[Senate Executive Report 108-9]
[From the U.S. Government Publishing Office]



108th Congress                                              Exec. Rept.
                                 SENATE
 2d Session                                                       108-9

======================================================================



 
                     TAXATION CONVENTION WITH JAPAN
                         (TREATY DOC. 108-14).

                                _______
                                

                 March 4, 2004.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                   [To accompany Treaty Doc. 108-14]

    The Committee on Foreign Relations, to which was referred 
the Convention Between the Government of the United States of 
America and the Government of Japan for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income, together with a Protocol and an Exchange of 
Notes, signed at Washington on November 6, 2003, 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...................................................19
VIII.Explanation of Proposed Treaty..................................19

 IX. Resolution of Ratification......................................19

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Japan 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 and proposed protocol were signed on 
November 6, 2003. The United States and Japan exchanged notes 
on the same day to provide clarification with respect to the 
application of the proposed treaty. The proposed treaty, 
together with the proposed protocol and the exchange of notes, 
would replace the existing income tax treaty between the United 
States and Japan that was signed in 1971.
    The proposed treaty, together with the proposed protocol 
and the exchange of notes, was transmitted to the Senate for 
advice and consent to its ratification on December 9, 2003 (see 
Treaty Doc. 108-14). 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''), and the 1992 model income tax treaty of the 
Organization for Economic Cooperation and Development, as 
updated (``OECD 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 14 and 16). 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 23).
    The proposed treaty contains the standard provision (the 
``saving clause'') included in U.S. tax treaties pursuant to 
which each country retains the right to tax its residents and 
citizens 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 under 
the domestic law of a country or under any other agreement 
between the two countries (Article 1).
    The proposed treaty contains provisions which can operate 
to deny the benefits of the dividends article (Article 10), the 
interest article (Article 11), the royalties article (Article 
12) and the other income article (Article 21) with respect to 
amounts paid in connection with certain conduit arrangements. 
The proposed treaty also contains a detailed limitation-on-
benefits provision to prevent the inappropriate use of the 
Treaty by third-country residents (Article 22).

                  IV. Entry Into Force and Termination


                          A. ENTRY INTO FORCE

    The proposed treaty will enter into force upon the exchange 
of instruments of ratification. The effective dates of the 
Treaty's provisions, however, vary.
    With respect to the United States, 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 July of 
the calendar year in which the proposed treaty enters into 
force, provided the proposed treaty enters into force before 
the first day of April of the calendar year. If the proposed 
treaty enters into force after the 31st day of March of a 
calendar year, the proposed treaty will be effective with 
respect to taxes withheld at source or amounts paid or credited 
on or after the first day of January of the calendar year 
following the calendar year in 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.
    With respect to Japan, 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 July of the 
calendar year in which the proposed treaty enters into force, 
provided the proposed treaty enters into force before the first 
day of April of the calendar year. If the proposed treaty 
enters into force after the 31st day of March of a calendar 
year, the proposed treaty will be effective with respect to 
taxes withheld at source for amounts taxable on or after the 
first day of January of the calendar year following the 
calendar year in which the proposed treaty enters into force. 
With respect to taxes on income that are not withheld at source 
and the enterprise tax, the proposed treaty will be effective 
with regard to income for taxable years beginning on or after 
the first day of January next following the date on which the 
proposed treaty enters into force.
    The present treaty generally will cease to have effect in 
relation to any tax from the date on which the proposed treaty 
takes effect in relation to that tax. Taxpayers may elect 
temporarily to continue to claim benefits under the present 
treaty with respect to a period after the proposed treaty takes 
effect. For such a taxpayer, the present treaty would continue 
to have effect in its entirety for a twelve-month period from 
the date on which the provisions of the proposed treaty would 
otherwise take effect. The present treaty will terminate on the 
last date on which it has effect in relation to any tax in 
accordance with the provisions of this article.
    Notwithstanding the entry into force of the proposed 
treaty, an individual who is entitled to the benefits of 
Article 19 (Payments to Students and Business Apprentices) or 
Article 20 (Income from Teaching or Research) of the present 
treaty at the time the proposed treaty enters into force will 
continue to be entitled to such benefits as if the present 
treaty remained in force.

                             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 the United 
States, a termination is effective with respect to taxes 
withheld at source for amounts paid or credited on or after the 
first day of January of the calendar year next following the 
expiration for 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 of the calendar 
year next following the expiration of the six-month notice 
period.
    With respect to Japan, a termination is effective with 
respect to taxes withheld at source for amounts taxable on or 
after the first day of January of the calendar year next 
following the expiration of the six-month notice period. With 
respect to income taxes that are not withheld and the 
enterprise tax, a termination is effective with regard to 
income for taxable years beginning on or after the first day of 
January of the calendar year 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 Japan (Treaty Doc. 108-14) 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 Japan favorably reported by a 
vote of 19 in favor and 0 against, with the recommendation that 
the Senate give its advice and consent to ratification of the 
proposed treaty.
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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 Japan 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. ZERO RATE OF WITHHOLDING TAX ON DIRECT DIVIDENDS

In General

    The proposed treaty would eliminate withholding tax on 
dividends paid by one corporation to another corporation that 
owns more than 50 percent of the stock of the dividend-paying 
corporation (often referred to as ``direct dividends''), 
provided that certain conditions are met. The elimination of 
withholding tax under these circumstances is intended to reduce 
further the tax barriers to direct investment between the two 
countries.
    Under the present treaty, these dividends are permitted to 
be taxed by the source country at a maximum rate of 10 percent, 
a tax that both Japan and the United States impose as a matter 
of internal law. The principal immediate effects of the zero-
rate provision on U.S. taxpayers and U.S. fisc would be: (1) to 
relieve U.S. corporations of the burden of Japanese withholding 
taxes in connection with qualifying dividends received from 
Japanese subsidiaries; (2) to relieve the U.S. fisc of the 
requirement to allow foreign tax credits with respect to these 
dividends; and (3) to eliminate the withholding tax revenues 
currently collected by the U.S. fisc with respect to qualifying 
dividends received by Japanese corporations from U.S. 
subsidiaries.
    Until 2003, no U.S. treaty provided for a complete 
exemption from withholding tax under these circumstances and 
the U.S. and OECD models do not provide for such an exemption. 
However, many bilateral tax treaties to which the United States 
is not a party eliminate withholding taxes under similar 
circumstances, and the same result has been achieved within the 
European Union under its ``Parent-Subsidiary Directive.'' In 
addition, in 2003, the Senate approved adding zero-rate 
provisions to the U.S. treaties with Australia, Mexico, and the 
United Kingdom. These provisions are similar to the provision 
in the proposed treaty, although the proposed treaty allows a 
lower ownership threshold than the Mexico, Australia, and 
United Kingdom provisions (i.e., more than 50 percent, as 
opposed to at least 80 percent). Thus, the proposed treaty 
would be the fourth U.S. treaty to provide a complete exemption 
from withholding tax on direct dividends and would define the 
category of exempt dividends somewhat more broadly than the 
previous three treaties.

Description of Provision

    Under the proposed treaty, the withholding tax rate is 
reduced to zero on dividends beneficially owned by a company 
that has owned more than 50 percent of the voting power of the 
company paying the dividend for the 12-month period ending on 
the date on which entitlement to the dividend is determined, 
provided that the company receiving the dividend either: (1) 
qualifies for treaty benefits under the ``publicly traded'' 
test of the anti-treaty-shopping provision (subparagraph 1(c) 
of Article 22 (Limitation on Benefits)); (2) satisfies both the 
``ownership/base-erosion'' and the ``active trade or business'' 
tests described in subparagraph 1(f) and paragraph 2 of Article 
22 (Limitation on Benefits); or (3) is granted eligibility for 
the zero rate by the competent authorities pursuant to 
paragraph 4 of Article 22 (Limitation on Benefits). \2\
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    \2\ Both direct ownership and indirect ownership through entities 
resident in either contracting state will count for this purpose.
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Benefits and Costs of Adopting a Zero Rate With Japan

    Tax treaties mitigate double taxation by resolving the 
potentially conflicting claims of a residence country and a 
source country to tax the same item of income. In the case of 
dividends, standard international practice is for the source 
country to yield mostly or entirely to the residence country. 
Thus, the residence country preserves its right to tax the 
dividend income of its residents, and the source country agrees 
either to limit its withholding tax to a relatively low rate 
(e.g., 5 percent) or to forgo it entirely.
    Treaties that permit a positive rate of dividend 
withholding tax allow some degree of double taxation to 
persist. To the extent that the residence country allows a 
foreign tax credit for the withholding tax, this remaining 
double taxation may be mitigated or eliminated, but then the 
priority of the residence country's claim to tax the dividend 
income of its residents is not fully respected. Moreover, if a 
residence country imposes limitations on its foreign tax 
credit,\3\ withholding taxes may not be fully creditable as a 
practical matter, thus leaving some double taxation in place. 
For these reasons, dividend withholding taxes are commonly 
viewed as barriers to cross-border investment. The principal 
argument in favor of eliminating withholding taxes on certain 
direct dividends in the proposed treaty is that it would remove 
one such barrier.
---------------------------------------------------------------------------
    \3\ See e.g., Code sec. 904.
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    Direct dividends arguably present a particularly 
appropriate case in which to remove the barrier of a 
withholding tax, in view of the close economic relationship 
between the payor and the payee. Whether in the United States 
or in Japan, the dividend-paying corporation generally faces 
full net-basis income taxation in the source country, and the 
dividend-receiving corporation generally is taxed in the 
residence country on the receipt of the dividend (subject to 
allowable foreign tax credits). If the dividend-paying 
corporation is more than 50-percent owned by the dividend-
receiving corporation, it is arguably appropriate to regard the 
dividend-receiving corporation as a direct investor (and 
taxpayer) in the source country in this respect, rather than 
regarding the dividend-receiving corporation as having a more 
remote investor-type interest warranting the imposition of a 
second-level source-country tax.
    Although the United States only recently first agreed to 
bilateral zero rates of withholding tax on direct dividends, 
many other countries have done so in one or more of their 
bilateral tax treaties. These countries include OECD members 
Austria, Denmark, France, Finland, Germany, Iceland, Ireland, 
Japan, Luxembourg, Mexico, the Netherlands, Norway, Sweden, 
Switzerland, and the United Kingdom, as well as non-OECD-
members Belarus, Brazil, Cyprus, Egypt, Estonia, Israel, 
Latvia, Lithuania, Mauritius, Namibia, Pakistan, Singapore, 
South Africa, Ukraine, and the United Arab Emirates. In 
addition, a zero rate on direct dividends has been achieved 
within the European Union under its ``Parent-Subsidiary 
Directive.'' Finally, many countries have eliminated 
withholding taxes on dividends as a matter of internal law 
(e.g., the United Kingdom and Mexico). Thus, although the zero-
rate provision in the proposed treaty is a relatively recent 
development in U.S. treaty history, there is substantial 
precedent for it in the experience of other countries. It may 
be argued that this experience constitutes an international 
trend toward eliminating withholding taxes on direct dividends, 
and that the United States would benefit by joining many of its 
treaty partners in this trend and further reducing the tax 
barriers to cross-border direct investment.

Committee Conclusions

    The committee believes that every tax treaty must strike 
the appropriate balance of benefits in the allocation of taxing 
rights. The agreed level of dividend withholding for 
intercompany dividends is one of the elements that make up that 
balance, when considered in light of the benefits inuring to 
the United States from other concessions the treaty partner may 
make, the benefits of facilitating stable cross-border 
investment between the treaty partners, and each partner's 
domestic law with respect to dividend withholding tax.
    In the case of this treaty, considered as a whole, the 
committee believes that the elimination of withholding tax on 
intercompany dividends appropriately addresses a barrier to 
cross-border investment. The committee believes, however, that 
the Treasury Department should only incorporate similar 
provisions into future treaty or protocol negotiations on a 
case-by-case basis, and it notes with approval Treasury's past 
statement that ``[i]n light of the range of facts that should 
be considered, the Treasury Department does not view 
[elimination of withholding tax on intercompany dividends] as a 
blanket change in the United States' tax treaty practice.'' \4\
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    \4\ Senate Committee on Foreign Relations, Report, Tax Convention 
with the United Kingdom, Exec. Rept. 108-2, Mar. 13, 2003.
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    The committee encourages the Treasury Department to develop 
criteria for determining the circumstances under which the 
elimination of withholding tax on intercompany dividends would 
be appropriate in future negotiations in future negotiations 
with other countries. The committee expects the Treasury 
Department to consult with the committee with regard to these 
criteria and to the consideration of elimination of the 
withholding tax on intercompany dividends in future treaties.

                         B. ANTI-CONDUIT RULES

In General

    The proposed treaty includes anti-conduit rules that can 
operate to deny the benefits of the dividends article (Article 
10), the interest article (Article 11), the royalties article 
(Article 12), and the other income article (Article 21). These 
rules are not included in the U.S. or OECD models. The rules 
are similar to, but significantly narrower and more precise 
than, the ``main purpose'' rules that the Senate rejected in 
1999 in connection with its consideration of the U.S.-Italy and 
U.S.-Slovenia treaties.\5\ The rules are also similar to, but 
narrower than, the anti-conduit rule approved in the U.S.-U.K. 
treaty.\6\
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    \5\ See Senate Committee on Foreign Relations, Report, Tax 
Convention with Italy, Exec. Rpt. 106-8, Nov. 3, 1999; Senate Committee 
on Foreign Relations, Report, Tax Convention with Slovenia, Exec. Rpt. 
106-7, Nov. 3, 1999; see also Joint Committee on Taxation, Explanation 
of Proposed Income Tax Treaty and Proposed Protocol between the United 
States and the Italian Republic (JCS-9-99), October 8, 1999; Joint 
Committee on Taxation, Explanation of Proposed Income Tax Treaty 
between the United States and the Republic of Slovenia (JCS-11-99), 
October 8, 1999.
    \6\ Under the U.S.-U.K. treaty, the benefits of the dividends, 
interest, royalties, and other income articles are denied in connection 
with any payment made under a ``conduit arrangement.'' The term 
``conduit arrangement''' is defined as a transaction, or series of 
transactions, that meets both of the following criteria: (1) a resident 
of one contracting state receives an item of income that generally 
would qualify for treaty benefits, and then pays (directly or 
indirectly, at any time or in any form) all or substantially all of 
that income to a resident of a third state who would not be entitled to 
equivalent or greater treaty benefits if it had received the same item 
of income directly; and (2) obtaining the increased treaty benefits is 
the main purpose or one of the main purposes of the transaction or 
series of transactions.
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    The rules were included at the request of Japan. The 
purpose of the rules, from the Japanese perspective, is to 
prevent residents of third countries from improperly obtaining 
the reduced rates of Japanese tax provided under the Treaty by 
channeling payments to a third-country resident through a U.S. 
resident (acting as a ``conduit'').
    From the U.S. perspective, the rules are unnecessary 
because U.S. domestic law provides detailed rules governing 
arrangements to reduce U.S. tax through the use of conduits. 
\7\ The Technical Explanation emphasizes that the inclusion of 
narrow anti-conduit rules in the proposed treaty should create 
no inference that the generally broader anti-conduit rules (and 
other anti-abuse rules) of U.S. domestic law would not apply in 
a particular situation.
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    \7\ See Code sec. 7701(l); Treas. Reg. sec. 1.881-3.
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Description of Provisions

    Under the anti-conduit rules of the proposed treaty, the 
Treaty's provisions with respect to dividends will not apply to 
dividends paid pursuant to certain back-to-back preferred stock 
arrangements. Specifically, a resident of a contracting state 
will not be considered the beneficial owner of dividends in 
respect of preferred stock or other similar interest if such 
preferred stock or other interest would not have been 
established or acquired unless a person that is not entitled to 
the same or more favorable treaty benefits and that is not a 
resident of either contracting state held equivalent preferred 
stock or other interest in the resident.
    Similarly, for purposes of applying the interest article, a 
resident of a contracting state will not be considered the 
beneficial owner of interest in respect of a debt-claim if such 
debt-claim would not have been established unless a person that 
is not entitled to the same or more favorable treaty benefits 
and that is not a resident of either contracting state held an 
equivalent debt-claim against the resident. For purposes of 
applying the royalties article, a resident of the United States 
or Japan shall not be considered the beneficial owner of 
royalties in respect of intangible property if such royalties 
would not have been paid unless the resident pays royalties in 
respect of the same intangible property to a person that is not 
entitled to the same or more favorable treaty benefits and that 
is not a resident of either the United States or Japan. 
Finally, for purposes of applying the other income article, a 
resident of a contracting state will not be considered the 
beneficial owner of other income in respect of a right or 
property if such other income would not have been paid to the 
resident unless the resident pays others income in respect of 
the same right or property to a person that is not entitled to 
the same or more favorable treaty benefits and that is not a 
resident of either contracting state.

Issues

    The proposed anti-conduit rule may create confusion, 
because they apply not only to conduit arrangements in which a 
reduction in Japanese tax is claimed, but also to conduit 
arrangements in which a reduction in U.S. tax is claimed, 
despite the fact that there is no apparent reason for the rule 
to apply in the latter circumstance, in view of the existence 
of anti-conduit provisions under U.S. domestic law. To the 
extent that the proposed treaty's anti-conduit rule and the 
U.S. domestic-law anti-conduit rules are not consistent in 
every particular, taxpayers may be confused as to which set of 
rules the United States will apply in certain situations.

Committee Conclusions

    The committee emphasizes that the inclusion of the narrow 
anti-conduit rules in the proposed treaty should create no 
inference that the generally broader anti-conduit rules of U.S. 
domestic law would not apply in a particular situation. On 
balance, the committee believes that the Technical Explanation 
prevents any potential for confusion by making it clear that 
the anti-conduit rules and other anti-abuse rules of U.S. 
domestic law will still be applied, regardless of whether an 
arrangement may pass muster under the anti-conduit rules of the 
proposed treaty.

                        C. INSURANCE EXCISE TAX

    The proposed treaty, unlike the present treaty, waives the 
application of the U.S. insurance excise tax on foreign 
insurers and reinsurers. Thus, for example, a Japanese insurer 
or reinsurer generally may receive premiums on policies with 
respect to U.S. risks free of this tax. However, the tax is 
imposed to the extent that the risks covered by such premiums 
are reinsured with a person not entitled to the benefits of the 
proposed treaty or another treaty providing exemption from the 
tax. This latter rule is known as the ``anti-conduit'' clause.
    Waivers of the insurance excise tax in other treaties have 
raised serious congressional concerns. Specifically, concern 
has been expressed that such waivers may place U.S. insurers at 
a competitive disadvantage with respect to foreign competitors 
in U.S. markets if a substantial tax is not otherwise imposed 
by the treaty partner country or any other country on the 
insurance income of the foreign insurer or reinsurer. 
Furthermore, in such a case, a waiver of the tax does not serve 
the primary purpose of tax treaties to prevent double taxation, 
but instead has the undesirable effect of eliminating all tax 
on such income. The U.S.-Barbados and U.S.-Bermuda tax treaties 
each contained such a waiver as originally signed. In its 
report on the Bermuda treaty, the committee expressed the view 
that those waivers should not have been included and stated 
that waivers should not be given by Treasury in its future 
treaty negotiations without prior consultations with the 
appropriate committees of Congress. Congress subsequently 
enacted legislation to ensure the sunset of waivers in the two 
treaties.

Committee Conclusions

    The committee, while recognizing the concerns raised by the 
excise tax waiver, believes that the inclusion of the excise 
tax waiver in this treaty is consistent with the criteria the 
committee has previously laid down for waiver of the tax. As 
noted in the Technical Explanation, the U.S. negotiators agreed 
to include in the Treaty a waiver of these insurance excise 
taxes ``only after a review of Japanese tax law indicated that 
the income tax imposed by Japan on Japanese resident insurers 
results in a burden that is substantial in relation to the U.S. 
tax on U.S. resident insurers.'' Thus, unlike Bermuda and 
Barbados, Japan imposes substantial tax on income, including 
insurance income, of its residents. Therefore, the committee 
feels that the excise tax waiver is not harmful in this 
particular case since its effect is not to eliminate all or 
nearly all tax but rather to relieve double taxation.

 D. TAXATION OF GAINS ON SHARES IN RESTRUCTURED FINANCIAL INSTITUTIONS

    The proposed treaty contains a unique exception to the 
traditional residence-based taxing rule applicable to capital 
gains. Under the exception, if a treaty country (including, in 
the case of Japan, the Deposit Insurance Corporation of Japan) 
provides substantial financial assistance to a financial 
institution resident in that country, pursuant to its bank 
insolvency restructuring laws, and a resident of the other 
treaty country acquires shares in the financial institution 
from the first treaty country, the first treaty country may tax 
gains derived from the later disposition of such shares by such 
acquirer. The exception does not apply if the taxpayer's 
holding period exceeds five years from the first date on which 
such financial assistance was provided.
    The exception does not appear in any U.S. treaty, including 
the U.S. model, or the OECD model. It was included at the 
insistence of Japan.
    The exception would not apply if the resident of the United 
States acquired any shares in the financial institution from 
Japan before the date the proposed treaty enters into force (or 
pursuant to a binding contract entered into before that date). 
Thus, a person that acquired any shares before the Treaty 
enters into force will not be subject to tax under paragraph 3 
of Article 13 with respect to any shares acquired after the 
Treaty enters into force. It is difficult to determine the 
extent to which U.S. investors have purchased such shares to 
date or would have the opportunity to acquire such shares (or 
enter into a binding contract to acquire such shares) before 
the Treaty enters into force.
    One effect of this exception may be to shift some of the 
cost of Japan's bank restructurings to the U.S. fisc, to the 
extent U.S. investors in future restructurings claim foreign 
tax credits for Japanese taxes imposed on non-exempt gains.

Committee Conclusions

    The committee expresses concern that the provision may 
inhibit U.S. investors from participating in future Japanese 
bank restructuring and may be singling out U.S. investors by 
Japan for adverse tax treatment relative to investors from 
other countries. The committee understands from the Treasury 
Department that this narrow provision is a unique accommodation 
to the treaty partner and concludes that the provision is 
acceptable under these circumstances.

     E. NON-ARM'S LENGTH PAYMENTS AND CONTINGENT INTEREST PAYMENTS

Background

    With regard to the limitations on source country taxation 
of interest and royalties, the U.S. model provides a special 
rule for payments between related parties (and parties having 
an otherwise special relationship) of amounts that exceed the 
arm's-length amount. Under the U.S. model, such excess amounts 
are taxable according to the laws of each country, taking into 
account the other provisions of the Treaty. For example, the 
U.S. model provides that excess interest paid by a subsidiary 
in one treaty country to its parent corporation in the other 
treaty country may be treated as a dividend under local law 
and, thus, entitled to any benefits of treaty provisions 
relating to dividends.
    The U.S. model provides a similar special rule with regard 
to payments of interest the amount of which is determined with 
reference to (1) receipts, sales, income, profits, or other 
cash flow of the debtor or a related person, (2) any change in 
the value of any property of the debtor or a related person, or 
(3) any dividend, partnership distribution, or similar payment 
made by the debtor to a related person (i.e., ``contingent 
interest''). Under the U.S. model, such contingent interest 
generally may be taxed in the source country in accordance with 
its laws.\8\
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    \8\ However, if the beneficial owner of the contingent interest is 
a resident of the other treaty country, the U.S. model provides that 
the gross amount of the interest may be taxed at a rate not exceeding 
the rate prescribed in the Treaty for dividends paid to shareholders 
that own less than 10 percent of the dividend-paying company.
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Proposed Treaty

    Unlike the U.S. model and most recent U.S. tax treaties, 
the proposed treaty provides that non-arm's length payments of 
interest and royalties (as well as certain other income) 
between related parties are taxable in the treaty country of 
source at a rate not to exceed five percent of the gross amount 
of the excess of the payment over the arm's-length amount of 
the payment. The Technical Explanation states that the 
treatment of the excess amount of such payments under the 
proposed treaty ``is consistent in most circumstances with the 
results under the U.S. model and U.S. domestic law and practice 
[i.e., dividend or contribution to capital].'' With regard to 
Japanese-source non-arm's length interest payments, the 
Technical Explanation states that Japanese domestic tax law 
generally would impose (absent the proposed treaty provision) 
its 20-percent interest withholding tax on the excess amount of 
such payments, while denying a deduction to the payor of the 
excess amount. However, Japanese domestic tax law does not 
recharacterize such payments (e.g., as dividends or 
contributions to capital).
    The proposed treaty does not include the special rule for 
contingent interest that is contained in the U.S. model and 
most recent U.S. tax treaties. The Technical Explanation states 
that the provision concerning contingent interest payments that 
is contained in the U.S. model is not included in the proposed 
treaty ``because the highest rate applicable to dividend income 
(10 percent, as prescribed in paragraph 2 of Article 10 
(Dividends)) is the same as the general rate applicable to 
interest income (10 percent, as prescribed in paragraph 2 of 
Article 11 (Interest)).''

Issue

    The special rules in the U.S. model and most recent U.S. 
tax treaties for non-arm's length payments of interest and 
royalties and for payments of contingent interest are designed 
to ensure that the treaty countries are not precluded from 
taxing such payments in accordance with their substance rather 
than their form. These special rules are consistent with 
longstanding principles of internal U.S. tax law.\9\
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    \9\ In the case of contingent interest, the U.S. tax law principles 
of recognizing substance over form are reflected in the Code, which 
generally provides an exemption from U.S. withholding tax for interest 
payments on portfolio debt held by nonresident aliens and foreign 
corporations, but excludes from this exemption payments of certain 
contingent interest. See Code secs. 871(h)(4) and 881(c)(4).
---------------------------------------------------------------------------
    By contrast, the proposed treaty prescribes a maximum rate 
of five percent for non-arm's length payments of interest and 
royalties (as well as certain other income). Similarly, by not 
including the special rule for contingent interest that is 
contained in the U.S. model, the proposed treaty limits the 
source-country taxation of contingent interest in accordance 
with the provisions of the proposed treaty relating to interest 
(Article 11). \10\ The Technical Explanation suggests that the 
provisions in the proposed treaty concerning non-arm's length 
payments and payments of contingent interest generally reach 
the same result as the provisions contained in the U.S. model. 
However, in the case of non-arm's length payments, the 
applicable limitations on source-country taxation under the 
U.S. model depend upon the characterization of the non-arm's 
length amount by the source country and--where the source 
country characterizes such amount as a dividend--the level of 
stock ownership of the dividend recipient in the dividend-
paying company. \11\ Given the various limitations on source-
country taxation under the proposed treaty, the applicable 
limitation on source-country taxation of a particular arm's 
length amount would not necessarily equal five percent if the 
proposed treaty followed the U.S. model in this regard rather 
than providing a specified five percent limitation on all non-
arm's length amounts.
---------------------------------------------------------------------------
    \10\ Under Article 11, source-country tax on interest paid to a 
beneficial owner that is resident in the other treaty country generally 
is limited to 10 percent. However, the proposed treaty provides a 
complete exemption from source-country tax in certain circumstances, 
including interest paid to a beneficial owner that is a financial 
institution or pension fund.
    \11\ Under Article 10 of the proposed treaty, source-country 
taxation of dividends generally is limited to 10 percent of the gross 
amount of the dividends paid to residents of the other treaty country. 
However, a lower rate of five percent applies if the beneficial owner 
of the dividend is a company that owns at least 10 percent of the 
voting stock of the dividend-paying company, and dividends beneficially 
owned by a company that has owned more than 50 percent of the voting 
power of the dividend-paying company for at least a year generally are 
exempt from source-country taxation.
---------------------------------------------------------------------------
    Similarly, in the case of contingent interest payments, the 
general limitations on source-country taxation of interest 
under the proposed treaty depend upon the nature of the 
beneficial owner (i.e., interest payments may be completely 
exempt from source-country taxation if the beneficial owner of 
the payments is a financial institution or a pension fund). 
Therefore, the equivalency of results between the U.S. model 
and the proposed treaty with regard to payments of contingent 
interest depends upon the nature of the beneficial owner of the 
payment.
    For example, payments of contingent interest by a U.S. 
corporation to a Japanese bank would not be entitled to the 
exemption from U.S. withholding tax provided for interest under 
the U.S. model but, instead, would be subject to the dividend 
provisions of the U.S. model that would permit the imposition 
of a 15-percent U.S. withholding tax on the contingent interest 
payments. In contrast to the U.S. model, the proposed treaty 
would provide a complete exemption from U.S. withholding tax on 
the contingent interest payments (because the beneficial owner 
is a bank) because the proposed treaty does not include the 
special rule for contingent interest payments that is contained 
in the U.S. model.

Committee Conclusions

    The committee expresses concern about the advisability of 
any divergence from the intended results of the U.S. model, 
most recent U.S. tax treaties, and longstanding principles of 
U.S. tax law with respect to non-arm's length payments and 
payments of contingent interest. The committee encourages the 
Treasury Department to carefully evaluate deviations from the 
language of these provisions of the U.S. model to ensure that 
the results achieved are consistent with the policies reflected 
in the U.S. model.

           F. SALE OF U.S. REAL PROPERTY HOLDING CORPORATIONS

    Generally, under U.S. tax law, gain realized by a foreign 
corporation or a nonresident alien 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. However, the Foreign Investment in Real Property 
Tax Act (``FIRPTA''), effective June 19, 1980, extended the 
reach of U.S. taxation to dispositions of U.S. real property by 
foreign corporations and nonresident aliens regardless of their 
physical presence in the United States. FIRPTA contained a 
provision expressly overriding any tax treaty (including the 
current U.S.-Japan treaty) but generally delaying such override 
until after December 31, 1984.\12\
---------------------------------------------------------------------------
    \12\ See Foreign Investment in Real Property Tax Act, Pub. L. No. 
96-499, sec. 1125(c)(1) (1980).
---------------------------------------------------------------------------
    Under FIRPTA, a nonresident alien or foreign corporation is 
subject to U.S. tax on the 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. A 
``U.S. real property interest'' includes an interest in a 
domestic corporation if at least 50 percent of the assets of 
the corporation consist of U.S. real property at any time 
during the five-year period ending on the date of disposition 
(a ``U.S. real property holding corporation'').\13\ The rules 
provide an exception for a person who disposes of shares that 
are part of a class of stock regularly traded on an established 
securities market, if such person did not hold more than five 
percent of such class of stock at any time during the five-year 
testing period.\14\
---------------------------------------------------------------------------
    \13\ Code sec. 897(c)(1)(A). The regulations provide detailed rules 
for determining whether a corporation is a U.S. real property holding 
corporation, including rules specifying the dates on which such 
determination must be made. Treas. Reg. sec. 1.897-2(c). A U.S. real 
property interest does not include an interest in a domestic 
corporation if, as of the date of disposition of such interest, such 
corporation does not hold any U.S. real property interests and any U.S. 
real property interests held during the five-year period were disposed 
in taxable transactions (or ceased to be U.S. real property interests 
by means of application of this rule to other corporations). Code sec. 
897(c)(1)(B).
    \14\ Code sec. 897(c)(3).
---------------------------------------------------------------------------
    Under the proposed treaty, gains directly derived by a 
resident of Japan from the alienation of real property situated 
in the U.S. may be taxed under the FIRPTA rules. The proposed 
treaty also generally preserves U.S. taxing jurisdiction over 
gains from the indirect alienation of U.S. real property by 
means of alienation of certain entities holding an interest in 
U.S. real property. Under the proposed treaty, the U.S. may tax 
gains derived by a resident of Japan from the alienation of 
shares in a domestic company that derives at least 50 percent 
of its value directly or indirectly from U.S. real property. 
the Treaty provides an exception to U.S. taxation of such share 
gains if the relevant class of shares is traded on a recognized 
stock exchange and the alienator (and persons related thereto) 
own in the aggregate five percent or less or such class of 
shares.\15\
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    \15\ A ``recognized stock exchange'' is defined as any stock 
exchange established under the terms of the Securities and Exchange Law 
of Japan, any stock exchange registered with the Securities and 
Exchange Commission as a national securities exchange under the 
Securities Exchange Act of 1934, NASDAQ, and any other stock exchange 
agreed upon by the competent authorities. Article 22, paragraph 5(b). 
The parallel concept in FIRPTA, an ``established securities market,'' 
has substantially the same meaning. See Treas. Reg. sec. 1.897-1(m).
---------------------------------------------------------------------------
    In most instances, these treaty provisions have the effect 
of permitting the United States to tax a Japanese resident's 
disposition of a U.S. real property holding corporation under 
its domestic law rules. However, a few of the provisions of the 
proposed treaty are somewhat more favorable to taxpayers than 
their counterparts in the Code. Under the proposed treaty, the 
testing of whether a domestic company is a U.S. real property 
holding corporation is performed on the date of disposition and 
not throughout the five-year testing period as under FIRPTA. 
For example, under the proposed treaty, a Japanese resident 
would not be subject to U.S. tax on the sale of shares of a 
domestic corporation if, at the time of such sale, interests in 
U.S. real property comprise 40 percent of the value of the 
assets of such corporation. Absent the proposed treaty, 
however, U.S. tax would be imposed on such a sale if, at any 
time over the prior five years, 50 percent or more of the 
corporation's assets consisted of U.S. real property.
    In addition, although FIRPTA and the proposed treaty 
provide similar exclusions for dispositions of relatively small 
share interests in U.S. real property holding corporations 
traded on an established securities market, the FIRPTA 
exclusion is more difficult to obtain than the exclusion 
provided in the proposed treaty. FIRPTA requires that such 
shares be ``regularly'' traded at any time during the calendar 
year of disposition \16\ and provides a five-year ``look-back'' 
testing period for the ownership test.
---------------------------------------------------------------------------
    \16\ A class of interests traded on an established U.S. securities 
market is treated as regularly traded for any calendar quarter during 
which it is regularly quoted by brokers or dealers making a market in 
those interests. Temp. Treas. Reg. sec. 1.897-9T(d)(2). A quantitative 
test and certain reporting are required to show that shares are 
regularly traded on a foreign securities market. Temp. Treas. Reg. sec. 
1.897-9T(d)(1) and (3).
---------------------------------------------------------------------------

Committee Conclusions

    The committee is concerned about the recurrence of this 
divergence from normal practice. The committee notes that 
similar provisions were included in the 1999 treaty with the 
Republic of Slovenia. In view of the many benefits to the 
United States under this treaty, the committee is willing to 
acquiesce to these provisions in this treaty. The committee 
cautions the Treasury Department about such provisions and 
directs it to ensure in the future that U.S. taxing rights with 
respect to U.S. real property interests are fully protected.

                  G. TEACHERS, STUDENTS, AND TRAINEES

In General

    The proposed treaty generally would not change the 
application of income taxes to certain U.S. individuals who 
visit Japan as teachers, professors, and academic researchers, 
but would make changes in the application of income taxes to 
certain Japanese individuals who visit the United States as 
teachers, professors, and academic researchers (Article 20). 
The present treaty (Article 19) provides that a professor or 
teacher who visits Japan from the United States for a period of 
two years or less to engage in teaching or research at a 
university, college, or other educational institution is exempt 
from tax by Japan on any remuneration received for such 
teaching or research. Under Article 20 of the proposed treaty, 
a professor or teacher who visits the United States from Japan 
for a period of two years or less to engage in teaching or 
research at a university, college, or other educational 
institution, and who while visiting in the United States 
remains a resident of Japan, is exempt from tax by the United 
States on any remuneration received for such teaching or 
research. Unlike the present treaty, if a professor or teacher 
visiting the United States from Japan does not remain a 
resident of Japan while visiting in the United States, there is 
no exemption.

Issues

    Unlike the U.S. model, but like the present treaty, the 
proposed treaty, in most cases, would provide an exemption from 
the host country income tax for income an individual receives 
from teaching or research in the host country. Article 19 of 
the present treaty and Article 20 of the proposed treaty 
provide that a teacher who visits a country for the purpose of 
teaching or engaging in research at an educational institution 
generally is exempt from tax in that country for a period not 
exceeding two years. Under the proposed treaty, a U.S. person 
who is a teacher or professor may receive effectively an 
exemption from any income tax for some amount of income earned 
related to visiting Japan for the purpose of engaging in 
teaching or research for a period of two years or less. Under 
the terms of the Treaty, Japan would exempt any such income of 
a U.S. person from Japanese income tax. Under Code sec. 911, 
$80,000 would be exempt from U.S. income tax in 2004 through 
2007, \17\ and in addition certain living expenses would be 
deductible from income. To the extent the U.S. teacher's or 
professor's remuneration related to his or her visit to Japan 
was less that $80,000, the income would be tax free.
---------------------------------------------------------------------------
    \17\ For years after 2007, the $80,000 amount is indexed for 
inflation after 2006 (Code sec. 911(b)(2)(D)).
---------------------------------------------------------------------------
    Under the proposed treaty, two cases arise in the case of a 
Japanese person who is a teacher or professor visiting in the 
United States. If the individual is deemed to be a resident of 
Japan even while visiting in the United States, the individual 
receives an exemption from U.S. income tax for income earned 
related to visiting the United States for the purpose of 
engaging in teaching or research for a period of two years or 
less. However, as a resident of Japan, the individual would be 
liable for Japanese income tax on such income. If the 
individual visiting the United States is not deemed a resident 
of Japan while teaching or undertaking research in the United 
States, no exemption applies any remuneration for teaching or 
research is subject to U.S. income tax. As an individual not 
resident in Japan, the individual is only subject to income tax 
on income from sources in Japan. The individual may be able to 
claim a foreign tax credit against any Japanese income tax 
liability to the extent permitted under Japanese law. Japanese 
individuals who are employed by the Japanese government, 
including teachers and professors at public institutions are 
deemed residents of Japan, even if they are not physically 
present in Japan. Japanese teachers or professors employed at 
private educational institutions generally would not be 
considered resident in Japan if not physically present in 
Japan.
    The effect of both the present treaty and the proposed 
treaty is to make such cross-border visits more attractive 
financially for U.S. teachers and professors. Ignoring 
relocation expenses, a U.S. citizen or permanent resident may 
receive more net, after-tax remuneration from teaching or 
research from visiting Japan as a teacher or researcher than if 
he or she had remained in the United States. Relative to the 
present treaty, the proposed treaty makes no change with 
respect to a Japanese teacher or professor at a public 
institution who visits the United States for teaching or 
research. Under the present treaty, a Japanese teacher or 
professor at a private institution could receive effectively an 
exemption from any income tax for income earned related to 
visiting the United States as the United States would exempt 
any such income from U.S. income tax and as an individual not 
resident in Japan such income generally would not be taxable by 
Japan. Under the proposed treaty, the income of such an 
individual will be subject to U.S. income tax. Increasing 
(decreasing) the financial reward may serve to encourage 
(discourage) 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, complete exemption from income tax in 
both the United States and Japan for U.S. teachers and 
professors who visit Japan may be seen as unfair when compared 
to persons engaged in other occupations whose occupation or 
employment may cause them to relocate temporarily abroad. For a 
U.S. citizen or permanent resident who is not a teacher or 
professor, but who temporarily takes up residence and 
employment in Japan, his or her income is subject to income tax 
in Japan and may be subject income tax in the United States. In 
other words, the proposed treaty could be said to violate the 
principle of horizontal equity by treating otherwise similarly 
economically situated taxpayers differently.
    The proposed treaty stands in partial contrast to the U.S. 
model in which no such exemption would be provided to teachers 
and professors visiting from either country. The proposed 
treaty provides Japanese teachers and professors from private 
institutions the treatment recommended by the U.S. model. For 
Japanese teachers and professors from public institutions the 
proposed treaty provides treatment comparable to that 
recommended by the U.S. model to the extent that the tax 
burdens of the Japanese individual income tax is comparable to 
the tax burdens of the U.S. individual income tax. For U.S. 
teachers and professors who visit Japan, the proposed treaty 
provides an exemption, where the U.S. model would provide no 
such exemption. 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. Indeed, four of the 
most recently ratified income tax treaties did contain such a 
provision. However, the proposed protocol with Sri Lanka would 
not provide such an exemption. In that treaty, all the 
remuneration of teachers, professors, and researchers visiting 
in a host country is fully taxable as provided under the laws 
of the host country.

Committee Conclusions

    The committee notes that while the provision regarding the 
taxation of visiting teachers and professors is inconsistent 
with the U.S. model, over half of the bilateral income tax 
treaties in force contain a similar provision. At the same 
time, of the three treaties that the committee has recently 
considered, only the U.K. treaty included such a provision, 
while the treaties with Mexico and Australia did not. The 
proposed protocol with Sri Lanka does not include such a 
provision. The committee encourages the Treasury Department to 
develop criteria for determining under what circumstances this 
provision is appropriate and to consult with the committee 
regarding these criteria.

                  H. 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 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.\18\
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    \18\ Treasury Department, Technical Explanation of the United 
States Model Income Tax Convention, at 3 (September 20, 1996).

    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.\19\ 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.
---------------------------------------------------------------------------
    \19\ 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.
---------------------------------------------------------------------------

                           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 Federal budget receipts during the 
fiscal years 2004-2013 period.

                  VIII. Explanation of Proposed Treaty

    A detailed, article-by-article explanation of the proposed 
income tax treaty between the United States and Japan can be 
found in the pamphlet of the Joint Committee on Taxation 
entitled Explanation of Proposed Income Tax Treaty Between the 
United States and Japan (JCS-1-04), 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 Japan for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income, together with a 
Protocol and an Exchange of Notes, signed at Washington on 
November 6, 2003 (Treaty Doc. 108-14).

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