[Senate Treaty Document 105-8]
[From the U.S. Government Publishing Office]



105th Congress                                              Treaty Doc.
                                SENATE

 1st Session                                                      105-8
_______________________________________________________________________


 
                TAX CONVENTION WITH SWISS CONFEDERATION

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

     CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE SWISS 
  CONFEDERATION FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO 
TAXES ON INCOME, SIGNED AT WASHINGTON, OCTOBER 2, 1996, TOGETHER WITH A 
                       PROTOCOL TO THE CONVENTION





 June 25, 1997.--Convention 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, June 25, 1997.
To the Senate of the United States:
    I transmit herewith for Senate advice and consent to 
ratification the Convention Between the United States of 
America and the Swiss Confederation for the Avoidance of Double 
Taxation with Respect to Taxes on Income, signed at Washington, 
October 2, 1996, together with a Protocol to the Convention. An 
enclosed exchange of notes with an attached Memorandum of 
Understanding, transmitted for the information of the Senate, 
provides clarification with respect to the application of the 
Convention in specified cases. Also transmitted is the report 
of the Department of State concerning the Convention.
    This Convention, which is similar to tax treaties between 
the United States and other Organization for Economic 
Cooperation and Development (OECD) nations, provides maximum 
rates of tax to be applied to various types of income and 
protection from double taxation of income. The Convention also 
provides for exchange of information and sets forth rules to 
limit the benefits of the Convention so that they are available 
only to residents that are not engaged in treaty shopping.
    I recommend that the Senate give early and favorable 
consideration to this Convention and give its advice and 
consent to ratification.

                                                William J. Clinton.


                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                          Washington, May 29, 1997.
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 Convention Between the United States of 
America and the Swiss Confederation for the Avoidance of Double 
Taxation with Respect to Taxes on Income, signed at Washington 
on October 2, 1996, (``the Convention'') together with a 
Protocol. Also enclosed for the information of the Senate is an 
exchange of notes with an attached Memorandum of Understanding, 
which provides clarification with respect to the application of 
the Convention in specified cases.
    This Convention will replace the existing Convention 
Between the United States of America and the Swiss 
Confederation for the Avoidance of Double Taxation with Respect 
to Taxes on Income signed at Washington on May 24, 1951. The 
new Convention maintains many provisions of the existing 
convention, but it also provides certain additional benefits 
and updates the text to reflect current tax treaty policies.
    This Convention is similar to the tax treaties between the 
United States and other OECD nations. It provides for maximum 
rates of tax to be applied to various types of income, 
protection from double taxation of income, exchange of 
information, and rules to limit the benefits of the Convention 
to persons that are not engaged in treaty shopping.
    Like other U.S. tax conventions, this Convention provides 
rules specifying when income that arises in one of the 
countries and is attributable to residents of the other country 
may be taxed by the country in which the income arises (the 
``source'' country). In most respects, the rates under the new 
Convention are the same as those in many recent U.S. tax 
treaties with OECD countries.
    The maximum rates of tax that may be imposed on dividend 
and royalty income are generally the same as in the current 
U.S.-Switzerland treaty. Pursuant to Article 10, dividends from 
direct investments are subject to tax by the source country at 
a rate of five percent. The threshold criterion for direct 
investment has been reduced from 95 percent ownership of the 
equity of a firm to ten percent consistent with other modern 
U.S. treaties, in order to facilitate direct investment. Other 
dividends are generally taxable at 15 percent. Under Article 
12, royalties derived and beneficially owned by a resident of a 
Contracting State are generally taxable only in that State.
    The current convention, at Article 11, provides for a five 
percent rate of tax by the source country on most interest 
payments. Interest is exempt from taxation by the country in 
which the interest arises under the new Convention. The 
restrictions on the taxation of royalty and interest income do 
not apply, however, if the beneficial owner of the income is a 
resident of one Contracting State who carries on business in 
the other Contracting State in which the income arises and the 
income is attributable to a permanent establishment in that 
State. In that situation, the income is to be considered either 
business profit or income from independent personal services.
    The maximum rates of withholding tax described in the 
preceding paragraphs are subject to the standard anti-abuse 
rules for certain classes of investment income found in other 
U.S. tax treaties and agreements.
    The taxation of capital gains, described in Article 13 of 
the Convention, generally follows the rule of recent U.S. tax 
treaties as well as the OECD model. Gains on real property are 
taxable in the country in which the property is located, and 
gains from the sale of personal property are taxed only in the 
State of residence of the seller, unless attributable to a 
permanent establishment or fixed base in the other State. The 
Convention, at Sections 6 and 7 of Article 13, also contains 
rules, found in a few other U.S. tax treaties, that allow for 
adjustments to the timing of the taxation of certain classes of 
capital gains. These rules serve to minimize possible double 
taxation that could otherwise result.
    Article 7 of the new Convention 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 generally limited to cases in 
which the profits are attributable to a permanent establishment 
located in that country.
    As do all recent U.S. treaties, this Convention preserves 
the right of the United States to impose its branch profits tax 
in addition to the basic corporate tax on a branch's business 
(Article 7). This tax, which was introduced in 1986, is not 
imposed under the present treaty. The new Convention, at 
Article 28, also accommodates a provision of the 1986 Tax 
Reform Act thatattributes 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.
    Consistent with U.S. treaty policy, Article 8 of the new 
Convention permits only the country of residence to tax profits 
from international carriage by ships or airplanes. This 
reciprocal exemption also extends to income from the rental of 
ships and aircraft if the rental income is incidental to income 
from the operation of ships or aircraft in international 
traffic. Other income from the rental of ships or aircraft and 
income from the use or rental of containers, however, is 
treated as business profits.
    The taxation of income from the performance of personal 
services under Articles 14 through 17 of the new Convention is 
essentially the same as that under other recent U.S. treaties 
with OECD countries. Unlike many U.S. treaties, however, the 
new Convention, at Article 28, provides for the deductibility 
of cross-border contributions by temporary residents of one 
State to pension plans registered in the other State under 
limited circumstances.
    Article 22 of the new Convention contains significant anti-
treaty-shopping rules making its benefits unavailable to 
persons engaged in treaty shopping. The current convention 
contains no such anti-treaty-shopping rules.
    The proposed Convention also contains rules necessary for 
administering the Convention, including rules for the 
resolution of disputes under the Convention (Article 25) and 
for exchange of information (Article 26). The proposed 
Convention significantly expands the scope of the exchange of 
information between the United States and Switzerland. For 
example, as elaborated in the Protocol and Memorandum of 
Understanding, U.S. tax authorities will be given access to 
Swiss bank information in cases of tax fraud. The Protocol 
contains a broad definition of tax fraud that should ensure 
that more information will be made available to U.S. 
authorities. Furthermore, the new Convention provides for 
information to be provided in a form acceptable for use in 
court proceedings (Article 26, Section 1).
    The Convention would permit the General Accounting Office 
and the tax-writing committees of Congress to obtain access to 
certain tax information exchanged under the Convention for use 
in their oversight of the administration of U.S. tax laws and 
treaties.
    This Convention is subject to ratification. In accordance 
with Article 29, it will enter into force upon the exchange of 
instruments of ratification and will have effect for payments 
made or credited on or after the first day of the second month 
following entry into force with respect to taxes withheld by 
the source country; with respect to other taxes, the Convention 
will take effect for taxable periods beginning on or after the 
first day of January following the date on which the Convention 
enters into force. When the present convention affords a more 
favorable result for a taxpayer than the proposed Convention, 
the taxpayer may elect to continue to apply the provisions of 
the present convention, in its entirety, for one additional 
year.
    This Convention will remain in force indefinitely unless 
terminated by one of the Contracting States, pursuant to 
Article 30. Either State may terminate the Convention by giving 
at least six months of prior notice through diplomatic 
channels.
    A Protocol and an exchange of notes with an attached 
Memorandum of Understanding accompany the Convention and 
provide clarification with respect to the application of the 
Convention in specified cases. The Protocol, which is an 
integral part of the Convention, elaborates on the meaning of 
certain terms used in the Convention. The exchange of notes, 
with its attached Memorandum of Understanding, provides 
clarification and is submitted for the information of the 
Senate. It includes examples of the application of various 
provisions of the Convention, particularly those concerning the 
limitation of benefits.
    A technical memorandum explaining in detail the provisions 
of the Convention 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 Convention. It has the 
full approval of both Departments.
    Respectfully submitted,
                                                     Lynn E. Davis.




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