[Senate Executive Report 105-6]
[From the U.S. Government Publishing Office]



105th Congress                                               Exec. Rpt.
                                 SENATE

 1st Session                                                      105-6
_______________________________________________________________________


 
                     TAXATION AGREEMENT WITH TURKEY

                                _______
                                

                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. 104-30]

    The Committee on Foreign Relations, to which was referred 
the Agreement between the Government of the United States of 
America and the Government of the Republic of Turkey for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income, together with a 
related Protocol, signed at Washington on March 28, 1996, 
having considered the same, reports favorably thereon, with one 
declaration 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.................................................3
 VI. Committee Comments...............................................3
VII. Budget Impact...................................................16
VIII.Explanation of Proposed Treaty..................................16

 IX. Text of the Resolution of Ratification..........................53

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Turkey 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 promote close economic 
cooperation and facilitate trade and investment between the two 
countries. It also is intended to enable the two countries to 
cooperate in preventing avoidance and evasion of taxes.

                             II. Background

    The proposed treaty and proposed protocol were signed on 
March 28, 1996. No income tax treaty between the United States 
and Turkey is in force at present.
    The proposed treaty, together with the related protocol, 
was transmitted to the Senate for advice and consent to its 
ratification on September 4, 1996 (see Treaty Doc. 104-30). The 
Committee on Foreign Relations held a public hearing on the 
proposed treaty and related protocol 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 1992 model income tax treaty of the 
Organization for Economic Cooperation and Development (``OECD 
model''). However, the proposed treaty contains certain 
substantive deviations from those treaties and models.
---------------------------------------------------------------------------
    \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 through each country's agreement to 
limit, in certain specified situations, its right to tax income 
derived from its territory by residents of the other country. 
For example, the proposed treaty contains provisions under 
which each country generally agrees not to tax business income 
derived from sources within that country by residents of the 
other country unless the business activities in the taxing 
country are substantial enough to constitute a permanent 
establishment or fixed base (Articles 7 and 14). Similarly, the 
proposed treaty contains ``commercial visitor'' exemptions 
under which residents of one country performing personal 
services in the other country will not be required to pay tax 
in the other country unless their contact with the other 
country exceeds specified minimums (Articles 14, 15, and 17). 
The proposed treaty provides that dividends, interest, 
royalties, and certain capital gains derived by a resident of 
either country from sources within the other country generally 
may be taxed by both countries (Articles 10, 11, 12, and 13); 
however, the rate of tax that the source country may impose on 
a resident of the other country on dividends, interest, and 
royalties generally will be limited by the proposed treaty 
(Articles 10, 11, and 12).
    In situations where the country of source retains the right 
under the proposed treaty to tax income derived by residents of 
the other country, the proposed treaty generally provides for 
relief from 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 23).
    The proposed treaty contains the standard provision (the 
``saving clause'') included in U.S. tax treaties pursuant to 
which each country retains the right to tax its residents (and 
citizens in the case of the United States) as if the treaty had 
not come into effect (Article 1). In addition, the proposed 
treaty contains the standard provision providing that the 
treaty may not be applied to deny any taxpayer any benefits the 
taxpayer would be entitled to under the domestic law of a 
country or under any other agreement between the two countries 
(Article 1). The proposed treaty also contains a detailed 
limitation on benefits provision to prevent the inappropriate 
use of the proposed treaty (Article 22).

                  IV. Entry Into Force and Termination

                          A. Entry into Force

    The proposed treaty provides that the instruments of 
ratification are to be exchanged as soon as possible. The 
proposed treaty will enter into force on the date the 
instruments of ratification are exchanged. 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 the entry into force. With respect to other taxes, 
the proposed treaty will be effective for taxable periods 
beginning on or after such first of January.

                             B. Termination

    The proposed treaty will continue in force until terminated 
by either country. Either country may terminate the proposed 
treaty at any time after the expiration of the five-year period 
from the date of its entry into force, provided that at least 
six months prior notice of termination has been given through 
diplomatic channels. A termination is effective, with respect 
to taxes withheld at source, for amounts paid or credited on or 
after the first of January following the expiration of the six-
month period. In the case of other taxes, a termination is 
effective for taxable periods 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 Turkey and the related protocol 
(Treaty Doc. 104-30), 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 Turkey favorably reported by a voice vote, with the 
recommendation that the Senate give its advice and consent to 
ratification of the proposed treaty and the proposed protocol, 
subject to a declaration and a proviso.

                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed treaty with Turkey is in the interest of the 
United States and urges that the Senate act promptly to give 
advice and consent to ratification. The Committee has taken 
note of certain issues raised by the proposed treaty, and 
believes that the following comments may be useful to Treasury 
Department officials in providing guidance on these matters 
should they arise in the course of future treaty negotiations.
    In addition, the Committee would like to clarify that the 
proposed treaty applies only to residents of Turkey, as defined 
in the proposed treaty, which does not include any part of 
Cyprus. In this regard, the United States does not consider 
Turkish Cypriots or Turkish settlers on Cyprus as residents of 
Turkey eligible for benefits under the proposed treaty.

                     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 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. The proposed treaty generally provides for a 
maximum 20-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 reduces the U.S. 30-percent withholding tax to 20 
percent in the case of dividends generally (compared to 15 
percent in many other treaties). Prior to 1989, U.S. tax 
treaties contained no special rules excluding dividends from 
REITs from these reduced rates. Therefore, under pre-1989 
treaties, 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 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. The proposed treaty provides 
a maximum tax rate of 20 percent for REIT dividends beneficially owned 
by such an individual.
---------------------------------------------------------------------------

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 as in many treaties) 
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 (20 percent, 
in the case of the proposed treaty) 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.
    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 
anticipates that incorporation of this new policy will be 
considered in connection with any future modification to the 
proposed treaty.

                   B. Developing Country Concessions

    The proposed treaty and proposed protocol contain a number 
of developing country concessions, some of which are found in 
other U.S. income tax treaties with developing countries. The 
most significant of these concessions are described below.

Definition of permanent establishment

    The proposed treaty departs from the U.S. and OECD models 
by providing for broader source-basis taxation with respect to 
business activities of residents of the other country. The 
proposed treaty's permanent establishment article, for example, 
permits the country in which business activities are carried on 
to tax the activities in circumstances where it would not be 
able to do so under either of the model treaties. Under the 
proposed treaty, a building site or construction, assembly or 
installation project in a treaty country constitutes a 
permanent establishment if the site or project continues in a 
country for more than six months; under the U.S. and OECD 
models, such a site or project must last for more than one year 
in order to constitute a permanent establishment. Thus, for 
example, under the proposed treaty, a U.S. enterprise's 
business profits that are attributable to a construction 
project in Turkey will be taxable by Turkey if the project 
lasts for more than six months. In addition, under the proposed 
protocol, the use of an installation or drilling rig or ship 
for the exploration or exploitation of natural resources in a 
country for more than 183 days in any twelve-month period would 
cause such rig or ship to be treated in a manner analogous to a 
permanent establishment. Under the U.S. model, drilling rigs or 
ships must be present in a country for more than one year in 
order to constitute a permanent establishment. It should be 
noted that many tax treaties between the United States and 
developing countries similarly provide a permanent 
establishment threshold of six months for building sites and 
drilling rigs.
    The proposed treaty contains a provision, not present in 
either the U.S. model or the OECD model, which expands the 
circumstances under which activities of dependent agents will 
give rise to a permanent establishment. Under this provision, 
an enterprise of one treaty country is treated as having a 
permanent establishment in the other country if its dependent 
agent habitually maintains in the other country a stock of 
goods or merchandise from which the agent regularly makes 
deliveries on behalf of the enterprise. However, this rule 
applies only if it is proved that in order to avoid tax in such 
country the agent also undertakes virtually all the activities 
connected with the sale of such goods or merchandise (except 
for the actual conclusion of the sales contract).

Taxation of business profits

    Under the U.S. model and many other U.S. income tax 
treaties, a country may tax the business profits of a resident 
of the other country only to the extent those profits are 
attributable to a permanent establishment situated within the 
first country. The proposed protocol expands the definition of 
business profits that are attributable to a permanent 
establishment to include profits that are derived from sales of 
goods or merchandise of the same or similar kind as those sold 
through the permanent establishment and profits derived from 
other business activities of the same or similar kind as those 
effected through the permanent establishment. However, this 
rule applies only if it is proved that the sale or activities 
were structured in a manner intended to avoid tax in the 
country where the permanent establishment is located. This 
expanded definition is narrower than the rule included in some 
other U.S. tax treaties with developing countries. It should be 
noted that although this rule provides for broader source basis 
taxation than does the rule contained in the U.S. model, it is 
not as broad as the ``force of attraction'' rule that is 
included in the Internal Revenue Code (the ``Code'').

Taxation of certain equipment leasing

    The proposed treaty treats as royalties payments for the 
use of, or the right to use, industrial, commercial, or 
scientific equipment. In most other treaties, these payments 
are considered rental income; as such, the payments are subject 
to the business profits rules, which generally permit the 
source country to tax such amounts only if they are 
attributable to a permanent establishment located in that 
country, and the payments are taxed, if at all, on a net basis. 
By contrast, the proposed treaty permits gross-basis source-
country taxation of these payments, at a rate not to exceed 5 
percent, if the payments are not attributable to a permanent 
establishment situated in that country. If the payments are 
attributable to such a permanent establishment, the business 
profits article of the proposed treaty is applicable.

Other taxation by source country

    The proposed treaty includes a number of additional 
concessions with respect to source basis taxation of amounts 
earned by residents of the other treaty country.
    The proposed treaty allows a maximum rate of source-country 
tax on dividends of 20 percent (15 percent if the beneficial 
owner of the dividend is a company that owns at least 10 
percent of the voting shares of the payor). These maximum rates 
on dividends are higher than those provided in either the U.S. 
model or the OECD model.
    The proposed treaty allows a maximum rate of source-country 
tax on interest of 15 percent (10 percent in the case of 
interest on a loan granted by a financial institution). The 
proposed treaty provides an exemption from source-country tax 
for interest paid to the government of each country and to 
certain governmental entities. It should be noted that the 
maximum rates are higher than the rates of withholding tax on 
interest under Turkish law currently. By contrast, the U.S. 
model generally would not permit source-country taxation of 
interest. Moreover, the maximum rate permitted under the 
proposed treaty is higher than the maximum rate provided in the 
OECD model.
    The proposed treaty allows a maximum rate of source-country 
tax on royalties of 10 percent (5 percent in the case of income 
from the use of certain equipment as discussed above). By 
contrast, both the U.S. model and the OECD model generally 
would not permit source-country taxation of royalties.
    The proposed treaty permits source-country taxation of 
income derived by a resident of the other treaty country from 
professional or other independent services if the resident is 
present in the source country for the purpose of performing 
such services for more than 183 days in any 12-month period. 
Similarly, the proposed treaty permits source-country taxation 
of income derived by an enterprise of the other treaty country 
from professional or other independent services if the period 
or periods during which such services are performed exceed 183 
days in any 12-month period. By contrast, the U.S. and OECD 
models generally would permit source-country taxation of income 
from independent personal services only where such income is 
attributable to a fixed base or permanent establishment in the 
source country.
    The proposed treaty generally permits source-country 
taxation of entertainers and athletes if the gross receipts 
derived by the individual in the source country exceed $3,000. 
By contrast, the U.S. model generally would permit source-
country taxation of entertainers and athletes only if the gross 
receipts (including reimbursed expenses) exceed $20,000.

Committee conclusions

    One purpose of the proposed treaty is to reduce tax 
barriers to direct investment by U.S. firms in Turkey. The 
practical effect of these developing country concessions could 
be greater Turkish taxation of future activities of U.S. firms 
in Turkey than would be the case under the rules of either the 
U.S. or OECD models.
    There is a risk that the inclusion of these developing 
country concessions in the proposed treaty could result in 
additional pressure on the United States to include them in 
future treaties negotiated with developing countries. However, 
these precedents already exist in the U.N. model treaty, and a 
number of existing U.S. income tax treaties with developing 
countries already include similar concessions. Such concessions 
arguably are necessary in order to obtain treaties with 
developing countries. Tax treaties with developing countries 
can be in the interest of the United States because they 
provide developing country tax relief for U.S. investors and a 
clearer framework within which the taxation of U.S. investors 
will take place.
    As part of its consideration of the proposed treaty and 
proposed protocol, the Committee asked the Treasury Department 
about the appropriateness of the developing country concessions 
granted to Turkey in the proposed treaty. The relevant portion 
of the Treasury Department's October 8, 1997 letter 
4 responding to this inquiry is reproduced below:
---------------------------------------------------------------------------
    \4\  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'').

    Treasury believes that it is clear that Turkey, like 
Thailand, should be considered a developing country. As of 
1995, the per capita GDP of Turkey was approximately one-fifth 
the per capita GDP of the United States and the per capita GDP 
of Thailand was approximately one-fourth the per capita GDP of 
the United States. In contrast, the 1995 per capita GDP of 
Ireland, the poorest of the non-developing countries with a 
treaty pending before the Committee, had a 1995 per capita GDP 
that was more than one-half the 1995 U.S. per capita GDP. 
Although Turkey is a member of the OECD, it is both a 
developing country and a net capital importer.
    The Treasury believes that the developing country 
concessions in the proposed treaty are in line with the 
concessions granted by the United States to other developing 
countries and compare favorably with developing country 
concessions granted to Turkey by other OECD countries.

    The Committee accepts the Treasury Department's assessment 
of Turkey as a developing country. However, the Committee is 
concerned that developing country concessions not be viewed as 
the starting point for future negotiations with developing 
countries. It must be clearly recognized that several of the 
rules of the proposed treaty represent substantial concessions 
by the United States, and that such concessions must be met 
with substantial concessions by the treaty partner. Thus, 
future negotiations with developing countries should not 
assume, for example, that the definition of permanent 
establishment provided in this treaty necessarily will be 
available in every case; rather, such a definition will be 
adopted only in the context of an agreement that satisfactorily 
addresses the concerns of the United States.

            C. Income From the Rental of Ships and Aircraft

    The proposed treaty includes a provision found in the U.S. 
model treaty and many U.S. income tax treaties under which 
profits from an enterprise's operation of ships or aircraft in 
international traffic are taxable only in the enterprise's 
country of residence. In the case of profits derived from the 
rental of ships and aircraft, the rule limiting the right to 
tax to the country of residence applies to such rental profits 
only if the rental profits are incidental to other profits from 
the operation of ships and aircraft in international traffic. 
Rental profits that are not incidental to other income from the 
international operation of ships and aircraft generally would 
be taxable by the source country as royalties at a 5-percent 
rate (or as business profits if such profits are attributable 
to a permanent establishment). Under the proposed treaty, 
unlike the U.S. model, an enterprise such as a bank or leasing 
company that engages only in the rental of ships and aircraft, 
but does not engage in the operation of ships and aircraft, 
would not be eligible for the rule limiting the right to tax 
income from operations in international traffic to the 
enterprise's country of residence.
    As part of its consideration of the proposed treaty and 
proposed protocol, the Committee asked the Treasury Department 
to provide additional explanation regarding the appropriateness 
of the treatment of shipping and aircraft rental income in the 
proposed treaty. The relevant portion of the October 8, 1997 
Treasury Department letter responding to this inquiry is 
reproduced below:

    The treatment of international transportation income was 
perhaps the single most difficult issue in these treaty 
negotiations, and we believe that the provision we finally 
negotiated regarding ship and aircraft rental income represents 
a favorable result for both countries. The treaty permits 
Turkey to impose tax at source only in a very limited number of 
cases, and even then at a much lower rate (5%) than Turkey has 
agreed to in any of its other treaties.
    Turkey has taken several reservations to the OECD Model's 
general source exemption for international transportation 
income. In particular, Turkey has reserved the right to impose 
tax at source on incidental or non-incidental container 
leasing. Turkey also has reserved the right to impose tax on 
international transportation income in certain cases where 
there is a permanent establishment.
    Turkey finally agreed to exempt all container leasing at 
source. Turkey insisted, however, that we continue to permit 
source taxation of non-incidental ship and airplane rentals. 
The treaty thus permits Turkey to tax non-incidental ship and 
aircraft leasing income at a 5% rate, unless the income is 
attributable to a permanent establishment, in which case Turkey 
will tax it on a net basis as business profits. Thus, where a 
bank ``leases'' an airplane to a carrier and receives Turkish-
source ``rental'' payments in exchange, Turkey will generally 
be able to apply a 5% rate to the income. There are likely to 
be very few U.S. residents affected by this provision, however, 
because lease payments are not sourced in Turkey if both the 
lessor and lessee are outside of Turkey and if the payments are 
not reflected on any books kept for Turkish tax purposes. This 
means that Turkey will not impose tax on a payment from a U.S. 
carrier to a U.S. bank under an airplane finance lease, even if 
the aircraft flies into Turkey. In all other Turkish treaties, 
such income is subject to a 10 percent source tax.

    The provision in the proposed treaty represents a departure 
from the U.S. and OECD models. Based on the Treasury 
Department's assurances that very few U.S. residents will be 
affected by this provision (as described above), the Committee 
does not believe that a reservation or rejection of the 
proposed treaty would be warranted in order to effect a change 
in the treatment of shipping and aircraft rental income. 
However, the Committee believes that in negotiating future 
treaties, the Treasury Department should continue to seek 
provisions that conform more closely to the U.S. model.

                         D. Certain Stock Gains

    The proposed treaty contains a narrow rule under which a 
treaty country may tax in accordance with its internal law 
certain gains derived by a resident of the other country from 
the alienation of shares or bonds issued by a company that is 
resident in the first country. This rule applies only if (1) 
the shares or bonds are not quoted on a stock exchange of the 
country in which the company is resident, (2) the shares or 
bonds are alienated to a resident of the country in which the 
company is resident, and (3) the shares or bonds have been held 
by the resident of the other country for one year or less.
    Although this provision would permit either country to 
impose its tax on stock gains derived by a resident of the 
other country in such circumstances, only Turkey imposes such a 
tax under its internal law. The United States generally does 
not tax nonresident individuals and foreign corporations on 
capital gains, other than gains with respect to a U.S. real 
property interest, unless such gains are effectively connected 
with a U.S. trade or business. The provision creates the 
potential for double taxation of gains derived by a U.S. 
resident or citizen from the alienation of shares or bonds that 
are covered by the provision.
    The targeted exception contained in the proposed treaty is 
not found in the U.S. or OECD models. The Committee understands 
that the taxing right granted to Turkey by this narrow 
provision is limited. This provision should not stand as a 
model for other treaty negotiations, however. In negotiating 
future treaties, the Treasury Department should continue to 
seek provisions that conform more closely to the U.S. model in 
generally providing for exclusive residence-country taxation of 
stock gains.

                        E. Royalty Source Rules

    Under the proposed treaty, royalties are sourced by 
reference to where the payor resides (or where the payor has a 
permanent establishment or fixed base, if the royalty was 
incurred and borne by the permanent establishment or fixed 
base). If this rule does not treat the royalty as sourced in 
one of the treaty countries, the royalty is sourced based on 
the place of use of the property. This source provision has 
been included in some other U.S. treaties (e.g., the 1995 U.S.-
Canada protocol). However, this source provision is different 
than the U.S. internal law rule which sources royalties based 
on the place of use of the property.
    Under the proposed treaty, if a Turkish resident that does 
not have a permanent establishment or fixed base in the United 
States pays a royalty to a U.S. resident for the right to use 
property exclusively in the United States, the proposed treaty 
would treat such royalty as Turkish source (and therefore 
potentially taxable in Turkey). However, U.S. internal law 
would treaty such a royalty as U.S.-source income. This creates 
the potential for double taxation of royalty income derived by 
a U.S. resident. The Committee believes that this situation 
would arise in relatively few cases (compared to the more 
common presence of a permanent establishment in the country 
where the property is used). However, the Committee believes 
that in negotiating future treaties, the Treasury Department 
should continue to seek provisions that conform more closely to 
the U.S. model.

                           F. Treaty Shopping

    The proposed treaty, like a number of U.S. income tax 
treaties, generally limits treaty benefits for treaty country 
residents so that only those residents with a sufficient nexus 
to a treaty country will receive treaty benefits. Although the 
proposed treaty is intended to benefit residents of Turkey and 
the United States only, residents of third countries sometimes 
attempt to use a treaty to obtain treaty benefits. This is 
known as ``treaty shopping.'' Investors from countries that do 
not have tax treaties with the United States, or from countries 
that have not agreed in their tax treaties with the United 
States to limit source-country taxation to the same extent that 
it is limited in another treaty may, for example, attempt to 
secure a lower rate of tax by lending money to a U.S. person 
indirectly through a country whose treaty with the United 
States provides for a lower rate. The third-country investor 
may do this by establishing in that treaty country a 
subsidiary, trust, or other investing 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 an anti-treaty-shopping provision in the Code (as 
interpreted by Treasury regulations), and in several newer 
treaties. Some aspects of the provision, however, differ from 
an anti-treaty-shopping provision in the U.S. model treaty.
    One provision of the anti-treaty-shopping article differs 
from the comparable rule in some earlier U.S. treaties, but the 
effect of the change is not completely clear. The general test 
applied by those earlier treaties for the allowance of 
benefits, short of satisfaction of a bright-line ownership and 
base erosion test, is a broadly subjective one, looking to 
whether the acquisition, maintenance, or operation of an entity 
did not have ``as a principal purpose obtaining benefits'' 
under the treaty. By contrast, the proposed treaty contains a 
more precise test that allows denial of benefits only with 
respect to income not derived in connection with the active 
conduct of a trade or business. (However, this active trade or 
business test generally does not apply with respect to a 
business of making or managing financial investments, so 
benefits can be denied with respect to such a business 
regardless of how actively it is conducted.) In addition, the 
proposed treaty gives the competent authority of the source 
country the ability to override this standard and to allow 
benefits if it so determines in its discretion.
    The practical difference between the proposed treaty tests 
and the earlier tests will depend upon how they are interpreted 
and applied. The principal purpose test may be applied 
leniently (so that any colorable business purpose suffices to 
preserve treaty benefits), or it may be applied strictly (so 
that any significant intent to obtain treaty benefits suffices 
to deny them). Similarly, the standards in the proposed treaty 
could be interpreted to require, for example, a more active or 
a less active trade or business (though the range of 
interpretation is far narrower). Thus, a narrow reading of the 
principal purpose test could theoretically be stricter than a 
broad reading of the proposed treaty test (i.e., would operate 
to deny benefits in potentially abusive situations more often).
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department about the adequacy 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:

    The Treasury believes that the limitation on benefits 
provision in the proposed treaty is sufficient to deter treaty 
shopping. The Treasury has included in all its recent tax 
treaties, including the proposed treaty with Turkey, 
comprehensive ``limitation on benefits'' provisions that limit 
the benefits of the treaty to bona fide residents of the treaty 
partner. These provisions are not uniform, as each country has 
its own characteristics that make it more or less inviting to 
treaty shopping in particular ways. Consequently, each 
provision must to some extent be tailored to fit the facts and 
circumstances of the treaty partners' internal laws and 
practices. Moreover, these provisions should be crafted to 
avoid interfering with legitimate and desirable economic 
activity.

    The Committee believes that limitation on benefits 
provisions are important to protect against ``treaty shopping'' 
by limiting benefits of a treaty to bona fide residents of the 
treaty partner. The Committee further believes that the United 
States should maintain its policy of limiting treaty shopping 
opportunities whenever possible. The Committee continues to 
believe further that, in exercising any latitude Treasury has 
to adjust the operation of the proposed treaty, the rules as 
applied should adequately deter treaty shopping abuses. The 
anti-treaty-shopping provision in the proposed treaty may be 
effective in preventing third-country investors from obtaining 
treaty benefits by establishing investing entities in Turkey 
since third-country investors may be unwilling to share 
ownership of such investing entities on a less-than-50-percent 
basis with U.S. or Turkish residents or other qualified owners 
to meet the ownership test of the anti-treaty-shopping 
provision. In addition, the base erosion test provides 
protection from certain potential abuses of a Turkish conduit. 
Finally, Turkey imposes significant taxes of its own; these 
taxes may deter third-country investors from seeking to use 
Turkish entities to make U.S. investments. On the other hand, 
implementation of the detailed tests for treaty shopping set 
forth in the proposed treaty may raise factual, administrative, 
or other issues that cannot currently be foreseen. The 
Committee emphasizes that the proposed anti-treaty-shopping 
provision must be implemented so as to serve as an adequate 
tool for preventing possible treaty-shopping abuses in the 
future.

                           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

    A detailed, article-by-article explanation of the proposed 
income tax treaty between the United States and Turkey is set 
forth below. The provisions of the proposed protocol are 
covered together with the relevant articles of the proposed 
treaty.

Article 1. Personal Scope

            Overview
    The personal scope article describes the persons who may 
claim the benefits of the proposed treaty. It also includes a 
``saving clause'' provision similar to provisions found in most 
U.S. income tax treaties.
    The proposed treaty generally applies to residents of the 
United States and to residents of Turkey, with specific 
modifications to such scope provided in other articles (e.g., 
Article 24 (Non-Discrimination) and Article 26 (Exchange of 
Information)). This scope is consistent with the scope of other 
U.S. income tax treaties, the U.S. model, and the OECD model. 
For purposes of the proposed treaty, residence is determined 
under Article 4 (Resident).
    The proposed treaty provides that it does not restrict in 
any manner any exclusion, exemption, deduction, credit, or 
other allowance accorded by internal law or by any other 
agreement between the United States and Turkey. Thus, the 
proposed treaty will not apply to increase the tax burden of a 
resident of either the United States or Turkey. According to 
the Treasury Department's Technical Explanation (hereinafter 
referred to as the ``Technical Explanation''), the fact that 
the proposed treaty only applies to a taxpayer's benefit does 
not mean that a taxpayer may select inconsistently among treaty 
and internal law provisions in order to minimize its overall 
tax burden. In this regard, the Technical Explanation sets 
forth the following example. Assume a resident of Turkey 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. 
5
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    \5\  See Rev. Rul. 84-17, 1984-1 C.B. 308.
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            Saving clause
    Like all U.S. income tax treaties, the proposed treaty 
includes a ``saving clause.'' Under this clause, with specific 
exceptions described below, the proposed treaty does not affect 
the taxation by a country of its residents or, in the case of 
the United States, its citizens. By reason of this saving 
clause, unless otherwise specifically provided in the proposed 
treaty, the United States may continue to tax its citizens who 
are residents of Turkey as if the treaty were not in force. For 
purposes of the proposed treaty (and, thus, for purposes of the 
saving clause), the term ``residents,'' which is defined in 
Article 4 (Resident), includes corporations and other entities 
as well as individuals.
    The proposed treaty contains a provision under which the 
saving clause (and therefore the U.S. jurisdiction to tax) 
applies to a former U.S. citizen whose loss of citizenship had 
as one of its principal purposes the avoidance of tax; such 
application is limited to the ten-year period following the 
loss of citizenship. Prior to the enactment of the Health 
Insurance Portability and Accountability Act of 1996, section 
877 of the Code provided special rules for the imposition of 
U.S. income tax on former U.S. citizens for a period of ten 
years following the loss of citizenship; these special tax 
rules applied to a former citizen only if his or her loss of 
U.S. citizenship had as one of its principal purposes the 
avoidance of U.S. income, estate or gift taxes. The Health 
Insurance Portability and Accountability Act of 1996 expanded 
section 877 in several respects. Under these amendments, the 
special income tax rules of section 877 were extended to apply 
also to certain former long-term residents of the United 
States. For purposes of applying the special tax rules to 
former citizens and long-term residents, individuals who meet a 
specified income tax liability threshold or a specified net 
worth threshold generally are considered to have lost 
citizenship or resident status for a principal purpose of U.S. 
tax avoidance. In addition, an expanded foreign tax credit is 
provided with respect to the U.S. tax imposed under these 
rules. The amendments to section 877 generally are applicable 
to individuals whose loss of U.S. citizenship or U.S. resident 
status occurred on or after February 6, 1995. The proposed 
treaty provision reflects the reach of the U.S. tax 
jurisdiction pursuant to section 877 prior to its expansion by 
the Health Insurance Portability and Accountability Act of 
1996. 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 treaty country: the allowance 
of correlative adjustments when the profits of an associated 
enterprise are adjusted by the other country (Article 9, 
paragraph 2); the exemption from residence country tax for 
social security benefits (Article 18, paragraph 2); relief from 
double taxation through the provision of a foreign tax credit 
(Article 23); protection from discriminatory tax treatment 
(Article 24); and benefits under the mutual agreement 
procedures (Article 25). These exceptions to the saving clause 
permit residents of the United States or Turkey and citizens of 
the United States to obtain such benefits of the proposed 
treaty with respect to their country of residence (or 
citizenship).
    In addition, the saving clause does not apply to the 
following benefits conferred by one of the countries upon 
individuals who neither are citizens of that country nor have 
immigrant status in that country. Under this set of exceptions 
to the saving clause, the specified treaty benefits are 
available to, for example, a Turkish citizen who spends enough 
time in the United States to be taxed as a U.S. resident but 
who has not acquired U.S. immigrant status (i.e., does not hold 
a ``green card''). The benefits that are covered under this set 
of exceptions are the exemptions from host country tax for 
certain compensation from government service (Article 19), 
certain income received by students, apprentices or teachers 
(Article 20), and certain income of diplomats and consular 
officers (Article 27).
    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 Turkey 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 Turkey, 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 form of measure.

Article 2. Taxes Covered

    The proposed treaty generally applies to the income taxes 
of the United States and Turkey. However, Article 24 (Non-
Discrimination) is applicable to all taxes imposed at all 
levels of government, including State and local taxes. 
Moreover, Article 26 (Exchange of Information) generally is 
applicable to all national-level taxes, including, for example, 
estate and gift taxes.
    In the case of the United States, the proposed treaty 
applies to the Federal income taxes imposed by the Code, but 
excludes the accumulated earnings tax, the personal holding 
company tax, and social security taxes. The proposed treaty 
also applies to the excise taxes imposed with respect to 
private foundations.
    In the case of Turkey, the proposed treaty applies to the 
income tax (Gelir Vergisi), the corporation tax (Kurumlar 
Vergisi), and the levy imposed on the income and corporation 
taxes.
    The proposed treaty also contains a rule generally found in 
U.S. income tax treaties which provides that the proposed 
treaty applies to any identical or substantially similar taxes 
that may be imposed subsequently in addition to or in place of 
the taxes covered. The proposed treaty obligates the competent 
authority of each country to notify the competent authority of 
the other country of any significant changes in its internal 
tax laws. The Technical Explanation states that this 
requirement relates to changes that are significant to the 
operation of the proposed treaty.

Article 3. General Definitions

    The proposed treaty provides definitions of a number of 
terms for purposes of the proposed treaty. Certain of the 
standard definitions found in most U.S. income tax treaties are 
included in the proposed treaty.
    The term ``Turkey'' means the territory of the Republic of 
Turkey, as well as the continental shelf over which Turkey has, 
in accordance with international law, sovereign rights to 
explore and exploit its natural resources.
    The term ``United States'' means the United States of 
America, but does not include Puerto Rico, the Virgin Islands, 
Guam, or any other U.S. possession or territory. When used in 
the geographic sense, the term ``United States'' means the 
States, the District of Columbia, and the internal waters and 
territorial sea established in accordance with international 
law; it also includes the seas, seabed and subsoil adjacent to 
the territorial sea over which the United States has sovereign 
rights in accordance with international law. The Technical 
Explanation states that the continental shelves of Turkey and 
the United States are included only to the extent that the 
application of the proposed treaty to the continental shelf is 
consistent with international law and is connected with the 
exploration or exploitation of the natural resources of the 
shelf.
    The term ``person'' includes an individual, a company, and 
any other body of persons. According to the Technical 
Explanation, the term is understood to include a partnership, 
estate, or trust.
    A ``company'' under the proposed treaty is any body 
corporate or any entity which is treated as a body corporate 
for tax purposes. The Technical Explanation states that, for 
U.S. tax purposes, the principles of Treas. Reg. section 
301.7701-2 generally are applicable in determining whether an 
entity is taxed as a body corporate.
    A company is considered to have its ``place of 
incorporation'' in the United States if it is organized, 
created, or incorporated under the laws of the United States or 
a political subdivision thereof. A company is considered to 
have its ``place of incorporation'' in Turkey if its legal head 
office is registered in Turkey under the Turkish Code of 
Commerce.
    A person is a ``national'' of Turkey if the person is an 
individual possessing Turkish nationality under the Turkish 
Nationality Code or is a legal person, partnership, or 
association deriving its status as such from Turkish law. A 
person is a ``national'' of the United States if the person is 
an individual who is a U.S. citizen or is a company, 
association, or other entity deriving its status as such from 
the laws of the United States or a political subdivision.
    The terms ``enterprise of a Contracting State'' and 
``enterprise of the other Contracting State'' mean, 
respectively, an enterprise carried on by a resident of a 
Contracting State and an enterprise carried on by a resident of 
the other Contracting State. The proposed treaty does not 
define the term ``enterprise.'' The terms ``a Contracting 
State'' and ``the other Contracting State'' mean the United 
States or Turkey, according to the context in which such terms 
are used.
    The U.S. ``competent authority'' is the Secretary of the 
Treasury or his delegate. The U.S. competent authority function 
has been delegated to the Commissioner of Internal Revenue, who 
has redelegated the authority to the Assistant Commissioner 
(International). On interpretative issues, the latter acts with 
the concurrence of the Associate Chief Counsel (International) 
of the IRS. The Turkish ``competent authority'' is the Minister 
of Finance or his authorized representatives.
    The proposed treaty defines ``international traffic'' as 
any transport by a ship or aircraft operated by an enterprise 
of a treaty country, except when the transport is solely 
between places in the other treaty country. Accordingly, with 
respect to a Turkish enterprise, purely domestic transport 
within the United States does not constitute ``international 
traffic.''
    The proposed treaty also contains the standard provision 
that, unless the context otherwise requires or the competent 
authorities agree to a common meaning, all terms not defined in 
the treaty have the meaning that they have under the tax laws 
of the country that is applying the treaty. The Technical 
Explanation states that where a term is defined both under a 
country's tax law and under a non-tax law, the definition in 
the tax law is to be used in applying the proposed treaty.

Article 4. Resident

    The assignment of a country of residence is important 
because the benefits of the proposed treaty generally are 
available only to a resident of one of the treaty countries as 
that term is defined in the proposed treaty. Furthermore, 
issues arising because of dual residency, including situations 
of double taxation, may be avoided by the assignment of one 
treaty country as the country of residence when under the 
internal laws of the treaty countries a person is a resident of 
both countries.
            Internal taxation rules

United States

    Under U.S. law, the residence of an individual is important 
because a resident alien, like a U.S. citizen, is taxed on his 
or her worldwide income, while a nonresident alien is taxed 
only on certain U.S.-source income and on income that is 
effectively connected with a U.S. trade or business. An 
individual who spends sufficient time in the United States in 
any year or over a three-year period generally is treated as a 
U.S. resident. A permanent resident for immigration purposes 
(i.e., a ``green card'' holder) also is treated as a U.S. 
resident.
    Under U.S. law, a company is taxed on its worldwide income 
if it is a ``domestic corporation.'' A domestic corporation is 
one that is created or organized in the United States or under 
the laws of the United States, a State, or the District of 
Columbia.

Turkey

    Under Turkish law, resident individuals are subject to tax 
on their worldwide income, while nonresident individuals are 
subject to tax only on certain income derived in Turkey. A 
foreign individual generally is considered a resident if the 
individual is present in Turkey for an uninterrupted period of 
more than six months during a calendar year (other than because 
of imprisonment, illness, or assignment for specific, temporary 
projects).
    Under Turkish law, a corporation generally is subject to 
tax on its worldwide income if the corporation's legal head 
office or actual business center is located in Turkey. A 
corporation that is established in Turkey under the Turkish 
Commercial Code is subject to tax on its worldwide income. 
Corporations that are taxable on their worldwide income are 
``unlimited'' taxpayers; other corporations, that are taxable 
only on certain income derived in Turkey, are ``limited'' 
taxpayers.
            Proposed treaty rules
    The proposed treaty specifies rules to determine whether a 
person is a resident of the United States or Turkey for 
purposes of the proposed treaty. The rules generally are 
consistent with the rules of the U.S. model.
    The proposed treaty generally defines ``resident of a 
Contracting State'' to mean any person who, under the laws of 
that country, is liable to tax in that country by reason of the 
person's domicile, residence, place of management, place of 
incorporation, or any other criterion of a similar nature. The 
term ``resident of a Contracting State'' does not include any 
person that is liable to tax in that country only on income 
from sources in that country. According to the Technical 
Explanation, the reference in the proposed treaty to persons 
``liable to tax'' in a country is interpreted as referring to 
those persons subject to the taxation laws of such country; the 
reference therefore includes tax-exempt organizations that are 
subject to the tax laws of a country (even though such 
organizations are exempt from tax). Although citizenship is not 
specifically listed as one of the bases for taxing jurisdiction 
that establishes residence, the Technical Explanation states 
that citizenship is understood to be a ``criterion of a similar 
nature'' within the meaning of the proposed treaty definition. 
The proposed protocol provides, however, that a citizen or 
national of a treaty country may be considered to be a resident 
of a third country for purposes of the proposed treaty. The 
determination of whether a citizen or national is considered a 
resident of the United States or Turkey or a resident of a 
third country is made based on the principles of the treaty 
tie-breaker rules described below.
    The proposed treaty provides that a partnership or similar 
pass-through entity, estate, or trust is considered to be a 
resident of one of the treaty countries only to the extent that 
the income it derives is subject to tax in that country as the 
income of a resident, either in its hands or in the hands of 
its partners, beneficiaries, members, or grantors. The 
Technical Explanation states that the phrase ``similar pass-
through entity'' includes a U.S. limited liability company that 
is classified as a partnership for U.S. tax purposes. Under 
this provision, for example, if the U.S. partners' share of the 
income of a U.S. partnership is only one-half, the proposed 
treaty's limitations on withholding tax rates would apply to 
only one-half of the Turkish source income paid to the 
partnership.
    The Technical Explanation states that it is understood that 
the treaty countries themselves, and political subdivisions 
thereof, are to be treated as residents of such countries for 
purposes of the proposed treaty.
    A set of ``tie-breaker'' rules is provided to determine 
residence in the case of an individual who, under the basic 
residence definition, would be considered to be a resident of 
both countries. Under these rules, an individual is deemed to 
be a resident of the country in which he or she has a permanent 
home available. If the individual has a permanent home in both 
countries, the individual's residence is deemed to be the 
country with which his or her personal and economic relations 
are closer (i.e., his or her ``centre of vital interests''). If 
the country in which the individual has his or her centre of 
vital interests cannot be determined, or if he or she does not 
have a permanent home available in either country, he or she is 
deemed to be a resident of the country in which he or she has 
an habitual abode. If the individual has an habitual abode in 
both countries or in neither country, he or she is deemed to be 
a resident of the country of which he or she is a national. If 
the individual is a national of both countries or neither 
country, the competent authorities of the countries will settle 
the question of residence by mutual agreement.
    A company that would be a resident of both countries under 
the basic definition in the proposed treaty is deemed to be a 
resident of the country in which it has its place of 
incorporation (as defined in Article 3 (General Definitions)). 
In the case of any other person that would be a resident of 
both countries under the basic definition in the proposed 
treaty, the proposed treaty requires the competent authorities 
by mutual agreement to settle the issue of residence and to 
determine the mode of application of the proposed treaty to 
such person.

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 items of income will be taxed as business 
profits.
    In general, under the proposed treaty, a permanent 
establishment is a fixed place of business through which the 
business of an enterprise is wholly or partly carried on. A 
permanent establishment includes a place of management, a 
branch, an office, a factory, a workshop, a mine, an oil or gas 
well, a quarry, or any other place of extraction of natural 
resources. It also includes a building site or a construction, 
assembly, or installation project, if the site, project, or 
activities continue for more than six months. The Technical 
Explanation states that the six-month test applies separately 
to each individual site or project, with a series of contracts 
or projects that are interdependent both commercially and 
geographically treated as a single project. The Technical 
Explanation further states that if the six-month threshold is 
exceeded, the site or project constitutes a permanent 
establishment as of the first day that work in the country 
began. The U.S. and OECD models contain similar rules, but the 
threshold period is twelve months rather than six months.
    The proposed protocol provides that the mere presence of an 
installation or drilling rig or ship used for the exploration 
or exploitation of natural resources will never constitute a 
permanent establishment. If, however, a resident of one country 
carries on drilling activities in the other country for periods 
exceeding 183 days in any continuous twelve-month period or 
performs such activities through a permanent establishment 
other than the installation, rig or ship, that presence or 
performance is treated as analogous to a permanent 
establishment. The six-month period for establishing a 
permanent establishment in connection with a site, project, 
rig, or ship is significantly shorter than the twelve-month 
period provided in the corresponding rule of the U.S. model, 
but is similar to the periods contained in U.S. treaties with 
some developing countries.
    Under the proposed treaty, the following activities are 
deemed not to constitute a permanent establishment: the use of 
facilities solely for storing, displaying, or delivering goods 
or merchandise belonging to the enterprise; the maintenance of 
a stock of goods or merchandise belonging to the enterprise 
solely for storage, display, or delivery or solely for 
processing by another enterprise; the maintenance of a fixed 
place of business solely for the purchase of goods or 
merchandise or for the collection of information for the 
enterprise; and 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 
Technical Explanation gives advertising (other than by an 
advertising company), supplying information, and conducting 
scientific activities as examples of such preparatory and 
auxiliary activities.
    Under the U.S. model, the maintenance of a fixed place of 
business solely for any combination of the above-listed 
activities does not constitute a permanent establishment. Under 
the proposed treaty (as under the OECD Model), a fixed place of 
business used solely for any combination of these activities 
does not constitute a permanent establishment, provided that 
the overall activity of the fixed place of business is of a 
preparatory or auxiliary character. In this regard, the 
Technical Explanation states that it is assumed that a 
combination of preparatory or auxiliary activities generally 
will also be of a character that is preparatory or auxiliary.
    Under the proposed treaty, if a person, other than an 
independent agent, is acting in a treaty country on behalf of 
an enterprise of the other country and has, and habitually 
exercises, the authority to conclude contracts on behalf of 
such enterprise, the enterprise is deemed to have a permanent 
establishment in the first country in respect of any activities 
undertaken for that enterprise. This rule does not apply where 
the contracting authority is limited to the activities listed 
above, such as storage, display, or delivery of merchandise, 
which are excluded from the definition of a permanent 
establishment.
    The proposed treaty contains an additional rule that deems 
an enterprise to have a permanent establishment in a country if 
the agent has no authority to conclude contracts on behalf of 
the enterprise, but the agent habitually maintains in the 
country a stock of goods or merchandise from which the agent 
regularly delivers goods or merchandise on behalf of the 
enterprise. This rule applies only if the agent undertakes 
virtually all the activities connected with the sale of such 
goods (except the conclusion of the contract) and it is proven 
that this structure is established in order to avoid tax in 
such country.
    Under the proposed treaty, no permanent establishment is 
deemed to arise if the agent is a broker, general commission 
agent, or any other agent of independent status, provided that 
the agent is acting in the ordinary course of its business. The 
Technical Explanation states that whether an enterprise and an 
agent are independent is a factual determination; relevant 
factors include the extent to which the agent operates based on 
instructions from the enterprise and which party bears the risk 
associated with the agent's activities on behalf of the 
enterprise.
    The proposed treaty provides that the fact that a company 
that is a resident of one country controls or is controlled by 
a company that is a resident of the other country or that 
engages in business in the other country does not of itself 
cause either company to be a permanent establishment of the 
other. Thus, such relationships would not be relevant to the 
determination of whether a company is a permanent 
establishment.

Article 6. Income from Immovable Property (Real Property)

    This article covers income from real property. The rules 
covering gains from the sale of real property are in Article 13 
(Gains).
    Under the proposed treaty, income derived by a resident of 
one country from immovable (real) property situated in the 
other country may be taxed in the country where the property is 
located. This rule is consistent with the rules in the U.S. and 
OECD models. For this purpose, income from immovable property 
includes income from agriculture or forestry.
    The term ``immovable property'' has the meaning which it 
has under the law of the country in which the property in 
question is situated. The proposed treaty specifies that the 
term in any case includes property accessory to immovable 
property; livestock and equipment used in agriculture and 
forestry; fishing places of every kind; rights to which the 
provisions of general law respecting landed property apply; 
usufruct of immovable property; and rights to variable or fixed 
payments as consideration for the working of, or the right to 
work, mineral deposits, sources, and other natural resources. 
Ships, boats, and aircraft are not considered to be immovable 
property.
    The proposed treaty specifies that the country in which 
immovable property is situated also may tax income derived from 
the direct use, letting, or use in any other form of such 
immovable property. The proposed treaty further provides that 
the rules of this article permitting source-country taxation 
apply to the income from immovable property of an enterprise 
and to income from immovable property used for the performance 
of independent personal services.

Article 7. Business Profits

            Internal taxation rules

United States

    U.S. law distinguishes between the U.S. business income and 
the other U.S. income of a nonresident alien or foreign 
corporation. A nonresident alien or foreign corporation is 
subject to a flat 30-percent rate (or lower treaty rate) of tax 
on certain U.S.-source income if that income is not effectively 
connected with the conduct of a trade or business within the 
United States. The regular individual or corporate rates apply 
to income (from any source) which is effectively connected with 
the conduct of a trade or business within the United States.
    The treatment of income as effectively connected with a 
U.S. trade or business depends upon whether the source of the 
income is U.S. or foreign. In general, U.S.-source periodic 
income (such as interest, dividends, rents, and wages) and 
U.S.-source capital gains are effectively connected with the 
conduct of a trade or business within the United States if the 
asset generating the income is used in (or held for use in) the 
conduct of the trade or business or if the activities of the 
trade or business were a material factor in the realization of 
the income. All other U.S.-source income of a person engaged in 
a trade or business in the United States is treated as 
effectively connected with the conduct of a trade or business 
in the United States (under what is referred to as a ``force of 
attraction'' rule).
    Foreign-source income generally is effectively connected 
income only if the foreign person has an office or other fixed 
place of business in the United States and the income is 
attributable to that place of business. Only three types of 
foreign-source income are considered to be effectively 
connected income: rents and royalties for the use of certain 
intangible property derived from the active conduct of a U.S. 
business; certain dividends and interest either derived in the 
active conduct of a banking, financing or similar business in 
the United States or received by a corporation the principal 
business of which is trading in stocks or securities for its 
own account; and certain sales income attributable to a U.S. 
sales office. Special rules apply for purposes of determining 
the foreign-source income that is effectively connected with a 
U.S. business of an insurance company.
    Any income or gain of a foreign person for any taxable year 
that is attributable to a transaction in another year is 
treated as effectively connected with the conduct of a U.S. 
trade or business if it would have been so treated had it been 
taken into account in that other year (Code sec. 864(c)(6)). In 
addition, if any property ceases to be used or held for use in 
connection with the conduct of a trade or business within the 
United States, the determination of whether any income or gain 
attributable to a sale or exchange of that property occurring 
within ten years after the cessation of business is effectively 
connected with the conduct of a trade or business within the 
United States is made as if the sale or exchange occurred 
immediately before the cessation of business (Code sec. 
864(c)(7)).

Turkey

    Foreign corporations and nonresident individuals generally 
are limited taxpayers in Turkey and are subject to Turkish tax 
only on income derived in Turkey. Business income derived in 
Turkey by a foreign corporation or nonresident individual 
generally is taxed in the same manner as the income of a 
Turkish corporation or resident individual.
            Proposed treaty limitations on internal law

Business profits subject to host country tax

    Under the proposed treaty, business profits of an 
enterprise of one of the countries 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. This is one of the basic 
limitations on a country's right to tax income of a resident of 
the other country. The rule is similar to those contained in 
the U.S. and OECD models.
    Under the proposed protocol, business profits of an 
enterprise of one country may be taxable in the other country 
even though the permanent establishment was not involved in the 
generation of such profits if two conditions are met. First, 
the profits must be derived either from the sale of goods of 
the same or similar kind as those sold through the permanent 
establishment or from other business activities of the same or 
similar kind as those effected through the permanent 
establishment. Second, it must be proved that the sale or 
activities were structured in a manner intended to avoid 
taxation in the country in which the permanent establishment is 
located. Taxation by the source country of this category of 
profits represents a limited force of attraction rule that is 
similar to, but narrower than, the rule in some other U.S. 
treaties. The intent of the provision is to permit the source 
country to tax the income derived from sales or other business 
activities within its borders by the home office of the 
enterprise if such sales or activities are the same as or 
similar to sales or activities conducted there by the permanent 
establishment. Such profits may not be taxed by the source 
country, however, unless it is established that the 
transactions were structured to avoid such tax.
    The taxation of business profits under the proposed treaty 
differs from U.S. internal law rules for taxing business 
profits primarily by requiring more than merely being engaged 
in a trade or business before a country can tax business 
profits and by substituting an ``attributable to'' standard for 
the Code's ``effectively connected'' standard. Under the 
proposed treaty, some level of fixed place of business would 
have to be present and the business profits generally would 
have to be attributable to that fixed place of business (or 
subject to the limited force of attraction rule described 
above).
    The proposed protocol provides that, for purposes of the 
taxation of business profits, income may be attributable to a 
permanent establishment (and therefore may be taxable in the 
country where the permanent establishment was situated) even if 
the payment of such income is deferred until after the 
permanent establishment has ceased to exist. This rule 
incorporates into the proposed treaty the rule of Code section 
864(c)(6) described above.
    The proposed treaty provides that there will be attributed 
to a permanent establishment the business profits which it 
might be expected to make if it were a distinct and independent 
entity engaged in the same or similar activities under the same 
or similar conditions. The Technical Explanation states that 
amounts may be attributed to the permanent establishment 
whether or not they are from sources within the country in 
which the permanent establishment is located. The Technical 
Explanation further states that the permanent establishment is 
to be treated as if it were an enterprise that deals 
independently with all related companies.
    As noted above in connection with Article 5 (Permanent 
Establishment), the proposed protocol provides a special rule 
with respect to the treatment of income from offshore 
exploration. Income from an installation or drilling rig or 
ship used for the exploration or exploitation of natural 
resources is considered to be business profits (or independent 
personal services income). Such income derived by an enterprise 
of one country from activities performed in the other country 
may be taxed by the other country if the enterprise has a 
permanent establishment other than the installation or drilling 
rig or ship itself in the other country through which the 
activities are performed or if the periods during which the 
activities are performed exceed 183 days in any continuous 
twelve-month period.

Treatment of expenses

    In computing taxable business profits, the proposed treaty 
provides that deductions are allowed for expenses, wherever 
incurred, which are incurred for the purposes of the permanent 
establishment. These deductions include executive and general 
administrative expenses incurred for purposes of the permanent 
establishment. Unlike many U.S. treaties, the proposed treaty 
does not specifically provide that deductions will be allowed 
for a reasonable allocation of expenses. However, the Technical 
Explanation states that certain expenses (e.g., interest) may 
be allocated.
    The proposed protocol clarifies that deductions will not be 
allowed for interest, royalties, commissions, and other similar 
payments by the permanent establishment to the head office or 
to other permanent establishments unless such payments are 
reimbursements of actual expenses incurred for purposes of the 
permanent establishment According to the Technical Explanation, 
this rule reflects the premise that because the permanent 
establishment and the head office are parts of a single entity, 
there should be no profit element in such intracompany 
transactions.

Other rules

    Business profits are not attributed to a permanent 
establishment merely by reason of the purchase of goods or 
merchandise by the permanent establishment for the enterprise. 
Thus, where a permanent establishment purchases goods for its 
head office, the business profits attributed to the permanent 
establishment with respect to its other activities are not 
increased by a profit element in its purchasing activities.
    The proposed treaty contains the language of the U.S. model 
and many existing treaties under which the business profits to 
be attributed to the permanent establishment include only the 
profits derived from the assets or activities of the permanent 
establishment. The Technical Explanation states that the 
limited force of attraction rule contained in the proposed 
protocol (described above) takes precedence over this rule.
    Where business profits include items of income that are 
dealt with separately in other articles of the proposed treaty, 
those other articles, and not the business profits article, 
govern the treatment of those items of income (except where 
such other articles specifically provide to the contrary). 
Thus, for example, dividends are taxed under the provisions of 
Article 10 (Dividends), and not as business profits, except as 
specifically provided in Article 10.

Article 8. Shipping and Air Transport

    Article 8 of the proposed treaty covers income from the 
operation or rental of ships, aircraft, and containers in 
international traffic. The rules governing income from the 
disposition of ships, aircraft, and containers are contained in 
Article 13 (Gains).
    The United States generally taxes the U.S.-source income of 
a foreign person from the operation of ships or aircraft to or 
from the United States. An exemption from U.S. tax is provided 
if the income is earned by a corporation that is organized in, 
or an alien individual who is resident in, a foreign country 
that grants an equivalent exemption to U.S. corporations and 
residents. The United States has entered into agreements with a 
number of countries providing such reciprocal exemptions.
    Under the proposed treaty, profits which are derived by an 
enterprise of one country from the operation in international 
traffic of ships or aircraft (``shipping profits'') 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 operated by 
an enterprise of a country, except where the transport is 
solely between places in the other country (Article 3(1)(i) 
(General Definitions)).
    For purposes of the proposed treaty, shipping profits 
subject to the rule described in the foregoing paragraph 
include profits derived from the rental of ships or aircraft if 
such rental profits are incidental to other profits from the 
operation of ships or aircrafts in international traffic. The 
Technical Explanation states that this rule applies to income 
from bareboat leasing of ships and aircraft and that income 
from leasing ships and aircraft on a full basis is considered 
to be income from the operation of ships and aircraft (and thus 
is covered under the general rule).
    Like the U.S. model, the proposed treaty provides that 
profits of an enterprise of a country from the use, 
maintenance, or rental of containers (including trailers, 
barges, and related equipment for the transport of containers) 
used in international traffic is exempt from tax in the other 
country. The Technical Explanation states that charges from the 
delayed return of containers and related equipment are treated 
as profits from the use of such containers and related 
equipment.
    The shipping and air transport provisions of the proposed 
treaty apply to profits from participation in a pool, joint 
business, or international operating agency. This refers to 
various arrangements for international cooperation by 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 proposed treaty 
recognizes the right of each country to make an allocation of 
profits to an enterprise of that country in the case of 
transactions between related enterprises, if conditions are 
made or imposed between the two enterprises in their commercial 
or financial relations which differ from those which would be 
made between independent enterprises. In such a case, a country 
may allocate to such an enterprise the profits which it would 
have accrued but for the conditions so imposed. This treatment 
is consistent with the U.S. model.
    For purposes of the proposed treaty, an enterprise of one 
country is related to an enterprise of the other country if one 
of the enterprises participates directly or indirectly in the 
management, control, or capital of the other enterprise. 
Enterprises are also related if the same persons participate 
directly or indirectly in their management, control, or 
capital.
    Under the proposed treaty, when a redetermination of tax 
liability has been made by one country under the provisions of 
this article, the other country will make an appropriate 
adjustment to the amount of tax paid in that country on the 
redetermined income if it considers an adjustment justified. In 
making such adjustment, due regard is to be given to other 
provisions of the proposed treaty, and the competent 
authorities of the two countries are to consult with each other 
if necessary. The proposed treaty's saving clause retaining 
full taxing jurisdiction in the country of residence or 
citizenship does not apply in the case of such adjustments. 
Accordingly, internal statute of limitations provisions do not 
prevent the allowance of appropriate correlative adjustments.
    According to the Technical Explanation, it is understood 
that this article does not replace the internal law provisions 
that permit this type of adjustment. Adjustments are permitted 
under internal law provisions even if such adjustments are 
different from, or go beyond, the adjustments authorized by 
this article, provided that such adjustments are consistent 
with the general principles of this article permitting 
adjustments to reflect arm's-length terms. The Technical 
Explanation states that this article also permits the tax 
authorities of the countries to address thin capitalization 
issues.

Article 10. Dividends

            Internal taxation rules

United States

    The United States generally imposes a 30-percent tax on the 
gross amount of U.S.-source dividends paid to nonresident alien 
individuals and foreign corporations. The 30-percent tax does 
not apply if the foreign recipient is engaged in a trade or 
business in the United States and the dividends are effectively 
connected with that trade or business. In such a case, the 
foreign recipient is subject to U.S. tax on such dividends on a 
net basis at graduated rates in the same manner that a U.S. 
person would be taxed.
    Under U.S. law, the term dividend generally means any 
distribution of property made by a corporation to its 
shareholders, either from accumulated earnings and profits or 
current earnings and profits. However, liquidating 
distributions generally are treated as payments in exchange for 
stock and thus are not subject to the 30-percent withholding 
tax described above (see discussion of capital gains in 
connection with Article 13 below).
    Dividends paid by a U.S. corporation generally are U.S.-
source income. Also treated as U.S.-source dividends for this 
purpose are portions of certain dividends paid by a foreign 
corporation that conducts a U.S. trade or business. The U.S. 
30-percent withholding tax imposed on the U.S.-source portion 
of the dividends paid by a foreign corporation is referred to 
as the ``second-level'' withholding tax. This second-level 
withholding tax is imposed only if a treaty prevents 
application of the statutory branch profits tax.
    In general, corporations are not entitled under U.S. law to 
a deduction for dividends paid. Thus, the withholding tax on 
dividends theoretically represents imposition of a second level 
of tax on corporate taxable income. Treaty reductions of this 
tax reflect the view that where the United States already 
imposes corporate-level tax on the earnings of a U.S. 
corporation, a 30-percent withholding rate may represent an 
excessive level of source-country taxation. Moreover, the 
reduced rate of tax often applied by treaty to dividends paid 
to direct investors reflects the view that the source-country 
tax on payments of profits to a substantial foreign corporate 
shareholder may properly be reduced further to avoid double 
corporate-level taxation and to facilitate international 
investment.
    A REIT is a corporation, trust, or association that is 
subject to the regular corporate income tax, but that receives 
a deduction for dividends paid to its shareholders if certain 
conditions are met. In order to qualify for the deduction for 
dividends paid, a REIT must distribute most of its income. 
Thus, a REIT is treated, in essence, as a conduit for federal 
income tax purposes. Because a REIT is taxable as a U.S. 
corporation, a distribution of its earnings is treated as a 
dividend rather than income of the same type as the underlying 
earnings. Such distributions are subject to the U.S. 30-percent 
withholding tax when paid to foreign owners.
    A REIT is organized to allow persons to diversify ownership 
in primarily passive real estate investments. As such, the 
principal income of a REIT often is rentals from real estate 
holdings. Like dividends, U.S.-source rental income of foreign 
persons generally is subject to the 30-percent withholding tax 
(unless the recipient makes an election to have such rental 
income taxed in the United States on a net basis at the regular 
graduated rates). Unlike the withholding tax on dividends, 
however, the withholding tax on rental income generally is not 
reduced in U.S. income tax treaties.
    U.S. internal law also generally treats a regulated 
investment company (``RIC'') as both a corporation and a 
conduit for income tax purposes. The purpose of a RIC is to 
allow investors to hold a diversified portfolio of securities. 
Thus, the holder of stock in a RIC may be characterized as a 
portfolio investor in the stock held by the RIC, regardless of 
the proportion of the RIC's stock owned by the dividend 
recipient.
    A foreign corporation engaged in the conduct of a trade or 
business in the United States is subject to a flat 30-percent 
branch profits tax on its ``dividend equivalent amount.'' The 
dividend equivalent amount is the corporation's earnings and 
profits which are attributable to its income that is 
effectively connected with its U.S. trade or business, 
decreased by the amount of such earnings that are reinvested in 
business assets located in the United States (or used to reduce 
liabilities of the U.S. business), and increased by any such 
previously reinvested earnings that are withdrawn from 
investment in the U.S. business. The dividend equivalent amount 
is limited by (among other things) aggregate earnings and 
profits accumulated in taxable years beginning after December 
31, 1986.

Turkey

    Turkey generally imposes a withholding tax on all after-tax 
corporate profits, whether or not the profits are distributed. 
This withholding tax is imposed on the company at a rate of 10 
percent with respect to public companies and at a rate of 20 
percent with respect to all other companies. In addition, 
Turkey levies a 10-percent surtax on such withholding tax. An 
entity that operates through a branch office in Turkey is 
subject to Turkish tax with respect to the income derived in 
Turkey. Such income is subject to corporation tax in the same 
manner and at the same rate as the income of a Turkish 
corporation. The after-tax profits of a branch also are subject 
to the withholding tax and the surtax described above.
            Proposed treaty limitations on internal law
    Under the proposed treaty, dividends paid by a resident of 
a treaty country to a resident of the other country may be 
taxed in such other country. Dividends paid by a resident of a 
treaty country to a resident of the other country may also be 
taxed by the country in which the payor is resident, but the 
rate of such tax is limited. Under the proposed treaty, source-
country taxation (i.e., taxation by the country in which the 
payor is resident) generally is limited to 15 percent of the 
gross amount of the dividend if the beneficial owner of the 
dividend is a company which owns at least 10 percent of the 
voting shares of the payor company. The source-country dividend 
withholding tax generally is limited to 20 percent of the gross 
amount of the dividends paid to residents of the other country 
in all other cases. The rates of source-country dividend 
withholding tax permitted under the proposed treaty are higher 
than those provided for in the U.S. model, the OECD model and 
most other U.S. income tax treaties.
    As noted above, Turkey does not presently impose a 
traditional shareholder-level withholding tax on dividends paid 
to nonresident individuals and foreign corporations. However, 
Turkey imposes a withholding tax, together with a surtax, on 
all after-tax profits of a corporation, whether or not those 
profits are distributed as a dividend. The Technical 
Explanation states that such withholding tax will be subject to 
the rules limiting the rate of tax on dividends provided for in 
the proposed treaty.
    The proposed treaty provides that the 20-percent maximum 
rate applies to dividends paid by a U.S. RIC or by a Turkish 
Securities Investment Corporation or Securities Investment 
Fund, regardless of the dividend recipient's percentage 
ownership in such entity. The proposed treaty provides that the 
20-percent maximum tax rate applies to dividends paid by a U.S. 
REIT or by a Turkish Real Estate Investment Corporation or Real 
Estate Investment Fund to an individual beneficially owning 
less than 10 percent of the payor entity. There is no 
limitation in the proposed treaty on the tax that may be 
imposed by the source country on dividends paid by a U.S. REIT 
or by a Turkish Real Estate Investment Corporation or Real 
Estate Investment Fund, if the beneficial owner of the dividend 
is either an individual holding a 10-percent or greater 
interest in the payor entity or is not an individual. Thus, a 
dividend from a U.S. REIT to such persons is taxable at the 30-
percent U.S. statutory rate.
    The proposed treaty provides a definition of ``dividends'' 
that is broader than the definition in the U.S. model, the OECD 
model and some other recent U.S. treaties. The proposed treaty 
generally defines ``dividends'' as income from shares, 
``jouissance'' shares or ``jouissance'' rights, founders' 
shares, or other rights which participate in profits and which 
are not debt claims. The term also includes income from other 
corporate rights if such income is subjected to the same tax 
treatment by the country in which the distributing corporation 
is resident as income from shares. The proposed treaty also 
provides that the term ``dividends'' includes income from 
arrangements, including debt obligations, that carry the right 
to participate in (or are determined by reference to) profits, 
to the extent such income is so characterized under the laws of 
the country in which the income arises. The proposed protocol 
further provides that it is understood that the term 
``dividends'' includes distributions from Turkish Securities 
Investment Funds and Real Estate Investment Funds.
    The proposed treaty permits the imposition of a branch 
profits tax, but limits the rate of such tax to 15 percent. In 
the case of Turkey, source-country tax may be imposed on the 
profits that are attributable to a permanent establishment in 
Turkey and that remain after payment of the Turkish corporate 
tax pursuant to the provisions of Article 7 (Business Profits). 
In the case of the United States, the branch profits tax may be 
imposed on a Turkish corporation that either has a permanent 
establishment in the United States or is subject to net-basis 
U.S. tax on income from real property or gains from the 
disposition of real property interests. Such tax may be imposed 
only on the portion of the business profits attributable to 
such permanent establishment, or the portion of such real 
property income or gains, that represents the ``dividend 
equivalent amount.'' The Technical Explanation states that the 
term ``dividend equivalent amount'' was understood to refer to 
Code section 884(b) (as it may be amended).
    The proposed treaty's reduced rates of tax on dividends do 
not apply if the dividend recipient carries on business through 
a permanent establishment in the source country and the 
dividends are attributable to the permanent establishment. 
Dividends attributable to a permanent establishment are taxed 
as business profits (Article 7). The proposed treaty's reduced 
rates of tax on dividends also do not apply if the dividend 
recipient is a Turkish resident who performs independent 
personal services in the United States from a fixed base 
located in the United States and such dividends are 
attributable to the fixed base. In such a case, the dividends 
attributable to the fixed base are taxed as income from the 
performance of independent personal services (Article 14). 
Under the proposed protocol, these rules also apply if the 
permanent establishment or fixed base no longer exists when the 
dividends are paid but such dividends are attributable to the 
former permanent establishment or fixed base.
    The proposed treaty contains a general limitation on the 
taxation by a treaty country of dividends paid to a resident of 
the other country by a corporation that is not a resident of 
the first country (a so-called ``second-level withholding 
tax''). Under this provision, a treaty country may not impose 
any tax on dividends paid by a corporation that is resident in 
the other country except where the dividends are paid to a 
resident of the first country, or insofar as the holding in 
respect of which the dividends are paid is effectively 
connected with a permanent establishment or fixed base of the 
recipient in the first country.

Article 11. Interest

            Internal taxation rules

United States

    Subject to several exceptions (such as those for portfolio 
interest, bank deposit interest, and short-term original issue 
discount), the United States imposes a 30-percent withholding 
tax on U.S.-source interest paid to foreign persons under the 
same rules that apply to dividends. U.S.-source interest, for 
purposes of the 30-percent tax, generally is interest on the 
debt obligations of a U.S. person, other than a U.S. person 
that meets specified foreign business requirements. Also 
subject to the 30-percent tax is interest paid by the U.S. 
trade or business of a foreign corporation. A foreign 
corporation is subject to a branch-level excess interest tax 
with respect to certain ``excess interest'' of a U.S. trade or 
business of such corporation; under this rule, an amount equal 
to the excess of the interest deduction allowed with respect to 
the U.S. business over the interest paid by such business is 
treated as if paid by a U.S. corporation to a foreign parent 
and therefore is subject to the 30-percent withholding tax.
    Portfolio interest generally is defined as any U.S.-source 
interest that is not effectively connected with the conduct of 
a trade or business if such interest (1) is paid on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto and (2) is not received by a 10-
percent owner of the issuer of the obligation, taking into 
account shares owned by attribution. However, the portfolio 
interest exemption does not apply to certain contingent 
interest income.
    If an investor holds an interest in a fixed pool of real 
estate mortgages that is a real estate mortgage interest 
conduit (``REMIC''), the REMIC generally is treated for U.S. 
tax purposes as a pass-through entity and the investor is 
subject to U.S. tax on a portion of the REMIC's income (which, 
generally is interest income). If the investor holds a so-
called ``residual interest'' in the REMIC, the Code provides 
that a portion of the net income of the REMIC that is taxed in 
the hands of the investor--referred to as the investor's 
``excess inclusion''--may not be offset by any net operating 
losses of the investor, must be treated as unrelated business 
income if the investor is an organization subject to the 
unrelated business income tax, and is not eligible for any 
reduction in the 30-percent rate of withholding tax (by treaty 
or otherwise) that would apply if the investor were otherwise 
eligible for such a rate reduction.

Turkey

    Turkey generally imposes a withholding tax on Turkish-
source interest paid to nonresidents of Turkey at a rate of 5 
or 10 percent. Turkey also levies a 10-percent surtax on such 
withholding tax.
            Proposed treaty limitations on internal law
    The proposed treaty provides that interest arising in one 
of the countries and paid to a resident of the other country 
generally may be taxed by both countries. This is contrary to 
the position of the U.S. model which provides for an exemption 
from source-country tax for interest earned by a resident of 
the other country.
    The proposed treaty limits the rate of source-country tax 
that may be imposed on interest income. Under the proposed 
treaty, if the beneficial owner of interest is a resident of 
the other country, the source-country tax on such interest 
generally may not exceed 15 percent of the gross amount of such 
interest. This rate is higher than the rate permitted under 
most other U.S. income tax treaties. In the case of interest 
derived from any type of loan granted by a financial 
institution such as a bank, savings institution, or insurance 
company, the rate of source-country tax may not exceed 10 
percent of the gross amount of such interest.
    The proposed treaty provides for a complete exemption from 
source-country withholding tax in the case of certain 
categories of interest earned by residents of the other 
country. Interest arising in the United States and paid to the 
Government of Turkey or the Central Bank of Turkey (Turkiye 
Cumhuriyet Merkez Bankasi) is exempt from U.S. tax. Similarly, 
interest arising in Turkey and paid to the Government of the 
United States or any Federal Reserve Bank is exempt from 
Turkish tax. Moreover, interest arising in either country in 
connection with a debt obligation that is guaranteed or insured 
by the government of the other country is exempt from source-
country tax. The proposed treaty provides that the competent 
authorities will by mutual agreement determine the scope of 
this third exemption rule. The Technical Explanation states 
that it is understood that this third exemption refers to loans 
guaranteed or insured by U.S. institutions such as the Export-
Import Bank and the Overseas Private Investment Corporation.
    The proposed treaty defines the term ``interest'' as income 
from debt claims of every kind, whether or not secured by a 
mortgage and whether or not carrying a right to participate in 
the debtor's profits. In particular, it includes income from 
government securities and from bonds or debentures, including 
premiums or prizes attaching to such securities, bonds, or 
debentures. The proposed treaty includes in the definition of 
interest any other income that is treated as income from money 
lent by the domestic law of the country in which the income 
arises. The proposed treaty provides that the term ``interest'' 
does not include amounts treated as dividends under Article 10 
(Dividends).
    The proposed treaty does not exclude from the definition of 
interest penalty charges for late payments. The Technical 
Explanation states that such payments are regarded as interest 
under Turkish law and will be taxable in Turkey (subject to the 
limitations of this article).
    In the case of the United States, the term ``interest'' 
includes the excess of (1) the amount of interest borne by a 
permanent establishment, fixed base, or trade or business 
subject to tax on a net basis with respect to real property 
income or gains, over (2) the interest paid by that permanent 
establishment, fixed base or trade or business in the United 
States. This rule allows the United States to impose its 
branch-level excess interest tax; however, such tax may be 
imposed only at the treaty rate applicable to interest 
payments.
    The proposed treaty's reductions in source-country tax on 
interest do not apply if the beneficial owner carries on 
business in the source country through a permanent 
establishment located in that country and the interest is 
attributable to that permanent establishment. In such an event, 
the interest is taxed as business profits (Article 7). The 
proposed treaty's reduced rates of tax on interest also do not 
apply if the interest recipient is a Turkish resident who 
performs independent personal services in the United States 
from a fixed base located in the United States and such 
interest is attributable to the fixed base. In such a case, the 
interest attributable to the fixed base is taxed as income from 
the performance of independent personal services (Article 14). 
Under the proposed protocol, these rules also apply if the 
permanent establishment or fixed base no longer exists when the 
interest is paid but such interest is attributable to the 
former permanent establishment or fixed base.
    The proposed treaty addresses the issue of non-arm's-length 
interest charges between related parties (or parties otherwise 
having a special relationship) by providing that the amount of 
interest for purposes of applying this article is the amount of 
interest that would have been agreed upon by the payor and the 
beneficial owner in the absence of the special relationship. 
Any amount of interest paid in excess of such amount is taxable 
according to the laws of each country, taking into account the 
other provisions of the proposed treaty. For example, excess 
interest paid by a subsidiary corporation to its parent 
corporation may be treated as a dividend under local law and 
thus be subject to the provisions of Article 10 (Dividends).
    The proposed treaty provides that the reductions in and 
exemption from source-country tax do not apply to excess 
inclusions with respect to a U.S. REMIC. Such income may be 
taxed in accordance with U.S. internal law. The proposed treaty 
also provides that such reductions and exemption do not apply 
to contingent interest of a type that does not qualify as 
portfolio interest under U.S. law and to equivalent amounts 
under Turkish law. Such contingent interest is taxed under 
Article 10 (Dividends) as if it were a dividend. The proposed 
protocol provides that it is understood that the term 
``contingent interest'' will be defined in accordance with 
sections 871(h)(4) and 881(c)(4) of the Code when such interest 
arises in the United States.
    The proposed treaty provides that interest is treated as 
arising in a country if the payor is that country, including 
its political subdivisions and local authorities, or a resident 
of that country. 6 If, however, the interest expense 
is borne by a permanent establishment or a fixed base or a 
trade or business subject to net-basis tax on real property 
income or gains in a treaty country, the interest would have as 
its source the country in which the permanent establishment, 
fixed base, or trade or business is located, regardless of the 
residence of the payor. Thus, for example, if a French resident 
has a permanent establishment in Turkey and that French 
resident incurs indebtedness to a U.S. person, the interest on 
which is borne by the Turkish permanent establishment, the 
interest would be treated as having its source in Turkey.
---------------------------------------------------------------------------
    \6\  This is consistent with the source rules of U.S. law, which 
provide as a general rule that interest income has as its source the 
country in which the payor is resident.
---------------------------------------------------------------------------

Article 12. Royalties

            Internal taxation rules

United States

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

Turkey

    Turkey generally imposes a withholding tax of 25 percent on 
royalties derived by nonresidents. Turkey also levies a 10-
percent surtax on such withholding tax.
            Proposed treaty limitations on internal law
    The proposed treaty provides that royalties arising in a 
treaty country paid to a resident of the other country may be 
taxed by that other country. In addition, the proposed treaty 
allows the country where the royalties arise (the ``source 
country'') to tax such royalties. However, if the beneficial 
owner of the royalties is a resident of the other country, the 
source-country tax generally may not exceed 10 percent of the 
gross royalties. This 10-percent rate is higher than the rate 
permitted under most U.S. treaties and the U.S. and OECD 
models. The U.S. and OECD models generally exempt royalties 
from source-country taxation.
    For purposes of this 10-percent limitation, the term 
``royalties'' means payment of any kind received as 
consideration for the use of, the right to use, or the sale 
(which is contingent on the productivity, use, or disposition) 
of any copyright of literary, artistic, or scientific work, 
patent, trademark, design or model, plan, secret formula or 
process. The term also includes consideration for information 
concerning industrial, commercial or scientific experience. In 
addition, the term includes royalties in respect of motion 
pictures and works on film, tape or other means of reproduction 
for use in connection with radio or television broadcasting. 
According to the Technical Explanation, it is understood that 
whether payments with respect to computer software are treated 
as royalties (or as business profits) will depend on the facts 
and circumstances of the particular transaction. The Technical 
Explanation also states that it is understood that payments 
with respect to transfers of ``shrink wrap'' computer software 
will be treated as business profits.
    The proposed treaty further provides that the source-
country tax on certain amounts treated as royalties may not 
exceed 5 percent of the gross royalties. This 5-percent 
limitation applies to payments of any kind in consideration for 
the use, or the right to use, industrial, commercial, or 
scientific equipment.
    These reduced rates apply only if the royalty is 
beneficially owned by a resident of the other country; they do 
not apply if the recipient of the royalty is a nominee for a 
nonresident.
    In addition, the reduced rates do not apply where the 
recipient is an enterprise that carries on business through a 
permanent establishment in the source country, and the 
royalties are attributable to the permanent establishment. In 
that event, the royalties are taxed as business profits 
(Article 7). The proposed treaty's reduced rates of tax on 
royalties also do not apply if the recipient is a Turkish 
resident who performs independent personal services in the 
United States from a fixed base located in the United States 
and such royalties are attributable to the fixed base. In such 
a case, the royalties attributable to the fixed base are taxed 
as income from the performance of independent personal services 
(Article 14). Under the proposed protocol, these rules also 
apply if the permanent establishment or fixed base no longer 
exists when the royalties are paid but such royalties are 
attributable to the former permanent establishment or fixed 
base.
    The proposed treaty addresses the issue of non-arm's-length 
royalties between related parties (or parties otherwise having 
a special relationship) by providing that the amount of 
royalties for purposes of applying this article is the amount 
that would have been agreed upon by the payor and the 
beneficial owner in the absence of the special relationship, 
Any amount of royalties paid in excess of such amount is 
taxable according to the laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess royalties paid by a subsidiary corporation to 
its parent corporation may be treated as a dividend under local 
law and thus be subject to the provisions of Article 10 
(Dividends).
    The proposed treaty provides source rules for royalties 
which differ, in part, from those provided under U.S. internal 
law. Royalties are deemed to arise within a country if the 
payor is that country, including its political subdivisions and 
local authorities, or a resident of that country. If, however, 
the royalty expense is borne by a permanent establishment (or 
fixed base) that the payor has in Turkey or the United States, 
the royalty has as its source the country in which the 
permanent establishment (or fixed base) is located, regardless 
of the residence of the payor. Thus, for example, if a French 
resident has a permanent establishment in Turkey and that 
French resident pays a royalty to a U.S. person which is 
attributable to the Turkish permanent establishment, then the 
royalty would be treated as having its source in Turkey. In 
addition, the proposed treaty provides that where the preceding 
rules do not operate to deem royalties as arising in either the 
United States or Turkey, and the royalties relate to the use 
of, or the right to use, a right or property in one of those 
countries, the royalties are deemed to arise in that country.

Article 13. Gains

            Internal taxation rules

United States

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

Turkey

    Under Turkish law, gains from the sale of a capital asset 
by a foreign corporation or a nonresident individual may be 
subject to Turkish tax. Gains of a foreign corporation 
constitute business income that are taxed in the same manner as 
other business income. Certain exemptions from the tax on gains 
that are available to Turkish corporations and resident 
individuals are not applicable to foreign corporations and 
nonresident individuals.
            Proposed treaty limitations on internal law
    The proposed treaty specifies rules governing when a 
country may tax gains from the alienation of property by a 
resident of the other country. The rules generally are 
consistent with those contained in the U.S. model.
    Under the proposed treaty, gains derived by a resident of 
one treaty country from the alienation of real property 
situated in the other country may be taxed in the country where 
the property is situated. In addition, gains derived by a 
resident of one country from the alienation of an interest in a 
partnership, trust, or estate, to the extent attributable to 
real property situated in the other country, may be taxed in 
the country where the property is situated. For the purposes of 
this article, real property in the other country includes (1) 
real property as defined in Article 6 (Income for Immovable 
Property (Real Property)) situated in the other country, (2) an 
interest in a partnership, trust, or estate, to the extent that 
its assets consist of real property situated in that other 
country, and (3) a U.S. real property interest or an equivalent 
interest in Turkish real estate.
    Gains from the alienation of movable property that forms a 
part of the business property of a permanent establishment 
which an enterprise of one country has in the other country, 
gains from the alienation of movable property pertaining to a 
fixed base which is available to a resident of one country in 
the other country for the purpose of performing independent 
personal services, and gains from the alienation of such a 
permanent establishment (alone or with the whole enterprise) or 
such a fixed base, may be taxed in that other country. Under 
the proposed protocol, this rule also applies if the permanent 
establishment or fixed base no longer exists when the gains are 
recognized but such gains relate to the former permanent 
establishment or fixed base.
    Gains from the alienation of ships, aircraft, or containers 
operated in international traffic, (or movable property 
pertaining to the operation of ships, aircraft, or containers) 
are taxable only in the country in which the person disposing 
of such property is resident.
    Gains from the alienation of any other property is taxable 
under the proposed treaty only in the country where the person 
disposing of the property is resident. However, the proposed 
treaty provides an exception to this general rule. Under this 
exception, a treaty country, in accordance with its internal 
law, may tax gains derived by a resident of the other country 
from the alienation of shares or bonds issued by a company that 
is resident in the first country if three conditions are met. 
First, the shares or bonds must not be listed on a stock 
exchange in the first country. Second, the shares or bonds must 
be alienated to a resident of the first country. Third, the 
person who is alienating such shares or bonds must have held 
them for one year or less. This exception was included at the 
request of Turkey; the United States does not impose U.S. tax 
on gains of foreign persons under such circumstances.

Article 14. Independent Personal Services

            Internal taxation rules

United States

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

Turkey

    Nonresident individuals generally are subject to Turkish 
withholding tax at a rate of 10 or 20 percent on Turkish source 
income with respect to the performance of professional 
services. Turkey also levies a 10 percent surtax on such 
withholding tax.
            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 performed in one country by a resident of the other 
country is exempt from tax in the country where the services 
are performed (the source country) unless the individual 
performing the services crosses either of two thresholds in the 
source country. The individual may be taxed in the source 
country if he or she has a fixed base regularly available to 
him or her in that country for the purpose of performing the 
services. 7 In that case, the source country is 
permitted to tax only that portion of the individual's income 
which is attributable to the fixed base. In addition, if the 
individual is present in the source country for the purpose of 
performing the services for a period or periods exceeding 183 
days within a twelve-month period, the source country is 
permitted to tax the income derived from the performance of 
services in that country during that period. This latter rule 
represents a departure from the U.S. model, which would permit 
the source country to tax the income from independent personal 
services of a resident of the other country only if the income 
is attributable to a fixed base regularly available to the 
individual in the source country for the purpose of performing 
the activities.
---------------------------------------------------------------------------
    \7\  According to the Technical Explanation, it is understood that 
the concept of a fixed base is analogous to the concept of a permanent 
establishment.
---------------------------------------------------------------------------
    The Technical Explanation states that it is understood that 
the rules of Article 7 (Business Profits) for attributing 
income and expenses to a permanent establishment are relevant 
for attributing income to a fixed base; in particular, such 
income must be taxed on a net basis.
    The proposed treaty also provides that income derived by an 
enterprise of one country in respect of professional services 
or other activities of a similar character performed in the 
other country may be taxed in the source country if the 
enterprise has a permanent establishment in the source country 
through which such services are performed or the periods during 
which such services are performed exceed 183 days in any 
twelve-month period. In such cases, the source country is 
permitted to tax only the income that is attributable to the 
permanent establishment or to the services performed in the 
source country, as the case may be. The proposed treaty 
provides that Turkey may levy a withholding tax on such income. 
However, the proposed treaty further provides that the 
enterprise may elect to be taxed on such income on a net basis, 
in accordance with the provisions of Article 7 (Business 
Profits).

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 by the country of residence 
if three requirements are met: (1) the individual must be 
present in the source country for not more than 183 days in any 
twelve-month period; (2) his or her employer must not be a 
resident of the source country; and (3) the compensation must 
not be borne by a permanent establishment or fixed base of the 
employer in the source country. These limitations on source-
country taxation are similar to the rules of the U.S. model and 
the OECD model.
    The proposed treaty contains a special rule that permits 
remuneration derived by a resident of one country in respect of 
employment as a member of the crew of a ship or aircraft 
operated in international traffic by an enterprise of the other 
country to be taxed in that other country. A similar rule is 
included in the OECD model. U.S. internal law does not impose 
tax on such income of a nonresident alien, even if such person 
is employed by a U.S. entity.
    This article is subject to the provisions of the separate 
articles covering directors' fees (Article 16), pensions and 
annuities (Article 18), government service income (Article 19), 
and income of students and teachers (Article 20).

Article 16. Directors' Fees

    Under the proposed treaty, directors' fees and other 
similar payments derived by a resident of one country for 
services rendered in the other country as a member of the board 
of directors of a company which is a resident of that other 
country is taxable in that other country. Under the proposed 
treaty, as under the U.S. model, the country where the director 
resides continues to have sole taxing jurisdiction over 
remuneration derived from services performed outside the other 
country.

Article 17. Artistes and Athletes

    Like the U.S. and OECD models, the proposed treaty contains 
a separate set of rules that apply to the taxation of income 
earned by entertainers (such as theater, motion picture, radio, 
or television ``artistes'' or musicians) and athletes. These 
rules apply notwithstanding the other provisions dealing with 
the taxation of income from personal services (Articles 14 and 
15) and are intended, in part, to prevent entertainers and 
athletes from using the treaty to avoid paying any tax on their 
income earned in one of the countries.
    Under the proposed treaty, income derived by an entertainer 
or athlete who is a resident of one country from his or her 
personal activities as such in the other country may be taxed 
in the other country if the amount of the gross receipts 
derived by him or her from such activities exceeds $3,000 or 
its Turkish currency equivalent. The Technical Explanation 
states that the $3,000 threshold does not include reimbursed 
expenses. Under this rule, if a Turkish entertainer or athlete 
maintains no fixed base in the United States and performs (as 
an independent contractor) for one day of a taxable year in the 
United States for total compensation of $2,000, the United 
States could not tax that income. If, however, that 
entertainer's or athlete's total compensation were $4,000, the 
full amount would be subject to U.S. tax.
    The proposed treaty provides that where income in respect 
of activities exercised by an entertainer or athlete in his or 
her capacity as such accrues not to the entertainer or athlete 
but to another person, that income is taxable by the country in 
which the activities are exercised unless it is established 
that neither the entertainer or athlete nor persons related to 
him or her participated directly or indirectly in the profits 
of that other person in any manner, including the receipt of 
deferred remuneration, bonuses, fees, dividends, partnership 
distributions, or other distributions. (This provision applies 
notwithstanding the business profits and independent personal 
service articles (Articles 7 and 14).) This provision prevents 
highly-paid entertainers and athletes from avoiding tax in the 
country in which they perform by, for example, routing the 
compensation for their services through a third entity such as 
a personal holding company or a trust located in a country that 
would not tax the income.
    The proposed treaty provides that these rules do not apply 
to income derived from activities performed in a country by 
entertainers or athletes if such activities are substantially 
supported by a non-profit organization of the other country or 
by public funds of the other country or a political subdivision 
or a local authority thereof.

Article 18. Pensions and Annuities

    Under the proposed treaty, pensions and other similar 
remuneration paid to a resident of either country in 
consideration of past employment, whether paid periodically or 
in a lump sum, is subject to tax only in the recipient's 
country of residence. In contrast, the proposed treaty provides 
that payments made by one of the countries under the provisions 
of the social security or similar legislation of the country to 
a resident of the other country or to a U.S. citizen are 
taxable by the source country, but not by the country of 
residence. The Technical Explanation states that the term 
``similar legislation'' is intended to include U.S. tier 1 
Railroad Retirement benefits. Consistent with the U.S. model, 
this rule with respect to social security payments is an 
exception to the proposed treaty's saving clause. These rules 
are subject to the provisions of Article 19 (Government 
Service) with respect to pensions.
    The proposed treaty also provides that annuities are taxed 
only in the country of residence of the individual who 
beneficially owns and derives them. The term ``annuities'' is 
defined for purposes of this provision as a stated sum paid 
periodically at stated times during a specified number of 
years, under an obligation to make the payments in return for 
adequate and full consideration (other than services rendered).

Article 19. Government Service

    Under the proposed treaty, remuneration, other than a 
pension, paid by one of the countries (or a political 
subdivision or local authority thereof) to an individual in 
respect of services rendered to that country (or subdivision or 
authority) generally is taxable only by that country. Such 
remuneration is taxable only in the other country, however, if 
the services are rendered in that other country by an 
individual who is a resident of that country and who (1) is 
also a national of that country or (2) did not become a 
resident of that country solely for the purpose of rendering 
the services. This treatment is similar to the rules under the 
U.S. and OECD models.
    The proposed treaty further provides that any pension paid 
by, or out of funds created by, one of the countries (or a 
political subdivision or local authority thereof) to an 
individual in respect of services rendered to that country (or 
subdivision or authority) is taxable only by that country. Such 
a pension is taxable only by the other country, however, if the 
individual is a national and resident of that other country. 
This treatment is similar to the rules under the U.S. and OECD 
models.
    The provisions described in the foregoing paragraphs are 
exceptions to the proposed treaty's saving clause for 
individuals who are neither citizens nor permanent residents of 
the country where the services are performed. Thus, for 
example, payments by the government of Turkey to its employees 
in the United States are exempt from U.S. tax if the employees 
are not U.S. citizens or green card holders and were not 
residents of the United States at the time they became employed 
by the Turkish government.
    The proposed treaty provides that if a country or one of 
its political subdivisions or local authorities is carrying on 
business (as opposed to functions of a governmental nature), 
the provisions of Articles 15 (Dependent Personal Services), 16 
(Directors' Fees), and 18 (Pensions and Annuities) apply to 
remuneration and pensions paid for services rendered in 
connection with the business.

Article 20. Students, Apprentices, and Teachers

    Under the proposed treaty, a student, apprentice, or 
business trainee who is, or was immediately before visiting the 
host country, a resident of the other country, and who is 
present in the host country for the purpose of his or her full-
time education or training, 8 is not taxable in the 
host country on payments received for the purpose of education 
or training, provided the payments arise outside of the host 
country. The U.S. and OECD models also provide for some host-
country exemptions for students and trainees. The U.S. model 
differs from the proposed treaty and the OECD model by 
providing a time limit for such exemption.
---------------------------------------------------------------------------
    \8\  According to the Technical Explanation, use of the word 
``full-time'' in the proposed treaty is not intended to exclude 
students or trainees who, in accordance with their visas, are also 
employed in the host country. Such person will still be entitled to 
exemption from host country tax so long as he or she participates in a 
full-time program of study or training.
---------------------------------------------------------------------------
    Under the proposed treaty, a teacher or instructor who is, 
or was immediately before visiting the host country, a resident 
of the other country and who is present in the host country for 
the purpose of teaching or engaging in scientific research is 
not taxable in the host country on his or her remuneration from 
personal services for teaching or research, provided such 
remuneration arises outside the host country. However, this 
rule applies only if the individual is present in the host 
country for a period or periods not exceeding two years.
    This article of the proposed treaty is an exception from 
the saving clause in the case of persons who are neither 
citizens nor lawful permanent residents of the host country.

Article 21. 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 Turkey. As a general rule, items of 
income not otherwise dealt with in the proposed treaty which 
are derived by residents of one of the countries are taxable 
only in the country of residence. This rule is similar to the 
rules in the U.S. and OECD models.
    This rule, for example, gives the United States the sole 
right under the proposed treaty to tax income derived from 
sources in a third country and paid to a U.S. resident. This 
article is subject to the saving clause, so U.S. citizens who 
are residents of Turkey will continue to be taxable by the 
United States on their third-country income.
    The general rule just stated does not apply to income 
(other than income from real property as defined in Article 6) 
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 performs services in the other 
country from 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. Under the proposed protocol, such exception also applies 
where the income is received after the permanent establishment 
or fixed base is no longer in existence, but the income is 
attributable to the former permanent establishment or fixed 
base.

Article 22. Limitation on Benefits

            In general
    The proposed treaty contains a provision generally intended 
to limit the indirect use of the proposed treaty by persons who 
are not entitled to its benefits by reason of residence in the 
United States or Turkey.
    The proposed treaty is intended to limit double taxation 
caused by the interaction of the tax systems of the United 
States and Turkey as they apply to residents of the two 
countries. At times, however, residents of third countries 
attempt to use a treaty. This use is known as ``treaty 
shopping,'' which refers to the situation where a person who is 
not a resident of either treaty country seeks certain benefits 
under the income tax treaty between the two countries. Under 
certain circumstances, and without appropriate safeguards, the 
third-country resident may be able to secure these benefits 
indirectly by establishing a corporation or other entity in one 
of the treaty countries, which entity, as a resident of that 
country, is entitled to the benefits of the treaty. 
Additionally, it may be possible for the third-country resident 
to reduce the income base of the treaty country resident by 
having the latter pay out interest, royalties, or other amounts 
under favorable conditions either through relaxed tax 
provisions in the distributing country or by passing the funds 
through other treaty countries until the funds can be 
repatriated under favorable terms.
    The proposed anti-treaty-shopping article provides that a 
person other than an individual that is a resident of either 
Turkey or the United States and that derives income from the 
other treaty country is not entitled to the benefits of the 
treaty unless one of the following requirements is satisfied:

  (1) the resident is one of the treaty countries or a 
            political subdivision or local authority thereof;
  (2) the income derived by the resident from the other country 
            is derived by a not-for-profit organization that 
            meets specified conditions;
  (3) the resident is a company that meets one of two public 
            company tests;
  (4) the resident meets an ownership and base erosion test; or
  (5) the resident meets an active business test.

In addition, a person that does not satisfy any of the above 
requirements may be granted the benefits of the proposed treaty 
if the competent authority of the country in which the income 
in question arises so determines.
            Tax-exempt entities
    An entity is entitled to benefits under the proposed treaty 
if it is a not-for-profit organization that, by virtue of that 
status, generally is exempt from income taxation in its treaty 
country of residence, provided that more than half of its 
annual support is expended for the benefit of ``qualified 
persons'' or is derived from ``qualified persons.'' For this 
purpose, a ``qualified person'' is a citizen of the United 
States or a person (including an individual) that qualifies for 
the benefits of the proposed treaty, but not by reason of the 
active business test. The U.S. model does not contain a similar 
support test.
            Public company tests
    Under the public company tests, a company that is a 
resident of Turkey or the United States and that has 
substantial and regular trading in its principal class of 
shares on a recognized stock exchange is entitled to the 
benefits of the treaty regardless of where its actual owners 
reside or the amount or destination of payments it makes. 
Similarly, treaty benefits are available to a company that is 
wholly owned (directly or indirectly) by a company that 
satisfies the public company test just described, provided that 
each company in the chain of ownership used to satisfy the 
control requirements is a resident of Turkey or the United 
States. These rules are similar, but not identical, to the 
corresponding rules in the U.S. model.
    The term ``recognized stock exchange'' means the NASDAQ 
System owned by the National Association of Securities Dealers, 
Inc.; 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 Istanbul 
Stock Exchange; and any other stock exchange agreed upon by the 
competent authorities of the two countries.
            Ownership and base erosion tests
    Under the ownership test, more than 50 percent of the 
beneficial interest in an entity (or, in the case of a company, 
more than 50 percent of the number of shares of each class of 
the company's shares) must be owned, directly or indirectly, by 
one or more individual residents of Turkey or the United 
States, citizens of the United States, certain publicly traded 
companies (as described in the discussion of the public company 
tests above), the countries themselves, political subdivisions 
or local authorities of the countries, or certain tax-exempt 
organizations (as described in the discussion of tax-exempt 
entities above). This rule could, for example, deny the 
benefits of the reduced U.S. withholding tax rates on dividends 
and royalties paid to a Turkish company that is controlled by 
individual residents of a third country. The more-than-50-
percent ownership threshold in the proposed treaty is slightly 
more stringent than the at-least-50-percent ownership threshold 
in the U.S. model.
    In addition, the base erosion test is met only if the 
income of the entity is not used in substantial part, directly 
or indirectly, to meet liabilities (including liabilities for 
interest or royalties) to persons or entities other than those 
referred to in the preceding paragraph. This rule is intended 
to prevent a corporation, for example, from distributing most 
of its income, in the form of deductible items such as 
interest, royalties, service fees, or other amounts) to persons 
not entitled to benefits under the proposed treaty. Unlike the 
U.S. model, the proposed treaty does not specify a percentage 
of the company's gross income that cannot be paid to non-
qualifying persons.
            Active business test
    Under the active business test, treaty benefits are 
available under the proposed treaty to an entity that is a 
resident of one of the treaty countries with respect to income 
from the other country if the entity is engaged in the active 
conduct of a trade or business in its residence country and the 
income is derived in connection with, or is incidental to, that 
trade or business. However, this does not apply (and benefits 
therefore may be denied) to the business of making or managing 
investments, unless these activities are banking or insurance 
activities carried on by a bank or insurance company. In the 
case of income derived in connection with the active trade or 
business, such trade or business in its residence country must 
be substantial in relation to the activity in the other country 
from which it derives the income for which it is claiming 
treaty benefits. Under the U.S. model, the trade or business in 
the residence country must also be ``substantial'' in cases 
where the income derived by the source country is 
``incidental'' to the trade or business of the residence 
country. The proposed treaty does not apply a substantiality 
test to such incidental income.
    The Technical Explanation provides that income is 
considered derived in connection with an active trade or 
business in the United States if, for example, the income 
generating activity in the United States is upstream, 
downstream, or parallel to that conducted in Turkey. The 
Technical Explanation further provides that income is 
considered incidental to a Turkish trade or business if it 
arises from the short-term investment of working capital of the 
Turkish resident in U.S. securities. The proposed treaty does 
not define whether a trade or business is ``substantial.'' The 
Technical Explanation states that to be considered substantial, 
it is not necessary, for example, that a trade or business in 
Turkey be as large as the U.S. income-generating activity. 
However, the Turkish trade or business cannot be, in terms of 
income, assets, or similar measures, only a very small 
percentage of the size of the U.S. activity.
    The term ``active conduct of a trade or business'' is not 
specifically defined in the proposed treaty. However, as 
provided in Article 3 (General Definitions), undefined terms 
are to have the meaning which they have under the laws of the 
country applying the proposed treaty. In this regard, the 
Technical Explanation states that the U.S. competent authority 
will refer to the regulations issued under Code section 367(a) 
to define an active trade or business. The Technical 
Explanation also states that it is understood that the active 
business test may be satisfied through activities of a person 
related to the entity in question.
            Grant of treaty benefits by the competent authority
    Finally, the proposed treaty provides a ``safety-valve'' 
for a person that has not established that it meets one of the 
other more objective tests, but for which the allowance of 
treaty benefits would not give rise to abuse or otherwise be 
contrary to the purposes of the treaty. Under this provision, 
such a person may be granted treaty benefits if the competent 
authority of the source country so determines. The 
corresponding article in the U.S. model contains a similar 
rule. According to the Technical Explanation, the competent 
authorities will base such a determination on whether the 
establishment, acquisition, or maintenance of the person, or 
the conduct of its operations, has or had as one of its 
principal purposes the obtaining of treaty benefits.

Article 23. Relief from Double Taxation

            Internal taxation rules

United States

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

Turkey

    Turkey taxes the worldwide income of Turkish corporations 
and resident individuals. Turkey generally provides relief from 
double taxation by allowing taxpayers to credit foreign taxes 
paid on foreign income against Turkish tax payable. The total 
credit generally may not exceed the Turkish tax that would be 
payable with respect to such income. Foreign tax credits 
generally are calculated separately with respect to each source 
of income from each country.
            Proposed treaty limitations on 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. Unilateral efforts to limit double taxation are 
imperfect. Because of differences in rules as to when a person 
may be taxed on business income, a business may be taxed by two 
countries as if it were engaged in business in both countries. 
Also, a corporation or individual may be treated as a resident 
of more than one country and be taxed on a worldwide basis by 
both.
    Part of the double tax problem is dealt with 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 Turkey and the United States otherwise still 
tax the same item of income. This article is not subject to the 
saving clause, so that the country of citizenship or residence 
will waive its overriding taxing jurisdiction to the extent 
that this article applies.
    The proposed treaty generally provides that the United 
States will allow a U.S. citizen or resident a foreign tax 
credit for the income taxes imposed by Turkey. The proposed 
treaty also requires the United States to allow a deemed-paid 
credit, with respect to Turkish income tax, to any U.S. company 
that receives dividends from a Turkish company if the U.S. 
company owns 10 percent or more of the voting stock of such 
Turkish company. The credit generally is to be computed in 
accordance with the provisions and subject to the limitations 
of U.S. law (as such law may be amended from time to time 
without changing the general principles of the proposed treaty 
provisions). This provision is similar to those found in the 
U.S. model and many U.S. treaties.
    The proposed protocol provides that a credit will be 
allowed against the alternative minimum tax (``AMT'') for taxes 
paid to Turkey, provided that such credit may not offset more 
than 90 percent of the AMT. Foreign tax credits that are unused 
because of this 90-percent limitation may be carried forward 
and backward against other years' AMT liability. If under U.S. 
law the 90-percent limitation is increased, such increased 
limitation will apply for purposes of the proposed treaty.
    The proposed treaty provides that the Turkish taxes 
referred to in Article 2 (Taxes Covered) are considered income 
taxes for purposes of the foregoing rules regarding the U.S. 
foreign tax credit. The proposed protocol provides that, for 
purposes of this article, the withholding tax under Article 94 
of Turkey's Income Tax Law is not considered an income tax. 
Such tax is imposed on certain progress payments with respect 
to construction contracts. Whether such tax is creditable for 
U.S. tax purposes depends upon whether it meets the U. S. 
internal law standards. The Technical Explanation states that 
issues exist with respect to the application of such standards 
to this tax.
    The proposed treaty generally provides that Turkey will 
allow residents of Turkey, who derive income that may be 
subject to tax in the United States and Turkey, a deduction 
against Turkish income tax for the U.S. incomes taxes paid. The 
allowance of this reduction is subject to the provisions of 
Turkish tax law regarding credit for foreign taxes (as such law 
may be amended from time to time without changing the general 
principles of this treaty provision). The reduction will not 
exceed the pre-credit amount of Turkish income tax appropriate 
to the income that may be taxed in the United States.
    For purposes of implementing the proposed treaty's foreign 
tax credit, the proposed treaty provides a source rule for 
determining the country in which an item of income is deemed to 
have arisen. Under this rule, income derived by a resident of 
one of the countries that may be taxed in the other country in 
accordance with the proposed treaty (other than solely by 
reason of citizenship) is treated as arising in that other 
country. However, the preceding rule does not override the 
source rules of the domestic laws of countries that are 
applicable for purposes of limiting the foreign tax credit.

Article 24. Non-Discrimination

    The proposed treaty contains a comprehensive non-
discrimination article relating to all taxes of every kind 
imposed at the national, state, or local level. It is similar 
to the non-discrimination article in the U.S. model and to 
provisions that have been included in other recent U.S. income 
tax treaties.
    In general, under the proposed treaty, one country could 
not discriminate by imposing other or more burdensome taxes (or 
requirements connected with taxes) on nationals of the other 
country than it would impose on its nationals in the same 
circumstances. This provision applies whether or not the 
nationals in question are residents of the United States or 
Turkey.
    Under the proposed treaty, neither country may tax a 
permanent establishment of an enterprise of the other country 
less favorably than it taxes its own enterprises carrying on 
the same activities. Consistent with the U.S. model and the 
OECD model, however, a country is not obligated to grant 
residents of the other country any personal allowances, 
reliefs, or reductions for tax purposes on account of civil 
status or family responsibilities which it grants to its own 
residents.
    The proposed treaty explicitly provides that nothing in the 
nondiscrimination article is to be construed as preventing 
either of the countries from imposing a branch profits tax or a 
branch-level interest tax.
    Each country is required (subject to the arm's-length 
pricing rules of Articles 9 (Associated Enterprises), 11 
(Interest), and 12 (Royalties)) to allow its residents 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 states that the term ``other disbursements'' is 
understood to include a reasonable allocation of executive and 
general administrative expenses, research and development 
expenses, and other expenses incurred for the benefit of a 
group of related persons. The Technical Explanation further 
states that the so-called ``earnings-stripping'' rules of 
section 163(j) of the Code are not discriminatory within the 
meaning of this provision.
    The nondiscrimination rules also apply 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 Technical Explanation includes examples of 
Code provisions that are understood by the two countries not to 
violate this provision of the proposed treaty. Those examples 
cover the rules that impose a withholding tax on non-U.S. 
partners of a partnership and the rules that prevent foreign 
persons from owning stock in Subchapter S corporations.
    The saving clause (which allows the country of residence or 
citizenship to impose tax notwithstanding certain treaty 
provisions) does not apply to the nondiscrimination article.

Article 25. Mutual Agreement Procedure

    The proposed treaty contains the standard mutual agreement 
provision, with some variation, that authorizes the competent 
authorities of the two countries to consult together to attempt 
to alleviate individual cases of double taxation not in 
accordance with the proposed treaty. The saving clause of the 
proposed treaty does not apply to this article, so that the 
application of this article might result in a waiver (otherwise 
mandated by the proposed treaty) of taxing jurisdiction by the 
country of citizenship or residence.
    Under this article, a resident of one country who considers 
that the action of one or both of the countries will cause him 
or her to be subject to tax which is not in accordance with the 
proposed treaty may present his or her case to the competent 
authority of the country of which he or she is a resident or 
national. The competent authority then makes a determination as 
to whether the objection appears justified. If the objection 
appears to it to be justified and if it is not itself able to 
arrive at a satisfactory solution, that competent authority 
endeavors to resolve the case by mutual agreement with the 
competent authority of the other country, with a view to the 
avoidance of taxation which is not in accordance with the 
proposed treaty. The provision authorizes a waiver of the 
statute of limitations of either country, provided that the 
competent authority of the other country received notification 
of the case within five years of the end of the taxable year to 
which the case relates.
    The proposed protocol provides that if a taxpayer is 
entitled to a refund from Turkey as a result of the mutual 
agreement procedures described above, the taxpayer must claim 
the refund within one year after the taxpayer has been notified 
by the tax administration of the results of such procedures.
    The competent authorities of the countries must endeavor to 
resolve by mutual agreement any difficulties or doubts arising 
as to the interpretation or application of the proposed treaty. 
In particular, the competent authorities may agree to (1) the 
attribution of income, deductions, credits, or allowances of an 
enterprise of one treaty country to the enterprise's permanent 
establishment in the other country; (2) the allocation of 
income, deductions, credits, or allowances between persons; (3) 
the characterization of particular items of income; (4) the 
application of source rules with respect to particular items of 
income; (5) a common meaning of a term; (6) increases in 
specific dollar thresholds in the proposed treaty to reflect 
economic or monetary developments; and (7) the application of 
provisions of each country's internal law regarding penalties, 
fines, and interest in a manner consistent with the purposes of 
the proposed treaty. The competent authorities may also consult 
together for the elimination of double taxation regarding cases 
not provided for in the proposed treaty. This treatment is 
similar to the treatment under the U.S. model.
    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 proposed treaty.

Article 26. Exchange of Information

    This article provides for the exchange of information 
between the two countries. Notwithstanding the provisions of 
Article 2 (Taxes Covered), the proposed treaty's information 
exchange provisions apply to all taxes imposed in either 
country at the national level.
    The proposed treaty provides that the two competent 
authorities will exchange such information as is necessary to 
carry out the provisions of the proposed treaty or the 
provisions of the domestic laws of the two countries concerning 
taxes to which the proposed treaty applies (provided that the 
taxation under those domestic laws is not contrary to the 
proposed treaty). This exchange of information is not 
restricted by Article 1 (Personal Scope). Therefore, 
information with respect to third-country residents is covered 
by these procedures.
    Any information exchanged under the proposed treaty will be 
treated as secret in the same manner as information obtained 
under the domestic laws of the country receiving the 
information. The exchanged information may be disclosed only to 
persons or authorities (including courts and administrative 
bodies) involved in the assessment, collection, or 
administration, enforcement, or prosecution in respect of, or 
the determination of appeals in relation to, the taxes to which 
the proposed treaty would apply. Such persons or authorities 
may use the information for such purposes only. 9 
The Technical Explanation states that persons involved in the 
administration of taxes include legislative bodies with 
oversight roles with respect to the administration of the tax 
laws, such as, for example, the tax-writing committees of 
Congress and the General Accounting Office. Exchanged 
information may be disclosed in public court proceedings or in 
judicial decisions.
---------------------------------------------------------------------------
    \9\  Code section 6103 provides that otherwise confidential tax 
information may be utilized for a number of specifically enumerated 
non-tax purposes. Information obtained by the United States pursuant to 
the proposed treaty could not be used for these non-tax purposes.
---------------------------------------------------------------------------
    As is true under the U.S. model and the OECD model, under 
the proposed treaty, a country is not required to carry out 
administrative measures at variance with the laws and 
administrative practice of either country, to supply 
information that is not obtainable under the laws or in the 
normal course of the administration of either country, or to 
supply information that would disclose any trade, business, 
industrial, commercial, or professional secret or trade process 
or information the disclosure of which would be contrary to 
public policy.
    The proposed treaty provides that upon an appropriate 
request for information, the requested country will obtain the 
information to which the request relates in the same manner and 
to the same extent as if the tax were its own tax. If 
specifically requested by the competent authority of a country, 
the competent authority of the other country will provide 
requested information in a form consistent with the purposes of 
the request to the maximum extent possible under its laws and 
administrative practices and procedures.

Article 27. Members of Diplomatic Missions and Consular Posts

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

Article 28. Entry Into Force

    The proposed treaty will enter into force on the date the 
instruments of ratification are exchanged.
    With respect to taxes withheld at source, the proposed 
treaty will be effective for amounts paid or credited on or 
after the first day of January next following the date on which 
the proposed treaty enters into force.
    With respect to other taxes, the proposed treaty will be 
effective for taxable periods beginning on or after the first 
day of January next following the date on which the proposed 
treaty enters into force.

Article 29. Termination

    The proposed treaty will continue in force until terminated 
by either country. Either country may terminate the proposed 
treaty at any time after the expiration of the five-year period 
from the date of its entry into force, provided that at least 
six months prior notice of termination has been given through 
diplomatic channels. A termination is effective, with respect 
to taxes withheld at source for amounts paid or credited on or 
after the first day of January next following the expiration of 
the notification period. In the case of other taxes, a 
termination is effective for taxable periods beginning on or 
after the first day of January next following the expiration of 
the notification 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 Agreement between the Government of the 
United States of America and the Government of the Republic of 
Turkey for the Avoidance of Double Taxation and the Prevention 
of Fiscal Evasion with Respect to Taxes on Income, together 
with a related Protocol, signed at Washington on March 28, 1996 
(Treaty Doc. 104-30), subject to the declaration of subsection 
(a), and the proviso of subsection (b).
    (a) DECLARATION.--The Senate's advice and consent is 
subject to the following declaration, which shall be binding on 
the President:
          (1) 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.
    (b) 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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