    [Senate Treaty Document 106-11]
    [From the U.S. Government Publishing Office]

    106th Congress
     1st Session                     SENATE                     Treaty Doc.
                                                                     106-11
    _______________________________________________________________________

                           TAX CONVENTION WITH ITALY

                                   __________

                                    MESSAGE

                                      FROM

                       THE PRESIDENT OF THE UNITED STATES

                                  transmitting

     CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
      THE GOVERNMENT OF THE ITALIAN REPUBLIC FOR THE AVOIDANCE OF DOUBLE
    TAXATION WITH RESPECT TO TAXES ON INCOME AND THE PREVENTION OF FRAUD OR
    FISCAL EVASION, SIGNED AT WASHINGTON ON AUGUST 25, 1999, TOGETHER WITH
                                   A PROTOCOL

     September 21, 1999.--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

                                   ______

                       U.S. GOVERNMENT PRINTING OFFICE
    69-112                     WASHINGTON : 1999

                             LETTER OF TRANSMITTAL

                                  ----------

                                   The White House, September 21, 1999.
    To the Senate of the United States:
        I transmit herewith for Senate advice and consent to
    ratification the Convention Between the Government of the
    United States of America and the Government of the Italian
    Republic for the Avoidance of Double Taxation with Respect to
    Taxes on Income and the Prevention of Fraud or Fiscal Evasion,
    signed at Washington on August 25, 1999, together with a
    Protocol. Also transmitted are an exchange of notes with a
    Memorandum of Understanding and the report of the Department of
    State concerning the Convention.
        This Convention, which is similar to tax treaties between
    the United States and other developed 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 resolution of disputes and sets forth rules making
    its benefits unavailable to residents that are engaged in
    treaty-shopping or certain abusive transactions.
        I recommend that the Senate give early and favorable
    consideration to this Convention and that the Senate give its
    advice and consent to ratification.

                                                    William J. Clinton.
                              LETTER OF SUBMITTAL

                                  ----------

                                           Department of State,
                                     Washington, DC, September 7, 1999.
    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 Government of the
    United States of America and the Government of the Italian
    Republic for the Avoidance of Double Taxation with Respect to
    Taxes on Income and the Prevention of Fraud or Fiscal Evasion,
    signed at Washington, DC, on August 25, 1999 (``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.
        This Convention would replace the current convention
    between the United States of America and the Government of the
    Republic of Italy signed at Rome on April 17, 1984. This
    proposed Convention generally follows the pattern of the U.S.
    Model Tax Treaty while incorporating some features of the OECD
    Model Tax Treaty. The proposed Convention provides for maximum
    rates of tax to be applied to various types of income,
    protection from double taxation of income, and exchange of
    information. It also contains rules making its benefits
    unavailable to persons that are engaged in treaty shopping and
    new provisions denying benefits in the case of certain abusive
    transactions. 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).
        The withholding rates on investment income under the
    proposed Convention are generally lower than those in the
    present Convention. Pursuant to Article 10, dividends from
    direct investments are subject to withholding tax by the source
    country at a rate of five percent. The threshold criterion for
    direct investment is 25 percent. Other dividends are generally
    taxable at 15 percent. Under Article 12, royalties arising in
    one Contracting State and owned by a resident of the other
    Contracting State are generally subject to tax in both
    countries, except that royalties for copyrights of literary,
    artistic or scientific work are exempt from a source-country
    taxation. The rate of tax by the source country on royalties
    arising in that State and paid to a resident of the other State
    may not exceed five percent in the case of royalties for the
    use of, or the right to use, computer software or industrial,
    commercial, or scientific equipment; and eight percent in all
    other cases.
        Under Article 11 of the proposed Convention, interest
    arising in one Contracting State and earned by a resident of
    the other Contracting State may generally be taxed in both
    countries. The rate of tax by the source country on interest
    owned by a resident of the other State is generally limited to
    10 percent, although certain classes of interest are exempt
    from source-country taxation.
        The reduced withholding rates described above do not apply
    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, in the case
    of business profits, the income is attributable to a permanent
    establishment or, in the case of independent personal services,
    a fixed base in that other State. If the income is attributable
    to a permanent establishment, it will be taxed as business
    profits, and, if the income is attributable to a fixed base, it
    will be taxed as 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 proposed Convention, follows the format of the existing
    treaty. Gains derived from the sale of real property (immovable
    property) and from real property interests may be taxed in the
    State in which the property is located. Likewise, gains from
    the sale of personal property pertaining to a fixed base or
    forming part of a permanent establishment situated in a
    Contracting State may be taxed in that State. As in the
    existing treaty, but unlike the U.S. Model Treaty, gains from
    the alienation of ships and aircraft rented on a bareboat basis
    and attributable to a permanent establishment situated in
    aContracting State may be taxed in that State if the rental profits
    were not incidental to other profits from the international operation
    of ships or aircraft. All other gains, including gains from the
    alienation of containers, gains from the alienation of ships and
    aircraft rented on a full basis, gains from the alienation of ships and
    aircraft rented on a bareboat basis if the rental profits were
    incidental to other profits from the international operation of ships
    or aircraft, and gains from the sale of stock in a corporation, are
    taxable only in the State of residence of the seller. These rules serve
    to minimize possible double taxation that could otherwise arise.
        Article 7 of the proposed 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 taxes in addition to the basic corporate tax on a
    branch's business.
        Consistent with the U.S. Model, Article 8 of the proposed
    Convention permits only the country of residence to tax profits
    from the international operation of ships or aircraft and, as
    explained in the Protocol, income from the use, maintenance or
    rental of containers used in international traffic. As further
    explained in the Protocol, this reciprocal exemption extends to
    income from the rental on a full basis of ships and aircraft
    and, if the rental income is incidental to income from the
    operation of ships and aircraft in international traffic, to
    income from the rental on a bareboat basis of ships and
    aircraft. As under the existing treaty, but unlike the U.S.
    Model Treaty, income from the rental of ships and aircraft on a
    bareboat basis that is not incidental to the operation of ships
    or aircraft by the lessor and that is attributable to a
    permanent establishment situated in a Contracting State may be
    taxed in that State.
        The taxation of income from the performance of personal
    services under Articles 14 through 17 of the new Convention
    generally follows U.S. standard treaty policy.
        The proposed Convention also contains rules necessary for
    its administration, including rules for the resolution of
    disputes under the Convention (Article 25) and for exchange of
    information (Article 26). Article 25 of the proposed Convention
    includes a provision authorizing the use of arbitration to
    settle disputes in certain cases, but such provision will not
    be effective until the Contracting States exchange diplomatic
    notes providing for such procedures.
        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.
        Comprehensive anti-treaty-shopping rules making the
    Convention's benefits unavailable to persons engaged in treaty-
    shopping are contained in Article 2 of the Protocol to the
    proposed Convention. These provisions are similar to those
    found in the U.S. Model Treaty and all recent U.S. tax treaties
    and are more comprehensive than those found in the existing
    treaty with Italy. In addition, the proposed Convention
    contains new provisions in Articles 10-12 and 22 aimed at
    preventing abuse with respect to specific transactions. Under
    these new provisions, a person otherwise entitled to treaty
    benefits will be denied those benefit if the main purpose, or
    one of the main purposes, of the creation or assignment of the
    rights giving rise to the income was to take advantage of the
    treaty.
        This Conventionis subject to ratification. In accordance
    with the provisions of Article 28, it will enter into force
    upon the exchange of instruments of ratification. The proposed
    Convention will have effect, with respect to taxes withheld at
    the source, for amounts paid or credited on or after the first
    day of the second month following the date on which the
    Convention comes into force; with respect to other taxes, the
    Convention will take effect for taxable periods beginning on or
    after the first day of January next following the date on which
    the Convention enters into force.
        The proposed Convention will remain in force indefinitely
    unless terminated by one of the Contracting States, pursuant to
    Article 29. That Article provides that, at any time after five
    years after the date on which the proposed Convention enters
    into force, either State may terminate the Convention by giving
    at least six months' prior notice through diplomatic channels.
        The Protocol is an integral part of the proposed
    Convention. In addition to containing the limitation on
    benefits provisons described above, the Protocol clarifies and
    suppluments the proposed Convention.
        In addition to the proposed Convention with its Protocol,
    an exchange of notes, with an attached Memorandum of
    Understanding, relates to Article 25 (Mutual Agreement
    Procedure) and concerns the future implementation of
    arbitration procedures to resolve tax disputes. These notes
    with the attached memorandum are submitted for the information
    of the Senate.
        A technical memoradum 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,
                                                        Strobe Talbott.