[Senate Executive Report 105-9]
[From the U.S. Government Publishing Office]



105th Congress                                              Exec. Rept.
                                 SENATE

 1st Session                                                  No. 105-9
_______________________________________________________________________


 
                   TAXATION CONVENTION WITH THAILAND

                                _______
                                

                October 30, 1997.--Ordered to be printed

_______________________________________________________________________


          Mr. Helms, from the Committee on Foreign Relations,

                        submitted the following

                              R E P O R T

                    [To accompany Treaty Doc. 105-2]

    The Committee on Foreign Relations, to which was referred 
the Convention between the Government of the United States of 
America and the Government of the Kingdom of Thailand for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income, signed at Bangkok, 
November 26, 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...............................................4
VII. Budget Impact...................................................19
VIII.Explanation of Proposed Treaty..................................20

 IX. Text of the Resolution of Ratification..........................63

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Thailand 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 was signed on November 26, 1996. No 
income tax treaty between the United States and Thailand is in 
force at present.
    The proposed treaty was transmitted to the Senate for 
advice and consent to its ratification on January 28, 1997 (see 
Treaty Doc. 105-2). The Committee on Foreign Relations held a 
public hearing on the proposed treaty on October 7, 1997.

                              III. Summary

    The proposed treaty is similar to other recent U.S. income 
tax treaties, the 1996 U.S. model income tax treaty (``U.S. 
model''), \1\ the 1992 model income tax treaty of the 
Organization for Economic Cooperation and Development (``OECD 
model''), and the 1980 United Nations Model Double Taxation 
Convention between Developed and Developing Countries (``U.N. 
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 15). 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 15, 16, and 19). 
The proposed treaty provides that dividends, interest, 
royalties, and 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 the potential double taxation through the allowance 
by the country of residence of a tax credit for certain foreign 
taxes paid to the other country (Article 25).
    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 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 
treaty (Article 18).

                  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 day of the 
sixth month 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 of January following the date on which the 
proposed treaty enters into force.

                             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.
    Notwithstanding the above rules, the proposed treaty will 
terminate on January 1 of the sixth year following its entry 
into force, unless the U.S. Government has received from the 
Thai Government by the preceding June 30th a diplomatic note 
indicating that Thailand is prepared to implement the provision 
of the exchange of information article relating to obtaining 
information upon request of the other country.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed treaty with Thailand (Treaty Doc. 105-2), 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 Thailand favorably 
reported by a voice vote, with the recommendation that the 
Senate give its advice and consent to ratification of the 
proposed treaty, subject to a declaration and a proviso.

                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed treaty with Thailand 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.

                     A. Treatment of REIT Dividends

REITs in general

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

Foreign investors in REITs

    Nonresident alien individuals and foreign corporations 
(collectively, foreign persons) are subject to U.S. tax on 
income that is effectively connected with the foreign person's 
conduct of a trade or business in the United States, in the 
same manner and at the same graduated tax rates as U.S. 
persons. In addition, foreign persons generally are subject to 
U.S. tax at a flat 30-percent rate on certain gross income that 
is derived from U.S. sources and that is not effectively 
connected with a U.S. trade or business. The 30-percent tax 
applies on a gross basis to U.S.-source interest, dividends, 
rents, royalties, and other similar types of income. This tax 
generally is collected by means of withholding by the person 
making the payment of such amounts to a foreign person.
    Capital gains of a nonresident alien individual that are 
not connected with a U.S. business generally are subject to the 
30-percent withholding tax only if the individual is present in 
the United States for 183 days or more during the year. The 
United States generally does not tax foreign corporations on 
capital gains that are not connected with a U.S. trade or 
business. However, foreign persons generally are subject to 
U.S. tax on any gain from a disposition of an interest in U.S. 
real property at the same rates that apply to similar income 
received by U.S. persons. Therefore, a foreign person that has 
capital gains with respect to U.S. real estate is subject to 
U.S. tax on such gains in the same manner as a U.S. person. For 
this purpose, a distribution by a REIT to a foreign shareholder 
that is attributable to gain from a disposition of U.S. real 
property by the REIT is treated as gain recognized by such 
shareholder from the disposition of U.S. real property.
    U.S. income tax treaties contain provisions limiting the 
amount of income tax that may be imposed by one country on 
residents of the other country. Many treaties, like the 
proposed treaty, generally allow the source country to impose 
not more than a 15-percent withholding tax on dividends paid to 
a resident of the other treaty country. In the case of real 
estate income, most treaties 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\ Many treaties allow 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. The proposed treaty provides 
that income derived from real property may be taxed by the country in 
which the real property is situated. Although the proposed treaty does 
not specify a rule for gains from the disposition of real property, 
under the proposed treaty such gains may be taxed in the country in 
which the property is located according to the internal law of that 
country.
---------------------------------------------------------------------------
    Although REITs are not subject to corporate-level taxation 
like other corporations, distributions of a REIT's income to 
its shareholders generally are treated as dividends in the same 
manner as distributions from other corporations. Accordingly, 
in cases where no treaty is applicable, a foreign shareholder 
of a REIT is subject to the U.S. 30-percent withholding tax on 
ordinary income distributions from the REIT. In addition, such 
shareholders are subject to U.S. tax on U.S. real estate 
capital gain distributions from a REIT in the same manner as a 
U.S. person.
    In cases where a treaty is applicable, this U.S. tax on 
capital gain distributions from a REIT still applies. However, 
absent special rules applicable to REIT dividends, treaty 
provisions specifying reduced rates of tax on dividends apply 
to ordinary income dividends from REITs as well as to dividends 
from taxable corporations. As discussed above, the proposed 
treaty, like many U.S. treaties, reduces the U.S. 30-percent 
withholding tax to 15 percent in the case of dividends 
generally. Prior to 1989, U.S. tax treaties contained no 
special rules excluding dividends from REITs from these reduced 
rates. Therefore, under pre-1989 treaties, 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 
that individuals who hold a less than 25 percent interest in a REIT 
qualify for the 15-percent dividend rate.
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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 investments 
through a REIT instead of directly, the income earned by the 
investor is treated as dividend income. If the reduced rates of 
withholding tax for dividends apply to REIT dividends, the 
foreign investor in the REIT is accorded a reduction in U.S. 
withholding tax that is not available for direct investments in 
real estate.
    On the other hand, some argue that it is important to 
encourage foreign investment in U.S. real estate through REITs. 
In this regard, a higher withholding tax on REIT dividends 
(i.e., 30 percent instead of 15 percent) may not be fully 
creditable in the foreign investor's home country and the cost 
of the higher withholding tax therefore may discourage foreign 
investment in REITs. For this reason, some oppose the inclusion 
in U.S. treaties of the special provisions governing REIT 
dividends, arguing that dividends from REITs should be given 
the same treatment as dividends from other corporate entities. 
Accordingly, under this view, the 15-percent withholding tax 
rate generally applicable under treaties to dividends should 
apply to REIT dividends as well.
    This argument is premised on the view that investment in a 
REIT is not equivalent to direct investment in real property. 
From this perspective, an investment in a REIT should be viewed 
as comparable to other investments in corporate stock. In this 
regard, like other corporate shareholders, REIT investors are 
investing in the management of the REIT and not just its 
underlying assets. Moreover, because the interests in a REIT 
are widely held and the REIT itself typically holds a large and 
diversified asset portfolio, an investment in a REIT represents 
a very small investment in each of a large number of 
properties. Thus, the REIT investment provides diversification 
and risk reduction that are not easily replicated through 
direct investment in real estate.
    At the October 7, 1997 hearing on the proposed treaty (as 
well as other proposed treaties and protocols), the Treasury 
Department announced that it has modified its policy with 
respect to the exclusion of REIT dividends from the reduced 
withholding tax rates applicable to other dividends under 
treaties. The Treasury Department worked extensively with the 
staff of the Committee on Foreign Relations, the staff of the 
Joint Committee on Taxation, and representatives of the REIT 
industry in order to address the concern that the current 
treaty policy with respect to REIT dividends may discourage 
some foreign investment in REITs while maintaining a treaty 
policy that properly preserves the U.S. taxing jurisdiction 
over foreign direct investment in U.S. real property. The new 
policy is a result of significant cooperation among all parties 
to balance these competing considerations.
    Under this policy, REIT dividends paid to a resident of a 
treaty country will be eligible for the reduced rate of 
withholding tax applicable to portfolio dividends (typically, 
15 percent) in two cases. First, the reduced withholding tax 
rate will apply to REIT dividends if the treaty country 
resident beneficially holds an interest of 5 percent or less in 
each class of the REIT's stock and such dividends are paid with 
respect to a class of the REIT's stock that is publicly traded. 
Second, the reduced withholding tax rate will apply to REIT 
dividends if the treaty country resident beneficially holds an 
interest of 10 percent or less in the REIT and the REIT is 
diversified, regardless of whether the REIT's stock is publicly 
traded. In addition, the current treaty policy with respect to 
the application of the reduced withholding tax rate to REIT 
dividends paid to individuals holding less than a specified 
interest in the REIT will remain unchanged.
    For purposes of these rules, a REIT will be considered 
diversified if the value of no single interest in real property 
held by the REIT exceeds 10 percent of the value of the REIT's 
total interests in real property. An interest in real property 
will not include a mortgage, unless the mortgage has 
substantial equity components. An interest in real property 
also will not include foreclosure property. Accordingly, a REIT 
that holds exclusively mortgages will be considered to be 
diversified. The diversification rule will be applied by 
looking through a partnership interest held by a REIT to the 
underlying interests in real property held by the partnership. 
Finally, the reduced withholding tax rate will apply to a REIT 
dividend if the REIT's trustees or directors make a good faith 
determination that the diversification requirement is satisfied 
as of the date the dividend is declared.
    The Treasury Department will incorporate this new policy 
with respect to the treatment of REIT dividends in the U.S. 
model treaty and in future treaty negotiations.
    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 contains 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 the U.S., OECD and U.N. models. Under the 
proposed treaty, a building site or construction, assembly or 
installation project, or supervisory activities in connection 
therewith, or an installation or drilling rig or ship used for 
the exploration or exploitation of natural resources, 
constitutes a permanent establishment if the site, project or 
activities continue in a country for more than 120 days within 
any 12-month period. For example, under the proposed treaty, a 
U.S. enterprise's business profits that are attributable to a 
construction project in Thailand will be taxable by Thailand if 
the project lasts for more than 120 days within a 12-month 
period. 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. Under the U.N. model and other U.S. 
treaties with developing countries, the site or project must 
last for more than six months in order to constitute a 
permanent establishment. Thus, the proposed treaty's 120-day 
period for establishing a permanent establishment is 
significantly shorter than the corresponding periods in the 
U.S., OECD and U.N. models.
    The proposed treaty contains a provision, not present in 
either the U.S. model or the OECD model, which deems a 
permanent establishment to exist where an enterprise provides 
services through its employees in a country if the activities 
continue for a period or periods aggregating more than 90 days 
within any 12-month period. The U.N. model contains a similar 
rule, but it does not deem a permanent establishment to exist 
unless the service activities continue for more than six 
months. Thus, the proposed treaty grants broader taxing rights 
to the source country than the U.N. model with respect to such 
service activities. The proposed treaty also deems a permanent 
establishment to exist where the enterprise provides services 
through its employees for a related enterprise, regardless of 
the period of time spent providing such services. This latter 
rule is not contained in the U.S., OECD or U.N. models.
    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 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 agent 
regularly secures orders in a country for the enterprise. A 
permanent establishment of an enterprise also is deemed to 
exist if its agent maintains in the other country a stock of 
goods or merchandise belonging to the enterprise from which the 
agent regularly makes deliveries on behalf of the enterprise.

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 treaty 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 8 
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 15 percent (10 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 beneficially owned by a financial institution, or by a 
resident of a country and paid with respect to indebtedness 
arising from credit sales of equipment, merchandise or 
services). The proposed treaty provides an exemption from 
source-country tax for interest paid to the government of each 
country and to certain governmental entities. 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 5, 8, or 15 percent, depending on the type 
of property involved. The 5-percent limitation applies to 
payments for the use of, or the right to use, any copyright of 
literary, artistic or scientific work, including software, and 
motion pictures and works on film, tape or other means of 
reproduction for use in connection with radio or television 
broadcasting. The 8-percent limitation applies to payments for 
the use of, or the right to use, industrial, commercial or 
scientific equipment. The 15-percent limitation applies to 
payments of any kind for the use of, or the right to use, any 
patent, trademark, design or model, plan, secret formula or 
process, or for information concerning industrial, commercial 
or scientific experience. 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 90 days or more in the taxable year 
concerned. 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 U.N. model contains a similar rule as the proposed treaty, 
but does not deem a permanent establishment to exist unless the 
resident is present in the source country for the purpose of 
performing independent professional services for more than 183 
days in the taxable year concerned. Thus, the proposed treaty 
grants broader taxing rights to the source country than the 
U.N. model with respect to such professional services. The 
proposed treaty also allows source-country taxation if the 
remuneration for an individual's activities in a country is 
paid by a resident of that country, or is borne by a permanent 
establishment or fixed base in that country, and the 
remuneration exceeds $10,000. This latter rule is not contained 
in the U.S. or OECD models.
    The proposed treaty generally permits source-country 
taxation of artistes and sportsmen if the gross receipts 
derived by the individual in the source country exceed the 
lesser of $100 per day or $3,000 in the aggregate for the 
taxable year concerned. By contrast, the U.S. model generally 
would permit source-country taxation of artistes and sportsmen 
only if the gross receipts (including reimbursed expenses) 
exceed $20,000.
    The proposed treaty permits source-country taxation under 
Article 24 (Other Income) for income of a resident of a country 
that is not dealt with in other articles of the proposed 
treaty. Under the proposed treaty, such income may also be 
taxed by the recipient's country of residence. By contrast, the 
U.S. and OECD models generally would permit only a recipient's 
country of residence to tax such other income.

Committee conclusions

    One purpose of the proposed treaty is to reduce tax 
barriers to direct investment by U.S. firms in Thailand. The 
practical effect of these developing country concessions could 
be greater Thai taxation of future activities of U.S. firms in 
Thailand than would be the case under the rules of either the 
U.S. or OECD model treaties.
    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, 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, the 
Committee asked the Treasury Department about the 
appropriateness of the developing country concessions granted 
to Thailand 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'').

    Regarding whether Thailand is an appropriate recipient of 
developing country concessions, it should be noted that for 
1995, Thailand's gross domestic product (GDP) was $416.7 
billion and its per capita GDP was $6,900. By contrast, the 
United States' 1995 GDP was $7.2 trillion and its per capita 
GDP was $27,500.
     . . . Entering into a tax treaty with Thailand is a very 
high priority in the U.S. business community. Without a treaty, 
U.S. businesses are at a competitive disadvantage in Thailand, 
since most of their competitors invest from countries that have 
already concluded tax treaties with Thailand. Also, this treaty 
is a step toward expansion of our tax treaty network in Asia. 
Entering into this treaty with Thailand will facilitate 
negotiating treaties with other important countries in the 
region. Thus, we think the concessions are appropriate, both 
because of the economic position of Thailand as a developing 
nation and because of the benefits that will accrue to the 
United States.

    The Committee accepts the Treasury Department's assessment 
of Thailand 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 only 
adopted in the context of an agreement that satisfactorily 
addresses the concerns of the United States.

                                C. Gains

    The proposed treaty contains a broad rule under which both 
treaty countries generally may tax gains from the alienation of 
property in accordance with its internal law. This represents a 
departure from the U.S. and OECD models and most other U.S. 
treaties, which generally provide that gains are permitted to 
be taxed only in the country of residence (with specified 
exceptions for gains with respect to real property interests or 
with respect to a permanent establishment or fixed base).
    Under current Thai law, only gains from the disposal of 
shares in a Thai company by a foreign corporation are subject 
to Thai tax. The provision in the proposed treaty, however, is 
drafted broadly and, thus, would allow Thailand to impose a tax 
in the future on gains from the alienation of other types of 
property. 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.
    Under current Thai law, the provision creates the potential 
for double taxation of the gains derived by a U.S. corporation 
from the alienation of shares in a Thai company. U.S. internal 
law generally would treat gains realized by a U.S. person from 
the disposition of shares issued by a foreign corporation as 
U.S.-source income. The U.S. foreign tax credit rules permit 
foreign taxes to offset only U.S. taxes on foreign-source 
income. Under these rules, the Thai taxes paid on such gains 
could not be used to offset the U.S. taxes paid on the same 
gains. The potential double taxation would have to be referred 
to the competent authorities of the two countries for possible 
relief.
    The provision contained in the proposed treaty is not found 
in the U.S. or OECD models. Although Thailand's right to tax 
such gains is limited under current Thai law to certain stock 
gains, the provision is drafted broadly to cover any future 
gains that Thailand might tax on the alienation of other types 
of property. This provision should not stand as a model for 
other treaty negotiations. Moreover, in negotiating future tax 
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 
gains (other than gains on real property).

               D. Shipping, Aircraft and Container Income

Income from the operation of ships and aircraft

    The proposed treaty treats income from the operation of 
ships differently than income from the operation of aircraft. 
Under the proposed treaty, income derived by a resident of a 
treaty country from the operation of aircraft in international 
traffic is taxable only in that country, regardless of whether 
the resident maintains a permanent establishment in the other 
country. Unlike the U.S. model and most U.S. tax treaties, an 
enterprise that engages in the operation of ships in 
international traffic 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. 
Rather, the proposed treaty provides limited source-country 
taxation of income from the operation of ships in international 
traffic. In this regard, the proposed treaty provides that the 
amount of tax imposed by a treaty country on income or profits 
derived by a resident of the other country from the operation 
of ships in international traffic is reduced to 50 percent of 
the amount which would have been imposed in the absence of the 
proposed treaty. Thus, the amount of Thai tax that may be 
imposed on income or profits derived by a U.S. resident from 
the operation of ships in international traffic is equal to 50 
percent of the tax imposed on such income under Thai internal 
law. Under Thai law, a 3 percent tax is imposed on fees from 
the shipment or carriage of goods from Thailand, and on fees 
from the carriage of passengers that are collectible or 
collected in Thailand; the Thai tax does not apply to the 
shipment or carriage of goods into Thailand, or to fees from 
the carriage of passengers that are collectible and collected 
outside Thailand. Thus, under the proposed treaty, U.S. 
residents would be subject to a 1.5 percent Thai tax with 
respect to income from the operation of ships in international 
traffic that is derived from, for example, shipment of goods 
from Thailand.

Income from the rental of ships, aircraft and containers

    Unlike the U.S. model and many U.S. tax treaties, the 
proposed treaty contains a provision under which income or 
profits derived from the rental of ships or aircraft will be 
treated as income from the operation of ships or aircraft in 
international traffic (and, thus, will be covered by the 
respective rules described above for income from the operation 
of ships and aircraft in international traffic), only if the 
rental profits are incidental to other profits from the 
operation of ships or aircraft in international traffic. 
Similarly, the proposed treaty provides that income derived 
from the rental of containers (including trailers, barges, and 
related equipment for the transport of containers) will be 
treated as income from the operation of ships or aircraft in 
international traffic, only if the rental profits are 
incidental to other profits from the operation of ships or 
aircraft in international traffic. The U.S. model and many 
other treaties provide that profits from the rental of ships, 
aircraft and containers operated or used in international 
traffic are taxable only in the country of residence, without 
requiring that the rental profits be incidental to income of 
the recipient from the operation of ships or aircraft in 
international traffic. Under the proposed treaty, unlike under 
the U.S. model, an enterprise that engages, for example, only 
in the rental of aircraft, but does not engage in the operation 
of 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.
    Under the proposed treaty, profits from the rental of 
ships, aircraft or containers that are not incidental to other 
income from the international operation of ships and aircraft 
generally would be taxable by the source country as business 
profits if such profits are attributable to a permanent 
establishment. This represents a departure from current U.S. 
treaty policy, which is to treat such non-incidental rental 
income as taxable only in the country of residence. Although 
the treatment in the proposed treaty is not as favorable as the 
treatment under the U.S. model and most U.S. tax treaties, the 
proposed treaty's rule may be more favorable than some U.S. 
treaties which treat such types of ``non-incidental'' rental 
income as royalties potentially subject to a gross withholding 
tax in the source country, regardless of whether such income is 
attributable to a permanent establishment in the source 
country.

Committee conclusions

    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department whether the treatment 
of income derived from the operation of ships in international 
traffic (as compared to income from the operation of aircraft 
in international traffic), and from the rental of ships, 
aircraft and containers, is appropriate. The relevant portion 
of the October 8, 1997 Treasury Department letter responding to 
this inquiry is reproduced below:

    The provisions of the proposed treaty accommodate 
Thailand's long-standing and consistently applied treaty 
policy. In the absence of the treaty, Thailand would impose a 
tax of 3 percent of gross income from the carriage of goods 
from Thailand. The treaty will allow income from the 
international operation of ships to be taxed at one-half of the 
tax rate otherwise applicable. The proposed treaty, consistent 
with current U.S. treaty policy, exempts U.S. companies from 
Thai tax on their profits from international carriage by 
aircraft. In addition, the United States and Thailand have 
agreed that if Thailand grants to any other country more 
favorable treatment on shipping income than is granted in this 
proposed treaty, negotiations will be reopened to extend that 
more favorable treatment to the United States.
    Under the proposed treaty, income derived from any trade or 
business, including profits from the rental of ships, aircraft 
and containers that are not incidental to income from the 
operation of ships or aircraft in international traffic, is 
treated as business profits, and is thus taxable by the state 
in which the income recipient is not resident only a net basis 
and only if attributable to a permanent establishment in that 
state. Current U.S. treaty policy is to treat such non-
incidental rental income as taxable only in the state of 
residence, and its inclusion in the definition of ``business 
profits'' is thus a concession by the United States. The 
current treaty policy of Thailand as reflected in various of 
their other tax treaties is to include such income in the 
definition of ``royalties'': Under the proposed treaty, 
taxation as royalties would subject the income to a tax of 8 
percent of the gross amount. Thus the inclusion of such income 
in the definition of ``business profits'' is a concession by 
Thailand.
    We believe the treatment under the proposed treaty of 
income derived from the operation of ships in international 
traffic and from the rental of ships, aircraft and containers 
represents an appropriate compromise between the treaty 
policies of the United States and Thailand.

    The proposed treaty provides for limited source-country 
taxation of income from the operation of ships in international 
traffic, representing a departure from the U.S. and OECD 
models. The diplomatic notes supplementing the proposed treaty 
provide that if Thailand grants to any other country more 
favorable treatment on such shipping income than is granted in 
the proposed treaty, negotiations will be reopened to extend 
that more favorable treatment to the United States. In the 
past, the Committee has expressed concern about the anti-
competitive effects of a provision, such as the provision in 
the U.S.-Indonesia treaty, that treats non-incidental income 
from container leasing as royalty income subject to a source-
country withholding tax. The Committee understands that under 
the proposed treaty non-incidental income derived by a resident 
of one country from the rental of ships, aircraft and 
containers would be subject to tax in the other country only if 
such income is attributable to a permanent establishment 
maintained by the resident in the other country. In light of 
the limited circumstances under which source-country taxation 
will apply to income from the rental of ships, aircraft and 
containers, the Committee believes that the provision in the 
proposed treaty with respect to such non-incidental rental 
income generally is consistent with the treaty purpose of 
reducing or eliminating double taxation.

                        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 Thai 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 a royalty as Thai source (and therefore 
potentially taxable in Thailand). 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. Exchange of Information

    One of the principal purposes of the proposed income tax 
treaty between the United States and Thailand is to prevent 
avoidance or evasion of income taxes of the two countries. The 
exchange of information article of the proposed treaty is one 
of the primary vehicles used to achieve that purpose.
    The exchange of information article contained in the 
proposed treaty conforms in most respects to the corresponding 
articles of the U.S. and OECD models. As is true under these 
model treaties, under the proposed treaty the countries are to 
exchange such information as is necessary for carrying out the 
provisions of the proposed treaty or the domestic tax laws of 
the countries. As is also true under these model treaties, 
under the proposed treaty a country is not required to carry 
out administrative measures at variance with the laws and 
administrative practices of either country, to supply 
information which is not obtainable under the laws or in the 
normal course of the administration of either country, or to 
supply information which discloses any trade, business, 
industrial, commercial, or professional secret or trade 
process, or information the disclosure of which is contrary to 
public policy.
    There is one significant respect in which the exchange of 
information article does not conform to the corresponding 
article of the U.S. model. Although the proposed treaty 
includes the standard provision that upon request a country 
shall obtain information to which the request relates in the 
same manner and to the same extent as if the tax of the 
requesting country were imposed by the requested country, the 
proposed treaty would also suspend the application of this 
provision until the U.S. receives from Thailand a diplomatic 
note indicating that Thailand is prepared and able to implement 
these provisions. The Technical Explanation states that it is 
understood that Thailand will not be prepared and able to 
implement these provisions until enabling legislation is 
enacted in Thailand. This means that neither country will 
obtain information upon a request of the other until this 
diplomatic note is provided. \5\
---------------------------------------------------------------------------
    \5\ The Letter of Submittal from the Secretary of State to the 
President states that Thailand may not ``provide'' information under 
the proposed treaty until the U.S. receives from Thailand a diplomatic 
note indicating that Thailand is prepared and able to implement these 
provisions. It appears that this is necessarily a reference to the 
provision regarding obtaining information rather than exchanging 
information already in the possession of Thailand, because the 
suspension clause in the proposed treaty refers to ``this paragraph'' 
(obtaining information), not to ``this article.'' See Treaty Doc. 105-
2, page vii.
---------------------------------------------------------------------------
    The provision of this diplomatic note also is an important 
element in the termination article of the proposed treaty. 
There are two ways in which the proposed treaty can terminate. 
The first is a voluntary mechanism under which either country 
can terminate the proposed treaty at any time after five years 
after it enters into force, provided that appropriate 
notification is given. The second, which is much more unusual, 
is a mandatory termination on January 1 of the sixth year 
following the year the proposed treaty enters into force, 
unless this diplomatic note is received by the previous June 
30th.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department whether the exchange of 
information provisions of the proposed treaty are sufficient 
and whether the termination provision represents an appropriate 
balancing of incentives and consequences that will achieve the 
goal of implementing the provisions relating to obtaining 
information. The relevant portion of the October 8, 1997 
Treasury Department letter responding to this inquiry is 
reproduced below:

    Under the existing Mutual Legal Assistance Treaty between 
the two countries, Thailand will be able to provide adequate 
tax information, including bank information, relevant to 
criminal cases that may be pursued by U.S. authorities. In 
addition, under the proposed treaty and in accordance with 
present Thai law, Thailand will be able to provide to the 
United States adequate tax information, including bank 
information, in any civil case in which there is a Thai tax 
interest. Under current Thai law, however, Thailand may not be 
able to provide information under the tax treaty where there is 
no Thai tax interest. The treaty contains a special provision 
regarding exchange of information, designed to deal with this 
``tax interest'' problem.
    The treaty provides that Thailand generally is required to 
treat a U.S. tax interest as a Thai tax interest in all cases, 
including both civil and criminal tax proceedings. However, 
this general provision will not be in effect for either country 
until the United States receives from Thailand a diplomatic 
note indicating that Thailand is both prepared and able to 
implement this provision, which will not be possible until Thai 
law is changed. If the United States has not received such a 
diplomatic note by June 30 of the fifth year following the 
treaty's entry into force, the entire treaty will terminate on 
January 1 of the sixth year following its entry into force.

    Although broader exchange of information provisions are 
desirable, the Committee understands the difficulty in 
achieving broader provisions given the current constraints of 
Thai law and practices. Although the termination mechanism in 
the proposed treaty is not the preferred method for achieving 
U.S. tax treaty policy, the Committee is assured by the 
Treasury Department that this termination mechanism will 
encourage Thailand to change its laws to fully accommodate the 
United States' goal of implementing the provisions relating to 
obtaining information. However, the Committee does not believe 
that the proposed Thai treaty should be construed in any way as 
a precedent for other treaty negotiations. The exchange of 
information provisions in treaties are central to the purposes 
for which tax treaties are entered into, and significant 
limitations on their effect, relative to the preferred U.S. tax 
treaty position, should not be accepted in negotiations with 
other countries that seek to have or to maintain the benefits 
of a tax treaty relationship with the United States.

                           G. 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 Thailand 
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), in the U.S. model, and 
several newer treaties.
    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 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 tests (i.e., would operate 
to deny benefits in potentially abusive situations more often).
    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 
proposed anti-treaty-shopping provision may be effective in 
preventing third-country investors from obtaining treaty 
benefits by establishing investing entities in Thailand 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 Thai 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 Thai conduit. Finally, Thailand 
imposes significant taxes of its own; these taxes may deter 
third-country investors from seeking to use Thai entities to 
make U.S. investments. On the other hand, implementation of the 
detailed tests for treaty shopping set forth in the 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 Thailand is set 
forth below. The understandings set forth in the diplomatic 
notes exchanged at the time the proposed treaty was signed are 
covered together with the relevant articles of the proposed 
treaty.

Article 1. Personal Scope

    The proposed treaty generally applies to residents of the 
United States and to residents of Thailand, with specific 
modifications to such scope provided in other articles (e.g., 
Article 21 (Government Service), Article 26 (Non-
Discrimination) and Article 28 (Exchange of Information)). This 
scope generally is consistent with the scope of other U.S. 
income tax treaties, the U.S. model, the OECD model and the 
U.N. model. For purposes of the proposed treaty, residence is 
determined under Article 4 (Residence).
    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 Thailand. Thus, the 
proposed treaty will not apply to increase the tax burden of a 
resident of either the United States or Thailand. 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 Thailand 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. \6\
---------------------------------------------------------------------------
    \6\ See Rev. Rul. 84-17, 1984-1 C.B. 308.
---------------------------------------------------------------------------
    Like all U.S. income tax treaties and the U.S. model, the 
proposed treaty includes a ``saving clause.'' Under this 
clause, with specific exceptions described below, the proposed 
treaty does not affect the taxation by either treaty country of 
its residents or its citizens. By reason of this saving clause, 
unless otherwise specifically provided in the proposed treaty, 
the United States will continue to tax its citizens who are 
residents of Thailand as if the treaty were not in force. 
``Residents'' for purposes of the proposed treaty (and, thus, 
for purposes of the saving clause) includes persons defined as 
such in Article 4 (Residence), including 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 or a former long-term resident 
(whether or not treated as such under Article 4 (Residence)), 
whose loss of citizenship or resident status, respectively, 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 or resident status. Section 877 of the Code 
provides special rules for the imposition of U.S. income tax on 
former U.S. citizens and long-term residents for a period of 
ten years following the loss of citizenship or resident status; 
these special tax rules apply to a former citizen or long-term 
resident only if his or her loss of U.S. citizenship or 
resident status had as one of its principal purposes the 
avoidance of U.S. income, estate or gift taxes. 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.
    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 
recipients of social security benefits and child support 
payments (Article 20, paragraphs 2 and 5); relief from double 
taxation through the provision of a foreign tax credit (Article 
25); protection from discriminatory tax treatment (Article 26); 
and benefits under the mutual agreement procedures (Article 
27). These exceptions to the saving clause permit residents and 
citizens of the United States or Thailand 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 Thai 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 government service salaries and pensions (Article 21), 
certain income received by visiting students and trainees 
(Article 22), certain income of visiting teachers and 
researchers (Article 23), and certain income of diplomats and 
consular officers (Article 29).
    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 Thailand 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 Thailand, 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 Thailand. However, Article 28 
(Exchange of Information) generally is applicable to all taxes 
imposed by the United States under the Code (including gift, 
estate and excise taxes), and by Thailand under the Thai 
Revenue Code and the Petroleum Income Tax Act.
    In the case of the United States, the proposed treaty 
applies to the Federal income taxes imposed by the Code, but 
excludes social security taxes. Unlike many U.S. income tax 
treaties in force, but like the U.S. model, the proposed treaty 
applies to the accumulated earnings tax and the personal 
holding company tax. The proposed treaty does not apply to any 
U.S. State or local income taxes.
    In the case of Thailand, the proposed treaty applies to the 
income tax and the petroleum income tax.
    The proposed treaty also contains a rule generally found in 
U.S. income tax treaties and the U.S., OECD and U.N. models 
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, and of any 
official published material concerning the application of the 
proposed treaty, including explanations, regulations, rulings 
or judicial decisions. The Technical Explanation states that 
the term ``significant'' means that changes must be reported 
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 ``Thailand'' means the territory of the Kingdom of 
Thailand. The Technical Explanation states that the term 
``Thailand'' is understood to include the territorial waters of 
Thailand. The proposed treaty further provides that the term 
includes any area adjacent to the territorial waters of 
Thailand over which Thailand exercises rights, in accordance 
with Thai and international laws, with respect to the seabed 
and subsoil and their natural resources. The Technical 
Explanation states that the extension of the definition to such 
adjacent areas of the territorial sea of Thailand applies only 
if the person, property or activity to which the proposed 
treaty is being applied is connected with the exploration or 
exploitation of 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. The Technical 
Explanation states that the term ``United States'' is 
understood to include the States, the District of Columbia and 
the territorial sea of the United States. When used in the 
geographic sense, the term ``United States'' includes any area 
outside the territorial sea of the United States over which the 
United States exercises rights, in accordance with U.S. and 
international laws, with respect to the exploration and 
exploitation of the natural resources of the seabed or its 
subsoil. The Technical Explanation states that the extension of 
the term to such areas outside the territorial sea of the 
United States applies only if the person, property or activity 
to which the proposed treaty is being applied is connected with 
such natural resource exploration or exploitation.
    The term ``person'' includes an individual, an estate, a 
trust, a partnership, a company, and any other body of persons.
    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.
    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 Technical Explanation 
states that the term ``enterprise'' generally is understood to 
refer to any activity or set of activities that constitutes a 
trade or business. The terms ``a Contracting State'' and ``the 
other Contracting State'' mean the United States or Thailand, 
according to the context in which such terms are used.
    The term ``tax'' means United States tax, or Thai tax, as 
the case may be. United States tax and Thai tax are defined in 
Article 2 (Taxes Covered) of the proposed treaty.
    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 Thai ``competent authority'' is the Minister of 
Finance or his authorized representative.
    The proposed treaty provides that the term ``nationals'' 
means all individuals possessing the nationality or citizenship 
of the United States or Thailand, and all legal persons, 
partnerships, associations and any other entities deriving 
their status as such from the laws in force in the United 
States or Thailand.
    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 proposed treaty have the meaning that they have under the 
laws of the country concerning the taxes to which the proposed 
treaty applies. 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. Residence

    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.

Thailand

    Under Thai law, resident individuals generally are subject 
to tax on their worldwide income, while nonresident individuals 
are subject to tax only on certain income derived from sources 
within Thailand. A nonresident individual includes a person who 
resides in Thailand for less than 180 days.
    Under Thai law, a corporation generally is subject to tax 
on worldwide income if it is incorporated in Thailand. 
Corporations that are incorporated under foreign law generally 
are subject to tax only on certain income derived from sources 
within Thailand.
            Proposed treaty rules
    The proposed treaty specifies rules to determine whether a 
person is a resident of the United States or Thailand 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, citizenship, place of management, 
place of incorporation, or any other criterion of a similar 
nature. 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).
    The term ``resident of a Contracting State'' also includes 
the United States or Thailand and any of its political 
subdivisions or local authorities. 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. Under the proposed treaty, a U.S. citizen or an alien 
admitted to the United States for permanent residence (a 
``green card'' holder), who is not a resident of Thailand under 
the basic residence rules, will be treated as a U.S. resident 
only if such individual has a substantial presence, permanent 
home or habitual abode in the United States. If such individual 
is a resident of Thailand under the basic residence rules, he 
or she is considered to be a resident of both countries and his 
or her residence for purposes of the proposed treaty is 
determined under the tie-breaker rules described below.
    Although not specifically provided for in the proposed 
treaty, the Technical Explanation addresses residence issues 
for purposes of the proposed treaty in the case of fiscally 
transparent entities (e.g., partnerships, estates and trusts) 
that are not subject to an entity-level tax. The Technical 
Explanation states that in the case of the United States, such 
entities include partnerships, common investment trusts under 
section 584 of the Code, grantor trusts and U.S. limited 
liability companies treated as partnerships for U.S. tax 
purposes. The Technical Explanation states that it is the 
Treasury Department's understanding that an item of income 
derived through such fiscally transparent entities will be 
considered to be derived by a resident of a country if the 
resident is treated under the tax laws of the country where 
such person is resident as deriving the item of income. Thus, 
for example, if the U.S. partners' share in the income of a 
U.S. limited liability company (treated as a partnership for 
U.S. tax purposes) is only one-half, Thailand would be required 
to reduce its withholding tax pursuant to the proposed treaty 
on only one-half of the Thai-source income paid to the 
partnership.
    The Technical Explanation states that these rules for 
income derived through fiscally transparent entities apply 
regardless of where the entity is organized (i.e., in the 
United States, Thailand or a third country). The Technical 
Explanation also states that these rules apply even if the 
entity is viewed differently under the tax laws of the other 
country. As an example, the Technical Explanation states that 
income from Thai sources received by an entity organized under 
the laws of Thailand, which is treated for U.S. tax purposes as 
a corporation and is owned by a U.S. shareholder who is a U.S. 
resident for U.S. tax purposes, is not considered derived by 
the shareholder of that corporation, even if under the tax laws 
of Thailand the entity is treated as fiscally transparent. 
Rather, for purposes of the proposed treaty, the income is 
treated as derived by the Thai entity.
            Dual residents

Individuals

    A set of ``tie-breaker'' rules is provided to determine 
residence in the case of an individual who, under the basic 
residence rules, would be considered to be a resident of both 
countries. 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 ``center of vital interests''). If 
the country in which the individual has his or her center 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.

Entities

    In the case of any person other than an individual that is 
a resident of both countries under the basis residence rules, 
the proposed treaty requires the competent authorities to 
settle the issue of residence by mutual agreement and to 
determine the mode of application of the proposed treaty to 
such person. Under the U.S. model, if a company is a resident 
of both countries, it is deemed to be a resident of the country 
in which it is created or organized. The Technical Explanation 
states that this rule is not contained in the proposed treaty 
because dual corporate residence cannot occur under the laws of 
the United States and Thailand.

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, the 
OECD model and the U.N. 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 warehouse (in 
relation to a person performing storage facilities for others), 
and a mine, an oil or gas well, a quarry, or any other place of 
extraction of natural resources. It also includes a building 
site, a construction, assembly, or installation project, or 
supervisory activities in connection therewith, or an 
installation or drilling rig or ship used for the exploration 
or exploitation of natural resources, but only if such site, 
project, or activities continue for more than 120 days within 
any 12-month period. The Technical Explanation states that the 
120-day 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 120-day threshold is exceeded, the site or project 
constitutes a permanent establishment as of the first day that 
work in the country began within the 12-month period. This rule 
providing the 120-day 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, and the six-month 
periods contained in the U.N. model and U.S. treaties with some 
other countries.
    The proposed treaty further provides that a permanent 
establishment includes the furnishing of services, including 
consultancy services, by an enterprise through employees or 
other personnel engaged by the enterprise for such purpose if 
the activities of that nature continue (for the same or a 
connected project) within that country for a period or periods 
aggregating more than 90 days within any 12-month period, 
provided that a permanent establishment does not exist in any 
taxable year in which such services are rendered in that 
country for a period or periods aggregating less than 30 days 
in that taxable year. In addition, the furnishing of services 
by an enterprise through its employees also will be deemed to 
constitute a permanent establishment if the services are 
performed within a country for a related enterprise within the 
meaning of Article 9 (Associated Enterprises). These rules 
regarding the performance of services as constituting a 
permanent establishment are not contained in the U.S. or OECD 
models. A similar, but not identical rule is contained in the 
U.N. model, which provides that the furnishing of services in a 
country by an enterprise through its employees can give rise to 
a permanent establishment if the activity continues in the 
country for a period or periods of more than six months in any 
12-month period. The proposed treaty's 90-day rule grants the 
source country broader rights to tax residents of the other 
country than the six-month rule in the U.N. model.
    Under the proposed treaty, the following activities are 
deemed not to constitute a permanent establishment: the use of 
facilities solely for storing or displaying goods or 
merchandise belonging to the enterprise; the maintenance of a 
stock of goods or merchandise belonging to the enterprise 
solely for storage or display, 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 and supplying information as examples of 
preparatory and auxiliary activities that would not give rise 
to a permanent establishment. In addition, the proposed treaty 
provides that a permanent establishment does not include the 
maintenance of a fixed place of business solely for the purpose 
of any combination of the activities described above, provided 
that the overall activity of the fixed place of business 
resulting from this combination is of a preparatory or 
auxiliary character. This latter rule, which is similar to the 
rule in the OECD model, differs from the rule in the U.S. 
model. The U.S. model provides that the maintenance of a fixed 
place of business solely for any combination of the above-
listed activities does not constitute a permanent 
establishment, without requiring that the overall combination 
of activities be of a preparatory or auxiliary character.
    The proposed treaty provides that a permanent establishment 
also is deemed not to include the use of facilities or the 
maintenance of a stock of goods or merchandise belonging to the 
enterprise for the purpose of occasional delivery of such goods 
or merchandise. This rule is different from the rules in the 
U.S. and OECD models, which provide that a permanent 
establishment does not include the use of facilities or the 
maintenance of a stock of goods or merchandise belonging to the 
enterprise solely for delivery. The Technical Explanation 
states that under the proposed treaty, a permanent 
establishment will be deemed to exist if deliveries are made on 
a regular basis from a warehouse or other storage facility.
    Under the proposed treaty, an enterprise is deemed to have 
a permanent establishment if it engages in business in a 
country through an agent who has, and regularly exercises, the 
authority to conclude contracts in the name of such enterprise, 
unless the contracting authority is limited to the activities 
listed above, such as storage or display of merchandise, which 
if exercised through a fixed place of business would be 
excluded from the definition of a permanent establishment. A 
permanent establishment of an enterprise also is deemed to 
exist if the agent regularly secures orders in that country for 
that enterprise. This rule is not contained in the U.S. or OECD 
models. A permanent establishment of an enterprise also is 
deemed to exist if the agent maintains in that country a stock 
of goods or merchandise belonging to the enterprise from which 
the agent regularly makes deliveries on behalf of the 
enterprise. This rule, which is not contained in the U.S. or 
OECD models, is similar to a rule contained in the U.N. model.
    Under the proposed treaty, no permanent establishment is 
deemed to arise merely because the enterprise carries on 
business in a country through a broker, general commission 
agent, or any other agent of independent status, provided that 
such persons are acting in the ordinary course of their 
business. Unlike the U.S. model, but similar to the U.N. model, 
the proposed treaty provides that when by agreement between the 
agent and the enterprise, the activities of such agent are 
devoted wholly on behalf of that enterprise and other 
enterprises controlling, or controlled by, that enterprise, 
such agent will not be considered to be an independent agent 
for purposes of the foregoing rule.
    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 carries on business in the other 
country (whether through a permanent establishment or 
otherwise) does not of itself cause either company to be a 
permanent establishment of the other.

Article 6. Income from Immovable (Real) Property

    This article covers income from real property. The rules in 
Article 13 (Gains) cover gains from the sale of real property.
    Under the proposed treaty, income derived by a resident of 
one country from immovable (real) property (including income 
from agriculture or forestry) 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., OECD and U.N. 
models.
    The terms ``immovable property'' or ``real property'' have 
the meanings which they have under the law of the country in 
which the property in question is situated. \7\ The proposed 
treaty specifies that the term in any case includes property 
accessory to immovable property; livestock and equipment used 
in agriculture and forestry; 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.
---------------------------------------------------------------------------
    \7\ In the case of the United States, the term ``real property'' is 
defined in Treas. Reg. sec. 1.897-1(b).
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    The proposed treaty specifies that the country in which the 
property is situated may tax income derived from the direct 
use, letting, or use in any other form of 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 the ``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)).

Thailand

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

Business profits subject to host country tax

    Under the proposed treaty, income or profits of an 
enterprise of one of the countries are taxable in the other 
country if the enterprise carries on business through a 
permanent establishment within the other country, but only so 
much of the income or profits that is attributable to that 
permanent establishment. In addition, the proposed treaty 
provides that income or profits of an enterprise of one of the 
countries 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 in the other country of goods 
or merchandise of the same or similar kind as those sold 
through the permanent establishment, or from other business 
activities carried on in the other country 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 tax.
    The limited force of attraction rule described in the 
foregoing paragraph is not contained in the U.S. or OECD 
models, and is similar to, but narrower than, a corresponding 
rule contained in the U.N. model. Under the U.N. model, if an 
enterprise of one country derives income from the sale of goods 
or the carrying on of other business activities through a 
permanent establishment situated in either country, income 
derived directly by the enterprise from the sale of goods of 
the same or similar kind as those sold through the permanent 
establishment, or from the carrying on of activities of the 
same or similar kind as those carried on through the permanent 
establishment may be attributed to the permanent establishment. 
Unlike the U.N. model, the rule in the proposed treaty applies 
only if it can be shown that such sales or activities were not 
carried out by the permanent establishment in order to avoid 
tax in the country in which it was located.
    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 treaty provides that there will be attributed 
to a permanent establishment the income or 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.
    Like the OECD and U.N. models, but unlike the U.S. model, 
the proposed treaty provides that a country may, where it is 
customary to do so under its law and practice, determine the 
income or profits attributable to a permanent establishment on 
the basis of an apportionment of the total profits of the 
enterprise to its various parts, or in the case of a person who 
does not claim taxation on the basis of the actual net profits 
of the permanent establishment, on the basis of a certain 
reasonable percentage of the gross receipts of the permanent 
establishment. The proposed treaty provides that the method 
adopted must yield a result that is in accordance with the 
principles of this article. The Technical Explanation states 
that any such method must be designed to approximate an arm's-
length result.

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 a reasonable allocation 
or apportionment of executive and general administrative 
expenses incurred for purposes of the permanent establishment. 
Unlike the U.S. model, the proposed treaty does not specify 
that research and development expenses and interest also may 
allocated on a reasonable basis for these purposes. The 
Technical Explanation states that it is understood that such 
types of expense allocations are permissible.
    The Technical Explanation states that no deductions are 
allowed for expenses charged to a permanent establishment by 
another unit of the enterprise. Thus, a permanent establishment 
may not deduct a royalty deemed paid to its head office. The 
Technical Explanation states that a permanent establishment may 
not increase its business profits by the amount of any notional 
fees for ancillary services performed for another unit of the 
enterprise, and also may not deduct expenses in providing such 
services, because those expenses would be incurred for purposes 
of a business unit other than the permanent establishment.

Other rules

    Income or 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 income or profits attributable to a permanent 
establishment must be determined under the same method each 
year unless there is a good and sufficient reason to the 
contrary. Where income or 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.
    The proposed treaty provides that the term ``business 
profits'' means income derived from any trade or business. The 
Technical Explanation states that the term ``business profits'' 
is understood to include income from the performance of 
personal services by an enterprise. Unlike the U.S. model, the 
proposed treaty provides that the term ``business profits'' 
includes profits from the rental of ships, aircraft and 
containers (including trailers, barges and related equipment 
for the transport of containers), if such profits are not 
incidental to income from the operation of ships or aircraft in 
international traffic. The Technical Explanation states that 
the inclusion of such profits from the rental of ships, 
aircraft and containers in the definition of ``business 
profits'' makes clear that such income earned by a resident of 
a country can be taxed by the other country only if such income 
is attributable to a permanent establishment in the other 
country.
    The proposed treaty incorporates the rule of Code section 
864(c)(6) and provides that any income attributable to a 
permanent establishment or a fixed base during its existence is 
taxable in the country where the permanent establishment or 
fixed base is located even though payments are deferred until 
after the permanent establishment or fixed base has ceased to 
exist. This rule applies with respect to business profits 
(Article 7, paragraphs 1 and 2), dividends (Article 10, 
paragraph 5), interest (Article 11, paragraph 5), royalties 
(Article 12, paragraph 4), independent personal services income 
(Article 15, paragraph 1(a)), and other income (Article 24, 
paragraph 2).

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.
    The proposed treaty provides that income or profits derived 
by a U.S. resident from the operation of aircraft in 
international traffic is taxable only in the United States. 
Similarly, the proposed treaty provides that income or profits 
derived by a Thai resident from the operation of aircraft in 
international traffic is taxable only in Thailand. The 
Technical Explanation states that such income derived by a 
resident of one of the countries may not be taxed in the other 
country even if the resident has a permanent establishment in 
that other country.
    Unlike the U.S. model and most U.S. tax treaties, this rule 
granting the country of residence the exclusive right to tax 
income applies only with respect to income from the operation 
of aircraft in international traffic, and not to income from 
the operation of ships. Rather, the proposed treaty provides 
limited source-country taxation of income from the operation of 
ships in international traffic. In this regard, the proposed 
treaty provides that the amount of Thai tax that may be imposed 
on income or profits derived by a resident of the United States 
from the operation of ships in international traffic is reduced 
to 50 percent of the amount which would have been imposed in 
the absence of the proposed treaty. Similarly, the proposed 
treaty provides that the amount of U.S. tax that may be imposed 
on income or profits derived by a resident of Thailand from the 
operation of ships in international traffic is reduced to 50 
percent of the amount which would have been imposed in the 
absence of the proposed treaty. As an example, the Technical 
Explanation states that the income of a Thai shipping company 
from the operation of ships in international traffic would be 
limited to 2 percent of the company's U.S.-source gross 
transportation income from such operation (under section 887 of 
the Code, the U.S. tax rate is 4 percent). The diplomatic notes 
provide that if Thailand agrees in a treaty or other agreement 
with any other country to a tax rate on income or profits 
derived by residents of the other country on the operation of 
ships that is lower than the rate provided for in the proposed 
treaty for shipping profits (i.e., 50 percent of Thailand's tax 
rate), then Thailand will agree to reopen negotiations with the 
United States with a view to concluding a protocol which would 
extend such lower rate to U.S. residents.
    ``International traffic'' means any transport by a ship or 
aircraft, except where the transport is solely between places 
in the other country (Article 3(1)(d) (General Definitions)). 
Accordingly, with respect to a Thai enterprise, purely domestic 
transport within the United States does not constitute 
``international traffic.''
    For purposes of the proposed treaty, income or profits 
derived from the operation of ships or aircraft in 
international traffic include income or profits derived from 
the rental of ships or aircraft, if such rental profits are 
incidental to other income or profits from the operation of 
ships or aircraft in international traffic. The Technical 
Explanation states that the rental of ships or aircraft is 
incidental to income from the operation of ships or aircraft in 
international traffic if the lessor is a shipping company or 
airline, and the ship or aircraft is part of the body of 
equipment used by the lessor in its business as an 
international carrier. Thus, under the proposed treaty, the 
exemption from source-country tax for shipping profits would 
not apply to a bareboat lessor (such as a financial institution 
or leasing company) that does not operate ships or aircraft in 
international traffic, but that leases ships or aircraft for 
use in international traffic. This treatment is different from 
the U.S. model, which would permit the exemption from source-
country tax if the ship or aircraft was operated in 
international traffic by the lessee. The Technical Explanation 
states that income from the leasing of ships and aircraft on a 
full basis when such ships are used in international traffic is 
considered to be income from the operation of ships and 
aircraft in international traffic (and, thus, is covered under 
the general rules described in the foregoing paragraphs).
    The proposed treaty provides that income or 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) that are incidental to income 
from the operation of ships or aircraft in international 
traffic is treated as income from the operation of ships or 
aircraft in international traffic for purposes of the rules 
described in the foregoing paragraphs. This rule is different 
from the U.S. model, which provides that such profits are 
treated as income from the operation of ships or aircraft in 
international traffic if such transport is undertaken as part 
of international traffic, without requiring that such income be 
incidental to the enterprise's income from the operation of 
ships or aircraft in international traffic. The diplomatic 
notes provide that if Thailand agrees in a treaty or other 
agreement with any other country to treatment for the rental or 
use of containers in international traffic that is more 
favorable than the treatment for such income under the proposed 
treaty (i.e., under this article or under the business profits 
article (Article 7)), then Thailand will agree to reopen 
negotiations with the United States with a view to concluding a 
protocol which would extend such more favorable treatment to 
U.S. residents.
    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.
    The proposed treaty does not specify, as does the 
corresponding article in the U.S. model, that income earned by 
an enterprise from the inland transport of property or 
passengers within either country falls within the rules of this 
article if the transport is undertaken as part of the 
international transport of property or passengers by that 
enterprise. The Technical Explanation states that the proposed 
treaty should be interpreted consistently with this rule.

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 agrees that the adjustment was 
correct. 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.

Thailand

    Thailand generally imposes a withholding tax on dividends 
at a rate of 10 percent.
            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 10 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 power of the payor company. The source-country dividend 
withholding tax generally is limited to 15 percent of the gross 
amount of the dividends paid to residents of the other country 
in all other cases.
    The Technical Explanation states that the term ``beneficial 
owner'' is not defined in the proposed treaty and, thus, is 
defined under the internal law of the source country. The 
Technical Explanation further states that the beneficial owner 
of a dividend for purposes of this article is the person to 
which the dividend income is attributable for tax purposes 
under the laws of the source country.
    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. The proposed treaty provides that 
these rules do not affect the taxation of the paying company on 
the profits out of which the dividends are paid.
    The proposed treaty provides that the 15-percent maximum 
tax rate applies to dividends paid by a RIC. The proposed 
treaty provides that the 15-percent maximum tax rate applies to 
dividends paid by a REIT to an individual owning less than 25 
percent of the REIT. There is no limitation in the proposed 
treaty on the tax that may be imposed by the United States on a 
REIT dividend that is beneficially owned by a Thai resident, if 
the beneficial owner of the dividend is either an individual 
holding a 25 percent or greater interest in the REIT or is not 
an individual. Thus, such a dividend is taxable at the 30-
percent United States statutory rate. The proposed treaty 
provides that these rules also apply to dividends paid by Thai 
companies that are similar to a U.S. RIC or REIT. The proposed 
treaty provides that whether a Thai company is similar to a 
U.S. RIC or REIT will be determined by mutual agreement of the 
competent authorities.
    The proposed treaty generally defines ``dividends'' as 
income from shares or other rights, which are not debt claims 
and which participate in profits. The term also includes income 
from other corporate rights if such income is subjected to the 
same tax treatment as income from shares by the country in 
which the distributing corporation is resident. The proposed 
treaty also provides that the term ``dividends'' includes 
income from arrangements, including debt obligations, that 
carry the right to participate in profits, to the extent such 
income is so characterized under the laws of the country in 
which the income arises.
    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, or performs in 
the source country independent personal services from a fixed 
base located in that country, and the holding in respect of 
which the dividends are paid is effectively connected with such 
permanent establishment or fixed base. In such cases, the 
dividends effectively connected to the permanent establishment 
or the fixed base are taxed as business profits (Article 7) or 
as income from the performance of independent personal services 
(Article 15), as the case may be. Under the proposed treaty, 
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.

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.
    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.

Thailand

    Thailand generally imposes a withholding tax on Thai-source 
interest paid to nonresidents of Thailand at a rate of 15 
percent.
            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 in 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 if the beneficial owner 
of the interest is a resident of the other country. The source-
country tax on such interest may not exceed 10 percent of the 
gross amount of the interest if it is beneficially owned by any 
financial institution, including an insurance company.
    The rate of source-country tax on interest also may not 
exceed 10 percent of the gross amount of the interest if it is 
beneficially owned by a resident of the other country and is 
paid with respect to indebtedness arising as a consequence of a 
sale on credit by a resident of that other country of any 
equipment, merchandise, or services. However, this rule does 
not apply where such sale was between persons not dealing with 
each other on arm's length terms.
    In all other cases, the rate of source-country tax on 
interest may not exceed 15 percent of the gross amount of such 
interest. These rates are higher than the rates permitted under 
the U.S. model and most other U.S. income tax treaties.
    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 one country and paid to the 
Government of the other country, or to a resident of that other 
country with respect to debt obligations guaranteed or insured 
by that Government, is exempt from source-country tax. The 
proposed treaty specifies that for purposes of these rules, the 
term ``Government'' means in the case of Thailand, the Thai 
Government, the Bank of Thailand, the Export-Import Bank of 
Thailand, the local authorities, and such financial 
institutions, the capital of which is wholly owned by the 
Government of Thailand or any local authority as may be agreed 
from time to time by the competent authorities. In the case of 
the United States, the term ``Government'' means, the U.S. 
Government, the Federal Reserve Banks, the Export-Import Bank, 
the Overseas Private Investment Corporation, the States and 
local authorities, and such financial institutions, the capital 
of which is wholly owned by the U.S. Government or any State or 
local authority as may be agreed from time to time by the 
competent authorities.
    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 tax 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's reductions in source-country tax on 
interest do not apply if (1) the beneficial owner of the 
interest carries on business in the source country through a 
permanent establishment located in that country, or performs in 
the source country independent personal services from a fixed 
base located in that country, and (2) the debt claim in respect 
of which the interest is paid is effectively connected with 
such permanent establishment or fixed base, or with certain 
business activities described in the business profits article 
(Article 7(1)(b) and (c)) that are similar to those carried by 
an enterprise through the permanent establishment. In such 
events, the interest is taxed as business profits (Article 7) 
or as independent personal services income (Article 15), as the 
case may be. Under the proposed treaty, the reduction in 
source-country tax also does not 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 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. \8\ If, however, the payor of the interest has 
a permanent establishment or a fixed base in a country in 
connection with which the indebtedness on which the interest is 
paid was incurred, and the interest is borne by such permanent 
establishment or fixed base, then the interest would have 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 Thailand and that French resident incurs 
indebtedness to a U.S. person, the interest on which is borne 
by the Thai permanent establishment, the interest would be 
treated as having its source in Thailand.
---------------------------------------------------------------------------
    \8\ 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.
---------------------------------------------------------------------------
    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 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 residual interest in a U.S. REMIC. 
Such income may be taxed in accordance with U.S. internal law.

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.

Thailand

    Thailand generally imposes a withholding tax of 15 percent 
on royalties derived by nonresidents.
            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 is limited.
    The proposed treaty provides that the rate of source-
country tax on certain royalties may not exceed 5 percent of 
the gross royalties. The 5-percent limitation applies to 
payments of any kind for the use of, or the right to use, any 
copyright of literary, artistic, or scientific work, including 
software, and 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, payments with respect to computer software are 
treated as royalties or as income from the alienation of 
tangible personal property, depending 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, and not as royalties.
    In addition, the rate of source-country tax on certain 
royalties may not exceed 8 percent of the gross royalties. The 
8-percent limitation applies to payments of any kind for the 
use of, or the right to use, industrial, commercial or 
scientific equipment. Unlike the proposed treaty, the U.S. 
model treats such income as business profits, and not as 
royalties.
    The proposed treaty further specifies that the rate of 
source-country tax on certain royalties may not exceed 15 
percent of the gross royalties. The 15-percent limitation 
applies to payments of any kind for the use of, or the right to 
use, any patent, trademark, design or model, plan, secret 
formula or process, or for information concerning industrial, 
commercial or scientific experience. The Technical Explanation 
states that the term ``industrial, commercial or scientific 
experience'' includes information that is ancillary to a right 
otherwise giving rise to royalties, such as a patent or secret 
process.
    Under the proposed treaty, the term ``royalties'' means 
payments for the use of, or the right to use, property as 
described in the foregoing paragraphs. In addition, the term 
``royalties'' includes gain derived from the alienation of any 
right or property that would give rise to such types of 
royalties, to the extent that the gain is contingent on the 
productivity, use or disposition thereof.
    The proposed treaty's reductions in source-country tax on 
royalties do not apply if (1) the beneficial owner of the 
royalties carries on business in the source country through a 
permanent establishment located in that country, or performs in 
the source country independent personal services from a fixed 
base located in that country, and (2) the right or property in 
respect of which the royalties are paid is effectively 
connected with such permanent establishment or fixed base, or 
with certain business activities described in the business 
profits article (Article 7(1)(c)) that are similar to those 
carried by an enterprise through the permanent establishment. 
In such cases, the royalties are taxed as business profits 
(Article 7) or as independent personal services income (Article 
15), as the case may be. Under the proposed treaty, the 
reduction from source-country tax also does not 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 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 Thailand 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 Thailand and that 
French resident pays a royalty to a U.S. person which is 
attributable to the Thai permanent establishment, then the 
royalty would be treated as having its source in Thailand. 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 Thailand, 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.
    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 subject to the provisions of Article 10 
(Dividends).

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.

Thailand

    Under Thai law, capital gains of foreign corporations from 
the disposal of shares in a Thai company generally are subject 
to a 15 percent withholding tax. Other capital gains generally 
are not subject to tax in Thailand.
            Proposed treaty limitations on internal law
    The proposed treaty provides that except as otherwise 
provided in the proposed treaty, each country may tax gains 
from the alienation of property in accordance with the 
provisions of its domestic law. This represents a departure 
from the U.S. model and most other U.S. tax treaties, which 
generally provide that gain from the alienation of property 
(other than real property) is subject to tax only in the 
country in which the seller is resident.
    The foregoing rule in the proposed treaty permits the 
United States to tax gains derived by a resident of the other 
country that are attributable to the alienation of real 
property situated in the United States under the rules of 
section 897 of the Code. Gain from the alienation of real 
property includes real property referred to in Article 6 (i.e., 
an interest in the real property itself) and a U.S. real 
property interest as defined in section 897 of the Code. A U.S. 
real property interest includes an interest in certain 
corporations if at least 50 percent of the assets of the 
corporation consist of U.S. real property.
    The Technical Explanation states that for purposes of this 
article, the United States will look through distributions made 
by a REIT. Accordingly, distributions made by a REIT are 
taxable under this article, and not under the dividends article 
(Article 10), if the distributions are attributable to gains 
derived from the alienation of real property.
    The Technical Explanation further states that both the 
residence country and the source country may tax 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.
    The proposed treaty provides that gains from the alienation 
of ships, aircraft, or containers used or operated by an 
enterprise of a country in international traffic (or movable 
property pertaining to the use or operation of such ships, 
aircraft, or containers) are taxable only in the country of 
which the enterprise is a resident.

Article 14. Branch Tax

            Internal taxation rules

United States

    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.
    If a U.S. branch of a foreign corporation has allocated to 
it under Treasury regulation sec. 1.882-5 an interest deduction 
in excess of the interest actually paid by the branch, such 
excess interest is treated as if it were paid on a notional 
loan to a U.S. subsidiary from its foreign corporate parent. 
This excess interest is subject to 30-percent withholding tax 
absent a specific statutory exemption.

Thailand

    Under Thai law, tax generally is imposed at a 10 percent 
rate on the profits of a Thai branch of a foreign corporation, 
after the normal corporate tax, that is remitted to the foreign 
head office.
            Proposed treaty limitations on internal law
    The proposed treaty provides that a corporation which is a 
resident of a country may be subject in the other country to a 
tax in addition to the tax allowable under other provisions of 
the proposed treaty.
    In the case of the United States, the proposed treaty 
permits the imposition of a branch profits tax, but limits the 
rate of such tax to 10 percent. In this regard, the proposed 
treaty provides that the United States may impose a tax on the 
``dividend equivalent amount'' of the branch profits of a Thai 
corporation which are effectively connected (or treated as 
effectively connected) with the conduct of a trade or business 
in the United States, and which are attributable to a U.S. 
permanent establishment or that are subject to tax on a net 
basis as income or gains from real property. The proposed 
treaty provides that the rate of tax imposed on such dividend 
equivalent amount may not exceed 10 percent (i.e., the rate 
specified in Article 10(2)(a)). The Technical Explanation 
states that the term ``dividend equivalent amount'' has the 
same meaning it has under Code section 884(b), as it may be 
amended, provided that the amendments are consistent with the 
purposes of the branch profits tax.
    In the case of the United States, the proposed treaty 
permits the imposition of the branch excess interest tax, but 
limits the rate of source-country tax. In this regard, the 
proposed treaty provides that the United States may impose a 
tax on the excess, if any of (1) interest deductible in the 
United States in computing the profits of a Thai corporation 
subject to tax in the United States, and that are either 
attributable to a U.S. permanent establishment or that are 
subject to tax on a net basis as income or gains from real 
property, over (2) the interest paid by or from the U.S. 
permanent establishment or trade or business. The proposed 
treaty provides that the rate of tax imposed on such excess 
interest may not exceed the specified rates in the interest 
article (i.e., 10 or 15 percent, as the case may be, under 
Article 11(2)). Thus, for example, if the enterprise is a bank, 
the excess interest tax would be imposed at a 10 percent rate.
    In the case of Thailand, the proposed treaty provides that 
a company which is a resident of the United States and which 
has a permanent establishment in Thailand remains liable for 
taxes on disposal of profits out of Thailand in accordance with 
the provisions of Thai law. The proposed treaty provides that 
the rate of tax imposed on such profits may not exceed 10 
percent.

Article 15. 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.

Thailand

    Nonresident individuals are subject to Thai withholding tax 
at a rate of 15 percent on certain Thai-source income with 
respect to the performance of certain professional services.
            Proposed treaty limitations on internal law
    Under the proposed treaty, income in respect of 
professional services or other activities of an independent 
character derived by a resident of a country is taxable in that 
country. However, such income also may be taxed by the other 
country (the source country) if the individual performing the 
services crosses one of three thresholds in the source country, 
described below. The proposed treaty provides that the term 
``professional services'' includes independent scientific, 
literary, artistic, educational, or teaching activities, as 
well as the independent activities of physicians, lawyers, 
engineers, architects, dentists and accountants.
    Under the proposed treaty, the individual may be taxed by 
the source country if he or she has a fixed base regularly 
available to him or her in the other country for the purpose of 
performing the activities. In that case, the source country is 
permitted to tax only that portion of the individual's income 
which is attributable to that fixed base. Unlike the U.S. model 
and many U.S. treaties, but like the U.N. model, the proposed 
treaty does not require that the services be performed in the 
source country. The Technical Explanation states that the term 
``fixed base'' is understood to be similar, but not identical, 
to the term ``permanent establishment,'' as defined in the 
permanent establishment article (Article 5).
    In addition, if the individual's stay in the source country 
is for a period or periods in the aggregate of 90 days or more 
in the fiscal year concerned, the source country is permitted 
to tax the income derived from the performances of services in 
that country during that period. The individual may also be 
taxed by the source country if the remuneration for the 
individual's activities in the source country (1) is paid by a 
resident of the source country or is borne by a permanent 
establishment or fixed based situated in the source country, 
and (2) exceeds $10,000 or its equivalent in Thai currency, not 
including reimbursed expenses.
    The foregoing rules are similar, but not identical, to the 
rules in the U.N. model. Under the U.N. model, the source 
country is permitted to tax income derived by a resident of a 
country in respect of professional services if the individual's 
stay in the source country is for more than 183 days during the 
year concerned. The proposed treaty's 90-day rule grants the 
source country broader rights to tax individual residents of 
the other country than the 183-day rule in the U.N. model. In 
addition, the rules represent 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.
    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.

Article 16. Dependent Personal Services

    Under the proposed treaty, salaries, wages, 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 commencing or ending in the taxable year 
concerned; (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., OECD and U.N. 
models. The Technical Explanation states that this article is 
understood to apply to any form of compensation for employment, 
including payments in kind, regardless of whether the 
remuneration could be characterized as salaries or wages.
    The proposed treaty provides that remuneration derived in 
respect of employment exercised aboard a ship or aircraft 
operated by an enterprise of a country in international traffic 
may be taxed in the country in which the enterprise is 
resident. A similar rule is contained in the U.N. and OECD 
models.
    This article is subject to the provisions of the separate 
articles covering directors' fees (Article 17), pensions and 
social security payments (Article 20), government service 
income (Article 21), income of students and trainees (Article 
22), and income of teachers (Article 23).

Article 17. Directors' Fees

    Under the proposed treaty, directors' fees and other 
similar payments derived by a resident of one country in his or 
her capacity as a member of the board of directors of a company 
(or as a designee of a director serving in the capacity of a 
director) which is a resident of that other country may be 
taxed in that other country, unless the services are performed 
in the first country. This treatment is unlike the U.S. model, 
which provides that the country where the director resides 
continues to have sole taxing jurisdiction over remuneration 
derived from services performed outside the country of 
residence of the corporation of which the individual is a 
director.

Article 18. 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 Thailand. The proposed treaty is intended to 
limit double taxation caused by the interaction of the tax 
systems of the United States and Thailand 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 that is a resident of either Thailand or the United 
States and that derives income from the other treaty country is 
entitled to all the benefits of the proposed treaty only if 
such person is:

  (1) an individual;
  (2) one of the treaty countries or a political subdivision or 
            local authority thereof;
  (3) a person that satisfies an ownership and base erosion 
            test;
  (4) a company that satisfies a public company test;
  (5) a company that is owned by certain public companies; or
  (6) an entity that is a not-for-profit tax-exempt 
            organization that satisfies an ownership test.

    Alternatively, a resident that does not fit into any of the 
above categories may claim treaty benefits with respect to 
certain items of income under the 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 source country's competent authority so determines.
    The proposed treaty provides that a Thai resident that is 
an ``international banking facility'' as that term is defined 
under the laws of Thailand (or any other Thai resident that is 
subject to the same tax treatment under Thai law as an 
international banking facility) is not entitled to any U.S. 
benefits under the proposed treaty with respect to any income 
that such facility receives from the United States.
            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 Thailand or the United 
States, citizens of the United States, the countries 
themselves, political subdivisions or local authorities of the 
countries, certain publicly traded companies and subsidiaries 
of publicly traded companies (as described in the discussion of 
the public company tests below), or certain tax-exempt 
organizations (as described in the discussion of tax-exempt 
entities below). This rule could, for example, deny the 
benefits of the reduced U.S. withholding tax rates on dividends 
and royalties paid to a Thai company that is controlled by 
individual residents of a third country. This rule is similar, 
but not identical, to a corresponding rule in the U.S. model. 
In addition, the base erosion test is met only if more than 50 
percent of the gross income of the entity is not used, 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. This 
treatment is similar to the corresponding rule in the U.S. 
model.
            Public company tests
    Under the public company tests, a company that is a 
resident of Thailand or the United States is entitled to the 
benefits of the proposed treaty if there is substantial and 
regular trading in its principal class of shares on a 
recognized stock exchange, regardless of where its actual 
owners reside or the amount or destination of payments it 
makes. This test is similar to the rule contained in the U.S. 
model. The Technical Explanation states that the term 
``principal class of shares'' is to be interpreted as the class 
of shares that represents the majority of the voting power and 
value of the company. The Technical Explanation also states 
that the term ``substantial and regular trading,'' although not 
defined in the proposed treaty, will be defined by reference to 
the domestic laws of the country from which treaty benefits are 
being sought. In the case of the United States, this term is 
understood to have the meaning given ``regularly traded'' in 
Treas. Reg. sec. 1.884-5(d)(4)(i)(B), relating to the branch 
tax provisions of the Code.
    Similarly, treaty benefits are available to a company that 
is a resident of Thailand or the United States and 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 Thailand or the United 
States. Under the U.S. model, at least 50 percent of each class 
of shares in a company must be owned directly or indirectly by 
a company that satisfies a similar public company test as 
described above. Thus, the wholly owned requirement in the 
proposed treaty for companies owned by publicly traded 
companies generally is more stringent than the corresponding 
ownership requirement 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; any securities 
exchange recognized by the Securities and Exchange Commission 
of Thailand; and any other stock exchange agreed upon by the 
competent authorities of the two countries.
            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 
beneficiaries, members or participants, if any, are entitled 
under this article to the benefits of the proposed treaty. 
Unlike the proposed treaty, the U.S. model does not contain an 
ownership requirement for such tax-exempt organizations.
            Active business test

In general

    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 if 
(1) the income is derived in connection with that trade or 
business, and that trade or business substantial in relation to 
the income-generating activity in the other country, or (2) the 
income is incidental to the trade or business in the 
recipient's residence country. Under the U.S. model, the trade 
or business in the residence country must also be 
``substantial'' in cases where the income derived in the other 
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 term ``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. Under the proposed treaty, the active 
business test 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. The Technical 
Explanation states these rules do not apply to a headquarters 
company, because the company would not be considered to be 
engaged in an active trade or business.

Income derived in connection with a trade or business that is 
        substantial

    The Technical Explanation states that an item of income is 
derived in connection with a trade or business if the income-
producing activity in the source country is a line of business 
which forms a part of, or is complementary to, the trade or 
business conducted in the residence country. \9\ This rule is 
similar to the rule in the U.S. model. The Technical 
Explanation states that it is intended that a business activity 
generally will be considered to ``form a part of'' a business 
activity conducted in the other country if the two activities 
involve the design, manufacture or sale of the same products or 
type of products, or the provision of similar services. The 
Technical Explanation further states that in order for 
activities to be ``complementary,'' the activities need not 
relate to the same types of products or services, but they 
should be part of the same overall industry and be related in 
the sense that success or failure of one activity will tend to 
result in the success or failure of the other activity. The 
Technical Explanation provides several examples illustrating 
these principles.
---------------------------------------------------------------------------
    \9\ Cf. Treas. Reg. sec. 1.884-5(e)(1) (To satisfy the active 
business test, the activities that give rise to the U.S. income must be 
part of a U.S. business and that business must be an integral part of 
an active trade or business conducted by the foreign corporation in its 
residence country.).
---------------------------------------------------------------------------
    The proposed treaty provides that whether a trade or 
business of a resident is substantial is determined based on 
all the facts and circumstances. According to the Technical 
Explanation, the factors to be considered include the relative 
scale of the activities conducted in the two countries, and the 
relative contributions made to the conduct of the trade or 
business in both countries. \10\
---------------------------------------------------------------------------
    \10\ Cf. Treas. Reg. sec. 1.884-5(e)(3) (A foreign corporation 
engaged in business in its residence country has a substantial presence 
in that country if certain of the attributes of that business, 
physically located in its residence country, equal at least a threshold 
percentage of its worldwide attributes.).
---------------------------------------------------------------------------

Income incidental to a trade or business

    The Technical Explanation states that it is understood that 
income is incidental to a trade or business conducted in the 
other country if the production of such income facilitates the 
conduct of a trade or business in the other country. This rule 
is the same as the rule in the U.S. model. As an example, the 
Technical Explanation states that incidental income includes 
the temporary investment of working capital derived from a 
trade or business.
            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.
            Other rules
    The proposed treaty provides that if income arising in one 
of the countries is relieved in whole or in part from tax in 
that country, and a person is subject to tax in respect of such 
income under the law in force of the other country by reference 
to the amount of the income which is remitted to or received in 
that other country, and not by reference to the full amount of 
the income, then the relief to be allowed under the proposed 
treaty in the country in which the income arises will apply 
only to the portion of the income that is remitted to or 
received in the other country during the calendar year such 
income accrues or the next succeeding year.
    The proposed treaty also provides that the competent 
authorities of the countries will exchange such information as 
is necessary to carry out the provisions of this article.

Article 19. Artistes and Sportsmen

    Like the U.S., OECD and U.N. 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 sportsmen. 
These rules apply notwithstanding the other provisions dealing 
with the taxation of income from personal services (Articles 15 
and 16) and are intended, in part, to prevent entertainers and 
sportsmen from using the proposed treaty to avoid paying any 
tax on their income earned in one of the countries.
    Under the proposed treaty, income derived by an entertainer 
or sportsman 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 the lesser 
of (1) $100 or its Thai currency equivalent per day, or (2) 
$3,000 or its Thai currency equivalent in the aggregate for the 
entire taxable year concerned. Under this rule, if a Thai 
entertainer or sportsman 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 $200, 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 sportsman in his 
or her capacity as such accrues not to the entertainer or 
sportsman but to another person, that income of that other 
person is taxable by the country in which the activities are 
exercised, unless it is established that neither the 
entertainer or sportsman nor persons related to him or her 
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 personal services 
articles (Articles 7, 15 and 16).) This provision prevents 
highly-paid entertainers and sportsmen from avoiding tax in the 
country in which they perform by, for example, routing the 
compensation for their services through a third entity such as 
a personal holding company or a trust located in a country that 
would not tax the income.
    The proposed treaty provides that these rules do not apply 
to remuneration, or profits, salaries, wages and similar income 
derived from activities performed in a country by public 
entertainers if the visit to that country is substantially 
supported by public funds of the other country, including any 
of its political subdivisions or local authorities. This rule 
is not contained in the U.S., OECD or U.N. models, but is 
contained in some other U.S. treaties.

Article 20. Pensions and Social Security Payments

    Under the proposed treaty, pensions and other similar 
remuneration paid to a resident of either country in 
consideration of past employment is subject to tax only in the 
recipient's country of residence. The Technical Explanation 
states that, for purposes of this rule, the pension may be paid 
periodically or in a lump sum. This rule is subject to the 
provisions of Article 21 (Government Service) with respect to 
pensions.
    The proposed treaty provides that social security benefits 
and other similar public pensions paid by a country to a 
resident of the other country or to a U.S. citizen are taxable 
only by the payor's country, and not by the recipient's country 
of residence. According to the Technical Explanation, the 
phrase ``similar public pension'' is intended to include United 
States 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.
    The proposed treaty also provides that annuities are taxed 
only in the country of residence of the person that 
beneficially owns and derives them. This rule is similar to the 
rule in the U.S. model. 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).
    The proposed treaty provides that alimony paid to a 
resident of a country is taxable only in the recipient's 
country of residence. For purposes of the proposed treaty, the 
term ``alimony'' means periodic payments made pursuant to a 
written separation agreement or a decree of divorce, separate 
maintenance or compulsory support, which payments are taxable 
under the laws of the country in which the recipient is a 
resident. This rule is similar to the rule contained in the 
U.S. model.
    The proposed treaty provides that child support payments 
made by a resident of a country to a resident of the other 
country are taxable only in the payor's country of residence. 
This rule is different from the rule in the U.S. model, which 
provides that child support payments are exempt from tax in 
both countries. For these purposes, child support payments are 
periodic payments, not treated as alimony payments, for the 
support of a child made pursuant to a written separation 
agreement, or a decree of divorce, separate maintenance or 
compulsory support.

Article 21. Government Service

    The proposed treaty provides rules with respect to the tax 
treatment of income (including pensions) from governmental 
employment. The provisions generally follow the corresponding 
provisions in the U.S., OECD and U.N. models.
    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 by 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.
    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.
    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 Thailand 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 Thai 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 16 (Dependent Personal Services), 17 
(Directors' Fees), and 20 (Pensions and Social Security 
Payments) apply to remuneration and pensions paid for services 
rendered in connection with the business.

Article 22. Students and Trainees

    The proposed treaty provides rules with respect to the 
taxation of income of students and trainees. The provisions of 
this article differ substantially from the provisions in the 
U.S., OECD and U.N. models.
    Under the proposed treaty, an individual who is a resident 
of a country (the residence country) at the time he or she 
becomes temporarily present in the other country (the host 
country) will be exempt from tax by the host country for 
certain amounts received by the individual, if the individual's 
visit in the host country was for the primary purpose of (1) 
studying at a university or other recognized educational 
institution in the host country, (2) securing training required 
to qualify such individual to practice a profession or 
professional specialty, or (3) studying or doing research as a 
recipient of a grant, allowance or award from a government, 
religious, charitable, scientific, literary or educational 
organization. In such cases, the individual will be exempt from 
host country tax for a period not exceeding five taxable years 
from the date of the individual's arrival in the host country 
in respect of (1) gifts from abroad for the purpose of 
maintenance, education, study, research, or training, (2) a 
grant, allowance or award, and (3) income from personal 
services performed in the host country in an amount not to 
exceed $3,000 or its Thai currency equivalent for any taxable 
year. The Technical Explanation states that a gift will be 
considered to be made from abroad if the payor is located 
outside the host country. The Technical Explanation states that 
the term ``primary purpose'' (as referred to above) is meant to 
describe individuals participating in a full-time program of 
study, training or research. \11\
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    \11\ The Technical Explanation states that it is not the intention 
to exclude full-time students who, in accordance with their visas, may 
hold part-time employment jobs.
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    The proposed treaty provides that the benefits described 
under the foregoing paragraph, as well as the benefits provided 
to teachers under Article 23, may, when taken together, extend 
for a period of time not to exceed five taxable years from the 
date of the individual's arrival in the host country, as may 
reasonably or customarily be required to effectuate the purpose 
of the visit. In addition, the benefits provided to teachers 
under Article 23 are not available to an individual, if during 
the immediately preceding period, such individual enjoyed the 
benefits described in the foregoing paragraph.
    Under the proposed treaty, an individual who is a resident 
of one country at the time he or she becomes temporarily 
present in the other country as an employee of, or under 
contract with, a resident of the first country, will be exempt 
from tax by the host country for certain amounts received by 
the individual, if the individual's visit in the host country 
was for the primary purpose of (1) acquiring technical, 
professional, or business experience from a person other than 
that resident of the first country or a person related to that 
resident, or (2) studying at a university or other recognized 
educational institution in the host country. In such cases, the 
individual will be exempt from tax by the host country for a 
period not exceeding 12 consecutive months with respect to his 
or her income from personal services in an aggregate amount 
which does not exceed $7,500 or its Thai currency equivalent 
(not including reimbursed expenses).
    Under the proposed treaty, an individual who is a resident 
of one country at the time he or she becomes temporarily 
present in the other country for a period not exceeding one 
year, as a participant in a program sponsored by the Government 
of the host country, for the primary purpose of training, 
research or study, is exempt from tax by the host country with 
respect to income from personal services in respect of such 
training, research or study performed in the host country. This 
exemption from host country tax applies to an amount that may 
not exceed, in the aggregate, $10,000 or its Thai currency 
equivalent in any taxable year (not including reimbursed 
expenses).
    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 host country. Thus, for example, a person who is not a U.S. 
citizen, and who visits the United States as a student and 
remains long enough to become a resident under U.S. law, but 
does not become a permanent resident, will be entitled to the 
full benefits of this article.

Article 23. Teachers

    The proposed treaty provides rules with respect to the 
taxation of income earned by teachers. The U.S., OECD and U.N. 
models do not contain similar provisions.
    Under the proposed treaty, a teacher or instructor who, 
immediately before visiting a country (the host country), was a 
resident of the other country and who is present in the host 
country for a period not exceeding two years for the purposes 
of teaching or engaging in research at a university, college or 
other recognized educational institution in the host country, 
is not taxable in the host country on any remuneration for such 
teaching or research, for a period not exceeding two years from 
the date he or she first visits the host country for such 
purpose.
    The proposed treaty provides that this article applies to 
income from research only if such research is undertaken by the 
individual in the public interest and not primarily for the 
benefit of some other private person or persons.
    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 24. 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 Thailand. 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, 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 Thailand 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 right or property in respect 
of which the income is paid is effectively connected with such 
permanent establishment or fixed base. In such a case, the 
provisions of Article 7 (Business Profits) or Article 15 
(Independent Personal Services), as the case may be, will 
apply. Under the proposed treaty, 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.
    The proposed treaty provides that notwithstanding the 
foregoing rules, items of income of a resident of a country not 
dealt with in the other articles of the proposed treaty and 
arising in the other country, may also be taxed by that other 
country. This rule, which is not contained in the U.S. and OECD 
models, is similar to the corresponding rule in the U.N. model.

Article 25. 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.

Thailand

    Under Thai law, the relevant taxes paid to foreign 
countries generally are deductible expenses of a Thai 
corporation. Generally no specific foreign tax relief is 
provided for Thai resident individuals.
            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.
    The double tax issue is addressed in part in other articles 
of the proposed treaty that limit the right of a source country 
to tax income. This article provides further relief where both 
Thailand 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.
    In the case of the United States, 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 Thailand. The proposed treaty also requires the 
United States to allow a deemed-paid credit, with respect to 
Thai income tax, to any U.S. company that receives dividends 
from a Thai company if the U.S. company owns 10 percent or more 
of the voting stock of such Thai company. The credit generally 
is to be computed in accordance with the provisions and subject 
to the conditions and 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). The diplomatic 
notes provide that the term ``conditions'' is intended to make 
clear that U.S. rules regarding dual capacity taxpayers apply 
in determining the extent to which the Thailand petroleum 
income tax will be considered an income tax for purposes of the 
relief from double taxation article (Article 25). The proposed 
treaty provides that the Thai taxes referred to in Article 2 
(Taxes Covered) are considered income taxes for purposes of the 
foregoing rules.
    In the case of Thailand, the proposed treaty generally 
provides that U.S. tax payable in respect of U.S.-source income 
is allowed as a credit against Thai tax payable on such income. 
The credit may not exceed the portion of the pre-credit amount 
of Thai tax which is appropriate to such income. The allowance 
of this credit is subject to the provisions of Thai 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 proposed treaty provides that these 
rules regarding the creditability of U.S. taxes for Thai tax 
purposes will not apply in the case of income that has been 
denied the benefits of the proposed treaty under the limitation 
on benefits article (Article 18).
    For purposes of implementing the proposed treaty's foreign 
tax credit, the proposed treaty provides source rules for 
determining the country in which an item of income is deemed to 
have arisen. Under these rules, 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. In 
addition, income derived by a resident of one of the countries 
that may not be taxed in the other country in accordance with 
the proposed treaty is treated as arising in the resident's 
country of residence. Notwithstanding these rules, the proposed 
treaty provides that the determination of the source of income 
for purposes of this article will be subject to such source 
rules in the domestic laws of the country as apply for the 
purpose of limiting the foreign tax credit. The proposed treaty 
clarifies that these rules do not apply in determining foreign 
tax credits in a country for foreign taxes other than the taxes 
of the other country referred to in Article 2 (Taxes Covered).
    The diplomatic notes provide that it is understood that if 
the United States alters its policy regarding the provision of 
a tax sparing credit, or if the United States reaches an 
agreement on the provision of a tax sparing credit with any 
other country, the United States will agree to reopen 
negotiations with Thailand with a view to concluding a protocol 
which would provide a similar tax sparing credit to Thailand.

Article 26. Non-Discrimination

    The proposed treaty contains a non-discrimination article 
that is generally 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. Under the U.S. model, 
however, nondiscrimination protection is provided with respect 
to all taxes imposed by a country or its political subdivisions 
or local authorities. Unlike the U.S. model, this article 
applies only to taxes covered by the proposed treaty under 
Article 2 (Taxes Covered).
    In general, under the proposed treaty, one country may 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 
Thailand.
    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., OECD and U.N. 
models, 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.
    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 27. 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, 
if the case comes under the non-discrimination article (Article 
26), to the competent authority of the country in which he or 
she is a national. Similar to the OECD and U.N. models, and 
unlike the U.S. model, the proposed treaty provides that the 
case must be presented within three years from the first 
notification of the action resulting in taxation not in 
accordance with the provisions of the proposed treaty.
    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 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 increase 
any specific amounts referred to in the proposed treaty to 
reflect economic or monetary developments. The competent 
authorities may also consult together for the elimination of 
double taxation in cases not provided for in the proposed 
treaty. The Technical Explanation states that the competent 
authorities may agree on other matters, including 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; advance pricing 
arrangements; the characterization of particular items of 
income; the characterization of persons; the application of 
source rules with respect to particular items of income; the 
application of provisions of each country's internal law 
regarding penalties, fines, and interest; uniform standards for 
the use of exchange rates; and consistent timing of gain 
recognition with respect to a transaction to avoid double 
taxation.
    The proposed treaty provides that in the event that the 
competent authorities reach an agreement under this article, 
taxes will be imposed on such income, and refund or credit of 
taxes will be allowed by the countries in accordance with such 
agreement.
    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 28. 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 by the United 
States under the Code, and in the case of Thailand, to all 
taxes imposed under the Thai Revenue Code and the Thai 
Petroleum Income Tax Act.
    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. \12\ 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.
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    \12\ Code section 6103 provides that otherwise confidential tax 
information may be utilized for a number of specifically enumerated 
non-tax purposes. Information obtained by the United States pursuant to 
the proposed treaty could not be used for these non-tax purposes.
---------------------------------------------------------------------------
    As is true under the U.S., OECD and U.N. models, under the 
proposed treaty, a country is not required to carry out 
administrative measures at variance with the laws and 
administrative practice of either country, to supply 
information 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.
    Subject to the termination article (Article 31), the 
proposed treaty provides that if information is requested by a 
country in accordance with the exchange of information article, 
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. The Technical Explanation states that 
this rule applies even if the requested country has no direct 
tax interest in the case to which the tax relates. However, the 
proposed treaty provides that the application of this rule will 
be suspended until such time as the U.S. Government receives 
from the Thai Government a diplomatic note indicating that 
Thailand is prepared and able to implement this provision. The 
Technical Explanation states that it is understood that 
Thailand will not be prepared and able to implement this 
provision until enabling legislation has been enacted and 
becomes effective.

Article 29. Diplomatic Agents and Consular Officers

    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 diplomatic agents or consular 
officers 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 
Thai residents generally may be protected from Thai tax.

Article 30. Entry Into Force

    This article provides for the ratification of the proposed 
treaty in accordance with the applicable procedures of each 
country, and for the exchange of instruments of ratification at 
Washington DC. 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 the sixth month 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 31. 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 six month 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 six month notification period.
    Notwithstanding the above rules, the proposed treaty will 
terminate on January 1 of the sixth year following its entry 
into force, unless the U.S. Government has received from the 
Thai Government by the preceding June 30th, a diplomatic note 
as described in the exchange of information article (Article 
28), indicating that Thailand is prepared to implement the 
provision relating to obtaining information upon request 
described in paragraph 3 of that article.

               IX. Text of the Resolution of Ratification

    Resolved, (two-thirds of the Senators present concurring 
therein), That the Senate advise and consent to the 
ratification of the Convention between the Government of the 
United States of America and the Government of the Kingdom of 
Thailand for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income, 
signed at Bangkok, November 26, 1996 (Treaty Doc. 105-2), 
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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