[Senate Executive Report 104-4]
[From the U.S. Government Publishing Office]



104th Congress                                              Exec. Rept.
                                 SENATE

 1st Session                                                      104-4
_______________________________________________________________________


 
                   INCOME TAX CONVENTION WITH SWEDEN

                                _______


   August 10 (legislative day, July 10), 1995.--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. 103-29, 103d Congress, 2d Session]
    The Committee on Foreign Relations, to which was referred 
the Convention Between the Government of the United States of 
America and the Government of Sweden for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income signed at Stockholm on September 1, 
1994, together with a related exchange of notes, 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 principal purposes of the proposed income tax treaty 
between the United States and Sweden 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 income taxes of the two countries. The proposed 
treaty is intended to continue to promote close economic 
cooperation between the two countries and to eliminate possible 
barriers to trade caused by overlapping taxing jurisdictions of 
the two countries. It is also intended to enable the countries 
to cooperate in preventing avoidance and evasion of taxes.
                             II. Background

    The proposed treaty was signed on September 1, 1994, and 
replaces the existing income tax treaty between the two 
countries that was signed in 1939, and amended by a 
supplementary protocol signed in 1963.
    The proposed treaty was transmitted to the Senate for 
advice and consent to its ratification on September 14, 1994 
(see Treaty Doc. 103-29). The Committee on Foreign Relations 
held a public hearing on the proposed treaty on June 13, 1995.

                              III. Summary

    The proposed treaty is similar to other recent U.S. income 
tax treaties, the 1981 proposed U.S. model income tax treaty 
(the ``U.S. model''),\1\ and the model income tax treaty of the 
Organization for Economic Cooperation and Development (the 
``OECD model''). However, the proposed treaty contains certain 
deviations from those documents. Among other modifications, the 
proposed treaty includes a number of revisions to accommodate 
aspects of the Tax Reform Act of 1986.
    \1\ The U.S. model has been withdrawn from use as a model treaty by 
the Treasury Department. Accordingly, its provisions may no longer 
represent the preferred position of U.S. tax treaty negotiations. A new 
model has not yet been released by the Treasury Department. Pending the 
release of a new model, comparison of the provisions of the proposed 
treaty against the provisions of the former U.S. model should be 
considered in the context of the provisions of comparable recent U.S. 
treaties.
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    As in other U.S. tax treaties, the objectives of the 
proposed treaty are principally achieved by each country 
agreeing to limit, in certain specified situations, its right 
to tax income derived from its territory by residents of the 
other. For example, the proposed treaty contains the standard 
treaty provisions that neither country will tax business income 
derived by residents of the other unless the business 
activities in the taxing country are substantial enough to 
constitute a permanent establishment or fixed base and the 
income is attributable to the permanent establishment or fixed 
base (Articles 7 and 14). Similarly, the proposed treaty 
contains the standard ``commercial visitor'' exemptions under 
which residents of one country performing personal services in 
the other will not be required to pay tax in the other unless 
their contact with the other exceeds specified minimums 
(Articles 14, 15, and 18). The proposed treaty provides that 
dividends 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 and 13). Generally, 
however, dividends received by a resident of one country from 
sources within the other country are to be taxed by the source 
country on a restricted basis (Article 10). The proposed treaty 
also provides that, as a general rule, the source country may 
not tax interest and royalties received by a resident of the 
other treaty country (Articles 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 treaty generally provides for the relief 
of the potential double taxation by requiring the country of 
residence either to grant a credit against its tax for the 
taxes paid to the second country or to exempt that income 
(Article 23).
    The treaty contains a ``saving clause'' similar to that 
contained in U.S. tax treaties that each country retains the 
right to tax its citizens and residents as if the treaty had 
not come into effect (Article 1). In addition, the treaty 
contains the standard provision that the treaty will not be 
applied to deny any taxpayer any benefits he would be entitled 
to under the domestic law of the country or under any other 
agreement between the two countries (Article 1); that is, the 
treaty will only be applied to the benefit of taxpayers.
    The proposed treaty differs in certain respects from other 
U.S. income tax treaties and from the U.S. and OECD model 
treaties. It also differs in significant respects from the 
present treaty with Sweden. (The present treaty predates the 
1981 U.S. model treaty.) A summary of the provisions of the 
proposed treaty, including some of these differences, follows:
    (1) The U.S. excise tax on insurance premiums paid to a 
foreign insurer generally is covered; that is, the excise tax 
is treated as a tax that may be eliminated by treaty. This 
treatment is a departure from the prior treaty, which generally 
allowed the U.S. excise tax to be imposed on premiums paid to 
Swedish insurers. Similar coverage appears in recent tax 
treaties (such as the treaties with Germany and the Netherlands 
and the present and proposed treaties with France), and under 
the U.S. model treaty (Article 2).
    (2) The definition of the term ``United States'' as 
contained in the proposed treaty generally conforms to the 
definition provided in the U.S. model. In both treaties the 
term generally is limited to the United States of America, thus 
excluding from the definition U.S. possessions and territories. 
The proposed treaty, however, makes it clear that the United 
States includes its territorial sea and the seabed and subsoil 
of the adjacent area over which the United States may exercise 
rights in accordance with international law and in which laws 
relating to U.S. tax are in force. The U.S. model is silent 
with respect to this point. The definition of the term 
``Sweden'' as contained in the proposed treaty similarly 
includes its territorial sea and other maritime areas over 
which Sweden, in accordance with international law, exercises 
sovereign rights or jurisdiction (Article 3).
    (3) By contrast with the present treaty, the proposed 
treaty introduces rules for determining when a person is a 
resident of either the United States or Sweden, and hence 
(subject to the limitation on benefits) entitled to benefits 
under the treaty. The proposed treaty, like the U.S. model 
treaty, provides tie-breaker rules for determining the 
residence for treaty purposes of ``dual residents,'' or persons 
having residence status under the internal laws of each of 
these treaty countries. These rules differ in some respects 
from the rules in the U.S. model treaty. For example, under the 
treaty, as under many other U.S. treaties, Sweden need not 
treat U.S. citizens or green card holders as U.S. residents 
unless they have a substantial presence, permanent home, or 
habitual abode in the United States. The U.S. model, by 
contrast, provides for the other country to reduce taxes on all 
U.S. citizens, regardless of where they reside. The United 
States, however, rarely has been able to negotiate coverage for 
nonresident citizens in its income tax treaties (Article 4).
    (4) The proposed treaty does not contain the U.S. model 
treaty provision under which investors in real property in the 
country not of their residence, and who make an election to be 
taxed on those investments on a net basis, are bound by that 
election for all subsequent years unless the countries agree to 
allow the taxpayer to terminate it. Instead, the making of the 
election is controlled by internal law. Although current U.S. 
and Swedish law independently provide for elective net basis 
taxation, the making of a second election under internal U.S. 
law is restricted once a first election has been revoked. 
Unlike the U.S. model treaty and most U.S. treaties, but like 
the OECD model treaty and several recent U.S. treaties, the 
proposed treaty defines real property to include accessory 
property, as well as livestock and equipment used in 
agriculture and forestry (Article 6).
    (5) By contrast to most other U.S. treaties, the proposed 
treaty treats a permanent establishment as if it were a 
``distinct and separate enterprise'' (as in the OECD model 
treaty) rather than a ``distinct and independent enterprise'' 
(as in the U.S. model treaty). The language in other U.S. 
treaties is intended to make clear that, as described in 
paragraph 10 of the OECD Commentaries to Article 7, a permanent 
establishment is to be treated as if it were a totally 
independent enterprise, i.e., one that deals independently with 
all related companies, not just its home office. The Treasury 
Department Technical Explanation of the Convention Between the 
Government of the United States of America and the Government 
of Sweden for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion With Respect to Taxes on Income 
signed at Stockholm on September 1, 1994, May 1995 (``Technical 
Explanation'') explains that in the course of the negotiations 
of the proposed treaty, the Swedish negotiators made clear that 
they subscribed to the interpretation in the OECD Commentaries, 
but preferred to retain the language from the OECD model. The 
explanation further states that there should be no difference 
in applications between paragraph 2 of Article 7 of the 
proposed treaty and its analog in other U.S. treaties (Article 
7).
    (6) The business profits article of the proposed treaty 
omits the force of attraction rules contained in the Code, 
providing instead that the business profits to be attributed to 
a permanent establishment shall include only the profits 
derived from the assets or activities of the permanent 
establishment. This is consistent with the U.S. model (Article 
7).
    (7) The proposed treaty, like the present and model 
treaties, provides that profits of an enterprise of one treaty 
country from the operation of ships or aircraft in 
international traffic are taxable only in that country. Like 
the U.S. model treaty, but unlike the present treaty, the 
proposed treaty provides that profits of a treaty-country 
enterprise from the use or rental of containers and related 
equipment used in international traffic shall be taxable only 
in that country (Article 8).
    (8) Profits derived by the air transport consortium 
Scandinavian Airlines System (SAS) are subject to the exemption 
from tax for international traffic under the proposed treaty 
only to the extent that the SAS profits correspond to the 
participation held in that consortium by AB Aerotransport 
(ABA), the Swedish partner of SAS. SAS is an entity in the 
nature of a partnership which was created jointly by the 
legislatures of Sweden, Norway and Denmark. The entire income 
of the consortium will be subject to an exemption from tax for 
international traffic because, in addition to the proposed 
treaty, there are treaties between the United States and Norway 
and Denmark that provide similar exemptions to residents of 
those countries. In addition, notes exchanged at the signing of 
the treaty provide that all income earned by Scandinavian 
Airlines of North America Inc. (SANA Inc.), a New York 
corporation, from the operation in international traffic of 
aircraft would be treated as income of SAS, the consortium 
whose constituent corporate members own the stock of SANA Inc. 
The Technical Explanation states that (1) SANA Inc. was created 
and is operated as an entity apart from SAS to satisfy U.S. 
regulations regarding foreign airlines, which SAS as a 
consortium could not meet, (2) SANA Inc. is a conduit for SAS 
with regard to receipts and its expenses are guaranteed by SAS 
and, therefore, (3) the income of SANA Inc. will be taxed under 
the proposed treaty in the same manner as if it were earned 
directly by SAS. The same result is achieved with respect to 
the Danish and Norwegian partners in SAS. The result is spelled 
out in an exchange of notes with Norway, in the same manner as 
in this treaty. The present Danish treaty predates the 
establishment of SANA Inc., and is, therefore, silent on this 
issue. Similar notes were signed in connection with the 1980 
treaty with Denmark which was approved by the Committee, but 
was not approved by the full Senate (on other grounds) (Article 
8).
    (9) The associated enterprise article of the proposed 
treaty incorporates the general principles of section 482 of 
the Internal Revenue Code (``Code''). It also conforms more 
closely than does the present treaty to the corresponding 
article in the U.S. model. Under the present treaty, each 
country may tax an enterprise resident in that country on 
profits that were, by virtue of its participation in the 
management or the financial structure of an enterprise of the 
other contracting State, reduced by non-arm's-length conditions 
agreed to or imposed upon the second enterprise. In these 
cases, adjustments may be made in the accounts of the resident 
enterprise. The proposed treaty contains broader language, 
similar to the U.S. model, expressly permitting the use of 
internal law standards such as section 482. It further provides 
that either treaty country must correlatively adjust any tax 
liability it previously imposed on an enterprise for profits 
reallocated to an associated enterprise by the other treaty 
country, if the first country agrees with the substance of the 
second country's adjustment (Article 9).
    (10) Under the proposed treaty, as well as the U.S. model, 
direct investment dividends (i.e., dividends paid to companies 
resident in the other country that own directly at least 10 
percent of the voting shares of the payor) will generally be 
taxable by the source country, after the treaty is fully phased 
in, at a rate no greater than 5 percent. Portfolio investment 
dividends (i.e., those paid to companies owning less than a 10 
percent voting share interest in the payor, or to noncorporate 
residents of the other country) are generally taxable by the 
source country at a rate no greater than 15 percent (Article 
10).
    (11) Like the U.S. model treaty, the proposed treaty 
generally defines ``dividends'' as income from shares or other 
rights which participate in profits and which are not debt 
claims. Unlike the U.S. model treaty, the proposed treaty also 
provides that the term dividends includes income from 
arrangements, including debt obligations, carrying the right to 
participate in profits to the extent so characterized under the 
law of the source country. Thus, the treaty would permit 
dividend treatment of an ``equity kicker'' amount that is paid 
on a loan (Article 10).
    (12) The prohibition on source country tax in excess of 5 
percent on direct investment dividends does not apply to a 
dividend from a regulated investment company (a ``RIC''). These 
dividends are generally subject to a 15-percent tax. In 
addition, a dividend from a real estate investment trust (a 
``REIT'') is taxed at source at the 15-percent portfolio 
dividend rate if the beneficial owner of the dividend is a 
Swedish individual who owns less than a 10-percent interest in 
the REIT (dividends paid by a REIT are taxed at source at the 
full 30-percent statutory rate in other cases) (Article 10).
    (13) The proposed treaty provides an exemption from U.S. 
excise taxes on private foundations in the case of a religious, 
scientific, literary, educational, or charitable organization 
which is resident in Sweden, but only if such organization has 
received substantially all of its support from persons other 
than citizens or residents of the United States. This provision 
is designed to ensure that the Nobel Foundation, a Swedish 
charitable organization, will not be subject to U.S. excise 
taxes (Article 10).
    (14) Unlike the present treaty, the proposed treaty 
expressly permits the United States to impose its branch 
profits tax. The United States may only apply its branch 
profits tax to the portion of the business profits of a Swedish 
company attributable to a permanent establishment or to certain 
income from real property. The amount of profits subject to the 
branch profits tax is limited to the amount representing the 
``dividend equivalent amount,'' as defined under the Code 
(Article 10).
    (15) Like the U.S. model, the proposed treaty generally 
provides that interest derived and beneficially owned by a 
resident of a country may be taxed only by that country. Thus, 
the proposed treaty generally exempts from the U.S. 30-percent 
tax U.S. source interest paid to Swedish residents, and exempts 
from Swedish tax interest paid to U.S. residents. The proposed 
treaty also provides that the exemption at source for interest 
does not apply to an excess inclusion of a U.S. real estate 
mortgage investment conduit (a ``REMIC''). The U.S. model 
(which was written before the enactment of the REMIC regime) 
does not exclude an excess inclusion of a REMIC from the 
exemption at source for interest (Article 11).
    (16) Like the present treaty, the proposed treaty provides 
that royalties derived and beneficially owned by a resident of 
a country generally may be taxed only by that country. Thus, 
the proposed treaty generally exempts from the U.S. 30-percent 
tax all U.S. source royalties paid to Swedish residents, and 
exempts from Swedish tax royalties paid to U.S. residents. 
These reciprocal exemptions are similar to those provided in 
the U.S. and OECD model treaties. However, unlike under the 
U.S. model treaty, payments for the use of, or the right to 
use, any motion pictures and works on film, tape or other means 
of reproduction used for radio or television broadcasting, are 
treated as royalties (Article 12).
     (17) Both the U.S. model treaty and the proposed treaty 
provide for source country taxation of capital gains from the 
disposition of real property regardless of whether the taxpayer 
is engaged in a trade or business in the source country. The 
proposed treaty expands the present treaty (and U.S. model) 
definition of real property for these purposes to encompass 
``U.S. real property interests.'' This safeguards U.S. tax 
under the Foreign Investment in Real Property Tax Act of 1980 
which applies to dispositions of U.S. real property interests 
by nonresident aliens and foreign corporations (Article 13).
     (18) The proposed treaty permits Sweden to impose its 
statutory tax on gains by an expatriate resident in the United 
States from any property derived by this individual during the 
10 years following the date on which the individual ceased to 
be a resident of Sweden. Under the proposed treaty, the United 
States also retains a right to tax its former citizens for 10 
years where their loss of citizenship had as one of its 
principal purposes the avoidance of tax (Article 13).
     (19) The proposed treaty generally conforms to the U.S. 
model treaty the provisions relating to independent personal 
services. Under the proposed treaty, like the model treaty, 
independent personal services performed by a resident of one 
country in the other country can be taxed by the source country 
only if the income is attributable to a fixed base regularly 
available to the individual in the source country for the 
purpose of performing his or her activities (Article 14).
     (20) The dependent services article of the proposed treaty 
varies slightly from that article of the U.S. model. Under the 
U.S. model, salaries, wages and other similar remuneration 
derived by a resident of one treaty country in respect of 
employment exercised in the other country is taxable only in 
the residence country (i.e., is not taxable in the other 
country) if the recipient is present in the other country for a 
period or periods not exceeding in the aggregate 183 days in 
the taxable year concerned and certain other conditions are 
satisfied. The proposed treaty contains a similar rule, but 
like the OECD model as revised in 1992, provides that the 
measurement period for the 183-day test is not limited to the 
taxable year; rather, the source country may not tax the income 
if the individual is not present there for a period or periods 
exceeding in the aggregate 183 days in a 12-month period 
(Article 15).
    (21) The proposed treaty prohibits source country tax on 
remuneration of a treaty country resident employed as a member 
of the regular complement of a ship or aircraft operating in 
international traffic (including an aircraft operated in 
international traffic by the air transport consortium 
Scandinavian Airlines System). This is the same as the U.S. 
model provision, but differs from the present treaty (which 
provides no special rule for such employment income) and from 
the OECD model, which permits taxation in such case by the 
country in which the place of effective management of the 
employer is situated (Article 15).
     (22) The proposed treaty allows directors' fees paid by a 
company resident in one country to a resident of the other 
country to be taxed in the first country if the fees are paid 
for services performed in that country. The U.S. model treaty 
and the present treaty, on the other hand, subject directors' 
fees to the normal rules regarding the taxation of persons 
performing personal services. Under the U.S. model treaty (and 
the present treaty), the country where the recipient resides 
generally has primary taxing jurisdiction over personal service 
income and the source country tax on directors' fees is 
limited. By contrast, under the OECD model treaty the country 
where the company is resident has full taxing jurisdiction over 
directors' fees and other similar payments the company makes to 
residents of the other treaty country, regardless of where the 
services are performed. Thus, the proposed treaty represents a 
compromise between the U.S. model and the OECD model positions 
(Article 16).
     (23) The proposed treaty, unlike the present treaty, 
contains a limitation on benefits, or ``anti-treaty shopping,'' 
article. This proposed treaty provision retains in some 
respects the outline of the limitation on benefits provisions 
contained in recent U.S. treaties and in the branch tax 
provisions of the Internal Revenue Code and Treasury 
Regulations. The proposed treaty provision is similar to the 
limitation on benefits article contained in the recent U.S. 
income tax treaty with Germany (Article 17).
     (24) As is true of the U.S. and the OECD model treaties, 
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 athletes. These rules apply notwithstanding the 
other provisions dealing with the taxation of income from 
personal services and business profits and are intended, in 
part, to prevent entertainers and athletes from using the 
treaty to avoid paying any tax on their income earned in one of 
the countries. The dollar threshold for taxation under the 
proposed treaty, however, is less than one-third of the 
threshold provided in the U.S. model. U.S. tax treaties 
generally follow the U.S. model rules, but often use a lower 
annual income threshold. Under the OECD model, entertainers and 
athletes may be taxed by the country of source, regardless of 
the amount of income they earn from artistic or sporting 
endeavors (Article 18).
     (25) Under the proposed treaty, pensions and other similar 
remuneration beneficially derived by a resident of either 
country in consideration of past employment generally are 
subject to tax only in the recipient's country of residence. 
However, pensions and other payment made by one of the 
countries under the provisions of its social security system or 
similar legislation paid to a resident of the other country or 
to a citizen of the United States will be taxable only in the 
paying country. Similar legislation is defined in the notes 
exchanged at the time of the signing of the proposed treaty to 
refer to United States Tier 1 Railroad Retirement benefits. The 
proposed treaty also provides for the deductibility of 
contributions of an employee in the host country of the 
employee, under certain circumstances, to a pension or 
retirement arrangement in the other country, as may be agreed 
by the competent authorities of the two countries (Article 19).
     (26) The proposed treaty retains the present treaty's rule 
that, as a general matter, employment compensation paid by a 
treaty country government may only be taxed by that country. 
If, however, the employee is a citizen of the other country, or 
did not become a resident of the other country solely for the 
purposes of his employment, the other country has the exclusive 
taxing right. A similar set of rules applies to pensions in 
respect of government service. The proposed treaty applies to 
all compensation paid by a governmental entity for services 
rendered to that governmental entity, regardless of whether the 
services are rendered in the discharge of governmental 
functions, so long as the services are not rendered in 
connection with a business carried on by the governmental 
entity (Article 20).
     (27) The present and proposed treaties, like the U.S. 
model, preclude a visited country from taxing certain 
compensation received by students, trainees, and certain other 
temporary visitors, when that compensation is for purposes of 
full time education or training and is received from abroad 
(Article 21).
    (28) The proposed treaty, unlike the present treaty, 
contains the standard other income article, found in the model 
treaties and more recent treaties, under which income not dealt 
with in another treaty article generally may be taxed only by 
the residence country (Article 22).
    (29) The relief from double taxation article of the 
proposed treaty, which generally ensures that each country 
allow foreign tax credits for the income taxes imposed by the 
other country, contains a special rule (not contained in the 
present treaty but contained in many other treaties) for U.S. 
citizens who reside in Sweden. Under this rule, Sweden will 
allow as a credit against Swedish tax the U.S. income taxes 
paid on U.S. source income. The credit, however, will not 
exceed the amount of tax that would have been paid to the 
United States if the resident were not a U.S. citizen (Article 
23).
    (30) The proposed treaty greatly expands the non-
discrimination rule in the present treaty, generally conforming 
it to the U.S. model. The present treaty prohibits only 
discrimination under the laws of one country against citizens 
of the other country resident in the first country. The 
proposed treaty prohibits discrimination under the laws of one 
country against nationals of the other country in the same 
circumstances as nationals of the first country. The proposed 
treaty also prohibits discrimination under the laws of one 
country against permanent establishments of enterprises of the 
other country, against the deductibility of amounts paid to 
residents of the other country, or against enterprises owned by 
residents of the other country (Article 24).
    (31) Like the U.S. model treaty, the proposed treaty makes 
express provision for competent authorities to mutually agree 
on topics that would arise under the present treaty, but are 
not mentioned in the present treaty's mutual agreement article, 
such as the characterization of particular items of income, the 
common meaning of a term, the application of procedural aspects 
of internal law, and the elimination of double taxation in 
cases not provided for in the treaty. Also like the U.S. model, 
the proposed treaty makes express provision for competent 
authorities to mutually agree on topics that would arise under 
the proposed treaty (Article 25).
    (32) The proposed treaty provides that its dispute 
resolution procedures under the mutual agreement article would 
take precedence over the corresponding provisions of any other 
agreement between the United States and Sweden in determining 
whether a law or other measure is within the scope of the 
proposed treaty. Unless the competent authorities agree that 
the law or other measure is outside the scope of the proposed 
treaty, only the proposed treaty's nondiscrimination rules, and 
not the nondiscrimination rules of any trade or investment 
agreement in effect between the United States and Sweden, 
generally would apply to that law or measure. The only 
exception to this general rule is that the nondiscrimination 
rules of the General Agreement on Tariffs and Trade would 
continue to apply with respect to trade in goods (Article 25).
    (33) The proposed treaty contains a provision requiring 
each country to undertake to lend administrative assistance to 
the other in collecting taxes covered by the treaty. This 
provision, carried over with modifications from the present 
treaty, is more expansive than the administrative assistance 
provision in the U.S. model treaty. Among other things, the 
proposed treaty provision specifies that one country's 
application to the other for assistance must include a 
certification that the taxes at issue have been ``finally 
determined.'' A country is not required to lend assistance with 
respect to the country's own citizens or entities, except as 
necessary to ensure that exemptions or reduced rates under the 
treaty will not be enjoyed by those not entitled to them. 
Neither country, however, is required to carry out 
administrative measures different from those used in the 
collection of its own taxes, or which would be contrary to its 
sovereignty, security, or public policy (Article 27).

                  IV. Entry Into Force and Termination

                          A. Entry into Force

    The proposed treaty will enter into force upon the exchange 
of instruments of ratification. The proposed treaty will take 
effect for the United States, with regard to withholding taxes 
on dividends, interest or royalties, for amounts paid or 
credited on or after the first day of the January following the 
date on which the treaty enters into force. With respect to 
other taxes, the proposed treaty will take effect for taxable 
years beginning on or after the first of January following the 
date the treaty enters into force. For Sweden, with regard to 
taxes on income, the proposed treaty will take effect for 
income derived on or after the first day of January following 
the date on which the treaty enters into force; with regard to 
the Swedish capital tax, for tax that is assessed in or after 
the second calendar year following the year the treaty enters 
into force; and with regard to the excise tax imposed on 
insurance premiums paid to foreign insurers, for premiums paid 
on or after the first day of January following the date the 
treaty enters into force.

                             B. Termination

    The proposed treaty will continue in force until terminated 
by a treaty country. Either country may terminate it at any 
time after five years from the date of its entry into force, by 
giving at least six months prior notice through diplomatic 
channels.
    In the case of the United States, with respect to taxes 
withheld at source, a termination will be effective for amounts 
paid or credited on or after the first of January following the 
expiration of the six-month period. With respect to other 
taxes, a termination is to be effective for taxable years 
beginning on or after the first of January following the 
expiration of the six-month period.
    In the case of Sweden, with respect to taxes on income, a 
termination will be effective for income derived on or after 
the first day of January following the expiration of the six 
months period. With respect to the capital tax, a termination 
will be effective for tax that is assessed in or after the 
second calendar year following the expiration of the 6 months 
period. With respect to the excise tax imposed on insurance 
premiums paid to foreign insurers, a termination will be 
effective for premiums paid on or after the first day of 
January following the expiration of the six months period.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed treaty with Sweden, and on other proposed tax 
treaties and protocols, on June 13, 1995. The hearing was 
chaired by Senator Thompson. The Committee considered the 
proposed treaty on July 11, 1995, and ordered the proposed 
treaty and protocol favorably reported by a voice vote, with 
the recommendation that the Senate give its advice and consent 
to the ratification of the proposed treaty.

                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that this treaty 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 treaty, and believes that 
the following comments may be useful to U.S. Treasury officials 
in providing guidance on these matters should they arise in the 
course of future treaty negotiations.

                           A. 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 is intended to benefit residents of Sweden and 
the United States only, 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 
secure a lower rate of tax by lending money to a U.S. person 
indirectly through a country whose treaty with the United 
States provides for a lower rate. The third-country investor 
may do this by establishing a subsidiary, trust, or other 
investing entity in that treaty country which then makes the 
loan to the U.S. person and claims the treaty reduction for the 
interest it receives. Although the present Swedish treaty does 
not contain an anti-treaty-shopping provision, treaty shopping 
through Sweden apparently has not been a problem. However, as 
the United States negotiates anti-treaty-shopping provisions 
with additional countries, treaty shopping through countries 
with treaties without such provisions may become more of a 
problem.
    The anti-treaty-shopping provision of the proposed treaty 
is similar to an anti-treaty-shopping provision in the Code (as 
interpreted by Treasury regulations) and in several newer 
treaties. Some aspects of the provision, however, differ either 
from the anti-treaty-shopping provision of the U.S. model or 
from the anti-treaty-shopping provisions sought by the United 
States in some treaty negotiations since the model was 
published in 1981. The issue is whether the anti-treaty-
shopping provision of the treaty effectively forestalls 
potential treaty-shopping abuses.
    One provision of the anti-treaty-shopping article of the 
proposed treaty is more lenient than the comparable rule in one 
version proposed with the U.S. model. That U.S. model proposal 
allows benefits to be denied if 75 percent or less of a 
resident company's stock is held by individual residents of the 
country of residence, while the proposed treaty (like several 
newer treaties and an anti-treaty-shopping provision in the 
Code) lowers the qualifying percentage to 50, and broadens the 
class of qualifying shareholders to include residents of either 
treaty country (and citizens of the United States). Thus, this 
safe harbor is considerably easier to enter, under the proposed 
treaty. On the other hand, counting for this purpose 
shareholders who are residents of either treaty country would 
not appear to invite the type of abuse at which the provision 
is aimed, since the targeted abuse is ownership by third-
country residents attempting to obtain treaty benefits.
    Another provision of the anti-treaty-shopping article 
differs from the comparable rule of the U.S. model, but the 
effect of the change is less clear. The general test applied by 
the U.S. model to allow benefits, short of meeting the bright-
line ownership and base-erosion test, is a broadly subjective 
one, looking to whether the acquisition, maintenance, or 
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 the active conduct of a trade or business. 
(However, this active trade or business test does not apply 
with respect to a business of making or managing investments, 
except for banking and insurance activities carried on by a 
bank or an insurance company, so benefits can be denied with 
respect to such a business regardless of how actively it is 
conducted.) In addition, the proposed treaty gives the 
competent authority of the source country the ability to 
override this standard.
    The practical difference between the proposed treaty tests 
and the U.S. model test will depend upon how they are 
interpreted and applied. The principal purpose test may be 
applied leniently (so that any colorable business purpose 
suffices to preserve treaty benefits), or it may be applied 
strictly (so that any significant intent to obtain treaty 
benefits suffices to deny them). Similarly, the standards in 
the proposed treaty could be interpreted to require, for 
example, a more active or a less active trade or business 
(though the range of interpretation is far narrower). Thus, a 
narrow reading of the principal purpose test could 
theoretically be stricter than a broad reading of the proposed 
treaty tests (i.e., would operate to deny benefits in 
potentially abusive situations more often).
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department to provide additional 
explanation regarding the sufficiency of the anti-treaty 
shopping provisions in the proposed treaty and other treaties. 
The relevant portion of Treasury's letter responding to this 
and other inquires, dated July 5, 1995, is reproduced below: 
2
    \2\ Letter from Assistant Secretary of the Treasury (Tax Policy), 
Leslie B. Samuels to Senator Fred Thompson, Committee on Foreign 
Relations, July 5, 1995 (``July 5, 1995 Treasury letter'').

          7. Is Treasury confident that the anti-treaty 
        shopping provisions in these treaties will ensure full 
        payment of taxes by multinational corporations and 
        eliminate abuse of the treaties to lower taxes?
          In conjunction with various domestic statutes and 
        regulations, the limitation on benefits provisions 
        should be very effective in preventing underpayment of 
        U.S. withholding taxes by non-residents, including 
        multinationals.

    The Committee continues to believe that the United States 
should maintain its policy of limiting treaty-shopping 
opportunities whenever possible. In exercising any latitude 
Treasury has to adjust the operation of the proposed treaty, 
Treasury should satisfy itself that its rules adequately deter 
treaty-shopping abuses. The present income tax treaty between 
the United States and Sweden does not contain anti-treaty-
shopping rules. The proposed anti-treaty-shopping provision may 
be effective in preventing third-country investors from 
obtaining treaty benefits by establishing investing entities in 
Sweden since third-country investors may be unwilling to share 
ownership of such investing entities on a 50-50 basis with U.S. 
or Swedish residents or other qualified owners to meet the 
ownership test of the anti-treaty-shopping provision. Further 
the base erosion test provides protection from certain 
potential abuses of a Swedish conduit. Finally, Sweden imposes 
significant taxes of its own; these taxes may deter third-
country investors from seeking to use Swedish entities to make 
U.S. investments. On the other hand, the Committee is aware 
that implementation of the tests for treaty shopping set forth 
in the treaty may raise factual, administrative, or other 
issues that currently cannot be foreseen. The Committee 
emphasizes that the new rules must be implemented so as to 
serve as an adequate tool for preventing possible treaty-
shopping abuses in the future.

                          b. transfer pricing

    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 reallocate profits 
among related enterprises residing in each country, if a 
reallocation is necessary to reflect the conditions which would 
have been made between independent enterprises. The Code, under 
section 482, provides the Secretary of the Treasury the power 
to make reallocations wherever necessary in order to prevent 
evasion of taxes or clearly to reflect the income of related 
enterprises. Under regulations, the Treasury Department 
implements this authority using an arm's-length standard, and 
has indicated its belief that the standard it applies is fully 
consistent with the proposed treaty.\3\ A significant function 
of this authority is to ensure that the United States asserts 
taxing jurisdiction over its fair share of the worldwide income 
of a multinational enterprise. The arm's-length standard has 
been adopted uniformly by the leading industrialized countries 
of the world, in order to secure the appropriate tax base in 
each country and avoid double taxation, ``thereby minimizing 
conflict between tax administrations and promoting 
international trade and investment.'' \4\
    \3\ The OECD report on transfer pricing generally approves the 
methods that are incorporated in the current Treasury regulations under 
section 482 as consistent with the arm's-length principles upon which 
Article 9 of the proposed treaty is based. See ``Transfer Pricing 
Guidelines for Multinational Enterprises and Tax Administrations,'' 
OECD, Paris 1995.
    \4\ Id. (preface).
    Some have argued in the recent past that the IRS has not 
performed adequately in this area. Some have argued that the 
IRS cannot be expected to do so using its current approach. 
They argue that the approach now set forth in the regulations 
is impracticable, and that the Treasury Department should adopt 
a different approach, under the authority of section 482, for 
measuring the U.S. share of multinational income.5 Some 
prefer a so-called ``formulary apportionment'' approach, which 
can take a variety of forms. The general thrust of formulary 
apportionment is to first measure total profit of a person or 
group of related persons without regard to geography, and only 
then to apportion the total, using a mathematical formula, 
among the tax jurisdictions that claim primary taxing rights 
over portions of the whole. Some prefer an approach that is 
based on the expectation that an investor generally will insist 
on a minimum return on investment or sales.6
    \5\ See generally The Breakdown of IRS Tax Enforcement Regarding 
Multinational Corporations: Revenue Losses, Excessive Litigation, and 
Unfair Burdens for U.S. Producers: Hearing before the Senate Committee 
on Governmental Affairs, 103d Cong., 1st Sess. (1993) (hereinafter, 
Hearing Before the Senate Committee on Governmental Affairs).
    \6\ See Tax Underpayments by U.S. Subsidiaries of Foreign 
Companies: Hearings Before the Subcommittee on Oversight of the House 
Committee on Ways and Means, 101st Cong., 2d Sess. 360-61 (1990) 
(statement of James E. Wheeler); H.R. 460, 461, and 500, 103d Cong., 
1st Sess. (1993); sec. 304 of H.R. 5270, 102d Cong., 2d Sess. (1992) 
(introduced bills); see also Department of the Treasury's Report on 
Issues Related to the Compliance with U.S. Tax Laws by Foreign Firms 
Operating in the United States: Hearing Before the Subcommittee on 
Oversight of the House Committee on Ways and Means, 102d Cong., 2d 
Sess. (1992).
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    A debate exists as to whether an alternative to the 
Treasury Department's current approach would violate the arm's-
length standard embodied in Article 9 of the proposed treaty, 
or the nondiscrimination rules embodied in Article 25.7 
Some, who advocate a change in internal U.S. tax policy in 
favor of an alternative method, fear that U.S. obligations 
under treaties such as the proposed treaty would be cited as 
obstacles to change. The issue is whether the United States 
should enter into agreements that might conflict with a move to 
an alternative approach in the future, and if not, the degree 
to which U.S. obligations under the proposed treaty would in 
fact conflict with such a move.
    \7\ Compare Tax Conventions with: The Russian Federation, Treaty 
Doc. 102-39; United Mexican States, Treaty Doc. 103-7; The Czech 
Republic, Treaty Doc. 103-17; The Slovak Republic, Treaty Doc. 103-18; 
and The Netherlands, Treaty Doc. 103-6. Protocols Amending Tax 
Conventions with: Israel, Treaty Doc. 103-16; The Netherlands, Treaty 
Doc. 103-19; and Barbados, Treaty Doc. 102-41. Hearing Before the 
Committee on Foreign Relations, United States Senate, 103d Cong., 1st 
Sess. 38 (1993) (``A proposal to use a formulary method would be 
inconsistent with our existing treaties and our new treaties.'') (oral 
testimony of Leslie B. Samuels, Assistant Secretary for Tax Policy, 
U.S. Treasury Department); a statement conveyed by foreign governments 
to the U.S. State Department that ``[w]orldwide unitary taxation is 
contrary to the internationally agreed arm's length principle embodied 
in the bilateral tax treaties of the United States'' (letter dated 14 
October 1993 from Robin Renwick, U.K. Ambassador to the United States, 
to Warren Christopher, U.S. Secretary of State); and American Law 
Institute Federal Income Tax Project: International Aspects of United 
States Income Taxation II: Proposals on United States Income Tax 
Treaties (1992), at 204 (n. 545) (``Use of a world-wide combination 
unitary apportionment method to determine the income of a corporation 
is inconsistent with the `Associated Enterprises' article of U.S. tax 
treaties and the OECD model treaty'') with Hearing Before the Senate 
Committee on Governmental Affairs at 26, 28 (``I do not believe that 
the apportionment method is barred by any tax treaty that United States 
has now entered into.'') (statement of Louis M. Kauder). See also 
Foreign Income Tax Rationalization and Simplification Act of 1992: 
Hearings Before the House Committee on Ways and Means, 102d Cong., 2d 
Sess. 224, 246 (1992) (written statement of Fred T. Goldberg, Jr., 
Assistant Secretary for Tax Policy, U.S. Treasury Department).
    As part of its consideration of the proposed treaty, the 
Committee requested the Treasury Department to provide 
additional information on the Administration's current policy 
with respect to transfer pricing issues. The information 
requested included a description of the Administration's 
general position on transfer pricing issues, an analysis of 
whether the United States should interpret Article 9 of tax 
treaties regarding transfer pricing as permitting other methods 
of pricing such as the unitary method or formulary 
apportionment method and the reasons for industry's support of 
the arm's-length pricing method. In addition, the Committee 
also inquired whether the Treasury Department is satisfied that 
the proposed treaty, and other treaties that are the subject of 
the hearing, ensure foreign corporations are paying their share 
of U.S. taxes. The relevant portions of Treasury's response to 
these inquiries, in the July 5, 1995 Treasury letter, are 
---------------------------------------------------------------------------
reproduced below:

    1. Please describe the position of the U.S. Treasury with 
regard to the transfer pricing issue.
    While estimates of the magnitude of the problem vary, 
Treasury regards transfer pricing as one of the most important 
international tax issues that it faces. Treasury believes that 
both foreign and U.S.-owned multinationals have engaged in 
significant income shifting through improper transfer pricing.
    Treasury identified three problems that allowed these 
abuses to occur: (1) lack of substantive guidance in U.S. 
regulations for taxpayers and tax administrators to apply in 
cases where the traditional approaches did not work; (2) lack 
of an incentive for taxpayers to attempt to set their transfer 
prices in accordance with the substantive rules; and (3) lack 
of international consensus on appropriate approaches. To 
resolve these problems, Treasury has taken the following steps 
in the last two years:
          In July 1994, Treasury issued new final regulations 
        under section 482 of the Internal Revenue Code. These 
        regulations contain methods that were not reflected in 
        prior final regulations: the Comparable Profits and 
        Profit Split Methods. These methods are intended to be 
        used when the more traditional methods are unworkable 
        or do not provide a reliable basis for determining an 
        appropriate transfer price.
          In August 1993, Congress enacted a Treasury proposal 
        to amend section 6662(e) of the Internal Revenue Code. 
        This provision penalizes taxpayers that both (1) are 
        subject to large transfer pricing adjustments and (2) 
        do not provide documentation indicating that they made 
        a reasonable effort to comply with the regulations 
        under section 482 in setting their transfer prices. 
        Treasury issued temporary regulations implementing the 
        statute in February 1994.
          In July 1994, the Organization for Economic 
        Cooperation and Development issued a draft report on 
        transfer pricing. The United States is an active 
        participant in this body. The OECD transfer pricing 
        guidelines serve as the basis for the resolution of 
        transfer pricing cases between treaty partners and it 
        therefore is critical that any approach adopted in any 
        country be sanctioned in this report in order to reduce 
        the risk of double taxation. The draft report permits 
        the use of the new U.S. methods in appropriate cases.
    2. Why shouldn't the United States interpret Article 9 of 
the tax treaties regarding transfer pricing as permitting other 
methods of pricing such as the unitary or formulary 
apportionment method?
    If Treasury adopted such an interpretation, it would send a 
signal to our treaty partners that we were moving away from the 
arm's length standard to a different, more arbitrary approach. 
Sending such a signal would be very destructive and, if 
implemented, would inevitably result in double (and under) 
taxation due to the fundamental inconsistency between the 
approach used in the United States and that used elsewhere. 
Further, adopting such an interpretation would invite non-OECD 
countries to introduce their own approaches that currently 
cannot be foreseen, but that could inappropriately increase 
their tax bases at the expense of the United States and other 
countries.
    3. The consensus regarding transfer pricing methods is 
currently the arm's length standard. Will the U.S. remain open 
to the possibility of better or alternative methods without 
moving to such alternative methods unilaterally?
    If it appeared that another approach was superior to the 
current approach, the U.S. would push for the adoption of this 
new approach on a multilateral basis so that there would be the 
necessary international consensus in favor of the new approach.
    4. Why does industry support the arm's length pricing 
method?
    Most multinationals are willing to pay their fair share of 
tax. Their primary concern is that they not be subjected to 
double taxation. Because the arm's length standard is the 
universally adopted international norm and the major countries 
of the world have adopted a consensus interpretation of that 
standard within the OECD, the risks of double taxation are 
infinitely smaller under the arm's length standard than under 
any other approach.
    5. A recent GAO report suggested that many foreign 
corporations are not paying their fair share of taxes. Is 
Treasury satisfied that these treaties ensure full payment of 
required taxes?
    A tax treaty by itself will not prevent transfer pricing 
abuses. Rather, the treaty leaves it to the internal rules and 
practices of the treaty partners to deal with such issues. In 
the United States, Treasury has taken the measures described 
above to ensure that foreign--and domestic--corporations pay 
their fair share of taxes. A tax treaty can make these internal 
measures more effective, particularly through the exchange of 
information provisions that enable the U.S. tax authorities to 
obtain transfer pricing information on transactions between 
related parties in the United States and the treaty partner. 
The treaties also facilitate Advance Pricing Agreements that 
preclude the possibility of double taxation and at the same 
time ensure that each country receives an appropriate share of 
the taxes paid by a multinational.
           C. Relationship to Uruguay Round Trade Agreements

    The multilateral trade agreements encompassed in the 
Uruguay Round Final Act, which entered into force as of January 
1, 1995, include a General Agreement on Trade in Services 
(``GATS''). This agreement generally obligates members (such as 
the United States and Sweden) and their political subdivisions 
to afford persons resident in member countries (and related 
persons) ``national treatment'' and ``most-favored-nation 
treatment'' in certain cases relating to services. The GATS 
applies to ``measures'' affecting trade in services. A 
``measure'' includes any law, regulation, rule, procedure, 
decisions, administrative action, or any other form. Therefore, 
the obligations of the GATS extend to any type of measure, 
including taxation measures.
    However, the application of the GATS to tax measures is 
limited by certain exceptions under Article XIV and Article 
XXII(3). Article XIV requires that a tax measure not be applied 
in a manner that would constitute a means of arbitrary or 
unjustifiable discrimination between countries where like 
conditions prevail, or a disguised restriction on trade in 
services. Article XIV(d) allows exceptions to the national 
treatment otherwise required by the GATS, provided that the 
difference in treatment is aimed at ensuring the equitable or 
effective imposition or collection of direct taxes in respect 
of services or service suppliers of other members. ``Direct 
taxes'' under the GATS comprise all taxes on income or capital, 
including taxes on gains from the alienation of property, taxes 
on estates, inheritances and gifts, and taxes on the total 
amounts of wages or salaries paid by enterprises as well as 
taxes on capital appreciation.
    Article XXII(3) provides that a member may not invoke the 
GATS national treatment provisions with respect to a measure of 
another member that falls within the scope of an international 
agreement between them relating to the avoidance of double 
taxation. In case of disagreement between members as to whether 
a measure falls within the scope of such an agreement between 
them, either member may bring this matter before the Council 
for Trade in Services. The Council is to refer the matter to 
arbitration; the decision of the arbitrator is final and 
binding on the members. However, with respect to agreements on 
the avoidance of double taxation that are in force on January 
1, 1995, such a matter may be brought before the Council for 
Trade in Services only with the consent of both parties to the 
tax agreement.
    Article XIV(e) allows exceptions to the most-favored-nation 
treatment otherwise required by the GATS, provided that the 
difference in treatment is the result of an agreement on the 
avoidance of double taxation or provisions on the avoidance of 
double taxation in any other international agreement or 
arrangement by which the member is bound.
    The proposed treaty provides that notwithstanding any other 
agreement to which the United States and Sweden are parties, a 
dispute concerning whether a measure is within the scope of the 
proposed treaty is to be considered only by the competent 
authorities under the dispute settlement procedures of the 
proposed treaty. Moreover, the proposed treaty provides that 
the nondiscrimination provisions of the proposed treaty are the 
only nondiscrimination provisions that may be applied to a 
taxation measure unless the competent authorities determine 
that the taxation measure is not within the scope of the 
proposed treaty (with the exception of nondiscrimination 
obligations under the General Agreement on Tariffs and Trade 
(``GATT'') with respect to trade in goods).
    The Committee believes that it is important that the 
competent authorities are granted the sole authority to resolve 
any potential dispute concerning whether a measure is within 
the scope of the proposed treaty and that the nondiscrimination 
provisions of the proposed treaty are the only appropriate 
nondiscrimination provisions that may be applied to a tax 
measure unless the competent authorities determine that the 
proposed treaty does not apply to it (except nondiscrimination 
obligations under GATT with respect to trade in goods). The 
Committee also believes that the provision of the proposed 
treaty is adequate to preclude the preemption of the mutual 
agreement provisions of the proposed treaty by the dispute 
settlement procedures under the GATS.

                        D. Insurance Excise Tax

    The proposed treaty, unlike the present treaty, contains a 
waiver of the U.S. excise tax on insurance premiums paid to 
foreign insurers. Thus, for example, a Swedish insurer or 
reinsurer without a permanent establishment in the United 
States can collect premiums on policies covering a U.S. risk or 
a U.S. person free of this tax. However, the tax is imposed to 
the extent that the risk is reinsured by the Swedish insurer or 
reinsurer with a person not entitled to the benefits of the 
proposed treaty or another treaty providing exemption from the 
tax. This latter rule is known as the ``anti-conduit'' clause.
    Although waiver of the excise tax appears in the 1981 U.S. 
model treaty, waivers of the excise tax have raised serious 
Congressional concerns. For example, concern has been expressed 
over the possibility that such waivers may place U.S. insurers 
at a competitive disadvantage to foreign competitors in U.S. 
markets if insubstantial tax is imposed by the other country to 
the treaty (or any other country) on the insurance income of 
its residents (or the income of companies with which they 
reinsure their risks). Moreover, in such a case waiver of the 
tax does not serve the purpose of treaties to avoid double 
taxation, but instead has the undesirable effect of eliminating 
all taxation.
    The U.S.-Barbados and U.S.-Bermuda tax treaties each 
contained such a waiver as originally signed. In its report on 
the Bermuda treaty, the Foreign Relations Committee expressed 
the view that those waivers should not have been included. The 
Committee stated that waivers should not be given by Treasury 
in its future treaty negotiations without prior consultations 
with the appropriate committees of Congress. 8 Congress 
subsequently enacted legislation to ensure the sunset of the 
waivers in the two treaties. The waiver of the tax in the 
treaty with the United Kingdom (where the tax was waived 
without the so-called ``anti-conduit rule'') has been followed 
by a number of legislative efforts to redress perceived 
competitive imbalance created by the waiver.
    \8\  The Committee understands that such consultations took place 
in connection with the proposed treaty.
---------------------------------------------------------------------------
    Technical Explanation explains that the U.S. negotiators 
agreed to waive these insurance excise taxes ``only after a 
review of Swedish law indicated that the income tax imposed by 
Sweden on Swedish resident insurers results in a burden that is 
substantial in relation to the U.S. tax on U.S. resident 
insurers.'' Thus, unlike Bermuda and Barbados, Sweden appears 
to impose substantial tax on income, including insurance 
income, of its residents. In addition, unlike the U.K. waiver, 
the Swedish treaty waiver contains the standard anti-conduit 
language. Thus, although it may be difficult to generalize 
about the precise tax burdens Swedish insurers bear relative to 
U.S. insurers, or the precise effects of imposing or waiving 
the excise tax on Swedish insurers' rates of economic return, 
there is reason to believe that agreeing not to impose the tax 
on Swedish insurers is consistent with the criteria the 
Committee has previously laid down for waiver of the tax.
     As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department to provide additional 
explanation on the insurance excise tax waiver provision. The 
relevant portions of the July 5, 1995 Treasury letter 
responding to this and other inquiries are reproduced below:


     1. Is Treasury satisfied that no competitive imbalance 
will result from the insurance excise tax waiver provision?
     Our insurance experts reviewed Swedish taxation of 
insurance companies resident in Sweden to ensure that the 
competitive position of U.S. insurance companies will not be 
affected adversely by granting a waiver of the U.S. insurance 
excise tax to Swedish companies. This review confirmed that 
Swedish insurance companies bear a significant level of Swedish 
tax on their income from insuring U.S. risks.
     2. Can this Committee be assured that this waiver is 
peculiar to the Swedish treaty as a result of the substantial 
tax burdens and will not provide a precedent for future waivers 
in tax treaties?
     The coverage of the insurance excise tax is not peculiar 
to the Swedish treaty. It has been U.S. treaty policy for about 
20 years to cover the insurance excise tax, and thereby waive 
its imposition, where the other country sought coverage, 
subject to an anti-abuse provision, so long as the other 
country did not have a comparable tax that it was not willing 
to cover. In recent years, in accordance with Congressional 
views, we have modified our policy to cover the tax only in 
treaties with countries that impose a significant level of tax 
on their resident insurance companies. As indicated above, 
Sweden passed this test.

     Swedish law may, however, exempt low-taxed foreign income 
of a Swedish resident from tax; if foreign laws that apply to 
the foreign insurance income of a Swedish resident were changed 
in the future (or applied differently than they are now), the 
result might be a level of tax inconsistent with the criteria 
previously laid down by the Committee for waiver of the U.S. 
excise tax on premiums. While the Committee has no reason 
currently to expect that such foreign law changes will occur, 
the Committee is aware of this possibility, and thus instructs 
the Treasury Department promptly to inform the Committee of any 
changes in foreign laws or business practices that would have 
an impact on the tax burden of Swedish insurers relative to 
that of U.S. insurers.

                           VII. Budget Impact

     The Committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed treaty is estimated to 
have a negligible effect on Federal budget receipts during the 
fiscal year 1995-2000 period.

                 VIII. Explanation of Treaty Provisions

     For a detailed, article-by-article explanation of the 
proposed treaty, see the ``Treasury Department Technical 
Explanation of the Convention Between the Government of the 
United States of America and the Government of Sweden for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion With Respect to Taxes on Income Signed at Stockholm on 
September 1, 1994,'' May 1995.

               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 Convention between the Government of the 
United States of America and the Government of Sweden for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income, signed at Stockholm on 
September 1, 1994, together with related exchange of notes 
(Treaty Doc. 103-29).