9,y.

r

LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS

PREPARED BY THE STAFF OF

THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION

IN FOUR VOLUMES

Volume 1 Income Tax Conventions SeMs. 1-11

J0 4&o
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For ft by Mhe Supefttadat of Dowents U.8 OovMent Pdalng O

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LETTER OF TRANSMITTAL
('oONORKa Ft0o THE UNITED STATES, #JOINT COMMITTEE ON INTERNAL REVENUE TAXATION,

1l'shington, D.C., December 1,1.961. chairman , Joint Committee on Internal Reenu Taxation W1aahington, .(h DEAR MR. MILLS: I am transmitting herewith a Legisative history of United States Tax Convention* prepared by the staff. It contains various types of legislative history materials relating to tax conventions to which the United States is a signatory. I believe this document will be useful to the committee ill connection with its work o United States tax law which may be affected by tax
BUR 101. WU 4

D. MILLS

conventions between the United States and other countries. Respectfully yours, COIN . STAM

CJIoi of w-A Joint Committee on Intertud Retenue Taxations

(I!I)

t

LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS
INTRODUCTION The Legislative History Of United States Tax Contve.io is a com. pilation of legislative history materials relating to the various tax conventions to which the United States is a signatory. Parts 1, 11, and III contain materials relating respectively, to income tax conventions, death tax conventions and gift tax conventions. The first section in each of these parts contains general information relating to conventions of the type covered by that part and includes tabulations of significant dates and reference material concerning those conventions, as well as certain Congressional materials relating generally to the United States tax treaty program. Each of the other sections in these three parts covers a country with which the United States has signed a tax convention, and includes the verbatim text of each (1) Presidential message of transmittal to the Senate, (2) Senate committee hearing (3) Senate committee executive report, (4) Senate floor debate, and (5) Presidential proclamation, pertaining to any convention or protocol signed by the United States and that country. It should be noted that the materials in these three parts include only those resulting from the processing of conventions by the Government of the United States. As a consequence, this document does not contain that portion of the legislative history of United States tax conventions resulting from the processing of those conventions by governments of the other countries involved. Part IV contains materials relating to work on model tax conventions done under the auspices of international organizations such as the League of Nations, the Organisation for European Economic Cooperation (OEEC) and the Organisation for Economic Cooperation and Development (OECD). These materials include the texts of, and commentaries on, model convention provisions, as well as other related materials. To facilitate citation to materials in documents reproduced in this compilation original pag numbers of those documents have been retained. fn the case of proceedings on the Senate floor, page numbers of the Congressional Record in which the proceedings were reported have been inserted in brackets at the appropriate places within the text of the material. The materials included in this document, although frequently needed for purposes of interpreting or tracing the development of provisions of tax conventions, have generally been difficult to obtain and in many cases have been unavailable. This document has been prepared to meet the need for a compilation of such materials.
(vi

This Legiakutive History is the second of two documents prepared by the Staff to facilitate understanding and analysis of treaty tax law of the United States. The first document, entitled A Topical Com. part on ol united Stares Income Taw Conrentions and published under date of November 1, 1960, may also be useful to those who have occasion to use this document.
Attorney to tas Joint Commiaee on Internal Revenue Taxation. WAsINGToN, December 1, 1961.
DALE W. WICKHAM

(VI)

LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS SUMMARY OF CONTENTS
VOLUME 1 PART I-INcoME TAX CONVuNTION8
Section Section Section Section Section
Pas

(3 1. General Information ..................................... 2. Australia-----------------------------------------(6 (15 3. Austria ............................................... 413 (239 5. Ceagida ................................................ 4. Belgium............................................... 5. Canada-------------------------------------......(413 (681 (741 (1275 (1357 (1437
(799

Section 6. Denmark .............................................. Section 7. Finland ................................................ Section 9. Germany -----------------------------------Section 10. Greece ............................................. Section 11. Hondura ............................................. Section 13. Section 14. Section 15. Section 16. Section 17. Section 18.
Section 8. France .................................................

1579 Ireland-----------------------------. .................. w...... 1631 Israel --------.............. 1651 Italy-......................-- ----------.............. ........ 172 Japan .. w ........ 188 Netherlands .............-............................. w...----------------2013 New Zealand------... 2067 7...... Section 19. Norway -----------------------Section 21. Section 22. Section 23. Section 24.

VOLUME 2 Section 12. India .................................

1503

Section 20. Pakistan..........

Section 25. United Kingdom. .........................

--- 2319 w ........ w...------------Sweden--. ..... 2381 Switzerland............ ................. 2457 Union of South Africa .................................. United Arab Republic. w-----------------------(241

............ .........

....... (2585

Section Section Section Section Section Section Section

VOLUME 3 PART I-DRATa TAX CONVANTIONS . Section 1. General Information-------.. Section 2. Australia ..........-..............................-

Section 10. Japan-.-.............................

3007 3. Belgium ..-......................................... 3045 4. Canada .............................................. (3257 5. Finland ............................................... 3309 6. France ...................-........................... a............. 3409 7. Greece ................................... 8. Ireland----------------------------------.3485 ... -3529 ;;." 9. Italy ........----------..--- ".'

(.-------------2961 2967

Section 11.

Section 12. Switserland ........................................... Section 13. Union of South Africa .................................. Section 14. United Kingdom ..................................
PAxT lll-Girr TAX CotvxNNTIONs

y--Norw ..............................................- 3687
3745 3791 3865

3587

SectIon 1. General Information ..................... . -(3955) Section 2. Australia--------------------------------(....3961) 3 Section 3. Japan ................................................
(VII)

VOLUME 4 PART IV-MoDmL TAX CONVENTIONS Section 1. League of Nations ..................................... 3999 Section 2. Organisation for European Econoinlo Corporation (OBEC).- (4441) Section 3. Organistion for Economic Corporation and Development (OECD) ............................................ (4703)

(vui)

I

PART I INCOME TAX CONVENTIONS

(1)

'I,

6.

,(8)

j
I

A

CONTENTS OF SECTION 1
Pon

. Tabulation of Data relating to United States Income Tax Conventions. (6) . Countries with which United States has Sined Income Tax Conven. tons Listed in order of Date of Si tnature of Basic Convention. .. (7) . Countries with which United States has Entered into Income Tax Conventions, Listed in order of Date of Entry Into Force of Basic Convention ...................................................... Legislation Directing President to Negotiate Tax Treaties and to Seek Compliance Therewith by other Countries ----------------------(9) . Hearings of February 28 and March 1, 1930, before House Ways and Means Committee, on H.R. 10165 (an unenacted bill proposing an alternative to tax treaties as a means for elimination of International double taxation) .............................................. (11)

(5)

1. Tabulation of data relating to United States income tax contentions (as of December 1, 1961)
(it Coruntry and agreement Date of signature
(31) (1)

(IS) Date of Senate cosnnittVe (O'suloliailttee) hearilgps

:.

Senate executive designation

Vate of. 110 Congresstonal Ikcord citation to, Senate receipt anti removal of injunction of secrecy

Dote Ind executive 4esign1t ion of Seusite comillce report

.7) Dt, Conrw, tssion. and Congrcmlonili Record i'itti n to &uate floor action

(8) Nature of Senate floor action Date of ratifletl ion by U.S. President

(10) Date of ritiflication by otbor country,"

(II) exclage of of radiflction

Date of

Aut~tr,;iia:

8a3.1c convention ...............

May 14, 19 .............

Austria: 1l3l9Cconvention ............... Oct. 25, 19 .............. Belgium: 1. Basic convention ............ Oct. 28, 198 ............. 2. Supplementary convention.. Sept. 9,12 .............. 3. Supplementary convention Aug. 22, 1.M7 touventlon); Apr. 2.1)4 (note). and Belgian note relating to territorial exteion. 4 .Exchange of notes ........... Aug. 7and Sept. 8,1952...... 5. Note-U.S. reply to Belgian July 28,199 ................. Canada" note of Apr. 2,1054. 1. First basic convention ....... Dec. 30,1938................ 2. Second basic convention Atar. 4, 1942................. (nd accompanying pro* tocol). 1950............... a. Supplementary convention.. June 12,I 4. Ltter from Canada to Feb. 20, 1951 ................ United States. 6. Supplementary convention.. Aux. 8,1956............... Denmark: Basic convention ............... May 6, 1948............... Finland: Dile convention ............... Mar. 3,1952............. France: 1. First busic convention (and acwtmpanyinr protocol). 2. Second basic convention (and acompanying pro. tocol). 3. Supplementary convention..I Oct. 18, 1946.............. 4. Supplementary protocol..... May 17, I14................ 5. Supplementary convention.. June 22, 1 .......... Germany: 1. Basi convention............ July 22, 1954 .............. Apr. 27,1932 ................

99 Jun e 3, 11v53, Cong. June 29, 153 (subeommilt. July 2, 19 , Ex. Hept. No. 2,.3d, 0 July 9,1983,4, 1t. 99 Cong. Rec. -IAdvice and consent... lit. tee). Re.. 1043. .•1I03 Cong. July 30,197 ................. Aug. 8, 1957, Ex. Rept. No. 12, Aug. 8, 1967, 83th, 1st, 103 Cong. Advice and consent... Ex. A,61th, t... Jan.17,1I kith, 1st. lice. 727-72. flee. 14009, 14012-14013. , July o,8 m st, 99 cong. nee. Advice and consent... Ex. I, 81it, 1st.... Mar. 16, I949,93 Cong. June 29, 1953 (subcommlt- July 2,1953, Ex. Rept. No. 2,83d, Ist. Ree. 25&5-2&KS. toe). Ex. A, 83d, ist .... Jan. 9, 1953, 99 Cong. Ju A 29, 1963 (subcommit- July 2,1953. EL Rept, No. 2,83d, JuZI, 9A3,M3dlt, 90 Cons. Ree. Advice and consent... lit. Ree. 276-27. tee). 194,85th, 2d, Ex. B,85th, 2d .... Jan. 30,198,104 Cong. 1958, Ex.flRpt. No. 1,85th. July C..13238,1324213244.104 Cong. Advice and consent... Bee. 1335. ().................... v])..... ............. ........ ..... o..... (I)......................... (I).................(I)................... Ex. 1, 83d, J.

July 23.1953

Dec. 14.1963

Dec. 14, 1OU Oct. 10,19-57

Aug. 30, 1957 Apr. 26,1967

July 2&1963 July 27.1953 Sept. 9.1 U July 23,19S July 27,1953 SepL 9193 July 23,199 Nons......... None ........ July ,l1w July 10,19o

July 1 ..................
()..........................

None......... . None......... None........ . None........

().................() ....................

(11.........................

(..............................

(I)....................

Aug. 5, 1937, EL Rept. NO. 19, Aug. 6,1937, 7Wth, 1st, 81 Cong. Advice at consent... Aug. 13, IN Aug. 11, 1937 Aug. 13, 137 Ex. B, 75th, ist... Jan.ll,1937(received). (.......................... Ree.8427. 75th 1st Advice and consent... June 4,1942 June 12,1942 June is, 194 Ex. B, 77th. 2.... Mar.9,190(received); None ....................... May id,1942, Ex. Rept. No. 3, May 27 and 28, 1942, 7th, 2d8 Cong. Rec. 460-017,4713-4714. 77th, id. Mar. 10,1942 (made Public); 88Cos Bee. 2155-2160. Ex. R. gist, 2d.... June30, IM0,96Cong. Ree. V5.
(I).................Q) ....................

Apr. 12 and 13. 1051 (sub. committee).
()..........................

Aug. 6, 1951, Es. Rept. No. 1, 2W, Sept.17, 1951, 824, 1st 97 Cong. Bee. 114*11458 11441-11442, Ist. 114wi-14a8.

Advice and consent with reservation.
() ....................

Nov. 16,1951 Aug. 1, None ........ None ........

Nov. 21,1951 None........

() ................................

(1) ................................

tiI, ... Jan.17,1937,103Cong. ist Bee. 727-728. Ex. 11,80th, 2d... Mayl 19, 94 Cong. Bee. W8-4. Ex. B,
Es. L, 821. 24 ... Mar. 17.195,2, 9 Cong.

July 30, 1937 ................ Aug. 6. 1957, Ex. Rept. No. 12, Aug. 8,1197, 85th, 1t, 103 Cong. Advice and consent... Aug. 29,1957 Sept. 25,1957 Sept. 261967 Bee. 14009,14015-14013. 83th, 1st. Nov. 24,190 Nov. 23190 Dec. 1,10 June 16, 1948, Ex. Rept. No. 10, June 17, 148Both, 24, 94 Cong. Advice and consent None ....................... with reservation. None .......................

July 419I62,8 2d4,96 Cons. Res. 9290,920-MS. 82d, 2d. M)......... oo....... ... o... I June 8, 1932, 72d, slt, 75 Con. June 15,93, 2, 1st, 75 Cong. Ex. K, 2d, st.... June 3,1932 (received). Re. 13007-13009. g dssonal Record 12272, no written report. May 8, 1940, Ex. lpt. No. 7, SeP. 20, 1940, 76th, 3d, N8Cong. Es. A,76th, 3d.... Feb. 1,1940 treceived). None.................... 78tb 3d. None ........................ Dec. 1944, Ex. Rept. No. 4, DL $M1r.th,2d, 90 Cong. M, Es. 1, 7li, 2d..... Nov. 30, 1044 (re,8tb, 2d. ceived); Dec. 1,1944 (made public); 90 Roe. /0 nee. 23. N 2h,O94 Cong. Ex. A, &Mlh,lot... Jan. 10, 1947, 93 Cons. Jan. 30, Feb. 8.and Apr. 17, May 261948, EL Rapt. No. 7, June 2.1 1947 (subcommittee). Ree. 2S-2&%. Mny - . 948, Ex. Rept..So. 7, Ex. 0,80t, 2d....' May 19,1948,94 Cong. None ........................ tb, 2d. Ree. 3 I E. J, 84th, 2d .... July 6,10.5I0,102 Cong. None .................... July 18,2d. , Ex. Rept. No. 10, July 19, 195, 84tb, 24, 102 Cong. Utb, Bee. I11vi1-11192. fee. o130-11515 . Cong. 1964832 1d00 I20, None ........................ Atu1t.19 4, Ex. Rept. No. 8, Au Ex. J, 83d, 2d ..... Juiy29.1954.10Cong. ]
.ee..I.•.
V.,........................ ().............................. (|)............................... (I)...............................

June 23, 1952, Ex. Rept. No. 13,

Advice and consent

July 21,1932

Dee. 1,1952 Dee. 18,194 Apr. 8.195 Apr. 9.195

Advice and consent... July 2,19 Returned to Secretary of State. Advice and consent...

Dec. I, 1944I Dec. 29,1944

Dee. 30,1944

Cong. SM

nee•

Advice and consent.. Advice and consent.. Advice and consent.. Advice and consent...
() .................... (,)....................

June 1,190 Sept. A 1949 Oct. 17,190 Oct. 17,190 June 1,190 Sept July 31,1956 Apr. 12, 1r7 June 13,107 Sept. 22,1964 None ........ De. 1.19,4 None ......... None ........ Dec. 2%,193

Dee. 2% IOU
None ......... None........ Dec. 30 1OU

2. Exchange of notes........... Nov. 16 and Dee. 20, 1954.... (,).................(I).................... 3. Exchange of notes ........... Jan. 4 and 17, 195........... (I).................() .................... Greece: 1. Basic convention ............ Feb. 20,190................ Es. L, gst, 2d.... A.1, 19W,l92Cons . Ree. 528. 2. Protocol.................. Honduras: 1. Basic convention............ 2. Exchange of notes ........... Apr. 20,1953................ June 25, 195................
(,).................() ....................

(1) .........................

(I)................................

Apr. 12and 13, 1951 (sub. Aug,.6, 193i, Ex. Rept. No. 1,824, committee). 1st.

Sep 17, 1961, 82dlit, 97 Cons. 1140-1142.

Advice and consent Dee. 5,1051 with understanding.
() ....................

........................... (1).............................. (1)............................... ((1) s. Rept. No. 10, July 19 195, 84th, 2d, 102 Cong. July 18, Es. K, 8t9h, 2d.... Julyll,1 9A6102lCong. JNone ........................ 8Uth, 2d. Re. 13500-133. Reee. 920• (1) ................................ .................... Q( (|)................................ (1)........................ Feb. 6, 1957 ................. (9......... .--.--. Ex. H,66~, 2d ....

None ......... I Dec. 21O l

I None ........

Advice and consent...
() ...................
(4) ....................

Nov. 20,1961 Jan. 919671Feb. 6.197

I None......I

Noe.........I None.

India: 1. Basie convention ............ Nov. 10,1950............. 2. Exchange of notes ........... Apr. I and 7,1980 ...........

une 2, 1980w................1(4) ................................ 8th, 2d.... May 6,1960,106 Cong. Ju Ex. H, oneN ............ . . Rec. 9710.

May 6, lO,106 Cons.

Ju

(4)................................
... ooo., ..... .. o o.oooo. .. ...........

Advice and com t... .1.8.1951...
Dee.l 11

.De...o..o..

Ireland: Base convention............... SepL 13 1949 ................ Ex. F. 8ist, 2d.... Jan. 18,19,50,96 Cong. Apro 1 and .3 191 Ree. 508. committee). -; footnotes at end of table.

Advice and consent b- AutIIM 6,1951; Et. fer.t. No. I, Set. 17, 151, 82d 1t 97 Cons. i with relation. 1 1-118I, eIe• 15145-1l8 i••
11455-1458.

Dec.10,1951

Dee, 20, 1951

'

Sh*e income tax cont nation (as of December 1,1061) I I I
(G) (6) (10) action Date of ratiition by U.S. Presklent
-I---

I
SDate of (11)

i
(13)

nt Afoor tion

I oCss, msion and Con. Nature of Senate flo am Reowdcitation to

DAte of riliflc'tl)u by other moutr,?

exchange o iistrtlivent of ratuiftwetil on

[hPte A: entry
Into force

Effective date

(I) Date of Date of proclilanti on terminatiO Iy V.S. of force Prcs!elit

(141

(t6) Cit ltion to ollcla text

i -i
9,IA 83d, lit, 9 Cong. 1c. Adice and corset.

or.

-Dec. 14,1963 Dec. 14,1Mts Dee. 14,1W53 ..........

I
Jan. 1,19W (as to United Stats); Dec. 22,196 *3 July 1, 1963 (s to Austaa). Jan. 1,1967................ Oct. 23,196
o~........

July 23,19,

S, 1067. nth, lit 103 Cons. Advice and consent. S1400M 14012-14013. 0,10,634, 9,9 Cong. Ree. Advice and cosent. 0-8300. *-eM. Advice and consent. . 19A,5h, 2d, 104 Coot. Advice and consent. -11 W-1344-, ().................. ().................. ., 167, 7", lst, 81 Con.
... o

Au. 30,19657 Apr. 26,1957 Oct. 10,t1o. 37 Oct. 106,16 ........... July

TIARA M0, 4 UST 2274. TIAS3 328 UST 169K TIAS 2633, 4 UST 1047. TIAS 2S33 4 UST 1642. TI I q4280,10 UST TlAR M 4 UST 1"O. TIAS 4.-',10 UST 1364. TS V0, 50 Slat. 13A). T8 9A636 Stat. .1 1. TIAS 2347, 2 UST

,9 042 ., Co ,.

July 27 Wo Sept. 6,19, 14 Sept. 6,1tW........... Jan. 1,19W................... July 23,1W9 July 27,199 Sept. 9,19 53 Sept. 9, 13........... Jan. 1, 1953.. .... ........ July 23. 1956 July &,19m July 1t19 July 10,1060.......... Jan. 1100................... None ......... None. None ....... None ...... Notledinnote.. Notselfledlnnot..

Sept. 2&819 Sept 23,195 63 July 26, 1,
.... o.......*

o.......o.....

None ...

Nne.......

Advice and coment... Aug. 13,193I7 Aug. 11, I93 Aug. 13,1937 Aug. 13, 1937........Jan. 1,low ..................... Aug. 16,1937, Apr. 3, 1941 27*...,,...,........ 1942, Mt ... e....o. and 2, 2o86 Advice and conent... June 4,1942 June 12.1943 June 15.1942 Not s ifed In con. Jam. 1,1941 ...................... June 17,1942 I I I venon. I I Advice and counseat with rervaton.
(Q ....................

Not spedcfed In noe ............ I None. Jan. 1,1M ...................I None...... I

,...........

I

Nov. 16,1951 I
None...

Aug.

, 1950INov. 21,106 i I Nov. , 15..........

IJan. 1,1951............

Oit

1. Nov. 29,1911 ..............

***

M& 931ONML 7 Ous Advice and consent... Aug. 29,1967 e 17 ec. OWM7.-tIAM. AdvIce and consent 44-4,.47-4. Nov. 24,1946 with reservation.

None ........ None ................. None ........................... None....................... Sept. 2%1937 Sept. A5,19671 Sept. 26,1967.......... Jan. 1,1957 ...................... I Oct. 10,10671............... Dec. S,194 Dec. 22,192 S.
Apr. 10, 195

'**I

Nov. 2,I1948 Dee. 1,1041I.. I....................... Jan. I,1948 (as to United States) Apr. 1, 194 (as to Denmark). Advice and consnt .. .1 21,1921 Dee. July Dec. 1,1962 11, Jan. 1, 1982....................
O

e..........
.... o.....

TIAS 2347, 2 US? TIAS 3916, 8 UST 1619. TIAS 1864,62 Stat. 1730.

.,
.

h , , Co.

Advice and consnt.. Returned to Secretary Advice and consent...

July 2 .1932 1 Apr. 8,1935

Apr. 9,19M 14 Apr. 9, 1935....... I Jan. 1,1936.................

TIA 206 I UST 445. Dee. 31,1944 TS 8K% 40 Stat. 314.

t Kd, N Co. .,6C.c. 176th1, d 90 Cog. 15.19, 74, li, 75 Cong -. 1380H513 A10 e0. 1I6H6N 28 Con. , 5S6-580

. 1940 s 4,9264

o(State.

DMe 1i.1044 J

I1Dee. 2,1944 Dm. 30,1944 1 Dec.3019OU..........IJan.1, lm ....................... Jan. 6.194 .......... T8 n I.............. I
Oct. 17,1949 Jan. ta Oct 17,1949 Jan. June 131967 JUiM 1, 19,0 (Income Jan. , 1980 (a to provsos of ()ot. 27,1949 Provisions only). title 11 and eslaed provisom). C 1,1980........... Jan. 1,1960................... O)cL 27,1946 A 1967 .......... to certain J Ino 18,1067 Jum 1,1967 subjectt exception). Not spfled In con. Jan.)1, I19...4............. Dec. 24,194 Not spefkd in notes.
.............. I

30Stt.

Advice and cosent...

June 18,1946 Sept. ,1904 Advice and conset... Jrune 18,1948 SepL 5,1049 Advice and consent... J uly 31,1956 Apr. 12,.1067

1.

..............

-IScpt. 22,14 .20,19 b,,, 97 Col4 217,1061,e421s 100 Cong. Advice and consent... e4L 1143-43Li 4 -1
0o.l00-4.ll

Dee. 1,1964 Dee. 24194

............. B

0).................... I Now ........ INon ......... I .... 0).................... I ..... Now ........ Nwo....

IIDec. ,1951 De . ,IM I Dc. 3 I 30,1IM .......... IJan.1.Io................... IJan. Advice and conset I0,196 IDw with understandlnt I I -() .................... I Dee. AIOU None....... De. 30, log.........Jan. 1,19a................ Jan. None.,..
. ot ,. " 2 100 Cong. Advice ad conset... Nov. 20,1066 JAn. 6,1067 Feb. 6,1957 Feb. , 1S57.n.1t167............. (1 .................... Nowe... Noe ......... None ........ Not spiedin notr. Not specfed in notes......

Not spied in notes.......... None ........................ Not specified In notes.. Not spwiied in note......I N ............... I DQ4 15,1964 I 0

I

TIAS 19J, 64 Stat. (3) B3. TIAS 192, 64 Stat. (D) 28. TIAS3644, 6 UST 643. TIAS 3133,5 UST 274. TIAS 3133,5 USP 2613.

15,1654 Feb. 18, 1967 None .........

...............
TIAS 3 6, UST 212. TIAS 3766 8 C.ST 249.
I.o* I*o* I

TIAS 3133,5 ST 2814. TIAS 2002, 5 UST 47.

-I I .............................. ... ... and... t..... ....... ................... I Advice and comment I
.17 1951, 82 Ist 97 Cont. I Advice and consent e. 1143411L 11 18-11441, withreservation. 4W-1148L

&...............
Dec. 13,1951 Dec. 10,1931 II De. 210,1951

D

Not force . ......................................

D

Dec. 2,1951.....

Jw. 11951 (astoUnited State); Ivaoas(Mto rand).

I

I

Dee. 24,1651

I

.......

I

TI

2
No. I

2 UST

730) - 2

(Face p. 6)

r

I
C y ))
Country 8and agreement

I. Tabulation of data relating to United Stoa income tax conrenti n (as of December 1, 1961)--ContiniDateandexeutivIduII

tIc

(2) Dat of nature

(3)

(4)

(a)
(orsubcommittee) hems p

(6)
Date and exeutive desglltonlot

(7) Date, Cong :;!=

(1)

(9)

(10) ratlflcath on by othe wr Country Of0....0.....

Date of, and Conr sate e euti'VS0 sload Recrd clat. to, Benate r eIp , desigation

Date of Smate commiltt

removal of injuneu ion o eCrecy

Senate committee repor

sessin, and Cco. Nature of Senate £low Date of W, ratlhcatk =crd atim to

Date Of

a.t.on
(4)..............................

byU1. . Pres

rnel: lbasi convention........

Sept. 30, 19M.............

Ex. B, .th, 1st

Jan.10, 11., 107 Cong. (,)........................ Re. 440 (daily c4l. tlou); Jan. 11, 1951, 107 Cous. Rec. 4544 (daily edition).

(4) .........................

(*) ...........

latgsc convention.......

Mar. 0 195....

......

Es. C, Sitl 1st.

Apr. 25, 1955,101 Cong. Ree. 4961.
May7, 194,100 Cong. Bee. am2. May 7,19,4,100 Cong. Roe. I le. Apr. 29, 1957,103 Cog.Be. 609. Aug1 190,100 Cong. I ee. 1e0.

None................
Nolue ........................

Japan: 1. Basic convention .........

Apr.18, 1054.......

Es. D,s3d, 2 ..

2. Excange of notes ........... April 119 4............... Noe ........... S.Supplementary protocol. .... Mar. 23, 1957 ............. Ex. K, 6t1h,1lt 4. Supplmentary protocol ..... May, t190................. Ex. K, S th, d. Netherlands: I. Baie convention............ Apr. 20, 1948................ EL 1,80th, 3d..
2. Suppkmentar protocol..... Jne 15,1958............. 3. Exchanp of notes........... June 24 and Aug. 7, 1983; 1 5e13, 4 and 10, N ov.

None...............
July 30, 1937..............
(1) .........................

July 27. 15, Ex. Rept. No. 12, JuY ,D 1035, 64tb, lot, 101 Con. ate. 1 01 .13 94th ist AuM, I564; Es. Relt..So. 6, Atl. 20, 19M, 3d, 2d100 on ee. m-i5 a,w I= 15307 1W14-915 . 9,IOU$, Ex. Rept. No. 8, Feb. 21, 19, N4t, lit, 101 Can#. Rec. 2182-2140. 54th, lit.

-- I

None ......................... Noe .......................... Aug. , 1967, Ex. Rept. No. 12, Ang. 8, 1967, 5th, lst, 103 Conl. Ke. 1400-14018. Sith, lit. oo.......... (1) ................................. (1).....................

$obh.
82d, 1st.

IAdvice and coneut...
Fouemewnt of
Advic and consent...
None............

t
•....... i

Aug. 22,16
7,11

July 2.511
155

Oc

I ~Mar.

Mar. 23,M

Ap

Advice and omusl... Nowe... Aug. 10,10
(O)..................
ut

None ...... Nol Sept. 9,I 67 Sep
........

may19, l1949 Copg. Ro. am6. June 22,19A5,101 31. i, 4t, slt.. Co Rec. 814. JUy 2194,100 ER. 83d, 2d I

note of June
10,

New Zealand:
Ba

nly).

Cns. 11o. 11548-

connatlon...............

Mar. 18, 1948.............

E. 1, 80th, 3d..

may 1, 1948,104 Cong. Re. 106.
July 26,1040395Cowi. Ao14, l1" 104
Cogo . 114"4. •Apr. 20 J);1939 (re. 109 celv ]MAY II0

and conieut None ........................ June 16,194S, E. Rept. No. 11, June 17, 194I,80th, 2d, 94 Cong. Advlve rcsrrtalons. with Advice and conmnt... Nov. 19,1 5 Nov. ,19461 Ree. 8619, U2i-3M. W.thid. None .................... Juy 196, Es. Rept. No. 12, J17 20.1954 84th, lit, 101 Cong. M Aug. 4,191 Oct. 14,10 No' It. 14sh, 9.55 Re. 12091 . None .................... July 27, 195, Ex. Rept. No. 12, Advice and consent... None....... 51 Nwi ....... o Not 64th, 1st (reported favorbly Rie. 12019-12025. with understandlng). 191, I1d lot, 97Con. 511 Apr. 12 and 13, 1981 tsub. Aur. 0, 1951, Ex. lept. No. 1, Sept. 17,114P4-11li51400-1441, Dee. 10,19 Apr. &19 We. commIttee).

I
Nov.

j

N .L conention............
2. Supplementary Convention.. Pakistan: Baslc convention............ Sweden: Base convention tand accom. paying protocol). Swlterland: Bade convention............
Unon of Soutb Attica:

11447-11440.

511,

IJune 11949.............. I, 10,1958............ Juy 11 I I, 1957................. July I I Mar., 103..............

El. 0, $1st, It.. 11.Do Wth, 3d.
IL No 8b, lit.

Apr. 12 and 13, 1951 (sub. committee). Aug. lit199................ July 30 and Aug. 9, 1987. Non ....... .........

.l,171,182dM 11418I-11441, Advie understanding. • Nov. 2,191U Aug. 1,1940V Dec CoUg. A.6,131, Es. Bept. N~o. 1, SeRoe. 115 , .5t,97 d and cogent 14 &A slt. 114W-11452. 1219 AM, Oct Aug. 11, 19A. Ex. Rept. No. 10, Au r.e.IS40-M477 lot, 105 Cong. Advice and conel... Sept. 4,1In Ian. 3,19 V 8tbt, 1st.
J , 1956, Ex. Rept. No. 1, 5tb, July ,9 , 5th, d, 104 Cong. ea. 13236-13244.

Advis rmnmtim. wilb and consent

,195

I

I

)

may 2,19 kug. 21, 19o
t
O

Zi. K,7tb, ist..

ma

ile); 195

J1th 119b Ex. Rept. No. 10, Augl.IlaId , 19, 1081'-10614. 14 Advice and const... 8Sept. 3,19t ~I.Reo. 10iO:, 76tb, lot, x Aug~ s.91 ,

May 14, 101 ............... .1 CL NoSd, le... tJ 18, INS............... .3 :s. 0, 0tb, Ist.. )00.
O

None...................
AMj, 0191, Zon. ce.54-t

Es. Rept. No. I, St. 17, 11444-u1t lit, 97 Con. Ree. 191, 62, 111441, 11464-11407. Es. lepl, No. 1, 1.17, 191,82d, 11442-11"s.

Advle and con=et SepL 2,1951 wl rervtin.
Advice and on nt

ept. 22.,1951Ilk lopt
t

1. Basic convenon.........

2. Suppkmntry protocol.... Unitd Arab iRpuble: Bl conveton...............

St

,ly

14,1ow0................. .3 CL ilit, d... U,

D0.111900 ................

L A,S7h. 1St...

Jan. I,1l61, 107

June2I,1947 93 Cong

J

J J (' 4) ...........................

Apr. It and 13, 1951 (sub. committeee. Apr. 12and 13, 1951 (sub. CommIttee).

Al

, 1910

t 97 Cotj.

82,1st.

Ex. Rept. No. I, 8ept.17,191 82it,97.. Pm- 1'115915A 1111011441,
1I149-1144&

jAdvige and oemt

undstanding.

with reseration and

.. i )". 1J 14,1951 St

mne 11953 A
me0°.oIt IOU 13,192 1 aly

I
1 (*)................ ..........

!

I

with n,a wi and undmtadiMl.

D)c, 14,1981

I

United Kingdom: 1. Bsc convention......I Apr. 16, IM............

-I 6,1it" ................. 2. Supplemental protocol.....I I June
&.Supplmentary prtol.

-"

i.

D, 7

st, t...

Apr. 14 (re. ceivei); Apr.2, 91 Con1. Rec. 168o Congo xc. 544.

Eli. F, ,th,2d ....

Feb. 0194, MMt,AV, 90 Cong. Recommittal to committee. May 10, 194E, Bept. No. 4, June 1, 1940, 9th, 2d, 9 Cong. Advice and consent... Es. tth M3d Ree. 61054110. lIune 21%16 lone ..................... June 13,194, 79tb 2,9,Con2res. June 19, 1946, 799h, 3d, 92 Cong. Advice and oamsnt... June 294 lAl lecor W INotwrim 0951.
ay and June 13, 1945, and 3Apr. 17, 1940(ub. committee)I
ios........................ N r:e# or t E. Rept. No.6, 83d, A& 0,O.1954, 88de ad,100 S i aly i, 195 .................. Au. 7,956,ES1. Rept. No. 1, M6 AuV. 13, 198Ba6th, s24,104 uly 1, 196..................,jJul.7, 1938, s. Rept. No. 1,65b, Juy 0 1956s, I Ath 3,104 Aug.?, 1956,%S. Rept. No.2,68tb, AV. 13IT7O-171I. M,104 190,8tb2, lRee. I A .'1,1r ep.N.0

I- Ilsi 31943, Es. Rept. No.6, nth July,

I 1.
I I---

(1)..............................

......
action.

...

Ju 2 1945t79tb, 1st, 91 Cong.

I--Postponement ot

1954, 100 16I4............ IEL 1,8d, ad.... June22, 1951, 8608. Cons. Jan. 11, lice. 104 104" 4. Supplmentar rtool..... Aug. 1,1987............. Es. Al 6tb, 2d.... Jan.l 950, change of notee........... Auu. 1, 1987, and Dee. 3, Es. C,S hb, .... Cong. Ree. 1U L 3d

---IMay 2,

~d

Rtc. 7185.

Cong. cong. Cong. Cong.

Advice and consen...

Advice and conMt... Aug. 3198I Advige and consent

I

ww r=tion. tb

vatio onterl July
9,1938.

I
A stbmiledtoorct upon by U.,S. Senate. No *An ntowmvro lSWndie no .bbicheiwer hed. a tiat v borbn 'heaton, " weoemade inte cm-o UmhSenate&oordeboate cnthis ad=8s0I=-1 a etniv erch dielud no reowd of amy public heringsand oheconvnin ha Ies!" heeprbby iwo so public ha

l J I
None.

I

.

...........

Ju

ly It314
Jo]

Jy
Jo]

ly 1it1INS
De

Sept. 2%,19m

21,195

Jan a

pt. 29, ION
No nD.*°.....I Noi)O

income ta conention (as of December 1, 1861)--Continued
(7) (6) oo Date of ratificaton by U.S. Presdent (10) Date of ratlficetion by other Mntry
-1 ~
... * ..........

(11)

0|2)

(IS Effel...l.e

(14)
prtelsrati

(35) terntnati on

(16)
citation to ofmleaI text

c Cai,, ooand Con. Nalure of Seamt action rita 'Pod station to Vate floo, aellon
I -~-~I

Instrument of ratllcetlo

exchange o

Date of

Date of

Vate of entry Into force

... sIden

by U.S.

Date of of force

.......................

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

I

.............
Not In force. .........
Doo

0 1966, 54t3, EIt, 101 Can. ).11 1185. IJON,1 M,2410 , Cns
le-JAM&S I I lUMO

Advice and comet.. futnMmnt of

Aug. A,19,

July 2.5,1 MIOct.

,19,

Oct. i',

.......... IJan. I, IW ................. I Jan. 1, 1955..........

Nov. 2,1v
5,5. Apr. &193

,o.

TIAS 3679. ..........

UST

5? II-M5 . I. 94th, 1st, 101 Conl. , Ue.81W210. . ................ " 8, 1 67, sub, 11t, 106 Cong. - 140014018.
............ ,•ee••.•eo e.........

Advice oad conet... None....None. Non ..............
(1).....................I......I.................

If".

,1M I Mar. 2.19561 Apr. 1,105 Apr. 1.19,M............

TIAS 317, 6UBT 149.
.. 0..........

None.

Advice and coment... Aug. 1,1967 Sept. 9.1"7 sept. 9.15

Not $peel1100 innotes.. None ................... 7................... Sept. P, 937........... Jan. it197 NotinIfo e........... De.3,3I9....... Nov. 10, 195. Jan. 1,1957...................

Noe .......
sept. i193 P

TIAS 3001, 8 UST 144&.
... ,.•....

TIA8 317 ,6 UST 00.

Nor. 10, 394 Nov. %,948 Dee. 1.104 Cog. Advice and consent 17,14., Oth, 2d, 904 with rmervatlom. .4 19, 8M6 2.-55. Advic ad conet... Aug. ,IIU Oct. I4,195 Nov. 10,39 a5I2019-1205 Ist, 101 Cong. ;. 1964, 54th, -. 19, 4th, Is, oCong. Ad'ie and coent... Non ........ None ......... None ....... 01

Ji.

i, 1047................... Dee. &I9 Not specified Inotool........ Nov. 14.1"5

TIAS 156,9 1Sta. 1767. 3m9 TEAS SM, UOT

Nov. 10, 1038.......... Jan. i, 196............. Noew .......

with reeervatlon. 11431.1441, . 11434-114 1447-11450. I,1951, d, li1t. 9 Co Advice and cogent .11484-114,11, 11416"11441,

It7, 1961.82d, 1i* 97 Cons.

Advice and comment

With undestamding Advice and consent...

1931 Dec is, 18pI.......... Jan. 1, (as United States); De. 20,1O Apr. 1, 19a, to New )1. Zealand). Mee. 1&.1031 Nov. 36,19511 Aug. 1,1410 Dec. 1.1911 D II, 1I.......... Jan. Is 1963 ............
Dec. 10,191

Apr., 3.9IIDe. 18,109

.1e

3701 TIAB337, 3 UST

an

190 1 Oct. 8astpt. 41, I0JAL. &
Nov. ,019 1 May 2.19

23,1,I

Oct. 21, 191'........... Jan. i, 1o................. May 2, I9..........
'7

Nov. A. ION .May 219M

........ 0...

TIA 834,6 UST 1IAO 423%0 US? 13.
.1

9, 19A6

1Sub, 104 Cong. Advi a nd consent 3d,

JiMay 21,195

Jan. ,1, 9..................

Og. Reo. 107(0,10611-10814.

I and 2, 10, 7th, 1st, 4 Advice and conent... Sept. 8101 Aug. 21, I989I Nov. 14, Im

NoV. 14, .......... I Jul. 1,1i0............. 10
OS
6 J

Dee. I,.IM

1'EAS 4816,10US? TlAB9557, UST
f851.

.It, 1931, 14 1467.

d, it, 97 CoE.

Advigs and count Advice and consent

Spt. 30' 1%51 Sept22. 31

Sept. 27,1961

lept. 27, 19 .......... I Jan. to 1,51..................

Oct.

3.131
. TI

Ml. rIA8 4310,38 US? 'lAS 3510,8 UOT 3841. TI
.T

1? 1196,adIse,97 Cos. with re toand -; 115 3143k 11 4-1441, understanding. 442-1144L. and content i 1N01, 63d lit 9 Cong. Advicermrvttio and Dee, 14IW IJUno 1,6 I 1J ulv I&! with - 1144-1146, 1145-1141, undontandn. 40-1144.
0.....

Dec. 14,3951 Juvne I8,195IIJuly

1,1W uly 18, 1052........... I July I, 3 4.................. ulF 3,195 l, UM

Aug. It 10

A

oo,

.. July 194 (SU to certain Au. 1,1053 exceptions). c

(.)........
AMttof
Recommittal to corn.

I.............. ..
June 30,191O
July 18,I4o1 July 25,101

'ot in force........... INot specified inoto ol.

I194 s, I

b, slit, 91

ng.

TI TI lyl, 3944.......... 1J air A two ..........
0(

d, 1I 194 " oAt, 0 Cang. 0e. 604110. 10 194,79b, d,1 Cogl.
. IM5 ado 3d, 100 Cong. I, 3d, 1041Owg. o Is17300-1720&, 3d, 104 Cong. *A5sub, tlS121414. . 198' S 5 dC,104 Con.

Advice and consnt...
Advice ani consnt...

June A,19M July 1,19i1 July 3804
Set. 21,I Oa. 10,IOU I8pt.2kI$" I Oct.13IOU1I Non ......... NoneI.

ly Jan. 1 394o twted states); (as variu (as touted Kng. It dora). Not peelfied toItool ......... uly Not spelled Inotool ........

1lg 19t o
............

IAS 3544, 08sIt, TI137?.

.TI, 1380.

lAB 3544,0081.

Advice and oeom t... SApt. ,15 Advice and conMn... Aug. 2II Advig and *com t on. , 19a vtonentered Jul; Nowe.
9,0,56s.

in. t, 195...........

an. 28, I6 Oc 24.1IOU ct.

.......... JanI 11M5(astMltedStates); Wt. 195V 1, varlus (as telnted King. dom). eK. 3,lg........... V aroouus......................

N( ......... ,one

11 TI)[AS 4143, 9 UST 14A9

AS 816 6 US? TI.!.',84124,90UST V829.

t

S. Countries

which United & 8o haigned Incomt taxce
Apr. Dec. Ar. uly

iono,
27 193 2 30:1936 28, 1939 23, 1939

-

Mar. 41 1942 Apr. 16, 1948 Deo. 13, 196 7. Union of South Afra........ .......................... Mar. 16,1948 8. New Zlaa la....n d............................... 9. Netherlands ....................................... ,p.29,1948 Denmark ............................................ : : my6, 1948 Oct. 28,1948 Begim.......................... ... o... June 18,1949 N 12. Nwoaay ............................................ 18. Ireland ................................................ Sept. 18, 1949 14. , 1950 Fe. May 24,1961 AGrwi ............................................... 18. SwitJerand ............................................ Mar. so192 16. Feiland .............................................. May 14, 1958 17. Australia ........................ Apr. 16, 1964 18. Japan.................................. 19. Germany ......................... "'"'".. '"'". July 22, 1984 20. I ta w........................ Mar. 80,19 ly . 21. Honduras ........................ June 26, 196 22. Austria ................................................ Oct. 25 g6 28. Pakistan ............................................... July 1,1957 24. India .................................................. Nov. 10, 1959 26. Israel Ar............................................... Sept. 30l1960 Dec-. 21, 190 26. United Arab Republic .......... w.................. 6. NeCad ........................................... United Knnd .........................................

a.

1. France (convention terminated) ........................... 2. Canada (convention terminated) .......................... 8. Sweden ........ w...................................... 4. Fne .... c........................................

S. CouniW with wAic United tas A. .naed into income tax con-

ventione, lited in order Q t o o

in"oforce o1 Mai convention

1. Frane (convention terminated) ........................... 2. Canada (convention terminated) .......................... ....... ................. 3. Sweden..... ................ 4. Canada ................ 5. Frane ................................................. 6. United Kingdom ........................................ ............................... 7. Netherlands. & Denmark .............................................. 9. Switserland ............................................ 10. Norway ............................................... 11. New Zeand ........................................... 12. Ireland ................................................ 18. Union of South Afric ................................... ......... ................ 14. Finland ..... 18. Belgium ............................................... ........................ 16. Australia ......... M7. Greece ................................................ 19. 20. 21. 22. 23.
I& Germany.

.. Japan ..................................... .................................... It&ly Honduras. ................................. Austria ................................................ ...... Pakistan ...................................

....................................

Jan. 1, 1936 Aug. 12, 19 7 Nov. 14, 1939 June 15 1942 Jan. 1 1945 July 2981946 Dei. 1948 De. 1 1948 Sept. 27, 1951 Dee. 11 1951 Dec. 18 1951 Dee. 20, 1951 July 161952 Dec. 18 1952 ept. 9 1953 De. 14, 953 Dee. 30 1953 Apr. Oct. Feb. Oct. May
Dec. 201964

1 1958 26,1956 6,1957 10,1957 21 1959

(7)

4. Legiultion direting President to gotiat t treaties and to sek eomplianc4 terewiti by our 4s Provisions directing the President to negotiate tax treaties, and to seek compliance therewith by other countries, have appeared in annual foreign aid legislation for the past several years. The wost recent provision of this type appears in section 661 of the Foreign Assistance Act of 1961 (75 Stat. 438), and reads in pertinent part as follows:
Sic. 601. ENCOt'aAoGMXN? or Fas ENTaRPalsS AND PRVAT8 PARTICIPArloN.-(a) The Conqress of the United States reco nises the vital role of free enterprise in achievin. rising levels of production and standards of lIvinx essential to economic progress and development. Accordin-dy, it Is declared to be the policy of the United States to encourage the efforts of other countries to increase the flow of international trade, to foster private initiative and competition, to encourage the development and use of cooperatives, credit unions, and savings and loan associations to discourage monopolistic practices, to improve the technical efficiency of their industry, agriculture, and commerce, and to stren .then free labor unions; and to encourage the contribution of United States enterprise toward economic strength of less developed friendly countries, through private trade and investment abroad, private participation in pro trams carried out under this Act (including the use of private trade channels to the maximum extent practicable in carrying out such programs), and exchange of ideas and technical information on the matters covered by this subsection. (b) In order to encourage and facilitate participation by private enterprise to the maximum extent practicable in achieving any of the purposes of this Act, the President shall(1) make arran-zements to find, and draw the attention of private enterprise to, opportunities for investment and development in less-developed friendly countries and areas; (2) accelerate a program of negotiatint treaties for commerce and trade inc uding tax treaties, which shall include provisions to encourage and facilitate the flow of private investment to, and its equitable treatment in, friendly countries and areas participatint in prorams under this Act; (3) seek, consistent with the national interest, compliance by other countries or areas with all treaties for commerce and trade and taxes, and take all reasonable measures under this Act or other authority to secure compliance therewith and to assist United States citizens in obtainin 1 Just ompensation for losses sustained by them or payments exacted from them as a result of measures taken or imposed by any country or area thereof in violation of any such treaty; and

The provisions of section 601(b), just quoted, are derived substantially unchangd from provisions of prior law which first appeared in section 413(b) of the Mutual Security Act of 1954. The report of the Senate Foreign Relations Committee with respect to section 413(b) (S.Rept. No. 1799 on H.R. 9678, 83d Cong., 2d ses., p. 82) reads as follows:
With two clarifying changes, the bill reenacts provisions of existinj law relative to encouraging and facilitating participation by private enterprise in achieving the purposes of the act. Existing law (sec. 516(d) of the Mutual Security Act) directs the Department of State to "accelerate a program of neiotiating treaties of commerce and trade, or other temporary arrangements where more suitable or expeditious,

Tom

0-4$-vol. 1-2

(9)

which shall include provisions to encourage and facilitate the flow of private Investment to countries participating in programs under this act." In the present bill, this provision is directed to the President instead of the Department of State. The committee has deleted the phrase "or other temporary arrangements where more suitable or expeditious." This will make it clear that the bill does not contain advance authorization of executive agreements on this subject and that its intent is limited to treaties, entered into with the advice and consent of the Senate. The committee has also added a phrase "includinI tax treaties" to emphasize Its belief that appropriate taxation arrangements can make a significant contribution in stimulating private investment.

5. Hearings of February28 and Marcl 1,180, before House Ways and Mean Committee, on H.R. 10165 (an unenacted bill proposinq an alternative to tax treaties as a means for elimination of international doube tkation)

(11)

INTERNATIONAL DOUBLE TAXATION

HEARINGS
BEOI"0 TH

COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES
SEVENTY-FIRST CONGRESS
SECOND SESSION
ON

H. R. 10165
A BILL TO REDUCE INTERNATIONAL DOUBLE TAXATION

FEBRUARY 28 AND MARCH 1, 1930

1o40

UNITED STATUS GOVNMIXN PRINTING OWI WASHINOTON: IM

(18)

COMMITTEE ON WAYS AND MEANS
WILLIS 0. NAW&,Y, Ow^m, Gefrlm
ALLEN T. TREADWAY, Mm-bow-h. ISAAC BACHARACH, Now Im?. lIJNDLUY H. HADLBYo WaWagt OHARLE8 B. TIMBERLAK, Cdoma4& HENRY W. WATSON, PysWni IAMES C. MCLAUOHLIN Mlbip CHARLES C. KEARNS, Ohio. CARL R. CHINDBLOM, fhL FRANK CR0WTHER, Now York. RICHARD S. ALDRICH, Rbode Isnd. HARRY A. ESTEP, Psmzuylvs"n C. WILLIAM RAMSNYBR, Iowa. FREDERICK U. DAVENPORTo Now York. JAMES A. FRBAR, Wbooula. Cuim F. 31 JOHN N. GAINER, Tun. JAMES W. COLLIER, Mhohlpp. CHARIES ft CRISP, Gora HENRY T. RAINEY, filnola CORDBLL HULL, Tm..m. ROBERT L. DOUOHTON, Noth Carh. HEARTSILL RAOON, Arkaas. SAMUEL B. HILL, Washngton. HARRY C. CANFIELD, IndiaL THOMAS H. CULLEN, Now York.

9Moos, GuS

(14)

INTERNATIONAL DOUBLE TAXATION
flIDAT, M1 UAT got 1980

HOUfZ OF RUPBI=BNTATIVZS,

CoITwni's oN WAYS AND MrAsN

Woahinglon, b. 0.

The CnAmmAx. This is a hearing on H. R. 10165, a bill to reduce international double taxation, propong the simplification of pro. cedure in relation to the taxes due from our citizens abroad and due from forgner in this country. The Chair offers for the record a copy of the bill and a copy of the formal report of the Treury on the subject. The Treasury has had charge of the negotiations generally in connection with this matter and the Secretary of the Treasury, Hon. A. W. Mellon, is here present, and we will be very much delihted, Mr. Secretary, to hear any statement you may desire to make. (The bill, H. R. 10165, and the report above referred to, are as

man) presiding.

The committee met at 10.30 a. m., Hon. Willis C. Hawley (chair.

follows:)

1H. A.101k UIhmy4Mt Oupm, emed misou

A3ILL To nrdm ImnWat doubs tuIm Be it .secW. by tA. Bentse sd How* of Repreea.llus" 44 U'*. 8W...# qf Au ris i Corm oueubled, That the Income of an individual who Isa resident on of a foreign country, or of a corporation created or orgaisd In or under the law of a foreign country, shall be exempt from taxatVonby the United States if ts Commoner of Internal Revenue, with the approval of the secretary of the ,reasury determines that such foreign country grants an equivalent exemption in repeot of income of individuals who are resident. of the United Stat, and of dometie corporations, except that the following shall not be exempt from taxation under this section: (a) Income derived from any business, trade, or profession which is allocable to a Permanent establishment in the United State.; (b) Compensation for labor or personal services p*tormed In the United (a) Income derived from reel property located in the United State. or from any Interest In such property, Icluding rentals and royalties thererom, gains from the sal or other deposition thereof, and Interest on obligation. (Other than oblgtins of a corporation) secured by such prope ry. Saft 2. Compensation paid by a foreign oount'r Its uitiA for laWo or enonal services performed in the United States sall not be Included in gross Income and shall be exempt from taxation by the United States If the Comimi-. doner of Internal Revenue, with the approved of the Secretary of the TMasr ds that uch foreign country 8te equivalent for Lbr in !thompenau paid by the Unitedmatet antots citisensexmptlon or srvies psifaM In smh for1epi country; and compensation paid by the United States whc Is thus emp m taxation by a foreign country thai not be exeldsd ftm gross Incom under section 116 (a) of 0emvenue et of lUS. biso & Plensdon paid by at forudo owayt an individual who is a resident of te United S sal not be sided Insm and hl be emipt hm taa" by tw United S f tWk Cem0mOw I nAl Rovmu.

(16)

2

INTERNATIONAL DOUBLE TAXATION

with the approval of the Secretary of the Treasury, determines that such foreign country grants an equivalent exemption in respect of pensions paid by the U'nited States to residents In such foreign country. Sac. 4. The income of an Individual who is a resident of a foreign country, or of a corporation created or organized in or under the law of a foreign country, which conlit. exclusively of earnings derived from the operation of aircraft shall not be included In gross Income and shall be exempt from taxation by the United States if the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, determines that such foreign country grants an equivalent exemption to residents of the United States and to domestic corpora. tions. oa. 5. (a) For the purposes of this act, a tax impoed in respect of the income of a corporation shall not be considered as impoel on the shareholder, whether or not such tax may be recouped by the corporation from the shareholder; but a tax Imposed in respect of dividends distributed by a corporation shall be con. sidered as imposed on the shareholder. (b) If it is determined under this act that a foreign country giant. an equiva. lent exemption snd any income from sources within such country Is on that account exempt from tax in such country then such income shall not be consid. ered as Incoms from sources without the limited States (or the purposes of section 131 of the revenue act of 1928. Ouc. 6. The exemption under section I of this act shall be effected by the ex. elusion or deduction of the exempted items from gros Income, in accordane# with such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe. In the case of items of Income which are subject to withholding at the source and which are exempt from taxa. tion by the United States under this at, the Commissioner of Internal Revenue is authorized, If he determines to effect the exemption by way of deduction, to give effe it to such exempton by refundilg or crediting as an overpayment any tax paid in respect thereof, or b rellevil the withholding agent of his obligation to withhold. There shall not allowed as a deduction from gross Income any di. duction properly allocable to or chargeable against Items of income which are exempt from tax by this at. Sic. 7. Any determination under this set that a foreign country grants an equivalent exeNption shall unless revoked, be applicable t the taxable year in which such determination is made and to each taxable year thereafter. Sac. 8. (a) Notwithstanding the f(ac that it isdetermined under section I of this act that a foreign country grants an equivalent exemption in respect of a taxable year, an individual shall not be granted fo any part, of such taxable year the exemption under section I of this a unle; he ha been, for at least six months during such taxl year, a relent of such foreign country. (b As used in this act the term "'permanent establishment'Y includes real cents of maaeet tttory ofties or sats, branches, mines oil wells, factori , workshops, warehouses offiese, agencies, and other fAxe places o business; but the fact that an individual who Isa resident of a foreign country, or a corporation created or organized in or organied under the law of a foreign country, has business dealing Inthe United States through a bona Ade oommisslon agent or broker shall not be held to mean that such individual or corporation has a permanent establishment In the United States. Income allocable to permanent establishments in the United States shall be determined in accordance with regulation, presribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury. It, in the opinion of the commisaement in a country other than swooer, a corporatiop has Its real center of m that In or under the laws of which it was created organized, such corporation nt is situated. may be treated as if orgsaized where 10 real center of maa shall W~ve the same meann "owhen used in to) The terms used In this the venue act of, 1928. (d) This act may be cited a the "International double tpaton relief act of

4

FuBZUaAT 18, IM. HM. WiWI&s C. HAwLT,

Chainnsft Cmsuileseon Waelid MOGO MT Duaa Ma. OMaIMMIAM: In the anand report of the eretary of the e TenMu for the fiscalst endsd June 89, 192 some of the prinapls involved In th. plans proposed foe relie from Internattonal double taxation wero die-

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INTERNATIONAL DOUBLE TAXATION

3

cussed (pp. 26-28). It wu also stated that the Treasury would submit during the current session of the Congress its studies of the subject aid its recom. mendations, which will permit our Government to participate In the movement to eliminate International double taxation, The studies on the part of the Treasury, in which we have bad the collaboration of Dr. T. S. Adams, have eulminated in the draft of the bill transmitted herewith. The primary purposes of the bill are: (1) To transfer to other countries a part of the burden of relief now borne by the United States through the provisions in the revenue act of 1928 for crediting foreign taxes against the Federal income tax; (2)to free residents and domestic corporations from heavier rates of taxation In foreign countries in respect of interest, dividends, and certain other less Important Items of income through an offer of reciprocal exemption and thus subject them solely to the United States tax; and (3) to secure for United States eitisens and corl rations various advantages similar to those which a number of Important European Governments have granted their rpetive taxpayers In reciprocal undertandings. Even before the World War i number of European governments took measures to prevent the cumulation of taxes on the income derived from investments or business carried on In one country by a taxpayer resident Inanother. When the exigencies of post-war budgets caused ageneral increase In tax rates, the reultlng burden on international commerce became almost unbearable. At the worst, the taxes paid by a person residing in one country In respect of Income derived from another consumed almost all of the Income involved. Even to-day the superposition of the rates of the country of residence on those of the country of source may in some Instances absorb more than half of the income. In order to prevent this double liability there have been concluded at least 18 agreements between European States, the parties thereto Including such States a Great Britain, Franoe, Germany, Italy, the Netherlando, Poland, and Sweden. Prac©tically all of these agreement. are blateral, and there is a great diversity in their form and content. In order to assure uniformity in International tax law, committees of experts of Interested countries have been engaed for almost 10 years In studying the economic and practical poets of double taxation and in devising standard methods for Its elimination. Dr. T. S. Adams has collaborated with the representatives of other government In drafting projects for proventing double taxation. The last stop taken in the internationalmovement wua the adoption by the Congress of the International Chamber of Commerce, As terdam July, 199, of a uniform code of prinelple for eliminating double tlaxation. Nbis code was originally drafted by the American section of the International Chamber of Commerce, &n It akes Ito count the basis principles of the methods proposed by previous international gatherings, al s the Interests of the United States. The proposed legislation is band on this code, which signs ;nitmt Items of Income to the residence of the taxpayer for the purposes of taxation. Experience has shown that taxation at residence is not only the most practical, from an aduudstrative viewpoint, but it isaso the only place at which a highly progressive tax, such as our own, can be successfully levied. Moreover the observance of this principle to the extent coitemplated should Increase tax revenues. In 1928 Americans received $817,000 000 from lollgterm investments abroad a compared with $262,000,000 paId In the United States to forel Investors. (See "The Balance of the United State in 1028," by Ray Hall, Dpartment of Commerce, p. VI.) It has been roughly estimated b1y Mr. Ray Hall that in 1929, these figures have increased to $00,600,000 and S,000 000 respectively, revealing a muoh larger augmentation of income derived by Aericans from long-term investments abroad than by foreigner from such insstmentd in the United States. One of the objects of the bill is to free from tx abroad the Income flowing into the United States and collect full tax theruon. As the Income received by Americans isabout three times that derived from the United States by foreigners the excess of the gain from taxing Inflowing income over the low from exempting that flowing to persons abroad should be considerable in the lonls run, even taking Into conuideration items of Income otherwise exempt by foreign governments. The key provision of the bill is the first section which piovides that the United States shl exempt, on condition of reciproelty, the Income of Individuals reident abroad or foreign oporatons, exclusive of Income from (1) a business, trade, or Profession carried on in the United States through a permanent ntab. lishment; (2)compensation for personal services rendered In the United States; (17)

4

4NTKITNATIONAL

IM)VOL

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ald (3)inome derived froin real property located in the United StAt.., rental. and royalties thervfrom, gins from tat ae or other di"P0etion thereof, and intremt oil obligatiou. (other thaiu those of a ourportion), secured by such property. Tie.. excluded items remain taxable in the United States, The leiome exempted on owoditlun of reiprocity embrae such items As dividends and iteret, patent and copyright royalty, and such minor Items as private pwnsilsi anuitis, and income from casual transactions and from sles through bona Oide broker, The present reciprocal exemption for ship In proflita I extended to air navigation profits in order to faclitate the growth Ilakrnitiulad air transport The preet exezapjtion for renuneration of foreign government ofeials servIng in the United States i plaed on areelprca basis in orderprovision an th one to secure equivai lent exemption Jor our officla serving abroad. A mi.or relative tW the reciprocal exemption olGovernment penotli. The effect of both these sections is to permit uch nome to be taxed only by the paying government if it chmoese to do so. As previously indicated, taxes paid abroad on Income from foreign sources may now be credited against the United Otates tax. If the r ig1me contemiplated in the attached draftof a bill is brought Into effect, the United States Treasury would collect full American tax on such income but would forego taxes now collected on the designated cl&a of Income derived from sources within the Uited States by persons living permanently abroad or by foreign corporations. We do not now, however, colleo anyanormal tax on dividends paid to nonresi dent, and foreign corporations, and, In the course of time, the total amount of taxes withheld from other kinds of income together with the surax collected on the 4a& of a return should be les in amount than the credits allowed against the American tax for taxes paid abroad on similar foreign income. In addition to the advauto ape.rui~l to Auwrican taxpayer as the result of being: relieved of tax abroad, the Treasury should therefore benefit through Increased revenues. The bi transmitted herewith has been drafted primarily for th. purpues of preeen.ting the places involved Inas simple a form As possibe. Several teehuical amendment. to the bill amd to the revenue act of IM2S will probably be necessary prior to final Mation of your committee. Very truly yours, A. W. MIuoK, 8&c ruy o IAs Tretiryf.

STATIMNT 013 01. A.W,MELON, SECRTARY OF TI TREA8A gIT, ACCOMPANIED) BY RON. OODIN L. MLLS, TI UNDn. 81UTARY, 10 ALTORD, SPECIAL ASSISTANT TO T1I 81 IEC, TART, AND Dl, THOMAS S. ADAMS movement to prevent international double taxation and prQpoid to submit to you, during the prient e n of Congres., rwontinda. tioae as to the manner in which this Government could paricipate in the world-wide effort to remove this barrier to the expansion of foreign trade and Investments. These recoup mendations have been incorporated in the bill introduced by your chairman, Mr. Hawley. The movement to mitigate the evils and burdens that arie front the taxation of the same income, profits, or property by two or more country, has in recent years gathered considerable momentum, due to the high postwar tax rate and to the growing realization that double tasatuon of this character is unscientfic and unsound. Sine 1921 most of the Euraean countries have entered into two-party agreements under which they preclude the double taxation of ali Iknds of income. Thee aorooments embody reciprocal conceioss. Instead of one State bearing the ntire burden of relief, as is done in the credit provisions of the-United States revenue act each party to the Iguropean type of agreement shoulders it share. Unfortunately, these M ments differ widely in form and content.

finances for the fiscal year ended June 30, 1929, 1outlined the general

Secretary hI ILwN. In my annual report on the state of the

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INTERNATIONAL DOUL',2 TAXATION

While governments have been entering into various arrangements, international committees of experts--for the most part high govern. meit officials-have boon endeavoring to evolve a unifomm scheme of relief from double taxation. Dr. T. 8. Adam has been the American member of these committees. The outcome of these efforts was the adoption, by the congresW of the International Chamber of Commerce at Amsterdam, July, 1929, of a uniform code of principles for eliminating double taxation. This code was prepared by the double taxation committee, of the embodied those principles of taxation which are considered the most favorable not only for American interest but also for world commerce in general. It represent. a consolidation, in so far as possible, of the model conventions for eliminating double taxation at the Geneva conferenc on double taxation, October, 1928, and embodies the followed In the proposed legislation. As you gentlemen know, our revenue laws make partial provision against the evils of double taxation by crediting, against our Federal income tax, taxes paid in foreign countries, and in the ase of s ping rofits, by offering to exempt the profits derived in the Uiited tates foreign companies if the country under the laws of which their pa were documented grant an equivalent exemption in respect of the shipping profits derived by American companies in its territory. Argentina, Canada, Denmark France, Germany, Great Britain and Northern Ireland, Italy, Japan the Netherlands, Norway, ad Sweden are among the countries whiich meet the requirements for reciprocal exemption. Thus, American ships today are exempt from tax in many countries in which they embark passengers or freight, and are, therefore, liable only to the income tax of this country. The benefits assured the shipping industry by this leI lation are of very great value indeed. In so far as the credits for foreign taxes are concerned, at the time the legislation was first enaced the sacrifice involved was relatively unimportant, but as our foreign trade and investments expand the credits claimed for foreign taxes correspondingly increase, and in 1927 American citizens 2,534 807 in respect of the taxes imposed and corporations ei by other countries. Even so, full relief is not afforded, to American enterprise abroad. Our credit for foreign taxes islimited. It permits the foreign tax to be credited, in effect, only up to the amount of the American tax. Because foreign tax rates are in general higher than our rates, Americans still pay, despite the relief afforded by our credit, a considerable tax to the foreign countries in which they do business. There am generaRy speaking, two lines of approach to the solution of the double taxation problem: The first is by treaty with one or more countries, which involves mutual concssions in respect of the station of the nationals of the treaty-mak"g countries. The objections to this method appear to me to be that the concessions a more likely to be based on bargaining thaa on sound principlee of taxation, and that this method results in the taxation by the United States of the nationals of different countries on dissimilar bases.

American section of the International Chamber of Commerce, and

substacor(erehce. modelprinciples ocontained inby Doctor have been nce of the The conventi n proposed this code Adams at that

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INTERNATIONAL DOUBLE TAXATION

While there are some obvious advantages in the treaty method the Treasury Department believes that what I may call the reciprocal exemption method is the sounder of the two and more in accordance with traditional American policy. Broadly speaking, the measure now before you for consideration divides income into two classes: (a) Certain items which are to be exclusively taxed at the residence of the taxpayer and exempted at source; and (b)other items which are subjected to the full tax of the country of source. The items of income taxable at residence include interests, dividends, patent and copyright royalties, and a few other Items of minor importance which can be conveniently taxed only at the residence of the taxpayer. Interer and dividends are made taxable at the residence of the taxpayer primarily because that is the only place where interest and dividends can be successfully subjected to progresve income tax. Our withholding provisions and our collection at source (despite unusually good administration of these pro. visions of our tax laws do not work effectively as regards interest and dividends paid to foreign taxpayers. Under the proposed bill, we would give up a tax which we do not collect successfully, for a tax which we lnow we can collect. In addition, taxation at residence represents the sound principle of taxing interest. Where a tax on interest is collected at source, it frequently must be borne by the debtor. To accomplish this end, it is proposed to secure the exemption in other countries of such income derived by American investors through offering a reciprocal exemption from the American tax. The reciprocal exemption of the items of income mentioned should not mean a sacrifice of tax revenues by the United States but should effect a gain in the course of time. Under our present law we collect no tax on dividends flowing to foreign corporations and no normal tax on dividends derived by nonresident aliens. It is true that nonresident aliens are liable to American surtax on dividends and other income in excess of $10,000 but it is impracticable to collect surtax from them because the collection of surtax is dependent upon the filing of a return, and a the alien is beyond the jufisd~ on of the United States, It is almost impossible to enforce any penalties for failure to file the return. At the prnt time we know im information returns that $6,426 420 have been paid in dividends to nonresident aliens who have filed no surtax returns. With regard to interest in 1028 only $1,175,777.83 in tax were withhold from interest ala to nonresident aliens. As you know the nonresident aken on fing a return is entitled to a $1,500 permnal exemption, which means that the Bureau of Internal Revenue after

dIctions.

The second bass on which avoidance of international double tax. action may rest is exemplified by our present law covering the taxation of shipping profit., which as I have already stated, authorizes the exemption of foreign shipping profits providing the shipping profit of Aierican companies are exempt from taxation in foreign countries. This plan permits the adoption of sound principles in respect of the taxation of income yr profits taxable in different jurisdictions, and the offer to all countries to appl, these principles uniformly to the taxation of their nationals providing they will apply the same prA. iples to the taxation of American citizens in their respective juri-

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INTERNATIONAL DOUBLE TAXATION

7

sorting out all the ownership certificates filed by the nonresident alien and checking his tax liability must refund the tax on $1,600 in a considerable number of cases. Again, in respect of interest the nonrei. dent alien is liable to surtax if his total net income from American sources exceeds $10,000, but the difficulties in collecting surtax from them are almost as rat as in the case of dividends. As only $590,515.13 were withheld from copyright and patent royalties in 1928, the exemption of this type of income would be well worth while if in return we obtain for American owners of patents and copyrights the exemption by other countries of such income from licenses in their territory. The items of income subject to full tax at source include: (1) In. come from a business, trade, or profession carried on within the country through a permanent establishment; (2) compensation for persona services performed within the country; and (3) income from real estate, including rentals and royalties therefrom, gains from the sale thereof, and interest on ordinary loans secured by such property. If a foreign enterprise has a permanent establishment in the United States, such as a factory, sales office warehouse, or any other fixed place of business, the United States levies its full tax thereon at the corporation rate if the foreign enterprise is incorporated, at the com. bind normal and surtax rates if the foreign enterprise belongs to an individual or partnership. It is proposed to tax business income at source primarily because we can not permit foreign business concerns to compete with American concerns in our market without subjecting the foreign concern to the same tax which the American concern must pay. Similarly compensation for services rendered in the United States by an alien individual and income from real estate situated in the United States are to be taxed at the usual rates. If an American resident in the United States or a corporation organized in the United States derives any of these types of income from a foreign country, that country will levy its full tax thereon but such tax may be credited against the American tax in accordance with the credit provisions authorized by section 131 of the revenue act of 1928. Consequently, under the propoed rdgime, residents, American citizens and domestic corporations will still have the benefits of the credit provisions in respect of income taxable abroad, and have the additional advantage of receiving their interest, divi. dends, and royalties from abroad without deduction of any tax in the country assuring the reciprocal exemption. As, a consequence of the exemption in foreign countries, there will be no occasion to credit taxes in respect of dividends, interest, patent and copyright royalties and the other minor items of income thus exempted, against the American tax, which means that the United States Will collect full tax thereon. This should result in an increase in revenues. It is impossible to compute exactly the amount of taxes on the above-mentioned items of income which have been credited against the American tax, but one may deduce I. the ratio of income derived by Americans from forei sourest0 the amount derived by foreigners from American sources that * propod enactment should not reduce our revenues, but rather hiues. # thm in the long run. The machinery for bring the proposed ri into effect is verj simple. It consists in extending the application of the prindple of

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8

INTERNATIONAL DOUBLE TAXATION

rcal exem-p-tion and observed the revenue shipping profit udir section 212 (b now 231 (b) ofin the case ofact, to dividends,, interest, and other relative unimportant items of income previously mentioned. It is hoped tat other countries mayenactments, offer meet this Worresponding just of reciprocal exemption by means of as has been done in the case of shipping profits. The opportuneness of the proposed bl is shown by the fact that in the course of the last year this Government has received informal advices from Canada, Great Britain, the Netherlands, and Switzerland that they would welcome the possibility of entering into reciprocal understandings with the United States. A telegram has just been received from the American Embassy at Pari stating that the French Government wishes to conclude a double taxation arrangement. It is not improbable that this Government may in due time have occasion to effectuate reciprocal arrangements With Germany, Denmark, Sweden ad other countries. The proposed bill offers a uniform and simple basis for preventing double taxation as between the United States and such interested countries. Mr. GARNER. Mr. Secretary, let me ask you some questions. You refer to the arrangements made with reference to shipping profits. Explain that, wTl you, just whit you mean, on page 8 o1 your statement? Sfcretay MzLw. That is the measure under which an American company is taxed bT the United States on all its. shipping profits, whether rignating in this country or in a foreog country, and is exempt by -foreign countries, anda foreign ahpping company is exempt by us, upon a reciprocal bass. Mr. GARNZR. But that is an American law and it does not depend on any arrangement. of any kind. Mr. Mius. It depends on reciprocity, Mr. Garner. Mr. GAuZA. It depends on legtistion of other countries? Mr. MILLs. Yes, sir; foreign nationals do not get the exemption in this country unless the foreign country exempt. American nationals. Mr. GAAwu. In what bill-is that contained, or in what law? Mr. Mizs. Oh that is in the 1921, 1924, 1926, and 1928 acts. Mr. GARNER. Shipping acts.? Mr. MILLS. Revenue acts-in the last four revenue acts. Mr. 04NwR. Well I do not recall that particular provision of the legislation. If I understand it, then the 1928 act provided that in case foreign countries gave this country an exemption of its shipping profits origated in this country, we would, in turn, exempt our shipping profits in their country? Mr. Mu s. Well, we made the offer and whenever the Commissioner of IUternal Revenue finds that a foreign country is exempting the income earned by an American shppnompny in it. territory, w.y then we exempt the earnings of the nationsof the foreign counJMr. T DWAY. Wou!o it not be well to have thl section of the law quotr.? W,. ALvOID . It is found in section 212 (b) of the 1928 act, applioa le to individuals, and section 231 (b) applicable to corporations. Itu 'provided that income which consists exclusively of inoomp from she operation of a ship or ships documented under the laws of a foreign eouptry will 4 exempt from tax by the United States-,

try-n the United States.

Mr. dARNz. Suppose you read thai.
21~

INTERNATIONAL DOUBLE TAXATION

9

[Reading:)

Mr. ALVORD. Yes, sir. This is on page 64 of the 1928 act.

The income of a nonresident alien individual which consists e.cluiively of earning derived from the operation of aship or ships documented under the laws of a foreign country which grant@ an equivalent exemption to citizens of the United states and to corporations organied In the United States, shall not be included In gross Income and shall be exempt from taxation under this title. Mr. GARNER. What was the practical object in putting that

principle into the bill, to encourage our shipping industry? Mr. ALVORD. I think it had two principal objects; first, the very
practical purpose of simplification by attempting to avoid allocation

of the income derived. A ship, for example, carries freight from the United States to Great Britain. How much of the freight charge is derived from the United States and how much is attributable to the voyage to Great Britain, and how should the expenses be allocated, are very difficult questions. The fact that a great many of the shipping cases are still pending for years prior to 1921 indicates the .dilculties. Second, there wa the purpose which you suggest, the fact that the income should be subject to tax but once. The present law is based on the principle that the United States will tax the American ship on all its income wherever derived and the foreign country will tax its ship on all of its income wherever derived. Mr. GARNER. It was more in the interest of simplification, however than it was reciprocal taxation was it not? more important.
Mr. ALVOED. It camed both, Judge; I do not know which was

at the time they recommended it? Mr. ALVORD. I was down here at that time. Doctor Adams was represents the Treasury at that time, and I think can go into the details with you. Mr. GARN. Let me ask the Secretary another question, if I may. How are these agreements arrived at in the European countries that you refer to in your statement? SecretV MELLON. They would be naturally inspired by the fact, if we had this measure, that they could obtain the advantages of the offered exemption by adopting a reciprocal measure. Such action Secretary MZLLON. By the various countries. Mr. GmNR. But how did they arrive at that agreement; did- they arrive at it in the form of a treaty? Secretary Mauox. By passing a law the equivalent of ours. Mr. GARNE. Have you any of those reciprocal agreements in the form of a treaty or legislative act? Secretary MzLLON. Well, of course, this measure has not afforded the opportunity as yet for such arrangements. Mr. MIs. Mr. Secretary, I think Mr. Garner is referring to Agreements now existing between the various European countries. Mr. GARNER. Yes..He refers in his statement to remprocal agreements that now exist between foreign countries with reference to double taxation. Mr. Mzixa. They are by treaty., (28)
would be taken voluntarily. Mr. GARNa. By the various countries?

Mr. GARNSR. What did the Treasury Department consider it was

10

INTEtNATIONAL DOUBLE TAXATION

Secretary MELLON. No. Mr. GARNER. Well you have got to make some kind of arrangements with' foreign countries else this law would not go into effect. Secretary MZLLON. No; it is only affording a basis by which they can enact legislation which will accommodate the reciprocal arrange. ment. Mr. GARNER. YOU say they have reciprocal arrangements ii Europe. Has any European country enacted any leAtion proposing reciprocal relations with this country, conditioned that we I enact certain legislation? Secretary MELLON. No; but I suppose on the shipping question we have. We would initiate the shipping legislation, I presume, ourselves, would we not? Secretary MELLON. Is not this just the same; we do this ourselves? Mr. GARNER. I am asking you now whether any European country has enacted reciprocal legislation conditioned that we enact certain legislation.ADAMS. No; but in respect of shipping profits there have Doctor been many enactments. England, France, and country after country has accommodated its legislation to our legislation. Mr. GARNER. Now I would like to ask the Secretary to have that placed in the record at this point-legislation of other countries applying to this country that would depend upon legislation of this country-so that the committee may consider the question whether or not they would reciprocate that leg nation; because, as I uiderstand it, various and sundry countries have passed certain acts lookto reciprocal taxation with this country. Doctor ADAMiS. On the shipping.:
Mr. GARNER. You suppose on the shipping question we have.

foreign countries.

Mr. GARNER. How were they arrived at? For instance, did. France and England have a treaty on the subject? Secretary MELLON. By the usual treaty arrangement. Mr. GARNER. Treaty arrangement? Secretary MELLON. Yel. Mr. GARNER. Now the thing I want to call attention to, Mr. Secretary, is that, so far as I know, outside of this shipping you called attention to-and I think that was in the interest of simplification of taxation, more than a reciprocal relation-in my recollection this is the first time I with that Congress has been the arrangement legislation dealing recall a foreign country where requested to pass should be made other than through the State Department. Here you are proposing to enter into what you term treaty obligations, the obligation of one country with another, and you are proposing to do it through the Treasury Department rather than through the State Department. Mr. MiLLs. I suppose it is a matter that would bring about the enactment of legislation in the foreign country which would afford this reciprocal advantage, and our information in respect thereto would come through the State Department. Mr. GARNER. Yes; but, Mr. Secretary, you are proposing here to authorize the Treasury Department to enter into negotiations with

INTERNATIONAL DOUBLE TAXATION

11

Mr. GARNER. I would like to have that put in the record at this point. It is my understanding you have that and, if you have it, it would be interesting to know just what those authorizations are of foreign countries to this country. Mr. MiLLS. We have received no such offers from foreign countries except informal suggestions that they would like to enter into double taxation arrangements with us. There were no reciprocal enactments except to meet the requirements of our legislative provision concerning shipping profits. You must remember, Mr. Garner, that all this question of international double taxation is comparatively new; in fact, the study of it goes back only a few years. They. have had two or three general conferences in Europe attended by Doctor Adams. They have drafted model conventions that have been submitted to the various countries and, in the meanwhile, many of the European countries have proceeded to solve the problem by a series of treaties which is the usual European method of dealing one country with another Mr. GARNER. May I interrupt you there just to ask if that is not the general custom in this country and does not the Constitution of the United States provide the method by which to make agreements with foreign countries? Mr. Miuas. That is the very ti'I was coming to. Now, there are two ways of approaching the problem in this country. You either can make a treaty with a number of countries which, of course, is based entirely on bargaining. If we take up the matter with France to-morrow, we will endeavor to get the best kind of a bargain we can for our nationals and, in reaching that bargain, we will have to make concessions in so far as the taxation of French nationals is concerned, and the kind of a bargain will depend entirely on existing French laws and our laws. Now, if we take up the same problem with England, it results in another treaty, but England has not got the same tax laws as France and may not be in as strong a barga ' position; therefore, a British citizen in this country may not receive as good terms as a French citizen. Then we make a treat with Holland then we make a treaty the bargaining principle. make when you get through all based on with Switzerland; then we And a treaty with benmark; you have the United States in the position of taxing the nationals of different countries in this country on totally dissimilar bases, depending on the character of the treaties made through the bargaining method. Now, the other proposition and that is the one which we are advocating, is to say that taxation should not be based on bargaining, but on certain fundamental principles and inasmuch as this double taxation question is now before the world the United States is going to endeavor to take the leadership by asserting certain basic principles that should be observed. We will adopt those principles and if any nation recognizes them and accepts them in so far as the treatment of our nationals is concerned, we will accord its natitmals the benefit of the application of those principles. Now, you say that is not the historic American position. I maintain that is precisely what it is. The question has not arisen hitherto in the field of taxation, because international taxation was not of great importance until after the war; but in the field of tariff duties the question has arisen ever since we have had a Government, and our UmO9
0--S--vol. 1-3(

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INTERNATIONAL DOUBLE TAXATION 2

method of dealing with our tariff relations with other countries is the identical method which we are suggesting in the field of taxation, as contrasted with the European method. The CHAIRMAN. That is, you have in mind the most-favorednation clause? Mr. MILLS. I have in mind, Mr. Chairman the fact that a good many European countries deal with their tarik laws entirely on the basis of commercial treaties with different countries, applying differ. ent rates to goods of different countries; whereas with one or two possible exceptions, my recollection is that the United States has always made the same offer to the entire world rather than to enter upon a series of bargaining commercial treaties with different nations. We have laid down our tariff rates applicable to the same goods no matter where they come from, but with a maximum and minimum provision, depen ing upon the treatment which our goods receive. In other words, we nave a uniform policy in the field of tariff applicable to all foreign countries, and not a series of bilateral treaties made with different countries, and that is the very principle we are endeavoring to follow in this case. Now you say that we are transferring the jurisdiction over foreign questions from the State Department to the Treasury Department. Of course, I think that statement arises from a misconception of what we are suggesting to Congress. You would simply pas a law saying that the taxation of the nationals of different countries would be on such and such a basis, providing they accorded similar treatment to nationals of the United States. There would be no bargaining; there would be no treaty; there would be no taking up the question with foreign countries through the Treasury Department. The only question we would have to ascertain, or the Commissioner of Internal Revenue would have to ascertain, is whether the particular foreign country taxes American nationals along the lines that we suggested we would tax their nationals. The State Department would obtain the information and would submit it to the Commissioner of Internal Revenue and, if he was satisfied that the reciprocal advantages had been granted our nationals by a foreign country, the law automatically would go into effect with regard to the nationals of that country, just as it does in the case of shipping profits to-day. Does that make it clear? Mr. GARNER. Well, I think so. Mr. Secretary, you referred to partnerships and individuals and did not include corporations: What is the distinction between the two? Secretary MELLON. I do not think there is a distinction. Mr. MILLS. There is no distinction, Mr. Garner. Mr. GARNER. You referred to partnerships and individuals in your statement. ,cretary MELLON. I also referred to corporations.
Mr. GARNER. How is that? Secretary MELLON. I do not think I made any such distinction.

Mr. GARNER. You do not think there is any difference between the two? of a foreign company: In what position would it be with reference to reciprocal taxation? (26)
Secretary MELLON. No. Mr. GARNER. Take a corporation in this country owning the stock

INTURNATIONAL DOUBLE TAXATION

13

Secretary MzLLoN. If that foreign corporation had its plant, its main center of business activity, in a foreign country, the foreign country would, of course, tax that property and the income from that business. Mr. GARNER. And it would be exempt in this country? Secretary MELLON. It would be exempt in this country, unless it carried on business here through an establishment, in which case we would tax it on the profits allocated to that establishment just as we would tax any American concern. Mr. GARNER. You have, we will say, a corporation in this country, for instance, that owns 100 per cent of the stock of a corporation doing business in France. country, although owned by American citizens. If its principal business was done in France it would be exempt under this reciproc relation? Secretary MZLLON. Yes, if it did no business in the United States. Mr. GAINER. Have you in mind, Mr. Secretary, from the console. -dated returns in your office, the amount of capital invested in Euro. pean countries and held by a holding company in the United States? Secretary MZLLON. I do not think that information has been tabulated nor segregated in the returns at all. Mr. GANER. Well if a corporation in this country owned, we will say, or had 8 or 10 corporations in different foreign countries, and the business of those corporations were transactd in the forei States and ,countries and there is only one corporation in the United the principal revenue it got would be from those foreign companies, -or the individuals in it, they would be exempt from taxation under this reciprocal relation? Mr. MILLS. No, Mr. Garner, they would not; the situation re mains unchanged. Mr. GARNR. The Secretary just said a minute ago, when I illus. trated it by saymg that a corporation in this country owns 100 per cent of the stock of a corporation organized in France, but the oor portion in France does its principal business in France-that these reciprocal relations would relieve that corporation from paying anytn in the United States. Mf. Minis. No, sir; it would leave them just where they are to-day; a tax would be paid on every cent of dividend received by the parent corporation. parent corporation, but accumulate it over there and hold it in the corporation? Mr. MILLS. If they come in the -Iss of a foreign subsidiary, then the situation remains just as it is to-.Ay. Secretary MZLLoN. Exactly. Mr. GARNER. And the discretion ia left with the corporation in this country whether it will file a separate or consolidated return? Mr. MIn&s. No; it can not fie a consolidated return for the foreign
Mr. GAiNME. Mr. GARNzR. Suppose they do not pay any dividends to the
Secretary MZLLoN. Yes. Mr. GARNs. That corporation in France is incorporated in that

subsidiary.

Mr. Mime. No, sir.

I say it is left discretionary?

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Mr. GARNER. Has not each corporation the right to say whether it will file a separate return? Mr. MILLS. Not so far as a foreign subsidiary is concerned. Mr. GARNER. I am speaking of the law of 1928. Mr. MILLS. My understanding is you can not file a conslidated return for the foreign subsidiary, Mr. GARNFR~. Not for the foreign company, I understand that. Mr. MILLS. If you have a subsidiary in the foreign country, you can not include that in your consolidated return; is not that correct? Mr. GARNER. But you can file a consolidated return and leave that company out. Mr. MILLS. You would have to leave it out.
Mr. ALVORD. That is right.

kind: You have in this country a corporation that has subsidiaries to the extent of 12, we will say, and 1 of those corporations is in France- its principal business is done in France. They make a consolidated return in this country for 10 corporations and make their return in France and pay no tax on the profits the American corporation made in that country until they send them a dividend; that is correct, is it not? Mr. GARNER. In other words, the foreign corporation does not pay anything unless it gets a dividend, regardless of what country owns It? Mr. MILLs. The foreign corporation pays no tax if it receives no income.

Mr. GARNER. Now let me bring it down to an illustration of this

Mr. MILLS. Yes; that is the law to-day. Mr. GARNER. They would not have to pay anything? Secretary MELLON. Not if they did not receive a dividend.

Mr. GARNER. Mr. Secretary, you recall a meeting we had in your office-and it is what I want to ask you, about and get your viewpoint -of certain Members of Congress, of the House and the Senate, yourself, Mr. Mills, and I think Mr. Alvord was there, as I recall, from the Treasury Department, in which we sought to get unanimous agreement to reduce the taxes for this fiscal year, the calendar year 1929, to the extent of about $160,000,000. You recall that meeting? Secretary MELLON. Yes.

meant I made with reference to the agreement, that if we would agree to that (and we did agree to it) there was to be no other internal revenue legislation at tis session of Congress? Secretary MELLON. There was the understanding that so far as proposed but this is of a rather different character, and 1do not take it that it has a bearing on anything that affeota the taxation this year, nor in the next fiscal year, or of-a general character. This is not qute a species of domestic tax legislation such as was conis subject to different interpretations; but I did use the language and I ca each man there byname, including the Senators andMembers of the House because I happened to be the only Democrat from the House attenig that meeting and, if you will recall I said I bound
(28) templated in that conversation. Mr. GARNzR. Well, now, the question of contemplation, of course the Treasury was concerned there was to be no revenue legislation

Mr. GARNER. Do you recall any conversation had there or state.

myself and, as tar as I could, would use whatever Attle influence i

INTERNATIONAL DOUBLE TAXATION

is

this piece of legislation, with the idea ical effect on the stock market. That was one of tho, principal objects of that meeting as I conceived it, and I called on each man there and said, if they would agree there would be no other internal tax legislation at this session of Congress, I would endeavor to do that and each man responded that there would be none. And when this bill was sent over to my desk and notice was given of this hearing, I could not understand just how you gentlemen made this suggestion unless you had entirely overlooked that agreement. naturally, I have no doubt there are incidental matters of tax legislation that will come up from time to time. Mr. ALVORD. There are three or four or five technical amendments to the revenue act, and the staff of the joint committee has made certain recommendations. Secretary MELLON. These incidental amendments I would not
Secretary MELLON. I had never thought of that conversation in connection with this measure. This is so different in character and,

might have with the Democrats of theof tryingtotoget them to agree to House have its psycholog-

have taken as coming within the bounds of what you are speaking of.
what we had in mind was that legislation affecting the rates would not be considered.
MELLON. Yes. Secretary rates in we would JhThe CHAIRMAN. Thatclub dues andnot change anyt of thethat were various other the permanent law, or

The CHAIRMAN. I was at that conference. My understanding of

mentioned; but it did not have reference to administrative features, if it was found necessary to go into them for the purpose of simplifying the matter or extendig~ the operation of the administrative features. We were talking then about the rates of taxation. Secretary MELLON. Yes. The CHAIRMAN. The question before us was whether we would propose a general bill containing specific reductions in rates or propose what we did a reduction by resolution, of certain rates that were specified in die proposed resolution. Secretary MELLON. That is the conception generally which I have of that conference. Mr. GARNER. Mr. Secretary, by amendment of the administrative features of the law you could very materially affect the revenue of the Treasury, could you not? Mr. GARNER. Now this is just exactly the same thing; you are presenting an administrative feature here, as Mr. Hawley as termed it, which might affect the Treasury's receipts. Secretary MLLON. The consequence of this, though, is rather remote; it would not affect anything that comes within the time that those tax reduction measures affect.
The CHAIRMAN. Mr. Crisp desires to interrogate you, Mr. Secre.

Secretary

MZLLON. Yes.

tary. Mr. Ciusi. I just want to ask one question. Mr. Secretary, ar there any figures available in the Treasury Department that will show the amount of taxes that American nationals pa toforeign countries, and the amount of taxes collected by the United States on foreign nationals? In other words, I am seeking light as to who would be the

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capital invested in this country.

beneficiaries of this legislation if it were put into effect-whether American nationals or foreign nationals would gain by it. eretarT MELLON. I do not believe that can be approximately determined, at all. Mr. MILLS. I think we can, so far as individuals am concerned. We are having the matter looked into now and trying to make a careful compilation of returns filed at Baltimore by nonresidents. and I think we can get a fairly accurate picture. We did the same thing two or three years ago and found we were not collecting any very considerable amount. My recollection is when we last looked into it the principal foreign taxpayers (I am talking about individuals) did not pay more than five or six million dollars. Is not that correct, Mr. Alvord? Mr. ALvoRD. Yes, air. Mr. MILLS. Whereas, on the other hand, when you consider the very large sum of American money that is being invested abroad and the fact that taxes paid at the source are deducted from the American tax by.means of a credit, our best estimate is that in the long run we are oing to be the 900er from this legislation, rather than loser; but, inany event, we o to have the best figures we can get in the course of the next two or three weeks. Mr. GARNE. I would like to ask in that connection, if I may, Mr. Secretary what is the opinion of the Treasury Department as to the public policy of this country, by its tax methods, encouraging American capital to make investment. abroad? ecretary MELLON. I do not think there is any opinion on that, or any inclination to encourage investments abroad. That issomething that comes through the general working of foreign trade and commerce. Mr. GARNzR. Do I understand, then, that the Treasury Department does not believe in the matter of taxation we should encourage American capital to make investments abroad? Secretary MELLON. This is not in the nature of encouragng American capital to make investments abroad, but it is treating the matter of American taxpayers on a broad principle by which, whatever they do in that direction the will not be penalized. Mr. OARNER. Wel, I do not care to press you if you do not care to answer the question direct. My question was, What Is the opinion of the Treasury Department as to the public policy of arranging our tax laws so as to encourage American capital to make investments abroad? Secretary MzLLoN. I do not think there would be any occasion for arranging our tax laws with a view to encouraging investment of capital abroad. That investment will be made without regard to anything that we may do. Mr. GARNER. Well under this .arrangement that Mr. Mills has just spoken of, of this capital being invested abroad and making reciprocal, if it would be advantageus to that capital, that certanly would be encouraging that capital to make investment abroad. Secretary MELLON. It is to that extent; it is encouragin# to our investors. There is a very great volume of American capia invested abroad. Mr. GARNER. Oh, I know thm is. Semt7 MmwN. And very much more than there is of foreign

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Mr. GARNRa. I was just wondering, though, what your idea of the public policy should be with reference to enacting our tax laws-for instance, reciprocal relations-so s to encourage Imerican capital to make foreign investments. Seerotary MELLON. I do not think there would be any occasion to consider that in the making of our tax laws. The CHAIRMAN. Well Mr Secretar, is this the situation? As I understand this proposal, it are out of existing conditions of trade and commerce wherein our American people have made investments abroad and foreign people have mad investments in the United States, creating a certain situation and difficulty in regard .to tax matters, and this is a proposal to simply the situation so that it will operate fairly to all parties concernW? Seceitary MELON., Yes. The CuAwA. Now with referepce to inceasing our capital abroad or foreign capital hare, that situation exists now and wlt Is the best way to deal with itd Secretw7 MELLoN. It is just to afford an equitable arrangement to our citisn who do busines and have investments abroad and, in order to accomplish that, to afford the same opportunity to foreign investors in this country. Mr. GARNER. In other words, it we make reciprocal relations we will encourage Americans to make investment. abroad and the foreigners to make investment. in this country? Secretary MELLON. It will encourage general trade. Mr. GARNER. General investment--forigners investing in this country and Americans investing in foreign countries?

The CHAiMAN. Have you concluded your statement, Mr. SecreeretaVY MELLON. I have concluded. The CHAIRMAN. Have yo.u any statement to make, Mr. Mills? Mr. MiLw. No, Mr. Chairman; I think that Doctor Adams ishere, prepared to discuss the history of this movement and the specific r:iurea of it. Mr. GARNER. Mr. Mills, I wish you would give for the record your understanding of the conference that we had at the Treasury Department that Ireferred to a moment ago. Mr. Mzai. Well, I think my understai is the same under. stands the Secretar's Mr Garner, and I am confirmed in that belief by the fact that in the part of the annual report de with double taxation we stated very specifically that we would submit certain recommendations to Congress at this present session. I hap. poned to write that part of the report, and it was written at about the time of the conference and that would indicate to me very dearly that what we ha in mind was, it we passed the emergency measure deai with tax reduction this year, that woud prelude the Trea ury from comin to Congress with say general tax bill affeetwg the revenues or the rates t year. It never occurred to me that the nderstanding would apply to this kind of a suggestion. We are brinn it to you now beauseyou have more time for cosideration and study. Rt is a new question, a new problem, and if we should come in December, at a time when your minds will be occupied possibly with rates and the revenue neded for the next so year

Seeret

MuLwr. Exactly.

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and you feel the necessity of acting promptly in order to make the rates effective by March 15, this committee would not have the time to give to a new question. Mr. OARNER. Are you familiar with the debates in the Senate on the $160 000,000 reduction bill? Mr. Naui. No; Mr. Garner. Mr. GARNER. I think if you will examine the debates over there, there was an effort made to amend the bill over in the Senate and the statement was made by some of the gentlemen who attended that conference that they were favorable to those amendments but under the agreement they had entered into at the Treasury Department that there should be no amendments to that resolution and that there should be no other tax legislation at this session of Congress they could not support any amendment to it. I had occasion to examine this yesterday, I believe, and I had occasion to discuss the matter with Senator Watson and Senator Smoot and Senator Harrison and Senator S.immons, and that was their impression-that there was to be no other legislation at this session of Congress. Now, I am not speaking of that for the purpose of discussing the merits of this bill-at may have very great meit--but I do think we ought to be Very careful when we enter into agreements to observe them as far as it is possible to do so. Mr. Mius. Oh, I think it is esential and you malize, of oure, if it had occurred to anyone in the Treasury that this in any way violated the letter or spirit of any understanding, it wouldnever have been suggested; or, if it had been suggested it would have been presented with the sample statement that we calI this to your attention and ask you to examine into the legislation, not with a view of enacting it at the present time but to have it before you for study. Mr. GARNER. I recall one distinct occasion, Mr. Secretary, when I sought to modify an agreement made by you and you very frankly said, No, sir- you have made that agreement and you are going to keep it," and i said "Yes, si.;Iam going to keep it." (Laughter.i The CRAIRMAN. Would it be in order to inquire what the agreement was? Mr. MILL.& That is a dangerous question, Mr. Chairman. Mr. GMAI . Yes; it would be in order to inquire what the agree. ment was. I wtoted to modify in conference the 80 per cent deduc.e tion by the Stwter in the inheritance tax and I called Mr. Mills because be was t'woily one I had the conference with and I did not have anybody JU to we but him, and I called him and I said, "Would it be agreeable to you to modify this," and he spoke in very strong language over the phone and said, "It would not; you said you wou do so and so ad you are going to keep that agreement," and I said, "Yes, air; I am Roing to keep that agreement.' Lgaughter.j Mr. MuLas. Mr. Garner, I can assure yoa-there is not a thought on the part of any one in the Treasury Deparument in athe way to matter you think violate he spirit of an apemet. I think, f over, you would agree it is peetly legitimate, even in view of th. ee nt to come here and submit this proposition to you for your iovsderation at this time, so as to give you plenty of time to think it over. Mr. Rwssnru On the first pag of the bill it spsakof the income of an individual and of a orpom Uon, in line 3. Nov them I pro(3)

INTERNATIONAL DOUBLE TAXATION

19

sume you mean a United States citizen riding abroad, doing busi. now taere; is that correct? the law of a foreign country." Does that mean a corporation located in another country, say Switzerland, organized under the laws of Switzerland, and the stock owned by American citizens, or what does it mean? Mr. MILLS. It means just what it says, Mr. Ramseyer-a cor. poration created or organized in or under the law of aforeign country, a foreign corporation. Mr. RAMsz R. Suppeos it is owned by Swiss citizent-we have nothing to do with that; there is nothing exempt there? Mr. MLLS. We would have if partio their income were derived in the United States, you see. Of course, if they have no income from the United States, we are not interested i them; but if they happen to have income in the United States, they ome squarely under our jurisdiction. Mr. RAuMsKy. Do you mean then, in line 3, any individual, whether a foreianer or United States citizen? Mr. MILLS. Yes; who is a foreign resident. citizen in Switzerland? Mr. MIans. Yes. Mr. RAUGzrza. The business he does in Switzerland is not to be taxed here? Mr. MiuA. That is right. Mr. RAUSBY'R. Then a Swiss corporation, either owned by the Swim or Americans doing business in Switzerland, is not to be axed here? Mr. MILLS. Oh, you can not make that sweeping statement; you have to read all the provisions of the bill. They are not to be taxed on certain types of income derived in the United States; but, on the other hand, if that Swiss corporation maintains a permanent establishient in the United States, then it has to pay a tax on the income that i properly allocable to the business done in the United States. Mr. RAMsVEs. I know; I have read the bill through once, and there are certain exemptions, but I want first to get at the use of these terms.. Now in line 3 what do you mean by individual and, in line 4, what do you mean by corporation? Mr. MILta. Well the word "individual" means an individual, no matter what his nationality, and he is to be taxed on dividends, interests, royalties, at the place of residence. It is true that the corporation if it does business through a permanent establishmentor the individual who maintains a permanent establishment-in this county, is to be taxed on the income that is properly allocable to the tstablishment in this country. Mr. Riasxrza. In the first six lines it deals with individuals and Mr. Mite. Yes. Mr. RAMS 'rt.And, speaking of corporations, limits it specilo. ally to orporations orgaiised in or under the laws of the foreign
corporations who are resident abroad. Mr. RAM&Z5Tt1. That is either United States citizen or Swis Mr. MILLS. Yes. Mr. RAMs;YzB. Now in line 4 it is corporation organized under

country. Now you s.,a they shall be exempt. Of ourse, you do not mean that a Swiss citizen or a Swim corporation doing umness in

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Switzerland, with no business here. It would be absurd to try to cover individuals and corporations and businesses wholly in another country; certainly you have no reference to that kind o a situation. Mr. MnLe. We certainly have, Mr. Ramseyer. A Swiss citizen who owns stock in an American corporation or derived interest from American bonds is taxable in the United States to-day. Mr. RAMSIZYR. Well, but the first four lines there have reference to an individual abroad and to a business abroad and to a corporation abroad. Further on you make some provisions covering what you have explained; but here, in the first page, you certainly, in line 3, have in mind a certain kind of individuals. That is what I am trying to get at. And in line 4 you must have in mind a certain kind of corporation. Mr. MrnAs. We have in mind a now resident individual and a foreign corporation. Mr. RAMsBEzR. Then when you get down further line 9, with re spect to the income of individuals resident in the United States, that means either foreigners or citizens, I presume? Mr. Miuas. Yes. Mr. RAMBSIER. Now, then, if we want to tax the business abroad of individuals or corporations resident abroad, if that country will not tax the individuals or corporations here, it would only apply to foreign individuals and corporations owned by foreigners here. Now, in line 8, you have individual in the singular: in line 9 you speak of individ. us]a in the plural. Is there any significance in that? Mr. MILLS. Why I do not think there is any si'gnifcance. hen why not have it plural in both places or Mr. RAUSBRY. singular in both places? Mr. M I. I tae it you could with respect to the income of an individual who is a resident of the United States-I take it that the meaning would be the same. Doctor Adams did most of the actual drafting. There is no significance in the use of the plural, is there, in the second place? Mr. RANMSmn. You are loaded down there with experts in the Treaury Department and everything that comes up here has a pecul. nifiance and I am trying to get at that. ir Mr. Muzm. I do not think Ihere is any significance in the use of the singular in the first place and the plual in the second place. If the committee ever sits down and reads this Mr. RAMSZYIv. bill section by section, we will have the service of your experts to explain what you mean by these various terms? Mr. Mius. Yes, I presume the usual procedure will be followed of discusing it line for line. Mr. EsmIP. Mr. Mills, I do not know that I have got this clear after these questons. Sup psn that an American citizen went over to England and took up his permanent resident abroad and held stock in a number of American .rorations: At the present time he is an American citizen residing i England and pays to the Government an income tax from the dividendderived from those stocks and bonds. Mr. Ma. He doe. Mr. Erna. And he also, as I understand it, pays an income taxin
Doctor ADAM. No.

England?

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Mr. MILS. Yes. Mr. EsTje. Upon the income derived from these same stocks and bonds? Mr. Es'ra. So if this bill goes through or is passed, we will collect the income on those stocks and bonds and, if England agrees with us, she will relinquish her right to collect; and if there was an English citizen living in this country, as his permanent residence, we would relinquish our right to collect on any dividends that he might collect in English-owned corporations? Mr. Mxi s. No; it is just the opposite. Mind you, in answering your first question in the affirmative, I am answering from the standpoint of what the law is. Actually, I take it, an American citizen with an American income would be careful to maintain an American residence so as not to be caught in two jurisdictions. In other words, he would not be a permanent resident of England and keep his American citizenship and pay full tax in both places. Praotically it would not work out that way. But under this bill, if he actuay established his residence in England, so far as his income from dividends and bonds is concerned he would be taxable in England, and the Englishman resident in the United States would be taxable in the United States, no matter where the income from capital-invested abroad was derived, if it were paid in the form of interest and dividends. Mr. EsTZr. That is under this bill, or under the existing law? Mr. WATSON. An alien owing re estate previous to 1918 and should sell it at an advance, he would be liable for taxes?
Mr. MILLS. That is under this bill. Mr. MILLS. In this country? Mr. WATSON. Yes. Mr. MILLS. Yes. Mr. WATSON. Suppose he does not come to this country, how can Mr. MILLS. Yes.

you Collect it? Mr. back Of course that a difficult plain, practical of the reasons Mi ,.of thi legislationisis that as8 aquestion and onematter, unless you have jurisdiction over the person, it is aost impoible to apaprogressive income tax. Mr.. WATSo. If anAmuican citizen resided in England, we would not be able to collect the taxes? Mr. Mas. Unless we can actually get our hands on him or his P r. WATSON. I presume there are many instances? Mr. MausJ. Well as the statement presented by the Secretary says from information on returns we know of $5,000,000 in dividends subject to surtax and no returns filed. Mr. WATSON. Dividends alone; no taxes on real estate? Mr. MILLs. You can not enforce progressive rates against nonresidents who never come to this country. Mr. ESTs?. There is in my mind no. question of a double tax; because, if your answer to my question is the proper one, then there is no double taxation. Mr. MILLS. There is as a matter of law, but I think that a man while he could spend a great deal of his time in England, would probably maintain his residence here and probably spend enough of

I

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his time in the United States so as to maintain his American residence and not be taxed in both places. But if he were a resident of Great Britain and a citizen of the United States, he would pay a full tax on his entire income in both jurisdictions. the circumstances I set out, if he lived in England and retained his ,citizenship in this country. Mr. EsTur. Under the existing law, what would be the effect under the same circumstances? Mr. MILLS. Under the existing law he would pay full tax in Great Britain and full tax on that particular income in the United States. Mr. FRZAR. Right in relation to that, would that be true if an American citizen wished to ro abroad for the purpose of escaping taxation, assuming he would do so because of a lower tax over there. Mr. MALtS. Mr. Frear, just before answering that question, I want to make one correction here. I am afraid my statement was a little too sweeping. My understanding is that on his American tax the gentleman you mentioned would receive a credit for his taxes paid to England on his British income, would he not, Doctor Adams?
Mr. MILLS. He would pay full tax. Mr. ESTs,. That is the question I asked and that is the fact under

Mr. GARNER. On gross receipts? Doctor ADAMS. Not on dividends.
Mr. MILLS. Not on dividends?

Doctor XDAMS. Not on dividends.

Doctor ADAMS. On foreign dividends he would. Mr. MILLS. But not on American dividends? Mr. FRNAR. The question I had in mind, was whether a citizen of this country, could go abroad for the purpose of escaping taxation onMr. property on his income,practical question, passage of is a perhis MILLS. hat is a very by reason of the but there this bill. fectly practical answer. Under the existing conditions in the world today few men would do that thing, because in almost any country in which he would want to live-he would pay higher taxes by becoming a resident there than he would pay at home. So that it is. hardly likely anyone will become a foreign resident for the purpose of avoiding taxes at home, as practical matter. Mr. FRAR. Suppose he goes to Norway or Sweden, or any other country temporarily and establishes a evidence there for the purPo Of escaping taxes? Mr. MiLS. Well to me it is inconceivable; but it is a possibility. A man who is rich enough to make it worth his while to expatriate himsef for the purpose of avoiding taxes would find it very difficult to do so in places fe would like to live in. I think he might find a country where he could escape taxes, but he would not be very happy there. Mr. FRZAR. How would the Treasury be able to keep trace of the residence of the individual; that ist what would be the method of determining whether he was a resident of England, a resident of Norway, Switzerland, Mexico, or a resident of the United States, if he g abroad? Mr. MiLu. Wel I think you would have to define what is meant by "residence." I mean there arecertain definite tests of a permanent home, spending so much time there, and so forth.

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2

Mr. FRaAR. But under section 8 in the bill it provides for a certain percentage of the year, a few months, to determine his residence. I am wondering what method of securing such evidence would be followed and how you would ascertain it. Mr. MILLS. It seems to me that is a question which arises right along now under any tax system. You have to determine residence, and those are the factors. Doctor ADAMS. May I suggest the answer to that? This bill con. templates no change in whatI regard as the very wise present American procedure, namely, to make every American citizen file a return and prove he pays tax abroad in order to get a credit therefor. Do 1 make myself plain? Mr. FRZAR. Yes; but, Doctor Adams, how does that answer the question? If he is going abroad for the purpose of escaping taxation and he establishes a residence temporarily there, he may not live there, but may contend his residence is there. Doctor ADAMS. Yes. is Mr. FRzAR. How are you going to determine that question, if he trying to avoid taxation? Doctor ADAMS. We are just where we are to-day, Mr. Frear, so far as the procedure is concerned. His theoretical duty under this bill would be the same as is his theoretical duty to-day; he would make a return to the American Government, putting in all of his income and taking his exemptions which can only be secured if he proves he is entitled to them. We are in a helpless position in that respect now, a good many fellows are going abroad and not making tax returns. But, so far as this bill is concerned, we are doing all we can do; that is the wisest procedure, so far as I know, and we stick Mr. GARNER. You have some gentlemen in this country who pay a pretty heavy income tax; that is correct, is it not, a rather heavy tax? Mr. MILLS. No; I. think to-day it is a reasonable tax. Mr. GARNER. I think it is a reasonable tax but the amount is considerable; as my friend in the other end of the Capitol says, it is "quite a lot for a poor class of people." as much as $10 000,000 a year income tax. As I recall, your last report showed their were 24 people that had a $10,000,000 income tax. Mr. MILLs. I do not remember that; it may be so. Mr. GARNER. That is what your report says. Now suppose some one wanted to avoid paying that 810,000,000 and, for a year, he trans. ferred his residence to another country and he would be exempt from that tax under this bill. Mr. MILLS. He would be exempt from a part of the tax. Mr. MILLS. No- he would be exempt only from part of the tax. Mr. GARzNu. %hat part of it would not be exempted, if he received it all as dividends? Mr. MILLS. Income other than dividends and interest and assimilated items.
Mr. GARNER. He would be exempt from all of it? Mr. MILLS. It is not a lot unless they have a lot. Mr. GARNER. Unless they have a lot, but some, I understand, pay
by it.

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INTiUINATIONAL DOUBLE TAXATION

Mr. GARNER. All right, and he received all of his income in the form of dividends, let us say, to take one thing. Mr. GARNER. He owed the Government $10,000,000 and he received it all from dividends and he moved into Matamoros, Mexico, had his residence over there that year: His income would be entirely exempt except for what he paid as a corporation tax at the beginning, would it not? Mr. MILLS. He could not just move temporarily into Mexico and claim that he established a permanent residence in Mexico. He would not be allowed to get away with anything like that. Mr. GARNER. He would under this law. Mr. MILLS. It is not my understanding that he could get away with anything like that. Is that correct, Doctor Adams? Mr. GARNER. You just said a moment ago if he received dividends and the other country reciprocated and exempted its citizens paying on dividends, you would exempt American citizens. Mr. Mi s. Oh, yes; but he would have to go to live in Mexico permanently. There is no question about that. Mr. GARNER. All right, he goes over there and declares that is his permanent residence. Mr. MILLS. Yes; but he would have to do more than declare. Mr. GARNER. Suppose he lives there? $10,000 000 a year? Mr. i s. I do not accept your figures about anyone paying
$10,000,000 in taxes. Maybe they do but I do not accept those Mr. MILLS. He would have to live there. Mr. GARNzR. Then would he be exempt from paying this
Mr. MILLS. Yes.

particular figures. But if he went and lived in Mexico and gave up his residence in the United States, that is true. Mr. GARNER. He would get exemption in taxes? Mr. MILLS. On dividends and interest, if he left the United States and went and lived in Mexico and made that his permanent residence. Mr. EsTW. I have just been reading section 8 along this line. It says, in line 5, 'page 5:
The exemption under section 1 of this act unless he has been-

and so forth-it is not particularly clear by reading those three lines, but it gives the thoughthe has been for at lest six months during such taxable year a resident of such foreign country.

It would seem to leave it open, if a man wanted to move into a foreign country and establish a residence there for one particular table year, where his income might be greater in that particular year than at any other time, to establish a residence for six months and escape the payment of taxes on that particular income in that particular year. Doctor ADAMS. I think there is a double qualification. Residence for six months would not give them a residence for the entire year. The definition merely establishes a minimum period. By the way,
Mr. MILLS. What do you say about that, Doctor Adams?

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INTERNATIONAL DOUBLE TAXATION

25

there; but, having studied that, I think your answer is entirely correct, that ie-bUs to prove his permanent residence abroad. A 6-months residence does not do it; that is just simply a limitation, but you have to establish you are a resident abroad by certain tests and in any event you can not establish that unless you have been abroad for six months. It is a very different proposition, sir. As I say, I think the bill here could stand a little improvement, possibly. I say that frankly. But that is a double test; you have to prove by present standards that you have a permanent residence abroad and now, in order to cut out a lot of cases, we are going to say we won't even consider that question unless you have lived abroad for six months. The CHAIRMAN. We will not have time to hear anyone else at this 'hour. The committee will stand in recess until 10.30 to-morrow morning. (Thereupon the committee recessed until 10.30 a. in., Saturday, March 1, 1930.)

I want to say, very frankly I think the bill may be improved perhaps

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SATURDAY, MAR01 1, 1980
Houes or REPRESENTATIVES,

Wtauingon, ). 0. The committee met at 10.30 o'clock a. m., Hon. Willis C. Hawley (chairman) presiding. The CHAIRMAN. This is a continuation of the hearings on H. R. 10165, a bill to reduce international double taxation. Doctor Adams, the committee would be very glad to hear you now. STATEMENT OF DR. THOMAS 8. ADAMS, CHAIMAN OF COMMITTEE ON DOUBLE TAXATION, AMERICAN SECTION, INTERNATIONAL CHAMBER OF. OMMEOE this morning I am going to say in the spirit of Mr. Beamon or Mr. Lee; I mean I am here for the moment to dig up all of the weaknesses in this bill and all its unfavorable features. Before I get through, I am going to tell you the worst about it that I know. I say that or two reasons; because in the first place, it leaves me more comfortable; in the second place, I do not think there are many weaknesses. I do not see how a measure, a bill, could come down here of which the Treasury would say, as it says of this bill, that this bill serves the best interests of everybody, as I think it does. I think that is literally true. It serves the Treasury as well as the taxpayers of the United States. It has no bad effect of importance so far as I know. I want to give you the general reasons for that, before I dig up the weaknesses. The CHAIRMAN. Would you state to the committee your relation to the subject? Doctor ADAMS. Yes, sir; I have been related in a number of capacities. First of all, I am the chairman of the committee on double taxation of the American section of the International Chamber of Commerce, which has considered and reported upon this subject several times. Secondly, I am a member of the fiscal committee of the League of Nations, which has been framing those model treaties in this connection, and I am interested from that standpoint. The CHAIRMAN. You have attended a number of international conferences where this matter has been discussed? Doctor ADAMS. Yes; I have represented the United States at two of these international conferences and introduced, in one of those-the second-a model treaty which serves as the basis of this bill. I mention that fact for the reason that before I went to the conference,
27

COMMITTra

ON WAYS AND MEANS

Doctor ADAMS. Mr. Chairman and gentlemen what I have to say

T095 0-4a-vol. 1--4

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INTERNATIONAL DOUBLE TAXATION

I endeavored to find out the basis of such a treaty that would beat serve the interests of the United States and discussed the subject very carefully with the Treasury and State. Departments before I went, so that that model treaty, in one sense, is an American model; it is the model which from all we can learn, and which I confidently believe, best serves the interests of the United States. Mr. CHINDBLOM. May we have for the record where and when those conferences were held? Doctor ADAMS. Many conferences have been held. The two I attended were the conference at London in 1927 and the general conference at Qeneva in 1028. The latter conference, although it was held in the building of the League of Nations, was a world conference- 27 nations were represented. The United States was represented, and the Union of Soviet Republics was represented; it was not confined to league members. At that meeting I was able to secure the recommendation of the so-called model convention 1-b drawn up after consultation with the American people most interested Land Itnean by that primarily the State Department and the Treasury Department), in order to get one of theme treaties that would be based on principles accepted and approved in the United States. Mr. GARNER. May I ask, Doctor Adams, at this point, to put a copy of the model treaty you speak of in the record? Doctor ADAMS. I will put that in, Mr. Garner; then I will put something else in you asked for yesterday; I will try to get you a abroad, which you asked for yesterday.. Mr. GARNER. It would be very interesting to put the model treaty in at this time; because, as I understood you a moment ago, that treaty was speed to by representatives of 27 nations and you said in your opinion, it was most favorable to the United States.
(The model treaty above referred to is as follows:)
TzxT o DRA" CONvaxTiLN No. In

collective statement of all these treaties that have been adopted-

whether nationals or otherwise. 6) * * *

The present convention is designed to prevent double taxation a regards the following specified taxes In the a of the taxpayers of the contracting State.,

ATICLS 1, TAXI AT TRI PCAL DoMIC11A A. In prncipl, income shall be taxable by the State in which the taxpayer has his f=a domile, 1. e., his normal reednoe, the term "residence" bi understood to mean a permanent home B. In the case of taxpyen who poesessa fiscal domicile In both oontracting States, the tAx imposed In each of these States in proportion to the period of stay during the fiscal year, or according to a division to be determlied'by ageement between the competent admiatto ARTIoLE U. TAS AT SOURC The following elsss of ipoomee shall be tWal by pulrlty atl to pective sowee adeonlo Weow: Imum& props.--The inome from immovaib poperty, A. tew 1.e., tbit which corresponds to the actual or presumed rental vdu or such property, as well as any other income from euqh property whieh Is not covered by paarph B below, shall be taxable in the State in which the property In question is situated.

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INTERNATIONAL DOUBLE TAXATION

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This rule shall apply to Income from mortgages or other similar claims. B. InduariaJ, commercia, or agrieuUural inow.--Income from any Industrial, commercial, or agricultural undertaking, and from any other trades cr profemions not referred to in paragraph D, shall be taxable in the State in which a permanent establishment Is situated. The real centers of management branlee, mining and ol-fields, factories, workshops, agencies, warehouses, omces, depot., shall be regarded as permanent establishments. The fact that an undertaking has business dealing with a foreign country through a bona Ode agent of independent status (broker, commission agent, etc.) shall not be held to mean that the undertaking In question as it permanent establishment In that country. Should the undertaking possess permanent establishments in both contracting States, each State shall impose the tax applicable to that part of the income pro. duced on it. territory. The competent administrations of the two contracting States shall come to an arrangement as to the basis for apportonment. Nevertheless, income from maritime shipping and air navigation shall be tax. able only In the State in which the real center of management is situated. C. i4 f makers and diredora.-The fees of managers and directors of Jointstock companies shall be taxable in the State where the real center of management of the undertaking Is situated. D. Salaries and woago.-Salarles, wages, or other remuneration of any kind shall be taxable in the State in which the recipient. carry on their employment. Salaries of officials and publiceemployee who are seeing abroad shall, however, be taxable in the State which pays these salaries. , Z. Public p.,e..--Public pensions shall be taxable in the State of the debtor of sueh income.
AMIONDS. ItLINU THROUGH DnDUOON8 AND I2FVNDG

A. Dodudion.-On reportin his or It. total income from all sources any person or company 4omlclled n the territory of one of the contracting states shall be granted relief In reset of taxes apyable in the other oontrastn State on income taxable underarticle 2 by priority in such other contracting State. For this purpose the State of domicile shall deduct from its tax on the toWA income the lesser of the two following amount.: (a) The tax Imposed by the other contracting State on income taxable bt priority therein; or (b) An amount which represent. the same proportion of the tax payable on the total income as the income taxable by priority bears to the total income. B. Refu%.-The State which has collected an origin tax on revenues not enumerated under article 2 shall refund the amount on production of proper evidence.
ARTICLE 4

As regards any special provisions which may be neessary to enable the present convention to be applied more particularly in cases not expressly provided for,' the financial admitrations of the two contracting States Wa confer together and take the measures required in accordance with the spirit of this convention.
Aa"lCLSI5

Should a disput. arise between tbe contracting 8tate# as to the laterpretatioq or pplication of the provisions of the present convention, and should such dispute not be settled either directly between the States or bythe employment of any other meand of reaching agreement, the dispute may be submitted, with a view to an amicable settlement to such. technical body as the Clounel Of the Leaue of Nations may appoint for thi purpose. Tis body will give an advisor opinion after hearing the parties and arranging a meeting between -them f necessary. The contracting States may agree, prior to the opening of such procedure to regad the advisory opinion given by the aid body as fiiL In the abeam of sch an agreement, the opinion shall not be binding upon the contrating states unle It Gaccepted by both, and thoy shall be free, after resort tosuch procedure or In lieu thereof, to have recourse to any irbltral or j udicial procedure which the may slet including reference to the Permanent 0err of Internatonal ude t = "t& matters which are'within tle eompetec c that court any

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INTERNATIONAL DOUBLE TAXATION

Neither the opening of the procedure before the body referred to above nor the opinion which It delivers sA in any case involve the suspension of the measures complained of; the same shall rule apply in the event of prooeedini beng taken before the Permanent Court of International Justice, unless the court decides otherwise under article 41 of Its statute.

The CRAIRMAN. Proceed, Doctor Adams, and make your statement in lour own way. Doctor ADAMS. I said a moment ago, that this bill as I see it, would really serve the interests of pretty nearly everybody. I want to show you, in a general way, why that is true, if Fcan; because it is true. We have, as you know, a sort of double system of taxes as they apply.particularly to foreigners, and foreign countries. First of all, we collect a lot of taxes at the source. If a foreigner derives interest or dividend income from the United States, theoretically he is subject to taxation here. We have then a lot of taxes applicable to income where it arises. If interest arises here, if dividends arise here, they ar supposed to be taxable, even though the recipient is a foreigner. Now, then, on top of that we have a credit system and we credit the American taxpayer with the taxes which he pays on income derived from foreign sources. Now you all know that, but here is the way the thing works out. We do not collect those source taxes well. It is not the fault of the administration. They are well adndnistered. But the taxes which we endeavor to collect from the foreigners, we collect poorly. Some time, when you get around to it, you ought to go into this situation because it is bad. Mr. BACRARACH. About how much do we collect, Doctor Adams? Doctor ADAMS. I have never been able to trace anything over $8,000,000. I think, if we were to get complete figures they would amount to about $9,000,000. Mr. BACHARAGio. Here? Doctor ADAMS. Yes, sir; whereas, in our credit system, we have been able to trace $26,000,000 paid out in credits from the Treasury. Mr. HADLZY. Do you know what per cent that would be of the whole in regard to the credits? Doctor ADAMS. I do not. As I say, it is not the fault of the administration; it is not leakage in the sense of evasion. If you will permit me to sa so, it is due to poor law. The administration is particularly good; the law is bad. If you will stop to think about it, you offer a lot of taxpayers a credit; everybody is on his toes to get it, and he gets every cent of credit he can get, because it is his business to et it. On the other hand; you start to tax foreigners on income which they get from this country and you can not do it well. Let us look into the reasons for that, because I want you to see that as it is the heart of this whole situation. For instance we attempt to impoe our surtaxes, not normal taxes, but surtaxes, on dividends derived from American corporations, but we attempt to do that only in respect of individuals. A foreign corporation which receives a dividend is not subject to any surtaxes; an individual who receives a dividend is exempt from normal taxes but subject to surtaxes. Now it is the easiest thing in the world for a foregner, who is perhaps 4,000 miles away, who owns some stock in an American corporation to put that stock in the name of some bankirin Institution, which is a corporation, and then no surtax is applicable. (44)

INTERNATIONAL DOUBLE TAXATION

31

providing an additional tax where there are interlocking holding com panics, so that the dividend that is paid by one corporation to another may bear an additional tax, as it does in the case of the individual? Doctor ADAMS. Mr. Garner, I do not know that I have any opinion offhand; I mean I would like to think about that. Mr. dARNER. The trouble with us here at least the trouble with myself, is that we have no knowledge of what is going on in the Tiasury Department touching these thing and we can not get It except as the Treasury gives it to us and, wherever we find the Treasury opposed to a policy which you might like or I might like, it is impossible to get the information. That is the reason I am asking you this particular question. I think the whole thing would depend upon the check up in the Treasury Department as to the psible loss on account of this paying dividends to holding corpora. ion-s. Doctor ADAMS. Well I not think you would point is that the law at present permits it.youdoee, Mr. Garner, the find any difference of opinion or difference of policy in the Treasury Department from your own policy, but the law long has been that a corporation receiving dividends from another corporation is subject to no further taxes. It may be wrong; I have sometimes thought that it is, but it is the present law. The foreigner who owns some stock in an American corporation has only to put it in a "Street" name, or get some banking corporation to hold it for him and collect the dividends, in order to avoid surtaxes. Evbi if he keeps the stock in his own name, he must receive income from sources within the United States in excess of 810 000 before he is subject to surtaxes. And our rates ar often trivial. Mliens resident in contiguous countries pay only 1% cent and 3 per cent on compensation for personal service up per to $8,000 received from sources in the United States. On much of the tax-free covenant bond interest going to foreigners a tax of only 2 per cent is withheld. The maximum rate withheld in the case of an individual nonresident alien is only 5 per cent. Moreover, if the foreigner chooses to file a return, you give him, under the law, a personal exemption of 81,600. Mr. GAMER. You have it three times as much as it is this year; this year it is only a half of one per cent. Doctor ADAis. Most foreign countries withhold at a higher rate. If an American derives interest from bonds of a British corporation, the English withhold at the source 20 per cent; if you derive interest from %erman bond Germany collect., I believe, 10 per cent at the a source. We have a dual system, collection at source and credits to ourown tax payers. As a system, it is good' it is the envy of other nations; that is, our credit system. But collection at source is not very. productive, while we authorize a credit and every taxpayer is on his toe to gt every dollar which the law allows hi. We- have a collection at the sourceMi. BACHAzUCH. If I may interrupt you, what I have in mind is this: you say you have advocated this for some years, and you believe the Treasury Department is sympathetic. If that is true why did
0

Mr. GARNER. Will it disturb you if I ask you a question there? Doctor ADAMs. No; I hope you will. Mr. GARNER. What do you say about changing the basic law and

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INTlNATIONAL DOUBLE TAXATION

not the department advocate it when we revised the revenue law instead of putting it off until this time when this committee is about through with conaiderng special bills for this season. Doctor AJ)AMs. I do not know whether the Treasury Department ever came to think very seriously about international double taxation until an American delegate was sent to the European conferences of 1927 and 1928. In the latter year, in order to get a model treaty suited to our tax system and to American interests, the Treasury Department developed or formulated the policy which is the bass of this bill. You see, Mr. Bacharach, you are busy, the Treasury is busy with other things and their minds did not get round to inter. national double taxation until 1928. Since that tune I have done a great deal of work on this project, and this bill is in some degree my baby. Mr. BACH AMACH: My thought is this: I do not believe we help ourselves and the country, and certainly we do not help the public, if we bring in special legislation, particularly on tariff and tax matters, without first giving the people an opportunity to consider it. I am not speaking about this particular bill; it isal right and fine to have the hearing; but, personally, unless there are some outstanding -reasons why we should enact this legislation I am not inclined to favor reporting the bill out at this time. We are very anxious to get through with the tariff bill and get home, and give the people of the country a chance to think it over. You say you have had this idea for a greater number of years. I know your great interest in this legislation, I know the interest you have always taken in tax legislation, since I have been in Congres. Now it seems to me that with the weight of your influence and, of course, your ability you would have been able to sell the idea to the department and others back in 1928 so that we could have considered it in connection with the bill for revision of the revenue law. As I say that smy objection now. 1 do not mind having the hearing on tis; I think is all right but I do think it would-be a mistake for us to again open up the subject in order to put in something special and rush it through Congress. Doctor ADAMS. I do not think it ought to be rushed I am not suggesting that it be rushed. The explanation is this: It does not change the revenue law, except under reciprocal agreements. This kind of legislation is so special, that if we brought it up in connection with rates and all thope Intricate things you have to deal with in a general revenue bill, you would never get time to consider it properly. . Mr. BACEIARACK. The Treasury Department certainly must have known they were losing agood dal of money. Doctor ADAMS. Why, Mr. Bachmach, on the taxation of non. resident alies-d-any tme this committee will let .me do it, I will bring down about 15 amendments to the provisions of the revenue law Affecting nonresident aliens, which I believe ought to be made. BUt that irto big a thing, it raises So many issues, it affect* the revenue and this-bill is,not going to affect the revenue materially one - or the other. Mr. BlACHARAC. It will increase the revenue, if I understand you
o t AM

I beve so; but these agreements will come in

rst.

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INTERNATIONAL DOUBLE TAXATION

38

Mr. GARnSER. There is no one who can tell, definitely, what effect it will have? Doctor ADAMS. Definitely? Mr. GARNER. Yes. Doctor ADAMS. You never can tell with great definiteness to what extent any bill will affect the revenue; but I think almost certainly this will increase the revenue to the United States in the long run. The CHAIRMAN. Would you mind if the committee would ask Mr. McCoy to give us an estimate?

Mr. GARNER. Doctor, you say, of course, this is one of your child. dren; you are very devoted to this particular child but you "y the Treasury Department has been so busy thinking about other it has not had a chance, really, to give this consderation. Mr. GARNER* What were the other things the Treasury Depart. ment was thinking about? Doctor ADAMS. I do not know about that. Mr. GARNER. You said they had been so very busy with their minds on other thing, in reply to Mr. Bacharach, that they did not have time to give this much consideration. Now I want to know what those other things are. Doctor ADAMS. Does it need much consideration? I think you are just raggin me a little. (Laughter.) The CHAIRMAN. Were we in any position to give this very serious attention, either the Treasury or this committee, until the meeting at Geneva in 1928?

Doctor ADAMS. I certainly would not.

recently.

Doctor ADAMS. No; it has given a great deal of consideration to it

When you got the agreements through on which we could base our legWilation; isnot that correct?
The CHAIRMAN.

Doctor ADAMS. That is the answer.

reduction of the credits whichrou now PAY out tha you will lose in
tax revenue. The Tr urlT be the gane. and eliminate double taxation. You can savq money,

Mr. GARNER. You could have put this legislation in the 1928 act? This isonly persuasive. Doctor ADAMS. We could have done a number of those things; but you know, as well as I know, that a strange new thi of this kindMr. GARNZR. You know also, Doctor Adams, with your experience with this committee, that there has not been a member on this com. mittee since 1921 who has been in greater sympathy, exerted greater efforts to help the administration to admiiter the law more per. fectly, than ; but when the adminstration offers an administrtive proposal that, in my judgment, is going to lose money and give an opportunity and a haven for "arg taxpayers to escape ayiag taxes, then I am not in sympathy with this kind of adnistrative proposal., This bill, on Its face, shows it is not an administrative measure at all; it is for a reduction of taxes. Its title says, "To reduce international double taxation," and it is not a matter of m tion at all. You do not need this bill to administer the la; you need this bill to give somebody a chance to avoid taxes... . Doctor ADAMS. I sy definitely this: That you will gain more in the

Doctor ADAMS. That is exactly correct.

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long questions of this'kind have been actively engaging the attention of other governments? Doctor ADAMS. Since 1923. There has been a group of govern. mental experts abroad meeting regularly since 1923. Mr. CHINDPLOM. And when did those experts and this conference reach any concrete agreement? Doctor ADA.MS. They reached a concrete agreement by 1927, an agreement which was not suited, either in content or form, for use in the United States. When I got there and found that was the case, I proceeded to try to devise a method of dealing with this which would, in content and form, be suited to the United States. The latter received the approval of this international body in October, 1928. I then prepared to come back to the United States and try to get some legislation here that would enable us to participate in this movement on that basis. Mr. CU!NDBLOM. And when did we pass the revenue act of 1928? It was approved on May 29, 1928, and you reached a concrete arrangement which you thought was suitable to the United States in October of that year, six months later; is that right? Doctor ADAMS. That is correct. I wonder if you gentlemen know how long It takes to work out some of these things? You sweat blood in getting those things in practical form. You can not do them in a day. Mr. WATSON. Doctor Adams, since the war there have been millions and millions of American money invested in nearly every part of Europe and South America. For instance, in London one will find Woolworth's Ten Cent Stores, American drug stores American automobile industries, many of which have been established since the war. Hove Americans in the interests abroad asked that the law of double taxation be modified? Doctor ADAMS. Why there is at the present time a very strong movement to try to get something done With respect to some of the cases of double taxation. Let us deal concretely with this situation. IAt us suppose an American corporation wants to do business in France. It organizes . French subsidiary corporation. Now that French subsidiary corporation will pay a 15 per cent corporation tax to the French Government. The dividends which it distributes will pay 18 per cent tax additional at the time of distribu. tion. Furthermore, the French Government, in most of the cases which have come to our attention recently, will assume that a pro. portion of the dividends distributed principally if not exclusively to Americans by the parent American corporation (equal to the pro. portion which the assets in France bear to the entire assets of the parent corporation), are further subject to tbe 18 per cent dividend tax. They are imposing a tax on that triple basis at the present time. This method of taxation has been confirmed by such of the French courts as have dealt with the matter. Mr. WATSON. If we modify the law, will it encourage American captal to invest abroad? Doctor ADAMS. I think the effect_ be more to encourage the wil investment of foreign capital in this country. We are fairly well protected, n9t completely, but we are fairly wOll protected; that is to
(4S~

Mr. CINDBLOU. This kind of legislation, of course, is dependent upon reciprocal legislation abroad. Can you state, very briefly, how

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INTERNATIONAL DOUBLE TAXATION

N5

I

say, American individuals and American corporations, by reason of our credit provision. The foreigner fears this collection of our tax at the source over here, and if we could make a trade by which he would be exempt here and our taxpayers would be exempt there, we would only lose that tax which we collect poorly at the source, whereas we would be relieved by a very substantial amount of credit which we would not have to pay out. Mr. WATSON. There is more American money invested abroad than foreign money invested in this country. Doctor ADAMS. I think that is true. Mr. WATSON. Then why would it be a benefit to America? Doctor ADAMS. It would be a benefit. Mr. WATSON. I mean that American capital invested in foreign countries would decrease our Federal taxes. Doctor ADAMS. Why, Mr. Watson, the basis of this bill is that we should keep taxable here the interest and dividends received by Amenicans; we are not exempting the American, either the corporation or the individual, from taxes on income which he derives from abroad; wc are continuing to tax that as we do to-day, but to abandon the credit with respect to it, and the foreign government is to abandon its attempt to collect taxes o4 those items. That is another reason why I say it Would pay the American taxpayer. The principal effect of this will be to stimulate investment in the United States and Particularly in loans here. There is coming out next week, I think on Monday ot next week, a loan of $50,000 000 by an American corpora. tion, which can be floated at a materially lower rate of interest if it could go out tax free to the foreign investor. In other words, the foreigner would invest much more freely in the United States if he could do so knowing that he would not be subject to our withholding taxes, although this withholding of taxes, as a matter of fact, works most imperfectly. Mr. GARNER. I do not understand, Doctor, how the foreigner can afford to invest in our securities, when we have the lowest rate of inter. est of any country in the world. Doctor ADAMS. I am not so certain of that, Mr. Garner. Mr. GARNER. Well, according to the reports. If you will look at the Congressional Record in the last three or four days, they give the interest rate in nearly all of the countries-our Federal reserve rates and the bank rates of all countries-and I take that as an indication of the interest rate which securities would bear in those countries. Of course, long-time securities may not correspond with the commercial banking rate of the various countries, but I am sure we have in th country , as a general proposition, as cheap money as anywhere in the world.
I!

foreign country and float loans, instead of that foreign company coming here to float loans? Doctor ADAMS. You are theorizing about things where the facts are easily available. The foreign banker says the oreigner is anxious to invest in the United States. Perhaps they think American corporations and other business enterprises offer a better security. I think that is true. Europe is anxious to invest in the United States, and is doing so at the present time.

Mr. GARNER. Then why does an American corporation go to a

Doctor ADAMS. Maybe so.

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36

INTERNATIONAL DOUBLE TAXATION

Mr. GARNER. Is that possibly because of a fear of the stability of the European governments? a fact.
Doctor ADAMS. I do not know, Mr. Garner. I simply know it is

other cause, because they have Government securities, unless it is the stability of the Government-if that is the fact, then why do you want to encourage Americans, by a system of taxation, to invest their money in foreign business enterprises? Doctor ADAMS. I do not want to encourage it; I do not think this bill would encourage it; but what I do say is that to the extent our citizens invest abroad this bill would save money by reducing the credit for foreign taxes. At the same time we would help to do away with double taxation. The bill would permit us to participate in a movement which has as its object the elimination of a thing which throws all taxation in disrepute, namely, double taxation, and you would do so without losing any money. The way you gain is in swapping the surtax on nonresidents, which you do not collect well, for taxes which we do collect well. Mr. CRIsP. Will you give an example of a case of double taxation under the existing law? Doctor ADAMS. I will give several of them. I have just given one which is a case of triple taxation. This French situation is the worst I know of. Let us take the case of an English citizen who resides in the United States. An English citizen who resides in the Uidted States is subject to tax over here. Suppose he owns some British securities; he is subject to tax in this country on the interest and dividends derived from those British securities and he does not got any credit. Accordingly, therefore, he is taxed in England, which collects its 20 per cent tax at source on those dividends and interest, and he is taxed on the full amount over here and gets no credit. The same thing is true with respect to an American citizen who lives abroad. He is subject to tax on his dividends and interest derived from American corporations, without any credit and, theoretically, he is subject to tax in Great Britain. Now I want to say in that respect, that the practical situation is somewhat different from the theoretical situation. This is the case you were discussing yesterday. The truth of the matter is that almost without exception wealthy Americans who do, in fact reside abroad, keep up their tax residence in America by kee ing a aomicile and ning back enough to claim a residence here. The y do. that to avoid the foreign taxes; but there are some cases where that is not so. The worst instance that exists is that French situation. I do not want to introduce a criticism of a foreign nation, but that situation is very bad. Mr. GARNER. What country is that? Doctor ADAM. That is France. There is another situation which is not so bad; the rates are not so high; it is not triple taxation-it is i"Germany. Mr. EsTZP. I put that same concrete illustration you just described to Mr. Mills yesterday, and what Mr. Mills said in his testimony-I read it this morning-was just the opposite. I am in a little bit worse state of mind now as to just what the illustration amounts to, after your statement. You corroborated what I suggested yesterday, Mr.
Mills denied it.., I I . .

Mr. GARNER. If that is the cause of it-and I can not see any

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INTERNATIONAL DOUBLE TAXATION

37

Doctor ADAMS. Some of these situations, especially this double action of the credit, are very intricate and we can all go wrong: I can, at least very easily. Now the situation, I think I am correct in sying is this- An American goes abroad; he takes up a residence in fact in England; he is there, theoretically, subject to the full English tax. He at the same time, is subject to our taxes on interest and dividends and not entitled to the credit, because they are American taxes. Now there would be double taxation in that instance. Practically, there are not many such cases, they are almost negligible, because that American, in practice, does keep his residence in the United States and does not pay the English tax. Those cases are not important in volume one way or the other. Mr. GARNER. What would you say, doctor, about the general policy of this country withholding at the source portions of the dividends received? What you would term a graduated withholding at the source that depended upon the amount of the dividends received by the individual? Doctor ADAMS. It does not work well and I think it can not work well. Mr. GARNER. It is not working well in Europe? Doctor ADAMS. It works a little better there, because they do not give such high exemptions and they have higher rates. England withholds 20 percent, as I told you. It works better there, but it does not work well with us. The leakage is great; not so much from evasion, but because of the holes in the law. Mr. GARNER. Is there any way to sew up the holes? [Laughter.1 Doctor ADAMS. I could sew them tp, but whether it would do more harm than good, I do not know. Y ou will have to decide that. I think it ought to be remedied, personally. I have thought so for a good many years and I hope, when you get around to general amend. ments to the revenue act, you will let me come in hero and talk about it. But I do not want to mix this bill up with the question of general amendments. This bill works no changes in the present tax law except "if and when" its reciprocal offers are met by foreign tax laws. It will never affect the revenue seriously. It will have no effect until these reciprocal arrangements with foreign countries are concluded and you are not going to conclude those arrangements very fast. Foreign arrangements take time, even though foreign governments want to qualify under this bill. Now, I doubt if more than a few countries qualify before 1932. If you were to pass this bill this year, 1930, it is just possible that some nation would qualify before the end of the year but the effect of that on the revenue would be negligible. Mr. Ige8Tp. On February 18, the Secretary of the Treasury issued a statement and, on page 3 of that statement, he gives certain figures as of 1928, and it reads to this effect: In 1928, Americans received $81T,000,000 from long-term investments abroad as compared with $252,000,000 paid in the United States to foreign investors. It says these figures have been estimated by Mr. Ray.Hall'and he gives a further estimate that, in 1929, the figures will be $900,000,. 000 received by Americans as a result of investments abroad, and $275,000,000 received by foreigners as a result of investments in American securities. Now, of thisdouble taxation that $817,000,000

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INTERNATIONAL. DOUBLE TAXATION

that was collected in 1928 by American citizens having investments in foreign corporations, did they pay a tax to the governments wherein these companies were located in Europe and also pay a tax to the Federal Treasury here upon the amount of money that came back here to them? Doctor ADAMS. They did in the first instance, but they were relieved later by the credit. May I take a specific illustration? Doctor ADAMS. Suppose an American corporation owns stock in a British corporation. The British will collect their 20 per cent tax on the profits of that foreign corporation, and will withhold that 20 per cent out of the dividends coming to the American corporation. The British, then, are taxing the dividends. Also, that American corporation must put those dividends in its tax return and pay taxes on them in the first instance but jt is permitted to subtract from its tax, thus computed, the Aritish tax. This credit or deduction can not go beyond the American rate, but the corporation can subtract any part of the American tax assessed with respect to those dividends. Mr. ESTE . The British tax, you say, is 20 per cent. Doctor AD.Mts. Yes. Mr. ESTE . The American tax rate at that time was 12 per cent?
Doctor ADAMS. Yes. Mr. ESTEP. Now you speak of this credit: Is this credit the diffeience between the 12 per cent and the 20 per cent-inamely, 8 per cent? Mr. EsTEP. Yes.

Doctor AD.ts. No. The credit is, roughly speaking, the 12 per cent, or whatever the American rate is. We do not permit them, in short, to credit more than the American tax. What would happen in that instance would be, roughly, this: The American would get off by paying the British tax. Mr. ESTEP. In other words, he would pay England instead of paying them 20 per cent, lie pays them 8 per cent; is that right?
Doctor ADAMS. He would pay Great Britain 20 per cent and pay the United States Government nothing, through the credit provision.

Mr. ESTEP. There is no double taxation there, if that is true. Doctor ADAMS. Possibly no double taxation, but he is paying Eng-

Doctor ADAMS. Let that be; I have no objection to that. Mr. ESTZP. He does not come back here to pay us anything for it if he gets the credit you speak of. Doctor ADAMS. I do not see anything wrong in that situation. Let him pay the 20 per cent rate. I am not trying to change that. But what I do say is this, that the American Government is losing out by reason of that credit arrangement. If we could make that income from British sources subject to tax in the United States, we could save money. Mr. EsTEP. Let me ask this one question: If this proposition would be passed and become a law, then that $817,000,000, supposing it was all invested in England, England would not collect anything on that, but we would collect 12 per ent, or whatever the corporation tax was, if it was dividends from a corporation, or if there was a corporation involved; or if there was individual income in this amount
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land 20_per cent, which is 8 per cent more than the American rate. Mr. ESTE . Well that is a penalty upon his taking his money over and investing it in England

I

I

INTERNATIONAL DOUBLE TAXATION

39

of money, we would then collect from the individual according to our tax rate in this country, and England would get nothing, but we would get it; is that the idea? Doctor ADAMS. Yes. Mr. ESTE,. And vice versa on the $275,000,000 received in this country by foreign citizens, we would reserve to them the right to tax that? Doctor ADAMS. In substance, we would not collect on that. Mr. ESTEP. And lot the other country collect at whatever rate they have over there? Doctor ADAMS. Yes. I do not urge that arrangement on grounds of justice alone-please get this-but I urge it principally because it is the practical way to collect the tax. The CHAIRMAN. In the case Mr. Estep cited, when an American corporation distributes its dividends, those dividends might go to individuals of considerable income and be placed in the higher brnekets, where there would be a tax on them? Doctor ADAMS. Oh, yes. The CHAIRMA.i. Andthat would be, in a sense, double taxation? l)octor ADAMS. Well, that would be adding the surtax; the normal tax is exempt iight straight through. The CHAIRMAN. Yes; but it would be subject to the surtax; there would be the surtax on those distributed dividends.
Doctor ADAMS. Yes.
Nil'.
QIAREIt1.

Mr. GARNER. The same money paysY tax twice in the United States. The corporation declares its dividend; it has paid 12 per cent into the Treastry already, and that dividend is subject to the surtax, ip it not? Doctor ADAM. If it (oes to a man who is subject to the surtax; yes. Mr. GARNER. I say i? it goes to a man who has an income, say, of $ 100,000.

in England and once in the United States.

The CnAIl.1A.. But the same money would pay tax twice, once

Just the same way it is in thi.; country.

Doctor ADAMS. I would not call that double taxation; he pays the surtax.
Mr. GARNER. He pays the surtax? Doctor ADAMS. Yes. Mr. GARNER. Anyhow, the same money is taxed twice. Doctor,

Doctor ADAMS. Yes. Mr. GARNER. He pays double taxation, does he not?

suppose you have $100,000 income and it is on English bonds; you are living in this country; do you pay any tax on it?
Doctor ADAMS. Here? Mr. GARNER. Yes. Doctor ADAMS. Yes.

from a corporation in England that withholds 20 per cent at the source, you still pay the same rate, do you not? Doctor ADAMS. Yes.
Doctor ADAMS. Let us get straight, now, with respect to this. Mr. GARNER. All right.
Mr. GARNER. Surely.

Mr. GARNER. That is exactly it. If you have $100,000 income

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40
Doctor

INTEIAIIO.KAI. DOUBLE TAXATION

ADAMS. An Aineican citizen

has $100),000 income.

Mr. GARNER. Yes.

Doctor ADAMS. From IlEitish bonds.
Doctor ADAMS. lie is subjeCt to our full tax on th8t in tme tir-At instance. But now, wait. En*las has withheld 20 per cent fron the interest on those bonds. Now the American can claim a (credit for tihe tax which Britain collects under the existing law. That is the tiing I want to change. I want to make that bod interest

Mr. GARNER. Yes.

British bonds, you would pay the full tax. Doctor ADAMS. No; I can not admit that, because it is not the fact. You get the credit, you know. Mr. GARNER. How do you get the credit? Doctor ADAMS. Simply by claiming it. Mr. GARNER. Would not you pay the same thing if you had a British corporation tax as though you had British bonds; would not you pay the same amount of money? Doctor ADAMS. I do not know that I understand your point. Mr. GARNER. In other words, you have $100,000 income. Doctor ADAMS. From British bonds? Mr. GARNER. From British bonds. Doctor ADAMS. Yes. Mr. GARNER. And Mr. Hawley has $100,000 income from British corporations. Doctor ADAMS. You mean dividends? Mr. GARNER. Dividends; that is all you get. You are both American citizens, how much money do you pay into the Treasury of the United States? Mr. GARNER. That is what I say. Doctor ADAMS. But in both instances we take a credit for the tax withheld in England. Mr. GARNER. But you both pay the same amount of tax in this country? Doctor ADAMS. Yes; both the same. Mr. GARNER. I do not wish to confuse the situation at all, but the credit is all taken out over here; it is like net income to you? Doctor ADAMS. No. Let us get exactly straight on this; this is fact and not a question of opinion. I get an income of $100,000 from British bonds. That is all I have got. Doctor ADAMS. If that is my sole income, I do not pay any tax at all in this country on it; because, after having computed the tax, I claim the British tax as a credit against my tax, dollar for dollar. country, if you had $100,000 income from a British bond, that you do not pay any income tax in this country? Doctor ADAMS. I only qualify that by this-what rate do you pay on an income of $100,000?
Mr. GARNER. You mean to say under the present law in this Doctor ADAMS. Both pay the same thing.

exempt in England and subject to tax in the ULnited Staus without credit. Mr. GARNER. Well, but you have admitted just a moment ago, in reply to my question, that if you have $100,000 income from

Mr.

GARNER.

Yes.

The CLERK. Eleven per cent on $100,000.

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INTERNATIONAL DOUBLE TAXATION

41

Doctor

ADAMS.

Is it under 20 per cent?

on $100,000 net income in this country? Doctor ADAMS. Then Britain will withhold the tax at a 20 per cent rate; her tax would be bigger than ours and our tax would be wiped out and that man would pay not a dollar into the United States Treasury. Mr. CmisP. I understood you to answer a question of Mr. Estep's that, if this bill became a law, the foreign governments would cease withholding any tax on the dividends of stocks and bonds, and so forth, owned by Americans? Doctor ADAMS. Yes, if they agreed with us; if they entered into an agreement. Mr. CRIsP. They would not even withhold the normal tax? Doctor ADAMS. No, they would not withhold anything. I have to say one thing there, so we do not get confused-the tax on corporations is to be regarded as a tax on the corporation, and not as a tax on dividends. The only tax on dividends, is an additional tax. England under the reciprocal agreement would not abandon her tax on the corporations. Mr. CRISP. The corporation pays the tax and the dividend is distributed and if a man has sufficient dividend to get in the surtax class, he pays? Doctor ADAMS. The corporation would be taxed as it is to-day, but no additional tax on the dividends would be collected at source. Mr. ESTEP. Take the reverse of your proposition: Supposing the tax of England was less than the taxwe would charge in this country? Instead of 20 per cent, say it was 10 per cent? Doctor ADAMS. Yes. Mr. ESTZ,. But our tax computed on that amount would be 15 per cent. Now he would get credit for the 10 per cent he paid, but he would be bound to pay 5 per cent to the United States Government? Doctor ADAMS. That is true. Doctor ADAMS. That is true, but with few exceptions the rates of foreign taxes are higher than ours. Mr. ESTZP. I know that. Mr. CRISP. This credit of the tax paid, withheld by foreign governments, is exactly the same as tax paid in America against American income; in other words, in making an income tax return, any amount you paid to the country, State or city, as taxes, you are entitled to credit? Doctor ADAMS. That is a different kind of allowance. A State tax is simply deducted. Mr. CRISP. Of the amount paid in taxes? Doctor ADAMS. No; you deduct it. Suppose you paid $500 taxes in the State of Georgia, you deduct that as expenses in computing your net income. (55)
Mr. EsTEP. On which our tax would apply?

you will save money by this bill. Mr. GARNER. You would pay $11,000

IDuctor ADAMS. Then I would not pay any tax in this. country, because the credit from the British tax would wipe it out. Now you are getting to a thing I hoped you would get to, because you see how

Mr. GARNER. Yes.

42

INTERNATIONAL DOUBLE TAXATION

credit we take for foreign taxes. This credit is dollar for dollar against the American taxes. The deduction you mention is just a deduction from income. The CHAIRMAN. The credit for American taxes paid to State and municipalities is against the gross income? Mr. Cmis,.. I was familiar witi the tax paid in America, but I was not familiar with the other. Mr. COLLIER. One is just die opposite of the other? Doctor ADAMS. Subject to the limitation that the credit shall not exceed the American tax oni the foreign income source, every dollar you pay in foreign taxes is an actul dollar in paying American taxes; you wipe out vour Amenriean tax dollar for dollar.
Doctor ADAMS. Against the grosm income. The CHAIRMAN. And the foreign tax is against the amount of tax.

Mr. CtisP. And compute it at the taxing rate? Doctor ADAMS. Yes; but that is a very different thing from the

Mr. Cnisp. 'You set oil tax against tax? Doctor ADAMS. You set off tax against tax, but we do not let you set off taxes at higher than the American rate. If we can, in soni way which does not hurt the American taxpayer, abolish this credit and at the same time swap this poorly collecteid tax at the source for it, the United States will be a gainer in the transaction. Under this bill we would collect our tax on interest an(l dividends from abroad without any credit; meanwhile, we are going to allow the foreignvr, in exchange for that, to take interest and dividends from this country without any impositioni of our tax. The justification is we do not impose that ast tax successfully. Mr. ESTHP. Of course taxation matters, in many instances, are wonderful theories which are sometimes not practicable; but let us assume the rates in all of these countries, which enter into agreements, will, sooner or later, if this bill is passed, be exactly the sante that we impose. Then take that $100 000 income upon bonds and interest that we discussed: There would not be any double taxation, because one credit would offset the other; therefore, lie would pay a tax to England and we would credit it, because our tax is at the same rate. There is no double taxation there. Mr. ESTEP. And where do we gain if there is no double taxation? Doctor ADAMS. Why, Mr. Estep, at the present, time the United States Government has the distinction among the Governments of the world of preventing a lot of double taxation through our credit system. The purpose of this bill is to get a less expensive and better method of preventing double taxation. You are doing a great deal now to relieve double taxation; doing it generously anddoing it well, but it is costing you more money than this proposal would cost. Mr. BACHARACH. You made the statement that you thought about $9,000,000 was collected from abroad and that we paid out about
$25,000,000 or $26,000,000. Doctor ADAMS. Let us assume that is true.

Doctor ADAMS. In the credits. Mr. BACHARACH. Yes.
BACUARACH.

really paying the $9000,000?

Mr.

Doctor ADAMS. $26,000,000 that we can trace.

Is there any woy to tell or to find out who is

Doctor ADAMS. YE;, sir.

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INTERNATIONAL DOUBLE TAXATION

43

Mr.

$0,000,000, because I put in a half million additional as a guess of the amount collected but not appearing in the statistics. Mr. BACHARACI. Mr. Alvord and Mr. Mills said it was between seven and eight million. which I am about to mention. Mr. BACHARACH. I would like to find out, because I am wondering if it is just on large amounts.

Doctor ADAMS. I can give you certain classes. You won't get

BACHARACI.

I mean the individuals?

Doctor ADAMS. Perhaps they did not include sonic one of the classes

Doctor ADAMS. Now here are the figures so far as I can go: The tax withheld at source, normal tax only, on coupon and registered bond interest, is $900,326; all other interest subject to withholding, $275,450; salaries, wages, and personal services performed in the United States, $140,373; royalties on patents and copyrights, $590,515; annuities, 82,629; private pensions, $773; miscellaneous, $314,255; dividends, no normal tax due. Total tax paid at source for nonresident aliens $2,224,325.31. Mr. BACHARACI. What does that total, if you know? The entire total there is $2,000,000? Doctor ADAMS. Up to the present time. Now, Mr. Bacharach, we come to the next point. We do not have accurate statistics showing the collection of surtaxes on dividends paid, but we know this, that the amount of dividends of $12,000 and over paid to nonresident alien stockholders of domestic corporations, for which returns are due but which has not been filed, but for which efforts are being made to secure delinquent returns, is $5,426,420. That is dividends; not tax. We are not getting these taxes for reasons I spoke of before. I do not wee how we can get them, to tell the truth, but the Treasury Department is making an effort to get them. The total tax withheld at source is, as I said a moment ago, $2,224,325.31; approximately $2 225,000. There is, in addition to that, taxes returned, not withheld at source, 82,667,660.82. That represents returns voluntarily made by foreigners. That makes a total of $4,891.986.13. The figures Ihave given up to this point all relate to individuals. Now, foreign corporations have paid to us $3,597,753; total tax paid by nonresident aliens and foreign corporations, $8,489,739.13. That is the total collection that we can trace. I said it was something over $8,000,000 and I added about $500,000 for items that possibly do not get into our statistics, making $9,000,000 in all. Now the credits claimed by American corporations and citizens in 1927 amounted to $26,534,807, Mr. BACHARACH. Were those claims allowed? You said $26,000,000 was claimed. Doctor ADAMS. They just take it out in the return; they do not have to get the claim allowed. Mr. BACHARACH. I thought probably there would be a check-up
on it. Doctor ADAMS. It is checked.

has allowed, $26,000,000? Doctor ADAMS. I do not know that absolutely. Mr. BACHARACH. That is important.
73093 0-42--vol. 1---(

Mr. BACHARACK. Those are claims which the Treasury Department

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INTEGRATION. l, DOUBLE TAXATION

Doctor ADAMs. That is important. I am certain the amount allowed can not be greatly different from that, sir; because there is not much dispute over those credits. It is up to the taxpay er to prove them, and they can prove them, because they have their foreign tax receipts and have been paid. do not have much diAculty in proving that the taxes Mr. BACArACi. have observed that many people claim that they pay taxes in substantial suns, which are not rebated. doctor ADAMs. I will take occasion to find out if that, figure is what has been allowed. Mr. BACIARACH. Mr. Chairman, are we going to have people who oppose this bill appear before us? Trho CHAIRMAN. The notice was given generally. No one who wished to discuss it, I suppose, would be denied by the committee. Mr. BACHARACU. I am wondering if you had set any time for it? The CHAIRMAN. No; no one has appeared and no one has made any suggestion of appearing. Mr. CHINDBLOM. Doctor, with reference to rebates that have been allowed by the Treasury Department against taxes previously paid, do you have any idea of the percentage of the total amount of taxes those rebates represent, on at average, per year? Doctor ADAMS. You mean these credits for these foreign taxes? Mr. CHINDBLOM. Oh, no. Doctor ADAMS. The rebates? Mr. CHINDBLOM. The rebates which have been allowed? Doctor ADAMS. I am sorry I can not. say, sir; I do not know. Mr. CHINDLOM. My recollection is it is a very small percentage: very large in amount, in some instances, as against the taxes actually paid, but it is a small percentage and these largo rebates are practically all for the big Years of income back in 1916, 1917, and 1918; so thai, if you applied the same ratio to the rebates that total $26,000,000, it probably would not amount to much. Mr. BA6UAnACu. Yet it would amount to a very substantial sum if the Trow-ury Department had to refund it. Mr. CHnrNDLoM. In amount; but $20,000,000 as against the billions of dollars that have been collected, upon which rebates have been allowed, would make a very small amount of the total of $26000,000 hir. IACI*IAIACI. Assuming this is on the same basis. Mr. CmHnm O,. Assuming it to be practically on the same basis. Doctor ADAMS. This $26,000,000, I now this much, that. it was taken in the taxpayer's returns In the first instance, and that a subsequent audit might prove somine had wrongfully been taken. But I also know, front experience, that subsequent reductions of the credits are not very extensive. It might get down to $22,000,000. I do not know that I can get the exact figures, because in tax statistics you have to add up the returns at some time; you can not wait until they are settled. all finished, because it may be 15 years before every disputed point is The CHAIRMAN. When you began, you said you were going through the bill and point out things you thought were the weaknesses of the bill and to which objection in' ht be raised. That would be ver" interesting to have in the record, so that when we come to study it we can give particular attention to them.

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I.NTIiNATIONAI. I)OUBLE TAXATION

45

l)otor ,\t.AMH. I will do that. ir. IlimL. I understood from your statement that generally .-j waking, the rates of taxation in foreign countries are higher than in thils country? Doctor ADAtMS. Particularly their normal taxes; they are, yea; .enerally speaking. Mr. lIhLL. Also that our nationals have a greater amount of investments in foreign countries than the foreign nationals have invested in oir country. Doctor ADAMS. I think so. Mr. HILL. Would the existence of that relative situation be a practical difficulty in securing these reciprocal arrangements, which this hill contemplates? Doctor ADAMS. Yes; I think so. I think that foreign nations are going to consider that situation before they agree to deal with us. 'hat is one of the weaknesses, as I was going to say. However, I think we are going to get, for a variety of reasons, a number of them to agree to come in; for instance, reasons like this, this is one of the reasons that is going to work most powerfully in our favor: A foreign iiittion' which collects taxes on the interest payable by the debtors resident in that country, finds, after examination, that in a great many instances those debtors are forced to pay that tax. The E~uropean nations, I think, with respect to interest, will jn a great 1.any instanes &ivo tip what appears to be a big sunt of taxes because it relieves their debtors. Now Tthink that is a sound reason; I think that is sound economics. There are other reastns. Are these he'irings going to be published? let us airsuie a nation- I think there is such a nation--a broad, in Europe tit present that has driven some of its taxes so far that I think, at the iottom of their hearts, they are a little ashamed. I think in that instance their administrative authorities might be glad to conclude i reciprocal agreement in order to get, out of their present. position, which they kitow in their hearts is wrong. I think that other countries will accept our principle of taxation, namely, to tax interest and dlividends primarily where the taxpayer lives. 'ihey regard this as the practicable, effeictive, working l)asis of income taxation, and they wi)llagree with us simply on thebi)asi of this principle. Now to aitswer your question then, as a matter of fact, representatives of (Ireat Brit in, of Ireland, of Switzerland, of Holland, have told me personaIlv-I do not know how far they can go with their legislatures, althout;h they have much more freedom than the administrative authorities here--that they would recommend such legislation or administrative orders as may be necessary to enter into one of these reciprocal arrangements. the taxing authorities of France have toll Mr. Edge in the last 10 days, I understand, that they would like to consider such an arrangement. The taxing authorities of two or three of the Scandinavian countries have intimated to me, and also Germany, that they would be very much interested. I think we would conclude a few of these arrangements soon; I think it would take some time to conclude many of thow. Mr. HILL. It just seemed to time that under the situation as you picture it they would be giving up something, while we would be (59)
The CARitmAN. Yes; thete hearings will be published. Doctor ADAMS. Then I hesitate about mentioning names.

46

INTERNATIONAL VOUIF. TAXATION

gaining something. Why, therefore, should other nations cons,90t
Doctor ADAMS. Maybe this is the situation; they would give up more in appearance than in fact. We would be giving up, in appear. ance, a lot of taxes on interests and dividends arising in this country and giving up very little in fact. Mr. COLLIER. I understood the second reason that you gave is that you say some European countries have gotten the taxes so high that they are ashamed of then. Doctor ADAMS. So high. Mr. COLLIER. They are measured hy their necessities, are they not? Doctor ADAMS. I think what you say is true. It is not the high rates; it is double and triple taxation that I think, in a way, they art' a little ashamed of. Mr. COLLIER. And you say they want an excuse to reduce thom, taxes. Are not those taxes measured by their necessities? Doctor ADAMs. Their high rates are explained that way, I think, Mr. Collier, but not the double and triple taxation that is imposed in some instances. Mr. COLLIER. I do not see any excuse any country needs to reduce taxes, if they are in a position lo do it, because it is no .pleasure to any country to tax its people more than they need. 1e all know that one of the most popular pastimes is criticizing a government for high taxes. Doctor ADAMS. Yes. Let us take a government taxing foreign corporations having a local subsidiary company in the first instance at the rate of 15 per cent upon the latter's earnings, then imposing# in addition, 18 per cent tax on the dividends it distributes; then, in addition to that, is assuminhg that this subsidiary corporation is a part of the entire business of the foreign concern and is therefore imposing an additional dividend tax of 18 per cent on a part of the dividends distributed by the foreign parent concern. Suppose they get into that situation-and I am portraying a real situation-suppose their courts say, "Yes, you can do that; that is the tax law, you can do it." I say if a nation gets into such a tangle of taxation, it is conceivable, and I believe it personally to be a fact, that they want to get out of it. They may want some good excuse to get out of it, and they would find their excuse in an international arrangement of

to such proposed reciprocal arrangement?

some kind. Mr. GAIINsR. But I can not understand, in view of the statement you have just related about the interests of these various governments in this proposition, why you can not have a treaty made by these 27 nations that have gotten together and agreed on this proposition. Doctor ADAMS. Because they do not agree on a single uniform
treaty.

you yesterday-they approved this idea as a model treaty, but they also adopted another one, on a different line. Mr. GARNER. They approved it as a model treaty, but for the other fellow; not for them. (Laughter.] . as to the basis of agreement. I have no hope you will conclude early
(80) Doctor
ADAMS.

Mr. GARNER. I thought you said those 27 nations did agree. Doctor ADAMS. No; those 27 nations adopted as Mr. Mills told

There is a difference of opinion and of interest

I

I

INTERNATIONAL, I)O'I.E TAXATION

47

taxes in the United States on interest and dividends derived from this country; he is subject to the withholding. Now, this bill, as it stands at the present moment, I am afraid would exempt such people. It

different lines; I have the greatest hope that, you will conclude arrangements with other nations, such os (reat Britaii, Holland, and Rwitzerland. The CHAIRMAN. Now, if you will piwccd with a discussion of the bill. Mr. GAiNrF,. You said you were going to tell us what. the weak. nesPs were. Doctor, ADA.MS. The first weakness is the weakness which this gentleman (Ir. lill) brought out, that the adoption of these agreements is going to be slow. The second weakness arises in connection with the case Mr. Estep brought up yesterday. I do not know whether it is a weakness or not, but I want you to see the possibilities. Take an American citizen resident in Great Britain, who derives a big income from American securities, either bonds or stocks. At the present time, that man must make a return to the American Government and he receives no credit by reason of the American tax on his interest and dividends derived from American corporations. He does not get. any credit. If this bill went through in its present form, he would get an exemption, because he would be treated as a resident of (treat Britain. Now it is very easy to correct that, if you want to correct it. It does not amount to much in dollars and cents; because, as Mr. Mills told you, very few wealthy Americans ever take a tax residence abroad. But it is a fact that probably most of you, some of you at least, would regard the exemption as a weakness. If so, I want you to see it, and say to you it is very easy to change it. The reason it is put that way, gentlemen, is this: We impose taxes now on the foreign citizen who is a resident of the United States. If a foreign citizen comes over here and becomes a resident, we tax him at full rates on all his income from whatever source derived. On the other hand, if an American citizen resides abroad, we do not follow that principle of residence. In the first instance, at least, this bill has been drafted on the basis of residence. Now, if you do not like that exemption, it would be the easiest thing in Lhe world to correct it. It does not amount to much in dollars and cents; I personally do not care much about it; but we followed the principle of residence because we apply that principle to aliens in the present American law, and sometimes I think we had better follow principles even though it costs a few dollars. The other point, which I had not foreseen until it was called to my attention the other day, is more serious. As the bill stands, in its present form, I think it, is possible that we would, automatically, give exemption for taxes now collected by the United States-we would automatically give an exemption for income derived by citizens of certain nations which do not impose an income tax at the present time. It is an intricate matter; I had better repeat it. At the present time, the citizen of a foreign country which imposes no income tax, pays

arrangements with Italy or Belgium, which wish or de,sire to act along

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I

48

INTERNATIONAL DOUBLE TAXATION

is a matter of debate in the department whether the bill grants this exemption, but if so it ought to be so changed and it wil be quite easy to change it so that this privilege of exemption on interest and dividends derved from the United States would not be given to residents of countries which do not impose an income tax. We want to sell any exemption from our taxes collected at source only in exchange for some positive advantage to us. If a foreign country does not have an come tax, I think you certainly would not want to exempt its residents from our withholding taxes. That possibly is a rather large hole in the bill that can be easily plugged. Ido not know of any other weakness. Ifthere is any other, I do not know it. We tell you it is a practical proposal, that it will save money to the United States; that it will permit our engaging in a movement for the reduction of international double taxation, which is a good thing in itself. It seems to me that we should be ready to take just a little trouble to go out of our way to do some of these things that aro worth doing on their merits, because they are in accordance with sound principle, particularly when they do not cost any money.. May I ask you one question? You are directing your Mr. Cisp. interest in these matters to American citizens. Do you think it is sound governmental policy for any country to exempt from taxation one of its nationals who resides out of the country and does not thereby contribute to the maintenance and support of the country? And following it up, if a foreigner leaves his own country and resides in this country and is getting the advantage of this country, should he not be taxed to help maintain this Government? Doctor ADAMS. Answering your first question, Mr. Crisp, I would not relieve from the duty of reporting and computing tax in the first instance any American citizen for reasons which you stated. I think he ought to report and pay taxes on any income not taxed in a foreign country. But in dealing with the nonresident citizen we should bear in mind our attitude toward the resident alien. To this foreign national living with us we say:
Here, if you live with us regularly. we are going to treat you " one of our nationals said to put the full burden of tax on you.

We should be consistent if possible. I do not care how you settle this question it is not a matter of much importance one way of the other. By the change of two words in the bill you could cut out the privileges granted in this bill to American citizens who become confirmed and permanent residents abroad; but so long as we have this residence principletoin our present law, I thought it better to brin r.this question up you. show us just where those two words b ChiN toM. Wil you
are?

Doctor ADAMS. Where we could make that change? Doctor ADAMS. It is in the opening lines of the bill, "That the income of an individual who is a resident of a foreign country." Now, if you will make that simply "The income of a nonresident alien," that is all you have to do. (62)
Mr. CIINDBLOM. Yes.

INTERNATIONAL DOUBLE TAXATION

49

ferences, I understood that principle of residence was very favorably considered by the conference. Doctor ADAMS. It was, sir; btit there are some of the nations that do not receive it favorably. As I told you, Italy, Belgium, and ,ome others. Mr. E8TEP. I am just wondering where you got the language that was used in section 8, because I do not recall ever having read anything describing a resident or a nonresident in such a way as under the language here, to give a man a right to move out of this country and live in some other country for six months of any particular taxable year, which would exempt him then from )aving an income tax. Following that up, supposing there were and there have been a lot of stocks in the last severalyears that have skyrocketed to extreme heights and were purchased by people at very low prices., and they held on to them because they did not want to pay a large income tax. Now suppose that a particular stock had skyrocketed and some individual had a lot of it, but decided, in that particular year, that that was the time to sell and he had a tremendous income in that year as a result of a profit. Under that section, as I read it, he could go to one of those countries that you describe, that has no income tax law, and reside there for six months and escape the payment in that one year of possibly a very heavy tax. Doctor ADAMS. You can cure that by just that change I suggested, by putting in the first two lines "nonresident itlien" and not saying "and individual who is a resident of a foreign coumtrv." Se odly, I want to say that the matter which you have up wits investigated thoroughly by some of the attorneys'in the Treasury Department, who concluded what we told you yesterday, that *while that six months' test imposed a sort of a check, it would not establish a residence. Foreign residence could not be established by merely living abroad six months. Residence is to be deteriiined by the ordinary tests with which you are familiar; that is, intention, but we put in the six months' provision so that in no event could an American establish a foreign residence unless lie had lived abroad for a period of six months. in other words, you have the year as a unit, and then have put in six months. Doctor ADAMS. All right. I am at a little disadvantage, because I rather agree with you, but it was left with the expert on the subject of residence and his opinion rather than my own was followed. You can very easily correct that by putting in "nonresident alien" in the first two lines of the bill, instead of "individual who is a resident of a foreign country." Mr. CHINDBLOM. That would materially change the theory of the bill. Doctor ADAMS. It is a practical matter which is not of great importance, in my opinion. you have been kind enough to give the committee. Do you know whether the Treasury has any further matters to present?
The CHAIRMAN. We thank you; Doctor Adams, for the information Mr. ESTE . But you have in there "during such taxable year";

The CHAinMAN. Doctor Adams, in reading the reports of the con-

(63)

80
however.

INTERNATIONAL DOUBLE TAXATION

Doctor ADAMS. I can not say definitely, Mr. Hawley. I think not,

chairman.)

The CHAIRMAN. Well, gentlemen. the hearings will be sent to each one of you for correction. I have already sent to each member of the committee a number of documents on this subject. I trust you will give them your attention. What we will lo further willbe decided by the committee at some future session. The committee will now stand adjourned subject to the call of the chairman. (The committee thereupon adjourned subject to the call of the

(64)

SECTION 2 Convention With AUSTRALIA

(65)

INCOME TAX CONVENTION BETWEEN THE UNITED STATES AND

AUSTRALIA

May 14, 1953.. June 3, 1953. June 29, 1953. July 2, 1953. July 9, 1953

Signed at Washington. Received by Senate; designated Executive I 83d Congress, 1st Session; injunction of secrecy removed (99 Congressional Record 5943). Senate Committee Hearings. Reported by Senate Foreign Relations Committee (Ex. Rept. No. 2, 83d Cong., Ratification by Senate of its advice and consent (99 Congressional Record 8299-8302, 8305-8306, 8308). Ratified by United States President.

1st Ses.).

July 23, 1953-----December 14, 1953 ... - - Ratified by Australia. December 14, 1953....- iastruments of ratification exchanged, convention entered into force effective January 1, 1953 (as to U.S. tax), July 1, 1953 December 22, 1953 .... Proclaimed by United States President. Official Text ---------- TIAS 2880; 4 UST 2274.
(as to Australian tax).

V

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CONTENTS OF SECTION 2
1. Presidential Message of Transmittal to Senate -------------------3. Senate Committee Report -------------------------------------4. Senate Floor Debate and Action -------------------------------5. Presidential Proclamation (including Official Text of Convention)2. Senate Committee Hearings
-.-------------------------------

(69)

Pae

(113) (123) (133)

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(87)

PresidentialMessage of Transmittalto Senate (including materialsenclosed therewith)

(69)

83v Coxom.m let Seujm

I

SENATE

tJxL'U I

TAXATION CONVENTION WITH AUSTRALIA

MESSAGE
FROM

THE PRESIDENT OF THE UNITED STATES
TRANSMIrTINO

THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE COMMONWEALTH OF AUSTRALIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVA. SION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON MAY 14, 1953

JUNE

3, 1958.-Convention was read the fAint time and the Injunction of meey was removed therefrom. The convention, the President's messge of transmittal, and all accompanying papers were referred to the Committee on Forelp Relations and ordered to be printed for the use of the Senate

Tin WHITE Hous., June 8, 1958.

To t Senate of doe United State: 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 Commonwealth of Australia, signed at W gton on May 14, 1953, 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 Acting Secretary of State with respect to the convention. The convention has the approval of the Department of State and the Department of the Treasury. DwiGT D. EMsvrowZ. (Enclosures: (1) Report by the Acting Secretary of State; (2) convention between the United States and Australia relating to taxes on income.) (71)

2

TAXATION CONVENTION WITH AUSTRALIA
DEPARTMENT O STATi,

The PRESIDENT,

l'ashington, June 1, 1963.

Te HAite House:

taxation have been strongly supported by both the taxpayers and the tax authorities. This has been made (lear in all of the hearings which have been held by the Senate Committee on Foreign Relations with respect to tax conventions. (See, for example, the committee's reports during the 80th Cong., recommending approval, subject to certain reservations, of the conventions with the Netherlands and ee.1

country often result. in double taxation of a qevere character. It is believed that income-tax conventions constitute an important step toward the removal of this undesirable impediment to international trade and economic development. The convention with Australia establishes asatisfactory basis for the accomplishment of this objective in the mutusd interest of the two countries and for the direct benefit of the tfpayers of both countries. The negotiation and conclusion of conventions regarding double

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 convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on May 14, 1953. This convention, together with one relating to taxes on the estates of deceased persons anld one relating to taxes on gifts, was formulated as a result of techimical discussions between representatives of this Government and representatives of the Government of Australia, wherein an effort was made to determine the bases upon which conventions between the two Governments might be concluded for the purpose of eliminating double taxation, as far as practicable, and establishing certain procedures for mutual administrative cooperation for the effective enforcement of the convention. The Department of State and the Department of the Treasury cooperated in the negotiation of the convention submitted herewith, after public announcement of the contemplated negotiations. It has the approval of both Departments. The income-tax convention with Australia has the same basic objectives as similar conventions which have been entered into by the United States with a number of other countries. In principle and substance the provisions of the convention with Australia are consistent with, if not identical to, provisions in one or nore of the income-tax conventions now in force between the United States and foreign countries, namely Canada, Denmark, Finland, France, Ireland, the Netherlands, New Zealand, Norway. Sweden, Switzerland, the Union of South Africa, and the United Kingdom, as well as an income-tax convention with Greece, which has been approved by the Senate but which has not yet entered into force. As stated in previous reports with respect to tax conventions with other countries, it is realized that the imposition and collection of taxt.s upon the same income by Ith the United Stat s alnd a foreign

(72).

TAXATION4 CONVENTION WITH AUSTRALIA

8

believed to be in harmony with the policies expressed by the Senate in approving tax conventions. The convention would be applicable (art. I), so far as United States taxes are concerned, only to the Federal income taxes. It would not apply to taxes imposed by the several States of the United States, the Tistrict of Columbia, or the Territories or possessions of the United States. &o far as Australian taxes are concerned, the convention would apply to the Cqmmonwealth income tax and social services contribution including the tax at the further rates of tax payable in respect of income from property and the additional tax as.essed in respect of the undistributed amount of the distributable income of a private company. Article 11 defines numerous terms or expressions found in the convention and contains also the usual provision to the effect that in applying the 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. As usual a comprehensive definition of "permanent establishment" is included. Articles Ill anti IV express the principles affecting the determination of amount and the taxation of business income derived by enterprisels of one of the countries from sources within the other country. income is adopted as in other tax conventions of the United States. The principle found in section 45 of the Internal Revenue Code is also adopted in regard to the adjustment of accounts as between interlocking blusinesses. Article V contains the provisions regarding reciprocal exemption from taxation of earnings derived from the operation of registered ships or aircraft. These prey;sions being consistent with the principle embodied in section 212 (b) and 231 (d) of the Internal Revenue Code, as amended, apply only to business income from such operations, having no application to corporate dividends. Article VI provides, on a reciprocal basis, for exemption from Australian tax of dividends paid by a United States corporation, not managed and controlled in Australia to a stockholder who ic not a resident of Australia, regardless of tle percentage of gross income, where such dividends are derived by that corporation from sources in Australia. Article VII relats to taxation of dividends and contains provisions whereby the rate of tax at the source is reduced to 15 percent in the case of all dividends. There is no provision, such as that which will be found in certain other tax conventions, for reducing to 5 percent the tax upon subsidiary dividends paid to the parent company. Article VIII is related to VI and VII and was included in order to confirm that Australia's imposition of undistributed profits tax as applied to a" private company" would not be disturbed. Since United States law iniposes a tax oni undistributed profits of certain corporations, the provisions were made reciprocal.
Ne. I

Denmark; S.Ex. Rept. No. 10, 80th Cong., 2d ses. and S.E. Rept. No. II, 80th Cong., 2d ses.) The provisions of the income-tax convention with Australia are

Tle principle of "permanent establishment" as. apl)lied to business

73095 0-62-vol. 1----6

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4

TAXATION CONVENTION WITH AUSTRALIA

Article IX contains the provisions regarding exempt ion, upon spec. ified conditions, from taxation in respect or earned income derived as compensation for labor or personal services, including professional services. The policy expressed by the Senate in connecton with such provisions was taken into consideration, so that there is no limitation With respect to services performed by entertainers. Article X contains the provisions regarding reciprocal exemption in the case of royalties for the use, production or reproduction of, or for the privilege of using, producing or reproducing, a literary, dramatic, musical or artistic work, but the provisions do not apply to royalties in relation to motion picture films or the reproduction by any means of images or sound produced directly or indirectly from those films$, Article XI contains provisions, along the lines of those in existing tax conventions, respecting income from real-property and natural. resource royalties. Article XII exempts pensions, both private and governmental, from taxation at the source. Snilar provisions are in other tax conventions. Article XIII, in harmony with the principle expressed in provisions of other tax conventions, provides for exemption in regard to the remuneration of professors or teachers, upon specified conditions. Article XIV provides for reciprocal exemption of religious, scientific, educational, and charitable organizations. Income derived from sources within one of the countries by such an institution of the other country would be exempt from tax by the country from which the income was derived: Provisions along the same line are contained in the income tax conventions with Canada and the Union of South Africa. Each country is left free to impose its tax on business income or like income of such institutions. Article XV is the credit article, wherein the principles Qf the United States tax system are adopted with respect to credit tor taxes paid to a foreign government. There is provision for a credit against United States tax of income tax paid to Australia. Taken together with article XX, it is the effect of this provision that section 131 of the Internal Revenue Code, as in effect on the day of signature of the convention will be applicable to allowance of credit for Australian tax. The provision respecting credit against Australian tax is analogous to that in article XIII (2) of tie convention of the United States with the United Kingdom as applied to United Kingdom tax. Article XV also expresses the principle, as found in the Internal Revenue Code, that for purposes of credit earned income is derived from the country in whicb services are rendered. 'Australia retains its power of taxing (1) film rentals from sources in Australia and (2) insurance premiunms paid for risks assumed on property located in Australia. It is provided that where a penalty is imposed by either country, such penalty will not be recognized as a tax for which or against. hiich credit is allowed. This is consistent with a principle recognized in United States law. The United States retains full control over taxation of its own citizens, resident., and corporations. relates to assistance in the collection of taxes. It is Article XVI limited to the collection by one country of such tax imposed by the other country as will insure that the exemption or reduced rate of
]Bxe4. I

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TAXATION CONVENTION WITH AUSTRALIA

5

tax granted under article VII (dividends) and article X (royalties) shall not be enjoyed by persons not entitled to those benefits. The scope and effect of this article are in accord with the policy expressed by the Senate in approving a number of income-tax conventions in 1952 and as em (ied in certain reservations. A provision of the kind in article XVI is necessary in order to apply effectively at the source in tie United States the reduced rates of tax or exemptions provided by the convention. Article XVII contains provisions assuring taxpayers a right to lodge a claim when they can show that, double taxation has resulted or is likely to result, contrary to the terms of the convention. Article XVIII relates to the reciprocal exchange of information by the taxation authorities necessary for carrying out the provisions of the convention or for the prevent ion of fraud or, in general, to prevent fiscal evasion in regard to the taxes covered by the convention. Similar provisions are contained in conventions with certain other countries. As usual, provision is made against disclosure to unauthorized persons of information so exchanged and against disclosure of any trade process. Article XIX confirms that the taxation authority of each country may communicate directly with the taxation authority of the other country for the purpose of giving effect to Ilit, convention. Article XX placing certain limitations on the application of the convention, should be read principally in conjunction with article XV, the credit article. 'Tie provision in clause (a), that the convention shall not be construed as restricting in any manner any exemption deduction, credit or other allowance accorded by the laws of one of the countries in determining the tax payable to that, country, is a standard provision to be found in other tax conventions. Clause (b) confirms the understanding that the convention shall not affect the operation of Australian law relating to film business controlled abroad and insurance with nonresidents. Australia retains its tax on film rentals and insurance premiums anti the permanent establishment principle is made inapplicable to such items in the case of a taxpayer having no such establishment in Australia. Article XXI provides for ratification and prescribes that the convention shall become effective, as to United States tax, on January I of the year in which the exchange of instruments of ratification takes place and, as to Australian tax, for the year of income commencing on Jtdy 1 next succeeding the date on which the convention becomes effective for United States tax. It is provided also that the convention shall continue in effect indefinitely, but may be terminated by either party by the giving of a notice of termination to the other party on or before June 30 in any year after 1955. The termination, m such case, would be effective, as to United States tax, on and after January 1 next following the giving of the notice and, as to Australian taN, for the year of income commencing on July 1 next succeeding the date on which the convention ceases to be effective for United-States tax, and for all subsequent years. Respectfully submitted, WALTER B. SMITH, Under Secretary. (Enclosure: Convention between the United States and Australia relating to taxes on income.)
Wx I

8

TAXATION CONVENTION WITH AUSTRALIA

[Text of Conventionj

,Ze. I

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Senate Committee Hearings
June 29.. 1953 83d Congress, 1st Session Subcommittee of the Senate Committee on Foreign Relations

(77)

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

HEARING
53703 A

8UBCqXMm -01-TRfE COMMI TJE 0N FOREIGN RELATIONS UNITED STATES SENATE
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JUNE 29, 1950

(83D1 CONG., 1ST 4Va TAXATIO.X

Printed iefott us of the Committee onForeign

Relations
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UNITD STATUS
WASHINOTON : 1l3l

(7o)

COMMITTEE ON FOREIGN RELATIONS
ALEXANDER WILEY, Wbomsin, CkI.Lrm WALTER F. GEORGE, Gemis R. ALEXANDER SMITH, New lermy THEODORE FRANCIS GREEN, Itb*te Ihinel ROURKE B. HICKENLOOPER, Iowa J. WILLIAM FULBRIOIIT. Arkansu CHARLES W.TOBDY, Now Hampshir JOHN'S. SPARKMAN, Aklbams ROBERT A.TAFT, Ohio OUY M. OILLETTE, ows WILUAM LANOER, North Dakota

HUBERT H. HUMPHREY, Minumota HOMR FBROUSON, Mihm MIKE MANSFIELD, Montina WILLIAM P. KNOWLAND, Calliula F&Aua 0. Wsto, W#/&a# Tnounsw V. NAaAnvk Cmhsaw CAlL M. MACY, CJM &Ws avus N. CAI1, Gwsmh 0.0. O'Div, CSW Clo
PAY M. HOLY, AuKdU CkuA Monnus HANSuN, Aniston Ckr

SUvicoMMiur

ON DounLs TAXATION CONVENTIONS

H. ALEXANDER SMITH, New smny, Ch*m. OGwrg F. GEORGE WALTER OA. M. MAlfCv, O(Mate# to

(S0)

CONTENTS
Ahord, Ell.worth C., United States Council of the International Chamber of Commerce, Inc ................................................ 40 Bachracl, Howard A., attorney New York ........................... 63 Carroll Miitchell B., National Foreign Trade Council .................. 48 King, ildon P., head, Office of iitertiational Tax Relationis, Bureau of Internal Iteveuue ................................................ 34,55 Smith, Dan T., Assistant to the Secretary of the Treasury .............. 33
III

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DOUBLE TAXATION INVENTIONS WITH BELGIUM AND AUSTRALIA
MONDAY, M" 3O, 1953

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32

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AIT3TRALIA

Senator SUIT. Three of these are double-tax conventions between the United States and Australia, one of which relates to taxes on income, Executive I; one of which relates to taxes on estates Executive J; and the third of Which relates to gift taxes, Executive k. We also have before us two conventions with Belgium for the avoidance of double taxation on income, exhibit I of the 81st Congress, and Executive A of the 83d Congress. The principal convention with Belgium was submitted to the Senate in 1949. The Foreign Relations Committee did not take action on that convention at that time because of a request from the executive branch that action be deferred until further negotiations had taken place. In January of this year a supplementary tax convention with Belgium was submitted to the Senate, and tat convention, as well as the convention submitted in 1949, is now before us. Some weeks ago I asked the staff of the Joint Committee on Internal Revenue Taxation to examine these conventions. I understand they have done.so, and that Mr. Colin Staem is with us this morning. (84)

DOUBLE TAXATION COAViNTIONS WITH BELGIUM AND AUSrRALIA

33

I might say I have a statement that Mr. Siam sent me which will help to explain the conventions when we have to present them on the floor. It will be recalled that during the last-session the Sente considered double-tax conventions with South Africa, New Zealand, Norway, Ireland, Greece, and Canada, and gave its consent to the ratification of these conventions, subject to I or 2 reservations. Mr. Eldon P. King, Special Deputy Commissioner of the Bureau of Internal Revenue, has been busy negotiating double-tax conventions since that time. He is with us today. Before I ask Mr. King to testify, I am going to ask Mr. Dan T. Smith, assistant to the Secretary of the Treasury, to make an opening statement for the Treasury. Is Mr. Smith here? STATMIINT OF DAN T. SMITE, ASSISTANT TO THE SECRETARY OF THE TREASURY Mr. SMITH. Thank you, Senator Smith and Senator George. I asked to make a brief opening statement because these are the first tax conventions to be presented under the present administration. We an heartily in sympathy with the general principle and objec. tives of tax conventions Whih have been developed over so many years in the past. They a ppear to be extremely useful in removinor at least reducing--double taxation, and ingiving certainty by clear definitions on various matters. The Belgian treaty, as you noted in your comments, was negotiated earlier, and was submitted to the Senate prior to January 20 of this year. The present administration titus has had no part in the negotiation of t hat treaty. We have reviewed it and have only one comment on it which I shall make shortly. Negotiations on the Australian treaty were started last year, and concluded this year. We have followed the negotiations on that subject in detail. I might, as one additional point, note that in my previous contact with tax conventions I have been impressed by the variety of conditions and circumstances which inevitably appcat .ithcm. As I see it, the peculiar and distinctive circumstances, of each country's tax provisions mean that when it comes to a matter of negotiation, certain thigs are attractive to other countries but the matters are not altogether uniform as to what can be included.
ARTICLE X OF BELGIAN TAX TREATY

your judgment, are all right?

One point that I wish to call to your attention in the Belgian treaty was the factSenator SMITH. Might I ask you whether the Australian treaties, in

Mr. SMITJlYes, sir; they are. Senator SMiTn. You are supporting those three conventions Mr. SuiTn. "_ sir; we are supporting those in full and without a, reservation, and the points I wish to make on the Belgian treaty do not indicate a reservation, but merely a point I wish to call to your attention.'

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34 DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTMAI

Article X of the Belgian treaty provides:
Wages, salarins and Atiilar onmpentioni, and pensions and annuities paid by one of the Contracting States or by'the political subdivisions or territories thereof to citizens of that State residing in the other State shall be exempt from taxation In the latter State.

That is the, principal clause, and I shall not read the rest of it. .Thatis a clause, as I understand it, which has very commonly appeared in the earlier tax treaties negotiated up to the time that the Belgian treaty was negotiated. The exact significance of that clause in comparison with or with reference to the McCarran Act, adopted subsequent to the time of the negotiation of this treaty, has not bcei fully clarified by the various legal agencies of the Government. To avoid any possible conflict in this area, we decided as a matter of policy, in the Australian treaty not to include any clause of this sort. As I say, the significance of this clause is not fully resolved by the legal agencies of t e Government. I certainly am not in a position to have any useful opinion on it, but I thought it only proper to call to your attention the fact that that clause does exist, and that it does not exist in the AustraiaiL treaty. Senator SUITE. I think Mr. Stam called attention to that in his memorandum to us on the Belgian treaty. Mr. SwxzC I believe he was, going, to; I haye. not seen his ineiorandum as yet. This very brief statement of endorsement of the Australian treaties, and approbation of the general principles of tax conventions concludes my remarks, Senators. have with me here Mr. King and various other technicians who have been concerned with the negotiations of the treaties and they can handle the technical details much better than I can. Senator SMITE. Mr. King is an old friend of ours in these treaty discussions. Mr. SMITH. He has done a magnificent job with these conventions. Senator SMITH. I will ask Mr. Eldon P. King, of the Bitreau of Internal Revenue to testify now. STATMUT OF ELDON P. KING, READ, OFFCE OF INTER. NATIONAL TAX RELATIONS, BUREAU 01 INTERNAL REVENUE. I think I should make merely a brief statement pending further developments, especially since I have not been able to foresee any materil controversies in these treaties, such as some of those we have had in the past treaties.
BACKGROUND OF THB BELGIAN TRZATIve

Mr. KING. Thank you, Senator.

The Belgian income tax treaty ias been Pending for some Mine. It started outthatrather standard principles AS applied to the businessincome field, on is the relaitonip of an enterprise of onecountry to its activities in tle other.,' However, its provisions on investment income were quite narrow, that is, the items of dividends, interest, rents, and royalties.

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DOUBLE TAXATION CONVENTIONS WITH'BELGI;M AND AUSTRALIA 85

After the treaty reached the Senate, the Belgian Government asked for renegotiation with a view to broadening the treaty. That has since been done in the supplemental treaty signed September 9, 1952. Senator SMITH. Is that why we deferred consideration of the Belgian treaty along with several others pending at that time, but thd Belgian Government asked that it be deferred.
CHANGES MADE BY SUPPLEMENTARY BELGIAN TREATY

American company, which was offset against some reductions made by Belgium on royalties.

It provided for a rather limited rate, reduction on the dividends flowing from the American subsidiary to the Belgian parent, where the Belgian parent owned more than 95 percent of the stock in the

first Belgian treaty.? Mr. Kin. Yes. The Senat;e was about ready to take up the

One of the revisions made was to enter into an arrangement for the reciprocal reduction of rates on interest to 15 percent

Another was to substitute for the previous dividend provision a provision which would reduce the rate on dividends flowing from United States sources to Belgian residents, to 15 percent. There was no express reduction to 15 percent on the Belgian side because of the underlying principles involved in the Belgian system, which places the tax essentially on the corporation and imposes no tax on the out"oi dividend. supplemental treaty also broadens out the credit provisions on the Belgian side to conform more closely to the credit provisions on the United States' side. This, in turn, is beneficial to American citizens resident in Belgium and als to United States enterprises carrying on activities in Belgium. The treaty now contains a provision for reciprocal exemption from taxation on shipping and aircraft, which is a standard provision in our treaties. It also contains a provision under which commercial travelers can go from one country to the other for as much as 183 days and be taxfree in the country they travel into.
PROVISIONS RELATING TO ENTERTAINERS AND ADMINISTRATIVE
COOPERATION

I might add there that. there is no reservation as to public enteoa tainets, such as we had in some of our other treaties and which prookeasome controversy. rSIT. Don t we touch on the subject of public.enter-. tainers in this treat ?. Mr. KING. No; they are put on the qame basis as all others. The administrative cooperation provisions in the first treaty were broader than those now found in the supplemental treaty. the changes in the supplemental treaty were intended to take cognizanee of past controversies, on that subject and to conform to the provisions adopted in the treaties approved several years ago. Mr. Smith has alreadymado a statement on the Government-salary article, so I will pass that over. Senator SMITH. Is the Government-ealary. artice in the Belgian treaty satisfactory from our standpoint?

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36

AUSTRALIA DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND

here is to remain neutral as affecting constructions of the McCarran Act. being quite We regard the original Belgian. treaty, as .amended asNetherlands The a broad treaty and quite comparable to those with and other European countries.
AND ESTATE PREVIOUS PATTERNS FOLLOWED IN AUSTRALIAN INCOME TREATIES

Mr. KINo. On the question of the Government salaries, as Mr. Smith pointed out, that is in the process of study, and the object

I turn next to the Australian treaty. TheofAustralian income-tax the treaty, I might say at the outset, is the last our treaties with British dominions. We had previously concluded treaties with Canada, the Union of South Africa, Ireland, and New Zealand. with The pattern here employed is quite close toofthat employedwhich Africa South the other dominions except, perhaps, the Union broadly comparable different tax system. It is also has a somewhat Kingdom. to that between the United States and the United country with the in one The provisions relating to the enterprise permanent establishment or other business activity in the other however, for country are quite standard. There is no provision,interest. rates with regard to reciprocal exemption or reduced The handling of royalties is somewhat limited in that the reductions to cultural royalties. outside of natural resource royalties are confined with Canada. treaty follows the plan used In that respect the The matter of dividends was handled by the adoption of a reciprocal reduction in rates to not more than 15 percent. to that, a 5-percent In some of our other treaties we have, in addition company in one the parent rate on intercompany dividends where the stock in the subsidiary in as 95 percent of country"owns as the other country. States and Such provision was urged by the United was that thewas studied mte Should but their view at great length with Australia distinction in be 15 percent for all shareholders; there should be no the intercompany dividends. add for 5-percent rate in a very limited clan I think I a provion thatain the Australian-United Iligdom treaty, there ishould of cases where the corporation in one country owns ail of the qualifying directors' shares, and shares in the subsidiary in the other, except 5 percent of the toW not exceed where the directors' shares do share. The Australian attitude on that was that that constituted merely a was not readjustment of tax accounts between the two countries andinvolved rather to be extended generally. It was a substitution for a credit system that the two countries had previously entered ito, and hence not appropriate as a matter of overall policy. dividend tax in Senator OGORGE.-Do they have the intercorporate Australia? Mr. Kim. Oh, yes, indeed; the system is set up about like ours.
the They have a basic tax on the corporation and then they have

extra tax on shareholders, the same as we do.

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DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

37

Senator GEOitrE. I was speaking of the intercorporate dividends. Mr. KiNG. Oh, the intercorporate? Senator Gi.o-iw.,. They do not have that; do they? Mr. KING. No; thcy do not. Senator GEoRtGE. They are very wise; they are wiser than we are. Mr. KING. The dividend paid by one Australian company to another Australian company is, in effect, exempt from Australian tax. Senator Gt;oRGE. I thuik so. Mr. KING. That is my recollection of it. We now have a good reciprocal credit system established with Australia. As you know, we have a rather coinprehensive system in our law, and Australia has matched that, either through a credit
system or exemptin|g completely the income from sources outsile of

Australia. We also have a provision in the convention for reciprocal exemptit., from taxation of shipping and aircraft profits. Our law has long offered reciprocity to countries, and we have a good many reciprocal arrangements with countries but we found that a good many other important countries can only see fit to enter into such a plan as a part of a broad tax treaty. Australia was one of those. For years we have attempted to have reciprocal exemption with Australia, but we were not able to obtain one until we hadthis broad tax treaty covering that and many other items. The administrative provisions hero also conform to the settlement of that-issue in past treaties. Turning to the tstate-tax treaty, it follows our usual pattern of combining a credit system with the settlement of a number of situs However, it happens that we are not always able to agree on situs rule., and in those cases the item is adjusted through the credit pro. visions. That happened in the case of Australia where we had to leave the situs of corporate dividends open, because of Australia's desire to retain Aitus in Australia, in these instances where the stock transfer office is located there.
INAUGURATION OF GIFT-TAX TREATY

rules.

We have for the first time a gift-tax treaty. The gift tax in Australia supplements the estate tax about the same way it does here, and it was thought desirable to round out the double-taxation subject by having a gift-tax treaty. The remarks made with reference to the estate-tax treaty are Naplicable also to the gift tax. The situs rule on shares was left open but handled through a credit system. That is merely a brief outline of these treaties and if more questions develop as a result of statements of the other witnesses, we will be glad to answer them. Senator SMITH. Mr. King, let me ask you one overall question.
NO DEPARTURE FROM PREVIOUS TREATIES

You have been familiar with the treaties in question, as I knov, because I have seen vou before this committee in the past. Do you feel that there is any departure in these treaties from the general principles and rules we have approved in previous treaties?
1 ?I'
n
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38 DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

Is there anything special *e should call to the attention of the Senate with respect to these particular treaties? Mr. KI.o. I. cannot think of anything. Mr. Smith mentioned, of course, the governmental salary point. Mr. KING. That provision is entirely standard compared to a good many past treaties, but it has run into some developments in view of the McCarrih law which leaves it rather complicated and"ather unsettled. I think about the only positioit we can take is one of neutrality and try not to interfere 'with whatever future construction may be placed upon that act in higher legal circles. I would not call that a different provision; it is rather standard, but it happened to get involved in a later law, at least to some degree.
ADEQUACY OF PROTECTION OFFERED

Senator SMITH. Yes.

protection to American citizens. Mr. KING. Yes. I thinkSenator SMITH. We are interested in having justice done by these treaties-with other countries. Mr. KING. Yes. We regard them as very satisfactory treaties, measured by past standards and future hopes. Senator SMITH. Have you any more of these double-tax conventions under negotiation? Mr. KING. This closes the ones before you, I think, for the moment. We have others in various stages of discussions, but so far as I can Joresee there would not be any intention of sending any more over at .this session. Senator SMITH. We have not had any objections filed to any of I -hese pending treaties. Jthink we will have a witness this morning who wants to raie some points, but there have been no formal objections filed to any of these treaties, so far as our committee is concerned. Do you know of any objections to these treaties filed With the Treasury Department? Mr. KING. No; we have received no objections that have been called to my attention.
RETROACTIVE PROVISION IN TRJAMES

Senator SMITH. Do you feel that these treaties give adequate

left after approval by the Senate to exchange ratifications, but that dite seems to give ample time.'

believe it isSeptember 30. There has to be an exchange of ratification by September 30. That means we would have to have a little time

staff. If these treaties were acted on before adjounment of the Congress, which may be at the end of July, would they become retroactive to the first of this year? Mr. KING. Yes. Senator SMITH. Is that the understanding with these other countries? Mr. KING. Yes. Now, you have to watch the basic date'1n the Belgian treaty. I

Senator SMITH. One more question was suggested to me by our

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DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA 39 September 30, they are retroactive to the first of the year? Mr. KINo. Yes.
STATUS OF IAIFICATION

Senator SMITH. That means if they are ratified and in effect by

these conventions? Mr. KING. Yes. I did receive word on the Belgium treaty-it is in about the same status there as it is here; it has been referred to the legislative branch with approval. recommended by the executive branch. to ask.
Senator SMITH. Senator George, you probably have some quesbons

Senator SMITH. Can you tell us of the present status of action by the other parties? Have either the Belgians or Australians ratified

treaties, I would have some..

Senator GEORGE. NO; not now. If any objections arise to these

carefully, and we found most of these objections that had been raised in the past had been eliminated. For example, you did not have anything affecting capital gains or 102 or-some of these other provi. ions and so we did:not find anything of a controversial nature in here. I tihnk you have already discussed the McCarran Act on the ques-

matters, and I will ask him if he has any questions of Mr. King. Mr. STAM. I do not think so, Senator. We went over these very

Senator SMITH. 'We have Mr. Stain who is always helpful in these

tion of Government salaries, so we did not find anything objectionable.
PROBLEM OF DEFINITION OF TERMS

the particular country, so that there really is not any meeting of the minds between. the two countries as to who are residents. I mean, thAt runs through the whole treaty structure, and, of course, sometimes we have wondered whether or not it would be possible to work out a. common undcrstaidiog of what they.mean when they use certain terms in these conventions. But at the present time it i left deorally up to the two countries to construe. That i of course, I think, is .in some ways an unfortunate result, but I do not think that tan be helped. But that problem has been in all of these conventions. We do not have any objection. We have gone over these treaties very carefully, and we do not have any objections, as was said in Our letter which, I think, we sent you. . Senator SMITH. I have a statement here which is entitled "Proposed Tax Convention for Belgium and Australia," which is enclosed with your letter to me. Mr. "STAM. That is right. Senator SMITH. Senator George, that statement of Mr. Stain's was very carefully worked out in discussing these conventions, and should be Apart ot our record. Thank you, Mr. King.

comes up from time to time, and Ido not' think Mr. King can help the situation-that problem is that when we define terms, generally speaking each country has its own definition. For example, take the question of resident for the purpose of the estate tax: The definition of. a resident would depend on the laws of

Of course, the only problem in all of these tax conventions that

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40 DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

We have Mr. Eflsworth C. Alvord, United States Council of the International Chamber of Commerce, and I understand he wants to Mr. King, I take it you will be bere? Mr. KINd. Yes. Senator SMITH. Yes. Mr. Alvord, we are very glad to see you here, sir, and get the benefit of your advice. STATEMENT OF ELLSWORTH 0. ALVORD, UNITED STATES COUNCIL OF THE INTERNATIONAL CHAMBER OF COMMERCE, INC. Mr. ALVORD. Mr. Chairman and Senator George, it is a pleasure to be here. We would like to commend the work of Mr. King and the Treasury officials in the negotiation of double-tax treaties. We would like to urge them on to further negotiations and more extensive negotiations, and we trust that this subcommittee and the Foreign Relations Committee and the Senate will give its advice and consent to the ratification of the three Australian treaties and the Belgian treaty as it is proposed to be amended by the supplemental treaty. There are a few points that I would like to make. They are not directed toward our unconditional approval of the treaties as they stand; they are not intended to be a word of caution to the Treasury, mind as, I am sure, they otherwise would be, in the negotiation of other treaties. Senator SMITH. You are not really filing any objection to these treaties. Mr. ALVORD. No objection, sir. Senator SmTe. But you want to give us a caution in regard to certain points in the future?
Mr. ALVOaD. Yes sir. but "we would like to make them, so that the points can be in their

tes tify.

Senator SMITH. That is very valuable.
T4XATIQN OF INTERCORPORATE DIVIDEND8

Mr. ALVQ-RD. The first point I would like to suggest for future consideration is the matter of the taxation of intqrcorporate dividends. We have a pretty goQd record in our past treaties that dividends from the 95-percent-.wned subsidiary would be taxed at only a 5-percent rate. That is being eliminated from the Belgian treaty and is not in the Australian treaty. It is in a good many of our treaties and we urge that the principle be advocated on the part of the United States. It is a perfectly sound principle, and there were reasons for its elimination in the two treaties, but we merely urge that if it is to be eliminated the reasons for tho elimination be rather predominant. TAXATION 0? INTEREST our past treaties, if not always consistent. Many of our treaties, such as our treaties with Denmark and Finland, Greece, Ireland, and the Dutch treaty I think-I am sure the Dutch treaty-grant a complete r exemption to interest. Canada, 'as I recall it, imposes a 5-percent limitatin-I should say a 15-percent limitation, I thhik, in the case of Canada, and 5 percent
Second, as to the taxation of interest, we have a very good record in

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

41

in the case of Switzerland, and Sweden I think imposes a limitation of a withholding rate which is 30 percent. We think the principle of the complete exemption of interest is sound; it has been approved by various administrations; it has been approved by the Senate; and we urge that it be advocated s'riowly and sincerely and adopted wherever it is possible. There is no limitation in either the proposed Australian income tax treaty or the Belgian treaty on the taxatiori of interest.
IXCHANGE-OF-INFORMATION PROVISION

A third point which I would like to point out with respect to the proposed estate tax is I think the exchange-of-information provision of article VI can well be enforced, and the provisions that are in pnor treaties adopted, which are somewhat broader than in the Australian treaty, and Mr. King has explained the reason fcr the elimination of the provision with respect to the situs of shares of stock of a corporation. The reason, I assume, was strong enough to eliminate it from this treaty, but it is always a very difficult question, and we think that the Treasury should make every effort to establish the principle that in all our prior treaties, all our prior estate-tax treaties, that the situs of the shares of a corporation is the place of the incorporation of that corporation. Australia has an unusual situation, and I would urge that if there are further negotiations with respect to further treaties with Australia and with respect to other estate-tax treaties with other countries , I would urge that that situs question be considered a pretty important matter. I think that those are my comments with respect to the treaties now pending before you. There are always necessarily differences in each treaty because, as Secretary Smith has told you, the treaty or the situation, the tax situation, in each country just vaies enough so that we cannot have boilerplate provisions such as, I think you, Mr. Chairman, suggested a few years ago that we try to have. I would like to make just 1 or 2 'comments with respect'to the negotiation of further treaties. We have pretty well covered the field I think, with countries that have taxes somewhat similar to ours. I think Mr. King is now negotiating with 3 or 4 other countries that will almost conclude treaties with countries that have tax concepts very much like ours.
INCENTIVES FOR FUTURE NEGOTIATIONS WITH LATIN AMERICAN COUNTRIES

American countries, and there are a good many reasons why we have not. I would like to urge that Mr. Stain here, and you two gentlemen, a prve, if the Treasury approves, the adoption of a few new princiles m treaties so that we ave something to offer the Central and south American countrriC. I will just ive you one illustration. I discussed a good many with Mr. King in Am past, and I would just give you one illustration. It is very di cult in the South American countries todraw the line between an income tax for which a credit is given under section 131 of our law and the tax that is almost an income tax.
fA

However, we have not gotten very far with the Central and South

42 DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA
I think, in the negotiation of treaties with South American and Central American countries we could well take the step beyond the income-tax technical credit provision of section 131 and sa to every. one of these countries, as you examine these taxes:'" his tax is enough like an income tax that we will, in negotiating this treaty with

lso as income taxes so that a credit can be given." That is merely an illustration of the point I make, and I think it would be very much worthwhile for the administration to consider points like that going out beyond anything that we have done in the past so that we can really enter into double-tax treaties with countries have quite different concept with respect to taxation that the countries with which we now have'treaties.
TREATYMAZINO POLICIES

you and with concession-on your part,*consider the following -taxes

The resolution itself is directed toward the so-called underdeveloped countries, *whichis a very favorite phrase but pretty well undefined, and urges the so-called capital exportig'countries to recognize in either legislation or in treaties that the tax system of the country into which the investment goes must be considered very carefully, as well as the *taxsystem of the capital exporting country which must be' considered very carefully in working g out a system which will truly attract capital to the country which wants it. PROBLEM OF FOREIGN INVESTMENT I pointed out several things, and I would just summarize very briely those for you-that this matter of climate for the investment of foreign funds-and we hear a great deal in the United States on "trade and not aid," and on the investment of private funds abroad, hoping to overcome the necessity for funds going abroad into private business-the matter of climate is not a simple thing, and this whole group of problems, I think, can be handled in one treaty. . Our point 4 program and our Rockefeller reports and our Paley reports do not quito hit it. They rely mostly on the general principle. that there will be no discrimination in the taxation in the foreign country as between a citizen of that country and a citizen, for example, of the United States. That is a fair enough principle if everything else is favoiable to the investment of funds there. But we have such problems as nationalization, and the problems resulting from that such as eyaluatiofi and payment for properties. which are. socialized; we have problems of exchange control and' of
IIA %

The matter came up-it hasbeen before' the fiscal commissions of the United Nations for a good many years, and this year a pretty substantial step forward was taken, with the help of our own Treasury, representatives-I was attending as a representative of the International Chamber of Commerce, and the resolution as finally adopted is a little bit limited, but it is a substantial step forward. I would like to, if I may, offer for the record a copy of that resolution, together with a copy of the transcript of some remarks that I made while the resolution was under consideration.

Then I would like to suggest, if I may, a new approach to our treatymaking policies. I call it, instead of a tax treaty I would call It a trade and tax treaty.

I

h DOLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA 43

convertibility of currency; problems of the export of current earnings and profits, and the return of capital that is invested abroad; a very large number of just ordinary but'very important financial problems. I we can solve those satisfactorily then we can also solve, I am sure, the tax problems existing so that that which is left after taxes will be enough if the thing works, to really attract capital, for example, from the United States. I think it is very much worth considering, and I would urge Mr. Stam to consider the princ!ples-the Treasury I know, is considering them, and the administration, and I am just laying them before you so that f you will be consulted formally or informally you will have at least some record on which to act. I think there is an opportunity to do a very real job in the field. It is a job that has not been done yet, and I will explain my position very briefly. There are many people, and you gentlomen have heard the policy advocated-there are many who urge that we exempt entirely income from abroad by legislation. That principle I have never supported and I do not support. I think the only way to do the job is through bilateral agreements so that if the country abroad really wants capital from the United States, we can sit down and negotiate the basis, including as many of the problems as we can, in addition to the tax problems, and work out a treaty which will be in force for a long period of time, and under which we stand some chance of substituting private investment abroad for the flow of Government funds, and I think there is much more chance of the creation of lasting friendships with people abroad under that sort of a system than there is under our present policies. That, gentlemen, is all I have to say with respect to the pendingtreaties and further negotiations, and f will leave this for the record. Senator StITH. We Will be very glad to have that for the record, Mr. Alvord. (The documents referred to follow:)
UNITED NATIONS ECONOMIC AND SOCIAL COUNCIL Fiscal Commision Dlstr. Limited Fourth session EICN.8/L.6 Agenda Item 3 (a) 6 May 1953 Orilgina: EnosbINTERNATIONAL TAX PROBLEMS
TAxATIoN oP FoRziGN INvzsTmaT

IMPOT OF TUBS WORKING osour iPiecal incentiw to incrmee the national .ow of priat capita for as 0eumi. f 1. The Working Group was composed as fpllows: Mr. Erik Lindahl (Sweden), Chairman Mr. Paul CaUebaut (Belgium) Mr. A. K. Eaton (Canada) Rapporteur Mr. Carlo Valensuela (Chile) Mv: Kan Lee (China) Mr. Jose Pres Cubillas (Cuba) Mr. Arthur Lall (India) Mr. Abdul Qadir (Pakistan) Mr. M.J. Wells (Union of South Africa) Mr. R. 0. Nicholas (United Kingdom) Mr. E. F. Bartell (United Statei)
dondpmet of undr-dwdped countries

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DOUBLE TAXATION CONVENTIONS WI BELGIUM AND AUSTRALIA Mr. E. C. Alvord and Mr.. R. M. Lusardi, observers for the International Chamber of Commerce attended the meetings of the Working Group. Mr. 11. 8. Bloch Director of the Fisal Division, represented the Secretary. General, and Mr. R. E. Loachmann, Chief of the International Tax Section, Fiscal Division, acted as Secretary to the Working Group. The Working Party held three meetings, on 30 April and 1 and 4 May 1953. 2. The Worklno Group was appointed to consider item 3 (a) of the Commission's agenda, Intemrtonal Tax Problems- Taxation of Foreign Investment and to prepare the special section of the Report of the Fiscal Commission to the economic and Social Council requested by the Council in its resolution 416 D (XIV) which called on the Commission to: "give further consideration to the problems of taxation In relation to foreign fuvestment; . .. (and) to examfiie further the proposal that, through bilateral agreements or unilateral measures, Income from foreign investments In under-developed countries should be taxed only In these countries, with such Income being exempted from taxes by countries other than those In which the foreign Investments are made." 3. The Working Group had before it a draft resolution Introduced by the representative of Cuba, entitled "Fiscal Incentives to Increase the International Flow of Private Capital for the Economic Development of Under-developed Countries" (document EICN.8/L.3). 4. The draft resolution was fully discussed by members of the group but was not adopted. The representative of Cuba stated that he would present It for a vote In the Commission itself. 8. The subsequent discuslon showed general appreciation among all members of the desirability of assisting undereveloped countries by stimulating the flow of capital in their direction. These views suggested a resolution which, while recommending sympathetic consideration for the principle advocated in the draft resolution of the representative of Cuba, would allow countries to be selective In their approach to the problem, and would enable them to act unilaterally in a manner best suited to their circumstances, or adopt through bilateral agreements the methods or devices found to be mutually satisfactory. 6. The Working Group therefore decided unanimously, with one member abstaining, to propose the following draft resolution (F4CN.8/L.8) submitted by the representative of Pakistan, for Inclusion in the Commission's report to the Economic and Social Council.
"FISCAL INCENTIVES TO INCREASE THE INTERNATIONAL Fiow oF PRIVATIN CAPITAL FoR Tils ECONOMIC DEVELOPMENT OF UNDER-DJEVELOPED COUNTRIas

TA Economic and Social Council,
Recognizing: (a) The great importance of finding means to stimulate the flow of private investment from the highly developed to the under-developed countries, in order to accelatate the economic development of the latter, (b) That the present flow of capital exported to the under-developed countries is insufficient for their development needs, (c) That relatively lower taxation in force in the under-developed countries is one of the attractions which such countries can offer to foreign capital as an incentive to investment, (d) That this Incentive becomes less effective-although International double taxation is avoided-if the capital-exporting countries apply to the Income from investments in under-developed countries any further taxation beyond that already paid in the latter, (e) That favourab o tax treatment is one of the many factors affecting the flow of foreign capital, 1. Reaffirms that the country in which income arises has as a general principle an undoubted right to tax that Income; 2. Recommends that the highly developed countries acting unilaterally or when concluding tax agreements should give sympathetic consideration to the feasibility of taxing such income pnly or primarily In the country in which the Income was produced."

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DOUBLE TAXATION CONVENTION WITH BELGIUM AND AUSTRALIA SUMMARY OF MR. ALVORD'S REMARKS
INTRODUCnOro

45

Fiscal Commission b the Economic and Social Council of the United Nations. The resolution in efect asked the Fiscal Commission to consider methods for stimulating the flow of private capital into Investments In underdeveloped countries. The representative from Cuba Introduced a resolution which, in effect, provided that the country in which the income arose had the sole right to taxin other words, the Income of an American enterprise from investments In Cuba would be exempt from tax by the United States and taxed only by Cuba. The Cuban resolution had been under debate substantially all day. It was supported by the by the delegates from Cuba Pakistan, Chile and India. It was op delegates from the United States, the Kingaom of Great Britain. the Union of South Africa, Belgium, and China. The arguments of the United States (not all of which were adopted by the other opposing delegates) were: (1) The complete change In policy, which the United States was not wilig to accept; (2) Loss of revenue, estimated to be at least 8150 million; (3) Favorable tax treatment not alone can induce investments; (4) Administrative difficulties in determining the source of income; and (5) Opportunities for avoidance of the United States tax.
'133 THREN OWJCTIVSS

A "Working grou p" had been appointed to consider a resolution referred to the

Mr. Avord pointed out that there were three objectives under consideralion and the debate had not always distinguished among them: 1(I) Elimination of double or multiple taxation; 2) The fair treatment of foreign investors; and 3) The attraction of foreign investment. Mr. Alvord also pointed out that each of these objectives *as induced by specific and rather distinct problems.. Elimination of double' taxation was Induced by each of the various countries involved attempting to tax 100 percent of the income. The objective was to tax the Income but once and not to tax more than 100 percent ot the income. the solution was(a) The allocation of the income between the countries involved and a determination as to which country should tax. The principles involved were fairly well agreed to, resulting In som Income being taxed only at the source, other income being zxed only by the country of residence, and In some Income being taxed at lower rates. These principles have been and are being carried into effect. (b) Unilateral action, bilateral action, in the nature of tax treaties, and both. Again, the objective was merely one of equity. Double-tax treaties, for example, were not designed primarily to attract foreign investment. With respect to the fair treatment of foreign Investors, a simple general principle has ben fairly well accepted, "The foreign country will not discriminato against the foreign investor and in favor of its own citizen." Here, again, this general rule was not designed to attract foreign Investment. P CAITAL VHS ATRACTION Of O rEIOK Mr. Alvord then pointed out that the Cuban resolution was directed toward encouraging the flow of foreign investments. It was quite true taxation was only one of the factors involved. But If all other factors are favorable, then taati6n may well become the determinative factor. Perhaps the best method of considering the factors involved is to discuss a pacific case. Assume that Cuba decides that It really wants capital from the united States. This, Cuba must decide for itself. Having made that decision, then the potential American investor takes the matter under consideration, lie asks himself the following questions: (1) Does Cuba really want me to invest in Cuba(2) How much capital will be required to make the enterprise asuccess; (3) What risks to my capital are Involved, 1.e.
(a) How stable Is the Cuban Government;

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DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

(b) What chance do I have of withdrawing my capital in the event of an international crisis; (c) How long a period of time Is Involved' (d) In brief, what are the risks in addition to the normal business (4) happens in case of loss; and (5) What happens if the enterprise Isprofitable, 1.e.1 (a) How long will it take mnake thb nterpise jkoftab!e (b) Can I bring my profits home. In other words, the American Investor must find a favorable "climate."' That is to say, such problems as expropriation, convertibility of currency, exchange Controls, and other restriction, for both the present atd the future, as well as the general policies of the foreign government and te attitude of its nationals, are fundamental conmsidratIons.

But assume that all these are ikswered favorably. There then remains one fundamental qtiestion: Will the profits be conune.surate with the risk assumed? And he measures hii profits after taxes. He will not be too concerned as to which country taxes, but he will be very concerned with the aggregate taxes. Consider further the position of the potential American investor. He Is confronted with the problem of getting his hands on the necessary capital. The re ar but three sources available to him: (1) borrowing from the bankq-but only in rare cases would the project be bankable; (2) using accumulated earnings and profits-I. e., money belonging to his stockholders, which may or may not be adequate In amount; or (3) the publl--L e., an Issue of equity securities or of debt. The principal point to be remembered is that the potential American Investor must not only be "sold" himself on the project but he must be able to "sell" other potential Investors. It is frequently difficult enough for an American enter. prise in need of capital to raise adequate capital in the United States. It is much more difficult when the risks of foreign Investment are added. If the risk are too great, no American capital will -be available. If the risks are not too great, then the opportunities must be commensurate with the risks, and, again, opportunities include opportunities for profit .after taxes. Mr. Alvord then reviewed the stated objections on the part of the United States. (1) The policy Involved is not new. But If It were new, It is a policy which the United States should wholeheartedly support.

(2) Los of revenue: If the policy "works", there will be no loss in revenue. In fact, there will be very substantial gain in revenue resulting from increased economic activities in the United States and the opportunities to supply foreign nationals with the goods they want and 'for the fint time can buy. Furthermore, if the plan "works," then private Investment will be replacing Government aid. In that event, the Treasury will profit substantially. (3)Favorable tax treatment alone: This subject has already been discussed. It Isquite true that It is not the one obstacle: -But it will always be a very Imporant factor.
) Administrative difficulties. These difficulties have already been pretty

worketLout in the United states tax laws and in our various treaties. (5) Opportunities for avoidance: This subject ties In very closely with the preceding subject. This objection should be dismissed. Mr. Alvord then pointed out that In his opinion ageneral United States exemption of all foreign income would not be adopted by the Congress of the United States. The sound approach and the best way to proceed, from the United States point of view Isthrough bilateral or multilateral treaties, to be concluded between th United Wats ad those countries who really wish private capital from the United States. He referred to the ICC Code of Fair Treatment for Foreign Investments, and su ested that the principles there Involved be given very serious consideration by the foreign countries. In coelusion, Mr. Avord stated that he urges financing economic development through private investment rather than through Government grants-In-aid. And, a"e all, the United States should not overlook the point imade by the delegate from Cuba: High standards of living, -education, health, and better food, clothing and shelter Invariably follow Industrialization and private enterprie. If the proposed policies assist the underdeveloped countries and promote the general welfare of their citizens, and good will and understanding awong nations, then we nmay look forward to a prolonged period of peace. If this should result, then no price is too big to pay. I

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DOUBLE TAXATION CONVO

IoS w WI

3WM AND AUSAllA 47 S

Senator SMITe. We am rae grateful to you for this inteting y testimony. Senator George, have you any questions to ask Mr. Alvord? Senator Gzoaoz. No, I believe not, 1Mr. Chairman. Senator SMTHr. Mr. tam does anything occur to you with respect to Mr. Alvord's statement tlat you want to comment on?
PROBLEMS WITH SOUTH AMIRICAW NZOOTIATIONS

Mr. STAM. I do not think so, Senator Smith no; except, Senator Smith, I think you had a constituent who talked a lot about the difficulties that were occasioned in South America by some of these countries iminjsing extm taxes on the paying out of dividends and things like that, you know. There was real discrimination down there, and I was wonderg whether Air. King has ever considered those problems in connection with these tax conventions, where they have a special tax of some sort on the paying out of the dividends due corporations in this country. Mr.Xrxo. Yes. We have had discussions with countries to the south in varying degrees, but our European and British Commonwealth treaty program has been so active in the last few years that I have always felt we have not really gotten to the bottom of it; we have just made a start. That is an instance where they. impose special tax on the exportation of capital. It is not, so far as I can recall directed esp1ciallV at dividends but made applicable to any exportation include dividends which, in turn p a nice treaty problem as to whether that sort of tax should W eliminated by the other country or recognie for credit purposes by us insofar i it is appjieable to an item of income. The whole Lati-American field, or so-cakc] capital importing country field, is, I think, becoming more and more active as concerns tax treaties, and undoubtedly there is room for much study and constructive work to be done there. Mr. ALVORD. Ma, I interject, Mr. Chairman, at this point? Senator SITH; 1 s. .Mr. ALVORD. The problem Mr. Stam raises is merely one of the many problems. If we are to do a double-tax treaty then, as Mr. King stated, I would say that the tax on the export of capital, insofar as it relate s income tax, amt hat is all it is. Insofar as it becomes a barrier to tho flow of capital, such as the return of capital invested, there, to the United States, then that problem will be one of the more important and larger problems to be negotiated in comiection with thqse so-called trade and tax treaties that Ihave discussed. Senator SMITH. I thik Mr. Kig has a meniormulum; or he will get it from the record, of the proposals that Mr. Alvord made Mr. K.,o. Yes; we are glad to get it. Senator SMITH. Next we have Mr. Mitchell B. Carroll of the National Foreign Trade Council, who has boom wit!-us before. We will be glad to welcome you to say some wise thl'igs, as you always do.
Mr. ALVORD. Yes.

to the current profits, could well be considered income tax. It is an

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DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRAIJA

STATEMENT OF MITCHELL B. CARROLL, NATIONAL FOREIGN TRADE COUNCIL

Mr. Chairman and Senator George, in behalf of the National Foreign Trade Council I would like to repeat that we have already expressed our approval of the 2 conventions with Belgium, that is, the principal coawention and the supplementary convention, and the $ conventions with Australia. Although we do not find in them all that we would like to see, we feel that Mr. King in the face of great odds, has accomplished so much that we would rather take whab.we have in these conventions and use them as a basis for improvement and negotiation of more favorable provisions in the future.
SUGGESTIONS FOR FUTURE TREATIES

Mr. CARROLL. Thank you, Mr. Chairman, very much.

Inasmuch as you have expressed an interest in some general ideas on which might be incorporated in tax treaties, I might add a few words if I may, as to the general principles that we fbel-that is to sty, e National Foreign Trade Council feels-should be accomphihed in these tax conventions. Of course, their main purpose is to remove barriers to the flow of capital and commerce. Now, these barriers can sometimes arse through obstructive taxation in the other country, and in other cases the superim osing of the tax in the United States on the income that arises abroad and has already been taxed abroad. As regards the first category of obstruction, the obstructions to tne sale of commodities and the like are removed by the principle of taxing income only if it is attributable to a permanent establishment in the other contracting state, and this term is defined so as to exclude sales of our commodities and raw materials, and the like, if they are effected through a bona fide commission agent or broker, and certain obstruction to the sale of manufactured goods is removed through providing, in substance, that if you merely send in a traveling salesman to the other country, no tax liability will be imposed there. However, as regards the individuals engaged in promoting trade, we feel that there is a shortcoming in some of these treaties. We have a provision that if an individual is employed by an enterprise, a corporation, for example, in one contracting stat3, be may go into the other for a period of, say, up to 183 days in the taxable year, the amount involved is small and therefore, he should be exempt. However, in most of our treaties we have not been realistic and recognized that a branch of an enterprise of the other contracting state should be treated in the same manner as a subsidiary, withithe result that if the employee of the branch goes back to his head office for instructions and the like today under many of these treaties he is taxed on what income might be attributable to that short visit. Whereas if he is an employee of a subsidiary company he is not taxed. We do not see any sense in that discrimination, and we think that the employee of a branch should be treated on the same basis as an employee of a subsidiary company. ,(100)
and be exempt from taxation in. that country. It is a short trip;

DOUBLE TAXATION CONVENTIONS WITH BELOIUM AND AUSTRALIA
INTERCORPORATE DIVIDENDS AND INTEREST

49

Much has been said by my predecessor here today on the question of the freeing of intercorporate dividends'from tWx, and we certainly agree with what has been said. We feel that, generally speaking, when a; subsidiary abroad of an American corporation has been subjected to tax, then the income flowing to the parent in the United States should be treated as nearly as possible on a par with dividends flowing from a subsidiary of the United States, and this application of a 6-percent rate that has appeared in a number of treaties, roughly accomplishes that, and we certainly urge. Mr. King to keep on trying to obtain the adoption of that in other treaties. As regards interest, we also subscribe to the idea that the soundest principle is that interest should be exempt in the country of the borrower and taxed only in the country. of the recipient creditor. The reason is-and this is a reason that has been expounded for years before the committees of the League of Nations that were set up in the twenties and ever since-that if a borrowing country imposes a withholding tax on interest, it is tantamount to imposing a tariff on that interest, and the weiht of the withholding tax is usually taken into consideration by the lender in determining the rate of interest, so that the lender will get a net return on his lending as high, at least, as he would get from lending in his own country. In other words you cannot expect a capitalist, if I may use that word, anyone with capital in the United States, who wants to help foreign trade, to got less for lending in the development of an enterprise abroad than he would receive from lending in the United States. In other words, if he would ordinarily lend, say at 6 percent, but the foreign country imposes a withholding tax of 20 or 25 percent, the net return of interest is much less than he would get in the United States, so that the soundest principle is for the country of the borrower to exempt interest from taxation by withholding at source or otherwise.
TREATMENT OF ROYALTIES FOR PATENT TS AND COPYRIGHT

Another important point that has been overlooked in this Australian convention, for ample, is the treatment of royalties for patents and copyrights of an industrial nature. It seems that there is a provision in there for exempting royalties on cultural copyrights, but for some reason or other the Australians did not wish to encourage, it wouldseem, the bringing in of American know-how and specially patented know-how into Australia. Now, the Australians have a rather complicated system for tx that kind of income, and it would have been very helpful if they coul have adopted either exemption for*that type of income or a low withholding rate; and we, therefore, urg tirst when Mr. King has an opportunity to resume negotiations'with Australia that he take up that question. As regards general observations, I may point out that our tax treaties are very helpful in that they provide common concepts as to principles of liability which may not have existed prior to the treaty or at least were not aware of them, because of foreign tax is imposed under a language that is foreign to us, and here we see it interpreted in terms that Americans can understand.

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50 DOUBLE TAXATION CONVENTIONS WITH BELWM AND AUSTRALIA

M

ALLOWANCE FOR FORINO LNC8NTIVZ

TAX EXEMPTIONS

But there is one thing that the treaties fail to do, and that is the countries, namely, they have not take full cogizance of the fact that in most of these countries the rate of tax is.-often lower than it is in * United States. As a conseueace, if an American enterprise has a the branch for example, in Brazil, it pays there a 15-percent rate, say, on its prots, and when income is credited to the head office, another 15percent tax is payable, as distinguished from our high rates ranging up to 52 percent, where no excess-profits tax is payable, and muc higher if an excess.profits tax is payable. how, the Brazilians feel that "if the United States imposes its 2-percent rate on the profits of the Brazilian enterprise, that it reaches in and destroys an iribentive that the Brazilian Government has offered to foreign companies to reinvest in their plants down there. Brazil exempts from this second 15-percent tax profits reinvested in the plant, and ollects only the profits tax of 15 percent. In other words, if an An ican corporation has a branch in Brazil and wants to extend its plant down there, it has to pay 15 percent on its profits in Brazil and it would be free from the second Brazilian tax of 15 percent if it put up another building for the expansion of its facilities. But there is no advantage in it because it has to pay to the United States the 52 percent against which the 15 percent first tax is credited leaving the difference between 15 and 52 to be payable to the United States. In other words, the claiming of our full tax on that income from the branch in Brazil destroys the incentive that the Brazilian Government has given to enterprises to expand and develop the economy of Brazil. Mr. S mA. Carroll, hasn't that been true in the case of Cuba? Mr. Mr. CARROLL. Yes. Mr. STAN. Where they granted some kind of a partial exemption where they go down there and are subject to our full tax and, of course, get no credit; is that right? Mr. #ARROLL. That is true in Cuba; it is true in Mexico; it is true in Puerto Rico; it is true in quite a number of countries. In order to encourage the development, and to attract foreigners to come in and develop the raw materials and the sources, and Aire like, a number of these backward countries have offered these tax concessions. .The English have a descriptive expression, they call it a tax holiday for a certain number of years or they offer increased depreciation allowances, so that they can recover their investment more rapidly. But If an American enterprise does that, why, the incentive offered by the other country is nullified because wve say "0 K., you can give your incentive, but all it means is that the United States Treasury wTcollect that much more revenue," so that the incentive offered by the other country is nullified by tho imposition of the rate of at least 52 percent in the United States. Our treaties do nothing to remedy that situation, and I think that is Omi of the reasons why the South American countries have been so uninterested in'our treatiesbecause they feel that it is not right for the United States to step into their territory, so to speak, and sub.

on why they have not been successful vis-a.vis South Amarican

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DOUBLE TAXATION CONVENTIONS WITH BILGIUM AND AUSTRALIA 51

ject an enterprise down there to the samo-in an underdeveloped area which cannot stand, generally speaking, a high tax rate-to the same dgh tax rate that is applied in our well-developed economy in the United States. Now, undoubtedly Mr. King would have much more suoein if he could make some concessions alonst that line. I know that the Treasury is probably apprehensive that if you make a concession like that to an Amerian enterprise that is operating in Brazil or Cubs, likehe has mentioned or other countries, that there might be some diversion of profit.. But the advantage of a treaty is that it puts the two tax administrations into contact so that they can get together and they can verify the allocation of income to sources within the foreign country andto sources within the United-States, and prevent any shifting of profits or tax avoidance.
INCOME OF AMERICAN PERMANENT ENTERPRISES ABROAD

The National Foreign Trade Council a number of years ago first endorsed the propostion that where an American enterprise has a permanent establishment abroad as defined in these treaties, the Income should be taxable only in dhe country where it is earned, and it still is in favor of that. It has gone a ptep further, and urges the adoption of that principle even where no treaty exists, because treaties do not always advance as rapidly as we would like to have them and the thought was at that time when a definite stimulus to development abroad is desired that the United States might accord unilateay that concession to encourage the development of foreign countries It is however, tat to National Foreign Trade Council ures the ment., only in regard the the income of foreign permanent establishadoption' of this principle. It is not a general exemption of income allocable to sources abroad that is being advocated. So, in short, we heartily endorse these treaties with Belgium and with Australia. We commend Mr. King and his colleagues for their patience in keeping at this. The Australians were very slow to come around, and he finally achieved what, on the whole. I think is a very satisfactory convention. We feel that a splendid basis has been laid for operations down there. Most of the important problem have been treated, but there remain things to be accomplished in the future, and we have indicated what they Can be.
RECOGNITION O TAX ADVANTAGES IN UNDERDEVELOPED COUNYZIES

As regards treaties with Latki-American countries, les developed countries, where the rates are lower than our rates, we urge that some way be found to prevent this nullification of advantages offered by other countries through the imposing of our high rates on the income and sources such as a permanent establishment in those countriu. Mention has been made of the of the mission of the United Nations, and Irecent sessionstudentsFiscal Comam sure that of taxation, such as you two would have enjoyed hearing the delegate from Cuba expound these iMeas. He said it was a matter of statecraft, in effect. He said that this was a sound principle that les developed countries (103)

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DOUBLE TAXATION CONVENTION

WITH BELGIUM AND AUSTRALIA

certainly had the prior right, if not tie exclusive right, to tax income from sources in their territory, and it was not fair for the United States to reach in and superimpose its jurisdiction upon that of Cuba, and he felt that whatever advantages Cuba would offer would be nullified if the United States does that. And, of course, Cuba does not have an opportunity; soto speak, to retaliate becauseyoudo-not have any flow of investments in the opposite direction, so he proposed this resolution which-wis turned over to a study group and, as has been said, the principle was recognized in the resolution that was finally adopted. And I know that several years ago negotiations with Cuba were undertaken, and I was asked to appear on behalf of the American ChamberWf Commerce in Cuba to explain the intricacies of the Cuban tax law to the American delegation, and they had a number of these near income taxes that should be allowed as credits and a number of other taxes that should be considered but generally speaking-Senator GiORoG. And the ocar tax in the local communities. Mr. CARROLL. Exactly. In other words, there are a number of things that we thought should have been brought within the purview of section 131 (I), as sponsored by the Committee on Finance of the United States Senate in 1942, when Senator Geotge was chairman. But these werp explained to the representatives of the Treasury, but they have not yet come around to the same viewpoint. But I am mentioning that to show in connection with that treaty that we tried to clarify that situation, but nothing.has yet happened. One of the reasons for opposition on the part of COiba to the treaty is that the United States has wanted to step right in, so to speak, and superimpose its complicated tax system on top of the already complicated tax system of Cuba and, as you know the Cubans are very touchy about their sovereignty and independence, and they. object to that. and thethere is an of that splendid letter of Senatorbe accomplished, But objectives example of where much could George of May 29, 1952, asking for a more liberal interpretation of section 131 (h) so as to consider these near income taxes-it could be easily accomplished through agreeing in a treaty that such-and-such tax will be regarded as an income tax for the purpose of the credit on foreign taxes. I think ,have delivered much too long a speech this morning. I appreciate your kind attention to my observations. If you have any questions I will be glad to try to answer them. Senator SazT. Jam very grateful for your exposition; it is very helpful to us to have it in the record. Senator George, do you have any questions? us this explanation though, Mr. Carroll. Mr. CAtROLL. Thank you. Senator SMrT. Mr. Star, do you have any comment?
Mr, STAM. No.

Senator GEORoG.

No. We were very glad to have had you give

Senator Surr. Thank you, Mr. Carroll. We were very glad to have you here. The next witness is Mr. Howard A. Bachrach who has asked to be Will you begood enough for the record to identify yourself, and your backgrun5? I

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I

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALA53

STATEMENT OF HOWARD A. BAORACH, ATTORNEY, NEW YORK Mr. BACHRACH. Mr. Chairman and Senator George, I am grateful for the privilege of appearing before you. As an atmo~y practicing in New York,-1 am aware of the hardships that many of our citizens encounter abroad, and that many Belgian citizens encounter in the United States, in the absence of a treaty to avoid double taxation. I have encountered many situations in which real hardship has occurred, and I feel that a great debt of gratitude is owing to Mr. King who has neg tiated the.elgian and many other treaties, and we hope he wil[ be able to continue in the sameline. With your permission, Mr. Chairman, I would like to stress just a few aspects of the Belgian treaties that may not have been fully developed before you. Senator SaTH. Are yoa representing some Belgian groups? Mr. BACERAcH. No, sir; I am not really representing any clients here, although I have quite a few Belgian clients and auite a few American clients with business in both countries, but I really felt this is a matter of general interest in which I have been personally inter. ested for a long time. In fact, I have been writing articles about it, and I have been asked lately to write another article on the Belgian tax convention, and I felt that I could combine this With an appearance before the committee. Senator SMITE. All right, you may proceed. Mr. BACHRACE. Thank you, sr.
REMOVAL O THREAT OF CUMULATIVE TAXATION

I believe that the most important reasons why thin treaty is beneficial are that it removes the threat of cumulative taxation of several sources of income by two governments. In this, the proposed treaties make a signal contribution to the flow of international trade. Thus, for instance, an American national will find encouragement to acquire mining properties in Belgium if the treaty assures hin that income derived from such operations will be taxed solely by Belgium and, conversely, a Belgian national will find similar encouragement with respect. to real estate located in the United States. Inventors, authors film producers will find it attractive to license their patents, to sell their copyrights, to lease their movies to naitiola of the other country if a treaty assures them that no taxation inhe country in which they are operating will reduce their income. Businessmen of both nations are protected against double taxation by those provisions of the treaty that stipulates that commercial and industrial profits earned in one country will not be taxable in the other so long as no permanent establishment exists in such other country. .In this last instance which, I believe, is very important, a rather elaborate set of rules is to take the place of an extremely complicated and uncertain state of affairs prevailing right now in the absence of a treaty and, I believe, that this change cannot but encourage the reciprocal export and import of goods and services between our country and Belgium. These are instances where one of the two contracting countries waives altogether taxation in favor of the other.
739M 0--2-vol. 1--8

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WITH DELOIUM AND AUSTRALIA.

RSDUCTION.O1 CONFLICTING TAXES

By limiting to 15 percent of the amount of interest paid*the taxation levied by the government of the payor, and by similar and analogous relief afforded to the recipeints of dividends, the conventions are designed to and, I believe, in fact, will encourage the reciprocal flow of international investment. It is axiomatic and Mr. Mitchell Carroll has stressed that, the price of loan an investment capital rather correctly reflects the charges imposed upon it by way of taxation. By decreasing those latter charges, both governments encourage investors of both countries to add to the already impressive list of reciprocal investments. These are but a few selected instances of direct benefits expected to flow from the treaties, but I submit there are a few indirect benefits worthwhile mentioning. Numerous businesses trades, professions in both countries would benefit from increased b usiness interchanges expected to result from the conventions. Insurance, shipping, forwarding, banking are such instances. Now, while the problem of preserving and increasing holdings of foreign exchange is of relatively minor direct importance to us, it is of very great"importance to countries such as Belgium, which will be the last dependent on our aid and which will be the better able to aid their own neighbors in Europe as their own dollar income is not excessively curtailed by United States taxation. In the end result the American taxpayer will find his own tax burden decreased by the lesser need for providing direct assistance. Whether such assistance takes the form of direct aid or offshore proeurement, the American taxpayer will find his own tax burden deCreased. Therefore, in the final analysis I believe the proposed conventions are practical application of "trade, not aid."
EXCHANGE OF INFORMATION

conflicting taxes.

treaties reduce rather than eliminate altogether the impact of two

Now, of equal importance there are instances in which the proposed

Finally, it might be pointed out that several provisions in the proposed conventions willthe discovery of tax evasion Belgium obtain mation that mosy lead to enable us to secure from and to inforassistance from the Belgian Government in collecting tvces. The sume privilege is. extended[ by us to the Government of-Belgium. By adding tliese provisions the United States is- taking a further step in the direction of abolishing the antiquated concept according to which one sovereign did not lend assistance to anOther sovereign for "-called political measures, of which tax measures were one. The proposed provisions should prove to be of mutual benefit to the Treasury of both countries in providing for peat tax honesty and for an increased measure of recovery of unpaid taxes. Now, there is one more point, and that is one point that Mr. King has stressed already to the committee, namely, if the subcommittee,

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DOUBLIe TAX.ATIO.q CONVENTIONS WITH BELGIUM AND AUSTRALIA 55

recommending that the Senate advise and favor and conset. to ratification of theproposed convention,.then-it *proper to drauwattention to article XXXIII of the treaty pursuant to which the relief afforded, or let me say the substantial measures of relief afforded, will become effective as of the 1st of January of the calendar year in which ratification takes place, provided that the exchange of instruments of ratification takes place not later than the 30th of September of this year. retroConsequently, in order for the conventions to be effTe 'nate 1953, it would be required that t actively as of January 1, action during the present session of Congn take airmative 0.ing As a last word, I found very encouraging the fact that itton was able to present in the Australian case not only a tax regarding income, but also regarding estates and gift taxes, uitd, if it is not presumptuous, I should be glad if this system of providing by conventions relief against double taxation of estates would be further and further extended to include Belgium and many other countries, because, as every practitioner knows that is one of the topics where real hardship occurs when people (lie leaving assets in 2 or 3 countries. Thank you sir. Senator 9MITH. Senator George, any questions? Senator GEoRGE. No questions. I see others here. Does anyone else want to make any comments on this matter? Senator GEORGE. Mr. King. Senator SUITH. Mr. King, you have heard these witnesses, and you might make some other comments. STATEMENT OF ELDON P. KING-Resumed Mr. KINo. Just a general comment or two. I think the statements that were made are especially to be commended, and we will certainly study all the points presented most carefully. Turning to our past rather standard treaties with European countries, I think very little controversy has developed here, and objectives are about the same. The treaties vary some from country to country and, although some treaties may appear to be somewhat narrow, I think they shitld be regarded as a start. Past history of treaties has shown that as tley are amended from time to time, the provisions and subject matter are expanded rather than ontracted, so I think all indications are that the relief from double taxation will grow, and although there may be some disappointments over some treaties in the first instance, they should be regarded as.a good start and a step in the right direotion. On the subject of estate-tax treaties, I can say that we do try to supplement our income-tax treaties with those, and that we now have one in process of negotiation with Belgium which, I think,' will in due course supplement the pending income-tax treaty, but will not be ready for submission to this session of the Senate.
Senator SMITH. Thank you very mtich for your statement.

as well as the Committee on Foreign Relations, should issue a report

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56

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA COMMENTS ON TESTIMONY

The remarks on future activities with the capital importing countries, especially those to the south, I think, are very interesting and, as I said earlier, that whole field is a field which has. hardly been scratched up to this point. I think that is one field which is open for much constructive effort, something to look forward to for the future. Whatever the results may be whether it is found to be only a small field or a large one, it deserves, I think, very serious study. I note especially Mr. Stam's remark about the desire to expand our definitions in the treaties with which we agree thoroughly in principle, but on the matter of, say, trying to define residence, that concept varies so considerably among countries that instead of having a series of definitions we have preferred to throw the subject back on the laws of the respective countries. Admittedly that is not too satisfactory. Perhaps that is another illustration where in due course as the treaty program continues, we can improve in that field. In conclusion, I would like to say that I think the points made here today are most constructive and welcome to the Treasury in connection with future studies of this program.
ARTICLE X Of BELGIAN TREATY AND THE IMMIGRATION ACT OF 1952

Senator SMITH. Could you give us a brief statement, Mr. King, on the effect of the recent Icarran Act on the Belgian tax treaty? What part of the McCarran Act are you speaking of? Mr. KING. Well, that is a subject we regard as begin quitee delicate because we had treaties and then we had a new act o &ngress, and it has raised the question of the effect of that act on past treaties. The passage of a law after a treaty can present difficult legal points. They are now in process of study in the executive branch, and may reach the courts depending on the construction first given and we have had some difficulty in trying to decide what we should say at this time. We decided we should remain neutral as far as possible and not express an opinion at all on the subject except just to point to the fact that there is an Issue pending. Senator GEORGE. Exactly what is the issue, Mr. King? You can tell us that. aliens who Mr. KING. Well, the issue is immigrant visas, are employed confined to governments come in on by foreign and international organizations while waiting to become citizens, and who have been asked under the provisions of the McCarran Act to either waive any advantages, they may have while so employed, or if they prefer, retain those idvantages, and give up their claims for citizenship. I Now, the controversy turns over the wording of the act and its historical background as to whether it did or did not intend to invoke this rule in cases where we had treaties that clearly said that these artes would not be subject to tax, and you can see that begins to a rather nice issue. Senator SamrT. Heretofore, they have not been subject to tax; is that right? , (108)

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

57

Mr. KINo. That is right; they have not been subject to tax. Senator SMTU. If they should not waive that exemption from taxation, they could not go ahead and apply for American citizenship? Mr. Kmo. Yes. I understand that is recognized now as being pretty clear in the case where they claim exemption under our law, but where they claim the exemption under the treaty, that becomes a difficult problem. Our income tax treaties were written prior to and without any thought of the McCarran Act, and the objective has been somewhat different in different countries; the treaties were worded somewhat differently. Now it was. more or less a matter of fortuitous circumstances whether the treaty happened to be so worded as to give absolute protection or whether it was not. I think in something like threefourths of our treaties we say plainly that any employee here of a foreign government other than a United States citizen, regardless of his type of employment, is entitled to tax exemption, and possibly in one-fourth of the treaties we do nQt quite word it that way. Now, the basic question here is whether the McCarran Act utended to override existing treaties. Senator GEORGE. Well, basically, the McCarran Act was intended to be a codification of existing law. It may have gone beyond it in certain instances. Mr. STAM. It is a rather restricted application, though; is it not, in this situation? I mean, you have to have a status, do you not, in your intending to become a citizen of the United States; is that right? have no problem? Mr. KiXo. Oh, yes. This whole issue is only confined to those cases where the party working for the foreign government is at the same time intending 'to become a citizen of the United States. Senator S,1ITn. Mr. Smith has a suggestion.
FUTURE NEGOTIATIONS TO CONFORM TO IMMIGRATION ACT OF 1952

If you do not intend to become A citizen of the United States, you

Mr. STAM. Yes.

Mr. SMITH. Mr. Chairman, may I elaborate very briefly on this with reference to the policy implications, as we see it, in the'Treasury of this provision? The past tax treaties have had a provision exempting income of government employees in their respective countries. The McCarran Act provided in connection with immigrant status that there was to be a waiver of any rights for tax exemption. On the basis of that act, the Treasury Department in the Australian treaty did not even suggest that there bd a clause or section concerning reciprocal tax exemption because we felt that that would be contrary to the recently expressed intent of Congress as embodied in the McCarran Act. The Belgian treaty negotiated prior to that time has this earlier provision which was then a completely standard type of provision as to that. Whether that, would, in fact, if now ratitied in its present form, have the effect of making an exception to the intent of COigrA,s as expressed in tl, MeCarran Act, is soinethizg oil which hgail opinion

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DOUBLE TAXATIOX CONVENTIONS WITH BEIUI( AND AUBTRALIA

is apparently not yet clear, and our only purpose today-my purpose in raising it was to call attention to the fact that a possible issue did arise here. Senator SMITH. Thank you, air. Any more questions? Senator GEORGE. You-bring it to our attention.primarily for the purpose of indicating why certain provisions were not included in the Australian treaty? Mr. SMITH. Precisely, sir; and they were included in the Belgian treaty because that was negotiated at an earlier time. . Senator GsoRE. Because that was negotiated prior to the Immigration Act? Mr.SMITH. Precisely, sir. Senator SMITH. Senator George, I have got a letter here signed by Mr. Charles D. Post, of a Boston law firm. Mr. Post was formerly a chairman of the committee on extraterritorial application of taxes of the American Bar Association, and he makes some comments here which I think might be worth putting in the record. Senator GEORGE. Does he raise any objections? Senator SMITH. No; he is very much for it. Senator GEORGE. If he raises any objection, I think you ought to brin it to the attention of the Treasury while they are here. Senator SMITH. Mr. Post is no longer chairman of the committee. He says he has a successor. Senator G&ORGE. Put it in the record, then.
Senator SMITH. I will put it in the record.

(The letter refened to is as follows:)

GooDwN, PRocTon & HOAR,

I assume you notified me of the hearing since I was for several years chairman of the committee on extraterritorial application of taxes of the American Bar Association tex section. John P. Ohl. 63 Wall Street, New York 5, N. Y., is now chairman of that committee and I am now chairman of a different committee, namely, the committee on Federal income taxes. I have forwarded your telegram to Mr. Ohl. His name should be substituted for mine ott your records with respect to tax conventions with other countries. A year ago our committee on extraterritorial application of taxes was particularly interested in the mutual enforcement provisions of these foreign tax oonventions. Bome individuals, Including some members of our committee, were of the strong opinion that even the limited assistance provisions agreed to under former conventions involve a serious compromise of the fundamental principle that one government should not collect the taxes of another government and that there was substantial risk that taxpayers might be unjustly prejudiced without adequate Judicial safeguards in the enforcement of such assistance provisfos. Other Individuals were of the opinion that the conventions were proper as originally negotiated and should not have been restricted by the Senate. The majority of our committee, however, believed that the Senate Foreign Relations Committee adhered to precisely tht, correct line in recomnicudis acceptance of the collection provisions in the convention with the Union of South Africa, Greece, and Norway, "subject to the-understanding that each of the governments may collect the other's tax solely Inorder to insure that the exeip'tions or reduced rates of tax provided under the respective oonventious will not be enjoyed by persons not entitled to such benefits."

Boeton , Man., June 8, 1958. Mr. C. C. OT Clerk, nat Pes'r n Relations Committee hna e Oce hdlding, fla.Aingon, D3. C. DEAR 8Sp: Thank you for your telegram of June 19 re hearing on the Belgian and Australian tax conventions to be held June 29.

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DOUBLE TAXATION CONVENTION 8 WITH BELOIUM AND AUSTRALIA

59

You may be inteicited hi the comment I made fi my committee report at the annual meeting of the American Bar Association it San Francisco In September 1952 as follows: "The majority of this committee ISof the opinion that, since the Treasury itself isapparently not now disposed to press for provisions going further than the Senate mandate of 1951. there is no reason to take the position that the Senate mandate was unduly restrictive: nor, conversely, does the majority of this committee consider that the mutual enforcement provisions within the limited orbit permitted by the Senate constitute such a serious imminent threat to individual liberties that the Senate should now be urged further to restrict such mutual enforcement provisions. The majority of this committee, in other words, far from criticizing the Senate from either point of view, Is of the opinion that the Senate and the Senate Committee on Foreign Relations are to be congratulated upon achieving an equitable and balanced solution of ani extremely difficult problem; but any propos-d departures from the present formula should be subject to careful scrutiny." Since no action was requested by our committee, none was taken by the section of taxation or the American Bar Association on this matter. It should be under. stood that at the preient time I speak only as an individual on such matters. So speaking, I still feel that the Senate Committee on Foreign Relations took a sound position In 1951 and established a precedent which should not be departed from without good reason on this particular point. Very truly yours,
CEARL, s D. Poor.

questions, the committee meeting will stand adjourned. (Whereupon, at 11:35 a. m., the committee adjourned.)

Senator SMITH. If there ae no further comments and no further

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Senate Committee Report
July 2, 1953 Executive Report No. 2, 83d Congress, 1st Session Senate Foreign Relations Committee

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83D CowoUs let1'

SENATE'Exju

No.2

v Rum.

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA
TnuasDAT, JoLT 2j, 1958.--Ordered to be printed

Mr. Smri of New Jersey, from the Committee on Foreign Relations, submitted the following

REPORT
(To accompany Executive I, Eighty-first Congress, first session; Executive A Eighty-third Congress, first session; Executive 1, Eighty-third Congress, first session; Executive J, Eighty-third Congress, first session; and Executive K, Eighty-third Congress, first 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 between the United States of America and Belgium

I

2. Convention between the United States of America and Belgum, eigjetat Washington on September 9 1952 modiying a pplementing the Convention oi Octoier 28, 1948, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (Ex. A, 83d Cong., Ist sees.). 3. Convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on May 14, 1953 (Ex. I, 83d Cong., 1st ses.). 4. Convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on the estates of deceased persons, signed at Wash. ingion on May 14, 1953 (Ex. J, 83d Cong., 1st sese.).

sON.).

for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on October 28, 1948 (Ex. I, 81st Cong., 1st

2

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

5. Convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on gifts, signed at Washington on May 14, 1953 (Ex. K, 83d Cong., Ist sess.).
2. SUBCOMMITTEE HEARINGS

A subcommittee under the chairmanshi of Senator Smith of New Jersey, and Senator George held public fiearing on June 29. The principal witness in support" of the pending conventions was Mr. Eldon P. King, head, Office of International Tax Relations of the Bureau of Internal Revenue. The executive branch of the 6 overnment was also represented at the hearings by Mr. Dan Throop Smith, Special assistant to the Secretary of the Treasury. Other witnesses, abl of whom testified in support of the pending conventions, were Mr. Ellsworth C. Alvord, of the United States Council of the International Chamber of Commerce; Mr. Mitchell B. Carroll of the National Foreign Trade Council; and Mr. Howard A. Bachrach. On July 2, 1953, the Committee on Foreign Relations favorably reported the pending conventions to the Senate.
8. ANALYSIS OF PENDING CONVENTIONS

In response to a request from the chairman of the subcommittee, the hief of staff of the Joint Committee on Internal Revenue Taxation compared the provisions of the pending conventions with previous conventions which have been approved by the Senate. He reported that in general the conventions now before the Committee on Foreign Relations closely parallel the provisions of the conventions now in effect. The analysis which follows sets forth the principal features of the pending conventions with particular emphasis upon those provisions. which depart from concepts of conventions now ineffect.
4. INCOME TAX CONVENTIONS WITH BELGIUM AND AUSTRALIA

The pending income-tax conventions with Australia and Belgium do not contain any of the provisions which the Senate previously has found objectionable in its consideration of other tax treaties. The conventions contain no discrimination against the earnings of public entertainers, nor do they provide for the exemption fim United States tax of capital gains or accumulated earnings. Moreover, the collection provision contained in the treaties is in the modified form which the Senate haspreviously approved. The Australian and Belgian income-tax conventions are substantially identical with other conventions which are already in effect and their objectives include 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 establislment of a system of reciprocal administrative assistance between the tax authorities of the two countries. The conventions include provisions similar in character (except as will be noted below) to other income-tax treaties now in force concerning business income, shipping and aircraft, dividends, interest, royalties, compensation, (116)

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTALIA

3

and personal services, Government wages and salarif, penions and annuities, professor and .students, and fiscal cooeation. The convettiong,. with certainminor limitations. with. respt to the Belgian., trety, on a reciprocal basis. t In most tax conventions to which the United States is &party, the United States tax on dividends -paid, by a United States domestic subsidiary corporation to s parent -corporation in the other country isreduced to 6 percent onz,reclproal basis. No comparableprovision ppears -in either the Belgian, or theAustralian treaty. In regard to the Belgian 'convention,. Belgium imposes no tax on. dividends paid by a.Belgian eorporation-to a nonesdent shareholder. ConeequentLq, Education to-6percent of the a.x n -dividends. paid. by yb.dmestic subsidiary to a -parent in the othet country .woidd. be a unilateral provision' operating to reduce the United States tax -only.. Thus, bhe Belgian convention is limited to a reduction to 15.percent of the United States tax on dividends derived from hources within tii United States by a resident or corporation of Belgium.. Correspond ingly Belgium agrees not to impose anyta. withholding tax oreurta , on dividends derived from sources within Belgium y residents ot corporations of the United States. The Australian convention provides for a redprocal reduction to 15 percent of the tax on dividends paid to residents of the other cony tracting country, but it omits, as indicated above, a reciprocal reduce& tion to 5 percent of dividends paid by. a domestic subsidiary to a foreign parent corporation. This omission is one to which American taxpayer groups may take exception and, as a matter of fact, several witnesses commented on this point. It is understood, however, that United States representatives in their negotiations with.- Australia made determined efforts to secure the reciprocal exemption. .They were unable to do so because of the Australian position that reciprol reduction of the tax on dividends to 15 percent provides more favorable treatment generally than does the corresponding provision of -Australia's tax convention with the United Kingdom. I IThe reciprocal exemption of royalties derived from sources in one of the contracting countries -by a resident or corporation of the other 4*hen not engaged in a trade or business in the former country through a permanent establishment there) is provided in both. conventions; However, unlike the Belgian convention, the convention with Australia, insofar as it relates to royalties, is confined to copyright or other cultural royalties and does not include industrial royalties or film rentals. A similar exclusion of film rentals from the exemption r nted to cultural royalties is found in the income-tax conventions With Canada and Finland. The Belgian convention provides fot exemption from tax of salaries, wPa, and similar compensation puid by one of the contracting countries to its Citizens who are resident'in the other contracting country. Similar provisions are contained in other; income-tax. con' ventions now in force. The possibility of a conflict between this exemption accorded in the Belgian convention and-section 247 of .the IMzmtion. and Nationality Aot (Public Law 414 82d -Cong.),has been. suMested. The latter section. provides that aens whose occuv pationa .tatuwould place them m a noimmigrant status under other provisions of the act may be required to surrender their immi.

principle of the United States tax-credit system li.

Opted in both

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4

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

t status unless they.execute a written waiver of "all rights, privi es, exemptions, and immunities under any law or any executive order" which would otherwise accrue because of such occupational status. It should be noted that this section of the Immigraion Act does not require the alien to waive any -emption he pomen but ges him the option, of executing such a waiver if he desires to retain Iis immigrant status. AsumIg rguendo .that the provisions of setion 247 of the.Immi tion Act do conflict with provisions granting exemptions to aliens, there would still appear to be a subetantial question as to whether section 247 extends to exemptions conferred by treaty. However, it appears unnecessary to determine at this time whether the exemption provisions of the convention and section 247 of the Immigration Act would conflict.. Such a conflict, if it did met, would be of limited applicability, extending only to those Belgian citizens employed by the Blgi Government in the United States who had previously been admitted to the United States on an iant vm and who would prefer to remain in the United States with the intention of acqumrmg United States citizenship. The possible effects of the convention in the determination of the rights of such a limited group would not appear to warrant the elimination of this provision from the convention. Moreover a representative of in , 7auyDepa.rtment testified that the.,.Try Depar'tment, the order "to avoid any possible conflict in this area," decided "not to include any clause of this sort" in the Australian treaty. The Australian convention does not contain such an exemption for salaries and wars of Government*employees. By statute, Australia exempts such Government compensation paid by another country to its citizens when resident in Australia provided they ane resident in Australia solely by reason of their Government employment. Thus the Australian statutory exemption does not apply to nion-United Rtates citizens employed by the United States m Austrais nor does it apply to United States citizens already resident in Astrali prior to their employment there by the United States. An equivalent exemption i gated to Australian Government emyees resident in the United States since the United States statute .etc. 116 (h)) is based on reciprocity. Since the Australian conven. t/on contains no exemption for Government wages and salaries, the pneent statutory treatment is unchanged. Provimion is made in the Belgian convention for reduction on a reciprocal basis to a rate of 15 percent on interest derived from sources with one of the contracting countries by a resident or corporation of the other country (if no permanent establishment is maintained in the former country). No WI provion for interest is contained in the Australian convention. In both conventions the articles providing for the mutual assistance in the collection of taxes extends only to such cooperation as will Inur that the nmnption or reduced rates of tax granted under the convention shal not be enjoyed by persons not entitled to such benefits. The Bedgiam convention provides that it shall become effective on of the year m which the exchgis of or ftw the lt day of janu hti uoo of tax istuments ofahq ratification, takes plake oep ns1101 such ecag mourSatombr S0 ee tpvo x

0m8a

dt Septem

go,

tan p o

iti n ort

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I

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

5

are to be applicable only to payments &Wade after December 31 of such year. The Australian income-tax convention provides that in the aneof United States tax it shall become effective on or after the 1st day of Jamiry-of theearmin which- the'axchane of instruments-taktplace and that in the ase of Austualiantax it &hall be effective for the year of income commencing on the let day of July next succeedig the date upon which the convention becomes effective in the can of United States tax. The Australian taxable year (known as the year of income) is the year generally beginning July 1.
.

UTATI TAX CONv TI00I WIt*ASTWIAM

The estate-tax convention with Australia follows the same pattern and has the same basic objectives as estate-tax conventions now in force, I. e:, the avoidance of double taxation and the prevention of fiscal evsmon. As is true with respect to all other estate-tax conventions, the Australian convention *i spplcable only to the Federal state tax imposed by the United States Government." Thus, State inheritanc4 estate, or succession taxes remain unaffteted. Double taxation is principally avoided as in other existing estatetax conventions, by means of credits. .Furthermore, as ihe ease with other conventions, the Australian convention provides rules of situs of property binding upon both countrim. An exception exists however, as to the situs of corporate stock. Under most estate-tax conventions the situs of corporate stock is determined by tie country title mAY be acomplishid on a stock transfer register located in, Australa. As a result, the convention does not apply a uniform countries applies its own situs rule for corporate stock.' For the United States this means that corporate stock for estate-tax purposes is deemed to be situated in the United States either (1) if the corporation was created or ornd herein or (2) if the stock certificate is physically located in the United States. The convention provides only for such exchange of information between the, taxation authorities of the contractifng countries as is necesai to carry out the provisions of the convention and to prevent tax evasion, specifically excluding information which would disclose any trade secret or trade process, It contains no provision for mutual assistance in the collection of taxes. It is provided that the convention shall come into force on the day of exchange of instruments of ratification, being applicable only to estates of persons dying on or after such date. 6. GilT TAX CONYINT'ON WI AUTUUAIA The onvention with Australia relating to gift tues is the finit

in which the company issuing the stock is incorporated *4=* l would not abandon its rule for determination of situs, I e that shares of corporate stock are regarded as located in Au i tanser of

sits rule as to corporate stock; consequently eah of te oontreoting

gift-tax convention to be considered by the Senate. Fundamentally1
n "4te f .I) (d) etL mbnudhtl mmi tat tem bmaboWdd Wt em ma 1 wo i6hMhaE.&Isi R4$4W*t otuus to go, a~ts h ,M-l" 60emikes a t

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6

DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

-it has. the same' basic.-objctves as the aoconpanyin, estate-tax convention with Australia and similar estate-tax conventions already approved by the Senate..- Ths objectives are the avoidance of double taxation and the prevention o/fiscal evasion. Both the United States and Australian gift taxes serve principally as complement to the estate taxes which ach impose, the gift taxes being prfiariy enacted to prevent' avoidance of estate taxes. I view of the closely related naire of the gift and estate taxes, the United States representative proposed the consolidation of both the gift- and estate-tai conventions in'ode convention but it was found that such a consolidation would violate a provision of the Australian constitution providing that tax laws deal with one subject of taxation is the case with ihe accompanying Australian estate-tax con.vention and othqr ebtate-tix oonventions now in.effect, the convention has no effect upon either gift taxes or,Inheritance, estate, or succession taxes imposed by the various Sttes of either of the contracting countries. Theg'neral Aimilarity of the Australian and. United States gift tax in both the United I8ttes and Australi is' ordinarily imposed direot#y upon the donor or maker of the gift and not upon the donee or recipient. Both taxes are imposed at graduated rates although the. Australian schne of graduation differs in several respects from that employed in the United States tax. For example, the Australian tax O gifts i upon each particular gift e t than upon Australian rather for the the agge. gtoa lmuposed £ taleyear. tax as determined bytaggresga'ti. all mitmadd by the donor- during a year period. Thimis{lgifte mao by the donor to the same or other donees within 10 months prior to and 18 months subsequent to the gift in question are taken.into account in determining the rate. Procedure usually requires adjustment and r entbf pr to, Another difference in the two tax sisthat theAus. trtian x applies to.gif to made by corporations as' well as to gifts by individual whereas the United States tax is limini to gifts made

tax

fdlitated the driting' of the gift-tax convention. The gift

Thd difference in urisdiotional aopcoion of the 'two fexes is the

posed by the two countries. Therere thibe bases for imposition of
upon application .of its gift tpx. • As m the cae of estate-tax coiventipns, double taxation is ei.. inated geanory by ieans of thece8dit device; .,By statute no credit is given in the United StatS.gift tak for any*foreign gift taxes paid; nor is such a credit granted by the Australian gift tax (except on a very limited' Iro- 1iab iCh that the trdit is,restricted in pr _ ogft taxess effect .ed ,Y Nev.Zvalaud). Thus, the t provide 'in' 3co eniol'.woulla ptoe vbiy beneficialto tam scope. -the of thetax and forpurp ep, p B0. na W1ithin 'its-lOn rerdit;se~~co oul forde mtion of situisf property aBrset forth

same differentiation that obtains in6the case of the estate 'taxes im-

latte two jurisdi c oal ba . Austra oh4si

the United States tax. (1) United StateW citizenship of the donor, (9) domie of the donor in the'.United States, and (3)'situs in the united States of the rty. The Australian tax is limited to the

, no effect

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DOUBLE TAXATION CONVENTIONS WITH BELGIUM AND AUSTRALIA

7

in the convention. With minor exceptions, these rules closely parallel the rules contained in the accompanying Australian estate-tax convention. Similarly, provision is made for prorating the specific exemption under the gift tax in the same manner that proration of the estate-tax exemption is achieved under the estate-tax convention. This proration provision is similar to those contained in estate-tax conventions now in effect. Certain precautionary provisions are included, such as the article providing that the convention shall not be construed to increase the liability of any person for United States gift tax. The convention contains no provision for mutual assistance in the collection of taxes and provides only for such interchange of information as is necessary to carry out the purposes of the convention. It is provided that the convention shall come into force on the date of exchange of instruments of ratification and shall apply only as to gifts made on or after such date. It is believed that the above conventions with Belgium and Australia represent important contributions to the objective of eliminating double taxation by the United States and the respective contracting countries in these conventions.
7. CONCLUSIONS

The committee has noted that all witnesses who appeared before it supported the conventions with Belgium and Australia. While there were some suggestions that additional provisions might well be in. eluded in suc conventions, it was recognized that the problem of negotiating tax conventions from state to state, depends upon the t systems in those states. The committee urges the Senate to give its advice and consent to the ratification of the pending conventions.

7809 O--62-vol. 1---1

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I

Senate Floor Debate and Action
July 9, 1953 83d Congress, 1st Session 99 Congressional Record 8299-8302, 8305-8306, 8308

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[P. 82991 DOUBLE TAXATION CONVENTIONS The Legislative Clerk proceeded to read the convention, Executive I, 81st Congress, 1st session, a convention between the United States of America and Belium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on October 28, 1948. Mr. SMITH of New Jersey. Mr. President, there are five double taxation conventions on the Executive Calendar. Unless there is objection-and I will ask the acting majority leader if there is objection-I should like to have them taken p. 83001 up together. The Committee on Foreign Relations has held hearings on all the conventions together, and is prepared to ask for their ratification en bloc, unless it is preferred to take them up separately. Mr. KNOWLAND. I refer the Senator's inquiry to the minority leader, and also to the Senator from Iowa [Mr. GWrriwJ. The Senator from New Jersey [Mr. SMrrHJ, who is handling the tax conventions, has made inquiry whether there is objection to considering all the tax conventions en bloc, or whether it is desired to consider them separately. Since he addressed the inquiry to me I should say that I have no objection, because the Senator has said that all the conventions are along the same general line, and can be covered by the explanation he desires to make. However, I thought I should make this statement, because I understood the minority leader to say that the Senator from Iowa had one objection. Mr. GILLETTE. By the tax conventions, does the Senator refer to the double taxation conventions? Mr. SMITH of New Jersey. I think the point the Senator from Iowa desired to raise was with regard to the German debt settlement convention. Mr. GILLETTE. I have no objection to the double taxation conventions. Mr. KNOWLAND. I think it will be perfectly agreeable to consider the conventions in the manner suggested. Mr. SMITH of New Jersey. I thank the majority leader. Mr. President, the Committee on Foreign Relations has recommended that the Senate give its advice and consent to the ratification of five conventions between the United States on the one hand and Belgium and Australia on the other. These conventions are for the purpose of avoiding double taxation on incomes, on the estates of decedents, and on gifts. I may say that we have considered a number of conventions of this nature. Mr. Star, chief of staff of the Joint Committee on Internal Revenue Taxation, has been handling all these conventions for us. They are all of a pattern, with slight variations due to conditions in the several countries.
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The pending conventions are part of a comprehensive program on, the part. of this Government to conclude tax conventions which will protect Americans from paying double taxes by reason of the fact that their income arises in part abroad or because of differing tax legislation applying to estates or gifts. Since 1939 we have conducted 26 conventions and protocols with 12 different countries. From time to time during consideration of these conventions,' the Senate has attached reservations to certain provisions. In this way we have been able to give guidance to the executive branch in the negotiation of conventions of this type. For the past few years the Senator from Georgia [Mr. Gzoaos and I have been meeting in connection with these conventions and working with Mr. Stain so we are familiar with the various changes which have been made from time to time in perfecting the formulas. The conventions now before us were referred, as has been the custom of the Foreign Relations Committee in the past, to the staff of the Joint Committee on Internal Revenue Taxation. That staff has given the Foreign Relations Committee the benefit of its technical kowledge and good judgment. After studying these conventions, a subcommittee consisting of Senator G~oRrlE and myself held public hearings. All witnesses, including representatives of the International Chamber of Commerce and the National Foreign Trade Council, testified in support of these conventions. No one has opposed them and the files of the committee show no objections to them. Mr. President, the provisions of the pending conventions closely follow the provisions of other double-tax conventions now in effect. They do not contain any provisions to which the Senate has heretofore objected. The provisions of the conventions are discussed in the committee's report. Before concluding my remarks, however, I should like to invite your attention to the general nature of the conventions before Us.
INCOME-TAX CONVENTIONS WITH BELGIUM AND AUSTRALIA

Three of the conventions before the Senate relate to income taxes. Two of these conventions are with Belgium and the third with Australia. Their purpose is to eliminate, insofar as possible, double taxation with respect to corporate or individual income. Double taxation of such income is avoided under the terms of the conventions either by exemption of the income from taxation in one of the states or by giving credit for taxes paid in the other state. Mr. THYE. Mr. President, will the Senator Yield for a question? Mr. SMITH of New Jersey. I am glad to yield. Mr. THYE. One convention is with Australia. Assume that a citizen of the United States received half his income in the United States and that the other half was derived from enterprises or business activities in Australia. Would he then pay an income tax on his earnings in Australia, and be free to bring them to the United States, without being taxed in the United States on such earnings? Mr. SMITH of New Jersey. The purpose of these conventions is to avoid double taxation. As I said a moment ago, that is done in some cases by the exemption of the income from taxation in one of the states, or by giving credit for taxes paid in the other state. We have consistently followed that pattern.
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Mr. THYE. I am trying to make certain that I understand the conventions. For example if a person were to earn $50,000 in Australia, and were compelled to pay taxes on the $50,000 in Australia, and if he received an equal amount of income in the United States would he be free to bring his earnings from Australia after he had paid the Australian Government the income tax imposed upon that income, to the United States and there be free from taxation on the Australian earnings? Mr. SMITH of New Jersey. The way these conventions are drafted, for the purpose of the conventions the taxpayer must pay a tax in only one country. He would not pay a tax on the same income in two countries. There would be no doubling up. Mr. THYE. There are those who have business interests in Australia and who reside in the United States. They are citizens of the United States. However, annually they are in Australia for a period of say, 3 or 4 months, and they receive income from business establishment there. The question I wish to get clear in my mind is this: If such a person pays an income tax in Australia, is he then privileged to take out of Australia whatever the Australian Government allows him to take out of the country-there are certain restrictions -and bring it to the United States without being subjected to the United States Federal income tax on the earnings in Australia? Mr. SMITH of New Jersey. I refer the Senator to article III of the convention with Australia. There are two paragraphs in that article which may cover the point which the Senator makes. Article III, paragraph I; reads as follows:
An Australian enterprise shall not be subject to United States tax in respect to its industrial or commercial profits unless it is engaged in trade or business in the United States through a permanent establishment in the United States. If it is so engaged, United States tax may be imposed upon the entire income of that enterprise from sources within the United State.

Paragraph 2 reads as follows:
A United States enterprise shall not be subject to Australian tax in respect of Its industrial or commercial profits unless it is engaged In trade or business in Australia through a permanent establishment in Australia. If it is so engaged, Australian tax may oe imposed upon the entire income of that enterprise from sources within Australia&

Mr. THYE. That is the question which I wished to have clarified. I did not quite understand the situation. If a person is doing business inboth countries, but happens to be a citizen of the-United States and has business interests in Australia, and if he spends say, 2 or 3 months in Australia taking care of that business while stili retaining his residence in the United States, would he be able, by paying a tax in Australia, to take the earnings from Australia and bring them to the United States, and there be free from United States Federal tax on such earnings? I am assuming that he received equal earnings in Australia and in the United States. In other words, suppose he earned $50,000 a year in Australia and $50,000 a year from his enterprises in the United States. Would he be free from tax on the earnings which he had made in Australia, and upon which he had paid a tax in Australia, when he brought those earnings to the United States? I did not quite understand that provision of the treaty, and I wanted to make it absolutely clear, because I can easily see how there might be confusion [p. 88011 in the case of anyone trying to determine what his tax obligation was with respect to his Australfan earnings. (197)

the United States, being allowed to deduct only the amount of the tax he had paid in the foreign country on the earnings there. Mr. SMITH of New Jersey. He could have an income in two places. The determination of the situs would be the country in which he lived the major part of the year. That would be the basis of the tax. But the tax paid in the other country could be credited on the tax in the United States. Mr. THYE. Then if I used the $60,000 figure earned in Australia and the $50 000 earned in the United StatesMr. SMITH of New Jersey. Assuming that the Senator from Minnesota lived in the United States. Mr. THYE. Yes and that thiq was my home, and I was recognized as a citizen of the United States. I would then not have to declare my earnings in Australia when I made my United States report on my earning but I would report only on the United States income because I fad already declie4 my income in Australia, and I had paid a tax.on that portion of may income. Therefore the earnings I S(198)

Mr. SMITH of New Jersey. As I recall the discussions in the committee, if I correctly understand the question of the distinguished Senator, if a tax had been paid in Australia on the income there, and such income were brought to the United States, there could be deducted from the overall Federal tax here the actual tax paid in Australia, so that there would be no doubling up. Mr. THYE. For the taxes he paid in Australia he could get a deduction. The question I wish to have completely cleared up is, Could he take the earnings he was privileged to make in Australia and add them to his earnings in the United States, and be eligible to deduct only the portion on which he had paid a tax in Australia, but would ay a tax on the portion of the earnings he made in Australia on which e had not paid a tax? I want to be sure that I know whether he would have to declare his earnings in Australia and his earnings in the United States, and then be qualified to deduct from the total joint earnings only the amount on which he had paid taxes in Australia or would he have to pay a tax in the United States on the tota amount of joint earnings That is the question. Mr. SMITH of New Jersey. I think I get the point of the Senator's question. It is a technical subject. It depends on where the primary tax is paid. There might be a case of a man who would earn dividends on Australian corporations, in which case the Australian Government would deduct the tax at the source, whether he filed a return or not. The subject is somewhat complicated and it is difficult to give a straight answer that a man can do this or that. The purpose is not to save a person from paying taxes which he would normally have to pay, but to give a person credit for taxes paid in other countries. Mr. THYE. We are all endeavoring to encourage business expansion and business operation in other countries, because in that manner we have mutual security compounded without the necessity of spending tax dollars in making possible such a business expansion in foreign countries. I wanted to make certain that we had that question cleared up, because it could be very confusing to an individual taxpayer in the United States. I do not have it clear in my mind whether the earnings in a foreign country, even though the foreign taxes were paid on them, would be recognized as income in this country, with the taxpayer being compelled to report them as a part of his net income and to pay a tax in

had made in Australia could absolutely be kept separate from my net earnings in the United States. That was the question I wanted to have cleared up. Mr. SMITH of New Jersey. I am not sure that I would say yes to the question whether the Senator from Minnesota would have to declare in the United States his earnings in the other country. I have myself held a few securities in Canada for example, and I have had to make a return on those securities in Canada. I was able to deduct the tax I paid there of course. Mr. FLANDERS. Mr. President, will the Senator yield? Mr. SMITH of New Jersey. I yield. Mr. FLANDERS. I wonder whether I could ask some questions in very condensed form. The first question is this: In the case suggested by the Senator from Minnesota can the American import his earnings and profits into the United States tax free. Mr. SMITH of New Jersey. No; he cannot import them tax free. He can import them with a credit for the taxes paid in the other country. Mr. FLANDERS. The second question is this: When he imports them with the credit for the taxes paid in the other country, how is the tax credit applied? Is it applied to reducing his income by that much, or is it applied to reducing the United States tax by that much. Mr. SMITH of New Jersey.-if I am correct in my understanding I would say that he would have to show his total income in the United States and abroad, namely, the overall total income. Then he would show the taxes paid abroad, and he would get credit for the taxes paid abroad against the total tax figured in the United States. Mr. FLANDERS. I suppose that would be the situation. Mr. SMITH of New Jersey. I believe that is the correct answer. From the questions that have been asked there can be seen the importance of our having these understandings with foreign countries because there are many Americans in France--I use France only as an example, and the same situation applies to Belgium, England, and other countries-who have income derived from foreign sources. Such persons would be stuck at home for their taxes and they would be in a state of confusion. So the organizations which have been set up to protect the American taxpayers have tried to work out a formula. We worked with them and we have developed the tax conventions to cover the very kind of questions the Senator has been asking. I hope I have made it clear. It is a very complicated subject. Mr. THYE. I fully appreciate the fact that it is complicated. It is complicated to the man who is trying to make out a tax return. That is why I asked the questions, namely, in an endeavor-to clarify the standpoint of I it from up the tax return. the accountant or the individual who Is making Mr. SMITH of New Jersey. I thank the Senator. I think he has made a very helpful contribution to the RECORD. I continue with my statement. During consideration of the income-tax convention with Belgium, the committee's attention was drawn to the provision of that convention-iarticle X-which provides for exemption from tax of the alaries paid by one of the contracting countries to its citizens who are residnt"in the other contracting country. It was suggested that section 247 of the Immigration Act might be in conflict with this provision since the Immigration Act provides that aliens whose occu(120)

pational status would place them in a nonimmigrant status may be required to surrender their immigrant status uidess they execute a written waiver of "all rights, privileges, exemptions, and immunities under any law or any Executive order." Since the provision of the Belgium convention was negotiated prior to the passage of the Immigration Act, since the Treasury Department told the committee that it does not expect to include such provisions in new conventions to be negotiated, and since the Possible effect of any conflict between this provision of the Immigration Act and the Be .ium convention would be of a very limited nature, the committee did not believe that any particular action was required with respect to this provision at this time.
ESTATE TAX CONVENTION WITH AUSTRALIA

The convention with Australia follows the jame pattern as other estate tax conventions now in effect. As is true with respect to those other conventions, this convention applies only to the Federa estate tax. It has no effect upon State inheritance, estate, or succession taxes.
GIFT TAX CONVENTION WITH AUSTRALIA

This convention is the first that has been negotiated relating exclusively to gift taxes. Its fundamental objectives are the same as those of the income and estate taxes, namely, to avoid double taxation and to prevent fiscal evasion. Mr. President, in conclusion I wish to commend the representatives of the Treasury Department and the staff of the Foreign Relations Committee for the hard work they have done in connection with negotiation of these conventions. Mr. King, of the Treasury Department, has been in charge of that work for the Department, and has been in constant [p. 850*J negotiation with representatives of the various countries involved, in regard to relief from the burden of double taxation. Mr. eld to me? league HENDRICKSON. Mr. President, will my distinguished colPRESIDING OFFICER (Mr. BRICER in the chair). Does the Senator from New Jersey yield to his colleague? Mr. SMITH of New Jersey. I am very glad to yield. Mr. HENDRICKSON. Have the treaties been approved by the full Foreign Relations Committee? ' Mr. SMITH of New Jersey. Yes. The subcommittee reported the treaties to the full committee, and the full committee approved the report of the subcommittee. Mr. HENDRICKSON. Were they considered by the full committee and were they re orted unanimousy? Mr. SMITH of New Jersey. They were. Mr. HENDRICKSON. I thank my colleague. Mr. SMITH of New Jersey. Mr. President, the following conventions are to be considered at this time: Executive I, 81st Congress, 1st session, a convention between the United States of America and Belgium for the avoidance of double taxation and the prvention of fiscal evasion with respect to taxes on income, slpge4at Washington on October 28, 1948. .

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That has been in abeyance for some time at the request of the executive branch. Executive A, 83d Congress, 1st session, a convention between the United States of America and Belgium, signed at Washington on September 9, 1952, modifying and supplementing the convention of October 28, 1948, for the avoidance of double taxation and the pre. vention of fiscal evasion with respect to taxes on income. That is the convention to which I have just referred. Executive I, 83d Congress, 1st session, a convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on May 14, 1953. Executive J, 83d Congress, 1st session, a convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on the estates of deceased persons, signed at Washington on May 14, 1953. Executive K, 83d Congress, 1st session, a convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on gifts, signed at Washington on May 14, 1953. Mr. President I urge my colleagues to approve these conventions. Mr. GEORGE. Mr. President, I merely wish to say that these con. ventions or treaties are in line with all similar treaties we have made. I did not hear all the statements made by the distinguished chairman of the subcommittee, the senior Senator front New Jersey [Mr. SMITHJ, regarding the treaties; but I believe it should be added that all wit. nesses who appeared in connection with the treaties agreed about then and urged that they be ratified. There were some witnesses from outside the Government and they were finally in unanimous agreement with respect to all the treaties. Mr. SMITH of New Jersey. I thank the Senator from Georgia for his contribution.

IP.88051 DOUBLE TAXATION CONVENTION WITH AUSTRALIA-INCOME TAXES The Senate, as in Committee of the Whole, proceeded to consider the convention (Executive I, 82d Cong., 1st seas.), a convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of P. 88061 fiscal evasion with respect to taxes on income, signed at Washington on May 14, 1953, which was read the second time, as follows: (Text of Convention] [P. 88081 The PRESIDING OFFICER. The convention is open to amendment. If there be no amendment to be proposed, the contention will be reported to the Senate. The convention was reported to the Senate without amendment. The PRESIDING OFFICER. The resolution of ratification will

Ibe

read.

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The legislative clerk read the resolution of ratification, as follows:
Resolved (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of Executive I, 83d Congress, first session, a convention between the United States of America and the Commonwealth of Australia, signed at Washington on May 14, 1953, 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 resolution of ratification. [Putting the questibn.j Two-thirds of the Senators present concurring therein, the resolution of ratification is agreed to, and the convention is ratified.

'

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Presidential Proclamation (including official text of convention)
[Reprint of TIAS 2880]

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RATIS AND OT13

INTERNATIONAL ACT

533135 2SSJ

,)UBLE TAXATION
on se Income

Convention between the UNITED STATES oF ARNICA
and AUSTRALIA

* Signed at Washington May 14, 1953 * Ratification advised by the Senate of the United States of America July 9, 1953 * Ratified by the President of the United States of America July 23, 1953 * Ratified by Australia December 14,1953 * Ratifications exchanged at Canberra December 14, 1953 * Proclaimed by the President of the United States of America December 22, 1953 * Entered into force December 14, 1953

I

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DEPARTMENT OF STATE
Puucuow 5351

(Literal print)

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BY THi PRsIDENT OF TH UNITED STATES O1 AMERICA

A PROCLAMATION WHEEAES a convention between the United States of America and
the Commonwealth of Australia for the avoidance of double taxation

and the prevention of fiscal evasion with respect to taxes on income was signed at Washington on Msy 14, 1953, the original of which convention is word for word as follows:
(1)

73095 0-62-vol. 1-

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CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE COMMONWEALTH OF AUSTRALIA 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 the Commonwealth of Australia, 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 Government of the United States of America: Mr. Walter Bedell Smith, Acting Secretary of State of the United States of America, and The Government of the Commonwealth of Australia: Sir Percy C. Spender, K.B.E., Q.C., Ambassador Extraordinary and Plenipotentiary of the Commonwealth of Australia, who, having communicated to one another their full powers, found in good and due form, have agreed as follows:
ARTcLu I

(1) The taxes which are the subject of this Convention are(a) In Australia: The Commonwealth income tax and social services contribution, including the tax at the further rates of tax payable in respect of income from property and the additiond tax messed in respect of the undistributed amount of the distributable income of a private company (hereinafter referred to as "Australian tax"); (b) In the United State: The Federal income taxes, including surtaxes and excess profits taxes (hereinafter referred to as "United States

tax").
(2) This Convention shall also apply to any other tax of a substantially similar character imposed by either Contracting State after the date of signature of this Convention.

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ABTICLI II

(1) In this Convention, unless the context otherwise requires-(a) the terms "one of the Contracting States" and "the other Contracting State" mean the United States or Australia, as the context requires; (b) the term "Australia" means the Commonwealth of Australia and includes the Territories of Papua, New Guinea and Norfolk Island; (o) the term "United States" means the United States of America and when used in a geographical sense includes only the States thereof, the Territories of Alaska and Hawaii, and the District of Columbia; (d) the term "tax" means Australian tax or United States tax, as the context requires; (e) the terms "resident of one of the Contracting States" and "resident of the other Contracting State" mean a United States resident or an Australian resident, as the context requires; (f) the term "Australian resident" means any person (other than a citizen of the United States or a United States corporation) who is a resident of Australia and not resident in the United States for the purposes of United States tax, but a corporation (other than a United States corporation) which is a resident of Australia 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; (g) the term "United States resident" means any individual who is resident in the United States for the purposes of United States tax and not a resident of Australia, and any United States corporation and any partnership created or organized in or under the laws of the United States, being a corporation or partneship which is not a resident of Australia; (h) the term "resident of Australia" has the meaning which it has under the laws of Australia relating to Australian tax; (i) the terms "enterprise of one of the Contracting States" and "enterprise of the other Contracting State" mean a United States enterprise or an Australian enterprise, as the context requires;

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(3) the term "Australian enterprise" means an industrial or
commercial enterprise or undertaking carried on by an Australian resident; (k) the term "United States enterprise" means an industrial or commercial enterprise or undertaking carried on by a United States resident; (1) the term "company" has the meaning which it has under Australian law relating to Australian tax; (m) 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; (n) the term "industrial or commercial profits" includes the profits of an industrial or commercial enterprise or undertaking but does not include income in the form of dividends, interest, rent, royalties, management charges, remuneration for personal services, or income from the operation of ships or aircraft; (o) the term "permanent establishment" means a branch, agency, management or fixed place of business and includes a factory, workshop, mine, oilwell, office or agricultural or pastoral property, or the use or installation of substantial equipment or machinery by, for, or under contract with, an enterprise of one of the Contracting States. Where an enterprise or a resident of one of the Contracting States-

(i) carries on business dealings in the other Contracting
State through a bona fide commisson agent or broker acting in the ordinary course of his business as such and receiving remuneration in respect of those dealing at the rate customary in the class of Pusinem in question; or (i) maintains in that other State a fixed place of busine exclusively for the purchase of goods or merchandise; or (M') has a subsidiary corporation which is engaged in trade or businem in that other State, whether through a permanent Mtaihment or otherwise; or (iv) hsan agent in that other State (other than anagent who has, and habitually exercise, a general authority to negotiate and conclude contracts on behalf of that enterprise, or-regularly fills orders on its behalf from a,

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stock of goods or merchandise located in that other

State),
that enterprise or resident shall not, merely by reason thereof, be deemed to have a permanent etablihment in that other State; (p) the term "taxation authority" means, In the case of the United States, the Commlssioner of Internal Revenue as authorized by the Secretary of the Treasury and, in the eae of Australia, the Commissioner of Taxation or his authorized representative. (2) In the application of the provisions of this 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 State relatingto the taxes which are the subject of this Convention.
ARTIcLI III

(1) An Australian 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 in the United States. If it is so engaged, United States tax may be imposed upon the entire income of that enterprise from sources within the United States. (2) A United States enterprise shall not'be subject to Australian tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Australia through a permanent establishment in Australia. If it is so engaged, Australian tax may be imposed upon the entire income of that enterprise from sources within Australia. (3) There shall be allowed in determining the industrial or com. mercial profits attributable to 'apermanent establishment in one of the Contracting States all expenses of a type allowed as a deduction by that State and which are reasonably attributable to the permanent stablshment, including executive and general administrative expenses so attributable, eroept that, -in the ae of Australia, there shall be applied the principle underlying section 38 of the Australian Income Tax and So"W Serviem Contribution Assessment Act 1936-1953. (4),Wherea terprie of one of the Contracting States is engaged

in trade or buinesin the other Contrating State through a permanent etabishment in that other State, there shall be attributed to thAt penamet etablishment the industrial or commercial profit which tha enterpris might be expected to derive in that other State

ifAt wo

indedent nterprie engaged .in,the same or similar

activities and its dealings with the enterprise of which it is a perma-

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nent establishment were dealings at arm's length with that enterprise or an independent enterprise; and the profits so attributed shall be deemed to be income of that permanent establishment and shall be

taxed accordingly.

(5) If the information available to the taxation authority of the Contracting State concerned is inadequate to determine the profits to be attributed to the permanent establishment, nothing in this Article shall affect the application of any law of that State 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 State: Provid, That the discretion shall be exercised or the estimate shall be made, so far as the information available to the taxation authority permits, in accordance with the principle stated in this Article. (6) No portion of any profits arising from the sale of goods or merchandise by an enterprise of one of the Contracting States shall be attributed to a permanent establishment in the other Contracting State by reason of the mere purchase by that enterprise of the goods or merchandise within that other Contracting State.
ARTICLE IV

(1) 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 operative between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing at am's length with one another, then, if by reason of those circumstances profits which migt be expected to accrue to one of the enterprises do not accrue to that enterprise, there my be included in the profits of that enterprise the profits which would have accrued to it if it were an independent enterprise engaged in the same or similar activities and Its deal with the other enterprise were dealings at arm's length with that enterprise or an independent enterprise. (2) Profits included in the profits of an enterprise of one of the Qontractinr States under pamgrph (1) of this Article shall, subject (148)

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to the provisions of Article XX of this Convention, be deemed to be income of that enterprise and shall be taxed accordingly. (8) If the information available to the taxation authority of the Contracting State 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 this Article shall affect the application of any law of that State 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 State: Provided, That the discretion shall be exercised or the estimate shall be made, so far as the information available to the taxation authority permits, in accordance with the principle stated in this Article.
ARTICLE V

(1) Profits which an Australian resident derives from operating ships or aircraft registered in Australia shall be exempt from United States tax. (2) Profits which a citizen of the United States who is not a resident of Australia or a United States corporation which is not a resident of Australia derives from operating ships or aircraft registered under the laws of the United States shall be exempt from Australian tax.
ARTICLE VI

(1) A dividend paid to a United States resident by a United States corporation which is not a resident of Australia shall be exempt from Australian tax. (2) A dividend paid to an Australian resident by a company which is a resident of Australia (other than a United States corporation) shall be exempt from United States tax.
ARTICLE VII

(1) The amount of Australian tax on dividends paid by a company which is a resident of Australia to a United States resident who is liable for United States tax thereon and is not engaged in trade or business in Australia through a permanent establishment in Australia shall not exceed 15 per centum of the dividend. (2)- The rate of United States tax on dividends derived from sources within the United States by anAustralian resident who is liable for Australian tax thereon and is not engaged in trade or business in the

United States through a permaent establishment in the United States
shall not exceed 15 per centum.

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9 ARTICLE VIII

TIAS 2880

Any additional tax assessable(a) in respect of the undistributed amount of the distributable income of a company which is a private company for purposes of Australian tax; or (b) under the laws of the United States with respect to un. distributed profits of corporations as the case may be, shall be the amount which would have been assessable if Articles VI and VII had not been included in this Convention. ARTICLE IX (1) An individual who is an Australian resident shall be exempt from United States tax on remuneration or other income received, in respect of personal (including professional) services performed in the United States, on or after the effective date of this Convention ifJa) during the taxable year in which the services are performed he is present in the United States for a period or periods not exceeding in the aggregate 183 days; and (b) the services are performed for or on behalf of an Australian resident. (2) An individual who is a United States resident shall be exempt from Australian tax on remuneration or other income received, in respect of personal (including professional) services performed in Australia, on or after the effective date of this Convention if(a) during the year of income in which the services are performed he is present in Australia for a period or periods not exceeding in the aggregate 183 days; and (b) the services are performed for or on behalf of a United States resident. (3) In determining, for the purposes of this Article, whether a person for, or on behalf of, whom services are performed is a resident of one of the Contracting States that person shall not be considered a resident of the other Contracting State solely by reason of the fact that he is engaged in trade or business in that other State through a permanent establishment in that other State.
ARTW Lo X

Royalties (not being royalties in relation to motion picture films or the reproduction by any means of images or sound produced directly or indirectly from those films) for the use, production or (145)

TIAS 2880

10

reproduction of, or for the privilege of using, producing or reproducing, a literary, dramatic, musical or artistic work in which copyright subsista, being royalties derived from sources within one of the Contracting States by a resident of the other Contracting State not engaged in trade or business in the former State through a permanent establishment in that State, shall be exempt from tax by the former State. ARWTCLI XI A resident of one of the Contracting States deriving from sources within the other Contracting State(a) royalties in respect of the exploitation of mines, quarries or other natural resources; or (b) rentals from real property, may elect for any taxable year to be subject to the tax of the other State on a net basis as if that resident were engaged in trade or business within the other State through a permanent establishment in that State.
ART 'CLZ XII

(1) A pension (including a Government pension) and an annuity, derived from sources within one of the Contracting States by a resident of the other Contracting State, shall be exempt from tax by the former State. (2) The term "annuity" 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 consideration of money paid.
ARTiCL XIII

Where a professor or teacher, who is a resident of one of the Contracting States, is temporarily present in the other Contracting State for the purpose of teaching during a period not exceeding two years at a university, college, school or other educational institution in that other State, remuneration derived by him for so teaching for that period shall be exempt from tax by that other State. ARTICLZ XIV Income derived from sources within one of the Contracting States by a religious, scientific, educational, or charitable organization 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, that organization would, if established in that State, be exempt in respect of that income, and if within the meaning of

(140)

11

TIAS 2880

the laws of the other State it would be exempt in respect of income derived from sources within that other State. ARTICLE XV (1) Subject to section 131 of the United States Internal Revenue Code as in effect on the date of signature of this Convention, Australian tax shall be allowed as a credit against United States tax. (2) Subject to any provisions of the law of Australia which may from time to time be in force and which(a) relate to the allowance of a credit against Australian tax of tax payable outside Australia; and (b) do not affect the general principle of this paragraph, United States tax payable in respect of income derived by a resident of Australia from sources in the United States shall be allowed as a credit against Australian tax payable in respect of that income. (3) For the purposes of this Article(a) profits, remuneration or other income in respect of personal (including professional) services performed in one of the Contracting States shall be deemed to be income derived from sources in that State; (b) subject to the provisions of paragraph (1) of this Article, an amount included in taxable income under Division 14 or 15 of Part I. of the Australian Income Tax and Social Services Contribution Assessment Act 1936-1953, or that Act as amended from time to time, or the corresponding provisions of a statute substituted for that Act, shall be deemed to be income derived from sources in Australia; I and (c) the terms "Australian tax" and "United States tax" do not include any tax payable in Australia or the United States which represents a penalty imposed under the law of either Contracting State relating to the taxes which are the subject of this Convention. A ICLE XVI, Each Contracting State shall, so far as it is practicable to do so, collect, and pay to the other Contracting State, amounts equivalent to amounts due to the other Contracting State by way of taxes which are the subject of this Convention,, being amounts the collection of which is necessary in order to ensure that the benefit of exemptions from tax, or of reductions in rates of tax, provided for by this Convention is not received by persons not entitled to that benefit.

(147)

TIAS 2880

12

Airwa XVHI Where a taxpayer shows proof that the action of the taxation authority of one of the Contracting States has resulted, or is likely to result, in double taxation contrary to the provisions of this 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 and, should the taxpayer's claim be deemed worthy of consideration, the taxation authority of that State shall endeavor to come to an agreement with the taxation authority of the other State with a view to avoidance of the double taxation in question. ARTICL XVIII (1) The taxation authorities of the Contracting States shall exchange such information (being information available under the respective taxation laws of the Contracting States) as is necessary for carrying out the provisions of this Convention or for the prevention of fraud or for the administration of statutory provisions against avoidance of the taxes which are the subject of this Convention. (2) Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those (including a Court or a reviewing authority) concerned with the assessment or collection of the taxes, which are the subject of this Convention, or the determination of appeals in relation thereto. (3) No information shall be exchanged which would disclose any trade secret or trade process. AmTiCL XIX The taxation authority of each Contracting State may communicate directly with the taxation authority of the other Contracting State for the purpose of giving effect to the provisions of this Convention. ARTnIs XX The provisions of this Convention shall not'-(a) be construed as restricting 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 det~mination of the tax payable to that State; or (b) affect the operation of Divisions 14 and 15 of Pt I. of the Australian Income Tax and Social Services Contribution Asessment Act, 1936-1953, or that Act as amended from time to time, relating to film business controlled

(148)

13

TIAS 2880

abroad and insurance with non-residents, or the corresponding provisions of any statute substituted for that Act. ARTiCLE XXI (1) This Convention shall be ratified and the instruments of ratification shall be exchanged at Canberra as soon as possible. (2) This Convention shall become effective(a) in the case of United States tax, on the first day of January in the year in which the exchange of instruments of ratification takes place; and (b) in the case of Australian tax, for the year of income commencing on the first day of July next succeeding the date upon which this Convention becomes effective in the case of United States tax. (8) This Convention shall continue in effect indefinitely but either Contracting State may, on or before the thirtieth day of June in any year after 1955, give to the other Contracting State notice of termination and, in that event, this Convention shall cease to be effective(a) in the case of United States tax, on and after the first day of January next following the giving of that notice of termination; and (b) in the case of Australian tax, for the year of income commencing on the first day of July next succeeding the date on which this Convention ceases to be effective in the case of United States tax, and for all subsequent years. IN wrrNzss wUBzor the above-mentioned Plenipotentiaries have signed the present Convention and have affixed thereto their seals. DoNE at Washington, in duplicate, on the fourteenth day of May, one thousand nine hundred and fifty-three.
FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA: [smALl WALTER BzDEL SMTz FOR THE GOVERNMENT OF THE COMMONWEALTH OF AUSTRALIA: [SzEAL PUcr 0 SZNDIn.

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TIAS 2880

14

* AND WHURIAB the Senate of the United States of America, by their

resolution of July 9, 1953, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid convention;
AxD wxnuAs the aforesaid convention was duly ratified by the

President of the United States of America on July 23, 1953, in pursuance of the aforesaid advice and consent of the Senate, and was duly ratified on the part of the Commonwealth of Australia; AND wHzERAs the respective instruments of ratification of the aforesaid convention were duly exchanged at Canberra on December 14, 1953, 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 Commonwealth of Australia; AND WHERAS it is provided in Article XXI of the aforesaid convention that the convention shall become effective (a) in the case of United States tax, on the first day of January in the year in which the exchange of instruments of ratification takes place, and (b) in the case of Australian tax, for the year of income commencing on the first day of July next succeeding the date upon which the convention becomes effective in the case of United States tax; AND wHzxtAs, accordingly, upon the exchange of instruments of ratification of the aforesaid convention, the convention became effective commencing January 1, 1953, in the case of United States tax, and for the year of income commencing July 1, 1953, in the case of Australian tax; Now, TH5irRFoR, 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 by the citizens of the United States of America and all other persons subject to the jurisdiction thereof. I TXTIMONY WHaREOF, I have hereunto set my hand and caused the Seal of the United States of America to be affixed. Dowu at the city of Washington this twenty-second day of December in the year of our Lord one thousand nine hundred [SUAL) fifty-three and of the Independence of the United States of
America the one hundred seventy-eighth.

I

DWIGHT D EISENHOWER

By the President:
JOHN Fos

am DuLLEs

S&aV Of &a

# (150)

SECTION 8 Convention With AUSTRIA

(151)

INCOMs TAX CoNvmrNoN BrrwEEN THE UNITED STATES AND AUSTRIA

October 25, 1956 ------ Signed at Washington. January 17, 1957... Received by Senate; designated Executive A, 85th Congress, 1st Session; injunction of secrecy removed (103 Congressional RecApril 26, 1957_________ Ratified by Austria. July 30, 1957 _. Senate Committee Hearings. August 6, 1957.. Reported by Senate Foreign Relations Committee (Ex. Rept. No. 12, 85th Cong., sent (103 Congressional Record 14009, 14012-14013). August 30, 1957----Ratified by United States President. October 10, 1957 ------ Instruments of ratification exchanged; convention entered into force effective January 1, 1957. October 23, 1957 ------ Proclaimed by United States President. TIAS 3923; 8 UST 1699. Official Text...
August 8, 1957 -------- Ratification by Senate of its advice and conord 727-728).

lst Ses.).

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I'

1.,-eni 2.

o

---Com -

- .

naSe Committ= port ----.- 193 ......... ....... Senate, Floor Debate and Actioqp .- . -... ....... 5. Presidptial Prodamatlon (Including Officl Text W/d Convent n). 10 /t,

" X

\

0

now 0-0-vol. 1-11

(153)

PresidentialMessage of Transmittal to Snate includingg materials enclosed therewith)

(155)

A

Mt CoxORN 85TH Seea*on

SENATE

EXWUM A

CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF AUSTRIA

MESSAGE
mu

THE PRESIDENT OF THE UNITED STATES
5IRSUM 1TInm

THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF AUSTRIA FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON OCTOBER 25, 1956
JANUARY 17,

1957.-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 Forign Relations and ordered to be printed for the use of the Senate

Tn Wnrra Houss, Jn.ww 17, I97. To & Senae of tAe Uni9d Stow: With a view to receiving the advice and 00oamt Of the Senate to ratification, I transmit herewith the convention between the Unie States of America and the Republic of Austria for the avoidance of double taxation with respect to taxes on income, signed at Washington on October 25, 1956.

has the approval of the Department of State and the Department of the Treasury. DwiaT D. Enuuowa. (Enclosures: (1) Report of the Secretary of State; (2) inoome-ta convention between the United States and Austria.)

Secretary of State with respect to the convention. The convention

I also transmit for the information of the Senate the report by the

811s

(10?)

2

CONVENTION BETWEEN UN1TRD STATES AND AVOT

DEPARTMENT? Or &A Z ',

T White Hose: The undemigned, 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 Amerioa and the Republic of Austria for the avoidance .of double taxation with respect to taxes on income, signed in the English and German languages at Washington on October 25, 1956. The convention was formulated over a long period as a result of technical discussions between representatives of this Government and representatives of the Gove ment of the Republic of Austria. The Department of State and the Department of the Treasury cooperate in the negotiation of ;he convention. It has the approval of loth Departments. If and when brought into force, the convention will establish, in the mutual interest of the two countries and of considerable benefit to their taxpayers, a satisfactory basis for achieving objectives essentially the same as those of income-tax conventions now in force between the United States and numerous other countries. The imposition and collection of taxes upon the same income by two countries may, and often do, result in severe double taxation. An income-tax convention is an important and practical step toward removing this undesirable impediment to international trade, investment, and economic development. The provisions of the convention with Austria are believed to be in harmony with the policies expressed by the Senate in approve tax conventions. The pattern f6r such conventions is now fairly well established. In matters of principle and substance the provisions of the convention with Austria are consistent with, if not identical to provisions in one or more of the existing income-tax conventions of the United States including those with Australia, Belgium, Canada, Denmark Finland France, Federal Republic of Germany, Greece, Ireland Irtaly, Netherlands, New Zealand LNorway, Sweden, Switzer land, Union of South Africa, and United Kingdom. The principal features and objectives ol the convention with Austria may be minmarized as follows: 1. Article I describes the taxes which are the subject of the convention. Asand the United States, the provisions for avoidance ofFederal taxation to for administrative cooperation apply only to the double income taxes, moludini surtaxes. They do not apply to the imposton or collection of taxes by the several States, the Disrict of Columbia, or the Territories or possemions of the United States. As to Aul.r.a, the convention applies to the income tax, the corporation tax, anti the housing reconstruction and f!amil allowance contribution. 2. Article II contains definitions of numerous terms or expressions found in the convention, with a provision that in applyingtheprovi"sions 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. As usual, there is a comprehensive definition of 'permanent, establishment" for the purposes of the convention. '(158)

The PRSIDENT,

W lhingt, Januay 6, 1957.

9OWVZWIW BMTWUUZN UNITD. STATUS$ AND AUKTRU

3

3. Articles III and IV set forth the prinples goveming the determination of amount and the taxation of business income derived by enterprises of one country from sources within the .other country. Article III stipulates that business income (industrial -or ommwerial profits) shall be subjected to taxation only if the enterprise carries on trade or business through a permanent establishment in the country imposing the tax. Article IV deals with intercorporate relationships a authorizes allocation of business income as between the two countries. The provisions of these articles do not apply to investment income or income arising from personal services. 4. Articles V though XIV deal with reciprocal exemptions, in whole or in part from taxation of various items of. income, as follows: (a) Article V contains the provisions, inharmony with 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. (b) Article VI contains the p; visions relating to. limited exemption from tax on dividends received from sources in one of the countries by a resident or corporation of the other country not having a permanent establishment in the country of source. In no case shall the rate of tax imposed by the country of source exceed 50 percent of the statutory rate of tax on such dividends, but the rate is to be reduced to 5.percent if the shareholder is a corporation which controls, directly or indirectly, at leat 95 percent of the entire voting power in the corporation paying the dividends and if not more tban 25 percent of the gross income of the dividend.paying corcvtrition is derived from interest and dividends other than interest and dividends received from its own subsidiary corporations. (c) Article VII relates to the reciprocal exemption from .taxa. tion, on certain conditions, of interest on bonds, notes, debentures, securities, or any other form of indebtedness except interest on debts secured by mortgages. (d) Article VIII, paragraph (a), contains the provisions regrading reciprocal exemption from taxation of royalties for the right to use copyrights, artistic and scientific works, patents designs, plans, secret processes and formulas, trde-marks, and other like property and rights, including rentals and like payments for the use of industrial, commercial, or scientific equipment, but excluding motion picture film.rentals. In paragraph (b) a special rule is stated. as to motion-picture.fibm rentals, whereby on specified conditions the rate of tax imposed there shall not exceed 50 percent of the statutory rate of tax imposed, on such rentals but in any case shall not exceed 10 percent. of. the amount of such rentals. (e) Article IX relates to the taxation of income from real property and royalties in respect of th operation of mine, -oil wells, or other natural resources. It is provided, in effect, that a resident or corporation of one of the countries deriving suclk income or royalties from, sources within the other country may elect to be subject to the tax of such other country on a n4 basis as if he or it were engaged. in trade or business through a permanent establishment therin.

(159)

4

4ONVE"iION'

BETWEEN UXIMD STATE

AMD AUSTRIA

bellows :

(J) Article X contains the provisions regarding exemption- on specified conditions from taxation of earned income derived as compensation for labor or personal services, including the practice of the liberal professions and rendition of services as director. Like corresponding provisions in other tax conventions of the United States, this article would facilitate the work of commercial travelers and avoid administrative difficulties otherwise incident to the filing of foreign income-tax forms and the execution of claims for credits. (g) Article XI contains the provisions regarding exemption from taxation of Government salaries, wages, and similar compenSation,public pensions, and private pensions and life annuities. As to United States tax, the exemption with respect to wages, salaries and similar compensation paid by Austria or any of its political subdivisions, or by a public pension fund in Austria, will apply to aliens other than those who were admitted for permanent res dence in the United States. By application of paragraph I (c) of this article, annuities paid by the United States to its retired civil-service employees Will be exempt from Austrian tax, provided the recipient is not an Austrian citizen. (h) Article XII contains the provisions relating to exemption 'from taxation, on certain conditions, with respect to the remuneration of professors and teachers of one of the countries temporarily visiting the other country for the purpose of teaching. (i) Article XIII contains the provisions relating to exemption from taxation with respect to (1)remittances received by students or by business or technical apprentices; (2) grants, allowances, or awards, not including compensation for personal services, received by a resident of one of the countries from a religious, charitable, scientific, literary, or educational organization of such country while temporarily present in the other country; and (3) tompensation, if not over $10,000, paid to a resident of one country who is temporarily present in the other country for not over 1 year solely to acquire techm'cal, professional, or business experence from a person other than the enterprise or organization paying such compensation. Ci) Article XIV provides that dividends and interest paid by a corporation of one of the countries shall b exempt from tax in the other country where the recipient is a nonresident alien or a foreign corporation. 5. Article XV relates to credits. It embodies, in general, the principle of the United States tax credit as expressed in sections 901905 of the Internal Revenue Code of 1954. Provisions of a similar character are in other tax conventions of the United States. Each country retains its right to tax its own citizens, residents, or corporations "regardless of any other provisions of this Convention" subject fb stipulations in paragraph (3) regarding the provisions on Government salaries, teacher remuneration, and 'student or apprentice remittances or grants.* 6. Articles XVI through XIX deal with administrative matters, as
(a) Article XVI contains the provisions regarding reciprocal exchange of information Jetween the competent authorities of the two countries.

0 (160)

CONVENTION BETWEEN UNITED STATES AND AUSTRIA

(b) Article XVII relates to the right of taxpayers to lodge claims when they can show that double taxation has resulted or will result contr to the terms of the convention. (c) Article XVII- rovides (1) that the convention shall not affect the right of dipl omatic or consular officers to other or additional exemptions; (2) that the other allowance not restrict the exemption, deduction, credit, or convention shall accorded by any
-

laws of either country in determining its tax; and (3) that the

"national treatment' principle shall apple with respect to all taxes so as to prevent a citizen of one o the countries, while residing in the other country, from being subjected to other or more burdensome taxes than are the citizens of such other country in its territory. (d) Article XIX provides that the competent authorities may prescribe regulations and may communicate with each other for the purpose of giving effect to the convention. 7. Article XX provides for ratification and for exchange of instruments of ratification. It prescribes that, upon such exchange, the convention shall have effect on and after January 1 of the calendar year in which the exchange takes place. It is provided further that the convention shall continue effective indefinitely, but may be terminated by the giving of a 6-month notice by one of the contracting states to the other, in which event the convention would cease to be effective for taxable years beginning on or after January I next following the expiration of the 6-month period. Respectfully submitted. FOSTEnDULLES. (Enclosure: Income-tax convention between the United States and Austria.)

[Text of Convention]

(161)

Senate Committee Hearings
July 30, 1957 85th Congress, 1st Session

Senate Committee on Foreign Relations

(18)

DOUBLE TAXATION CONVENTIONS HEARING
BUOB T"U

COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE
EIGHTY-FIFTH CONGRESS
'MRST SESSION ON INCOME TAX CONVENTION WITH AUSTRIA (EX. A, 85TH CONG., 1ST BESS.); SUPPLEMENTARY INCOME TAX CONVENTION WITH CANADA (EX. B, 85TH CONG., 1ST BESS.); SUPPLEMENTARY INCOME TAX PROTOCOL WITH JAPAN (EX. K, 85TH CONG., 1ST BESS.); AND INCOME TAX CONVENTION WITH PAKISTAN (EX. N, 85TH CONG., 1ST

BSS.)
JULY 80, 1957 Printed for the use of the Committee on Foreign Relations

UNITED STAT2S GOVERNUZ T PRINTING OFFICE WASHINOTON: I?

(165)

COMMITTEE ON FOREIGN RELATIONS
THEnr)ORE FRANCIS GREEN, Rhode Island, Coirman 1. W. FULERIGHT, Ar as ALEXANDER WILEY, WItonsin JOHN PARKMAN. Aituuma H. ALEXANDER MITH. New Jersey BOVIRKE B. HICKENLOOPER, Iowa HUBERT H. HUMPIHREY. Mlnneota WILLIAM LANGER, North Dakota MIKE MANHFIELD, Montana WILLIAM F. KNOWLAND, California WAYNE MOR iE, Ortgon GEORGE D. AIKEN, Vermont RUSSELL B. LONO, Louisiana HOMER E. CAPEIHART, Indiana JOHN F. KENNEDY, Matsachusetts

CALt MAACY, C/iff(/&Of
C. 0. O'D.iy, Clerk [NoTK: After holli ig this he'trilig the Co,,njitte, o i Fo-eign Relit'is voted to report favorably the o . t lolls with Austri-1, Canada, Japan, 3rnd PNki~st. Subseiue:dltv, the committee receivted evidence O'c r'ii' opposition to some portions of the Pakistan Treaty and agreed to reopen hearings on that con. vention.]
It

I

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/

CONTENTS
Statements byStain, Colin F., Chief of Staff, Joint Committee on Internal Revenue Taxation; and Dan Throop Smith, Deputy to the Secretary of the Treastury, accompanied by Nathan Gordon, Chief, International Tax Staff, Department of ihe Treasury -----------------------Statements submitted for the record byAlvord, EIlsworth C., chairman, Committee on Taxation, United States Council of the International Chamber of Commerce -------Keating, Hon. Kenneth B., Member of Congress from New York... Swingle, William S., president, National Foreign Trade Council, Inc...
Mu

Pap 1 21 23 20

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1

DOUBLE TAXATION CONVENTIONS
TUESDAY JULY 80, 1957

[

The committee met, pursuant to call, at 10:10 a. m. in the commi ttee room, United States Capitol, Senator Theodore Francis Green (chairman) presiding. Present: Sotators Green, Fulbright, Mansfield, Kennedy, Smith of New Jersey, and Aiken. The CHAIRMAN. 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 wil have a meeting in executive session. At this public meeting the subject is double taxation conventions with four countries, Austria, Canada, Japan and Pakistan. 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 is limited to providing reciprocal tax 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 provisions in the other conventions.. Our first witness will be Mr. Colin F. Stam, 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. Stam. STATEMENTS OF COIN F. STAN, CHIEF OF STAFF, JOINT COMMITTEE 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 Mr. STAM. Mr. Chairman, at your request the staff has examined all of these four conventions and we have made a short statement. The CHAIRMAN. You mean your staff?
1

COMMITTEE ON FOREIGN RELATIONS Wah4ingto, b. 0.

UNTED STATES SENATE,

We are meeting this morning to give consideration to the four

2

DOUBLE TAXATION CONVTIONS

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.
The CHURMAN. Please proceed. Mr. STAM (reading):
"DEAR SENATOR GREEN: At your request, the staff of the Joint

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 attention of the committee.
PROTOCOL WITH JAPAN

"This 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 Baiik 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 money 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 because 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 differentpriblem, 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-

"Su1pemenkary protocol with Japan.

(170)

DOUBLE TAXATION CONVNIONI

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 Nicaraguan Government. That Nicaraguan corporation which was operating under the laws of the State of New York, the Nicaraguan Government, attempted to claim that ol1 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 waq 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 stockholder, which happened in that case to be the Nicaraguan Government. 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 crmmercial 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 is just a tax irritant, and we have all agreed that the best a roach 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? Mr. STAM. That's right. It is solved that way. Senator SMITH. Are they mentioned by name in the convention? Mr. STAM. I believe they are, yes. Senator SMITH. They art) definitely identified. Mr. STAM. That's right. The problem really arose in connection 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.

the laws of the State of New York, and all the stock was owned by the

(1 1)

4

4

kvt*Lt TAMATOS 'O TENSIONS

United States? Mr. SrAM. This convention only concerns this one point, that is the only point involved. Now you did have the Japanese Treaty which t committee passed several years ago.
Senator AizaN. But are there substantial Japanese investments in

The CHAIRMAN. Yes, Senator Aiken. Senator AiKE.N. Are there material Japanese investments in the

Senator AmxEN. Mr. Chairman?

the United States, either by the Export-Import Bank with Japan or private citizens? Mr. GoRDON. There are no investments by the Export-Import Bank 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 CamRMAN. Mr. Sta, will you proceed?
CONVENTION WITH CANADA-INTERCORPORATE DIVIDENDS

Mr. STAM (reading):

"Suppnwa wpion titd Cada on "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 corpration 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 1 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. The CHAIRMAN. Does this discrimination go down further? How about these other 3 or 4 corporations? Are there conditions as to how they shall be constituted? made up 'y three other corporations and they would have to own altogether 51 percent. The CHAIRMAN. That's what I mean. corporations Mr. STAM. And at least each of those The 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 tle stock. (172)
Mr. STAM. They are the subsidiaries. The 51 percent must be

I
DOUBLD TAXATION C0NVENTONS

tion of corporations?

The CHAIRMAN. Which is just one way of encouraging the combina-

Mr. STAM. That's right. The CHAIRMAN. Is that a good Government policy?

encouraging investments abroad. The CHAIR MAN. It is vice versa; we are considering it the other 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 just asking your approval or disapproval

Mr. STAM. Well, it is a good Government policy in the sense of

way around now.

of it.

opinion; is that right? Mr. TAM. That's right. It is no departure from existing policy.

Mr. SrAM. All I can say on that is it is in ine with what we have done in the past. The CHAIRMAN. As I take it, you prefer not to express a personal

CONVENTION WITH CANADA-EXEMPTION FOR TRUCK TRANSPORTATION PROFITS

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 gods 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 P, 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 same problem. Mr. SMITH. I am Mr. Dan T. Smith, Deputy to the Secretary of the Treasury, for identification, Mr. Chairman.

In addition, the pending convention provides a reciprocal exemp-

(178)

6

DOUBLE

TAXCATIOK OONVITZNS

. The trety already provides a similar provision as do many other treaties in the case of dining and aircraft. Now trucking is clearly a unique situation in Canaa because it is the only country where there is any appreciable amount of trucking flowing back and forth from one country to the other. In the absence f this provision, each country taxes the income arising from the truckifg from points originating in the United States and going to Canada or originating in Canada and going into the United States, a very complicated problem between the two countries. What the treaty provides for trucking is the same as now exists for shipping and aircraft. That is to the effect that Canada will not tax the income from shipments from the United States into Canada carried by American trucking companies. The United States alone will tax that income. Canada alone will tax the income arising from shipments from Canada to the United States. Senator SITH. You say that reciprocal arrangement already exists with re to aircraft. Senator Sm;n. How about railroads that crow the boundary? Mr. SMTH. Apparently the railroads have worked out a modus opeAndi with the Canadians such that they were not interested in this thing. There is a basis of allocation such that no problem exists. We did consult with the railroad people on that, but they have found .another way of dealing with it. Senator KZNNEDY. Mr. Smith, on the return trip of an American trucker from Canada, do you consider that a Canadian tax area? Mr. SMITH. I think it applies on the basis of the ownership of the company, but just let me check that, Senator Kennedy. Is that correct Mr. Gordon? Mr. Goiwoi. Yes. Mr. SWTH. It is related to the ownership of the company so if the American company picks up a load from there and brings it back that is still income attributable to United States tax in the United States and reciprocally if the Canadian company picks up a load here and carries it. The net effect of it all is that he income is taxed in full by one country or the other, but we avoid the complex problems of either allocation as between the two countries or even more seriously, the problem of double taxation with a discriminatory burden against this sort of income.
CONVENTIO]i. WITH CANADA-C HAITABLE G1TS

_Mr. giM

Aircraft and shipping.

Mr. STAM. The other novel point-it is not really novel, but it is a little different--is this question of charitable gifts. Under the American income tax law you get a deduction for a gift to charitable organimations only if the organization is organized under the laws of the United States. This convention will permit a charitable deduction to a Canadian charitable organization, but there are certain limitations, only to the extent that it is permitted in the case of a gift to an American charitable organization. That is,we have the 20 and 30 percent limits of the income, and there is another limitation that insofar as this particular deduction is concerned, it is limited to the income arising in Canada. You have to have income from Canadian sources and a charitable deduction cannot exceed the American limits, and also it cannot exceed (174)

DOUBLE, TAXATION O

NTION8

the income from sources within Canada. This is a reciprocal arrange. ment and the same thing would apply to Canadians making gifts to American organizations. Mr. STAM. Yes. I might say that this provision as well as the one which we just went over about the trucking profits, similar provisions are contaied in the existing conventions with Honduras. We have those already adopted in the Honduras convention. Senator AIK.N. Mr. Chairman, may I ask if this would result in raising the limit on deductible gifts? Mr. STAM. It would not.
Senator AiKZN. It would not?

Senator SmTH. Are you recommending that?

amounting to 20 percent of the pro ts'earned in the United States, and also give 20 percent of their profits in Canada to Canadian institutions?

Mr. 8TAM. It would keep the same limits. Senator AizKN. That is to say the company could make gift.

viduals. You see, we have a limit on rpii gifts. It is rate only 5 percent. But, whatever limitation, it would still apply in case of these gifts to these charitable Canadian corporations. Senator AiKEN. It would not increase the overall deductions? Mr. STAM. That's right. And I understand that, in addition, if there are any limits in anada, they would also apply in this situation and if the American limit is less, then the American limit would appfy instead of the Canadian limit. We would never give them any more than we give for our own charitable organizations. The CHAIRMAN. Instead of being double taxation, this is double exemption? Mr. STAM. That's right.
CONVENTION WITH AUSTRIA-MOTION-PICTURE FILM RENTALS

r,).STAM. We have, of course-you are now talking about indi-

Now the next one is the convention with the Republic of Austria. "There are no novel features in the Austrian treaty. However, the following provisions differ in certain respects from the provision of other treaties." There are some that do have these provisions. "First motion-picture film rentals are expressly excluded from the reciprocal exemption of royalties provided by article. VIII (1). In the case of film rentals, article VIII (2) provides a reduction in tax to 50 percent of the statutory rate of tax otherwise imposed on such rentals, with the maximum tax not to exceed 10 percent of the rentals. I understand that an effort was made to try to work for a complete exemption of these rentals, but the negotiators were only able to.work out with the Austrian Government this limited 10 percent mwmum tax. That was all that the Austrians were wiling to agree to, so that this is not a complete exemption, as in the case of a lot of other treaties, but it is a reduced rate of tax Which can't exceed 10 percent on these rentals.
Senator SMITH. Mr. Chairman, could I ask a question there?

Senator SMnui. I assume that that sort of an exchange would be s lot more to the advantage of the United States and that that is why the Austrians wished to go a little easy on it. Is that right?
(175)

The CHAIRMAN. Senator Smith?

8

DOUI=

TAXAUOW O0

PWOIS

Mr &TAm. That's right. Senator SuTm. But we have the big bulge on that. Mr. STAm. That's right.
CONVZMON WITH AUSTM-PROFITS ATTRIBUTED TO PURCHASE "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 being attributed to a mere purchase." Our negotiators tried to get the ustrians 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 difflicultr you had in trying to eliminate that problem among the negotiators? felt that, under their law there was some profit to be attributed from purchAing, and we couldn't persuade them to give up the tax there. .gain, it was much the same sort of thing as in the case of motionpicture royalties. The flow was principally in this direction, and they wouldn't agree to give up completely the tax on such activities. Mr. STAy. 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.
CONVENTION WITH AUSTRIA-EXEMPTION FOR FOREIGN STUDENTS AND BUSINESS APPRENTICES

%. GoRDoN. I think the main problem there was that the Austrians

"Third article XIII, which provides an exemption for foreign students 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 saliy 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? #(178)

DOURJJ TAXATiON WXVXW=WIOW

Mr. STAN. Up to $10,900.

r

Senator SMITH. That ought to take care of the younger people that come over. Mr. STAN. That's right. And it has to be paid, of.course, by a foreinemployer, not a domestic employer but a foreign employer uho 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. STAN. And it isonly for Iyear; that's right.

Senator SMITH. And I year.

The next is the convention with Pakistan. "This convention, like the pending 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 I-now, this is rely the most important change in all of these treaties, this article VI that Iam poing to comment on now. This is the one novel change in the Pakistan convention. "Article-I, relating to a reduction in tax at source on outgoing dividends, although simi 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 CRIT FEATURE vision not contained in any other tax convention. Under this provision, 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 thee concessions has been partially or completely nullified by existing la , because the decrease in the credit allowed for taxes paid to Pakisn 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 fu American tax on all of its income and we have had complaints from time to time-for example, I recall 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 years, so that the taxpayer will get a credit, a foreign tax credit, for the tax that would have been pid 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. (177)
"In addition to the above, article XV contains an important pro-

10

10am=

F TIOa OM'NN7I NS HL3

the Treasury, I think in a speech some tine ago, mentioned the fact that he thought this might be a practical way of dealing with this problem. Senator AIKE".,. In Pakistan? Mr. 5wu. He wasn't speakin& 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 CHAIRAN. Then that concludes your testimony. We wil call on Mr. Smith. Thank you very much Mr Stim. Mr. Dan Throop Smith, Deputy to the Secretary of the Treasury? Mr. Sm. Mr. Chairman, I have a very brief four paragraph statement on the subject of all of the conventions. May I reid that first and then go on to the more detailed aspects of the Pakistan Convention?
The CHAIMAN. Very well.

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

for'privat Idainess to go to these countries and the want to get whatever tax benefits they can from that process. We ought to-le. preyered to help on that. Senator Axxmr. May I ask one question? In your opinion, Mr. Stain, wll:th benefltsprovided inthe PI.an Convention be likely to lead to a demand for an expansion of these benefits to other countries? Mr. S-Ax. 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

trying to work out in our mutual security p

I would like to gave Mr. Smith comment on that, because it is a 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 [think it ought to be considered very carefully by the committee. , Mr. Smith, do you want to say anything on that? The CAIRMAN. Are you oing to call on Mr. Smith? Mr. STAN. Yes. The CHAIRMAN. Have you finished? Mr. STAN. Yes. The CAIm Am. I will find out if there are any questions. Do you have any questions, Senator Smith?' Senator Smrn.- J st on that last point, which Mr. Smith is going to cover more fully. I am interested 'inthat'point because we ar

5 percent of the capital invested in that country.

It is limited to a 5-year period, and it i limited to not more than

the opportunities

PENDING TAX CONVENTIONS Mr. SNITe. I am pleased to have this opportunity to express the Treasury's views on the income tax conventions pending before thi committee.

(178)

DO~tYBi .'rXAT"ON bONVUNTIONS

I represent the position of ihe administration as well as the Treasury Department on this. There are before you conventions with four -countries: Austria, Canada, Japan, and Pakistan. The Canadiali and Japanese Conventions are relatively brief. They amend th. full-scale income tax conventions with those two countrl~s that are now in effect. The Japanese Convention merely provides for exemption on a reciprocal basis of the interest received by the Export. -Import 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. 41 The Canadian Convention contains one major modification and ,several minor ones. Principaly, it would modif the convention provision now in effect which limits v 5 percent the withholding tax applied in each country to dividends flowing from a domestic cotporation to a parent corporation in the other country which ow at least 95 percent of the stock of the subsidiary.. It is propoed in -the convention to reduce this ownership requirement to 51 percent (by 1 to 4 corporations). This. will make possible greater participation of Canadians im American-owned corporations created in Canad. Similarly it wilt make possible more American participation in Canadian-owned .. corporations created in, the United State. The Austrian Convention is similar in all significant restct the income tax conventions which are now m 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.
CONVENTION WIMl PAKJsTAN"-NOVzL TAX CRuDIT .nATUR

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 new venture. As you know, at the present time the credit allowed under our taxes operates in such a manner that the income tax law for for exemption granted by Pakistan is, for all practical purposes, oullified. To the extent that Pakistan reduces its taxes on a United States corporation engaged ir business there through this device, the United States tax on thit 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 asscites from the Treasury will be glad to answer such further questions as you have but might I just elaborate beCAus. of questions that have already come up on this Pakistan provision.

American taxpayer wWgFed in business operations there.

It is the Pakistan Income Tax Convention which, though in, most respects similar to our other conventions, contains a new provision. The Pakistan Convention provides that the United States will give credit for income taxes impoe on profits derived in Pakistan by an

rhe

r, i anew and distinctive provision. A suggestion that we-.wovM give sympathetic. consideration to something of this sort was first

(179)

0VULMS TAXATION OONVKNTIONB

c-E.o Iy Serrot.ciry 1lumphroy at b, Rio c'tfte r o in tho winter of 5 .ife..iaeo t4 it liss l.ei rt'ponCicd tit, v..riou timet in IL54 6ti. thoI tW0icoUli(i iiiI'*mag"h ('otigt, IliI114IgIet of LIII lridisili toI ChoIL aid I think ill Poilti' inii4mcmie.'e tlio hudgol mi€tgo. iliply il this. IdLtit ,4Irhlm ovrmIillitiify by T 111 i tiusot| giving all illutratiLon. Amuiio Chat anothor country hat I it) ile tax rat that we havo, 62 percent, cu ostfurtiur that th other
()ulltry dCividl,4 iii ortltr 14) iidIuce now privitto inves ent1,4o waive par of iti tax for a 1wriod of yeoar, lot's tay b ytiars. Again fpor Iiswt* of simpcl)lic'ity le't.'s tcit3 it uL, its rcLo ill iif to 21 por'ont,. le ilcorlieI im IIllu. ilredL of hitt ilnioIIf.r a tilt Americanl v'olllitiny ii. '.ll inceLtul of havingli full foreign tax Iftid to Li; foreign cotry as tilt |nitold Sfitatt tx, in which ('me15thlerol would ho no ollfsl tto ho Unitoll Stalts Iax C forei i Cax boing cUL in half, Clh for ign ILax onlliit is cut ill, h flandt.el I.h ni, St-6ts picks up very Ilhl', 1,h0 , Uniti'd SaL *i rt ury pi'ko ill) (ivory dollIr of tax tLhaLt, tho olier counLry him waivIi. pre Tl'lat is wlla is illeenIL by trying that o armction of tlt% int law tax ill ,ur.t llilif.s lthe clin.eionis that foreign coui'tLries iake mitid foreign countries hlavo utimelr't uidably cll hiL, what, hi ti o (4) oiicourago boll dliticI i(c inivesti ieolt nd tortign illvituLttlait, in their , r aoultries ill devilol)ing their lrivahi ontmrpriwlol t-vinto in, Co rlpeat, timllilied itlmfuir cim Aiiicrica cOmpllfliio opetrat ug downi theme are

8ernator MANH4PII1I). Mr. Smttith, doti(h, apply (4)oil t'I)1i114111i08 too? Mr. Smiru. 'Tlhat would apply t4) iy ind all companies. Senator MANOWIVI.P. 1) 8 tiaS tApply 1to thit iiiVitlli'tt in tt1
Mr. Smilr.
aro io

Thore art' nao Craty provisions of tuiat mort, ill fa t t-her0 trllaties with ilny oIf liti Mihdlh KshvI'ri I'Iolntirinq, Silnltor
Are thewro any etietitlivo igrl'eellie'Iit

Senator M ANSII.h.

best of my knowhledge. 8lti11t4) MANIS41cI hl). Whit, you mIli i there ar ioll) IiX cIilI ventiolm? Mr. SMITI, 'T'Ix cOnVelitfionol, I wts referring to Cx eonliVlitionull entirely.

Are you nI'm? eluiVi tigrovillelits, a belive dere ar any Xe Somi.or MAN$IlIAhl). Isti't Cther. al exlli qcigrevietll t wiIlh Situdi Arabia, which was oli.treel iul41 about I l41) lealing with friendship, (ioniauerce, lld liaVigltiil iatteIro? lim)t)ion 14) 1.h lax IIll.y well he. 'That. hiam lit) Mr. Smlrr. Tro
Sonacor MANSI ICI.

Mr. Smi-ri,. No.

Mr. SmiTr.

I dni'ti

tho hig Aimerican oil colnpatnim in thllhMiddle Nt are alliwed tiir deptutlon allownco.
It Mr. mm'..By
ati'(1 all Aimerican oil e

Senator MA NeHYl 0Ior. hut

ill relation to lie cOmil1riutl)Ii VOt iltad,

aro allowll the apinim

tle

mointor MANHYl ID. RoI'garllm of wtlire tlity opjrAtlt? Mr. SMiru. 'r'iat1' right. Lnmar MANRFPli.n. And with rtIreoie to tho example you gave,

dpeinahlowalaco regarim of wherTo they operate.

AIneriean companies would be given a privilege in theii forin of

(180)

DOUDLI TAXATION 0 ooVnM

ows

13

i tlx redI(tilon which would place Clen ill a favorubl .omparion with lih. loial ic'rio.rattom. Mr. SMITH. ''o flit% bent. of my knowledge, senator Ni.umfield, there are no hix i'4isi,,XioI il I he NI iddle I0ast.. Sent.or N1ANsrimI.. No, I btok lu to tI-e count-ry of Pakimtan. Mr. Skivriit. Ye,
Smintor NIA NSPII:.). They wotild he given a favorable position vi-A-a-vi" fle local corporatliotti. through a I ax re utifioll. Mr. SMIt. Tlhey would i, give ll' 1,111 1 position fhnt, otite

(,olltlis,.0 ol)4rfttitng in1 Paki tn would Ie givell. Senator I Nl4PI ri. Other foreign comptiniH?

11 l'I Weit '-'t111t, Iax. Now if that. is tiw' sorl. of sitmtlatl,ioIi we are ('ontfrolt,41 with, we would not. recoglitize thuit, iln y Suh)Seit it 1Il'if-loiaiolts. Bt, ill the Plkistm tilatioI, thlir ('0Ol4'4ietwio is ai ov4'rnl '4llC'.'4i01l Itavailable o fill illvest'lmlit ill i 'rti'lln types of indlusris tht, l.hi'y dire to develop o.0 further their own ecololmiv dIevelolpent.. intliI(atci', tit; ht, il itipmai it., this is something As MIr. Shitm 11111 im, should Ie approached frm .h. istla inlt of egoltint-iot antd not by statute. I hiartily conicr in that.. We woulti be, greatly core' t'limd about. i st iltory provision, hlll leui it. might, 1e posstllle to ereill,' legalistic Ixes that. wer(' never' mlly etle't 'i) t ipj)ly, and thlln wltik'l 1,1141111. Also, infl ior imam1, lniih illporlil'c, w tiik tiim should he at its done only by treaty, hlt'iise it.is it suifiih'auti. bargaining poili., a baif for ivonlie55si;lis, getiiig ('i)l, (,iMS011from (ihi' other countries. Now as enalor Sutith hil inldica'd ill ctti ietioill with the vIleOi rIyalties from Austria, tin' flow is largely on1el way,. With countries thh., are still ill thle rlatively eary stages of colloillie development, the inieome it; geniraly" and oi'(rfwihniligly all ill on lireeti)l, and wo hvo not been ilde Io get, ius far, li1ly slignificallnt tti i'Oix tioits with those cointriea. c A i (X enllorml thi lthe 54sililities of what, sort, if rieciproc'al comicemit, Sil miiight )o 1111(hl, occurred tW i ill tie Tl'eniry aoti.hilig over 2S years io that this wait (heiIll)l, Signifiiitl Olli, t1tid iill toiltiu tioni Willi tho N.ato t)parlnelt, aid with Cho viariouls olthir groups in the xetcive, bralilt o tlie (lovernient, it Aeenoed to ul9 that, tis wta one thai, we properly could cotoede because the other (outlittls find A valid iphlitn.hallit we were', 1 it rlpentniig iyseilf againi.nulhifvfill

aire t(. tilxe.i thia ' arilif'itlly imposol in it legalistiv' wa ' just, for l Ilki' of being wniv,'. I0.r insmice1 , as so t11 i.m , ill em,illt ppells, ia foleigl ionV might. work out it prcit'ulr foi f' incoilme tax 1,11111 c al)jnpliid 4)nlto' inerilit ('0)11) in ,"tr' i) lh0Operat ing in a i't rt.ain fypi,I Of indlthlry or operating it I vertin evel(l (iiiii ci'rfain 4)f ti' ll 4.11lllr countries th ee ImI' b), only I or 2 cotIl1piic (1t. hiav' nn inlv'oint' of let-'s sav more t hal it milhon dollars i year or $1() million i Veal') or tlh' voli'ld sio si'ldii their rates thlat. tOle ,tx would aIl)4'lar iplly generolhl, bill, ill effet ai)ply oI1ly3 to AImrica'iln

()t.ir foreign (4ll H11il. or otiler Pakistnn '1o011Pni s. S IIe President's -41ntilit lt111in', alwys indicate ',that, the ta%slparing laws should Ie recognized subject, ito iapproprini , saifguards mid restrictitns, and in4141 negot il liliol4 we fjpro ch t hi,, I mll gft'say, with health) kept iisn, to 111ki' sur' I ha1t ltl 1 ixi, ht. wi recoghuie, II spard I(lixes dl. we re ognize.,, are bolann fli t xide that they ,

Now

NIr. Smumr.

(

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14

SVU4,TA ATION *CONVINTIONs

:;ng their tax concessions, what they forewent in the way of taxes merely put something into the United States Trasury instead of .JQnouraging the economic development there.
PAKISTANI CONCE88IONS IN CONVENTION WITH PAKISTAN

Furthermore it was the basis for other concessions. In the Pakistan Treaty lot me list six concessions. These are on a reciprocal basis, , 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 held companies when the income is invested in 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 iaw rorides a tax on income that is retained in the corporation. Tey want it paid out so it would be subject to tax in the hands of the individual 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 coming 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 they are not willing to concede it, and it is part of the give and take of all of these negotiations. and we did

Pakistan.

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 win 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, because without that the foreign country may tax income arising from casual transactions there. Under our law if there is no permanent establishment over there, nQ real situs of business, we would say that there is no source of income there. So even though the income IStaxed there we would not allow m a credit against our tax for the tax that country, because we say the Wcome is derived bare,

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DOUBLE TAXATION

CONVENTION

15

Senator KENNEDY. Mr. Smith, these various points are all part of the convention with Pakistan.

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 neptiation. These were things that we typically have in tax conventions with other countries that have reached about the same stage of economic develop. mont that we have. In the countries that have not reached that stage, since the flow of income is from then" to us they are disposed not to give up the right to tax any way in which tley can assert a source of
income in that country.' UNITED STATES CONCESSIONS IN CONVENVION WITH PAKISTAN 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 whichh they

Mr. SmrrH. Yes. Senator KENNEDY. Are most of those concessions made as the

will recognize, in determining the amount of income subject to tax in
Pakistan, certain home office expenses. in treaties. MUTUAL B224372' That is a common provision

lit QONVNTIONf WIT# PAKISTAN

Senator KE3NEDY. Mr. Smith, the only point was that infa country which is the rocipient-any country, not, necessarily Pakistan-of substantial American assistance, I wxmnt to be sitre that the negotiations and the concessions at . arrived ak just because of the economic trading tax trading as in this case, and not as result of the fact that the United States might Jave an advantageous position over all of ith the relationship % the second country. Do you fpel that in this case the benefits derived wre mutual? Mr. SMITA .Oh, yes; I think very definitely so., I think both the negotiators on -the side of both countries. felt, this was a matter of clearly mutual advatage that would encourag, by removing present and the flow of income in the tax deterrents to the flow.of nvestzm future.
CONVENTION WITH PAKISTAN-NOVEL TAX CREDIT FEATURE Senator KENNEDY. Is it the plan of the administration to attempt to arrange a similar plan with oLher countries on this question of fore,goin our tax collection? Mr. SMInH. 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 same 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.
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1.6

DOUBLE TAXATION CONVENTION

Tle 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 give 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 wos signed last year and approved last year. they develop If a tax sparing convention, they would be in a somewhat similar position. Now we do with many of the Latin American countries anticipate that this same point will come up in connection with the bargaining on tax treaties, and there are several Latin American 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 negotiations-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 all countries, and where we, and we alone by our law are nullifying that tax concession, then we will give very sympathetic consideration from the st ndpoint 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 country. make concessions which are clearly to the advantage of this will also That is a long sentence, but in general I might say this applies to what has been 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.

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 (184)
Mr. SMITH. Yes.

Right.

DOUBLE TAXATION COIRVENTIONS

17 1

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. SMITU. That's right exactly. This is unique only because it is the first.
Senator SMITH. That's what I want to bring out.

r
j

treaty, this question of permitting a foreign corporation to engage inbusiness 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

question that we had up in connection with, I think it was the French

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 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

The CHAIRMAN. Have you any tables showing the general things 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. The CHAIRMAN. I wonder if you have reduced to writing the general

them to writing?

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. The CHAIRMAN. Don't you think it would be worthwhile to reduce

Mr. STAM. I would think so. The CHAIRMAN. Will you favor the committee with some such statement?
73095 0-02-vol. 1-13

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18

DOUBLE TAXATION CONVENTIONS

(Tie information requested had not been received at the time these hearings went to print.) The CHAIRMAN. Thank you. Any other questions?
CONVENTION WITH PAKISTAN-NOVEL TAX CREDIT FEATURE

Mr. STAM. Surely. The CHAIRMAN. General principles that are as specific as possible. Mr. STAM. All right.

Senator KENNEDY. 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 kn.ow if you would care to state what his objections are. Senator SMITH. Who is that, Senator?

I am not acquainted. I understand there are some objections and I understood he 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 well 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. 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. Bub 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 objectioais 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. SMITH. I assure you we have proceeded with a very great caution in the course of the negotiatibns.
Senator KENNEDY. You mean on the tax?

Senator KENNEDY. A Prof. Stanley Surrey of Harvard with whom

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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 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 KEN.EDY. Mr. Chairman, may I ask another question? Mr. Stain, 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 ive expect to have a report to the committee very shortly on that, the oil problem in the Far East. Senator MANSFIELD. 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 other has and we are working on the report. Senator KENNEDY. Senator Smith, you go cad and then we will come back to that. Senator SMITH. 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? MNr. SMITH. Oh, yes. Senator SMITH. Because I can see the possibility of approach between your Department, the Treasury Department, and the ICA Administrator, whoever lie may be after Mr. Hollister leaves, in dealing with these underdeveloped countries. Is that going to be worked out jointly? Mr. SMITH. Very definitely so, and this particular provision has been discussed-I forget the exact name 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 not only approval but hearty encouragement from all of them to try Senator SMITH. Deputy Under Secretary Dillon from the State Department, I assume, has 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. Stam 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
to use it. discussing this tax sparing concept with that group, and have received

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

20

20mPB*

TAXATION CONVENTION

very thoroughly and make a report. In doing that we are also under instructions to consider the whole field of the foreign tax credit, just how it is working, and whether we have any suggestions for improving the situation. Senator KENNEDY. When they pay the Saudi Government 50 percent then do they say that that is a royalty or do they say it is a tax and therefore attempt to deduct that from their American tax? Mr. STAM. You see, if that happens to be a tax, then it would be 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 KENNEDY. How have we treated this in the past? Mr. STAM. As far as royalties, generally speaking they are deductible. Mr. STAM. Are deductible as a business expense, and taxes imposed by a foreign country are allowed as a credit against the United States tax within certain limitations. It is more to their advantage of course to claim this as a tax credit than 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 the 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 facts on, is to determine whether it is in effect a tax and whether it is imposed generally like a tax or whether these oil companies are just singled out for special treatment. We are getting material on that for the committee. In connection with that study, it is very interesting it seems to me because there has been a charge made that the foreign taxes, that is the foreign tax credit, to some extent is an inducement on the part of these foreign countries to raise their rates because the United States will bear part of the burden, and we are looking into that angle of it too. The CHAIRMAN. Thank you very much.. I want to put into the record at this point a letter bearing on thih subject. It is a letter from the National Foreign Trade Council, Inc., addressed to me as chairman of this committee and dated July 26. I will put the whole letter in the record. (The letter referred to follows:)
DEAR SIR: Reference is made to the 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 (S. Ex. N, 85th Cong., let sees.), which is now pending before your committee. 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" as set forth in article XV (I) 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 employs' pension or annuity plan, contributions to which under the tax law of the Unted States are deductible in determining the taxable income of the employer" (art. X (3)). This limitation does not appear in other

Senator MANSFIELD. Deductible?

recent conventions, e. g., article X of the Tax Convention with the Republic of

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DOmma TAXATMN OONIWW'
(S.Ex. J, 83d Cong., 2d sea.).

21

Honduras Relating to Double Taxation (S. Ex. K, 84th Cong., 2d sees.) article XI of t e Convention on Double Taxation with the Federal Republic of Germany It is believed that this limitation could constitute an undesirable precedent because it fails to remove one of the 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 I1 (2) of the Tax Convention with the Republic of Honduras Relating to Double Taxation (S. Ex. K, 84th Cong., 2d sees.) and article I1 (4) of the Convention on Double Taxation with the Federal Republic of Germany (S. Ex. J, 83d Cong., 2d seas.). Such a provision is very important to business and its omission from this con. vention should not be considered as a 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 of the convention. Very truly yours, WIWAM . SWINLE, Pkident.

There is one other witness who I think came in a provisional capacity, in that he might be called on if needed. Mr. Eldon B. King, Office of International Tax Relations, Bureau of Internal Revenue, Department of the Treasury. Unless he can advance some information which he thinks can help the committee, we won't call on him. Mr. KING. No, Mr. Chairman, I haven't anything to add. I think the subject has been very fully covered. The CHAIRMAN. If so and if there are no other questions to be asked, the meeting stands adjourned. Thank you very much, gentlemen. (Whereupon, at 11:20 a. m. the hearing was adjourned, and the committee proceeded to executive session.) (The following letters were received for inclusion in the record:)
Hon. THEODORE FRANCIS GREEN, Chairman, Senate Committee on Foreign Reatio%8, Senate Office Building, Washington, D. C. Mv DEAR SENATOR GREcEN: I am writing in my capacity as chairman of the committee on taxation of the United States Council of the International Chamber of Commerce with regard to the income-tax conventions pending before the Senate Committee on Foreign Relations. You are respectfully requested to Include this letter in the record of the July 30, 1957, hearings on these conventions. The Committee on Taxation of the United States Council endorses the incometax 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 one. 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 the so-called tax-sparing provision. Briefly, the tax-sparing provision permits United States taxpayers to take a foreign tax credit against their tentative United 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. Washington, D. C., July 80, 1957.
ALVORD & ALVORD,

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22

DOUBL ITAXATION COW/EWIONS

Pakistan normally imposes an income tax on corporations at the rate of 31,4 percent, plus a profits tax at the rate of 1636 percent, and pilus a supertax at rates varying between 12.5 and 25 percent. Pakistan law provides an exemption from all three of the foregoing taxes for certain new establishments commenced between August 15, 1947, and March 31, 1958. This exemption is for 5 years after the year in which the establishment is set up, and the amount 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 would permit the amount of the corporate income tax and supertax, payment of which is excused (or spared) under the exemption, to be credited against tentative United States income-tax liability. No credit would be allowed under the treaty by reason of exemption from the Pakistan profits tax. We commend the first recognition by our Government of the basic difficulty 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 disappointment that the State Department and the Treastiry have chosen such as inadequate device as tax sparing to cope with this difficilty. The difficulty is that underdeveloped countries which need and want American private capital are thwarted in their attempts to reduce the tax barriers to such investment by the operation of our own tax system. Under our tax system, as it has previously leen applied, United States taxpayers would receive no benefits from either special exemptions or tax reductions offered them by underdeveloped countries or by consistetly moderate levels of income taxation in such countries. Instead, the margin between the foreign tax rate and our own income-tax rate has simply been swallowed by owr Treasury. This result is, of course inconsistent with our avowed policy of encouraging the development of friendly, underdeveloped countries through the investment of private American capital. The tax-sparing concept used in the Pakistan treaty attempts to solve this difficulty by giving American taxpayers the benefit. of certain special concessions allowed from the general rates of Pakistan tax. While considerably better than 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 have ado pted a general policy of low or moderate levels of income taxation applicable to all businesses. Yet, 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 established high rates of income tax and then introduced short-run devices for exemptions, rebates, and rate reductions in special cases. This is probably the biggest objection to the tax-sparing ideas as 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 some 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 thatthe Pakist'.,n law did not make its benefits available to existing businesses, and, in reommnending ratification of this treaty, we respectfully suggest that this committee make it clear that the tax-sparing provision in the Pakistan treaty should not be 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 the Senate of the principle that it is desirable that any relief from foreign taxes (and correlative 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 Pakistan Government for reasons best known to it, and oir treaty negotiators, presumably, merely took the Pakistan law a4 they found it, without approval or disapproval of his device and without the # establishment of any precedent affecting the negotiation of flit-ire treaties. In principle, the best solution to the difficulty which is giving rise to the taxsparing provision in this treaty is recognition of the exclusive right to taxation by the country in which Income originates. This is the position of the International Chamber of Commerce. We fully. recognize, however, that this principle is contrary to the historic policy of this coUfitry of ta!Kini its taxpayers bn income wherever originating, and we realize tl~at a change in this policy would be beyond

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DOUBLE TAXATION CONVENTIONS th' responsibility of this committee. I suggest, however, that the biateral-treaty device offers an opportunity for us to make low tax rates in underdeveloped countries effective without the limitations and complications inherent in the To thi4 ead we urge an energetic program of bilateral investment treaties with those friendly and underdeveloped countries which need and want private American investment. Such treaties offer an opportunity (as yet unrealized) to encourage the flow of private capital from the United States into the development of stich countries by removing, so far as is possible, the impediments to private inve:tnents existing in the foreign countries. For example, if serious problems exj-t in any particular country, such treaties could provide protection against nat ionializat ion, nonconvertibility of currencies, freezing of capital or earnings, discriminatory local laws and practices, restrictions on imports of raw materials or ,achinery, 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 from taxes for a period of time, reducing our tax rates so as to make lower tax rates in the underdeveloped countries effective and remove 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 bu'piness or invest in the underdeveloped countries like dividends of domestic corporations, exempting earnings brought back from such countries from treatwent as personal holding company income or as income of corporations improperly nccu- ulating surplus, treating funds brought back as return of capital until the investment i4 recovered, making lo..es deductible from United States income, pree(,rving the special status of capital gains brought home, and by other similar and applicable policies. We believe that only through treaties of this type, negotiated with the aid of persons fan'iliar with the problems, together with plans, where necessary, for Respectfully, C. ALVORD.
tax-spaIring device.

b

developing and providing skilled personnel, can the flow of goods services, and
encourage.
ELLSWORTH

private capital from the United States into the lesser developed countries be

sources and, as a result, can only give in a limited fashion. The president of the university informs me that he understands the Canadian Government itself iq willing to liberalize the provision to the extent of allowing tax deductions based on contributions made to chaitable organizations from the entire income of Canadian citizens. This concession would, of course, be contingent upon an equivalent concession wade on the part of the United States. Especially in view of the close bonds which now exist between this country and Canadi, and the growing interest among our educational Institutions in studying the Cnadiin econo'ie and political systems, it would seem that the possibility of encouraging contributions by means of an amended tax convention should be given close study. I would app-eciate very much If you would keep this matter In mind during consideration of the tax convention, and would bring it to the attention of the
committee, if you deem it appropriate.

where the Canadian who wishes to contribute earns all his money from Canadian

Hon. THEODORE F. GREENS, United States Senate, Washington, D. C. DEAR SENATOR GREEN: It has come to my attention that the Foreign Relations Committeo will soon consider in executive session the Canada-United States tax convention. The president of the University of Rochester, who is a constituent of mine, has written me concerning a matter involved in the convention which is of great conearn to a number of Awerican colleges and universities. This is the fact that, under the provisions of the convention, a Canadian who wishes to contribute to an American university can deduct for tax purposes only income earned in the United States. Thiq, of course, works a real hardship in the many instances

HousE oF REPRESENTATIVES, Washington, D. C., July 29, 1957.

With all good wishes, I am
Very sincerely yours,

KENNETH B. KEATNG.

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Senate Committee Report
August 6, 1957 Executive Report No. 12, 85th Congress, 1st Session Senate Foreign Relations Committee

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85TI[ CONW.ESS

14 f A8SW1

.

SENATE

I

ExE.CUTIVE RETIvF.

No. 12

DOUBLE TAXATION CONVENTIONS WITH CANA)A, JAPAN, AND AUSTRIA

TtESDAY, AUGUST

6, 1957.-Ordered to bo printed

.Mr. GltiEN, fr-on the Committee onl Foreign Relations, submitted the following

REPORT
[To accompany Executives A, 11, and K, Eighty-fifth Congress, first sessions

The Coninittee on Foreign Relations has had under consideration the tax treaties list ed below, and recommends that the Senate give its advice and consent to their rat-ification: 1. Convention with the Republic of Austria, signed on October 25, 1956, relating to taxes on income (Ex. A,85th Cong., 1st, sess.). 2. Convention with Canada, signed on August 8, 1956, further modifying and supplementing the income-tax convention and I)roto(Vol of March 4, 1942, as modified by the 1st sess.). supplementary convention of June 12, 1950 (Ex. B, 85th (Cong., 3. Protocol witl Japan, signed on Mfarch 23, 1957, supplepment ing the convention of April 16, 1954, relating to taxes on income (Ex. K, 85th Cong., 1st sess.).
1, PtURPOsE OF THE TAX TREATIES

The pending agreements with Canada, Japan, and Austria relate to the system of double-taxation conventions which officials of the Department of the Treasury and the Department, of State have negotiated withi a number of foreign governments. The purpose of these conventions, which have followed the same basic pattern, has been to relieve the burden of taxation on incomes, inheritances, and gifts which otherwise would be struck by taxes imposed by both the United States and the other government due to conflicting conceptions of the jurisdictional power to tax. Executive B (the convention with Canada) introduces certain modifications in the convention with Canada of March 4, 1942, based upon experience with tax problems since that convention went into effect. Among other things, these modifications extend the application of the

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2

IXUBLI.E TAXATION CONVENTIONS

double-taxation principle on a reciprocal basis to income derived from trucking, and to incolne frorm j)t'rsonal services received by employees
of the Canadian branch of til Aierii(an enterprise. Th( con vitioli also reduces the tax ol dividends paid Idy at subsidiary Corl'oration to a parent corporation froin 15 to 5 I)Icent where certain stockownershlip conditions are Intt. Executive K (the protocol with Japan) contains but one substtaintive provisions, which relates to exemption of the Export-Import Banks of Canada and the [Tnited States from taxation on interest received from sources within the country of the other party.

Executive A (tile convention with Austria) follows in general the pattern of previous double-taxation conventions to which the Senate particular problems in Austria, the principles while
has given its approval.

Apart from some differences occasioned by

embodies are substanitially identical with those found in one or more of the earlier agreements 'which tile United States has concluded with other governments. 2. COMMITTEE ACTION

the cOlventio'n

The agreements, which were transmitted to the Senlate on Januarv 17, 1957 (the Austrian and Canadian conventions), amd on April 29, 1957 (tle protocol with Japan), were referred by the clairnian to Mr. Colin F. Stain, chief of staff of the Joint Colmnittee on Internal Revenue Taxation, for examination. 'rhe committee helix a jnlblic hearing on the conventions and the protocol on July 30, 1957, at which time testimony was presented by MI. Stare, by Mr. Dan Throop Smith, Deputy to the Secretary of the, Treasury, a;ld by Mr. Nathan Gordon, Chief of the Inlternational Tax Staff, Department of the Treasury. After considering the treaties in executive session, the committee voted without objection to report then favorably to ihe Senate. 3. ANALYSIS OF PENDING CONVENTIONS A letter anid nemorandum analyzing the conventions and tihe protocol were also submitted to the onmit tee bv Mr. Stain. lhe communications from the chief of staff of the Joint, Committee on Internal Revenuo Taxation are as follows:
CONGRESSS OF TIlE UNITNI) STATES, JOINT COMMITTEE ON INTERNAL. ltEvENuE TAXATION,

lloni. Taw:ovorl FRANCIS GREEN,

Washington,

D. C'.

Chairman, Senate Foreign Relations Com mittee, United Stales Senate, Washington, D. C. DEAR SENATOR GREEN: At your request the staff of tlw ,Joint Comnittee on Internal Revente Taxation has reviewed the provisions of the following tax treaties now pending before tile Senate Foreign relations (omnittee: Supplementary protocol with Japan Supplementary convention with Canada Convention with the Republic of Austria Convention with Pakistan It general, these conventions follow the provisions of existing tax conventions which the Senate has previously approved, Ioever, certain features of tile pending conventions which are not contained in other conventions now in force,. are specifically called to the attention of the comnmittee. Supplementary protocol with Japan This protocol contains only one substantive article which provides that the Export-Import Bank of Japan will be exempt from tax by the United States in interest front sources within the United States. Reciprocally, the Export-lmport

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OIBLE TAXATION CONVENTIONS

*

Bank of Washington will be exempt from tax by Japan on interest from Sources within Jupan. Under this provision a Japaiese borrower, for example, will be permitted to pay interest to the Export-Import Bank of WashingtWi without being sulbj..t to Japanese withholding tax on the interest ):lynwnts. Supplementary conenlion with Canada This convention aniends and supplements the I)res.enly existing Canadian treaty. Under the existing convention a reduced rate of 5 Ipercent is applied at source on dividends paid by a subsidiary corporation in oil(. country to Its parent corpJoratioti in the other country, if the parent corporation owns at least 95 percent of the voting stock of the subsidiary. Under the spending convention the reduced rate of 5 percent will apply if at least 51 percent of the vo, ing stock of the sulbsidiary is held by the parent, corporation alone or in association with not more than 3 oth r corporations, each of which owns at least 10 percent. of the voting stock. This provision is more liberal than the corresl)ondig provisions of other Convelltions. In addition, the pending convention provides a reciprocal exemption for truck-transportation profits and permits charitable contribution-deductions for gifts to charitable organizations in the other country. These latter two provisions are not entirely new, however, since similar provisions are contained in the existing convention with Honduras. Convention with the Republic of Austria There are no novel features In the Austrian treaty. However, the following provisions differ in certain respe-ts from the provisions of other treaties. First, motion-pi.-ture-film rentals are expressly excluded from the reciprocal exemption of royalties provided by article VIII '(1). In the case of fil'n rentals, article VIII (2) provides a reduction in tax to 50 percent of the statutory rate of tax otherwise imposed on such rentals, with t)Ie maximum tax not to exceed 10 percent of the rentals. This provision differs from corresponding provisions of a number of other tax treaties whi-h provide t complete exemption for filn rentals. Second, the pending convention, unlike other recent tax convention-, does not. contain a provision preventing profits from being attributed to a mere purchase. Consequently, an Amerk-an enterprise making purchases in Austria and sales in the United States may still be subject to a double tax. Third, article XIII, which provides an exemption for foreign students and business apprenties, is son.what 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 I year and the annual salary does not exceed $10,000. A memorandum from this office summarizing the principal provisions of the pending treaties is enclosed. COLIN . STAM, Sincerely yours,
Chief of Straff.

(Memoranaium from the Joint Committee on Internal Revenue Taxation)
INCOME TAX CONVENTION WITH CANADA

convention and protocol of March 4, 1942, as modified by the supplementary convention of June 12, 1950. It has two articles. Article I, containing the substantive provisions, has seven paragraphs, each of which modifies to some extent the provisions of the convention now in force. These modifications are similar to provisions of some of the more recent tax conventions which the Senate has approved. Article V of the existing convention provides a reciprocal exemption for income received by an enterprise of one country from the operation of aircraft or ships in

The pending convention with Canada modifies and supplements the income-tax

the other country. Paragraph (a) of article I extends this exemption to income from transportation of property by motor vehicles. An exemption of income from the operation of motor vehicles is also contained in the existing income-tax convention with Honduras. Under article VII of the existing convention income from personal services performed in the United States by a resident of Canada is exempt from United States tax if the Canadian resident spends not more thau 183 days of the taxable year in the United States and the services are performed for a Canadian eviterprise. Paragraph (b) of article I of the proposed convention expands this exemption to

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4

DOUBLE TAXATION CONVENTIONS

considered, tinder section 211 (b) of the 1939 Code, to be engaged In trade or business in the United States. Paragraph (c) of article I of the pending convention eliminates earned Income from the scope of article XI of the existing treaty. As a result the earnings of a Canadian citizen employed in the United States will again be subject to the regular United States rates. Article XI of the existing treaty) provides for a maximum tax of 5 percent on dividends when the dividends are paid by a parent corporation in one country to a subsidiary corporation in the other'country. A subsidiary corporations is defined as one In which 95 percent or more of the voting stock is held by the parent corporation. Paragraph (d) of article I of the pending convention provides that 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 3 other corporations, each of which own at least 10 percent of the voting stock. This treatment of intercompany dividends is more liberal than the treatment provided for in the other UInited States income-tax conventions to which the United States is now a party. Section 170 of the 1954 Code does not allow deduction for contributions to charitable organizations abroad. Paragraph (e) of article I of the proposed convention adds a new provision to article XIII of the existing convention which would allow a deduction for such contributions to charitable organizations created in Canada provided the organization would qualify for this purpose had it been organized In the United States, and Provided further that the charitable organization qualifies under the invone-tax laws of C:uaada. The aimouilt allowed as a deduction is limited to the amount allowed as a deduction under Canadian law computed as if the taxpayer's income from soures in Canada were his only income. A similar provision is contained in the existing convention with Honduras. Paragraph (f) of article I adds a further provision to article XIII of the existing treaty wherein a resident of one cottitry who is a beneficiary of an estate or trust of the other country will be exempt fromii tax by the other country on distributions by the estate or trust out of income from sources outside the other country. This new provision has tile effect of amending Canadian law since income received by a Canadian trust from a foreign source and distributed to a United States beneficiary is subject to tax in Canada when the distribution is made. The United States does not presently tax income which is received by a domestic trust from foreign sources and paid to a Canadian beneficiary. Paragraph (f) of arti 'Ie I of the proposed convention adopts t~e conduit principle of United States law. In addition to the above, the proposed convention eliminates certain administrative provisions which are no longer considered to be necessary. It will apldy to taxable years beginning oil or after the first day of January of the year in which the exchange of instruments of ratification takes place.
PROTOCOL WITH JAPAN

because an individual can live in Canada and be employed In the United States without maintaining a permanent establishment here. Prior to the protocol of June 12, 1950, which substituted the permanent establishment test for the trade or business test of the then existing convention, earnings front personal services rendered in the United States were taxed at regular United States rates since a nonresident individual rendering personal services In the United States was

placing an employee of a Canadian branch of a United States enterprise in tile same position as employees of Canadian subsidiaries of United States corporations and employees of other Canadian enterprises. This provision Is reciprocal fnd it is similar to provisions contained in other recent income tax conventions, for ex. am pi in conventions with Honduras and France. Under article XI of the existing convention a resident of Canada who receives income from sources in the United States pays the United States a maximum titx of 15 percent unless he has a permanent establishment here. Consequently the reduced rate of 15 percent applies to earned Income as well as investment Income

include services performed for a permanent establishment.

This has the effect of

The protocol with Japan supplements the convention now in effect. It 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 on loans or investments received by the bank from sources within the United States. Reciprocally, the Export-Import Bank of Washington will be exempt from tax by Japan on interest on loans or investments received by the bank from sources within Japan. This problem was discussed at a meeting with Treasury on August 16, 1956, at which time the Internal Revenue Service had been asked by the Japanese Embassy to rule that the Export-Import Bank of Japan was a part of the Japanese

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DOUBLE TAXATION CONVENTIONS

5

*

Uru er the income-tax laws of Japan, agencies of foreign governments can anTherefore, if tife Service'held that the Export-Import Bank of Japan was a part of the Japanese (hivernmeit, the Japanese Government would exempt from their withholding tax interest payments by Japamese borrowers on loans obtained from the ExpartIniport Bank of Wa.shiiiigton. The exemption had considerable significance in the r.ie of four Japanese power companies which were negotiating loans with the Expxrt-lmport Bank of Washington for the purchase of facilities from Westinghouse International and International General Electric. However, as a result of action taken by the joint committee in 1942 and 1945,
pjrentlv be granted exemption from tax on a reciprocal basis.

(;ovierniient awld therefore exempt from tax under section 892 of the 1954 Code.

q

that section 892 did not apply to a corporation, even if the corporation was wholly owieid by a foreign government, since the corporation was an entity separate and distinct from its sole shareholder. At the meeting with Treasury it was decided that the problem could be most satisfactorily handled by al amendment to the convention providing a reciprocal exemption in such cases. The provisions of article I of the convention carry out the agreem-nt reached at the meeting.
INCOME TAX ('ONVENTON
ITIi AUSTRIA

enyimng exemption to the Universal Trading Corp., the Service took the position

The pending income-tax convention between the United States and Austria is substantially similar to income-tax conventions previously approved by the Senate within Austria, Belgium Canada, Denmark, Finland, France, Germany, Greece Ireland, Italy, the Netherlands, New Zealand, Norway, Sweden, Switzerland, tihe Union of South Africa, and the United Kingdom. It has as its purpose the elimination of double taxation and the establishment of procedures for mutual asistance between the two countries in the administration of income-tax laws. As to the United States the provisions of the convention apply only to the Federal income tax. They do not apply to taxes imposed by the various States, the District of Columbia," or the Territories or possesions of the United States. As to Austria the convention applies only to national taxes, that is, the income tax, the corporation tax, and the housing reconstruction and family-allowance contribution. BRsiness profils Article III of the convention adopts the principle of permanent establishment which is found in the other income-tax treaties to which the United States is now a party. Under this principle an enterprise of one of the contracting states will not be subject to tax by the other on its business profits unless it has a permanent establishment in the other state. Consequently the sale by an Austrian enterprise of its products in the United States will not result in the imposition of tax by the United States on the profits from the sale unless the enterprise has a permanent establishment in the United States. Likewise, an American enterprise will be permitted to market its goods in Austria through a sales agentt there without being subject to tax by Austria. On the other hand, If an American enterprise maintains a permanent establishment in Austria, profits from sales by the permanent establishment will be subject to tax by Austria. In addition, purchases in Austria and sales outside Austria by the permanent establishment may result in an Austrian tax since the convention does not contain any provision preventing profits from being attributed to purchases by a permanent establish. ment in Austria. In this latter respect the pending convention differs from othei recent tax conventions to which the United States is a party. In addition article III specifically allows deductions for any main office expenses which are attributable to the permanent establishment. It also provides that the authorities of the two countries may by agreement prescribe rules for the apportionnient of industrial or commercial profits in any ease in which conflicting rules of source arise. Article IV adopts a principle similar to that of section 482 of the Internal Revenue Code of 1954, authorizing the allocation of income between related busilesses in order that income subject to tax in either country will be the same as the income which would be taxable in either country in the absence of common control or management. Article 111 (2) contains a similar allocation principle in the case of an enterprise of one country which maintains a permanent establishment in the other country.

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6

DOUBLE TAXATION CONVENTIONS

Income from ships and aircraft

Article V provides a reciprocal exemption for shipping and aircraft operating profits. At the present time the exemption of earnings from the operation of aircraft will operate exclusively in favor of the United States since no Austrian airlines are currently operating in this country. A similar exemption is contained in a number of existing income-tax treaties.
Diiidends

Article VI, relating to reduction in tax on outgoing dividends, differs from corresponding articles in tax conventions to which the United States is now a party. The difference exists because the reduced rate on outgoing dividends is expressed in terms of a reduction of one-half of the statutory rate of tax otherwise imposed on the outgoing dividend rather than as a specific reduced rate. At the present time the United States rate on outgoing dividends is 30 percent while the Austrian tax withheld at source is 17.7 percent. Under the convention the United States rate will drop to 15 percent while the Ausprian rate will drop from 17.7 percent to e one-half of that rate. In the case of di - nds paid by a subsidiary corporation in one country to its parent corporation ,, the other country, article VI provides that the inaxiniuni tax may not exceed 5 percent. This latter provision is cont ined in a number of other income-tax treaties.
Interest

Article VII provides that interest received from sources in one country by a resident or corporation or other entity of the other country will be exempt from tax by the former country if the recipient does not have a permanent establishment there. This article eliminates the United States tax on interest paid from United States sources to nonresident aliens residing in Austria or to Austrian corporations or other Austrian entities. It does not change Austrian law, however, since Austria does not impose a tax on Austrian source interest paid to nonresidents. The exemption does not apply to interest on debts secured by mortgages.
Royalties and rentals

A reciprocal exemption is provided in article VIII for royalties from copyrights, artistic and scientific works, patents designs, secret processes and formulas, trademarks, and similar property. This exemption does not include motion. picture-filhn rentals. In the case of film rentals article VIII provides for a reciprocal reduction in the rate of tax to a rate not exceeding 50 percent of the rate ot erwise imposed, with a further limitation restricting the tax to an amount not in excess of 10 percent of the amount of the film rentals. Under article IX income from real property (including gains derived from the sale or exchange of such property and interest on mortgages secured by such property) and income from royalties derived from natural resources Is taxable in the country in which the property is located. A resident, corporation, or other entity of one country receiving such income from the other country may elect to be stibject to tax upon a net basis as if such resident, corporation, or other entity were engaged in a trade or business in the other country through a permanent establishment in the other country. Similar provisions are contained in a number of existing income tax conventions; for example, in conventions with Denmark, Italy, and the United Kingdom.
Salaries, wages, and professionalfees

Article X provides a reciprocal exemption for compensation for labor or personal services (including professional services and services as a director) in the case of individual residents of one country who are temporarily present in the other country for not more than 183 days during the taxable year. Where an individual receives compensation for labor or personal services performed as an employee or under a contract with a resident, corporation, or other entity of the country of his residence, the compensation received is exempt without regard to the amount rece-ived. In all other cases the exemption applies only if the total earnings do not exceed $3,000. Thus a resident of the United States performing personal services in Austria for his United States employer will be exempt from Austrian tax on his earnings if he is present in Austria for not more than 183 days during the taxable year. However, if he is employed by an Austrian employer or client he will be exempt from Austrian tax only if his compensation does not exceed $3,000. Corresponding provisions are contained in other existing income-tax treaties.

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DOUBLE TAXATION CONVENTIONS

I'#0sions, annuities, and Government salaries Article X! provides a reciprocal exemption for Government compensation and pensions unless the recipient is a citizen of the country which would otherwise impose the tax. However, Government compensation and pensions paid by Austria will not be exempt if the recipient has been admitted to the United States for permanent residence here. Under this article an annuity paid by the United States to a retired civil-service employee residing in Austriaw'ill be considered to be a pension and therefore exempt from the Austrian tax if the recipient is not an Austrian citizen. Article XI also exempts private pensions and private life annuities at source on a reciprocal basis. Similar provisions are contained in a number of existing income-tax conventions.
Teachers' salaries

Under article XII remuneration for teaching received by a resident of one country temporarily visiting the other country for the purpose of teaching for a period not exceeding 2 years at an educational institution therein is exempt from tax by the country in which the educational institution is located. Similar provisions are contained in a number of existing income-tax conventions; for example, in conventions with the United Kingdom, Canada, Norway, and Italy.
Payments to students and business apprentices

resident of one country who is employed by a business enterprise or a charitable organization of his country of residence and who temporarily visits the other country for a period not exceeding 1 year solely to acquire business, professional, or technical experience will be exempt from tax by such other country on compensation received from his employer if his annual compensation does not exceed $10,000. Although this article is more liberal than corresponding articles of other conventions, it is similar in principle to the student and business apprentice provisions contained in all tax conventions to which the United States is a party.
Tax credit provisions

exempt from tax by the other county.

Under article XIII a student or business apprentice of one country who is temporarily present in the other country exclusively for study or training will be granted an exemption by the country of temporary residence for payments he receives from abroad for his study and maintenance. This article also provides that a grant, allowance, or award from a nonprofit religious, charitable, scientific, literary, or educational organization received by a resident of one country will be
In addition article XIII provides that a

Under article XV the United States will, subject to the provisions of sections 901 through 905 of the 1954 Code, grant a foreign tax credit for the Austrian taxes specified in article I. Austria will likewise grant a credit against its tax for the amount of United States taxes specified in article I with respect to income received from sources within the United States by its residents or corporations. However, the amount allowed as a credit will not in any case be permitted to exceed the Austrian tax imposed on the income from sources within the United States. The article also provides that regardless of any provision of the convention (other than art. XI (1) relating to Government compensation and pensions; art. XII relating to teachers' salaries; and art. XIII relating to students and business apprentices) each country may continue to apply its income-tax laws to its citizens, residents, or corporations as though the convention had not come into effect. However, each country reserves the right to tax its own citizens with respect to income falling within articles XII and XIII.
Other provisions

In addition to the above revisions the convention also contains the usual,l articles providing for appeal from double taxation and for consultation between the revenue authorities ol the two countries, for exchange of information between the contracting countries, for safeguarding the diplomatic exemption, and for the issuance of regulations necessary to carry out the provisions of the convention. It also provides that none of the provisions of the convention are to be construed to restrict in any manner any exemption, deduction, credit or other allowance provided under the laws of the respective countries. It contains no provisions relating to the collection of taxes. The convention will become effective on January I of the calendar year in which the exchange of instruments of ratification takes place. It will remain in force indefinitely but it may be terminated by either country provided at least 6 months' notice of termination is given the other country. In such event it will cease to be effective for taxable years beginning on or after the first January 1 following the expiration of the O-month period.

73095 0-02-vol. 1- 14

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Senate Floor Debate and Action
August 8, 1957 85th Congress, 1st Session 103 Congressional Record 14009, 14012-14013

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[P.1.009] CONVENTION BETWEEN UNITED STATES OF

AMERICA AND THE REPUBLIC OF AUSTRIA--CONVEN-

TION BETWEEN UNITED STATES OF AMERICA AND
CANADA-PROTOCOL WITH JAPAN, SUPPLEMENTING THE CONVENTION OF APRIL 16, 1954, RELATING TO TAXES ON INCOME
~'Mr. JOHNSON of Texas. Mr. President, I ask unanimous consent that Calendar Nos. 11, 12 and 13, respectively, Executive A, Execufive B, and Executive K, all of the 85th Congress, 1st session, relating to conventions avoiding double taxation, be considered en bloc. The PRESIDING OFFICER. Is there objection to the request of the Senator from 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: [Texts of Conventions] [P. 14012] Mr. GREEN. Mr. President, the pending treaties with Canada, Japan and Austria give further application to what has become the established policy of the United 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 subject 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 from 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 from 15 percent to 5 percent the tax which a subsidiary corporation pays on dividends to the parent company, provided that the latter either alone, or in association with three other companies, holds at least 51 percent of the voting stock of the subsidiary. There is only one substantive provision in the pending protocol with Japan, which supplements the convention of 1954. The protocol exempts the Export-Im port, Bank of each country from taxation with respect to interest [p. 14013] received by the bank on loans or investments made by it in the other country. The remaining convention, NMr. President, that with the Republic of Austria, has substantially the same objectives as those which

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resulted in income tax conventions between the United States and some 17 other countries. It is drawn along much tile same lines as the earlier conventions providing for reciprocal exemption from taxation of various items of income. Its provisions are discussed in detail iin the committee report, and there is no need for me to review

then here.

the Joint Committee on Internal Revenue Taxation who has examined them front the standpoint of United States revenue laws. 'liey were also carefully considered by the Committee on Foreign Relltions, which conclded that the agreements are wholly in harmony with the policies which the Senate, has expressed in approving prior tax convent ionis. 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

I shoul like to say, Mr. President, that these conventions were the subject of a most, careful analysis by Mr. Stain, clder or Staff or

i

be done. Mr. JOHNSON of Texas. Mr. President, on the question of the
ratification of Executive A, Executive B, and Executive K, I ask for the yeas and nays. The PRESIDING OFFICER. The yeas and nays have been requested. Is there a sufficient second?

The yeas and nays were ordered. The PRESIDING 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.
The resolutions of ratification of Executive A, Executive B, and Executive K were read, as follows:
advise and consent to the ratification of Executive A, 85th Congrews, 1st session, The convention between the United States of America and the Republic of Austria for the avoidance of double taxation with respect to taxes on income, signed at
Resohed (two-thirds of the Senators present concurring therein), That the Senate

Washington on October 25, 1956.

convention of June 12, 1950.

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
Resoled (two-thirds of the Senators present concurring therein), That the Senate

Resoled (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 larch 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. The PRESIDING OFFICER. The question is, Will the Senate
advise and consent to the respective resolutions of ratification. yeas and nays have been ordered. The clerk will call the roll.

The

The Chief Clerk called the roll. Mr. MANSFIELD. I announce that the Senator from New Mexico [Mr. CHAVEZ], the Senator front Delaware [Mr. FREAR], the

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Senator fro,. Ohio [.\fr. LAUSCHE), and the Senator from West Virginia [Mr. NEEv] are absent on official business. The Senator from Missouri [Mr. IIENIMs] is absent by leave of
the Senate because of illness. I further announce that if present and voting, the Senator front New Mexico [Mr. ('HAVEZ], the Senator front Delaware [Mr. FItf.A U], the .Senator from Missouri [Mr. lWNNInGs], the Senator front Ohio [Mr. IAUSCHE], and the Senator froni West Virginia [Mr. NEELY] would each vote "yea". Mr. DIRKSEN: I announce that the Senator from New Hampshire [Mr. BRIDO:s] and the Senator front Maine [Mr. I'AVNE] are absent because of illness. The Senator from Nevada [Mr. MA 0LoNF) is necessarily absent. Te Senator from Pennsylvania [Mr. MARTIN) is detainiied on official business, and if present and voting, he would vote "yea." On this vote, the Senator front Nevada [Mr. MALON E] is paired with tihe Senator from Maine [M.r. PAYNE]. If present and voting, the Senator front 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

#

Bible Bricker Bush Butler Byrd Capehart Carlson Carroll Case, N.J. Church Clark Cooper Cotton Curtis Dirksen Douglas Dworshak Eastland Ellender Ervin Flanders Fulbright

Bennett

Case, S. Dak.

Green Hayden Hickenlooper Hill Holland Hruska Humphrey Lives Jackson Javits Jenner Johnson, Tex. Johnston, S.C. Kefauver Kennedy Knowland Kuchel Langer Long

Goldwater Gore

Morton Murray
Mundt

O'Mahoney Pastore Potter Purtell Revercomb Robertson Russell
Saltonstall Scott Smathers Smith, Maine Smith, N.J. Sparkman Stennis S mington nalmadge

Neuberger

Sehoeppel

Kerr

Magnuson

Thurmond

Morse

Mansfield Martin, Iowa McClellan McNamara Monroney

Thye Watkins Wiley Williams Yarborough Young

NOT VOTING-9 Chavez
Frear Bridges Hennings

Lausehe Malone

Martin, Pa.
Neely Payne

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jV 'jr ,,'"" .r ''" V--1 V .V C

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 todav. The PRESIDING OFFICER. Without objectioi, the President of the United States will be notified of the ratification by the Senate this afternoon of each of the treaties.

The PRESIDING OFFICER. Two-thirds of the Senators present having voted in the affirmative, the resolutions of ratification of Executive A, Executive B, and Executive K are deemed to have

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PresidentialProclamation(including oficial text of convention)
[Reprint of TIAS 3923

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TIATIIES

AND

OTHEII

INTERNATIONAL

ACTS

SIEIIES4 3023

I()IlBll TAXATION
'I'ule oil Inicotte

Convent
AUSTUIA

Ion Between tlhe

UNITHI) STATES OF -A!M.EIICA 1ml

Sig'd at WaoIiIglon Ot'hlbr .5, 1956

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DEPARTMENT OF STATE [Literal print]

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AUSTRIA
Double Taxation: Taxes on Income
Contrntion signed at Washington October 25, 1956; Ratification advised by the Senate of the United States of America August 8, 1957; Ratified by the President oJ the United States of America August 30, 1957; Ratified by Austria April 26, 1957; Ratifications exchanged at Vienna October 10, 1957; Proclaimed by the President of the United States of America October 23, 1957; Entered into force October 10, 1957; Operatire retroactively January 1, 1957.

BY THE PRESIDENT OF THE UNITED STATES OF AMERICA

A PROCLAMATION
WHEREAS A convention between the United States of America and the Republic of Austria for the avoidance of double taxation with respect to taxes on income was signed at Washington on October 25, 1956 by their respective Plenipotentiaries, the original of which convention, in the English and German languages, is word for word as follows:

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2

CONVENTION BETWEEN TIE UNITED STATES OF AMERICA AND THE REPUBLIC OF AUSTRIA FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME The President of the United States of America and the Federal ,President of the Republic of Austria, desiring to avoid double taxation with respect to taxes on income, have agreed to conclude the following Convention. For that purpose they have appointed as their Plenipotentiaries: The President of the United States of America: John Foster Dulles, Secretary of State of the United States of America, and The Federal President of the Republic of Austria: Dr. Karl Gruber, Ambassador Extraordinary and Plenipotentiary of the Republic of Austria in Washimgton, The Plenipotentiaries, having communicated to one another their full powers, found in good and due form, have agreed as follows:
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. (b) In the case of the Republic of Austria: The Einkommensteuer (income tax), the Koerperschaftsteuer (corporation tax) and the Beitrag oni Einkommen zur Foerderung des Wohnbaues und fuer Zwecke des Familienlastenaqusgleiches (housing recotistrction and family allowance contribution). (2) The present Convention shall also apply to any other income or profits tax of a substantially similar character which may le imposed by one of the contracting States after the date of signature of the present Convention.

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3 ARTICLE 11

(I) As used in this Convention: (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 Hawaii, and the District of Columbia; (b) the term "Austria" means the Republic of Austria; (c) the term "enterprise of one of the contracting States" means, as the case may be, a United States enterprise or an Austrian enterprise; (d) the term "United States enterprise" means an industrial or commercial enterprise or undertaking carried on in the United States by a natural person (including an individual in his individual capacity or as a member of a partnership) resident in 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 lav of the United States or of any State or Territory of the United States; (e) the term "Austrian enterprise" means an industrial or commercial enterprise or undertaking carried on in Austria by a natural person (including an individual in his individual capacity or as a member of a partnership) resident in Austria or by an Austrian corporation; the term "Austrian corporation" means a corporation or other entity created or organized under the law of Austria; (f) the term "permanent establishment" means a branch, office, factory, workshop, a warehouse, a merchandising establishment, a mine, oil well or other plae of exploitation of the ground or soil, a construction or assembly project or the like, the duration of which exceeds or will likely exceed twelve months, or other fixed place of business; but does neither include the casual and temporary use of mere storage facilities, nor an agent or employee unless the agent or employee has full power for the negotiation and concluding of contracts on behalf of an enterprise and also habitually exercises this power in that other State or has a stock of merchandise belonging to the enterprise of the other State from which he regularly fills orders on behalf of (215)

4 the enterprise. 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 commission agent, broker, 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 and merchandise shall not of itself constitute such fixed place of business a permanent establishment of the enterprise. 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. 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; (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 in the case of Austria, the Federal Ministry of Finance. (2) For the purpose of the present Convention: (a) Dividends paid by a corporation of one of the contracting States shall be treated as income from sources within such State. (b) Interest paid by one of the contracting States, including any local government thereof, or by an enterprise of one of the contracting States not having a permanent establishment in the other contracting State shall be treated as income from sources within the former State. (c) 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, oil wells, or other natural resources (216)

5 shall be treated as income derived from the contracting State in which such real property, mines, oil wells or other natural resources are situated. (d) Compensation for labor or personal services (including the practice of liberal professions) shall be treated as income from sources within the contracting State where are rendered the services for which such compensation is paid. (e) 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. (3) In the application of the provisions of this Convention by one of the contracting States any term not otherwise defined shall, unless the context otherwise requires, have the meaning which the term has under its own tax laws. For the purposes of this Convention the term "residence" in Austria shall include the customary place of abode therein. ARTICLE III (1) Industrial or commercial profits of an enterprise of one of the contracting States (including gains derived from the sale of any of the assets used by that enterprise) shall not be subject to tax by the other State unless the enterprise carries on trade or business in such other State through a permanent establishment situated therein. If it is so engaged, such other State may impose its tax upun the entire income of such enterprise from sources within such State and will limit its taxation of the enterprise to income from such sources. (2) Where an enterprise of one of the contracting States is engaged in trade or business in the territory of the other contractiig 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. (3) In the determination of the industrial or commercial profits of the permanent establishment there shall be allowed as deductions all expenses which are reasonably allocable, to the permanent establishment, including executive and general ad-' ministrative expenses so allocable.
73095 O-62-vol. 115

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6

(4) The competent authorities of the two contracting States may lay down rules by agreement for the apportionment of industrial or commercial profits.
ARTICLE IV

Where an enterprise of one of the contracting States, by reason of its dhect or indirect participation in the management or the financial structure of an enterprise of the other contracting State, agrees to, or imposes on the latter enterprise, commercial or financial conditions differing 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

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. ARTICLE VI 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 other contracting State not having a permanent establishment in the former State shall not exceed 50 percent of the statutory rate of tax imposed on such dividends by such former State but such rate of tax shall not exceed 5 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 been arranged or is maintained primarily with the intention of securing such reduced rate.
ARTICLE VII

Interest received from sources within one of the contracting States, on bonds, notes, debentures, securities or on any other form of indebtedness (exclusive of interest on debts secured by. mortgages) by a resident or corporation or other entity of the other contracting State shall, in an amount not exceeding fair and

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7 reasonable consideration oin indebtedness, be exempt from tax by the former State if such resident, corporation or other entity has no permanent establishment in such former State. ARTICLE VIII (1) Royalties and other amounts received as consideration for the right to use literary, musical or other copyrights, artistic and scientific works, patents, designs, plans, secret processes and formulae, trademarks, and other like property and rights (including rentals and like payments for the use of industrial, commercial or scientific equipment but not including motion picture-film rentals) by a resident or a corporation or other entity of one of the contracting States from sources within the other contracting State shall, in an amount not exceeding fair and reasonable consideration for such right to use, Ie exempt from taxation by such other State if the recipient has no permanent establishment situated in such other State. (2) The rate of tax imposed by one of the contracting States upon motion picture film rentals received 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 50 percent of the statutory rate of tax imposed on such rentals but in any case s8all not exceed 10 percent of the amount of such rentals. ARTICLE IX (1) Income from real property (including gains derived from the sale or exchange of such property and interest on mortgages secured by such property) and royalties in respect of the operation of mines, oil wells or other natural resources shaU be taxable in the contracting State in which such property, mines, oil wells or other natural resources are situated. (2) Where a resident or corporation or other entity of one of the contracting States derives any income coming within the scope of paragraph (1) from property within the other contracting State, the recipient 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, corporation or other entity were engaged in trade or business within such other State through a permanent establishment therein. ARTICLE X (1) An individual resident of Austria slall be exempt from United States tax upon compensation for labor or personal services (219)

8 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 services performed as an employee of, or under con. tract with, a natural person resident in Austria, or an Austrian corporation and such compensation is borne by such resident or corporation or (b) his compensation received for such labor or personal services does not exceed $3,000. (2) The provisions of paragraph (1) of this Article shall apply, mulatia mutandi8, to an individual resident of the United States with respect to compensation for such labor or personal services performed in Austria.
AiTICL XI

(1) (a) Wages, salaries and similar compensation and pensions paid by the United States or by its States, territories or political subdivisions, to an individual (other than an Austrian citizen) shall be exempt from tax by Austria. (b) Wages, salaries and similar compensation and pensiotns paid by Austria, Bundeslaender, districts or municipalities or other public corporations, or by a public pension fund, to an individual (other than a citizen of the United States and 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. (c) For the purposes of this paragraph the term "pensions" shall be deemed to include annuities paid to a retired civilian government employee. (2) Private pensions and private life annuities which are from sources within one of the contracting States and are paid to individuals residing in the other contracting State shall be exempt from taxation by 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.

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9
(4) The term "life annuities", as used in this Article, ineans 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 X11 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 by the other contracting State from tax on his remuneration for such teaching during that period. ARTICLE XIII (1) A resident of one of the contracting States who is temporarily present in the other contracting State solely as a student at a university, college, school or other educational institution in the other contracting State, shall be exempt from tax by the latter State with respect to remittances from abroad for study and maintenance. (2) An apprentice (inclusive of Volontaere and Praktikanten in Austria), a resident of one of the contracting States who is temporarily present in the other contracting State exclusively for the purposes of acquiring business or technical experience, shall be exempt from tax by the latter State in respect of remittances from abroad for study and maintenance. (3) A resident of one of the contracting States who is a recipient of a grant, allowance or award from a non-profit religious, charitable, scientific, literary or educational organization, shall be exempt from tax by the other State on such payments from such organization (other than compensation for personal services). (4) A resident of one of the contracting States who is an employee of an enterprise of such State or an organization described in paragraph (3) of this Article, and who is temporarily present in the other contracting State for a period not exceeding one year solely to acquire tech. Al, professional or business experience from any person other than such enterprise or organization, shall be exempt from tax by such other State on compensation from abroad paid by such enterprise or organization if his annual compensation for services wherever performed does not

exceed $10,000.

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10
ARTICLE XIV

(1) Dividends and interest paid by an Austrian corporation (other than a United States corporation) shall be exempt from United States tax where the recipient is a nonresident alien or a foreign corporation. (2) Dividends and interest paid by a United States corporation shall be exempt from tax by Austria where the recipient is not a resident or an Austrian corporation.
ARTICLE XV

68A sta.20-288. 2O . S. 0. It 901-

(1) The United States, in determining its taxes specified in Article I of this Convention in the case of its citizens, or residents or corporations, may, regardless of any other provision of this Convention, 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 conic into effect. The United States shall, however, subject to the provisions of sections 901-905, Internal Revenue Code of 1954, as in effect on the entry into force of this Convention, deduct from its taxes the amount of Austrian taxes specified in Article I of this Convention. (2) Austria, in determining its taxes specified in Article I of the Convention in the case of its residents or corporations, may, regardless of any other provisions of this Convention, include in the basis upon which such taxes are imposed all items of income taxable under the revenue laws of Austria as if this Convention had not come into effect. Austria shall, however, deduct from its taxes the amount of United States taxes specified in Article I of the Convention with respect to income derived from sources within the United States by such residents or corporations and subject to such Austrian income tax but the amount so deducted shall not, in any case, exceed the Austrian tax imposed with respect to such income so derived from sources within the United States. (3) The provisions of this Article shall not be construed to deny the exemptions from United States tax or Austrian tax, as the case may le, granted by Articles XI (1), XII and XIII of this Convention nor to prevent either of the contracting States from taxing its own citizens with respect to income coming within Article XII or Article XIII.
AwR:,.LE XVI

(1) The competent authorities of the contracting States shall exchange such information (being information available under the respective taxation laws of the contracting States) as is necessary

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I1 for carrying out the provisions of the present Convention or for the prevention of fraud or the like 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 any trade process. (2) 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.
ARTICLE XVII

(1) Where a taxpayer shows proof that the action of the tax 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 present his case to the State of which he is a citizen or a resident, or, if the taxpayer is a corporation or an other entity of one of the contracting States, to that State. Should the taxpayer's claim be deemed worthy of consideration, the competent authority of the State to which the claim is made shall endeavor to come to an agreement with the competent authority of the other State with a view to avoidance of double taxation. (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 competent authorities of the contracting States may settle the question by mutual agreement.
ARTICLE XVIII

(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 granted by the laws

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12
of one of the contracting States in the determination of the tax imposed by such State. (3) 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 contracting State residing in its territory. The term "citizens of one of the contracting States" as used in this Article includes all legal persons, partnerships and associations created or organized under the laws in force in the respective contracting States. In this Article the term "taxes" means taxes of every kind or description, whether Federal, State, Bundeslaender, district or municipal.
ARTICME XIX

1

(1) The competent, authorities of the two contracting States inay prescribe regulations necessary to carry into effect the present Convention 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.
ARTICLE' XX

(1) .The present Convention shall be ratified and the instruments of ratification shall be exchanged at Vienna as soon as possible. The Convention shall have effect on and after the first day of January of the calendar year in which such exchange takes place. (2) The present Convention shall remain in force indefinitely, but may be terminated by either of the contracting States, provided that at least six months' prior notice of termination has been given through diplomatic channels. 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.

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13

ABKOMMEN ZWISCHEN DEN VEREINIGTEN STAATEN VON AMERIKA UND DER REPUBLIK OSTERREICH ZUR VERMEIDUNG DER DOPPELBESTEUERUNG AUF DEM GEBIETE DER STEUERN VOM EINKOMMEN Der Prisident der Vereiniglen Stuaten von Amerika und der

BlindesprAsident der Republik 0sterreich sind, Yon deni Wunsehe geleitet, die Doppelbesteuerung auf denim Gebiete der Steuern vom Eiukommen zu vermeiden, ilbereingekomnen, dis naclistehende Abkommen abzus('diesseui. Zu diescin Zweeke haben zu ihren Bevollmtchtigten ernannt: Der PrAsideut der Vereinigten Stzaten von Arnerika: John Foster Dulles, Stastssekretfr der Vereinigten Staaten von Amerika, und Der Bundesprilsident der Republik Osterreich: Dr. Karl Gruber, asserordentlic',a und bevollmiichtigter Botschafter der Republik Osterreich in Washington, Die BevollmAchtigten haben, nachdem sic sich ihre Vollnachten mitgeteilt und diese in guter und geh6riger Form befunden, folgendes vereinbart:
ARTIKEL I

(1) Die Steuern, anf die sich dieses Abkommen bezieht, sind: a) auf Seiten der Vereinigten Staaten von Amerika: die Bundeseinkommensteuern (federal income taxes) einschliesslich der Zusatzsteuern (surtaxes), b) auf Seiten der Republik Osterreich: die Einkommensteuer, die K6rperschaftsteuer und der Beitrag vom Einkommen zurF6rderung desWohnbaues und ffir Zwecke des Familienlastenausgleiches. (2) Das vorliegende Abkommen ist auch auf jede andere ihrem Wesen nach Ahnliche Einkommeno oder Gewinnsteuer anzuwenden, die nach Unterzeichnung dieses Abkommens von einem der Vertragstaaten erhoben wird.

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14 ARTIKEL II diesem Ahkomimen bedeuten:

(I)

rn

a) der Begriff "Vereinigte Staat en" die Vereinigten Stant en von Amerika; in geographisehem Sinn verwendet, bodeutet, er lhro Staaten, lie Torritorien von Aloska und thawaii und den District of Columbia; b) der Begriff "Ostterreich" die Republik Osterreich; c) der Begriff "Unternebmen eites der Vertragstaaten je naris dent Zusanmenhang ein amerikanisehes oder ein 6sterreiehisehes Unternehinen; (1) der liegriff "amerikanislhme IrTnternehmen" ein gewerbliehes Unternehinen, das in den Vereinigten Staten Von einer nattitrlien Peron (ls soleher oder ads Gesellsthafter einer l'ersonengesellseliaft) wit Wohnsitz in den Verejuigten Statnten oder von einer amerikanisehen Korperselmaft oder einem anderen Reehtstrfier betrieben wird; der Begriff "amerikanisehi Krperst'haft. older anderer Retitstriager" bedeutet nach deni Reelit tier Vereinigten Staaten, ihrer Gliedstaaten older Territorien errielitete otter organisierte Ktrperschaften otter andere Rteitstriiger; e) der Begrif" "6sterriehisehes tUnternelinien" ein gewerbliehes Unternehmen, tis in Mterreich von eimer nntfirliehen Person (als sol'her older als Gesellsebafter einer Personengesellsciift) nit. Wohnsitz in O.sterreich older von einer osterreiehischen Kdrpersehaft betrioben wird; der Begriff "6sterreichiscte Kdrperseliaft" bedeutet nieh dem &sterreiehistien Reeht erriehtete oder orgnnisierte Krpersehinften Oder andere ReebtstrAger; f) der Begriff "Betriebstlltte" vine Zweigniederlassing, Gesehiftsstelle (office), Fabrik, Werkstfit.te, ein Lgerhans, eine Handelsniederlassung, ein Bergwerk, eine Olquelle oder andere St/tle der Ausbeutung ties Gruntd und Bodens, eine Bauausfflhrumg, Montage n. dgl., deren Daner zwo1f Monate fiberechreitet oder voraussichtlich lbersehreiten wird, oder cine andere stfindige Gesechiftseinrichtung; er schliesst aber weder die gelegentliche und zeitlich begrenzte Benfltzung blosser Stapelgelegenheiten ein, noch einen Vertreter odor Angesteilten, es sei denn, der Vertreter odor Angestilte besitzt eine allgemeine Vollmacht zu Vertrags(226)

15 verhandlungen tind zu Vertragsabscllissen ftIr ein Unternehmen und Obt diese Vollmneht gem 6hnlieh in dem anderen Staat auch aus oder er verftlgt. Sober ein Warenlager, das dem Unternehmen des anderen States geh6rt, von dem er regelmftssig Bestellungen for das Unternehmen ausftlhrt. Eine Betriebstfltte wird aber im anderen Staste nieht sehon desialb angenommen, weil Pin Unternehmen des einen Vertragstaates in dem anderen Staate OeschAfte durch eiinen Kommissionfr, Makler, Saehwalter (custodian) oder einen anderen unablhingigen Vertreter tltiigt, (ier im Rahmen seiner ordentlielien OeschlftstAmigkeit han(felt. Die Tatsaehe, (lass ein Tternelimen eities dier nl Vertragstaaten in dem anderen Staat eine stAtidige Geschliftseinrielitung nussehliesslich for den Einkatif von Oitern und Waren unterhiilt, malit (fir siclh allein eine solche stAndige GesehAftseinrichtung niieht zur BetriebstAtte (les Unternehmens. Unterhilt ein Unternelinien t(les einen Vrtragstaates im Gebiet des anderen Vert.ragstaates cin Lagerhaus zu Auslieferungs-, niclit.aber zu Ausstellungszweeken, so begrOndet dies for sich allein keine BetriebstAtte in dem anderen Staat. Die Tatsaehc, dass cine Kdrpersehaft eines (ier Vertragstaaten eine Tocltergesellschaft besitzt, die eine K6rperschaft des anderen Staates ist oder in diesem anderen Staat GeschiAftsbeziehungen ianterhAlt, mahft (fir sich allein diese Toehtergesellsehaft nicht zur Betriebsthtte ihrer Mtuttergesellsehaft; g) der Begriff "zustAndige Beh6rden" nuf Sciten (er Vereinigten Staaten den Commissioner of Internal Revenue im Rahmen der ihm vom Sekretir des Schatzamtes erteilten Vollmachten und auf Seiten Osterreiehs dqs Bundesministerium fur Finanzen. (2) Ffr Zweeke des vorliegenden Abkommens werden: a) Dividenden, die von ciner K6rpersehnft cites der Vertragstaaten gezalit werden, als Einkflnftc aus Quellen dieses Staates behandelt; b) Zinsen, die von einem der Vertragstaaten einsehliesslich seiner Gebietsk6rpersechaften oder von einem Un. ternehmen cines der Vertragstaaten, das in dem anderen Vertrstaat keine Betriebetitte hat, gezahit werden, ale Einkonfte aus Quellen in dem erstgenannten Staate behandelt;

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16 Einkonfte &us unboweglichem Verm6gen (einschliesslich der Gowinne aus dem Verkauf odor Tausch cines solchen Verni6gons, ausgenommen Zinsen von Hy. potheken odor grundbiicherlich sichergestellten Schuldverschreibungen) sowie Vergfitungen (royalties) aus der Ausbeutung von Bergiverken, Olquellen odor anderen Bodenschatzen, als Einkiinfte ius jenen Vertragstaate angesehen, in dem das unbewegliche Verm6gen, die Bergwerke, Olquellen oder anderen Bodenschlitze gelegen sind; d) Entgelte fir Arbeit odor per6nlieche Dienste (einseliliesslich der Ausfibung freer Bertife), ale Einkfinfte aus Quellen, in dem Vertragstaate behandelt, in dent die Dienste geleislet wurden, fOr die die Entlohnung Erfolgt ist; e) Lizenzgeblbhren ffr die Nutzung oder das Recht auf Nutzung von Patenten, Urheberreehten, Mustern, Markenreehten und Oihnlichen Vernigenswerten in einem der Vertragstanten, als Einkinfte aus Quellen innerhalib dieses Stantes behandelt. (3) Bei Anwendung der Vorsehriften dieses Abkommens wird jeder Vertragstaat, sofern sidh aus dem Zusanmenhang nicht etwas anderes ergibt, jedem nieht anders bestiunmten Begriff den Sinn beilegen, der ihm nach den eigene. Steuergesetzen zukomnit. Im Sinne dieses Abkommens umfasst der Begriff "Wohnsitz" in Osterreich auch den gewohuliehen Aufenthalt. 0
AnTIL, III

(1) Gewerbliehe Gewinne aus einem Unternebmen eines der Vertragstaaten (einschliesslich der Gewinne aus der Verltusserung irgendeines der von diesel Unternehmen genutzten Verm6genswerte) sind in dew anderen Staate nicht steuerpflichtig, ce sei denn, dass das Unternehmen in dem anderen Staate durch eine dort gelegene Betriebstlitte gewerblich t/itig ist.. Sofern dies der Fall ist, kann dieser andero Staat die gesamten, aus Quellen innerhalb dieses Stantes erzielten Einkfinfte des Unternebmens besteuern; dabei wird er die Besteuerung des Unternehmens auf die aus diesen Quellen erzielten Einklinfte beschr/inken. (2) Ist ein Unternebmen eines der Vertragstaaten im Gebiete des anderen Staates durch eine dort gelegene Betriebst/tte gewerbIch ttig, so sollen dieser Betriebstfttte die Cewinne aus gewerblicher TAtigkeit zugerechnet werden, die sie ale selbstAndiges Unternehmen durch gleiche odor Abnliche TAtigkeiten unter den

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17 gleichen odor Ahnlichen Bedingungen und ohne jede AbhAngigkeit vore Unternehmen, desson Betriebstitte sie ist, hAtte erzielen knnen. (3)Bei der Festsetzung der gowerblichen Gewinne ciner Bet riebstotte sollon alley billigerweise der Betriebstittte zurechenbaren Ausgaben, mit Einschluss von Gesehififtsfihrungs- und allgemeinen Verwaltungsunkosten zum Abzug zugelassen werden. (4)Die zustfindigen Behbrden der beiden Vertragstaaten konnen einvernehmlich Riehtlinien zur Aufteilung der Gewine aus gowerblicher Titigkeit festlegen.
AHTIKrF IV

Weni Pin Unt~crnehmen des einen Vcrtragstaates vernoge seiner uninittelbaren oder mit telbaren Beteiligung an der GescliAftsfahrung odor sin finanziellen Aufbau cites Unt-ernehmens (ies anderen Vertragstaates it disem Unterneimen wirtschaftliche odor finanzielle Bedingungen vreinbart odor ihm solche auferlegt, (ie von denjenigen abweichen, die mit einem unabhftngigen Unternehmen vereinbart warden, so dOrfen Gewinne, die eines der boiden Unterelunen Ublieherweise erzielt hbttte, aber wegen dieser Bedingungen niclit erzielt hat, den Gewinnen dieses Unternnimens zugereclnet und entsprechend besteuert werden.
ARTiKEL V

Gewinne, die durch ein Unternehmen Pines der Vertragstaaten aus dem Betrieb von SchifTen, odor Luftfahrzeugen erzielt werden, sind in don anderen Stasit von der Besteuerung ausgenoninen.
ARTIKEL VI

Der Satz der Stoer, die von einem der Vertragstaten auf Dividenden erboben wird, die aus Quellen in diesem Staate durch Pine natarlicho Person mit Wohnsitz im anderen Staate, eine Kfirperschaft oder einen anderen RechtstrAger des anderen Vertragstaates bezogen warden, die im orstoren Staate keine Betripbstittte haben, soil 50 v.H. des gesetzlichen Satzes der Steuer, welche auf solche Dividenden vom erstgenannten Staat erhoben wird, nicht Obersteigen; aber dieser Steuersatz soil 5 v.H. nicht Ubersteigen, wenn der Anteilsbesitzer eine K6rperschaft ist, die unmittelbar oder mittelbar mindestens 95 v.H. der gesamten stimmberechtigton Anteile der K6rperschaft besitzt, die die Dividenden bezahlt, und wenn nicht mehr als 25 v.H. des Rohgewinnes der zahlendon Karperschaft aus Zinsen und Dividenden bezogen werden, die nicht von iiren eigenen Tochtergesellschaften stammen. Diese Ermtssigung des Steuersatzes auf 5 v.H. ist nicht anwendbar, wenn die Beziehungen der beiden (229)

18 K6rperschaften hauptsftchlich in der Absicht errichtet oder aufrechterhalten werden, diesen verminderten Steuersatz zu erlangen.
ARTIKEL VII

Zinsen von Obligationen, Wertpapieren, Kassenscheinen, Schuldverschreibungen oder von irgend einer anderen Schuldverpflichtung (ausgenommen Zinsen fur hypothekarisch sichergestellte Forderungen), die aus Quellen eines der Vertragstaaten von einer nattirlichen Person mit Wohnsitz im anderen Vertragstaat oder einer K6rperschaft oder einem anderen Rechtstrliger des anderen Vertragstaates bezogen werden, werden mit einem Betrage, der eine angemessene Vergiitung ffir die Schuldverpflichtung nicht Ubersteigt, von der Besteuerung in dem erstgenannten Staate ausgenommen, wenn eine solehe natfirliche Person, Kbrperschaft oder anderer RechtstrAgcr keine Betriebstltte in dem erstgenannten Staate fiat.
ARTmm, VIII

(1) Lizenzgebihren (royalties) und andere Betrage, die als Vergiitungen for die tOberlassung des Gebrauchsrechtes an literarischen, musikalischen oder sonstigen Urhcberrechten, klnstlerischen oder wissenschaftlichen Werken, Patenten, Mustern, Plltnen, geheimen Verfabren und Formeln, Markenrechten und anderen thnlichen Vermigenswerten und Rechten (einschliesslich der Mietgeblhren und ithmliehen Vergtitungen ffir die Beniltzung von gewerblichen, kaufmiinnischen oder wissenschaftlichen Ausrostungen, jedoch ausgenommen Lizenzgebihren flr kinenm.tographische Filme), von einer nattrlichen Person mit Wohnsitz in einem der Vertragstaaten, von einer K6rperschaft oder einem anderen Rechtstrger eines der beiden Vertragstaaten aus im anderen Vertragstaate gelegenen Quellen bezogen werden, sollen mit einem Betrage, der ein angemcssenes Entgelt ffir ein derartiges Recht auf Nutzung nicht Obersteigt, von der Besteuerung durch diesen anderen Staat ausgenommen spin, wern der Empftnger keine im anderen Staate gelegene Betriebstiitte hat. (2) Der Satz der Steuer, der von einem der Vertragstaaten von Lizenzgebilhren far kinematographische Filme erhoben wird, die aus Quellen in diesem Vertragstaat durch eine natfirliche Person mit Wohnsitz im anderen Vertragstaate oder cine Krperschaft oder einen anderen RechtstrAger des anderen Vertragstaates bezogen werden, die im ersteren Staate keine Betriebstttte haben, soil nicht 50 v.H. des gesetzlichen Steuersatzes, der von solchen

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19

Lizenzgebabren erhoben wird, jedenfalls aber nicht 10 v.H. des Betrages solcher Gebtlhren, Ubersteigen. ARTIKEL IX (1) Einkflnfte aus unbeweglichem Vermngen (einschliesslich der Gewinne aus dem Verkauf oder Tausch eines solchen Vermgens und Zinsen von Hypotheken, die durch ein solches Verm6gen sichergestellt sind) sowie Vergttungen (royalties) for die Ausbeutung von Bergwerken, Olquellen oder anderen Bodenschitzen sollen in dem Vertragstaate besteuert werden, in dem dieses Verm6gen, diese Bergwerke, Olquellen oder anderen Bodenschttze gelegen sind. (2) Bezieht eine nat~rliche Person mit Wohnsitz in einem der Vertragstaaten, eine K6rperschaft oder ein anderer Rechtstriger eines der Vertragstaaten Einkflnfte im Sinne des Absatzcs 1 aus Verm6gen, das im anderen Vertragstaate gelegen ist, so kann der Empfinger ffir jedes Steuerjahr verlangen, in diesem anderen Vertragstaat auf Grund des Nettoeinkommens besteuert zu werden, wie wenn er in diesem anderen Staate durch eine dort gelegene Betriebstitte gewerblich tAtig gewesen wire.
ARTIKEL X

(1) Sine natfrliche Person mit Wohnsitz in Osterreich ist von der Steuer der Vereinigten Staaten von Vergitungen ffr Arbeit oder personliche Dienste, die in den Vereinigten Staaten geleistet werden (einschiesslich der Austibung der freien Berufe und der Titigkeit als Aufsichtsratsmitglied), ausgenommen, wenn sich diese Person in den Vereinigten Staaten vorlbergehend, zusammen nicht mehr als 183 Tage wAhrend eines Steuerjahres aufhllt und eine der beiden folgenden Bedingungen erfilt ist: a) wean die ffr solche Arbeit oder persouliche Dienste entrichtete Vergiitung auf Grund eines Dienstverhiltnisses oder eines Vertrages mit einer natirlichen Person mit Wohnsitz in Osterreich oder mit einer Osterreichischen K6rperschaft bezogen und von dieser Person oder Kdrpersclaft getragen wird, oder b) wenn die Vergfitung for solche Arbeit oder personliche Dienste 3.000 Dollar nicht 0bersteigt. (2) Abatz 1 ist auf eine natfrliche Person, mit Wohnsitz in den Vereinigten Staaten, die Vergitungen fOr in Osterreich geleistete Arbeit oder pers6nliche Dienste bezieht, entsprechend anzuwenden.

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20 ARTIKEL XI

Lolme, Gehalter und Ahnliche Vergitungen sowie Pensiouen, die die Vereinigten Stuaten odor ihre Staaten, Territorien odor Gebietskorperschaften an uatirliche Personen (ausser an Osterreichische Staatsangehorige) zahle, sind in (sterreich von der Steuer ausgenolnlnen. b) Lohne, Gehiilter und ahnliche Vergitungen sowie Pensionen, die Osterreich, die Bundeslander, Bezirke odor Genciuden odor andere 6frentlich-rechtliche Kirperschaften oder dlfentlich-rechtliche Pensionsfonds an nattirliche Personen (ausser an Staatsangeh6rige der Vereinigten Staaten und natikrliche Personen, denen die Einreise in die Vereinigten Staaten zur Griindung eines stfindigen Wohnsitzes gestattet worden ist) zablen, sind in den Vereinigten Staaten von der Steuer ausgenonimen. c) Der Begriir "IPensionen" imn Sime dieses Absatzes tunfasst auch Renten, die an im Ruhestand befindliche Angestellte des Offentlichen Dienstes gezahlt warden. (2) 'rivate Pensionen und private Leibrenten, die aus Quellen eies der Vertragsttaten an naturliche Personeu mit Wohnsitz im anderen Vertragstaat gezalilt werden, sind im ersteren Staat von der Besteuerung ausgenommen. (3) Der in diesel Artikel verwendete Begriff "Pensionen" bedeutet regelanussig wiederkehrende Vergfitungen, die im tinblick auf geleistete Dienste odor zum Ausghich erlittener Nachteile gewithrt werden. (4) De' in diesean Artikel verwenlete Begritr "Leibrenten" bedeutet bostinunte BetrAge, die regelmiissig an festen Terminen auf Lebenszeit oder w~ihrend einer bestinunten Anzahl yon Jahren auf Grund ciner Verptlichtung zahlbar sind, die diesel Zahlungen als Gegenleistung flr eine in Geld oder Geldeswert erbrachle
angeonessene Leistung vorsieht. ARTIKEL XII

(1) a)

Ein Hochschullehrer oder Lehrer mit Wohnsitz in cinema der
Vertragstaaten, der sich voriibergehend ffir hchstens zwei Jahre zu Unterrichtszwecken an einer Universitiit, einen College, einer

Schule odor anderen Lehranstalt im anderen Vertragstaate aufhlt, ist. in dem auderen Vertragstaat von der Steuer auf die Einkiinfte aus dieser Lehrtitigheit wlhreud des genanuten Zeitraumes ausgenommen.

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21

ARTIKEL XIII (1) Eine Person mit Wohnsitz in einem der Vertragstaaten, die sich ausschliesslich als Student an einer Universitlt, einem College, einer Schule oder anderen Lehranstalt in dem anderen Staat vorlibergehend aufhitlt, ist von der Steuer des anderen States auf Uborweisungen aus dem Ausland fur Studienkosten und Unterhalt ausgenommen. (2) Ein Lehrling (in Osterreieh einschliesslich der Volontite und Praktikanten) mit Wohnsitz in einem der Vertragstaaten, der sich voriibergehend in dern anderen Staat ausschliesslich zurn Erwerb geschitftlicher oder technischer Erfabrungen aufhilt, ist von der Steuer des anderen Staates auf Uberweisungen aus denim Ausland for Studienkosten und Unterhalt ausgenommen. (3) Eine Person mit Wohnsitz in einemn der Vertragstaaten, die einen Zuschuss, Unterhaltsbeitrag oder einen Preis von einer religi6sen, mildtittigen, wissenschaftlichen, literarischen oder pitdagogischen, nicht auf Gowinnerzielung gerichteten Organisation erhftlt, ist von der Steuer des anderen Staates auf derartig6 Zahlungen solcher Organisationen (ausser Vergiltungen for pers6nliche Dienstleistungen) ausgenonmnen. (4) Eine Person mit Wohnsitz in einem der Vertragstaamen, die ein Angesteilter eines Unternehmens diesel Stuates oder einer der in Absatz 3 genannten Organisationen ist und die sich vorfibergehend for cinen Zeitraum von nicht nichr als einem Jahr in den anderen Staat aussehliesslich zu dem Zweck aufhilt, technische, berufliche oder geschuiftliche Erfabrungen von einer anderen Person als diesel Unternehmen oder dieser Organisation zu erwerben, ist in dem anderen Staat von der Steuer anf Vergatungen aus den Ausland, die von diesen Unternehmen oder dieser Organisation gezahlt werden, ausgenommen, wenn ibre jAhrliche Vergiltung for Dienstleistungen ohne Rtlcksicht darauf, wo sie geleistet warden, 10.000 Dollar nicht fUbersteigt.
ARTIKEL XIV

(1) Dividendon und Zinsen, die von einer 6sterreichischen K6rperschaft (ausser wenn sie gleichzeitig eine amerikanische Krperschaft ist) gezahlt werden, sind von der Steuer der Vereinigten Staaten ausgenonunen, wenn der Empfainger ein Auslinder ohne Wohnsitz in den Vereinigten Staaten oder cine ausliindische K~rperschaft ist. (2) Dividenden und Zinsen, die von einer amerikanischen Kdrperschaft gezahlt werden, sind in Osterreich von der Steuer ausgenommen, wenn der Empflinger in Osterreich keinen Wohnsitz hat oder keine 6sterreichische Kdrperschaft ist.

73095 o--2-vol. 1--1o

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22
ARTIKEL XV

(1) Die Vereinigten Staaten dOrfen bei der Festsetzung ihr'er im Artikel I dieses Abkommens bezeichneten Steuern, soweit ihre Staatsangehorigen, natarlichen Personen mit Wohnsitz in den Vereinigten Staaten oder KOrperschaften in den Vereinigten Staaten in Frage stehen, ungeachtet anderer Vorschriften dieses Abkommens alle Einkommensteile, die nach den Steuergesetzen der Vereinigten Staaten steuerpflichtig sind, so in die Bemessungs. grundlage dieser Steuern cinbeziehen, als ob das Abkommen nicht in Kraft getreten witre. Die Vereinigten Staaten werden indessen gembs den Bestinunungen der Abschnitte 901 - 905 des Internal Revenue Code 1964 in der am Tage des Inkrafttretens dieses Abkomnens massgebenden Fassung von ihren Steuern den Betrag der in Artikel I dieses Abkommens bezeichneten 6sterreichischen Steuern in Abzug bringen. (2) Osterreich darf bei der Festsetzung seiner im Artikel I dieses Abkommens bezeichneten Steuern, soweit natihrliche Personen mit Wohnsitz in Osterreich oder 6sterreichische K6rperschaften in Frage stehen, ungeachtet anderer Vorschriften dieses Abkommens alte Einkommensteile, die nach den 6sterreichischcn Steuergesetzen steuerpfliclitig sind, so in die Bemessungsgrundlage dieser Steuern einbezichen, als ob das Abkommen nicht in Kraft getreten wire. Osterreich wird jedoch bei natfirlichen Personen mit Wohnsitz in Osterreich oder bei 6sterreichisclien Krperschaften, die in Osterreich der Steuer unterliegen, von seiner Steuer den Betrag der in Artikel I dieses Abkommens angefifhrten Steuern der Vereinigten Staaten in Abzug bringen, soweit sic auf Einkommensteile entfallen, die aus Quellen in den Vereinigten Staaten stammen; der in Abzug gebradite Betrag wird jedoch in keinem Fall die 6sterreichische Steuer Ubersteigen, die auf Einkanfte aus Quellen in den Vereinigten Staaten entflillt. (3) Die Bestimniungen dieses Artikels dtirfen nicht so ausgelegt werden, dass, je nachider Lage des Falles, die nach Artikel XI Abs. 1, XII older XIII dieses Abkommens gewilrleisteten Ausnahmen von den Steuern der Vereinigten Staaten oder Osterreichs versagt werden, noch dass einer der Vertragstaaten gehindert wird, seine eigenen Staatsangehrigen hinsichtlich der unter die Artikel XII oder XIII fallenden Einkfinfte zu besteuern.
ARTIKEL XVI

(1) Die zustitndigen Bel6den der Vertragstaaten werden unter sich die Auskinfte austauschen, die nach den Steuergesetzen der beiden Vertragstaaten gefordert werden konnen, und die notwen(284)

23 * dig sind ftr die Durchffthrung der Bestimmungen dieses Abkommens oder ffir die Verhiltuig von Hinterziehungen und dgl. bei Steuern, die unter dieses Abkommen fallen. Jede auf diese Weise ausge ,uschte Auskunft ist geheim zu halten, und nur jenon Personen zugAngich zu machen, die mit der Veranlagung odor der Einhebung der unter dieses Abkommen fallenden Steuern befasst sind. Auskfinfte, die irgond ein Handels-, Geschlifts., Gowerbe- oder Berufsgehoimnis odor ein Geschliftsverfahren offenbaren warden, dfirfen nicht ausgetauscht werden. (2) Die Bestimmungen dieses Artikels dfirfen keinesfalls dahin ausgelegt werden, dass sie einem der Vertragstaaten die Verpflichtung auferlegen, Verwaltungsmassnahmen durchzuffihren, die von den Vorschriften und von der Verwaltungspraxis des einen oder des anderen Vertragstaates abweichen, oder die seiner SouverinitAt, Sicherheit oder der 6ffentlichen Ordnung widersprechen, odor Angaben zu vermitteln, die nicht auf Grund seinor eigenen oder auf Grund der Gesetzgebung des ersuchenden Staates beschafft werden konnen. ARTIKEL XVII (1) Weist ein Steuerpflichtiger nach, dam die Massuahmen der Steuerbeharden dor Vertragstaaten die Wirkung einer den Bestimmungen diesel Abkommens widersprechenden Doppelbesteuerung haben odor haben werden, so kann er seinen Fall dom State, dem or angehort oder in dem er seinen Wohnsitz hat, oder, sofern es sich um eine K6rperschaft oder einen anderen RechtstrAger eines der Vertragstaaten handelt, diosem Staat unterbreiten. Erscheinen die Einwendungen des Steuerpflichtigen als beachtenswert, so wird die zustlindige Beh6rde des angerufenen States bestrebt sein, sich mit dor zustlindigen Behordo des anderen States fiber eine Vermeidung dieser Doppelbesteucrung zu verstAndigen. (2) Sollten sich bei der Auslegung oder Anwendung dieses Abkommens oder bezilglich der Beziehungen des Abkommens zu

Abkommen der Vertragstaaten mit dritten Staaten Schwierigkeiten oder Zweifel ergeben, so konneu sich die zustindigen Bohorden der Vertragstaaten hiertiber gegenseitig verstAndigen.
ARTIKEL XVIII

(1) Die Bestimmungen dieses Abkommens sollen nicht so ausgelegt warden, dass sie das Recht der diplomatischen und konsularischen Beamten auf andere oder zusiitzliche Befroiungen, die ihnen derzeit zustehen odor ihnen kfinftig eingerliumt werden kdnnten, in irgendeiner Weise versagen oder berhren.

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.24 (2) Die Bestimmungen dieses Abkommens sollen nicht so ausgelegt werdon, dass sie in irgendeiner Weise Befreiungen, Abzige, Steucranrechnungen oder andere Begtinstigungen einschriinken, die derzeit oder kilnftig durch die Gesetze eines der Vertragstaaten bei der Steuerfestsetzung eingeritumt werden. ,3) Die Staatsangeh6rigen eines der Vertragstaaten, die im anderen Staate einen Wohnsitz haben, diirfen dort nicht anderen oder drickenderen Steuern unterworfen werden als die Staatsangeh6rigen dieses anderen Staates, die dort ihren Wohnsitz haben. Der Ausdruck "Staatsangeh6rige eines der Vertragstaaten" im Sinne dieses Artikels umfasst auch aile nach dem in dem einen oder anderen Vertragstaat in Kraft stehenden Recht erricliteten oder organisierten juristisechen Personen, Personengesellschaften (partnerships) und Vereinigungen. Der Begriff "Steuern" be. deutet in diesem Artikel Abgaben jeder Art oder Bezeichnung, ohne Rflcksicht darauf, ob sie Abgaben des Bundes, der Gliedstaaten, der BundeslItnder, Bezirke oder Gemeinden sifd.
ARTIKEL XIX

(1) Die zusttndigen Beh6rden der beiden Vertragstaaten k6nnen Ausfiihrungsbestimmungen erlassen, die fOr die Durchfihrung dieses Abkommens in ihrem Staat erforderlich sind. (2) Zum Zweeke der Durchfihrung dieses Abkommens k6nnen die zusttndigen Behdrden der beiden Vertragstaaten unmittelbar miteinander in Verbindung treten.
ARTIKEL XX

(1) Dieses Abkommen soil ratifiziert und die Ratifikationsurkunden sollen sobald als m6glich in Wien ausgetauscht werden. Das Abkommen soil vom 1. Jiinner des Kalenderjahres an wirksam warden, in dem der Austausch der Ratifikationsurkunden stattfindet. (2) Dieses Abkommen sol ffir unbestimmte Zeit in Kraft b!eiben, kann jedoch von jedem der Vertragstaaten mit sechsmonatiger Kiindigungsfrist auf diplomatischem Wege gekdindigt warden. In dieseni Fall tritt das Abkommen fur jene Steuerjahre ausser Kraft, die an dem oder nach dem 1. JAnner des Kalenderjahres beginnen, das auf den Ablauf der sechsmonatigen Kilndigungsfrist folgt.

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25 -DONE at Washington in du. plicate, in the English and German languages, each text having equal authenticity, this 25th day of October, 1956.
GQGEBEN ZU Washington in

doppelter Ausfertigung, in eng. lischer und deutscher Sprache, wobei beide Texte in gleicher Weise authentisch sind, am 25. Oktober 1956.

FOR THE UNITED STATES OF AMERICA:

FOR DIE VEREINIOTEN STAATEN VON AMERIKA: JOHN FosTER DULLES [sEAL]
FOR THE REPUBLIC OF AUSTRIA:

FUR DIE REPUBLIK OSTERREICH:

(SEAL]

GRu3ER

(28'T)

26 WeiEREAs the Senate of the United States of America by their resolution of August 8, 1957, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid convention; WHEREAS the aforesaid convention was duly ratified by the Prpident of the United States of America on August 30, 1957, in pursuance of the aforesaid advice and consent of the Senate, and was duly ratified on the part of the Republic of Austria; WHEREAS the respective instruments of ratification of the aforesaid convention were duly exchanged at Vienna on October 10, 1957;
AND WHEREAS it is provided in Article XX of the aforesaid

convention that the convention shall have effect on and after the first day of January of the calendar year in which the exchange of instruments of ratification takes place; 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 twenty-third day of October in the year of our Lord one thousand nine hun[SEAL,] dred fifty-seven and of the Independence of the United
States of America the one hundred eighty-second.

DWIGHT D EISENHOWER By the President:
JoHN FOSTER DULLES

Secretary of State

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SECTION 4 Convention With BELGIUM

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IN('Om

TAX CONVENTION BETWEEN TIlE UNITED STATES AND BEorr,0

Signed at Washington. Received by 8,Pna{,e; designlit ted l-Nevxt, ive I, 81st Coll. gress, Is( Session; injunction of seereevy removed (95 Congressional Record 2555-2556). August 7, l952.. )ate of Belgian note to United States conoerning di. verge'nc'. between the Frenc'h an1d Englisl texts of basic Collveit. Sel)teml)er 8, 1952 . Date of United States note in reply to ltelgian note of August 7, 1952. Supplementary Convent ionl: Selpteml)er 1),1952 . Signed at Washingonl. l 'eceived hy Senamte: designated lxecut{ive A, 9:h1 ('oimJanuary 9, I1)53,.. gress, Ist Sessio1n; iijinetion of secrecy relml eid (99 Congressional Record 276-277). )it Basic Convent iot anld SipkIlem)enl ary Convent ion: Senate Committee Ilearings. ,une 29, it)53- . ------ reported by Senate Foreign Rtelations committeeee (lIx. July 2, 195:3 Rept. No. 2, 83d Cong., Ist Sess.). Iatifieation l)y Senate of its advice and conset (9) .July 9, 1915: Icongressional l Record 8299-8305). Ratified by ITnited States President. ,hulv 2:3, 191 3Ratified by Belgium. .July, 27, 19)53-.... Septenler I 1953 1, Instruments of ratification exchanged convention ,,ntered into fore, effective fJan. 1, 1)53. September 2:1, 195:1 Proelaimed ,v United States President. Official text -.... TIAS 2833; 4 UST 1647 (basic convention), .1 UST 1672 (suppltenentary convention), 4 UST 1680 (notes). Notes and Sulppi hementary Convention relating to Territorial Extension: J)ate of Belgian 1Ote to United Statts. April 2, 195 .1___. Supplementary convention signed a{t Washington. August 22, 1957 January 30, 1158_ Received by Senate; designated Ixecut ive II, 85th ('ongress, 2d Session; injunction of secrecy removed (104 Congressional Record 1335). July 1, 1958 ...... Senate Committee I earings. July 7, 1958 ReportedIby Senate Foreign Relations Committee (lx. Welt. No. 1, 85th Cong., 2d Serem.). Jiuly 9, 1958 Ratification Iby Senate of its advice and consent (104 -.---.Congressional Record 13238, 13242-13244). July 23, 115 8 ------ Ratified by United States President. ,Aul 8, 1959 Ratified ------by Belgium. Instruments of ratification exchanged; convention enJuly I0, 195 9 ---tered into force effective January 1, 1951). .July 28, 115 9... )ate of United States note in reply to Belgian note of April 2, 1954. TIAS 4280; 10 UST 1:358 (supplementary convention) Official text- ...... 10 UST 1364 (notes).
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Basic Convent ion: October 28, 1948.. March 16, 11949-..

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CONTENTS OF SECTION 4
Signed October 9, 1952: Basic Convention and Supplementary Convention
I. Presidential Message of Iransmittal to Senate of Basic Convention. 2. Presidential Message of Transmittal to Senate of Supplementary Convention --------------------------------------------3. Senate Committee Hearings on Basic and Supplementary Conventions -----------------------------------------------.. Senate Committee Report on Basic and Supplementary Conventions --------------------------------------------------5. senate Floor )ebate and Action on Basic and Supplementary 6. Presidential Proclamation (including Ollicial Text of Basic and Supplementiary ('ontIen tions 1111(E'xchange of Notes dated August 7, 1952, and September 8, 1952) -------------------Supplementary Convention Signed August 22, 1957 and Belgian Note date(l April'2, 195-1: I. Presidential Message of Transmittal to Senate ----------------2. Senate Committee Hearings --------------------------------3. Senate Committee Report ----------------------------------4. Senate Floor l)ebatc and Action ---------------------------5. Presidential Proclamation (including )flicial Text. of Supplementary Convention and Notes) -----------------------------------Conventions ----------------------------------------------

Page

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I

BASIC CONVENTION AND SUPPLEMENTARY CONVENTION SIGNED OCTOBER 9, 1952

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PresidentialMessage of Transmittal to Senate of Basic Convention (including materials enclosed therewith)

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819T CON RE s ist Session j

SENATE

EXECUTIVE

I

TAXATION CONVENTION WITH BELGIUM

MESSAGE
FROM

THE PRESIDENT OF THE UNITED STATES
TRANSMITINO

THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA
AND BELGIUM FOR THE AVOIDANCE OF DOUBLE TAXATION AND TIIE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON OCTOBER 28, 1948

MARCH 16, 1949.-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

States: To the Senate of the United 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 Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on October 28, 1948. 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 Belgium relating to taxes on income, pgned October 28, 1948.)

THE WHITE HOUSE, March 12, 1949.

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2

TAXATION CONVENTION WITH BELGIUM DEPARTMENT OF STATE,

Canada, Denmark, France, the Netherlands, Sweden, and the United Kingdom and of such conventions which have been negotiated with New Zealand and the Union of South Africa and are now under con. sideration in the Senate. Those objectives include the elimination as far as practicable of double taxation with respect to income and the establishment of a system of reciprocal administrative assistance between the tax authorities of the two countries. Among the more important of the substantive provisions of the convention are the following, in summary: (1) Adoption of principles for determining and taxing business income derived by enterprises of one country from sources within the other country. (2) Reciprocal exemption from taxation, upon certain conditions, of various items of business income, including profits from the operation of ships and aircraft derived from sources within one country by residents or corporations of the other country. (3) Reservation by each country of the right to tax its own citizens, residents, or corporations without regard to the provisions of the convention. (4) Reciprocal exemption of industrial royalties and like income, and reciprocal taxation, on the basis of net income, of real property rentals and natural resource royalties. (5) Reduction to 5 percent of the United States tax on dividends paid by a subsidiary corporation in the United States to its parent corporation in Belgium. (6) Reciprocal credit provisions, whereby the credit under section 131 of the Internal Revenue Code is allowed by the United States with respect to tax paid to Belgium, and whereby the rates of Belgian i'icome tax and national crisis tax applicable to income from sources within the United States are reduced. (7) Exemptions, comparable to those accorded in existing incometax conventions of the United States, with respect to Government wages, salaries, and pensions, private pensions and life annuities, compensation for labor or personal services, and remuneration or payments received by teachers and students. (8) Provisions assuring taxpayers a right of appeal when they can show that double taxation has resulted or will result in respect of any of the taxes to which the convention relates and safeguarding taxpayers against any construction of the convention that would

Wa8hington, March 9,1949. The PRESIDENT, The White oue: Tile 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 Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on October 28, 1948. The objectives of the convention, and for the most part the terms thereof, are comparable to the objectives and terms of bilateral income-tax conventions now in force between the United States and

r t o r c ce t a

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TAXATION CONVENTION WITH BELGIUM

3

by the laws of the respective countries. (9) Provisions for reciprocal exchange of information, subject to certain limitations similar to those provided for in certain other tax conventions of the United States, and for assistance in collection in certain cases, subject to the proviso to insure that an exemption or reduced rate of tax granted by the convention shall not be enjoyed by persons not entitled to such benefits. The following specific comments regarding some of the more important provisions of the convention may be useful: Article I, as is usual in the opening article of such conventions, describes the taxes which are the subject of the convention. In the case of the United States, those taxes are only the Federal income taxes. The convention does not apply to taxes imposed by the several States of the United States. In the case of Belgium, the taxes to which the convention relates are described as the income taxes, the national crisis tax, and the personal complementary tax, including all additions to these taxes. Comprised within the term "income taxes," so far as the Belgian tax system is concerned, are three schedular income taxes, including income from land and building, income from investments, loans, and deposits, and the so-called "taxe professionnelle" (industrial and business profits, professional fees, salaries pensions, et cetera). The national crisis tax is a special tax, imposed by Belgium on the income which is subject to the three schedular taxes, at progressive rates. The personal complementary tax ("imp6t compl6mentaire personnel") is a super-tax imposed with respect to certain types of income. Article I contains the usual provision that the convention shall apply to other taxes of a substantially similar character imposed by either country after the date of signature of the convention. The subject of business income as affecting an enterprise of one country having a permanent establishment in the other country is dealt with in articles III, IV, and V. Conditions affecting the relationship between enterprises particularly the intercorporate relationship, are prescribed. Article V provides that income derived from real property (not including income from mortgages or bonds secured by real property), whatever may be the nature of the income, shall be taxable only in the countrytwowhich such property isfor the purposes the understanding of the in Governments that, situated. It is of this article, income from real property includes gains from the sale of real property. Article V, as is the case with other provisions of the convention, must be applied together with article XII under which each country is left free to tax its own citizens, residents, and corporations. Article VII provides for the reciprocal exemption of earnings derived from the operation of ships and aircraft y enterprises of the two countries; that is to say, earnings derived by enterprises of one of the countries from the operation of ships or aircraft documented or registered in that country shall be exempt from tax in the other country on a reciprocal basis. So far as the United States is concorned, this provision gives effect to sections 212 (b) and 231 (d) of the Internal I? venue Code. Article VII does not apply to profits arising from d uidends but only to business income.
73095 0-62-vol. 1(17

restrict any exemption, deduction, credit, or other allowance accorded

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4

TAXATION CONVENTION WITH BELGIUM

United states tax oil dividends paid by a United States domestic

With reference to the provisions of article VIII, unler which tile

tax of approximately 42 percent on dividends paid by corporations nianaged and controlled in Belgium. The United States imposes a tax on the earnings of the domestic subsidiary corporation of some 38 percent in the aggregate, so that the imposition of a tax of 5 per. cent, under the provisions of article VIII, approximates in effect the Belgian tax. In the event that Belgian law is altered, so as to impose a tax on the earnings of corporations as such, it is contemplated that a protocol or other instrument supplementing the convention will be concluded in order tc adjust the provisionsthe the convention. a partial while, article VIII has been included in of convention as Mean. balance to concessions given by Belgium in regard to reciprocal
exemption of royalties and in regard to the applicability of the con. vention to all permanent income taxes, including the personal complementary tax (super-tax). It will be noted that paragraph (2) of

to 5 .percent, it. should be pointed out, that there is no corresponding provision for reduction in Belgian tax because Belgium does not impose a-tax on corporate earnings as such, although it imposes a

subsidiary corporation to its Belgian parent corporation is reduced

article VIII provides that the United States may terminate article VIII by simple notice to Belgium. Paragraph (1) of article IX deals with industrial royalties, while paragraph (2) deals with the movable capital items of copyright and similar royalties. Under paragraph (1), natural-resource royalties and rentals from real property are to be taxable only in the country where the property is situated and it is provided that nonresident aliens who are residents of Belgium may elect to be subject to United States tax in respect of such royalties or rentals upon the basis of net income from sources within the United States. It was found that under

existig Belgium law such classes of income are not taxable on a grow

but on a net basis, 15 to 20 percent being considered as income and the

where no specific exemption from tax is accorded by either country. Provisions relating to reciprocal administrative cooperation, through the exchange of information and assistance in ollectiOn, are contgi .-d
in articles XV to XXI, inclusive.

marks, and analogous rights, "royalties" being defined for this purpose to include rentals in respect of motion-picture films. The reciprocal exemption from taxation, upon certain conditions, of compensation for labor or personal services performed by a resident of one country while temporarily within the other country is covered by article XI. Article XII, in addition to reserving (with one exception) the right of each country to continue to tax its own citizens, residents, and corporations as though the convention had not come into effect, contaW. the reciprocal credit provisions. The exception to the reservation refers to paragraph (1) of article X, relating to Government wagts, salaries, pensions, and annuities. By virtue of the provisions for the allowance of credits by one of the countries with respect to tax paid the other country, double taxation may be eliminated in those caw

balance as cost. No specific tax reduction by either country is provided. Under paragrph (2) the principle of exemption at source and taxation at residence is adopted with respect to royalties for the right to use copyrights, patents, secret processes and formldas, trade-

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TAXATION CONVENTION WITH BELGIUM

5

article XXI[ of the income-tax convention of April 29, 1948, with

to which application for assistance is made, except to the extent nveesiary to insure that theexompio'6or reduced rate of tax granted by the convention shall not be enjoyed by persons not entitled to such benelits. Article XVIII provides that neither country is obliged to carry out administrative measures at variance with the regulations and practices of either country, or to supply information not procurable ! upder its own law or that of the other country, and also that either country may refuse to comply with a request for assistance for reasons of public policy or if compliance would involve violation of a business, industrial, or trade secret. These provisions are similar to those in article XXIII of the abovo-mentioned convention of 1948 with the Netherlands. Article XX provides (1) that exemptions, deductions, credits, or other Allowances accorded by the laws of the country shall not be restricted by the convention; (2)that the competent authorities of the two countries shall undertake to settle by mutual agreement any question ts to the interpretation or application of the convention; and (3) national treatment for the citizens and the corporations or other juridical persons of one of the countries within the other country inrespect of taxes to which the convention applies. Article XXII establishes a basis for the extension of the provisions of the convention to overseas territory in which taxes substantially similar in character to those which are the subject of the convention ar imposed. It is made possible, on specifld conditions, for the provisions to be so extauded without the necessity for a separate convention. The procedure by which the extension may be made effective in any particular case is set forth, involving the giving of a written notification. The extension by either country cannot become
effective in any case until expressly accepted by the other country, although it is expected that as a matter of practice the notification is not likely to be given until it is known that the extension isacceptable. The extension, if made effective, may apply either to the convention inits entirety or as to such provisions thereof as may be deemed to have special application. Provision is made for the separate termination of the convention, or of such part or parts thereof as may have been made applicable under article XXII, as to any overseas territory. These provisions are comparable to those in article XXII of the Mcome-tax convention of April 15, 1945, with the United Kingdom (S.Exec. D, 79th Cong. lst ses.) and article XXVII of the convention of 1948 with the Netherlands. Article XXIII provides for ratification and for the exchange of imtruments of ratification and prescribes the effective date of the c ion, namely, January I of the year in which the exchange lkes pace It in provided that the convention shall remains in force bt a minimum peiod of 5 years, but may be terminated at the end

respect to the citizens, corporations, or other entities of the country

The provisions which entered are force on December 1, 1948 the Netherlands, of article XVII into identical to the provisions in (s. Exe. 1, 80th Cong., 2d sess.). A basis for mutual assistance in the collection of taxes and the enforcement of revenue claims is laid, subject to certain conditions. The final paragraph provides'specificalIy that assistance shall not be accorded under this article with

I

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6

TAXATION CONVENTION WIT1|

'

",MIUM

of that period or thereafter b'. a 6-mouth writ I , notice by one of t ie (GoN erimnits to t ie other (]overonnwt , the t ur TiII ioii to become month Period. uar1 111*,h I following the expirat ion)of II effet(t ive The Department of State anld the Treasury Ikjl,, !!:nL eollabo. rated in the negotiation of the convention. Respectfully submitted. l)E.\N .',. "ls) (Enclosure: Convention between the United Slates and 1',,Igiun relating to taxes ol income, signed October 28, 1948.)

[Text of Convention]

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Presidential Message of Transmittal to Senate of Supplementory Convention (including materials enclosed therewith)

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83r CoNGRESS

SENATE

1t Session

{

AEUTIVL

SUPPLEMENTARY TAX CONVENTION WITH BELGIUM

MESSAGE
FROM

THE PRESIDENT OF THE UNITED STATES
TRANSMITTINO

THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND BELGIUM, SIGNED AT WASHINGTON ON SEPTEMBER 9,
1952, MODIFYING AND SUPPLEMENTING THE CONVENTION OF

OCTOBER 28, 1948, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

JANUARY 9,

1953.-The convention was read the first time rnd 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 THE WHITE HOUSE, January9, 1953.

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 Belgium, signed at Washington on September 9, 1952, modifying and supplementing the convention of October 28, 1948, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The convention of 1948 was transmitted to the Senate with my message of March 12, 1949. It is presently under consideration in the Committee on Foreign Relations (S. Ex. I, 81st Cong., 1st ses.). It is requested that the supplementary convention be considered

together with the convention of 1948.

I also transmit for the formation of the Senate the report by the Secretary of State with respect to the supplementary convention.

2

SUPPLEMENTARY TAX CONVENTION WITII BELGIUM

The suppleinentary convention has the approval of the Department of :tate and the Department of the Ircastrv. II.AUBr S. TIIU'MAN. (Enclosures: (I) Report of the Secretary of State; (2) supplenilelltary convention between the United State's and Belgium relating to taxes onl iteotie, signed September 9, 1952.)

DEAIITMENT OF STATE,

'rho

PRESIDENingto,

January6, 1953.

The W1hite House:
Tile 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's judgment approve thereof, a convention between the United States of America and Belgium, signed at Washington on September 9, 1952, modifying and supplementing the convention of October 28, 1948, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The convention of 1948 was transititted to the Senate with 'ie President's message of March 12, 1949, and is presently under consideration in tile Committee on Foreign Relations (S. Ex. 1, 81st Cong., 1st sess.). Beginning early in 1951 there were, from time to time, further technical discussions and coiniinications between the respective tax authorities of the two countries and action on the 'onvention of 1948 was deferred until certain modifications therein could be effected by a supplementary convention to be considered along with it. The supplementary convention subinitted herewith has been formulated to give effect to modifications agreed unon as being desirable. The modifications made by the supplementary convention in the convention of 1948 are, in summary, as follows: $(a) The addition in article I of a provision for allowance, as leductions, of all expenses reasonable" allocable to the permanent establishment in tile determuination of net industrial and commercial profits allocable to such establishment; (b) the substitution of an an(icde article VIII relating to the taxation of dividends; (r) the insertion of a new article VIlla relating to the reciprocal reduction of tax with respect to interest oil bonds, notes, debentures, or other form of indebtedness; (d) the amendment of article XII (3) (a) so as to reduce from oli,-fourth (as provided in the 1948 convention) to one-fifth the Belgian professional tax and Belgian national crisis tax affecting taxable income from sources within and taxed by the United States; (e) the substitution of an amnthd article XVII so as to bring the provisions regarding assistance in collection of taxes into harniony with the policy expressed by the Senate during the 1951 session'of the CongYress in its consideration of then-pending tax conventions; (f) the changing of the place for exchange of instruments of ratification from Washington to Brussels; and (g) the modification of the provisions of article XXIII (2) regarding the date of entry into force. All of the modifications mentionepd above are set forth in Article I of the supplementary convention in lettered subparagraphs cor-

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SUPPLEMENTARY TAX CONVENTION WITH BELOIUM

3

I

sidering then: Article I, subparagraph (a), would have the effect of inserting a new paragraph (4) in article XV of the convention of 1948. That new paragraph would contain provisions corresponding, for example, to article III (5) of the existing income-tax convention with New Zealand and article I (a) of the existing income-tax convention with Canada, under which a reasonable part of head-oflice expense of an
enterprise would be deductible by a foreign branch. Such provisions are designed to encourage, in practical operation, the application by Belgium of principles similar to those recognized by the United States. Article 1, subparagraph (1), would replace the existing article VIII in the convention of 1048 by an article VIII more consistent with the j)riiciples and pur poses of corresponding provisions In existing conventionis between the United States and a number of other countries. In the report of March 9, 1949, by which the Secretary of State submitted the convention of 1948 to the President with a view to its transmision to the Senate it was stated, in regard to the article VIII as .onllained itn that convention, that provision was male for the reduction to 5 percent of the rate of United States tax on dividends paid by a [nited States domestic subsidiary corporation to its Belgian parent corporation, but thiat. there was no corresponding provision for reduction in Belgian tax. It, was pointed out further that a supplefientary protocol or other instrument might later be conclude I between the two countries in order to adjust those provisions of the convention. rhe explanations given in that report with respect to the tlien-existing Belgian law did not convey a full and accurate under. standing of that law in regard to the taxation of corporate earnings. That, however, now becomes a purely academic matter, because tle supplementary convention submitted herewith eliminates the provisions which were the subject of those explanations and substitutes therefor more comprehensive provisions of the kind contemplated for the purpose of adjusting the provisions-regarding taxation of dividendls. Article VIII as amended by article I (b) of the supplemeutary convention contains in paragraph (1) a provision that the rate of United States tax on dividends derived from sources within the United States by a resident or corporation or other entity of Belgium not having a permanent establishment within the United States shall not exceed 15 percent. Such a reduction is provided for, as mentioned hereinbefore, in income-tax conventions now in force with certain other countries. Paragraph (2) of the amended article VIII relates

The following additional statements with respect to the substantive provisions of the supplementary convention may be helpful in conresponding to the lettered clauses in the last preceding paragraph.

to Belgian taxes; in practical effect it constitutes a reasonable balance in comparison with the reduction allowed in respect of United States tax. It is provided that Belgium shall not impose on dividends derived from sources within Belgium by a resident or corporation or other entity of the United States not having a permanent establishment within Belgium (a) any tax in the nature of a personal complemnentary tax or surtax thereon, or (b)any tax similar to that withheld at the source on dividends under United'States law in the case of nonresident aliens or foreign corporations. The unilateral aspect of article VIII as it appears in the convention of 1948 is eliminated. As

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4

SUPPLEMENTARY TAX CONVENTION WITH BELGIUM

amended by the supplementary convention article VIII would accord desirable exemptions from Belgian taxes in consideration for the reduction accorded with respect to United States tax. It may be mentioned also that Belgium has agreed, in further consideration for such reduction in United States tax, to the addition, as mentioned hereinbefore, of the new paragrph (4) in article IV and also to the amendment of the credit provisions in article XII (3) (a) so that the Belgian professional tax and the Belgian national crisis tax on income from sources within the United States are further reduced from one. fourth to one-fifth. That amendment is effected by article I (d) of the supplementary convention. The new article VIIIA which would be inserted as a result of article I (c) of the supplementary convention would reduce to 15 percent, on a reciprocal basis, the rate of tax on certain interest derived from sources within one of the countries by a resident or corporation or other entity of the other country not having a permanent establish. ment in the taxing country. These provisions would apply to interest on bonds, notes, debentures, or any other form of indebtedness. The change effected by article I (e) of the supplementary convention in the provisions of article XVII, relating to assistance in collection, is designed to bring those provisions into precise harmony with the policy as expressed by the Senate on September 17, 1951, in certain understandings set forth in resolutions of advice and consent with respect to a number of income-tax conventions then under consider. tion. The amended article XVII provides that each party shall, with respect to taxes which are the subject of the convention, collect taxes imposed by the other party, but only to the extent necessary to ensure that the exemption, or reduced rate of tax, as the case may be, granted under the convention by such other party shall not be enjoyed by persons not entitled to such benefits. Article I (f) merely changes the name of the place where instruments of ratification shall be exchanged from Wa.iington to Brussels. It is the usual, though not invariable practice, to have the signature of a convention take place in the capital city of one of the countries and to have the exchange of instruments of ratification take place in the capital city of the other country. Article I (g) amends article XXIII of the convention of 1948 in regard to the date of effectiveness of the provisions. Pursuant to the amended provisions of article XXIII, the convention of 1948 as amended by the supplementary convention will become effective with respect to income derived in taxable years beginning on or after January 1 of the calendar year in which the exchange of instruments of ratification takes place, subject to the exception that if such exchange takes place after September 30 of such year, articles VIII, VIIIA, and IX (2) shall become effective only with respect to payments made after December 31 of such calendar year. It is provided also that the convention shall remain effective for a minimum period of 5 years, but may be terminated at the end of thatperiod or thereafter by a 6-month notice of termination by one of the Governments to the other Government, the termination to become effective on January 1 following the expiration of the 6-month period. Article II of the supplementary convention provides for ratification and the exchange of instruments of ratification, and provides also that the supplementary convention shall be regarded as an.integral part of

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SUPPLEMENTARY TAX CONVENTION WITH BELGIUM

5

the convention of 1948, subject to the same provisions respecting orated in the negotiation of the supplementary convention. Respectfully submitted.

effectiveness and duration. The Department of State and the Treasury Department collabDEAN ACHESON.

(Enclosure: Supplementary convention between the United States and Belgium relating to taxes on income, signed September 9, 1952.)

[Text of convention]

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Senate Committee Hearings on Basic and Supplementary Conventions
June 29, 1953 83d Congress, 1st Session Subcommittee of the Senate Committee on Foreign Relations
[NOTE: This document is printed in Volume I beginning at page 1131

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Senate Committee Report on Basic and Supplementary Conventions
July 2, 1953 Executive Report No. 2 83d Congress, 1st Session Senate Foreign Relations Committee
(NOTE:

This document is printed in Volume 1 beginning at page 771

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S

ewlt I)cbate (hd .Iclion on Basic and ;Suppecnntary FbI)r Conventi ,s
July 9, 1953 83(1 ('ongress, 1st Ssimi 99 Congrmiona Record 8299-9 302, 8305

4',

0--.462- t, ,, I

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.)2a)

1I'. S-4:)")]

DOUBLE TAXATION CONVENTIONS

lader, snd also to the Senator from Iowi [Jr. GmLlFrrtj. The
ill the tix conventions en bloc, or whether it is desired to consider then sellrately. Since he addressed the inquiry to me, I should say that I have no objection, because the Senitor 'has said that sill the conventions are talon the same general line, and can be covered by the exphlition he desires to make. However, I thought I should Iitiake this statement, because I understood the minority leader to say that the Senator front Iowa had oie objection. Mr. (IIILE'rT By tile tax conventions, does the Senitor refer r. to tile (olihble taxatillonolitOntiois.? Mr. SMITl of New Jersev. I think the point the Senator from howio desired to raise -is witi regliri to tie (iarnil debt settlement o(lVetIt ion. Mr. GILLETTE. I have no objection to the double taxation
cove'llt 0ions.

The ILegislative ('lerk proveetl4d to read the, convention, Executive 1, 81st ('Oigri, s, Ist ,stiOl, itilonv'ltiol betwe'l' the U'nited States of America and Beligium for th(, avoidance of double taxaition and the prevelntioll of fiscal (el'sioli with respect to taxes on incOi, signed at Washington on October 28, 1948. Mr. SMIITI of New Jersev. Mr. President, there ire five double taxitjolt convention oi th' Ix'('itive Calendar. Winless there is objection --and I will ask the acting majority leader if there is o01ie tion I should like to have them taken [P. 83(~l up together. Thel ('osinnit tee on Foreign Relations has held hearings on all the conventioliis together, siin is pre pired to ask for their ratification en bloc, s unless it is preferred to take them tip separately. Mr. KNOWIJAND. I refer the Senator's inquirv to the minority

Slnitor from New Jersey [Mr. SUITH 1,who is handling the tax conVeittiolns, his made inquiry whether there is objection to considering

Mr. KNOWLANI). I think it will be perfectly agreeile to consider
the 'onventions in tile manner -;uggested.

Mr. Mr. Itleldl of live

SM'ITH of New ,Jersev. I thank ti, majority leader. President. tile ('onin'iittee on Foreign Relations has recointhiit tile Senate give its advice and consent to tlhe ratification (onventionS bet ween thel Inited State4s Oil t lite hiandl find(

Belgium and Auistralia oiln ile other. Ti(t4es convention liare for the liirpom4' of avoiding double taxation on incomes, on the estites of

(lecdli,

I Iimay

and on gifts. siy that we have considered a number of convtitions of

Mr. Siln, chief of staff of the Joint ( 'Cniiiiit on Internal Revenue tee Talton.t, alils ben hdlingsllig tll these on'ention for us. The sart, lill of ai ieltrn, wilh)light vsarialiltis due to conditions in lhe 5vfllil
"'ltI
1ile

thig itlure.

ries.,

"vile im-mliig conventionis ire part of it oilprelieisive prograii o)1 psart of this (oiivernnien t to ivomu e lax co'eniitions which will n

hI.-i,4llitill playing Io s at - or gifts. "in' 1939 wep have,conducted 211 coIventioits and protoeois with :1 dliirriu-i ' Mlri .*W "Irotim' it) tiite during consid,'ration of Ih-t.e voil ve'i Ihills, II~ i4111i!0t 111% alt uthed reserviti ois to 'ertill ill gt'ive giditlle to tile v ,,,.' jliate been bi' tab prvisiulls. iII this executive brtllell illit' iwi. ittliot 'oi rM1vItltt iOnls Of this Ivpe. Mr. (;E0(WE; For the patst few ,t r- flit- Semi tor fnlim (etOrgin I. tIliese ent'olnvetiolls 11ill Ilid I have been, tllvelili. ill tnlliet'tlo1 %'itl so time to familiar I)erfetiug ilh( ehat'l'es working with Mr.Slain,fnmlil Wt' fart till.' ill "jilit lit' variousformla-l~s. which ht1,l be'en jill1d,
t' Teli' 'oIIveltiolns now before s we-,re re ferreil, as i hetu the t'llsi.(ull ps(t, to til' staiir of t'ie of ilt' Foreign Relatjiolts ('ommntittet' ii, li' Joint ('ommittee oil lternui Revenue Taxation. Tlat stall hts give tlit' Foreign Rlhitiolis 'oniuittee the b'iletfit of its tedlilitll knowledgee nud good judgmieint. After studying these eonventiolts. i vself t'lld public ubeotuntit tee to'isistltg of 'n tlor GEORG E and In harir.m . All wit nesses. including representat ives of Ott' Intt'rnationah ('halii tr of ('oliner'e ad tIle National Forin Ir'ntde (uOt'il, testifiet ill support of these conventotils. No olie has opposed theu tillti' lil's Of the ninOlllllittet' Show io objections to them. Mr. President, tile provisions of tilt pending conventionss closely follow tie l)rovisiois of other double-tax 'onvnitions now ill erte. t They 1 loito 'tlntill all y provisions to which (lit, &-nate huts hretlofort' objected. "'hte provisitsuA of tie 'onvetions tre dist'ussed in tie conltiltee's report. Ilt'fore coc'luding m reitarks, however, I should like to invite youir atittmit ion to tile generaI nature of tlit' t'onvettions before INto.Mf-r{x totNvENFPIO)NS WITH BELuIII AN) AUSTRALIA

erieitns frou pyin double taxes ly reson of te fitt rilortd Or itztiliSt' Of tJireriiig tax tihat their illiulle arises Ii purl
prOt-t ,. .

Three of tlit' c'Onve'ntions before th' Se tte relate to ineoie In'e'.

IwO ofi lliem olivelltit.on are iit h Belgium and ildtI third with Ause, ralii. Their purpose is to timiat insofar as possible, doublh taxa lioll wit Ii rt'spet to Orl)ptrzte or individla:tl iuomte. I)oubh tixttioll conventionns either oml lif i ue is avoided tinder the terms (of the e.t'uttpt ion o the incomite front taxation ill ot' of tile states or by b\ .t ,ig 'redit for 1axes paid ill t le other stute. NIr. TIIYE. Mr. lresideut. will tit, Senator viehl for i qlilt."tioll. Mr. S\II'I'II of New ,Jersey. I .a glad t) Yield. \Ir. 'I IlY. ()i' to't'nlill is with Ausir;diai. Assuote that :a il Il Unitt4d ' 'e, liied States4 r'eeive'eI hlf lis t.' , .,ei : .,,. :+... itl (lie' ot her hl,:f ii s thtrived frmtt entlerplrises or l~isii,.' .s niltiiioite tax (I hi. \iistr:lliti. Woil lit' tt'l pa iii, m 1 \Iu-lrilal, amil be frete it ring flit-li (to tlit, United stalet, .. lilu11141
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would heibe free to bring his earnings from Australia, after he had and ifle Austrdianan equal amount of income inimposed upon that he received Government the income tax the United States, thaid im-onlte, to tilt' United States and there be free from taxation on the Australian earnings? Mr. SMITH! of New Jersey. The way the ' eo ventions are drafted. for the purpose of tile con entions tlIe taxpayer must pay a tax in onl one country. lie woul iot pay a t ax oti the same income in two countries. i'there would be no (louldlig ill). Mr. TIIYE. There are those who business interestsAaeAustralia in aud who reside in the United States. The v are citizens of tie United States. However, annual they are in At, tralia for a peril of, say, :3or 4 months, and they receive income from business establishments tiere. The question I'wish to get clear inl ity mnd is this: If such a piersnIpays an income tax i1 Australia, is I. tlen privileged to take out of Australia whatever the Australian governmentt allows him to take out of the countrv--tihere are certain restrictions- and bring it. to tie United States without being subjected to the United States Federal income tax on the earnings in Australia? Mr. SMITH of New Jersey. I refer the Senator to article Ill of the convention with Atnstralia. There are two paragraphs inl that article which may cover the point, which the Senator makes. Article III, paragraph 1, reads its follows:
An Australian enterprise hall iot subject to United in reswct to its industrial or commercial profitsIxeuiles" it is engaged states taxor business fIn trade in tlt United Sqtates through t permanent establishnwnt in the United States. If it is so engaged, United States tax may be im xed upon the entire income of that enterprise from sources within the Unlited States.

Paragraph 2 reads is follows:
A United States enterprise shall not Ix, subject to Australian tax in respect of its industrial or commercial Iwfits unless it is engaged in trade or business in Australia through a pIrmanent tstablishnent in Australia. If it is so engaged. Australian tax may be imposed upon the entire income of that enterlirise from source-s within Australia.

Mr. TIIYE. That is the question which I wished to have clarified. I did not quite understand the situation. If a person is doing business in both countries, but happens to be a citizen of tie United States a1d has business interests in Australia, and if ie spends, say, 2 or 3 months in Australia taking care of that business while still retaining his residence in the United States, would he be able, by paying it tx in Australia, to take th, earnings from Australia, and bI ing theil to the United States, antd there be free front unitedd States Federal tax on such hearings? I am asunhng that he received equal earniii ill Austlndia and in the United States. In other worts, 51pposc he earned $50,H) a year ill Australia and $50,MX) a year front his entterprises in the Inite'd States. Would lie be free front tax on the earnings which he had imnde in Australia, and upon which lie haid paid a tax in Atustralia, when lie brouglf thos, eaitigs to tile Ignited Stalte.,? I did not quite umerstatmd that pIrtvisiml of the Irv'ilil. alnl I wan1tedl tointake it al, ilutelv clear, because I van easily ,'44 I14w hen night be e'on fi'ion p. ,SM3l inl the cas- of afiyone Irvilli to d4ewrine what his taix obligathon was with resp1.t to lis
.%list rlii n earllilu.zs.

Mr. SMiIrlm of New ,Jtrmv. As I recall tile dcl''ussill.S ill t he cotnlulttee. it I coirr'ct lv umidet.lld the ulestiotl of tile distilgtillhed i'

(26;9)

Senator, if a tax had been paid in Austrialia on the income there, and such income were brought to the United States, there could be deAustralia, so that there would be no doubling up. Mr. TIIY,. For the taxes he paid in Australia he could get a deduction. The question I wish to have completely cleared tip is, Coul he take the earnings he was privileged to make in Australia and add them to his earnings, in the United States, and be eligible to deduct only the portion on which he had paid a.tax in Australia, but would pay a tax on the portion of tie earnings he made in
Australia on which lie bad not paid i tax? I want to be sure that I know whether he would have to declare his earnings in Australia and his earnings in the United States, and then be qualified to deduct ducted front the overall Federal tax here the actual tax paid in

Mr. SM ITHl of New Jersey. I think I get the point of the Senator's question. It is a technical subject. It depends on where the primary tax is paid. There might be a case of a man who would earn divides on Australian corporations, in which case the Australian Government would deduct the tax at the source, whether lie filed a return or not. The subject is somewhat complicated and it is difficult to give a straight answer that a man can do this or that. The purpose is not

front the total joint earnings only the amount on which he had paid taxes in Australia, or would he ive to pay a tax in the United States on the total amount of joint earnings? That is the question.

to save at person front paying taxes which he would normally have to pay, but to Lrive a person credit for taxes paid in other countries. Mr. THY. We are all endeavoring to encourage business expansion and business operation in other countries, because in that manner
we have mutual security compounded without the necessity of spending tax dollars in making possible such a business expansion in foreign countries. I wanted to make certain that we had that question cleared tip, because it could be very confusing to an individual taxpayer in the United States. I do not have it clear in my mind whether the earnings in a foreign country, even though the foreign taxes were paid on them, would be

recognized as income in this country, with the taxpayer being compelled to report them as a part of his net income and to pay a tax in the United States, being allowed to deduct only the amount of the tax lie had paid in the foreign country on the earnings there. Mr. SMI H of New Jersey. He could have an income in two he lived the major part of the year. That would be the basis of the tax. But, the tax paid in the other country could be credited on the
tax in the United States. Mr. THYE. Then if I used the $50,000 figure earned in Australia and the $50,000 earned in the United States-- Mr. SMITH of New Jersey. Assuming that the Senator from Minnesota lived in the United States. places. The determination of the situs would be the country in which

Mr. THYE. Yeq, and that this was my home, and I was recognized as a citizen of tile United States. I would then not have to declare my earnings in Australia when I made my United States report on my earning, sbut I would report only on the United States ncome.
because I ad already declared my income in Australia, and I had paid a tax on that portion of my income. Therefore the earnings I ad made in Australia could absolutely be kept separate from my net

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earnings in the United States. That was the question I wanted to Mr. MIITH of New Jersey. I am not sure that I would say yes to the (Iuestion whether the Snator from Minnesota would have to declare in the United States his earnings in the other country. I have myself held a few securities in Canada for example, and I have
have cleared
hf).

Mr. 'FLANDERS. The second question is this: When he imports them with the credit for the taxes paid in the other country, how is the tax credit applied? Is it applied to reducing his income by*that much, or is it applied to reducing the United States tax by thai much. Mr. SMITH of New Jersey. If I am correct in my understanding, I would say that he would have to show his total income in the united States and abroad, namely, the overall total income. Then he would show the taxes paid abroad, and he would get credit for the taxes paid abroad, against the total tax figured in the United
States.

country.

had to make a return on those securities in Canada. I was able to deduct the tax I paid there, of course. Mr. FLANDERS. Mr. President, will the Senator yield? Mr. SMITH of New Jersey. I yield. Mr. FLANDERS. I wonder whether I could ask some questions in very condensed form. The first question is this: In the case suggesied by the Senator from Minnesota, can the American import his earnings and profits into the United States tax free. Mr. SMITH of New Jersey. No; he cannot import them tax free. He can import them with a credit for the taxes paid in the other

because there are many Americans in France-I use France only as and other countries-who have income derived from foreign sources. Such persons would Ie stuck at home for their taxes and they would be in a state of confusion. So the organizations which have been set up to protect the American taxpayers have tried to work out a formula. We worked with them anl we have developed the tax conventions to cover the very kind of questions the Senator has been asking. I hope I have made it dear. It is a very complicated subject.
an example, and the same situation applies to Belgium, England,

Mr. SMITH of New Jersey. I believe that is the correct answer. From the questions that have been asked there ('an be seen the importance of our having these understandings with foreign countries

Mr. FLANDERS. I suppose that would be the situation.

complicated to the man who is trying to make out a tax return. That is why I asked the questions. namely, in an endeavor to clarify it from the standpoint of the accountant or the individual who is making up the tax return. Mr. SITH of New Jersey. I thank the Senator. I think he has

Mr. THYE. I fully appreciate the fact that it is complicated. It is

made a very helpful contribution to the
I conitinue with my statement.

RECORD.

During consideration of the income-tax convention with Belgium. the committee's attention was drawn to the provision of that convention-- article X- which provides for exemption from tax of the salaries paid by one of the contracting countries to its citizens who are resident in the other contracting country. It was suggested that section 247 of the Immigration Act mighi be in conflict with this

(2nl)

provision since the Immigration Act provides that aliens whose occu. national status would place them iii a inonininigrant status may be required to surrender their immigrant status unless they execute a written waiver of "all rights, privileges, exemptions, and immunities under any law or any Executive order." Since the provision' of the Belgium convention was negotiated prior to the passage of the Immigration Act, since the Treasury Depart. meant told the committee that it does not ex pect to include'such pro. visions in new conventions to be negotiate(l, and since the possible effect of ativ conflit between this provision of the Immigration Act and the Belgium convention would be of a very limited nature, the committee did not believe that any particular action was required with respect to this provision at this time.

ESTATE TAX CONVENTION WITH AUSTRALIA
The convention with Australia follows the same pattern as other estate tax conventions now in effect. As is true with respect to those other conventions, this convention applies only to the Federal estate tax. It has no effect upon State inheritance, estate, or succession taxes.
GO1F TAX CONVENTION WITH AUSTRALIA

Foreign Relations Committee?

This convention is the first that has been negotiated relating i exclusively to gift taxes. Its fumdamental objectives are the sate as those of the income and estate taxes, namely, to avoid double taxation and to prevent fiscal evasion. Mr. President, in conclusion I wish to commend the representatives of the Treasury Department and the staff of the Foreign Relations Committee for the hard work they have done in connection with negotiation of these conventions. Mr. King, of the Treasury lepartmeat, has been in charge of that work for the Department, and has been in constant 1p. 83021 negotiation with representatives of the various countries involved, in regard to relief from the burden of double taxation. Mr. HENDRICKSON. Mr. President, will my distinguished colleague yield to nie? The PRESIDING OFFICER (Mr. BiucKEmR in the chair). Does the Senator from New ,Jersev yield to his colleague? Mr. SMITH of New Jer,ey. I am very glad to yield. Mr. HENDRICKSON. Have the treaties been approved by the full

treaties to the full committee, and the full committee approved the
report of the subeonmittee. Mr. HENI)RICKSON. Were they mnsidered by the full committee and were they reported unanimiouslv? Mr. SNITH of New Jerv. Th,;y were. Mr. HENDRICKSON. ilthank my colleague. Mr. SMITH of New Jersey. Mr. Pesident, the following conventions are to be considere4l at this time: Ex,.cutiie 1. 81st ('ougrcss. Ist sesSion, a convention between the Uiiited States of America a'd Belgium for the avoidance of double taxation and the prevention of focal evasion with respect to taxes 011

Mr. SMITH of New Jersey. Yes. The subomnuittee reported the

income, signed at Washington on October 28, 1948.
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Washington on May 14, 1953.

executive branch. Fxecutive A, 83d Congress, 1st session, a convention between the United States of America and Belgium, signed at Washington on September 9, 1952, modifying and supplenienting the convention of (Ocober28, 1948, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. That is the convention to which I have just referred. Fxecutive I, 83d congresss , Ist session, a convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on .May 14, 1953. Executive J, 83d ( congress , ]st session, a convention between the United States of America and the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on the estates of deceased persons, signed at

That has been inabeyance for some time at the request of the

Executive K, 83d Congress, 1st session, a convention between the United States of America and the Commonwealth of Austrdia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on gifts, signed ait Washington on May 14, 1953. Mr. President, I urge my colleagues to approve these conventions.

conventions or treaties are in line with all similar treaties we have Iliade. I (lid not hear all theb statements made by tle distinguished chairman of the subcommittee, the senior Senator from New Jorsev [Mr. SMITHJ, regarding the treaties; but I believe it should be addeal that all witnesses who appeared in connection with the treaties agreed about th.,li and urged that they be ratified. There were some wit,e.,ses from outside the, Governent, and they were finally in unanimous agreement with respect to all the treaties. Mr. SMITH of New Jersey. I thank the Snator front Georgia for lis contribution.

Mr. GEORGE. Mr. President, I merely wish to say that these

DOUBLE TAXATION CONVENTION WITH BELGIUM
The Senate, as in Coziunittee of the Whole, proceeded to consider the convention Executive 1 (81st Cong., 1st sess.), a convention between the United States of America and Belgium for the avoidance of double taxation and the prevention of fiscal evosion with respect to txes on income, signed at Washington on October 28, 1948, which was read the second time, as follows: [Text of convention, pp. 8302-83051 ['. S,3051 The PR.ESIDIN(I OFFICER. The convention is open to anmendmtent. If there be no anietiditIent to be proposal. the convention will be reported to the Senate. was reported to the !*;,nate without anendllent. PRESIDING OFFIItE. The resolution of ratification will The ,'onvention be read. The legislative clerk read the resolution of ratification, as follows:

The

adu se ,nld consent to the ratification of Execltir.' 1. Slot (otign-ss, lot seusimi.

t6mohlved Lwothtrds itf thr irnators prrstnt concurrino thrr n , That the -. natr

a

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convention between the United States of America and Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington Octolxr 28, 1948.

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.

MODIFICATION OF DOUBLE TAXATION CONVENTION WITH BELGIUM The Senate, as in Committee of the Whole, proceeded to consider the convention Executive A (83d Cong., 1st sess.), a convention between the 1'nite(i States of America and Belgium, signed at Washing.

ton on September 9, 1952, modifying and supplementing the convention of October 28, 1948, 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]

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.

1P. 83051 The PRESIDING OFFICER. The convention is open to

Tihe PRESIDING OFFICER. The resolution of ratification will be read. The legislative clerk read the resolution of ratification, as follows:
Resoled (two-thirds of the Senators present concurred therein), That the Sen:ute advise and conent to tilt ratification of Executive A, 83d Congress, 1st session, a convention between the United States of America and Belgium, signed tit Washington on ,epteuilwr 9, 1952, modifying and supplennting the convention of October 28, 1948, for the avoidance of double taxation and the prevention of fiscal evasion with nsxet to taxes on income.

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.

The PRESIDING OFFICER. The question is on agreeing to the

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Presidential Proclamation (including official text of basic and supplementary conventions and exchange of notes dated August 7, 1952, and September 8, 1952)
[Reprint of TIAS 2833)

(275)

TRIATIES AND OTHER INTERNATIONAL ACTS SERIES 2833

DOUBLE TAXATION
Taxes on Income

Conventions between the
UNITED STATES OF AMERICA BELGIUM

and

* Convention signed at Washington October 28, 1948; Supplementary Convention signed at Washington September 9, 1952 0 Ratification advised by the Senate of the United States of America July 9, 1953 * Ratified by the President of the United States of America July 23, 1953 0 Ratified by Belgium July 27. 1953 0 Ratifications exchaiged at IBrussels September 9. 1953 * Proclaimed by the President of the United States of America September 23, 1953 o Entered into force Septemler 9, 1953; operative retroactively January 1, 1953

and Exchange of Notes
0 Signed at 1'a lhington August 7 and September 8. 1952

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DEPARTMENT OF STATE Pumucvbioc 52S3

(Literal priat)

For ask &ydoe Sipwinabdm of D a.sw, US. Gommm
.ashin~ee 25, D.C :4k 15 cents I

rntin

m

(278)

BY THE PRESIDENT OF THE UNITED STATES Or AMERICA

A PROCLAMATION
WHEREtIAS a convention between the United States of America and Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on inome was signed at Washington on October 28, 1948; AND WHERSAS a convention between the United States of Amerioa and Belgium modifying and supplementing the aforesaid convention of October 28, 1948, was signed at Washington on September 9, 1952; AND WHEREAS the originals of the two conventions aforesaid are word for word as follows:

(1)

(279)

t

9

4 I

CONVENTION BETWEEN TI]1E ?ONVENTION ENTRE LES UNITED STATES OF AME.R. ETATS.UNIS D'AMERIQUE ICA AND BELGIUM FOR TIi [E ET LA BELGIQUE POUR AVOIDANCE OF DOUBt ,E EVITER LA DOUBLE IM. TAXATION AND THE PR E. POSITION ET EMPECHER VENTION OF FISCAL EV,A. L'EVASION FISCALE EN SION WITH RESPECT 'I0 MATIERE D'IMPOTS SUR LE TAXES ON INCOME REVENU

Le Gouvernement des EtatsSt' tes of America anl the Goverin- Unis d'Amdrique et le Gouvernement of Belgium, desiring to ment beige, d~sireux de conclure conclude a Convention for tlhe tine Convention pour Aiter la avoidance of double taxation atid double imposition et empkher the prevention of fiscal evasicoi I'hvasion fiscale en mati&er d'imne, with respect to taxes on income p6ts str le revenu ont d~sign6 have appointed for that purpoi3e A cette fin pour leufs pldnipoas their respective Plenipoteia- tentiaires respectifs: tiaries: The Government of the Unitc -d Le Gouvernement des EtatsUnis d'.Ajndrique: States of America: Robert A.Lovett, Acting Seer D- Robert A. Lovett, Scretaire d'Etat faisant fonction des tary of State of the Unite d States of America, and Etats-Unis d'Amirique, et Le Gouvernement beige: The Government of Belgium: Baron Silvercruys, Ainbassadc ir Baron Silvercruys, Ambassadeur Extraordinary and Plenip( Extraordinaire et Plenipotentiaire de Belgique A Washtentiary of Belgium at Wast Iington, ington, who, having communicated t o lesquels, aprs s'Ntre communique each other their full powers, foun,d leurs pleins pouvoirs, reconnus in good and due form, have agree d en bonne et due forme, sont upon the following Articles: convenes des articles suivants: (8)
The Government of the Unit( d

73095 O-62-vol. 1-

19

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TIAB 2833

4
ARTICLE I

(1) The taxes which are (lie

ARTICLES I (I) IAS imp6ts qui font l'objet

subject of the present Convention Ide 1a prtk-.'te ('Convention sont: are: (a) en co qui concerne l (a) In the case of the United
States: The Federal income

taxes. (b) In the case of Belgium: The income taxes, the national crises tax, and the personal complementary tax, including all

Etats-Unis: les imp6ts felraux sur le revenu; (b) en ce qui oie'rne I4 Belgique: lea impt,, sur les

revwnus, In contribution natio.
sale de criso et l'imp6t conipl.

additions to these taxes. (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

mentaire personnel, y comprise tolls additioniiels Aces imp6ts.
(2) La pr&sente Conventioii s'appliquera 6galenient A tous autres iinp6ts ('un caractire analogue en substance, qui serout institu6s 'par l'n ou l'autre des

signature of the present Conven- Etats Contractants apris ia (late tion or by the government of any de signature de la pr~sente.-Con-

territory to which the present vention, on par le Gouvernenient Convention is extended under do tout Territoire auquel Ia prdArticle XXII. sente Convention serait 6tendue en execution do l'article XXII. (3) Dans le cas do modifica(3) In the event of appreciable changes in the fiscal laws of either tions apprdciables aux lois fiscales of the Contracting States the com- d'un des Etats Contractants, lea petent authorities of the Contract- autorit&s compdtentes des Etats ing States will consult together. Contractants se consulteront.
ARTICLE II ARTICLE II

(1) In the present Convention,
unless the context otherwise re-

quires: (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 "Belgium" when used in a geographical

(1) Dans la prdsente Convention et A moins quo le contexte n'exige une autre interpretation: (a) Le terme' "Etats-Unis" dsigne les Etats-Unis d'Am6rique, et, lorsqu'il est employ6 dans un sens g6ographique, les Etats, les Territoires de l'Alaska et de Hawai et le District do Colombie. (b) Le terme "Belgique", lorsqu'il est utilis6 dans un

(282)

5

TIAS 2833

sense means tie Kingdom of
Belgimn in Eirope. (e) The term "United States

enterprise" means an industrial

or commercial enterprise or mndertaking carried on in the
United States by a citizen or

resident of the United States
or by a corporation or other

juridical person created or organized in the United States or under the laws of the United

sens g~ographique, signifie le Royaume de Begique en Europe. (c) Ie terme "Entreprisa des Etats-Unis" ddsigne une entreprise ou exploitation industrielle ou commerciale pratiqude aux Etats-Unis par un ressortissant (citizen) ou residentt" des Etats-Unis, ou par une socidt.6 ou autre personne morale crd6e ou organisko aux Etats-Unis,

States or of any State or Territory of the United States. (d) The term "Belgian enterprise" means an industrial or commercial enterprise or undertaking carried on in Belgium by a citizen or resident of Belgium or by a corporation or other juridical person created or organized in Belgium or under the laws of Belgium.
(e) The terms "enterprise of one of the Contracting States" and "enterprise of the other Contracting State" mean a United States enterprise or a Belgian enterprise, as the con-

ou conformment Ia 16gislation des Etats-Unis, de Pun des Etats ou d'un territoire des
Etats-Unis. (d) Le term "Entreprise belge" ddsigue, une entreprise ou exploitation industriellh ou commercial pratiqude en Belgique par un ressortissant ou habitant du Royaume de Belgique ou par une socidWt ou autre

personae morale cr~de ou organisde en Belgique ou conformoment A la legislation belge.
(e) Les termes "Entreprise de Fun des Etats Contractants" et "Entreprise de l'autre Etat Contractant" d~signent une entreprise des Etats-Unis ou une Entreprise beige suivant le con. text. (f) Le terme "Etablissemont stable", lorsqu'il eat employ A l'6ard d'une entreprise de Pun des Etats Contractants, d~signe une succursale, usine, mine, exploitation pdtrolifre, plantation, atelier, entrep6t, installation ou autre lieu fixe d'affaires, mais ne comprend pas une agence, i moins que l'agent ne posse' et n'exerce habituellement un pouvoir gOn~ral pour

text requires.
(f) The term "permanent establishment", when used with respect to an enterprise of one of the Congacting States, means a branch, factory, mine, oilwelr7 plantation, workshop, warehouse, installation, 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 con-

(283)

TIAS 2833

6
ndgocier et conclure des con. trats pour le compte d'une telle entreprise ou ne dispose d'un stock de marchandises au moyen duquel il ex&ute r6guli~rement des commandes pour le compte do ladite entreprise. Une entreprise do Pun des Etats Contractants no sera pas consid6r~a com;ne ayant umn 6tablissenent stable dans l'autre Etat Contractant uniquement, parce qu'elle traite des affaires dans le territoire do cet autre Etat Contractant par l'internimdiaire d'un commissionnaire ou courtier, agissant comme tel et vraiment autonome. Si une soci tde l'un des Etats Contractants a tine filiale qui est une socidtd crd& ou organis&e dans l'autre Etat Contractant ou qui se livre A des operations commerciales ou trait des affaires dans l'autre Etat Contractant, cette filiale ne constituera pas, de ce seul fait, un dtablissement stable de la Socidt6-mAre. (g) L'expression "B6ndfiees industriels et commerciaux" ne comprend pas ce qui suit: (i) les revenus de propri& tds immobili~res; (ii) les revenus d'hypoth~ques, fonds publics, valeurs mobili~res (obligations hypothcaires comprises), emprunts, ddp6ts et comptescourants; (iii) les dividendes et autres revenus d'actions dens tine socidt6 (corporation); (iv) les loyers ou redevances (royalties) prove-

tracts on behalf of such enterprise or has control over a stock of merchandise from which he regularly fills orders on behalf of such enterprise. 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 such other Contracting State through a bona fide commission agent or broker acting in the ordiniry course of his business as such. When a corporation of one Contracting State has a subsidiary corporation which is a corporation created or organized in 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. (g) The term "industrial and commercial profits" shall not include the following: (i) Income from real property; (ii) Income from mortgages, from public funds, securities (including mortgage bonds), loans, deposits, and current accounts; (iii) Dividends and other income from shares in a corporation; (iv) Rentals or royalties arising from leasing personal

(284)

7
property or from any interest
in such property, including

TIAS 2833

rentals or royalties for the use of, or for the privilege of using, patents, copyrights, secret processes and formulae, good will, trade marks, trade brands, franchises, and other like property;

(v) Profit or loss from the sale or exchange of capital assets; (vi) Compensation for labor or personal services.

nant ie la location d'urn ien mobilier ou d'intdrtt queiConque dans un tel bien, y conipris les loyers ou redevances (royalties) pour l'usage ou pour le privilege d'usage de brevets, droits d'auteur et de reproduction, procd6s et formules secrets, clientele (goodwill), marques do fabrique, marques de commerce (trade brands), concessions (franchises) et autres biens analogues; (v) les profits et pertes provenant de la vente ou de l'ichange do bins (capital
assets);

(vi) les r6mun6rations du travail et des services personnels. Subject to the provisions of the Sous reserve des dispositions do la pr6sente Convention, lea present Convention, the income referred to in subparagraphs (i) revenus visas aux No$ (i) A (vi) to (vi) shall be taxed separately ci-avant seront taxds spardment ou cumulativement avec or together with industrial and les b6ndfices industriels et comcommercial profits in accordance with the laws of the Con- merciaux conform6ment aux lois de chacun des Etats Contractracting States. tants. (h) Le terme "autorit4 (h) The term "competent authority" or "competent au- comp6tente" ou "autoritds thorities" means, in the case of comp6tentes" signifie, en ce qui the United States, the Commis- concerne les Etats-Unis, le sioner of Internal Revenue or "Commissioner of Internal Revenue" ou son repr6sentant his duly authorized representadtment autoris6; en ce qui tive; and in the case of Belgium, General de the Directeur concerne la Belgique, le Direcl'Administration des Contri- teur g~ndral de l'Administration butions Directes or his duly des Contributions directes ou son authorized representative; and, repr6sentant dfment autoris6, in the case of any territory to et en ce qui concerne tout Terriwhich the present Convention is toire auquel ha prdsente Conven3936-54-2

(285)

TIAS 288

8
tion serait tendue en execution de l'article XXII, l'autorit6 qui, dans ce Territoire, est comp6tento en matire d'imp6ts auxquels s'applique la pr~sente Convention. (2) Pour l'application des dispos 'ions de ]a presente Convention par Fun des Etats Contractants, tout terme qui n'y est pas d6fini, aura, A moins que le contexte n'exige une autre interpr6tation, la signification que lui attribuent les lois do cot Etat Contractant relatives aux inp6ts qui font l'objet do la prdsente Convention.
ARTICLE III

extended under Article XXII, the competent authority for the administration in such territory of the taxes to which the present Convention applies. (2) In the application of the provision of the present Convention by either of the Contracting States, any term which is not otherwise defined 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.
ARTICLE III

(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 such other State. (2) However, an enterprise of one of the Contracting States is not subject to taxation by the other Contracting State if it maintains in the latter State only an establishment which confines itself to the purchasing of merchandise for the purpose of supplying establishments which such enterprise maintains in the former State.

(1) Une entreprise de l'un des Etats Contractants n'est imposable par l'autre Etat Contractant du chef do ss bdnfices industriels et commerciaux, (lu'en raison desdits b~n6fices attribuables A ses dtablissements stables dans cot autre Etat. (2) Toutefois, tine entreprise de l'un des Etats Contractants n'est pas impossible par l'autre Etat Contractant lorsqu'elle n'y possde qu'un ou plusiours 4tablissements qui se bornent Ay acheter des marchandises destinies A des dtablissements qu'elle exploite dans le premier Etat.
ARTICLE IV

ARTICLE IV
(1) If an enterprise of one of the Contracting States has a permanent establishment in the other Contracting State, thereI shall be attributed to such per-t

(1) Lorsqu'une entreprise de Pun des Etats Contractants possie un 6tablissement stable dans l'autre Etat Contractant, on attibuera Acot dtablissement stable

(280)

9

TIAS 83

nianent establishment the not lo b6n6fice not industriel et comindustrial and commercial profit mercial qu'il pourrait normalewhich it might be expected to ment obtenir s'il 6tait une entrederive if it were an independent prise inddpendante exergant lea enterprise engaged in the same mmes activities ou des activities or similar activities under the similaires, dans les mmes condisame or similar conditions. Such tions ou dans des conditions siminet profit will, in principle, be laires. En principe, ce b6ndAce determined on the basis of the net sera d~termin6 sur la base des separate accounts pertaining to comptes distinct se rapportant audit dtablissement. such establishment. (2) The competent authority (2) L'autorit4 comp6tento do of the taxing State may, when l'Etat taxateur pout, en cas de necessary, in execution of para- ndcessitd, pour l'ex6cution du paragraph (1) of this Article, rectify graphe (1) du present article, the accounts produced, notably rectifier les comptes produits, noto correct errors and omissions tamment pour corriger des erreurs or to re-establish the costs, prices et omissions ou pour redresser les or remuneration entered in the prix do revient ou de vente ou lea books at the value which would r~mundrations comptabilisds, sur prevail between independent per- la base do la valour qui serait sons. If retenue entree personnes inddpendantes. Si: (a) an establishment does not (a) un 6tablissement ne pro. produce an accounting showing duit pas une comptabilit6 faisant its own operations, or ressortir ses propres operations, ou (b) the accounting produced (b) la comptabiit6 produite does not correspond to the n'est pas conforme aux usages normal usages of the trade in normaux du commerce dans I the country where the establish- pays oil l'6tabissement est 6tament is situated, or bli ou (c) the rectifications provided (c) les rectifications prvues for in this paragraph cannot be au present paragraphe ne effected, peuvent 6tre effectudes, the competent authority of the 1'autorit6 comp6tente de l'Etat taxing State may determine the taxateur pout determiner le bnet industrial and commercial ridfice net industriel et commerprofit by applying to the opera- cial, en appliquant aux operations tions of the establishment such dle l'tablissement susvisd, toutes methods or formulae as may be rn6thodes ou formules dquitables fair and reasonable. et raisonnables.

(287)

TIAS 2833

10

(3) To facilitate the determine - (3) Pour faciliter la ditermination of industrial and conunercia I tion des b6ntfices indust-iels et profits which are allocable to thiD commerciaux qui doivent, tre permanent establishment, the con - attribus A l'6tablissemnent stable, potent authorities of the Contract - lea autoritts comp6tentes des Eing States may consult togetherr tats Contractants peuvent se conwith a view to the adoption olf suiter en vue de adoption de uniform riles of allocation wit i rgles unifornies de ventilation respect to such profits. de ces bndfices.
ARTICLE V ARTICLE V

When an enterprise of one of thc Iorsqu'une entreprise de 'un Contracting States, by reason el des Etats Contractants, du fait de its participation in the manage- sa participation A la gestion ou A ment or financial structure of an la structure financi~re d'une enenterprise of the other Contract- treprise de f'autre Etat Contracing State, makes with or imposes tant, fait ou impose A cette deron the latter enterprise, in their nifre ent reprise, dans leurs relations financial or commercial relations, coniuerciales ou financiires, des conditions different from those conditions diffdrentes de cellos qui which would be made with an in- seraient faites A tine entreprise dependent enterprise, any profits ind6pendante, tous b6ndfices qui, which, but for those conditions, sans ces conditions, auraient t6 would have accrued to one of the acquis A l'une des entreprises, enterprises may be included in the peuvent Otre compris dans lea b6n& taxable profits of that enterprise, fices taxables de cette entreprise, subject to applicable measures of sous reserve des droits de recours de celle-ci. appeal. ARTICLE VI ARTICLE VI Income of whatever nature derived from real property shall be taxable only in the Contracting State in which the real property is situated. This Article does not apply to income derived from mortgages or bonds secured by real property. ARTICLE VII Les revenus quelconques 'de biens immobiliers sont imposables seuleiment dans I'Etat Contractant dans lequel sont situ6s lea bins immobiliers. Cette disposition ne s'applique pas aux revenus de crdances hypothdcaires ou d'obligations garanties par des biens immobiliers. ARTICLE VII

(1) Les revenus qu'une entre(1) Income which an enterprise of one of the Contracting States prise do l'un des Etats Contracderives from the operation of ships tants tire de exploitation do (288)

1I
Or aircraft registered in that. State shall be exempt from taxation in tie other Colntracting State. (2) mhe present Convention shall not )e deemed to affect the provisions of the exchange of
DONI('S l)AtWeL'11 the Urnited States

TIAS 2&'KM

and Belgium, dated January 28,
193;, providing for relief front
double inIcOLe taxiltion oil ship-

navires oil aftroiifs ill,tric lI& darts cet Etat ne s01t IMS illIpOSAbles (ons I'autire Etat Contractant. (2) La I)r65(ente Convention reste sang efret sur l(s dispositions faisant I'oljt de I'Iange de hett-res entire les Etats-Ulnis et la Belgique, en date di 28 janvier 1936, et qui ont eu pour hut 'Vitet la double imposition des bWnd-

ping proits.I1J ArTwLE: VIII

lices provenant de lit navigation. ARTICLE VII

(1) Le taux de l'impot des (1) The rate of United States tax oni dividends derived from a Etats-Unis sur hes dividends proUnited States corporation by a venant ilne soeidtd am6ricaine corporation created or organized et at.tribu& A tine soci6t6 cr6~e in Belgium or tinder the laws of oil organis6e en Belgique on conBelgium which is not engaged in fornihient A In Idgislation beige, trade' or business ill the ITnitid laquelle n se livre pas A des States through a permanent estab- operations commerciales ou no lishment therein shall not exceed traite pas d'afraires aux Etatsfive percent if tile latter corpora- Unis par l'entremise d'un dtablis. tion controls, directly or indirectly, segment. stable y situ6, no pourra at least ninety-five percent of thet excder 5% si Ia socidt6 bdn6fientire voting power in tie corpora- ciaire contr6le, directement ou tion paying the divided, and not indirectement, au moins 95% de more than twenty-five percent of la totalit6 des voix all sein do Ia the gross income of such paying socitd qui paie le dividende, et corporation is derived from inter- si cette dernire socidtd no tire est and dividends, other than pas plus de 25% de ses revenus interest and dividendss received bruts d'intdr~ta et de dividends from- its own subsidiary corpora- autres que cux qui proviennent tions. Such reduction of the rate do ses propres filiales. Cetto r& to five percent shall not apply if duction du taux A 6% no sera pas the r lationship of the two cor- applicable si les relations des deux porations has" been arranged or is socidt6s onb dtd combines ou sont maintained primarily with the mainte-nues dans le but ossentiel intention of securing such reduced d'obtenir ce taux r~duit. rate. (2) Par drogation aux dislosi(2) Notwithstanding the provisions of Articlh XXIII of this Con- tions de l'article XXIII de Ia pr6.

I Executive Agreement Series 87; 49 Stat. 3871.

(289)

TIAS 2833

12

vention the provisions of this Ar •- sente Convention, les Etats-Unis ticle may be terminated by th,B pourront mettre fin Al'application United States provided priornoticiD du present article pour autant is given to Belgium, such termina - qu'ils en avisent la Belgique au tion. to become effective on thie prdalable, une tell d6nonciation first day of the fourth calendarr ne prenant effet qu'au premier jour month following the calendarr du quatri~me mois qui suivra le month in which such notice ii mois durant lequel le prdavis est doan. given. ARTICLE IX ARTICLE IX (1) Les loyers ou redevances (1) Rentals or royalties from real property or in respect of the provenant de biens immobiliers ou operation of mines, quarries or affdrents a l'exploitation des mines, other natural resources shall be carribres ou autres ressources nataxable only in the Contracting turelles no seront imposables que State in which such property, dans l'Etat Contractant o4i sont mines, quarries or other natural situ~s ces immeubles, mines, carresources are situated. A resident ribres ou autres ressources naturelof Belgium, or a corporation or les. Un habitant du Royaume do other juridical person created or Belgique, une socidt6 ou autre per. organized in Belgium deriving such sonne morale crde ou organis6o rentals or royalties from sources en Belgique recevant de tols loyers within the United States may elect ou do telles redevances, do sources for any taxable year to be subject situdes sur le territoire des Etatsto United States tax as if such Unis, peuvent choisir, pour chaque resident, corporation or entity annde d'imposition, d'dtre soumis were engaged in trade or business A l'imp6t des Etats-Unis, comme within the United States through si, pendant ladite ann6e d'imposia permanent establishment therein tion, ils avaient exploit6 une entreprise ou fait des affairs aux in such taxable year. Etats-Unis par un dtablissement stable situd jians cot Etat. (2) Les redevances tires du from (2) Royalties derived within one of the Contracting territoire de l'un des Etats ConStates by a resident or by a corpo- tractants par un resident (habiration or other entity of the other tant) ou par une socidt6 ou autre Contracting State as considera- personme morale de l'autre Etat tion for the right to use copy- Contractant, en contrepartie di rights, patents, secret processes droit d'utiliser des droits d'auteur and formulae, trade marks and ou de reproduction, des brevets, other analogous rights shall be des procddds et formules secrets, exempt from taxation in the for- des marques de fabrique et autres mer State, provided such resident, droits analogues seront exemptes

(290)

13

TIAS 2833

corporation or other entity doiDs d'inlp6t dans le premier Etat, A
not have a permanent establishi- condition que ledit rsident (habi-

went there. The termn "roya 1- tant), ladite socit6 ou personne ties" as used in this paragrap h morale Wy poss6dent pas d'dtashall be deemed to include rentalIs blissement stable. Pour I'appli. in respect of motion picture fili ;. cation du present paragraph, le ternie "redevances" comprend les revenues relatifs aux films cindmatographiques. ARTICLE X (1) Wages, salaries and simila r (1) Les traitements, salaires et I compensations, and pensions am r~mun6rations analogues ainsi que annuities, paid by one of thi3 les pensions et rents, pays par Contracting States or by thie l'un des Etats Contractants, par political subdivisions or territorie,s tine de ses subdivisions politiques thereof to citizens of that State re,- ou par l'un de ses territoires, Ases siding in the other State whetheri ressortissants qui resident dans or not also citizens of such othei l'autre Etat et qui en sont ou non State) shall be exempt from taxa.* 6galement des ressortissants (citizens), seront exempts d'imp6ts tion in the latter State. dans ce dernier Etat. (2) Private pensions and an. (2) Les pensions et rentes nuities derived from within one of priv6es provenant du territoire do the Contracting States and paid l'un des Etats Contractants et to individuals residing in the other pay6es A des personnes r~sidant Contracting State shall be exempt dans l'autre Etat Contractant, from taxation in the former State. seront exemptdes d'imp6ts dans le premier Etat. (3) The term "pensions" as (3) Pour I'application du pr&ent used in this Article means periodic article, le terme "pensions" payments made in consideration s'entend do paiements p6riodiques for services rendered or by way of faits en consideration de services compensation for injuries received. rendus ou en compensation de dommages corporels. (4) The term "annuities" as (4) PourI'application du present used in this Article means a stated article, le terme "rentes" s'entend sim payable periodically at stated d'une somme d~terminde payable times, under an obligation to make pdriodiquement A des dpoques the payments in consideration of d6termindes, en contrepartie de money paid. sommes vers6es. ARTICLE X

(291)

TIAS 2833

14
ARTICLE X1

ARTICLE XI (1) A resident of the United States shall be exempt from Belgian tax upon compensation for labor or personal services perforhied within Belgium if he falls within either of the following classifications: (a) lie is temporarily present within Belgium for a period or periods not exceeding a total of ninety (lays during the calendar year and the compensation received for such labor or personal services does not exceed $3,000.00 in the aggregate, or its corresponding amount, except that the provisions of this subparagraph shall not apply to remuneration of "adininistrateurs", "commissaires", or "liquidateurs" of, or of other individuals exercising similar functions in corporations created or organized in Belgium; (b) He is temporarily present within Belgium for a period or periods not exceeding a total of one hundred eighty-three days during the calendar year and his compensation is received for labor or personal services performed as a worker or employee of, or tinder contract with, a resident of, or a corporation or other juridical person created or organized in, the United States which carries the actual burden of the remuneration.

(1) Tout r&ident des EtatsUnis sera exon6r6 de l'imp6t beige sur la r6mun&ation du travail on des services personnels (labor or personal services) accomplis en Belgique, s'il tombe dans l'une des categories suivantes: (a) Il s6journe temporairement en Belgique an cours de l'annde civile, pendant tine ou plusieurs priodes n'exc~dant pas tin total de nonante jours
et la r6niundration toque pour

tin tel travail ou de tels services n'exc~de pas an total $3.000 ou la contrevaleur de cc montant, toutefois, les dispositions du present alin~a ne s'appliquent pas aux r~mundrations des administrators, commissaires, liquidateurs et antres personnes exergant des fonctions analogues, dans des soci~t s de capitaux cres ou organises en Belgique; (b) Il sdjourne temporairement en Belgiqne, au cours de l'ann6c civile, pendant tine ou pinsieurs pdriodes dont ]a duroc totale no dpasse pas cent quatre-vingt-trois jours et sa r~munration est perque pour un travail ou des services personnels accomplis en quality d'ouvrier ou employ d'un r6sident des Etats-Unis, d'une soci6 ou d'une autre personne morale crd6e ou organisde aux Etats-Unis, (ou en excution d'un cantrat avec tin tel r6si(lent, une telle soci6t6 ou personne morale), qui supporte

(292)

15

TIAS 2888

I

In such cases the United States reserves the right to tax such income. (2) A resident of Belgium shall be exempt from United States tax upon compensation for labor or personal services performed within the United States if he falls within either of the following classifications: (a) He is temporarily present within the United States for a period or periods not exceeding a total of ninety days during the taxable year and the compensation received for such labor or personal services does not exceed $3,000.00 in the aggregate, or its corresponding amount, except that the provisions of this subparagraph shall not apply to remuneration of officers and directors of corporations created or organized in the United States; (b) He is temporarily present within the United States for a period or periods not exceeding a total of one hundred eightythree days during the taxable year and his compensation is received for labor or personal services performed as a worker or employee of, or under contract with, a resident of, or a corporation or other juridical person created or organized in, Belgium which carries the actual burden of the remuneration.
8986"--A---

effectivement la charge do cette r6mundration. Dans ces cas, les Etats-Unis se r6servont le droit d'imposer ces revenus. (2) Tout habitant du Royaume do Belgique sera exon6r6 do l'imp6t des Etats-Unis sur la rdmun6ration
du travail ou des services per-

sonnels (labor or personal services) accomplis aux Etats-Unis, s'il tombe dana l'une des categories suivantes: (a) II s6journe temporairement aux Etats-Unis, au cours de l'ann~e imposable, pendant une ou plusieurs p~riodes n'exc~dant pas un total de nonante jours et la rdmun6ration regue pour un tel travail ou do tels services personnels, n'excde pas au total $3.000 ou la contrevaleur do ce montant; toutefois, les dispositions du present alin~a ne s'appliquent pas aux rdmundrations des "officers" et "directors" do socidtds (corporations) cr~es ou organisdes aux Etats-Unis; (b) II s~journe temporairement aux Etata-Unis, au course do l'ann~e imposable, pendant une ou plusieurs p6riodes dont la dur~e totale no ddpasse pas cent-quatre-vingt-trois jours (it sa rdmundration cat perque pour un travail ou des services personneLs accomplis en quality d'ouvrier ou employ d'un habitant du Royaume de Belgique, d'une soci6td ou autre personnel morale crdde ou organis6e en Belgique (ou en exeution d'un

i

(293)

TIAB 2888

16
contrat avec un tel Itbitant uno
tell soci6t6 ou persontno morale), qui SUpportLo efrectivomentl Is

charge do cetto r6mun6ration. In sich etses lelghiu reserves )lns ces elis, lit Ielgiqiuo so the right to ttlx sich incoelo. r6serveo lI droit d'iliposer ('('s
revnus.
(3) Ie, (iiSlOSilioIlS d I)il eleit. (3) The provisions of lhis Art ich shall hilliv Io a)i)licitioli to) the articlo io seront, i)ts apliialhes, iiioll to whih Artihle X reltos. M1IIX ro0Oll1011de il est, questioLn 1

1'artiole X.
ARTIVlI.' XII
(1) Notwithstaniding fify pro-

An'rcia, XII

(1) Nonobsttnt tolutes disp.osiVisions of tle I) 'ilt Convention tions tic li I)r6smitO (onvention.... (other than piragrph (1) of iutres quo celles till ptlt'llgrl'aihe Arlico X) 0ii(1h of the two ('ont- (I) ic Iart ice X -cli'icun (des
trietiliig Stat(s, iii deterniiiing

helx Ittils ('ontractints, en 4I4(surtatxes), de st,4 ressort issnts

the incoliO ttixos, ihlllling fill tertinant les iilp(ts sir les rosurt axes, of its citizens or resi- velilU, Y (10iii5ris tllts lidlitionleh
donts or corporations or other jurildicil pesollltS, 11111 inIlu(ili the lutis lll)On whih such lilies tire iipo)setd ill iteis of income taxible ider its own revenuel

citizensns,
S(ilost

hi

niils (rnshdents),

Oil IIlr('s persollles

-illi-

law.- as though thih Convention (i'110-olrhes dol revelius hlim iisalehs ell vltlli de siti klgi.llitlh tiseale hlad not collie inlto erect.
lpr
're, illilo si iillili lionl n1'xitlii, ls.

rales, )llll colrelltdre (I ins Its batis do ('('s iitjls toiles les

(,lilveli-

t2) Ii accordance with Lith pro(2) Conformt6lnent. aux (lisposivisions of sction 131 of Ihe United tiills do i ,etlldioln 131 fil coeo des State lntorntl Revenue (oloe as iinip6ts 't,,% lit llts-1 lis (1lnit(d inereitl on (lie (lay of tio entry Staio Internil lRevelilo lCode), into force of tIllh present. Conven- tilll qu'l'lo existern A It dale do ion, tlie I ied Sttes agres ito P'('ittr&o eli viu'iur de lit pr& ent e tillw is it dtOduionl from the (onvontion, ls Iltits-Uinis Conincleome Iaxes imposed by the solientl a d~filiro do lenrs imipits United Stat(s the alppropriito sur to rovonu, Io iiolint. appro. t ilO,'ttl. Olf t ixV, paii 1o I|elolg lili, pli6( des illi6ts ptaiyS Oll Belgilue, whetlhier paid dirctl1 by the tax- soit di'eclenent, pir h contrilu. payer or by wit hhIlding. iilhp SOi pl.'voio do I'et.enll. (3) lit order to ie intoalcounlt. (3) Plour tetlir ,onpte (1t ihip6ts 5 the Fe(lertil income taxes collected rW'1tilx sir I revonU, pprgius aux

(214)

17

TIAS 2838

in tlle IUnited States, IlegiuJ,in IEtA1t-thlis, li lelgiqoe Consent A
1.gr1e8 in Conforlity with tl ie rMuir , eonforin6mment aux dilpoprovisions. of lelgian law rolatii Ig sit ions tie lit lkislat ionl lelge to income taxes fnd the nation id relative atx impdt stur les revenues .rimii tax, as in edeetl the dy )f et. A It contribution natiotle do i the entry into force of the pesel it, criso, tile qto oep dispositions (onveItion, to reduee etxistertmt A li dte (ol'entre en vigueur do Iai)rsete (ConvenIion: (a) to ono-fourth, tile pr a(a) all quart, Ia taxe profesfessiotmal tax and the 1fionl ii sionnelle et lia cottribuion naho crisis tax which affect, tirto Itrt tionale do criso, ulrdrentes proof tho taxable income which i8 portionnellement, Ala partie des

derived from sources within amd taxed by time United State., (1)) to it Jmxii1Uil of I 2

rovmma taxaihes r talishoe, imos6o aux Etats-Unis;

percent., tle tax on income frou 1 personal and real property whiel I has its source in the Initmo I States, amnl
(c) iti derogation of thw, pro,-

(b) ai taux niaxilumi de 12% hi taxe auohilire sur les reveflhiS d Wiells IIoi)iliers et, (1
imiimobilier,
.soirove iIII.

qui trouvent. leur

ldtms-Unki; et

visions of Relgian law, t4' ofle-fourti the Iersomail oomplh. imenviry aix due Ily 'itizen.s 0 resident of tie United Stat-ev I who are also residents of ellgium,I

in respect of invoine from sourcesI within and taxed by the ,lited

((c) par dl6rogation aix dispositions de Ia iWgislation. beige, A r~'duire an quart l'inmpft vniplinentaire persoimel, afffr:mt proI)ortionnellenwilt Ia )artio des revenus r alis6s et inposdo aux Etata-Unis, qli eat pamible dudit imlp6t dans le chef do res4ortimants ou r6gidents dte Etats-Unis, qui sont 6galomont habitanUi. du Royaumo do Belgique.
ARtCicL XIII

State.

.Aui'vttm: XIII

Professors or teachers, citizeIni ldes professetirs ou tiattres res. of one of tlho (ontracting States, sortis-msnts tie un des Etats (onmwho, within the framework of truct-ant qti, daim Ie cadre d'icagreements between the Contract- cords intervenus eutreiea hltat, ing States or )ttween teaching Contractants ou entre des ticst0ablishmnents in the ('ontracting Iliilonu ('t, nseignetitMnt de ces

States for the sending of jprofemsors Eta-9 pour l'onvoi do profeseurs alnd t Atel5, visit within tho tor- et maitros, sadjourneront dans le ritdry of the other Contracting tarritoire do l'autro Etat Con. State to teach, for maxinmum tractant pour enseigner, pendant period of two years, in a univer- line p6riode d'uno dur&e maximum

(295)

TIA 2833

18

sity, college, school or other teach de deux ans, dans uno Universit6, ing establishment in the territor y un college, une dcolo ou un autre of such other Contracting Stat I, 6tablissement d'enseignoment, sishall not be taxed by such other tu6s sur le territoire do cet autre State with respect to the remu - Etat Contractant, seront exon6rds neration which they receive for d'imp6t par cet autre Etat du such teaching. chef de ]a rdmundration qu'ils recevront pour cet enseignement.
ARTICLE XIV ARTICLE XIV

Students or apprentices, citi,- Les dtudiants ou apprentis reszens of one of the Contractinj sortissants de Fun des Etats ConStates, residing in the other Con.- tractants qui resident dans l'autre tracting State exclusively for pur.-Etat Contractant dans I but poses of study or for acquiring exclusif d'y fare des 6tudes ou d'y experience, shall not be taxable acqu6rir une formation professionby the latter State in respect ol nelle seront exon6rs d'imp6t par remittances received by them fromi cot autre Etat, du chef des sommes abroad for the purposes of their* regues par eux do l'dtranger pour leur entretien ou leurs etudes. maintenance or studies.

ARTICLE XV [']

ARTICLE XV [11

(1) The competent authorities (1) Les autorit&s comptentes of the Contracting States shall des Etats Contractants Mhanexchange such information (being geront tous renseignernents (disinformation available under the ponibles en vertu do la Igislation respective taxation laws of the fiscal respective des Etats ConContracting States) as is necessary tractants) qui seront n~cessaires, for carrying out the provisions of soit pour executer les dispositions the present Convention or for the do la pr~sente Convention, soit prevention of fraud or the adminis- pour emptcher les fraudes ou tration of statutory provisions and appliquer les dispositions lgales regulations against legal avoidance et r6glementaires centre les abus in relation to the taxes which are du droit (legal avoidance) en ce the subject of the present Con- qui concerne les imp6ts qui font l'objet do la prdsente Convention. vention. (2) Les documents et les ren(2) Documents and information contained therein, transmitted seignements y contenus, transmis under the provisions of the present conformndment aux dispositions de Convention by one of the Con- la pr~sente Convention par l'un tracting States to the other Con- des Etats Contractants A'I'autre tracting State shall not be pub- Etat Contractant, no seront ni lished, revealed or disclosed to any publics, ni r~vdls, ni divulguds A
ISee post, p. 34.

(296)

19

TIAS 2883

person except to the extent peir- qui que ce soit, sauf dans la limite fitted under the laws of th e permise par les lois de ce dernier latter State with respect to simils ir Etat en ce qui concern les documents ou renseignements anadoctuments or information. logues. ARTICLE XVI ARTICLE XVI The competent authority cif L'autoritd comp6tente de chacun oaih of the Contracting States des Etats Contractants fournira, shall furnish, upon request by th o & ]a requite de l'autorit6 comcompetent authority of the other p6tente do l'autre Etat ConContracting State, particulars rela - tractant, des renseignements se tive to the application in concreteD rapportant A application, dans cases of the taxes of the requesting; des cas concrets, des imp6ts de State to which the present Con,- l'Etat requ6rant qui font l'objet de la prdsente Convention. vention relates. ARTICLE: XVII (1) The Contracting StateE (1) Les Etats Contractants undertake to lend assistance andI s'engagent A se prater assistance support to each other in the collec. . et concours aux fins de recouvrer tion of the taxes to which the los imp~ts vis~s par la pr6sente present Convention relates, to-* Convention, ainsi que les addigether with additions, interest, tionnels, les intdr~ts, les frais et costs, and fines not being of a les amendes qui n'ont pas un caractbre pnal. penal character. (2) In the case of an application (2) Dans le cas d'une demande for enforcement of taxes, revenue en recouvrement d'imp6ts, les claims of each of the Contracting crdances fiscales d~finitivement arStates which have been finally de- rdtdes de chacun des Etats Contermined may be accepted for en- tractants pourront 6tre acceptdes forcement by the other Contract- pour recouvrement par l'autre ing State and collected in that Etat Contractant et 6tre pergues State in accordance with the laws par cet Etat conformdment aux applicable to the collection of its lois applicables Ala perception do own taxes. The State to which ses propres imp6ts. L'Etat requis application is made shall not be nest pas tenu d'appliquer des required to enforce executory mesures d'exdcution qui ne sont measures for which there is no pas pr6vues par la legislation de provision in the law of the State l'Etat requdrant. making the application. (3) II sera joint , la demanded (3) An application for collection shall be accompanied by such doc- en recouvrement tels documents uments as are required by the qui sont exig& par lee lois de
ARTICLE XVII
73095 0-62-vol. 1-20

(297)

TIAS 2&33

20

laws of the State making the l'Etat requtrant, pour 6tablir quo application to establish that the les impts ont dt dfinitivement taxes have been finally deter- arrt8. mined.
(4) The assistance' provided for with respect to the citizens, corporations, or other entities of the State to which application is Iflfde, 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 benefit's. ARTICI, XVI I I (4) L'aUsistance pr6vuo al pr6l'6gard (1o ressorti ants, socits o0 autres porsonnes morale do l'Etat auquel la, domando est atiress6e, sauf dans la mesuro n cessaire pour 6viter quo 1o b6n6fice des exemptions ou ties reductions d'imp6t accord6os par la Convention A ces ressortissants, so. ciftk oil autreq peersonties morales, no soit ohtenu par des personnel qui n'y ont pa. droit. AriciLE XVIII (1) En aictn cas, les dispositions des articles XV, XVI el XVII nie seront interpr~tves Volnmnt' iniposant Al'un ou l'autre des Etats Contractants l'obligation: (a) ('appliquor des measures administrative non couformes aux r~glements et A l'usage de Fun on toi'autre Etat Contractant oil

in this Article shall not be accorded sent article no sera pas prdtte A

(1) ]n no case

shall the pro-

visionls of Articles XV, XVI, and XVII 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 information or particulars which are not procurable under its own legislation or that of the State making tht application. (2) The State to which application is mado for information or assistance shall t'oinplv as Soon as possible with the request addressed to it. Nevertheless, such State may refuse to comply with the request for reasons of public

(b) de fournir ds informnations ou renseigneients qui no peuvent 6tre obtenus en Vert', de ht legislation soit dto

l'Etat requis, soit de I'Etat requ~rant. (2) ,'Etat, auquel lia (lelande le renseignentents on d'assistance
est. aIdress6e, y dtlhnefra suite avee lotte lia pronptit ude possible. Naninoins, l'Et.at requis pent irefuser de donner suite A la deiflflhIC pour des r'aiSonlS (I'ordre

(298)

21

TAS 2888

policy or if compliance would in- public ou si Ia deianle ne pout volvo violation of a business, in.- 6tre satisfaito que par Ia violation ,lustrial or trade secret. In sucl k d'un secret commercial, industriel case it shall inform, as soon a; ou professionnel. Dans ce cas, il possible, the State making th, en informers aussit6t quo possible I'Etat requfrant. application. ARTICLE X1X ARTICLE XIX Where a taxpayer shows prool 'Tout contribuable qui prouve that the action of the tax adminis-* quo les mesures prises par los adtrations of the Contracting Statesi ministrations fiscales des Etats has resulted or will result in doubleI Contractants ont entrain6 ou entaxation in his case in respect of tratneront pour lii une double any of the taxes to which the iimposition en cc qui concerne I'un present Convention relates, he quelconque des imp6ts vis6s par shall be entitled (within a period la pr&sente Convention, petit (dans of two years from the date of the un d6lai do 2 ans A dater de Ia notification of the tax which has notification do l'impOt 6tabli ou been last asserted or proposed, or projet6 en derniotr lieu oil (h paieof the payment of the tax if such ment de cet imj)6t, si co paiernent payment has been made prior to a t6 fait avant notification) notification) to lodge a claim with adresser une r6clamation, soit A the State of which he is a citizen, l'Etat dont il et rossortissant or, if he is not, a citizen of either (citizen), soit s'il 'est liS reSof the Contracting States, with sortissant (de I'ti11 des Etats ('on-

the State of which he is a resident, tractants, A l'Etat dont il est. or, if the taxpayer is a corporation habitant (resident), soit, si le conor other juridical person, with the tribuablo est une socidt6 ou autre
State in which it is created or personno morale, A 'Etat oil clleorganized. Should the claim be ci a tA cr.o ou organis6o. Si he

upheld, the competent authorities ibien-fond6 de la demande est

of the two Contracting States reconnu, les autoritts comp6tentes shall come to an agreement with des deux Etats Contraetants s'ena view to equital)le avoidane of tendront pour kiter do fagon equitable, la double imposition the double taxation in question. dont il s'agit. ARTICLE XX ARTICLE XX 6 (1) Les dispositions do Ia p1 (1) The provisions of the presPut Convention shall not be con- sento Convention no pourront strued to restrict in any maner tre interpr6tes do fagon A resany exemption, deduction, credit treindro en quelquo mani6ro que

or other allowance accorded by ce soit, touted exemption, d6ducthe laws of one of the Contracting tion, cr6tit, ou autre reduction

(299)

TIAR 2f%13

22

states il the det eriihlilt.ti of the actcord6e ptir les lois do 'unt dt. tax im seI y s I I I rate. Etats Contractants pour In deter-

zuination de l'iip6t do cet Etat. (2) Shoidl any diiliculty or (2) S'il surgissait une difli('ultt lou)t, arise as to the interpreta- oi un doute quelconque (plant A tion or apl)lieiition of the present lVinterpr ;tation ou h\Iapplication Convent ion, t he competent, author- dte In prisente Convention, les ities of the Contracting States autorit~s comf6tentes des Etats shall settle the question by mutual Contractants r/gleront la question agreenient,. par accord inutuel. (3) Citizens or corporations or (3) les ressortissants (citizens), other juridical persons of one of soci~t~s ou autres personnes the Contracting States within the morales (o 'un des Etats Conother Contracting State shall not tractants, qui sont dtablis stir le be subjected, as regards the taxes territoire de l'autre Etat Conreferred to in the present, Conven- tractant, n'y seront pas soumis, en tion, to the payment, of higher cc qui concerned les imp6ts viss taxes than are imposed upon'the par la pr6.-ente Convention, an citizens or corporations or other paiemient d'itnp6ts plus Olevis que juridical persons of such other ceux inpos5s atix ressortissant s, Contracting State. soci~t&. ou autres pesonnes n1orales do cet autre Etat ('ontractant.
ARTICLE XXI
ARTICLE XXI

The competent authorities of Les autorit~s conipttentes des the two Contracting States may deux Etats Contractants (avec (in the case of the United States, 'approbation du Secr6taire du with the approval of the Secretary rr~or, en ce qui concerne les of the Treasury, and in the case of IEtats-Unis et avec l'approbatioii Belgium, with the approval of the ii Ministre des Finances, en ce Minister of Finance) prescribe (jui concerne Ia Belgique) pourront regulations necessary to carry out irr~ter les r glements n6cessaires the provisions of the present Con- Al'ex6cution des dispositions do la vention. With respect to the Itr~sente Convention. En cc qui provisions of the present Conven- c 'oncerne les dispositions (1e cette tion relating to exchange of infor- ('onvention, relatives A l'Nchange mation and mutual assistance in dIeronseignements et it assistance the collection of taxes, such au- Iautuello pour le recouvrement (lei thorities may, by common agree- ifnp6ts, lesdites autorit6s pourront, ment, prescribe rules concerning de commun accord, r6gler les quesmatters of procedure, forms of tiions relatives Ala proedure, il it application and replies thereto, f rme des demandes et des r~ponconversion of currency, disposi- s 3s Aces demiandes, a Ia conversion

(300)

23

TIAS 2833

tion of amiouits collected, mii ii- des monnaies, A I'nfreetation des

mum amounts subjtt to colle c- sommes recouvr6es, A Ia dtcrini.

tion, and related matters.
ARTICLE XXII

nation du montant minimum (let sommes recouvrables et autres
questions connexes.

ARTICLE XXII

(1) Either of the Contractii ig (1) Chacun des Etats ConStates may, at tle time of e: x-tractants peut, aul moment do change of instrument.- of ratifici t- l' change des instruments do ratition or thereafter while the presei it fication ou ultdrieurement, aussi Convention continues in force, by longtemps que Ia pr~sente Con. a written notification of extensio n vention rest era en vigueur, par given to the other Contractin g uno notification 6crite d'extension State through diplomatic channel i, faite par Ia voie diplomnatique A declare its desire that the operation l'autre Etat Contractant, exprimer n of the present Convention, eithe r son ddsir que I'application de la in whole or as to such provision a prksente Convention soit, pour thereof as may be deemed to hay o routes ou pour certaines do ses special application, shall extend tb dispositions jugdes sp~cialement D any of its colonies or overseass applicables, dtendue Al'une de ses territories which imposes taxe.9 Colonies ou A 'un do ses Terrisubstantially similar in characte r toires d'outre-mer qui pr616ve des to those which are the subject of imp6ts d'un caract~re analogue en the present Convention. substance A ceux qui font I'objet
do Ia prksente Convention.

(2) In the event that a notifica. - (2) Dans 'dventualit6 oil une tion is given by one of the Con. . notification est fate par un des tracting States in accordance with Etats Contractants, conform& paragraph (1) of this Article, the ment au paragraph (1) du present present Convention, or such pro- article, Ia pr6sente Convention ou visions thereof as may be specified cells de ses dispositions qui in the notification, shall apply to seraient sp6cifi~es dans Ia notificaany territory named in such notifi- tion, s'appliqueront A tout Terri. cation on and after the first day of toire d~sign6 dans cette notifica#January following the date of a tion, Apartir du Ier janvier suivant written communication through Ia date do la communication dcrite diplomatic channels addres.qsed to teblissant quo cette notification such Contracting State by the est accepted en ce qui concern le other Contracting State, after such Territoire susvis6, communication action by the latter State as may qui sera adrecae par ha voie diplobe necessary in accordance with matique audit Etat Contractant its own procedures, stating that par 'autre Etat Contractant, apr~s such notification is accepted in que ce dernier Etat aura pris toute

(801)

TIAS 2832

24

respect of such territory.

of tihe provisions of the presentit (Wat

In th e 1ne8ne qui serait nvessaire suabsence of such acceptable, non P' rant sit propre higislation. A
W'une telle sacceptation,
des.1

Convention shall apply to suclIt 11110ll10 territory. (:) At any time after the expire tion of one year from the elrectivi e date of all extension Iatle by vir tile of partigrapihs (I) an(1 (2) of

dislpOsitiOnsH

t% it,

this Article, either of the contractt ,ing States may, by a written notice( of termination given to the otheir ants peut, par un avis 6crit de ('otitrating State through diplo. Sr6siliation tlonn6 A l'autre 0tat niatic channels, terminate the ap.- Contractant par I vole diploplication of the j)reselt Conven. - matique, mettre fin Al'application tion to ally territory to which th xle lit Ir6snte Convention a tout Convention, or any of its provi. 'Territoire auquel la Convention ou silons, has been extended. Il that certatines tie ses dispositions, ont case, tile present Convention, or 6te6" teidues. Dans co cas, ]a pr& the provisions thereof specified ill sent Convention, on celles tie ses the notice of termination, shall dispositions Sl) tei1i6Cs dants l'avis cease to be ap)plieable to any of the do r6siliation, cesseront d'Otre apterritories named ill such notice of plieables A tout Territoire ttlsigi6 termination on and after the first tlns cet avis do r&siliation, Al)artic (lay of ,January following the expi- du Ier janvier qui suit l'expiration ration of a period of six months thine ptriode (ie six mlois aprO~s la after the date of such notice; pro- date dudit avis; toutofois, cela vided, however, that this slall not n 'arectera pas la continuation do affect the ('ontined' aj)plication of application do Is Convention ou the ('onvention, or anky of the pro- do certaines tie ss dispositions, visions thereof, to the 1Vlited aux Etats-Unis, Aha Belgique, ou A States, to Belgium, or to any terri- tout Territoire, (non dilsign6 dans
tory (not nialned in the notice of l'avis it)r6siliation) auquel s'applitermination) to which the Con- quo Ia Convention on telle tie ses vention, or such provision thereof, dispositions.

prtsente (onvenitioni tie s'ap)pliquera audit Territoire. (3) A tout Ilt 1Ipris 1*,expiration Wu'Ilte p6riode W'Ulm all il i)artir do lia (late effective ('ine extension faito eI vertu ies pari. graphes (1) et (2) du present article, cliacu tes Etats Contract-

I

applies. (4) For the application of the present Convention to any territory to which it is extended by the United States or by Belgium, references to "the United States" or to "Belgium" or to ono or the other Contracting State, as the

(4) Pour l'application

tie ha

present Convention A tout territoire auquel ello cst 6tenduo par les Etats-Unis oil par Ia Belgique, lea r6f~rences aux "Eta,,-LUnis" ou A Ia "Belgique" ou AI l'un on h'autre Etat Contractant, suivant

(302)

25

TIAS 2833

case may be, shall he Construe I le cas, seront considrdes comine visunt co Torritoiro. to refer to such territory. (5) For the purposes of tJ1 (5) Aux fins do Ia pr~sento p)rcsent Convention, the Belgimti Convention, lo Congo Beige sera Congo shall be considered to bt considr6 comme tin Territoiro ai Belgian territory to which tht belge auquel pourront s'appliquer provisiouts of this Article shallI lea dispositions du pr6sent article.

alIy.
ARTICLE XXIII (1) The present Convention (1) La

ARTICLE XXIII
pr~sente Convention

shall be ratified attd the instru. sera, ratified et les instrunonts do
ments of ratification shall be ex. ratificatiot seront dchaug&s A changed at Washington as soon Washington lo plUS t6t possible. as possible. (2) The present Convention (2) la prisento Convention sera shall become efreetive on the list mise en vigueur le ler janvier do

day of January of the year in l'anno au cours do laquelle les
which the exchange of instruments of ratification takes place. It shall continue efrective for a period of live years beginning with that late and indefinitely after that period, but ilmay 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 mouths' )rior notice of termination has been given, the termination to become effective on the first (lay of Janiuary following the expiration of the six-mont h period. DoNE in duplicate, in the English and French hnguages, tie two texts having equal anlthenticity, at,Washington this twentyeighth day of October, 1948. instruments ole ratification seront ehang6s. Elle restera en vigueur pendant uno p6riodo (i0 cinq utns A partir do cette (late, et ind6fini-

nmt apr& eetto p6riodoe, mais
pourra Otre d6nondCo par l'un ou l'autre des Etats Contractants A la iin (ic Ia p6riode do einq ans, ou en tout temps april's cette date; toutefois un prdavis do d6noneiation d'une durd'u moins six mois devra tro donn6, la dtnonciation no produisaint ses effets qua le ler janvier de l'anu~e ojui suivra I'expiration ole cot te p6riodo tie six 11ais. FAIT en double exemplaire, en langues anglaise et franqaise les deux textes faisant e'galement foi, 11 Washington le vingt-huit octobre, 1948.

FOIR TllHE GOVERNMENT OF II. UN I) lATl,:s OF AMERICA: POUR LE GOI TVEI,*NEMIiN' IE ETIATS-UNIS 1)'AMEIRIQUE: ROBtEiT A Iovt.irT IsEA1L] FOiL rI GO\'EINMENT OF BI.CI.GIUM:

POUR LE GOUVI.lNI.'MI'NT BEIGE: SlimVmHIcmUYs

is A.]L

(303)

CONVENTION BETWEEN THE CONVENTION ENTRE LES UNITED STATES OF AMER. ETATS-UNIS D'AMERIQUE ICA AND BELGIUM MODI. ET LA BELGIQUE MODI. FYING AND SUPPLEMENT. FIANT ET COMPLETANT LA ING THE CONVENTION OF CONVENTION DU 28 OCTO. OCTOBER 28, 1948, FOR THE BRE 1948, POUR EVITER LA AVOIDANCE OF DOUBLE DOUBLE IMPOSITION ET TAXATION AND THE PRE. EMPECHER L'EVASION FIS. VENTION OF FISCAL EVA. CALE EN MATIERE D'IM. SION WITH RESPECT TO POTS SUR LE REVENU TAXES ON INCOME The Government of the United Le Gouvernement des EtatsStates of America and the Govern- Unis d'Am6rique et le Gouvernement of Belgium, being desirous of ment belge, ddsireux de modifier et modifying and supplementing in de compl6ter sur certains points la certain respects the Convention Convention pour 6viter la double for the avoidance of double taxa- imposition et empcher l'6vasion tion and the prevention of fiscal fiscale en mati~re d'imp6ts sur le evasion with respect to taxes on revenu, signed A Washington, le income, signed at Washington on 28 octobre 1948, ont d6cid6 de October 28, 1948, have decided to conclure dans ce but une Convciconclude a supplementary Con- tion compl6mentaire et ont dsign6 vention for that purpose and have pour leurs pldnipotentiaires respecappointed as their respective Plen- tifs: ipotentiaries: The Government of the United Le- Gouvernement des EtatsStates of America: Unis d'Amdrique: Dean Acheson, Secretary of Dean Acheson, Secrtaire d'Etat State of the United States of des Etats-Unis d'Am6rique, et America, and Le Gouvernement beige: The Government of Belgium: Baron Silvercruys, AmbassaBaron Silvercruys, Ambassador deur Extraordinaire et PlniExtraordinary and Plenipopotentiaire de Belgique it tentiary of Belgium at Washington, Washington,
420)

I
InAAN

27
who, having communicated to one another their respective full powers, found in good and due form, have agreed its follows:
ARTICLE I

TIAS 2833

lesquels, aprs s'6tre communique
leurs plains pouvoirs, reconnus en

bonne et due forme, sont convenus de ce que suit:
ARTICLE I

i

(4) Pour determiner le ben4flee net industriel et commercial qui doit 6tre attribu6 & l'tablissement stable, on admettra en deduction, quel que soit le lieu o6x elles ont 06 faites, toutes lea ddpenses, y compris lea d~penses de gestion et d'administration g6ndrale, dans la mesure ot: elias peuvent raisonablement 6tre imputes &cot 6tablissement stable. (b) By striking out Article VIII (b) L'article VIII eat supprim6 and inserting in lieu thereof the et remplac6 par la disposition following: suivante:
ARTICLE VIII ARTICLE VIII

The provisions of the Convention between the United States and Belgium, signed at Washington on October 28, 1948, are hereby modified and supplemented as follows: (a) By adding at the end of Article IV the following new paragraph: (4) In the determination of the net industrial and commercial profits allocable to the permanent establishment there shall be allowed as deductions all expenses, wherever incurred, insofar as they are reasonably allocable to the permanent establishment, including executive and general administrative expenses so allocable.

Les dispositions de Ia Convention entre les Etats-Unis et Ia Belgique, sign6e A Washington le 28 octobre 1948, sont par la prisente modifies et completes comme suit: (a) Le nouveau paragraphe ciaprbs est ajoutd AParticle IV:

(1) The rate of United States tax on dividends derived from sources within the United States by a resident or corporation or other entity of Belgium not having a permanent establishment within the United States shall not exceed 16 percent. on (2) Belgium shall not impose dividends derived from

(1) Le taux do l'imp6t des Etats-Unis sur les dividendes provenant de sources situes aux Etats-Unis et attributes & un habitant, une socidtd ou une autre personne morale do la Belgique, qui n'a pas d'dtablissement stable aux Etats-Unis, ne pourra excdder 15 pour cent. (2) La Belgique n'appliquera pas aux dividendes provenant

(305)

TIAS 2833

28
de sources sittu6es en Belgique et attribus A un resident, tine socidt6 ou autre personne morale des Etats-Unis, qui Wa pas d'6tablissement stable en Bel. gique, une taxe quelconque ayant le caractbre d'un imp6t complnientaire personnel ou d'additionnels A cet imp6t ou une taxo quelconque d'un caract6ro analogue A cello qui est retenue A Ia source sur les dividendes on vertu de la loi des Etats-Unis en co qui concerne les strangers non residents et les soci6t6s 6trangtres. (c) Le nouvel article suivant

sources within Belgium by s resident or corporation or otheir entity of the United States not having a permanent establish. . ment within Belgium any tax

in the nature of a personal complementary tax or surtax thereon, or any tax similar to that withheld at the source on dividends tinder United States law in the case of nonresident aliens and foreign corporations.

(c) By inserting immediately after Article VIII the following est insdr6 immddiatement apr&s 'article VIII: new Article: ARTICLE VIIIA ARTICLE VIIIA Le taux do l'imnp6t appliqu6 The rate of tax imposed by
par chacun des Etats contrtcupon interest (on bonds, notes, tants stir les int~rgts (d'obligadebentures, or on any other tions, d'cffets do commerce, on form of indebtedness) derived de tous autres titres do cr6ance) from sources within such State provenant de sources situ~es by a resident or corporation or dans cot Etat et attributes a ti other entity of the other State resident (habitant), uno soci6t6 not having a permanent estab- ou autre personno morale do lishment within the former State l'autro Etat, qui n'a pas d' tablissement stable dans le preshall not exceed 15 percent. mier Etat, n'exc6dera pas 15 pour cent. (d) By striking from Article (d) L'expression "au quart" fiXII (3)(a) "one-fourth" and in- gurant A l'Article XII (3) (a) est serting in lieu thereof "one-fifth". supprim~e ot remplacdo par "au cinqui6me". (e) By striking out Article (e) L'articlh XVII est supprim6 XVII and inserting in lieu thereof et remplac6 par l'articlo suivant: the following Article:

each of the Contracting States

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29 ARTICLE XVII Each of the Contracting States shall collect taxes, which are the subject of this Convention, imposed by the other Contracting State (as though such tax were a tax imposed by the former State) as will ensure that the exemption, or reduced rate of tax. as the case may be, granted under the present Convention by such other State shall not be enjoyed by persons not entitled to such benefits.

TIAS 2838

*

ARTICLE XVII Chacuit les Etats Contractantq recouvrera, comme s'il s'agissait de son propre imp6t, tout imp6t vis6 A la pr6sente Convention, qui eat Atabli par l'autre Ftat Contractant et don't la perception sera n~cessaire pour quo le b6n~fice de l'exemption ou do la reduction du taux do cot imp6t accordde, suivant le cas, par cot autre Etat, en vertu do la prksento Convention, ne soit pas obtenu par des personnes qui n'y ont pas droit. (f) By striking from paragraph (f) Le mot "Washington" figu(1) of Article XXIII the word rant au paragraph (1) de 'arti"Washington" and inserting in cle XXIII ost supprim6 et remplac par "Bruxelles". lieu thereof "Brussels". (g) By striking out paragraph (g) Le paragraph (2) de l'arti(2)of Article XXIII and inserting cle XXIII est supprim6 et remin lieu thereof the following: placd par la disposition suivante: (2) The present Convention (2) La pr~sente Convention shall become effective with re- s'appliquera aux revenus obtespect to income derived in tax- nus pendant touted pdriode imable years beginning on or after posable annuelle commengant the first day of January of the A partir du premier janvier de calendar year in which the ex- l'ann6e civil au cours de lachange of the instruments of quelle les instruments do ratifiratification takes place, except cation seront 6chang6s; toutethat if such exchange takes place fois, si cot dchange a lieu apr~s after the thirtieth day of Sep. le 30 septembre d'une tell tember of such calendar year, annde civil, les articles VIII et Articles VIII and VIIIA and VIIIA et Particle IX (2) ne Article IX (2) shall become s'appliqueront qu'aux paiements effective only with respect to effectu6s apr&s le 31 d6cembre payments made after the thirty- de la dito annie civil. Elle first day of December of such restera en vigueur pendant une calendar year. It shall con- p6riodo de cinq ans Apartir du

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TIAS 2833

30

tinue effective for a period of liv 'e, years beginning with tlhe firsit ,r day of January of the calendar year in which such exchang e takes place and indefinitel.y after that period, but may b,P terminated by either of thiD Contracting States at the en(I of the five-year period or at an] , time thereafter, provided thait at least six months' prior noticee of termination has been given the termination to become ef,fective on the first day of Janu.ary following the expiration oi the six-month period.
ARTICLE II

premier janvier do I'ann~e civile
au cours do laquelle lea instruments de ratification seront dchang~s et inddflniment aprbs cette pdriode, mais elle pourra 6tre ddnoncde par l'un ou l'autre des Etats contractants A la fin de Is pdriode de cinq ans ou en tout temps aprbs cette date; toutefois un pr6avis de ddnonciation de six mois au moins devra tre donn6, Is d~nonciation ne produisant ses effets que le premier janvier de l'an. nde qui suivra l'expiration de cette pdriode de six mois.
ARTICLE II

(1) La pr~sente Convention (1) The present supplementary complfmentaire sera ratifide et lee Convention shall be ratified and the instruments of ratification instruments de ratification seront shall be exchanged at Brussels as dchangds aussit6t que possible i soon as possible. Bruxelles. (2) This supplementary Con- (2) La pr~sente Convention vention shall be regarded as an complmentaire sera considdrde integral part of the Convention of comme formant partie int~grante October 28, 1948, and shall be- de la Convention du 28 octobre come effective and continue effec- 1948; elle entrera et restera en tive in accordance with Article vigueur conformnment aux dispoXXIII of that Convention as sitions de l'article XXIII de cette amended by Article I (g) of this Convention, amend6 par l'article supplementary Convention and, I (g) de la prdsente et en cas de in the event of termination of such d~nonciation de cette Convention, Convention, shall terminate simul- elle cessera ses effets en m~me taneously with such Convention. temps que celle-ci. IN WITNESS WHEREOF the unEN FOI DE QUOi les pl6nipotendersigned Plenipotentiaries, being tiaires soussignds, A ce autorisds authorized thereto by their re- par leurs Gouvernements respecspective Governments, have tifs, ont sign la pr~sente. Convensigned this supplementary Con- tion compldmentaire et y ont vention and have affixed thereto apposd leurs sceaux. their seals.
DONE in duplicate, in the EngFAIT en double exemplaire, en

lish and French languages, the two langues anglaise et frangaise, les

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31

TIAS 283

texts being equally authentic, at deux textes faisant dgalement foi, Washington this ninth day of A Washington le neuf septembre September, 1952. 1952.
FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA: POUR LE GOUVERNEMENT DES ETATS-UNIS D'AMERIQUE:

DEAN AcHESON
FOR THE GOVERNMENT OF BELGIUM: POUR LE GOUVERNEMENT BELGE: SILVERCRUYS

[SEAL]

[SEAL)

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TIAS 2833

32

AND WHEREAS the Senate of the United States of Amnerica by their resolution of July 9, 1953, two.thirds of the Senatoi:, present concur-

ring therein, did advise and consent to the ratilication of the two

conventions aforesaid;
AND WHEVlIEA the two conventions aforesaid were duly ratified by the President of the United States of America on July 23, 1953, in pursuance of the aforesaid advice and consent of the Senate, ond the two conventions aforesaid were duly ratified on the part of Belgium; A.ND WHEREAS the respective instruments of ratification of the two conventions aforesaid were duly exchanged at Brussels on Septemher 9, 1953, 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 Belgium; AND WHEREAS it, is provided in Article XXIII of the aforesaid convention of October 28, 1948, as amended by Article I (g) of the aforesaid convention of September 9, 1952, that the convention shall become effective with respect to income derived in taxable yeals beginning on or after the first day of January of the calendar year in which the exchange of the instruments of ratification takes place, provided such exchange takes place oi or before the thirtieth day of September of such calendar year; AND WHEREAS it is provided in Article 1I of the aforesaid convention of September 9, 1952, that the supplementary convention shall be regarded as an integral part of the convention of October 28, 1948, and shall become effective and continue effective in accordance with Article XXIII of that convention as amended by Article I (g) of tle supplementary convention; 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 of October 28, 1948, and the aforesaid convention of September 9, 1952, 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 persons subject to the jurisdiction thereof, the said conventions being deemed to be effective with respect to income derived in taxable years beginning on or after January 1, 1953. IN TE8TIMONY WHEREOF, I have hereunto set my hand and caused the Seal of the United States of America to be affixed.

Ioln\

IU.I

03

TIAS 283

DoNU at the city of Washington this twenty-third day of September in the year of our Lord one thousand nine hundred fifty[SEAL) three and of the Independence of the United States of

America thie one hundred seventy-eighth. DWIGHT D EISENHOWER By the President:
JoHN FOSTER DULLES

Secretary of S afe

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TIAS 2833

34

The Belgian Ambaeador to the Acting Secretary of &Vt AMBAsSADE 1) BELOIQUE
No. 3029 WASHINGTON,

August 7th, 195.2

SIR:

I have the honor to refer to the convention between Belgium and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, which was signed at Washington on October 28, 1948. It has been noted that there is an apparent divergence between the French and English texts of paragraph (1) of Article XV of the convention mentioned above. It is the understanding of the Belgian Government that the French text of the said paragraph is intended to have and shall have the same meaning and application as the English text thereof so that, in any case where the application of the said paragraph is in question, the English text shall be understood to govern. I shall appreciate receiving an acknowledgement of the receipt of

this note, indicating that the statements above are in accordance
with the understanding of the United States Government. Accept, Sir, the assurances of my highest consideration.
SILVERCRUYS

Honorable

K. BRUCE Acting Secretary of State,
DAVID

Department of State, Wahifgton, DC. The Secretary of State to the Belgian Ambassador
DEPARTMENT OF STATE WASHINGTON

Sep 8 1952 EXCELLENCY:

I have the honor to acknowledge the receipt of Your Excellency's note of August 7, 1952, in which, after reference to the convention between the United States of America and Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, which was signed at Washington on October 28, 1948, it is stated as follows: "It has been noted that there is an apparent divergence between the French and English texts of paragraph (1) of Article XV of the convention mentioned above. It is the understanding of the

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or

TIAS 2833

Belgian Government that the French text of the said paragraph is intended to have and shall have the same meaning and application as the English text thereof so that, in any case where the application of the said paragraph is in question, the English text shall be understood to govern." The statement quoted above is in accord with the understanding of the United States Government.
Accept, Excellency, the renewed assurances of my highest consideration. For the Secretary of State:

JACK B. TATE
His Excellency
Baron SILvERCRUYS,

Amba88ador of Belgium.

73095 O-62-vol. 1-21

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SUPPLEMENTARY CONVENTION SIGNED AUGUST 22, 1957, AND BELGIAN NOTE DATED APRIL 2, 1954

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Presidential Message of Transmittal to Senate (including materials enclosed therewith)

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85Th CONGRESS
,-d Sesmion

SENATE

I

ECUB

CONVENTION WITH BELGIUM SUPPLEMENTING THE CONVENTION OF OCTOBER 28, 1948, RELATING TO DOUBLE TAXATION

MESSAGE

THE PRESIDENT OF THE UNITED STATES
TZANBMXTT/NG

THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND BELGIUM, SIGNED AT WASHINGTON ON AUGUST 22, 1957, SUPPLEMENTING THE CONVENTION OF OCTOBER 28, 1948, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, AS MODIFIED BY THE SUPPLEMENTARY CONVENTION OF SEPTEMBER 9, 1952

JANUAnT

30, 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

To the Se nte of the United Statee: 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 Belgium, signed at Washington on August 22, 1957, supplementing the convention of October 28, 1948, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, as modified by the supplementary convention of September 9, 1952. The new supplementary convention is designed to facilitate the extension of the 1948 convention, as modified, to the Belgian Congo and the Trust Territory of Ruanda-Urundi.

THE WHITE HoUSE, January 80, 1958.

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I

2

0MVMT'IO? WITH BELGrUM, RIATINO TO TAXATION

I transmit also an English translation of a note dated April 2, 1954, addressed by the Ambassador of Belgiuni to the Secretary of State, constituting it notification by the Belgian Government under article XXII of the 1948 convention for the purpose of extending the operation of that convention as modihfied, to the Belgian Congo and the Trust Territory of Rtuanaa-Urundi. It is desired that, in conjunction with the consideration of the supplementary convention, the Senate consid er and approve the acceptance by the United States Governnent of the Belgian Government's notification. I transmit also for the information of the Senate the report by the Secretary of State with respect to the supplenentary convention and the notification, both of which have the approval of the Department of State and the Department of the Treasury. DWIHT D. EISENHOWER. Enclosures: (1) Report by the Secretary of State; (2) convention of August 22, 1957 supplementing the income-tax convention of 1948, as modified, between the United States and Belgium; (3) translation of note of April 2, 1954, Ambassador of Belgium to the Secretary of State.
DEPAtTME NT OF STATE,

The

PRE8IDENTz

Washington, January 16, 1968.

The White house:
Thie undersigned, the Secretary of State, has the honor to submit herewith, for 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 Belgium, signed at Washington on August 22, 1957, supplementing the convention of October 28 1948, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, as modified by the supplementary convention of September 9, 1952. It is desired also that, in conjunction with the consideration of the supplementary convention submitted herewith, the Senate consider and approve the acceptance by the United States Government of a notification given 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 (S. Ex. I, I81st Cong., Ist sess.; 4 U. S. T. 1647), as modified (S. Ex. A, 83d Cong., Ist seas.; 4 U. S. T. 1647). That notification is embodied in a note dated April 2, 1954, addressed by the Ambassador of Belgium to the Secretary of State. An English translation of that note, prepared in the Department of State, is enclosed for transmission to the Senate. The purpose of the new supplementary convention is to facilitate the extension of the 1948 convention, as modified, to the Belgian Congo and the Trust, Territory of Ruanda-Urundi and thereby to facilitate investment in those areas. Upon entry into force of this convention, and after Senate approval of the proposed extension as mentioned above, it would be possible to complete the procedure prescribed in the 1948 convention for extending its operation to those
are".

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CoNVDTrON

WITH BF.LGIUM, R[AnTINO

TAXATION T

In a letter relating to this matter, addressed by the Secretary of the Treasury to the Scretary of State prior to the signing of the
suppletentary convention, it was stated:
The Belgian (overnnent first notified the United States Government of its desire to huve the treaty exktdCd init not to the State Ipartment on April 2, the basic treaty would 1w necessury before the United State.i could give its ac-

10,51.

Following such notification, it. became clear that certain modifications in

would effect, the modifications ,o,,sidered desirable to lay an adequate
organized or created under the laws of Belgiun or of the Belgian Congo and subject to tax under the Belgian fiscal law of June 21, 1927.

cejptaiee to the notificationi as rquired l)y the convention. The prolmsed suppleouteofie of (|iseutlssioti held with officials of the Belgian menta3ry con)venltion Is ai1 (overinllelt since that tine. 'ri' new supplementary convention contains 5 articles, 4 of which

basis for the pro )osed extension. Article I would amend the definition of "Belgian enterprise" in article 11 (1) (d) of the 1948 convention so as to cover any corporation For purposes of the proposed extension, the definition will Iean an industrial or conlmercial enterprise or undertaking carried on in the Coneo by a citizen or resident of the Congo or by a corporation or oithier juridical entity created or organized under the laws of the Congo. An individual resident of the Congo, regardless of nationality, would

be entitled to the benefits accorded by tie convention to a Congo enterprise, provided he carries on business in the Congo, but a corporation created or organized under tie laws of a country other than tile ('ongo would not be entitled to benefits.
Article II of the supplementary convention is related to article VIII of the 1948 convention and would preclude tih, Belgian Congo and the Trust 'l'erritory of Ruanda-ITrundi front imposing the "tax who, or a corporation or other entity of the United States which, does not. have it permanent establishlnent in such area. The effect of article 1iII of the 1948 convention as modified by the 1952 convention and the convention submitted herewith, taken together with article XXII (4) of the 1948 convention, is to leave the Congo tax on dividends unchanged, but frozen at, a maximunt of 15 percent. The effect is also to reduce from 30 percent to 15 percent the United States tax on dividends gvoin, from the United States to aliens residing in tile Congo or the Trust 'erritory of Ruanda-Urunidi. The effect is, therefore, reciprocal.

mobili6re" at a rate in excess of 15 percent o1 dividenls front sources within either of those areas paid to a resident of the Uited states

Article II!, by substituting the words "immediately preceding" for the word "following" in article XXll (2) of tlze 1948 convention. would make the extension to tile Congo and the Trust. Territory of Ruanda-Urundi effective on and after Tanuary 1 immediately pre*cedGovernment's notification for such extension.

ing the (late ott which the United States formally accepts the Belgian

Article IV clarifies the term "overseas territories" itt accordance with the original intent. as applying to any overseas territory for the foreign relations of which either the United States or Belgium is

responsible.

Aarticle V provides for ratification and for exchange of instruments of ratification, the supplementary convention toIbecome effective with respect to taxable years beginning on or after January 1 of the

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4

cimNVEurroNr

WITH BELOIUM, RFELATINO

TAXATION T0

year in which such exchange takes place. Tite supplementary prowould continue in effect as an integral part of the 1948 contol vention, as modified, subject to the same provisions in regard to termination. 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. No national crisis tax or personal complementary tax, applicable in Belgiuin (see art. I of the 1948 convention) has becii enacted for the Congo. Article XXII of the 1948 convention contains provisions in paragraph (1) whereby either party may, with a written notification to the other party through diplomatic channels-declare its desire that the operation of the present convention, either in wholh or as to such provisions thereof as may be deemed to have special application,

shall extend to any of Its colonies or overseas territories which imposes taxes substantially similar in character to those which are the subject of the present

Convention. Article XXII (2) provides that, in the event a notification is given by one of the parties in accordance with that procedure--

the present Convention, or such provisions thereof as may be specified in the iioti ication, shall apply to any territory named in such notficatiotn on aml after the first day of January following the date of a written communication through diplomatic channels addressed to such Contracting State by the other ('onance with its own procedures, stating that such notification is accepted in respect.
tracting State, after such action by the latter State as may be necessary in accordof such territory. In the albence of such acceptance, none of the provisions of the present Convention shall apply t such territory.

As indicated hereinabove, the Belgian Government gave, by a note dated April 2, 1954, a written notification in accordance with article XXII of the 1948 convntion expressing the desire of that Government that the application of the provisions of that convention and of the supplementary convention of 1952 be extended to the Belgian Congo and the Trust Territory of Ruanda-Urundi. In accordance with established policy (see S. Ex. Rept. No. 11. 80th Cong., 2d ses.), any proposal for extension, before being accepted by the United States Government, is to be submitted to tile Senate for approval. Accordingly it is desired that the Senate not only give advice and consent to ratifcation of the new supplemental' convention in order to effect the necessary modifications in the 1948 convention, as modified, but also approve the acceptance by the United States Government of the proposed extension to the Belgian Congo and the Trust Territory of Ruanda-Urundi. Both the supplementmy convention and the proposed extension have the approval of the Department of State and the Depi rtment, of the Treasury. Respectfully submitted.
JoWIN

FosT :m DULLs.

(Enclosures: (1) Convention of August 22, 1957, supplementing the income-tax convention of 1948, as modified, between the United States and Belgium' (2) translation of note of April 2, 1954, Ambassador of Belgium to ie Secretary of State.)

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N

CONVFNPION WITH BEGIUM, RELATING TO TAXATION

5
5

[Text of convention]

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Senate Committee Hearngs
July 1, 1958 85th Congress, 2d Session

Senate Committee on Foreign Relations

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DOUBLE TAXATION

CONVENTIONS

HEARING
1BEFOR THU

COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE
EIGHTY-FIFTH CONGRESS
SIOOND SESSION
ON SUPPLEMENTARY INCOME TAX PROTOCOL WITH THE UNITED KINGDOM (EX. A, 85TH CONG., 2D SESS.); SUPPLEMENTARY INCOME TAX CONVENTION WITH BELGIUM (EX. B, 85TH CONG., 2D SESS.); AND NOTIFICATION OF EXTENSION OF INCOME TAX CONVENTION WITH THE UNITED KINGDOM (EX. C, 85TH

CONG., 2D SESS.)
JULY it 1958

Printed for the use of the Committee on Foreign Relations

*
UNITE STATUS GOVERNMENT PRINTING O1I1C3 WASHIBGTON: 1968

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COMMITTEE ON FOREIGN RELATIONS
.THEODORE FRANCIS GREEN, Rhode Isand. Clairma ALEXANDER WILEY, Wisconsin Y. W. FULBRIOHT, Arklum H. ALEXANDER SMITH, New Jersey JOHN SPARKMAN, Alabama BOURKE B. HICKENLOOPER, Iowa HUBERT H. HUMPHREY, Mlnnemta WILLIAM LANGER, North Dakota MIKE MANSFIELD, Montana WILLIAM F. KNOWLAND, Caliornia WAYNE MORSE, Oregon GEOROE D. AIKEN, Vermont RUSSELL B. LONG, Loubtla HOMER E. CAPEHART, Indiana JOHN F. KENNEDY, Masschusetts CAXL MARCY, A Of Sof DAIRLL St. CuI, ol Clerk n

(828)

CONTENTS
Carroll, Mitchell B., special counsel, National Foreign Trade Council, FAe New York N. Y------------------------------------------------34 Frear, Hon. i. Allen, Jr., United States Senator i. om the State of Delaware. 30 Kust, Leonard E., general tax counsel, W1 ;inghouse Electric Corp., Pittsburgh, Pa --------------------------------------------41 Martin, Hon. Edward, United States Senator from the State of.Pennsylvania ...........----------------------------------------------1 Raum, !,e ,iintrd, representing American Metal Climax Co., Inc... 48 Sim,.. ,, lion., Richard M., United States Representative from the 18th District of Pennsylvania ----------------------------------------81 Smith, Dan Throop, Deputy to the Secretary of the Treasury ----------20 Stain, Colin F., chief of staff, Joint Committee on Internal Revenue Taxation, accompanied by Arnold C. Johnson, attorney, Joint Committee on Internal Revenue Taxation-----------------------. 4
III

73095 0-02-vol. 1-22

(3°)

DOUBLE TAXATION CONVENTIONS
TURDAY, JULY 1, 1958

Waehington, 19. 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, Sparkman, Mansfield, Morse, Long, Wiley, Smith of New Jersey Aiken, and Capehart. Te CHAIRMAN. The meeting Will please come to order.
COMMITTEE CONSIDERATION OF DOUBLE TAXATION CONVENTIONS

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE,

The Foreign Relations Committee is meeting in public session this morning for a hearing on 3 pending double taxation conventions, 2 with the United Kingdom and 1 with Belgum. Following the completion of the heanng, 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 RON. EDWARD MARTIN, A UNITED STATES SENATOR FROM THE STATE OF PENNSYLVANIA

Mr. Chairman, and members of the committee, I appreciate the opportunity to appear before the committee this morning and regret that 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. On August 28, 1957, Congressman Simpson, of Pennsylvaia, and I sent a joint letter to the chairman of this committee regarding the protocol amending articles VIII and XIII of the Anglo-Aierican Tax Convention of Apiil 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

Senator MARTIN. Thank you, sir.

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I

2

DOUBLE TAXATION CONVENTIONS PROTOCOL INADEQUATE TO MEET DEFICIENCIES OF CONVENTION

You will recall that the Secretary of State and the British Ambassador signed the protocol on August 19, 1957, and the State Department stated at that time that the protocol was signed to meet the wishes of Congress. Undoubtedly this statement refers to H. R. 7643, which wits unanimously passed by the 84th Congress in 1956 to eliminate double taxation by providing a credit to anl American recipient of British royalties subject to tax in Britain. The President vetoed this bill on the grounds that the proper way to prevent double taxation on sucll royalty income was by amendment to the 'rax Convention between the United States and the United Kingdom. The protocol is intended to serve this purpose. It is clear, however, that the protocol does not take care of the problems covered by the bill vetoed by the President. On February 18, 1957, Congressman Simpson, realizing the inadequacies of the protocol, introduced H. R. 4952 which is substantially the same as the bill vetoed by the President. This bill has again been passed by the House and is pending before the Senate Finance Coinmittee. Action has been delayed upon it pending an opportunity to discuss the protocol. It is our hope to be ablh to convince the cornmittee that the protocol does not accomplish the purpose intended by the legislation. Mr. Chairman, as I previously stated, I have two other meetings this morning, and as the distinguished chairman anld the members of the 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 leave-

but similar boats. Senator MArTix. Yes, sir. I will leave the presentation in the hands of my colleague from Pennsylvania, Congressman Richard 1M. Simpson of Pennsylvania, and he is accompanied by Mr. Leonard Kust, general tax counsel of the Westinghouse Corp., and Mr. E. M. Elkin, who was formerly the chief counsel for the Westinghouse Corp. I think Congressman Simpson-it might be advisable, if it is agreeable to the commit tee, taint we hear front the 'Treasury first--whatever the committee may desire. I would like to present Mr. Kust, so that, you will know hinm, and Mr. Elkin. The CHAIRMAN. Shall we proceed now to hear tie other witnesses? Are vou finished, Senator? Senator MARTIN. Whatever the will of the committee is. I do not want to suggest the order of witnesses to the committee, but probably the Treasury would like to be heard first. The ('.IAIJIMAN. Mr. Stain, the chief of staff of the Joint Committee on Internal Revenue Taxation is here, and we would like now to
hear from him. Senator MlANSFIELD.. Mr. Chairman, before you call Mr. Stani, could I ask Senator Martin one question? The CIAILMIAN. Yes, certaily.

The CHAIRMAN. I think we are all in-i cannot say the same boat,

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DOUBLE TAXATION CONVENTIONS POS4IIIITY OF ANOTHER VETO OF SIMPSON 11,
St'llatoil' MAXSFIEI,I. Seniiator, is the-re assurance that, the President might not again veto the simpson bill?

Senator MARTIN. Senator, that, of course is also probable. Personally, I am of the old school where I feel thlat the legislative ought to act entirely independent of (lie executive, but I will adnit-I will give you anl illustration Senator Maisfield. I went contrary to that on the authorization bill for flood control. Some of us worked for 4 or 5 weeks to try to work out a bill that would meet with the approval

of the executive. We probably did better to work closely together,
but that depends upon the circumstances.

p

Senator MANSFIELD. I just wanted to raise the (Iuestion. Senator MARTIN. Well, Senator Mansfield, that is a very good question, andl I will admit that I have not talked to anyone in the executive relative to it. Mr. Chairman, I would like very much to stay, because I consider this of great importance. But if you will excuse me now, I have two committee meetings this morning. The CHAIRMAN. I call sympathize with you. Senator MARTIN. It is not that I am not extremely interested. I think what you have before you is one of the most important problems that I havn on my agenda. I am sorry that I cannot stay and maybe question some of the folks from the Treasury Department, but I know they will be eminently fair. Ti1e CHAIRMAN. If'you find you can return, we will be glad to have you.
PROPOSED STUDY OF FOREIGN ECONOMIC PROBLEMS

9

ments Act, as you knowv from (lie hearings we on that committee conduct. so frequently. Furthermore, all the taxes, imports, and quota matters are legislatively before tle Finance Committee, but the treaties come to this committee. So it seems to me there is some need of a study of matters that come to the cognizance of both committees to try-to keep all these complicated problems straight. a Senator tMARTIN. with the distinguished Senator from I agree Louisiana that that is true. InI te 1s8c quarter of a century, the affairs of our country have become so much more complicated because of our foreign relations. I appreciate very much, Mr. Chairman, your courtesy. The CIIAIRMAN. We are very glad to have you here. Mr. Simpson, did you want to defer your testimony? Representative SIMPSON. I will do'whatever the Chair requests. I am prepared to go ahead, or do whatever you suggest.
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mittee to make a study of this whole problem involving foreign trade and foreign taxation matters. Senator MARTIN. Well, I would like to cooperate in any way I can, as a member, the senior minority member on the Finance Committee. However, I think we should act more rapidly in this instance than would be possible for that to do. Senator LONG. The point I had in mind, youi see, Senator Martin, is that the Finance Committee has jurisdictionI over the Trade Agree-

Senator LONG. Mr. 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 members of the Foreign Relations Committee and the Finance Com-

DOUBLE TAXATION CONVENTIONS The CHAIRMAN. Well, the suggestion is made that we hear 1 or 2 other witnesses first. But they will not take too long, I hope.

Mr. Stain.

STATEMENT OF COLIN F. STAN, CHIEF OF STAFF, JOINT COMMITTEE ON INTERNAL REVENUE TAXATION Mr. STAM. 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 protocol, but I can present either one first. The CHAIRMAN. Will you please give your full name for the record? Mr. STAM. My name is Jolhn F. Stain, chief of staff of the Joint Committee on Internal Revenue Twxation. At your request, the staff of the Joint Committee on Internal
Revenue Taxation has reviewed the following tax conventions pending

before the Committee on Foreign Relations: The supplementary protocol between the United States of America and the Kingdom of Great Britain and Northern Ireland-that is Executive A, and that is one I think the witnesses want to speak on-and then the notification b y the Government of Great Britain and Northerni 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

and Northeri Ireland, which is Executive C, is in accord with the principles underlying the provisions of existing tax conventions which the Senate has previously approvd.
Now, that is executivee o. The supllemnntary protocol between the United States of America and the Kingdom of Great Britain and Northern Ireland, Executive A, however raises important questions of tax policy which the committee

In general, the notification by the Government of Great Britain

may wish to consider. These questions are discussed in a memoranduin prepared by us. I will present this document for the record, but I will just read the conclusion of it.

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, is the same as that provided by I. R. 4952. The supplementary protocol, therefore, 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.

This supplementary protocol relates to a tax question currently under legislative consideration. It contains two entirely different devices for the elimination of double taxation. One of these devices, the extension of the exemption from taxa-

before both the Ways and meanss Comnut tee and the Finance Conimittee. It. has passi-d the Ways and Means Committee twice, and it
has passed the Fiance Comn'ittee once, and is now pending before the Finance Committee at the present time. And I am speaking now about the bill It. R. 4952.. I1. R. 4952 would be effective for all

Now, at, that poit, I would like to say that this matter has been

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DOUBLE TAXATION CONVENTIONS

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taxable years after #January 1, 1950. While both measures seek to eliminate double taxation areed to exist, at the present time, the supplementary protocol would not affect the prior period to which 11. It. 4952 relates. In other words, H. R. 4952 is retroactive and goes back to 1950, while the protocol is not retroactive and therefore would not affect many past situations.
This supplementary protocol relates solely to a complicated issue of tax policy which Congress considered in 1956, and which Congress is now currently considering in the tax committees of the Congress. If made effective, it would fore. close 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 royalties.

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 CHAIRMAN. Are you making any recommendation? Mr. STAM. We have a recommendation; yes. We suggest that the 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 past, 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 OVERRIDE PENDING LEGISLATION

Senator LONG. 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 problem 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 American company. 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 H. R. 4952. So that both the Ways and Means Comniittee and the Finance Committee have in the past felt that the credit should be allowed to the American company, and not to the British company. And that is the reason

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DOUBLE TAXATION CONVENTIONS

that we are bringing this matter up before tile committee, because it does involve a direct conflict between tile action which the Foreign Relations Committee is being requested to take and the 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 oug it to be tilhe 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 HILL 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 Lo'a. 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 OWns8 the )atent, falld has licensed it, to the British corporation, and under the British law there is a withholding of the United Kingdom tax on the payments under the license agreement to the American corporation. Now, that reduces the net amount that the American corporation is going to receive in the case of a gross royalty. However, in the ease of a net royalty-and I an talking now about a particular situation, because that isa 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, whic-h is a set amount after time 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.
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 last. Now, in order to do that,
you will have to make a certain modification, because the way the The CHAIRMAN. What is your recommendation?

extension is worded, it brings into the extension the pending E9xecutive A, and extends that to the territories. And we feel that. the
conImittee should nmot act. on that part. at this time, particularly while tme matter is pending before the Finance Committee. The Cn.HAIRM.. you think we ought to take any pie, emeal .0o

act ion? MNr. STAM. Not on Executive A, because that only relates to that subject. Tie CHAIIMAN. It is a part of it.; is it not? '\r. STAM. That is riglht. I think we should l)rovi(le for the extension to the protectorates, but not extend Executive A to tie territories.

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DOUBLE TAXATION CONVENTIONS

7

H. R. 4952 WOULD AVOID DOUBLE TAXATION

Senator CAPEHART. 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 CAPEIHART. 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

licensee must pay, which, after United Kingdom taxes, equals X

Senator LONG. Let me try to get this straight. This royalty payment is made by the Britisi company to the American company. Mr. STA N. That is right. Senator LoNG. Prior to the time that the American company gets its royalty payment, it has an agreement with the British company that the 3rintishi company will pay it whatever the net, royalty payment would be? Mr. STAM. The British tax would not come out, you see, of the net. But if the British are excused-I mean if the British company is excused 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 thani it would be if the company is not excused? Mr. STAM. Mr. Johnson will answer that. Mr. JOHNSON. A net royalty arrangement would be-for instance, in the terms of a particular contract-an amount that the British

dollars. Now, suppose that the net figure intended to be arrived at is $75. The British tax rate, assume, is 50 percent. At the present 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 $76 (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. would have to be paid to the United Kingdom. So, therefore, there would be no withholding, no need to withhold any amount. And 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 fict that no Now, if the supplementary protocol were in effect, no amount

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DOUBLE TAXATION CONVENTIONS

United Kingdom tax is payable inures to the benefit of the United Kingdom licensee. Ifr. STAM. In other words, it will not do the American company any good. They would be getting the same not amount that they get now. Senator LoNG. Does the American company pay taxes to this Government on that income from his royalty? Senator LoNe. The American company pays taxes over here. And the British company is not paying 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 OTHER 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 is involved. How does the convention operate in general as far as other companies are concerned? Do we have 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 is going to be very confusing for many of these companies to determine whether or not they 4o come within the terms of the convention. One of the approaches is this exemption from the United Kingdom tax. The other approach is the same approach that is adopted in H. R. 4952, giving a credit. Which device applies depends, under the supplementary protocol, upon whether or not the royalties derived by the 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 United 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 British 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 association with the branch in the United Kingdom is with respect to the royalty.
BILL SIMILAR TO PENDING BILL (H. R. 4952) VETOED BY PRESIDENT

Mr. JOHNSON. This supplementary protocol adopts two approaches.

questions. Is H. R. 4952 the bill pending before the Finance Committee? Mr. STAM. It is; that is right.

Senator MORSE. Mr. Chairman, I would like to ask Mr. Stain two

year? Mr. STAM. Asimilar bill was vetoed by the President. Whether he 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 en-

Senator MORSE. Was a similar bill vetoed by the President last

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DOUBLE TAXATION CONVENTIONS

?

tirely correct this year from an analysis of the facts. He spoke something about unjust enrichment, andI 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 income is not taxed twice. It also follows very much the system that we have with respect to dividends paid in 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 message? 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 that the veto message in many respects adopted sound reasons for the veto in many situations. And we could bring that out-I mean the committee vi bring that out in the report of the Finance Committee. The CHAIRMAN. Is it your opinion that it would complicate matters if we took some action here in this committee? Mr. STAM. I think it would, and I think it would raise a very serious problem that this committee may well be concerned with. That is, when the Finance Committee has legislation pending before it, to have that legislation nullified by action of this committee, by adopting an entirely different approach. And, to that extent, I think it would be unfortunate for the committee to act on this at the moment. Senator LONG. Mr. Chairman, I would particularly like to make a point in support of Mr. Stam's position that as far as tax policy is concerned, the House of Representatives has some Members who are experts on taxation, particularly on the Ways and Means Committee where some Members have been serving for more than 20 years and studying these tax probems. And it does seem to me 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 and report directly back to the public, so they have pretty close contact with a great number of these problems. They study them, work on them. If we try to settle a tax problem by taking the agreement approach and ratifying the agreement in the Senate, we foreclose their working on it.
EXECUTIVE BRANCH POSITION ON H. R. 4962

Senator MORSE. Mr. Stain, what position has the Treasury taken this year on H. R. 4952? Mr. STAM. The matter has not come up before the Finance Committee this year, so that the Treasury has not.-they may have sent a letter 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 recommending or opposing H. R. 4952?

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DOUBLE TAXATION CONVENTIONS

memoranda will be inserted in the record at. this point.

Mr. STAM. They are here, and I think they could probably state that better than 1 can. They have n1ot. mtade aln oral stalenten before the committee. They may have sent in a report. l)id you send in a report, Mr. Smith? Mr. SMIT IL do not, know--is it appropriate for ne to speak? I do not know whether we have reported forinally to the Senate Finance Committee,. We did report to the Ways and Means Coinmittee, and .I would be glad to indicate our position on that bill when I testify. The (C'HAn MAN. Well, it is quite (lear Ihere are arguments on both sides as to t-he relations under the treaty. We also have with is Mr. Dan Throop Smith, Deputy to the ,ecretarv, department. of ie Treasury. Perhaps it would be useful to call on hini now to give us his views. Mr. STAM. Then we can take up the Belgium Treaty later. There is no Colntroversy on that. The CIIAIIM.N. ''he letters from Mr. Stain and accompanying (The material referred to follows:)
CONGRESS OF TIlE UNITED STATES,

JOINT CO&IMITTE. ON INTERNAL. IEVNTE TAXATION, Washington. lIon. TiEODORIE FRANCIS GREEN, Chairman, Comninlittee on Foreign Rclatians, United States Senate, lI'ashington, 1). C. DEAR SENATOR GRE.N: At. your request, the staff of the Joint Conmittee Ol Internal Revenue Taxation has reviewed the provisions of the following tax conventions now pending Iefore the Conmi.ittee 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 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 (Ex. C). Memoranda from this office summarizing t lie princiapl provisions of these conventionsi are enclosed. In general, the notification by the Governmeit of Great Britain and Northern Ireland (executive C) is in accord with the principles underlying the provisions o existing tax conventions which th., Semilate has previously apl)rovCd. The supplementary protocol between the United States of America and tile 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 supplenentary protocol. 'rhe 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 peIding further legislative consideration 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 convention signed at Washington, April 16, 1945 as modified by the supplementary protocols signed at Washington June 6, 1946, kiay 25, 1954, and August 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

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DOUBLE TAXATION CONVENTIONS

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was taken by the committee when it considered tile Netherlands tax convention in 1948. (e Ex. Iept. No. 11, 80th Cong., 2d se-a.) Sincerely yours,
COLIN F. STAy, Chief of Staff. SUPPLEMENTARY PROTOCOl, BETWEEN TiE UNITED STATES oF AMERICA AND THiE
KINOIDOM OF GREAT BRITAIN AND NORTIIERN IRELAND (Ex. A, 85TII CONG., 2D

ssss.) This supplementary protocol was signed at Washington on August 19, 1957. It would amend the Convention for the Avoidance of Double Taxation and tile 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 0 1946, and by the supplenentary protocol signed at Washingon on May 25, 1954. 1 Thi. supplementary protocol relates solely to the tax treatment of royalties and other amounts paid a consideration for the use of, or for the privilege of using, copyrights, patents, designs, secret processes aid formulas, trademarks and other like property. It would alter substantially the existing rules relating to the tax treatment of such amounts. The existing rules have been considered by Congress on two recent occasions. H. R. 7043 (84th, Cong., 2d se.s.), "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," was passed by both Houses of Congress. Tle approach contained in that bill differed signifcantly from that adopted by this isupplementary protocol. The President withheld approval front It. It. 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 1I. R. 7643. His message indicated that tax inequalities did exist but that the appropriate way to correct the situation was by modification of tile tax convention. I. R. 4952 (85th Cong., 1st sess.), now pending before the Senate Finance Committee, is substantially the same as II. It. 7613. IT.It. 4952 like II. It. 7643, would alter the existing riles 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 niemoranduni suniimarize the existing rules and compare the rules contained in H. R. 4952 with those con. tained in the supplementary protocol.
Existing rules relatng 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) it 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 establislunent 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 froin the royalty payment. (Tile United Kf'ngdoin 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 S143 F. 2d 256 (CCA-2, 1944)); Cleveland Graphite Bronze Co. v. Commissioner 177 F. 2d 200 (CCA-6, 1949)S. 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 acconiplish this in a different manner than wot.ld H R. 4952. The differences between these two measures involve substantial differences in the burden of taxation and so present important questions of tax policy.

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Wedc of supplemaoRary prooco The supplementary protocol would make two amendments to the 1945 convention. Article I of the supplementary protocol would amend the 1945 convention b extending the exemption from United Kingdom tax for royalty payments. The 1945 convention exempts such payments where the United States lcensor does not have a permanent establishment in the United Kingdom. The supplementary protocol would also exempt such payments where the United states licensor has a permanent establishment in the United Kingdom provided-d t 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. (1) of art. I.) Accordingly, where a United States licensor has a permanent establishment in the United King. dor 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 s no further problem. The United Kingdom payor 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 the other 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 reason of the elimination of the United States tax, but rather will pay the same amount of tax that he is required to pay under present law. (See appendix, example 2.) Thus the position of the holder of such a "net royalty" contract will not be affected by the supplementary protocol. Although double taxation of the royalty payments has 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 cost of using the patent. The second amendment which would be made b) the supplementary protocol deals with the remaining royalty situation not cove,'ed 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 supplementary 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 inposed upon royalty payments received by a United States licensor no tax credit is presently available for such tax. The 1945 convention dealt with a similar problem which had arisen In the case of the United Kingdom tax on dividends. Article XIII of the 1945 convention provided a credit against United States 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 by article II 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. However in this situation the elimination is accomplished by revising the tax credit. Thfs is also the approach adopted by H. R. 4952. Under this approach, the United States licensor who has a fixed royalty is treated in the same manner as if the royalty were exempt from United Kingdom tax. Moreover, the United States licensor who has a net royalty is not treated differently under this approach. (See appendix, example 3.) Both licensors will have exactly the same amount after payment of taxes. Thus, this a 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.

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April 1, 1950, and for the unexpired current at that date). Effect of H. R. 495* II. R. 4952 would amend the 1939 Code and the 1954 Code by adding a provisloil to each which would permit a United States recipient of a royalty derived from sources within the United Kingdom to obtaint a foreign tox credit, subject to the usual limitations, for income taxes paid to the United Kingdom with respect to such royalty if the United States recipient includes in its income the amount of the United Kingdom tax. As noted above, H. R. 4952 has no effect upon the United Kingdom tax. That tax would continue to be imposed with respect to royalty payments in the same manner as under existing lw. However, the bill would 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 provided by article II of the supplementary protocol. (See appendix, example 3.) The report of the CommitWe on Ways and Means with respect to this bill indicates that the Committee on Ways amnd Means believed this approach was desirable because it eliminated double taxation and because it would give United States royalty recipients who have permanent business establishments in the United Kingdom the same relief accorded to dividend recipients under the 1945 income tax convention (H. Rept. No. 1033, 85th Cong., Ist sess., p. 2). As the discussion of the supplementary protocol indicates, this approach results in the same tax treatment for all United States royalty recipients, whether they have fixed royalty contracts or net royalty contracts. H. B. .1952. thus, would adopt the sami' approach as that nidopted in the 1945 incone-tax convention ill the case of dividends by in effect overruling the court decisiotis by reason of which a foreign tax credit has been denied under existing law for the United Kingdom tax imposed on such payments. The amendments made by H. R. 4952 would apply for t"-xable years beginning on or after January 1, 1950. It has been argued that H. R. 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 United 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 pay to a United States patent holder who does not have a branch in the United Itingdom. 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 taxpayers without United Kingdom branches in a worse position than those having United Kingdom 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 same amount as the taxpayer with a branch, it is clear that both taxpayers are in

after shall have effect for any chargeable accounting period beginning on orperiod portion of any chargeable accounting

Article III of the supplementary protocol provides that it shall enter into force upon the exchange of instruments of ratification and shall thereupon have effect in the United States for taxable years beginning on or after January 1, 1956, and in the United Kingdom for an' 'ear of assessment beginning on or after April 6 1956 (in the case of the United ]kingdom profits tax, the supplementary protocol

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DOUBLE TAXATION CONV NTIONS

exactly the same position. Each will be left, after taxes, with the same amount. This is demonstrated by example 3 In the appendix. Moreover as In the ease of the "windfall gain" argument, it should be observed that insofar as the supplementary protocol adopts the tax credit approach contained In H. IL 4952 ilm. plicitly rejects the validity of this argument.

Codwion
This supplementary protocol relates to a tax question currently under legislative consideration. It contains two entirely different devices for the elimination of double taxation. One of these devices Ithe extension of the exemption from taxation) has the effect of operating disadvantageously in the cae of some United States licensors. The other device (the extension of the foreign tax credit) is the sme as that provided by H. R. 4952. The supplementary protocol, therefore, 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 sup lementary protocol would, in general, be effective foryears beginning 11 1956. H. R. 4952 would be effective for all taxable years after Januar 1, 192O 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 which 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 royalties. 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 ated upon.

framp/e 1

APPENDIX

The double taxation under present law may be illustrated by the following example: Suppose that a United 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 Uilted Kingdom. The United Itates 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 5O), and a United States tax or $75 would have been imposed (50 percent of W leaving the corporation with $75 after, the single United States tax.

samplee I
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 Ach are unrelated to the business operations carried on by their United Kingdom branch. Assume also that the United States and United Kingdom tax rates ar both 50 percent. Corporation A,prior to the supplementary protocol entered Into a fixed royalty contract, under which it is to receive $150 per year. The supplentary protocol will eliminate the $75 tax which would otherwise be withheld by the United Kingdom payor. Thus, corporation A will receive $150 and w pay a United States tax of $75, leaving it with $75 after United States tax. This is the same amount of tax that it would have paid If It did not have &branch in the United Kingdom. See example 1. Corporation B on the other hand, prior to the supplementaty protocol, entered into a "net royalty" contract. It calls for payment of an amount whlch, after United Kingdom taxes, equals $75. At the present tu!L'th Un ite" Kingdom payor Isrequired to pay $150 under such a contractr-$761o the United Kingdom (50 percent of $150) and $75 to corporation B. Corporation B, at the present

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DOUBLE TAXATION CONVENTION *

15

*

,

after taxes. In short, the elimination of the United Kingdom tax-in an effort to eliminate the dollle tax oi the royalty--in no way alters the tax the United

timne, 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. Tie supplementary protocol will not affe ct iii any way the tax position of corporation B. It will still receive only $75 and will still piy a United States tax of $37.50, leaving it with $37.50

States corporatioii must pay on the royalty income.
Example 3

The following example illustrates the effect of allowing a foreign tax credit under the supenentarv protocol (or under II. R. 4952) in the case of a fixed royalty and a net royalty: Suppose corporation A and corporation 13, both United State.4 corporations witl branches in the United Kingdom, have equally valuable patents. Each corporation enters into a license agreement with a United Kingdon licensee. The royalties received by each are directly associated with the business carried on through the United Kingdom branch. Assume also that the United States and the United Kingdon tax rates are both 50 percent. W Corporation A, prior to the supplementarv protocol, entered into a fixed royalty contract under which it is to receive $150"per year. Under the supplementar) protocol, the payor will deduct $75 (50 percent of $150) from the rolty payment and pay that amount over to the United Kingdom. The United States corporation, under the tax credit provision of the sttl)plelentary protocol, will include $150 in its United States income (the $75 actually received and the $75 of tax imposed by the United Kingdom on such royalty). The United States tax on $150 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 tnd the United States corporation will have, after taxes, $05. Corporation B, prior to the su)plementary protocol, entered into a "net royalty" contract. This contract calls for pa ment of an amount, which, after United Kingdom taxes, equals $75. Since a UJnited Kingdom tax is imposed on royalty payments under thiis contract., the United Kingdom payor will still be required topay $150 under the contract-$75 to the United Kinglom (50 percent of $150) and $75 to Corporation B. Under the supplementary protocol Corporation B will include in its United States income $150 (the $75 it act ally receives from the United Kingdom payor and the $75 of the United Kingdom tax deducted by the payor). The United State 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 providing a tax credit for the amount of the United Kingdom tax, the United KIngdom tax was eliminated. See example 2.
NOTIFICATION BY TilE GOVERNMENT OF GREAT BRITAIN AND NORTHERN IRELAND WITH A VIEW To EXTENDING TO CERTAIN BRITISlI OVERSEAS TERRITORIES THn APPLICATION OF THE CoNvzNATioN ON TAXES ON INCOME, AS MODIFIED, SIGNED APRIL 16, 19.15 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 1957, 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

I

This notification by the Government of the United Kingdom has been given in accordance with thie 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.
73095 O-62-vol. 123

to the note, subject to the modifications and %itheffect from the dates specified in the note.

Amerioa as modified by the supplementary protocols of June 6, 1946, May 25, 1954, and August 19, f957, be extended to the territories specified in the annex

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This notification would extend to the territories specified in the notification the supplementary protocol of August 19, 1957 (Ex. A, 85th C(ong., 2d seas.), if the Senate approves tile supplementary protocol. As pointed out in the attached memorandum (entitled "Stpplementary Protocol Between the United States of America and the Kingdom of Great Britain and Northern Ireland"), this supple. mentary protocol raises important questions of tax policy. If the Senate desires to approve this notification without approving th supplementary prot.icol of August 19, 1957, it would be i)o. ii)l(, to approve the notification subject to the reservation that tile Governnent of the t united States does not accept the pro. visions of the supph'lnentary protocol. When the Netherlands convention eane before the Senate in 1948, the Senate a)proved that convention subject to reser. nations with respect to several articles of the convention. (Se S. Ex. 1, 80th Cong., 2d sess., p 18.) The supplementary protocol between the Governnent of the United Kingdom of Great Britain anl Northern Ireland and the Govein. ment of the United States of May 2.5, 1954, was principally for the purpose of modifying the territorial-extension provisions of the 1945 convention to permit tile extension of the 194,5 convention to territories without extending to such territories any provisions sintilar to those which were the subject of a reservation by the Senate. (See S. Ex. 11, 83d ('ong., 2d ses.) The annex to the British A nbassador's note is divided into three parts. Paragraph I lists the British territories to which the convention would he extetidtd, subject to the conditions and modifications contained in paragraphs It and III The territories to which the convention would he extended are Aden; Antigua; Barbados; British Honduras; Cyprus; Dominilca; Falkland Islands; Gambia; Grenada; Janaica; Montserrat; Pederation of Nigeria; Federation of Rhodesia and Nyasaland; St. Christopher, Nevis, and Anguilla; St. Lucia; St. Vincent; Seychelles; Sierra Leone; Trinidad and Tobago; and Virgin Islands. Paragraph I also specifies the taxes iil )0'd ill the respective territories to which the convention shall We extended. '1'he taxes listed are those taxes which partake of the essential nature of income, excess profits taxes, amid itationwil defense contributions. Paragraph I also specifies the dates on which, as to each territory, the provisions shall be effective. Paragra ph 1 of the annex provides for tile application of the convention in the case of each of tle territories. Under this paragraph it is provided that the extension shall have e ffect wlhen the last of those measures shall have beei takeii 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 Ifl of the annex contains tie modifications in tlie convention which shall be made for the purpose of the proposed extension. For the purpostes 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 United Kingdom not engaged in trade or business in the United States through a pernmanent establishment therein. Article XVI provides that a United Kingdom corporation will be exempt from Uinited State. tax imposed u)on undistributed profits if' more than one-half of the voting powetr of the corporation is ill 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 correspoiiding 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 III also provides that article VII of the 1945 convention shall be deemed to be deleted for the purposes of the extension to all of the territories except the Federatiot. of Rhodesia and Nyasaland. Article VII provides for the reciprocal exemption of interest (on bonds, securities, notes, debentures, or oni any other form of indebtedness). The effect of this modification will be that interest front United States sources, going to any of tile territories except tile Federation of Rhodesia and Nyasaland, will be subject to ITnited State tax. Similarly, interest derived front 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 VII of the 1045 convention be applicable to exempt such interest payments from tax.

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17

The remaining modifications4 are required because of differences in methods of imposing tax in tho territories. These diterences do not appear to be matters of

IOINT COMMITTEE ON INTERNAl, REVENUE TAXATION, WIashington. le Executive B, 85th Congress, 2d Session. Hon. TilponoiE FRANCIS GREEN, Chairman, Senate C'nmiittie, on Foreign Relations, United States Senate, 11'ashington, D. C. DEAR SENATOR GrCEEr.: At your request the staff of the ,1oint Committee on Internal Revenue Taxation has reviewed the provisions of Executive B, 85th Congress, 2d session, a convent ion wit h Belgium suppleient ing the convention of October 2,8, 1948, relating to the avoidance of double taxation, as modified. by the sulpplementary convention of September 9, 1952. The supplementary convention is designed to facilitate the extention of the 1948 convention, as modified, to the Belgium Congo and the Trust Territory of Ruanda-1trundl. In connection with tlihe consideration of the supiplementary convention the enm'te has been requested to consider and approve ti, acceptance by the United States Government of the Belgium Governnent's notitication under date of .%pril 2, 1954. of its desire to have the 19.8 convention, as modified, extended to the Belgium Congo and the Trust Territory of luanda-l'rundi. An analysis of this supplementary convention is set forth in tle attached memorandun from this office. In general the convention with Belgium, as heretofore modified and its proposed to Ie modified Iby the supplementary convention follows the provisions of existing tax conventions which the Senate has preViously approved and is in accordance with the principles that guide United states representatives in negotiating income tax conventions with representatives of foreign countries. Those princildels are set forth in a nieliorandui entitled "Principles of Income Tax Conventions" dated March 3, 195',R, forwarded to you oinider (late of ,March 4, 1958. Although the convention with Belgium places no express restrictions upon the rate of the taxe mnobiliere imposed by Belgium with respect to dividends, the proposed supplementary convention would prohibit the Belgium Congo and the Trust Territory from imposing a taxe mobiliere at a rate in excess of 15 percent (the existing rate) on dividends from sources within their territories paid to a resident or corporation or other entity of the United States not having a permanent establishment within such territories. ||owever, whether or not the taxe mol)iliere of the Congo or the Trust Territory is available to a shareholder as a credit against United States tax is not settled by the proposed 6uplletenitary convention but remains subject to the law as construed in the light of the facts relating to the tax. Sincerely yours, COLIN F. STAM, Chief of Staff.
CONVENTION WITH BELnIuM SLUPPI.EMENTING THE CONVENTION OF OCTOBER 28, 1948, REILATINO TO DOUBLE TAXATION (Ex. B, 85TH CONG., 2D SESS.)

CONUREs8s OF TilE UNITED STATE,

This is in reference to Executive B, 85th Congress, 2d session-a convention with Belgium supplementing the convention of October 28, 1948, relating to the avoidance of double taxation, as modified by the supplementary convention of September 9, 1952. This supplementary convention was submitted under date of January 30, 1958, by the President to the Senate with a view to receiving the advice and consent of ihe Senate to ratification. The supplementary convention is designed to facilitate the extension of the 1948 convention, as modified, to the Bcl pan Congo and the Trust Territory of ltuanda-Urundi. 1he President also requested that in conjunction with the consideration of the supplementary convention, the Senate consider and approve the acceptance by the United States Government of the ]Belgium Government's notification under date of April 2, 1954, of its desire to have the 1948 convention, as modified, extended to the Belgium Congo and the Trust Territory of Ituanda-Crundi. The Treasury Department has advised the following: Ruanda-Urundi comprises some 20,000 square miles, contiguous to the northeastern boundary of the Congo, and has a population of about 4 million. Formerly part of Gertiman East Africa, it was placed under Belgian administration by mandate of the League of

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Congo. "

DOUBLE TAXATION CONVENTIONS

Nations and is now held under a trusteeship from the United Nations. For government administration the territories of Ruanda-Urundi are united with the The notification dated April 2, 1954 by the Belgium Government was in accordance with article XXII of the 1948 convention which contains provisions in paragraph (1) whereby either contracting state may, with the written notifica. 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 as may be deemed to have special application, extend to any of its colonies or overseas territories which imposes taxds substantially similar in character to those which are the subject of that 1948 convention, as modified. Article XXII of the 1948 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 apply to such territory. In accordance with established policy (see S. Ex. Rept. No. I1, 80th Cong., 2d seas.) any proposal for an extension of the convention before being accepted by the United stats overnment, Is to 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 supplementary convention Following the request of Vie Belgium Government that the income tax convention be extended to the Belgium Congo and the Trust Territory of RuandaUrundi (both of which are hereinafter referred to aq 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. Article I-Definition of "Belgium 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 advises-however that an extension of the basic convention, as heretofore modified without further modification, would be inadequate in dealing with two classes oi corporations. One consists of corporations created under Belgium law, having their center of management in Belgium and doing all their business 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 Congo. The Treasury Department further advises that both these classes of corporations are subject to tax by Belgium, under-its fiscal law of June 21, 1927, rather than by the Congo. Article I of the proposed convention deems these two classes of corporations to be "Belgium enterprises" with the result that the 1948 convention, as modified, with Belgium will apply to them rather than the convention as 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 definition of a "Belgium enterprise" in article II of the 1948 convention, as modified in 1952 and as proposed to be modified, will mean an industrial or commercial enterprise 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 laws 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 enterprise provided he carries on business in the Congo, but a corporation created or organized under the laws of a country other than the Congo (or Belgium) will not be entitled to such benefits. For illustration, a corporation organized under the laws of the Congo engaged itl the business in the Congo and having no permanent establishment in the United States will enjoy, by virtue of article III of the convention, exemption from United States tax in respect of profits from goods sold in this country. However the profits of a corporation organized under the laws of Spain, for example, will not be exempt under similar circumstance.

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19

Article 11-Congo tax on dividends frozen at 15 percent The Congo imposes a taxes mobiliere at the rate of 15 percent on dividends paid by Congo corporations. Under the convention, as proposed to be extended and modified, the Congo may continue to collect a tax up to this rate on dividends paid by Congo corporations to United States residents and corporations not having a permanent establishment in the Congo and the rate of United States tax on dividends derived from sources within the United States by a resident of the Congo or a corporation 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 United States tax on dividends flowing to aliens residing in the Congo. Whether or not the Congo taxe mobilicro is available to the shareholder as a credit against United States tax is not settled by the proposed supplementary convention but remains subject to the law as construed in the light of the facts relating to the tax. Nor does the article disturb or affect the qualifications of the Belgium taxe mobiliere for credit purposes. That is likewise left to the law as construed in the light of the facts with respca to the imposition 4nd collection of sach tax. Article IIl-Effecive date of.extension N The 1948 convention, wlth Belgium provides that any extension of it shall become effective January I of the year following acceptance of a request for an extension. The Trasury advises however tht After the Belgium Government expressed Its desire in 1954 to have- the basic convention extended, it became evident that prompt action could not be take to secure such extension and, to compensate for the delay, and'in accordalice with the practice that has developed in connection with more recent conventions, article III provides that this particular extension qf the Belgium convention shall tale effect upoji january 1 of the year in which request by one Governipent for tension Wus been accepted by the other. Consequently the extension of the convention to the Congo Would be effective oh and afterJanuary 1 mmediatkly preceding the date on which the United States Government formally 4wepta the Belgiup Government's notification for such an extension. N,1 Article IV-Definition of overseasa Aerritories" To remove any ambiguity concerning the,territories to which the basic con. vention may e extended, article IV of the proposed.upplementary convention provides that "overseas 'territories" shall mean pughl territories for the foreign relations of which the contracting states arc 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 Ruandit-Urundi which, as heretofore indicated, was formerly part of German East Africa fand was placed under Belgian administration by knandate of the League of Nations and is now held under a trusteeship from the United Nations. Article V-Ratification qnd termination Article V, the final article of the proposed convention, contains the customary provisions concerning ratiflcatio4 and the period of effectiveness of the convention. It provides for ratification and for- exchange of instrutments of ratification, the supplementary convention to become effective with it pect 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 the 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?

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STATEMENT OF DAN THROOP SMITH, DEPUTY TO THE SECRETARY, DEPARTMENT OF THE TREASURY Mr. SMrr. Thank you, Mr. Chairman. I have a prepared statement, Mr. Chairman, of about three pages. If I might read tlt, I think it describes as concisely as I can, ue 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 rreasurv, I web(one this opl)ortunity to present the Department's views on the conventions now pending before your committee. There are four documents awaiting action by your coin. nittee. As I understand it, oee of these, the convention withI Pakistan, is uot, ol your agenda today, and I shall therefore confine my comments to t,!eo other three. One of these( would anlend the existing income tax convention with Great Britain. Another would extend that convention, as amended, to a lunl)er of overseas territories of the United Kingdon. The third would modify the convention with Belgiun and would extend it., with the lnodificfations, to the Belgian Congo and to Ruanda Urundu, which Belgiunt administers as a I1.N. trusteeship.
MODIFICATION OF UNITED KINMD0M CONVENTION

two objectives. Ffirst, it will remove a barrier which now exists to the establishment of American enterprises in the tfited Kingdom, and whict would exist with respect to the overseas territories of tile
United Kingdom if tie treaty were extended to those territories without niod dilation. Second, it ih dlesig'ed to eliminate double taxation in rases where this is not done by tihe existing tax convention, and to it)so in such a manner that the i'evenule loss is shared by the United Kingdom and the United States. as we see it, and the, proposed legislation, is that the convention divides the cost of tue relief from double taxation between tihe United

The proposed modification in the ilcOle tax convention between the United States and the United Kingdom is designed to achieve

If I may interject here, the basic difference between the convention,

States and the United Kingd'(tom, whereas under the legislation the entire cost is horns, by the I unitedd States Treasury. lUnder 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 Kingdo(1, if the United Statts liet-nsor 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 pays tax on such income without any credit for foreign taxes. If the United States licensor does have a permanent 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 to establish a branch enterprise in the United Kingdom, the royalties hitherto exempt from Briti taxes would becomesubject to tax. This would tend to imrease the cost of the royalty to the British licensee, and if the magnitudes involved are large enough, the American licensor (35Oy

DOUBLE TAXATION CONVENTION

not, simply 1I hypothletical possibility, but, has emerged in actual situations, and would be eliminated by the proposed protocol to the Britisth convention. Snitor IjON0. I'. (hairman, are we going to ask questions now or later? I would be interested in having Mr. Smith give its an xanple, of this Iossibility. \Ir. SMITH. I do have anl example at the end, Senator Long. The (HAIMAN. We will 1et,-thP witness Complet his statement. \ir. SMITH. Thank yotf.A,OURhE TAXATION ON UOYAL'TIN'

mtay ind it, or its overseas tile contemplated tVlp, of problemthe impractical to make territories. 'l'his invested nt in is 11lled Kingdom,

ease, and takes the vie4 that. the Btitish timx. is Iot imptioed oil the American livenor and hence cannot be claimed by hina as a credit. ('onsequently, witen royalties are subject to British tax, the American

'lhe second problem sought. to be solved, by the propoi(d protocol arises in (,ases where flip British convention loes not now Confer exe111 1 tion ontroyalties Jlowing fr4in the United Kingdom liceen4.e to the Itited Slates licensor, that. is,, in ttLatkons where the licenhor does have a pinanent eatablishmort, in the. United. Kingdom. hi such imstaneesl the British impose' thtir tax bv.denying tile licenseq a douietion for rovalios in cOmilhting taxable hicome. How(wot, the licensee May, tintler British Ia, rocdup thle tbX arising from tlt nondeductibilit y of royalties by withholdifigan amount equivalent go the tax from the rovalties dut,the licetisor. flhe United States t-ourts have held that tinder these (ircunstinces the. American licensor may not, claim\ a credit against United Stite.* tax "for any amoatns retaned bv 1the licensee to recover -his united Kingdomaa tax liability. 'lhe leading ease is the Ira'ing Airl'hute f(rnpany-v. ('ompaui',ioner (143 F. 2d 266, 19.14). Thi§ decision restsion a 1938 Suprome Court

recipient, reports theut amount received and pays Vtnit.ed States tax on that amount, witlh6ut. adjustment for any iax imposed by the United Kingtom. This is the description as it. now stands. Now, I will describe the proposed modification.
PROPOSED PROTOCOL WOULD AVOID DOUBI, E TAXATION

now granted by the British to royalties paid to a Unfited States licensor

Under tile proposed modification of the convention, the exemption

without a pernmanent. establislunent in the United Kingdom would be expanded to apply even if there is a permanent establishment., provided the royalties are not directly related to the activities carried on by that permanent establishment. And in those cases where double taxation is not elinainated by exemption from British tax, the United States would allow a tax credit. Thus, if an American firm has a branch in the United Kingdom tJt negotiates the licensing of its rights to patents, copyrights, designs, and trademarks, then the royalties obtained as a result of these activities would be subject to United Kingdom tax, and in such cases, the United States would allow a credit for tile tax. This would be in accord with the general principle incorporated in our tax treaties that a permanent establishment should (851)

22 located.

DOUBLE TAXATION CONVENTIONS

be subject ( tax on all its business ilicoilie by the country where it is

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. Ihe provision is, of course, reciprocal in character.
So their concession rat ewise is greater tlan ours. I should add hat the treaty provisions would have no adverste ettret,tilpon any American licensor of patents or copyrights compared with existing j;riovisions of law.
PROTOCOL WOULD NOT ACHIEVE SAME SOLUTION AS IEOISLATION

The proposed protocol to the United Kingdomi treaty would thus eliminate double taxation by a sharing of the roev'Iiie loss. The United Kingdom loss would rise front an expansion of its exemption,

be giving ip a 30-percent tax, which is the rate we have under the statute, whereas the British would be giving up a 52%-percent rate.

If I may interjee. here, in terms of the relative benefits, we would

However, 1want. to call to your attention that the proposed solution
to the double taxation problem is not tie same as that which would be aclhieved by f1. R. 4952, a previous version of which the President vetoed. tnder I1. It. 4952, the Treasurv woull bear the entire cost of eliminating double taxation. It 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, ill lie Unit(d Kingdon,'and irrespective of whether the royalty illcolo is attributable to the activities of that permanent establishment. There would seen 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 to extend the British convention to a number of its overseas territories. The potential effect of tle proposed protocol in the usual licensing 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 U!nited States Goveinnent would be increased in those cases where royalties now subject to United Kingdom tax are iiade nontaxable under the protocol. Mr. Chairman, I would like to invite the attention of the committee to the table on the last, sheet of my statement, which is a comparison of tie taxes on royalties paid by United Kingdom licensee to United States licensor under existing law and tilder the proposed. protocol. Now, Air. Stane has referred to one particular sort ot contract. 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 purlxSes of simplicity. United Kingdom tax on tie license at the British rate of 52.5 percent is $52.50, leaving a net royalty of $47.50 for the United States licensor. That amount is subject to United States tax of 52 percen. giving a United States tax of $24.70. (352)

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
tax is $22.80.

Now, we recoguize this as double taxation.

Frankly, we first

and should be relieved, consistent with the objectives of the treaty program. But we felt it should be relieved on a reciprocal basis with the cost shared by the two countries. Senator SMITH. As I understand your presentation, you prefer this protocol to H. R. 4952. Mr. SMITH. Yes, sir.
DIFFERENT TYPES OF CONTRACTS AFFECTED BY TAX POLICIES

sideration. As we appraised the situation, double taxation did exist

became aware of it when the earlier version of 4952 was up for con-

commnnent, ol that.

Senator SPARKMAN. Mr. Smith, may I ask a question? You give one type of contract here. Mr. Stain gave another. Which is more commionly used? Mr. SMITH. Neither one is uncommon. As I already indicated, it is our 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
The (,HAn.(m.,N. Have you completed your sta te'nt? Mr. SMITH. No; I have not.

Mr. SMITH. No, sir; because to do that would mean the United States Treasury would pick lip the entire cost of the relief, and we feel that over the yeam contracts can be modified. We think this is a sound reciprocal basis.
GROA8 AND NET ROYALTY CONTRACTS

both types in?

at this point. If the advantage here is to the man holding the paiteit, why are all American licens-ors opposed to this treaty? Mr. SMITH. Senator Capehart., to the best of mny knowledge they are not. all opposed to this treaty. One particular group is opposed to this treaty, because their contract (oes not come within the particular method of relief that exists here. Senator CAPEHAUT. Could the protocol be arranged, then, to bring

The ('.AIUlMAN. I have a question myself, but. I am deferring it. until Mr. Smith completes his statement. Senator CAI'EuART. I have a question which I think is important

Senator CAIE1AUT. May I ask one question?

Senator CAPEIIART. Mr. Chairman, I think it is important for us to get into the record here the 2 different types of contracts, 1 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

royalty 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

(On3)

4

DOUBLE TAXATION CONVENTIONS

tax, tile entire $100 comes to the United States licensor. That becomes the base for tile United States tax. There is a United States tax of $52, instead of a United States tax of $24.70. Deducting that from the $100, the licensor gets $48. example of where tile licensor loses out. scribedMr. Smrri. The other situation is the one that Mr. Stare deSHARING OF REVENUE LOSS Senator LONG. Just a minute, please. Let me ask this question now. You say that this loss is shared I the United States and the Senator CAPEIAJT. Instead of $24.70. Now, give us tile other

United Kingdom. It looks to me as ifit this instance the.United
Kingdom gives all the way.

Mr. SMITH. That is correct.

Now, in the other instance, where we

would pick tij), as iv p*,fred statellent, indieated--in those instances

where the United lkingdoin does not forego tax, because the line of
activity is associated with the permanent establishment, then in those

could be illustrated-I do not have it.on here, but I could describe it-the effect. of that woull be that we would give a credit for the

instances we would give a credit, for the tax.

And the effect of that

British tax paid, so there would be 11o net united States tax, and in that case, the American licensor would get $47.50 and we would get nothing. In that ease, we give ul) the $24.70 per $10011 of royalty, A against tifs case described ill flie secolld colunl.
IstcOME FROM PERM.\ENT ESTAIIhlSlIM IT

Senator Lom ;. As I ullderstand youlr proposal, t he nl;ited Slatc-s would give ij) conpletelv with regard to some comnpalies, and with regard to other companies thie Iritish would give uj) completely. But if a comipaliy had at l)elniietwt establishment, you would treat the income associated with the periiiment establishment. on a different basis fromi other income of tlie corporation. Is that right? Mr. SMITH. 'Yes. We and Great Britain together would treat the income associated with itie perinanetit esta)lishmllenit in a different way than the income not associated. For instance, if the permanent establishment is in the business of making, just to pt11 a product out of the air, medicine products, but t-hey also, the same company, license a patent to make tires, for instance, something conll)ietely unrelated-then, under the protocol, the British would give up their

right to tax the patent royalties associated with the tire patents. then the British would continue to tax them, but we would give recognition to that tax. Now, to compare this, if I may, because questions have been askedSenator CAPEHART. Now, in this chart you show an advantage to
If, however, the royalties were associated with the drug business,

the licensor.

Mr. SMITH." Yes.
DISADVANTAGES TO LICEXSOR

has a disadvantage. Why did you not show that instead of just limiting your example to the advantages? Why did you not also have

Senator

CAPEIART.

Now you say there is another case inwhich he

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DOUBLE.

TAXATION

CONVENTIONS

25

a chart showing the disadvantages? Could you please give us an
X example of the disadvantage to the licensor? Mr. SMITH. Might I complete this statement and then get this

Senator (CAPEHArr. ('ertainly. Except, to nie, that is the important thing. You say there are two kinds of 1icensoim, and you give a chart here showing'the net result of this treaty to one, iut. not to the other Mr. SMITH. As I have ilicated, Senator Capehart, there is no

illtistration?

disadvantage in this protocol, as against existing law, for any coinpany. T his does not give the same extent of relief that the legislation

wodld give. But we feel that the legislation goes too far in putting the entire cost on the Treasury.
DEFINITION OF "PiRMANENT F8TABLISiHMENT"

The CAIArMAn. The term "Permanent establishment" has been

used a good deal. countries?

fias this been legally defined ii either or both

art that has a common meaning il all the countries.

Mr. SMITH. Not hy a statute. But is has come to be a word of

the needs for treaties. The hritish treaty has a long-established use of the pernancut concept.
REASONS FOR VETO OF H. It. 7643

common definition of it. The permanent establishment concept where it isstated in the treaty, signed by both parties--that is one ol

Mr. SMITH. It is elaborated and delined in the treaties. The treaties themselves contain a definition. The ('HARAN. What is the definition? Mr. SMITH. I will have to ask one of nay asociates, if I may, to provide a "nmple of that. The CHIAIRMAN. I find it here in the original trealy. Mr. SMITH. Yes; that is one of the purposes of a treaty, to got a

The CHAIRMAN. Has it been definied by court decisions?

Executive A, the veto message is produced on page 3. 1 shall not read it all, but I should like to readt several paragraphs of it.

Now, as to the legislation that was vetoed, H. R. 7643-in your

between licenstes and licensorm have reflected existing law, and the burden of British tax may not rest on United States licensors in such cases. C.ousequently, to allow the British tax against the United States tax on a retroactive basis would give a windfall gain to sonne American licensors. The proposed change would single out for special relief a snidl group of taxnayers whose need for relief has not hw demntionstrated. Tax relief should not givenn in this way. For these reason I am constrained to withhold my approval of the bill.
EXECUTIVE POSITION ON H. R. 4952

The present status of royalty payments has been well known to interested parties at least since the convention was adopted in 1945. Many arrangements

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.

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26
Senator

DOUBLE TAXATION CONVENTIONS
SPARKMAN.

Mr. SMITH. I believe Senator Mansfield asked that before Senator Morse was hero. Senator Morse also did ask the question. The Treasury did report adversely on H. R. 4952 to the Ways and Moans Comnnittoo 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, t e final paragraph of which is:
In the light of these considerations, a bill similar to H. R. 4952 has been passed by the 84th Congress and returned by the President without approval. Since then, the negotiations with the British have been concluded, thus strengthening the case against the bill. The Treasury is opposed to enactment of 4952.

question.

Senator Morse was the one that asked that

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 LONG. What was in the bill passed by Congress that the President regarded as undue enrichment? We are trying to understand 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 taxpoyers 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 inade 1 uate 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 States 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?

Mr. SMITH. That is correct. Senator LoNG. 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 REI.IEF GO TO BOTH AMERICAN AND BJITISH COMPANIES

Senator LONG. The staff of the joint committee contends that to take the approach you are advocating would just be the difference between the British company's getting the windfall and the Americon coin pany'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, asothere is now, double taxationi-which I think we are all in agreement needs to be alleviated-it is our feeling

(356)

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 is double 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 particuilar taxes are to be creditable and not to be creditable, what is to be exempt and not exempt, i 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.
I..EGILATION APPLICABLE ONLY TO SITUATION IN UNITED KINGDOM

The CHAIRMAN. Has a draft applicable to all countries been prepared? Mr. SMITH. The legislation though stated in general terms, would in effect apply to this specialized situation in the United Kingdom. Tt 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

Senator CAPEHART. Is

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 royalty. 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 licensor, but on the licensee. So the answer is no, there is no similar one, but it is because only of the very distinctive 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. The CHAIRM AN. We have a number of other witnesses here. Senator Lo.NG. Might I just ask this witness a further question to get one point straight? It seems to me, when you try to negotiate these agreements 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 dealing.

the treatment of royalties in this protocol

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28

DOUBLE TAXATION CONVENTIONS

It seems to me that what has happened is that, in negotiating a treaty that took good care of some of our companies, other companies were left out in the cold because they had negotiated agreements where the foreign company was going to pay them X amount of dollars regardless of what "the foreign tax was going to be. Now, some American companies would benefit greatly by our protocol here, but others would be left without benefit; is that correct? Mr. SMITH. The point on that-I am very glad to have a chance to answer that-is that when we negotiate on a matter of treaty arrangements, we do not approach it from the standpoint of a special relef provision for certain designated companies. We are approaching it from the standpoint of what is a reasonable and fair basis for the generality of companies in both countries. And it is our feeling that the chips should fall where they may on that, so long as we have a rule that is generally fair; and then over the years contracts do come up for renegotiation and can be modified. Senator LONG. If you go down to Venezuela to negotiate an agree. ment, the American interests that you are negotiating for are oil 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 companies are doing business you are going to negotiate an agreement where some of them are very much benefited and others are completely left out. They are all Americans who are asking you to negotiate these agreements, and who are interested in getting these things agreed to and confirmed. To say we are going to find a principle and negotiate on that principle is departing from what actually happens. If you negotiate in Saudi Arabia you are not negotiating for anything but oil. I do not see how you can say that you are negotiating for a principle. It is a fine principle, but the principle is such that half the Americans are taken care of and the others are left out. Mr. SMITH. But, Senator Long, in the other instances, where under the British concession there is relief of the tax in Britain, then the American companies are in a position, in due course of time, because the net cost to the British licensee is less, to renegotiate the terms of their contract. And I still feel no apology whatsoever for approaching these matters of treaty negotiations in terms of what is a reasonable reciprocal basis rather than attempting to give full relief to all American companies when it is entirely at the expense of the United States Treasury.
PROPOSED EXTENSION OF TREATY TO TERRITORIES

Turning now to the proposed extension of the British convention to the 20 overseas territories of the United Kingdom, as listed in Executive 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 Netherlands Convention when it was extended to the Netherlands Antilles. The proposed extension is in line with the general program of expanding our network of tax agreements to remove tax barriers to 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. However, several modifications would be made for pur-

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DOUBLE TAXATION CONVENTIONS

29

ses of the extension. In accord with the views previously expressed by the Senate the articles conferring exemption from capital gains tax, Article XV and exemption from the tax on improper accumulation of surplus, Article XVI, 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 same results with respect to the taxes of the 20 territories that the basic treaty achieves with respect to British taxes.
MODIFICATIONS OF BELGIAN CONVENTION IN EXECUTIVE B

To extend the convention with Belgium to its African territories, it was found necessary to make certain modifications as 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 shareholder. This is the same rate that the United States imposes on dividends going to Belgian shareholders under the basic convention. In concluding Mr. Chairman, I should like to say that the Treasury staff stands ready to render all possible assistance to your committee in its work on these tax conventions. Senator MORSE. I would like to ask Mr. Smith for a memorandum, Mr. Chairman. We are dealing here, in my judgment, with the key witness in the sense that we are going to be faced with the veto-I think he 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 wotld prepare a memo for me that will give me this I would like to know what happens to the American Treasury and to the British Treasury under the protocol in connection with these two general classes of cases we have been talking about. Mr. SMITH. I should be very glad to give that to you. Senator MonsE. And then I would like to have a inemo 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

information which I tFink would benefit the committee.

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?

Morse.

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30

DOUBLE TAXATION CONVENTIONS

STATEMENT OF HON. 3. ALLEN FREAR, JR., A UNITED STATES SENATOR FROM THE STATE OF DELEWARE Senator FiEAR. Mr. Chairman, I have listened with great interest to the questions and answers given thus far. I have a very short prepared statement and sin happy to ask that, to say that I concur in the position of the Treasury on the protocol, and sincerely request that the committee give favorable consideration to the protocol. The CHAIRMAN. Thank you very much. That will be placed in full in the record. Senator FAR. Thank you Mr. Chairman. (The statement referred to follows:)
STATEMENT OF eION. ALLEN FREAn, JR., A UNITED STATUS SENATOR FROM J.

with your permission, it be made part of the record. I want simply

THE STATE OF DELAWARE

I an here, Mr. Chairman, to make a brief statement in support of the supple. mentary income-tax protocol of August 19, 1957, with the United Kingdom. As you know, this treaty amendment is designed to correct an existing inequity In the taxation of royalty payment. received from British licensees by Iuited States licensors of patents, copyrights, etc., who have a permanent estabilishment In the United Kingdom. Under' British law a licensee paying a royalty must withhold a sum equal to the tax on such payment, which sum is owed as'a debt to the Crown. The American courts have ruled that the withheld tax Is not technically imposed on the American recipient so that no credit for the British tax is allowed against the tax paid to the United States Government on account of the receipt of this royalty (Trico Products Corp., 40 B. T. A. 346 (1943);

(2d Cir. 1944)). Since the British tax is 42.5 percent. slid the American tax 52 percent on the balance, the total tax paid to the two Governments on account of a royalty payment of $100 would be $72.40. This result is certainly contrary to the intent to prevent double taxation which prompted the exeCution of the existing reciprocal income tax treaty with the United Kingdom. Prior to 1945 a similar situation existed with regard to the British withholding tax on dividend payments because the United States Supreme Court had ruled that the tax withheld by the British company was not imposed on the American shareholders under United States legal concepts (Biddle v. Commissioner of Internal Rrenur. 302 U. S. 573 (1938)). The existing income tax treaty between the United States and Great Britain was negotiated to provide that'a United States taxpayer receiving dividend income from a British corporation could include the gross dividend prior to withholding In computing his United States taxable income and take a credit for the British tax withheld against the United States tax on such dividend. Under the treaty the British tax is treated, in effect, as if it were a tax on the shareholders for United States tax purposes. The treaty presently contains no such provision with regard to royalties and interest. It does provide for a reciprocal exemption from tax if the foreign recipient of the royalty or interest has no permanent establishment in the country from which the amount is paid. The present treaty amendment would simply extend the exemption from British tax on royalties to an American licensor who has a permanent establishment in the United Kingdom if the royalties were not directly associated with the business carried on through the permanent establishment. Where the royalties are associated with the business carried on through the permanent establishment, the American licensor would receive the same tax treatment already granted under the existing treaty to dividend recipients. A United States censor would be allowed to credit against his United States tax on the gross amount of the royalty payment, the tax which had been withheld and paid to the United Kingdom. Thus, a royalty payment of $100 would be taxed at the United States corporate tax rate of 52percent, $42.50 having been paid to the United Kingdom and $9.50 to the United States. I believe there is general agreement that it is a desirable objective to make American patents and know-how available to British producers. The ratifica-

Irring Air (hule Co., In,. v. Commissioner of Internal Revenue, 143 F. (2d) 256,

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DOUBLE TAXATION CONVENTIONS

31

tion of the tax convention under consideration should encourage such a program. Certainly tile interrelation of the tax laws of the United States and the United Kingdom should not operate to discourage this objective. Mr. Chairman, I hope the committee will see fit to approve this supplementary income-tax protocol,

The

CHAIRMAN.

Representative Simpson?

STATEMENT OF RON. RICHARD M. SIMPSON, A UNITED STATES REPRESENTATIVE FROM THE STATE OF PENNSYLVANIA Representative SIMPSON. Mr. Chairman, and gentlemen of the committee, I sponsored the legislation in the Hgouse which passed the Ways and Means Committee. It was approved unanimously in the House Si'bsequently, it was approved in the Finance Committee of the Senate, and then it was passed by that body.
VFTO OF REPRESENTATIVE SIMPSON'S BILL

was, of course, referring to the basis upon which he withheld approval of 7643. He likewise said:

It was returned by the President without his approval, with, among other sentences, the comment that "The appropriate way to correct the situation would be modification of the convention.'" There he

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 others. The Treasury Department currently is conducting discussions on the convention with the British and will add this problem to the agenda.

That was in August of 1956, after which Mr. Dan Throop Smith, special assistant to the Secretary, went abroad, presumably to carry out this reference made by the President in his message, to include in the treaty agreement a solution to the problem which was presented by H. R. 7643, which bill hid been approved by the Congress and handed to the President.
EFFORT TO NEGOTIATE AGREEMENT TO AVOID DOUBLE TAXATION

Mr. Smith wrote me in December of 1956, I believe after he had returned from Europe, and said:
We thoroughly agree that the double taxation should be eliminated-

not just a part of the double taxation, but that double taxation should be eliminated with respect to the royalties. He said:
We were able to work out a tentative understanding, subject to final approval there, which will apparently be satisfactory to the tax people in both countries. Since there has been no final approval in England, any premature announcement or publicity on this subject might well jeopardize the whole agreement. But, in view of your great interest I want you to know that we have started promptly to get theproblem settled, and have made what I regard as extremely good progress. With all good wishes,-

I believe I had every reason to assume he was addressing himself to carrying out the neretation most people made with respect to the basis of the Presidential veto, namely, that the points of H. R. 7643 would be carried out in the treaty. Subsequently, when we learned the provisions of the proposed treaty, we discovered that the recipients of royalties are to be treated
73095 0-62-ol. 124

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32
they ire not.

DOUBLE, TAXATION CONVENTIONS
Therefore, double taxation will continue, gentlemen,

as they should be only in some of the eases, and in other instances
or their patented articles to he inanuifactured in Great Britain under the terms of an agreement by which the American owner says, in

to somlle American business people who see lit to permit their copyrights

erect "I want to get back a certain amount of money."

will lot you use this patent, provided I get $100 every time you use it. You go'ahead and pick up the tax bill. You pay the local taxes. I don't have any lawyers over there. I can't (10 it. You pay the taxes and we will got the $100 certain."
II. It. 4952 PROVIDE S BE TAX RELn.I EF .ADE
That is what this bill. II. It. 4952, will nmke clear -ita. when lie taxes are paid abroad, the American businessman who hasq that kind of agreement will get the credit for those taxes. And that is not COVered at all under tlis protocol. Senator Lo.N. It would seem that tie British company saves lhe money, and the American pays full taxes on his $100. Re)resentative SiM0so. 'that is correct. It is even, as T understand it, worse than that. The Ways anid Meazis Commilee ha1s devotedd long hour It this problem. It. is really a conltilluing problem', which INadditional countries- and there are n11111V exei'cise lie right, Its licensees of Americaii owners, of copyrights and patents and various things - and vet if this is made a matter of trenty, it is efr(etively, Means Conligent1 e1e1n, taken froil the jurisdiction of the Ways iand Ilouse and the Finance Committee in the Senate. mittee in the 1resect fully suggest, that, it is a problem that should remain under the cognizance of the appropriate committee of the Congress dealing with revenue to the (Governnent. The (HAIRM.AN. When you say "ai)proJpriate conuinttee," you mean the Finance Committee; is thatright? Rellresen(itlive SIMPSON. I beg your pardon the Finance Coin-

lie says, "I

nmittree.

It is no answer to say that tie American buisinessman who has for many years, or evenl w)io wants in the future to negotiate these net royalty agreements, that he may change them, because they have d1ne oe been established over long years and it just simply cannot with respect to some cOhal)nties. Nor, I respectfully suggest., is it proper to call this a windfall if the money ha, been. taken incorrectly, and improperly, by the Treasury in the past years. Treasury approved the reports of the taxpavyrs in which they took

I point out, as Mr. Smith indicated, for a number of years the

clhaiige in administration, they decided otherwise. So that we in the Congress decided to exercise our right to make the law and in
eff,,et to say that tinder the treaty, which the Treasury subsequently,
aft ,,r having approved for .5or 6 years, the taxpayers method, reversed themselves. Senator LoNe. Ltet me see if I can get that straight, because it, seems to me that point, is very important. The kind of contract that you have in mind is one in which a man says, "I want you to pay me a certain figure so that I will receive

the credit for taxes paid abroad, and then, subsequently, uider a

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DOUBLE TAXATION CONVENTIONS

33

$100 of American money irrespective of taxes. I want you to pay me X figure, so that after the taxes have been paid on it, I will have $100 left.." Is that correct?
Representative SIMPSON. That is correct.

Senator LONG. The Treasury takes the attitude that this $100 is taxable at 52 percent. The taxpayer takes the attitude that that is 1 an error and that the amount was originally, let us say, $220, which was reduced to $100 after the tax had been paid. Now, that is why you contend that what you have been advocating io not actually a windfall. But as I understand it, the Treasury representatives contend that there is a tax case decided by the court
on their side.
COURT DECISION UPHOLDING TREASURY'S POSITION

Representative SIMPSON. There were two cases.

as the Biddle case many years ago, which had to do with dividends, under which it was held, in effect, that the taxes paid to the British Government were not to the credit of the American stockholder who received the dividend. We had a convention, and they solved that completely by simply declaring that that was to be considered as income to the American stockholder. So if you have stock abroadI mean dividends from stock in foreign corporations, you include the dividends you receive plus the amount of taxes paid as a part of your income. You take credit, on the other side of your income account, for the amount paid as taxes by the British. Now, if they would do that for royalties, it would have been solved. But, no, they didn't do that. Tiey went only part way on that, and we want now to go the other way. Treat the American who receives his income from abroad by way of a royalty exactly as you treat the American who receives his income by way of a dividend, and we are all right. Senator LONG. How about the case to which the Treasury makes reference? Is that a case involving royalty or dividends? Biddfec e, which had to do with dividends. The Irving Air Chute case held with respect to royalties the same thing, namely, that the royalties paid by the British corporation to the Government of Great Britain were not taxes paid by the American licensor. Now, our contention is, and in effect this bill would say, that that is income to the American licensor, and he would report all of that, and then take credit for the taxes paid, just as the stockholder does who gets his dividend. Now, if we did that, there is no complaint.
EFFECTIVE DATE OF PROPOSED BILL

One was known

Representative SIMPSON. The first case I referred to- was the

Senator LONG. Actually, though, you are asking for what Would be-based on the present decision and the present state of the lawa retroactive provision, insofar as it goes back to 1950. Representative SIMPSON. No, sir--because in the action tkea ,with respect to the convention held after the Irving Air Chute Corp-oratioll case, reference in that convention is made t6 royalty recipients in the United States, and it is said right there that they shall be-it

I

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34

DOUBLE TAXATION CONVENTION

says right there that, Ameriecuis who receive the royalties from abroad shll not be consideredd to have received taxable income from Great Briloin imlu', ttev ih'",. e-tahlihmeot abroad. Let nil' rep. ,t.I, \triftIaI who are licensors, and have no pormaient estahlisLinent ii (treual Briiao, and receive royalties, shall not be taxed -it completely eliminates it. But it they have a permanent office in Great Britain, it did not touch that. And so the companies, the licensors here argued that the convention did handle this question of royalties and (lid mean that if they do not have an office there they shallhnot be taxed, and if they do have an office there they should be taxed. That is the contention they made. And the ] reasury agreed with them for a number of years. But they have now taken the opposite position. Nol, l think this subject, gentlemen, should be one that is kept before the legislative committees of the House and the Senate. Certainly the door shoul not be closed against further consideration
of it. I have with me Mr. Kus, Mr. Chairman, who is an expert in these

matters. I believe his name is before you, and he can answer sonie of the technical questions, if there are any to be asked. He is the tax counsel for the Westinghouse Electric oip. The CIIAIRMAN. We have only a limited time we can spend on this. The Senate convenes soon, and some of the Senators have business before have got to discus this matter at length in committee after this We it. public hearing ends. So 1 think that we wil not have time to hoar idl of the witnesses. But I think we may have time to hear Mr. Mit!hell B. Carroll, of the National Trade Council of New York
Mr. CARROLL. Present, sir.

The

In view of nwy statement that, we have to be brief, perhaps you
could emphasis" the main points of your statement, and leave your

CHAIRMAN.

Perhaps you could move up here.

leave for the record.
it.

full prepared statement if you have one. Mr.CARROLL. I have a prepared statement which I would like to

The CHAIRMAN. It will be put into the record without your reading

Mr. CARROLL. I will not read it. I will just summarize it very briefly. The CHAIRnAN. Yes, you summarize that now, and we will put the whole statement in the record.
STATEMENT OF MITCHELL B. CARROLL, SPECIAL COUNSEL, NATIONAL FOREIGN TRADE COUNCIL, NEW YORK, N. Y.
Mr. CARROLL. I am Mitchell B. Carroll, special counsel of the National Foreign Trade Council. Our association represents about 1,000 corporations and individuals interested in international trade. Unfortunately, this is tho first time that we are not unanimous, because one of our members, the Westinghouse Co. has different views in regard to this convention that you have just been speaking about. But-

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DOUBLE TAXATION CONVENTION

35

OPPORTUNITY FOR WESTINGHOUSE TO FILE OPPOSITION STATEMENT

senator Moi:i:. Nfay I interrupt at that point ,Mr. Clirman, for a procedural inatter? If this is true, then is the Westinghouse Co. going to be given ample opportunity to file its statement in opposition to the present witnem? I think it only fair that we hear both sides. The CHAIRMAN. Yes; we can put the statement by Leonard Kust in the record regarding the supplementary protocol. Mr. KusT. Mr. Chairman, I am Leonard 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 raised by other witnesses. 'The CHAIRMAN. W'l, we can only hoar one witness at a time. 1 Mr. CAUIOL,. I think in view of the fact that. Senator Martin and Congressman Simpson have more or loss made the prelude to what Mr. Kust would say, I would be very happy to step aside and let him make his points, so that you have their complete story before
The CHAIRMAN. 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 CHAIRMAN. Well, will you proceed now, please? hear Mr. Kust, so as to get the complete picture. The CHAIRMAN. You proceed first, and after you finish we can
you.

Mr. CARROLL. All right, sir. I thought probably you would like to

hear from him. Mr. CARROLL. All right, sir.

FOREIGN TRADE COUNCIL FAVORS ALL PENDING CONVENTIONS

with Paistan.

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 2 ou want it, we are in favor of the adoption of the convention

We are in favor of all the conventions that are pending before you. In other 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,

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.
BRITISH LAW AND LICENSING AGREEMENTS SOMETIMES UNCLEAR

I t ink that there has been a great deal of confusion about what the British law says, and, secondly, about the types of agreements that iare concluded in the licensing of the use of patents of foreign corporations.

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36

DOUBLE TAXATION CONVENTIONS

Let me give you a picture of thd British law. The British law is traced back to the time when England was fighting Napoleon. There are a number of lawyers here who are familiar with it.
The CHAIRMAN. I do not think we need go into history at this point. Mr. CARROLL. Well, the concept was developed, sir, that the tax

is imposed on all the profits of the company, without any deduction being allowed for dividends, interest, or royalties. If dividends, interest, or royalties are paid, the corporation is authorized to withhold the tax. Now, in the case that the royalty is not paid out of profits, then the corporation is required to withhold the standard rate of tax. So that the British Treasury gets its tax.
TAX ON OROSS ROYALTY BASIS

Now, many contracts are on what is called a gross royalty basis. That is to say, the American licensor says to the licensee, "You pay me so much for Jhe use of this patent, withhold whatever tax is
imposed on that incoie in a foreign country, and that tax can be

lishmnent in England. If the American licensor does not have a permanent establishment in England, England gives up its tax on royalties, so that the United States can tax that income in full. ' Now, as you know, gentlemen, there are many instances where you simply have a sales establishment inEngland and at the same time you will be licensing patents to this British corporation and that British corporation and they have no relationship whatsoever to the permanent establishment. So the primary purpose of this protocol, from our viewpoint, the general viewpoint, was to extend this granting of the excill tion by the United Kingdom-and that is a considerable exemption, from a 42.5 percent tax-to the case where the American licensor grants to a British licensee the right to use patents, and receives royalties. And that has no relationship whatsoever to the permanent establishment.
entirely--you ignore it? Mr. CARROLL. Yes. It. is just as if it did not exist. Now, the treaty goes still further, Mr. Chairman, and says if you do have a permanent establishment in England and that rovaltv is somehow or other associated with the permanent establishment, so that you are not entitled to exemption in England 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. (366)

credited against the United States tax, un(r sections 901 and so forth of the Internal Revenue Code." Now, there is no doubt about it that this protocol, this supplementary agreement with the United Kingdom, takes care of that situation perfectly'. The thing is, it takes care of it only from the effective date of the convention, and not for the past. ButThe CuAIRMAN'. You advocate that it should be made retroactive? Mr. CARROLL. No, sir. I am approving this convention as it is, because we feel that this broadens the present convention of 1945, which provides relief from double taxation in the case of royalties only where the American licensor does not have a permanent estab-

The

CHAIRMAN.

You cut out tihe idea of permanent establishment

11 DOUBLE TAXATION CONVENTIONd

Well, we want to hear Mr. Kust now, and presently we will be going to the floor.
T'lle CHAI
A . N. RETROACTIVE PROVISION IS IMPORTANT DIFFERENCE

37

Senator FULBRIGJIT. May I ask one question? Is the onlv difference here whether the proteoI is retroactive or not? Is that what the people on the other side wish-tha' we make this retroactive?
Mr. CARROLL. Well, of Course, naturally a taxpayer always loves

'

to get retroactivity. Senator FX'LnRIairr. Is that the main difference between your position and that of the others?
GROSS AND NET ROYALTY PAYMENTS TO AMERICAN LICENSOR

Mr. CARROLL. No, there are two differences, sir. One is that they want something that is equivalent to what is in the bill that would cover the situation whore, as Congressman Simpson lhas stated, the ensee has agreed to pay so much royalty free of tax, and pay the tax himself. In other words, the American licensor says, "I want $100 for the use of my patent, and you will hiavc to bear all taxes on it." And the licensee says, "All right, I will bear all the taxes." And the American hicensor 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 withholds, we will say, for simplicity's sake, a tax of 50 percent, the American licensor receives $50 in cash for the use of his patent, and the right to take a credit against the United States tax for the other $50. Now, the difference is that if, under one of these net royalty.agreenients, the American licensor says, "Pay me $100 free of~ alf taxes," the British licensee says, "I will bear the United Kingdom tax." Then the American licensor hats to include the royalty in his income sulbJect to the 52-percent tax here, and gets no credit for the U. K. tax. Senator FULBRIGHT. Why can we not arrange that by the way his contract is made? He has liberty to make it either way. Mr. CARROLL. That is a business question probably Mr. Kust can explain to you, sir. Zinator LONG. I wouhl like to ask one question.
FOREIGN TRADE COUNCIL'S POSITION ON TREATIES

Were you consulted on the making of this agreement, Mr. Carroll? Mr. CARROLL. No, sir, I was not honored to be asked. Senator LONG. So, after it was drawn up, you had to decide to be for it or against it? Mr. CARROLL. We saw it and thought this was fine. Senator LONG. It took care of all your people except one? Mr. CARROLL. No. We regarded it as a sound extension of the principle of relief from double taxation. Senator LONG. If you had been consulted would you advise that there is one major company left out completely although the protocol has taken care of the rest of your members? How many of your companies are doing business in England?
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,go
Mr. CARROLL.

DOUBLE TAXATION CONVENTIONS

A great majority of them, I suppose. Senator LoNa. Five hundred? Mr. CARROLL. I don't know, Four or five hundred. It might well be. Senator Low;. 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 taken care of all? Mr. CARROLL. Well, the Treasury has something to say about that. Senator Lo.xa. You (lid 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:)
STATEMENT ON BEHALF OF THE NATIONAL FOREIGN TRADE COUNCIL

COMMIrEE

TAX

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 lItheritances, because they are wise and effective measures to implement on a bil'iteral basis the provisions in the Internal Revenue Code for obviating or mitigating double taxation arising from the taxation by the United States of income derived from sources, or of assets in an estate, which are situated in another country. Such income and assets are inevitably subject to the prior right of the other state to tax them. The income-tax 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 of 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 United States allows the tax withheld abroad to be credited against the United States tax in accordance with section 901, Internal Revenue Code. he 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 corporation, 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 is 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 governments 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 reduce a tax to attract American investments, and then find that the sacrifice is of no

of the members of the tax committee of the National Foreign Trade Council,

Mr. Chairman and members of the Committee on Foreign Relations, in behalf

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DOUBLE TAXATION CONVENTIONS

39

avail because the United States 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 establishment in another country. The United Kingdom has recently adopted an interesting measure which permits a British corporation meeting certain tests to take advantage of so-called tax holidays or tax reductions in various foreign countries without incurring any liability to United Kingdom tax until the income is brought into the United Kingdom and distributed as a dividend.
NOTIFICATION TO EXTEND THE CONVENTION WITH THE UNITED KINGDOM TO

OVENRAS TERRITORIEs

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 April 16, 1945. This notification is found in Executive C, Senate, 85th Congress, 21d seion. Before this notification can be accepted by the Government of 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 1045 convention with the United Kinidom should aid in encouraging American corporations to invest and operate in their territories.
NOTIFICATION TO EXTEND TUB CONVENTION WITH BELGIUM TO TUE CONGO

Another matter pending is 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 sea.). 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 in the 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.
SUPPLEMENTARY PROTOCOL WITH THE UNITED KINGDOM REGARDING ROYALTIES

A supplementary protocol with the United Kingdom, signed August 19, 1957' 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 seas.)# 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 42.0 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 is paid by the British licensee and therefore is not 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 article 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 corporation which is subject to United States tax thereon is not engaged in trade or business in the tUnited Kingdom through a permanent establishment situated therein, or (b) if the American corporation is so engaged but the royalties or other amounts are not directly associated with the businem carried on through that permanent establishment. (369)

40

DOUBLE TAXATION CONVENTIONS

Article 11 of the supplementary protocol amends article XIII of the convention of 1945, to provide that sections 901 to 905 Internal Revenue Code as in effect on January 1, 1956, will allow a credit to the United States recipient licensor of any royalty or other amnonit coming within the scope of article VII I of the preset convention by deeming that he shall have paid any United Kingdom tax legally deducted from the royalty or other aniount by the person by or through whom any payment thereof is made, if the recipient of the royalty or other amount, elects to include itt his gross income for the purpose of United States tax the amount of such United Kiigdom income tax. An explanation of this provision in Executive A, page 3, states in substance that where the royalties are not, exempt from United Kingdom tax because they they are related to the business operations of the American corporation's permtanent 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 busincs operations of its permanent establishment in the Unitked Kingdom the tax committee of the National Foreign Trade Council recommends 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, 85th Cong., 1st sess.), 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 Seeretary Humphiey at the conference at Rio d,, Janeiro, Brazil, in 1964, was reiterated in Economic Reports to the Congress by President Eisenhower on January 10, 1955, January 24, 1956, and January 23, 1957, and was categorically endorsed by the present Secretary of the Treasuiry, 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, 1957, 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 for 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 taxes 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 legislatie bodies of the signatory countries."' This statement refers to the treaty with Pakistan which is now before your committee for consideration. It is understood 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 veery 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 Pakistani Income Tax Act as in effect on the date the convention was signed, i. e. on July 1, 1957 provided this minor reduction over a period of 5 years for approved industries which were established during the period from August 15, 1947, to March 31, 1958. The Pakistan Minister of Finance in his speech concerning the budget for the year ending March 31, 1958, stated categorically that he "would 11k.- 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 * * *." -o Cong., IHearing Wfor tb. Committee on Foign Reticoim United 8tas Smate, W5th ig Ies,
Ksome
Tat Qanveaotm with Pakistan (S. N, sub oug., 14 se., Augst , 1967, p. 40).

(370)

DOUBLE TAXATION CONVENTIONS This reduction in tax would clearly apply to approved industries owned by Americans that were established prior to March 31, 1958, and it is reported that the benefit 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 bein , of course understood that if the 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?

STATEMENT OF LEONARD E. gUST, GENERAL TAX COUNSEL OF WESTINGHOUSE ELECTRIC CORP., PITTSBURGH, PA.
1Mr. KUsT. I just want to make three points. I represent Westinghouse Electric Corp., as general tax counsel, and I think it has been made clear up to this point that Westingiouse has a very important stake in the choice between the protocol, Executive A, and H. R. 4952, before the Senate committee. 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 or two exceptions. And I want to make 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 his rent, instead lie says to the lessee, "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

I think this illustration makes what a net royalty agreement is a little clearer than it may have been. At least Ihope so. With respect to English royalties, we have found, even after the so-called Irving Air Chute case, that the tax convention which was 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 if he does have a permanent establisirment, then the United Kingdom may continue to impose tax on royalties. It was left to the United States to eliminate double taxationly 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 unposed oh the licensor. Andwhen that argument was made to the Treasury, they said, "We think that the Irving Air Chute case by saving 'this is not a tax on the licensor,' should be no longer followed." They agreed with us until our year

licensee.

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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. This 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. I would like to say something to the point of whether this should be regarded as a windfall. It is perfectly clear that this is economically a tax which is imposed upon Westinglhouse as licensor, even though we have a net royalty agreement-that is the British tax is economically imposed on us. When we are not allowed a credit for the British tax, and must pay the United States tax on our net royalty agreement, without credit, we suffer double taxation. The effective rate is somethinglike 72 percent on our royalties, where it should be only 52 percent, which is the American tax rate. Our agreements are longstanding. Commercially it is not possible to go back to the licensee and say, "Look, we are suffering double taxation under our net royalty agreements. If we just revised our agreements we could eliminate double taxation under the pending protocol." Well, if anyone has ever been engaged in these royalty negotiations, you know that they are adverse negotiations. We cannot go to our licensees and ask for a favor without having to give them something in return. It is not practicable, therefore, to revise existing agreements. For the future, yes, I suppose we could shift from net royalty agreements to gross royalty agreements. Now, I see no greater merit in the one approach and the other, and why should we be compelled to negotiate gross royalty agreements when commercially, over many years, and all over ihe world, we find that it makes a good deal of sense 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 since you are going to have to bear the tax on top of the net royalty that you have to pay us, it will be to your interest to make sure that the foreign tax is properly paid." And that is our main reason for negotiating net royalty agreements.
RELATION OF BILL TO COURT DECISION

Senator MORSE. May I ask a question at this point, M1r. Chairman?

as to what my final position will be on the protocol versus the statute. Congressman Simpson's argument about protecting the jurisdiction of the Ways and Means Committee and the Finance Committee as far as the legislative process is concerned, has considerable weight with me. But this tax that was imposed by the Treasury, on your company, from 1950-there wasn't anything illegal about it? Mr. KIsT. 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 distance, 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

Senator MORSE. I want you to know I am completely undecided

The CHAIRMAN. Yes.

sir.

(372)

DOUBLE TAXATION CONVENTIONS

43

British barristers, and the editor of Taxes in the United Kingdom, which is published by the Harvard JAW School-and I would be happy to submit those for the record. They are unanimous in agreeing that the Irving Air Chute case was wrongly decided-it was an incorrect interpretation of the British law to say that the British tax was not imposed on the iceensor, and therefore, for that reason was not a creditable tax under the Internal Revenue Code. Senator MousE. But there has been litigation on the point applied to your company, in which litigation you lost. Mr. KusT. We were not involved in the litigation, Senator Morse. Senator MoRse. The legal principle was established in the litigation which the Treasury Department then applied to your company? Mr. KUST. That is correct. Senator MosE. And in effect, are you not asking for legislation, then, that reverses that earlier opinion and makes that reversal retroactive? Mr. KITST. That is correct. Senator MoitsE:. You will have a hard time selling that one to me,
ihcIlmse of

Senator MomtsE. Because of the whole chain of precedents you will open up, then, whenever you get a decision that you don't like, that
you think may encroach upon such equity, to have us passing legislation to upset decisions that other companies, in negotiating agreements, have relied upon and they proceeded with a modification of their net royalty agreements. Why shouldn't your eompanv have done the same thing since 1950? MIr. K IsT. The agreements to which this applies are long-term agreements that were in existence then and continued for a number of vears. I think another point I want to be sure is understood is thtit so far as we can see, H. I. 4952 takes care of all American licensors. It eliminates double taxation with respect to royalties, whatever may be te form of the agreement. W lereas the protocol, while it would work with respect to licensors with a gross royavlt agreement, it instead confers a benefit on the licensee in the case of a net royalty

Mlr. KUST. It has been done frequently.

the--

agreement, and leaves the licensor, the American licensor, in the
AMOUNTS OF NET AND GROSS ROYALTY PAYMENTS

same position as before suffering double taxation.

Senator LONG. lAt me get this straight. You are interested in this thing both prospectively and retroactively, if I understand it? XMr. KusT. Yes, sir. Senator Loxom. In other words, you are interested in the prospective effect of it as well as the past etrect of it. Now on the kind of net royalty agreement you have, if a man is going to pay you $48 net in Eigland; he would just as soon have paid you $100 if he didn't have to pay the tax, wouldn't he? Mr. KUsT. In the initial negotiations presumably that would be so. Senator LONG. lie is going to pay $52 on that transaction anid 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. KvsT. Yes, indeed. I think generally I can say that the net royalty is less than the gross royalty would be by the amount of the then applicable tax, foreign tax.

(373)

44

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 better 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 LoN*. Actually in effect you are the fellow who is being taxed. But because of the way the agreement works out, the other man is getting the tax reduction. Mr. KUST. His costs under the license would be cut from $100 toSenator LoNe. 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 committee, which brings that out. Senator ION(v. Yes, sir.
RETROACTIVE EFFECT

Senator MOWE. One more question. Help me with this, if you call. You negotiated your net royalty agreements. The best legal judgment at the time was that the courts would not decide the case as 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 tile money. Mr. KUST. Well, that is putting the worst possible light on it. Senator MOME. I am trying toMr. KUsT. I think it can be viewed another way.

Senator MoWE. 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 MoEsE. 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 prem-dents 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. K1714. Yes, Senator, I think there are cases where tax traties have been made effective retroactively; sowetirnq for quite a number of veas. I couldn't cite you specific examples, but there are, and I could submit them 'to the committee or to you pfnrHonally, Senator

(:374)

-DOUBLE TAXATION CONVENTIONS

45

Morse, if you like. But I do know there are cases of tax treaties that have elininated double taxation retroactively. '1h CHAIRMAN. ThaIlik you, sir.
(The staAnet referred to is as follows:)
STATEMENT sr LEONitw E. KURT, GENERAL TAX CouNslc. or WESTINIIIOvot

ELECTRIC COUP.

Mr. ('hairman and memberss of the committee, I am Leonard E. Kust, general tax counsel of WeAtinghouse Electric C*orp., Pitt.burgh, fla. It is a privilege to apljswr before this committees for the purpose of clarifying the substantive
ilt:(h uacy of the Supplementary Protocol under consii(Ieration, de.igliated 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 resix.ct to royalties by permitting only the country of the licensor's nationality to imitae tax, tinless the licensor has a permaMit establishuwit in the licensee's country, in which came 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. COURT DECISIONS REG{ARDINO BRIT1sl ROYALTY TAX The British tax treaty is presently in this form. Unfortunately, however, two Tax Court cases, one of them, the Irving Air Chute case, affirmed by the Court of Appeals for the Second Circuit (143 F. 2d 256 (1944), certiorari denied, 323 U. S. 773 (1944)), have held that the British ta on royalties is not a tax imposed on 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. fence, on the authority of the Irving Air Chute caseW, royalties paid to an American licensor with a permanent estalsishment In the United Kingdom are pr'sently subject to both the British tax and the United States tax. This is not only an unjust result but, we believe, it is incorrect on the law. It is to be noted that in deciding that the British tax on royalties was t, t impose on the licensor, the American court undertook to interprt British law. I have obtained the opinion. of three lawyers eminently qualified to pass on the correctness of this interpretation. Two of the lawyers are English barristers specializing in British income tax law and the third is editor of Taxation in the United Kingdom, published by Harvard Law School. The opinions of all three of thete lawyert are unanimous to the effect that the Irving Air Chute cate was wrongly decided and that the British tax withheld from the royalty payments is a tax imposed on the licensor. 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 licenser, 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 case 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 ('ode by appropriate action reversing the decision in the Irving Air Chute case; and as Congre..sman Simpson so ably minted out, this is more properly a subject of congressional action than of treaty action.
BUBsTANTIYK IJFICIENCcZRs Or PROTOCOL GROSS AND NET ROTALTIRS

But entirely aside from the propriety o( the treaty action taken, the protocol is substantively deficient. While the protocol does eliminate double taxation of "gross royalties," it only aggravates the inequity which exists in those instances where a United States licensor has a so-called net royalty agreement with a British licensee. 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 hi,1 royalty. The licensor reports for United States tax purposes the "gross royalty" and takes the foreign tax as a credit against him United Stat" tax. A "net royalty" agreement provides that the license must pay on behalf of the licensor anv foreign taxes due in resliect of the royaltWs and pay to the licenmor royalties at a fixed rate net of such taxes. In thternuinzg the net royalty rate to

(375)

46

DOUBLE TAXATION CONVENTIONS

be used in the agreement, the fact that the licensee will p.ty the foreign tax for the licensor is taken into account so that the net royalty rate is less than what the rate would be if the licensor paid tle tax. In other words, the arrangement is like the more familiar "net lease" of real estate where the lessee assumes as part of the rent the payment of local taxes. In entering such agreements, the licensor considers that the foreign tax mid by the licensee is additional royalty and is creditable against the United States tax liability of the licensor. This is the usual tax treatment accorded such agreements, except in the case of British royalties under the application of the Irving Air Chute decision. The difference between a "net" and a "gross" royalty has for tax purposes been merely one of form. LEGISLATION WOULD OVERRIDE COURT DECISION Under H. R. 7643 in the 84th Congress, which was vetoed by the President and under H. It. 4952 in the present Congress, a credit for the British tax wouli be allowed in spite of the Irving Air Chute decision. Thus British royalties, whether "gross" or "net," would be given the sante treatment for United States tax purposes as are similar royalties front other countries. The protocol, on the other hand, would eliminate the British tax on royalty payments where the licensor has a "permanent establishment" in England unless the royalty is "directly associated' with the business carried on through the permanent establislhtnmt." The usual "permanent establishment" of an American licensor in Great Britain is a sales tl, coatd hence the royalties would itot he "directly associated" with the business of this office. The protocol would, there-

fore, eliminate the British tax which, in the case of a "net royalty" agreement, would merely leave the American licensor with his net royalty and without a credit for any British tax. This is precisely where he is nder the incorrect result of the Irving Air Chute case. The British licensee, however, would be relieved of paying the British tax so that his cost under the license agreement would he substantially reduced. Thus, the protocol fails to give any relief to the American lFeensor, bIt instead confers a substantial benefit on the British licensee. This is illustrated in the tabulatio attached.
PROTOCOL DEFECTIVE IN NET ROYAIATY AGREEMENTS This remarkable operation of the protocol in the caso of a "net royalty" agree-

ment must be attributed to a failure on the part of the United States negotiators to understand the operation of a "net royalty" agreement. Yet this defective operation of the protocol in the case of a "net royalty" agreement was conveyed to the Treasury Department prior to the signing of the protocol. The protocol would work satisfactorily in the case of a "gross royalty" agreement. However, even in the case of "gross royalties" there is, it eems to ins, less merit in the approach taken in the protocol than in the approach taken in II. R. 4952. The approach of It. R. 4952 would conform the treatment of British royalties to the treatment of royalties front most other countries. The protocol, on the other hand, introduces a new approach which might affect our treaties with other countries. Under the protocol the British tax is eliminated on royalties paid to an American licensor, but this is only in return for elimination of the United States tax on royalties paid by American liceisees to British licensors in similar circumstances. Thiis s a now concept not to be found in any of our other treaties.
REVENUE LOSS UNDER PROTOCOL MAY NOT BE LES THAN UNDER LEGISLATION

many arrangements between licensees and licensors have reflected existing law and the burden of the British tax may not rest on united States licensors in suich cases. Consequently, to allow the British tax as a credit against the United States tax on a retroactive basis would give a windfall gain to some Americani licenRors. I believe I have made it clear that the burden of the British tax, economically and legally, is on the American licensor whether he has a gross or net royalty agreement. It is error, therefore, to speak of the allowance to the American licensor of a credit for the British tax as a windfall. On the other

I do not know of any data to indicate that the revenue loss under the approach of the protocol is less than the loss under the approach in H. R. 4952 and in our other treaties. It should be noted that in the case of corporations the revenue loss under It. R. 4952 is only at the British tax rate of 42.5 percent, while the loss under the protocol is at the United States tax rate of 52 percent. In his memorandum of disapproval of H. R. 7643, the President observed that

...(378)

DOUBLE TAXATION CONVENTIONS

47

hand, it is clear that in the case of a "net royalty" agreement the elimination of the British tax under the protocol confers a real windfall on the Br..ish licensee. I believe that the protocol is seriously defective in it. attempted correction of the double taxation of British royalties which results from the improper decision in the Irving Air Chute case. On the other hand, 11. R. 4952 presently pending before the Senate Finance Committee would achieve the purpose clearly and correctly. I recommend that consent to ratification of the protocol be withheld in order to permit proper correction of the inequity by the legislation presently pending in the Senate Finance Committee.

(Subsequently, the following was supplied in response to the request of Mr. Morse):
II. R. 4952 corrects unjust double taxation in the case of a net royalty agreement with a British licensee which is not covered by the protocol. The fact that II. It 4952 corrects double taxation retroactively camnot properly be regarded as a windfall to a particular taxpayer.

The do,mle taxation arises from the application by the Treasury of the decision in the Irving Air Chute case. This case was decided jiist prior to the 1945 British Tax Treaty, and competent counsel at that time considered that the treatment of royalties in the treaty overruled the Irving Air Chute ctas. In any event, the Irving Air Chute case is based on an erroneous interpretation of British tax law as s4t forth in three opinions of experts in British tax law, copies of which have been filed with the committee.

The Pittsburgh office of the Ilternal Revenue Service, after consideration

of the matter, agreed that the treaty had the effect of overriding the Irving Air Chute care, and allowed a credit fo British taxes on the English royalties of actively to 1950, on instructions from the Washingto office. Under these circumstances, it is submitted that, the retroactive allowance of a credit to eliminate double taxation that was retroactively and improperly

Westinghouse up to the year 1950. In 1955, they reversed their position retro-

im)osed cannQt he regarded as a windfall. It is believed that investigation will reveal that several tax treaties with foreign countries eliminated double taxation retroactively; some for several. years, permitting refunds to affected taxpayers. There has een no time to give specific
examples. % t

The Treasury representative stated that the cost of eliminating double taxation was shared with the United Kingdom under t h6 protocol, but was butme solely by the United Statos under H. R. 4952. The support of his statement, however, was based only upon analyzing the cost with respect to the royalties of an American licensor. He failed to point out that in addition, there isia cost to the United States under the protocol in that tIlxe United States giyes up United States tax on the United States royalties of a British licensor whteh it can presently collect. This tax is not lost under H. R. 4952. Hence, it is probable that the loss of revenue under protocol is greater than under H. It. 4952.
MEMORANDUM

SUPPLEMENTARY PROTOCOL (EX. A BEFORE SENATE FOREIGN RELATIONS COMMITTEE) H. R. 4962 (BEFORE SENATE FINANCE COMMITTEE) (1) The purpose of H. R. 4952 Is to eliminate double taxation of British royalties received by an American licensor by providing a credit for the British taxes imposed on such royalties, presently erroneously not allowed under a United States court decision. This bill is In substantially the same form and is intended.. to accomplish the same purpose as H. R. 7643 which was unanimously enacted by the 84th Congress in 1950 but was vetoed by the President. (2) The President's memorandum of disapproval stated that this problem could be more appropriately handled by amendment of the Anglo-American tax convention of April 16, 194. rather than by legislation. (3) A protocol on this matter was subsequently presented to Congress, January 1,6 1958, and is now pending before the Senate Foreign Relations Committee as Ipxecutive A." (4) The protocol does not remove the inequities of double taxation which *ould he correct4d by If. It. 4952: 78095 0-.42-vol. 125

(877)

48

DOUBLE TAXATION CONVENTIONS

(a) Under H. It. 4952, a credit for Britisth taxes paid would he allowed to an American licensor whether Ie has a gross royalty agrtementt or a so-called "net royalty" agreement. (Under a net royidty agreement the British tax is paid by the British licensee and the, royalty rate is comiprably reduced. This is like a net lease of real estate where til lessee assumes as part of the rent tile payment of local taxes.) (b) Under the prolposed protvol, in the case of a net royalty agreement, the British licensee would be relieved from payment of the tax, a great benefit to him, but the American licensor is afforded no relief. (e) On the other hand, under If. It. 4952, the British licensee's cost remains the sam;e, but the American licensor is relived or the burden of double taxation. (5) Obviously, it is the United States licensor that is suffering, and because of an improlwr Inited Stat, s court decision. We do not need an agreement with a foreign country to stride relief for United Staties Ia~payt-rs to correct tite results of a decision of a United States court. This is prolperly a legislative function and the legislative process, should prevail when a contest develops, its here, between the Executive and Congress, especially when the protocol does not serve the purpose for which the legislation is intended. Trafment for unitedd States income-ta.r purposrs of royalty/ income from the United Kingdom-American taxpayer hair'ig a net royalty' agreement and apermanent establishment in England with which royalties are not directly associated
Under prescut treaty aid Irving Case PT Treaury Department Interpretation $100,000
Air Chute

Irving Air Chute case

Prior to

Under proto. Under I. R.

col (Ex. A)

4962

Total cost to nritLh licensee ................... Deduct applicable British taxes, at rate of 42.8 percent ....................................... Amount received by United States licensor under "net royalty" agreement 1 . Gross royalty subject to United States tax .......
United States tax, at 52 percent ............. [,es foreign a credit ....................... .

$100,000 42, 500 87, a0100,0
5000 4..500
i

$575,00

$100,000 4, 0
z ,

42.500 ..............
:

57, 500 -=J .. 578 0
29,W00

"

57,,00 87,500

67,3t:t0
, ,

,

100,000
11,000 &90 42,50

Not United States tax ....................
Net Income after taxes to United States censor ................................

,800
4000

29,000
27,600

29,00
27,600

9.500
48000

I Under a "net ro ty" agreement the British tax is paid by the British licensee and the royalty rate Is comparably reduced. This Is like a net lease of real estate where the lessee assumes as part of the rent the payment of lot taxes.

The CHAIRMAN. We will hear Mr. Raum now.

STATEMENT OF LEONARD RAUM, REPRESENTING AMERICAN METAL CLIMAX, INC. Mr. RAUM. Mr. Chairman and gentlemen of the committee, my name is Leonard Raum, and I am here representing American Metal States-iTnited Kingdom tax convention to the British territories. The CHAIRMAN. You may file your statement. Mr. RAUM. I have filed a statement which I ask to be made a part of the record, sir. The CHAIRMAN. Yes. (378)
Climax Inc., in connection with a proposed extension of the United

DOUBLE TAXATION CONVENTIONS FAVORS EXTKNDINO CONVENTION TO TERIUTOtLIES

49

Mr. RAvIt. The American ,Metal (iimax Co. strongly favors the extension. The extension has been under negotiation since 1949. It has been oflicially ret utsted by Ilie British Governmtent. Both the Treasury and the State I)partmnents have recomnmentied it favorably, and the President has submitted it to the Senate. There is a procedural tic-up between the proposed extension and the royalty convention this conllinittee hias been considering this

pro.4pective.

experts that it is easy for the committee to separate the two problems procedurally. I would like to point out that the effective date of the extension is
It is the 1st day of January following the date on which

morning, but only a pro'edilral tie. And I understand from technical

the last act is done, both in the United States anti in the particular
1959. if, for any reason, this committee should put it over until next year, the earliest it could come 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. Stam, this morn-

territory, to put the extension into effect. so that if this colnnittee and tile Senate act this year, and all other necessary steps are taken, the extension comes into effect January 1,

ing, recommended it. And I see no reason to postpone it. It has been under consideration since 1949.
ROYALTY PROBLEM AND EXTENSION ARE INDEPENDENT ISSUES

I would like to make eminently clear that I am taking no position

this year, it might be January 1960. The royalty issue and the extension present completely independent substantive issues. There is a procedural tieup which 1 am told can be separated very easily by the committee simply making a reservation in adopting or approving the extension that references to the royalty protoco[ be eliminated. And I am told by the technical experts that presents no problems.

the extension depends on when the committee acts. And if the committee acts this year, it might be January 1, 1959. If it doesn't act

on the royalty issue whatsoever. But the royalty issue and the extension have presented completely different and independent substantive issues. It is true that the extension would extend the royalty part of the treaty also if the royalty part were approved. But there are many, many, other provisions 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 from the royalty issue. My request to this committee is that regardless of what it does on the royalty i~sue whether it approves the protocol, whether it disapproves it, whether it lets it lie over-whatever it does-that it take up affirmatively, and act affirmatively on the proposed extensionand of course I hope act favorably to the proposed extension, at this session of Congress. At the risk of repeating within my 5 minutes, the effective date of the royalty convention is January 1, 1950, regardless of when this committee would act on it. The effective date of

(379)

50

DOUBLE TAXATION CONVENTIONS

that to my knowledge no one, including the exeeitive branch of the Government, taxpavers-I don't even know in this case of one member

The effective date, tie differences in substantive issues, the fact

of the Foreign Tax Council or any other group that opposes this extension. I think they all favorably support it, and it is extremely important, Mr. Chairnlan, 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 I 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 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 OF LEONARD RAUM

minutes you have afforded me, sir. The CHAIRMAN. I appreciate the way you have packed a lot of

Mr. Chairman and iinibers of the{ committee, my name is Leonard Rauni. I am a partner in the law firm of Wcnihel, Shulman & Manning, of Washington, D. C. I appear hero on behalf of American Metal Climax, 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 American Metal Climax Co. strongly favors the prompt extension of the convention.

BRITISH HAVE FAVORED EXTENSION SINCE 1940
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 accepted by the other party. As stated in the report to the President by the Acting Secretary of State, under date of January 23, 1958, "British authorities indicated informally as long ago as 1949 that there was a desire to give this Government notification for extending the operation of the convention to certain named British overseas areas." [Emphasis 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 by the United States Government, and the British Government accbrdingly heldup its official request to the United States authorities to extend the con ention 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 Aug ust 19, 1957, officially requested the extension of the United States-United Kingldom convention to certain British territories. The President, "'With the view to receiving the approval of the Senate", submitted 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 extension has the approval of both the Department of State and the Department of the Treasury. It is to be noted that the Acting Secretary of State in his report to the President indicated that the Secretary of the Treasurv had called the attention of the State Department "to the widespread interest in 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 the part of both the United States and the British Governments, an official request has been 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 proposed extension; and the President has submitted the proposal to the Senate

with a view toward favorable action on the part of the Senate. We know of no opposition on the merits of the proposed extension to its being approved by this committee and by the full Senate.

(880)

DOUBLE TAXATION CONVENTONS
POLICY OF UNCOURAGINO PRIVATE INVESTMENT ABROAD

51

It is the definite policy of this Governmenit to encourage private capital invest. ment in foreign countries. A major reason for the approval of the original United States-United 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 territories. Section 902 (a) of the 1954 Internal Revenue Code (sec. 131 (f) of the 1939 code), for example, in effect provides that where a United States corporation owns 10 percent or more of the voting stock of a foreign corporation from which it receives 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 dividends are paid. For example, if an American corporation owns 10 percent or more of the voting stock in a foreign corporation 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 is paid. 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 less than 10 percent of the voting stock in the foreign corporation. Article XIII of the Unites 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 States-United 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 territories, including the extension of this particular provision, clearly would assist greatly in promoting private American business Investments in the British territories.
COPPER PRODUCTION IN RHODESIA

The United States Government is vitally interested in copper production in Northern Rhodesia. We understand that the Government has recently loaned £5 million to Chibuluma 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 in the world in copper production. Two Northern Rhodesian companies alone, Rhodesian Selection Trust, Ltd. (through its ownership of approxiately two-thirds of Mufulira Copper Mines, Ltd.) and Roan Antelope Copper Mines, Ltd., account for approximately 50 percent of the copper production in Northern Rhodesia. Both Rhodesian Selection 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 192,000 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 51 percent of the stock of Rhodesian Selection Trust, Ltd.) who owned stock in Rhodesian Selection Irust amounting to approximately 15 percent of the total outstanding stock of that company. Likewise, there were approximately 3,300 American stockholders (not. including American' Metal Climax, Inc., which owns approximately 33 percent of the stock of Roan Antelope Copper Mines) who owned stock in Roan Antelope Copper Mines, Ltd., amounting to approximately 12 pe-rcent of the total outstanding stock in that company. -These stockholders are individuals, investment trusts, etc. The extension of the convention to the British territories will result in these stockholders being allowed the appropriate foreign tax credit with respect to the dividends which they receive from Rhodesian Selection Trust, Ltd., and Roan Antelope Copper Mines, Ltd. It is to be noted that American Metal Climax, Inc., will not receive any tax benefit in this respect from the extension of the convention since as a corporate stockholder owning more than 10 percent of the voting stock of both Rhodesian Selection Trust, Ltd.. and Roan Antelope Copper Mines, Ltd., it already is entitled under section 902 of the Internal Revenue Code of 1954 to a foreign tax credit with respect to the dividends which it receives from these two corporations. American Metal Climax, Inc., however, is interested in
encouraging American investment in Northern Rhodesia. The extension of the United States-United Kingdom tax convention to the

British territories will encourage substantial further investment in Northern

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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 loan 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 1945, commented on the anticipated extension of the convention to the British colonies or other territories. The Secretary stated that such extension "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 tie between the United States and such areas." (Emphasis supplied.)
PROMPT COMMITTEE ACTrION 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 th, effective date with respect to the United States tax, of the extension of the United States-United Kingdom convention n connection with any particular British territory is the 1st day of Januar following the date on which the last act necessary to put the extension into efect 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 States taxes. If, however, this committee for 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. E
PENDING SUPPLEMENTARY PROTOCOL

There is likewise pending before this committee a supplementary protocol 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 substantive 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 the British territories and the supplementary protocol on royalties only have a procedural relationship. The request for extension was submitted after the supplementary 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 royalties. This supplementary protocol on royalties may be approved may be disapproved, or may be allowed to lie over until the next Conqress. We take no position, and make no recommendation, as to what this committee or the Senate should do with respect to the supplementary protocol dealing with royalties. Our only position Is that whatever action is taken with respect to the royalty issue should have no 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.

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DOUBLE TAXATION CONVENTIONS EFFECTIVE DATE OF EXTENSION DEPENDS UPON WHEN ACTION 1S TAKEN

53

this afternoon, when we will meet in executive session. (Whereupon, at 12:05 p. m., the hearing was recessed, to reconvene in executive session at 3 p. m., on the same day.)

It is to be noted that the supplenmentary protocol on royalties specifically is made applicable, as regards United States tax, to taxable years beginning on or after January 1, 1956. The effective (late of the suppleientary protocol on royalties thus does not depend on when the protocol is ratified. As pointed out above, however, the 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 shoud take affirmative and favorable action on the proposed extension at this session of Congress, regardless of what action is taken or is not 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 supplementary 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

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4

Senate Committee Report
July 7, 1958 Executive Report No. 1 85th Congress, 2d Session Senate Foreign Relations Committee

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zed ' ,i 8-rH .(eumms

}

SENATE

No. { Excurvn 1Rzr.

DOUBLE TAX CONVENTIONS

MOXDAr, JCLT

7, 195S8.-Ordered to be printed

Mr. G(EzN, from the Committee on Foreign Relations, submitted the following

REPORT
[To accompany Ex. N, 85th Cong., lot se .; Ex. B, 85th Cong., 2d seas.; and

Ex. C,85th Cong., 2d sess.]

The Committee on Foreign Relations has had under consideration its advice and consent to their ratification: 1. Taxation convention with Pakistan, si ned at Washington July 1, 1957 (Ex. N, 85th Cong., 1st seas.), 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, Ex. C 85th Cong., 2d seas.), 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 ses.), 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 CoNvZNTIoNs the eonvetions listed below and recommends that the Senate give

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 dle 1945 convention to 20 British overseas territories. The committee reservation, which is

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DOUBLE TAX CONVENTIONS

of a 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 by United States acceptance (for which the advice and consent of the Senate is necessary) of a notification of such extension given this Government by the Belgian Government in 1954.
2. CommirrEz AcroN

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. The notification from the United Kingdom and the supplementary convention with Belgium were received by the Senate January 30, 1958. These matters were the subject of hearings before the committee 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 convention and likewise approved it with a reservation.

3. THE CoNvEroN Wrm 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 granting tion in one country to income which would otherwise be tax exempsubject 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 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-eparing 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

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I

DOUBLE TAX CONVENTIONS

3

such as that in article XV (1), 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 United 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 new principle in United States tax treaties. Its application requires careful 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 firstparagraph of article XV from the resolution of advice and consent. This is the sentence which provides the United States credit for taxes waived bv 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 is no 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 CONVENTION

The 1945 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 the notification. On August 19, 1957, 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 Holiduras, Cyprus, Dominica, Falkland Islands, Gambia, 6 renada, Jamaica Montserrat, Nigeria, Rhodesia and Nyasaland, St. Christopher, kevis and An illa, St. Lucia, St. Vincent, Seychelles, Sierra Leone, Trinidad and Tobag, 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 followinF April. For the territories other than Rhodesia and Nyasaland, the extension will not apply to taxation of interest on bonds, securities, notes, debentures, or other forms of indebtedness. For Rhodesia and Nyasaland the extension will not apply to United States taxes on gains from

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DOUBLE TAX CONVENTIONS

the sale or exchange of capital assets or on accumulated or undistributed earnings, profits, income, or surplus. In addition, it will apply to the surtax in British Honduras, Grenada, and Jamaica; to the supertax and undistributed-profits tax in Rhodesia and Nyasaland; and to the duty on profits, the din mond-industryprofit8 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 1945 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 conunittee feels it should not be further 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 protocols and should exclude the 1957 protocol. This would be accomplished by the reservation proposed by the committee. 5.
SUPPLEMENTARY CONVENTION WITH BELGIUM

rhe convention will apply to the income tax in all of the territories.

This convention is designed 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 Ruanda-Urundi. The 1948 convention with Belgium, 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 waays 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 Belgium by a citizen or resident of Belgium'or by a corporation or other juridical person created or organized in Belgium or under the laws 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 provided, in article IV 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 conjunction with the existing convention %illprovide 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 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 supplementary 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 wll-estallished practice. The committee recommends that the Senate give its advice and consent to ratification.

[Text of conventions and of Presidential messages of transmittal]

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Senate Floor Debate and Action
July 9, 1958 85th Congress, 2d Session 104 Congressional Record 13238, 13242-13244

78095 0--62--vol. 1-26

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[P. 1323ss]

DOUBLE TAX CONVENTIONS

\fr. MANSFIELD. Mr. President, may we 'have order so that the Senators will be aware of the announcenent to l)e made? The PRESIDING OFFICER. The Senate will be in order. Mr. BIBLE. Mr. President, I ask unanimous consent that CalenExecutive N, 85th Congress, 1st session; and Executive B and Executive C, 85th Congress, 2d session-be considered en bloc; that a yeaand-nay vote be taken on the question of advising and consenting to Executive N of the 85th Congress, 1st session, and that the resolutions, with the accompanying reservations, advising and consenting to the ratification of the other two conventions; be deemed to have been agreed to by the same vote. The PRESIDING OFFICER. Is there objection to the request of Senator from Nevada? There being no objection, the Senate, as in Commit tee of the Whol6, proceeded to consider, en bloc, the following conventions, which were severally read the second time: [Text of Conventions] [P. 18242] Mr. MANSFIELD. Mr. President, will the Senator yield? Mr. BIBLE. I yield to the distinguished Senator from Montana. Mr. MANSFIELD. Do I correctly understand from the acting majority leader that the 1 vote will have the effect of 3 yea-and-nay votes so far as these executive agreements are concerned? Mr. BIBLE. The Senator from Montana is absolutely correct. Mr. President, I suggest the absence of a quorum. The PRESIDING OFFICER. 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 be explained very briefly and disposed of en bloc. The first one is Executive N, the convention with Pakistan, which follows the same general pattern as 19 conventions with other countries to which the United States is a party and which are designed to eliminate double taxation and to prevent fiscal evasion. Thisis done, on a reciprocal basis, by granting tax exemption in one country to income which would otherwise be subject to tax ip both countries. Provision is also made for administrative cooperation between the tax authorities in both countries. The Foreign Relations Committee recommends 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 expired, and consequently, the provision of the treaty based on that law would be inoperative even if ratified.

dar No. 1,Calendar No. 2, and Calendar No. 3-being, respectively,

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q

original situation? Mr. MANSFIELD. The Senator is 'orrect. 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 (396)

have established a credit in cases in which thi tax had not actually been paid, which would have been a new principle so far as our tax laws are concerned, and one which has never been approved by the Congress. Mr. MANSFIELD. The Senator is correct. Mr. WILLIAMS. As I understand, the reservation restores the

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 a reservation. Mr. WILLIAMS. My reason for propounding the question is that the only way to strike ii out is by way of a reservation. Mr. GREEN. That is correct. Mr. MANSFIELD. Mr. President, will the Senator yield? Mr. GREEN. I yield. Mr. MANSFIELD. Is it not, true that in connection with the consideration of all three of these conventions the committee had the benefit of the advice and counsel of the chief of staff of the Finance Committee, Mr. Colin Stain of the Joint Committee on Internal Revenue Taxation. Mr. GREEN. That is correct. Mr. WILLIAMS. As the treaty wis originally submitted, it would

The second convention is Executive B, which modifies the existing tax convention with Belgium and extends it to the Belgian Congo and the Trust Territory of Ruanda-Urundi. Tie 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 convention with the United Kingdom to 20 British territories. The committee recoilends a reservation to mako it clear that the extension 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 clay on the other conventions. With the reservations which have been recommended by the committee, I know of no opposition to the conventions. On the contrary, they have widespread support in the international business community. "They are also recommended by the State Department and tie T'reasurv Department and have been carefully analyzed by the staff of the Joint Committee of the Congress on Internal Revenue. I ask that the conventions be approved by the Senate. Mr. WILLIAMS. Mr. President, will ihe Senator yield for a question? Mr. GREEN. I vield. Mr. WILLIAMS 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. GREEN. That is correct.

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, as follows:
Resolved (two-thirds of the Senators present concurring therein), That the Senate advise and consent to the ratification of Executive N, 85th Congress, 1st 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 Washington on July 1, 1957, subject to the reservation, which

shall be agreed to by the other high contractingparty before ratifications are exchanged, that the second sentence of paragraph 1 of article XV shall not be ratified. Resolved (two-thirds 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 August 22, 1957, supplementing the convention of October 28, 1948,
for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, as 1p. 182.31 modified by the supplementary convenunder 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

tion of September 9, 1952; and a notification given by the Belgian Government

Territory of Ruanda-Urundi.

advise and consent to the ratification of Executive C 85th Congress, 2d session,

Resolved (two-thirds of the Senators present concurring therein), That the Senate

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, 1957, subject to the reservation that the application of the supplementary protocol of August 19, 1957, shall not be extended.

a notification given by the Government of the United Kingdom of Great Britain

The PRESIDING OFFICER. The yeas and nays having been ordered on the question of agreeing to tfie resolutions of ratification, 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

Mr. MANSFIELD. I announce that the Senator front Tennessee [Mr. GORE], the Senator from Missouri [Mr. HENNINGS], the Senator front Minnesota [Mr. HUMPHREY], the Senator from Washington [Mr. JACKSON], the Senator from Massachusetts (Mr. KENNEDY],
the Senator from Washington [Mr. MAGNUSON], the Senator from Florida [Mr. SMATHERS], the Senator from Missouri [Mr. SYMINGTON.], and the Senator from Texas [Mr. YARBOROUGH] are absent on official

business. I further announce that, if present and voting, the Senator from
Tennessee [Mr. GORE], the Senator front Missouri [Mr. HENNINGS],

the Senator from Minnesota (Mr. HUMPHREY], the Senator from Washington [Mr. JACKSON], the Senator from Massachusetts [Nr. KENNEDY], the Senator front Washington [Mr. MAGNUSON], the Senator from Florida [Mr. SMATnlERS], the Senator from Missouri would each vote "yea." Mr. DIRKSEN. I announce that the Senator from Kansas [Mr. SCHOEPPEL] is absent on official business and, if present and voting, would vote "yea." The Senator from kew York [Mr. IVES], and
[Ir. SYMINGTON], and the Senator from Texas [Mr. YARBOROUGH]

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the Senator from Indiana [Mr. JENNER] 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 Allott Anderson Barrett Beall Bennett Bible Bricker Bridges Bush Butler Byrd Capehart Carlson Ervin Frear Fulbright Goldwater Green Hayden Hickenlooper Hill Hoblitzell Holland Hruska Javits Johnson, Tex. Johnston, S.C. Jordan Kefauver Kerr Knowland Kuchel Langer Lausehe Long Malone Mansfield Martin, Iowa Martin, Pa. McClellan
NAYS--O NOT VOTING-12

Flanders

McNamara Monroney

Morse

Mundt Murray Neuberger O'Mahoney Pastore Potter Proxmire Purtell

Morton

Payne

Carroll Case, N.J.

Case, S. Dak. Chavez Church Clark Cotton Curtis Dirksen Douglas Dworshak Eastland Ellender

Cooper

Robertson Russell Saltonstall Smith, Main,Smith, N.J. Sparkman Stennis Talmadge

Revercomb

Thurmond
Thye Watkins Wiley Williams Young

Gore Ives

Hennings Humphrey

Jackson Jenner Kennedy Magnuson

Schoeppel
Smathers

boington Yabrough

The PRESIDING .)FFICER. Two-thirds of the Senators present concurring therein, te resolution of ratification of Executive N, together with the reservation, is agreed to.
EXECUTIVE B

Yea-and-nay vote on resolution of ratification of Executive B, identical with that on Executive N. Mr. MANSFIELD. I announce that the Senator from Tennessee [Mr. GORE], the Senator from Missouri [Mr. HENNINGS], the Senator from Minnesota [Mr. HUMPHREY], the Senator from Washington [Mr. JACKSON], the Senator from Massachusetts [Mr. KENNEDY), the Senator from Washington [Mr. MAGNUSON], the Senator from Florida [Mr. SMATHERSJ, the Senator from Missouri [Mr. SYMINGTON], and the
Senator from Texas [Mr. YARBOROUnH] are absent on official business. I further announce that, if present and voting, the Senator from Tennessee [Mr. GonEl, the Senator from Missouri [Mr. HENINnsJ, the Senator from Minnesota [Mr. HUMPHREY], the Senator from Washington [Mr. JACKSON], the Senator from Massachusetts [Mr. KENNEDY], the Senator from Washington [Mr. MAGNUSON], the Senator

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TON ],

vote "yea." Mr. DIRKSEN. I announce that the Senator from Kansas [Mr.
SCIIOfPPEiLj is absent on official business, and, if present and voting,

from Florida [Mr. SMATHERS], the Senator from Missouri [Mr. Symiru,and the Senator from Texas [Mr. YARTImotour] would each
The Senator from New York [.\r. Ivks], and the

Senator from Indiana [Mr. JENNFt] are detained on official business,

would vote "yea."

and, if present and voting, would each vote "yea." The yeas and nays resulted-yeas 84, nays 0, as follows:
YEAS-84

Beall

Aiken Allott Anderson Barrett

Capehart Carlson Carroll Case, N.J. Case, S. Dak. Chavez Church Clark Cooper Cotton Curtis Dirksen Douglas Dworshak Eastland Ellender

Byrd

Bennett Bible Bricker Bridges Bush Butler

Ervin Flanders Frear Fulbright Goldwater Green Hayden Hickenlooper Hill Hoblitzell Holland Hruska Javits Johnson, Tex. Johnston, S.C. Jordan Kefauver Kerr Knowland Kuchel Langer Lausche Long Malone Mansfield Martin, Iowa Martin, Pa. McClellan
NAYS-O NOT VOTING-12

McNamara Monroney Morse Morton Mundt Murray Neuberger O'Mahoney Payne Potter Proxmire Purtell Revercomb Robertson Russell Saltonstall Smith, Maine Smith, N.J. Sparkman Stennis Talmadge Thurmond Thye Watkins Wiley Williams Young

Pastore

Gore Hennings Humphrey Ives

Jackson Jenner Kennedy Magnuson

Schoeppel Smathers Symington Yarborough

The PRESIDING OFFICER. Two-thirds of the Senators present concurring therein, the resolution of ratification of Executive B is agreed to.
EXECUTIVE C

Yea-and-nay vote on resolution of ratification of Executive C, together with the reservation: Mr. MANSFIELD. I announce that the Senator from Tennessee
[Mr. GORE], the Senator from Missouri [Mr. HENNINGS], the Senator from Minnesota [Mr. HUMPHREY], the Senator from Washington [Mr. JACKSON], the Senator from Massachusetts [Mr. KENNEDY], the Senator from Washigton [Mr. MAGNUSON], the Senator from Florida [Mr. SMATHERS], the Senator from Missouri [Mr. SYMINGTON], and

(899)

the Senator from Texas [Mr. YARBOROtVOH] are absent on official
business. Tennessee [Mr. GoR., the Senator from Missouri [Mr. ItEis. J, tie Senator from umesota [Mr. iU MPHREY], the Senator from Washington [Mr. JACKSON], the Senator from Massachusetts [M\r. KENNEDY), the Senatr from Washington [Mr. MAWNt'SON], the Sell- !

I further annomice that, if present and voting, the Senator from

ator from Florida [Mr. SMATHERS], the Senator from Missouri [Mr. Senator from Texas [Mr. YARBoitouo] would each vote "yea." Mr. DIR'KSEN. I announce that the Senator from Kansas [Mr. SCHOEPPEL] is absent on official business, and, if present and voting, would vote "yea." The Senator from New York (Mr. IvEs], and the Senator from Indiana [Mr. JENNER] 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:
SyminTON], and the Aiken Allott Anderson Barrett Beall Bennett Bible Bricker Bridges Butler Byrd Capehart Carlson Carroll Case, N.J. Case, S. Dak. Chavez Cooper Cotton
Bush

YEAS-84 Ervin Flanders Frear Fulbright Goldwater Green Hayden Hickenlooper Hill Hoblitzell Holland Hruska Javits Johnson, Tex. Johnson, S.C. Jordan Kefauver Knowland Kuchel Lausche Long Malone Mansfield Martin, Iowa Martin, Pa. McClellan NAYSNOT VOTING-12 Jackson Jenner Kennedy Magnuson

Church Clark

Kerr

Langer

Dirksen Douglas Dworshak Eastland Ellender

Curtis

Morton Mundt Murray Neuberger O'Mahoney Pastore Payne Potter Proxmire Purtell Revercomb Robertson Russell Saltonstall Smith, Maine Smith, N.J. Sparkman Stennis Talmadge Thurmond Thye Watkins Wiley Williams Young

Morse

McNamara Monroney

(P.132441
Gore Hennings Humphrey Ives

Schoeppel Smothers

mboington Yabrough

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.

(400)

Presidential Proclamation (including official text of supplementary convention and notes)
[Reprint of TIAS 42801

I

(401)

'TREATIES

AND OTHER INTERNATIONAL

ACTS SERIES 4280

DOUBLE TAXATION
Taxes on Income

Supplementary Convention Between the UNITED STATES OF AMERICA and
BELGIUM

Modifying Convention of October 28, 1948, as Modified by Supplementary Convention of September 9, 1952

Signed at Washington August 22, 1957

Exchange of Notes Signed at Washington April 2, 1954, and July 28, 1959

(
(403)

DEPARTMENT OF STATE [Literal print)

(404)

BELGIUM
Double Taxation: Taxes on Income
Supplementary convention modifying the convention of Ocober 28, 1948, as
modified by the supplementary convention of September 9, 1952.

Signed at Washington August 22, 1957;
Ratification advised by the Senate of the United States of America July 9,

1958; Ratified by the President of the United States of America July 23, 1958; Ratified by Belgium July 8, 1959; Ratifications exchanged at Brussels July 10, 1959; Proclaimedby the Presidentof the United States of America July 28, 1959;
Entered into force July 10, 1959. With exchange of notes Signed at Washington April 2, 1954, and July 28, 1959.

By nin PSEIDENT oF THE Uwrm) STATEs OF AMRCA

A PROCLAMATION Wnmu~s a supplementary convention between the United States of America and Belgium relating to taxes on income was signed at Washington on August 22, 1957 by their respective Plenipotentiaries, guages, is word for word as follows:
the original of which convention, in the English and French lan-

(1)

TIAS 4280

(405)

2

SUPPLEMENTARY CONVEN. CONVENTION COMPLEMEN. TION BETWEEN THE TAIRE ENTRE LES ETATS. UNIS D'AMERIQUE ET LA UNITED STATES OF AMER. ICA AND BELGIUM RELAT- BELGIQUE CONCERNANT ING TO TAXES ON INCOME LES IMPOTS SUR LE RE. VENU The Government of the United Le Gouvernement des EtatsStates of America and the Gov- Unis d'Amerique et le Gouverneernment of Belgium, desiring to ment beige, d~sireux de modifier modify and supplement in certain et de complete sous certains respects the convention for the rapports la convention 6tablie avoidance of double taxation and pour 6viter la double imposition the prevention of fiscal evasion et empecher l'6vasion fiscale en with respect to taxes on income, mati~re d'impts sur le revenu, signed at Washington on October signed &Washington le 28 octo28, 1948,[')] as modified by the sup- bre 1948, telle qu'elie a r6t modified plementary convention of Septem- par la convention compldmentaire ber 9, 1952,[] and desiring to du 9 septembre 1952, d6sireux de facilitate the extension thereof to, faciliter extension de ces convenand facilitate investment in, the tions au Congo beige et au TerriBelgian Congo and the Trust Ter- toire sous tutelle du Ruandaritory of Ruanda-Urundi,[2] in Urundi, d~sireux aussi d'y faciliaccordance with the provisions of ter les investissements, ont decid6 Article XXII of the convention, conform~ment aux dispositions do have decided to conclude a supple- Particle XXII de ]a convention mentary convention and have ap- do conclure une convention compointed as their respective pleni- plimentaire et ont d6sign6 comme plnipotentiaires respectifs: potentiaries: The Government of the United Le Gouvernement des EtatsStates of America: Unis d'Am6rique: John Foster Dulles, Secretary John Foster Dulles, Secr6of State of the United States taire d'Etat des Etats-Unis of America, and d'Am6rique, et The Government of Belgium: Le Gouvernement beige: Baron Silvercruys, AmbassaLe Baron Silvercruys, Amdor Extraordinary and Plenibassadeur extraordinaire et potentiary of Belgium at plenipotentiaire de Belgique Washington, AWashington,
TIAS 2833; 4 UST, pt. 2, pp. 1647, 1672.

See post, pp. 7-8.

TIAS 4280

(406)

3
who, having communicated to each other their full powers, found in good and due form, have agreed upon the following articles: ARTICLE I Article II (1) (d) of the convention of October 28, 1948 is amended by adding the following sentence at the end thereof: For the purposes of this conven tion, any corporation organize I or created under the laws o:f Belgium or of the Belgial1 Congo and subject to tax unde r tho Belgian fiscal law of Jun 21, 1927 shall be deemed to lx a "Belgian enterprise."
Am=CL II

qui s'6tant communiqu6 leurs pleins pouvoirs, reconnus en bonne et due forme, sont convenus des articles suivants:
ARTICLE I

L'article II (1) (d) de Is convention du 28 octobre 1948, est amend par addition de ]a phrase suivante, 4 la fin du dit article: Pour application de la pr~sente convention, toute soci&tA organis~e ou cr6e d'apr~s lea lois de la Belgique ou du Congo beige et soumise & l'imp6t d'apr~s la loi fiscale belge du 21 juin 1927, sera consid6r6e comme 6tant une "entreprise beige".
ARTCLz II

In the application to the Belgian Pour application au Congo Congo and the Trust Territory ol beige et au Territoire sous tutelle Ruanda-Urundi of the convention du Ruanda-Urundi de ]a convenof October 28, 1948, as amended tion du 28 octobre 1948, telle by the supplementary convention qu'elle a 6t0 amend~e par la conof September 9, 1952, the Belgian vention compltmentaire du 9 Congo and the Trust Territory of septembre 1952, le Congo beige et Ruanda-Urundi may impose taxe le Territoire sous tutelle du mobilie're at a rate not in excess Ruanda-Urundi peuvent imposer of 15 percent on dividends from une taxe mobilire A un taux qui sources within the Belgian Congo n'excedera pas 15% sur les diviand Ruanda-Urundi paid to a dendes provenant du Congo beige resident or corporation or other et du Ruanda-Urundi, pay&e 4 un entity of the United States not resident ou une society ou une having a permanent establishment autre entity des Etats-Unis qui in the Belgian Congo or Ruanda- n'ont pas un tablissement permaUrundi. nent au Congo beige ou au RuandaUrundi. ARTCL III Am=CLE III In its application to the Belgian Congo and the Trust Territory of Ruanda-Urundi, paragraph (2) of Article XXII of the convention of October 28, 1948 is amended by Pour son application au Congo belge et au Territoire sous tutelle du Ruanda-Unundi, le paragraphe (2) do l'article XXII de ]a convention du 28 octobre 1948 est

(407)

TIAS 4280

4
striking out the word "following" amend par la suppression du mot and inserting in lieu thereof the "suivant" qui eat remplac6 par les words "inunediately preceding." moots "qui pr6cdent imm6diate. ment". AirricLz IV AzTxciz IV For the purposes of Article Pour application do Particle XXII of the convention of Ooto- XXII do la convention du 28 octo. ber 28, 1948, the expression "over- bre 1948, l'expression "les terriseas territories" is construed as toires d'outremer" est interpreted applying to any overseas territory comme s'appliquant &tout terrifor the foreign relations of which toire d'outremer pour lea relations either contracting State is respon- 6trangbres duquel chaque Etat contractant est responsable. sible. ARi.CL V ARTILz V (1) La pr6sente convention (1) The present supplementary convention shall be ratified compl6mentaire sera ratifl6e et los and the instruments of ratification instruments do ratification seront shall be exchanged at Brussels as changes aussit6t quo possible, i Bruxelles. soon as possible. (2) La pr6sente convention (2) The present supplementary convention shall be regarded compl6mentaire sera consid6r6oe as an integral part of the conven- comme faisant partie int6grante de tion of October 28, 1948, as Is convention du 28 octobre 1948, amended, but shall become effec- telle qu'elle a 6t6 amend6e, mais tive with respect to taxable years entrera en vigueur en ce qui conbeginning oi or after the first day corne les annges imposables preof January of the calendar year in nant cours le premier jour de janwhich the exchange of instruments vier do l'ann6e civile pendant of ratification takes place. It laquelle l'6change des instruments shall continue in effect in accord- de ratification a lieu, ou apr~s cette ance with Article XXIII of the date. Elle continuera &produire convention of October 28, 1948, as ses effets conform6ment i Particle amended by Article I (g) of the XXIII do Is convention du 28 supplementary convention of Sep- octobre 1948, tel qu'il a 6t amend6 tember 9, 1952, and in the event of par Particle I (g) do Ia convention termination of such convention compl6mentaire du 9 septembre shall terminate simultaneously 1952, et dans le cas oil cette convention prendrait fin, elle prenwith such convention. drait simultanement fin avec cotte convention.

TIAS 4280

(408)

6 Don in duplicate, in the Eng- FA= en double exemplaire, en lish and French languages, the langues anglaise et frangaise, lee two texts having equal authentic- deux textes faisant 6galement foi, ity, at Washington this 22nd day & Washington Is22 aofit, 1957. of August, 1957.
FOR THE GOVERNMENT OF THE UNITED STATES OF AMERICA: POUR LE GOUVERNEMENT DES ETATS-UNIS D'AMItRIQUE: JOHN FOSTER Duuzs FOR THE GOVERNMENT OF BELGIUM: POUR LB GOUVERNEMENT BELGE:

S-mvrisurs

WHwAs the Senate of the United States of America by their resolution of July 9, 1958, two-thirds of the Senators present concurring therein, did advise and consent to the ratification of the aforesaid supplementary convention; Wwmus the aforesaid supplementary convention was duly ratified by the President of the United States of America on July 23, 1958, in pursuance of the aforesaid advice and consent of the Senate, and was duly ratified on the part of Belgium; WuERys the respective instruments of ratification of the aforesaid supplementary convention were duly exchanged at Brussels on July 10, 1959; AND WHP.S it is provided in Article V of the aforesaid supplementary convention that, upon the exchange of the instruments of ratification with respect thereto, the said convention shall be regarded as an integral part of the convention of October 28, 1948, as amended, but shall become effective with respect to taxable years beginning on or after the first day of January of the calendar year in which the exchange of instruments of ratification takes place; Now, THEREFRE, be it known that I, Dwight D. Eisenhower, President 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 Amer. ica and by the citizens of the United States of America and all other persons subject to the jurisdiction thereof.

TflR

wvvtwv

A
V

VD--IWV411

...

1...01 4L--IBI

"jut)

TEAS 4280

8
IN
TzsF7iioNY

WHFREOF, I have hereunto set my hand and caused

the seal of the United States of America to be affixed. DoNI at the city of Washington this twenty-eighth day of July in the year of our Lord one thousand nine hundred fifty[s8FL] nine and of the Independence of the United States of
America the one hundred eighty-fourth.

DWIGHT D EISENHOWER By the President: DouaLAs DmoN
Acting Secrtary of State

The Belgian Ambassador to the Secretary of State

AMBASSADOR DR BSLOIQUB
D. 6698

No. 1460
MONSIEUR LE SECUTAIRE D'ETAT,

WAsHINGoN,

le f evri1954.

D'ordre de mon Gouvernement, j'ai l'honneur de porter &votre connaissance quo, conformezment aux dispositions de l'article XXII de la Convention entre ]a Belgique et les Etats-Unis d'Amerique pour eviter ]a double imposition et eomp her l'6vasion fiscale en matibre d'imp6ts sur le revenu, sign6e h Washington le 28 octobre 1948, le Gouvernement beige desire quo I'application do routes les dispositions do la Convention precit~e et do ]a Convention complimentaire, signed AWashington le 9 septembre 1952, soit 6tendue au Territoire dix Congo Belge et aux Territoires sous tutelle du Ruanda-Urundi. Je serais heureux d'etre avise de l'accord du gouvernement des Etats-Unis sur cette extension. Je saisis cette occasion, Monsieur le Secr6taire d'Etat, de vous renouveler l'assurance do ma plus haute consideration.
SILVEMCjUYS

L'Honorable JoHN FosTit Duum,

"S ec.taire d'Etat, Washington,D.C.

TIAS 4280

(410)

7 Traslation
EMBASSY OF BELGIUM

.sWAsHNGToN,
No. 1460

April, ,964.

inform you On instruction of my Government, I have the honor to of the Conprovisions of Article XXII that, in accordance with the for the vention between Belgium and the United States of America evasion prevention of fiscal avoidance of double taxation and the 28, with respect to taxes on income, signed at Washington October the of all 1948, the Belgian Government desires that the application Conprovisions of the said Convention and of the supplementary to vention, signed at Washington September 9, 1952, be extended of to the Trust Territories, the Territory of the Belgian Congo and Ruanda-Urundi. I shall be happy to be advised of the acceptance by the Government of the United States of such extension. I take this occasion, Mr. Secretary of State, to renew to you the assurance of my highest consideration.

MR. SEcRLrARY oF STATE,

SMLVECRUTS

The Honorable JOHN FosTr DuLLAs, Secretaryof State, Washington,D.C. The Acting Secretery of State to the Belgian Charge d'Affaires ad interim

DEPARTMENT OF STATE
. July 28, 1959

I refer to the note dated April 2, 1954 (D.6698 No. 1460) from the Ambassador of Belgium notifying the Government of the United States of America, in accordance with the provisions of Article XXII of the convention between the United States of America and Belgium for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on October 28, 1948, that the Belgian Government desires that the application of all the provisions of the said convention and of the supplementary convention signed at Washington on September 9, 1952, be extended to the Territory of the Belgian Congo and to the 'Jrust Territory of Ruanda-Urundi. After the above-mentioned notification had been given, the competent authorities of the United States of America and Belgium reached
k '11)

TIA 4280

8
the conclusion that it was necessary to make certain modifications in the 1948 convention, as modified by the 1952 supplementary convention, before completing action under Article XXII to make the proposed extension effective. Theme was signed at Washington on August 22, 1957 a supplementary convention modifying the 1948 convention, as modified, in order to facilitate the extension thereof to, and facilitate investment in, the Belgian Congo and the Trust Territory of RuandaUrundi. The supplementary convention of August 22,1957 was brought into force by the exchange of instruments of ratification at Brussels on July 10, 1959. Pursuant to the terms of Article V thereof, the supplementary protocol became effective with respect to taxable years beginning on or after January 1, 1959. Consequently, the Government of the United States of America hereby informs the Government of Belgium that the above-mentioned notification by the Government of Belgium in respect of the Belgian Congo and the Trust Territory of Ruanda-Urundi is accepted by the Government of the United States of America. It is understood that, in accordance with Article XXII (2) of the 1948 convention as modified by Article III of the 1957 supplementary convention, the operation of the 1948 convention as modified by the supplementary conventions of 1952 and 1957 is extended and applies to the Belgian Congo and the Trust Territory of Ruanda-Urundi with respect to taxable years beginning on or after January 1, 1959. Accept, Sir, the renewed assurances of my high consideration. For the Acting Secretary of State:
RAYMuND T. YINaoUN

Mr. JEN D BAssoMxPrw , (larg6 d'Affaire8 ad interim

of Begium

%7As 42so

(412)

SECTION 5 Convention With CANADA

(418)

INcOME TA% CONVENTIO,

BETWEEN Tll UNITED STATES AND CANADA

December 30. 193.... Signed at Washington. January I1, 1937 ...... Received by Senate; designated Executive 11,75th Conress, Ist Seslon. August 5, 1937........ Reported by Senate Foreign Relations Conmitte (Ex. Rept. No. 19, 75th Conic. 1st Sess.). August 6, 1937........ Ratification by Senate of its advice and consent (A1Congres ional Record 8427). Aunust I1, 1937 ....... Ratified by Canada. August 13, 1937 ....... ta~fied by United States President. August 13, 1937....... Instruments of ratification exchanged; convention entered into force effective January 1, 1936. August 16, 1937....... Proclanimed by United States Pitesident. April 30, 1941 ......... Terminated in force. Official text ........... TS 920; 50 Stat. 1399. Second Basic Convention (and Accompanying Ptotocol) March 4. 1942-....... Signed at Washington. March 9, 1942.......- Received by Senate: Iledgnated Executive P. 77th Congresi, 21d Sesion. March 10, 1942. Injunction of ,ereey removed by senate (m Congressiontil Record 2155-2159). May 20. 1942.... Reported by Senate Foreign Relations Commiltee (Ex. Rept. No. 3, 77th ( owag., 2d Ses-.). May 27-28, 1942 ....... Ratification by Senate of its advice and consent (88 Congressional Record 4.424647, 4713-4714). June 4. 1942 ........... Ratified by United Slates ['resident. June 12. 1942 .. . Ratifled by Canada. June 15, 1942 ......... instnments of ratifiealilon exchanged; convention entered hto force effective as of January 1, 1941. June 17, 1942.......... Proclaimed by United Slates President. Olicial Text .......... TS 983; Stat. 1399. 56 First Sunpp!ementary Convention June 12, 1950 ......... Signed at Ottawa. June 30, 1O ........ Received by Senlfe; designated Executive R, 81st Congres, 2d Session; injunc. lion of secrecy removed (96 Congressional Record 95,W3). August I, 190........ Ratified by Canad. February 20, 1951 ..... Date of Canadian letter to United states concerning interpieation of provision In supplementary convention. April 12 and 13. 195l.. Senate Committee Hearings. August fi, 1951 ........ Reported by Senate Foreign Relations Committee (Ex. Rept. No. 1,92d Cong.. 1st Ses.). September 17, 1951.... Ratification by Senate of its advice and consent with reservation (97 CongnrssionIl Record I1434-11435. 11441-11442. 114f2-t14). November 16, 1951... Ratified by United Stiles Prtsident. November 21, 1951 .... Instruments of ratification exchanged; convention entered into force effective January I, 1951. November 29, 1951 .... Proclaimed by United States President. Olticiail Text ......... 2347; 2 UST 2235. TIAS Second Supplementary Convention August 8, 195A ........ Signed at Ottawa. January 17,1957 ...... Received by Senate; designated Executive 11.M5th ('ongre,., lot Session; in. junction of serecy removed (103 Congrssionaal Record 7N27-72 ). July 30, 1957 .. . . seate Committee hearings. August 6, 1957.. . Reported by Senate Foreign Relations Committee (Ex. Rept. No. 12, 85th Cong., Ist Sess.). August 8, 1957........ Ratification by Senate of its advice and consent (103 Congressional Record 14009, 14012-14013). August 29, 1957 ....... Ratified by United States President. September 25, 1957.... Ratified by Canada. September 26, 1957 .... Instruments of ratification exchanged; convention entered into force effective January 1, 1957. October 10, 1957....... Proclaimed by United States President. Official Text .......... TIAS 3916; 8 UST 1619.

First B&,ic Convention

(414)

CONTENTS OF SECTION 5
First Biazic Convent ion: 1. Presidential Message of Transnittal to Senate----------------2. Senate (Cniommittee 1iearings (none held) . . .. 3. Sente ('omnittee Report -----------------------------.1. Senate Floor )ebate and Action -------------------------5. Presidential Proclamation includingg (Official 'Text of Convention)._
Second Basic convention n (and Accomipanying Protocol): PaRe

(419)) (423) (42.5)
(431P

(435)

I. Presidential Mes, ag(, of Transmittal to Senate ---------------- (-13) 2. Aenate committeeee I larings (none held) . (451) 3. Semite Committee Report ----------------------------------(453) 4. Senate Floor le)hite and Action (461) 5. Presidential Proclamation (including Oflicial Text of Convention
and Aceompanying Protocol) -------------------------------

First Smtpplt'ntary ('onvention: I. Pr.sidential" M...s:lg, of Transmittal to Senate----------------2. iate Commilttee I earings- -.. 4. ,hnate Floor Debate and Action ----------------------------5. Presidential Proclanation (including f)flicial Text of Convention and (.amiditn lIt tter dated February 20, 195!) -------------Set'ondl Suppleimentary conventionn : I. Presidential Message of Transmittal to Senate -----------------2. Senate Committee Hearings ---.----------------------------3. Senate Committee Report -----------------------------------4. Senate Floor Debate and Action ----------------------------5. Presidential iProclamation (including ()ficial Text of Convention)Internal Revenue Service Technical Information Release No. 28:1 (D)'ectmber 29, 1960).------------------------.----------------3. ',n:ate Committee Report ------------------------------------

(.171

(41) (613) (t625 (645) (655)
(657)

(---------(58:1)

(659) (665)

(177)

(415)

FIRST BASIC CONVENTION

(417)

Ii

I

Presidential Message of Transmittal to Senate (including materials enclosed therewith)

(419)

75T

CONGRESS

18t sen

f

SENATE

EXECUTIVE

B

CANADA-INCOME TAXATION

MESSAGE
IOM

TiE PRESIDENT OF THE UNITED STATES
TUANSMINTING

A CONVENTION BETWEEN THE UNITED STATES OF AMERICA
AND CANADA ON THE SUBJECT OF INCOME TAXATION, SIGNED AT WASHINGTON, ON DECEMBER 30, 1936

JANUARY 11,

1937.-Convention read the first time and referred to the Committee on Foreign Relations, and, together with message, ordered to be printed in confidence for the use of the Senate
AUGUST 5, 1937.-Reported and made public
AUGUST

6, 1937.-Senate gave advice and consent to ratification, without amendment or reservation AUGUST 13, 1937.-Ratified by the President of the United States AuousT 13, 1937.-Ratifications exchanged at Washington

To the Senate of the United Stale:
With a view to receiving the advice and consent of the Senate to its ratification, I transmit herewith a convention between the United States of America and Canada on the subject of income taxation, The attention of dhe Senate is invited to the explanatory statement regarding the convention contained in the accompanying report of the Acting Secretary of State. FRANKLIN D. ROOSEVELT. THE WHITE HoUSE, January 11, 1937. (Enclosure: Convention. Report.) The PRESIDENT: 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 his judgment approve thereof, a convention between the United States of America and Canada to regulate certain questions of income taxation, signed at Washington, on December 30, 1936.
signed at Washington on December 30, 1936.

(421)

2

CANADA-iNCOME

TAXATION

The purpose of the convention is to give effect with respect to Canada, to the provisions of the Revenue Act of 1936 with regard to a withholding rate in the case of a resident of such countries shall be reduced from 10 to 5 percent and section 231 provides that the withholding rates on dividends paid to nonresident foreign corporations in the case of corporations organized under the laws of contiguous countries shall be reduced from 10 to 5 percent. On the part of Canada the effect of the convention is to continue in their application to residents of the United States and to American corporations provisions of Canadian fiscal laws under which withholding taxes are now as low as ile 5 percent provided in the convention. For the ready convenience of the Senate, the relevant provisions of the Revenue Act of 1936, above referred to, are quoted hereunder:
treaty with contiguous countries; i. e., section 211 provides that the

,SEc. 211. TAX ON NONRESIDENT ALIEN INDIVIDUALS.-(a) No United States business or office: There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 11 and 12, upon the amount received, by every nonresident alien individual not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 10 per centum of such amount, except that such rate shall be reduced, in the case of a resident of a contiguous country, to such rate (not less than 5 per centum) as may be provided by treaty with such country. Szc. 231. TAX ON FOREIGN CORPORATION.-(a) Nonresident corporation: There shall be levied, collccr 1, and paid for each taxable year, in lieu of the tax imposed by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, ann cities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 15 per centum of such amount, except that in the case of dividends the rate shall be 10 per centum, and except that in the case of corporations organized under the laws of a contiguous country such rate of 10 per centum with respect to dividends shall be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country.

Respectfully submitted.
R. WALTON MOORE.

[Text of convention]

(422)

Senate Committee Hearings
[Note: Extensive research indicated that no public hearings were held.]

(423)

Senate Committee Report
August 5, 1937 Executive Report. No. 19 751h congress , Ist. Session Senate Committee on Foreign Relations

73095 0-62-vol. 1-28

(4-25 )

75T11

CONIORESS

Is? Scion

f

SENATE

EXECUTIVES REPT.

1

No. 19

CONVENTION BETWEEN THE UNITED STATES AND CANADA ON INCOME TAXATION

TnrxslAY, AUGUsT 5 (legislative day, THURSDAY,

JULY

22), 1937.-Ordered to

be printed

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

REPORT
[To accompany Executive B, Seventy-fifth Congress, first session]

The Senate Committee on Foreign Relations, having had under nsideration Executive B, Seventy-fifth Congress, first session, a nvention between the United States of America and Canada on the subject of Income Taxation, signed at Washington, on December 30, 1936, transmitted by the President to the Senate on January 11, 1937, hereby report with the recommendation that the Senate do advise and consent to the same. This convention was undoubtedly brought about by certain proiions of the Revenue Act of 1936, which, in a practical way, invited treaties to be negotiated with the governments of contiguous countries which would permit of a reduction in the standard rate of income tax on nonresident alien individuals from 10 percent to 5 percent, and inthe case of nonresident foreign corporations would permit of a reuction in the standard rate of income tax on dividends from 10 percent to 5 percent. In referring to nonresident alien individuals ad to nonresident foreign corporations, it is intended to include only those not engaged in trade or business in the United States and Iot having an office or place of business therein. Under the Revenue Act of 1936, our method of taxing nonresident alen individuals and nonresident foreign corporations was substantlly changed. Under the prior revenue act, that of 1934, a nonresident alien individual was taxable at normal and surtax rates on the net income arising from sources within the United States. The same general rule applied to nonresident foreign corporations who were taxed at the standard corporation rate. These nonresident individuals and corporations were supposed to file returns under our incometax law. One method of collecting this tax was by withholding at the source and the other through the voluntary filing of returns. Persons

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2

CONVENTIONN IIETWEEN UNITED STATES AND CANADA

income of nonresident alien individuals from sources within the United States. It provided for a tax of 15 percent on the total income of nonresident corporations on interest, rents, etc., except that in the case of dividends from domestic corporations the rate was sot at 10 percent. The capital-gains tax on foreigners was eliminated. It was contemplated that these flat rates of taxes should be collected almost entirely by withholding at the source. Therefore, all persons in the United States making payments on salaries, interest, rents, dividends, etc., to nonresident alien Individuals were required to deduct from such payments and transmit to the Treasury of the United States an amount eqial to 10 percent of such payment. In the case of payment to nonresident foreign corporations, the withholding rate was 15 percent except in respect to dividends where the rate was 10 percent. The Revenue Act of 1936 also provided that in the case of residents of contiguous countries the 10-percent rate of taxation and the corresponding withholding rate might be reduced to not less than 5 per. cent, providing such a rate was specified in a treaty with such country. In the same way, in the case of nonresident foreign corporations, it was provided that the tax rate and the withholding rate might be reduced from 10 to 5 percent in the case of dividend income. (In the case of other income, the withholding rate is 15 percent.) The convention with Canada which has been under consideration by your committee merely provides for a reduction in the ordinary rate of taxation on nonresident alien individuals and nonresident foreign corporations in conformity with the provisions of the Revenue Act of 1936. Furthermore, the convention proposes that either state shall be at liberty to increase the rate of taxation on the income of nonresidlnts, but in such a case the other state is released from the require ments of the lower rate of taxation provided for. The convention is clearly on a reciprocal basis. It appears that the citizens of the United States have approximately four times the investment in Canada that Canadian citizens have in the United States. It appears, therefore, that the proposed convention is distinctly to the advantage of the United States, since both allow a credit for taxes paid to the other country. investigation discloses that the Treasury Department of the United States and the Finance Department of the Government of Canada expect to cooperate in respect to the taxation of nonresidents so that there is practically no danger of the avoidance of taxation by the nationals of either country.
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making payment on rents, salaries, interest, annuities, etc., to anI nonresident alien were required to withhold 4 percent of the amount of the payment and to transmit the same to the Government. In like manner, in the case of a nonresident foreign corporation, 131 percent was withheld. There was no withholding with respect to the I payment of dividends by domestic corporations to either nonresident alien individuals or corporations. rhese foreign individuals'and co. porations were also theoretically subject to the tax on capital gains, although, as a practical matter, it was impossible to collect any sub. stantial proportion of the capital gains tax which undoubtedly should have been paid by foreigners. The Revenue Act of 1936 changed the system provided for in the prior revenue act. It provided for a tax of 10 percent on the total

CONVENTION BETWEEN UNITED STATES AND CANADA

3

Y

The Treasury report on that convention follows:
TREASURY DEPARTMENT, Washington, March 16, 1987.

I
14 Hon. PAT HARRISON, I 5I
I $

t

(nite'iI Stics S nate, Washington, D. C.

treaty with respect to its own rates.

Canadian corporations except in the case of dividends, where the imposing rate would be reduced to 5 percent. It should be observed that the convention is drawn upon a reciprocal basis and that it leaves either of the contracting parties at liberty to increase their rate of taxation on the income of nonresidents but provides that, in such case, the other party is released from the requirements of the

not affect at all the taxation of individuals resident in Canada or Canadian corporations who are ,ligaged in trade or business in the United States. The taxation of such indivd,ials is governed by section 211 (b) of the Revenue Act of 1936. Under that section they would continue to be subject to normal tax and surtax upon their total income from United States sources, including capital gains, if the treaty is ratified. Likewise, such Canadian corporations would, under section 231 (b) continue to be taxed, like all other foreign corporations similarly situated, on their entire income from United States sources, including capital gains, at a fiat rate of 22 percent. The convention would operate, in other words, to reduce the rate of taxation only with respect to those indiv iduals residing in Canada and those corporations incorprated there who are not engaged in trade or business in the United States and do not have an office or place of business therein, but who derive income from sources within the United States. It was with respect to these categories of taxpayers that our prior methods of taxation were substantially changed by the Revenue Act of 1936. Under that act they are no longer theoretically liable to tax on their capital gains, but they are subject to what is virtually a gross income tax on specified items of income from United States sources such as dividends, interests, rents, royalties, wages, salaries, compensations, and other fixed or determinable annual or periodical gains, profits, and income. With minor exceptions, this tax is collected at the source and the filing of returns will be dispensed with except in a few cases, such as tax-free covenant bonds, where the full tax has not been so withheld at the source. The rate of tax imposed on this category of nonresident alien individuals generally is 10 percent. The convention would operate to reduce this imposing rate in the case of residents of Canada to 5 percent. The rate on this category of foreign corporations in general is 15 percent, except in the case of dividends where it is 10 percent. The convention would leave these rates unchanged as to such

made via telephone, for a statement ntowthe views of the Treasuryyour subeom. relative to the Iproposed convention of under consideration lby Department 11ittee between, the I united States of America and Canada on the sil)ject of income taxation signed at Washingtoti on December 30, 1936, and transmitted by the President of the United States to the Senate on January 1I, 1937. The negotiation and signing of this convention was undoubtedly the result of certain provisions of the Revenue Act of 1936, viz, sections 211 (a) and 231 (a), which contemplated and in effect invited the consummation of treaties with contiguous countries which night in the cases of their residents and corporations operate to reduce the rate of tax imposed on the taxable items of income received by nonresider' aliens individuals from United States sources from 10 percent to uot less than a percent and to reduce the rate of tax imposed on dividends paid by domestic corporations to nonresident foreign corporations from 10 percent to not less than 5 percent. The convention with Canada goes no further in its terms than the above provisions of the Revenue Act of 1936 seem to contemplate. Its provisions do

My DEAR SENATOR: Reference is made to your request of March 12, 1937,

In'view of the fact that the investments of our own citizens in Canada are greatly in excess of Canadian investments in the United States and that both

commendable willingness to cooperate in whatever measures may be reasonably necessary to obviate any danger that the preferred status give: to residents of
Canadalby the convention might be used as an avenue of tax evasion. Vervy truly yours. (Signed) ROSWELL MAGILL,

ratification.

countries allow a tax credit for taxes paid to the other, the Treasury Department believes that the ratification of this convention would he conducive to the best interests of the United States and therefore interposes no objection to such
I should say also that the Canadian authorities have displayed a

Acting Secretary of the Treasury.

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Senate Floor Dcbate and Action
Aiigiit 6, 1937 75th Congress, 1st St'ssioni SI ("ongressiotilt

l evord S427

(431)

I

i
{

A

S, O1.

INCOME TAXATION TREATY IIETWEEN Tile I NITEI) STATES OF
AMIII('A AN) ('ANAI)A

The ,'%hatle, its ill (olllle~e of lI Wole, proceeded to vonlsider. Ex'eulive II, Sevenlty-lifth ( congress , first sessloli, a voniventioll iween Ile Ulnited Slatles of Ameria and ('anada on the subject of inolte Iaxittioll, signed at W\ashinngton, oi l)evemlher :30, 1936, wlill was reiid tle second t i11e, its follows:

j'lext of convention]

Mr. IIARRISON. M'. President, the State Deptrnient and the Treasury Department have been very insistentt on ear1y1' consideration of this I'reti'A'. There Were certain provisions ill thei even, Act of 19311 which, ill pilractieal way, invited Ireal ivs to be negotiated witi Ilie govet'itltielits of vonltigitolis eolliltries which Would perltiit of a redulion ill the standard rate of income tax oil nonlresidlent aleit itlividuals front 10 pel'ell to ,5 percent, findti tIhe e'ase of nontresident foreign co'loraIti oils Would )e1'i1it of a reduction ill tile standard rate of intole Ifax on dividellds from It percent 0to percent. In referring ,5 to nonresident, alitei intdividll s 1titt to nonresident foreign CorM'l)rtions, it is intended to inlhde only those not eiptaritid it trade or i)llsitt,(s il lile Tnite( Stales 1111(hvilg an 0 t 0 phite of ( lusimss I herein. ('amda is aiding our country ill the matter of ferretinlg out people who fire itttemptinlg to evadet' ie payment of taxes, mid hope very itelh tile treaty moy be ratified. Mr. AUSTIN. lr. President, I should like to ttsk lilt, Senator from Mississippi whether tile committee whil considered tit treaty was imnionos, or whether there was opposition. ir. IIARRISON. I unde'stanld there was no opposition ill eecommitee. I will ask tie chairman of tilte committee whether o ' not I 111 correct it Ihat st atelent. Mrt'. iITITMAN. Mr. President, with the permission of tile Senator from ,Mississi)pli, 1 may state that this matter was investigated a month or 6 weeks ago, altd we received reports at itlat time fromil both the Treasury Department atd tlt,- State Deprtment . A subeomIllittee was appointed, with tilt' Senator from MississippIi its chairman,
ported

Alout. t limt a joit committee' was appointed, as flile Senate will time i recall, to investigate and detltvise lilealts of plugging llh) by which toles
soMe were attemlpting to escape tile plitvnelt, of income taxes, and for hthat, reason it. was sulggested that. tlto slbcolllittee of the ('1tt-

mid that sibeommit tee went litto tile m1a1ttr verv carefully f11(d rehack unanimously in favor of tie treat'.

miltee oil Foreipl1 Relations lakt further investigation and have Conversations with both the Treasury Departmenl and the State Deiarlttt'tit, and see whediher this treat would ill ally way conflict with lit investigations then going forward. The chairs of ie an (433)

4mI

subcommittee was authorized to make a report, and the salhom. nittee eftW to tlie ('o1lsion hlt liet' treaty %wasill 110 wa obstructive of the action of the colit iti e 'vestigaiifg Imssibki iL loopholes by which people wer'e seeking to escap' talixtion. Mr. HAftRISON. I maiy say to Ilie Sena (or from Veriiiont tihat I it. was believed bv till the members of thit, ('oImlitlee who wer present, nd I beieve all were present, that this treaty should 6 ratified. Mr. AUSTIN. M'. President, the Senator from Oregon IMir. ,Mc. NA RY 1ot being present, I felt bound to make these iiquiri'es. I (ersomallv have no objection, and in view or what, has bee said, l will not i'ke ant obieCtiol On belillf of a iiyone. treaty will be reported to the Senate. The treaty was reported to the Senate without amendment.

took this matter up with t'he Joint Committee on Tax Evasion, ani

I'he PRESII)ING OFFICER. If there be no amendment, th

The PRISII)1NG OFFICER. The resolution of ratification wil be read. The legislative clerk read as follows:
Resohed (two-thirds of the Senators present concurrini therein), That the Senate advise mid consent to the ritification of Executive i, ,evviy-fifthi Congrss, first session, a convention betwi t he United States of America mid Caniada on the subject of income taxation, signed at Watshington, on December 30, 1936.

The PRESII)TNG OFFICER. The question] Two-thids of ift resolution of ratifi:uItion. [Put ting thtquestion is on agreeing to til Senators present. concurring therein, the resolution is agreed to, and the treaty is ratified.

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PresidentialProclamation (including official text of convention)
[Reprint of TS 920)

(435)

TREATY SERIES, No. 920

I

INCOME TAXATION

I

CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND CANADA*

Signed at Washington, December 30, 1936. Ratification advised by the Senate of the United States, August 6, 1937. 1937. Ratified by Canada, August 11, 1937. Ratifications exchanged at Washington, August 13, 1987. Proclaimed by the President of the United States, August 16, 1937.
Ratified by the President of the United States, August 13,

UNITED STATES
GOVERNMENT PRINTING OFFICE WASHINGTON: 1937

I
mm

*Convention terminated April 30,

1941

By 'rmie PRESIDENT OF TIlE UNITED STATES OF AMERICA. A PROCLAMATION.
WHEREAS

a reciprocal convention between the United States 0f

America and Canada concerning rates of income tax imposed upon non-resident individuals and corporations was concluded and signed

by their respective Plenipotentiaries at Washington, on the thirtieth

(lay of December, one thousand nine hundred and thirty-six, a true copy of which reciprocal convention is word for word as follows: The Government of the United States of America and the Govern. ment of Canada, being desirous of concluding a reciprocal convention concerning rates of income tax imposed upon non-resident individ. uals and corporations, have agreed as follows: ARTici. I taxation imposed in the two States shall e subject to the following reciprocal prouisions: (a) The rate of income tax imposed by one of the Contractig States, in respect of income derived from sources theini, upon individuals residing in the other State, who are ,,I engaged in trade or business in the taxin.g State and have no ofce or place of business therein, shall not exceed five per centumn for each taxable year, so long as an equivalent or lower rate of income taxation is imposed by the other State upon individuals residing in the former State who
are not engaged in trade or business in such other State and do not have an office or place of business therein.

The High Cot ractiug Parties imitually agree that, the income

laws of the former State which are not engaged in trade or business in such other State and do not have an offic or place of business therein. (e) Either State shall be at liberty to increase the rate of taxa. tion prescribed by paragralhs (a) and (b) of this article, and in such case the other State shall be released from the requiirements of the said paragraphs (a) and (b).
(1)

(b) The rate of income tax imposed by one of the Contracting States, in respect of dividends derived from sources therein, upon non-resident foreign corporations organized under the laws of the other State, wiuch are not engaged in trade or business in the taxing State and have no office or place of business therein, shall not exceed five per centum for each taxable year, so long as an equivalent or lower rate of income taxation on dividends is imposed by the other State upon corporations organized under the

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2
(d) Effect shall be giveii to tlio foregoing pWOvisions by both States as aiid front the first day of .January, ninieteein

hundred and thirty-six.

II

Li

AirricLtE II The provisions of this Convention shall not apply to citizens of the United States of America domiciled or resident in Canada. AIMTIIE InI i- ('il Vtion1 shll Ib1raltilied ai1 shall take effect. immediately oni the exchange of ratifications which shall take place at Washing-

as a tol ls 0Soonpossible. Signed, in duplicate, at Washington by the duly authorized represoitatives of the United States of America and Canada, this thirtieth

(Iay of December, in the year of our Lord, one thousand nine hiti(Ihed and thirty-six. For the United States of America:

[SEAL]
[SEAL]

R. WALTON MOORE
Acting Secretaty of State For Canada:
HERBERT M MARLEII.

Enroy Extraordinary and Minister Pleniipotentiary
AND wnREs the said reciprocal convention has been duly ratified on both parts, and the ratifications of the two Governments were exchanged in the city of Washington, on the thirteenth day of August, one thousand nine hundred and thirty-seven; Now, THEREFORE, be it known that I, Franklin D. Roosevelt, President of the United States of America, have caused the said reciprocal convention to be made public, to the end that the same and every rtice and clause thereof may be observed and fulfilled with good faith by the United States of America and the citizens thereof. IN ESTIMOY 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 sixteenth day of August in the year of our Lord one thousand nine hundred and [SEAL] thirty-seven, and of the Independence of the United States of America the one hundred and sixty-second. FRANKLIN D ROOSEVELT By the President:

CowEU,. Hum
Secretary of State.

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SECOND

BASIC

CONVENTION (AND PROTOCOL)

ACCOMPANYING

73095 O--62-vol. 1-29

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Presidential Message of Transmittal to Senate (including materials enclosed therewith)

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77TH CO1ORES
2?d&S88ion

SENATE

EXECUtTriv
I

B

TAXATION CONVENTION WITH CANADA

MESSAGE
FROM

THE PRESIDENT OF THE UNITED STATES
TUANSMITTING

A CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND CANADA PROVIDING FOR AVOIDANCE OF DOUBLE INCOME TAXATION, MODIFICATION OF CERTAIN CONFLICTING PRINCIPLES OF TAXATION, REDUCTIONS OF CERTAIN RATES OF TAXATION AND ESTABLISHMENT OF EXCHANGE OF INFORMATION BETWEEN THE UNITED STATES AND CANADA IN THE FIELD OF INCOME TAXATION, SIGNED AT WASHINGTON ON MARCH 4,1942 1942.-Convention and attached protocol were read the first time and referred to the Committee on Foreign Relations and together with the message and the accompanying papers were ordered to be printed in confidence for the use of the Senate. MARCH 10, 1942.-Made public.
MARCH 9,

THE WHITE HOUSE, March 9, 1942.

To the Senate of the United States: I transmit herewith a convention between the United States of America and Canada providing for avoidance of double income taxation, modification of certain conflicting principles of taxation, reductions of certain rates of taxation, and establishment of exchange of information between the United States and Canada in the field of incom taxation, signed by the Acting Secretary of State and the Canadian Minister at Washington on March 4, 1942. The convention was negotiated and signed under full powers issued by me. 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 attached thereto and made an integral part of the convention, which defines certain terms used in the convention and contains provisions to govern the administration of the convention.

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TAXATION CONVENTION WITH CANADA

I enclose for the information of the Senate a copy of the report of thc Acting Secrettiry of State laying the convention I)efore me, in which its provisions arc reviewed. It woull be of considerable public and administrative assistance if the convention could be ratified and put into force at an early (fate. I commend it to the early consideration of the Senate. FRANKLIN D. RoosEVEiLT. (Enclosures: (1) Report of the Acting Secretary of State; (2) Convention for the avoidance of double taxation between the United States and Canada, signed March 4,1942, with accompanying protocol.) DEPARTMENT OF STATE, 1ahington, March 6, 1914.

Th7e White H1ouse: The undersigned, the Acting Secretary of State, has the honor to lay before the President, with a view to their transmission to the Senate to receive the advice and consent of that body to ratification, if his judgmelh approves thereof, a convention between the United States Of America and Canada signed at Washington March 4, 1942, providing for avoidance of double income taxation, modification of certain conflicing principles of taxation, reductions of certain rates of taxation, and establishment of exchange of information between the United States and Canada in the field of income taxation, together with an accompanying protocol signed at the same time consisting of definitions of terms used in the convention and provisions affecting certain matters incident to its administration, which forms an integral part of the convention and will require ratification with the convention. In explanation of the convention, the following statement is made: The major phases of the convention may be sunmarized as follou-s: (1) Adoption of principles of deternuna tion, and taxation, of business income derived by enterprises of one of the contracting states from sources within the other contracting sate; (2) reciprocil exemption from taxation of certain items of income derived from sources within one country by residents or corporations of the otler country; (3) reduction, reciprocally, to 15 percent in the rate of taxation upon certain income derived by individual residents of Canada and by Canadian corporations from United States sources if such persons and corporations are not engaged in trade or business within the United States and have no office or place of business therein; (4) alleviation, with respect to Canada, of certain allegedly extraterritorial taxation by the United States of nonresident aliens and foreign corporations; (5) the settlement of certain spending cases of Canadian residents and Canadian corporations involving the taxation of capital gains and the application of the principles involved in (4), supra; and (6) cooperation between the two countries directed against evasion of taxation imposed by the respective countries. Articles 1 to IV. inclusive, are concerned with the first aspect; articles V to X, inclusive, with the second; article XI with the third; articles XII and XIII with the fourth; article XIV with the fifthand articles XIX to XXI, inclusive, with the sixth. Article XV preserves existing methods of avoidance of double taxation. Article
1(446)

The PRESIDENT,

TAXATION CONVENTION WITH CANADA

3

XVI merely recites principles which in any event are implicit leaves convention. Article XVII makes clear that the convention in the undisturbed the taxation by the United States of its own citizens and corporations. Article XVIII confers power upon the appropriate authorities to make regulations incident to the administration of the convention in the respective countries. Except as indicated below the articles of the convention are in accord with existing revenue iaws of the United States and are consistent with or similar to the provisions of the conventions in regard to double taxation of 1932 between the United States and France and of 1939 between the United States and Sweden. The 27% percent rate of United States income tax generally applicable to nonresident alien individuals and nonresident foreign corporations is reduced by article XI to 15 percent in the case of residents of Canada and Canadian corporations. In the case of dividends paid by a United States domestic subsidiary corporation to its Canadian parent corporation the rate is reduced to 5 percent. The corresponding income taxes collectible by Canada from residents and corporations of the United States are limited to the same rates. The rates thus provided in article XI of the convention are generally in keeping with certain provisions of the Internal Revenue Code, as amended by sections 105, 106, 107, and 109 of the Revenue Act of 1941, relating to taxation of nonresident aliens and nonresident foreign corporations and to withholding of the tax at the source with respect to such taxpayers, under which the reduction, by treaty, in the rates of taxation is authorized. Under the convention concerning income taxation between th-3 United States and Canada signed December 30, 1936, which was in effect from January 1,.1936, to April 30, 1941, dividends, interest royalties, and otherlike income moving from one country to individual residents of the other country, and dividends in the case of corporations, were subject in the country of origin to tax at the rate of only 5 percent so long as an equivalent or lower rate was imposed by the other country in similar circumstatices. Under its terms that convention became inoperative on April 30, 1941, upon Canada increasing to 15 percent the rate of tax upon such income derived from Canadian sources by nonresidents of that country, including residents of the United states. Articles XII and XIII are concerned with the solution of problems which have existed for many years growing out of (a) the taxation by the United States of dividends paid to Canadians by Canadian corporations and (b) the taxation by the United States of Canadian corporations which are classified as personal holding companies. With respect to (a), it has long been provided in the revenue laws of the United States that, upon certain conditions, dividends paid by a foreign corporation to nonresident aliens and to foreign corporations are regarded as income from sources within the United States and as such are taxable by the United States in the hands of persons or corporations receiving the dividends, even though the recipient of any such dividend and the foreign corporation paying it are not resident in the United States. The Canadian reverie laws do not contain any corresponding provision and this feature of the revenue law of the United States has been the object of frequent objection on the part of the Canadian authorities as being a form of extraterritorial taxation. (447)

4

TAXATION CONVENTION WITH CANADA

In practice the collection of the tax from Canadian nationals or cor. porations receiving such dividends has proved a difficult matter. The proposed article X1I, by prov-iding for exemption of such dividends from United States taxation, removes a source of irritation to Canada and constitutes a favorable factor in securing from Canada informa. tion at the source with respect to .the identity of persons whose addresses are in the United States and who derive from sources in Canada dividends, interest, and other income, as well as in securing other information from Canadian sources which will be of considerable use in the administration of the revenue laws of the United States. The provision, therefore, it is believed, would prove of appreciable utility to both countries. Under section 500 of the Internal Revenue Code of the United States certain corporations which are closely held are subject to severe rates of income taxation. The provisions of the section extend to foreign corporations, including Canadian corporations, meeting the prescribed statutory tests. Where, however, such Canadian corporation is controlled by Canadian residents other than citizens of the United States, there would not exist any incentive to avoidance of taxation through the medium of such corporations since such stockholders would be subject only to the flat rate of 15 percent proposed in the convention. It. is, accordingly, proposed by article XIII that in such cases Canadian corporations which are controlled by Canadian residents shall not be subject to taxes imposed with respect to accumulated or undistributed earnings, profits, income, or surplus of such corporations. The provision contains a safeguard against its being used as a means by which taxation may be avoided. This technical concession to Canada is reciprocated by the cooperation which Canada will extend to the United States with respect to furnishing information in regard to the dividends paid by such corporations at the source, as is hereinafter explained. Article XI1 has for its purpose 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 were subject to tax upon gains derived from transactions upon American security and commodity exchanges. In practice it was found extremely difficult, if not impossible, to ascertain the identity of such aliens and consequently the tax was not strictly enforceable. Beginning with the Revenue Act of 1936, such aliens were, generally, not subject to tax upon such gain but only upon investment income and other like income from United States sources. However, there remained a number of unsettled cases, pending before the Commissioner of Internal Revenue, including cases of Canadians, concerning tax liability for years prior to 1936. It is contemplated by article XIV to confer upon the Commissioner of Internal Revenue discretion to deal with such cases individually