[Senate Executive Report 104-36]
[From the U.S. Government Publishing Office]



104th Congress                                              Exec. Rept.
                                 SENATE

 2d Session                                                      104-36
_______________________________________________________________________


 
          TAXATION PROTOCOL AMENDING CONVENTION WITH INDONESIA

                                _______
                                

               September 25, 1996.--Ordered to be printed

_______________________________________________________________________


   Mr. Helms, from the Committee on Foreign Relations, submitted the 
                               following

                              R E P O R T

                   [To accompany Treaty Doc. 104-32]

    The Committee on Foreign Relations, to which was referred 
the Protocol, signed at Jakarta on July 24, 1996, amending the 
Convention between the Government of the United States of 
America and the Government of the Republic of Indonesia for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income with a Related Protocol 
and Exchange of Notes signed at Jakarta on July 11, 1988, 
having considered the same, reports favorably thereon, without 
amendment, and recommends that the Senate give its advice and 
consent to ratification thereof.

                               I. Purpose

    The proposed protocol amends the current treaty between the 
United States and Indonesia. The principal purposes of the 
proposed protocol are to modify the treaty to continue to 
promote close economic cooperation between the two countries, 
to reduce or eliminate double taxation of income earned by 
residents of either country from sources within the other 
country, and to eliminate possible barriers to trade caused by 
overlapping taxing jurisdictions of the two countries.

                             II. Background

    The proposed protocol to the income tax treaty between the 
United States and Indonesia was signed in Jakarta on July 24, 
1996 (see Treaty Doc. 104-32). The proposed protocol amends the 
current income tax treaty, with related protocol and exchange 
of notes, between the two countries that was signed in Jakarta 
on July 11, 1988, and entered into force on December 30, 1990.
    The proposed protocol was transmitted to the Senate for 
advice and consent to its ratification on September 4, 1996. 
The Senate Committee on Foreign Relations considered the 
proposed protocol at its Committee business meeting on 
September 25, 1996.

                              III. Summary

    The current treaty between the United States and Indonesia 
contains a number of developing country concessions. In 
particular, the current treaty provides maximum rates of source 
country tax on certain dividends, interest, and royalties that 
exceed the rates preferred by the United States. The proposed 
protocol reduces those maximum rates of source country tax.
    The current treaty (as modified by the proposed protocol) 
is similar to other recent U.S. income tax treaties, the 1981 
proposed U.S. model income tax treaty (``U.S. model''), 1 
and the model income tax treaty of the Organization for 
Economic Cooperation and Development (``OECD model''). However, 
the current treaty as so modified contains certain substantive 
deviations from those documents.
---------------------------------------------------------------------------
    \1\ The Treasury Department has withdrawn the U.S. model from use 
as a model treaty. Accordingly, its provisions may no longer represent 
the preferred position for U.S. treaty negotiations. Comparison of the 
provisions of the current treaty as modified by the proposed protocol 
against the provisions of the U.S. model should be considered in the 
context of the provisions of comparable recent U.S. treaties with other 
countries. The Treasury Department's new model, released on September 
20, 1996, was released too late for consideration by the Committee in 
connection with the proposed protocol.
---------------------------------------------------------------------------

                          IV. Entry Into Force

    The proposed protocol provides that it will enter into 
force on the date of exchange of the instruments of 
ratification. The proposed protocol provides that its 
provisions will take effect for amounts paid or credited on or 
after the first day of the second month next following the date 
on which it enters into force.

                          V. Committee Action

    The Committee on Foreign Relations considered the proposed 
protocol to the income tax treaty between the United States and 
Indonesia on September 25, 1996, and ordered the proposed 
protocol favorably reported by a voice vote, with the 
recommendation that the Senate give its advice and consent to 
the ratification of the proposed protocol.

                         VI. Committee Comments

    The Committee on Foreign Relations believes that the 
proposed protocol is in the interest of the United States and 
urges that the Senate act promptly to give its advice and 
consent to ratification. The committee has taken note of 
certain issues raised by the proposed protocol, and believes 
that the following comments may be useful to U.S. Treasury 
officials in providing guidance on these matters.
    The current treaty between the United States and Indonesia 
contains a number of developing country concessions, some of 
which are found in other U.S. income tax treaties with 
developing countries. The proposed protocol would modify 
several of the most significant of these concessions.
    The proposed protocol reduces the maximum rate of source 
country tax on dividends from 15 percent to 10 percent if the 
beneficial owner is a company that is a resident of the other 
country and that owns directly at least 25 percent of the 
voting stock of the dividend-paying company. The proposed 
protocol also reduces the maximum rate of branch taxes that may 
be imposed by the source country from 15 percent to 10 percent. 
In addition, the proposed protocol reduces the maximum rate of 
source country tax on interest and royalties from 15 percent to 
10 percent. These reduced maximum rates are closer to, but 
still generally higher than, the maximum rates of source 
country tax that would be permitted under the U.S. and OECD 
models.
    The current treaty contains a number of additional 
developing country concessions that are not modified by the 
proposed protocol. These concessions include an expanded 
definition of permanent establishment; a force of attraction 
rule with respect to business profits; broader source country 
taxation of personal services income, capital gains of 
individuals, private pensions, entertainer's income and other 
income not specifically covered in the current treaty; and the 
treatment of certain equipment leasing income as royalty income 
which may be taxed in the source country at a maximum rate of 
10 percent. 2
---------------------------------------------------------------------------
    \2\ For a more detailed discussion of these concessions and other 
issues with respect to the current treaty, see Exec. Rept. 101-24, 
101st Cong., 2d Sess. (1990).
---------------------------------------------------------------------------
    The committee views the proposed protocol's reduction of 
the maximum rates of source country tax on dividends, interest, 
and royalties under the current treaty as a significant move to 
bring the treaty more in line with general U.S. treaty policy. 
The fact that a protocol reducing these developing country 
concession was negotiated so quickly after ratification of the 
current treaty suggests that such concessions may not, in fact, 
work to the advantage of the developing country, insofar as 
they serve to limit the country's attractiveness to potential 
investors. The committee therefore commends the proposed 
protocol as an example for future negotiations with developing 
countries, and reiterates its believe that developing country 
concessions such as those contained in the current treaty with 
Indonesia should not be viewed as the starting point for future 
negotiations with other developing countries.

                           VII. Budget Impact

    The committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed protocol is estimated 
to increase Federal budget receipts by less than $10 million 
annually during the fiscal year 1997-2003 period.

                 VIII. Explanation of Proposed Protocol

    A detailed, article-by-article explanation of the proposed 
protocol between the United States and Indonesia amending the 
current treaty is set forth below.

                               Article 1

    The proposed protocol amends Article 11 (Dividends) of the 
current treaty to reduce the maximum rate of source country tax 
on certain dividends permitted under the treaty.

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 in the same manner as a U.S. person would be taxed.
    Dividends paid by a U.S. corporation generally are U.S. 
source. 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 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.'' The 
dividend equivalent amount is the corporation's earnings and 
profits which are attributable to its income that is 
effectively connected with its U.S. trade or business, 
decreased by the amount of such earnings that are reinvested in 
business assets located in the United States (or used to reduce 
liabilities of the U.S. business), and increased by any such 
previously reinvested earnings that are withdrawn from 
investment in the U.S. business. 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 the 30-percent withholding tax.
            Indonesia
    Indonesia generally imposes a 20-percent withholding tax on 
dividends paid to a nonresident individual or foreign 
corporation. Indonesia also generally imposes a 20-percent 
withholding tax on profits of an Indonesian branch of a foreign 
corporation.

Current treaty rules

    The current treaty provides that dividends derived from 
sources within a treaty country by a resident of the other 
country may be taxed by both countries. Under the current 
treaty, the rate of source country tax is limited to 15 percent 
of the gross amount of the dividends actually distributed if 
the beneficial owner of the dividend is a resident of the other 
country.
    The current treaty's reduced rate of tax on dividends does 
not apply if the dividend recipient has a permanent 
establishment or fixed base in the source country and the 
shares with respect to which the dividends are paid are 
effectively connected with the permanent establishment or fixed 
base. Such dividends are taxed as business profits or income 
from the performance of independent personal services.
    The current treaty permits the imposition of a branch 
profits tax or a branch-level excess interest tax, but limits 
the rate of such tax to 15 percent. Under the current treaty, 
if a company that is a resident of a treaty country has a 
permanent establishment in the other country, the other country 
may impose an additional tax in accordance with its law on the 
after-tax profits attributable to the permanent establishment 
and on interest payments allocable to the permanent 
establishment. The rate of such tax may not exceed 15 percent. 
This limitation does not affect the rate of any such additional 
tax with respect to production sharing contracts, contracts of 
work, and any similar contracts relating to oil and gas or 
other mineral products between the Government of Indonesia or 
an entity thereof and a resident of the United States.

Proposed protocol rules

    The proposed protocol reduces the rate of source country 
tax that may be imposed on certain dividends from 15 percent to 
10 percent. The reduced rate of 10 percent applies to dividends 
paid by a company that is a resident of one treaty country if 
the beneficial owner of the dividends is a company that is a 
resident of the other country and that owns directly at least 
25 percent of the voting stock of the dividend-paying company. 
The rate of source country tax that may be imposed on all other 
dividends derived from sources in one treaty country by a 
resident of the other country remains 15 percent.
    The proposed protocol reduces the rate of source country 
tax that may be imposed on the profits attributable to a 
permanent establishment and on interest payments allocable to a 
permanent establishment from 15 percent to 10 percent. This 
reduced rate of 10 percent applies to both the U.S. and 
Indonesian branch taxes.

                               Article 2

    The proposed protocol amends Article 12 (Interest) of the 
current treaty to reduce the maximum rate of source country tax 
on interest permitted under the treaty and to modify the 
exemption from source country tax on interest paid to a 
government or governmental entity of a treaty country.

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.
            Indonesia
    Indonesia generally imposes a withholding tax on interest 
paid to nonresident individuals and foreign corporations at a 
rate of 20 percent.

Current treaty rules

    The current treaty provides that interest derived from 
sources within a treaty country by a resident of the other 
country generally may be taxed by both countries. Under the 
current treaty, the rate of source country tax is limited to 15 
percent of the gross amount of such interest if the beneficial 
owner of the interest is a resident of the other country.
    The current treaty provides for a complete exemption from 
source country withholding tax in the case of interest derived 
within such country by the other country or by any agency or 
instrumentality of the other country not subject to tax by the 
other country.
    The current treaty's reduced rate of tax on interest does 
not apply if the interest recipient has a permanent 
establishment or fixed base in the source country and the 
indebtedness giving rise to the interest is effectively 
connected with the permanent establishment or fixed base. Such 
interest is taxed as business profits or income from the 
performance of independent personal services.
    The current treaty addresses the issue of non-arm's-length 
interest charges between related persons by providing that the 
amount of interest for purposes of applying this article is the 
amount of interest that would have been paid to an unrelated 
person. Any amount of interest paid in excess of such amount is 
taxable according to the laws of each country, taking into 
account the other provisions of the treaty.
    The current treaty defines the term ``interest'' as income 
from bonds, debentures, government securities, notes, or other 
evidences of indebtedness, whether or not secured by a mortgage 
or other security and whether or not carrying a right to 
participate in the debtor's profits. The term also includes 
income from debt claims of every kind, as well as all other 
income that is assimilated to income from money lent under the 
tax law of the country in which the income has it source.

Proposed protocol rules

    The proposed protocol reduces the rate of source country 
tax that generally may be imposed on interest that is derived 
from sources within one treaty country and that is beneficially 
owned by a resident of the other country from 15 percent to 10 
percent.
    The proposed protocol provides that interest arising in one 
treaty country is taxable only in the other country (and is 
exempt from source country taxation) to the extent that such 
interest is derived by the Government of the other country 
(including a political subdivision and local authority 
thereof), the central bank of the other country, or a financial 
institution owned or controlled by the Government of the other 
country (including political subdivisions and local authorities 
thereof).

                               Article 3

    The proposed protocol amends Article 13 (Royalties) of the 
Convention to reduce the maximum rate of source country tax on 
royalties permitted under the Convention.

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.
            Indonesia
    Indonesia generally imposes a 20-percent withholding tax on 
royalties derived by nonresident individuals and foreign 
corporations.

Current treaty rules

    The current treaty provides that royalties derived from 
sources within a treaty country by a resident of the other 
country may be taxed by both countries.
    Under the current treaty, the rate of source country tax 
generally is limited to 15 percent of the gross amount of 
royalties if the beneficial owner of the royalties is a 
resident of the other country. For purposes of this 15-percent 
maximum rate, the term ``royalties'' means payment of any kind 
made as consideration for the use of, or the right to use, 
copyrights of literary, artistic, or scientific works 
(including copyrights of motion pictures and films, tapes or 
other means of reproduction used for radio or television 
broadcasting), patents, designs, models, plans, secret formulas 
or processes, and trademarks. It also includes payment for the 
use of, or the right to use, information concerning industrial, 
commercial or scientific experience. In addition, the term 
includes gain derived from the sale, exchange, or other 
disposition of any such property or rights to the extent that 
the amounts realized on such sale, exchange or other 
disposition are contingent on the productivity, use, or 
disposition of such property or rights.
    In the case of certain amounts treated as royalties, the 
current treaty limits the rate of source country tax to 10 
percent of the gross amount of such royalties. The royalties 
that are subject to this 10-percent maximum rate are payments 
by a resident of a treaty country for the use of, or the right 
to use, industrial, commercial, or scientific equipment (but 
not including certain ships, aircraft, or containers).
    The current treaty reduced rates of tax on royalties do not 
apply if the recipient of the royalty has a permanent 
establishment or fixed base in the source country and the 
property or rights giving rise to the royalty is effectively 
connected with the permanent establishment or fixed base. Such 
royalties are taxed as business profits or income from the 
performance of independent personal services.
    The current treaty addresses the issue of non-arm's-length 
royalties between related persons by providing that the amount 
of the royalty for purposes of applying this article is the 
amount of royalty that would have been paid to an unrelated 
person. Any amount of royalty paid in excess of such amount is 
taxable according to the laws of each country, taking into 
account the other provisions of the current treaty.

Proposed protocol rules

    The proposed protocol reduces the rate of source country 
tax that may be imposed on royalties that are derived from 
sources within one treaty country and that are beneficially 
owned by a resident of the other country from 15 percent to 10 
percent.

                               Article 4

    The proposed protocol provides that the protocol will be an 
integral and inseparable part of the current treaty.

                               Article 5

    The proposed protocol provides that it is subject to 
ratification and that instruments of ratification will be 
exchanged as soon as possible. The proposed protocol provides 
that it will enter into force on the date of exchange of the 
instruments of ratification. The proposed protocol provides 
that its provisions will take effect for amounts paid or 
credited on or after the first day of the second month next 
following the date on which it enters into force.

               IX. Text of the Resolution of Ratification

    Resolved, (two-thirds of the Senators present concurring 
therein), That the Senate advise and consent to the 
ratification of the Protocol, signed at Jakarta on July 24, 
1996, Amending the Convention Between the Government of the 
United States of America and the Government of the Republic of 
Indonesia for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income, 
with a Related Protocol and Exchange of Notes signed at Jakarta 
on July 11, 1988 (Treaty Doc. 104-32).
                           X. A P P E N D I X

                              ----------                              


 Written Statement of Joseph H. Guttentag, International Tax Counsel, 
Department of the Treasury, Before the Committee on Foreign Relations, 
                    U.S. Senate, September 24, 1996

    Mr. Chairman and Members of the Committee, I am pleased to 
submit this statement on behalf of the Administration to 
recommend favorable action on the protocols to two tax 
treaties, with Indonesia and with the Netherlands with respect 
to the Netherlands Antilles, that are on the Committee's 
business meeting agenda. Also on the agenda is the tax treaty 
with Kazakstan, on which the Administration recommended 
favorable action in testimony before the Committee on June 13, 
1995. There are also three additional bilateral tax treaties 
that the President has transmitted to the Senate, with Austria, 
Luxembourg, and Turkey. All these agreements provide 
significant benefits to the United States, as well as to our 
treaty partners. Treasury appreciates the Committee's interest 
in these agreements, and requests the Committee and the Senate 
to take favorable action at this time on the three agreements 
that are on the Committee's agenda, and on the remaining three 
treaties as soon as possible.
    The tax treaty program is designed to remove obstacles to 
international trade and investment, such as double taxation, 
and to prevent fiscal evasion, such as through treaty shopping 
and information concealing. Accordingly, tax treaties provide 
substantial benefits to taxpayers as well as to the fiscs of 
both treaty partners.
    For example, high withholding taxes at source are an 
impediment to international economic activity. Under United 
States domestic law, all payments to non-United States persons 
of dividends and royalties as well as certain payments of 
interest are subject to withholding tax equal to 30 percent of 
the gross amount paid. Inasmuch as this tax is imposed on a 
gross rather than net amount, it imposes a high cost on 
investors receiving such payments. Indeed, in many cases the 
cost of such taxes can be prohibitive. Most of our trading 
partners impose similar levels of withholding tax on these 
types of income.
    Tax treaties alleviate this burden by reducing the levels 
of withholding tax that the treaty partners may impose on these 
types of income. In general, United States policy is to reduce 
the rate of withholding taxation on interest and royalties to 
zero. Dividends normally are subject to tax at one of two 
rates, 15 percent on portfolio investors and 5 percent on 
direct corporate investors, with certain exceptions.
    The Treasury Department has included in all its recent tax 
treaties comprehensive ``limitation on benefits'' provisions 
that limit the benefits of the treaty to bona fide residents of 
the treaty partner. These provisions are not uniform, as each 
country has its own characteristics that make it more or less 
inviting to treaty shopping in particular ways. Consequently, 
each provision must to some extent be tailored to fit the facts 
and circumstances of the treaty partners' internal laws and 
practices. Moreover, these provisions should be crafted to 
avoid interfering with legitimate and desirable economic 
activity. For example, in the future we plan to address 
directly in our negotiations the issue of how open-end United 
States regulated investment companies (RICs) should be treated 
under limitation on benefits provisions in order to facilitate 
cross-border investments from this important source of capital. 
Because these funds are required to stand ready to redeem their 
shares on a daily basis, we believe they generally should be 
entitled to treaty benefits to the same extent as closed-end 
RICs, which qualify for benefits under standard limitation on 
benefits provisions because they are publicly traded on stock 
exchanges. However, the extent to which this goal may be 
achieved is likely to vary from treaty to treaty, as the 
negotiators need to ensure that mutual funds established in the 
treaty partner cannot be used to promote treaty shopping.
    Our tax treaties and treaty positions are subject to 
continual review. We reexamine the appropriateness and 
effectiveness of our treaty provisions, and receive comments 
from both public and private sources. The release last week of 
the new U.S. model income tax treaty, copies of which were 
provided to the Committee, is an important step in this process 
but does not represent its conclusion. The new model represents 
our favored treaty positions at this time; we will reevaluate 
and update the model over time as we evaluate model treaty 
positions as employed in our recent tax treaties and receive 
comments and further suggestions on the model itself.

Discussion of Pending Agreements--Indonesia, Netherlands Antilles, and 
                               Kazakstan

    I would like to discuss the importance and purposes of each 
agreement that the Committee has set for consideration. We have 
submitted Technical Explanations of each agreement that contain 
detailed discussions of each treaty and protocol. These 
Technical Explanations serve as an official guide to each 
agreement. We have furnished our treaty partners with a copy of 
the relevant technical explanation and offered them the 
opportunity to submit their comments, suggestions and 
concurrence.
Indonesia
    The proposed protocol with Indonesia, which was signed at 
Jakarta on July 24, 1996, amends the income tax treaty with 
Indonesia that was signed in 1988 and entered into force on 
December 30, 1990. In many cases, the withholding tax rates 
permitted under the existing tax treaty with Indonesia 
significantly exceed those found in Indonesia's treaties with 
other OECD countries. This places United States business at a 
substantial competitive disadvantage in Indonesia relative to 
competitors from other industrialized countries. Because 
Indonesia is one of the world's most populous countries, with a 
rapidly expanding market that is located in a region of dynamic 
economic growth, it is especially important that United States 
firms be able to compete there without this disadvantage.
    The proposed protocol achieves this objective by reducing 
the withholding tax rates permitted to bring them into line 
with those in Indonesia's recent treaties with other OECD 
countries. The protocol reduces the maximum rates of tax on 
direct-investment dividends, interest, and royalty income, 
which are generally 15 percent under the current treaty, to 10 
percent.

Netherlands Antilles

    Many years ago, the United States and the Netherlands 
agreed to extend the then treaty between them to the 
Netherlands Antilles. The extension became a contentious issue, 
and in 1987 most of the provisions of the treaty as extended to 
the Netherlands Antilles were terminated, except for the 
taxation of interest at source and ancillary provisions. The 
proposed protocol to the Netherlands treaty relates only to the 
Netherlands Antilles and would complete the termination by 
eliminating the exemption from the United States withholding 
tax for interest, except with respect to certain grandfathered 
debt instruments.
    The proposed protocol relating to the Netherlands Antilles 
would eliminate ongoing treaty shopping through the Netherlands 
Antilles by limiting the exemption from United States 
withholding tax to certain debt instruments issued on or before 
October 15, 1984. These debt instruments were issued in 
connection with Eurobond offerings by Netherlands Antilles 
subsidiaries of United States companies, generally before the 
Deficit Reduction Act of 1984 allowed United States companies 
to issue debt, free of United States withholding tax, directly 
into the international capital markets. It is appropriate to 
provide a continued exemption for these debt instruments 
because the Eurobonds were issued in reasonable reliance on the 
continued existence of the exemption and it is believed that 
eliminating the exemption entirely would have an adverse effect 
on international capital markets.

Kazakstan

    In addition to the five new treaties and protocols, the 
Committee still has under consideration a treaty between the 
United States and Kazakstan. This treaty was the subject of a 
hearing last year. At our request, the Committee delayed its 
vote on this treaty until we received adequate assurances from 
the Government of Kazakstan regarding access to bank account 
information. At the time of last year's hearing, Kazakstan had 
recently adopted laws permitting the opening of anonymous bank 
accounts, and we wanted to be certain that the existence of 
these accounts would not, as a legal or a practical matter, 
impede our access to bank account information in order to 
enforce our tax laws.
    I am pleased to report that Kazakstan is now clearly moving 
away from bank secrecy. The Government of Kazakstan has 
submitted legislation to the Kazakstan Parliament to repeal the 
earlier laws permitting the establishment of anonymous bank 
accounts. We understand that the lower house of the Kazakstan 
Parliament has passed the legislation and that the Government 
of Kazakstan expects the law to be enacted without opposition 
this week.
    We appreciate the Committee's support on this very 
important issue and hope that we can work cooperatively to move 
this treaty forward while at the same time protecting the 
integrity of the treaty's exchange of information provisions. 
One alternative that we would support is for the Committee to 
report the treaty recommending that the Senate give its advice 
and consent to ratification assuming Kazakstan's adoption of 
the new law. The full Senate then could approve the 
recommendation with appropriate conditions concerning the 
elimination of anonymous bank accounts. We have provided the 
Committee with the latest information we have regarding the 
status of this issue and will continue to keep the Committee 
advised. If the Senate chooses to give its advice and consent 
to the treaty at the present time, the Administration is 
willing and able to accept the responsibility of not permitting 
instruments of ratification to be exchanged until it is fully 
satisfied that the conditions described above have been fully 
satisfied. Absent this procedure, entry into force of the 
treaty could be further substantially delayed. Based on 
information we have received it would be in the interest of the 
United States to have the treaty enter into force as promptly 
as possible.
    We will continue to work with the Committee and its staff 
to bring this issue to a mutually satisfactory conclusion.

                               conclusion

    Let me conclude by again thanking the Committee for its 
continuing interest in the tax treaty program. We appreciate 
the assistance and cooperation of the staffs of this Committee 
and of the Joint Committee on Taxation in the tax treaty 
process. With your and their help, we have over the past 
several years brought into force 19 new treaties and protocols.
    We urge the Committee to take prompt and favorable action 
on the three agreements before you at the business meeting. We 
further urge the Committee to take favorable action as soon as 
possible on the remaining three tax treaties that the President 
has submitted to the Senate. Such action will send an important 
message to our trading partners and our business community. It 
will demonstrate our desire to expand the United States treaty 
network with income tax treaties formulated to enhance the 
worldwide competitiveness of United States companies. It will 
strengthen and expand our economic relations with countries 
that have seen significant economic and political changes in 
recent years. Finally, it will make clear our intention to deal 
bilaterally in a forceful and realistic way with treaty abuse.

                                
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