    [Senate Treaty Document 110-17]
    [From the U.S. Government Publishing Office]

    110th Congress
     2d Session                      SENATE                     Treaty Doc.
                                                                     110-17
    _______________________________________________________________________

                          TAX CONVENTION WITH ICELAND

                                   __________

                                    MESSAGE

                                      from

                         THEPRESIDENTOFTHEUNITEDSTATES

                                  transmitting

     CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
    THE GOVERNMENT OF ICELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
       PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, AND
     ACCOMPANYING PROTOCOL, SIGNED ON OCTOBER 23, 2007, AT WASHINGTON, D.C.

      May 6, 2008.--Treaty 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, May 6, 2008.
    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 Iceland for the
    Avoidance of Double Taxation and the Prevention of Fiscal
    Evasion with Respect to Taxes on Income, and accompanying
    Protocol, signed on October 23, 2007, at Washington, D.C. (the
    ``proposed Treaty''). The proposed Treaty would replace the
    existing income tax Convention with Iceland that was concluded
    in 1975 (the ``existing Treaty''). Also transmitted for the
    information of the Senate is the report of the Department of
    State with respect to the proposed Treaty.
        The proposed Treaty contains a comprehensive provision
    designed to prevent so-called treaty shopping. The existing
    Treaty contains no such protections, resulting in substantial
    abuse of the existing Treaty's provisions by third-country
    investors. The proposed Treaty also reflects changes to U.S.
    and Icelandic law and tax treaty policy since 1975.
        I recommend that the Senate give early and favorable
    consideration to the proposed Treaty and give its advice and
    consent to ratification.
                                                        George W. Bush.
                              LETTER OF SUBMITTAL

                                  ----------

                                        The Secretary of State,
                                         Washington, February 29, 2008.
    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 Iceland for the
    Avoidance of Double Taxation and the Prevention of Fiscal
    Evasion with Respect to Taxes on Income, and accompanying
    Protocol, signed on October 23, 2007, at Washington (the
    ``proposed Treaty''). The proposed Treaty will replace the
    existing income tax Convention which was concluded in 1975 (the
    ``existing Treaty'').
        The proposed Treaty contains a comprehensive provision
    designed to prevent so-called treaty shopping. The existing
    Treaty contains no such protections, resulting in substantial
    abuse of the existing Treaty's provisions by third-country
    investors. As with the existing Treaty, the proposed Treaty
    eliminates or significantly reduces withholding taxes on
    certain cross-border payments of dividends, interest, and
    royalties.
        Ratification of the proposed Treaty would recognize the
    importance of the United States' economic relations with
    Iceland. The Department of the Treasury and the Department of
    State cooperated in the negotiation of the proposed Treaty. It
    has the full approval of both Departments.
        Respectfully submitted.
                                                      Condoleezza Rice.
        Enclosure: Key Provisions of the U.S.-Iceland Income Tax
    Convention and Protocol.

     Key Provisions of the U.S.-Iceland Income Tax Convention and Protocol

        The attached Convention and accompanying Protocol with
    Iceland (the ``proposed Treaty'') would replace the existing
    Convention, concluded in 1975 (the ``existing Treaty'').
    Although the proposed Treaty would bring our tax treaty
    relations with Iceland into closer conformity with current U.S.
    tax treaty policy, there are, as with all bilateral tax
    conventions, some variations from these norms. In the proposed
    Treaty, these differences reflect particular aspects of
    Icelandic law and treaty policy, the interaction of U.S. and
    Icelandic law, and U.S.-Icelandic economic relations.
        The most important change from the existing Treaty is the
    addition of a comprehensive provision to address ``treaty
    shopping,'' which is the inappropriate use of a tax treaty by
    third-country residents. The existing Treaty does not contain
    treaty shopping protections and, as a result, has been abused
    by third-country investors in recent years.
        The proposed Treaty generally provides for withholding
    rates on investment income that are the same as or lower than
    those in the existing Treaty. Like the existing Treaty, the
    proposed Treaty provides for reduced source-country taxation of
    cross-border dividends. In addition, the proposed Treaty would
    eliminate source-country withholding tax on cross-border
    dividend payments to pension funds. As with the existing
    Treaty, the proposed Treaty generally would eliminate source-
    country withholding tax on cross-border interest payments.
    While the existing Treaty eliminates source-country withholding
    taxes on all cross-border payments of royalties, the proposed
    Treaty would allow the country in which certain cross-border
    trademark royalties arise to impose a withholding tax of up to
    five percent.
        The proposed Treaty provides, in addition, for the exchange
    between the tax authorities of each country of information
    relevant to carrying out the provisions of the Treaty or the
    domestic tax laws of either country. The proposed Treaty allows
    the United States to obtain information (including information
    from financial institutions) from Iceland whether or not
    Iceland needs the information for its own tax purposes.
        The proposed Treaty also reflects changes to U.S. and
    Icelandic law since 1975. For example, the proposed Treaty
    updates the ``saving clause'' to provide that former citizens
    or long-term residents of the United States may, for the period
    of ten years following the loss of such status, be taxed in
    accordance with the laws of the United States. The proposed
    Treaty also makes various other changes to modernize our treaty
    relationship with Iceland and brings it into closer conformity
    with current U.S. tax treaty policy.
        The Parties shall notify each other in writing, through
    diplomatic channels, when their respective applicable
    procedures for ratification have been satisfied.
        The proposed Treaty will enter into force on the date of
    the later of the notifications. It will have effect, with
    respect to taxes withheld at source, on income derived on or
    after the first day of January of the calendar year next
    following entry into force, and with respect to other taxes,
    for taxable years beginning on or after the first day of
    January next following the date upon which the proposed Treaty
    enters into force. The existing Treaty will, with respect to
    any tax, cease to have effect as of the date on which this
    proposed Treaty has effect with respect to such tax. However,
    where any person would be entitled to greater benefits under
    the existing Treaty, the existing Treaty, at the election of
    the person, shall continue to have effect in its entirety with
    respect to such person for a period of twelve months from the
    date the provisions of the proposed Treaty are effective.