[Senate Treaty Document 104-30]
[From the U.S. Government Publishing Office]



104th Congress                                              Treaty Doc.
                                 SENATE   

 2d Session                                                      104-30
_______________________________________________________________________


 
                    TAXATION AGREEMENT WITH TURKEY

                               __________

                                MESSAGE

                                  FROM

                   THE PRESIDENT OF THE UNITED STATES

                              TRANSMITTING

 AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND 
 THE GOVERNMENT OF THE REPUBLIC OF TURKEY, FOR THE AVOIDANCE OF DOUBLE 
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON 
INCOME, TOGETHER WITH A RELATED PROTOCOL, SIGNED AT WASHINGTON ON MARCH 
                                28, 1996




  September 4, 1996.--Agreement was read the first time and, together 
  with the accompanying papers, referred to the Committee on Foreign 
     Relations and ordered to be printed for the use of the Senate


                         LETTER OF TRANSMITTAL

                              ----------                              

                                The White House, September 3, 1996.
To the Senate of the United States:
    I transmit herewith for Senate advice and consent to 
ratification the Agreement Between the Government of the United 
States of America and the Government of the Republic of Turkey 
for the Avoidance of Double Taxation and the Prevention of 
Fiscal Evasion with Respect to Taxes on Income, together with a 
related Protocol, signed at Washington March 28, 1996. Also 
transmitted for the information of the Senate is the report of 
the Department of State with respect to the Agreement.
    This Agreement, which is similar to tax treaties between 
the United States and other OECD nations, provides maximum 
rates of tax to be applied to various types of income, 
protection from double taxation of income, exchange of 
information to prevent fiscal evasion, and standard rules to 
limit the benefits of the Agreement to persons that are not 
engaged in treaty shopping.
    I recommend that the Senate give early and favorable 
consideration to this Agreement and related Protocol and give 
its advice and consent to ratification.
                                                William J. Clinton.


                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                         Washington, July 30, 1996.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its transmission to the Senate for advice and consent 
to ratification, the Agreement Between the Government of the 
United States of America and the Government of the Republic of 
Turkey for the Avoidance of Double Taxation and the Prevention 
of Fiscal Evasion with Respect to Taxes on Income, together 
with a related Protocol, signed at Washington March 28, 1996 
(``the Agreement'').
    This Agreement is the first bilateral income tax convention 
between the United States and Turkey, the only OECD partner 
country with which the United States does not have a tax 
treaty. It is, thus, an important extension of the U.S. network 
of tax treaties. Since the maximum rates of taxation it 
specifies are lower than those currently applied to some types 
of income earned by foreign investors in Turkey, the Agreement 
will remove a disincentive to U.S. investment in that nation.
    This Agreement is similar to the tax treaties between the 
United States and other OECD nations. It provides maximum rates 
of tax to be applied to various types of income, protection 
from double taxation of income, exchange of information to 
prevent fiscal evasion, and standard rules to limit the 
benefits of the Agreement to persons that are not engaged in 
treaty shopping.
    Like other U.S. tax conventions, this Agreement provides 
rules specifying when income that arises in one of the 
countries and is derived by residents of the other country may 
be taxed by the country in which the income arises (the 
``source'' country). The Agreement establishes maximum rates of 
tax that may be imposed by the source country on specified 
categories of income, including dividends, interest, and 
royalties, to residents of the other country. These rates are 
somewhat higher than those found in most U.S. treaties with 
OECD countries. Dividends may be subject to tax by the source 
country at a maximum rate of 20 percent, except when the 
dividends are paid to a corporation that owns at least 10 
percent of the payor, in which case the maximum rate is 15 
percent.
    The general rate of tax on interest by the source country 
under the Agreement is 15 percent, but interest on a loan 
granted by a financial institution may be taxed at a maximum 
rate of 10 percent. Interest received, guaranteed, or insured 
by the government of either the United States or Turkey or paid 
to the central bank of either State is exempt from withholding 
by the source country.
    Royalties are generally subject to tax by the source 
country at a maximum rate of 10 percent. Payments for the use 
of industrial, commercial or scientific equipment are treated 
as royalties but are subject to tax at a maximum rate of five 
percent at source.
    Like other U.S. tax treaties and agreements, this Agreement 
provides the standard anti-abuse rules for certain classes of 
investment income. For example, Turkish residents cannot, by 
investing in a tax-favored real estate investment trust, obtain 
tax treatment more favorable than they would have obtained by 
investing in the underlying real property directly. Similar 
rules prevent a Turkish resident's using a U.S. regulated 
investment company to reduce artificially the U.S. tax on the 
income generated by investments held by that company.
    The taxation of capital gains under the Agreement is 
essentially the same as under most recent U.S. tax treaties. In 
general, except for real property and business property, the 
country of the seller's residence is given the exclusive right 
to tax capital gains. A limited exception to this general rule 
relates to the alienation of corporate shares. Under the 
exemption, one Contracting State may, in accordance with its 
law, tax a resident of the other State on the gain from the 
alienation of shares issued by a corporation that is a resident 
of the first Contracting State if (i) the shares are not quoted 
on a stock exchange in the first Contracting State; (ii) the 
shares are alienated to a resident of that State; and (iii) the 
seller held the securities for one year or less. (Current U.S. 
law does not impose tax on a foreign person on the disposal of 
shares in a U.S. corporation.)
    The Agreement generally follows the standard rules for 
taxation by one country of the business profits of a resident 
of the other. The non-residence country's right to tax such 
profits is limited to cases in which the profits are 
attributable to a permanent establishment located in that 
country. The Agreement accommodates a provision of the 1986 Tax 
Reform Act that attributes to a permanent establishment income 
that is earned during the life of the permanent establishment 
but is deferred and not received until after the permanent 
establishment no longer exists.
    As do all recent U.S. treaties, the Agreement preserves the 
right of each country to impose its branch profits tax in 
addition to the basic corporate tax on the branch's business 
profits. Additionally, the United States has also preserved its 
right to impose its branch-level interest tax.
    Consistent with U.S. treaty policy, the Agreement permits 
only the country of residence to tax profits from international 
carriage by ships or airplanes and income from the use or 
rental of containers. In a departure from this policy, however, 
the reciprocal exemption does not extend to income from the 
non-incidental rental of ships or aircraft. Such income is 
treated as royalties and is, therefore, generally subject to a 
maximum tax by the source country of five percent.
    The taxation of income from the performance of personal 
services under the Agreement differs in some respects from the 
standard U.S. treaty policy. For example, a 183-day test 
applies in addition to the standard fixed-base test to 
determine the host-country's right to tax income from 
independent personal services. Thus, even if there is no fixed 
base, the ``host'' Contracting State may tax the income from 
the services performed in that State by an individual who is 
present there for more than 183 days in a twelve-month period. 
The Agreement provides for host-country exemption of visiting 
teachers if the visit does not exceed two years and if the 
remuneration arises outside the host country.
    This Agreement contains standard rules making its benefits 
unavailable to persons engaged in treaty shopping. It also 
contains the standard rules necessary for administering the 
Agreement, including rules for the resolution of disputes under 
the Agreement and for exchange of information.
    The Agreement authorizes the General Accounting Office and 
the Tax-Writing Committees of Congress to obtain access to 
certain tax information exchanged under the Agreement for use 
in their oversight of the administration of U.S. tax laws and 
treaties.
    This Agreement is subject to ratification. It will enter 
into force upon the exchange of instruments of ratification and 
will have effect with respect to taxes withheld by the source 
country for payments made or credited on or after the first day 
of January following entry into force and in other cases for 
taxable years beginning on or after that date.
    This Agreement will remain in force indefinitely unless 
terminated by one of the Contracting States. Either State may 
terminate the Agreement after five years from its entry into 
force by giving at least six months prior notice through 
diplomatic channels.
    A Protocol accompanies and forms an integral part of the 
Agreement and provides clarification with respect to the 
application of the Agreement in specified cases. For example, 
the Protocol defines certain technical tax terms used in the 
Agreement by reference to particular provisions of the Internal 
Revenue Code.
    A technical memorandum explaining in detail the provisions 
of the Agreement will be prepared by the Department of the 
Treasury and will be submitted separately to the Senate 
Committee on Foreign Relations.
    The Department of the Treasury and the Department of State 
cooperated in the negotiation of the Agreement. It has the full 
approval of both Departments.
            Respectfully submitted,
                                                Warren Christopher.



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