[Congressional Record (Bound Edition), Volume 150 (2004), Part 17]
[Senate]
[Pages 23723-23726]
[From the U.S. Government Publishing Office, www.gpo.gov]




PROTOCOL AMENDING TAX CONVENTION WITH THE NETHERLANDS--TREATY DOCUMENT 
                               NO. 108-25

  Mr. FRIST. As in executive session, I ask unanimous consent that the 
Foreign Relations Committee be discharged from further consideration of

[[Page 23724]]

Treaty Document No. 108-25, the Protocol Amending the Tax Convention 
with the Netherlands.
  I further ask unanimous consent that the Senate proceed to its 
consideration and to the accompanying resolution of ratification which 
is at the desk; that the treaty be considered as having passed through 
its various parliamentary stages, up to and including the presentation 
of the resolution of ratification; that any statements be printed in 
the Congressional Record as if read; and that the Senate immediately 
proceed to a vote on the resolution of ratification; further, that when 
the resolution of ratification is voted upon, the motion to reconsider 
be laid upon the table, and that the President be notified of the 
Senate's action.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. FRIST. Mr. President, I ask for a division vote on the resolution 
of ratification.
  The PRESIDING OFFICER. A division vote is requested. Senators in 
favor of the resolution of ratification will rise and stand until 
counted.
  Those opposed will rise and stand until counted.
  On a division, two-thirds of the Senators present and voting having 
voted in the affirmative, the resolution of ratification is agreed to.
  The resolution of ratification is as follows:

       Resolved (two-thirds of the Senators present concurring 
     therein), That the Senate advise and consent to the 
     ratification of the Protocol Amending the Convention Between 
     the United States of America and the Kingdom of the 
     Netherlands for the Avoidance of Double Taxation and the 
     Prevention of Fiscal Evasion with Respect to Taxes on Income, 
     signed at Washington on March 8, 2004 (T. Doc. 108-25).

  (At the request of Mr. Daschle, the following statement was ordered 
to be printed in the Record.)
 Mr. BIDEN. Mr. President, today the Senate considered a 
protocol to the current tax convention between the United States and 
the Kingdom of the Netherlands. There is substantial trade and cross-
border investment between our two countries; the tax convention 
provides an important basis for facilitating this economic 
relationship. The original convention was concluded in the early 1990s, 
and there have been several developments in U.S. tax treaty policy in 
the intervening years that the protocol seeks to address. It contains 
several significant provisions, including a revised provision designed 
to ensure that the treaty cannot be used for inappropriate purposes--a 
so-called antitreaty-shopping provision. I commend Chairman Lugar for 
his diligence in bringing the protocol before the Senate.
  During the Foreign Relations Committee's review of the protocol, I 
raised a concern about a provision in the current treaty that is not 
addressed by the protocol. Article 24(1) of the current treaty permits 
the United States to tax former citizens for a period of 10 years after 
they lose their citizenship, if the loss of their citizenship has as 
one of its principal purposes the avoidance of income tax. With one 
exception, this provision in the treaty is consistent with U.S. law--
specifically, section 877 of the Internal Revenue Code--as it existed 
at the time the treaty was concluded. The exception is this: the treaty 
does not allow the United States to tax former citizens who become 
nationals of the Netherlands. Such an exclusion for nationals of the 
treaty partner is unique in our tax treaty practice; it is not found in 
any other treaty, nor is it contained in our model treaty.
  The protocol before the Senate does not close this gap. Consistent 
with statutory amendments made by Congress in 1996, it does extend the 
taxation authority of the United States to former long-term residents 
who leave the United States to avoid taxation. But the exclusion for 
nationals of the Netherlands remains.
  Maintaining this exclusion for nationals of the Netherlands is 
unwarranted, and raises two concerns. First, I wanted to be sure that 
retaining the exclusion would not serve as a precedent in future tax 
treaty negotiations. The Treasury Department has noted that such an 
exclusion for nationals of the treaty partner has not been included in 
over two dozen tax treaties negotiated since the treaty with the 
Netherlands entered into force. More important, the Treasury has 
committed in writing that it does not intend the provision in the 
Netherlands treaty to serve as a precedent in the future.
  Second, I was concerned that maintaining the exclusion might subvert 
the purpose of section 877 of the Internal Revenue Code. Based on the 
information we have received from the Treasury, and after consultation 
with the staff of the Joint Committee on Taxation, it seems unlikely 
that the provision in the treaty will, in practice, undermine the 
operation of section 877. The reasons for this are set forth in detail 
in the materials that I will seek to include in the Record.
  Finally, it is worth noting that Congress amended section 877 in 
section 804 of The American Jobs Creation Act of 2004, also known as 
the FSC/ETI bill, which was enacted last month. The primary purpose of 
the provision remains: to continue to tax people who expatriate in 
order to avoid tax. But the test under the revised section 877 is a 
more objective test--one based on income levels--than had been applied 
under the prior law. A question therefore arises about the relationship 
between the revised language in section 877 and the provision in the 
U.S.-Netherlands treaty, which uses a more subjective test of whether a 
``principal purpose'' of the expatriating act is to avoid taxation. In 
a letter that I will insert in the Record, the Treasury has set forth 
information about its intentions for applying the treaty provision in 
light of the revisions to section 877.
  The committee on Foreign Relations held a hearing on the protocol on 
September 24, 2004. The committee did not vote on the protocol, 
however, and therefore there is no committee report. So that may 
colleagues and the public will have a better understanding of the 
issues I have described, I will ask consent to include two sets of 
documents in the Record. The first is a series of questions for the 
record that I submitted after the hearing, and the responses from the 
Treasury witness at the hearing, Barbara Angus, who serves as the 
international tax counsel at the Department. It should be noted that 
these questions and answers for the record were written before 
enactment of the revisions to section 877 of the Internal Revenue Code 
in the FSC/ETI bill. The second set of documents is an exchange of 
letters between myself and Ms. Angus on November 15, 2004, which 
elaborates on the issues that I have discussed, including the 
Department's intentions for interpreting the revisions to section 877.
  Accordingly, I ask unanimous consent to have printed in the Record 
the materials I have described.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

 Treasury Department Response to Question for the Record From Senator 
 Biden to Barbara Angus, With Respect to the Proposed Protocol to the 
Income Tax Convention Between the United States and the Kingdom of the 
                      Netherlands--October 6, 2004


                                Question

       Section 877 of the Internal Revenue Code provides for 
     continued taxation of former citizens and long-term residents 
     of the United States if one of the principal purposes of the 
     loss of U.S. citizenship or change of residence status is the 
     avoidance of taxes.
       When Congress amended Section 877 in 1996 to extend this 
     provision to former long-term residents, the conference 
     report on the legislation stated that ``it is intended that 
     the purpose of the expatriation tax provisions, as amended, 
     not be defeated by any treaty provision. The Treasury 
     Department is expected to review all outstanding treaties to 
     determine whether the expatriation tax provisions, as 
     revised, potentially conflict with treaty provisions and to 
     eliminate any such potential conflicts through renegotiation 
     of the affected treaties as necessary. Beginning on the tenth 
     anniversary of the enactment of the House bill, any 
     conflicting treaty provisions that remain in force would take 
     precedence over the expatriation tax provisions as revised.'' 
     (Conf. Rept. on the Health Insurance Portability and 
     Accountability Act of 1996, H. Rept. 104-736, at 329). The 
     Internal Revenue Service subsequently issued guidance stating 
     that it ``will interpret section 877 as consistent with U.S. 
     income tax treaties. To the extent that there is a conflict, 
     however, all provisions of section 877, as amended, prevail 
     over treaty provisions in

[[Page 23725]]

     effect on August 21, 1996.'' (Internal Revenue Bulletin 1997-
     10, Mar. 10, 1997, at 48.) Presumably, however, the effect of 
     this guidance expires in 2006, as set forth in the above-
     quoted conference report.
       Article 6 of the protocol pending before the Committee 
     extends Article 24(1) and its authority over residents and 
     nationals to former long-term residents, but retains an 
     exclusion for nationals of the Netherlands, whether or not 
     they are former citizens or former long-term residents. Thus, 
     rather than follow the 1996 directive urging the elimination 
     of any potential conflicts between a tax treaty and Section 
     877, the protocol appears to preserve an existing conflict 
     (for former citizens who are Dutch nationals) and create a 
     new one (for former long-term residents who are Dutch 
     nationals). This exclusion of the treaty partner's nationals 
     also departs from the U.S. model tax treaty.
       Please answer the following questions:
       a. Is the exclusion in Article 24(1) for nationals of the 
     Netherlands found in any other U.S. tax treaty? If not, why 
     is it contained in the U.S.-Netherlands treaty?
       b. Was the exclusion for nationals of the Netherlands in 
     Article 24(l) of the underlying treaty discussed in the 
     negotiations of the Protocol? Did the United States propose 
     amending this provision? Please elaborate.
       c. Why was the exclusion for nationals of the Netherlands 
     in Article 24(1) extended to former long-term residents?
       d. What is the estimated fiscal effect of (1) retaining the 
     exclusion for nationals of the Netherlands who were formerly 
     U.S. citizens; and (2) extending the exclusion to nationals 
     of the Netherlands who were formerly long-term residents?


                                Response

       Section 877 of the Internal Revenue Code, which has been 
     part of the U.S. tax law since 1966, provides for special tax 
     treatment of former U.S. citizens who gave up their 
     citizenship to avoid U.S. tax. Amendments enacted in 1996 
     strengthened these tax rules and extended the special tax 
     treatment to apply also to certain former long-term U.S. 
     permanent residents who gave up such status to avoid U.S. 
     tax.
       Under section 877, former U.S. citizens and certain former 
     long-term U.S. residents are subject to special rules that 
     impose U.S. tax on certain categories of income that have a 
     connection to the United States; these special tax rules are 
     applicable for the 10-year period following the individual's 
     relinquishment of U.S. citizenship or long-term resident 
     status. The special tax rules apply only to individuals who 
     relinquish U.S. citizenship or long-term resident status for 
     a principal purpose of avoiding U.S. income or estate and 
     gift taxes. For this purpose, a presumption of tax avoidance 
     motive applies in the case of certain individuals whose net 
     worth or average annual net income tax liability exceeds 
     specified thresholds; this presumption does not apply, 
     however, to individuals who meet specified criteria.
       Section 877 provides that the presumption of tax-avoidance 
     motive (which otherwise would apply if the individual's net 
     worth or average tax liability exceeds the specified 
     thresholds) does not apply to former U.S. citizens who fall 
     into one of the following classes and who submit a ruling 
     request to the Internal Revenue Service:
       (i) former U.S. citizens who were dual citizens at birth 
     and who have remained citizens of the other country;
       (ii) former U.S. citizens who become citizens of their 
     country of birth, their spouse's country of birth, or one of 
     their parents' countries of birth;
       (iii) former U.S. citizens who for the 10 years prior to 
     expatriation were present in the United States for no more 
     than 30 days in any year; and
       (iv) former U.S. citizens who gave up their U.S. 
     citizenship before age 18\1/2\. Analogous exceptions apply in 
     the case of former long-term U.S. residents.
       The special tax rules of section 877 apply only when there 
     is a tax-avoidance purpose for an individual's relinquishment 
     of U.S. citizenship or U.S. long-term resident status. These 
     exceptions to the presumption of tax-avoidance motive 
     recognize that individuals who have close personal ties to 
     another country are likely to have non-tax reasons for a 
     decision to give up U.S. citizenship or long-term resident 
     status.
       The U.S.-Netherlands treaty sets forth specific guidance 
     regarding how each country is to tax individuals who are 
     resident in the other country. Although the treaty, like all 
     other U.S. tax treaties, generally limits each country's 
     ability to tax residents of the other country, the treaty 
     contains specific rules that permit the United States to 
     apply its domestic tax rules to U.S. citizens who are 
     resident in the Netherlands. The treaty further provides a 
     rule under which the United States may apply its domestic tax 
     rules to former U.S. citizens who are resident in the 
     Netherlands and who are not Netherlands nationals. The 
     proposed protocol would add to the treaty a rule that extends 
     this same treatment to former U.S. long-term residents who 
     are resident in the Netherlands and who are not Netherlands 
     nationals.
       The provision in Article 24(1) of the U.S.-Netherlands 
     income tax treaty that limits the imposition of the special 
     U.S. tax rules under section 877 when applied to Netherlands 
     nationals is unique among U.S. tax treaties. However, this 
     exception for Netherlands nationals is not qualitatively 
     different from the underlying approach reflected in section 
     877 as amended in 1996. As described above, section 877 
     provides several exceptions to the tax-avoidance presumption, 
     including exceptions for individuals who are (or become) 
     citizens of the country in which they (or certain family 
     members) were born or who have very limited links to the 
     United States. These exceptions in section 877 are in several 
     cases broader than the exception for Netherlands nationals in 
     the U.S.-Netherlands treaty.
       The provision in the U.S.-Netherlands treaty is not 
     expected to produce significantly different results than 
     would be provided under section 877 in practice. As described 
     above, the special tax treatment provided in section 877 
     applies only in the case of individuals whose relinquishment 
     of U.S. citizenship or long-term resident status had a 
     principal purpose of tax avoidance. Because the Netherlands 
     imposes substantial tax on individuals who are resident there 
     (and only resident individuals who are subject to Netherlands 
     tax are eligible for the benefits of the U.S.-Netherlands tax 
     treaty, including the provision that limits the imposition of 
     U.S. tax), individuals who are trying to avoid tax are 
     unlikely to become residents of the Netherlands. Indeed, 
     pursuant to section 877, the Internal Revenue Service has 
     issued rulings in cases involving Netherlands nationals who 
     relinquished U.S. citizenship or long-term resident status in 
     order to return to the Netherlands, concluding that the 
     individuals did not have a principal motive of tax avoidance 
     and therefore were not subject to the special tax rules 
     provided in section 877. Moreover, because section 877 
     requires the United States to provide a credit against U.S. 
     tax for tax paid in the country of residence, the application 
     of section 877 to a resident of the Netherlands is unlikely 
     to result in significant U.S. tax (given the substantial tax 
     imposed by the Netherlands on the income of individuals who 
     are resident there).
       Although the Netherlands agreed to the application of the 
     special rules of section 877 to residents of the Netherlands 
     who are former U.S. citizens or long-term residents, for a 
     period of 10 years when loss of U.S. citizenship or long-term 
     resident status had as one of its principal purposes the 
     avoidance of U.S. income tax, the exception for Netherlands 
     nationals contained in the 1993 treaty (and continued in the 
     proposed protocol) was important to the Netherlands. This 
     position reflects the underlying view that the special tax 
     rules applicable in the case of tax-avoidance motivated 
     changes in citizenship or residence should not be applicable 
     in cases where the move is to go home. As noted above, the 
     rules of section 877 and the exceptions contained therein 
     reflect a similar perspective.
       In light of the limited potential impact of the exception 
     for Netherlands nationals, it was determined that 
     continuation of the exception in the proposed protocol was 
     not inappropriate, particularly given the narrow scope of the 
     proposed protocol. The focus of the proposed protocol is on 
     the withholding tax treatment of dividends and the limitation 
     on benefits provisions. Both countries were interested in the 
     prompt conclusion of a protocol to address these important 
     issues. For the United States in particular, it was a matter 
     of priority to secure improvements to the limitation on 
     benefits provisions in order to prevent the potential for 
     inappropriate use of the treaty through treaty shopping. It 
     is important that the ground-breaking changes to the 
     limitation on benefits provision reflected in the proposed 
     protocol enter into force as soon as possible. In addition, 
     there also were significant benefits to the United States in 
     having the new limitation on benefits rules contained in the 
     proposed protocol become public as soon as possible in order 
     to establish a precedent in terms of strengthened anti-
     treaty-shopping provisions for other ongoing treaty 
     negotiations. In order to achieve these goals, at the start 
     of negotiations both countries agreed that this protocol 
     would not address other issues where there were differences 
     between the two countries that could slow the process and 
     jeopardize an important agreement.
       While this protocol did not revisit the agreement reached 
     in 1993 regarding the treatment of Netherlands nationals 
     under the special rules applicable to former U.S. citizens, 
     the proposed protocol does include a straightforward 
     extension of these special rules regarding U.S. taxing 
     jurisdiction of Netherlands residents contained in the 
     current treaty to provide for coverage of former U.S. long-
     term residents to the same extent as former U.S. citizens. 
     The current treaty does not contain special rules providing 
     for U.S. taxing jurisdiction over former long-term residents. 
     In addition, other significant 1996 changes strengthening 
     section 877, such as the inclusion of new categories of 
     income subject to the special tax rules, are applicable under 
     the treaty.

[[Page 23726]]

     
                                  ____
                                                      U.S. Senate,


                               Committee on Foreign Relations,

                                Washington, DC, November 15, 2004.
     Ms. Barbara Angus,
     International Tax Counsel, Department of the Treasury, 
         Washington, DC.
       Dear Ms. Angus: I write regarding the protocol to the U.S.-
     Netherlands tax treaty now pending before the Senate.

       As you know, I have been concerned about the continuation 
     of the exclusion from U.S. taxation authority for nationals 
     of the Netherlands set forth in Article 24(1) of the current 
     U.S.-Netherlands tax treaty. Such an exclusion is unique to 
     the Netherlands treaty, and is not contained in the U.S. 
     model treaty. I am therefore concerned that this provision 
     not serve as a precedent in future tax convention 
     negotiations, and would be grateful for any assurances you 
     can provide in this regard.

       Since the Committee's hearing on the protocol, the Congress 
     has approved and the President has signed into law a measure 
     that modifies section 877 of the Internal Revenue Code (Sec. 
     804 of The American Jobs Creation Act of 2004, Pub. Law 108-
     357); that provision of law, as you know, provides for 
     special tax treatment of former U.S. citizens and long-term 
     nationals who expatriate. The revised section 877 sets forth 
     an objective test with regard to such individuals, replacing 
     the prior version, which focused on whether the expatriating 
     individual had as a principal purpose the avoidance of U.S. 
     taxation.

       In previous exchanges between the Department and the 
     Committee, Department officials have asserted to the 
     Committee that the exclusion in Article 24 for nationals of 
     the Netherlands would not produce a significantly different 
     result in practice than would be provided under section 877. 
     I would appreciate the Department's views on whether that 
     remains the case under the revised section 877.

       Finally, a question arises about the interaction between 
     Article 24 and revised section 877. As noted, the latter now 
     contains an objective test; the former provides for continued 
     taxation for 10 years of former U.S. nationals and long-term 
     U.S. residents--provided they are not nationals of the 
     Netherlands--in cases where the loss of such status ``has as 
     one of its principal purposes the avoidance of income tax.'' 
     I am interested in knowing the Department's views on how it 
     will interpret and apply these provisions, not only under the 
     U.S.-Netherlands treaty but also in the case of similar 
     bilateral tax treaties currently in force.

       I appreciate your attention to this matter. I expect that 
     the Senate will consider the protocol to the U.S.-Netherlands 
     treaty during this week's session, and I would therefore be 
     grateful for a prompt response to the issues that I have 
     raised.
           Sincerely,
                                             Joseph R. Biden, Jr.,
     Ranking Minority Member.
                                  ____



                                   Department of the Treasury,

                                Washington, DC, November 15, 2004.
     Hon. Joseph R. Biden, Jr.,
     Ranking Member, Committee on Foreign Relations, U.S. Senate, 
         Washington, DC.
       Dear Senator Biden: I am writing in response to your letter 
     of November 15, 2004, regarding the pending protocol amending 
     the existing tax treaty with the Netherlands. Your letter 
     focuses on the particular provisions in the U.S.-Netherlands 
     treaty and protocol relating to the tax treatment of certain 
     former U.S. citizens and former U.S. long-term residents. You 
     also asked about the interaction of the provisions in this 
     treaty, and in other treaties, with the provisions of section 
     377 of the Internal Revenue Code as amended by the American 
     Jobs Creation Act enacted last month.

       The U.S.-Netherlands treaty includes a provision under 
     which the United States may apply its domestic tax rules to 
     former U.S. citizens who are resident in the Netherlands and 
     who are not Netherlands nationals. The pending protocol would 
     add to the treaty a rule that extends this same treatment to 
     former U.S. long-term residents. The provision in the U.S.-
     Netherlands treaty that limits the imposition of the special 
     U.S. tax rules under section 877 when applied to individuals 
     who are Netherlands nationals is unique among U.S. tax 
     treaties. This special rule with respect to nationals was 
     incorporated in the U.S.-Netherlands tax treaty in 1993 and 
     has not been included in any other treaties since that time. 
     None of the twenty-seven agreements that have entered into 
     force since the Netherlands treaty entered into force 
     includes such a rule for nationals. This special rule in the 
     U.S.-Netherlands treaty has not served as a precedent for 
     other treaties and we do not intend for it to serve as a 
     precedent going forward.

       In my response to your questions for the record, I 
     explained why we believed that the continuation of the 
     special rule for Netherlands nationals in the U.S.-
     Netherlands treaty would not produce significantly different 
     results than would be produced under U.S. domestic law in 
     practice. We continue to believe that will be the case 
     following the recent amendments to section 877. Although the 
     test in section 377 has been modified to make it more 
     objective, key considerations underlying our view regarding 
     the practical result were the fact that the Netherlands 
     imposes substantial taxes on individuals and the fact that 
     section 877 provides for a credit that reduces the U.S. tax 
     otherwise due by the tax paid in the country of residence. 
     There has been no change with respect to this factual 
     background.

       More generally, you asked about our intentions regarding 
     the interpretation of the treaty language which preserves 
     U.S. taxing jurisdiction over former U.S. citizens and former 
     U.S. long-term residents where the individual's 
     relinquishment of citizenship or resident status has ``as one 
     of its principal purposes the avoidance of tax''. The quoted 
     language regarding principal purpose has long been included 
     in the U.S. Model Income Tax Convention and thus appears in 
     many U.S. tax treaties. This treaty language was intended to 
     be read consistently with section 877. Following the 
     modification of section 877 in 1996 to add objective tests, 
     we have taken the position that those objective tests 
     represent the administrative means by which the United States 
     determines whether a taxpayer has a tax avoidance purpose. 
     The recently-enacted changes represent a further step in this 
     direction and are intended to facilitate the administration 
     of the special tax rules of section 877 by making the rules 
     more objective; however, the underlying purpose of section 
     877 has not changed. Accordingly, we intend to continue to 
     take the position, in interpreting the ``principal purpose'' 
     language in the U.S.-Netherlands treaty and other existing 
     treaties, that the objective tests in section 877 as recently 
     amended represent the means by which the United States 
     detemines tax avoidance purpose.

       We appreciate your interest in this issue. The pending 
     protocol to the U.S.-Netherlands tax treaty will 
     substantially improve a long-standing U.S. treaty 
     relationship and we believe it is in the interest of the 
     United States to bring this agreement into force as soon as 
     possible.
           Sincerely yours,
                                                 Barbara M. Angus,
     International Tax Counsel.

                          ____________________