[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.


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