[Senate Executive Report 109-11]
[From the U.S. Government Publishing Office]



109th Congress                                              Exec. Rept.
                                 SENATE
 2d Session                                                      109-11

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



 
PROTOCOL AMENDING THE ESTATE, INHERITANCE, AND GIFT TAX CONVENTION WITH 
                       FRANCE (TREATY DOC. 109-7)

                                _______
                                

                 March 27, 2006.--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. 109-7]

    The Committee on Foreign Relations, to which was referred 
the Protocol Amending the Convention Between the United States 
of America and the French Republic for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Estates, Inheritances, and Gifts, signed at Washington 
on December 8, 2004, 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.................................................2
  V. Committee Action.................................................3
 VI. Committee Comments...............................................3
VII. Budget Impact....................................................5
VIII.Explanation of Proposed Protocol.................................5

 IX. Text of Resolution of Advice and Consent to Ratification.........6

                               I. Purpose

    The principal purpose of the estate, inheritance, and gift 
tax treaty between the United States and France\1\ and the 
proposed protocol is to reduce or eliminate double taxation in 
connection with estate, inheritance, and gift taxes. One of the 
general principles of the treaty and the proposed protocol is 
that the country in which a donor or decedent was domiciled may 
tax the estate or gifts of that individual on a worldwide 
basis, but must credit tax paid to the other country with 
respect to certain types of property located in such other 
country. Specifically, immovable property, certain business 
assets, and partnership interests attributable to such property 
are taxable in the country in which such property is situated.
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    \1\ All references to the treaty between the United States and 
France are to the Convention Between the United States of America and 
the Government of the French Republic for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on 
Estates, Inheritances, and Gifts, signed at Washington on November 24, 
1978.
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                             II. Background

    The proposed protocol was signed at Washington on December 
8, 2004. It would amend the U.S.-France estate, inheritance, 
and gift tax treaty, which was signed at Washington on November 
24, 1978.
    The proposed protocol was transmitted to the Senate for 
advice and consent to its ratification on November 4, 2005 (see 
Treaty Doc. 109-7). The Committee on Foreign Relations held a 
public hearing on the proposed protocol on February 2, 2006.

                              III. Summary

    The proposed protocol would make several updates and other 
modifications to the treaty. Among other updates, the proposed 
protocol would add a ``saving clause,'' which would protect the 
right of the United States to apply its estate and gift tax 
rules to U.S. citizens, as well as to certain former U.S. 
citizens and long-term residents.
    The proposed protocol also would provide a pro rata unified 
credit to the estate of an individual domiciled in France 
(other than a U.S. citizen) for purposes of computing the U.S. 
estate tax due. An estate eligible for this provision would be 
entitled to a portion of the full, generally applicable credit, 
based on the ratio of the value of the estate's U.S.-situated 
assets to the value of its worldwide assets.
    In addition, the proposed protocol would provide a limited 
U.S. estate tax marital deduction in cases in which the 
surviving spouse is not a U.S. citizen. This provision would 
apply in the case of certain small estates. The proposed 
protocol also would add new limits to the situs-based taxation 
of certain inter-spousal transfers of non-community property.

                          IV. Entry Into Force

    The proposed protocol will enter into force upon the 
exchange of instruments of ratification and would have effect 
with respect to deaths occurring and gifts made after that 
date.
    A special retroactive effective date applies with respect 
to the provisions of the proposed protocol relating to the pro 
rata unified credit and the limited U.S. estate tax marital 
deduction. The proposed protocol provides that these provisions 
would have effect with respect to deaths occurring and gifts 
made after November 10, 1988, notwithstanding any limitation 
imposed under internal law on the assessment, reassessment, or 
refund with respect to a person's or estate's return, and 
provided that any return or claim for refund asserting the 
benefits of the proposed protocol is filed before the date that 
is one year after the first day of the second month following 
the date on which on which the proposed protocol enters into 
force, or within the otherwise applicable period for filing 
such claims under internal law.
    Additionally, the saving clause applies to any such claim 
for refund. Where an estate, prior to entry into force of the 
proposed protocol, was allowed a marital deduction for a 
transfer to a qualified domestic trust under Internal Revenue 
Code section 2056A(d), such estate may elect to treat the 
qualified domestic trust as if it had never been established in 
order to claim the benefits of paragraph 3 of Article 11 or 
paragraph 3 of Article 12, as long as it does so within the 
time for filing a claim for refund referred to above. Where 
such an election is made, the property is treated as having 
been transferred to the surviving spouse at the time of the 
decedent's death for all purposes of the treaty.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed protocol with France (Treaty Doc. 109-7) on 
February 2, 2006. The hearing was chaired by Senator Lugar.\2\ 
The committee considered the proposed protocol at its business 
meeting on March 14, 2006, and ordered the proposed protocol 
with France favorably reported by voice vote, with a quorum 
present and without objection.
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    \2\ The transcript of this hearing (``Tax Treaties,'' February 2, 
2006, S. Hrg. 109-308) has been printed and is available at http://
www.gpoaccess.gov/congress/senate/foreignrelations/index.html.
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                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed protocol with France 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 protocol 
and believes that the following comments may be useful to 
Treasury Department officials in providing guidance on these 
matters should they arise in the course of future treaty 
negotiations.

           EXPATRIATION TO AVOID TAX BY FORMER U.S. CITIZENS
                        AND LONG-TERM RESIDENTS

    There is a potential conflict between the special 
expatriation tax regime of U.S. internal law and the proposed 
protocol. Under U.S. law, former U.S. citizens or long-term 
residents who relinquish U.S. citizenship or terminate U.S. 
residency may be subject to a special set of income, estate, 
and gift tax rules for the 10-year period following such loss 
of status. These rules mainly have the effect of expanding the 
scope of income and wealth transfers that are subject to 
taxation by the United States, such that the individual is 
subject to U.S. tax on a somewhat broader basis than other 
nonresident aliens, but still on a narrower basis than a 
current U.S. citizen or resident.
    The saving clause of the proposed treaty applies to former 
U.S. citizens and long-term residents whose loss of citizenship 
or termination of residency status had as one of its principal 
purposes the avoidance of U.S. tax. The saving clause states 
that the determination is made according to the laws of the 
country of which the person was a citizen or long-term 
resident.
    Under U.S. law, the subjective ``principal purposes of tax 
avoidance'' formulation in determining whether the special tax 
regime may apply to individuals who expatriate was made 
obsolete by the American Jobs Creation Act of 2004 (AJCA) 
(Section 804 of P.L. 108-357). AJCA replaced the subjective 
determinations of tax-avoidance purpose with objective rules 
for determining the applicability of the special tax regime.
    Prior to AJCA, for purposes of determining the 
applicability of the regime, an individual who relinquished 
citizenship or terminated residency was generally treated as 
having done so with a principal purpose of tax avoidance if the 
individual's average Federal income tax liability or net worth 
exceeded certain monetary thresholds. However, the law allowed 
for subjective determinations of tax-avoidance purpose based on 
the relevant facts and circumstances. Certain categories of 
individuals, including a very limited class of dual residents 
or citizens, could avoid being deemed to have a tax avoidance 
purpose for relinquishing citizenship or terminating residency 
by submitting a ruling request to the IRS for a determination 
as to whether the relinquishment of citizenship or termination 
of residency had as one of its principal purposes the avoidance 
of U.S. income, estate or gift taxes.
    AJCA eliminated these subjective determinations of tax-
avoidance purpose and replaced them with objective rules. Under 
the regime as amended by AJCA, a former citizen or former long-
term resident is subject to the special income, estate, and 
gift tax rules for expatriates unless the individual: (1) 
establishes that his or her average annual net income tax 
liability for the five preceding years does not exceed $124,000 
(adjusted for inflation after 2004) and his or her net worth is 
less than $2 million, or alternatively satisfies limited, 
objective exceptions for dual citizens and minors who have had 
no substantial contact with the United States; and (2) 
certifies under penalties of perjury that he or she has 
complied with all Federal tax obligations for the preceding 
five years and provides such evidence of compliance as the 
Treasury Secretary may require. Thus, as a result of AJCA, the 
application of the expatriation tax regime no longer turns on 
determinations of whether a person had a principal purpose of 
tax avoidance, as it often did prior to AJCA.
    The Treasury Department's Technical Explanation notes that 
under the proposed protocol, the determination of whether there 
was a principal purpose of tax avoidance with respect to former 
citizens or long-term residents of the United States is made 
under the laws of the United States. The Technical Explanation 
further states that this language would include ``the 
irrebuttable presumptions based on average annual net income 
tax liability and net worth under section 877 [of the Internal 
Revenue Code],'' and that the new objective tests ``represent 
the administrative means by which the United States determines 
whether a taxpayer has a tax avoidance purpose.'' Thus, 
although the proposed protocol employs the now-obsolete concept 
of a tax-avoidance purpose, the Technical Explanation maintains 
that this language should be understood as fully preserving 
U.S. taxing jurisdiction under the expatriation tax rules in 
their current form.

Committee Conclusions

    The committee is concerned that the proposed protocol 
contains outdated language with respect to determination of 
whether individuals who relinquished U.S. citizenship or 
terminated U.S. residency did so with a ``principal purpose of 
tax avoidance.'' The committee believes that bilateral tax 
treaties should reflect current U.S. domestic tax law.
    The committee recognizes that the proposed protocol was 
largely completed before AJCA was enacted, and therefore that 
incorporation of the AJCA's objective tests into the protocol 
would have required significant renegotiation. Further, the 
committee understands that, as noted in the Technical 
Explanation, since the ``principal purpose of tax avoidance'' 
determination is made under U.S. law, such determination will 
be made according to the objective criteria contained in the 
AJCA.
    Under these circumstances, the committee is satisfied that, 
under the proposed protocol, the ``principal purpose of tax 
avoidance'' determination in the saving clause will be made by 
applying the objective criteria enacted in the AJCA. However, 
the committee expects that future treaties and protocols will 
remove the ``principal purpose of tax avoidance'' language, and 
simply provide that former citizens or long-term residents of 
the United States will be taxed in accordance with the laws of 
the United States.

                           VII. Budget Impact

    The committee has been informed by the staff of the Joint 
Committee on Taxation that it has assessed the likely budget 
impact of the proposed protocol to the estate, inheritance, and 
gift tax treaty between the United States and France. The Joint 
Committee staff estimates that the proposed protocol will cause 
a negligible change in Federal budget receipts during the 
fiscal year 2006-2015 period.

                 VIII. Explanation of Proposed Protocol

    A detailed, article-by-article explanation of the proposed 
protocol between the United States and France can be found in 
the pamphlet of the Joint Committee on Taxation entitled 
Explanation of Proposed Protocol to the Estate, Inheritance, 
and Gift Tax Treaty Between the United States and France (JCX-
3-06), January 26, 2006.

      IX. Text of Resolution of Advice and Consent to Ratification

    Resolved (two-thirds of the Senators present concurring 
therein), That the Senate advise and consent to the 
ratification of the Protocol Amending the Convention Between 
the United States of America and the French Republic for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Estates, Inheritances, and 
Gifts of November 24, 1978, signed at Washington on December 8, 
2004 (Treaty Doc. 109-7).

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