[Senate Executive Report 108-11]
[From the U.S. Government Publishing Office]



108th Congress                                               Exec. Rpt.
                                 SENATE
 2d Session                                                      108-11
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   TAXATION CONVENTION AND PROTOCOL WITH THE GOVERNMENT OF SRI LANKA

                                _______
                                

                 March 18, 2004.--Ordered to be printed

  Filed under authority of the order of the Senate of March 12, 2004.

                                _______
                                

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

                              R E P O R T

              [To accompany Treaty Docs. 99-10 and 108-9]

    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 Democratic Socialist Republic 
of Sri Lanka for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income, 
signed at Colombo on March 14, 1985, and the Protocol amending 
the Convention, together with an Exchange of Notes, signed at 
Washington on September 20, 2002, having considered the same, 
reports favorably thereon and recommends that the Senate give 
its advice and consent to ratification thereof, as set forth in 
this report and the accompanying resolution of ratification.

                                CONTENTS

                                                                   Page

  I. Purpose..........................................................1
 II. Background.......................................................2
III. Summary..........................................................2
 IV. Entry Into Force and Termination.................................3
  V. Committee Action.................................................4
 VI. Committee Comments...............................................4
VII. Budget Impact...................................................13
VIII.Explanation of Proposed Treaty..................................13

 IX. Resolution of Ratification......................................13

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Sri Lanka 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 taxes of the two countries. 
The proposed treaty also is intended to continue to promote 
close economic cooperation between the two countries and to 
eliminate possible barriers to trade and investment caused by 
overlapping taxing jurisdictions of the two countries.

                             II. Background

    The proposed treaty between the United States and Sri Lanka 
was signed at Colombo on March 14, 1985 but has not entered 
into force. The proposed treaty was not acted on by the Senate 
at the time because changes made to U.S. international tax 
rules by the Tax Reform Act of 1986 necessitated some 
modifications to the agreement. The proposed protocol to amend 
that treaty was signed at Washington on September 20, 2002. The 
United States and Sri Lanka exchanged notes on the same day to 
provide clarification with respect to the application of the 
proposed treaty. Unless otherwise specified, the proposed 
treaty, the proposed protocol, and the notes are hereinafter 
referred to collectively as the ``proposed treaty.''
    The Convention was sent to the Senate for advice and 
consent to its ratification on October 2, 1985 (see Treaty Doc. 
99-10). The proposed protocol was sent to the Senate for advice 
and consent to its ratification on October 28, 2003 (see Treaty 
Doc. 108-9). The Committee on Foreign Relations held a public 
hearing on the proposed treaty on February 25, 2004.

                              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''), the 1992 model income tax treaty of the Organization 
for Economic Cooperation and Development, as updated (``OECD 
model''), and the 1980 United Nations Model Double Taxation 
Convention Between Developed and Developing Countries, as 
amended in 2001 (``U.N. model''). However, the proposed treaty 
contains certain substantive deviations from these treaties and 
models.
    As in other U.S. tax treaties, the purposes of the treaty 
principally are 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 (Article 7). 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 18). The proposed 
treaty provides that dividends, interest, royalties, and 
certain capital gains derived by a resident of either country 
from sources within the other country generally may be taxed by 
both countries (Articles 10, 11, 12, and 13); however, the rate 
of tax that the source country may impose on a resident of the 
other country on dividends, interest, and royalties may be 
limited or eliminated by the proposed treaty (Articles 10, 11, 
and 12).
    In situations in which the country of source retains the 
right under the proposed treaty to tax income derived by 
residents of the other country, the proposed treaty generally 
provides for relief from the potential double taxation through 
the allowance by the country of residence of a tax credit for 
certain foreign taxes paid to the other country (Article 24).
    The proposed treaty contains the standard provision (the 
``saving clause'') 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 by third-country residents (Article 23).

                  IV. Entry Into Force and Termination


                          A. ENTRY INTO FORCE

    The proposed treaty will enter into force upon the exchange 
of instruments of ratification. With respect to each country, 
the proposed treaty will be effective with respect to taxes 
withheld at source for amounts paid or credited on or after the 
first day of the second 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 day of January of the year in 
which the proposed treaty enters into force.
    The Technical Explanation states that the provisions of 
Article 26 (Mutual Agreement Procedure) and Article 27 
(Exchange of Information) of the proposed treaty will have 
effect from the date of entry into force of the proposed 
treaty, without regard to the taxable or chargeable period to 
which the matter relates.

                             B. TERMINATION

    The proposed treaty will remain in force until terminated 
by either country. Either country may terminate the proposed 
treaty, after the expiration of a period of five years from the 
date of its entry into force, by giving six months prior 
written notice of termination to the other country through 
diplomatic channels. In such case, with respect to each 
country, 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 notice period. With respect to 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 notice period.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed treaty with Sri Lanka on February 25, 2004. The 
hearing was chaired by Senator Lugar.\1\ The committee 
considered the proposed treaty on March 4, 2004, and ordered 
the proposed treaty with Sri Lanka favorably reported by a vote 
of 19 in favor and 0 against. Ayes: Senators Lugar, Hagel, 
Chafee, Allen, Brownback, Enzi, Voinovich, Alexander, Coleman, 
Sununu, Biden, Sarbanes, Dodd, Kerry, Feingold, Boxer, Nelson, 
Rockefeller, and Corzine.
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    \1\ The transcript of this hearing will be forthcoming as a 
separate committee print.
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                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed treaty with Sri Lanka 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 the 
Treasury Department officials in providing guidance on these 
matters should they arise in the course of future treaty 
negotiations.

                     A. STABILITY OF SRI LANKAN LAW

    In the past, the Treasury Department has maintained that a 
country's political situation should be a factor in determining 
whether to build stronger economic ties with that country. As 
the Treasury Department explained in a letter to the Senate 
Foreign Relations Committee:

          A country's political situation is a factor that is 
        considered in determining whether to build stronger 
        economic ties with that country. When consideration of 
        this and other factors leads to a policy of building 
        stronger economic ties with a particular country, a tax 
        treaty becomes a logical part of that policy. One of a 
        treaty's main purposes is to foster the competitiveness 
        of U.S. firms that enter the treaty partner's market 
        place. As long as it is U.S. policy to encourage U.S. 
        firms to compete in these market places, it is in the 
        interest of the United States to enter tax treaties.
          Moreover, in countries where an unstable political 
        climate may result in rapid and unforeseen changes in 
        economic and fiscal policy, a tax treaty can be 
        especially valuable to U.S. companies, as the tax 
        treaty may restrain the government from taking actions 
        that would adversely impact U.S. firms, and provide a 
        forum to air grievances that otherwise would be 
        unavailable.\2\
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    \2\ Letter dated July 5, 1995 from the Department of the Treasury 
to the Senate Foreign Relations Committee, as quoted in the Report of 
the Senate Foreign Relations Committee on the Income Tax Convention 
with Ukraine, Exec. Rept. 104-5, August 10, 1995.

Background of Political Developments in Sri Lanka

    The government of Sri Lanka is a constitutional democracy. 
For approximately the past 20 years, the country has 
experienced periods of significant conflict involving a 
separatist group that has been declared by the United States to 
be a terrorist organization. In recent years, the Norwegian 
government has facilitated a peace process designed to resolve 
this conflict. In November 2003, while the Sri Lankan prime 
minister was in Washington seeking support for the peace 
process, the Sri Lankan president removed three cabinet 
ministers, suspended parliament, and imposed martial law. In 
February 2004, the Sri Lankan president dissolved parliament 
and set April 2, 2004 for the next general election. The State 
Department has recently stated that Sri Lanka is currently 
experiencing a ``domestic political crisis.'' \3\
---------------------------------------------------------------------------
    \3\ Press Statement by Adam Ereli, Deputy Spokesman, United States 
Department of State, Sri Lanka: Deputy Secretary Armitage's Meeting 
with Minister for Economic Reform, Science, And Technology Milinda 
Moragoda, December 29, 2003.

Issues

    Several issues arise in the consideration of a tax treaty 
with a government that is experiencing political instability. 
One issue is that it may be difficult to identify correctly the 
other country's competent authority in situations where there 
are competing claims as to who is authorized to exercise 
legislative, executive, or judicial authority. Another issue is 
the extent to which any political instability also causes 
uncertainty as to the precise nature of the substantive law of 
that country. These uncertainties may make it difficult to 
administer the treaty.
    A more specific issue arises in the context of the 
exchange-of-information provisions of the proposed treaty 
(Article 27). The exchange-of-information provision requires 
that information that is exchanged shall be treated as secret 
by the receiving country in the same manner as information 
obtained under its local laws and may only be disclosed to 
persons involved in the assessment, collection, or 
administration of taxes covered by the provision. Several 
concerns may arise with respect to the utilization of this 
provision with a government that is experiencing political 
instability. First, it may be more difficult to assess whether 
confidentiality will be respected when the information is 
initially exchanged. Second, it may be more difficult to assess 
the possibility that inappropriate use will be made in the 
future of the exchanged information. Third, the country 
receiving the information could weaken (or potentially 
eliminate) the confidentiality protections under its local 
laws, which would concomitantly weaken or eliminate those 
protections for exchanged information. However, these issues 
involving exchange of information may be dealt with by the 
United States competent authority in administering the 
provisions of the proposed treaty.

Committee Conclusions

    The committee has considered the political situation in Sri 
Lanka and its implications for the proposed treaty. The 
committee recognizes the benefits this treaty would provide to 
U.S. taxpayers and the positive effect the treaty could have on 
the Sri Lankan economic environment. On balance, the committee 
believes that it is appropriate to proceed with the 
consideration of this proposed treaty and recommends its 
ratification.

                   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 listed below.

Definition of Permanent Establishment

    The proposed treaty departs from the U.S. model treaty by 
providing for relatively broad source-basis taxation. In 
particular, the proposed treaty's permanent establishment 
article permits the country in which business activities are 
performed to tax these activities in a broader range of 
circumstances than would be permitted under the U.S. model.
    For example, under the proposed treaty, a building site, a 
construction or assembly project, or an installation or 
drilling rig or ship used for the exploration of natural 
resources constitutes a permanent establishment if such 
project, or activity relating to such installation, rig, or 
ship, as the case may be, continues for more than 183 days. The 
U.S. model uses a threshold of 12 months. The proposed treaty 
also provides that the furnishing of services (e.g., consulting 
services) by an enterprise through employees or other personnel 
engaged for such purpose constitutes a permanent establishment 
if the activity continues within the country for an aggregate 
of more than 183 days in any 12-month period. The U.S. model 
provides that these activities give rise to a permanent 
establishment only if conducted through a fixed place of 
business or by a dependent agent.
    In addition, the proposed treaty provides that, except in 
the case of reinsurance, an insurance enterprise of one treaty 
country will be deemed to have a permanent establishment in the 
other treaty country if it collects premiums or insures risks 
situated in the other treaty country through a person other 
than an independent agent. The proposed treaty also provides 
that if the activities of an agent are devoted wholly or almost 
wholly on behalf of an enterprise, and the transactions between 
the enterprise and the agent do not conform to arm's-length 
conditions, then the agent may cause the enterprise to have a 
permanent establishment in the country in which the agent's 
activities are performed. In addition, the proposed treaty 
provides that if a dependent agent maintains in one treaty 
country a stock of goods or merchandise from which the agent 
regularly fills orders or makes deliveries on behalf of an 
enterprise of the other treaty country, and additional 
activities conducted in the source country on behalf of the 
enterprise have contributed to the conclusion of the sale of 
such goods or merchandise, then the enterprise is deemed to 
have a permanent establishment in the source country. These 
provisions all expand source-basis taxation beyond what is 
provided in the U.S. model.

Source Basis Taxation

    Additional concessions to source basis taxation in the 
proposed treaty include a maximum rate of source country tax on 
dividends (15 percent) that is higher than that provided in the 
U.S. model treaty; and broader source country taxation of 
personal services income (especially directors' fees) and 
income of artistes and athletes than that allowed by the U.S. 
model treaty.

Taxation of Business Profits

    Unlike the U.S. model, the proposed treaty does not permit 
a permanent establishment to deduct payments that it makes to 
the head office, or any other office, of the enterprise that 
includes the permanent establishment if such payments 
constitute: (1) royalties, fees or other similar payments in 
return for the use of patents, know-how or other rights; (2) 
commissions or other charges for specific services performed or 
for management; or (3) interest on loans to the permanent 
establishment. Similarly, such payments made to the permanent 
establishment by the head office or other office of the 
enterprise that includes the permanent establishment are not 
taken into account in determining the taxable business profits 
of the permanent establishment.

Other Concessions to Source-Basis Taxation

    In several instances, the proposed treaty allows higher 
rates of source-country tax than the U.S. model allows. The 
proposed treaty allows a maximum rate of source-country tax of 
15 percent on dividends, which is consistent with the U.S. 
model, but it does not reduce this maximum rate to five percent 
in cases in which the shareholder owns at least 10 percent of 
the voting stock of the dividend-paying company, as the U.S. 
model does. The proposed treaty also allows source-country 
taxation of interest at a maximum rate of 10 percent, whereas 
the U.S. model generally does not permit source-country 
taxation of interest. Similarly, the proposed treaty allows 
source-country taxation of royalties at a maximum rate of 10 
percent and certain equipment rentals at a maximum rate of five 
percent, whereas the U.S. model generally does not permit 
source-country taxation of such royalties and rental fees. The 
proposed treaty also allows the source country a non-exclusive 
right to tax ``other income'' (i.e., income not specifically 
dealt with in other provisions of the treaty), whereas the U.S. 
model provides for exclusive residence-based taxation of such 
income.
    In addition, the proposed treaty permits source-country 
taxation of income derived by a resident of the other treaty 
country from the performance of independent personal services 
if the resident is present in the source country for a total of 
more than 183 days during any 12-month period, even if such 
income is not attributable to a fixed base or permanent 
establishment, as the U.S. model would require.

Grants

    The proposed treaty includes a provision providing 
favorable treatment for grants received by a U.S. resident 
company from the government of Sri Lanka for purposes of 
investment promotion and economic development in Sri Lanka. The 
provision provides for the exclusion from income and from 
earnings and profits for U.S. tax purposes of a cash grant or 
similar payment by the government of Sri Lanka to a U.S. 
resident in respect of a wholly owned enterprise in Sri Lanka, 
or to a company resident in Sri Lanka that is wholly owned by a 
U.S. resident. No similar provision is found in the U.S. model 
treaty, nor is any similar provision included in any U.S. 
bilateral tax treaty other than the U.S.-Israel treaty.

Issues

    One purpose of the proposed treaty is to reduce tax 
barriers to direct investment by U.S. firms in Sri Lanka. The 
practical effect of the developing-country concessions could be 
greater Sri Lankan taxation (or less U.S. taxation) of 
activities of U.S. firms in Sri Lanka 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 UN model treaty, and a 
number of existing U.S. income tax treaties with developing 
countries already include similar concessions. Such concessions 
arguably are necessary in order to obtain treaties with 
developing countries. Tax treaties with developing countries 
can be in the interest of the United States because they 
provide developing country tax relief for U.S. investors and a 
clearer framework within which the taxation of U.S. investors 
will take place.

Committee Conclusions

    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 
will necessarily 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. EDUCATION AND TRAINING

    Under the proposed treaty, U.S. taxpayers who are visiting 
Sri Lanka and individuals who immediately prior to visiting the 
United States were resident in Sri Lanka will be exempt from 
income tax in the host country on certain payments received if 
the purpose of their visit is to engage in full-time education 
or to engage in full-time training. The exempt payments are 
limited to those payments the individual may receive for his or 
her maintenance, education or training as long as such payments 
are from sources outside the host country. In the case of an 
individual engaged primarily in training or education, but who 
is an employee of a person resident in his or her home country 
or who is participating in a program of the government of the 
host country or of an international organization, a different 
exemption applies. Such an individual is exempt from host 
country tax on up to $6,000 of personal service income. The 
exemption from income tax in the host country applies only for 
a period of one year or less.

Issues

            Full-time students and persons engaged in full-time 
                    training
    The proposed treaty generally has the effect of exempting 
payments received for the maintenance, education, and training 
of full-time students and persons engaged in full-time training 
as a visitor from the United States to Sri Lanka or as a 
visitor from Sri Lanka to the United States from the income tax 
of both the United States and Sri Lanka. This conforms to the 
U.S. model with respect to students and generally conforms to 
the OECD model provisions with respect to students and 
trainees.
    This provision generally would have the effect of reducing 
the cost of such education and training received by visitors. 
This may encourage individuals in both countries to consider 
study abroad in the other country. Such cross-border visits by 
students and trainees may foster the advancement of knowledge 
and redound to the benefit of residents of both countries.
    The proposed treaty applies a different standard when the 
visiting individual is an employee of a person in his or her 
home country or participates in a program sponsored by the 
government of the host country or of an international 
organization. For such an individual, exemption is not provided 
for payments from outside the host country for maintenance, 
education, and training; rather, such an individual may exempt, 
for the period of one year, up to $6,000 in personal services 
income from tax in the host country. In this regard the 
proposed treaty departs from the U.S. and OECD model treaties. 
The U.S. model limits exemptions for payments of maintenance, 
education, and training for one year in the case of business 
trainees but does not provide any exemption related to personal 
services income. The OECD model does not limit the duration of 
exemption for payments for maintenance, education, and training 
for business trainees and does not provide any exemption 
related to personal services income.
    Depending upon the costs of maintenance, education, and 
training, the dollar value of the exemption to non-employee 
visitors may be greater than the dollar value of the exemption 
for employee (or program participant) visitors. By potentially 
subjecting such payments for maintenance, education, and 
training as well as all personal services income received to 
host country income tax in the case of visits by employees or 
program participants engaged in visits of greater than one year 
in duration, the cost for such cross-border visitors of 
engaging in education or training programs of longer duration 
would be increased. It could be argued that the training or 
education of an employee relates primarily to specific job 
skills of value to the individual or the individual's employer 
rather than enhancing general knowledge and cross-border 
understanding, as may be the case in the education or training 
of a non-employee visitor. This could provide a rationale for 
providing more open-ended treaty benefits in the case of non-
employee students and trainees as opposed to employees. 
However, if employment provides the underlying rationale for 
disparate treaty benefits, it may be questioned as to why 
training requiring one year or less is preferred to training 
that requires a longer visit to the host country. As such, the 
proposed treaty would favor certain types of training 
arrangements over others. Further, if employment provides the 
underlying rationale for disparate treaty benefits, why 
participants in a host country or international organization 
sponsored program of education or training would be treated 
like employees is less easily discerned.
            Teachers and professors
    The proposed treaty is consistent with the U.S. model in 
which no such exemption would be provided for the remuneration 
of visiting teachers, professors, or academic researchers. 
While this is the position of the U.S. model, an exemption for 
visiting teachers and professors has been included in many 
bilateral tax treaties. Of the more than 50 bilateral income 
tax treaties in force, 30 include provisions exempting from 
host country taxation the income of a visiting individual 
engaged in teaching or research at an educational institution, 
and an additional 10 treaties provide a more limited exemption 
from taxation in the host county for a visiting individual 
engaged in research. Four of the most recently ratified income 
tax treaties and the proposed treaty with Japan include such a 
provision.
    The effect of such exemptions for the remuneration of 
visiting teachers, professors, and academic researchers 
generally is to make such cross-border visits more attractive 
financially. Increasing the financial reward may serve to 
encourage cross-border visits by academics. Such cross-border 
visits by academics for teaching and research may foster the 
advancement of knowledge and redound to the benefit of 
residents of both countries. On the other hand, such an 
exemption from income tax may be seen as unfair when compared 
to persons engaged in other occupations whose occupation or 
employment may cause them to relocate temporarily abroad. Such 
exemptions for remuneration of teachers, professors, and 
academic researchers could be said to violate the principle of 
horizontal equity by treating otherwise similarly economically 
situated taxpayers differently.

Committee Conclusions

    The committee notes that the special rules for certain 
students and trainees differ from the U.S. and OECD model 
treaties. The committee also notes that while the treatment of 
visiting teachers and professors under the proposed treaty is 
consistent with the U.S. model, it is inconsistent with other 
U.S. tax treaties in force.\4\ The committee encourages the 
Treasury Department to develop criteria for determining under 
what circumstances the inclusion of these special provisions is 
appropriate and to consult with the committee regarding these 
criteria.
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    \4\ The treaties with Italy, Slovenia, and Venezuela, each 
considered in 1999, the treaty with the United Kingdom, considered in 
2003, and the proposed treaty with Japan contain provisions exempting 
the remuneration of visiting teachers and professors from host country 
income taxation. The treaties with Denmark, Estonia, Latvia, and 
Lithuania, also considered in 1999, did not contain such an exemption, 
but did contain a more limited exemption for visiting researchers. The 
protocols with Australia and Mexico, ratified in 2003, did not include 
such exemptions.

 D. DISCLOSURE OF INFORMATION IN CONNECTION WITH OVERSIGHT OF THE TAX 
                                 SYSTEM

    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 of the 
domestic laws of the two countries concerning all national 
taxes insofar as the taxation thereunder is not contrary to the 
proposed treaty, as well as to prevent fiscal evasion. Any 
information exchanged under the proposed treaty is 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 of, 
the enforcement or prosecution in respect of, or the 
determination of appeals in relation to, the taxes to which the 
proposed treaty applies. Such persons or authorities must use 
the information for such purposes only. Exchanged information 
may be disclosed in public court proceedings or in judicial 
decisions.
    Unlike the U.S. model and unlike virtually all recent U.S. 
tax treaties, the proposed treaty does not include a specific 
reference to disclosure of exchanged information to persons or 
authorities engaged in the oversight of the tax system (e.g., 
the tax-writing committees of Congress and the General 
Accounting Office). This lacuna could present a serious 
impediment to legislative branch oversight of the operation of 
the proposed treaty. The Treasury Department explained this 
omission as follows:

          The matter of access of information in connection 
        with oversight by the GAO and certain Congressional 
        committees was discussed during the course of the 
        negotiations, and it was agreed with Sri Lanka that the 
        language included in the provision allowed the 
        necessary disclosures. Therefore, a specific reference 
        to oversight was not considered necessary. 
        Nevertheless, an outstanding clarifying this issue 
        might be helpful in order to eliminate any doubt.\5\
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    \5\ Testimony of Barbara M. Angus, International Tax Counsel, 
United States Department of the Treasury, before the Senate Committee 
on Foreign Relations on Pending Income Tax Agreements, February 25, 
2004.

Committee Conclusions

    The committee proposes an understanding as part of the 
resolution of ratification to make clear that information 
exchanged under the treaty may be disclosed to appropriate 
congressional committees and the General Accounting Office. 
Although the negotiating history of the treaty indicates that 
this issue was discussed in the negotiations and that Sri Lanka 
agreed that Article 27 permitted such disclosure, the committee 
believes it useful to add this understanding in order to ensure 
that there is no doubt on this matter. The committee has not 
defined the term ``appropriate congressional committees.'' The 
committee intends that it be given a broad reading and apply to 
any committees that, under applicable U.S. law or regulation, 
are authorized to have access to tax information in connection 
with their role in overseeing the administration of U.S. tax 
law.

                  E. U.S. MODEL TAX TREATY DIVERGENCE

    It has been longstanding practice for the Treasury 
Department to maintain, and update as necessary, a model income 
tax treaty that reflects the current policies of the United 
States pertaining to income tax treaties. The current U.S. 
policies on income tax treaties are contained in the U.S. 
model. Some of the purposes of the U.S. model are explained by 
the Treasury Department in its Technical Explanation of the 
U.S. model:

          [T]he Model is not intended to represent an ideal 
        United States income tax treaty. Rather, a principal 
        function of the Model is to facilitate negotiations by 
        helping the negotiators identify differences between 
        income tax policies in the two countries. In this 
        regard, the Model can be especially valuable with 
        respect to the many countries that are conversant with 
        the OECD Model. . . . Another purpose of the Model and 
        the Technical Explanation is to provide a basic 
        explanation of U.S. treaty policy for all interested 
        parties, regardless of whether they are prospective 
        treaty partners.

    U.S. model tax treaties provide a framework for U.S. treaty 
policy. These models provide helpful information to taxpayers, 
the Congress, and foreign governments as to U.S. policies on 
often complicated treaty matters. For purposes of clarity and 
transparency in this area, the U.S. model tax treaties should 
reflect the most current positions on U.S. treaty policy. 
Periodically updating the U.S. model tax treaties to reflect 
changes, revisions, developments, and the viewpoints of 
Congress with regard to U.S. treaty policy would ensure that 
the model treaties remain meaningful and relevant.
    With assistance from the staff of the Joint Committee on 
Taxation, the Senate Committee on Foreign Relations reviews tax 
treaties negotiated and signed by the Treasury Department 
before advice and consent to ratification by the full Senate is 
considered. The U.S. model is important as part of this review 
process because it helps the Senate determine the 
Administration's most recent treaty policy and understand the 
reasons for diverging from the U.S. model in a particular tax 
treaty. To the extent that a particular tax treaty adheres to 
the U.S. model, transparency of the policies encompassed in the 
tax treaty is increased and the risk of technical flaws and 
unintended consequences resulting from the tax treaty is 
reduced.

Committee Conclusions

    The committee recognizes that tax treaties often diverge 
from the U.S. model due to, among other things, the unique 
characteristics of the legal and tax systems of treaty 
partners, the outcome of negotiations with treaty partners, and 
recent developments in U.S. treaty policy. However, even 
without taking into account the central features of tax 
treaties that predictably diverge from the U.S. model (e.g., 
withholding rates, limitation on benefits), the technical 
provisions of recent U.S. tax treaties have diverged 
substantively from the U.S. model with increasing frequency. 
The proposed treaty continues this apparent pattern, which may 
be indicative of a growing obsolescence of the U.S. model. The 
important purposes served by the U.S. model tax treaty are 
undermined if that model does not accurately reflect current 
U.S. positions and the committee notes with approval the 
intention of the Treasury Department to update the U.S. model 
treaty and strongly encourages the Treasury Department to 
complete the update in the coming year.\6\ In the process of 
revising the U.S. model, the committee expects the Treasury 
Department to consult with the committee generally, and 
specifically regarding the potential implications for U.S. 
trade and revenue of the policies and provisions reflected in 
the new model.
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    \6\ Testimony of Barbara M. Angus, International Tax Counsel, 
United States Department of the Treasury, before the Senate Committee 
on Foreign Relations on Pending Income Tax Agreements, February 25, 
2004.
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                           VII. Budget Impact

    The committee has been informed by the staff of the Joint 
Committee on Taxation that the withholding tax changes and 
other provisions of the proposed treaty are estimated to cause 
a negligible change in Federal budget receipts during the 
fiscal year 2004-2013 budget period, based solely on the amount 
and type of historical income flows between Sri Lanka and the 
United States.

                  VIII. Explanation of Proposed Treaty

    A detailed, article-by-article explanation of the proposed 
income tax treaty between the United States and Sri Lanka can 
be found in the pamphlet of the Joint Committee on Taxation 
entitled Explanation of Proposed Income Tax Treaty Between the 
United States and Sri Lanka (JCS-2-04), February 19, 2004.

                     IX. 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 Democratic 
Socialist Republic of Sri Lanka for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income, signed at Colombo on March 14, 1985 (Treaty 
Doc. 99-10), and the Protocol amending the Convention, together 
with an Exchange of Notes, signed at Washington on September 
20, 2002 (Treaty Doc. 108-9), subject to the understanding that 
the authorities to which information may be disclosed under 
Article 27 include appropriate congressional committees and the 
General Accounting Office.

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