[JPRT 106-10-99]
[From the U.S. Government Publishing Office]


                                                              JCS-10-99

                                     

                        [JOINT COMMITTEE PRINT]


 
                        EXPLANATION OF PROPOSED
                         INCOME TAX TREATY AND
                       PROPOSED PROTOCOL BETWEEN
                         THE UNITED STATES AND
                       THE REPUBLIC OF VENEZUELA

                        Scheduled for a Hearing

                               before the

                     COMMITTEE ON FOREIGN RELATIONS

                          UNITED STATES SENATE

                          ON OCTOBER 13, 1999

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED]


                            OCTOBER 8, 1999
                      JOINT COMMITTEE ON TAXATION

                      106th Congress, 1st Session
                                 ------                                
               HOUSE                               SENATE
BILL ARCHER, Texas,                  WILLIAM V. ROTH, Jr., Delaware,
  Chairman                             Vice Chairman
PHILIP M. CRANE, Illinois            JOHN H. CHAFEE, Rhode Island
WILLIAM M. THOMAS, California        CHARLES GRASSLEY, Iowa
CHARLES B. RANGEL, New York          DANIEL PATRICK MOYNIHAN, New York
FORTNEY PETE STARK, California       MAX BAUCUS, Montana
                     Lindy L. Paull, Chief of Staff
               Bernard A. Schmitt, Deputy Chief of Staff
                 Mary M. Schmitt, Deputy Chief of Staff
              Richard A. Grafmeyer, Deputy Chief of Staff
                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

 I. Summary...........................................................2

II. Overview of U.S. Taxation of International Trade and Investment and 
    U.S. Tax Treaties.................................................4

        A. U.S. Tax Rules........................................     4

        B. U.S. Tax Treaties.....................................     5

III.Explanation of Proposed Treaty and Proposed Protocol..............8


        Article 1.  General Scope................................     8
        Article 2.  Taxes Covered................................    10
        Article 3.  General Definitions..........................    10
        Article 4.  Residence....................................    12
        Article 5.  Permanent Establishment......................    15
        Article 6.  Income From Immovable Property (Real 
            Property)............................................    17
        Article 7.  Business Profits.............................    18
        Article 8.  Shipping and Air Transport...................    22
        Article 9.  Associated Enterprises.......................    23
        Article 10. Dividends....................................    23
        Article 11. Interest.....................................    27
        Article 11A. Branch Tax..................................    30
        Article 12. Royalties....................................    31
        Article 13. Gains........................................    33
        Article 14. Independent Personal Services................    34
        Article 15. Dependent Personal Services..................    35
        Article 16. Directors' Fees..............................    36
        Article 17. Limitation on Benefits.......................    36
        Article 18. Artistes and Sportsmen.......................    41
        Article 19. Pensions, Social Security, Annuities, and 
            Child Support........................................    42
        Article 20. Government Service...........................    43
        Article 21. Students, Trainees, Teachers and Researchers    44
        Article 22. Other Income.................................    46
        Article 23. Capital......................................    46
        Article 24. Relief from Double Taxation..................    47
        Article 25. Non-Discrimination...........................    48
        Article 26. Mutual Agreement Procedure...................    49
        Article 27. Exchange of Information......................    50
        Article 28. Diplomatic Agents and Consular Officers.....    52
        Article 29. Entry Into Force.............................    52
        Article 30. Termination..................................    52

IV. Issues...........................................................54

        A. Developing Country Concessions........................    54

        B. Treaty Shopping.......................................    56

        C. Venezuelan Territorial Tax System.....................    57

        D. Stability of Venezuelan Law...........................    59
                              INTRODUCTION

    This pamphlet,1 prepared by the staff of the 
Joint Committee on Taxation, describes the proposed income tax 
treaty, as supplemented by the proposed protocol, between the 
United States of America and the Republic of Venezuela 
(``Venezuela''). The proposed treaty and proposed protocol were 
signed on January 25, 1999.2 The Senate Committee on 
Foreign Relations has scheduled a public hearing on the 
proposed treaty and proposed protocol on October 13, 1999.
---------------------------------------------------------------------------
    \1\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, Explanation of Proposed Income Tax Treaty and Proposed 
Protocol Between the United States and the Republic of Venezuela (JCS-
10-99), October 8, 1999.
    \2\ For a copy of the proposed treaty and proposed protocol, see 
Senate Treaty Doc. 106-3, June 29, 1999.
---------------------------------------------------------------------------
    Part I of the pamphlet provides a summary with respect to 
the proposed treaty and proposed protocol. Part II provides a 
brief overview of U.S. tax laws relating to international trade 
and investment and of U.S. income tax treaties in general. Part 
III contains an article-by-article explanation of the proposed 
treaty and proposed protocol. Part IV contains a discussion of 
issues with respect to the proposed treaty and proposed 
protocol.

                               I. SUMMARY

    The principal purposes of the proposed income tax treaty 
between the United States and Venezuela are to reduce or 
eliminate double taxation of income earned by residents of 
either country from sources within the other country and to 
prevent avoidance or evasion of the taxes of the two countries. 
The proposed treaty also is intended to promote close economic 
cooperation between the two countries and to eliminate possible 
barriers to trade and investment caused by overlapping taxing 
jurisdictions of the two countries.
    As in other U.S. tax treaties, these objectives principally 
are achieved through each country's agreement to limit, in 
certain specified situations, its right to tax income derived 
from its territory by residents of the other country.
    For example, the proposed treaty contains provisions under 
which each country generally agrees not to tax business income 
derived from sources within that country by residents of the 
other country unless the business activities in the taxing 
country are substantial enough to constitute a permanent 
establishment or fixed base (Articles 7 and 14). Similarly, the 
proposed treaty contains ``commercial visitor'' exemptions 
under which residents of one country performing personal 
services in the other country will not be required to pay tax 
in the other country unless their contact with the other 
country exceeds specified minimums (Articles 14, 15, 18 and 
21). The proposed treaty provides that dividends, interest, 
royalties, and certain capital gains derived by a resident of 
either country from sources within the other country generally 
may be taxed by both countries (Articles 10, 11, 12 and 13); 
however, the rate of tax that the source country may impose on 
a resident of the other country on dividends, interest, and 
royalties generally will be limited by the proposed treaty 
(Articles 10, 11, and 12).
    In situations where the country of source retains the right 
under the proposed treaty to tax income derived by residents of 
the other country, the proposed treaty generally provides for 
relief from the potential double taxation through the allowance 
by the country of residence of a tax credit for certain foreign 
taxes paid to the other country, or alternatively, in the case 
of Venezuela, an exemption from Venezuelan income tax (Article 
24).
    The proposed treaty contains the standard provision (the 
``saving clause'') included in U.S. tax treaties pursuant to 
which each country retains the right to tax its residents and 
citizens as if the treaty had not come into effect (Article 1). 
In addition, the proposed treaty contains the standard 
provision providing that the treaty may not be applied to deny 
any taxpayer any benefits the taxpayer would be entitled to 
under the domestic law of a country or under any other 
agreement between the two countries (Article 1).
    The proposed treaty also contains a detailed limitation on 
benefits provision to prevent the inappropriate use of the 
treaty by third-country residents (Article 17).
    No income tax treaty between the United States and 
Venezuela is in force at present. The proposed treaty is 
similar to other recent U.S. income tax treaties, the 1996 U.S. 
model income tax treaty (``U.S. model''), the model income tax 
treaty of the Organization for Economic Cooperation and 
Development (``OECD model''), and the United Nations Model 
Double Taxation Convention between Developed and Developing 
Countries (the ``U.N. model''). However, the proposed treaty 
contains certain substantive deviations from those treaties and 
models.

II. OVERVIEW OF U.S. TAXATION OF INTERNATIONAL TRADE AND INVESTMENT AND 
                           U.S. TAX TREATIES

    This overview briefly describes certain U.S. tax rules 
relating to foreign income and foreign persons that apply in 
the absence of a U.S. tax treaty. This overview also discusses 
the general objectives of U.S. tax treaties and describes some 
of the modifications to U.S. tax rules made by treaties.

                           A. U.S. Tax Rules

    The United States taxes U.S. citizens, residents, and 
corporations on their worldwide income, whether derived in the 
United States or abroad. The United States generally taxes 
nonresident alien individuals and foreign corporations on all 
their income that is effectively connected with the conduct of 
a trade or business in the United States (sometimes referred to 
as ``effectively connected income''). The United States also 
taxes nonresident alien individuals and foreign corporations on 
certain U.S.-source income that is not effectively connected 
with a U.S. trade or business.
    Income of a nonresident alien individual or foreign 
corporation that is effectively connected with the conduct of a 
trade or business in the United States generally is subject to 
U.S. tax in the same manner and at the same rates as income of 
a U.S. person. Deductions are allowed to the extent that they 
are related to effectively connected income. A foreign 
corporation also is subject to a flat 30-percent branch profits 
tax on its ``dividend equivalent amount,'' which is a measure 
of the effectively connected earnings and profits of the 
corporation that are removed in any year from the conduct of 
its U.S. trade or business. In addition, a foreign corporation 
is subject to a flat 30-percent branch-level excess interest 
tax on the excess of the amount of interest that is deducted by 
the foreign corporation in computing its effectively connected 
income over the amount of interest that is paid by its U.S. 
trade or business.
    U.S.-source fixed or determinable annual or periodical 
income of a nonresident alien individual or foreign corporation 
(including, for example, interest, dividends, rents, royalties, 
salaries, and annuities) that is not effectively connected with 
the conduct of a U.S. trade or business is subject to U.S. tax 
at a rate of 30 percent of the gross amount paid. Certain 
insurance premiums earned by a nonresident alien individual or 
foreign corporation are subject to U.S. tax at a rate of 1 or 4 
percent of the premiums. These taxes generally are collected by 
means of withholding.
    Specific statutory exemptions from the 30-percent 
withholding tax are provided. For example, certain original 
issue discount and certain interest on deposits with banks or 
savings institutions are exempt from the 30-percent withholding 
tax. An exemption also is provided for certain interest paid on 
portfolio debt obligations. In addition, income of a foreign 
government or international organization from investments in 
U.S. securities is exempt from U.S. tax.
    U.S.-source capital gains of a nonresident alien individual 
or a foreign corporation that are not effectively connected 
with a U.S. trade or business generally are exempt from U.S. 
tax, with two exceptions: (1) gains realized by a nonresident 
alien individual who is present in the United States for at 
least 183 days during the taxable year, and (2) certain gains 
from the disposition of interests in U.S. real property.
    Rules are provided for the determination of the source of 
income. For example, interest and dividends paid by a U.S. 
citizen or resident or by a U.S. corporation generally are 
considered U.S.-source income. Conversely, dividends and 
interest paid by a foreign corporation generally are treated as 
foreign-source income. Special rules apply to treat as foreign-
source income (in whole or in part) interest and dividends paid 
by certain U.S. corporations with foreign businesses and to 
treat as U.S.-source income (in whole or in part) dividends 
paid by certain foreign corporations with U.S. businesses. 
Rents and royalties paid for the use of property in the United 
States are considered U.S.-source income.
    Because the United States taxes U.S. citizens, residents, 
and corporations on their worldwide income, double taxation of 
income can arise when income earned abroad by a U.S. person is 
taxed by the country in which the income is earned and also by 
the United States. The United States seeks to mitigate this 
double taxation generally by allowing U.S. persons to credit 
foreign income taxes paid against the U.S. tax imposed on their 
foreign-source income. A fundamental premise of the foreign tax 
credit is that it may not offset the U.S. tax liability on 
U.S.-source income. Therefore, the foreign tax credit 
provisions contain a limitation that ensures that the foreign 
tax credit offsets only the U.S. tax on foreign-source income. 
The foreign tax credit limitation generally is computed on a 
worldwide basis (as opposed to a ``per-country'' basis). The 
limitation is applied separately for certain classifications of 
income. In addition, a special limitation applies to the credit 
for foreign taxes imposed on foreign oil and gas extraction 
income.
    For foreign tax credit purposes, a U.S. corporation that 
owns 10 percent or more of the voting stock of a foreign 
corporation and receives a dividend from the foreign 
corporation (or is otherwise required to include in its income 
earnings of the foreign corporation) is deemed to have paid a 
portion of the foreign income taxes paid by the foreign 
corporation on its accumulated earnings. The taxes deemed paid 
by the U.S. corporation are included in its total foreign taxes 
paid and its foreign tax credit limitation calculations for the 
year the dividend is received.

                          B. U.S. Tax Treaties

    The traditional objectives of U.S. tax treaties have been 
the avoidance of international double taxation and the 
prevention of tax avoidance and evasion. Another related 
objective of U.S. tax treaties is the removal of the barriers 
to trade, capital flows, and commercial travel that may be 
caused by overlapping tax jurisdictions and by the burdens of 
complying with the tax laws of a jurisdiction when a person's 
contacts with, and income derived from, that jurisdiction are 
minimal. To a large extent, the treaty provisions designed to 
carry out these objectives supplement U.S. tax law provisions 
having the same objectives; treaty provisions modify the 
generally applicable statutory rules with provisions that take 
into account the particular tax system of the treaty partner.
    The objective of limiting double taxation generally is 
accomplished in treaties through the agreement of each country 
to limit, in specified situations, its right to tax income 
earned from its territory by residents of the other country. 
For the most part, the various rate reductions and exemptions 
agreed to by the source country in treaties are premised on the 
assumption that the country of residence will tax the income at 
levels comparable to those imposed by the source country on its 
residents. Treaties also provide for the elimination of double 
taxation by requiring the residence country to allow a credit 
for taxes that the source country retains the right to impose 
under the treaty. In addition, in the case of certain types of 
income, treaties may provide for exemption by the residence 
country of income taxed by the source country.
    Treaties define the term ``resident'' so that an individual 
or corporation generally will not be subject to tax as a 
resident by both the countries. Treaties generally provide that 
neither country will tax business income derived by residents 
of the other country unless the business activities in the 
taxing jurisdiction are substantial enough to constitute a 
permanent establishment or fixed base in that jurisdiction. 
Treaties also contain commercial visitation exemptions under 
which individual residents of one country performing personal 
services in the other will not be required to pay tax in that 
other country unless their contacts exceed certain specified 
minimums (e.g., presence for a set number of days or earnings 
in excess of a specified amount). Treaties address passive 
income such as dividends, interest, and royalties from sources 
within one country derived by residents of the other country 
either by providing that such income is taxed only in the 
recipient's country of residence or by reducing the rate of the 
source country's withholding tax imposed on such income. In 
this regard, the United States agrees in its tax treaties to 
reduce its 30-percent withholding tax (or, in the case of some 
income, to eliminate it entirely) in return for reciprocal 
treatment by its treaty partner.
    In its treaties, the United States, as a matter of policy, 
generally retains the right to tax its citizens and residents 
on their worldwide income as if the treaty had not come into 
effect. The United States also provides in its treaties that it 
will allow a credit against U.S. tax for income taxes paid to 
the treaty partners, subject to the various limitations of U.S. 
law.
    The objective of preventing tax avoidance and evasion 
generally is accomplished in treaties by the agreement of each 
country to exchange tax-related information. Treaties generally 
provide for the exchange of information between the tax 
authorities of the two countries when such information is 
necessary for carrying out provisions of the treaty or of their 
domestic tax laws. The obligation to exchange information under 
the treaties typically does not require either country to carry 
out measures contrary to its laws or administrative practices 
or to supply information that is not obtainable under its laws 
or in the normal course of its administration or that would 
reveal trade secrets or other information the disclosure of 
which would be contrary to public policy. The Internal Revenue 
Service (the ``IRS''), and the treaty partner's tax 
authorities, also can request specific tax information from a 
treaty partner. This can include information to be used in a 
criminal investigation or prosecution.
    Administrative cooperation between countries is enhanced 
further under treaties by the inclusion of a ``competent 
authority'' mechanism to resolve double taxation problems 
arising in individual cases and, more generally, to facilitate 
consultation between tax officials of the two governments.
    Treaties generally provide that neither country may subject 
nationals of the other country (or permanent establishments of 
enterprises of the other country) to taxation more burdensome 
than that it imposes on its own nationals (or on its own 
enterprises). Similarly, in general, neither treaty country may 
discriminate against enterprises owned by residents of the 
other country.
    At times, residents of countries that do not have income 
tax treaties with the United States attempt to use a treaty 
between the United States and another country to avoid U.S. 
tax. To prevent third-country residents from obtaining treaty 
benefits intended for treaty country residents only, treaties 
generally contain an ``anti-treaty shopping'' provision that is 
designed to limit treaty benefits to bona fide residents of the 
two countries.

       III. EXPLANATION OF PROPOSED TREATY AND PROPOSED PROTOCOL

    A detailed, article-by-article explanation of the proposed 
income tax treaty between the United States and Venezuela, as 
supplemented by the proposed protocol, is set forth below.
Article 1. General Scope
    The general scope article describes the persons who may 
claim the benefits of the proposed treaty. The proposed treaty 
generally applies to residents of the United States and to 
residents of Venezuela, with specific modifications to such 
scope provided in other articles (e.g., Article 20 (Government 
Service), Article 25 (Non-Discrimination) and Article 27 
(Exchange of Information)). The determination of whether a 
person is a resident of the United States or Venezuela is made 
under the provisions of Article 4 (Residence).
    The proposed treaty provides that it does not restrict in 
any manner any exclusion, exemption, deduction, credit, or 
other allowance accorded by internal law or by any other 
agreement between the United States and Venezuela. Thus, the 
proposed treaty will not apply to increase the tax burden of a 
resident of either the United States or Venezuela. According to 
the Treasury Department's Technical Explanation (hereinafter 
referred to as the ``Technical Explanation''), the fact that 
the proposed treaty only applies to a taxpayer's benefit does 
not mean that a taxpayer may select inconsistently among treaty 
and internal law provisions in order to minimize its overall 
tax burden. In this regard, the Technical Explanation sets 
forth the following example. Assume a resident of Venezuela has 
three separate businesses in the United States. One business is 
profitable and constitutes a U.S. permanent establishment. The 
other two businesses generate effectively connected income as 
determined under the Internal Revenue Code (the ``Code''), but 
do not constitute permanent establishments as determined under 
the proposed treaty; one business is profitable and the other 
business generates a net loss. Under the Code, all three 
businesses would be subject to U.S. income tax, in which case 
the losses from the unprofitable business could offset the 
taxable income from the other businesses. On the other hand, 
only the income of the business which gives rise to a permanent 
establishment is taxable by the United States under the 
proposed treaty. The Technical Explanation makes clear that the 
taxpayer may not invoke the proposed treaty to exclude the 
profits of the profitable business that does not constitute a 
permanent establishment and invoke U.S. internal law to claim 
the loss of the unprofitable business that does not constitute 
a permanent establishment to offset the taxable income of the 
permanent establishment.3
---------------------------------------------------------------------------
    \3\ See Rev. Rul. 84-17, 1984-1 C.B. 308.
---------------------------------------------------------------------------
    The proposed treaty provides that the dispute resolution 
procedures under its mutual agreement procedure article 
(Article 26) (and not the corresponding provisions of any other 
agreement to which the United States and Venezuela are parties) 
exclusively apply in determining whether a measure is within 
the scope of the proposed treaty. Unless the competent 
authorities agree that a taxation measure is outside the scope 
of the proposed treaty, only the proposed treaty's 
nondiscrimination rules, and not the nondiscrimination rules of 
any other agreement in effect between the United States and 
Venezuela, generally apply to that law or other measure. The 
only exception to this general rule is such national treatment 
or most favored nation obligations as may apply to trade in 
goods under the General Agreement on Tariffs and Trade. For 
purposes of this provision, the term ``measure'' means a law, 
regulation, rule, procedure, decision, administrative action, 
or any other similar provision or action.
    Like all U.S. income tax treaties and the U.S. model, the 
proposed treaty includes a ``saving clause.'' Under this 
clause, with specific exceptions described below, the proposed 
treaty does not affect the taxation by either treaty country of 
its residents or its citizens. By reason of this saving clause, 
unless otherwise specifically provided in the proposed treaty, 
the United States will continue to tax its citizens who are 
residents of Venezuela as if the treaty were not in force. 
``Residents'' for purposes of the proposed treaty (and, thus, 
for purposes of the saving clause) includes persons defined as 
such in Article 4 (Residence), including corporations and other 
entities as well as individuals.
    The proposed protocol contains a provision under which the 
saving clause (and therefore the U.S. jurisdiction to tax) 
applies for U.S. tax purposes to a former U.S. citizen whose 
loss of citizenship status had as one of its principal purposes 
the avoidance of U.S. tax; such application is limited to the 
ten-year period following the loss of citizenship status. The 
proposed treaty also contains a provision under Article 17 
(Limitation on Benefits) which denies treaty benefits to former 
long-term residents of the United States for ten years 
following the loss of such residence status if such loss of 
status had as one of its principal purposes the avoidance of 
U.S. tax. Section 877 of the Code provides special rules for 
the imposition of U.S. income tax on former U.S. citizens and 
long-term residents for a period of ten years following the 
loss of citizenship or resident; these special tax rules apply 
to a former citizen or long-term resident only if his or her 
loss of U.S. citizenship or resident status had as one of its 
principal purposes the avoidance of U.S. income, estate or gift 
taxes. For purposes of applying the special tax rules to former 
citizens and long-term residents, individuals who meet a 
specified income tax liability threshold or a specified net 
worth threshold generally are considered to have lost 
citizenship or resident status for a principal purpose of U.S. 
tax avoidance.
    Exceptions to the saving clause are provided for the 
following benefits conferred by a treaty country: the allowance 
of corresponding adjustments when the profits of an associated 
enterprise are adjusted by the other country (Article 9, 
paragraph 2); relief from double taxation through the provision 
of a foreign tax credit or, in the case of Venezuela, an 
exemption of income from tax (Article 24); protection from 
discriminatory tax treatment (Article 25); and benefits under 
the mutual agreement procedures (Article 26). These exceptions 
to the saving clause permit residents and citizens of the 
United States or Venezuela to obtain such benefits of the 
proposed treaty with respect to their country of residence or 
citizenship.
    In addition, the saving clause does not apply to the 
following benefits conferred by one of the countries upon 
individuals who neither are citizens of that country nor have 
immigrant status in that country. Under this set of exceptions 
to the saving clause, the specified treaty benefits are 
available to, for example, a Venezuelan citizen who spends 
enough time in the United States to be taxed as a U.S. resident 
but who has not acquired U.S. immigrant status (i.e., does not 
hold a ``green card''). The benefits that are covered under 
this set of exceptions are the exemptions from host country tax 
for certain government service salaries and pensions (Article 
20), certain income received by visiting students, trainees, 
teachers and researchers (Article 21), and certain income of 
diplomats and consular officers (Article 28).
Article 2. Taxes Covered
    The proposed treaty generally applies to the income taxes 
of the United States and Venezuela. However, Article 27 
(Exchange of Information) generally is applicable to all taxes 
imposed by the United States and by Venezuela.
    In the case of the United States, the proposed treaty 
applies to the Federal income taxes imposed by the Code, but 
excludes social security taxes. Unlike many U.S. income tax 
treaties in force, but like the U.S. model, the proposed treaty 
applies to the accumulated earnings tax and the personal 
holding company tax. The proposed treaty generally does not 
apply to any U.S. State or local income taxes; however, Article 
25 (Non-Discrimination) applies to all taxes, including those 
imposed by state or local governments.
    In the case of Venezuela, the proposed treaty generally 
applies to the income tax and the business assets tax. Under 
Article 24 (Relief from Double Taxation), however, the United 
States is not required under the proposed treaty to grant a 
U.S. foreign tax credit for business assets taxes paid to 
Venezuela.
    The proposed treaty also contains a rule generally found in 
U.S. income tax treaties and the U.S., OECD and U.N. models 
which provides that the proposed treaty applies to any 
identical or substantially similar taxes that are imposed 
subsequently in addition to or in place of the taxes covered. 
The proposed treaty obligates the competent authority of each 
country to notify the competent authority of the other country 
of any significant changes in its internal tax laws, and of any 
official published material concerning the application of the 
proposed treaty. The Technical Explanation states that the term 
``significant'' means that changes must be reported that are 
significant to the operation of the proposed treaty.
Article 3. General Definitions
    The proposed treaty provides definitions of a number of 
terms for purposes of the proposed treaty. Certain of the 
standard definitions found in most U.S. income tax treaties are 
included in the proposed treaty.
    The term ``Venezuela'' means the Republic of Venezuela.
    The term ``United States'' means the United States of 
America, but does not include Puerto Rico, the Virgin Islands, 
Guam, or any other U.S. possession or territory. The Technical 
Explanation states that the term ``United States'' includes the 
territorial seas of the United States.
    The proposed protocol provides that when referred to in the 
geographical sense, ``Venezuela'' and ``United States'' include 
the areas of the seabed and subsoil adjacent to their 
respective territorial seas in which they may exercises rights 
in accordance with domestic legislation and international laws. 
The Technical Explanation states that the extension of these 
terms to areas adjacent to the territorial seas of the United 
States and Venezuela (as the case may be) applies to the extent 
that the United States or Venezuela exercises sovereignty in 
accordance with domestic legislation and international law for 
the purpose of natural resource exploration and exploitation of 
such areas. The Technical Explanation further states that the 
extension of such terms applies only if the person, property or 
activity to which the proposed treaty is being applied is 
connected with such natural resource exploration or 
exploitation.
    The terms ``a Contracting State'' and ``the other 
Contracting State'' mean the United States or Venezuela, 
according to the context in which such terms are used.
    The term ``person'' includes an individual, an estate, a 
trust, a partnership, a company, and any other body of persons. 
The Technical Explanation states that the term ``person'' 
includes Venezuelan ``entidades'' or ``colectividades,'' which 
are not legal persons under Venezuelan law, but are taxable 
persons for Venezuelan tax purposes.
    A ``company'' under the proposed treaty is any body 
corporate or any entity which is treated as a body corporate 
for tax purposes.
    The terms ``enterprise of a Contracting State'' and 
``enterprise of the other Contracting State'' mean, 
respectively, an enterprise carried on by a resident of a 
treaty country and an enterprise carried on by a resident of 
the other treaty country. The terms also include an enterprise 
carried on by a resident of a treaty country through an entity 
(such as a partnership) that is treated as fiscally transparent 
in that country. The Technical Explanation states that the 
definition in the proposed treaty is intended to make clear 
that an enterprise conducted by a fiscally transparent entity 
will be treated as carried on by a resident of a treaty country 
to the extent its partners or other owners are residents. The 
proposed treaty does not define the term ``enterprise.'' The 
Technical Explanation states that the term ``enterprise'' 
generally is understood to refer to any activity or set of 
activities that constitutes a trade or business.
    The proposed treaty provides that the term ``national'' 
means any individual possessing the nationality of the United 
States or Venezuela, and any legal person, association or other 
entities (including a Venezuelan ``entidad'' or 
``colectividad'') deriving their status as such from the laws 
in force in the United States or Venezuela.
    The term ``international operation of ships or aircraft'' 
means any transport by a ship or aircraft, except when such 
transport is solely between places within a country. This 
definition principally applies in the context of Article 8 
(Shipping and Air Transport), which refers to the term 
``operation of ships or aircraft in international traffic.'' 
The Technical Explanation states that such terms are understood 
to have the same meaning. The Technical Explanation also states 
that transport that constitutes international traffic includes 
any portion of the transport that is between two points within 
a country, even if the internal portion of the transport 
involves a transfer to a land vehicle or is handled by an 
independent contractor (provided that the original bills of 
lading include such portion of the transport).
    The U.S. ``competent authority'' is the Secretary of the 
Treasury or his delegate. The U.S. competent authority function 
has been delegated to the Commissioner of Internal Revenue, who 
has redelegated the authority to the Assistant Commissioner 
(International). On interpretative issues, the latter acts with 
the concurrence of the Associate Chief Counsel (International) 
of the IRS. The Venezuelan ``competent authority'' is the 
Integrated National Service of Tax Administration (Servicio 
Nacional Integrado de Administracion Tributaria--SENIAT), its 
authorized representative or the authority which is designated 
by the Ministry of Finance as a competent authority.
    The proposed treaty also contains the standard provision 
that, unless the context otherwise requires or the competent 
authorities agree to a common meaning pursuant to the 
provisions of the mutual agreement procedures of the proposed 
treaty (Article 26), all terms not defined in the proposed 
treaty have the meaning that they have under the laws of the 
country concerning the taxes to which the proposed treaty 
applies.
Article 4. Residence
    The assignment of a country of residence is important 
because the benefits of the proposed treaty generally are 
available only to a resident of one of the treaty countries as 
that term is defined in the proposed treaty. Furthermore, 
issues arising because of dual residency, including situations 
of double taxation, may be avoided by the assignment of one 
treaty country as the country of residence when under the 
internal laws of the treaty countries a person is a resident of 
both countries.
            Internal taxation rules
United States
    Under U.S. law, the residence of an individual is important 
because a resident alien, like a U.S. citizen, is taxed on his 
or her worldwide income, while a nonresident alien is taxed 
only on certain U.S.-source income and on income that is 
effectively connected with a U.S. trade or business. An 
individual who spends sufficient time in the United States in 
any year or over a three-year period generally is treated as a 
U.S. resident. A permanent resident for immigration purposes 
(i.e., a ``green card'' holder) also is treated as a U.S. 
resident.
    Under U.S. law, a company is taxed on its worldwide income 
if it is a ``domestic corporation.'' A domestic corporation is 
one that is created or organized in the United States or under 
the laws of the United States, a State, or the District of 
Columbia.
Venezuela
    Under Venezuelan law, individuals and corporations 
generally are taxed under a territorial-based system, that is, 
based on income from sources in Venezuela. The sourcing rules 
of Venezuela's territorial system generally apply to residents 
and nonresidents. However, the tax rates imposed on Venezuelan 
source income, as well as the manner in which the income is 
taxed (e.g., on a net or gross basis), differ for Venezuelan 
residents and nonresidents. Individuals are considered to be 
residents of Venezuela if they are present in Venezuela for 
more than 180 days in the current or preceding calendar year. A 
Venezuelan corporation is one that is registered under a 
commercial registry in Venezuela (i.e., incorporated in 
Venezuela).
            Proposed treaty rules
    The proposed treaty provides rules to determine whether a 
person is a resident of the United States or Venezuela for 
purposes of the proposed treaty.
    The proposed treaty generally defines ``resident of a 
Contracting State'' separately in the case of the United States 
and Venezuela, respectively, to determine whether a person is a 
resident of the United States or a resident of Venezuela for 
purposes of the proposed treaty. The Technical Explanation 
states that these separate definitions are provided due to 
differences in the structure of the U.S. and Venezuelan tax 
systems.
    Under the proposed treaty, a resident of the United States 
means any person who, under the laws of the United States, is 
liable to tax in the United States by reason of the person's 
domicile, residence, citizenship, place of incorporation, or 
any other criterion of a similar nature. The proposed treaty 
provides that a U.S. citizen or an alien admitted lawfully to 
the United States for permanent residence (a ``green card'' 
holder), who is not a resident of Venezuela under the basic 
residence rules, will be treated as a U.S. resident only if 
such individual has a permanent home or habitual abode in the 
United States. If such individual is a resident of Venezuela 
under the basic residence rules, he or she is considered to be 
a resident of both countries and his or her residence for 
purposes of the proposed treaty is determined under the tie-
breaker rules described below.
    Under the proposed treaty, a resident of Venezuela means 
any resident individual (``domiciliado''), any legal person 
that is created or organized under the laws of Venezuela, and 
any entity or collectivity (``entidad o colectividad'') formed 
under the laws of Venezuela which is not a legal person but is 
subject to the taxation applicable to corporations in 
Venezuela. The Technical Explanation states that those 
entidades and colectividades that are not taxed as corporations 
in Venezuela are treated as fiscally transparent entities under 
Venezuelan law and, thus, are subject to the special rules for 
such fiscally transparent entities described below.
    The proposed protocol provides that the term ``resident of 
a Contracting State'' also includes the United States or 
Venezuela and any of its political subdivisions or local 
authorities.
    The proposed protocol also provides a special rule to treat 
as residents of a treaty country certain organizations that 
generally are exempt from tax in that country. Under this rule, 
pension trusts and any other organizations that are constituted 
and operated exclusively to provide pension benefits, or for 
religious, charitable, scientific, artistic, cultural, or 
educational purposes and that are residents of that country 
according to its laws, are treated as residents of such country 
notwithstanding that all or part of its income may be exempt 
from tax under the domestic law of that country.
    The proposed treaty provides a special rule for fiscally 
transparent entities. Under this rule, an item of income, 
profit or gain derived through an entity that is fiscally 
transparent under the laws of either country will be considered 
to be derived by a resident of a country to the extent that the 
item is treated, for purposes of the tax laws of such country, 
as the income, profit, or gain of a resident of such country. 
The Technical Explanation states that in the case of the United 
States, such fiscally transparent entities include 
partnerships, common investment trusts under section 584 of the 
Code, grantor trusts and U.S. limited liability companies 
treated as partnerships for U.S. tax purposes. For example, if 
a corporation resident in Venezuela distributes a dividend to 
an entity treated as fiscally transparent for U.S. tax 
purposes, the dividend will be considered to be derived by a 
resident of the United States only to the extent that U.S. tax 
laws treat one or more U.S. residents (whose status as U.S. 
residents is determined under U.S. tax laws) as deriving the 
dividend income for U.S. tax purposes.
    The Technical Explanation states that these rules for 
income derived through fiscally transparent entities apply 
regardless of where the entity is organized (i.e., in the 
United States, Venezuela, or a third country). The Technical 
Explanation also states that these rules apply even if the 
entity is viewed differently under the tax laws of the other 
country. As an example, the Technical Explanation states that 
income from Venezuelan sources received by an entity organized 
under the laws of Venezuela, which is treated for U.S. tax 
purposes as a corporation and is owned by a U.S. shareholder 
who is a U.S. resident for U.S. tax purposes, is not considered 
derived by the shareholder of that corporation, even if under 
the tax laws of Venezuela the entity is treated as fiscally 
transparent. Rather, for purposes of the proposed treaty, the 
income is treated as derived by the Venezuelan entity.
            Dual residents
Individuals
    A set of ``tie-breaker'' rules is provided to determine 
residence in the case of an individual who, under the basic 
residence rules, would be considered to be a resident of both 
countries. Under these rules, an individual is deemed to be a 
resident of the country in which he or she has a permanent home 
available. If the individual has a permanent home in both 
countries, the individual's residence is deemed to be the 
country with which his or her personal and economic relations 
are closer (i.e., his or her ``center of vital interests''). If 
the country in which the individual has his or her center of 
vital interests cannot be determined, or if he or she does not 
have a permanent home available in either country, he or she is 
deemed to be a resident of the country in which he or she has 
an habitual abode. If the individual has an habitual abode in 
both countries or in neither country, he or she is deemed to be 
a resident of the country of which he or she is a national. If 
the individual is a national of both countries or neither 
country, the competent authorities of the countries will settle 
the question of residence by mutual agreement.
Entities
    In the case of any person other than an individual that is 
a resident of both countries under the basis residence rules, 
the proposed treaty requires the competent authorities to 
settle the issue of residence by mutual agreement and to 
determine the mode of application of the proposed treaty to 
such person. Under the proposed treaty, if the competent 
authorities are unable to make such a determination, the person 
will not be considered a resident of either country and, thus, 
will not be granted benefits under the proposed treaty.
Article 5. Permanent Establishment
    The proposed treaty contains a definition of the term 
``permanent establishment'' that generally follows the pattern 
of other recent U.S. income tax treaties, the U.S. model, the 
OECD model and the U.N. model.
    The permanent establishment concept is one of the basic 
devices used in income tax treaties to limit the taxing 
jurisdiction of the host country and, thus, to mitigate double 
taxation. Generally, an enterprise that is a resident of one 
country is not taxable by the other country on its business 
profits unless those profits are attributable to a permanent 
establishment of the resident in the other country. In 
addition, the permanent establishment concept is used to 
determine whether the reduced rates of, or exemptions from, tax 
provided for dividends, interest, and royalties apply, or 
whether those items of income will be taxed as business 
profits.
    In general, under the proposed treaty, a permanent 
establishment is a fixed place of business through which the 
business of an enterprise is wholly or partly carried on. A 
permanent establishment includes a place of management, a 
branch, an office, a factory, a workshop, and a mine, an oil or 
gas well, a quarry, or any other place of extraction of natural 
resources. It also includes a building site or construction or 
installation project, or an installation or drilling rig or 
ship used for the exploration of natural resources, but only if 
such site, project, or activities continue for more than 183 
days within any 12-month period beginning or ending in the 
taxable year concerned. The Technical Explanation states that 
the 183-day test applies separately to each individual site or 
project, with a series of contracts or projects that are 
interdependent both commercially and geographically treated as 
a single project. The Technical Explanation further states that 
if the 183-day threshold is exceeded, the site or project 
constitutes a permanent establishment as of the first day of 
activity. The 183-day period for establishing a permanent 
establishment in connection with a site, project, rig, or ship 
is significantly shorter than the twelve-month period provided 
in the corresponding rule of the U.S. and OECD models, but is 
the same as the periods contained in the U.N. model and U.S. 
treaties with some other countries.
    The proposed protocol provides that it is understood that 
if an enterprise which is a general contractor undertakes the 
performance of a comprehensive project and subcontracts parts 
of such project to a subcontractor, the time spent by such 
subcontractor is considered to be time spent by the general 
contractor for purposes of the 183-day test. The subcontractor 
will have a permanent establishment only if its activities 
satisfy the 183-day test. The proposed protocol provides that 
the 183-day period begins as of the date on which the 
construction activity itself begins, and does not take into 
account time spent solely on preparatory activities such as 
obtaining permits.
    The proposed treaty further provides that a permanent 
establishment includes the furnishing of services, including 
consultancy services, by an enterprise through employees or 
other personnel engaged by the enterprise for such purpose, but 
only if the activities of that nature continue (for the same or 
a connected project) within that country for a period or 
periods aggregating more than 183 days within any 12-month 
period beginning or ending in the taxable year concerned. This 
rule regarding the performance of services as constituting a 
permanent establishment is not contained in the U.S. or OECD 
models. A similar rule is contained in the U.N. model.
    Under the proposed treaty, the following activities are 
deemed not to constitute a permanent establishment: the use of 
facilities solely for storing, displaying, or delivering goods 
or merchandise belonging to the enterprise; the maintenance of 
a stock of goods or merchandise belonging to the enterprise 
solely for storage, display, or delivery, or solely for 
processing by another enterprise; the maintenance of a fixed 
place of business solely for the purchase of goods or 
merchandise or for the collection of information for the 
enterprise; the maintenance of a fixed place of business solely 
for the purpose of carrying on for the enterprise any other 
activity of a preparatory or auxiliary character; and the 
maintenance of a fixed place of business solely for the purpose 
of any combination of the forgoing activities described above, 
provided that the overall activity of the fixed place of 
business resulting from this combination is of a preparatory or 
auxiliary character. The proposed protocol provides that it is 
understood that in order for these rules to apply, the 
activities described above that are conducted by a resident of 
a country must each be of a preparatory or auxiliary character. 
Thus, maintaining sales personnel in a country would not be an 
activity excepted from treatment as a permanent establishment 
under these rules, and, if other requirements of the permanent 
establishment article are satisfied, would constitute a 
permanent establishment. The Technical Explanation gives 
advertising and supplying information as examples of 
preparatory and auxiliary activities that would not give rise 
to a permanent establishment. The rules in the proposed treaty 
are similar to the rule in the OECD model. Unlike the proposed 
treaty and the OECD model, the U.S. model provides that the 
maintenance of a fixed place of business solely for any 
combination of the above-listed activities does not constitute 
a permanent establishment, without requiring that the overall 
combination of activities be of a preparatory or auxiliary 
character.
    If a person, other than an independent agent, is acting on 
behalf of an enterprise and has and habitually exercises in a 
country the authority to conclude contracts in the name of the 
enterprise, the enterprise generally will be deemed to have a 
permanent establishment in that country in respect of any 
activities that person undertakes for the enterprise. This rule 
does not apply where the activities of such person are limited 
to those activities specified above, such as storage or display 
of merchandise, which do not constitute a permanent 
establishment.
    Under the proposed treaty, no permanent establishment is 
deemed to arise merely because the enterprise carries on 
business in a country through a broker, general commission 
agent, or any other agent of independent status, provided that 
such persons are acting in the ordinary course of their 
business. Unlike the U.S. model, but similar to the U.N. model, 
the proposed treaty provides that when the activities of such 
agent are devoted wholly or almost wholly on behalf of that 
enterprise and the transactions between the agent and the 
enterprise are not made under arm's length conditions, such 
agent will not be considered to be an independent agent for 
purposes of the foregoing rule.
    The fact that a company that is a resident of one country 
controls or is controlled by a company that is a resident of 
the other country or that carries on business in the other 
country (whether through a permanent establishment or 
otherwise) does not of itself cause either company to be a 
permanent establishment of the other.
Article 6. Income from Immovable Property (Real Property)
    This article covers income from real property. The rules in 
Article 13 (Gains) cover gains from the sale of real property.
    Under the proposed treaty, income derived by a resident of 
one country from immovable property (real property), including 
income from agriculture or forestry, situated in the other 
country may be taxed in the country where the property is 
located. This rule is consistent with the rules in the U.S., 
OECD and U.N. models.
    The term ``immovable property (real property)'' has the 
meaning which it has under the law of the country in which the 
property in question is situated.4 The proposed 
treaty specifies that the term in any case includes property 
accessory to immovable property (real property); livestock and 
equipment used in agriculture and forestry; rights to which the 
provisions of general law respecting landed property apply; 
usufruct of immovable property (real property); and rights to 
variable or fixed payments as consideration for the working of, 
or the right to work, mineral deposits, sources, and other 
natural resources. Ships, boats, and aircraft are not 
considered to be immovable property (real property).
---------------------------------------------------------------------------
    \4\ In the case of the United States, the term is defined in Treas. 
Reg. sec. 1.897-1(b).
---------------------------------------------------------------------------
    The proposed treaty specifies that the country in which the 
property is situated may tax income derived from the direct 
use, letting, or use in any other form of immovable property 
(real property). The proposed treaty further provides that the 
rules of this article permitting source-country taxation apply 
to the income from immovable property (real property) of an 
enterprise and to income from immovable property (real 
property) used for the performance of independent personal 
services.
    Similar to the U.S. model and other U.S. income tax 
treaties, the proposed treaty provides residents of a country 
with an election to be taxed by the other country on a net 
basis on income from real property in that country, as if such 
income were business profits attributable to a permanent 
establishment in such other country (where such treatment is 
not otherwise allowed). Such election is binding for the 
taxable year and all subsequent taxable years unless the 
competent authority of the country in which the property is 
situated agrees to terminate the election. U.S. internal law 
provides such a net-basis election in the case of income of a 
foreign person from U.S. real property (Code secs. 871(d) and 
882(d)).
Article 7. Business Profits
            U.S. internal law
    U.S. law distinguishes between the U.S. business income and 
the other U.S. income of a nonresident alien or foreign 
corporation. A nonresident alien or foreign corporation is 
subject to a flat 30-percent rate (or lower treaty rate) of tax 
on certain U.S.-source income if that income is not effectively 
connected with the conduct of a trade or business within the 
United States. The regular individual or corporate rates apply 
to income (from any source) which is effectively connected with 
the conduct of a trade or business within the United States.
    The treatment of income as effectively connected with a 
U.S. trade or business depends upon whether the source of the 
income is U.S. or foreign. In general, U.S.-source periodic 
income (such as interest, dividends, rents, and wages) and 
U.S.-source capital gains are effectively connected with the 
conduct of a trade or business within the United States if the 
asset generating the income is used in (or held for use in) the 
conduct of the trade or business or if the activities of the 
trade or business were a material factor in the realization of 
the income. All other U.S.-source income of a person engaged in 
a trade or business in the United States is treated as 
effectively connected with the conduct of a trade or business 
in the United States (under what is referred to as the ``force 
of attraction'' rule).
    Foreign-source income generally is effectively connected 
income only if the foreign person has an office or other fixed 
place of business in the United States and the income is 
attributable to that place of business. Only three types of 
foreign-source income are considered to be effectively 
connected income: rents and royalties for the use of certain 
intangible property derived from the active conduct of a U.S. 
business; certain dividends and interest either derived in the 
active conduct of a banking, financing, or similar business in 
the United States or received by a corporation the principal 
business of which is trading in stocks or securities for its 
own account; and certain sales income attributable to a U.S. 
sales office. Special rules apply for purposes of determining 
the foreign-source income that is effectively connected with a 
U.S. business of an insurance company.
    Any income or gain of a foreign person for any taxable year 
that is attributable to a transaction in another year is 
treated as effectively connected with the conduct of a U.S. 
trade or business if it would have been so treated had it been 
taken into account in that other year (Code sec. 864(c)(6)). In 
addition, if any property ceases to be used or held for use in 
connection with the conduct of a trade or business within the 
United States, the determination of whether any income or gain 
attributable to a sale or exchange of that property occurring 
within ten years after the cessation of business is effectively 
connected with the conduct of a trade or business within the 
United States is made as if the sale or exchange occurred 
immediately before the cessation of business (Code sec. 
864(c)(7)).
            Proposed treaty limitations on internal law
Business profits subject to host country tax
    Under the proposed treaty, the business profits of an 
enterprise of one of the countries are taxable in the other 
country if the enterprise carries on business through a 
permanent establishment within the other country, but only so 
much of the business profits that is attributable to that 
permanent establishment.
    The taxation of business profits under the proposed treaty 
differs from U.S. internal law rules for taxing business 
profits primarily by requiring more than merely being engaged 
in a trade or business before a country can tax business 
profits and by substituting an ``attributable to'' standard for 
the Code's ``effectively connected'' standard. Under the 
proposed treaty, some level of fixed place of business would 
have to be present and the business profits generally would 
have to be attributable to that fixed place of business.
    The proposed treaty provides that there will be attributed 
to a permanent establishment the business profits which it 
might be expected to make if it were a distinct and independent 
enterprise engaged in the same or similar activities under the 
same or similar conditions. The Technical Explanation states 
that amounts may be attributed to the permanent establishment 
whether or not they are from sources within the country in 
which the permanent establishment is located.
    Nothing in this article will affect the application of any 
law of a country relating to the determination of the tax 
liability of a person in cases where the information available 
to the competent authority of that country is inadequate to 
determine the profits to be attributed to a permanent 
establishment. In such cases, the determination of the profits 
of the permanent establishment must be consistent with the 
principles stated in this article (i.e., to reflect arm's 
length pricing and appropriate deductions of expenses).
Treatment of expenses
    In computing taxable business profits, the proposed treaty 
provides that deductions are allowed for expenses, wherever 
incurred, which are incurred for the purposes of the permanent 
establishment, including executive and general administrative 
expenses so incurred. However, no deductions are allowed for 
amounts paid by the permanent establishment to its head office 
or other offices of the enterprise (other than reimbursement 
for actual expenses) by way of royalties, fees, or other 
similar payments in return for the use of patents or other 
rights, or by way of commission for specific services performed 
or for management, or by way of interest for loans to the 
permanent establishment. The Technical Explanation states that 
there should be no profit element in such intra-company 
transfers. Similarly, no account is taken for amounts charged 
by the permanent establishment to its head office or other 
offices of the enterprise (other than reimbursement for actual 
expenses) by way of royalties, fees, or other similar payments 
in return for the use of patents or other rights, or by way of 
commission for specific services performed or for management, 
or by way of interest for loans to the head office of the 
enterprise or any other of its offices. The Technical 
Explanation states that a permanent establishment may not 
increase its business profits by the amount of any notional 
fees for ancillary services performed for another unit of the 
enterprise, and also may not deduct expenses in providing such 
services, because those expenses would be incurred for purposes 
of a business unit other than the permanent establishment.
    A country may, consistent with its law, impose limitations 
on deductions taken by the permanent establishment so long as 
these limitations are consistent with the concept of net 
income. The Technical Explanation states that this rule would 
not permit the countries to deny a deduction for wages and 
interest expenses because such expenses are so fundamental that 
denial of such deductions would be inconsistent with the 
concept of net income.
    The proposed protocol provides that expenses allowed as a 
deduction include a reasonable allocation of expenses, 
including executive and general administrative expenses, 
research and development expenses, interest, and other expenses 
incurred in the taxable year for the purposes of the enterprise 
as a whole (or the part thereof which includes the permanent 
establishment), regardless of where incurred. However, such 
expenses are allowed as deductions only to the extent that such 
expenses have not been deducted by such enterprise and are not 
reflected in other deductions allowed to the permanent 
establishment, such as the deduction for cost of goods sold or 
the value of the purchases. The proposed protocol provides that 
the allocation of expenses must be accomplished in a manner 
that reflects to a reasonably close extent the factual 
relationship between the deduction and the permanent 
establishment and the enterprise. The proposed protocol 
provides examples of bases and factors which may be considered, 
including but not limited to: (1) comparison of units sold; (2) 
comparison of the amount of gross sales or receipts; (3) 
comparison of cost of goods sold; (4) comparison of profit 
contribution; (5) comparison of expenses incurred, assets used, 
salaries paid, space utilized, and time spent that are 
attributable to the activities of the permanent establishment; 
and (6) comparison of gross income.5 The Technical 
Explanation states that these rules permit (but do not require) 
each country to apply the type of expense allocation rules 
provided by U.S. law, such as in Treas. Reg. secs. 1.861-8 and 
1.882-5.
---------------------------------------------------------------------------
    \5\ These bases and factors are taken from those described in Temp. 
Treas. Reg. sec. 1.861-8T(c)(1).
---------------------------------------------------------------------------
    The proposed protocol provides that research and 
development expenses incurred with respect to the same product 
line may be allocated to a permanent establishment based on 
gross receipts (i.e., the ratio of gross receipts of the 
permanent establishment to the total gross receipts of the 
enterprise with respect to that product line). The proposed 
protocol further provides that Venezuela will not allow a 
deduction with respect to any expenses allocable to income not 
subject to tax in Venezuela under its territorial system of 
taxation.
Other rules
    Business profits are not attributed to a permanent 
establishment merely by reason of the mere purchase of goods or 
merchandise by the permanent establishment for the enterprise. 
Thus, where a permanent establishment purchases goods for its 
head office, the business profits attributed to the permanent 
establishment with respect to its other activities are not 
increased by a profit element in its purchasing activities.
    The business profits attributable to a permanent 
establishment must be determined under the same method each 
year unless there is a good and sufficient reason to the 
contrary. The Technical Explanation states that this rule does 
not restrict a treaty country from imposing additional 
requirements, such as the rules under Code section 481, to 
prevent amounts from being duplicated or omitted following a 
change in accounting method.
    The proposed treaty provides that business profits 
attributable to a permanent establishment include only the 
profits or losses derived from the assets or activities of the 
permanent establishment. The proposed treaty does not 
incorporate the limited force of attraction rule of Code 
section 864(c)(3). The proposed treaty is consistent with the 
U.S. model and other existing U.S. treaties in this regard.
    Where business profits include items of income that are 
dealt with separately in other articles of the proposed treaty, 
those other articles, and not the business profits article, 
govern the treatment of those items of income (except where 
such other articles specifically provide to the contrary). 
Thus, for example, dividends are taxed under the provisions of 
Article 10 (Dividends), and not as business profits, except as 
specifically provided in Article 10.
    The proposed treaty incorporates the rule of Code section 
864(c)(6) and provides that any income or gain attributable to 
a permanent establishment or a fixed base during its existence 
is taxable in the country where the permanent establishment or 
fixed base is located even though payments are deferred until 
after the permanent establishment or fixed base has ceased to 
exist. This rule applies with respect to business profits 
(Article 7, paragraphs 1 and 2), dividends (Article 10, 
paragraph 6), interest (Article 11, paragraph 6), royalties 
(Article 12, paragraph 4), gains (Article 13, paragraph 3), 
independent personal services income (Article 14), and other 
income (Article 22, paragraph 2).
Article 8. Shipping and Air Transport
    Article 8 of the proposed treaty covers income from the 
operation or rental of ships, aircraft, and containers in 
international traffic. The rules governing income from the 
disposition of ships, aircraft, and containers are contained in 
Article 13 (Gains).
    The United States generally taxes the U.S.-source income of 
a foreign person from the operation of ships or aircraft to or 
from the United States. An exemption from U.S. tax is provided 
if the income is earned by a corporation that is organized in, 
or an alien individual who is resident in, a foreign country 
that grants an equivalent exemption to U.S. corporations and 
residents. The United States has entered into agreements with a 
number of countries providing such reciprocal exemptions.
    The proposed treaty provides that profits which are derived 
by an enterprise of one country from the operation in 
international traffic of ships or aircraft are taxable only in 
that country, regardless of the existence of a permanent 
establishment in the other country. International traffic means 
any transport by a ship or aircraft, except where the transport 
is solely between places in the other country.
    The proposed treaty provides that profits from the rental 
of ships or aircraft on a full (time or voyage) basis 
constitute profits from the operation of ships or aircraft. 
Thus, such profits from the rental of ships or aircraft for use 
in international traffic are exempt from tax in the other 
country. In addition, the proposed treaty provides that profits 
from the operation of ships or aircraft include profits derived 
from the rental of ships or aircraft on a bareboat basis if 
such ships or aircraft are operated in international traffic by 
the lessee or if such rental profits are incidental to profits 
from the operation of ships or aircraft in international 
traffic. The proposed treaty further provides that profits 
derived by an enterprise from the inland transport of property 
or passengers within either country is treated as profits from 
the operation of ships or aircraft in international traffic if 
such transport is undertaken as part of international traffic.
    Like the U.S. model, the proposed treaty provides that 
profits derived by an enterprise of a country from the use, 
maintenance, or rental of containers (including trailers, 
barges, and related equipment for the transport of containers) 
used in international traffic are taxable only in that country.
    Like the U.S. model, the shipping and air transport 
provisions of the proposed treaty also apply to profits from 
participation in a pool, joint business, or international 
operating agency. This rule covers profits derived pursuant to 
an arrangement for international cooperation between carriers 
in shipping and air transport.
    The proposed protocol provides that this article will not 
affect the provisions of the December 29, 1987, agreement 
between the United States and Venezuela for the avoidance of 
double taxation with respect to shipping and air transport.
Article 9. Associated Enterprises
    The proposed treaty, like most other U.S. tax treaties, 
contains an arm's-length pricing provision. The proposed treaty 
recognizes the right of each country to make an allocation of 
profits to an enterprise of that country in the case of 
transactions between related enterprises, if conditions are 
made or imposed between the two enterprises in their commercial 
or financial relations which differ from those which would be 
made between independent enterprises. In such a case, a country 
may allocate to such an enterprise the profits which it would 
have accrued but for the conditions so imposed. This treatment 
is consistent with the U.S. model.
    For purposes of the proposed treaty, an enterprise of one 
country is related to an enterprise of the other country if one 
of the enterprises participates directly or indirectly in the 
management, control, or capital of the other enterprise. 
Enterprises are also related if the same persons participate 
directly or indirectly in their management, control, or 
capital.
    Under the proposed treaty, when a redetermination of tax 
liability has been made by one country under the provisions of 
this article, the other country will make a corresponding 
adjustment to the amount of tax paid in that country on the 
redetermined income if it agrees that the adjustment was 
correct. In making such adjustment, due regard is to be given 
to other provisions of the proposed treaty, and the competent 
authorities of the two countries are to consult with each other 
if necessary. The proposed treaty's saving clause retaining 
full taxing jurisdiction in the country of residence or 
citizenship does not apply in the case of such adjustments. 
Accordingly, internal statute of limitations provisions do not 
prevent the allowance of appropriate correlative adjustments.
    This article does not replace the internal law provisions 
that permit this type of adjustment. Under the proposed treaty, 
this article does not limit any law provisions of either 
country that permit the distribution, apportionment, or 
allocation of income, deductions, credits, or allowances 
between persons (whether or not residents of one of the treaty 
countries) that are owned or controlled directly or indirectly 
by the same interests when necessary in order to prevent 
evasion of taxes or to clearly reflect income. The Technical 
Explanation states that adjustments are permitted under 
internal law provisions even if such adjustments are different 
from, or go beyond, the adjustments authorized by this article, 
provided that such adjustments are consistent with the general 
principles of this article permitting adjustments to reflect 
arm's-length terms. The Technical Explanation states that this 
article also permits the tax authorities of the countries to 
address thin capitalization issues.
Article 10. Dividends
            Internal taxation rules
United States
    The United States generally imposes a 30-percent tax on the 
gross amount of U.S.-source dividends paid to nonresident alien 
individuals and foreign corporations. The 30-percent tax does 
not apply if the foreign recipient is engaged in a trade or 
business in the United States and the dividends are effectively 
connected with that trade or business. In such a case, the 
foreign recipient is subject to U.S. tax on such dividends on a 
net basis at graduated rates in the same manner that a U.S. 
person would be taxed.
    Under U.S. law, the term ``dividend'' generally means any 
distribution of property made by a corporation to its 
shareholders, either from accumulated earnings and profits or 
current earnings and profits. However, liquidating 
distributions generally are treated as payments in exchange for 
stock and, thus, are not subject to the 30-percent withholding 
tax described above (see discussion of gains in connection with 
Article 13 below).
    Dividends paid by a U.S. corporation generally are U.S.-
source income. Also treated as U.S.-source dividends for this 
purpose are portions of certain dividends paid by a foreign 
corporation that conducts a U.S. trade or business. The U.S. 
30-percent withholding tax imposed on the U.S.-source portion 
of the dividends paid by a foreign corporation is referred to 
as the ``second-level'' withholding tax. This second-level 
withholding tax is imposed only if a treaty prevents 
application of the statutory branch profits tax.
    In general, corporations are not entitled under U.S. law to 
a deduction for dividends paid. Thus, the withholding tax on 
dividends theoretically represents imposition of a second level 
of tax on corporate taxable income. Treaty reductions of this 
tax reflect the view that where the United States already 
imposes corporate-level tax on the earnings of a U.S. 
corporation, a 30-percent withholding rate may represent an 
excessive level of source-country taxation. Moreover, the 
reduced rate of tax often applied by treaty to dividends paid 
to direct investors reflects the view that the source-country 
tax on payments of profits to a substantial foreign corporate 
shareholder may properly be reduced further to avoid double 
corporate-level taxation and to facilitate international 
investment.
    A real estate investment trust (``REIT'') is a corporation, 
trust, or association that is subject to the regular corporate 
income tax, but that receives a deduction for dividends paid to 
its shareholders if certain conditions are met. In order to 
qualify for the deduction for dividends paid, a REIT must 
distribute most of its income. Thus, a REIT is treated, in 
essence, as a conduit for federal income tax purposes. Because 
a REIT is taxable as a U.S. corporation, a distribution of its 
earnings is treated as a dividend rather than income of the 
same type as the underlying earnings. Such distributions are 
subject to the U.S. 30-percent withholding tax when paid to 
foreign owners.
    A REIT is organized to allow persons to diversify ownership 
in primarily passive real estate investments. As such, the 
principal income of a REIT often is rentals from real estate 
holdings. Like dividends, U.S.-source rental income of foreign 
persons generally is subject to the 30-percent withholding tax 
(unless the recipient makes an election to have such rental 
income taxed in the United States on a net basis at the regular 
graduated rates). Unlike the withholding tax on dividends, 
however, the withholding tax on rental income generally is not 
reduced in U.S. income tax treaties.
    U.S. internal law also generally treats a regulated 
investment company (``RIC'') as both a corporation and a 
conduit for income tax purposes. The purpose of a RIC is to 
allow investors to hold a diversified portfolio of securities. 
Thus, the holder of stock in a RIC may be characterized as a 
portfolio investor in the stock held by the RIC, regardless of 
the proportion of the RIC's stock owned by the dividend 
recipient.
Venezuela
    Venezuela generally does not impose a withholding tax on 
dividends.
            Proposed treaty limitations on internal law
    Under the proposed treaty, dividends paid by a company that 
is a resident of a treaty country to a resident of the other 
country may be taxed in such other country. Such dividends may 
also be taxed by the country in which the payor company is 
resident, and according to the laws of that country, but the 
rate of such tax is limited. Under the proposed treaty, source-
country taxation (i.e., taxation by the country in which the 
payor company is resident) generally is limited to 5 percent of 
the gross amount of the dividend if the beneficial owner of the 
dividend is a resident of the other country and is a company 
which owns at least 10 percent of the voting stock of the payor 
company. The source-country dividend withholding tax generally 
is limited to 15 percent of the gross amount of the dividends 
beneficially owned by residents of the other country in all 
other cases.
    The Technical Explanation states that the term ``beneficial 
owner'' is not defined in the proposed treaty and, thus, is 
defined under the internal law of the source country. The 
Technical Explanation further states that the beneficial owner 
of a dividend for purposes of this article is the person to 
which the dividend income is attributable for tax purposes 
under the laws of the source country.
    The rates of source-country dividend withholding tax 
permitted under the proposed treaty are consistent with those 
provided for in the U.S. model, the OECD model, and most other 
U.S. income tax treaties. The proposed treaty provides that 
these rules do not affect the taxation of the paying company on 
the profits out of which the dividends are paid.
    The proposed treaty allows the United States to impose a 
15-percent tax on a U.S.-source dividend paid by a RIC to a 
Venezuelan person. The proposed treaty allows the United States 
to impose a 15-percent tax on a U.S.-source dividend paid by a 
REIT to a Venezuelan person if: (1) the beneficial owner of the 
dividend is an individual holding an interest of not more than 
10 percent of the REIT; (2) the dividend is paid with respect 
to a class of stock that is publicly traded and the beneficial 
owner of the dividend is a person holding an interest of not 
more than 5 percent of any class of the REIT's stock; or (3) 
the beneficial owner of the dividend is a person holding an 
interest of not more than 10 percent of the REIT and the REIT 
is diversified. There is no limitation in the proposed treaty 
on the tax that may be imposed by the United States with 
respect to a REIT dividend that does not satisfy at least one 
of these requirements. Thus, such a dividend is taxable at the 
30-percent U.S. statutory withholding rate. For purposes of 
this provision, the Technical Explanation states that a REIT 
will be considered to be diversified if the value of no single 
interest in the REIT's real property exceeds 10 percent of the 
REIT's total interests in real property.
    The proposed treaty provides that dividends may not be 
taxed by the source country if the beneficial owner of the 
dividends is (1) the other country or a political subdivision 
or local authority thereof, or (2) a governmental entity 
constituted and operated exclusively to administer or provide 
pension benefits. This rule does not apply if the dividends are 
derived from carrying on a trade or business or from an 
associated enterprise. For these purposes, the proposed 
protocol provides that it is understood that a ``governmental 
entity constituted and operated exclusively to administer or 
provide pension benefits'' includes, in the case of Venezuela, 
private, public or mixed entities operating under or pursuant 
to the Ley del Subsistema de Pensiones (Law of the Pension 
System), enacted under the Ley Organica del Sistema de 
Seguridad Social Integral (Organic Law of the Integrated Social 
Security System).
    The Technical Explanation states that Venezuela is 
currently considering ways of reforming its government-run 
social security system. The Ley del Subsistema de Pensiones 
currently is proposed legislation that would replace 
Venezuela's existing regime with a system of privatized funds 
that would be permitted to invest in equities. The Technical 
Explanation states that the inclusion of the proposed funds 
within the exemption for dividend payments was judged warranted 
because the system under the proposed legislation is similar to 
a government-run social security system (as opposed to a 
private pension plan system).
    The Technical Explanation states that because the Ley del 
Subsistema de Pensiones has not been enacted, additional 
general requirements are listed in the proposed protocol to 
ensure that the exemption for dividend payments will apply only 
to entities that operate under or pursuant to a final version 
of the law that includes the significant features of the 
proposed law. In order to satisfy these requirements, the 
version of the Ley del Subsistema de Pensiones that is enacted 
must: (1) provide universal coverage; (2) require mandatory 
contributions by both employers and employees; (3) limit the 
discretion of employers or employees to direct investment; (4) 
restrict distributions or borrowings, directly or indirectly, 
except upon death, retirement or disability; and (5) require 
that accounts be maintained at only one such qualifying entity 
at a time. The proposed protocol further provides that such 
entities also must be operated, and their investment parameters 
established, pursuant to governmental oversight and regulation. 
For purposes of the rules described above, the term 
``governmental entity constituted and operated exclusively to 
administer or provide pension benefits'' also includes any 
equivalent entities in the United States.
    The proposed treaty defines ``dividends'' as income from 
shares or other rights, which are not debt claims and which 
participate in profits. The term also includes income from 
other corporate rights if such income is subjected to the same 
tax treatment as income from shares by the country in which the 
distributing corporation is resident. Furthermore, dividends 
include income from arrangements, including debt obligations, 
that carry the right to participate in, or determined with 
reference to, profits to the extent such income is so 
characterized under the laws of the country in which the income 
arises.
    The proposed treaty's reduced rates of tax on dividends do 
not apply if the dividend recipient carries on business through 
a permanent establishment in the source country, or performs in 
the source country independent personal services from a fixed 
base located in that country, and the dividend is attributable 
to such permanent establishment or fixed base. In such cases, 
the dividend attributable to the permanent establishment or the 
fixed base is taxed as business profits (Article 7) or as 
income from the performance of independent personal services 
(Article 14), as the case may be. Under the proposed treaty, 
these rules also apply if the permanent establishment or fixed 
base no longer exists when the dividends are paid but such 
dividends are attributable to the former permanent 
establishment or fixed base.
    The proposed treaty provides that a country may not impose 
any tax on dividends paid by a company that is a resident of 
the other country, except to the extent that the dividends are 
paid to a resident of the first country or the dividends are 
attributable to a permanent establishment or fixed base 
situated in that first country. Thus, this provision generally 
overrides the ability of the United States to impose its 
second-level withholding tax on the U.S.-source portion of 
dividends paid by a Venezuelan corporation.
Article 11. Interest
            Internal taxation rules
United States
    Subject to several exceptions (such as those for portfolio 
interest, bank deposit interest, and short-term original issue 
discount), the United States imposes a 30-percent withholding 
tax on U.S.-source interest paid to foreign persons under the 
same rules that apply to dividends. U.S.-source interest, for 
purposes of the 30-percent tax, generally is interest on the 
debt obligations of a U.S. person, other than a U.S. person 
that meets specified foreign business requirements. Also 
subject to the 30-percent tax is interest paid by the U.S. 
trade or business of a foreign corporation.
    Portfolio interest generally is defined as any U.S.-source 
interest that is not effectively connected with the conduct of 
a trade or business if such interest (1) is paid on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto and (2) is not received by a 10-
percent owner of the issuer of the obligation, taking into 
account shares owned by attribution. However, the portfolio 
interest exemption does not apply to certain contingent 
interest income.
    If an investor holds an interest in a fixed pool of real 
estate mortgages that is a real estate mortgage interest 
conduit (``REMIC''), the REMIC generally is treated for U.S. 
tax purposes as a pass-through entity and the investor is 
subject to U.S. tax on a portion of the REMIC's income (which, 
generally is interest income). If the investor holds a so-
called ``residual interest'' in the REMIC, the Code provides 
that a portion of the net income of the REMIC that is taxed in 
the hands of the investor--referred to as the investor's 
``excess inclusion''--may not be offset by any net operating 
losses of the investor, must be treated as unrelated business 
income if the investor is an organization subject to the 
unrelated business income tax, and is not eligible for any 
reduction in the 30-percent rate of withholding tax (by treaty 
or otherwise) that would apply if the investor were otherwise 
eligible for such a rate reduction.
Venezuela
    Venezuela generally imposes a withholding tax on interest 
paid to nonresidents at a rate of 34 percent on 95 percent of 
the gross payment (i.e., an effective rate of 32.3 percent). 
However, interest paid to nonresident financial institutions is 
subject to withholding tax at a rate of 4.95 percent.
            Proposed treaty limitations on internal law
    The proposed treaty provides that interest arising in one 
of the countries and derived by a resident of the other country 
generally may be taxed in both countries. This is contrary to 
the position of the U.S. model which provides for an exemption 
from source-country tax for interest beneficially owned by a 
resident of the other country.
    The proposed treaty limits the rate of source-country tax 
that may be imposed on interest income if the beneficial owner 
of the interest is a resident of the other country. The source-
country tax on such interest may not exceed 4.95 percent of the 
gross amount of the interest if it is beneficially owned by any 
financial institution, including an insurance company. The 
Technical Explanation states that this rate is based on the 
Venezuelan statutory rate of interest withholding for payments 
made to financial institutions. In all other cases, the rate of 
source-country tax on interest generally may not exceed 10 
percent of the gross amount of such interest. These rates are 
higher than the rates permitted under the U.S. model and many 
U.S. income tax treaties.
    The proposed treaty provides for a complete exemption from 
source-country withholding tax in the case of certain 
categories of interest arising in a country and earned by 
residents of the other country. Interest that is paid by a 
treaty country (or a political subdivision or local authority 
thereof) is exempt from source-country tax. In addition, 
exemptions from source-country tax apply to cases in which the 
beneficial owner of the interest is (1) the other country (or a 
political subdivision or local authority thereof) or an 
instrumentality wholly owned by the other country), or (2) a 
resident of that other country and the interest is paid with 
respect to debt obligations made, guaranteed, or insured 
(directly or indirectly) by that country or an instrumentality 
wholly owned by that country. The proposed protocol states that 
instrumentalities, referred to above, include the U.S. Export-
Import Bank, the Federal Reserve Banks and the Overseas Private 
Investment Corporation, the Venezuelan Banco de Comercio 
Exterior, the Banco Central de Venezuela and the Fondo de 
Inversiones de Venezuela, and such other instrumentalities as 
the competent authorities may agree upon.
    The proposed treaty provides two anti-abuse exceptions to 
the general source-country reduction in tax discussed above. 
The first exception relates to ``contingent interest'' 
payments. If interest is paid by a source-country resident to a 
resident of the other country and is determined with reference 
(1) to receipts, sales, income, profits, or other cash flow of 
the debtor or a related person, (2) to any change in the value 
of any property of the debtor or a related person, or (3) to 
any dividend, partnership distribution, or similar payment made 
by the debtor to a related person, such interest may be taxed 
in the source country in accordance with its internal laws. 
However, if the beneficial owner is a resident of the other 
country, such interest may not be taxed at a rate exceeding 15 
percent (i.e., the rate prescribed in subparagraph (b) of 
paragraph 2 of Article 10 (Dividends)). The second anti-abuse 
exception provides that the reductions in and exemption from 
source country tax do not apply to excess inclusions with 
respect to a residual interest in a REMIC. Such income may be 
taxed in accordance with each country's internal law.
    The proposed treaty defines the term ``interest'' as income 
from debt claims of every kind, whether or not secured by a 
mortgage and whether or not carrying a right to participate in 
the debtor's profits. In particular, it includes income from 
government securities and from bonds or debentures, including 
premiums or prizes attaching to such securities, bonds, or 
debentures. Furthermore, interest includes any other income 
that is treated as interest by the tax law of the country in 
which the income arises. The proposed treaty provides that the 
term ``interest'' does not include amounts treated as dividends 
under Article 10 (Dividends) or penalty charges for late 
payment.
    The proposed treaty's reductions in source country tax on 
interest do not apply if (1) the beneficial owner of the 
interest carries on business in the source country through a 
permanent establishment located in that country, or performs 
independent personal services in the source country from a 
fixed base located in that country, and (2) the interest paid 
is attributable to such permanent establishment or fixed base. 
In such events, the interest is taxed as business profits 
(Article 7) or as independent personal services income (Article 
14), as the case may be. These rules also apply if the 
permanent establishment or fixed base no longer exists when the 
interest is paid but such interest is attributable to the 
former permanent establishment or fixed base.
    The proposed treaty provides that interest is treated as 
arising in a country if the payor is that country, including 
its political subdivisions and local authorities, or if the 
payor is a resident of that country.6 If, however, 
the payor of the interest has a permanent establishment or a 
fixed base in a country and such interest is borne by the 
permanent establishment or fixed base, then such interest is 
sourced to the country in which the permanent establishment or 
fixed base is situated. In addition, if a person derives 
profits that are taxable on a net basis in such country under 
paragraph 5 of Article 6 (Income From Immovable Property (Real 
Property)) or paragraph 1 of Article 13 (Gains), and the 
interest is allocable to such profits, then such interest is 
sourced to the country in which such profits are derived. Thus, 
for example, if a French resident has a permanent establishment 
in Venezuela and that French resident incurs indebtedness to a 
U.S. person, the interest on which is borne by the Venezuelan 
permanent establishment, the interest would be treated as 
having its source in Venezuela.
---------------------------------------------------------------------------
    \6\ This is consistent with the source rules of U.S. law, which 
provide as a general rule that interest income has as its source the 
country in which the payor is resident.
---------------------------------------------------------------------------
    The proposed treaty addresses the issue of non-arm's-length 
interest charges between related parties (or parties otherwise 
having a special relationship) by providing that the amount of 
interest for purposes of applying this article is the amount of 
interest that would have been agreed upon by the payor and the 
beneficial owner in the absence of the special relationship. 
Any amount of interest paid in excess of such amount is taxable 
according to the internal laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess interest paid by a subsidiary corporation to 
its parent corporation may be treated as a dividend under 
internal law and thus subject to the provisions of Article 10 
(Dividends).

Article 11A. Branch Tax

            Internal taxation rules

United States

    A foreign corporation engaged in the conduct of a trade or 
business in the United States is subject to a flat 30-percent 
branch profits tax on its ``dividend equivalent amount,'' which 
is a measure of the accumulated U.S. effectively connected 
earnings of the corporation that are removed in any year from 
its U.S. trade or business. The dividend equivalent amount is 
limited by (among other things) the foreign corporation's 
aggregate earnings and profits accumulated in taxable years 
beginning after December 31, 1986. The Code provides that no 
U.S. treaty shall exempt any foreign corporation from the 
branch profits tax (or reduce the amount thereof) unless the 
foreign corporation is a ``qualified resident'' of the treaty 
country. The definition of a ``qualified resident'' under U.S. 
internal law is somewhat similar to the definition of a 
corporation eligible for benefits under the proposed treaty 
(discussed below in connection with Article 17 (Limitation on 
Benefits)).
    A foreign corporation is subject to a branch-level excess 
interest tax with respect to certain ``excess interest'' of a 
U.S. trade or business of such corporation; under this rule an 
amount equal to the excess of the interest deduction allowed 
with respect to the U.S. business over the interest paid by 
such business is treated as if paid by a U.S. corporation to a 
foreign parent and therefore is subject to a withholding tax.

Venezuela

    Venezuela does not impose tax on the dividend equivalent 
amount of branch profits or on excess interest.
            Proposed treaty limitations on internal law
    The proposed treaty provides that a company that is a 
resident of a country may be subject in the other country to a 
tax in addition to the tax on profits.
    The proposed treaty permits the United States to impose its 
branch profits tax, but limits the rate of such tax to 5 
percent. In this regard, the proposed treaty permits the United 
States to impose a tax on the ``dividend equivalent amount'' of 
the business profits of a Venezuelan corporation which are 
attributable to a U.S. permanent establishment or that are 
subject to tax on a net basis as income or gains from real 
property. The proposed protocol provides that in the case of 
the United States, the term ``dividend equivalent amount'' has 
the meaning it has under U.S. laws, as it may be amended from 
time to time without changing the general principle thereof. 
The Technical Explanation states that the term ``dividend 
equivalent amount'' has the same meaning it has under Code 
section 884, as it may be amended, provided that the amendments 
are consistent with the purposes of the branch profits tax.
    The proposed treaty permits the imposition of the U.S. tax 
on excess interest, but limits the rate of source-country tax. 
In this regard, the proposed protocol provides that for these 
purposes, excess interest means the excess, if any of (1) 
interest deductible in one or more years in computing the 
profits of a corporation that are either attributable to a 
permanent establishment or that are subject to tax on a net 
basis as income or gains from real property, over (2) the 
interest paid by or from such permanent establishment or trade 
or business. The proposed treaty provides that the rate of tax 
imposed on such excess interest may not exceed the specified 
rates in the interest article (i.e., 4.95 or 10 percent, as the 
case may be, under Article 11(2)). Thus, for example, if the 
enterprise is a financial institution, the excess interest tax 
would be imposed at a 4.95 percent rate.
    This article is drafted reciprocally to apply to both the 
United States and Venezuela. Although Venezuela currently does 
not impose branch taxes under its internal law, the Technical 
Explanation states that if in the future Venezuela should adopt 
such branch taxes, it may apply them to U.S. companies subject 
to the limitations of this article.

Article 12. Royalties

            Internal taxation rules

United States

    Under the same system that applies to dividends and 
interest, the United States imposes a 30-percent withholding 
tax on U.S.-source royalties paid to foreign persons. U.S.-
source royalties include royalties for the use of or the right 
to use intangible property in the United States.

Venezuela

    Venezuela generally imposes a withholding tax on royalties 
paid to nonresidents at a rate of 34 percent. The 34 percent 
rate is applied to 90 percent of notional income (i.e., an 
effective rate of 30.6 percent) in the case of certain 
turnover-based royalties, and to 50 percent of notional income 
(i.e., an effective rate of 17 percent) in the case of certain 
lump-sum royalties.
            Proposed treaty limitations on internal law
    The proposed treaty provides that royalties arising in a 
treaty country and derived by a resident of the other country 
may be taxed by that other country. In addition, the proposed 
treaty allows the country where the royalties arise (the 
``source country'') to tax such royalties according to its 
laws. However, if the beneficial owner of the royalties is a 
resident of the other country, the source country tax is 
limited.
    The proposed treaty provides that the rate of source-
country tax on certain royalties may not exceed 5 percent of 
the gross royalties. The 5-percent limitation applies to 
payments of any kind for the use of, or the right to use, 
industrial, commercial or scientific equipment. Unlike the 
proposed treaty, the U.S. model treats such income as business 
profits, and not as royalties.
    The proposed treaty further provides that the rate of 
source-country tax on certain royalties may not exceed 10 
percent of the gross royalties. The 10-percent limitation 
applies to payments of any kind received in consideration for 
the use of, or the right to use, any copyright of literary, 
dramatic, musical, artistic, or scientific work, including 
cinematographic films, tapes, and other means of image or sound 
reproduction, any patent, trademark, design or model, plan, 
secret formula or process, or other like right or property, or 
for information concerning industrial, commercial or scientific 
experience. The proposed treaty also treats as royalties 
subject to the 10-percent limitation gains derived from the 
alienation of such right or property to the extent that such 
gains are contingent on the productivity, use or disposition 
thereof.
    According to the Technical Explanation, payments with 
respect to computer software are treated as royalties or as 
business profits, depending on the facts and circumstances of 
the particular transaction. The Technical Explanation also 
states that it is understood that payments with respect to 
transfers of ``shrink wrap'' computer software will be treated 
as business profits, and not as royalties. The Technical 
Explanation also states that the term ``industrial, commercial 
or scientific experience'' includes information that is 
ancillary to a right otherwise giving rise to royalties, such 
as a patent or secret process.
    The proposed treaty's reductions in source country tax on 
royalties do not apply if (1) the beneficial owner of the 
royalties carries on business in the source country through a 
permanent establishment located in that country, or performs in 
the source country independent personal services from a fixed 
base located in that country, and (2) the royalties are 
attributable to such permanent establishment or fixed base. In 
such cases, the interest is taxed as business profits (Article 
7) or as independent personal services income (Article 14), as 
the case may be. These rules also apply if the permanent 
establishment or fixed base no longer exists when the royalties 
are paid but such royalties are attributable to the former 
permanent establishment or fixed base.
    The proposed treaty provides that royalties are deemed to 
arise in a country when they are in consideration for the use 
of, or the right to use, property, information or experience in 
that country. This source rule generally is consistent with the 
place of use source rules under U.S. law.
    The proposed protocol provides that payments received as 
consideration for technical services or assistance, including 
studies or surveys of a scientific, geological or technical 
nature, for engineering works including the plans related 
thereto, or for consultancy or supervisory services or 
assistance are not considered royalties, but are treated as 
either business profits under Article 7 or as independent 
personal services income under Article 14.
    The proposed treaty addresses the issue of non-arm's-length 
royalties between related parties (or parties otherwise having 
a special relationship) by providing that the amount of 
royalties for purposes of applying this article is the amount 
that would have been agreed upon by the payor and the 
beneficial owner in the absence of the special relationship. 
Any amount of royalties paid in excess of such amount is 
taxable according to the laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess royalties paid by a subsidiary corporation to 
its parent corporation may be treated as a dividend under local 
law and thus subject to the provisions of Article 10 
(Dividends).

Article 13. Gains

            Internal taxation rules

United States

    Generally, gain realized by a nonresident alien or a 
foreign corporation from the sale of a capital asset is not 
subject to U.S. tax unless the gain is effectively connected 
with the conduct of a U.S. trade or business or, in the case of 
a nonresident alien, he or she is physically present in the 
United States for at least 183 days in the taxable year. A 
nonresident alien or foreign corporation is subject to U.S. tax 
on gain from the sale of a U.S. real property interest as if 
the gain were effectively connected with a trade or business 
conducted in the United States. ``U.S. real property 
interests'' include interests in certain corporations if at 
least 50 percent of the assets of the corporation consist of 
U.S. real property.

Venezuela

    Capital gains generally are subject to a withholding tax of 
34 percent. However, the sale of shares of a publicly traded 
Venezuelan company are subject to a withholding tax of 1 
percent of the sales price.
            Proposed treaty limitations on internal law
    Under the proposed treaty, gains or income derived by a 
treaty country resident from the alienation of immovable 
property (real property) situated in the other country may be 
taxed in the other country. Immovable property (real property) 
situated in the other country for purposes of this article 
includes immovable property (real property) referred to in 
Article 6 (Income from Immovable Property (Real Property)) that 
is situated in the other country, an interest in a partnership, 
trust or estate to the extent that its assets consist of 
immovable property (real property) situated in the other 
country, and a United States real property interest and an 
equivalent interest in Venezuelan immovable property (real 
property). The Technical Explanation states that distributions 
by a REIT that are attributable to gains derived from the 
alienation of real property are taxable under this article (and 
are not taxable under the dividends article (Article 10)).
    The proposed treaty contains a standard provision which 
permits a country to tax the gain or income from the alienation 
of personal (movable) property that is attributable to a 
permanent establishment that an enterprise of a country has in 
the other country, or that is attributable to a fixed base that 
is available to a resident of a country in the other country 
for purposes of performing independent personal services. This 
rule also applies to gains from the alienation of such a 
permanent establishment (alone or with the whole enterprise) or 
such fixed base. This rule also applies if the permanent 
establishment or fixed base no longer exists when the gains are 
recognized but such gains are attributable to the former 
permanent establishment or fixed base.
    The proposed treaty provides that gains or income derived 
by an enterprise of a country from the alienation of ships, 
aircraft, or containers operated in international traffic are 
taxable only in that country. This rule also applies to 
personal property pertaining to the operation or use of such 
ships, aircraft, or containers. This rule applies even if such 
gain is attributable to a permanent establishment in the other 
country.
    The proposed treaty provides that gains from the alienation 
of any property other than that discussed above are taxable 
under the proposed treaty only in the country where the 
alienator is a resident.

Article 14. Independent Personal Services

            Internal taxation rules

United States

    The United States taxes the income of a nonresident alien 
individual at the regular graduated rates if the income is 
effectively connected with the conduct of a trade or business 
in the United States by the individual. The performance of 
personal services within the United States may constitute a 
trade or business within the United States.
    Under the Code, the income of a nonresident alien 
individual from the performance of personal services in the 
United States is excluded from U.S.-source income, and 
therefore is not taxed by the United States in the absence of a 
U.S. trade or business, if the following criteria are met: (1) 
the individual is not in the United States for over 90 days 
during the taxable year, (2) the compensation does not exceed 
$3,000, and (3) the services are performed as an employee of, 
or under a contract with, a foreign person not engaged in a 
trade or business in the United States, or are performed for a 
foreign office or place of business of a U.S. person.

Venezuela

    Nonresident individuals generally are subject to a 
withholding tax on income with respect to the performance of 
professional services in Venezuela at a rate of 34 percent on 
90 percent of notional income (i.e., an effective rate of 30.6 
percent).
            Proposed treaty limitations on internal law
    Under the proposed treaty, income in respect of 
professional services or other activities of an independent 
character derived by a resident of a country is taxable only in 
that country. However, such income also may be taxed by the 
other country (the source country) if the individual has a 
fixed base regularly available to him or her in the other 
country for the purpose of performing the activities. In that 
case, the source country is permitted to tax only that portion 
of the individual's income which is attributable to that fixed 
base. This rule also applies where the income is received after 
the fixed base is no longer in existence, but the income is 
attributable to the former fixed base. The Technical 
Explanation states that the term ``fixed base'' is understood 
to be similar, but not identical, to the term ``permanent 
establishment,'' as defined in the permanent establishment 
article (Article 5).
    The proposed treaty provides that the term ``professional 
services'' includes especially independent scientific, 
literary, artistic, educational, or teaching activities, as 
well as the independent activities of physicians, lawyers, 
engineers, architects, dentists and accountants.
    The proposed treaty provides that the rules for taxing 
independent personal services income is subject to the 
provisions of the business profits article (Article 7). The 
Technical Explanation states that this rule ensures that in 
cases where the source country taxes income from independent 
personal services, it will do so only on a net basis. The 
proposed protocol provides that this article is to be 
interpreted according to the Commentary to Article 14 
(Independent Personal Services) of the OECD Model, and of any 
guidelines which, for the application of such article, may be 
developed in the future. Thus, it is understood that the tax on 
such independent personal services income will be imposed on 
net income as if the income were attributable to a permanent 
establishment and taxable under Article 7 (Business Profits).

Article 15. Dependent Personal Services

    Under the proposed treaty, salaries, wages, and other 
similar remuneration derived from services performed as an 
employee in one country (the source country) by a resident of 
the other country are taxable only by the country of residence 
if three requirements are met: (1) the individual must be 
present in the source country for not more than 183 days in any 
twelve-month period commencing or ending in the taxable year 
concerned; (2) his or her employer must not be a resident of 
the source country; and (3) the compensation must not be borne 
by a permanent establishment or fixed base of the employer in 
the source country. These limitations on source- country 
taxation generally are consistent with the U.S. and OECD 
models. The proposed protocol provides that the term ``similar 
remuneration'' includes benefits in kind received in respect of 
an employment and any other benefits, whether or not considered 
as salaries under the domestic laws of both countries. The 
proposed protocol gives a non-exhaustive list of examples of 
compensation that would be considered to be ``similar 
remuneration.'' The list includes, but is not limited to, the 
use of a residence or automobile, health or life insurance 
coverage and club memberships, provision of meals, food and 
groceries, child care, reimbursement of medical, pharmaceutical 
and dental care expenses, provision of work clothing, toys and 
school supplies, scholarships, reimbursement of training course 
expenses, and mortuary and burial expenses.
    The proposed treaty, similar to the U.S. model, provides 
that remuneration derived in respect of employment as a member 
of the crew of a ship or aircraft, or as other personnel 
regularly employed to serve aboard a ship or aircraft, operated 
in international traffic is taxable only in the employee's 
country of residence.
    This article is subject to the provisions of the separate 
articles covering directors' fees (Article 16), pensions, 
social security, annuities, and child support (Article 19), 
government service income (Article 20), and income of students, 
trainees, teachers and researchers (Article 21).

Article 16. Directors' Fees

    Under the proposed treaty, directors' fees and other 
similar payments derived by a resident of one country for 
services performed in the other country in his or her capacity 
as a member of the board of directors of a company which is a 
resident of that other country may be taxed in that other 
country. This rule is similar to the corresponding rule in the 
U.S. model. This rule applies notwithstanding the provisions of 
Article 14 (Independent Personal Services) and Article 15 
(Dependent Personal Services).
    The proposed protocol provides that for these purposes the 
term ``similar payments'' includes benefits in kind received in 
respect of an employment and any other benefits, whether or not 
considered as salaries under the domestic laws of both 
countries. The proposed protocol gives a non-exhaustive list of 
examples of compensation that would be considered to be 
``similar payments.'' The list includes, but is not limited to, 
the use of a residence or automobile, health or life insurance 
coverage and club memberships, provision of meals, food and 
groceries, child care, reimbursement of medical, pharmaceutical 
and dental care expenses, provision of work clothing, toys and 
school supplies, scholarships, reimbursement of training course 
expenses, and mortuary and burial expenses.

Article 17. Limitation on Benefits

            In general
    The proposed treaty contains a provision generally intended 
to limit the indirect use of the proposed treaty by persons who 
are not entitled to its benefits by reason of residence in the 
United States or Venezuela. The proposed treaty is intended to 
limit double taxation caused by the interaction of the tax 
systems of the United States and Venezuela as they apply to 
residents of the two countries. At times, however, residents of 
third countries attempt to use a treaty. This use is known as 
``treaty shopping,'' which refers to the situation where a 
person who is not a resident of either treaty country seeks 
certain benefits under the income tax treaty between the two 
countries. Under certain circumstances, and without appropriate 
safeguards, the third-country resident may be able to secure 
these benefits indirectly by establishing a corporation or 
other entity in one of the treaty countries, which entity, as a 
resident of that country, is entitled to the benefits of the 
treaty. Additionally, it may be possible for the third-country 
resident to reduce the income base of the treaty country 
resident by having the latter pay out interest, royalties, or 
other amounts under favorable conditions either through relaxed 
tax provisions in the distributing country or by passing the 
funds through other treaty countries until the funds can be 
repatriated under favorable terms.
    The proposed anti-treaty shopping article provides that a 
person that is a resident of either Venezuela or the United 
States and that derives income from the other treaty country is 
entitled to the benefits of the proposed treaty in that other 
country only if such person:
          (1) is an individual not treated as a resident of a 
        third country;
          (2) is one of the treaty countries or their political 
        subdivisions or local authorities, or instrumentalities 
        or companies wholly-owned by one of the treaty 
        countries or their political subdivisions or local 
        authorities;
          (3) is an entity that is a not for profit 
        organization that satisfies an ownership test;
          (4) meets an active business test with respect to a 
        particular item of income;
          (5) is a company that satisfies a public company 
        test;
          (6) is a company that is owned by certain public 
        companies; or
          (7) is an entity that satisfies an ownership and base 
        erosion test.
    In addition, a person that does not satisfy any of the 
above requirements may be granted the benefits of the proposed 
treaty if the source country's competent authority so 
determines.
            Individuals
    An individual resident of a treaty country is entitled to 
the benefits of the proposed treaty provided that the 
individual is not treated as a resident of another country 
under the principles of the tie-breaker rules under 
subparagraph 3(a) and 3(b) of Article 4 (Residence). The 
Technical Explanation states that this provision is intended to 
prevent a third-country resident individual from using 
Venezuela's broad residency concept (``domiciliado'') to 
treaty-shop into the United States.
            Governments
    Under the proposed treaty, the two countries, their 
political subdivisions or local authorities, or 
instrumentalities or companies wholly-owned by one of the 
countries or their political subdivisions or local authorities, 
are entitled to all treaty benefits.
            Tax exempt entities
    An entity is entitled to the benefits under the proposed 
treaty if it is a not for profit organization (including a 
pension fund or private foundation) that, by virtue of that 
status, generally is exempt from income tax in its country of 
residence, provided that more than half of the beneficiaries, 
members, or participants (if any) in such organization are 
entitled to the benefits of the proposed treaty.
            Active business test

In general

    Under the active business test, treaty benefits are 
available under the proposed treaty to a person that is engaged 
in the active conduct of a trade or business in its residence 
country if (1) the income derived in the other country is 
derived in connection with, or is incidental to, that trade or 
business, and (2) that trade or business is substantial in 
relation to the income-generating activity in the other country 
giving rise to the income in respect of which treaty benefits 
are being claimed in that other country.
    This active trade or business test is applied separately to 
each item of income. Accordingly, an entity may be eligible for 
treaty benefits with respect to some but not all of the income 
derived in the source country. In contrast, satisfaction of the 
requirements for any one of the other specified categories 
allows treaty benefits for all income derived in the source 
country.
    The term ``trade or business'' is not specifically defined 
in the proposed treaty. However, as provided in Article 3 
(General Definitions), undefined terms are to have the meaning 
which they have under the laws of the country applying the 
proposed treaty. In this regard, the Technical Explanation 
states that the U.S. competent authority will refer to the 
regulations issued under Code section 367(a) to define an 
active trade or business. Under the proposed treaty, the active 
business test does not apply (and benefits therefore may be 
denied) to the business of making or managing investments, 
unless these activities are banking or insurance activities 
carried on by a bank or insurance company. The Technical 
Explanation states these rules do not apply to a headquarters 
company, because the company would not be considered to be 
engaged in an active trade or business.

Income derived in connection with, or incidental to, a trade or 
        business that is substantial

    The Technical Explanation states that an item of income is 
derived in connection with a trade or business if the income-
producing activity in the source country is a line of business 
which forms a part of, or is complementary to, the trade or 
business conducted in the residence country.7 This 
rule is similar to the rule in the U.S. model. The Technical 
Explanation states that it is intended that a business activity 
generally will be considered to ``form a part of'' a business 
activity conducted in the other country if the two activities 
involve the design, manufacture or sale of the same products or 
type of products, or the provision of similar services. The 
Technical Explanation further states that in order for 
activities to be ``complementary,'' the activities need not 
relate to the same types of products or services, but they 
should be part of the same overall industry and be related in 
the sense that success or failure of one activity will tend to 
result in the success or failure of the other activity. The 
Technical Explanation provides several examples illustrating 
these principles.
---------------------------------------------------------------------------
    \7\ Cf. Treas. Reg. sec. 1.884-5(e)(1). (To satisfy the active 
business test, the activities that give rise to the U.S. income must be 
part of a U.S. business and that business must be an integral part of 
an active trade or business conducted by the foreign corporation in its 
residence country.)
---------------------------------------------------------------------------
    The Technical Explanation states that whether a trade or 
business of a resident is substantial is determined based on 
all the facts and circumstances. According to the Technical 
Explanation, the factors to be considered include the relative 
scale of the activities conducted in the two countries, and the 
relative contributions made to the conduct of the trade or 
business in both countries.8
---------------------------------------------------------------------------
    \8\ Cf. Treas. Reg. sec. 1.884-5(e)(3). (A foreign corporation 
engaged in business in its residence country has a substantial presence 
in that country if certain of the attributes of that business, 
physically located in its residence country, equal at least a threshold 
percentage of its worldwide attributes.)
---------------------------------------------------------------------------
    The Technical Explanation states that it is understood that 
income is incidental to a trade or business conducted in the 
other country if the production of such income facilitates the 
conduct of a trade or business in the other country. This rule 
is the same as the rule in the U.S. model. As an example, the 
Technical Explanation states that incidental income includes 
the temporary investment of working capital derived from a 
trade or business.
            Public company tests
    Under the public company tests, a company that is a 
resident of Venezuela or the United States is entitled to the 
benefits of the proposed treaty if there is substantial and 
regular trading in its principal class of shares on a 
recognized securities exchange. This test is similar to the 
rule contained in the U.S. model. The Technical Explanation 
states that the term ``principal class of shares'' is to be 
interpreted as the class of shares that represents the majority 
of the voting power and value of the company. The term 
``substantial and regular trading,'' although not defined in 
the proposed treaty, is to be defined by reference to the 
domestic laws of the country from which treaty benefits are 
being sought. In the case of the United States, this term is 
understood to have the meaning given ``regularly traded'' in 
Treas. Reg. sec. 1.884-5(d)(4)(i)(B), relating to the branch 
tax provisions of the Code.
    Similarly, treaty benefits are available to a company that 
is a resident of Venezuela or the United States if at least 50 
percent of each class of shares of the company is owned 
(directly or indirectly) by five or fewer companies that 
satisfy the public company test just described, provided that 
in the case of indirect ownership, each intermediate owner is a 
person entitled to the benefits of the proposed treaty under 
one of the various alternative tests.
    The term ``recognized securities exchange'' means: (1) the 
Caracas and Maracaibo stock exchanges, the Bolsa Electronica 
and any stock exchange registered with the Comision Nacional de 
Valores in accordance with the Ley de Mercado de Capitales; (2) 
the NASDAQ System owned by the National Association of 
Securities Dealers, Inc., and any stock exchange registered 
with the Securities and Exchange Commission as a national 
securities exchange for the purposes of the Securities Exchange 
Act of 1934; and (3) any other stock exchange agreed upon by 
the competent authorities of the two countries.
            Ownership and base erosion tests
    Under the proposed treaty, a person that is resident in one 
of the treaty countries is entitled to treaty benefits if it 
satisfies an ownership test and a base erosion test. Under the 
ownership test, more than 50 percent of the beneficial interest 
in a person (or, in the case of a company, more than 50 percent 
of the number of shares of each class of the company's shares) 
must be owned, directly or indirectly, by one or more 
individual residents of Venezuela or the United States, U.S. 
citizens, the countries themselves, political subdivisions or 
local authorities of the countries or instrumentalities or 
companies wholly-owned by such entities, certain tax-exempt 
organizations (as described in the discussion of tax-exempt 
entities above), or certain publicly traded companies and 
subsidiaries of publicly traded companies (as described in the 
discussion of the public company tests above) (so-called 
``qualified residents''). This rule could, for example, deny 
the benefits of the reduced U.S. withholding tax rates on 
dividends and royalties paid to a Venezuelan company that is 
controlled by individual residents of a third country. This 
rule is similar to a corresponding rule in the U.S. model. The 
Technical Explanation states that trusts may be entitled to 
treaty benefits under this provision if they are treated as 
residents under Article 4 (Residence) and otherwise satisfy 
these requirements.
    In addition, the base erosion test is met only if less than 
50 percent of the gross income of the person is used, directly 
or indirectly, to meet liabilities (including liabilities for 
interest or royalties) to persons or entities other than those 
referred to in the preceding paragraph. This rule is intended 
to prevent a corporation, for example, from distributing most 
of its income, in the form of deductible items such as 
interest, royalties, service fees, or other amounts) to persons 
not entitled to benefits under the proposed treaty. This 
treatment is similar to the corresponding rule in the U.S. 
model. For purposes of the base erosion test, the proposed 
treaty provides that the term ``gross income'' generally means 
gross receipts. In the case of an enterprise that is engaged in 
a business which includes the manufacture or production of 
goods, gross income means gross receipts reduced by the direct 
costs of labor and materials attributable to such manufacture 
or production and paid or payable out of such receipts.
            Venezuelan entidad or colectividad
    Under the proposed treaty, an entidad or colectividad 
formed under the laws of Venezuela (and otherwise entitled to 
treaty benefits under the objective tests described above) is 
not entitled to treaty benefits if such entidad or colectividad 
(or another entidad or colectividad or other person that 
controls such entity) has outstanding a class of interests: (1) 
that is ``disproportionate,'' and (2) in which 50 percent or 
more of the vote or value of such entity is owned by certain 
persons or entities who are not qualified residents (as 
described above) of either Venezuela or the United States. A 
class of interests is disproportionate for these purposes if 
the terms of such interests, or the arrangements with respect 
to such interests, entitle its holders to a portion of the 
income of the entidad or colectividad derived from the United 
States that is larger than the portion such holders would 
receive absent such terms or arrangements.
            Former U.S. long-term residents
    Notwithstanding the objective tests described above, a 
former long-term resident of the United States is not entitled 
to the benefits of the proposed treaty for the ten-year period 
following loss of such long-term resident status, if such loss 
of status had as one of its principal purposes the avoidance of 
U.S. tax, determined in accordance with U.S. law applicable to 
former U.S. citizens and long-term residents. Section 877 of 
the Code provides special rules for the imposition of U.S. 
income tax on former U.S. citizens and long-term residents for 
a period of ten years following the loss of citizenship or 
resident status; these special tax rules apply to a former 
citizen or long-term resident only if his or her loss of U.S. 
citizenship or resident status had as one of its principal 
purposes the avoidance of U.S. income, estate or gift taxes. 
For purposes of applying the special tax rules to former 
citizens and long-term residents, individuals who meet a 
specified income tax liability threshold or a specified net 
worth threshold generally are considered to have lost 
citizenship or resident status for a principal purpose of U.S. 
tax avoidance. The proposed protocol provides that a ``long-
term resident'' means any individual who is a lawful permanent 
resident of the United States in 8 or more taxable years during 
the preceding 15 taxable years. In determining whether this 
threshold is met, the proposed protocol provides that there is 
not taken into account any year in which the individual is 
treated as a resident of Venezuela under the proposed treaty, 
or as a resident of any other country other than the United 
States under the provisions of any other U.S. tax treaty and, 
in either case, the individual does not waive the benefits of 
such treaty applicable to residents of the other country.
            Grant of treaty benefits by the competent authority
    The proposed treaty provides a ``safety-valve'' for a 
person that has not established that it meets one of the other 
more objective tests, but for which the allowance of treaty 
benefits would not give rise to abuse or otherwise be contrary 
to the purposes of the treaty. Under this provision, such a 
person may be granted treaty benefits if the competent 
authority of the source country so determines. The 
corresponding article in the U.S. model contains a similar 
rule. For this purpose, one of the factors the competent 
authorities must take into account is whether the 
establishment, acquisition, and maintenance of the person, and 
the conduct of its operations, did not have as one of its 
principal purposes the obtaining of treaty benefits.

Article 18. Artistes and Sportsmen

    Like the U.S., OECD and U.N. models, the proposed treaty 
contains a separate set of rules that apply to the taxation of 
income earned by entertainers (such as theater, motion picture, 
radio, or television artistes or musicians) and sportsmen. 
These rules apply notwithstanding the other provisions dealing 
with the taxation of income from personal services (Articles 14 
(Independent Personal Services) and Article 15 (Dependent 
Personal Services)) and are intended, in part, to prevent 
entertainers and sportsmen from using the proposed treaty to 
avoid paying any tax on their income earned in one of the 
countries.
    Under the proposed treaty, income derived by an entertainer 
or sportsman who is a resident of one country from his or her 
personal activities as such in the other country may be taxed 
in the other country if the amount of the compensation derived 
by him or her from such activities (including expenses 
reimbursed to him or her or borne on his or her behalf) exceeds 
$6,000 or its Venezuelan currency equivalent for the entire 
taxable year concerned. Under this rule, if a Venezuelan 
entertainer or sportsman maintains no fixed base in the United 
States and performs (as an independent contractor) for one day 
of a taxable year in the United States for total compensation 
of $10,000, the full amount would be subject to U.S. tax.
    The proposed treaty provides that where income in respect 
of activities exercised by an entertainer or sportsman in his 
or her capacity as such accrues not to the entertainer or 
sportsman but to another person, that income of that other 
person is taxable by the country in which the activities are 
exercised, unless it is established that neither the 
entertainer or sportsman nor persons related to him or her 
participated directly or indirectly in the profits of that 
other person in any manner, including the receipt of deferred 
remuneration, bonuses, fees, dividends, partnership 
distributions, or other distributions. This provision applies 
notwithstanding the business profits and independent personal 
services articles (Articles 7 and 14).) This provision prevents 
highly-paid entertainers and sportsmen from avoiding tax in the 
country in which they perform by, for example, routing the 
compensation for their services through a third entity such as 
a personal holding company or a trust located in a country that 
would not tax the income.
    The proposed treaty provides that these rules do not apply 
to income derived from activities performed in a country as an 
entertainer or sporstman if the visit to that country is wholly 
or mainly supported by public funds of one or both of the 
treaty countries or any of its political subdivisions or local 
authorities. In such a case, the income is taxable only in the 
entertainer's or sportsman's country of residence. This rule is 
not contained in the U.S., OECD or U.N. models, but is 
contained in some other U.S. treaties.

Article 19. Pensions, Social Security, Annuities, and Child Support

    Under the proposed treaty, pensions and other similar 
remuneration derived and beneficially owned by a resident of 
either country in consideration of past employment is taxable 
only in the recipient's country of residence. The Technical 
Explanation states that, for purposes of this rule, the pension 
may be paid periodically or in a lump sum. The Technical 
Explanation also states that the provision is intended to 
encompass payments made by private retirement plans and 
arrangements in consideration of past employment. This 
provision is subject to the provisions of Article 20 
(Government Service) with respect to pensions.
    The proposed treaty provides that social security benefits 
paid by a country to a resident of the other country or to a 
U.S. citizen may be taxable by the payor's (i.e., the source) 
country. This provision represents a departure from the U.S. 
model, which provides that social security benefits paid by a 
country to a resident of the other country or to a U.S. citizen 
are taxable only in the source country. The proposed treaty 
would allow such social security benefits to be taxed by both 
the residence and source country.9 The proposed 
protocol provides that for these purposes the term ``social 
security benefits'' is intended to include United States tier 1 
Railroad Retirement benefits.
---------------------------------------------------------------------------
    \9\ Under Venezuelan law, U.S. social security benefits paid to a 
Venezuelan resident generally would not be taxable by Venezuela under 
its territorial tax system. In addition, social security benefits paid 
by Venezuela to a U.S. resident generally would be taxed by both 
Venezuela and the United States under each country's tax laws. The 
United States generally would provide a foreign tax credit for 
Venezuelan taxes paid with respect to such income.
---------------------------------------------------------------------------
    The proposed treaty also provides that annuities (other 
than those covered under the pension rule described above) that 
are derived from a country and beneficially owned by an 
individual resident of the other country are taxable only in 
the country from which they are derived. This rule is different 
from the corresponding rule in the U.S. model, which provides 
that annuities are taxable only in the individual recipient's 
country of residence. The term ``annuities'' is defined for 
purposes of this provision as a stated sum paid periodically at 
stated times during a specific time period, under an obligation 
to make the payments in return for adequate and full 
consideration (other than services rendered).
    The proposed treaty provides that child support payments 
made by a resident of a country to a resident of the other 
country are taxable only in the recipient's country of 
residence. This rule is different from the rule in the U.S. 
model, which provides that child support payments are exempt 
from tax in both countries. For these purposes, child support 
payments are periodic payments for the support of a minor child 
made pursuant to a written separation agreement, or a decree of 
divorce, separate maintenance or compulsory support.
    Unlike many U.S. tax treaties, the proposed treaty does not 
contain a rule for alimony payments. Thus, such payments fall 
under the rules of Article 22 (Other Income), which generally 
allow such payments to be taxed both by the payor's country of 
residence and the recipient's country of residence. This 
approach generally is inconsistent with the U.S. model, which 
provides that alimony paid by a resident of a country and 
deductible in such country to a resident of the other country 
is taxable exclusively by the recipient's country of residence.

Article 20. Government Service

    The proposed treaty provides rules with respect to the tax 
treatment of income (including pensions) from governmental 
employment. The provisions generally follow the corresponding 
provisions in the U.S., OECD and U.N. models.
    Under the proposed treaty, remuneration, other than a 
pension, paid by one of the countries (or a political 
subdivision or local authority thereof) to an individual in 
respect of services rendered to that country (or subdivision or 
authority) generally is taxable only by that country. Such 
remuneration is taxable only in the other country, however, if 
the services are rendered in that other country by an 
individual who is a resident of that country and who (1) is 
also a national of that country or (2) did not become a 
resident of that country solely for the purpose of rendering 
the services.
    The proposed treaty further provides that any pension paid 
by, or out of funds created by, one of the countries (or a 
political subdivision or local authority thereof) to an 
individual in respect of services rendered to that country (or 
subdivision or authority) is taxable only by that country. Such 
a pension is taxable only by the other country, however, if the 
individual is a national and resident of that other country. 
This provision is subject to paragraph 2 of Article 19 
(Pensions, Social Security, Annuities, and Child Support), 
which provide that social security benefits paid by a country 
to a resident of the other country or a U.S. citizen may be 
taxed by the payor country.
    The provisions described in the foregoing paragraphs are 
exceptions to the proposed treaty's saving clause for 
individuals who are neither citizens nor permanent residents of 
the country where the services are performed. Thus, for 
example, payments by the government of Venezuela to its 
employees in the United States are exempt from U.S. tax if the 
employees are not U.S. citizens or green card holders and were 
not residents of the United States at the time they became 
employed by the Venezuelan government.
    The proposed treaty provides that if a country or one of 
its political subdivisions or local authorities is carrying on 
business (as opposed to functions of a governmental nature), 
the provisions of Articles 14 (Independent Personal Services), 
15 (Dependent Personal Services), 16 (Directors' Fees), 18 
(Artistes and Sportsmen), and 19 (Pensions, Social Security, 
Annuities, and Child Support) apply to remuneration and 
pensions paid for services rendered in connection with the 
business.

Article 21. Students, Trainees, Teachers and Researchers

    The proposed treaty provides rules with respect to the 
taxation of income of students, trainees, teachers, and 
researchers.
    Under the proposed treaty, an individual who is a resident 
of a country (the residence country) at the time he or she 
becomes temporarily present in the other country (the host 
country) will be exempt from tax by the host country for 
certain amounts received by the individual, if the individual's 
visit in the host country was for the primary purpose of (1) 
studying at a university or other recognized educational 
institution in the host country, (2) securing training required 
to qualify such individual to practice a profession or 
professional specialty, or (3) studying or doing research as a 
recipient of a grant, allowance or award from a government, 
religious, charitable, scientific, literary or educational 
organization. In such cases, the individual will be exempt from 
host country tax for a period not exceeding five taxable years 
from the date of the individual's arrival in the host country 
(and such additional period as is necessary to complete, as a 
full time student, educational requirements for a postgraduate 
or professional degree from a recognized educational 
institution). The exemptions from host country tax apply to (1) 
payments from abroad, other than compensation for personal 
services, for the purpose of maintenance, education, study, 
research, or training, (2) a grant, allowance or award, and (3) 
income from personal services performed in the host country in 
an amount not to exceed $5,000 or its Venezuelan currency 
equivalent for any taxable year.
    Under the proposed treaty, an individual who is a resident 
of one country (the residence country) at the time he or she 
becomes temporarily present in the other country (the host 
country) as an employee of, or under contract with, a resident 
of the first country, will be exempt from tax by the host 
country for certain amounts received by the individual, if the 
individual's visit in the host country was for the primary 
purpose of (1) acquiring technical, professional, or business 
experience from a person other than that resident of the 
residence country, or (2) studying at a university or other 
recognized educational institution in the host country. In such 
cases, the individual will be exempt from tax by the host 
country for a period not exceeding 12 months with respect to 
his or her income from personal services in an aggregate amount 
which does not exceed $8,000 or its Venezuelan currency 
equivalent.
    The proposed protocol provides that the exemption amounts 
from host country tax described in the above paragraphs (i.e., 
$5,000 and $8,000, respectively) are in addition to (and not in 
lieu of) any personal exemptions otherwise allowed under the 
domestic laws of the host country. Thus, an unmarried resident 
of Venezuela who is temporarily present in the United States 
for the primary purpose of studying at a university would be 
entitled to exclude from U.S. tax $5,000 of personal services 
income, and in addition, would be entitled to personal 
exemption amounts allowed by the Code.
    The proposed treaty provides rules with respect to the 
taxation of income earned by teachers. The U.S., OECD and U.N. 
models do not contain similar provisions.
    Under the proposed treaty, an individual who is a resident 
of a country (the residence country) at the time he or she 
becomes temporarily present in the other country (the host 
country) will be exempt from tax by the host country for 
certain amounts received by the individual, if the individual's 
visit in the host country was for the purpose of teaching or 
carrying on research at a recognized educational institution. 
In such cases, the individual will be exempt from tax by the 
host country for a period not exceeding two years from the date 
he or she visits the host country for such purposes with 
respect to his or her income from personal services for 
training or research at such institution. The proposed treaty 
provides that in no event will any individual have the benefits 
of this provision for more than five taxable years.
    The proposed treaty provides that this article does not 
apply to income from research if such research is not 
undertaken by the individual in the public interest but 
primarily for the private benefit of a specific person or 
persons.
    The provisions described in the foregoing paragraphs are 
exceptions to the proposed treaty's saving clause for 
individuals who are neither citizens nor permanent residents of 
the host country. Thus, for example, a person who is not a U.S. 
citizen, and who visits the United States as a student and 
remains long enough to become a resident under U.S. law, but 
does not become a permanent resident, will be entitled to the 
full benefits of this article.

Article 22. Other Income

    This article is a catch-all provision intended to cover 
items of income not specifically covered in other articles, and 
to assign the right to tax income from third countries to 
either the United States or Venezuela. As a general rule, items 
of income not otherwise dealt with in the proposed treaty which 
are derived by residents of one of the countries are taxable 
only in the country of residence.
    This rule, for example, gives the United States the sole 
right under the proposed treaty to tax income derived from 
sources in a third country and paid to a U.S. resident. This 
article is subject to the saving clause, so U.S. citizens who 
are residents of Venezuela will continue to be taxable by the 
United States on their third-country income.
    The general rule just stated does not apply to income 
(other than income from immovable property (real property) as 
defined in Article 6) if the recipient of the income is a 
resident of one country and carries on business in the other 
country through a permanent establishment, or performs 
independent personal services in the other country from a fixed 
base, and the right or property in respect of which the income 
is paid is attributable to such permanent establishment or 
fixed base. In such a case, the provisions of Article 7 
(Business Profits) or Article 14 (Independent Personal 
Services), as the case may be, will apply. This rule also 
applies where the income is received after the permanent 
establishment or fixed base is no longer in existence, but the 
income is attributable to the former permanent establishment or 
fixed base.
    The proposed treaty provides that notwithstanding the 
foregoing rules, items of income of a resident of a country not 
dealt with in the other articles of the proposed treaty and 
arising in the other country, may also be taxed by that other 
country. This rule, which is not contained in the U.S. and OECD 
models, is similar to the corresponding rule in the U.N. model.

Article 23. Capital

    Venezuela imposes a 1-percent capital tax on the value of 
business assets. Income taxes imposed by Venezuela may be 
credited against the capital tax.
    The proposed treaty specifies the circumstances in which 
either treaty country may impose tax on capital owned by a 
resident of the other country. Since the United States does not 
impose taxes on capital, the only capital taxes covered by the 
proposed treaty are those imposed by Venezuela (i.e., 
Venezuela's business assets tax). Thus, although the article is 
drafted in a reciprocal manner, its provisions are relevant 
only for the imposition of the Venezuelan tax.
    The proposed treaty describes two situations under which 
Venezuela may tax the capital of a U.S. resident. First, 
capital represented by immovable property (real property) (as 
defined in Article 6) that is owned by a U.S. resident and 
located in Venezuela. Second, capital represented by personal 
(movable) property forming part of the business property of a 
permanent establishment which a U.S. resident has in Venezuela 
or pertaining to a fixed base available to a U.S. resident for 
the purpose of performing independent personal services may be 
taxed by Venezuela.
    The proposed treaty provides that capital represented by 
ships, aircraft, or containers that are owned by a U.S. 
resident and used in international operations, and other 
personal (movable) property pertaining to the operation of such 
ships, aircraft, and containers is taxable only in the 
residence country of the enterprise. All other elements of 
capital of a resident of either country are taxable only by 
that country. Thus, except as provided above, Venezuela 
generally cannot tax a U.S. resident on capital owned by that 
resident.

Article 24. Relief from Double Taxation

            Internal taxation rules

United States

    The United States taxes the worldwide income of its 
citizens and residents. It attempts unilaterally to mitigate 
double taxation generally by allowing taxpayers to credit the 
foreign income taxes that they pay against U.S. tax imposed on 
their foreign-source income. An indirect or ``deemed-paid'' 
credit is also provided. Under this rule, a U.S. corporation 
that owns 10 percent or more of the voting stock of a foreign 
corporation and that receives a dividend from the foreign 
corporation (or an inclusion of the foreign corporation's 
income) is deemed to have paid a portion of the foreign income 
taxes paid (or deemed paid) by the foreign corporation on its 
earnings. The taxes deemed paid by the U.S. corporation are 
included in its total foreign taxes paid for the year the 
dividend is received.

Venezuela

    Under Venezuelan law, the primary method of avoiding double 
taxation is an exemption from foreign source income under its 
territorial-based tax system. Thus, generally no specific 
foreign tax credit relief is provided under Venezuelan law.
            Proposed treaty limitations on internal law
    One of the principal purposes for entering into an income 
tax treaty is to limit double taxation of income earned by a 
resident of one of the countries that may be taxed by the other 
country. Unilateral efforts to limit double taxation are 
imperfect. Because of differences in rules as to when a person 
may be taxed on business income, a business may be taxed by two 
countries as if it were engaged in business in both countries. 
Also, a corporation or individual may be treated as a resident 
of more than one country and be taxed on a worldwide basis by 
both.
    The double tax issue is addressed in part in other articles 
of the proposed treaty that limit the right of a source country 
to tax income. This article provides further relief where both 
Venezuela and the United States otherwise still tax the same 
item of income. This article is not subject to the saving 
clause, so that the country of citizenship or residence will 
waive its overriding taxing jurisdiction to the extent that 
this article applies.
    The proposed treaty provides that it is understood that 
double taxation will be avoided in accordance with the other 
paragraphs of this article (as described below).
    In the case of Venezuela, the proposed treaty generally 
provides that when a resident of Venezuela derives income that, 
in accordance with the provisions of the proposed treaty, may 
be taxed by the United States, Venezuela will allow relief to 
such resident. Such relief may consist alternatively of (1) an 
exemption of such income from Venezuelan tax, or (2) a credit 
against Venezuelan tax on income. The proposed treaty provides 
that such relief will be allowed in accordance with the 
provisions and subject to the limitations of Venezuelan laws, 
as they may be amended from time to time without changing the 
principle of the proposed treaty provisions.
    In the case of the United States, the proposed treaty 
generally provides that the United States will allow a U.S. 
citizen or resident a foreign tax credit for the income taxes 
paid to Venezuela by or on behalf of such U.S. citizen or 
resident. The proposed treaty also requires the United States 
to allow a deemed-paid credit, with respect to Venezuelan 
income tax, to any U.S. company that receives dividends from a 
Venezuelan company if the U.S. company owns 10 percent or more 
of the voting stock of such Venezuelan company. The credit 
generally is to be computed in accordance with the provisions 
and subject to the conditions and limitations of U.S. law (as 
such law may be amended from time to time without changing the 
general principles of the proposed treaty provisions).

Article 25. Non-Discrimination

    The proposed treaty contains a non-discrimination article 
that is generally similar to the non-discrimination article in 
the U.S. model and to provisions that have been included in 
other recent U.S. income tax treaties. Like the U.S. model, 
non-discrimination protection is provided with respect to all 
taxes imposed by a country or its political subdivisions or 
local authorities, and not just to taxes covered by the 
proposed treaty under Article 2 (Taxes Covered).
    In general, under the proposed treaty, one country may not 
discriminate by imposing other or more burdensome taxes (or 
requirements connected with taxes) on nationals of the other 
country than it would impose on its nationals in the same 
circumstances. The proposed protocol provides that it is 
understood that a nonresident of a country who is subject to 
tax by that country on his or her worldwide income by reason of 
being a national there is not in the same circumstances as a 
nonresident of that country who is subject to tax on income 
only from sources in that country. This provision applies, 
notwithstanding the provisions of Article 1 (General Scope), 
whether or not the nationals in question are residents of the 
United States or Venezuela.
    Under the proposed treaty, neither country may tax a 
permanent establishment of an enterprise of the other country 
less favorably than it taxes its own enterprises carrying on 
the same activities. Consistent with the U.S., OECD and U.N. 
models, however, a country is not obligated to grant residents 
of the other country any personal allowances, reliefs, or 
reductions for tax purposes on account of civil status or 
family responsibilities which it grants to its own residents.
    The proposed treaty provides that nothing in the non-
discrimination article is to be construed as preventing either 
of the countries from imposing the branch taxes described in 
Article 11A (Branch Tax).
    Each country is required (subject to the arm's-length 
pricing rules of Articles 9 (Associated Enterprises), 11 
(Interest), and 12 (Royalties)) to allow an enterprise of a 
country to deduct interest, royalties, and other disbursements 
paid by such enterprise to residents of the other country under 
the same conditions that it allows deductions for such amounts 
paid to residents of the same country as the payor. Similarly, 
each country is required to allow a resident of a country to 
deduct any debts of such resident to a resident of the other 
country, for purposes of determining the taxable capital of the 
resident of the first country, under the same conditions that 
it allows deductions for debts contracted to a resident of the 
first country. The Technical Explanation states that the term 
``other disbursements'' is understood to include a reasonable 
allocation of executive and general administrative expenses, 
research and development expenses, and other expenses incurred 
for the benefit of a group of related persons.
    The non-discrimination rules also apply to enterprises of 
one country that are owned in whole or in part by residents of 
the other country. Enterprises of one country, the capital of 
which is wholly or partly owned or controlled, directly or 
indirectly, by one or more residents of the other country, will 
not be subjected in the first country to any taxation or any 
connected requirement which is other or more burdensome than 
the taxation and connected requirements that the first country 
imposes or may impose on its similarly situated enterprises. 
The Technical Explanation includes examples of Code provisions 
that are understood by the two countries not to violate this 
provision of the proposed treaty. Those examples cover the 
rules that impose a withholding tax on non-U.S. partners of a 
partnership and the rules that prevent foreign persons from 
owning stock in Subchapter S corporations.
    The saving clause (which allows the country of residence or 
citizenship to impose tax notwithstanding certain treaty 
provisions) does not apply to the non-discrimination article.

Article 26. Mutual Agreement Procedure

    The proposed treaty contains the standard mutual agreement 
provision, with some variation, that authorizes the competent 
authorities of the two countries to consult together to attempt 
to alleviate individual cases of double taxation not in 
accordance with the proposed treaty. The saving clause of the 
proposed treaty does not apply to this article, so that the 
application of this article might result in a waiver (otherwise 
mandated by the proposed treaty) of taxing jurisdiction by the 
country of citizenship or residence.
    Under this article, a resident of one country who considers 
that the action of one or both of the countries result or will 
result in taxation which is not in accordance with the proposed 
treaty may present his or her case to the competent authority 
of either country. The proposed treaty provides that the case 
may be presented to the competent authorities irrespective of 
the remedies provided by the domestic laws of the countries and 
the time limits prescribed in such laws for claiming a refund.
    The competent authority then makes a determination as to 
whether the objection appears justified. If the objection 
appears to it to be justified and if it is not itself able to 
arrive at a satisfactory solution, that competent authority is 
to endeavor to resolve the case by mutual agreement with the 
competent authority of the other country, with a view to the 
avoidance of taxation which is not in accordance with the 
proposed treaty. The proposed protocol provides that the 
competent authorities are to endeavor to resolve such cases as 
promptly as possible. Provided that the statute of limitations 
has been interrupted in accordance with the steps designated by 
domestic law, any agreement reached is to be implemented 
notwithstanding any time limits or other procedural limitations 
under the domestic laws of the countries.
    The competent authorities of the countries must endeavor to 
resolve by mutual agreement any difficulties or doubts arising 
as to the interpretation or application of the proposed treaty. 
The proposed treaty provides a non-exhaustive list of items 
that the competent authorities may agree to, including: (1) the 
same allocation of income, deductions, credits, or allowances 
of an enterprise of a country to its permanent establishment 
situated in the other country; (2) the same allocation of 
income, deductions, credits, or allowances between persons; (3) 
the same characterization of particular items of income; (4) 
the same application of source rules with respect to particular 
items of income; (5) the common meaning of a term; (6) 
increases in any specific amounts referred to in the proposed 
treaty to reflect economic or monetary developments; and (7) 
the application of the provisions of domestic law regarding 
penalties, fines, and interest in a manner consistent with the 
purposes of the proposed treaty. The competent authorities may 
also consult together for the elimination of double taxation in 
cases not provided for in the proposed treaty.
    The proposed treaty authorizes the competent authorities to 
communicate with each other directly for purposes of reaching 
an agreement in the sense of this mutual agreement article. The 
Technical Explanation states that this provision makes clear 
that it is not necessary to go through diplomatic channels in 
order to discuss problems arising in the application of the 
proposed treaty.

Article 27. Exchange of Information

    This article provides for the exchange of information 
between the two countries. Notwithstanding the provisions of 
Article 2 (Taxes Covered), the proposed treaty's information 
exchange provisions apply to all taxes imposed at the national 
level by the United States and Venezuela.
    The proposed treaty provides that the two competent 
authorities will exchange such information as is necessary to 
carry out the provisions of the proposed treaty or the 
provisions of the domestic laws of the two countries concerning 
taxes covered by the proposed treaty (insofar as the taxation 
thereunder is not contrary to the proposed treaty). This 
exchange of information is not restricted by Article 1 (General 
Scope). Therefore, information with respect to third-country 
residents is covered by these procedures.
    Any information exchanged under the proposed treaty will be 
treated as secret in the same manner as information obtained 
under the domestic laws of the country receiving the 
information. The exchanged information may be disclosed only to 
persons or authorities (including courts and administrative 
bodies) involved in the assessment, collection, or 
administration, enforcement, or prosecution in respect of, or 
the determination of appeals in relation to, the taxes covered 
by the proposed treaty or the oversight of the above. Such 
persons or authorities may use the information for such 
purposes only.10 The Technical Explanation states 
that persons involved in the administration of taxes include 
legislative bodies with oversight roles with respect to the 
administration of the tax laws, such as, for example, the tax-
writing committees of Congress and the General Accounting 
Office. Information received by these bodies must be for use in 
the performance of their role in overseeing the administration 
of U.S. tax laws. Exchanged information may be disclosed in 
public court proceedings or in judicial decisions.
---------------------------------------------------------------------------
    \10\ Code section 6103 provides that otherwise confidential tax 
information may be utilized for a number of specifically enumerated 
non-tax purposes. Information obtained by the United States pursuant to 
the proposed treaty could not be used for these non-tax purposes.
---------------------------------------------------------------------------
    As is true under the U.S., OECD and U.N. models, under the 
proposed treaty, a country is not required to carry out 
administrative measures at variance with the laws and 
administrative practice of either country, to supply 
information that is not obtainable under the laws or in the 
normal course of the administration of either country, or to 
supply information that would disclose any trade, business, 
industrial, commercial, or professional secret or trade process 
or information the disclosure of which would be contrary to 
public policy.
    The proposed treaty provides that if information is 
requested by a country in accordance with the exchange of 
information article, the requested country will obtain the 
information to which the request relates in the same manner and 
to the same extent as if the tax were its own tax. The 
Technical Explanation states that this rule applies even if the 
requested country has no direct tax interest in the case to 
which the tax relates.
    If specifically requested by the competent authority of a 
country, the competent authority of the other country must 
provide information under this article in the form of 
depositions of witnesses and authenticated copies of unedited 
original documents (including books, papers, statements, 
records, accounts, and writings), to the same extent such 
depositions and documents can be obtained under the laws and 
administrative practices of the other country with respect to 
its own taxes.
    The proposed protocol provides that it is understood that 
in order to comply with this exchange of information article, 
the competent authorities of the countries are empowered by 
their respective domestic laws to obtain information held by 
persons other than taxpayers, including information held by 
financial institutions, agents and trustees. The Technical 
Explanation states that although the proposed treaty does not 
include the provision in the U.S. model dealing with bank 
secrecy rules, the proposed protocol clarifies that the 
competent authorities of both countries have the necessary 
authority to comply with the provisions of this article 
(including obtaining information held by banks).

Article 28. Diplomatic Agents and Consular Officers

    The proposed treaty contains the rule found in the U.S. 
model and other U.S. tax treaties that its provisions do not 
affect the fiscal privileges of diplomatic agents or consular 
officers under the general rules of international law or the 
provisions of special agreements. Accordingly, the proposed 
treaty will not defeat the exemption from tax which a host 
country may grant to the salary of diplomatic officials of the 
other country. The saving clause does not apply in the 
application of this article to host country residents who are 
neither citizens nor lawful permanent residents of that 
country. Thus, for example, U.S. diplomats who are considered 
Venezuelan residents generally may be protected from Venezuelan 
tax.

Article 29. Entry Into Force

    This article provides that the proposed treaty will be 
subject to ratification in accordance with the applicable 
procedures of each country. Each country is required to notify 
the other through diplomatic channels, accompanied by an 
instrument of ratification, when it has completed the required 
procedures.
    The proposed treaty will enter into force on the date on 
which the second of the two notifications of the completion of 
ratification requirements and accompanying instrument of 
ratification has been received. With respect to taxes withheld 
at source, the proposed treaty will be effective for amounts 
paid or credited on or after the first day of January following 
the date on which the proposed treaty enters into force. With 
respect to other taxes, the proposed treaty will be effective 
for taxable periods beginning on or after the first day of 
January following the date on which the proposed treaty enters 
into force.

Article 30. Termination

    The proposed treaty will continue in force until terminated 
by either country. Either country may terminate the proposed 
treaty at any time after the expiration of the five-year period 
from the date of its entry into force, provided that at least 
six months prior notice of termination has been given through 
diplomatic channels. A termination is effective, with respect 
to taxes imposed in accordance with Article 10 (Dividends), 
Article 11 (Interest), and Article 12 (Royalties) for amounts 
paid or credited on or after the first day of January following 
the date on which notice of expiration is given. In the case of 
other taxes, a termination is effective for taxable periods 
beginning on or after the first day of January following the 
date on which such notice of expiration is given.
    The proposed treaty includes a provision with respect to 
the effect of changes in the law of either country. The 
appropriate authority of each country may request consultations 
with the appropriate authority of the other country to 
determine whether an amendment to the proposed treaty is 
appropriate to address a change in the law or policy of either 
country. If, as a result of these consultations, a 
determination is made that the effect or application of the 
proposed treaty has been changed unilaterally by reason of 
domestic legislation enacted by a country such that the balance 
of benefits provided by the proposed treaty has been altered 
significantly, such authorities will consult with a view toward 
amending the treaty to restore an appropriate balance of 
benefits. The Technical Explanation notes that any such 
amendment would be subject to Senate advice and consent to 
ratification.

                               IV. ISSUES

    The proposed treaty and proposed protocol with Venezuela 
presents the following specific issues.

                   A. Developing Country Concessions

    The proposed treaty contains a number of developing country 
concessions, some of which are found in other U.S. income tax 
treaties with developing countries. The most significant of 
these concessions are described below.
Definition of permanent establishment
    The proposed treaty departs from the U.S. and OECD models 
by providing for broader source-basis taxation with respect to 
business activities. The proposed treaty's permanent 
establishment article, for example, permits the country in 
which business activities are carried on to tax the activities 
in circumstances where it would not be able to do so under the 
U.S. or OECD models. Under the proposed treaty, a building site 
or construction or installation project, or an installation or 
drilling rig or ship used for the exploration of natural 
resources, constitutes a permanent establishment if the site, 
project or activities continue in a country for more than 183 
days within any 12-month period. For example, under the 
proposed treaty, a U.S. enterprise's business profits that are 
attributable to a construction project in Venezuela will be 
taxable by Venezuela if the project lasts for more than 183 
days within a 12-month period. Under the U.S. and OECD models, 
such a site or project must last for more than one year in 
order to constitute a permanent establishment. Under the U.N. 
model and other U.S. treaties with developing countries, the 
site or project must last for more than six months in order to 
constitute a permanent establishment. Thus, the proposed 
treaty's 183-day period for establishing a permanent 
establishment is significantly shorter than the corresponding 
periods in the U.S. and OECD models but is similar to the six-
month period provided in U.S. treaties with developing 
countries.
    The proposed treaty contains a provision, not present in 
either the U.S. model or the OECD model, which deems a 
permanent establishment to exist where an enterprise provides 
services through its employees in a country if the activities 
continue for a period or periods aggregating more than 183 days 
within any 12-month period. The U.N. model contains a similar 
rule.
Taxation of certain equipment leasing
    The proposed treaty treats as royalties payments for the 
use of, or the right to use, industrial, commercial, or 
scientific equipment. In most other treaties, these payments 
are considered rental income; as such, the payments are subject 
to the business profits rules, which generally permit the 
source country to tax such amounts only if they are 
attributable to a permanent establishment located in that 
country, and the payments are taxed, if at all, on a net basis. 
By contrast, the proposed treaty permits gross-basis source 
country taxation of these payments, at a rate not to exceed 5 
percent, if the payments are not attributable to a permanent 
establishment situated in that country. If the payments are 
attributable to such a permanent establishment, the business 
profits article of the proposed treaty is applicable.
Other taxation by source country
    The proposed treaty includes additional concessions with 
respect to source-based taxation of amounts earned by residents 
of the other treaty country.
    The proposed treaty allows a maximum rate of source country 
tax on royalties of 5 or 10 percent, depending on the type of 
property involved. The 5-percent limitation applies to payments 
for the use of, or the right to use, industrial, commercial or 
scientific equipment. The 10-percent limitation applies to 
payments for the use of, or the right to use, any copyright of 
literary, artistic or scientific work, including 
cinematographic films, tapes and other means of image or sound 
reproduction, and payments for the use of, or the right to use, 
any patent, trademark, design or model, plan, secret formula or 
process, or other like right or property, or for information 
concerning industrial, commercial or scientific experience. The 
10-percent limitation also applies to gains derived from the 
alienation of such right or property to the extent that such 
gains are contingent on the productivity, use, or disposition 
thereof. By contrast, both the U.S. model and the OECD model 
generally would not permit source-country taxation of 
royalties.
    The proposed treaty generally permits source-country 
taxation of artistes and sportsmen if the amount of 
compensation derived by the individual in the source country 
exceeds $6,000 (including reimbursed expenses) for the taxable 
year concerned. By contrast, the U.S. model generally would 
permit source country taxation of artistes and sportsmen only 
if the gross receipts (including reimbursed expenses) exceed 
$20,000.
    The proposed treaty permits residence-country taxation 
under Article 22 (Other Income) for income of a resident of a 
country that is not dealt with in other articles of the 
proposed treaty. Under the proposed treaty, such income that 
arises in a treaty country may also be taxed by the source 
country. By contrast, the U.S. and OECD models generally would 
permit only a recipient's country of residence to tax such 
other income.
Issue
    One purpose of the proposed treaty is to reduce tax 
barriers to direct investment by U.S. firms in Venezuela. The 
practical effect of these developing country concessions could 
be greater Venezuelan taxation of future activities of U.S. 
firms in Venezuela than would be the case under rules that were 
comparable to those of either the U.S. model or the OECD model.
    The issue is whether these developing country concessions 
represent appropriate U.S. treaty policy and, if so, whether 
Venezuela is an appropriate recipient of these concessions. 
There is a risk that the inclusion of these concessions in the 
proposed treaty could result in additional pressure on the 
United States to include such concessions in future treaties 
negotiated with developing countries. However, a number of 
existing U.S. income tax treaties with developing countries 
already include similar concessions. Such concessions arguably 
are necessary in order to enter into treaties with developing 
countries. Tax treaties with developing countries can be in the 
interest of the United States because they provide reductions 
in the taxation by such countries of U.S. investors and a 
clearer framework for the taxation of U.S. investors. Such 
treaties also provide dispute resolution and nondiscrimination 
rules that benefit U.S. investors and exchange of information 
procedures that benefit the tax authorities.

                           B. Treaty Shopping

    The proposed treaty, like a number of U.S. income tax 
treaties, generally limits treaty benefits for treaty country 
residents so that only those residents with a sufficient nexus 
to a treaty country will receive treaty benefits. Although the 
proposed treaty generally is intended to benefit only residents 
of Venezuela and the United States, residents of third 
countries sometimes attempt to use a treaty to obtain treaty 
benefits. This is known as treaty shopping. Investors from 
countries that do not have tax treaties with the United States, 
or from countries that have not agreed in their tax treaties 
with the United States to limit source country taxation to the 
same extent that it is limited in another treaty may, for 
example, attempt to reduce the tax on interest on a loan to a 
U.S. person by lending money to the U.S. person indirectly 
through a country whose treaty with the United States provides 
for a lower rate of withholding tax on interest. The third-
country investor may attempt to do this by establishing in that 
treaty country a subsidiary, trust, or other entity which then 
makes the loan to the U.S. person and claims the treaty 
reduction for the interest it receives.
    The anti-treaty shopping provision of the proposed treaty 
is similar to anti-treaty shopping provisions in the Code (as 
interpreted by Treasury regulations) and in the U.S. model. The 
provision also is similar to the anti-treaty shopping provision 
in several recent treaties. The degree of detail included in 
these provisions is notable in itself. The proliferation of 
detail may reflect, in part, a diminution in the scope afforded 
the IRS and the courts to resolve interpretive issues adversely 
to a person attempting to claim the benefits of a treaty; this 
diminution represents a bilateral commitment, not alterable by 
developing internal U.S. tax policies, rules, and procedures, 
unless enacted as legislation that would override the treaty. 
(In contrast, the IRS generally is not limited under the 
proposed treaty in its discretion to allow treaty benefits 
under the anti-treaty shopping rules.) The detail in the 
proposed treaty does represent added guidance and certainty for 
taxpayers that may be absent under treaties that may have 
somewhat simpler and more flexible provisions.
    One provision of the anti-treaty shopping article differs 
from the comparable rule of some earlier U.S. treaties, but the 
effect of the change is not clear. The general test applied by 
those treaties to allow benefits to an entity that does not 
meet the bright-line ownership and base erosion tests is a 
broadly subjective one, looking to whether the acquisition, 
maintenance, operation of an entity did not have ``as a 
principal purpose obtaining benefits under'' the treaty. By 
contrast, the proposed treaty contains a more precise test that 
allows denial of benefits only with respect to income not 
derived in connection with (or incidental to) the active 
conduct of a substantial trade or business. (However, this 
active trade or business test does not apply with respect to a 
business of making or managing investments carried on by a 
person other than a bank or insurance company, so benefits may 
be denied with respect to such a business regardless of how 
actively it is conducted). In addition, the proposed treaty 
(like all recent treaties) gives the competent authority of the 
country in which the income arises the authority to determine 
that the benefits of the treaty will be granted to a person 
even if the specified tests are not satisfied.
    The practical difference between the proposed treaty tests 
and the corresponding tests in other treaties will depend upon 
how they are interpreted and applied. Given the relatively 
bright line rules provided in the proposed treaty, the range of 
interpretation under it may be fairly narrow.
    The Committee has in the past expressed its belief that the 
United States should maintain its policy of limiting treaty-
shopping opportunities whenever possible. The Committee has 
further expressed its belief that, in exercising any latitude 
Treasury has with respect to the operation of a treaty, the 
treaty rules should be applied to deter treaty-shopping abuses. 
The proposed treaty's ownership test may be effective in 
preventing third-country investors from obtaining treaty 
benefits by establishing investing entities in Venezuela 
because third-country investors may be unwilling to allow more 
than 50 percent of such investing entities to be owned by U.S. 
or Venezuelan residents or other qualified owners in order to 
meet the ownership test of the anti-treaty shopping provision. 
The base erosion test contained in the proposed treaty will 
provide protection from certain potential abuses of a 
Venezuelan conduit. On the other hand, implementation of the 
tests for treaty shopping set forth in the proposed treaty 
raise factual, administrative, and other issues. The Committee 
may wish to satisfy itself that the anti-treaty-shopping rules 
in the proposed treaty are adequate under the circumstances.

                  C. Venezuelan Territorial Tax System

    The proposed treaty raises unique issues because Venezuela 
has a territorial tax system. Under this system, Venezuela 
taxes income of residents or nonresidents only with respect to 
income from Venezuelan sources. Foreign source income is not 
subject to Venezuelan tax.
    Some argue that it is inappropriate to forego U.S. tax 
when, because of the territorial tax system of the treaty 
partner, the result would be total elimination of any tax paid 
by the foreign investor on U.S. source income. In general, 
Venezuela does not tax the foreign source business income of a 
Venezuelan resident doing business in the United States. Under 
the proposed treaty, a Venezuelan resident engaged in business 
in the United States but not at a level that gives rise to a 
permanent establishment would not pay U.S. tax, and would not 
pay any tax to Venezuela under its territorial system (assuming 
that the income was treated as not being from Venezuelan 
sources). In the absence of the proposed treaty, that person 
would be considered to be engaged in a U.S. trade or business 
and would be subject to U.S. tax on such income. Similarly, 
under the proposed treaty, a Venezuelan individual performing 
independent personal services in the United States would not be 
taxable in the United States on income earned from such 
services if not attributable to a fixed base. Assuming 
Venezuela did not tax such income under its territorial tax 
system, the result would be a complete exemption from tax. In 
addition, under the proposed treaty, the reduced rates of U.S. 
withholding tax on certain payments to Venezuelan persons 
(e.g., for dividends, interest and royalties) would provide 
additional relief for such persons from taxation by both 
countries.
    One of the principal purposes of a tax treaty is to 
eliminate double taxation of income (by both the source country 
and residence country). One way this goal is achieved is for 
the source country to cede its jurisdiction to tax the income 
to the residence country. This concept is less relevant where 
the residence country exempts the income from taxation. Some 
argue that it is not appropriate to enter into a treaty that 
results in a double exemption from taxation. In other U.S. 
treaties with countries that do not tax certain types of income 
earned abroad by its taxpayers until repatriated (i.e., a 
remittance-based tax system), the United States has included 
provisions denying U.S. rate reductions and exemptions for 
income which is not remitted to and, thus, not subject to tax 
by the treaty partner.11 Some might argue that a 
similar limitation might be appropriate here.
---------------------------------------------------------------------------
    \11\ Such provisions are included in the U.S. treaties with Jamaica 
and the United Kingdom.
---------------------------------------------------------------------------
    On the other hand, the proposed treaty would provide 
benefits for U.S. persons.12 The proposed treaty 
generally would provide relief from potential double taxation 
for U.S. persons. A U.S. person is taxable by the United States 
on its worldwide income. Such income could also be subject to 
Venezuelan tax if treated as being from Venezuelan sources 
under its territorial tax system. Venezuelan sourcing rules 
relating to income and deductions may vary and be inconsistent 
with corresponding U.S. sourcing rules. Double taxation could 
result in cases where the income earned by such person is 
treated as being from U.S. sources under U.S. rules and from 
Venezuelan sources under Venezuelan rules. For example, absent 
the proposed treaty, Venezuela levies withholding tax on 
payments for certain services performed in the United States. 
Because the United States would treat this payment as being 
from U.S. sources, the U.S. foreign tax credit limitation in 
many cases would prevent the U.S. recipient of such income from 
claiming a credit against U.S. taxes for the Venezuelan taxes. 
The proposed treaty generally would address such potential 
cases of double taxation by preventing Venezuela from imposing 
tax on income from the performance of services except when the 
income is attributable to a fixed base or permanent 
establishment in Venezuela.
---------------------------------------------------------------------------
    \12\ Venezuela has entered into tax treaties with the Czech 
Republic, Germany, Italy, the Netherlands, Portugal, Switzerland, 
Trinidad and Tobago, and the United Kingdom. Venezuela also has entered 
into a tax treaty with France that covers income taxes and air and 
shipping activities.
---------------------------------------------------------------------------
    The proposed treaty would also prevent double taxation 
which would result from the calculation of net income under 
Venezuela's statutory rules. Because Venezuela generally does 
not tax foreign source income, it does not permit foreign 
source deductions in calculating taxable income. This would 
prohibit a Venezuelan permanent establishment from deducting 
its share of the entity's home office expenses incurred for the 
benefit of the entire entity. Moreover, Venezuela generally 
would not permit its residents to deduct payments to foreign 
persons even if such payments would be deductible if paid to a 
Venezuelan person. Under the business profits (Article 7) and 
non-discrimination (Article 25) articles of the proposed 
treaty, these deductions would be permitted.
    In addition, the exchange of information and mutual 
agreement provisions of the proposed treaty will provide 
additional benefits. These provisions are useful for purposes 
of preventing fiscal evasion, as well as addressing cases of 
potential double taxation (not otherwise specifically addressed 
under the treaty). In addition, the reduced rates of source 
country tax under the proposed treaty would provide U.S. 
investors with relief, for example, from Venezuelan statutory 
withholding taxes (e.g., on interest and royalties). This would 
have the effect of encouraging additional trade with, and 
investment in, Venezuela.
    The Committee may wish to consider whether entering into a 
treaty with a country that has a territorial tax system like 
that of Venezuela is appropriate as a matter of U.S. treaty 
policy.

                     D. Stability of Venezuelan Law

    In the past the Treasury Department has maintained that a 
country's political situation should be a factor in determining 
whether to build stronger economic ties with that country. In a 
July 5, 1995, letter to the Senate Foreign Relations Committee 
the Treasury Department wrote:

          A country's political situation is a factor that is 
        considered in determining whether to build stronger 
        economic ties with that country. When consideration of 
        this and other factors leads to a policy of building 
        stronger economic ties with a particular country, a tax 
        treaty becomes a logical part of that policy. One of a 
        treaty's main purposes is to foster the competitiveness 
        of U.S. firms that enter the treaty partner's market 
        place. As long as it is U.S. policy to encourage U.S. 
        firms to compete in these market places, it is in the 
        interest of the United States to enter tax treaties.
          Moreover, in countries where an unstable political 
        climate may result in rapid and unforeseen changes in 
        economic and fiscal policy, a tax treaty can be 
        especially valuable to U.S. companies, as the tax 
        treaty may restrain the government from taking actions 
        that would adversely impact U.S. firms, and provide a 
        forum to air grievances that otherwise would be 
        unavailable.13
---------------------------------------------------------------------------
    \13\ This quote appears in the Report of the Senate Foreign 
Relations Committee on the Income Tax Convention with Ukraine, Exec. 
Rept. 104-5, August 10, 1995, regarding an issue that was raised with 
respect to that treaty in connection with the stability of the 
Ukrainian tax law.
---------------------------------------------------------------------------
Background of political developments in Venezuela
    Venezuela currently is in a period of constitutional and 
institutional change. In a recent statement, Peter F. Romero, 
Acting Assistant Secretary of State for Western Hemisphere 
Affairs, described the political situation in Venezuela as 
follows.

          Hugo Chavez was elected president of Venezuela by a 
        wide margin in December 1998 on the promise of 
        eliminating corruption and inefficiency in government 
        and ensuring social justice. Seven months after his 
        inauguration, Chavez continues to enjoy an approval 
        rating around 80%.
          In April, Venezuelans returned to the polls to vote 
        on a referendum, voting overwhelmingly in favor of the 
        formation of a National Constituent Assembly (ANC) to 
        draft a new Constitution. Elected on July 25, the vast 
        majority of the 131-member ANC supports President 
        Chavez. The ANC was given 6 months to complete a draft 
        of a new Constitution; however, Chavez has asked the 
        ANC to accelerate its work and to finish within 3 
        months.
          The process was off to a difficult start in August, 
        when turf conflicts between the new ANC and established 
        institutions threatened to overtake action on 
        Venezuela's needed reforms. In August the ANC issued 
        two decrees to establish committees to investigate the 
        judicial and legislative branches. The Assembly's claim 
        to ``originating'' powers (in essence, establishing its 
        superiority to the existing branches of government) was 
        indirectly upheld in a Supreme Court opinion and the 
        President of the Court resigned in protest. The 
        Congress attempted to come back into plenary session, 
        despite a previous agreement to remain in recess, and 
        the ANC issued emergency decrees limiting Congress's 
        powers. Approximately two weeks after the crisis began, 
        an agreement brokered by the Catholic Church, resulted 
        in a new written ``cohabitation'' accord. Under the 
        terms of the agreement, the Congress will resume 
        plenary sessions on October 2, the traditional end of 
        the summer recess.
          In the wake of the public dispute with the Congress, 
        the ANC declared it would intensify its work on the new 
        Constitution. While further political friction is 
        almost certain, it appears that the [government], the 
        ANC and the opposition are buckling down to the work of 
        writing the constitution and revamping the country's 
        institutions.14
---------------------------------------------------------------------------
    \14\ Statement of Ambassador Peter F. Romero, Acting Assistant 
Secretary of State for Western Hemisphere Affairs, before the Western 
Hemisphere Subcommittee of the House International Relations Committee 
on ``Current Issues in the Western Hemisphere Region,'' September 29, 
1999.

    President Chavez's popularity, his appeal to the 
disadvantaged of Venezuela, his failed military coup attempt in 
1992, and the possibility of change to existing political 
institutions have raised both expectations and fears regarding 
institutional change. The Joint Committee staff has been told 
that President Chavez and his government have assured the 
United States that all changes will proceed in a democratic 
fashion. The Joint Committee staff further has been told that 
President Clinton, at his two meetings with President Chavez in 
January and September 1999, reinforced with President Chavez 
the U.S. interest in democratic fair play and cooperation on 
regional issues.
Issues
    Several issues arise in the consideration of a tax treaty 
with a government that is experiencing political instability. 
One is that it may be difficult to identify correctly the other 
country's competent authority in situations where there are 
competing claims as to who is authorized to exercise 
legislative, executive, or judicial authority. Another issue is 
the extent to which any political instability also causes 
uncertainty as to the precise nature of the substantive law of 
that country. These uncertainties may make it difficult to 
administer the treaty.
    A more specific issue arises in the context of the exchange 
of information provisions of the proposed treaty (Article 27 of 
the proposed treaty, as explicated by paragraph 19 of the 
proposed protocol). The exchange of information provision 
requires that information that is exchanged shall be treated as 
secret by the receiving country in the same manner as 
information obtained under its local laws and may only be 
disclosed to persons involved in the assessment, collection, or 
administration of taxes covered by the provision. Several 
issues may arise with respect to the utilization of this 
provision with a government that is experiencing political 
instability. First, it may be more difficult to assess whether 
confidentiality will be respected when the information is 
initially exchanged. Second, it may be more difficult to assess 
the possibility that inappropriate use will be made in the 
future of the exchanged information. Third, the country 
receiving the information could weaken (or potentially 
eliminate) the confidentiality protections under its local 
laws, which would concomitantly weaken or eliminate those 
protections for exchanged information.
    The Committee may wish to consider the implications of this 
political instability on this proposed treaty. Some might argue 
that, in light of the instability, it might be prudent to 
consider delaying consideration of ratification. Others might 
respond that the United States has tax treaties with other 
countries that have also experienced political instability, so 
that should not be a disqualifying factor. In addition, the 
proposed treaty would provide benefits (as well as certainty) 
to taxpayers who have no choice but to live through the period 
of political instability; some would argue that these taxpayers 
should not be denied the benefits of the treaty. The Committee 
may wish to consider the benefits provided under the proposed 
treaty as well as the concerns over political instability. 
Finally, the issues involving the exchange of information 
provisions, while serious, may be dealt with by the United 
States competent authority in administering the provisions of 
the proposed treaty.

                                  
