1) As In onderneming van con van die kontraktorende State 'n pormanento ssak in die ander Start hot, word san die permanent saak diM notto nywerheids. en handelawinste tocgeskryf wat hy us vorwagting kan verkry indion hy 'n onafhanklike onderneming was wat hom met dieseltdo of soortgelyke bedrywighedo onder dieseltdo

    (2518)

    TIAS 251

    of soortgolyke omstandighede besighou. Sulks netto winste gal in beginsel vasgestel word op die grondslag van die afsonderlike rekening wat op di6 saek betrekking het. (2) Die bovoegde owerhoid van die 8taat wat die belasting opl6 kan wannoer nodig by die uitvooring van paragraaf I van birdie srtikel die voorgelegde rekenings verboter, veral om foute on weg1stings to hertel of om die pryse of besoldiging wat in die books opgoteken is opnuut vas to stel teen die waarde wat sou beeor tuuen onafhankliko persons wat afsondorlik sake dozen. (3) Indion (a) 'n saak ie boeke voorl6 wat sy eie transaksies ean toon hie, of (b) die voorgelogde boeke wie ooreenkom met die normal handologebruik in die land wear die saek gele& is nie, of (c) die verbeterings waarvoor paragraaf (2) van hierdie artikel voorsiening mank nie aangebring kan word nie, kan die bevoegde owerhoid van die Staat wat die belasting opl6 die netto nywerheids. en handelawinste vanstel dour redelike en billike metodes of formulas op die transaksies van die saak toe to pa. (4) Ten einde (lie vasstelling van nyworheids. en handelswinst. wat aan die permanent saek toegowys kan word to vorgemaklik, ken die bevoegdo owerliede van die kontraktorende State met meksar oorleg pleeg met dlie oog op die aanvaarding van eenvormige r.6l vir die toewysing van sulke winste.
    ARTIKEiL VII.

    Wanneer 'n onderneming van eon of wander van die kontrakterende 8tate, uit hoofde van sy deelname san die bestuur of kapitsal van 'n onderneming van die nnder kontrakterende Stat, in hul handel.- of finansifle verhoudinge voorwaardes met laasgenoemde aangaan of laagonoemde opl6 wat verskil van di0 wat met 'n onafhanklike ondernoming aangegaan sou word of wat 'n onafhanklike ondorneming opgelA sou word, kan winste wat onder normal omstandighede in die rekonings van laasgenoemde onderneming behoort to verskyn hot, mar op hierdie wyse na oersgenoemde onderneming gegaan hot ingesluit word, onderworpe san die toepaslike appi1msatreals, by die belasbare winste van laasgenoemde onderneming. Die bevoegde owerhede van die twee kontrakterende State kan, ten elude verbeterings wat billik en redelik skyn to vergemaklik, met mokaar oorleg pleog.
    ARTIKE.L VIII.

    (1) Vergoeding, behalwo pensioene, vir work of persoonlike dienste in eon van die kontrakterende State verrig, wat dour die ander kontrakterende StaLt of dour die staatkundige onderafdelings of gebiede of besittings dsarvan betaal woid san individue wat Wie (2519)

    T"I 81o

    20

    gewoonlik in oempnoomde 6taat woonagtig is nie, Is vrygestel van belasting dour oorgenoemde 8tast. (2) Pensioene on lyfrente vorkry uit broune binne son van die kontraktoronde State on betts! an individue in die andor 8tast is vrygestol van belastimg deur lagonoomdo Stast. AnuTL IX. 'n Professor of onderwyser uit son van die kontrakterende State wat die ander kontraterendo Stast besoek met die oog op dosoring gedurende 'n tydpork van hooptens twee jiar san 'n univonsiteit, kollogo, skool of ander ondorwysinrigting in die andor kontraktoronde 8twat word dour di6 andor kontraktorende 8taxt vrygestol van bela. ting op sy vorodinwg vir sodanige dosering godurendo gonoemds ATITIxU X. Students of besighoidsvakleerlinge uit eon van die kontrakteronde State wat in die ander kontrakteronde 8tast woon met die oog op studio of om besigheidsondervinding op to doon, is nie dour lassw pnoemde 8tast belasbaar ten opsigte van remisos wat hull. van binns oerspnoomde Stast met die oog op hul onderhoud of studies ontvang nie.
    AncIanL XI.

    tydpork.

    Inkomato verkry uit bronne biane eon van die kontrakterende State dour 'n godidienstigo, wetenskaplike, letterkundigo, onderwye. of liofdadigheidorganiaie van die ander kontraktorende Steat Is vrygestel van blasting dour die Stast waaruit die inkomnte verkry word as die organiasie binno die betekenis van die worts van daardis 8taat, indien dit in daardio Steat gevestig was, vrygestel sou weos ten opsigte van sodanige inkomte on indien dit binne die betekenis van die wette van die ander Stant vrygestel sou woes ten opeigte van inkomsto verkry uit bronno bWann sodanip ander Slant.
    Aanzu XII.

    Dividends en rented wat op of na die datum van lnwerkingtreding van hierdie konvensie dour 'n korporasie gestig of georganisoo krag tens die wette van die Unie van Suid-Afrika betai word san individuele inwoners van die Unie van Suid-Afrika, behalwe burgers van die Verenigdo State van Amerika, of san korporasios gestig of georganiseer krmatns wetter van die Unie van Suld-Afrika, isindie mate wat sulks dividends on rents dour die Unie van Suid-Afrika belas word vrygsbtel van die belastings opgel6 dour die Verenigde State van Amnerika.

    (2520)

    21

    2WNW B

    ATnIsb XIIL Wanneer 'n bolastinbetaler bewys lower d,' diQ optred v~an die Inkomst-werhbede van die kontraktorends tAti.tgelo bet, tot dubbele bWlasting in sy goval ten opsigte van belastings wiarop hierdi. kon. venue betrekking hot, is hy geregtig om 'n slain ti dion by die Stiat waarvan hy 'n burger of inwoner is oft as die beolstingbetaler 'n korporauio of ander entiteit is,by die Staut weuin, di* .ltig mi%. of paisoer is. Indian boskou word dat dhe els oor wg vgyrdwaion die bevoegde owerhoid van di6 Stoat met die bevoogde Ower;iqid van die ander Stoat oorleg pleeg ton eind. vas to steel of dio b.qtokke dtubale belauting very kan word ooreenkomatig dii bopalinga van hlordie konvensio.
    MtTIzZIA XIV.

    Met die oog op die doeltreffender oplegging van die ' (luWgI wasrop blerdie konvensie betrekking hot, onderneem'ekeen van die kontrakterende State om &an die ander kontrakterende *t at di6 Wnligting betreffende belasting to verstrek wat die bevoegde' oworheid van oerngenoemde kontraktorende Staat tot sy boskikking het of in staat is om volgens sy oie wet to verkry on wat vfr die bevoogde ower. beid van die ander Stwat van nut mag woes by die ainslaan van die belastings waarop hierdie konvensie betrekking hot en om hulp to verleen by die diening van dokumente in verband daarmoe. Sulke inligting of korrospondensie betreffendo die inhoud van hierdie artikel word tussen die bevoegdo owerhede van die kontrakterendo State in die gowone loop van sake of op versoek uitgoeruil.
    ARTIKEL XV.

    (1) Elko kontrak.ternds Stait ondorneem om hulp en steun to vYok lon by die invordering van die belutings wasrop bierdle konvenale being het, tesame met rente, koste en byvoegingp by die belastinp en booted. wat We as straf opgel&word nle. ' Die kontrakterende stut wit sulks invorderings doon, is &an die andeo kontktterond 8tat verantwoordelik *irdie bedra. wat aldus inivorder word. (2) In die gval van amnsoeko om die afdwinging van belastings word die inkomte-sise van elkeen van die kontrakteronds State wet 6mm! vasgestel is,mangeneem vir afdwinging dour die nnder kontrak. wit op die afdwinging en invordering van sy ol. belasting van tooe
    (8) Die nasoeke moot vergesel garn van die dokumentse wi by die wotto van die Stami wit die ansoek doen vereu word om to bewMy terende Staat en in daardio Staat ingevorder oproenkomstig die wetto

    dat die belastings Bnma vasgestol is.

    (2521)

    TLUA

    w'

    VZ

    (4) As die inkoinMste-eis jie blaal vaigestel is Wie kan die Stoat by wie annsock gedoen word, op vermoek van die ander kontraktorqnde Stoat, mantrcls wat by die inkonistowetto van ersgenoeinde Staat. met betrekking tot sy cie belastings gemagtig word, tref om betaling van die cis to waarborg. ARTIKEL XVI. (I) By die toepassing van die bepalintgs van hierdie konvensi, betreffende die itruiling van inligting, die diening van dokutnento en otiderlitige huIlp by die invordering van belastings, word gelde en koste wat in die gewone loop van sake aangegaan %:.-)rd gedra dear die Stoat by wie aansoek gedoen word inaar buitengewone koste verbond, aan spesiale vorme van proseduro word gedra deur die Stoat wart die annsoek doen. (2) Dokuneite en ander nmededolings of inligting (daarinvervat wat ooreenkooistig die bepalings van hierdie konvensie deur ceon van die bevoegde owerlhde aan die bevoegde owerheid van die ander kon. trakterende Staat geatnur word, word nio deur laasgenoeinde owerheid gebruik Wte behalwe in verband met die vervulling van sy pligte by die vasstelling, aanslaan cil invordering van. die belastings. ARTIIC, XVWI. (1) Regulasies wat nodig muag wees vir die vertolking en uitvoering van (lie bepalings van hierdie konvensie kan in elkeen van die kon. trakterendo State voorgeskryf word. Met betrekking tot die be. palings van hierdie konvensio betrelrende (lie uitruiling van inligting, die dieting van dokumente en onderlinge hulp by die invordering van belastings kan die bevoegdo owerhede, deur onderlingo ooreenkons, reols voorskryf in vorband met procedure, aansookvorms on antwoorde daarop, omsetting van valuta, boskikking oor ingevordorde bedrae, mininium bcdrao wat ingevorderkan word en verwante aangeleonthede. (2) Die bevoegde owerhedo van die twee kontrakterendo State kan regstrecks met mekaar in verbinding tree met die doel om uitvocrbig &an die bepalings van hierdio konvensio to gee. ARTIKE, XVIII. (1) Hierdie konvensio moet bekragtig en die bekragtigingsdokumento uitgeruil word to Washington so spoedig as wat moontlik is. (2) Ilierdio konvensie tree in working op (lie cernts dog van Julie 1946 en word, behalwe ten opsigte van adhninistratiewe hulp, cerste toegepas met betrekking tot inkomsto wat op of na daardie datum ontstaan. Dit bly van krag godurende 'n tydperk van drie jaw vana& daardie datum en onbepaald na daardie tydperk, maw kan dour enigeen van die kontrakterende State aan die einde van die tydperk

    (2622)

    23

    TIAS 2010

    ,van drio jaar of to eniger tyd daarna opgms word op voorwaarde dat keimis van opsegging minstens sea maando vooraf gegeo word. Die opsegging word van krag op die orsto dag van Julio na vomtryking van die tydpork van ses maando. As DIwYs waarvan die onderskeio govolmagtigdes hierdie konveusio pteken en hul sewas dearop aangebring hot. Oedoon in duplo to Pretoria in Afrikaans on Engelso toksto op hods die Dertiende dag van Desember 1946.
    TiiOMAs Hotcome NAMENS DIE REOERINO VAN DIE VERENIODE STATE VAN AMERIKA:

    JAx H. HorMayR
    NAMENS DIE REGERINO VAN DIE UNIE VAN BUID-AFRIKA:

    (sEAL) (sAL)

    (2523)

    PROTOCOL

    SUPPLEMENTING

    IN CERTAIN

    RESPECTS THE CONVENTION FOR THE AVOID. ANCE OF DOUBLE TAXATION AND FOR ESTAB. LISHING RULES OF RECIPROCAL ADMINISTRATIVE ASSISTANCE WITH RESPECT TO TAXES ON INCOME WHICH WAS SIGNED AT PRETORIA ON DECEMBER 13, 1946.

    PROTOKOL TER AANVULLING,

    IN SEKERE

    OPSIGTE, VAN DIE KONVENSIE MET DIE OOG OP DIE VERMYDING VAN DUBBELE BELASTING EN DIE OPSTELLING VAN REELS BETREFFENDE WEDERSYDSE ADMINISTRATIEWE HULP MET BETREKKING TOT BELASTINGS OP INKOMSTE, WAT TE PRETORIA OP 13 DESEMBER 1946 ONDERTEKEN IS.

    (2525)

    The Government of the United States of America and the Govern. ment of the Union of South Africa, Desiring to conclude a protocol supplementing in certain respects the Convention for the avoidance of double taxation and for establishing rules of reciprocal administrative assistance with respect to taxes on income which was signed at Pretoria on December 13, 1948, Have agreed as follows: AnTICLO I (1) Profits derived by a United States enterprise from the operation of aircraft registered in the United States of America or ships whose port of registry is in the United States of America, shall be exempt from Union of South Africa tax as specified in Article I (1) (b) of the Convention of December 13, 1946: Provided that such exemption shall not be applicable to any such enterprise whose business is managed and controlled in the Union nor to an individual who is ordinarily resident in the Union. (2) Profits derived by a Union enterprise from the operation of aircraft registered in the Union of South Africa or ships whose port of regstry is in the Union of South Africa shall be exempt from United States of America tax.
    ARTICLE II

    (1) An individual who is a resident of the United States of America shall be exempt from Union of South Africa tax on profits or remunera. tion in respect of personal (including professional) services performed within the Union of South Africa in any year of assessment if: (a) He is present within the Union of South Africa for a period or periods not exceeding in the aggregate 183 days during that year, and (b) The services are performed for or on behalf of a person resident in the United States of America, and (c) The profits or remuneration are subject to United States of America tax. (2) An individual who is a resident of the Union of South Africa shall be exempt from United States of America tax on profits or remuneration in respect of personal (including professional) services performed within the United States of America in any taxable year if:
    (2?)

    (2627)

    TIAS 2510

    28

    (a) He is present within the United States of America for a period or periods not exceeding in the aggregate 183 days during that year, and (b) The services are performed for or on behalf of a person resident in the Union of South Africa, and (c) The profits or remuneration are subject to Union of South Africa tax. (3) The provisions of this Article shall not apply to the profits or remuneration of public entertainers, such as stage, motion picture or radio artists, musicians or athletes. ARTICLE III A resident or corporation of one of the contracting States, deriving from sources within the other contracting State royalties in respect of the operation of mines, quarries, or natural resources, or rentals from real property, for any taxable year or year of assessment shall be, or may elect to be, subject to the tax of such other contracting State, on the basis which would be applicable if such resident or corporation were engaged in trade or business within such other contracting State through a permanent establishment therein during such taxable year or year of assessment. ARTICLE IV Article V of the Convention of December 13, 1946, is amended by changing the period at the end of paragraph (1) to a comma and the addition thereafter of the words "Provided that if such enterprise is a private company having a permanent establishment within the Union of South Africa nothing in this paragraph shall affect any provisions of the law of the Union of South Africa regarding the imposition upon the shareholders of that private company of the taxes payable in respect of its income."
    ARTICLE V

    The Convention of December 13, 1946, is amended by the deletion of Article XII. ARTICLE VI Article XIV of the Convention of December 13, 1946, is amended by inaerting at the end thereof the following sentence: "No information shall be exclanged which would disclose any trade secret or trade process."

    (2528)

    29

    TIAS 2510

    ARTICLE VII Article XV of the Convention of December 13, 1046, is amended by deleting paragraph (4) and substituting the following:"(4) The assistance provided for in this Article shall not be accorded in respect of a citizen or national or corporation of the State to which application is made." ARTICLE VIII (1) This protocol shall be ratified and the instruments of ratifica.tion thereof shall be exchanged at Washington as soon as possible. (2) This protocol shall be regarded as an integral part of the Convention of December 13, 1946, and shall, except as provided in paragraph 3 of this Article, become effective and continue effective in accordance with Article XVIII (2) of that Convention and, in the event of termination of such Convention, shall terminate simultaneously with such Convention. (3) Notwithstanding the provisions of Article XVIII of the Convention signed at Pretoria on December 13, 1946, the provisions of Articles 1, 11 and III of this protocol shall become effective and first be applied in respect of income arising on or after the first day of July, 1948. IN WITNESS WHEREOFr the undersigned plenipotentiaries, being authorised thereto by their respective Governments, have signed this protocol and have affixed thereto their seals. DONE in duplicate, in the English and Afrikaans languages, at Pretoria this the fourteenth day of July, 1950.
    FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA:

    BERNARD C. CONNELLY C~argl d'Aairmes ad interim of the United State of Ameria.


    FOR THE GOVERNMENT OF THE UNION OF SOUTH AFRICA:

    P. 0. SAUER Minister of Transportof Oe Union of South Africa.

    [SEAL)
    [sEAL]

    (2529)

    Die Regering van die Verenigde State van Amorika en die Regering van die Unie van Suid-Afrika, Wat wens om 'n Protokol aan to paan ter aanvulling, in sekero opsigte, van die Konvensie met die oog op die vermyding van dubbelo belasting en die opstolling van reols betreffonde wedorsydse administratiewe hulp met betrekking tot bolastings op lnkomste, wat to Pretoria op 13 Desembor 1946 ondortoken is, Hot soos voig ooreengekom: ARTIKEL I (1) Wins wat vorkry word deur 'n ondorneming van die Verenigde State uit die in bedryf hou van vliegtuio wat in die Verenigde State van Amerika goregistreor is, of skepe waarvan die registrasiohawe in die Vorenigde State van Amorika is, is vrygestol van blasting van die Unie van Suid-Afrika, soos bepaal in Artikol I (1) (b) van die Konvensie van 13 Desember 1946: Met dien verstande dat hierdie vrystoUing nie op so 'n ondernoming wie so besigheid bestuur en beheor word in die Unio on ook nie op 'n indiwidu wat gewoonlik in die Unie woonagtig is, van toepassing is nie. (2) Wins wat verkry word deur 'n onderneming van die Unie uit die in bedryf hou van vliegtuie wat in die Unie van Suid-Afrika geregistreer is, of skepe waarvan die registrasiehawe in die Unie van Suid-Afrika is,isvrygestel van blasting van die Vereuigde State van Amerika. ARTIKEL II (1) 'n Indiwidu wat 'n inwoner van die Verenigde State van Amerika is, is vrygestel van blasting van die Unie van Suid-Afrika op wins of vergoeding ton opsigte van persoonlike (met inbegrip van professionele) dienste wat in enige jaar van aanslag in die Unie van SuidAfrika verrig is, as: (a) Hy in die Unie van Suid-Afrika teenwoordig is vir 'n tydperk of tydperke van altesaam hoogstens 183 dao gedurende daardie jaar, en (b) die dienste verrig word vir of ten behoewe van 'n persoon wat in die Verenigde State van Amerika woonagtig is, on (c) die wins of vergoeding aan belasting van die Verenigde State van Amerika onderworpe is.
    (81)

    (2581)

    TIAS 2510

    32

    (2) 'In Indiwidu wat 'n inwoner van die Unie van Suid-Afrika is, is vrygiestel van blasting van die Verenigde State van Amerika op wins of vergoeding ten opsigto van persooiliko (met inbogrip van professionele) diensto wat in enigo belastingjaar in die Verenigde State van Amerika verrig is, as: (a) Ify in die Verenigde State van Amerika teenwoordig is vir 'n tydperk of tydperke van altesaam hioogstens 183 (1a4 godurende duardie jaar, en (b) die dienste verrig word vir of ten behoewe van 'n person wat in die Unie van Suid-Afrika, woonagtig is, en (c) (lie wins of vergoeding aan belasting van die Unio van Suid. Afrika onderworpe is. (3) Die bepalings van hierdie Artikel is uie op die wins of ver. goeding van verskoffers van publieke vernaaklikheid, soos tonedi-, rolprent- of radio-articste, musikanto of atlete, van toepassing nie.
    ARTIKEL IHI

    'n Inwoner of korporasie van een van (lie kontrakterendo State, wat uit bronne binno die ander kontrakterende Staat tanti6hie ten opsigto van die in bedryf hou van inyne, steengroewe, of natuurlike hulpbronno, of huur uit onroerende eiendom, vir 'n belastingjaar of jasr van aanslag verkry, is onderworpe, of kan verkies om onderworpe to wees aan die behlsting van daardie ander kontrakterende Staat, op (lie basis watr van toepassing sou wees as sodanige inwoner of korporosio handel of besig!,id binne daardie ander kontrakterende Staat gedryf het dour ben iddeling van 'n permanente saak duarin gedurende sodanige belastingjuar of jaar van aanslag. ARTIKEL IV Artikel V van die Konvensie van 13 Desember 1940 word gewyig dour die punt aan die end van paragraaf (1) to verander in 'n komma en dour daarna die volgende woorde by to voeg: "Met dien verstande dat as so 'n onderneming 'n private maatskappy is wat 'n perinanento saak in die Unie van Suid-Afrika het, niks in hierdie paragraaf enigeen van (lie bepalings van die Wet van die Unie van Suid-Afrika betreffende die oplegging, aan die aandeelhouers van daardie private mnaatskappy, van die belastings wat ten opsigto van sy inkomste betaalbaar is raak nie." ARTIK1L V Die Konvensie van 13 Desember 1940 word gewysig deur Artikel XII to skrap.

    (2532)

    33
    ARTIKEL VI

    TIAS 2510

    Artikel XIV van (lie Konvensie von 13 Desember 1946 word gmwysig deur ann (lie ennd doarvan (lie volgende sin in to voeg: "Geen inligting wat. 'n handelsgeheimn of handelsproses openbaur sal maak, nwg uitgeruil word nie."
    ARTIKEL VII

    Artikel XV van die Konvensio van 13 Desember 1940 word gowysig deur parograaf (4) to skrup en (lour (lie volgenldo to vervamg:"(4) Die hulp waarvoor In hierdie Artikel voorsiening gemnak
    word, word hic verleen ton opsigto van 'n burger of landsburger of

    korpornsio van (lie Stant by wip nanstoek gedoen word nie."


    ARTIKML VIII

    (1) liverdie Protokol word bekragtig en die bekragtigingsdoku. mentc daarvan word uitgeruil to Washington so spoedig moontlik. (2) Hierdie Protokol word beskou as 'n integrerendo deel van die Konvensie van 13 Desember 1940, en word, uitgeaonderd 8oos bepual in parugraaf 3 van hierdio Artikel, van krag on bly van krag oorecnkonistig Artikel XVIII (2)van daardio Konvensio on, in (lie geval van die opsegging van duardio Konvensie, verval dit gelyktydig met duardie Konvensie. (3) Ondanks (lie bepalings van Artikel XVIII van die Konvensie, ondertekon to Pretoria op 13 Desomber 1046, word dio bepalings van Artikels III on III van hierdic Protokol van krag en vir die cersto maul toegepas ten opsigte van inkomsto wat ontstaan op of na die cersto dag van Julie 1048. TEiN REWYSF. WAARVAN die ondergetokende gavolmngtigdes, wat deur hul onderskeio Regeriags daartoo gemagtig is, hiordio Protokol ondertoken on hul scls daarop aangebring het. OCDON in duplo, in die Engelso en in die Afrikaanso taal, to
    Protoria op hedo die veertiendo dog van Julio 1950. NAMENS DIE REGERINO VAN DIE VERENIUDE STATE VAN AMERIKA:
    BER1NARD C. CONNELLY

    Tydelike Saakgelautigde van die Verenigde Stae van Amerika.


    NAMEN8 DIE REGERINO VAN DIE UNIE VAN SUID.AFRIKA: P. 0. SAUER

    Minister van Vervoer van die Unit van 8uid-Afrika. tsEAL)


    ISEAL)

    (2533)

    TIAS 21310

    34

    AND wHIIWtAS the Senate of the United States of America by their resolution of September 17, 1051, two-thirds of the Sienators present concurring therein, did advise and consent to the ratifl. cation of the aforesaid convention and the aforesaid supplementary protocol subject to a reservation and an understanding as follows: "The governmentt of the United States of America does not accept paragraph (3) of Article 11 of the protocol, relating to the profits or remuneration of public entertainers. "It is understood that the application of Article XV of the convention, as amended by Article VII of the protocol, shall he confined and limited as granting authority to each Contracting State to collect only such taxes imposed by the other Contracting State as will insure that the exemption or reduced rate of tax granted under the present convention by such other State shall not be enjoyed by persons not entitled to such benefits." A.%,D wii.nFAS the texts of the aforesaid reservation and understanding were communicated by the Government of the United

    States of America to the Government of the Union of Sutlh Africa and the aforesaid reservation and understanding were accepted by the Government of the Union of South Africa; AND WIIEItAs the aforesaid convention and supplementary protocol were duly rattified by the President of the United States of America on

    December 14, 19051, in pursuance of the aforesaid advice and consent of the Senate and subject to the aforesaid reservation and understanding, and the aforesaid convention and supplementary protocol

    were duly ratified on the part of the Union of South Africa;


    AND WtVtI!AS the respective instruments of ratification of the

    aforestid convention and supplementary protocol were duly exchanged at Washington on July 15, 1952, and a protocol of exchange, in the English and Afrikaans languages, was signed at that place and on that (late by the respective Plenipotentiaries of the United States of America and the Union of South Africa, the said protocol of exchange containing a statement that it is understood by the two Governments that the aforesaid convention and supplementary protocol, upon entry into force in accordance with their provisions, are modified in accordance with the said reservation, so that, in effect, paragraph (3) of Article It of the aforesaid supplementary protocol is deemed to be deleted, and further that, upon entry into force of the aforesaid convention and sul)lelenl(tary protocol in accordance with their
    provisions, Article XV of the convention, as amended by Article VII of the supplementary protocol, shall be applied in accordance with the said understanding;

    (2534)

    35

    TIAS 2510

    vention that the convention shall become effective on July 1, 1040, and except Inmatters of administrative assistance shall first be applied inrespect of income arising on or after that date; AND WRERInAs it is provided in Article VIII of the aforesaid supple. mentary protocol that the protocol shall be regarded as an integral part of the aforesaid convention and shall, except As provided in paragraph 3 of the said Article VIII, become effective and continue effective in accordance with Article XVIII (2) of the convention; Now, TIIstrFOflK, be it known that I, Harry S.Truman, President of the United States of America, do hereby proclaim and make public the aforesaid convention and the aforesaid supplementary protocol to the end that the same and every article and clause thereof may be ohbrved and fulfilled in good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof, subject to thie aforesaid reservation and understanding. IN TESTIMONY wimitsor, I have hereunto set my hand and caused the S&al of the United States of America to be affixed.
    DoNs1 at the city of Washington this nineteenth day of August in

    AND WHRnMAS it is provided In Article XVIII of the aforesaid con-

    [sEABL

    the year of our Lord one thousand nine hundred flfty-two and of the Independence of the United States of America the one hundred seventy-seventh.

    HARRY 8 TRUMAN
    By the President:
    DAVID BRucE

    Acting Secretary of State

    (2535)

    PROTOKOL PROTOCOL 'l'he undersigned, Dean Ache. Die ondergetokendes, Dean son, ,Secrotaryof State of the Acheson, Staatsekretaris van die United States of America, and G. Verenigde State van Amerika, on P. Jooste, Ambassador Extraordi- 0. P. Jooste, Buitengewone on nary and Plenipotentiary of the Gevolmagtigdo Ainbassadeur van Union of South Africa to the (lie Unie van Suid-Afrika by die United States of America, being Verenigde State van Amerika, duly authorized thereto by their daartoo behoorlik gemogtig dour respective Governments, have met hullo onderskeie Regerings, hot for the purpose of exchanging the bymekaar gekom met die dodl om instruments of ratification by their die dokumente van bekragtiging respective Governments of the dour hullo onderskeie Regerings convention between the United van (lie Konvensio tusson die VerStates of America and the Union enigde State van Amorika en die of South Africa for thoavoidance of Unie van Suid-Afrika vir die verdouble taxation and for establish- myding van dubbebo belasting en ing rules of reciprocal administra- die opstelling van reels betreffendo tivo assistance with respect to wedersydse administratiewo hulp taxes on income, signed at Pretoria met betrekking tot belastings op on December 13, 1940, and the inkomste, goteken to Pretoria op protocol signed at Pretoria on July 13 Desember 1940 on die protokol 14, 1050, supplementing the said getekon to Pretoria op 14 Julie convention, and, the respective 1950 ter aanvulling van die geinstruments of ratification of the noemdo Konvensie, uit to ruil, en convention and protocol aforesaid nadat die onderskoie dokumente having been compared and found van bekragtiging van voornoemde to be in due form, the exchange konvensie on protokol vergelyk is, en behoorlik opgestel bevind is, took place this day. hot die uitruiling vandag plaasgevind.

    (88) (2&36)

    37

    TIAS 2510

    As recited in the ratification on Soos aangehaal in die bekragthe part of the United States of tiging van die kant van die VerAmerica, the Senate of the United enigdo State van Amerika hot die States of America, in its resolution onaat van die Verenigde State of September 17, 1951, advising van Amerika, in sy besluit van and consenting to the ratification 17 September 1951, waarin hy sy of the convention and protocol bekragtiging van voornoeinde konaforesaid, expressed a certain res- vensio on protokol meedeel en ervation and a certain under. daarin toestem, 'n sekere voorbostanding with respect thereto, as houd en 'n sekere verstandhouding in verband daarmee soos volg to follows: kenne gegee: "Die Regering van die Ver"The Government of the enigde State van Amerika aanUnited States of America does not accept paragraph (3) of vaar nie paragraaf (3) van ArArticle II of the protocol, re- tikel II van die protokol, met lating to the profits or remuner- betrekking tot winste of vergoeding van vorskaffers van pubation of public entertainers. lieke vermaaklikheid, nie. Daar word verstuan dat die "It is understood that the of Article XV of the toepassing van Artikel XV van application convention, as amended by Ar- (lie Konvensie, soos gewysig by ticle VII of the protocol, shall Artikel VII van die protokol, be confined and limited as grant- bepaal en beperk word om maging authority to each Contract- tiging aan elke Kontraktorende ing State to collect only such Stuat to verleen om alleen taxes imposed by the other sodanige belastings, gehef deur Contracting State as will insure die ander Kontraktorende Staat, that the exemption or reduced in to border as wat sal verseker rate of tax granted tinder the dat die vrystolling of verminpresent convention by such derde skaal van blasting verother State shall not be enjoyed lecn onder die huidige konvonsie by persons not entitled to such dour sodanige ander stoat, nie persone baat wat nie op sodanige benefits." voordele geregtig is nie."

    (2537)

    TIAS 2510

    38

    The texts of the said reserva.a Die tekste van genoemde voor. tion and the said understandingFbehoud en genoemde verstand. were communicated by the Gov. houding is deur die Regering van ernment of the United States of die Verenigde State van Amerika America to the Government of the aan die Regering van die Unie Union of South Africa. The Gov- van Suid-Afrika meegedeel. Die ernment of the Union of South Regering van die Unie van Suid. Africa has accepted the said reset. Afrika hot genoemde voorbehoud vat ion and the said understanding. en genoemde vcrstandhouding Accordingly, it is understood by aanvaar. Derhalwo word dour the two Governments that the die twee Regerings verstaan dat convention and protocol aforesaid, voornoeinde konvensie en protokol upon entry into force in accord- by inwerkingtreding ingovolge hul ance with their provisions, are bepalings, gewysig word in ooreenmodified in accordance with the stemming met genoemndo voorbe. said reservation, so that, in effect, houd sodat paragraaf (3) van paragraph (3) of Article II of the Artikel II van voornoemde proto. protocol aforesaid is deemed to be kol in werklikheid geag word gesdeleted, and it is understood fur. krap to wees, on word verder dour there by the two Governments that., die twee Regerings verstaan dat upon entry into force of the con. by die inwerkingtreding van vention and protocol aforesaid in voornoemde konvensie on protokol accordance with their provisions, in ooreenstemming met hul bepaArticle XV of the convention, as lings, Artikel XV van die Konamended by Article VII of the vensie, soos gewysig by Artikel protocol, shall be applied in ac- VII van die protokol, toegepas cordance with the said under- moet word ooreenkomstig genoemde verstandhouding. standing. Tjsc nzwIsE WAARVAW die onIN WITNESS WHEREOF, the respective Plenipotentiaries have derskeie govolmagtigdes die signed the present Protocol of huidige protokol van uitruiling geteken het. Exchange.

    (2538)

    39

    TIAS 2510

    DONE in duplicate, in the Eng- GIEDOEN in duplo in die Engelso lish and Afrikaans languages, at en in die Afrikaanse taal to Washington this fifteenth day of Washington op hede die vyftiende dag van Julie 1952. July, 1952.
    FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA: NAMENS DIE REGERING VAN DIE VERENIODE STATE VAN AMERIKA:

    DMAN AcmEsoN
    FOR THE GOVERNMENT OF THE UNION OF SOUTH AFRICA: NAMENS DIE REGERING VAN DIE UNIE VAN SUID-AFRIKA:

    0. P. JOOST

    (2639)

    SECTION 24 Convention With UNITED ARAB REPUBLIC

    (2541)

    INcE. TAX. ('oN-VEN'rtoN ITwE' N THE ITNlurKI) STA'rI* AND TiHE UItnro, AHAu REPil'UBLIC
    l)t,,,li rolh 1I91) 21,

    Signed MI1 Wishiigtol . Recet'ivt,(I by Set, it'e; dtgiunii ed Exeeitive A,

    1471,1
    P43 5

    Sioll; iojullletion of (C'ongress, IM .t st441rte1y r.emiiov edl (101)C'ontrgssionul IRenordI

    544 (dthily ediiion)).


    lts or

    Iratliml or

    'fore't' 1 ii'd stItes s, n Im. ll cis e1111t1 m

    dilte or l)i'epa-

    (2542)

    CONTENTS OF SECTION 24 I President ial ,Mrtugge of 'l'ranlsmuittal to $t'uute (including text of coliveltrfol) (2545)

    (2543)

    PresidentialMessage of Transmittal to Senate (Including materials enclosed therewith)

    (2545)
    4

    87TH CONGResS 18t SesRion

    SENATE

    E AEx

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    MESSAGE
    mlOu

    THE PRESIDENT OF THE UNITED STATES


    iso

    ACONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED ARAB REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION OF INCOME, THE PREVENTION OF FISCALIEVASION WITH RESPECT TO TAXES ON INCOME, AND THE ELIMINATION OF OBSTACLES TO INTERNATIONAL TRADE AND INVESTMENT, SIGNED AT WASHINGTON ON DECEMBER 21, 1960

    JANVARV

    and accompanying papers, was referred to the Committee on Foreign Relations and was ordered to be printed for the use of the Senate

    11, 1961.-Convention read the first time and, together with the message

    Tni Wmmja Hotis, January 10, 1961 To the Senate of th United Statee:
    With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith a convention between the United of double taxation of income, the prevention of fiscal evasion with

    States of America and the United Arab Republic for the avoidance

    1 transmit also for the information of the Senate the report by the Secretary of State with respect to the proposed convention.

    respect to taxes on income, and the elimination of obstacles to inter. national trade and investment, signed at Washington on December 21 1960.

    The convention has the approval of the Department of State and Dwoa D. EISENHOWER. the Department of the Treasury.

    (Enclosures: (1) Report by the Secretary of State, (2)income tax convention with United Arab Republic signed December 21, 1960.) (2547)

    CONVENTION WITH THE UNITED ARAB REPUBLIC DEPARTMENT OF STATE,

    W'aehington, January6, 1901.

    The undersigned, the Secretary of State, has the honor to submit to the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the President approve thereof, a convention between the United States of America and the United Arab Republic for the avoidance of double taxation of income, the prevention of fiscal evasion with respect. to taxes on income, and thie elimination of obstacles to international trade and investment, signed at Washington on December 21, 1960. The convention was formulated as a result of technical discussions between representatives of this Government and representatives of the Government of the United Arab Republic, in the course of which an effort was made to determine the bases upon which agreement might be reached for the purpose of eliminating double taxation removing impediments to international trade and investment, and establishing certain procedures for mutual administrative assistance, in regard to taxes on income. The convention with the United Arab Republic follows the pattern of most of the income tax conventions presently in force between the United States and other countries. Income tax conventions are now in force between the United States and Australia, Austria Belgium, Canada, Denmark, Finland, France, Federal Republic o0 Germany, Greece, Honduras, Ireland, Italy, Japan, Netherlands, New Zealand, Norway Pakistan, Sweden, Switzerland, Union of South Africa, and United Kingdom. An income tax agreement with India is now under consideration in the Senate. An income tax convention with Israel, signed recently, has been submitted for transmission to the Senate. As in the cases of similar conventions, the convention with the United Arab Republic contains provisions relating to business and investment income, personal service (including professional) Income, official salaries, pensions and annuities, remuneration received by teachers, and remittances or grants to students and apprentices. It also contains, as is customary, provisions regarding administrative prbcedures, including exchange of information, for giving effect to the convention. As in the case of the pending agreement with India and the recently signed convention with Israel, the principal provision in the convention with the United Arab Republic not found in other income tax conventions is a provision under which the United States would take a limited but important step toward avoiding nullification of the efforts of a foreign country to encore industrial development through its tax law. This is the so-cled tax-sparing provision, under which the United States, in the case of income derived by American enterprises from operations in the United Arab Republic would ive recognition to certain tax incentives offered by the United Arab Republic to promote capital investment and economic develop. ment. The provision, contained in article XIII, would allow a credit against United States tax for certain tax exemptions or reductions granted by the United Arab Republic to attract new investment. In

    The PRESIDENT, The White House.

    (2548)

    CONVENTION WITH THE UNITED AA. I .,. . u si,

    the absence of such a provision, the credit allowed under existing United States law for taxes paid by an American enterprise to the United Arab Republic would be diminished as the Republic's tax is reduced and the tax liability of the enterprise to the United States would be increased commensurately. This amounts to a nullification of the Republic's tax concessions. The tax-sparing provision in the convention would remedy this situation within reasonable limits. A tax-sparing provision along the lines of that indicated above was included in the income tax convention of July 1, 1957 with Pakistan (S. N, 85th Cong., 1st sess.). Prior to final consideration of that Ex. convention in the Senate, the Pakistan tax incentive law had been permitted to expire, thus taking awa.y the basis for the provision in the convention. The Senate, in giving advice and consent to the ratification of the convention with Paistan, did so subject to a reser. vation having the effect of deleting the tax-sparing provision from the convention. The Senate Committee on Foreigni Relations, in recommending such a reservation (S. Ex. Rept. No. 1, 85th Cong., 2d sess.), emphasized thatthe committee wants to make It perfectly clear that this 1Iwithout prejudice to future consideration of the matter in the event the Pakistani tax-waiver law is reenacted and the question again comes before the committee. There is no occasion for the Senate at this time to decide the question. The committee reserves complete freedom of decision for the future.

    Article I of the convention submitted herewith specifies the taxes which are the subject of the convention, namely, the Federal income taxes, including surtaxes imposed in the United States and the corresponding taxes imposed in the United Arab Republic. Article 1I1 contains definitions of terms found in the convention, including a definition of "permanent establishment" along the lines of the definition contained in other income-tax conventions. Particular note should be taken of the definition of "United Arab Republic" as meaning the Province of Egypt. It is provided that the term will be understood as includin also the Province of Syria when the Govern. ment of the United Arab Republic notifies the United States Government that a unified tax system has been adopted throughout the Republic. III and IV contain the provisions Articles relating to the taxation of industrial and commercial profits. Article V provides for a reciprocal reduction in the rate of tax on dividends. It follows the pattern of similar articles in other income tax conventions of the United States, including a7 provision that, in the case of a United States corporation which is not deemed to be eident in the United Arab Republic under that country's revenue laws, dividends paid by such corporation to a person (other than a United States citizen or company) who is a resident of the United Arab Republic and does not have a permanent establishment in the United States shall be subject to United States tax at a rate not to exceed 15 percent. Article VI applies the principle of reciprocal exemption from tax of profits derived from the operation of ships or aircraft. Dividends paid by a corporation which is resident in the United Arab Republic and which operates ships or aircraft will not be considered profits from the operation of ships or aircraft and, consequently, will not be exempt from United States tax under this article.
    ?3095 O--6O-vol. 2--G?

    (2 (.2549)

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    Article VII contains the provisions relating to taxation of royalties. Under this article, a royalty received from sources within one of the countries by a resident of the other country as consideration for the use of, or for the privilege of using, any copyright, patent, design, secret process or formula, trademark, or other like property is exempt from tax by the former country if the recipient of the royalty does not have a permanent establishment in that country. Article VIII contains provisions, similar to those found in other tax conventions to which the United States is a party, relating to earned income, granting upon certain conditions exemption from tax upon compensation for personal (including professional) services. Article IX contains the provisions relating to exemption from tax on (a) wages, salaries, and pensions paid by the Governments to individuals for present or past services in the discharge of govern. mental functions and (b) private pensions and annuities. Tlhe governmental "pensions" are defined as including, for this purpose, annuities paid to a retired civilian Government em plovee itd tthe term "governmental functions" is understood to exclude any trade or business carried onl by either of the Governments for purposes of profit. Article X, relating to taxes on interest, limits to 15 percent the rate of either country's tax upon interest on bonds, notes, debentures, or any other form of indebtedness (other than interest on indebted. ness secured by mortgages on real estate) received from sources therein by a resident of the other country not having a permanent establishment in the former country. flowever, interest received by the Export-Import Bank of Washington or the Development Loan Fund from United Arab Republic sources is exempted from tax by the Republic and interest received by the National Baik of Egypt from United States sources is exempted from United States tax. Article XI, relating to the exemption on certain conditions from tax on the remuneration of teachers, extends the exemption to remuneration for research as well as for teaching, provided the results of such research are freely available to the general public. Article XII contains the provisions relating to exemption from tax on remittances or grants to students and apprentices. Under paragraph (1) an individual from one of the countries temporarily present in the other country solely for one of the specified purposes will be entitled to exemption from such other country's tax on remittances received from abroad as compensation for personal services or for the purpose of his maintenance, education, or training. Under paragraph (2), in the case of an individual from one of the countries temporarily present in the other country for a C'eriod not exceeding 1 year is an employee of, or under contract with, an enterprise of such other country or of a religious, charitable, scientific, or educational organization, solely to acquire technical, professional, or business experience from a person other than that enterprise or organization, the compensation up to a specified amount earned by the individual during that period will be exempt from suclh other country's tax. Under paragraph (3), in the case of an individual from one of the countries temporarily present in the other country under arrangements with the latter's Government solely for training, research, or study, the compensation up to a specified amount received by the individual for such training, research, or study will be exempt from such other country's tax. ('2550)

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    Article XIII contains the credit provisions, including the so-called tax-sparing provision, mentioned hereinbefore. Articles XIV, XV, XVI, and XVII contain administrative provisions, corresponding in general to such provisions in other tax conventions to which the United States is a party. Article XVIII provides for ratification and for exchange of instruments of ratification. It prescribes that the convention shall enter into force upon such exchange. Article XIX provides that, upon entry into force, the convention shall be applicable (a) in the United States, to income or profits derived during taxable years beginning on or after January 1 of the calendlar year next following the year in which the exchange occurs and (b) in the United Arab Republic, on specified dates as applied to specified categories of income. Article XX provides that either party may terminate the convention at any time after a period of 3 years has elapsed from the date of entry into force, such party to give to the other party a notice for that purpose on or before June 30, in which event the convention shall cease to be effective (a) in the United States, for taxable years beginning on or after January 1 of the calendar year next following that in which the notice is given and (b) in the United Arab Republic, on specified dates as applied to specified categories of income. The convention does not appry to the imposition or collection of taxes by the several States or the District of Columbia except with resPect to the traditional "national treatment" provisions in article
    Xv.

    It is understood that the Department of the Treasury is prepared to make such further explanations as may be found desirable regarding the technical aspects and application of the convention with the United Arab Republic. Respectfully submitted. CH~iSTIAN A. HE.RTER. (Enclosure: Income-tax convention with United Arab Republic, signed December 21, 1960.)

    (2551)

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED ARAB REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION OF INCOME, THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, AND THE ELIMINATION OF OBSTACLES TO INTERNATIONAL TRADE AND INVEST. MENT
    The Government of the United States of America and the Govern. ment of the United Arab Republic, desiring to conclude a Convention for the avoidance of double taxation of income, the prevention of fiscal evasion with respect to taxes on income, and the elimination of obstacles to international trade and investment, have agreed as follows:
    ARTICLE I

    (1) The taxes which are the subject of the present Convention are: (a) In the United Arab Republic: (i) Tax on income derived from immovable property (including the land tax, the building tax and the ghaffir tax); (ii) Tax on income from movable capital; (iii) Tax on commercial and inlustrial profits; (iv) Tax on wages, salaries, indemnities and pensions: (v) Tax on profits from liberal professions and all other noi-comnercia professions;
    (vi) General income tax; (vii) Defense tax;

    (hereinafter referred to as "United Arab Republic tax").

    (ix) Supp ementary taxes imposedas a percentage of taxes mentioned above;

    (viii) Supplementary tax on directors' remuneration: and

    States tax"). (2) The present Convention .shall apply to any other taxes of a substantially similar character imposed Iv either contracting State
    after the date of signature of tile present Convention.

    (b) hi the United States of America: The Federal income taxes, including surtaxes (hereinafter referred to as "UTnited

    ARTICLE II
    (I) In tihe present Convention, unless the context otherwise requires: (a) The term "United States" means the United States of Anieriva and when used in a geographical sense means tile States thereof and the District or Columbia; (b) The t erm " United Arab Republic" means the Province of

    Egypt.

    Arab Republic;

    has notified tile Government of the United States that a unified tax system has been adopted throughout the United Arab RIepublic, the term "United Arab Repltilic" shall be understood to include both the Egyptian and Syrian Provinces of the United

    WIhen the Government of the United Arab Repuitlic

    (2552)

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    (c) The terns "one of the contracting States" and "the other contracting State" mean the United States or the United Arab Republic, as the context. requires; (d) The terni "tax" means United States tax, or United Arab Republic tax, as the context requires; (e) The term "person" includes any body of persons, corporate or not corporate; (f) The term "company" means any body corporate and any association or other like entity which is treated as a body corporate for tax purposes; (g) (i) The term "United States company" means a corporation, association or other like entity created or organized under the laws of the United States or of any State of the United States; (ii) The term "United Arab Republic company" means a company, association or other like entity created or organized under the laws of the United Arab Republic; (Ih)The terin "resident of the United States" means any individual or fiduciary who is resident in the United States for the purposes of the IVnited States tax and is not resident in the United Arab Republic for the purposes of the United Arab Republic tax, and any United States company or any partnership created or organized under the laws of the United States or of any State thereof, being a coip any or partnership which is not resident in the United Arab Republic for the purposes of the United Arab Republic tax; Provided that the term "resident of the United States" shall not be construed to prevent the United Arab Republic from taxing a United Arab Republic citizen or company under its of source; laws on all income irrespective (i) The term "resident of the United Arab Republic" means: In the case of a company, one having its principal seat. of control and ,anan,,genent. in the United Arab Republic; in the case of any other person, one who is resident in the United Arab Republic foi' the purpose of the United Arab Republic tax and not resident in the United States for the purposes of the United States tax; Provided that the term "resident of lhei rited At-ii Republie" shall not be construed to prevent the United States from citizen taxing a United States source; or cOmpnaiy under its laws on ill income iirrespective of (j) The terms "resident of one of the contracting States" and "resident of the other contracting State" ,nean a person who is a resident, of the United States or a person who is a resid.nnt of tile ignited Arab Republic, as the context requires; (k) The terms "United States enterprise" and "mtilted Arab Republic enterprise" mean, respectively, an in(lustrial, conmier. :Tl, or agricultural enterprise or undertaking carried on by a resident of the United States and an industrial, commercial, or agricultural enterprise or undertaking carried on by a resident of the United Arab Republic; and the terms "enterprise of one of the contracting States" and "lemerprise of the other contracting State" mean a United States enterprise or a United Arab Republic enterprise, as the comtext requires;

    (2553)

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    (1) Tfie term "permanent establishment" means a branilh, management, factory, office, oil field, mine, quarry, or other place of natural resources subject io exploitation, farm, plant. tion, workshop, warehouse, installation, or other fixed place of business through which the business of the enterprise is wholly or partly carried on. It also includes a place where building or construction activity is carried on for a period of at least six months. The term shall also include an agent or an employee who has, and habitually exercises, an authority to negotiate and conclude contracts on behalf of an enterprise of one of the eon. tracting States or has a stoek of merchandise from which he regular-ly fills orders on its behalf; 6) An enterprise of one of the contracting States shall not he dlemned to have a permanent establishment in the other State merely because it carries on business dealings in that. other State'through a bona fide broker, general commission agent or other independent agent acting in the ordinary course of his business as such; (ii) The fact that tan enterprise of one of the contracting States maintains in the other St~ate a fixed place of business exclusively for the purchase of goods or merchandise for that. enterprise shall not of itself constitute that fixed place of business a permanent establishment of the enterprise; u (iii) The fact that a company which is a resident of one of the contracting States has a subsidiary company which is a resident of the other State or which carries on a trade or business in that other State (whether through a permanent | establishment or otherwise) shall not of itself constitute that subsidiary company a permanent establishment of its parent company; (m) The term "taxation authorities" means in the case of the United States, the Secretary of the Treasury or his delegate; in the case of the United Arab Republic the Minister of Treasury or his authorized representative. (2) In the application of the provisions of the present Convention by one of the contracting States any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws in force in the territory of that State relating to the taxes which are the subject of the present Convention.
    ARTICLE III

    (1) The industrial or commercial profits of a United States enterprise shall not be subject to United Arab Republic tax unless the enterprise carries on a trade or business in the United Arab Republic through a permanent establishment situated therein. If it h;s such a permanent establishment situated therein, tax may be imposed by the United Arab Republic upon its entire industrial or commercial profits from sources within the United Arab Republic. (2) The industrial or commercial profits of a United Arab Republic enterprise shall not be subject to United States tax unless the enterprise carries on a trade or business in the United States through a permanent establishment situated therein. If it has such a permanent establishment situated therein, tax may be imposed by the United (2554)

    CAtVENTION WITH THE UNITED ARAB REPUBLIC

    States upon its entire industrial or commercial profits from sources within the United Stat.s. (3) Where an enterprise of one of the contracting States carries on a trade or business in the other State through a permanent establishment situated therein, there shall be attributed to that permanent establishment the industrial or commercial profits which it might be expected to derive in that other State if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment. Such industrial or commercial profits will in principle be determined on the basis of the separate accounts pertaining to such permanent establishment. However, in the determination of the net industrial or commercial profits of the permanent establishment there shall be allowed as deductions all expenses, wherever incurred, %hich are reasonably attributable to the permanent establishment, including executive and general administrative expenses so attributable. (4) The taxation authorities of the taxing State n..aty, when necessary, in execution of paragraph (3) of this Article, rectitv the accounts produced, notably to correct errors and omissions or to re-establish the prices o1' remunerations entered in the books at the value which wo i(d prevail between independent persons dealing at arm's length. (5) If a permanent establishment does not produce an accounting showing its own operations, or the accounting produced does not correspond to the normal usages of the trade in the State where the establishment is situated, or the rectifications provided for in paragraph (4)of this Article cannot be effected, the taxation authorities of the taxing State may determine the net industrial or commercial profits by applying such methods or formulas to the operations of the establishment as may be fair and reasonable. (6) To facilitate the determination of industrial or commercial profits attributable to the permanent establishment, the taxation authorities of the contracting States may consult together with a view to the adoption of uniform rules of attribution of such profits. (7) No portion of any profits of an enterprise of one of the contracting States shall be attributed to a permanent establishment situated in the other State by reason of the mere purchase of goods or merchandise within that other State, provided that no expenses or costs relating directly or indirectly to such purchases shall be allowed as deductions in determining the profits of the permanent establishment. (8) Paragraphs (1), (2)and (3)shall not be construed as preventing one of the contracting States from imposing a tax on income other than industrial or commercial profits derived from sources within its territory by a resident of the other State whether or not such income is attributable to a permanent establishment in the first-mentioned State. Such income may, subject to the provisions of this Convention, be taxed either separately or together with industrial or commercial profits in accordance with the laws of the contracting State imposing the tax.

    (2555)

    10

    CONVENTION" WITH TH1 VNrIrD ARAB REPUBLIC


    %itTICLi IV

    (I) Where

    (it) Ali eniterprist' of olne of fihe contracting Stlatws partliciptl( dirertly or iindirectth ill the illtinlilgentlnll, control or carpilal or llt
    enterprise of I hit, other State, or (w) Ile sam.e p)eoiis partliciltes directly or. indirectly itl the il1l1ageminellk , cont rol or capitalaof tilt enterprise of ou1' of [he contracting Stlaes 11n4dlit enterprise of tihe other Staie,

    ihen any profits %iihich would, excepti toir Idhose (conitionls, have au'crued to one of tflie ,lr'l'ie..i, but by. reason. o)f thoso coniditions live not so aceritrd may be included in the profits of that. enterprise 11,11 tax.e'd accordingly. uthorilies of the laxing Sltle m1ay, whevn lleces. (2) The txationl scary, in execultion of ,araigrit ph (I) of this Article, ret ifytiv die alhcotli' s pruduI'vd, notably to correct errors and ontissiouis of' to re-establish the )rives or refitlll.erat Iiona entIered ill the books lit the values wlhivh independent l)peCt(O1 dealing at arnm's lenglh. Wvoit 4Ir'vaiil l4,twe'l, (: - If aI, ent erprise does not l)roduce tlt account ing showing its Own 41ipeait,11s, or the accounting prodituee' d ott's inot corresl)ouid to the (lit' ti'l Slt% u rr fill lilel)rl' is sit tllletd, n0ol1lma1ll usaIges of the trade ill or li, reclitihlelionls p)rovaided for ill paIragraph (2) of this Articlh ca'il x(llion aut horitites or tihet laxing Stllae 111a11, not1 be etffcted,l ie tIa )ip dterIrmilne the net ind'strial or co.minnvtiaIl prolils by plpvili such lay nlit' hods or fornlais to tlil' o)lTrAtiOlls of tilit t11iprlristA 11ai 1), fair oco.. the de'termninatlion o('industrial or he. Tro facilities a111d retialls vlerpriset'(ltlh axition aut horities atlriblut ble to (lhen iiierciad prolits itto tile consult toget'thter wilt li va w of lite ro llraulting Stateis nla1 r alhoptlion of uiiformu rules of it tIribiltiotn of such profits.
    ARTICLE V

    Wid in either case, conditions tire made or impl)osed betvweei the two in their cotimmerc'ial or financial relations, which ditter ,,l'erprises., %lich would Ili Iiltlt belvelt i independt, enl etierl)risit, from hose

    (1) l)ividen'tds p)aiid by it copl)an thlt is it resident of the 'nited Slates to ia resident of" lihe U united Ariab Republic shall niot be subject to tax by flip Uiitetd Sltates tit it rate in excess of 15 pt'er'ent.. HIow' l , eve'r, suich rae. shall not exceed 5 t'rctei where lit ret'ipUt isia Republic company anl if during tlie whoh,' of tie taxable United of Arali, tIe aImvr c.iil)aliv (a) niore than 50 ptrr'tilu of it' vioiting vr.'ar stock of sud i pa er company wais vIilt'd by lit' reipilenlt cOiUilya.l.I: either altone tr in its..'htiliion with not miotret'hat Ihre, collier [1nit;1i raub riepuhlic conllipaIIlit's, provideld each such rep'it ct)Il)IIcopainy tiWi ait least (to p)ercenlt of the stock of tilhe pi* er ctomp)anIy aond (b) 114)l more than otne-fourth of tl1' iWIN$ss ilVt' olll f lit,' pait.vi'r "1t111)iaI.i iS i derived fromlt resta uid di idends. * it (2) l)ividends paidl y conpalmp y that ios t resident of the Uniletd Anra) Republi iot a ri-sidelnt of llel United Staitles shall) in the' Uuitted Arab Rrepublic 4i4 subject (a) to tile tiax on ini'ollle derived frmi inol able raitadl, lhe su1pplehenntaryv taxes. and defense' tax (which taxe S111l Ibp tied u'rt4d at s1aurce). provided thtait such divieilds, If distributed out of tilt laivbh' pr-olits of tile sa.'1 taxable year a111! iHo out of accumiulate'dI rt'srie or aasek , shall In allowed- as it (atded Iltof 1 subjwt front the aItount of (il' cumlpanvy'4 taxable ill4,114I1P or proftl.t
    4~5#;)

    CONVENTION WITH THI

    UNMD ARAB RZPUBDIC

    1!

    to tax as industrial or commercial profits, and (b) wheel I paid to a nattiral person, t) lite general income tax levied oil net lotali income. However, flhe general income tax thus iniposed shall in no case exceed an average of 20 percent of tit(, net dividends payable to such natural

    person. Thle dividends payable to a United 4ta0es company shall


    not be snbjetl to any taxes other than those described ill elaine (a)

    above. (:0) D)ividends alid by a United States company whose activities lie solvly or mainly in tlt(fe United Arab Republic shall in the United Arab {Iepublie be' treated as mentionedd in paragraph (2) of this Article. (4) I)i 'ideuids deemed to be paid, according to tlh prIltisiol5s of tde United Arab Republic taxation law, out of yearly punlits by a perniaite'nt establishmient maintained in the United Artb Republlic by at b'lited States company whose activities extend to ('otintries otlier thmit tlh Ipnited Arab Reputblic shall in the United Arab Repiublic be treated )as mentioned in/paragraph (2) of this Article. y5) I paragraphs (1), (2)amd (3) shall not appply where tlihe recipient of a dividend isa resident of one of theicontracting States and tas a permtanent establishment in tile other State, and in such event, Article ]11 of this ('onventioll 81 apply.
    ARTICLE VI

    Notwithstanding tle provisions of Articles Ill, 11" and V, profits which a resident of ope of the ('oltracting states derivtes from operating ships or aircraft shlall be exempt front tax by the other State.
    ARTItCL VII

    using, anly copyright, patent, design, secret process or fornmtla, trademark, or other like property, but does not. include any royalty or other amount paid inrespect, of tle operation of a inile or quarry or of any otlier extraction of natural resources oi rents or royalties iln respect of cinemnatograp)hiic ftins. (3) Notwithstandiog any provision of this ('onvention. rents or royalties in respect of cinematographic films shall continue to he taxed under the laws of the respective contracting States. (4) Where any royalty exceeds a fair and reasonable consideration in respect of th' rights for which it is paid, the exemption provided by uthis Article shall apply only to so much of the rovalt v as repreinits fair and reasonable consideration.
    US) The provisions of this Article shall not. apply to dividends on founders' shares issued in the United Arab Republic as conisideration0 for the rights mentioned in paragraph (2) of this Article and which are taxed in accordance with the provision, of the United Arab Republic ta-ation law.

    (I) Any royalty received from sources within one of the contracting States by a resident of the other State shall be exempt front tax in the first-nlelnltope State. (2) in this Article the term "royaltyf" means any royalty or other anountit paid as consideration for the use of, or for the Irivilege of

    4,

    1,00)

    12

    CONUVNTION -WITIi THE UNITED ARAB REPUBIa6C

    (6) The provisions of this Article shall not applTr where the recipient of the royalty is a resident of one of the contracting States and has 4 permanent establishment in the other State, and in such event Article Ill of this Convention shall apply.
    ARTICLE Vill

    (1) An individual who is a resident of the United Arab Republic shall be exempt from United States tax on profits or compensation in respect of personal (including professional) services performed within the United- States in any taxable year if: (a) In the case o iadirector or employee: (i) The individual ib present within the United States for a period or periods aggregating not more than 180 days durillng that year; (ii) The services are performed for or on behalf of a resi. dent of the United Arab Republic or of a permanent estab. within the United Arab Republic of a United li*(shnent States enterprise; and (iii) The profits or compensation is paid by such resident
    or permanent establishment ; or (1)) Iii any case other than that or a director or employee:

    (i) The individual is present within thes United States for it period or periods aggregpit ing not more than 00 (lays during thut year;

    (ii) le has no permanent establishment within the United States;,and (iii) The total profits or compensation received in respect of sumh services does not exceed 3,000 dollars or its equivalent in currency of the United Arab Republic. he (2) Aln individual who is a resident or the United States shaM profits or compensation in from United Arab Republie tax onl exempt respect of personal (including professional) services performed within the United Arab Republic in any taxable year if: (it) In thle case of a director or emploype: (i) r'Fhe individual is present within tthe United Arab Republic for a period or periods aggregating not more than 180 lavs during that year; (ii) 'I'he services are performed for or on behalf of a resident of the United States or of a permanent establishment within the United States of a United Arab Republic enterprise; and (iii) The profits or compensation is paid by such resident or permanent establishment; or ()b In any case other than that of a director or employee: (i) The individual is present within the United Arab Republic for a period or periods aggregating not Jnore than 90 days during that year; (ii) He has no permanent establishment within the United Arab Republic; and (iii) The total profits or compensation received in respct of such services does not exceed 3,000 dollars or its equivalent in currency of the United Arab Republic.

    (255$)

    CONVENTION WITH THE UNITED ARAB REPUBLIC ARTICLE IX

    13

    (t) Wages and salaries, and pensions paid by the United Arab Republic (including a governmental public organization such as the Post Organization, tile Railway Organization and tihe Telephone afnd Telehraph Organization), or by any political or administrative sgib. (livisioll thereof, to anly individual for preset,t or past services in the (lisctarge of governmental functions shall be exempt from tax by the United States unless the recipient is a citizen of, or has immigrant stattus in, the Uinited States. (2) Wages and salaries, and pensions, paid IV the United States or biy ialn politial subdivision thereof, to ay, indlividuld for present or past, services in tie (diseharge of governimental functions shall be exenptt from tax by the United Arab Republic, unless the recipient is it citizen of, or has been admitted as a doinieiliary of, the United Araib Republic. (3) Any pension or annuity (whether representing employee or efiploer contributions or accretions thereto) from sources within the United States paid to a resident. of the United Arab Republie for past. services shall be exempt front tax by the United States to the extent that such payments are allocable to services the remuneration fgr which was exempt from tax by the United States. (4) Any pension or annuity (whether representing employee or eimlployer contributions or accretions thereto) from sources within the United Arab Republic paid to a resident of the United States for past services shall be exempt front tax by the United Arab Republic to the extent that such payments are allocable to services the remuneration for which was exempt front tax by the United Arab Republic. (5) For the purposes of paragraphs (1) and (2) of this Article, the termi "pensions" shall be deemed to include annuities paid to a retired civilian government employee- and the term "governmental functions" slull be understood to exclude any trade or business carried on by either of the contracting States for purposes of profit.
    ARTICLE X

    (1) The rate of tax on interest on bonds, notes, debentures or any other form of indebtedness (other than interest on indebtedness secured by mortgages on real estate) received from sources within ono of the contracting States by a resident of the other State shall not exceed 15 percent in the first-mentioned State. (2) Notwithstanding paragraph (1), interest received by the ExportImport, Bank of Washington or the Development Loan Fund from sources within the United Arab Republic shall be exempt from tax by the United Arab Republic; and interest received by the National Bank of Egypt from sources within the United States shall be exem rpt from tax by the United States. (3) Paragraph (1) shall not apply to interest received by a resident of one of th;e contracting States who has a permanent. establishment in the other contracting State, and in suich event Article III of this convention shall apply.

    (25559)

    14

    CONVENTION WITH THE UNITED ARAB REPUBLIC ARTICLE XI

    (1) A professor or teacher from one of the contracting States who, at the invitation of a university, college, or other recognized institution for higher education in the other State, visits such other State solely for the purpose of teaching, o0engaging in research, at such educational institution for a period not exceeding two years shall not be taxed by such other State on his remuneration for such teaching or research. (2) This Article shall apply to an individual engaged in research only if the results of such research are freely available to the general public.
    ARTICLE XII

    respect of such training, research or study, unless the amount thereof exceeds 8,000 dollars or its equivalent in the currency of the United Arab Republic. (4) In the application of this Article, the exemption granted under each paragraph shall be determined without regard to the exemption granted under the other paragraphs of this Article.
    ARTICLE XIII

    (1) An individual from one of the contracting States who is tern. porarily present in the other contracting State solely (a) as a student at a recognized university, college or school in such other State, or (b) as a business apprentice, or (c) as the recipient of a grant, allowance or award for the pur. pose of study or research from a religious, charitable, scientitfe or educational organization shall not be taxed in such other State in respect of remittances from abroad received as compensation for personal services or for the pur. poses of his maintenance, education or training. (2) An individual from one of the contracting States who is tem. porarily present in the other State for a period not exceeding one year, as an employee of, or under contract with, an enterprise of the former State or an organization referred to in paragraph (1) subparagraph (c) above, solely to acquire technical, professional or business experience from a person other than such enterprise or organization, shall not be taxed in such other State on compensation for such period, unless the amount thereof exceeds 5,000 dollars or its equivalent in the currency of the United Arab Republic. (3) An individual from one of the contracting States temporarily present in the other State under arrangements with the Government of such other State solely for the purpose of training, research or study shall not be taxed in such other State on compensation received in

    (1) Subject to the provisions of the Internal Revenue Code regarding the allowance of a credit against United States tax for tax payable in a territory outside the United States, United Arab Repubfic tax payable, whether directly or by deduction in respect of income front sources within the United Arab Republic, shall be allowed as a MARdt against United States tax. For the purposes of this creditt, a United States company, or a United Arab Republic company of which at least 10 percent of the voting stock is owned by a tUnited States company, shall be deemed to have paid the United Arab Republic tax

    (2560)

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    15

    which would have been paid by that company but for the exemption granted by Articles I through 4 of Law No. 430 of 1953, provided that the amount of tax so deemed to have been paid shall not exceed an amount determined under the provisions of United Arab Republic law as in effect on the date of signature of the present Convention. It is agreed that the United Arab Republic is deemed to satisfy the similar credit requirement of section 901 (b) (3) of the Internal Revenue Code. (2) United States tax payable, whether directly or by deduction, by a person who is a resident of the United Arab Republic in respect of income from sources within the United States shall be allowed as a credit against any United Arab Republic tax payable in respect of that income, but the credit so allowed shall not exceed an amount computed on the basis of the average rate of United Arab Republic tax. The United Arab Republic retains the right to take into account, in the determination of such average rate of tax, all items of income taxable under the taxation law of the United Arab Republic, regardless of any other provision of this Convention.
    ARTICLE XIV

    (1) The taxation authorities of the contracting States shall exchange such Information (being information which is at their disposal under their respective taxation laws in the normal course of administration) as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or for the administration of statutory provisions against tax avoidance in relation to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those concerned with the assessment and collection of the taxes which are the subject of the present Convention. No information shall be exchanged which would disclose any trade, business, industrial or professional secret or trade process. (2) In the event of substantial changes in the fiscal law of either of the contracting States, the taxation authorities of the contracting States will consult together in order to determine whether it is necessary for that reason to amend any of the provisions of this Convention.
    ARTICLE XV

    (1) The citizens of one of the contracting States shall not be subjected in the territory of the other contracting State to any taxation or any requirement connected thercwith which is other, higher, or more 'burdensome than the taxation and connected requirements to which the citizens of the latter State are or may be subjected. (2) The enterprises of one of the contracting States shall not be subjected in the other State in respect of income or profits attributable to their permanent establishments in that other State to any taxation which is other, higher, or more burdensome than the taxation to which the enterprises of that other State similarly carried on are or may be subjected in respect of like income or profits. (3) Nothing in this Article shall be construed as: (a) obliging one of the contracting States to apply to citizens of the other contracting State who are not residents of the former

    (2561)

    16

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    State tile saNie personal allowances, exeisl)tiolis, deductiolns, cred. its and tax rates ats are applied to its citizelis; (h) obhliging ti, liniti.t Aa Republic to grant, to United State C'0111jlltnicS tie exception graxited to tiiitebd Arab Republic
    com. panies hy Articles 5 and 0 of L,aw 1.4 of 1939; or (c) aftecting the application in the United Arab Republic of the first and second paragraphs of Article II an(d Article It bis (4) In this Article tihte term "citizens" includes, ill relation to the United Adrab lIl)uhllie, all legal pe'solls, pIartlielshil)s, amo'iiitiolls sand olher (,lit deriving their sttIus as such fromti tihe laws in force ictus

    of Law 14 of 1939.

    ill the hnike(d Arab Republic, awll in relation to the United States, all legal pensmis, partnlershil)s, associat3i0s, and other entities (eriv. ilg their status ais such from the laws ill force ill hlie Unied StAtes. (5) In this Article tile term "taxation" means taxes of every kiud and description levied on behalf of aiy authority whatsoever.
    ARTICLE XVI

    (1) Where a resident of one of the contracting States shows proof that t(he action of thle taxation authorities of either contracting Slate has resulted or~will result in doulell taxation (contraryto the provisions of this Collvellnion, he shall be entitled to present his case to the Slate of which he is a resident. Should his claim be deemed worthy of collsideratlion, the taxatiol authority of the State to which tlhe claim is made shall endeavor to come to all agreement. with the taxa. tion autlhority of the other State with a view to avoidance of double taxation. (2) The taxation authorities of both contracting States may prescribe regulations necessary to iliterpret and carry out the provisions of the present, Convention and will consult together, its may be necessary, for the purpose of carrying out the provisions of the present Conivelntioll. (3) Tshe provisions of the present Conventfion shall not be construed to restrict ill any inniier any exemnption, deduction, credit or other allowance ntow or hereafter accorded ly the laws of either centrratting State i( determiningg the tax of such State.
    ARTICLE XV1n

    For the purposes of Article XIII of the present Convention: (a) Interest paid by one of the contracting States, including any local Government thereof or by an enterprise of one of the cont ract ing States not hiavingni permnuient est allishment in the other contracting State shall be treated as income from sources within the former State. (b) Gains, profits and income derived from the sale by a taxpayer in one of the contracting States of goods produced hi whole or in part in tihe other contracting State by such taxpayer shall be treated as derived in part from the State in which produced and in part from the State ill which sold. (e) Income from real property (including gains derived from fhe sale or exchange of such property, and interest oni indebtedness secured by mortgages o01 estate) and royaliets ill respect real (2562)

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    17

    of the operation of mines, quarries, or other natural resources shall be treated as income derived front the State in which such real property, mines, quarries or other natural resources are situated. (d) Conipensation for labor or personal services (including thie' practiee or liberal professions) shall be treated as income frolil sources within the State where are rendered the services for' which such compensation is paid, and the services of all individual whose services are wholly or mainly performed ill ships or aircraft operated by a residenIt of one of the contracting States shall be deenid to lbe performied tin that State. (e) Royalties for using, or for the right to use,, in one or the contracting Statles, patents, copyrights, designs, trademnarks and like property slhll be treated as Income fromt sources within such State. (f) Pensions and annuities paid by an enterprise of one of the contracting States to individuals who are residents of the other contracting State shall be treatedas income front sources within the former State. (g) I)ividends which are subject to United Arab Republic tax in accordance with paragraph (3) of Article V of this Convention shall be deemed to be income from sources within the United Arab Republic.
    ARTICLE XVIII

    (1) The present Convention shall be ratified and the instruments of ratification shall be exchanged at as soon as possible.
    (2) The present Convention. shall enter into force upon the exchange of the instruments of ratilfeation. ARTICLE XIX (1) Upon the entry into force of the present Convention, the provisions of the Convention shull be applicable: (a) In the United States:

    to income or profits derived during the taxable year beginning on or after the first, day of January of the calendar year next following the year in which the exchange of instruments of ratification takes place; (b) In the United Arab Republic: (i) as respects tax on income derived from immovable property, tax on income front novable capital, and tax on
    wages, salaries, indemnities and pensions, which taxes are payable or (lie on or after the first, dia of July of thie calendar year next following the year in which the exchange of Inst ruments of ratification takes place;

    (ii) as respects tax on commercial and industrial profits for any accounting period beginning on or after the first, day of July of the calendar yeuir next following the year in place and for theI"unexpired portion of any fiscal period current at that (late;

    (25M3)

    18

    CONVENTION WITH THE UNITED ARAB REPUBLIC

    (iii) as respects tax on profits from liberal professions and all other non-commercial professions, the general income tax and supplementary tax on directors' remuneration for any taxation year beginning on or after the first day of January of the calendar year next following the year in which the exchange of instruments of ratification takes place. The rulhs in subparagraph (b) shall be correspondingly applicable respectively to the defense tax and to the supplementary taxes. (2) Upon application of this Convention to the Province of Syria, it shall be applicable for taxable Years beginning after the date of notification specified in paragraph (l)(b) of Article II of this Convention.
    ARTICLE XX

    Either of the contracting States may terminate the present Con. vention at, any time after at period of three years shall have expired from the (late on which the present Convention enters into force, by giving to the other contracting State notice of termination, provided that such notice is given on or before the 30th day of June and, in such event, the present Convention shall cease to be effective: (a) In the United States: For the taxable years beginning on or after the first day of January of the calen(lar year next following that in which the notice of termination is given. (b) In the United Arab Republic: (i) As respects tax on income derived from immovable property, tax on income from movable capital and tax on wages, salaries, indemnities and pensions, which taxes are payable or due on or after the first day of July in the calendar year next following that in which the notice of termination is given; (ii) As respects tax on commercial and industrial profits for any accounting period beginning on or after the first day of July in the calendar year next following that in which the notice is given and for the unexpired portion of any fiscal period current at that date; (iii) As respects tax on profits from liberal professions and all other non-commercial professions, the general income tax, and supplementary tax on directors' remuneration for say taxation year beginning on or after the first day of January in the calendar year next following that in which the notice Isgiven. The rules in subparagraph (b) shall be correspondingly applicable respectively to the defense tax and to the supplementary taxes. IN WITNESS WHEREOF, the undersigned, duly authorized thereto, have signed the present Convention. DONE: in duplicate at Washington in the English language on the 21st day of December, 1960. For the Government of the United States of America: CHRISTIAN A. HERTER
    For tlhe Government of the United Arab Repuplie:
    MOSTAFA KAMEL

    (25U4)

    ii

    I/

    SECTION 25"' Convention With


    UNITED KINGDOM,

    4,
    i

    78095 0-42-vol. 2.-

    (2565) (2

    UNITED INi;IoM x 11I1 IxnoIl 'r% C"onvTiOv I|YTWTEw U':NITED STATES Ont TillH

    11ir conventionni: April 16. 1943...... AprIl 24, 1945 April A, 1945 .%lily 23, anti Jiue 13, July 3. 11945. July 12. U9 Felhruary 5,114....

    Signed tit Washington. Receivedt hy ieiate; lesignahed Executive 1), 79th Congress, lst ,$e"Wo. Senate (01 Congressional Record 38M). Injint'tloi of secrecy removed boy *linlteConinitttIt, lHearings (l'art 1).

    Rept. No. 6, 79gth Senate Foreign Relations Committee (P.11. ... Reitrted by (ong., Ist Sen.). P5ostponement by Senate of further action on convention (91 CongreMsonal Record 7448). Senate recommilttal of convention to Senate Foreign Relations Coninaitte, (92 Congresional RecordI441.-947). April I1. IP46 .... Senate Commilltee Ifearills (Part It). IlrteLl again hy Senate Foreign Relations Committee (Ex. Rept. No. 4, R May it, 194IM.. 714th Cong 2.1$4,xs.). Ratllfiation by senate of Its alvice anti consent (92 Congressional Retad June I, 1946,.
    6108-6110).

    Yirst ~Supth,mentary Protocol: Junie 6, 194 6-.. Signed at Washington. Sesion; in. Reerivetd lay Seate; designateat Executive F, Wlth Congress, 2W1 . June Ie, 1946.. Junction of secrecy removed (02 Congressional ReHord 6662-1663). Sepnae Foreign Relations Committee (no written report-rn tJ Reporitel boy Jite t3, 1'4*1..... Congressional Record 60.1), 79th Cong., 2ot Sss. . Ratifiucation hy Senate of its adivire antl consent (92 Congressional Record 715). June' 11. 94l0.... Itaic ('onvention and First S11plllenieuitary Prolovol: id t.. by United States Presidlent. Juiae 26, R94M..... atifiuh~l bty Pnilted Kingdom. ........ July IN,194.1 _Instruments of ratifliutlon exchange convention anti protocol entered Into 141; July 25. . ...... force effeyive January I*1945 (as t0 t.united States tax), anl as of various dates las to United K.ingdlom ta%). t1946 ......... Pr(,lninclmed hy nitlel States President. Jily), 31 TIAS 1546; 60 Stat. 1377 (Ialic convention), (1)Slat. 1389 (supplietmentauy O(lficial Text ....... protocol). A-,(1)jndI Soplqmenletary Protocol: Signed it Washaington. ....... l . Awsion; In. eeive Iby Senate; designated Executive I1, 3I. ('ongress, 2d1 June 22, l934 ......... Conoagressional Record W56). junction of secrecy n'moved (10o Rept. No. 6,83d Conl., Reported lay Senate Foreign Relations Committee (Ex. August fl, 19.4. 2a1 Sess.). ,1 August 21) ....... Rtatlfication by Senate of Its advice and consent (100 Congressional Reod I M5,5-I MD). ,itatnill-r 22, 11954.... Ratified bly 17nIted States President. 21, 1951.... Ratlfid y United Kingdom. I .ec.nllr l..Instrunments of ratification exchanged1; supplementary protocol entered Into January 19, tIL. force. . january 28, HO1.W5 Preclaimedd ihy UIited States President. T`IAS 31l15; 6 1'ST 37. Ollialal Text -_ Third Supilcmintary P'roto(ol: Signed at Wiisliiintoo. August Ill. 1,57 .. Semion; in. MW15 Received hay Senate; designated Executive A, 85th Congress. 241 January I11l. junction of secrecy removed (104 Congressional Record 544). Senate Committee Ilearings. July I, 1958. Rli orted lay Henate Foreign Relations Committee (Ex. Rept. No. 2,suh Aulust 7, 19'8. . (ong., 2,1 Sens.). Senite of its advice andi consent (104 Congressional Rerd atification by August 13, 115 ... R... 17218--10203). Ratified hy United States President. .. Auust 22. 158 19WS.... Ratified lay United Kingdom. eptemlher 211. Otolir 1I, 11)58.. Instruments of ratification exchanged; supplementary protocol entered into is force effective January 1,1936 (us to United States tax), ans of various dates to (ast United Kingdom tax). United States President. o()collwr 24. 19.m.... l'roalalneed hby 01lhlal Text ......... TIAS 4124; 9 UST 139. Exchanges of Notes relating to Territorial Extension: August 19, 19.57 .... l)Dte of lritish note to 'nitel States. Itritsh note received by Senate;. designated Exeeutlve C, 85th CongresS, lal 1958. January 311n, ('ongressional Record 1335). Session (11)4 senate Committee iHearings. ....... Jtuly l, 1995 Comnmittee (Ex. Rept. No.. . RIXrd 2d1Se,.). July 7,19., .5 Corte., hy Senate Foreign Relations RntifIation hy Senate of Its advIc. anal consent with reservation (104 Conrfre July 9, 1958 ........ tonal Romrd 13238-13244). of wit Relrt y Senale Foreign Relations Committee recommending 8511. lairnwal2d August 7. 1958;.I Coalm., reservation previously entered hy Senate (Ex. Rept. Nu. 2, sesaQ.. A ugust 13. 19M.. Withdrawal hy Senate of reservation previously entered on July 9, 1958 (10I Congressional itecord 17260-17263). Iece mlier 3, 1958.... Iate oT United States note to United Kingdom accepting notification collatid1le in Itritish note of August 19, 1957. Ileemler 3, 19X.... Agreement relating to extension of convention to certain British terrttorkr entered into force efTective as of the various dates specified In the nainrlnpnt. . TIAS 4141, 9 |'ST 1450. Oicli:el Text_ ..

    (2566)
    L,

    CONTENTS OF SECTION 25
    iteie Convention ind First Supplementary Protocol: I. Presidential Memsage of Transmittal to lkenate of Basic Conven.
    ti -...................................................

    Pag#
    (2871)

    2. "k-ate Committee ][earings on Basic Convention of May 23 and June 13, 1945 ........................................... (2881) :4.Senate -----------------..-------------------------..--...3,(2640 ) Committee Report on Basic Convention Dated July 1945 Floor Debate and Action on Basic Convention of July 12, 4. 5eite 1945 --------------------------------------------------- (2667) 5. Seate Floor Debate and Action on Basic Convention of February 0, 1946 ................................................. (2671) 6. Senate Committee llearings on Basic Convention of April 17, 1946------------------------------------- (2675) 7. eM'iate Committee Report on Basic Convention Dated May 10, (2719) 1940 ................................................... 8. Senate Floor Debate and Action omi Basic Convention of June 1, (2745) 1946 ................ .................................. 9. Presidential Message of Tramismittal to Senate of Supplementary Protocol Siglmed Jtulie 0, 1946 ----------------------------(2751) 10. Selliate Committee lhlearimgs Onl uppielliitarv Protocol (iolne)-. (2767) II. FSentnte Comittee Report oni "Supplementary Protocol (no written report) (2769) 12. Slenatte Floor Debate and Action on Supplementary Protocol..... (2761) 13. Presidential Proclamation (including Official Text of Basic ConVenmtion and Supplementul Protocol-..-............. (27065) &Seond Supplementary Protocol: I. Presidential Message of Transmittal to Senate ................. (2787) 2. .Sli Coinnmittee I|I hearings (nionme held) -....... nate (2793) :4.Senate Committee Report .............................. (2795) (2807) 1 1.S,4mate Floor D)ebate and Action ............................. 5. Presidential Proclamation (including Official Text of Protocol).- (2815) Third Suppplehmentary Protocol: I. lr(sidential Message of Transmittal to Senate---------------(2826)
    -

    3. Senate Committee Report ----------------------------------4. Semmate Floor Debate and Action ............................ 5. Presidential Proclamation (including Official Text of Protocol)..'xclhatige of Notes Dated August 19, 1957, and l),ceneber 3, 1958: I. Presidential Message of Transmittal to Senate....-------------2. Senate Committee Hearings .................................. ,I. Senate Committee Report Dated July 7, 1958 ----------------4. Semmate Floor Debate and Action of July 9, 1958 --------------5. Sleiate Committee Report Dated Augu'st 7, 1958- ---------6. Senate Floor Debate and Action of August 13, 1958- ------7. Official Text of Notes .......................................

    2. Senate Committee Hearings ---------------------------------

    (2831)

    (2891)
    (2897)

    (2905) (2917) (2927) (2929) (2937) (2943) (2945) (2947)

    (2567)

    BASIC CONVENTION AND FIRST SUPPLEMENTARY PROTOCOL

    (2569)

    PreridknltialMesstage of TraLnsmiltal to Senate of BIasic conventionna (Inchuding Materials E'hed Therousith)

    (2571)

    ftris ,s,'.,in lH (CoNuwms

    1 JI)

    1,N A'I'1I,

    WIII (IItEAT ('(oNVENTION WITHIN !IFPE"rT I#110 TIIIAIN ANI) NOI'rIIERN TAXN'S OiN INCOMIC IIMtAND) 1

    M 0H 8 A 41 E

    E1F TH PRESIDENT

    TIlE IGNITED STATFIS


    ?3ANMIMTING

    A ('ONVINTION IIF.'rwI,;N Ti!0. UITNI1ED) STATES OF AMEfRIC(A ANDP TIHE i'NITFI,:) KIN(II)OM OF G;IEATI' iIIUTAIN AND) NOIrI.;IIN IllIoAN IM,FORI T'1l AVOID)ANCE OF DIOUriIU. TAXATION EVASION WITH IIRSPECT To AND) TillF, I'lIFVVI.NrTION OF FIlAIS CA IUNi"i) AT WAS!I4N('TON ON APRIl. 1, 1045 TAXE.8 N INCOME,

    firet Aimi. 2.1, Ill'b.( t'01vetiliioB Wm read (lho Iime ani(ld mferred to the Corn. tFon, 1ifit Amt' ilgn ItelIiOls and, together with the ltue.'a'go of trllanSuuttal and aamlatuiing nl))ri, wits unluml to he printed for ti uise of the Senate. tile c Amil. 2,1, 1946.--ada P111410w.

    1945. Tim WllITH IlOUSIC, Aprl 4p To fAr xSRemte of the UnmIed Mahtes: With itview to reveivitig the advice and consent of the Senata to rataheatia n I trnsmit lherewith two conventions between t01e United States of Arleri'a and the United Killoln of Oreati Britain and Northern lrelanud, which were signed iniVt iwhiuigtoli on April 10,1045 as follows: (i) A convention for tie avoidance of double taxation and IlncomelO, and the prevention of fiscal twasioI. with respect to taxes on1 (2) a convention for the avoidance of double taxation and the pre. voution of fiscal evasion with rmspect to taxes on the estates of (leeoaSed The conventions have the approval of the Department of State and the Treasury Departnlent. I also trausmat herewith, for the information of the Senate, tihe report of the &ecretary of State with respect to tle conventions. HARRY1S. TmuMAN. (Enclosures: (1) Report of the Secretary of State; (2) convention

    S persouiB.

    between the United States and the United Kingdom, signed April 16,
    (-16178)

    2
    tulxt'.1 oi

    COx1:NV'NION WITH I0|4SPI ETO 'I'AU$ ON INV'ObIl (3) .otmvelt io


    btwe.e'n l

    Silati's iti IIii IleUite'dl dKigido.., si.:vi'el Alpril 11o, I15 rlilti ng to
    lil .'sll, tof d,'e'vs.d lIe'rseills.) I's

    1t.15, rs'hulhg Io It taxes tilt ihii'emw;

    h1w Iilt,.l

    i F T helii' ) " vii t TT 1IAII Il', s': Ihr oIy Iloeforo Thile mid'isigin,'d. tlt, Sect'relary of 81 le, has fihi limoir It tihe lresihlen, , ilhi it view Io lheir Irnimliosnsi Ito lh St'-ei IvIto rev'' Vill l '1 tihl, l dvive' 11i111 voll 'llt (of thatl 1ock' to r4) li4-1i1 jol , if hIs jilldgill'tll, I 'd ite's !IiIppro e'1ile'r'tof, Iwot 4'e- li'l'l itiens et wet'n'll If'it-ild S of .llc'11iNd 4.1-h1.1'1 Inr-.land, 1 (IoliI dit he 1 f lh 'l I ifeltd ni .l1 ktr'laiI i.t signed'l ill V .shillu Iill Afoi 16, i9.15, its ftllo s: I) A tilt %V114-1 '%.ert 1di' ntvllion for il.th livoidtllac'c' Of thtllhbl Iaxall 11i11lit, t.imvnlit
    ,I;

    r% 1) :l' Ltri itNI)rF' 'rATl', e I Ifglon, .tprI IlM . 1.9 .15.

    he Ialnd TreI' ure'y I)trnietit v'olh.lboThe I)epartmuientl of SItle.i riltted ini flie, negotiation (if the tOliveiltit)IW. l'l voli'ei;I iouIs Ilaivo p IIt'h lj rwoval of bont h I)elairtmnenits. iRllizilu Ihllgtt tlhe ilml)osilionl 11l 'Oll'.l'lio1 Of IlaIxe 1l11101 the 8111ui10 income or uIpoti tho saltic' ctit-Afe bylotli (lie IUniteud Sitles of Americat n1tic1 li ItiUnited Kingdlom miay, ltuld oftiel do, reillt. ill lolelle lalllaioll of it severe heliarwler, rl'preseuitillvi.s of Ihis (lov'erlmlt nt iavo hllivi'll disu'u-iions with repre'seut tit ivt's of tlhe Ilrilish allgaiged ill l.i, .Ilpoll which con(ioveriunlut. with it view to deletelrning Ihe bises e two velntion between lhe (loverlulletits llighlt be 'oncluded for .lio
    pulrpir

    i'llioll of tis-vil t'valitmln witlh re'spe.'l I Iax,'.s tillt illt',ilt', 51i141 (2) ii ,4111i~' itll flt',p'lellnion of liast-ll evitI hed ' f(tr Itli' aI-othll'.' tat tileof h' IIXaluoli 0 8i,01 %Vwlh rtespe't' Ito IfIae's filI lie 'st ale's of el.''.t'ast, petlsttllis.

    and i(l*fib. certiuti 'onftlit'tinug Iprinct'iples of taxitiloll for tillns purpol lishllhg 'ertain proceduires for tlhe exchlimig of ithfotiiaitrioin between tho illubtwo countries ini relation to taxittioli. 'T'le two conventions
    Inittid hlerewiLh we're forunulted its it result, of those dism'iasions. Iii Iitiatteirs of principle tuld silbstatllle, most, of he Itol'visiolls of tilei
    coInven1tioti relitting tio tlxes on income are 'onsistenit, if litidelitilil, with provisions iii one olr ainotl'her of the existing incotie-tax coilventioll betWpell tie Unililted S11161t'8 of America and certain foreign

    of (i avoiding double taixltion, hhsofar its lrantic'lhle, modifying

    conIvenlitioi andul protocol of Matrch 4, 1942, with c"lNadihn, which Wals Inulud eeffective as of Jnlnitnry I, 1941 ; lnd (3) Ole colvenation ind i prototol of July 211, 1939, with rllnice, which become elect'iv't loil Jnlua1y 1,194A.
    'The coIventiotl relatiig to taxis ti (lie estita's of dehelisutl persons is similar, in substantial resjee'cts, to tithe existilag convention of 11un1e0 8, 1944, between thle Unitted IStatest of America amd Ca(nada, relating to doullell taxation inl the aisp of state taixes ulni Surlcct'Sloll dutlies,

    :ountll,riesi,likely, (1) the o et ion and protocol of March 23, 1939, wit-h wtSwodt, which hecaune effective on atillary I, 1940' (2) the

    wbhich, tipos the exchange ol instruments of ratification,


    eflertive as of iJune 14, 11141.

    becamluo

    It is believed thatlie applitatioln of the provisions of anll inicoUlotax convenlitoil of thle kint submlitted herewith will cowituto a defitnio step toward Lile removal of an undesirable impediment to

    (26004)

    ('ONVElNTION WITH lItIl'Knr 2"o TAXUS ON INCOME

    international trdh, which resulls from list' doublelh' lumil.i,on of hll'rllls, 1-allux convention . lald 1I h111t, the il liciitioll ot flitesIrvisimis ti1 i d of ilt! kill slilletlrd here-with will go fur lt,',lrd hlimiiiti.ig ,hilhil ill wit he ... t.li',lii.l 11 ,it114.1- 4.4,lllit iUv of estate's Iltlxl-ioit oll ,ill other bilsiris6 . the aii t m'l:ov lliplisht ill wllh'ic ioas lottiomls ofit tihlt isiaito't or coiklilt rv ha viplilt illllt.rls. 'rhe two .sli| t,.:411l1lish
    ("OllVe'ill

    iiiit Ithe tll niterirst of tilt- two coult ru's. ('toll.sidimrllg emlh of the two i'onveIntions seprtrilly, slatetlltllts in further etxplhilation are Imiade il Ithe liartigrlilils bIlohw. ll1i'll|1 of olpi'eflivi's ill
    ('ONVI.:NTION IIR;IATIIN TO TAXES O)N INC'OM,

    lim The Il1l1jor features of the illnOlut,-tX cOnlVenlltiolln Itll)y aylellllsm a. rizM til follows: (I) Spe'rilii: refeireme io the taxes to wliilh the convention relat's ulnd i.tell-SiVe difuinition of terms llfolil hi (III, cniv'eltionl (arls. I aSld II). ('0) Adopt ion of plrinlciplIes airect ing lise, dleterlmiillintioll. of liotltl111, aind llllct llg Ih liitXltitol, of ii15illi's'5ss Illenoe ilt-ru' ,d bv husiliess enterprises of oil( coiltlly ollll solire't's within the othluter country (arts. III, IV. and V). (3) lReduction ill tlt, Unitetd Sltales ratel4 of tax tt tilte source, from i(ili's of dividends moving froni the I IUitted 15 30I Ito jeri'lnt ill the Stalv's to tli I Tlnitedt Kinlgldollm stid, cilnespolldilngly, conltinuliane of i1.1dl adolthe existing lritish systemlll of exIlntlion front ileo Ilt%. as' (if dlViifroill il' Iiligdomi sulrtax, i lltlite of lionl txelieiptton I movilg fromt tle Unitedl Ikingdhlomi toI lhe IUnited Slliat dedld (art. VI). (4) I0xemltionl front taxation of (ua) interest, (b) ro.lties, (e) (yvoenltil salaries, (d) amtllitit* snd pensions, aind (r) earned inlcolmle urces it olne cOullntry, b)y rrsiuellsn, or corjorlc i0l1s. Of derived from lilr tle othir country not engalged in traid or hiusiluemm in the foWier country (arts. VII, Vill, IX, X, XI, land XII). (Ai) (0ontillulntioll alld expllmniol by the lliji.te. Stell.t" of tlhe credit lllit'ed Kingdom of the for foreign inicomiei tainxe, and Udopition by tle principle of credit, for tinitt'd Shtues income ta1x (art. XIII).

    smidents of the United Kingdom, (0) Alleviation, with rects! o, reto of taxation by the Unit4ed Stats of noiresident, alieus and foreign corlmirstioll il tile ase of certain taxes alleged to have an extratertorial character (arts. XIV, XV, and XVI).

    (7) SeLdemola, of pedihng casms affecting residents of the United Kingdom or UJnikiti Ilingdom corporattolus anid involving the taxation
    of capital gains and the loplication of principles to which (6), above, rlstat (art. XVlI). (8) Exomntion, upon certain conditions, of profe.mrs or teachers anid Autudnts or 1)ulsntne apprentices from taxes on their remuneration

    or on payments made to them (arts. XVIII and X"X).

    the prevention of evision of talxatlion imposed by the respective countries (art. XX). (10) Extonsion of the principle, expressed in many treaties of the States, respecting national treatment of resident alien in tX MUi matters with a view to equality of taxation (art. XXI). (1. IN) 57

    (9) Cmiooprtion between tile conitractinlg countries with a view U)

    4'

    CONVENTION WITH Rg8PRCT TO TAXES ON IN'O&III

    (11) IAying tie ground work for application of thle provisions of the conventtioni to colonies or other territories which imnposo taxes substantially similar to the taxes to which the convention relates (art. XXII). extent, to which the convention may modify tile existing revellue laws of tile United States: Bly article 1, the convention is made applicable. in respect of the United S"tlles, only to Federal ilncomte toxe,, including surtaxes and l. oxea,-prollts taxts. Consequently. the conventionn os not apply to taxes imtposed by the several Stati%of tile Unittd States, with one exception. namely, article XXI, to which further reference is made hereinafter. By article V1 the 30-percent rate of United States tax generally /ppi.ed with respect to nonresident aliens andI nonresident foreign corporations, and the higher rates of normal tax and surtax when applicable to such aliens, are reduced to 15 plr)I't'l, in the case of dividends in general, or to 5 pIercetnt in the ease of dividends paid by a United States domestic suhb:idiary corporation to its British parent corporation. A like reduction to 15f percent is applied, under article iX, to ross mineral royalties and to gros real-property rentals dorved from United States sources by residents of tile United Kipsdom, such reduced rate being considered substantially equivalent to rentals flowing from the United King. the rate of 50 percent upon onet dom to the United States. The United Kingdlom, in effect, imposes no tax oil dividends as such, but( does impose surtax with respect to dividndeas under the proposed convention dividends moving to the

    Soine of tile significant provisions of the convention mtay be explaiLne further ais follows, particularly with a view to indicating the'

    from sources within tile Ufnlited States and, as such, taxable by the .United States even though the recipient of such dividends and the foreign corporation paying them are not resident in the United States. The unitedd Kingdom law does not contain any corresponding pro-

    UniMe States from the United Kingdom will thus be exempt from United Kingdom standard tax and surtax. ay articles %ii and VIII interest and royalties are wholly exempt upon a reciprocal basis. Accordingly. interest anI royalties will move to the Unitud State, from the United Kingdom free from United King. dom tax iothienvii, generally imposed at thle rate of 50 percent) and from the United Statte to the United Kingdom free from United Stats tax (otherwise generally imposed at the rate of 30 percent). By article XI the United States agrees to continue, during the lifetime of the convention, its existing system of credit for foreign tax insofar as credit for United Kingdom income tax is concerned, and to liberalize such system so as to allow credit for United Kingdom tax on eGining out of which dividends are paid to United States shareholders Of United Kingdom corporations. The United Kinldom, on the other hand, agree to adopt thie system of credit for United States tax Inlosed upon income derived fromn Uniteul States sources by residents oleo U11"'dl Kingdom or by United Kingdom corporations. It has long been a provision of United Statis revenue laws that, upon certain conditions, dividends paid by a foreign corporation to nonresident aliens or foreigp corporations are to be regarded as income

    vision. That' provision of the United States revenue laws has been the object of frequent objections, it being charged that such a provision has an extraterritorial character. The existing income-tax
    . (2iT6)

    CONVENTION WITH I8PICCT TO TAX58 ON INCOME

    IcovIentionl with (Iatla makes that prOVl~l~l illappli11lhIe to resi. dents of Can(lada. Article XV of the convention with the United Kingdom makes the provisionl inappjlicable to residlints of the United Ki.41 0 11.

    0.

    ,S iiilurly, article XVI miakis the .lsoallholdig-comlpay prove. sills of tih' nited(l States revenue laws inialplical)Ie to Uniteul K!ilgdiin corporaltis which tire controlled lby resitlets of the United Kingduloim. It this respect article XVI isidllentical in principle with arlicle XII1 of the iticoine-tax convention between the I 1iliteil States II1mi4 ( Catidih (S. Executive It. 77th t'oug., 2d seas., cOIltallll a detailed statement, co'onernilig art. XIII of the convention with Canada), which nmikes the iersolal.holdilg-eonpaly provisiolln illlpplicahlQ to ('andian corporations. Article X1I of the convention with the United Kingdonl contains safeguards against the exemption being used as1; a malliS of tax avoidIance. Artiele XVII is identical inlprinciple with art ile XIV of tile incomlle. tax convention with ('tam1ia. Under article XIV of that convention the sethtlment of casts involving ('anadians andl Ciandian corpora. tions with respect to taxable years begginning prior to 1036, and gemtrally involving the taxation of )ita] gains frint sources within thie ).l U lnitedl States, has been facilitated. Wlhilo the number of similar cases involving United Kingdom residents anld United Kingdom corlorations is lbelieved to he small, it isconsidered dtesirable to extelnl to the United Kingdomn the saino revisionss ii this respect ,i fare found in the existing conIvenlioll with (C"anada. Article XX marks atn important step in the direction of fiscal cooj)eration between the United State. anid the United Kingdomn in the lield of income taxation. Under this article there will be ohtained b)y the UTnited States, upoll a reciprocal basis, information with respect to income derived by residents of the United States fromn sources in the United Kingdom, as well as information in cases of specific taxpayers with respect to whom information is available to the revenue authorities of the United Kingdom. Tile principle here alopted materially complements the ntitted States domestic system of information at the source and, it is anticipated, will be of considerable utility in the administration of United States revenue laws, even though the British system of information at source is less comprehensive than that employed by the United States. Article XXI gives expression to principles, long recognized in practice in the Uniited States and found in many commercial or gonoral-relations treaties of tile United States, relating to equality of taxation in the United States as between United States citizens residing in the United states and aliens resident in the United States. Article XXI effects no change in existing United States revenue laws. Article XXII is an innovation so far as tax conventions of the United Statws are concerned. It. lays the basis for application of the convention to colonies, overseas territories, and certain other areas over which authority is exorcised by the respective Governments. It is anticipated that many of the British colonies or other territories, United Kingdom, will elect in the course of time, to come within the scope of tile convention. this, it is expected, will have the effect of providing a solution to problems in the field of income taxation which may exist between the United States and such colonies or other territories, and of stimulating the ,economic ties between the United
    'a.,).') " T

    which have tax systems closely analogous to that existina inthe

    (I

    CONVtNTION WITH RIWIAJiPC

    TO TAXWI 014 INCOM11

    8tatt* and suell areas. Inasluch as thle United Sta1te rvenue laws do 0ot, ext'gid to overseas 'osasssioi|s, such so l1uorto ltito, thiose0 Posawhios will hoe free, to elect to eolno within tCli srope of the convolition. Mi the~v te lit,.
    Artit'e XXI II provides for ratification and for the exlhanoe of instrunoents of rettilleation and rtiVat'li'iv Cheo detective datA' of the convonltioi. uniter article XXIII the convention will btcoome effec. tivo with rolpedt to taxableyeamr beginning on or after elanuary 1, 1045, w the United States, and, as to the united Kingdom, with to

    respect to .?iir of assessment beginning on or after Apiil 0. 1947. Thl Iprovisions of article V1, relatingm to dividends, are n#ade subject to tl4rmiilation, without. affecting tho remaining lrovitilon of the conventIion, at tCleo end of a 2-year period or thereafter by the giving of a notice along the lines' of that preicribod in article XXIV. CONVENTION RIlATIlM TO TAX%$ ON 2STATS

    10411, so that as to the tfnited States thlo convention may bIe terminated with respect to taxublo yeasm beginning on or after January 1, 1947, and iw to the unitedd Kingdom the conventionsn may be terminated with

    restlpt, to years of aseissent beginning in accordance with the coro retIponding l1ritish tax systeln. it is provided in article XXIV that bmy ter. Ciow clonvenitionl shall tiontihuoe In effett inidefinlitely, b1111ill mlinated by thle giving of a noticeo for t-liat purpxmio by either GovernIlment to thei othler (lovernilnot. on or before June :0 in ainy year afterr

    otherwise wohld rtsult from the application to the name totate of both

    The estate-tax convention with the United Kingdom, like the estate tax aind snee.msion duty convention of June 8, 1944, with Canada (HI. Vi.xteiutivo (0,78th (long., 2d kw.), has for its principal purpose thie elimination, insofar as practicable, of double taxation which

    Federal etoate taxes and British estate duties. The convention also
    As in the case of the convention with Canada, the oon-"ention with the United Kingdom exteinld in its application, insofar as the United States is concerned, only to estate taxes imposed by the Federal Government. The imposition and collection of inheritance or estate taxes by States or Territories of the United State or by the District

    contains provisions relating to mutual administrative assistance

    through.the exchange of information, with a view to discouraging tax oeasion.

    apply to United Kingdom legacy or succession duties. In the technical disussions which resulted in the formulation of the convention, consideration was given to the basic differences between the American and British systems of taxation affecting the

    of Columbia are not restricted by the convention. As to the United Kinldom the convention is applicable to the estate duty but does not

    Governments to reach a satisfactory understanding with respect to a number of important matters of principle.

    settlement of estates. The two systems were found to be sufficiently comparable to make it possible for the taxing authorities of the two

    The provisions of the convention are contained in I articles. The following explanations of the provisions may be useful (the word "convention,' unless otherwise indicated, is here used in reference to the convention with the United Kingdom): (,.t)7-I)

    CONVENTION WITH RJAPACT TO TAXUS ON INCOME

    Article I specifies the taxes to which the convention applies. This is analogous to article I of the convention of 1944 with Canada. The taxes are the Federal estate tax imposed by the United States and the United Kingdom estate duty imposed in Great Britain. Article ItI contains definitions of terms found in the convention. It corresponds, in general, to article XIII of the convention of 1944 with Canada. Article 111 contains rules, for the purposes of the operation of the convention, relatinig to the situs of rights and interests forming part of an estate to which the convention may be applicable. This article corresponds 'i geral, to articles II, III, and IV of the convention of 1944 with Cntiada. The treatment is considerably different in a number of respects, but the object is essentially the satnm in that the Frovisions are designed mainly to establish a greater degree of uniformI'ty in aidnisteruing the applicable revenue laws and to facilitate, upon a reasonable basis the settlement of estates. Articles IV, V, and VI contain fundamental provisions relating to the bases upon which estate taxes shall be computed and upon which relief from double taxation shall be accorded. The plan which would be made eftective by these provisions is consistent with the principles expresoed in existing tax conventions of the United States. The provisions in articles IV, V, and VI are analogous to but in some respl)ts shnpler tian, provisions in articles V and VI of the convention of 1944 with Canada. Article VII contains provisions relating to the exchange of information, leading to administrative cooperation in preventting fiscal Canada, except that paragraph (2) of article VII (containing certain definitions) of thp convention with the United Kingdom is ainalogous to paragraph I of article XIII of the convention with Canada. The provisions of article VIIJ do not correspond to any provisions of existuig tax conventions of the United States. Uke article XXII of the income-tax convention with the United Kingdom, it lays the basis for application of the convention to colonies, overseas territories, and certain other areas over which authority is exercised by the respective Governments. The statements which have been made hereinbefore concerning article XXII of the income-tax convention are applicable, in a general way, to article VIII of the estate-tax convention. Article IX, which is to be considered in conjunction with article VIII, represents a formula proposed by the British authorities, in accordance with British constitutional procedure, with a view to making the convention applicable in respect of Norther Ireland. Article X provides' for ratification and prescribes that the convention shall come nto force on the date of the exchange of instruments of ratification, to be effective only (1) as to estates of porsoiis dying on or after that date, and (2)at the option of the persona representative, upon appropriate conditions, as to the estate of any person dying before that date and after December 81, 1944 . It is provided in article XI that the convention shall remain in force not less than 8 years, but may be terminated at the end of that 3-year period or at any time thereafter by the giving of a notice for that purpose by either Government to the other Government, the (2579)

    evasion. It corresponds to article VII of the convention of 1944 with

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    termination to be effective as to the estates of persons dying on or after the date specified in the notice, such date than 60 das after the date of the notice, or, if no date ofbeing not lessbe specitermination ied, the termnation is to be effective as to the estates of persons dying on or after the sixtieth day after the date of the notice. The fundamental provisions of the convention may be summarized as follows: (1) The uniform rules relating to the situs in article III. The determination of situs of property, as set forth with respect to certain types of property is necessary for the purposes of the convention, first, in order to ascertain the property be included for computation if jurisdiction be-based on that mayproperty within tax situs of the country, and, second, in order to ascertain the credit for estate taxes attributable to property situated as prescribed in the credit For example, a simple rule for the determination of the situs ofarticle. of corporate stock is provided, namely, that the situs shall be shares where the suing corporation was created or organized. This uniform rule is adopted by the United Kingdom in place of a complexity of rules now applicable in such cases. This uniform rule is of long stand. mg in the United States, but tinder the convention one United States the relinquishes another and inconsistent rule, namely, that the situs of corporate stock is where the stock certificate is located. (2) The credit provisions, as set forth in article V, whereby the country of the decedent's domicile, or the country of the decedent's citizenship in the case of the United States, allows a credit against its tax for the tax paid the other country with respect to property which otherwise would be subjected to taxation by both countries. The credit authorized by the convention is subordinated effect upon the credit against the Federal estate tax to and has no authorized by section 813 (b) of the Internal Revenue Code for inheritance and estate taxes paid to the States, Territories, or possessions of the Umted States, or to the District of Columbia. Respectfully submitted. E. R. STswrrlus, Jr. (Enclosures: (1) Convention between the United States United Kingdom, signed April 16, 1945, relating to taxes on and the income; (2) convention between the United States and the United Kingdom signed April 16, 1945, relating to taxes on the estates of deceased persons.)

    [Text of convention]

    (2680)

    Senate Committee Hearings on Basic Convention


    Niaty 2:3 and June 1:3, 1945

    79th Congress, 1st Session Subcommittee of the Senate Committee on Foreign Relations

    78095 0--62-vol. 29(--69

    (2o581)

    CONVENTIONS WITH GREAT BRITAIN AND NORTHERN IRELAND RESPECTING INCOME AND ESTATE TAXES

    HEARING
    11WFOIUE A

    SUBCOMMITTEE OF THE COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE


    SEA' EN'I'Y-NINTiI CONGIRESS
    FIRST SHNSWIN
    ON

    Executive D,79th Congress, hst Session


    A CONVENTION BETWEEN TilHE, UNITEl) s'r.A.TF8 OF AMIUICA AND.) THlE UNITE!) KIN(DOM 0(1F"(IEA'T ItRITAIN AND NORTHEIIN IIIKI.dANI),. OIt Tie AVOIDIANCE O1F I0'111IE 4 TAXATION ANm) Till.: I'IVENTIIIN 1. F,ISCAIL EVASION WIT! IIK l41'1I' TO TAXI8 ON INCOME. 8O1INEI) AT WA$1IINUTON ON APIIll10, 11145 AND

    Executive E, 79th Congress, hat Session


    A CONVENTION IIETWEEN Till- I'NITED STATE$ 01F AMEI.IICA AND TIlE VNITrI)- KINODOM OF (10.:AW1 III{I'rAIN AND) NOITHtRN I1IFI.AND,. FoIt TiE AVOIDANCE. OF11010.] TAXATION AND) Tll NREVENTION()0"F F1ISCAI, EVAXl40N wiritItIsPECTr T TAXES~ ON TIlE ESTATE 0F IE('E.A81,I) PERSONS, ItUNEDI) AT WARIIINtTON ON APRIL. 10, 1945 MAY .. AND .hI'NE 3 Printed for tho 11 t luse('of it Clttte , 1145

    iut on Foregn Igtnhetflowt

    Uwn'ri:I STATEIS GOVERNMENT RINTING OFFICE


    WAMIINOTON : 1945

    (2583)

    COMMITTEE ON FOREIGN RELATIONS


    TOM CONNAILLY. Tlou, (Utriww HIRAM W. JOHNSON. rwallona WALTER (t-OKO1N, (leoorla ROBERT F. WAGNER, New York ARTHUR ('APPER, anams ROBERT M. LA FOLL&TTE, Ji., Wisconsn l.BF.Rqr D).THOMAS, 1tah ARTHUR ff. VANDENDEIMI, Michilan JAME S F. MURRAY. Montana CLAUT)E PEPPER, Florida WALLACE H1. WHITE, JI., Muim THEOD)ORE FRANCIS (JR0RN, Rhode Island HENRIK 8HIPOTEAI), Mlnsowa ALDEN W. BARKLEY, Kentucky WARREN R. AUSTIN, Vemont STYLES BRII)(1K8 New Hamps'huire JOREPH F. (IUFFEY, Pennsyivanla CARTER (GLASS, Virginia ALEXANDFR WILEY, Wlsaonln JAMES M. TUNNELL, Ielaware ('ARL A.HATCH, New Mfoico LISTER HILL, Alasams SCOTT W. LU('AS, llihola Rount V.SHila, ('hkv Auscoawwugu OARL A. BATCH #COTT W. LUCAS if ALUMN W. DARELZY, Oslrmea ROBDRT M. LA FOLLITTE, JA. WALLACI H. WBITE, JR.

    (9584)

    CONTENTS
    Statemnn~,t of-Pao

    Text of Executive D ---------------------------------------------Text of Executive E .. ..... ....... ...... ....... ....... ...... Letter frout the Chief of Staff of the Joint ('omnittee oiu Internal Revenue Taxation relative to Executive E --.----------------------------Memorandum relative to ExeulI'e 1)-... --- . ......................

    stau Co

    ('rrull, Mitchell B Cole, Franklin... King. EWu~ P. .. Phillis Perey W....4

    38, M

    F...

    60

    I 14

    29 3

    (2585)

    ('CINVE;NTIONS WITHl'11U!"A'l' I TIlIIAIN AiND NORTIIEIIN IRIILA NDI IIEIPEO'TIN41 INC('O1ME ANDI ESTATE TAXES
    WIDNESDAY. MAY 23, 1904 (COiMMITI"IF;9
    OiN I"mltlliN

    IRF;.'lAlTONS

    Theu slibrom,llmll lil

    II,'1. I t-,,,

    slilalill 1 ,-'1l, fit 111:31 n . IIl., ill til i


    illt liig clum ir-

    1 ,tolall iiit'e' room1. Ilt- (.'1)litlI, ,O,,liituir ,11.' W . I oilerll,


    I'l'"' a ' 1111d While. Th.e .411 1',v ll" r1 I ,I'rula. wt llmil It I ' l ha

    ,irliu,

    'I,

    IIluat elh, 1.11

    IIt't .', lh'


    ll'li -1Iutlh

    l9t't' lit c.1ns4ide,,r I' l

    911naid Noa'lhaarit Ia ( 'tgres-s, firt s.'ssitna, co'in.'t iot with ( r'at Briiii lIr.'hmial with at'l-se'It lto tluxes (ll iI'llrll', 11iatd 1)4"'Neivhtie E", 'sevelityll 'a ll ritlill114 ial'lli 16ia 1( 'Col s, first '4cI.i jloVlll l i h l'eat ag'.' l on 4 I '.1( if ila .'s . 'ih Nort.Ii'hi'l Iri,011hlu ,111111 I','.lt't't to 9IIXI'S h,t v.,lllllillet,, pllr elld'lpe'sollsl . ts collilllillilng I0NO\'l'liive K' 11 4ll S (lEXI,'ruliv,' 1) iaau te',,rieI

    veitrll s. t' I1).

    hlho , 'ehlltiv,, 11 lilt Iwo ,t,1 I,,llioltl'1 11$ 1149 wm:)

    [Text of

    ( IP'esidential nuesmMigtes and coniventions, in). 1-22]

    (2,5L87)

    INCOME AND ESTATE TAX

    CONVENTIONNS
    VNItpu

    NIIUMOlRANaI'1 ! l'A-M I' llN1i lt TIlK ('OMMITYKIC " FOlRIIOIN ittIATIoIIN, ON STATE4N 8MATEh lJtbATIVI TO C "NVICATION .( WTrU liAllJ (kM'A'r NORT1u634.4 lI4*M.A.141 WIT1H RNMdi'E('TO7 TAXIRl4 ON? IN('UME 4'PMMINTA INi'llUl'411%kis hkrilll ('1NMVENTI(ON
    First fib*ebgello

    ANO

    I1137. ts hirol'lltinth'dil M seiouikl 211 iet)tif the iiihrrial lRevvihtue Code. s11, provisiollpio tlt'l Tax vaiwiou aml Avoidalict " I.A r: , t d rinr-lily llifiei Thit. pnovikiii n'itirin, a timi iii. Ialitia iillivilhiatl lol t'ngltigt-tl ill trade for hwui. It'll Iles. witlhill flie 'llihell 8tiaue ullJ w1l1s, grtS.S illii, wl1 111111 Jlh111 t, dliviuleids, a114J a relits 6 allire. thall $1.itI, to la y the fill irrmal atil mirtax till such iliL'Uiole ssm allowal 14delt'l ielsi. This in'isiowi adolplueui Io io'ev'l, liouarsidauit aliclis Sa t inJlelllilljg former t'itixtein of tille Uite'd Hlaths, iuow citizells tio other coilitriesi lit who tlea'ri'eia large alatiotlat of illtolue aoil t1ourcel, withill the 1 liited 8taltt either flirtol,v or tirmugh ani Ataterictcta corlorations to lly suhlstaialalla less lFedehral hni'iallt tIax that tll-ey Isaid iider prior rtwi'ialae' act$. The re'alty v1 article% VI i 'a V II modilits the proiahisi uf the itmeime Act fit 1937. Noauresihleit alitaips residing in Uratl fIritaini saidl who are uil tiotligged lel tratd lo lfriaisiems withiii thil 1'ailled States will pity ill ieu if tile reglhr itorilal auid xurltaxe- which ranige trol 23 ti 94 l'recii, witIfi anit over-all Rhiiiit of 11i1 'w'rcull, aitax a^ follows:
    Aerl lit

    011 dfiV'II'II- 4 ri-tViVI'i.l 1i.l... ' itj i)il itet'.n-rviveel by iat rideiht oftI het I'iiite

    Iltoiillt

    '... fitr

    I114teu,11.tis.

    riilgiht, t rittle-Itiirks, 1111 like lihe

    Kilgdohill"

    Nto tax.
    -

    15 Ilrcelit.

    .. .

    Iloy.-llii' till laitaierilss .I.A. h'euiiouili' 111d lit' aitanuiiill fl ru ae'r ItifirsI tibjraieon

    No tax. lie l t'revit.

    o lax.

    items 14Ih Siweldishmvoliv'latitai,liersiiaimmiil PtNOlil)l froml froaamunited thStates; tax States. rect'ilit'ittfi uch ioi.' i lhhtetisn t'uilit'ivltiilis .re tan-exiemptentetiil e Uuited laxthe Unidier of i rn.allh.' teijalhli'aiiit.d States if iallil divihh'iidl witiai are rtihijete' vliitiol u iht C8it11h1i aill divhidlnds, ilinterel, ronyli his, naiilals, taid Ihe4 like delrivted ha fromua laiied Stateh. souarv.es by ri.tidtnits of ('aiadat, utit t'lt ted lit trade or eikg hliaisiau within aihll,'ii.I4' State art,,i . :aject'r it tax illxa redualilr tie rate of 15 's, .. itehirilau' l lhtnitru' iiasofuir tsIliaestlieiait liclOllt' i:4 L'tial'erled. lwrceaiii. ilu'twet'11i'h ll-p14' ilti't ol. ilvt'iltion ndiil those Itiw ill force a%hiidillited above are-. (a) Ixl'teiljutloti apple' Io llit'rtlrst for the4' first tlime.; stiff tiM ithe exeiptuini with resotl't' to itiletst aittl roivallis ail the rtttii'll41 mite of tax with n'slo''t iot ivihidluds. iiaatural rNot'sire rovall ei, auin real properly rteitals tirt iithle dhlieiadait uponi thie ridellt of tha t'liitled l(iiuigdloa IOl, having a litrnlaet esIablishiait lt withita the It hilied Hatea . It Should ' tIs, lerved that these plrolote't lrrovisiotis anr reciprocal in character. aIlider l'liite'd hiiigdoiai iiii'tliaiie'ltx law the olhy tax tallll.im'Id !lapol dlivithendu trout t'liitetl Kiaagduiusources it lthe siirriax. rite standard rate of tax (ieurrelilly 50 pItre'nit) is tatit liuposl tilddi'tidtnllds. This is dile to the Ilritish iaxtvit'w that. thie slaailard rate' of tax iailuipel Iapoai thill earailigs of thle corporatiii ll1a4'illg the divhideld is. in effect., a tax ailt tl' hare'hhuler astll slie tihle shareholder Iears lh h sauch lax (tactoirdiaig to the IBritishl theIory) a further staitilard rate of tax sihouldl nlot he llaa iWd tapocall the Mllhareholder whieui tlie dividend is paid out. of Ptach earaailigs. The releliitihia by the Uiiited Statesi of theitax oif 1A5 perc'i o divideatils Oil tromt Utuiteti Ntate stu /es to resiutit.ts of (Ireat Blritauta ilt regarded by the r pail

    Tito' proiisioatit of arlie'h, %'1l1 m far as thev relate its Fimalili; arisinig rout piatlilts, t'tiljriglits, traldth.iiarkLs, anid fillt like art ideahli hal ai thpritilple with the pro'ishiis tit art irh. 7 of tihi lax ellaltll tiai Il1W ill foirre with Ii maces iliive thiewl iii '

    i5 littlPltIgiit'll il Inraitleit haisim-i iltw lhiai tlie iTidied l

    ru.ipiitl ntsiilg ili Suetdlai tilidy ti ltii alt tlha rittt' ol It) 1wrttlint If tht'h 1taites. I'aider lite tax ,onil-

    itrilalas&a4 seoil tax burden niiwhat, imcolsideret' hIy theta the salle itittll(aie. i ill It will lit' olmrvted that the I'aited Khiaaglotla waives tle surlax with resplec't. to British tlhividhealda ill tihl, hlallds ut 'itpd Stateiasharehuldenr of l4ritith corporatiotis.
    ItNUMkMaT AND INltUtRatlAl0 RIOYALTIESI

    The pro'viiount of article VII aad article VIII are rciprocal. Thuit, such items flowhia from flal- I'iited S4tates to the 'Uniited Kingdomn will be exempt from the tt ntited tate's 30-te'rei't tax alld surtarx where applicable. Reciprocally, such (2589)

    24
    the I'lited

    INCOME AND FATATU TAX CONVENTION$

    itn1ems no% (rinll tIh' 1ilid Kingdom Ito the I'niled $llaie will 1' ,exeitlfront llg h Ie't the iilgdoln rate of 50 lerelnlt, allied sirlax where allpliahllh. '111u1, olel'ed at lite sotilTI' at ti'e ate of 30 percent 'rcltofore llnited 1States rt'Vtlille h pirodluced an will be rediucd. Iloutiver, Iolr elttilg ,i-tir reiduetioei there will iem ii, ileirtiase of 100) lvrevit In thlhe grei.' iner'ole of Ih eslii e laxlr)e'rsn arising from
    su11cii ilh'l.ie,.

    t abseile tit the treatly will bp rennlitted l) lhle I'nited statesti, las nlhililill tax IhI iile. thils inreasingithe I'ilted State's tax 1)"-.'. Inithr iexisinig U'litled Stateis tax law. onlily (hle uelt ainetiet of lie inlterest and royalfies after lte.' tledt loi of thee lIlrtisl tax fills into I'neited States grL'. illlelioee.
    IIN'RAI. R4iTALTI,4 AND RE:Vl. PROPERTY RhiNTA.14

    This iS

    of 44u ihe ill fart int 0ti-li4i11lf Of $tii iwonlle withheldl iI

    |'iher tfe proplired eiliveinl ion tlipe I'tlivil States rt'e (if tax of 30 percent. withheld ait the' suree, will li redeureeil o IS lplrent. With respect to lUnited Kingdom tax ti correspllonditlg items flowing to thfe invited Stalts it 14ho0uhld be eeerved that little or nin fiatural-resoiire royalties flow fromn the Ioniled Kingdomn to the Unit'id States. Hlowe'ver. with replel fit real.property rentals and the like flowing frills the I'nihted Kingiulln to the IUitled States, lie Ilrilsn ihl standard rate of 50 [wreenl is pioed on the nlet anelelilt oif such rentals. The United States ire rate of 30 jwreent isinilNled Iplin tlip gross amounto such Itent without any t of allowance for deduetlol s. The reductinlons in the United States rate fromn 30 pervent tioI15 rlirent ipon the grss anillollit offthle rentals intended to Co)institutie a is tax leurden ortrrpoliling as tecarly a incay IN'to the lrilish ratle of 50llw'eent pillon the net rentals.
    PKNMieIN1 AND iorlX ANNIITIN8

    exempted Upllon a reciprocal exemption fronm the Untiled States tax of 30 percent and fromn flie Uniteid Kildngdom itax of .50 percent. Hllerle, while a small reuduetion fit revenue will resell from the exenmpthion fretii ('iilled Mtales tax, there illl relilt an increase in Uthited Staits revenues resultling fromt the fact that ilch items flowing from ithe United Kingdonm to the I'inted States tax-free will avoid the necessity of allowing credit against United States tax, thus increasing United State's revelillu to that pxxteln. It is sileinitted that the effect of these exemptions or reductionis in rate of tax, as the case may be does not constitute a tax loophole. The recipient in tlhe United iingdoti of the dividlends, interest, or royallies from tUunited States sources will continue to be subject there to the very hih rates of nitled Kingdom tax. Siuch recipient, it istrue, will pay materially lets United States tax on such items because of sulch exemption or reduction in rate, and hence will Pay materially higher Vnited Kingdom tax on such items. Since he pays no United Bstrte tax or sharply reduced United States tax on these items he 'will be subject to United Kingdom tax upon a sharply increased basis, and not merely upon the net amount of the iltems after deduction for United States tax otherwise imposed in thie absencem of the convent ion. Conversely, the United State resident recipient of such income from United Kingdom suurcm will have no surtax imposed upon his dividends and will he exempt frNm both the standard rate and the surtax of the United Kingdom with respect to his interest and royalties front nilted Kingdom sources; and, hence, will have a larger gross income for U'nited States tax purposes will, no credits against his United States tax. The net effect of these provisions may be summarized by stating that articles VI, VIIVIII, and XII, while making a sharply different allocation of the aggregite tax in any given case between the two Governments, leave an aggregate tax to be paid by the taxpayer to the two Governments substantially unchanged. Titus, a nonresident allen, a resident of the United Kingdom, arriving, ay, $100,000 in dividends from United States sources, will, tinder the convention, pay $15,000 to the United States instead of about $70,000 under existing law. However, the United Kingdom, Instead of taxing him upon 830,000 ($100,000 less $70,000) will subject him to tax upon approximately $140,000, I. e., 885,000 plus $15,000 phis $40,000 (the United States chapter 1 tax on the corporation earnings) and will then allow him a credit for about $18,000 plus $40,000, the United States corporate tax upon $100,000. It should also be observed that the United States will obtain material advantage from disclosure of information at the source to be obtained from the United Kingdom, a concession which is rendered possible only because of those provisions 'f the convention relating to rates of taxation. (259()O)

    The provisions of article XII relating to private pensions and life annuities are

    IN((IMK AND ISTATS TAX CONVRNTIONI icitiel5t Under article XV if the tresty, dividends received by an individual not a or revi(ient of the Untlled States from a British corporation are exempt front tax, even though the British corporation derives the greater part of Its Income from United Btakt sources. Anssuer to second objection This arltil owe" its existence to t.he fact that the United Mtatee, unlike the IInited Kingdom, holds that dividends paid by a foreign (as to the United States) corporation may constitute i'cone from sources within the l'nitded State.s if 50 percent or more of the groes income of such corlrtratlon is derived from sources within the :nited States (see. 119 (a) (2) (Ii), internal RIevenue Code.) Thud, if a United Kingdom corporation derives business or investment income front sources within the United Stakt to the extent of such percentage the dividends paid by such corporation t4 its shareholders living In the Unlted Kingdom are, to that extent, Income from sources within the IVnlted States and hence would be theoretically taxable in the hands of such resident of the United Kingdonm. The Ultited Kintgdom duoes not undertake to asmsrt Its tax against the dividends 1(1d a United Staltes crporation deriving Income froth sources within the by united Kingdom. The cited United States statutory provision have beem. productive of sharp criticismn as constituting extraterritorial taxation which is a. tye of provision inviting discriminatory legislation against the U'nited States by other countries. The purpose of the article is, therefore to reciprocate with tile United Kingdom as to taxation of dividends paid by a foreign corporation. cable for the In practice it is recognized that only in rare instances is it Irat, Blureau to ascertain whether a British corporation derivesImore than the requisite percentage of its grosw income froth United State sources so as to constitute its Interest or Its dividends Income front sources within the United Mtates. The situation is, therefore, highly thetret Wilsl and hei ce ti v arti'he Ixe regar'itl as having ainiy effect in terms of revenumle other than in those inislanlces In which there ii encountered a United KingJomn subsidiary corporation carrying ome practically all Its activitis, and having Its fiscal office., In the United States. Third objection Article XVI exempts a Pritimh corporation from United States tax on accumuslaed profits. provided residents of Biritain control over 50 percent of its stock. Thus, a lBritih corporation doing business in the United States could accumulate earnings in tile United States without being subject to section 102. This Wls eim might be true of American shareholders who represent a minority interest In * Brtish corporation deriving more than 50 percent of It. incoeon from United tate sources. 4sur to third objetion Article XVI provides that a corporation organized under the laws of the United Kingdom shall not be subject to the tax imposed by (a) section 102 and (b) section 500 of the Internal Revenue Code If such corporation is controlled directly or Indirectly by alien residents of the United Kingdom. Hence the article cannot be employed by United State citizens or residents lit an effort to avoid the impolstion of surtax. Thus, if two United States citizens undertake to create a United Kingdom corporation to avoid surtax, it is aapparent front the text of the article that they must first surrender control over their capital into the hands of allen revidents of the United Kingdom. It is suggested that a reasonable men, they will not do sto in order to avoid tax upon income arising from such capital. In addition, United Kingdom law provides for the Imposition of surtax on companies under the control of not more than five persons, such provisiopa being In akin to section 5W0 its terms and objectives. Section 22, Finance Act of 1921, as amended by various subseqlent finance sets. Under such provisions a reasonable part. of the income of the company is deemed to have been distributed and (thusIs subject to sum tax in the hands of the shareholders. Here again the United Kingdom does not impose tax upon the undistributed! profits or surplus of a United States corporation. Hence the article is intended to establish a reciprocity in this regard as between the two countries Fourth oibjection capitala gains) United States or not performing personal services within the United Statm is: not subject to the United States capital-gains tax. Thus refugees who am not residents of the United States have bwen making large sums of money trading on
    &rropd olVertion

    A nonresident alien Individual not engaged in trade or business within the.

    (2591)

    20

    INCOME AND ESATh TAX CONVENTIONS

    otur slotwk exehlangis. The coliventiol tier only continues this existing practice btut etnlarges the exelnlltioll to a)ply to anly British residents who doe not have a permanent estalllslthntet In the I'nlited States. A nawer to fourth bhjrction In illlmosittg 111)t111 lonrceid, llt aliens and foreign eorlporations a flat rate of tax ijolltt the gross attiolltl of invt-sltntet! iitcoltt from sources within the U'nited State's the IVtliI-nt Act of 111301 exertnwied front U'nited States tax capital gains derived by sctih taxpayers front till sale of securities and the like in lite United States If the taxpayer was not engaged tin trade or business within the United States. The term "engaged ill tralte or business" was specilically defined in section 211 (itb)of that art to exclude from its seope the carrying on of transact ions in stocks, sectirities, or contntolities Ithrough a cotitttisslion agent or broker. Thus, such alivens could carry ott transactions upon our domestic security exchanges through tile foreign brokerage house or directly through a domestic house without Weing subject to United States tax upon ithe gains derived from such transactions. Tile principles of taxation, thus adopted, have been carried Into existing law as reflected in ithe Internal IRevenue Code. The fundamental reasons for the adoption of such princilples of taxation are set forth in part as follows in Senate Rieport. No. 2156, Seventy-fourth congresss , second ,sion, otil tle reventtue hill of 1930.
    "NONRICOIDUNT AIAlNS, AND FORIClIN CORPORATIONS

    Your contitlt tee concurs int tliet main in the substantial changes made by the House bill it our present system of taxing nonresident aliens and foreign corporations. It setwels obvious that a surtax ott distributed corporate profits is not well adapted ito the taxation of a foreign corporation with foreign shareholders itt respct of its Ineone front sources within tihe U'nited States. In-section 211 (a) it Is pro!mmedIthat thlie tax otn a itonresidentt alitn not. eutgaged lit a trade or business In tile Inited state and InOt ftaving ait ofiee or place of business therein, shall be at tile rate of 10 percet.t ott his income from interest., dividends, rents, wages, and salaries, and other fixed atld deterntittable income, with 1no allowance for the deductions from gross income and credits against net income allowed to In. dividuals sobject to normal tax attd sturtax oil net Intcotme. Your committee recommends, however, an attendinent fixing the rate of 6 percent in the case of nonresident alien presidents of contiguous countries. There is some precedent for sutch difference In treat ment of residents of contiguous countries in rior revenue acts. It is believed to be Justified at this time by the relatively low rates of tax impos.-ed by such countries oon income flowing therefrom to resi. dents of the Utnited States. This flat. tax (ii tile usual ca&e) is collected at the source bv withholding as provided for in section 1.13. 18tich a nonresidctnt alien will not "be s.,,lject to thlV tax otl capital gains, including so-called gains front hedging transh..tions, as at present, it haavIng been found adnitistratively illtposible effectually to collect this latter tax. It is believed this exemption from tax will result itt considerable additional revenue from the transfer taxes and from the inucotie tax in the case of persons carrying ott thie brokerage business. The principal increase in reventie will result, however, front withholding tax ott dividends heretofore not required. "Your committee believes that the proposed revision of our system of taxing nonresident aliens and foreign corporations will be productive of substantial amounts of additional revenue, since it replaces a theoretical system Impractical of administration in a great number of cases." The liasic reasons underlying impracticability of taxation of capital gains of nonresident aliens are (a) lack of Jurisdiction over such persons, which fact no draftsmainhip can overcome, and (b) Imossibility of identification of the alien with his dlomest ic security transactions. The three tax conventions to % the United States is now a paity (tlose with hich Canada, Sweden, and France), contain articles under %i the nonresident alien hich or corporation of these countries is exempt front tax upon capital gains on transactions carried on in this country, if they have no permanent establishment within the United states. lit general, no other coumttry in tile world imposes tax upon capital gains and, hence, tax conventions u ith other countries necessarily reflect the desire of those foreign countries to make such principle reciprocal by providing for exenmption of such gains from United States tax. In providing f-or sctch exemption it has been the unvarying experience that foreign countries are

    (2502)

    INCOME AND ESTATE TAX CONVENTIONS

    27

    it once or nonexistence of the peritmanent estal)ishmhent i%hill t lie I('tited States as the tesl iiluether the alien should or hlloild not be subject to United States tax on capital gaits. The diflereuces ill the area of tax liability between tihe concept "enlgaged Il trade or I)uNilIMAS" au(d the concept. of "pernianett establishment" iN largely I heoret eal. Such difference play be illustrated 1y a itonres-ident alien, a resident of the United Kitndgoin %1ho comes it the 'UnitedStates and rentders personal services reason of it It personal therein as all engineer or in other technical capacity. 1i services he is under sectiotl 211 (b)), Internal levenllue ('ode, enaged in trade or within business %% tile unitedd Slates a1d Idhence, under the mide would be technically liable to tax upon capital galls resulting frotu the sale of securities Ill tile Unitedt has States. In tlte sproposed Conventiotn, suisceo le nio pertnanent establishnlettt In Ihe Cnited Staltes, ti, is n1ot subject to 11tiled States tax ont capital gains. There is , no difference, houtever, as a practical matter Ixbeteieen tle two situations, because such ntonresident alien could just as readily have his transactions carried on lis ipreet his idelltificatioll %,ith tlhroutghI his London broker and thus effectively 1United States security transactions. The tax treatment. thlus proposed under article XIV of tile conventionon is not niecessarilh inconsistent %%itb ltie proposition now be-ing conidered of subjecting to United' States tax capital gains realized Ill the Pnited States by a noitresident ha; alien individual bv reason of %%arconditions %1Ilto brought 4is capital to thle Puited States and is aettialhI living there for an indefinite I)crlod of ttile. Tlhe tax situation presented by such aliens finds no parallel in tilted casual biltsness visitor front the United Kingdom, %%ho itn the normal piursult of his business or profession visits the United States for a short period of time. Onte of the basic objectives of tile ('oltvention is to facilitate commercial enterprise between both countries to their iutltual advantage. Obviously tltere are few, if any, British refugees.
    Fifth objection

    fanilliar "ellgaged in m "pleruanlilent establihshlnet," but much less of tile existtltl trade or busilless" tending touiard tihe adoption so 1i0h tile thie concept

    Through article Ill of the Contventtion, a British enterprise mlay -sell its goods in the United States through a commission agent or broker ultlbout being subject to United States tax tlpOtt its business incolie. l. the existing tax conventions between the united States and Canada, France, atd Sweden, a 11ritish enterprise call market its mianuifactured goods or other coitimercial cotmmodities ttpont tile Uilted States market throtght a commnisision agent or broker uithtout incurring any United Slates tax liability upoIn the rebulthig grilts. It uould be subject to tax upon such gains under existing law. fit. ever, it should be emphasized that, reciprocally, a United States enterprise call market its goods iii (reat Blritain through a contminioini agent or broker thierein, but under article Ill of tile convention, vlll not be subject, to Uttited ]%illdgonl tax it upon the resulting gains. Under existing United Knitdgolt tax la%%, ioould be subject to United Ktingdom income tax otl such profits. I lie principle of "permatienti establishtnent" is a basic one contllnot to practically all international tax agreetmtents and has for its basic purpo-se the prottotion of foreign trade without multiple taxationt. it its application to the Untited States it tends to reduce United States revenues to the extetit that. it exempts British etnterprises from United States tax ott their business profits, but. on tile be other hand, it increases United States revenues in that there %\ill no British tax on United States enterprises itarketing their goods Ill Great Britain througha be commission agent and -he like, sitiated therelit. Hence, there %ill no reductioin of United States tax through credit for British taxes u hich %iould othler\%ise be Imposed on the operations of such United States enterprise. That the provision stimulates foreign trade there call be no doubt. The determninatlont of the amount of profits of a foreign enterprise from sources wvithin the United States has always been attended i'lth considerable adininistrative difficulties. It is for this reason that foreign shtippitng enterprises are exempt upoti a reeiproei basis from United States income taxes Uitder provisions of internal revenue law, %hich have beeti itt existence for about 25 years. 'rhe "permanent establishment" principle is merely an expansion of such principle of existing law. With expansion of Un-lted States foreign trade anticipated 1in the postwar period, and with the necessity of imports fromt the United States for reconstruction and
    Answer to fifth objection Under tite proposed convention, in keeping
    itlts corrtsl)Oiidilig provisioins of

    (2593)

    28

    INCOME AND E8TAT1 TAX CONVENTIONS

    like purposs in Great Britain, it would appear that United States' busineems definitely stands to gain from the adoption of the "permanent establishment" principle in the Tax Convention with Great Britain. S&xh objection Under the convention, interest on United States obligations is exempt from tax in the hands of a British resident (not a United States citizen). On the other hand, under the Internal Revenue Code, American citizens and aliens other than those who purchase United States obligations are required to include the interest therefrom in their income subject to United States income tax, Answer to sixh objection Under article VII of the proposed convention, interest (including interest on obligations of the United States) will move from the United States to the United Kingdom free from United States tax. Reciprocally, interest will move to the United States from the United Kingdom. without deduction of the existing tax rate of 50 percent. Under existing United Kingdom law the only part of the interest included in gross income for United States tax purposes Is, of course, the net amount remaining after the deduction of the United Kingdom tax at the source. Under the convention however, the entire amount of the interest is included in the United States tax base thus Increasing the United States revenue and offsetting the reduction In Onited States revenue, resulting from the exemption from United States tax at the 30percent rate. With respect to Government bond interest the United Kingdom exempts United States holders of British Government bonds from United Kingdom income tax. There exist two possible methods of placing both countries upon a reciprocal basis with respect to Government bond interQst, namely, (1)the United Kingdom to subject to its tax interest on British Goveb'hment securities in the hands of United States citizens and residents, thus forcing the United States to allow a credit for such tax; or (2) the United States to exempt from its tax interest on United States Government obligations held by residents of the United Kingdom. The convention adopts the latter alternative. The reciprocal exemption of interest represents but one phase of the general problem of taxation at the source, or taxation at the residence of the recipient of the income which problem figured largely in the discussions. The British position was thatof exemption at source in the case of all investment income. This was finally denied, the United States retaining its tax of 15 percent upon dividends which represent 75 percent of all investment income derived from sources within the United States by nonresident aliens and foreign corporations.

    Seventh objkeion
    Under the convention (art. XXII) either of the contracting parties may, while the present convention continues in force, declare its desire in writing to extend the convention to all or any of its colonies, overseas territories, protectorates or territories in respect of wliich it exercises a mandate, and such convention shall apply to such colony or territory unless the other contracting party objects in writing to such extension. By this article, the convention can be extended without the consent of the Congress or ratification of the Senate, to colonies, territories, or protectorates with low income tax rates, and thus provide a haven for nonresident aliens (including former American citizens) to avoid United States income taxes. Answer to seventh objection The situation thus created is not without parallel in our existing revenue law. A United States citizen residing in a United States possession is not subject to United States tax if substantially all of his income is derived from such United States possessions. Thus, a domestic cooration carrying on its business as an engineering organization, for instance, in the Canal'Zone, is not subject to United States tax at all, notwithstanding the scope of its operations in the zone (sec. 251, Internal Revenue Code). Likewise a domestic corporation carrying on practically all its activities outside the United States, but within the Western Hemisphere,'is exempt from surtax as well as from excess-profits tax (sees. 109 and 727 (g), Internal Revenue Code). The objectives of these provisions is the promotion of United States trade and commerce with foreign countries and our possessions. Similarly, the extension of the proposed convention to British colonies also has for its objective the extetis*on of united States trade in those colonies. These desirable objectives (2594)

    INCOME AND ESTATE TAX CONVENTIONS

    2.9

    proposed convention. The article has no application to Puerto Rico or the Philippines, which are autonomous in matters of revenue. It will similarly have no application to the Canal Zone, Guam, and other po&.cssions, so long as such posmessions continue to impose no income taxation. Likewise, it can have no application to the sovereign members of the British Commonwealth of Nations such as Australia, New Zealand, and South Africa. The convention will not be extended unless both contracting parties agree, and if it appears that the extension might be utilized for tax-avoidance purposes the consent to such an extension would not be granted. Furthermore, through the exchange of information contained in the convention, tax-avoidance schemes could be more readily discovered.
    GENERAL OBSERVATIONS

    should not be lost sight of inconsidering the provisions of article XXII of the

    Examination of every income-tax convention to which the United States is a party will show that it is composed of a series of compromises so far as existing laws and practices of the parties to the convention are concerned, and the pending convention with Britainis no exception. This is a natural and unavoidable consequence of two countries having legislated in the same field, without attempt at coordination of their laws. In arriving at the major reciprocal provisions in the British convention it Is important to observe that It was necessary fcr Britain to modify Its existing law through the adoption of credit principles 'substantia! y similar to those employed by the United States, and to adopt broad principle authorizing the exchange of tax information comparable to those employed ty the United States internally and In its existing tax conventions. These represented major legal and policy adjustments on the part of Britain and the lack of their prior employment unilaterally, or consent to adopt them internationally, had long proven a severe handicap to the adoption of broad income or estate-tax convention between the two countries.
    (Committee Print, 7l9th Cong., 1st sess.J

    LETTER FROM THE CHIEF OF STAFF, JOINT COMMITTEE ON INTERNAL IREVENUR TAXATION% RELATIVE TO CONVENTION WITH GREAT BRITAIN AND N'ORTHLRN IRELAND WITH RESPECT TO TAXES ON ESTATES OF DECEASED PERSONS

    Hon. WALTER F. GEORGE,


    DEAR SENATOR

    WAsImNOTON, D. C., May 16, 1945.

    United Stales Senate, Washington, D. C.

    provisions of the death-duty convention between the United States and" the United Kingdom, signed at Washington on April 16, 1945, designed to avoid double taxation and the prevention of fiscal evasion. The convention is now pending before the Committee on Foreign Relations. The convention applies to the estate tix imposed by the United States and to the estate duty imposed by the United Kingdom In Great Britain (art. I) and to the estate duty imposed in Northern Ireland (art. IX). It does not apply to and has no effect upon, death taxes imposed by the various States of the United States or the succession and legacy ditties imposed by the United Kingdom. The convention provides that after it comes Into force It may, by notification through diplomatic channels, be extended to substantially similar taxes imposed In the colonies or other territories of the contracting parties (art. VIII). The convention is hereinafter explained, first, from the standpoint of its effect upon the estate tax imposed by the United States, and then from the standpoint
    of Its effect upon the estate duties imposed in Great Britain and Northern Ireland. I. UNITED STATES In the imposition of the estate tax, estates of decedents are classified in two

    GEoRGE: Pursuant to your request, I have examined the

    categories: First, estates taxed on the basis of domicile or citizenship decedentss

    taxed on the basis of situs of property (property situated in the United Atate. In cases of noncitizens of the United States domiciled outside the United States).

    who were domiciled in or citizens of the United States), and, second estates

    (2595)

    30

    INCOME AND ESTATE TAX CONVENTIONS

    Citizens of the United States

    Under the Internal Revenue Code, the Federal estate tax applies to the entire estate of a citizen of the United States regardless of where domiciled or where the property is situated, with the one exception that it does not apply to real estate located outside of the United States. The convention does not change these rules, but removes double taxation by allowing a credit under article V (1) for British or Northern Irish estate duty paid with respect to property (other than real estate) situated in Great Britain or Northern Ireland, The convention allows a further credit under article V (2) in any case where the United States imposes tax by reason of the decedents being domiciled in this country in accordance with the laws of the United States, and the United Kingdom imposes tax by reason of the decedents being domiciled in that country in accordance with the laws of the United Kingdom. It Is not anticipated that such cases of "double domicile" will be of frequent occurrence. In such a case In addition to the credit previously explained with respect to property deemed situated only in Great Britain or Northern Ireland there will be allowed by each contracting country with respect to any property (a) deemed situated in both countries, or (b) deemed situated in neither of the contracting countries, a credit against its tax of that portion of the smaller of the two taxes attributable to such property which such tax of the crediting country bears to the sum of such taxes of both countries. No corresponding provision exists in the Canadian convention. For example, in the case of a decedent who at time of death was a citizen of the United States domiciled in France owning a total of $500,000 worth of personal property of which $300 ,000 is situated in Great Britain, a credit for the British estate duty paid with respect to the $300,000 would be allowed against the United States estate tax. Such credit, however, cannot exceed the proportion of the entire United States estate tax (computed without the credit) which $300,000 bears to $500 000, or three-fifths of the United States tax. As an example of the further credit allowed under article V (2) suppose the decedent is regarded by the United States Government as domiciled In the United States and by the British Government as domiciled in Great Britain, and the total gross estate consists of personal property worth $500,000, of which $300,000 is situated in Great Britain, $50,000 is situated in France, and $150,000 is situated in the United States. It will be noted that in this example both the United States and the United Kingdom tax the entire $500,000. As in the first example, the United States will allow a credit for the British tax paid with respect to the $300,000 worth of property situated in Great Britain. Since the United Kingdom regards the decedent as domiciled in Great Britain the United Kingdom will allow a credit for the United States tax paid with respect to the $150,000 worth fo property situated in the United States. Furthermore since this is a so-called double domicile case the second paragraph of article V will also apply and both countries will allow credits for taxes imposed by the contracting countries with respect to the property situated in France. If the United States tax (before computing the credit) which is attributable to the $50,000 worth of property situated in France is $5,000, and the British tax (before computing the credit) which is attributable to the same French property is $6,000, the credit allowable by the United States is $5,0000 $ $5,000= $2,227.73, X and the credit allowable by the United Kingdom is $61,000
    i$i,000 X$5,0000= $2,727.27.

    Noncitizens domiciled in the United States As in the case of the estate of a citizen of the United States, the Federal estate tax applies under the Internal Revenue Code to the entire estate (other than real estate outside the United States) of a noncitizen who at time of death was domiciled in the United States. The convention removes double taxation by allowing a credit for the British or Northern Irish estate duty paid with rsepect to property (other than real estate) situated in Great Britain or Northern Ireland. The convention also provides for a further credit in the case where the United States ira. jloses tax by reason of the decedent's being domiciled in this country in accordance with the laws of the United States, and the United Kingdom imposes tax by reason of the decedent's being domiciled in that country in accordance with the laws of the United Kingdom. The operation of such further credit is explained in the preceding paragraph.

    (2596)

    INCOME AND ESTATE TAX CONVENTIONS

    31

    Noncitiaene not domiciled in the United States (a) Domiciled in the United Kingdom.-In the case of an alien domiciled in the United Kingdom at time of death, the Federal estate tax is applicable only to property situated within the United States. Under the United States law stock in a foreign corporation is deemed to be property situated within the United States if the stock certificate is physically located in the United States. Further, stock in an American corporation is deemed to be property situated in the United States regardless of where the certificate is located. UInder article III of the convention (in the case of the estate of a decedent who at time of death was domiciled in either of the contracting countries) stock in any corporation is deemed to be situated in the country in which the corporation was created regardlem.s of the location of the stock certificate. It may be observed that the convention adopts the second American rule of situs with respect to stocks. Under the United States law bonds, regardless of the residence of the obligor are deemed to be situated in the country where the bond certificates are located. Under article III of the convention, debts, including bonds, are deemed to be situated in the contracting country where the decedent was domiciled at the time of death; and this rule in effect constitutes an exemption from tax imposed upon the basis of situs of property. Other rules of situs set forth in the convention confirm existinF rules relative to the estate tax under the Internal Revenue Code, including the situs of real good will copyrights, property, Intangible personal property, ships, patents, trade-marks, and judgment debts. proceeds of a policy of insurance on the life oefa decedent and bank accounts are under the treaty deemed to be situated in the contracting country where the decedent was domiciled at the time of death- and such rules constitute in effect exemptions from tax Imposed on the basis of sftus of property. Under the Internal Revenue Code such irsurance proceeds and practically all such bank deposits are similarly deemed situated outside the United States and in effect exempted from tax imposed upon the basis of situs of property. (b) Domiciled outside the United Kingdom.-The convention makes no change in the Federal estate tax law as applied to the estate of a nonresident ali n not domiciled in the United Kingdom or any of its colonies or territories to which the convention may be extended. The existing Federal estate tax law provides that the estate of such an alien is taxable with respect to his property situated within the United States. For example, if the certificate of stock in a foreign corporal. tion, including stock in a British corporation, Is physically located in the United States the stock is still regarded as property situated within the United States.
    It. UNITED KINGDOM

    In the imposition of the estate duty in Great Britain or Northern Ireland estates of decedents are classified in two categories: First, estates taxed on the basis of domicile (decedents who were domiciled in Great Britain of Northern Ireland), and, second, estates taxed on the basis of situs of property (property situated in Great Britain or Northern Ireland in cases of decedents who at time of death were domiciled outsid.k Great Britain or Northern Ireland). Unlike the United States, no distinotion is made as to citizenship. Decedents domiciled in (Treat Britain or Northern Ireland In the case of a decedent (whether or not a United States citizen) domiciled in Great Britain or Northern Ireland at the time of his death the estate duty applies to all of his property wherever situated except immovableproperty out. side Great Britain or Northern Ireland. This rule is not changed by the convention. However, double taxation is avoided under the convention with respect to property situated in the United States by allowing a credit under article V (1) for the United States tax paid with respect to such property. The convention also provides for a further credit under article V (2) in the case where the United Kingdom imposes tax by reason of the decedent's being domiciled in that country in accordance with the laws of the United Kingdom, and the United States imposes tax by reason of the decedent's being domiciled in this country in accordance with the laws of the United States. In such a case, in additin to the credit previously explained with respect to property deemed situated only in the United States, there will be allowed by each contracting country with respect to any property (a) deemed situated in both countries, or (b) deemed situated in neither of the contracting countries, a credit against its tax of that portion of the smaller of the two taxes attributable to such property which said tax of the crediting country bears to the sum of such taxes of both countries. No corresponding provision exists in the Canadian convention, and it is anticipated that such cases of "double domicile" would be unusual. 78095 0--2-vol. 270

    (2597)

    32

    INCOME AND ESTATI TAX COtNVENTIONS Inrlaill


    il.'cl il

    (I;'.il l1rilunisi ct( :crllrio, In'lainl.

    blrr,, Ws1mot ,hol..,'dlrd on Ga'rowl lfarlcca tor Xaorthirrot Ir, lplo r III lile rl.i'ae tf it ii'c'c'deiat luat ,laiiiiulell in (;ralt Btritain air Nrt ho'rn llt fliet' t all e' his ti etK' fil.' 4"',itti' clili lh, i'ale'a Onily iu litl N'rtl sitlal

    lii. vase' cf n d''cd'ill d lcia,'lhd in ll110 the'

    V'itihe'l Stlalvs stluk its Ialy carlourals m is. Uinle'r article Ill of Ihi, econvenltionl, ic'h' mil colh 'arlt~rtiiralt i as eite'r4lh trdhss t lhif hli',lotui (a I hlitsla.k rerl dirahles r the I reuistcr agent . r,,Is'n.'ttt saitliAne ll'lli triluhe law iii (e'raetl firilam atnd NarthIternu Inhi'nl hetan ftheltsuiltus ut stick is deter. nilkwd Ili nordm'catlire with Ita c'mtll,,uil'y cat rules. nrluhillf fhel, alratli ull t. tfit rc'rlil ttie'a mid flie I trslel aU'tIll. 'hlig ill lie rats' r euat ,fa 44, I4e1-tl-' hldomiiledl ill IN- |llhll it t Ii the ir lestte l in i (ormtit Britalint itr Nrlhem Itlaill wio utld .h a, tllau Iivaloilale Ite A itierhari, ct ( 'or itlihaian sltrk me en I himlih Ihe smuck cert iricate aln t lihe t1 ranstr i-II t ll Ima ate II 14lun.iml lor e iiiu (I1 her rules ci sit lu heeltnatufrc' explainied Uider parl I ate aisca cuaitroaluxig %%aenl'i1t tll fill al plication 1u11t(to ilt v.silalt, cliiimirs i mtiail.d (I'rc.I lrilain o dil Nuortlerig Ihlatidl. in

    d14.le1.,nl setiit.'el

    Ill. EXCiIIAIF: Or INi'NiIiMATIOItN

    T'hI'

    lN'lilitg rciilnelioiun 'iciilaiti Iir

    sioi.ins itir.

    VlI

    ftr tlite ex'erliairge a

    inti'rimicit ic luvi l'he lUtiht'cI lilihml nit tIt ' I itil,'cl '14afte's %%-ilia niSlMi'(c ti c,.lll It t lai',s in at llliletr simililatr to lhin.tl i'coitiil ill flath'caleI-chtify e'cmvin . ticall It lac''e' lie' ',ii e t citia'bl I llil itisl .. 'ia.. %ill i atcrill) s i lien te 'Tis 'ntcr ie'it t h' h llls Iha,, Oftlk, e ti tt t'io t tilc'rs. tflii I ,
    ItV. ll'I-Ecli' t. AT lOPi rl Nt i:,N %tAIN

    Thei rcl1veiIullitll will hIIlmn,'u e'lt'rtlive' at le' hele' catex'rhnltig' ciftiust rtu entin t caf nit itirci irti itm tec'slles -cit l'ltmm clh ing till Or iitct r Ittit athli, n4cite tlht icla l iii ca cit lie' 'e',ctil rt'la-1s'.'ii tlit ti lit' is l Itt, i lstali' liat), l rie th iig lbetc , litha I t siii y ceile' mid| aitft'r I) tlaml'r :11, l91t t. X. It is liW'li,,ie' flint the lie' v'cnuic'tvota ig nit itiltlt rhit. v'ccriiutiten Icanard I lit, retmvli of ee,|lidle' tloilotent 8ilel is Iliglil' ii f Ytilla alsc llg,'ci11 ill li'tiltillfntrs cito li,' lIc, reaucilrivc. A incitell'h ,ile' h.imet'ssiciii caf lat- le'rmic'l Iircivisitim. will lie'til i 1i1 lit' ,'lt,ielcau'c nemlicranichii. I'lc,,liifilly yoolI,".,%ii Chifa%'cf.
    TlIeINIClril. MEWi:ui1AicuNlIa'
    T'hei'

    4i 'I'It lV

    ii:AStIIII' I

    I i,

    lNi' ciN Till,: r11Nt'KN'rIiN

    li' itriisiimm4 ci lie' lat-irolocl ,'inu c'l ci tit' rlh 'rhlfett tiarlic' Ill, rle tilos ,f ,i.Iits, mitict ii i it ,' l m0 iiiicc'r ht'irh, lby Iv ic l at clti ci lie' , cat c're'ditigimi t liet, o-sit'lai clit l%Iie' ri etilt' chili, cis li,iflm er ii,' lie', impiuse' I% cute' c'aitrv t tlia to"l I l t cle.'til chcaiit'ileic IIti'reiii ir i 'ifl ize',t lhetrcif in lii'h 'cm, eaf ille 'llile. llitctttI li,'re' is ,ilica,,cl a e'nccil l teat l'he enint, chily can.l, t'xl intica by' flattheirr ,'catinlrvil %%Iirtslavel tle polr't-rlt siltltilnted 11hc'i-'iun. ' , lilrcilio' ca rtleulil Ihit.4 aelelalel, is sliilair lit flint ft1id'ii anrtich, SI cif ,lie c-tl.1-chihl. c'citi '1tl iinll l I Citiila i andhl ct tcla-r's,'ntl tih le'irhc''itic' iiih tc'lir ti,,ilile' t i ihi is n oithl,'d nt%lact Icc I lie' Ifus ,ci 'ciilri. ' W is. liet' t hi alaiic'iia ili ca cirltio', V. uiili INe t'c ,ii|,cr',,c ut litacr'loi, ii- ill ,hi le',,tcaai% hri lh cit tli strr li .hi Ine,'r in t his llioliticriilhiinti, it shiouhl lhe cila',riel flint thtlre' ii as miil imtlil ullilli lil . ato %ic'sl% ne'ni fllIc 'llih ll-,1 act Si 114-.1 a 1 li t- I 'Iilc'cl ljilig111e cicaiti cit tot flIt-' |1io4lcal oc lie' t'nt.' il lorili'ielo' Its lie' nilahra prialle' ii.ii i f mat,icdl ' rte'Ihil

    prainclile'

    ii

    Itg ehIia, lcillifill.

    Iln lice cat-' ct t lie', 1lidh'

    lihlgcihuli

    it hits lo',t a'it

    tneallr' cf

    t-ally allltrtclorl' sal e'ccilc'tc'il n ,litacrtaint fite IIAcio ica onlly cllnte Ilameo; ill lht' I'lli'clIl Slate's, the' nelclithn eaf mtcl'lt rules lao'ing fncilitatcdla Iythle fact flint

    lth' c-ile'M-i4-11u1v hli Silce', lie' ''itnch'ieit at lint laiw ill lII Iti aliow tn'clil.t feair chleth ichite's in ailali rc'.,li,'t ita h''c'cl,'nt 'c larcila,'tv sit tiai'c ill a rlintsli t' , lpcis.-.se',sio (s.e'c. '121 lhtilic'lc lc't, IAct filial l linac tc'clic'' lie' 'stilie' catl,'tn iaie II I) lmatlilthe It lie' ('trown il '1'i't ll sicli 'stite'. 'T'h samite ltriiicljhe is ftcatiel it ura h iIt;o ltaillch..nmai nitil Iia IrishF ngre'e'ltii'tit ln'.' tlilt(- as inltilivi'h0t It., set. luau I.'5, rifli l"re'. illh' 'cit,'elUc'iitlihalr 5. lPtovisins) A'etof 11122, Iii nirrchtren with Iihich, tIIi atc r'c'prcai l'asis, flien, is cIIc ,I aigaitist Ilie-' lBritith 'el4 stestat' cdiltv clit,,r e lInvanihlait crri0c'l 4'clual Iii t lie' auticaunt cf dutly Iapid lby flie' c'sfallc' 'i.' oaf il cc'c',ce',hlll ,hail'ihlil lii t i ll, 'll'tct KilnlKel ilt nrI a''l ha chc''hele'itl s prplerUtlll uiti'lu lI flit, 16411 I*rlt'c' lc||c (811'1 at11 IPritiI callsh D)tlic's, 19:0 ` 1 tI i 'lilhcatma. IS.1,2. I'h' llriii'ilteih cat rrt'lhl i.1 c'cnsisi'ni t ilt Ittlhe' n'hlacrtrl cr'ldit , igronvimisi l alnch liti lie' lainai 101.I iltcritO-iax Ccaliitc'iohitll olic't Ile 'iillted t 'll lall,.'s allh like I'llih', Ki glehelli. Th' ir loillsd dlraft rctilnaiti in article' IllI hlhe,'a rule's it i(tlus i'tic'vlrng plar-

    (251)98)

    INC'OMIK AND K'rA'l',

    TAX rONVKNI'ION.s I

    33
    It liho

    1l (111 Pl,,t itOl 11ll,4-1 r 1-1O 'lfll S1114-1 "tel', Cl|('m,l". til fill-' 1llter h14111, tlhe lil' ll 0,1lY $I111,. ruh.' J.'untili-1 ln'ltrenit is Illnt( itIt rv,.-'lv it) shares ,f til ilal ml,.mk of (C'atatlimit midl Atl-rit'ii t'tlrltrralititis ati, iildirthrrlly, a Peitltn rule t't.e ritli rieal lir-i,ri v. It shislhl io,.l loss t 6.1 iltt this rgarlr I lilt trtirlhoratt' is titfk still rieal l6rtI.,rlv an, t'v limalt*'.l to t'tnttt ilttl 4' 4lQtnitt ,1 wrt''lt , fi t'si1t' %J4n111 ftvrltliltg 1 .f

    to I.'olniih.rlilh. dlgnit, a

    tiths rle, tif silii inld ot Ith unlittritno etiltivite'.

    Ilit' lial.s fur n,,il.tel,, ti

    isrltim-'.

    ,,6 t'-r J6,rhnloai tsitlit ter Itt l.,r',',t , ltnviitig liotlil ,5t lort',,uItt Its detr,,rtiittl lt|, 1t11l4.r 4,x.%itito Ilium. Thl. Ilh,t (of .. ih rtithm u ill lIe, I toaltd till dth- il tit Ilhitsroli. m A.t,'rl titil to( art i'lrIh I I ill u hi.'h .tuiv, ritiuh. ail6k'.r.
    .AIt lt't'.i': l

    'This .dhilit ital rtth's atltl'ited oithi

    Itrilain

    'lih., I, estell't tir.t lihl tillij.l lot lt'hi estis'litinni artsilt forth i llt his articl ts4 tin' ll't ,lhr.l e.,tIiltl It\ Mim ,141,11 lhl- I'liit'thl $titt'.. ai114h 1 liv tiln I.' ,tdilly iiltl" .,vil Id lit.' 'ti-'t liil gt tl1n, a.l n'uiill,, lot l.tglihti.l, $'4-t hltul, 1114 Wall-'s, v ' iatil Ithis arlithe, fun lt'rr iirtides I fhat ,'tVt'tlit6tll llv11,' 'N' l lhl' I t'idt'.h' ill lie iiunttiitr Inm,+t'ril6,d in, art.. VIIII It anlt1ly ts similar taxs. ill i.ht.iut's anl 6tit lnr Itrriltirihs of fli't inmlrm'lmili) Iarlir,,s. h 1i ev'v',r, itnh' artarticle I X., tin' ct.ovnltitnm
    v4 ili1it1,.411111.Is ,\i~tu141.4i It) flhe, i-s,,1111, (Iiiii ill .Ntorlhbrlt In-lattl. 'I'h' tlitllmo.iii'l A114 l i 0( t't4ll.'l iheritin't' talxis l. tit' . litml h it( its-' I'titim iare tfu t b hy if i 11111 n-invlrrled byfle-111 emm-mllitoill F~r l m , hi llllltll I 1,le S11llli4* it ulst ri'sitthrlry iii.'.titnlil, Its rai.Irtirl lutit tlpiiito( t of ill't'm ill lliti W-t'1044

    to Ii.l

    xltei.t r'11tiinrt1 ht sul l tillh

    1a8%,1

    l',.'ll itillight

    %ilit ill

    1t4-41111 tll- ut

    t11

    angrtt'iieiilt

    llrinsli thgt'. antI 1a 11 tilhl ikt i's, uli.li are' tiftw.tilititarlliv.,ly nlimisn iul" i lnIrll.'.' ill lh, rB~ritish ht-gtavy 1110tml et-Pif',.illttit wit hili 1114r4 it'llrs, i 0f t tl~itsu, .h'at dlli-th.lily stmltiil, an' flullv,% silhl m.f-m4 i lle emmt-mltiutt. The,

    It) t-:4114'4S I)f eh't't''n sll nii'ileld ill lit, |'ntt'tI St altI's. ''lis' l*iglty hlivii in gt,'riil n,-Ari'teltl 1t) t's810lt,1 tif iitle'et'utnts d tiniied tl 1re'at Itailnin is n a1itu1" stl''tssitiiu tl11ty is in gt'l'nd en.strititte tit n'al lrnrilmrlt siltuttitl ins (reta lite Itrilail, uliii.hl is l141t siihjeet.'l Its fle i'n'il. nttl italti tliv.
    hltd11411 eiiut

    AtTItIK 11
    81,1nii1.41t," "11 litl'l ltlernntlhm," "lnt' rriT'irlrha 1 hliire.' lthla lihit'f "f'itlf ty, tif "i atI l, ra'i tirviti tinlhatIrit'i, I : iu lmt i flit'd il1 Ihs rs tltiilciut sltisll p111 r, , Alt lt i'ij Intat lh'attllilIKS .lil.gll'd I t'it t't thi illiti il Vthin'sl It' rl.ete'iiiive illlris eat, liimt'.
    AII1II4I F. Ill

    lhsIiit't I atniuu1I llt, i',lll.'llv.s th t1 Ifll factin n 'em.'t' ll at it-1 41h1lmivileh,Iallhrilti deferlimm4itlllehr the I,,lh, Paragralph I)(ilinr,,v tiiell~it'ill' ltatv'r, 41f r'equ11 ,intntsastr i sjr~illi the 611 fit'x v.iulramlitig t imllilr%l0teistl uth r'ht imitls{1itg flile ires.wl till lo Ia..is fif llitillicihe. It is lx flel lvItw ,fllit-,
    ill atllit'i ilt,4llat' tir le% emt'iultlirl 'ari..s~
    st'*ilva4 lt t1itil4l1v.Iiwever,

    t r%'.l''l h-11-1

    dIlts 11li~i, it' C81 1.t11111Y IW'. nU.


    C, 1illlriet. l..wist

    ill all1.%I'lram. Ill whlicth 114111

    Itm fihll I

    INbu its ((1llitlilt' Witlh eiilrllliv.s, will alllhw credt~lis as iprl~widhe l.+. (If

    in

    art ihlt, V. lParagra~li 2 tf art Me ItIlinst'rii's ruit's fi1sit Its fir lit' nlr ,,sost' thp Con. I h tif ventli i.m. hi,'h tive61r, ill onitir, tal rills tir iltift'rsts in ll iti vatlie prtijl'rty;
    ttl) ri.itts tii llftr eurlrhvltit tivtr aII1Itkil lUtilthll, irtilierlv (e) deli, sllellltle l, rsilicallyv ei'vel),rd. l6ts in1t1r Iiliss, IlUigihhi' vgiliahlk, hiuntellll~itmw fitit 1llitwist, $Ioe. tir' lulli.seti'uttlr ; (d) Miami, ;if shtic'k ill a ti'rlsirafitll 6 liter ltha ill a Itlvellielital i'srlporatitl: (r) Iiwte',stlsf illtIlrnllra ' tell flit thIlls'i.ihill's lift: (f) shils alilt aircraft atil 61111r.-k I lhler'ill; f(g) 'vtisNhwill; (h) Jiatt'ilts, Iratlt-mIliarks, atiel t ht'sigi1t; (i) Collpv'riglt s, fraiieltimst, iSitif righlis Or li'tHlVINe ii MW lilt' snilt'1; j) C'18iltl'1l aSlid riglits oif at'l Itit tliv'io i e'x slrviviig to itit,' t'satl'; altl (k) jlltdgill'lt d'bits. I' ' ll, l it' l-itiltti1t miltr If ifo t 1116 le alilatl'lt frllt a clill'idraruh, ill tioll t' 11ill, ihe l (llliltilli l)Ilrl.1'S tlf lilnhiatimnM(it Iilf its tif411 lirU'lerly,flt' application(firt til litlm,'rtv hi imlliteet-mary% otf emOivet lititt.i 'Ilh de flit, silull wo 11trliwt',Li. t,., fir-it, ill linrter Ito asilertatin It'e pmI rtrv that Inuliy I' lithldled for tax if itri.istti1' hisetitl llitl.itt sit us f llle'rly wifil tpe coulllt , alllt. second, itii hit ill oreir to .11S.rtlin ertlit for death ellel the tlthorized't biy tll' Conven'tiion, aut sPtinlle'lth enr.li'eittg 04lttntry otiy allows $llit critelit illul'r paragrah 1 of arle 6 V with reisloo-el to 3irt)lim iitilaeiI ili the other comtlt ry; atit iln "dtlhle dioliiile" rt

    cam'sm, lrtviwt{l'

    ftor ill laragraph 2 (if article V, credit dept'ttds upIon tlie sil it of
    ei.

    tafts of de''tdtsllls d1uiihtled ill either of the oteitractitig countries', anl such rule$

    'Itolv of flhi ajlqiefiflion of sucih rules o(f it tis if expremsly liniltel to hie

    (2599)

    34
    narrower

    INCOME AND ESTATE TAX CONVENTIONS

    have 1)IApplication to tile estale of ai eillizen this lile I'tited Statffs not 1401110hiat, of rnsle-et tile sc.Ix, IN domiciled its either lit thecliill, cottlelu ,iutries. lit that the m'opl of thle sitlus rules prescribed by Article Ill (f the con. vention with (Canlada. Ilowever, it all"y noted htlu1 another respect tho be inI iCOpe' of thet rules (ef sit us Ip'rlaining It; sUIres (if corlorntle sltck is fionui-lial, broader than lithe provision ill thlie ('anadimUi convention, it hi'h is realirit'ed t) shares of stotk of (0'nladinit and Anerican corporations it ht-'a. in lit, herolpoed Itrilish coitenutloin thm.,e rules apply to tll eorlorantion.,, i% linvier eaileul,. U'"on suggestion of the British a slNciall exceptions froum the ajplicliot f fite silis rules prescrili'd hI' article III is contained in a provi..o at tlh end of t lie article. Thi4 t',emIliiou aipliest to stIt',ld proj-Irty which would iUot Ite suilijecetd to Federal eltate tax. In counuidlerini the silutu rules tlhis adoltled, it should l, oli-'r.'ed tfhat for estatle-ltx pIrl.ses our eaisftiiw slalitute prescriled lbut three situs rules, tnaielly: (a) flint stock in a t aoiesttie corlporatioll shall liNe deellne to it' proimrly sitlluatl'd IN within Ihlie I'ililed $ttlles (oe. 862 (It) of lit, le eternal lRevenue Code;., ) tlint Proceeds of life iuu.iurince upon tlie lif, of a 1io1llit'sideht aliell are no#t thct'mn.l to I roprii.rly iiliin fe li 'it-i Naitleg (wee. 8ti3 tit) o(f fte It- terul l RIevenuet' ,odiel), U aitI (ri th0I ihtibnk te|oslisiit for it illur.sidt'lltlaiesi not uilgaged in lbiillns it hilt li (hue IU'nited Slatets are not deemed to lie lrop.'rt% ilhiiit' Iti-Unitl ltltes (se. . 863 (it) oftl Ith internal IRevenule Coo'). I'll(, latter two are in dlrltt special ex. cmlp lions rather thanl riuh's ofll sits. O)thher rules oof siltus recingi/neI lit the aldtIill istrt ion of tihe estate tax have liveni develop m-llil keeping -ilt Il ri princi'leis of tile coimnon law folloied ill ast' law, ats in, Almird %'.IhUonk ('89 1. 1,4. :178, 19)33), relating to Stocks and lllmids (of fonrign corlporalions, thie ,orlilicales of Solic'h %ien.pllhysicat'ly proselt ini the United latit-s galld henc ,re.re a sit tllitl rll r In tile 'tilted Naiites'. js intIe ('ull dallill coni'tv'ntion le Unite'd States retails tile rule thnt slhnars (of stock have i it sil im here the issli (:gi'orltrltion was created and relinquishes lit' rule t'slablir.litd in Irtirnt v. llrovk', slra, Itihnt i ithares of stck have a sitlu where ithe stock cerliliczut,'s art, located. Under

    Blritish law a share (if corlooraIt slock Is regarded iht having ai stills where it "call be tl't'etivielv deafllt withi, ' and, in accoronlalnt, whitl this principle, it is regarded of situated fit (eat Blritlainl) if the cerporatimi lot. otily itit' transfer registry otlice lo.'aledl in (;reat Britain; (2) ifl lhei corporation has a tirusfter registry otllice
    il rn'iatl Ilritain and( another outside. (rclat Britain and the slock et'rltlaitle is

    located in (tn'at Prilain; (3) if the corlpororal ion is iuvorlporatt'd undt'r Blrilish Iaw silla rt'tlrt'l by such Ilaw it keep its register lii (relal Blritain; (I) if tho sharesare stlalingl on it branch register lit ('eal,t Britain aid call lI tralsferred cn onlly on sich register; or (5) if the stock certificate is lotled il relat Britain lil thie case of a certificate endorsed1 in blank which coititltem it hitearer secuirily (Oretui onlBritish ID)t'ath iut it's, 11)30 e('lition, If. 4W11). Und'er tlit' 'onvellttlion 1 the LUinited ihigtltm r-linlquishies much rules of sit us and ahilits the soiniplo rulo retained 3Ing United $tat's, I. e., that tile stock Is tsituated where the issliuug th COrolrat ilol wa1crtattle.
    It may be Utted that stocks of nuuunieilal tr gtovernmnental corporations arc eXeepled front (l e rule tf sitlus relative to shares of Attcks of corlporttins (par. 2 (d) oif art. Ill). Hloweivr. suidi exception refers ouIly to issues of (ovoerunient stock comnnion it the I'nited Kinugdomii, which are " properly Classiliable with Government bonlds Asluce such stock represents An Il t til st uti. aslosknt'lrdllss a stock and shunu'. DII% 11 mitt
    bottler'slplroprieary~htrllrl in~rporatltu" etvrlll reft'rs to(,ithetr

    ContractIiug Joirty or political subdivision the.,eof, such as a Sbate, county, eity, or town, all I luatio reference to a corpoiratiotii does not itself constillle such that a political body r sblldlivi slonialthough it may Iha sponsored by or establishdel y)) I such a govertuniielt. It,. is Imllortant to ujteil thatlie rules of situs pertailiug to shares of sltck are applicable othlerwise. Thle stewk anld uiot) theAmitd whether evi. if the isttck is held by a nomuintee scrip)certifIatle. deuredI by scrip) certlft'att's or

    property Antd "iniiiiovable property" have been adopted ftr this article Instead of the classilications of personall property" and "lreal properly." The former conforms tO the British usago with respect to foreign assets amid is Iiiore commonly used in international relations. Article 11I provides that (debts,securcd or ullsecured, and proceeds of Insurance on the life of Lhe deeldemt simll be deemiled situated at the place where th(e decedent was domiciled. These, particular rules are ili effect exeniptious frolni the tax liit. posed on t(le basis of situus of property, aind insofar as. they cover batik deposits and life Iusurance proceeds are the substantial equivalents of such exemptions In

    in such case is considered t(le properly suubjecttd to the tax. As sumglested b~y (lie British reir-selltatives, the clas.ificatlon0s of "ml|o1vablo

    (2800)

    INCOOME AND Fv'ATw TAX CONV'ZNTION8

    Irli IIIP

    as s'elitoiil Istl! n. for tfli' Iiit'rmil Bveiiie (C'sile. liUlils at. iiillcltip' ill thlsv adt 'ii lFtede'rnl s'state-tix litirlmow.'s itids liivi have rr'gurdilits lituizite| ilily wlhere the lmiti eert ifistates ire ls'tiv.ts'sl andtlot Ii mis vert lteist',4 irell it.-tiilv ftimid ilt the (151ll1. 'nt., flit cll,' fir tl' sit'h h1n. lew' rile Iln till-' 4'smilllis' llill hnve l1tt1 slight efl''ect ol it Iit lit' e'leli|). lhis e'tliti|it htlit tf sl:li,. ti pre jurtiv is ill JlurilmliSl tlti- luix . FTh' v'simllilen ll roni iiith'r.. fr. m tit motirlr'e lortvidesd in tin' lirilix..,e'd imnt's ili-ta% lion tof itlh the i t'ited Kiltlminl. A1IVIieI.X: IV
    lit priin'illi th Ill tixint T'ilt ln,.iv' lrivi.-ioiti sif thiA arlir-le is flive Steltl-,I 1- td tf le eitractitill emollriue f 111 filteI"t ' oIititisuiri-pitlielt sit out' ioflit't1e' its rtlle of tulax B il hlldivlt id thlitl li)&t el 'rltlr 0rility rli'l ,omivtlr.' will tauke ittiiii l'nuemit tltihi j Were .u Irn'ketl wleii'li %%mitld reeilill if t nhere taJX stir'li Imrlirly itt thi s light e il lllrv. : l la ,'lt'h it keli ili -4'-'tles lii si t'lrl illili g Ih1 it't Irs 'rty ,.ilt i t.'d stilllu.isll' lil, nlj1'h'l't tit hlrKrajll s 2 ill mlUid 4 (alt it( arlide % r Th'le' arlitile' v'irrm'j-I.,el.. illt Iillti t iew , ' li-ls'rs'iree, ill mempe i H li (f tfill ovellnitillulilt eisti'itig its lillellt1n I1o1,' ulllliwel! liv Ihilt I'tilltdSin$lt 111)(1I 1i41w. allihel, hy thl' wu iirltinlitilo e'xtliIilipt us as 1frtrilnll rs'hiiiiit lit, rinvirtisim %%as thilltt'd lKiils wits tlstite ill pulralgralp1is 2,0li0 ust 4 00 tof' artic'h' V sf ithe (a'mitimdit eoiivetitinl1. l i ' h'ml.'r lie Ui'ihil'Kll uilleohll law t it exe'iiptim Io lily 9it1M), whilt liiler tie
    tilt' Dstemtiii'il't tuiileitte (

    ts l'itiltle aintes law tilie exts'llliiult is $,40.INN) hfr t'stmvts', fit dhedtlenil wh were .VION thesiicilu.d iii tir vit izi'ii i tie I'tliltled ,tSltel itlt $nd fior estatt; itl tieceleliits
    Wlmi iieret Illi t'i

    I'llth'll

    "tateI4.

    r iv Iwo) rullt.Z' ui1t1 re'.loml'tit edit liet Ite al-. liss by sitie sinltlr agtist its e.4tate tax sir ,'stats, sllu
    etilml

    'Tl'h

    lirt ir.le mirrm-sitoits tst art ilh, V 111 'lite

    ( 'liiallillilt

    1lils4 prsIl t'tit 'llii

    lilt'$

    eslltitrie-t

    rv.

    h, than the cuir. theiriitisitin Which lprescriblt' Ilie first rule iAlss ehtils'tI Whih tlii' res'sl.iisiling lirsvi-i44i ill thill C'aiiaiam rii lvention, thise pras'titl e.tffct aIllnobjeeltas liiv's s b Ii irsuisisios n- imihitaiiallny ishciitie'til. 'rims, miille'r thle ('allalljill f esonvs'ntisin, iisi crtedhit will be nllimwt'sh fir lix impos.e't Wvllhi r,sl'et tit lmlilrtiy niot Puuhijs'etesh tit tax It%thie c'rs'tlitlig s.t'inl lr., its, ftor exiamipl, Irihtrtrv siit'eiftahlly titlherwise t anis a llutls'll it' tow el'lharitalt' sirtluiiat itilkna fsr such ireaso tts'ts'st sledtr the i 'xciltidt'd frosin tax by tilt- erlit'ilt .m'ilitry hut1subhjec'ti'd to intx liy colltry conventionn, tlie credlit lit whilsh the pIrtl'kitv is situiatsl's. As i; the (lit-adian esitliltry which Is eliott execesd the jIlioll its Ihe IlIX ill;o.sest lby tile c'reditiligC ledto h altrihutta'li' t) Ithe I)nrtry suah 'ts'ije tax Iby Ate coteunttry iii which tus lpropl)e'rty Which both couitr iles iitipO6 T'ho secolln rille apliliets in Iltlse Ultlltulial c'as'd in tax ipotll thl' bitsis oif titlnticieh. No etlrrt'spordilg irrivisiti, xists in the Canadian litll. Ill s(ch cslls', ill atdlifitll Ito t1 O credit aililwedt uit'r paragraph I coliilit v'ysil uialt'd ili Ithu s'inol rsuc iiig suiiit rhos, tis'rt' will hi,' allowed 'ihmirl ti ithi rs'sls'et to miyprty (la d'se'ims'd sit uitssel ii botIh coutiby 'paiu'hi esUillry, with "rvs'sps't ti a te tries, or b)deeinest illiatli's i neither (if tith cotitractinig eolillt'it'5, a credit of Ogfiltilst 1it tax sit lhat shirtiillr Ill tllaller sit tle IWO Itaxes (Infore tie credit) atltriutablsl tii siu'uh proluirly which sueh tax of the creditintg (olnttrty Imare to iof lhe suni sit such taxes lbit Ii esoantris's. 1i1lhiks Illse ('atalltilul emo entlioll, fiis tiformulia for computillog the Iiirt ion of tax Altribilahlsl' to parlieular Iproperly is noI e'xprnly istalet. ]lHowever, it is undeihrstoofnt t mhtlrs, part iscuular proi',rlty taxed e.listlitutlei%a part of all aggre. gal itil sif properly illotl whdeh a tax u itposs'ed at graduhate'sd rates, the amount of Ih' tax alluriallhihe to stusl' partlillhar Imrperly is thi proplorlion of esuch wholo tax as thi' value ofsuch proIllerty bears to Ihe ;aluhe of the aggregated property taxed. Paragn lph 3 dealls wilti Ii' order sif vreslilt and provides, in substantitail eft'rt, that lbis enrelil auithurlzlsi'I h thi, sIlluiluitioll is to lie rouliplut'sl after Allowance

    af ligitill. iti estStetax inl the eastP' A 1es's'ts'lelit rille thits I'illtted Sntat, will aill4111 R'r'slit (ifr U'nited liiieglisin estate sismils'ilh'd in. sir a 'itize (iof.,the U'111144I StItPS a t'sl stuttv illullmSusll muonl ers'slent ' lirul.'r si ltllpey within tht I'iiled Kiiiotm.

    (sr ioio tflie, lam.i.,

    ols 4i4 'Thit first stosucs'h rultet ihfels %liiltllie co.w lit whli-h uI si1lv tile Is iils1lIs 11ts talx u1ipun tlit- litisi tie th'edelt'l ' lus'Iiig dsllnit'iled thereini
    sf

    , J .teiat i

    for liiawhi'%, er-alt'l silltv tir tax illtosedi Ity the titier '
    it

    rit im-tshilt

    ited the cuss' sit t'h I'uil. Stalates).

    Under such

    jj

    credit auithort titlt, flie credit atutlhoimized I' hlis convention is mulionsinated to lhips Ized by section 813 (i) oft tie Inte'rnal l1evelnluue ('odei'for emlate, inlherlianlop,

    Iais e for ayiv other cr.'silts agniniest tihls lax. lu

    m'hus, itas It, ('atnasiaut thl

    convert-

    (2801)

    36l

    INCOME AND EI'rATr,

    TAX COtNVENTIOIINS

    Mltlelid by the' 'tmllfio luln. l h B 'lhis arlit el

    ht'.gim, er ni r..shtell tt haill iii t $lBate- 'erritcr. is( flih It'itiil Stlaers, eir tir It Bli;- istri'c tif ( 'hilidPittl. fir Ito tll%, Iiei mst.ii li;- I'ltil cI Stailrs. Xvilithr ithe' 'redlit for uirh lltta atllihriitetl 1h.* seetliot KI t130 i ittr the' trtlif for glift Ian antluhrim,'.l Il .,'t ioins 9l, 4al )tit 3l (tl) , flit-l llt, riial Jc'1 'llnti' Co'tle' It ill lio I
    mtr Ii.: Vi

    t'tlil% ithll iii1tst I". filed 'i hi l 1; %arsi trn tite elante of et cif the',vedlmn., aind itit illi luth flui imlurei't nill lit, alimieuti'd re'siet ) all *11 c urlsavii ii resliltl v1 iteivilt'ld. It ailsi jroi irlde' a iihm er Iu'ril( fir sueeh giirlpsts iln tie' c'st, cit I lcst m t of ptsn

    li' ijlt",si Ihll aiIt On'la inl fr

    ret'flmel ti, cr'elif arisilK ielhr Iiw

    I1 (hlt, tit at rellmlit

    er hile'rri.:.

    'rhiis artiljt' prin ide ftir r'ciliruir'al e',e'lilge' tit iltefirinatlio lit, lihe Iuei ei'cetitritc. II is wic' itil, ll Leii.IKuti Ith I "it OflIe' ItI riiei t- ierie'ne'e Iii; Ith aetliiiistrsfitli iii rti.stlilj II e'4lit rutlliiu.. to thllit thit' I'tile'd S11tate's is a litirt , I h eme l gIwvi..-itil,. will linve, of lUhitt'rial % in farilitil ig t liet aeinniist raill of111 lht' it eslltotax 'im's itiltilig I'llil'4l Iiigjeuhin fi',clirs. Wlltile' Ilitv iriou i.icl i Iof arlit'le i li art', r l ill lterltl. e'eiie'ndl utitheir ittllliirt aits r-itillred t ilhIthe, pei'tlfic Iri isitis of Ilhe ei'trrc,'swiltllg articles' isi the' Ca'nuaclii 'till fil it'll, fiht' st-'tel- cit t'rlm-ic'ral itcll e'iiu isngc' mitltr fliit' arti clt iis 11 lirl'acd ias t 1t tif lile ('8lttlltlilll in' e iol.

    'rhis article' hlts a linsis fur lritigiig Irlish C'rIt 4tiltuit',lullt t ilhin till' St'IllK of ilet t'it llit iiiatl Is ili kLt'eping with a mIralllhI prinL.-jiml il ihe' lirtiloillwt illln It efidlii'- tat 'eltt'tllt I It lrleei liii' tit IMP Ctitt nri.es. Since' l'ic'rlo Hirti anml tiho I'hilipgiitt' Islandls are- tIlltllttiii smiln aiil e'rs itf rme't'ltnc', Ihil' ti,' 11111 1I11u8hihtll Bli l it rrm wit wel'lply wileloli, f1'ile. ptilil vlil itill mlemlih.,l, hr %vllllllarilv crulilt, uil it Ioii jtn idet'l ical in Iriciplih wihIhnht ive'i'liiiled bli tit' st'n'igl It n-icn lt'ri cit fhit Itrili(h 'imitieiutlue'aliih, .iu'h lis AisIralilia stI B il 'lit thhScf tit1 Africa. n o (lir timI ikt.Svclmiei4 (Olllllll, "lalia, lit' ., ill-alial Z4onie', IIAnl lie' rnSt, (li i Itit ( haiv 14141841 If.%teS. l'racl i1l 1 ll t h' lit.Bislih C'rciutn i'il41i4,101 illl isi estate, fa'ts h1t1, r-Il f aIt ratc'o einsidltrrably Icituc'r liaii tla ' le't it'd ilUnder I'litlrc I i outgdit law. Auntivi
    Bhis arl i'le' tilt- ri'lilltolll i.

    ix

    I'mlelnr

    .ortlie,

    re'lanh s Imimiedhiately ll
    Ak'rlT'I.I: X

    it

    Ow lile

    e.' of

    art li'li' pri)e ilt', flint tlihe ircllsis'il 4'cintv tliill %ill lie i.,Irecti i' ith hrIlXCt It s lat of 'eil',its,113ll oiii tinafter tille c'tliage ti rtiB iti,'atiins, mil furf hler ,,i it ilig r V iitle's flint fliv'n, rni'hre,r ltltfit e' eitr lif e'%i' t'e cit atm, ilherellvils who diil I'l,1e',tt' 1)ecy'ull'r 311, .. ael Ilie' elate' itf i'xeluuige' it raBl lBic'a Ions uiatv elect ti havy Mtli It C'itel%'Illliill 11l1l1l11k eait'. It illlnt 1l14 ft. hik I1teirtl, hliclutctrn, Ihlnt tiel siul'h lilt illal rI'fn- e'lr live' apllhc'aflit is Iinhit inli'cl i'cas lbriughl iider Bliit' i'tcie'tliml 113 aiiy furtlher exrte'siiis tlo tit'her Itrrritti sit liiii ri/,cl hiy art ie Vll Iii.
    T'hils

    ARHTIi'I.

    XI

    This art ilt', pIrvidekts tihat flih CcoiVt'nticln will ctoltliltute foir a Im-rioil cit 3 3vrarm slid thc'nt'affthr n flliilit' exphiiratio t itf liii tcith ii flfit da (le' liet. if c erilltilla-

    tioii give'ni by ritlhe'r cit lit' contnac'tinig cttlr~ui'irs.

    (20w2)

    Priwcipal changes iy ezxsting law made by the estate tax convention Wth tho U'nitted Ktngdrom (Ex'cutaLt Clam of deeedents inoaved
    L CWZTID STATiM WATK T&Z

    E,

    Elxautn law

    A. Citiens of the United States:

    1. Ltoiloed in the V ited States.


    *

    te,, Tel on all property except rei gioperty outside United Stae.
    aD,)

    No ebbnge. tl Credtt kwr British tax on personal property in the Vnited. o.

    No aedit for British tax-

    2. DomiA

    tulde th United Sttsm..

    (it- Additbortad credit. if domticiled in the United Ktogdom under Intisl law. fer IRittsh tax on any IrOMty(A, deemed situatd in both countriaL or t 8 dveinwe not situated in either eontrmy. C.) Tax on all property. .euvpt r*al propery outs~e United No Change. eires. . Credit for lriutah tax on perunal torpenrty tn the United ....... No credit for British taz
    1

    B. Noncitixes: 1. Domiciled in:the United States

    ~Kioidomi

    (e1 TaX on all Property ~expt eal tr,'perty outsiOiUnited states. . .......... 0() No cevdit forwBritish tax. ..

    No chamu.
    Crit1 kir Bntish tox on 1wpmnal prolm y. itn the United ,loi. (t-i A'IditK,nal redlit, I! demiddld in the United Kfingom

    2. Domiciled in tW.UnitedlKingdom &.DocibeDd ebewberen .. ......


    U. bSWU LXTATZ DtTY

    brit.h law. for British tax on amy propertydeemed situated in both cones. or dvvmed, not situated in either eiutry. FiIo . exf- dslngTax fm prnrty in the Unitod Staie- iiwlhldlr to: St ck in fneigtn ercponmvo. in &ulrome (a) S1tock ini foreign carn-ratiaois. J certficeite are n thbe United States. xis. in al Ceom (to (b) Bonds. if O-rtiftites we in the United itaes ........... No cang.. Tax on prvoprty in the United -tases. in0wluAn-inn the (a) Stok in fIrf-runoripratimam. if cerntihaM we United statv%.
    Tax onjar Ir',irt), ,-t all
    t uaianoival*e

    domAciled in the United Ktngom A. D4edmnts

    the United Ktindom.

    aw',Pe'rtI outc-ide

    Do.

    Stutes, if domiciled an (u, Addat ,nzl crw4at. law, for Unied the Unjied ea my unir propStati tI vd, tes p tiedty-

    Unit .d states.

    for United fitaba tM oin'mol

    prov

    ty in the

    United State. B. Doedents damiiled in tbtt. C. United salmt:zendomlled iwbere...

    lu I. On OPV"min thW Unied KingOM IfWItlll ing -I (e) 8uoek in Onrtudb or other copM urns,L. suoek ertifi. if

    gek in British carporehim in an ces, but not in ibm arin the Unitod Kingm. I eute. md trunsfe am O"Mgn carpotation in any .... tf NO bonds, in any rose. (b) Bonds. if rtifteates we in t United Ka Ne chang Tan otn progmelty in the Iiuted Kingdom. tN'twtlne.:'fek epit(4) Stck in litish ,e other .nrot ((4 Bontds.il mnted Kingtd Kndm aen the T,wuted Kom o. am"t and transfer offl"

    emed not situated in eth Ill . tailng44 iet#

    (i

    detn-ed sited in both coutr1s w ceui

    ab3

    E-1

    INCOOI A MND UTATh TAX CONVENTION

    PrOCK(EDINms Senator'lUt'CAS actingg clairinau). Thle committee will be in order. At a recent meeting of the commit lee, Senator (herge apl)oilated Senastor Barkley us chairman of a sulwcommnitteer t hi er these convention!. SLenator Barkley is out of he city for tit mIonietit, andl he has designated mie to act as chairman of* Ihis iileollnilittee until lie returns. The minater thal we have before us are E.4xecutive D, the convelntion with treat Britain and hlNorlhemrit rrellnd with respect to axes oil income, aind I':xecit ive K, coliventioln with (treat llritlaim with respect to taxes on estates of dece,,std Iprsons,. Copies tifthe two collvelntlons

    The witnesses who are* here this morning to testify are Eldonh l. King, Special Delputy (Comnlttissioeter, Bureau ofIlnterlnal Revenue; Colin F. Stm, chief of stair, ,Ioilt ('ollullitltee on Internal Revenule Taxation; fitchell B. Carroll, special coulnsel, tax colnnlitne, Na. tional I'oreigni rnitie ('oumicil, Inc., New ,York. N. Y.; Franklin Cole, economici ,onsultant, ('ole. Iloisinghon & ('o., New York, N. Y. Percy W. Phillips, chairman, section onitxaftion, Amlerican liar Association, Washlaington, I). C. I think l)erhaps in view ofe fact that. two of tile witneMeg are the from ollt. of the city we should hear from themn first. Please coulne forward, Mr. ('arrotl. STATEMENT BY MITCHELL B. CARROLL, SPECIAL COUNSEL, TAX COMMITTEE, NATIONAL FOREIGN TRADE COUNCIL, INC., NEW YORK, N. Y. Senator ,IT('AM. uhist give your full name to the committee. Mr. C.4AnaOnm.m. Mitlchell B. Carroll. Senator lva'lAS. Whom1 do you represent, Mr. Ctrroll? Mr. (.muomy,. I am rel)resintity thqi Natiomld Foreign Trade Council, of 26 Beaver Street, New I ork. Senator i;.cAs. Are you prepared to speak upon Eixecutive E, the convention now Ibfore the committee? Senator IAC~As. Are vou also prepared to speak on Executiive I)? Mr. (CArrOLL. Yes. *Yas, I am, sir. Senator ,'CAs. hlave vou statements lprepared, that youI would like to read to tlie cominnittee, or (0o you wlant, to (liscus themn illformally? Mr. tArTIOLL. I have i long statement which I would like to submit for the record, but it is some 23 pages, so perlrhaps) I had just better ever the high lights informally in addressing the conmmtittee. Senator litACAS. 1)O you hllve obhje(tions to tSe two cOVenitiOlls? Mr. CAIMoLmLm. No; oha the contrary, we heartily endorse them, sir. Senator I*CAs. You heartily e(m(lo-se both of them? script, and then submit. it for the record. Mr. CARROLL. I shall bo very glad to do that, sir.
    Mr. CARROLL. Yes. Senator UVc.As. Suppose you give us the high lights of your mannMr.('.ARRoLL. Yes', sir.

    and two comnmittee prints containing material on the coliventiolas are, being inserted in the record for (he information of the commitittee.

    (2004)

    INCOME AND 198TATO TAX CONVENTION

    39

    I might say that the National Foreign Trade Council represents p)ract ically all the American eoiipasmies that are interested .in foreign trade, and we have been following this nlovetuent to Settle the coll. lights of tax jurisdictions through treaties for soits years. As you are Doubtless aware, there lis been in eret.t a treaty with France, which was negotiated inl 1130 and signed in 1932, aid then finally ratified in 11935, which canis into effect oi J* enuary 1 1930. Since that time, treaties more or les almng the same lines but more complete, have treaty with France, which supenseded tile first; auid now we have thest two convenlions with England.
    As we regard then, the one on income tax is of course of major im-

    been concluded with Swedehn and ('almada, and there huisssecond been a

    portance to businem, but the rone concerning death taxes complements or supplements the one con'ernitng incoine taxes; because, after all, business is to a large extent carried on by individuals, and investments are to a large extent mtad, by individuals. There are often individuals who go abroad in the interest of anl Amuerican company and become established in the foreign country, become domicilehd there, and be. coMe subject to these death taxes oil tile basis of domicile, while reumaining subject to our death taxes on the basis of nationality; hence it is important to protect these individuals who have accumulated something front their years of service abroad, as well as those who are currently engaging in business abroad, and as well as corporations that carry on the bulk of the business. tion is not it niew one. Whiile there were som lew treaties between Central Eurnojpean countries and some internal legislative provisions prior to World War 1, the movement really gathered momentum wheu we incorporated in our Revenue Act of 11918 unilateral provisions for relief from double taxation, which have beens kept in the act through the years. Soon after these l)rovisiols for unilateral relief were

    As you are doubtless aware, this movement to prevent doilble taxa-

    of income taxes. We have with Canada a special convention con-

    general conventions for the prevention of double taxatioln, in the field

    tax officials, meeting under the auspices of the League of Natiols, in elaborating model conventions for the prevention of double taxation, the purpose being to distribute the relief burden between any two countries which concluded a treaty based on the model conventions and to agree on common concepts of taxation that would prevent overlapping taxes. That movement developed through the twenties and the thirties and before the outbreak of Worlard Wari 11 there were some 00 general conventions for the prevention of double taxation concluded along the lines proposed by these experts, meeting at Geneva, and well over a hundred special conventions to prevent int ermntiomual double taxation. Senator WHITE. There were 60? Mr. CARROLL. Sixty. Senator WHITE. Sixty, to which this Government was a party? Mr. CARROLL. We were not a party to all of those. We have up to this time become a party to our conventions with France, our convention with Sweden, and our convention with Canada; that is to sa,

    adopted, the United States began to cooperate with a group of high

    cerming death taxes, which has more or less served as a model for this

    convention concerning death taxes with the United Kingdom; therefore, there is no real novelty in these conventions. The income tax

    ..... (2605)

    40

    INCOME AND ESTATE TAX CONVENTIONS

    convention is along the lines of the income taX conventions with France and Sweden and Canada that have already been examined and approved by the Senate and are in force, and they are very helpful. The death tax convention with Canada was recently approved and came into effect, and it has served as a model for this one with England, which refines in some ways the provisions in the Canadian convention, and in our opinion is a splendid example of the way this very complicated question of relief from double death duties can be obviated. Senator LucAs. You have made a careful study, I take it, of all these different conventions? Mr. CARROLL. Yes. Senator LucAs. Is there any material difference in the convention that is now before the Senate and the conventions agreed upon with France and Sweden and Canada? Mr. CAROLL. The basic provisions are the same; that is to say, regarding the treatment of business income, and the general treatment regarding salaries of individuals. There are special provisions reaiding the treatment of dividends due to special provisions in the ritish income-tax law, which required particular attention. The principle of reciprocal exemption that has been applied in regard to royalties in our convention with Canada is extended as well to interest, in this convention; but we consider that a desirable thing. In general I would not say that the special features of this convention are of such significance as to necessitate special attention being given As you know, the general scope of this convention on income taxesis all kinds of taxes on income; in the case of the United States, our normal tax and our surtax and our excess-profits tax; in the case of England you have fairly equivalent taxes-tthe national defense contribution, an excess-profits tax, the standard rate of income tax, and the surtax; and they have tried to find a way of accommodating these two tax systems one to the other to prevent a double taxation, which in our opinion is entirely satisfactory. The provisions for relief from double taxation continue to b.e subject to the limitations already contained in section 131 of the Internal Revenue Code, but certain things that you might call "artificial obstacles" in the way of applying the relief intended by section 131 have been overcome by the language of the treaty, so that now the intent of Congress is in my opinion carried out. As you know, under the different tax systems of the various countries, there is a basic similarity in many respects, with a great many differences in minor degree in other respects, and that makes it necessary to look at the two systems to try to arrive at a common terminology for describing then and I think they have done exceedingly well in this convention in ending a common language for describing the two systems, for arriving at common concepts of sources of income, for dealing with those respective sources of income in such a way as to prevent double taxation; and on the whole, it seems to me the British have been induced to give up much more than the United States has
    to them..

    given up.

    Senator WHITE. May I ask a question, Mr. Chairman. Senator LuCAS. Yes. Senator WHITE. Are you familiar with this memorandum, prepared for the Committee on Foreign Relations, I presume, by the

    (2606)

    INCOME AND ESTATE TAX CONVENTIONS

    41

    State Department, on the general subject of income-tax conventions with Great Britain? Mr. CARROLL. I do not believe I have seen that one, sir. I have
    these two.

    nent one to address to you, but in this memorandum there seem to be stated a number of objections to the treaty-at. least seven objections to the treaty; and then there is an answer made to each of the objections. I was wondering as to the origin of these objections. Whose Mir. CARROLL. I do nbt know. They certainly did not come from us. Senator LUCAS. I wonder if they just made objections, and stated they had been raised, in order to answer them. Mr. KING. Eldon P. King, Speial Deputy Commissioner of Internal Revenue. I understood they arose in this way, that Mr. Stam had had some discussion with members of the committee, and some questions arose, and he anticipated others, and we met together and framed those answers. Senator WHITE. These are questions, or objections, then, that have been raised by some of the members of the committee? Mr. KING. Mr. Stam is not here. I am not positive: Senator LUCAS. I think probably they*are objections that have come in to the chairman of the Committee on Foreign Relations and that have been submitted to us. I do not know. Where is Mr. Stam? Mr. KIo. He just stepped into the other room. He can answer that better than I can. Senator WHITE. I just wondered who was responsible for these objections, and how much weight we should accord them. Mr. KING. I think they were primarily questions in anticipation of the primary interest the committee would have in this connection. That isthe way I would answer that. Senator WHITE. Excuse me, Mr. Carroll. Mr. CARROLL. Yes, indeed. Senator LVcAs. Mr. Stain, Senator White asked the witness and Mr. King if they knew about the objections that have been filed and where they came front. Mr. King said you probably would know and can tell us. Mr. STAM (chief of staff, Joint Committee on Internal Revenue Taxation). I will tell you what happened on that. We were asked by Senator George, when this treaty first came up, to prepare a memorandum trying to give both sides of the whole problem, and we thought we would list all the objections to the treaty and then attempt to prepare some of the answers. that you got? Mr. STAM. I would not say that. The record is there for the Senators to read. If they feel that the answer to the objection is complete, it is there otheriise, they will disregard it. Senator WHiTE. f was interested, Mr. Chairman, as to the source of the objections. (2607)
    Senator LUCAS. Are these objections? Senator WHITE. You feel that you have answered the objections Mr. KING. They arose in this waySenator LUCAS. Please state your name for the record.
    obljeCtions are they?

    Senator WHITE. The next question I was going to ask is not a perti-

    42

    INCOME AND ESTATE TAX CONVENTIONS

    Mr. STAM. The source of objections generally was to some extent from the outside people who made some complaints; the people, some of them, did not want to appear, and otherwise, they were objections that we felt would be made by people if they had had an opportunity to study the tax background of this whole situation. Senator LucAs. Mr. Stam is going to testify a little later, and perhaps he can give us that whole information, without our delving into it at this time. Senator WHITE. Yes, sir. Well, the question has been answered, so far as I am concerned. Senator LUCAS. Are there any other qtiestions? Senator Hatch. Senator HATCH. I wanted to ask a question, Mr. Carroll. I do not suppose it is hardly possible to answer, right now. I notice from the letter of the Secretary of State it is said:
    It is believed that the application of the provisions of an income-tax convention of the kind submitted herewith will constitute a definite step toward the removal of an undesirable impediment to international trade which results from the
    double taxation * * *

    Senator HATCH. I was going to ask if the conventions already agreed to had had that effect; but there has not been much international trade since that time and they have not been tried out much to determine it. Mr. CARROLL. Yes; during the war period that is impossible, because of the restrictions; but in normal tunes I do not think there is any doubt but that these conventions do remove very serious obstacles to international trade. The proof has been in their popularity. It was very interesting to watch the tempo of the conclusion of these conventions in the interwar period. The movement started out after World War I, when taxes were so high in the two countries where an enterprise might be carrying on a business that they often exceeded the income when added together. Today, for example, if you have an accumulation of rates in England of 5 percent national defense contribution and 50 percent standard rate, and on the top of that you have over here our 40 percent normal tax and surtax-there, you have 95 percent, without regard to the United Kingdom and United States excess-profits taxes, which might be quite a lot. Senator HATCH. It would constitute almost an impassable barrier to international trade? designed their tax systems from a purely domestic viewpoint and have not considered the impact oil international business. Now, there have been two ways to deal-with this problem. Trade could not carry on, subject to both levies inthe two countries concerned; somebody had to niake a concession; and we started out I think very wisely back in 1918 on the theory that foreign trade was of vital 'importance to us, that we should go ahead ind take the initiative, and recognize the prior right of the foreign country, where income from the sale of goods arises, for example, to tax that income in the first instance; and we decided to grant a credit for that tax against our tax; but that credit is so limited that it cannot cut into our domestic tax on domestic income. If the foreign rate is lower than our rate, the Treasury collects the difference between the foreign rate and our rate. If it is equal to our rate, we do not get the tax in the first instance on that income as
    Mr. CARROLL.

    Mr. CARROLL. Yes.

    Exactly; and countries have for the most part

    ((2608)

    INCOME AND ESTATE TAX CONVENTIONS

    43

    it returns, but when that income passes from hand to hand in the United States and increases the wealth of the country we pick up the tax every time there is a new transaction and source of income in this country, which is paid for out of that income that flows from foreign sources. Now, a lot of people thought that the relief should not be unilateral, that it should be bilateral; that countries should get together in pairs, sit around the table, and try to accommodate' their tax systems one to the other make concessions here and there, so that the burden of relief would be distributed between the two. Well, obviously that is a much slower process. The credit has worked spendidly throughout these years, and is still working, but we are glad to see that now the tempo of negotiated treaties is increasing insofar as the United States is concerned. Reverting to a statement I made a little while ago about the tempo of treaties between other countries during tht, interwar period, it was remarkable that even during the days of the long depression in the thirties there was a noticeable increase in the number of treaties between European countries, and they realized then more keenly than ever the impact of the liability to taxes in two or more countries on the same income or property and what an obstacle to trade that constituted, and it was principally during that period that the number of general treaties was increased to around 60, and quite a number of special conventions were negotiated dealitig with companies of one country that were selling through agencies i another, and air navigation and shipping enterprises. n the case of air navigation and shipping enterprises, the general practice adopt edlconsisted of the reciprocal exemption of income; that is to say, it is recognized that the country in which the enterprise is established and in which ships are registered should have the sole right to tax the income derived, and that the other countries where the ships take on or unload passengers, and aircraft land and take on or unload passengers, should be cognizant of the difficulties in trying to impose taxes on that kind of income and should exempt it. T at principle has been pretty widely accepted, and is incorporated in these treaties. If you would like, I could take tip the articles one by one and give you the background of their development and why they are important to American business. Senator LUCAS. Do you cover that in your manuscript? Mr. CARROLL. Yes; I do cover it in the manuscript. Senator LUCAS. I do not think it is necessary to do that, unless the committee wants to hear it, Mr. Carroll. Mr. CARROLL. But I might say in concluding that, getting back to the question of the novelty of these conventions, they embody essential principles that have been incorporated in our previous conventions, have been approved and appied, and found very satisfactory. The special provisions are put in there to deal with special provisions in the British law or our own, and I think the negotiators have worked out the problem admirably. Senator LUCAS. The special provisions in these treaties that might apply to Britain might not apply to Canada or France-some of them, at least? Mr. CARROLL. W ell, but the thing is that they arrive at practically the same results as you would have under our treaties with Canada

    (2609)

    44

    INCOME AND ESTATE TAX CONVENTIONS

    and arrive at practically the same results, except for the question of interest, for example, where there is this provision for reciprocal exemption. In our French treaty we had a provision for reciprocal exemption on patent and copyright royalties. We have that in here. Senator LucAs. The results are practically the same, but we go a little different route to get them? Mr. CARROLL. That is it. You have to have special language to overcome the curious language of the British law. Senator LUCAS. Without objection, the manuscript that has been prepared by Mr. Carroll will be received and made a part of the record. Mr. CAnROLL. All right, sir. Senator LUCAs. Are there any other questions, gentlemen? (The manuscript presented by Mr. Carroll for the record is as follows:)
    BRIEr ADVOCATING APPROVAL OF THE CONVENTIONS CONCLUDED BY THIE UNITED
    STATES WITH GREAT BRITAIN AND NORTHERN IRELAND WITH RESPECT TO TAxEs ON INCOMES AND ESTATES, SIGNED APRIL 10, 1945

    and France. They overcome the peculiarities of the British system

    (Submitted before a Special Subcommittee of the Senate Committee on Foreign Relations by Mitchell B. firroll, In behalf of the National Foreign Trade
    Council, Inc., New York, N. Y.)

    property and consequent double taxation. The treaties previously concluded by the United States with other countries for the prevention of double taxation of income, such as the convention with France signed April 27, 1932, and the one signed July 25, 1939, which superseded the former, the convention with Sweden signed March 23, 1939, and the one with Canada signed March 4, 1042, have

    countries so as to prevent the overlapping Jurisdiction on the same income or

    In behalf of its numerous members who are interested In developing trade with Great Britain and Northern Ireland as quickly as circumstances permit, the National Foreign Trade Council wishes uiost heartily to urge that the Senate give its advice and consent to the ratification of the conventions with Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with re.elect to taxes on income and on estates of deceased persons which were signed at Washington on April 16, 1945. These two conventions are properly plreented at the same time Inasmuch as thefsupplement one another. In the field of estate taxes, as well as income taxes, the accumulation of the burdens of both countries on the same property or income often exceeds 100 percent of the amount involved; and the failure to provide for relief from the confiscator effect of such cunmlative burdens in the case of death taxes would tend to nullify the benefits to be derived from the convention to pre. vent double taxation of income. The National Foreign Trade Council has long encouraged the conclusion of treaties to accommodate the conflicting provisions in the tax laws of two different.

    unquestionably encouraged, except for the blockades occupation by the enemy and other obstacles presented bj the recent war in europe, the development of business with those countries. Furthermore, the convention of June 8 1944, with Canada, to prevent double taxation in the field of estate taxes and succession duties has protected direct Investments by individuals and obviated any need for recourse to such expediants as intermediate companies. With this background, the two conventions with the United Kingdom have been concluded, and we feel that they will give great impetus toward the negotiation of essentially similar conventions with countries in Latin America and elsewhere throughout the world as a part of the general program of rehabilitating mutual trade and investments with those countries.
    INCOME TAX CONVENTION-BASIC PRINCIPLES

    It may be stated that the convention with Great Britain and Northern Ireland concerning Income taxes embodies certain general principles of tax jurisdiction over the income of foreign enterprises which are already Incorporated in the existing treaties to which the United States is a party, and in some 60 conventions between various pairs of European states, which were concluded before World War II but presumably in many cases are now in effect.

    (2610)

    INCOME AND ESTATE TAX CONVENTIONS

    45

    The basic principle is that one country should not tax an enterprise of.the other contracting state unless it has in its territory a permanent establishment such as a branch office or a factory. This principle is found in article III of the income-tax convention with Great'Britain and Northern Ireland, and a definition of a pernmanetll establishment is found in subparagraph (I) of paragraph (1) of art ic If. Tian concept of a permanent establishment has been built up after a number of years of study by the Fiscal Comnittee of the IA'agute of Nations, and is reflected, with only minor variations, in the vgrious treaties previously men. tioned. Thus, in t0e treaty with Great Britain it is defined to mean "a branch, management, factory, or other fixed place of business, but does not include an agency unles" the igent has, and habitually exercises, a general authority to Inegottate and conclude contracts on behalf of such enterprise or has a stock of merchandise front which he regularly fills orders on its behalf." In other words, the term "prmanent establishment" connotes a projection of the foreign enter. rise itself hitto the territory of the taxing state in a sitbIstantial anld enduring form, It. does not. include occasional .transactions. Carrying out this thought, the definition provides in substance, for example, that ai enterprise of tlte United States shall not be deemed to have a permanent establishment in London merely becaut. it. carries on dealings through a bona tide commission agent, broker, or custodian in England acting in the ordinary course of his business as such. This would preclude a recurrence of the attempt on the part of the United Kingdom authorities to tax Anterican companies marketing raw materials in England through regular commission agents or brokers such as was done after tile last war and was stopped, after protest. and litigation, by ant antendinent to the United Kingdom income Tax Act. of 1918 (Finance Act., 1925, see. 17).
    COROLLARY OF RECIPROCAL EXEMPTION OF TRANSACTIONS ON EXCIIANGE8

    More or less as a corollary of this principle, American citizens and corporations have not been subject to tax ott gains derived from transactions in securities on the London Stock Exchange, and the existence of this exemption under the laws of the United Kingdom, as well as of other foreign countries, was one ofnonresident for the antendntent adopted fromn Revenue Act of tiansact ions in the reasons aliens attd foreign corporationsin the gains derived from1936 exempting securit ies or poratlon was not engaged int trade or business and had no office or place of business It the Utnited States. This principle istnow found in section 211 (a) (I) (A) and section 231 (a) (1), hIternal lRevenue (ode, except that the qualifying clause has been antended to read "not engaged in trade or hu,,iness wit hin the United States." Correspx)ndingly, article XIV of tlte convention provides that a resident of the United Kingdomntnot engaged in trade or business in the United States shall be exempt front United States tax oit gains from tlte sale or exchange of capital assets. The phrase "a resident of the United Kingdom" is defined In subpara. graph (g) of paragraph (1) of article 11 to include any person (other titan a cttizen of the United Statc or a United States corporation) who is a resident in the United Kingdom for tlte purposes of tlte United Kingdom tax and not. resident for the purposes of the United States tax. A corporation is to be regarded as resident in tite United Kingdom if its business is managed and controlled in the United Kingdont. llence, the benefit of this exemption does not extend to United States citizens or corporations even though they are resident in England, nor to a citizen of the United Kingdom who under outlaw is regarded as resident in the United States. The concept of residence as set forth in regulations 111 t relat itg to the United States Income tax Is so broad that in normal circumstances It should preclude any
    abuse of this provision,
    I Section 29.211-2of RegulationsIt states that "An alien actually present in the United Stats who is not I a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he Isa transient isdetermined by his intentions with regard to the length and nature of his stay. A mere float int Intention, indefinite as to time, to return to another country Isnot sumclent to constitute him a transient. i he lives in the United States mid has no definite intention as to his stay, he is a resident. One who comes to the United States for a definite purlxmie which in its nature may be promptly accomplished isa transient; but if his purpose isof such a nature that an extended stay may be necessary for Its accomplishment, and to that end the aCien makes his home temporarily in the United States, he becomes a resident, though it may be his Intention at all times to return to his domicile abroad when the purpose for which he eame has been consummated or abandoned. An alien whose stay in the United States islimited toa definite period by the Immigration laws isnot a resident of the United States within the meaning of this section, In the absence.of

    commtoditties on Atmerican excltanges as long as tlhe nonresident alien or foreign cor.

    exceptional eircunstances."

    (2611)

    46

    INCOME AND ESTATE TAX CONVENTIONS


    OTHER LIMITATIONS ON PERMANENT ESTABLSIMIIENT CONCEPT

    To complete the definition of "permanent establishment," It may be noted that the definiition~ in subparagraph (1)[ell of paragraph (1) of article If of the conven. tioti contains two further lim itat ions. in the fir.4t place, it shall not Include a fixed place of business ex~clusively for the purchase of goods or merchandise. This has the effect of protecting the export of merchandise from the imposition of an incomno tax o(n a profit arbitrarily imputed to the mere act of purchasing. In the second place, the term does not include a subsidiary corporation, whether organized under the laws of the taxing state or organized under the laws of the state of the parent corporation but engaged in trade or business in the territory of the taxing state through a permanent establishment or otherwise. This pre. eludes disregarding the separate legal existence of the subsidiary iII order to reach through it the parent. The foregoing clatise, however, does not prevent applying section 45 of our Internal revenue Code so as to aisure a fair allocation of profits between the parent and the subllsidliary, expecially as article IV of the convention eml,odies the principle contained in that section of our law. This section states in sil). stance that where, for example, a Biritish company by reason of its iparticilpation in the management, control, or capital of an Ameirican company makes with or imposes on the latter, in their commercial or financial relation.,, conditions different from those which would be made with an independent enterprise, any l)rofits which would but for those conditions have accrued to one of the enterprises, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly. Hence, thle Treasury now has rce'ouition of its powers under section 415 to assure the proper allocationi of profits as between an American subsidiary and a British parent corporation.
    TEST OF DEALINGS ON ARMS-LENUTH BASIS

    The test of dealings with an independent enterprise Isalso applicable in dealings between a principal establishment in one country and a permanent establishment In the other country; for example, if an English enterprise has a permanent establishment in New York, under paragraph (3) of article III there shall be attributed to the New York branch the Industrial or commercial profits which it might be expected to derive if it were an independent enterprie engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it Is a permanent establishment, anI the profits so attributed shall, subject to the law of the country in question, be deemed to be Income from sources within its territory. However, in accordance with the exception from the definition of a permanent establishment previously stated, paraitraph (4) of article III stipulates that no profit shall be deemed t arise from the mere purchase of goods or merchandise within a territory of said country (par. (1), art. 11I, convention). This' principle of allocation was taken from a model convention I on the allocation of business income for tax purposes approved by a group composed mostly of high officials ot the tax administration of the leading commercial countries, which embodied the results of a world-wide survey of allocation methods conducted under the atuspices of the fiscal committee of the League of Nations and concluded in 1933.3 The idea is to require the branch to keep. separate accounts reflecting the results of its transactions on the same basis as if it were. a separate entity. This principle is Inherent in the rules of allocation contained in section 29.109-12 of Regulations 111.
    SPECIAL RULE FOR SHIPPING AND AIR NAVIGATION ENTERPRISES

    Ever since the Revenue Act of 1921, the United States has applied the principle

    of reciprocal exemption to shipping profits. This has been incorporated In many executive agreements with practically all the other maritime countries and has been confirmed In the tax conventions with France, Canada, and Sweden. As between the United Kingdom and the United States, the regime was Introduced by an exchange of notes dated August 11, 1924; November 18, 1924; November 26 1924; January 15, 1925; February 13, 1925; and March 16, 1925. The principle has been ext-nded 'to air-navigation profits in our conventions with Sweden, Canada, and France, and article V of the convention with Great Britain now applies the principle to air-navigation profits as well as maritime 'League of Nations, firal committee report to the Council on fourth session, June 26, 1933, and on the
    fifth session, June 17, 1933. I League of Nations, Taxation of Foreign and National Enterprises, vols. I-V.

    ,(2612)

    INCOME AND ESTATE TAX CONVENTIONS

    47

    shipping income, thuts taking these types of enterprises out oi the scope of articles enterprises. Accordingly, no United Kingdom tax will be payable on the profits which a citizen of the United States not resident In the United Kingdom. or a United tle laws of the United States.

    III and IV dealing with industrial, commercial, banking, and other business

    States corporation, derives from operating ships documented or registered under


    DIVIDENDS

    One of the most troublesome problems arising in our tax relations with the United Kingdom has been the treatment of dividends under the United Kingdom Income Tax Act. While under our tax law a corporation is first taxable as such on Its net income, and then the shareholder is taxable on the basis of his taxable income inclusivt~of dividends, the British look upon the corporation as a means of collecting at source tile standard rate of income tax which is borne by the taxpayer. This is due to the fact that, the United Kingdom income tax was first Introduced during the wars against Napoleon, when the concept of the corporation as a separate corporate entity was not well established and it was regarded rather as a"body of persons." While the corporation was required to pay the standard rate of tax on Its statutory income in the first, instance, it was enamount of the dividend distributed to him, i.e., inclusive of the standard rate of tax appropriate thereto, and this gross amount was included in his income subject to surtax. While our courts have treated the British standard rate as equivalent to our corporation tax, they have, nevertheless, acknowledged that it is added into the income subject to surtax, and this has given rise to serious difficulties and unInternal I7venue Code. As a consequence, although an American corporation owning a majority of stock in a British company has been entitled to claim the credit for the British tax against its American tax under section 131 (f) the American corporation owning a minorityinterest in a British company and the American individual shareholder have been denied the credit. Today a British corporation is subject first to the national defense contribution of 5 percent, to the excess-profits tax of 106 percent on the income exceeding the standard profits, and the balance of the income is subject to the standard rate of income tax equivalent to 50 percent. Not taking into account the excessprofits tax, the earnings of a British company are therefore subject to the national defense contribution of 5 percent, and then to the standard rate of 50 percent, making roughly a total of 55 percent. Without considering the American excess-profits tax, an American corporation today pays a normal tax of 24 percent and surtax of 16 percent, making a total of 40percent and when dividends are distributed to a resident of England, 30 percent is witheld. Thus, without taking into account the excess-profits taxes of both countries, income flowing from a British corporation to an American shareholder is subject to taxes totaling approximately 55 percent., while income flowing from an American corporation to a British citizen residing in England is subject to taxes of 24 percent plus 16 percent plus 30 percent, or roughly 70 percent. Article VI of the convention very wisely establishes an approximate equality of treatment of dividend income moving in each direction. A resident of the United States not engaged in trade or business in the United Kingdom or subject

    titled to pass the tax on to the shareholder who treated as his income the full

    fairness in applying the credit for foreign taxes allowable under section 131,

    to the United States tax with respect to dividends from an English company is
    regarded as bearing in effect the British national defense contribution and stand. ard rate of 55 percent, but is specifically exempted from United Kingdom surtax (par. (2), art. VI, convention). To arrive at an equivalence of burden, a British subject resident in the United

    can company, is regarded as bearing United States normal tax and surtax totaling 40 percent, but the additional tax withheld from the dividend as such Is not to exceed 15 percent, making a total maximum burden of 55 percent. A special clause envisages a British corporation controlling, directly or In. directly, at least 95 percent of the entire voting power in the dividend-paying American corporation, not more than 25 percent of the gross income of which American corporation is derived from interest and dividends other than interest and dividends received from its own subsidiary corporations; such a British

    Kingdom, and who is not engaged in trade or business in the United States but is subject to the United Kingdom income tax on dividends received from an Ameri-

    18095 O-42.--voL 2-71

    (2618)

    48

    INCOME AND E*'rATh TAX CONVENNTIONS

    given.

    5 Iereent, tIllt'ss It , relatlcltlihI) of the Iwo t'corpioral ions has tiei' retired or is iiiitlltlimed irinitiril' wilh Inth eiioni of se'curing sucih r~ed'I e nt ralte, in which cst' Itlt wilti. holding raIt' is 15 jierceiit (piar. (I), airl. VI or Ihie conventleion). IHaving it mind tie pIo-isiiility Ihlnt. rales mity be amielndeItlhe it, third Iparagraiph of arlit e VI xerlnits it elrhel contract ing party to terlinale, this art ideh by giving wril flei notIce o(f lferlliallt ilo t Ih(, other e'llml ltg parly i hrotagh diploiiat ie cl'hnl ls oil r rid On ieforeitr ,he thirlieth tiny of ,iie i aillny e'ar afite'r the year 11.15, atid, in silch atn event, p)airtagraphi (I), re'dtcing Ihe(- Alitriean rat' it) 15 itertent. or 5 Iperce,iL according to t lie ease' shall evast' to Iobc'tlrcelivafig to Ithe I'llittl' lStates oin aind after fihe first cay otl JaiiUary, liied piairaigrallih (2), c'xci litllilg Brlitish dividendls from su1rt.ax, shall cease toi he elrectliv, fig1i theli iitc' lI' iidKinlo tax onl 81ui4t afc'tr the fith day of April, Inl lieIyear next following hliat ini which iit idel co is

    vorporltlitni sliall not Ib suibjct to tax olt dividielns ais suelh iin cxces of

    PATFNT ANI) e'1PYIIIT Ii'iYAli:riiKS

    Eve.r siice tti movemiiicnt. It) p)revent internal itiotial douehh taxatiton) wats snarled t In lit' first, lt'ede after World War I, lihe lritish (|overnnntll has fIavoredl the l~rlnililpc of exemiptn itillclpill sollrorc'1 fixing it solely aflIt' re'sidte'ie of It lg ai1 he r't)ietlt', as is shown by Ihe tax iigr-eemtucnts1 between t lie 1,uii'hll KItingdom 11 iho initet Irishi leree State which are based cxchltsivtly oin thalt Ilriciphe.i 'I 'rhis lpriclilel has bi'een incorporated l Ithe tax coliivctliotI with (r h h-at. lrint tin aid Norlt he'rn 1rlantel in rtgardl to iltrecst, and royalltics Ocl pIlittlts, col)yrighlis, atidI the' like. T'huls, artilet.' V%' Ilie' c'i)IIve'ti ioln pirovid.s tlint ilntere'st on'till kilits of indehbtcdl. ctI
    lit-s.

    inchldilig bond. sIeculriliesl, inoltt.an

    delll llsimt ieh

    derived from s4ources,

    wit hin filc I'tll Iitegd tlo hy aircdsiem otfnit unitc'l states who is not tlngage'ci in iit e t rache' or bIiltiess it flile |liltect illgdollc 111t1 stiljeelt Ito tile' |llild alaes tax is te otl such inc'rmest, shall it e.xelmpt from thie' United Kingdml tllax. IBy way of exceptlill, Ihe exemploll $ltii not aply Ito intc'rtst alid by a corporal imi resident, shall in t ie'- Ulilecd Kingdioni to i i lleedI. tnthe's corl)oration cotitrolling, directly cir lin direct ly, more I hiui Sf) percent of thie cill ire vot imig st,,olck ilt Itie paying corlorallt Io). Nor shallie thXeleximpti apply ilt fit' easet of it Uiilted ltatecs cilizc'n, eorltoralltion l)f or ipartmiershili eIngaigaed iII tItact' or httsii,-'s In tti' Uiited Kingdlom, stuch taix. patyrs remaining stibjc'ct. io taixat ion t Ureat Britaiti or Northlei'rn Inreland in It accotlaimco with tihle e'xit iing practice' of hel)llt't't tsirce. ltl Similarly, royilties mind other amltotltmits patid itS coIsideraf.ioui for thie usc, of, or for lthe privilh-go of using, copyrights, piatcnits, dcsignm, stc're',t pirtto't'ssc.4 tili foriltutas, Itrace iamnes, atted ofwlie'r like tiroelrerty, ait cherived frout soilrtet wit lill the Unlited Kinigdomli b)y' a remsielllti tiOf the1( ilc' t41 wiho is ntt ctligllgc'Id ill 1 lc's, trade or utisimcss in lthe Utilc'tl l(itgdOIl) hilt who is stIhjc'ct to IIiitl'el 8111t1'1tax Oil sich'tt royvlties or other tmotios, shall be e'xeimlp from Untiithe Kinigdoml tax (art. VIII, c'nive'nt ioitn). RI pro'cairl'ally, a president. of lite Unitld Kiogdoltm iicli enigage'd in trade ci liusiiie'ss in thine Itlled $ltatt's btil. sttbjc'l to United Kingdon tax oniitl ic interest cir reivalt ics shati hI%,, exempilt. fromi I nltede S'ttalm taix. 113 wayv of exceltIicnl, thei xenmlpt ion for iterc'st shllah niot. lpplytI ltec'rest. palid n h'v ai Uilit'd 8aclles corportir iciti It)ao t'torliorttitm resideIttl it Ithe UnIlted I(ligdotto colltrollitng, ctircel3ly or incdirctly, more than 7'l) 50percenti of tile ent ire vot ilg t)towor ill tile piaiyinig corliorafIlon. MNtor 'er, BIritish scutbjeets antil crorpiatlint residleit, ittllt 1niled Kingdoim which ar' engaged iti trade or hIisincss In the United ihc States reality stubjcct. to Itaxat ion tundtcer otir law as provided, rc.spelctively, in sections 211 (b) andt231 (b)), Inteorniatl Revenuei otle. As used In I lie foregoing provision contceriming ro3'altli, lhe tormin shall Io doetiied to inctludo rentals in rc'spect, to m0tiOil-Iictellrt' tihts.
    I1ENTAI-8 AND MINNINO R()YAI.TIR,

    royalties in respect of tihe operation of mini' or quarries or of otthr extraction of natural resources, and rentals front real prolscrt v or front an hnitrest in su10h property, derived front sources within IhIo Unilted I'tlgdont biy an Individual who is &president of the Minltcd States tnot engaged iu trade or t)iishiess fit the IitiIted Kingdom but subject to United States tax with respect to stch iroyaltties and tentls,li.hall rentain subject to collection of tax at source In England (i. C., tho
    I Aem'entcns of April 14, 19Mit, April 23. IM2. Leas!ie of Nations, Colltion of Intenatllonal Aotrfo anid ments and Intertal trovistins for tIe Prevention of Moublo Taxation and ViFcatl Ivaon, Vol.1, 1pp. Mo and be.

    A special provision concerning rentals frota re'al 1)rt)olH,rt and miiinlg royaltiles Is foilnd II article IX of the convention. They are assinkila'lt to dividlends inI tlht

    (2614)

    INCOME AND ESTATE TAX (CONVENTIONS

    49

    p're)it but, i.dlll I4' A'xe'nllt from t1he United Kingdom surtax (liar. 2, art. IX, evolve'ltioll.) ("orrt'.spmiuldiigly, if such roytll it,'. or rvliitals art' derived from miourev% withini tile U tilted Stlat es by i resident of t1he I ltilt td1 Kiligtluin nlot e'Iigagel iII trath or hllsii'mt III tiho United $1item but -Iilbject to tl I Utnited Kingdomn ax. such, tiv~lt ies or h rental shall be subjeett to ai iuiixiiuul wiit hhhlhecldig r'le InI the 'iiited Sltatem of 15 percent. This reduttlluon to 115 pereent of Ifhe rat.l aiplie'clde to grm4 ulimiral royaltlits ani to gros, real Jlireirl v rentael- derivelq from I'n.lIed Sluatos sourett by ret.idetits of t he l'Unit.ed Kingdlom is considered ai. eqflivalent it) ho rafts of ';O0 reeitpon net relitlst allowing from,111 he, united Kigilgou to itle U'llited State$ ou letter frotim the l)epartmetil of Sltn1te to tIo Premide'lt., daled April It, 111,15, contained Iti thie lwessage from tile President lo the Seimnte, 7tItIh ("ong., .st sess., executivee 1), I)..). COlMI'PNSATION VOl1 I'MIXONAh SE 1W.;VI. A provision intended to eetiourage visits of bhiesinen'.,lei front one coititry to time other is founititI i rliele XI. Under ile IUilted Kiingdim itcomie-tax atct as it, nlow exists, fil Amierican cilizeiu o1io goes to E'I'lghuIee Onl b1l-Ainess is taxable iI respect of his Income earned lherie even during at very short visit, bul, utinder paragraph 2 iif artrilet X[ of lite ('ovent'llmi1, aill iudivithlial normally resident, in li lt' ed tihte shll Ibe exenpllt front tilth United Kingdom tax oll Irolits, t'inoluamlellts, or other remun eriatlion in trespliel of tl'rsolial (including professional) bervite litrforined uilltili the 'United liigildoin lIi nlly year of assessment il(el ghillilig Aloril (I) if (l) hit is lpresenl, il the U;Inited Kifgtilom for a lteriod or is'riods not exeeeding intli'e aggre'gaute 183 dlays tdurig Iiha(t year, snd 04b) such services if an, performed for titl olehilf of it nern msenitlet in the United Stattes (hie terml "llt'rson president inI the Untitetd states" Ilteans any individual who is residetit inl the iltuihd Mtaes for Ihte Iumrli,,ses of U'littd States tax aiid nto ret sideit InI the Unitetd I(iwtgdton for pur losts of Unitell Kingdom tax, amid ally Unfilted States corporation andt parl iier'sliip erea ted or organized il or under (lie laws of I lit' fiiy United States, being ia corporation or plartnierslp %,Plhieh is Iiol resident. lit the I'Uilted Kingdom for purlposes of the unitedd K(inmgdomu tax subpar. (I) of par. (1) of art. II, Comlventliol). A corlptoratlion is to I', r'egardedtias residentlit the United Kingdom if its bustiiess is managt'getl amJ coitrolletd il thlal country (subpar. (g), ibid.). This provision applies reciprocally to atresident, of tlio Un.ll ledI Kingdoill who Comes ltio the United Stale's to lierfoini l'rsoa l (Including plrofessionial) serviet'c during the' taxable , year witlhili thes Uniited States (par. (1), art. IX, ctinvention). 'fl It' oregtoing exemptiu ion does not. apply to t lie coliisellSat ion, profits, emolhilleicts, or oltitr rlielmuneriatioln of public elitertaiiners suclh ats stage',iot iOn Iietlmro or radlo artists, miiiisicialls, and athlletes. In ctollt1rast to the foregoing provision ctoncernliig private e loyimeiit, re. IInIltierat ioll jayab1eby hile government, of one country to onte of Its citizens rentlerIlg official srvirce' Int ilie otter tomiilrmy shall Ise exeiiillt, in tle other couit rmV, andt! therefore stlbject to tax under the law1s of his lisuhoe Country. Tlhiis Iprovisioll is found lit artic ;X of the convention, which applies similarly to governmUeittal r iiselitolis. Private iw'iisitts anid life aitiult It's are taxalilt the country Ini which tlhe.reclpiemit resides, under art ice XI1 of tile ltconvelntion.
    PIIVENTION OF" I)OVIIIJI TAXATION

    titt itllt dteft.ie ouirlrihtlltiu of S 'Ft'iItr aI.I th I lleslalldard rate of

    We have seen how iI the case of lIntrestt and patent aied colpyright. rovalt It's, ait well is certain other items of income, double taxationm is Imsvevtid through

    exeiilit ing suclh income inl lie count ry of source atid leaving it taxable ill tile coulntry t)f re-side'nee of the rmciplent. however, ill the case of business iincomeo at.triblutable to a lpelrlent estalbllShmlentI, (l0vi(h1011 distriblued by a corxoratliou,

    tions, are full, sullhect. to the American tax. To provide relief from double taxa,lcm, article .II I of the state. that,1onvetion wetionm 131 of thie United subject to States Interna1 lRevenuo (Codeas it effect on the first day of January 19.15, which I11poses strict liniit1s oi t(me remdit allowable, the UIulted Iklngdom ta.6s, (including time national defense contribution, tIme exces-profits tax, amd (lie incoamme tax, As well as surtax) are allowable as a credit.agaimist t le Unmited States incomeo taxes (uIcludimlg imortualt axes, suurtaxes and exces-IroflIts taxes, accord lItig W the case). For th1it l)tirlO$, time recipient of a divldentd paid by a corporation Wli,him resident of is a thie UnIted kiltgdonm shall be deeed to havo paid the United Kingdo1m1 imnconmo

    rentals, anId Mining royalties, the incomet Is taxable at source ani ltmay again ho taxable In the other country where tile recipient Is resident. Moreover, citizens of lio Untited Stae's1 evell though resident. IIm England, and United $ta'es corpora-

    (261 M)

    50

    INCOME AND ESTATE TAX CONVENTIONS

    dom tax. Correspondingly paragrap)h (2) of article XIII envisages the enactment of legislation in the United Kingdom whereby the United States tax payable in respect of income from sources within this country shall be allowed as a credit against tile IUnited Kingdom tax payable in respect of the income in question. Where such income is an ordinary dividend paid by a United States corporation such credit shall take into account (in addition to any United States income tax deducted fromt or imposed on such dividend) the United States Income tax Imposed on such corporation in respect of its profits, and where such Income is a dividend paid on participating preference shares and representing both the dividend at the fixed rate at which the shares are entitled and an additional participation in profits, such tax on Iprofits shall likewise be taken into account Inso far as theldivvidend exceeds such fixed rate. For the purposes of this relief front double taxation, compensation, profits, entolimneuts, and other remuneration for personal (including professional) services shall be deemed to be income from sources within the territory of the contracting party where such services are performed. This is 4 pritciplo of allocation already incorporated in section 110 (a) (3) of the United States Internal Rovenue Code.
    EXTRATERRITORIAL TAXATION-SETTLEMENT OF I-ENDING CASES

    income for (tle purposes of United States tax the amount of such Unitqd King.

    tax appropriate to such dividend If such recipient elects to include in his gross

    The convention also contains certain provisions to overcome the effect of sections in the United States law which invade what might be regarded as the tax jurisdiction of England. For example, under section 119 (a) (2) (11), dividends paid hv a British corporation to nonresident aliens or corporations are arbitrarily treated as income from sources within the United States, and therefore taxable by the United States if 50 percent or more of the income of the British corporation has been derived from sources in the United States. This is true even though the recipient of such dividends and the British corporation are not resident in the United Mtates. No corresponding provision'is found in the United Kingdom law, and such tax.,tion ott the part of this country has naturally been criticized as having an extraterritorial character. This extraterritorial taxation has already been abandoned in the existing income-tax convention with Canada insofar as residents of Canada, who are not citizens of the United States, are concerned. Similarly, article XV of the convention with the United Kingdom exempts dividends and interest paid on or .ifter the first day of January 1045, by a United Kingdom corporation, except where the recipient is a citizen or a resident of the United States or a United States corporation. Likewise, article XVI terminates the application of the personal holding company provisions of the United States Internal Revenue Code to United Kingdomn corporations which are controlled throughout the lat half of the taxable year, by Individuals who are residents ct the United Kingdom. Prior to the Revenue Act, of 1936, a number of claims against residents and corporations of the United Kingdom arose because of the efforts of the United States to subject them to its taxes on capital gains. A fair basis of settlement was incorporated. in the tax convention with Canada (art. XIV), and the sime basis is enmbodied in article XVII of the convention with the United Kingdom.
    FISCAL COOPERATION

    To assure the proper application of provisions for relief from double txaxt'on and to prevent tax evasion, article XX of the convention provides, upon a r of )rocal bamis, Information with respect to Income derived by a resident of thte Unite I States from sources in the United Kingdom, as well as information in caqc o0 specific taxpayers with respect to whom information is available to th3 revenue authorities of the United Kingdom. While the British system of information at source is less comprehensive than that employed in the United States, the President's message to the Senate (supra p. 5) states that the principle here adopted materially complements the United States domestic system of information at the source and it is anticipated, will be of considerable utility in the administration of the United States revenue laws. Article XX specifically provides that any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those concerned with the assessment and collection of taxes'which are the subject of the present convention, and that no information shall be exchanged which would disclose any trade secret or trade process.

    (2616)

    INCOME AND ESTATE TAX CONVENTIONS


    ASSURANCE OF EQUAL TREATMENT OF RESIDENTS

    51

    A sound principle of nondiscrimination in the field of taxes is incorporated in article XXI, under which the nationals of one of the contracting parties shall not, while president Inthe territory of the other contracting party, lxw subjected therein to other or more burdensome taxes than are the nationals of such other contracting party resident In its territory. It. Is to be noted that this applies only to residents and not. to nonresidents, and therefore it does not affect the withholding rate applicable to nonresident aliens and foreign corporations not, engaged In trade or business within the United States under sections 211 (a) (1) and 231 (a) (1), Internal Itevenue (1 ode. The term "nationals" means, in relation to the United Kingdom, all British subjects and British-protected persons from the United Kingdom or any territory with respect to which the recentt convention is apl)lieable. In relation to th'e United States, the term includes United States citizens, and all persons under the protection of the United States from the United States or any territory to which the present convention is applicable. The term also includes all legal persons, partnerships, and associations deriving their status as such from, or created or organized under, the laws in force in any territory of the contracting parties to wiwhi!th the present convention applies. For the purpose of this article, the word taxes" ineanis taxes of every kind or description, whether National, Federal, State, Provincial, or municipal. Although previously conventions for the avoidance of double taxation have been limited to Federal taxes, it is considered appropriate to extend this provision to State and local taxes, because it has already been incorporated in many commercial or generat-relations treaties to which the United States has been a party.
    EXTENSION OP CONVENTION TO TERRITORIAL POSSESSIONS

    An interesting innovation Is found in article XXII which lays the basis for the application of the convention to colonies, overseas territories, and certain other areas over which authority is exercised by the respective governments. Thus, tile convention could be made applicable to british colonies or other territories which have tax systems closely analogous to that existing in the United Kingdom, if their respective governments so elect. Correspondingly, overseas possessions of the United States such as Puerto Rico will be free to elect to come within the scope of the convention, if they see fit.
    TERM OP CONVENTION

    After the convention has been ratified and ratifications have been exchanged AS foreseen in article XXIII, the convention will become effective, as to the VnIted States with respect to the taxable year beginning on or after January 1, 1946, and as to thie United Kingdom income tax for the year of assessment beginning on the 0th of April 1945, and subsequent years; but, as regards the United Kingdom surtax, for the year of assessment 0ginning on the 0th day of April 1944, and subsequent years. For the United Kingdom excess-profits tax and the national defence contribution, the convention shall have effect for any chargeable accoUintIng period beginning on or after the 1st day of April 1945, and for the unexpired portion of any chargeable accounting period current at that date. Anticipating a permanent solution to the double-taxation problem as between the two governments, the present convention Isto continue in effect indefinitely, unless either of the contracting parties, on or before the 30th day of June in any year after the year 1046 gives to the other contracting party, through diplomatic channels, notice of termination. In such case, the present convention shall cease to be effective as regards United States tax for the taxable years beginning on or after the 1st day of January in the year next following that in which such notice was given. As regards United Kingdom income tax, the convention shall cease to be effective as for any year of assessment beginning on or after the 6th day of April in the year next following that in which such notice is given. As regards the Untied Kingdom surtax, the convention ceases to be effective for any year of assessment beginning on or after the 6th day of April in the year In which such notice Is given. The date of cessation for the United Kingdom excess-profits tax and the national defence contribution is any chargeable accounting period begin. ning on or after the lt day of April in the year next following that in which such notice is given and for the unexpired portion of any chargeable accounting period current at that date.
    ",0

    (2617)

    52
    'r'he convntitonl l eisttles of tI'ccitvis,

    INCOME AND EIT'i'ATH'r

    TAX CONVENTIrONS
    -

    VI*TA'ITH rAX YC't)NViENTION

    -IIA.'I

    PIRIN('INCIPLES

    II. llqiplies, itisoftir its Ihlit, |'lehd Slahts is Iho Fedei, ( 'ovtmireltilt, and, imtifur ral ats the ilt uil& KIlgdoiii is conceried, Itl; c'moiilltIn aiplie's only tli Ilii teshltlt , di(t mllnot 1 11to (hle Itgamitv 11n41 sii'Ics.tonl 1ulit's. It. Jlwid'itlllllh t'oiallits it Jlro. i Vision railatug Io Iilult11I I1ihllnisltrllivo aKsistainco Ill ouigh -le I cl'hilligt of
    coil't'rlit'd, tolnly I t'slithi taIlxes iliios)4 'by As lIn lie lonvet'llimil with (Cainaidlua, (le Iitchinlt'ry for mllitf frol double taixattion c'iilislt., hroandly sllaikiing. of, first,'detlitilig Inlsofikr a1s lpraclicl flilt- sitlus of vari4uus Ivlm,of a1,w,,is tlutl miighl It, subhjtecl Ili llait 11 III both c('lri's, anl, 14110111iily, providing it ljilih'd credit for taIx4s paiel at situis lgaitutllst I le h.i paid Ill Ilie ot')1her e')lliitry I)%reasn oIf filt' ihcv'll'4 l's be'ing domniciled Ihlnro'in or W)hitig it

    it (realt IBritaiiin aiiid Nort hem Inrhind regairdiaig IlIxt,. o)l Ce wrsons, s~ignlted April Ill. I1915, ri'seinhhs ill iiiIII1y nrslccs tIh collvelit J4)ll with (C'aitdit ol e'stahto taxii alliii sil't'cessioll dilie's, sigiseel .Iihll4' 8, 1941

    ,H.I'-ectlt ive' (1, 7t lIt ('Cog.0 2d se,.).

    natilti4nal IIi'rtdof. I leictl, fillInt'lll14 ot relief i's 4.'niillly I,

    siimilair tii I

    fai followed

    ill Il' h'elcm' of Ili'IIt'mcoit' tlfx c'tiIet'lillionll, mid4 is c)isi4h'reId tquille silt isfacttury froin tIhe view'Wj~intt of I le ilriiensted iii'nhem rs (if Ilit' he al 4 Foreign I,1111 Iraire, '4)lil'i.

    Sltn'ihor seallll, (nt't illfoh,, 111l stlaleIs It-AS MrI.( t'h11iil'unno). youir IiliiaI'rinklin (it, rnmlithe,. Fir. ('(llh' ipi'st'nl? t IcO Just, lilt

    STATEMENT BY FRANKLIN COLE, ECONOMIC CONSULTANT, OF COLE, HOISINOTON & CO., NEW YORK, N. Y.
    Mlr. ('o1,.. Fra nklin ('oih%. Semitnior I I,('AS. Y01' bllusiness'? Mir. ('Oi:.. I am1 preisideniit of ('ole, Illoisinglon & Co., 120 Blroadway, Ne'w lork. I nlt. its t'ommici' eonstlltnt, ill sevt'inl buniiks uiniitrust,
    conliltlnits.
    Set'nator

    r4Ut'AS. Ait, yill tlot' i ' gllitor Ibst' eonvtintions'? you f ths Mlr. ('cil,:. No, sir-. Well, I IIII hearirly inl favo~r oft' he brood
    oInvenionsl~ll.

    olbje'llivem of IIlthes

    t.lllflor litT('AS. You want to treat thet's ('toIVteitions together? Mr. ('o1,i. lilit I it)iwont, to iolt' jilst, two or three olservoations. Seniiator lItT'A5, 1) you Want t) 'onsiter tie t'o11vent ions stIoir ,lOMy?

    Mr. ('Ol,p:. I distuss Exe('utive' 1), but I cover both of them. Sellatlor lait'AS. ('over liFxocuitv'e D, if you can, briel'y. (live thle
    pols"!S. .

    ottiit'tcee your objtections to it. Mr. ('oi'v:. I hlve it very brief prepared memorandunm of only 3 Will yolu W'ldti it? Mr. ('oitr. I would just like to high-sgiot it., sir.
    Seliator UTASH.

    My interest, in iap)n)VI'ing Itbfore, your mt'tnlniI I is sole'ly tlint of tee Iit import ant silljewt, bt'fore you. in 11i of ity 5P iht clieint. i i Ido Inot illnlt th intetrt

    tihe brood, general' ifitt'reY4t f have int

    Although I ant in ogreementl with the broad obljetivel4 of tfiest conveinttolls there ore st'e'enI points I wish to coll to) this conIullitt'e'S
    attontion.

    ,me two c'onlventions witIi tlte {nit i Kingdiom ant Nol'therin Ireland, one r'iiting to incomeoitt taxes and lt'e other i't'loting Ito estate taxes have merit, and jpossess virt uts which I reg i'd is desirable in that t hey ai'oid illtr'nat iolnol double' ttxot iolt anm thereby encourage) thito free (low of foreign cotUnterce lnd capital.

    (2018)

    INCOME AND B14TATE TAX CONVENTIONSi

    53

    I. i'IIOCFIit)UE FOIl',OWI,) IN TIHE NFOOTIATION OF TAX CONVENTIONS

    tunity to know what specific matters ar- to be covered or how they tire to be treated, until the convention is signed and is before this t'oinulitt4ee for ratification or rejection. Since a tax convention made )rtsualtlt to the treaty.naking power is the supreme law of the land, (,are should be exercised to cooformi it, to the general scheme of internalrevenue taxation. For that reason, it. is submitted that the secrecy which heretofore has prevailed in connection with thle negotiation of suh conveitijolts is in my opinion undesirable. i It has been the practice of the House Ways and Means Committee ancl the Senate Finance Commuittee to permit interested persons to aI)fppear before them in connection with pending revenue legislation. I respectfully submit that before similar convent,ions are signed in lthe future it would Ie desirable if the negotiator presented to this committee a draft of the plrl)osed oIvenItion so that public hearings may be held at which witnesses, within and without the Congress will have anl opportunity to preme'it their views prior to the formal execution of the convention.
    2. I'088ll1lFl. EXTENSION OF CONVFNTIONS 'rO COI.ONIES Oil POSSESSIONS

    1114 pIer5oti who may be interested iii the

    International tax conventions are negotiated under a veil of secrecy

    suibjeet are given no oppo00.

    Th'lese conventions obviously are designed a.s conveli ions which will be ulsed a.s models for future 'oIvoenItions. Article XXll of the income

    eitllc

    tax coliVeittioll aild article VI I I of thle estate tax coltnventioni contain a toveil, d.l, ty tItito.l, ilt uihesirible principle. Under these articles. to

    wliieh impose taxes substantially similar to those which are the silbject Ih'owever, insofar as Ihe Uniited States is concerned, sluch antll extension inay be effected solehI by executive action without any opportunity for Vongress to consider tlle effects of such
    of ihe convention.
    all extension1 upon our general tax system.

    ally of its colonies, territories, overseas posse.sions, or mandated areas,

    consent. of tIlie other, extend the provisions of the conventioll to all or

    1IheUnited States or the United Kingdonm n1ay, subject, to the

    Senator WHVITE. I notice you enumerate in this second comments of yours "colonies, territories, overseas possessions, or mandated areas." ] take it the D)ominions tire purposely left. out. Mr. (Cont . Yes, sir;.I think they negotiate separately. 1 Senator WuimrE. There would be no authority under the treaty for Britain to extend the provisions of this convention to any of the Doninions? Mr. Coi, :. No, sir; not to mky knowledge.
    S. FIIEENZINO OF TIlE EXEMPTION OF CAPITAL OAINS

    Selia1tori' WHItm. May I ititerruplt, Mr. Chairman? Senator lUCAS. Senator White.

    Article XIV of the income tax convention provides t(iat, a resident of the United Kingdom iot engaged in trade or business in the United States is exempted from United States tax oil capital gains. This exemption is substantially tie saime as that now accorded any nonresident. aient under the fIternal Revente Code. However, thie con(2619)

    54

    INCOME AND ESTATE TAX CONVENTIONS

    mention goes somewhat further than tile code in that article 1 (2)of tile
    conventionon providi-s that a resident of the Uniteil Kingdom is not

    engaged in business in the United States unless he has a permanent establishment here. I might point out that this provision is not truly reciprocal since there is no exemption of capital gains realized in the United Kingdom by United States citizens, although the United Kingdom. does not ordinarily tax capital gains. howeverr, such gains are taxed if they are realized in the course, of a trade or business. Thus there is some doubt whether gains realized in the United Kingdom by United States citizens are exempt from British tax in all cases. The provisions of the Internal Revenue Code exempting nonresident aliens not engaged in business in the United States from tax on capital gains have worked well in practice and should not be disturbed in so far as they apply to persons actually residing outside of the United States. Due to the extraordinary conditions which have prevailed during the prcsteit war, many aliens are physically residing in the United States although they technically are nonresidents since they are here on visitors' visas. Under the Internal Revenue Code such persons are now ex(mptcd from tax on capital gains, but the question arises as to %lihether such exemption should be frozen under article XIV of the convention. Thank' you, sir. Senator LUCAS. Are there any questions, gentlemen? Senator Hatch? Senator HrATCH. .1 think not. Senator LUCAS. Senator White? Senator WHITE. No. Senator LUCAS. Senator La Follette? Senator LA FOLLETTE. No; thank you. Senator LUCAS. Is Mr. Phillips, of the American Bar Association, here? Mr. PHILLIPS. Yes, sir. STATEMENT BY PERCY W. PHILLIPS, CHAIRMAN, SECTION ON TAXATION, AMERICAN BAR ASSOCIATION, WASHINGTON, D,C. Senator LUCAS. Mr. Phillips,.you wanted about 3 minutes, you told me over the phone this morning. Will you state your name and whom you represent here before the committee. Mr. PVILLIPs. Percy IV. Phillips, Washington, D. C.; chairman of tile section on taxation of the American Bar Association. As a result of the Canadian tax convention and the fact that there was a feeling among many of the lawyers of the country that the death tax convention with Canada might have been improved in many respects, the council of the. section on taxation of tile American Bar Association adopted a resolution, which I would like to read into the
    record, if I may. Senator LUCAS. Proceed.

    Mr. Phillips (reading).

    Resolved, That the council for the section on taxation of the American Bar Association recommends to the appropriate divisions of the State and Treasury Departments and to the subcommittee on taxes of the Senate Foreign Relations Committee that qualified, interested organizations be informed of the terms of proposed International tax treaties, and that an opportunity be afforded such organizations for the presentation of their recommendations with respect thereto.

    (2620)

    INCOME AND ESTATi TAX CONVENTIONS

    55

    * *

    I might say that over a period of years the American Bar Association and a number of other interested organizations in the country have been presented with the question of*ouble taxation among the States of the Union both with respect to income taxes, sales, and use taxes, and especially with respect to inheritance and death taxes. They have hada great deal of experience in dealing with those matters, and it is our feeling that that experience could be useful in the negotiation of international treaties. Senator LUCAS. You are making the same objection the previous witness made with respect to the secrecy of this treaty? Mr. PHILLIPS. I believe so; yes, sir. Senator LUCAS. Is that your only objection, sir? Mr. PHILLIPS. That is the only objection that I have. There has been no opportunity for the American Bar Association to take formal action or make any recommendations with respect to the treaty now pending before this committee. Senator HATCH. Your association does approve the general policy of entering into these conventions to prevent double taxation? Senator WHITE. As the matter stands, the American Bar Association is neither advocating nor objecting to these particular treaties? action on the treaties. Senator WHITE. Yes; but you are saying, in so many words, "Yes or no"; and I take it you are saying No." The bar association has no specific objections to make at tris time to the treaties? Mr. PHILLIPS. It has no recommendations to make at this time. Mr. Phillips submitted the following letter to accompany the resolution previously read by him:
    AMERICAN BAR ASSOCIATION,

    Mr. PHILLIPS. I believe they would.

    Mr. PHILLIPS. We have had no opportunity to take any formal

    SECTION ON TAXATION,

    In re tax convention with Great Britain


    Hon. ALDEN W. BARKLtEY.r, Chairman, Subcommtllee of Senate Committee on Foreign Relationa, United Sales Senat, HWeshinglon, D. C. Rtai: On behalf of the section of taxation of the American Bar Association, I enclose herewith a resolution recently adopted which recommends that qualified interested organizations be informed of the terms of proposed international tax treaties and that an Ol)lortunity he afforded Ruch organizations for the presentation of their recommendations with respect thereto. rhis resolution was ar!optcd as a rmult of the recent tax treaty with Canada. The procedure now followed in negotiating such treaties is suclhthat interested organizations have no opportunity to present their views or suggestions, either with respect to principles or details of operation, until a convention has been signed, after which tenc no opportunity for effective action remains. The American Bar Association and many other organizations have devoted many years to a rather .effective program to avoid the problems of double taxation between our states. In that program much hai been learned which could be of substantial vklue to those charged with the negotiation of international tax
    Conventions.

    PERcY W. PIHILLIPS, Chairman.

    Senator LUCAS. Are there apiy other witnesses from out of the city? Those are the only three witnesses, apparently, who have asked to testify. The next witness is Dr. King,$pecial Deputy Commissioner of the Bureau of Internal Revenue. Mr. King, come forward. Mr. King, will you give the committee the benefit of your knowledge upon this question? (2621)

    ff 9

    INCOME AND ESTATE TAX CONVE.NTIONS

    STATEMENT BY ELDON P. KING, SPECIAL DEPUTY COMMIT. SIONER, BUREAU OF INTERNAL REVENUE Mr. KING. I am somewhat puzzled as to just how I could proceed, here, with the most benefit to the committee. Mr. Carroll gave a summary of the earlier history of these conventions, the general world background. He stopped short of taking up each article and giving its general objective. I hesitate whether I should attempt to do that. I would be glad to, if the committee would like to have that approach. There are also the seven questions or objections referred to, which I assume will be made the subject of discussion. By way of further analysis of those I prepared some notes after Mr. Stain and I had finished with those answers. Senator Luc.is. Are you and Mr. Stain in agreement upon the. objections and answers? Mr. KING. The approach, there, was more of a technical approach. The questions were technical, and the answers were more or less technical. I think the answers should probably be followed up by bringing in more of the compromise features of the convention. The answers are directed more to changes in United States law. Britain made many changes. There were many compromises in this convention. Some of the supplemental notes I prepared go to those questions. If you think it would help the committee on those questions and answers, I would be glad to read this memorandum. It is not very long. Senator LUCAS. I think you had better read it, sir. If it is not veiy long, you had better read it. Mr. KING. It is 10 pages, double space, I can hurry along. I believe it would give you a bettor over-all pictur3 of the convention. Then I would be glad to answer any specific questions after that. Senator Luc&w. All right, sir. Mr. KINo. The memorandum is directed primarily to adjustments in the United States law produced by the convention. Since the provisions of tax conventions represent mutual concessions by both contracting Governments, the present memorandum is directed to that subject. Of first importance among the concessions mhde by Britain is that found in article XX of the convention, which authorizes exchange of tax information between the countries. The Federal Government has long since conferred upon administrative officers comprehensive powers of investigation, including a source information system and power to inspect the taxpayers' records. Although this is regarded as a matter of routine procedure in the United States, Britain has adhered to rules of fiscal secrecy to the point where the nominee or owner of record cannot be required to disclose the beneficial owner and the tax officials are not granted general authority to inspect the taxpayers' accounts and records. Within the past few years Britain has liberalized the power of inspection, but because of war conditions the laws have not been invoked. In a preliminary exploration with Britain in 1937 looking toward a tax convention, it was recognized that the British policy of fiscal secrecy and British objections to alleged extraterritorial practices on the part of the United States formed the greatest barriers to the conclusion of a tax convention (2622)

    INCOME AND ESTATE TAX CONVENTIONS

    57

    between the two countries. I pause here for a moment to add that I am emphasizing the conflict in principles over investigative powers since it figured prominently in the negotiation. We wanted certain concessions in this field and Britain wanted certain concessions regarding extraterritorial practices; these and many other conflicts are in the background which eventually formed the compromise now reflected in the convention. In tax-convention negotiations it has been regarded as fundamental that as a part of a plan for cooperation in tax enforcement the countries would desire to first agree on the principles of taxation which would come under the enforcement plan; otherwise they would be parties to a plan under which they would be in a positionto indulge in extraterritorial and discriminatory taxation and call on each other for cooperation in the enforcement of such taxation. In certain instances in the present convention, such as those referred to in some of the committee's objections, the countries have proposed to place their laws on substantially a reciprocal basis before joining in a plan for reciprocal enforcement. It follows that should the United States desire to withdraw from some of such substantive provisions, Britain would be in a po.ition to withdraw, wholly or qualifiedly, from the administrative provisions. The proposedadministrative provisions set forth in article XX are obviously far reaching and of first importance from a tax administrative point of view. In dealing with transactions as affecting the individual, partnership, or corporation of one country having business, trade, or investment transactions in the other, the countries are frequently at a loss under their existing laws to obtain or verify information regarding the foreign transactions, while the convention establishes a coordinated arrangement under which the laws can be better enforced. Thus as items exempt or partially exempt at source, such as interest, royalties, aad dividends move to the country of residence, the latter will be so advised by the source country, and in business transactions involving intercorporate or similar relationships provision is also made for exchange of information. The indirect advantages of such an arrangement should not be lost sight of, since with % grant of authority to exchange tax information taxpayers of one country having business or investment transactions in the other are more likely to render proper returns in the first instance. Upon Britain having decided to adopt the principle of exchange of tax information, a comprehe nsive plan was agreed upon. The plan envisages automatic exchange of information with respect to recurring items of income and investigation by one country for the other in particular cases, without reservations concerning nationality; that is, in agreeing to make investigations for the United States, Britain made it clear that she intends that her own subjects will come under the plan. This is in contrast with reservations as to nationality insisted upon by other countries with which we have had negotiations, such as Sweden and France. The general observation is made at this point that the convention deals with the citizen, resident, and corporation or other entity of one country having trade, business, or investment transactions inthe other, and the citizen or resident of one country who performs personal services in the other. Although the field dealt with is of narrow scope and of minor importance when compared to the general income-tax systems (2623)

    58

    INCOME AND ESTATE TAX CONVENTIONS

    of the countries, it is regarded as a troublesome phase of most any income-tax system. The natural conflicts resulting from two countries legislating in this field without attempt at coordination of their laws produces a natural setting for reconciliation of principles through a By way of further general observation, it may be said that the most common methods of eliminating double taxation are through exemption of income from tax at source and taxation at residence or taxation at both source and residence followed by the country of residence giving credit for the tax at source. Where conflicts in choice of methods exist, the convention is likely to reflect a compromise and such was the solution'reached with Britain. Since in dealing with its own citizens, residents, and corporations, the United States has long employed a credit system through which it permits deduction of the foreign tax from the United States tax imposed on the foreign income, it has naturally turned to this solution as a part of a tax-convention plait. It was found, however, that Britain preferred the more direct system of eliminating double taxation through exemption from tax at source so the convention reflects a compromise of the two plans. Thus, in most matters of business income and in certain instances affecting earned income, the credit system is employed as a means of eliminating double taxation, while in most matters of investment income the source exemption system is used. It might be noted that in reaching the compron ise as between credit and exemption methods the pattern is quite similar to that found in the convention between the United States and Sweden and the United States and France, since those countries likewise preferred the source exemption system. In the light of the above general backgrowid, reference is made below to the more important changes made in the laws of the two countries. It will be recalled that preliminary to the submission of this memorandum I stated that the prior memorandum pending before the committee containing certain objections and answers was directed primarily to the United States law, whereas the present memorandum is directed to reciprocal adjustments and compromise considerations. Article IIldeals with the business enterprise o! one country-whether in individual, partnership, corporate, or other entity formhaving a permanent establishment-branch, factory, mine, agency, etc.-in the other country. Existing laws of the two countries in this technical field, both as affecting the objects of taxation and the rules of income allocation, were found to be substantially at variance, but a common meeting ground was found through the adoption of the so-called enterprise-permanent establishment relationship with the accompanying rules of allocation as set forth in article I1. It is quite difficult to judge which country made the greater concessions in its existing princi ples when compared to the solution reached, but it can be said that tho plan adopted is the one which is contained in all the income-tax conventions to which the United States is a party and is one employed in tax conventions generally. One particularly troublesome phase of the above subject pertains to taxation of certain transactions of the enterprise which are carried on independently of its permanent establishment. In dealing with somewhat similar questions under existing law, Britain had long since had regard for the separateness of such transactions while the United (2624)
    tax convention, and this method has been employed by many countries.

    INCOME AND ESTATE TAX CONVENTIONS

    59

    States income British having Unite

    were independent of those carried on through the permanent establishment. For example, the British bank with a branch in the United States would be permitted to sell securities through a United States broker free of United States tax. As article III is drawn, however, Britain has waived this principle in favor of the United'States concept, so that upon a British enterprise having a permanent establishment in the United States all income from Unit.ed States sources of the British enterprise and the permanent establishment will be combined for United States taxation purposes. Under the plan of. article III, when read in connection with article XIII, Britain will give credit of the United States tax against the British tax. This is but one of many instances where through the convention Britian has agreed to match the credit system found in section 131 of the Internal Revenue Code. When measured in terms of existing law, concessions were made by Britain but not by the United States. The situation is comparable to several of the points made in the questions pending before the committee where the United States changed existing law to effect reconciliations with British law in order to reach an accord on the issues as a whole. Tie adoption of a broad credit system constitutes a major change in British principles, and since it is intended that the system be extended to other countries it was anticipated that it would have considerable effect on British revenue. Article III, above, is further discussed under the fifth point raised by the committee. Article IV .can be described as a mutual cooperative provision through which both countries expect to benefit in dealing with certain business relationships, especially thie intercorporate relationship. Through their respective existing laws the countries have authorized consolidation of accounts so as to place closely related enterprises on an arm's-length or independent basis in their commercial and financial I relationships, but in the absence of reciprocal cooperation in such matters the provisions are difficult to administer. Such cooperation is provided through article IV when combined with article XX, which authorizes exchange of information. Both countries changed their laws to bring about exchange of information. Article V adopts the principle of taxation at residence and exemption from tax at source of shipping and aircraft profits. Congress has authorized this method of taxation of shipping profits on a reciprocal basis since the enactment of the Revenue Act of 1921, and the United States has entered into many reciprocal arrangements oil that basis. In authorizing such arrangements the primary objective was simplicity of tax administration rather than revenue. The arrangements have thus avoided the difficulty and annoyance attendant upon the computation of profit allocable to the foreign ship while in United States waters. So far as shipping is concerned, article V merely confirms the principle of prior exchanges, of notes between Britain and tihe United States, but taxation of aircraft operations has been brought (2825)

    taxation with respect to its transactions in the United States which

    had long since aggregated the transactions in computing of the foreign enterprise. Under the British concept, the bank, or for that matter the individual resident of Britain, a branch or other form of permanent establishment in the States would be permitted to claim a separate regime of

    60

    INCOME AND ESTATE TAX CONVENTIONS

    within the principle. The same provision reppecting shipping and aircraft has been included in all our existing income-tax conventions. The solution reached represents a change in the general laws of the United.States and Britain. At this point it is perhaps well to add that when tile several pro. visions of a tax convention are taken together, it is difficult to say which country has received the greater benefit, since much depends upon the particular cases which arise tile direct and indirect effects of the provisions for the exchange of tax information the shifts in flow of business, investment income, and the like. The reciprocal shipping arrangements which thle United States has entered into since about 1921 are illustrative of the point. Prior to the war there were probably more ships documented under foreign laws entering foreign ports with the result that the United States may have sustained a loss ih revenue on net balance, but after the war the result may be reversed and the United States may also stand to gain under the provisions on aircraft. But aside from revenue considerations, which are by no means ignored, there is the over-all objective of attempting to find a commu.i meeting ground which is administratively feasible and to establish a forum for the settlement, of tax disputes as between the two countries. Article VI reduces generally the United States rate from 30 to 15 percent in the case of dividends going to British residents, and from 30 to 5 percent in the case of certain intercorporate dividends. This article is typical of the compromises reached. After imposing a tax on the corporation the United States imposes a second tax on the dividend paid to the shareholder. Aside from the technical point of whether the British standard rate of 50 percent is on the shareholder or the corporation, the-fact is that the corporate pool of profits is subjected to only one British tax. From the British point of view, reciprocity required removal of the second United States tax, but the issue was compromised by the United States removing one half the tax and by Britain crediting this tax against the British tax on the same income, Sealtor L'A.cs. Now, right on that point, will it take legislation by the Congress to take care of that? Mr. KING. No sir; the treaty itself supersedes the law. .\hr. KING. The Congress has for several years continded to enact the provision in each revenue act, to thie effect that nothing in the act would be construed as being inconsistent with any treaty provision. S(,nator Lucas. Yes, I understand. .Mr. KiNo. And it makes the treaty the supreme lawv of the land. As a part of the solution Britain agreed to treat the United States corporate normal tax and surtax as being borne by the British shareholder, and the United States agreed to treat the British standard tax as being borne by the United States shareholder. The latter adjust.inent represents a change in construction of (Jniteed States law, while both phases of the credit granted by Britain iuvolve a change in British law. The dividend issue, which is made the subject of further discussion under the first point raised by the committee, was one of the most controversial points involved in the negotiations. Article VII, relating to interest, and article VIII, relating to industrial royalties, are instances of the United States adopting the British (2628)
    S(eiator LUCAs. The treaty will take care of that?

    INCOME AND ESTATE TAX CONVENTIONS

    61

    solution for eliminating double taxation by exemption of income from tax at source. It has been found from negotiations with European countries that the source exemption mothol is generally preferred to the credit method as a means of eliminating double taxation, and our conventions to date with such countries reflect compromises of the two methods. Since Britain already employed the source exemption method as to British Government bond interestt, tile United States credit method was hardly applicable for a solution of this point. Full employment of the credit method would have required Britain to set up a now system for taxation of British (Government bond interest, followed by the United States granting it credit of the British tax. As a part of the settlement of many issues, the United States agreed to adopt the more direct method of exempting such interest from tax ?it sQuree. Respecting other interest andl royalties items, the solution reached through the .convention changed the laws of both countries. I might add, here, that that. solution also conforms to that reached with Sweden and France, except as to interest. The solution reached in article IX respecting rentals from realestate and natural resource royalties reflects a reduction in the United States rate of tax on the gross to approximate the British tax on the net income and a change in British law to permit the United States tax to be credited against the British tax in order to conform to principles of United States law. Article XII, respecting private pensions, and life annuities is another instance where double taxation is avoided through exemption from tax at source. The solution represents a change in the aws of both countries. In discussing the treatment of periodical items of income such as dividends, interest, and royalties in the Committee's first objection, reference is made to the fact that the United States has waived its tax at the statutory rate-section 211 (c), Internal Revenue Codewhere the income from these sources exceeds $15,400. Britain has no comparable system of imposing a gross tax at source up to a certain amount followed by a tax on net income but not less than the gross tax. As a part of the general settlement, the United States dropped the double method as it has done in whole or in part in the course of ileacthing agreements in its several other conventions. As a part of the Plan Britain has dropped its most comparable tax, the surtax, on the United States recipients of the above type of income. Article XV provides that the resident of Britain not having a permanent establishment in the United States shall be exempt from United States tax oin gains from the sale or exchange of capital assets. Other countries with which we have dealt have not imposed such a tax, so in the course of reaching a parity 'we have invariably made the same concessions in our con -entions with them. Since the enactment of sections 211 and 231 of the 1936 act, Congress had granted substantiallv the same exemption to the nonresident alien and foreign corporation. Although the exemption granted through such sections and corresponding sections of the code are niade dependent on that class of taxpayers not being engaged in business in the United States, the distinction between that concept and tht permanent establishment is for capital gains purposes believed to have very little practical significance. For convention purposes, and as a part of a general settlement, we have therefore used the permanent establishment as (2627)

    62

    INCOME AND ESTATE TAX CONVENTIONS

    the test. If it is consideredd that some capital gsins may escape tax by tying the exemption to the permanent establishment instead of the concept of being en rtged in business it its well to recall tlht under the convention the ITnited States will through the exchange of tax
    information be in a position to ascertain iu the future those taxpayers having a permanent establishnlleit in the United States who engage ill capital tranlsactionls.

    This subject is furthe.-'analyzed under the questions before the conmiinttee. Through article XV the United States gives tip its right to tax the British shareholder of a British corporation-other than a citizen or resident of thCi Unitd States or a United States corporation-where the corporation derives more than 50 percent of its income from the United States sources and a similar concession'is made in article XVI British corporation which is controlled by residents of Britain. These taxes are regarded other countries as being than real and are frequ1tently charged by as being more theoreticalextraterritorial in scope.
    Counterparts to the United States system tire not found in the British with respect to United States tax imposed in certain instances on the

    system, so the system was dropped as a part of the general settlement. teso articles are made the subject of the third and fourth questions before the committee and the points are more fully analyzed in the answers to such questions. Article XVI1l beans relation to articles XIV, XV, and XVI in that it pertains to the retroactive application of these articles and specifies the conditions under which set thlements of cases involving capital gains for earlier years may be made. In preliminary explorations with the British leading tip to the instant convention it become apparent that as a part of any plan involving exchange of tax information the United States would be required to make the adjustments now contained in articles XIV to XVII inclusive. As above indicated, the Unilted States taxation in these fields, aside from being subject to certain extraterritorial charges was regarded as having a rather Ili hly theoretical application. Under the information provisions, the 1United States will be in a position to trace through British sources such items as United States ownership in a British corporation-whether a personal holding company or otherwise- and security and other transactions abroad of American citizens or corporations which may be handled through British nominees. The information provisions will also extend into many other fields such as that affectiing business income. The position of Canada with respect to the subjects covered in articles XIV to XVII, inclusive, was practically identical in character with those above discussed, and such adjustments were made as a part of the convention with that country which becmune effective on January 1, 1942. Recent changes in the information policy of Britain have opened the way for a convention with that country. Article XXII deals with possible extension of the convention to colonies, overseas territories and protectorates. In dealing with Empire countries it has been common practice to extend conventions of various kinds to such units within the Empire but the present con. vention seems to represent the only instance where a veto power has been reserved to the contracting countries. In adopting article XXII it was understood that the standard protocol in such matters required (2628)

    INCOME AND ESTATE TAX CONVENTIONS

    03

    derived through the adoption of such provisions as those dealing with the enterprise and permanent establhshment, shipping and aircraft operations, and. exchange of tax information. This article is further discussed under the seventh objections pending before the committee. Senator LucAs. Are there any questions? Senator Batch? Senator 1ATCH. No questions. Senator ILUCAS. Senator White? Senator WRTE. No questions. Senator LUCAS. Senator lia Follette? Senator I jA Fot.,,I:TTrr:. No questions. Senator I wouhl like to ask one (question of tlie witness, 1AFC!5. dealing with statements made by Mr. Cole. lHe ol)jects to the pro(etdur( followed in thi negotiation of tax conventions, on the ground thit all of the negotiations are held in secret, therefore no one, other than the contracting parties, has any opportunity to be heard. What have you to say abl)out that? Mr. KINO. I followed those stwtenwtits with a great deal of interest, becatise they were new to me, andtii my severa'ears' experience in this field I had never heard those questions raised Ibefore. Prior to the United States deciding to have a negotiation for an income-tax convention, as I recall, there has been a pulic aFtlnnounlcemnent, a press relense issued. As a result of those releases I think we havo invariably hlad questions presented by parties who have anl interest in a particular issue or principle or their solution. Moreover, we receive many stiggestions in anticipJation of negotiations which are t(ade by intteI'est(ed parties and file(m by countries and considered inlthe course of a negotiation. We invite' ail are glad to receive sumih suggestions. Senator WHImT. May I ask, right there? Stt 9ntor LUCAS. Yes. Senator WHITE. What was the subject matter of the release? Simply it notice that you were to undertake to negotiate? NI1r. KING. Yes, sir. Senator HWIm. Was there anything to indicate what the subject matter or scope of the treaties would be? Mr. King. As I recall, the initial releases read about this way, or inl substaance to this effect, that "The United States and France (say) are to have a negotiation looking toward the (onclusion of a tax convention involving principles of elimination of double taxation ald reciprocal aClmiitistrittive assistance." Senator Wn'Ir-:. That was the French negotiation? , Mr. KINo. That has been about the same in all of them, as I recall it-French Swedish, Canadian, British, South Afric.,n. Senator WVHITE. Canl yOU indicate the time that those releases Mr. KiNG. Ordinarily they would be put out several weeks ahead of a negotiation, or, where there has been p)reliminary discussion, iin ample time for presentation of suggestions prior to conclusion of the negotiations. For example, after preliminary discussions in England a release was issued onl August 21, 1944, stating that (discussions would
    73095 0-02--vol. 2--72

    Such factors as possible tax evasion or avoidance and the benefits to be

    that there first be an exploration in order to ascertain whether the veto power would be invoked. Such exploration would necessarily involve

    were put out?

    (26'29)

    A6A

    INCOME AND ESTATE TAX CONVENTIONS

    be resumed in Wasl~ihton at an early date. Discussions were December of the same year. Beyond that I should think it would be quite difficult, because when the representatives meet, one issue leads to another, and we go through much exploring, over a period of weeks, sometimes months, until the issues are reduced to a point of agreement, the picture keeps changing constantly, and eventluollly we strike a balance; we can hardly define our issues specifically in advance. Another thought is that since the field involved is comparatively narrow, our existing conventions are substantially indicative of the general issues which will be considered. Senator WHITE. May I ask this question. After you had negoti. ated and the treaties had beon reduced to writing, how much time intervened before they were sent tip here to the Senate by the President? Mr. KIN. I was just trying to judge the time element, there, for you, Senator. From the time of signature by. the Secretary of State and the ambassador or the representative of the other country, they come hero very promptly-within a week or so, but when signed abroad a longer period will intervene. Senator WIT&. I do not mean to be critical, in the question, but I was just wondering, as a practical proposition, between the time of negotiation and the transmission of the treaties hero to the Senate, was there any reasonable opportunity for the interested public to familiarize itself with the terms of the treaty and to offer to you criticisms? Mr. KINO. No publication of terms is made at that point, and I should like to add that the executive branch has always been very careful to have regard for the senatorial secrecy in Ahese matters until they arrive here and are made public. Moreover the foreign country has invariably insisted on secrecy until subsequent to signature. Senator WHITE. That means, if secrecy is preserved from the time of the negotiation and signature of the instruments, and from then on, of course there has not been very much chance for the American public, or that part of it which is interested in these matters, to voice either approval or criticism. Mr. KtNG. Not of the finished instrument, but-Senator LuCAs. The convention was signed April 16, 1945, and it was delivered by the White House to the Senate, April 24, 1945. Senator WHITE. As I say, I am not inspired by any critical mind, but of course I do feel that. so far as possible the persons interested in matters of this sort should have a whack at it before it was put in its final and irrevocable form. Senator LUCAS. Of course, I presume that is why we are having these hearings, now, so that people can object, if they so desire, and be heard. You said, in the beginning of your testimony, that you had some difficulty in getting the agreement with England on this double taxation because the English people refused to give to the Government many sources of information that you believe necessary and desirable in order to reach an agreement, and that was one of the thins that held it in abeyance for a long time, as I remember it. Mr. KING. Yes, sir. Senator LUCAS. Now, I notice hi article XX it states:
    resumed about the midI e of November 1944 and concluded late in

    (2630)

    INCOME AND ESTATE TAX CONVENTIONS

    65

    Any Information so exchanged shall be treated as secret and shall not be dis. closed to any person other than those concerned with the assessment and collection of the taxes which are the subject of the present Convention. No information shall be exchanged which would disclose any trade secret or trade process.

    internally England had very little information-at the source nor power of investigation. Not having employed those principles internally it was difficult to extend them internationally. Having decided through this convention to extend them between the United States and Eng. land, provision is then made that upon the information coming to the Bureau of Internal Revenue in this country or the tax officials, it will rest there and not be passed on to others. it is about the same provi. sion we have had in all our tax conventions, that upon information being received by one country from the other, it will be treated as secret. Of course, our own tax information is in terms of secrecy. this kind 6f convention except the Bureau of Internal Revenue? Mr. KING. Oh, yes.
    Senator LUCAS. What other agencies? Senator LUCAS. Does any other agency of the Government sit in on

    Does that about, here, have has sometorelation to it. I would firstare talking now? anything do with this question that we say that Mr. KINQ. It

    Mr. KINo. The State Department is always represented. It is a coordinated effort between the State and Treasury Departments and the Bureau of Internal Revenue. Senator LUCAS. Do you have anything to say with respect to his other objections-the possible extension of conventions to colonies or possessions? That is his second objection. Mr. Cole says:
    Under those articles either the United States or the United Kingdom may subject to the consent of the other, extend the provisions of the Convention to all or any of its colonies, territories-

    et cetera.
    However, insofar as the United States is concerned, such an extension may be effected solely by executive action without any opportunity for Congress to consider the effects of such an extension upon our general tax system.

    What do you say about that? Mr. KINO. I would answer'that in this way, that having agreed that we had a good conventionbetween the principal countries, and since it appeared that the laws within the British Crown Colonies and the like were substantially similar and followed a rather common pattern it was thought that provision should be made for the extension. tlowever, a veto power was reserved, and.in the application of the convention it is contemplated that upon a certain colony, say Kenya, desiring to come in, there would be an exploration and it would first be determined whether the United States found any objection; if it did, the matter would be dropped. Senator LUCAS. Do we have a similar provision in the convention with France?
    Mr. KINo. No. It was discussed.

    Senator LUCAS. But it was not included?

    French colonies and protectorates were found to have their own tax systems, such for example'as the Philippines and Puerto Rico, and wherever they have a different tax system they usually have different (2681)

    Mr. KING. It was not included, for this reason, as I recall.

    The

    66

    INCOME AND ESTATE TAX CONVENTIONS

    laws, making it rather impractical to extend such a convention betweell two countries to others, so that is the reason they were omitted. However, I understand it has been rather common practice in other types of conventions, such as a consular convention, extradition, land tenure-conventions generally-to apply them automatically to cojonies, and to rrotectorates, within an empire. Senator LuCAS. Do you think it is sound to give the Executive the power, here, to extend, rather than resubmitting it to Congress? Mr. KING. I understand in that connection that the extension heretofore has always been automatic, and this is the first time a reservation has been made for a veto; but of course that still does not exactly answer your question of whether it should not have gone beyond that point. Senator LUCAS. Are there any other questions, gentlemen? I guess that is all, Mr. King. Are, there any other witnesses? It is now 12 o'clock. Mr. Stain will testify it little later, I think. FURTHER STATEMENT BY MITCHELL B. CARROLL, SPECIAL COUNSEL, TAX COMMITTEE, NATIONAL FOREIGN TRADE COUNCIL, INC., NEW YORK, N. Y.
    words withI r,,fervi',, to .4oilU, points :nael., by \h'. Cole? And itlso. the question of the Amriean Bar Assoiation? All I want, to say i.s

    Mlr. CARROLL. Mlr. Chairman, would you permit me to say a few

    this. As regards the third point raised by Mr. ('ole, we think that Article XI\V is a very desirablee htlatise. The reason is a practical one. W.e have adopted ats at blsiIi principle for the convention thei taxation of Ihe enterprise of Eilgland for example in the United States, if it ilts a pei'lialaient estilllishment here, and in that way we specific' ally exemijpt tratnsactions through bonn fide brokers ano cosmoissiol 1,(.ents. 'I hat is a general principle that has been adopted in most of the treaties existing betecen other countries. Senator LJUCAS. Right oil that point, before you finish, will that pernitt the man, for Instance, ,from England, to come over here ani speild 3 months living in a New York hotel and playing the stock making for market,any taxes? himself a lot of motley, and to then return without paying CARROLL. We regard this as a different problem. We art, pAfr. dealing here with business enterprises, as you see, and it is a principle that is necessary for example in connection with transactions in cotton and commodities and all that sort"of thing. That is what we have in mind particularly in connection with the permanent estabhislinsent. Senator LUCAS. I have in mind something different.
    Mr. CARROLL. No; but I want to get to it, if I may. That is tlh basic principle. Now, that basic principle of reciprocal exemption of transactions in the actual commodities is supplemented by extending the same principle.. to dealings on the commodity exchanges, because, as you know, when you (heal in cotton, or cocoa, or in any actual conjinodity-alhnost invariably you have that transaction hedged by dealing in futures; so that it is normal to extend the same principle .f reciprocal exemption of transactions through brokers and commission agents, to transactions in commodities on the comnmodity exchanges. (2632)

    MNr. CARROLL. Yes. Senator LUCAS. You did not answer my question.

    INCOME AND ESTATE TAX CONVENTIONS

    67

    wit Il France and Swedhn and Canada, is a very logical cxte.sioli of the Jprineiple of reciprocal exenlptioui of gains front in,111s .ctious in act lu ('comin((ldities through brokers and commission agents. That in4.vitald tie-in of tlt, hd(Ig( with the actual comnuloditvy is, of paraIlloIill importallCe, *1an(d extension to transactions lit stocks and the honds isnecessitated by the very practical aspect, that if nonr'elidents
    its you know sell here, then theremight be a possibility of taxing t hem; but if yout threatens to tax theli, they can etrect their szde abroad, put their transaction through in ljo;1(1Io1, and escaple the tax here: and it wits becali'se of the large volume of transactions that. would norimally he conchluded here bNing driven to Engln and to ot ler exci changes that Congress in 1936 adopted those provisions iit sectiolis 211 and 2:31 anti we consider theni very sound. We (o not feel that they should be inpa'lJ ed just because of a teilJ)orary situation dlue to the falet that there are sonle refutge e(s hlere in the (ourse of tile war. Senator LUCAS. fin the last paragraph, Mr. Cole says: war, many aliens are. physically residing in the United States, althoughI thvy technicallv are nonresid(iits since, they are here on visitors' visas. Under thie Internal Revenue Code such persons are now exempted from tax om capital gains, but the question arises as to whether siiel exemption should Ile frozeit mider article XIV or the convientiol. That presents a serious question, does it not.? Mr. CARROLL. I (to not. think it does. There are two separate questions. I think that the question of these people who are here temporarily involves first of all a question of the concept of residence, as set. forth in the regulations. I mean, are they actually nonresidents, or are they residents? That is one of the things that shoutld be looked .. into. In the regulations there is an arbitrary provision that when an
    Due to the extraordinary conditions which have prevailed during the present

    statemnent'.Sen)litoi' HATCH. You do not ent~eratan that dloubt, (1o you, youlrself? MIr. CA~RRoLL. No; but the point, I wanted to make is, that we 1onsid8er that this clause, which hlas also been embodied in our treaties

    In 1936 for very practical reasons the same idea wits extonule(1 to transactions in securities. That put our exchange on a par with the British exchali.ge, because the British did not, attempt to tax the gains realized by nonresidents eifected in England. Senator HATCH. Right. there, Mr. Cole made the point that this was not truly reciprocal because there was doubt as to whether the gains of United Steltes citizens in Britain were exempt. Mr. CARROLL. Well, *1s 1 um1lrertaild the British law, I (to not think there is any question about the American being eXenli)t ti Elngland, if he effects transactions from here on British exchanges, or even if he goes over there (nd does transactions on the exchange, 1ttiless he is eigaged ill t-h, busniess of t 'ailing ill securities ill England, in whieh (I-'eInt they will aitteImpt to tax li'in; but the general ruh( is fr'ep(oill froth taxa tion on gailts realized on the liondon exchage, ill the case of tr'alnsactions 4y individuals, tind it is oily wheni the iuidividutal gets to be in the, luSinuess of dealing in securities that they tax him over there. I Ra pretty surelthat this is a fair statement of the English law. Se0ator HATCH. l- says there is some doubt, whether gains realized in the United States, or in the United Kingdom by United States citizens, are extempt from the British tax, in all cases. Mr. CARIao,,. I do not know what authority he has for that.

    (2633)

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    INCOME AND ESTATE TAX CONVENTIONS

    alien comes here under a temporary visa, say for 0 months, that he is regarded as a nonresident. Now, many of those people have had those visas extended "from 6 months, to 6 months, to 6 months, to 6 months," over it period of yeats, and it seems to me it is a very doubtful question whether a lot of those people especially if they engage Ji gainful activ. 1 cities over here, can really ho regarded as nonresidents. It doesn't make sense to nie. It seems to me that is the angle to attack it rather than to in any way impair this very sound principle that was adopted in out laws and has been put in other treaties and has been again stated hero, and we consider it the sound rule over the long term. (Discussion off the record.) r. CARROLL. My feeling about that is that that is something arising out of this temporary situation duo to this arbitrary inter. p rotation of the significance of a temporary visa, and it should not be permitted to impair what is a sound principle to prevail over the long term relations with England. TWe other point that you asked about was the American Bar Association's attitude. I might say that I am chairman of the section on international and comparative law of the American Bar Association, and have been for quite a number of years the chairman of its committee on international double taxation, and we have proposed resolutions advocating treaties for the prevention of double taxation and discriminatory taxation and extraterritorial taxation which have been adopted by the association; and as chairman of that committee I can say that we would consider this convention to be along the lines advocated in these resolutions which have been adopted by the association. Senator LUCAS. Do you represent the American Bar Association, also now, down here? Kir. CARROLL. No, no; but the point was raised. He raised the point.. Mr. Phillips raised the point what the attitude of the bar was, and I just wanted to speak about that attitude of the section on international and comparative law, which is a co-equal section in the association, occupied more with the international aspects of taxation. Senator LUCAS. I see. Mr. CARROLL. Thank you, sir. Senator LUCAS. Gentlemen, the committee stands adjourned. (Whereupon, at 12:15 p. m., the subcommittee adjourned, subject to call.)

    (26,34)

    CONVENTIONS WITH GREAT IRITAIN AND NORTHERN

    IRELAND RESPECTING INCOME AND ESTATE TAXES


    WEDNESDAY, JUNE 13, 1945

    UNITErD STArE:s SENATE. COMMri 'oTTEEH ON FORIIONII~1'asinglhon, D). 0'. H .:iLArIoNs.


    SU1IOMMIITIE'R OF TIlE

    'I'lle slheoimlite met, plirsIutat to call, at. 10 a. m., it) (t01 cormnutiltee room, tlhe Ca(itol, Senator C'al A. Latch, ehnirmanl, acting Vice Smititor Alhen 11. Barkicy, clihiirna.iti. I'resen t: Semators Hatclh (a61cling chairman), ],La Follette, White,

    Also presellt: SenatorslPpper in( (htfey. (The subcommittee met further to consider E~xecu tive E, con.'eu,1ion with Great Britain and Northern Irreland with respect to tax(-s oil (estates of ,le(eas(,(l I)el.sols, a111l Exe(utive' 1), convention with Greta Britain and Northern Ireland with re.s)ect to taxes on income.) Senattor H1:rTCi (acting chairmaM). I thimmk we may just, as well start to hear Nir. Suam. This is at continuation of the hearing on the

    anIId Austin.

    doul)le-taxation matter that we had the other (lay. STATEMENT BY COLIN F. STAN, CHIEF OF STAFF, JOINT COMMITTEE ON INTERNAL REVENUE TAXATION
    SeInator h1ATCu. All right, Mr. Stam; you may proceed in your * own way. Mr.l STAM. I do not have any prepared statement. I win attempt to cover some of the main features. Any convention of this sort is pretty well frozen when it comes to us. it is a sort of give-and-take arrangement b)etweon the two countries. Iookimng at the convention from the solh standpoint of the American tax law, there are some objectionable featurres. However, each country has made some concessions with respect to its tax laws, and to that extent it may be said to be reciprocal. Let me bring up one objection. Under the present internalrevenue law, an American citizen is taxable on his income from all sources. It does not make any difference whether he resides abroad or whether he resides in the United States, he is required to report to the United States his income from all sources, and in order to prevent double taxation he is allowed a credit against his American tax for the taxes paid to a fore ign country. That has been in the law since 1918. It was adopted to prevent Americans abroad from being
    69

    (2635)

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    INCOME AND ESTATE TAX CONVENTIONS

    subject to double taxation, so they would not be at an unfair competitive advantage with citizens of other countries. The convention incorporates this credit into its provisions. However, it makes another important change over existing law which will further benefit American citizens. There was a case that went up to the Supreme Court, the Biddls case, in which it was held that the tax collected or paid by a British corporation is not a tax on the shareholder but a tax on the corporation itself, and that, therefore, all American shareholder who was a stockholder in a British corporation was not entitled to any credit for the tax paid by the British corporation to the Britishl treasury. This convention overrules that' decision by providing that the American shareholder may elect to treat such a tax as his tax and thereby secure credit for the British corporate tax. All the shareholders do not have to elect under the convention, but any one shareholder can elect to include the amount of the British tax in his gross income. The convention thus adopts a rule which was in effect prior to the Biddle decision for a period of about 15 years. That ruling was reversed and the Government took the question up to the Supreme Court. Under the theory of the Biddle case, if the British corporate tax is paid by the British corporation, then the corporation is entitled to a deduction with respect to its tax on the American part of its income, because our law provides a deduction to the taxpayer for foreign taxes paid. However, under the old practice, where we held that the British corporate tax was paid by the shareholder the Bureau refused to allow the British corporation to claim the deduction. In other words, we were consistent-if the British tax is a tax on the shareholder, it is not a tax on the corporation. In one case, Welch versus St. Helens Petroleum Co., a circuit court of appeals held that a British corporation could deduct this tax, because it was a tax on the corporation and not on the shareholder. The convention does not deny the deduction to the corporation. Accordingly, not only will the American shareholder get credit for this tax but the British corporation will also be allowed to deduct this tax in computing its corporate net income. In effect, a double deduction is allowed. This may or may not be very important. It was. important in the St. Helens Petroleum case, because there was quite a lot of revenue involved. In other cases it might not be so important, because it depends upon how large a part of the income of the British corporation comes from sources within the United States. This is a matter which does not concern the British. It is a concession to our own American shareholders with respect to our own tax law. The question, therefore, arises as to whether matters of this nature should be incorporated in the convention or whether they should be left to general legislation. Another change along the same line was made with respect to the subsidiary of an American corporation operating abroad. Under the internal revenue code, if an American corporation owns more than 50 percent of the stock of foreign subsidiary corporation, the taxes paid by the subsidiary corporation are deemed to have been paid by the. parent. The convention applies this rule regardless of whether or not the American corporation owns 50 percent. It may own less than that and still be entitled to this credit.
    (2636)

    INCOME AND ESTATE TAX CONVENiTIONS

    71

    Senator LA FOLLETTE. May it own merely an infinitesimal amount of stock? Mr. STAht. That is right. Senator LA FOILLETTE. And it may still get the credit? Mr. STAM. That is true. This is a problem which does not concern the British. It involves the application of our own tax laws to our own domestic corporations. Now, j diens. another problem that we have is the treatment. of nonresident in the record before us up to this time to indicate that questions of this sort which Mr. Stain has just raised were considered by the State Department, or how they negotiated and arrived at this tentative agreement or this treaty in this tentative form without having those problems clearly before it? Mr. STAM. We did take these matters up with Mr. King and people of the Bureau, who were acting for the State Department, and they indicate that these problems had been discussed. Senator HATCH. Before you discuss that, I was thinking of the other question, Mr. Stare. Does not that give a decided advantage to stockholders in a foreign corporation over stockholders in our own country in the matter of taxes? NMr. STA.M. The British concept of regarding the corporate tax as paid by shareholders does give an advantage tax wise to the share. holder in a British corporation as compared to a shareholder in an American corporation. We do not treat the tax p aid by an American corporation as paid by the shareholder. We allow the shareholder no credit for the tax paid by the corporation. The British have it system in which the tax is levied on the corporation and the tax is
    Senator WHITE. May I interrupt, right there? Is there anythin

    later declares a dividend to its ahareholders, the corporation recoups from that dividend the atnount of the tax that it has paid into tho British treasury. In other words, if the British corporation was going to declare a dividend of $100,000, 50 percent of that $100,000 would be retained by the corporation because it had paid the 50 percent tax to theBritisl treasury. Tnhe shareholder will actually receive only $50,000, but he must report the entire gross dividend of $100,000 in his return. And he will get a tax credit of $50,000. The British surtax does not start until $8,000. The shareholder includes the whole $100,000 dividend, gets credit for the normal tax but not the surtax. Now the question came up as to whether or not under the American law this British tax should be regarded as a tax on the corporation. The Supreme Court said in effect, in the Biddle case, that under the concept in this country this is a tax of the corporation, and the law does not permit the shareholder to get credit for the tax. The convention adopts the British concept and allows the shareholder to get the credit. The treatment is reciprocal. If you had a British corporation and an American shareholder, the British would allow the American shareholder the credit for the British corporate tax. The American shareholder will also, undei the convention be relieved of the British surtax.

    paid into the British treasury; then, when the British corporation

    (2637)

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    INCOME AND ESTATE -TAX CONVENTIONS

    Senator HATCH. Pardon me, Mr. Stain. I am very sorry, but I do have to to go to the Judiciary Committee for a little while and Senator Lit Folletto, will yqu preside, and just go right ahead. Mr. STAM. I will be glad to, Senator. Senator HATCH. If I can get through, I will return. Mr. STAM. The second question deals with a problem that disturbed the committee quite a bit, in 1937, and that is this question of American citizens who become foreign subjects to avoid American taxes. Prior to the 1937 act, we adopted a special rule for taxing
    nonresident aliens. The Revenue Act of 1936 applied a special tax to nonresident aliens not engaged in business within the United States, and not having an office or place of business in this country. They

    were subjected to a tax only on their interest, dividends, and rents received from United States sources, which was 10 percent. It developed that as a result of the 1936 act there were certain Americans who went down to Bermuda, and other nearby places and established citizenship (town there, and in that, way they received dividends and( interest, and they were only subject to this 10 percent tax, whereas if they had receive( the dividends and interest in this country they would have been subject to the full normal and surtax. To avoid this, the Revenue Act of 1937 was adopted. And I quote the following from the report of the Ways and Means Committee:
    Section 211 (a) of the Revenue Act of 1936 Imposes on nonresidient alien mndividi'als not. engaged in trade or business within the United States and not having an office or place of business therein a flat. rate of 10 percent on an income from interest, dividends, rents, salaries, and annuities, and other fixed or determinable income received from United States sources. This tax is in the usual case collected at the source by means of withholding and has worked well, both front an administrative and a revenue standpoint. While the additional revenue derived over that produced under the prior revenue acts is estimated to be not less than $15,000,000 per annum, it appears that certain wealthy nonresident aliens have had their Federal-income taxes substantially reduced "by this new system. In fact, it has permitted certain former citizens of the United States, now citizens of other countries but who derive a large amount of income from sources within the United States either directly or through an American trust, to pay substantially less Federal income tax than they paid under the prior revenue acts.

    As a remedy for that, the law was amended so that the special rate would not apply to any nonresident alien individual if the aggregate amount received during the taxable year from the sources specified was more than $21 ,600. The convention removes this limitation and says, for example, as far as dividends are concerned, that even nonresident aliens will pay a tax of only 15 percent, regardless of the amount of their income from American sources. Senator WHITE. How much do the differences amount to, in dollars and cents, as between the treaty provision and our present law? Mr. STAM. It would depend, of course, on the particular case as to what rate bracket the individual was in. Senator WHmTE. I wondered if roughly you could indicate the total amount involved. Mr. STAM. For example, I can take a few cases. Here is one particular case where the tax paid at the source is on a 15-percent rate, amounts to $18,000. Under existing law the balance of tax forgiven tinder the convention is around $66,000. In another case the tax saving under the convention amounts to $316,000.

    (2638)

    IN(COMIE AND ESTATI'E TAX CONVENTIONS

    73

    TIhe 1037 hearings discussed the case of Jhacobl Schiek. lie wa's the inventor of the Schick razor, and he went to Canadia and becan(e it Canadian itizen in order to reduce his i American taxes. 'IThel'roblem is not so important when applied to Great Britain, because their tax rates are very high. Itt other words, these nonresidiell( Iliepieis will lbe silject to the high British taxes to that thero will not be tiny great ilducemtn'tt for Americans to beconie British subjects. But the convention has a clause in it, that I think they discussed ill the iearin-gs, the other (lay, wherelby it (-an be extelidetd to protectorates anid possessions without the approval of the Sinate. If the convention were applied to protectorates and possessions, we might encounter the same problem we had in 1937. in regard to the question of the taxes on capital gains, the complaint has been, in this country, recently, that, there have Ibeeln a lot of nonresident aliens trading on our stock exchange and making quite a lot of money, and not paying anty capital gainm tax. Under the present law, nonresident alieliis not etiigatled in business within the United States are not suhbje('t to capital gailis tax. The nonresident alien is exempt uihless he has a trade or business in the itidI Stateis, or unle-ss j lie receives compensation for personal services iii the United States. The convention exempts the British nonresident alien from tax unless Therefore, the convention not only freezes thle existing exemption but extends it further. Mr. Schram, the president of the New York Stock Exchange, made the following comment in a speech before tile Bond Club of PhiladelphiaonJune6, 1945: Hosaid: the frec (lowof foreign commerce and capital are awaiting, ratification or rejection by the Senate. I am in hearty agreement with the broad oiljectives of these con%'entlons, but I question the freezing by the convention of the tax-free status
    The proposed tax conventions between the United States and the United Kingdom, designed to avoid International double taxation and thereby encourage

    evIasiollnd VOlllance. .I1. STAhM. That is right.

    Senator IA FoLL:A''ri. There was a consi(lerable ind(icemient for (i,,le tile tippet lrackets who had income fromn tlhsesJlseciiedI in soilrVes to change thilr residence in order to get this tax change. Senator Wimrmri. There waas reason for that. Senator L, Fom,ltwrn.. And as I recall, it was one of the big loopholes which we felt we had to plug as the result of the investigation ill 1937' which we Swil weeks on, trying to phlg up the looplhtoles on et

    the Britisher has a permanent place of business in the United States.

    granted nonresideut aliens while actually residing In this country. This subject Seems to merit consideration by Congress, at a time of extreme sacrifice on the part of their own people in pursuit of the war effort. I have no knowledge of the number of people from abroad preseltly residing In this country under visitors' visas, neither do I know the length of time they have been here. Furthermore, I have no personal knowledge of the amount ot capital which they have to their account in this country. The information, I presume, is a part of the Government's files. It is commnon knowledge that they are operating in our markets on a wide scale. There is no good reason why these visitors should not be similarly realization of short-term profits. The present provisions present a strong deterrent against this type of operation, and it Is only where these exemptions exist that uncontrolled speculation may occur.
    subject to the provisions of the cal)itaf gains law, which distinguishes clearly between short- anti long-term commitments and Imposes heavy taxes upon the

    (2689)

    74

    INCOME AND ESTATE TAX CONVENTIONS

    I understand there are many nonresident aliens who have been over in this country on temporary visas who have had their stay extended and that a great many of thein come from Holland, Czechoslovakia, and France, and that there ore not very few Britishers. Now, the convention will permit a Britisher who did not have an office or place of business in this country but who wats working over here as a technician, on a salary, like an engineer, to give expert advice, he could trade on our market without being subject, to the capital gains tax. This becomes important in connection with short-term capital rains which is very important from a day-by-day trading standpoint. If the American traded on our market on a daily, basis, his gains are treated as ordinary income. There is a possibility though that is being looked into, that the Bureau might hold that some of these people are residents of the United States because of their long stay over here, and I suggest you might inquire of Mr. King whether something could be done administratively along these lines. Our concept of residence may he different from the British concept of residence. We do not, have any uniform rule. But thie British havI a provision that, provides if anybody has been in Great Britain over 6 months, he is treated as i resident. Senator WHITu. I take it tile suggestion is of considering them as resi(lents only for the purpose of our taxation laws, not perhaps to (all tleni citiz,%vs geuerally of the United States. and with all the rights and privileges of citizenship, is it not? Mr. STAM. That is right; and of course when you treat a person as a resident of the United States for tax purposes, you tax him oil his worhl income; that is. not only from tile 1.nitedl States sources, but from ill sources; so it is a real problem; but we have in our regulations this definition, which is not very long, and I might read it:
    Ali alien actltially present in the U'nitcd States, who is not a mere transient or of the I'iited Statles for pulrloseQs of thelt Income tax. 1i her hie is a transient is determined by his intentions with regard to the lengtlb het anld natIre of his stay. A mere floating intention indeflitie as to line, to return to anotlhr country is not suflicient to constitute him a transient. If hfi lives in the 'luited Slates and has li), leillite intentions as to his slave, hie is a resident. One wiho conlies to tlie IUnited States for a(defilitle purpose whicl, hi its nature may Ixplromiplthly actoimiplished is a traiisient, but if lis purpos.e is of such a nature- that all exttniidedi stay may li tiecesary for its acconhpit inlt, alnld 1o that end thie lishlulalin 11k44s his homet)ll- iliorarilv" In the Uinited ftti., hie becomes a resident. though It miay bie his intention at all Itnes to return to his donmicile abroad, wheni tilt! lrurmOse tor which we camie has beeni consutnieatd or abandoned. Aln alien whose stay hi the united d State's is limited t a)deatliite ixrioid bIy the Immigration Laws ik not a residtit of tihe Inited States within the meallinilg of thim section in the absetice of exceptional circumstances.
    8o1touriiwr. is a r.,.i'ent

    It nimay be iecelksary to amend the regulations. What effect that might haiive on the convention is a problem tlint you might walnt to consider. How long (lid you want to go along?

    Senator

    LA FOLLETTEI (acting chairman). I think we will go ahead,

    Mr. Stam. Mr. STAM. I do not want to leave the impression with the committee that a lot of the provisions in the convention are not reciprocal provisions in the sense that they would benefit Americans in Great Britain to a somewhat similar extent that they do benefit Britishers in the United States. I am attaching at the end a short analysis on this point. (2640)

    INCOME AND ESTATE TAX CONVENTION

    75

    Another point is in connection with the interest on Government obligations and obligations of a nongovernmental character. Under the existing law when interest is paid out to a nonresident alien, he is subject to a withholding tax of 30 percent. Under the convention there is no tax at all imposed on interest paid out to a resident of Great Britain. Of course, the converse is also true, that an American receiving interest from British sources is not subject to the British withholding tax. There is no tax levied by Great Britain on the interest from the British bond. On the other hand, if the Britisher should buy an American Government bond, under existing law, he is . subject to a tax of 30 percent, on the interest. Under the convention, Sthe re is no tax. That is also true with respect to these pensions and lift, annuities and royalties and real property rentals going, where we removed the tax com latelyy on a somewhat reciprocal basis. So far is the ca pita, gaitis tax is concerned, we freeze our provisions so that. we( cannot levy a tax on capital gains. The British as a general rules do not tax capital gains under their statute; but. the convention (oees not freeze this rule. It only applies to the American method of tatxing capital gains. An American must rely oui the British law for his exemption, while the ]ritisher is covered by the convention. The British law concept of capital gains is not alw.vs the same as ours, so that an American who makes t sale bi Britain might hbsubject to the British tax on something which we would regard untie our law Its a caj)itzil gain. Another problem relates to a British corporation doing business in (ithe United Stattes. There are quite a few in the United States. The 1936 hearings disclosed that the Emphlyers lAability Assurance Corporation was a British corporation, organized in 1880. It was the, first, insurance company to write liability insurance in the United States. It hats b)een engaged in busine-ss in this country for about 6(1 years. The corporation now does over 50 percent of its business in the VTnited States and has over 6,000 foreign and domestic stockholders, many of whom have small holdings of 5 or 10 shares. There are very ftw Arlerican shareholders. The principal office of the corporation in the United States is iin Boston, but it maintains other large offices in buildings owned by it in New York and Philadelphia, as well as st'Vera'11l branch offices 'and many agents throughout thie United States. 1 'ust mention that as one type ol British corporation. Some of our Io a('comICIIpis aret also british-owned. Senator WzT1.:. At one time-I do not know what the situation is now--practically all the marine insurance written in this country was written by 1British companies. IMr. STArM. that is right. ,Snator WHITE. I say, I suspect that has been substantially changed. Mr. 5rM. Now, article XVI of the convention exempts a British corporation fnrn thie United States tax on accumulated profitsprovided residents of Britain control over 50 percent of the stock; so that you might run up against a situation in this country where you would have, two competing corporations, one the American and one the British. The British would not be subject to a revenue provision relating to unreasonable accumulation of surplus or the personal holding company provisions of our internal-revenue code, although the American corporations would be subject to these provisions. Under the convention we would have to rely upon the British to compel

    (2641)

    76

    INCOME AND ESTATE TAX CONVE1NTIONS

    lritish corporations to liAstribute or their sharelholdets to pay tiix oh unretwonablth aoemulatrions of surplus even tihoughi they wrte doing Iuitni,.I. ill the, U Tnitedl Statets. The prblehm rOf 11lirdiwg aiIhering on pending etnvehitions before tivy are' erystalizid, wiw sugg'sted by otflier witnesses, partiuIlarly tle representatives of lit, American Blar Assoiaion. That would not) alret this conivention, hbut it, might provide ia future Iolicy. St410tor W1- lA 1 a1k you, who went into that, question, mnd mrH. i14% who remlied tlhi, contision tfhat. lii'riti.4 were t),nad vista le --tli, , St ate ID)eparttn'itm ? Mr. ST..t,. W44,,I, we .list'ussd it, with MIlr. King, of tfli, lirean of Internal lRevemue, who wits in touch with the Stat1 l)4Dpartment. Senitor When. hn lii sliv "we, yolu iletlilt whlltIorglinzlit ionl? MIr. Sn.M. The stair of tlha' *Itint (C'onilnittee on Interntll l|evetIi
    And voiurslf? Mr. S'rTAi. We hlad it, ulp with Mr. King, who represented (ltlh United Stlttes ill these llegotilltiOllns. It WaIs )oillted ou1t that it Mnight he dillhmult to have representatives of both countries to conduct [leatrings i juist one cout nit rv and would dehlvy %,,coinhsider blY the llrogress. T'he lBritishi are larticularlv careful about, releasing material of tIhis sort to the pullic' hclore the convent ion is submit ted to t'he Parliament. Senator WIII. I dIo not know whether it. is at proper quest ion for me to ask, inl view of tlhe polsitionl which .von hohld, blnt do4 an.swer not itf ifyou do not want to. Is it, your ation that the treaties, deconil be apl)proved y I commit tee, or have you ia -onil t rarv vi ew about it? the Now, do not answer that, if you do not want to. You'called attention to sjltecilie things which are in theli treatyv. Mr. STAM. That is right. Senator Waim,. But, of courts, what we tire, obligated ispit is, ats you say, to have th1,ese things aill oUt ; aund it is to average these things all out, undl vote "Yes" or ",No." I was wonldering whether yoll wanted to make a recomnlnndlat iol as to what vyl want (ollae. Mr. STAm. First. You gentlemen consider whether the, convention should be extended to protectorates or Imsssmsions by Executive action withoutt approval by the, Senate. It seenis to mle that at, Ieat, some understanding shoulld bIe arrived at with tile State D)epartment to submit allny extension to the Foreign IRelat olhs (Conmmittees before final approval. S'ec4ond14. The treatment of ca'.pital gains of noniresidelint aliens ttelimoririly in this country Shoul )e .considered from tlie stanlinllmit of whether the regulatiol.s oif flit- departmentl could not be amended to
    tojourning in this country

    Seinitor Wa. iT.

    for a long period of time and trading ol our stock markets. MrI. King., Slpcial D)eputy ('ommissioner of Internal Revenue. is making an investil iatioll of Il ht existing sitluatioll, anlll I would sulgVest that Ile he called to explain the results of his investigations, and almo representatives (of lito State I)epartment, to determlinie whether such ilvivstigatii)ln wouhl be frozen by the oni'vlntion, M)far as British residents are concerlltie. Thinr. I believe tlhe sulbcommilttee ill its relmpr should make it clear that this convention is not. to be eonsideretl as a precedent for treaties with other countries, particularly with coulntris- with low income-tax ratns, where, if such prhovisiowm were applild, the result micht be substantial avoidanlce of United State's income taxes.

    redefine "resident" ito take care of persos

    (2642.)

    INCOME E AND E-I'TATE TAX CONVE'NTIONS

    77

    "

    it i.zels111 t4 ni ld llist h' c i'l ('0t rpior lls ut1dth, Ole I r With (i Wtllt.' otllIp)u fltiVo tllr In conclu'lsionl, it,lihis tllh s 111d tn'side'litlls. thlt the covention will ,not, lvlltIlIl of Britis 111v 111htimtl~ldli.lhlg bw clted uIpon by tlhe flretih (,1it ,lovel'unmiet( utittl 'ifter forlntitioti tlhe, of tlie IIew gove('I'liIlletII following the ehl'etion. itn other words, tihe ilil1'rilll gOVel'lillillfll will notI act~ uplll1 tilt- tl'elity.
    'i'aII: T
    .'ME-T ,i- .tt:'I.II'HAN ('ITIZt.NS AND I)oItI:sTI' ( 'ouIIroR
    I. FORl VNITrD) I.TATI TA T.aX t'II'tt.t(AS

    so tihalt Valid objections could be reiliedii'd without restillig in (Ito


    cnventitoll. wtilhliti'will of lhi'ltni ii''('tc
    I amll

    Ibe m1his ill 111(he tetilIlivt' .' lr'e'li

    Igui'lrh. It might Iheltih ,futl 1

    if soime Study of (he p)rOp)osals ouhld


    tilury slotvt s by' inidepniidenht groups,

    submnitting lit shllitemetli,

    shlowighlIeentllIet

    of Allericllli

    ATIONS

    Il'ider the. lliddle de'i,.i't. dei'ivid'd hlv IIt-. ' rlm-II~ire1 (302 1'. S. 573). it (C'oiurt was hel1 fhlint thlie tax *'ollh'ctl'd froama i'llritash orl'wrt)rtin ias ntl Intitu by fhl' lt A.mn-lrolhehr Ism liv lhi', v'orlioratlotiand that. hen'lore, lit) rerdit couhl li,' alliowu'd n Io II., A.iae'riva'an .,lAar,'hulhe'r for fit' Ite,., ,nid by fiw llt ritish corporation tl hp iota ltrilt Irm,.t rr. The' roaielntilinl oaverrude's this dehrki.it b' jaroviditllint fh lhlA:maerivata sihamblreihhr iS hde.ieil Ii hiave Imid the ta\ liltsit it lit , lriiliti h 4'lrlrrationl st aiimt thi lilint isih ltr'. where stiah s.ahn'hohiler heets tea 1illllt hI' titnO11111I1- Bitih ta ill Ili%gr. ttiti li ll' it incllomlll' Ialer thit- Aiaerican llal'elilletx law tilt shiartoldter is tolt h, miltlit li' 1lll rrdit for taXPS paid Ihy lhi AiaV
    it hia that Iby it from t tilt. lrit ishi thle Vlelid hI' a laritisia trlxlrai. I umiln lsi'v' held I incomelS~ll derim~ ltm,'s jaidhlsourc.es wi|illimGovl'rlnlmlenat Sisth.s are dethllrlible

    I I .l-'rican ,itu'lphits reride Wita I (or I ml'ehr fi ll, Itternta ll 'vitmi'(C'ode, till AIImI'riim'iI viIIzetI or rsidun'llt of tile Ilailted St111h4., i,4 t11\8l1h' til' t4 itaote' from till moaurr.'s, e'enli tioigih derived fromu .ift',rce.'s oulti'Ide h tiIed Statesi,. i'T trv.elt douleu' taxatliota. lhl ilteralal t, i 1`v1,1a11' hlw. legnalainag wit ihIhIe hlveaaa el of 1911,. Ires allowed a eit iizet of t ih, I'tihted Slltates itii'rtlit tagtlilast his \lliarhnii tix for Itmes pald It a foreign i'omiaulry. Ilh lit.- of nit 'a."t' aliena re.,ihle. Iflit- credit is allhowale only1' If Ilk own coiittlt r' allvs a similar erndit it) Aaaae'ircan 'ti/ens nrsidi'. li, i lint (.)lmlry. TIhei co'tlvol'lit iO 1Ill'r'ct i1iorlirnles Ole provi,,iols of I( 11eriutl lhiv.llU' ('Cide atllowhlit mig .. t1ch it enrdil ito American ciatutzi.t. or alit'il residmutm. However. it lakik' an illal Nitltit i'ihlll.tge ill outar itlle',ill'-tl law tlareiltiig oBar Aiiittri'vili v'ilizi'tas.

    elhte'rltiiiitatg taet incomlal' taxalekh by fll' I United Staft' (Il'nlch v St 111155 er, , ('orngJminy. IS Fid. 12d) 631). T'his wiK on tiln theory l rolir thit th Britih corlirrate tlax is at tax oiln tliht corlrtiotll aaad taot otilh' .ltesaail t holaer. lhwt,-cver. tihi Irntv allow t lie- Amale'ricanl sihara'hohi.,r it dedluct lit' lBritish tax, anul tll- exisetlitag 'Inatertal n.ve'lla, whii'. is not1 distaurli4e by lihte lw, I e'lr '.nl ko al-e, s til ltritish cor,,rlsinult1 to de.iutflit-'t ll ltriliht tlx on iti AtiI'riV'an itai'ttlle.. 'hur.I lit e'.aie'ta iota ill ellreclt, rlllis aidtaule tieelat' iotaltl allaiu iag theIIlirIt 1 Iuh :1s LI t.r'etlit agaiia.al tlittx Ifm \ (if ti ll-American shareholdehr and al as I eled'tltl'ioll ill 'dllitiill( t lat' incomief it n e 1rili.t i-,l l'liorait, from Amenricat M'airl,.ee.. It tlhiptNs flha Itit' lfrint.h tax .htiauhl Ise alleged eit ha'r Ito the corlporaIiII or !oei,.,; Aluan' hohhir ,,iliell Imo, let ltih. e freoml groKiti, lael'lll' in a.) I)umrMe,c reuprulereuiee, T'lle cotavetnatlio ill ge'alltrtll iimk.tn tiao i'luaaie ill llm. Unlitedl ,taft.' lax liability t' of lllmetii ' conrllitralioml, lit'lt ar-ItIa, lll llijlol their illc)tllle trllta all .4la".r44 l 'wh'tlle'rle'.riim hfrtiaa wit hita or without thie ltit(,d Statt-.s witl1a taxl .n'lit f ,r Vtas\ iteher l l midlto a foreign 4'i.Undetrr lae ltrviiiots ,f m-ftioll 131 (J) of the Iltit.nill ltt.e'iitc' ('Code. if sit Atln'aerlll ctarlaeratioui iwniaa majority ef t(if vttlig utek of is ( 'ie a liritisi tlrliraiitl. tilltax pailli by idtch lBriti.h corlmration Ito the lritlish (tve''riaaivtil iB. u islltj ti Iti v'e'rl ils lintitatlion, dtteltet'l Ito hiaave itfl patid by the Anl'i', i ilr trt1at. 'hi, 4'illil,ltittfl Clee ,onit lltoir rateis thip rile biut 1n l'lis it to ca.w, w u'n, thle' Amllericanl coriiieratttos i.wn ht,,e than a majority oif the sltok of a lliitish raurliratasi,. Ihie. American iaqrporale sanrehilahhrae ownilla ."W) wf'rentlt or hIt of Ithe 04hwk of a hiritlh t1mrpotatiinl are' entitlled to a tax c'dit,. , with certain lintititataos. tar taxes p aid by the Blritiseh corlirattnl to tile Blritish (;overlalmltll.

    ('2643)

    78

    INCOME AND ESTATE TAX CONVENTIONS


    II. Pler UNITKD KINUDOM TAX PIRPONiN5

    (1) American citizens, wherever residing Under article V (2) of the convention, profits derived by a citizen frout operating ships documented or aircraft registered under the laws of the United States are exempt from U'nited Kingdom tax. There are at. present arrangenments for such exemption as; to shilm but not as to aircrai : (0) American citizens residing in the (Inited Kingdiom Under article XIII (2) of the convention, credit is allowed for United States tax oil income from sources in the United States against United Kingdom tax onl the same Income. In the case of dividends, the corporation tax is included in tile

    tax credited.

    (8) Residents of the United States having a permanent establish ment in the United Kingdom (a) Article I11 (3) of the convention contains a rule for allocating industrial or commercial profits as between sources within and sources outside the United Kingdom. (b) Theoretically the last four itenis under (4), below, are relevant here, also, hut It is unlikely that the facts would be such as to make them aplplicable. (4) Rresidents of the United State0 not having a permanent establishment in the United Kingdom

    (a) Under article Ill (2) of the convention, industrial and commercial profits are exempt from United Kingdom tax. (b) nitder article VI (2) of the convent ion, dividends from sureso in the United KinFadomn, if subject to United StaWte tax, are exmnpt from 1'nited Kingdom surtax. (This article may be terminated by written notice front either country.) (W) Under article VII (2) of the convention, interest derived froni sources in the United Kingdom is exempt froin tax if it is subject to United Slates lax. (d) Under article VIII (2) of the convention, royalties for the use of patents, copyrights, etc., are exempt fromn United Kingdom tix if subject to U'nited States (e) Under article IX (2) of the convention, rovalties in respect of mines, (uarries, etc., are exempt from Unitedl Kingdom surtax if subject to United States tax. (W)Under article XI (2) of the convention, income frons personal services is exempt from United Kingdom tax if (a) the person performing theni is in the
    formed for a resident of the United States. (g) Under article XII (2) od the convent ion, peinions and life annuities derived from United Kingdom sources are exempt from United Kingdom tax. (A) Under article XVIII of the convention, visiting teachers are exempt up to 2 years from United Kingdom tax on their compensation as such. (i) Under article XIX of the convention, students and buwines apprentices receiving full-tim. education or training in the United Kingdom are exempt from United Kingdom tax on paynients made to them for maintenance, education, or training. (5) American corporationshaving a permanent establishment in the Uunitedd Kingdom (a) Article I11 (3) of the convention contains; a rule as to the allocation of United Kingdom. (b) Article V of the convention exempts profits derived from operating ships docunkented or aircraft registered under the laws of the United Stats from United Kingdom tax. There ar at present armaogeenw1ats for such exempt ion as to ships tax.

    United Kingdom not over 183 days during the year and (b) the services are per-

    industrial or commercial profits as between sources within and sources outside the

    but not as to aircraft.

    (6) American corporation. not having a permanent establishment is the niluttd Kingdom (a) The exemptions under (4) (a), (c), (W), adl (5) (W)are applicable here also, except (4) (c) ins the case of a lBritish sulmidiary of a United States corporation. (b) If such corporations are taxable in the United Kingdom with respect to any income from sources within the United States. they are. under article XIII (2) of die convention, entitled to credit against such tax for the United tates tax

    on the sanne income (including corporation tax in the cas o( dividends rqoeived).

    (2644)

    INCO.1E AND ESTATE TAX CONVENTIONS


    TRKATMONT OF BRITISH SUDJECTS, RESIDENTS, AND CORPORATIONS

    79

    British subjects residing in tAe United States The benefits outlined under I (1) in reference to American citizens or residents would apply equally to British subjects residing in the United States. (5) Residents of the United Kingdom (other than Amerisan ntiesem) having a per. maneni etn'kAbWhrenl in the United State. (a) Article III (3) of the convention contains a rule for allocating industrial or commercial profits as between sources within and sources outside the United States. (b) Under article V (1) of the convention, profits derived from operating ships documented or aircraft registered under the laws of the United Kingdom are exempt front United States tax. There are at present arrangements for such exempt ion as to ships but not as to aircraft. W() Under article XV of the convention, dividends and interest paid by a United Kingdom corporation are exempt from United States tax. Under the Internal Revenue Code these are already exempt, except that I. R. C. section IJ9 (a) (2) (B) makes dividends taxable it 50 percent or more of the corporation's .. rows income for the l&t 3 years was derived from sources within the United
    (j)

    (d) Theoretically the benefits outlined under (3) (g), (h), (k), (I), below are relevant here alW, but it Isunlikely that the facts would be such as to make them
    applicable.

    permanent stalaibshwnd in the Unsid Stes (a) Under article III) of the convention, industrial and commercial profits are exempt from United states tax. Under I. R. C. section 211 (b) such profits, whether from sources within or outside the United States, are taxable if the non. resident alien isemployed in the United States at any time during the year (except for a nonresident alien or foreign corporation or partnership for not over 90 days and for not over $3,000). Under I. R. C. section 211 (a) and (c), income from sources within the United States is taxable at 30 percent unless the total income from such sources is over $15,400, in which case the regular normal and surtax rats apply.pl (b) Under article V (1) of the convention, profits derived from operating ships documented or aircraft registered under the laws of the United Kingdom are exempt from United States tax. There are at present arrangements for such ex. emption as to ships but not as to aircraft. (W)Under article VI (1) of the convention, the rate of tax on dividends from United Staest corporations is reduced from a minimum of 30 percent (under I. It. C. see. 211) to a maximum of 15 percent, in case such dividends are sub. to United Kingdom tax. (This article may be teumnate by written notice Iromeither country.) (d) Under artie VII (I) of the convention, interest derived from sources in the United States is exempt from United 8Slae tax if it is subject to United King. dom tax. (e) Under article VIII (1) of the convention, royalties for the use of patents, copyrights, etc., are exempt from United States tax if subject to Unite4,Kingdom tax. (f) Under at icle IX (1) of the convention, the rate of tax on royalties in respect Of mines, quarries, etc., is reduced from a minimum of 30 percent (under I. IK. C. uwe. 211) to a maximum of 16 percent, in cae such royalties am subject to United Kingdom tax. W() Under article XI (I) of the convention income from personal services is exempt from United States tax If (a) the person performing them is in the United States not over 183 days during the year and (b) the services are performed for a resident o the United Kingdom. Under 1. R.C. section 119 (a) (3) there is such an exemption only u to 90 days and up to $3,000. (A) Under article 1ll (1) of the convention pensions and life annuities derived from United Wsates sources ar exempt from United Otares tax (0 Under article XIV of the convention, gins from the sale or exchanme cpital asset are exempt from Unittd States tax. Under I. IL C. section 211 (b) caiasains are not at present exempt in the ease of a nonresident s employed in the United States (except by a wnoare4iident alien or foreign corporation or

    (8) Residents of tWe ulcd Kingdom (other than Amnerican ,Misus) not having a

    partnership for not over 90 day mad for nA over $50,000).


    TOM50-40-vet. 41-28

    (W")
    (2

    80

    INCOME AND ESTATE TAX CONVENTIONS

    Q1 Under article XV of the convention, dividends and interest paid by a United Kingdom corporation are exempt from United States tax. Under the Internal RIevenue Code, these are already exempt, except that I. R. C. section 119 (a) (2) (H) makes dividends taxable If "50 percent or more of the corporation's gross income for the last 3 years was derived from sources within the United 8tat~e. (k) Under article XViII of the convention, visiting teachers are exempt up to 2 yearsUnder United Statesof the convention, (1) from article XIX tax on their compensation as such. students and business apprentices receiving full-time education or training in the United States are exempt from United States tax on payments made to them for maintenance, education, or training. (4) British corporationshaving a permanent establishment in the United States (a) The benefits under 42) (4), (c) above are applicable here also. (M)If individual residents of the United Kingdom (not Including American citizens) control over 50 percent of the voting power, the corporation is, under article XVI. "exempt from U'.i, d States tax on its accumulated or undistributed earnings, profits, income or surplus." The benefits under (3) (a), (i), and (4), above, are applicable here, also, except that (3) (d) does not apply in the case of an American sulmidiary of a British corPnration: in 3 (r), the maximum rate is 5 percent instead of 15 percent in ese the British corporation controls 95 percent of the voting power of the corporation paving the dividend, and not over 25 percent of the latter's grovs income is derived from interest and dividends othtr than from its own suhuidiaries.
    (4) British corporations not hving a permanWnt etabliShMenI in the United Statks

    Revenuie. as to the type of income derived by nonresident aliens and foreign corporations."

    I amn alo p resenting i table prepared by the Bureati of Internal

    T.ALM l.-Analysis of fixed or determinUble annual or periodiad income paid it

    aomrefsidnt alien individuals end foreign cerporatouo and reported on with. holding returns, form 104*, for calendar Iears 198M, 1940 and 194*:; fAate are to the nearest 500,000 ereepl where amounts are less than J0,000; percentages to total are indicated opposite each figure IktM

    amnIS I
    Dou n

    I'we4t

    194

    PlWmS It M

    Corre baud intenu............ u


    Oth

    Dve4

    ..................

    1A O

    I00 73

    14

    $16. OW M M7 $144.o0.0i0 1001 7..4 110000,


    1, 011k 00 7.3W3.01 0n. mom

    u'vtmvlgt nd ....... .. IS0 1ltaum .... . ... M M. o0 koa sumiatens adsupytihhs). %W00te ("Mi'om w ...................... MsON ARnaut . ...... ........ M0.00. nnt ......................... 3.,L00 Mi bmiownwadup k"4 3f n

    to
    75 4.3,

    4.u0OWm

    &0 & 54

    301
    .47 .17

    I&MM I
    3L0.003
    .M3OW. 1 o1 ot40 14t.= LU00.00

    1. 7.30

    .36

    40 .

    L000

    It

    1.0010w

    47

    &51 $. 1.. 313 AN

    Total .........................

    (23154. one) Mae (,111?. =) 3091

    (,s&447. (M) M00

    Table I may be interesting in connection with consideration of the types of income exempt under the convention, which are as follows:
    Convention Eistminsiar,

    ..
    P ftau.i

    .............. .. ................ ............................ . ..... ... .... ......................................

    ..

    is

    a 30

    sad Ni nU idl.......... ........ ........ Nsm~s.......I. . .............................. on ........ ........


    md

    'No us.

    Vamte eusao Am, MN nasru

    will apply *bm do Van 3am. amd 0M..

    (NOw)

    INCOME AND ESTATE TAX CONVENTIONS

    81

    The following data prepared by the International Economists and Statistical Unit of the Department of Commerce in 1944 may also be of interest to the suleommittee:
    UNITED KINGDOM

    United Kingdom investments in the United States amount to about $2,000,000,000,1 of which probably $1.2 or more is held by the general public, including about $175 000,000 vested by the British Government and pledged to secure a loan from tie RFC. (It should be noted, however, that the prevalence of investnient trusts in the United Kingdom probably results In a much larger proportion of eorporate-owned securities in the total public holdings of that country than of either the United States or Canada.) The balance is held by British rent companies or by British corporations with branch operations in the United Itates. Our investment. in the United Kingdom, on the other hand,- amount to only about $1,000,000,000. of which $100,000,000 may represent securities of British. registered corporations whose total operations are outside the United Kingdom. About $500,000 000 of our investment is held by American parent companies; the amount held by the general I unitedd States public, therefore, is somewhat less than $0,000,000. It is probable that, at the moment, investments of individuals resident in one country in securities of the other country are about equal, or that British investments here are only slightly larger than ours in Britain. In prewar days total British investme .ts in the United States were about $1,000,000,000 more than at present with almost the whole billion represented by general public holdings. However, the prospective international financial position of the United Kingdom at the close of the war would not seem to permit any large scale new foreign investments on the pa.t of British residents, at least for many years. Moreover, there is at least a strong possibility that the securities now held by the British Government valued at, say $200,000,000, will be sold in this market after the war, thus effecting a further reduction in the British portfolio of American securities. The United Kingdom has no bonds outstanding payable in United Statm dollars, and Britih holdings of American bonds are relatively small. Reciprocal
    holdings of beater securities, therefore, do not appear to be of significance.

    X Iname paid to t,United Kingdom addressees in 1943, according to preliminary tabulations is shown in the following table. These figures do not include income of $8.7 paid on securities owned by the Government of the United Kingdom and pledged to the RFC loan.$ They also do not include income of United Kingdom corporations which have qualified am resident foreign corporations under section 231 of the Internal Revenue Code. The income of these corporations is probably Wuite suatanttial-perhaps s much as 15 or 20 million dollar annually. Many English and Scottish investment trusts, and at leat two very important British industrial companies (Britiph-American Tobacco and I. P. Clarke, Ltd.) are taxed as resident foreign corporations.
    I/wow raid to UWed Kianpiom addrouei in 1943 a. reported on wilAkolding retursrs, ?Orm 104o3
    1'19ded stain

    Type of iacouae:

    t') (uno"e dUav,)

    Dividends-....Fiduciary .

    ----------------.........................
    --...-. -.................

    21 5
    4 0 I S

    ....................

    Other income . .

    Rovalties-

    ........................................

    ......................................... --..

    . 17 32.0

    Total .... .

    ............................................

    s.y oen ome-as revd, expeealiy withholMdt Mutm It fS Smusilly 1Tbs wAW is basd Th a of 4ewnt uettia the mastmanal amounts d An marttm bsred the Britih bmdk en4 broken bMo u Ii n-.mded isaoumrm atueo BrttisbAInvmestst ofs1 al9mbel thirdemtunr, TbabldWsoipid

    to would ulabmaim wW&eb stabl mto masa. timw. in&W Untzed Sat , Anisewehove no I1f addom it is mdwktsd that tbs Ovemmant of tlb Unied K Itdes" addlttmal Untied NW W110h,u41 AmitSot R eovWaft 99"u swIp Unted state bm.VC low. w 006bduadsd bt*emlm 6MeOWWOat tdar bebde hs ftPSN e- at ast pldu bts

    (OU7)

    Inn 04

    INCOME

    AND KBTATZ TAX COMMNTONS

    Nom's-Data not complete for following reasons: (I) Tsbulation of Income reported on Forms 1042 not quite completed; (2) tabulation of interest Mpid on about $1,000,000); and (3) income paid on securities owned by the British Gov. ernment, which Income is not subject to tax, not included.

    corporate bonds not yet made (band on our records, this probably amounted to

    Senator LA FOLLETS (acting chairman). Were there any other

    on you felt should be brought to the committee's attention,

    INS appre te your bwig here. And, so far as I amaaare, this eondtide the heamns on these conventions, and the subcommittee will take a recess, subject to the call of the charman, Senator Lucas. (Whereupon, at eAof the Chair.) 11 a. m., the subcommittee recessed, subject to the

    Mr. STAM. I think those are the main points that we have. Senator LA FOLLU1!s. Well, thiak ym very much, Mr. Stam.

    (NO48)

    Senate Committee Report on Basic Convention

    July 3, 1945
    Executive Report No. 6 79th Congress, lst Session Senate Foreign Relations Committee

    (2649)

    1st CONOREY 79rH Session

    SENATE

    No. I EXECUTIVE6REPT.

    CONVENTION WITH 'GREAT BRITAIN AND NORTHERN IRELAND WITH RESPECT TO TAXES ON INCOME
    Jt'LV 3, 1945.-Ordered to be printed

    TL'SDAY,

    Mr. LvcAs, from the Committee on Foreign Relations, submitted the


    following

    REPORT
    [To accompany Executive D, Seventy-ninth Congress, first session]

    The Senate Committee on Foreign Relations, having had under consideration Executive D, Seventy-ninth Congress, first session, a convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16, 1945, hereby report the same favorably to the Senate without amendment and recommend that it advise and consent to its ratification. For the information of the Senate, there is appended hereto, and made a part of this report, the report of the subcommittee under date of June 30, 1945. There is as appended for the information the of the and the accompanying report of the Secretary of State. convention &nto memage from the Preideat transmitting the

    UNITED STATE8 SENATE, ONS, Coxmwrrrs ow FoRIazG Rz,

    Waskixgon, D. C., Jumn 30, 1945.

    Rzojrr or

    oN ExCUtrrvE D, SzvzETY-NIsiNr SuBCOMMITrzE CONGRass, Fins? SrssIoN (A CoNvzwxnow BETWZEN ThE UwrruD SrATES AND ThE UNrrED KINoDom von Tu AVOIDANCE Or Douvns TAXATION or INCoMs, ETC.)

    Hon. ToM CONNALLY,

    on Executive D, Seventj-ninth Conpi, first session (a convention Great Britain and Northern Ireland for the avoidance

    United as. &nsk WwAhington D. C Dsza SESATOr: The subcommittee appointed to study and report

    ,irmComomite on Fom.. Rel ,

    f,

    between the United States of Amenca and the United rKingdoaof


    double

    (M1)

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    taxation and the prevention of fiscal evasion with respect to taxes on income signed fit Washington on April 16, 1945),jhereby report back to the full conmtittee with a recommendation. Incident to your subconmmittee's coiisideration of the proposed convention, fottr certain questions have attracted its special atotention, namely: (I) The desirability of transmitting to the Senate for its advice and consent atny contemplated extension of tilte proposed convention to a British colony or to a United Jtates poggessio1, as the case may be;

    domestic principles of taxation of capital gains 1prinmarily stocks,

    (2)The relation of tlme provisions of thie convention to our

    securities, and commodities) as applied to the alien resident in the or business in the United States: (3) Whether the proposed convention should be regarded as a precedent for future conventions with other countries; (4) The desirability of affording to business and its represintatives an opportunity to present to the executive departments concerned, preliminary to any tax conventions discussions with any foreign country, taxation problems existing with respect to such foreign country. The problem in (1) relating to affording an opportunity of review by the Senate of contemplated adherence to the convention of any colony, overseas territory, or other areas over which one of the contracting countries exeritses authority Ias been discussed with both the State and Treasury Departments. As a result, the commitwe is now in receipt of the following letter from the Secretary of State in which it is set forth that the State Department will recommend to the President that any such formal declaration under article XXII by either country will be transmitted to the Senate for its advice and consent before admitting such colony or such possession within the framework of the convention. Your subcommittee views such arrangement as entirely satisfactory and as laying the basis for working out the-problem satisfactorily as it arises.
    JuNK~

    United States and the nonresitlent alien who is engaged in trade

    27, 1945.

    Hon. Tom

    CONNALLY.

    CAairman, Commiae on Fortifs Reltiomm,

    Viked 8tes Stemote, WasmAimgten, D. C.

    MY Da&a 811mATer CONNALLY: Reference is made to discussions before a sub. committee of the Committee on Foreign Relations regarding the convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16 1941 (Senate Executive D, 79th Cong., lot ae,). during thoe diseusion a question was presented respecting the procedure to be followed by this Government in accepting or giving a notification 9f extension of the convention, under the provisions of article XXII thereof, to colonies, overseas territories, or other areas over which one of the contracting parties exercises authority. I am glad to inform you that in connection with any such botification of extension of the convention, the Depatmnt of State will recommend to the President that the matter be submitted to the Senate for its advice and consent before any notification of extension is accepted or given on behalf of the United States. Jowam C. Guaw, Adin# &artsr.

    (m65)

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    on his income from all sources, including.his capital gains, but where lit, is found to be a mere transient, or sojourner, or for other reasons not resident in the United States, he is not taxable on his capital States. The convention principle but does contain some modification of taxation on. the basis of being engaged in trade or business, in that the test prescribed in the convention is whether the alien has a permant establishment (branch, agency, or other fixed place of business) in the United States as distinguished from being engaged in trade or business therein. Althot It alien lan having a permanent establishment in the United States would ill nearly all cases be engaged in business therein, certain cases could fronm tax on capital gains. Respecting this variation, however, there is an important compensating factor,-in that it is not practicable to trace, in the absence of the convention, transactions on the United States exchaiges carried on through British brokers by a British resident who under existing law is classed as being engagedin business in the United States. Under the convention, however, the means have been provided, through exchange of tax information, to ascertain

    found to be resident inthe United States he isunder existing law taxed

    With respect to the taxation of capital gains, where the alien is

    business in in transactions unless he isengagednot trade or the existingthe United residence disturb does

    arise where he could engage in trade or business without having a permanent establishment and in such instances he would be exempt

    was also considered. Comparisons between the United States and British systems respecting taxation of such transactions become somee what involved because thl divergent taxation concepts of the two countries but the following more important principles are noted: A can deal on the British stock or security exchanges free from British tax unless his transactions are under British law regarded as trading profits, and the permanent establishment provision of the convention does not modify this principle. The United States law as modified by the permanent establishment principle is less liberal, in that the British resident upon having a permanent establishment in the United States is taxable on profits from his transactions on the exchanges. For example, the United States lawyer or engineer having a branch office (permanent establishment) in London could deal extensively on the London exchanges without being subject to British tax on his resultimngrofits while the British lawyer or engineer with a branch office in e United States would be subject to United States tax on profits from exchange transactions in the United States. Thus, mi such instances the Unted States taxes its citizen on his profits on the British exchanges and the British resident having an ofice or other form of permanent establishment in the United States on his profits on United States exchanges. Since Britain in such instances imposes no tax the United States tax is not reduced because there is no credit for the nonexistent British tax. It is again noted that the convention

    The effect of the pernmanent establishment principle on British methods of taxation on the securities and commodities exchanges

    the British resident having a permanent establishment in the United States and to locate and tax his transactions oni the United States exchanges even though carried on from sources in Britain. Thus there has been substituted for a theoretical and ineffective basis of taxation' a more realistic and effective one.

    United States citizen, regardless of his place of residence or domicile,

    (2653)

    CONVENTION WITH RY.8PEIC TO TAXUS ON INtCO1l


    so

    Stzahtf is in a bi'llr i)sit ion to follow the tralsactions (if citizensl its

    muake"s prmvilsmis for the exrhalume of information

    that tile' Inllted

    British law in lhis regard. III (.01.isihltring this general subject, the sumieoninttee i. aware of live'sti. tu lureau of Internal Rlevenue has udher active flit f(d that he galion the laxllion of capital transat'ions of renfugeel naliens in the' 'nih44l Sl~lott anl flhe Iposbilifly of heislation, if found necessary, to suipple'uih',t mluh progrant. At above' ilicate'ei, thero may be certain 4111411 falling in hIetwet''n (lh, test of Ihtiuig engaged in trade or bumsin' aiul having a pernianent fisttablislihment where the convention its nmore

    teal'iishlment Coneipt adopted in ihe coemuw,'ion may overlap. Thus, if a IUnit6l4 SAtate'S hink with a bramnh in IAmide should sell Mecurities on fill I611110h1 e'Xthinge it would lie subject to British tax since it wou1hl have a jwrmnul,,nt tolablishnilent in tiritain and its saleh of se'urilit't. wold Ilie regarded as part of (lit, trading profits of tihe hank. On the oliretr sid.i, the U'ihltl States. wouldl alio) tax profits of a lIrislish bank avingit branch in fil U'nitetd Slalet. a It is also noted thai in tIhe first illustration the Uniiitehd States' would W reducild bhr Ifo a 'rreit for the Brinlih tax under hlit existing United SIate law iw I andi ti1e e'etii','titn aut4 ill thei e'vond illustration tile litr iish tax would be re'dueed Iv flihe I'nited State's tax tinder file convention whiie'hi iiioehifije

    II transiwimlis oif Blritish residents oin the nited State's. markets. Th,,ere are' fttlher instlan'e'.,lhiever, where ini prI' ict' the I1,'rnuament.

    ald re.side.' tt.o the Biritisl markets anid, where

    rlirthient, of the

    liberal thimu existing law, buit there are other conlae'nlsatnig factor

    1,1It'ciaulh whien the provisionA relating to exchange of tax information aret 0'eusildereti. With respect to the third point, your subcomnalitte ha ben iven W Io understanl that neither this convention nor any of our existing convenltions are regarded by the executive branches concerned as

    still FraIi.'. It is Ielie'rv, that satisfactory reconciliation ha been made between hteihnical Iprineiple' of the two iysstemts, anti that the adjustments ngre'e'd upmon are, on the whole, aidaintsagous to the Unitid States

    tIl ieo sut'h tet,'chiial eoifliel't existt wheru the" test of taxation is rosideli,e. Moure'over, the samne' proviSiMcI found in the British conve'ntion ire' iow in el',irt under the' conventions with (anada, Swteen,

    precedents for future tax conventions. The conditions encountered in negotiations with foreign countries are found to vary widely a between tho replvtive countrie, and thum any specific provisiols found in one' convention may not be found, from the United States st~antlpeint, to be acceptable in a convention with Another country. A couirw ion made to a particular country by the United Statws in a tax convention with such country may not be made in the case of authlu,'r country in the absence o compensating concessioms by such
    country.

    With rtvptct to (4) it is the underntanding of Your subommitt"e that the e,cutive departnme'nts comcerned have in the pmt elwoursd American bualemnw mterinte,' to present their views rMfating to taxation problems with fore,1 countries. Stle that, wheever practicable, such
    of t ir in';Ctitiontu with other country,.
    and otfber lke e'eimh.eratio.

    tht'ay *iH in thfi Kitur he expanded. It is undemtWod, however, are' dimanlined to publicize the advent te that invv fm, itn count will po'rmit, your subcnum tt4,e is sateTo the extlnt that msch

    ('ONVENTION WITH RIanerP

    TO TAXES ON INCOME

    lied that every effort will be made to invite exprnuioI of views by tions. In this regard, the executive departments concerns are anxious in the interests of tax conventions effecting their purpsXlk*, of being fudly infornmed of all taxation problems existing between the United States and any foreign country with which it propose. entering %ehave had tlte benelit of test iltony by the ('hief of Staff, Joint Committee on Internal Revenue Taxation, and a represntative' of tle', Tnaasury l)Department as well as a technical nie'nlorandunt stub. nit ted by the Trnasury D)epartment, all of which have received careful studyv. W'believe that the tern. of the convention an' on the %%holeadvantiageous to the United States. and fhst the convention should be ratified. Vhe further believe, hoeyer, that in the interest of promoting 'losr coornination bIetneen future income-tax conventions and taxai tio Im, measures or studies, which may be pending or trnder consideration in ('ongress. lower operation be estahlishel in this regard between the appropriate exeettive and legislative branches. For the information of the conmnmittee. the mennorandlum1 referred to is attached hereto and inaele a part of the report of ithe subtont. nit tee. lie'sp,.'etfttlly suuhnuittc'd.
    Amir..s W. 11.RA,KYt:. (C.ARL A. Hf ATCHt. SCOTT W. lo-APc.. Ilour.1T M. IA FOLLY.-.rz, Jr. WALLACE It. Wmirii, Jr. TEWNICAL U.xLMORANDI'M Or THE TRY:ASUR C(ON V NTION DEPARTMENT ON TH.
    upon negotiations.

    donsePtic interests involved prior to undertaking fulturn tax negotia-

    The proposed convention represents the first instance in which the United Kinhdom is party to a convention of comprehensive scopo corrponding in subject matter msubtantially to the existing bilateral

    There is transmitted herewith for your considertion with re)mniendation that It be approved and tramunitted in due courw to the I)epartment of State, the draft of a proplosd iunonme-tax convention betwee'i thel United States and this United Kingdlon. Such convention had its inception in discumions at IA 4Ndo In-gning in April 1944, which were rsunmed at Washington during November, and ,lprestte the culmination of developneints since prior exploratory discussions in London in 19.37.

    conventionsIbtween the United Statvs on the one hanm ami ('anada, Sweden, and France on the other.
    ARTICLE I

    This artwce enuneratus the taxe* with which the convention is cononrned in general. Where any given arti.,U is 4napplicable to opw or more of astih tax the article so tatws. The artwile o)ntain the usual provuswms that the convention will apply to other taxes of sub-

    (24114)

    CONVENTION WITH RgSPECt TO TAXES ON INCOME

    stautially similar character impowd by either contracting party ot by a territory concerned subsequent to the date of signature' of the
    convention. ARTlCLE. It

    This article defined; various terms used in the convention. Clauses (8l, (b), antd (r) are routine and appear to require no cl-viric con. sl4dUation. Clauses (g) anti (h) are of vital importeeie a' votearlitut, the key to the application of articles iii, 1t, VII. VIII, IX, Xl. XCI, and XIV. Thus it will he observed that the terni "resideit of the United Kihfdonl" exciuhde. a citizen of the United Sttes, a resident of the I united States and a t'ete'el Statea domnetic corptora. tion. Hence, a citizen'of the United States asild a 1'Uit,,d S(1tt domestic corporation even though actually resident in the United Kingdom remain iubjec't to U'nitel -States tax upon dividends, interest rents, royalties, and business income as though tLhe convention EWA not come into effect. If, however, a corporation organized, for example, under the laws of France' is mana1re. and controlled in thfi United Kingdom, sucth corporation constitutes a resident of the United Kingledom and i6 eutit'ed to the exemptions or partial exenp. tions proviuled in the cited articlh. Thus such corporation selling its mannfacture'd gools in the United States through a broker or conmmision agent in the United States and having no branch or other installation in the United States will be exempt fromn United States tax upon its business income from U'nited States sources. On tb.' other hand a corporation organized under the laws of the United Kingdosn hut having its control anti management in, for example. India, is not entitled to such exemption. However, article V relating to shipping antd aircraft pnreits shouldd he contrasted in this regard. On the other hand a resident of the Unite'd Stateo (whether or niot. a United States citizen) and a United States deomettic corporation not resident in the United Kingdom is entitled to exemption from United Kingdom tax as to its business income if it sells its products on the English market through a broker or commission agnt in the United Kinge lo. Thee' exemptioms will be more fully treated in the various articles upon which article' II sad the definitions therein foul have, as already pointed out, a most important bearing. The definitions of " United Kingdom enterprise" ant " nited Stat.s enterprise ' tie into "rvsidentis of the United Kingdom" aul presidentss f the Unit"e Statea," reosptively. corresponds to, and is subantially identical with, that contained in clause (f) of the protocol to the Canadian convention aid to paragraph (I) of the protocol to the existing Swedish convention. Istararph (2) of the article, when read in amociatiou with article VIVI[. Ill, IX. and XIV. has the effect as will be mavr, fully dat C with under those' rmptive articles, of rendering applicable theenp. tions there provided in the cas of individ ual performing personal services within the United Stat or the Unit I4inmOMMas the cAs may be, even though such individuals are engae Mn trade or businme therein 0y rmess of the pefotueae of suach erviem.
    THe definition of "permanent e'stabhlshment" found in clause (i)

    (2WA; 1)

    ('O*4VZNTION WITH RIrSPIg(r TO TAXA ON' INCOMl ARTICLE III

    and follows the principle of Anermanent establishment" in the field of buslii income. Unduhr sochpriiwiple. the United States will, upon a r4ci firtwal basis, subject to such taxation the iusiess income of a United Kingdom enterprise only if such enterprise haq a permanent i-stablishment in the United States. The article has application only (o husiztui income, or "industrial and commenrial" profits as it is dosigtuated in the convention. The article has no application for examnpe, to investment income or income arising from the retndition of Ie,rloal services, which items are in tems exempt from tax in whole or in part in accordance with separate articles of the convention and, in the aslence of such rules with nespect to any particular item, by thie Inuternal Revenue ('ode. Ulauses (g), (h), (i), (j), (k), and (i) of article II should be read in association with article III since such clauses define" ,resident the United States," "resident ok the United of Kingdtom," "enterprise of one of the contracting States," and "perniatent establiihniet." The effect of theie definitionl upon tax*tioul by the Utnited Stat" or by the United Kitglom is traced udder article II in the consideration of the definitions. It will be observed fromt a reading of parraph (2) of article III that the United Kingdom reserves from the application of the article th,,e provisions of her excss-profits tax and her national defense contribution under which the profits of the United States subsidiary corporation are consolidated with those of its United Kingdom parent
    corporation and could tut see fit to waive her taxes of the subsidiary in hlie Uaited Kingdom (ser Finance Act of 1940. fifth schedule, pt. 1). The principles of taxation found in article III thus are recognized aul followed in the three existing conventions to which the United

    of the Swedish, and to article 3 of the existing French, convention

    This article corresponds to article I of the Canadian. to article I1

    profits even thought the sulmidiary had no branch or other installation

    States is a party and are substantially in harmony with existing United States law. For a more detailed treaUnent ot such, see Executive Report No. 18 (pp. 6 and 7) relating to the Swedish convention, a copy of which report is attarclhd hereto.
    ARTICLE IT

    article IIl of the Swedish, and to article 5 of the French. convention. It ire z the principle found in section 45 of tihe Intral Revenue Code to adjust the accounts as between interl,.king bumnesm and supplements prgraph (3) of article 111. The article authoriss the Wkwoa of humlowm income " between the two countries to the end that a reani tax bwaIs will be allocated to stwh, From the Unted State Wie ther will he framd regulations comaepond4n to sectmi 7.2 of Trnary 1)ecisis 5M.6 ajpp ed December 31, 1942, bei regulation under the tax omventim between the United Swtat. Cmad.

    This artie responds to article IV (1) (a) of tle Canadian, to

    (M10)

    COXVUNTION WITH RmWWI

    TO TAX= ON IMCOMS

    AJMTCLS V

    This article provides for the reciprocal exemption of earnings derived from the operation of ships and aicradt. It has application only to business income from such activities and has no application to dividends which might be paid by a corporstion engaged in whole or in part in maritiue or aircraft operations. Insofar as rte article concerns maritime operations it conforms to the reciprocal exemption which has existed for more then 20 years between the two countries aw is hosed upon exchange of notes dated at various times from 1921 to 1924. Insofar as it concerns aircraft operations, it represents an ob/ctive, the accouaplishmnict of which has been frejuently desired by the Department and which has been embodied i all other income-tax convention, to which the United States is a party. It will be observed that the article applies to corporations organized under the laws of the United Kingdom aid to corporations organized under the laws of the United States regardless of the place where such corporations ar managed or confrolled. This principle was agreel upon in order to -adere to the proviMsio underying the existing reciprocal exemptions of shipping profits.
    ARTICLE VI

    Under this article the nonresident alien residing in the United Kingdom, the foreign corporation controlled and managed in the United Kinpl~om, and the trust or partnership in the United Kingdom will be subject to United Stat.s taw at the flat rate of 15 percent upon dividends from sources within the United States it such individual, corporation, or entity is not engaged in trade or business in the tvnited States at any time during the year in which such divi. dend is paid. When read in association with article 11 (2) it will be seen that such alien, even though be performs personal services within the United States in such taxable year, is entitled to the reduced rate of tax. Thus, aasumniig that A, a British subject residing in the United Kingdom, performs personal services in the United States for a period of 4 months in 1945 as a consulting engineer employed by a Unitd States domestic corporation and is paid compensation tlwrefor of $10,000. A holds 100 shas of X company stock on which he received in 1945 dividends amounting to $900. Such dividends are subject to tax at the rate of 15 percent. His earned income is subject to tax under sections 11 Iad 12 after allowance of the appropriate deductions aid exemptions. For the purpose of (such tax le is et*Agd in trade or business within the United Stako but is not so enuugd for the purpost of the appl-Ation of The Vaited Kitoom do" not impose its "sandard"' tax upon dividends but does aapuw surtax upon suh dividends if the over-all imcmne exceeds 2.000 or about $84.00. Parmar 2 af article VI examnpts from Unitd Kingdom surta dividends desired from Uited Kinpiton source by residents of the Uniated States. A citizen of the Unit-d StateS reid in Brai-l is uot, however, entitled to such exemption. Likewise, reduction in the rate of United States tax to 1 percrit applies only to residents of the nitutd Kingdom and des nMt apply to B~ritius subjects reading putude the U'nited Lngdus. J9650)

    the rate Of 1 percent with respect to i

    vidends.

    CONVENTION WITH RXSMFr

    TO TAXI

    ON INCOME

    subject to the same conditions su ,tantially as is that found in article corresponds XI-2 of the Canadian convention. The exchange of information at the source which naturally flows from reduction in the rate of tax or exemption from tax will be dealt with under article IX below.

    The proviso found inparafraph (I)


    ARTICLE VII

    to and isapplied

    This article exempts upon a reciprocal basis interest flowing from United States sources to residents of the Unitled Kingdom. The individuals in the United Kingdom entitled to such exemption are identical as to classification with thoe, entitled to the 15-jwerent rate in the case of dividends, imnely, nonresident aliens resident in the UnitAd Khigdom and nonresident in the United States; and foreign corporations controlled or msniged in the United Kingdom. It wil be observed that the article does not, in terms, refer to interest on United States obligations nor to United Kingdom Goveunient securities, but merely refers to intivrest from sources within the respective countries. Interest on United States Government securities is, of course, ifiterest (ron sources within the United States (,sec. 119 (a) (1), Internal Revenue Code). The article contains an exception to the general rule, the effect of which exception is to deny exemption in the case of interest paid by a subsidiary corporation in one country to its parent corporation in the other. The exception has the desirable effect of eliminating the possibility of the parent taking the profits of the subsidiary in the nominal form of interest and thus avoiding tax on the subsidiary by the country in which it is situated.
    ARTICLE Vill

    This article exempts upon a reciprocal basis royalties and the like from United States sources flowing to the United Kingdom. The classification of individuals and corporations entitled to such exemp. tion is identical with the classification of those persons entitled to the reduced rate of tax on dividends and to the exemption with respect to interest. The inclusion of film rentals within the scope of the tein "royalties" is solely for the purpose of article VIII and does not disturb the essential nature of film rentals. Under the British practice neither yearly interestt nor royalties can be taken as deductions by the payor of such items in the computation of the ors United K tax. Thus the payor pays the tax in the first instance to the Crown. However, when the interest or the royalty is disbursed the tax thus paid to the Crown is wit d fron Ilegros Smount of the iunts or the royalty at the cuent ruipt is $1,000 ther is actually paid to the ]der of the patent only $600, the remaining $60beg withhed by te payor to re mu

    retei o United Kiapdm tax. Thus, it the grow amunt of the

    WuMs him for the tax previously paiP to the Crown. In king With

    the p,inyipl of .H" V.C'

    no credit is allowed with respet to the $600 ta withheld at tde.source. Irfn Air Chsb Ce.,t Im. v. C . wuss (I T. C. M0, alnned 1/43 .
    AN~b)

    00 inhis gross income for Unlited States tax purpose and, oa course,

    ,ilmesiow *upr, the recipient includes

    10

    1CO CONVENTION WITU lUglCT TO TAXIS ON IN

    Fed. 2d (d) 266 certiorari denied). In the proposed convention no withholding will take place in the United Kingdom hence there will be included in grosn income under the assumed facts the amount of $1,000. No credits will be involved since there is no United Kingdom tax imposed upon such item. Articles VII and VIII, therefore, while producing a decrease in the revenue thrpugh exemption from tax on items of interest and royalties going to a resident of the United Kingdom also tend to increase the revenue by reason of exemption from United Kingdom tax on such items flowing to the United States from the United Kingdom.
    ARTICLE IX

    Mineral royalties and real property rentals are subject to United Kingdom tax at the standard rate of 50 percent, not however upon the grosm amount thereof but upon what is substantially net income from that source. Thus the taxpayer is subject to tax upon his net rentals aming from real property and shown in schedule A of the British Income Tax Act. The reduction in our rate from 30 to 15 percent upon the gross amount of the rentals is intended to constitute a tax burden corresponding as nearly a may be to the British rate of 50 percent upon the net rentals. Under'the article, however the nonresident alien resident in the United Kingdom and the foreign corporation controlled in the United Kingdom may elect as to any taxable year to be subject to United States tax as though he or it were engaged ux trade or business within the United States in such taxable year, thus permitting deductions and credits against the grosm rentals. Paragraph 2 exempts from the Unit.d Kingdom surtax the items forming the subject matter of the article.
    ARTICLL X

    This article, corresponding in subject matter to article VI of the Canadian, to article X of the Swediuh, and to article 8 of the French convention deals with the exemption from tax imposed b one of the contracting parties of salaries and the like paid by the other contracting party to individuals other than citizens of the former state. Thus the article is in substantial Uarmony with section 110 of the Internal Revenue Code The article has, however, a feature not found in any other convention to which the United States is a party. Under United Kingdom law a United States citizen (female) marrying a British subjectbecomes ipso facto a British subject. As such, sbe is subject to tax by the Unted Kigdom it resident therein as are other British subject and hence is subjw-t to tax on income from sourceo in the United KXigdom. Thus, if such United States citizen while retaining her United Statts citienship is employed in the Americ.n Embasy in London, the Unitd Kingdom has heretofore asrted its right to tax such individual ou her compensatin for such services, but under tbh propoed convention the United Kingdom exempt. such individual from UVited Kingdom tax upon her salary and the like as an employee of the United States. lecipromioly, the United State will not subject to its tax salaries and other com ]SaW tins for services rendered the United Kingdom by a Unit.d States cawaen who as also a Bntish subject under :e circumstances set forth above.
    t~S6))

    CONVENTION WITH RErPrCT TO TAXI= ON INCOMt ARTICLE XI

    11

    This article corresponds to article VII of the Canadian and to article XI of the Swedish convention. The article provides upon a reciprocal basis for the exemption from United States tax of a resident of the United Kingdom upon his earned income from United States sources if(a) he is present in the United States for a period or periods aggregating not more than 183 days during the taxable year; and (b)-such income is paid by a United Kingdonm employer. No limitation is placed upon the-amount of compensation, for such services. It has no application to the remuneration of public entertainers such as actors, musicians, and athletes.
    ARTICLE XII

    This articlp exempts upon a reciprocal basis nongovernmental ensions and life annuities derived from sources within one country by a resident of the other. Through the definition "resident of the United Kingdom" it leaves untouched taxation of United States citizens. It covers only a minute segment of income.
    AwnrICLE Xi1

    In this article the United Kingdom adopts, with respect to United States income andjn section 131 taxes, the system of credit for foreign income tax found excesn-profila of the Internal Revenue Code. The credit provided in this article is, of colmme, one limited to the scope of section 131 and hence does not extend to the tax, if any, under section 102 or under section 500. The second sentence of paragraph (1), in effect, revokes the principle of Biddle v. Commissioner, supra. Thus in unusual instances a deduction mfay be allowed a British corporation for British tax while a credit will be allowed the United Statts shareholder of such corporation for portion of the same tax. However, it should be observed that the credit in such case is largely neutralized by reason of the inclusion in gros income of the amount of the British tax. It will also be seen that section 131 (f), internal Revenue Code, allows a cemlit to the domestic parent corporation for its foreign subsidiary's foreign tax but does not require the inclusion of such foreign tax in the gross income of the parent. The foreign subsidiary may also be doing business in the United States, thus getting a deduction for a proportioate part of such foreign subsidiary's foreign tax. Paragraph (3) of the article appears to merit some further considers. tion here. The adoption of the credit provisions bf the United Kidn will require allowance of the credit by the United Kinigdma in cases in which individuals will be claimed as residents ofthe United Kingdom by reason of the fact that such individuals sojourned in the United Kingdom for more thai 6 months within tU. ymar of awnsment. of the in example I, is emupyed or other technician and a Thus, Unit4d State an engieer by a British conmea at a citizen salary of $18.000 per year. He speeds 8 months of the year in England and the remainng 4 months in the United Statem. The Uwted Kingdom will subject ham to tax upon his entire income. However, in the application of the credit, the United Kirndom will ?SNO 0--f--Vel. S--4

    (Vul)

    12

    CONV5XXOX W l

    UW TO TAX= ON INCOME M

    recognize. that onethird of his earned income for such year has been

    derived from sources within the United States. Assume, however, in exoampl II that he is employed by a United States domestic corporal

    tion and spends the same period o time in the United Krndo

    amount of his income which he brings into the United Kingdom. In cme I, the United KidI tax extends to the entire income, while the United States would in the converse situation tax only the saltm allocable to the 8 months spent in the United States. In case 11, however, the United States law woW impose its tax upon the $12,000 reardlem of whether such income was brought into the United States wiile the United Kingdom imposes its tax only if, and to the extent, the earned income isbrought by the taxpayer into the United Kingdom. On the other hand, if a British-contro6id corporation pays ditor's fees to a United States citizen and resident such fees are subject to United Kingdom tax even though the recipient never was present in

    this instance the United Kingdom would tax him only upon the

    in

    the Unt e d

    United Kingdom as between those (a) resident in the n,tedKinplom, b) ord resident in the United Kingdom, (c) domiciled M; the

    om.

    an, the rles of txioa emploedby the

    taxation of nonresident aliens. Because of such multiplicity of laws, the United Kingdom from sources within earned income derived was dsinclined to say, that for Kingdom b the United all purposes

    n Kingdom are so complex that it is difcult, if not impoiible to make a comparison between that system and the United States

    respect to such income attributed to services actually rendered in the

    the residents of the United States would be subject to tax only with

    United Kingdom. For the purposes of the credit, the United King. dom will recognize sich pricp found insection 119 (a) (3) of the Internal Revenue Code. This article orespon;s to article VIII of the Ca , article IX of the Swedish, and article 1 of the French convention. The rendition of pd=W services within the United States by a resident of the United Tuidm will not, prevent the exemption from tax on capital ga ev tough such resident is thus engaged in trade or business within the UMite States. The United Kingdom does not include capital gams within the tax

    bose, unkle the individual, corporation or'.oh entity a"trader"

    teco tat with respect to capital gains. The number of tansactions hsnothin to do with the liability. For example, a retired busine.sman may be activy ea d i stock-maket t actions in his
    private capacity sad not as a" trader" but he is not considered because from a ingl securities "solby abink is treated as trading profite d the bak d taxedasMuck It is base of this factor tati was found inwactiab fact. mnaie the article Mrscican oits fac even in to

    and reistered as suck, then such indvidual, coporat0on or other entity, whether or not resident in the United Kingdom, is never sub-

    of that fact lh"


    thoeSk it is a

    to tax upon his g"s

    On the other hand the gain

    (AG9~)

    coxUwnoN w

    iNnci To TX= oN WCOxN

    13

    A5WCLU lVi ZVI* AN" ZVII

    hence the article cannot be readed as having any effect in terms of revenue, other than in those instances in which there is encountered a United Kingdom subsidiary corporation carrying on practically all its activitims wad having its fiscal offices, in the United States. Article XI provides tht a corporation organized under the laws of the United Kingdom shall not be subject to the tax imposed by (a) section 102 and (b) section 500 of the Internal Revenue Code if such corporation is controlled directly or indirectly by alien resis dents of the United Kingdom,, Hence the article cannot be employed by United States cien or residents in an effort to avoid the imposition of surtax. Thus, if two United St.ate citizens undertake to corporation to avoid surtax, it is appaet create a United King from the text of the article that they must first surrener control over

    United States. The situation is therefore, highly theoretical and

    These articles corespond, repec Vely to artides XI, XJII, and XIV of the Canadian covention. Under section 119 (a) (1) (15 and section 119 (a) (2) (B), Internal Revenue Code, interest dividends paid by a foreign corporation constitute, provided the conditions aid down are met. income from sources within the United States and hence are subject to United States tax in the hands of reskients of the United Kingdom. In practice it is recognized that it prticle for the Bureau to ascertain only in rare instances derives more than the requisite per, British oporat whether from United States sources so as to conistiemlApe of its grus income tut, its intemrt or its dividends income from sources within the

    their capital into te hands o( alien residents of the United Kingdom.

    suh provisions being akin to action 500 in its terms and objectiv*essection 22, Finance Act o( 1921, as amended by various subsequent finance acts. Under such provisions a reasonable part of the income of the company is deemed to have been distributed and thus is subject to surtax in the hands of the shareholders.

    avoid twt upon income arising from such capital. In addition, United Kingdom law provide for the imposition o( Msrx on companies under te control of not more than five persons,

    It is suggested that's renable men, they will not do so in order to

    e tion and has for ita purpose the solution U prMoem growing out of gpror to 19341 inaccord provisions of our intLrn revenue laws exciting

    Article XVII corresponds to article XIV of the Canadian couvre.

    ance with which the "t

    nt as a practical matter enforceable. BeWiningwith the Revenue Act of IO0 such alien were peeraiy nmt sublet to tax upon such

    to "ascrtain the identity of such alins nd consequently,

    corporations driving incme from United States sources were subject to tax upon gains derived from transactions upon United SAt.M security and commodity exchanges. in proctuce owing to factor beyond our control, it was found extenmely dilicult, if not impomible,
    the tax was

    oty-o nzoresident ains SAn farei,

    Oai but Oly 7taxabl upon invesaet imM And the like foms However, them remained a number of un*sourem Uuit States e Im 5 Ia liability Nonr settled cae pending before the C

    14

    CO.NVZXTIOS WITH RWDPWCT TO TAXS ON INCOMe

    for years prior to 1936. While it is believed that few cases involving British residents and corporations are outstandig, the British delegation cnsdered it emential, in. principle, that tilwre Ite inserted in the propoa-d convention an article corresponding to dial found in the Canadian convention and relating to the pre-19;16 problem.
    ARTICLE XVIIl

    to which the United States is a party. Its effect is to exempt from United States tax, upon & reciprocal basis, compensation for personal services ren,|ered in the United States by a reoldent of the Unite-d Kingdom who is temporarily prewnt in the IUitedl States for the purpose of teaching at a united States university or other educational institution in the United States. The intent is to allow an exemption States under circumstances which 4idicate a stay within the Unitted State. in excess of 2 years, the exemption will apply in such came for the first 2 years. Such instances will, it is anticipat(A, btw rare. It is the purpose of the article that such exemption shall cease at the end of 2 years from the date of Is initial arrival in the United States. Thus, if he reaches the United Stste on July 1, 1945, he is exempt with respect to his remuneration earned in the United States up to June 30, 1947. If he then leaves the United States on vacation but resumes his duties in the United States at the beginning of the school term in the fall of 1947, he is not exempt with respect to his remuneration earned thereafter. If. however, he leaves the United States for an entire year or more and then returns to the United States, it is the t of the article that he will then enter upon another inteidti exemption period of 2 years In the normal cu, however, the article will be conemea with a situation in which the exchange profesor will be present in the United States wly during the period
    for 2 year. in any event. Thus, if the individual comes to the United

    This article finds no counterpart in any previous tax convention

    covered by one academic year.

    ARTICLE 112

    This article corresponds to artti.le IX of the Canadian. to article XII of the Swedish, and to srtile, 12 of the French convention. From thie United States standpoint it has little or no piacical effect smie the amounts involved are not ordinarily gross income in any evet in the hands of the recipients thereot.
    ARTICLE XX

    This article corrmeponds to articles XIX. XX. and XXI of the Canadian convention, to artitle.. XV, XVI, XVIII. and XIX of the Swedish convention and to artcles 20. 21. and 22 of the French convention. Whde the terms of article XX are qute general. it to the intetiment of such article to e.change such unhurmatuu ulMn a brood sial be twfwn the reveitue authortlem o( the two coutattres both
    with re4prt to period i rnrimawmn covering rerning income and a also to specific rac.,. The prolpltmn arising in this general field ar akin to thfl e entountered in dth aItluiustratitou of our existing

    CONVENTION WITH RUESECF TO TAXES ON INCOME

    13

    regard will be formulated, as was done in the cae of Canaoda, after 4101ulttaiions ltetW'ttin the two revenue servit'4' with a view toward bruigincg the terms of.the convention into effect as early as practicable saftguard the interests of the revenue. auln t he mine tl mi' at
    ARTICL, XXI

    tax i',,,vetitions. espciaIlly that with Canada. The details of the r,.Vulatiorv mes-aureo necessary to implement the convention in this

    tile S"etdish colliventiulol, IMil to paoagraph V of the protocol to the Fre.nh conveitioni. It is. however. more elaborately drawn in order to bring within its s.ope British subjects residue in areas to which the vonve'nt ion is appli a le and United States citizens residing in areas to which the, convent ion is applicable and extension to juridical iErsWuWti It will be observed that this article extend to all taxes I.oth Federal and local. Such extension, however, is in keeping with ,?ver'l commercial treaties (such as that with Norwsy, of 1928, and that with Germany, of 1923) to which the United States is now a party. It has no practical effect, since our domestic taxation does not diu-craniminate as between United tastess citizens and British nationals residing in the United States.
    ARTICLE XXIl

    This article, is in principle identical with pragraph 12 of the protw',l to the ('anadian convention, parsgr__aph 7 of the protocol to

    UnitVd States is now a party. Its basic purpose is to make possible

    This article finds no counterpart in any convention to which the

    Canada, Austrulia, and New Zaland.

    extension of the convention to colonies, overseas territories, or other areas over which one of the countries exercises authority. Each country has reserved veto power over applicatioiw for extensions made by the oi her country. The article has no application to sovereign members of the British Commonweahh of Nations, such as
    ARTICLE Xxiii

    tr'butrio follow conVent1iona ac ouing penods and not the historical dates awsoitated with the incroome tax aid surtax. Since the convention is retroact ive to ,laJnuary 1. 1945. it is anticipated that the initial effects f the eonventlOtn from the I ited Statelstandpoint will be to rea'lt t'excess4 laxA4* withhehld tV Withiholdiig agents in the U'nited State's as was loime In the cAse of (snaimUls (is T. D. 5157. C. B,
    1042 -2. 1317).

    This article provides that the convention comesin mto effect with the calendar year 1945. as to Unitted State' tax, and on the 6th of April 1945. for the purposes of Umited Kingdom tax, thus br mpn the convention into effect ctincideut in the respective countries with the ciommencement of new taxable verts. Whoever, an the case of the United Kingdom. the surtax 's a year behind the income tax. Thus, the surtax for the wear of asitiniwnt 1944-45 ts based on the 11c".I'e for the ver endted April 5. 1945. and ts payable on or before Januas" 1. 194'. The exries-pntitstLax and national defense con-

    (2m~~)

    16

    CONVENTION WITH RESPECT TO TAXIS ON INCOME ARTICLE XXIV

    This article provides the usual conditions under which the con. vention may be terminated and specifies the dates upon which the convention shall cease to be effective, the dates thus stated being such as will allow the convention to be in effect in one country for the same length of time as in the other.

    (Text of conventions and of Presidential messae of transmittal]

    Senate Floor Debate and Action on Basic Convention

    July 12, 1945


    79th Congress, 1st Session 91 Congressional Record 7448

    (2667)

    A
    It If

    4 44l1

    fl

    J I Il ~ % n,rzs,I Irw

    141,1400.)

    nr.,l ,St, itt of l) (7111,11 lin"m.'.Il,4I T'l'ho legislifivt' ,lrk h1441V44111 |tioI.4I lnoli,,, Kuxewive' Amrllfrt (',41. 310 #HIII! 8 ('41l1VOll'011

    l1h ~lloid Kinlom~ ti4 (Ireat lUrit iii oui Noirflhoros lrolosIiul, for1. to 41 "VOW1114-olia'tr~hhlolotxao![ll with lrlXoml,ll. i0xt* toll lllt'41lll41, miJgllod

    t sit Wasihi:,jill ipi Aprili III, 1tI4A. mw oive Mr. I'r. 'oi Iriuieial, ait. Iths fI1~mcioll 1,111 .11111tr Mlr. W lmi volondr wmnl, ovo~r oIl, I tha i,.t u'K'l'tlwa (ofw iWll ill # t I nrilaim. motl m !,rom WIWI Vil-Kiolis Mlr.l l{vo,,',omoil, lItgrgeroi l.f the frositil lwk Itlk 1 (1941 that him. in tho uBl1Itt l iit Sr'sl~oi ~('1111s 'IIPItu114, lsio. gos over.

    941 OVs''.

    'l'hoileUt

    I !)l NO OFFII( 'Kit. Withlout itjp'ii Ilh tirslrit"iu' will

    ("a)

    ,SenaUtel FPltr Iealme (and A clion on Biasic C'onve


    Felrijary 1,r1141; 112 ( '..ngr'msiI ite'rIi NO41147

    ion

    (21;71)

    W. 114,61e THN:ATIMS WITHIN (IRKU:T BR!ITAIN AND N()ITI!!,CIN

    IRIEILAND) lEI.dATIN( l')I Ni I*'lA II


    wiol.

    )l lI1J, TAXATIONI .... X()s1.

    As its e'Xe'4ltitit' exetive

    I.'ltwi'ttsi the |lsiledl Stol4eu of Ameue'rica nudl thep United Kill l 0of (Orsl0, Iritoin ondl Northern .relaneI, for the avoida.it.' of lnilel laxlattlim l lite lin,ve'liim of lhcal evajeoo with reglwi,'t 14oltxi o its ite', sigredl sit Wsi h ouinlelApril fl1, 1944".5 ail . ou Exee'cutive' X', it rvOisv'e'ion Ixtwe'ei lite iiilk Smed of Aelue'ris Ie i ls 1111 lite t|nite'ed Kilgliilom of (ir.sst lrittsio aud Northeru Ireludl foorthe avoiire of 410 4 ltaxitiol ccimliliv ltevlliltiOll of ii,91ai e'%ct$itoI wiIIl rt'h trex taxets oil thie e'etexcs or ele'eom*4i lproocuus, to sigutesit .Iasluhiiigion o) April 10, 1045, I.e tlawkeu fromi lihe e'n)1.l, g!I;7jeiar ii tuhd c$It recomm itted'eIh ('llhe lommittee m Poreigii~ Itelit e Wr 14 t c
    4,'lvels'llioI

    Mr. (VOK(E. Mr. I're.iidem.'t, on I'1if 4f t1., (theuemmitle o Fort'ign flalieoisie, I a.k humihoivuioo e'wm.4'1 thai ex'leutive 1), it

    fort ler Iceci *.

    rie Iu l'Q -ii)K. pro tvi'ijlore. I hear isseoie, mcidi it, ise w torlemer

    I, theri' .llbjet1i0?

    The' ('lhchir

    (4073)

    Senate (ommile
    I

    crarings on Basic ('onvnlion


    April 17, 1946

    79th (Congrem, 2d sessionn Subcommittee of th1 ,Seate('ommitteo on Foreilpi Relationis

    (2075)

    CONVENTIONS WITH GREAT BRITAIN AND NORTHERN


    IRElANDPWSPECTING INCOME AND ESTATE TAXES

    HEARING
    1131033 A

    SUBCOMMITTEE OF THE COOIITTE1I ON FOREIGN RELATIONS UNITED STATES SENATE


    SEVENTY-NINTH CONGIRES8
    SECOND 8iUS1ON
    ON

    A CONVENTION BETWEEN THE UNITED STATES Or AE5R. ICA AND THIN UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, FOR TIHE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME. SIGNED AT WASHINGTON ON APRIL 106 1945 AND

    Cgrss, Ift Stuid Ezecldive 5,7bw


    A CONVENTION BETWEEN T=E UNITED STATES OF AMER. ICA AND TINE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, FOR TIHE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON TIHE ESTATES OF DECEASED PERSONS, SIGNED AT WASHINGTON ON APRIL 16, 11I

    PART 2
    APRIL 17o 1946 Printed for the ue of the Oommittee on Foreiln Raldtoo

    UNITED STATUS PRINTINO OPPICs OOV3RNM3NU WASHINOmCD : IN# TISNM-4--voL 2-46

    (241010)

    ('COMMNIITTEE ON VOREIG N RELATIONS


    TOM CONNAII.V, Texa, (lk'hmsa HIRAM Wl.JOIINSON, ('Callkatn WALTKR F. (EORtlK, (leaoga ARTHUR CAPPER, KNum ROBERT F. WAUNIER, New York ROBERIT M. LA FOLLETTE, Ju.. Wlsomeuin KLIlIXKT 1), TIOMAXi, Utah JAMES ER. MRRAY. Montana ARTIIUR II. VANI)KNIIKRO, Illchigan WAL LACE II. WIIITE, JR.,. Malie CLAUI)E PEPPER. Fk iaS THEODORE FRANCIS OREKN, Rhode Islnd HIENRIK SHI1PSTTAD, Illnsoota WARREN R. AUSTIN, 'VegmouI ALIIEN W. DARKLY, Keoucky ,TYL8S 1II910098, New ismgsobias JOSEPH F. OUFFEY, Penmn,'lvani CARTER GLASS. Virginia AI.FXA,.NDR WILKY. Wt.Womlm JAMES M. TUNNRLL, Dekwar, CARL A. HATCH. New Melco ISTER UII1I.. Alabama SCOTT W. L.UC'AS. Illinois RoDSe? V. SHIRL., t'MrA

    81rscoulw~vr. OARL A. HATCH SCOTT W. LUCAS it ALDEN W. DAIIICLEY. (Ukils. RONKEIT SIt. LA FOLoETTS, JI. WAI.LACE H. WHITE, Jo.

    (2678)

    CONVENTIONS WITH GREAT BRITAIN AND NORTHERN IRELAND RESPECTING INCOME AND ESTATE TAXES
    wUDR3S, DAT, flZ, !7, 1946 SMITCOMMITTE OF THE COMMITTEE ON FOREIGN RELATIONS
    UNITED STATES SENATE,

    mittee on Internal Revenue Taxation. (The subcommittee met for further hearing in connection with Conventiorias with Great Britain and Northern Ireland, respecting

    The subcommittee, met, pursuatt to call, at 10 o'clock, in the conunittee room of the Committee on Forign Relations, in the Capitol, &nator Scott W. Lucas, acting chairman, presiding. resent: Senators Loass (acting ehairnts) and La Follette. Also present: Eldon P. King, Special Deputy Commissioner, Bureaw of Internal Revenue, and Colin F. Stamp, Chiief of Staff, Joint Con-

    11'4Aeinglon,

    b. C.

    income and estate taxes, vis, Executive D, 79th Cong., lot seas., and Executive E, 79th Cong., let see.)
    PROONBDINGS

    Let the record show that on May 23 and June 18 1945, this subcommittee of the Committee on Foreign Relations held hearing on two conventions with Great Britain respecting income and estate taxes. Later, that subcommittee made it report to the full committee. The full committee approved the convention. Thereafter that report was submitted to the United states Senate for its approval. It remained upon the calendar of the Senate for Some time without action. While the report was awaiting action, certain interested groups representing the Soreen Actors Guild and the Artists Manasge Guild ard others requested that the report be resubmitted to, the Committee on Foreig Relations in order that they might testify upon certain phases of the Conventions. As I understand it, article XT of convention D is involved before the committee this morning. Article XI provides:
    ARTICLIE Xi

    Senator LUCAS (acting chairman). The committee will be in order..

    (1)An individual who Isa resident of the United Kingdom shall be exempt from United Stt tax u compensation for personal (including profeonal) service performed duina thetaaneyearwthalnte Unted 8tstf (A) i present he within the United states for a peri or periods not exoeding in the aurepte 188 dys during such taxable year6 and (b)such serveM ar performed for oF on bef'oT person resident in the nite4 Kingdom. oa (0) An Individual who Isa resident of the United sall be exempt from "tate United Kingdom tax upon profits, emoluments, or other remuneration Intempe" 88

    (2679)

    84

    147INt'41,t

    AND KSTATR TAX CONVENTIONNS

    )leronIal inhltiutig proftwim, iail ,ervieslirfrlii'sI within tfhe fruited Kingdon in uit'avr of auwwwint If tit) beis pre's ut ilihin the' quilted Kiniplont -for a ll still ior Iwriluis stll

    Wh) w, burls rvirvs are

    rnidfor tdiall iof a lr-wol rmidesi uit, '

    'onust-4inr the' a ill

    aatilejrt ')l' during that year, and 18I3

    in tiho United

    M3) The provisionus of (his Article shall not apply to thlm o utii n, Iftt, emollitnuleis ol other llnUleralton ihilic entiertailri asuch as stop, motion. lf 1 pli.ttlni, or radio artote, muisies.sU, asnilthh, :ls.

    It, is t1l unilerstaiding of tis, chairman (f this conintteo that paragraph (3) of article X1 is thie one ill oitllreirv'e .
    witnesses who are here this Inornillg t4) testify as to wily that. section

    Tit' clerk of the onunit tee hta, given joil the names of three

    ahluild lis deleted (rnon the convention. A.r, Sir. l)afis,, Mlr. Abel, and Mr. Nlc'alhnan all here'? Mr. Ntr'ALMAN. ic5, sir. Senator 14r'AS. Which 0on, of You gitle'ni1en wants 14) testtify first? Mr. , .CCALMAN. Dhles. Mr. Air. I)AL.ES. I will, Senator liucas. And may I proceed?
    Senator lIaeAs. Proceed, sir.

    STATMINIT BT JO!N DALE, JR., ON BEHALF 0F TIE SCREEN ACTORS OUILD Mr. )A:L.Es. I am John I)alhv, ,Jr., executive secretary of the Screeni Actors (luild, the American Federation of ialmr union reprosenting all motion-p icture actors in the United States. It addition to Mr. Walter Ahet, our president, (leorge Mlurphy, was to appear, but. this notice of hearing caught hin in the middle of a picture alignment, and in Vonseqlene lie to forego this meeting. had Actually we havel very little to say. Our only reason for pIlanning to have more porsotn here on our behalf was to show the sincerity of our feelings with respect to our appeal for the deletion of section (,1) which you have read. On a theory so nebulous as to incline one to wonder if it was not rationalization after the fact, the Internal Revenue Department lisa causel to he inserted into that treaty a clause, seetion 3, article XI, which baldly excludes; ateors from the benefit of the treaty. In his mteage of reonmlendation to the President, the Secretary of State decried the severe burden of the inmposition and the collection of taxes upon the same income by both the United States and the United Kinp(do1 , and lie described this treaty in his nessge as a solution, insofar as practical, to the severe character of double taxation. Without niore.-.without figures or prognostications, as actors we say to you, What. is themr different, about our profession that we alone should continue to carry the burden that our Government prolpms to lift from the backs of everyone else- doctors, lawyers, salesmen, businessmen, government representatives, astd all other professions, There was a tin in England, and for that matter, in the early history of some of our Str.ts, when actors were officially noted on the statutes " "rogues" and "vagabonds." That time, we tink, isno more. Actors as a class have proved their desire, worthinew, and ability to take their place In civic, community, and national affairs, and in fact in times of emergency or need are particularly called upon by their National Government, the Treaiury Department, and the War ('4010m)
    businesses, and aet ivities?

    INCOUI AND I&TAT? CONVINTION8 TAX

    85

    on special provisions in this regard. There is 11o mentions of actors as a elam or of public entertainers as a class. I find nothing on thI subject. itl the French treaty whatsoe'er--Ino mention. There are similar provisions in tihe Swedish atid Canadians Convenstionss. All I can say of such provisions is that they have never bets br'oulit to our attention, atltd I doubt that thenre have been a lsandful of{tistances where circunistances have vausted such pryovisionis of nmeritorious prteedeut, but, merely of having existed unntsoticed. Senator LITCAs. May f ask you, right there? Mr. DALUa. Yes Senator. Senator LtCAs. The Swediuh Consvetntion laas been its ellect for sonse tinme, so has the Casnadian Convention. this sort of taxing section il tlsese previous treaties? Mr. DNxie. KSnator, uly beat guet on that is thlat the interchange of acting talent between tisis country and Sweden, or tsiscountry asld Canada, has been so slight as to never have created the issue. I am not certain-atud this isgpess, purely--I ans not certain that tUe Canadiam, for example, take full advantage of their right to tax. I hsave no way of knowing. Senator LCAS. I am not itstertst4d in that. I am only interested to know why the Screen Actors Guild atid the Artists Managers Guild and other groups interested in this have not discovered it before. ("Il)
    Mr. DAis. That, is rigllt. Senator LucAs. How does it come that you Isave fsot discovered to be put into effect. Certainly we feel that they furnish IIo argpullelt

    There is a reference to taxing touring shows, but alms a statement tisat 'OuIpetellt adtninist rations of the (egoiaI tiIg countries Isay agree

    Of the arguments whicl I have heard and read of the Internal Revenue )epartnent for this separation of actor fromn all others, I think oinly two need he givens consideration. They are(I) C(l'tont. (2) Tihe statenientt ihat actors iay go inuto another cou.ilr, for a short. period of time and retiret with a goodly su1n of nIoney. As to esastons, I would like to say, I understand this claIls to be based upont the League of Nations Miodel Bilateral Convention of 11143, asilt upon the Frenchl thie Swedishs, sill the Canadias Cos. velstiOlns. I have read the m od1del convention, atsd it nly knowledge it contains no sinsilar provision to section 3, article Xi, whatlsoever.

    as to thos. few who reach the jpinnacie of finslneial success, thlir balanIe, is a precarious on1e, anlt its tile il they do not eontilille ins that position for many years. That is a brief Lecononiic picture of the nlotiol)-lpicturo actor.

    Departnsssot, to give freely of their time and talents. They have always rtopoindoe, and in fact are today responding, to tlwso pleas. They do not then understand why tiJS (loverlnllllnt should set thonm t pip!radversely front all other occupations. tIII are aware, I atsture, that tie profetssion of acting is not a more lucrative one than law, mesdicine, or literature. Out of8,1)0 lmotionpirture players ill tie industry, 400 make more than $16,000 annually. Of{ tltwe 400, only alpproxillitely 150 approach those sunls which thie pul)lic likte to associate with actors . . . $50,X10HI a year or more. The other 7,1t00 players snake fromt $2.,000 to $14,W0 a year, with the n141ne, at our heat calculation, approxinately $0,000. Furthermore,

    an

    INCOME AND ESTATE TAX CONVENTIONS

    Mr. DALES. Senator, we would have been equally interested, had we discovered it before. Why we have not discovered it before is simply as I say based upon the fact that no actor has brought this to our attention. We do not have anyone in Washington reading over all such treaties. It just escaped us, and there has been no complaint under it, and we received of course no notice of hearing on any of those things. There was, I understand, a notice of the Bintish hearingsSenator LUCAS. Do you propose to discuss how seriously this Treaty will affect actors going to England? Mr. DALES. All three of us-Mfr. Abel, Mr. McCalman, and myself-will touch on it; yes. I think it can be tuken for granted that there will be considerably more and historically has been consid. erably more interchange of talent between England and our country than with Sweden or Canada. Senator Lucas. All right, proceed. I will not interrupt you. Mr. DALES. The second statement, that actors may go into another country for a short period of time and retreat with a large sum of money-I would like to say of that that if it is really the policy of this Government and the British Government to doubly tax high incomes earned in a short period of time under the circumstances provided in section 3 of article XI, then let the treaty say so, and let it provide for double taxation of all such high incomes,, not just those of an actor. On the other hand, it is of course the avowed purpose of this treaty to stimulate international trade, and any such exclusion of benefit, either against the actor or against all, would seem to us contrary to the spirit of the treaty. It is a peculiar line that is drawn by section 3. May I give you an example? Robert Montgomery, an actor member of our board of directors, whose services for the studio by which he is employed have heretofore been confined to acting, solely, is now, as his next service for the studio, to direct a picture. Suppose for the sake of this presentationfor Metro-Goldwyn-Mayer, as a director: Mr.by Mr. Montgomery that this service is to be rendered 'n England Montgomery would have the full benefits of article XI. Section 3 would not operate to deprive him of them, as a director. If, however, he were to act in this picture, he would be deprived of those benefits. What is the difference between an actor and the director of a picture, that should make this so? What also of the writer and the producer of that picture, as compared to an actor? What is the feature that distinguishes the actor from all the rest? It cannot be the personality, for often one person acts and directs, acts and writes, or acts and produces. It cannot be the rate of salary, because I assure you that, as a class, director and writers fare much better than actors. Well, then, the case seems to us to be this-a measure is proposed by the United States negotiators-for what purpose, and to whose benefit? To gain revenue for our country? I doubt it. Under the restricted circumstances which bring section 3 into play that is to say taking one side of it, an American actor's going to England for an American producer, there is not enough revenue in the whole set-up to seriously contemplate. Did our negotiators then propose it as a trading point? Was it something they offered Englend in return for (2682)

    INCOME AND 2STAT3 TAX CONVENTION8

    87

    These conventions have been in existence all these years, and this is

    ,something of value to us? The answer to that is "no" for you will hear from others today that En:gland had no original thought of such a proposal, and as I understanI it, ev(ptutillty, only accepted it as a rather harmless "now'lty"- that %ord is tbeuI-prop .d hy the United States and consi&,red by England not important enough to make a point of. In return, theni, for this questionable asset to thit treaty, shouil our Government brazenly discriminate against a proud Hlass of its ritiMAis--30,o00 of them? If it is done - anl this js our fear, Senator lucas--a precedent will Ie set- a dangerous an d unjustified precedent. ()n behalf of all actors in the entertainment field, I ask that )you and this committee give this matter your most earnest reconsideration before returning it to the Senate. Senator Ijt, As. The tronible is you already have a precedent in the Canadian mid Swedish treaties. Mr. DA LS. We have a precedent -a rather unimpressive precedent, I would think. S-nator lUCAs. It may be unimpressive, because it has never been called to the attention of you folks out there who have been getting along very well under this and never noticed it very much. You fear nowlbecause of the high taxes I take it in England that somebody is going to get hurt. tr. DALES. Well, certainly so. I do not mean "unimpreisive precedent" in only that sense. I mean it in tihe fact that there has not been a great interchange in the acting profession with the other two countries, Canada and Sweden. As I say, it would seem peculiar that that clause, h.vinpv existed in those treaties for all this time, has never been brought lo our attention by any actor, by any agent, or by anybody else. No producer in Sweden has ever had difficulty getting an actor apparently because of a tax set-up. Senator LuCAS. Well, that is what seems rather peculiar to me.

    the first time, now, that you gentlemen have come in here to enter
    objections t it.

    Mr. DALES. For the first time, Senator, once mone, to our knowledge of the existence of any such a thing; and again, I am not a tax expert on any taxes. I certainly am not, on Swedish and Canadian taxes; and it could well be--Senator LuCAS. I am a little surprised that your wide-awake crowd would sleep on their rights all these years. Mr. DALES. If we had been hurt by them, I can assure you we would have hollered. Mr. ABEL. I do not ever remember of any American actor going to work in Sweden. Mr. DALES. That is the point. Mr. ABEL. Only a very few American actors have had any trouble with Canadian taxation, that I know of. Senator LUCAS. Are there any questions, Senator, you want to ask this gentleman?.
    Senator LA FOLLEzr1'.

    Senator LucaS. The next witness.

    No.

    (2688)

    so
    STATIMIUNT

    INCOME AND 3STATX TAX CONYINTIONS

    T WALT1R ABEL, STAB 01 RADIO

    1 SCREE, AND 0TE11 0

    Mr. Awe,. I appreciate this privilege. I would like to have about 4 minutes. I should think that would do it. I am the "horrible example" so will you excuse me if I speak personally at the beginning. I have been an actor since 1917. I have appeared in every form of entertainment-theater, vaudeville motion picture, radio, and television-and through the medium of the motion picture, my "unique and extraordinary persnalit,"as it states in my contract, has been known throughout the world, by the evidence of my fan mail, though since last October I escaped to the East, from over 10 yqars in California, because I wanted to resume a career; I have bien spending my time largely in New York, and some in London. In 1930 1 appeared in an American play in London. We were one of three American plays and three-they were all-American casts. Also at the same time, the two London vaudeville theaters and the vaudeville theaters in every large city in Engalud and Ireland anl Scotland and Wales, had, I shoidd say, in some cases, half the bill made up of American actors. In 1930, Will Rogers was the toast of England, from the royal house down to every cabbie in the street. As an actor, having had that experience, I want to saut that the hospitality extended by England-we have never enjoyed anything greater. Flattery was never greater, the money was never greater. Al of that was in a tradition that goes back a great many years. Edwin Booth's "sweetest triumphs," in his own words, were his sue. cemes at Drury Lane many years ago. John Barrymore's persomal satisfaction was never so great as when his Hamlet was acclaimed in London. Now, between the periods of those gentlemen's careers in London, the American theater has been represented by plays, and by vaudevillists, in a traditional and historical movement to England every year. The American vaudeville actor, at the finish of his spring season in America, had a full summer season in London, and as Isa there is no welcome like the English public's; but never has American actor received the distinction and the seeking out that ho has received in article XI, section (3) of this convention. Unless there be other reasons he is reconverted to the role of a rogue and a aod, as the statutes of England and the State of Pennsylvania st8l ltstand in their books-statutes that at one time denied him the privileges that his fellowmen enjoyed. Yet this actor's business is one of the biggest and most constant and most international in good times and-In bad, in wars and in depression. Through the war he has gained a greater international public than he has ever known. In England and all over the Seven Seas he has played and played. There is no question but that this business is big business. The securities that represent the ownership of the medium in which he does his playing, the theaters, the films, and the air--the securities which represent the ownership of these things ar freely traded in markets all over the world. The profits of these tbinp are corporate and have certain exemptions. But this act within the United Kingdom denies the actor the traditional and historical opportunity to practice his art and earn its income on an equal

    Y80

    (2684)

    INCOME AND US'AT3 TAX CONVONTIONS

    basis with other' employees. Why, when his fellow taxpayer-any other American-businessman-may go to the United Kingdom earn what he can for himself within 183 days,* and return to the United States with all his compensation, and pay only his United States tax, with the blessing of the United Kingdom should not the same be true of tie actor? 'I his, in the face of the traditionally known welcome we have enjoyed in England, is just not understandable to all of us. On Monday, -by chance I ran into Mr. John Harding and his wife, who had just arrived from England with the Marquis of Queensbury. I had never known the gentleman before. Mr. HAring occupies in the British theater what, let us say, Mr. Schubert does in the Ameri. ican theater. I had never met the man. We started talking, and I said that I was going down to Washington to the inquiry into section 3, and he said, "Oh, my Godi Thais something that we don't understand." Now; this man has just arrived from England to pursue a theatrical business in this country, and that expressed his indignation at the fact that the British have allowed that to apear in the convention. He could not understand, because he hinulf "We said, need American actors as we have always needed them, to appear in the London theater, in the English theater, because we need that new blood in our theater, and we -have always welcomed it." Not only that--the American actor not only appears in person in England, but the American actor on the film occupies 80 percent of the playing time in all English moving-picture theaters. asked what he could do about it, and he volunteered without any suggestion from me to telephone to Mr. Will Hay the president of theVariety Artists Federation of England, which he did on Tuesday morning at 6 o'clock, and he called me yesterday to inform me that Mr. WillHay had called an emergency meeting of the Variety Artist. Federation which represents most of the actors in England. This morning I received this cable from Mr. Will Hay:
    WAINr

    Wa.Aiu, D. C.:

    AnaL,

    Any reduction Intax making poesble an interchaee of artiste between Unted States of America and Britain would greatly benefltnt omuent indwtry In both countries. Wish you every success WIL HAT

    Vice Pm..u, Varke ArM Pedi&u, Unit&

    Now, we are not asking any more than is given to any other American businemman. We cannot understand why we should be singled out in the face of the traditional experience which is ours and the welcome given to us by England. It is incomprehensible to us. If we were taxed the same as every other American businesman is taxed we would ce.d= accept those conditions; but how can this difference exist? "71mu y~ou.
    Senator LUCAS. Mr. MoCalman.

    gdups"-actors, writers, directors, producers, and anybody connected with the motion-picture business, the radio busmintmne, mi and so forth-in fact, the entertainment world. (2686)

    STATUIS T B3 ADIAX E9cOALAN, ARTISTS NANAGUS GMULD Mr. MCCALMAN. Senator Lucas, I represent the Artist. Manmmms Guild, which isan amociation of managers of members of the "talent

    90

    9INCOMg AND ESTATE TAX CONVENTIONS


    1'i.,4

    and ('luladiii resties beire? And. ill fact, why did we not find t out almint this lirtihular lBritisl treatty until Novemblier of last year? The ans'wi'r to t lie first as it the) ('IheC al llislial ' ,1h wtdlislh Treat iis is the oh~i~ous answer, that helvauw1,1 w41 do not se'iid people i. the Suedi or ('Cinada to render their " imotin.ipicture indlustry in1to1 sel-Vi,,- inl eithler of tlhos, countries we' wouild have no0 reamms have to tilklldge of provisions ill those treal't.is similar to article XI of irol)0$.4 Irt i.ih-.Ai.rii'u Tr, ty. t le iTe listanthi ritish-American t'wi Treaty wai negohlatv'i during thet war whel wt, liki'wi.etu |not seiid ctolis in tile entert|ailinment did iliusry into (h'nt iBritain and it wits negotiated with dr sch tCrecy .eLweii til' two countries tint we l1d no notice of nythlling coll. 1 tiected with the treaty until just prior to Novei'ber I-194. Tih,* (lUetiol %.as raised inl th, transcript of the l,arings held before this subcommiittee in the spring of 1945 byitwo witnesses, Mr. Franklin Coles, nill eloloillic consultant of New York City, tilt([ Mr. 1Perry IV. lPhillips, of diet Allelicae Bar As-ociatioi, regarding tile secrecy surroundinhg tflit negotiations (of this treaty and tilta of publicity hIk concerning it. You, Senator l.uias, ol page (13 of tilth tranuorit' asketl Mr. King whetherr it wais cu:*toinary" to negotiate such treaties in secret. Mr. King rd'jliedl that it was cus'itomiiary and h foreign int .vernnlllt'its insisted upon sv'rne'ry. Ile further stated that no )bliciation of til termi.s (if the treaty is lmadtIe until it arrives in the
    Senate in order to have regard for senatorial secrvecy in these matterm until th'y are mnale public. Mr. Stilti made ia reIoniniviilidatioi appearing onl Iuge 77 of the transcript of previoluls learhiahgs held, before this subcoallmitee which was nullbt[red "Iourth." flie stated thlnt it lmitght he helplful if som-1e sill'd of ill(')ille-t1-.x treaitties Could be liade ill tih )rtehpliiary states hy iiidlependent group-l so that valid objections could 1Ise remediel %6:ithitL resulting ill the withdrawal of thle entin, convention. I heurtil. approve of that nreomlilmendation. l)uring thw war, the Bureul of litttermud Revenue cow.ulted uiiay industries, inclu.liltg ours, to ohiatmi ah'ive oil how to italhimister the Wage and Sal.lry

    asked Mr. I)hle-: Why lhave we not found oui t aibloutI the Swet

    First, I would like very mJuct to atiawer thil questiolithat you

    Stabilizvatioul Act, mind( while this ll113y lnot he a prict'e'nt, llevtert elleles, thie cuItom of hearings ill both branches of (Conigrss before legislatioll is intrnoureld wouhl certainly hie helpful in connection wit I future tegotiatio s of ilncome-tax treaties. about the second week in November 1945. 1 calne l'~itst oit or abolmt November 21, 1945, to see if I could ascertain why Rection 3 of article chlded inl the tneaty. Before I take up the question of the dliscrimnaition set forth iii section :,of article XI, Inlay I give you snoe exlamlpl)es of how sectioils I and 2 of article XI can come into twl in tite entertainment industry,
    atidl particularly ii, tie Inotioi-i.)icture industry: 1. An American motion-picture p)ro(dluing company with a perniaHent, establishnienit ill the United States and llone in Emigland may decide to prodluce a imiotion picture in England. Actors quite often are mplloyed by motion-lIicture c(omlpaieCs under a contract for an aggregate period of 7 years. The contract usually requires the actor (2686) X1, discritniuating against public entertainers an.d athletes, was inWe first saw a copy of the instant British-American 'Tix Treaty

    V1 1 to perfort hi6 services anywhere in the world that his employer may
    INCOME AND ROTATZ TAX CONVENTION

    by him in England, and therefore he should not be taxable. Let me show you the difference, right there. I will give you another example. We have also what we call in the industry-and incidentally, anything I say about tite motion-picture industry can be appli substantially to any other branch of tile entertainment industry-in this particular exampleSenator IA FOLLMrIE. Mr. Chairman, I ant very sorry, but I have got to go to a conference on the Philippine Trade Act, but I shall read the testimony when it is available. Senator lUCAs. All right, Senator lA Follette. Mr. MCCALMAN. The third example is that of a free-lance actor. The free-lance actor may enter into a contract with tihe British pro. ducer to render lis services in England. Assuming that tile actor's going rate of salary is $2,000 per week on a 5-week guaranty for one picture, he is in a position to bargain with the British producer for a higher rate of salary than his customary salary in order to offset the loss he would sustain from the payment of taxes to the United Kingdom. Thus, this situation differs from the other two examples and this particular actor does not come under tlte terms and provisions of article XI tall because he is employed by a British producer and not an American producer. In this instance, he is in a position to say "I will either perform my services for you in England at a higher salary than my customary salary of $2,000 per week,'or, "I will not perform my services at all because if I do, the payment of United Kingdom

    %ith tile making of the picture in England, except the actors, will be governed h1 the provisions of section 2 of article Xl of the treaty, anad (1ince tire picture usually takes much les thtan 183 days to make, everyone. except tihe actors, is not subject to United Kingdo,. taxies, but the actors arte, because of the inclusion of section 3 in article X1. 2. Another case is the example of an actor who is employed by an Anieritan cotmp~alny with ito pernmanent establishineitt in Esnjland on the samle 7-year contract mentioned above. Assuine that him salary is $1,000 per week and the American company inakes a deal with a British produ.cing company to loan to the British company tile service of tile actor for a period of 10 weeks. If the actor's net taxable income for the year was $40.000 and )to was in England for 10 weeks, thereby receiving $10,000 for performing his serviete int England, Ito would be subject to a tax of, roughly, N,0W0 lhv tile United Kintgdont, and, under section 131 of our Internal Revenue ('ode. It, would only be allowed a credit against his t['ited States int-nte tax of tihe antouIDt of tax which hie would have paid to the L'nitel Stalis had tihe $10.000 been earned by the actor in the United States. lit this particular instance, Itis credit would be a) roximately $4,000 and lte actor suffers a loss of $2,000 because of iis payment of taxes to tihe United Kingdom. lit this instance, the actor has the alternative of working in Etigland and taking itloss of $2,000 or of refusing to work in Englind and breaching his contract with his emnploycr. The money paid the actor who is it Elngland for 10 weeks making a picture is usually paid to the actor in Hollywood and is never receive

    picture in England where it mot0Otlpicture company. ii) producing as lIus no pernaanent eatablishlnent, tran sports sufficient of its employee. including -actors, to England to mauke a picture. Everyone connected

    (Itsignate. In this particular instance, the employer, tihe Americaln

    (2687)

    92

    INCOME AND STATX TAX CONVENTIONS

    a bargaining position-to break oven, on the British tax that he has to Pay, which as you know is higher than die American tax, and probably will be for some time. Senator ltucas. The producer would be compelled to absorb that, would he not? Mr. MCCALUAM. Sir? Senator LUcAs. The producer would be compelled to absorb the
    tax? Mr. MNCCAi.AN. That is a question that I cannot answer. We have had it up. Senator laue.w. I am only sugglistng that, in view of the fact that

    taxes by me and the reduced credit allowed me by the United States will cau, ile to suffer loss in net income." In other words, he is in

    the United States, including Mr. King and Mr. Mitchell, of the Bureau of Internal Revenue. I also conferred with Mr. M. g. Bathurst, the legal adviser to the British Embassy in Washingtona, in order to obtain

    you are talking about this tellow bargaining. lie is going to bargain before lie goes. Somebody is going to have to absorb that tax, some plarl. Mr. MCCALMAN. Yes; you are right. In that situation, that is correct. I meean, hIe has a choice. If the British producer will not pay sufficient to give him a net before United Stat4s taxes of what lie oriinarily would have received here for a picture, and lie is working over here, lie can say to the British producer, "I won't take the jobor I will, on my ownt terms," Senator LUCAS. I do not think lie would be repudiating his con. tract, uider those conditions. Mr. MCCALMAN. My last example was that of a free-lance actor. Senator LUcAs. Oh, I seae. Mr. MCCALMAN. Yes; you are right. In the last example I gave you, the free-lance actor has a choice. If the British producer will not pay him a salary sufficient, to return him a net income equal to what lie would have received had lie performed his services in the United States, lie can sy to the British producer, "I will not take the Job." However, in the first two examples, he has no freedom of choice unless lie intends to breach his contract with his American employer. Reverting back to my activities in Washington. in November and December 1945-1 amn not a tax expert aiid I knew nothing about income-tax treaties at that time. I conferred with almost every representative of the executive branches of this Government, with a few posible exceptions, who had negotiated this treaty on behalf of

    In the latter part of November, I had a conference with Commissioner of Internal Revenue Nunan. I told the Conunissioner that I was representiing the Artists' Managers Guild and the Screen Actors' Guild and that we were very concerned as to the reason for the inclusion of section 3 in article XI of the treaty and the possibilities of having said section deleted therefrom. At Voimimioner Nunan's request, I prepared a memorandum for him which was the subject of discussion between the Conunissioner, Mr. King, and myself the day after my first meeting with the Commissioner. At this second conference, the Commissioner advised me that he would not initiate
    negotiations with the British at that time looking toward the deletion

    fr6m him the British views with regard to section 3 of article XI.

    (2M88)

    '

    INCOME AND EWSATE TAX CONVENTIONS

    98

    of section 3 of article XI of the treaty. The Commissioner did say that be thought that I was right that section 3 of article XI was discriminatory agaust actors. He said, however, that this should not deter me from doing anything I could to accomplish my mission, and his advice to me was to see everyone in the Government connected with the matter. I told him whom I had already seon and he aug. gated to me that I see one of the persons in the Treasury Department and interview him, and requested Mr. King to make an appointment with that person for me. In the memorandum I had given him I had set forth my under. standing of a conversation I had had with Mr. Bathlust and I want to read that particular part of the memorandum which came into question, if I may; and this is an excerpt from my memorandum to Commissioner Nunan:
    In conference with Mr. Bathurst, legal adviser to the British Embassy, who drafted the treaty, I was informed that the British questioned section 3 of article XI, when it was proposed by the United 8tate., but nevertheless finally waived any objections that they ha at the time of the negotiations. I also asked Mr. Bathurst, assuming the United States could be persuaded to delete section 8 of article XI, would the British now object to such deletion. Mr. Bathurst, of course, would not make a binding statement, merely expremed his own personal opinion, which was to the effect that he knew of no reason why the British would now have adifferent attitude regarding section 3 of article XI, and he could think of no reason why the British should change their mind in the Interim between the negotiations and the present time, befig a period of approximately a year, and therefore his conclusion was that the British would react favorably to the deletion of section 3 of article XI If the United States requested them to do so.

    The Commissioner said that Mr. KinK had read the above-men. toned part of my memorandum to h1fr. Bathurst of the British Embasy over the telephone. Mr. Bathurst informed Mr. King that I had misunderstood him and consequently had misquoted him. After trying to get Mr. Bathurst on the telephone several times, I addressed a letter to him under date of December 5, 1945, and in that letter set forth the above-quoted paragraph that I have just read to you, requesting him to address a letter to Commissioner Nunan, with copies to Mr. King and myself, setting forth the understanding of our conversations reprding the matter of the original position of the British in the negotiations concerning section 3 of article XI and his understandingf of their present position. Instead Mr. Bathurst addressed a letter to me, dated January 18, 1946, which reads as follows:
    DuAs Ma. McCALmAN: I regret that your letter of December 5, 1948, has gone so long unanswered. I have been waiting to obtain from London the views of the government of the United Kingdom on their probable reaction to any repreo sentations which might be made with a view to deleting paragrph () fom awrtlee XI of the Income Tax Convention between the United 8taet and the United Kingdom. A telegram has recently been received by the Ambassador stating categorialY that tOe United Kin -dom would object to Its deletion. When you called upon me to discuss t his matter Istated that no one at this Embeasy could speak for the inland revenue authorities of the United Kingdom but that I could state my personal thoughts based on my recollection of the Qna states of the double taxation discusions. I sid that, although the parasaph in question had initialy been proposed by the United States partlants in the diecussions leading to the treaty, the United Kingdom represtativee on learning the reasons for the proposal agreed toIts inclRuion and must therefore be con. slder tohave beenmi favor of it. tpartfrom my other draIoaa the United K1i*om authorities would, I stated, in any easm be reluctant to eon. alder altering the treaty which had bees sined and was about to be ratified by the United Kirnldom and enseted Into lWW. When you asked If the Unite4

    (2689)

    94

    INC1OitE AND ESTATE TAX C'ONVENTIONS

    Kigoi, vlouot1d be pre.larvl to oiikuiss deletloui of laragmph GO) of article XI If (l.iuti Til Stalt.e pno.losbu recti.s.id.ralioi, of It, I akI taint the Utilted Kingdorai would 11ot, (f coll'.e, decline toIflscusu lilt projlx*& pulut forward by ihe fihfact made, would United States, a11d toighmll such isroliasi. if ihey Jl, receive, conlSertlnm that alll" Iprolally reluctantllly... wew
    delelition of pIararanph (3), yout arrir1d away -. io duhlbt thrlllgllh l"y failure" to , Iw- ebs,-Ielfrlarlv- -It wrollut illlpresitiil of I hat pearl of our converoa (litl. I I thlk whilt I have Nuil al'ove n'rnraft," tmimtmrizl ltA4he nints of our uijncUwion. u i.'*hndig i1m1 hive oirihilhael fi1 your hitlieviitg thtn the I tlihik li t- inkii at .i hadl n lmi , lngv' e'Xinre ,J'.I 't 1it-l-'iiijt ii m to thii' Inlt J'Itle'iJ KJillgi ih'li i0l) of article XI. I tio t)10t think att ally *lilkidilion to Ihlie ipro.,wil glaragntlih wi decrii -,I ol4l,;.ition A.i11c'e at Iirt I hey did ntat lietle their allittde cotld wIl flp promwll uzs fully itthderstland Ihe riea'wa for t1-, lrnt -el i..ertflim.t lutl Iaell then4 a explaihil It Iltienm, Ihtiey agrl to itl iu1011,.1n41 If t, iltletdl tle (;ovirlt,. Pr-lliL-al for tiphiclut.-hiiu of paragraph (3) of article V ilt-lit had 1o1 IIaldi' the'Il; iltlh Irolw'al would tihltl 't air' ,correct ill f ilikjm flint I do mit hIeli've tinat Ativ' it alslilarel to thiemn aga novelty of n have I'll ilale bv' tile I'lliltel Kiljahmuloill thoulihillt. (ttu wlii'll they Ih' eft I alit marry fhta yll ht Withittiton wilthitul Illy lping aAble to se, olu agailln. I reti urlldl your teh,!htoite call lilt I)er,,llter :1 liltl yua1 were Otit, anid I re'tivetl nII alil ast' to lhit, effiel tlhat 'oii had called on Ihjccuillter 1. If I had donle so I umihl, of cmtrie, have crlled you Ilack.

    thtn I Iteli'eld Itlat Io%% 'Ilitlll hIIhih yil Ieli, vil I litI str ( ItI Itlthtforv npl*hIii thato thil'n I'iled Kingdom wouid actually readt favourahly Its sew prIli",al for tile

    Wilhl kind n.ganl,.

    As I iiidersthInd Mr. Ilnlitirsir's letter, tile Unitetl Kingdom is anxious to Ihave the Uidted States anltrnve ilhe treaty. The lBritish however, ot or bfotre clidi nol ulitititt" section :i of artli(,I XI. Tlhey diii.
    Iforlll.

    feel ainunr.y 18. 1946-, thint tile treIlly should lie pIanle in its present

    111 lthe relqust. was made throiiFhl proper diplomatic nlid reconinieti channels. I base hl1t n1Opiniion oil diselssiolls whirh Ihave had wilh a IBritish tax aiii who was ret.ently in Hollywood anti who htd illitiated nn inVestiltfllh ill IA1ntlon to aiscertain tfie reasons for the iucilusioti of section :3 in nrti'let' XI of ihe treaty. His investiiation was qullite independent of mine ill Washingtoni. Alm), British p)rodumhra are anxious to cotinract for Amterican actors to appear in their pictures for tihe obvious rea.sou tlhnt tlie box office appeal of ain A. eritann actor will is.ilre lheine.t sme IIarket for their pictures in the United States. Certain artists' nini 'gerg who have been nppmrached by British pro. actors dit('erm, hloking towar negottinations for (lie service. of Ainerica ill British pi'ttlres, have advisiedl tie British producers of tihe terms of

    fl Nly ownI pI'solitl1 ojihliolt is that the United Kingdomt would 11ot, itt pres.ent. object to lite deletion of setlion :1 of arlitle XI of the treaty if this sullholllnlllttee fnl tihe full Fonrign ll ations C(olnlnitlite s)

    to tile advantage of the British actor: is it not? Mr. MN.CALIAN. YcA, sir; well, to. That is not quite right. It is not to tlhe disadvantage of the British actor. Since the British actor pays Anterican taxes on compensation received for services performed in tile UTnited Staltes, amid since Americatn tax rates are lower thnn tax rates in the Uttited Kingdoinm, his credit for American taxes paid under article XIII of tile treaty would be less titan die British tax paid I)y him on the imane amount of motey earned amid, thereforo, lie does not los8e 4ty money as uloes tile Aterican actor who performs his service iii Englad mnitler eircuimstatne-es which would bring him under tile terms of section 2 of article XI if section 3 was deleted.

    twe''tiott :3 0of rticle XI. It is Slenaltor II:A,.

    (2690)

    INCOME

    AND STATES TAX CONVUNTION8

    AM

    Mr. MCCALMAN. Let me make myself clear. This is the example of the actor who is under a term contract. Senator LU1CAs. If there is no advantage to the British actor, and it is a disadvantage to the American actor, then I do not quite follow you. If there is no advantage to the British actor, it comes to the same thing, and there is a disadvantage to an American actor going to ,ngland. Mr. MCCALMAN. Speaking taxwise. Senastr LUCAS. That is what I am talking about. Mr. MCCALMAN. Tazwise, financially, to is t no disadvantage, because on $40,000 in England he will pay X dollars-I do not know fhow much. Senator LuCAS. Well, I have a table, here for instance. We will American actor spent 3 months in the United Kingdom and lie was getting $40,000 salary in this country, the United Kingdom tax would-be 14,700. Mr. KING. Against the United States tax we allow about $3,780 of the total Unitd Kingdom tax of $4,700; that is to say, we allow a credit for the United Kingdom tax up to, but not in excess of, the amount of the United States tax on the portion of the income earned in the United Kingdom. Senator LUCAS. All right. Now, what I want to know is the answer to the question that I asked a moment ago--what does the American actor, whose annual income is $40,000 an d who spends 3 months in the United Kingdom, have to pay in taxes? What does the British actor, who has the amne income and who comes to the United States and spends 3 months, have to pay in taxes? Mr. KING. On the first illustration, the United Kingdom tax paid by the United States actor would be $4,700. Mr. McCALMAN. How much money did he receive? Mr. KING. On the $40,000 we are tidking about. Mr. MCCALMAN. I know, but how much money did he receive while rendering his services in England? Mr. KING. It would be thr-twelfths of $40,000. Mr. STAN. $10,000.
    Mr. ABs,. That is right. Mr. MCCALMAn. Thank you. of his British tax-or, no-he can use $3,778. just use the $40,000 example. I understand from this table, if an

    Senator IUcAs. No, I do not follow you.

    Mr. KING. Then, applying our credit formula, he can use $4,700

    Senator LUCAS. That is what hie is allowed in this country? Mr. KING. That is what lie is allowed in this country. So there is a difference of a little less than $1,000 that he pays. He pays about $1,000 more in aggregate tax than he would pay had he not rendered services in the Unite Kingdom. Mr. KING. To reverse the picture-we haven't a table on that. Senator LucAs. Would he not get a credit on it? What I want to know is, would not the British actor get the credit of $1,000 it he were in this country? A moment ago, you said there was no advanto&& British actor. to the
    r. ADi,. He is not hurt.

    Senator LuCAs. All right, now, the reverse of that?

    (2691)

    If01

    IN90IN OM

    AND ROTATE TAX CONVIPNTIONS

    working in America, under the circunmstances set forth in section I of article Xl, pays an American tax lower than the British tax he is obliged to pay and, therefore, when he credits his American tax to his British tax it makes no difference to him because lie is obligated to pay his owns country the higher rate. On the other hand, the American actor in the reverse situation lost money. Mr. KIso. I might try to sumnmarize it this way. We have covered the States. He is taxet here oi the tine basis. If lie is here 3 months, we take three-twelfths of his income. Sonator LrUAs. Now, let us get right back to the $40,000. 1 want to get rilit back to that. He is taxed threo-twelfths? Mr. STAU. Three-twelftls of that would be $10,000. Mr. KINO. All right; he is taxed oh $10,000 when Ite comes over Senator LucAs. Now, what rate? Mr. KING. It is our graduated rate on $10 000

    particular 3-month period; is that correct, Mr. King? Mr. KING. Yes; tUut is correct. Mr. MCCAI.LMAN. All right. Theu the British actor coming over here pas to the United States $3,778, an(I he returns to London? Mr. KIN. lie would pay the United States tax 111j)OU $10,000 which would be about $2,700. Mr. McCALMAN. Mayb)O that is not correct. Maybe you had bettor explain it. But what I am saying is that the British actor

    Mr. Mt.C.'IM.%. No; wo arc in agreement as to what you say. What I say is this, that the British actor would pay $4,700 tax hi England, would he not, the same as the American4 actor, on that

    the United States actor. Now take the British actor who comes to

    hero.

    British tax the United States tax. In other words, under the treaty he gets the same credit system applied to him that the UnitAd States actor gets under our law and under the treaty, so definitely the British actor isbetter off than lie was before the treaty. Mr. MCCALUAN. That is right, but you are talking about credits under article XIII of the treaty and I am talking about article XI. Mr. KING. Another way to summarize it is that both the actors pay the British tax, if you want to put it that way. Mr. MCCALMAN. That is right, but you are still talking about article XIII. Mr. MCCALMAN. That is right. Mr. KING. I think, up to this point enough attention has not been given to this credit system. It underlies our whole treat . The United States has long employed a credit system as a part of its domestic legislation and the principle has been carried into the treaties. We continue to eliminate double taxation in many instances through the credit system, in others through an exemption system. Now, it should be made especially clear that the actors are merely having applied to them a credit system, as are numerous taxpayers under ths treaty. I think it is entirely unfair to say that anyone who has a credit system applied to him is being treated as a rogue, and one who ha an exemption system applied is not being treated as a rogue. I think that the comparison is very unfair. (2692)
    Mr. KING. They pay the higher of the two taxes.

    that British actor, in figuring these taxes in Biritain, could only deduct front his income the United States tax. Now, he can deduct trom the

    Prior to the treaty,

    INCOMI AND UTAT3 TAX CONV3TIOXR Senator LucAs. Let me

    97

    Give me some examples of other individuals who are taxed under the credit arISr ment that you are now discuss. Mr: KiNG. A ve7 ntotem ting comparison could be gotten up aong instances that happon that line withmylittle study. I M' t note a fewease of the Americ to come to a mind immediately. Take a automobile concern or, say, a tobacco concern, a bank-in fact, any cncern, except a United States shipping compay which has a b=an in Britain. It is taxed in Britain on Its Britzs income andin the United States on the same income. The United States deducts from the United States tax on that income the British tax. In other words, the credit system is invoked. Senator LUCAs. Now, let me ask, from the standpoint of taxation would these gentlemen, here, represented by these men, be placed in the same category as the example you have given?
    Mr. KING. 'Aimolutely. Mr. MCCALMAN. He is right. Mr. King is again discussin a"ricle XIII, not rtriOe XI. Mr. KING. They certainly are exactly in the category; you are . placed under the credit stem. Surely; that is right. Mr. MCCALMAN. Mr. DALES. I was just curious to see whether Mr. King could clear it up for us. In one case I understood we were talking about employees. Put your case of the employee, and that of the banking MrI. NXa. I am coming to a lot of those illustrations. The Senator asked me for some illustrations. That is No. 1. We can o on here by the dozens perhaps. Some are handled through the credit method, some through the exemption method. Now, to continue with m illustrations, turn to the shi ping company, where double taxation eliminated in an entirely different way. The treaty says that as to the income of a United States shipping company, as to its ships regis. tered in the United States-and the same is true of an aircraft company, I nht say-Britain will not tax the income earned in Britain. Double taxation is eliminated through t&e exemption method, but that does not prove we have got a grudge against automobile com. panics, banks, and dozens of others, In contrast to the shipping company. Another illustration is that we would eliminate double taxation in the case of teachers and professors who come here or go there not more than 2 years, through an exemption method by iaking them nontaxable in the country they go into, and taxable by their home country. It is a practical problem affecting exchange teachers and not a preat deal of revenue is involved. Ukewise alien employes of the United Kipgdom Government rendering services in the United States are wholly exempt from United States tax with respect to their compensation for such services. Take the case of exemption of interest at source. There is very broad provision, where we generally exempt interest from taxation at the source. We have, say, a debtor here, a creditor in England: and interest paid here goes out of the United States tax free. However, where interest is paid to a British company that owns more than 50
    TO& 0-4--vol. a--is

    ask you right on that point, Mr. K[ing.

    Mr. DALES. No.

    (2698) (6

    IVOONm. ANm UTATU TAX C*)NVxNTIONS

    percent of the stock of the United States company we turn to the credit method. We tax; the British tax- the credit avoids double taxation. That is what your case is based on. It dates back to the 1936 law, where, in deciding what to do with the alien who is coming into this country, and paid from abroad the whole field was discussed, including the actor field, and it was decided not to give an all-out exemption but to give it within limitations; then, if a party were here not more than 90 days or made no more than $3,000, he would get his exemption, but otherwise we would have to handle it through a credit system. SenatorLC cAs. Right at this point I want to put into the record an excerpt from the Senate Finance Committee report on the bill to which Mr. King has reference. (The law referred to is as follows:)
    RlVNUVS BILL OF 1m

    (Committee Rept. No. 21561


    C C
    e e e
    C C

    One other chanp Inthe taxation of nonresident aliens is recommended by your committee in theform of an amendment to section 119 (a) 8 of the House bill. This amendment would operate to exclude from the definition of income from sources within the United States compensation received by a nonresident alien individual for labor or services performed In the United States under an, employment or eontraet with a nonresident alien Individual or a foreign partnership or erpmration, provided such services are rendered by such nonresident alien Individual while temporarily present In the United States for a period or periods not exceeding a total of 90 days during the taxable ear and that the sure te compensation for such services does not exceed 83,006. The purpose oft amendment is to permit residents of other countries to make brief visits to the United States for business purposes, such asthe buying and selling of goods without being subject, before Weaving the country, to a demand for payment of tax on their compensation during the period of their stay here. Numerous cas of this character &rising under the present law have created Irritation and Ill will quite disproportionate to the slight revenue Involved. The limitations contained In the amendment an, it is believed, adequately drawn to prevent any serious abuse of the exemption. This change is consistent in purpose with the amendment to section 211 (b) which the committee has recommended.

    Mr. KiNo. I should like to add right there that in conforming the terms of tax conventions to'the tax systems of the contracting countries it i often found impracticable to adopt provisions which axe uniformly logical and consistent with one another, resulting in the adoption of compromises, the background of which it is necemry to understand -inorder to properly appraise them. Senator LucAs. Let me ask you, right there, Mr. King, were the Swedish and Canadian treaties drawn on the law, or under the spirit of the law as we expressed it in the statute book in 1936? Mr. KING. I would may the prime influence was the lead that we thought we had in the 1936 law. Senator LuCAs. Now, Mr. McCalman, I do not think you had finished. M. Kao. Could I add just one thing, before I lose it? Senator LuCAS. Yes; that is perfectly all right. This is more or lees Informal. Mr. KiNo. Very little has been said about our credit system. Much was said about the actor being doubly taxed; then the statement rested there. Our view is that where the one tax is removed
    Mr. MCCALMAN. No sir.

    (2694)

    INCOME AND WTAT3 TAX OONVUNTIONS

    99

    through a credit system there is no double tax consequently our posi. tion is that the actors are not doubly taxed. They are it is true paying the higher of the two taxes incident to the application of the credit stem, but I believe that is the fair statement, rather than to say
    tat they mer doubly taxed. Mr. MCALMAN. I agree to that. Mr. King, however, is not dis-

    cussing sections I and 2 of article XI as applied to all residents of the United States, except actors and athlete.. He is discussing article XIII which is an entirely different matter. Senator LucAs. In 10 years frqm now, if the tax situation is just reversed, the American actor would be getting the benefit rather than the British actor? Mr. McCALMAN. That is rigt. Senator LUcAs. That is, if the tax situation were just reversed. Mr. KINo. Thus, if at that time or any other time, the United States tax is higher than the United Kingdom tax then the taxation by the United Kingdom of a United States actor would not make any difference in his aregte tax liability. Senator LucAa.-Then there is hardly a justification for the state. ment that this special dia of people that are being taxed under this section of the convention are being discriminated a t, compared to other people who are also being taxed under the credit system rather than under the exemption system? Mr. KINa. That is correct. Mr. McCALMAN. Senator may I answer that, sir? I will agree with practically everything Mr. R iaid, up until the last statement. Mr, King has discussed sections of te treaty other than those contained in arti~e XI. It is true that under article XIII of the treaty a "free lance" actor may contract with a British producer to render his serv.ices and the tax situation will be governed by article XIII. We have no quarrel with that because article XIII does not discriminate against residents, of either country as a clam. Section 2 of article XI, however, if I may use an example. states, in effect, that if I were a salesman, a resident of the United States, employed by an American aircraft company. and I took a trip to England and was successful in selling $20,000,000 in airplanes for my American company, on which I was paid acommit n of 5 percent, and I did aH within a period of les than 183 days and subsequently made a million dollars, I would not be liable for any United Kingdom taxes. Obviously I would have to pay taxes to the United States. On the other hand, if an actor, a resident of the United States, employed by an American company, renders his services in England and makes $10,000 for I0 weeks' services he is required to pay taxes to the United Kingdom, as we read sections 3 of article XI. What in the world is the difference between the airplane salesman who makes a million dollars and the actor? Neither one of them should be subject to United Kingdom taxes and that is why we are objecting to section 3 of article XI. Senator LucAs. You contend that you are being discriminated against because there are exemptions for other classes of people in the same category that you contend you are in? Mr. MCCAUIAN. That is right. All other "reidents" of the United States except actors, are exempt from United Kingdom taxes where they ar employed by an Amenri employer and perorm their

    (2895)

    100

    100 OOME ANIbD XRTAO'U AX COAXNVTIONS

    I with him from Commissioner Nunan heldunderstoodin November 1945 where MRr.at the second conference hsndwas present, that I could quote him as saying that if he wer le upon by this sub. committee to testify he woild testify on his own behalf that Section 8 of article XI was discriminatory against actors and that such testimony would not bind the Treasury Department, the State Department or any other department. He stated to me that I could quote him to anyone. I wired him from Colorado last Sunday night that I wanted to see him on Tuesday before this hearing. The Commissioner was not in town yesterday and I am, therefore, putting this in the record subject to Co.mmissoner Nunan's correcting any statement that I have made as to his statement to me last November. I believe, Senator that if this subcommittee finds that they can I recommend to -the 'oreirn Relations Committee that article $ is discriminatory and should be renegotiated, that through diplomatic channels and the proper representatives of our Government, we will be able to reach an accord with Great Britain rather easly on the deletion of it, from the conversations that I have had relative thereto. Senator LucAs. You may have had those conversations, but what about your letter that you read into the record? Mr. McCALYAN. That was on January 18, 1946, and considerable has been done in Great Britain about section 8 of article XI, as evi. danced by the telegram received by Mr. Abel. Also- British producers have been put on notice by artists' managers in Hollywood that such a clause was in the treat and transactions for the employment of American actors in Briti pictures have either not been mide at all o because of section 8 or have been made subject to the option of the actor to refuse to perform his services in (Jreat Britain If section 8 is not deleted from article XI of the treaty. Senator LvcAs. Mr. King, do you have anything to say further? Mr. KiNg. Well, he drew a compamon between the traveling sales. man and the actor. I think it i hardly worth while to go on and draw many other similar comparisons. It all come back I believe to the question that those who are treated under'the credit method can turn to those who, me treated under the exemption method and be&in are in the same class as a teacher, &nod we cAg probably think thy to .complinabout it, and there are othswho on rut that sort of comparison rather indefinitely. I hardly thin that requires any further answer. Senator LvcAs. Have you got a statement, Mr. Stem, or do you want to make a sugestion, one way or another? Mr. STAu. No; "do not think so, except one t that worries me a little, and maybe we can clear itup. As I understand, in Lngand they regard these people, a lot of them,asexercaisnga proa fession, or not exercising a profession m the United Kingom. As I understand it, there is very grave doubt as to whether any Enish tax would apply at all. In cases where no Brithh tax is collected, it should be mfade clear that an American tax is paid.

    I am through.

    services in England during a period of loes than 183 days in ay taxable year. What we cannot understand is why the disciriination aginst actors in section 3. Senator Lucas. Are there any other statements Mr. McCalman? Mr. McCXAuaN. I just want to make one closing statement, then

    (2696)

    INCOME AND MBTATi TAX COMOViNIOON

    101
    actor

    Mr. MCOALUAN. You are talking now about an E working over here?
    Mr. STAM. That is right.

    collects a tax under such circumstances. Mr. STAM. There is a little conflict in the cases, but it seems to be the general rule that if they are exercisin a profession in the United Kdom they would be taxable on their income from outside the United Kingdom, whereas, if they were not exercising a profession in the United Kingdom, they may not, if the money is not remitted to England. Mr. MCCALMAN. Then you think that if section (3) of article XI were deleted that the United Kingdom should take step to clarify that in their laws. That is the only suggestion I can make. Mr. STAM. Some classification should be made, if this is true. Mr. MCOALUAN. I agree. Mr. STAM. This, of course, not only includes movie actors, it ineludes prizefighters and people like that, who come over to this country and put on entertainment and take quite a lot of money out of the country, and it would seem such income should bear a tax. The question might also come up, there, as to whether or not somebody should not collect a tax on the income. That is the real problem. Mr. MCCALMAN. From the gross revenue standpoint for both countries, I do not know of any stat6i1cs which will show which country will get the most revenue. It looks to me, as far as the entertAnment industry i concerned, that for the next few years, it ispractically a stand..o , and that the dollar revenue for either country will not be very different if section 3 is deleted from article XI Of course that is simpjMy opinion, and as I say I have no statistics. Senator LicAs. Do you have any figures to show how many actors from America go to Engl and annually to perform services there? Mr. McCAMuAw. No, sir; we do not; and of course, during the war there were practically none at all, and the only ones who did go were in the USO units. Senator LuCAS. You made a statement that only 400 out of 8,000 in the industry obtained a salary of more than $15,000 per annum. Do those actors obtaining a smaller sum than $15,000 go to England? Mr. DAzs. Oh, yes. Senator LuCAS. Frequently? Mr. DALz& Oh, yes. Senator LuCAS. Qute a few of them, I presume. Mr. DALes. Quite a few of them particularly variety actors and that sort of thing. The truth of tie matter of course is that the average motion-picture actor is not just doing that. He works on the radio, he works on the stage, and so on, and those people inter. chang in their profession between the various types of entertainment, and also between the countries. It is true, as-Mr. McCalman says that because, of the war there just are not any statistics. Senator LUCAS Yes, I understand. Mr. D~us. And it is anticipated, I think, by the industry inter. nationally that there will be considerably higher interchange of actors, not necessarily stars, only, but of all types, that will play In Englisli casts.
    Senator LCAs. That is what I had In mind.

    Mr. MCCALMAN. I cannot answer you; I do not know if England

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    INCOMU A"P UTATI TAX CONVUNIrONS

    Mr. Duius. Yes.

    $15,000, as to what the interchange would be along that line, and I presume there would probably be more actors under the $15,000 than there would be over it. Mr. DALIS. It very well could be. Mr. MCCALMAN. Oh, yes. Actually, Senator, the figures are only as to the motion-picture industry. fairly large salaries, but the musicians who make up the personnel of a band, the members of symphony orchestras, concert singers and others of similar nature are not highly paid artists. These are the people who really should be protected in any treaty involving income taxes. I will close on that and may I introduce into the record a brief which is in support of our position, which I sent to the members of the Senate Foreign Relations Committee before their meeting on February 6, when they recommended that this treaty be resubmitted to this subcommittee? (The brief in support of proposal to delete section 3 of article XI of the treaty, submitted by Mr. McCalmau, is as follows:)
    A CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON APRIL 16, 1945-EXECUTIVE D BurIF IN SUPPORT OF PROPOSAL To DELETE 8SECoN $ oF ARTICLE XI or A
    CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, FOn Tits AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITm RESPrCTc To TAXES ON INCOME, SIGNED AT WASHINGTON ON APmRL 16, 1945 GENERAL

    Senator LuCAS. I was wondering about those who were under the

    Mr. DALlS. That is right. Mr. MCCALMAN. The public hears of band leaders who receive

    The above-designated Treaty was read for the first time on the floor of the Senate on April 24, 1945, and referred to the Senate Committee on Foreign Relations.

    follows: Alben W. Barkley, Chairman (Kentucky) Carl A.Hatch (New Mexico) Scott W. Luca (Illinois) Robert M. LaFollette, Jr. (Wisconsin) Wallace H. White, Jr. (Maine) The above-mentioned hearings were held on May 23 and June 13, 1945, at which time the following witnesses appeared and testified briefly: Mitchell B. Carroll, Special Counsel, Tax Committee, National Foreign Trade Council Inc New York, N.Y. Franklin Nole, coonomio Consultant, of Cole Hoislngton & Co., New York, N. Y. re W. Ph , chairman, Section on Taxation, American Bar Association, WecahingtoneD. 0. Eldon P. King Speial Deputy Commissioner, Bureau of Internal Revenue, Washington, b. 0. Colin F. Stam, Chief of Staff, Joint Committee on Internal Revenue Taxation, Washington, D. C.

    Subcommittee of the Senate Committee' on Foreign Relations constituted as

    On April 26, 1945. the Treaty was made public. Hearings were held before a

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    103

    On June 30, 1945, the above-mentioned $ubcomnlttoe reported back to the ful C(.oulmittee with a recomnnmendat ion that the Troaty be trusuditted to the Senate for itN favorable advice and consent and without ameondmuent. An of January 14,

    1046, the Treaty is on the Executive Calendar of the Senate.'

    ARTICIR XI OF THE TREATY AND IN PARTICULAR Sr/CTION I TUI9I8OV

    This brief contains no comment or criticisms on the Treaty as a whole. The only point considered and discused In this brief is the groely unjust and unezplained discrimination against public entertainers contained In Section 8 of Article XI of the Treaty. Article XI reads as follows: (1) An Individual who ina resident of the United Kingdom shall be exempt from United States tax upon compensation for personal (including professional) services performed during the taxable year within the Unite States If (a) he is present within the United States for a period or periods not exceeding in the aggregate 183 days during such taxable year, and (b) such services are performed for or on behalf of a person resident in the United Kingdom. (2) An Individual who Is a resident of the United States shall be exempt from United Kingdom tax upon profits, emoluments or other remuneration In respect of personal (including professional) services performed within the United Kingdom In any year of assemment If (a) he is present within the United Kingdom for a period or periods not exceeding in the aggregate 183 days during that year, and (b) such services are performed for or on behalf of a person residelet in the United States. (3) Tnt PROVIMIONIS OF THIS ARTICLoE SHALL NOT APPFY TO THU COMPItMRATION, PROFITS. IKMOLUIBMNTS, OR OTHER REMUNERATION Of PUt7LIC NMTIETAINKiRt SUCH AS STAGE, MOTION-PICTI'RU, OR RADIO ARTISTS, MUSICIANS,

    AND AT1HLET.ES. (Cape. ou1s.j

    IF OSCTION I OF ARTICI.U XI 18 NOT DELETED FROM THU TREATY PIRLIC ZNTIETAINERN (AND ATHI.ETES) WiL.L PAY A GtREATER TAX THAN ALL OTHER RzSIDENT8 OF TUB UNITED BATES WILL PAT UNDER SIMILAR CIRCUMSTANCES

    from the exemption granted all other residents of the United States under Section 2 ' On Tebruary 0,1041 eat lForeip the nRelatIons Commltteerecommaended that the Treaty bereturu to the subegmIttee for further hearing. BY unanmowm o0onotam Febrnu# y so 194, the 8e4a2e rbmo the Trealt rom dzeautivo Caedar ad returned Itto the SubeommitteO. the

    The tax rate of the United Kingdom is at present higher than the income-tax rate of the United States. In all probabilitv the tax rate of the United Kingdom will remain higher than that of the United'States for many years to cone. At the present time, there is obviously no way of accurately forecasting the United States income-tax rates for the next few years, but it is a reasonable assumption that the tax rate in the United States will be reduced sooner than the tax rate in the Uuited Kingdom will be reduced. At the present moment certain United Kingdom motion-picture companies, have contracted with certain United State. mot ion-picture producing companies, to loan British stars to the American companies to perform their services in American pictures made in the United States, and to borrow from the Ameria coan rioe American stars to perform their services in British pictures made in the United Kingdom. The services to be performed will not ordinarily take over 188 days. In most instances they will take about 10 or 12 weeks. The ordinary term contract in the American motion-picture industry require. the actor to perform his w-rvices in any part of the world designated by his employer. If Section 3 of Article XI is not d,.leted fromjthe Treaty (as an example) an actor under contract to an American motion picture company loaned to a British motion-picture company to perform his services in England in a picture on behalf of his American comnpatny would find himself in this kind of a tax position: Assume that the actor was paid at the rate of $1.000 per week and that his total net taxable Income would be approximately $40,000 for the taxable year, including the amount net forth below paid him while in the United Kingdom, and assume that the actor performed his services In the United Kingdom for 10 weeks, the American company (not. the British Company) would pay the actor 10 weeks' salary of $10000 Min the United States and not in the United Kingdom. The contract for the actor's services In this Instance is between the British Company and the American Companv (not the British Company and the actor). Section 8 of Article XI of the Treaty, as it is now wrrit ten, excludes the actor

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    INOOM3 AND MTAT3 TAX CONVENTIONS

    of Article XI. and accordingly the aster would have to pay United Kingdom txem on the $10,00 that he earne while there. Assume that the tax on $10,000 in the United Kingdom Is$6,000. Let us asume that the actor owe the United ates total of $16,000 in Income taxw on $40,000 net taxable Income. The United States, under Section 131 of the Internal Revenue Code and Article XIII of the opposed Treaty, would allow the actor a credit of only S4,000 of the O6,000 of the tax paid to the United Kindom, as provided in Section 181 of the Internal Revenue C.ode which tates that the credit cannot be higher than the amount of tax which would have been paid to the United 8tate hadthe money been eaned and received by the actor for hiemploy. ment'in the United Stat.s. Tn other words, the Credit would be 10 O,, Or of $16,000, making a Credit of only $4,000. In this Instance, the actor stands to lose $2,000 because: 1. he I an Actor, and 2. his employer the American company has loaned him to a British company. Assuming that the Onited States Inoome-tax rate will be reduced sooner than the United Kingdom tax rate will be reduced, the spread will prow larger each year, and the actor w0l lose more money by payment of United Kingdom taxes. The above Illustration of an American motion-picture company loaning an, actor to a British motion pleture company would apply similarly to any fild o$ the entertainment industry which the provisions of Article XI would govern. Transportation facilities before the war were largely confined to a travel between the United Kingdom and the United States, which made exchange of public entertain between the two Countries difficult because of the time element. Within a very short time there will be available sufficient airplane transporton to enable residents of both countriesto go back and forth in a matter of a few hours to transact business in either country. This will facilitate the exchange of public entertainers between the United KIngdom and the United States, and therefore the deletion of Section 8 of Article XI of the Treaty becomes most important to public entertainers Contrat the example given of an actor who Is aresident of the United State employed by a United States employer performing services in the United King. dom, with the example of a businessman who Isa resident of the United Sta employed by aUnited States employer andfor leo than ana egte his employer in he United Kingdom remainig there who transacts business for of 18da during any taxable year, which would bring him within the terms of action 2 of Article XI of the Trey. Assuming that the bisinessman I the salesman for an American airplane company, he might conceivably negotiate orders for the sale of his company's airplanes to a customer or customers In the United Kingdom which orders we will assume aggregate 820,000,000. If the salesman operates on a straight commission basis of F%* he receives for his services in connection with the order or orders for "rplanenegotiated by him In the United Kingdom the sum of $1,000,000 in Commission. Accordingly, this situation falls directly within the terms of actionn of Article Xl olthe Treaty and the salesman Z exempt from taxes by the United Kingdom. There is certainly no plausible reason why public entertainers, such as stage, motion-picture, or radio artiste, should be excluded from the same exemption granted to the airplane sleman under Bsetion 2 of Artlels XI of the Treaty. There exists in the minds of the public genendly the Idea that all public entertainers are Compensated on a easle comparable to the highest-paid Hollywood stars. Obviously this Isas untrueias to amume that everyone in the steelindustry is compensated at the rate that the president of the Bethlehem Steel Company is paId7or for that matter the head oI any large Industrial corporation, who ispaid at the rate of between $100,000 and $a0,0 year, and often also receives a perentage of the profits. Such an executive of an Industrial corporation, resident in the United states maY fly to the United Kingdom and transit business for which his compenstion my be many times even that of the highest-paid public entertainers, but the head of the Industrial corporation is exempt from United Kingdom taxes, assuming that he ispresent In the United Kinqgdm for no longer than an aggregate of 188 days in any taxable year. The low-eslaried entertainer in the variety field, Ispaid only when performing on the stage or in a night club. Out of his small salary he is required to pay for hie otumes, hotel, and board, while traveling in pursuit d his profession. (Usually his transportation Ispaid.) If alow4e ure public entertainer in the variety field, who i s resident of the United States employed by a United Stales employer Issnt by his employer to the united Kingdom to perform in the United (2700)

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    idom, he wil be subject to United Kingdom tax, only a part of which can be The example of a low-salarled variety entertainer can be extended to any field of the entertainment Industry. All concert singers ae not pa-d la salar _-ln fact usually only the leads ae adequately compensated for their service The supporting ast in any opera compay are usually paid very small salaries. It Is "o true that musi---, whether members of bW&is spee* sing In modem musi or symphony orchestras are low.slarcd employee it Is true that often, but not always, the leader of the band or the orchestra s pad an adequatesals but the member of his band or orchestra fall within the low4elarled clseou, from which their expense for instruments uniforms, lodging, and meas am deducted. Using the example heretofore set forth but reversing it so that an actor, a real. dent of the United Kingdom, performing services in the United States for or on behalf of a United Kingdom motion-picture-producing company on a loan-out srrnement similar to the example heretofore given amre M h 800104 8 of Ar'ti X1 is l de W .4w x* urs o u. Article XIIF of the Treaty prvides that the British actor will be allowed a credit against his United Kingdom taxes for all income taxes paid to the United States. Since the United Kinsdom tax rote is higher than that of the United States the actor in this ex amp will lose no money in taxes and since it Is reasonable to assume that the c.nlteKingdom tax rate will continue to be higher than the United States incomotax rate, the British actor isnot concerned with the discrimination ainst public entertainers except Insofar as the principle Isinvolved. If Section 8 of Article XI remains In the Treaty the result will be low of employ. meant to American public entertainers who otherwise would perform their servem in the United KinIdom but wo are precluded from doing so because of the payment of the a"ditonal United K dom tax. Section I of Article XI acts a a tariff soinst the American actor, whera, It favors the lritish ator, and In doet areates unfair completion for the American ar. It, therefore follows that If the Tresty Isapproved by the Senate in Its present form without deleting Section 8 of Article XI. oltisens of the United States who an, public entertainers, such as #tsgs motion-picture, or radio artists, sand musln does. havi been unjustly discriminat~edaspinet, under the termas of section 8 of
    RUMMV NTA"TIU OFTU UMINTD Sit ATSM STAU3 DUPAUirNW , TRRASUMT D2PA1M WNW?, AND TUE DVUMAU OF INTMUNAL RVRUBU RAVE ADVANCED NO NUAGON* ANA8 3ZPLANATION FOR Tri IRLMUSION OP SMUION OF 01 AICLM ZI IN TUE

    A representative of the Artists' Managers Guild, an association of artiste' manager, who in turn represent public entertainer, such as motionpictur radlo, stage, and variety actors, and musicians, recently spent some time In Washindgton Interviewing those representatives of the State De tnt, Treasury Department and the Bureau of internal Revenue who were active participnts ;ninegotlAtn the Treaty. The purpose of Interviewing the above mentioned epresentatve of the United States Government Bureaus was to attempt to diover why Section 8 of Article XI was injected Into the Treaty. There are only four reasons advanced by reprMentatives of the United Stakes for Inclusion of on8of Article Xl. and tey are briefly s follows: I. That theILeagu of Nations had on a model form of bilaterl con=agred vention which Included such oaus. It will be shown hereafter that n this Is not trus. 2. That the United States deired Setion 8 of Article XI to be Included because they wanted to collectrevenue from foreign pdbA entertained

    a. Thata somewhat Unied State siY9w'S In the United States and Ca. nai ad do almUt dam annmnd g utss
    4. That Inthe curesa ty, It i s of pc on ttt d dn at esoprealribe for taxation, Including exepnptlons, for different classes of taxpayers. Let us examine the above-anentloned reasons.

    I. 7% LMW 4f' Naio Mou Bhrul Cm

    In 1I48 in Mexico City a meeting of the Legoue of Nations Fiscal Co tte was held where Mment was reached between certain countries on a 'Model Biaeral Convention for the Prevention of Double Taxation and Fiscl Evasion.'

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    INCOME AND USTAT3 TAX CONVENTIONS

    The United Kingdom was not represented at the conference but the United Stat. wa. At Mexico City the conferees agreed on an Article substantially similar to Article XI but which did %ot include a dause similar to Section 8, Atlide XI of Me 7 IWasY. There was some reference in the Protocol of the Slexlo City Conference that "touring shows" would be taxable in accordance with the legislation of the country where the occupation I carried on but It was further stated tat the corn. pu adminuisralions o thngoiatin cuntriue may if necessary atmo special pro.sions relaing ltereto. (Article Vill of the Protocol.) An analogy between Article VIII of the Protocol which refers to "touring shows" and fation 3 of Article XI of the Treaty is no Analogy at all. There isnot the remotest similarity between Article VIII of the Protocl and Section',3 of Article XI of the Treaty. Section 3 of Article XI of the' Treaty deals with "an Individual who is a resident of the United States," not "touring shows." The exclusion net forth in Section 3 of Article XI from the exemption set forth in Section 2 thereof still deals with "individuals" (who us/rally are citizens of the United States) and as such. public entertainers are entitled to the mue exemption and protection accorded all other individuals resident in the United Stat.s. 2. TA United Saies Desires to Coiled Ruvunue From Foreign Public Ialrtuainwrs
    Perorming is Lda United Stasie

    Certain representatives of the Bureau of Internal Revenue further stated that the United States had in mind acquiring revenue from public entertainers who were residents of the United Kingdom performing services in the United States. It is Indeed strange that the United States should wish to receive an infinitesimal amount of revenue from British entertainers performing services in this country at the ost of being unjustifiably discriminatory against the citizens of the United States in "show business " It is believed that the United States will not obtain ucient revenue from the application of Section 3of Article XI as It is now written to justify in the slightest stigmatizing public entertainers as a clm. The income-tax rate is exceedingly high at the present moment and therefore the successful public entertainer who is compensated for his services at a very high salary remits to the United States a considerable sum of money In taxes. That even the successful actor should be discriminated against Is unthinkable &ad contrary to the fundamental principle of the American idea of fair play. Since the high-saried public enteraner is the exception rather than the rule, the low-salaied entertainer, in being discriminated against, is the one who, least of all, can afford It. In the motion-pliture industry out of an approximate total of 8,000 actors 150 earn over $50,000 per year 250 earn between $16,000 and $50 per year, and all the rest earn le tlha 1n6,000 per year, the great bulk of the latter elass averging less than $5,000 per year. In the variety field, the number of actom is grater and the average hearings am much lower than in the motion-icture dus~ty. It can only be said that the amount which would be received by the United States from British ato performing their services in the United States for a United Kingdom employer and remaining in the United States for lees than an aggrgte of 188 days during any taxable year will be infinitesimal. The United Kingdom has recently completed negotiations with the United States for a loan which is considerably in excess of four billion dollars. The matter of the approval of this loan will shortly come before the Senate. The American actor performing his services in the United Kingdom for. a United State employer ls penalized by paying to the United Kingdom an amount in taxes in exem of te mount he would pay to the United States If he had performed such services here. The American actor is therefore in the anomalous position of belonging to the only clam of citizens of the United States (with the exception of athletes) who through payment of hs United States income taxes contributes to the British loan (assuming that it is approved by the United States) and in addition pao taxe to the United Kingdom. S. A Clau. Simaw to Section Xo&uTe o ft Appear. in W.Tax l'atss lB. umin'Uk Uflited ShOsa and bhsed endwIld. the Ufited Slaje and Asubstantially similir clause does appema in the Swedish and Canadian treaise with the United States deling with avoidance of double taxation. The fact that such a clause slpoIer in the above mentioned treaties, however, isfurther ation of the unust discrimination against public entertainers ae class. a argument that the claue should remain in the Treaty with the United KIng-

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    dom because of two previous mistakes is fallacious as ertainly two previous mistakes Isno precedent to continue making the some unjust error. 4.In e Courw ofJNspDl"Prwui-. a.for a T Tr ,ax iey it it Common Practice to Prescr& pipibt Baits forn Tazsd , IIndudiug &m.pli", foreDiffer.

    eM Cle. of

    Mers

    Aj a pneml rule It may be true that It is common practice to preeribe dif. ferent bases for nation, Including exemption, for different classes of taxpayer. it iscertainly not common pratice to make a distinction between various claume of citizens of the United States (which would be included under the classIfiation of individuals resident in the United States) in our tax laws. In aertain caws It is recognized that classes of citizens must have certain wesph'es under the tax laws or preat hardships would result. In the instant me, however, the United States has not given an exemption to public entertainers but ha given an exemption to every other cass of citizens of the United States vow publu erinoisers; in other words Instead of granting an exempion ubc entertainer are distriminated agans wider Section 8 bf Article Xl oF t&e Treaty.
    s8CRUcY O NNOOTIATIONS O7 TREATY AND INADRQUACY OF NOTICE OP MIARINo
    n1FORs IUIcoMMIIrUE 07 COMM fl8l3 on oO MUIOM R9LATIONG

    The hearings before the Sullommlttee of the Senate Forlan Relations Cow, mittee were held May 28 and June 13, 1948, at which time the United Nations Conference was InseMsion in San Francisco. The testimony shows that there was an objection by one of the witnesses to the procedure followed In negptiation of all tax conventions (and In particular, the negotiation of the Instant Treaty wais questioned), on the grounds that all of the negotiations are held in seret, there. fore, no one other than the representatives of the two _governments had any oppor. tunity to be heard prior to the closing of the negotiations. One of the witnesses for the United States government a representative of the Bureau of Internal Revenue, Mr. Eldon P. King, stated that there had been a press release simply giving notice to the public that the United States was under. iaki to neotiate with the United Kingdom a treaty for the avoidance of double taxation. Both Senator Lueas and Senator White questioned Mr. King as to why the negotiations were conducted In seret. (See n 6 and 64 of the transcript of the hearings before the Subcommlttee of the Committee on Foreign Relations.) Mr. King replied to the effect that the executive brnch of the gov. emnment had always been very careful to have regard for senatorial secrecy in matters of treaties until the treaties arrive in the Senate and are then made pub. lie. He further stated that the foreign country, Involved has invariablyy Insisted upon secrecy until subsequent to signature of the treaty by both countries. Excluding the prepared written statements, the transcript of the testimony given by the witnesses covers approximately 36printed pages 911 x 6". Two of the five witnesses were representatives of the 1nilted States government, Mr. Eldon P. King for the Bureau of Internal Revenue, and Mr. Colin F. Stamp, Chief of Staff, Joint Committee on Internal Revenue Taxation. One of the other three witnesses Mitchell V. Carroll, Special Counsel for the Tax Committee, National Foreign Trade Council, Inc., was formerly special counsel for the United States Tresury, and attended the conference In Mexico City In 1948 where various powers including the United States negotiated and agreed on the Model Bilateral Convention for the Prevention of D)ouble Taxation and Fiscal Evasion. Nowhere In the testimony or in any of the prepared written statements Isany mention made of Section 8 of Article XI by way of explanation or criticism. If "show business" representing the public entertainers had received any notice or had seen In the papers any indication that the Treaty containqd such a clause as Section 3 of Article XI the vigorous protest herein made would have been made at the hearings held in the summer of 1945 with appropriate statements and testh. mony by competent witnesses. The Artists' Maniagers Oild and the Screen Acton Guild received a copy of the Treaty and saw for the first time the provi. sins of Article XI thereof on or about the second week in November 194i. Since "show business" was not represented at the hearings of the Subcommittee and was not consulted during the negotiations, It Is respectfully requested that appropriate action be taken to delete Section 8 of Article XI ot the Treaty and plae public entertainers In the sane category as all other citizens of the United states.

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    ZO LIGOMO n 0i TIMsoVT1113 PrUaUe nmTnRYAINSM TO Y1111 WARNM YUS CONYRn 0 UM 0 TP Tito" M5m1n18201 YF PR3OFUSION WhEO 2173119 Y21 AMM

    Commenoins early in the spring of 1941 ar the Selective Service Act had an beore Peedl harbor, show business" .1Amer-ca, being the entire entertainment Industry of ators and actress In every e, motion picture, radio stage, night clube and variety, and musicians, without any request from the United States Government formed what late beme tha Hollywooddraftees In Committee. Actors voluntarily gavetravelingservices to p during the year 1941 and the their and lving n Victory ent expenses during the initial staes, of the Rol ,wood Victory Committee wereua for by the Asociatlon of MOtion Picture -odiucers and the Artiste' Guild jointly, and In some case were paid for by the atr themselves. No w c~mpessties w s presnsest cars eithe before Pload Harber or dunue# he t Andth After Peard Harbor, USO-Camp Shows, Inc., was orvaudeville circuit that the world has ever known cam into being. Certain of the small variety actors were compensated on a reduced scale for performing their services in the mps and hospitals in the United Stats, sand throughout the world on the battle fronts of Europe and in the Pacific wherever American service. men were gathered but still the big-name entertainers, such a Jack Denny, Bob Hopei Bi Crosby, Joe E. Brown, DinahShore Jane Froman, Gypsy Ma-koff. Franes Langford, and hundreds of others, glady, willingly, and voluntarliv gave their services without thought .of compensation as their contribution to the war effort. Several of them gave their lives, among them Carole Lombard; some of them were seriously in ure4, among them Jane Froman. These people do not deseve the unjust discrimination against members of their profession by being excluded from the exemption granted to all other residents of the United State, who would be overned by the terms of Section of Article XI of the Treaty. That they are justified in having their Interests safeguarded Just the smo as other citizens by their own government Ispatently apparent when conslde-ation is given to their gra voluntary contribution to the war effort a being but one of the many. things that should be taken into consideration Inthis connection. With full recognition of the r-iht of the Congress under the Constitution of the United States to pass laws affei certain properly classified portion of the public, there Isnothing inherent in the profemsion of public entertainer .to justify taw dilwvlmination either by lgisation or Treaty against this profssion alone. The Constitution does not speoifically mention the public entertainer as being Sclals of citizen who should not be discriminated against, but certainly the spirit, If not the letter of the Constitution Isbeing violated by the terms of Seotion 8 of Article Xl of the Treaty. It Isnot intended herein to raise the question as to whether a treaty between the United States and the United Kingdom can chnenl the letter or spirit of the Constitution of the United States, but it Isa matter of deep consideration for the members of the Senste to say whether Sec tion 8 of Article XI as now written does not completely and totally ignore what the framers of the Constitution meant when they took great palns to protect 'the intorets of all citizens of the United States against clams discrimination,

    been passed by Co

    IN CONOLUIBlON

    There is no member of the Sente, past, present, or future, who would not rise In righteous indignation were Section 8 of Article XI of the Treaty to read as follows: "'. The provisions of this article shall not apply to the compensation profits, emoluments, or other remuneration of persons resident or domiciled in the stte of ................. and each Senator may insert the name of his own state in the above blank apace. If the Senator did not object to such unjust discrimination on behalf of the residents of the state which he represents he would be subject to the severest criticism by his constituents who ed him. and rightly so. The members of the acting profesion feel the same as the constituents of any state in the United public States would feel If they were unjustly discriminated against. The ane n wu state on As unieu, not just in Califeorua, Ntw' York, entertainers resid The Artists' Managers Guild, an association of artists' managers, and the Screen Actors Guild, labor union representing all the actors in the motion-picture

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    INCOME AND ISTATZ TAX CONVENTIONS

    109

    industry, have collaborated in this brief. It Is anticipated that the following labor unions representing luhlic entertainers in the following fields will make direct representations to either the Senate or the Subcommittee of the Senate Foreign IRelations Committee assumingg that the Treaty is referred back to the Subcommittee) and that such representations will concur with the views set fortb in this brief. American Federation of IRadio Artists, representing all actors in the radio industry. American Guild of Variety Artists, representing all actors in the night-club said variety field. Actors Equity Association, representing all actors on the stage. American Guild of Musical Artists, representing all concert artists. With the exception of the Artists' Managers Guild, all of the foregoing, including the Screen Actors Guild are affiliated with the Assoeiated Actors and Artistos of America, which in turn Is affiliated with the American Federation of Lalmr. We respectfully request that Section 3 of Article XI be deleted from the Treaty on the grounds stated In this brief. ARmTIST' NIANAGEDIs GUILD, By ADRIAN MCCALMAN, Administrator.
    SCRICHN ACToPA GUILD, DALE, Jr.,

    By JoHm

    Izcutio Secretary.

    Senator LucAs. There is one thing that I noticed from this table. It would seem that the lower-income fellow is hit harder under the tax exchange than the fellow who, for instance, has a $200,000 income. England taxes the $200,000 man in the amount of $35,000, while the maximum United States credit would be $32,230-a difference of only $3,000. Mr. MCCALMAN. That is correct. Senator LUcAs. So it would not make much difference to him, on that basis, but it might make a good deal of difference to the little fellow who was struggling to get along. Are there any other statements? Mr. KING. There is one more point, Senator. Senator LucAs. All right, Mr. King; proceed. Mr. KING. This, I t]ink, probably should go into the record. Mr. McCalman and others have assumed that Britain would tax the American actor working for the American concern, who is loaned or leased to the British concern. Now, it is our understanding that this is a very doubtful point. The British reserve the right to examine the contracts in each case and consider all the facts, and as we read the British decisions, there may be many instances where the American actor will not be taxed at all under the British law. If so, of course, there is no double taxation, no credit involved; and from another angle he is better off than the British actor who comes here because we will tax him, regardless of where his contract is made or for whom he works. With further reference to this point, I would like to ask these gentlemen if they know of any specific instances where Britain has taxed the actors under the 5- or 7-year contracts with American companies, who have been loaned to British companies? Mr. DALES. Could we put it this way, Mr. King? Do you know of any instances where they have not? Mr. KinG. I have no way of knowing one way or the other. Mr. DAuLES. I know of Americans being taxed, but I do not know what their set-up was. I know Claude Rains was taxed by England.

    (2705)

    110

    INCOME AND UTATIC TAX CONVENTIONS

    I do not know what his contractual set-up was. We have not had such opportunity. I certainly know of no case where one was not taxed. Mr. McAMA.. That is about the only case we know of in the last Mr. DALES. Mr. Abel was taxed when he went to England, but of course he was working I think for an English producer. Mr. ABEL. Yes. I ou arespeaking of an American contract actor, working for an American contractor, in England? Mr. DALES. Either way. Mr. ABEL. But this act penalizes the contract player-the man who is under contract to an American company. Mr. DALES. That raises this point, Mr. King, if I may say so. It is interesting that, in view of the fact that this language in the treaty is so clear, thatAn individual who Is a resident of the United States shall be exempt from United Kingdom tax upon profits, emolumenuts * * * in respect of per. sonal * * * mrviees--

    5 or 0 years.

    if there has not been a tax, there certainly is going to be-isn't it? It says, "We will exempt everybody from United Kingdom tax, except the actor." Mr. KING. No- I do not believe your thought is correct, there. The treaty in reterrinif to an exemption or a credit losess not mean that in all instances there has been a tax. You turn to the laws to find whtother there has been a tax. Mr. DALES. That is right. Mr. KINo. If there has been, then the credit comes into play. This assumes, however, that there is a tax to.sturt with. Mr. MCALMAN. Your original statement was that this is a contro. versial point, as to whether or not an actor under the circumstances sot forth in section (2)of article XI is taxed by the United Kingdom. Mir. KING. That is right. Mr. MCCALMAN. You can certainly resolve that controversy by deleting section (3), and if there is no tax in England, there is no reason for discriminating against the American actor, because it leaves the door wide open for the United Kingdom to say, "Well, all right, our British subject, going on a loan-out -from a British company to an American company, is taxed by the United States-we will recipro. cate." I mean, isn't that mostly true of international tax lawsreciprocity? So they will pass a law taxing American actors if it is not clear at this point. Mr. KING. No I think that goes too far. There are many instances where countries do not change their law, after a treaty, to fit the law of the other country. Mr. MCCALMAN. I cannot answer for England. I do not know whether you could. Mr. KING. I do not want to press the point too far, but in order for us to run it down, we would have to examine numerous cases n the Bureau; but you, being in the profession, I thought might have knowledge of such cases. Senator LUCAS. We do not want you to go that far. We do not want you to run down all the law; wehaven'tgot time for that. Now, are there any other questions? (2706)
    Mr. DALES. No.

    INCOME AND ESTATE TAX CONVENTIONS

    111

    (Mr. King presented for the record tile following table, showing tfle operation of the United States credit to the American actor who
    ,arnitigs of the United kMtates actor present in the Un ited Kingdom the effect of the credit for United Kingdom tax may be seen from the following table:
    3 months In United 4 months In United 5 months in United Kingdom Kingdomn Kingdom Assumied total annual income UnitedStates tax Maxi. nmum United I'nited Kintdom United Xinsdoui tax states ta14
    4.7TWJ It M . 3.000 31.1t0 4. 1%.q C A 7,7.4 N 0.703 It.04A 11,0111 9.916 16.012 14,724 11-035 21.241

    is taxed in Great Britain:) Assuming, without admnitting, that the United Kingdom Imloes a tax on the

    Mat mui United 8t tes

    Mail. Unitedl mum Kingdom United tax sltatei


    6,2I 166 ,296 11.17 16,575 2& 406

    .. .K 20 14.1fie $120.00 ........... ... ti34 $aluto ................. .113,21 ?i0. S!t!)O.0........................ 94,470 13, 744 U........................ M ,A0 3.% M0

    Mot0.s ................ ....... i0 840.4M ................... $ull,(J .................... $41,40.9 ................. ... tti)ou.W) ........................

    .5,lt0 IN% Ito A '1 .3% 9.7O A5,W

    16I.3Ia 24.618 3A,

    01 .. 32 2A,7 W Z 34.640o 51. 110

    2% 27 . L7.% 3. WA 4Z,3

    1M . 4.1i iO rlM IT P. No . 340) 14.721 13. ,10 21,244 17. W19 2%30

    :1,Aolo 3 4172 4.1 3101) 34,M 51.110) 41.028 * , 67 U17 ,

    schedule that the actor (If he should be subject to United Kingdom law) may pro 'etd to the t'tilted Klindom, reninin therein four nionthli in ilew pursuit of hli employment for his I nnted states*A.'mniuyer aid ItVeive sascrdit against his United ltaltes tax front 0lo0to lierent of his United Kinga dom taw. In treshing these 1ierrentsurm it will be oloerved that th ere are a.'tsunsed aggrgate delductions of ,Mlercent of grosm incule. In any cam In which there isIncone othe tIhan salary or in which the deductions fall below 18 percent of grost incoire the amount of credit allowed increases.

    amount fittile rMlit. It will he seen ntlne

    NoTI i.-The conversion rate employed IsW4 the pound lterl ins. to NoTin 2.-The United Kigtdom tax Isthat coniputed by the British revenue convertid into dollars, NiOT& 3.-In conput Ins United Mtatns tax 2 crel irts ae enil'lliyrd (married person no delendents). Nuti3 4.-In coniuflrig V'nited States l ax, deduelionl tit I. percent of groas ae allowed for contributions, laies. interest, had debts, hiames. Statistics indicate this Is a liberal allowance, tending to decratem the

    Senator LuCAS. I have requested Mr. Stam to submit a further statement lie desires to make before the committee as a part of this report upon the question which is in issue-not the refugee question, but the question of the deletion of paragraph (3) of article XI. (The statement referred to, subsequently supplied by Mr. Stam, is as follows:)
    STATSIMiNT OF COLtIN

    F. STA, CHIEF OF STAFF, JOINT COMNITTri ON INTERNAL


    RhzVENUs TAXATION

    from the United States tax (a) if the Birtish resident performing such services is In the United States for a period not over 183 days during the year and (b) the services are performed for a resident of the United Kingdom. Similarly, income from personal services performed by a resident of the United States Is exempt from United Kingdom tax (a) if the person performing them is the United In Kingdom not over 183 days during the year and (b) the services are performed for a resident of the United States. However, the exemption gamntid by the article does not apply to the compensation of public entertainers such as stage, motion picture or radio artiste, musicians, or athletes. Because of the fact that public entertainers are not given the same exemption, it Isclaimed by represent. atives of the motion-picture industry and others, that the convention Isdicrimi. natory and should be amended so that public entertainers may be treated like other persons performing services in the United Kingdom or in the United States, as the case may be. The public entertainers exception stems from the Revenue Act of 1930 and has been applied not only in the British convention, but klo In conventions with Sweden, and Canada.

    Under article XI of the Convention, income from personal services is exempt

    (27o7)

    112

    INCOM AND

    ,JrVT WrAT TAX

    IONS

    a nonresident ur- performed byperiod not n q for a the t txableyear and whs comnsation for 0 days duI. ) seeding a total ,t was exempt from the United a such services did not exceed in tihe a Rev. Sta income tax. A similar von acontind;adon in the current Inralin our e sucksa provision necessity for onuo Code, econ11(). TnWreasu DeptmentInternal Revenue Code was expilmaie oy Mr. Kest, 0 pe Under the Revenue Act o01930, I in the Unit, d t Slien individual, temporarily p follows: "Mr. KuT. Thee is a revision in the prew.snt law, $action 19, denJnI.compensi_ come from sources within &e United Stats,. which provides thatdeemedInme be U cited for labor or services performed within the thinkStates shallthe s.ees which to some 0o from sources within the United States. the been madere simply absurd. I think it Isreally beneathhere dignity referce has, negot. who has been
    situation to deal wij&. rfrred to the man was here 2 waeks and they Wnaa "Senator Noe. to asked him to make a rtur_ ad p7, and n was hee trying sellAnd market for goods in return. d bhere, a he wanted to our sods. He wanted to buy "Mr. K=T. And on the o hand, one thing that makes the situation rather difficult to deal with Isthis: You may have some English p us o German month and and beinghere pugilisrtheatrical sAr coming over we activItWe inthisfor and JW,000 out 01 their out0 .oIt. sotcountry ;e, the feel. 0130 10n or i dfficult to Isra n oreth tbist awte oulh to at some tax

    avenue In a statement before the Senat Finaoe Committee when the this pointAct 01 Is As e ration. Mr. Kent's statement a to 1936 was under

    01 this Government to hold a commercial representative tosUe_ a contracts for 8 or 4 week, up M the port Ino atNicommercialm very well telltUem in

    We cannot fow dollars out of him, but our agents .dol. doing so, and ItIsa very difficult Washington that they are violating the law In

    let out the fra6mea amendment even which will draw heo line 01 distinction andto include." out some that u want to exclude without let 5Uame that you want 30, the .Tv..uell Thsreport 01 the inoun Commif under following lAngua 9a also sets, te forth the oesesity for such a 01 tpon nonresident aliens Isrecomm_endmedb n Ii the O eN
    form 01soem endmet to from 11y(a (3)0 the Hous our This amendent would operate to sexludesection thn01oso income bilL sommittes gsompeeaton a under an the or services Witbin laborUnited Ste wihsources for Usited State Irntherepived bymnoresident_ alles individual individual or a foreign partner r aliens recent employment or contract with a ship or corporation provided such services are ordered by smucwh nonesident yd, t in the United States for a that or alien Individual while tamOro NOW during the taxable year and PeO the da 0;l a tota 01 periods not for sub sarchZu does not eceed 98,000. The Purpos o emtrsdnso other countries to make bifvst ofteaedetI of ma god theun e to the United States for business purpose1,sc qulte disproportionate to the slight revenue involved In the amendment are, It is believed adequatsl~af to prevent any serious .... . flP. to section 211 ) which the eommnitte has exeptoe Th,000 Inicte abuse thet Was Jn.

    for payment c without being subject, before levIing the country to a demand Numerous cases trstay her. on their compensation durln the period futh created irritation and pods tax ill will ... ask~ kelaw have buyin andu km,ti. arising v 01 this characterud~v of under tue present such The limitations contained limitaon t t Study of the legislative hstr or theater stars conducting perform in this thpuils o t don country or2 morS and leeiving considerable remuneration frtheir rv

    tl leswu M be subjc to thUnite S tatstL The convention, Ar=t~ce , Britis" cos b nt icorortin th 9800 limit, woouald completely exempttax for srie athete, pbli enerainrsfrom the Unite States suib services nd ths i th perormd UntedStaeswithin the prescribed 198 days If ecuefo h eeis0 were peformedfor a Itish epl oyer, fAeAI* y*%Oka cnetion did not szld rmtebot eta910 the compnston 01 Britih puglseo P01 ecmeeat~onfpbl a Th 0is , sSuepeforlnasvs in; conryudr a contrast 6fo Britis thearisa ohwU exemp frm eat Britain would be copet= nodent U 4 change is the Staestaxerfor,,asde from the question 01 whether anyfourth nesuotl Covetin t hi tmewould unduy dely Itsadoptiongndg beleve toomIte a @te the 100la question as to whthr"h tic00hee

    (2708)

    INCOME AND ESTATE TAX CONVENTIONS


    Ili this country.

    113

    "ltat . ,ax sliould IV* collected on services performed by lrit ith IItlik entertainers An examination of the Britlsh statutes and decisions MIyaks 'onstiferalde dtotibt aii to whletlher an American actor performinig srviers in t w Ulniied Ili;.g'Ini for a piejiod of l.e.ss than) 6 IOllntf ts will be subject to the British Iicoiiie t/. If ho Is inert'1v et-rii'illig an employment in 6r'at Britain as (listinguki-hed frotm a profes,ion. tl.'h Itriiii law does nit apix-ar to reach him where the tlil rcract wad.Ite in :O, Uil(ited States, and t)aymnieit of the comlpensation is made there. The .Amierlcan actor Ilav lIe able to .,itablish that he is not carrying ont a profess. Aimn il thle |'nlit-4 King'Iotn bit inerely exercisinig an employn'ent there. The lritin-hcourt In the case of ltrhiv'. v. BIriaithua..il. (1 '111 lts (1192h, 1929)) uiiade of all

    the following distinerion betweevn thie carrying oil of a profession and the cxrue

    elliploynllent:

    it certainly involves going fron oee to the other and mnot going on playing one part for the rest of his or fler life, bitt in obtaining first one elngagelliiltt a',nd then amiot ler, and a whole series of I hemi -t Illen eaclh of these elgagetli eldl oll not be ntl considered an employment, itt is a mere engagement IiI thie eour.e of exercising a limofe...mi, alnd every professloio and ever vrude flo'.s involve the uttaking of slile, t ' tsi\'e lgagenienti sIUce;IjvQe aIdI tnitt fnlllt one slese Of the Word, ill-. ll ill plovtnetlts. That i.s the line which I draw on that principles, rightly or wronilv.y. In I,,nn, v. .Mairshall (22 1. ('. (1i 73:i (l93,4 i,.a involved "the cu-ie Wotni vnipl,,yee or olficer of the Nat.\ ional (Cash It,liiter Co'o. who, itlli'r his emortirnt of "11mt1ipwilomit Imlade in t lhe U'nitled Slatt.,4 was4 a n:ilis ti'vitw'r for I lint ef 1111ip4ny Itrmiohotit ilt,\ world, excpt tlift-e nit'ul Statsi -t.mil (i'ttiieialad. .lar-hall wa, a retiufiit of te inlited Kingdom for m/titny year prior to Itlihe yar,4 involved (19314 andt 1935); his salary wais deplsited to hiscredit in it('annlitin baik agoimist which tltiesit.if drew front I !file to I ilnl. ito Itlfi4 he isl living an I her iexpensis- ili Entgl:anld, with tile result that, lie drew aptproxiimately otte.l'hilf Ilis salary. The quiestIon involvedl was whether Mar-lall wais haibe to rtilted Kimnghloin tn*x tlipn li, eintiro >.alarv or iertil ipoit thatt piortioi Of his salary which lie brought into the I'Itlted Kingldo1. The I..nglikh courts tiniforiallu held thitat .Marshiill received iteonile fi front anp epnlploynlteiit And hellee tinder l',tgllkh law wa, .ublhjeet to United! Kingeelon tax only utlpon that Ilrt ion of hik salary which lie Ibrought Into tit.' I'nited K(intg. ditI. I1lie principle tiiIon which the court procu'e"v'll is.'xpre.rvl a,, follows: "The Iloul.e' of Laird, HA .e4it,,11. to Ic. ilt Pit'4I'0`8 v. FtOed;,4.P (1) T. C. 261) it have defillItelyh decided tlhit. in the case of an eCliff ivtInit.t lhe, llocality of tile .eutiree of illcolle. is not the place witu're the act ivit its of lie emlploytv'i re exercised butt lift pic'( eit her wheret lhe contract for paymnlet is d441ieI11l tu') have n locality or whi.'re the paymilenits for the emptl)loyi)lent. are Ihande, which may Iinean tile sane l hui, it was held thliat even a resident of the Unlted ihingdomn acting upomn ia Contract of eiploymvenit execlited abroad where the relnumerat ion is also paid alhroaul is liable for Untitel Kintidoi tax oily' on that portion of stch renuttiteration which is brouightl into tile United Klingdomn. It would therefore applar with reasonable iLaurance that a Unitetd State's actor, till emnijloyve inlder a long-terln contract of emi)loyment with alnft Antrie.-to pro. dlticing company, who isteilloxtrarily present, lit thiei'ttited iltngdomtn. cit her on loan to a Ilrit ish producing company or on1l Ilhalf of his Aittenricatll emlloyer for the purlose of making a pictture or portion e a )it m itire lit tlihe Uliiited KIntgdomt is exercising all elltlt yllteilt and I hitti if hi- ,altary is paid tthe Utited Stotes alld li not reduced to Iti.sset.s.don in the Utnited Kihigdolm, he would be ('xemlpt from utilted Kintgdomt tax ot Stich remuniteratiion. It. should alst be noted that tle ptrimciple of leihtnn v. Mlarshtll, supra. is clearly applicable to the case. of a resident tif tlhe I llitditSlt at, who (a) gioes to tile Unitedl lKigdlom for a short jt.,riod. (b) sells there nterchantdise for his Uinited States emltployer, sifft (c) derives, say, $WNW.Ot)) conidlssion for qtult sale', sitch eoitllinksioln being deposited to his accotiut itt thle United States,. Ilt such ec the Untited Kingdom tinder it, revenue laws would mtot itti 1ose its tax on s1ch inlcomet, conIrary to the innpression created kelstwhere in the record of this hetiriiig. lmtde.

    "But I would go further than taint, and what T may Isthat It scents to i(e that where one finds( a niet hod of earning a livelihood whih h(hoe(s not contemplate hthe ohtaill. infig Of a I)pot anId 14tylig Init, hill eIssent ially eontentjlat v, a series of engagement A tmid mIIovlng front one to anotlher--and in 1the case of an actor's or atvress' life

    r ri(lently, therefore, of the provisions of the convention stleh eo1nmfnisS.ion wotlld lie exempt from Utiited Kingdom tax.

    MW095 0--6---vol. 2-7?'

    (2709)

    114

    INCOME AND ESTATE TAX CONVENTIONS

    It would therefore appear from the state of English law as set forth In the cited decisions that there would likely be no English tax and to that extent there would be no reduction of United States revenue due to the credits for United Kingdom tax which would follow had the English tax been Imposed upon the English earnings of United States actors temporarily present in the United Kingdom.

    Permission was granted by Senator Lucas to Adrian McCalman

    and John Dales, Jr. to reply to Mr. Stain's statement. (The statement referred to, subsequently supplied by Adrian McCalman and John Dales, Jr., is as follows:)
    STATEMENT FOR TIlE RECORD IN THE SENATE FOREIGN RELATIONS SUBCOMMITrEE

    HEARING OF WEDNESDAY, APRIL 17, 1946

    Pursuant to permission granted by Senator Scott W. Lucas, John Dales, Jr., and Adrian McCalman hereby file the following statement In answer to any material submitted in the above hearing by Mr. Colin Starn. Mr. Stain has attempted to trace the h story of the excepting of public enter. tainers from the benefits granted to other employees generally to the Revenue Act of 1936. In a sense our entire case rests upon such reasoning by Mr. Stain and Mr. King of the Internal Revenue Department. As Mr. Dales stated to Mr. King, actors had no objection to the fact, if it is a fact, that the Revenue Act of 1936 may have affected them more severely than It did other classes of employees, because if it did so, it did it by indirection. Actors were not specifically excepted from the benefits granted to others under this revenue act. The act exempted all employees-nonresident aliens temporarily present in the United States for a period not exceeding 90 days whose incomes did not exceed $3,000--from United Staes income tax. According to testimony adduced prior to the passage of said revenue act, the purpose of such a formula was to except from the exemption of taxes the cases of large income earners, for example, pugilists and theatrical stars. That may be. There was no evidence then or ever introduced to show that as a matter of fact, more high-Income public enter. tainers were affected than other high-income earners such as salesmen or executives. In any event, the formula set forth In said revenue act acted equally upon all high-income earners whatever their business or profession. Had said act blatantly named public entertainers as the sole group to be excepted from the benefits of tax exemption, then it would undoubtedly have been invalid as unJustifiable class legislation. To put into a treaty language which if put into a aw would render that law unconstitutional and invalid is a precedent which is dangerous, unjustified, and, above all, unnecessary. The formula used in the 1936 Revenue Act was used in substantially the same language in other tax treaties. The fact that the Internal Revenue Department chooses to think that more actors will be affected thereby than other employees, does not make such formula objectionable to actors. We are informed by the representatives of the Internal Revenue Department that they now prefer to specifically exclude public entertainers by name rather than to use the formula above discussed because even if they miss collecting tax on a high-income-earning foreign director executive, or salesman, these persons are here in the interests of international intercourse and stimulate international trade. When asked if the same hi not true with regard to the interchange of public entertainers to the stimulation of international trade in the motion-picture industry (which is after all just a manufacturing business) and in the other publicentertainment fields, they simply answer that there may some day be another Firpo or Georges Carpentier and they want to tax such person if and when he comes to this country. We ask why, to catch a high-income earner such as the next greater foreign boxer, must a professional line be drawn covering only public entertainers, whether large- or small-income earners. Would it not be more logical to draw a line covering all high-income earners regardless of business or profession? At this point we are reminded that Senator Lucas asked if there were any figures available to throw any light on the amount of talent interchange count, but every booking agency will testify that the ratio of American actors going to the United Kingdom as against British actors brought to the United States is almost 20 to 1. While there may be many factors contributing to this one-sided interchange, perhaps the beat reason is simply that the English public has proved much more receptive to American actors and forms df entertainment than the American public has to the English entertainers.

    between England and the United States. We have been able to find no accurate

    (2710)

    INCOME AND ESTATE TAX CONVENTIONS

    115

    We understand that the Bureau of Internal Revenue has run a test check on the amount of income earned by aliens in the stock market and that the findings of the Department will enable this subcommittee to arrive at a conclusion regarding the criticism leveled at article XIV of the treaty. It would be well if a similar check. could be made with reference to the probable tax Income to this country from visiting English public entertainers who would be tax-exempt under the limited circumstances of section 1 of article XI of thie treaty were they not excepted therefrom by section 3. We are certain that such a check would prove this expected tax-able income to be ninny times less than that earned by the aliens above referred to, and in consequence even less of a problem. term our objection to section I of article XI as sentimentala" upon the grounds that they doubt that British law authorizes the taxation of American performers who go to England for less than 6 months for American producers. They will not state that England does not tax such performers-but. rather put in the torim that, if taxes, the American entertainer can take the matter to court successfully under their interpretation of British law. They, maintain, then, that the Amnerican actor actually hms the same benefits in England which are given to all other classes of employees under section 2 of article XI, irrespective of the apparent avoidance of this by section 3. This is just not the English law and the very cases cited in Mr. Stain's additional statement prove our point. In the Braithwaite case, although there is some dicta which sounds as though the court Is also doubtful as to whether Enaland can tax an American performer under the circumstances of that case, the judgment of the court finally ends by taxing Mrs. Braithwaite, the question being resolved by other factors not concerned in our case. In the Marshall case, it is true that Marshall escaped tax on moneys never reduced to possession in England. We ask the Internol Revenue Department representatives where in Article XI they find this additional requirement; that to escape taxation by Great Brithin the money must not be received In England. In other words, if the Internal Revenue representatives have concluded that even If actors are excluded from the benefits of article XI, they nevertheless actually have the same benefits by reason of the state of English tax laws, that conclusion is patently false. Under article XI an employee working in England less than 6 months for an American employer is exempt from British tax, even if he receives his salary or remuneration li the Unltea Kingdom. Whereas under the general tax laws which would goven actors, even if the Bureau is right as to the effect of that law, actors would be taxed on any salary or remuneration they received within the United Kingdom and It is no answer to say that they could arrange to be paid In the United States. That might constitute evasion. It certainly adds complications and requires the actor to take risks to which there is no need to subject him. One -shouldnot forget that inasmuch as this law applies to all actors regardless of their incomes, they will in the main not be able to afford themselves the advice of reliable tax experts. Even had our case been one of sentiment, it would be worthy of the full consideration of the Senate. Who knows what the tax laws of Briltain will be tomorrow? In fact, If,as we understand it, treaties override laws, who knows what the British tax laws will actually le on the day the treaty is signed, for article XI, sections 2 and 3 then become British law.* It would appear that actors at that moment are certainl,' adversely affected by the plain invitation and perhaps the plain requirment that. by the terms of this treaty actors, not being exempted under section 2, shall be taxed by the United Kingdom. For all of the reasons stated in this hearing, the language of section 3 of article XI should be deleted front the treaty. Respectfully submitted. SCREEN ACTORS GUILD, I.xc., By JOHN DALES, Jr. ARTISTS MANAGERS GUILD, By ADRIAN MCCALMAN.
    Representatives of the Internal Revenue Departneint. next, have chosen to

    TAXATION OF REFUGEES
    concern the question which is in controversy before the committee. Mr. MCCALMAN. Thank you, Senator Lucas, very much.

    Senator LUCAS. You wanted to discuss one question with respect to refugees, that came up in these previous hearings, which does not

    (2711)

    116

    INCOME AND ESTATE TAX CONVENTIONS

    Mr. DALEMs. Do vou want to excuse us? Senator LUCAS. ton gentlemen may be excused, imlesaq you want to hear something about taxation of refugees. You might be able to help us a little on that. Mr. MCCAIIMAN. We might have some refugee actors over here. I understand that we have some. Senator LUCAS. Incidentally, that is of more concern to a lot of folks than protecting the actor here from a little double taxation. Mr. KiNo. Since our principal report was completed, in Febru. ary 1940, we have continued with the investigation, and I also desire to submit a supplemental report modifying some of the figures used in the February report. However, by' a comparison of the two, it will be noted that in all essential particulars the recent report does not affect the prior report. Senator LUCAS. The question in the previous hearing was raised by some members of the committee with respect to the possibility of the taxation of certain refugees that were in this country for a short while, making a lot of money, so the story goes, and at the time we had these hearings, the Treasury Department (lid not have a full and complete report, but promised the committee that as soon as the investigation was completed they wouhl make a report back to the committee. It seems to me that this is an appropriate time for the Treasury Department to make such report; so proceed, Mr. King. I say this with the understanding that the report is now complete. Mr. KING. Following the last meeting on the treaty with the United Kingdom, and because of questions concerning refugee aliens, which had also been raised before the Ways and Means Committee, the Bureau undertook an investigation of the problem. The investigation was quite comprehensive. I think I should just attempt to give a brief summary. Senator LUCAS. Yes; just brief the high lights, then place your manuscript in the record, because I am scheduled to leave here in about 5 minutes. Mr. KING. I might even Suggest this, that maybe it would be better if I just handed this in instead of summarizing. Senator LUCAS. Have you got a complete report of it? Senator
    Mr. KING. Yes.
    LUCAS.

    Well, I think that is perhaps preferable.

    Senator LUCAS. Without objection, it may be so ordered. (The memorandum concerning investigation of alien taxation with the supplemental report submitted for thie record by Mr. King, is as follows:)

    Mr. KING. I think so.

    MEMORANDUM CONCERNING INVESTIGATION OF ALIEN TAXATION


    ORIGIN OF PROBLEM

    Beginning about May 1945 there appeared in the press a series of articles questioning the sufficiency of the existing income-tax law as applied to aliens who were physically present in the United States. The articles referred to "refugee stock traders" or "guest speculators" and the like who as war refugees in the United States were reaping allegedly tax.free profits in this country, especially in their, transactions on domestic stock and commodity exchanges. Some writers suggested that such profits might be as high as $800,000,000 on which the minimum tax would be about $200,000 000. In connection with a legislative measure

    Pending before the Ways and MIeans Committee and an income-tax convention

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    INCOME AND ESTATE TAX CONVENTIONS

    117

    lendllng before tile ellate Foreign ]Relat ions ('oinmittec, consideration was given to IjKsilble enabling legislation liut action was susixended lending further check concerning the adequacy of exist ing law.
    API'LICABLE STATUTORY PROVISIONS There are outlined below the provisions of existing law, including tax convon.

    tieM)s, whielh are the subject of the present controversy. For Federal Income-tax purposes aliens are classified into resident and non.

    therein. All alien resident in the United States is, like the citizen of the United States, taxed on his inicomne from till sources. including his capital trans-actions. How ever. in the operation of the credit provisions contained in section 131 of the Internal Revenue {'ode he may be denied credits for foreign taxes paid which are granted to the citizen. Tioe nonresident alien not engaged in trade or business in tile United States is taxed on all his fixed or deternunable annual or periodical income from sources within tile United States such as dividends, interest, rents, anid royalties, but Is exempt front tax on anty gains front his transactions in stocks, securities, or com. ,moditiesthrough a United States resident broker, commission agent, or custodian. Thieo exemption thus granted to aliens in this category and on this class of trans. actions takes account, inter alia, of the rate of tax imposedd on a gross basis) on such periodical items of incomne anl such administrative questions as tihe Impracticability of determining and enforcing a tax against such aliens incident to their House Report, No. 2475 transactions clearing through our domestic exchanges. alid Senate Reiport No. 2156 on the revenue bill of 1936 recognize tile collection difficulties Involved in this type of case. The system of levying a gros,. tax on Items of fixed and periodical income, with accompanying provisions for collection at source, has proven very successful since its adoption in 1936, not only from an administrative but also from a revenue point of view. The tax collected in this class of cases in 1943, the latest year for which complete statistics are available, was about $50,000,000 which exceeds by many times collections from such class of taxpayers under previous principles of taxation. Under existing statutory provisions the nonresident alien is not subject to tax on capital gains merely by reason of his transactions in stocks, securities, or commodities through a resident broker, commission agent. or custodian, but he is subject to tax on such gains If he is otherwise engaged in trade or business in tie United States and most any sort of activity in this respect, including tile performance of personal tscrvices within the U.ilted States at. any time during the taxable year, constitutes engaging in trade or business. However, it should bee observed that with respect. to countries with which we have income-tax conventions (Canada, France, and Sweden), this particular phase of alien taxation is modified to provide that residents of those countries (other than United States citizens) are not subject to tax on capital gains unless they have a permanent establishment in the United States. This forms a part. of the permanent establishment base used elsewhere in the conventions, and the base so employed with those countries has been made a part of the pending convention with the United Kingdom. The adoption of the permanent establishment principle has been found in the course of the investigation referred to below to have little effect on cases involving nationals of Canada, France Sweden, or the United Kingdom. Thus out of 12 cases of British subjects involvin potential deficiencies of about $60,000 none is affected by the permanent establishinent principle. Also in the case of eight French citizens involving proposed deficiencies of aboutI$500,000 the outcome of only one deficiency of about $250 seems to be dependent on whether the individual had a permanent establishment In the United States. No cases of Canadian or Swedish nationals involving this principle have been discovered.
    SCOPn OF INVESTIGATION

    resident aliens and the latter are subelassified as between t hose (a) not enraged it trade or business in tile United States and (b) those engaged in trade or business

    The investigation referred to above as to the adequacy of existing law was opened by the issuance of Commissioner's Mimeograph No. 5883, dated June 27, 1945, for the information of the public and Bureau personnel and contained a careful analysis of the operation of existing law. The Commissioner accompanied such mimeograph by a press release calling attention to the narrow scope of the exemption granted to nonresident aliens deriving Income from United States

    (2718)

    118
    Nliolw izllltwe

    INCOME AND

    M.TATE 'rAX CONVENTION8

    stirc'.s anti direclitig that close serolity Ie made of all claih.. for exemption. Ito have their It% A1t elariticd anid Ithir att ent ion was called to lile- proyisi..l; at1,i of e\ktlitig low %%hi'h relinre delpanrlilog Aliemw it sit1111ifll liax .tt1.1rtl'ive before delalrtitre. As a ptart of the getllral itsttisaliee aUl itt lcsfignttive plitl. intetulded tll ias.r, fair itel ijnrper FI ituetit tier ei.itl iigilaw anll oll provide dllta which . Itmighlt atTorl it lmsit for hlgislatihe or alitiji-ti ratl ittilroeiettll, a qit ion. imaire tlormll I1011, prepared andI issm-ed in order to elicit all leliminetIt facts uas IJ'enruig oul Iheiqlit ill ifr I t titti l ofifIwitjets fo r Ita ation plrlttwos. ionlf tovil The fortil tid nout tuterel. Ithat tlie It'otwl izei clutitititig exi'ltljt itll slate iverfatit ask t4tititt1J1tititns of ltity or fatct rcls''cting iiis state ius was of searching character Ill. hit tenadead it ibritng otl all his act iviti's frottm which the Iurvaitl couhl furtm Its tina
    11.wr sk4ed to coti'llt withI appritpriatle lurvaii otllirials ii orler mu

    .t ittIllgh till' iltvest igat ion was of etittiprelltive .solll till e 8ili4 iet' otIt ilitiltg (of atpliafl tiltn, net ivil it's etltered largely on cerl Itill RMr1 is in which I hIle wecre Jlrean ha1 fitl. tilttI illlliceli:tedl interest. 'lt.s. lthern wern ir-t hrout ght tititheri. _ jitVest gat io Ittis, alients hi brought n it It I i'tin otr oflthIrwi.' I ratltkrrfed imrtl'rl . in Ctislmherahule ttwitllttll hit tile U'nttited Scltates. Willi it llo the .oollratiton of ollivild. of the New York Stock atidh (C'otllltolijv I.xitat1gts, illr ll 1gelltit eauttiled all acoittllsll itt sillh emcltatige hiu.itse of the albh've antd llt it llier grips who had e1.agtdtl in Irntii1sItliots on thi i'.chat1ges.. In making Sticlh check tihern were h. .et a1sidle 1i11 lie'ttllilltt s of IlllttizellI who were mllth ns.4silied as bethweett resilltllt HtIMl nlolltresitil alieins. Altogether itn excess of 7tHN).t) arcot'tults were emi\tilttl sund frouti tIhes' about 15,4000 a1t't'iiitis of tiotucniit s.ewere located. . 4 iltilarl:, A ehieck wits made of all C.tsiov, safl6k-elpilig, atntd tInvestmn'ill1t't'llev Il'veolltlls in th' ballots of ite New York aria at d frottt this cheek it list of 5,0N) liollelt izell tcottllills was vtollltpil'd. ('.ams were also located tlrotghi standard Jlbreait pro. etelihrea go tllltlt tiati'ms of aliells seutt itn hy ithe putlie or Iimentnlted itn tind ihe press were' ithlded inIhie lptlrnau's Illvestigatiott. As a part of it' tle)lpln it. was tIeei't'tslrv It' eliminate duplications incident io otl(e plry having atillai)cotit withIiiore ihati one lirokt'rage or fluaitei1l httlse atnd also ito ratsf'er a good many easets frouti onie list riet to alloit hlir It'catt.., of clit1uige- ii addlnesse.. I'pon utiakinig sueh adjultllstuien I hern% remaitained for ilnvest.igati inl New York areait lit' alone abothttl 2.11N cases atd for I he coittutlrv as a whole aolt 15,000 cMA cases. Sat .fat'ctory tinttds of 4'ooJ-t' muhviln g Je'iiut pi'rfeil'htl It'ltwee'i lhe Jillreall ratl atnd flip New York brokerage and bhtikitlg itst Altitt flipe Ilureau tfield olliv'i. ion, wiere asked to enter int o similar arralgettlltlts with siell it slitutitis in their r'sl.. Ie territories. A similar spirit (if cooperatioti was fomitult to exist in sutch territories: in fart, lhe program was greatly facilitatedl in tlhe New York Atnd other areas by the lpulblicity andI Ilptl)lie interest 'which it -Ittracted.

    tII8I'IT. OF INVKEIT(IAT(ION

    The tinvestligation to date has unttcovered 79 eases where disptlle exists as to whet her the oticil izen is a nonresident or resident oif the 'tiitted Stateq or wheel her h lie was. engaged in trade or btitnnc,.ss withiti the tited States. The attmounit of fl taxes projo-eid by flit' 1ltre'it iii suich eases I-s $3.953.2'1.3 at ribtmtable to a variety of eaIts'. which are ditellull to sitnarize. IHlowevier, tle two largest deficletleies atmountitag to aboitt $1.500.000 andt$500,000, respecelively, art' proposed agatillSt former eiltizetu. who. after reltittneing their citizenship, hlaie leen itn the U1nited tates itue tfhe early dlays tf the war. The deflcie1ncies in thise cases may be s attributed almost entirel., to eautses other than capital transacelions: 5 of th'e 79 case,,%acotult for abiut.*$2.900,000 of the total proposed (lefleiencits. Oilt of the 79 ease.s 43 involving $3.,579.339 in proposed efleieticies, are stituated in the have filed returns on the hbsis of being resident, fii ithe itled Stlate.s or engaged In trade or Ibisite.ss Itherein, thus concedlinig thait thev were subject, to tax on their Inicmne frotm capital tranisaction-s ini the Uunite(d States. About 15 percent. of the group of 10.500 ases, were found nt. mtrit further invest igat ion because of the otto smallanouts itiolved. About. 3 ix'reeiit of the remaittinl 5 percent aretlassitied priticipally am resitdelnt. aliens not required to file returns because their Ilconie was nlot engaged In bhllillent. ill thie Ui'tlled States who were not. required to file returns because their taxes ahad Ib-el fItlly satisfied at source and nonresident aliens

    New York area. 'T'hese easets were located as the result of processing aboult 10.500 eases. * Of the 10,500 alet'. investigated about. 80 pereett were fotuid to

    less thalitallowable exempltiouis.

    The balance Is compo.sed of nonresidenti aliens

    who had filed relttrtts reporting their taxes which had not been fully satisfied

    at source. Only a few of such nonresidents were found to have been In tho

    United States during the taxable periods involved and their stays here were of very limited duration. Of the 12,200 potential noncitizens taxpayers in the

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    INCOME AND ESTATE TAX CONVENTIONS

    119

    New York area about goo have not yet Ibeen Cnlltaete.d aII(l alitit! 90eases are still in process of auditl. After giving special atrinlitli for the iast se-veral itont hs to cases; where there was delayed retn.AIMs. to Itureah letters, it has beein folid that rnch delay was in nearly all instances dtile to ordinary causes, such a changes in address, ;o it i" n1ot an5itipatled that thle, grntlp of W84) cses will be thee castes will be IlrO14',l Ibeatise or the sitiall aniouints involved. Moreover, colisiderilng that, all cases where contact- had bIeen Illide were examlinedlin Meecting tile 43cass., represt'.i ing Ihose where deficiencies were inIost likely to develop, it is not believed that suibsta, ittial detfl'iellcies arn likely to Ibe uncovered ill the filnal audit, of the group of 900 cases. Altogether it eemis that the figure $3.,53,253 is not likely to be increased when the 79 cases are finally adjusted. It is known that adjustnents will be upward in s0ome cases when thie years 1944 and 1945 are considered but it is also known that in computing tentative taxes making tip the $3,953,253 figure go.s Income has been used In inanly instances pending ascertainlent. of the cost of securities

    lrulu ive (fsubstantial leficiencies; infact,. l thought thal practi cally all of

    (ol pas.t experience, it is ,sed

    alnd other dehdlctible itenms, and lhat, IxndiniK furt her linvest igat ion as to the t inie fhe capital assls were held, tax has; been computed oln the basis of short-term gains. It also seemlt unlikely that the (,overnlment will be successful in asserting its claim of residence or engaged in business in all cases. However, even if tile project. In this general connection, the current additional taxes It'ilig asserted as the result of audits of other cass and other Investigative projects of the Bureau are now exceeding $1,000,000,000 per year.
    HIUIMMAIIT OF INVESTIOATION

    the figure $3,953,253 were doubled to take care of the above and other contingencies, such as the discovery of new cases, it would still be quite sniall from a revenue Iint of view considering the amount of effort which has been put into

    The claims made hi tlie press and financial circles that aliens present In the United States were engaged in business transactions onl substantial basis in thlis country, especially on our exchanges, weneto have been well founded but there seems to be little justification for the charge that they, have altellpted to avoid taxation under t he provisions of exist ing law. On t he' count rary, th st uidies indi. le cate that all except a comparatively small number of the aliens having any potential liability have heretofore flled' tax ret urns on the basis of being resident n the United Slates or engaged in trade or business therein, thereby aldmitting that they are subject to tax oni their capital transactions in this country. As4 with respect to citizens, errors mnay be found upon audit of their returns but. it is important to note that they have-not. tried to hide or to avoid their reoponsibilities under our tax laws. Moreover, a test check madle of the more important returns filed indicates that the percentage of accuracy and error is comparable to that found in the returns of citizens. Even in the t9 cases many of the aliens had filed returns on a nonresident basis. However, aside from the immediate results of the investigation, reflected primarily in the 79 cases, there are certain over-all considerations which should be mentioned. Although such Immediate results have been quite negligible from a revenue point of view, the uiatter of alien taxation becomes active every few years and it is believed that the statistics gathered will be found to be of subslantial benefit. for future legislative and administrative purposes. Also, UpOlk considering the.pumi.icity given to tile investigation and the thoroughness with which the alien field was combed, It is believed that the program is entitled to credit for certain Indirect benefits looking toward a better understanding and enforcement of taxes in the alien field.
    PRIOR LEGISLATIVE CON81DERATIONS

    This subject Is reflected primarily In H. It. 3138, May 7, 1945; the report. of the Committee on F~oreign Relations concerning t(le prolosed income tax convention between the United States and the Ujilted Kingdom executivee report No. 6, July 3, 1945, 79th Cong., 1st seas.); and in the discussion between Senator MeMahon and Senator Maybank on the subject of alien taxation (vol. 91, Juily 19, 1915, 79th Cong., 1st seas., pp. 7916-7919). The legislative changes considered were those Involving (1) a statutory definition of "residence" and (2) a inodification of the existing statutory definition of engaging in trade or bu.siners. In executive report No. 6 the conclusion Was reached that any statutory definlition of residence would be equally applicable to cases coming within the Pen(ing convention with the United Kingdom, since residence Is not defined in such convention. The conclusion was also reached that although a change in the definition of what constitutes engaging in trade or business might not affect all cases coming

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    120

    IN COMtE AND ESTATE TAX CONVENTIONS

    anthlaI ati upttn iorvt'tl si ltit fi tlite ri'vi-te rulings of. tihe' Treaisuiry ill this regarl hlii, as:i wilt lriejarl, tI sit itt Ifit' silllmt ll haiid Iil Ieen takin t'are'e" . i v i i1 natii r Nie.ahlltl lals glavi. lismiranre Ite elcater Littagi'r that tihl r,,vistd rmillint ot the w aellliniitrailii-e Israich weculh t appliedi ret r tmtlivtly tie t'eewer t hl., ahli,,es wiioe Itt, hbal Ill'it ill tI1i' 'eUit'ed t ,ltihs during tlt- war Iii'ritl: nilld. it Shotuhul I%ahhdt', tha1t sutlh rucliegs Iim-e' hebll ste applietid uld iheir aeletivatliten so relhveh'te ill tile bt e. tl,
    moiitllition.I resullts etftih' reit'ent drive,. It lIeiclhl alseo liet IitietI that., rtr lhe ilbiwVo, slattesIt. ainv itlierlirellittii fitr resid,,mete by tilt' adeieith rat ii'e otr juldicial hranlievs ks vepiuail' aipplicalih' lW eur sevtrail iiue'eimt'-ta. t r,.tlitt . Althatigh it't4ll4ifelrahhblt ati lltentien ta Ice'ritim't r Iteeei gwivIte Olt- ii~htliv,, g ' tIiihe allplraiue'h lit it sthlttlie| or illiitrii'llIit fir it' lrietlene, ffit' ialrtet's' 4 tht-' lh|r,,.it Iiielllor01lneltuil is mtere'ly itc set orlt the flt'.ats rve't'liv ais.'ertailted 1ev th1tilt-ar ,gIwith ri'sjl,' lit iftclathe ' ahiliy t4 intcoml'. parlitiuiarly t'zl1illl gaices. etlrivte-l fr I, woulrce', wilhitut tie' U|'1ilae ,t alt's le- rt'-tlg.', aliens. it it tihieuijlt thaIt cirtrher delvithiullitnl till 'hll, i.e'ftj,. welcIi tbt st.miewha ler,,l'ire' wlitilt the' ehtre "eel t".oeitaeitfe'.s (it I'elgri-,wr have had ailn tqjelerlfnifv ytto lema.,itlr the rec':t-,l fat W de've'htlclt (i ter flt' lierteh'lln.
    Io'aimslIl

    within s t v,-llli, n thc're we're ilnieertitctl (imelnlt'I11atinht faitl lcrs. Il ithOe iiehli CtUrm, o4f dibsrvi ,nii IN.t w,..'n Soillttir Mi Nl.llln anltd Semilittir +laivhtelk tilt telritrer attath'd, ill (llI-44l, 11ha1 all t11Iigh lihe w as first inclinelited ti' fi lh:'t tilte itnllmirliimtN' fit tiht' .llljc w:l. Suc'h la. te1 wairrmntllth eh'tlsidthrittion (f an aillt'iihime' tIo ixi'sliig law Ite defi,it what eionst.ittts "rtesidelet,." ie haIll %ill-ve elelllided thal thl' eh'ft'll wVaS 1i111 tu1lh i111a ,tr of sta|i tiit in llaw atf interler'ttel tiIhie'threof S.el1 4 l

    Ituntitizrn teaxiiayers' cease eassigncd, Ncr York .ire Fidd Dirision,, us .,f Apr. I, 106It
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    I Or (e) nonresimlene', (Pt) Ineope levttitan exemlnn, vt'rlflt from lble sour,. wilte I After v'eriflmtllon a Itel o elenre ll.1l If re'ldelnt, extUniinalil of returns. jete'nt w or. SPonnd uinwier.ily ofe'anel11a l of re'teh'nl i'luirnis or, if hit 11"ur, Itt aeenltof sniall to warrant furtlhe

    Senator LUCAS. I

    Miley which will bo printed in the record.

    have a statement from Mr. Thomas Jefferson

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    INCOME AND ESTATE TAX CONVENTIONS

    121

    (The statement referred to is as follows:)


    lion. Sco~rr l~UCAs. Committee on borein Relations,
    PDAN SENATOR LtCAS:

    (COMMERKCE AND INDUSTRY ASSOCIATION oF Nsw YORK, INC., LNew York 7, N. Y., April 16, 1946.

    I tiled Stales enate, Washington, D. C. This will acknowledge the kind invitation of April 12 from Mr. Emmett O'(rady, assistant clerk of the Conmnittee on Foreign uelalions, to appear before the heftring to be held by your subcommittee on the in favor of the adoption of this convent ion I will appreciate your incorpmrating in the official record the enclosed statement of this association with regard to the tax convention.
    Sicl y THOMAS JErrFEsoN MILKY, Secretary. STATEMENT OF COMMERCE AND INDvSTRT ASSOCIATION Or Nzw YORu, INC., GREAT BRITAIN WITH RESPECT TO TAXES ON INCOMES AND ESTATES RECOMMENDATION The provisions of the pending convention between the United States and the United Kiihgdom of Great Britain anld Northern Ireland conform substantially to the conventions which have been adopted in the past. The Commerce and Industry Association of New York, Inc., believes that double taxation of incomes and estates of residents and corporations in the United States atid the United Kingdonm should be halted. Senate.
    FAVORING ADOPTION OF THE CONVENTION BETWEEN T19 UNITED STATES AND

    Income Tax ('onvention with Great Britain, on Wednesday, April 17. Since we will be unable to have a representative appear to present. our statement

    This association urges adoption of the Tax Convention by the United States
    REASONS

    I)iscriminatory taxation of foreign business and investment is a practice that must be avoided or coirected if we are to enjoy free and uninterrupted ilnternational economic anid financial Intercourse. Business enterprise has always tended to expand beyond national frontiers. ('olnmunications are rapid, raw materials are located in distant lands slid produotion depends upon the maintenance of large foreign markets. It has become vital, therefore, to give particular attention to the taxation problems of these international enterprises. Each country makes its own tax laws, so that difficult and intricate questions arise as to the taxability of businesses
    operating in more than one country

    the basis of cooperative economic relations. There are obvious hardships to individuals caused by double tisxation of their investimeints, and there are equally obvious cases where foreign enterprises may be used as a means of physical evasion or where they contribute less than they take from a national economy. As in most cases where econonlic activity crosses national boundaries, national action can never provide an adequate solution for

    extreme cases they may lead t, unfriendly acts, but becauba they undermine

    constitute a direct cause of international friction. It is highly desirable to lessen the number slid diminish the significance of such disputes, not so much because in

    Disputes over the operations of foreign enterprises or their taxation frequently

    such hardships, evasions, and exploitation. International agreement is called for on just and fair principles to be applied by the governments concerned.

    The worst damage done by double taxation lies in the barriers which it presents to a further development of efficient enterprise.

    likely to hinder international enterprise and checkmate efforts to promote international economic cooperation. The unfettered exercise of unlimited national sovereignty is.as dangerous in the field of taxation as elsewhere. Only by mutual agreement on the application of principles that are fair to all

    It should be emphasized that without such agreements double taxation is

    parties concerned, business and government, debtors and creditors, can it be


    loped to establish mutually advantageous international economic cooperation.

    were concluded.)

    (Whereupon at 1-1:50 o'clock, the public hearings on said matter

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    Senate Committee Report on Basic Convention


    May 10, 1946 Executive Report No. 4 79th Congress, 2d sessionn Senate Foreign Relations Committee

    (2719)

    79M11 CONos _0I

    IdSeasion

    SENATE

    ! EXECUTIVE Rzr'r. Ima No. 4

    CONVENTION WITH GREAT BRITAIN AND NORTHERN IRELAND WITH RESPECT TO TAXES ON INCOME
    10, 1946.-Ordered to be printed

    FRIDAY, MAY

    Mr. LucAs, from the Committee on Foreign Relations, submitted the

    following

    REPORT
    ITo accompany Executive D, Seventy-ninth Congress, first session]

    The Committee on Foreign Relations has had under consideration Executive D Seventy-ninth Congress, first session, a convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16, 1945. This is the second time this convention has been considered by this committee. It was first referred to this committee on April 24, 1945. Thereafter it was made the subject of extended consideration by a subcommittee in the course of which the subcommittee held public hearings on Ray 23, and June 13, 1945. The convention was favorably reported to the full committee under date of June 30, 1945, and the full committee made a favorable report to the Senate on July 3, 1945, Executive Report No. 6, Seventy-ninth Congress, first session. For the information of the Senate there is appended-hereto and made a part of this report the report of the Committee on Foreign Relations referred to. On February 6, 1946, however, the convention with its related Executive E, a convention relating to estate taxes between the United States and the United Kingdom, was recommitted to the committee for further hearings with respect to (a) certain objections and (b) the application of article XIV of the convention to the problem of taxation of so-called refugee aliens present in the United
    rates.

    raised with respect to paragraph (3) of article XI of the convention

    These latter problems have been considered by a subcommittee of the Committee on Foreign Relations and hearings were held before that subcommittee on April 17, 1946, for the purpose of hearing interested persons. The report of the subcommittee on these points is also appended hereto and made a part of this report.
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    CONVENTION WITH RESPECT TO TAXES ON INCOME

    It will be seen from such subcommittee report that the subcom. mittee recommends (a) that the convention be ratified without amend. ment; (b)that the objections taken to the presence in the convention of paragraph (3) of article XI are sound; aud (c) that appropriate steps be- taken, after ratification, looking to striking such paragraph from the convention. The subcommittee is satisfied with assurances given it that the appropriate agencies of the two Governments will cooperala in the drafting of a protocol to the convention designed to accomplis, the purpose in (d), which protocol will, in due course and at the earliest practicable date, be presented to the Senate, the amend. meant thus made to the convention taking effect as at the effective date of the convention itself. The full committee concurs in the views of the subcommittee and hereby report the convention favorably to the Senate without amend. ment and recommend that it advise and consent to its ratification.
    UNITED STATES SENATE,
    COMMITTEE ON FOREIGN RELATIONS

    Waehington, 9. 0.

    REPORT OF SUBCOMMITTEE ON EXECUTIVE D, SEVENTY-NINTH CONGRESS, FIRST SESSION (A CONVENTION BETWEEN THE UNITED STATES AND THE UNITED KINGDOM FOR THE AVOIDANCE OF DOUBLE TAXATION

    OF INCOME, ETC.)

    CMairman, Commiese on Forekn ReWim, Uniftd Stake Senat, WaI-hington, D. C. DEAR SENATOR: The subcommittee appointed to study and report on Executive D, Seventy-ninth Congress, first session (a convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with reap, ct to taxes on incorme signed at Washington on April 16, 1945), reported back to the full committee on June 30 1945, with recommendation (Executive Report No. 6, Seventy-ninti Congress, first ein). Such report is readopted by this subcommittee as its report, subject to the qulifications thereto resulting from the recommittal of Executive D to the Committee on Foreign Relations as set forth below. On February 6, 1946, Executive D was recommitted to the Committee on Foreign Relations for further hearing. The subcommittee appointed to study and report on Executive D as a result of the recommittal hereby report back to the full committee with recommendation.' The issues constituting the basis for recommtta&l of Executive D, as set forth above and considered by your subcommittee, are as follows: ,(a)IeeZ thereof; .and" UtceXI question of striking from the convention paragraph (3) of (b) The application of article XIV to the taxation of So-called refugee aliens present in the United States.. Wlth .respect to (a) your subcommittee believes that there exist substantial grounds for the view which has been urged upon it that

    Hon. ToM CONNALLY,

    (2722)

    CONVENTION WIT USPJ

    :TO TAXES ON INCOME

    paragph (3) of article XI is open to the objection that it ii discrimi. nusatory in that the reciprocal exemption, granted under paragaphs I and 2 of the article by each of the contracting countries with respect to compensation for personal services performed within such. country by ] a resident of the other country, is denied to actor, musicians, athletes, and other public entertainers. While the operation of the credit gwen by one of the Government. for the tax which may be imposed upon such compensation in the case of such individuals by the other Govemment does in fact avoid double taxation, it nevertheless, appears that the paragraph does draw a distinction between persons falling within its scope and persons failing without it, denying, as it does, the exemption to the former clas and allowing it to the latter. In addition, the number of taxpayereconcemed is small and the net balance of revenues resulting from the elimination of the paragraph is actually and relatively small and hence such elimination isnot objectionable from the revenue standpoint of the United States. In any instance in which the United Kingdom imposes a tax on the earnings of an American actor in England, the United States would allow a credit, thus reducing our revenue and offsetting to this extent the United States tax on the British actor. Your subcommittee therefore, while fully mindful of the desirability of prompt and favorable action upon the convention as drawn and in view of the fact that the British Government ratified. the convention many months aso, sught means designed to bring about the elimination of the objectionable paragraph without impeing Senote action on the convention. Assurances have been ven your subcommittee that the appro riato branches of the two Government. are now engaged in the d=aftin; of a protocol to the convention and the taking of necessary steps incident thereto for the elimination of such pars graph. The protocol will, in due course and at the earliest practicable date, be submitted to the Government of the United Kin-dom. the ness to sanction ouch provision, and to the Senate. Such protocol will, when adopted, hive retroactive effect to the date of the con. vention itself. It is, therefore, recommended by your committee in this regard that the convention be ratified as now drafted in the light of the asurances thus given. With respect to (b) it will be seen by referelice to Executive Report No. 6 (p. 4) that at the time such report was made the Bureau of Internal Revenue had under investigation on.a comprehensive scale, the taxable status of refugee aliens in &te United States, .and the appraisal of the scope of the problem and its relation to article XVI of the proposed convention. In the meantime such investigation is in process of being concluded and the result. thereof in the formn of a report are spread upon the hearins beforeeyour committee incident to its reconsideration of the convention. (See p. 116 et seq., hearings.) From a study of such report and discussions biasd thereon, the membern of your committee believe that the mo-called refugee-alien taxation question is a relatively minor problem, and do notrgr. it as having any appreciable bear up action with,.resp6et to te proposed convention. For the n.ormia.ii on of the Committee the report of the Bureau relating to investigation of refugee aliens is attached hereto and made a part of the report of the subcommittee.

    executive branch of which has, after consultation, signifiedt willing

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    CONVENTION WITH RESPECT TO TAXES ON INCOME

    We believe that the terms of the convention are, on the whole, dvantageoup to the United, States and that the convention should be ratified. Respectfully submitted, ScoT W. LUCAS, Acting C'Aaiman~.
    MEMORANDUM CONCIcNINo INVxSTiOATION

    or ALiUN

    TAXATION

    ORIGIN O0 PROBLEM

    Beginnin; about May 1945 there appeared in the press a series of articles ques. toning the sufciency of the existing income-tax law as applied to aliens who were physically present in the United States. The articles referred to "refugee stock traders" or "guest speculators" and the like who as war refugees in the United States were reaping allegedly tax-free profits in this country, especially in their "rsnaotions on domestic stock and commodity exchanges. Some writers sug. gested that such profits might be as high as $800 000,000 on which the minimum tax would be about $200,000 000. In connection with a legislative measure pending before the Ways and Rseans Committee and an Income-tax convention pending befOre the Senate Foreign Relations Committee, consideration was given to possible enabling legislation but action was suspending pending further check concerning the adequacy of existing law.
    APPLICABLE STATUTORY PROVISIONS

    There are outlined below the provisions of existing law, Including tax conven. tions, which are the subject of the present controversy. For Federal income-tax purposes aliens are classified Into resident and non. aWldent aliens and the latter are subclassified as between those (a) not engaged in trade ov, business In the United States and (b)those engaged in trade or business th.rein. An alien resident in the United States Is,like the citizen of the United States, taxed on his Income from all sources, including his capital transactions. However in the operation of the credit provisions contained in section 181 of the Internal Revenue Code he may be denied credits for foreign taxes paid which, aM granted to the citizen. The nonresident alien not engaged In trade or business in the United States is tiird on all his fixed or determinable annual or periodical income from sources *IthWn the United States, such as dividends, Interest, rents, and royalties, but is exeMpt from tax on any gains from his transactions in stocks, securities, or com. mnodities through a United States resident broker, commisIon agent, or custodian. The exemption thus granted to aliens In this category and on this class of transm actions takes account, inter alia, of the rate of tax (imposed on a gross basis) on ruch periodical Items of Income and such administrative questions as the imprao. liability of determining and enforcing a tax against such aliens Incident to their transactions clearing through our domestic exchanges. House Report No. 2475 and Senate Report No. 2195 on the revenue bill of 1936 recognize the collection difficulties Involved in this type of case. The system of levying a gros tax on items of fixed and periodical income, with ancompanying provisions for collection at source, has proven very successful since its adoption. In 1938, not only from an administrative but also from a revenue point of view. The tax collecd in this class of cases In 1943, the latest year for which complete statistics are available, was about $50,000,000 which exceeds by many times collections from such class of taxpayers under previous principles of taxation. Under existing statutory provisions the nonresident alien is not subject to tax on c00plta! gains merely by reason of his transactions in stocks, securities, or coanmodlties through a resident broker, commission agent or custodian, but he is subject to tax on such gains If he is otherwise engaged In trade or business in the Unitd States and most any sort of activity inthis respect, including the per. iiutnitmce of personal services within the United States at any time during the tWxawle year, constitutes engaging in trade or business. However, It should be olberved that with respect to countries with which we have Income-tax conven-

    (2724)

    CONVENTION WITH IESPZCTY'TO TAXES ON INCOMi

    tions (Canada, France, and Sweden), this particular phase of alien taxation Is modified, to provide that residents of those countries (other than United States citizens) are not subject to tax on capital gaias unless they have a permanent establishment in the United States. This forms a 'part of the permanent establishment base used elsewhere in the conventions, and the base so employed with those countries has been made a part of the pending convention with the United Kingdom. The adoption of the permanent establishment principle has been found in the course of the investigation referred to below to have little effect on cases involving nationals of Canada, France, Sweden, or the United Kingdom. Thus out of 12 cases of British subjects involving potential deficiencies of about $60,000 none is affected by the permanent establishment principle. Also in the case of eight French citizens involving proposed deficiencies of about $500,000 the outcome of only one deficiency of about $250 seems to be dependent on whether the Individual had a permanent establishment in the United States. No cases of Canadian or Swpdish nationals involving this principle have been discovered.
    8CoPS OF IMVIRTIGATrQN

    The investigation referred to above as to the adequacy of existing law was opened by the issuance of Commissioner's Mimeograph No. 5883, dated June 27, 194M, for the information, of the public and Bureau personnel and contained a careful analysis of the operation of existing law. The Commissioner accompanied such mimeograph by a press release calling attention to the narrow sco of the exemption granted to nonresident aliens deriving. income from United Cates sources and directing that close scrutiny be made of all claims for exemption. Noncitizens were also asked to consult with appropriate Bureau officials in order to have their tax status clarified and theft attention was called to the provisions of existing law which require departing aliens to obtain tax clearance before departure. As a part of the general assistance and investigative plan, intended to assure fair and proper treatment under existing law and to provide data which might afford a basis for legislative or administrative improvements, a questionnaire (Form 1044) was prepared and issued in order to elicit all pertinent facts bearing on the question of proper classification of noncitizens for taxation purposes. The form did not ask merely that the noncitizen claiming exemption state certain conclusions of law or fact respecting his status but was of searching character intended to bring out all his activities from which the Bureau could form its own conclusions. Although the investigation was of comprehensive scope and one of continuing application, activities were centered largely on certain groups in which the Bureau had the most immediate interest. Thus, there were first brought under investi. gation those aliens who brought with them or otherwise transferred property in considerable amounts into the United States. With the cooperation of officials of the New York Stock and Commodity Exchanges, Bureau agents examined a&l account. in such exchange houses of the above and any other groups who had engaged in transactions on those exchanges. In making such check there were set aside all accounts of noncitizens who were subelassified as between resident and nonresident aliens. Altogether in excess of 700,000 accounts were examined and from these about 15,000 accounts of noncitizens were located. Similarly, a check was made of all custody, safekeeping, and Investment agency accounts in the banks of the New York area and from this check a list of 5,000 noncitizen account. was compiled. Cases were also located through standard Bureau pro. cedure and a good many names of aliens sent in by the public or mentioned in the press were included in the Bureau's investigation. As a rt of the plan it was necessary to eliminate duplications Incident to one party having an account with more than one brokerage or financial house and also to transfer a good many cases from one district to another because of changes in addresses. Upon making such adjustments there remained for investigation in the New York area alone about 12,200 cases and for the country as a whole about 156000 cases. Satisfactory methods of cooperation having been perfected between the Bureau and the New York brokerage and banking institutions, the Bureau field offloes were asked to enter Into similar arrangements with such Institutions In their respective territories. A similar spirit of cooperation was found to exist in such territories- in fact the program was greatly facilitated in the New York and other areas by the publicity and public interest which it attracted.

    78095 0-42--vol. 2-478

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    CONVENTION WITH RESPECT TO TAXES ON INCOME

    RESULT O0INVESTIGATION The investigation to date has uncovered 79 cases where dispute exits as to whether the noncitizen is a nonresident or resident of the United States or whether he was engaged In trade or business within the United States. The amount of taxes proposed by the Bureau In such cases is $0,953,253attributable to a variety of causes which are difficult to summarize. However, the two largest deficienciw amounting to about $1,500,000 and $500,000 respectively, are proposed against former citizens who, after renouncing their citizenship, have been in the United I States since the early days of the war. The deficiencies in these cases may be attributed almost entirely to causes other than capital transactions; 5 of the 70 [ cases account for about $2 900 000 of the total proposed deficiencies. Out of the 79 cases 43 involving $X,576,339in proposed deficiencies, are situated in the New York area. These cases were located as the result of processing about 10,500 cases. Of the 10,500 aliens investigated about 80 percent were found to U have filed returns on the basis of being resident in the United States or engaged In trade or business therein, thus conceding that they were subject to tax on their income from capital transactions in the United States. About 15 percent of the group of 10,500 cases were found not to merit further investigation because of the small amounts involved. About 3 percent of the remaining 5 percent are classified principally as resident aliens not required to file returns because their income was less than allowable exemptions. The balance is composed of nonresident aliens not engaged In business in the United States who wiere not required to file returns because their taxes had been fully satisfied at source and nonresident aliens who had filed returns reporting their taxes which had not been fully satisfied at source. Only a few of such nonresident were found to have been in the United States during the taxable periods involved and their stays here were of very limited duration. Of the 12,200 potential noncitizen taxpayers in the New York area about 800 have not yet been contacted and about 900 cases am still in process of audit. After giving special attention for the past several months to cases where there was delayed response to Bureau letters, it has been found that such delay was In nearly all instances due to ordinary causes, such as changes in address, so it is not anticipated that the group of 800 cases will be productive of substantial deficiencies; in fact, based on past experience, it Is thought that practically all of these cases will be dropped because of.,the small amounts involved. Moreover, considering that all cases where contacts had been made were examined in selecting the 43 cases, representing those where deficiencies were most likely to develop, it is not believed that substantial deficiencies are likely to be uncovered in the final audit of the group of 900 cases. Altogether it seems that the figure $3,953,253 is not likely to be increased when the 79 case are finally adjusted. It is known that adjustments will be upward in some cases when the years 1944 and 1945 are considered but it is also known that in computing tentative taxes making up the $3,953,p253 figure gross income has been used In many instances, pending ascertainment of the cost of securities and other deductible items and that, pending further investigation as to the time the capital assets were held tax has been computed on the basis of short-term gains. It also seems unlikely that the Government will be successful in assertIng its claim of residence or engaged in business in all cases. However, even if the figure $3,953,253 were doubled to take care of the above and other contingencies, such as the discovery of new cases, it would still be quite small from a revenue point of view considering the amount of effort which has been put into the project. In this general connection, the current additional taxes being asserted as the result of audits of other cases and other investigative projects of the Bureau are now exceeding $1,000,000,000 per year.

    The claims made in the press and financial circles that aliens present in the
    United States were engaged in business transactions on substantial basis in this country, especially on our exchanges, seem to have been well founded but there seems to be little justification for the charge that they have attempted to avoid taxation under the provisions of existing law. On the contrary the studies inc-h oate that all except a comparatively small number of the aliens having any potential liability have heretofore filed tax returns on the basis of being resident

    SUMMARYr OP INISTIGATION

    (2726),

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    in the United States or bngaged in trade or business therein, thereby admitting that they are subject to tax on their capital transactions in this country. As with respect to cities, errors may be found upon auelt of their returns but it is important to note that they have not tried to hide or t0 avoid their responsibilitie under our tax laws. Moreover, a test check made of the more important returns filed indicates that the percentage of accuracy anc, error is comparable to that found in the returns of citizens. Even in the 79 case many of the aliens hWd filed returns on a nonresident basis. However aside from the immediate results of the investigation, reflected pri. manly in the 79 cases, there are certain over-all considerations which should be mentioned. Although such immediate results have been quite negligible from a revenue point of view, the matter of alien taxation becomes active every few years and it is believed that the statistics gathered will be found to be of substantial benefit for future legislative and administrative purposes. Also, upon considering the publicity given to the investigation and the thoroughness with which the alien field was combed, it is believed that the program Is entitled to credit for certain, indirect benefits looking toward a better understanding and enforcement of taxes in the alien field.
    PRIOR LEGISLATIVE CONSIDERATIONS

    This subject is reflected primarily in H. R. 3138 May 7, 1945; the report of the Committee on Forel n Relations concerning the proposed Income-tax convention between the United States and the United Kingdom (executive report No. 6,July 3, 1945, 79th Cong., 1st sess.); and in the discussion between Senator McMahon and Senator Maybank on the subject of alien taxation (vol. 91, July 19, 1946, 79th Cong., 1st sess., pp. 7916-7910). The legislative changes consid. ered were those Involving (1) a statutory definition of "residence" and (2) a modification of the existing statutory definition of engaging in trade or business. Inexecutive report No. 6 the conclusion was reached that a~ny statutory definition of residence would be equally applicable to cases coming within the pending con. vention with the United Kingdom, since residence is not defined in such convention. The conclusion was also reached that although a change in the definition of what constitutes engaging in trade or business might not affect all cases coming within such convention there were important compensating factors. In the course of discussion between Senator McMahon and Senator Maybank the former stated, in effect, that although he was first inclined to feel that the Importance of the subject was such as to warrant the consideration of an amendment to existing law to define what constitutes "residence" he had since concluded that the defect was not so much a matter of statutory law as of interpretation thereof and that upon careful study of the revised rulings of the Treasury in this regard he was not prepared to say that the situation had not been taken care of. Senator MeMahon also gave assurances to Senator Langer that the revised rulings of the administrative branch would be applied retroactively to cover those aliens who had been in the United States during the war period; and, it should be added that such rulings have been so applied and their application so reflected in the abovementioned results of the recent drive. It should also be noted that, for the reasons above stated, any interpretation of residence by the administrative or judicial branches is equally aipplicable to our several income-tax treaties. Although considerable attention has heretofore been given to the legislative approach to a solution or improvement of the problem, the purpose of the present memorandum is merely to set forth the facts recently ascertained by the Bureau with respect to the taxability of income particularly capital gains, derived from sources within the United States by refugee aliens. It is thought that further development of the subject would be somewhat premature until the interested committees of Congress have had an opportunity to consider the recent factual development of the problem.

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    CONVENTION WITH RESPECT TO TAXES ON INCOME

    Nonditise, taxpayers' ae#e assiged, New York area jAlJ divisions, as of Apr. 16,
    1946
    Second New York gepwr Btooklyn York
    I III

    --- I
    Total letters mailed ...................................... Replies received I............................ No reply ...................................................... Replies receIved ................................................ Transferred .................................................... Replies to be accounted for .............................. Replies to be accounted for ..................................... Cases in press ................................................ Investigation completed .................................. Result to date: Closed, no change I......................................... Closed, surveyI ............................................ Total closed .................................. Changes made or proposed ......................... Total .................................................... Letters mailed out .................................................. Cases transferred ..................................................... 1,481 1,414 1,414 18

    Total

    8,517
    81208

    2.85
    Ue
    2,658 166 891,9

    47

    309

    381
    12,290 a

    820W 218

    1,396
    1,398 231 1,1067 1l7 813

    7,990
    7,990 814 7,378 682 6,657

    Z492
    Z,492 62 2,430 2,127 271

    11,910
    11,810 907 10, 973 3,40 7,441

    1,130 37
    1,187

    7,339 37
    7,376

    Z,398 32
    2,430

    10,87
    12,6x 40 12,23, 35 11,880 90 10.,7O 10, 807

    1ol

    Cases retained .......................................................................... No reply...................................................................................... Cases to be investigated ............................................................. Cases in process ............................................................................. Ca" procssed ........................................................................... Closed, no ebanw ...............................................................................

    Changed ues ......................... e................................................... 16 aOr (a) nonresidence, (b)hicome less than exemption, verified from reliable source. I After verification as to nonresident status or, Ifresident examination of returns. $ Found unworthy of examination of resident returns or, Ifno return, account too small to warrant further InvestigAtion.

    Executive Report No. 6 Seventy-ninth Congress first session, sub. mitted by Mr. _Lucas on Tuesday, July 3, 194f,follows: The Senate Committee on Foreign Relations, having had under consideration Executive D Seventy-ninth Congress, first session, a convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16, 1945, hereby report the same favorably to the Senate without amendment and recommend that it advise and consent to its ratification. For the information of the Senate, there is appended hereto, and made a part of tbis report, the report of the subcommittee under date of June 30, 1945. There is also appended for the information of the Senate the message from the President, transmitting the convention and the accompanying report of the Secretary of State.

    (2728)

    CONVENTION WITH RESPECT TO TAXES ON INCOME UNITED STATES SENATE,

    COMMITTEE ON FOREIGN RELATIONS,

    WaAhington, D. C., June 80, 1946.

    REPORT OF SUBCOMMITTEE ON EXECUTIVE D, SEVENTY-NINTH CONGRESS, FIRST SESSION (A CONVENTION BETWEEN THE UNITED STATES AND THE UNITED KINGDOM FOR THE AVOIDANCE OF DOUBLE

    TAXATION OF INCOME, ETC.)

    income signed at Washington on April 16, 1945), hereby report back

    Hon. TOM CONNALLY, Chairman, Committee on Foreign Relations, United Statw8 Senate, Wasihington, D. 0. DEAR SENATOR: The subcommittee appointed to study and report on Executive D, Seventy-ninth Congress, first session (a convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on

    to the full committee with a recommendation. Incident to your subcommittee's consideration of the proposed convention, four certain questions have attracted its special atten. tion, namely: (1) The desirability of transmitting to the Senate for its advice and consent. any contemplated extension of the proposed convention to a British colony or to a United States possession, as the case may be; (2) The relation of the provisions of the convention to our domestic principles of taxation of capital gains .(primarily stocks, securities, and commodities) as applied to the alien resident in the United States and the nonresident alien who is engaged in trade or business in the United States; (3) Whether the proposed convention should be regarded as a precedent for future conventions with other countries; (4) The desirability of affording to business and its representatives an opportunity to present to the executive departments concerned, preliminary to any tax conventions discussions with
    such foreign country.

    any foreign country, taxation problems existing with respect to

    colony, overseas territory, or other areas over which one of the contracting countries exercises authority has been discussed with both the State and Treasury Departments. As a result, the committee is now in receipt of the following letter from the Secretary of State in which it is set forth that the State Department will recommend to the President that any such formal declaration under article XXII by either country will be transmitted to the Senate for its advice and consent before admitting such colony or such possession within the framework of the convention. Your subcommittee views such arrangement as entirely satisfactory and as laying the basis for working out the problem satisfactorily as it arises.

    The problem in (1) relating to affording an opportunity of review by the Senate of contemplated adherence to the convention of any

    (2729)

    10
    Hon. TOM

    CONVENTION WITH RESPECT TO TAXES ON INCOME


    CONNALLY, JUNE 27,

    1945.

    of fiscal evasion with respect to taxes on income, signed at Washington on April 16 1945 (Senate Executive D, 79th Cong., 1st sess.). during those discussions a question was presented respecting the procedure to be followed by this Government in accepting or giving a notification of extension of the convention, under the provisions of article XXII thereof, to colonies, overseas territories, or other areas over which one of the contracting partim exercises authority. I am glad to Inform you that in connection with any such notification of extension of the convention, the Department of State will recom. mend to the President that the matter be submitted to the Senate for Its advice and consent before any notification of extension is accepted or given on behalf
    of the United States.

    Chairman, Committee on Foreion Relations, United States Senate, Washington, D. C. My DEAR SENATOR CONNALLY: Reference is made to discussions before a sub. committee of the Committee on Foreign Relations regarding the convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention

    Sincerely yours,

    C. GnRw, Acting secretary.

    With respect to the taxation of capital gains where the alien found to be resident in the United States he is under existing law taxed on his income from all sources, including his capital gains but where he is found to be a mere transient, or sojourner, or for otler reasons not resident in the United States, he is not taxable on his capital transactions unless he is engaged in trade or business in the United States. The convention does not disturb the existing residence principle but does contain some modification of taxation on the basis of being engaged in trade or business, in that the test prescribed in the convention is whether the alien has a pernant establishment (branch, agency or other fixed place of business) in the United States as di& tinguished from being engaged in trade or business therein. Although an alien having a permanent establishment in the United States would in nearly all cases be engaged in business therein, certain cases could arise where he could engage in trade or business without having a permanent establishment and in such instances he would be exempt from tax on capital gains. Respecting this variation, however, there is an important compensating factor, in that it is not practicable to trace, in the absence of the convention, transactions on the United States exchanges carried on through British brokers by a British resident who under existing law is classed as being engage in business in the United States. Under the convention however, the means have been provided, through exchange of tax information, to ascertain the British resident having a permanent establishment in the United States and to locate and tax his transactions on the United States exchanges even though carried on from sources in Britain. Thus there has been substituted for a theoretical and ineffective basis of taxation a more realistic and effective one. The effect of the permanent establishment principle on British methods of taxation on the securities and commodities exchanges was also considered. Comparisons between the United States and British systems respecting taxation of such transactions become somewhat involved because of the divergent taxation concepts of the two countries but the following more important principles are noted: A United States citizen, regardless of his place of residence or domicile, can deal on the British stock or security exchanges free from British tax unless his transactions ate under British law regarded as trading

    (2730)

    I1I I profits, and the permanent establishment provision of the convention


    CONVENTION WITH RESPECT TO TAXES ON INCOME

    does not modify this principle. The United. States law as modified by the permanent establishment principle is less liberal, in that the British resident upon having a permanent establishment in the United States is 'taxable on profits from his transactions on the exchanges. For example, the United States lawyer or engineer having a branch office (permanent establishment) in London could deal extensively on the London exchanges without being subject to British tax on his resulting profits while the British lawyer or engineer with a branch office in the United States would be subject to United States tax on profits from exchange transactions in the United States. Thus, in such instances the United States taxes its citizen on his profits on the British exchanges and the British resident having an office or other form of permanent establishment in the United States on his profits on United States exchanges. Since Britain in such instances imposes no tax the United States tax is not reduced because there is no credit for the nonexistent British tax. It is again noted that the convention makes provisions for the exchange of information so that the United States is in a better position to follow the transactions of its citizens and residents on the British markets and, where pertinent, of the transactions of British residents on the United States markets. There are other instances, however, where inpractice the permanent. establishment concept adopted inthe convention may overlap. Thus, ifa United States bank with a branch in London should sell securities on the London exchange it would be subject to British tax since it would have a permanent establishment in Britain and its sales of securities would be regarded as part of the trading profits of the bank. On the converse side, the United States would also tax profits of a British bank having a branch in the United States. It is also noted that in the first illustration the United States tax would be reduced by a credit for the British tax under the existing United States law and the convention and in the second illustration the British tax would be reduced by the United States tax under the convention which modifies British law in this regard. In considering this general subject, the subcommittee is aware of the fact that the Bureau of Internal Revenue has under active investigation the taxation of capital transactions of refugee aliens in the united States and the possibility of legislation if found necessary, to supplement such program. As above indicated, there may be certain cases falling in between the test of being engaged in trade or business and having a permanent establishment where the convention is more liberal than existing law, but there are other compensating factors and no such technical conflict exists where the test of taxation is residence. Moreover, the same provisions found in the British convention are now in effect under the conventions with Canada, Sweden, and France. It is believed that satisfactory reconciliation has been made between technical principles of the two systems, and that the adjustments agreed upon are, on the whole, advantageous to the United States, especially when the provisions relating to exchange of tax information are considered. With respect to the third point, your subcommittee has been Oven to understand that neither this convention nor any of our exiting conventions are regarded by the executive branches concerned as precedents for future tax conventions. The conditions encountered (2781)

    With respect to (4) it is the understanding of your subcommittee that the executive departments concerned have In the past encouraged American business interests to present their views relating to taxation prblemse with foreign countries and that, wherever practicable, such policy will in the future bo expanded. It is understood, however that many foreign countries are disinclined to publicize the adven of their neotiatlons with other countries. To the extent that such and other like considerations will penmt, your subcommittee i atis. fled that every effort will be made to invite expression of views by domestic interests involved prior to undertaking future tax negotis. tions. In this regard, the executive departments concerned are anxious in the interests of tax conventions effecting their purpose, of being fully informed of all taxation problems existing between the UnitedStates and any foreign country with which it proposes entering upon negotiations. We have had the benefit of testimony by the Chief of Staff, Joint Committee on Internal Revenue Taxation and a representative of the Treasury Department as well as a technical memorandum sub. mitted by. the Treasury Department, all of which have received careful study believe that the terms of the convention are on the whole ad. s e vantageous to the United States, and that the convention should be ratified. We further believe, however, that in the interest of promoting closer coordination between future income-tax conventions and taxa. tion measures or studies, which may be pending or under consideration in Congress, closer cooperation be established in this regard between the appropriate executive and legislative branches. For the information of the committee, the memorandum referred to is attached hereto and made a part of the report of the subcommittee. Respectfully submitted. ALBEN W. BARKLEY. CARL A. HATCH.
    SCOTT W. LUCAS. ROBERT M. LA FOLLETTE, Jr. WALLACE H. WHITE, Jr. TECHNICAL MEMORANDUM OP THE TREASURY DEPARTMENT ON THE CONVENTION

    country.

    between the respective countries and thus any specific provision found in one convention may not be found, from the United Stat. standpoint, to be acceptable in a convention with another country, A concession made to a particular country by the United States in a tax convention with such country may not be made in the case of another country in the absence of compensating concessions by such

    REPEM TO TAXES= ON INeOM, CONVENTION in negotiations with foreign countries are found to vay widely v,

    12

    There is transmitted herewitA for your consideration with recommendation that it be approved and transmitted in due course to the
    Department of State the draft of a proposed income-tax convention

    between the United States and the United Kingdom. Such convention had its inception in discussions at London being ing in April 1944, which were resumed at Washington during November, and
    (2782)

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    18

    represents the culmination of developments since prior exploratory discussions in London in 1937. The proposed convention represents the first instance in which the United Kingdom is party to a convention of comprehensive scope corresponding insubject matter substantiaUy to the existing bilateral conventions between the United States on the one hand an d Sweden, and France on the other.
    ARTICLE I

    This article enumerates the taxes with which the convention is concerned in general. Where any given article is inapplicable to one or more of such taxes the article so states. The article contains the usual provisions that the convention will apply to other taxes of substantially similar character imposed by either contracting party or by a territory concerned subsequent to the date of signature of the convention.
    ARTICLE II

    TJiis article defines various terms used in the convention. Clauses (a), (b), and (c) are routine and appear to require no specific con. sideration. Clauses (g) and (h) are of vital importance and constitute the key to the affliction of articles III, VI, VII, VIII, IX, XI XII, and XIV. Thus it will be observed that the term "resident of the United Kingdom" excludes a citizen of the United States, a resident of the United States and a United States domestic corpora. tion. Hence, a citizen of the United States and a United States domestic corporation even though actually resident in the United Kingdom remain subject to United States tax upon dividends, interest rents, royalties, and business income as though the convention haa not come into effect. If, however, a corporation organized, for example under the laws of France is managed and controlled in the United kingdom, such corporation constitutes a resident of the United Kingdom and is entitled to the exemptions or partial exemptions provided in the cited articles. Thus such corporation selling its manufactured goods in the United States through a broker or commission agent in the United States and having no branch or other installation in the United States will be exempt from United States tax upon its business income from United States sources. On the other hand a having organized the United Kingdom but corporation control and under the laws offor example, its management in, Indi, is not entitled to such exemption. However article V relating to shipping aqd aircraft profits should be contrasted in this regard. On the other fiand a resident of the United States (whether or not a Unitedin the United Kingdom is entitled to exemption from United resident States citizen) and a United States domestic corporation not Kingdom tax as to its business income if it sells its products on the English market through a broker or commission agent in the United Kingdom. These exemptions will be more fully treated in the various articles upon which article II and the definitions therein found have. as already pointed out, a most important bearing. The definitions of "United Kingdom enterprise" and "United States enterprise" tie into "residents of the United Kingdom" and "residents of the United States," respectively.

    (2788)

    14

    GONVUNTION WITH 31M

    TO TAX= ON1 INOOMB

    The definition of "permanent establishment" found in clause () corresponds to, and is substantially Identical with, that contained m clause (f) of the protocol to the Canadian convention and to pars. graph (1) of the protocol to the existing Swedish convention. Paragraph (2) of the article, when read in association with articles VI,-VIT, VIII, IX, and XIV, has the effect as will be more fully dealt with under those respective articles, of rendermig applicable the exempt. tions there provided in the case of individuals performing personal services within the United States or the United Kingdom, as the case may be, even though such individuals are engaged in trade or busineu therein by reason of the performance of such services.
    ARTICLE III

    This article correspond to article I of the Canadian to article II of the Swedith, and to article 3 of the existing FrencA, conventioD and follows the principle of"permanent establish .nent" in the field of business income. Under such principle, the United States will, upon a reciprocal basis, subject to such taxation the business income of a United Kingdom enterprise only if such enterprise has a permanent establishment in the United States. The article has application only to business income, or "industrial and commercial" profits as it is designated in the convention. The article has no application for ex. ample, to investment income or income arising from the rendition of personal services, which items are in terms exempt from tax in whole or in part in accordance with separate articles of the convention and, in the absence of such rules with respect to an particular item by the Internal Revenue Code. Clauses (g), (.), (i), (I), (k), and (1) of article 11 should be read in association with article III since such clauses define "resident of the United States," "resident o; the United Kingdom," "enterprise of one of the contracting States," and "permanent establishment." The effect of these definitions upon taxa. tion by the United States or by the United Kingdom is traced under article II in the consideration of the definitions. tIt will be observed from a reading of paragraph (2) of article III that the United Kingdom reserves from the application of the article those provisions of her excess-profits tax ani her nationWl defense contribution under which theprofits of the United States subsidiary corporation are consolidated with those of its United Kingdom parent corporation and could not see fit to waive her taxes of the subsidiary profits even though the subsidiary had no branch or other installation in theUnited Kingom (see Finance Act of 1940 fifth schedule, pt. I). The principles of taxation found in article I[ thus are reco d and followed in the' three existing conventions to whiph the United States is a party and are substanti0lly in harmony with existing United States law. For a more detailed treatment of such, see Executive Report No. 18 (pp. 6 and 7) relating to the Swedish convention, a copy of which report is attached hereto.
    ARTICLE IV

    This article corresponds to article IV (1) (a) of the Canadian, to article III of the Swedish, and to article 5 of the French, convention. It recognize the principle found in section 45 of the Inter.al Revenue Code to adjust the accounts as between interlocking businesses and supplements paragraph (3) of article III. The article authorizes the
    (07PAI

    VON.VUNroN WrTE, RUUNOM

    TO TAMU Off JWOM3

    15

    allocation of.business income as between the two countries to the end that a reasonable tax basiswill be allocated to each. From the United nn t s yov ol ectio nt o b e w e t is~ States .T there r 7,25 of side emur y will be framed regulations corresponding' to section 7.25of Treasury Decision 5206, approved December 31, 1942, being regulations under the tax convention between the Umitecb States andt Cinada.
    ARTIOLM V

    This article provides for the reciprocal exemption of earning. derived from the operation of ships and aircraft. It has application only to business income from such activities and has no application to divi. dends which might be paid by a corporation engaged in whole or in part in maritime or aircraft operations. Insofar as the article concerns maritime operations It conforms to the reciprocal exemption which has existed for more then 20 years between the two countries and is based upon exchange of notes dated at various times from 1921 to 1924. Insofar as it concerns aircraft operations, it represents an objective, the accomplishment of which has been frequently desired by the Department and which has been embodied in all other income-tax conventions to which the United States is a party. It will be observed that the article applies to corporations organized under the laws of the United Kingdom and to corporations organized under the laws of the United States regardless of the place where such corporations are managed or controlled. This principle was agreed upon in order to" adhere to the provisions underlying the existing reciprocal exemptions of shipping profits.
    ARTICLE VI

    Under this article the nonresident alien residing in the United Kingdom, the foreign ' corporation controlled and managed in the United Kingdom, and the trust or partnership in the United Kingdom will be subject to United States tax at the fiat rate of 15 percent upon dividends from sources within the United States if such individual, corporation, or entity is not engaged in trade or business in the United States at any time during the year in which such divi. dend is paid. When read in association with article II (2) it will be ween that such alien, even though he performs personal services within the United States in such taxable year, is entitled to the' reduced rate of tax. Thus assuming that A, a British subject residing in the United Kingaom, performs personal services in the United States for a period o 4 months in 1945 as a consulting e9nneer employed by a United States domestic corporation and is paid compensation therefor of $10,000. A holds 100 shares of X company stock on which he received in 1945 dividends amounting to $900. Such dividends are subject to tax at the rate of 15 percent. His earned income is subject to tax under sections I I and 12 after allow. ance of the appropriate deductions and exemptions. For the purposes of such tax he is engaged in trade or business within the United states but is not so engaged for the purposes of the application of the rate of 15 percent within respect to his dividends. The United Kingdom does not impose its "standard" tax upon divideuds but does impose surtax upon such dividends if the over-all income exceeds 2,000 or about $8,000. Paragraph 2 of article VI exempts from United Kingdom surtax dividendi derived from United

    (2785)

    16

    CONVENTION WITH USPECr TO TAXES ON INCOME

    Kingdom sources by residents of the United States. A citizen of the United States residing in Brazil is not, however, entitled to such exemp. tion. Likewise reduction in the rate of United States tax to 15 per. cent applies only to residents of the United Kingdom and does not apply to British subjects residing outside the United Kingdom. athe proviso found in paragraph (1)corresponds to and is applied subject to the same conditions substantially as is that found in article XI-2 of the Canadian convention. The exchange of information at the source which naturally flows from reduction in the rate of tax or exemption from tax will be dealt with under article IX below.
    ARTICLE VII

    This article exempts upon a reciprocal basis interest flowing from United States sources to residents of the United Kingdom. The individuals in the United Kingdom entitled to such exemption are identical as to classification with those entitled to the percent rate in the case of dividends, namely, nonresident aliens resident in the United Kingdom and nonresident in the United States- and foreign corporations controlled or managed in the United Kingdom.. It will be observed that the article does not, in terms, refer to interest on United States obligations nor to United Kingdom Government securi. ties, but merely refers to interest from sources within the respective countries. Interest on United States Government securities is, of course, interest from sources within the United States (see. 119 (a) (1), Internal Revenue Code). The article contains an exception to the general rule, the effect of which exception is to deny exemption in the case of interest paid by a subsidiary corporation in one country to its parent corporation in the other. The exception has the desirable effect of eliminating the possibility of the parent taking the profits of the subsidiary in the nominal form of interest and thus avoiding tax on the subsidiary by the country in which it is situated.
    ARTICLE VWII

    This article exempts upon a reciprocal basis royalties and the like from United States sources flowing to the United Kingdom. The classification of individuals and corporations entitled to such exemption is identical with the classification of those persons entitled to the reduced rate of tax on dividends and to the exemption with respect to interest. The inclusion of film rentals within the scope of the term "royalties" is solely for the purposes of article VIII and does not disturb the essential nature of film rentals. Under the British practice neither yearly interest nor royalties can be taken as deductions by the payor of such items in the computation of the payor's United Kingdom tax. Thus the hayor pays the tax in the instance to the Crown. However, when the interest or the royalty is disbursed the tax thus paid to the Crown is withheld from the grosst amount of the interest or the royalty at the current rates of United Kingdom tax. Thus, if the gross amount of the receipt is $1,000 there is actually paid to the holder of the patent only $500, the remaimng $500 being withheld by the payor to reimburse him for the tax previously paid to the Crown. In keeping with the principle of Bid"L v. OomAiesionr, supra, the recipient includes 8500 in his gross income for United Statqs tax purposes and, of course,

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    17

    no credit is allowed with respect to the $500 tax withheld at the source. IringAir Chute Co., Inc. v. Commissioner (1 T. C. 880, ftffirmed 1/43 Fed. 2d (d) 266 certiorari denied). In the proposed convention no withholding will take place in the United Kingdom hence there will be included ip gross income under the assumed facts the amount of $1,000. No credits will be involved since there is no United Kingdom tax imposed upon such item. Articles VII and VIII, therefore, while producing a decrease in the revenue through exemption from tax on items of interest and royalties going to a resident of the United Kingdom also tend to increase the revenue by reason of exemption from United Kingdom t-x on such items flowing to the United States from the United Kingdom.
    ARTICLE IX

    Mineral royalties and real property rentals are subject to United Kingdom tax at the standard rate of 50 percent, not however upon the gross amount thereof but upon what is substantially net income from that source. Thus the taxpayer is subject to tax upon his net rentals arising from real property and shown in schedule A of the British Income Tax Act. The reduction in our rate from 30 to 15 percent upon the gross amount of the rentals is intended to constitute a tax burden corresponding as nearly as may be to the British rate of 80 percent upon the net rentals. Under the article, however, the nonresident alien resident in the United Kingdom and the foreign corporation controlled in the United Kingdom may elect as to. any taxable year to be subject to United States tax as though he or it were engaged in trade or business within the United States in such taxable year, thus permitting deductions and credits against the gross rentals. Paragraph 2 exempts from the United Kingdom surtax the items forming the subject matter of the article.
    ARTICLE X

    This article, corresponding in subject matter to article VI of the Canadian, to article X of the Swedish, and to article 8 of the French convention deals with the exemption from tax imposed by one of the contracting parties of salaries and the like paid by the other contracting party to individuals other than citizens of the former state. Thus "the article is in substantial harmony with section 116 of the Internal Revenue Code. The article has, however a feature not found in any other convention to which the United States is a party. Under United Kingdom law a United States citizen (female) marrying a British subjectbecomes ipso facto a British subject. As such, she is subject to tax by the United Kingdom if resident therein as are other British subjects and hence is subject to tax on income from soucnes in the United Ki.ngdom. Thus, if such United States citizen while retaining her United States citizenship is employed in the American Embassy in London, the United Kingdom has heretofore asserted its right to tax such individual on her compensation for such services, but under the proposed convention the United Kingdom exempts such individual from United Kingdom tax upon her salary and the like as an employee of the United States. Reciprocally, the United States will not subject to its tax salaries and other compensation for services rendered the United Kingdom by a United States citizen who -is also a British subject under the circumstances set forth above.

    (2787)

    18

    CONVENTION WITH RESPECT TO TAXES ON INCOME ARTICLE XI

    This article corresponds to article VII of the Canadian and to article XI of the Swedish convention. The article provides upon a reciprocal basis for the exemption from United States tax of a resi. dent of the United Kingdom upon his earned income from United " States sources if(a) he is present in the United States for a period or periods aggegating not more than 183 days during tbe taxable year; and (b) such income is paid by a United Kingdom employer. No limitation is placed upon the amount of compensation for such services. It has no application to the remuneration of public enter. tainers such as actors, musicians, and athletes.
    ARTICLE XII

    This article exempts upon a reciprocal basis nongovernmental pensions and life annuities derived from sources within one country V a resident of the other. Through the definition "resident of the nited Kingdom" it leaves untouched taxation of United States citizens. It covers only a minute segment of income.
    ARTICLE XIII

    In this article the United Kingdom adopts, with respect to United States income and excess-profits taxes, the system of credit for foreign income tax found in section 131 of the Internal Revenue Code. The credit provided in this article is, of course, one limited to the scope of section 131 and hence does not extend to the tax, if any, under section 102 or under section 500. The second sentence of paragraph (1), in effect, revokes the principle of Biddle v. Commissioner, supra. Thus in unusual instances a~deduction may be allowed a British corp6ration for British tax while a credit will be allowed the United States shareholder of such corporation for portion of the same tax. However, it should be observed that the credit in such case is largely neutralized by reason of the inclusion in gross income of the amount of the British tax. It will also be seen that section 131 (f), Internal Revenue Code, allows a credit to the domestic parent cororation for its foreign subsidiary's foreign ta but does not require the inclusion of such foreign tax in the gross income of the parent. The foreign subsidiary may also be doing business in the Unitid States, thus getting a deduction for a proportionate part of such foreign subsidiary's foreign tax. Paragraph (3)of the article appears to meritlsome further considers. tione here. The adoption of the credit provisions by the I.United Kingdom will require allowance of the credit by the United Kingdom m cases in which individuals will be classed as residents of the United Kingdom by reason of the fact that such individuals sojourned in the United Kingdom for more than 8 months within the year of assesment. Thus, in example I, an en eer or other technician and a citizen of the United States is employed by a British concern at a salary of $18,000 per year. He spends 8 months of the year in England and the remaing 4 months in the United States. The 1(2738)

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    19

    United Kingdom will subject him to tax upon his entire income. However, 'in the' application of the credit, the United Kingdom will recognize that one-third of his earned income for such year has been derived from sources within the United States. Assume, however, in example II that he is employed by a Uiited States domestic corporation and spends the same period of time in the United Kingdom. In this instance the United Kingdom would tax him only upon the amount of his income which he brings into the United Kingdom. In case I, the United Kingdom tax extends to the entire income, while the United States woula in the converse situation tax only the salary allocable to the 8 months spent in the United States. In case I I however, the United States law would impose its tax upon the $12,000 regardless of whether such income was brought into the United States while the United Kingdom imposestaxpayeronly if, and to the extent, the earned income is brought by the its tax into the United Kingdom. On the other hand, if aBritish-controlled corporationpays director's fees to a United States citizen and resident such fees are subject to United Kingdom tax even though the recipient never was present in the United Kingdom. Again, the rules of taxation employed by the United K'igdom as between those (a) resident in the United Kingdom, (b)ordinarily resident in the United Kingdom, (c) domiciled in the nited Kingdom are so complex that it is difficult, if not impossible to make a comparison between that system and the United States taxation of nonresident aliens. Because of such multiplicity of laws, the United Kingdom was disinclined to say that for all purposes earned income derived from sources within the United Kingdom by the residents of the United States would be subject to tax only with respect to such income attributed to services actually rendered in the n"ited Kingdom. For the purposes of the credit, the United Kingdom will recognize such principles found in section 119 (a) (3) of the Internal Revenue Code.
    ARTICLE XIV

    This article corresponds to article MII of the Canadian, article IX of the Swedish and article 11 of the French convention. The rendition of ,ersonaZ services within the United States by a resident of the United idom will not prevent the exemption from tax on capital gans. even though such resident is thus engaged in trade or business ithin the United States. The United Kingdom does not include capital gains within the tax base, unless the individual, corporation, or other entity, is a "trader" and registered as such, then such individual corporation, or other entity, whether or not resident in the United kingdom, is never subset tax with respect to capital gains. The number of transactions to ha nothing to do with the liability. For example, a retired businessman may be actively engaged in stock-market transactions in his private capacity and not as a "trader" but he is not considered because of that fact liable to tax upon his gains. On the other hand the gain from a single securities sale by a bank is treated as trading profits of the bank and taxed as such. It i because of this factor tat it was found impracticable to make the article reciprocal on its face even though it i so in fact. (2789)

    20

    CONVENTION WITH RESPECT TO TAXES ON INCOME ARTICLES XV, XVI, AND XVII

    These articles correspond, respectively, to articles XII, XIII, and XIV of the Canadian convention. Under section 119 (a) (1) (B) and section 119 (a) (2) (B), Internal Revenue Code, interest and dividends paid by a foreign corporation constitute, provided the conditions laid down are met, income from sources within the United States and hence are subject to United States tax in the hands of residents of the United Kingdom. In practice it is recognized that only in rare instances is it practicable for the Bureau to ascertain whether a British corporation derives more than the requisite per. centage of its gross income from United States sources so as to consti. United States. The situation is, therefore, highly theoretical and hence the article cannot be regarded as having any effect in terms of revenue, other than in those instances in which there is encountered a United Kingdom subsidiary corporation carrying on practically all its activities, and having its fiscal offices, in the United States. Article XVI provides that a coloration organized under the laws of the United King(lom shall notrbe subject to the tax imposed by (a) section 102 and (b) section 500 of the Internal Revenue Code if such corporation is controlled directly or indirectly by alien resi. dents of the United Kingdom. Hence the article cannot be employed by United States citizens or residents in an effort to avoid the impo. create a United Kingdom corporation to avoid surtax, it is apparent from the text of the article that they must first surrender control over their capital into the hands of alien residents of the United Kingdom. It is suggested that, as reasonable men, they will not do so in order to avoid tax upon income arising from such capital. , In addition, United Kingdom law provides for the imposition of surtax on companies under the control of not more than five pereno.., such provisions being akin to section 500 in its terms and objectivessection 22, Finance Act of 1921, as amended by various subsequent finance acts. Under such provisions a reasonable part of the income
    of the company is deemed to have been distributed and thus is subject sition of surtax. Thus, if two United States citizens undertake to tute its interest or its dividends income from sources within the

    to surtax in the hands of the shareholders.

    to ascertain the identity of such aliens and, consequently, the tax was not as a practical matter enforceable. Beginning within the Revenue

    tion and has for its purposes the solution of problems growing out of provisions of our internal revenue laws existing prior to 1936 in accordance with which the great majority of nonresident aliens and foreign corporations deriving income from United States sources were subject to tax upon gains derived from transactions upon United States security and commodity exchanges. In practice, owing to factors beyond our control, it was found extremely difficult, if not impossible,

    Article XVII corresponds to article XIV of the Canadian conven-

    Act of 1936 such aliens were generally not subject to tax upon such gain but only taxable upon investment income and the like from

    United States sources. However, there remained a number of unsettled cases pending before the Commissioner concerning tax liability

    (2740)

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    21

    for years prior to 1936. While it is believed that few cases involving British residents and corporations are outstanding, the British delention considered it essential, in principle, that there be inserted in e proposed convention an article corresponding to that found in the Canadian convention and relating to the pre-1936 problem.
    ARTICLE XVIII

    This article finds no counterpart in any previous tax convention to which the United States is a party. Its effect is to exempt from United States tax, upon a reciprocal basis, compensation for personal services rendered in the United States by a resident of the United Kingdom who is temporarily present in the United States for the purpose of teaching at a United States university or other educational institution in the United States. The intent is to allow an exemption for 2years in any event. Thus, if the individual comes to the United States under circumstances which indicate a stay within the United States in excess of 2 years, the exemption will apply in such case for the first 2 years. Such instances will, it is anticipated, be rare. It is the purpose of the article that such exemption shall cease at the end of 2 years from the date of his initial arrival in the United States. Thus, if he reaches the United States on July 1 19045, he is exempt with respect to his remuneration earned in the Unted States up to Juno 30, 1947. If he then leaves the United States on vacation but resumes his duties in the United States at the beginning of the school term in the fall of 1947, he is not exempt with respect to his remuneration earned thereafter. If, however, he leaves the United States for an entire year or more and then returns to the United States, it is the intendment of the article that he will then enter upon another exemption period of 2 years. In the normal case, however, the article will be concerned with a situation in which the exchange professor will be present in the United States only during the period covered by one academic year.
    ARTICLE XIX

    This article corresponds to article IX of the Canadian, to article XII of the Swedish, and to article 12 of the French convention. From the United States standpoint it has little or no practical effect since the amounts involved are not ordinarily gross income in any event in the hands of the recipients thereof.
    ARTICLE XX

    This article corresponds to articles XIX, XX, and XXI of the Canadian convention, to articles XV, XVI, XVIII, and XIX of the Swedish convention and to articles 20, 21, and 22 of the French convention. While the terms of article XX are quite general, it is the intendment of such article to exchange such information upon a broad scale between the revenue authorities of the two countries both with respect to periodic information covering recurring income and also as to specific cases. The problems arising in this general field are akin to those encountered in the administration of our existing
    7098 O4-.--oI. 2-..(-41 (2741)

    22

    CONVENTION WITH RESPECT TO TAXES ON INCOME

    tax conventions, especially that with Canada. The details of the regulatory measures necessary to implement the convention in this regard wil be formulated, as was done in the case of Canada, aftet consultations between the two revenue services with a view toward bringing the terms of the convention into effect as ehrly as practicable and at the same time safeguard the interests of the revenue.
    ARVTICL XXI

    This article is in principle identical with aragr h 12 of the protocol to the Canadian convention, par aMph 7of tMe protocol to the Swedish convention, and to paragraph V of the protocol to the French convention. It is, however, more elaborately drawn in order to bring within ita scope British subjects residing in areas to which the convention is applicable and United States citizens residing in areas to which the convention is applicable and extension to uridical persons. It will be observed that this article extends to all taxes, both Federal and local. Such extension, however, is in kee with several commercial treaties (such as that with Norway, of 192, and that with Germany, of 1028) to which the United States is now a party. It has no practical effect sinee our domestic taxation does not discriminate as between United States citizens and British nationals residing in the United States.
    ARTICLE XXII

    This article finds no counterpart in any convention to which the United States is now a party. Its basic purpose is to make possible extension of the convention to colonies, overseas territories, or other areas over which one of the countries exercises authority. Each country has reserved veto power over applications for extensions made by the other country. The article has 'no application to sovereign members of the British Commonwealth of Nations, such as Canada, Australia, and New Zealand.
    ARTICLE XXIII

    This article provides that the convention comes into effect with the calendar year 1945, as to United States tax, and on the 6th of April 1945, for the purposes of United Kingdom tax, thus brVno the convention into effect coincident in the respective countries Wil the commencement of new taxable years. However, in the case of the United Kingdom, the surtax is a year behind the income tax. Thus, the surtax for the year of assessment 1944-45 is based on the income for the year ended April 5, 1945, and is payable on or before January 1, 1946. The excess-profitj tax and national defense con tribution follow conventional accounting periods and not the historical dates associated withJanuary 1,1945 and santicipated that the initial . Since the conven tion is retroactive to the income tax it is 41%ct of the convention from the United States standpoint will be States as was done in the case fCanada (se T. D. 5157, C. B. 1942-2, 187). (2742)

    to relee excs taxes withheld by withholding wants Ihthe United

    CONVENTION WITH RESPECT TO TAXES ON INCOME ARTICLE XXIV

    23

    This article provides the usual conditions under which the con. vention may be terminated and specifies the dates upon which the convention Fl.all cease to be effective, the dates thus stated being such as will allow the convention to be in effect in one country for the same length of time as in the other.

    [Text of Presidential message of transmittal and of convention]

    4.

    (2748)

    Senate Floor Debate and Action on Ba8ic Convention


    June 1, 1946 79th Congress, 1st Session 92 Congressional Record 6108-6110

    (2745)

    [P. 6108J CONVENTION WITH GREAT BRITAIN AND


    NORTHERN IRELAND WITH RESPECT TO TAXES ON INCOME Mr. CONNALLY. Mr. President, I ask unanimous consent for the present consideration of Executive D, a convention with Great Britain and Northern Ireland with respect to taxes on estates of deceased persons. The PRESIDING OFFICER. Is there objection? [P. 6109] There being no objection, the Senate, as in Committee of the Whole, proceeded to consider the Convention, Executive D Seventy-ninth Congres, first session, a convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland, for the avoidance 67 double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16, 1945, which was read the second time. (The convention was printed in the CONGRESSIONAL RECORD, VOI. 91, pt. III, p. 3853, Apr. 26, 1945, at the time the injunction of secrecy was removed.) Mr. TAFT. Mr. President, without questioning the competence of the Committee on Foreign Relations, it occurs to me that possibly the Committee on Finance should have something to say about this matter. Mr. CONNALLY. The Senator from Georgia [Mr. GEORGE], chairman of the Finance Committee, was chairman of the Subcommittee of the Committee on Foreign Relations which considered this convention. It came under the scrutiny of the chairman and other members of the Finance Committee, and was originally reported by the committee, and later recommitted for further screening. Mr. TAFT. Who were the members of the subcommittee? Mr. CONNALLY. I do not know, other than the Senator from Georgia [Mr. GEORGE]. He was the chairman. Mr. TAFT. Did he recommend favorable action to be taken on the treaty? Mr. CONNALLY. Yes. Mr. TAFT. I have no objection, Mr. President. Mr. WHERRY. Mr. President, reserving the right to object, I ask th. Senator from Texas if the Senator from West Virginia [Mr. REVERCOMB] has consulted with him about this convention. Mr. CONNALLY. I do not know. I have been available for some time, however. Mr. WHERRY. I understand that the Senator from West Virginia has asked that consideration of one or two of these matters go over, and I was wondering if this was one of them. Mr. CONNALLY. I am sure that the convention was given very careful consideration. Mr. TAFT. I have been handed a copy of Executive D which seems to be something entirely different from the Executive D which is on the calendar. It was reported yesterday. Mr. CONNALLY. O, no; tis Executive D was reported on the 10th of May. (2747)

    I may say to the Senator that one of the items which caused Execu. tive D to be recommitted to the committee was the claim which had been made by representatives of the moving-picture industry, includ. ing actors, that they were being taxed both in the United States and in the United Kingdom, and that it amounted to double taxation. The convention was recommitted to the committee, and the part about which there had been complaint was rectified. The Senator from Wis. cousin (Mr. LA FOLLETTE) is present and he can give assurances to the Senator from Ohio that thle convention is in proper shape. Mr. LA FOLLETTE. Mr. President, insofar as the treaty which has to do with the United Kingdom is concerned, I may say that there was vigorous protest registered on behalf of the actors and motion. picture producers. I do not have a copy of the treaty before me. However, there was one section of it which the actors and motion.
    picture producers felt discriminated against them. Therefore, the treaties were returned to the committee for further consideration. in any respect. We were assured by representatives of the Treasury mitted to the British Parliament with the recommendation on the part of the British Government that it be approved by the Parliament. It will also have to be approved-I am referring now to the protocol-by the Senate after the British Parliament bas acted upon it. It is anticipated that since the Government of the United Kingdom has agreed to it there will be no difficulty about a favorable action on their part being taken with regard to the protocol. M'r. TAFT. The Senator feels, does lie, that the treaty does not give any special advantage to the residents of Great Britain? Mr. LA FOLLETTE. I believe that since we have worked out what we believe will be a procedure to rectify the discrimination which the actors and motion-picture producers contended they were laboring under, and if the protocols are acted upon subsequent to our ratification of the treaty, the situation of the motion-picture people will have been corrected. While I am on my feet I wish to make a general statement for the RECOnD concerning these tax treaties. The procedure which has usually been followed, and which was followed in this case, is to have the State Department, in conjunction with the Treasury Department, draw tip tax treaties. Like all other treaties, the drafting and negotiating of them are carried on in secret. They are then submitted to the Senate for ratification. We are always in the position of either having to take the treaties as we receive them or risk delay or, perhaps, rejection if we amend them. The particular matter which we have just been discussing is a case in point. I believe that the procedure which has been worked out for this particular treaty-the protocol procedure which I have described-will rectify the situation in this particular case. But, as a member of the Committee on Finance and as a member of the Committee on Foreign Relations, I should like to emphasize the statement made in the original report from the Committee on Foreign Relations-that some other procedure should be found in the drafting of tax treaties whereby the Congress will be apprised of what is contemplated and will be advised of what is intended to be incorporated in such treaties, so that we will not be confronted with such situations

    The procedure which was worked out was to not change the treaties

    Department and of the State Department that they had drawn up a protocol which, as I understand, was to have been signed and sub.

    (2748)

    on Finance and would give attention to this particular treaty.

    as we have discovered, not only in connection with this treaty but in connection with other tax treaties which have been drafted. My own view is that the staff of the Joint Committee on Internal Revenue Taxation should be drawn into these negotiations so that the members of the Joint Committee on Internal Revenue Tfaxation will be privy to the matters which are being negotiated, and the drafts of the treaties as they are being made. Thus, we will not be in the position of being confronted with faits accompli when tax treaties are drawn. I think we have a right to make a special differentiation between the methods used when tax treaties are drawn and those em. ployed when other treaties are drawn because the matter of taxation s so peculiarly a responsibility, first of all, of the House of Representatives where all tax legislation must originate, and, secondly, the Senate, which must also act upon tax matters. Mr. TAFT. Mr. President, will the Senator from Wisconsin yield? Mr. LA FOLLETTE. I yield. Mr. TAFT. The Senator knows the Finance Committee gives very careful consideration to every detail of a tax bill, it works it all out, then a treaty comes along and the provisions are changed without any consideration by the Committee on Finance itself. It happens in this case that the distinguished chairman of the Committee on Finance is a member of the Committee on Foreign Relations, and has worked on this treaty, and I am willing to take his judgment on it. But in a case, for instance, like that of the reduction in the withholding tax at the source from 30 percent to 15 percent, in the case of dividends moving from the United States to the United Kingdom, with a good deal of care and study we fixed on 30 percent as the rate on dividends going to citizens who are nonresidents of the United States. That is changed, and very properly so, probably, to avoid a duplication of taxation. But it seems to me that the Committee on Finance through the Joint Committee on Internal Revenue Taxation, should give some consideration to the questions in advance. Mr. LA FOLLETTE. I appreciate the Senator's reenforcement of what I have said, because so far as I am concerned, I serve notice now that I shall not be restrained in my opposition to any future treaties which are submitted which deal with tax problems, unless the Joint Committee on Internal Revenue Taxation and its staff are taken into the proceedings at a time when we can have something to say about the policies which are to be adopted, because obviously a treaty overrides any law which we may have on the subject. Mr. CONNALLY. Mr. President, will the Senator from Wisconsin yield? .Mr.LA FOLLETTE. I am glad to yield to the distinguished distinguished chairman of the Committee on Foreign Relations. Mr. N CONNALLY. I am in hearty agreement with the Senator from Wisconsin in the statement that the Joint Committee on Internal Revenue Taxation, which has been established by the two Houses of Congress to look after tax matters, should be consulted prior to the final negotiations of these treaties. . [P. 6110) To explain to the Senator from Ohio my course n the matter as chairman of the Committee on Foreign Relations I appointed the Senator from Georgia [Mr. GEoRoE] chairman of the subcommittee, because of the fact tat he was chairman of the Committee Mr. TAFT. Mr. President, will the Senator from Wisconsin yield?

    (2749)

    Mr. LA FOLLETTE. I yield. Mr. TAFT. That is the reason why I ant not objecting to the treaty, but I still think that the Committee on Finance, which writes ta bills, should pass on modifications of themmade by treaty. Mr. LA FOLLETTE. The point is that although the Senator from Texas did appoint the Senator from Georgia, who is chairman of the Committee on Finance, and one or two other Senators who are ment. bers of the Committee on Finance, the situation with which we are confronted is that this treaty has been signed, sealed, and delivered, to the Senate for ratification, and we have either to take the risk of rejecting the treaty or delaying its ratification, or swallowing the bitter with the sweet. 'Therefore I believe that we are justified in urging upon both the State Department and the Treasury Department that the Joint Committee on Internal Revenue Taxation and its staff be drawn into these negotiations from the beginning, so that we may have an opportunity to have something to say about the policies which are to be worked out in connection with these negotiations at a time when our judgment may have some bearing on the outcome. The PRESIDING OFFICER. The convention is before the Senate as in Committee of the Whole, and open to amendment. If there be no amendment to be proposed, the convention will be reported to the Senate. The convention was reported to the Senate without amendment. The PRESIDING OFFICER. The resolution of ratification will be read. The legislative clerk read as follows:
    Resolved (two.thirds of the Senators present concurring therein), That the Senate advise and consentt to the ratification of Executive D, Seventy.ninth Congress first session, a convention between the United States of America and the anired Kingdom of Great Britain and Northern Ireland, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16, 1945.

    The PRESIDING OFFICER. The question is on agreeing to the resolution of ratification. (Putting the question.) Two.thirds of the Senators present concurring therein, the resolution of ratification is agreed to, and the convention is ratified.

    (2750)

    PresidentialMessage of Transmittalto Senate of First Supplementary Protocol

    (2751)

    TOMe CosonR

    idSusion

    If

    SENATE

    EXZEUTMVS

    F'

    SUPPLEMENTARY PROTOCOL RELATING TO TAXES ON INCOME

    MESSAGE
    MUM

    T PRESIDENT OF THE UNITED STATES


    TRNSMITIN

    A SUPPLEMENTARY PROTOCOL, SIGNED AT WASHINGTON ON JUNE 6, 1946, MODIFYING IN CERTAIN RESPECTS THE CONVEN. TION BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRE. LAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME WHICH WAS SIGNED AT WASHINGTON ON APRIL 16, 1945 JuNs 11, 1946.--Protocol wu read the first time, the injunction of secrecy was removed therefrom, and, together with the message and the accompanying report, was referred to the Committee on Foreign Relations ad ordered to be printed for the use of the Senate THz WHITE HOUSE, JAnd Ii, 1946.

    To h Semate of the United States: ratification, I transmit herewith a supplementary protocol, signed at Washington on June 6, 1946 modify-ing in certain respects the con. vention between the united States of America and the United King. dora of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income which wa simed at Wash n on April 16, 1945. I also transmit herewith, for the information of the Senate, the report of the Secretary of State with respect to the protocol.
    HARRY 8. TRUMAN.

    With a view to receiving the advice and consent of the Senate to

    (Enclosures: (1) Report of the Secretary of State; (2) protocol of June 6, 1946, modifying the convention of Aptil 16 1945 relating to

    taxes on income, between the United States and the United Kingdom.) (27.53)

    SUPPLEMENTARY PROTOCOL RELATING TO TAXES ON INCOME DEPAImTMENT OF STATE,

    Wa8hing.ton, Jun 10,1946.

    The PRESIDENT, The While I1oue: The undersigned, the Secretary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if his judgment approve thereof, a supplementary protocol, signed at Washington on Juno 6, 1946, modifying in certain respects the convention between the United Statebs f Aurneica and the United Kingdom of Great Britain and Northern Ireland for the avoidance of dou-ble taxation and the prevention of fiscal evasion with respect to taxes on incomes which was signed at Washington April 16, 1945. The convention was submitted by the President to the Senate with a message of April 24, 1945, and was referred to the Committee on Foreign Relations (Executive D, 79th Cong., 1st seas.). By its report of May 10, 1946 (Senate Executive Report No. 4 79th Cong., 2d seas.), the Committee on Foreign Relations reported the convention favorably to the Senate without amendment and recommended that advice and consent be given to its ratification. However, in that report reference was made to hearings which were held before a subcommittee of the Committee on Foreign Relations, in the course of which hearings interested persons were heard with resp6ct to certain objections which had been raised in regard to paragraph (3) of article XI of the convention. The full committee concurred in the resommendations of the subcommittee "(a) that the convention be ratified without amendment; (b) that the object. tions taken to the presence in the convention of paragraph (3) of article XI are sound; and (c) that appropriate steps be taken, after ratification, looking to striking such paragaph from the convention." Article XI of the convention contains three paragraphs, under the first two of which a reciprocal exemption is accorded by each of the contracting countries, upon certain conditions, with respect to compmnsation for personal services performed within such country by a resident of the other country. Paragraph (3) of article XI specifically excludes public entertainers from the benefits of such exemption, the paragraph reading as follows:
    (3) The provisions of this article shall not apply to the compensation, profits, emoluments or other remuneration of public entertainers such as stage, motion picture, or radio artists, musicians, and athletes.

    The subcommittee of the Committee on Foreign Relations reached the conclusion that a substantial basis existed for the view that para. graph (3)of article XI is open to the objection that it isdiscriminatory. However, upon receiving assurances that appropriate steps would be taken with a view to eliminating the provision of that paragraph from the convention, the subconunittee proceeded to recommend approval of the convention without amendment, at the same time recommending that "appropriate steps be taken, after ratification, looking to striking such paragraph from the convention." On June 1 1946, the Senate gave Its advice and consent to the ratification ol the convention, without amendment. Without awaiting ratification of the convention, the plenipotentiaries of the two Governments have concluded and signed the sup(2754)

    SUPPLEMENTARY PROTOCOL RELATING TO TAXES ON INCOME

    plementary protocol, enclosed herewith. The protocol provides in article I that paragraph (3) of article XI of the convention "shall be II of the protocol deemed to be deleted and of no effect." Article integral part of the as an provides that the protocol shall be regarded convention and shall be ratified, the instruments of ratification to be exchanged at Washing ton. Senate at this It isbelieved that, by submitting the protocol to thethe convention with a view to bringg time, action may be facilitated objection has been raised. into force without the provisions to which with the protocol, may be It is hoped that the convention, together brought into force as soon'as possible in order that the impediment to international trade which results from the double taxation of of America incomes may be removed as between the United StatosIreland. Britain and Northern and the United Kingdom of Great JAMES F. BYRNES. Respectfully submitted. (Enclosure: Protocol of June 6, 1946. modifying the convention of April 16, 1945 relating to taxes on income, between the United States and the Unted Kingdom.)

    [Text of protocol]

    (.2755)

    Senate Committee Hearings on First Supplementary Protocol


    [No hearings held)

    78095 0--4voL.S(277)

    (2757)

    Senate Committee Report on FirstSupplementary Protocol


    June 13, 1946
    79th Congress, 2d Semsion 92 Congressional Record 6851 INo written report.]

    (2T5m))

    Senate Floor Debate and Action on First Supplementary Protocol


    June 19, 1946

    79th Congress, 2d Session 92 Congressional Record 7156

    (2761)

    (P.71661

    MODIFICATION OF CONVENTION BETWEEN THE UNITED STATES AND UNITED KINGDOM TO AVOID DOUBLE TAXATION

    Mr. GEORGE. Mr. President, I ask unanimous consent for the present consideration of Executive F, a supplementary protocol, modifying in certain respects the convention between the LUnited States of America and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, which was signed at Washington on April 16, 1945. This protocol merely eliminates what the Committee on Foreign Relations thought was a discrimination against artists. The protocol has received the unanimous approval of the committee, and therefore I ask that the Senate dispose of it at this time. Mr. WHITE. Mr. President, there is not a large attendance of Senators at the moment, but in view of the Statement of the Senator front Georgia as to the unanimity with which the protocol was approved by the Foreign Relations Committee, I think it to be highly appropriate that the matter be now disposed of. Mlr. GEORGE. I believe that the protocol should be disposed of, because it is really in the nature of an amendment to the treaty, but it was thought best to deal with it in the manner prescribed. The PRESIDING OFFICER. Is there objection to the present consideration of the supplementary protocol? There being no objection, the Senate, as in Commit tee of the Whole proceeded to consider Executive F, a supplementary protocol, signed at Washington on June 6, 1946, modifying in certain respects the convention between the United States of America and the United Kingdoma of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income which was signed at Washington on April 16, 1945. The PRESIDING OFFICER. The supplementary protocol is before the Senate as in Committee of the Whole, and open to amendment. If there be no amendment to be proposed, the supplementary protocol will be reported to the Senate. The supplementary protocol was reported to the Senate without amnendment. The PRESIDING OFFICER. The resolution of ratification will he read. The legislative clerk read as follows:
    IResolved (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of Executive F. S4eventy-ninth Congress, second scmion, a stippleinentary protocol, signed at Washington oil June 6, 1946, molifyiing in certain respects the convention between the Untited States of Amerance of double taxation and the prevention of fiscal evasion with respet to taxes

    ica and the United Kingdom of Great Britain and Northern Ireland for the avoid.

    on Income which was signed at Washington on April 16, 1945.

    The PRESIDING OFFICER. The question is on agreeing to the

    resolution of ratification. [Putting the question.j Two-thirds of the Senators present concurring therein, the resolution of ratification is agreed to, and the supplementary protocol is ratified. (2763)

    PresidentialProclamation (Including Official Text of Basic Convention and First Supplementary Protocol)
    [Reprint of TIAS 15461

    yTAITIXS AND OTHER INTERNATIONAL ACTS 53313S 1546

    DOUBLE., TAXATION
    Taxes on Ino9me'
    Ifi ,
    '.

    Conv"4eni

    -- et'ween-the B

    UNTED STATES OF AMERICA


    anj tbetJrDKINGDOM/

    \ 7 / , Igned-atashingtonAp0l169 1945
    and Protocpl
    and June 6, 1946, rwpeccyely.
    tion-advisied by the Senate *Ra' of the United States of America June 1, 1946 and June 19, 1946, respectively. * Ratified by the President of the United States of America June 26, 1946. * Ratifications exchanged at Washington July 25, 1946. I Proclaimed by the President of the United States of America July 30, 1946.

    0
    Ia

    (2767)

    The Department of State publications entitled 7Treay Series and ecamas, Aremen Swri have been discontinued. The TretIs and Other Inter.
    national Acts Seriea has been Inaugurated to make

    available in a single series the text&of treaties and other instruments (such as constitutions and charters of international organizations, declara. tions, agreements effected by exchanges of diplo. matic notes, et cetera) establishing or defining re. nations between the United States of America and other countries. The texts printed in the present series, as in the Trety Srim and F&ctmiav Agree. ment Series, are authentic and, in appropriate cases, are certified as such by the Department of State.

    The Teade, and Ohr luernewad Acts Swim begins with the number 1501, the combined numbers in the 7Vaty Sar and &EwthvAgreenwa Series i

    Arsmmt Sies being 606.

    having reached 1500, the last number in the Treaty Swri., being 994 and the last number in the &euaue DEPARTMENT OF STATE

    PPmucArion 2650

    For saf by th Sipwmneuuden of Dwomen. U.S. Gowernmtm Prndng 1W., Wahington A, D.


    Price 10 mas UNITED STATES GOVIRNMENT PRINTING OFCE WASHINGTON 11946

    (~7~$)

    BY THIS PRESIDENT OF THE UNITED STATES Or AMERICA

    A PROCLAMATION
    WnFmwAs a convention between tihe United States of America and

    the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income was signed by their respective Plenipo. tentiaries at Washington on April 16, 1945;
    AND WHIEREAS a supplementary protocol modifying in certain

    respects the said convention was signed by the respective Plenipo. tentiaries of the United States of America and the United Kingdom of Great Britain and Northern Ireland at Washington on June 6,1946;
    AND WHERSAS the originals of the said convention and the said

    supplementary protocol are word for word as follows:


    (1).

    (27691)

    The Government of the United States of America and the Govem mont of the United Kingdom of Great Britain and Northern Irelamj Desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes %, income, Have appointed for that purpose as their Plenipotentiaries: The Government of the United States of America: Mr. Edward R. Stettinius, Jr., Secretary of State, and The Government of the United Kingdom of Great Britain aW Northern Ireland: The Right Honorable the Earl of Halifax, K.G., Ambassador Extraordinary and Plenipotentiary in Washington, Who, having exhibited their respective full powers, found in good and due form, have agreed as follows:
    ARTICLE I

    (1) The taxes which are the subject of the present Convention are: (a) In the United States of America: The Federal income taxes, including surtaxes and excess profits taxes (hereinafter referred to as United States tax), (b) In the United Kingdom of Great Britain and Northern Ireland: The income tax (including surtax), the excess profits to and the national defense contribution (hereinafter referred to as United Kingdom tax). (2) The present Convention shall als^ apply to any other tax* of a substantially similar character imposed by either Contractiq Party subsequently to the date of signature of the present Conv, tion or by the government of any territory to which the present Coo vention is extended under Article XXII. ARTICLs II (1) In the present Convention, unless the context otherwise require (a) The term "United States" means the United States d America, and when used in a geographical sense mean the States, the Territories of Alaska and of Hawaii, and the District of Columbia. (b) The term "United Kingdom" means Great Britain and Northern Ireland, excluding the Channel Islands and the Isle of Man. (c) The terms"territory of one of the Contracting Parties" and "territory of the other Contracting Party" mean the United States or the United Kingdom as the context requires. (d) The term "United States corporation" means a corporm tion, association or other like entity created or organized in or under the laws of the United States. (e) The term "United Kingdom corporation" means any kind
    (2) (2770)

    frM& 1UA1

    of juridical person created under the laws of the United Kingdom. (f) The terms "corporation of one Contracting Party" and "corporation of the other Contracting Party" mean a United States corporation or a United Kingdom corporation as the context requires. (g) The term "resident of the United Kingdom" means any person (other than a citizen of the United States or a United States corporation) who is resident in the United Kingdom for the purposes of United Kingdom tax and not resident in the United States for the purposes of United States tax. A corporation is to be regarded as resident in the United Kingdom if its business is managed and controlled in the United Kingdom. (h) The term "resident of the United States" means any individual who is resident in the United States for the purposes of United States tax and not resident in the United Kingdom for the purposes of United Kingdom tax, and any United States corporation and any partnership created or organized in or under the laws of the United States, being a corporation or partnership which is not resident in the United Kingdom for the purposes of United King.

    dom tax.
    (i) The term "United Kingdom enterprise" means an industrial or commercial enterprise or undertaking carried on by a resident of the United Kingdom. (j) The term "United States enterprise" means an industrial or commercial enterprise or undertaking carried on by a resident of the United States. (k) The terms "enterprise of one of the Contracting Parties" and "enterprise of the other Contracting Party" mean a United States enterprise or a United Kingdom enterprise, as the context requires. (I) The term "permanent establishment" when used with respect to an enterprise of one of the Contracting Parties moans a branch, management, factory or other fixed place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of merchandise from which he regu. larly fills orders on its behalf. An enterprise of one of the Contracting Parties shall not be deemed to have permanent establishment in the territory of the other Contracting Party merely because it carries on business dealings in the
    (2771)

    [No. 15J44

    4 territory of such other Contracting Party through I bo commiion agent, broker or custodian sak
    in the ordinary course of his business as such. Thefeg that an enterprise of one of the Contracting Parties m6

    tains in the territory of the other Contracting Party, fixed plua of business exclusively for the purchase of goo&

    or merchandise shall not of itself constitute such Wx plac of business a permanent etablishment of sud enterprise. The fact that a corporation of one Contractiq Party has a subsidiary corporation which i a corporatim of the other Contracting Party or which is engaged in.trads or business in the territory of such other Contracgq Party (whether through a permanent establishment a otherwise) shall not of itself constitute that subsidiary cem poration a permanent establishment of its parent corp. ration. (2) For the purposes of Articles VI, VI, VIII, IX and XIV a red. dent of the United Kingdom shall not be deemed to be engaged h trade or business in the United States in any taxable year unless suc resident has a permanent establishment situated therein in such taxable year. The same principle shall be applied, mutgai mutandi, by the United Kingdom in the case of a resident of the United Stata (3) In the application of the provisions of the present Conventias by one of the Contracting Parties any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting Party relating to the tax which are the subject-of the present Convention. (1) A United Kingdom enterprise shall not be subject to Unid States tax in respect of its industrial or commercial profits unless it i engae in trade or business in the United States through a permanent establishment situated therein. If it is so engaged, United Stats tax may be imposed upon the entire income of such enterprise from

    sources within the United States.


    (2) A United States enterprise shall not be subject to United Kig dom tax in respect of its industrial or commercial profits unless it b engaged in trade or business in the United Kingdom through a perm. nent establishment situated therein. If it is so engaged, Unit Kingdom tax may be imposed upon the entire income of such enter* prise from sources within the United Kingdom: Provided that nothing in this paragraph shall affect any provisions of the law of the United Kingdom regarding the imposition of United Kingdom excess profits

    (2772)
    J

    [No.A1546

    ta and national defence contribution in the case of inter-connected compas.

    (8)Where an enterprise of one of the Contracting Parties isengaged


    in trade or business in the territory of the other Contracting Party through a permanent etablishment situated therein, there shall be attributed to such permanent establishment the industrial or commierial profits which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment, and the profits oattributed shall, subject to the law of such other Contracting Party,

    be deemed to be income from sources within the territory of such other

    Contracting Party. (4) In derinlng the industrial or commercial profits from sources within the territory of one of the Contracting Parties of an enterprise of the other Contracting Party, no profits shall be deemed' to arise from the mere purchase of goods or merchandise within the territory of the former Contracting Party by such enterprises
    ATiacLU IV

    prise of the other Contracting Party, makes with or imposes on the


    latter, in their commercial or financial relations, conditions different from those which would be made with an independent enterprise, any profits which would but for those conditions have accrued to -one of the enterprises but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
    AmcLue V

    Where -an enterprise bf one of the Contracting Parties, by reason of its participation in the management, control or capital of an enter.

    (1) Notwithstanding the provisions of Articles IlI and IV of the present Convention, profits which an individual (other than a citizen of the United States) reddent in the United Kingdom or a United Kingdom corporation derives from operating ships documented or aircraft registered under the laws of the United Kingdom, shall be exempt from United States tax.(2) Notwithstanding the provisions of Articles III and IV of the present Convention, profits which a citizen of the United States not resident in the United Kingdom or a United States corporation derives from operating ships documented or aircraft registered under the laws of the United States, shall be exempt from United Kingdom tax. (8) This Article shall be deemed to, have superseded, on and after the first day of January, 1945, as to United States tax, and on and after the 6th day of April, 1945, as to United Kingdom tax, the
    78095 0-42-vol. 281

    (2778)

    INo. 1W04j

    arrangements relating to reciprocal exemption of shipping profits from income tax effected between the Government of the United States and the Government of the United Kingdom by exchange of Notes dated August 11, 1924, November 18, 1924, November 26, 1924, January 15, 1925, February 13, 1925 and March 16, 1925, which shall accordingly cease to have effect.

    ri

    AnTcL3 VI
    (1) The rate of United States tax on dividends derived from a United States corporation by a resident of the United Kingdom who is subject to United Kingdom tax on such dividends and not engaged in trade or business in the United States shall not exceed 15 percent: Provided that such rate of tax shall not exceed five percent if such resident is a corporation controlling, directly or indirectly, at least 95 percent of the entire voting power in the corporation paying the dividend, and not more than 25 percent of the gross income of such paying corporation is derived from interest and dividends, other than interest and dividends received from its own subsidiary corporations Such reduction of the rate to five percent shall not apply if the relation. ship of the two corporations has been arranged or is maintained primarily with the intention of securing such reduced rate. (2) Dividends derived from sources within the United Kingdom by an individual who is (a) a resident of the United States, (b) subject to United States tax with respect to such dividends, and (q)not engaged in trade or business in the United Kingdom, shall be exempt from United Kingdom surtax. (3) Either of the Contracting Parties may terminate this Artic by giving written notice of termination to the other Contracting Party, through diplomatic channels, on or before the thirtieth day of June in any year after the year 1945, and in such event paragraph (1) hereof shall cease to be effective as to United States tax on and after the first day of January, and paragraph (2) hereof shall cease to be effective as to United Kingdom tax on and after the 6th day of April, in the year next following that in which such notice is given.
    ARTICLE VII

    (1) Interest (on bonds, securities, notes, debentures, or on any other form of indebtedness) derived from sources within the United State by a resident of the United Kingdom who issubject to United Kingdom tax on such interest and not engaged in trade or business in the United States, shall be exempt from United States tax; but such exemption shall not apply to such interest paid by a United States corporation to a corporation resident in the United Kingdom controlling, directly or
    I(Executive

    Agreement Series 7; 47 Stat. 2587.1

    (2774)

    [No. 15M1

    indirectly, more than 50 percent of the entire voting power in the paying corporation. (2) Interest (on bonds, securities, notes, debentures, or on any other form of indebtedness) derived from sources within the United Kingdom by a resident of the United States who is subject to United States tax on such interest and not engaged in trade or business in the United Kingdom, shail be exempt from United Kingdom tax; but such exemption shall not apply to such interest paid by a corporation resident in the United Kingdom to a United States corporation controlling, directly or indirectly, more than 50 percent of the entire voting power in the paying corporation.
    ARTICLE VIII

    (1) Royalties and other amounts paid as consideration for the use of, or for tjlie privilege of using, copyrights, patents, designs, secret pro. cesses and formulae,trade-marks, and other like property, and derived from sources within the United States by a resident of the United Kingdom who is subject to United Kingdom tax on such royalties or other amounts and not engaged in trade or business in the United Statts, shall be exempt from United States tax. (2) Royalties and other anmounts paid as consideration for the use of, or for the privilege of using, copyrights, patents, designs, secret processes and formulae, trade-marks, and other like property, and derived from sources within the United Kingdom by a resident of the United States who is subject to United States tax on such royalties or other amounts and not engaged in trade or business in the United Kingdom, shall be exempt front United Kingdom tax. (3) For the purposes of this Article the term "royalties" shall be deemed to include rentals in respect of motion picture films. AWiFCLE IX
    (1) The rate of United States tax on royalties in respect of the operation of mines or quarries or of other extraction of natural resources, and on rentals from real property or from an interest in such property, derived from sources within the United States by a resident of the United Kingdom who is subject to United Kingdom tax with respect to such royalties or rentals and not engaged in trade or business in the United States, shall not exceed 16 percent: Provided that any such resident may elect for any taxable year to be subject to United States tax as if such resident were engaged in trade or business in the United States. (2) Royalties in respect of the operation of mines or quarries or of

    other extraction of natural resources, and rentals from real property or from an interest in such property, derived from sources within the
    ('2775)

    (N0o. 15461

    States, (b) subject to United States tax with respect to such royaltim and rentals, and (c)not engaged in trade or business in the United Kingdom, shall be exempt from United Kingdom surtax.
    ARTICLE X

    United Kingdom by an individual who is (a) a resident of the United

    (1) Any salary, wage, similar remuneration, or pension, paid by th Government of the United States to an individual (other than a British subject who is not also a citizen of the United States) in respect d services rendered to the United States in the discharge of government tal functions, shall be exempt from United Kingdom tax. (2) Any salary, wage, similar remuneration, or pension, paid by the Government of the United Kingdom to an individual (other than a citizen of the United States who isnot also a British subject) in respect of services rendered to the United Kingdom in the discharge of govern. mental functions, shall be exempt from United States tax. (3) The provisions of this Article shall not apply to payments in respect of services rendered in connection with any trade or business carried on by either of the Contracting Parties for purposes of profit.
    ARTICLE XI

    (1) An individual who is a resident of the United Kingdom shall be exempt from United States tax upon compensation for personal (in. eluding professional) services performed during the taxable year within the United States if (a) he is present within the United States for a period or periods not exceeding in the aggregate 183 days during such taxable year, and (b) such services are performed for or on behalf of a person resident in the United Kingdom. (2) An individual who is a resident of the United States shall be exempt from United Kingdom tax upon profits, emoluments or other remuneration in respect of personal (including professional) services performed within the United Kingdom in any year of assessment if (a) he is present within the United Kingdom for a period or periods not exceeding in the aggregate 183 days during that year, and (b) such services are performed for or on behalf of a person resident in the United States. (3) The provisions of this Article shall not apply to the compensftion, profits, emoluments or other remuneration of public entertainers such as stage, motion picture or radio artists, musicians and athletes.r]

    ARTICLE XII
    (1) Any pension (other than a pension to which Article X applies), and any life annuity, derived from sources within the United States by an individual who is a resident of the United Kingdom shall be exempt from United States tax.
    ISee Protocol signed June 6, 1946, poet, p. 15.1

    (2776)

    [No. 15461

    (2) Any pension (other than a pension to which Article X applies), aud any life annuity, derived from sources within the United Kingdom by an individual who is a resident of the United States shall be exempt from Itnited Kingdom tax. (3) The term "life annuity" means a stated sum payable periodically at stated times, during life or during a specified or ascertain. able period of time, under an obligation to make the payments in consideration of money paid.
    ARTICLE XIII (1) Subject to section 131 of the United States Internal Revenue

    Code as in effect on the first day of January, 1945, United Kingdom tax shall be allowed as q credit against United States tax, For this purpose, the recipient of a dividend paid by a corporation which is a resident of the United Kingdom shall be deemed to have paid the United Kingdom income tax appropriate to such dividend if such recipient elects to include in his gross income for the purposes of United States tax the amount of such United Kingdom income tax. (2) Subject to such provisions (which shall not affect the general principle hereof) as may be enacted in the United Kingdom, United States tax payable in respect of income from sources within the United States shall be allowed as a credit against any United Kingdom tax payable in respect of that income. Where such income is an ordinary dividend paid by a United States corporation, such credit shall take into account (in addition to any United States income tax deducted from or imposed on such dividend) the United States income tax imposed on such corporation ir. respect of its profits, and where it is a dividend paid on participating preference shares and representing both a dividend at the fixed rate to which the shares are entitled and an additional participation in profits, such tax on profits shall likewise be taken into account in so far as the dividend exceeds such fixed rate. (3) For the purposes of this Article, compensation, profits, emoluments and other remuneration for personal (including professional) services shall be deemed to be income from sources within the territory of the Contracting Party where such services are performed. ARTICLE XIV A resident of the United Kingdom not engaged in trade or business in the United States shall be exempt from United States tax on gains from the sale or exchange of capital assets.
    ARTICLE XV

    Dividends and interest paid on or after the first day of January 1945 by a United Kingdom corporation shall be exempt from United

    (2777)

    [No. 1 J1

    10

    States tax except where the recipient is a citizen of or a resident of the United States or a United States corporation. ARTICLE XVI A United Kingdom corporation shall be exempt from United State tax on its accumulated or undistributed earnings, profits, income or surplus, if individuals who are residents of the United Kingdom con. trol, directly or indirectly, throughout the last half of the taxable year, more than 50 percent of the entire voting power in such corpo. ration.
    ARTICLE XVII

    (1) The United States income tax liability for any taxable year beginning prior to January 1, 1936 of any individual (other than a citizen of the United States) resident in the United& Kingdom, or of any United Kingdom corporation, remaining unpaid on the date of signature of the present Convention, may be adjusted on a basis satisfactory to the United States Commissioner of Internal Revenue: Provided that the amount to be paid in settlement of such liability shall not exceed the amount of the liability which would have been determined if (a) the United States Revenue Act of 1936 ('1 (except in the case of a United Kingdom corporation in which more than 50 percent of the entire voting power was controlled, directly or indirectly, throughout the latter half of the taxable year, by citizens or residents of the United States), and (b) Articles XV and XVI of ihe present Convention, had been in effect for such year. If the taxpayer was not, within the meaning of such Revenue Act, engaged in trade or business in the United States and had no office or place of business therein during the taxable year, the amount of interest and penalties shall not exceed 50 percent of the amount of the tax with respect to which such interest and penalties have been computed. (2) The United States income tax unpaid on the date of signature of the present Convention for any taxable year beginning after the thirty-first day of December 1935 and prior to the first day of January 1945 in the case of an individual (other than a citizen of the United States) resident ;f the United Kingdom, or in the case of any United Kingdom corporation shall be determined as if the provisions of Articles XV and XVI of the present Convention had been in effect for such taxable year.
    '[49 Stat. 1648.1

    (2778)

    11

    (No. 1M6

    (3) The provisions of paragraph (1) of this Article shall not apply-. (a) unless the taxpayer files with the Commissioner of Internal Revenue on or before the thirty-first day of December 1947 a request that such tax liability be so adjusted and furnishes such information as the Commissioner may require; or (b) in any case in which the Commissioner is satisfied that any deficiency in tax is due to fraud with intent to evade the tax. ARTICLE XVII A professor or teacher from the territory of one of the Contracting Parties who visits the territory of the other Contracting Party for the purpose of teaching, for a period not exceeding two years, at a university, college, school or other educational instit,,tion in the territory of such other Contracting Party shall be exempted by such other Contracting Party from tax on his remuneration for such teach. ing for such period. AnTICLE XIX A student or business apprentice from the territory of one of the Contracting Parties who is receiving full-time education or training in the territory of the other Contracting Party shall be exempted by such other Contracting Party from tax on payments made to him by persons within the territory of the former Contracting Party for the purposes of his maintenance, education or training.
    ARTICLE XX

    (1) The taxation authorities of the Contracting Parties shall exchange such information (being information available under the respective taxation laws of the Contracting Parties) as is necessary for carrying out the provisions of the present Convention or for the prevention of fraud or the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of the present Convention. Any information so exchanged shall be treated as secret and shall not be disclosed to any person other than those concerned with the assessment and collection of the taxes which are the subject of the present Convention. No information shall be exchanged which would disclose any trade secret or trade process. (2) As used in this Article, the term "taxation authorities" means, inthe case of the United States, the Commissioner of Internal Revenue or his authorized representative; in the case of the United Kingdom, the Commissioners of Inland Revenue or their authorized representative; and, in the case of any territory to which the present Convention (2779)

    fNo. 1M402

    12

    is extended under Article XXII, the competent authority for the


    administration in such territory of the taxes to which the present Convention applies.

    resident in lite territory of dte other Contracting Party, be subjected therein to other or more burdensome taxes than are the nationals of

    ArTc.M XXI (1) The nationals of one of the Contracting Parties shall not, while

    such other Contracting Party resident in its territory.


    (2) The term "nationals" as used hi this Article means

    (a) in relation to the United Kingdom, all British subjects


    andl British protected persons, from the United Kingdom or any territory with respect to which the present Conven. tion is applicable by reason of extension made by the United Kingdom wuder Article XXII; and

    (b) h) relation to the United States, United States citizens,


    and all persons wnder the protection of the United State, from the United States or any territory to which the present Convention is applicable by reason of extension made by the United States under Article XXII; and includes all legal personS, partnerships and associations deriving their status as such from, or created or organized under, the laws in force in any territory of the Contracting Parties to which the present Convention applies. (3) In this Article the wordl "taxes" means taxes of every kind or description, whether national, Federal, state, provincial or municipal.
    ARITICLN XXII

    (1) Either of the Contracting Parties may, at the time of exchange of instruments of ratification or thereafter while the present Convention continues in force, by a written notification of extension given to the other Contracting Party through diplomatic channels, doclae its desire that the operation of the present Convention shall extend to all or any of its colonies, overseas territories, protectorates, or territories in respect of which it exercises a mandate, which impose taxes substantially similar in character to those which are the subject of the present Convention. The present Convention shall apply to the territory or territories nained in such notification on the date or date# specified in the notification (not being less than sixty days from the date of the notification) or, if no date is specified in respect of any shch territory, on the sixtieth day after the (late of such notification, unless, prior to the date on which the Convention would otherwise become applicable to a particular territory, the Contracting Party to whom

    (6.28No)

    13

    (No. IWO)

    notification is given shall have informed the other Contracting Party in writing through diplomatic channels that it does not accept such

    notification as to that territory. In th, absence of such extension, the


    present Convention shall not app)v to any such territory. (2) At any time after the expiration of one year from the entry into force of an extension under paragraph (1) of this Article, either of the Contracting Parties may, by written notice of termination given to tho other Contracting Party through diplomatic channels, terminate the application of the present Convention to any territory to which it has beon extended under paragraph (1), mid in such event the present Convention shall cease to apply, six months after the date of such notice, to the territory or territories named therein, but without affecting its continued application to the United States, the United Kingdom or to any other territory to which it has been extended under paragraph (1) hereof. (3) In the application of the present Convention in relation to any territory to which it is extended by notification by the United States or the United Kingdom references to the "United States" or, as the case may be, the "United Kingdom" shall be construed as references to that territory. (4) The termination in respect of the United States or the United Kingdom of the present Convention under Article XXIV or of Article VI shall, unless otherwise expressly agreed by both Contracting Parties, terminate the application of the present Convention or, as the cue may be, that Artidca to any territory to which the Convention has been extended by the United States or the United Kingdom. (5) The provisions of thle preceding paragraphs of this Article shall apply to the Channel Islands and the Isle of Man as if they were colonies of the United Kingdom. ARTWCIJE XXIII (1) The present Convention shall be ratified and the instrument& of ratification shall be exchanged at Washington as soon as possible. (2) Upon exchange of ratifications, the present Convention shall have effect (a) as respects United States tax, for the taxable years beginning on or after the first (lay of January 1945; (b) (i) as respects United Kingdom income tax, for the year of assessment beginning on the 6th (lay of April 1945 and subsequent years; (ii) respects United Kingdom, surtax, na

    for the year of asses meant beginnhig on the 6th day of


    April 1944 anti subsequent years; and (iii) as respects United Kingdom excess profits tax and national defence contribu(2781)

    [No. 15,t0J

    14 tion, for any chargeable accounting period beginning on or aftor the first day of April 1945 and for the unexpired por. Lion of any chargiable accounting period current atithat date.

    AIrTICLI XXIV
    (I)* The present Convention shall continue in effect intleinitely but either of the Contracting Parties may, on or before the 30th day of June in any year after the year 1040, give to the other Con. treating Party, through diplomatic channels, notice of termination and, in such event, the present Convention shall cease to be effective (a) as respocta United States tax, for the taxable years be. ginning on or after the first day of January in the year next following that in which such notice is given; (b) (i) is respects United Kingdom income tax, for any you of amesment beginning on or after the 6thl day of April in the year next following that in which such notice is given; (ii) is rnspecta United Kingdom surtax, for any year of uw se,,mnent beginning on or after the 0th day of April in the year in which such notice isgiven; and(iii)as respects United Kingdom excess profits tax and national defence contribu. tion, for any chargeable accounting period beginning on or after the first day of April in the year next following that in which such notice isgiven and for tho unexpired portion of any chargeable accounting period current at that dat.. (2) The termination of the present Convention or of any Articl thereof shall not have the effect of reviving any treaty or arrangement abrogated by the present Convention or by treaties previously concluded between the Contracting Parties. IN WITNESS wntwcor the above-mentioned Plenipotentiaries have signed the present Convention and have affixed thereto their soal DONe at Washington, in duplicate, on the 10th day of April, 1945.
    FOR TIlE GOVEIINMENT OF TIlE UNITED STATES OF AMERICA:
    scaleL )

    E R STMrINIUs Jr

    FOR THE GOVERNMENT OF THlE UNITED KINGDOM OF GREAT iTIIIAIN AND NORTlIERN IRELAND: [SEAL) HAl V1AX.

    (12"482)

    PROTOCOl. The governmentt of the United States of America and the Govern. ment of the United Kingdom of Great Britain and Northern Ireland, Desiring to conclude a supplementary Protocol modifying in certain
    rpects the Convention for the avoidance of double taxation and the provetiion of fiscal evasion with respect to taxes on income which

    was signed at Washington on April 10, 1945, ('j Have agreed as follows:
    ARTICLE I

    Paragraph (3) of Article XI of the Convention of April 16, 1945 for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income shall be doomed to be deleted and of no effect.
    ARTiCLm 1 This Protocol, which shall be regarded as an integral part of the

    said Convention, shall be ratified and the instruments of ratification thereof shall be exchanged at Washington. IN WITNESS WHEREOF the underlined Plenipotentiaries, being authorized thereto by their respective Governments, have signed this
    Protmool and have affixed thereto their seals.

    DONe: at Washington, in duplicate, this sixth day of June, 1946.


    FOR TIlE GOVERNMENT OF TIlE UNITED 8TATE8 OF AMERICA: [1EALI JAMES F BYRNICS

    &Cre(rj of Rate

    of tAe United tales of Americ


    FOR TIlE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND: JOHN BALFOUJR. [SEAJL0

    lli MAfajesly's
    Envoy Elraordinar
    [ge, p. 2.,I l (15)

    and Minister I'lenipotentiary

    in Washington

    (2783)

    [No. 15401

    16

    AND WHEREAS the said convention and the said supplementary

    protocol have been ratified by both Governments, and the instrument. of ratification of the two Governments were exchanged at Washingto on the twenty-fifth day of July, 1946; AND WHEREAS it is provided in Article XXIII of the said convention that upon the exchange of instruments of ratification the convention shall have effect as respects United States tax, for the taxable yea beginning on or after the first day of January 1945, and shall have effect as respects United Kingdom income tax, for the year of asse. ment beginning on the sixth day of April 1945 and subsequent year and shall have effect as respects United Kingdom surtax, for the yearof assessment beginning on the sixth day of April 1944 and subsequent years, and shall have effect as respects United Kingdom excess profit. tax and national defense contribution, for any chargeable accounting period beginning on or after the first day of April 1945 and for the unexpired portion of any chargeable accounting period current at that date; AND WHEREAS it is provided in Article II of the said supplementary protocol that the protocol shall be regarded as an integral part of t said convention; Now, THEREFORE, be it known that I, Harry S. Truman, President of the United States of America, do hereby proclaim and make public the said convention and the said supplementary protocol to the end that the same and every article and clause thereof may be observed and fulfilled with good faith by the United States of America, and by the citizens of the United States of America, and all other person subject to the jurisdiction thereof, the said convention as modified by the said supplementary protocol being deemed to have effect as pro. vided in Article XXIII of the said convention, as aforesaid. IN TESTIMONY WHERIOF, I have hereunto set my hand and caused the Seal of the United States of America to be afied. DONE at the city of Washington this thirtieth day of Jtly in tjh year of our Lord one thousand nine hundred forty-six and of the [SEAL] Independence of the United States of America the one
    hundred seventy-first.

    HARRY S TRUMAN By the President:


    DZAN Acusioq

    Actirg Sereary of SW.

    (2784)

    'p

    SECOND SUPPLEMENTARY PROTOCOL, SIGNED MAY 25, 1954

    (2785)

    PresidentialMessage of Transmittalto Senate (Including Materials Enclosed Theremith)

    (2787)

    83D CoNxMSon

    SENATE

    Rd Sension

    II

    SUPPLEMENTARY PROTOCOL WITH THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND RELATING TO TAXES ON INCOME

    MESSAGE
    IOM

    THE PRESIDENT OF THE UNITED STATES


    TIANBuMWU

    THE SUPPLEMENTARY PROTOCOL BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELANT, SIGNED AT WASHINGTON ON MAY 25, 1954, AMENDING THE CONVENTION FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME SIGNED AT WASHINGTON ON APRIL 16, 1945, AS MODIFIED BY THE SUPPLEMENTARY PROTOCOL SIGNED AT WASHINGTON ON JUNE 6, 1946
    JUNz

    22, 1954.--Protocol was read the first time and the injunction of secrecy was removed therefrom. The protocol, the Presidqnt's mesage of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    THE WHITE Hous;, June 55, 1954.

    To the Senate of the United Stata: With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the supplementary protocol between the United States of America and the United Kingdom of Great Britain and Northern Ireland, signed at. Washington on May 25, 1954, amending the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at Washington on April 16, 1945, as modified by the supplementary protocol signed at Washington on June 6, 1946. I also transmit for the information of the Senate the report by the Acting Secretary of State with respect to the supplementary protocol
    78096 0-4--vol. 2--(28

    (2789)

    PROTOCOL WITH GREAT BRITAIN AND NORTHERN IRELAND

    of May 25, 1954. That protocol has the approval of the Department of State and tie Department of the Treasury. DWIGHT D. EISENHOWER. (Enclosures: (1) Report by the Acting Secretary of State; (2) sup. plemeattary protocol signed Mlay 25, 1954, amending the inctome-tu convention of April 16 1945, as modified by the protocol of June 6,

    1946, with the United kingdom.)

    DEPARTMENT OF STATE,

    Walshington, June 1, 1954.

    now WAite Itvoue: The undersigned, the Acting Secretary of State, has the honor to lay before the President, with a view to its transmission to the Senate to receive the advice and consent of that body to ratification, if the
    President approve thereof, a supplementary protocol between the and Northern Ireland, signed at Washington on May 25, 1954, amending the convention for the avoidance of double taxation and the Washington on April 16, 1945, as modified by the supplementary protocol signed at Washington on June 0 1940. The supplementary protocol submitted herewith has the sole purpose of modifying the territorial-extension provisions of the 1945 con. vention (60 Stat. 1391; 8. Ex. E, 79th Cong., 1st sess.) in such a way

    The PRESIDENT

    United States of America and the United Kingdom of Great Britain

    prevention of fiscal evasion with respect to taxes on income signed at

    as to make the procedure specified therein consistent with corresponding provisions in tax conventions in force between the United States and certain other countries, particularly the income-tax convention of April 29, 1948, with the Netherlands (62 Stat., pt. 2, 1757; 8. Ex. I, 80th Cong., 2d sess.). The protocol has two articles. Article I would amend paragraph (1) of article LXXII of the 1945 convention, which sets forth the procedure by which the convention may be extended to overseas territories. That procedure makes it possible for either country to give formal notification of a desire that the convention apply to "all or any of its colonies, overseas territories, protectorates, or territories in respect of which it exercises a mandate, whict impose taxes substantially similar in character to those which are the subject" of the convention. A period of 60 days from the date of that notification is allowed for the country receiving the notification to act with 'ietpect to the matter. In the absence of a specific rejection, the extended application would be automatic at the end of the period of CO days. In that event, the convention in its entirety would apply to the territories specified in the notification, no provision being made for modifying or eliminating any of the provisions of the convention so far as the territories are concerned. The 1945 convention with the United Kingdom was approved by the Senate and was brought into force in 1946. As a result. of action taken, and policies expressed, by the Senate in approving tax conventions with certain other countries, in 1948, 1951, and 1952, having the effect of deleting or modifyingcertain provisions similar to provisions which had been approved ]n the convention with the United Kingdom

    (2790)

    PROTOCOL WITH GREAT BRITAIN AND NORTHERN IRELAND

    garding thie taxation of gains from the sale or exchange of capital assets (and taxation of undistributed earnings, profits, income, or the surplus), it became appanrent that any proposal involving extension open to question. It became necessary, thert4ore, to consider a forniula by which, in extending the convention to territories, the applicatioti of certain provisions would not he extended or could be extended with necessary modifications. Moreover, it was considered that the imprctical 60-day time limit on action by the country receiving a notification should be eliminated. A workable precedent for territorial-extension provisions accomplishing those objectives is found in the convention of 1948 with the Netherlands which entered into force after approval bv the Senato during the 80th Congress. The pertinent article of that convention permits the giving of a notification with respect to overseas areas so that, the operation of the convention, "either in whole or as to such provisions thereof as may be deemed to have special application," would be extended to such area. The time limitation was not included, so that either country can take as long as is neexled to complete its study and final action with respect to a notification from the other country. The supplementary protocol submitted herewith amends article XXII (1) of the 1945 convention with the United Kingdom so that (a) certain provisions can be deleted or modified so far as extension to part icular colonies or other territories isconcerned; (b) no limitation of time is placed on action by either country in taking action with respect to a notification from the other; and (e) no extension would be effective until formally accepted by the country receiving the notification. In the event of any notification from the British Government, pursuant to the procedure provided by the convention, as amended, the procedure would be as follows: (a) The proposed extension with respect to particular British colonies or other territories will be subjected to a thorough study within the Department of the Treasury in order to determine, from the standpoint of tax administration, whether and to what extent the proposal can be accepted. (M)The'text of the formal notification; embodying the proposal for extension to particular British colonies or other territories, will be communicated to the Senate for its consideration and approval. (c) A formal notification to the British Government of acceptance of such proposal by this Government will not be sent unless and until the Senate gives its approval. Article II of the supplementary protocol provides that the protocol shall be regarded as an integral part of the convention, that it shall be ratified, and that instruments of ratification shall be exchanged.
    of such provisions to British colonies or other territories would be

    (for example, provisions in tile convention with the Netherlands re-

    (2791)

    PROTOCOL WiMM UREAT- BRITAIN AND NORTHERN IRELAND

    The protocol has the approval of the Department of State and the Department of the Treasury. Respectfully submitted. ROBERT MURPHY, Acting Secretary. (Enclosure: Supplementary protocol signed May 25, 1954, amend. ing the income-tax convention of April 16, 1945, as modified by the protocol of June 6, 1946, with the United Kingdom.)

    [Text of protocol]

    (2792)

    Senate Committee Hearings


    [No hearings held

    (2793)

    ,i'enall. ( ommilflre Reportr August 6I,19.54


    Itxectitive Report No. 6
    S83d I'ongregs, 2d S('ion

    Sm,inte Foreign Rlaht ions C'omm~ittee,

    (276.')-11,)

    &WDOI CoNoPEs d Se88ion

    tW

    II

    SENATE

    EXZCUTIVo

    No. 6

    RzPT.

    DOUBLE TAXATION CONVENTIONS WITH JAPAN AND TIlE UNITED KINGDOM

    FImDAY, AUGUST 6, 1954.-Orderod to be printed

    Mr. WILEY, from the Committee on Foreign Relations, submitted

    the following

    REPORT
    ITo aeconmpany Executive D, 83d Cong., 2d sea.; Executive E, 83d Cong., 2d seas.; and Executive 11, 83d Cong., 2d soss.)

    1. COMMITTEE RECOMMENDATION the conventions listed below and recommends that the Senate give its advice and consent to their ratification: 1. Convention with Japan relating to taxes on income (Ex. D, 83d Cong., 2d sess.) 2. Convention with Japan relating to taxes on estates, inheritances and gifts (Ex. H, 83d Cong 2d sess.) 1 3. Supplementary protocol with the United Kingdom of Great Britain and Northern Ireland relating to taxes on income (Ex. H, 83d Cong., 2d seos.)
    2. COMMITTEEI1 ACTION

    The Committee on Foreign Relations has had under consideration

    Over a period of years the Department of the Treasury, in cooperation with the Department of State, has negotiated a series of double taxation conventions with, certain foreign governments. These conventions have been negotiated in order to relieve American nationals, on a reciprocal basis, from paying taxes in the United States on incomes, inheritances, and gifts upon which they have been taxed in a foreign country. In addition to the double taxation conventions listed above, the committee also has pending before it the following conventions: 1. Convention with Belgium relating to taxes on estates limitations, the convention of April 29, 1948, relating to taxes

    and successions (Ex. 0, 83d Cong., 2d sess.). 2. Notification from the Netherlands to extend, with certain (27,1))

    DOUBLE TAXATION CONVENTIONS

    on income and certain other taxes, to the Netherlands Antillm (Ex. I, 83d Cohg., 2d sess.). 3. Convention on double, taxation with the Federal Republic of Germany (Ex. J, 83d Cong., 2d sess.). The committee has not acted upon these conventions because they were received late in the session and it was felt that there should be opportunity for interested parties to study them before the committee acts upon them. The conventions with Japan and the United Kingdom, upon which favorable action is now recommended, were referred by the chairman to Mr. Colin F. Stain chief of staff of the Joint Committee on Internal Revenue Taxation. The committee felt that these conventions should be examined bearing in mind the relationship which they have to the tax law of the United States. Consideration was given to the holding of hearings on these con. ventions. In view of the report from Mr. Stam, which noted that, with two exceptions, the conventions here recommended for ratifica. tion are similar to past conventions, and noting that the committee files contain several letters in support of the pending conventions and indicate no opposition thereto, tihe committee decided that hearings were unnecessary. It will be observed that the communication from the Joint Committee on Internal Revenue Taxation calls attention to the follow. ing new elements in these conventions: 1. The provision in the Japanese income tax convention (art. XIV) which provides a credit against tax of 25 percent to the American recipient of dividends from Japanese corporations. 2. The liberalization of the student and business apprentice provisions with respect to income in the Japanese income tax convention. 3. The increased personal exemption for Japanese residents in the United States. 4. The inclusion of gift tax provisions in the convention with Japan relating to taxes on estates and inheritances. Consideration was given to these new provisions, and the committee believes that they should be approved.
    S. ANALYSIS OF PENDING CONVENTIONS

    The communication from the Chief of Staff of the Joint Committee on Iqternal Revenue Taxation is as follows:
    Washington, August 8, 1954. Hon. ALEXANDER WILEY, Senate Office Building, W1ashington, D. C. DEAR 8ENATOR WILEY: At your request, I have examined the following income
    CONGRESS OP TlE UNITED STATES, JOINT COMMITTEE ON INTERNAL, REVENUE TAXATION,

    tax conventions which are now pending before your committee: Convention with Japan relating to taxes on income (Ex. D, 83d Cong.,

    Convention with Japan relating to taxes on estates, inheritances, and gifts (Ex. E, 83d Cong., 2d ness.) Supplementary protocol with the United Kingdom of Great Britain nd Northern Ireland relating to taxes on income (Ex. U, 83d Cong., 2d sess.) The estate and gift tax convention with Japan closely parallels estate ta conventions' which the Senate has previously approved with other countries.

    2d sess.)

    (2798)

    DOUBLE TAXATION CONVZN72O0S

    The pending income tax convention with Japan contains the same objectives as other income tax conventions already in effect; namely, the elimination, insofar as possible, of double taxation with respect to income, either by exemption in one of the countries or by the application of the credit principle, or both, and the establishment, of a system of reciprocal administrative assistance between the tax authorities of the two countries. The proposed Japanese income tax convention, however contains several features which are not contained in other conventions now In force. While these provisions will be discussed In detail in a supplementary memorandum, it is deemed desirable to bring several of these features which may be controversial, specifically to the attention of your committee. Wor example the convention provides for a credit against tax of 25 percent to the American recipient of dividends from Japanese corporations. The rationale of this credit is that the American shareholder has borne the tax burden of the Japanese corporate income tax imposed on the earnings and profits out of which the dividend is paid. (Under the convention, Japan also agrees not to impose any withholding tax on dividends going to American shareholders other than the Japanese corporate tax; at the present time, Japan imposes a 20-percent withholding tax on outgoing dividends which is reduced to 10 percent if the investment tends to further the Japanese economy.) The 25-percent tax credit on dividends from Japanese corporations will be available to the American recipient only if he includes in income the amount of the credit, i. e., 25 percent of the dividends received, as well as including In income the amount of the dividends received. It should be pointed out that this credit to alleviate the burdens of double taxation of corporate earnings is conaiderably larger than the 4-percent dividends received credit granted to individuals for dividends received from domestic corporations which is contained in H. R. 8300 (as passed by the Senate on July 29, 1954). It should also be pointed out that the credit is granted under the proposed treaty at, fixed percentage of 25 percent without regard to possible future variations In the Japanese corporate tax rate. Thus, if the Japanese corporate tax rate were reduced in the future to less than 25 percent, the American recipient of dividends from a Japanese corporation would still be entitled to receive the 25 percent-credit against his United States income tax. The other unusual features of the proposed convention which should be called specifically to your committee's attention relate to (1) the liberalization of the student and business apprentices rule, and (2) allowance of an increased personal exemption for Japanese residents (other than officers or employees of the Japanese Government) who are temporarily present In the United States. The first of these provisions permits a Japanese student who is temporarily present in the United States to be exempt from United States tax on any remittances from abroad, including payments by his Japanese employer. Under other conventions now in effect, this type of provision is usually limited to an exemption of remittances to cover the maintenance and support of the student and does not extend to wage or salary payments received from a foreign employer. Also, under the business apprentice provision, a Japanese employee of a Japanese corporation who is temporarily present in the United States for a period not to exceed I year will be exempt from tax on any compensation-received from his Japanese employer ifthe tolal compensation on an annual basiardoes not exceed $6,000. In contrast, the usual business apprentice provision in other treaties only exempts remittances received from abroad for purposes of maintenance of the business apprentice, rather than exempting his total wages. The convention also will give to a Japanese nonresident alien (other than an officer or employee of the Japanese Govern. ment) a limited increase in personal exemptions for his spouse and children who are present and living with him in the United States for any part of his taxable year. There are no similar provisions for increased personal exemptions for nonresident aliens in other tax conventions. In general, a nonresident alien is entitled only to a personal exemption for himself under the internal revenue laws. The supplementary protocol with the United Kingdom is intended to modify the provisions contained in the income tax convention with the United Kingdom for extending the provisions of the convention to the colonies, overseas territories, protectorates, or mandated territories of the contracting countries. This modifcation is deemed necessary so that the provisions of the present convention may be extended with certain limitations on the application of the convention to the territories to which extended. These modifications are necessary to reflect the policies expressed by the Senate in approving tax conventions with other ooune subsequent to its approval in 1945 of the tax convention with the United Moiodom.

    (2799)

    DOUBLE STATION C0NWENTION&

    A memorandum setting forth a detailed analysis of the provisions of the above proposed tax conventions will be submitted to your committee. This memoi random will give particular emphasis to those provisions which depart from the customary provisions of other tax conventions now in force. Sincerely yours, COLIN F. ST'll, Chief of Staff.
    4. INCOME TAX CONVENTION WITH JAPAN

    (Memorandunm from the Joint Committee on Internal Revenue Taxation) Tie Income tax convention with Japan has the general purpose of affording relief fromt double taxation resulthig from the fact that the tax laws of the two countries imposed tax liability on different, bases. It also establishes procedures for mutual administrative assistance between the fiscal authorities Vf the two countries. The convention does not contain any of the prosisiotis which the Senate hau previously deemed objectionable lit its consideration of other tax treaties. Thus, the Jnpanese income tax convention does not contain any discrimination against tlte earnings of public entertainers, nor does it provide for exem pIotion from United States tax of capital gains or accumulated earnings. The pro% ision for collection of taxes by one of the contracting states for the other is limited to that necessary to Insure that the benefits provided in the convention will not be enjoyed by persons not entitled thereto. Correspomtding to the principles of ot htr hicome tax conventlonts, it is prodlded that an enterprise of one of the contracting countries will not be subject to tax by the other on its business profits unless it.has a permanent establishment itt the other stste. Thus, the inere sale by a Japanese enterprise of Its products in the United States will not subject the Japanese concern to tax ont the profits fromt such sale unless tite concern has a permanetnt esteablishiniet it the Uttited States. A reciprocal exemption of shipping and ttircraft operating profits is provided wonder article V where the ships or aircraft are registered itt one of the contracting countries or are registered in a thiird country which exempts from its tax shippittg attd aircraft operating profits of both Jap and the United States. The lattertype exemption is a new one which is ntot contained itt other income-tax conventions now itt effect. At the present time, the exemption of earnings from the operation of aircraft will operate almost exclusively in favor of the United States. Tax on interest A reciprocal reduction to 15 percent of the rate of tax on interest is provided tinder article VI where the Interest is received from sources within one of the contracting states by a resident. corporation, or other entity of the other contracting state not having a permanent establishment in the former. At the present time thr Japanese withholding tax on outgoing interest is 20 percent except where the loan tentds to further the Japanese economy in which case the withholding tax is 10 percent. Thus. interest on most Untited States loans to Japanese enterprises will not be affected at the present time by this provision. A similar reciprocal reduction to a tax rate of 15 percent is provided itt the e&,t of royalties from copyrights, artistic and scientific works, patents, designs, secret processes, trade-marks, and similar properties where the royalties are derived from sources within one of the countries by a resident, corporation, or other entity of the other country having no permanent establishment itt tire former cotnttry. This provision sPecifically Includes film rentals which are subject to a withholding tax of 20 percent under the Japanese income tax. As in the cam of most other income-tax cotventions, it is provided that. a resident, corporation, or other entity deriving ittcome from real property (other than interest from realestate mortgages or real-estate bonds) or income from royalties derived from natural resources may elect to he stmbject to tax upon a net basis rather than upon the gross income fro~t such sourc.s. Where such att election is made, tax L Imposed as though the resident, corporation, or other entity had a permanent establishment it the other country. Earned income Reciprocal exemption of earned income (compensation for labor or personal services, including professional services) is provided in article IX if an individual resident of one of the countries is temporarily present in the other. Where hil compensation is derived from services performed as an officer or employee for&

    (2800)

    DOUBLE TAXATION CONVENTIONS

    corporation, resident, or other entity of his country of residence, the compensation is exempt without regard to amount provided his presence in the other country does not exceed 180 days during the taxable year. In other cases (for example, amounts received by public entertainers of the United States from shows performed in Japan) the exemption is limited to a maximum amount of $3,000 (or the Japanese equivalent thereof) and to a maximum period of 90 days In the taxable year. A reciprocal exemption of compensation paid by one of the governments tc. its citizens who are otherwise subject to tax by the other government is provided inarticle X. The exemption does not apply, however, if the services are performed in connection with a trade or business carried on by the government for profit. This latter limitation is similar to one contained in the income tax conventions with the United Kingdom, Ireland, and New Zealand. This exemption is expressly made inapplicable to a citizen of one of the countries who has been admitted t the other country for permanent residence. Thus, no possibility exists of a conflict between these provisions of the convention wv!ih section 247 of the Immigration and Nationality Act (Public Law 414, 82d Cong.). For example, a Japaneso national would not be exempt from United States Income tax on salary paid to him by the Japanese Government for services performed in the United States if he has been admitted to the United States for permanent residence. On the other hand, if such indivudual became a United States citizen, he would acquire exemption from United States tax on compensation paid to him by the Japanese Government; however, such cases of dual nationality would appear to be rare. This exemption of tax on compensation paid by one of the contracting governments should prove particularly important to United States citizens employed as technical experts by the United States Government for performing services within Japan where their employment is not of such a nature as to bring them within the diplomatic immunity. Exemption of compensation received by visiting professors or teachers is provided under article XI on a reciprocal basis in cases where the duration of the visit does not exceed 2 years and where the teacher or professor is present in the taxing country either under an exchange program or at the invitation of the taxing government or of an educational establishment therein. The latter limitation is similar to that contained in the income tax convention with the Netherlands and is somewhat stricter than similar provisions contained in other tax treaties.
    Students and business apprentices

    The provision contained in article XII dealing with the exemption of certain amounts received by students and business apprentices represents a liberalized version of similar provisions contained in other income tax conventions. Thus, a resident of one of the contracting countries who is temporarily present in the other country solely as a student is exempt from tax by the other country on any remittances from abroad, including any payments received from his employer abroad. In most other income tax conventions, the student would only be exempt on remittances made as a gift or made specifically to provide for his maintenance. Article XII also provides that the recipient of a grant from a charitable, etc., organization of one of the contracting countries while temporarily present in the other country will be exempt from tax by such other country on the grant. (unless the grant is in the nature of compensation for personal services). This provision makes no change in the United States income tax treatment, but. would affect treatment under the Japanese incomq tax since the Japanese income tax extends to gifts. This provision is similar to those contained in other treaties now in effect. Under paragraph 3 of article XII an exemption not found in other income tax conventions is provided. Under this provision, exemption is extended on a reciprocal basis to a resident employee of an enterprise (or charitable, etc., organization) of one of the contracting countries who is present for not more than I year in the other country to acquire technical, professional, or business experience In the other country. The exemption is limited to cases where the annual compensation paid by the employer does not exceed $6,000, or the Japanese equivalent

    in yen. This provision, because of the dollar limitation, would appear to be of


    more benefit to Japanese employees temporarily present in the United States than to United States employees temporarily present in Japan.
    &ourcesof income

    Under article XlII rules respecting the source of Income are specifically provided. In general, these source rules are derived from the source rules conta ned
    in the United States Internal Revenue Code. While specific provision for source

    (2801)

    DOUBLE TAXATION CONVENTIONS

    rules has become a familiar part of estate tax conventions, this treaty is the am income tax convention to provide detailed source rules. The only departum front the source rules contained in the United States internal revenue laws and regulations are found in the rules relating to dividends and interest. The de. partures here are of a technical nature and are intended princinlilly to liheralit Mhe foreign tax credit provisions contained in article XIV. lWor exaniple, it 6 provided that inter('st paid b)y one of the contracting countries (including a local government or enterprise not having a permanent establishment in the other country) is to be treated as income from sources within the country where the interest, is paid. Thus, interest, paid on United States Governineit securities would be regarded as income from sources within the United States, even though under Japanese law such interest might. be regarded as derived front source within Japan wlv re the sRcurities result from investmnenus made from deposits in banks located within Japan. Tax credit provisions The principal method for preventing double taxation, other than the exeniptlono or reduction in tax rates provided in other articles of the treaty, is contained iII article XIV. This provision gives recognition by treaty to the foreign tax credit provisions of the tax laws of the respective countries. in this respect, it is similar to provisions of income tax conventions now in force. The article contains. however, two novel provisions. The first of these provisions relates to the foreign tax credit under the Internal Revenue Code of the United States for interest received from a United States enterprise with a permanent establishlnent in Jpan. It is provided that interest. received from such an enterprise (arising from a (debtconnected with the htsisess of the permanent establishment) will Ie treated as income from sources within Japan to the extent It is so treated under Japanew law. Thus,_ where a United States enterprise ha.s a branch in Japan antd payp interest on loans (the proceeds of which are employed in the operation of tip branch), the interest so paid will be deemed interest from sources within Japan to the extent that the proceeds of the loan are utilized in operating the Japanese branch. As a result, an .lapaneso tax Imposed on such Interest would he entitled to foreign tax credit under United States tax laws; whereas, without this provision of the treaty, such interest would be deemed derived from sources within the United States and would thus not be entitled to a foreign tax credit for any Japaneso income tax imposed thereon. Tax on dividends The other unique feature of article XIV is the provision that the United States recipient including,%a citizen, resident, corporation or other entity of the United States) of a dividend from a Japanese corporation shall be deemed to have paid Japanese income tax in amount equal to 25 percent of such dividend and will Ib entitled to a foreign tax credit under the pertinent provisions of the Internal Revenue Code In respect of such tax, provided that the recipient also includes In gross income the amount of the tax thus deemed to have been paid. To furnish a simple illustration of the effect of this provision, assume that a United Stat citizen receives a dividend of $100 from a Japanese corporation. Under the treaty provision, he will be deemed to have paid Japanese income tax of $25 on this dividend (representing, in effect, the corporate tax burden borne by the earnings out of which the dividend is paid). He will then be entitled to a foreign tIW credit of $25 against his United States income tax provided that he includes $25 as well as the amount of the dividend in his gross income. Thus, assuming that his effective United Stat6s tax is 50 percent, in respect of the dividend from the Japanese corporation, he would include $125 in gross income, pay tax thereon of $62.50 against which he would apply a foreign tax credit of $25. This provision is somewhat similar to article XI1 of the income tax convention with the United Kingdom except that tinder that convention, credit is permitted (on a similar "grossing up" basis) for the United Kingdom tax deemed under its laws attributable to the dividend; whereas, under this provision of the proposed Japanese convention the credit is established at a fixed percentage of 25 percent. The basis for setting the credit at 25 percent is that 25 percent approximates the amount necessary to equalize the tax burden between income which has been taxed at both the corporate and shareholder levels aid Income which has been taxed at only the individual level under the prevailing Japanese individual and corporate Income tax rates. Article XIV further provides that Japan will Impose no tax on the United States recipient (unless the recipient is a Japanese resident or has a permanent establishment in Japan) with respect to dividends other than the corporate tM

    (2802)

    DOUBLE TAXATION 'CONVENTIONS

    Imposed on the earnings and profits out of which the dividends are paid. This provision is a unilateral concession on the part of Japan, and, in effect, grants to the United lStates recipient (except as noted above) with respect to dividends, a complete exemption from the Japanese tax at the shareholder level. Exemption for charitableorganizations Charitable, etc., organizations of one of the contracting countries are specifically exempted from tax in the other country under article XW to the extent provided under the laws of the other country. This provision corresponds to provisions contained in the income-tax conventions with Canada and with the Union of South Africa. Thus, a charitable foundation organized in Japan would be exempt from United States income tax on its income from United States sources, except to the extent it would be denied exemption under the internal revenue laws, such as the unrelated business income provisions. This provision should prove of especial benefit to United States charities operating in Japan if the Japanese laws are aen1oded to provide an exemption in accord with the spirit of this treaty provision. Under existing Japanese tax laws, a charitable organization is doomed to derive taxable income from contributions made to it. Exemptions for Japanese nonresident aliens The provisions of article XVI are not found in other tax conventions now in effect. This article allows to a Japanese nonresident alien living In the United States (other than an officer or employee of the Japanese Government) an additional personal exemption for his spouse and for each of his children provided that they are present in the United States and residing with him at any time during the taxable year. The credit may not exceed, however, that part of the credit otherwise allowable which his gross income from sources within the United States for the taxable year bears to his entire gross income for the year. Under the internal revenue laws, a Japanese nonresident alien would be allowed only one personal exemption. Thus, this provision liberalizes the present exemption provisions but does not accord the Japanese nonresident alien all of the possible personal exemptions to which a United States citizen might be entitled. On the other hand, the treaty provision grants to a United States citizen who is resident inJapan the same exemptions for dependents as are granted to a national in Japan who isresident there. Other provisions The provision for exchanging of information between the fiscal authorities of the contracting states is limited to that necessary to carry out the provisions of the convention and to prevent fraud or tax avoidance. In addition to the above-described provisions, the convention contains articles similar to those of other conventions, such as the article describing the taxes which are subject to the convention, an article containing definition of terms, articles setting forth limited provisions for collection of taxes of the other contraeting state, appeal from double taxation, safeguarding of the diplomatic exe'nptions and a general provision that the convention shall not restrict any exemption, deduction, or credit otherwise accorded by the laws of the contracting countries. As in other conventions, it is provided that the convention shall be effective with respect to taxable years beginning on or after the let day of January of the calendar year in which'the exchange of the instruments of ratification takes place. It is also provided that either of the contracting countries may terminate the convention after a period of 5 years with termination to be effective not earlier than 8 months after the giving of notices of such termination. The memorandum which accompanies the convention is intended to resolve questions of interpretation as to the interrelation of certain of the provisions. Without the memorandum article XIV might be construed to defeat the exemption provided in articles R (1), XI, and XII. Thus, article XIV provides that each of the countries in determining tax on its residents may tax all Income subject to tax under its laws without regard to the other provision of this convention. The manner in which this proviso could be construed to deny the exemption provided In other articles can be shown by the following example: Under Japanese law, an individual becomes a Japanese resident after the expiration of I year. Hence, under article XIV Japan could tax a United Sates professor who taught in Japas under an exchange program for more than 1 year (but not more than 2 years) even though the professor's remuneration from teaching in Japan would be exempt under article XI. The effect of the memorandum Is to resolve this conflict by making the provisions of the exempting article (art. XI in the example) paramount In such cases.

    (2803)

    DOUBLE TAXATION CONVENTIONS

    However the memorandum specifically provides that neither country is to he precludeA from taxing its own nationals or citizens by reason of the exemptions provided in articles XI and XII. Thus, in the example, the professor's sala would still be subject to United States income tax (but not Japanese incometalu unless specifically exempted by provisions of the internal revenue laws of the United States.
    5. ESTATE AND GIFT TAX CONVENTION WITH JAPAN

    (Memorandum from the Joint Committee on Internal Revenue Taxation) The estate and gift tax convention with Japan is a new type of treaty since it combines for the first time a gift tax and an estate tax convention. Thie United States has estate tax conventions in effect with Canada, United Kingdom, France, Norway, South Africa, Switzerland, Finland, Ireland, Greece, and Australia. A gift-tax convention is now in effect between the United States and Australia. This convention, however, is the first dual estate and gift-tax convention. There appear to be no significant departures in this convention from the usual type of provisions which the Senate has approved in estate tax treaties now in effect. Difference# in United States and Japanese tax laws As in the case of other estate tax conventions, the proposed convention is intended to alleviate the burden of double taxation and to prevent fiscal evasion with respect to taxes on estates, inheritances, and gifts. The proposed estate and gift convention with Japan is of special importance in carrying out these objectives because the differences in jurisdictional application of thie death duties and gift taxes of the two countries are more likely to'result in double taxation than in the case of most other countries. The jurisdiction to tax undir the Japanese inheritance and gift taxes is based upon (1) the domicile in Japan of the heir devisee, legatee, or donee, or (2) tha situs of property in Japan. This jurisdictional application ari.es from the fact that the Japanese Inheritance tax ih levied against the heir, devise, or le atee and is imposed upon the receipt of the inheritance, devise, or bequest. This differs from the United States estate tax which is levied against the decedent's estate and is imposed generally upon the property transferred at death. Similarly, the Japanese gift tax is a tax levied against the donee and is imposed upon the total gifts received by the donee during the taxable year whether from one or more donors. This differs from the United States gift tix which is imposed upon the donor and which takes into account gifts received in prior years in the computation of the taxable base. On the other hand, jurisdiction to tax tinder the United States estate and gift taxes is bwued upon (1) the United St4tes citizenship of the decedent or donor, (2) domicile in the United States of the decedent or donor, or (3) situs of property in the United States. These differences in jurisdiction to tax between the two countries can result in both countries imposing death duties or gift taxes on the same transfer
    of property.

    Credit provisions The principal method of achieving relief from the burden of double taxation is provided by allowance of credits under article V. This provision is similar to provisions contained in other estate-tax conventions now in effect. It provides for a credit to be allowed by the country which imposes tax on property situated outside that country for the tax imposed by the other country with respect to the property situated in such other country. The amount of credit may not exceed the portion of the tax imposed by the crediting country which is attributable to such property. Credit is also provided where each of the countries imposes tax by reason of the nationality or domicile of the decedent, donor, or beneficiary with respect to property which is situated at the time of the transfer outside of both countries. In such cases, credit is allowed for the lesser of the two taxes imposed with respect to such property, the credit being apportioned between the two countries on the basis of the portion of such tax which the tax of the crediting country (attributable to such property) bears to the sum of the taxes of both countries (attributable to such property). A similar allocation of credit for the lesser tax is also allowed with respect to property taxed by both countries when the property is deemed (1) by each country to be situated in its own territory, or (2) by one country to be situated in either country and by the other to be situated outside both countries or (3) by each country to be situated in the other country. The second of the above situations is a provision which has not been contained in other estate te I

    (2804)

    DOUBLE TAXATION CONVENTIONS

    conventions now in effect. This situation could arise, for example, whore the Dropertv deemed subject to tax by both countries would be considered under the United States estate of gift tax laws to be situated In Japan but tax would be imposed because the decedent or donor was domiciled In or a citizen of the United States. Japan, on the other hand might construe the property to be situated outside both Japan and the United States but would impose tax because of the domicile of the beneficiary within Japan Article V also provides for the relationship of credits authorized by the convention and credits authorized by the statutes of the contracting countries. It. isspecifically provided that credit may be taken either under the statute or under the convention, whichever is greater, but that a double credit may not be taken. it is also provided that the credit under the convention is to be computed after allowance has been made for other credits againxt tax tinder the respective statutes of the contracting countries. For example, the credit under the convention for Japanese Inheritance taxes would be applied against the United States estate tax oni" after allo" ance of any credit for state death duties. Credit against the death duties imposed by one of the countries Is allowable only for death duties by the other country (within the limitations imposed by the credit provisions) and no credit may thus be taken against the death duties Imposed by one country for any gift taxes imposed by the other country. Similarly, credit may not be taken against one country's gift tax for estate or inherltance taxes paid to the other country. A limitation period of 5 years from the due date of the tai is also provided in article Vfor the allowance of any credit thereunder. Final allowance of the credit isdenied until the tax for which the credit is claimed has been paid. Payment of interest on any refund resulting from the allowance of the credit is denied under the convention unless specifically authorized under the law of the crediting country. Prorated allowances Where one of the contracting countries imposes tax solely by reason of the situs of property within the country, article IV provides for a prorated allowance of any specific exemption which would otherwise be allowable under its laws if the decedent or donor (in the case of the United States) or the beneficiary (in the case of Japan) had been a national of or domiciled in the country so imposing the tax. This provision is similar to provisions contained in other estate tax conventions now in effect. It liberalizes the specific exemption of $2,000 which is provided under the United States estate tax laws for estates of nondomiciliarv alien decedents. It also grants a limited exemption to a nondomiciliary alien donor where no exemption is presently permitted under the United States gift tax. The amount of the specific exemption is limited to the proportion of the exemption which the value of the property situated in the country imposing tax (and which is subject to the tax of both countries or would be so subject except for a specific exemption) bears to the value of the total property which would be subject to the tax of such country if the decedent, donor or beneficiary had been a national of or domiciled in such country. The rules for determining situs 'of property which are contained in article III correspond to similar provisions contained in other estate tax conventions. The situs rules are useful in ascertaining the property that may be included for purposes of tax where jurisdiction to tax is based upon the situs of property within the taxing country. The situs rules also have significance for purposes of ascertaining the credit allowed under Article V. As in other estate tax conventions, it is provided that situs of shares of stock of corporations shall be deemed situated at the place where the corporation was created or organized. Similarly, it is provided that debts (including bonds, promissory notes. bills of exchange, bank deposits and insurance, except bonds or other ntegGwiable instruments in bearer form) are deemed situated at the place of residence of the debtor. In the case of bonds or other negotiable instruments in bearer form, the situs of such property is determined in accordance with the laws of the contracting country imposing tax on the basis of situs of property; where neither of the contracting countries imposes tax on that basis, it is deemed situated under the applicable laws of each country. Oter provision In addition to the above provisions, the convention contains the customary provisions dealing with (I) definition of the taxes subject to the convention; (2)definition of terms used in the convention; (3) provision for reciprocal exchange
    73095 O-62-vol. S-8(

    sit,,s

    (2805))

    10

    DOUBLE TAXATION CONVENTIONS

    The effective date of the convention Is the day of the exchange of the instm ments of ratification; the convention will a"ply to estates and inheritances of persons dying on or after that date and to gifts made on or after that date. Tme convention is to remain in effect for a period of 5 years but may be sooner termi. nated upon the giving of at least 6 months' notice. 6. SUPPLEMENTARY PROTOCOL WITH THE UNITED KINGDOM (Memorandum from the Joint Committee on Internal Revenue Taxation) between the two countries to all or any of its territories for whose international relations it is responsible. The income tax convention now in effect between the two countries was signed on April 16, 1945, and was modified by a supplemen. tary protocol signed on June 6, 1940. Subsequently, in its consideration of the income tax conventions with Denmrk and Ireland, the Senate expressed its di&. approval of certain provisions in those treaties which would have provided ex. emption from United States tax of capital gains and of the tax on accumulated earnings. Provisions of this nature are contained in the United Kingdom treaty. The pending supplementary protocol is intended to make possible the extension of the United Kingdom treaty to various territories of the United Kingdom but in a modified form so that provisions which the Senate has Indicated that it found objectionable in subsequent treaties can be omitted from the extension. Thus, the supplementary protocol would amend paragraph (1) of article XXII of the 1945 convention which set forth a procedure for extension of the treaty to overseas territories of the contracting countries. Under that procedure, the country seeking extension of the treaty to all or any of its overseas territories i required to give notice of its desire for such extension. In the absence of a specific rejection by the other country within 60 days following such notification, the treaty in its entirety would be automatically extended. The pending protocol (0) eliminates any specific time limitation for acting upon a notification of extension; (2) provides that any provisions of the treaty may be modified or deleted in the extension; and (3) provides that no extension is effective until formally accepted by the country receiving the request for extension. Secretary of State, dated June 12, 1954 (see Ex..H, 83d Cong., 2d sess.), it is stated that if the pending protocol is adopted, any request thereunder for extension of the treaty to any of the British colonies or territories will be communicated to the ance of the request for extension will not be made unless and until the Senate gives its approval of the request. The supplementary protocol with the United Kingdom would permit either

    of information between the fiscal authorities of the two countries; and (4)pm. visions for facilitating appeals for relief from double taxation. The provision for collection of the taxes of the other country is limited to those measures neceay to Insure that the credit or other benefits provided under the convention will not be enjoyed by persons not entitled thereto. This collection provision isin the form which has been previously approved by the Senate in other treaties. It isals specifically provided that the right of diplomatic officials to other exemptions h not to be affected and that the provisions of the convention are not to be construed so as to increase the tax imposed by either country.

    the United States or the United Kingdom to extend the income tax convention

    In a letter addressed to the President of the United States from the Acting

    Senate for its consideration and approval and that formal notification of accept-

    (2806)

    Senate Floor Debate and Action

    August 20, 1954 83d Congress, 2d Session 100 Congressional Record 15365-15367

    (2807)

    [P. 16865] Mr. KNOWLAND. Mr. President, we have on the executive calendar a series of treaties. The distinguished Senator from Georgia [Mr. GEORGE] is handling them oln behalf of the Foreign RelationsCommittee. The reason it is necessary to bring them up at this time is that under the general procedure of the Senate which has been in effect for some time a yea-and-nay vote is required on treaties. Therefore it is important that the treaties be taken up at this time when there is no question as to there being a quorum present in the Senate. SUPPLEMENTARY PROTOCOL WITH THE UNITED KINGDOM OF GREAT BRITIAN AND NORTHERN IRELAND RELATING TO TAXES ON INCOME The Senate, as in Committee of the Whole, proceeded to consider the supplementary protocol (Ex. H. 83d Cong., 2d sess.) between the United States of America and the United Kingdom of Great Britain and Northern Ireland, signed at Washington on May 25, 1954, amending the convention for t ie avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at Washington on April 16, 1945, as modified by the supplementary protocol signed at Washington on June 6, 1946, which was read the second time, as follows: [Text of protocol] [P. 15366] Mr. GEORGE. Mr. President, the protocol gives to the parties signatory to the treaty the right to extend the existing treaty relating to taxation to the possessions or to the areas over which the parties have administrative jurisdiction. It is not a new treaty. The protocol merely permits the United States and Great Britain to deal with certain possessions in the Pacific as they do now under the treaty. It is wholly for the purpose of avoiding double taxation. So far as I know, there is no objection to the protocol. I believe it must be ratified by a yea-and-nay vote. The VICE PRESIDI9NT. If there be no objection, the supplementary protocol will be considered as having passed through its various parliamentary stages, up to the presentation of the resolution of ratification. Mr. MALONE. Mr. President, will the Senator yield? Mr. GEORGE. I yield. Mr. MALONE. I should like to ask the distinguished Senator from Georgia if the protocol under discussion has anything to do with the Japanese treaty. Mr. GEORGE. 'Nothing whatever. It does not write new treaties. It merely permits the signatory powers to treaties already in existence to apply tst treaties to the possessions that have come under their administrative jurisdiction since the treaties were entered into. It has nothing to ao with the Japanese treaty.

    (2809)

    Mir. MAIONE. This protocol hms nothing whatever to do with trade treaties or the le nerai Agreeenent ont Tiaritrs and trade, and dhe gellreil, tall-around t-i,,niomite struet'lre tdht is being woven around tie I United States? .Nit. GEORGE. No; it has nothing whatever to do with thoe subjects. T'l.' whole Iur'pose of the tax convention is to Avoid double country who unity be in the taxittion anid to relieve (lte citizens of onet other country front double taxation on income taxes, estate taxes, anld gift taxes. it does not al)p)ly to any other subject. ,Nit'. MIAIONE. The (ist inguishied Senator from eorgia is onle of th( nuost influential Inelmibems, and iafine member, of the Senae ('onU. nilittee oln hailllne. ltoncessions discussed a11td lie, along wit Ithe junior 1le has heard the Senator from Nevuida, bits heard tile exl)*anation given that thie reason we receive no taxes front many of the foreign ol)erat ions is, for example, hat inthe Middle East, where tax aillowallnes aire Ina1de in the pro. dlut'lion or it (,erialill product, the taxes ill the roreigmn nitiolns art' oIten Set, to conform wilh alntlost the exact ait1ottuum which would otherwise be duo lhe [nliled States. Mr. GEORGE. Thai is truie. However, these treaties have nothing to do with thatproblem. Mr. AIAIA)NE. Do's this trealty extend ainy authority to (Io that Ipart~icuhu'thng Mr. GEOR(GE. No. That, problem arises when an Ainerican citi. zen is entitled to a tax credit. If file tax in lihe foreign ('O1nt1ry is sO adjusted as to deprive him of thie credit, he his not thing to lake. Thes
    treaties are addremed wholly to the I)proper relief and proper protection

    of our 'itizens r'tesiding in (h'eat Britain, let us say, and British'snubjects residing in this coumnry. 'l'he whole purpose is to avoid double taxation.

    Mr. [AI,()NE. I have not, had an opportunity to study all t(ie lhat, treaties which are being extendedt 1, is, to the extent. that they are extended with respect, to agreements otl taxes, and there is no time to study thetit now. 1 shall take the statement. of the distinguished Senator from Geor ia, to the effect that. there is nothing derogatory in tdheni, and that, tile United States ('tllltOt bie injured in anly way by these aigreements. I wish to ask if thIe Senator front Georgia intends to bring before thie Seitate the convention between the United States of Ainerica and J1tapan for the avoidance of doublee taxation and tihe prevention of fiscal evasion with respect. to taxes oil income, signed at Washin gton on April 16, 1054. Mr. GEORGE. Later I expect to submit it to tile Senate. Of course, it will be del)attable. It is a new treaty, containing some new features. That is not. involved now I wish to take tip t10ose agreements concerning which there is no controversy Mir. MANLONE]. Mr. President, I serve notice that the junior Senator front Nevada intends to debate the treaty. I ask the Senator front Georgia whether inthat, lartfieilar treaty a special concession of 25 percent is inatde to Americans whto have invested money in Japan, giving them the right to bring the money back to this country. Mr. GEORGE. The Senator is correct. NMr. MALONE. I think that is a very unfair provision. It carries with it thle incentive to take American money out, of this country and invest it in foreign countries.

    (2810)

    Mr. GEORGI''E. That question is not involved in this treaty. This treaty and the litter one with the Republic of Germany do not involve that question at aill. These treaties follow a pattern, which was initiated on the advice and request, of the Senate many years ago. The Senate requested the Treasury and State Departments to negotiate these tax conventions, and they have been negotiated with many countries. One of the purposes is to avoid double taxation of Amercan citizens residing in a foreign country. Of course, reciprocal rights are aurorded to subJects of the other country residing in our country. Mr. MAIONE. Since there is no time fr the junior Senator from Nevada to study these provisions, I should like to say that the senior Senator froll Georgia is fully aware of the fact that in the Committee on Finance it was proposedd to write into the tax bill a provision to favor bky 14 percent. American investments in foreign nations, pernlitting investors to bring the money into this country and that provision was defeated in the committee. I wish to ask the distinguishedd Senator from Georgia whether he remembers such a provision. Mr. GEORGE. Oh, yes; indeed I do. Mr. MAIONE. I should like to ask one final question of the distinguished Senator from Georgia. Is there any provision of that nature whatever in these agreements which have been made and are being ext ended? Mir. GEORGE. No; I do not believe so. If so, I would call it to the attention of the Senate. I shall make a brief statement, regarding the Japanese treaty, but first 1 should like to have a vote upon the pending treaty. It, merely permits tihe Unitted Kingdom of Great Britain, Northern Ireland, andil the United States Government to apply existing treaties in new areas thatl have come within the jurisdiction of the signatories to the treaty. The P'RESII)ING OFFICER. The clerk Will read the resolution of ratification. The legislative clerk read as follows: and Northern Ireland, signed at Washington oni May 25, 1954, amnending the convention for the avoidance of double taxation and the I)mevention of fiscal
    kesolbrd (two-thirds of the Senators present concurringtherein), That the Senate adviw mnd consent, to thle ratification of l!'xecutive 11, the stl)plek'ientary protocol between the Unitted States of America and the United Kingdom of Great Britain

    evasion with rsu ect to taxes on income signed at Washington on April 10, 1945, 1 as modified by tile supplenmentary protocol signed at Washington on June 0, 1046.

    The PRESIDING OFFICER. Tile resolution of ratification is open for reseriP. 16867Jvation. If there be no reservation to be offered, the question is on agreeing to the resolution of ratification. Mr. KNOWLAND. I ask for the yeas and nayw. The yeas and nays were ordered. Mr. kNOWIAND. I suggest the absence of a quorumn. The PRESIDING OFFICER. The Secretary will call the roll. The legislative clerk proceeded to call the roll. Mr. KNOWLAND. Mr. President, I ask unanimous consent that, the order for the quorum call be rescinded. The PRESIDING OFFICER. Without objection, it is so ordered Mr. KNOWIAND. Mr. President, a parliamentary inquiry. The PRESIDING OFFICER. The Senator will state it. resolution of ratification?
    Mr. KNOWLAND. Have tie yeas and nays been ordered on the

    (2811)

    ordered. Tihe ('hair will state that. tho Semnte is now l)roceeediig ill exemtitive ,et'55 It,to tO lonsideratiolt of the I'jxectitivo (allentlar, havitig tdo . io with treaties. The matter preseily umher otOliderat ion is lhe sunl)leltentary p)rotocol between flhe itnited States of America aid the t.'iited Kilngdom of Great. Britain and Northoern Ireland, relliting to taxes oniln cllolle. Mr. GEORGE. Mr. President, there are several treaties to be considered by the Sentate. If Senators will. remains in altiendaihe, I believe the treaties can be speedily disposed of. Onle is highly con. trovermial mad will be taken up last, because the Sonator from Nevads expects to oppose it, or at. least, to speak on it.. I call attention to the fact. that there are two other treaties that, are noncontroversial, mild I ask Senators to remain for a few minutes, so that, they may be dis. posed of. The PRESIDING OFFICER. 'ite question is on agreeing to the resolution of ratilication. phe yeas and nays have 1)ee ordered, ad the clerk will call the roll. mhe legislative clerk called the roll. Mr. SAlT STAjli.. I annomnce tlat the Senator from Nebraska ION" (Mrs. Bowt>.nJ, the Semntor from Maryland IMr. fihrti.m:, the Senator from Kautsas Mr. (.Ai,.1oN'], the Senator from iVerollOt [Mr. FLAN-DoEi,. the Senator front Arizoln [Mr. Go,.tw.Ammol, lhe Senator fronm Indiana [Mil. ,o:NNi:rJ, the Senator front ('onneeticut and lMr. lPRt'T.,1.] are inecessarily abselit. 'Tihe Sentlor from IldianiI[Mr. C.APMr,irh aild t1he Senator from Idaho (Mr. WiVKmij aret absent ott official imsiless. The senior Senator front Michigam (Mr. Fmmtsoxj, tlie 'ljior Senator from Michidgain Mr. Porrlr , the Senator fromt New Jt"it'Sey .(Mr.S~MIT1I, and11 Senator front llWiscotsil (Mr. Wiilj are absentt the bY leave of the Sellate. If preseitl mitdo volintg, tlte senior Selitaor front Mihiganl (.Mr. Fmrit,,soN], lhe Seinator from \'ermtont. [Mr. FLASPHIMu, tte jtltmior Senator front Mi.ltigan (Mr. Porrmil, the Seltator front ('outlectient (Mr. Pr'TEL.L], aind the Senator front New Jersey [Mr. SMITim, Would each vote "veal."1 Mr. CI.lM\IEN'I'S. I amutmoCe tlait. tfte Setiator from Virginia lMr. liun,, the Senmtor from Arktimsas [Mr. Fmuma,,T), the Seltator from nTemtemee (Mr. KlPAvV.Euuj, the Senator from Florida (Mr. SMATIM-104s, fl(l the Sienator from Alabama (Mr. SPAR MXNI aire uie'essarily absent. 'ihe Seiator froth 'l'exas (Mr. DA.NINm., (lie Senator from Illinois Senator from IAtisiana (Mr. E.m,m], I Senator from North tho Carolina [Mr. IJENsonI, aolt the Sentator frout Nevada (Mr. Mc("'ARHANu absent oit ollicial business. tire T1ho Senatlor front Iowa (Mr. (i.,m'rEJ is absent. by leave of the Senlate. I aimomice further that. if presel, and voting, the Senator from Texas (Mr. D)ANIEL], the Seuttor from Illinois |lIr. Dotiy,.AsJ, tile Setiator fromt Arkautas (Mr. FtimmuonT], the Spenat~or front Iowa (Mr. Gnau:m:h, the Setator from Telitesseo [Mr. KEFAUVERI, HIo tilte Senator from Alabama [Mr. SPPrK.M.ANl would vote "yea."

    The PRESIDING OFFICER. The yeas and nays have been

    IMr. I)orw...41, tilte Setator from Mississipji (Mr. EASTLAnD], the

    (2812.)

    The yeas and nays resulted-yeas 71, nays 0, as follows:


    YEA8-71 Aiken Andersro Barrett Whall Ileett Bricker Bridges Burke Bush Case Chavez ('lenlents Ctoo er Cordon Cri ip1a I)irksen Dutff I)worshak Ervin Frear George G(0ore Orayeen
    HIendrickson Ifllnlings McCartyiv Me(:ellail

    Iliekenloolwr
    I1111

    Holland 1luntldphry 1ves Jackson


    Johlitsonl, ('Co1. Joinsoll, Tex.
    Johilistoln, X.(.

    PIastore

    Millikin Monrotey Morse Mtunidt Murray Neely

    IPayne

    Kennedy Kerr Kilgore Knowland

    Kuchel lanlger

    R1obertson h1115t'ell sultoltstall selloeplx-I intlth, Mahle

    Stennisi

    ]AelInhliti

    syllillngtoll

    ilolg Mngnuson
    Malone

    '1Yhye

    lTpton U atkins
    'Ollallis

    .Mansfield

    Martin Maybank Ferguson Flatuders Fulbright (lllette

    2 NOT V(YTI N -- h
    Potter Purtell Smat hers .'tttith, N.J. Wilerkman Walker
    Wiley

    (Goldwater Jenner Keftiaver IA'IIIIOl1 M(cCarran

    The PRESIDINOt OFFICER. Two-thirds of tlie Senators present havinty voted in tho aflirmatiive, the resolution of ratification is agreedt to.

    (2813)

    PresidentialProclamation, (Including Official Text of Protocol)


    [Reprint of TIAS 31651

    (2815)

    fINATIES AND OTHER INTERNATIONAL ACTS SERIES 8115

    DOUBLE TAXATION
    Taxes on Incoi ne

    Supplementary Protocol between the


    UNITED STATES OF AMmucA and the UNITED KINGDOM OF GREAT BRITAIN

    AND NoRTHN IRELAND

    Amending Convention of April 16, 1945, as Modified by Supplementary Protocol of June 6, 1946

    Signed at Waahington May 25,1954

    (2817)

    DEPARTMENT OF STATE PuDUapTION sm i[itead print)

    (2818)

    UNITED KINGDOM
    DOUBLE TAXATION: INCOME
    Supplementaryprotocol Waending the conwvnon of April 16, 1945, as TIAS 8165 May 25, 194 modified by the supplementary protool of June 6, 1946. Siged at Washington May 25,1954; Rtfication advised by the Senate of the United States of Amrica August 20, 1954; Ratfied by the Presidentof the United State. of Anmeric Septenber 22, 1954;

    RadtW by th United Kingdom of Great Brtn and Northern Irland


    December 21, 1954; RPasion arrangedat London Jaury19,1955; Proclaimedby the Presidentof the United States of Amerai January 28, 1955;

    Etrd intofore. January19, 1955.


    B Tax PRESIDENT O TUBE UNITED STATES Or AMERzcA

    A PROCLAMATION was signed at Washington on May 25, 1954 a supplementary protocol between the United States of America and the United Kingdom of Great Britain and Northern Ireland amending the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on April 16,1945, as modified by the suppleWIAS mentary protocol signed at Washington on June 6, 1946; of the said supplementary protocol of WHEREAS the original
    WHEREAS there AND

    May 25, 1954 is word for word as follows:

    (2819)

    (1)

    SUPPLEMENTARY PROTOCOL AMENDING THE CONVEN. TION FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON THE 16TH APRIL, 1945, AS MODIFIED BY THE SUPPLE. MENTARY PROTOCOL, SIGNED AT WASHINGTON ON THE 6TH JUNE, 1946 The Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland, Desiring to conclude a further supplementary Protocol amending the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed at Washington on the 16th April, 1945, as modified by the supplementary Protocol, signed at Washington on the 6th June, 1946, Have speed as follows:
    ARTCLE I
    *Stat. 115.

    Mhe46C

    zatauoutotwmt

    Paragraph (1) of Article XXII of the Convention of the 16th April, 1945, for the Avoidance of Double Taxation and the PI' vention of Fiscal Evasion with respect to Taxes on Income s hereby amended to read as follows: "(1) Either of the Contracting Parties may, at any time while the present Convention continues in force, by a written notifica. tion given to the other Contracting Party through the diplo. matie channel, declare its desire that the operation of the present Convention, either in whole or in part or with suchlmodifications as may be found necessary for special application in a particular case, shall extend to all or any of its territories for whose inter national relations it is responsible, which impose taxes sub. stantiallysimilar in character to those which are the subject of the present Convention. When the other Contracting Party has, by a written communication through the diplomatic channel, signified to the first Contracting Party that such notification is accepted in respect of such territory or territories, the present Convention, in whole or in part or with such modifications as may be found necessary for special application in a particular case, as specified in the notification, shall apply to the territory or territories named in the notification on and after the date or TIAS 8168
    (2820)

    8 dates specified therein. None of the provisions of the present Convention shall apply to any such territory in the absence of such acceptance in respect of that territory."

    AnTICE H
    This supplementary Protocol, which shall be regarded as an integral part of the said Convention, shall be ratified and the instruments of ratification thereof shall be exchanged in London.
    ImWITNESS wuuuzor the undersigned, being authorized thereto

    by their respective Governments, have signed this supplementary Protocol and have affixed thereto their seals. DoNE in duplicate at Washington this twenty-fifth day of May, 1954. FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA:

    [SMAL]

    JOHN FosTER DULLzES


    SecreWTa O"of & Of tke UniWe ~ate of Amv*4

    FOR THE GOVERNMENT OF THE UNITED KINGDOM


    OF GREAT BRITAIN AND NORTHERN IRELAND:

    (on")

    ROGER MAINS
    Her Majeeyre Ambassador E*adin4ri and PeniponiWa at WaeIhingtor

    Am) wHEREis the Senate of the United States of America by their resohtlon" of August 20, 1954, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the said supplementary protocol of May 25, 1954; AND WHEREAS the said supplementary protocol of May 25, 1954 was duly ratified by the President of the United States of America on September 22, 1954, in pursuance of the aforesaid advice and consent of the Senate, and the said protocol was duly ratified on *the part of the United Kingdom of Great Britain and Northern

    Ireland;
    Am) WHmREAS the respective instruments of ratification of the said supplementary protocol of May 25,1954 were duly exchanged at London on January 19, 1955; Am) WEREAS it is provided In Article ]I of the said supplementary protocol of May 25, 1954 that the said protocol shall be regarded as an integral part of the said convention of April 16,
    1945; 78096 O-42--vol. 2-84--k

    .(2821)

    TIAS 8165

    4
    Now, TUCREFORN, be it known that I, Dwight D. Eisenhower President of the United States of America, do hereby proclaim aa make public the said supplementary protocol of May 25, 194 to the end that the said protocol and each and every article W! clause thereof may be observed and fulfilled with good faith, m and after January 19, 1955, by the United States of America W by the citizens of the United States of America and all other
    persons subject to the jurisdiction thereof. IN TESTIMONY wnERFOr, I have hereunto sot my hand W

    RIatr 11to twros.

    caused the Seal of the United States of America to be affixed.


    DoNs at the city of Washington this twenty-eighth day of January in the year of our Lord one thousand hnue

    hundred fifty-five and of the Independence of the UnitMd States of America the one hundred seventy-ninth, DWIGHT D EISENHOWER By the President:
    (sEALU JoII? FoSTER DULLES

    Secretary of Stats

    TIAS 8165

    N1~~'2)

    to

    Old let

    THIRD SUPPLEMENTARY PROTOCOLt $IGNED AUGUST 19t

    1957

    (2823)

    Presidential Alessage of Transmittalto Senate (Including Materials Enclosed Thereirith)

    (2825)

    DM CONRESSt

    Id Session

    SENATE
    I

    ExzcunvA

    SUPPLEMENTARY PROTOCOL BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND

    MESSAGE

    noM

    THE PRESIDENT OF THE UNITED STATES


    ASUPPLEMENTARY PROTOCOL BETWEEN THE UNITED STATES OF AMERICA AND THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, SIGNED AT WASHINGTON ON AUGUST 19, 1957, AMENDING THE CONVENTION FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON APRIL 16, 1945, AS MODIFIED BY THE SUPPLEMENTARY PROTOCOL SIGNED AT WASHINGTON ON JUNE 6, 1946, AND THE SUPPLEMENTARY PROTOCOL SIGNED AT WASHINGTON ON MAY 25, 1954

    JANUARY

    16, 1958.-Protocol was read the first time and the injunction of secrecy was removed therefrom. The protocol, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate

    To the Senate of the United

    States:

    THE WHITE HOUSE, 1958. January 16,

    With a view to receiving the advice and consent of the Senate to ratification, I transmit herewith the supplementary protocol between the United States of America and the United Kingdom of Great and the prevention of fiscal evasion with respect to taxes on income
    Britain and Northern Ireland, signed at Washington on August 19, 1957, amending the convention for the avoidance of double taxation

    (2827)

    PROTOCOL BETWEEN U.S. AND GREAT BRITAIN, NORTHERN IRELAN

    signed at Washington on April 16, 1945, as modified by the supple. mentary protocol signed at Washington on June 6, 1946, and the supplementary protocol signed at Washington on May 25, 1954. I also transmit for the information of the Senate the report by the Secretary of State with respect. to the supplementary protocol of August 19, 1957. That protocol has the approval of the Department of State and the Department of the Treasury.
    DWIGIIT

    D. EISEINHOWER.

    (Enclosures: (1) Report by the Secretary of State; (2) supple. mentary protocol with the United Kingdom amending the income.tax convention of April 16 1945, as modified by supplementary protocols of June 6, 1946, and M4iay 25, 1954.)
    DEPARTMENT OF STATE

    7Ua WANtt House: The undersigned, the Secretary of State, has the honor to submit herewith, for transmission to thie Senate to receive the advice and consent of that body to ratification, if tho President approve thereof a supplementary protocol between the United States of America and the United Kingdom of Great Britain and Northern Ireland, signed at Washington on August 19, 1957, amending the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at Washington on April 16, 1945, as modified by the supplementary protocol signed at Washington on June 6, 1946, and the supplementary protocol signed at Washington on May 25, 1954. The convention of 1945 (S. Ex. D, 79th Cong., 1st sews.; 60 Stat., pt. 2, 1377) and the supplementary protocol of 1946 (S. Ex. F, 79th Cong., 2d sews.; 60 Stat., pt. 2, 1389) were brought into force on July 25, 1946. The supplementary protocol of 1954 (S. Ex. H, 83d Cong., 2d sees.; 6 U. S. T. 37) was brought into force on January 19, 1955. Article I of the supplementary protocol would amend article VIII of the 1945 convention relating to exemption from taxation, on certain conditions, or for the privilee of using, copyrights consideration for the use of, of royalties and other amounts paid as patents, designs, Secret processes and formulas, trademarks, and other like property. Article II of the supplementary protocol would amend article XIII of the 1945 convention relating to credits against the tax paid to one country for tax paid to the other country. In a letter from the Secretary of the Treasury to the Secretary of State relating to this matter the following explanation is given regarding the purpose and effect of the supplementary convention:
    Under the existing convention, royalties paid by a United Kingdom licensee to a licensor in the United States for the use of a patent or copyright are exempt from tax in the United Kingdom if the licensor does not have a permanent est*Olishment there. If the licensor does have a permanent establishment there, A tax is imposed by the United Kingdom. However, the tax is not imposed on the licensor as such and under the United States law no credit is available for the British tax on the royalties, with the result that double taxation ensues.

    The

    PRESIDENT,

    jJ8agjgf

    0. b.

    (2828)

    PROTOCOL BETWEEN U.S. AND GREAT BRITAIN, NORTHERN IRELAND 3 The proposed supplementary protocol would modify the existing convention so that the exemption of royalties would continue to apply in cases where they are received by a United .tates enterprise with k permanent establishment in the United Kingdom, provided the royalties are unrelated to the business opera. tions carried onl by the permanent establishment. And in those cases where the royalties are not exempt, tihe United States would give a credit for the British tax. These provisions would, of course, operate on a reciprocal basis.

    The negotiation and conclusion of the supplementary protocol carry out the purpose indicated in the President s message of August 10, 1950 (congressional Record, August 13, 1950, pp. A6471-A6472) whereby approval was withheld with respect to a bill approved by the Congress. The statements in that message are relevant to a consideration of the supplementary protocol. The text of the message, therefore, is quoted in ful1as follows:
    I am withholding my approval of H. R. 7043, an act to amend the Internal Revenue Code of 1939 and the Internal Revenue Code of 1954 with respect to foreign tax credit for United Kingdom income tax paid with respect to royalties and other like amounts. This bill would extend to firms with a permanent establishment in the United Kingdom that receive royalties there a credit for taxes imposed by the United Kingdom on the payor of the royalties. This provision would be retroactive to 1950. Under the income-tax convention with the United Kingdom royalties received by a United States licensor are not subject to tax in the United Kingdom if the recipient has no permanent establishment there. If it does have a permanent establishment, the royalty is subject to British taxation. The American recipient reports tle net amount of royalties from British sources and receives no United States tax credit for the British tax paid. This treatment under United States law arises from two court decisions (Trico Products Corp. (46 B. T. A. 346, affirmed 137 F. (2d) 424, cert. den. 320 U. S. 799 reh. den. 321 U. 8. 801) lrai'ng Air Chyle Co. Inc. (i T. C. 880, affirmed 143 Fo, (2d) 256, cert. den. 323 U. 8. 73)). The combined effect of the United States income-tax law and the income-tax convention with the United Kingdom is to produce a different combination of British and United States taxes on the royalties paid some American recipients than on others. However, the United States tax law is not the cause of this difference in treatment. It is caused by the provisions in the convention itself. The appropriate way to correct the situation would be modification of the conven. tion. The Treasury Department currently is conducting discussions on the convention with the British and will add this problem to the agenda. The present status of royalty payments from the United Kingdom to the United States has been well ecnown to interested parties at least since the convention was adopted in 1945. Many arrangements between licensees and licensors have reflected existing law and"the burden of British tax may not rest on United States licensors in such cases. Consequently, to allow the British tax as a credit against the United States tax oen a retroactive basis would give a windfall gain to some American licensors. The proposed change would single out for special relief a small group of taxpayers whose need for relief has not been demonstrated. Tax relief should not be given in this way. For these reasons, I am constrained to withhold my approval of the bill.

    Article III of the supplementary protocol provides for ratification and the exchange of instruments of ratification and specifies the dates on and after which the provisions shall be effective with respect to United States and British taxes. The protocol has the approval of the Department of State and the Department of the Treasury. Respectfully submitted. JOHN FOSTER DULLED. (Enclosure: Supplementary protocol with the United Kingdom amending the income-tax convention of April 16, 1945, as modifiid by the supplementary protocols of June 6, 1946, and May 25, 1954.) (Text of protocol]

    (2829)

    Senate Committee Hearings


    July 1, 1958 85th Congress, 2d Session Senate Committee on Foreign Relations

    (2881)

    DOUBLE TAXATION CONVENTIONS HEARING


    COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE
    EIGHTY-FIFTH CONGRESS
    SNOOND SESSION
    ON BEFMu
    THE

    SUPPLEMENTARY INCOME TAX PROTOCOL WITH TIE UNITED KINGDOM (EX. A, 85TH CONG., 2D BESS.); SUPPLEMENTARY INCOME TAX CONVENTION WITH BELGIUM (EX. B, 85TH CONG., 2D BESS.); AND NOTIFICATION OF EXTENSION OF INCOME TAX CONVENTION WITH THE UNITED KINGDOM (EX. O, 85TIH CONG., 2D BESS.)
    JUY 1, 1958

    Printed for the use of the Committee on Foreign Relations

    *
    Vr 8ATEN GOVRNION PRINTING OMC1 WAIBnGTON t 19N

    (2838)

    COMMITTEE ON FOREIGN RELATIONS


    JOHN SPARKMAN, Abbim. HUBERT H. HUMPHREY, Mbnmts MIKE MANSFIELD, Montma WAYNE MORSE, Oregon RUBSELL B. LONG, Louiin JOHN F. KENNEDY, Masombuwst

    THEODORE FRlANOIA GREEN Rhode IJsd, COkdnr.s ALEXANDER WILEY, Wheonan I. W.FULBRIONT, Arkbm
    H. ALEXANDER SMITH, New Jmns BOURKE B. HICKENLOOPER, luo WILLIAM LANOER, North Dabkoa WILLIAM F. KNOWLAND, Calof0b OEOROB D. AIKBN, Vermont HOMBR B. CAPBHART, Indan

    CAOR MA#o Q Of &Of DAuRsu Sr. COuws, Ck/kfCla

    (2834)

    CONTENTS
    Carroll, Mitchell B., special counsel, National Foreign Trade Council, he New York N. Y.................................................. 84 Frw, Hon. i. Alien, Jr., United States Senator from the State of Delaware. 30 Rut, Leonard E., general tax counsel, Westinghouse Electric Corp., Pittsburgh, Pa.................................................. 41 Martin, Hon. Edward, United States Senator from the State of.Pennsyl. vania..... I Raum, Leonard, representing American Metal Climax Co., Inc.........48 Simpson, Hon., Richard M., United States Representative from the 18th Dibtriot of Pennsylvania .......................................... 81 Smith, Dan Throop, Deputy to the Secretary of the Treasury ........... 20 Stam, Colin F., chief of staff Joint Committee on Internal Revenue Taxation, accompanied by Arnold C. Johnson, attorney, Joint Committee on Internal Revenue Taxation----------------------. 4
    'U

    (2835)

    DOUBLE TAXATION CONVENTIONS


    TUESAY, AULY 19 1958
    UNITED STATES SENATE,

    COMMITTEE ON FOREIoN RELATIONS

    Waohiugtn,

    . 0.

    The committee met, pursuant to call, at 10 a. m., in the Foreign Relations Committee room United States Capitol Building, Senator Theodore Francis Green (chairman) presiding. Present: Senators Green, Fulbright, Spark-man, Mansfield, Morse, Long, Wiley, Smith of Now Jersoy Aiken, and Capehart. The CIIAIRMAN. The meeting will please come to order.
    COMMITTEE CONSIDERATION OF DOUBLE TAXATION CONVENTIONS

    The Foreign Relations Committee is meeting in public session this morning for a hearing on 3 pendg double taxation conventions, 2 with the United Kingdom and 1 with Belgium. Following the completion of the hearing, the committee will go into executive session to consider what action to take with respect to these conventions. It will also consider at that time, I hope, action on the pending double taxation convention with Pakistan which has been before the committee for almost a year, and on which hearings were held last summer. Our first witness this morning is Senator Martin of Pennsylvania. Senator Martin, would you kindly proceed in your own way. You may remain seated, if you wish. STATEMENT OF HON. EDWARD MARTIN, A UNITED STATES SENATOR FROM THE STATE OF PENNSYLVANIA Senator MARTIN. Thank you, sir. Mr. Chairman, and members of the committee, I appreciate the opportunity to appear before the committee this morning and regret tlat I must make only a brief statement, as I am due to attend a Finance Committee meeting at this time and also another meeting of a subcommittee relative to financial work. iOn August 28, 1957, Congressman Simpson, of Pennsylvania, and I sent a joint letter to the chairman of this committee regarding the Protocol amending articles VIII and XIII of the Anglo-American Tax lConvention of April 16, 1945, with respect to royalties, which is now pending before the committee.
    I also wrote to the chairman on this subject on January 21 last.
    1

    ?8095 O-62-vol. 2----85

    (2837)

    DOUBLE TAXATION CONVENTIONS PROTOCOL INADEQUATE TO MEET DEFICIENCIES OF CONVENTION

    You will recall that the Secretary of State and the British Anibams. dor signed the protocol on,August. 19, 1957, and the State l)epartmnent stated at that timo that the protocol was signed to meet the wishes of Congress. Undoubtedly this statement refers to H. R. 7643, which wits untani. mously passed by the 84th Congress in 1951 to eliminate double taxation by providing at credit, to an American recipient of British royalties sulq-ect- to tax i, Britain. The President vetoed this bill on the grounds that. thte proper way to prevent. double taxation on such royalty income was by amendment tA) the Tax Convention between the United States and the United Kingdom. The protocol is intended to serve this purpose. It is clear, however, that. thprotocol does not take care of the p)rol)lems covered l)y the hlill vetoed( by the President. On February 18, 1957, Congresnian Simpson, realizing the made. quacies of the protocol, introduced 11. R. 4952 which is substantially the samine as the bill vetoed by the President. This bill has again been passed by the House and is pending before the Senate Finance Com. mittee. Action has been delayed upon it. pending an opportunity to discuss t(heprotocol. It. is our hope to be able to convince the comn. mitttee that the protocol does not. accomplish the purpose intended by the legislation. Mr. Chairman, as I previously stated, I have two other meeting this morning, and ais the dist-inguished chairman antd thue mniembr of thie committee will realize, there is a lot, of committee work that we must get done in order to push to conclusion as rapidly as possible the adjournment, of Congress. And I will leaveThe CHAIRMAN. I think we are all in-[ cannot say the same boat, but similar boats. Senator MARTIN. Yes, sir. I will leave the presentation in the hIands of my colleague from Pennsylvania, Congressman Richard M. Simpson of Pennsylvania, and lie is accompanied ly Mr. IA',oilrd Kust, general tax counstil of the Westinghouse Corp., and Mr. E.M. Elkin, who was formerly the chief counsel for the WestinglhouN Corp. I think Congress.man Simpson-it night able to the committee, that we hear from thebe advisable, if itwhatever Treasury first.. isagree. t.hle committee may desire. I would like to resent 'iMr.Kust, so that you will know him, and Mr. Elkin. The CHAIRMAN. Shall we proceed now to hear the other wittnees? Are you finished, Senator? Sen~ator MARTIN. Whatever the will of the committee is. I do not want to suggest. the order of witnemes to the committee, but probably the Treasury, would like to be heard first.. The CiHAIRMAN. Mr. Stain, the chief of stant of the Joint. Conunitte oil Internal Revenue Taxation is here, and we would like now to hear froni him. Senator MANSFItELDl.. Mr. Chairman, before you call Mr. Stiam, cold I ask Senator Martin one question? The CiHAIRMAN. Yes, certainly.

    (2838)

    DOUBLE TAXATION C'ONVENTIONS


    1'08KIlIIltTY OF ANOTIIEII VKTO Or, SIMPSON 14IM,

    81i11tor NtA-M svFIEL..

    Senator, is there assurance that the President

    senator MAIRTIN. Senator, that, of course is also probable. Per. of Sally, 1 n111 the ohl school where I feel that thle legislative oughl, to amt entirely indepell(enit of the pxecultive, lut I will admit-I will give you an ihist-ration, Seinator Mansfield. I went (,contraryto that

    uni,hl not again veto thl' Sinllpsol bill?

    or 5 weeks to try to work out a hill lhat. would mleet with the approval of thi executive. Wo probably did better to work closely together, but, that depends iupon the circlimstances, Senator MANSFIEtLD. I just, witaitted to raism the question. Senator MlAir'ri. Well, Senator Mansfield, that. is a very good question, asid I will admit that. I have not. Lalked to anyone ill the excetitive relative to it. MXr. Chairman, I woul( like viery much to stay, becutlse I consider this of great. iniportanee. luthl if youi will excuse lte How, 1 have two committee meetings this morning. The (CIHAIRIMAN. I can1 sympl1athize with you. Senator Nl.irriFn. It is 6nt that I amn not extremely interest-ed. I think what, you have before, you is otie of the most. important. problems that I havo' on my agenda. "I am sorry that I cannot stay and maybe (jlmtionsome of the folks from tilhe Tastlry Delartmem., bill. I know tlier will be eminenttly fair. '1'hie (1 IAIIMAN. if you find you calt return, we will be glad to have
    PRIOPOSOD STUI)Y OF FOIIRION ECONOMIC P11Oh11.EMB

    oti the authorization bill for flood control. Some (if its worked for 4

    Senator lONO. Nilr. (Chairman, may I say one word to Senator Martin? I would like to call his attention to the fact, that there is a resolution being proposed. to appoint a committee composed of mittee to make ast udyI this whole problem involving foreign trade of Canl, as a member, the senior minority member on the FIinance Committee. However, I think we should act more rapidly in this instance than would be possible for that to do. Senator ILoNo. The point I had in mindl, you see, Senator Martin, isthat tie, Finmuaie Committee has jurisdiction over the Trade Agreemelnts Act., as 'ol know from the hearings we on thalt. committee
    and foreign ttxation m'iatlers. Senator MARITIN. Well, I would like to cooperate in any way I members of the ForeigntRelations Commitltee and thle Financo Com-

    I appreciate very much, Mr. Chairmami, your courtesy. Tile CIAIIMAN. We are very glad to have you here. Mr. Simpson, dil you want, to (deferyour testimony? Representative S-IMPsoN. I will do'whatever the lChair requests. I am prepared to go ahead, or do whatever you suggest.

    of our foreign relations.

    coMdut., so frequently. Furthermnore, all tihte taxes, imports, and quota matletts are legislativevly before the Finance C(ommittee, but, the treaties comoe, to this commit te. So it seems to lite there is some iteed of a s-.01V of 1lialtetrs that coeic to the cognizance of both committees to try too keep) all these complicated problems straight. Senator N i-ARTIN. I agree with the distingnished Senator from Louisiana lhat thai is trite. i he last quarterr of a century, the affairs of our country have become so much more complicated beea11so

    (2839)

    4
    Mr. Stam.

    DOUBLE TAXATION CONVENTIONS

    The (IIATIMAN. Well, the suggestion is made that we hear I or 2


    other witnesses first. But they will not take too long, I hope.

    STATEMENT OF COLIN F. STAMP, CHIEF OF STAFF, JOINT COMMITTEE ON INTERNAL REVENUE TAXATION
    Mr. ST.&M. Mr. Chairman, at your request we have examined the conventions, both with extending the treaty of Belgium to the Congo, and also the two British conventions. Now, which one would you like me to go ahead on first? The two witnesses spoke on Executive A, the British supplementary pro.

    tocol, but I can present either one first.

    The CH.ItMAN. Will you please give your full name for the record?

    Mr. STAM. My name is Colin F. Stare, chief of staff of the Joint Committee on Internal Revenue Taxation. At your request, the staff of the Joint Committee on Internal Revenue 'Taxation hlas reviewed the following tax conventions pending before the Committee on Foreign Relations: The supplementary grotocol between the United States of America and the Kingdom of reat Britain and Northern Ireland--that is Executive A, and that is one I think the witnesses want to speak on-and then the notification by the Government of Great Britain and Northern Ireland with a view to extending to certain British overseas the application of the convention on taxes on income, as modified, signed on April 16,1945.
    QUESTIONS OF TAX POLICY IN CONVENTIONS

    In general, the notification by the Government of Great Britain and Northern Ireland, which is Executive C, is in accord with the prince leas underlying the provisions of existing tax conventions which Now, that is Executive C. The supplementary protocol between the United States of America and the Kingdom of breat Britain and Northern Ireland, Executive A,
    however raises important questions of tax policy which the committee may wish to consider. These questions are discussed in a memoranduni prepared by us. I will present this document for the record, but I will just read the conclusion of it. This supplementary protocol relates to a tax question currently under legislatie consideration. It contains two entirely different devices for the elimination of double taxation. One of these devices, the extension of the exemption from taxa' tion, has the effect of operating disadvantageously in the case of some United States licensors. The other device, the extension of the foreign tax credit, isth same as that provided by It. R. 4952. The supplementary protocol, therefore, creates additional complexity by intro~Iucing two different technical deviot Difficult questions of fact would have to be resolved in order to ascertain which device applies in the case of a particular United States licensor. The supplementary protocol would, in general, be effective for years beginnlo In 1956. the Senate has previously approved.

    the Finance Committee at the present time. And I am speaking now about the bill If. R. 4952. H. R. 4952 would be effective for a4

    Now at that point, I would like to say that this matter has been before both the Ways and Means Cominuttee and the Finance Committee. It has passed the Ways and Means Committee twice, and it has passed the Finance Committee once, and is now pendhig before

    (2840)

    DOUBLE TAXATION CONVENTIONS

    taxable years after January 1, 1950. While both measures seek to eliminated double taxation agreed to exist, at the present time, the supplementary protocol would not affect. the prior period to which H. 4952 relates. 1. In other words, 11. R. 4952 is retroactive amd goes back to 1950, while the protocol is not retroactive and therefore would not affect many past situations.
    sidering in the tax committees of the Congress. If made effective, it would foreclose consideration by Congres of this question for the future, and ill so doing, would adversely affect some taxpayers merely because they had adopted a particular form of contract and did not have a permanent wtablishment in the United Kingdom directly associated with their royalties.

    which Congress considered in 1956, and which Congress is now currently con-

    This supplementary protocol relates solely to a complicated issue of tax policy

    For all of these reasons, the staff of the joint committee believes there are serious doubts as to whether this supplementary protocol should be favorably acted upon at this time. Now, that is the protocol.
    JOINT COMMITTEE STAFF RECOMMENDATION

    The CIAIRsMAN. Are you making any recommendation? Mr. STAM. We have a recommendation; yes. We suggest that tile provisions of Executive C, which merely extends the existing convention to British territories, are in line With the policy that the committee has adopted in the paqt, and we feel that Executive C should be adopted. That is our recommendation. Executive A, we feel, a serious question of policy, and is in conflict with legislation which is now pending before the Committee on Finance, and which has already been acted upon by the Committee on Ways and Means. The question is raised whether the Foreign Relations Committee should adopt in a convention which directly overrides legislation being considered by the Senate Finance Committee and which has already been acted upon by the Ways and Means Committee. So that we do have a reservation on that point.
    EXECUTIVE A WOUld) OVEIIIDE PENDING LEGISLATION

    Senator LoNo. Would you explain to us how the convention overrides the legislation? Mr. STAM. The bill that. is pending before the Senate Finance Committee allows a credit, against, our tax to the United States corporation who receives a royalty from a British licensee. So that the way the bill handles the iiroblem is to permit a credit against our tax. The way the convention handles the problem is to relieve the British licensee of the tax due the British Government, and in that respect, it is somewhat of a windfall to the British licensee, and not to the Now the Finance Committee has not acted upon H. R. 4952 this year. However, the Finance Committee did report favorably, in 1956, H. R. 7643, a bill substantially the same as If. R. 4952. So that both the Ways and Means Committee and the Finance Committee have in the ptst felt that the credit should be allowed to the American company, and not to the British company. And that is the reason
    American company.

    (2841)

    DOUBLE TAXATION CONVENTIONS

    that we are bringing this matter up before the committee, because it does involve a direct conflict between the action which the Foreign Relations Committee is being requested to take and tile legislation in contemplation by the Finance Committee. Senator LONG. After looking into this matter personally your feeling is that the corporation that gets the break ought to be the American company rather than the British company, and that the treaty would make it just the other way around? Mr. STAM. Yes, sir. Now, there are some situations involved where the treaty will give some relief to an American corporation, depending, under the technical wording of the convention, as to whether or not they have a related business in Britain.
    PENDING BILL WOULD GIVE TAX BENEFIT TO AMERICAN COMPANIES

    But, on the other hand, the bill before the Finance Committee would afford relief to American companies regardless. Senator LoNo. There must be some basis upon which you feel that the American company ought to be the one to get. the break. It owns the patent, I take it? Mr. STAM. It, owns the patent., and has licensed it to tlie British corporation, and under the British law there is a withholding of the United Kingdom tax on the paynients under the license agreement to the American corporation. Now, that reduces the net amount that the American corporation i going to receive in the case of a gross royalty. However, in the case of a net royalty-and I am talking now about a particular situation, because that is a case that was called to our attention--by virtue of the contractual terms between the licensee and the American company, the only thing that the American company gets is what we call a net royalty, which is a set amount after the United Kingdom tax has been deducted. So that in the case of a net royalty, the British corporation gets a windfall by being relieved of the British tax under this convention. And the American corporation does not get any relief, because under its contract it still only gets the net royalty. So that it looks like a clear discrimination. The CHAIRMAN. What is your recommendation? Mr. STAM. Well, our recommendation is that as far as this Executive A is concerned, it should be reserved out of the pending notification, Executive C. That is, you should take the Executive'C, which is the extension provision, and apply it to the British territories, you have taken similar action in the past.. Now, in order to do that, you will have to make a certain modification, because the way the extension is worded, it. brings into the extension the pending Executive A, and extends that to the territories. And we feel that the committee should not act on that part. at this time, particularly while the matter is pending before the Finance Committee. The CHAIHMAN. Do you think we ought to take any piecemeal action? Mr. STAM. Not on Executive A, because that, only relates to that subject. Tle CHAIRMAN. It is a part of it; is it not? Mr. STAM. That is right. I think we should provide for the extension to the protectorates, but not extend Executive A to the territories.

    (2842)

    DOUBLE TAXATION CONVENTIONS

    7'

    ff. R. 4952 WOULD AVOID DOUBLE TAXATION

    Senator CAPXIIART. Mr. Chairman, I would like to ask a question of Mr. Stain. Would H. R. 4952 avoid double taxation as completely its the protocol does and, in addition, take care of American licensors whether or not they have a royalty agreement? Mr. STAM. That is our opinion, yes, that it would. And I might say that( approach of H. R. 4952 is somewhat the approach that has been followed in connection with the payment of dividends in order to avoid double taxation. The original British treaty adopted the credit, approach, the same one that we have in the bill that is now pending before the Finance Committee, in the case of dividends.
    Senator CAPEHIAItT. Then, if it would avoid double taxation as

    effectively as the protocol, is the bill not more desirable? Mr. STAM. We think so.
    AGREEMENT ON NET ROYALTY PAYMENT Senator Looa. Let. me try to get this straight. This royalty pay-

    ment is made b1 the Britishi company to the American company. Mr. STAM. Thlat is right.. Senator LoNG. Prior to the time that the American company gets its rovalty payment, it has an agreement with the British company that, ihe britis'h company will pay it whatever the net royalty payment ,would be?
    ,Mr. STAM.

    isexcused from the British tax, then it does not benefit the American corporation at all, because they still get the same amount, and it is sort of a windfall to the British company. That is the problem we are concerned with. Senator LoNG. Well, if the British corporation is excused from the tax on the royalty payment, why will not that make the net royalty a larger figure than it would be if the company is not excused? Mr. STAM. Mr. Johnson will answer that. AMr. JOHNSON. A net royalty arrangement would be-for instance, in the terms of a particular contract-an amount that the British licensee must pay, which, after United Kingdom taxes, equals X dollars. Now suppose that the net figure intended to be arrived at is $75. The Frishrate, assume, is 50 percent. At the present tax time, under present law, the amount the British licensee would have to pay under such a net royalty agreement is $150, since $150, less the United Kingdom tax of $75 (at a 50 percent rate) would be $75. The British licensee would have to pay $75 to Great Britain, would withhold that amount under the license agreement and pay that to the United Kingdom, and would pay $75 to the United States licensor. Now, if the supplementary protocol were in effect, no amount would have to be paid to the United Kingdom. So, therefore, there merely because it is a net royalty, all the United States licensor patent holder could get would be $75. Since there is no withholding, the amount which, after United Kingdom taxes (now zero), equals $75 is $75. Just because it is a net royalty arrangement, the fact that no
    would be no withhlolding, no need to withhold any amount. And

    net. But if the British are excused-I mean if the British company

    The British tax would not come out, you see, of the

    (2843)

    DOUBLE TAXATION CONVENTIONS

    United Kingdom tax is payable inures to the benefit of the United Kingdom licensee. N r. STAM. In other words, it. will not do the American comply any good. They would be getting the same net amount that they get now. Senator LONG. Does the American company pay taxes to th6 Government on that income from his royalty? Senator LoNo. The American company pays taxes over here. And the British company is iot paving taxes over there. Thus, the protocol is to the advantage of the British company, but it will not help the American company. Mr. STAM. That is right..
    APPLICATION OF CONVENTION TO OTMER TYPES OF AGREEMENTS

    Mr. STAM. Yes.

    Senator LONG. Now, that is just one situation where a significant agreement between an American and a British company isinvolved, How does the convention operate in general as far as other companim are concerned? Do we hove a large volume of business and a large number of other companies? Mr. STAM. I think we do. And there is some difficulty about the wording of the convention, as to when they get relief and when they do not. Would you explain that Mr. Johnson, because I think that h going to be very confusing for many of these companies to determine whet er or not they do come within the terms of the convention. One of the approaches is this exemption from the United Kingdom ta. The other approach is the same approach that is adopted in H.R. 4952, giving a credit. Which device applies depends, under the sup. elementary protocol, upon whether or not the royalties derived byt United States licensor are directly associated with the business carried on through the permanent establishment. If the royalties are directly associated with the branch of the United States licensor in the Unite Kingdom, then a credit will be given under this supplementary protocol the same as under the bill. But if they are not so associated, no relief is given, and the Britih licensee gets the entire advantage of the supplementary protocol. It is a difficult question of fact to know whether or not they are directly associated or not. It turns upon Just that difference-what the aso. ciation with the branch in the United Kingdom is with respect to the royalty.
    BILL SIMILAR TO PENDING DILL (ff. R. 4952) VETOED BY PRESIDENT

    Mr. JOHNsON. This supplementary protocol adopts two approached

    questions. Is H. R. 4952 the bill pending before the Finance Committee? Mr. STAM. It is; that is right. year?

    Senator MORSE. Mr. Chairman, I would like to ask Mr. Stam two

    Senator MoRsE. Was a similar bill vetoed by the President ls

    Mr. STAM. A similar bill was vetoed by the President. Whether hO will veto it this year, I am not sure at all, but the President did veto the bill and he said certain things in there that I am not sure are a*

    (2844)

    r-

    DOUBLE TAXATION CONVENTIONS

    timely correct this year from all analysis of the facts. He spoke some. ad OtNg about unjust enrichment, and I believe we had some problems as to whether or not that was really true. And the bill does follow the general practice that we have on preventing double taxation by allowing a credit for the taxes paid to a foreign country so that the same inconmo is not taxed twice. It also follows very much the systam that we have with respect to dividends paid iii Great Britain, where we allow the credit. And so to that extent, we feel that it is departing from the precedent. that. this committee has followed, to a large extent, and that the Congress has followed in the treatment of double taxation. The CHAIRMAN. Does the bill that is now pending before the Finance Committee avoid the reasons for the President's veto given in his veto messa ge? Mr. STAM. That is a debatable point. I think some of the reasons given in the veto message last year can be answered, and to that extent I think the report will show where it does answer some of those reasons, because we did not feel tu.it the veto message in many rospects adopted sound reasons for the veto in many situations. Anid we could bring that out-I imean the committee will bring that out i-i the report of the Finance Committee. The CHAIRIMN. Is it. your opinions that, it would complicate matters ifwe (ook sonie action hiere in this committee? Mr. SAMS. I think it. would, and I think it, would raise a very serious problem that. this committee invy we'l be concerned with. That is, when t(ie Finance Committee has legislation pending before it, to have that legislation nullified by action of this conunitteo, by adoptiing an entirely different, approach. And, to that. extent, I think it would be unfortunate for the committee to act. on this at (lie moment. Senator LoNG. Mtr. Chairman, I would particularly like to make a point in support of Mr. Stain's position that as far as tax policy is concerned, the House of Representatives has some Members who are experts on taxation, partitularly oni the Ways and ,Means Committeo where some Members have bee'ii serving for more than 20 years and studying these tax probenis. And it, does seem to ine if we take an agreement made by the executive branch with a different approach to taxes, then we completely foreclose the House from having an opportunity to study the problem at all and pass judgment on it. House Members have to be elected every 2 years ald report directly back to the public, so they have pretty close contact withI a great, number of these problems. They study then, work on them. If we try to settle a tax problem by takiiig thie agreement approach and ratifying the agreement in tie Senate, we foreclose their working on it.
    EXECUTIVE BILaNC!! POSITION ON H. It. 4952

    aletter down, but they have not appeared before the committee on this bill this year, Senator MoRsE. You do not know whether or not they are recomnmending or opposing 11. R. 4952?
    (28415)

    Senator foits&. Nfr. Stain, what position has the Treasury taken this year on H. It. 4952? Mir. STAM. Time matter has not. come up before the Finance ComnMittee this year, so that. the Treasury has not-they may have sent

    10

    DOUBLE TAXATION CONVENTIONS

    Mr. STAM. They are here, and I think they could probably state that better titan I can. They have not made an oral statement before the committee. They may have sent in a report. Did you send in a report, Mr. Smith? Mr. SMITH. I do not know-is it appropriate for me to speak? I do not know whether we have reported formally to the Senate Finance Committee. We did report to the Ways and Means Com. mittee and I would be glad to indicate our position on that bill when I testily. The CHAIRMAN. Well, it is quite clear there are arguments on both sides as to the relations under the treaty. We also have with us Mr. Dan Throop Smith, Deputy to the Secretary, Department of the Treasury. Perhaps it would be useful to call on him now to give us
    Mr. STAM. Then we can take up the Belgium Treaty later. There is no controversy on that. The CHAIRMAN. The letters from Mr. Stain and accompanying memoranda will be inserted in the record at this point. (The material referred to follows:)
    CONGRESS OF TIlE UNITED STATES,

    his views.

    JOINT COMMirrEE ON INTERNAL REVENUE TAXATION,


    GREEN?, 1ion. THEODORE FRANCIS

    Chairman, Commitee on Forign Relations, United States Senate, Washington, D. C.


    DEAR SENATOR GREEN: At your request, the staff of the Joint Committee on Internal Revenue Taxation has reviewed the provisions of the following tax conventions now pending before the Comnmittee on Foreign Relations: Supplementary protocol between the United States of America and the Kingdom of Great Britain and Northern Ireland (Ex. A). Notification by the Government of Great Britain and Northern Inrland with a view to extending to certain British overseas territories the applicstion of the convention on taxes on income, as modified, signed on April 16, 1945 (Ex. C). Memoranda from this office summarizing the princiapl provisions of these conventions are enclosed. In general, the notification by the Government of Great Britain and Northern Ireland (executive C) is in accord with the principles underlying the provisions o existing tax conventions which the Senate has previously approved. The supplementary protocol between the United States of America and the Kingdom of Great Britain and Northern Ireland (Ex. A), however, raises important questions of tax policy which the committee may wish to consider. These questions are discussed in the enclosed memorandum relating to this supplementary protocol. The protocol would resolve, beginning with its effective date, a matter of tax policy which the House of Representatives has considered and decided in a different manner, and which is pending further legislative considerstion by the Senate Finance Committee. The supplementary protocol would not eliminate many of the inequities that exist under present law, as would the pending legislation, but rather would perpetuate these inequities and make it impossible to correct them by legislation. For the reasons set forth in the accompanying memorandum the staff believes that there are serious doubts as whether this protocol (Ex. A) should be favorably acted upon. , The notification by the Government of Great Britain and Northern Ireland (Ex. C) would extend to certain British overseas territories the income tax con vention signed at Washington, April 16, 1945 as modified by the supplemental protocols signed at Washington June 6, 1946, May 25, 1954, and Atigust 19, 1957. The supplementary protocol signed August 19, 1957, is Executive A referred to in the preceding paragraph. If the committee desires to report with respect to the notification without reporting favorably upon the supplementary protocol signed August 19, 1957 (Ex. A), the committee could make Its approval subject to a reservation with respect to that supplementary protocol. Similar action

    (2846)

    DOUBLE TAXATION CONVENTIONS

    11

    was taken by the committee when it considered the Netherlands tax convention in 1948. (See Ex. Rept. No. 11, 80th Cong., 2d seas.) Sincerely y , COLIN F. STAM, Chief of Staff.
    SUPPLEMENTARY PROTOCOL BETWEEN THE UNITED STATES Or AMERICA AND THE KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND (Ex. A, 85TH CONG., 2D BESS.)

    This supplementary protocol was signed at Washin ton on August 19, 1957. It would amend the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Washington on April 16, 1945, as modified by the supplementary protocol signed at Washington on June 6, 1946, and by the supplementary protocol signed at Washingtonon May 25, 1954. T'his upplementary protocol relates solely to the tax treatment of royalties and other amounts paid as consideration for the use of, or for the privilege of using, copyrights, patents, designs, secret processes and formulas, trademarks and other like property. It would alter substantially the existing rules relating to the tax The existing rules have been considered by Congress on two recent occasions. H.Rt. 7643 (84th Cong 2d sess.), "An act to amend the Internal Revenue Code of 1939 and the Interna Revenue Code of 1954 with respect to foreign tax credit for United Kingdom Income tax paid with respect to royalties and other like amounts," waspassed by both Houses of Congress. The approach contained in that bill differed significantly front that adopted by this supplementaryjprotocol. The President withheld approval front 1t. R. 7643. The report by the Secretary of State to the President accompanying this supplementary protocol states that it has been negotiated to carry out the purpose indicated in the President's message withholding approval of H.*R. 7643. His message indicated that tax inequalities did exist but that the appropriate way to correct the situation was by modification
    treatment of such amounts.

    H. It. 4952 (85th Cong., 1st sess.), now pending before the Senate Finance Committee, is substantially the same as II. It. 7643. H. Rt. 4952 like H. R. 7043, would alter the existing rules relating to the tax treatment of United Kingdom royalties in a substantially different manner than that provided in this supplementary protocol. The following paragraphs of this memorandum summarize the existing rules and compare the rules contained in H. IR.4952 with those con. taned in the supplementary protocol. Existing rules relating to tax treatment of royalties At the present time, some royalties paid by a United Kingdom licensee to a licensor in the United States for the use of a patent or copyright are subject to United Kingdom tax and some are not. If the United states licensor does not have a permanent establishment (such as a branch) in the United Kingdom, no United Kingdom tax is Imposed (par. (2) of art. VIII of the 1945 convention). If the United States licensor does have a permanent establishment in the United Kingdom, a tax is imposed by the United Kingdom. Where a United Kingdom tax is imposed on royalty payments, it is collected at the source, that is the United Kingdom payor of the royalty deducts the United Kingdom tax from the royalty payment. (The United Kingdom tax on dividends is also collected at the source in a somewhat similar manner.) The United States recipient is required to report the net amount of the royalty as Income, subject to United States income tax. However, under the existing court decisions, the United States taxpayer is not entitled to a credit for the United Kingdom tax imposed on the royalty. Irving Air Chute Co. v. Commissioner 177 F. 2d 200 (CCA-1, 1949)1. As a result of these rules, where a United states enterprise has a permenent establishment In the United Kingdom and receives royalty payments, there is double taxation with respect to such royalty payments. See appendix, example 1. Both the supplementary protocol and H. R. 4952 are intended to eliminate this double taxation. The supplementary protocol, however, would accomplish this in a different manner than would H R. 4952. The differences between
    these two measures involve substantial differences In the burden of taxation and

    of the tax convention.

    i143

    F. 2d 256 (CCA-2 1944)), Cleveland Graphite Brones Co. v. Commissioner

    80 present important questions of tax policy.

    (2847)

    12

    DOUBLE TAXATION CONVENTIONS

    Bled of supplementary protocol The supplementary protocol would make two amendments to the 1945 con. vention. Article I of the supplementary protocol wottld amend the 1945 convention by extending the exemption from United Kingdom tax for royalty payments. The 1945 convention exempts such payments where the United States licensor does not have a permanent establishment In the United Kingdom. The supple. mentary protocol would also exempt sutch payments where the United States licensor has aipermanent establishment in the United Kingdom provided that the royalties "are not directly associated with the business carried on through that permanent establishment.". (Par. (2) of art. I. A similar reciprocal exemption from United States tax is provided in par. (I) of art. I.) Accordingly, where a United States licensor has a permanent establishment in the United f-g. dom and receives royalties which are not directly associated with the business carried on through that establishment, the supplementary protocol will eliminate the double taxation which exists at the present time. If the United States licensor has a royalty agreement with a United Kingdom licensee calling for fixed payments there is no further problem. The United Kingdom naoer will not deduct any United Kingdom tax, the United States recipient will'include the entire royalty payment in income, and there will be only a single United States tax. On thme 6ther hand, if the royalty agreement is cast in terms of a "net royalty"'(i. e., the agreement calls for payment of an amount which after United Kingdom tax, equals X dollars) there is an additional problem. Under such a contract the elimination of the United Kingdom tax will inure to the benefit of the United Kingdom payor only, the United States licensee will not get any additional amount by retton of the elimination of the United States tax, but rather will pay the same amount of tax that he is required to pay tinder present law. (See appendix, example 2.) Thus the position of the holder of such a "net royalty" contract will not. be affected 6 the supplementary protocol Although double taxation of the royalty payments ttas been eliminated, the form of the royalty contract, under the; protocol, precludes him from receiving any additional amount. The elimination of the United Kingdom tax, thus, inures solely to the benefit of the United Kingdom licensee and so reduces his coxst of using the patent. The second aniendmnent which would be made by the supplenuentary protocol deals with the remaining rovalty situation not covered by the first amendment. This amendment adopts an entirely different approach to the problem and treats fixed royalties and net royalties alike. Article II of the sup)plementary protocol would amend the 1945 convention by extending the provision providing for a credit against United States tax for United Kingdom tax. Where a United Kingdom tax is imposed upon royalty payments received by a United States licensor no tax credit is presently available for such tax. Th~o 1945 convention dealt with a similar problem which had arisen in the case of the United Kingdom tax on dividends. Article XIll of the 1945 convention provided a credit against United State tax for the amount of the United Kingdom tax on dividends paid by United Kingdom corporations provided the United States recipient elects to include in his income for United States purposes the amount of such United Kingdom tax. The amendment. which would be made bIy article 11 of the supplementary protocol would extend this tax credit to cover "patent royalties and like amounts with respect to which a United Kingdom tax is imposed. As seen above, the only remaining situation in which a United Kingdom tax would be imposed, under the supplementary protocol, is where the United States licensor has a permanent establishment in the United Kingdom and the royalty payments are directly associated with the business carried on through that permanent establishment. In this remaining case the supplementary convention also will eliminate double taxation. However2 in this situation the elimination is accomplished by revising the tax credit. This is also the approach adopted by H. R. 4952. Tinder this approach, the United States licensor who has a fixed rovalty is treated in the same manner its if the royalty were exempt from United Kiigdom tax. Moreover, the United States Icensor who has a net rovalty is not treated differently under this approach. (See appendix, example 3.) "Both licensors will hav exactly the same amount after payment of taxes. Thus, this approach avoids entirely the problem encountered under the exemption approach contained in article I of the supplementary protocol by adopting the approach contained in H. R. 4952.

    (2848)

    DOUBLE TAXATION CONVENTIONS

    13

    shall have effect, for alny' chargeable accounting period beginning oin or after April 1, 1956, and for the tunexpired portion of any ehargeable accounting period current at that, date). Effort of HI. R?. 4952 If. It.4952 would amend the 1939 Code and the 195.1 Code by adding a provision to eacth which would permit a United States recipient of it royalty derived from sources within the United Kingdoml to obtain a foreign tsix credit, subject to the usual limitations, for income taxes paid to tlhe United Kingdom with respect to such royalty if the United States recipient Ineluleg in it- il:cotle Ithe amountlt of the 4952 has no effect. upon the United United 10igdoni tax. As noted above, I1. RI. Kingdom tax. That tax would continue to be imposed with respect to royalty payIe ts In the same manner as under existing low. However, the bill woula provide a foreign tax credit for any United Kingdom tax imposed on royalty payments and would operate in exactly the same manner as would the credit pro. vided by article 11 of the supplementary protocol. (See appendix. example :i.) The report. of the (ommit tee on Ways and Meains with respect to this bill Indicates that the Committee on WaVys and Means believed this approach was desirable because it eliminated double taxation and because, it nould give United States royalty recipients who have permanent buoine.ss establishments In the UInited Kingdom the same relief accorded to dividend recipients under the 1945 Income tax convention (11. ltept. No. 1033, 85th Cong., Ist sess., p. 2)h. As the discosbion of the s pplementary protocol indicates, this approach results in the same tax treatinnt for all United States royalty recipment.,4, whether they have fixed royalty contracts or net royalty contrates. 11 R. .1952, thus,. would adopt the same Approaeh ais that adopted in the 1945 incolelt-ltx vot'liv'tlll I ill f lie case of dividends,by in effect overruling the court decisions by reason of which at foreign tax credit hats been denied under existing law for the Uniited Kingdom tax imposed on such p)aymnent~s. The amendments made by I. R. 4952 would apply for tL-.ab!l years; behiiwing on or after January 1, 1950. R. It has been argued that H1. 4952 is defective in two respects: (1) it would provide a "windfall gain" to some American licensors, and (2) it places United States taxpayers without United Kingdom branches in a worse position than those who have Uifted Kingdom branches. As to the first point, "windfall gains" arise, it has been suggested, because existing royalty contracts have been entered into with knowledge of the present state of the law. It is difficult to perceive how knowledge of existing law can affect the position of the United States taxpayer with a United Kingdom branch. At the present time, royalties paid to him are subject to British tax and he is denied a foreign tax credit. It seems unrealistic to assume that a British licensee would be willing to pay a United States taxpayer having a branch in the United Kingdom a greater total amount for the use of his patent than the British licensee would have to pav to a United States patent holder who does not have a branch in the United i"Ingdom. Presumably, these arrangements are arms' length business transactions. That being so, it is difficult to perceive why a British licensee would be willing to absorb the entire United Kingdom tax on such royalties. If the British payor is not willing to absorb the entire United Kingdom tax, then it is apparent that the United States taxpayer having a branch in the United Kingdom is not able, under existing law, to obtain the same amount, after taxes that can be obtained by a United States taxpayer without a branch in the United Kingdom. Correction of this inequity would not appear to result in a "windfall gain." Moreover, the supplementary protocol itself adopts the same approach as that contained in the bill in the case of some royalty payments to United States licensors. Accordingly, the Treasury must have believed that no "windfall gain" would inure to a taxpayer who is entitled to a credit under the proposed stipplementary protocol, The second point-that the bill places United States tax payers without United Kingdom branches in a worse position than those having United Kingdomn branches-also appears erroneous. If it Is assumed that the United States taxpayer without a branch has a patent which is worth, to a British licensee, the Mine amount as the taxpayer with a branch, it Is clear that both taxpayers are in

    Article upon ti'he exchange of Inlstrumlnients of ratification and shall thereupon have effect in the United States for taxable years beginning on or after January 1, 1956, amid of assessment beginning on or after April 6, year inthe United King~dom for any (in the case of the United kingdom profits tax, the stlpple ntary protocol 1956

    III of the supplementary protocol provide- that it 4hiill enter into force

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    14

    DOUBLE TAXATION CONVENTIONS

    exactly the same position. Each will be left, after taxes, with the same amount. This Isdemonstrated by example 3 In the appendix. Moreover as in the case of the "windfall gain" argument, It should be observed that insofar s the sup $eI mentary protocol adopts the tax credit approach contained in H. R. 4952 itba. plicitly rejects the validity of this argument.
    Conclusion

    creates additional complexity by introducing two different technical devices Difficult questions of fact would have to be resolved in order to ascertain which device applies in the case of a particular United States licensor. The supplementary protocol would, In general, be effective for years beginning in 1956. H. R. 4952 would be effective for all taxable years after January 1, l95O While both measures seek to eliminate the double taxation agreed to exist at the present time, the supplementary protocol would not affect the prior period to which H. R. 4952 relates. This supplementary. protocol relates solely to a complicated issue of tax policy which Congress considered in 1956 and whch Congress is currently considering. If made effective, it would foreclose consideration by Congress of this question for the future and, In so doing, would adversely affect some taxpayers merely because they had adopted a particular form of contract and did not have a permanent establishment In the United Kingdom directly associated with their roy afltes. For all of these reasons, the staff of the joint committee believes that there are serious doubts as to whether this supplementary protocol should be favorably acted upon.

    This supplementary protocol relates to a tax question currently under legisa. tive consideration. It contains two entirely different devices for the elimination of double taxation. One of these devices (the extension of the exemption from taxation) has the effect of operating disadvantageously in the case of some United States licensors. The other device (the extension of the foreign tax credit) isthe same as that provided by H. R. 4952. The supplementary protocol, therefore

    &rampie 1

    APPENDIX

    The double taxation under present law may be illustrated by the following example: Suppose that a Unitid States corporation has a branch In the United Kingdom and enters Into a patent license agreement with a British licensee under which the licensee is to pay $150 per year for the use of the patent. Assume also that both the United Kingdom tax and the United States tax rates are 50 percent. Since the United States corporation has a permanent establishment In the United Kingdom, the licensee will deduct $75 (50 percent of $150) from the royalty payment and pay that amount over to the Unilted Kingdom. The United States corporation, therefore, will include $75 in its income and pay a tax of $37.50 (50 percent of $75) on that amount, thus having $37.50 left after United States and United Kingdom taxes. If the United States corporation did not have a branch in the United Kingdom, no United Kingdom tax would have been paid and a United States tax of $75 would have been imposed (50 percent of $150), leaving the corporation with $75 after the single United States tax. Piample * The following example illustrates the effect of the supplementary protocol in the case of a fixed royalty and a net royalty: Suppose corporation A and corporation B, both United States corporations with branches in the United Kingdom, have equally valuable patents. Each corporation enters into a license agreement with a United Kingdom licensee. The royalties received by each are unrelated to the business operations carried on by their United Kingdom branch. Assume also that the United States and United Kingdom tax rates are both 50 percent. Corporation A, prior to the supplementary protocol entered into a fixed royalty contract, under which it is to receive $150 pet year. The supplementary protocol will eliminate the $75 tax which would otherwise be withheld by the United ]Kingdom payor. Thus, corporation A will receive $150 and will pay a United States tax of $75, leaving it with $75 after United States tax. This is the saife amount of tax that it would have paid If it did not have a branch In the United Kingdom. See example 1. Corporation B, on the other hand, prior to the supplementary protocol, entered into a "net royalty" contract. It calls for payment of an amount which, after United Kingdom taxes, equals $75. At the present time, the United Kingdom payor is required to pay $150 under such a contract-$75 to the United Kingdom

    (50 percent of $150) and $75 to corporation B. Corporation B, at the present

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    DOUBLE TAXATION CONVENTIONS

    15

    time, includes $75 in its United States income and pays a United States tax of $37.50 (50 percent of $75), leaving it with $37.50. The supplementary protocol will not affect in any way the tax position of corporation B. It will stili receive only $75 and will still iay a United States tax of $37.50, leaving it with $37.50 after taxes. In short, the elimination of the United Kingdom tax-in an effort to eliminate the double tax on the royalty-in no way alters the tax the United States corporation must pay on the royalty income. amplee 3 The following example illustrates the effect of allowing a foreign tax credit under the supplementary protocol (or under H. R. 4952) in the case of a fixed royalty and a net royalty: Suppose corporation A and corporation B, both United States corporations wsith branches in the United Kingdom, have equally valuable patents. Each corporation enters into a license agreement with a UnitedKingdom licensee. The royalties received by each arc directly associated with the business carried on through the United Kingdom branch. Assume also that the United States and the UMAted Kingdom tax rates are both 50 percent. Corporation A,prior to the supplementary pr'otocol, entered into a fixed royalty contract under which it is to receive $150 per year. Under the supplementary protocol, the payor will deduct $75 (50 percent of $150) from the royalty payment and pay that amount over to the United Kingdom. The United States corporation under the tax credit provision of the supplementary protocol, will include $156 in its United States income (the $75 actually received and the $75 of tax ro sed by the United Kingdom on such royalty). The United States tax on $11 is $75 (50 percent of $150). Under the tax credit provided by the supplementary protocol, the United States corporation will be entitled to a $75 credit against his United States tax for the United Kingdom tax deducted from the royalty by the payor. Accordingly, only the United Kingdom tax will be paid with respect to the royalty and the United States corporation will have, after taxes, $75. Corporation B, prior to the supplementary protocol, entered into a "net royalty" contract. This contract calls for payment of an amount, which, after United Kingdom taxes, equals $75. Since a United Kingdom tax is impose on royalty payments under this contract, the United Kingdom payor will still be required to ay $150 under the contract-$75 to the United Kingdom (50 percent of $150) and $75 to Corporation B. Under the supplementary protocol Corporation B will include in its United States income $10 (the $75 it actually receives from the United Kingdom payor and the $75 of the United Kingdom tax deducted by the payor). The United States tax, before credit, on $150 is $75. Under the tax credit which would be provided by the supplementary protocol Corporation B will be entitled to a foreign tax credit of $75. Thus, only the United Kingdom tax will be imposed on the royalty payment and Corporation B will have left, after taxes, $75. This is the same amount Corporation A has after taxes and Is twice as great as the amount which Corporation B would have if instead of pro. viding a tax credit for the amount of the United Kingdom tax, the United Kingdom tax was eliminated. See example 2.
    %OTItrICATION BY TIE GOVERNMENT OP GREAT BRITAIN AND NORTHERN IRELAND WITH A VIEw To EXTENDING TO CERTAIN BRITISH OVERSEAS TERRIToRIES THIE APPLICATION OP TIHE CONVzNwION ON TAXES ON INCOME, AS MODIFIED,

    SIGNED APRIL

    16, 1945

    This notification has been transmitted by the President to the Senate with a view to receiving the approval of the Senate. The notification is embodied in a note dated August 19 13)57, from the British Ambassador in Washington to the Secretary of State. The notification proposes that the operation of the 1945 Income-tax convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America as modified by the supplementary protocols of June 6 1946, May 25, 1954, and August 19, 1957, be extended to the territories specified in the annex to the note, subject to the modifications and with effect from the dates specified in the note. This notification by the Government of the United Kingdom has been given Inaccordance with the procedure described in article XXII of the 1945 convention, as amended by the supplementary protocol of 1954. It will become effective when accepted by the Government of the United States and will apply to the territories named in the notification on or after the dates specified therein.

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    DOUBLE TAXATION CONVENTIONS

    This notification would extend to the territories specified in the notifleation the supplementary protocol of August 19, 1957 (Ex. A, 855th Cong., 2d stw.), if the Senate approves the supplementary protocol. As pointed oit In tle attached meunwrandumn (entitled "Supplementary Protocol Between the United States of America sld the Kingdom of tIreat Britain and Northern Ireland"), this stipple. roentary protocol raies important questions of tax policy. If the Senate desire. to approve this notification without approving the supplementary prot,'col of August 19, 1957, it would be possible to approve the notification subject to the reservation that the Government of the United States does not accept the pro. visions of the supplementary protocol. When the Netherlands convention came before the Seonate In 1948, the Senate approved that convention sub)ject to reser. nations with respect to sevieal articles of the convention. (See 8. Ex. 1,80t Cong., 2d smss. p. 18.) The supphlementary protocol between the Government of the United Kingdom of Great Britain and Northern Ireland and the Govern. ment of the United States of May 25, 1954, was principally for the purpose of modifying the territorial-extension provisions of the 1915 convention to permit the extension of the 1945 convention to territories without extending to stich territories any provisions similar to those which were the subject of a reservation by the Senate. (See S. Ex. II, 83d Cong., 2d seas.) The annex to the British Ambassador's note is divided into three parts. Pars. graph I lists the British territories to which the convention weld be extended, subject to the conditions aud modifications contained in paragraphs I1 and IMI. The territories to which the convention would he extended are Aden; Antigus; Barbados; British Honduras; C prus; Dominica; Falkland Islands- Gambia; Grenada; Jamaica; Montserrat; Federation of Nigeria; Federation of Rhodesia and Nyasahund; St. Christopher, Nevis, and Anguilla; St. Lucia; St. Vincent; Seychelles; 8ierra Ieone; TIrinidad and Tobago; and Virgin Islands. Paragraph I also sp-ecifies the taxes imposed in the respective territories to which tie convention shall be extended. The taxes listed are those taxes which partake of the essential nature of income, excess profits taxes, and national defense contributions. Paragraph I also si-eifies the dates on which, as to each territory, the provisions shall Ib effective. Paraugra )h It of the annex provides for the application of the convention in tlhe case of each of the territories. Under this paragraph it is provided that the extension shall have effect when the last of those measures shall have been taken In the United States of America and in any territory to give the extension the force of law in the United States of America and such territory. It is provided that when such measures have been taken the extension shall have effect for subsequent tax years. Paragraph IIIof the annex contains thie modifications in the convention which slaIll be made for the purpose of the proposed extension. For the pura Koses of the extension to all of the territories enumerated, articles XIV and VI of the 1945 convention shall be deemed to be deleted. Article XIV exempts from United States tax capital gains realized in the United States by a resident or corporation of the Untited Kingdom not engaged In trade or business in the United States through it permanent establishment therein. Article XVI pro. vides that it United Kingdom corporation will be exempt from United States tax imposed upon undistributed profits if more than one-half of the voting power of the corporation is in the hands of individuals (other than United States citizens) resident In the United Kingdom during the latter half of the taxable year. When the Netherlands convention canie before the Senate in 1948 the Senate approved that convention subject to reservations that the articles of that convention corresponding to articles XIV and XVI of the United Kingdom convention be not accepted. No convention subsequently adopted has contained any such provisions and under this notification these provisions of the United Kingdom convention will not be extended to the territories. Paragraph IIf also provides that article VII of the 1045 convention shall he deemed to be deleted for the purposes of the extension to all of the territories except the Federation of Rhodesia and Nyasaland. Article VII provides for the reciprocal exemptions of Interest (on bonds, securities, notes, debentures, or ot any other form of indebtedness). The effect of this modification will be that interest from United States sources going to any of the territories except the Federation of Rhodesia and Nyasafand, will be subject to United States tax. Similarly, interest derived from sources within any of the territories, except the Federation of Rhodesia and Nyasaland, will be subject to tax by such territorY. Only in the case of the Federation of Rhodesia and Nyasaland will article VI Uf the 1945 convention be applicable to exempt such interest payments from tax.

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    DOMELE TAXATION CONVENTION

    17

    The remaining modifications are required because of differences in methods of in.1posing tax it the territorial. TIhese differences do uiot appear to be matters of sulkl~ltallee.
    CONORNSS OF TIlE UNITED STATFH, JOINT COMMIT'TER ON INTHIHNAI, IIVENUE TAXATION,

    2d session. Re Executive B, 85tth Congress,

    lion. Tiwonou, FRANC114 OREEN,

    Chairman, Senato ominmiftte on Foreign Relations, United States Senate, Washington, D. C.

    DPAR SENATOR GREN: At your request the staff of the Joint Committee op Internal Reveme T'axation has reviewed the provisions of Executtive B, 85th October 29, 1948. relating to tihe avoidance of dolible taxation, as modified, by the suppnimuentary convention of September 9, 1952. The supl)lementary convenation is designed to facilitate t he extelitloll of tile 1048 convention, its modified, to the Belgium Congo and Ihe Trust Territory of Ruanda-Prundl. In connection with the consideration of the supplementary convention the senate has been requested to consider and approve the aeceltanice by the United States Government of the Belgium Governmtnt's notification tinder date of April 2, 19541, of its desire to have the 1948 convention, its modified, extended to from this office. lit general the convention with Belgium, as
    Congress, 2d session, a convention with Belgitun supplementing tle convention of

    the Ilelgiunt Congo and the Truist Territory of liuanda-Urundi. Antanalysis of this supplementary convention is set forth lin the attached

    inemoraldthn

    under (late of March 4, 1058. Although the convention with Belgium places no express restrictions upon the rate of the taxes inobiliere imposed by Belgium with respect to dividends the

    previously approved and is in accordance with the principles that guide United l states representatives iit negot eating income tax conventions with representatives of foreign countries. T'hos- p)rinciples ar set forth in a meniorandtum entitled "Principles of Income 'Tax Conventions" dated March 3, 1958, forwarded to you

    heretofore mnodilied and its proposed to be modified by the suipplemetntary convention follows the provisions of existing tax conventions which the senate has

    resident or corporation or other entity of tile United States not having a permanent establisltntent within rich territories. llowever, whether or not tie taxe inobiliero of the Congo or the Trust Territory is available to a shareholder os a credit agailist United States tax is not settle biy thie proposed suti)letnent.ary convention but remains subject to the law ai construed in the light of the facts relating to the tax. Sincerely yours, COLIN F. STAM, Chief of Staff. CONVENTION WITH IIEIOIUM SlPPrtEMNTING TIUR CONVENTION OP acTODElR 28, 1948, ItLATINO TO DOUBLni TAXATION (EX. B, 85TH CONe., 2D Smss.) This is in reference to executivee B, 85th Congress, 2d session-ia convention with Belgium sulppleentitig tile convention of October 28, 1948, relating to the avoidance of double taxation, its tiodifled by tile supplementary convention of eptnlltelr 0, 1952. This supplementary convention w'as sutlllitted under ditto of January 30, 1958, by the Presidentt to the Senate with a view to receiving tile advice and consenti. of tlhe Senate to ratification. The suipplementtary convention is designmid to facilitate tlte extension of the 19418 convention, as 1.4molfied, to the Befuan Congo autd tite Trust, Territory of Ittianda-Urtundi. The President also requested tiat hii conjunction with the consideration of tile Supplententary convention, the Senate consider and approve tile acceptance by the United 4tatcs Government of tile Belgium Government's notification under date of April 2, 1954, of its desire to have the 1048 convention, as modified, extended to the Belgium Congo and the Trust Territory of Ritanda-Urundi. The Treasury Department hits advised the following: Itutanda-Urtindi com. rises some 20,000 square miles, contiguous to the northeastern boundary of the Congo, and has a population of about 4 million. Formerly part of (lermanl East Africa, it was placed under Belgian administration by mandate of the League of

    Proposed supplementary convention would prohibit the Belgium Congo alit' the Trust Territorv from imuposing a taxe mobifiere at a rate in excess of 15 percent (the existing ralte) on dividends from sources within their territories paid to a

    78095 O-42-vol. 2--80

    (283 (2853)

    18

    DOUBLE TAXATION CONVENTIONS

    Nations and is now held under a trusteeshilp from the United Nations. For government administration the territories of Ruanda-Urundi are united with the V~on o. TWe notification dated April 2, 1954 by the Belgium Government wu i0 accordance with article XXTI of the 1948 convention which contains provisions in paragraph (1)whereby either contracting state may, with the written notiiffi. tion to the other through diplomatic channels, declare its desire that the operation of such convention, either In whole or as to such provisions thereof " may be deemed to have special application, extend to any of its colonies or overea territories which imposes taxds substantially sinmlar In character to those which are the subject of that 1948 convention, as modified. Article XXII of the 194 convention, as modified, also provides, in paragraph (2), that in the event a notification is given by one of the contracting states in accordance with that procedure, the convention, or such provisions thereof as may be specified in the notification, shall apply to any territory named in such notification on and after the 1st day of January following the date of a written communication through diplomatic channels addressed to such contracting state by the other after such action by the latter state as may be necessary in accordance with its own procedures stating that such notification is accepted In respect of such territory. In the absence of such acceptance, none of the provisions of the present convention can a pply to such territory. In accordance with established policy (see 8. Ex. Rept. No. 11, 80th Cong., 2d sees.) anyproposa for an extension of the convention before being accepted -by the United Stato Government, isto be submitted to the Senate for approval. Both the supplementary convention and the proposed extension have the approval of the Department of State and the Department of the Treasury.
    The proposed eupplementaor convention

    Following the request of the Belgium Government that the Income tax coven. tion be extended to the Belgium Congo and the Trust Territory of RuandaUrundi (both of which are hereinafter referred to as the 'Congo"), It developed that modification of the convention would be necessary for its proper application to those territories. Certain corporations, for example, doing business in the Congo would not be fully covered if the convention were extended in Its present form to the Congo. The first article of the proposed supplementary convention deals with this problem.
    Articke I-Definition of "Belgitim enterprise"

    The provisions of the basic convention apply to Belgium corporations doing business in Belgium. The provisions of the convention, extended to the Congo, would apply to Congo corporations doing business In the Congo. The Treasury Department adviseshowever that an extension of the basic,convention, as heretofore modified without further modification, would be inadequate in dealing with two classes of corporations. One consists of corporations created under Belgium law, having their center of management in Belgium and doing all their buslnue In the Congo. The other consists of corporations created under Congo law with their center of management in Belgium and doing all their business in the dongo. The Treasury Department further advises that both'these classes of corporations are subject to tax by Belgium, under its fiscal law of June 21, iKt, rather than by the Congo. Article I of the proposed conventin dlee thes two classes of corporations to be "Belgium enterprises" with the result tM'"t the' 1948 ionvention, as modified, with Belgium will apply to them rather than the'convention U extended to the Congo. Thus, such corporations will be treated like other Belgium corporations in the application of the 1948 convention, as modified. For purposes of the extension to the Congo, the deflntion of a "Belgium enterprise" fn article II of the 1948 convention, as modifld idn 9152 and as propod to be modified, will mean an industrial or commercial utnerprise or undertaking carried on in the Congo by a citizen or resident of the Congo or by a corporation or other juridical person created or organized under the.1wa of the Cong. An individual resident of the Congo, regardless of nationality, will be entitled to the benefit accorded by the convention to a Congo enterprises rovbdd be carries on business in the Congo, but a corporation created or ora t under the laws of a country other than the Congo (or Belgium) will not b entitled to such benefits For illustration, a corporation organized under the laws of the Congo engaged in the business in the C-ongo and having no permanent establishment in the United States will enjoy, by virtue of article I of the convention, exemption from United States tax in respect of profits from goods sold in this country. However the po. fits of a corporation organized under the laws of Spain, for example; will not I* exempt under similar circumstances.

    (2854)

    DOUBLE TAXATION CONVENTIONS

    19

    Article I I-Congo tar on ditidende frozen at 15 percon* The ('Congo imposes a taxes mobiliere at the rate of 15 percent on dividends paid by ('olgo corporations. Under the convention, as proposed to be extended and modititd, the Congo mnay continue to collect a tax tip to this rate on dividends aid by Congo corporations to United Sates residents and corporations not having a perina'ent establishment in the (Congo and the rate of United States tax on dividend i derived from sources within the united States by a resident of the Cougo or atcorporation of the Congo not having a permanent establishment In the United States may not exceed 15 percent. The effect is to leave unchanged, but frozen, the Congo tax on dividends and to reduce from 30 Percent to 15 percent the Unlted States tax on dividends flowing to aliens residing lit the Congo. Whether or not the Congo taxe mobiliere is available to the shareholder as a credit against United States tax Isnot settled by the proposed supplementary convention but remains subject to the law as construed In the light of the facts relating to the the tax. Nor (1oe0 article disturb or affect the qualifications of the Belgium taxes tol)ilic're for credit purposes. That io likewise left to the law as construed .. n the light of the facts with respect to the Imposition and collection of such tax. Article II I-Effective dMle of extension The 1948 convention with Belgium provides that any extension of It shall become effective January 1 of the year following acceptance of a request for an extension. The Treasury advises however that after the Belgium Government expressed its desire in 1964 to have the basic convention extended, it became evident that prompt action could not be taken to secure such extension and, to compensate for the delay, and in accordance with the practice that has developed in connection with more recent conventions, article III provides that this particular extension of the Belgium convention shall take effect upon January I of the year in which a request by one Government for extension has been accepted by the other. Consequently the extension of the convention to the Congo would be effective on and after January 1 Immediately preceding the date on which the United States Government formally accepts the Belgium Government's notification for such an extension. Article IV-Definition of "orersaca territories" To remove any ambiguity concerning the territories to which the basic con. vention may be extended, article IV of the proposed supplementary convention provides that "overseas territories" shall mean such territories for the foreign relations of which the contracting states are responsible. The purpose of this modification is to make clear that the basic convention, as heretofore modified, could be extended to the Trust Territory of Ruanda-Urundl which, as heretofore Indicated, was formerly part of German Past Africa and was placed under Belgian administration by mandate of the League of Nations and is now held under a trusteeship from the United Nations. Article V-Ratification and termination Article V, the final article of the proposed convention, contains the customary provisions concerning ratification and the period of effectiveness of the convention. It provides for ratification and for exchange of instruments of ratification, the supplementary convention to become effective with respect to taxable years beginning on or after January 1 of the year in which such exchange takes place. The supplementary convention would continue in effect as an integral part of the basic convention with Belgium, as modified, subject to the same provisions in regard to termination, The department of State has advised that the only Congo taxes that will be subject to the convention if and when the proposed extension is accepted by the United States Government, are the Income taxes, additions to those taxes, and similar taxes that may be imposed in the future. It further advised that no national crises tax or personal complementary tax, applicable in Belgium (see art. I of the 1948 convention), has been enacted for the Congo. However if the Congo should adopt such taxes in the future, the convention, as proposed to be extended and modified, would apply to them as well, by reason of article XXII of the 1948 convention, if such taxes are "substantially similar in character to these which are tihe subject of the present convention." The basic convention, as modified, and as proposed to be further modified, does not contain any provisions which the Senate has regarded in the past as undesirable or objectionable.

    The CHAIRMAN. Mr. Smith, will you kindly comment?


    (2855)

    on

    DOUBLE TAXATION CONVENTIONS

    STATEMENT OF DAN THROOP SMITH, DEPUTY TO THE SECRETARY, DEPARTMENT OF THE TREASURY I have a prepared statements Mr. Chairman, of about three page. If I might read that, I think it describes as concisely as I can, the issues as we see them. I think the copies of this are available to be distributed to the members of the committee. On behalf of the Treasury, I welcome this opportunity to present the Department's views on tthe conventions now pendingy before your committee. There are four documents awaiting action by your com. Pakistan, is not on your agenda today', and i shall therefore confine my comments to the other three. One of these would aniend the existing income tax convention with Great Britain. Another would extend that convention, as amended, to a number of overseas toni. tories of the United Kingdom. Tihe third would modify the conven. tion with Belgium and would extend it, with the modifications, to the Belgian Congo r id to Ruanda Urundu, which Belgium administm as a U. N. trusteeship.
    MODIFICATION OF UNITED KINGDOM CONVENTION Mr. SUITI.

    Thank you, Mr. Chairman.

    mittee. As I understand it, one of these the convention with

    The proposed modification in the income tax convention between the United States and the United Kingdom is designed to achieve two objectives. First., it will remove a barrier which now exists to the establishments of American enterprises in the United Kingdom, and which would exist with respect. to the overseas territories of the United Kingdom if the treaty were extended to those territories without modihcation. Second. it is designed to eliminate double taxation in cases where this is not done by the existing tax convention, and to do so in such a manner that the revenue loss is shared by the United Kingdoin and the United States. If I may interyrect here, the basic difference between the convention, as we see it., an t11e proposed legislation, is that the convention entire cost is born by the UInited State Treasury. Under the present. convention with the United Kingdom, royalties paid by a British licensee for the use of an American patent, copyright, design, or trademark is not subject to tax in the United Kingk dom, if the United States licensor does not have a place of business, permanent establishment, there. In such situations, the United States licensor simply reports for United States tax purposes the net amount of royalties received and pavs tax on such income without any credit for foreign taxes. If the Cnited States licensor does have a pernmaneut establishment in the United Kingdom, however, the British impose a tax on the royalties. Accordingly, if an American licensor of a patent or copyright, without a permanent establishment in the United Kingdom, should decide hitherto exempt from British taxes would become subject to tax. This would tend to iperease the cost of the royalty to the British licensee, and if the magnitudes involved are large enough, the American licensor

    vides the cost of the relief from double taxation between the United States and the United Kingdom, whereas under the legislation the

    to establish a branch enterprise in the United Kingdom, the royalties

    I
    *1

    I)OUDI,FI TAXATION CONVENTION

    21

    (Itilvl~lf~ ioll.

    pjyv find it imnpr'actical to muake the ,,olitenijlhlatd investiu1ent in the l'11itt(l litigdonm, or itR ouverstoos teri'itories. Tiis tyln' of lroblem is not Simply a llypothletical pno.sihility, but has emierge! in actual situalioIs. und wol)(t he elinunatted by the proposed prot ocol to the British

    S, (Itor LoxN. Mr. Cchairman , are w,, going (4)ask questions now tixor hlter'? I would he interested in having MIr. ,mnili give us an

    1ilnpII' ofI this jiossiliilit %.


    Mr. SMITII.

    N.tl. .4I'ii-r. I do lihai tiln eXanyle at flit' obnd, Senator Lonig. The ( IIAIIiMA N. We will lN flie Witness ('0onjl)et( his sttlemillen.

    'h'llank you.

    DO' III,FL TAXATION ON tOiAITI:ES arise's Inl ('ast'S Where tle nitisli convention tlO's 101 IIOW confer cxenlption onl royalties flowing fromt (hlie iiied Kingdom lictnsee todoes (lie United .,-01ties licelsor, thaiot is. inl situationls where flth% liev,nor hive it )erniiliatel establishlinet in (it'e united Kingdom. in sut'ii ilnMtate('('s, (lie British impose their tax by denying tlil, licensee a dedumtioni for royalties in comnpuiting taxable ilc('oIne. HIoweve', tle li'ensteemi nlv, itider I'itisli law. recoup tile tax arising fron the lion-

    'IT' .letolld piroblemni sou01hlit to he, solved by (lite ilrolOseid protocol

    proposed modification.

    tax froml lie royalties dih' the licensor. The United States courts have held that inlnter these circumstances (lite American lii'ensor may inot elim it credit against Vnited States tax for tilly amounts retaintd by t(he licensee to recover his Uinited Kingdoii tax liability. The leading ease is (lie Ir'in.g Air (Chute ('ompanl ! v, (',inriszuoiter (143 11'. l2d 19414). 'lihstizvision rests oil a 19:18 Supremle Court 25(1, fase, and takes (lit' view that (lit British tax is not imposed on the Aineric-an licensor and lience cannot bl claimued ly hint as a credit. (Consequently, when royalties are subject to British tax, tlits American r(T'illlleit reports tlie nt't amount received and pays, United States tax oil that amount without adjustment for anly tax imposed by the T nited Kingdom. This is the description as it now stands. Now, T will describe the
    PROPOSED PROTOCOL WOVi.D AVOID DOUBI., TAXATION

    dedu'tibilitv of royalties Ihv withlilitlding an amount equivalent to t(le

    rights to patents, copyrigll!ts, designs, and trademarks, thien the

    Under the proposed modifications of tlhet convention, tie exemption how granted bky the British to royalties paid to a United States licensor without a permanent establishment in the Uniteil Kingdom would be expanded to apply even if there is a permanent establishment, proVitted flie royal ties are not. directly related to the activities carried oni by that. permanent' eat ablishiment. And in those cases where double taxatioii is not eliminated by exeinption front British tax, the United States would allow a tax credit. Thus, if ani American firm has a brantch in lit', United Kingdom that negotiates the licensing of its

    royalties obtained as a result of these activities would be subject to United Kingdonm tax, and in su(chi cases, t(le United States would allow a credit for tlie tax. This would lie in accord with the general principle incorporated in our tax treaties that a permanent establishment should
    ( %.8 411-1)

    22

    DOUBLE TAXATION CONVENTIONS

    be subject located. to tax on all its business income by the country where it k The proposed protocol to the United Kingdom treaty would thas e inmate double taxation by a sharing of the revenue loss. T6. United Kingdom loss would arise from an expansion of its exemption, and the United States would assume a loss through the tax credit with respect to the residual royalty area not exempt from United Kingdom tax. The provision is,of course, reciprocal in eba'acter. If I may interject here, in terms of the relative'benefits, we would be giving up a 30.percent tax, which is the rate we have under the statute, whereas the British would be giving up a 52Yrpercent rate. So their concession ratewise is greater than ours. I should add that the treaty provisions would have no adverm effect upon any American licensor of patents or copyrights compared with existing provisions of law.
    PROTOCOL WOULD NOT ACHIEVE SAME SOLUTION AS LEGISLATION

    However I want to call to your attention that the proposed solution to the double taxation problem is not the same as that which would be achieved by H. R. 4952, a previous version of which the President vetoed. Under H. R. 4952, the Treasury would bear the entire cost of eliminating double taxation. I.t would be obliged to give a credit in all cases where the United Kingdom now imposes a tax, that is,in every case where the royalty recipient has a permanent establishment in the United Kingdom, and irrespective of whether the royalty income is attributable to the activities of that permanent establishment. There would seem to be no sound reason for adopting this solution when an alternative such as the one embodied in the proposed protocol to the British convention is'available. The importance of these considerations are all the greater in view of the fact that it is proposed Jo extend the British convention to a number of its overseas teroi. tories. The potential effect of the proposed protocol in the usual license arrangement, where royalties are set on a gross basis, that is, before foreign tax, is illustrated in the attached table. Both the amount that would be obtained by the American licensor and the revenue of the United States Government would be increased in those came where royalties now subject to United Kingdom tax are made nontaxable under the proto col. Mr. ChairmanI would like to invite the attention of the committee to the table on the last sheet of my statement, which is a comarnson of the taxes on royalties paid by United Kingdom licensee to Unirted States licensor under existing law and under tie proposed protocol. Now, Mr. Stamp has referred to one particular sort of contracL Here is another particular sort of contract, we feel a very common sort of contract.
    OCCURRENCE OF DOUBLE TAXATION UNDER PRESENT CONTRACTS

    Under the present law, the contract provides for gross royalty of $100, for purposes of simplicity. United Kingdom tax on the licen at the British rate of 5265 percent is $52.50, leaving a net royalty of $47.5) for the Unitd States licepsor. That amount is subject to United states tax of a2 Percent, giving a United States tax of $24.70. (2868)

    I
    5 S

    DOUBLE TAXATION CONVENTIONS

    23

    There is no credit against the United States tax, and that is where the double taxation arises under the present law. So the net United States tax is $24.70, and the amount available to the licensor after tu is $22.80. Now, we recognize this as double taxation. Frankly, we first became aware of it when the earlier version of 4952 was up for consideration. As we appraised the situation, double taxation did exist and should be relieved, consistent with the objectives of the treaty am. But we felt it should be relieved on a reciprocal basis wviththe cost shared by the two countries. protocol to H. R. 4952. Mr. SMITH. Yes, sir.
    Senator SMITH. As I understand your presentation, you prefer this

    DIFFERENT TYPES OF CONTRACTS AFFECTED BY TAX POLICIES senatorr SPARKMAN. Mr. Smith, may I ask a question? You give one type of contract here. Mr. Stain gave another. Which is more conuionly used? Mr. SMITH. Neither one is uncommon. As I already indicated, it isour impression the method we have here is a very common type. And, frankly, sir, I am not. in a position to indicate which is more

    common. Perhaps some of the public witnesses from other groups who are closer in touch with a variety of business conditions could comment on that.
    Senator (CAPEIIART. May I ask one question? The CHAIRMAN. I have a question myself, but I am deferring it

    The CHAIRMAN. Have you completed your statement? Mr. SMITit. NO; I have not.

    until Mr. Smith completes his statement. senator CAPEHART. I have a question which I think is important at this point.

    both types in? Mr. SMITH. No, sir; because to do that would mean the United States Treasury would pick up the entire cost of the relief, and we feel that over the years contracts can be modified. We think this
    isa sound reciprocal basis.
    Senator
    CAPEHART. GROSS AND NET ROYALTY CONTRACTS

    to this treaty, because their contract does not come within the particular method of relief that exists here. Senator CAPEHAUT. Could the protocol be arranged, then, to bring

    American licensors opposed to this treaty? Mr. SMITH. Senator Capehart, to the best. of my knowledge they are not all opposed to this treaty. One particular group is opposed

    If the advantage here is to the man holding the patent, why ore all

    to get into the record here the 2 different types of contracts, I of which benefits by the protocol and the other of which takes a loss. What. are those two kinds of contracts? Mr. SMITH. The question is whether it is a gross or net type of loyalty contract. Now, in this particular one I have here, continuing the illustration, the British in this case will exempt this royalty from
    their tax. That means, of course, that there is no United Kingdom

    Mr. Chairman, I think it is important for us

    (2859)

    246

    DOUBLE TAXATION CONVENTIONS

    tax, the entire $100 comes to the United States licensor. That becomes the base for the United States tax. There is a United Statm tax of $52, instead of a United States tax of $24.70. Deducting that from the $100, the licensor gets $48. example of where the licensor loses out. Mr. SMnur. The other situation is the one that Mr. Stam d6. scribedSHARING OF REVENUE LOSS

    Senator CAPEnART. Instead of $24.70. Now, give us the other

    Senator LONe. Just a minute, please. Let me ask this question now. You say that this loss is shared by the United States and the United Kingdom. It looks to me as if in this instance the.United Kingdom gives all the way. Mr. SMITH. That is correct. Now, in the other instance, where we would pick tip, as my prepared statement indicated-in those instance where the United kingdom does not forego tax, because the line of activity is associated with the permanent establishment, then in.those
    instances we would give a credit for the tax. And the effect of that could be illustrated-I do not have it. on here, but I could describe it-the effect. of that would be that we would give a credit for the British tax paid, so there would be no net United States tax, and in that case, the American licensor would get. $47.50 and we would get nothing. In that case, we give up the $24.70 per $100 of royalty, as against this case described in the second column.

    way than the income not associated. For instance, if the permanent establishment is in the business of making, just to pull a product out of the air, medicine products, but they also, the same company, license a patent to make tires, for instance, something completely unrelated--then, under the protocol, the British would give up their right to tax the patent royalties associated with the tire patents.

    INCOME FROM PERMANENT ESTABHISHMEXT Senator Lov'. As I understand your proposal, the United States would give up completely with regard to some companies, and with regard to other companies the British would give up completely. But if a company had ai permanent establishment, you would treat the income associated with the permanent establishment on at different basis from other income of the corporation. Is that right? Mr. SMITH. Yes. We and Great Britain together would treat the income associated with the permanent establishment in a different

    then the British would continue to tax them, but we would give recognition to that tax. the licensor.

    If, however, the royalties were associated with the drug business,

    Now, to compare this, if I may, because questions have been askedSenator CAPEHART. NOW, in this chart you show an advantage to
    Mr. SMIThII Yes.
    DISADVANTAGES TO LICENSOR

    limiting your example to the advantages? Why did you not also have

    Senator CAPEHART. NOW you say there is another case in which he has a disadvantage. Why did you not show that instead of just (2860)

    DOUBLE TAXATION CONVENTIONS

    25

    a chart showing the disad(vantages? Could you please give us an example of the disadvantage to the Iicensor?* Mr. SMITH. Might I complete this statement and then get this illustration?
    Senator CAPEHART. Certainly. Except, to me, that is the impor-

    tant thing. You say there are two kinds of licensors, and you give a chart here showing the net result of this treaty to one, but not to the other disadvantage in this protocol, as against existing law, for any company. This does not give the same extent of relief that the legislation would give. But we 'feel that the legislation goes too far in putting the entire cost on the Treasury.
    DEFINITION OF "PERMANENT ESTABLISHMENT"

    Mr. SMITH. As I have indicated, Senator Capoehart, there is no

    The CIAIJIMAN. The term "Permanent establishment" has been used a good deal. Has this been legally defined in either or both countries? Mr. SMITH. Not by a statute. But is has come to be a word of art that has a common meaning in all the countries. The CiAInMAN. Has it been defined by court decisions? Mr. S.ITu. It is elaborated and defined in the treaties. The treaties themselves contain a definition. The CHAIRMAN. What is the definition? Mr. SMITH. I will have to ask one of miy associates, if I may, to provide a sample of that. The CHIAIAM.N. I find it here in the original treaty. Mr. SMITH. Yes; that is one of the I)puIPOses of a treaty, to get a common definition of it. The permanent establishment concept where it is stated in the treaty, signed by both parties-that is Ote of the needs for treaties. The British treaty has a long-established use of the permanent concept. REASONS FOR VrTO OF H. It. 7648

    Now, as to the legislation that was vetoed, Hf. R. 7643-in your Executive A, the veto message is produced on page 3. 1 shal not read it all, but, I should like to read several paragraphs of it.
    The present status of royalty payments has been well known to interested parties at least since the Convention was adopted in 1915. Many arrangements between licentsees and licensors have reflected existing law, and the burden of British tax mnay not rest on United 8tatcs lice'tsors in suchl cases. (Coiiscquelitly to allow the British tax against. the United States tatx oil a retroactive basis would give a windfall gain to soine American licensors. The Irolosed change would single out for special relief a small group of taxpayers whose need for relief has not been d.tmonstratd. Tax relief should not be given in this way. For these reasons I aia constrained to withhold nmy approval of tilhe bill.
    EXECUTIVE POSITION ON It. It. 4952

    Senator Mansfield asked earlier if there was any assurance as to what position would be taken on H. R. 4952 if it were adopted. Consistent with the general policy of the Treasury, i cannot indicate, Senator, whether there would be a veto. That is up to the President
    if he were confronted with the bill.

    (2861)

    aft

    DOUBLE TAXATION CONVENTIONS

    Senator SPARKMAN. Senator Morse was the one that asked that question. Mr. SMITH. I believe Senator Mansfield asked that before Senator Morse was here. Senator Morse also did ask the question. The Treasury did report adversely on H. R. 4952 to the Ways and Means Committee when it was considered last year and on January 28 of this year to the Senate Finance Committee. i have here a copy of our report to the chairman of the Senate Finance Committee, the fin paragraph of which is:
    In the light of these considerations, a bill similar to H. R. 4952 has been pame by the 84th Congress and returned by the President without approval. 8ince then, the negotiations with the British have been concluded, thus strengthening the case against the bill. The Treasury is opposed to enactment of 4952.

    That is still the Treasury's position and will continue to be the Treasury's position on this bill before the Senate Finance Committee. Senator LoNe. What was in the bill passed by Congress that the President regarded as undue enrichment? We are trying to under. stand what is being advocated that the Administration thinks is an undue windfall. Mr. SMITH. The bill is retroactive, I believe, to 1950. We felt that the law had been, and in the minds of most taxpayers it was perfectly clear that the British tax was not creditable. Now, the facts are that a particular company to which H. R. 4952 and its predecessor-in the situation to which it was directed-had claimed a credit for that tax. That tax at some time had apparently been allowed, because of what we must confess was inadequate audit. The issue was raised and it was in due course of time referred up to higher authority. The credit was disallowed. I have talked with many lawyers on this, not only in the Government, but some lawyers of other companies, outside of the Government, who were somewhat surprised that the claim had ever been made that the tax was creditable. Therefore, the undue enrichment, the windfall aspect, would have come from legislation giving a retroactive credit for many years against the United Statie tax for a British tax, which under court cases, and under the opinions of the lawyers of the Treasury, and many lawyers outside, was not creditable. Senator MoRsE. Is that same provision in the bill this year? Senator LoxG. As I understand it, you say that this tax is owed the United States Government, and that this legislation-which I am not advocating-would have given the American company credit back to 1950? Mr. SMITH. I believe it was 1950, yes.
    BENEFITS OF TAX RELIEF (0 TO BOTH AMERICAN AND BEPITISH COMPANJE8

    Mr. SMITH. That is correct.

    Senator LoNe. The staff of the joint committee contends that to take the approach you are advocating would just be the dlifferenlce between the British company's getting the windfall and the American company's getting it. Is that correct?
    Mr. SMITH. In some instances, Senator Long, the relief would go to the British payor. In some other instances, it would go to the American recipient. Inevitably, when there is, as there is. now, double taxation-which I think we are all in agreement needs to be alleviated-it is our feeling ,A (2862)

    DOUBLE TAXATION CONVENTIONS

    27

    that when relief is given, the benefits should be divided, along with the costs of it between the two countries. It is a peculiar circumstance of the British law and our interpretation of it that means there isdouble taxation. We think, furthermore, that such relief is an eminently proper thing. and entirely consistent with past treaty practices and the other treaties ratified by this committee. The designation of what particular taxes are to be creditable and not to be creditable, what is to be exempt and not exempt, iq properly worked out on a negotiated basis. To the best of my knowledge, no provision in the Internal Revenue Code at present specifies by name and country a particular tax that will be credited. There is a general provision for income taxes and taxes in lieu thereof.
    LEGISLATION APPLICABLE ONLY TO SITUATION IN UNITED KINGDOM

    pared?

    The CHAIRMAN. Has a draft applicable to all countries been pre-

    in effect apply to this' specialized situation in the United Kingdom. It is only in the United Kingdom that this situation exists. Reference has been made to the fact that this is somewhat analogous to the treatment of the British tax on the corporations which is held to be a tax on the shareholders. That was handled by treaty, and not by statute. So to have this handled by treaty is completely analogous to that.
    PRECEDENT FOR TREATMENT OF ROYALTIES IN PROTOCOL

    Mr. SMITH. The legislation though stated in general terms, would

    used in any other existing tax treaty? ,Mr. SMITH. Not exactly this treatment, and the reason for that, Senator Capehart, is that the British situation is unique in that they have this rather-well, completely distinctive treatment of providing that their tax is recoverable by withholding against the recipient of the royalty. Under their concept, it is as though it is a tax on the royaltv. Under our concept, the Supreme Court case, and then this circuit court of appeals case I referred to we have interpreted that as being a tax, not on the hicensor, but on the licensee. So the answer .Js no, there is no similar one, but it is because only of the very dis. tinctive British law. Now, this is of importance in various British colonies to which another protocol is here for extension of the treaty; that would be comparable. Tie CHAIRMAN. We have a number of other witnesses here. Senator Lo-o. Might I just ask this witness a further question to get one point straight? It seems to me, when you try to negotiate these arcements in a country where you have a great many businesses established, you have a different situation than where there are no businesses established and you are trying to encourage new American enterprise there. Now, I do not see how you can negotiate in a vacuum without knowing the ways in which American companies established there are dea ing.
    (2863)

    Senator CAPEHART. Is the treatment of royalties in this protocol

    no

    DOUDLIZ TAXATION 00NVINTION8

    that is generally fair; and then over the years contracts do come up for renegotiation a(nd can be modified. Senator LoN~a. If you go down to Venezuela to negotiate an agre. pient, the Amnericau interests that you are negotiating for are oi-and iron ore. If you go to honduras you have bananas in mind, and in Brazil you are negotiating for coffee. Now, it seems .you.are saying that in a country where many com. parties are doing busmess you are going to negotiate an agreement where s*oe of thent are very nmch benefited and others are completely left out. They are all Americans who are asking you to negotiate these agreemen ts, and who are interested in getting these things agreed to and confirmed. To say we are going to find a principle and nep. tiate on that principle is departing from what actually happens. If you neiotiate in Saudi Arabia you are not negotiating for any. thing but oil. I do not see how you can say that you are negotiate for a principle. It is a fine principle, but the principle is such that

    provision for certain designated companies. We are approaching it front the statilloint of what is a reasonable and fair basis for Ut genrality of 'omlpaie, in loth countries. And it is our feeling that the chips should fall where they may on that, so long as we have a rule

    It 1,e1nu1 to ne that, what hIas IhaplpXit is that, in negohtiatiull treaty that took g.od care of galiie of our companies, other rompanlm Were eft out it) thie I.old beraause they had negotiated agreententl witm the foreign v.'oipaiy, was going to pay them X amount of dolla regardless of what tlhe foreign tax was going to Ie. Now, mw Anmerivan cowpanie, would -benefit greatly by our protocmol hItr, but others would be left without benefit; is that correct? Mr. SMITH. The point on that-I ant very glad to have a chance to answer that--is that when we negotiate an a matter of treaty arranm. uentai, we do not approach it front the standpoint of a special reIW

    those matters of treaty negotiations in terms of what is a reionase reciprocal basis rather than attempting to give full relief to all Amercan companies when it is entirely at the expense of the United State Treasury.
    PROPOI8D EXTENSION OF TREATY TO TERRITORIES

    their contract.

    half the Americans are taken care of and the others are left out. Mr. SMITH. But, &qnator long, in the other instances, where under the British concession there is .l.ief of the tax in Britain, then the American companies are in a position in duo course of time, because the net cost to the British licensee isIess, to renegotiate the terms of
    And I still feel no apology whatsoever for approaching

    Turning now to the proposed extension of the British convention to the 20 overseas territories of the United Kingdom, as listed in ENCCitive C, I should like to point out that the action proposed is similar to that taken by your committee in 1955 with respect to the Nether' lands Convention when it was extended to the Netherlands Antill"L The proposed extension is in line with the general program of expandig our network of tax agreements to remove tax barriersto the flow of trade and capital between countries. The income tax structures of the overseas territories are substantially similar to that of the United Kingdom, and the treaty can be extended intact to those territories, Howover, several modifications would be made for pur(2~8f)

    DOUDIE TAXATION CONvENTIONS

    29

    8'ate the articles oonferring exemption from capit ain9 Se ta, Article XIV and exemption from the tax on improper cumulatio of surplus, Article XV[, are deleted. In addition, the article providing for reciprocal exemption of interest would be inapplicable in all but one of the listed territories. The other modifications are technical in character designed to achieve the mue results with respect to the tam of the 20 temtories that the basic treaty achieves with repeO to British taxes.
    MODIFICATIONS OF RILOIAN CONVENTION IN EXECUTIVE B

    of the extension. In accord with the views previously exr.

    To extenl the convention with Belgium to its African territories, it was found ne4ssary to make certain modifications a indicated in Executive B. The principal modification is contained in article II of the proposed protocol which limits to 15 percent the Congo tax on dividends flowing to a United States sharholder. This is the same rate that the United Statts imposes on dividends going to Belgian shareoholders under the basic convention. Inconcluding Mr. Chairman, I should like to say that the Treasury sa stands ready to render all possible assistanice to your committee inits work on these tax conventions. Senator Motwse. J would like to ask Mr. Smith for a memorandum, Mr. Chairman. We are dealing her, in my judgment, .with the key witness it the seise that we are going to be faced with the veto-think lie has made that very clear-if this bill passes in its present form. Mr. Smith, this is not my forte. If I have a forte, this is not it. I wish you would prepare a memio for me that will give me this information which I think would benefit the committee. I would like to know what happens to tlie American Treasury and to the British Treasury under the protocol in connection with these two general clawsss of cases we have beehm talking about. Mr. SMITH. I should be very glad to give that to you. Senator Mous. And then I would like to have a memo that would show what would happen to the American Treasury and the British Treasury under the bill. And then I would like to know something about this retroactive windfall, because it has aroused my curiosity. And I would like to know whether it is a windfall or a refund and I would like to know who gets it. The CHAIRMAN. Is Mr. Smith prepared to furnish that? Mr. SMITH. I should be delighted to, Mr. Chairman, and Senator MoM. The CHAIRMAN. Thank you very much for your testimony. Senator SPARKMAN. I suggest that memo be made available to the whole committee. (The information had not been received when the hearings went to press.) The CHAIRMAN. Senator Frear, do you have a statement?

    (2865)

    30

    DOURIO

    TAXATION CONVENTION

    STATUIMET O R10N. 1. ALLEN EARJ, 19., A UNITED STAIN SIEATOR FROM TIE STATE O DILEWARE Senator FIRAu. Mr. Chairman, I have listoomIe with great hitergi
    I have a very whort prepartl statement and an happy to ai.k that, with your pormiawion, it he made part of the rteord. t wint simply to say that I concur in the position -of the Treasury oln thle protocol, and auwvccrely request that the committee give favorable ro'aiderstit to the protocol.
    The C.AIRMA.. Thank you very much. to the quistions amd answem given this far.

    That will he placed in full in thei' record. (The statem~nnt referred to follows:)
    STATEMKNT OF liON.

    0entator Flt:An. Thank you Mr. Chairman.


    J. As.LEN FEAR,
    TSHS $TATl OF D)ILAWAlS
    JR., A UNITEDD .T'ATMS ?&NATos Piov

    I ali hIe re, Mr. Chairman, to inake- a brief statement in suipprt of the s.ippIe montary inicome-tax protocol of August 1i), 1157, with th. United Kingdom. As yon know, thii treaty amendment i designed to correct an existing inequity in the tfxation of royalty paymnenits received from British licensets |' Unitied Stated licenisorst of liatenitim, colpyrights, ete wil have a jwrilriiiiilit ei4talli-liiiient in the Tmlited Kiigdlomi. lVnder IBrIti-h law a Ietiisee paying a roually must withhold a siuns equal to the tax on such lpylnent, which Suki is owedl ai a debt to the Crown. Thi American courts have ruled that the withheld aix i4 not techiiicilly itnloeed oil the Anmerhian redltipiit so that no reodit for tillI British tax Is allowed against the tax paid to the Vniited lStates (loverimiim t onlt account of the reeipt of this royalty (Triro Prodludlj Corp., 411 B. T. A. 3441 (1943); Irving Air CAult ('o., I*-. v. (Conmia'sioner IUrrnal Rtevenuaeu, 143 F. 21d) 256 of (2d Cir. l044)). Since the British tax is 42.5 pserenti, and the Allerican tax i52 terct-mii on the balanee, the tot'il ta p!'iid to the two (tlovorniliinti onl accoutit ofit royally paymnit of $100 would Ie $72.40. This rliiiult is certilily contritry to the; ilitenI to prevent double taxation whilh proiiiptwd the exutliou of the existing reeilproal income tix tre-ty with thi Flnited Kingdol,. Prior to 11948 a similar situation existel with regard to the Ilrit ish witlliholdi!, tax cii dividend paymnts because the Uniled tatcs tviupremie Court had ruled that the tax withheld by the liritish compliny was not, tiinlom-d on the Aniieuica shareholders under United States legal concetis (Riddle v. Coneiueiusiuiner # Internal Rewpoee, 302 VY. A73 (11i8)). The existing hicome tax tretly betwnll K4. the Unmited states and (Areat Britaii wallnegotiated to provide thai i Initelld States taxpayer receiving dividend inconie front a iBritish coroiral iion could include the gross dividend prior to withholding in coinputing his United stiate taxalle income and take a credit for the Ilritish tax withheld again nst the oniled States tax on such dividend. Under the treaty the British tax is treated, in effect, as if it were a tax oit the shareholders for United States tax lpturl."ils. The treaty pretently contains no much pIrovision with regard to royaltis and interest. It does provide for a reciprocal exemlptlon from tax if the foreign recipient of the royalty or interest has no permaiient establishmisent In tile country from which the amount inpaid. The present treaty amendment would simply extend the exemption from British tax on royalties to an American licensor who has a permanent istablish. mint in the United Kingdom if the royalties were not directly associated witih the business carried on through the permanenot establisliment. Where the royil' ties are associated with the business carried on through the permanent established mnent, the American licenisor would receive the same tax treatment already granted tinder the existing treaty to dividend recipitents. A United OWtaN censor would be allowed to credit against his United Stat.ms tax tin time grorn amount of the royalty payment, the tax which iad been wit)"ield and paid to the United Kingdom. Thus, a royalty payment of S!100 would be taxed at the United 8tatte corporate tax rate of 52 percent, $42.50 having been paid to til United Kingldom and $9.50 to the United state.. I believe there Is general agreement that it is a desirable objective to tlaw American patents and know-how available to British producers. The ratifiW

    DOUB14E TAXATION CONVENTIONS

    31

    Ins-tial protocol.

    do of tile tax 0ouaveiition uuder clawideration shollld encouragi, such a program. Ortsily the Interrelation of the tax laws of the Visited Statms, and the tfuited Iragd its should not operate to discourag this objective. "Wr. Chairman, I hope the committee will ae fit to approve this "upplementary

    The ('inAI RMAN. Representtaivo Sinilnon? ITATIMINT Of RO. RICAIAD K. SIMPOON, A UNITED STATIS IIPRUSIUTATIVI MOE T12 ITATI Of PINNSILVANIA

    committee, I sponsored the hlgislation in tfie


    Houlse.

    Reprcentative SIuMPioN. Mr. Chairman, and goittlenien of the Jltouse whieh passed the Ways wad Means (Commitl4w. It was approved lnaliolmoUly in the SuAbsquently, it was approved in the Filnance ('1OninittIee of the 11d tlhe it was pawedl by that body.
    VETO OF REPIFl'ENTATIVEl
    SII'MPON 1.

    Senate.

    I ILL

    was, of conuse, referring to the basis tipon which he withheld approval of 7043. lte likewise said:
    The combined effect of the United States iuiconm-tax law amd the income-tax convention with the Unisted Kingdom is to produce a different comnbiation of British and United ttatom' taxes on the royalties paid some American remipient. than others. The Treasury D)epartment currently is conducting discusoarles on te convention with their British and will add this problem to the agenda.

    It was reltlrned by the President without his approval, with, among other sI'Ict(ll((s, tht' coinnient that "The appropriate way to correct th situation' wouid be modification of title Covtltion. There he

    That was in Atugust of 19,50, after which Mr. Dan Throop, Sinith, special assistant to the Secretary, went abroad, presunmably to carry out this reference made by tile Prtsident in his message, to inrludo inthe treaty agreement, a ollution to flie problem which was presented by H. R. t643, which bill had been approved by the Congress and handed to the P~resident.
    IFFORT TO NEGOTIATE AGREEMENT TO AVOID DOUBLE TAXATION

    Mr. Smith wrote me in December of 1905, I believe after he had returned from Europe, and said:
    We thoroughly agree that the double taxation should he eliminated-

    not just a part of the double taxation, but that double taxation should be eiminated with respect to the royalties. He said: We were able to work out a tentative understanding, subject to final approval there, which will apparently Ixb satldatory to the tax people in both countries.
    But, In v of your great interest I want you to know that we have started promptly to got the problem settled, and have made what I nrgard as extremely good Progress. With all good wishes, -

    Since there has bemn no final approved In England, any premature announcement
    Or publicity on this subject might well jeopardise the whole agreement.

    I believe I had every reason to usume he was addressing himself to .arrying out the interpretation most people made .with repect to the basis othe Presidential veto, namely, that the points of H. R. 7843 would be csaried out in the treaty. Subsequently, when we learned the provisions of the proper

    traty, we discovered that the recipients of royalties are to be treated (286t7)

    *14I too

    111i11I,4 TAXATION CONVENTIO)N

    or their pltmllteI, arlidetI Ito liilitmiafnd 'Iured in (;rt'at llri6,11 wiular thle |terms of nl rilt tgieenit Its, whit'hli le Aleriti't lowlier sai,. in tdret'( "I wtillt to gi~l buck ai('11rilli mllintllollifo iIllnt'Y." lit$si..', "I $1111 vtrv (mil,' Vil use ii. l liut,41ant1, provided I getill will lii. ,vllil0 u als I.u'xes. I You po alhad anti pick ill tle tax bill. )'tni pay flt lo'nl doi't have any lawyers ovl' therel. I ,a'lt do it. Youi pasv the Ilk taxos anti we will got tdli' $1M ertaiti."
    of. It. 49b 111O 'ilViIOl'S 114i CHiFl l'vSIll~F

    as thkry should Iew only il soie of tw lieaseii, till iltohler .llitalc* il th.s ll oi Thiet4ore, ulihlu tafxit will t'tinlll|ll': gentel, nen, ma. to sw Awrit-rttaii hwmutiSs pl-uple wht se lit it)permit Ihlit t'pyrighlt

    That. is4 whill this bill. II. It..Itl,-521, will mailke' ,'lem-l

    lhilm

    l,.,| lite

    Si'naltir I tI,I. It Wmollll so'e'gll 1ha1t Oh lkiili~h I'llilt1,Il.%' S11%04 Jihl, illti,'v, IatIl Olw An,,rh',tue pavs ftill IixI's till IliS $1-1Ht. It is evn. as, I ,.iltr. , litpri,'sililitive Simi-,strN. Thatlu is ,.rre,'l. l'as 11tI Nlills (0'oninijilt' li.e 11iTh stanidll it, wiose' llt n lhit. 'rlh e I'xe'r.i.e' I1e' uighl, ,ll ,itititio l ,nnuiiritvs muid tlieh'i nIt,' ilitautY which US li,''-,,see''s of Aleii'tum iti-ii , o,f ' I.ol'ighlls 11Il4at1'li1s 1Iln4 aleirs of l!'4-1tlv, il is O'IGe'eiive', lst Ihh ll Irs vt'L if this is Inuihlt a Iltil' ad fhit tf gent Itinil'l, lik!t'u from lie, jurisdiet mutifnWays.s autI .XIe'm (C'll. e I iust lI Illit t ,' ill th t i' and 1 e ll ll,,'t'' ( 'ti liit-to'' I lhl' l nt, ' I lt',sl't' tflly sllggt'st Ihat1 it is ii lIprhlt'lin tlha sht.leh r'i-nniim milder t he' t , lli, "'ogniinilt' tf liet pprtprilte e'tiililet',o Ir(flI 'tnlre's+ d.lnliqg

    mltl h,, hla, %%shi , ,, the .llri,'i hiisi tixi's ares piad abiril tf linIr.'e e'1ii* will glo-I i.' tl t'die fill' lilit,' iIIxes. .%ti lil Ji 'vivt'retl at il ldltl,'r lhi. lwtII,.totl.

    rii

    kinl mha
    I"1 lit1

    vit buig holiis it) his plrtdh'ni. 'd'ot'l

    1I isre-allY it vonliiumig irehltni,

    Illittloe'.

    with rtv',lue' , to fhlt (livernii'l. e' ronlu h'tt," t ,l "uppoit Tihll (CHAlRlMAN.. WlIeII you s1yil" Owi Ieilailti't ('tonunilhtee'; is li1t right? lFilwinure' C'lil lirtheit th,' ,lrtmse'ntilatlive Slsti.xN. I lug your lilt', it'iil hlisiiit'us It isllut liullWt'i' Iti svliv tht1Ih
    or evell Wllo Wallis ill the 1

    hIlhniI,litleast. tIh,4v hae' hl tlit (l y 1t-11i1p agre nts, 1realt,. stiahlisletd over long yers' muid it jusl simply c'anniot it' doue l with r('s pel, to somle ,'tllliillit's. Nor, I relpect'fully lllugg t, is it. irlopci'r lio mill Otis it windfall if tie money hau benu takgel nitiorl'ellly, and improperly, hiy he Treasury in tie puit yeamr. I point out, as MIr. S"inith iilvit'dited, for it number of years the axpayI)l1rt4 hin h ilithey tOWk Treasury aijwroved t(it repliort of lie I. l ubwl)mtllnelly, Mlllera the terelit tor taxes paid ilhlroIIl,ad O tIinge it adinhiitil ratlion, tiety de't'ihdle olltrwise. So tlout we ill the Congress de'idtlih it txei'rt'se our right to llake' te law and ill effWtl. to say iatl, under tlhe treaty, whi,,lt die, Treaillret ry mlisitliue'illt after having approveid fir Aor Iiyears, I t Impxip'erm iiethiod, n'vsnml thlemselvesti it cenator LojN(I. liet ne tile if I ,'ua ge th, til,araiigh, hism! h seei to lite tilha, point, is; very important. rt'lt , .that illvt Inilnd is Olle ill whi'h ft m141 ytsi l Then kind of olrtl, isys, "I want, yto to pay meia cerlitai liguei soItalit I will receive
    Well

    iin11% yearsli,

    roy

    lliilli %lho hais for to t'lilrv Ilt'egliile' he'.t' lift

    ('2088)

    IX)OUIlhr TAXATION V.ONV'ENTIONS

    33

    $1s10 to( Amri.'a. mollnley irrsl.,v, iV4% of taxes. I w11it yo1 1 I).Y lail me X figuir,, so that. after the tlaxem have hetitl on il,'i will haio: to
    $1mNIehrl

    is miot acictullly a wiIfu. hll us I liderstiil it, the Treasury But. rellmeliiII ive.,ifetmcn ihatt tlh is it tax v'ase- dh''ieilc' byhlie court t ern, their 1did'. ia1
    OUllRIT' i)I,I4It4II)NA Ill01.IiiNil TIiHIR 4'K POI')ITION

    ,'miticr Laomm. The T'rematiiF' taki* tih4' attillilt e that th1i.s $1114) is h lahxlli1 521 |ii pe lvi|. The ttaxpayer Iiakes Ip lliht d, t hat i lilt isi in errr and I$ tlmI e ialliOllif was originally, ll. is say. $20, which was rc'cliMe'cd Ilo $101) after ftle tax had hbeeni'umid. Noi. that iswhiy yo ileoutemil thiat what p'm)il hImVm advo ating |beel|

    Is that cirrmVIt? Iblprc''cnilatitcv Simi'ts). That is c'orreet-

    11'41i44.'d th11 elivieh'iiel. Wt, 111d a ,.wve'iltim., 111I the'.y solvedl thalt 1 ecmm1ll'hc'1V bV 8i4iuly%declirilng that thlat Was t) I he'isiderel i ts imom', it; tih; Amerian scit'kholhter. S1 if you hleave .st.k hlromd*I mattai clividhemids froeml stock ill fort'igil c'irlptirmilis, you ihlcli, tho divid'lId yvol r'eive hi the 11a 11mom1it paid ats it part of y'oulr 1 of laxes illitlll,. Vout takes eh.,ilt, oll thei other side of your inolilme actount, for Ihe imount. paid ats taxi.,$ y the BIritish. l Now, if they wuld ito that ftor roalliets, it. would have bee solmedl. But, tit), lilt. didlln't dh that. They wetl. W euly part, way ll that, amid ' watl Itow Ito go fth lllciher way. 'reatl the Amnc'rivalt who rmivis his illomeoI' frill alibroadll by wat of a novaltv e''xatly ats yull treat, the Americatn who receives his irmlume h1. wa'%* oifalividelid, aind wi' ae aill right. Senltor I.omI. how ahout. the case to which lit*' 'I'remasry makes referen'.'? I. thal. aic'a' involving roflty or ilividcenls? hIeliritalhivo SmmIo'N. 'T'he first. i-am; I reftorrd to was flhe Biddle (i.a.,which had it fIo wilt i lividenids. The. Irvilg Air C 'hubo mat |i'hi wilhi reslpeet, ito royaltiesth4 sahll thing, Inme P, that t0ho royllties paid by tihe irilish tcorpllir ouiwi ithe (icoverirmleltl of (irOit to Ilittaii, wenr not taxei paid by heo AImmericaut hicelsor. s Now, umr contenotlio is, ald ill r'e't this bill would msy, that. that h is iliicmo Ito tho Aemericvait hic'meor, mied le would report, all of that, aind then take credlil for tho taxi* paid, just. as the stoelkholder dots who gels hisa dividend. Now. if we dild lthat, there is no eimplaiint.
    KHFlV.IIVK DATE OP i'IOI' )11"-I) IlIIJh

    wits kwalimm ,Itcgia.'.'.athtliv.~'~lSImimm. 'Thermi we're'l wo i'ases.. ( as It-' Bildhl, cuis.o mum-i eiVuIs ago, which lihdl Ito do with dividt.vnds, mi.dcr uhichi it %wais hIc;Il, "in erirfi. Ihat fhli, iuaxi pamid toih. te ritishl (loyerleiecliit weri Ilitl to fllm', 'rc'ilit of the' Aiime'riai stinwkhuhhdr who

    Semmaihwr ILoNm. Actually, though, you are asking for what would o--bai onl Lth itreprimdl dlecisicu and the' lrpreei state of the lawSretroactfive provsisc, iuwfar as it it"e hack to 1)60. Represeimiativo lIlluON. No, sir- "|ecillse ill the act loIm takoel with rlespec t)o coivention held after tih Irving Air (ltdtlo ('orporathe iol case, reference ln that. eonveltiomi is madllo to nrvalty reciplielts in the UImited tate, almul it is said right there that, they shall bo-it
    IN" (-W-Vol. $-.T

    (2811))

    314

    DOUDM81

    TAXATION CONVrCNTIONS

    amyu right hiere that Airier.ti, who receive the royalty jie from abrhmJ 4hill wint Ih,v'.,siired to have reveivel taxable imeotiti from reOr Iltrinin hle ti hy have an e,wthhlih ,t ahroad. am ILt me r ', aisit. Anmeritcan4 Whi are liie.,sors, m1id hIve no pema. t iv'temlmalallislummll iii (Ura.t l1rilaia,, andi rilveive royaltits, 81llII not Ib Ilixe,'l it 'oitlithely e'liliiitl it. Blut, if Ilihey hIave a p)e'rlmanent olliv'il in (Iriat, lIrilain,, it did nlot ourh Ihliat. Aidi sothe lltcoillalieus, t lilt' livensors hIeret argue hoil Convention did handile this 1ilesti, o ht t of nrvalfie, and did liilmeant(hlt if Ihiey do not have an. oIico there they hifhlhl' ot i Itaeild, miid if Ithey do hlve all ofleo there/,they siholuldb taxed. That is tile collnleltionl Ithey Illadell. And the 'Ireaeeury, agreed will llhit for a numbly r (if year;. Biut they liave nowleii I thn
    Opl~l iil'e I)l0ifiollli.

    Now, I 1hilik hi1. subject. gentlllhellt, should he one llat i't kept hl'fil't' hle lehgislative ,onulllliat te14 Of the IloHuse ailll thle .1,icuate. (C'erainlvfi tle door should niot hi. dosed against, furtlher voisilieralio,
    Of it.

    Of tihe technical luesetions, if there are any to be asked. lie is the tax sounisel for the Westinglioue Ehlctric ('Ni1p. '1he1 ('IIAIIIMAN. Wi hlaVe onlV a limiltd tihlli we (at1 spend oln thii. 'Th' 14ell le ot olleles H oo, soin lolMlle ,f lftihe ellnator have busileim before it. Wet hive% Ito dimscus tIhi& tA'r ait hugi hi in committee after this got. il puhlii hearing endls. So I think that wi' will not. lhave time to hear all of thie witnties . But, I think we may have time to hlar Mr. Mithell It. ('arroll, of the National 'rrlhe t'ounlil of New York. ThI ('IAIIRMAN. lerliaip you vouldl move tip here. InI View Of nily sttelllnt, t-114,hat, to be brief, pwrhalp you wO have cou01ld etpliamize' lit, main points of your sltlaemento, inli leave your full pre pired st IIIellt if You have olle. ielt, Nir. 'AIIROLL.. I havae a prepared sitatetmeit, which I would like to leave for tilhe re-ord. 'T1h1e ('IIAIIIMAN. It will be' pilu. intio the record without your reading it. brielly.
    Mr. ('!AHulolI,. I will not. read it..

    I have with lme' .lr. Kust, N1ir. chairmann , who is an expert iii tht matters. I Ibelievie hi6 name is before You, and he ran an.swe'r son

    Mr. ('Al1l10ll.t.

    Present, sir.

    I will just 8ullumlal, riz. it very

    Tlhe (1IA1AIRMAN. Yes, you m mUllarize that now, andi we will Idt the whole stateoIent in thle rord.
    STATEMENT Of MITCHELL B. CARROLL, SPECIAL COUNSM NATIONAL FOREIGN TRADE COUNCIL, NEW YORK, N. Ye .Mr. (',woi.. I am Mitchell B. Carroll, special counsel of the National loreign Trade ('oumeil. Our association represents about 1,Ot)0 ivorplrations and individuals interested in international trade. Unfortunately, thlis is tlht first time that we are not unanimol8, because ono of our members, tihe Wstinghouse (o. lias different viows in regard to this convention tlat yonl havo just been sfpetking about. But--

    (2870)

    DOUBLE TAXATION CONVENTIONS

    35

    OPPORTUNITY FOR WNOTIN$TNHIOl'

    TO FILE OPPOSITION STATSMWNT

    Senator Mo.iso,-. May I interrupt at that point, \fr. Chairman, for a procedural matter? If this is true, then is the Westinghouso Co.

    to theo present witness? I think it only fair that we hear both sides. The ('IRUAiMAN. Yes; we can put the statement by Leonard Kust in the record regarding the SUp)lplenmentary protocol. Mr. KeST. Air. (Chairman, I am lAonard Kust. I think that is agreeable to me, simply to leave the statement in the record. But if it would be possible, before you adjourn, I would like to address myself to just two points that were raistd by other witnesses. M\r. CItom.I. I think in view of ithe fact that. Senator Martin and Congnminan Simpson have more or les made the prelude to what Mr. Kust would say, I would he very happy to step aside and let him make his points, so that you have their complete story before you. The C AN. I will leave it to you. But your full statement will go in the record. Mr. CARROLL. Yes, sir; but, subsequently, I would like to make a few remarks. The C(HAIRAIAN. Well will you proceed now, please? Mr. CARROLL. All right, sir. I thought probably you would like to hear Mr. Kust, so as to get the complete picture. The CHAIRMAN. You proceed first, and after you finish we can hear from him. Mr. CARROLL. All right, sir.
    PORNIGN TRADE COUNCIL FAVORS ALL, PENDING CONVENTIONS
    1 The C( IAItM.IA-.

    going to be givon ample opportunity to file ita statement in opposition

    Well, we can onlv hear one witness at a time.

    Inother words, we are in favor of extending the convention of April 16 1945, to the British territories. That is your Executive C. In the second place, we are in favor of extending our income tax convention with Belgium of October 28, 1948, your Executive B, to the Belgian Congo. We are categorically, definitely enthusiastic about Executive A, which is the convention that has been discussed, and we feel that it should be approved by the Senate as a definite and favorable step forward in helping American business. And, also, sir, if one may mention it. and we are prepared to talk on it if you want it, we are in favor of the adoption of the convention with Pakistan. Now, I suppose that in view of the fact that this Executive A has received so much attention, and it is a matter of primary interest, I should address myself to that in just a few words.
    BRITISuI LAW AND LICENSINO AGREEMENTS SOMETIAIE8 UNCLEAR

    We are in favor of all the convention that are pending before you.

    I think that there has been a great deal of confusion about what the British law says, and, secondly, about the types of agreements corporations.

    that are concluded in the licensing of the use of patents of foreign (2871)

    36
    fighting Napoleon.

    3lI)O1ttl 4I.

    TAXATION CONVENTIONS

    Let nie give You 0 picture of the British law. 'T'lie Britisli law is traced back to the time when Englaul wau The '1n10CAInRM1do not1 . think we leed go into history at. this point, There are a mtlber of lawyers here who are familiar with it. Mr. CARRoLu. Well, the concept. was developed, sir, that the tax is imposed on all the profits of thle cOmlany, without any deduction being allowed for dividends, interest, or royalties. It dividends, interest, or royalties are paid, the corporation is authorized to withhold the tax. Now, in the case thatit the royalty is not, paid out of profits, thieu the corporation is required to withhold tle standard rate of tax. S thai, tle British Treasury gets ils tax.
    TAX ON (IttOSS IRO)YAILTY BASIS

    Now, Imay cotit tacts are ott what is called a gro, royally basis. That is to s'ay. the American lietensor says to the liceisee, "Yolt pay me so luwh for Ihle use of this patent, withhold wlhalever tax is imposed on that iincotne in a foreign cotmilry, and that. tax (,tilt be credited atiaust. the Unitl..d States tax, uintder sections 901 and so forth of tei, lternal Revenue ('ode." Now, there is no doubt about it. that this prolocol, thits supple. mentary agreement with the United Kingdom, takes care of tlat siluatitin perfeetlly. Ilhe thiig is, it takes care of it, c. y from the effective date of the convention, and not for the )ast. billutTihe (CIIAIIMAN. 'iII advocate that. it.should I)M ittade retroactive? 'Mr. (',AR1o0,. No, sir. I am approving this convention tis it is, because we feel thal. this broadetis ihe present, cotveltition of 1945, which provides relief from double taxation in the case of royalties otly wihtere lhe AIIerican lieensor does not haveia pernitiltet estab. ialhment. inl Englaud. If thle Amterican licensor does not have a perlltanelti establisltnieitt in Etngland, Englatd gives uall its tax on royalties, so tlhat the United Slates cat tax that ncotme in full. , Now, as you know, gentilemen, there are many instanices where you siniplv hlave a siles establishtneut. in Enigland an-d at the sante time you yill lc licensing patents to this Britisli corporat-ion atil that Britishi corporation atinlthey have no relatmiotnslip whatsoever to the pernmienti estlablisfihient.' So the primary purpose of this protocol, from our viewpoint., the general viewpoint, was to extend this granltitig of tile exemnptmn by the Utnited Kingdotn--and that is it considerable exemption, froma'42.5 percent. tax-to the case where the American licetsor grantts to a lritishi licensee Ilie righlt to use Ilatetts, and rem ceives royalties. Atnl that has no relatonstihl) wlhtsoever to the permatetnt establishlttettt. The CHAIIIMAN. You cut, out. the idea of pernatient establishmnent entirely-you ignore it? Mr. CAtOt.L,. Yes. It. is just as if it did not exist. Now, the treaty goes still further, 'Mr. ('iairman, ind says if you do havae A permanent estallisliment in Etigland and that "roytilty is somehow or other associated with the permanent establishment, so that you are not entitled to exemplton it Eiigland but have to pay tax there, nevertheless we will give the American taxing source credit for that tax. So double taxation is completely avoided right across the board.

    (287'2)

    DOUBLE TAXATION CONVENTIONS

    37

    ',el, C.,,ARMAN. Well we want to liiar Mr. Kust, now, and presently
    we will be going to the iloor. RI,"FoACT'IV. PROVISION 1s .IPORITAN DFF'RNCE &enator Fumnmouni'. May I ask one question? Is flie only difference here whether tOh protrol is retroactive or not? Is that what. the people on the other side wish--that, we make this ret roative? Mr. CARRoLm.L Well, of course, naturally a taxpayer always loves to get retroactivity. Senator FIItIIIOIT. Is that the nmain difference between your position and that of the others?
    O0OSS AND NET IIOYALTY PAYMENTS TO AMERICAN LICENSOR

    Mr. ('CARRoL. No, there are two differences, sir. One is that they want something that is equivalent to what is ill time 1ill that, would cover the situation were, as Congressman Simpson has stated, the licensee has agreed to pay so much royaltv free of tax, and pay the tax himself. fi other words, the Aznercan licnsor says, "I want $S100 for the use of my patent, and you will hiave to bear aft taxes on it." And the licensee says, "All right, I will bear all the taxes." And the American licensor gets the hundred dollars that has been contracted for. Now, the difference is this. Whereas, say, the American licensor agreed to a royalty of $100, and the British" Government wiihholds, we will say, for simplicity's sake, a tax of 50 percent., the American licensor receives $50 in cash for tihe use of his patent alid tile right to take a credit against tihe United States tax for the other $,50. Now, the difference is that. if, under one of these net. royalty agreements, the American licensor says "Pay ime $100 free o. all taxes," the British licensee says, "I will hear the Un~ited K(ingdomn tax." Thmen the AmlericanI licensor hlas to icluelde thme royalty in his inlcomle subject to the 52-percent, tax here, anid gets no credit, for thle UT. K. tax. Senator FLtm T. Why can we not arrange that. by the way his Lmmuu contract. is made? lie has liberty to make it. either way. Mr. CARRoLLm,. That. is a business question probably Mr. Kust can explain to y'ou, sir. Nenator LON0. I would like to ask onle question.
    FORIMON TRADE CO1NCII,'S POSITION ON TREATIES

    Were you consulted oil the making of this agreement., Mr. Carroll? Mr. CAiroLil. No, sir, I was not honored to be asked. Senator LoNG. So, after it. was drawn tip, you had to deeide to he for it or against, it.? Mr. CARRoL;,. We saw it and thought. this was fine. Senator LONG. It. took care of all your people except. one? Mr. CARRozA,. No. We regarded it as a sound extension of the principle of relief from double taxation. Senator LoNG. If you had been consulted would yiou advise that there isone major company left out completely although the protocol has taken care of the rest, of your members? 1-low many of your companies are doing business in" England? (2873)

    38

    DOUBLE TAXATION CONVENTIONS

    Senator Io.NG. It seems that the agreement could possibly have been negotiated to take care of all of them. Rather than taking care of all but one, could it have take care of all? Senator LoNG. You did not have anything to say about that, did you?
    Mr. CARROLL. No, we were not consulted. The CHAIRMAN. Thank you very much. (Statement referred to follows:)
    CoMmiM'rrEE

    Mr. CARROLL. A great majority of them, I suppose. Senator Io\on. Five hundred? Mr. CA rROLL. I don't know. Four or five hundred. It might well be.

    Mr. CARROLL. Well, the Treasury has something to say about that.

    STATEMENT O.\ BEHALF OF THE NATIONAL FOREIGN TRADE COUNCiL

    TAX

    Mr. Chairman and members of the Committee on Foreign Relations, in behlf( of the members of the tax committee of the National Foreign Trade Counci, Inc., who are interested in trading or investing in the other contracting states this appearance is made in order to urge you to approve the two pending supple. mentary income-tax conventions with the United Kingdom, a third with Belgium, and also the convention with Pakistan. It has long supported the efforts of the United States to conclude with other governments conventions for the avoidance of International double taxation In the field of taxes ou income and inheritances, because they are wise and effective me.aures to implement on a bil-iteral basis tle provisions in the Internal Revenue Code for obviating or niltigating double taxation arising from the taxation by the United States of income derived from sources, or of assets in an estate, which M situated In another country. Such income and assets are Inevitably subject to the prior right of the other state to tax them. The income-tsx conventions which the United States has hitherto concluded with some 20 countries (that with the Netherlands has been extended to the Netherlands Antilles) obviate International double taxation of income In one d several ways. For example, the first Is by providing for the exemption at source in the other country of certain kinds of income, such as patent royalties and frequently interest, so that the income will bear the full tax in the United States. The second is by reducing the rate withheld at source by the other country such as is sometimes provided for interest as well as for dividends, and the Unitei States allows the tax withheld abroad to be credited against the United States tax in accordance with section 901, Internal Revenue Code. The third method recognizes that the foreign country has the right to tax at Its regular rates the Income allocable to sources in its territory, such as profits attributable to a permanent establishment situated therein and, at the same time, reserves to the United States the right to subject the Income to Its full rate of tax, for example, a top rate of 52 percent In the case of a domestic cor portion, but allows a credit for the tax paid in the other country against the tax due In the United States on entire net Income In accordance with sections 901-905, Internal Revenue Code. All these provisions are reciprocal In form. This system of relief by crediting the foreign tax against the domestic tax i satisfactory when the income tax rates In the other contracting state are approxImately as high as those of the United States. However, when the rates In the foreign country are appreciably lower than those of the United States-which does occur in regard to ordinary industrial or commercial enterprises in a number of countries in Latin America and in less developed areas-various other govern. ments have objected to recognizing by treaty the right of the United States to superimpose on the lower rates which they have seen fit to Impose in their own territory on income produced therein, the much higher rate levied by the United States. In other words they regard the United States Treasury's reaching Into their own territory and taxing income earned therein as an unfriendly act of invasion into their tax preserves. They are particularly resentful if they give up or reduct a tax to attract American investments, and then find that the sacrifice is of 0o

    (2874)

    DOUBLE TAXATION CONVENTIONS

    39

    avail because the United State. makes its corporation pay to the United States Treasury the amount of tax that the other government sacrificed. It is ironical that If the other government had collected its tax, instead of sacrificing it, the United States credit provisions would have provided relief. This is largely a United States problem because many foreign governments refrain from Invading the tax preserves of other governments by exempting under their tax laws or treaties income attributable to a permanent establihment in another country. The United Kingdom has recently adopted an interesting measure which permits a British corporation meeting certain tests to take ad vantage of so.called tax holidays or tax reductions In various foreign countries without incurin any liability to United Kingdom tax until the income is brought into the United Kingdom and distributed as a dividend.
    NO"IICATION TO EXTEND THIS CONVENTION WITH THM OVERZEAS TERRITORIES ,NITED SINODOM TO

    One of the pending matters is the notification by the Government of Great Britain and Northern Ireland, with a view to extending to certain British overseas territories the application of the convention on income taxes, as modified, signed 9A 16l 1945. This notification is found in Executive C, Senate, 85th Congress. rl 2iosesson. Before this notification can be accepted by the Government o7 the United States, the matter must be submitted to the Senate for approval. The annex to the notification published as an annex in Executive C lists a number of territories to which the convention would be extended. The tax committee of the National Foreign Trade Council, Inc. has recommended that the Foreign Relations Committee approve this extension to the indicated territories, as many of them are not advanced economically and the application to them of the sound principles of taxation contained in the 1046 convention with the United Kingdom should aid in encouraging American corporations to invest and operate in their territories.
    NOTIFICATION TO EXTEND THU CONVENTION WITH BELOIUM TO Ten CONGO

    Another matter pending in the convention with Belgium supplementing the income tax convention of October 28, 1948, to facilitate the extension of the 1948 convention as modified, to the Belgian Congo and the Trust Territory of RuandaUrundi (Ex. B,Senate, 85th Cong., 2d seas.). Perhaps the most significant provision of this convention from an American viewpoint, is one which leaves the Congo tax of 15 percent on dividends unchanged but "frozen" at that level and refers to Imposing the tax on dividends paid to a resident or corporation of the United States not having a permanent establishment inthe Belgian Congo or Ruanda-Urundi, which indicates that the tax is paid as a source tax by the recipient of the dividend and therefore should be allowed as a credit under section 901, Internal Revenue Code. We urge this committee to approve this convention.
    SUIPLEMENTARY PROTOCOL WITH THU UNITED KINGDOM REGARDING ROYALTIES

    Asupplementary protocol with the United Kingdom, signed August 19, 1057' contains certain provisions of substantive value for American corporations which have licensing agreements with British companies and, at the same time, have a permanent establishment In the United Kingdom (Ex. A,Senate, 85th Cong., 2d SM.). The United Kingdom Income Tax Act provides In substance that when a British licensee pays royalties for the use of patents out of profits, such licensee must pay thereon the United Kingdom standard rate of Income tax of 42.5 percent, but authorizes the licensee to withhold the tax from the amount of the royalty paid. It has been held that for the purpose of the credit for foreign taxes, the tax so paid ispaid by the British licensee and therefore isnot allowed as credit against the United States tax which has to be paid by the licensor. Serious double taxation results. To overcome this inequity, article I of the supplementary protocol amends Mrcle VIII of the 1945 convention by providing that such royalties or other amounts will not be taxable in the UnIted Kingdom (a) if the American corpora. tion which is subject to United States tax thereon is not engaged in trade or business in the United Kingdom through a permanent establishment situated therein, or (6) if the American corporation is so engaged but the royalties or other amounts are not directly associated with the busins carried on through that permanent establishment.

    (2875)

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    DOUBLE TAXATION CONVENTIONS

    Article II of the supplementary protocol amends article XIII of the convention of 1945, to provide that sections 901 to 905 Internal Revenue Code as in effet on January 1, 1950, will allow a credit to the United States recipient licensor of any royalty or other amount coming within the scope of article VIII of the present convention by deeming that he shall have paid any United Kingdom tax legally deducted from the royalty or other amount by the person by or through whom any payment thereof is made, If the recipient of the royalty or other amount, elects to include in his gross income for the purpose of United States tax the amount of such t',itied Kingdom Income tax. An explanation of this provision in Executive A, page 3, states in subttae that where the royalties are not exempt from United Kingdom tax because they they are related to the bWslness operations of the American corporation's permia. nent establishment in the United Kingdom, "the United States would give a credit for the British tax." Presupposing that this explanation means that the United States corporation is deemed to have paid the United Kingdom tax when the royalties are considered as related to the business operations of its permanent establishment in the United Kingdom the tax committee of the National Foreign Trade Council recommend$ that the Senate Committee on Foreign Relations approve this convention.
    CONVENTION WITH PAKISTAN

    The income tax convention with Pakistan, signed July 1, 1957 (Ex. N,85tJ Cong., let seas.), has been given considerable attention by this committee, and we hope that in view of the overwhelming support it has received, your committee will approve this convention. In the main it follows the pattern set by conventions with some 20 foreign governments which have received the approval of your committee and have been ratified. There is one clause in article XV (1) of this convention which has caused some discussion, due to the fact that it carries out a recommendation which was originally made by Seiretary Humphiey at the conference at Rio de Janeiro, Brazil, In 1954, was reiterated in Economic Reports to the Congress by President Eisenhower on January 10, 1955, January 24, 1950, and January 23, 1957, and was categorically endorsed by the present Secretary of the Treasury, Robert B. Anderson, before the first plenary session of the Economic Conference of the Organization of American States, at Buenos Aires, Argentina, on August 19,1967, in the following language: "We have been engaged in the negotiation of broad tax agreements with a number of countries. In addition to establishing rules in these agreements by which to assure fair tax treatment, we have sought to give recognition to so-called tax-sparing laws which seek to encourage the inflow of capital by granting tax reduction or limited periods of time. "The executive departments of our Government are trying to devise a formula by which a credit would be allowed under our laws for the taxes given up by a country seeking to attract capital, in the same way as a credit is given for taxs actually collected by that country." At the end of his statement, the Secretary of the Treasury says that "one treaty, which includes a credit for tax sparing, is now under review by the legilative bodies of the signatory countries." This statement refers to the treaty with Pakistan which is now before your committee for consideration. It isunderstood that the convention has been approved by the Government of Pakistan. In other words, relying on the repeated statements of the President of the United States and his Secretaries of the Treasury, Pakistan, a very friendly nation in the Far East, concluded a tax convention with the United States which inter alia would grant a credit against the United States tax for a very limited reduction in the Pakistan income tax and super tax equal to 5 percent of the capital employed in certain approved industrial enterprises. Section 15B of the Pakistan Income Tax Act as in effect on the date the convention was signed, 1.e. on July 1, 1957 provided this minor reduction over a period of 5years for approved industries which were established during the period from August 15, 1947, io March 31, 198. The Pakistan Minister of Finance in his speech concerning the budget for the year ending March 31, 1958 stated categorically that he "would like to make it clear that approved industries established up to 31st March 1958 would continue to enjoy for a period of 5 years exemption from income tax and supertax on profits equal to 5 percent of the capital employed * * *."
    Income Tx Convention with Pakistan (Es. N, Mt Cons., Ist sam., August 9, 197, p. 49).
    'lEwting before the Committee on Foreign Relation& United Mtalem Senate, 85th Cong.,lat $O.,D

    (2876)

    DOUBLE

    TAXATION CONVENTION

    41

    This reduction in tax would clearly aply to approved industries owned by ricns that were established prior to March 31, 1958, and it is reported that the bendt may be granted by a legislative amendment to approved Industries established after that date. The National Foreign Trade Council's tax committee therefore earnestly urges this committee to approve the convention with Pakistan, it being, of course understood that Ifthe Executive considers it to be in the Interest of the United States to incorporate a similar provision in a convention with another country, your committee would reserve its right to consider such a provision on its merits. The CHAIRMAN, Mr. Kust?

    STATEIMET Of LEONARD I. RUST, GENERAL TAX COUNSEL OF WESTINGHOUSE ELECTRIO CORP., PITTSBURGH, PA.
    Mr. KusT. I just want to make three points. I represent Westing. house Electric (or., as general tax counsel, and I think it has been made clear up to this point that Westinghouse has a very important stake in the choice between the protocol, Executive A, and H. R. 4952,

    We have net royalty agreements all over the world. We have about 100 different licensing agreements with licensees. All of them are net royalty agreements with possibly one 6r two exceptions. And I want to madke clear what a net royalty agreement is, because I think there has been some confusion about what it is. I think the clearest analogy to be made is with a net lease. That is more familiar to all of us. If a lessor owns real estate, he frequently decides that instead of asking for a certain gross amount of rent, and then paying the local property taxes out of hi rent, instead he says to , the lesser 'You pay me a certain amount of net rental, and you bear the local property taxes." It is perfectly clear that his rent is still his net rent plus the property taxes, and that the property taxes are his taxes. That is the way in-which we operate our net royalty agreements. Our net royalty is obviously less by the amount of the existing foreign tax than it would be if we had a gross royalty agreement, and we have always considered that the gross income, gross royalty income is our net royalty plus the foreign tax that is paid on our behalf by our licensee. I think this illustration makes what a net royalty agreement is a little clearer than it may have been. At least I hope so. With respect to English royalties, we have found, even after the Irving Air Chute case, that the tax convention which was .s.aed signed with the United Kingdom in 1945, as Congressman Simpson explained, established this treatment of royalties. In other words, if an American licensor does not have a permanent establishment in England then England will not impose tax on his royalties- but f he does have a permanent establishment, then the United Kingdom may continue to impose tax on royalties. It was left to the United States to eliminate double taxation by allowing a credit for the British tax. Thus, it seemed to us, the original treaty made it clear the parties contemplated that the tax was imposed on the licensor. And when that argument was made to the Treasury, they said, "We think that the Irving Air Chute case by saying 'this is not a tax on the licensor,' should be no longer followed." They agreed with us until our year
    (2877)

    before the Senate committee.

    42

    DOUBLE TAXATION CONVENTIONS

    1950 tax was up for audit review. Therefore, it was not until 1955 that they decided it was an incorrect interpretation and that the Irving AIr Chute case should be made applicable. 'lhis was brought to the attention of Congress as a case of con. tinuing double taxation, and the legislation that. has been described was the result. 1 would like to say something to tho point of whether this should he regarded as a windfall. It, is perfectly clear that this is economically a tax which is imposed upon Westinghlouse as licensor, even though we have a net royalty agreement -that. is the British tax is economically imposed on its. When we are not allowed a credit for the British tax, and must pay the United States tax on our net. royalty agreement, without crednit, we suffer double taxation. The effective rate is something like 72 percent oil our royalties, where it.should be only 52 percent., w h is the American tax rate. Our agreenents are longstanding. Commercially it is notipossible to go back to the licensee and say, "Look, we arle suffering double taxation under our net. royalty agreements. If we just. revised our agreements we could eliminate doublee taxation under the pending protocol." Well, if anyone has ever been engaged in these royalty negotiations, you know that they atre adverse negotiations. We canmoto go to our licensees anid ask for a favor without having to give them something in return. It is not practicable, therefore, to revise existing agree. Intets. For the future, yes, I suppose we could shift front net royalty Now, 1 see no greater merit agree(ients to gross roytIty agreements. whI. should we be compelled in the one approach aid t(Aie other, and to negotiate gross royalty agreements wlen commercially, over manty years, and all over the wiirld, we find that it inakes a good deal of .,ense to say to the licensee, "You pay the local tax. You are there. You can determine whether that, tax is being correctly imposed or not. And sine you are going to have to bear the tax on top of the not rovylty th1t. you have to pay us, ito will be to your interest to make sullre that the foreign tax is properly paid." And that. is our main reason for negotiating net royalty agreements.
    RELATION OF lLl TO COURT DECISION

    Senator Niorse. May I ask a question at this point, Mr. Chairman? Senator Morse. I want yo!i to know I am completely undecided as to what my final position will be oln the protocol versus tihe statute. Congressinan SinpPon's argument about, protecting the jurisdiction of the Ways ad leans Comnuittee and the Finance Committee s far as the legislative process is concerned, has considerable weight But this tax that was imposed by the Treasury, on your company, front 1950--there wasn't anything illegal about it? Mr. KusT. It is not illegal, but we think that. it is an improper interpretation of the applicable law. I think there has been something indicated, for instance, in the memorandum of disapproval by the President, that the law was perfectly clear in these circumstances. I don't think that is really so. Indeed, I have the opinion of two
    with me. The CHAIRMAN. Yes. sir.

    (2878)

    DOUBLE TAXATION CONVENTIONS

    43

    British barristers, and the editor of Taxes iU1 the United Kingdomn, which is ptullished ily tile Ilarvard Iaw chool--antd I wolild 1) happy to submit those, for tile record. They are unanimous ill agreeing that tie Irving Air h'uhte case was wrongly decided--it. was an incorrect interpretation of the British law to say that the British tax was not imposed oil the lihensor, and therefore, for that reason was not it creditahle tax under thie Internal Revenue ('ode. Senator Morise:. ,tid there has been litigation on tlhe point applied to your company, in which litigation you lost. Sir. KusT. We were not involved in the litigation, Senator Morse. Senator Mouts. 'rhe legal principle was estahlished in the litigation which the Treasury Department then applied to your company? Mr. KuST. That is correct. Senator MoWts. And in effee, are you not asking for legislation, then, that reverses that earlier opinion and inakes that reversal retroactive? Mr. KtST. That is correct. Senator MoitsE:. You will have a hard time selling that onle to mi1e, because of the Mr. KMsT. It has been done frequently. Senator Morasl.. Because of the whole chain of precedents vou will opent ti], then, whenever you get, a tecision1 that you don't. lilie, that you think may encroach ne1on such equity, to have us a.ising legisIation to upset decisions that olher comnpinliies, inll negotiating agreenents, have relied upon and they proceeded with a nmodification of their net royalty agreements. Whyn shouldn't your compnnv hlave done tile same timing sinee I050? Mr. K TsT. The agreemnents to which this, applies are long-term anreeiients that were in existence then and continued for a nunl,)er oryears. I think another l)oint I want to he ssure is uinlderstood is thwt so far as we can see, II. 1. 4)952 takes care of all American licensors. It eliminates double taxation with respect, to royalties, whatever may be the form of the agreement. Whereas the protocol, while it would work with respect to licensors with a gross royalty agreement, it, instead confers a benefit on the licensee 1ii tile case of a net royalty agreement, and leaves tie licensor, the Amnerican licensor, in thfe
    sine position as before suffering double taxation.
    AMOUNTS OF NET AND GROSS ROYALTY PAYMENTS

    Senator LONG. let me get this straight. You are interested in this thing both prospectively and retroactively, if I understand it? Mr. KUST. Yes sir. Senator LONG. In other words, you are interested in thle prospective effect of it as well as tile past effect of it. Now on the kind of net royalty agreement you have, if a man is going to pay you $48 net in ngland ;ioe would just as soon have paid you $100 if he didn't have to pay tile tax, wouldn't lhe? Mr. KUST. in the initial negotiations presumably that would be so. Senator LONG. He is going to pay $52 on that transaction and give you $48. As far as you are concerned you could have gotten more than $48 if you had not negotiated for a net agreement. Mr. KUIST. Yes, indeed. I think generally can say that the net royalty is less than tile gross royalty would be by the amount of the then applicable tax, foreign tax. (2879)

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    DOUBLE TAXATION CONVENTIONS

    Senator LoNG. It is the same proposition as a direct and indirect sales tax. In either event the man who buys the product is paying it. And so your situation here is that you could have gotten a betNu price in your agreement if you had not sought a net royalty agreement. Now, when this person over there is relieved of that tax he is paying you, he is saving--out of $100 he would be saving $52? Mr. KUST. Well, the British rate is 42.5 percent. Senator LoN0. Actually in effect you are the fellow who is being taxed. But bl'eause of the way the agreement works out, the other man is getting the tax reduction. Mr. KUST. His costs under thle license would be cut from $100 toSenator Lo.No. If he is paying 52 percent tax, he is paying you $48 a hundred? Mr. KUST. He is paying 42.5 percent tax under the British income tax. So his cost is cut from $100 to $57.50. I have a tabulation attached to my statement which has been submitted to the committt, which brings that out. Senator Lo.xO. Yes, sir.
    RETROACTIVE EFFECT

    Senator MomoE. One more question. Help me with this, if you can. You negotiated your net ro alty agreements. The best legal judgment at the time was that tie courts would not decide the case u the court did decide the case, in the Irving Air Chute case. But they handed down a decision that made you tax liable. You didn't think you were going to be tax liable. And now you think that because you have negotiated an unfortunate type of agreement, that all the taxpayers of this country now ought to make you whole, and refund you the money. Mr. KusT. Well, that is putting the worst possible light on it. Senator Moui8. I am trying toMr. KUST. I think it can be viewed another way. Senator MoimE. I am trying to put the worst possible light on it to think through the problem. Mr. KUST. I think the question is whether or not double taxation is something that should be tolerated. Generally, we have made every effort, both in our Internal Revenue Code, and by negotiating tax treaties, to eliminate double taxation by reason of what we believe is an erroneous decision of the court. It turned out that we were subjected to double taxation. We are asking to be relieved of it. Senator MorsE. There is nothing new about double taxation. We have had a great deal of it, but we have dealt with it prospectively. Do you have any precedents you can cite to this committee in which, when we have eliminated double taxation in any field, we have gone back X number of years to refund to people? Mr. KuST. Yes, Senator, I think there are cases where tax treativ have been made effective retroactively; sometimes for quite a number
    of years. I couldn't cite you specific examples, but there are, and

    I could submit them to the committee or to you personally, Senator

    (2880)

    DOUBLE TAXATION CONVENTIONS

    45

    Morse, if you like. But I do know there are cases of tax treaties that have eliminated double taxation retroactively. The CHAIRMAN, Thank you, sir. (The statement referred to is as follows:)
    E. KusT, GENERAL TAX COUNSEL OF WurTouNousn ELECTRIC CORP. Mr. Chairman and members of the committee, I am Leonard E. Kust, general tax counsel of Westinghouse Electric Corp., Pittsburgh, Pa. It is a privilege to appear before this committee for the purpose of clarifying the substantive inadequacy of the Supplementary Protocol under consideration, designated as "Executive A." In all but a few of our tax treaties the contracting nations and the United States have reached a common ground with respect to royalties by permitting only the country of the licensor's nationality to impose tax, unless the licensor has a perma. nent establishment in the licensee's country in which case the treaties permit both countries to impose a tax on royalties and the avoidance of double taxation is accomplished by the allowance of a credit of the foreign tax by the country of the licensor's nationality. We subscribe to this basic approach to the avoidance of international double taxation.
    STATEMZNT my LZONARD

    COUNT DECISIONs REOARDINo $rRTISH ROYALTY TAX

    The British tax treaty is presently in this form. Unfortunately, however, two Tax Court cases, one of them, the Irving Air Chute ease affirmed by the Court of Appeals for the Second Circuit (143 F. 2d 256 (1944), certiorari denied, 323 tr.B.773 (1944)), have held that the British tax on royalties is not a tax imposed the licensor and, therefore, under the provisions of the United States Internal Revenue Code is not allowable as a credit against the licensor's United States tax. Hence, on the authority of the Irving Air Chute case, royalties paid to an American licensor with a permanent establishment in the United Kingdom are presently subject to both the British tax and the United States tax. This in not only an unjust resudt but, we believe, it is incorrect on the law. It is to be noted that in deciding that the British tax on royalties was not Imn posed on the licensor the American court undertook to interpret British law. I have obtained the opinions of three lawyers eminently qualified to pass on the corrctneus of this interpretation. Two of the lawyers are English barristers specialing in British income tax law and the third is editor of Taxation Iii the United Kingdom, published by Harvard Law School. The opinions of all three of these lawyers are unanimous to the effect that the Irving Air Chute case was wrongly decided and that the British tax withheld from the royalty payments is a tax Thus, it is clear that except for the improper decision in the Irving Air Chute case, there would not be double taxation of British royalties of an American licen. bor, since a credit would be allowed under the Internal Revenue Code for the British tax as is contemplated by the present treaty and as is the ease with respect to foreign taxes on royalties derived in other foreign countries. Achieving this result would certainly appear to be wholly a matter of correcting the erroneous application of the Internal Revenue Code by appropriate action reversing the decision in the Irving Air Chute case; and as Congressman Simpson so ably pointed out, this is more properly a subject of congressional action than of treaty action. SuISTANTIY DIFICIENCIES OP PROTOCOL 0R0"S AND NET ROYAlTiES But entirely aside from the propriety of the treaty action taken, the protocol is 10bstantively deficient. While the protocol does eliminate double taxation of pose royalties," it only aggravates the inequity which exists in those instances VIiira United States licensor has a so-called net royalty agreement with a British 1:1004M. In the usual case of an American licensor deriving taxable royalties in a foreign country the licensor pays the tax or it is withheld from his royalty. The licensor reports for United States tax purposes the "gross royalty" and takes the foreign tax as a credit against his United States tax.

    imposed on the licensor.

    (2881)

    46

    DOUBRIP. TAXATION CONVI'ENTIONS

    he1151.1, iusielin'I tegreement, 1:he, GietI h tiut Ithe li1,l'lm1, will I1y tIlh fer'igt Ill%foir t* liclLenisr is tackei' inito aei'cetillt, so1thiat tile' ie't ri'yalit.y rutit ie iess It whit thlis, half nap welld IN,if the' live''illsr piaiei the' tatx. Illit ihe'r wor6s, tilt' arratigo'llec is like the llcate' faenuiiiecr "ne'tlil'lso' r'i'1l esinite' wher' tIhe' 11ss8'4' lowilme$ ae part cf thle rtv1 ' eat i lil' glinll. uiit fir heal laxies. Ill m'ite'ring such rogmlll-m tstit' i''liciesr i'titicetto il , thatlitill Alreitl tax pacii hy the' iie'ei.i k addiiti ru y llya n ix crr'dietab lliy againSt. thil, Ilite' St iltys tax laiiity cif dh li'eeisr. 'This iiisI tile- sidtl"l int l etel't a'cleitlrd s'mll algr't-'iillIltsli|, V'Xc'it ill riam' e'aes'of lIrtiish royaitia eeitd"'r . tilh'iii irtitiill eof tile' Irviisg Air ('1i11t1' eie'eisiiii. 'rite lilre'n'tce' ,ie'.Wt'evti -3 "l''t" will II ''eroc.s' re.yalcl' hats foitr Its% Itlrurrease'sia'c'n nie'r'ily tille-' of torm.
    I.HellsI.ATIIN W011l.I1
    IIYVKIIiK COlUR

    IDE'CISIlclN

    I .lle'r If. It. 76t4:3 it ill-' 144t1 ('Congre's", Which wag veleael hV" till' Irn.lient and l isne t.It. .1)52 in thie' Iao'nent. (I onallre', It 1'n'lit fear the' lirilish ta:x weoti i hei allowedl iii spilt' ofi til' Irving Air R u('lI de'risiost. 'IuIis Ilritish rllt'lel, hlte whether "gross' eir "field'" wouilei i v'ei iie' tlile' tliltltliilltlt tor Itlil'lStiim tax Hilrlomes 118 anre liiillir rcilylti's frmterll her mle itrie.c. Tite prtlecl, oifi tniet, ith ei, wtilhl eilinminaPteii' lhit liItax tl1l royi'alty t Iam elntstle withe're' tio liei'el'ier Iha11sa "ie'rlati'it 'stabiilisdi.tlett 'l"'itsI'itiaEdlacd iIttilk l
    ircugh 11tl l the' r1cislty is "'lirt','lly lasi.45alri't!" wit thet i)lo ill,55 c'aerrie'd l Ih tintelel etallii.ielliit.'' '1'ha,Uisetacl ''js'rtilaehee'illL e'staihiestblihlme't ''f" ioai Affird' ''is'rie' e'asc lie'n'tisor inl (re'tli Britacin is icsale'0ailes aireml hidhen'c tilt rayacitis's watihl wint be ,, iire''llyiv.sseoc'ialtccl" witlst ilt- Imsint.e'ss of this otli'e, Thi'lrlte rl'el wielI, tiherm feire, eilinminile' tile' lintis tfix whieh, ittll t i'itse' oft I "' ot royally" gre'eim,tt, i' weaihl Ilic're'l' leave tile Aim'ric'acn lii','iis-r witt his uiet- roy allt y' antdc wilhtituit crl'il foar aicy lritish ttex. 'l'his is ireeis'lv where, lies ei'rtlie iir i'eirre'e't re..-illi of the Irvilig Air ( ' iht' ('ise'. lhe Blritishli lite'iis'e, IiiWste vr, wstll I. rt'lit',v'e ca peieving lie' e'n-e' acgrell'i't %tvllctllhl IWSill le.ttlIallhv the' lrititlisl ta4e that him ('cist ttler 'ill, rc'llete'l. Tihilus, lite iltraeil (tisl teo give lgl', relief Ii t ll AmIIe'ni'ca lire'tsser, 14t itite'all conlfe;rs ia -tiisltaitiallt il-i'cl'Ir o tilthe' llritish li'e'tnsee'. 'ihiis is ilieittraled In floo lilillltitil., :eitti'lel'el.

    do

    I'ReiyTol'l, I)KtC'1'TIVE. 1I4 NVJ' RoY% tIT1V WIIkKbMPNTS I''iti renalrkabile' oliaxariti-d eif the' pilrocolelil ill the' 'ase it "tel'i rolly'al " ugl''hef ilteI1it iIst li ailtribtutedi tll i faillUre' oi th1 plart ci( tih 'teill' leitacte w:glietlll tcl iiunldrstacnd tile' rli'ri l of it''i"net reo it''" acgrn'e'e't. V'et thlis cl''e'tlite i ic'ratition ci the proaticol ill t I 0me of et l i1 ''ie "aise ravait" I'racgree'tllt wits C'eIlV(i'yVed tk) til Tre'ascury ID)c'pacrtmntt, 't Iprior to tlhe signIingeif tilhe Iproiti'ol. Tih pridolot'l would work ail isface'torily in Iie' e'c,' ofat "it (gnc roiyaully" 3"'algtc melnt. IHowever, etni ite c'atse' etf "gSreSs royalti''tie's'e' is, it St''111.4 tel lie, le.e mne'rilt, Ill 1t(- aile'appriarh tacke'n i fiilreitell I iianiIt the aclllrlilq'h tackentl ill hIt II. R. 49152. Tihe' apiiltitell0'i elf II. It. 4952 witihl e'coiformI Itl, tw'titinlat e1 Ilrilish m rkylallies to tilt, trie ieit o 'f elflroylaltie'J ftroml lilest c ll'Sir c'iattlllri. t e' iarlilmmil, oi t lie lthis 'thliethaindr,lt irilwice is nelw atiltlriai'i wiiel'h miIgit affre'c't outrI trletlie' with other e'ouintrie'.s IUnOde'r tw ie lorta'eal tlhe Ilritih tax ise e'limiiiatil Onl ro'altiesee flid tel an Alnieril'aun liie'e'ar. iut r illt Is only Ilit re'tusrn toir e'limiltlion ci( lie' I' (I H lfteti li's cl roaill il'-s pIid by3' Anle'riccili I'it't-,SA'eS 10 lit itish li'e'iiel'1 l taix li similar eirc'ltiltitalcta'es. Thils is aitnw foll' llee'll. not toilie litlllld ill ally tat our othie'r tware'tIcs. ! 1tKIKNICI' LeIA KNDIRC PlItcil's'li
    TIIN IINI)K I.Fi ItII.ATI1iN MAY NOl? UIl IKCHS

    hI under II. II. 41152 is ulc lit Lilte Blritish ltsx ratie of 42.53 itre'e!t, while' ilc, v IONI under tle prmote'o is lie li. United Stateit tiax rate of 52 perve''t. cth In his letllllTmino of dialpprevial of II. It. 764:1, thhe ]re'cidlet olise'rve! thall llnln manly arriagetiieitt5 l)e't eili h'le'iis'e's atticlld t4fileislrt hitve' rel'hie'ele' e'iilSt Ihi W i1 nIt and tlhe Iblltden of tlte Blritisl tatmay ot re'st, ot1 I fIilled Statte'as li'c'tiscrs,I i11c'h ',iled waall-t tile' Ih Mcas14. ('0itil1tulltc'iy, to al11c1w the 'ltrisish Iat as a e'relit Aei'trile'sl States's tatx oln i rtotcit;idive, basis would give' a windlfiall glaliin toiome' lic'c'uors. I belie't'e I hav.'e mitate It el'atr thlit the htride'n of the' BIritish ta, ecolllnoi'a1lly aid legally', is oil tile Amiericani licelnsor whether hi' hatsat grel or it inet royaltav agrewiielit, It Is error, therefore, to scpelaek of tite aillowane'e' 1,1 th as a landfall. ()1 lthe othef Amerlican "lie','tso'r of a credit for the Brihtisa h4t

    oic'a tidle'r I lie' iprtci'h I I do niot knew of aitiy hciactl to indir'lt thiatt tile revn'l'' cif tihe Irlotll is le'ss thiin ih,' lo Ulehr tih. lllt-llc h ippro . 1..152 aind il eltr oi II other tre'atics. It shoticd lie'toleid thtact il lUse cam', ef crurliratioris tilt, r'l'v'nutl'

    (2102)

    DOURLF 'TAXATION CONVENTIONS

    47

    hand, it i ehlear that in the awe of ek"net royalty" *rettlliSlt the eliminiation of the liritish tax uilder the Iproittwl eutifttrs is rtal win'h Ill(il the liritish lirelllws.

    the douhlbt taxation of lrills royalties whit'h re-Sults frotl the Imlpropqr decision ill thet' lrvilig Air C'hute' cimae. 61 title other hanlld( II. It. 41152 pirtltity JMIlltlitJudl before' tilt' tlilde Fillilluvt ('ollliittee' would ftlviiicve tit' pIulrlpose clearly ain Correctly. I l'eoimlmell that ol isetlnt to ratitie'tioia of tihe pruotiool ble withheld ill order d to pwrmlit plmpJ|itr correcttioll of tilt Illeuity' by tho legislation ipriettly pienidinig in the' 8th'liitoi Fililalnt'ee Commllit te'. of N\Itr. NI cim) :

    I lliava' that the Ipotea'ol is seriously die'etive Il its aittlillpted Corretion of

    (Subisequently, t,1e following wias sutppjlied ill riponse to tiule tmitlelt

    II. IItiI| . hh.voirre-t'ts iti the''st'of i net royalty greetlii lotitlait' |illjulllt taxation iit it with it l rilish lieiMt' e which is not coere'd hy the pIrou.ol. i The tzt'l tiOht I. It..11152 eorren'ts dowlhle.' txWatlon retroactively calinot. piropierly lii regarded its atwindfall Itt pa rti'tilar taxllyve'r. Thia' dohlule' taiXtion arise's from till, ajillit:Jtt hi' the' 1're'asilrv of tie elc'ision ill tlt'i ]lrviag Air ('bitt.' "'ase.' coml-ll' c'ase4 wa'sidt'evitll't jism priner tlo'tlie' I,145 British l'liis Ill thid| |line movldi,,rethtl ill i |l l, n- mer1 Talx ri:i|, midlt conlll|Httnll t ntll~ll
    of royailliv- l tie I't'it ovtrruihl tile' lr'vilig Air (hbutte ciats. ll l ailtay eivttil,,the t'inilg Air ('hlimt' t'*1C' iS hiist'61 lilt a'llonrli't llS ithe'F'in't,1tilon t(tf lritish tax lhw til o a *'I bart 11 t iirPe41 Oluiluielig t(tf exlarts ill lfritih btax law, 'Oiit's (of whiih hlime' Wti'ei 51tl I t tilhe4h'llillitt't'. T'ile 1ittitiIrgh t't1. of Lilt- ]nherlnd |{tm-mmlllt Arvire,, after ronsidtrai~ilon ollivet of thle mlle~lr, altrev'il tihat thi, l'mitl halml lil't,reffect of ovriliiling til- Irv~ing Air ('hillt- ':a.. and 1allowei'l it enr'il ifur lritish taxes till Ili,' l'.llish rt'oyalties of WeStiliglimltl,' Ullt tti this' year 19511. in 11155, thhey rvt'rsed their position retrowliv.h. li llrl, 1991 (ilInsructtionsl fromll ithe Wasi Ilil~t~l offirce, |'ll11tr thesei eirci.mqis l iute, it, is .lid nim itted thatl lilt- nr oartivmit, allow ance~l of a vrettil ta 'lilillaho' htle tiaxaiontfl I di lit' tllt itt rietroartivt,' y Uiand imipljropetrlv tlljalb,'i rltlilltit itt' nt'garde'dl its a wiiiiitifll. IIi-1 I.litve'll 111111 ilnv,,tigation will reveal (hill|, se4ve~rall tax.I tell'les with forniml~ t'rlillri's m'Iiliiil t'td tiutil' ltiil o itaxrt'tio -rat'tie'y; stel fto r mt''nal v''ar1r, Il'frikilli nt'ulf l Ittillaffe't'elhd htxiuy'tr. Then' hut' hi't',ii tit timll' to give sx'tP'rilt' This lrt',asilrv nlinrt,,vvl l iv St ted 1tttiI t . ch' if e'liniillilt ilig hlhttibl ltaxat itn li~t t Was sllhartl with Ilit' Un'nit'edt K~ingdomllill.ut,'r thli prIttrtI, huh wits Itrrnael', 1by'

    t'islletier Ii. It. 41152. 'rhe stiplltrt of lii.' statt'tit'mnt, however, t'el allying t'etI, wit Ihn-s'iKtr to tli rtoyail its tit lltn Ailtnerilili t lie iielsta. li'e fullile't it ipint out thautt iti atlddt itoIt. tiet're is i'ost tem toO United 81als t l'Ii.' ilt- Irmo'l Inl that thli tUaitr'tl Stmit's i1VIS' li|ll) h Inih'td Stales ta% oil tiah I'hteI Staites's royalties ot' it Blritish licensor whih it ciun lirne''ati eolyttt. This h:\x is toit lot. under II..It. .115.. I.litet', it, is probable Itat tilt, loss of reve'iat'I ualde'r Irtatol'tl is greater hliani nldelr 11. It. 4952.
    Wasl1,1asth t111% 111u,1ll alli

    the Cit'h'

    8UPL',E1MENTART P'I)T, t'0it. (WX. A TIflFRIti iQ;NATK .'eItIltlM RKLATIaNs t41'MMtitaEl) II R. 4 (OiMPeiiKl SKNATK FINANC'E ('tiMMIl'1'KK)

    imlxmo, oil sut'h rtv3altit's, Ipre'sently erroneously no.t allowed undtr a Unied Stlt,,t tourt decision.: This hill is In sulstantially t ite same forun and is iutended to acetiniplish the sanie purlue,. its II. It. 7643 which was unanimously enacted by tlit' 101th ('ongnt'ss ill 11150 but wAS vetoed by thle Prt'sidt',it. (2) Tihl, ln-sidhtlit 's ie'lol'illorlttlili! eif disapproval ittatA'd thtit this piroblhm could be litire alworiithely hiandltd by amemen entiL of the AlIglo-Amnerican tax convon. tion of April 1i1, 1t14A, rather thlan by legislation.

    (I) The' pllrIi.w' tf It. It. 4952 is to tlltmlnate double tIaxation of lritish royilties 'ie%'ived by ill AImeric'a lit'tnsor by l)prvidinx a credit tor Ililt British taxes

    1I8 m8, anti isltnow p.'ndilg before tht Setate Foreigni Ilthitioli Couiuittee as 41l''tl
    lVe '

    (3) A protocol titI Ili$ natter %V'u.su "lilsubequente'ly president' to Cogrle',


    A.''

    January

    be trmr'ted by II. R. 4115A2:

    (4) The, lprotot'ol cldot' not remove the inequities of double taxation which would

    (U-88: )

    tKnIxtlg TAXATION CONVENTIONS


    Anturikan litensor whether lie hint a1rO Is

    (as) Unde'r If. it. .t11', a credit for IlriliNit taxes Iald wooldhle allowed to u
    royalty igretetitt or a so-called "net

    lty" ugnett. (Undher a net rnvlt nllgrt't'tenttitfile larlith tax IspIld by thes WItish Ict'nsee0 miani 0l14% nrVIlt.Y rhit In 'oluprlhiyV rf*4tcd1 rhis it like a 4. tet, IcAm, of real esttatt where Ilhe less' h ssu, ts tImrt of tho rnt tthe paymitent of n lical tixeus.) (tI floute'r thits' lrpti,'ed protiocl, it) thle camt of a iet royalty ngret' nitnt, the thllee1t.1ht't1t1c4W014li ,lt' rc,,.Vel frtm IpayVnent. oif thu taxi a great lwteflt to hint hill, (i'e Atuerietis leitnsor Inatrordted lito r lif. (; in thI, tithler Iaitld, 1111der If. It. .It.'g lilt' liritlollh Iiet,1stv's crtima ilnahi the satlit', Wit. fit, Anerieru'alietitntr is rtlelieved of tho burden of double taxation. (A) Obvioilsly. It Is the Utnited lt$ates lIcensor that. Insuffering, ant Ilwcaum, of an hinlretusr lIWtehd $tites corurt decihsiotn. Wle dou not lived itt itgnt'eine with a fun'ign euiuttry Io ictivIhlo relief for Ilylhtel States Inxlmuytrs to rorrret the' result. of a decl"iolin of a lyltllltf S1ates court. Titis IN prolitrily a hegleshlivt function anid th legIhlatIvh e Iroeess sh11uhtl Irt'vail wtlit a iltlest. develops, ais liurt, between It the IExecutlive antl Congress, esmsti'illy when tihp prottcol 1Twoc sterve the niot ptUrlitit for which the le'gislation Is Iitldthd. rni Treatment for 1 unitedd ,itde inropete-tu purposes of ropeallty inoe'tre from the (mhlild Ksigvdteuvi-.4nerienvi tairpayer harin n "net royalty' agrerineit and a iermnional e-stablish meat in Rngluinc With teifroyalties (ire not directly iassoeiated
    Undtter pn'.
    I'r1or to Irvnig Air ('lhut. 0111 an~d Irileeg Iryllilg

    Air ('1h111 IUnder prolo. 1inder 11.R. t 1W ovt A) i (Ms. 401 _e Tresulry
    Intelor~lwe.

    'rolta est to llrltLKh Iimm....................


    IPelliutlapplicablle BIritish Iaim, at rat# of 42.6 ix lnt ......................... ............. Aniiunt remivl by tr nil'tl S1aim IImllonuniter une t roynlty" nar",mernt 0Irm' royally sublJet to Uintil l4latm tI ...... 11nit itamitA2pement......... ... UW foNign tax e1rli t....... ...... Neo t lll slotI ltat t................. t.. Net Inmolle dfer letmato tvllletl states

    PAt,100 442, tW 57,5 7 I00t Otto

    $100, 100

    $6 $,6?,0

    lOi ,04 A s,0 57W I00.0&V 4.,..0 0,10

    42600 .............. 87. U0W ,4w! 86, e,.600 87.,00 20,900.


    ...

    .,0 20,0 42, W .............. ... 9, NO go, ION

    29, 0,0

    IIcnvx ................................

    49.00

    27010

    27,000

    I U'ndler aI"not tahi&tJ nlent the tirllish tat is aidh the' tIrllsh lhivisem amtul royalty rate I ,ir hiy the tc,14anhlb Vluml. Thtls L like anet kii of real CIsto where the lose #usuimas iart of heirnl thl nt u lppnent aloft tax".

    'Th10 CHAIRMAN. Wle will lhar Mr. lhnum ufow.


    STATEMENT OF LEONARD RAUM, REPRESENTING AMERICAII METAL CLIMAX, INC. Mr. Chairman and jentlemuen of the eomninittee, my. lonard Rlufmi, and I aIm here rpresemting American Metal , it I Optosd extenmision of theo United Climax, In ., in con fle ol ith a prn St ates- 'itite, Kingdom fax convention to the British territories. The CuAIRmMAN. YoU nlay file your statement,. Mr. RtAVM. I have filed i statement which I ask to he made a parl of the record, sir. The CIIAIItMAN. YQ8.
    Mfr.

    ltIIt.

    nmiami

    is

    DOUBLE TAXATION CONVENTION$


    FAVORS EXTENDINO CONVENTION TO TERRITORIES

    49

    prospective. It is the Ist day of January following the date on which th0 184 act is 1done, both in the Unit4,d States and in the particular
    territory, to put the extension into effect.

    experts that it is easy for the committee to separate the two problems procedurally. I would Ake to point out that the effective date of the extension is So that if this committee and the Senate act this year, and all other

    extension. The extension has been under negotiation since 1949. It has been officially requested lby the British (lovernuieent. Both the Treasury and the State D)eparttnients have recomniended it favorably, and th&-President lhts submitted it to the Senato. There is a procedural tie-up between the proposed extension and the royalty convention this comnnittee has been considering this morning, but only at procedural tie. And I understand front technical

    Mr. ]tAUM. The American Metal Climax Co. strongly favors the

    nIeceu.y steps are taken, the extension cones into effect January 1, 1959. If, for any reason this coninitteo should put it over until next year, the earliest it could comne into effect would be January 1, 1960. I understand that there is no opposition on the merits to this particular extension. As I say, the executive department has approved it. The British Government has requested it.. Mr. Stain, this morning, reconimended it. And I see no reason to postpone it. It has been under consideration since 1949.
    ROYALTY PROBLEM AND EXTHNSION AHE INDEPENDENT IS8UE8

    up affiranatively, and act. affirmnatively on the proposed extension-and of course I hope act favorably to the proposed extension, at this osesion of Congress. At the risk of repeating&within mny 5 niinutes, the effective date of the royalty convention is january I, 1950, regardloss of when this coninittee would act on it. The effective date of the extension depends on when the conmnittoe acts. And if the coinInittee acts this year, it might be January 1, 1959. If it doesn't act this year, it might be January 1900. The royalty issue and the extension present completely independent substantive issues. There is a procedural tioup which I am told can be separated very easily by the conmmittee simply making a resorvation in adopting" or approvhig the extension that references to thxe royalty protocol be eliminated. And I ame told, by the technical exports that presents no problems. (288h~)
    7800 o--42--vol. 2---88

    I would like to make eninently clear that I am taking no position on the royalty issue whatsoever. But the royalty issue and the extenion have presented completely different and dependent substantive iuues. It is true that the extension would extendftho royalty part of the treaty also if the royalty art were approved. But there are many, many, other provisionR in the treaty which would be affected by the extension. And the question of extension, which would prompt foreign investment in the various territories, presents a completely and different independent issue front the royalty issue. My request to this committoo is that regardless of what it does on the royalty issue whether it approves the protocol, whether it disapproves iti, whether it lets it, lie over-whatever it does-that it take

    50

    DOUBLE TAXATION CONVENTIONS

    The effective (late, the difterences lin substantive issues, the fact that. to my knowledge no one, ineltding the executive branch of the of the Foreign Ta' Council or any other group that opposes this extension. I think they all favorably support it, and it is extremely important, Mr. Chairmanf, that the committee take action this year. This has been pending now-the negotiations on an informal level have been going on since 1949. And 1 respectfully request that the committee take specific and favorable action at this session of Congress. I know that you have been very busy and I appreciate the few minutes you have afforded me, sir. The CHAIItMAN. I appreciate the way you have packed a lot of information into a very short time. Mr. RAUM. If I can answer any question, I would be glad to do so. The CHAIRMAN. Thank you. (The statement referred to is as follows:)
    STATEMENT Or LEONARD HAUM

    Government, taxpaye's-- don't even know in this case of one member

    Mr. Chairman and members of tle committee, iny name is oIA-onlrd Raum. I am a partner in the law firm of Wenchel, Shuhuanl & Manning, of Washington, D. C. I appear hero on behalf of American Metal Climuax, Inc. in connection with the proposed extension to certain British territories of the operation of the United States-United Kingdom tax convention on Income. The America Metal Climax Co. strongly favors the prompt extension of the convention.
    BRITISfH HAVE FAVORED EXTENSION SINCE 1949

    Article XXII of the convention provides for the extension of the operation of the convention to any or all territories at the request of either party to the convention when accepte(I by the other party. As stated in the report to the Presidentt by the Acting Secretary of State, under Ante of January 2:3, 1958, "Britis aut hori ties Indicated informally as long ago as 1949 that there was a desire to give this Government notification for extending the operation of thle convention to certain named British overseas areas." [Emiphasis supplied.] As the Acting Secretary. of State further pointed out in his report, a great deal of technical study and work had to be done in' the United States Government, and the British Govern. ment accbrdingly held'up its official request to the United States authorities to extend the convention to certain British territories. This necessary work was accomplished on an informal level, extending over a period of many years, between representatives of the two countries. As a result of this informal work the British Government, on August 19, 1957, officially requested the extension of the United
    States-United Kiigdomn convention to certain British territories. The Pre.sident, "With the view to receiving the approval of thie Senate", -ibmittedl the British request to the Senate under date of January 30, 1958. The President, in his message to the Senate, carefully stated that the proposed exteiIt is to be noted that the Acting Secretary of State in his report to the President

    sMon has,- the approval of both the Department of State and tho Department of the Treasurv. indicated that the Secretarv of the Treasurv blind called the attention of the State Department "to the widespread interest i6 the extension" of the convention to the British territories. We thus have a situation today where, after a period of many years of work on que.4 has ben made by the British Government, pursuant to a provision of the original United States-United Kingdom convention, that the operation of the convention be extended to certain British territories; the Treasury Department and the State Department of the United States have expressly approved the prolposd extension: and the President has submitted the proposal to the ,%eIate with a view toward favorable action oi the part of the Senate. We know of no opposition on the merits of tile propo.swd extension to its being approved by this committee and by the full Senate.

    the part of both the United States and the British Governments, an ofcial nM-

    (2886)

    DOUBLE TAXATION CONVENTIONS


    Po04Ct Of NCOURAOIINO PUNVATl INVESTMENT ABROAD

    51

    It U the definite policy of this Government to encourage private capital Investnent In forign countries. A major reason for the approval of the original United &tatc.Unitred Kingdom tax convention of 1945 was to facilitate investment in Great Britain. The extension of the convention to the British territories at this time would likewise facilitate private American investment in the British terri. tories. Section 902 (a) of the 1954 Internal Revenue Code (see. 131 (f) of the 1939 code), for example, in effect provides that where a United States corporation omw 10 percent or more of the voting stock of a foreign corporation from which it received dividends, the United States corporation is allowed a foreign tax credit with respect to the tax paid to the foreign country by the foreign corporation on the accumulated profits out of which the dividend are paid. For example, if an American corporation owns 10 percent or more of the voting stock in a foreign corlomration and receives dividends from that foreign corporation, the United States corporation will be entitled to a foreign tax credit as if It itself had paid the tax to the foreign country on the accumulated profits out of which the dividend ispaid. This provision of the code, however, only applies to American corporate stockholders who own 10 percent or more of the voting stock In the foreign corporation. It does not apply to individual stockholders or to corporate stockholders who own Iess than 10 percent of the voting stock In the foreign corporation. Article XIII of the United States-United Kingdom income tax convention of 1945 extended the above rule to all stockholders. Thus, where an American individual or corporation owns stock in a British corporation, regardless of the amount of stock owned, the American shareholder is entitled under the United 8tates-Utited Kingdom income tax convention to a foreign tax credit with respect to the dividends which he receives from the British corporation. The extension of the United States-United Kingdom convention to the British terri. tories, including the extension of this particular provision, clearly would assist greatly in promoting private American business Investments in the British territories.
    COPPER PRODITeON IN RHODEI3A

    The United States Government is vitally interested in copper production in Northern Rhodesia. We understand that the Government has recently loaned 5 million to Chibuluin Mines, Ltd., for the development of copper and cobalt production. Northern Rhodesia for the past 3 or 4 years has ranked either second or third fit the world Iln coplpr production. Two Northern Rhodesian companies alone, Rhodesian Selection Trust, Ltd. (through its ownership of approximately two-thirds of Mufulira Copper Mines, Ltd.) and Roan Antelope Copper Mines, Ltd., account for a )proximately 50 percent of the copper production in Northern Rhodesia. Both lIhodesiain 8election Trust, Ltd., and Roan Antelope Copper Mines, Ltd., are listed and are actively traded on the New York Stock Exchange. In the month of May 1958 for example, 726 000 shares of Rhodesian Selection Trust and 102,000 shares of Roan Antelope Mines were so traded. On a recent. date in 1958 there were approximately 10,100 American stockholders (not including, American Metal Climax, Inc., which owns approximately A1 percent of the tock of llhodesian Selection Trust, Ltd.) who owned stock "in R1hodesian Selection Trust amounting to approximately 15 percent of the total outstanding stock of that company. Likewise, there were approximately 3,300 American stockholders (not including Anmrican Metal Climax, Inc., which owns approximately 33 percent of the stock of Roan Antelope Copper Mines) who owned stock In"Roan Antelope Coplwr Mines, Ltd., amounting to approximately 12 peArcent of the total outstanding stock in that company. These stockholders are individuals, investment trusts, etc. The extension of the convention to tle British territories will result in these stockholders Ileing allowed the nppro rate foreign tax credit with respect to the dividends which they receive front Ahodesian election Trust, Ltd., and eoan Antelope Copper Mines, Ltd. It is to be noted that American Metal Cllimax, Inc., will not receive any tax benefit in this respect from the, extension of thll! convenltion since as a corltorate stockholder owning more than 10 percent of the voting stock of both lthodeshan election Trust, Ltd., andl Roan Antelope Cojpler Mines, Ltd., it already is entitled under section 902 of the Internal Revenue (Codeof 1954 to a foreign tax credit with respect, to tlhe dividends which it receives from these two eorplorations. American Metal Clinax, Inc., however, is interested in encouraging Anieriean investn,,nt in Northern ]1hodesia. The extension of the United States-United Kingdom tax convention to the
    British territories will encourage substantial further investment in Northern

    (2887)

    52

    DOUBLE TAXATION CONVENTIONS

    Rhodesia, as well as In other British territories, at a time when the interest of the United States in such investment is amply demonstrated by the above IOU of 5 million by the United States Government for the development of the Chibuluma Mines. The Secretary of State in his report to the President, dated April 16, 1945, in connection with the original United States-United Kingdom convention of 1_94, commented on the anticipated extension of the convention to the British coloniw or other territories. The Secretary stated that such extension "it is expected, will have the effect of providing a solution to problem In the field of Income taxation which may exist between the United States and such colonies or other territories and of elimulating the economic lies between the United States and aMd area8" [Emphasis supplied.) PROMPT" COMMITBM ACION URGED We respectfully request that the committee take definite action and approve the proposed extension at this session of Congress. It is to be specifically noted that under the terms of the proposed extension the effective date with respect to the United States tax, of the extension of the United States4United Kingdom convention in connection with any particular British territory is the 1st day of January following the date on which the last act necessary to put the extension into effect is taken In the United States and in that British territory. Thus, if the Senate gives its approval at this session of Congress and the United States Government at some time during the calendar year 1958 accepts the British request to extend the operation of the convention, and if the Government of a certain British possession likewise takes whatever final steps are necessary during 1958, then the operation of the convention In connection with that particular territory will be effective on January 1, 1959, with respect to United Btats taxes. If, however, this committee or any reason should not take favorable action at this session of Congress, but for example should let the matter lie over until next year, the extension could not become effective until January 1, 1960, at the earliest. Many American investors would be affected by the prompt extension which would encourage private investment in the British territories. These investors have waited patiently for many years while the necessary studies and negotiations were taking place. There would seem to be no reason, fiscal or otherwise, for this committee or the Senate to fail to take specific and favorable action on the extension at this session of Congress.
    PENDING SUPPLUMUNTARY PROTOCOL

    There Is likewise pending before this committee a supplementary protoc which would amend the United States-United Kingdom income tax convention of 1945 with respect to the taxation of royalties and the foreign tax credit in connection with such royalties. The request for the extension of the convention to the British territories and the supplementary protocol on royalties present completely separate and independent substantive issues. Each of these subsantive Issues should be decided on its own merits and without regard to what action is taken on the other Issue. The request for the extension of the convention to Ut British territories and the supplementary protocol on royalties only have a pmcedural relationship. The request for extension was submitted after the sup*le" mentary protocol was signed and accordingly refers to the original 1945 convention as modified by the supplementary protocol on royalties. It has come to our attention that there may be some opposition to the approval of the supplementary protocol with respect to the taxation of ryalties. This supplementary protocol on royalties may be approved may be disapproved, or may be allowed to lie over until the next Congress. We take no position, and make no recommendation, as to what this committee or the Senate should do with the respect to_ supplementary protocol dealing with royalties. Our only position is that whatever action is taken with respect to the royalty issue should have DO effect on the extension of the convention to the British territories. There Is nothing In common, fiscal or otherwise, except a procedural relationship, between the royalty issue and the proposed extension.

    (2888)

    DOUBLE TAXATION CONVENTIONS Of


    EFFECTIVE DATE OP EXTENSION DEPENDS UPON WHEN ACTION 15 TAKEN

    53

    It is to be noted that the supplementary protocol on royalties specifically is made applicable, as regards United States tax, to taxable years beginning on or after January 1, 1950. The effective ditte of the supplementary protocol on royalties thus does not depend on when the protocol is ratified. As pointed out above however, tioe effective date of the proposed extension of the convention does depend on when the request for extension is accepted by the United States, and a delay in action by this committee or the Senate necessarily would postpone the effective date of the extension. In view of this difference in effective dates and in further consideration of the fact that the extension and the royalty issues present completely different and independent substantive questions, this committee and the Senate should take affirmative and favorable action on the pro. posed extension at this session of Congress, regardless of what action is taken or Isnot taken with respect to the supplementary protocol on royalties and regardless of any fiscal or other problems which might result from the royalty issue. Failure to take favorable action on the proposed extension at this session of Congress would discourage American private Investments in the British territories and would adversely affect a substantial number of American taxpayers who have no interest in the royalty issue or its ultimate resolution. We have been informed by technical experts that there would be no problem as a matter of procedure in separating the request for extension and the supple. mentary protocol on royalties. We understand, for example that the Senate could agree to the requested extension of the convention with the reservation that the reference to the supplementary protocol on royalties be eliminated. I wish to thank the committee for the opportunity to appear before it on this important issue, and will be happy to answer any questions which the committee may have.

    The CHAIRMAN. This meeting will stand adjourned until 3 o'clock this afternoon, when we will meet in executive session. (Whereupon, at 12:05 p. m., the hearing was recessed, to reconvene m executive session at 3 p. m., on the same day.)

    (2889)

    Senate Committee Report


    August 7, 1058 Executive Report No. 2 85th Congress, 2d Session Senate Foreign Relations Committee

    (2891)
    I~'.

    N
    4)

    t A

    A
    4

    Om

    td CON ""On ,'ssion

    SENATE

    I Exzovu2Rurr. I No.

    TAX

    PI'OTOCOL WITH UNITl

    ) KINGDOM

    TiiUR$LDAV, AI'(IIST 7, 1958.- -)rderd to be printed

    Mr. (IIm.MN,

    froit tle ('oinintifte on Foreign Rtelations, sublmlitt d

    tle following

    REPORT
    [To arcecomp)any FEx. A, 85th C(ong.,

    2d wss..

    tion of fiscal evasion with respect to taxes on income, as modified by supplementary protocols of Juno 6, 1940, May 25, 1964, and August 19, 1957.
    1. PRtoVISIONS OP THEE PROToCoL

    of Great Britain and Northern Ireland with a view to extending to certain British overseas territories the application of the convention of April 16, 1945, for the avoidance of double taxation and the preven-

    blicone, signed at Washington on April 101, 1945, as mnodifed by 0te supplelnentary protocol signed at, Washington on June (1,1946, and the stipplenmentary protocol signed at Was hington on Mayl256 1954. The committee also recommends that Clie Senate withdraw the reservatioii contained in the resolution, agreed to July 9, 1958, advising and consenting to the ratification of Executive C, 85th Congress 21 ssion, a not,ication given by the Government of (1.e United iinglom

    of, Exeeti' e A, 85lth Congress, 2d session, a supplementary protocol between the United States of America and the United Kingdom of Great Britain and Northern Ireland, signed at Washington on Augu1st 19, 1957 amending the convention for the avoidance of double ta4xatioll 11nd41 thte prevention of fiscal evasion with respect to taxes on

    The ('onnittee on Foreign lIelattions has considered, and reeonm. mends that the Senate give its advice and consent. to Clie ratification

    licensor are exempt from British tax if the licensor does not have a permanent establishment in the United Kingdom. If he does have

    This protocol amends the basic tax convention with the United Kingdom so as to elihmiate double taxation on royalty payments. As the law now stands, British royalty payments to an American

    such an establishment, the royalty payments are taxed by the United Kingdom. However, because tIns tax is collected from the British ('2893)

    TAX PROTOCOL WITll

    UNITED KINGDOM

    licenstle, lite Aiiericati liiensor cannot. claim a foreign tax credit tates tax. nitus, trouble taxation occurs. against, his Iutnitet Asn tihe' 'onvent'iotn woilld IX'e mtodifiedl )y thli proposed protocol, it h.. wouhl extend tl Blritish Iax exetntiplioll to'rovyit 'japaid to an Amen. can firm which does have a permanent, estalishnet in the United Kingdomn, provided te royvltlies are unrelated to thiet b siness carried on Ib IlihtI easttalishlnent. In tcikss ill which tlie rovalties t,re related establiqiettnl, lit British tai to the uItsaintss of tlie pernaente exntnluttioil would not, app)l)ly, bitt the British tax could 1e itllett(led in the Amnerican foreign tax credit,. These provisionts are conlllet ely reciprocal in nature, and apply d equally to lritish firms receiving royalties front IUitte(l tattl licvlnsves. 2. IBACKOUOIIND AND (CoMMl'mrr* ACTION

    This protocol is dlesigned to correttilt inequity, which has developed regarding tlaxltlioll of royalties ltinlder the 1945 double tax convention with til.t IT il Kingdom. rife nature of that. inequity is outlined nit I.ve,. TI'he 8th congressss plmess(d it bill (ft. R. 76143) which wits also method-na designed to corrci't Ite iinequity, but by it dilletrenti h m-- ely, bhi exte'lding Ito firmns with ai pernuituentl, establishment. in the United kingtonlli it foreigll tax credit for British taxes itp)osed oil royally jplitsVllHM 111td collected from the British firm )aying tlhe royaltiels. T his Will wats Iocket-vetoed by the President with the objection that it. "would give a windfall gihin to somne Antericat licensors" and lte thatt it. "wotid singh, t for special relief t small groupI of taxpaveti whose need for relief hts tIot, been theivonstratled." Whe residentnt recognized thie existence of (dollule tiltltion, blt,, lie Said, "the atiero. l)rialte waty to correct the stitlitiOll WoUlhd be 1nodifiCaltion of the Con1velntioll." 'The problem was therellpoil added to tile agenda of ditctS.qiotis which tie Treasury was con ducting with tile Writish. The petlltlig protocol restitted, anid wats sent to the Sentate by tile President in oJalnularv 1958. A bill (I1. It. 4952) similar to thal which the President vetoed pa1sse(l the Iloutse agalin in AtntIst, 1957, and was pending ill the etullatte Fillltatice COmmtnittee at, the time the ForeignRelatiolls Comuillte consithre(d thie protocol in ,tilly 195.8. At, thlat time the comltint tee heard not only tfie,Treasury D1)artment but all other interested parties who had asked to he heart). The committee felt that it should withhol aclt iont ihe protocol pending furt her congressional action oil osane situation, oIn the bill hecatse, although dlesigned to correct the the two are IncoInsistent. and action ot the protocol would have foreclose(d action oil the bill. On1 Auigust 01, the Foreign Relations Committee was notified that thie Fi0naivce Commit tee hIa cha onsidered adding the provisions of II. R. 4952 as all amtenIdment to another tax bill and had decided against doing so. Thereupon, on August. 7, the Foreign Relations eoninltitle recoonsidered the protocol and ordered it favorably reported t(o the
    Senate.

    A bill similar to II. It. 49-52 has been vetoed once. The commnittees hearings oil tile protocol contain clear testimony that the Treasury would strongly recotmmend a veto should a similar bill pass ongroes. (2894)

    TAX PROTOCOL WITH UNITED KINGDOM

    As at practical matter, therefore, tile protocol provides the only avenue t) relief in regard to thie double taxation of royalty payment in tlip United Kingdonm. Th0e .only alternative to tihe protocol is uilluinoiion of tlle priselit situation. Aside fromn this practical consideration, however, the Foreign Relations Comnittee is of the opinion that thie protocol itself is fair and equitable. ItU provides effective relief and fuirtther, it. provides that tlie revenue Ioms resulting from this relief will be shared by otih Hei Anerican ald British Treasuries. The committee therefore reconmmends that the Senate give its advice and consent to ratification.
    :3. RIE:LATIONSHIP TO 11I1TIBil OVEI1t8As TEhIRITOnRiS

    On July 9, 1958, the Senate gave its advice and consent to ratification of Ex'eutive C, 85th Congresm, 2d session, a notification given by the Government of Great Britain witli a view to extending to certain British overseam territories the application of the convention on taxes on inconuiE, as modified. This notification hlad been given by the British Ainlhaador, in accordinceo with the ternis of tile basic 1945 convention which provides that its application can be extended to the overseas territories of either party upon notification to the other party and acceptance by the other ])arty of the notification. The advice and consent of the Senate was required before the United States could accept the notification. In giving its advice and consent, however, tile Sonate did so sub. ject to the reservation that the application of the supplementary protocol of August 19, 1957, should not bo extended. The supplementary protocol of August 19, 1957, here referred to, is the same which the committee now recommends that the Senate approve. It was excluded from the earlier extension of the basic convention be. cause it lind not, at that time, been ratified by the United States but was still pending before the Senate. If the supplementary protocol is now to be ratified, then it should no longer he excluded from the extension of the basic convention. The committee, therefore recommends that, in giving its advice and consent to ratification of the protocol, the Senate also declare the above-mentioned reservation to be of no effect.

    (2895)

    isendate k floor Drebate and IAotion


    August 13, 1958 85th Congress, 2d Session

    104 Congrossional Record 17200-1726:3

    (2897)

    [P. 17260] TAX PROTOCOL WITH UNITED KINGDOM


    Mr. JOHNSON of Texas. Mr. President, I move that the Senate proceed to the consideration of executive A-85th Congress, 2d session-a tax protocol with the United Kingdom. The motion wits agreed to; and the Senate, as in Committee of the Whole, proceeded to consider the supplementary protocol (executive A, 85th ('ong., 2d sess.) between the United States of America and the Unite(l Kingdom of Great Britain and Northern Ireland, signed at Washington on August 19, 1957, amending the convention for the avoid(ico of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on A ril 16, 1945, as modified by the supplementary protocol signed at lashington on Juno 6, 1946, and the supplementary' protocol signed at Washington on May 25, 1954, which was read the second time, as follows: [Text of protocol] [P. 17261] Mr. GREEN. Mr. President, this protocol amends the 1945 tax convention with the United Kingdom so as to eliminate double taxation of royalty payments on patents, copyrights, trhdemarks, and things of that nature. As tihe convention now stands, these payments are taxed twice when they are paid by a United Kingdom licensee to an American licensor with a permanent establishment in the United Kingdom. In these cases, a Uni.ted Kingdom tax is collected from the licensee, and the Ainerican tax is collected from the licensor who is not given credit for the British tax paid by the licensee. The protocol would correct this situation by providing an exemption from British tax in cases in which the payments are not related to the business operations carried on by the licensor's permanent establishment in the United Kingdom. In cases in which the payments were ,ot exempt from the British tax, the protocol would make the American foreign tax credit available to the licensor. These provisions operate on a reciprocal basis. The Senate should -be aware, Mr. President, that objection has been made to this protocol by one--and only one-large American corporation which has a number of net royalty arrangements with British firms. Under these arrangements, the American corporation receives a fixed amount of royalties, after all British taxes have been paid by the licensees. The amount of the British tax, therefore, does not affect the net payment received by the American company. The particular corporation-and the only one-to which I refer appeared before the Foreign Relations Committee, and complained tI'at it would not receive any relief under the protocol. It preferred a legislative approach under which it would receive a retroactive wind(all going back to 1950. On the other hand, it made no showing that it would suffer disadvantage under the protocol. The Foreign Relations Committee was not persuaded by single objection; but I thought that in fairness I should call it to that atten. the

    (2899)

    tion of the Senate. At the same time, I point out that the protocol is strongly supported by the National Foreign Trade Council and, of course, by the Treasury and the Department of State. I urge the Senate to add its approval. ADDRESS BY THE PRESIDENT OF THE UNITED STATES BEFORE THE GENERAL ASSEMBLY OF THE UNITED NATIONS
    Mr. MoRsE. Mr. President, while the protocol between the United

    States and Great Britain is under debate, I wish to take only a few moments to comment on another matter. [P. 17262] TAX PROTOCOL WITH UNITED KINGDOM

    The Senate resumed the consideration of the supplementary pro. tocol (executive A, 85th Cong., 2d sess.) between the United States of America and the United Kingdom of Great Britain and Northern Ireland, signed at Washington on August 19, 1957, amending the con. vention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. signed at Washington on April 16, 1945, as modified by the supplementary protocol signed at Washington on June 6,1946, and the supplementary protocol signed at Washington on May 25, 1954. Mr. FREAR. Mr. President, I rise to support the approval by the Senate of the supplementary income tax protocol between the United States and the United Kingdom. This protocol will alleviate the present onerous double tax burden now imposed by both countries on royalties received from British licensees by American business concerns that happen to have permanent establishments in the United Kingdom. The protocol is a long-needed cure of the situation brought about by certain court decisions back in 1944 to the effect that the British tax imposed on royalties paid by British licensees is not allowable as a foreign tax credit to the American recipient. There is no doubt that if the protocol is ratified, there will no longer be any double taxation on royalty payments made by a licensee in I of the 2 countries to a licensor in the other. It. was suggested that the elimination of the double taxation of royalties from British licensees might better be effected through an amendment to the Internal Revenue Code. Such a legislative solution of the problem was contained in a bill, H.R. 7643, which passed both Houses of Congress in 1956, but which was vetoed by the President. A similar bill, H.R. 4952, has been passed by the House of Repre sentatives during this session of the Congress. The substance of this bill, in amendment form, is being taken to conference as a part of H.R. 8381, with the understanding that if the Treasury Department continues to oppose it, as has been the case in the past, the Senate conferees will not insist on its adoption. While I vigorously supported the former bill and can agree that in some respects such i legislative approach might have been preferable

    (2900)

    to the treaty approach represented by the protocol, I now believe that the protocol before us offers the only practical method of elimiating the double taxation of this royalty income, which must be done promptly. To be sure, there are significant differences between the protocol and H.R. 4952 in their effect on particular American taxpayers, but they both achieve the main objective of eliminating double taxation by, the two countries. The essential difference between the two is this: The protocol eliminates the British tax upon certain royalties which they now tax, and makes the foreign tax credit provisions of our law applicable with respect to the British tax on those royalties which would be continued to be taxable under British law. On the other hand, H.R. 4952 does not contemplate any change in the British taxation of royalties, but would allow the American taxpayer to credit any such British taxes against his United States tax. It is to, be noted that the present treaty between the two countries now requires the United Kingdom to exempt from its tax any royalties received by American [p. 17268. taxpayers who have no permanent establishment in the United Kingdom. Thus, the protocol represents a mere extension of a principle already incorporated in the treaty between the two countries, as well as in many other treaties between the United States and other foreign countries. Likewise, the provision allowing the American taxpayer to take a forei n tax credit for the British tax that will continue to be levied on royalties is altogether comparable to a provision in the present treaty which allows such a credit for the British tax imposed on dividends received by American taxpayers. I appreciate that in the case of American business concerns which have entered into so-called net royalty agreements with British licensees, the protocol will not be helpful, whereas H.R. 4952 would be. I have considerable sympathy for them. However, I firmly believe that it is desirable to have the double taxation problem cured in the manner set forth in the protocol, whether or not the amendment is agreed upon by the conferees. I may also add, as the Treasury Department has pointed out, that the solution presented by the protocol should be considerably less costly to the United States Treasury than would the solution embodied inH.R. 4952. In any event, the protocol will clearly remove the discriminatory tax burden on much, if not all, of royalties paid by British licensees to American concerns; and I, therefore, urge that the Senate consent to its ratification. The PRESIDING OFFICER. If there be no objection, the protocol will be considered as having passed through its several parliamentary stages up to the point of the consideration of the resolution of ratification, which the clerk will read. The legislative clerk read'as follows:
    and consent to the ratification of executive A, 85th Congress, 2d session, ASupplementary Protocol Between the United States of America and the Kingdom of Great Britain and Northern Ireland, signed at Washington on August 19 1957; and that the reservation contained in the resolution of ratification of executive C,85th Congress, 2d session, agreed to July 9, 1958, shall be considered U being deleted and of no effect.
    advise

    Reolved (two-third&of the Senators present concurring therein), That the Senate

    78095 0-U2--ol. 2-89

    (2901)

    Mr. JOHNSON of Texas. Mr. President, I ask for the yeas and nays on the question of the Senate's advice and consent to the resolu. tion of ratification. The yens and nays were ordered. The PRESIDING OFFICER. The question now is, Will the Senate advise and consent to the resolution of ratification? On this question, the yeas and nays have been ordered, and the clerk will canl the roll. The legislative clerk called the roll. Mr. XMANSFIELD. I announce that the Senator from Missouri
    [Mr. HEN.NINos] and the Senator front Florida [Mr. HOLLAND] are
    absent on official business. The Senator front Ohio [M[r. LAUSCHE] is absent attending a funeral.

    Missouri [Mr. HENNEX.os, the Senator front Florida fMr. HOLLANXD, and the Senator from Ohio [Mr. LAUSCHE] would each vote "yea." Mr. KNOWLAND. I announce that the Senator from "Illinois [Mr. DInKSEN] is absent by leave of the Senate to attend the funeral services of Congressman McVey and, if present and voting, would vote "yea.") The Senator front Maine [Mr. PAYNE] is necessarily absent and, if present and voting, would vote "yea." The Senator from Vermont [11r. FLANDERS] is absent because of illness in his family, and if present and voting, would vote "yea." The yeas and nays resulted-yeas 90, nays 0, as follows: YEAS-90
    Aiken
    Allott Anderson Barrett Beall Bennett Bible Bricker Bridges Bush Butler Goldwater Green Hayden Hckenlooper Hill Hoblitzell Hruska Ives Jackson Javits Jenner Johnson, Tex. Johnston, S.C. Jordan Kefauver Kennedy Knowland Kuchel Langer Long Magnuson Malone Mansfield Martin, Iowa Martin, Pa. McClellan Monroney Morse Morton Mundt Murray Neuberger O'Mahoney Pastore Potter Proxmire Revercomb Robertson Russell Saltonstall Schoeppel Smathers Smith, Maine Smith, N.J. Sparkman Stennis ymington Talmadge Thurmond

    I further announce that if present and voting, the Senator from

    Gore

    Humphrey

    Byrd Capehart

    Purtell

    Carlson Carroll Case, N.J. Case, S. Dak. Chavez Church Clark Curtis Douglas

    Kerr

    Cooper Cotton

    Eastland Ellender Ervin Frear Fulbright

    Dworshak

    Thve

    Witkins Wiley Williams

    McNamara

    Yarborough Young

    (2902)

    NAY"-NOT VOTING-6
    Fenders

    Dirksen

    Henningp Holland

    Lausche Payne

    The PRESIDING OFFICERS. Two-thirds of the Senators present having voted in the affirmative, the resolution of ratification is agreed t0. Without objection, the President of the United States will be immediately notified that the resolution of ratification has been agreed to.

    (2908)

    PresidentialProclamation (Including Official Text of Protocol)


    [Reprint of TIAS 41241

    (2905)

    TlWilTIESI AND OTHIEI

    INTERN.NTIONAU.

    ACTS MICIIENS .12.1

    I114I4S Oll Incl(,OmleC*

    Sulllbemenlary Proytovol Iht, ween the Ilm-rihlm STATES or ASIMIA l,lin,ad NoliTIIEIN IREL..ANDl

    Illt

    UNITI,3) KINGIH)RM OF (t1II'lATr 1111TAIN ANDI

    Amending convention n of April 16, 19415, as Modiiled 1by Supplementary Protocols of June 6, 19416, iandt May 25, 195.4

    SilliieI tit Walihilgloll Aulgust. 1|), 1957

    S
    II

    (2907)

    DEPARTMENT OF STATE Literal print]

    (2908)

    UNITED KINGDOM
    Double Taxation: Income
    Supplementary protocol amending the convention of April 16, 1945, as modified by the supplementary protocols of June 6, 1946, and May 25, 1954. Signed at Washington August 19, 1957; Ratification adtisod by the Senate of the United States of America Augs, t 13, 1958; . Ratified by the President of the United States of Amemca August 22, 1958; Ratified by the United Kingdom of Great Britain and Northern Ireland September 29,1958; Ratfiwations arcmangedat London October 15, 1958; Proclaimed by the President of the United State of America October 24, 1958; Entered inso orce October 15, 1958. BY TIE PUSIDENT OF THE UNITED STATES oF AMERICA A PROCLAMATION WHERE:AS supplementary protocol between the United States of America and the United Kingdom of Great Britain and Northern Ireland amending the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on the 16th April 1945, as modi. fied by the supplementary protocol signed at Washington on the 6th Juno 1046 and the supplementary protocol signed at Washington on the 25th May 1954, was signed at Washington on A-ugust 19, 1057 by their respective Plenipotentiaries, the original of which protocol is word for word as follows:

    (1)

    T1A, 4M

    (2909)

    SiiI'JLiI;MINTARY PROTOCOL, IIETWEEN TIHE UNITED STATES OF AMERICA AND TIlE UNITED KINGDOM OF GREAT BRITAIN AND NOIITIIERIN I1-EIAND AMENI)ING THill,' CONVENTION FORTIlE AVOII)ANCE ()F 1)OJl3II, TAXATION AND THE, I'EEVENTION ()F FISCAl. EVASION WITI ItESI',ECT TO TAXE'S ON IN. COME. SIGNIEl) AT WASIIIN(;TON ON TilE, 16'I'I APIIII, 1945, AS MOI)IFI:I) BY TIlE SUIPLIEME'NTAIIY PRO. TOCOI SIGNIND AT WASHINGTON ON Till 6TII JUNE 19,16 AND BY TH1E SIJPPIEMEI:NTARY PRO(TOCOL. SIGNED) AT WASIIINGTON ON TIllI' 25TII MAY 1954 The Oovernnent of the United States of Anierira and the (yveminent of the U1niled Kingdom of ]reat. Britain and Northern IrelanI,
    I)esiring to enm'ildle a further supj)ldenentary Prlotocol amedl.
    TPIAN 1I.q. 9AMt. 13".

    1. doMat.315. TIAH

    OVUT 37.

    lig the Convention for tlhe Avoidance of )ouble 'raxat iol ail the Prevention of Fiscal Evs.ion with respect to Taxes on Income, signed at Washington on the I ith April 194'5, as modified by (fie suI)l ementary Protocol signed at Washington on the tlth June s 19404 and by the supplementary Prototoi soignid at Washington on the 251th May 19A4, Have agreed as follows:
    JI AtTICh,

    Paragraphs (I) and (2) of Article VIII of thle Convention of Ihie 1U6t April 1945 for the Avoidance of Double Taxation and (ie lPrevention of Fiscal Evasion with respect to taxes on income are hereby amended to read as follows: "(I) Royalties and other amounts paid as consideration for the use of, or for the privilege of using, copyrights, patets8, designs, secret process and formulae, trade marks and other like property, and derived from sources within the United States by a resident of the United Kingdom who is subject to United Kingdom tax on such royalties or other amounts shall be exempt from United States tax (a) if such resi(elet is not engaged in trado or business in the IUnited States through a permnantent estahbilhinenit situated therein or (Ib) if such resident is so en-

    TiAB 412

    (2910)

    3
    ated with the business carried on through that permanent establishment. "(2) Royalties and other amounts paid as consideration for tile use, of, or for the privilege of using, copyrights, patents, designs, secret processes and formulae, trade marks and other like property, and derived from sources within the United Kingdom by a resident of the United States who is subject to United State tax oil such royalties or other amounts shall be exempt fron United Kingdom tax (a) if such resident is not engaged in trade or biusineas in the United Kingdom through a permanent establishment situated therein or (b) if such resident is so engaged, the royalties or other amounts are not directly associated with the businemA carried on through that permanent estabgaged,' the royalties or other amounts are not directly associ.

    lislhmnent." ARTICLE II
    Paraigraph (I) of Article XIII of the said Convention is hereby anIPIIlded to read as follows: "(I) Subject to Sections 901 to 905 of the United States Internal lievenue Code as iu elect onl the 1st day of January ow. 195, united Kingdom tax shall be allowed as a credit against ltiiledti tates tax. For this purpose 4 (a) the recipient of a dividend paid by a corporation which is a resident of the United Kingdom shall be deemed to have paid the United Kingdom tax appropriate to such dividend, and (h) the recipient of any royalty or other amount coming within the scope of Article VIII of the present Convention shall be deemed to have paid any United Kingdom

    dom income tax."

    tax legally deducted from tie royalty or other amount by the person by or through whom any payment thereof ismade, if the recipient of tie dividend or royalty or other amount, as the case may be, elects to Include in his gross income for the purposes of United States tax the amount of such United KingARTICLE III

    (I) This sipplementary Protocol shall be ratified and the instruinenut of ratification shall be exchanged at London as soon

    TUB 4M84

    (2911)

    4 (2) This supplementary Protocol shall enter into force upon the exchange of instruments of ratification and shall thereupon
    have effect
    -

    (a) In the United Kingdom: (i) as respects income tax and surtax for any year of assessment beginning on or after the 6th April 1950; (ii) as respects profits tax for any chargeable accounting period beginning on or after the 1st April 1956, and for the unexpired portion of any chargeable accounting period current at that date. (b) In the United States: As respects taxable years beginning on or after the hit January 1956. INWITSSs WHeREOF the undersigned, being authorized thereto
    by their respective Governments, have signed this supplementary

    Protocol and have affixed thereto their seals. DoNE in duplicate at Washington this nineteenth day of August, 1957.
    FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA: JOSi FOSTER DULLES FOR THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND: HAROLD CACCtA [SEAL)

    AND WHEREAS the Senate of the United States of America by their resolution of August 13, 1958, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid supplementary protocol of August 19, 1957; AND WHEREAS the aforesaid supplementary protocol of August 19, 1957 was duly ratified by the President of the United States of America on August 22, 1958, in pursuance of the aforesaid advice and consent of the Senate, and was duly ratified on the part of the United Kingdom of Great Britain and Northern Ireland; AND WHEREAS the respective instruments of ratification of the aforesaid supplementary protocol of August 19, 1957 were duly exchanged at London on October 15, 1958; TIAS 41M

    . (2912)

    5
    AND WHEREAS it is provided in Article III of the aforesaid supplementary protocol of August 19, 1957 that the protocol shall enter into force upon the exchange of instruments of ratification, with effect as specified therein; Now, THEREYORs, be it known that I, Dwight D. Eisenhower, Prcsidewit of the United States of America, do hereby proclaim and make public the aforesaid supplementary protocol of August 19, 1957 to the end that the said protocol and each and every article and clause thereof may be observed and fulfilled with good faith by the United States of America and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. IN TESTIMONY WHEREOF, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. DoxE at the city of Washington this twenty-fourth day of October in the year of our Lord one thousand nine IRALJ hundred fifty-eight and of the Independence of the United States of America the one hundred eighty-third. DWIGHT D EISENHOWER By the President: JoHm FOSTER DULLES

    Secretary of State

    TIAS 4124

    (2918)

    EXCHANGE OF NOTES DATED AUGUST 19, 1957t AND

    DECEMBER 3, 1958

    (2915)

    PresidentialMessage of Transmittal to Senate (Including Materials Enclosed Therewith)

    TG095 O-42--vol. 2-0

    ( (2917)

    85M CONOGFSS

    id Seaaion

    SENATE

    Exzcu'rive

    NOTIFICATION BY THE GOVERNMENT OF GREAT BRITAIN AND NORTHERN IRELAND WITH A VIEW TO EXTENDING TO CERTAIN BRITISH OVERSEAS TERRITORIES THE APPLICATION OF THE CONVENTION ON TAXES ON INCOME, AS MODIFIED, SIGNED ON APRIL 16, 1945

    MESSAGE
    PROM

    THE PRESIDENT OF THE UNITED STATES


    TRANSMITTINO

    A NOTIFICATION GIVEN BY THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND WITH

    AVIEW TO EXTENDING TO CERTAIN BRITISH OVERSEAS TERRITORIES THE APPLICATION OF TIlE CONVENTION OF APRIL 16,
    1945, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON

    INCOME, AS MODIFIED BY THE SUPPLEMENTARY PROTOCOLS


    OF JUNE 6, 1946, MAY 25. 1954, AND AUGUST 19, 1957

    JANUARY 30, 1958.-Notification was read the first time and the injunction of

    secrecy was removed therefrom. The notification, the President's message of transmittal, and all accompanying papers were referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate. Taz WRTE Housz, January 80, 1958. To the Senate of the United States: With a view to receiving the approval of the Senate, if the Senate

    Government of the United Kingdom of Great Britain and Northern Ireland with a view to extending to certain British overseas territories the application of the convention of April 16, 1945, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, as modified by supplementary protocols of June 6, 1946, May 25, 1954, and August 19, 19957. The notification is embodied in a note dated August 19, 1957, from the British Ambassador in Washington to the Secretary of Statd, a
    (2919)

    approve thereof, I transmit herewith a notification given by the

    AVOIDANCE OF DOUBLE. TAXATION AND EVASION OF TAXES

    copy of which is transmitted herewith, together with a copy of the annex thereto. I transmit also for the information of the Senate the report by the Acting Secretary of State with respect to the proposed extension, which has the approval of the Department of State and the Depart.
    ment of the Treasury.

    DWIGHT D. EISE.NHOWER.

    (Enclosures: (1) Report by the Acting Secretary of State; (2)note, with enclosure, from the British Ambassador to the Secretary of State,
    August 19, 1957.)
    DEPARTMENT OF STATE,

    Washington, January *3, 1958. The PRESIDENT Th White Iouse: The undersigned, the Acting Secretary of State, has the honor to submit herewith, for transmission to the Senate to receive the approval of that body, a notification given by the Government of the United Kingdom of Great Britain and Northern Ireland with a view to ex. tending to certain British overseas territories the application of the convention of April 16, 1945, for the atvoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, as modified by supplementary protocols of June 6, 1946, May 25, 1954, . and August 19, 1957. The notification is embodiedin a note dated August 19, 1957, from the British Ambassador in Washington to the Secretary of State, a copy of which is enclosed, together with a copy of the annex thereto. Article XXII of the 1945 convention, as amended by the supplementary protocol of 1954, contains provisions in paragraph (1) whereby either party may, by a written notification to the other party through diplomatic channelsdeclare its desire that the operation of the present Convention, either in whole or in part or with such modifications as may be found necessary for special application in a particular case, shall extend to all or any of itsq territories for whose International relations it iq responsible, which impose taxes substantially similar in character to those which are the subject of the present Convention * *. .

    It is provided further in'the same paragraph that the proposed extension shall become effective when the party to which the notification is given accepts it. The provision reads:
    * * * When the other Contracting Party has, by a written communication through the diplomatic channel, signified to the first Contracting Party that such notification is accepted in respect of such territory or territories, the present Convention, in whole or in part or with such modifications as may be found neeessary for special application in a particular case, as specified in the notification, shall apply to the territory or territories named in the notification on and after the date or dates specified therein. None of the provisions of the present Convention shall apply to any such territory in the absence of such acceptance in respect of that territory.

    The notification by the Government of the United Kingdom proposing that the operation of the convention, as modified, be extended to the territories specified in the notification, was given in accordance with the procedure prescribed in article XXII, as amended. Before the proposal can be accepted by the Government of the United States it is necessary that the matter be submitted to the Senate for approval.

    (2920)

    AVOIDANCE OF DOUBLE TAXATION-'ANIJ IVABION OF TAXES

    When the 1945 convention was under consideration in the Senate Committee on Foreign Relations, the Acting Secretary of State sent to the chairman of that committee a letter dated June 27, 1945 (S. Ex. Rept. No. 6, 79th Cong., 1st seas., p. 2), in which, after referring to discussions before a subcommittee of that committee, it was stated:
    During those discussions a question was presented respecting the procedure to of the convention, under the provisions of article XXII thereof, to colonies, overseas territories, or other areas over which one of the contracting parties
    be followed by this Government in acceptin or giving a notification of extension

    . British authorities indicated informally as long ago as 1949 that there was a desire to give this Government a notification for extending the operation of the convention to certain named British overseas areas. Recognizing that this would entail a great deal of technical study by the tax authorities of this Government, including a study of the tax laws applicable in the various named territories, in order to determine the extent to which it would be feasible to extend the operation of the convention to such territories, the British authorities delayed the sending of the formal notification until the United States tax authorities had completed the necessary studies and had indicated that such a notification, when received, would be acceptable so far as technical and administrative aspects thereof are concerned. A draft of the note, with annex, which the British Government planned to send to this Government was formulated as a result of discussions between the interested authorities of the two Governments. The formal notification which has been received from the British Government is based upon that draft. The Secretary of the Treasury has informed the Secretary of State that the text thereof has the approval of the Department of the Treasury. It will be observed that the British Ambassador's note expresses the desire of the British Government-that the application of the Convention should be extended to the territories named in the Annex to this note, subject to the modifications and with effect from the dates specified therein. The annex to the note is divided into three parts. Paragraph I is a table listing the British territories to which the convention, as modified, would be extended, subject to the conditions set out in paragraphs II and III. It also specifies the taxes imposed in the respective territories to which the convention, as modified, shall apply and the date on which, as to each territory, the provisions shall be effective. Paragraph II of the annex indicates the extent to which the convention, as modified, shall be extended with respect to each of the territories mentioned in paragraph I. Paragraph III of the annex indicates certain necessary modifications in the convention, as modified, for the purpose of the proposed extension. The territories specified in paragraph I of the annex are Aden Antigua; Barbados; British Honduras; Cyprus; Dominica; Falkland Islands; Gambia; Grenada; Jamaica; Montserrat; Federation of Nigeria; Federation of Rhodesia and N asaland; St. Christopher, Nevis, and Anguilla: St. Lucia; St. Vincent; Seychelles; Tierra Leone; Trinidad and Wobago; and Virgin Islands. (2921)

    exercises authority. I am glad to Inform you that in connection with any such notification of extension of the convention, the Department of State will recommend to the President that the matter be submitted to the Senate for its advice and consent before any notification of extension -i accepted or given on behalf of the United States.

    AVOIDANCE OF DOUBLE TAXATION AND EVASION OF TAXES

    The dates set forth in column (3) of the tabulation refer to the respective dates of commencement of the year of assessment in each of the named territories. It is stipulated in subparagraph (b) of paragraph I1 of the annex that whenthe last of those measuresishogl hiaveobeen taken In the United States of America and in any territory named In' the above Table necessary to give the present extension the force of law in the United States of America and in such territory,
    respectively-t

    respect the extension shall have effect (1) in the United States, withthe ate to United States tax, on and after January 1 next following on which the last of those measures have been taken, and (2) in each of the territories, with respect to its tax, for the year of assessment beginning on the date specified opposite its name next following the date on which the last of those measures have been taken, and for subsequent years of assessment. The United States Government would inform the British Government when the last of the measures necessary have been taken in the United States. The British Govern. ment would inform the United States Government when the last of the measures necessary in the several named territories have been taken in the several named territories. Pursuant to paragraph III of the annex, if and when the proposed extension becomes effective the convention of 1945, as modified by the supplementary protocols of 1946, 1954, and 1957 would apply with certain exceptions, namely, (1) for the purposes of the extension to the Federation of Rhodesia and Nyasaland articles XIV (United States tax on rains from the sale or exchange of capital assets) and XVI (United -States tax on accumulated or undistributed earnings, profits, income, or surplus) shall be deemed to be deleted; and (2)for the purposes of the extension to the other territories named in the tabulation articles VII (taxation of interest on bonds securities notes debentures, or any other form of indebtedness), XIM , and XVI shad be deemed to be deleted. The Secretary of the Treasury in his communication to the Secrotary of State indicating approval of the text of the proposed British notifiation has called attention to the widespread interest in the extension of the operation of the 1945 convention, as modified, to the British territories. It is understood that the Department of the Treasury is prepared to make such further explanations as may be found desirable regarding the technical aspects and application o the proposed extension. Respectfully submitted. Acting Secretary. (Enclosure: Note, with enclosure, from the British Ambassador to the Secretary of State, August 19, 1957.)
    CHRISTIAN A. HERTER,

    (2922)

    AVOIDAXCD OF DOUDBI TAXATION AND EVABION OF TAXIS

    Washington, D. 0., August 19, 197.

    BRITISH EMBASSY,

    No. 654
    The Honorable JoHNr FOSTER DULLES, Secretary o State A. the United States, Wfthinoton, of 0.
    I have the honour, upon instructions of Her Majesty's Principal secretary of State for Foreign Affairs, to refer to the Convention be. tween the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed at Washington on the 16th of April, 1945, as modified by the Supplementary Protocols signed at Washington on the 0th of June, 1946, the 25th of May, 1954, and the 19th of August, 1957.
    SIR,

    mentioned Convention, as amended by the Supplementary Protocol of the 25th of May, 1954, Her Majesty's Government In the United Kingdom desire that the application of the Convention should be extended to the territories named in the Annex to this note, subject to the mnodifications and with effect from the dates specified therein. If the present notification is acceptable to the Government of the United States of America, I have the honour to request that you will be so good as to inform me accordingly and confirm that the desired application of the Convention to the territories in question shall take effect from the dates specified in the Annex to this Note. I avail myself of this opportunity to renew to you the assurance of my highest consideration.
    HAROLD CACCIA

    In accordance with the provisions of Article XXII of the above.

    (2928)

    AVOIDANCE Of DOUBLE TAXATION AND EVASION OF TAXES

    ANNEX
    I. TABLE or TERRITORIES TO WHICH THE CONVENTION OF THE 16TO APitita, 1045, FOR THE AvoiDANCE Or DouwLE TAXATION AND THE PRueVNTIoN OF FISCAL, EVASION WITH RESPECT To TAXeS ON INCOME Is To BE EXTENDED IN ACCORDANCE WITH ARTICLE XXII O0 THE SAID CONVENTION AS AMENDED, SUBJECT TO THIC CONDITIONS SET OUT IN PARAGRAPHS 1I AND III or Tm. AmNex Cb/uMN (1) MWums (5) CuN s0 Aden Income Tax lot April Antigua Income Tax lst January Barbados Income Tax let January British Honduras Income Tax lst January (including Surtax) Cyprus Income Tax 1et January Dominica Income Tax lot January Falkland Islands Income Tax let January Oambla Income Tax lt January Orenada Income Tax let January (including Surtax) Jamaica Income Tax lt January (including Surtax) Montserrat Income Tax lot January Nigeria Federation of Income Tax lot April Rhodesia and Nyasaland, Fed- Income Tax, Super Tax and 1st April eration of Undistributed Profits Tax St. Christopher, Nevis and An. Income Tax 1st January guilla St. Lucia Income Tax lt January St. Vincent Income Tax lst January Seychelles Income Tax lot. January Sierra Leone The Income Tax, the duty on let April profits charged under the Concessions Ordinance, 1931, the diamond Industry Profits Tax and the Iron Ore Concessions Tax Income Tax Irrnidad and Tobago lot January Virgin Islands Income Tax 1st January

    II. APPLICATION (a) The said Convention as modified shall apply in the case of each teortory mentioned in Column (1) of the above Table, (1) as if the Contracting Parties were the Government of the United States of America and the Government of that territory; those mentioned opposite the name of that territory in Column
    (2) as if the taxes concerned in the case of each territory were

    the application of Article XIII (1) of the Convention to the Federation of Rhodesia and Nyasaland the taxes concerned shall include the Territorial Surcharges charged in Northern Rhodesia, Nyasaland and Southern Rhodesia; (3) as if references to "the date of signature of the present Convention" were references to the date of the reply from the United States Government to the note from the United Kingdom Government of the 19th of August, 1957, relating hereto;
    (2924)

    (2) of the above Table; provided that for the purposes only of

    AVOIDANCE OF DOUBLE TAXATION AND EVASION OF TAXES

    (4) as if reference to the 6th day of April were references to the date opposite the name of each territory in Column (3) of the above Table. (b) When the last of those measures shall have been taken in the United States of America and in any territory named in the above Table necessary to give the present extension the force of law in the United States of America and in such territory, respectively, the present extension shall have effect, (1) in the United States of America as respects United States tax on and after the first day of January next following the date on which the last of those measures have been taken* and (2) in such territory as respects tax for the year of assessment beginning on the date specified opposite its name in Column (3) of the above Table, next following the date on which the last of those measures have been taken, and for subsequent years of amessment. (c) The Government of the United States of America shall inform the Government of the United Kingdom, in writing through the diplomatic channel, when the last of the measures necessary, as indicated in paragraph (b), have been taken in the Uhited States of America. The Government of the United Kingdom %hall inform the Government of the United States of America, in wrining through the diplomatic channel, when the last of the measures necessary, as indicated in paragraph (b), have been taken in all or any of the territories named in the above Table. III. MODIFICATIONS (a) The said Convention as modified shall apply with the exception that for the purposes of the extension to the Federation of Rhodesia and Nyasaland Articles XIV and XVI shall be (teemed to be deleted, and for the purposes of the extension to the other territories in the above Table Articles VII XIV and XVI shall be deemed to be deleted. (b) The words "1lmll be exempt from United Kingdom surtax" in Article VI (2)of the Convention shall be understood for the purposes of this extension, as though they read "shall not e liable to any tax in the territory other than tax imposed with respect to the profits or earnings of the corporation out of which such dividends are paid". (c) The words "shall be exempt from United Kingdom surtax" in Article IX (2)of the Convention shall be understood, for the purposes of this extension, as though they read "shall not be liable to tax in the territory at a rate in excess of the rate applicable to a company". (d) #or the purposes of the extension to the Federation of Rhodesia and Nyasaland the term "the laws of the United Kingdom" shall be
    understood as though it read "the laws of the Federation of Rhodesia

    and Nyasaland and-the laws of its constituent Territories".

    (2925)

    Senate Committee Hearings


    tuily I, 1958

    85th Congress, 2d Session


    Seat ("onuCmittee on Foreign Relations

    (NOTI.-TTles, hearings are reprinted above in Volume 2 beginning at. poge (2831).]

    (2927)

    I *1 4

    ci

    S ak'Committee Report
    July 7, 1958
    Executive Report No. I

    85th Congress, 2d Session Senate Foreign Relations Committee

    (2 9)

    CONOREsS Rd Seeion

    SENATE

    EXECouT

    No. 1

    REFr.

    DOUBLE TAX CONVENTIONS


    MONDAT, JULY 7, 1958.-Ordered to be printed

    MNr. GREuN, from the Committee on Foreign Relations, submitted the following

    REPORT
    [To scoompany Ex. N, 85th Cong., lot seas.; Ex. B, 85th Cong., 2d seas.; and

    Ex. C,85th Cong., 2d sess.]

    The Committee on Foreign Relations has had under consideration the conventions listed below and recommends that the Senate give its advice and consent to their ratification: 1. Taxation convention with Pakistan, signed at Washington July 1 1957 (Ex. N, 85th Cong., 1st sees.), with a reservation. 2. Notification by the Government of Great Britain and Northern Ireland with a view to extending to certain British overseas territories the application of the convention on taxes on income, as modified, signed on April 16, 1945 (notification received August 19, 1957, ERx. C 85th Cong., 2d sees.), with a reservation. 3. Convention with Belgium supplementing the convention of October 28, 1948, relating to double taxation, signed at Washington August 22, 1957 (Ex. B, 85th Cong., 2d seas.), without a reservation. In connection with this convention, the committee also recommends that the Senate give its advice and consent to acceptance by the United States of a notification given April 2 1954, by the Belgian Government with a view to extending to the belgian Congo and the Trust Territory of Ruanda-Urundi the operation of the 1948 convention with Belgium, as modified.
    1. MAIN PURPOSE oF THE CoNVrENIoNs

    The taxation convention with Pakistan is designed to avoid double taxation and to prevent fiscal evasion with respect to income taxes. As modified by the committee reservation it follows the general pattern of other double tax conventions of this type. The notification by the British Government when accepted by the United States, will extend the coverage of the 1945 convention to 20 British overseas territories. The committee reservation, which is

    (2981)

    DOUBLE TAX CONVENTION

    of a technical nature, deletes a reference to a protocol which would supplement the 1945 convention but which has not, been ratified. Ilte supplementary convention with Belgium makes certain changes which are necessary in the 1948 convention to facilitate the extension of that convention to the Belgian Congo and Ruanda-Urundi. The extension can then be accomplished bv United States acceptance (for which the advice and consent of the senate is necessary) of a notifi. cation of such extension given this Government by the Belgian Government in 1954. 2. COMMITTEE ACTION The convention with Pakistan was signed July 1, 1957, and sent. to the senatee July 12. It was the subject of committee hearings July 30 and August 9, 1957. The convention was considered in executive session August 13, after which further information was sought from the Departments of State and the Treasury. The notification friom the United Kingdonm and the supplementary convention with Belgium were received by the Senate January 30, 1958. These matters were the subject of hearings Lefore tlie commit tee July 1,after which the committee considered them inexecutive session and voted to report them favorably to the Senate. At the same session, the committee further considered the Pakistan conven. lion and likewise approved it with a reservation. 3. THE CONVENTION WITH PAKISTAN As noted above, the Pakistan convention, as modified by the committee reservations, follows generally the pattern established by earlier tax conventions which are now in force with Australia, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Honduras, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, South Africa and the United Kingdom. The convention eliminates double taxation by grating tax exemption in one country to income which would otherwise be subject to tax in both countries. It is reciprotdJ in nature, and covers income from businesses, investments, personal services, and pensions and annuities. Remittances or gants to students or trainees are also exempt, as is interest received by the State Bank of Pakistan from sources in the United States or by the Federal Reserve banks of the United States from sources in Pakistan. The convention also provides for administrative cooperation, including the exchange of information, between the tax authorities of the two countries in order to give effect to its provisions and to prevent tax evasion. All of these provisions have become standard in tax conventions and have been approved by the Senate many times. Committee consideration of the Pakistan convention hinged around the tax-sparing provisions of article XV (1), and it is to this section that the reservation applies:. The paragraph provides, in effect, that the United States will allow as a foreign tax credit Pakistani taxes which are waived. Under Pakistan law at the time the treaty was negotiated, earnings up to 5
    percent on certain types of invested capital were tax exempt for the

    first 5 years after the investment was made. Without a provision

    (2932)

    DOUBLE TAX CONVENTIONS

    such as that in article XV (I), United States tax laws would have effectively nullified this concession on the part of Pakistan in an effort to attract, foreign investment. This would have been so, because the U1nited States tax would have been increased to the extent that the Pakistan tax was reduced. Tax sparing, as incorporated in article' XV (1), is a now principle in U . nited States tax treaties. Its application requires carefu consideration on a country-by-country basis. During the period when the Pakistan convention was pending in the committee and before the committee came to any conclusion regarding the tax-sparing article, the Pakistan law providing a waiver of taxes expired. The question of tax sparing in this case, therefore, becomes moot.. The committee accordingly recommends a reservation excepting the second sentence of the first paragraph of article XV from the resolution of advice and consent. This is the sentence which provides the United States credit for taxes waived by Pakistan. Because Pakistan has terminated its tax waiver, this provision would be inoperative for the present and future even without a reservation. If approved, it would operate to the retroactive benefit, of two United States corporations. The principal argument for tax sparing is that it is a means of encouraging foreign investment, and this argument loses validity when made retroactively. In recommending a reservation to article XV (1), the committee wants to make it perfectly clear that this is without prejudice to future consideration of the matter in the event the Pakistani tax-waiver law is reenacted and the question again comes before the committee. There isno occasion for the Senate at this time to decide the question. The committee reserves complete freedom of decision for the future. 4. ExTENsIoN OF UNITED KINGDOM TAx CoNvENWIoN The 1948 double tax convention with the United Kingdom, as modified, provides that the convention may be extended to the overseas territories of either party by notification to the other party and acceptance by that party of tthe notification. On August. 19, 1957, in a note to the S.eretary of State, the British Am bassdor gave notification of the desire of his Government to extend the convention to certain British overseas territories. The Senate is now called upon to give its advice and consent to the President to accept the notification, and the committee recommends that this be done. The territories in question are Aden Antigua, Barbados, British Honduras Cyprus, Dominica, Falkland Islands, Gambia, Grenada, Jamaica M4ontserrat, Nigeria, Rhodesia and Nyasaland, St. Christopher, kevis and Anriilla, St. Lucia, St. Vincent, Seychelles, Sierra lAone, Trinidad and Tobago, and Virgin Islands. When action to give effect to the notification has been completed, the extension will be effective from the 1st of the following January in the United States and in all the territories except Aden, Nigeria, Rhodesia, and Nyasaland, and Sierra Leone where it will be effective from the 1st of the following April. For the territories other than Rhodesia and Nyasaland, the extension will not apply to taxation of interest on bonds, securities, notes, debentures, or oiher forms of indebtedness. For Rhodesia aiid Nyasaland the extension will not apply to United States taxes on gains from

    (2988)
    7Ism5 O-61t-vol. a---

    DOUBLE TAX CONVENTIONS

    the sale or exchange of capital assets or on aceminlated or midistrib. tited earnings, profits income, or urpJlus. Trhe convention will apply to the income tax in all of the territories. In addition, it will apply to the surtax in British Honduras, Grenada, and Jtnmaics; to the supertax and undistributled-prolits tax in Rhodesia and Nyasaland; and to the duty on profits, the diamond-industiy. profits tax, and the iron-ore-concessions tax in Sierra Leone. The notification fromn the British Governmentt expresses the desire of that Government to extend the 1945 convention its modified by the supplenmentary protocols of 1946, 1954, and 1957. The protocols of 1946 and 1954 have been ratified and are in effect as a part of the basic convention. The 1957 protocol. which deals with the taxation of royalties, is still pending. The committee feels it should not be fur. tiher considered until final action is taken on H. R. 4052, a bill dealing with the same subject matter which is now pending before the Finance Committee. ('onsequently, the extension of the 1945 convention with the traited Kingdom should inchide only tlhe 1946 and 1954 proto. cols and should exchltue the 1957 protocol. This wotihl ho accom. polished Iby the reservation proposed by the committee.
    5. SUPPLEMENTARY CONVENTION WiTII

    Bt EOitiM

    This convention is designed to remove certain difficulties in the way of extension of the 1948 convention with Belgium to the Belgian Congo atnd to the Trust Territory of ltuanda-Urundi. The 1948 convention with Belgiumn, like the 1945 convention with the United Kingdoim, discusis( above, provides that it may be extended to the overseas territories of either party by notification to the other party and acceptance by the other part of that notification. The Belgian Government gave stuch notification ini 1954. The pending conventiont has been negotiated since that time in order to modify the 1948 convention in ways to make it acceptable as applied to the Congo and Ruanda-Urundi. TRe following changes are made in the 1948 convention: The definition of "Belgian enterprise" is extended to includeany corlmration organized or created under the laws of Belgium or of the Belgian Congo and subject to tax under the Belgian fiscal law of June 21, 1927.

    lit the 1948 convention, the definition is limited to-a citizen or resident of Belgiun or byv a corporation or other Juridical person created or organized in Belgiutm or under the laws of Belgium.

    an industrial or comnmreial enterprise or undertaking carried on in Bolg am by

    The 1948 convention provides, in article XXII (2), that extensions to overseas territories will be effective on the 1st of January following acceptance of the notification of extension. This is changed, in article HI of the pending supplementary convention, to the st of January immediately preceding acceptance of the notification so far -as thle Congo and Ruanda-Urutidi are concerned.. It is further provided, in article TV of the pending supplementary convention, that for the purposes of the 1948 convention, the term

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    DOUBLE TAX CONVENTIONS

    "overseas territories" applies to any such territory for the foreign relations of which either contracting state is responsible. This interpretation is necessary to make it possible to extend the 1948 convention to Ruanda-Urundi, which Belgium administers under a United Nations trusteeship agreement and which is not, strictly speaking, a Belgian territory. Finally, article II of the pending convention, when taken in con. junction with the existing convention will provide a 15-percent tax inthe Congo and Ruanda-Urundi on tile one hand, and in the United States on the other hand, on dividends from, sources within one area paid to a resident of the other. In the case of the Congo and RuandaUrundi the present tax rate is 15 percent and will be frozen at that level. In the case of the United States the present rate of 30 percent will be reduced to 15 percent. In order to extend the 1948 convention to the Congo and RuandaUrundi, it is necessary for the Senate to approve not only the supple. mentary cenivention but also acceptance by the President of the Belgian notification of 1954 informing the United States of Belgium's desire to extend the convention.
    6. CONcLUSION AND RECOMMENDATION

    The three international tax matters covered in this report are a part of the continuing effort of the United States to encourage private foreign investment and thereby promote economic development and world trade. Among the many ways in which this goal can be pursued, the elimination of double'taxation is among the more important. Tax treaties not only provide relief for American investment oversema; they also provide to foreign governments and territories an earnest of American good faith in our frequently expressed desire to encourage foreign investment. The instant treaties and modifications follow well-established practice. The committee recommends that the Senate give its advice and consent to ratification.

    (2935)

    Senate Floor Debate and Action


    1July 0, 1958 85sth Congress, 2d Session
    104 Congressional Record 132:18-13244

    (2987)

    [P. 132381

    Executive N, 85th Congress, Ist session; and Executive B and Executive (C,85th Congress, 2d session -be considered en bloc; that a yea-ald-nay vote be taken on the question of advising anid consenting to Executive N of the 85th Congress, Ist session, and that the resolutions, with the Accompanying reswrvations, advising and consenting to the ratification of tile other two conventions, be deemed to have been agreed to by the same vote. Theo PRESIDING OFFICER. Is there objection to the request of the Senator from Nevada? There being no objection, the Senate, as in ('ommittee of the Whole, proceeded to consider, en bloc, tile following conventions, which were severally read the second time: (Texts of conventions] [P. 81241J Mr. *-iANSFIELD. Mr. President, will the Senator yield? Mir. BIBLE. I yield to the distinguished Senator from Montana. Mr. ,MANSFI9ID. Do I correctly understand from the acting majority leader that the I vote will have the effect of 3 yea-and-nay votes so far as ihew executive agreements am concerned? Mr. BIBLE. The Senator from Montana is absolutely correct. Mr. lPrsident, I su ,get he absence of a quorum. The PRESIDING OFMk ER. The clerk will call the roll. The legislative clerk proceeded to call the roll. Mr. BIBLE. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded. The PRESIDING OFFICER. Without objection, it is so ordered. Mr. GREEN. Mr. President, the three tax conventions pending before the Senate can bo explained very briefly and disposd of en bloc. The first one is Executive N, the convention with Pakistan, which follows the samepgeneral pattern as 19 conventiotns with other countries to which the Untied States is a party mad which are designed to elim. inate double taxation mad to prevent fiscal evasion. This is done, on a recipro.al basis by Patting tax exemr-tion in onie country to income which would otherwise be subjec' %in both countries. Provision 6i also made for administrative co 'between the tax authorities in both countries. The Foreign Relations Committee. ,mmends a reservation to the portion of the Pakistan treaty under which a United States foreign tax credit would have been granted for Pakistan taxes which were waived. The Pakistan law which provided for the waiver of certain taxes has

    Mr. BIBlIE. Mr. President, I ask unanimous consent that Calendar No. 1,Calendar No. 2, and Calendar No. 3-being, respectively,

    Senators will be aware of the announceent to be made? 'Thie 'IIESIDING OFFICER. The Senate will be in order.

    DOUBLE TAX CONVENTIONS Mr. MANSFIELD. Mr. President, may we have order so that the

    (2039)

    expired, and consequently, the provision of the treaty based on that law would be inoperative even if ratified. The second convention is Executive B, which modifies tihe existing tax convention with Belgium and extends it to tile Belgium Conp and the Trust Territory of Ruanda-Urundi. Tile modification is designed solely to facilitate the extension and does not affect the basic terms of the convention. Finally, the third one is Executive C, which extends the existing tax committee recommends a reservation to make it clear that the exten. sion applies to the convention as it presently exists. Mr. President, the Foreign Relations Committee has held 2 days of hearings on the Pakistan convention and I (lay onl the other convene. tions. With the reservations which have been recommended by the committee, I know of no opposition to the conventions. Onl the con. trary, they have widespread support in the American business com. mulnit. They are also recommended by the State Department and k the Treasury Department and have been carefully analyzed by the staff of the Joint, Committee of the Congress onl Inuernal Revenue. I ask that the conventions be approved by the Senate. Mr. WILLIAMS. Mr. President, will tihe Senator yield for a question? Mr. GREEN. I yield. M.r. WIIIAMS. It. is my understanding that as the treaty with Pakistan was originally presented to the Senate, it provided that a foreign tax credit would be allowed to American companies doing business in that country as though they had been paid rather than allowing credit, on the basis of what tax actually was paid. Mr. (REEN. That is correct. Mr. WILLIAMS. Is that provision still in the treaty? Mr. GREEN. No; it. is not.. .Mr. WILLIAMS. Did the committee strike it out? Is there a reservation which would prohibit that.? Mr. GREEN. There is such it reservation. Mr. WILLIAMS. My reason for propounding the question is that the only way to strike it out is by way of a reservation. Mr. GRIEN. That is correct. Mr. MANSFIE[D. Mr. President, will the Senator yield? Mr. GREEN. I yield. Mr. MANSFIELD. Is it. not true that in connection with the consideration oftall three of these conventions the committee had the benefit of the advice and counsel of the chief of staff of tile Finance Committee, Mr. (Colin Stain of the Joint Committee on Internal Revenue Taxation. Mr. GREEN. That is correct. Mr. WILLIAMS. As the treaty was originally submitted, it would have estallished a credit in cases in whic the tax had not actually been paid, which would have been a new principle so far its our tax laws are concerned, and one which has never been approved by the congresss . ,Mr. MANSFIELD. The Senator is correct. original situation? Mr. MANSFIELD. The Senator is correct.
    convention with the United Kingdom to 20 British territories. The

    Mr. WILLIAMS. As I understand, the reservation restores the

    (2940)

    as follows:

    The PRESIDING OFFICER. If there be no objection, the conventions and notification will be considered as having passed through their various parliamentary stages to the point of the consideration of the resolutions of ratification. The resolutions of ratification will now be read for the information of the Senate. The legislative clerk read the respective resolutions of ratification,

    Resoltvd (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of Executive N, 85th Congress, lst session, a convention between the United States of America and Pakistan for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washlngton on July 1, 1957, subject to the reservation which shall be agreed to by the other high contracting party before ratifications are exchanged, that the second sentence of paragraph I of article XV shall not be ratified. Resolved (two4hirds of the Senators present concurring therein). That the Senate advise and consent to the ratification of Executive B, 85th Congress, 2d session, the convention between the United States of America and Belgium signed at Washington on Auglst 22, 1957 supplementing the convention of October 28, 1948, for the avoidance of double taxation and the prevention of fiscal evsilon with respect to taxes on income, as (p. 138431 modifi d by the supple. mentaty convention of September 9, 1952; and a notification given by the Belgian Government under article XXII of the convention of October 28, 1948, with a view to extending the operation of that convention, as modified, to the Belgian Congo and the Trust Territory of Ruanda-Urundi. Resolved (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of Executive C 85th Congress, 2d session, a notification given by the Government of the United Kingdom of Great Britain and Northern Ireland with a view to extending to certain British overseas territories the application of the convention of April 16, 1945 for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, as modified by supplementary protocols of June 6, 194, May 25, 1954, and August 19, 1957, subject to the reservation that the application of the supplementary protocol of August 19, 1957, shall not be extended.

    ordered on the question of agreeing to the resolutions of ratification,

    The PRESIDING OFFICER. The yeas and nays having been

    together with the reservations with respect to Executive N, 85th Congress, 1st session, and Executive C, 85th Congress, 2d session, the clerk will call the roll. The legislative clerk called the roll.
    EXECUTIVE N
    EXECUTIVE R

    EXECUTIVE 0

    together with the reservation: Mr. MANSFIELD. I announce that the Senator from Tennessee

    Yea-and-nay vote on resolution of ratification of Executive C,

    Mr. GORE],, the Senator from Missouri [Mr. HENNINGS), the Senator roni Minnesota [Mr. HuMPitREYJ, the Senator from Washington PMr. JACKSONh, the Senator from Massachusetts [Mr. KENNEDYJ, the senator from Washington [Mr. MAGNUSON], the Senator from Florida (Mr. SMATHERSJ, the Senator from Missouri [Mr. SYMINGTON], and the Senator from Texas [Mr. YARBORiOUoH] are absent on official

    business.

    (2941)

    Tennessee [Mr. GonEJ, the Senator from Missouri Mr. H ENNJosJ, tle Senator froin Minnesota [Mr. HUMPHtREY], tIe Senator from KENNE-DY], the Senator front Washington [Mr. MAGNUSON], the Senator front Florida [Mr. SMATHEIRS], the Senator front Missouri [Mr. SYMINOTON], and the Senator front Texas [Mr. YAnnonoVou]

    I further announce that, if present and voting, the Senator from


    JACKSON],

    Washington (Mr.

    the Senator front Massachusetts [Mr.

    would each vote "yea." Mr. DIRKSEN. I announce that the Senator from Kansas [Mr. SCeliOPPEr] is absent on official business, and, if present and voting,
    would vote "yea." The Senator front New York [Mr. IVEs], and the Senator from Indiana [Mr. JENNEu] are detained on official business, and, if present and voting, would each vote "yea." The yeas and nays resulted-yeas 84, nays 0, as follows: YEAS--84 Aiken AlIott Anderson Barrett Beall
    Bible
    Bennett Ervin Flanders Frear

    McNanmara
    Monroney

    Fulbright Goldwater

    Morton
    Murray Neuberger O'Mahoney Pastor Payne Potter Proxmire Purtell Revercomb Robertson Russell Saltonstall Smith, Maine Smith, N.J. Talmadge Thurmond
    Sparkman tennis Mundt

    Morse

    Green

    Bridges Bush Butler Byrd Capehart Carlson Carroll Case, N.J. Chavez Church
    Clark Cooper
    Cotfwn

    Bricker

    Case, S. Dak.

    Hill Hoblitsell Holland Hruska Javits Johnson, Tex. Johnston, S.C. Jordan Kefauver Kerr
    Kuchel Langer Lausche
    Knowland

    Hayden Hlickenlooper

    Eastland Ellender

    Curtis Dirksen Douglas l)worshak

    Long Malone Mansfield Martin, Iowa


    Martin Pa McClellan

    Thye Watkins
    Wiley Young

    Williams

    1P. 132441
    Gore Hennings Humphrey Ives

    NAYS-0
    NOT VOTING-12 Jackson Jenner Kennedy Magnuson Schoeppel Snrathers

    vamington Yaborough

    The PRESIDING OFFICER. Two-thirds of the Senators present concurring therein, the resolution of ratification of Executive C, together with the reservation, is agreed to. Without objection, the President of the United States will be immediately notified.

    (2942)

    Senate Committee Report


    Aipgust 7, 1958 Executive Report No. 2 85th Congress, 2d Session Senate Foreign Relations Committee [EDITOR'S NoTE.-The portion of this Committee Report which relates to Executive C, 851th Congress, 2d Session, is reprinted above, ii Volume 2 at page (2895), as the last four paragraphs in the Committee Report relating to the third supplementary protocol.]

    (294)

    Senate Floor Debate and Action


    August 13, 1%58 85th Congress, 2d Session 104 Congressional Record 17260-17263 [EDITOR'S NoTz.-The portion of the record of the Senate proceedings of Augumt 13, 1958, relating to Executive C, 85th Congress, 2d Session, is reprinted above, in Volume 2 at page (2901), with the materials relating to the third supplementary protocol and consists of the last clause of the resolution o ratification of Executive A, 85th Congress, 2d Session, which appears at 104 Congressional Record 17263.]

    (2945)

    Ofwial Text of Notes


    [Reprint of TIAS 4141J

    (2947)

    TIEATIES

    AND OTERl

    INTEBNATIONAL ACTM

    SE5IES 4141

    DOUBLE TAXATION
    Taxes on Income

    Agreement Between the


    UNITED STATES OF AMERICA

    and the UmTED KINGDOM Or


    GREAT BRITAIN AND NORTHERN hELAND

    Relating to Extension to Certain British

    Territories of the Application of Convention of April 16, 1945, as Modified

    Effected by Exchange d Notes Siged at Washlngton August 19, 1957, and December S, 1958

    (2949)

    DEPARTMENT OF STATE fLIteral print)

    (295o)

    UNITED KINGDOM
    Double Taxation: Inoome
    Admg ms dtuing so # amnion so rtain B ritishgerruori of the application qI dw n ion QI April 16, 1945, as modnied. e

    EIfead by wAuan## Qneos

    Sigrid at Washington Autpa 19, 1957, and Denber So 1958;

    Enwrd intoforce Docnber 3, 1958.


    The Itritihi Ambassador to the Secretary of .am BRITISH EUBAOSY,
    WAsmINGTSo,
    No. 04

    D.C.

    Augut Igo 1987

    SIR, I have the honour, upon instructions of Her Majesty's Principal Secretary of State for Foreign Affairs, to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed at Washington on the 16th of April, 1945, as modified by the Supplementary Protocols signed at Washington on the 6th of
    June, 1946, the 25th of May, 1954, and the 19th of August, 1057. In accordance with the provisions of Article XXII of the

    IAS 1 M t
    16 i3i,|i Irmtat. I, ;aV.Tr
    TIAS 41N4.

    above.mentioned Convention, as amended by the Supplementary Protocol of the 25th of May, 1984, Her Majesty's Government, in the United Kingdom desire that the application of the Convention should be extended to the territories named in the Annex to this
    note, subject to the modifications and with effect from the dates

    specifthd therein. If the present notification is acceptable to the Government of


    the United States of America, I have the honour to request that you will be so good as to inform me accordingly and confirm that the desired application of the Convention to the territories it) question shall take effect from the dates specified in the Annex to this Note.

    (1)

    TIAS 4141

    (29-1)

    I avail myself of this opportunity to renew to you the assurance


    of my highest consideration.
    HAROLD CACCJA,

    The Honorable
    JoHN FOSTzR DULLES,

    Seereanj of &o Of Me United tes, / WoAhngon, D.C.

    ANNEX I. TABLE OF TERRITORIES TO WHICH THE CONVENTION OF THE 16TH APRIL, 1945, FOR THE AVOIDANCE OF DOUBLE TAXATION AND TIlE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME IS TO BE EXTENDED IN ACCORDANCE WITH ARTICLE XXII OF THE SAID CONVENTION AS AMENDED, SUBJECT TO THE CONDITIONS SET OUT IN PARAGRAPHS II AND III OF THIS ANNEX
    Column (1) Column (t) Column (8)

    Aden Antigua Barbados British Honduras Cyprus Dominica Falkland Islande Gambia Grenada Jamaica Montserrat Nigeria, Federation of Rhodesia and Nyasaland, Federation of St. Christopher, Nevis and Anguilla
    St. Lucia

    Income Tax Income Tax Income Tax Income Tax (including Surtax) Income Tax Income Tax Income Tax Income Tax Income Tax (including Surtax) Income Tax (including Surtax) Income Tax Income Tax Income Tax, Super Tax and Undistributed Profits Tax Income Tax Income Tax Income Tax Income Tax

    Ist April lit January lst January lot January let January let January lot January lot January lst January let January let January lst April let April lst January lot January lst January let January

    St. Vincent Seychells

    TIAS 4141

    (2952)

    8
    Column (t) Sierra Leone Column (0) The Income Tax, the duty on profits charged under the Concemsons Ordinance, 1931, the diamond Industry Profits Tax and the Iron Ore Concessions Tax Income Tax Columns () lot April

    Trinidad and lst January Tobago Virgin Islands Income Tax let January 11. APPLICATION (a) The said Convention as modified shall apply In the case of each territory mentioned In Column (I) of the above Table, (1) As Ifthe Contracting Parties were the Government of the United States of America and the Government of that territory; (2) as Ifthe taxes concerned in the ease of each territory were those mentioned opposite the name of that territory In Column (2) of the above Table; provided that for the purposes only of the application of Article XII1 (1)of the Convention to the Feder. tion of Rhodesia and Nyasaland the taxes concerned shall In. elude the Territorial Surcharges charged In Northern Rhodesia, Nyasaland and Southern Rhodesia; (3) as If references to "the date of signature of the present Conven. tion" were references to the date of the reply from the United States Government to the note from the United Kingdom Government of the 19th of August, 1957, relating hereto; (4) as Ifreference to the 6th day of April were references to the date opposite the name of each territory In Column (3) of the above Table. (b) When the last of those measures shall have been taken in the United States of America and in any territory named In the above Table necessary to give the present extension the force of law in the United States of America and In such territory, respectively, the present extension shall have effect, (1) In the United States of America as respects United States tax on and after the first day of January next following the date on which the last of those measures have been taken; and (2) In such territory As respects tax for the year of assessment beginning on the date specified opposite its name In Column (3)of the obove Table, next following the date on which the last of those measures have been taken, and for subsequent years of Assessment. (o) The Government of the United States of America shall inform the Government of the United Kingdom, In writing through the diplomatic channel, when the last of the measures necessary, as
    Indicated in paragraph (b), have been taken In the United States

    of America. The Government of the United Kingdom shall Inform the Government of the United States of America, Inwriting through

    TrAS 4141

    (2953)

    4
    Pe. the diplomatic channel, when the last of the measures necessary, as Indicated in paragraph (b), have been taken In al&or any of the territories named in the above Table. I11.MODIFICATIONS (a)The said Convention a modified shall apply with the exception that for the purposes of the extension to the Federation of Rhodesia and Nyasaland Articles XIV and XVI shall be deemed to be deleted, and for the purposes of the extension to the other territories In the above Table Articles VII, XIV and XVI shall be deemed to he deleted. (b) The words "shall be exempt from United Kingdom surtax" In Article VI(2) of the Convention shall be understood, for the purposes of this extension, as though they read "shall not be liable to any tax in the territory other than tax imposed with respect to the profits or earn. Ingo of the corporation out of which such dividends are paid". (c) The words "shall be exempt from United Kingdom surtax" inArtlole IX(2) of the Convention shall be understood, for the purposes of this extension, as though they read "shall not be liable to tax in the terri. tory at a rate Inexcess of the rate applicable to a company". (d) For the purposes of the extension to the Federation of Rhodesia and Nyasaland the term "the laws of the United Kingdom" shall be understood as though It read "the laws of the Federation of Rhodesia and Nyasaland and the laws of Its constituent Territories".

    The Acting Secretary of State to the Briish Ambawidor


    DEPARTMENT OF STATE WASHMiOTON Excauj NcY:

    Dec 8 1858

    I have the honor to refer to Your Excellency's note No. 554 dated August 19, 1957, in which reference is made to the Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed at Washington on the 16th of Aprl 1945, as modified by the Supplementary Protocols signed at Washington on the 6th of June 1946, the 25th of May 1954, and the 19th of August 1057. In the above-mentioned note the Government of the United States of America is notified, in accordance with the provisions of Article XXII of the 1945 Convention, as amended by the Supplementary Protocol of 1954, of the desire of Her Majesty'i Government in the United Kingdom that the application of the

    Convention should be extended to the territories named in the Annex to the note, subject to the modifications and with effect from the dates specified therein.
    TIAB 4141

    (2954)

    a On July 9, 1958 the Senate of the United States of America approved the proposal for extending to the territories named in the above-mentioned note, on the terms and conditions set forth therein, the 1945 Convention as modified by theSupplementary Protocols of 1946, 1954, and 1957. The Supplementary Protocol of 1957 having been brought into force by the exchange of lnstru. mants of ratification on October 15, 1958, it isnow possible for the (loverument of the United States of America to take the action prescribed in Article XXII of the 1945 Convention, as amended, to give effect to the proposed extension. The Government of the United States of America hereby accept. the notification embodied in the above-mentioned note. Accord. ingly, pursuant to the aforesaid Article XXII as amended, the Convention, as modified by the Supplementary Protocols of 1946, 1954, and 1957, shall apply to the territories named in the Annex to the above-nmentioned note, subject to the modifications and with effect from the dates specified therein and subject to the completion of such legislative or other internal measures in the
    respective territories as will give effect to the extension in such
    territories.

    from the British Government, the following territoris on the repective dates indicated (all in 1958), took the last of the measures necessary on their part to give the extension the force of law In the respective territories: Aden, Dec. 29; Antigua, Dee. 23; Barbados, Dee. 24; British Honduras, Dee. 31; Dominlca, Dec. 22; Falkland Islands, Dec. 29; Gambfa, Dee. 31; Grenada, Dee. 27; Jamaica, Dec. 22; Rhodesia and Nyasaland, Federation of, Dec. 19; St. Christopher, Nevis and Angulla, Dee. 24; St Luci, Dec. 27; Seychellus Dec. 29; Sierra Leons, Dec. I; Trinidad and Tobago, Dee. 31; and Virgin Islands, Dec. 30.

    This acceptance by the Government of the United States of America is the last of the measures necessary on its part to give the extension the force of law in the United States of America. It isunderstood that the Government of the United Kingdom will inform the Government of the United States of America when the last of the measures necessary have been taken in all or any of the territories named in the aforesaid Annex to give the extension the force of law in the respective territories. ['I Accept, Excellency, the renewed assurances of my highest consideration. CnmSTzAr A. HRaTzR Mding 8er&wr" of&aS. His Excellency Sir HAROLD CAcCIA, K.O.M.O., K.C.V.O., Bi*ie Ambador. I According to communications received by the United States Government

    TUN4141

    (2955)

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