[Senate Executive Report 105-13]
[From the U.S. Government Publishing Office]



105th Congress                                              Exec. Rept.
                                 SENATE

 1st Session                                                     105-13
_______________________________________________________________________


 
                      TAX CONVENTION WITH IRELAND

                                _______
                                

                October 30, 1997.--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. 105-31]

    The Committee on Foreign Relations, to which was referred 
the Convention between the Government of the United States of 
America and the Government of Ireland for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income and Capital Gains, signed at Dublin 
on July 28, 1997, together with a Protocol and exchange of 
notes done on the same date, having considered the same, 
reports favorably thereon, with one understanding, two 
declarations, and one proviso, and recommends that the Senate 
give its advice and consent to ratification thereof, as set 
forth in this report and the accompanying resolution of 
ratification.


                                CONTENTS
                                                                   Page
  I. Purpose..........................................................1
 II. Background.......................................................2
III. Summary..........................................................2
 IV. Entry Into Force and Termination.................................3
  V. Committee Action.................................................4
 VI. Committee Comments...............................................4
VII. Budget Impact...................................................17
VIII.Explanation of Proposed Treaty and Proposed Protocol............17

 IX. Text of the Resolution of Ratification..........................60

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Ireland are to reduce or 
eliminate double taxation of income earned by residents of 
either country from sources within the other country and to 
prevent avoidance or evasion of the 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 and investment 
caused by overlapping taxing jurisdictions of the two 
countries. It is intended to enable the two countries to 
cooperate in preventing avoidance and evasion of taxes.

                             II. Background

    The proposed treaty and proposed protocol both were signed 
on July 28, 1997. The United States and Ireland also exchanged 
diplomatic notes on July 28, 1997 reflecting certain common 
understandings and interpretations with respect to the proposed 
treaty. The proposed treaty would replace the existing income 
tax treaty between the two countries that was signed in 1949.
    The proposed treaty, together with the proposed protocol 
and the exchange of notes, was transmitted to the Senate for 
advice and consent to its ratification on September 24, 1997 
(see Treaty Doc. 105-31). The Senate Committee on Foreign 
Relations held a public hearing on the proposed treaty and 
proposed protocol and exchange of notes on October 7, 1997.

                              III. Summary

    The proposed treaty (as supplemented by the proposed 
protocol) is similar to other recent U.S. income tax treaties, 
the 1996 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 proposed treaty and proposed protocol 
contain certain substantive deviations from those documents.
---------------------------------------------------------------------------
    \1\ The Treasury Department released the U.S. model on September 
20, 1996. A 1981 U.S. model treaty was withdrawn by the Treasury 
Department on July 17, 1992.
---------------------------------------------------------------------------
    As in other U.S. tax treaties, the proposed treaty's 
objective of reducing or eliminating double taxation 
principally is 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 country. For 
example, the proposed treaty contains provisions under which 
neither country generally will tax business income derived from 
sources within that country by residents of the other country 
unless the business activities in the taxing country are 
substantial enough to constitute a permanent establishment or 
fixed base (Articles 7 and 14). Similarly, the proposed treaty 
contains ``commercial visitor'' exemptions under which 
residents of one country performing personal services in the 
other country will not be required to pay tax in the other 
country unless their contact with the other country exceeds 
specified minimums (Articles 14, 15, and 17). The proposed 
treaty provides that dividends and certain capital gains 
derived by a resident of either country from sources within the 
other country may be taxed by both countries (Articles 10 and 
13); however, the rate of tax that the source country may 
impose on a resident of the other country on dividends 
generally will be limited by the proposed treaty (Article 10). 
The proposed treaty also provides that interest and royalties 
derived by a resident of either country generally will be 
exempt from tax in the other country (Articles 11, 12 and 22).
    In situations where the country of source retains the right 
under the proposed treaty to tax income derived by residents of 
the other country, the proposed treaty generally provides for 
relief from the potential double taxation through the allowance 
by the country of residence of a tax credit for certain foreign 
taxes paid to the other country (Article 24).
    The proposed treaty contains the standard provision (the 
``saving clause'') contained in U.S. tax treaties pursuant to 
which each country retains the right to tax its citizens and 
residents as if the proposed treaty had not come into effect 
(Article 1). In addition, the proposed treaty contains the 
standard provision that it may not be applied to deny any 
taxpayer any benefits the taxpayer would be entitled to under 
the domestic law of a country or under any other agreement 
between the two countries (Article 1).
    The proposed treaty also contains a detailed limitation on 
benefits provision to prevent the inappropriate use of the 
proposed treaty by third-country residents (Article 23).

                  IV. Entry Into Force and Termination

                          A. Entry into Force

    The proposed treaty is subject to ratification in 
accordance with the applicable procedures of each country, and 
the instruments of ratification are to be exchanged as soon as 
possible. In general, the proposed treaty will enter into force 
when the instruments of ratification are exchanged. The present 
treaty generally ceases to have effect once the provisions of 
the proposed treaty take effect.
    With respect to taxes withheld at source, the proposed 
treaty will be effective for amounts paid or credited on or 
after the first of January following entry into force. With 
respect to other taxes, the proposed treaty will be effective, 
in the case of the United States, for taxable periods beginning 
on or after the first of January following entry into force 
and, in the case of Ireland, for financial years with respect 
to the corporation tax and years of assessment with respect to 
the income and capital gains taxes beginning on or after the 
first of January following entry into force.
    Where greater benefits would be available to a taxpayer 
under the present treaty than under the proposed treaty, the 
proposed treaty provides that the taxpayer may elect to be 
taxed under the present treaty (in its entirety) for the 
twelve-month period following the date on which the proposed 
treaty otherwise would have effect.
    The proposed treaty includes a special transition rule with 
respect to the limitation on benefits provision. Under this 
rule, an Irish company that is claiming the benefits of the 
proposed treaty on the basis that it is owned by residents of 
European Union (``EU'') or North American Free Trade Agreement 
(``NAFTA'') countries may do so without regard to the 
requirement that such owners be entitled to benefits equivalent 
to those under the proposed treaty. This rule generally applies 
for the two-year period from the date the proposed treaty 
otherwise takes effect; however, it applies for the three-year 
period from the date the proposed treaty takes effect if the 
election to continue the application of the present treaty is 
made.

                             B. Termination

    The proposed treaty will remain in force until terminated 
by either country. Either country may terminate the proposed 
treaty 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. A termination will be effective with 
respect to taxes withheld at source for amounts paid or 
credited on or after the first of January following the 
expiration of the six-month period. A termination will be 
effective with respect to other taxes, in the case of the 
United States, for taxable periods beginning on or after the 
first of January following the expiration of the six-month 
period and, in the case of Ireland, for financial years with 
respect to the corporation tax and years of assessment with 
respect to the income and capital gains taxes beginning on or 
after the first of January following the expiration of the six-
month period.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed treaty with Ireland and the related protocol and 
exchange of notes (Treaty Doc. 105-31), as well as on other 
proposed tax treaties and protocols, on October 7, 1997. The 
hearing was chaired by Senator Hagel. The Committee considered 
these proposed treaties and protocols on October 8, 1997, and 
ordered the proposed treaty with Ireland and the related 
protocol and exchange of notes favorably reported by a voice 
vote, with the recommendation that the Senate give its advice 
and consent to ratification of the proposed treaty, subject to 
an understanding, two declarations, and a proviso.

                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed treaty with Ireland is in the interest of the 
United States and urges that the Senate act promptly to give 
advice and consent to ratification. However, the Committee has 
taken note of certain issues raised by the proposed treaty and 
believes that the following comments may be useful to Treasury 
Department officials in providing guidance on these matters 
should they arise in the course of future treaty negotiations.

                     A. Treatment of REIT Dividends

REITs in general

    Real Estate Investment Trusts (``REITs'') essentially are 
treated as conduits for U.S. tax purposes. The income of a REIT 
generally is not taxed at the entity level but is distributed 
and taxed only at the investor level. This single level of tax 
on REIT income is in contrast to other corporations, the income 
of which is subject to tax at the corporate level and is taxed 
again at the shareholder level upon distribution as a dividend. 
Hence, a REIT is like a mutual fund that invests in qualified 
real estate assets.
    An entity that qualifies as a REIT is taxable as a 
corporation. However, unlike other corporations, a REIT is 
allowed a deduction for dividends paid to its shareholders. 
Accordingly, income that is distributed by a REIT to its 
shareholders is not subject to corporate tax at the REIT level. 
A REIT is subject to corporate tax only on any income that it 
does not distribute currently to its shareholders. As discussed 
below, a REIT is required to distribute on a current basis the 
bulk of its income each year.
    In order to qualify as a REIT, an entity must satisfy, on a 
year-by-year basis, specific requirements with respect to its 
organizational structure, the nature of its assets, the source 
of its income, and the distribution of its income. These 
requirements are intended to ensure that the benefits of REIT 
status are accorded only to pooling of investment arrangements, 
the income of which is derived from passive investments in real 
estate and is distributed to the investors on a current basis.
    In order to satisfy the organizational structure 
requirements for REIT status, a REIT must have at least 100 
shareholders and not more than 50 percent (by value) of its 
shares may be owned by five or fewer individuals. In addition, 
shares of a REIT must be transferrable.
    In order to satisfy the asset requirements for REIT status, 
a REIT must have at least 75 percent of the value of its assets 
invested in real estate, cash and cash items, and government 
securities. In addition, diversification rules apply to the 
REIT's investment in assets other than the foregoing qualifying 
assets. Under these rules, not more than 5 percent of the value 
of its assets may be invested in securities of a single issuer 
and any such securities held may not represent more than 10 
percent of the voting securities of the issuer.
    In order to satisfy the source of income requirements, at 
least 95 percent of the gross income of the REIT generally must 
be from certain passive sources (e.g., dividends, interest, and 
rents). In addition, at least 75 percent of its gross income 
generally must be from certain real estate sources (e.g., real 
property rents, mortgage interest, and real property gains).
    Finally, in order to satisfy the distribution of income 
requirement, the REIT generally is required to distribute to 
its shareholders each year at least 95 percent of its taxable 
income for the year (excluding net capital gains). A REIT may 
retain 5 percent or less of its taxable income and all or part 
of its net capital gain.
    A REIT is subject to corporate-level tax only on any 
taxable income and net capital gains that the REIT retains. 
Under an available election, shareholders may be taxed 
currently on the undistributed capital gains of a REIT, with 
the shareholder entitled to a credit for the tax paid by the 
REIT with respect to the undistributed capital gains such that 
the gains are subject only to a single level of tax. 
Distributions from a REIT of ordinary income are taxable to the 
shareholders as a dividend, in the same manner as dividends 
from an ordinary corporation. Accordingly, such dividends are 
subject to tax at a maximum rate of 39.6 percent in the case of 
individuals and 35 percent in the case of corporations. In 
addition, capital gains of a REIT distributed as a capital gain 
dividend are taxable to the shareholders as capital gain. 
Capital gain dividends received by an individual will be 
eligible for preferential capital gain tax rates if the 
relevant holding period requirements are satisfied.

Foreign investors in REITs

    Nonresident alien individuals and foreign corporations 
(collectively, foreign persons) are subject to U.S. tax on 
income that is effectively connected with the foreign person's 
conduct of a trade or business in the United States, in the 
same manner and at the same graduated tax rates as U.S. 
persons. In addition, foreign persons generally are subject to 
U.S. tax at a flat 30-percent rate on certain gross income that 
is derived from U.S. sources and that is not effectively 
connected with a U.S. trade or business. The 30-percent tax 
applies on a gross basis to U.S.-source interest, dividends, 
rents, royalties, and other similar types of income. This tax 
generally is collected by means of withholding by the person 
making the payment of such amounts to a foreign person.
    Capital gains of a nonresident alien individual that are 
not connected with a U.S. business generally are subject to the 
30-percent withholding tax only if the individual is present in 
the United States for 183 days or more during the year. The 
United States generally does not tax foreign corporations on 
capital gains that are not connected with a U.S. trade or 
business. However, foreign persons generally are subject to 
U.S. tax on any gain from a disposition of an interest in U.S. 
real property at the same rates that apply to similar income 
received by U.S. persons. Therefore, a foreign person that has 
capital gains with respect to U.S. real estate is subject to 
U.S. tax on such gains in the same manner as a U.S. person. For 
this purpose, a distribution by a REIT to a foreign shareholder 
that is attributable to gain from a disposition of U.S. real 
property by the REIT is treated as gain recognized by such 
shareholder from the disposition of U.S. real property.
    U.S. income tax treaties contain provisions limiting the 
amount of income tax that may be imposed by one country on 
residents of the other country. Many treaties, like the 
proposed treaty, generally allow the source country to impose 
not more than a 15-percent withholding tax on dividends paid to 
a resident of the other treaty country. In the case of real 
estate income, most treaties, like the proposed treaty, specify 
that income derived from, and gain from dispositions of, real 
property in one country may be taxed by the country in which 
the real property is situated without limitation. 2 
Accordingly, U.S. real property rental income derived by a 
resident of a treaty partner generally is subject to the U.S. 
withholding tax at the full 30-percent rate (unless the net-
basis taxation election is made), and U.S. real property gains 
of a treaty partner resident are subject to U.S. tax in the 
manner and at the rates applicable to U.S. persons.
---------------------------------------------------------------------------
    \2\ The proposed treaty, like many treaties, allows the foreign 
person to elect to be taxed in the source country on income derived 
from real property on a net basis under the source country's domestic 
laws.
---------------------------------------------------------------------------
    Although REITs are not subject to corporate-level taxation 
like other corporations, distributions of a REIT's income to 
its shareholders generally are treated as dividends in the same 
manner as distributions from other corporations. Accordingly, 
in cases where no treaty is applicable, a foreign shareholder 
of a REIT is subject to the U.S. 30-percent withholding tax on 
ordinary income distributions from the REIT. In addition, such 
shareholders are subject to U.S. tax on U.S. real estate 
capital gain distributions from a REIT in the same manner as a 
U.S. person.
    In cases where a treaty is applicable, this U.S. tax on 
capital gain distributions from a REIT still applies. However, 
absent special rules applicable to REIT dividends, treaty 
provisions specifying reduced rates of tax on dividends apply 
to ordinary income dividends from REITs as well as to dividends 
from taxable corporations. As discussed above, the proposed 
treaty, like many U.S. treaties, reduces the U.S. 30-percent 
withholding tax to 15 percent in the case of dividends 
generally. Prior to 1989, U.S. tax treaties contained no 
special rules excluding dividends from REITs from these reduced 
rates. Therefore, under pre-1989 treaties such as the present 
treaty with Ireland, REIT dividends are eligible for the same 
reductions in the U.S. withholding tax that apply to other 
corporate dividends.
    Beginning in 1989, U.S. treaty negotiators began including 
in treaties provisions excluding REIT dividends from the 
reduced rates of withholding tax generally applicable to 
dividends. Under treaties with these provisions such as the 
proposed treaty, REIT dividends generally are subject to the 
full U.S. 30-percent withholding tax. 3 
---------------------------------------------------------------------------
    \3\ Many treaties, like the proposed treaty, provide a maximum tax 
rate of 15 percent in the case of REIT dividends beneficially owned by 
an individual who holds a less than 10 percent interest in the REIT.
---------------------------------------------------------------------------

Analysis of treaty treatment of REIT dividends

    The specific treaty provisions governing REIT dividends 
were introduced beginning in 1989 because of concerns that the 
reductions in withholding tax generally applicable to dividends 
were inappropriate in the case of dividends from REITs. The 
reductions in the rates of source country tax on dividends 
reflect the view that the full 30-percent withholding tax rate 
may represent an excessive rate of source-country taxation 
where the source country already has imposed a corporate-level 
tax on the income prior to its distribution to the shareholders 
in the form of a dividend. In the case of dividends from a 
REIT, however, the income generally is not subject to 
corporate-level taxation.
    REITs are required to distribute their income to their 
shareholders on a current basis. The assets of a REIT consist 
primarily of passive real estate investments and the REIT's 
income may consist principally of rentals from such real estate 
holdings. U.S.-source rental income generally is subject to the 
U.S. 30-percent withholding tax. Moreover, the United States's 
treaty policy is to preserve its right to tax real property 
income derived from the United States. Accordingly, the U.S. 
30-percent tax on rental income from U.S. real property is not 
reduced in U.S. tax treaties.
    If a foreign investor in a REIT were instead to invest in 
U.S. real estate directly, the foreign investor would be 
subject to the full 30-percent withholding tax on rental income 
earned on such property (unless the net-basis taxation election 
is made). However, when the investor makes such investment 
through a REIT instead of directly, the income earned by the 
investor is treated as dividend income. If the reduced rates of 
withholding tax for dividends apply to REIT dividends, the 
foreign investor in the REIT is accorded a reduction in U.S. 
withholding tax that is not available for direct investments in 
real estate.
    On the other hand, some argue that it is important to 
encourage foreign investment in U.S. real estate through REITs. 
In this regard, a higher withholding tax on REIT dividends 
(i.e., 30 percent instead of 15 percent) may not be fully 
creditable in the foreign investor's home country and the cost 
of the higher withholding tax therefore may discourage foreign 
investment in REITs. For this reason, some oppose the inclusion 
in U.S. treaties of the special provisions governing REIT 
dividends, arguing that dividends from REITs should be given 
the same treatment as dividends from other corporate entities. 
Accordingly, under this view, the 15-percent withholding tax 
rate generally applicable under treaties to dividends should 
apply to REIT dividends as well.
    This argument is premised on the view that investment in a 
REIT is not equivalent to direct investment in real property. 
From this perspective, an investment in a REIT should be viewed 
as comparable to other investments in corporate stock. In this 
regard, like other corporate shareholders, REIT investors are 
investing in the management of the REIT and not just its 
underlying assets. Moreover, because the interests in a REIT 
are widely held and the REIT itself typically holds a large and 
diversified asset portfolio, an investment in a REIT represents 
a very small investment in each of a large number of 
properties. Thus, the REIT investment provides diversification 
and risk reduction that are not easily replicated through 
direct investment in real estate.
    At the October 7, 1997 hearing on the proposed treaty (as 
well as other proposed treaties and protocols), the Treasury 
Department announced that it has modified its policy with 
respect to the exclusion of REIT dividends from the reduced 
withholding tax rates applicable to other dividends under 
treaties. The Treasury Department worked extensively with the 
staff of the Committee on Foreign Relations, the staff of the 
Joint Committee on Taxation, and representatives of the REIT 
industry in order to address the concern that the current 
treaty policy with respect to REIT dividends may discourage 
some foreign investment in REITs while maintaining a treaty 
policy that properly preserves the U.S. taxing jurisdiction 
over foreign direct investment in U.S. real property. The new 
policy is a result of significant cooperation among all parties 
to balance these competing considerations.
    Under this policy, REIT dividends paid to a resident of a 
treaty country will be eligible for the reduced rate of 
withholding tax applicable to portfolio dividends (typically, 
15 percent) in two cases. First, the reduced withholding tax 
rate will apply to REIT dividends if the treaty country 
resident beneficially holds an interest of 5 percent or less in 
each class of the REIT's stock and such dividends are paid with 
respect to a class of the REIT's stock that is publicly traded. 
Second, the reduced withholding tax rate will apply to REIT 
dividends if the treaty country resident beneficially holds an 
interest of 10 percent or less in the REIT and the REIT is 
diversified, regardless of whether the REIT's stock is publicly 
traded. In addition, the current treaty policy with respect to 
the application of the reduced withholding tax rate to REIT 
dividends paid to individuals holding less than a specified 
interest in the REIT will remain unchanged.
    For purposes of these rules, a REIT will be considered 
diversified if the value of no single interest in real property 
held by the REIT exceeds 10 percent of the value of the REIT's 
total interests in real property. An interest in real property 
will not include a mortgage, unless the mortgage has 
substantial equity components. An interest in real property 
also will not include foreclosure property. Accordingly, a REIT 
that holds exclusively mortgages will be considered to be 
diversified. The diversification rule will be applied by 
looking through a partnership interest held by a REIT to the 
underlying interests in real property held by the partnership. 
Finally, the reduced withholding tax rate will apply to a REIT 
dividend if the REIT's trustees or directors make a good faith 
determination that the diversification requirement is satisfied 
as of the date the dividend is declared.
    The Treasury Department will incorporate this new policy 
with respect to the treatment of REIT dividends in the U.S. 
model treaty and in future treaty negotiations. In addition, 
the Treasury Department has committed to use its best efforts 
to negotiate a protocol with Ireland to amend the proposed 
treaty to incorporate this policy.
    The Committee believes that the new policy with respect to 
the applicability of reduced withholding tax rates to REIT 
dividends appropriately reflects economic changes since the 
establishment of the current policy. The Committee further 
believes that the new policy fairly balances competing 
considerations by extending the reduced rate of withholding tax 
on dividends generally to dividends paid by REITs that are 
relatively widely-held and diversified. The Committee 
encourages the Treasury Department to act expeditiously in 
meeting its commitment to negotiate a protocol with Ireland 
that incorporates this new policy.

                       B. Exchange of Information

    One of the principal purposes of the proposed income tax 
treaty between the United States and Ireland is to prevent 
avoidance or evasion of income taxes of the two countries. The 
exchange of information article of the proposed treaty is one 
of the primary vehicles used to achieve that purpose.
    The exchange of information article contained in the 
proposed treaty conforms in most respects to the corresponding 
articles of the U.S. and OECD models. As is true under the U.S. 
model, under the proposed treaty the countries are to exchange 
such information as is relevant for carrying out the provisions 
of the proposed treaty or the domestic tax laws of the 
countries. As is also true under these model treaties, under 
the proposed treaty a country is not required to carry out 
administrative measures at variance with the laws and 
administrative practices of either country, to supply 
information which is not obtainable under the laws or in the 
normal course of the administration of either country, or to 
supply information which discloses any trade, business, 
industrial, commercial, or professional secret or trade 
process, or information the disclosure of which is contrary to 
public policy.
    There is one significant respect in which the exchange of 
information article will not be fully implemented by Ireland. 
The proposed treaty conforms to the corresponding article of 
the U.S. model by including the standard provision that upon 
request a country shall obtain information to which the request 
relates in the same manner and to the same extent as if the tax 
of the requesting country were imposed by the requested 
country. However, paragraph 10 of the proposed protocol states 
that, for purposes of this provision regarding obtaining 
information, as of the date of signature of the proposed 
treaty, 4 the laws and practices of Ireland do not 
permit its tax authorities to carry out inquiries on behalf of 
another country where no Irish liability for a tax covered by 
the proposed treaty is at issue. The proposed protocol also 
states that if Irish laws and practices later change to permit 
such inquiries, Ireland will then implement this provision of 
the proposed treaty. The diplomatic notes state that, in 
addition to these provisions, pursuant to a provision of Irish 
law, the United States may obtain information of financial 
institutions in Ireland or depositions of witnesses located in 
Ireland, for the purpose of investigating or prosecuting 
criminal fiscal offenses (including criminal revenue offenses) 
under the laws of the United States. The consequence of both 
the diplomatic notes and the proposed protocol is that the 
United States may obtain limited information with respect to 
criminal offenses, and may obtain no information with respect 
to civil offenses; Ireland may obtain information generally 
with respect to both criminal and civil offenses.
---------------------------------------------------------------------------
    \4\ July 28, 1997.
---------------------------------------------------------------------------
    As part of its consideration of the proposed treaty, the 
Committee asked if the Treasury Department considers the 
exchange of information provisions of the proposed treaty to be 
adequate to carry out the tax-avoidance purposes for which 
income tax treaties are entered into by the United States. The 
relevant portion of the Treasury Department's October 8, 1997 
letter 5 responding to this inquiry is reproduced 
below:
---------------------------------------------------------------------------
    \5\ Letter from Joseph H. Guttentag, International Tax Counsel, 
Treasury Department, to Senator Paul Sarbanes, Committee on Foreign 
Relations, October 8, 1997 (``October 8, 1997 Treasury Department 
letter'').

    Adequate exchange of information with our treaty partners 
is one of the key objectives of our tax treaty policy. While 
the proposed convention deviates to some extent from the U.S. 
Model, we believe that it provides substantial benefits to the 
United States. The proposed convention obligates Ireland to 
obtain and exchange information in a broad class of cases. 
Ireland will obtain and exchange information without 
restriction for U.S. investigations and prosecutions of 
criminal tax cases. Legislation granting authority to exchange 
information in such cases was formulated during negotiation of 
the proposed Convention and its enactment by the Irish 
legislature was viewed by the United States as a precondition 
to completing the negotiations. In civil cases Ireland will 
provide any information its tax authorities possess and will 
obtain information if Ireland also has a tax interest in the 
case (that is, where Irish tax liability is also at issue). 
While the laws and practices of Ireland currently do not permit 
it to obtain information in civil cases where it does not have 
a tax interest, the Protocol includes Ireland's agreement that, 
if the laws and practices of Ireland change in this respect, 
Ireland will carry out enquiries on behalf of the United States 
in such cases.
    The information exchange provision in fact does impose 
reciprocal obligations on Ireland and the United States. Under 
rules of international comity, recognized by the OECD, the 
United States would not feel compelled to obtain information on 
behalf of Ireland in cases in which Ireland would not 
reciprocate. This issue was fully addressed during 
negotiations, and Ireland recognizes that it cannot expect to 
obtain information on a non-reciprocal basis.

    Although broader exchange of information provisions are 
desirable, the Committee understands the difficulty in 
achieving broader provisions given the current constraints of 
Irish laws and practices. However, the Committee does not 
believe that the Irish treaty should be construed in any way as 
a precedent for other negotiations. The Committee is 
particularly concerned about the presence in the proposed 
treaty of information exchange provisions that appear to be 
non-reciprocal. In this regard, the Committee has been assured 
by the Treasury Department that the provisions of the treaty do 
not compel the United States to obtain and provide information 
on a non-reciprocal basis. Because of the significance of 
information exchange provisions to this and all U.S. tax 
treaties, the Committee has included in its recommended 
resolution of ratification an understanding regarding the fact 
that the U.S. competent authority follows this practice of 
comity with respect to exchanges of information under all tax 
treaties. Moreover, the Committee does not believe that 
significant limitations on the effect of information exchange 
provisions, relative to the preferred U.S. tax treaty position, 
should be accepted in negotiations with other countries that 
seek to have or to maintain the benefits of a tax treaty 
relationship with the United States.

                        C. Insurance Excise Tax

    The proposed treaty, unlike the present treaty, covers the 
U.S. excise tax on insurance premiums paid to foreign insurers. 
With the waiver of the excise tax on insurance premiums, for 
example, an Irish insurer 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 the excise tax on insurance 
premiums. However, the tax is imposed to the extent that the 
risk is reinsured by the Irish insurer with a person not 
entitled to the benefits of an income tax treaty providing 
exemption from the tax. This latter rule is known as the 
``anti-conduit'' clause. Moreover, the tax is imposed if the 
premiums paid to the Irish insurer are not subject to the 
generally applicable tax imposed on insurance corporations in 
Ireland.
    Such 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 with respect to foreign 
competitors in U.S. markets if a substantial tax is not 
otherwise imposed (e.g., by the treaty partner country) on the 
insurance income of the foreign insurer (or, if the risk is 
reinsured, the reinsurer). Moreover, in such case, a waiver of 
the tax does not serve the primary purpose of treaties to 
prevent double taxation, but instead has the undesirable effect 
of eliminating all tax on such income.
    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 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. 6 Congress 
subsequently enacted legislation to ensure the sunset of the 
waivers in the two treaties. The insurance excise tax also is 
waived in the treaty with the United Kingdom (without the so-
called ``anti-conduit rule''). The inclusion of such a waiver 
in that treaty has been followed by a number of legislative 
efforts to redress the perceived competitive imbalance created 
by the waiver.
---------------------------------------------------------------------------
    \6\ Limited consultations took place in connection with the 
proposed treaty.
---------------------------------------------------------------------------
    The proposed treaty waives imposition of the excise tax on 
insurance and reinsurance premiums paid to residents of 
Ireland. The Committee understands that, unlike Bermuda and 
Barbados, Ireland imposes substantial tax on the income, 
including insurance income, of its residents. In this regard, 
the proposed treaty includes a special rule that denies the 
waiver if the premiums are not subject to the generally 
applicable tax on Irish insurance companies. Moreover, unlike 
in the case of the U.K. treaty, the waiver in the proposed 
treaty contains the anti-conduit clause.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department whether the Irish 
income tax imposed on Irish insurance companies with respect to 
insurance premiums results in a tax burden that is substantial 
in relation to the U.S. tax on U.S. insurance companies. The 
relevant portion of the October 8, 1997 Treasury Department 
letter responding to this inquiry is reproduced below:

    Treasury recognizes the valid policy concerns about the 
competitiveness of U.S. insurance companies that justify the 
imposition of the excise tax on foreign insurers insuring U.S. 
risks. Consistent with this policy objective, the Treasury 
Department will only agree to cover this excise tax in an 
income tax convention, and thereby grant an exemption from the 
tax, if Treasury is satisfied that an insurer operating from 
the treaty partner and insuring U.S. risks would face a level 
of taxation that is substantial relative to the level of 
taxation faced by U.S. insurers. We agreed to the exemption 
provided in the proposed convention only after a thorough 
review of Irish law and information on Irish insurance company 
operations. This review concluded that insurance companies 
facing Ireland's general insurance tax provisions were subject 
to a substantial level of tax in Ireland. However, it also 
concluded that insurers benefitting from Ireland's 
International Financial Services Center do not face a 
significant level of tax relative to U.S. insurance companies. 
The treaty therefore denies the exemption if an insurer does 
not face Ireland's general tax provisions. Consultations were 
held with Senate and House Committee staff members before a 
final decision was made.

    In light of the inclusion in the proposed treaty of the 
anti-conduit clause and the provision requiring that the 
insurance company be subject to the country's generally 
applicable tax, and based on the assessment provided by the 
Treasury Department regarding the relative tax burdens of Irish 
insurers and U.S. insurers, the Committee believes that the 
waiver of the excise tax for Irish insurers is consistent with 
the criteria the Committee has articulated for such waivers. 
However, the Committee instructs the Treasury Department 
promptly to notify the Committee of any changes in laws or 
business practices that would have an impact on the tax burden 
of Irish insurers relative to that of U.S. insurers.

                           D. Treaty Shopping

    The proposed treaty, like many U.S. income tax treaties, 
generally limits treaty benefits for treaty country residents 
so that only those residents with a sufficient nexus to a 
treaty country will receive treaty benefits. Although the 
proposed treaty generally is intended to benefit residents of 
Ireland 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 reduce the tax on interest on a loan to a 
U.S. person by lending money to the U.S. person indirectly 
through a country whose treaty with the United States provides 
for a lower rate of withholding tax on interest. The third-
country investor may attempt to do this by establishing in that 
treaty country a subsidiary, trust, or other entity which then 
makes the loan to the U.S. person and claims the treaty 
reduction for the interest it receives.
    The anti-treaty-shopping provision of the proposed treaty 
is similar to anti-treaty-shopping provisions in the Internal 
Revenue Code (the ``Code'') (as interpreted by Treasury 
regulations) and in the U.S. model. The provision also is 
similar to the anti-treaty-shopping provision in several recent 
treaties. In particular, the proposed treaty provision 
resembles the anti-treaty-shopping provisions contained in the 
1993 U.S. treaty with the Netherlands and the 1995 U.S. treaty 
with France. The degree of detail included in this provision is 
notable in itself. The proliferation of detail may reflect, in 
part, a diminution in the scope afforded the Internal Revenue 
Service (the ``IRS'') and the courts to resolve interpretive 
issues adversely to a person attempting to claim the benefits 
of a treaty; this diminution represents a bilateral commitment, 
not alterable by developing internal U.S. tax policies, rules, 
and procedures, unless enacted as legislation that would 
override the treaty. (In contrast, the IRS generally is not 
limited under the proposed treaty in its discretion to allow 
treaty benefits under the anti-treaty-shopping rules.) The 
detail in the proposed treaty does represent added guidance and 
certainty for taxpayers that may be absent under treaties that 
may have somewhat simpler and more flexible provisions.
    The anti-treaty-shopping provisions in the proposed treaty 
differ from those in the Code and other treaties in a number of 
respects. The proposed treaty contains a particularly broad 
range of categories under which persons may qualify for some or 
all benefits of the treaty.
    For example, the proposed treaty includes a special rule 
under which income derived from the operation of ships and 
aircraft in international traffic will be eligible for the 
exemption from source-country tax provided under the treaty. 
Under this rule, an Irish resident that derives shipping income 
from the United States is entitled to exemption from U.S. tax 
on such income if at least 50 percent of the interests in the 
resident is owned, directly or indirectly, by qualified 
persons, U.S. citizens or residents, or individuals who are 
residents of a third country or a company or companies the 
principal shares of which are substantially and regularly 
traded on an established securities market in the third 
country. This rule applies as long as the third country grants 
an exemption to shipping income under similar terms to citizens 
and corporations of the source country. This rule also is 
included in the treaty with the Netherlands.
    The proposed treaty is similar to other U.S. treaties and 
the branch tax rules in affording treaty benefits to certain 
publicly traded companies. In comparison with the U.S. branch 
tax rules, the proposed treaty is more lenient. The proposed 
treaty allows benefits to be afforded to a company that is at 
least 50-percent owned, directly or indirectly, by one or more 
qualifying publicly traded corporations, while the branch tax 
rules allow benefits to be afforded only to a wholly-owned 
subsidiary of a publicly traded company. The proposed treaty 
also allows benefits to non-corporate entities, such as trusts, 
that satisfy a similar standard for public ownership.
    The proposed treaty also provides mechanical rules under 
which so-called ``derivative benefits'' are afforded. 
7 Under these rules, an entity is afforded certain 
benefits based in part on its ultimate ownership of at least 95 
percent by seven or fewer residents of EU or NAFTA countries 
who would be entitled to treaty benefits under an existing 
treaty with the third country. The U.S. model does not contain 
a derivative benefits provision.
---------------------------------------------------------------------------
    \7\ The U.S. income tax treaties with the Netherlands, Jamaica and 
Mexico also provide similar benefits.
---------------------------------------------------------------------------
    Taken as a whole, some may argue that the derivative 
benefits provision of the proposed treaty is more generous to 
taxpayers claiming U.S. treaty benefits than the derivative 
benefits provision of any U.S. tax treaties currently in 
effect. For example, while most other treaties to which the 
United States is a party generally allow derivative benefits 
only with respect to certain income (e.g., interest, dividends 
or royalties), the proposed treaty allows a taxpayer to claim 
derivative benefits with respect to the entire treaty. 
8 In addition, unlike most existing treaties, the 
proposed treaty, does not require any same-country ownership of 
an Irish company claiming treaty benefits. 9 In 
other words, an Irish entity that is 100-percent owned by 
certain third-country residents and that does not otherwise 
have a nexus with Ireland (e.g., by engaging in an active trade 
or business there), may be entitled to claim benefits under the 
proposed treaty. Moreover, in order for residents of third 
countries to be taken into account under this rule, the 
proposed treaty generally requires only that the third country 
have an income tax treaty with the United States, and does not 
require that such treaty provide benefits as favorable as those 
under the proposed treaty. The latter requirement is imposed 
under the proposed treaty only in order to qualify for benefits 
with respect to dividends, interest, and royalties. In 
addition, that requirement with respect to eligibility for 
derivative benefits with respect to dividends, interest, and 
royalties does not apply for the first two or three years that 
the treaty is in force.
---------------------------------------------------------------------------
    \8\ The U.S.-Jamaica tax treaty is the only other existing treaty 
that allows a taxpayer to claim derivative benefits with respect to the 
entire treaty.
    \9\ Article 26(4) of the U.S.-Netherlands treaty, for example, 
requires more than 30-percent Dutch ownership of the entity claiming 
derivative benefits, and more than 70-percent EU ownership of such 
entity. On the other hand, the 1995 U.S.-Canada protocol permits a 
company to claim certain treaty benefits under the derivative benefits 
provision without any same country ownership; however, the benefits 
that may be so obtained are limited to reduced withholding rates for 
dividends, interest and royalties.
---------------------------------------------------------------------------
    The proposed treaty includes a special rule designed to 
prevent the proposed treaty from reducing or eliminating U.S. 
tax on income of an Irish resident in a case where no other 
substantial tax is imposed on that income (the so-called 
``triangular case''). This is necessary because an Irish 
resident may in some cases be wholly or partially exempt from 
Irish tax on foreign (i.e., non-Irish) income. The special rule 
applies generally if the combined Irish and third-country 
taxation of U.S.-source income derived by an Irish enterprise 
and attributable to a permanent establishment in the third 
country is less than 50 percent of the tax that would be 
imposed if the Irish enterprise earned the income in Ireland.
    Under the special rule, the United States is permitted to 
tax dividends, interest, and royalties paid to the third-
country permanent establishment at the rate of 15 percent. In 
addition, under the special rule, the United States is 
permitted to tax other types of income without regard to the 
proposed treaty. The special rule generally does not apply if 
the U.S. income is derived in connection with, or is incidental 
to, an active trade or business in the third country. The 
special rule is similar to a provision of the 1993 protocol to 
the U.S.-Netherlands tax treaty and a provision of the U.S.-
France treaty. This special rule for triangular cases is not 
included in the U.S. model.
    The U.S.-France treaty provides a further exception from 
the application of the special rule for the triangular case if 
the third-country income is subject to taxation by either the 
United States or France under the controlled foreign 
corporation rules of either country. 10 Although the 
proposed treaty does not provide an explicit controlled foreign 
corporation exception, the Committee expects that the U.S. 
competent authority would grant relief under the proposed 
treaty in a case where the U.S.-source income subject to the 
special rule ultimately is included in a U.S. shareholder's 
income under the subpart F rules. The Committee believes that 
either an explicit controlled foreign corporation exception 
should have been included in the text of the proposed treaty, 
as in the French treaty and the proposed treaties with Austria 
and South Africa, or the availability of such relief should 
have been described in the Technical Explanation of the 
proposed treaty, as in the case of the proposed treaty with 
Luxembourg.
---------------------------------------------------------------------------
    \10\ In the case of the United States, these provisions are 
contained in sections 951-964 of the Code and are referred to as the 
``subpart F'' rules.
---------------------------------------------------------------------------
    The practical difference between the proposed treaty tests 
and the corresponding tests in other treaties will depend upon 
how they are interpreted and applied. Given the relatively 
bright line rules provided in the proposed treaty, the range of 
interpretation under it may be fairly narrow.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department about the sufficiency 
of the anti-treaty-shopping provision in the proposed treaty. 
The relevant portion of the October 8, 1997 Treasury Department 
letter responding to this inquiry is reproduced below:

    We made every effort in negotiating the proposed Convention 
to ensure that the limitation on benefits provision adequately 
distinguished between persons that legitimately should qualify 
for treaty benefits and persons that may have a treaty shopping 
motive. We believe that we have been successful.
    The provisions in this treaty do differ in some respects 
from those in the U.S. Model and in other U.S. treaties, but 
this is to be expected. Negotiation of these provisions 
requires that the specific circumstances of the treaty partner 
be taken into account. As a consequence, no two treaties have 
identical limitation on benefits provision. In Ireland's case, 
the provisions needed to accommodate the fact that Ireland is a 
country with close economic ties to the rest of Europe and 
historically substantial foreign participation in its business 
sector. The provisions do this without compromising their 
fundamental objective.

    The Committee believes that the United States should 
maintain its policy of limiting treaty-shopping opportunities 
whenever possible. The Committee further believes that, in 
exercising any latitude Treasury has with respect to the 
operation of a treaty, the treaty rules should be applied to 
deter treaty-shopping abuses. On the other hand, the Committee 
recognizes that implementation of the tests for treaty shopping 
set forth in the proposed treaty raise factual, administrative, 
and other issues that cannot currently be foreseen. The 
Committee emphasizes that the provisions in the proposed treaty 
must be implemented so as to serve as an adequate tool for 
preventing possible treaty-shopping abuses in the future.

              E. Arbitration of Competent Authority Issues

    The proposed treaty would allow for a binding arbitration 
procedure, if agreed by both competent authorities and the 
taxpayer or taxpayers involved, for the resolution of those 
disputes in the interpretation or application of the proposed 
treaty that are within the jurisdiction of the competent 
authorities to resolve. The competent authorities could release 
to the arbitration board such information as is necessary to 
carry out the arbitration procedure. The members of the 
arbitration board are subject to the limitations on disclosure 
contained in the exchange of information article of the 
proposed treaty. This provision would take effect only after an 
exchange of diplomatic notes between the United States and 
Ireland.
    Generally, the jurisdiction of the competent authorities 
under the proposed treaty is as broad as it is under any U.S. 
income tax treaties. For example, the competent authorities are 
empowered (in this as in other treaties) to agree on the 
attribution of income, deductions, credits, or allowances of an 
enterprise to a permanent establishment. They may agree on the 
allocation of income, deductions, credits, or allowances 
between associated enterprises and others under the provisions 
of Article 9 (Associated Enterprises), which is the treaty 
analogue of Code section 482. They also may agree on the 
characterization of particular items of income, on the common 
meaning of a term, and on the application of procedural aspects 
of internal law. Finally, the competent authorities may agree 
on the elimination of double taxation in cases not provided for 
in the treaty. According to the Technical Explanation with 
respect to this procedure, agreements reached by the competent 
authorities need not conform to the internal law provisions of 
either treaty country.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department about the 
appropriateness of the arbitration provision contained in the 
proposed treaty. The relevant portion of the October 8, 1997 
Treasury Department letter responding to this inquiry is 
reproduced below:

    Treasury recognizes that there has been little practical 
experience with arbitration of tax treaty disputes and this 
creates some uncertainty about how well arbitration would work. 
For this reason, Treasury does not advocate the inclusion of 
arbitration provisions in new treaties. However, if the treaty 
partner is strongly interested in an arbitration provision, we 
are willing to include such a provision in a new treaty with 
the proviso that it cannot be implemented until the treaty 
partners have exchanged diplomatic notes to that effect. This 
provides the opportunity to wait until more experience has been 
gained with arbitration and with the treaty partner before 
deciding whether the implementation of such a provision is 
desirable.

    The Committee continues to believe that the tax system 
potentially may have much to gain from use of a procedure, such 
as arbitration, in which independent experts can resolve 
disputes that otherwise may impede efficient administration of 
the tax laws. However, the Committee also believes that the 
appropriateness of such a clause in a future treaty depends 
strongly on the other party to the treaty, and the experience 
that the competent authorities have under the provision in the 
German treaty. The Committee understands that to date there 
have been no arbitrations of competent authority cases under 
the German treaty, and few tax arbitrations outside the context 
of that treaty. The Committee believes that it is appropriate 
to have conditioned the effectiveness of the arbitration 
provision in the proposed treaty on subsequent action which 
should occur only after review of future developments in this 
evolving area of international tax administration.

                           VII. Budget Impact

    The Committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed treaty is estimated to 
cause a negligible change in fiscal year Federal budget 
receipts during the 1998-2007 period.

       VIII. Explanation of Proposed Treaty and Proposed Protocol

    A detailed, article-by-article explanation of the proposed 
treaty between the United States and Ireland, as supplemented 
by the proposed protocol, is presented below. In the 
explanation below, the understandings and interpretations 
reflected in the diplomatic notes are covered together with the 
relevant articles of the proposed treaty.

Article 1. General Scope

    The general scope article describes the persons who may 
claim the benefits of the proposed treaty. The proposed treaty 
generally applies to residents of the United States and 
residents of Ireland. However, other articles of the proposed 
treaty provide for specific expansions of this scope to persons 
that are residents of neither the United States nor Ireland for 
purposes of such articles (e.g., Article 25 (Non-
Discrimination) and Article 27 (Exchange of Information and 
Administrative Assistance)). The determination of whether a 
person is a resident of the United States or Ireland is made 
under the provisions of Article 4 (Residence).
    The proposed treaty provides that it does not restrict in 
any manner any benefit accorded by internal law or by any other 
agreement between the United States and Ireland. Thus, the 
proposed treaty will not apply to increase the tax burden of a 
resident of either the United States or Ireland. According to 
the Technical Explanation, the fact that the proposed treaty 
only applies to a taxpayer's benefit does not mean that a 
taxpayer may select inconsistently among treaty and internal 
law provisions in order to minimize its overall tax burden. In 
this regard, the Treasury Department's Technical Explanation 
(hereinafter referred to as the ``Technical Explanation'') sets 
forth the following example. Assume a resident of Ireland has 
three separate businesses in the United States. One business is 
profitable and constitutes a U.S. permanent establishment. The 
other two businesses generate effectively connected income as 
determined under the Code, but do not constitute permanent 
establishments as determined under the proposed treaty; one 
business is profitable and the other business generates a net 
loss. Under the Code, all three businesses would be subject to 
U.S. income tax, in which case the losses from the unprofitable 
business could offset the taxable income from the other 
businesses. On the other hand, only the income of the business 
which gives rise to a permanent establishment is taxable by the 
United States under the proposed treaty. The Technical 
Explanation makes clear that the taxpayer may not invoke the 
proposed treaty to exclude the profits of the profitable 
business that does not constitute a permanent establishment and 
invoke U.S. internal law to claim the loss of the unprofitable 
business that does not constitute a permanent establishment to 
offset the taxable income of the permanent establishment. 
11 
---------------------------------------------------------------------------
    \11\ See Rev. Rul. 84-17, 1984-1 C.B. 308.
---------------------------------------------------------------------------
    The proposed treaty provides that the dispute resolution 
procedures under its mutual agreement article take precedence 
over the corresponding provisions of any other agreement to 
which the United States and Ireland are parties in determining 
whether a measure is within the scope of the proposed treaty. 
Unless the competent authorities agree that a taxation measure 
is outside the scope of the proposed treaty, only the proposed 
treaty's nondiscrimination rules, and not the nondiscrimination 
rules of any other agreement in effect between the United 
States and Ireland, generally apply to that law or other 
measure. The only exception to this general rule is such 
national treatment or most favored nation obligations as may 
apply to trade in goods under the General Agreement on Tariffs 
and Trade. For purposes of this provision, the term ``measure'' 
means a law, regulation, rule, procedure, decision, 
administrative action, or any other similar provision or 
action.
    Like all U.S. income tax treaties, the proposed treaty is 
subject to a ``saving clause.'' Under this clause, with 
specific exceptions described below, the proposed treaty is not 
to affect a country's taxation of its residents or its 
citizens. By reason of this saving clause, unless otherwise 
specifically provided in the proposed treaty, the United States 
will continue to tax its citizens who are residents of Ireland 
as if the treaty were not in force. Similarly, the United 
States will continue to tax persons that are treated as U.S. 
residents under U.S. tax law as if the treaty were not in 
force, unless such persons are treated as residents of Ireland 
under the treaty tie-breaker rules governing dual residents 
provided in Article 4 (Residence). The term ``residents'' 
includes corporations and other entities as well as 
individuals.
    The proposed treaty contains a provision under which the 
saving clause (and therefore the jurisdiction to tax) applies 
to former citizens whose loss of citizenship had as one of its 
principal purposes the avoidance of tax. This rule applies only 
for a period of 10 years following such loss of citizenship. 
Under the U.S. model, the saving clause applies to both former 
citizens and former long-term residents. The Code provides 
special rules for the imposition of U.S. income tax on former 
U.S. citizens for a period of ten years following their loss of 
U.S. citizenship. The Health Insurance Portability and 
Accountability Act of 1996 extended the special income tax 
rules for former U.S. citizens to apply also to certain former 
long-term residents of the United States. The proposed treaty 
provision reflects the reach of the U.S. tax jurisdiction 
pursuant to these special rules prior to its extension to 
former U.S. long-term residents. Accordingly, the saving clause 
in the proposed treaty does not permit the United States to 
impose tax on former U.S. long-term residents who otherwise 
would be subject to the special income tax rules contained in 
the Code.
    Exceptions to the saving clause are provided for the 
following benefits conferred by a country pursuant to the 
proposed treaty: the provision for correlative adjustments to 
the profits of an enterprise following an adjustment by Ireland 
of the profits of a related enterprise (Article 9, paragraph 
2); the rule regarding source of directors' fees (Article 16, 
paragraph 2); the treatment of social security benefits and 
child support payments (Article 18, paragraphs 1(b) and 4); the 
provisions for relief from double taxation (Article 24); the 
non-discrimination rules (Article 25); and the mutual agreement 
procedures (Article 26). These exceptions to the saving clause 
allow the provision of the enumerated benefits to citizens and 
residents of a country, without regard to its internal law.
    In addition, exceptions from the saving clause are provided 
for certain benefits conferred by a treaty country pursuant to 
the proposed treaty, but only in the case of an individual who 
neither is a citizen of, nor has immigrant status in, such 
country. Under this rule, the specified benefits under the 
proposed treaty are available to an individual who spends 
enough time in the United States to be taxed as a U.S. resident 
under Code section 7701(b), provided that the individual has 
not acquired U.S. immigrant status (i.e., is not a green-card 
holder). The following benefits are subject to this rule: the 
treatment of pension fund contributions (Article 18, paragraph 
5); the exemption from tax on compensation from government 
service (Article 19) the exemption from U.S. tax on certain 
income received by temporary visitors who are students or 
trainees (Article 20); and the special rules applicable to 
diplomatic agents and consular officers (Article 28).

Article 2. Taxes Covered

    The proposed treaty specifies the particular covered taxes 
of each country for all purposes of the proposed treaty. Unlike 
the U.S. model and most other U.S. income tax treaties, the 
non-discrimination rules of Article 25 apply just to these 
covered taxes, and not to taxes of all kinds imposed by either 
country or its political subdivisions or local authorities.
    In the case of the United States, the proposed treaty, like 
the present treaty, applies to the Federal income taxes imposed 
by the Code. However a specific exclusion is provided for the 
accumulated earnings tax, the personal holding company tax and 
social security taxes. The proposed treaty also applies to the 
U.S. excise taxes imposed on insurance premiums paid to foreign 
insurers and the U.S. excise tax imposed with respect to 
private foundations. The present treaty does not apply to any 
excise taxes.
    The proposed treaty applies to the excise taxes on 
insurance premiums paid to foreign insurers only to the extent 
that the risks covered by such premiums are not reinsured with 
a person that is not entitled to an exemption from such taxes 
either under the proposed treaty or under any other treaty. The 
proposed protocol further provides that it is understood that 
the proposed treaty will not apply to the excise taxes on 
insurance premiums where such premiums are not subject to the 
generally applicable tax imposed on insurance corporations in 
the country in which the insurer is resident. Because the 
insurance excise taxes are covered taxes under the proposed 
treaty, Irish insurance companies generally are not subject to 
the U.S. excise taxes on insurance premiums for insuring U.S. 
risks. The excise taxes continue to apply, however, when an 
Irish insurer reinsures a policy it has written on a U.S. risk 
with a foreign reinsurer that is not entitled to a similar 
exemption under this or a different tax treaty. Moreover, such 
taxes continue to apply if the Irish insurance company is 
entitled to benefits under a special tax regime. Because the 
present treaty does not cover excise taxes, the U.S. insurance 
excise taxes may be imposed on Irish insurance company under 
the present treaty.
    In the case of Ireland, the proposed treaty applies to the 
income tax, the corporation tax, and the capital gains tax.
    The proposed treaty also contains a provision generally 
found in U.S. income tax treaties that applies the treaty to 
any identical or substantially similar taxes that either 
country may subsequently impose. The proposed treaty obligates 
the competent authority of each country to notify the competent 
authority of the other country of any significant changes in 
its internal tax laws and of any official published material 
concerning the application of the proposed treaty (including 
explanations, regulations, rulings, or judicial decisions). 
Unlike the U.S. model, the proposed treaty does not 
specifically obligate the competent authorities to notify each 
other of significant changes in other laws affecting their 
obligations under the proposed treaty.

Article 3. General Definitions

    This article provides definitions of terms used in the 
proposed treaty that apply for all purposes of the proposed 
treaty, unless the context requires otherwise. These 
definitions generally are consistent with the definitions 
contained in the U.S. model. In addition, certain terms are 
defined in the articles in which such terms are used.
    The term ``person'' includes an individual, an estate, a 
trust, a partnership, a company, and any other body of persons. 
A ``company'' is any body corporate or any entity which is 
treated as a body corporate for tax purposes.
    An ``enterprise of a Contracting State'' is defined as an 
enterprise carried on by a resident of that country. Similarly, 
an ``enterprise of the other Contracting State'' is defined as 
an enterprise carried on by a resident of the other country. 
The proposed treaty does not define the term ``enterprise.'' 
The Technical Explanation states that it is understood to mean 
any activity or set of activities that constitutes a trade or 
business.
    The term ``international traffic'' means any transport by a 
ship or aircraft, other than transport solely between two 
points within a country. The Technical Explanation states that 
transport that constitutes international traffic includes any 
portion of the transport that is between two points within a 
country, even if the internal portion of the transport involves 
a transfer to a land vehicle or is handled by an independent 
contractor (provided that the original bills of lading include 
such portion of the transport).
    The Irish competent authority is the Revenue Commissioners 
or their authorized representative. The U.S. competent 
authority is the Secretary of the Treasury or his delegate. In 
fact, the U.S. competent authority function has been delegated 
to the Commissioner of Internal Revenue, who has redelegated 
the authority to the Assistant Commissioner (International) of 
the IRS. On interpretative issues, the latter acts with the 
concurrence of the Associate Chief Counsel (International) of 
the IRS.
    The term ``United States'' means the United States of 
America and includes the States and the District of Columbia, 
but does not include Puerto Rico, the Virgin Islands, Guam or 
any other U.S. possession or territory. The term also includes 
any area outside the U.S. territorial waters which in accord 
with international law has been, or may hereafter be, 
designated under U.S. law as an area over which U.S. rights 
with respect to the seabed and subsoil and their natural 
resources may be exercised.
    The term ``Ireland'' similarly includes areas outside the 
territorial waters of Ireland.
    The terms ``the Contracting State,'' ``one of the 
Contracting States'' and ``the other Contracting State'' mean 
Ireland or the United States, as the context requires. The term 
``Contracting States'' means Ireland and the United States.
    The term ``national'' with respect to a country means any 
citizen of that country and any legal person, association or 
other entity deriving its status as such from the laws in force 
in that country.
    The term ``qualified governmental entity'' means (1) the 
government or a department of government of one of the 
countries or a political subdivision or local authority of a 
country; (2) a person wholly owned, directly or indirectly, by 
a country or a political subdivision or local authority, 
provided it is organized under the laws of the country, its 
earnings are credited to its own account, and its assets vest 
in the country, political subdivision or local authority upon 
its dissolution; and (3) a pension trust or fund of a person 
described herein that is constituted and operated exclusively 
to administer or provide government service pension benefits. 
Under the proposed treaty, a qualified governmental entity may 
not engage in commercial activity, and its income may not inure 
to the benefit of a private person.
    The proposed treaty also provides that, unless the context 
otherwise requires or the competent authorities of the two 
countries agree to a common meaning, all terms not defined in 
the treaty are to have the meanings which they have under the 
laws of the country whose tax is being applied. The Technical 
Explanation states that a meaning of a term provided under the 
tax laws of a country will take precedence over a meaning of 
such term under other laws of the country.

Article 4. Residence

    The assignment of a country of residence in a treaty is 
important because the benefits of the treaty generally are 
available only to a resident of one of the treaty countries as 
that term is defined in the treaty. Furthermore, double 
taxation often is avoided by the assignment of a single treaty 
country as the country of residence when, under the internal 
laws of the treaty countries, a person is a resident of both. 
The present treaty does not include a definition of the term 
``resident.''
    Under U.S. law, residence of an individual is important 
because a resident alien is taxed on worldwide income, while a 
nonresident alien is taxed only on certain U.S.-source income 
and on income that is effectively connected with a U.S. trade 
or business. An individual who spends substantial time in the 
United States in any year or over a three-year period generally 
is treated as a U.S. resident (Code sec. 7701(b)). A permanent 
resident for immigration purposes (i.e., a green-card holder) 
also is treated as a U.S. resident. Under the Code, a company 
is domestic, and therefore taxable on its worldwide income, if 
it is organized in the United States or under the laws of the 
United States, a State, or the District of Columbia.
    The proposed treaty generally defines the term ``resident 
of a Contracting State'' to mean any person who, under the laws 
of that country, is liable to tax therein by reason of his or 
her domicile, residence, place of management, place of 
incorporation, or any other criterion of a similar nature. The 
proposed treaty further provides that a U.S. citizen or alien 
admitted for permanent residence (i.e., a green-card holder) is 
a resident of the United States, but only if the individual has 
a substantial presence, permanent home, or habitual abode in 
the United States. Unlike under the U.S. model, citizenship 
alone does not establish residence. As a result, U.S. citizens 
residing overseas are not necessarily entitled to the benefits 
of the proposed treaty as U.S. residents.
    The proposed treaty also provides that a qualified 
governmental entity of a country is a resident of that country.
    Special rules apply to treat as residents of a treaty 
country certain organizations that generally are exempt from 
tax in that country. Under these rules, pension trusts and any 
other organizations established in a treaty country and 
maintained exclusively to administer or provide retirement or 
employee benefits are treated as residents of such country if 
they are established or sponsored by a person resident in such 
country. Similarly, charitable and other exempt organizations 
are residents, provided that the use of their assets, both 
currently and upon their dissolution or liquidation, is limited 
to the accomplishment of the purposes that serve as the basis 
for its tax exemption.
    The proposed treaty also provides special rules to treat 
certain investment entities as residents of the country in 
which they are organized or created, even though they may not 
be subject to significant tax at the entity level. Under this 
rule, Regulated Investment Companies (``RICs'') and REITs are 
treated as U.S. residents and Collective Investment 
Undertakings are treated as Irish residents. In addition, this 
rule may apply to any similar investment entities agreed upon 
by the competent authorities of both countries.
    The proposed protocol contains a special rule for fiscally 
transparent entities. Under this rule, if a resident of one 
country is entitled to income, profit or gain in respect of an 
interest in a person that derives income, profit or gain from 
the other country, any such item so derived will be considered 
to be an item of that resident to the extent it is so treated 
under the taxation laws of the first country. Thus, an item of 
income will be considered to be derived by a resident of a 
country if he or she is treated under the tax laws of such 
country as deriving such income.
    The term ``resident of a Contracting State'' does not 
include any person who is liable to tax in that country in 
respect only of income from sources in that country or of 
profits attributable to a permanent establishment in that 
country.
    The proposed treaty provides a set of ``tie-breaker'' rules 
to determine residence in the case of an individual who, under 
the basic residence rules, would be considered to be a resident 
of both countries. Such a dual resident individual is deemed to 
be a resident of the country in which he or she has a permanent 
home available. If the individual has a permanent home in both 
countries, the individual's residence is deemed to be the 
country with which his or her personal and economic relations 
are closer (i.e., the ``center of vital interests''). If the 
country in which the individual has his or her center of vital 
interests cannot be determined, or if the individual does not 
have a permanent home available in either country, such 
individual is deemed to be a resident of the country in which 
he or she has an habitual abode. If the individual has an 
habitual abode in both countries or in neither country, the 
individual is deemed to be a resident of the country of which 
he or she is a national. If the individual is a national of 
both countries or neither country, the competent authorities of 
the countries are to settle the question of residence by mutual 
agreement.
    In the case of a person other than an individual that would 
be considered to be a resident of both countries under the 
basic treaty definition, the proposed treaty provides that the 
competent authorities shall endeavor by mutual agreement to 
deem the person to be a resident of one country only for 
purposes of the proposed treaty.

Article 5. Permanent Establishment

    The proposed treaty contains a definition of the term 
``permanent establishment'' that generally follows the pattern 
of other recent U.S. income tax treaties, the U.S. model, and 
the OECD model.
    The permanent establishment concept is one of the basic 
devices used in income tax treaties to limit the taxing 
jurisdiction of the host country and thus to mitigate double 
taxation. Generally, an enterprise that is a resident of one 
country is not taxable by the other country on its business 
profits unless those profits are attributable to a permanent 
establishment of the resident in the other country. In 
addition, the permanent establishment concept is used to 
determine whether the reduced rates of, or exemptions from, tax 
provided for dividends, interest, and royalties apply or 
whether those amounts are taxed as business profits.
    In general, under the proposed treaty, a permanent 
establishment is a fixed place of business through which an 
enterprise carries on business in whole or in part. A permanent 
establishment includes especially a place of management, a 
branch, an office, a factory, a workshop, a mine, an oil or gas 
well, a quarry, or any other place of extraction of natural 
resources. It also includes any building site or construction 
or installation project, if the site or project lasts for more 
than 12 months. The Technical Explanation states that the 12-
month test applies separately to each site or project, but that 
projects that are commercially and geographically 
interdependent are to be treated as a single project. The 
Technical Explanation further states that if the 12-month 
threshold is exceeded, the site or project is treated as a 
permanent establishment from the first day of activity.
    Notwithstanding this general definition of a permanent 
establishment, the proposed treaty provides that the following 
specified activities do not constitute a permanent 
establishment: the use of facilities solely for storing, 
displaying, or delivering goods or merchandise belonging to the 
enterprise; the maintenance of a stock of goods or merchandise 
belonging to the enterprise solely for storage, display, or 
delivery or solely for processing by another enterprise; the 
maintenance of a fixed place of business solely for the 
purchase of goods or merchandise or the collection of 
information for the enterprise; the maintenance of a fixed 
place of business solely for the purpose of carrying on, for 
the enterprise, any other activity of a preparatory or 
auxiliary character. The proposed treaty provides that the 
maintenance of a fixed place of business solely for any 
combination of these activities does not constitute a permanent 
establishment, provided that the overall activity resulting 
from such combination is of a preparatory or auxiliary 
character. In contrast, the U.S. model provides that such a 
combination of activities does not give rise to a permanent 
establishment without regard to whether the combination is of a 
preparatory or auxiliary character.
    If a person, other than an independent agent, is acting on 
behalf of an enterprise and has and habitually exercises in a 
country an authority to conclude contracts in the name of the 
enterprise, the enterprise generally will be deemed to have a 
permanent establishment in that country in respect of any 
activities that person undertakes for the enterprise. This rule 
does not apply where the activities of such person is limited 
to those activities described above, such as storage, display, 
or delivery of merchandise, which do not constitute a permanent 
establishment.
    The proposed treaty further provides that no permanent 
establishment is deemed to arise based on an agent's activities 
if the agent is a broker, general commission agent, or any 
other agent of independent status acting in the ordinary course 
of its business as an independent agent. The Technical 
Explanation states that an independent agent is one that is 
both legally and economically independent of the enterprise. 
Whether an agent and an enterprise are independent depends on 
the facts and circumstances of the particular case.
    The fact that a company that is resident in one country 
controls or is controlled by a company that is a resident of 
the other country, or that carries on business in that other 
country, does not of itself cause either company to be a 
permanent establishment of the other.

Article 6. Income from Immovable Property (Real Property)

    This article covers income, but not gains, from real 
property. The rules covering gains from the sale of real 
property are contained in Article 13 (Capital Gains).
    Under the proposed treaty, income derived by a resident of 
one country from immovable property (real property) situated in 
the other country may be taxed in the country where the real 
property is situated. Income from real property includes income 
from agriculture or forestry. The country in which the real 
property is situated is not, however, granted an exclusive 
right to tax the income derived from the real property; such 
income also may be taxed in the recipient's country of 
residence.
    The term ``immovable property (real property)'' has the 
meaning that it has under the law of the country in which the 
property in question is situated. In the case of the United 
States, the term ``real property'' is defined in Treas. Reg. 
sec. 1.897-1(b).
    The country in which real property is situated may tax 
income derived from the direct use, letting, or use in any 
other form of such property. The rules of this article allowing 
source-country taxation also apply to income from real property 
of an enterprise and to income from real property used for the 
performance of independent personal services. Accordingly, 
income from real property may be taxed by the country in which 
it is situated even though such income is not attributable to a 
permanent establishment or fixed base in such country.
    The proposed protocol provides residents of a country that 
are taxable in the other country on income from real property 
situated in the other country with an election to be taxed by 
the other country on such income on a net basis in accordance 
with the law of that other country. Such election is binding 
for the taxable year of the election and all subsequent years 
unless the competent authority of that other country agrees to 
terminate the election. U.S. internal law provides such a net-
basis election in the case of income of a foreign person from 
U.S. real property (Code secs. 871(d) and 882(d)).

Article 7. Business Profits

            U.S. internal law
    U.S. law distinguishes between the U.S. business income and 
other U.S. income of a nonresident alien or foreign 
corporation. A nonresident alien or foreign corporation is 
subject to a flat 30-percent rate (or lower treaty rate) of tax 
on certain U.S.-source income if that income is not effectively 
connected with the conduct of a trade or business within the 
United States. The regular individual or corporate rates apply 
to income (from any source) which is effectively connected with 
the conduct of a trade or business within the United States.
    The treatment of income as effectively connected with a 
U.S. business depends upon whether the source of the income is 
U.S. or foreign. In general, U.S.-source periodic income (such 
as interest, dividends, and rents) and U.S.-source capital 
gains are effectively connected with the conduct of a trade or 
business within the United States if the asset generating the 
income is used in, or held for use in, the conduct of the trade 
or business or if the activities of the trade or business were 
a material factor in the realization of the income. All other 
U.S.-source income of a person engaged in a trade or business 
in the United States is treated as effectively connected with 
the conduct of a trade or business in the United States.
    Foreign-source income generally is treated as effectively 
connected income only if the foreign person has an office or 
other fixed place of business in the United States and the 
income is attributable to that place of business. Only three 
types of foreign-source income are considered to be effectively 
connected income: rents and royalties for the use of certain 
intangible property derived from the active conduct of a U.S. 
business; certain dividends and interest either derived in the 
active conduct of a banking, financing or similar business in 
the United States or received by a corporation the principal 
business of which is trading in stocks or securities for its 
own account; and certain sales income attributable to a U.S. 
sales office. Special rules apply in the case of insurance 
companies.
    Any income or gain of a foreign person for any taxable year 
that is attributable to a transaction in another taxable year 
is treated as effectively connected with the conduct of a U.S. 
trade or business if it would have been so treated had it been 
taken into account in that other taxable year (Code sec. 
864(c)(6)).
            Proposed treaty limitations on internal law
    Under the proposed treaty, profits of an enterprise of one 
country are taxable in the other country only to the extent 
that they are attributable to a permanent establishment in the 
other country through which the enterprise carries on business.
    The taxation of business profits under the proposed treaty 
differs from U.S. rules for taxing business profits primarily 
by requiring more than merely being engaged in a trade or 
business before a country can tax business profits and by 
substituting an ``attributable to'' standard for the Code's 
``effectively connected'' standard. Under the Code, all that is 
necessary for effectively connected business profits to be 
taxed is that a trade or business be carried on in the United 
States.
    Under the proposed treaty, the profits of a permanent 
establishment are determined on an arm's-length basis. The 
proposed treaty provides that the profits attributed to a 
permanent establishment are determined based on the profits it 
would make if it were a distinct and separate enterprise 
engaged in the same or similar activities under the same or 
similar conditions and dealing wholly independently with the 
enterprise of which it is a permanent establishment. Amounts 
may be attributed to the permanent establishment whether they 
are from sources within or without the country in which the 
permanent establishment is located.
    In computing profits of a permanent establishment, the 
proposed treaty provides that deductions are allowed for 
expenses incurred for the purposes of the permanent 
establishment. These deductions include a reasonable allocation 
of executive and general administrative expenses, research and 
development expenses, interest, and other expenses incurred for 
the purposes of the enterprise as a whole (or the part of the 
enterprise that includes the permanent establishment). This 
rule applies without regard to where such expenses are 
incurred. According to the Technical Explanation, this rule 
permits the United States to use its current expense allocation 
rules in determining deductible amounts. Thus, for example, an 
Irish company which has a permanent establishment in the United 
States but which has its head office in Ireland will, in 
computing the U.S. tax liability of the permanent 
establishment, be entitled to deduct a portion of the executive 
and general administrative expenses incurred in Ireland by the 
head office for purposes of operating the U.S. permanent 
establishment, allocated and apportioned in accordance with 
Treas. Reg. section 1.861-8.
    Like the OECD model, the proposed treaty provides that a 
country may determine the profits attributed to a permanent 
establishment on the basis of an apportionment of the total 
profits of the enterprise. If it is customary in a country to 
use a total profits apportionment method, such method may be 
used pursuant to the proposed treaty, provided that the method 
of apportionment gives results that are consistent with the 
arm's-length principle of this article. This rule is not 
specified in the U.S. model; however, the provisions of the 
U.S. model permit the use of a total profits apportionment 
method as a means of determining arm's-length profits. The 
Technical Explanation states that methods other than separate 
accounting may be used to estimate the arm's-length profits of 
a permanent establishment, provided that the method 
approximates the results that would be achieved under a 
separate accounting approach.
    Profits are not attributed to a permanent establishment 
merely by reason of the purchase of goods or merchandise by a 
permanent establishment for the enterprise. Thus, where a 
permanent establishment purchases goods for its head office, 
the business profits attributed to the permanent establishment 
with respect to its other activities are not increased by the 
profit element with respect to its purchasing activities.
    The proposed treaty provides that the amount of profits 
attributable to a permanent establishment shall include only 
the profits derived from the assets or activities of the 
permanent establishment and must be determined by the same 
method each year unless there is good and sufficient reason to 
change the method. In this regard, the diplomatic notes provide 
that the assets of a permanent establishment will be understood 
to include any property or rights used by or held by or for the 
permanent establishment.
    Unlike the U.S. model, the proposed treaty does not contain 
a general definition of ``profits.'' The Technical Explanation 
states that such term is understood to mean income derived from 
any trade or business. Under the proposed treaty, the term 
``profits'' as used in this article includes income from the 
performance of personal services by an enterprise and income 
from the rental of tangible movable property. Accordingly, such 
income may be taxed in the source country only if the income is 
attributable to a permanent establishment. The Technical 
Explanation states that the term ``profits'' is understood to 
include income attributable to notional principal contracts and 
other financial instruments to the extent such income is 
related to a trade or business carried on through the permanent 
establishment.
    Where business profits include items of income which are 
dealt with separately in other articles of the proposed treaty, 
those other articles, and not the business profits article, 
govern the treatment of such items of income. Thus, for 
example, profits attributable to a U.S. ticket office of an 
Irish airline generally are exempt from U.S. Federal income tax 
under the provisions of Article 8 (Shipping and Air Transport). 
This rule does not apply, however, where the other article 
specifically provides that this article takes precedence (e.g., 
Article 10 specifically provides that dividends attributable to 
a permanent establishment are taxable as business profits).
    The proposed protocol provides that income or gain 
attributable to a permanent establishment during its existence 
is taxable in the country where the permanent establishment is 
situated even if the payments are deferred until the permanent 
establishment has ceased to exist. This incorporates the U.S. 
internal law rule of Code section 864(c)(6).

Article 8. Shipping and Air Transport

    Article 8 of the proposed treaty covers income from the 
operation of ships and aircraft in international traffic. The 
rules governing income from the sale of ships and aircraft 
operated in international traffic are contained in Article 13 
(Capital Gains).
    Under the proposed treaty, profits which are derived by an 
enterprise of one country from the operation in international 
traffic of ships or aircraft are taxable only in that country, 
regardless of the existence of a permanent establishment in the 
other country. ``International traffic'' means any transport by 
a ship or aircraft except when such transport is operated 
solely between places in a treaty country (Article 3(1)(d) 
(General Definitions)). Unlike the exemption provided in the 
present treaty, the exemption in the proposed treaty applies 
whether or not the ships or aircraft are registered in the 
first country.
    The proposed treaty provides that profits from the rental 
of ships or aircraft on a full basis for use in international 
traffic constitute profits from the operation of ships and 
aircraft in international traffic. Such profits therefore are 
exempt from tax in the other country. In addition the proposed 
treaty provides that profits from the operation of ships or 
aircraft in international traffic include profits derived from 
the rental of ships or aircraft on a bareboat basis if such 
ships or aircraft are operated in international traffic by the 
lessee or if such rental profits are incidental to profits from 
the operation of ships or aircraft in international traffic. 
The proposed treaty further provides that profits derived by an 
enterprise from the inland transport of property or passengers 
within either country is treated as profits from the operation 
of ships or aircraft in international traffic if such transport 
is undertaken in the course of international traffic by the 
enterprise.
    Under the proposed treaty, income derived by an enterprise 
of one country from the use, maintenance, or rental of 
containers (including trailers, barges, and related equipment 
for the transport of containers) used in international traffic 
is taxable only in that country.
    As under the U.S. model, the shipping and air transport 
provisions of the proposed treaty also apply to profits from 
participation in a pool, joint business, or international 
operating agency. This rule covers profits derived pursuant to 
an arrangement for international cooperation between carriers 
in shipping and air transport.

Article 9. Associated Enterprises

    The proposed treaty, like most other U.S. tax treaties, 
contains an arm's-length pricing provision. The provision in 
the proposed treaty is more detailed than the corresponding 
provision in the present treaty. The proposed treaty recognizes 
the right of each country to determine the profits taxable by 
that country in the case of transactions between related 
enterprises, if the profits of an enterprise do not reflect the 
conditions which would have been made between independent 
enterprises.
    The redetermination rules of the proposed treaty apply 
where an enterprise of one country participates directly or 
indirectly in the management, control, or capital of an 
enterprise of the other country or the same persons participate 
directly or indirectly in the management, control, or capital 
of such enterprises. In such cases, if conditions between the 
two enterprises in their commercial or financial relations 
differ from those which would be made between independent 
enterprises, then any profits which would have accrued to one 
of the enterprises but for these conditions may be included in 
the profits of such enterprise and taxed accordingly. This 
provision allows a country to adjust the income or loss of one 
or both of the enterprises if they have entered into non-arm's-
length transactions.
    The Technical Explanation states that it is understood that 
this provision does not limit the rights of the respective 
countries to apply their internal intercompany pricing rules 
(e.g., Code sec. 482, in the case of the United States), 
provided that such rules are in accord with the arm's-length 
principle. The Technical Explanation also states that it is 
understood that the U.S. ``commensurate with income'' standard 
for determining appropriate transfer prices for intangibles was 
designed to operate consistently with the arm's-length 
standard. Finally, the Technical Explanation states that this 
rule permits adjustments to address thin capitalization issues.
    Under the proposed treaty, where a country includes in the 
profits of an enterprise of that country, and taxes, profits on 
which an enterprise of the other country has been charged to 
tax in that other country, and the other country agrees that 
the profits so included are profits that would have accrued to 
the enterprise of the first country if conditions between the 
two enterprises had been those that would have been made 
between independent enterprises, then the other country shall 
make an appropriate adjustment to the taxes charged on such 
profits. In making this adjustment, due regard is to be had to 
the other provisions of the proposed treaty. Moreover, the 
competent authorities will consult each other if necessary. To 
avoid double taxation, the proposed treaty's saving clause 
retaining each country's full taxing jurisdiction over its 
citizens and residents does not apply to prevent such 
correlative adjustments.

Article 10. Dividends

            Internal dividend taxation rules

United States

    The United States generally imposes a 30-percent tax on the 
gross amount of U.S.-source dividends paid to nonresident alien 
individuals and foreign corporations. The 30-percent tax does 
not apply if the foreign recipient is engaged in a trade or 
business in the United States and the dividends are effectively 
connected with that trade or business. In such a case, the 
foreign recipient is subject to U.S. tax on such dividends on a 
net basis at graduated rates in the same manner as a U.S. 
person would be taxed.
    Under U.S. law, the term ``dividend'' generally means any 
distribution of property made by a corporation to its 
shareholders, either from accumulated earnings and profits or 
current earnings and profits. However, liquidating 
distributions generally are treated as payments in exchange for 
stock and, thus, are not subject to the 30-percent withholding 
tax described above.
    Dividends paid by a U.S. corporation generally are U.S.-
source income. Also treated as U.S.-source income 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 
further 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 REIT is a corporation, trust, or association that is 
subject to the regular corporate income tax, but that receives 
a deduction for dividends paid to its shareholders if certain 
conditions are met. In particular, in order to qualify as a 
REIT, the REIT must distribute the bulk of its income on a 
current basis. Thus, a REIT is treated, in essence, as a 
conduit for federal income tax purposes: generally no tax is 
imposed at the entity level and the shareholders are taxed on a 
current basis on the REIT's earnings. Because a REIT in form is 
taxable as a U.S. corporation, a distribution of its earnings 
is treated as a dividend rather than as income of the same type 
as the underlying earnings. Such distributions are subject to 
the U.S. 30-percent withholding tax when paid to foreign 
owners.
    A REIT is organized to allow persons to diversify ownership 
in primarily passive real estate investments. As such, the 
principal income of a REIT often is rentals from real estate 
holdings. Like dividends, U.S.-source rental income of foreign 
persons generally is subject to the 30-percent withholding tax 
(unless the recipient makes an election to have such rental 
income taxed in the United States on a net basis at the regular 
graduated rates). Unlike the withholding tax on dividends, 
however, the withholding tax on rental income generally is not 
reduced in U.S. income tax treaties.
    U.S. internal law also generally treats a RIC as both a 
corporation and a conduit for income tax purposes: generally no 
tax is imposed at the entity level and the shareholders are 
taxed on a current basis on the RIC's earnings. The purpose of 
a RIC is to allow investors to hold a diversified portfolio of 
securities. Thus, the holder of stock in a RIC may be 
characterized as a portfolio investor in the stock held by the 
RIC, regardless of the proportion of the RIC's stock owned by 
the dividend recipient.
    A foreign corporation engaged in the conduct of a trade or 
business in the United States is subject to a flat 30-percent 
branch profits tax on its ``dividend equivalent amount,'' which 
is a measure of the accumulated U.S. effectively connected 
earnings of the corporation that are removed in any year from 
its U.S. trade or business. The dividend equivalent amount is 
limited by (among other things) the foreign corporation's 
aggregate earnings and profits accumulated in taxable years 
beginning after December 31, 1986. The Code provides that no 
U.S. treaty shall exempt any foreign corporation from the 
branch profits tax (or reduce the amount thereof) unless the 
foreign corporation is a ``qualified resident'' of the treaty 
country. The definition of a ``qualified resident'' under U.S. 
internal law is somewhat similar to the definition of a 
corporation eligible for benefits under the proposed treaty 
(discussed below in connection with Article 23 (Limitation on 
Benefits)).

Ireland

    Ireland generally does not impose a withholding tax on 
dividends paid by an Irish company to foreign shareholders. 
Ireland generally provides resident shareholders with an 
imputed tax credit on dividends for the taxes paid by the 
company. This credit may be provided to foreign shareholders by 
treaty.
            Proposed treaty limitations on internal law
    The present treaty provides that dividends derived from 
sources within the United States by a resident of Ireland may 
be taxed by the United States. The rate of U.S. tax generally 
is limited to 15 percent. However, the rate of tax is limited 
to 5 percent if the dividend recipient is a corporation 
controlling (directly or indirectly) at least 95 percent of the 
voting power of the payor and not more than 25 percent of the 
gross income of the payor is derived from interest and 
dividends (other than interest and dividends received from the 
payor's subsidiaries). This 5-percent rate does not apply if 
the relationship between the dividend-paying corporation and 
the dividend-receiving corporation was arranged or maintained 
primarily with the intention of qualifying for such rate. The 
present treaty provides that dividends from sources within 
Ireland shall be exempt from Irish surtax if derived by an 
individual who is a U.S. resident, is subject to U.S. tax with 
respect to such dividends, and is not engaged in a trade or 
business in Ireland.
    Under the proposed treaty, dividends paid to a resident of 
one country may be taxed in the residence country without 
limitation. In addition, such dividends also may be taxed in 
the country in which the dividend paying company is resident in 
accordance with that country's laws. However, source-country 
taxation is subject to limitations if the beneficial owner of 
the dividends is a resident of the other country. Under these 
limitations, source-country tax is limited to 5 percent of the 
gross amount of the dividends if the beneficial owner is a 
company that owns at least 10 percent of the voting stock of 
the payor company. Under the proposed treaty, source-country 
tax generally is limited to 15 percent of the gross amount of 
the dividends in all other cases. The proposed treaty provides 
that the competent authorities will by mutual agreement settle 
the mode of application of these limitations. The proposed 
treaty provides that these limitations do not affect the 
taxation of the company on the profits out of which the 
dividends are paid.
    The proposed treaty provides special rules that apply as 
long as an individual resident in Ireland is entitled under 
Irish law to a tax credit in respect of dividends paid by an 
Irish-resident company. Such is the case at the present time. 
Under these special rules, dividends paid by a company resident 
in Ireland to a U.S. resident may be taxed in the United 
States. Where a U.S. resident is entitled to a tax credit in 
Ireland in respect of the dividend, such dividend may also be 
taxed in Ireland at a rate not exceeding 15 percent on the 
aggregate of the amount or value of the dividend and the amount 
of the tax credit. Where the U.S. resident is not entitled to a 
tax credit in Ireland in respect of the dividend, such dividend 
will be exempt from any Irish tax chargeable on dividends. A 
resident of the United States who receives dividends from an 
Irish-resident company and who is the beneficial owner of the 
dividends is entitled to the tax credit in respect of such 
dividend to which an Irish individual resident would be 
entitled and to the payment of any excess of such tax credit 
over his or her liability for Irish tax. This tax credit is 
treated for U.S. foreign tax credit purposes as a dividend. 
These tax credit rules do not apply if the beneficial owner of 
the dividend is (or is associated with) a company which either 
alone or together with associated companies controls directly 
or indirectly at least 10 percent of the voting power of the 
dividend-paying company. For this purpose, two companies are 
deemed to be associated if one is controlled directly or 
indirectly by the other or both are controlled directly or 
indirectly by a third company.
    The proposed treaty provides that the 15-percent limitation 
(and not the 5-percent limitation) applies to dividends paid by 
a RIC. The proposed treaty provides that the 15-percent 
limitation applies to dividends paid by a REIT to an individual 
owning a less than 10-percent interest in the REIT. There is no 
limitation in the proposed treaty on the tax that may be 
imposed by the United States on a REIT dividend, if the 
beneficial owner of the dividend is either an individual 
holding a 10-percent or greater interest in the REIT or is not 
an individual. Thus, such a dividend is taxable at the 30-
percent United States statutory rate. The present treaty does 
not include these limitations on the application of the reduced 
rates of source-country taxation to dividends from RICs and 
REITs.
    Like the U.S. model, the proposed treaty defines 
``dividends'' as income from shares or other rights, not being 
debt-claims. Dividends include any income or distribution 
treated as income from shares under the tax laws of the country 
of which the company is resident. The proposed protocol 
provides that the term ``dividends'' does not include interest 
which, because it was paid to a nonresident company, is treated 
under the domestic law of a country as dividends, to the extent 
that the interest does not exceed the amount that would be 
expected to be paid on an arm's-length basis.
    The proposed treaty's reduced rates of tax on dividends do 
not apply if the beneficial owner of the dividend carries on 
business through a permanent establishment (or a fixed base, in 
the case of an individual who performs independent personal 
services) in the source country and the dividends are 
attributable to the permanent establishment (or fixed base). 
Such dividends are taxed as business profits (Article 7) or as 
income from the performance of independent personal services 
(Article 14). In addition, the proposed protocol provides that 
dividends attributable to a permanent establishment or fixed 
base, but received after the permanent establishment or fixed 
base is no longer in existence are taxable in the country where 
the permanent establishment or fixed base existed.
    The proposed treaty allows a treaty country to impose a 
branch profits tax on a company resident in the other country 
if such company either has a permanent establishment in the 
first country or is subject to tax on a net basis in the first 
country on income from real property or gains from the 
disposition of real property interests. In cases where an Irish 
corporation conducts a trade or business in the United States, 
but not through a permanent establishment, the proposed treaty 
generally eliminates the branch profits tax that the Code 
imposes on such corporation.
    In general, the proposed treaty provides that the branch 
profits tax may be imposed by the United States only on the 
business profits of the Irish corporation that are attributable 
to its U.S. permanent establishment and the income that is 
subject to tax on a net basis as income or gains from real 
property. The tax is further limited to such amounts that are 
included in the ``dividend equivalent amount,'' as that term is 
defined under the Code and as it may be amended from time to 
time without changing the general principle thereof. In the 
case of Ireland, such tax may be imposed only on the business 
profits of the U.S. corporation that are attributable to its 
Irish permanent establishment and the income that is subject to 
tax on a net basis as income or gains from real property. The 
tax is further limited to such amounts that would be 
distributed as a dividend if the business profits, income or 
gains were earned by a subsidiary incorporated in Ireland.
    The proposed treaty limits the rate of the branch profits 
tax to the direct investment dividend tax rate of 5 percent.

Article 11. Interest

            U.S. internal law
    Subject to numerous exceptions (such as those for portfolio 
interest, bank deposit interest, and short-term original issue 
discount), the United States imposes a 30-percent 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 to a foreign person by the 
U.S. trade or business of a foreign corporation. A foreign 
corporation is subject to a branch-level excess interest tax 
with respect to certain ``excess interest'' of a U.S. trade or 
business of such corporation; under this rule an amount equal 
to the excess of the interest deduction allowed with respect to 
the U.S. business over the interest paid by such business is 
treated as if paid by a U.S. corporation to a foreign parent 
and, therefore, is subject to a withholding tax.
    Portfolio interest generally is defined as any U.S.-source 
interest that is not effectively connected with the conduct of 
a trade or business and that (1) is paid on an obligation that 
satisfies certain registration requirements or specified 
exceptions thereto, and (2) is not received by a 10-percent 
owner of the issuer of the obligation, taking into account 
shares owned by attribution. However, the portfolio interest 
exemption is inapplicable to certain contingent interest 
income.
    If an investor holds an interest in a fixed pool of real 
estate mortgages that is a real estate mortgage interest 
conduit (``REMIC''), the REMIC generally is treated for U.S. 
tax purposes as a pass-through entity and the investor is 
subject to U.S. tax on a portion of the REMIC's income (which 
in turn generally is interest income). If the investor holds a 
so-called ``residual interest'' in the REMIC, the Code provides 
that a portion of the net income of the REMIC that is taxed in 
the hands of the investor--referred to as the investor's 
``excess inclusion''--may not be offset by any net operating 
losses of the investor, must be treated as unrelated business 
income if the investor is an organization subject to the 
unrelated business income tax and is not eligible for any 
reduction in the 30-percent rate of withholding tax (by treaty 
or otherwise) that would apply if the investor were otherwise 
eligible for such a rate reduction.
            Irish internal law
    Ireland generally imposes a withholding tax on interest 
paid to foreign persons at a rate of 26 percent. This tax does 
not apply to short-term trade interest. It also does not apply 
to interest payments to or by an Irish bank and certain 
interest payments within a corporate group.
            Proposed treaty limitations on internal law
    The proposed treaty generally exempts interest derived and 
beneficially owned by a resident of one country from tax in the 
other country. The present treaty also provided an exemption 
from source-country tax for interest, but included an exception 
for interest paid by a corporation resident in one country to a 
corporation resident in the other country that controlled 
(directly or indirectly) more than 50 percent of the voting 
power of the payor.
    The treaty defines the term ``interest'' generally as 
income from debt claims of every kind, whether or not secured 
by mortgage and whether or not carrying a right to participate 
in the debtor's profits. In particular, it includes income from 
government securities and from bonds or debentures, including 
premiums and prizes attaching to such securities, bonds, or 
debentures. The term ``interest'' includes all other income 
that is treated as income from money lent under the tax law of 
the country in which the income arises. Interest does not 
include income covered in Article 10 (Dividends). Penalty 
charges for late payment also are not treated as interest.
    This exemption from source-country tax does not apply if 
the beneficial owner of the interest carries on business 
through a permanent establishment (or a fixed base, in the case 
of an individual who performs independent personal services) in 
the source country and the interest paid is attributable to the 
permanent establishment (or fixed base). In that event, the 
interest is taxed as business profits (Article 7) or income 
from the performance of independent personal services (Article 
14). In addition, the proposed protocol provides that interest 
attributable to a permanent establishment or fixed base, but 
received after the permanent establishment or fixed base is no 
longer in existence, is taxable in the country where the 
permanent establishment or fixed base existed.
    The proposed treaty, unlike the U.S. model but like the 
OECD model, contains a rule for determining the source of 
interest. Under the proposed treaty, interest is deemed to 
arise in a country if the payor is a resident of that country 
or if the payor has in that country a permanent establishment 
or fixed base in connection with which the underlying 
indebtedness was incurred and by which the interest is borne.
    The proposed treaty addresses the issue of non-arm's-length 
interest charges between related parties (or parties having an 
otherwise special relationship) by stating that this article 
applies only to the amount of arm's-length interest. Any amount 
of interest paid in excess of the arm's-length interest is 
taxable according to the laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess interest paid to a parent corporation may be 
treated as a dividend under local law and, thus, entitled to 
the benefits of Article 10 (Dividends).
    The proposed treaty provides that the excess of the amount 
deductible by a U.S. permanent establishment of an Irish 
company over the interest actually paid by such permanent 
establishment, as determined under U.S. law, is treated as 
interest beneficially owned by an Irish resident. Accordingly, 
the exemption for interest beneficially owned by a resident of 
a treaty country generally will prevent the United States from 
imposing its excess interest tax.
    Like the U.S. model, the proposed protocol includes two 
limitations on the application of the exemption in the case of 
the United States. First, the exemption does not apply to 
interest arising in the United States if the amount of such 
interest is determined by reference to the profits of the 
issuer or an associated enterprise. However, if the beneficial 
owner is an Irish resident, such interest may be taxed by the 
United States at a maximum rate of 15 percent. Second, the 
exemption does not apply to an excess exclusion with respect to 
a residual interest in a REMIC. Amounts covered by this 
exception may be taxed by the United States under the proposed 
treaty at the full statutory rate of 30 percent.

Article 12. Royalties

            Internal law
    Under the same system that applies to dividends and 
interest, the United States imposes a 30-percent tax on U.S.-
source royalties paid to foreign persons and on gains from the 
disposition of certain intangible property to the extent that 
such gains are from payments contingent on the productivity, 
use, or disposition of the intangible property. Royalties are 
from U.S. sources if they are for the use of property located 
in the United States. U.S.-source royalties include royalties 
for the use of, or the right to use, intangible property in the 
United States. Ireland generally imposes a 26-percent 
withholding tax on patent royalties paid to foreign persons; no 
withholding tax is imposed on other types of royalties.
            Proposed treaty limitations on internal law
    The proposed treaty provides that royalties derived and 
beneficially owned by a resident of a treaty country may be 
taxed only by the residence country. Thus, the proposed treaty 
generally continues the rule of the present treaty that exempts 
U.S.-source royalties paid to Irish residents from the 30-
percent U.S. tax. This exemption is similar to that provided in 
the U.S. model.
    Royalties are defined as payments of any kind received as 
consideration for the use of or the right to use any copyright 
of literary, artistic, or scientific work (including 
cinematographic films and audio and video tapes and disks); for 
the use of or right to use any patent, trademark, design or 
model, plan, secret formula or process, or other like right or 
property; or for information concerning industrial, commercial 
or scientific experience. The term ``royalties'' also includes 
gains derived from the alienation of any property described 
above which are contingent on the productivity, use, or 
disposition of the property.
    Unlike the U.S. model, the proposed treaty does not include 
an explicit reference to computer software in the definition of 
royalties. The Technical Explanation states that it is mutually 
understood that consideration for the use of software is 
treated as royalties or business profits, depending on the 
facts and circumstances of the transaction. In this regard, the 
Technical Explanation further states that it is understood that 
payments for transfers of ``shrink-wrap'' computer software 
constitute business profits rather than royalties.
    The exemption under the proposed treaty does not apply 
where the beneficial owner carries on business through a 
permanent establishment (or a fixed base, in the case of an 
individual who performs independent personal services) in the 
source country and the royalties are attributable to the 
permanent establishment (or fixed base). In that event, such 
royalties are taxed as business profits (Article 7) or income 
from the performance of personal services (Article 14). In 
addition, the proposed protocol provides that royalties 
attributable to a permanent establishment or fixed base, but 
received after the permanent establishment or fixed base is no 
longer in existence, are taxable in the country where the 
permanent establishment or fixed base existed.
    The proposed treaty addresses the issue of non-arm's-length 
royalties between related parties (or parties having an 
otherwise special relationship) by stating that this article 
applies only to the amount of arm's-length royalties. Any 
amount of royalties paid in excess of the arm's-length royalty 
is taxable according to the laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess royalties paid to a parent corporation by its 
subsidiary may be treated as a dividend under local law and, 
thus, entitled to the benefits of Article 10 (Dividends) of the 
proposed treaty.
    The proposed treaty includes a provision not included in 
the U.S. or OECD models. Under the proposed treaty, a country 
may tax royalties paid by a resident of the other country only 
if one of four conditions is satisfied. First, the royalties 
are paid to a resident of the first country. Second, the 
royalties are attributable to a permanent establishment or 
fixed base in the first country. Third, the contract for the 
royalties was concluded in connection with a permanent 
establishment or fixed base in the first country, the royalties 
are borne by such permanent establishment or fixed base, and 
the royalties are not paid to a resident of the other country. 
Fourth, the royalties are paid in respect of intangible 
property used in the first country and are not paid to a 
resident of the other country, provided that the payor has 
received a royalty paid by a resident of the first country (or 
borne by a permanent establishment or fixed base in the first 
country) for the use of such property in the first country and 
provided that the use of the property is not a component part 
of nor directly related to the active conduct of a trade or 
business in which the payor is engaged.

Article 13. Capital Gains

            U.S. internal law
    Generally, gain realized by a nonresident alien individual 
or a foreign corporation from the sale of a capital asset is 
not subject to U.S. tax unless the gain is effectively 
connected with the conduct of a U.S. trade or business. 
However, a nonresident alien individual or foreign corporation 
is subject to U.S. tax on gain from the sale of a U.S. real 
property interest as if the gain were effectively connected 
with a trade or business conducted in the United States. ``U.S. 
real property interests'' include interests other than solely 
as a creditor (e.g., stock) in certain corporations if at least 
50 percent of the assets of the corporation consist of real 
property.
            Irish internal law
    Foreign corporations generally are subject to tax in 
Ireland on capital gains from assets used in a trade or 
business through a permanent establishment. In addition, 
foreign corporations and foreign individuals generally are 
subject to tax in Ireland on capital gains from real property 
located in Ireland and certain stock and securities that derive 
their value from such real property.
            Proposed treaty limitations on internal law
    Under the proposed treaty, gains derived by a treaty 
country resident attributable to the alienation of immovable 
property (real property) situated in the other country may be 
taxed in the other country. Immovable property (real property) 
situated in the other country for purposes of this article 
includes real property referred to in Article 6 (Income from 
Immovable Property (Real Property)), a United States real 
property interest, and shares (other than shares quoted on a 
stock exchange) deriving the greater part of their value 
directly or indirectly from immovable property in Ireland. The 
Technical Explanation states that distributions by a REIT that 
are attributable to gains derived from a disposition of real 
property are taxable under this article (and are not taxable 
under the dividends article (Article 10)).
    The proposed treaty contains a standard provision which 
permits a country to tax the gain from the alienation of 
movable property that is attributable to a permanent 
establishment or fixed base located in that country. This rule 
also applies to gains from the alienation of such a permanent 
establishment or such fixed base. The proposed treaty generally 
does not permit the United States to tax gains from the 
disposition of any movable property after such property ceases 
to be used in a U.S. trade or business. However, the proposed 
protocol provides that gains attributable to a permanent 
establishment or a fixed base, but received after the permanent 
establishment or fixed base is no longer in existence, are 
taxable in the country where the permanent establishment or 
fixed base existed.
    The proposed treaty provides that gains derived by an 
enterprise of one of the treaty countries from the alienation 
of ships, aircraft or containers operated in international 
traffic are taxable only in that country. This rule also 
applies to personal property pertaining to the operation of 
such ships, aircraft or containers. This rule applies even if 
such gain is attributable to a permanent establishment in the 
other country. The proposed treaty provides that gains from the 
alienation of any property other than that discussed above are 
taxable under the proposed treaty only in the country where the 
alienator is a resident.

Article 14. Independent Personal Services

            Internal law
    The United States taxes the income of a nonresident alien 
at the regular graduated rates if the income is effectively 
connected with the conduct of a trade or business in the United 
States by the individual. The performance of personal services 
within the United States may constitute the conduct of a trade 
or business within the United States.
    Under the Code, the income of a nonresident alien from the 
performance of personal services in the United States is 
excluded from U.S.-source income, and therefore is not taxed by 
the United States in the absence of a U.S. trade or business, 
if: (1) the individual is not in the United States for over 90 
days during the taxable year; (2) the compensation does not 
exceed $3,000; and (3) the services are performed as an 
employee of, or under a contract with, a foreign person not 
engaged in a trade or business in the United States or are 
performed for a foreign office or place of business of a U.S. 
person.
            Proposed treaty limitations on internal law
    The proposed treaty limits the right of a country to tax 
income from the performance of personal services by a resident 
of the other country. Under the proposed treaty, income from 
the performance of independent personal services (i.e., 
services performed as an independent contractor, not as an 
employee) is treated separately from income from the 
performance of dependent personal services.
    Under the proposed treaty, income in respect of 
professional services or other activities of an independent 
character derived by a resident of one country is exempt from 
tax in the other country unless the individual performing the 
services has a fixed base regularly available to him or her in 
the second country for the purpose of performing the 
activities. In that case, the nonresidence country may tax only 
that portion of the individual's income which is attributable 
to the fixed base in such country.
    The proposed protocol provides that amounts attributable to 
a fixed base, but received or incurred after the fixed base is 
no longer in existing, are taxable in the country in which the 
fixed base was located.
    Under the proposed protocol, in determining taxable 
independent personal services income, the principles of 
paragraph 3 of Article 7 (Business Profits) are applicable. 
According to the Technical Explanation, the taxpayer may deduct 
all relevant expenses, wherever incurred, in computing the net 
income from independent personal services subject to tax in the 
country in which the fixed base is located.
    Under the proposed protocol, the term ``professional 
services'' include especially independent scientific, literary, 
artistic, educational or teaching activities, as well as the 
independent activities of physicians, lawyers, engineers, 
architects, dentists, and accountants. The term ``professional 
services'' is not limited to this list, however.

Article 15. Dependent Personal Services

    Under the proposed treaty, wages, salaries, and other 
similar remuneration derived from services performed as an 
employee in one country (the source country) by a resident of 
the other country are taxable only in the other country if 
three requirements are met: (1) the recipient is present in the 
source country for not more than 183 days in any twelve-month 
period beginning or ending during the taxable year concerned; 
(2) the individual's employer is not a resident of the source 
country; and (3) the compensation is not borne by a permanent 
establishment or fixed base of the employer in the source 
country. These limitations on source country taxation generally 
are consistent with the U.S. and OECD models.
    The proposed treaty, like the U.S. model, provides that 
compensation derived from employment as a member of the regular 
complement of a ship or aircraft operated in international 
traffic is taxable only in the employee's country of residence.

Article 16. Directors' Fees

    Under the proposed treaty, directors' fees and other 
similar payments derived by a resident of one country in his or 
her capacity as a member of the board of directors of a company 
which is a resident of the other country may be taxed in the 
country where such fees or payments arise. Such amounts are 
deemed to arise in the country of residence of the company, 
except to the extent such amounts are paid in respect of 
attendance at meetings held in the director's country of 
residence. Accordingly, the company's country of residence may 
tax all directors' fees and similar payments other than any 
amounts paid for attendance at meetings in the director's 
country of residence (which are taxable in the director's 
country of residence). By contrast, under the U.S. model, the 
country in which the company is resident may tax only the 
portion of the non-resident board member's remuneration that is 
for services performed in such country.

Article 17. Artistes and Sportsmen

    Like the U.S. and OECD models, the proposed treaty contains 
rules that apply to the taxation of income earned by 
entertainers (such as theater, motion picture, radio, or 
television ``artistes,'' or musicians) and sportsmen. These 
rules apply notwithstanding the other provisions dealing with 
the taxation of income from personal services (Articles 14 and 
15) and business profits (Article 7), and are intended, in 
part, to prevent entertainers and sportsmen from using the 
proposed treaty to avoid paying any tax on their income earned 
in one of the countries.
    Under this article of the proposed treaty, one country may 
tax an entertainer or sportsman who is a resident of the other 
country on the income from his or her personal activities as 
such exercised in the first country during any year in which 
the gross receipts derived by him or her from such activities, 
including reimbursed expenses, exceed $20,000 or its Irish 
pound equivalent.
    Under the proposed treaty, if an Irish entertainer 
maintained no fixed base in the United States and performed (as 
an independent contractor) for one day of a taxable year in the 
United States for gross receipts of $2,000, the United States 
could not tax that income. If, however, that entertainer's 
gross receipts were $30,000, the full $30,000 (less appropriate 
deductions) would be subject to U.S. tax. This provision does 
not bar the country of residence from also taxing that income 
(subject to a foreign tax credit). (See Article 24 (Relief from 
Double Taxation.)
    The Technical Explanation states that because it is not 
possible to know whether the $20,000 threshold (or the Irish 
pound equivalent) is exceeded until the end of the year, the 
source country may subject all payments to an entertainer or 
sportsman to withholding and refund any excess amount withheld.
    According to the Technical Explanation, this article 
applies to all income directly connected with a performance by 
an entertainer or sportsman, such as appearance fees, award or 
prize money, and a share of the gate receipts. Income derived 
by an entertainer or sportsman from other than actual 
performance, such as royalties from record sales and payments 
for product endorsements, is not covered by this article; 
instead, these amounts are covered by other articles of the 
proposed treaty, such as Article 12 (Royalties) or Article 14 
(Independent Personal Services). For example, if an Irish 
entertainer receives royalty income from the sale of recordings 
of a concert given in the United States, the royalty income 
will be exempt from U.S. withholding tax under Article 12, even 
if the remuneration from the concert itself may have been 
covered by this article.
    The proposed treaty provides that where income in respect 
of activities exercised by an entertainer or sportsman in his 
or her capacity as such accrues not to the entertainer or 
sportsman but to another person, that income may be taxed by 
the country in which the activities are exercised, unless it is 
established that neither the entertainer or sportsman nor 
persons related to him or her participate directly or 
indirectly in the profits of that other person in any manner, 
including the receipt of deferred remuneration, bonuses, fees, 
dividends, partnership distributions or other distributions. 
(This provision applies notwithstanding the business profits 
and independent personal service articles (Articles 7 and 14).) 
This provision prevents certain entertainers and sportsmen from 
avoiding tax in the country in which they perform by, for 
example, routing the compensation for their services through a 
third entity such as a personal holding company or a trust 
located in a country that would not tax the income.

Article 18. Pensions, Social Security, Annuities, Alimony and Child 
        Support

    Under the proposed treaty, pensions and other similar 
remuneration derived and beneficially owned by a resident of 
either country in consideration of past employment generally 
are subject to tax only in the recipient's country of 
residence. This rule is subject to the provisions of Article 19 
(Government Service). Thus, for example, it generally does not 
apply to pensions paid to a resident of one treaty country 
attributable to services performed for government entities of 
the other country. The Technical Explanation states that it is 
understood that this provision will apply to both periodic and 
lump sum payments. The present treaty similarly provides for 
exclusive residence-country tax with respect to pensions. The 
Technical Explanation states that this provision covers amounts 
paid by all private retirement plans and arrangements in 
consideration of past employment, regardless of whether they 
are considered qualified plans under the Code. The Technical 
Explanation further states that this provision covers 
individual retirement accounts.
    The proposed treaty provides that payments made by a 
country under provisions of its social security or similar 
legislation to a resident of the other country are taxable only 
in the other country. The diplomatic notes state that it is 
understood that the term ``or similar legislation'' is intended 
to refer to United States tier 1 Railroad Retirement benefits. 
In contrast, the U.S. model provides that social security 
payments are taxable only in the source country and not in the 
recipient's country of residence.
    The proposed treaty provides that annuities may be taxed 
only in the country of residence of the person who derives and 
beneficially owns them. An annuity is defined as a stated sum 
paid periodically at stated times during a specified number of 
years or for life, under an obligation to make the payments in 
return for adequate and full consideration (other than services 
rendered). The present treaty similarly provides exclusive 
residence-country taxation for annuities. The U.S. model 
defines ``annuity'' to include only amounts paid during a 
specified number of years and not amounts paid for life.
    The proposed treaty provides that alimony paid by a 
resident of one country, and deductible in that country, to a 
resident of the other country is taxable only in the 
recipient's country of residence. The term ``alimony'' means 
periodic payments made pursuant to a written separation 
agreement or decree of divorce, judicial separation, separate 
maintenance, or compulsory support.
    The proposed treaty further provides that periodic 
payments, not constituting alimony, for the support of a minor 
child made pursuant to a written separation agreement or decree 
of divorce, judicial separation, separate maintenance, or 
compulsory support, paid by a resident of one country to a 
resident of the other country are exempt from tax in both 
countries.
    The proposed treaty includes special rules addressing the 
treatment of cross-border pension contributions. Under the 
proposed treaty, if an individual who is a member of a pension 
plan established and recognized under the law of one country 
performs personal services in the other country, contributions 
made by the individual to the plan during the period he or she 
performs such personal services are deductible in computing his 
or her taxable income in the other country within the limits 
that would apply if the contributions were made to a pension 
plan established and recognized under the laws of the other 
country. Similarly, payments made to the plan by or on behalf 
of his or her employer during such period are not treated as 
part of his or her taxable income and are allowed as a 
deduction in computing the employer's profits in the other 
country. However, these rules apply only if (1) contributions 
were made by or on behalf of the individual to the plan (or to 
a similar plan for which this plan is substituted) immediately 
before he or she visited the other country, (2) the individual 
has performed personal services in the other country for a 
cumulative period not exceeding five calendar years, and (3) 
the competent authority of the other country has agreed that 
the plan generally corresponds to a pension plan recognized for 
tax purposes by that country. Moreover, the benefits provided 
under these rules will not exceed the benefits that would be 
allowed by the other country to its residents for contributions 
to a pension plan recognized for tax purposes by that country.
    The proposed treaty further provides that where 
contributions to a foreign pension plan are deductible in 
computing an individual's taxable income in a country and the 
individual is subject to tax in that country only in respect of 
income or gains remitted or received in such country, then the 
deduction otherwise allowed for such contributions is reduced 
to an amount that bears the same proportion to such deduction 
as the amount remitted bears to the full amount of the 
individual's income or gains that would be taxable in the 
country if the individual had not been subject to tax on 
remitted amounts only. This rule is necessary because of 
Ireland's remittance system of taxation for individuals who are 
Irish residents not domiciled in Ireland.

Article 19. Government Service

    Under the proposed treaty, salaries, wages and other 
remuneration, other than a pension, paid by a country or one of 
its political subdivisions or local authorities to an 
individual for services rendered to the payor generally are 
taxable in that country only. However, such salaries, wages and 
other remuneration are taxable only in the other country (the 
country that is not the payor) if the services are rendered in 
that other country and the individual is a resident of that 
other country who either is a national of that other country or 
did not become a resident of that country solely for the 
purpose of rendering the services. Thus, for example, Ireland 
will not tax the compensation of a U.S. citizen and resident 
who is in Ireland to perform services for the U.S. Government, 
and the United States will not tax the compensation of an Irish 
citizen and resident who performs services for the U.S. 
Government in Ireland.
    Any pension paid by, or out of funds created by, a country, 
or one of its political subdivisions or local authorities, to 
an individual for services rendered to the payor generally is 
taxable only in that country. However, such pensions are 
taxable only in the other country if the individual is both a 
resident and a national of that other country.
    These rules regarding government remuneration and pensions 
are exceptions to the saving clause, pursuant to Article 1, 
paragraph 5(b) of the proposed treaty. Consequently, the saving 
clause does not apply to benefits conferred by this article to 
an individual who is neither a U.S. citizen nor a U.S. green-
card holder. Thus, for example, the United States would not tax 
the compensation of an Irish citizen who is not a U.S. green-
card holder but who resides in the United States to perform 
services for the Irish Government.
    If a country or one of its political subdivisions or local 
authorities is carrying on a business (as opposed to functions 
of a governmental nature), the provisions of Articles 15 
(Dependent Personal Services), 16 (Directors' Fees), 17 
(Artistes and Sportsmen), and 18 (Pensions, Social Security, 
Annuities, Alimony and Child Support) will apply to 
remuneration and pensions for services rendered in connection 
with such business.

Article 20. Students and Trainees

    Under the proposed treaty, a student, apprentice, or 
business trainee who visits the other country (the host 
country) for the purpose of full-time education at a recognized 
educational institution or full-time training, and who 
immediately before that visit is or was a resident of the other 
treaty country, is exempt from tax in the host country on 
payments that he or she receives for the purpose of 
maintenance, education, or training provided that such payments 
arise from sources outside the host country. However, in the 
case of an apprentice or trainee, this exemption is available 
only for a period of one year from the date the individual 
first arrives in the host country for the purpose of training. 
The present treaty contains an exemption for students and 
trainees but does not contain any time limitation on the 
availability of such exemption from host-country tax.
    This article is an exception to the saving clause, pursuant 
to Article 1, paragraph 5(b) of the proposed treaty. 
Consequently, the saving clause does not apply to benefits 
conferred by this article to an individual who is neither a 
U.S. citizen nor a U.S. green-card holder. Thus, for example, 
the United States would not tax such amounts paid to an Irish 
citizen who is not a U.S. green-card holder but who resides in 
the United States as a full-time student.

Article 21. Offshore Exploration and Exploitation Activities

    This article covers the taxation of offshore, exploration 
and exploitation activities with respect to the sea bed and 
subsoil and their natural resources in one of the countries. 
The rules of this article apply to such activities 
notwithstanding any other provision of the proposed treaty.
    Under the proposed treaty, an enterprise of one country 
which carries on exploration or exploitation activities in the 
other country generally is deemed to be carrying on business in 
the other country through a permanent establishment located in 
such other country. However, exploration activities carried on 
by an enterprise of one country in the other country for 120 
days or less within any 12-month period does not constitute the 
carrying on of business through a permanent establishment. For 
purposes of this rule, where associated enterprises are 
carrying on substantially similar exploration activities, one 
enterprise is deemed to carry on all such activities of the 
other enterprise, expect to the extent that the activities of 
the other enterprise are carried on at the same time as the 
enterprise's own activities. Enterprises are considered to be 
associated if one participates, directly or indirectly, in the 
management, control or capital of the other or if the same 
persons participate, directly or indirectly, in the management, 
control or capital of both enterprises.
    The proposed protocol provides that a ``balancing charge'' 
under Irish tax law will not be imposed solely because a 
business deemed to have been carried on through a permanent 
establishment is treated as having permanently ceased because 
of the termination of activities in Ireland, except to the 
extent the person carrying on the activities made a claim under 
Irish law for accelerated capital allowances with respect to 
machinery or plant used for the purposes of the permanent 
establishment. Normal wear and tear allowances are allowed and 
are not subject to recapture through a balancing charge. The 
Technical Explanation states that Ireland does not currently 
impose a balancing charge.
    Under the proposed treaty, a resident of one country who 
carries on exploration or exploitation activities in the other 
country consisting of professional services or other 
independent activities is deemed to be performing those 
activities from a fixed base in the other country. However, 
income derived from exploration activities are not taxable in 
the source country if the activities are performed in that 
country for 120 days or less within any 12-month period.
    Under the proposed treaty, salaries, wages and other 
similar remuneration derived by a resident of one country in 
respect of employment with a deemed permanent establishment 
with respect to exploration or exploitation activities carried 
on in the other country may be taxed in the other country to 
the extent that the employee's duties are performed offshore in 
that other country.

Article 22. Other Income

    This article is a catch-all provision intended to cover 
items of income not specifically covered in other articles, and 
to assign the right to tax income from third countries to 
either the United States or Ireland. This article is 
substantially similar to the corresponding article in the U.S. 
model.
    As a general rule, items of income beneficially owned by a 
resident of either country that are not otherwise dealt with in 
the proposed treaty are taxable only in the country of 
residence. This rule, for example, gives the United States the 
sole right under the treaty to tax income derived from sources 
in a third country and paid to a resident of the United States. 
This article is subject to the saving clause, so U.S. citizens 
who are Irish residents would continue to be taxable by the 
United States on their third-country income, with a foreign tax 
credit provided for income taxes paid to Ireland.
    The general rule just stated does not apply to income if 
the beneficial owner of the income is a resident of one country 
and carries on business in the other country through a 
permanent establishment or a fixed base and the income is 
attributable to such permanent establishment or fixed base. In 
such a case, the provisions of Article 7 (Business Profits) or 
Article 14 (Independent Personal Services), as the case may be, 
will apply. In addition, the proposed protocol provides that 
other income attributable to a permanent establishment or fixed 
base, but received after the permanent establishment or fixed 
base is no longer in existence, is taxable in the country where 
the permanent establishment or fixed base existed. An exception 
to this rule is provided for income from real property. Thus, 
for example, if a U.S. resident has an Irish permanent 
establishment and the resident derives income from real 
property located in a third country that is effectively 
connected with the Irish permanent establishment, under the 
proposed treaty, only the United States may tax such income.

Article 23. Limitation on Benefits

            In general
    The proposed treaty contains a provision generally intended 
to limit indirect use of the treaty by persons who are not 
entitled to its benefits by reason of residence in the United 
States or Ireland, or in some cases, in another member country 
of the EU or NAFTA.
    The proposed treaty is intended to limit double taxation 
caused by the interaction of the tax systems of the United 
States and Ireland as they apply to residents of the two 
countries. At times, however, residents of third countries 
attempt to use a treaty. This use is known as ``treaty 
shopping,'' which refers to the situation where a person who is 
not a resident of either country seeks certain benefits under 
the income tax treaty between the two countries. Under certain 
circumstances, and without appropriate safeguards, the 
nonresident may be able to secure these benefits indirectly by 
establishing a corporation (or other entity) in one of the 
countries, which entity, as a resident of that country, is 
entitled to the benefits of the treaty. Additionally, it may be 
possible for a third-country resident to reduce the income base 
of a treaty country resident by having the latter pay out 
interest, royalties, or other deductible amounts under 
favorable conditions either through relaxed tax provisions in 
the distributing country or by passing the funds through other 
treaty countries (essentially, continuing to treaty shop), 
until the funds can be repatriated under favorable terms.
            Summary of proposed treaty provisions
    The anti-treaty-shopping article in the proposed treaty 
provides that a treaty country resident is entitled to treaty 
benefits in the other country only if it falls within one of 
several specified categories. This provision of the proposed 
treaty is in some ways comparable to the U.S. Treasury 
regulation under the branch tax definition of a qualified 
resident. However, the proposed treaty provides opportunities 
for treaty benefit eligibility which are not provided under the 
regulation.
    Generally, a resident of either country qualifies for the 
benefits accorded by the proposed treaty if such resident falls 
within one of the following categories of qualified persons:

(1) An individual;
(2) A qualified governmental entity;
(3) An entity that satisfies an ownership test and a base 
        erosion test;
(4) An entity other than a company that satisfies a public 
        ownership test;
(5) A company that satisfies a public company test; or
(6) A qualified tax-exempt organization.

A resident that is not a qualified person under any of the 
above categories may claim treaty benefits for particular items 
of income if it satisfies an active business test. A resident 
that is not a qualified person also may claim treaty benefits 
for shipping income if certain conditions are satisfied. In 
addition, a resident that is not a qualified person may claim 
treaty benefits with respect to certain items of income under a 
derivative benefits test. Special rules apply to income derived 
by a resident of Ireland in certain ``triangular'' cases 
described below. Finally, a treaty country resident is entitled 
to treaty benefits if the resident is otherwise approved by the 
source country's competent authority, in the exercise of the 
latter's discretion.
    The proposed treaty provides that the competent authorities 
are to consult together with a view to developing a commonly 
agreed application of these provisions, including the 
publication of regulations or other public guidance. Subject to 
the limitations in the information exchange article, the 
competent authorities may exchange such information as is 
necessary for carrying out these provisions.
            Individuals
    Under the proposed treaty, individual residents of one of 
the countries are entitled to all treaty benefits.
            Governments
    Under the proposed treaty, a qualified governmental entity 
is entitled to all treaty benefits. Qualified governmental 
entities include the governments of the two countries and 
political subdivisions and local authorities thereof. Qualified 
governmental entities also include certain wholly-owned 
entities, the earnings of which are credited to the entity's 
own account, and certain pension trusts or funds providing 
government service pension benefits.
            Entities satisfying ownership and base erosion tests
    Under the proposed treaty, an entity that is resident in 
one of the countries is entitled to treaty benefits if it 
satisfies an ownership test and a base erosion test. Under the 
ownership test, at least 50 percent of the beneficial interest 
in such entity (at least 50 percent of the aggregate vote and 
value of the company's shares, in the case of a company) must 
be owned, directly or indirectly, by qualified persons or U.S. 
residents or citizens. For this purpose, qualified persons are 
those who are entitled to treaty benefits under one of the six 
categories. The ownership test is not satisfied in a case of 
indirect ownership through a chain of ownership unless it is 
satisfied by the last owners in the chain.
    The Technical Explanation states that in applying this test 
to a trust, the beneficial interests in the trust will be 
considered to be owned by the trust's beneficiaries in 
proportion to their actuarial interests in the trust. A 
remainder beneficiary's interest will be computed by backing 
out the aggregate percentage interests of the income 
beneficiaries. An interest of a beneficiary will not be 
considered to be owned by a qualified person if the 
beneficiary's interest cannot be actuarially determined.
    Under the base erosion test, amounts that are paid or 
accrued by the entity during its fiscal year to persons other 
than qualified persons or U.S. residents and citizens and that 
are deductible for income tax purposes in that year in the 
entity's country of residence must not exceed 50 percent of the 
entity's gross income. For this purpose, there are not taken 
into account arm's-length payments in the ordinary course of 
business for services or tangible property or for financial 
obligations to banks provided that, if the bank is not a 
resident of either country, the payment must be attributable to 
a permanent establishment of the bank located in either 
country. The term ``gross income'' is not defined in the 
proposed treaty. As such, it will have the meaning provided 
under domestic law. The Technical Explanation states that, in 
the case of the United States, it will mean gross receipts less 
cost of goods sold.
    The proposed treaty provides that the base erosion test is 
applied using gross income for the fiscal year preceding the 
current year, provided that the amount of gross income for such 
year is deemed to be not less than the average of the annual 
gross income for the four fiscal years preceding the current 
fiscal year.
            Public entities
    Under the proposed treaty, an entity other than a company 
that is a resident of the United States or Ireland is entitled 
to treaty benefits if the principal class of units in the 
entity is listed on a recognized stock exchange located in 
either country and is substantially and regularly traded on one 
or more recognized stock exchanges. Alternatively, the entity 
is entitled to treaty benefits if the direct or indirect owners 
of at least 50 percent of the beneficial interests in the 
entity are public entities under the preceding sentence or 
public companies as described below.
    The term ``units'' includes shares and any other 
instrument, other than a debt instrument, entitling the holder 
to share in the assets or income of, or to receive a 
distribution from, the entity. The term ``principal class of 
units'' is not defined. The Technical Explanation states that 
it is understood that it will be interpreted in accordance with 
the definition of ``principal class of shares,'' discussed 
below.
    The term ``recognized stock exchange'' means any stock 
exchange registered with the Securities and Exchange Commission 
as a national securities exchange for the purposes of the 
Securities Exchange Act of 1934; the NASDAQ System owned by the 
National Association of Securities Dealers; the Irish stock 
exchange; the stock exchanges of Amsterdam, Brussels, 
Frankfurt, Hamburg, London, Madrid, Milan, Paris, Stockholm, 
Sydney, Tokyo, Toronto, Vienna and Zurich; and any other stock 
exchange agreed upon by the competent authorities of the two 
countries.
    The proposed protocol provides that a class of units is 
considered to be substantially and regularly traded on one or 
more recognized stock exchanges during a fiscal year if trades 
in the class of such units are effected in more than de minimis 
quantities every quarter and the aggregate number of units of 
that class traded on such exchange or exchanges during the 
previous fiscal year is at least 6 percent of the average 
number of shares outstanding in that class during the year. 
However, if such class of units was not listed on a recognized 
stock exchange in the previous fiscal year, the units will be 
deemed to satisfy this 6-percent test.
            Public companies
    A company that is a resident of Ireland or the United 
States is entitled to treaty benefits if the principal class of 
its shares is substantially and regularly traded on one or more 
recognized stock exchanges. Thus, such a company is entitled to 
the benefits of the proposed treaty regardless of where its 
actual owners reside.
    The term ``principal class of shares'' is defined generally 
as the ordinary or common shares of the company, provided that 
such class of shares represents the majority of the voting 
power and value of the company. If no single class of shares 
accounts for more than half of the company's voting power and 
value, then the principal class of shares is those classes of 
the company's shares that in the aggregate account for more 
than half of the company's voting power and value. In this 
regard, it is necessary only that one such group be primarily 
and regularly traded on a recognized stock exchange. The 
principal class of shares always includes any 
``disproportionate'' class of shares. A disproportionate class 
of shares is any class of shares of a company resident in one 
country that entitles the shareholder to a disproportionately 
higher participation (through dividends, redemption payments or 
otherwise) in the earnings generated in the other country by 
particular assets or activities. The term ``shares'' includes 
depository receipts and trust certificates thereof.
    The proposed protocol provides that the term 
``substantially and regularly traded'' is defined as above. The 
proposed protocol further provides that an Irish Building 
Society is deemed to be a company the principal class of shares 
of which is listed on the Irish Stock Exchange and which is 
substantially and regularly traded thereon. The Technical 
Explanation further states that the substantially and regularly 
traded requirement can be met by trading on any one or more of 
the recognized stock exchanges.
    In addition, a company that is a resident of Ireland or the 
United States is entitled to treaty benefits if at least 50 
percent of the aggregate vote and value of its shares is owned 
directly or indirectly by publicly traded companies that are 
residents of Ireland or the United States; qualified 
governmental entities, or companies that are more than 50-
percent owned by qualified governmental entities.
            Tax-exempt organizations
    Under the proposed treaty, an entity is entitled to treaty 
benefits if it is a tax-exempt organization (as defined in 
Article 4(1)(c)) resident in one of the countries, provided 
that more than half the beneficiaries, members, or 
participants, if any, in the organization are qualified 
persons. This rule applies to organizations organized and 
operated exclusively to administer or provide retirement and 
employee benefits or to fulfill religious, educational, 
scientific, and other charitable purposes.
            Entities satisfying active trade or business test

In general

    Under the active business test, treaty benefits in the 
source country are available under the proposed treaty to an 
entity that is a resident of one treaty country if (1) it is 
engaged in the active conduct of a trade or business in the 
residence country and (2) the income derived from the source 
country is derived in connection with, or is incidental to, 
that trade or business. In addition, if the resident has an 
ownership interest in the income-producing activity, the trade 
or business must be substantial in relation to such income-
producing activity.
    This active business test is applied separately to each 
item of income. Accordingly, an entity may be eligible for 
treaty benefits with respect to some but not all of the income 
derived in the source country. In contrast, satisfaction of the 
requirements for any one of the specified categories of 
qualified persons allows treaty benefits for all income derived 
from the source country.

Trade or business

    Under the proposed treaty, the active business test is 
applied by disregarding the business of making or managing 
investments, unless such business is carried on by a bank or 
insurance company acting in the ordinary course of its 
business.
    The proposed protocol provides that whether a resident is 
engaged in the active conduct of a trade or business is 
determined based on all the facts and circumstances. The 
Technical Explanation states that a trade or business generally 
comprises activities that constitute an independent economic 
enterprise carried on for profit.
    The proposed protocol provides that a bank will be 
considered to be engaged in the active conduct of a trade or 
business if it regularly accepts deposits from the public or 
makes loans to the public. A resident that, as of the date of 
signature of the proposed treaty, is licensed to engage in the 
conduct of a banking business is considered to be engaged in 
the active conduct of a trade or business. The proposed 
protocol further provides that an insurance company will be 
considered to be engaged in the active conduct of a trade or 
business if its gross income consists primarily of insurance 
and reinsurance premiums and investment income attributable 
thereto.
    In applying this test to a resident, the resident is deemed 
to conduct activities conducted by a partnership in which it is 
a partner or by a person to which it is connected. Persons are 
connected if one owns at least a 50-percent beneficial interest 
in the other or if another person possesses, directly or 
indirectly, at least a 50-percent interest in both. Persons 
also are considered connected if, based on all the relevant 
facts and circumstances, one has control of the other or both 
are under the control of the same person or persons.

Income derived in connection with or incidental to a trade or business

    Under the proposed treaty, the income eligible for treaty 
benefits under this active business test is the income derived 
from the source country in connection with, or incidental to, 
the active conduct of a trade or business in the residence 
country. Income is considered derived in connection with an 
active trade or business in a country if the income-producing 
activity in the other country is a line of business which is 
part of or is complementary to the trade or business conducted 
in the first country. The Technical Explanation states that it 
is intended that a business activity in the source country will 
be considered to form a part of a business activity in the 
other country if the two activities involve the design, 
manufacture or sale of the same products or type of products or 
the provision of similar services. The Technical Explanation 
further states that two activities will be considered 
complementary if they are part of the same overall industry and 
the success or failure of the two are interrelated. According 
to the Technical Explanation, where more than one business is 
conducted in the source country and only one of such businesses 
forms a part of or is complementary to a business conducted in 
the residence country, the income attributable to that 
particular business must be determined for purposes of applying 
this test.
    The Technical Explanation states that income is considered 
to be incidental to the trade or business carried on in the 
other country if the production of such income facilitates the 
conduct of such trade or business. For example, interest income 
earned from the short-term investment of working capital would 
be considered to be incidental income.

Substantiality requirement

    Under the proposed treaty, if the resident has an ownership 
interest in the income-producing activity, the trade or 
business in the residence country must be substantial in 
relation to such income-producing activity in the other 
country. In this regard, the proposed treaty provides that 
``substantiality'' will be determined based on all the facts 
and circumstances. However, a safe harbor is provided if the 
following test is satisfied: for the preceding fiscal year, or 
the average of the three preceding fiscal years, the asset 
value, gross income, and payroll expense that are related to 
the trade or business are at least equal to 7.5 percent of the 
corresponding amounts that are related to the income-producing 
activity, and the average of these three ratios is at least 10 
percent. For purposes of these computations, only the 
resident's proportionate interest in the trade, business, or 
activity is taken into account.
            Shipping income
    A resident of one country that derives shipping income from 
the other country is entitled to treaty benefits with respect 
to such income if at least 50 percent of the beneficial 
interests in the resident is owned, directly or indirectly, by 
qualified persons, U.S. citizens or residents, or individuals 
who are residents of a third country, or a company or companies 
the principal shares of which are substantially and regularly 
traded on an established securities market in the third 
country. However, this rule applies only if the third country 
grants an exemption to shipping income under similar terms to 
citizens and corporations of the source country.
            Derivative benefits rule
    The proposed treaty contains a reciprocal derivative 
benefits rule. This rule effectively allows an Irish company, 
for example, to receive ``derivative benefits'' in the sense 
that it derives its entitlement to U.S. tax reductions in part 
from the U.S. treaty benefits to which its owners would be 
entitled if they earned the income directly. If the 
requirements of this rule are satisfied, a company that is 
resident in one of the countries will be entitled to treaty 
benefits.
    A company resident in one of the countries satisfies this 
rule if two requirements are met. First, the ultimate 
beneficial owners of at least 95 percent of the voting power 
and value of all its shares must be seven or fewer persons that 
are qualified persons or residents of a member state of the EU 
or a party to NAFTA. For this purpose, a person will be 
considered a resident of an EU member or NAFTA party only if 
the person would be entitled to the benefits of an income tax 
treaty between its residence country and the country from which 
benefits are being claimed. However, if such treaty does not 
include a comprehensive limitation on benefits provision, the 
person must be a person that would be a qualified person under 
the tests described above, applied by treating the person as if 
the person were a resident of the United States or Ireland. 
Second, the company must meet the base erosion test described 
above, applied by treating residents of a member state of the 
EU or a party to NAFTA as qualified persons.
    However, a company otherwise entitled to benefits pursuant 
to this rule will be denied benefits with respect to an item of 
income that constitutes dividends, interest, and royalties 
unless at least 95 percent of its shares is held directly or 
indirectly by one or more persons that are residents of an EU 
member or NAFTA party who are entitled to benefits under an 
income tax treaty between its residence country and the country 
from which benefits are being claimed that are at least as 
favorable as the benefits provided in the proposed treaty with 
respect to such item of income.
            Grant of treaty benefits by the competent authority
    The proposed treaty provides a ``safety-valve'' for a 
treaty country resident that has not established that it meets 
one of the other more objective tests. Under this provision, 
such a person may be granted treaty benefits if the competent 
authority of the source country determines that the 
establishment, acquisition, or maintenance of the person 
seeking benefits under the proposed treaty, or the conduct of 
such person's operations, has or had as one of its principal 
purposes the obtaining of benefits under the proposed treaty. 
Thus, persons that establish operations in either the United 
States or Ireland with the principal purposes of obtaining 
benefits under the proposed treaty ordinarily will not be 
granted such benefits. The competent authority of the source 
country must consult with the competent authority of the other 
country before denying benefits under this safety-valve 
provision. The Technical Explanation states that the competent 
authorities may determine to grant all, or partial, benefits of 
the proposed treaty.
    This provision of the proposed treaty is similar to a 
portion of the qualified resident definition under the Code 
branch tax rules, under which the Secretary of the Treasury 
may, in his sole discretion, treat a foreign corporation as a 
qualified resident of a foreign country if the corporation 
establishes to the satisfaction of the Secretary that it meets 
such requirements as the Secretary may establish to ensure that 
individuals who are not residents of the foreign country do not 
use the treaty between the foreign country and the United 
States in a manner inconsistent with the purposes of the Code 
rule (sec. 884(d)(4)(D)).
            Triangular cases
    Under present laws and treaties that apply to Irish 
residents, it is possible for profits of a permanent 
establishment maintained by an Irish resident in a third 
country to be subject to a very low aggregate rate of Irish and 
third-country income tax. The proposed treaty, in turn, 
eliminates the U.S. tax on several specified types of income of 
an Irish resident. In a case where the U.S. income is earned by 
a third-country permanent establishment of an Irish resident 
(the so-called ``triangular case'') the proposed treaty would 
have the potential of helping Irish residents to avoid all (or 
substantially all) taxation, rather than merely avoiding double 
taxation.
    In order to address this issue, the proposed treaty 
includes a special rule designed to prevent the proposed treaty 
from reducing or eliminating U.S. tax on income of an Irish 
resident in a case where no other substantial tax is imposed on 
that income. Under the special rule, the United States is 
permitted to tax dividends, interest, and royalties paid to the 
third-country permanent establishment at the rate of 15 
percent. In addition, under the special rule, the United States 
is permitted to tax other types of income without regard to the 
proposed treaty.
    In order for the special rule to apply, four conditions 
must be satisfied. First, an Irish enterprise must derive 
income from the United States. Second, such income must be 
attributable to a permanent establishment that the Irish 
enterprise has in a third country. Third, the enterprise must 
be exempt from tax in Ireland on profits attributable to the 
permanent establishment. Fourth, the combined Irish and third-
country taxation of the item of U.S.-source income earned by 
the Irish enterprise with the third-country permanent 
establishment must be less than 50 percent of the Irish tax 
that would be imposed if the income were earned by the same 
enterprise in Ireland and were not attributable to the 
permanent establishment.
    The special rule does not apply if the U.S.-source income 
is derived in connection with, or is incidental to, the active 
conduct of a trade or business carried on by the permanent 
establishment in the third country (other than the business of 
making or managing investments unless these activities are 
banking or insurance carried on by a bank or insurance 
company).

Article 24. Relief from Double Taxation

            U.S. internal law
    One of the two principal purposes for entering into an 
income tax treaty is to limit double taxation of income earned 
by a resident of one of the countries that may be taxed by the 
other country. The United States seeks unilaterally to mitigate 
double taxation by generally allowing U.S. taxpayers to credit 
the foreign income taxes that they pay against U.S. tax imposed 
on their foreign-source income. An indirect or ``deemed-paid'' 
credit is also provided. Under this rule, a U.S. corporation 
that owns 10 percent or more of the voting stock of a foreign 
corporation and receives a dividend from the foreign 
corporation is deemed to have paid a portion of the foreign 
income taxes paid by the foreign corporation on its accumulated 
earnings. The taxes deemed paid by the U.S. corporation are 
included in its total foreign taxes paid for the year the 
dividend is received.
    A fundamental premise of the foreign tax credit is that it 
may not offset the U.S. tax on U.S.-source income. Therefore, 
the foreign tax credit provisions contain a limitation that 
ensures that the foreign tax credit only offsets U.S. tax on 
foreign-source income. The foreign tax credit limitation 
generally is computed on a worldwide consolidated basis. Hence, 
all income taxes paid to all foreign countries are combined to 
offset U.S. taxes on all foreign income. The limitation is 
computed separately for certain classifications of income 
(e.g., passive income and financial services income) in order 
to prevent the crediting of foreign taxes on certain high-taxed 
foreign-source income against the U.S. tax on certain types of 
traditionally low-taxed foreign-source income. Other 
limitations may apply in determining the amount of foreign 
taxes that may be credited against the U.S. tax liability of a 
U.S. taxpayer.
            Irish internal law
    Ireland generally allows a deduction, rather than a credit, 
for taxes paid to foreign countries.
            Proposed treaty rules

Overview

    Unilateral efforts to limit double taxation are imperfect. 
Because of differences in rules as to when a person may be 
taxed on business income, a business may be taxed by two 
countries as if it is engaged in business in both countries. 
Also, a corporation or individual may be treated as a resident 
of more than one country and may be taxed on a worldwide basis 
by both.
    The double tax issue is addressed in part in other articles 
of the proposed treaty that limit the right of a source country 
to tax income. This article provides further relief where both 
Ireland and the United States would otherwise still tax the 
same item of income. This article is not subject to the saving 
clause, so that the United States waives its overriding taxing 
jurisdiction to the extent that this article applies.
    The present treaty generally provides for relief from 
double taxation of U.S. residents and citizens by requiring the 
United States to permit a credit against its tax for taxes paid 
to Ireland. The determination of this credit is made in 
accordance with U.S. law in effect on the date the present 
treaty went into effect. The present treaty generally provides 
for relief from double taxation of Irish residents by requiring 
Ireland to permit a credit against its tax for taxes paid to 
the United States.

Proposed treaty limitations on U.S. internal law

    The proposed treaty generally provides that the United 
States will allow a U.S. citizen or resident a foreign tax 
credit for Irish tax. The proposed treaty provides that the 
United States also will allow a deemed-paid credit, with 
respect to Irish tax, to any U.S. corporate shareholder of an 
Irish company that receives dividends from such company if the 
U.S. company owns 10 percent or more of the voting stock of the 
Irish company.
    The credit generally is to be computed in accordance with 
the provisions and subject to the limitations of U.S. law (as 
those provisions and limitations may change from time to time 
without changing the general principles of the treaty 
provisions). This provision is similar to those found in the 
U.S. model and many other U.S. income tax treaties.
    The proposed treaty provides that any credit allowed by 
Ireland with respect to dividends received from an Irish 
resident company, less any excess of such credit that is 
refunded, is treated as an income tax paid to Ireland.
    The proposed treaty, like the U.S. model and other U.S. 
treaties, contains a special rule designed to provide relief 
from double taxation for U.S. citizens who are Irish residents. 
Under this rule, a U.S. citizen who is resident in Ireland 
will:
    (1) Compute the tentative U.S. income tax and the tentative 
Irish income tax with respect to items of income that, under 
the proposed treaty, are subject to Irish tax and are either 
exempt from U.S. tax or are subject to a reduced rate of tax 
when derived by an Irish resident who is not a U.S. citizen.
    (2) Reduce the tentative Irish tax by a hypothetical 
foreign tax credit for taxes imposed on his or her U.S.-source 
income. The amount of this credit is limited to the U.S. tax 
that the citizen would have paid under the proposed treaty on 
such income if that person were an Irish resident but not a 
U.S. citizen (e.g., 15 percent in the case of portfolio 
dividends).
    (3) Reduce the tentative U.S. income tax by a foreign tax 
credit for income tax actually paid to Ireland as computed in 
step (2) (i.e., after Ireland allowed the credit for U.S. 
taxes). The proposed treaty recharacterizes the income that is 
subject to Irish taxation as foreign-source income for purposes 
of this computation.
The end result of this three-step formula is that the ultimate 
U.S. tax liability of a U.S. citizen who is an Irish resident, 
with respect to an item of income, should not be less than the 
tax that would be paid if the individual were an Irish resident 
and not a U.S. citizen.

Proposed treaty limitations on Irish internal law

    Under the proposed treaty, Ireland will allow as a credit 
against its tax the U.S. tax payable in accordance with the 
proposed treaty on profits, income or chargeable gains from 
sources within the United States. Ireland also will allow a 
credit, for the U.S. tax paid by a U.S. company, to any Irish 
company that receives dividends from such company and that 
controls directly or indirectly 10 percent or more of the 
voting power of the company. This credit is subject to the 
foreign tax credit provisions of Irish law.

Other rules

    The proposed treaty provides that for purposes of this 
article, income derived by a resident of a country that may be 
taxed in the other country under the proposed treaty will be 
considered to have its source in the other country. However, 
the source rules of the countries as applicable for purposes of 
limiting the foreign tax credit will take precedence over this 
rule.
    The proposed treaty further provides that where income or 
gains are wholly or partly relieved from tax in a country and 
an individual is taxable in the other country only in respect 
of the amount of such income or gains that is remitted or 
received in the other country, then the relief otherwise 
allowed in the first country will apply only to the portion of 
such income and gains that is remitted or received in the other 
country. This rule is necessary because of Ireland's remittance 
system of taxation for individuals who are Irish residents not 
domiciled in Ireland.

Article 25. Non-Discrimination

    The nondiscrimination article of the proposed treaty 
applies only with respect to taxes covered by the proposed 
treaty. In contrast, the U.S. model includes a comprehensive 
nondiscrimination article relating to all taxes of every kind 
imposed at the national, state, or local level.
    In general, under the proposed treaty, one country cannot 
discriminate by imposing other or more burdensome taxes (or 
requirements connected with taxes) on nationals of the other 
country than it would impose on its nationals in the same 
circumstances. This provision applies whether or not the 
nationals in question are residents of the United States or 
Ireland. A citizen of one country who is not a resident of that 
country and a citizen of the other country who is not a 
resident of the first country are not considered to be in the 
same circumstances. For example, a U.S. citizen who is not a 
resident of the United States and an Irish citizen who is not a 
resident of the United States are not considered to be in the 
same circumstances for U.S. tax purposes.
    Under the proposed treaty, neither country may tax a 
permanent establishment of a resident or enterprise of the 
other country less favorably than it taxes its own enterprise 
carrying on the same activities. Consistent with the U.S. and 
OECD models, a country is not obligated to grant residents of 
the other country any personal allowances, reliefs, or 
reductions for tax purposes on account of civil status or 
family responsibilities which it grants to its own residents.
    Each country is required (subject to the arm's-length 
pricing rules of Articles 9 (Associated Enterprises), 11 
(Interest), and 12 (Royalties)) to allow enterprises of such 
country to deduct interest, royalties, and other disbursements 
paid by them to residents of the other country under the same 
conditions that it allows deductions for such amounts paid to 
residents of the same country as the payor. The Technical 
Explanation indicates that the term ``other disbursements'' is 
understood to include a reasonable allocation of executive and 
general administrative expenses, research and development 
expenses, and other expenses incurred for the benefit of a 
group of related enterprises.
    The nondiscrimination rule also applies under the proposed 
treaty to enterprises of one country that are owned in whole or 
in part by residents of the other country. Enterprises resident 
in one country, the capital of which is wholly or partly owned 
or controlled, directly or indirectly, by one or more residents 
of the other country, will not be subjected in the first 
country to any taxation or any connected requirement which is 
other or more burdensome than the taxation and connected 
requirements that the first country imposes or may impose on 
its similar enterprises.
    The proposed treaty provides that nothing in this article 
will be construed as preventing either country from imposing a 
branch profits tax.
    U.S. internal law generally requires a corporation that 
distributes property to its shareholders as realizing gain or 
loss as if the property had been sold. A nonrecognition rule 
applies, however, to certain distributions of stock and 
securities of a controlled corporation. U.S. internal law also 
generally treats a corporation that distributes property in 
complete liquidation as realizing gain or loss as if the 
property had been sold to the distributee. If, however, 80 
percent or more of the stock of the corporation is owned by 
another corporation, a nonrecognition rule applies and no gain 
or loss is recognized to the liquidating corporation. Special 
provisions make these nonrecognition provisions inapplicable if 
the distributee is a foreign corporation (Code sec. 367(e)(1) 
and (2)). The Technical Explanation states that this 
nondiscrimination article will not prevent the United States 
from applying Code section 367(e)(1) or (2).
    U.S. internal law generally requires a partnership that 
engages in a U.S. trade or business to pay a withholding tax 
attributable to a foreign partner's share of the effectively-
connected income of the partnership. The withholding tax is not 
the final liability of the partner, but is a prepayment of tax 
which will be refunded to the extent it exceeds a partner's 
final U.S. tax liability. No withholding is required with 
respect to a U.S. partner's share of the effectively-connected 
income of the partnership. The Technical Explanation states 
that this nondiscrimination article will not prevent the United 
States from applying Code section 1446.
    The saving clause (which allows either country to tax its 
citizens or residents notwithstanding certain treaty 
provisions) does not apply to the nondiscrimination article. 
Therefore, for example, a U.S. citizen resident in Ireland may 
claim benefits with respect to the United States under this 
article.

Article 26. Mutual Agreement Procedure

    The proposed treaty contains the standard mutual agreement 
provision, with some variation, which authorizes the competent 
authorities of the United States and Ireland to consult 
together to attempt to alleviate individual cases of double 
taxation not in accordance with the proposed treaty. The saving 
clause of the proposed treaty does not apply to this article, 
so that the application of this article may result in a waiver 
(otherwise mandated by the proposed treaty) of U.S. taxing 
jurisdiction over its citizens or residents.
    Under this article, a resident of one country, who 
considers that the actions of one or both of the countries 
result, or will result, for him or her in taxation not in 
accordance with the proposed treaty, may present the case to 
the competent authority of either country. The competent 
authority will then make a determination as to whether the 
objection appears justified. If the objection appears to be 
justified and if the competent authority is not itself able to 
arrive at a satisfactory solution, then the competent authority 
will endeavor to resolve the case by mutual agreement with the 
competent authority of the other country, with a view to the 
avoidance of taxation which is not in accordance with the 
proposed treaty. Any agreement reached will be implemented 
notwithstanding any time limits or other procedural limitations 
in the domestic law of the countries.
    The competent authorities of the countries are to endeavor 
to resolve by mutual agreement any difficulties or doubts 
arising as to the interpretation or application of the proposed 
treaty. Like the U.S. model treaty, the proposed treaty makes 
express provision for competent authorities to mutually agree 
on various issues, including the attribution of income, 
deductions, credits, or allowances to a permanent establishment 
of an enterprise of a treaty country; the allocation of income, 
deductions, credits, or allowances; the characterization of 
particular items of income; the characterization of persons; 
the application of source rules with respect to particular 
items of income; the common meaning of a term; increases in the 
dollar thresholds in provisions such as the artistes and 
sportsmen article (Article 17) and the students and trainees 
article (Article 20) to reflect economic or monetary 
developments; advance pricing arrangements; the application of 
domestic law with respect to penalties, fines, and interest; 
and the elimination of double taxation in cases not provided 
for in the treaty. Any principles of general application that 
are established by an agreement or agreements are required to 
be published by the competent authorities of both countries in 
accordance with their laws and administrative practices.
    The proposed treaty authorizes the competent authorities to 
communicate with each other directly for purposes of reaching 
an agreement in the sense of this mutual agreement article. 
This provision makes clear that it is not necessary to go 
through diplomatic channels in order to discuss problems 
arising in the application of the treaty.
    The proposed treaty also allows for arbitration. If an 
agreement cannot be reached by the competent authorities 
pursuant to the mutual agreement procedures, the case may be 
submitted to arbitration. This procedure applies only if both 
competent authorities and the taxpayer agree to it and the 
taxpayer agrees in writing to be bound by the decision of the 
arbitration board. The decision of the arbitration board in a 
particular case will be binding on the taxpayer and both 
countries with respect to such case. The proposed treaty 
provides that the procedures with respect to arbitration will 
be established in an exchange of notes between the two 
countries. The proposed treaty further provides that the 
provisions with respect to arbitration will take effect only 
after the two countries have so agreed through an exchange of 
notes.

Article 27. Exchange of Information and Administrative Assistance

    The proposed treaty provides for the exchange of 
information as is relevant to carry out the provisions of the 
proposed treaty or the provisions of domestic laws of the 
countries concerning taxes covered by the proposed treaty 
provided that taxation thereunder is not contrary to the 
proposed treaty. The exchange of information is not restricted 
by Article 1 (General Scope). Therefore, third-country 
residents are covered by these exchange of information 
provisions. Unlike the U.S. model, the proposed treaty 
obligates the parties to exchange information only relating to 
taxes that are listed under Article 2 (Taxes Covered).
    Any information exchanged is to be treated as secret in the 
same manner as information obtained under the domestic laws of 
the country receiving the information. The exchanged 
information may be disclosed only to persons or authorities 
(including courts and administrative bodies) involved in 
assessment, collection, administration, enforcement, 
prosecution or determination of appeals with respect to the 
taxes covered by the proposed treaty. The information exchanged 
may be used only for the purposes stated above. 12 
The Technical Explanation states that the appropriate 
committees of the U.S. Congress and the U.S. General Accounting 
Office shall be afforded access to information for use in the 
performance of their role in overseeing the administration of 
U.S. tax laws. Information received may be discussed in public 
court proceedings or in judicial decisions.
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    \12\ Code section 6103 provides that otherwise confidential tax 
information may be utilized for a number of specifically enumerated 
non-tax purposes. Information obtained by the United States pursuant to 
this treaty could not be used for these non-tax purposes.
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    As is true under the U.S. and OECD models, under the 
proposed treaty, a country is not required to carry out 
administrative measures at variance with the laws and 
administrative practice of either country, to supply 
information which is not obtainable under the laws of either 
country, or to supply information which would disclose any 
trade, business, industrial, or professional secret or trade 
process or information the disclosure of which would be 
contrary to public policy.
    If information is requested by a country, the proposed 
treaty provides that the other country will obtain the 
information in the same manner and to the same extent as if its 
own tax were involved, notwithstanding the fact that such other 
country may not need such information at that time. However, 
paragraph 10 of the proposed protocol states that, as of the 
date the proposed treaty was signed, the laws and practices of 
Ireland do not permit its tax authorities to carry out 
inquiries on behalf of another country unless Irish taxes 
covered by the proposed treaty are at issue. The proposed 
protocol also states that if Irish laws and practices change to 
permit such inquiries, Ireland will then implement this 
provision of the proposed treaty. The diplomatic notes state 
that, in addition to these provisions, pursuant to a provision 
of Irish law, the United States may obtain information of 
financial institutions in Ireland or depositions of witnesses 
located in Ireland, for the purpose of investigating or 
prosecuting criminal fiscal offenses (including criminal 
revenue offenses) under the laws of the United States. The 
consequence of both the diplomatic notes and the proposed 
protocol is that the United States may obtain limited 
information with respect to criminal offenses, and may obtain 
no information with respect to civil offenses; Ireland may 
obtain information generally with respect to both criminal and 
civil offenses. Where specifically requested by the competent 
authority of one country, the competent authority of the other 
country shall provide information in the form of depositions of 
witnesses and authenticated copies of unedited original 
documents to the extent such depositions and documents can be 
obtained under the laws and practice of the other country.
    The competent authority of the requested country also shall 
allow representatives of the other country to enter the 
requested country to interview individuals and examine a 
person's books and records with their consent.

Article 28. Diplomatic Agents and Consular Officers

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

Article 29. Entry Into Force

    The proposed treaty will enter into force upon the exchange 
of instruments of ratification. The provisions of the proposed 
treaty generally take effect, in the case of the United States, 
for taxable periods beginning on or after the first day of 
January following the date of entry into force and, in the case 
of Ireland, for financial years with respect to the corporation 
tax and years of assessment with respect to the income tax and 
capital gains tax beginning on or after the first day of 
January in the year following the date of entry into force. In 
the case of taxes payable at source, the proposed treaty 
generally takes effect for amounts paid or credited on or after 
the first day of January in the year following the date of 
entry into force.
    Taxpayers may elect temporarily to continue to claim 
benefits under the present treaty with respect to a period 
after the proposed treaty takes effect. For such a taxpayer, 
the present treaty would continue to have effect in its 
entirety for a twelve-month period from the date on which the 
provisions of the proposed treaty would otherwise take effect. 
The present treaty ceases to have effect once the provisions of 
the proposed treaty take effect under the proposed treaty.
    The proposed treaty includes a special transition rule with 
respect to the limitation on benefits provision. Under this 
rule, an Irish company that is claiming the benefits of the 
proposed treaty on the basis that it is owned by residents of 
EU or NAFTA countries may do so without regard to the 
requirement that such owners be entitled to benefits equivalent 
to those under the proposed treaty. This rule generally applies 
for the two-year period from the date the proposed treaty 
otherwise takes effect; however, it applies for the three-year 
period from the date the proposed treaty takes effect if the 
election to continue the application of the present treaty is 
made.

Article 30. Termination

    The proposed treaty will continue in force until terminated 
by a treaty country. Either country may terminate the treaty at 
any time after it has been in force for five years by giving at 
least six months' prior notice through diplomatic channels. A 
termination generally will be effective, in the case of the 
United States, for taxable periods beginning on or after the 
first day of January following the expiration of the six-month 
period and, in the case of Ireland, for financial years with 
respect to the corporation tax and years of assessment with 
respect to the income tax and capital gains tax beginning on or 
after the first day of January following the expiration of the 
six-month period. With respect to taxes payable at source, a 
termination will be effective for payments made after the first 
day of January following the expiration of the six-month 
period.

               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 Ireland for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income and Capital Gains, 
signed at Dublin on July 28, 1997, together with a Protocol and 
exchange of notes done on the same date (Treaty Doc. 105-31), 
subject to the understanding of subsection (a), the 
declarations of subsection (b), and the proviso of subsection 
(c).
    (a) UNDERSTANDING.--The Senate's advice and consent is 
subject to the following understanding, which shall be included 
in the instrument of ratification, and shall be binding on the 
President:
          (1) EXCHANGE OF INFORMATION.--The United States 
        competent authority follows a practice of comity with 
        respect to exchanges of information under all tax 
        conventions.
    (b) DECLARATION.--The Senate's advice and consent is 
subject to the following two declarations, which shall be 
binding on the President:
          (1) REAL ESTATE INVESTMENT TRUSTS.--The United States 
        shall use its best efforts to negotiate with the 
        Government of Ireland a protocol amending the 
        Convention to provide for the application of 
        subparagraph (b) of paragraph 2 of Article 10 of the 
        Convention to dividends paid by a Real Estate 
        Investment Trust in cases where (i) the beneficial 
        owner of the dividends beneficially holds an interest 
        of 5 percent or less in each class of the stock of the 
        Real Estate Investment Trust and the dividends are paid 
        with respect to a class of stock of the Real Estate 
        Investment Trust that is publicly traded or (ii) the 
        beneficial owner of the dividends beneficially holds an 
        interest of 10 percent or less in the Real Estate 
        Investment Trust and the Real Estate Investment Trust 
        is diversified.
          (2) TREATY INTERPRETATION.--The Senate affirms the 
        applicability to all treaties of the constitutionally 
        based principles of treaty interpretation set forth in 
        Condition (1) of the resolution of ratification of the 
        INF Treaty, approved by the Senate on May 27, 1988, and 
        Condition (8) of the resolution of ratification of the 
        Document Agreed Among the States Parties to the Treaty 
        on Conventional Armed Forces in Europe, approved by the 
        Senate on May 14, 1997.
    (c) PROVISO.--The resolution of ratification is subject to 
the following proviso, which shall be binding on the President:
          (1) SUPREMACY OF THE CONSTITUTION.--Nothing in the 
        Treaty requires or authorizes legislation or other 
        action by the United States of America that is 
        prohibited by the Constitution of the United States as 
        interpreted by the United States.

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