[Senate Hearing 109-308]
[From the U.S. Government Publishing Office]
S. Hrg. 109-308
TAX TREATIES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
FEBRUARY 2, 2006
__________
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
?
C O N T E N T S
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Page
Barthold, Thomas A., Acting Chief of Staff, Joint Committee on
Taxation, Washington, DC....................................... 15
Prepared statement........................................... 20
Brown, Patricia, Deputy International Tax Counsel, Office of the
International Tax Counsel, Department of the Treasury,
Washington, DC................................................. 3
Prepared statement........................................... 6
Lugar, Hon. Richard G., Chairman, U.S. Senator from Indiana...... 1
Reinsch, Hon. William A., President, National Foreign Trade
Council, Washington, DC........................................ 24
Prepared statement........................................... 27
(iii)
TAX TREATIES
----------
Thursday, February 2, 2006
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 9:30 a.m. in Room
SD-419, Dirksen Senate Office Building, Hon. Richard G. Lugar,
chairman of the committee, presiding.
Present: Senator Lugar.
OPENING STATEMENT OF HON. RICHARD G. LUGAR,
U.S. SENATOR FROM INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order.
It's a pleasure to welcome our witnesses and our
distinguished guests to the Foreign Relations Committee hearing
on a tax treaty with Bangladesh, protocols amending the
existing tax treaties with France, and a protocol amending the
existing tax treaty with Sweden.
As chairman of the Senate Foreign Relations Committee, I'm
committed to moving tax treaties as expeditiously as possible.
I would point out, during the last Congress, the Committee and
the full Senate approved tax agreements with Mexico, Australia,
the United Kingdom, Japan, Sri Lanka, the Netherlands, and
Barbados. I encourage the administration to continue its
successful pursuit of treaties that strengthen the American
economy by helping our businesses access foreign markets and by
providing incentives for foreign companies to create more jobs
in the United States.
The agreements before us today will bolster the economic
relationships between the United States and countries that are
already close trade and investment partners. As the United
States considers how to create jobs and to maintain economic
growth, it's important that we try to eliminate impediments
that prevent our companies from fully accessing international
markets. These impediments may come in the form of regulatory
barriers, taxes, tariffs, and unfair treatment. In the case of
taxes, we should work to ensure that companies pay their fair
share without being unfairly taxed twice on the same revenue.
Tax treaties are intended to prevent double taxation so that
companies are not inhibited from doing business overseas. As
the United States moves to keep the economy growing and to
increase United States employment, international tax policies
that promote foreign direct investment in the United States are
critically important.
Our first agreement is a new tax treaty with Bangladesh,
which was signed on September 26th, 2004. The investment
banking firm Goldman Sachs recently cited Bangladesh in its
list of developing countries that have the greatest potential
to achieve long-term economic success. The United States is
currently the largest source of foreign investment in
Bangladesh, with $1.4 billion in fixed direct investment.
American companies export about $290 million of products to
Bangladesh each year.
Our next agreements are protocols with France. One protocol
amends provisions of the existing income-tax treaty signed in
1994. The other protocol amends provisions of the existing
estate-tax treaty signed in 1978. The United States is France's
largest trading partner outside the European Union. France is
one of our longest standing tax-treaty partners. We have had
such treaties in place with the French for more than 65 years.
The protocols before us contain provisions regarding treatment
of pensions, application of estate taxes, marital-tax
exclusions and deductions. These tax provisions are important
to the numerous American nationals living and working in
France, as well as French nationals living and working here. A
key provision in the income-tax protocol clarifies taxation of
partnerships.
Our final agreement is a protocol amending the existing
treaty with Sweden. The original treaty was signed in 1994, and
this protocol was finalized last September. The total amount of
Swedish investment in the United States has quadrupled over the
last decade, to $28.5 billion at the end of 2004. This is about
15 percent of Sweden's direct investments abroad. With $34
billion invested in Sweden, the United States is the largest
source of foreign direct investment in that country. The most
important aspect of the protocol before us deals with the
taxation of cross-border dividend payments. This protocol is
one of a few recent U.S. tax agreements to provide an
elimination of withholding tax on dividends arising from
certain direct investments. It will reduce tax-related barriers
to trade and investment flows between the United States and
Sweden, promoting even stronger economic ties between our
nations.
We are joined today by a distinguished panel of witnesses
who will help us evaluate the treaties and protocols before us.
From the Treasury Department, we welcome Ms. Patricia Brown,
the Deputy International Tax Counsel and the lead negotiator of
the treaties. We also welcome Mr. Tom Barthold, Acting Chief of
Staff of the Joint Committee on Taxation. Finally, we welcome
Mr. Bill Reinsch, the President of the National Foreign Trade
Council. The committee looks forward to the insights and
analysis of our expert witnesses.
I will ask you to testify in the order that I introduced
you--namely, Ms. Brown, then Mr. Barthold and Mr. Reinsch.
Let me say, at the outset, that your prepared statements
will be placed in the record in full, so you need not ask for
permission that that happen; it will occur.
You may proceed in any way that you wish, by reading the
full statement, or by summarizing. We are not in a hurry. We've
come to hear you today and to gain your insights. And then I
will raise questions, and if other members of the committee
join me, they may have questions, likewise, in due course.
It's a pleasure to have you before us. And would you please
proceed, Ms. Brown?
STATEMENT OF PATRICIA BROWN, DEPUTY INTERNATIONAL TAX COUNSEL,
OFFICE OF THE INTERNATIONAL TAX COUNSEL, DEPARTMENT OF THE
TREASURY, WASHINGTON, D.C.
Ms. Brown. Thank you, Mr. Chairman. I appreciate the
opportunity to appear here today to recommend, on behalf of the
administration, favorable action on the four tax agreements
that you have described and that are pending before the
committee.
We appreciate the committee's interest in these agreements,
as demonstrated by the scheduling of this hearing and of the
other hearings that you mentioned over the past few years.
In 2004, Mr. Chairman, you wrote that ``Tax treaties are
part of the basic infrastructure of the global marketplace.''
It is hard to imagine how that marketplace would operate
without the international network of 2,000 bilateral tax
treaties. They have established a stable framework for
international trade and investment to flourish. The success of
this framework is evidenced by the fact that countless cross-
border transactions take place every year, with only a
relatively few disputes regarding the allocation of tax
revenues between governments. Many of these transactions
involve individuals who benefit particularly from the rules
regarding income from employment, the tax treatment of cross-
border pension contributions and distributions, and, of course,
estate-tax treaties.
Just like our physical infrastructure, our tax-treaty
network requires constant attention. Countries introduce new
preferential taxing regimes or tighter anti-abuse rules. They
may introduce bank secrecy, or abolish it, or they may enter
into an agreement with another country that is more
advantageous than the agreement they have with the United
States. Any of these situations may create an opportunity or a
risk that needs to be addressed by a new or revised agreement.
To take advantage of these opportunities, we must be
creative, flexible, and efficient. More and more, we are
concluding short protocols in order to update an agreement
without calling into question every one of its provisions. Of
course, this committee's willingness to consider these
agreements quickly has been crucial. It can change the entire
tone and pace of a treaty negotiation when the other side
discovers that an advantageous change can be approved and
implemented within the course of a year, or if they realize
that some other country will do it if they don't.
Three of the four agreements that are before you today are
updates of this sort. The fourth, the full treaty with
Bangladesh, is an updated version of a 1980 treaty that was
approved by the Senate but never entered into force. The
administration believes that these agreements with Bangladesh,
France, and Sweden will serve to further the goals of our tax-
treaty network, and we urge the committee and the Senate to
take prompt and favorable action on all of these agreements.
In establishing our negotiating priorities, our primary
objective is the conclusion of tax treaties or protocols that
will provide the greatest economic benefit to the United States
and to U.S. taxpayers. We communicate regularly with the U.S.
business community, seeking input regarding the areas in which
treaty network expansion and improvement efforts should be
focused and information regarding practical problems
encountered by U.S. business.
Our treaty network of 57 bilateral income-tax treaties
covers the vast majority of U.S. foreign trade and investment.
Because the coverage of our treaty network is already quite
comprehensive, it frequently will make more sense, as an
economic matter, for the United States to negotiate an update
to an existing agreement rather than to negotiate a full treaty
with a new treaty partner. Such a full agreement will require
the potential treaty partner to grapple with many of the
complexities of U.S. domestic and international tax rules and
how it interacts with its own domestic law and policies. In
some situations, the right result may be no tax treaty at all,
or may be a substantially curtailed form of tax agreement. With
some countries, a tax treaty may not be appropriate, because of
the possibility of abuse. With other countries, there simply
may not be the type of cross-border tax issues that are best
resolved by treaty.
In all cases, the treaty that we present to the Senate
represent not only the best deal that we believe we can achieve
with the particular country, but also constitute an agreement
that we believe is in the best interest of the United States.
In that context, I would like to provide a short update on
the Treasury Department's position with respect to withholding
taxes on intercompany dividends.
In earlier testimony before this committee, Treasury
Department representatives have discussed the decision, first
made in connection with the negotiation of the U.K. treaty in
2001, to eliminate this withholding tax. The position of the
Treasury Department has been, and continues to be, that the
decision is made independently with respect to every treaty
negotiation. We agree to the provision only if the agreement
includes limitation on benefits and information-exchange
provisions that meet the highest standards, and if the overall
balance of the agreement is appropriate.
Since we first adopted this new policy, a number of treaty
relationships have changed for the better. Suddenly there was
some leverage to achieve goals that had seemed out of reach.
Thus, even though the policy is only 5 years old, we have been
able, in one or more treaties, to strengthen our position on
treaty shopping, to improve information exchange provisions, to
reduce withholding taxes on interest on royalties, and to
eliminate withholding taxes and dividends paid to pension
funds. The reductions we have achieved in our own treaties are
influencing the negotiation of agreements between other
countries. In fact, just this morning a new U.K./Japan tax
treaty was signed in London that adopts many of the provisions
that were in the U.S./Japan treaty that was approved by this
committee a few years ago. We believe that these significant
achievements demonstrate that the current policy is having very
positive effects on U.S. businesses and their subsidiaries, and
will continue to do so in the foreseeable future.
I now would like to discuss the four agreements that are
pending before the Senate. We have submitted technical
explanations of each agreement that contain detailed
discussions of the provisions of each treaty and protocol.
The proposed protocol with Sweden amends the income-tax
treaty that was signed in 1994. As you said, the most
significant provision is the elimination of the source-country
withholding tax on most intercompany dividends and on dividends
paid to pension funds. The provision dealing with intercompany
dividends was very important to Sweden, because it had
unilaterally eliminated its withholding tax on such dividends
in the 1990s, after the United States insisted that it could
not do so bilaterally. If we had failed to provide a reciprocal
benefit for Swedish companies now that U.S. treaty policy has
changed, it would have jeopardized the current exemption from
Swedish withholding taxes that benefits U.S. companies now.
We also took this opportunity to add anti-inversion
provisions to the limitation on benefits provisions of the
treaty. Including the provision in a mainstream agreement such
as this establishes a precedent that will be very useful in
other treaty negotiations, and, in fact, has already helped us
to secure similar provisions in protocols we're negotiating
today.
The protocol also provides an effective grandfathering rule
for Swedish employees of the U.S. Embassy in Stockholm and
Consulate in Gothenburg who were inadvertently disadvantaged by
changes made in the 1994 treaty.
The proposed income-tax protocol with France amends the
1994 income-tax treaty. The primary impetus for the negotiation
of this protocol was to deal with the treatment of investments
through partnerships located in the United States, France, or
third countries. The United States and France have very
different provisions dealing with partnerships. And so, the
result of this protocol is to allow France to tax its own
partnerships, but to give benefits to U.S. investors who invest
through partnerships in the U.S. or third countries.
It also modifies the provisions of the treaty dealing with
pensions and pension contributions in order to reflect the fact
that we have very different systems in the two countries and to
achieve parity, given those two fundamentally different pension
systems. The French pension system relies almost entirely on
the state social security system. Since the 1994 treaty
provided disparate treatment for private pensions and social
security distributions, there were significant differences in
taxing rights between the two countries.
The proposed protocol provides for taxation in the country
of source with respect to both, and also provides for
consistent treatment for cross-border contributions to French
social security and U.S. private pension plans.
The proposed estate-tax protocol amends the estate- and
gift-tax treaty between the United States and France to take
into account the changes that were made in U.S. domestic
estate-tax rules in 1988. France, along with several other
countries, objected to this change. Although we did not agree
that the 1988 change was discriminatory, we did agree to enter
into protocols with certain treaty partners to provide some
limited relief with respect to non-citizen spouses of U.S.
citizens. The United States' willingness to enter into the
proposed protocol was a significant factor in France's
ratification of the current U.S./France income-tax treaty,
which was signed in 1994.
The proposed treaty with Bangladesh would be the first
agreement between the United States and Bangladesh. The
proposed treaty is consistent with other U.S. treaties with
developing countries. The maximum rates of source-country
withholding taxes on investment income are generally equal to,
or lower than, the maximum rates provided in other U.S.
treaties with developing countries.
The rules regarding taxation of business profits are
generally consistent with the provisions of the U.S. model, as
modified in our treaties with other developing countries. In
particular, we were able to get Bangladesh to agree to U.S.
model rules with respect to the treatment of income from
shipping and aircraft and containers. And this was an issue
that was raised by the Senate in connection with the earlier
treaty that was not approved.
Turning now to the future, we continue to maintain a very
active calendar of tax-treaty negotiations. We are in ongoing
negotiations with Canada, Chile, Germany, Hungary, Iceland,
Korea, and Norway. We also have substantially completed work on
agreements with Denmark and Finland, and look forward to their
conclusion. In addition, we are beginning negotiations with
Bulgaria.
We, of course, will continue work on updating the few
remaining U.S. treaties that provide opportunities for treaty
shopping. We have also had informal exploratory discussions
with several countries in Asia, and we hope these will lead to
productive negotiations in the near future.
With respect to the U.S. model, we expect to forward a
draft text to the staffs of the Senate Foreign Relations
Committee and Joint Committee on Taxation within the next
month. We look forward to working with them on this project.
Let me conclude by again thanking the committee for its
continuing interest in the treaty program, and the members and
the staff for devoting time and attention to the review of
these new agreements. We greatly appreciate the assistance and
cooperation of the staffs of this committee and of the joint
committee in the tax-treaty process. We urge the committee to
take prompt and favorable action on the agreements before you
today.
I will, of course, be happy to answer any questions.
[The prepared statement of Ms. Brown follows:]
Prepared Statement of Patricia A. Brown
Mr. Chairman and distinguished Members of the Committee, I
appreciate the opportunity to appear today at this hearing to
recommend, on behalf of the Administration, favorable action on four
tax agreements that are pending before this Committee. We appreciate
the Committee's interest in these agreements and in the U.S. tax treaty
network, as demonstrated by the scheduling of this hearing.
As you expressed so well, Mr. Chairman, tax treaties are ``part of
the basic infrastructure of the global marketplace''. The international
network of over 2000 bilateral tax treaties has established a stable
framework that allows international trade and investment to flourish.
The success of this framework is evidenced by the fact that countless
cross-border transactions, from investments in a few shares of a
foreign company by an individual to multi-billion dollar purchases of
operating companies in a foreign country, take place each year, with
only a relatively few disputes regarding the allocation of tax revenues
between governments. Individuals, too, benefit from the rules regarding
allocation of investment income, but also from the rules regarding
income from employment, the tax treatment of cross-border pension
contributions and distributions, and, of course, the estate tax rules.
Just like our physical infrastructure, our tax treaty network
requires constant attention. Countries introduce new preferential
taxing regimes, or tighter anti-abuse rules; they may introduce bank
secrecy or abolish it; or they may enter into an agreement with another
country that is more advantageous than the agreement they have with the
United States. Any of these situations may create an opportunity or a
risk that needs to be addressed by a new or revised agreement. We must
be creative and flexible in how we approach issues to find solutions to
particular problems that are consistent with our overall goals. We are
also becoming more efficient, concluding short protocols in order to
update an agreement without calling into question every one of its
provisions. Of course, this committee's willingness to consider these
agreements quickly has been a tremendous help in this regard. It can
change the entire tone (and pace) of a treaty negotiation when the
other side discovers that an advantageous change can be approved and
implemented within the space of a year.
Three of the four agreements that are before you now are updates to
relatively recent agreements. The fourth, the full treaty with
Bangladesh, is an updated version of a 1980 treaty that never entered
into force because of Senate concerns about several provisions. The
Administration believes that these agreements with Bangladesh, France
and Sweden will serve to further the goals of our tax treaty network.
We urge the committee and the Senate to take prompt and favorable
action on all of these agreements.
PURPOSES AND BENEFITS OF TAX TREATIES
Tax treaties provide benefits to both taxpayers and governments by
setting out clear ground rules that will govern tax matters relating to
trade and investment between the two countries. A tax treaty is
intended to mesh the tax systems of the two countries in such a way
that there is little potential for dispute regarding the amount of tax
that should be paid to each country. The goal is to ensure that
taxpayers do not end up caught in the middle between two governments,
each of which claims taxing jurisdiction over the same income. A treaty
with clear rules addressing the most likely areas of disagreement
minimizes the time the two governments (and taxpayers) spend in
resolving individual disputes.
One of the primary functions of tax treaties is to provide
certainty to taxpayers regarding the threshold question with respect to
international taxation: whether the taxpayer's cross-border activities
will subject it to taxation by two or more countries. Treaties answer
this question by establishing the minimum level of economic activity
that must be engaged in within a country by a resident of the other
country before the first country may tax any resulting business
profits. In general terms, tax treaties provide that if the branch
operations in a foreign country have sufficient substance and
continuity, the country where those activities occur will have primary
(but not exclusive) jurisdiction to tax. In other cases, where the
operations in the foreign country are relatively minor, the home
country retains the sole jurisdiction to tax its residents.
Tax treaties protect taxpayers from potential double taxation
through the allocation of taxing rights between the two countries. This
allocation takes several forms. First, the treaty has a mechanism for
resolving the issue of residence in the case of a taxpayer that
otherwise would be considered to be a resident of both countries.
Second, with respect to each category of income, the treaty assigns the
``primary'' right to tax to one country, usually (but not always) the
country in which the income arises (the ``source'' country), and the
``residual'' right to tax to the other country, usually (but not
always) the country of residence of the taxpayer. Third, the treaty
provides rules for determining which country will be treated as the
source country for each category of income. Finally, the treaty
provides rules limiting the amount of tax that the source country can
impose on each category of income and establishes the obligation of the
residence country to eliminate double taxation that otherwise would
arise from the exercise of concurrent taxing jurisdiction by the two
countries.
As a complement to these substantive rules regarding allocation of
taxing rights, tax treaties provide a mechanism for dealing with
disputes or questions of application that arise after the treaty enters
into force. In such cases, designated tax authorities of the two
governments--known as the ``competent authorities'' in tax treaty
parlance--are 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 that might
otherwise result. The U.S. competent authority under our tax treaties
is the Secretary of the Treasury. That function has been delegated to
the Director, International (LMSB) of the Internal Revenue Service.
In addition to reducing potential double taxation, treaties also
reduce potential ``excessive'' taxation by reducing withholding taxes
that are imposed at source. Under U.S. domestic law, payments to non-
U.S. 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. Most of our trading partners impose similar levels
of withholding tax on these types of income. This tax is imposed on a
gross, rather than net, amount. Because the withholding tax does not
take into account expenses incurred in generating the income, the
taxpayer that bears the burden of withholding tax frequently will be
subject to an effective rate of tax that is significantly higher than
the tax rate that would be applicable to net income in either the
source or residence country. The taxpayer may be viewed, therefore, as
suffering ``excessive'' taxation. Tax treaties alleviate this burden by
setting maximum levels for the withholding tax that the treaty partners
may impose on these types of income or by providing for exclusive
residence-country taxation of such income through the elimination of
source-country withholding tax. Because of the excessive taxation that
withholding taxes can represent, the United States seeks to include in
tax treaties provisions that substantially reduce or eliminate source-
country withholding taxes.
Tax treaties also include provisions intended to ensure that cross-
border investors do not suffer discrimination in the application of the
tax laws of the other country. This is similar to a basic investor
protection provided in other types of agreements, but the non-
discrimination provisions of tax treaties are specifically tailored to
tax matters and therefore are the most effective means of addressing
potential discrimination in the tax context. The relevant tax treaty
provisions provide guidance about what ``national treatment'' means in
the tax context by explicitly prohibiting types of discriminatory
measures that once were common in some tax systems. At the same time,
tax treaties clarify the manner in which possible discrimination is to
be tested in the tax context. Particular rules are needed here, for
example, to reflect the fact that foreign persons that are subject to
tax in the host country only on certain income may not be in the same
position as domestic taxpayers that may be subject to tax in such
country on all their income.
In addition to these core provisions, tax treaties include
provisions dealing with more specialized situations, such as rules
coordinating the pension rules of the tax systems of the two countries
or addressing the treatment of Social Security benefits and alimony and
child support payments in the cross-border context. These provisions
are becoming increasingly important as the number of individuals who
move between countries or otherwise are engaged in cross-border
activities increases. While these matters may not involve substantial
tax revenue from the perspective of the two governments, rules
providing clear and appropriate treatment are very important to the
individual taxpayers who are affected.
Tax treaties also include provisions related to tax administration.
A key element of U.S. tax treaties is the provision addressing the
exchange of information between the tax authorities. Under tax
treaties, the competent authority of one country may request from the
other competent authority such information as may be relevant for the
proper administration of the country's tax laws; the requested
information will be provided subject to strict protections on the
confidentiality of taxpayer information. Because access to information
from other countries is critically important to the full and fair
enforcement of the U.S. tax laws, information exchange is a priority
for the United States in its tax treaty program. If a country has bank
secrecy rules that would operate to prevent or seriously inhibit the
appropriate exchange of information under a tax treaty, we will not
conclude a treaty with that country. Indeed, the need for appropriate
information exchange provisions is one of the treaty matters that we
consider non-negotiable.
TAX TREATY NEGOTIATING PRIORITIES AND PROCESS
In establishing our negotiating priorities, our primary objective
is the conclusion of tax treaties or protocols that will provide the
greatest economic benefit to the United States and to U.S. taxpayers.
We communicate regularly with the U.S. business community, seeking
input regarding the areas in which treaty network expansion and
improvement efforts should be focused and information regarding
practical problems encountered by U.S. businesses with respect to the
application of particular treaties and the application of the tax
regimes of particular countries.
The United States has a network of 57 bilateral income tax treaties
covering 65 countries. This network includes all 29 of our fellow
members of the OECD. It also covers the vast majority of foreign trade
and investment of U.S. businesses. Because the coverage of our treaty
network is already quite comprehensive, it frequently will make more
sense, as an economic matter, for the United States to negotiate an
update to an existing agreement, rather than to negotiate a full treaty
with a new treaty partner. Such a full agreement will require the
potential treaty partner to grapple with many of the complexities of
U.S. domestic and international tax rules and U.S. tax treaty policy,
and how it interacts with its own domestic law and policies. Thus, the
primary constraint on the size of our tax treaty network may be the
complexity of the negotiations themselves. The various functions
performed by tax treaties and most particularly the need to mesh the
particular tax systems of the two treaty partners, make the negotiation
process exacting and time-consuming.
A country's tax policy reflects the sovereign choices made by that
country. Numerous features of the treaty partner's particular tax
legislation and its interaction with U.S. domestic tax rules must be
considered in negotiating an appropriate treaty. Examples include
whether the country eliminates double taxation through an exemption
system or a credit system, the country's treatment of partnerships and
other transparent entities, and how the country taxes contributions to
pension funds, earnings of the funds, and distributions from the funds.
A treaty negotiation must take into account all of these and many other
aspects of the particular treaty partner's tax system in order to
arrive at an agreement that accomplishes the United States' tax treaty
objectives.
A country's fundamental tax policy choices are reflected not only
in its tax legislation but also in its tax treaty positions. The
choices in this regard can and do differ significantly from country to
country, with substantial variation even across countries that seem to
have quite similar economic profiles. A treaty negotiation also must
reconcile differences between the particular treaty partner's preferred
treaty positions and those of the United States.
Obtaining the agreement of our treaty partners on provisions of
importance to the United States sometimes requires other concessions on
our part. Similarly, the other country sometimes must make concessions
to obtain our agreement on matters that are critical to it. In most
cases, the process of give-and-take produces a document that is the
best tax treaty that is possible with that other country. In other
cases, we may reach a point where it is clear that it will not be
possible to reach an acceptable agreement. In those cases, we simply
stop negotiating with the understanding that negotiations might restart
if circumstances change. Each treaty that we present to the Senate
represents not only the best deal that we believe we can achieve with
the particular country, but also constitutes an agreement that we
believe is in the best interests of the United States.
In some situations, the right result may be no tax treaty at all or
may be a substantially curtailed form of tax agreement. With some
countries a tax treaty may not be appropriate because of the
possibility of abuse. With other countries there simply may not be the
type of cross-border tax issues that are best resolved by treaty. For
example, with a country that does not impose significant income taxes,
where there is little possibility of the double taxation of income in
the cross-border context that tax treaties are designed to address, an
agreement that is focused on the exchange of tax information may be
most valuable. Alternatively, a bifurcated approach may be appropriate
in situations where a country has a special preferential tax regime for
certain parts of the economy that is different from the tax rules
generally applicable to the country's residents. In those cases, the
residents benefiting from the preferential regime do not face potential
double taxation and so should not be entitled to the reductions in U.S.
withholding taxes accorded by a tax treaty, while a full treaty
relationship might be useful and appropriate in order to avoid double
taxation in the case of the residents who do not receive the benefit of
the preferential regime.
Prospective treaty partners must evidence a clear understanding of
what their obligations would be under the treaty, including those with
respect to information exchange, and must demonstrate that they would
be able to fulfill those obligations. Sometimes a tax treaty may not be
appropriate because a potential treaty partner is unable to do so. In
other cases, a tax treaty may be inappropriate because the potential
treaty partner is not willing to agree to particular treaty provisions
that are needed in order to address real tax problems that have been
identified by U.S. businesses operating there.
The U.S. commitment to including comprehensive limitation of
benefits provisions designed to prevent ``treaty shopping'' in all of
our tax treaties is one of the keys to improving our overall treaty
network. Our tax treaties are intended to provide benefits to residents
of the United States and residents of the particular treaty partner on
a reciprocal basis. The reductions in source-country taxes agreed to in
a particular treaty mean that U.S. persons pay less tax to that country
on income from their investments there and residents of that country
pay less U.S. tax on income from their investments in the United
States. Those reductions and benefits are not intended to flow to
residents of a third country. If third-country residents are able to
exploit one of our tax treaties to secure reductions in U.S. tax, the
benefits would flow only in one direction as third-country residents
would enjoy U.S. tax reductions for their U.S. investments but U.S.
residents would not enjoy reciprocal tax reductions for their
investments in that third country. Moreover, such third-country
residents may be securing benefits that are not appropriate in the
context of the interaction between their home country's tax systems and
policies and those of the United States. This use of tax treaties is
not consistent with the balance of the deal negotiated. Preventing this
exploitation of our tax treaties is critical to ensuring that the third
country will sit down at the table with us to negotiate on a reciprocal
basis, so that we can secure for U.S. persons the benefits of
reductions in source-country tax on their investments in that country.
update on the treasury department's position on inter-company dividends
In earlier testimony before this committee, Treasury Department
representatives have discussed the decision, first made in connection
with the negotiation of the treaty with the United Kingdom in 2001, to
eliminate the source-country withholding tax on certain inter-company
dividends. The position of the Treasury Department has been, and
continues to be, that this decision is made independently with respect
to every treaty negotiation. The United States will agree to the
provision only if the agreement includes limitation on benefits and
information exchange provisions that meet the highest standards, and if
the overall balance of the agreement is appropriate.
Since we first expressed our willingness to eliminate the source-
country withholding tax on inter-company dividends, a number of treaty
relationships that had been at best stagnant and at worst problematic
have changed for the better. Suddenly, there was some leverage to
achieve goals that had seemed out of reach for one reason or another.
Thus, although the new policy has been in place for only about five
years, it has enabled us to achieve the following goals in one or more
treaties:
Strengthening our provisions to prevent treaty shopping,
including the introduction of rules that prevent the use of tax
treaties after a corporate inversion transaction;
Significantly improving information exchange provisions,
allowing access to information even when the treaty partner
does not need the information for its own tax purposes;
Reducing withholding taxes on interest and royalties to
levels lower than those to which those treaty partners had ever
previously agreed;
Eliminating withholding taxes on dividends paid to pension
funds, a tax that otherwise would inevitably lead to double
taxation; and
Protecting U.S. companies against the retaliatory re-
imposition of withholding taxes on inter-company dividends.
The reductions we have achieved in our own treaties also are
influencing the negotiation of agreements between other countries. U.S.
companies benefit from those agreements as well, as many of them have
subsidiaries that may benefit if similar reductions in rates are
adopted under a new U.K.-Japan treaty, for example.
We believe that these significant achievements demonstrate that the
current policy is having very positive effects and will continue to do
so in the foreseeable future.
DISCUSSION OF PROPOSED NEW TREATIES AND PROTOCOLS
I now would like to discuss the four agreements that have been
transmitted for the Senate's consideration. We have submitted Technical
Explanations of each agreement that contain detailed discussions of the
provisions of each treaty and protocol. These Technical Explanations
serve as an official guide to each agreement.
The proposed Protocol amends the income tax treaty between the
United States and Sweden that was signed in 1994. The most significant
provisions in the Protocol relate to the treatment of dividends and
limitation on benefits. The Protocol also rectifies a mistake that was
made in the 1994 treaty that caused a great deal of hardship for a
number of former employees of the U.S. government. It also makes a
number of necessary updates to the treaty.
Like a number of recent agreements, the Protocol will eliminate the
source-country withholding tax on most inter-company dividends and on
dividends paid to pension funds. The provision dealing with inter-
company dividends was very important to Sweden, because it had
unilaterally eliminated its withholding tax on inter-company dividends.
The legislative history to that domestic law change makes it clear that
the main beneficiaries of that change were expected to be U.S.
companies. In fact, it refers specifically to assurances given to the
Swedish negotiators that the United States would not agree to eliminate
the withholding tax on inter-company dividends in any bilateral
agreement with any country. Now that U.S. policy has changed, failure
to provide a reciprocal benefit for Swedish companies would have
jeopardized the exemption from Swedish withholding tax that currently
benefits U.S. companies. We believe that securing that protection, as
well as eliminating the withholding tax on dividends paid to pension
funds, is a sufficient quid pro quo.
Nevertheless, we also took this opportunity to add anti-inversion
provisions to the limitation on benefits provisions of the treaty. The
new provision represents a somewhat simplified version of a similar
provision introduced in the recent protocol with the Netherlands.
Although we have no reason to believe that Sweden would be an
attractive destination for an inverted U.S. corporation, including the
provision in a mainstream agreement such as this helps to establish a
precedent that will be extremely useful in other treaty negotiations.
The Protocol also resolves a long-standing problem regarding the
taxation of local employees of the Embassy in Stockholm and consulate
in Gothenburg. The Protocol provides a grandfather rule to eliminate
the unintended consequences resulting from a change made by the 1994
U.S.-Sweden income tax treaty regarding the taxation of local employees
(or former employees) of the Embassy in Stockholm and consulate in
Gothenburg. To rectify this problem, the Protocol provides that Sweden
may not tax a pension under the U.S. Civil Service Retirement Pension
Plan paid by the United States to employees of the U.S. embassy in
Stockholm or the U.S. consulate general in Gothenburg if the individual
was hired prior to 1978.
Other provisions in the Protocol reflect changes in U.S. domestic
law or are intended to bring it into closer conformity with current
U.S. treaty practice. For example, the current treaty preserves the
U.S. right to tax former citizens whose loss of citizenship had, as one
of its principal purposes, the avoidance of tax. The proposed Protocol
updates this provision to reflect legislative changes since 1994. In
order to reflect 1996 changes to the Internal Revenue Code, the
Protocol provides that a former citizen or long-term resident of the
United States may, for the period of ten years following the loss of
such status, be taxed in accordance with the laws of the United States.
United States and Sweden will notify each other through the
diplomatic channel, accompanied by an instrument of ratification, when
their respective requirements for entry into force have been completed.
The proposed Protocol will enter into force on the thirtieth day after
the later of the notifications. It will have effect, with respect to
taxes withheld at source, on or after the first day of the second month
next following the date upon which the Protocol enters into force. With
respect to other taxes, it will have effect for taxable years beginning
on or after the first day of January next following the date upon which
the Protocol enters into force.
FRENCH INCOME TAX PROTOCOL
The proposed income tax protocol amends the 1994 income tax treaty
between the United States and France, which entered into force in 1995.
The primary impetus for the negotiation of the income tax Protocol
was to clarify the treatment of investments made in France by U.S.
investors through partnerships located in the United States, France, or
third countries. Because France taxes French partnerships on their
worldwide income, and does not treat them as fiscally transparent, the
Protocol confirms that France maintains taxing rights with respect to
French partnerships. However, the Protocol provides that French treaty
benefits will apply to U.S. residents who invest through U.S.
partnerships or partnerships located in certain third countries. These
partnership provisions will eliminate uncertainty and provide
significant benefits to U.S. investors.
The income tax Protocol also reforms the treatment of certain
French investment vehicles, which would have been entitled to U.S.
treaty benefits under the 1994 treaty. Under the revised provision, a
``fonds commun de placement'' will not itself qualify for U.S. treaty
benefits, but holders of interests in such an investment vehicle may
qualify for treaty benefits if they are residents of France or of a
third country that has an appropriate tax treaty with the United
States.
The income tax Protocol modifies the provisions of the treaty
dealing with pensions and pension contributions in order to achieve
parity given the two countries' fundamentally different pension
systems. The French pension system relies almost entirely on the state
social security system with much more limited use of private pension
arrangements such as employer plans and individual plans. The
provisions in the 1994 treaty that treated private pension payments and
social security payments differently are replaced in the proposed
Protocol with provisions that treat the two systems the same. Under the
proposed Protocol, the country of source is assigned taxing rights with
respect to both state social security payments and private pension
payments. The proposed Protocol also includes a provision that allows
U.S. persons to deduct voluntary contributions to the French social
security system to the same extent that contributions to a U.S. plan
would be deductible, which is comparable to the provision in the 1994
treaty that allows French residents deductions for contributions to
U.S. private pension plans.
The proposed Protocol makes other changes to the 1994 treaty to
reflect more closely current U.S. treaty policy. The proposed Protocol
updates the treatment of dividends paid by U.S. REITs to reflect a
change in approach adopted in 1997, which is intended to prevent the
use of structures designed to avoid U.S. withholding taxes on outbound
dividends while providing appropriate benefits to portfolio investors
in REITs. The proposed Protocol also extends the provision in the 1994
treaty preserving U.S. taxing rights with respect to certain former
citizens to cover certain former long-term residents in order to
reflect 1996 changes to the Internal Revenue Code.
Each state will notify the other when it has completed the
necessary steps to bring the proposed Protocol into force. The Protocol
will enter into force upon the receipt of the later of those two
notices. In general, 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 following the date on which the Protocol enters
into force and, with respect to other taxes, for taxable periods
beginning on or after the first day of January following entry into
force. However, because the rules benefiting U.S. residents investing
through partnerships are intended to ensure that the treaty provides
results that are consistent with the intent of the negotiators of the
1995 treaty, those changes will be applicable as of the effective dates
of the 1994 treaty.
FRENCH ESTATE TAX PROTOCOL
The proposed estate tax Protocol amends the estate and gift tax
treaty between the United States and France, which was signed in 1978
and entered into force in 1980.
In 1988, U.S. estate tax law was changed to tax currently transfers
of property to non-citizen surviving spouses. France, along with
several other countries with which the United States has estate tax
treaties, objected to this change.
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 non-citizen spouses in
appropriate cases. Accordingly, the proposed Protocol eases the impact
of the 1988 provisions upon certain estates of limited value. Pursuant
to the Protocol, transfers of non-community property from a French
domiciliary to a spouse who is not a United States citizen that may be
taxed by the United States solely on the basis of situs under the
treaty can be included in the tax base only to the extent that the
value of the property, after applicable deductions, exceeds 50 percent
of the value of all property that may be taxed by the United States.
In addition to the allowance of the marital exclusion, the Protocol
also provides for a limited elective estate tax marital deduction
which, if elected, waives the right to any available marital deduction
that would be allowed under United States domestic law. The election is
available only where the spouses satisfy certain domiciliary and
citizenship requirements and only to ``qualifying property''
(generally, property that passes to the surviving spouse and that would
have qualified for the marital deduction if the surviving spouse had
been a United States citizen). The amount of the deduction is equal to
the lesser of the value of the qualifying property or the ``applicable
exclusion amount'' (generally, the amount which the unified credit
shelters from estate tax) for the year of the decedent's death.
The United States, in a 1995 protocol to the U.S.-Canada income tax
treaty and a 1998 protocol to the U.S.-Germany estate tax treaty,
provided similar relief to certain estates of limited value involving
Canadians and Germans. The United States' willingness to enter into the
proposed Protocol was a significant factor in France's ratification of
the current U.S.-France income tax treaty, which was signed in 1994.
The proposed Protocol also provides a pro rata unified credit to
the estate of a French domiciliary for purposes of computing the U.S.
estate tax. Under this provision, a French 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
($555,800 in 2004 and 2005), based on the extent to which the assets of
the estate are situated in the United States (with either amount
reduced to the extent of any credit previously allowed with respect to
lifetime gifts). 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
and the 1998 German estate tax treaty protocol.
The proposed Protocol also modernizes the provisions dealing with
the elimination of double taxation. In determining the French tax, if
the transferor was a French domiciliary at the time of the transfer,
France may tax any property which may also be taxed by the United
States, but must allow a deduction from that tax in an amount equal to
the United States tax paid upon such transfer.
If the transferor is a domiciliary or citizen of the United States
and a transfer of property is subject to situs taxation by France, the
United States must allow a credit equal to the amount of tax imposed by
France with respect to such property. If the transferor is a United
States citizen (or former citizen or long-term resident who lost such
status with a principal purpose of tax avoidance) but a French
domiciliary, the United States must allow a credit for the amount of
tax imposed by France (after allowance for the deduction from French
tax referred to in the first paragraph) with respect to such property.
All of the credits allowed under the Protocol are limited to the tax
imposed (and actually paid) on the property for which the credit is
claimed.
The proposed estate tax Protocol also makes other changes to the
Convention to reflect more closely current U.S. treaty policy. For
example, the proposed Protocol extends the United States' ability to
tax former citizens and long-term residents to conform with 1996
legislative changes to the Internal Revenue Code. The proposed Protocol
also defines the term ``real property'' in a manner consistent with the
definition provided in Treas. Reg. Sec. 1.897-1(b) and our income tax
treaties. The proposed Protocol adds a rule that allows source state
taxation of stock in real property holding companies.
Each state will notify the other when it has completed the
necessary steps to bring the proposed estate tax Protocol into force.
The Protocol will enter into force upon the receipt of the later of
those two notices. Although the proposed Protocol generally will be
effective with respect to gifts made and deaths occurring after the
exchange of instruments of ratification, the relief provided with
respect to surviving non-citizen spouses and the pro rata unified
credit will be effective with respect to gifts made and deaths
occurring after November 10, 1988 (the effective date of the 1988
legislative changes). Claims for refund asserting the benefits of the
proposed Protocol that otherwise would be barred by the statute of
limitations must be made within one year of entry of the Protocol,
however, and all claims for retroactive relief are subject to the rules
regarding the United States' ability to tax former citizens and long-
term residents.
The negotiators believed that retrospective relief was not
inappropriate, given the fact that the 1988 legislative changes were
the impetus for negotiation of the proposed Protocol and negotiations
commenced soon after the enactment of those changes. The United States
agreed to similar retrospective relief in the 1995 U.S.-Canada income
tax treaty protocol and the 1998 U.S.-Germany estate tax treaty
protocol.
BANGLADESH
The United States does not currently have an income tax treaty with
Bangladesh. The proposed income tax treaty with Bangladesh was signed
in Dhaka September 26, 2004.
The proposed treaty generally follows the pattern of the U.S. model
treaty, while incorporating some provisions found in other U.S.
treaties with developing countries. The maximum rates of source-country
withholding taxes on investment income provided in the proposed treaty
are generally equal to or lower than the maximum rates provided in
other U.S. treaties with developing countries (and some developed
countries).
The proposed treaty generally provides a maximum source-country
withholding tax rate on dividends of 15 percent. Direct investment
dividends are subject to taxation at source at a 10-percent rate. The
proposed treaty requires a 10-percent ownership threshold for
application of the 10-percent tax rate.
The proposed treaty provides for a 10 percent rate of tax at source
on most interest payments. However, interest received by any financial
institution (including an insurance company) and interest earned on
trade credits are subject to a 5 percent rate of tax at source. In
addition, interest derived by the Governments of the Contracting States
and instrumentalities of those Governments, as well as debt guaranteed
by government agencies (e.g., the U.S. Export-Import Bank) is exempt
from tax at source.
The proposed treaty provides that royalties are subject to a 10
percent tax at source. Consistent with the U.S. and OECD Model
treaties, income from the rental of tangible personal property is not
treated as a royalty, but as business profits, thus eliminating any
withholding tax at source.
The standard U.S. anti-abuse rules are provided for certain classes
of investment income. For example, dividends paid by non-taxable
conduit entities, such as U.S. RICs and REITs, are subject to special
rules to prevent the use of these entities to transform what is
otherwise high-taxed income into lower-taxed income.
The proposed treaty follows the standard rules for taxation by the
source country of the business profits of a resident of the other
country. The source country's right to tax such profits is generally
limited to cases in which the profits are attributable to a permanent
establishment located in that country. The proposed treaty, however,
defines a ``permanent establishment'' in a way that grants rights to
tax business profits that are somewhat broader than those found in the
U.S. and OECD Models. However, these rules are quite similar to rules
found in our tax treaties with other developing countries.
In the case of shipping and aircraft, the proposed Convention,
consistent with current U.S. treaty policy, provides for exclusive
residence-country taxation of profits from the international operation
of ships or aircraft. Like the U.S. model, only the country of
residence may tax profits from the rental or maintenance of containers
used in international traffic.
The proposed treaty provides rules that are similar to the U.S.
model with respect to the taxation of income from the performance of
personal services. However, like some other U.S. treaties with
developing countries, the proposed treaty grants a taxing right to the
host country with respect to some classes of personal services income
that is broader in a few respects than in the OECD or U.S. model.
The proposed treaty contains a comprehensive limitation on benefits
article, which provides detailed rules designed to deny ``treaty
shoppers'' the benefits of the treaty. These rules are comparable to
the rules contained in the U.S. model and recent U.S. treaties.
The proposed treaty also sets out the manner in which each country
will relieve double taxation. Both the United States and Bangladesh
will provide such relief through the foreign tax credit mechanism. The
proposed Convention does not include a ``tax sparing credit,'' since
such credits are contrary to U.S. treaty policy. At Bangladesh's
request, the exchange of notes provides that, if the United States
alters its policy regarding the granting of tax sparing credits or
provides for such credits in another treaty, negotiations will be
reopened with a view to concluding a protocol that would offer similar
benefits to Bangladesh.
The proposed treaty provides for non-discriminatory treatment
(i.e., national treatment) by one country to residents and nationals of
the other. 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 includes an exchange of information provision
that generally follows the U.S. model. Under these provisions,
Bangladesh will provide U.S. tax officials such information as is
relevant to carry out the provisions of the treaty and the domestic tax
laws of the United States.
The proposed Convention is subject to ratification. It will enter
into force upon the exchange of instruments of ratification. It will
have effect, with respect to taxes withheld at the source, for amounts
paid or credited on or after the first day of the second month
following entry into force. In other cases the Convention will have
effect with respect to taxable periods beginning on or after the first
day of January following the date on which the Convention enters into
force.
TREATY PROGRAM PRIORITIES
We continue to maintain a very active calendar of tax treaty
negotiations. We currently are in ongoing negotiations with Canada,
Chile, Germany, Hungary, Iceland, Korea and Norway. In addition, we are
beginning negotiations with Bulgaria. We also have substantially
completed work on agreements with Denmark and Finland and look forward
to their conclusion.
A key continuing priority is updating the few remaining U.S. tax
treaties that provide for low withholding tax rates but do not include
the limitation on benefits provisions needed to protect against the
possibility of treaty shopping. We have also had informal exploratory
discussions with several countries in Asia; we hope that those
discussions will lead to productive negotiations later in 2006 or in
2007.
Work on the U.S. model was well advanced last year but was delayed
due to other commitments. However, we expect to forward a draft text to
the staffs of the Senate Foreign Relations Committee and Joint
Committee on Taxation within the next month. We look forward to working
with them on this project.
CONCLUSION
Let me conclude by again thanking the committee for its continuing
interest in the tax treaty program, and the members and staff for
devoting time and attention to the review of these new agreements. We
greatly appreciate the assistance and cooperation of the staffs of this
committee and of the Joint Committee on Taxation in the tax treaty
process.
We urge the committee to take prompt and favorable action on the
agreements before you today.
The Chairman. Well, thank you very much, Ms. Brown. We
appreciate your testimony; and likewise, your mention of the
close cooperation between you and your staff and the staff on
both sides of the aisle of this committee and the promise of
more work to come. The Department of the Treasury has an active
agenda in this vital endeavor. We appreciate your testimony.
I'd like to call now upon Mr. Barthold for his testimony.
STATEMENT OF THOMAS A. BARTHOLD, ACTING CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION, WASHINGTON, D.C.
Mr. Barthold. Thank you, Mr. Chairman.
It is my pleasure to present the testimony of the staff of
the joint committee today concerning the proposed income-tax
protocol with Sweden, the proposed income- and estate-tax
protocols with France, and the proposed income-tax treaty with
Bangladesh. As in the past, the joint committee staff has
prepared background pamphlets covering the proposed treaty and
protocols, providing detailed descriptions of their provisions
and including comparisons with the 1996 U.S. model income-tax
treaty, which generally reflects U.S. tax-treaty policy. Also,
we make comparisons with other recent U.S. treaties which have
come before the committee, and provide some detailed discussion
of issues raised by the proposed treaty and the protocols. In
this endeavor, we have consulted with the Treasury Department
and the staff of your committee in analyzing the proposed
treaty and protocols in preparation of this background
material.
As Ms. Brown noted, the proposed income-tax protocol with
Sweden is an amendment to an existing treaty signed in 1994.
Likewise, the proposed protocols with France update the
existing agreements, while the proposed income-tax treaty with
Bangladesh represents a new treaty relationship for the United
States. I will try to highlight some of the key features of the
protocols and the treaty, and certain issues that they may
raise.
Let me start with Sweden. The proposed protocol modifies
several provisions of the existing treaty to conform it to new
U.S. domestic tax laws and to make it similar to more recent
U.S. income-tax treaties and the U.S. model. For example, the
proposed protocol expands the saving-clause provision of the
existing treaty to allow the United States to tax certain
former citizens and long-term residents under the special
expatriation tax regime of U.S. internal law, as amended in
1996 and amended again in 2004. The proposed protocol also
updates the existing treaty to include rules in recent U.S. tax
treaties related to fiscally transparent entities.
As Ms. Brown noted, perhaps the Swedish protocol is most
noteworthy, because it would eliminate the withholding tax on
dividends paid by one corporation to another corporation that
owns at least 80 percent of the stock in the dividend-paying
corporation, often referred to as ``direct dividends,''
provided that certain conditions are met. The elimination of
the withholding tax under these circumstances is intended to
reduce further the tax barriers to direct investment between
Sweden and the United States. Under the present treaty, these
dividends may be taxed by the source country at a maximum rate
of 5 percent in the United States, but not Sweden, as Ms. Brown
noted. We impose this tax as a matter of internal law. Thus,
the principal and immediate effect of this provision would be
to exempt dividends from U.S. subsidiaries paid to Swedish
parent companies from U.S. withholding tax.
Now, also as Ms. Brown noted, until 2003 no U.S. treaty
provided for complete exemption from withholding tax under
these circumstances. And neither the U.S. nor OECD model
treaties currently provides for such an exemption. However, it
is not uncommon to see zero withholding rates on dividends
among the tax treaties of other developed Western economies.
And, as you well know, in 2003 and 2004 the Senate ratified
U.S. treaties and protocols containing zero rate provisions
with the United Kingdom, Australia, Mexico, Japan, and the
Netherlands.
Because the zero rate provisions have become a trend in
recent tax-treaty practice, and apparently Treasury Department
policy, the committee may wish to inquire of the Treasury
Department if it believes that a zero rate is generally
beneficial. In previous testimony, and again today, the
Treasury Department has indicated that zero-rate provisions
should be limited to treaties with the strongest limitation on
benefits and information exchange provisions. In light of the
Treasury Department's intention to update the model treaty, the
committee may wish to inquire whether it might be appropriate
to include a zero-withholding rate on dividends, coupled with
strong provisions on limitation on benefits and information
exchange, as part of a revised U.S. model treaty and as a guide
of future treaty policy of the United States.
The Treasury Department has also indicated that the package
of zero rate withholding, limitation on benefits and
information exchange must be assessed in light of the overall
balance of the treaty. The committee may wish to inquire what
considerations on the overall balance would lead to a departure
from the package of a zero rate, limitation on benefits, and
information exchange.
If such a package of provisions does represent the current
preferred Treasury Department policy, the committee may also
wish to inquire whether such a package was considered as a part
of the negotiations with France in the just-concluded income-
tax protocol.
It is also worth noting that the zero rate generally would
apply with respect to dividends received by tax-exempt pension
funds, similar to provisions in other recent treaties.
The proposed protocol replaces the limitation-on-benefits
article of the current treaty with a new article that reflects
the anti-treaty-shopping provisions included in the U.S. model
and most of the more recent U.S. income-tax treaties. For
example, the proposed protocol provides for tests for publicly-
traded companies, ownership and base erosion, derivative
benefits, and active business. The proposed protocol also
provides a new special anti-abuse rule to address the use of
certain triangular branch structures to earn certain types of
U.S. income.
Unlike the U.S. model, but like the recent protocol
amending the Netherlands income-tax treaty, the publicly-
traded-company test in the proposed protocol includes a set of
requirements which were referred to in the Netherlands protocol
as ``the substantial-presence test'' to determine whether a
company's public trading or management is adequately connected
to its residence in a treaty company. This provision demands
nexus between the taxpayer and the residence country. Under the
proposed protocol, a company that is resident in Sweden or the
United States is entitled to all treaty benefits if the
principal class of its shares, and any disproportionate class
of shares, is regularly traded on one or more recognized stock
exchanges and, in addition, the company meets either a public-
trading-connection test or a management-and-control test. The
public-trading-connection test is met if the company's
principal class of shares is primarily traded within the
economic area of the company. The management-and-control test
is met if the company's primary place of management and control
is in the treaty country where it is resident.
The intent of this provision is to prevent certain
companies from qualifying for treaty benefits if their nexus to
their residence country is not sufficiently strong. The
provision reflects a significant tightening of the public-
trading test in this regard. The committee may wish to ask
whether this tighter public-trading test is likely to be
included in future treaties, as opposed to the traditional
looser test.
It is also worth noting that, unlike most recent treaty
instruments, including the Netherlands protocol, the proposed
protocol does not require that the public company be listed in
a treaty country. Consequently, the test under the proposed
treaty is based primarily on a regional nexus. The committee
may wish to ask whether this regional focus is appropriate in
light of the anti-treaty-shopping purpose of the basic
provision, and whether such a focus would remain viable if the
political climate in Europe were to shift in favor of
decreasing the scope of European integration.
The last provision in the proposed protocol with Sweden
that I would like to note is somewhat anomalous for a tax
treaty. The proposed protocol amends the existing treaty to
include a special new rule related to Swedish tax on U.S.
Government pensions paid to certain Swedish citizens and
residents. The provision bars Sweden from imposing tax on such
pensions paid to former employees who were hired prior to 1978
to work for the U.S. Embassy in Stockholm or the U.S. Consulate
General in Gothenburg. These employee salaries and, therefore,
their future benefits, were reduced because the U.S./Sweden in
force at the time exempted their salaries from Swedish tax. As
Ms. Brown noted, when the treaty was renegotiated in 1994,
Sweden was permitted to tax such pensions, which were not
increased by the United States, notwithstanding the previous
decrease in the value of their benefits. The committee may wish
to satisfy itself regarding the necessity of a treaty provision
solely affecting Swedish taxation of Swedish individuals.
With respect to France, there is both a proposed income-tax
protocol and an estate- and gift-tax protocol. The proposed
income-tax protocol with France would make several
modifications and updates to the existing treaty. The proposed
protocol would amend the dividends provision of the existing
treaty by expanding the class of shareholders eligible for the
treaty's 15-percent rate of U.S. withholding tax on dividends
from real estate investment trusts, referred to as REITs. The
provision of the proposed protocol in this regard is similar to
those included in other recent U.S. income-tax treaties and
protocols.
The proposed protocol replaces the pension rules of the
current treaty and provides new rules for the taxation of
pensions and Social Security benefits. These new pension rules
are similar to those in recent U.S. tax treaties with both the
United Kingdom and the Netherlands.
The proposed protocol amends the residence rules of the
current treaty in a manner intended to address certain
ambiguities in the tax treatment of cross-border investments
through partnerships and similar entities. Ambiguities have
arisen in particular circumstances, in part, because of the
different rules governing the taxation of partnerships under
French and U.S. internal law.
The proposed protocol expands the saving-clause provision
of the existing treaty to allow the United States to tax its
former long-term residents whose termination of residency had,
as one of its principal purposes, the avoidance of tax. The
existing treaty only applies to former citizens. The extension
of this provision to long-term residents allows the United
States to apply amendments that were made to internal law in
1996 to the special tax regime for expatriates under section
877 of the Internal Revenue Code. The proposed protocol,
however, does not update the saving-clause provision to reflect
the more recent changes made to the special expatriation rules
of the American Jobs Creation Act of 2004. The American Jobs
Creation Act eliminated subjective determinations of tax-
avoidance purpose and replaced them with objective rules for
determining the applicability of the special tax regime for
expatriates.
Thus, in three of the four treaty instruments before the
committee today, the two French protocols and the proposed
Bangladesh treaty, the saving clause uses the obsolete
``principal purposes of tax-avoidance'' formulation in
determining whether this special tax regime may apply to
individuals who expatriate, even though the subjective
determinations of tax-avoidance purpose under prior law were
recently eliminated by the American Jobs Creation Act.
The Treasury Department technical explanations note that
under these instruments the determination of whether there is a
principal purpose of tax avoidance is made under the laws of
the United States. The technical explanations further state
that this language would include, ``the irrebuttable
presumptions based on average annual net income tax liability
and net worth under section 877,'' and that new objective
tests, ``represent the administrative means by which the United
States determines whether a taxpayer has a tax-avoidance
purpose.''
Thus, although the provisions employ the now-obsolete
concept of tax-avoidance purpose, the Treasury Department
maintains that this language should be understood, under these
proposed protocols and treaties, as fully preserving U.S.
taxing jurisdiction under the expatriation tax rules in their
current form, as amended by the American Jobs Creation Act. The
committee may wish to satisfy itself that the language included
in the proposed protocol allows the United States to exercise
its full taxing jurisdiction with respect to former citizens
and long-term residents.
The proposed estate, inheritance, and gift-tax protocol
with France would make several updates and other modifications
to the existing treaty, primarily to reflect changes in U.S.
law made in 1988. Among the other updates to the treaties, the
proposed protocol would add a saving clause which would protect
the right of the United States to apply its estate- and gift-
tax rules to U.S. citizens, as well as to certain former U.S.
citizens and long-term residents. The present treaty does not
have a such a provision. And, as I just noted above, this
saving clause was not updated to reflect the changes made to
the special expatriation tax regime by the American Jobs
Creation Act.
The proposed protocol also would provide a pro-rata unified
credit to the estate of an individual domiciled in France,
other than a U.S. citizen, for purposes of computing the U.S.
estate tax due. An estate eligible for this provision would be
entitled to a proportion of the full, generally applicable
credit based on a ratio of the value of the estate's U.S.-
situated assets to the value of its worldwide assets.
In addition, the proposed protocol would provide a limited
U.S. estate tax marital deduction in cases in which the
surviving spouse is not a citizen. This provision would apply
in the case of certain small estates.
The proposed protocol also would apply new limits to the
situs-based taxation of certain interspousal transfers of
noncommunity property. These changes are generally consistent
with changes made in other U.S. treaties in this area, such as
the treaties with Canada and Germany.
Lastly, the proposed income-tax treaty with Bangladesh, as
Ms. Brown noted, represents a brand new treaty relationship for
the United States. The proposed treaty with Bangladesh is
similar to the U.S. model in many ways, but it also includes
certain departures from the U.S. model.
In particular, the proposed treaty permits higher rates of
source-country withholding tax on interest, royalties, and
certain dividends than are provided for in the U.S. model. The
proposed treaty also is broader than the U.S. model in
circumstances in which the activities of a resident of one
country give rise to a permanent establishment in the other
country. Thus, in giving a wider scope to permitted source-
country taxation, the proposed treaty is similar to other
treaties negotiated with developing countries, but the
committee may wish to consider whether these concessions are
appropriate in the case of Bangladesh.
Lastly, let me note that, as your committee is fully aware,
the Joint Committee staff over the past several years has
emphasized what we have perceived as a need to update the
Treasury's model tax treaty. And so, we're extremely grateful
and excited that Treasury says that they will be forwarding a
draft within a month. We look forward to working with your
staff and Ms. Brown and her colleagues on a new model, which we
see as important in providing guidance to your committee and
the Senate in analyzing the course of U.S. treaty policy.
I am happy to answer any questions that you or other
committee members may have. And this concludes my formal
testimony.
[The prepared statement of Mr. Barthold follows:]
Prepared Statement of Thomas A. Barthold
My name is Tom Barthold. I am the Acting Chief of Staff of the
Joint Committee on Taxation. It is my pleasure to present the testimony
of the staff of the Joint Committee today concerning the proposed
income tax protocol with Sweden, the proposed income and estate and
gift tax protocols with France, and the proposed income tax treaty with
Bangladesh.\1\
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\1\ This document may be cited as follows: Joint Committee on
Taxation, Testimony of the Staff of the Joint Committee on Taxation
Before the Senate Committee on Foreign Relations Hearing on the
Proposed Tax Protocols with Sweden and France and the Proposed Tax
Treaty with Bangladesh (JCX-08-06), February 2, 2006.
---------------------------------------------------------------------------
OVERVIEW
As in the past, the Joint Committee staff has prepared pamphlets
covering the proposed treaty and protocols. The pamphlets provide
detailed descriptions of the proposed treaty and protocols, including
comparisons with the 1996 U.S. model income tax treaty (the ``U.S.
model''), which generally reflects preferred U.S. tax treaty policy,
and with other recent U.S. tax treaties. The pamphlets also provide
detailed discussions of issues raised by the proposed treaty and
protocols. We consulted with the Treasury Department and with the staff
of your committee in analyzing the proposed treaty and protocols and in
preparing the pamphlets.
The proposed income tax protocol with Sweden would amend an
existing treaty signed in 1994. The proposed income tax protocol with
France would amend an existing tax treaty that was signed in 1994. The
proposed estate tax protocol with France would amend an existing treaty
that was signed in 1978. The proposed income tax treaty with Bangladesh
represents a new tax treaty relationship for the United States. A
proposed treaty with Bangladesh was signed in 1980 but never went into
force. My testimony today will highlight some of the key features of
the proposed protocols and treaty and certain issues that they raise.
SWEDEN
Updates to Existing Treaty
The proposed protocol modifies several provisions in the existing
treaty to conform it to new U.S. domestic tax laws, and to make it
similar to more recent U.S. income tax treaties and the U.S. model. For
example, the proposed protocol expands the ``saving clause'' provision
of the existing treaty to allow the United States to tax certain former
citizens and long-term residents under the special expatriation tax
regime of U.S. internal law, as amended in 1996 and 2004. The proposed
protocol also updates the existing treaty to include the rules in
recent U.S. treaties related to fiscally transparent entities.
New ``zero-rate'' Dividend Provision
The proposed protocol also would eliminate withholding tax on
dividends paid by one corporation to another corporation that owns at
least 80 percent of the stock of the dividend-paying corporation (often
referred to as ``direct dividends''), provided that certain conditions
are met. The elimination of withholding tax under these circumstances
is intended to reduce further the tax barriers to direct investment
between the two countries.
Under the present treaty, these dividends may be taxed by the
source country at a maximum rate of five percent, a tax that the United
States, but not Sweden, imposes as a matter of internal law. Thus, the
principal immediate effect of this provision would be to exempt
dividends that U.S. subsidiaries pay to Swedish parent companies from
U.S. withholding tax. With respect to dividends paid by Swedish
subsidiaries to U.S. parent companies, the effect of this provision
would be to provide greater certainty as to the continued availability
of a zero rate of Swedish withholding tax, regardless of how Swedish
domestic law might change in this regard.
Until 2003, no U.S. treaty provided for a complete exemption from
withholding tax under these circumstances, and the U.S. and OECD models
currently do not provide for such an exemption. However, many bilateral
tax treaties to which the United States is not a party eliminate
withholding taxes under similar circumstances, and the same result has
been achieved within the European Union under its ``Parent-Subsidiary
Directive.'' Moreover, in 2003 and 2004, the Senate ratified U.S.
treaties and protocols containing zero-rate provisions with the United
Kingdom, Australia, Mexico, Japan, and the Netherlands. These
provisions are similar to the provision in the proposed protocol,
although the treaty with Japan allows a lower ownership threshold
(i.e., more than 50 percent, as opposed to at least 80 percent) than do
the other provisions, among other differences.
Because zero-rate provisions have become a trend in U.S. tax treaty
practice, the Committee may wish to examine the Treasury Department's
criteria for determining the circumstances under which a zero-rate
provision may be appropriate. In previous testimony before the
Committee, the Treasury Department has indicated that zero-rate
provisions should be limited to treaties that have the strongest
limitation-on-benefits and information-exchange provisions, where
appropriate in light of the overall balance of the treaty. The
Committee may wish to ask what ``overall balance'' considerations might
prompt the Treasury Department not to seek a zero-rate provision in a
treaty that has limitation-on-benefits and information-exchange
provisions meeting the highest standards. The Committee also may wish
to examine some of the specific design features of the provisions, such
as ownership thresholds, holding period requirements, the treatment of
indirect ownership, and heightened limitation-on-benefits requirements,
as discussed in detail in our pamphlet.
It is also worth noting that a zero rate generally would apply with
respect to dividends received by tax-exempt pension funds, similar to
provisions in other recent treaties.
Anti-Treaty-Shopping Provision
The proposed protocol replaces the limitation-on-benefits article
of the current treaty with a new article that reflects the anti-treaty-
shopping provisions included in the U.S. model and most of the more
recent U.S. income tax treaties. For example, the proposed protocol
provides for tests for publicly traded companies, ownership and base
erosion, derivative benefits, and active business.
The proposed protocol also provides a new, special anti-abuse rule
to address the use of certain triangular branch structures to earn
certain types of U.S. income. Under this rule, certain payments of
interest, royalties, or insurance premiums from a U.S. payor to a
permanent establishment of a Swedish resident in a third country may be
subject to U.S. withholding tax if Sweden does not tax such income and
the third country only taxes it lightly. The proposed protocol limits
such U.S. withholding tax to 15 percent in the case of interest or
royalties.
Unlike the U.S. model, but like the recent protocol amending the
Netherlands income tax treaty, the publicly traded company test in the
proposed protocol includes a set of requirements, referred to in the
Netherlands protocol as the ``substantial presence'' test, to determine
whether a company's public trading or management is adequately
connected to its residence in a treaty country. Under the proposed
protocol, a company that is a resident of Sweden or the United States
is entitled to all treaty benefits if the principal class of its
shares, and any disproportionate class of shares, is regularly traded
on one or more recognized stock exchanges, and, in addition, the
company meets either a public trading connection test or a management
and control test. The public trading connection test is met if the
company's principal class of shares is primarily traded (1) on a
recognized stock exchange in the treaty country in which the company is
resident, (2) in the case of a company resident in the United States,
on a recognized stock exchange located in a third country that is a
party to the North American Free Trade Agreement (``NAFTA''), or (3) in
the case of a company resident in Sweden, on a recognized stock
exchange located in the European Economic Area (``EEA''), the EU, or in
Switzerland. The management and control test is met if the company's
primary place of management and control is in the treaty country where
it is a resident.
The intent of this provision generally is to prevent certain
companies from qualifying for treaty benefits if their nexus to their
residence country is not sufficiently strong. The provision reflects a
significant tightening of the public trading test in this regard. The
Committee may wish to ask whether this tighter public trading test is
likely to be included in future treaties, as opposed to the
traditional, looser test.
It is also worth noting that, unlike most recent treaty
instruments, including the Netherlands protocol, the proposed protocol
does not require that the public company be listed in a treaty country.
Consequently, the test under the proposed treaty is based primarily
upon regional nexus. The Committee may wish to ask whether this
regional focus is appropriate in the light of the anti-treaty-shopping
purpose of this provision, and whether such a focus would remain viable
if the political climate in Europe were to shift in favor of decreasing
the scope of European integration.
Taxation of Certain U.S. Government Pensions
The proposed protocol amends the existing treaty to include a
special new rule related to Swedish tax on U.S. government pensions
paid to certain Swedish citizens and residents. The provision bars
Sweden from imposing tax on such pensions paid to former employees who
were hired prior to 1978 to work for the U.S. Embassy in Stockholm or
the U.S. consulate general in Gothenberg. These employees' salaries,
and, therefore, their future pensions, were reduced because the U.S.-
Sweden treaty in force at that time exempted their salaries from
Swedish tax. When the treaty was renegotiated in 1994, Sweden was
permitted to tax such pensions, which were not increased by the United
States, notwithstanding the previous decrease. The Committee may wish
to satisfy itself regarding the necessity of a treaty provision solely
affecting the Swedish taxation of Swedish individuals.
FRANCE
Income Tax Protocol
The proposed income tax protocol with France would make several
modifications and updates to the existing treaty. The proposed protocol
would amend the dividends provision of the existing treaty by expanding
the class of shareholders eligible for the treaty's 15-percent rate of
U.S. withholding tax on dividends from real estate investment trusts
(``REITs''). The provisions of the proposed protocol in this regard are
similar to those included in other recent U.S. income tax treaties and
protocols.
The proposed protocol replaces the pension rules of the current
treaty and provides new rules for the taxation of pensions and social
security benefits. The new pension rules are similar to those in recent
U.S. tax treaties with both the United Kingdom and the Netherlands.
The proposed protocol amends the residence rules of the current
treaty in a manner intended to address certain ambiguities in the tax
treatment of cross-border investments through partnerships and similar
entities. Ambiguities have arisen in particular circumstances in part
because of the different rules governing the taxation of partnerships
under French and U.S. internal law.
The proposed protocol expands the ``saving clause'' provision of
the existing treaty to allow the United States to tax former long-term
residents whose termination of residency has as one of its principal
purposes the avoidance of tax. The existing treaty only applies to
former citizens. The extension of this provision to long-term residents
allows the United States to apply amendments made in 1996 to the
special tax regime for expatriates under section 877 of the Code. The
proposed protocol does not, however, update the saving clause provision
to reflect more recent changes made to the special expatriation rules
by the American Jobs Creation Act of 2004 (``AJCA''). AJCA eliminated
subjective determinations of tax-avoidance purpose and replaced them
with objective rules for determining the applicability of the special
tax regime for expatriates.
In three of the four treaty instruments before the Committee today
(the two proposed French protocols and the proposed Bangladesh treaty),
the saving clause uses the obsolete ``principal purposes of tax
avoidance'' formulation in determining whether the special tax regime
may apply to individuals who expatriate, even though the subjective
determinations of tax-avoidance purpose under prior law were recently
eliminated. Treasury Department technical explanations note that under
these instruments, the determination of whether there was a principal
purpose of tax avoidance is made under the laws of the United States.
The technical explanations further state that this language would
include ``the irrebuttable presumptions based on average annual net
income tax liability and net worth under section 877,'' and that the
new objective tests ``represent the administrative means by which the
United States determines whether a taxpayer has a tax avoidance
purpose.'' Thus, although the provisions employ the now-obsolete
concept of a tax-avoidance purpose, the Treasury Department maintains
that this language should be understood as fully preserving U.S. taxing
jurisdiction under the expatriation tax rules in their current form.
The Committee may wish to satisfy itself that the language included in
the proposed protocol allows the United States to exercise its full
taxing jurisdiction with respect to former citizens and long-term
residents.
Estate Tax Protocol
The proposed estate, inheritance, and gift tax protocol with France
would make several updates and other modifications to the existing
treaty. The principal purpose of the treaty is to reduce or eliminate
double taxation in connection with estate, inheritance, and gift taxes.
One of the general principles of the treaty is that the country in
which a donor or decedent was domiciled may tax the estate or gifts of
that individual on a worldwide basis, but must credit tax paid to the
other country with respect to certain types of property located in such
other country.
Among other updates to the treaty, the proposed protocol would add
a saving clause, which would protect the right of the United States to
apply its estate and gift tax rules to U.S. citizens, as well as to
certain former U.S. citizens and long-term residents. (As noted above,
this saving clause was not updated to reflect changes made to the
special expatriation tax regime under U.S. law in 2004.) The proposed
protocol also would provide a pro rata unified credit to the estate of
an individual domiciled in France (other than a U.S. citizen) for
purposes of computing the U.S. estate tax due. An estate eligible for
this provision would be entitled to a portion of the full, generally
applicable credit, based on the ratio of the value of the estate's
U.S.-situated assets to the value of its worldwide assets.
In addition, the proposed protocol would provide a limited U.S.
estate tax marital deduction in cases in which the surviving spouse is
not a U.S. citizen. This provision would apply in the case of certain
small estates. The proposed protocol also would add new limits to the
situs-based taxation of certain interspousal transfers of noncommunity
property. These changes are generally consistent with those made in
other recent U.S. treaties in this area (e.g., in treaties with Canada
and Germany).
BANGLADESH
The proposed income tax treaty with Bangladesh represents a new
treaty relationship for the United States. A proposed income tax treaty
was signed in 1980 but never entered into force.
The proposed treaty with Bangladesh is similar to the U.S. model
treaty in many ways, but it also includes certain departures from the
U.S. model. In particular, the proposed treaty permits higher rates of
source-country withholding tax on interest, royalties, and certain
dividends than are provided for in the U.S. model. The proposed treaty
also is broader than the U.S. model in its circumstances in which the
activities of a resident of one treaty country give rise to a permanent
establishment in the other country. In giving wider scope to permitted
source-country taxation, the proposed treaty is similar to other
treaties negotiated with developing countries. The Committee may wish
to consider whether this concession is appropriate in the case of
Bangladesh.
UPDATING THE U.S. MODEL TREATY
As a general matter, U.S. model tax treaties provide a framework
for U.S. tax treaty policy. These models provide helpful information to
taxpayers, the Congress, and foreign governments as to U.S. policies on
tax treaty matters. Periodically updating the U.S. model tax treaties
to reflect changes, revisions, developments, and the viewpoints of
Congress with regard to U.S. tax treaty policy ensures that the model
treaties remain meaningful and relevant. The current U.S. model income
tax treaty was last updated in 1996. As we mentioned in the treaty
hearings in 2003 and 2004, the Joint Committee staff believes that this
model is becoming obsolete and is in need of an update. The Treasury
Department stated at a hearing in 2004 that it was updating the model.
The Committee may wish to inquire as to the current status of this
project.
I would be happy to answer any questions that the committee may
have at this time or in the future.
The Chairman. Well, thank you very much, Mr. Barthold, for
your very careful analysis of each of the provisions. And that
testimony is tremendously valuable for everyone to consider.
We'll get into it further with questions and maybe comments
from the panel members.
STATEMENT OF HON. WILLIAM A. REINSCH, PRESIDENT, NATIONAL
FOREIGN TRADE COUNCIL, WASHINGTON, DC
But first I want to call upon Mr. Reinsch. It's good to
have you again before us this morning. Will you please proceed
with your testimony?
Mr. Reinsch. Thank you, Mr. Chairman. It's a pleasure to be
back.
I'm here on behalf of the National Foreign Trade Council to
recommend ratification of the treaty and protocols that are
before the committee today. The committee has graciously taken
our advice, at least on tax matters, in the past, and we hope
that you'll do so again this time.
If U.S. businesses are going to maintain a competitive
position around the world, we need a treaty policy that
protects them from multiple or excessive levels of foreign tax
on cross-border investments, particularly if their competitors
already enjoy that advantage. The United States has lagged
behind other developed countries in eliminating this
withholding tax and leveling the playing field for cross-border
investment. The European Union eliminated the tax on intra-EU
parent-subsidiary dividends over a decade ago, and dozens of
bilateral treaties between foreign countries have followed that
route. The majority of OECD countries now have bilateral
treaties in place that provide for zero rate on parent-
subsidiary dividends, so we're particularly pleased to note the
additional progress on the treaty and protocols that are before
you today.
Tax treaties also provide other features that 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, which is available
exclusively under tax treaties, is the mutual-agreement
procedure. This bilateral administrative mechanism provides
another opportunity for the avoidance of double taxation on
cross-border transactions.
The Swedish protocol that is before the committee today
updates an existing agreement between Sweden and the United
States signed over a decade ago. The protocol improves a
convention that has stimulated increased investment, greater
transparency, and a stronger economic relationship between our
two countries. The NFTC commends Treasury for its determination
to facilitate increased trade and investment through this
protocol and the other agreements under consideration.
We have for years urged adjustment of U.S. treaty policies
to allow for a zero withholding rate on related-entity
dividends, and we commend the Treasury for making further
progress in its protocol with Sweden. This agreement continues
the important contribution toward improving the economic
competitiveness of U.S. companies achieved in prior agreements
with the Netherlands, Japan, the United Kingdom, Australia, and
Mexico. We thank the committee for its prior support of this
evolution in U.S. tax-treaty policy, and we strongly urge you
to continue that support by approving the Swedish protocol.
The existence of a withholding tax on cross-border parent-
subsidiary dividends, even at the 5 percent rate previously
typical in U.S. treaties, has served as a tariff-like
impediment to cross-border investment flows. Without a zero
rate, the combination of the underlying corporate tax and the
withholding tax on the dividend will often leave parent
companies with an excess of foreign tax credits. Because these
excesses are unusable, the result is a lower return from a
cross-border investment than a comparable domestic investment.
Tax treaties are designed to prevent this distortion in the
investment decision making process by reducing multiple
taxation of profits within a corporate group, and they serve to
prevent the hurdle to U.S. participation in international
commerce. Eliminating the withholding tax on cross-border
dividends means that U.S. companies with stakes in Swedish
companies will now be able to meet their foreign competitors on
a level playing field.
Another notable inclusion is the zero-withholding rate on
dividends paid to pension funds, which should attract
investment from those funds into U.S. stocks. Also reflected is
modern U.S. tax-treaty policy regarding when U.S. withholding
rates will apply to dividends paid by regulated investment
companies and real estate investment trusts, as well as recent
U.S. law changes aimed at preserving taxing jurisdiction over
certain individuals who terminate their long-term residence
within the United States.
The French protocols that are before the committee today
represent updates and improvements to existing agreements.
These protocols will enhance an already flourishing economic
relationship between our two countries. Included in the updated
agreements are current U.S. tax-treaty policies regarding
hybrid entities and the application of reduced withholding tax
rates for dividends paid by RICs and REITs.
Another notable inclusion in the French protocols
recognizes reciprocal pension and retirement benefits for
individuals of either country, eliminating double taxation on
contribution of payments paid by, or for, an individual to a
pension or retirement plan, reducing the burden on individuals
working for foreign subsidiaries of companies in either
country.
The tax treaty with Bangladesh represents a new tax-treaty
relationship for the United States. The agreement is a
significant step forward in the U.S. economic relationship with
Bangladesh. As a modernizing nation, Bangladesh is in a
developmental phase which gives rise to opportunities for
American business because of the projects and the economic
development that an expanding infrastructure will allow.
Without a similar tax arrangement, U.S. companies that are
interested in investing in, or trading with, Bangladesh are at
a competitive disadvantage.
While the Bangladesh treaty does not go as far as other
agreements--for example, in eliminating withholding taxes for
dividends, interest, and royalties--it represents an important
starting point in a growing economic relationship with
Bangladesh. The treaty reflects current U.S. tax-treaty policy
for agreements with developing nations, and it includes
appropriate measures to prevent treaty shopping. The NFT
strongly supports action to create the competitive balance
afforded to U.S. enterprises by this tax treaty.
While we are not aware of any opposition to the treaties
under consideration, the NFTC, as it has done in the past as a
general cautionary note, urges the committee to reject
opposition to the agreements based on the presence or absence
of a single provision. No process that is as laden with
competing considerations as the negotiation of a full-scale tax
treaty between sovereign states will be able to produce an
agreement that will completely satisfy every possible
constituency. And no such result should be expected. Agreements
should be judged on whether they encourage international flows
of trade and investment between the United States and the other
country. An agreement that meets this standard will provide the
guidance enterprises need in planning for the future, provide
nondiscriminatory treatment for U.S. traders and investors, as
compared to those of other countries, and meet a minimum level
of acceptability in comparison with the preferred U.S. position
and expressed goals of the business community.
The NFTC strongly supports the efforts of the Internal
Revenue Service and the Treasury to promote continuing
international consensus on the appropriate transfer pricing
standards, as well as innovative procedures for implementing
that consensus. We applaud the continuing growth of the advance
pricing agreement 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 ongoing efforts of the IRS to refine and improve
the operation of the competent authority process under treaties
to make it a more efficient and reliable means of avoiding
double taxation.
We also want to reiterate our 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 tax-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 particularly commend this committee, and you,
personally, Mr. Chairman, for scheduling tax-treaty hearings
quickly after receiving the agreements from the executive
branch. Doing so enables improvements in the treaty network to
enter into effect as quickly as possible, and it's much
appreciated by our members.
We would also like to reaffirm our view, frequently voiced
in the past--this is a message more for the Finance Committee
than the Foreign Relations Committee, but, nevertheless--that
Congress should avoid occasions of overriding, in subsequent
domestic legislation, the U.S. tax-treaty commitments approved
by your 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.
Finally, Mr. Chairman, the NFTC is grateful to you and to
the members of the committee for your continuing commitment to
give international economic relations prominence in the
committee's agenda, particularly when the demands upon your
time are so pressing.
We would also like to express our appreciation for the
efforts of both majority and minority staff in arranging for
this hearing to be scheduled and held at this time.
Thank you very much.
[The prepared statement of Mr. Reinsch follows:]
Prepared Statement of Hon. William A. Reinsch
Mr. Chairman and members of the committee: The National Foreign
Trade Council (NFTC) is pleased to recommend ratification of the
treaties and protocols under consideration by the committee today. We
appreciate the Chairman's actions in scheduling this hearing so early
in the year, and we strongly urge the committee to reaffirm the United
States' historic opposition to double taxation by giving its full
support to the pending Bangladesh Tax Treaty and the Protocols with
Sweden and France.
The NFTC, organized in 1914, is an association of some 300 U.S.
business enterprises engaged in all aspects of international trade and
investment. Our membership covers the full spectrum of industrial,
commercial, financial, and service activities, and 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 and impediments to the
flow of capital that can serve as barriers to full participation in the
international marketplace. Foreign trade is fundamental to the economic
growth of U.S. companies. Tax treaties are a crucial component of the
framework that is necessary to allow that growth and to balanced
competition.
This is why the NFTC has long supported the expansion and
strengthening of the U.S. tax treaty network and why we are here today
to recommend ratification of the Tax Treaty with Bangladesh and the
Protocols with Sweden and France.
TAX TREATIES AND THEIR IMPORTANCE TO THE UNITED STATES
Tax treaties are bilateral agreements between the United States and
foreign countries that serve to harmonize the tax systems of the two
countries with respect to persons involved in cross-border investment
and trade. Tax treaties eliminate this double taxation by allocating
taxing jurisdiction over the income between the two countries. In the
absence of tax treaties, income from international transactions or
investments may be subject to double taxation, first by the country
where the income arises and again by the country of the recipient's
residence.
In addition, the tax systems of most countries impose withholding
taxes, frequently at high rates, on payments of dividends, interest,
and royalties to foreigners, and treaties are the mechanism by which
these taxes are lowered on a bilateral basis. If U.S. enterprises
earning such income abroad cannot enjoy the reduced foreign withholding
rates offered by a tax treaty, they are liable to suffer excessive and
noncreditable levels of foreign tax and to be at a competitive
disadvantage relative to traders and investors from other countries
that do have such benefits. Tax treaties serve to prevent this barrier
to U.S. participation in international commerce.
If U.S. businesses are going to maintain a competitive position
around the world, we need a treaty policy that protects them from
multiple or excessive levels of foreign tax on cross border
investments, particularly if their competitors already enjoy that
advantage. The United States has lagged behind other developed
countries in eliminating this withholding tax and leveling the playing
field for cross-border investment. The European Union (EU) eliminated
the tax on intra-EU, parent-subsidiary dividends over a decade ago and
dozens of bilateral treaties between foreign countries have also
followed that route. The majority of OECD countries now have bilateral
treaties in place that provide for a zero rate on parent-subsidiary
dividends.
Tax treaties also provide other features that 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 which is available
exclusively under tax treaties is the mutual agreement procedure. This
bilateral administrative mechanism provides another opportunity for the
avoidance of double taxation on cross-border transactions.
Taxpayers are not the only beneficiaries of tax treaties. Treaties
protect the legitimate enforcement interests of the United States by
providing for the administration of U.S. tax laws and the
implementation of U.S. treaty policy. The article that provides for the
exchange of information between tax authorities is an excellent example
of the benefits that result from an expanded tax treaty network.
Treaties also offer the possibility of administrative assistance in the
collection of taxes between the relevant tax authorities.
A framework for the resolution of disputes with respect to
overlapping claims by the respective governments is also provided for
in tax treaties. In particular, the practices of the Competent
Authorities under the treaties have led to agreements, known as
``Advance Pricing Agreements'' or ``APAs,'' through which tax
authorities of the United States and other countries have been able to
avoid costly and unproductive proceedings 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.
AGREEMENTS BEFORE THE COMMITTEE
The Swedish Protocol that is before the committee today updates an
existing agreement between Sweden and the United States signed over a
decade ago. The protocol improves a convention that has stimulated
increased investment, greater transparency, and a stronger economic
relationship between our two countries. The NFTC commends Treasury for
its determination to facilitate increased trade and investment through
this protocol and the other agreements under consideration.
The NFTC has for years urged adjustment of U.S. treaty policies to
allow for a zero withholding rate on related-entity dividends, and we
praise the Treasury for making further progress in this protocol with
Sweden. This agreement continues the important contribution toward
improving the economic competitiveness of U.S. companies achieved in
prior agreements with the Netherlands, Japan, the United Kingdom,
Australia, and Mexico. We thank the committee for its prior support of
this evolution in U.S. tax treaty policy and we strongly urge you to
continue that support by approving the Swedish Protocol.
The existence of a withholding tax on cross-border, parent-
subsidiary dividends, even at the five percent rate previously typical
in U.S. treaties, has served as a tariff-like impediment to cross-
border investment flows. Without a zero rate, the combination of the
underlying corporate tax and the withholding tax on the dividend will
often leave parent companies with an excess of foreign tax credits.
Because these excesses are unusable, the result is a lower return from
a cross-border investment than a comparable domestic investment. Tax
treaties are designed to prevent this distortion in the investment
decision-making process by reducing multiple taxation of profits within
a corporate group, and they serve to prevent the hurdle to U.S.
participation in international commerce. Eliminating the withholding
tax on cross-border dividends means that U.S. companies with stakes in
Swedish companies will now be able to meet their foreign competitors on
a level playing field.
Another notable inclusion is a zero withholding rate on dividends
paid to pension funds which should attract investment from those funds
into U.S. stocks. Also reflected is modern U.S. tax treaty policy
regarding when reduced U.S. withholding rates will apply to dividends
paid by Regulated Investment Companies (RICs) and Real Estate
Investment Trusts (REITs), as well as recent U.S. law changes aimed at
preserving taxing jurisdiction over certain individuals who terminate
their long-term residence within the United States.
Additionally, important safeguards are included in the Swedish
Protocol to prevent treaty shopping. For example, in order to qualify
for the lowered rates specified by the agreement, companies must meet
certain requirements so that foreigners whose governments have not
negotiated a tax treaty with Sweden or the U.S. cannot free-ride on
this treaty. Provisions in the protocol are intended to ensure that its
benefits accrue only to those for which they are intended.
The French Protocols that are before the committee today represent
updates and improvements to existing agreements. These protocols will
enhance an already flourishing economic relationship between our two
countries. Included in the updated agreements are current U.S. tax
treaty policies regarding hybrid entities and the application of
reduced withholding tax rates for dividends paid by RICs and REITs.
Another notable inclusion in the French Protocols recognizes reciprocal
pension and retirement benefits for individuals of either country
eliminating double taxation on contributions and payments paid by or
for an individual to a pension or retirement plan, reducing the burden
on individuals working for foreign subsidiaries of companies in either
country.
Including REITs in the French Convention will stimulate foreign
direct investment into the U.S. and provide greater incentives for
French foreign nationals to keep that income in the U.S. Such measures
are integral to fostering an atmosphere conducive to the investment
needs of both foreign nationals and U.S. businesses, specifically in
the financial services industry.
The tax treaty with Bangladesh represents a new tax treaty
relationship for the United States. The agreement is a significant step
forward in the U.S. economic relationship with Bangladesh. As a
modernizing nation, Bangladesh is in a developmental phase, which gives
rise to opportunities for American business because of the projects and
the economic development that an expanding infrastructure will allow.
Without a similar tax arrangement, U.S. companies that are interested
in investing in or trading with Bangladesh are at a competitive
disadvantage.
While the Bangladesh Treaty does not go as far as other agreements
(e.g., in eliminating withholding taxes for dividends, interest, and
royalties), it represents an important starting point in a growing
economic relationship with Bangladesh. The Bangladesh Treaty reflects
current U.S. tax treaty policy for agreements with developing nations,
and it includes appropriate measures to prevent treaty shopping. The
NFTC strongly supports action to create the competitive balance
afforded to U.S. enterprises by this tax treaty.
GENERAL COMMENTS ON TAX TREATY POLICY
While we are not aware of any opposition to the treaties under
consideration, the NFTC as it has done in the past as a general
cautionary note, urges the committee to reject opposition to the
agreements based on the presence or absence of a single provision. No
process that is as laden with competing considerations as the
negotiation of a full-scale tax treaty between sovereign states will be
able to produce an agreement that will completely satisfy every
possible constituency, and no such result should be expected. Virtually
all treaty relationships arise from 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 effect. In other words,
agreements should be judged on whether they encourage international
flows of trade and investment between the United States and the other
country. An agreement that meets this standard will provide the
guidance enterprises need in planning for the future, provide
nondiscriminatory treatment for U.S. traders and investors as compared
to those of other countries, and meet a minimum level of acceptability
in comparison with the preferred U.S. position and expressed goals of
the business community.
Mechanical comparisons of a particular treaty's provisions with the
U.S. model or with treaties with other countries do not provide an
appropriate basis for analyzing a treaty's value. U.S. negotiators are
to be applauded for achieving agreements that reflect current U.S. tax
treaty policy and the views expressed by the U.S. business community.
The NFTC also wishes to emphasize how important treaties are in
creating, implementing, and preserving 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 through the
OECD and other fora 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 governments' commitment to prevent conflicting income
measurements from leading to double taxation and resulting distortions
and barriers for international trade. Treaties are a crucial element in
achieving this goal because they contain an expression of both
governments' commitment to the arm's length standard and provide the
only available bilateral mechanism, the competent authority procedure,
to resolve any disputes about the application of the standard in
practice.
We recognize 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 that 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 the Treasury to promote continuing international consensus
on the appropriate transfer pricing standards, as well as innovative
procedures for implementing that consensus. We applaud the continued
growth of the 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 ongoing
efforts of the IRS to refine and improve the operation of the competent
authority process under treaties to make it a more efficient and
reliable means of avoiding double taxation.
The NFTC also wishes to reiterate 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 tax 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 commend this committee for scheduling tax treaty
hearings quickly after receiving the agreements from the executive
branch. Doing so enables improvements in the treaty network to enter
into effect as quickly as possible.
We would also like to reaffirm our view, frequently voiced in the
past, that Congress should avoid occasions of overriding in subsequent
domestic legislation the U.S. tax treaty commitments 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.
IN CONCLUSION
Finally, the NFTC is grateful to the Chairman and the members of
the committee for their continuing commitment to giving international
economic relations prominence in the committee's agenda, particularly
when the demands upon the committee's time are so pressing. We would
also like to express our appreciation for the efforts of both majority
and minority staff in arranging for this hearing to be scheduled and
held at this time.
We commend the committee for its commitment to proceed with
ratification of these important agreements as expeditiously as
possible.
The Chairman. Thank you very much, Mr. Reinsch. We
appreciate the compliments to our staff for their work on this.
I take it as a point of pride that this committee and its
subcommittees held more meetings than any other committee in
the Senate last year, and it's largely because our country has
a very active foreign policy. We have conflicts in many areas.
We're seeking peace in many areas. But the considerations
before us today are extremely important, as are many functions
that the committee performs. And this means that our staffs
have to work especially diligently to prepare for the hearings,
to do a responsible job, as they will do once again with this
hearing today. So, I thank you for your thoughts.
Now, let me begin the questioning with you, Ms. Brown. I'm
excited, by the fact that you mentioned the new U.S. model
treaty. And Mr. Barthold has commented on his enthusiasm about
that, too. I want to ask both you about that treaty. Can you
give us any preview of what is likely to be included, what we
might anticipate? I know that, obviously, it's still under
consideration. You may not wish to reveal everything that is
going to occur, but can you give us some format for the future?
Ms. Brown. Yes, of course, Mr. Chairman.
I'm afraid it's not going to be nearly as exciting as Mr.
Barthold is anticipating.
The Chairman. Oh, that's too bad.
Ms. Brown. I think that we should see the model treaty as
really an evolution. We--because, in 1996--well, it was done in
1996, and, since then, we have done a number of treaties where
we've refined the language; we've made some mistakes, and we've
figured out how to fix them; and we've had some changes in
policies, such as the rules on RICs and REITs. And so, what
we're really trying to do is have a document that reflects all
those changes in policy, which you've seen, and gets the
drafting right, to have the best drafting that we've developed
over the course of the last 10 years.
We would not expect to have the zero-withholding rate on
dividends as part of that treaty, because it's not a provision
that we think we could have with every country. In fact, I
think probably only a handful of countries are really going to
adopt that, going forward. So, we don't think that that is
appropriate. We will have updated limitation-on-benefits
provisions.
And an issue that the Joint Committee has raised, and the
Senate Foreign Relations Committee has raised, is our treatment
of students and teachers in a number of treaties. I have to say
that that issue, we've been a little haphazard in the past.
There are a couple of provisions. As long as the other country
asks for something we've done before, we've agreed to it
without really thinking about creating differences between
different categories. And so, that's an issue that is
particularly a Foreign Relations issue. It's the question of
how to encourage cross-border cultural exchange. And we'd like
to have the views of the committee staffs and the committee on
that issue.
The Chairman. Well, I'm pleased that the student and
scholar issue is going to be a part of your consideration. We
look forward, obviously, to progress on that, because, you're
correct, this has been the subject in many forums--more
recently, immigration and visas and all the problems of
homeland defense and so forth. And the table that you occupy
has been filled with scholars from our universities, as well as
officials from our government. We're making headway there, and
the tax implications are often important, and have been long
before 9/11 and the crisis that occurred then.
You and Mr. Barthold have touched upon the zero-
withholding-rate treaties and the criteria that may be involved
there. I suppose, as you enter the model treaty, there may be
even further explication of the reasons why certain tax regimes
in certain countries are worthy of that kind of consideration,
as opposed to others. Can you make any further comment about
that?
Ms. Brown. We have applied the zero rate in a number of
different circumstances. Sometimes the treaty partner has a
foreign tax-credit system, sometimes it has a dividend-
exemption system. And so, it's not the particular taxing
regime, as long as we think that the other country has a robust
regime. Certainly if there's a country that does not impose
much tax at all, we may not enter into a treaty at all with
that country, but certainly they would not be a candidate for a
zero-withholding rate on dividends.
What we're interested in is protecting that provision. Mr.
Barthold asks whether we would be interested in having zero
across-the-board with all countries, and I think the answer is
that in an ideal world, we would. The U.S. receives more in the
way of dividends than it pays. And so, just as with respect to
interest, that would probably be the preferred approach. The
question really is, How do we get from where we are now, which
is having it in a handful of treaties, to that ideal situation?
And so, we think that we're going to have to continue to have
limitations in order to prevent residents of third countries
from getting the benefit of that provision without giving the
same benefit to our companies. Because the point really is, as
Mr. Reinsch will say, to make sure that our companies benefit
from the zero-withholding rate, and not just the residents of
third countries.
The Chairman. I thank you for that comment. And I know that
will probably arise again as we take a look at the model tax
treaty and the provisions that you make that pertain to this.
You discussed in your testimony that tax treaties provide
settlement mechanisms. Just for the record, can you give us an
example of a recent dispute that was resolved, and how the
existence of a treaty, any one of those that you have recently
formulated, led to a resolution of that dispute?
Ms. Brown. Mr. Chairman, we always like to resolve things
before they get to the level of a dispute, so maybe I'll
mention a few areas.
Of course, most of the disputes that we're talking about
relate to specific taxpayer matters. They're transfer pricing
matters where the competent authority may resolve dozens, maybe
hundreds, of those cases every year. Mostly transfer pricing.
Sometimes something as simple as whether an individual is a
resident of the United States or the United Kingdom, which has
ramifications throughout the treaty for that individual.
We also have the ability to reach agreements on matters of
general application. And so, in the past few years, recently,
we reached an agreement on the definition of what an
``investment bank'' is, since there's an--with Japan--there's
an exemption in that treaty for withholding--for interest
withholding on payments received by banks and investment banks.
And reaching an agreement with Japan on that was very important
for our financial-services industry. We have also reached
general agreements on what pension funds and insurance
companies that do pension business in the United Kingdom will
qualify for the exemption from withholding taxes on dividends
paid to pension funds. And so, we deal with the small issues
and the big issues.
But one of the things that our competent authority tells us
is that with respect to truly large cases--and there are some
that are in the paper--even our best treaty relationships can
be improved. And so, we are looking at ways to improve the
dispute settlement resolution mechanism, and you may hear more
about that in the future.
The Chairman. Well, I thank you for that explanation. You
know, obviously one of the purposes of your work, and our
hearing, is to bring greater fairness to American taxpayers;
likewise, reciprocally, taxpayers of other countries. But
frequently when the Congress or the Treasury Department or
others meet, why, taxpayers may fear that their lives are
jeopardy, that there are consequences. We're attempting to
bring some fairness to the process as advocates for American
taxpayers, whether they be individuals or businesses, vis-a-vis
other countries that might, at least in our judgment, have
unfair burdens. And through the mechanisms of treaties, the
ways in which the nations deal with each other can mitigate the
severity of those situations. So, we appreciate your
explanation--I think it's a good one--that sometimes you have
hundreds of cases. Only a very few may arise, sometimes with
questions of status, of the residence, of who is where and what
legal standing they have in countries involved.
Now, let me ask, on the Swedish situation--you've touched
upon this, and Mr. Barthold has, some more--that there was
unintended taxation of local employees of the United States
Embassy and the Consulate in Sweden. As Mr. Barthold has
pointed out, this pertains primarily to Swedish individuals,
citizens of Sweden. Can you offer further background on the
equities of this, why we became involved in it--and what the
resolution has been?
Ms. Brown. Thank you, Mr. Chairman. Yes, it is an unusual
situation. The issue was brought to our attention by the
ambassador, our ambassador to Sweden.
The Chairman. How long ago did that occur?
Ms. Brown. About 2002--actually, maybe as early as 2001.
The Chairman. But pertaining to people who had histories
way back from----
Ms. Brown. That is----
The Chairman (continuing). ----we've learned.
Ms. Brown. That is exactly right. It took some time for the
issue to really become clear to the embassy staff. And they
felt very strongly that this was an issue where people who had
spent their entire careers working for the U.S. Government were
really being treated unfairly, and, in some cases, losing
houses because they couldn't afford to pay them, because of the
reduced pension. And this was clearly not what was intended in
1995. So, it was a case where we really needed to find a
solution.
We did talk to the State Department about potentially
increasing the pensions. They said that was impossible. We
talked, for several years, with the Swedish Government about
making an exception. Their view was that if they made an
exception for these people, they would be asked to make
exceptions for numbers of classes of people. And so, the view
was that since this was a problem that was created by the
treaty, it should be resolved through the treaty. And it is a
little unusual, although one of the few articles that actually
does deal with the taxation by the other government, of
residents of that country, is the government-services article.
So, it's not that unusual in the context of that provision.
The Chairman. Well, I thank you for that additional
explanation, and I would estimate that all of this may pertain
to a relatively small number of individuals in the population
of Sweden; still, it would be good news to Swedes that there is
sensitivity on the part of their government, and our
government, to the situation of these employees, who have been
helpful to American interests, but, likewise, reciprocally, to
Swedish interests over the course of time.
Let me ask about the treaty with Sri Lanka, which we passed
in the last Congress. Bangladesh is sometimes also considered,
as countries are described, as a developing country. Can you
point out any key differences between the Sri Lanka treaty that
we passed last year and the Bangladesh treaty before us today?
And are there likely to be current negotiations with other
developing countries? Is that a trend, at least in the work in
your shop?
Ms. Brown. Thank you, Mr. Chairman.
The Sri Lanka treaty and the Bangladesh treaty are actually
fairly similar, not surprisingly. We began negotiating them
about the same time, quite a long time ago. I would say that
the Bangladesh treaty has slightly lower rates on investment
income. This is something that developing countries really have
to decide for themselves. They have a dilemma. They want to
attract investment, so they want the rates to be low enough to
attract investment, but if they make them too low, then their
own population may say, ``Why are you treating the foreign
companies better than our companies?'' And so, we can reach
appropriate resolutions at different rates with different
countries. But I would say that the Bangladesh treaty is a
little more favorable to businesses than the Sri Lanka treaty,
but not in a significant way. They're both fairly mainstream
developing-country treaties.
With respect to other developing countries, we have had
some informal talks, and I think the one that perhaps I'm most
hopeful about is Vietnam. But those are very preliminary talks,
and--but if things to go well, we may be talking to them later,
in 2006 or 2007.
The Chairman. Maybe a forecast of another hearing down the
road.
Now, finally, on a practical level, how will the new
protocols with France affect citizens currently living--that
is, U.S. citizens--currently living and working in France? And,
likewise, how will they affect French nationals working here?
In terms of day-to-day examples or the rudimentary situations
for these persons, how will they be affected?
Ms. Brown. Well, I think for--the easier case, perhaps, is
the French nationals who are living here. And that's partly
because of these disparities that I described earlier. Since
1995, U.S. citizens who are working in France have been given a
deduction by France for contributions that they make to their
U.S. pension funds, or that their employer makes----
The Chairman. So, that's been very clear to them there.
Ms. Brown (continuing). ----And so, they've had that
advantage, going back 10 years. Whereas, French persons living
in the United States who don't have private pension plans have
not gotten the same benefit with respect to voluntary
contributions that they make into the French social-security
system. Such people would make those contributions to ensure
that the benefits that they eventually get are maintained at a
high level. And so, really what this does is achieve parity for
the benefit we've been getting for the last 10 years.
I think the other significant benefit for U.S. people
living in France would be that, if they are married to a French
citizen, they won't see their estate disappear quite as quickly
under the new estate-tax protocol, that the French spouse will
be able to inherit some property without being subject to U.S.
estate tax on that. And so, I think that's a peace-of-mind
benefit for those people, that will be important.
The Chairman. Just a point of curiosity. Are French estate
taxes comparable to ours? How would they be measured?
Ms. Brown. I think they're actually higher.
The Chairman. Higher.
Ms. Brown. And they provide fewer exemptions, overall. The
French did agree, in this protocol, to provide for U.S. persons
the same exemptions that they provide to French nationals. And
so, there is parity there, but the exemptions are generally
less generous than in the United States. And, of course, in
France you can provide artwork to pay your estate taxes----
The Chairman. I see. Well, that's an interesting footnote
for the record.
Let me ask Mr. Barthold the same initial question I asked
Ms. Brown. The Joint Committee has taken a look at this model
treaty drafting coming along. Are there specific provisions
that you would suggest in the new model? We've touched a little
bit upon this zero-withholding-rate business as something that
may be considered, one way or another. But can you explore that
a little bit, in terms of some forecasts of what might occur,
or a wish list of what you wish would occur?
Mr. Barthold. Well, Mr. Chairman, I can't offer a forecast.
The model is for the Treasury to develop. And, as I said, I
know we've been accused by some of harping on the model, but we
view it as an important guidepost for your committee in
assessing how we're developing our treaty relationships. But
also, at a technical level, of course, it provides recommended
treaty language, and puts it out there so that people can
comment on it, so that people can explore whether it helps
achieve the results that we are trying to achieve in these
treaty relationships. And so, the points that Ms. Brown raised
about updating to reflect the RIC/REIT changes, coverage of the
issue that we raised today about the disparate treatment in the
three proposed protocols and proposed treaty before you today
with respect to the expatriation of citizens and long-term
residents. So, putting out common language is very helpful, in
terms of updating.
Now, the broader issue that we did raise, and of which you
have inquired, the zero rate, is if we view this as U.S.
policy, going forward, we might want to lay that out, in part,
for your committee's guidance and for people to understand. And
the context in which we raised the issue, is that, as part of
the zero-rate provisions that the Treasury has negotiated over
the last 5 years, as Ms. Brown noted, they have seen, as an
important component of this, very strong or increased strength
of limitation-on-benefit provisions and exchange-of-information
provisions. If that is Treasury's policy, going forward, we
think that there would be some benefit to your committee and to
the public at large, to lay that out. We understand, of course,
that in negotiations you do not expect to see everything in the
U.S. model adopted as the result of a negotiation and brought
before the committee and the Senate for ratification. But it
does tell us a direction that we'd like to go, and also
provides some guidance to investors and the business community.
Looking ahead, it gives them a sense of, ``How might the U.S.
Government be trying to update treaties with a country in which
I plan to make an investment? And what might this mean for my
investment?'' That is why we think the model, and updating the
model, is an important thing to consider. I do reiterate our
enthusiasm in working with your committee staff and the
Treasury Department in an update of the model.
The Chairman. Well, I think that is a good explanation. And
this model does offer Senators and staff a criteria that
obviously is important to American businesses, and taxpayers
have some idea of--in the best of circumstances. Now, I think,
Ms. Brown, you used the term ``some countries have a robust tax
regime,'' others have a lot of missing pieces. So, if you have
a model out there, you, I suppose, have to make some
measurement of the reciprocity or some comparability of
circumstances, and that is, I think, what you have said, what I
perceive to be the situation. But it's very useful to have the
model there that, in the event that other countries
reciprocally take seriously the drafting of tax legislation,
the collection of taxes, and so forth, as we do, then we offer
comparable regimes.
Just let me ask, for sake of curiosity, Mr. Barthold, are
there any specific provisions in the agreements before us
today, albeit a limited number, which you think ought to be
consistently included, or, for that matter, excluded from
treaties with similarly situated countries? Are there any new
features or things that you would like to highlight further in
the treaties we're discussing today?
Mr. Barthold. Thank you, Mr. Chairman.
We did highlight in our written materials and in my
testimony, changes in provisions that we think are potentially
very important for the committee: strengthened--as I noted a
couple of times, strengthened limitation on benefit provisions,
a new look at public trading, substantial presence, and
tightening the notion of nexus between the taxpayer and the
residence country. I think it is fair to say our staff viewed
those all as very positive moves, adding more clarity, and, at
least conceptually--of course, they have not been tested in
practice yet, but at least conceptually--adding more strength
to the result that the Treasury Department is trying to
achieve.
Those would be some main things I would highlight.
The Chairman. As I listened to your testimony, I jotted
down the substantial-presence situation, which is certainly
logical, this nexus of the taxpayer with the country. And
clearly that is emphasized in what we're considering today.
These are principles that have application that I presume will
reemerge in the model treaty, but might be worthy underlining
today.
Many recent tax treaties matters strengthen the so-called
``anti-treaty-shopping provisions.'' Do you believe the anti-
treaty-shopping provisions, for example, as in the Swedish
protocol we're talking about today, are effective in preventing
companies or persons not intended to receive these treaty
benefits from taking unfair advantage of the situation?
Mr. Barthold. Well, Mr. Chairman, we should note the
provisions in the Swedish protocol before us today are quite
similar also to those provisions of the Netherlands protocol of
a year ago. And so, we might want to think of those two as sort
of a package reflecting some new attempts to lay out these
limitations and anti-treaty-shopping provisions. So, since it
is brand new, we clearly cannot assess the effectiveness, but I
think it is certainly clear to say that by placing this
emphasis on nexus, and some of the increased exchange of
information that goes along with it, that conceptually a
stronger provision has been included in these two instances.
But, as with everything new, it is too soon to tell.
The Chairman. Yes. But these are two significant treaties.
The Netherlands, as we all observed last year, was a very large
treaty. Our investments and trade with the Netherlands are very
significant. And Sweden, likewise. We've illustrated today the
amount of investment and trade we currently have.
Mr. Barthold, you've noted in your testimony and your
discussion that the tax-avoidance test in the past maybe has
been supplanted by a new test, which appears in the American
Jobs Creation Act. The Treasury Department has explained that
the language for the old test can be interpreted to be
consistent with the new test. But I gather from your testimony
you're not totally satisfied with that explanation. Can you
illuminate considerations that we ought to have as we proceed
down that trail?
Mr. Barthold. Well, the Joint Committee staff's degree of
dissatisfaction expressed is relative only because we like
perfection in everything, even if we are not always able to
achieve it. We agree with the Treasury--that the Treasury's
interpretation in the language of the proposed French income-
tax protocol, the French estate-, gift-, and inheritance-tax
protocol, and the proposed Bangladesh treaty, is a reasonable
interpretation. However, I think we do have to say that in the
Swedish protocol, Treasury has provided better and more precise
language in the sense that it more clearly adapts or fits with
the direction that the Congress took in the expatriation
provisions of section 877 in the American Jobs Creation Act.
So, in that sense, for future treaties--and we would hope that
your committee agrees--I am sure the intent of the Treasury
would be to follow language such as that developed in the
Swedish protocol.
The Chairman. Ms. Brown, is that likely to be your intent,
or that of your cohorts at Treasury?
Ms. Brown. Thank you, Mr. Chairman.
Yes, certainly we intend to do that in future treaties. And
we would have done it in these other three agreements.
Bangladesh was actually signed before the legislation was
changed. The French protocols were signed after, but had gone
through all the approval processes, and to go back at that
point to try to change it, I think, would have slowed things
down. They had been in the works for some time.
No doubt that, hopefully, we'll be talking to the French
about other improvements, and in that context, we may bring
this up again.
The Chairman. Very well.
Let me begin to question Mr. Reinsch by observing his
comment that I think each of the other panelists reflects. Even
if a person or a business has some objection to some specific
provision of the work we're looking at today, it would be
unwise to reject the whole affair on the basis of that. As Mr.
Barthold said, we're seeking perfection, and may not have quite
achieved that in each provision, but, on the whole, as we take
a look at these instruments, they appear to be substantial
advances. And I want to ask you, Mr. Reinsch, for the record,
can you, having taken a look at these specific agreements
today, cite any benefits that you can see to American business
and investment in the respective jurisdictions we're talking
about?
Mr. Reinsch. Thank you, Mr. Chairman.
We believe, with respect to these particular treaties and
protocols, the benefits, while there are some specific ones--
and I'll mention one or two--the largest benefit is the
continued harmonization, if you will, of tax systems, and, in
particular, the continued march, as we see it, toward a zero-
withholding status in a number of other countries. While the
practical applications of that, in the Swedish case, are not
great, because the Swedes have already done that unilaterally,
we think adding that principle to this treaty will facilitate
our ability to do that with respect to some other countries,
particularly in the EU, where we've not yet achieved that goal.
So, it's building blocks, if you will, for a stronger
foundation.
With respect to the French, we particularly noted a number
of the pension provisions which we think will produce the kind
of parity, if you will, amongst their nationals here, and ours
there, that Ms. Brown alluded to. We think this is important
because our companies see this as an issue we--you and I have
discussed in other fora, I believe, Mr. Chairman--the
increasing movement of personnel all over the world. It's a
topic in the Dohar Round of multilateral trade negotiations.
It's a subject of congressional debate right now. We would like
to see that movement facilitated.
We view the movement of personnel as a little bit like
movement of capital, an opportunity for companies to deploy
their resources most efficiently. To the extent that people
would, for example, lose pension benefits or be in an adverse
tax position if they moved, we would like to see those
differences eliminated. And to the extent this treaty does that
with respect to France, we think that's a good thing. I don't
think it's a measurable benefit in the short term, but we
think, in the long term, it will facilitate the movement of
people, particularly senior people, around the world. And
that's good.
With respect to the Bangladesh treaty, I would simply say
that we applaud the Treasury entering into tax treaties with
developing countries. It encourages them to develop robust tax
systems, which is in all of our interest.
The Chairman. Well, thank you very much for those specific
thoughts about these treaties, as well as their potential
general application.
Let me just ask you the same question I've asked the other
panelists. As we move toward the model treaty, what additional
advice and counsel do you have, for the public record, of what
we ought to be hoping for?
Mr. Reinsch. Well, first let me say--Ms. Brown can speak
for her side--we feel we have a very good relationship with the
Treasury Department right now, and we have not hesitated to
supply that kind of advice frequently in the past, and we will
continue to do so.
I think the issue that I would touch on is the same one
that you have raised in your prior questions to the other
witnesses, Mr. Chairman, and that's the zero-withholding issue.
As a matter of principle, we support the expansion of that
concept globally, and would like to see it in all the treaties.
That said, we, nonetheless, support the Bangladesh treaty, even
though it doesn't get there. And we certainly sympathize with
Ms. Brown's and the Treasury Department's situation in not
wanting to do that in certain situations, depending, among
other things, on how robust the other party's tax system is.
So, we don't fall on our sword on this issue, but if the
question is, What would we like to see in the model treaty?--
yes, we would like to see that in the model treaty.
The Chairman. You have mentioned the communication you have
with Treasury. You're able to communicate on behalf of American
business and individual taxpayers. Please share your own
experience of how robust those tax systems are, or your
findings, as practical businesspeople.
Mr. Reinsch. We are, Mr. Chairman. In particular, we've
been very pleased with our relationship with Ms. Brown and with
the Treasury. With respect to how to focus the negotiations,
going forward, every year we survey our tax committee members,
asking them what countries they're particularly interested in,
and, with respect to those countries, what issues they're
particularly interested in. And we regularly supply that
information to the Treasury. We are pleased that the Treasury
makes a good-faith effort to pursue our recommendations. They
don't always succeed. Canada has been at the top of our list
for a long time, and they're not there yet, but we appreciate
the effort, nonetheless, and we would like to reinforce that.
And we intend to keep on providing that kind of advice. And I
think there's been a healthy dialogue. The Treasury has not
been shy about telling us when they don't agree with us, and I
think we've had a good exchange of views. We learn from them,
just as I hope they learn from us.
The Chairman. In addition to Canadian friends, what other
countries would you recommend as worthy of special attention,
presently?
Mr. Reinsch. Well, the other big one for us is Brazil, but
we're not having a lot of luck in that respect.
The Chairman. I see. What seems to be the dilemma?
Mr. Reinsch. I have to defer to Ms. Brown on the dilemma.
The Chairman. Oh, I see.
Mr. Reinsch. I think the dilemma's at their end, not at our
end.
The Chairman. But, anyway, you're recommending Brazil, and
that was really the gist of my question, as you try to take a
look at additional trading partners with which we might make
significant headway. And so, that may require some negotiation
with Brazilians so that their system is as ``robust,'' to use
that expression, as should be required.
Mr. Reinsch, what particular concerns would your members
like to raise? We've talked about the new tax treaty and the
zero-withholding situation, so obviously that is something
that's important. Please comment, generally, on effective or
ineffective provisions as they pertain to treaties that you
have looked at or advice that you're presently giving to
Treasury.
Mr. Reinsch. I think with respect to tax treaties, Mr.
Chairman, we really rest on the zero-withholding issue. That's
the single-most important thing to us, and we've already
discussed that in detail here. So, I won't harp on it.
Many of the provisions, of course, have to do with
enforcement and adjudication issues, and we welcome what the
Treasury is doing. We believe in strong enforcement. We don't
really take positions on that.
Otherwise, in general, to the extent that you can, in
specific cases, as in the French case, address pension issues
where there is no parity, we support that, but I think that's
hard to articulate as a general principle, because it really is
specific to whatever country we're negotiating with at the
time.
The Chairman. Let me just ask any of the three of you, or
all, as the case may be. The tax treaties and protocols we're
discussing today are important, in terms of equity for
individuals and businesses, but, at least from the standpoint
of our committee, they are also important in terms of our
overall public diplomacy. Public diplomacy is often mentioned
in other contexts, but it appears to me that we have an
example, as a practical effect, because of the tens of
thousands, maybe even more, who are affected, really, in their
everyday lives and in their business transactions. And the
impression that other countries, I hope, gain from this
discussion, as well as from the practical work which you're
describing, is that our country does work for fairness and for
equity with every country all over the world that has similar
objectives.
I'm just curious whether you see what you're doing in that
context and would even offer more illumination as to how
America's role in the world, and the perceptions of our
country, are enhanced by these treaties.
Ms. Brown, would you make a comment on that?
Ms. Brown. Thank you, Mr. Chairman.
It is an interesting question. We--and one of the things
that we haven't talked about here, because we're looking at
bilateral treaties, is some of the multilateral efforts we do.
And the United States actually has a fairly small tax-treaty
network. And, in part, that's because our tax system is so
complex that negotiating these agreements takes a lot of time.
But we participate, through the Organization for Economic
Cooperation and Development and also the U.N., in outreach to
developing countries through a global forum the OECD holds each
year on tax treaties, developing tax-treaty policy, and also I
participate in the U.N.'s group on international cooperation.
And I think that those efforts, in particular, help to
demonstrate this fairness. And we are open to developing
countries negotiating treaties with us when they're ready. And
I think we make that clear.
So, I think it is an important aspect of our tax treaty--of
American diplomacy that we do these agreements. Not every
country is going to be able to do one. Sometimes systems are
just very different, and it's not going to be possible to reach
a conclusion. That's certainly true with Brazil. Brazil has,
certainly, a robust tax system. There's no question. It's maybe
a little too robust. They're not willing to give up--make some
concessions that we would like. And so, that's really the
problem there. But we would like to increase our ties with
Latin America. We think this is an important aspect of that.
We'd like to increase our ties with Asian countries. And so, it
is part, a big part, of our international diplomacy.
The Chairman. Do either of you have a comment on that
question? Mr. Barthold?
Mr. Barthold. Mr. Chairman, I personally am not a
significant world traveler, and so in terms of public
diplomacy, it is more likely that your committee members and
staff would hear the feedback, because you are constantly
dealing with representatives of foreign governments and with
our embassy personnel reporting on our relations. And so, you
and your staff would actually have a much better sense of that
than I. Ms. Brown, of course, engages in these negotiations;
and so, gets some direct feedback in the NFTC. Their members
are on the ground abroad; and so, they would also have a sense.
But my committee staff do not really get that direct sense----
The Chairman. Well, the Joint Committee, in other words, is
really examining more of the quality of the documents and its
consistency with American law and practice.
Mr. Barthold (continuing). ----That's a fair assessment.
The Chairman. Mr. Reinsch, do you have any thoughts about
this?
Mr. Reinsch. Only, Mr. Chairman, that these things don't
make the front page, as some of our other public-diplomacy
efforts do, as you well know. But, from our perspective,
they're very important. Most large companies, which are our
members, devote a substantial amount of their internal
resources to tax issues and tax policy, both, trying to, as you
might imagine, minimize taxation in every jurisdiction. And
taxes are an important consideration when one goes into or
expands or contracts one's enterprise somewhere else. So, how
these things work out are very important to our companies and
also to their employees in other countries.
You haven't asked about relative benefit. And I think the
answer to the unasked question is, these things are not
supposed to produce enormous benefit to us, and not to the
other party; they're designed to create parity and to equalize
the situation. But I think it's clear, in the case of these
treaties, as well as some of the others that I've testified on,
that there are very clear benefits for some of the foreign
corporations, in doing business here. And I can tell you, from
my conversations with them--some of whom, by the way, have
American subsidiaries that are our members--that the
willingness of the United States to undertake these kinds of
negotiations and eliminate these inequities is very much
appreciated. As I said, it's not a front-page issue, and it
doesn't make the TV news, but, in corporate circles, these
documents and agreements are very important, and the network
that we are creating is a much appreciated one.
The Chairman. Well, I appreciate that testimony. I would
just say, anecdotally, I had an experience the other evening at
the beginning of the Cezanne in Provence exhibition, which is a
remarkable exhibition in our National Gallery. The French
Ambassador was present, but so were tens of citizens of Aix en
Provence, where the exhibit will be going, and other persons
from France who were really instrumental in this being the
opening of something which is a centennial for Cezanne's birth
and that great body of artwork. But the sponsor of the
situation, the leading sponsor, was DaimlerChrysler. This
reflects the numbers of persons who were there who travel
regularly, almost commute to Germany and back to various parts
of the United States where Americans are employed. This
illustrates how complex business is, and how important that it
be expedited well, and with fairness. The volume of contacts,
just business-wise, that assembled in that room to begin the
exhibition indicated how small the world is, in one respect,
and how intertwined we are in all the complexities that we're
talking about today. That probably undergirded the investments
in that exhibit, the actual acquisition of all the artwork.
Some thoughts that have been given about artwork as it enters
into taxation and so forth. So, as I say, this simply was an
anecdotal experience, but it struck home, again, a part of what
we're discussing today, and its illustrated importance.
Now, let me just, indicate that Americans want to make
certain that our tax code is fair. You've mentioned, Ms. Brown,
that it also is complex. One of the problems that you face--and
you've just touched upon this today--as you visit with other
countries and they're confronted--usually not the first time;
they have experts who are aware of what Americans are doing,
our tax debates--but this is not easy to get your arms around
to see what reciprocally might be of advantage or what things
might be worked out. It may seem such a daunting task that, for
a while, you may not make great headway. But I admire your
ability to explain this to others. We may or may not simplify
the tax code, ever, as the Congress moves. And the criticism is
that we have added additional pages, usually, in most sessions,
which is of discomfiture to some persons everywhere. We're
talking about something here that is complex, and yet has to be
made relatively simple so there is a perception on the part of
Americans that special advantage is not being given to foreign
nationals. On the other hand, as Mr. Reinsch has expressed,
we're not talking, today, about the United States coming out
well ahead of almost everybody we have negotiated with. Rather,
it has been a question of how we can balance--whether it's the
robust quality or the fairness or the coverage or the
comprehensive nature--these instruments to bring about
something which is important.
I would just observe that usually our hearings--and this is
no exception--on these subjects are covered by a few stalwarts
of the press, but not by many. The number of stories arising
from the Japanese and the Netherlands treaties and others that
were considered in recent times have been relatively small, in
terms of American comprehension, except for a few professionals
and a number of companies that have been involved. But I would
say that's not always the case abroad as people from our staffs
collect the stories that will occur from this hearing. I
suspect, in Sweden and in France and in Bangladesh, we would be
surprised with the interest. This is why I discussed the
public-diplomacy aspect. This may seem dry as dust to most
American observers and readers, but not so with situations
where the United States of America, its Treasury Department,
the Joint Committee, its businesses are all involved in an open
discussion of things which are very important to the growth of
those economies and their intersection with ours.
So, I appreciate the fact that you have taken time and
care. The testimony you've offered, I think, is excellent. And
you've been so forthcoming in your responses to our questions.
If any of you have further testimony, why, proceed.
And, otherwise, we will bring the hearing to an
adjournment. Are there any further questions or answers?
[No response.]
The Chairman. Well, we thank you all, and the hearing is
adjourned.
[Whereupon, at 11:05 a.m., the hearing was adjourned.]