[Senate Hearing 106-356]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 106-356


 
 BILATERAL  TAX  TREATIES  AND  PROTOCOL: ESTONIA--TREATY DOC. 105-55; 
  LATVIA--TREATY DOC. 105-57; VENEZUELA--TREATY DOC. 106-3; DENMARK--
  TREATY DOC. 106-12; LITHUANIA--TREATY DOC. 105-56; SLOVENIA--TREATY 
   DOC. 106-9; ITALY--TREATY DOC. 106-11; GERMANY--TREATY DOC. 106-13

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 27, 1999

                               __________

       Printed for the use of the Committee on Foreign Relations

                               

 Available via the World Wide Web: http://www.access.gpo.gov/congress/senate


                      U.S. GOVERNMENT PRINTING OFFICE
 62-509 CC                   WASHINGTON : 2000
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
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                     COMMITTEE ON FOREIGN RELATIONS

                 JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana            JOSEPH R. BIDEN, Jr., Delaware
PAUL COVERDELL, Georgia              PAUL S. SARBANES, Maryland
CHUCK HAGEL, Nebraska                CHRISTOPHER J. DODD, Connecticut
GORDON H. SMITH, Oregon              JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota                 RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                PAUL D. WELLSTONE, Minnesota
CRAIG THOMAS, Wyoming                BARBARA BOXER, California
JOHN ASHCROFT, Missouri              ROBERT G. TORRICELLI, New Jersey
BILL FRIST, Tennessee
                   Stephen E. Biegun, Staff Director
                 Edwin K. Hall, Minority Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page

Dorgan, Hon. Byron L., U.S. Senator from North Dakota............     2
    Prepared statement of........................................     4
Murray, Fred F., vice president for tax policy, National Foreign 
  Trade Council, Washington, DC..................................    52
    Prepared statement of........................................    55
Paull, Lindy L., chief of staff, Joint Committee on Taxation.....    31
    Prepared statement of........................................    35
Underwood, Hon. Robert A., U.S. Delegate from Guam, prepared 
  statement......................................................    66
West, Philip R., International Tax Counsel, Department of the 
  Treasury.......................................................     8
    Prepared statement of........................................    12

                                Appendix

Additional questions for the record from Senator Hagel to Phil 
  West, Treasury International Tax Counsel:
    Responses regarding additional issues on pending tax treaties    69
    Responses regarding issues raised in JCT pamphlets on pending 
      tax treaties...............................................    75
Statements in support of the Treaty for the Avoidance of Double 
  Taxation between Venezuela and the United States:
    D'Empaire Reyna Bermudez & Asociados, Caracas, Venezuela.....    93
    Hoet, Pelaez, Castillo & Duque, Caracas, Venezuela...........    95
    Venezuelan American Chamber of Commerce and Industry, 
      Caracas, Venezuela.........................................    97
    Torres, Plaz & Araujo, Caracas, Venezuela....................    98
Statement in support of the U.S.-Lithuanian Bilateral Tax Treaty:
    Williams Companies, Washington, DC...........................   100
Website addresses for the Treasury Department Technical 
  Explanations of the tax treaties and protocol in this hearing..   101

                                 (iii)



   BILATERAL TAX TREATIES AND PROTOCOL: ESTONIA--TREATY DOC. 105-55; 
  LATVIA--TREATY DOC. 105-57; VENEZUELA--TREATY DOC. 106-3; DENMARK--
  TREATY DOC. 106-12; LITHUANIA--TREATY DOC. 105-56; SLOVENIA--TREATY 
   DOC. 106-9; ITALY--TREATY DOC. 106-11; GERMANY--TREATY DOC. 106-13

                              ----------                              


                      WEDNESDAY, OCTOBER 27, 1999

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 3:05 p.m. in room 
SD-419, Dirksen Senate Office Building, Hon. Chuck Hagel 
presiding.
    Present: Senators Hagel and Sarbanes.
    Senator Hagel. Good afternoon.
    The committee meets today to consider bilateral income tax 
treaties between the United States and Estonia, Latvia, 
Lithuania, Venezuela, Denmark, Italy, and Slovenia as well as 
an estate tax protocol with Germany.\1\
---------------------------------------------------------------------------
    \1\ The Department of the Treasury technical explanations for these 
tax treaties and protocol are available via the World Wide Web. See 
appendix, page 101, for the Website addresses.
---------------------------------------------------------------------------
    The United States has tax treaties with 59 countries. This 
global network of treaties is designed to protect U.S. 
taxpayers from double taxation and to provide the IRS with 
information and data to prevent tax evasion and avoidance.
    The treaties prevent international double taxation by 
setting down rules to determine what country will have the 
primary right to tax income and at what rates. These bilateral 
international tax treaties are important for America's economic 
growth.
    As we move into the next millennium, today's global economy 
will be even more interconnected and more interdependent on 
international tax treaties. The treaties pending before this 
committee represent new treaty relationships between the United 
States and Estonia, Latvia, Lithuania, Venezuela and Slovenia.
    The treaties with Denmark and Italy would modernize 
existing treaty relationships. These treaties generally track 
with the U.S. tax treaty model, although some deviate to 
various degrees from the U.S. model.
    Additionally, some of the provisions in these treaties are 
being seen by this committee for the first time. The treaties 
with Italy and Slovenia contain main purpose tests that are not 
usually contained in U.S. treaties. These provisions would 
permit the denial of benefits under a treaty if one of the main 
purposes of a transaction was to take improper advantage of the 
treaty.
    I hope our Treasury witness today will be able to expand on 
those provisions and explain the intent and practicality of 
including these provisions in the treaties.
    A variety of other issues has been raised by the Joint 
Committee on Taxation. I know our witnesses are fully aware of 
these issues and will be prepared to discuss them. As usual, 
the Joint Committee staff has prepared careful analysis of each 
of the treaties.
    We are pleased today to have with us three distinguished 
panels of witnesses. The first panel consists of Senator Byron 
Dorgan from North Dakota. Senator Dorgan has been a leader on 
many important issues in the U.S. Senate, including 
agriculture, trade, taxes, and telecommunications.
    Senator Dorgan became the youngest constitutional officer 
in North Dakota's history when he was appointed State Tax 
Commissioner at the age of 26. He was later elected to that 
office twice. Senator Dorgan served a total of 11 years as Tax 
Commissioner for North Dakota, so I suspect he knows a little 
bit about this issue.
    And I hope he is very impressed that I know so much about 
that.
    The second panel includes Mr. Philip West, International 
Tax Counsel for the U.S. Department of the Treasury, and Ms. 
Lindy L. Paull, chief of staff of the Joint Committee on 
Taxation.
    Mr. West has served as International Tax Counsel for the 
Treasury Department for nearly 2 years. Prior to becoming Tax 
Counsel, Mr. West served as the Deputy International Tax 
Counsel.
    Ms. Paull has served as the chief of staff of the Joint 
Committee on Taxation since February, 1998. Prior to her work 
at the Joint Committee, she was staff director and chief 
counsel for the U.S. Senate's Finance Committee.
    On the third panel, we will hear from Mr. Fred Murray, vice 
president for tax policy of the National Foreign Trade Council. 
Prior to his work at the National Foreign Trade Council, Mr. 
Murray was special counsel for legislation in the office of the 
Chief Counsel at the Internal Revenue Service from 1992 to 
1996.
    My friend and counterpart on the subcommittee, Mr. 
Sarbanes, will be here momentarily. I understand he has 
requested that we proceed.
    So, with that, Senator Dorgan we welcome you and are 
pleased to have you.

  STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR FROM NORTH 
                             DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. I also, 
in addition to serving as State Tax Commissioner, served 10 
years in the House Ways and Means Committee when I was in the 
U.S. House. So I have an acquaintance with the tax issue.
    I am here today because we are dealing with tax treaties 
which spark very little public interest, and yet there are 
significant considerations that must be weighed in my judgment 
as we deal with these treaties. I hope that the representatives 
from the Treasury Department and the Joint Tax Committee will 
also weigh in on some of these issues. I don't know that they 
will, but I hope they will.
    My concern deals with what is traditionally article 9 and 
article 7 of these treaties, dealing with associated 
enterprises and business profits. They deal with transactions 
between intracorporate operations, that is, a corporation that 
owns another corporation and sells to itself, or buys from 
itself.
    To tell you a little about that, let me ask you to think 
about a toothbrush that is priced at $171. My expectation is 
that you have not purchased one of those lately. But that 
toothbrush is an intra-company transaction, designed by one 
part of a company wholly owned by the other to move income in 
one direction or another. Or if not $171 for a toothbrush, 
think of $38 for a pair of pantyhose, or a missile rocket 
launcher for $13, or how about a radial tire for $5. All of 
these are examples of transfer pricing.
    There is, in my estimation, a substantial amount of lost 
income from transfer pricing. The Internal Revenue Service has 
done some studies and they predict that it is somewhere in the 
$2 billion to $3 billion range. The studies done by Professors 
Pak and Zdanowicz in Florida suggest that it is between $30 
billion and $40 billion a year. The right number is perhaps 
somewhere in between.
    These treaties that we negotiate include an article 7 and 
an article 9. These treaties are, in my judgment, going to 
cause us more and more difficulty with respect to court 
decisions that have been rendered recently about them. I wanted 
to mention that to the committee and ask that you consider 
taking some action.
    First, let me say something about massive tax avoidance by 
some of the largest, especially foreign-based firms, but 
generally speaking large corporations that buy and sell to and 
from themselves in wholly owned subsidiaries. Thirty percent of 
the largest foreign based firms with at least $250 million in 
assets in the U.S. and business receipts of at least $50 
million in a recent year paid no Federal income tax at all--
zero, none--to this country. This is despite doing over $300 
billion of business in America. That information comes from a 
GAO study.
    Now is this something that is reasonable? Would you expect 
that to be the case? If you had a kind of main street 
mentality, where you do business, make a profit, and have to 
pay a tax, would you expect that companies doing $300 billion 
worth of business in this country would actually be able to 
tell the IRS that they suffered only losses--and, therefore, 
should exercise opportunities in our marketplace but should not 
exercise the opportunity to pay taxes on profits?
    This is where the $171 for a toothbrush comes in. It is the 
device by which profit is moved away from the United States tax 
collecting service.
    Now what has happened is this. The Treasury Department and 
the IRS use an antiquated system, called the arms length 
pricing approach, for dealing with intracompany transactions. 
It is like taking two plates of spaghetti and deciding to try 
to attach the ends of the spaghetti together. It is, of course, 
patently absurd and unworkable in today's practice. The 
Internal Revenue Service is literally drowning in complexity 
and is totally and completely unable to deal with it.
    They won't admit that, but I will help them do so in the 
absence of their admission. I might also say that the way to do 
this, as opposed to the current standard that is an antiquated 
one, is to use formulary apportionment, which most large 
enterprises do not want. This is an approach which, 
incidentally, the current U.S. Treasury Secretary previously 
embraced until he came to the Treasury Department. Using 
formulary apportionment makes a lot of sense.
    But I cannot force our Government to do that. I can, 
however, come to you and say that when a judge interprets tax 
treaties and articles 7 and 9 as absolutely prohibiting 
formulary apportionment, when our country believes it is the 
only approach by which we can accurately measure income, then 
this committee and the Congress had better get serious about 
evaluating what articles 9 and 7 mean.
    We have for many years felt that it is a harmless enough 
provision. And yet, recent court decisions show us this is not 
the case. A judge in the U.S. Court of Federal Claims in the 
case of National Westminster Bank ruled that an existing 
Treasury regulation was overridden by language in the U.S.-U.K. 
tax treaty. The language he refers to is exactly this language 
that exists in all of these treaties.
    I testified against the language previously when the 
Congress had moved these treaties out, and I come today again 
to say that we are running flat into trouble on these issues.
    This case alone will likely amount to $180 million in lost 
tax revenue to the Federal Government. But multiply that many 
fold, incidentally, if this case stands.
    I come here today to ask that the committee do two things. 
First, I want the committee to declare unequivocally that our 
tax treaties do not prohibit the United States from using 
reasonable formula methods to deal with tax avoidance.
    Second, the committee should make whatever changes it needs 
to these pending income tax treaties to stop the kind of absurd 
result that has recently been approved by a couple of Federal 
court cases, one of which I have just mentioned.
    So, Mr. Chairman, you have a number of expert witnesses. I 
know you are anxious to hear them. I have a lot more that I 
could say about this, but I think in my prepared testimony I 
have set out a more complete story.
    I thank you for your patience and courtesy in allowing me 
to stop by and present testimony today.
    [The prepared statement of Senator Dorgan follows:]

             Prepared Statement of Senator Byron L. Dorgan

    Mr. Chairman and members of the Senate Foreign Relations Committee, 
I appreciate the opportunity to testify about an urgent matter 
involving most of our bilateral income tax treaties including several 
of those being reviewed by the Committee this afternoon.
    Here are some facts that many Americans do not know. Sixty-seven 
percent of the foreign multinational firms operating in this country 
paid not one penny in federal income taxes despite having hundreds of 
billions of dollars of sales here in 1995, which is the latest year the 
IRS has statistics available. For many of the preceding years, this 
percentage was even higher!
    These facts, are of course, outrageous. This is an absolute affront 
to our families, individuals and Main Street business owners who 
diligently pay the taxes they owe, on time, every April 15th. It's 
equally galling that several foreign firms have snookered some of our 
federal courts into believing that tax treaties we have with other 
countries prohibit the United States from doing much to put a stop to 
this massive tax avoidance.
    That's why I'm here to urge you to do two things as the Committee 
considers the income tax treaties before it today. First, the Committee 
should declare unequivocally that our tax treaties do not prohibit the 
United States from using reasonable formula methods to deal with this 
enormous tax avoidance. Second, the Committee should make whatever 
changes it needs to these pending income tax treaties to stop the kind 
of absurd results that have recently been approved by our federal 
courts.
    When I last testified before your Committee about the transfer 
pricing problem and how our income tax treaties impact it, I shared 
with you a growing body of evidence that multinational firms are 
continuing to use a sophisticated tax scheme called ``transfer 
pricing'' to avoid paying their fair share of U.S. income taxes. This 
bookkeeping practice allows enormously profitable multinational firms 
to shift their profits out of one taxing jurisdiction into another more 
favorable taxing jurisdiction--or even nowhere at all--by the simple 
stroke of a pen.
    Since that time, we've made little progress in stopping the 
hemorrhaging of revenues caused by transfer pricing that some experts 
say is now draining our Treasury coffers by more than $30 billion 
annually. To make matters worse, the Treasury Department is continuing 
to negotiate language in our income tax treaties that the tax 
practitioners of large, sophisticated multinational firms are using to 
sidestep what may be our country's best tools for enforcing our tax 
laws in the fast-changing global marketplace. In theory, our income tax 
treaties are intended to prevent treaty countries from ``double'' 
taxing the profits of multinational firms that operate around the 
globe, while also allowing such countries to take steps to ensure that 
multinational firms pay the taxes they rightfully owe. Unfortunately, 
several troubling federal court rulings show that a handful of well-
represented multinational, companies can convince our courts that 
somehow the language in our tax treaties overrides reasonable U.S. 
efforts to enforce our international tax laws.
    But let me first step back and describe the nature of the tax 
avoidance by many large multinational conglomerates and how our income 
tax treaties impact it.
    Many of today's globe-trotting businesses are involved in a 
campaign of massive global tax avoidance. Far from being overtaxed, 
these large multinational companies have devised an aggressive 
accounting scam that allows them to avoid paying U.S. taxes with 
virtual immunity. Under this scheme called ``transfer pricing,'' 
multinational companies can move U.S. profits out of this country by 
simply manipulating the price they charge themselves for goods and 
services they move between related parts of their business.
    This ruse, for example, allows foreign-based corporations to 
purchase goods and services from U.S. affiliates at artificially low 
prices and to sell their foreign-produced goods and services to U.S. 
affiliates at artificially high prices. With transfer pricing, some 
foreign-based firms claimed their U.S.-based operations in 1998 
purchased toothbrushes for $171 each and pantyhose for $38 a pair, and 
sold missile and rocket launchers for $13 each and radial tires for $5 
each. This is absurd.
    It should, therefore, come as no surprise that the vast majority of 
foreign-based corporations are doing hundreds of billions of dollars of 
business in the United States without paying any U.S. income taxes, 
according to General Accounting Office (GAO) studies. This virtual tax 
holiday for many profitable multinational firms is not an aberration or 
limited, perhaps, to start-up firms or small businesses. In fact, the 
GAO's most recent review of IRS tax data shows that about 30-percent of 
the largest foreign-based firms with at least $250 million in U.S. 
assets or total U.S. business receipts of at least $50 million in 1995 
paid no federal income taxes that year, despite doing over $300 billion 
of business here. The results for large U.S.-based firms were no 
better.
    No one seriously disputes the dismal record that our tax 
enforcement officials have had in transfer pricing adjustment cases of 
international firms under audit. Even the Treasury Department 
understands that the potential for abuse in this area makes it one of, 
if not the most, important international tax issue we have to deal 
with.
    Now the income tax treaties being reviewed by your Committee today 
may pose a significant threat to both our current and possible future 
efforts to put a stop to transfer pricing abuses.
    Let me explain. Tucked away in the pending income tax treaties with 
Estonia, Slovenia, Latvia, Lithuania and Venezuela are the so-called 
``Associated Enterprises'' and ``Business Profits'' articles which deal 
with transactions between related companies--whether intercompany 
transactions between a parent company and its subsidiaries or intra-
corporate transactions between business branches. These provisions, 
which are frequently found in Article 9 and Article 7, respectively, 
are common to most bilateral income tax treaties that exist between the 
United States and other countries. The actual language in Articles 9 
and 7 appears harmless enough. But in practice, it is being used to 
undermine our ability to enforce our tax laws regarding the major 
multinational firms that do business between these countries.
    For years, U.S. tax officials have wrestled with the problem of how 
to divide the overall income of a firm doing business in many different 
jurisdictions. At first glance, the problem seems simple. If 
corporation X has operations in Idaho, and North Dakota, and Mexico, 
just audit the books of each.
    Unfortunately, though, the problem is not that simple. Corporations 
have multitudes of ways of shifting income around from one subsidiary 
or another, or one branch to another, by arranging artificial 
``transactions'' between them. There are literally thousands of paper 
transitions between these entities. Untangling them is a bureaucracy 
intensive and ultimately futile exercise. Frequently, the income 
disappears into the black holes of the company's multinational balance 
sheets and is reported to no jurisdiction at all.
    In the beginning, state tax officials tried to deal with the 
problem on what is called a ``separate accounting'' basis. They would 
pretend that the subsidiaries of a multistate corporation really were 
separate businesses, and tried to adjust the transactions between them 
one by one, to what they would be if the subsidiaries really were 
dealing at ``arm's length.''
    But for companies doing business between the states, the 
proliferation of commerce simply overwhelmed this system. One by one, 
the states shifted to using a formula method, which drops the arcane 
tax accounting and allocates the corporation's overall income through a 
simple, 3-factor formula instead.
    This formula method is now the norm between the states. And the 
United States Supreme Court has repeatedly held that the formula method 
as used by the states is reasonable and fair.
    Stubbornly, however, the Treasury Department has persisted with--
and the IRS has been burdened with--trying to enforce our international 
tax laws under the rubric of the antiquated, bureaucracy-intensive 
``arms-length'' or ``separate-entity'' accounting method that is 
embraced in current Treasury regulations and our income tax treaties. 
Yet the Treasury Department understands that traditional ``comparable 
pricing'' methods used by IRS examiners are often unworkable and 
therefore they have issued regulations using formula approaches to 
apportion profits of an international business in many cases.
    Many parties affected by our income tax treaties are now 
interpreting Articles 9 and 7 as prohibiting the use of any formulary 
methods to apportion income or expenses at the federal tax level. 
Although there is nothing in the language of our treaties, or past 
Committee reports interpreting our treaties, that sensibly supports 
this interpretation, some well-financed--and well-represented--
multinational firms are successfully convincing many of our federal 
court judges otherwise. For example, this past July, a judge on the 
U.S. Court of Federal Claims in the case of National Westminster Bank, 
PLC (NatWest) ruled that an existing Treasury regulation--Section 
1.882-5--was overridden by language in our U.S.-U.K. tax treaty merely 
because it used a formula to determine a reasonable apportionment of 
NatWest's true interest expense to its U.S. banking business.
    Unfortunately the judge's decision in NatWest is not an isolated 
case. This ruling, and others like it, have potentially exposed the 
Treasury Department to billions of dollars of new refund claims solely 
on a company's claim that any formula approach--however reasonable and 
fair--is in violation of our bilateral income tax treaties.
    Quite simply it is a mistake for companies, our treaty partners and 
our courts to read this restriction on formulary methods into our 
existing income tax treaties and those pending before the Committee 
today. This is certainly not the result this Committee intended to 
sanction.
    The Senate Foreign Relation Committee's view on this issue has 
remained basically unchanged for decades. This Committee's report 
language describing comparable language in the U.S.-United Kingdom 
treaty in 1977 went to great lengths to ensure that countries may 
``apply apportionment formulas . . . as a method to achieve an arm's 
length price for a transaction between related parties or to apportion 
income between related entities if it is established the entities are 
not dealing on an arm's-length basis.'' The Committee report expressed 
this view despite the existence of unique treaty language that 
attempted to limit the use of formula methods. This point was re-
emphasized in a 1993 colloquy between Senator Mitchell and Foreign 
Relations Committee Chairman Pell on the Senate floor during the 
consideration of income tax treaties. Senator Pell reiterated the 
Senate's longstanding position that our income tax treaties do not 
prevent the appropriate use of a formula method by the United States or 
our treaty partners to apportion overall income among associated 
enterprises.
    I urge this Committee to take steps to ensure that these pending 
treaties do not lock this nation into a tax enforcement system that 
does not work and cannot work. Again, this costs us billions of dollars 
in revenue that we cannot afford to lose. And frankly, it just makes no 
sense for the federal government to sit idly by as high-powered 
foreign-based multinational companies use our tax treaties or any other 
international agreements as a tool to prevent this country from 
enforcing its existing tax laws--or future alternatives--to end abusive 
tax avoidance practices such as transfer pricing. I happen to believe 
that our best chance to curtail this massive avoidance is for this 
country to replace its current transfer pricing enforcement provisions 
with the kind of formulary apportionment that the states have used to 
divide business profits successfully for decades. But I'm not here 
asking to impose this today.
    However, the Committee should take positive, formal steps to 
declare that the use of a reasonable and fair formula to reach the best 
possible result in a given circumstance would be contemplated by these 
treaties and any future treaties. Consequently, if a formula method to 
apportion income among related parties, or among units of a single 
party, renders a reasonable and fair result, then multinational 
companies must no longer be allowed to use our tax treaties to 
circumvent that result in order to avoid paying their fair share of 
U.S. income taxes. Such a declaration has always been appropriate. 
However, it's needed now more than ever to put a stop to the kind of 
absurd results that have recently been sanctioned by our federal 
courts.
    Once again, I appreciate your extending me the opportunity to 
testify before this Committee on this important issue. I urge you to 
consider taking the steps needed to ensure that this nation's tax 
enforcement laws can keep pace with the changing world of global 
economics and international business operations.

    Senator Hagel. Senator, thank you.
    May I ask just a general question? I will pursue your 
points in questions with our witnesses from Treasury and the 
Joint Committee on Taxation, and this committee will take a 
look. But you know this business about as well as anybody 
around here.
    What is your suggestion as to how we then would proceed if 
we took your suggestions? We have tax treaties with 59 
countries. How do you start unravelling this?
    Senator Dorgan. Well, you start by not moving a treaty that 
includes language in article 7 and article 9 that is now being 
misinterpreted by the courts and make more explicit exactly 
what these mean. But, in fact our representatives from the 
Treasury Department overseas in the OECD and elsewhere are 
representing this portion of a tax treaty absolutely prohibit 
formulary apportionment, than that is wrong. This is a bad 
interpretation and it is not consistent with what this 
committee and the Congress have said previously.
    So we have the Treasury Department misinterpreting it in 
the OECD. We have the court misinterpreting it now. And to the 
extent that the committee has a willingness to make certain it 
is not misinterpreted in the future, perhaps we need some more 
explicit language to say that nothing in these articles shall 
prohibit our taxing authorities, when they believe it is 
necessary and appropriate to find an accurate method of 
measuring income apportionment, from using a formulary 
approach. We perhaps need to be more explicit in doing that.
    Senator Hagel. Do you believe that would require going back 
and renegotiating all of the tax treaties?
    Senator Dorgan. I do not believe that is the case.
    There are several methods of doing that. One is a 
reservation. There are other approaches that can also be used. 
All I am doing today is asking the committee to evaluate 
especially what our obligation is in light of the recent U.S. 
Court of Federal Claims case. I don't think we ought to ignore 
this. I hope Treasury will not ignore it in its testimony, and 
I hope you will ask the Joint Taxation Committee people about 
it as well.
    This moves down the road a good, long way in furthering tax 
avoidance on a massive scale.
    Look, if I were running a multinational corporation, the 
last thing I would want is formulary apportionment because you 
are able, under the current circumstance, to create a great 
deal of ``nowhere income'' and, therefore, avoid the tax 
consequences of earning income in certain areas.
    But good corporations--and there are plenty of them--do not 
mind at all. They don't want to be overtaxed or double taxed, 
and I agree with that. Formulary apportionment will prevent 
double taxation and do so in a way that protect corporations 
while, at the same time, making sure that our country is able 
to collect a reasonable income tax on profits made in this 
country--just as we do from domestic corporations and from 
other taxpayers.
    Senator Hagel. Senator, thank you. I know you have other 
obligations. But I would say that you are welcome through any 
part of this hearing today to come up here, sit next to me, and 
ask questions or participate in any way you want. That 
invitation is open at any point to you.
    Senator Dorgan. Well, I will not wear out my welcome. But 
thank you for the courtesy of allowing me to come today.
    Senator Hagel. Thank you.
    Now we would ask the second panel to come forward. We have 
Mr. West and Ms. Paull.
    In the interest of full disclosure, I should tell you that 
this morning at our hearing on China--I don't know if it had 
anything to do with this subject matter--about halfway through 
the hearing all of the glasses with ice were immediately 
retrieved. The reason for that, after I asked Cheryl why this 
was done, is because there was glass in the ice. Again, in the 
interest of full disclosure and what is good for your health, I 
would tell you that I presume we have no glass in the ice 
today.
    So there you are. If you prefer something else, we will get 
you whatever else you need.
    Now, after I have given a sampling of your glittering 
backgrounds and resumes, let me ask you to proceed.
    Mr. West, we will begin with you. I thank you both for 
coming.

    STATEMENT OF PHILIP R. WEST, INTERNATIONAL TAX COUNSEL, 
                   DEPARTMENT OF THE TREASURY

    Mr. West. Thank you, Mr. Chairman. My name is Philip West 
and I am the Treasury Department's International Tax Counsel.
    I am pleased today to appear before the committee to 
recommend favorable action on eight bilateral tax treaties and 
protocols that the President has transmitted to the Senate and 
that are the subject of this hearing.
    These agreements would provide significant benefits to the 
United States, particularly our multinational businesses doing 
business around the world as well as benefits to our treaty 
partners. The Treasury appreciates the committee's interest in 
these agreements and requests the committee and the Senate take 
prompt and favorable action on all of these agreements.
    Mr. Chairman, the United States can be proud of our efforts 
in the tax treaty area. As you pointed out, we have a broad 
treaty network, including treaties with all 28 of our fellow 
members of the OECD. Our treaties cover the vast majority of 
trade and investment by U.S. companies abroad, and we meet 
regularly with members of the U.S. business community regarding 
their priorities and the practical problems they face with 
respect to particular countries.
    We are expanding our treaty network and we are focused on 
renegotiating our older treaties. Since the beginning of 1993, 
we have replaced our oldest treaties with Sweden, The 
Netherlands, Ireland and Switzerland, and the Denmark treaty, 
which you have before you today, will replace what is currently 
the oldest of our income tax treaties still in force.
    The treaties and the protocol before the committee today 
represent a cross section of our tax treaty program, as you 
have observed. We have treaties with developing countries in 
Latin America, Eastern Europe and the former Yugoslavia, as 
well as treaties with the developed world.
    These treaties, like all of our treaties, allocate taxing 
rights between the United States and our treaty partners when 
both might claim jurisdiction to tax the same item of income.
    As such, they remove impediments to international trade and 
investment by reducing the threat of double taxation. Although 
the domestic tax legislation of the United States furthers 
these same general objectives, a treaty goes beyond what 
domestic legislation can achieve. A treaty can address the 
unique aspects of other countries' laws and the way they 
interact with ours. A treaty can also modify the domestic law 
of each country as it applies to income flowing between the 
treaty partners.
    I would like to give you a few examples of how the treaties 
can operate to provide these benefits. All of the treaties 
contain mechanisms for resolving double tax problems, not 
otherwise resolved on the face of our treaties. The transfer 
pricing disputes that Senator Dorgan referred to are capable of 
resolution under our competent authority mechanisms in our 
treaties.
    The proposed treaty with Italy, as a specific example, is 
of great importance to the U.S. business community. It 
addresses the creditability of a new Italian regional tax and 
it generally lowers the withholding tax rates imposed by each 
country.
    Our proposed treaty with Venezuela also contains important 
benefits. Among these are establishing and clarifying minimum 
taxing threasholds, limiting the taxation of payments for 
technical services, and insuring the deductibility of payments 
by Venezuelan subsidiaries to their U.S. parents.
    The proposed treaty with Venezuela is of special importance 
because it represents a crucial step toward achieving our goal 
of expanding our tax treaty network in Latin America.
    I know that the committee has been alerted to a pending 
change in Venezuela's income tax law through which Venezuela 
will move to the U.S. standards for taxing international income 
and begin taxing all of the worldwide income earned by its 
residents, rather than only income determined under broad 
sourcing rules to be connected with Venezuela.
    The possibility that Venezuela would adopt this worldwide 
approach was anticipated throughout our treaty negotiations and 
we planned for it in drafting the treaty. After reading, 
analyzing, and discussing drafts of the new law, we have 
determined that the treaty will be at least as appropriate 
under the new law as the old law.
    The increased possibilities for double taxation that are 
the natural result of this change in Venezuela's law will make 
the treaty even more important than it would have been 
previously.
    Accordingly, we recommend that the committee approve the 
treaty despite this change in Venezuela's law.
    Our proposed treaty with Denmark also provides significant 
benefits to taxpayers, for example, by providing certainty with 
respect to the creditability of Denmark's hydrocarbons tax and 
by reducing the threshold that taxpayers must meet in order to 
qualify for a lower withholding tax on dividend payments.
    Also in the Denmark treaty, we furthered our effort to curb 
abuse of the treaty by adding important new treaty shopping 
rules. The treaty shopping rules play a significant role in our 
efforts to prevent tax avoidance and evasion and to insure that 
treaty benefits flow only to the intended recipients.
    Treasury shares the concerns expressed by this committee 
and the Congress regarding treaty shopping, and we have taken a 
leading role in developing anti-treaty shopping provisions and 
encouraging other countries to adopt these provisions in their 
treaties as well.
    As we have pursued our goal of eliminating treaty shopping, 
however, we have seen an increasing number of other 
transactions that seek to use treaties to achieve inappropriate 
results. Therefore, we have decided to include in two of the 
treaties before you today, the most recently negotiated of all 
the treaties before you, anti-abuse rules in addition to the 
limitation on benefits provisions. These rules are found in our 
proposed treaties with Italy and Slovenia, again, the most 
recently negotiated.
    Mr. Chairman, we can all agree on the need to curb abuse. 
Therefore, any debate on the subject should center on what 
measures are appropriate to that end. Although we understand 
the concerns that have been raised regarding the measures 
proposed here today, we believe that they represent an 
appropriate step to curb abuse.
    In this regard, it is important to keep in mind that our 
tax treaties contain only benefits for taxpayers. They contain 
no provisions that increase tax burdens and, as such, it is 
appropriate to impose reasonable limits on those benefits to 
curb abusive transactions that may be developed in the future.
    These rules are being proposed as a result of several 
concurrent developments in the international tax law. First, 
although the overwhelming majority of taxpayers who avail 
themselves of treaty benefits are entitled to those benefits 
and are not engaged in abusive transactions, aggressive abuse 
of treaties has increased.
    Congress has twice in recent years taken the unusual step 
of legislating against treaty abuse. Most recently, Congress 
enacted section 894(c) to deny benefits in certain transactions 
structured not only to eliminate double taxation, a legitimate 
goal, but, if possible, to eliminate all taxation.
    Several years earlier, Congress enacted section 7701(l), 
providing Treasury with regulatory authority to curb treaty 
abuse. This authority has been exercised to adopt a standard 
very similar to that under consideration by the committee today 
under which taxpayers have been operating for some years now, 
apparently without significant difficulty.
    The increase in treaty abuse has unfortunate results for 
both Treasury and our taxpayers. It requires Treasury to devote 
resources that otherwise could be spent expanding our treaty 
benefits to curbing abuse.
    The anti-abuse rules before you will address the abuse 
problem while, at the same time, freeing up Treasury resources 
to negotiate greater treaty benefits for our taxpayers.
    We believe that the proposed rules will be more effective 
than a narrower rule and we decided against a broader, more 
subjective, anti-abuse rule both because it provides a less 
certain standard against which taxpayers can evaluate their 
transaction and because it is less consistent with 
international norms.
    We decided on these particular rules in our treaties 
because, when we were considering what measures were 
appropriate to curb treaty abuse, we observed that virtually 
all of the other countries with which we were negotiating at 
the time either had treaty anti-abuse precedents generally 
consistent with the rules you have before you today, in the 
case of the United Kingdom, Chile, and Korea, or, in the case 
of Canada, it had already included in its treaty with the 
United States an explicit recognition of the right to apply a 
similar anti-abuse rules that was in force under its domestic 
law.
    In addition, other countries, such as Ireland and Mexico, 
have agreed to a similar provision with each other, and the 
rule has been included in more than 50 treaties, representing 
approximately 40 different countries, including 10 OECD 
members.
    Therefore, because the proposed rule appears in a 
significant number of treaties and promises to appear in more, 
it will likely be the subject of more interpretive law than the 
other standards and likely will provide greater certainty over 
time than some of the alternatives.
    We take additional comfort from the fact that the Internal 
Revenue Code contains at least 2 dozen separate provisions that 
use a very similar standard, whether one of the principal 
purposes of a transaction is the avoidance of tax. Development 
of the law under these code sections may also help provide 
greater certainty regarding the rules proposed here today.
    Finally, our competent authority process provides an 
additional measure of comfort to U.S. businesses if these 
provisions, which are included in treaties intended to last for 
decades, are misused by our treaty partners. The long-lasting 
nature of our treaties effectively prevents us from relying on 
amendments to the treaties to eliminate abuses that will arise 
in the future.
    Moreover, relying on amendments to domestic law will invite 
charges that our treaties are being over-ridden, such as were 
made when section 894(c) was enacted.
    For these reasons, the treaties should contain their own 
mechanisms to combat abuse, such as the provision in the 
treaties before you today.
    Mr. Chairman, I would like to close by addressing Senator 
Dorgan's comments. I want to address Senator Dorgan's comments 
and clarify the Treasury position on these matters, as well as 
some of the developments to which he has referred.
    First of all, the NatWest case, to which he referred, 
actually represents a favorable trend in the law compared to 
the prior case that he was referring to, the NorthWest Life 
case.
    In the earlier case, there was a decision with which we 
disagreed at the Treasury Department that had some broad 
language that indicated that perhaps these sorts of formulas 
that we include in our legislation and regulations on occasion 
were inappropriate and improper under our treaties.
    We believe a close reading of the more recent precedent, 
the NatWest case, is narrower and would not lead to that 
conclusion, and we are encouraged by the narrower scope of that 
opinion.
    We would also note that both opinions relied on 
commentaries to the OECD model treaty. Those commentaries are 
not, as Senator Dorgan suggested--that interpretation of those 
commentaries is not something the Treasury Department supports. 
The Treasury Department is working in this international forum 
to modify those commentaries in an effort to achieve what we 
believe is a more appropriate result under our treaties.
    Finally, I would like to clarify that, in the Treasury 
Department's view, nothing in our treaties would prohibit the 
sort of formulas to which Senator Dorgan alluded. We do not 
favor that approach currently and do not intend to pursue it, 
but would like to make clear that, in our view, our treaties do 
not prohibit those approaches.
    In closing, Mr. Chairman, I would like to reiterate our 
recommendation for favorable action on these agreements. I 
respectfully request that my written statement be included in 
the record and I would be glad to answer any questions that you 
may have.
    [The prepared statement of Mr. West follows:]

                  Prepared Statement of Philip R. West

    Mr. Chairman and members of the Committee, I am pleased today to 
recommend, on behalf of the Administration, favorable action on eight 
bilateral tax treaties and protocols that the President has transmitted 
to the Senate and that are the subject of this hearing. These 
agreements would provide significant benefits to the United States, as 
well as to our treaty partners. Treasury appreciates the Committee's 
interest in these agreements as demonstrated by the scheduling of this 
hearing, and requests that the Committee and the Senate take prompt and 
favorable action on all of these agreements.
    The treaties and protocols before the Committee today represent a 
cross-section of the United States tax treaty program. There are new 
agreements with three of our oldest treaty partners--new income tax 
treaties with Denmark and Italy and a protocol to our estate tax treaty 
with Germany--and five agreements--with Estonia, Latvia, Lithuania, 
Slovenia and Venezuela--expand our treaty network in Latin America, 
Eastern Europe, and the former Yugoslavia.
    An active treaty program is important to the overall international 
economic policy of the United States, and tax treaties have a 
substantial positive impact on the after-tax profitability of United 
States businesses that enter a treaty partners marketplace. This is an 
obvious incentive to expand our treaty network to new treaty partners. 
However, it also requires us to update our existing treaties. When 
President Clinton took office, many important U.S. tax treaties were 
nearly half a century old. Since the beginning of 1993, we have 
replaced our tax treaties with Sweden, which dated from 1939, with The 
Netherlands, which dated from 1948, with Ireland, which dated from 
1949, and with Switzerland, which dated from 1951. The Denmark treaty, 
which you are considering today, will replace the oldest of our income 
tax treaties still in force, which was signed in 1948.
    For these reasons, negotiating new treaties and updating existing 
treaties take up a large amount of my staff's time. We believe, 
however, that the investment of our resources is worthwhile because of 
the benefits a modern treaty network brings both to taxpayers and to 
the government. I'd like to speak now about these benefits.
                         benefits to taxpayers
    An income tax treaty removes impediments to international trade and 
investment by reducing the threat of ``double taxation'' that can occur 
when both countries impose tax on the same income. Four different 
aspects of this general goal illustrate the point. First, an income tax 
treaty generally increases the extent to which exporters can engage in 
trading activity in the other country without triggering tax. Second, 
when taxpayers do engage in a sufficient amount of activity for tax to 
be imposed, the treaty establishes rules that assign to one country or 
the other the primary right of taxation with respect to an item of 
income, that help ensure the allowance of appropriate deductions and 
that reduce withholding tax on payments of income to the treaty 
beneficiary. Third, the treaty provides a dispute resolution mechanism 
to prevent double taxation that sometimes can arise in spite of the 
treaty. Finally, the treaty helps to create stability of tax rules that 
the private sector needs if its member are to be confident in their 
projections of an investment's return.
    Although the domestic tax legislation of the United States and 
other countries in many ways is intended to further the same general 
objectives as our treaty program, a treaty goes beyond what domestic 
legislation can achieve. Legislation cannot easily take into account 
differences among other countries' rules for the taxation of particular 
classes of income and how those rules interact with United States law. 
Legislation also cannot reflect variations in the United States' 
bilateral relations with our treaty partners. A treaty, on the other 
hand, can make useful distinctions, and alter in an appropriate manner 
the domestic statutory law of both countries as it applies to income 
flowing between the treaty partners. Examples in the treaties before 
you include reductions in statutory withholding tax rates and the 
creditability of the Italian tax known as the IRAP.
    One of the principal ways in which double taxation is eliminated is 
by assigning primary taxing jurisdiction in particular factual settings 
to one treaty partner or the other. In the absence of a treaty, a 
United States company operating a branch or division or providing 
services in another country might be subject to income tax in both 
countries on the income generated by such operations. The resulting 
double taxation can impose an oppressive financial burden on the 
operation and might well make it economically non-viable.
    For example, lesser developed countries frequently assert much 
broader taxing jurisdiction than the United States does. In the absence 
of a treaty, they might well tax a foreign corporation on income from 
business activities even if the activities conducted in the other 
country are relatively negligible or, in some cases, if the payor of 
the income is a resident of the developing country without regard to 
whether any activities take place within its territory. In many cases, 
the country will not allow the foreign corporation to deduct business 
expenses relating to such income. Finally, the foreign corporation may 
not be able to plan its activities in such a way as to avoid the tax 
because the rules that establish the taxation threshold under the 
country's domestic laws may not be clear. If the economic activities 
that give rise to the income take place in the United States, we would 
view the income as being from U.S. sources. In cases where a foreign 
corporation taxes income that we view as U.S.-source, the effect of the 
U.S. tax rules may be to deny a foreign tax credit in whole or in part 
(depending on the U.S. corporation's overall foreign tax credit 
situation).
    Tax treaties help to resolve these situations by establishing the 
minimum level of economic activity that a resident of one country must 
engage in within the other before the latter country may tax the 
resulting business profits. The tax treaty lays out ground rules 
providing that one country or the other, but not both, will have 
primary taxing jurisdiction over branch operations and individuals 
performing services in the other country. In general terms, the treaty 
provides that if the branch operations have sufficient substance and 
continuity and, accordingly, sufficient economic penetration, the 
country where the activities occur will have primary (but not 
exclusive) jurisdiction to tax. In other cases, where the operations 
are relatively minor, the home country retains the sole jurisdiction to 
tax.
    Under these treaty rules, United States manufacturers may test a 
market by establishing a foreign presence through which products are 
sold without subjecting themselves to foreign tax, including 
compliance, rules. Generally, if the market proves promising, the 
company will establish a more substantial operation which would become 
subject to tax in the other country. Similarly, United States residents 
generally may live and work abroad for short periods without becoming 
subject to the other country's taxing jurisdiction; if they stay 
longer, however, they would become subject to tax on the income derived 
in the other country or, ultimately, might even become subject to 
taxation as residents. These rules, the permanent establishment and 
business profits rules and analogous provisions for individuals, not 
only eliminate in many cases the difficult task of allocating income 
and tax between countries but also serve to encourage desirable trade 
activities by eliminating or reducing what can often be complex tax 
compliance requirements.
    High withholding taxes at source can be an impediment to 
international economic activity. Under United States domestic law, all 
payments to non-United States persons of dividends and royalties as 
well as certain payments of interest are subject to withholding tax 
equal to 30 percent of the gross amount paid. Inasmuch as this tax is 
imposed on a gross rather than net amount, it imposes a high cost on 
investors receiving such payments. Indeed, in many cases the cost of 
such taxes can be prohibitive as a 30 percent tax on gross income often 
can exceed 100 percent of the net income. Most of our trading partners 
impose similar levels of withholding tax on these types of income. Tax 
treaties alleviate this burden by reducing the levels of withholding 
tax that the treaty partners may impose on these types of income. In 
general, United States policy is to reduce the rate of withholding 
taxation on interest and royalties to zero. Dividends normally are 
subject to tax at one of two rates, 15 percent on portfolio investors 
and 5 percent on direct corporate investors. The extent to which we 
realize our policy of reducing withholding rates depends on a number of 
factors. Although generalizations often are difficult to make in the 
context of complex negotiations, it is fair to say that we are more 
successful in reducing these rates with countries that are relatively 
developed and where there are substantial reciprocal income flows. We 
also achieve lesser but still significant reductions with countries 
where the flows tend to be disproportionately in favor of the United 
States.
    The benefits of tax treaties are not limited to business profits 
earned by companies. Treaties remove tax impediments to desirable 
scientific, educational, cultural and athletic interchanges, 
facilitating our ability to benefit from the skills and talents of 
foreigners including world-renowned rock stars, symphony orchestras, 
astrophysicists and Olympic athletes. In fact, treaty benefits are not 
limited to profit-making enterprises but extend to pension plans, 
Social Security benefits, charitable organizations, researchers and 
alimony and child support recipients.
    The rules provided in the treaty frequently do not explicitly 
address every future development. This may be because the international 
community has not yet reached a consensus on the appropriate standard 
for taxation. For example, the international community may take some 
time to reach a consensus on the appropriate taxation standard with 
respect to the area of communications technology. This is an area in 
which international cooperation is vitally important. To address these 
issues, our proposed treaties with Estonia, Latvia and Lithuania, 
require the parties to consult within five years after the treaties 
enter into force concerning the taxation of income from new 
technologies. This period was chosen because of the possibility that an 
international standard might emerge within that time that both 
Contracting States would want to consider adopting. In fact, the 
Organization for Economic Cooperation and Development (``OECD''), 
recognized as the leading international forum to consider developments 
such as these, is considering these issues today. Until resolution is 
reached, the treaties with the Baltic countries provide that income of 
a resident of one country from transmission by satellite, cable, optic 
fiber and similar technologies will not be taxable in the other country 
unless the resident has a permanent establishment in the other country. 
We rejected an approach that would have taxed this income like a 
royalty, subject to withholding.
    Even with constant monitoring, there will be cases in which double 
taxation occurs in spite of the treaty. In such cases, the treaty 
provides mechanisms enabling the tax authorities of the two 
governments--known as the ``competent authorities'' in tax treaty 
parlance--to consult and reach an agreement under which the taxpayer's 
income is allocated between the two taxing jurisdictions on a 
consistent basis, thereby preventing the double taxation. The U.S. 
competent authority under our tax treaties is the Secretary of the 
Treasury. Currently, that function is delegated to the Assistant 
Commissioner (International) of the Internal Revenue Service.
    One of the most common situations in which this type of agreement 
may be necessary is in the area of ``transfer pricing.'' If a 
multinational manipulates the prices charged in transactions between 
its affiliates in different countries, the income reported for tax 
purposes in one country may be artificially depressed, and the tax 
administration of that country will collect less tax from the 
enterprise than it should. In theory, the multinational would plan its 
transactions to ensure that its income is reported in the jurisdiction 
with the lowest effective tax rate. It is this possibility that makes 
transfer pricing one of the most important international tax issues.
    If this potential tax avoidance (and the potential for double 
taxation) is to be avoided, it is necessary to have a benchmark by 
which to evaluate the prices charged. The benchmark adopted by the 
United States and all our major trading partners is the arm's-length 
standard. Under the arm's-length standard, the price charged should be 
the same as it would have been had the parties to the transaction been 
unrelated to one another--in other words, the same as if they had 
bargained at ``arm's-length.'' This requires an analysis of the 
functions performed, resources employed and risks assumed by each 
party, to make sure each party is adequately compensated for those 
functions, resources and risks in light of the contractual terms and 
other relevant economic circumstances of the transaction. If taxpayers 
and tax administrators can find similar transactions that took place 
between unrelated parties, they begin the inquiry by analyzing those 
transactions to see whether the functions, resources and risks of each 
party are comparable to those in the related party transaction.
    In more and more cases, it is difficult or impossible to find a 
uniquely comparable transaction. This may be because the transactions 
between related parties are highly specialized or involve unique 
intangibles, or, as in the case of certain kinds of global securities 
trading, the functions are so highly integrated that there is a single 
profit center and no transactions are ever booked between the separate 
entities. In those cases, it will not be possible to apply 
``traditional transactional methods.'' Instead, taxpayers and tax 
administrators will have to perform the functional analysis required by 
the arm's-length approach, but will use transactional profits methods, 
such as the comparable profits method or the profit-split method, in 
order to compensate the entities for the functions performed, resources 
employed and risks assumed. The Internal Revenue Service developed 
transactional profits methods in the 1980's because it saw that it 
would not always be possible to use traditional transactional methods. 
These methods, including the use of multi-factor formulas in 
appropriate cases, were found by the OECD to be an acceptable 
application of the arm's length standard, at least as a method of last 
resort, in the Transfer Pricing Guidelines issued in 1995 and its 
report on Global Trading of Financial Instruments in 1998. We have 
seen, and expect to continue to see, increasing acceptance of these 
profits-based approaches in the coming years, speeded by the increase 
in globally-integrated businesses that will become possible as a result 
of improvements in telecommunications technology.
    Perhaps because of globalization, there has also been an increased 
focus in recent years on the taxation of branches (known as ``permanent 
establishments''). Treaties use the same arm's length standard to 
determine the profits attributable to a permanent establishment. Many 
of the legal developments that have occurred in the context of the 
taxation of separate legal entities, however, have not yet been 
extrapolated to the branch situation. Because the commentaries to the 
relevant parts of the OECD model tax treaty have not yet been revised 
to reflect current thinking regarding profit splits, taxpayers have 
taken inconsistent approaches in the context of permanent 
establishments. One recent court case suggests that it is not possible 
to use profits-based methods in determining the business profits 
attributable to a permanent establishment, and that the tax 
administrator is required to respect the income shown on the books of 
the branch, except in ``exceptional circumstances,'' a much higher 
standard than applies when adjusting the income of separate legal 
entities. A more recent case would allow the administrators to adjust 
the branch books to reflect an arm's length result, but does not 
provide any guidance on how that is to be accomplished.
    We believe that an international consensus eventually will develop 
around the proposition that any of the methods that are acceptable for 
transfer pricing between related entities will also be acceptable in 
the context of allocating income between branches of a single entity. 
The United States has already adopted this approach in the context of 
global dealing of financial instruments, both in advance pricing 
agreements and by regulation, as has the OECD in its report on Global 
Trading in Financial Instruments. It has done so by sanctioning the use 
of multi-factor formulas to allocate income from global trading 
activity under one common trading model--the ``functionally fully-
integrated'' model.
                prevention of tax avoidance and evasion
    The foregoing aspects of our tax treaties involve benefits to 
taxpayers. While providing these benefits certainly is a major purpose 
of any tax treaty, it is not the only purpose. The second major 
objective of our income tax treaty program is to prevent tax avoidance 
and evasion and to ensure that treaty benefits flow only to the 
intended recipients. Tax treaties achieve this objective in several 
ways. They provide for exchange of information between the tax 
authorities. They contain provisions designed to ensure that treaty 
benefits are limited to bona fide residents of the other treaty country 
and not to ``treaty shoppers.'' And two of the treaties before you 
reflect one version of an anti-abuse rule that set limits on aggressive 
tax avoidance transactions using treaties.
    Under the tax treaties, the competent authorities are authorized to 
exchange information, including confidential taxpayer information, as 
may be necessary for the proper administration of the countries' tax 
laws. This aspect of our tax treaty program is one of the most 
important features of a tax treaty from the standpoint of the United 
States. The information that is exchanged may be used for a variety of 
purposes. For instance, the information may be used to identify 
unreported income or to investigate a transfer pricing case. In recent 
years information exchange has become a priority for the United States 
in its tax treaty program. If a country has bank secrecy rules that 
prevent or seriously inhibit the exchange of information under the tax 
treaty, we will not conclude a treaty with it. In fact, we generally do 
not even negotiate with such countries. Information exchange is one of 
the handful of issues that we discuss with the other country before 
beginning formal negotiations because it is one of a very few issues 
that we consider non-negotiable. This has, of course, prevented us from 
entering into treaties with some countries with which we have 
significant economic ties, but we believe that it is the right policy.
    Recent technological developments which facilitate international, 
and anonymous, communications and commercial and financial activities 
can also encourage illegal activities. Over the past several years we 
have experienced a marked and important sea change as many of the 
industrialized nations have recognized the increasing importance of tax 
information exchange; the absence thereof serves to encourage not only 
tax avoidance and evasion, but also criminal tax fraud, money 
laundering, illegal drug trafficking, and other criminal activity. 
Treasury is proud of the role it has played in moving these issues 
forward not only in our bilateral treaty negotiations but also in other 
fora such as the OECD.
    A second aspect of U.S. tax treaty policy to deal with avoidance 
and evasion is to include in all treaties comprehensive provisions 
designed to prevent ``treaty shopping.'' This abuse of the treaty can 
take a number of forms, but it generally involves a resident of a third 
state that has either no treaty with the United States or a relatively 
unfavorable one establishing an entity in a treaty partner that has a 
relatively favorable treaty with the United States. This entity is used 
to hold title to the person's United States investments, which could 
range from portfolio stock investments to major direct investments or 
other treaty-favored assets in the United States. By placing the 
investment in the treaty partner, the third-country person is able to 
withdraw the returns from the United States investment subject to the 
favorable rates provided in the tax treaty, rather than the higher 
rates that would be imposed if the person had invested directly into 
the United States. Of course, the tax imposed by the treaty partner on 
the intermediate entity must be relatively low, or the structure will 
not produce tax savings that justify the added transaction costs.
    This Committee and the Congress have expressed strong concerns 
about treaty shopping, and the Treasury Department shares those 
concerns. Our treaty program is designed to give benefits to residents 
and, if applicable, nationals of our treaty partner. Treaty shopping 
represents an abusive attempt to siphon benefits to others. Moreover, 
if treaty shopping is allowed to occur, then there is less incentive 
for the third country with which the United States has no treaty to 
negotiate a treaty with the United States. The third country can 
maintain inappropriate barriers to United States investment and trade, 
and yet its companies can obtain the benefits of lower U.S. tax by 
organizing their United States transactions so that they flow through a 
country with a favorable United States tax treaty.
    For these reasons, the United States has taken a leading role in 
developing anti-treaty-shopping provisions and encouraging other 
countries to adopt the provisions in their treaties. The Department of 
the Treasury has included in all its recent tax treaties comprehensive 
``limitation on benefits'' provisions that limit the benefits of the 
treaty to bona fide residents of the treaty partner. These provisions 
are not uniform, as each country has its own characteristics that make 
it more or less inviting to treaty shopping in particular ways. 
Consequently, each provision must to some extent be tailored to fit the 
facts and circumstances of the treaty partners' internal laws and 
practices. Moreover, the provisions need to strike a balance that 
avoids interfering with legitimate and desirable economic activity.
    As we have pursued our goal of updating our existing treaties to 
eliminate treaty-shopping abuses, however, we have seen an increasing 
number of other types of transactions that seek to use treaties to 
achieve inappropriate results. Therefore, we have decided to include in 
our treaties relatively modest anti-abuse rules in addition to the 
limitation on benefits provision. In the treaties before you, these 
rules are found only in the treaties with Italy and Slovenia, because 
the others were substantially negotiated before this change in our 
policy.
    As described above, anti-treaty shopping rules are now firmly 
entrenched in our treaty policy, in part as a result of concerns raised 
by the Committee. The anti-abuse rules before you are complementary to 
these anti-treaty shopping rules. Anti-treaty shopping rules take the 
broad approach of denying all treaty benefits to persons who are not 
bona fide residents of the treaty country. Anti-abuse rules such as 
those before you are more targeted in the sense that they are not 
blanket exclusions from all treaty benefits; they deny specific treaty 
benefits in abuse cases.
    These rules have been included in our treaties because of several 
concurrent developments in international tax law. First, although the 
overwhelming majority of taxpayers who avail themselves of treaty 
benefits are entitled to those benefits and are not engaged in abusive 
transactions, aggressive abuse of treaties has increased. As evidence 
of this trend one need only observe that Congress has twice in recent 
years taken the unusual step of legislating against treaty abuse. Most 
recently, Congress enacted section 894(c) to deny benefits to certain 
taxpayers that are not excluded from our treaties under limitation on 
benefits provisions. Congress also enacted section 7701(l), providing 
the Treasury with a broad grant of regulatory authority to curb treaty 
abuse. This authority has been exercised to adopt a standard very 
similar to that under consideration by you today, under which taxpayers 
have been operating for some years now, apparently without significant 
difficulty. (The commentary to Article 1 of the OECD model tax treaty 
and the OECD Report on Harmful Tax Competition make clear that 
countries can impose their domestic anti-abuse rules to claims for 
treaty benefits.)
    A second development contributed to the decision to include these 
rules in our treaties. We observed that Italy had just concluded a 
treaty containing a broader but more subjective anti-abuse rule. We 
then observed that virtually all of the other countries with which we 
were negotiating at the time either had treaty anti-abuse precedents 
generally consistent with the rule you have before you (the United 
Kingdom, Chile and Korea) or, in the case of Canada, had already 
included in its treaty with the United States an explicit recognition 
of the right to apply a similar anti-abuse rule that was in force under 
its domestic law. In addition, other countries such as Ireland and 
Mexico had agreed to a similar provision with each other and other 
countries such as Israel were consistently seeking even broader 
provisions. The rule has been included in more than 50 treaties, 
representing approximately 40 different countries (including 10 OECD 
members). In fact, concerns about the adequacy of current treaty rules 
to prevent abuses have stimulated work in the OECD on this subject. As 
one of the more common approaches to achieving such an objective, rules 
such as those before you today are obviously part of that work.
    The increase in treaty abuse has unfortunate results for both 
Treasury and our taxpayers: it requires Treasury to divert resources to 
fighting abuse that it might otherwise devote to improving our treaty 
network. The emergence internationally of anti-abuse rules such as 
those before you provides a win-win solution. They help address the 
abuse problem, while at the same time freeing up Treasury resources to 
provide greater benefits for U.S. taxpayers. As such, the question 
became not whether an anti-abuse rule was appropriate, but which anti-
abuse rule was appropriate. Treasury rejected a narrower anti-abuse 
rule because of its ineffectiveness. Treasury also rejected a broader 
more subjective anti-abuse rule for several reasons. First, it provided 
a less certain standard against which a taxpayer could meaningfully 
evaluate its transaction. Second, since the narrower rule before you 
appears in a significant number of treaties around the world, and 
promises to appear in more, it is more consistent with international 
norms and will likely be the subject of more interpretive law than the 
other standards.
    As such, the proposed rule should provide greater certainty over 
time than some of the alternatives. Nevertheless, we are aware of 
concerns that the proposed anti-abuse rules will provide uncertainty 
for taxpayers. The test incorporated in the rule does require taxpayers 
and their advisors to make some judgements. This standard creates no 
more uncertainty, however, than other U.S. tax doctrines that may also 
apply to the transaction under consideration, such as the business 
purpose and step transaction doctrines. And, as the commentary to the 
OECD model treaty makes clear, even if our treaties are silent 
regarding abuse, other countries may apply their own internal anti-
abuse doctrines to U.S. taxpayers' claims for treaty benefits, whether 
we have explicitly agreed to those standards or not.
    Our treaties are intended to last decades before re-negotiation. 
Therefore, relying on treaty amendments to eliminate abuses that arise 
in the future will invariably prove inadequate. Moreover, relying on 
amendments to domestic law will invite charges that the treaty is being 
overridden, as were made when section 894(c) was enacted. For these 
reasons, the treaties should contain their own mechanisms to combat 
abuse, such as the provisions in the treaties before you today. In this 
regard, it is important to keep in mind that our tax treaties contain 
only benefits for taxpayers, and no provisions that increase tax 
burdens. As such, it is appropriate to impose reasonable limits on 
those benefits to curb abusive transactions that may be developed in 
the future.
               treaty program and negotiation priorities
    Given all of these benefits to taxpayers and the government, an 
obvious question is why we do not have a tax treaty with every country. 
The answer is slightly different for each potential treaty partner, but 
there are some general themes. In establishing priorities, we keep in 
mind the two principal objectives of tax treaties--to prevent both 
double taxation and tax avoidance and evasion.
    The United States has a network of 50 bilateral income tax 
treaties, the first of which was negotiated in 1939. Although that 
number is somewhat lower than the number of treaties that some other 
countries have, it is important to note that the network includes all 
28 of our fellow members of the OECD and covers the vast majority of 
trade and investment by U.S. companies abroad. For the past decade, the 
Treasury Department has given priority to renegotiating older treaties 
to ensure that they reflect current United States treaty policy, 
particularly with respect to anti-abuse provisions and information 
exchange.
    As demonstrated by the mix of treaties being considered today, the 
progress we have made at updating old conventions has given us the 
opportunity to focus on expanding our treaty network. In this, our 
primary concern is to conclude treaties or protocols that are likely to 
provide the greatest benefits to United States taxpayers, such as when 
economic relations are hindered by substantial tax obstacles. We meet 
regularly with members of the U.S. business community regarding their 
priorities and the practical problems they face with respect to 
particular countries. We are proud of our efforts in the treaty area, 
and believe that our record of accomplishment here is as strong as that 
of any other administration in recent memory.
    Even when business identifies problems that could be resolved by 
treaty, however, a treaty may not be appropriate for a variety of 
reasons. Despite the protections of the limitation on benefits 
provisions and anti-abuse rules, there may be countries with which we 
choose not to have a tax treaty because of the possibility of abuse. 
Other countries may not present us with sufficient tax problems that 
are best resolved by treaty. For example, we generally do not conclude 
tax treaties with jurisdictions that do not impose significant income 
taxes, because there is little danger of double taxation of income in 
such a case. In such cases, particularly with Caribbean Basin 
countries, we have offered to enter into an agreement limited to the 
exchange of tax information, which furthers the goal of reducing tax 
avoidance and evasion without creating other opportunities for abuse.
    However, the situation can become more complex when a country 
adopts a special regime for certain parts of the economy while the rest 
of its residents are subject to substantial taxation. It might be 
considered inappropriate to grant treaty benefits to companies taking 
advantage of such regimes, while a treaty relationship might be useful 
and appropriate in order to avoid double taxation in the case of the 
residents who are subject to substantial taxation. Accordingly, in some 
cases we have devised treaties that carve out from the benefits of the 
treaties certain residents and activities. The anti-treaty shopping 
provisions in our treaty network prevent investors from enjoying the 
benefits of a tax-haven regime or preferential tax regime in their home 
country and, at the same time, the benefits of a treaty between the 
United States and another country. The recent OECD report on Harmful 
Tax Competition recommends that member countries adopt similar 
policies, and not enter into tax treaties with tax havens. The report 
also directed the group within the Committee on Fiscal Affairs that is 
responsible for the OECD Model treaty to consider various additions to 
the Model that are intended to prevent abuse of tax treaties.
    Prospective treaty partners also have to indicate that they 
understand their obligations under the treaty, including with respect 
to information exchange, and demonstrate that they are able to comply 
with those obligations. Sometimes they are unable to do so. In other 
cases we may feel that a treaty is inappropriate because a treaty 
partner may be unwilling to deal with the tax problems that have been 
identified by business. Lesser developed and newly emerging economies, 
where capital and trade flows are often disproportionate or virtually 
one-way, may not be willing to reduce withholding taxes to a level that 
will eliminate double taxation because they feel that they cannot give 
up scarce tax revenues. None of the new treaties that we have asked you 
to consider today are in that class. All are with countries that showed 
a willingness to reduce or eliminate withholding taxes or other 
impediments to investment.
    Most of the emerging economies with which we have had successful 
treaty discussions--including those whose treaties we present today--
have been active participants in the training and outreach programs run 
by the Treasury Department, the Internal Revenue Service and the OECD. 
These programs are a wise investment as they help to ensure that all 
parties understand the international norms that are represented by 
these agreements. We have every reason to believe that these programs 
will continue to increase the number of countries--particularly in 
Eastern Europe and Latin America--that are ready to enter into mutually 
advantageous treaties with us. In many cases, the existence of a treaty 
that lowers taxation of trade and investment will help to establish 
economic ties that will contribute to the country's stability and 
independence, as well as improve its political relationships with the 
United States.
    The primary constraint on the size of our treaty network, however, 
may be the complexity of the negotiations themselves. The various 
functions performed by tax treaties, and particularly the goal of 
meshing two different tax systems, makes the process of negotiation 
quite time-consuming.
    A nation's tax policy, as reflected in its domestic tax legislation 
as well as its tax treaty positions, reflects the sovereign choices 
made by that country in the exercise of one of its most important 
governmental functions, that of funding the government. Numerous 
features of the treaty partner's unique tax legislation and its 
interaction with United States legislation must be considered in 
negotiating an appropriate treaty. Examples include whether the country 
eliminates double taxation through an exemption or a credit system, 
whether the country has bank secrecy legislation that needs to be 
modified by treaty, the treatment of partnerships and other transparent 
entities, and how the country taxes contributions to pension funds, the 
funds themselves and distributions from the funds. A negotiated treaty 
needs to take into account all of these and many other aspects of the 
treaty partner's tax system in order to arrive at an acceptable treaty 
from the perspective of the United States. Accordingly, a simple side-
by-side comparison of two actual treaties, or of a proposed treaty 
against a model treaty, will not enable meaningful conclusions to be 
drawn as to whether a proposed treaty reflects an appropriate balancing 
of interests. In many cases the differences are of little substantive 
importance, reflecting language problems, cultural obstacles or other 
impediments to the use of particular U.S. or OECD language.
    In addition to keeping in mind that each treaty must be adapted to 
the individual facts and circumstances of each treaty partner, it also 
is important to remember that each treaty is the result of a negotiated 
bargain between two countries that often have conflicting objectives. 
Each country has certain issues that it considers non-negotiable. The 
United States, which insists on effective anti-abuse and exchange-of-
information provisions, and which must accommodate its uniquely complex 
internal laws, probably has more non-negotiable issues than most 
countries. For example, each of the full treaties before the Committee 
today allows the United States to impose our branch profits tax and 
branch-level interest tax at the rates applicable to direct dividends 
and interest, respectively, paid to related parties. All of them also 
reflect our new policy with respect to dividend distributions from real 
estate investment trusts, except for the treaties with Estonia, Latvia 
and Lithuania, which were fully negotiated before the change in policy. 
They also include the ``saving clause,'' which permits the United 
States to tax its citizens and residents as if the treaty had not come 
into effect, and allow the United States to apply its rules dealing 
with former citizens and long-term residents and with investments in 
U.S. real property interests.
    Obtaining the agreement of our treaty partners on these issues 
sometimes requires other concessions on our part. Similarly, other 
countries sometimes must make concessions to obtain our agreement on 
issues that are critical to them. Eventually, the process of give-and-
take produces a document that is the best treaty that is possible with 
that other country. In many cases, the process ends there, as the 
Administration decides that the treaty does not further the interests 
of the United States enough to justify the necessary compromises. These 
treaties never make it to this Committee. Accordingly, each treaty that 
we present here represents not only the best deal that we believe we 
can achieve with the particular country at this time, but also 
constitutes an agreement that we believe is in the best interests of 
the United States. The technical explanations which accompany our 
treaty, the discussions with the staffs of this Committee and its 
members, and the staffs of the tax-writing Committees, and most 
importantly, hearings such as this, will provide the Senate with the 
assurance that a particular treaty is, overall, in the best interests 
of the United States.
                  discussion of treaties and protocols
    Each of the treaties before you today reflects the basic principles 
of current United States treaty policy. The provisions in each treaty 
borrow heavily from recent treaties approved by the Senate and the U.S. 
model and are generally consistent with the 1992 OECD Model Income Tax 
Convention, as subsequently amended. The United States was and 
continues to be an active participant in the development of the OECD 
Model, and we are generally able to use most of its provisions as a 
basis for negotiations.
    The U.S. model was published in September 1996. A model treaty is a 
useful device if used properly and kept current. In the course of the 
negotiation of these treaties, we discovered that certain provisions of 
our model treaty could be improved upon, and we did so in these 
agreements. Many of these improvements have become part of the document 
that we use to begin negotiations and we expect that they will be 
reflected in a new version of the U.S. model that will be published in 
the future.
    There are no major inconsistencies between the U.S. and OECD 
models, but rather the U.S. model elaborates on issues in which the 
United States may have a greater interest or which result from 
particular aspects of United States law and policy. For example, our 
limitation of benefits provisions are generally not found in typical 
tax treaties of other OECD countries. We have also found it useful to 
expand on treaty coverage and treatment of pass-through entities such 
as our limited liability companies. Despite the importance we attach to 
the OECD model and our continuing efforts with our colleagues to 
improve it and keep it current, most countries cannot accede to all of 
the provisions of that model, nor do we expect that all of our 
prospective treaty partners will agree with all of the provisions of 
our model. The primary benefit of the U.S. Model is that it enables all 
interested parties, including this Committee and the Congress and its 
staffs, the American business community, and our prospective treaty 
partners, to know and understand our treaty positions. We do not 
anticipate that the United States will ever sign a tax convention 
identical to the model; there are too many variables.
    Nevertheless, there are some basic provisions that are found in all 
of the treaties. These include provisions designed to improve the 
administration both of the treaty and of the underlying tax systems, 
including rules concerning exchange of information, mutual 
administrative assistance, dispute resolution and nondiscrimination. 
Each treaty permits the General Accounting Office and the tax-writing 
committees of Congress to obtain access to certain tax information 
exchanged under treaty for use in their oversight of the administration 
of United States tax laws and treaties. Each treaty also contains a 
now-standard provision ensuring that tax discrimination disputes 
between the two nations generally will be resolved within the ambit of 
the tax treaty, and not under any other dispute resolution mechanisms, 
including the World Trade Organization (WTO).
    Finally, some treaties will have special provisions not found in 
other agreements. These provisions account for unique or unusual 
aspects of the treaty partner's internal laws or circumstances. For 
example, many well-known Danish multinational companies are owned in 
part by ``taxable non-stock corporations.'' If the treaty had not 
included special rules for taxable non-stock corporations, the 
multinationals might not have qualified for full treaty benefits, even 
though they clearly are not treaty-shopping. These rules had to be 
tailored to the Danish law and the specific manner in which the taxable 
non-stock corporations operate, without violating any of the basic 
principles underlying our limitation on benefits provisions. The 
flexibility we bring to the table should be regarded as a strength 
rather than a weakness of the tax treaty program, since it is these 
differences in the treaties which enable us to reach agreement and 
thereby reduce taxation at source, prevent double taxation and increase 
tax cooperation.
    I would like to discuss the importance and purposes of each 
agreement that you have been asked to consider. We have submitted 
Technical Explanations of each agreement that contain detailed 
discussions of each treaty and protocol. These Technical Explanations 
serve as an official guide to each agreement. We have furnished our 
treaty partners with a copy of the relevant technical explanation and 
offered them the opportunity to submit their comments and suggestions.
The Baltic Treaties--Estonia, Latvia and Lithuania
    I would now like to turn to the three treaties colloquially known 
as the ``Baltic Treaties.'' Since gaining independence from the Soviet 
Union at the beginning of this decade, the three Baltic States--
Estonia, Latvia and Lithuania--have actively pursued reforms aimed at 
economic stabilization and market strengthening. These reforms have 
placed Estonia in the first wave of Central and East European 
applicants to the European Union, while Latvia and Lithuania are 
currently under consideration by the EU for promotion to this first 
wave. Economic performance in all three countries over the past several 
years has been among the best in the region.
    Entering into these treaties is an important element in our current 
tax treaty program and is a high priority with the U.S. business 
community. Without the current treaty, U.S. businesses are at a 
competitive disadvantage in the Baltics, since many of their 
competitors are from countries that have concluded a tax treaty with 
them. Under the proposed Conventions, the Baltic States taxation of 
U.S. operations would decrease on direct investment dividends, 
copyright royalties (including software), royalties on the right to use 
equipment, and interest paid on loans guaranteed by the U.S. Export-
Import Bank. In addition, the proposed Convention would provide U.S. 
business a greater degree of certainty, protection against 
discriminatory tax practices and the ability to resolve potential 
double taxation cases and other disputes.
    Although these Conventions were largely negotiated at joint 
sessions, these are, of course, three separate treaties with three 
separate, sovereign nations. I will, therefore, deal with each of the 
three separately. In general, however, it should be noted that none of 
the three deviates substantially from any of our more recent treaties.
            Estonia
    Let me first deal with Estonia. The treaty does differ from other 
recent U.S. treaties in a number of respects. I will now highlight some 
of these differences as well as other important provisions of the 
treaty.
    First, in respect of the taxation of investment income. The 
withholding rates under the treaty are in some respects higher than 
those in the U.S. Model and in many recent U.S. treaties with OECD 
countries. The rates are the same as in many Estonian treaties. Under 
the treaty dividends are subject to taxation at source in the same 
manner as under the U.S. Model. Direct investment dividends are subject 
to withholding tax at source at a maximum 5 percent rate, and portfolio 
dividends are taxable at a maximum 15 percent rate. The treaty requires 
a 10 percent ownership threshold for application of the 5 percent tax 
rate.
    The treaty provides for a maximum 10 percent rate of tax at source 
on most interest payments. Interest earned on trade credits, and on 
government debt, including debt guaranteed by government agencies 
(e.g., the U.S. Export-Import Bank) is exempt from tax at source.
    Royalties for the use of industrial, commercial or scientific 
equipment are subject to a 5 percent tax at source. All other royalties 
(including payments for the use of software, other than off-the-shelf 
software) are taxed at a maximum rate of 10 percent.
    In relation to the taxation of business income, consistent with the 
U.S. and OECD Models, the treaty provides generally for the taxation by 
one State of the business profits of a resident of the other only when 
such profits are attributable to a permanent establishment located in 
that other State. The treaty, however, includes an anti-abuse rule that 
would allow the source state to tax sales or activities performed by 
the enterprise outside the United States as if they were performed by a 
permanent establishment if it is ascertained that such activities were 
structured with the intention to avoid taxation in the State where the 
permanent establishment is situated.
    The treaty, consistent with current U.S. treaty policy, provides 
for exclusive residence-country taxation of profits from international 
carriage by aircraft and ships. This reciprocal exemption also extends 
to income from the rental of aircraft, ships and containers if the 
rental activity is incidental to the operation of aircraft and ships by 
the lessor in international traffic. However, income from the 
international rental of ships and aircraft that is non-incidental to 
operation of ships and aircrafts is taxed at a 5 percent rate as a 
royalty paid for the rental of equipment.
    Income from the use or rental of containers that is non-incidental 
to the operation of ships or aircraft in international traffic is 
treated as other income. Therefore, non-incidental leasing of 
containers by U.S. businesses is taxable only in the United States.
    With regard to the taxation of personal services income, the 
taxation of income from the performance of personal services under the 
treaty is generally similar to that under the U.S. Model, but, like 
some U.S. treaties with developing countries, it grants a taxing right 
to the host country with respect to certain categories of personal 
services income that is somewhat broader than in the OECD or U.S. 
Model.
    The limitation on benefits provisions are similar to those found in 
the U.S. Model and in all recent U.S. treaties.
    The exchange of information provisions generally follow the U.S. 
Model and make clear that Estonia is obligated to provide U.S. tax 
officials such information as is necessary to carry out the provisions 
of the treaty.
    The treaty provides a U.S. foreign tax credit for the Estonian 
income taxes covered by the treaty, and a Estonian foreign tax credit 
for the U.S. income taxes covered by the treaty.
    The treaty will enter into force after each State has notified the 
other that it has completed its ratification requirements. It will have 
effect, with respect to taxes withheld at the source, for amounts paid 
or credited on or after the first day of January of the calendar year 
next following the year in which the treaty enters into force. In other 
cases the treaty will have effect with respect to taxable years 
beginning on or after the first day of January of the calendar year 
next following the year in which the treaty enters into force. The 
treaty will remain in force indefinitely unless terminated by one of 
the Contracting States. Either State will be able to terminate the 
treaty at the end of any calendar year by giving written notice at 
least six months before the end of that calendar year.
    Unique to the treaty and the treaties with Latvia and Lithuania is 
an agreement that there will be a five-year period within which the 
appropriate authorities of the two States will meet to discuss the 
application of the treaty to income derived from new technologies (such 
as payments received for transmission by satellite, cable, optic fibre 
or similar technology). The meeting may result in a protocol that 
specifically addresses the treaty's application to income from new 
technologies.
            Latvia
    Next I will turn to Latvia. This treaty also differs in some 
respects from other recent U.S. tax treaties. I will again highlight 
some of these differences as well as other important provisions of the 
treaty.
    In respect of the taxation of investment income, the withholding 
rates under the treaty are, again, in some respects higher than those 
in the U.S. Model and in many recent U.S. treaties with OECD countries. 
The proposed rates are the same as in many Latvian treaties.
    Under the treaty dividends are subject to taxation at source in the 
same manner as under the U.S. Model. Direct investment dividends are 
subject to withholding tax at source at a maximum 5 percent rate, and 
portfolio dividends are taxable at a maximum 15 percent rate. The 
treaty requires a 10 percent ownership threshold for application of the 
5 percent tax rate.
    The treaty provides for a maximum 10 percent rate of tax at source 
on most interest payments. Interest earned on trade credits, and on 
government debt, including debt guaranteed by government agencies 
(e.g., the U.S. Export-Import Bank) is exempt from tax at source.
    Royalties for the use of industrial, commercial or scientific 
equipment are subject to a 5 percent tax at source. All other royalties 
(including payments for the use of software, other than off-the-shelf 
software) are taxed at a maximum rate of 10 percent.
    In relation to the taxation of business income, consistent with the 
U.S. and OECD Models, the treaty provides generally for the taxation by 
one State of the business profits of a resident of the other only when 
such profits are attributable to a permanent establishment located in 
that other State. The treaty, however, includes an anti-abuse rule that 
would allow the source state to tax sales or activities performed by 
the enterprise outside the United States as if they were performed by a 
permanent establishment if it is ascertained that such activities were 
structured with the intention to avoid taxation in the State where the 
permanent establishment is situated.
    The treaty, consistent with current U.S. treaty policy, provides 
for exclusive residence-country taxation of profits from international 
carriage by aircraft and ships. This reciprocal exemption also extends 
to income from the rental of aircraft, ships and containers if the 
rental activity is incidental to the operation of aircraft and ships by 
the lessor in international traffic. However, income from the 
international rental of ships and aircraft that is non-incidental to 
operation of ships and aircrafts is taxed at a 5 percent rate as a 
royalty paid for the rental of equipment.
    Income from the use or rental of containers that is non-incidental 
to the operation of ships or aircraft in international traffic is 
treated as other income. Therefore, non-incidental leasing of 
containers by U.S. businesses is taxable only in the United States.
    With regard to the taxation of offshore activities, the treaty 
contains a reciprocal agreement, found in several U.S. treaties, 
particularly those with our North Sea partners, that the income from 
the exploration or exploitation of the seabed and sub-soil is taxable 
by the source State if the activities are carried on for more than 30 
days in any twelve month period. Wages, salaries and similar 
remuneration paid to those whose employment is derived from such 
activities can be taxed in the state where the offshore activities 
occur if such activities exceed the 30 day threshold. However, that 
same remuneration can be taxed only in the non-source State if the 
period of activity does not exceed 30 days and the employer is not a 
resident of the source State. If the wages, salaries or other 
remuneration are derived from the transportation of supplies or from 
other activities (such as tugboats) auxiliary to the exploration and 
exploitation then that remuneration can be taxed only in the country of 
which the employer is resident.
    The taxation of income from the performance of personal services 
under the treaty is generally similar to that under the U.S. Model, 
but, like some U.S. treaties with developing countries, it grants a 
taxing right to the host country with respect to certain categories of 
personal services income that is somewhat broader than in the OECD or 
U.S. Model.
    The limitation on benefits rules of the treaty are similar to those 
found in the U.S. Model and in all recent U.S. treaties.
    The exchange of information provisions generally follow the U.S. 
Model and make clear that Latvia is obligated to provide U.S. tax 
officials such information as is necessary to carry out the provisions 
of the treaty.
    The treaty provides a U.S. foreign tax credit for the Latvian 
income taxes covered by the treaty, and a Latvian foreign tax credit 
for the U.S. income taxes covered by the treaty.
    The treaty will enter into force after each State has notified the 
other that it has completed its ratification requirements. It will have 
effect, with respect to taxes withheld at the source, for amounts paid 
or credited on or after the first day of January of the calendar year 
next following the year in which the treaty enters into force. In other 
cases the treaty will have effect with respect to taxable years 
beginning on or after the first day of January of the calendar year 
next following the year in which the treaty enters into force.
    The treaty will remain in force indefinitely unless terminated by 
one of the Contracting States. Either State will be able to terminate 
the treaty at the end of any calendar year by giving written notice at 
least six months before the end of that calendar year.
    Unique to the treaty and the treaties with Estonia and Lithuania is 
an agreement that there will be a five-year period within which the 
appropriate authorities of the two States will meet to discuss the 
application of the treaty to income derived from new technologies (such 
as payments received for transmission by satellite, cable, optic fibre 
or similar technology). The meeting may result in a protocol that 
specifically addresses the treaty's application to income from new 
technologies.
            Lithuania
    Finally, let me turn to Lithuania. As with the other two Baltic 
treaties, this treaty differs in some respects from other recent U.S. 
tax treaties. I will again highlight some of these differences as well 
as other important provisions of the treaty.
    Once again, the withholding rates under the treaty are, in some 
respects higher than those in the U.S. Model and in many recent U.S. 
treaties with OECD countries. The proposed rates are the same as in 
many Lithuanian treaties.
    Under the treaty, dividends are subject to taxation at source in 
the same manner as under the U.S. Model. Direct investment dividends 
are subject to withholding tax at source at a maximum 5 percent rate, 
and portfolio dividends are taxable at a maximum 15 percent rate. The 
treaty requires a 10 percent ownership threshold for application of the 
5 percent tax rate.
    The treaty provides for a maximum 10 percent rate of tax at source 
on most interest payments. Interest earned on trade credits, and on 
government debt, including debt guaranteed by government agencies 
(e.g., the U.S. Export-Import Bank) is exempt from tax at source.
    Royalties for the use of industrial, commercial or scientific 
equipment are subject to a 5 percent tax at source. All other royalties 
(including payments for the use of software, other than off-the-shelf 
software) are taxed at a maximum rate of 10 percent.
    Consistent with the U.S. and OECD Models, the treaty provides 
generally for the taxation by one State of the business profits of a 
resident of the other only when such profits are attributable to a 
permanent establishment located in that other State. The treaty, 
however, includes an anti-abuse rule that would allow the source state 
to tax sales or activities performed by the enterprise outside the 
United States as if they were performed by a permanent establishment if 
it is ascertained that such activities were structured with the 
intention to avoid taxation in the State where the permanent 
establishment is situated.
    The treaty, consistent with current U.S. treaty policy, provides 
for exclusive residence-country taxation of profits from international 
carriage by aircraft and ships. This reciprocal exemption also extends 
to income from the rental of aircraft, ships and containers if the 
rental activity is incidental to the operation of aircraft and ships by 
the lessor in international traffic. However, income from the 
international rental of ships and aircraft that are non-incidental to 
operation of ships and aircrafts is taxed at a 5 percent rate as a 
royalty paid for the rental of equipment.
    Income from the use or rental of containers that is non-incidental 
to the operation of ships or aircraft in international traffic is 
treated as other income. Therefore, non-incidental leasing of 
containers by U.S. businesses is taxable only in the United States.
    The treaty contains a reciprocal agreement, found in several U.S. 
treaties, particularly those with our North Sea partners, that the 
income from the exploration or exploitation of the seabed and sub-soil 
is taxable by the source State if the activities are carried on for 
more than 30 days in any twelve month period. Wages, salaries and 
similar remuneration paid to those whose employment is derived from 
such activities can be taxed in the state where the offshore activities 
occur if such activities exceed the 30 day threshold. However, that 
same remuneration can be taxed only in the non-source State if the 
period of activity does not exceed 30 days and the employer is not a 
resident of the source State. If the wages, salaries or other 
remuneration are derived from the transportation of supplies or from 
other activities (such as tugboats) auxiliary to the exploration and 
exploitation then that remuneration can be taxed only in the country of 
which the employer is resident.
    The taxation of income from the performance of personal services 
under the treaty is generally similar to that under the U.S. Model, 
but, like some U.S. treaties with developing countries, it grants a 
taxing right to the host country with respect to certain categories of 
personal services income that is somewhat broader than in the OECD or 
U.S. Model.
    The limitation on benefits rules of the treaty are similar to those 
found in the U.S. Model and in all recent U.S. treaties.
    The information exchange provisions generally follow the U.S. Model 
and make clear that Lithuania is obligated to provide U.S. tax 
officials such information as is necessary to carry out the provisions 
of the treaty.
    The treaty provides a U.S. foreign tax credit for the Lithuanian 
income taxes covered by the treaty, and a Lithuanian foreign tax credit 
for the U.S. income taxes covered by the treaty.
    The treaty will enter into force after each State has notified the 
other that it has completed its ratification requirements. It will have 
effect, with respect to taxes withheld at the source, for amounts paid 
or credited on or after the first day of January of the calendar year 
next following the year in which the treaty enters into force. In other 
cases the treaty will have effect with respect to taxable years 
beginning on or after the first day of January of the calendar year 
next following the year in which the treaty enters into force.
    The treaty will remain in force indefinitely unless terminated by 
one of the Contracting States. Either State will be able to terminate 
the treaty at the end of any calendar year by giving written notice at 
least six months before the end of that calendar year.
    Unique to this treaty and the treaties with Estonia and Latvia is 
an agreement that there will be a five-year period within which the 
appropriate authorities of the two States will meet to discuss the 
application of the treaty to income derived from new technologies (such 
as payments received for transmission by satellite, cable, optic fibre 
or similar technology). The meeting may result in a protocol that 
specifically addresses the treaty's application to income from new 
technologies.
    This concludes my remarks on the three Baltic treaties.
            Venezuela
    Next, I would like to tell you about the proposed treaty with 
Venezuela. This treaty is of special importance because it represents a 
crucial step towards achieving our goal of expanding our tax treaty 
network in Latin America. If ratified, this agreement would be the 
United States' only tax treaty in force with a South American nation.
    The proposed treaty with Venezuela generally follows the pattern of 
the 1996 U.S. Model, while incorporating some provisions found in 
recent U.S. treaties with other developing countries and in the OECD 
Model. The treaty's rules on the taxation of investment income are an 
example. Although the withholding rates under the proposed treaty are 
generally higher than those in the U.S. Model, the rates are comparable 
to those found in other U.S. tax treaties with developing countries and 
those in other tax treaties of Venezuela. Also, the withholding rates 
reflect Venezuela's territorial system of taxation and the policy 
objective of establishing an adequate single level of tax on cross-
border investment income.
    Under the proposed treaty, as in the U.S. Model, direct investment 
dividends are taxable at source at a 5 percent rate, and portfolio 
dividends are taxable at source at a 15 percent rate. The proposed 
treaty requires a 10 percent ownership threshold for application of the 
5 percent direct investment tax rate. Also similar to the U.S. Model, 
dividends paid to a Contracting State or a governmental entity 
constituted and operated exclusively to administer or provide pension 
benefits, are exempt from withholding in the source State.
    The proposed treaty provides for a 10 percent rate of tax at source 
on most interest payments. Interest that is received by a financial 
institution (including an insurance company) is subject to a lower 4.95 
percent rate of tax. Interest earned on government debt, including debt 
guaranteed by government agencies (e.g., the U.S. Export-Import Bank, 
the Federal Reserve Banks and the Overseas Private Investment 
Corporation) is exempt from tax at source. These provisions are, in 
effect, a melding of the U.S. and OECD Models.
    Royalties for the right to use copyrights, patents or trademarks 
are subject to a 10 percent tax at source. Royalties for the right to 
use industrial, commercial or scientific equipment are subject to a 
lower 5 percent rate of tax at source. Under the proposed treaty, fees 
for the provision of technical services and fees for technical 
assistance are considered business profits or personal services income, 
and are taxed as such, rather than as royalty payments. These latter 
important provisions thereby mitigate double taxation and generally 
limit any taxation to net rather than gross income, and then only to 
when a permanent establishment is created.
    The taxation of capital gains under the proposed treaty follows the 
format of the U.S. Model. Gains and income 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 or income from 
the sale of personal property, if attributable to a fixed base or 
permanent establishment situated in a Contracting State, may be taxed 
in that State. All other gains, including gains from the sale of ships, 
aircraft and containers, and gains from the sale of stock in a 
corporation, are taxable only in the State of residence of the seller.
    Regarding the taxation of business income, as with the U.S. and 
OECD Models, the proposed treaty provides generally for the taxation by 
one State of the business profits of a resident of the other only when 
such profits are attributable to a permanent establishment located in 
that other State. Under the proposed treaty, the taxation of income 
from the operation of ships and aircraft in international traffic and 
from the use, maintenance or rental of containers used in international 
traffic is fully consistent with the U.S. Model.
    The taxation of income from the performance of personal services 
under the proposed treaty is similar to that under some U.S. treaties 
with developing countries, but grants a taxing right to the host 
country with respect to such income that is broader than in the OECD or 
U.S. Model.
    The limitation on benefits provisions of the proposed treaty are 
similar to those found in the U.S. Model and in all recent U.S. 
treaties, with minor modifications necessary because of Venezuela's 
territorial tax system.
    The information exchange provisions generally follow the U.S. Model 
and make clear that Venezuela is obligated to provide U.S. tax 
officials such information as is necessary to carry out the provisions 
of the treaty.
    The proposed treaty provides a U.S. foreign tax credit for 
Venezuelan income taxes subject to the limitations imposed by U.S. 
internal law on the granting of foreign tax credits. Similarly, 
Venezuela shall, under the proposed Convention, provide relief against 
double taxation to Venezuelan taxpayers who are also subject to U.S. 
income tax, subject to the limitations imposed by Venezuelan law.
    The proposed treaty will enter into force when each Contracting 
State has notified the other that the domestic requirements needed for 
entry into force have been completed. It will have effect, with respect 
to taxes withheld at source, for amounts paid or credited on or after 
January 1 of the year following the date on which the treaty enters 
into force. In other cases the treaty will have effect with respect to 
taxable periods beginning on or after January 1 of the year following 
the date on which the treaty enters into force.
    I know that the Committee has been alerted to a pending change in 
Venezuela's income tax law, through which Venezuela will begin taxing 
all of the income received by its residents, rather than only that 
income that was determined, under broad ``sourcing'' rules, to be 
connected to Venezuela. The possibility that Venezuela would adopt this 
``worldwide'' system was present throughout our treaty negotiations, 
and we planned for it in drafting the treaty. And while more time with 
the new law may provide us with more opportunity to analyze its 
provisions, we belIeve that the analysis we have performed is adequate 
to allow us to determine that the treaty is at least as appropriate 
under the new law as it would have been under the old law, and likely 
more so. We believe that the treaty works appropriately, in large part 
because this change from ``territorial'' to ``worldwide'' taxation 
brings Venezuela's domestic laws into closer conformity with 
international norms. The increased possibilities for double taxation 
that are the natural result of this change make the treaty that much 
more important than it was when Venezuela had a territorial system. And 
the vestiges of Venezuela's territorial system are also addressed by 
special provisions in the treaty included to deal with that system. On 
balance, we believe we can recommend that the Committee approve the 
treaty despite this change in Venezuela's law.
            Slovenia
    The United States does not currently have an income tax treaty with 
Slovenia. Slovenia will be the first country in the area of the former 
Yugoslavia with which we will have concluded a tax treaty. It is the 
most economically advanced country in the former Yugoslavia and is in 
the first wave of applicants to the European Union from Central and 
Eastern Europe. We expect that the conclusion of the tax treaty will be 
an important element in expanding trade and investment between the 
United States and Slovenia.
    The proposed income tax treaty with the Republic of Slovenia 
generally follows the pattern of the U.S. Model, while incorporating 
some provisions found in the OECD Model. The proposed treaty 
establishes maximum rates of source country tax on cross-border 
payments of dividends, interest, and royalties. The withholding rates 
on investment income in the proposed treaty are generally consistent 
with those found in U.S. treaties with OECD member countries.
    Dividends may be subject to tax at source at a maximum rate of 15 
percent, except when paid to a corporation in the other country that 
owns at least 25 percent of the paying corporation, in which case the 
maximum rate is 5 percent.
    The maximum rate of withholding tax at source on interest under the 
proposed treaty is 5 percent. However, interest received, guaranteed, 
or insured by the Government of either Contracting State or the central 
bank of either Contracting State and interest with respect to a 
deferred payment for personal property or services is exempt from 
withholding at source.
    Royalties are generally subject to tax at source at a rate not to 
exceed 5 percent.
    The taxation of capital gains under the proposed treaty follows the 
format of the U.S. Model. Gains and income derived from the sale of 
real property and from real property interests may be taxed in the 
State in which the property is located. Likewise, gains or income from 
the sale of personal property, if attributable to a fixed base or 
permanent establishment situated in a Contracting State, may be taxed 
in that State. All other gains, including gains from the sale of ships, 
aircraft and containers, and stock in a corporation, are taxable only 
in the State of residence of the seller.
    As with the U.S. and OECD Models, the proposed treaty provides 
generally for the taxation by one State of the business profits of a 
resident of the other only when such profits are attributable to a 
permanent establishment located in that other State. Under the proposed 
treaty, the taxation of income from the operation of ships and aircraft 
in international traffic and from the use, maintenance or rental of 
containers used in international traffic is fully consistent with the 
U.S. Model.
    The taxation of income from the performance of personal services 
under the proposed treaty generally follows standard U.S. treaty 
policy. The taxation of income from dependent personal services or of 
income derived by corporate directors, by athletes, or by entertainers 
is essentially the same as in other recent U.S. treaties. The dollar 
threshold for the taxation of athletes and entertainers is slightly 
lower than in the U.S. Model to reflect the lower average income level 
in Slovenia.
    The treaty provides for host-country exemption for students for up 
to five years with respect to certain types of income. These exempted 
categories of income include support payments from abroad, grants and 
awards, and up to $5,000 of annual income from personal services in the 
host state. Business trainees temporarily present in the host State are 
exempted from tax for up to 12 months with respect to income from 
personal services not exceeding $8,000. Visiting professors and 
researchers at recognized educational or research institutions are 
exempt from host-country taxation for a period not exceeding two years 
from the date of first arrival.
    The proposed treaty contains comprehensive rules in its 
``Limitation on Benefits'' article, designed to deny ``treaty-
shoppers'' the benefits of the treaty. In addition, the treaty contains 
new provisions aimed at preventing abuse with respect to specific 
transactions. Under these provisions, a person otherwise entitled to 
treaty benefits will be denied those benefits 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. These 
provisions apply with respect to the Articles regarding Dividends, 
Interest, Royalties, and Other Income. It is expected that the United 
States will incorporate these new anti-abuse provisions into its Model.
    The information exchange provisions generally follow the U.S. Model 
and make clear that each State is obligated to provide tax officials of 
the other State such information as is necessary to carry out the 
provisions of the treaty. Slovenia has confirmed to us that it has no 
bank secrecy or other rules that would prevent such exchange from 
taking place.
    The proposed treaty provides a U.S. foreign tax credit for 
Slovenian income taxes subject to the limitations imposed by U.S. 
internal law on the granting of foreign tax credits. Similarly, 
Slovenia shall, under the proposed treaty, provide relief against 
double taxation to Slovenian taxpayers who are also subject to U.S. 
income tax, subject to the limitations imposed by Slovenian law.
    Also included in the proposed treaty are rules necessary for 
administering the treaty, including rules for the resolution of 
disputes under the treaty.
    The proposed treaty will enter into force upon the exchange of 
instruments of ratification. It will have effect with respect to taxes 
withheld at source for payments made or credited on or after the first 
day of the third month next following the date the treaty enters into 
force, 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.
            Denmark
    I'd like to turn now to the proposed treaty and protocol with 
Denmark. This proposed treaty would replace the existing convention, 
our oldest income tax treaty, which was signed in 1948. The new treaty 
generally follows the pattern of the OECD Model and of recent U.S. 
treaties with other developed countries.
    First, with regard to the taxation of investment income, the 
withholding tax rates under the proposed treaty are the same as those 
in the U.S. Model. Direct investment dividends are subject to 
withholding tax at source at a maximum 5 percent rate and portfolio 
dividends are taxable at a maximum 15 percent rate. The proposed treaty 
requires a 10 percent ownership threshold for application of the 5 
percent tax rate. This ownership threshold is reduced from the 95 
percent threshold required under the existing treaty. As under the 
existing treaty, interest and royalty payments are generally exempt 
from tax in the source country under the proposed treaty. These 
limitations on taxation by the source country do not apply if the 
beneficial owner of the income is a resident of a Contracting State 
that 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, to a fixed base in that other State.
    The taxation of capital gains under the proposed treaty generally 
follows the format of the U.S. Model. Gains 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 forming part of a fixed base or 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 corporate stock are taxable only in the seller's 
residence State. As a variation from the rules under the current treaty 
and the U.S. Model, gains of an enterprise of one Contracting State 
from the deemed alienation of an installation, drilling rig or ship 
used in the other State for the exploration or exploitation of oil and 
gas resources may be taxed in that other State in accordance with its 
law, but only to the extent of any depreciation taken in that other 
State. In order to minimize possible double taxation that could 
otherwise arise, the treaty allows adjustments to the timing of the 
taxation of capital gains.
    As with the existing treaty, recent U.S. treaties and the OECD 
Model, the proposed treaty provides generally for the taxation by one 
State of the business profits of a resident of the other only when such 
profits are attributable to a permanent establishment located in that 
other State.
    In addition, the proposed treaty preserves the U.S. right to impose 
its branch tax on U.S. branches of Danish corporations. This tax is not 
imposed under the existing treaty.
    Consistent with the U.S. Model, the proposed treaty 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 extends to income from the rental on a full basis of ships 
and aircraft and, if the ships or aircraft are operated in 
international traffic by the lessee or the income is incidental to 
income from the operation of ships or aircraft in international 
traffic, to income from the rental on a bareboat basis of ships and 
aircraft. The exemption under the proposed treaty is broader in scope 
than under the existing treaty.
    The proposed treaty clarifies the treatment of the profits of the 
Scandinavian Airlines System (SAS) by treating it as a consortium that 
is eligible for the exemption from taxation in the source State to the 
extent of the participation of the Danish member of SAS, SAS Danmark A/
S.
    The taxation of income from the performance of personal services 
under the proposed treaty generally follows U.S. standard treaty 
policy. The rules for the taxation of pension income vary from the 
rules found in the existing treaty and the U.S. Model by providing for 
taxation only in the source State, subject to an exception for persons 
currently receiving pensions, who will continue to be taxed only in the 
country of residence.
    The limitation on benefits provisions of the proposed treaty are 
similar to those found in the U.S. Model and recent U.S. treaties, with 
modifications to take account of certain types of entities found only 
in Denmark.
    The proposed treaty provides a foreign tax credit for certain taxes 
imposed under the Danish Hydrocarbon Tax Act, subject to the same type 
of limitation that is found in other tax treaties with countries on the 
North Sea.
    Also included in the proposed treaty are the rules necessary for 
administering the treaty, including rules for the resolution of 
disputes under the treaty and the exchange of information. The exchange 
of information provisions of the proposed treaty generally follow the 
U.S. Model. Our experience on exchange of information with Denmark is 
positive. As under the existing treaty, the proposed treaty contains a 
provision for assistance in the collection of taxes.
    The proposed treaty will enter into force when the Governments 
notify each other that their requirements for entry into force have 
been met. It will 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 on which the treaty enters into 
force; with respect to other taxes, the treaty will take effect for 
taxable periods beginning on or after the first day of January next 
following the date on which the treaty enters into force. Where the 
existing treaty would have provided greater relief from tax than the 
proposed treaty, the existing treaty will continue to have affect for 
an additional year at the election of any person that was entitled to 
benefits under the current treaty. The proposed treaty will remain in 
force indefinitely unless terminated by one of the Contracting States 
by giving prior notice through diplomatic channels.
            Italy
    The proposed new treaty and protocol with Italy would replace the 
existing treaty, which was signed in 1984. The proposed treaty 
generally follows the pattern of the OECD Model and other recent United 
States treaties with developed countries. The proposed treaty is of 
great importance to the U.S. business community because it addresses a 
new Italian regional tax on productive activities and generally lowers 
the withholding rates imposed by each country on passive investment 
income.
    The proposed treaty addresses the replacement of the Italian local 
income tax by the new Italian regional tax on productive activities 
(IRAP). Because IRAP is calculated without an allowance for labor costs 
and, for certain taxpayers, without an allowance for interest costs, it 
raises the issue of potential double taxation. By providing a U.S. tax 
credit for a portion of IRAP, the proposed treaty resolves this issue. 
A formula is provided in the proposed treaty for calculating the 
creditable portion. Only the creditable portion of IRAP is considered 
to be a covered tax under the proposed treaty.
    The proposed treaty establishes maximum rates of source country tax 
on cross-border payments of dividends, interest, and royalties that are 
generally lower than those in the existing treaty.
    Under the proposed treaty, dividends may be subject to tax at 
source at a maximum rate of 15 percent, except when paid to a 
corporation in the other country that owns at least 25 percent of the 
paying corporation, in which case the maximum rate is 5 percent. Under 
the existing treaty, the 5 percent rate is available only if the 
receiving corporation owns more than 50 percent of the stock or capital 
of the paying corporation, while a 10 percent rate applies if the 
receiving corporation owns between 10 and 50 percent of the paying 
corporation, and a 15 percent maximum rate applies in all other cases. 
While the maximum rate applicable to those corporate taxpayers owning 
at least 10 percent and less than 25 percent of the paying corporation 
will increase from 10 percent to 15 percent under the proposed treaty, 
the maximum rate for those owning between 25 percent and 50 percent of 
the paying corporation, including the significant group of taxpayers 
who own exactly 50 percent, will decrease from 10 percent to 5 percent.
    The proposed treaty lowers the maximum rate of withholding tax at 
source on interest to 10 percent from the 15 percent rate in the 
existing treaty. As in the existing treaty, the proposed treaty 
provides an exemption from withholding at source for interest received, 
guaranteed, or insured by the Government of either Contracting State 
(although, in order for interest received by a qualified governmental 
entity to be eligible for this exemption, the qualified governmental 
entity must hold less than 25 percent of the capital of the person 
paying the interest). The proposed treaty also exempts from withholding 
at source interest with respect to credit sales between enterprises and 
credit sales of industrial, commercial, or scientific equipment.
    The proposed treaty lowers the maximum rates of withholding tax at 
source for royalty payments compared to the rates in the existing 
treaty. Under the proposed treaty, royalties for literary copyrights 
are exempt from tax at source. The maximum rate for royalties for the 
use of computer software or for the rental of industrial, commercial, 
or scientific equipment is 5 percent, and the maximum rate for all 
other royalties is 8 percent. In contrast, under the existing treaty 
the maximum rate for royalties for literary copyrights is 5 percent, 
the maximum rate for royalties for the rental of tangible personal 
property is 7 percent, the maximum rate for royalties for motion 
pictures and films is 8 percent, and the maximum rate for all other 
royalties is 10 percent. Thus, although the proposed treaty does not 
reflect the U.S. Model position of exemption at source for software and 
rentals of tangible personal property, the proposed treaty reduces the 
rates of withholding as compared to the existing treaty.
    The taxation of capital gains under the proposed treaty follows the 
format of the existing treaty. Gains and income derived from the sale 
of real property and from real property interests may be taxed in the 
State in which the property is located. Likewise, gains or income from 
the sale of personal property, if attributable to a fixed base or 
permanent establishment situated in a Contracting State, may be taxed 
in that State. As in the existing treaty, but unlike the U.S. Model, 
non-incidental gains from the alienation of ships and aircraft rented 
on a bareboat basis and attributable to a permanent establishment 
situated in a Contracting State may be taxed in that State. All other 
gains, including gains from the alienation of containers, gains from 
the alienation of ships and aircraft rented on a full basis, incidental 
gains from the alienation of ships and aircraft rented on a bareboat 
basis, and gains from the sale of stock in a corporation, are taxable 
only in the State of residence of the seller.
    As with the U.S. and OECD Models, the proposed treaty provides 
generally for the taxation by one State of the business profits of a 
resident of the other only when such profits are attributable to a 
permanent establishment located in that other State.
    As under the U.S. Model, all income from the use, maintenance or 
rental of containers used in international traffic is exempt from 
source-country taxation under the proposed treaty. Also, the proposed 
treaty provides for exclusive residence-country taxation of profits 
from the international operation of ships or aircraft, including the 
rental of ships and aircraft on a full basis and, when the rental is 
incidental to the operation of ships or aircraft by the lessor, rentals 
of ships and aircraft on a bareboat basis. Like the existing treaty, 
but unlike the U.S. Model, 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.
    Unlike the existing treaty, the taxation of income from the 
performance of personal services under the proposed treaty generally 
follows standard U.S. treaty policy. Consistent with the U.S. Model, 
the proposed treaty eliminates a provision of the existing treaty that 
allows the source State to tax an individual performing independent 
personal services if that individual has been present in that State for 
more than 183 days during the year, even if that person does not have a 
fixed base regularly available to him.
    The limitation on benefits provisions of the proposed treaty are 
similar to those found in the U.S. Model and in all recent U.S. 
treaties, and are more comprehensive than those found in the existing 
treaty.
    In addition, the treaty contains new provisions aimed at preventing 
abuse with respect to specific transactions. Under these provisions, a 
person otherwise entitled to treaty benefits will be denied those 
benefits 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. These provisions apply with respect to 
the Articles regarding Dividends, Interest, Royalties, and Other 
Income. It is expected that the United States will incorporate these 
new anti-abuse provisions into its Model.
    The information exchange provisions are similar to those in the 
existing treaty and make clear that each State is obligated to provide 
tax officials of the other State such information as is necessary to 
carry out the provisions of the treaty. Italy has confirmed to us that 
it has no bank secrecy or other rules that would prevent such exchange 
from taking place.
    Finally, the proposed treaty includes modernized rules necessary 
for administering the treaty, including rules for the resolution of 
disputes under the treaty. These provisions now conform to the OECD 
Model, which should improve the functioning of the mutual agreement 
process. They include the use of arbitration to resolve disputes that 
may arise between the Contracting States. However, the arbitration 
process may be implemented under the treaty only after the two 
Contracting State have agreed to do so through an exchange of 
diplomatic notes. Once implemented, a particular case may be assigned 
to an arbitration panel only with the consent of all the parties to the 
case.
    The proposed treaty will enter into force upon the exchange of 
instruments of ratification. It will have effect with respect to taxes 
withheld at source for payments made or credited on or after the first 
day of the second month next following the date the treaty enters into 
force, 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. In the event that a person would have been entitled to greater 
relief under the existing treaty, that person may elect to continue to 
apply the existing treaty for a twelve-month period from the date on 
which the proposed treaty would otherwise have effect. The proposed 
treaty will remain in force indefinitely unless terminated by one of 
the Contracting States. Either State may terminate the proposed treaty 
at any time after 5 years from the date on which the proposed treaty 
enters into force by giving at least six months prior notice through 
diplomatic channels.
            Estate Tax Protocol with Germany
    The proposed protocol amends the estate, inheritance and gift tax 
treaty between the United States and Germany, which was signed in 1980 
and entered into force in 1986. In 1988, the United States amended its 
estate tax law in a way that increased estate taxes in the case of 
deceased U.S. citizens who were married to non-citizens.
    Although the U.S. rejected claims by estate tax treaty partners 
that the 1988 change violated treaty nondiscrimination clauses, we 
indicated our willingness to amend our estate tax treaties with certain 
treaty partners to provide relief to surviving noncitizen spouses in 
appropriate cases. In particular, the proposed protocol eases the 
impact of the 1988 provisions upon certain estates of limited value. 
The United States, in a 1995 protocol to the U.S.-Canada income tax 
treaty, provided similar relief to certain estates of limited value 
involving Canadians. The United States' willingness to enter into the 
proposed protocol was a significant factor in Germany's ratification of 
the current U.S.-Germany income tax treaty, which was signed in 1989.
    The proposed protocol also provides a pro rata unified credit to 
the estate of a German domiciliary for purposes of computing the U.S. 
estate tax. Under this provision, a German domiciliary is allowed a 
credit against U.S. estate tax ranging from the amount ordinarily 
allowed to the estate of a nonresident under the Code ($13,000) to the 
amount of credit allowed to the estate of a U.S. citizen under the Code 
($202,050 in 1998), based on the extent to which the assets of the 
estate are situated in the United States. Congress anticipated the 
negotiation of such pro rata unified credits in Internal Revenue Code 
section 2102(c)(3)(A), and a similar credit was included in the 1995 
U.S.-Canada income tax protocol.
    The proposed protocol also makes other changes to the Convention to 
reflect more closely current U.S. treaty policy. For example, the 
proposed protocol extends the period of time during which a citizen of 
one country can be domiciled in the other country without becoming 
subject to the primary taxing jurisdiction of the other country. Such a 
provision is increasingly important to peripatetic business executives. 
The proposed protocol also extends the United States' ability to tax 
former citizens and long-term residents to conform with 1996 
legislative changes to the Internal Revenue Code.
        agreements dealing with taxation of dividends from reits
    In 1997, the Senate approved three treaties, with Austria, Ireland 
and Switzerland, subject to the understanding that the Treasury 
Department would use its best efforts to negotiate agreements that 
would modify those treaties' treatment of dividends paid by Real Estate 
Investment Trusts. The agreements with Austria and Switzerland are in 
an advanced stage of negotiation, but have not yet been completed. 
However, the agreement with Ireland was signed on September 24, 1999. 
Although it is not yet pending before the Committee, we hope that, if 
the President transmits it to the Senate in time, the Committee will 
consider it at the same time as the rest of the treaties as the 
agreement does nothing other than respond to the Senate's 1997 
understanding.
                       treaties under negotiation
    We continue to maintain an active calendar of tax treaty 
negotiations. We are in active negotiations with Canada, Korea, the 
United Kingdom and Chile. We expect to announce the start of 
negotiations with several other countries soon. In accordance with the 
treaty program priorities noted earlier, we continue to seek 
appropriate opportunities for tax treaty discussions and negotiations 
with several countries in Latin America and in the developing world 
generally.
                               conclusion
    Let me conclude by again thanking the Committee for its continuing 
interest in the tax treaty program, and for devoting the time of 
Members and staff to undertake a meaningful review of the agreements 
that are pending before you. We appreciate your efforts this year and 
in past years to bring the treaties before this Committee and then to 
the full Senate for its advice and consent to ratification. We also 
appreciate the assistance and cooperation of the staffs of this 
Committee and of the Joint Committee on Taxation in the tax treaty 
process. With your and their help, we have, since the beginning of 
1993, brought into force 22 new treaties and protocols, not counting 
the eight agreements presently being considered.
    We urge the Committee to take prompt and favorable action on all of 
the Conventions and Protocols before you today. Such action will send 
an important message to our trading partners and our business 
community. It will demonstrate our desire to expand the United States 
treaty network with income tax treaties formulated to enhance the 
worldwide competitiveness of United States companies. It will 
strengthen and expand our economic relations with countries that have 
seen significant economic and political changes in recent years. It 
will make clear our intention to deal bilaterally in a forceful and 
realistic way with treaty abuse. Finally, it will enable us to improve 
the administration of our tax laws both domestically and 
internationally.
    I will be glad to answer any questions you might have.

    Senator Hagel. Mr. West, thank you.
    Ms. Paull.

STATEMENT OF LINDY L. PAULL, CHIEF OF STAFF, JOINT COMMITTEE ON 
                            TAXATION

    Ms. Paull. Thank you, Mr. Chairman. It is a pleasure to be 
here.
    Our staff has worked closely with the staff of this 
committee over the years on tax treaties, and we appreciate the 
opportunity to testify today before you.
    I, too, have submitted written testimony for the record and 
I would just like to highlight some of the issues that we have 
raised for which there is a lot more detail in our pamphlets 
with respect to the eight treaties and protocol that are before 
you today.
    With respect to the Baltic countries--Estonia, Latvia, and 
Lithuania--the proposed treaties are consistent with our 
treaties with developing countries. I would just highlight one 
issue which is that these treaties do not reduce withholding 
taxes on real estate investment trust dividends, which is 
contrary to a policy that was instituted in 1997.
    With respect to the Denmark proposed treaty, this is a 
major update of a 1948 treaty. Again, the proposed treaty is 
generally consistent with the U.S. model treaty. I would 
mention one issue here that Mr. West touched on and that is 
that the treaty provides, as is present with a few other 
treaties we have with North Sea countries, that a foreign tax 
credit may be claimed under the U.S. law for the Danish 
hydrocarbon tax. Also, there is a limitation that is placed on 
it which is consistent with at least one other treaty.
    With respect to the new protocol, the proposed protocol for 
Germany, that modifies a 1980 treaty dealing with estate, gift, 
and inheritance taxes. We are not aware of any particular 
problems. We would just kind of note that this is somewhat of a 
small modification, important to German residents. They are 
principally directed at easing U.S. taxes on German heirs.
    Again, we are unaware of any major issues involved in that 
protocol.
    With respect to the proposed treaty with the Italian 
Republic, this is, again, an update of a treaty, an existing 
treaty, that was in force since 1984. I would call to your 
attention four items in that treaty.
    The first item would be that there is a tax in that this 
proposed treaty would allow a portion of the so-called IRAP 
tax, the Italian Regional Tax on Productive Activities, to be 
eligible for a U.S. foreign tax credit. It is a little bit of 
an unusual provision in the sense that there is a hypothetical 
computation that is made to try to replicate or turn this tax 
into a proxy for an income tax. I think this is an unusual 
provision.
    However, because there is some history here that the IRAP 
tax replaces a previously creditable tax under the existing 
treaty and the Treasury Department worked closely with Congress 
on this, we think it is an appropriate provision.
    The proposed treaty also provides a limited exception for 
Italian insurance companies who are insuring U.S. risks. This 
has to do with, basically, a limited exception from the U.S. 
excise taxes on insurance premiums and reinsurance premiums.
    It is our understanding--and I don't think the prior 
testimony covered this--that there have been assurances that 
there is appropriate Italian tax being collected on any of that 
type of income that would be generated from U.S. risks.
    The proposed treaty also omits the U.S. model treaty 
language addressing bank secrecy laws. It is our understanding 
that there has been an exchange of letters on this subject so 
that there would be adequate exchange of information under the 
treaties between the two countries.
    Finally, the fourth item is the major item, which Mr. West 
discussed in his testimony. This is the new main purpose test, 
so to speak, that exists in the articles dealing with 
dividends, interest, royalty and other incomes, which reduces 
withholding rates on those items. The main purpose test would 
operate to deny the benefits of the treaty provisions, those 
articles, in the case of somebody who has created or assigned 
shares, debt claims rights, various things depending on the 
type of income that is generated.
    I highlight this for the committee because this is a new 
policy for the United States. It was not something of which I 
think the staff who worked on this diligently throughout the 
years with the Treasury Department was aware, that there was 
going to be this new policy in these two recent treaties for 
which the negotiations were just finished.
    The Treasury's testimony today indicates that this new 
policy would be included, possibly in a revision to the U.S. 
model treaty in the near future.
    I would note that there is a little, I guess, anxiety on 
the part of the staffs who work on treaties diligently with the 
Treasury Department to say that there was no consultation with 
respect to this change. Also, this change is very vague. It is 
very unclear what this means, we would have to note to the 
committee, especially the language that talks about one of the 
main purposes.
    One of the concerns certainly that we would have is that 
treaties are supposed to provide certainty and to facilitate 
investment between the two countries. I think our concern is 
that this will add quite a bit of uncertainty to investments 
between the two countries.
    Let me just give a simple example of what I mean. For 
example, a company is looking to make an investment in a region 
and, when looking at that region, may want to make that 
investment in a country that, if all things are equal, has a 
treaty with the United States. So, yes, one of the main 
purposes of making that investment in that country might be to 
make sure that they get some of the treaty benefits which would 
be a lower withholding rate on their interests, dividends, or 
royalties generated by that investment.
    What happens to that transaction under this language? We 
don't know the answer to that. But it seems like a fairly 
common transaction and it seems like something that the 
committee ought to be concerned about when you are trying to 
have a free flow of investment between two countries.
    I think we have other concerns about this particular 
language because it is inserted in some parts of the treaty and 
not throughout the treaty. What does that mean in terms of 
anti-abuse, the so-called anti-abuse provision? What does that 
mean for the rest of the treaties?
    Often courts will look to one provision and say well, you 
knew how to negotiate over an anti-abuse rule in that area, so 
you must not have been concerned or nothing applies there. We 
have a question as to what is the inference as to our domestic 
laws.
    Mr. West indicated we have a lot of domestic laws 
specifically targeting transactions that could be abusive. What 
is the inference here with respect to our domestic laws? Does 
the fact that these treaties have some test at some point in 
these treaties and then our domestic law--we just don't know 
how they interact with them and whether or not they would be 
elevated to a higher level than our domestic law, or whether or 
not the standard used here is at a higher level than our 
domestic law.
    Our domestic law would really look at an abusive 
transaction, look at such factors as is there a business 
purpose for the investment, or is there an economic substance 
to it--things like that. But this does not seem to incorporate 
any of those notions.
    These are some of the concerns that we would raise about 
these provisions.
    We, on balance, recognize there have been abusive 
transactions to abuse treaties like there are abusive 
transactions to abuse our current Tax Code. Congress has 
reacted to them in the past and can in the future. The question 
is whether or not that is such a significant concern that you 
would put a cloud on your investments under these treaties. 
That would be our concern there.
    The Slovenia treaty also has just two of the issues that I 
highlighted for the Italian Republic treaty, and that is that 
the main purpose test that I was just discussing is also 
included in the dividends, interests, royalties and other 
income articles. Also, that treaty does not include the U.S. 
model treaty language addressing bank secrecy laws.
    Finally, we have the treaty with Venezuela. This is a new 
treaty that was sought out by the United States at a time when 
the country had a territorial tax system. So it is a little bit 
unusual to be seeking out a treaty with a country like that. 
The country is in the process of moving to a worldwide tax 
system which makes a treaty to alleviate double taxation much 
more relevant, as Mr. West said.
    We have been informed that the worldwide tax system law was 
enacted yesterday in this country. We have not seen the final 
language of that law. We have consulted with representatives of 
Venezuela and have been told that the new law is generally 
consistent with our style of a worldwide tax system.
    We would just mention to the committee that the new law 
should be reviewed to make sure that the treaty provisions are 
not in need of some sort of modification. We have a concern 
with respect to the title that deals with the branch profits 
tax, that the language used in that title seems to be directed 
toward the United States branch profits tax as there was none 
in Venezuela at the time the treaty was negotiated. There is 
likely to be one in this new law. So we believe that that 
article should be looked at.
    Finally, on the Venezuela treaty, this is a country that is 
undergoing profound political changes. Right now, it could be 
perceived--we are not experts in this by any means, not even 
close--but it could be perceived that there are somewhat 
dueling bodies responsible, having overlapping responsibilities 
in Venezuela right now.
    They have a National Constituent Assembly, which is 
drafting a new constitution. I think it is imminent that a new 
constitution is going to be put before the people of Venezuela, 
which would also trigger some new elections. So that is just a 
question for the committee to consider, as to whether or not 
there is sufficient political stability in that country to 
insure that Venezuela will live up to its treaty obligations.
    This ends my brief highlights of the issues presented by 
the proposed treaties. As I said, the issues are discussed in a 
lot more detail in our pamphlets which were submitted to the 
committee. I would be happy to answer any questions you may 
have now or as you consider the treaties.
    [The prepared statement of Ms. Paull follows:]

   Prepared Statement of the Staff of the Joint Committee on Taxation

    My name is Lindy Paull. I am chief of staff of the Joint Committee 
on Taxation. It is my pleasure to present testimony of the staff of the 
Joint Committee on Taxation (``Joint Committee staff'') today 
concerning the proposed income tax treaties with Denmark, Estonia, 
Italy, Latvia, Lithuania, Slovenia, and Venezuela, and the proposed 
estate and gift tax protocol with Germany.
                                overview
    As in the past, the Joint Committee staff has prepared pamphlets 
covering each of the proposed treaties and protocols. The pamphlets 
contain detailed descriptions of the provisions of the proposed 
treaties and protocols, including comparisons with the 1996 U.S. model 
treaty, which reflects preferred U.S. treaty policy, and with other 
recent U.S. tax treaties. The pamphlets also contain detailed 
discussions of issues raised by the proposed treaties and protocols. We 
consulted extensively with the staff of your Committee in analyzing the 
proposed treaties and protocols and preparing the pamphlets.
    Five of the eight agreements at issue today represent new tax 
treaty relationships for the United States. The new agreements are with 
Estonia, Latvia, Lithuania, Slovenia, and Venezuela. The remaining 
three agreements modify existing treaty relationships. The proposed 
treaty with Denmark would replace an existing treaty signed in 1948. 
The proposed protocol with Germany would make several modifications to 
the existing estate, gift, and inheritance tax treaty signed in 1980. 
The proposed treaty with Italy would replace an existing treaty signed 
in 1984.
    My testimony will highlight some of the key features of these 
treaties and protocols and certain issues they raise.
           baltic countries (estonia, latvia, and lithuania)
    The proposed treaties with the three Baltic countries of Estonia, 
Latvia, and Lithuania represent new tax treaty relationships for the 
United States. The terms of the three proposed Baltic treaties are 
substantially similar to each other.
    Under the proposed treaties, each Baltic country agrees to reduce 
its taxes on the income that U.S. residents earn from sources in that 
country and the United States agrees to reciprocal reductions of its 
tax on U.S. income of Baltic country residents. The United States and 
each Baltic country also agree that their tax administrators will 
exchange tax information to carry out the provisions of the proposed 
treaties and each country's tax laws, and will cooperate together to 
resolve problems in the coordination of the tax rules of the countries 
that may arise in individual cases.
    The proposed treaties with Estonia, Latvia, and Lithuania follow 
the U.S. model treaty in many respects. However, they differ from the 
U.S. model treaty in certain respects, primarily by not reducing 
source-country taxation to the same extent as many U.S. tax treaties. 
In this regard, the proposed treaties are similar to other treaties 
that the United States has entered into with developing countries.
    The proposed treaties allow broader source-country taxation of 
business activities of residents of the other country than the U.S. 
model treaty. They also permit higher maximum rates of source-country 
tax on royalties, and permit the imposition of source-country tax on 
certain equipment rental income. The maximum rate of source-country tax 
on royalties generally is 10 percent. The proposed treaties treat 
equipment rental income as royalties subject to a maximum 5-percent 
source-country tax.
    Under the proposed treaties, as under certain other U.S. tax 
treaties, the reduced rates of U.S. withholding tax applicable to 
dividends generally would not apply to dividends from U.S. Real Estate 
Investment Trusts (``REITs''). Thus, REIT dividends may be subject to 
U.S. withholding tax at the full statutory rate of 30 percent. In 1997, 
the Treasury Department modified its policy with respect to the 
exclusion of REIT dividends from the reduced withholding tax rates 
applicable to other dividends under the treaties. Under this policy, 
REIT dividends paid to a resident of a treaty country will be eligible 
for the reduced rate of withholding tax applicable to portfolio 
dividends (typically, 15 percent) in certain cases. The proposed 
treaties do not incorporate this new policy with respect to the 
treatment of REIT dividends (i.e., the 30-percent U.S. withholding tax 
for REIT dividends generally would not be reduced under the proposed 
treaties).
                                denmark
    The proposed treaty with Denmark is a comprehensive update of the 
1948 treaty. The provisions of the proposed treaty generally are 
consistent with the U.S. model treaty.
    The proposed treaty includes a comprehensive anti-treaty-shopping 
provision, which resembles the provisions of the U.S. model treaty and 
other recent treaties. The proposed treaty includes a ``derivative 
benefits'' provision under which treaty benefits generally would be 
available to Danish companies owned by residents of countries that are 
members of the European Union or the European Economic Area, or are 
parties to the North American Free Trade Agreement.
    The proposed treaty provides certainty to U.S. taxpayers that taxes 
imposed under the Danish Hydrocarbon Tax Act are creditable income 
taxes for purposes of the U.S. foreign tax credit. It is not entirely 
clear whether such taxes would be creditable under U.S. law. The 
proposed treaty subjects each tax imposed under the Danish Hydrocarbon 
Tax Act to separate ``per-country'' limitations. Such limitations do 
not otherwise exist under U.S. law. A prior proposed U.S. income tax 
treaty with Denmark contained a similar provision providing for the 
creditability of taxes imposed under the Danish Hydrocarbon Tax Act. 
This Committee reported favorably the prior proposed treaty (and its 
protocol) in 1984 and 1985. During Senate consideration of the proposed 
treaty in 1985, objections were raised regarding the creditability 
under the treaty of the Danish hydrocarbon tax. The Senate has not 
given its advice and consent to ratification of that treaty.
                                germany
    The proposed protocol with Germany modifies in several respects the 
estate, gift, and inheritance tax treaty between the United States and 
Germany that was signed in 1980.
    First, the proposed protocol modifies certain tiebreaker rules in 
the existing treaty that determine which country has the right to tax 
on a worldwide basis when a decedent or donor is domiciled in both the 
United States and Germany at the time of death or at the time of making 
a gift. In this regard, the proposed protocol extends from five to ten 
years the period of time during which a citizen of one country can be 
domiciled in the other country without being subject to the primary 
taxing jurisdiction of the other country.
    Second, the proposed protocol modifies certain exemptions granted 
when property is transferred between spouses. The existing treaty 
provides that interspousal transfers of property are granted a 50-
percent exemption. The proposed protocol permits the United States to 
deny this exemption if the decedent or donor was a U.S. citizen, or was 
a former U.S. citizen or longterm resident who lost such status 
principally to avoid tax.
    Third, the proposed protocol provides a pro-rata unified credit to 
an individual domiciled in Germany, who is not a U.S. citizen, for 
purposes of computing the U.S. estate tax. Under this provision, such 
an individual domiciled in Germany would be entitled to a credit 
against U.S. estate tax with respect to assets of the estate that are 
located in the United States.
    Fourth, the proposed protocol provides a limited U.S. estate tax 
marital deduction when the surviving spouse is not a U.S. citizen.
    Finally, the proposed protocol expands the saving clause of the 
treaty to cover two additional classes of individuals over which the 
United States would retain the right to tax under U.S. law. These are 
individuals who, at the time of the transfer of property, were either 
domiciled in the United States, or were former long-term residents of 
the United States who lost such status principally to avoid tax.
                                 italy
    The proposed treaty with Italy would replace the 1984 treaty. The 
proposed treaty generally follows the U.S. model treaty. However, the 
proposed treaty differs from the U.S. model treaty in certain respects, 
as described below.
    The proposed treaty contains certain ``main purpose'' tests that do 
not appear in any other U.S. treaties or the U.S. model treaty. The 
main purpose tests operate to deny the benefits of the dividends, 
interest, royalties, and other income articles of the proposed treaty 
if the main purpose or one of the main purposes of a person is to take 
advantage of the benefits of the respective article through a creation 
or assignment of shares, debt claims, or rights that would give rise to 
income to which the respective article would otherwise apply. In 
addition, the proposed treaty provides that the competent authorities 
of the treaty countries can agree as to when the conditions of the main 
purpose tests have been met. While the main purpose tests are intended 
to prevent inappropriate benefits under the treaty, such tests inject 
considerable uncertainty into the treaty provisions because such tests 
are subjective and vague. This uncertainty can create difficulties for 
legitimate business transactions, and can hinder a taxpayer's ability 
to rely on the treaty.
    The proposed treaty provides certainty to U.S. taxpayers that a 
portion of taxes imposed with respect to the Italian regional tax on 
productive activities (referred to as the ``IRAP'') are creditable 
income taxes for purposes of the U.S. foreign tax credit. Effective 
January 1, 1998, the IRAP replaced Italy's local income tax (referred 
to as the ``ILOR''), which was a creditable tax under the present U.S.-
Italy treaty. Unlike the ILOR, the IRAP is calculated without a 
deduction for labor costs and, for certain taxpayers, without a 
deduction for interest costs. Absent the proposed treaty, the IRAP is 
unlikely to be a creditable tax under U.S. law. The proposed treaty 
provides a formula to calculate a portion of the IRAP that is intended 
to approximate an income tax under U.S. tax principles. Creditability 
is provided for only that portion of the IRAP.
    The proposed treaty provides an exemption for Italian insurance 
companies from the U.S. excise tax on insurance and reinsurance 
premiums paid to foreign insurers with respect to U.S. risks. This 
exemption applies only to the extent that the U.S. risk is not 
reinsured by the Italian insurer with a foreign person that is not 
entitled to the benefits of a U.S. treaty providing a similar exemption 
from such tax.
    The proposed treaty includes an arbitration provision that is 
similar to the provision that was included in the 1989 U.S.-Germany 
treaty. However, like the provisions in several other recent U.S. 
treaties, such as the treaties with Ireland and Switzerland, the 
arbitration provision in the proposed treaty will take effect only upon 
a future exchange of diplomatic notes. It is intended that this 
arbitration approach be evaluated by taking into account experience 
arbitrating cases under the U.S.-Germany treaty.
    The exchange of information article contained in the proposed 
treaty conforms in most respects to the corresponding articles of the 
U.S. and OECD model treaties. As is true under these model treaties, 
the proposed treaty requires the countries to exchange such information 
as is necessary for carrying out the provisions of the proposed treaty 
and the domestic tax laws of the countries. There is one significant 
respect in which the exchange of information article does not conform 
to the corresponding article of the U.S. model treaty. The proposed 
treaty omits the provision in the U.S. model treaty that requires 
information to be provided to the requesting country notwithstanding 
that such disclosure may be precluded under bank secrecy laws or 
similar legislation.
                                slovenia
    The proposed treaty with Slovenia is a new tax treaty relationship 
for the United States. The provisions of the proposed treaty generally 
comport with the U.S. model treaty. Under the proposed treaty, Slovenia 
agrees to reduce its taxes on the income that U.S. residents earn from 
sources in Slovenia and the United States agrees to a reciprocal 
reduction of its tax on U.S. income of Slovenian residents.
    Like the proposed treaty with Italy, the proposed treaty with 
Slovenia contains certain ``main purpose'' tests that do not appear in 
any other U.S. treaties or the U.S. model treaty. The main purpose 
tests operate to deny the benefits of the dividends, interest, 
royalties, and other income articles of the proposed treaty if the main 
purpose or one of the main purposes of a person is to take advantage of 
the benefits of the respective article through a creation or assignment 
of shares, debt claims, or rights that would give rise to income to 
which the respective article would otherwise apply. In addition, the 
proposed treaty provides that the competent authorities of the treaty 
countries can agree as to when the conditions of the main purpose tests 
have been met. While the main purpose tests are intended to prevent 
inappropriate benefits under the treaty, such tests inject considerable 
uncertainty into the treaty provisions because such tests are 
subjective and vague. This uncertainty can create difficulties for 
legitimate business transactions, and can hinder a taxpayer's ability 
to rely on the treaty.
    The exchange of information article contained in the proposed 
treaty conforms in most respects to the corresponding articles of the 
U.S. and OECD model treaties. As is true under these model treaties, 
the proposed treaty requires the countries to exchange such information 
as is relevant for carrying out the provisions of the proposed treaty 
and the domestic tax laws of the countries. There is one significant 
respect in which the exchange of information article does not conform 
to the corresponding article of the U.S. model treaty. The proposed 
treaty omits the provision in the U.S. model treaty that requires 
information to be provided to the requesting country notwithstanding 
that such disclosure may be precluded under bank secrecy laws or 
similar legislation.
                               venezuela
    The proposed treaty with Venezuela represents a new tax treaty 
relationship for the United States.
    The proposed treaty raises unique issues because Venezuela 
currently has a territorial tax system. Under this system, Venezuela 
taxes income of residents or nonresidents only with respect to income 
from Venezuelan sources; accordingly, foreign-source income is not 
taxed by Venezuela. This is unlike the U.S. tax system, which taxes 
U.S. residents on worldwide income and generally taxes nonresidents 
only on certain income from U.S. sources. The inconsistencies between 
the two tax systems could result, in certain cases, in Venezuelan 
residents obtaining a complete exemption from both U.S. and Venezuelan 
taxes under the proposed treaty with respect to certain U.S. source 
income. In addition, under the proposed treaty, the reduced rates of 
U.S. withholding tax on certain payments to Venezuelan persons (such as 
for dividends, interest, and royalties) would provide additional relief 
for such persons from taxation by both countries.
    The Committee should be aware that Venezuela is in the process of 
moving from a territorial tax system to a worldwide tax system. On 
April 26, 1999, an enabling law authorized the President to take 
``extraordinary economic and financial measures,'' including reforming 
Venezuela's income tax laws. Among other things, the enabling law 
specifically authorizes the President to amend Venezuela's tax laws to 
adopt a worldwide tax system (in lieu of Venezuela's current 
territorial tax system) with a credit system to provide relief from 
international double taxation. The enabling law authorizes the 
President to publish a decree within six months of the authorization 
(i.e., no later than October 26, 1999) which contains these and other 
changes to Venezuelan tax laws. In September 1999, the Council of 
Ministers, with the President presiding, approved a draft of a new 
income tax law which includes provisions adopting a worldwide tax 
system.\1\)
---------------------------------------------------------------------------
    \1\ The draft new tax law also provides for several fundamental 
changes in Venezuela's tax laws beyond the adoption of a worldwide tax 
system, including the imposition of taxes on dividends, the adoption of 
rules on transfer pricing, as well as general anti-abuse rules to allow 
the tax authorities to disregard transactions entered into with a 
principal purpose to evade, avoid, or otherwise reduce income taxes.
---------------------------------------------------------------------------
    In general, the new worldwide tax system is similar to the U.S. 
system. Under the new worldwide tax system, Venezuelan residents and 
domiciled entities would be taxable on worldwide income while 
nonresidents and non-domiciled entities would be taxable only on 
certain income from Venezuelan sources. Taxpayers generally would be 
permitted to claim a credit against their Venezuelan tax liability for 
foreign taxes paid on their foreign source income.
    The draft new tax law has not yet been published in Venezuela's 
Official Gazette.\2\ For such law to take effect as provided by the 
enabling law, this action must take place no later than October 26, 
1999. Once officially published, the new tax law generally would take 
effect for taxable years beginning after the law is published. However, 
the new worldwide tax system would take effect for taxable years 
beginning on or after January 1, 2001.
---------------------------------------------------------------------------
    \2\ In general, laws are enacted in Venezuela by means of 
publication in Venezuela's Official Gazette.
---------------------------------------------------------------------------
    The proposed treaty differs from the U.S. model treaty in certain 
respects. First, the proposed treaty does not reduce source-country 
taxation to the same extent as many U.S. treaties. In this regard, the 
proposed treaty is similar to other treaties that the United States has 
entered into with developing countries.
    Second, the proposed treaty would allow broader source-country 
taxation of business activities of residents of the other country than 
the U.S. model treaty. For example, the proposed treaty expands the 
definition of a permanent establishment to include cases in which an 
enterprise provides services through its employees in a country if the 
activities continue for more than 183 days.
    Third, the proposed treaty permits higher maximum rates of source-
country tax on royalties, and permits the imposition of source-country 
tax on certain equipment rental income. The maximum rate of source-
country tax on royalties generally is 10 percent. The proposed treaty 
treats equipment rental income as royalties subject to a maximum 5-
percent source-country tax.
    Venezuela currently is in a period of constitutional and 
institutional change. In the past ten months, the Venezuelan people 
have elected a new President, Hugo Chavez. In April, a new National 
Constituent Assembly was formed to draft a new constitution. Among 
other things, conflicts have developed between the new National 
Constituent Assembly and established political institutions, such as 
the Venezuelan Congress. The Committee should consider the implications 
of ongoing political changes in Venezuela as they relate to the 
proposed treaty. For example, if there are competing claims as to who 
is authorized to exercise legislative, executive, or judicial 
functions, it may be difficult to identify the responsible competent 
authority with respect to the proposed treaty. These uncertainties may 
make it difficult to administer the treaty.
                               conclusion
    These issues are discussed in more detail in the Joint Committee 
staff pamphlets on the proposed treaties and protocols. I would be 
happy to answer any questions the Committee may have at this time and 
in the future.

    Senator Hagel. Ms. Paull, thank you, and Mr. West, thank 
you.
    You each know the drill around here. As a matter of fact, I 
recall that not too long ago, Ms. Paull, you were on the other 
side developing the questions.
    What I would like to do is this. Let's just back through 
your testimony, Ms. Paull, because you raise some questions 
that I know Mr. West would like to engage in. I know he would 
like to clarify some of those points.
    So, if I might, let's just take your testimony and proceed 
right along our merry way and stay on Venezuela.
    Mr. West, you heard some of the concerns and the questions 
raised by Ms. Paull. Let's start with the current government.
    Obviously, that was factored into the equation as you all 
thought through this and negotiated. It is an unknown. We 
appreciate that. But why don't you start there and work your 
way through some of the questions that Ms. Paull raised.
    Thank you.
    Mr. West. I would be happy to, Mr. Chairman.
    Starting with the last issue, which is the political 
turmoil there, we have consulted closely with the State 
Department and, as Ms. Paull said, this is not something that 
the tax experts profess to be expert in. But what we understand 
from the State Department is that the changes that are going on 
in Venezuela--and there are changes--are in the nature of 
healthy changes that are fully consistent with democratic 
principles.
    Again, this is our understanding from the State Department. 
They are not seeing developments there inconsistent with a 
popularly elected government and popular democracy being 
exercised.
    So, while any further questions on that subject I would be 
happy to take back to the State Department so as to provide you 
with additional answers, we have not heard anything to indicate 
that there is any reason not to go forward. In fact, the one 
tax related concern in that area would be whether or not a 
treaty makes sense even if you assumed great instability. In 
our view, a tax treaty is perhaps even more important in an 
unstable environment than it is in a stable environment, 
because it will give U.S. taxpayers a measure of predictability 
and certainty when they do business in Venezuela, even if there 
is some change going on down there.
    But, again, we have not heard anything to indicate that 
there is any change that would affect the ability of Venezuela 
to bring the treaty into force, that would affect, would 
adversely affect, any of the provisions of the treaty.
    Senator Hagel. Of course, that all depends on whether a new 
government would enforce that treaty.
    Mr. West. We have asked that question. What we understand 
is this. The legislature has approved this treaty already. The 
question would then have to be whether any new government would 
actually invalidate a prior action of the legislature. We hear 
nothing to indicate that that is at all on the radar screen for 
what is happening in Venezuela.
    Senator Hagel. Have you had a chance to look at what was 
done yesterday with the passage of the language that Ms. Paull 
referenced? They have not had a chance to look at it. Is there 
anything that you know of that would be of concern to this 
committee?
    Mr. West. We have been working long and hard to make sure 
that everything we can find out about this new legislation we 
are learning, studying, discussing, and analyzing. As I said 
earlier, we are now comfortable with what we have seen so far 
that the treaty is an appropriate measure.
    Now that leaves the question of whether or not what 
ultimately is reflected in the final legislative language is 
consistent with what we know so far. And we have not seen that 
final legislative language. I do not believe it is available 
yet.
    But we understand that it will be available at any time.
    What we intend is, when that language is made available--
and, again, it ought to be at any time now--we want to make 
sure that the final legislative language is consistent with our 
understanding of what the drafts have said to date. I think 
that is important.
    We need to do that and intend to do that before the treaty 
is brought into force, to make sure that what is finally 
enacted is consistent with what our understanding is.
    Senator Hagel. Of course, you both know what we will do. 
Some of the areas that we do not cover today we will submit to 
you in writing for you to deal with.
    Are there other areas, Mr. West, that Ms. Paull brought up 
to which you want to respond regarding Venezuela?
    Mr. West. I would only reiterate, again, that the new tax 
system seems to us to be a move in a direction that makes the 
treaty make more sense even than it did before. We think that 
is a logical development and that our businesses will be all 
the more benefited by ratification of the treaty.
    Ms. Paull. And we agree with that.
    Senator Hagel. Before we leave our neighbors to the south, 
is there anything that you want to add, Ms. Paull, regarding 
Venezuela?
    Ms. Paull. No, but I would just agree with the last 
statement Mr. West made.
    Senator Hagel. OK. Thank you.
    We will submit some questions to further clarify some of 
these issues.
    Let's talk a little bit about Italy. There is an area that 
Ms. Paull raised in questions, and maybe a good place to start, 
one of the general areas we could work from is this. Maybe 
there was some lack of complete consultation between Treasury 
and Joint Tax Committee. I don't know that, but I pay attention 
occasionally.
    If I was listening to this correctly, I sensed that from 
Ms. Paull's testimony.
    Maybe you would like to reflect on that.
    Mr. West. I would, Mr. Chairman.
    Undoubtedly, we did not consult on this issue as much as we 
might have, as much as we could have. I will say that there are 
differing views as to the extent of the consultation that was 
engaged in. But I don't think that is something that is 
necessarily productive to go into.
    But I will say that we could have done more and I would 
like to undertake that in the future in areas like this we will 
do more.
    Senator Hagel. Ms. Paull brought out a couple of specific 
areas. I think she talked about the anti-abuse provision where 
there is some concern.
    Would you like to put her fears to rest?
    Mr. West. I would.
    Senator Hagel. And you are fortunate that Senator Sarbanes 
is now here as well. He brings a calmness and sereneness to the 
effort, and a much needed dignity, I might add.
    Is that good enough, Paul?
    Senator Sarbanes. I thought that was just fine, yes.
    Mr. West. Let me address some of the concerns that Ms. 
Paull raised.
    First, let me address the negative inference concern 
regarding what this means for our other treaties and the other 
parts of this treaty that do not contain this rule.
    Our technical explanation, which serves as the first stop 
after the committee reports and the congressional reports 
regarding interpretation of this agreement, make clear that no 
inference is intended; that our domestic law anti-abuse rules 
that otherwise would apply will no longer apply after this rule 
is in place.
    So it is not the intent of the negotiators that otherwise 
applicable rules will cease to apply after this rule comes into 
force.
    Senator Hagel. Are there any other areas on the Italy 
treaty that Ms. Paull raised to which you want to respond?
    Mr. West. Yes. Let me address the vagueness problem which I 
know is a concern.
    I tried to highlight in my testimony some of the reasons 
why this standard was chosen over other standards. Again, let 
me reiterate that there are broader standards--such as the one 
Italy agreed to in its immediately preceding treaty--broader 
standards, what we might call more subjective standards, that 
Italy had recently agreed to. We reviewed those standards and 
we rejected those. We thought that this produced a measure of 
uncertainty with which we were not comfortable.
    But we needed an effective standard, and we think this 
standard will be an effective standard. Again, we took comfort 
from the fact that it is contained in some 50 treaties around 
the world, 40 treaty countries, 10 OECD members. We have 
identified, as I said, over 2 dozen provisions of the Internal 
Revenue Code that contain a very, very similar provision--one 
of the main purposes is tax avoidance. The Internal Revenue 
Code in many places refers to one of the principal purposes 
being tax avoidance.
    We discussed the differences in those words with some of 
our treaty partners, and they viewed them as not being 
different. They thought that there was greater certainty going 
with the language that was already contained in many treaties 
around the world.
    So we agreed that that would actually enhance the certainty 
of our rule. So we decided on that provision.
    Senator Hagel. Does your reference to a standard mean that 
you had prepared a comprehensive analysis of these main purpose 
tests?
    When you say standard, what do you mean? Let me put it 
another way. Was there a comprehensive analysis done?
    Mr. West. Mr. Chairman, we can always do more. This is no 
doubt another example of a situation in which we could have 
done more in identifying the exact contours of what the 
ramifications of a rule like this would be.
    There is relatively little, we will acknowledge, relatively 
little interpretive authority on standards like this. The case 
law is sparse on standards like this. We acknowledge that.
    But, again, what we do believe is that, over time, the case 
law will develop and the interpretive authorities will develop 
in a way that will provide adequate certainty to our taxpayers.
    Senator Hagel. One of the questions, and I think it is a 
valid point, is the uncertainty issue--more uncertainty/less 
uncertainty. Of course, as you know, investment depends, to 
some extent, on certainty. Realizing that we cannot all be 
certain, do you think that this treaty makes it better in that 
area or not?
    Mr. West. Well, it does not make it better, Mr. Chairman. 
But, again, I would like to keep in mind that these treaties 
only provide benefits. They do not restrict taxpayer benefits 
in any way.
    Because of this, we view it as reasonable to impose 
reasonable limits.
    Now in some situations, like our limitation on benefits 
provisions, it is relatively easy to identify with bright line 
standards when a person, an entity, a company is a bona fide 
resident of a jurisdiction and when that company is not a bona 
fide resident of that jurisdiction.
    In the area of avoidance of tax, generalized tax avoidance, 
that does not lend itself as easily to those kinds of bright 
line standards. Again, we think the Internal Revenue Code 
reflects that because, again, in over 2 dozen places there is a 
very similar standard. It has been incorporated as recently as 
a provision relating to active financing income for our 
financial services businesses, which is included in the 
extenders bill that is under consideration by the Congress now.
    Even this provision contains language very similar--whether 
one of the principal purposes is the avoidance of tax.
    We have seen it elsewhere. It does not increase certainty. 
But our view, again, is that it is a reasonable measure in 
these circumstances where tax avoidance through treaty abuse is 
increasing.
    Senator Hagel. Thank you, Mr. West.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman. I 
appreciate your calling this hearing. I am not going to be able 
to stay. But I do have some questions that I want to ask.
    I am very much concerned by the fact that these tax 
treaties come before us and then, all of a sudden, we are 
confronted with new provisions that we have not dealt with 
before. It is difficult to ascertain the rationale for this.
    The main purpose test that you have just been talking 
about, it seems to me, is one clear example of that. Has it 
been incorporated in other U.S. tax treaties, the Italian and 
Slovenian main purposes tests?
    Mr. West. No other U.S. tax treaties, no.
    Senator Sarbanes. This is the first time, right?
    Mr. West. Yes, it is.
    Senator Sarbanes. Is it in the U.S. model treaty?
    Mr. West. No, it is not.
    Senator Sarbanes. Is it in the OECD model treaty?
    Mr. West. No, it is not.
    Senator Sarbanes. I understand that the countries insisting 
on such language internationally are the U.K., Ukraine, 
Kazakhstan, Canada, Mexico, and Uzbekistan. Is that correct?
    Mr. West. I would not say that was correct for the 
following reason. These provisions, as I am sure you know, 
Senator, the negotiations are frequently not a matter of one 
country insisting on a provision. We have a few nonnegotiable 
provisions we insist on. But many of these treaties are agreed 
on by both parties to the negotiation because they believe they 
are in the mutual interests of both parties.
    The countries you mentioned do have this as part of their 
policy. There are other countries that also have it as part of 
their policy.
    Senator Sarbanes. With respect to the countries I listed, 
does the U.S. have bilateral tax treaties with those countries?
    Mr. West. The U.S. has a tax treaty with the United 
Kingdom, Senator. We have a tax treaty with the Ukraine that 
has been signed and approved by the Senate but not yet brought 
into force.
    Senator Sarbanes. And Kazakhstan?
    Mr. West. We have a tax treaty with Kazakhstan, yes.
    Senator Sarbanes. Canada?
    Mr. West. We have a tax treaty with Canada, yes.
    Senator Sarbanes. Mexico?
    Mr. West. We do, yes.
    Senator Sarbanes. Uzbekistan?
    Mr. West. Our treaty with the former Soviet Union continues 
to apply.
    Senator Sarbanes. Would they contain main purpose language?
    Mr. West. Our treaty with Canada includes a provision that 
allows Canada to apply a similar rule under its domestic law to 
U.S. taxpayers. It is not the identical rule.
    Senator Sarbanes. Why wouldn't applying U.S. domestic law 
cover whatever problem you are concerned with?
    Mr. West. We have actually reviewed U.S. domestic law on 
that point. Actually, the standards are quite low.
    The most recent significant authority in that regard is a 
case called Northern Indiana Public Service Company. We look at 
that case and see that the kind of tax treaty, what we view as 
tax treaty abuse, that is allowed to go on under the standards 
as articulated by some of the courts beyond that which we think 
is appropriate.
    Senator Sarbanes. Has Slovenia incorporated such language 
in its previous tax treaties?
    Mr. West. Not to my knowledge, Senator.
    Senator Sarbanes. So it's the first time for Slovenia?
    Mr. West. I believe so.
    Senator Sarbanes. How about Italy?
    Mr. West. Italy has broader language in some of its prior 
treaties--more subjective, less certain standards in some of 
its provisions.
    Senator Sarbanes. In how many of its treaties?
    Mr. West. I do not have a count for you, but I would be 
happy to provide you with that number.
    I am informed that it is in seven.
    Senator Sarbanes. I am told that in five instances out of 
70 tax treaties, Italy has language that approximates this main 
purpose language. Would that be correct?
    Mr. West. I am advised the number is seven, and I don't 
know if it is the most recent seven.
    Senator Sarbanes. Seven out of what?
    Mr. West. Senator, it could be the most recent seven. It 
could be all seven of its most recently negotiated treaties. I 
do not have those numbers, though. I would be happy to get 
those to you.
    Senator Sarbanes. You don't know that it's seven out of how 
many?
    Mr. West. No, I don't know how many bilateral treaties 
Italy has, Senator.
    Senator Sarbanes. It's probably a fairly large number, 
wouldn't you think?
    Mr. West. We can surmise.
    Senator Sarbanes. Where did this impetus come from to put 
in this language?
    Mr. West. Originally from looking at the Italian precedent 
in its treaty with Israel, Senator. We looked at that precedent 
and saw that some very broad anti-abuse rules were being 
incorporated in treaties around the world. We considered the 
broader Italian precedent when we sat down at the table with 
Italy but decided against it. We decided it would not provide 
enough certainty to our taxpayers.
    Senator Sarbanes. Is it now our policy to request or 
support such language? Is it your intention to amend or change 
the U.S. model treaty?
    Mr. West. The Treasury Department believes it is 
appropriate policy, Senator. Whether it is our policy will, of 
course, depend on the views of this committee and our 
consultations and work with you.
    Senator Sarbanes. I don't quite follow that answer.
    Mr. West. It is the Treasury Department's view that it is 
appropriate policy. Whether it goes in our future treaties 
will, of course, be dependent on the views of this committee.
    Senator Sarbanes. Well, ultimately that is quite true 
because a treaty cannot go through if this committee and the 
Senate do not accede to it. But what is the Treasury's 
position?
    Mr. West. As I said, Senator, the Treasury's view is that 
this is appropriate treaty policy, yes.
    Senator Sarbanes. So you intend to put this in all 
succeeding tax treaties?
    Ms. Paull. Let me show you your testimony.
    Mr. West. Let me quote from my written testimony. ``It is 
expected that the United States will incorporate these new 
anti-abuse rules into its model.''
    Senator Sarbanes. Is that your statement?
    Mr. West. That is my written testimony.
    Senator Sarbanes. Well, I had not gone through your written 
testimony. But I am glad Ms. Paull helped us out. That seemed 
to be a lot clearer than what you have been telling me in the 
last few minutes.
    Mr. West. Let me explain the ambiguity.
    What is or is not our model position at any time is this. 
We have a published model. But, again, what our model is for 
our next negotiation is, in part, a function of developments 
between the publication of our last model and that negotiation. 
I hope that explains some of the ambiguity.
    Senator Sarbanes. Now does this treaty with Italy waive the 
excise tax on insurance premiums?
    Mr. West. It does, Senator.
    Senator Sarbanes. The Senate on numerous occasions has 
specifically expressed its opposition to such a waiver, has it 
not?
    Mr. West. The Senate has expressed its opposition I believe 
in cases in which there have been no assurance that there would 
be adequate taxation to protect the domestic insurance industry 
from unfair competition by foreign insurers who might compete 
for U.S. risk business.
    In the case of Italy, the Treasury Department is 
comfortable that Italian law does provide for a substantial 
level of taxation so that there would be no such unfair 
competition with our domestic insurance industry.
    Senator Sarbanes. So you're telling our people that you can 
assure them that they will not be placed at a competitive 
disadvantage?
    Mr. West. No, I would not make so broad a statement.
    Senator Sarbanes. Why shouldn't you be able to make that 
statement?
    Mr. West. It's a personal reticence about personal 
advantage and disadvantage and my ability to assess what 
competitive advantage and disadvantage is.
    What I would say, Senator, is that we are comfortable that 
Italy imposes a substantial domestic tax on the Italian 
companies competing with U.S. businesses.
    Senator Sarbanes. Do you have a view on that, Ms. Paull?
    Ms. Paull. Well, I certainly have been in the throes of 
this provision in my former capacity at the Senate Finance 
Committee. I flagged that for the committee because of that. We 
had inquired of the Treasury Department and they assured us 
that there would be an adequate level of tax imposed by Italy 
on the insurance companies who are insuring U.S. risks over 
here.
    If that is not the case, then certainly that would be an 
issue that the committee would want to visit. We do not have 
any independent way of judging.
    Senator Sarbanes. Nor do we, I assume.
    Ms. Paull. Yes.
    Senator Sarbanes. I mean, if that happens, it will happen 
after the fact, correct--after the treaty goes into effect?
    Ms. Paull. This is one of those things that certainly we 
are under an obligation, the Treasury Department is under an 
obligation, I would believe, to monitor very carefully.
    Senator Sarbanes. What would happen if you found out that 
the Italians were not doing this?
    Ms. Paull. Well, what happened in the past, of course, 
though there were a lot different circumstances, is the 
Congress overrode the treaty provision ultimately. That is not 
a great position for the Senate to be in.
    Senator Sarbanes. That's right. Everyone comes and tells us 
we should not do that because we won't be able to negotiate any 
treaties.
    What happens if, in effect, your assurances turn out to be 
empty?
    Mr. West. Well, Senator, we can go and seek renegotiation 
of that point and attempt to reach agreement on a protocol with 
the Italians if the facts change in such a dramatic manner.
    Senator Sarbanes. Let me ask about bank secrecy.
    The model treaty contains a provision on bank secrecy 
authorizing a country to obtain and provide information held by 
financial institutions, notwithstanding any laws or practices 
of the requested country that would otherwise preclude such 
exchange of information. Both the Italian and the Slovenian 
treaties are missing this provision, although both technical 
explanations state that the omission of this section does not 
relieve those countries of the obligation to provide this 
information.
    Why was the standard bank secrecy provision omitted from 
these two treaties?
    Mr. West. Senator, that language has proven problematic for 
us not for any substantive reasons in a number of cases but, 
really, for reasons that I will term diplomatic.
    What the language does, in effect, is require our treaty 
partner to declare in a rather open way that this treaty will 
override provisions of its domestic law potentially if that is 
the case; or, if it is not the case, they view this language as 
unnecessary because their domestic law already provides for 
full exchange of bank information.
    Let me assure you that in the case of Italy and Slovenia, 
we have obtained assurances in writing from both countries that 
they can obtain such information and that the absence of that 
language from our treaties does not in any way affect or alter 
our ability to obtain the information from financial 
institutions that is appropriate under our exchange of 
information provisions.
    Senator Sarbanes. That is not a very good precedent to be 
setting, is it, in terms of negotiating treaties with other 
countries that come along?
    Mr. West. Senator, we are coming to believe that the bad 
precedent is the language in our model treaty, and we are 
reconsidering that language, not in any way to step back from 
our full commitment to complete an open exchange of information 
regarding financial institutions, but because the language 
itself, the words, seem problematic to many of our treaty 
partners.
    Senator Sarbanes. What does that mean, ``problematic to our 
treaty partners''? They don't want to supply the information?
    Mr. West. Well, as I said, either it is unnecessary because 
they provide this information or it is, again, what I can best 
term diplomatically objectionable because it is an open 
declaration that laws that might otherwise be on the books 
would be overridden, or both, perhaps.
    Senator Sarbanes. Then how do you handle that situation?
    Mr. West. Well, what we do, again, Senator, is assure 
ourselves.
    Senator Sarbanes. Let's say a country has the laws on the 
books that would not enable this information to be exchanged. I 
think your phrase was ``it is diplomatically problematical'' to 
have language in the treaty that would provide for the exchange 
of information. So where are we, then?
    Mr. West. Senator, that is not a treaty we would enter 
into. In the facts you described, there is no ability to get 
the information. But they find the language objectionable.
    Senator Sarbanes. Presumably, the ability to get the 
information is on a continuum. At one end of the continuum is: 
you can't get anything; at the other end of the continuum is: 
what we can get by the provision in the model treaty. So you 
range across that landscape.
    Mr. West. Senator, there is no continuum for us. It is full 
and open exchange of information held by financial institutions 
or we will not enter into a new treaty relationship.
    Senator Sarbanes. But it should be in the treaty, then.
    In how many treaties is such a provision found?
    Mr. West. It is not a majority of our treaties. I will see 
if I can get that information. If I cannot answer it now, I 
will provide it to you.
    Senator Sarbanes. Has it been in all the treaties since we 
became increasingly concerned about this issue?
    Mr. West. It is not in all the treaties, Senator Sarbanes. 
We have 8 treaties that have been approved by the Senate since 
1996 when our model treaty language appeared that do not have 
this language.
    Senator Sarbanes. And how many do?
    Mr. West. Four do and most of the treaties before you today 
do. But several of them do not.
    Senator Sarbanes. Mr. Chairman, you have been very 
generous. I have just a couple of more questions and then will 
have to depart, which I regret.
    Senator Hagel. Why don't you continue, then.
    Senator Sarbanes. Thank you.
    You stated earlier at the table that there were benefits in 
all of these treaties for U.S. taxpayers, is that correct?
    Mr. West. I believe so. Yes, sir.
    Senator Sarbanes. And that it was just a question of 
limiting them. What are the benefits in the German protocol?
    Mr. West. One benefit in the German protocol is our ability 
to apply our recent expanded expatriation rules in that 
protocol, Senator.
    Senator Sarbanes. In my reading and in the reading we have 
done it seems to indicate that it works to the benefit of 
German residents with assets in the United States.
    Mr. West. There are a couple of things about that.
    Senator Sarbanes. But, also, there are no reciprocal 
benefits to U.S. residents with property in Germany.
    Mr. West. Well, first of all, German internal law provides 
many of those same benefits. So there was no need to obtain 
them through a reciprocal agreement.
    Senator Sarbanes. What happens if they change German 
internal law?
    Mr. West. We would, again, consider seeking renegotiation 
if this agreement became nonreciprocal.
    Senator Sarbanes. On what basis would we do that?
    Mr. West. A change in the circumstances. We are in 
discussions with Germany all the time.
    Senator Sarbanes. What would happen if we changed U.S. 
internal law to the disadvantage of German residents?
    Ms. Paull. That did happen.
    Mr. West. That is what happened, which engendered this 
negotiation.
    Senator Sarbanes. What?
    Mr. West. That is what happened. In 1988, our domestic law 
was amended. It adversely affected German decedents with 
noncitizen spouses, and Germany sought negotiation of this 
protocol to our estate and gift tax convention.
    They also sought it, Senator, in the context of our income 
tax treaty that was agreed to in the early 1990's. The way the 
Treasury Department has viewed this agreement is hand-in-glove 
with the benefits and agreements that were provided under our 
income tax treaty with Germany. Again, that was concluded after 
the 1988 changes in law that adversely affected the Germans, 
but prior to the conclusion of this estate and gift tax 
provision.
    Senator Sarbanes. Are you telling me that the reach of this 
protocol is only to the extent of altering our earlier treaty 
with Germany to encompass the changes in U.S. domestic tax law?
    Mr. West. The two main things it does is it addresses the 
1988 change in law that adversely affected German decedents 
with noncitizen spouses and also implements a congressional 
directive to negotiate with treaty partners to provide a pro 
rata unified credit to them more appropriate than the one 
provided to them under prior law.
    Senator Sarbanes. Ms. Paull, do you have any observations 
on any of these issues that I covered with Mr. West?
    Ms. Paull. Yes, I have a few observations. I could start 
with this last one.
    I think we were on notice that the issues rising from our 
1988 change in our law, Germany was on notice, and I believe 
their testimony indicates that we made some modifications for 
Canada as well.
    The process of negotiating an income tax treaty with 
Germany was near its final stages when we changed the law. So I 
think there were commitments made that we would revisit the 
Estate, Gift, and Inheritance Tax Treaty, and that is what this 
is. I think we have been aware of that all along, that it was 
an obligation of the United States to go back and revisit that.
    That is why it looks a little bit unusual, in the sense 
that it is principally a one-sided modification of the 1980 
treaty, which deals only with estate, gift, and inheritance 
taxes.
    With respect to the bank secrecy provisions of the U.S. 
model treaty, I would have to say that our staff would have 
concerns about the Treasury Department deleting that language 
from the model treaty.
    Certainly, some of the treaties that were concluded in the 
last 5 years only have some partial exchanges of information, 
and I imagine that this committee believed that that was a step 
in the right direction considering the countries that were 
involved.
    One would hope that we would hold that standard as a high 
standard so that we could, with all of our treaty partners, get 
a full and adequate exchange of information. I think you know 
the countries we are talking about here. So I would just simply 
comment on that.
    On the main purpose test, I would, again, say to the 
committee that this test is very vague, very vague, and we have 
serious concerns about it. There is nothing of the test that 
appears in the treaties in their various articles that deals 
with tax avoidance, to which Mr. West was pointing--a variety 
of, a kind of similar, a principal purpose, or a main purpose 
type motivation--to avoid taxes as in our anti-abuse rules.
    I go back to my situation, a fairly straight-forward 
situation, where, all things being equal, a company, a U.S. 
company is going to make an investment in a region. They might 
want to pick Slovenia, but they might not want to under this 
treaty to get the benefits of the treaty, the lower withholding 
on the income that is generated by their investment.
    It puts a major cloud on investments that has nothing to do 
with what is stated in the articles and in the test that there 
is tax avoidance involved. Certainly, the technical explanation 
goes into that. But, you know, courts tend to look right at the 
language of the provision they are having to interpret first.
    So it is troublesome language. I don't think we have a clue 
what it really means, to be perfectly frank with the committee.
    Senator Sarbanes. Thank you very much, Ms. Paull.
    Thank you, Mr. Chairman.
    Senator Hagel. Senator Sarbanes, thank you.
    Let me move along to a couple of other areas that we have 
not had an opportunity to talk about.
    First is the Baltic states. In reading the general dynamics 
of what you have here, it is my understanding that the treaties 
with the Baltics, as well as the Venezuela treaty, all contain 
developing country concessions. You know what that means 
regarding permitting higher withholding rates, different source 
rules, and so on.
    I guess I have two general questions. One is what was the 
criteria used to determine if a country is entitled to 
developing country concessions? That is my first question.
    Mr. West. Mr. Chairman, what we do in cases like these, in 
consultation with the State Department, is make a determination 
of whether in the administration's view it is in the overall 
interest of the United States to embark on treaty negotiations 
with a country that we'll call a developing country.
    Once we make a decision to do that and sit down at the 
table with them, the extent to which we make concessions from 
the positions we take with developed countries is a dynamic, 
and it is a function of factors that I would venture to say are 
not subject to precise delineation of how a negotiating dynamic 
proceeds.
    We take into account the overall benefits to the United 
States and we negotiate the best agreement that we can under 
the circumstances. That is certainly true with these treaties. 
They reflect long negotiations, detailed negotiations. They go 
on for a number of rounds, over weeks and years from beginning 
to end, and we make a judgment as to whether the overall 
package is the best that could be obtained.
    It is our view that these agreements before you are the 
best agreements that could be obtained with these countries.
    Senator Hagel. Who makes the final decision on this?
    Mr. West. The final decision is made by the Senate in 
determining passage.
    Senator Hagel. No, no. You know what I mean.
    Mr. West. In the Treasury Department?
    Senator Hagel. That's where you're from.
    Mr. West. Typically, the Assistant Secretary for Tax Policy 
is involved in reviewing these agreements and is apprised of 
the terms of the agreements, sometimes has a role in 
negotiating the agreements, and all of these negotiations are 
subject to his judgment as to whether they are appropriate. 
They are, of course, reviewed and transmitted by the Secretary 
of the Treasury. They are reviewed by his office to make a 
determination as to whether the Office of Tax Policy has acted 
appropriately. But the Assistant Secretary for Tax Policy is 
generally the official that I would say is responsible for 
those judgments.
    Senator Hagel. Thank you.
    Do you believe or can you quantify if there are any 
effects, impacts on investment in the countries that were given 
these kinds of concessions?
    Mr. West. Those are very hard to quantify, Mr. Chairman. I 
would not even venture a guess as to what the effects are. We 
do not negotiate these agreements with an eye toward a short-
term boost to investments. These are agreements that we enter 
into because they are in the overall interests of the United 
States, in our overall economic interests.
    Senator Hagel. Are you familiar with a letter that Senators 
Helms, Biden, and I recently wrote to the Secretary of the 
Treasury regarding the U.S.-Japan Tax Treaty?
    Mr. West. I am.
    Senator Hagel. So you know that the question we posed to 
the Secretary was about these same kinds of concessions with 
Japan?
    Mr. West. As I read the letter, Mr. Chairman, it was a 
request, or an expression of the view of the signing Senators 
that the Treasury Department should do what it can to open 
formal negotiations to renegotiate the Japanese treaty.
    Senator Hagel. Does that treaty have similar developing 
country provisions in it?
    Mr. West. I would say this, that certain of the positions 
held by the Japanese consistently in all their treaty 
relationships, relatively few but certain of them are 
inconsistent with international norms for developed countries. 
There is really one in particular and that is their withholding 
tax rate on royalties.
    One of the other provisions that I know is of interest to 
the U.S. business community is the withholding tax rate on 
interest. In that case, the United States position is actually 
lower than the international norm in that area. So, saying what 
a developed country versus developing country standard is can 
get a bit tricky because in some cases the United States 
standard is actually more favorable to our business community 
than the international norm. That is the case with the interest 
withholding tax rate in the Japanese treaty.
    But their royalties tax withholding rate is inconsistent 
with the international norm.
    Senator Hagel. Are we renegotiating that part of the 
treaty?
    Mr. West. Mr. Chairman, I am doing everything in my power 
to open negotiations in a manner that would lead to a treaty 
that would be acceptable to this committee, to our business 
community, and to the Japanese, as well. We want very much to 
renegotiate the existing agreement to arrive at something that 
would be acceptable to all three of those constituencies at 
this time.
    I am doing everything in my power to work toward opening 
those negotiations.
    Senator Hagel. Does it not occur to you--and I suspect it 
has--that we are dealing here with the second largest economy 
in the world, that of Japan, but yet it has developing country 
provisions in it? Are we not talking about a charade here and 
wouldn't that subject all further treaties to an erosion of any 
confidence or any standards?
    Mr. West. I would only comment, Mr. Chairman, not by way of 
justification but by way of context, that two of our three 
largest trading partners--that is, Canada and Japan--both hold 
that same position regarding interest withholding tax rates.
    Senator Hagel. The Secretary probably will be getting 
another letter.
    I want you to know that there are a number of us on this 
committee who would be very happy to work with you on this, Mr. 
West, if you feel you are not getting the kind of support and 
impetus you need. We would look forward to working with you on 
this.
    Mr. West. I very much appreciate that.
    Senator Hagel. Ms. Paull, is there anything you would like 
to add to what Mr. West has said in any of these areas, these 
general areas--anything we have talked about this afternoon?
    Ms. Paull. No. I think I probably have outstayed my 
welcome.
    Senator Hagel. Oh, you have been most helpful, as always.
    We could spend the rest of the day with some of the more 
specific areas that we have not gotten into. But, suffice it to 
say we will submit in writing some questions for details of 
some of the more specific areas we want to get into.
    This committee has a business meeting on November 3. 
Obviously, as is always the case, the more timely the response, 
the more likely that we could turn some of this around.
    As always, we are grateful that you could come up today, 
Mr. West. We appreciate it very much.
    Ms. Paull, it is always nice seeing you. Thank you very 
much.
    Are there any last comments?
    Mr. West. I would just say, again, that we request all of 
these treaties be favorably acted on. Thank you for your time.
    Senator Hagel. Thank you.
    Mr. Murray, are you still awake?
    Please come forward to the table. We will give you some 
coffee or water, whatever you need.
    Mr. Murray, thank you. We are grateful that you are here 
today and look forward to your testimony. Please proceed.

  STATEMENT OF FRED F. MURRAY, VICE PRESIDENT FOR TAX POLICY, 
         NATIONAL FOREIGN TRADE COUNCIL, WASHINGTON, DC

    Mr. Murray. Thank you, Mr. Chairman. I am very happy to be 
here. As you have noted, my name is Fred Murray. I am vice 
president for tax policy of the National Foreign Trade Council.
    The NFTC is an association of businesses with some 500-plus 
members founded in 1914. It is the oldest and largest U.S. 
association of businesses devoted to international trade 
matters.
    Most of the largest U.S. manufacturing companies and most 
of the 50 largest U.S. banks are members. They account for 
approximately 70 percent of all U.S. nonagricultural exports 
and 70 percent of U.S. private foreign investment.
    We are here today to recommend ratification of these 
treaties and protocols under consideration by the committee. We 
appreciate the chairman's and the committee's actions in 
scheduling this hearing and agreeing to receive both our 
testimony and our written statement for the record.
    Expanding U.S. foreign trade and investment and 
incorporating the United States into an increasingly integrated 
world economy is an evermore important concern. Foreign trade 
is fundamental to our economic growth and our future standard 
of living. Although the U.S. economy is still the largest 
economy in the world, its growth rate represents a mature 
market for many of our companies.
    As such, U.S. employers must export in order to expand the 
U.S. economy by taking full advantage of the opportunities in 
overseas markets.
    Today, some 96 percent of U.S. firms' potential customers 
are outside the United States. In the 1990's, some 86 percent 
of the gains in worldwide economic activity occurred outside 
the United States.
    In recent years, exports have accounted for as much as one-
third of total U.S. economic growth.
    As global competition grows ever more intense, it is vital 
to the health of the U.S. economy and to our enterprises that 
they be free from excessive foreign taxes or double taxation 
that can serve as a barrier to full participation in the 
international marketplace.
    Tax treaties are a crucial component of the framework that 
is necessary to allow such balanced competition. The NFTC has 
long supported the expansion and strengthening of the U.S. tax 
treaty network.
    As you noted, the United States has in force approximately 
59 income tax treaties, depending on how you count certain of 
the agreements with the former Soviet Union. It has taken more 
than 60 years to negotiate, sign, and approve these treaties 
that form the current network. And, although there has been 
significant progress in recent years in expanding the treaty 
network, the U.S. treaty network still covers considerably less 
of the developing world compared to coverage by the networks of 
Japan and leading European nations and is still considerably 
smaller than some of our major trading partners.
    This discrepancy has persisted for many years, even though 
the United States relies on the developing world to buy a far 
larger share of its exports than does Europe.
    Five of the eight agreements before the committee today 
represent new tax treaty relationships with the United States. 
The remaining three agreements modify existing relationships. 
Virtually all treaty relationships depend upon difficult, and 
sometimes delicate, negotiations aimed at resolving conflicts 
between the tax laws and policies of the negotiating countries.
    The resulting compromises always reflect a series of 
concessions by both countries from their preferred positions.
    With one exception that I will later note, we believe that 
the treaties and protocols presently under consideration 
represent a good compromise and that they will contribute 
significantly both to the economic competitiveness of U.S. 
companies and to the proper administration of U.S. tax laws.
    Though all of the treaties before the committee today are 
important and serve to expand the tax treaty network of the 
United States, two of the treaties before the committee are 
especially important to U.S. business interests.
    First, let me address the treaty with Venezuela. Venezuela 
is a major destination for U.S. based foreign investment, and 
the U.S. is a major recipient of Venezuelan foreign investment. 
Venezuela is the second largest importer and exporter to the 
U.S. in the Western Hemisphere outside of those countries in 
NAFTA. Only Brazil exceeds Venezuela.
    The U.S. is Venezuela's most important trading partner, and 
many U.S. based companies have a significant stake in 
Venezuela. In fact, I have been told that as many as 1,000 
companies are members of the ``AMCHAM'' in Venezuela.
    If the treaty is ratified and comes into force and effect, 
U.S. companies will be put on the same competitive footing that 
companies from other nations currently have in their 
relationships with Venezuela. There are 12 other countries with 
whom Venezuela currently has double taxation treaties.
    The United States currently has no tax treaties in force 
and effect with countries on the continent of South America. 
This remark bears special emphasis.
    South American countries, including Venezuela, consistently 
rank at or near the top of NFTC surveys in their importance to 
U.S. based companies. This treaty is extremely important, as 
noted above, because of its importance to U.S. based companies 
and their interests in Venezuela.
    It is perhaps even more critically important because its 
ratification would tend to encourage more cooperation between 
the new Government of Venezuela and that of the United States. 
Conversely, failure to ratify the treaty may have important 
negative implications to that relationship.
    It is difficult to overstate the importance of gaining a 
foothold in our treaty network with South American countries, 
particularly in light of some of the tensions that have 
previously existed with some of our neighbors and friends to 
the south.
    We are concerned, or, we have been made aware of some of 
the concerns that the committee has become aware of in regard 
to the situation there. I must say that my members report to me 
that they are cautiously optimistic about the situation in 
Venezuela and support the treaty. They hope that the committee 
will look upon it favorably.
    In fact, the NFTC congratulates the Treasury for its 
efforts to persevere through some difficult negotiations of 
this treaty, and through the change in government, to make this 
landmark treaty.
    I would also note that I am informed by some of my 
colleagues that the new law that has been the subject of some 
discussion this afternoon is to be published in the ``Official 
Gazette'' this afternoon, as we speak.
    The Treasury Department is also to be commended for 
modernizing tax treaties with our major trading partners and, 
specifically, members of the European Union.
    The new tax treaty with Italy updates the existing treaty 
to reflect current tax policies in the United States and Italy. 
In addition to its other important contributions, the new 
treaty addresses the replacement of the ILOR, the local income 
tax, by the new Italian regional tax on productive activities, 
the IRAP. This provision is very important to our companies 
and, in spite of the inclusion of the other provision that has 
been the subject of much discussion this afternoon and which 
has caused a lot of concerns not only within our membership but 
certainly within the committee as we have discussed or heard 
discussed, it is very important that the treaty, with or 
without the offending provision, be ratified so that the 
provision governing the creditability of the ILOR come into 
force and effect.
    Our economic relationship with the Italian Republic is one 
of our most important and the changes made by the treaty are 
beneficial and important to our companies and workers.
    Ratification of the treaties and protocols before the 
committee today continues the momentum that is needed to bring 
other nations into the U.S. treaty network. It sends a 
continuing signal that the U.S. wishes to reduce and eventually 
eliminate existing impediments to global business.
    Again, the Council is grateful to the chairman and to the 
members of the committee for the opportunity to speak before 
the committee. We respectfully urge the committee to proceed 
with ratification of these treaties and protocols as 
expeditiously as the committee finds it appropriate.
    I would like, given the discussion this afternoon, to make 
one additional comment before I close, Mr. Chairman. The two 
agreements that have been mentioned in a number of the comments 
and questions, those with Italy and Slovenia, contain this main 
purpose test that has been much discussed. Although the NFTC 
does not support inappropriate use of such treaties, the 
wording of these tests is vague and unclear. The tests must be 
applied in a subjective way under treaty language that may be 
difficult to change if they do not work as intended.
    The questions and answers have elicited a number of 
comments about these types of subjective rules. We have found 
in other circumstances where the principal purpose test has 
been used, or tests like the business purpose test, that there 
is a good deal of uncertainty and quite a bit of litigation. It 
gives rise to some concern in respect of the inclusion of these 
rules in this particular context.
    The rules may cause considerable uncertainty to taxpayers 
in the application of the otherwise available provisions of the 
treaties. In that respect, we certainly adopt Ms. Paull's 
concerns.
    That concludes my oral remarks this afternoon. I would be 
pleased to answer your questions.
    [The prepared statement of Mr. Murray follows:]

                  Prepared Statement of Fred F. Murray

    Mr. Chairman, and Members of the Committee:
    The National Foreign Trade Council, Inc. (the ``NFTC'' or the 
``Council'') is pleased to present its views on ratification of the 
various income tax treaties and protocols before the Committee 
today.\1\ We are here today to recommend ratification of the treaties 
and protocols under consideration by the Committee. We appreciate the 
Chairman's and the Committee's actions in scheduling this hearing and 
agreeing to receive our testimony and written statement. We strongly 
urge this Committee to reaffirm the United States' historic opposition 
to double taxation by giving your full support to the pending treaties.
---------------------------------------------------------------------------
    \1\ Convention Between the Government of the United States of 
America and the Government of the Kingdom of Denmark for the Avoidance 
of Double Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income Signed at Washington, D.C., on the 9th Day of August, 
1999, Together with a Protocol Signed at the Same Time and Place; 
Convention Between the United States of America and the Republic of 
Estonia for the Avoidance of Double Taxation and the Prevention of 
Fiscal Evasion With Respect to Taxes on Income, Signed at Washington, 
D.C., on the 15th Day of January, 1998; Protocol Signed at Washington, 
D.C., on the 14th Day of December, 1998, Amending the Convention 
Between the United States of America and Federal Republic of Germany 
For the Avoidance of Double Taxation with Respect to Taxes on Estates, 
Inheritances, and Gifts, Signed at Bonn on December 3, 1980; 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, D.C., on the 25th Day of August, 1999, 
Together with a Protocol Signed at the Same Time and Place; Convention 
Between the United States of America and the Republic of Latvia for the 
Avoidance of Double Taxation and the Prevention of Fiscal Evasion With 
Respect to Taxes on Income, Signed at Washington, D.C., on the 5th Day 
of January, 1998; Convention Between the Government of the United 
States of America and the Government of the Republic of Lithuania for 
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion 
with Respect to Taxes on Income, Signed at Washington, D.C., on the 
15th Day of January, 1998; Convention Between the United States of 
America and the Republic of Slovenia for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on 
Income and Capital, Signed at Ljubljana, on the 21st Day of June, 1999; 
And, Convention Between the Government of the United States of America 
and The Government of the Republic of Venezuela for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income and Capital, Signed at Caracas on the 25th Day of 
January, 1999, Together with a Protocol Signed at the Same Time and 
Place.
---------------------------------------------------------------------------
    The NFTC is an association of businesses with some 550 members, 
originally founded in 1914 with the support of President Woodrow Wilson 
and 341 business leaders from across the U.S. It is the oldest and 
largest U.S. association of businesses devoted to international trade 
matters. Its membership now consists primarily of U.S. firms engaged in 
all aspects of international business, trade, and investment. Most of 
the largest U.S. manufacturing companies and most of the 50 largest 
U.S. banks are Council members. Council members account for at least 
70% of all U.S. nonagricultural exports and 70% of U.S. private foreign 
investment. A significant NFTC emphasis is to encourage policies that 
will expand U.S. exports and enhance the competitiveness of U.S. 
companies by eliminating major tax inequities and anomalies.
    The founding of the Council was in recognition of the growing 
importance of foreign trade and investment to the health of the 
national economy. Since that time, expanding U.S. foreign trade and 
investment, and incorporating the United States into an increasingly 
integrated world economy, has become an even more vital concern of our 
nation's leaders. The share of U.S. corporate earnings attributable to 
foreign operations among many of our largest corporations now exceeds 
50 percent of their total earnings. Even this fact in and of itself 
does not convey the full importance of exports to our economy and to 
American-based jobs, because it does not address the additional fact 
that many of our smaller and medium-sized businesses do not consider 
themselves to be exporters although much of their product is supplied 
as inventory or components to other U.S.-based companies who do export.
    Foreign trade is fundamental to our economic growth and our future 
standard of living.\2\ Although the U.S. economy is still the largest 
economy in the world, its growth rate represents a mature market for 
many of our companies. As such, U.S. employers must export in order to 
expand the U.S. economy by taking full advantage of the opportunities 
in overseas markets. Today, some 96% of U.S. firms' potential customers 
are outside the United States, and in the 1990's 86% of the gains in 
worldwide economic activity occurred outside the United States. In 
recent years, exports have accounted for as much as one-third of total 
U.S. economic growth.\3\
---------------------------------------------------------------------------
    \2\ ``Continued robust exports by U.S. firms in a wide variety of 
manufactures and especially advanced technological products--such as 
sophisticated computing and electronic products and cutting-edge 
pharmaceuticals--are critical for maintaining satisfactory rates of GDP 
growth and the international competitiveness of the U.S. economy. 
Indeed, it is widely acknowledged that strong export performance ranks 
among the primary forces behind the economic well-being that U.S. 
workers and their families enjoy today, and expect to continue to enjoy 
in the years ahead.'' Gary Hufbauer (Reginald Jones Senior Fellow, 
Institute for International Economics) and Dean DeRosa (Principal 
Economist, ADR International, Ltd.), ``Costs and Benefits of the Export 
Source Rule, 1998-2002,'' A Report Prepared for the Export Source 
Coalition, February 19, 1997. For an extensive discussion of the 
importance of foreign operations and cross-border trade and investment 
to the United States and the effects of globalization of the world 
economy, see Ch. 5, ``The NFTC Foreign Income Project: International 
Tax Policy for the 21st Century; Part One: A Reconsideration of Subpart 
F,'' National Foreign Trade Council, Inc., Washington, D.C., March 25, 
1999.
    \3\ See, Fourth Annual Report of the Trade Promotion Coordinating 
Committee (TPCC) on the National Export Strategy: ``Toward the Next 
Century: A U.S. Strategic Response to Foreign Competitive Practices,'' 
October 1996, U.S. Department of Commerce, ISBN 0-16-048825-7; J. David 
Richardson and Karin Rindal, ``Why Exports Matter: More!,'' Institute 
for International Economics and the Manufacturing Institute, 
Washington, D.C., February 1996.
---------------------------------------------------------------------------
   tax treaties and their importance to the united states of america
    Given the importance of the international economy to the United 
States, the Council is grateful to the Committee for giving 
international economic relations a prominent place on its agenda.
    As noted, our membership is actively engaged in a broad spectrum of 
industrial, commercial, financial, and service activities. The NFTC 
therefore seeks to foster an environment in which U.S. companies can be 
dynamic and effective competitors in the international business arena. 
To achieve this goal, American businesses must be able to participate 
fully in business activities throughout the world, through the export 
of goods, services, technology, and entertainment, and through direct 
investment in facilities abroad. As global competition grows ever more 
intense, it is vital to the health of U.S. enterprises, and to their 
continuing ability to contribute to the U.S. economy, that they be free 
from excessive foreign taxes or double taxation that can serve as a 
barrier to full participation in the international marketplace. Tax 
treaties are a crucial component of the framework that is necessary to 
allow such balanced competition. The NFTC has long supported the 
expansion and strengthening of the U.S. tax treaty network.
    Tax treaties are bilateral agreements between the United States and 
foreign countries that serve to harmonize the tax systems of the two 
countries. In the absence of tax treaties, income from international 
transactions or investment may be subject to ``double taxation:'' once 
by the country where the income arises and again by the country of the 
income recipient's residence. Tax treaties eliminate this double 
taxation by allocating taxing jurisdiction between the two treaty 
countries.
    In addition, the tax systems of most countries impose withholding 
taxes, frequently at high rates, on payments of dividends, interest, 
and royalties to foreigners. These taxes can be reduced only by treaty. 
If U.S. enterprises earning such income abroad cannot enjoy the reduced 
foreign withholding rates offered by a tax treaty, they may suffer 
double taxation and be unable to compete with business ventures from 
other countries that do have such benefits. Thus, tax treaties serve to 
prevent this barrier to U.S. participation in international commerce.
    Tax treaties also provide other features which are vital to the 
competitive position of U.S. businesses. For example, by prescribing 
internationally agreed thresholds for the imposition of taxation by 
foreign countries on inbound investment, and by requiring foreign tax 
laws to be applied in a nondiscriminatory manner to U.S. enterprises, 
treaties offer a significant measure of certainty to potential 
investors. Another extremely important benefit, that is available 
exclusively under tax treaties, is the mutual agreement procedure, a 
bilateral administrative mechanism for avoiding double taxation.
    The United States has in force some forty-nine \4\ Conventions for 
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion 
With Respect to Taxes on Income (``income tax treaties'') with various 
jurisdictions, not including other agreements affecting income taxes 
and tax administration (e.g., Exchange of Tax Information Agreements or 
Treaties of Friendship and Navigation that may include provisions that 
deal with tax matters). It has taken more than sixty years to 
negotiate, sign, and approve the treaties that form the current 
network.\5\ A number of new agreements are being negotiated by the 
Treasury Department. Nevertheless, the U.S. treaty network has never 
been as extensive as the treaty networks of our principal competitors. 
The U.S. treaty network still covers considerably less of the 
developing world, compared to coverage by the networks of Japan and 
leading European nations. This discrepancy has persisted for many 
years, even though the United States relies on the developing world to 
buy a far larger share of its exports than does Europe.
---------------------------------------------------------------------------
    \4\ The count is somewhat imprecise--e.g., the effects of the 
treaty with the former Union of Soviet Socialist Republics and its 
effects on the former members of that Union are not considered (the 
count may be increased by up to nine depending upon how such effects 
are determined). Some treaties have been terminated in part, and there 
are a number under active negotiation or renegotiation, or that have 
been signed but not ratified.
    \5\ The current international consensus favoring income tax 
treaties is derived from sixty years of evolution, starting with the 
model income tax treaty drafted by the League of Nations in 1927, 
culminating in its ``London Model'' treaty in 1946, and carried on 
later by the United Nations, and the Committee on Fiscal Affairs of the 
Organization for Economic Cooperation and Development (``OECD''). The 
U.S. first signed a bilateral tax treaty in 1932 with France, which 
treaty never went into force. The first effective treaty, also with 
France, was signed July 25, 1939, and came into force on January 1, 
1945.
---------------------------------------------------------------------------
    As noted above, the typical income tax treaty provides for the 
elimination or at least mitigation of double taxation in a number of 
ways: modification of sourcing rules, clarification of rules affecting 
computation of foreign tax credits, specification of certain taxes that 
may be considered income taxes for the purposes of the foreign tax 
credit, rules allocating income to permanent establishments or 
establishing transfer prices, rules establishing the competent 
authority mechanism, and other rules in which jurisdiction to tax is 
relinquished. The reciprocal reduction of withholding taxes imposed by 
the respective contracting states on dividends, interest, royalties, 
and certain other types of cross-border flows is the most important 
form of mutually agreed relinquishment of jurisdiction to tax. The 
treaties also provide a number of ``administrative'' mechanisms for 
resolution of disputes as to state of residence, exchange of tax 
information between tax authorities of the two contracting states, 
nondiscrimination against nationals or other parties of one contracting 
state by the other contracting state, and the like.
    The principal function of an income tax treaty is to facilitate 
international trade, investment, and commerce by removing or preventing 
tax barriers to the free flow or exchange of goods and services and the 
free movement of capital and persons. In making such an agreement, a 
contracting state acts in two capacities.
    First, as a country of residence, the contracting state imposes tax 
on the income derived by resident individuals and legal entities (and, 
in countries like the United States that tax their citizens on a world-
wide basis, its non-resident citizens and those legal entities 
organized under its laws or otherwise subject to its jurisdiction). In 
this capacity, the contracting state seeks to minimize the source-based 
taxes imposed on these taxpayers by the other contracting state, its 
treaty partner. If, like the United States, its system of world-wide 
taxation is relieved by a foreign tax credit mechanism, it will have a 
revenue interest in this result, but even in other circumstances, it 
will have an interest in the reduction of source-based taxes as a means 
of assuring fair treatment of its taxpayers and promoting their foreign 
trade and commerce.
    Second, the country of source may impose a tax on income derived by 
individuals and entities resident in its treaty partner. In this role, 
the contracting states have multiple and sometimes incongruent 
interests. The source country may be interested in protecting its 
revenues from unwarranted erosion. However, it is also concerned with 
providing a hospitable environment for desirable inbound foreign 
investment. As these bilateral treaties are reciprocal agreements, 
contracting states must be willing to make concessions with respect to 
taxing authority to gain similar reciprocal concessions from its treaty 
partner.
    The loss of revenue from withholding taxes, or other reductions of 
source-based taxation has now, after these six decades, become 
generally accepted as the price for obtaining for its taxpayers the 
benefits of neutral tax treatment with respect to their international 
trade, investment, and commerce. In fact, there has developed a 
remarkably broad, general consensus among national governments, even 
those who agree on few other principles, that it is in their interest 
to enter into income tax treaties, and almost as broad consensus as to 
the form of the mechanisms adopted.
    Income tax treaties enable U.S. firms to compete in foreign 
countries, and foreign firms to establish plants in the United States 
and invest in U.S. securities. Without the tax treaty network and 
complementary national legislation, double taxation would create an 
enormous barrier to the international movement of capital and 
technology. Likewise, a crippling of our treaty network could cause 
world trade to shrink because so much of it depends upon cross-border 
investment and open channels for movement of capital and technology.
    A study, conducted under the auspices of the NFTC, illustrates the 
possible consequences of abandoning all existing U.S. tax treaties, 
and, in selective ways, changing U.S. tax laws to extract more revenue 
from inward foreign investment:

   Broadly speaking, the average foreign tax burden on income 
        flowing to the United States, which is predominantly from 
        direct investment and therefore subject to foreign corporate 
        tax as well as withholding taxes, would rise from about 16.0 
        percent (with a treaty network) to about 23.4 percent (without 
        a treaty network). The average U.S. tax burden on income 
        flowing to foreign investors would similarly rise from about 
        9.1 percent to about 14.1 percent.
   In relative terms, the tax burdens on U.S. investment abroad 
        and foreign investment in the United States would thus escalate 
        by about the same amount. However, the absolute tax level is 
        lower on foreign investments in the United States because that 
        investment is concentrated in bank deposits and portfolio 
        securities, which are not immediately subject to the U.S. 
        corporate income tax.
   As a consequence of higher tax rates, international 
        investment could implode. Using a conservative estimating 
        procedure, it was calculated that the stocks of U.S. investment 
        abroad and foreign investment in the United States would each 
        shrink by about $340 billion annually, without a treaty 
        network.
   Reduced foreign investment in the United States would curb 
        competition in the U.S. marketplace and raise U.S. interest 
        rates. U.S. consumers would have to pay higher prices for a 
        smaller variety of goods, investment would be squeezed and, 
        ultimately, growth rates would be lower. In addition, the 
        smaller role of multinational firms would curtail U.S. exports 
        by some $21 billion annually, which would reduce the domestic 
        employment of those firms and their suppliers by an estimated 
        340,000 jobs.
   In order for the U.S. Treasury to realize any revenue gain 
        from the non-treaty world, the Congress would need to impose a 
        new withholding tax on interest paid to foreign investors on 
        their U.S. bank deposits and Treasury securities. At a rate of 
        5 percent, the new tax would raise significant revenue, about 
        $6.4 billion annually. However, the larger tax revenues would 
        be more than offset by the inevitable rise in U.S. Treasury 
        interest payments (net of associated tax reflows) on Treasury 
        debt held by the public in this country and abroad. Higher 
        interest payments to the public (net of tax reflows) were 
        estimated by the model at $7.1 billion.
   If the level of international investment imploded by twice 
        as much as the conservative estimating procedure might suggest, 
        the U.S. Treasury would lose $0.8 billion on U.S. income 
        payments to foreigners, and $3.2 billion on U.S. income 
        receipts from foreign sources In other words, the Treasury 
        could lose up to $40 billion from a policy that abandoned the 
        U.S. tax treaty network.
   In any event, U.S. multinational enterpnses would be 
        substantially worse off. Their income flows before foreign tax 
        would contract from $279 billion to $240 billion. Their 
        combined tax burden, counting payments both to foreign 
        governments and the U.S. Treasury (after allowing for the U.S. 
        foreign tax credit), would rise by $9.4 billion. The loss of 
        income coupled with a rising tax burden would significantly 
        impair the competitive strength of U.S. multinational 
        enterpnses relative to rival firms based in Japan and Europe.
  --G. Hufbauer, ``Tax Treaties and American Interests--A Report to the 
        National Foreign Trade Council, Inc.'' (1988).

    While the preceding analysis is now somewhat out of date, world-
wide expansion of business enterprises and the increasing importance of 
foreign investment flows and exports have served to increase the 
importance of our treaty network. These conclusions nevertheless serve 
to illustrate the importance of maintaining and expanding the treaty 
network of which the United States is a member, and in a world in which 
U.S. multinational enterprises must compete. Absent a ``level playing 
field'' environment, taxes of all types on the income and capital flows 
of U.S. multinational enterprises can easily escalate in proportion to 
the economic activity involved. Particularly where more than two 
junsdictions are involved, they can exceed one hundred percent.
    Taxpayers are not the only beneficiaries of tax treaties. Treaties 
protect the legitimate enforcement interests of the U.S. Treasury by 
providing for the exchange of information between tax authorities. 
Treaties have also provided a framework for the resolution of disputes 
with respect to overlapping claims by the respective governments. In 
particular, the practices of the Competent Authorities under the 
treaties have led to agreements, known as ``Advance Pricing 
Agreements'' or ``APAs'' within which tax authorities of the United 
States and other countries, have been able to avoid costly and 
unproductive disputes over appropriate transfer prices for the trade in 
goods and services between related entities. APAs, which are agreements 
jointly entered into between one or more countries and particular 
taxpayers, have become common and increasingly popular procedures for 
countries and taxpayers to settle their transfer pricing issues in 
advance of dispute. The clear trend is that treaties are becoming an 
increasingly important tool used by tax authorities and taxpayers alike 
in striving for fairer and more efficient application of the tax laws.
                  treaties before the committee today
    Five of the eight agreements before the Committee today represent 
new tax treaty relationships for the United States: Estonia, Latvia, 
Lithuania, Slovenia, and Venezuela. The remaining three agreements 
modify existing relationships.
    Virtually all treaty relationships depend upon difficult and 
sometimes delicate negotiations aimed at resolving conflicts between 
the tax laws and policies of the negotiating countries. The resulting 
compromises always reflect a series of concessions by both countries 
from their preferred positions. Recognizing this, but also cognizant of 
the vital role tax treaties play in creating a level playing field for 
enterprises engaged in international commerce, the NFTC believes that 
treaties should be evaluated on the basis of their overall effects in 
encouraging international flows of trade and investment between the 
United States each of its treaty partners, in providing the guidance 
enterprises need to plan for the future, in providing nondiscriminatory 
treatment for U.S. traders and investors as compared to those of other 
countries, and in meeting a minimum level of acceptability in 
comparison with the preferred U.S. position and expressed goals of the 
business community. Comparisons of a particular treaty's provisions 
with the U.S. Model or with treaties with other countries may not in 
some cases provide an appropriate basis for analyzing a treaty's value.
    The treaties and protocols presently under consideration represent 
a good illustration of the contribution of such agreements to the 
economic competitiveness of U.S. companies and to the proper 
administration of U.S. tax laws. Each of these treaties also includes 
important advantages for the administration of U.S. tax laws. They 
offer the possibility of administrative assistance between the relevant 
tax authorities. The treaties also include modern safeguards against 
treaty-shopping in accordance with established U.S. policy.
    Moreover, each of the new treaties contains two very significant 
provisions of great importance. First, each treaty contains a 
nondiscrimination article which ensures even-handed treatment of 
taxpayers by both contracting states. Second, they contain a mutual 
agreement article which ensures that each country lives up to its 
treaty obligations to avoid double taxation.
    Likewise, these treaties set international norms for the conduct of 
administrative audits of transactions between affiliates and provides a 
mechanism to resolve tax disputes. Without these, U.S. companies could 
not be assured of protections against arbitrary tax assessments. These 
tax treaties help create the environment for predictable tax treatment 
of cross-border business transactions so necessary to successful global 
business enterprises. Transactions in tangible goods, intangible goods 
including computer software, information and services are more viable 
if the tax rules applied are consistent and avoid double taxation. It 
is vital that these treaties be ratified so that U.S.-based business 
can be better prepared to compete in an global marketplace.
    Though all of the treaties before the Committee today are important 
and serve to expand the tax treaty network of the United States, two of 
the treaties before the Committee are especially important to U.S. 
business interests.
                         republic of venezuela
    According to data received by NFTC, Venezuela is a major 
destination for U.S.-based foreign investment, and the U.S. is a major 
recipient of Venezuelan foreign investment. In fact, Venezuelan 
companies and individuals have invested more than one-hundred billion 
dollars in the United States. Venezuela exported more than $9.3 billion 
in trade to the U.S. in 1998, and imported more that $6.5 billion that 
year. Venezuela is the second largest importer and exporter to the U.S. 
in the Western Hemisphere outside of those countries in the North 
American Free Trade Agreement (Brazil is first).
    The United States currently has no tax treaties in force and effect 
with countries on the continent of South America. This remark bears 
emphasis. South American countries, including Venezuela, consistently 
rank at or near the top of NFTC surveys in their importance to U.S.-
based companies. The U.S. is Venezuela's most important trading 
partner, and many U.S.-based companies have a significant stake in 
Venezuela, its economy and its people. If the treaty is ratified and 
comes into force and effect, U.S.-Venezuela business will be put onto 
the same competitive footing that companies from other nations 
currently have in their relationships in Venezuela. There are twelve 
other countries with whom Venezuela currently has double taxation 
treaties.\6\
---------------------------------------------------------------------------
    \6\ Belgium, Czech Republic, France, Germany, Italy, Norway, 
Portugal, Sweden, Switzerland, The Netherlands, Trinidad & Tobago, and 
the United Kingdom. (A treaty with Mexico ratified by Venezuela is 
pending ratification by Mexico.)
---------------------------------------------------------------------------
    This treaty is extremely important, as noted above, because of its 
importance to U.S.-based companies and their interests in Venezuela. It 
is perhaps even more critically important because its ratification 
would tend to encourage more cooperation between the government of 
Venezuela and that of the United States. Conversely, failure to ratify 
the treaty may have important negative implications to that 
relationship. It is difficult to overstate the importance of gaining a 
foothold in our treaty network with South American countries, 
particularly in light of some of the tensions that have sometimes 
existed between the U.S. and its neighbors and friends to the south.
    The NFTC congratulates the Treasury for its efforts to persevere 
through difficult negotiations and changes in governments in Venezuela 
to make this landmark
treaty.
                            italian republic
    The Treasury Department is to be commended for modernizing tax 
treaties with our major trading partners and specifically members of 
the European Union.
    The new treaty with Italy updates the existing treaty to reflect 
current tax policies in the United States and Italy. The new treaty 
addresses the replacement of the Italian local income tax (l'imposta 
locale sul redditi or ``ILOR'') by the new Italian regional tax on 
productive activities (l'imposta regionale sulle attivat . . . 
produttive or ``IRAP''), revises the withholding rates for passive 
investment income for residents of each country, and strengthens the 
administrative provisions. Our economic relationship with the Italian 
Republic is one of our most important, and the changes made by the 
treaty are beneficial and important to our companies and workers.
    Ratification of the treaties and protocols before the Committee 
today continues the momentum that is needed to bring other nations into 
the U.S. treaty network. It sends a continuing signal that the U.S. 
wishes to reduce and eventually eliminate existing impediments to 
global business. The larger business community hopes that side issues 
do not get in the way of a treaty process that is working. We are 
extremely pleased that both the Executive Branch and the Congress have 
given the tax treaties very high priority.
                 general comments on tax treaty policy
    The NFTC also wishes to emphasize how important treaties are in 
creating, preserving, and implementing an international consensus on 
the desirability of avoiding double taxation, particularly with respect 
to transactions between related entities. The United States, together 
with many of its treaty partners, has worked long and hard to promote 
acceptance of the arm's length standard for pricing transactions 
between related parties. The worldwide acceptance of this standard, 
which is reflected in the intricate treaty network covering the United 
States and dozens of other countries, is a tribute to our government's 
commitment to prevent conflicting income measurements from leading to 
double taxation and the resulting distortions and barriers for healthy 
international trade. Treaties are a crucial element in achieving this 
goal, because they express both government's commitment to the arm's 
length standard and provide the only available bilateral mechanism, the 
competent authority procedure, to resolve overlapping claims.
    The NFTC recognizes that determination of the appropriate arm's 
length transfer price for the exchange of goods and services between 
related entities is sometimes a complex task which can lead to good 
faith disagreements between well-intentioned parties. Nevertheless, the 
points of international agreement on the governing principles far 
outnumber any points of disagreement. Indeed, after decades of close 
examination, governments around the world agree that the arm's length 
principle is the best available standard for determining the 
appropriate transfer price, because of both its economic neutrality and 
its ability to be applied by taxpayers and revenue authorities alike by 
reference to verifiable data.
    The NFTC strongly supports the efforts of the Internal Revenue 
Service and Treasury to promote continuing international consensus on 
the appropriate transfer pricing standards. We applaud the continuing 
growth of the Advance Pricing Agreement (``APA'') program, which is 
designed to achieve agreement between taxpayers and revenue authorities 
on the proper pricing methodology to be used, before disputes arise. We 
commend the Internal Revenue Services' efforts to refine and improve 
the competent authority process under treaties, to make it a more 
efficient and reliable means to avoid double taxation.
    The NFTC supported the arbitration option in earlier treaties with 
Germany, Mexico, and The Netherlands, and we urge that it be readily 
available in those unusual cases where competent authority negotiations 
prove unsuccessful.
    These developments emphasize the international consensus behind the 
arms-length standard. We cannot overemphasize the potential damage we 
believe could result from any movement away from that consensus.
    In fact, a recurring theme of our testimony is the importance of 
considering the United States as a member of the world community of 
nations, and the importance to United States business interests of 
providing harmony between the tax system of the United States and that 
of other nations where United States companies must conduct their 
business. The same is true as well for foreign investors who invest 
capital in the United States.
    The NFTC also wishes to reaffirm its support for the existing 
procedure by which Treasury consults on a regular basis with this 
Committee, the tax-writing Committees, and the appropriate 
Congressional Staffs concerning treaty issues and negotiations and the 
interaction between treaties and developing tax legislation. We 
encourage all participants in such consultations to give them a high 
priority. We also respectfully encourage this Committee to schedule tax 
treaty hearings, if possible at least once a year, to enable 
improvements in the treaty network to enter into effect as quickly as 
possible.
    The NFTC also wishes to reaffirm its view, frequently voiced in the 
past, that Congress should avoid occasions of overriding by subsequent 
domestic legislation the U.S. treaty commitments that are approved by 
this Committee. We believe that consultation, negotiation, and mutual 
agreement upon changes, rather than unilateral legislative abrogation 
of treaty commitments, better supports the mutual goals of treaty 
partners.
    Two of the agreements before the Committee today, those with Italy 
and Slovenia, have provisions that contain ``main purpose'' tests that 
do not appear in any other U.S. treaties or the U.S. Model Treaty. 
Although NFTC does not support inappropriate use of such treaties, the 
wording of these tests are vague and unclear. The tests must be applied 
in a subjective way under treaty language that may be difficult to 
change if they do not work as intended. The rules may cause 
considerable uncertainty to taxpayers in the application of otherwise 
available provisions of the treaties. The NFTC would hope that the 
Treasury would not use its franchise to negotiate treaties as a way to 
achieve new authority under new and untested general anti-avoidance 
rules, particularly where the need for such rules has not been vetted 
in the public discourse or has been refused by the Congress in other 
contexts. NFTC strongly supports the immediate ratification of both 
treaties, but finds the inclusion of these test provisions to be 
troubling.
                             in conclusion
    Again, the Council is grateful to the Chairman and the Members of 
the Committee for giving international economic relations prominence in 
the Committee's agenda. The NFTC appreciates the opportunity to submit 
written comments on the treaties and protocols pending before the 
Committee. We respectfully urge the Committee to proceed with 
ratification of these treaties and the protocol as expeditiously as 
possible.

    Senator Hagel. Mr. Murray, thank you. We appreciate very 
much what you have said and also what your organization does 
for our country.
    Mr. Murray. Thank you, Mr. Chairman.
    Senator Hagel. You have been very important to this country 
in our exports and our interests in the world. We recognize 
that and appreciate it very much.
    Mr. Murray. Thank you, Mr. Chairman.
    Senator Hagel. Let me begin with your last comment. I think 
you said regarding the main purpose test, the uncertainty, and 
your paraphrasing of what Ms. Paull and Mr. West said, that you 
tend to agree with Ms. Paull's concerns. Is that fair and 
accurate?
    Mr. Murray. Yes, Mr. Chairman, I believe it is.
    Senator Hagel. What does that mean?
    Mr. Murray. That is probably the hardest question you have 
asked this afternoon in many respects.
    As I noted in my testimony and as others have noted, all of 
the treaties reflect a balancing of various concessions made by 
both parties, and there are certainly provisions, as I 
mentioned, in the Italy treaty that are very important to us. 
So I have to preface my remark by consideration that my 
membership really does want the Italian treaty, at least those 
provisions that apply to the difficult transition issue that I 
mentioned, to come into force and effect.
    But I think it is also important to look at the policy 
underlying some of the concerns that both Mr. West and Ms. 
Paull have discussed this afternoon.
    These provisions are new. We have not yet had a chance to 
really parse through how they would work. The wording is fairly 
vague.
    I might also note, in addition to the other concerns that 
have been expressed, that there is a general concern, I think, 
in our jurisprudence about the use of general anti-avoidance 
rules. Some of the countries mentioned this afternoon make more 
prevalent use of such rules in their jurisprudence. But your 
colleagues on the tax writing committees have been very 
reluctant to make use of those rules in the past. In fact, as 
Mr. West noted, there are only two other instances of which I 
am aware that such a rule has been incorporated into our 
Internal Revenue Code.
    So I guess the bottom line, so to speak, is that we are 
uncertain exactly what to make of these rules. But we are 
troubled by them.
    Senator Hagel. You noted that your members had given you 
some sense of what they think is going on in Venezuela. I 
believe your term was that they are cautiously optimistic.
    Would you develop a little more what your members tell you 
about what is going on and how this might have a consequence 
and effect on the treaty and business?
    Mr. Murray. I think probably the best place to start, Mr. 
Chairman, in answer to that question is to sort of echo what 
Mr. West said about what he had heard from the State Department 
in this respect. I think it echoes to some degree what I have 
heard from our member companies who are on the ground in 
Venezuela.
    I also had the occasion to have breakfast with Ambassador 
Toro Hardy last week from Venezuela and to hear his view of how 
some of these things were developing. I guess the proper way to 
sum it up would be to say that, although I think there is a 
good deal of transition--perhaps that is the best way to say 
it--that is going on in Venezuela now, at least those on the 
ground that have had discussion with me have indicated that, so 
far, things seem to be proceeding in a direction that would 
tend to support the thought that they are moving toward greater 
development of their democracy and not the other way around. 
Commercial interests seem to be, as I have said, cautiously 
optimistic that things will continue to develop in that 
direction.
    It is certainly a situation that bears watching and there 
have been enough developments this year that have probably 
caused not only those who are citizens of Venezuela but also 
those who have to do business in Venezuela to carefully watch 
the situation.
    Senator Hagel. So it is your analysis, your judgment, your 
conclusion, based on the input you receive from members and 
others, that the best thing we could do is to ratify this 
treaty and move on, that that would be the most positive and, 
hopefully, potentially beneficial for future trade with 
Venezuela?
    Mr. Murray. Mr. Chairman, while we certainly understand the 
concerns that the committee has expressed, that members of the 
committee have expressed, at least in some of our conversations 
in recent weeks, I think our members believe that that is the 
best course of action at this time.
    Senator Hagel. Thank you.
    Let's talk about the Baltic states treaties now. Give this 
committee, if you would, your sense of how important that is. 
Are we looking at a rather dramatic breakthrough or not? Does 
it matter?
    What do you think?
    Mr. Murray. That is a hard question, also.
    Senator Hagel. Oh, Senator Sarbanes asks all of the hard 
questions.
    Mr. Murray. You should be entitled also.
    Senator Hagel. I'll tell him that.
    Mr. Murray. I think, Mr. Chairman, those treaties are 
important, not only because of the commercial relationships 
that exist between the United States and those republics but 
also because they represent an extension of our tax treaty 
network. It is difficult for me to assess the commercial 
importance of those treaties because they perhaps involve 
relationships that are somewhat newer than the more established 
relationships that we have in places like Italy and Venezuela, 
where our companies have been present for many years.
    Senator Hagel. What do your members say about it? Are they 
excited about these treaties? Will they jump on the next plane 
and go to the Baltics? What do your members think?
    Mr. Murray. To be honest, I have not heard a great deal of 
discussion from my members with respect to those particular 
treaties. But I think I have found in previous discussions that 
one of the reasons, in fact, why we spend so much time and 
energy supporting the Treasury Department's extension of the 
tax treaty network is because our members find that tax 
treaties play an integral role in expanding investment in these 
types of countries and help very much for our companies to, as 
you say, develop the certainty they need to make those kinds of 
investments.
    So I would hope that it would lead to greater commercial 
exports and investment.
    Senator Hagel. I personally believe it will. I was in 
Lithuania in December and I think there is great potential 
there. The more of the uncertainty that we have talked about 
this afternoon that we can remove from investment decisions, 
obviously the better off we are. I do think the Baltic piece of 
this is an important piece.
    You heard the give and take regarding Japan. Would you care 
to comment on the treaty with the Japanese, Third World 
concessions, and some of the other areas that we got into here 
today?
    Mr. Murray. Mr. Chairman, we agree to the utmost with the 
comments and questions that you raised in regard to the treaty. 
We think that particular treaty relationship is out of kilter 
with the rest of our network.
    As you noted, the provisions of the treaty are almost 
ancient by comparison to some of our other treaties. They are 
approximately 30 years old now and they do not work very well 
in the context of not only U.S. business operating in Japan, 
but some of our members who are Japanese companies have also 
expressed to us--in fact, I got a letter this morning from a 
major Japanese company--an interest in our work in trying to 
find a way to get that treaty renegotiated.
    We understand Mr. West's concerns about some of the 
negotiations. But, at the same time, we feel that if our 
executive branch and the Congress make enough of an issue with 
this, the Japanese will come to the table and, hopefully, will 
be able to negotiate an arrangement that is satisfactory to 
both governments.
    Senator Hagel. Have you or your organization talked to Mr. 
West or any of his colleagues about this particular 
renegotiation?
    Mr. Murray. Yes, Mr. Chairman. We had a dialog with the 
Treasury actually over several years, going back a number of 
years now, about this particular treaty. Most recently, six 
CEO's of our companies went in with me to talk to Secretary 
Summers about this particular treaty. It was our impression 
from the meeting that the Secretary was interested in renewing 
some of the internal discussions about how best to proceed 
forward with the negotiations.
    He seemed to be supportive and that was encouraging to us, 
as well.
    Senator Hagel. Well, you heard what I said about it. I 
would be very happy to help, as I suspect some of my colleagues 
would, as well. Maybe we could revisit that, all of us 
together.
    Mr. Murray. Thank you, Mr. Chairman. In doing our surveys 
and some of our internal analysis of the treaty network, we 
have found that that particular treaty is of concern to a great 
number of our companies. In fact, there are over 60 companies 
that presently are in our working group that are looking at 
ways to try to advance this negotiation. The flows that are 
involved in investment--for example, in some of our companies 
the remittances from their Japanese subsidiaries account for as 
much as 25 percent of their worldwide gross receipts.
    Some of our companies, despite the popular press about a 
U.S. presence in Japan, have significant presence in the 
Japanese markets, and this treaty is very necessary to enable 
those companies to effectively compete with their Japanese 
counterparts.
    Senator Hagel. Would this be one of the high priority, most 
important next venues for Treasury to negotiate?
    Mr. Murray. I would say in conducting our surveys, at least 
since I have been the counsel, that the regions of East Asia 
and Latin America are the two most prevalent regions in which 
our companies express an interest in treaties. Within those two 
regions, the Japanese treaty and the treaty with Brazil as well 
as with Venezuela, come at the top of the list.
    Senator Hagel. Thank you.
    I was in Asia, Southeast Asia, in August, and one of the 
countries I visited was Vietnam. Tell me a little bit about 
where your members are on the Vietnam issue.
    Mr. Murray. A number of our members are very interested in 
Vietnam. In fact, some years ago, our council had a working 
group on Vietnam, looking at the investment treaty with Vietnam 
and some of the issues that were involved. Although I was not 
personally involved in that effort, I know there is a 
considerable interest within the membership in trying to expand 
our commercial relations with Vietnam.
    Senator Hagel. As you know, we are engaged up here on 
normal trade relations, and I suspect that is not going to 
happen before we lock the doors around here--who knows when? 
But, nevertheless, I happen to believe as well that this is an 
area we should pursue.
    Have you talked to Treasury about it?
    Mr. Murray. That is one particular area we have not really 
had a real dialog about, although it is certainly something we 
would want to discuss.
    Senator Hagel. Is there an area here that we have not 
talked about this afternoon that you would like to get on 
record about?
    Mr. Murray. No, Mr. Chairman. I think we have covered most 
of the points that our membership has expressed some concern 
about.
    Again, I would ask that the committee give its prompt 
consideration, as I believe you have indicated you will, to the 
movement of the treaties within the remaining time of the 
session.
    I guess I would close by saying that we hope the committee 
and also the Senate will give advice and consent to the effect 
that these treaties should be ratified.
    Senator Hagel. Mr. Murray, thank you.
    Let me do just one piece of business here.
    I understand that Delegate Underwood of Guam has asked that 
his statement be included in the record. He wishes to note that 
he is concerned that Guam and other U.S. territories are not 
included in the treaty definition, of ``United States.'' I have 
done that. His statement will be recorded.
    [The statement referred to follows:]

Prepared Statement of Hon. Robert A. Underwood, U.S. Delegate from Guam

    Mr. Chairman, I would like to express my concern over the manner in 
which tax treaties like the ones being considered today by the Senate 
Foreign Relations Committee are negotiated by the United States with 
other countries. This hearing focuses on tax treaties which the United 
States negotiated with the countries of Estonia, Latvia, Venezuela, 
Denmark, Lithuania, Slovenia, Italy, and Germany.
    What will not be brought up today is the fact that under these tax 
treaties and many other tax treaties which the United States has 
negotiated with other countries over the years, the definition of the 
term ``United States'' generally excludes Guam and the other U.S 
territories. The most commonly employed definition of the term ``United 
States'' excludes Guam and the other territories by name like the 
treaties with Estonia, Latvia, Venezuela, Lithuania, Italy, and 
Germany. Some tax treaties explicitly includes the 50 states and the 
District of Columbia in the definition of the term ``United States'' 
like the treaty with Slovenia. Some tax treaties employ the antiquated 
definition of the term ``United States'' to mean ``only States, the 
Territories of Alaska and Hawaii, and the District of Columbia'' like 
the tax treaty with Denmark.
    The point I wish to make, Mr. Chairman, is that if one of the goals 
of tax treaties between the United States and other countries is to 
provide for better foreign investment tax rates between the affected 
countries, then I believe the current practice by U.S. negotiators has 
been discriminatory against Guam and other U.S. territories because we 
are unable to offer foreign investors the same tax treatment as the 
fifty states. There also appears to be no justifiable reason why Guam 
should not be included in tax treaties.
    As background, under the U.S. tax code, there is a 30% withholding 
tax rate on dividends, interest, and other forms of passive income 
remitted to foreign investors. Since Guam's tax law ``mirror's'' the 
rate established under the U.S. tax code, the standard rate for foreign 
investors on Guam is 30%. As a result, only large and profitable 
projects can absorb such high costs in Guam.
    Lower withholding tax rates as negotiated under tax treaties 
provides for a better foreign investment climate in the fifty states, 
which often leads to the creation of new jobs and the stimulation of 
the economy. These are goals which the people of Guam want just as much 
as any other U.S. jurisdiction. Seventy-five percent of Guam's 
commercial development is funded by foreign investors. Being excluded 
from the definition of the term ``United States'' under tax treaties 
makes Guam the single most expensive place under any state or 
territorial jurisdiction in the United States for foreign investors.
    To show how discriminatory the tax treaties being considered today 
are toward Guam, the following chart shows the difference in tax rates 
which the tax treaties would provide to the fifty states and the 
District of Columbia, as compared to what would be available to foreign 
investors in Guam.

                                       Withholding Tax Rate Under Treaties
----------------------------------------------------------------------------------------------------------------
                                                                             In Percent
                    Country                    -----------------------------------------------------------------
                                                             Dividends                         Interest
----------------------------------------------------------------------------------------------------------------
Estonia \1\...................................                       15                                0
Denmark \2\...................................                    5, 15                                0
Latvia \1\....................................                   10, 25                                0
Venezuela \1\.................................                    5, 15                         4.95, 10
Lithuania \1\.................................                        0                               20
Slovenia \1\..................................                       15                                0
Germany \2\...................................                5, 10, 15                                0
Italy \2\.....................................                    5, 15                               15
----------------------------------------------------------------------------------------------------------------
 
                            Withholding Tax Rate Under Guam Law (Based on U.S. Code)
 
Guam..........................................                       30                               30
 
----------------------------------------------------------------------------------------------------------------
\1\ Rates as quoted are from the general tax statutes of each country.
\2\ Rates as quoted are from the double tax treaties of each country.
Source: Deloitte & Touche LLP.


    In looking at Guam's situation, one might wonder why Guam just 
doesn't fix the problem by changing local law. Under current law, Guam 
has no authority to change the withholding tax rate for foreign 
investors. This is an issue that the federal government must resolve, 
which is why the policy of U.S. negotiators for various treaties in 
excluding Guam is so frustrating. Clearly, Guam cannot negotiate its 
own treaties with other countries. So the easiest solution for Guam 
would be for U.S. negotiators to include Guam in the definition of the 
term ``United States'' for all tax treaties.
    In the interim, however, I believe that there is no justification 
for Guam's unfair treatment, which is why I have sought a legislative 
solution under Guam's Organic Act. On July 1, 1999, I introduced H.R. 
2462, legislation which includes the Guam Foreign Direct Investment 
Equity Act. My bill seeks to amend Guam's Organic Act and allow Guam's 
tax law to withhold taxes under foreign income provisions of the U.S. 
tax code at the same rates available to states under U.S. tax treaties. 
This does not create any tax advantage for Guam when compared to the 
fifty states or any other U.S. territory. It simply levels the playing 
field and provides for a more favorable foreign investment environment 
on Guam by extending the same benefits foreign investors receive in the 
fifty states to Guam.
    Mr. Chairman, the underlying federal policy toward the U.S. 
territories has always been to promote political and economic 
development so that we can become more self-sufficient. There is no 
reason why the federal government should impede Guam's efforts to 
promote foreign investment in Guam. This is a benefit extended to all 
fifty states and has been remedied for all other U.S. territories. Guam 
is the only U.S. jurisdiction which is stymied with a 30% withholding 
tax rate. It is bad for economic development for Guam and it is bad for 
the United States.
    I ask that the members of the Senate Foreign Relations Committee 
consider reminding U.S. negotiators for future tax treaties with other 
countries to do what is right for the people of Guam on foreign 
investment opportunities by including Guam in the definition of the 
term ``United States'' or by supporting my legislation, the Guam 
Foreign Direct Investment Equity Act.

    Senator Hagel. Is there any other business we need to do?
    [Pause]
    Senator Hagel. We will keep the record open for 3 days for 
further comments and statements. That probably does not apply 
to you, Mr. Murray, as much as it does to others. But I would 
note that we still have representatives here from Treasury and 
the Joint Tax Committee. You know how that works, anyway, all 
of you.
    Unless you have anything to add, Mr. Murray, again, I thank 
you and your organization for your leadership.
    Mr. Murray. Thank you, Mr. Chairman.
    [Whereupon, at 4:58 p.m., the committee adjourned.]
                            A P P E N D I X

                              ----------                              


Questions From Senator Hagel for Phil West, Treasury International Tax 
       Counsel, Regarding Pending Tax Treaties--October 27, 1999

Main Purpose Tests contained in the Italy and Slovenia Treaties
    Question 1. Do the anti-abuse principles under current U.S. law, 
such as the Business Purpose Doctrine, currently apply in the treaty 
context?

    Question 2. Are these ``main purpose'' tests intended to clarify 
current domestic U.S. law or do they go beyond present U.S. law? If so, 
how?

    Question 3. How will you assure that the tests will not be used by 
treaty partners to deny treaty benefits for legitimate business 
transactions?

    Question 4. During the hearing you indicated that the Treasury 
Department has not prepared a comprehensive analysis of these ``main 
purpose'' tests? Will you undertake such an analysis and provide it to 
the Committee?

    [Note. See Memorandum for Senator Hagel that follows for responses 
to above questions.]

Other Issues
    Question 1. Please provide the Committee with a response to all 
issues raised in the Joint Committee pamphlets. (See page 75 for 
response.)

    Question 2. Please provide a response to Senator Dorgan's 
testimony, including your view on whether the treaties allow for 
application of the formulary apportionment method in lieu of the arm's 
length test if the United States were to change its policy. (See page 
91 for response.)

    Question 3. Please provide a response to Congressman Underwood's 
testimony regarding the U.S. Treasury treaty policy excluding Guam and 
other U.S. territories from the definition of the ``United States.'' 
(See page 92 for response.)

                                 ______
                                 

Memorandum for Senator Hagel

Re: Responses to Additional Issues Raised by Senator Hagel Regarding 
    Pending Tax Treaties, October 27, 1999

    This memorandum provides responses to additional issues raised by 
Senator Hagel in connection with the Senate Foreign Relations Committee 
hearing on seven income tax treaties and an estate tax protocol held on 
October 27, 1999. It also provides a response to the issues raised in 
the pamphlets prepared by the Joint Committee on Taxation regarding the 
``main purpose'' anti-abuse rules found in the treaties with Italy and 
Slovenia.
                         ``main purpose'' test
    Issue Raised by the JCT Pamphlet: The issue raised by the JCT 
pamphlet is whether the benefits of the anti-abuse rule outweigh the 
uncertainties created for business.
    Response: Because of the importance of preventing the abuse of our 
tax treaties, we believe that the benefits of the anti-abuse provisions 
outweigh any potential uncertainty.
    The standard in the anti-abuse rule is substantively the same as 
one found in several places in our tax code (including legislation 
passed by the Senate this week), our tax regulations and our tax 
treaties. Also, it is a developing international standard. Thus, 
adopting this standard increases the likelihood that taxpayers will be 
subject to one anti-abuse standard wherever they conduct their 
business. These reasons for adopting the rules are discussed in greater 
detail below.
Benefits of the Anti-Abuse Rules
    The literature regarding anti-abuse rules and the place they hold 
in U.S. tax jurisprudence, not to mention international tax 
jurisprudence, is vast. Thoughtful commentators acknowledge that there 
is a problem created by the self-assessment system, which creates an 
incentive to play the ``audit lottery.'' Furthermore, the adversarial 
system, which frequently results in settlements, rather than 
litigation, may be seen as rewarding taxpayers who have taken 
aggressive positions based on the words of a statute. The ``business 
purpose,'' ``sham transaction'' and ``substance-over-form'' doctrines 
alluded to in the question from Senator Hagel are themselves responses 
to this problem. The Commentary to Article 1 of the OECD Model and the 
OECD Report on Harmful Tax Competition make clear that countries can 
impose their domestic anti-abuse rules to claims for treaty benefits.
    Accordingly, these important common-law principles are incorporated 
into our tax treaties, as confirmed by statements in the section of the 
Technical Explanation to each treaty dealing with Limitation on 
Benefits. The statements (found on page 94 of the Technical Explanation 
to the treaty with Italy and pages 64-65 of the Technical Explanation 
to the treaty with Slovenia) describe the interaction of the proposed 
anti-abuse rules, domestic law and the limitation on benefits 
provisions of our tax treaties. As stated in those paragraphs, the 
limitation on benefits provisions of our treaties and the anti-abuse 
provisions of domestic law complement each other, as the limitation on 
benefits provisions effectively determine whether an entity has a 
sufficient nexus to the Contracting State to be treated as a resident 
for treaty purposes, while domestic anti-abuse provisions (e.g., 
business purpose, substance-over-form, step transaction or conduit 
principles) determine whether a particular transaction should be recast 
in accordance with its substance. Thus, internal law principles of the 
source State may be applied to identify the beneficial owner of an item 
of income, and the limitation on benefits provisions then will be 
applied to the beneficial owner to determine if that person is entitled 
to the benefits of the Convention with respect to such income.
    The previous inclusion in treaties of an anti-abuse rule--the 
limitation on benefits provision--was not seen as replacing domestic-
law anti-abuse rules. The treaties, of course, include a number of 
anti-abuse rules, such as the ``star-company'' rule in the Artistes and 
Sportsmen provision. This rule deals with the same types of abuses as 
were present in United States v. Johansson, 336 F.2d 809 (5th Cir. 
1964), where the court found that strictly applying the provisions of 
the treaty to the ``star company'' would have produced a result not in 
accordance with the rationale behind those provisions. No one has 
suggested, however, that these rules, addressing abuses of particular 
provisions, prevent us from applying our domestic anti-abuse rules.
    Unfortunately, the domestic-law anti-abuse provisions have not been 
working adequately to prevent treaty abuses. The main purpose tests of 
the proposed treaty supplement these common-law doctrines to ensure 
that treaties are not utilized for abusive purposes. The common-law 
doctrines, such as economic substance, substance-over-form, and step-
transaction, focus on whether, in addition to the abusive purpose, the 
transaction at issue has some colorable non-abusive purpose. In 
contrast, the ``main purpose'' test focuses on whether a principal 
purpose of the transaction is tax avoidance. This focus is justified 
because of the increasing trend toward aggressive abuse of tax treaties 
to obtain benefits that were not intended, such as the elimination of 
all taxation (in contrast to the intended goal of eliminating double 
taxation).
    For example, in Northern Indiana Public Service Co. v. 
Commissioner, 115 F.3d 506 (7th Cir. 1997), the taxpayer funneled 
financing through a corporation established in a treaty country solely 
for the purpose of obtaining the treaty's exemption from interest tax 
withholding. The court conceded that it was ``undisputed'' that the 
structure was set up for this tax-avoidance motive. Nonetheless, the 
court permitted this abuse of the treaty because the IRS was unable to 
prove that the corporation engaged ``in absolutely no business 
activity.'' This court case bolstered the confidence of aggressive 
taxpayers who had read very narrowly the seminal ``conduit'' case Aiken 
Industries v. Commissioner of Internal Revenue, 56 T.C. 925 (1971). In 
essence, many practitioners read a substantial business purpose test 
out of Aiken Industries, and interpreted the case as holding that 
treaty benefits could be denied only if the two legs of the conduit 
transaction exactly matched in terms of principal, interest rates and 
maturity dates.
    Fortunately, by the time Northern Indiana was decided, Congress had 
passed section 7701(1), providing Treasury with regulatory authority to 
curb certain multi-party financing abuses, including certain treaty 
abuses. This authority has been exercised to adopt a ``one of the 
principal purposes'' standard very similar to that reflected in the 
proposed anti-abuse rules, under which taxpayers have been operating 
for some years now, apparently without significant difficulty. 
Application of this test, rather than the ``business purpose'' test, 
would reverse the result of Northern Indiana.
    In addition to legislating on conduit transactions, Congress has 
also as recently as 1997 legislated against another abuse of tax 
treaties by enacting section 894(c) of the Code. The history of this 
provision demonstrates the fact that taxpayers are relatively 
indifferent as to whether they are engaged in the type of classic 
``treaty-shopping'' addressed by the limitation on benefits provisions 
or whether they participate in other transactions that produce the same 
result. Until 1993, Canadian companies with U.S. subsidiaries 
frequently used a financing structure that involved a Dutch corporation 
with a Swiss branch. In 1993, a limitation on benefits provision was 
added to the Netherlands tax treaty and the Canadian-U.S. groups 
adopted U.S. limited liability company structures. These were closed 
down in 1997 by the enactment of section 894(c). The companies then 
explored moving the financing structures to Ireland for the three years 
that remained before the limitation on benefits provision in that 
treaty became fully effective, and settled on a structure in other 
countries whose treaties with the United States do not have a 
limitation on benefits provision. We intend to re-negotiate those 
treaties in order to add a limitation on benefits provision, but we 
expect that the Canadian companies will develop new structures 
established with a main purpose to obtain treaty benefits.
    The use of treaty amendments to eliminate specific abuses will 
always be inadequate. Because our treaties are intended to last decades 
before re-negotiation, and because of the difficulty involved with 
negotiating a bilateral international treaty, it is not realistic to 
update a treaty each time a new abusive transaction is discovered. 
Moreover, such an approach would only encourage the search for new 
techniques or unexplored opportunities under old treaties. For these 
reasons, and because it is difficult to anticipate how various tax, 
corporate and regulatory regimes will interact over long periods of 
time, we should decide whether such anti-abuse provisions should be 
included in our treaties not on the basis of any current abuses but 
rather on the basis of patterns of abuses that we know tend to recur. 
Similarly, the rifle-shot legislative approach to specific abuses is 
not fully effective. Moreover, these post-ratification unilateral 
legislative fixes have led to claims that our subsequently enacted 
domestic anti-abuse rules constitute an override of our tax treaty 
obligations. Adding an explicit provision to the treaty would lay such 
arguments to rest in the future, and appropriate legislative history 
would help to ensure that there is no negative inference regarding 
existing treaties. Such a statement is included in the Treasury's 
Technical Explanation to the proposed treaty.
    These types of abusive transactions have become more prevalent as 
more U.S. treaties have included effective limitation on benefits 
provisions. Our treaty partners, which have even weaker anti-abuse 
rules than we do, and who do not include limitation on benefits 
provisions in their tax treaties, realized the necessity of these rules 
before we did. In the case of Italy, for example, we understand that 
this provision is necessary in order to combat the simplest of the 
conduit cases that we address under section 7701(l). Other transactions 
that would be addressed by this rule are more complicated. For example, 
several years ago, U.S. taxpayers with U.K. subsidiaries developed a 
scheme to inappropriately secure ``refunds'' of the advance corporation 
tax from the U.K. government by engaging in transactions that, under 
U.S. law, would be viewed as circular cash flows without economic 
substance. However, U.K. law did not allow that country to reach the 
U.S. result of ignoring the transaction entirely, and the current U.S.-
U.K. treaty did not permit the U.K. from denying these refunds because 
it does not include the anti-abuse rules. These transactions became 
very expensive for the United Kingdom and may have contributed to the 
United Kingdom's decision effectively to eliminate these payments to 
all U.S. taxpayers, whether they were abusing the system or not, 
through changes in their domestic integration system.
    It is therefore important to consider whether our treaty partner 
(or potential treaty partner) believes it is in its interest to have 
such rules in the treaty, in the same way that we consider the other 
peculiar aspects of that country's law when drafting other provisions 
of the treaty. Many countries do not have effective domestic anti-abuse 
rules. This could be a function of the legal system or the fact that 
their experience with sophisticated financial transactions is limited. 
These countries increasingly rely on explicit anti-abuse provisions in 
the treaty. It is difficult for the United States to tell such a 
developing country that it will be required to provide benefits to all 
U.S. taxpayers, without regard to whether they are participating in 
abusive transactions, but that the United States will be able to apply 
its panoply of anti-abuse rules in order to prevent many such abuses.
    Slovenian tax authorities have informed us that Slovenia currently 
has no domestic anti-abuse provisions. Although they are contemplating 
the introduction of specific anti-abuse provisions with respect to 
certain of the most basic types of abuses, these provisions would not 
be broad enough to prevent the more sophisticated abuses that can occur 
with treaties. Thus, the anti-abuse provisions would be necessary in 
order for these tax authorities to effectively stop abuses of the 
proposed treaties. Similarly, according to Italian tax authorities, 
Italy currently does not have effective domestic anti-abuse doctrines 
that could be used to deny treaty benefits in the case of abusive 
transactions. As a result, Italy has increasingly included anti-abuse 
provisions in its more recent treaties. For example, Italy's 1995 
treaty with Israel has the following anti-abuse rule:

          The competent authorities of the Contracting States, upon 
        their mutual agreement, may deny the benefits of this 
        Convention to any person, or with respect to any transaction, 
        if in their opinion the receipt of those benefits, under the 
        circumstances, would constitute an abuse of the Convention 
        according to its purposes.

Concerns about Uncertainty Interfering with Legitimate Business 
        Transaction Planning
    As noted before, the drafting of any anti-abuse provision involves 
the question of how to prevent the abuse without hindering legitimate 
business transactions. Treasury rejected the broader, more subjective 
anti-abuse rule found in the Italy-Israel treaty for several reasons. 
First, it provided a less certain standard against which a taxpayer 
could meaningfully evaluate its transaction. Second, since the narrower 
rule before you appears in a significant number of treaties around the 
world, and promises to appear in more, it is more consistent with 
international norms and will likely be the subject of more interpretive 
law than the other standards. Treasury rejected a narrower anti-abuse 
rule because of its ineffectiveness.
    In analyzing different approaches that have been taken over time, 
we had the benefit of participating in work on anti-abuse rules 
undertaken by Working Party 1 of the OECD's Committee on Fiscal Affairs 
in response to a recommendation in the OECD's Report on Harmful Tax 
Competition. The recommendation directs the Working Party to consider 
different ways in which the entitlement to treaty benefits should be 
restricted to prevent the abuse of tax treaties. As a result of that 
process, we have a significant catalog of approaches taken by different 
countries, and an idea of their views regarding how the law in this 
area should develop. Needless to say, that process has informed our 
thinking about the best ways to prevent treaty abuses.
    We gravitated toward the ``main purpose'' standard of our proposed 
rule because it corresponds to the U.S. ``a principal purpose'' 
standard which is applied in a number of our statutory provisions and 
regulations. (A partial list of the relevant sections is attached.) In 
fact, it is embedded in section 954(h) of the Code, which was enacted 
in 1998 and passed by the Senate this week.
    Judge Posner's ruling in Santa Fe Pacific Corporation v. Central 
States, Southeast and Southwest Areas Pension Fund, 22 F.3d 725 (1994) 
provides insight into the meaning of ``a principal purpose.'' This 
standard is different from ``the principal purpose.'' A purpose can be 
``a principal purpose'' if it is a major purpose for a transaction. The 
standard is not met if a purpose was a minor, subordinate purpose. In 
determining whether a purpose is major or minor, the question is 
whether it ``weighed heavily in the [relevant party's] thinking.'' 
Other synonyms provided by Judge Posner include ``major, weighty, 
salient, and important.'' The court acknowledges that, because the 
determination of purpose involves inferring state of mind, the process 
of determining whether the standard has been met may require the 
examination of the relevant evidence.
    Taxpayers, of course, are in the best position to know what 
``weighed heavily'' on their minds when considering entering into a 
transaction. Taxpayers are required to make subjective judgments under 
all of the Code provisions in the attached list, and they can also look 
to the principles developed under these statutes and regulations for 
guidance. In essence, what the taxpayer is required to do is ask 
whether it is entering into a transaction with a principal purpose of 
tax avoidance. We think that requiring taxpayers to engage in this 
basic analysis neither is overly burdensome nor introduces an 
unacceptable level of uncertainty, but it does preserve our ability to 
ensure that tax treaties do not become the tools of tax avoiders.
    Moreover, the underlying policies of the provision provide 
important guidance to taxpayers and limit its application. One 
underlying policy is the concept that, as a general matter, a treaty 
provision should not be exploited in a way that creates the opportunity 
to avoid tax in both countries. This type of abuse was present in the 
transactions that section 894(c) was intended to curb.
    A second underlying policy is that treaty benefits are intended 
only for certain persons (i.e., residents of the treaty countries and, 
in certain circumstances, only particular residents of the treaty 
countries). Although limitation on benefits provisions generally 
prevent residents of third countries from obtaining treaty benefits, 
Treasury's Technical Explanation to the proposed Italy and Slovenia 
treaties contain examples of an abusive situation (i.e., ``dividend 
washing'') where residents of third countries might nonetheless obtain 
treaty benefits in the absence of an anti-abuse provision. The two 
Technical Explanations also contain examples of abusive situations 
where a resident of a treaty country might inappropriately obtain 
benefits that are only intended for a narrow class of residents (i.e., 
dividend benefits that depend upon a specific ownership threshold).
    The Technical Explanations to our treaties generally provide 
rationales for the provisions found therein, and the Commentaries to 
the OECD Model provide more. Taxpayers therefore should not have great 
difficulty determining whether they were supposed to be entitled to 
certain benefits.
    Another benefit to taxpayers of adopting this standard is that the 
rule appears to be broadly acceptable to other countries. The rule has 
been included in more than 50 treaties, representing approximately 40 
different countries (including 10 OECD members). Therefore, because the 
proposed rule appears in a significant number of treaties around the 
world, and promises to appear in more, it will likely be the subject of 
more interpretive law than the other standards and likely will provide 
greater certainty over time than some of the alternatives.
Concerns regarding Application
    The JCT pamphlet also raises concerns regarding the application of 
the proposed anti-abuse provisions, in particular the concern that the 
provisions could be used by treaty partners to deny treaty benefits for 
legitimate business transactions. As noted above, countries currently 
can apply their own domestic anti-abuse rules to treaties. As a result, 
a potential risk currently exists that a treaty partner could deny 
treaty benefits to legitimate business transactions under domestic 
anti-abuse rules (if any).
    The explicit inclusion of ``main purpose'' tests in tax treaties 
will bring a more uniform standard to this area. As noted above, 
similar rules have been included in more than 50 treaties, representing 
approximately 40 different countries (including 10 OECD members). The 
expanding adoption and application of this standard will help ensure 
that it will be applied in a reasonable and consistent way. While a 
treaty partner's domestic anti-abuse rules (if any) could continue to 
apply, it is anticipated that in practice treaty partners will look 
primarily to the explicit standard in the treaty when they believe that 
an abusive transaction has occurred.
    As in other circumstances involving interpretation of the treaty, a 
U.S. taxpayer who believes that the treaty partner has applied this 
provision incorrectly may invoke the Mutual Agreement Procedure of 
Article 25. Under that mechanism, the U.S. competent authority, if it 
believes that the taxpayer's position is justified, will consult 
directly with the treaty partner's competent authority in order to 
resolve the issue. Article 25 explicitly authorizes the competent 
authorities to reach agreement to avoid taxation that is not in 
accordance with the treaty, and to resolve any doubts regarding the 
interpretation or application of the convention. Arguably, it will be 
easier for competent authorities' to reach a common understanding with 
respect to the ``main purpose'' standard, which is explicitly included 
in the treaty, than it would be to reach agreement with respect to an 
anti-abuse provision of one country's domestic law. Of course, a 
taxpayer who believes that the treaty partner has applied this 
provision incorrectly could also invoke any other remedies available 
under the domestic law of the treaty partner, such as judicial review.
    As a practical matter, we believe that treaty partners will not 
invoke this provision to deny treaty benefits for legitimate business 
transactions. We have consulted with the tax authorities of the United 
Kingdom, which has included a similar standard in more than 20 of its 
tax treaties. According to those authorities, the United Kingdom has 
not received any complaints from its taxpayers regarding the treaty 
partner's inappropriate use of the provision. Furthermore, one of the 
principal reasons that countries enter into tax treaties is to 
facilitate legitimate business transactions, so it would be unlikely 
that a treaty partner would invoke the main purpose provisions to 
challenge such transactions.
    We are also aware of concerns regarding the provision that allows 
the competent authorities to agree that certain types of transactions 
that are entered into by a broad number of taxpayers violate the anti-
abuse provisions. We believe that this provision is necessary to 
effectively prevent the potentially widespread abuses that can occur 
when a promoter develops and ``sells'' a treaty-abuse scheme to a 
number of taxpayers. These schemes are not aimed at furthering the 
specific business objectives of the ``purchasing'' taxpayers, but 
instead are aimed merely at taking advantage of the treaty to avoid tax 
liability. It is contemplated that the competent authorities will 
provide the public with notice regarding such abusive schemes. The 
published competent authority agreements would be subject to judicial 
review.
Lack of Conformity with other U.S. Tax Treaties
    The JCT pamphlet raises a slightly different issue regarding the 
fact that these provisions are not included in other U.S. tax treaties. 
In fact, a precursor to this provision can be found in the U.S. treaty 
with Canada, which explicitly recognizes each country's right to apply 
domestic anti-abuse rules, including Canada's right to apply a similar 
anti-abuse rule that is in force under its domestic law.
    We too were concerned about the possibility that our treaties would 
not be uniform with respect to this provision, although the context was 
slightly different. The countries other than Canada (whose position is 
described above) with which we are currently negotiating (the United 
Kingdom, Chile and Korea) include this provision in their standard 
negotiating document. Because this rule is important to them, we were 
considering adopting it in those treaties. Since the substantive 
analysis described above suggested that it would be appropriate to 
adopt it in those treaties, it also seemed that it would be appropriate 
to adopt it in the treaties that were still under negotiation. This 
decision was made rather late in the negotiating process, immediately 
before the last round of negotiations with each of Italy and Slovenia, 
which took place in late November and early December, 1998. At those 
rounds, it was agreed to include the provision. Because it was an 
unusual provision, in accordance with our usual procedure, we described 
the rule and its purpose at a briefing with the Senate Foreign 
Relations Committee and the staffs of the Joint Committee on Taxation 
and the tax-writing committees which took place on December 16, 1998. 
The treaty with Slovenia was signed on June 21, 1999 and the treaty 
with Italy was signed on August 25, 1999.

 Code provisions using ``a/one of the principal purposes'' anti-abuse 
                                language

 
 
 
 
 
Sec. 170(f)(9)...................--Denial of ``charitable deductions''--
                                    with a principal purpose of making
                                    non-deductible lobbying
                                    contribution.
Sec. 197(f)(9)(F)................  Denial of amortization for
                                    intangibles acquired where one of
                                    the principal purposes was to avoid
                                    the churning or grandfather rule.
Sec. 302(c)(2)(B)(ii)............  Exception to attribution where one of
                                    the principal purposes is tax
                                    avoidance.
Sec. 306(b)(4)(B)................  Section 306 does not apply if it is
                                    established to the satification of
                                    the Secretary that tax avoidance is
                                    not one of the principal purposes of
                                    the transaction.
Sec. 336(d)(2)(B)(i)(II).........  Plan to recognize loss through
                                    contribution/liquidation has a
                                    principal purpose of tax avoidance.
Sec. 355(a)(1)(D)(ii)............  Retention of stock in controlling
                                    corporation can't be in pursuance of
                                    plan with tax avoidance as one of
                                    its principal purposes.
Sec. 382(l)(1)(A)................  Capital contributions made with a
                                    principal purpose of avoiding/
                                    extending NOL limitations are
                                    ignored.
Sec. 453(e)(7)...................  Related person second distribution
                                    rules waived if it is established to
                                    the satisfaction of the Secretary
                                    that tax avoidance is not one of the
                                    principal purposes behind the
                                    distributions.
Sec. 467(b)(4)(B)................  ``Disqualified leaseback'' must have
                                    a principal tax avoidance purpose.
Sec. 614(e)(1)...................  Aggregation of non-operating mining
                                    interests allowable so long as a
                                    principal purpose is not tax
                                    avoidance.
Sec. 643(f)(2)...................  Two or more trusts may be treated as
                                    one if a principal purpose of such
                                    trusts is the avoidance of tax.
Sec. 751(b)(3)(B)................  Property contributed to PRS with a
                                    principal purpose of avoiding 120%
                                    ``substantial appreciation'' test is
                                    ignored.
Sec. 860K(e)(2)..................  FASITS supporting pass-thru interests
                                    received differing treatment if a
                                    tax avoidance is a principal purpose
                                    of the transaction. 1996.
Sec. 877(a)(2)...................  Expatriation tax (a principal purpose
                                    but with objective unsafe harbor).
                                    Test is referenced by Sec. Sec.
                                    2107, 2501(a)(3).
Sec. 953(e)(7)(C)................  CFC insurance companies change of
                                    reserve methods where a principal
                                    purpose of the change is to claim
                                    benefits under Sec. 953(f) or Sec.
                                    954(f) is disregarded. 1998.
Sec. 954(h)(7)(A),(D)............  If a one of the principal purposes of
                                    a transaction is to take advantage
                                    of this subsection, that transaction
                                    is disregared. 1997.
Sec. 1031(f)(2)(C)...............  Like-kind exchanges between related
                                    persons may still qualify for
                                    nonrecognition where it is
                                    established to the satisfaction of
                                    the Secretary that one of the
                                    principal purposes is not tax
                                    avoidance. 1984.
Sec. 1272(a)(2)(E)(ii)...........  Loans between natural persons with an
                                    IP of less than $10,000 may still be
                                    subject to OID by overzealous
                                    auditors if one of the principal
                                    purposes of the transaction is tax
                                    avoidance. 1984.
Sec. 1298(d)(3)(B)...............  Exception to leasing rules for PFIC
                                    status if a principal purpose of
                                    leasing property was to avoid PFIC
                                    status. 1993.
Sec. 1298(e)(2)(B)(ii)...........  Similar exception to intangible
                                    regime where a principal purpose of
                                    the license was to avoid PFIC
                                    ststus. 1993.
Sec. 7872(c)(1)(D)...............  Below market loan provision applies
                                    to any below market loan one of the
                                    principal purposes of which is tax
                                    avoidance. 1984.
Sec. 9722........................  Transactions with a principal purpose
                                    of tax avoidance are ignored.
------------------------------------------------------------------------

       Recapping Responses to Written Questions From Senator Hagel

    1. Do the anti-abuse principles under current U.S. law, such as the 
Business Purpose Doctrine, currently apply in the treaty context?
    --As noted above, such doctrines do apply in the treaty context.

    2. Are these ``main purpose'' tests intended to clarify current 
domestic U.S. law or do they go beyond present U.S. law? If so, how?
    --This question is discussed above under ``Benefits of the Anti-
Abuse Rules.''

    3. How will you assure that the tests will not be used by treaty 
partners to deny treaty benefits for legitimate business transactions?
    --This issue is discussed above under ``Concerns about 
Application.''

    4. During the hearing you indicated that the Treasury Department 
has not prepared a comprehensive analysis of these ``main purpose'' 
tests? Will you undertake such an analysis and provide it to the 
Committee?
    --The requested analysis is provided above.

                                 ______
                                 

Memorandum for Senator Hagel

Re: Responses to Issues Raised in JCT Pamphlets on Pending Tax Treaties

    This memorandum provides responses to issues raised by the Joint 
Committee on Taxation in its pamphlets on the seven tax treaties 
currently pending before the Senate Committee on Foreign Relations. No 
issues were raised by the Joint Committee with respect to the pending 
estate tax protocol with Germany. The other written questions submitted 
after the hearing and the anti-abuse rules found in the treaties with 
Italy and Slovenia will be discussed in a separate memorandum to follow 
shortly. We apologize for this approach, as we would prefer to answer 
all of the questions at the same time, but were asked by the Joint 
Committee to provide these answers as quickly as possible in order to 
facilitate its work on the Senate Foreign Relations Committee Reports.
                    proposed convention with denmark
Creditability of Danish Hydrocarbon Tax
    Issue: The issue raised by the JCT pamphlet is the extent to which 
treaties should be used to provide a credit for taxes that may not 
otherwise be fully creditable and, in cases where a treaty does provide 
creditability, to what extent the treaty should impose limitations not 
contained in the Internal Revenue Code.
    Response: The proposed Convention contains a limited credit with 
respect to taxes on oil and gas extraction income and oil-related 
income paid under Denmark's Hydrocarbon Tax Act. Various considerations 
led to the decision to include such a credit provision in this 
particular treaty.
    First, taxpayers face uncertainty under our domestic laws regarding 
the creditability of the taxes covered by this provision under domestic 
law. In a 1995 decision interpreting temporary regulations under 
section 901, the Tax Court determined that the Norwegian taxes on 
offshore extraction activities was a fully creditable tax for U.S. 
foreign tax credit purposes. The 1995 decision may be distinguishable, 
however, and was not reviewed on appeal. A case is pending in the Tax 
Court that will address the creditability of the U.K. Petroleum Revenue 
Tax.
    Second, our treaties with other North Sea countries provide that 
similar taxes in those countries are creditable. Although those taxes 
may be distinguishable from the Danish Hydrocarbons Tax, not providing 
for the creditability of that tax here would raise questions regarding 
the extent to which similarly-situated U.S. taxpayers are treated 
similarly.
    Third, we considered the treatment of Danish hydrocarbon taxes in 
the context of the treaty as a whole. For Denmark, obtaining certainty 
regarding the creditability of its hydrocarbon taxes similar to that 
found in U.S. tax treaties with its North Sea petroleum competitors was 
an important issue which we conceded in order to promptly conclude a 
new treaty with an effective anti-treaty-shopping provision.
    The pamphlet also questions the extent to which a tax treaty should 
impose limitations not otherwise contained in the Code. If the Danish 
tax were deemed to be noncreditable in the absence of a treaty, 
taxpayers would obtain a higher foreign tax credit under the treaty 
than they otherwise would. To limit the extent to which the treaty 
might have this effect, the Treasury chose to incorporate, within the 
treaty, an additional ``per-country'' limitation and restriction on the 
use of carryovers that is similar in effect to the limitations imposed 
by the other treaties in which this type of provision appears. Thus, 
the treaty imposes restrictions that prevent that tax from offsetting 
U.S. taxes on income earned in other countries or on Danish income that 
falls within a different foreign tax credit basket. Of course, since 
the treaty cannot put taxpayers in a worse position than domestic law, 
if it were determined that the tax were fully creditable under domestic 
law, these additional limitations would not apply. The Treasury 
Department believes that the limitation on the use of credits is a fair 
condition for the grant of the credit under the treaty.
Treaty Shopping
    Issue: The issue raised by the JCT pamphlet is whether the 
limitation on benefits provision of the proposed treaty is an adequate 
tool for preventing possible treaty-shopping abuses in the future. The 
pamphlet directs particular attention to the ``bright line rules'' 
under the active business test and to the so-called ``derivative 
benefits'' rule.
    Response: The United States is the international leader with 
respect to treaty provisions to prevent treaty-shopping. Unlike the 
existing treaty, the proposed treaty with Denmark contains a 
comprehensive anti-treaty-shopping provision. We made every effort in 
negotiating the proposed treaty with Denmark to ensure that the 
limitation on benefits provisions adequately distinguished between 
persons that legitimately should qualify for treaty benefits and 
persons that may have a treaty shopping motive.
    The provisions in this treaty do differ in some respects from those 
in the U.S. Model and in other U.S. treaties, but this is not unusual. 
Like our treaty with Ireland, there is more detail in the limitation on 
benefits provision than is found in the U.S. Model. There is somewhat 
less detail than in our treaties with Switzerland and The Netherlands. 
Denmark wanted the added provisions in order to provide a measure of 
certainty to taxpayers as to whether they would be entitled to treaty 
benefits, but did not want the added complexity of the Swiss and 
Netherlands treaties.
    In addition, negotiation of these provisions requires that the 
specific circumstances of the treaty partner be taken into account. As 
a consequence, no two treaties have identical limitation on benefits 
provisions. In Denmark's case, the provisions needed to accommodate the 
fact that Denmark is a country with close economic ties to the rest of 
Europe and the substantial foreign participation in its business 
sector. The provisions do this without compromising their fundamental 
objective.
    The provision covering income from the operation of ships and 
aircraft in international traffic essentially confirms the benefits 
already provided by U.S. law under section 883 of the Code and 
reciprocally requires Denmark to extend those benefits to U.S. 
residents. As noted in the pamphlet, this provision was also included 
in the conventions with The Netherlands and Ireland, which were 
reviewed by the Committee in 1993 and 1997, respectively. Other rules 
were added to address the treatment of taxable nonstock corporations, 
whose ownership of some important Danish multinationals might have 
disqualified those corporations from treaty benefits under an 
unmodified limitation on benefits provision.
    As noted in the JCT pamphlet, a company that satisfies the 
derivative benefits provision will be entitled to all the benefits of 
the treaty, just as in the U.S. treaties with France and Switzerland. 
The derivative benefits provision of the proposed Convention was 
crafted bearing in mind the openness of the Danish and U.S. economies 
and their close integration with their European and North American 
trading partners. Although the provision requires no Danish or U.S. 
ownership of a company in order for it to be entitled to benefits, at 
least 95 percent of the shares in the company must be owned by 
residents of countries in the European Union, European Economic Area or 
NAFTA. In addition, any third-country owners must be entitled to 
benefits under a comprehensive income tax treaty between their country 
of residence and the treaty partner (the United States or Denmark) from 
which the benefits of the proposed treaty are sought. And, in order to 
obtain the reduced withholding rates for an item of dividend, interest 
or royalty income, the treaty with the third country must provide a 
withholding rate on that item of income that is at least as low as the 
rate provided in the proposed treaty. The requirement that the third-
country treaty provide at least equivalent withholding rates means that 
this provision is unlikely to be exploited for treaty shopping 
purposes, because the principal benefits of the treaty could be 
obtained directly by the third-country resident. Finally, a base 
erosion test ensures that treaty benefitted income is not being 
diverted to another country through deductible payments.
                    proposed convention with estonia
Treatment of REIT Dividends
    Issue: The issue raised by the JCT pamphlet is whether the 
treatment of REIT dividends in the proposed treaty is appropriate.
    Response: REITs are not generally subject to entity-level tax and 
their predominant income is typically real estate rental income, which 
is statutorily subject to a 30% rate of withholding tax that is not 
generally reduced by treaties. Therefore, the JCT, the Senate Foreign 
Relations Committee, and Treasury had, from 1988 to 1997, taken the 
position that REIT dividends generally should be treated under U.S. tax 
treaties as conduit distributions of real estate rental income and, 
thus, as subject to 30% withholding tax except in very limited 
circumstances. This is the policy currently embodied in the pending 
treaty with Estonia.
    In 1997, we re-considered that position in light of economic 
changes since 1988. As a result of that re-consideration, we revised 
our treatment of REIT dividends under our tax treaties. At that time, 
we agreed to add the new rule in all ``future negotiations.'' However, 
this treaty, like the treaties with Latvia and Lithuania, were fully 
negotiated at the time that the new treatment of income from REITs was 
developed. It would not have been appropriate to re-open negotiations 
with the Baltic countries at that stage. We spoke to the REIT industry 
at the time and they understood our position. As part of any future 
revision of the Estonian treaty, we would seek to update the REIT rule.
Developing Country Concessions
    Issue: The issue raised in the JCT pamphlet is whether the 
developing country concessions represent appropriate U.S. treaty policy 
and, if they do, whether Estonia is an appropriate recipient of these 
concessions.
    Response: Regarding whether Estonia is an appropriate recipient of 
developing country concessions, it should be noted that for 1997, 
Estonia's gross domestic product (GDP) was $9.3 billion and its per 
capita GDP was $6,450. By contrast, the United States' 1997 GDP was 
$8,100 billion and its per capita GDP $30,200.
    With respect to the question of whether making developing country 
concessions is appropriate, we believe that when a treaty is in the 
interests of the United States we can agree to make such concessions 
when the treaty partner believes that it is in its interest. The issue 
is one of balancing the overall potential costs and benefits in the 
treaty and the potential costs of moving away from our preferred 
position against the potential benefits of having a treaty at all. With 
respect to Estonia, we believe that the potential benefits outweigh the 
potential costs.
    For example, it generally is U.S. policy to reduce the rate of 
withholding taxation on interest and royalties to zero, and to reduce 
dividend withholding rates to 5 percent for direct investment dividends 
and to 15 percent for portfolio dividends. The extent to which this 
policy is realized depends on a number of factors. Although 
generalizations often are difficult to make in the context of complex 
negotiations, it is fair to say that we are more successful in reducing 
these rates with countries that are relatively developed and where 
there are substantial reciprocal income flows. We also achieve lesser 
but still significant reductions with countries where the flows tend to 
be disproportionately in favor of the United States. Lesser developed 
and newly emerging economies, where capital and trade flows are often 
disparate or sometimes one-way, create obstacles to achieving our 
desired level of withholding. These countries frequently find 
themselves on the horns of a dilemma. They know that reducing their 
high levels of taxation may help to attract foreign capital but, at the 
same time, they are unwilling to give up scarce revenues. Such 
prospective treaty partners may perceive that, by reducing withholding 
tax rates, they would be making a tangible current concession in favor 
of the United States while receiving at most a possible future benefit. 
In some such cases, we will look at the overall level of tax and avoid 
agreements which may have a significant adverse impact on the fisc of 
the less developed partner. For this reason and others, the treaty 
withholding rates will vary Estonia agreed to accept U.S. policy with 
respect to dividend withholding, but not interest and royalty 
withholding.
    Businesses reinforce our view that frequently the treaty 
relationship itself is more important than any one or more specific 
benefits. For example, even if a treaty does not serve to reduce tax 
rates to the levels that we prefer, it provides limitations, certainty, 
and dispute resolution mechanisms that are important to business 
decision-makers. We think the concessions are appropriate, both because 
of the economic position of Estonia as a newly emerging economy and 
because of the overall package of benefits that will accrue to the 
United States under the treaty.
    With respect to particular developing country concessions in the 
proposed Estonian treaty, the JCT pamphlet identified the following:

   the definition of ``permanent establishment'';
   the taxation of business profits;
   the taxation of certain equipment leasing; and
   other taxation by the source country.

These are discussed below seriatim.
            Permanent Establishment Definition
    The Estonian treaty provides that the term ``permanent 
establishment'' includes building sites, etc. and rigs, ships and 
installations used for the exploration of natural resources when the 
site or activity continues for more than six months. The U.S. Model 
provides that these activities will constitute a ``permanent 
establishment'' only when the site or activity continues for 12 months. 
The lower threshold rule in the treaty reflects the fact that, as a 
newly emerging economy, Estonia is more dependent upon tax revenues 
from construction projects and similar activities than developed 
countries whose physical and business infrastructure are more 
established. This rule in the Estonian treaty is consistent both with 
other Estonian treaties and with many other U.S. treaties with 
developing countries.
            Taxation of Business Profits
    The proposed treaty provides that if an enterprise has a permanent 
establishment in a country, that country may tax the portion of the 
enterprise's business profits that is attributable to the permanent 
establishment. As the JCT pamphlet points out, the proposed treaty 
further provides that, under certain circumstances, the country in 
which the permanent establishment exists may also tax income of the 
enterprise attributable to sales in that country of goods or 
merchandise of the same kind as those sold through the permanent 
establishment or to other business transactions carried on in that 
country that are of the same or similar kind as those effected through 
the permanent establishment. These rules are of a type known as 
``limited force of attraction'' rules. Such rules are found in the U.N. 
Model, and are included in many treaties with developing countries.
    Estonia requested that a limited force of attraction rule be 
included in the proposed treaty. The United States agreed, but 
negotiated a limited force of attraction rule that is narrower than the 
rule found in the U.N. Model. The force of attraction rule in the 
proposed treaty operates as an anti-abuse rule. Its application is 
limited to situations in which it can be shown that the transaction 
giving rise to the income was carried on outside the permanent 
establishment and a principal purpose of the transaction is to avoid 
taxation in the country in which the permanent establishment is 
situated. We therefore concluded that the rule did not improperly 
expand the taxation of business income.
            Taxation of Certain Equipment Leasing
    Under the U.S. Model Treaty, income from the rental of tangible 
personal property is treated as business profits. Under the proposed 
Estonian treaty, payments for the use of, or the right to use, 
industrial, commercial, or scientific equipment will be treated as 
royalties. Treatment of such income as royalties is consistent with the 
position taken by many developing countries and with the former OECD 
Model Treaty. It also represents the treaty policy of Estonia. Through 
negotiation, we were able to reduce the withholding rate on this class 
of royalties to 5 percent (from the general rate of 10 percent). As 
with all royalty income, if the income from rentals of tangible 
personal property are attributable to a permanent establishment or 
fixed base in the source country, such income is taxed on a net basis 
under Articles 7 or 14. As discussed below with respect to ships and 
aircraft, there are exemptions from even the 5 percent withholding tax 
in the case of income from the rental of containers, and from the 
rental of ships and aircraft when such income is incidental to the 
operation of the ships and aircraft in international traffic.
            Other Taxation by Source Country
    The JCT pamphlet also noted other areas in which the proposed 
treaty provides for greater taxation by the source country than would 
be permitted under the corresponding provisions of the U.S. Model. It 
notes the fact that the withholding rate at source on royalties is 
generally 10 percent, with a 5 percent rate on rentals of tangible 
personal property, rather than the zero rate at source in the U.S. 
Model. As noted above, developing countries are frequently unwilling to 
lower their withholding rates to the levels in the U.S. Model, largely 
because of their concerns over the potential loss of revenue. We were 
able to get Estonia to agree to relatively low rates, similar to those 
found in a number of other U.S. treaties with developing countries.
    The JCT pamphlet also noted the fact that under the Estonia treaty 
a fixed base is deemed to exist, thus allowing the host country to tax 
income from independent personal services, when the visitor is present 
in that country for 183 days in a 12-month period. This rule is not in 
the U.S. Model. Estonia was concerned that, without this rule, a U.S. 
resident would be able to spend longer than 183 days in Estonia 
performing independent personal services, but would be able to do so 
without using a fixed base (e.g., moving among clients' offices) and 
would avoid Estonian tax. The addition of this rule will prevent this 
result. This is standard Estonian treaty policy. A similar rule is 
found in a number of other U.S. treaties with developing countries, 
some (e.g., Thailand) with lower time thresholds.
    It is pointed out in the JCT pamphlet that the ``Other Income'' 
provision in the Estonian treaty differs from the U.S. Model in that if 
``other income'' is sourced in a Contracting State, that State is 
allowed to tax the income. Under the U.S. Model all ``other income,'' 
regardless of source, may be taxed only in the State of residence of 
the beneficial owner. The Estonian position is reflected in all of its 
treaties, and is found in a number of U.S. treaties with developing 
countries, as well as with several OECD partners. It is another aspect 
of U.S. treaty policy that often is adjusted to reflect the economic 
position of our treaty partners.
Royalty Source Rules
    Issue: The issue raised by the JCT pamphlet is whether it is 
appropriate to have royalty source rules in the treaty that are 
different from the Internal Revenue Code rules regarding the source of 
royalties.
    Response: Under the proposed treaty, royalties are generally 
sourced according to the residence of the payor or the location of the 
permanent establishment or fixed base that incurs and bears the 
royalty. That rule is consistent with the U.N. Model rule but is 
different from the rule of U.S. internal law, which sources royalties 
according to the place where the property is used. Estonia requested 
the U.N. Model rule. The U.S. agreed, on the condition that the rule be 
modified to provide that if the general rule, stated above, did not 
source the royalty to either the United States or Estonia, the royalty 
would be sourced according to the place of use of the property, which 
is the general U.S. rule. A similar provision has been included in some 
other U.S. treaties (e.g., the 1995 U.S.-Canada protocol and 1997 
treaties with Thailand and Turkey). As noted in the JCT pamphlet, a 
conflict between U.S. law and the rule under the proposed U.S.-Estonia 
treaty would arise only in the circumstances where an Estonian resident 
that does not have a permanent establishment or fixed base in the 
United States pays a royalty to a U.S. resident for the right to use 
property exclusively in the United States. The proposed royalty source 
rule would treat such royalty as Estonian source (and therefore 
potentially taxable in Estonia). However, U.S. internal law would treat 
such royalty as U.S. source income. As noted in the JCT pamphlet, the 
JCT staff recognizes that this situation would arise in relatively few 
cases (as opposed to the more common situation in which an Estonian 
resident using property in the United States would also have a 
permanent establishment or fixed base in the United States to which the 
royalty would be attributed, in which case it would be U.S. source). As 
a consequence of a similar recognition by the Treasury staff, we 
believe that this provision was an acceptable concession in the context 
of the overall U.S.-Estonian tax treaty negotiation. A further 
exception to the general source rule was included, at the insistence of 
the United States, that sources royalties that are payments for the use 
of containers as arising in neither Contracting State, and thus 
taxable, as ``Other Income,'' only in the State of residence of the 
income recipient. The result of this rule is consistent with the rule 
in the U.S. Model, which, under Article 8, gives exclusive taxation 
rights for such income to the State of residence of the beneficial 
owner of the income.
Income from the Rental of Ships and Aircraft
    Issue: The issue presented in the JCT pamphlet is whether the 
proposed treaty's rules treating profits from certain rental of ships 
and aircraft less favorably than profits from the operation of ships 
and aircraft and the rental of containers are appropriate.
    Response: The treatment of income from the rental of ships and 
aircraft, where the rental is not incidental to the operation of ships 
and aircraft in international traffic, was a difficult issue in the 
negotiations. Although it is U.S. policy to include such income within 
the scope of the source exemption in Article 8, Estonia was unwilling 
to do so, although they were willing to exempt incidental rentals from 
source country tax. The treaty permits Estonia to impose tax at source 
on non-incidental ship and aircraft rentals, but at a rate limited to 5 
percent of the gross rental. This is a common result in Estonian 
treaties, and is also found in several other U.S. treaties.
Treaty Shopping
    Issue: The issue raised by the JCT pamphlet is whether the 
limitation on benefits provision of the proposed treaty is an adequate 
tool for preventing possible treaty-shopping abuses in the future.
    Response: The limitation on benefits provisions of the proposed 
treaty adhere closely to those of the U.S. Model. We therefore believe 
that they are adequate.
                     proposed convention with italy
``Main Purpose'' Anti-Abuse Test
    As noted above, this issue will be addressed in a separate 
memorandum.
Creditability of Italian IRAP Tax
    Issue: The issue raised by the JCT pamphlet is the extent to which 
treaties should be used to provide a foreign tax credit for taxes that 
may not otherwise be fully creditable.
    Response: One of the principal purposes for entering into an income 
tax treaty is to limit double taxation of income earned by a resident 
of one of the countries that may be taxed by the other country. One of 
the common ways in which this is accomplished is through a foreign tax 
credit, whereby the taxpayer's country of residence or citizenship, 
which taxes the worldwide income of the taxpayer, allows a credit for 
taxes paid to the other country on income that the other country is 
allowed to tax under the treaty. This mechanism is provided for under 
internal U.S. law, and is also a common feature of U.S. tax treaties.
    The proposed treaty provides for this mechanism, allowing U.S. 
residents or citizens a credit against U.S. income tax for the 
appropriate amount of income tax paid to Italy. The proposed treaty 
lists the specific Italian taxes that are considered creditable income 
taxes, and, like other U.S. treaties, provides that any identical or 
substantially similar taxes that are imposed by Italy after the date of 
signature will be considered creditable income taxes.
    The proposed treaty also addresses the creditability of the Italian 
regional tax on productive activities (``IRAP''). This tax, which 
became effective January 1, 1998, was enacted by Italy to replace the 
local income tax (``ILOR''), as well as certain other taxes. This 
enactment was part of a fundamental revision of the Italian system for 
financing its regions and localities. In calculating the IRAP tax base, 
taxpayers are allowed to deduct certain expenses, such as depreciation 
and rental payments, but are not allowed to deduct labor expense or, in 
the case of non-financial institutions, interest expense.
    The Italian legislation implementing IRAP provides that IRAP is to 
be considered substantially similar to ILOR for purposes of Italy's 
international agreements ILOR, which was an income tax under U.S. law, 
is explicitly listed as a creditable income tax in the existing treaty. 
Accordingly, Italian tax authorities took the position that IRAP is 
creditable in full under the existing treaty. In contrast, the Treasury 
Department believes that IRAP is not substantially similar to ILOR for 
purposes of the existing treaty. In particular, by disallowing 
deductions for labor and interest expense, IRAP is not likely to reach 
net gain in the normal circumstances in which it applies and, 
accordingly, it does not satisfy one of the requirements for being an 
income tax under U.S. law.
    Because IRAP replaced a tax explicitly addressed by the existing 
treaty, and because of the disagreement over the proper interpretation 
of the existing treaty, the Treasury Department agreed to address the 
creditability of IRAP in the context of a comprehensive renegotiation 
of the existing treaty. The Treasury Department believed that such a 
renegotiation would allow the existing treaty, which was signed in 
1984, to be updated to more closely reflect current U.S. treaty policy.
    In its economic effect, IRAP constitutes a tax not only on the net 
income of a taxpayer, but also on labor and, in the case of non-
financial institutions, interest. Accordingly, U.S. negotiators refused 
to permit a tax credit for the full amount of IRAP. However, because 
one of the principal purposes of the treaty is to eliminate double 
taxation of income, the negotiators believed it was appropriate to 
allow limited relief for that portion of IRAP that was equivalent to a 
tax on the net income of a U.S. taxpayer. Thus, the proposed treaty 
provides a formula for determining the portion of IRAP that is 
equivalent to an income tax for purposes of the foreign tax credit.
    It is important to note that the portion of IRAP that is equivalent 
to an income tax under the proposed treaty is subject to the same 
limitations on creditability as the other Italian income taxes listed 
in the treaty. In particular, in accordance with U.S. treaty policy, 
the proposed treaty provides that an income tax is creditable only in 
accordance with, and subject to the limitations of, U.S. law. Thus, for 
example, the credit with respect to the relevant portion of IRAP is 
subject to U.S. law rules governing ``basket limitations,'' currency 
translation, and carryover periods.
    As it has in the past, Treasury intends in its future negotiations 
to continue its practice of reviewing its treaty partner's taxes 
carefully to determine wehther their creditability should be provided 
for in our treaty.
    In summary, the proposed treaty's allowance of a foreign tax credit 
for a portion of IRAP represents an appropriate response to a 
particular set of circumstances arising in the context of an existing 
treaty relationship. Moreover, the approach is narrowly tailored to 
allow a credit only for that portion of IRAP that is equivalent to a 
tax on the U.S. taxpayer's net income, thereby furthering the treaty 
policy of eliminating double taxation on income. Under such 
circumstances, the provision of a foreign tax credit by treaty is 
appropriate.
Insurance Excise Tax
    Issue: The issue raised by the JCT pamphlet is whether it is 
appropriate to provide an exemption from the federal excise tax on 
insurance premiums paid to foreign insurers in the proposed treaty with 
Italy.
    Response: The existing treaty, which was signed in 1984, provides 
an exemption from the federal excise tax on insurance premiums paid to 
Italian insurers, as long as certain requirements are satisfied. The 
proposed treaty retains the existing treaty's coverage of this tax.
    Treasury recognizes the policy concerns about the competitiveness 
of U.S. insurance companies that serve as the basis for the imposition 
of the excise tax on foreign insurers insuring U.S. risks. Consistent 
with these policy concerns, the Treasury Department will only agree to 
cover this excise tax in an income tax convention, and thereby grant an 
exemption from the tax, if Treasury is satisfied that an insurer that 
is a resident of the treaty partner and is insuring U.S. risks would 
face a level of taxation that is substantial relative to the level of 
taxation faced by U.S. insurers.
    During the course of negotiations, Treasury conducted a thorough 
review of Italian law and information on Italian insurance company 
operations. This review demonstrated that insurance companies that are 
resident in Italy are subject to a substantial level of tax in Italy. 
Accordingly, it was determined that U.S. insurance companies would not 
be placed at a competitive disadvantage by the retention of coverage of 
the excise tax in the proposed treaty.
    As further protection, the proposed treaty includes the ``anti-
conduit'' clause also found in the existing treaty. This provision 
ensures that the excise, tax will apply if an Italian insurer reinsures 
a policy it has written on a U.S. risk with a foreign insurer that is 
not entitled to a similar exemption under this or a different tax
treaty.
Shipping and Aircraft Income
    Issue: The issue raised by the JCT pamphlet is whether the proposed 
treaty's rules with respect to income derived from the rental of ships 
and aircraft, and gains from the sale of ships and aircraft, are 
appropriate.
    Response: The proposed treaty, with one favorable exception, 
retains the existing treaty's treatment of income from the rental of 
ships and aircraft, and gains from their sale. As in the existing 
treaty, and consistent with U.S. policy, the proposed treaty provides 
an exemption from source-country taxation for rental income (and gains) 
from ships and aircraft rented on a full basis, as well as rental 
income (and gains) from containers used in international traffic. As in 
the existing treaty, the proposed treaty provides that income (and 
gains) from ships and aircraft rented on a bareboat basis will be 
exempt from source-country taxation only if the rentals are incidental 
to the lessor's profits from the operation of ships or aircraft in 
international traffic.
    Although it is the preferred U.S. policy to extend the source-
country exemption to include non-incidental income from the bareboat 
rental of ships and aircraft (and gains from the disposition of such 
ships and aircraft), Italy was unwilling to change the existing treaty 
on this point because of its strong treaty policy against such 
exemptions. Indeed, the inclusion of a source-country exemption for 
rental income (and gains) from containers used in international traffic 
represents a significant departure for Italy from its normal treaty 
policy.
    Nonetheless, the proposed treaty does represent an improvement over 
the existing treaty's treatment of rental income from the non-
incidental rental of ships and aircraft on a bareboat basis. Whereas 
the existing treaty allows the source country to impose a 7 percent tax 
rate on the gross amount of such rentals that are not attributable to a 
permanent establishment in the source country, the proposed treaty 
lowers that rate to 5 percent.
Treaty Shopping
    Issue: The issue raised by the JCT pamphlet is whether the 
limitation on benefits provision of the proposed treaty is an adequate 
tool for preventing possible treaty-shopping abuses in the future.
    Response: The limitation on benefits provision of the proposed 
treaty is identical in all substantive respects to the provision 
contemplated by the U.S. Model We therefore believe that it is 
adequate.
Arbitration of Competent Authority Issues
    Issue: The issue raised by the JCT pamphlet is whether the 
provision allowing for the competent authorities to agree to 
arbitration, with the consent of the affected taxpayer, is appropriate.
    Response: Treasury recognizes that there has been little practical 
experience with arbitration of tax treaty disputes and this creates 
some uncertainty about how well arbitration would work. For this 
reason, Treasury does not advocate the inclusion of arbitration 
provisions in new treaties. However, if the treaty partner is strongly 
interested in an arbitration provision, we are willing to include such 
a provision in a new treaty with the proviso that it cannot be 
implemented until the treaty partners have exchanged diplomatic notes 
to that effect. This provides the opportunity to wait until more 
experience has been gained with arbitration and with the treaty partner 
before deciding whether the implementation of such a provision is 
desirable. For the foregoing reasons, and because Italy was strongly 
interested in the provision, it was included in the proposed treaty.
Exchange of Information
    Issue: The issues raised by the JCT pamphlet are (1) whether the 
information exchange provision, which does not include a sentence 
regarding the ability to obtain information from financial 
institutions, is sufficient and (2) whether a statement that the 
omission of the provision regarding financial institutions does not 
lessen the commitment of the United States to pursue broader exchanges 
of information in future treaty negotiations would be beneficial.
    Response: Adequate exchange of information with our treaty partners 
is one of the key objectives of our tax treaty policy. The Treasury 
Department remains strongly committed to this objective, including the 
ability to exchange third-party information obtained from banks and 
other financial institutions.
    The Treasury Department believes that the exchange of information 
provisions in the proposed treaty will enable the United States to 
obtain this third-party information, and that the omission of paragraph 
3 of Article 26 of the U.S. Model will have no adverse effect on this 
ability. Treasury has received written assurances from the Italian 
Ministry of Finance regarding Italy's ability to obtain bank 
information under its internal laws in order to comply with the 
information exchange provisions contained in the proposed treaty. 
Moreover, Italy has been at the forefront of international efforts to 
increase information exchange in order to prevent tax avoidance and 
evasion. Indeed, Italy recently hosted a high-level OECD meeting 
between tax and bank regulatory officials and the private sector in 
order to discuss the problem of bank secrecy and explore the subject of 
greater access to bank information for tax administration purposes.
    It is important to note that the inclusion in a treaty of the first 
sentence of paragraph 3 of Article 26 of the U.S. Model, which purports 
to override a country's internal laws regarding bank secrecy, does not 
guarantee that the United States will, in practice, actually receive 
third-party bank information. For example, a country's internal laws 
might not allow the exchange of such information notwithstanding the 
purported override in the treaty. Accordingly, the most effective way 
of protecting the United States' interest in this area is through due 
diligence during negotiations to ensure that internal laws will, in 
fact, enable the exchange.
    In addition, some countries have viewed the request for this 
provision as a diplomatic slight. This is particularly of concern to 
those countries that have been affected by the United States' ``later-
in-time'' principle, which permits a subsequently enacted U.S. domestic 
law to take precedence over the provisions of a previously ratified 
treaty.
    For these reasons, the Treasury Department plans to substantially 
revise or eliminate this sentence in the U.S. Model. Of course, any 
change in the sentence would not lessen the Treasury Department's 
commitment to adequate information exchange, including third-party bank 
information.
    As to the second issue, as noted above, we believe that the effect 
of the information exchange provision of this treaty is as broad as in 
any of our tax treaties, and we do not believe that it would be 
beneficial to suggest otherwise. However, we always welcome strong 
statements from the Committee regarding the importance of information 
exchange. Therefore, we believe that a statement from the Committee 
that the omission of this statement in this treaty does not reflect any 
lessening of our commitment to receiving information from banks and 
other financial institutions would be beneficial.
                    proposed convention with latvia
Treatment of REIT Dividends
    Issue: The issue raised by the JCT pamphlet is whether the 
treatment of REIT dividends in the proposed treaty is appropriate.
    Response: As noted with respect to Estonia above, this treaty was 
fully negotiated at the time we decided to change our policy at the end 
of 1997. It was not appropriate to re-open negotiations, in particular 
because Latvia is not a significant source of investment in U.S. real 
estate.
Developing Country Concessions
    Issue: The issue raised in the JCT pamphlet is whether the 
developing country concessions represent appropriate U.S. treaty policy 
and, if they do, whether Latvia is an appropriate recipient of these 
concessions.
    Response: As noted above, developing country concessions may be 
necessary in order to enter into treaties with developing countries. 
Tax treaties with developing countries are in the interest of the 
United States because they provide reductions in the taxation by such 
countries of U.S. investors and a clearer framework for the taxation of 
U.S. investors. Such treaties also provide dispute resolution and 
nondiscrimination rules that benefit U.S. investors and exchange of 
information procedures that benefit the tax authorities.
    Regarding whether Estonia is an appropriate recipient of developing 
country concessions, it should be noted that for 1997, the GDP of 
Latvia was $10.4 billion (as compared to the U.S. GDP of $8,100 
billion) and the per capita GDP was $4,260 (as compared to $30,200 per 
capita GDP in the United States).
    The Treasury Department believes that the developing country 
concessions in the proposed treaty are in line with the concessions 
granted by the United States to other developing countries and compare 
favorably with developing country concessions granted to Latvia by 
other OECD countries. These provisions are addressed individually 
below.
    With respect to particular developing country concessions in the 
proposed Latvian treaty, the JCT pamphlet identified the following:

   the definition of ``permanent establishment'';
   the taxation of business profits;
   the taxation of certain equipment leasing; and
   other taxation by the source country.

These are discussed below seriatim.
            Permanent Establishment Definition
    The Latvian treaty provides that the term ``permanent 
establishment'' includes building sites, etc. when the site or activity 
continues for more than six months. A special article provides that 
``offshore activities'' relating to the exploration for natural 
resources will be taxed as a permanent establishment if such activities 
continue for more than 30 days in any twelve-month period. The U.S. 
Model provides that both building and oil exploration activities will 
constitute a ``permanent establishment'' only when the site or activity 
continues for 12 months. The lower threshold for building activities in 
the treaty reflects the fact that, as a newly emerging economy, Latvia 
is more dependent upon tax revenues from construction projects and 
similar activities than developed countries whose physical and business 
infrastructure are more established. This rule in the Latvian treaty is 
consistent both with other Latvian treaties and with many other U.S. 
treaties with developing countries. With respect to the offshore 
activities rules, Latvia takes the same view as a number of North Sea 
countries (and other countries whose tax laws have been influenced by 
the North Sea countries) that the oil in their territorial waters is 
part of their patrimony. They therefore want to make sure that they 
have primary taxing jurisdiction with respect to all revenues generated 
from the oil. The rule in the treaty is the same as that in our 
treaties with Ireland, The Netherlands, Norway and the United Kingdom.
            Taxation of Business Profits
    The proposed treaty provides that if an enterprise has a permanent 
establishment in a country, that country may tax the portion of the 
enterprise's business profits that is attributable to the permanent 
establishment. As in the treaty with Estonia, the treaty with Latvia 
includes a ``limited force of attraction'' rule. The rule in the treaty 
is narrower than the rule found in the U.N. Model and operates as an 
anti-abuse rule. We therefore concluded that the rule did not 
improperly expand the taxation of business income.
            Taxation of Certain Equipment Leasing
    Under the U.S. Model Treaty, income from the rental of tangible 
personal property is treated as business profits. Under the proposed 
Latvian treaty, payments for the use of or the right to use, 
industrial, commercial, or scientific equipment will be treated as 
royalties. Treatment of such income as royalties is consistent with the 
position taken by many developing countries and with the former OECD 
Model Treaty. It also represents the treaty policy of Latvia. Through 
negotiation, we were able to reduce the withholding rate on this class 
of royalties to 5 percent (from the general rate of 10 percent). As 
with all royalty income, if the income from rentals of tangible 
personal property are attributable to a permanent establishment or 
fixed base in the source country, such income is taxed on a net basis 
under Articles 7 or 14. As discussed below with respect to ships and 
aircraft, there are exemptions from even the 5 percent withholding tax 
in the case of income from the rental of containers used in 
international traffic, and from the rental of ships and aircraft used 
in international traffic on a full (time or voyage) basis, and on a 
bareboat basis when such income is incidental to the operation of the 
ships and aircraft in international traffic.
            Other Taxation by Source Country
    The JCT pamphlet also noted other areas in which the proposed 
treaty provides for greater taxation by the source country than would 
be permitted under the corresponding provisions of the U.S. Model. It 
notes the fact that the withholding rate at source on royalties is 
generally 10 percent, with a 5 percent rate on rentals of tangible 
personal property, rather than the zero rate at source in the U.S. 
Model. As noted above, developing countries are frequently unwilling to 
lower their withholding rates to the levels in the U.S. Model, largely 
because of their concerns over the potential loss of revenue. We were 
able to get Latvia to agree to relatively low rates, similar to those 
found in a number of other U.S. treaties with developing countries.
    The JCT pamphlet also noted the fact that under the Latvia treaty a 
fixed base is deemed to exist, thus allowing the host country to tax 
income from independent personal services, when the visitor is present 
in that country for 183 days in a 12-month period. This rule is not in 
the U.S. Model. Latvia was concerned that, without this rule, a U.S. 
resident would be able to spend longer than 183 days in Latvia 
performing independent personal services, but would be able to do so 
without using a fixed base (e.g., moving among clients' offices) and 
would avoid Latvian tax.
    The addition of this rule will prevent this result. This is 
standard Latvian treaty policy. A similar rule is found in a number of 
other U.S. treaties with developing countries, some (e.g., Thailand) 
with lower time thresholds.
Royalty Source Rules
    Issue: The issue raised by the JCT pamphlet is whether it is 
appropriate to have royalty source rules in the treaty that are 
different from the Internal Revenue Code rules regarding the source of 
royalties.
    Response: Under the proposed treaty, royalties are generally 
sourced according to the residence of the payor or the location of the 
permanent establishment or fixed base that incurs and bears the 
royalty. That rule is consistent with the U.N. Model rule but is 
different from the rule of U.S. internal law, which sources royalties 
according to the place where the property is used. Latvia requested the 
U.N. Model rule. The U.S. agreed, on the condition that the rule be 
modified to provide that if the general rule, stated above, did not 
source the royalty to either the United States or Latvia, the royalty 
would be sourced according to the place of use of the property, which 
is the general U.S. rule. This source provision has been included in 
some other U.S. treaties (e.g., the 1995 U.S.-Canada protocol and 1997 
treaties with Thailand and Turkey). As noted in the JCT pamphlet, a 
conflict between U.S. law and the rule under the proposed U.S.-Latvia 
treaty would arise only in the circumstances where a Latvian resident 
that does not have a permanent establishment or fixed base in the 
United States pays a royalty to a U.S. resident for the right to use 
property exclusively in the United States. The proposed royalty source 
rule would treat such royalty as Latvian source (and therefore 
potentially taxable in Latvia) However, U.S. internal law would treat 
such royalty as U.S. source income. As noted in the JCT pamphlet, the 
JCT staff recognizes that this situation would arise in relatively few 
cases (as opposed to the more common situation in which a Latvian 
resident using property in the United States would also have a 
permanent establishment or fixed base in the United States to which the 
royalty would be attributed, in which case it would be U.S. source). As 
a consequence of a similar recognition by the Treasury staff, we 
believe that this provision was an acceptable concession in the context 
of the overall U.S.-Latvian tax treaty negotiation. A further exception 
to the general source rule was included, at the insistence of the 
United States, that sources royalties that are payments for the use of 
containers as arising in neither Contracting State, and thus taxable, 
as ``Other Income,'' only in the State of residence of the income 
recipient. The result of this rule is consistent with the rule in the 
U.S. Model, which, under Article 8, gives exclusive taxation rights for 
such income to the State of residence of the beneficial owner of the 
income.
Income from the Rental of Ships and Aircraft
    Issue: The issue presented in the JCT pamphlet is whether the 
proposed treaty's rules treating profits from certain rental of ships 
and aircraft less favorably than profits from the operation of ships 
and aircraft and the rental of containers are appropriate.
    Response: The treatment of income from the bareboat rental of ships 
and aircraft, where the rental is not incidental to the operation of 
ships and aircraft in international traffic, was a difficult issue in 
the negotiations. Although it is U.S. policy to include such income 
within the scope of the source exemption in Article 8, Latvia was 
unwilling to do so, although they were willing to exempt incidental 
rentals from source country tax. The treaty permits Latvia to impose 
tax at source on non-incidental bareboat ship and aircraft rentals, but 
at a rate limited to 5 percent of the gross rental. This is a common 
result in Latvian treaties, and is also found in several other U.S. 
treaties.
Treaty Shopping
    Issue: The issue raised by the JCT pamphlet is whether the 
limitation on benefits provision of the proposed treaty is an adequate 
tool for preventing possible treaty-shopping abuses in the future.
    Response: The limitation on benefits provisions of the proposed 
treaty adhere closely to those of the U.S. Model. We therefore believe 
that they are adequate.
                   proposed convention with lithuania
Treatment of REIT Dividends
    Issue: The issue raised by the JCT pamphlet is whether the 
treatment of REIT dividends in the proposed treaty is appropriate.
    Response: As noted with respect to Estonia and Latvia above, this 
treaty was fully negotiated at the time we decided to change our policy 
at the end of 1997. It was not appropriate to re-open negotiations, in 
particular because Lithuania is not a significant source of investment 
in U.S. real estate.
Developing Country Concessions
    Issue: The issue raised in the JCT pamphlet is whether the 
developing country concessions represent appropriate U.S. treaty policy 
and, if they do, whether Lithuania is an appropriate recipient of these 
concessions.
    Response: As noted above, developing country concessions may be 
necessary in order to enter into treaties with developing countries. 
Tax treaties with developing countries are in the interest of the 
United States because they provide reductions in the taxation by such 
countries of U.S. investors and a clearer framework for the taxation of 
U.S. investors. Such treaties also provide dispute resolution and 
nondiscrimination rules that benefit U.S. investors and exchange of 
information procedures that benefit the tax authorities.
    Regarding whether Lithuania is an appropriate recipient of 
developing country concessions, it should be noted that for 1997, the 
GDP of Lithuania was $15.4 billion (as compared to the U.S. GDP of 
$8,100 billion) and the per capita GDP was $4,230 (as compared to 
$30,200 per capita GDP in the United States).
    The Treasury Department believes that the developing country 
concessions in the proposed treaty are in line with the concessions 
granted by the United States to other developing countries and compare 
favorably with developing country concessions granted to Lithuania by 
other OECD countries. With respect to particular developing country 
concessions in the proposed Lithuanian treaty, the JCT pamphlet 
identified the following:

   the definition of ``permanent establishment'';
   the taxation of business profits;
   the taxation of certain equipment leasing; and
   other taxation by the source country.

These are discussed below seriatim.
            Permanent Establishment Definition
    The Lithuanian treaty provides, that the term ``permanent 
establishment'' includes building sites, etc. when the site or activity 
continues for more than six months. A special article provides that 
``offshore activities'' relating to the exploration for natural 
resources will be taxed as a permanent establishment if such, 
activities continue for more than 30 days in any twelve-month period. 
The U.S. Model provides that both building and oil exploration 
activities will constitute a ``permanent establishment'' only when the 
site or activity continues for 12 months. The lower threshold for 
building activities in the treaty reflects the fact that, as a newly 
emerging economy, Lithuania is more dependent upon tax revenues from 
construction projects and similar activities than developed countries 
whose physical and business infrastructure are more established. This 
rule in the Lithuanian treaty is consistent both with other Lithuanian 
treaties and with many other U.S. treaties with developing countries. 
With respect to the offshore activities rules, Lithuania takes the same 
view as a number of North Sea countries (and other countries whose tax 
laws have been influenced by the North Sea countries) that the oil in 
their territorial waters is part of their patrimony. They therefore 
want to make sure that they have primary taxing jurisdiction with 
respect to all revenues generated from the oil. The rule in the treaty 
is the same as that in our treaties with Ireland, The Netherlands, 
Norway and the United Kingdom.
            Taxation of Business Profits
    The proposed treaty provides that if an enterprise has a permanent 
establishment in a country, that country may tax the portion of the 
enterprise's business profits that is attributable to the permanent 
establishment. As in the treaties with Estonia and Latvia, the treaty 
with Lithuania includes a ``limited force of attraction'' rule. The 
rule in the treaty is narrower than the rule found in the U.N. Model 
and operates as an anti-abuse rule. We therefore concluded that the 
rule did not improperly expand the taxation of business income.
            Taxation of Certain Equipment Leasing
    Under the U.S. Model Treaty, income from the rental of tangible 
personal property is treated as business profits. Under the proposed 
Lithuanian treaty, payments for the use of, or the right to use, 
industrial, commercial, or scientific equipment will be treated as 
royalties. Treatment of such income as royalties is consistent with the 
position taken by many developing countries and with the former OECD 
Model Treaty. It also represents the treaty policy of Lithuania. 
Through negotiation, we were able to reduce the withholding rate on 
this class of royalties to 5 percent (from the general rate of 10 
percent). As with all royalty income, if the income from rentals of 
tangible personal property are attributable to a permanent 
establishment or fixed base in the source country, such income is taxed 
on a net basis under Article 7. As discussed below with respect to 
ships and aircraft, there are exemptions from even the 5 percent 
withholding tax in the case of income from the rental of containers 
used in international traffic, and from the rental of ships and 
aircraft used in international traffic on a full (time or voyage) 
basis, and on a bareboat basis when such income is incidental to the 
operation of the ships and aircraft in international traffic.
            Other Taxation by Source Country
    The JCT pamphlet also noted other areas in which the proposed 
treaty provides for greater taxation by the source country than would 
be permitted under the corresponding provisions of the U.S. Model. It 
notes the fact that the withholding rate at source on royalties is 
generally 10 percent, with a 5 percent rate on rentals of tangible 
personal property, rather than the zero rate at source in the U.S. 
Model. As noted above, developing countries are frequently unwilling to 
lower their withholding rates to the levels in the U.S. Model, largely 
because of their concerns over the potential loss of revenue. We were 
able to get Lithuania to agree to relatively low rates, similar to 
those found in a number of other U.S. treaties with developing 
countries.
    The JCT pamphlet also noted the fact that under the Lithuania 
treaty a fixed base is deemed to exist, thus allowing the host country 
to tax income from independent personal services, when the visitor is 
present in that country for 183 days in a 12-month period. This rule is 
not in the U.S. Model. Lithuania was concerned that, without this rule, 
a U.S. resident would be able to spend longer than 183 days in Estonia 
performing independent personal services, but would be able to do so 
without using a fixed base (e.g., moving among clients' offices) and 
would avoid Lithuanian tax. The addition of this rule will prevent this 
result. This is standard Lithuanian treaty policy. A similar rule is 
found in a number of other U.S. treaties with developing countries, 
some (e.g., Thailand) with lower time thresholds.
Royalty Source Rules
    Issue: The issue raised by the JCT pamphlet is whether it is 
appropriate to have royalty source rules in the treaty that are 
different from the Internal Revenue Code rules regarding the source of 
royalties.
    Response: Under the proposed treaty, royalties are generally 
sourced according to the residence of the payor or the location of the 
permanent establishment or fixed base that incurs and bears the 
royalty. That rule is consistent with the U.N. Model rule but is 
different from the rule of U.S. internal law, which sources royalties 
according to the place where the property is used. Lithuania requested 
the U.N. Model rule. The U.S. agreed, on the condition that the rule be 
modified to provide that if the general rule, stated above, did not 
source the royalty to either the United States or Lithuania, the 
royalty would be sourced according to the place of use of the property, 
which is the general U.S. rule. This source provision has been included 
in some other U.S. treaties (e.g., the 1995 U.S.-Canada protocol and 
1997 treaties with Thailand and Turkey). As noted in the JCT pamphlet, 
a conflict between U.S. law and the rule under the proposed U.S.-
Lithuania treaty would arise only in the circumstances where a 
Lithuanian resident that does not have a permanent establishment or 
fixed base in the United States pays a royalty to a U.S. resident for 
the right to use property exclusively in the United States. The 
proposed royalty source rule would treat such royalty as Lithuanian 
source (and therefore potentially taxable in Lithuania). However, U.S. 
internal law would treat such royalty as U.S. source income. As noted 
in the JCT pamphlet, the JCT staff recognizes that this situation would 
arise in relatively few cases (as opposed to the more common situation 
in which a Lithuanian resident using property in the United States 
would also have a permanent establishment or fixed base in the United 
States to which the royalty would be attributed, in which case it would 
be U.S. source). As a consequence of a similar recognition by the 
Treasury staff, we believe that this provision was an acceptable 
concession in the context of the overall U.S.-Lithuanian tax treaty 
negotiation. A further exception to the general source rule was 
included, at the insistence of the United States, that sources 
royalties that are payments for the use of containers as arising in 
neither Contracting State, and thus taxable, as ``Other Income,'' only 
in the State of residence of the income recipient. The result of this 
rule is consistent with the rule in the U.S. Model, which, under 
Article 8, gives exclusive taxation rights for such income to the State 
of residence of the beneficial owner of the income.
Income from the Rental of Ships and Aircraft
    Issue: The issue presented in the JCT pamphlet is whether the 
proposed treaty's rules treating profits from certain rental of ships 
and aircraft less favorably than profits from the operation of ships 
and aircraft and the rental of containers are appropriate.
    Response: The treatment of income from the bareboat rental of ships 
and aircraft, where the rental is not incidental to the operation of 
ships and aircraft in international traffic, was a difficult issue in 
the negotiations. Although it is U.S. policy to include such income 
within the scope of the source exemption in Article 8, Latvia was 
unwilling to do so, although they were willing to exempt incidental 
rentals from source country tax. The treaty permits Latvia to impose 
tax af source on non-incidental bareboat ship and aircraft rentals, but 
at a rate limited to 5 percent of the gross rental. This is a common 
result in Latvian treaties, and is also found in several other U.S. 
treaties.
Treaty Shopping
    Issue: The issue raised by the JCT pamphlet is whether the 
limitation on benefits provision of the proposed treaty is an adequate 
tool for preventing possible treaty-shopping abuses in the future.
    Response: The limitation on benefits provisions of the proposed 
treaty adhere closely to those of the U.S. Model. We therefore believe 
that they are adequate.
                   proposed convention with slovenia
``Main Purpose'' Anti-Abuse Test
    As noted above, this issue will be addressed in a separate 
memorandum.
Exchange of Information
    Issue: The issues raised by the JCT pamphlet are (1) whether the 
information exchange provision, which does not include a sentence 
regarding the ability to obtain information from financial 
institutions, is sufficient and (2) whether a statement that the 
omission of the provision regarding financial institutions does not 
lessen the commitment of the United States to pursue broader exchanges 
of information in future treaty negotiations would be beneficial.
    Response: Adequate exchange of information with our treaty partners 
is one of the key objectives of our tax treaty policy. The Treasury 
Department remains strongly committed to this objective, including the 
ability to exchange third-party information obtained from banks and 
other financial institutions.
    The Treasury Department believes that the exchange of information 
provisions in the proposed treaty will enable the United States to 
obtain this third-party information, and that the omission of the first 
sentence of paragraph 3 of Article 26 of the U.S. Model will have no 
adverse effect on this ability. Treasury has received written 
assurances from the Slovenian Ministry of Finance regarding Slovenia's 
ability to obtain bank information under its internal laws in order to 
comply with the information exchange provisions contained in the 
proposed treaty. Moreover, the Slovenian Ministry of Finance has 
confirmed that penalties exist under its internal law in order to 
ensure that banks and other financial institutions comply with requests 
for information.
    It is important to note that the inclusion in a treaty of the first 
sentence of paragraph 3 of Article 26 of the U.S. Model, which purports 
to override a country s internal laws regarding bank secrecy, does not 
guarantee that the United States will, in practice, actually receive 
third-party bank information. For example, a country's internal laws 
might not allow the exchange of such information notwithstanding the 
purported override in the treaty. Accordingly, the most effective way 
of protecting the United States' interest in this area is through due 
diligence during negotiations to ensure that internal laws will, in 
fact, enable the exchange.
    In addition, some countries have viewed the request for this 
provision as a diplomatic slight. This is particularly of concern to 
those countries that have been affected by the United States' ``later-
in-time'' principle, which permits a subsequently enacted U.S. domestic 
law to take precedence over the provisions of a previously ratified 
treaty.
    For these reasons, the Treasury Department plans to substantially 
revise or eliminate this sentence in the U.S. Model. Of course, any 
change in the sentence would not lessen the Treasury Department's 
commitment to adequate information exchange, including third-party bank 
information.
    As to the second issue, as noted above, we believe that the effect 
of the information exchange provision of this treaty is as broad as in 
any of our tax treaties, and we do not believe that it would be 
beneficial to suggest otherwise. However, we always welcome strong 
statements from the Committee regarding the importance of information 
exchange. Therefore, we believe that a statement from the Committee 
that the omission of this statement in this treaty does not reflect any 
lessening of our commitment to receiving information from banks and 
other financial institutions would be beneficial.
Treaty Shopping
    Issue: The issue raised by the JCT pamphlet is whether the 
limitation on benefits provision of the proposed treaty is an adequate 
tool for preventing possible treaty-shopping abuses in the future.
    Response: The limitation on benefits provisions of the proposed 
treaty adhere closely to those of the U.S. Model. We therefore believe 
that they are adequate.
                   proposed convention with venezuela
Developing Country Concessions
    Issue: The issue raised in the JCT pamphlet is whether the 
developing country concessions represent appropriate U.S. treaty policy 
and, if they do, whether Venezuela is an appropriate recipient of these 
concessions.
    Response: Regarding whether Venezuela is an appropriate recipient 
of developing country concessions, it should be noted that for 1997, 
Venezuela's gross domestic product (GDP) was $185 billion and its per 
capita GDP was $8,300. By contrast, the United States' 1997 GDP was 
$8.1 trillion and its per capita GDP $30,200.
    With respect to particular developing country concessions in the 
proposed Venezuela treaty, the JCT pamphlet identified the following:

   the definition of ``permanent establishment'';
   the taxation of certain equipment leasing;
   other taxation by source country.

These are discussed below seriatim.
            The Definition of Permanent Establishment
    The Venezuela treaty provides that the term ``permanent 
establishment'' encompasses building sites and drilling rigs and ships 
used for the exploration for natural resources when the site or 
activity continues for periods aggregating more than 183 days within 
any 12-month period. Under the U.S. Model, the site or activity would 
have to last for more than 12 months. The Venezuela treaty also 
includes a rule under which an enterprise that provides services in the 
other country would be treated as having a permanent establishment if 
its employees are in the other country and the activities continue for 
a period or periods aggregating more than 183 days within a 12-month 
period. The U.S. Model contains no provision treating the furnishing of 
services as a permanent establishment.
    The building-site rule reflects the recognition that Venezuela is a 
developing nation and more dependent upon tax revenue from construction 
projects than developed nations whose physical and business 
infrastructure are more established. The building-site provision is 
consistent with other income tax treaties of Venezuela. The rules 
regarding the threshold for oil exploration were quite important to 
Venezuela because of the importance of the oil sector to Venezuela's 
economy. We also took into account the fact that the proximity of 
Venezuela to the United States would make it easier for owners of 
drilling rigs to move the rigs back and forth between the two countries 
than would be the case with respect to other areas in which oil 
exploration takes place. The rule in the treaty is the same as in our 
treaty with Mexico and significantly longer than in our treaty with 
Canada, which has a 3-month threshold.
    Venezuela also requested the 183-day/12-month-period permanent 
establishment rule with respect to the furnishing of services. As a 
developing nation, Venezuela must import consultancy and other services 
to a greater degree than developed nations and did not want to 
surrender its right to tax such services. A similar rule is found in a 
number of other U.S. treaties with developing countries, some (e.g., 
Thailand) with lower time thresholds.
            Taxation of Certain Equipment Leasing
    Under the U.S. Model Treaty, income from the rental of tangible 
personal is treated as business profits. Under the proposed Venezuela 
treaty, payments for the use of, or the right to use, industrial, 
commercial, or scientific equipment will be treated as royalties. 
Treatment of such income as royalties is consistent with the position 
taken by many developing countries and with the former OECD Model 
Treaty. It also represents the treaty policy of Venezuela. Through 
negotiation, we were able to reduce the withholding rate on this class 
of royalties to 5 percent (from the general rate of 10 percent), and to 
carve out of the definition of ``royalties'' ship, aircraft and 
container leasing income, whether or not such income is incidental to 
the operation of such ships, aircraft or containers in international 
traffic by the recipient of the income. Of course, payments for the use 
of, or the right to use, industrial, commercial, or scientific 
equipment that are attributable to a permanent establishment will be 
taxed as business profits on a net, as opposed to a gross, basis.
            Other Taxation by Source Country
    The U.S. Model provides for an exemption from source-country 
taxation for royalty payments. The Venezuela treaty provides that 
royalties will be subject to withholding tax of 5 percent (in the case 
of equipment leasing, as described above) or 10 percent with respect to 
all other payments covered by the article. The Venezuela treaty also 
provides that the source country may impose tax on ``other income'', 
under the U.S. Model, income falling under the ``other income'' article 
is taxable only by the country of residence of the beneficial owner. As 
with interest, source country taxation was preserved in the treaty for 
both royalties and other income to help ensure that under Venezuela's 
territorial system, U.S.-source income paid to Venezuela would be 
subject to a gross withholding tax that would approximate the results 
if the income were actually subject to a net income tax in Venezuela. 
We did not press for lower rates for these types of payments and do not 
view the rates in this treaty as developing country concessions. Of 
course, they are also in line with what Venezuela viewed as appropriate 
withholding rates under this treaty.
    The proposed treaty generally permits source country taxation of 
artistes and sportsmen if the gross receipts derived by the individual 
in the source country exceed $6,000 for the taxable year concerned. The 
OECD and U.N. Models provide for taxation by the country of performance 
of the remuneration of entertainers or sportsmen with no dollar or time 
threshold. The United States introduces the dollar threshold test in 
its treaties to distinguish between two groups of entertainers and 
athletes--those who are paid very large sums of money for very short 
periods of service, and who would, therefore, normally be exempt from 
host country tax under the standard personal services income rules, and 
those who earn relatively modest amounts and are, therefore, not easily 
distinguishable from those who earn other types of personal service 
income. The United States has entered a reservation to the OECD Model 
on this point. Although the U.S. Model threshold is $20,000, we 
frequently adopt a lower limit to reflect economic conditions in the 
other country.
Treaty Shopping
    Issue: The issue raised by the JCT pamphlet is whether the 
limitation on benefits provision of the proposed treaty is an adequate 
tool for preventing possible treaty-shopping abuses in the future.
    Response: The limitation on benefits provisions of the proposed 
treaty adhere closely to those of the U.S. Model. We therefore believe 
that they are adequate.
Venezuelan Territorial Tax System
    Issue: The issue raised by the JCT pamphlet is whether entering 
into a treaty with a country that has a territorial system like that of 
Venezuela is appropriate as a matter of U.S. treaty policy.
    Response: As discussed extensively at the hearing, Venezuela is in 
the process of changing its income tax law. Under the new system, 
Venezuela will begin taxing all of the income received by its 
residents, rather than only that income that was determined, under 
broad ``sourcing'' rules, to be connected to Venezuela. The possibility 
that Venezuela would adopt this ``worldwide'' system was present 
throughout our treaty negotiations, and we planned for it in drafting 
the treaty. After reading, analyzing and discussing drafts of the new 
law, we have determined that the treaty will be at least as appropriate 
under the new law as the old law. The increased possibilities for 
double taxation that are the natural result of this change in law will 
make the treaty even more important than under Venezuela's territorial 
system. We believe that the treaty works appropriately, in large part 
because this change from ``territorial'' to ``worldwide'' taxation 
brings Venezuela's domestic laws into closer conformity with 
international norms. Moreover, there are vestiges of Venezuela's 
territorial system that are also addressed by special provisions in the 
treaty included to deal with that system.
    Although the pending change in Venezuela's law makes this issue 
largely moot, we note that, in evaluating any tax treaty, it is 
important to consider the benefits of the treaty to taxpayers and the 
governments and weigh those benefits against any potential abuse that 
might arise. Other countries with which we already have treaties have 
certain aspects of territoriality in their tax codes, but we have 
entered into treaties with them because the treaty was in our overall 
interest. As with any prospective treaty partner, we analyzed 
Venezuela's system to determine where double taxation could arise and 
whether there were opportunities for double non-taxation and addressed 
both problems. In most cases, the solutions arrived at in the Venezuela 
treaty were based on principles established in other treaty contexts. 
We believe that the treaty with Venezuela would have been appropriate 
even without the change in law.
Stability of Venezuelan Law
    Issue: The issues raised in the JCT pamphlet are whether the 
constitutional and institutional changes in Venezuela will create 
difficulties in administering the treaty, and whether the 
confidentiality of taxpayer information exchanged under the treaty will 
continue to be respected by any possible changes in local law.
    Response: Potential constitutional and institutional changes in 
Venezuela make the certainty and stability that the treaty would 
provide especially important. The pamphlet suggests that there may be 
uncertainty regarding the substantive law of Venezuela. The major 
potential change in substantive tax law is the likely change in 
Venezuela's system from territorial to worldwide taxation. Although 
this issue is framed by a discussion of recent political developments, 
the possibility that the law would change in this way existed during 
the course of the negotiations and affected the negotiation of many of 
the provisions of the treaty. The goal was to draft a treaty that would 
protect taxpayers and the government whether Venezuela had a 
territorial or a worldwide system. The treaty would benefit taxpayers 
by providing general principles regarding the threshold for taxation, 
the right to deductions for business expenses and non-discrimination.
    With respect to tax administration, the provisions of the treaty 
would eliminate ambiguity with respect to the identity of the competent 
authority. The treaty clearly states that the Integrated National 
Service of Tax Administration (SENIAT) is the competent authority at 
this time, but Venezuela's Ministry of Finance also retains the 
discretion to re-designate the competent authority, just as, in the 
case of the United States, the Secretary of the Treasury retains the 
discretion to name the competent authority for purposes of the treaty. 
Maintaining the flexibility to change the designation of this authority 
is a standard practice of tax treaties.
    The Internal Revenue Service and the Treasury Department are 
committed to ensuring that information exchanged under tax treaties is 
used only for permitted purposes. The treaty provides that any 
information exchanged in accordance with its provisions shall be used 
exclusively for tax purposes. In the context of our review of 
Venezuela, we consulted other government agencies, including agencies 
experienced in exchanging information with many Latin American 
countries. In this consultation we were not advised to anticipate 
abuses of exchanged information on the part of Venezuela. It should 
also be noted that moreover, we also understand that the new draft 
constitution being written by the National Constituent Assembly 
contains strong protections for civil and individual rights.

                                 ______
                                 

                 Response to Senator Dorgan's Testimony

    The written questions from Senator Hagel request a response to 
Senator Dorgan's testimony regarding the use of formulary apportionment 
to allocate and apportion income between related business entities. In 
particular, Senator Dorgan is concerned that certain provisions 
contained in all seven of the double taxation treaties (but not the 
German Estate Tax Protocol) pending before the Senate Foreign Relations 
Committee would restrict the use of formulary apportionment based on 
the interpretation of other U.S. treaties in two recent court cases.
    Senator Dorgan's testimony raised concerns about the current 
approach by the United States to allocating income between related 
parties when those entities conduct business with one another. The 
problem arises because related entities can adjust the prices at which 
goods and services are purchased between each other without any non-tax 
economic consequences to the group, as both entities involved are owned 
or controlled by the same interests. Accordingly, other concerns such 
as taxation may effectively control how prices are determined for these 
related party transactions. For example, a multinational business can 
manipulate the prices charged in transactions between its affiliates in 
different countries, with the result that the income reported for tax 
purposes in one country may be artificially depressed, and the tax 
administration of that country collecting less tax from the enterprise 
than it should. In theory, the multinational would plan its 
transactions to ensure that its income is reported in the jurisdiction 
with the lowest effective tax rate. It is this possibility that makes 
transfer pricing one of the most important international tax issues.
    If this potential tax avoidance (and the potential for double 
taxation) is to be ameliorated, it is necessary to have a benchmark by 
which to evaluate the prices charged. The benchmark adopted by the 
United States and all our major trading partners is the arm's-length 
standard. Under the arm's-length standard, the price charged should be 
the same as it would have been had the parties to the transaction been 
unrelated to one another--in other words, the same as if they had 
bargained at ``arm's-length.'' This requires an analysis of the 
functions performed and risks assumed by each party to the transaction, 
to make sure each party is adequately compensated for those functions 
and risks. If taxpayers and tax administrators can find similar 
transactions that took place between unrelated parties, they begin the 
inquiry by analyzing those transactions to see whether the functions 
and risks performed by each party are comparable to those in the 
related party transaction.
    This approach has been reflected in all of our treaties to date, 
including all seven treaties pending before the Committee. These 
treaties also apply an analogous approach for allocating income to a 
business conducted by a foreign corporation in the United States 
through a branch. Two recent court decisions have addressed the 
taxation of branch operations under a tax treaty and are the source of 
Senator Dorgan's concern. The first case suggests that it is not 
possible to use profits-based methods in determining the business 
profits attributable to a permanent establishment, and that the tax 
administrator is required to respect the income shown on the books of 
the branch, except in ``exceptional circumstances,'' a much higher 
standard than applies when adjusting the income of separate legal 
entities. A more recent case provides that the tax administrators may 
adjust the branch's books to reflect an arm's length. Thus, the trend 
of the cases is in the right direction.
    Moreover, the courts that decided these cases relied heavily on the 
existing Commentary to Article 7 (Business Profits) of the OECD Model 
Tax Convention. Without addressing the issue of whether the courts used 
that Commentary in an appropriate manner, we can say that we believe 
the Commentary itself needs to be changed in order to reflect recent 
changes that have occurred with respect to transfer pricing between 
related parties. These changes include the acceptance of transactional 
profits methods, at least as a method of last resort, in the Transfer 
Pricing Guidelines issued in 1995. In the OECD's report on Global 
Trading of Financial Instruments in 1998, there is extensive discussion 
of profit split methods, including the use of multi-factor formulas in 
appropriate cases. We have seen, and expect to continue to see, 
increasing acceptance of these profits-based approaches in the coming 
years, speeded by the increase in globally-integrated businesses that 
will become possible as a result of improvements in telecommunications 
technology. If the Commentary to Article 7 had reflected these changes, 
which have already taken place in the context of the treaty provision 
dealing with related separate entities (as opposed to branches and 
their home offices), the results in these cases might well have been 
different.
    Accordingly, in response to Senator Dorgan's specific concerns 
regarding these cases, we do not believe that these recent cases limit 
the United States ability to apply formulary apportionment under the 
seven treaties before the Committee, or treaties currently in force. 
There is an international consensus that the provisions of Article 9 
require the application of the arm's length standard. For that reason, 
the Treasury Department has testified in the past that ``unilateral'' 
adoption of a formulary apportionment system by the United States would 
constitute an override of such provisions, and we have not advocated, 
and do not advocate, that approach. However, if the major participants 
in international trade were to reach a new consensus that formulaiy 
methods are consistent with Article 9, adoption of such methods would 
be acceptable within the scope of the current treaty provisions.
    In the case of allocating income to the operations of a foreign 
corporation's U.S. branch, we believe that an international consensus 
eventually will develop around the proposition that any of the methods 
that are acceptable for transfer pricing between related entities will 
also be acceptable in the context of allocating income between branches 
of a single entity. The United States has already adopted this approach 
in the context of global dealing of financial instruments, both in 
advance pricing agreements and by regulation, as has the OECD in its 
report on Global Trading in Financial Instruments. It has done so by 
sanctioning the use of multi-factor formulas to allocate income from 
global trading activity under one common trading model--the 
``functionally fully-integrated'' model.

                                 ______
                                 

             Responses to Congressman Underwood's Testimony

    The question Senator Hagel raised, in connection with Congressman 
Underwood's testimony, is whether it is Treasury's policy to exclude 
Guam and other U.S. territories from treaty coverage. Although the 
State Department has concluded that the territories do not have the 
constitutional authority to negotiate treaties with foreign 
governments, the allocation of powers under the constitution is not 
violated by the United States' signing a tax treaty that covers the 
possessions of the United States. Thus, there is no legal bar to 
extending treaty coverage to U.S. territories. Regarding the Treasury 
Department's tax treaty policy with respect to the coverage of Guam and 
other U.S. territories, the Treasury Department is willing to discuss 
with Guamanian officials, or the officials of any other U.S. 
possession, the implications of such coverage and the mechanisms 
available to achieve appropriate tax results. We note that one 
implication of treaty coverage may be a reduction in the possessions 
tax collections. This and other implications must be carefully 
considered by the appropriate parties before such coverage is extended.

                                 ______
                                 

                       D'Empaire Reyna Bermudez & Asociados
                              Caracas, Venezuela, October 11, 1999.

The Honorable Jesse Helms
Chairman, Senate Committee on Foreign Relations,
U.S. Senate,
Washington, DC.

    Dear Mr. Chairman: On behalf of d'Empaire Reyna Bermudez & 
Asociados, a law firm in Caracas, Venezuela which renders services to a 
number of multinational corporations of the United States of America, 
we submit the following statement, for its inclusion in the record of 
your committee hearings on the proposed Treaty for the Avoidance of 
Double Taxation Between Venezuela and The United States.
    We thank you for this opportunity to express our views to you and 
to your Committee.
            Very truly yours,
                                      Jose Rafael Bermudez,
                                      Alberto I. Benshimol,
                              d'Empaire Reyna Bermudez & Asociados.

  Statement to the Senate Committee on Foreign Relations--October 13, 
                                  1999

    On behalf of the Law Office of d'Empaire Reyna Bermudez & Asociados 
we wish to express our support to the ratification of the Treaty for 
the Avoidance of Double Taxation Between Venezuela and The United 
States (the ``Treaty'').
    If the Treaty comes into effect next year,\1\ business with United 
States, Venezuela's most important trading partner, will be put onto 
the same competitive footing that Venezuela already has with the other 
countries with whom it has bilateral comprehensive tax treaties based 
on the OECD Model Tax Convention on Income and on Capital.\2\
---------------------------------------------------------------------------
    \1\ Venezuela's Congress approved the Treaty last July 15.
    \2\ Belgium, Czech Republic, France, Germany, Italy, Norway, 
Portugal, Switzerland, The Netherlands, Trinidad & Tobago and the 
United Kingdom. The Venezuelan Congress has also approved tax treaties 
with Barbados, Denmark, Indonesia, Mexico and Sweden, which are not yet 
in effect.
---------------------------------------------------------------------------
    In line with the United States Model Income Tax Convention of 
September 20, 1996 and the OECD Model Tax Convention, the Treaty 
determines how each country will limit its taxing powers and 
jurisdictions, so that double taxation is eliminated or mitigated.
    The Treaty also has provisions aimed at preventing discriminatory 
taxation (so that nationals of one state are not subject to a heavier 
tax burden in the source state than that applicable to nationals of the 
source state). Also, of particular importance to both the Internal 
Revenue Service and the Venezuelan Tax Administration are standard 
provisions aimed at providing cooperation between both contracting 
States to combat tax evasion. These include the exchange of information 
relevant to the collection of domestic taxes in each country, which may 
come from sources other than the taxpayer (e.g. financial institutions, 
agents and trustees).
    Domestic tax laws change frequently, but tax treaties tend to have 
a permanence which affords a higher level of security to taxpayers. The 
Treaty will provide potential investors in each country with a level of 
certainty about the maximum levels of taxation of their activities, 
which is not currently available to them. It is this certainty that 
makes investment, financing, trade and technology transfers between 
both countries more attractive.
    Some examples of how businesses operating in Venezuela can benefit 
from the Treaty are:
    Gains from the sale of shares. Currently, U.S. residents must pay 
up to 34 percent income tax on the gains from the sale of their shares 
in Venezuelan companies. But when shares of listed companies are sold 
through a Venezuelan stock exchange, a flat income tax of one percent 
of the total price is withheld. Once the Treaty comes into effect, U.S. 
resident shareholders will not be subject to any income tax on the sale 
of shares of Venezuelan companies.
    Dividends. Because dividends are not taxed under Venezuela's 
existing tax law, the IRS presently gets the full benefit of taxing all 
dividends distributed by companies in Venezuela to U.S. residents. 
However, since Venezuela's new income tax law would probably begin to 
tax dividends at a flat tax of 34 percent, the Treaty will protect U.S. 
investors from double taxation by limiting Venezuela's taxation of 
dividends to a maximum of 15 percent. Furthermore, if the beneficial 
owner of the dividend owns at least 10 percent of the company's voting 
stock, the limit falls to 5 percent.
    Interest. Interest payments currently made by Venezuelan entities 
to U.S. creditors which are not financial institutions are subject up 
to a 34 percent income tax withholding in Venezuela. Under the Treaty 
this withholding will fall to 10 percent. Additionally, the 4.95 
percent withholding applicable to payments to financial institutions is 
guaranteed not to increase.
    Capital goods and technology. Income earned by U.S. residents on 
the leasing of equipment is currently subject to regular income tax in 
Venezuela and the U.S. Under the Treaty, taxation of this income by 
Venezuelan tax Administration is limited to five percent of the gross 
amount of the lease payments. In addition, the current income tax law 
levies a 10.2 percent withholding on technical assistance provided for 
use in Venezuela by U.S companies without a permanent establishment in 
Venezuela. Technical assistance provided on such a basis from the U.S. 
will not be subject to income taxation in Venezuela once the Treaty 
comes into effect. As a result, capital goods and technology sourced 
out of the U.S. will be more attractive to Venezuelan businesses, as 
the current general practice is to gross-up payments made to the 
foreign supplier to take account of taxation.
    There are many more areas covered by the Treaty than those 
mentioned above. The Treaty will work to protect not only businesses 
from double taxation, allowing corporations and individuals to plan 
their taxes and the financial aspects of their projects with greater 
certainty, but it will also benefit other cross border activities that 
take place between the U.S. and Venezuela. For example, sportsmen and 
women, government, diplomatic and consular officers, entertainers, as 
well of overseas recipients of payments such as students, or recipients 
of pensions and social security payments, will all benefit from the 
Treaty.
    The Treaty will facilitate access to the U.S. financial markets for 
Venezuelan companies, aid the use of leased capital goods and the 
contracting of U.S. technology and services. Moreover, the Treaty goes 
much further than simply protecting taxpayers from overlapping taxation 
by the two contracting States. The treaty can be seen as a guaranty of 
certainty to U.S. investors relating to the impact of the Venezuelan 
income tax on their investment in Venezuela.
    For the aforementioned reasons we express our support to the 
ratification of the Treaty for the Avoidance of Double Taxation Between 
Venezuela and The United States.
    We thank you again for this opportunity to express our views to you 
on this matter.
            Very truly yours,
                                      Jose Rafael Bermudez,
                                      Alberto I. Benshimol,
                              d'Empaire Reyna Bermudez & Asociados.

   Additional Statement to the Senate Committee on Foreign Relations

    On behalf of the Law Office of d'Empaire Reyna Bermudez & Asociados 
and further to our statement dated October 13, 1999, in which expressed 
our support to the ratification of the Treaty for the Avoidance of 
Double Taxation Between Venezuela and The United State (the 
``Treaty''), we wish to highlight the following issues:
    At the request of the Venezuelan Executive Branch of Government, 
the Venezuelan Congress issued on April 26, 1999 a special law 
authorizing the President to pass and amend economic and financial 
legislation (the ``Enabling Law'').\1\ Among other reforms, the 
Enabling Law expressly authorized the President to amend the Venezuelan 
income tax law (``ITL'') to introduce (i) a worldwide system of 
taxation with a credit system to relieve international double taxation; 
(ii) legal provisions authorizing the Tax Administration to disregard 
the abuse of corporate forms in tax-oriented transactions; and (iii) 
the taxation of dividends.
---------------------------------------------------------------------------
    \1\ Ley Organica que Autoriza al Presidente de la Republica para, 
Dictar Medidas Extraordinarias en Materia Economica y Financiera 
Requeridas por el Inetres Publico, published in the Official Gazette 
number 36.687, dated April 26, 1999.
---------------------------------------------------------------------------
    Pursuant to the Enabling Law, a proposed draft of amendments to the 
ITL (the ``Amended ITL'') was discussed by the President and his 
Council of Ministers. The Amended ITL adapts the worldwide income 
system of taxation applicable to Venezuelan resident individuals and 
legal entities and permanent establishments of foreign entities. Note 
that taxpayers would be generally allowed to credit against their 
Venezuelan income tax liability income tax paid in other jurisdictions, 
up to the amount resulting from applying the Amended ITL's rate to 
foreign source income.
    Pursuant to the Enabling Law, the Amended ITL, and all other 
economic and financial legislation passed thereunder, must be enacted 
no later than October 26, 1999.
    Generally, laws are enacted in Venezuela by publication in 
Venezuela's Official Gazette. We were informed, that the Amended ITL 
will be enacted shortly by the President or the Ministry of the 
Interior, who is currently acting as President of the Republic, while 
the President is on an official trip to Asia. The Amended ITL will be 
enforceable immediately after its enactment.
    Under the Constitution of the Republic of Venezuela any amendment 
to the current tax legislation may not be effective retroactively 
(article 226). Therefore, the provisions of the Amended ITL would 
generally be applicable to fiscal years beginning after their 
enactment. Because the Tax Administration needs to prepare to 
administer the Venezuela's new worldwide income system, the specific 
provisions governing the system will be effective for tax years 
beginning after December 31st, 2000.
    We express our support to the ratification of the Treaty for the 
Avoidance of Double Taxation Between Venezuela and the United States 
and we thank you again for this opportunity to express our views on 
this matter.
            Very truly yours,
                                      Jose Rafael Bermudez,
                                      Alberto I. Benshimol,
                              d'Empaire Reyna Bermudez & Asociados.

                                 ______
                                 

                            Hoet, Pelaez, Castillo & Duque,
                              Caracas, Venezuela, October 11, 1999.

The Honorable Jesse Helms
Chairman, Senate Committee on Foreign Relations,
U.S. Senate,
Washington DC.

    Dear Mr. Chairman: On behalf of Hoet Pelaez Castillo & Duque, an 
international law firm located in Caracas, Venezuela, we submit the 
following statement for inclusion in the record of your committee 
hearings on the proposed Treaty For The Avoidance Of Double Taxation 
Between Venezuela and The United States.
    We thank you for this opportunity to express our views to you and 
to your Committee.

            Very truly yours,
                     Francisco M. Castillo, Senior Partner.

  Statement to the Senate Committee on Foreign Relations--October 13, 
                                  1999

    The law offices of Hoet, Pelaez, Castillo & Duque wishes to express 
our support for the ratification of the Treaty for the Avoidance of 
Double Taxation between Venezuela and the United States.
    Hoet, Pelaez, Castillo & Duque has an extensive reputation and 
experience in joint-venture negotiations, international financing, 
including project financing of major projects, acting as Venezuelan 
Counsel for major U.S. Corporations doing business in Venezuela. We 
believe that a treaty to avoid double taxation between Venezuela and 
the United States is of extreme necessity, in order to create a crucial 
link between the tax systems of both nations. The treaty will allocate 
the taxing authority between the U.S. and Venezuela and bring certainty 
to the taxation of cross border transactions.
    The absence of a tax treaty between the U.S. and Venezuela will 
represent a disadvantage for U.S. investors, as Venezuela has already 
entered into double taxation treaties with most European developed 
nations, such as France, United Kingdom, Italy, Germany, Portugal, The 
Netherlands and Switzerland, among others.
    A double taxation treaty will never create or impose any tax, but 
it will allocate taxing authority on an exclusive basis to one 
contracting State or limit the taxing authority of one of the two 
contracting States, in order to avoid double taxation with its negative 
effects.
    The need for such a treaty is nowadays even more urgent due to the 
recent reform of the Venezuelan Income Tax.
    The Venezuelan Congress enabled President Hugo Chavez to take 
extraordinary economic and financial measures, including a reform of 
the Income Tax Law. The President and the Cabinet have approved this 
reform in the month of September, although the final text has not yet 
been available to the general public, the main aspects of this reform 
have been widely disclosed.
    Following the world trend, Venezuela has shifted from a territorial 
income tax to taxing global income.
    According to the draft law which we have reviewed, all income 
earned by natural persons or legal entities, who are residents or 
domiciled in Venezuela, shall be subject to income tax, whether or not 
said income is earned within Venezuela or abroad. In addition, as in 
the present law, the income of natural persons or legal entities, who 
are non-residents and not domiciled in Venezuela, shall be subject to 
income tax, even though they do not have a permanent establishment or 
fixed base within the country, when the source of said income is in or 
occurs within the country.
    Natural persons or legal entities domiciled or resident abroad and 
who have a permanent establishment or fixed base in the country, shall 
be subject to income tax exclusively on the income earned within 
Venezuela or abroad which is attributable to their permanent 
establishment or fixed base.
    The law provides for a ``tax credit'' allowing deductions to be 
made against the Venezuelan Income Tax, for income tax paid abroad for 
income earned from extraterritorial sources. The draft law includes 
definitions with respect to what is considered ``income tax'' and, in 
case of any doubts, the Venezuelan Tax Administration should determine 
the nature of the tax credit. In addition, the tax credit may not 
exceed the income tax resulting from application of the provisions of 
the Venezuelan Income Tax Law which would have been required to be paid 
for said income.
    On the other hand, to determine the income earned from a foreign 
source, the norms of the Venezuelan law will be applicable as far as 
income, costs and deductions of the income earned from an 
extraterritorial source. That is, in order to establish the net income 
the Venezuelan norms will be applied and not that of the country of 
origin, so that theoretically, at least, some deductions could be 
objected which in accordance to the Venezuelan law are not admissible, 
although in the country of origin of the income they are admissible.
    The new law includes an international tax transparency regime 
applicable to all investment in low taxation jurisdiction.
    Of particular importance are the rules on transfer pricing which 
may be applicable to transactions bctween related parties and which are 
included for the first time in Venezuelan tax legislation. These rules 
may allow the Tax Authorities to disregard for tax purposes the prices 
contained in import or export agreements if found different from those 
they determine by one of the methods included in the law.
    When the treaty was negotiated, Venezuela imposed no tax on 
dividends under its internal laws. The new law will impose a 
withholding tax on dividends, for the net income which exceeds the 
taxable income, that is, those dividends which correspond to profits 
that were not subject to income tax in Venezuela shall be subject to 
the Dividend Tax.
    The dividends will be subject to a proportional 34% tax, with the 
exception of those dividends arising from companies dedicated to mining 
activities, in which case the proportional dividend tax will be 60% or 
for those dividends coming from companies dedicated to the exploitation 
of hydrocarbons, the proportional dividend tax will be 67.7%.
    Article 10 of the Treaty which limits tax on dividends will be a 
clear advantage to U.S. business particularly in the field of 
hydrocarbons.
    Licensing of intellectual property is one of the most important 
business relationship between U.S. and Venezuela. In the absence of the 
Treaty, royalties would be subject to important withholding tax in both 
countries. The concept of royalties in the Treaty is important to limit 
the scope of the internal Venezuelan Income Tax Law that otherwise 
would impose a higher tax than that provided in the Treaty.
    As in the case of royalties, in the absence of the Treaty, 
Venezuela would impose a higher withholding tax on interests paid to 
lenders that are not financial institutions. The treatment in the 
Treaty would assist such lenders taxing interests paid at a reviewed 
rate of 10%, whereas financial institutions would be taxed under the 
Venezuela internal laws at a 4.95% rate.
    The Treaty would harmonize the taxation rules of both countries, 
avoiding that the new rules may result in an adverse effect to U.S. 
businesses investing in Venezuela.
    The treaty closely follows recent U.S. income tax treaties and the 
Model income tax treaty of the Organization for the Economic 
Cooperation and Development.
    Article 24 provides the rules for relief from double taxation. In 
the case of Venezuela, it will be either an exemption or a tax credit. 
As mentioned above, the new Venezuelan income tax law provides for a 
tax credit. The U.S. will provide a direct or indirect credit for 
Venezuelan taxes effectively paid.
    The Government of President Hugo Chavez initiated the most 
comprehensive legal reform of the Venezuelan democratic era, including 
a new Constitution that should be approved this year.
    The Venezuelan Congress has already ratified the Treaty in an 
unprecedented decision confirming the Government's commitment to make 
Venezuela more competitive and compatible with the global economy. 
Ratification of the treaty with the U.S. is a key tool in giving U.S. 
investors confidence in the stability of the Tax Regime in Venezuela.

                                 ______
                                 

                                         VenAmCham,
      Venezuelan American Chamber of Commerce and Industry,
                              Caracas, Venezuela, October 26, 1999.

The Honorable Jesse Helms
Chairman, Senate Committee on Foreign Relations,
United States Senate,
Washington DC.

    Dear Mr. Chairman: On behalf of the Venezuelan American Chamber of 
Commerce and industry (VenAmCham), we submit the following written 
statement for inclusion in the record of your Committee Hearings on the 
proposed Treaty for the Avoidance of Double Taxation Between Venezuela 
and The United States of America.
    We thank you for this opportunity to express our views to you and 
to your Committee.
            Yours very truly,
                                  Jorge Redmond, President.
                               Antonio A. Herrera-Vaillant,
                                Vice President and General Manager.

 Written Statement of the Venezuelan American Chamber of Commerce and 
                       Industry--October 27, 1999

    The following is submitted as a written statement of the views of 
the Venezuelan American Chamber of Commerce and Industry (VenAmCham) in 
reference to the proposed Treaty For The Avoidance of Double Taxation 
Between Venezuela and The United States of America.
   i. reasons for the need of a prompt ratification of the tax treaty
    VenAmCham submits that the ratification of this treaty will be most 
beneficial to both countries for the following three main reasons 
which, not at the exclusion of others are:
    First: The proposed treaty reduces or eliminates double taxation of 
income earned by residents of either country from sources from the 
other country in addition to preventing avoidance or evasion of the 
taxes of the two countries and increasing transparency.
    Second: The proposed treaty is also intended to promote close 
economic cooperation between the two countries and to eliminate 
possible barriers to trade and investment caused by overlapping taxing 
jurisdictions of the two countries.
    Third: The absence of a treaty between Venezuela and the U.S. is a 
disadvantage for both Venezuelan and U.S. investors in either country, 
because Venezuela has already in effect double taxation treaties with 
most developed nations such as France, the United Kingdom, The 
Netherlands, Germany, Italy, Portugal and Switzerland. The new treaty 
will place on an equal competitive footing U.S. investments in 
Venezuela ``vis-a-vis'' those of the above mentioned countries.
                     ii. who we are and what we do
    VenAmCham, founded in 1950, is one of the largest overseas U.S. 
Chambers of Commerce in the world with over 1,040 corporate and 6,000 
individual members. Our membership includes all major U.S. corporations 
and all U.S. oil companies doing business in Venezuela. We are a 
private, non-government, non-profit institution. Our mission is to 
foster, and improve business between the United States and Venezuela, 
to promote and defend private enterprise, free trade and free markets 
where member companies operating in Venezuela can prosper, support and 
protect the general legitimate interests of our members.
    VenAmCham has an active presence throughout Venezuela, as well as 
in the capital city of Caracas. Accordingly, we have offices in the 
cities of Maracaibo, Maturin, Barquisimeto and Valencia where we 
conduct similar activities as in Caracas.
    VenAmCham is represented in Washington DC by Ulrico A. Reale, in 
order to maintain close contacts with the United States Congress, with 
all departments of the U.S. Federal Government and its agencies in 
addition with international lending institutions such as the IMF, the 
World Bank and the IDB.
    VenAmCham is associated with the U.S. Chamber of Commerce and with 
the Association of the American Chambers of Commerce of which we are a 
founding member. In 1998 VenAmCham became the contractual 
representative in Venezuela of ``Enterprise Florida,'' an organization 
jointly operated by business and the State of Florida, a state which is 
Venezuela's top trading partner with the United States.
    Among our U.S. related activities, VenAmCham hosted during the last 
two years the chairmen of the Senate Energy Committee and of the House 
Ways and Means Committee, who made working visits to Venezuela with 
several members of their committees. On the U.S. Administration side, 
VenAmCham has also recently hosted the President of the United States 
of America, as well as the Secretaries of State, Commerce and Energy, 
in addition to the Special Presidential Envoy to Latin America.
                       iii. facts about venezuela
    Venezuela has had a new government since February of 1999. As a 
presidential candidate, President Chavez chose to enter the Venezuelan 
established process by running for president according to the standing 
rules of 1998. He was freely elected by a decisive majority of the 
Venezuelan people in an election process monitored by international 
observers, such as the OAS and by U.S. Government representatives.
    There has been no disruption of the Constitutional order in the 
process leading to the establishment of the Constituent Assembly, this 
opinion is shared by the majority of the standing Supreme Court and 
most international observers. The Government has an overwhelming 
majority in the Assembly. Dissent and minority opinions have been 
expressed at all times and there has been no curtailment whatsoever of 
personal freedoms.
    The Assembly is completing its process of drafting a new 
Constitution and the recent proposed drafts of the Constitution respect 
and encourage private property and enterprise, granting, as a general 
rule, equal treatment to national and foreign investments.
    President Chavez has offered public and private assurances in 
Venezuela and to foreign governments--including the United States and 
international organizations such as the United Nations and the OAS--
that Venezuela will remain a democracy, intends to pursue a democratic 
course of action, and a market oriented economy.
                             iv. conclusion
    For the above reasons, although not to the exclusion of others, 
VenAmCham strongly supports and endorses without reservations the 
prompt ratification of the proposed Treaty for the Avoidance of Double 
Taxation between Venezuela and The United States of America.
    VenAmCham thanks the members of the Senate Foreign Relations 
Committee for this opportunity to present its views and to be heard.

                                 ______
                                 

                             Torres, Plaz & Araujo,
                      Caracas, Venezuela, October 11, 1999.

The Honorable Jesse Helms
Chairman, Senate Committee on Foreign Relations,
U.S. Senate,
Washington, DC.

    Dear Mr. Chairman: On behaif of Torres, Plaz & Araujo, an 
Venezuelan firm active in international law areas, with its offices in 
Caracas, Venezuela, which specializes in international taxation, we 
submit the following statement, for inclusion in the record of your 
committee hearings on the proposed Treaty For The Avoidance of Double 
Taxation Between Venezuela and The United States.
    We thank you for this opportunity to express our views to you and 
to your Committee.
            Very truly yours,
                    Federico Araujo Medina, Senior Partner.

  Statement to the Senate Committee on Foreign Relations--October 13, 
                                  1999

    The Law Offices of Torres, Plaz & Araujo wishes to express our 
support for the ratification of the Treaty For The Avoidance of Double 
Taxation Between Venezuela and The United States.
    Our firm has been acting as legal counsel on corporate tax matters 
for both U.S. and Venezuelan corporations engaged in trade and 
investments in the most significant economical sectors of our Country, 
namely petroleum, petrochemical, food sector, banking, among others, 
for more than 25 years. Along said period of time we have realized and 
event felt the need for the existence of a tax treaty between our 
countries, settling grounds for certainty and thus with enhancing the 
flow of business amount in our countries. We believe that in order to 
compete fairly with other countries that have already agreed with 
Venezuela Treaties in the Income Tax, we find that American investors 
could be in an incompetitive position compared to investors from other 
O.E.C.D. countries, which have concluded treaties previously with 
Venezuela.
    The approval of the Treaty and its entering into force becomes 
critical in a moment when Venezuela has announced, through its 
Executive Branch, a major amendment of the income tax regime--by 
shifting from our traditional territorial tax principle, to the 
worldwide system of taxation (i.e. adding domiciled/resident taxation 
to source taxation) and by--furthermore--providing for taxation of 
dividends, tax-free since 1991.
    In addition, what we envisage as a need for certainty--through a 
Tax Treaty--is enhanced since both taxpayer and Tax Administration will 
be confronted with a whole new concept in tax law (from the Venezuelan 
standpoint of view), having little or no experience in dealing with 
such complex issues as (i) piercing corporate veil through; the 
application of subtance over form rules; (ii) providing for a black-
listing or ``look-through'' scenario for investments in law tax 
juridiction; (iii) including tax legislation (copies party from OECD 
directives rules) on transfer pricing for international trade among 
related parties; all of which even though bringing Venezuela's tax 
system close to systems in place in the USA and other OECD countries, 
is liable to end up in controversy between taxpayers and the Tax 
Aministration, which may result in costly litigation and uncertainty, 
in a moment when the latter cannot be afforded, at least for 
investments in our Country, which, could--and perhaps will be likely 
to--affect United States of American's individual and corporate 
citizens investing in Venezuela (being the U.S.A. the most important 
importing Country to Venezuela, of both investment and goods), as a 
drawback via a vis investors from other OECD countries with treaties 
already in force with Venezuela.
    We sincerely believe that in view above mentioned of the facts and 
under the current Treaty drafting (e.g. rules for avoidance of tax 
treaty-shopping ``LOB'' provisions) ratification of the treaty could 
not result in the creation of a tax treaty protected shelter, but 
rather its approval would protect American investors in our country 
from the income tax point of view further and would provide the same 
with leverage in front of third country investors.
                                 draft
    The Committee should be aware that Venezuela may be moving from a 
territorial tax system to a worldwide system. On April 26, 1999, the 
Venezuela Congress authorized President Chavez under an enabling law to 
take extraordinary economic and financial measures, including a reform 
of Venezuela's income tax law. The enabling law specifically provide 
that the changes must include the adoption of a worldwide tax system in 
lieu of Venezuela's current territorial tax system as well as dividend 
taxation, tax heaven's investments blacklisting a (look through) and 
elaborate transfer pricing provisions, inter alia. Under the worldwide 
tax system, similar to the U.S. system, Venezuelan residents and 
domiciled entities are taxable on worldwide income while nonresident 
and nondomiciled entities are taxable on certain income from Venezuela 
sources. The enabling law authorized the President to publish a decree 
within six months of the authorization (i.e., by October 26, 1999) 
which contain these and other changes to Venezuelan tax laws. In 
September 1999, the Cabinet approved a new income tax, which, among 
other things, included provisions adopting a worldwide tax system. The 
new tax law has not yet been signed by the President or published in 
the Official Gazette. The Joint Committee staff has been told that 
these actions are expected to be imminent. Once officially published, 
the new laws generally will take effect for fiscal years beginning 
after the law is published (with the law generally not being effective 
later than January 1, 2000), even though a one (1) fiscal year tax 
postponement on worldwide income and dividend taxation is expected to 
be included in said income tax law transitional provisions.

                                 ______
                                 

                                          Williams,
                           1627 Eye Street, NW., Suite 900,
                                  Washington, DC, October 13, 1999.

 Statement of the Williams Companies in Support of the U.S.-Lithuanian 
                 Bilateral Tax Treaty--October 13, 1999

    On behalf of The Williams Companies, I want to express our strong 
support for the bilateral tax treaty between the United States and the 
Government of Lithuania now pending before the Committee and urge its 
ratification prior to adjournment of this session of Congress.
    Williams is an $18 billion energy and communications company 
headquartered in Tulsa, Oklahoma. Williams is active in most areas of 
the oil and natural gas industry. Williams owns two refineries in the 
United States, natural gas gathering and processing facilities, five 
interstate natural gas pipeline systems, a large petroleum products 
pipeline network, petroleum products terminals throughout the Midwest 
and Southeast, and a large energy marketing and trading business. In 
addition, we have numerous international investments through our 
Williams International subsidiary. We also are leaders in the wholesale 
transmission of voice, data and video communications.
    The Government of Lithuania has selected Williams International to 
be the strategic investor in the country's refining, transportation and 
oil export industry. This selection has been confirmed by the 
Parliament. While the terms of arrangement are still being discussed, 
Williams is prepared to invest $150 million in the businesses and 
manage a modernization program involving approximately $700 million. 
Once completed, the refinery and related facilities, known as Mazeikiu 
Nafta, will meet world class standards, including the more stringent 
fuel quality standards that will apply in Europe after the year 2000.
    Assuming our agreements with the Lithuanian Government are 
concluded successfully, Williams will be the largest U.S. investor in 
Lithuania by a large margin.
    As a result of our investment, Williams will maintain considerable 
staff in Lithuania. In addition to our direct investment, Williams will 
operate the refinery and related facilities pursuant to a management 
services agreement.
    Ratification of the tax treaty is important for several reasons. It 
will allow for the elimination of Lithuanian withholding tax at the 
source on certain payments to U.S. legal entities, whose activities do 
not rise to the level of a permanent establishment. Further, it will 
reduce the withholding tax rates on payments of interest, dividends and 
other types of income, which is paid from Lithuanian sources to U.S. 
residents. This treaty will also benefit the competitive standing of 
United States businesses operating in Lithuania. Currently, U.S. 
businesses are at a severe disadvantage to businesses from countries 
which have ratified double tax treaties with Lithuania.
    In addition to the above tax savings, the treaty will provide 
important relief from the double taxation of U.S. citizens and 
residents in Lithuania, who may otherwise be subject to double taxation 
of their income in both the United States and Lithuania.
    In summary, we urge the Committee and the Senate to approve this 
important treaty this year. If our agreement with the Lithuanian 
Government is successfully concluded, we will begin making major 
investments in the oil sector immediately. Williams to date has 
expended considerable funds in studying the refinery and its operations 
and has provided considerable assistance in the completion of the 
Butinge oil export terminal on the Baltic. Any delay in ratifying the 
treaty will have a negative impact on our investments to date and cloud 
our future activities in the country.
    We appreciate the Committee's desire to move this treaty forward 
and urge its ratification by the full Senate.
            Submitted by:
                                     John C. Bumgamer, Jr.,
                                 President, Williams International.

                                 ______
                                 

  Website Addresses for the Treasury Department Technical Explanations

Estonia:
        http://www.ustreas.gov/taxpolicy/documents.html#Estonia

Latvia:
        http://www.ustreas.gov/taxpolicy/documents.html#Latvia

Lithuania:
        http://www.ustreas.gov/taxpolicy/
documents.html#Lithuania

Venezuela:
        http://www.ustreas.gov/taxpolicy/
documents.html#Venezuela

Denmark:
        http://www.ustreas.gov/taxpolicy/documents.html#Denmark

Italy:
        http://www.ustreas.gov/taxpolicy/documents.html#Italy

Slovenia:
        http://www.ustreas.gov/taxpolicy/
documents.html#Slovenia

Germany:
        http://www.ustreas.gov/taxpolicy/documents.html#Germany

                                 
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