[Senate Treaty Document 108-14]
[From the U.S. Government Publishing Office]



108th Congress                   SENATE                   Treaty Doc.
1st Session                                                   108-14
_______________________________________________________________________

 
                     TAXATION CONVENTION WITH JAPAN

                               __________

                             M E S S A G E

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

 CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND 
 THE GOVERNMENT OF JAPAN FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE 
PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT 
    WASHINGTON ON NOVEMBER 6, 2003, TOGETHER WITH A PROTOCOL AND AN 
                 EXCHANGE OF NOTES (THE ``CONVENTION'')




  December 9, 2003.--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, December 9, 2003.
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 Japan for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with respect to Taxes on Income, signed at Washington 
on November 6, 2003, together with a Protocol and an exchange 
of notes (the ``Convention''). I also transmit, for the 
information of the Senate, the report of the Department of 
State concerning the Convention.
    This Convention would replace the Convention between the 
United States of America and Japan for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with respect to 
Taxes on Income, signed at Tokyo on March 8, 1971.
    This Convention, which is similar to tax treaties between 
the United States and other developed nations, provides rules 
specifying the circumstances under which 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 income arises, 
providing for maximum source-country withholding tax rates that 
may be applied to various types of income and providing for 
protection from double taxation of income. The proposed 
Convention also provides rules designed to ensure that the 
benefits of the Convention are not available to persons that 
are engaged in treaty shopping. Also included in the proposed 
Convention are rules necessary for administering the 
Convention.
    I recommend that the Senate give early and favorable 
consideration to this Convention, and that the Senate give its 
advice and consent to the ratification of the Convention.
                                                    George W. Bush.
                          LETTER OF SUBMITTAL

                              ----------                              

                                      Department of States,
                                                        Washington,
November 21, 2003.
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 Japan for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with respect to Taxes on Income, signed at Washington 
on November 6, 2003, together with a Protocol and an exchange 
of notes (``the Convention'').
    This Convention would replace the current convention 
between the United States and Japan that was signed at Tokyo on 
March 8, 1971. This proposed Convention generally follows the 
pattern of the U.S. Model Income Tax Convention while 
incorporating some features of recent U.S. tax treaties with 
other developed countries. There are, however, as with all 
bilateral income tax conventions, some variations from these 
norms. In the proposed Convention, these differences reflect 
particular aspects of Japanese law and treaty policy, and the 
interaction of U.S. and Japanese tax law.
    The proposed Convention provides rules specifying the 
circumstances under which 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 income arises (the ``source'' 
country), providing for maximum source-country withholding tax 
rates that may be applied to various types of income and 
providing for protection from double taxation of income. The 
proposed Convention also provides rules designed to ensure that 
the benefits of the Convention are not available to persons 
that are engaged in treaty shopping. Also included in the 
proposed Convention are rules necessary for administering the 
Convention.
    The maximum source-country withholding tax rates on 
investment income provided in the proposed Convention (Article 
10) are significantly lower than those in the existing 
convention. Direct investment dividends and portfolio dividends 
are subject to maximum source-country withholding tax rates of 
5 and 10 percent, respectively. Further, the proposed 
Convention provides for the elimination of source-country 
withholding tax for dividends received from certain controlled 
(e.g., more than 50-percent-owned) corporate subsidiaries and 
dividends received by pension funds. Dividends paid by non-
taxable conduit entities, such as U.S. Regulated Investment 
Companies and Real Estate Investment Trusts and certain similar 
Japanese entities, are subject to special rules to ensure the 
appropriate treatment under the Convention of income earned 
through such entities.
    Interest generally is subject to a maximum source country 
withholding tax rate of 10 percent under the proposed 
Convention (Article 11), as under the existing convention. 
However, the proposed Convention provides for the elimination 
of the source-country withholding tax for the following 
categories of interest that are subject in the existing 
convention to the provisions allowing the maximum 10 percent 
withholding tax rate: interest received by banks (including 
investment banks), insurance companies, registered securities 
dealers, or other financial institutions; interest received by 
pension funds; and interest earned on sales of equipment or 
merchandise on credit. Interest derived by each of the 
Governments of the two countries and certain instrumentalities 
of those Governments, as well as interest on debt guaranteed by 
Government agencies, also is exempt from source-country 
withholding tax. The provisions of the proposed Convention 
generally applicable to interest do not apply to excess 
inclusions with respect to residual interests in Real Estate 
Mortgage Interest Conduits.
    Royalties are exempt from source-country withholding tax 
under the proposed Convention (Article 12), as they are under 
the U.S. Model and recent U.S. tax treaties with 
developedcountries. The existing convention provides for a maximum 
source-country withholding tax rate of 10 percent on royalties.
    As with the U.S. Model, but unlike the existing convention, 
the proposed Convention (Article 21) provides that income other 
than the income specifically described in the Convention is 
exempt from source-country taxation.
    The taxation of gains under the proposed Convention 
(Article 13) generally follows the U.S. Model. Gains derived 
from the sale of real property and from real property interests 
may be taxed by the country 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 country may be taxed in that country. The 
proposed Convention also includes a narrow provision providing 
that a country may, in certain circumstances, tax gains derived 
from the sale of shares in financial institutions that have 
benefited from a substantial bail-out by the Government of that 
country. All other gains, including gains from the alienation 
of ships, aircraft and containers used in international traffic 
and gains from the sale of stock in a corporation not described 
above, are taxable only in the country of residence of the 
seller.
    As with the U.S. Model, the proposed Convention (Article 7) 
provides generally that one country may tax the business 
profits of a resident of the other country only if such profits 
are attributable to a permanent establishment located in the 
first country. The proposed Convention also provides that 
income that is earned during the life of a permanent 
establishment, but is deferred and not received until after the 
permanent establishment no longer exists, is attributable to 
the permanent establishment, as under U.S. domestic law. As do 
all recent U.S. tax treaties, the proposed Convention preserves 
the right of the United States to impose its branch taxes in 
addition to the basic corporate tax on the business income of a 
branch. As in some U.S. tax treaties, the proposed Convention 
provides that the United States generally will not impose the 
excise tax on insurance policies issued by foreign insurers if 
the policy premiums are derived by a Japanese enterprise, 
unless the risks covered by such premiums are reinsured with 
persons that are subject to the excise tax.
    Consistent with the U.S. Model, the proposed Convention 
(Article 8) permits only the country of residence to tax 
profits from the international operation of ships or aircraft 
and income from the use, maintenance or rental of containers 
used in international traffic. 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 and aircraft in international traffic. However, income 
from the international rental of ships and aircraft that is not 
incidental to operation of ships and aircraft in international 
traffic is treated as business profits and therefore is subject 
to tax by the source country only if it is attributable to a 
permanent establishment in that country.
    The taxation of income from the performance of personal 
services under the proposed Convention (Articles 14 through 16) 
is essentially the same as that under recent U.S. tax treaties 
with developed countries. Unlike the U.S. Model, but consistent 
with the OECD Model Income Tax Convention, under the proposed 
Convention, income from independent personal services is 
categorized as business profits and is therefore subject to tax 
in a country only if it is attributable to a permanent 
establishment in that country. Accordingly, the proposed 
Convention contains no separate article regarding the treatment 
of independent personal services. This update simplifies the 
Convention. The rules for the taxation of pensions, annuities, 
and support payments included in the proposed Convention 
(Article 17) provide generally that pensions and annuities may 
only be taxed by the country of residence of the recipient of 
such payments, and that support payments may only be taxed by 
the country of residence of the payor, or in some circumstances 
not at all. These rules generally are consistent with, although 
less comprehensive than, the comparable rules in the U.S. 
Model. The Convention includes specific provisions for income 
earned by government employees, students and teachers (Articles 
18 through 20).
    The proposed Convention contains rules coordinating the 
treatment of income earned through entities that are subject to 
tax in one country but are treated as fiscally transparent 
entities in the other country (Article 4). These rules reach 
results consistent with the rules in the U.S. Model and in 
recent U.S. tax treaties.
    The proposed Convention (Article 22) contains comprehensive 
rules designed to ensure that the benefits of the Convention 
are not available to persons that are engaged in treaty 
shopping. The provisions are similar to those found in the U.S. 
Model and in all recent U.S. tax treaties, with refinements to 
accommodate Japanese laws and practices. In addition, the 
proposed Convention provides rules with respect to categories 
of investment income (dividends on preferred stock, interest, 
royalties, and other income) designed to prevent the use of 
conduit arrangements to derive treaty benefits. Under the 
proposed Convention (Article 1), the United States retains for 
a period of ten years its right to tax former citizens and 
longterm residents whose loss of citizenship or long-term 
resident status had, as one of its principal purposes, the 
avoidance of tax.
    Like the existing convention, the proposed Convention 
contains special rules to account for the Japanese remittance 
tax system (Article 4). Unlike the United States, Japan taxes 
certain Japanese residents on non-Japanese-source income only 
when that income is repatriated to Japan. To account for this 
system, a Japanese resident taxed on a remittance basis may 
obtain the benefits of the proposed Convention only upon 
remittance of the income in question.
    The proposed Convention provides relief from double 
taxation in a manner consistent with the U.S. Model. The 
proposed Convention also contains a re-sourcing rule to ensure 
that a U.S. resident can obtain a U.S. foreign tax credit for 
Japanese taxes paid when the Convention assigns to Japan 
primary taxing rights over an item of gross income. A 
comparable rule applies for purposes of the Japanese foreign 
tax credit. Although the U.S. Model does not contain a re-
sourcing rule, the existing convention contains rules for the 
sourcing of income and re-sourcing rules are included in many 
U.S. tax treaties.
    The proposed Convention provides for non-discriminatory 
treatment (i.e., national treatment) by one country of 
residents and nationals of the other (Article 24). Also 
included in the proposed Convention are rules necessary for 
administering the Convention, including rules for the 
resolution of disputes under the Convention, as well as 
provisions on the exchange of information and on assistance in 
collection of taxes (Articles 25 through 27). The proposed 
Convention contains a provision not contained in the U.S. Model 
specifically providing for consultation upon a substantial 
change by one country in its laws relevant to the Convention 
(Article 29).
    The proposed Convention will enter into force upon the 
exchange of instruments of ratification (Article 30). The 
Convention will be applicable, with respect of taxes withheld 
at source: for amounts taxable (in the case of Japan) or paid 
or credited (in the case of the United States) on or after July 
1 of the calendar year in which the Convention enters into 
force if the Convention enters into force before April 1 of a 
calendar year; or for amounts taxable (in the case of Japan) or 
paid or credited (in the case of the United States) on or after 
January 1 of the calendar year next following the year in which 
the Convention enters into force if the Convention enters into 
force after March 31 of a calendar year. The Convention will be 
applicable with respect to other taxes for any taxable year (in 
the case of Japan) and for taxable periods (in the case of the 
United States) beginning on or after January 1 of the calendar 
year next following that in which the Convention enters into 
force. The proposed Convention contains a rule under which 
persons may elect to continue to apply the provisions of the 
existing convention for one additional year. Special provisions 
are included in the proposed Convention that allow teachers and 
students who are receiving benefits under the provisions 
applicable to teachers and students in the existing convention 
to continue to receive those benefits until the end of the 
period for such benefits under the existing convention.
    The new Convention will remain in force until terminated by 
one of the countries (Article 31). Either country may terminate 
the Convention after 5 years from the date on which the 
Convention enters into force by giving at least six months 
prior notice through diplomatic channels.
    A technical memorandum explaining in detail the provisions 
of the proposed 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,
                                                   Colin L. Powell.


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