[Senate Treaty Document 111-7]
[From the U.S. Government Publishing Office]
111th Congress Treaty Doc.
SENATE
2d Session 111-7
_______________________________________________________________________
TAX CONVENTION WITH HUNGARY
__________
MESSAGE
from
THE PRESIDENT OF THE UNITED STATES
transmitting
CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
THE GOVERNMENT OF THE REPUBLIC OF HUNGARY FOR THE AVOIDANCE OF DOUBLE
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON
INCOME, SIGNED ON FEBRUARY 4, 2010, AT BUDAPEST (THE ``PROPOSED
CONVENTION'') AND A RELATED AGREEMENT EFFECTED BY AN EXCHANGE OF NOTES
ON FEBRUARY 4, 2010
November 15, 2010.--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,
November 15, 2010.
To the Senate of the United States:
I transmit herewith, for the advice and consent of the
Senate to its ratification, the Convention between the
Government of the United States of America and the Government
of the Republic of Hungary for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on
Income, signed on February 4, 2010, at Budapest (the ``proposed
Convention'') and a related agreement effected by an exchange
of notes on February 4, 2010. I also transmit for the
information of the Senate the report of the Department of
State, which includes an Overview of the proposed Convention
and related agreement.
The proposed Convention and related agreement were
negotiated to bring U.S.-Hungary tax treaty relations into
closer conformity with current U.S. tax treaty policies. For
example, the proposed Convention contains comprehensive
provisions designed to address ``treaty shopping,'' which is
the inappropriate use of a tax treaty by residents of a third
country. The existing Convention with Hungary, signed in 1979,
does not contain treaty shopping protections and, as a result,
has been abused by third-country investors in recent years. For
this reason, concluding the proposed Convention has been a top
priority for the Department of the Treasury's tax treaty
program.
I recommend that the Senate give early and favorable
consideration to the proposed Convention and related agreement
and give its advice and consent to their ratification.
Barack Obama.
LETTER OF SUBMITTAL
----------
Department of State,
Washington, September 17, 2010.
The President,
The White House.
The President: I have the honor to submit to you, with a
view to their 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 Republic of
Hungary for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income, signed on
February 4, 2010, at Budapest together with a related agreement
effected by exchange of notes on February 4, 2010. The proposed
Convention and related agreement were negotiated to bring U.S.-
Hungary tax treaty relations into closer conformity with
current U.S. tax treaty policies. For example, the proposed
Convention contains comprehensive provisions designed to
address ``treaty shopping,'' which is the inappropriate use of
a tax treaty by residents of a third country. The existing
Convention with Hungary signed in 1979 (Convention between the
Government of the United States of America and the Government
of the Hungarian People's Republic for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income, signed at Washington, February 12, 1979) does
not contain treaty shopping protections and, as a result, has
been abused by third-country investors in recent years. For
this reason, concluding the proposed new Convention has been a
top priority for the Department of the Treasury's tax treaty
program. An overview of key provisions of the proposed
Convention and related agreement are enclosed with this report.
The proposed Convention is self-executing. I recommend that
the proposed Convention and related agreement be transmitted to
the Senate for its advice and consent to ratification. The
Department of the Treasury and the Department of State
cooperated in the negotiation of the proposed Convention and
related agreement, and the Department of the Treasury joins the
Department of State in recommending that the proposed
Convention and related agreement be transmitted to the Senate
as soon as possible for its advice and consent to ratification.
Respectfully submitted,
Hillary Rodham Clinton.
Enclosures: As stated.
OVERVIEW
The proposed income tax Convention with Hungary signed on
February 4, 2010 and the related agreement effected by exchange
of notes on the same day were negotiated to bring U.S.-Hungary
tax treaty relations into closer conformity with current U.S.
tax treaty policy. There are, as with all bilateral tax
treaties, some variations from these norms. In the proposed
Convention and related agreement, these differences reflect
particular aspects of Hungarian law and treaty policy, the
interaction of U.S. and Hungarian law, and U.S.-Hungarian
economic relations.
Anti-abuse provisions
The proposed Convention and the related agreement contain
comprehensive ``Limitation on Benefits'' provisions designed to
address ``treaty shopping,'' which is the inappropriate use of
a tax treaty by residents of a third country. The existing
Convention (the Convention between the Government of the United
States of America and the Government of the Hungarian People's
Republic for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income,
signed at Washington, February 12, 1979), does not contain
treaty shopping protections, and, as a result, has been abused
by third-country investors in recent years. For this reason,
replacing the existing Convention with a Convention containing
comprehensive ``Limitation on Benefits'' provisions has been a
top tax treaty priority for the Treasury Department. The new
``Limitation on Benefits'' provisions include a provision
granting so-called ``derivative benefits'' similar to the
provision included in all recent U.S. tax treaties with
countries that are members of the European Union. The new
``Limitation on Benefits'' provisions also contain a special
rule of so-called ``headquarters companies'' that is identical
to what the Treasury Department has agreed to with a number of
other tax treaty partners.
The proposed Convention incorporates updated rules that
provide that a former citizen or long-term resident 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 convention also coordinates the
U.S. and Hungarian tax rules to address the ``mark-to-market''
provision enacted by the United States in 2007 that apply to
individuals who relinquish U.S. citizenship to terminate long-
term residency.
Taxation of investment income
The withholding rates on investment income in the proposed
Convention are the same as or lower than those in the existing
Convention. The proposed Convention provides for reduced
source-country taxation of dividends distributed by a company
resident in one Contracting State to a resident of the other
Contracting State. The proposed Convention generally allows for
taxation at source of five percent on direct dividends (i.e.,
where a 10-percent ownership threshold is met) and 15 percent
on all other dividends. Additionally, the proposed Convention
provides for an exemption from withholding tax on certain
cross-border dividend payments to pension funds.
The proposed Convention updates the treatment of dividends
paid by U.S. Regulated Investment Companies (RICs) and Real
Estate Investment Trusts (REITs) to prevent the use of
structures designed to inappropriately avoid U.S. tax.
Consistent with the existing Convention, the proposed
Convention generally eliminates source-country withholding
taxes on cross-border interest and royalty payments. However,
consistent with existing U.S. tax treaty policy, source-country
tax may be imposed on certain contingent interest and payments
from a U.S. real estate mortgage investment conduit.
The taxation of capital gains under the proposed Convention
generally follows the format of the current U.S. Model Income
Tax Convention. Gains derived from the sale of real property
and from real property interests may be taxed by the State in
which the property is located. Likewise, gains from the sale of
personal property forming part of a permanent establishment
situated in a Contracting State may be taxed in that State. All
other gains, including gains from the alienation of ships,
boats, aircraft and containers used in international traffic
and gains from the sale of stock in a corporation, are taxable
only in the State of residence of the seller.
Taxation of business income
The proposed Convention and related agreement, like several
recent treaties, provide that the OECD Transfer Pricing
Guidelines apply by analogy in determining the amount of
business profits of a resident of the other country. The source
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. The proposed Convention
generally defines a ``permanent establishment'' in a way that
grants rights to tax business profits that are consistent with
those found in the current U.S. Model income tax treaty.
The proposed Convention preserves the U.S. right to impose
its branch profits tax on U.S. branches of Hungarian
corporations. The proposed Convention also accommodates a
provision of U.S. domestic law that attributes 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.
Taxation of personal services income
The proposed Convention would change the rules currently
applied pursuant to the existing Convention regarding the
taxation of independent personal services. Under the proposed
Convention, an enterprise performing services in the other
country will become taxable in the other country only if the
enterprise has a fixed place of business.
The rules for the taxation of income from employment under
the proposed Convention are generally similar to those under
the current U.S. Model Income Tax Convention. The general rule
is that employment income may be taxed in the State where the
employment is exercised unless three conditions constituting a
safe harbor are satisfied.
Pensions
The proposed Convention preserves the existing Convention's
rules that allow for exclusive residence-country taxation of
pensions, and consistent with current U.S. tax treaty policy,
provides for exclusive source-country taxation of social
security payments.
Exchange of information
The proposed Convention provides for the full exchange of
information between the competent authorities to facilitate the
administration of each country's tax laws. It generally follows
the current U.S. Model Income Tax Convention and the
Organization for Economic Cooperation and Development standards
for exchange of tax information. Accordingly, the proposed
Convention allows the United States to obtain information
(including from financial institutions) from Hungary whether or
not Hungary needs the information for its own tax purposes.
Entry into force
The proposed Convention would enter into force on the date
of an exchange of instruments of ratification. It would have
effect, with respect to taxes withheld at source, for amounts
paid or credited on or after the first day of the second month
next following the date of entry into force of the proposed
Convention, and with respect to other taxes, for taxable years
beginning on or after the first day of January next following
the date of entry into force of the proposed Convention. The
related agreement effected by exchange of notes would enter
into force on the date of entry into force of the proposed
Convention.
Effect on the existing convention
The existing Convention would, with respect to any tax,
cease to have effect as of the date on which this proposed
Convention has effect with respect to such tax. However, where
any person would be entitled to greater benefits under the
existing Convention, the existing Convention, at the election
of the person, would continue to have effect in its entirety
with respect to such person until either the date of entry into
force of the proposed Convention or December 31, 2010,
whichever is later. Additionally, individuals who benefit from
the Articles on Students and Trainees and on Teachers under the
existing Convention would continue to be entitled to such
benefits as if the existing Convention remained in force.