[Senate Executive Report 109-9]
[From the U.S. Government Publishing Office]
109th Congress Exec. Rept.
SENATE
2d Session 109-9
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PROTOCOL AMENDING THE INCOME TAX CONVENTION WITH FRANCE (TREATY
DOC. 109-4)
_______
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. 109-4]
The Committee on Foreign Relations, to which was referred
the Protocol Amending 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 Income, 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.................................................3
V. Committee Action.................................................3
VI. Committee Comments...............................................3
VII. Budget Impact....................................................6
VIII.Explanation of Proposed Protocol.................................7
IX. Text of Resolution of Advice and Consent to Ratification.........7
I. Purpose
The principal purposes of the existing income tax treaty
between the United States and France\1\ and the proposed
protocol amending the treaty 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 existing treaty
and proposed protocol also are 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.
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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
Income, signed at Paris on August 31, 1994.
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II. Background
The proposed protocol was signed at Washington on December
8, 2004. The proposed protocol would amend the U.S.-France
income tax treaty, which was signed at Paris on August 31,
1994.
The proposed protocol was transmitted to the Senate for
advice and consent to its ratification on September 28, 2005
(see Treaty Doc. 109-4). The Committee on Foreign Relations
held a public hearing on the proposed protocol on February 2,
2006.
III. Summary
The proposed protocol amends six articles of the existing
treaty. The treaty is broadly similar to other U.S. income tax
treaties, the 1996 U.S. model income tax treaty (the ``U.S.
model''), and the 1992 model income tax treaty of the
Organization for Economic Cooperation and Development, as
updated (the ``OECD model''), with some substantive deviations
from these treaties and models.
The proposed protocol would revise Article 4 (Resident) of
the current treaty to clarify the meaning of ``resident'' in
certain cases and address the treatment of cross-border
investments made through partnerships and other similar forms
of entity.
The proposed protocol would amend Article 10 (Dividends) of
the existing treaty by expanding the class of shareholders
eligible for the treaty's 15-percent rate of U.S. withholding
tax on dividends from real estate investment trusts
(``REITs''). The provisions of the proposed protocol in this
regard are similar to those included in other recent U.S.
income tax treaties and protocols.
The proposed protocol replaces Article 18 (Pensions) of the
current treaty, and provides rules for the taxation of pensions
and social security benefits. The proposed protocol also makes
changes to Article 19 (Public Remuneration) of the current
treaty in coordination with the changes made to Article 18
(Pensions). Under the proposed protocol, the taxation of
pensions paid by a treaty country (or political subdivision or
local authority) for services rendered to such country (or
political subdivision or local authority) is governed by the
provisions of Article 18, regardless of whether the services
are rendered in connection with a governmental function or a
business carried on by such country. In addition, the proposed
protocol would make technical conforming changes to Article 24
(Relief From Double Taxation) of the existing treaty, to
reflect the changes that would be made by the proposed protocol
to Article 18 (Pensions) and Article 19 (Public Remuneration)
of the treaty, as described above.
The proposed protocol expands the ``saving clause''
provision in Article 29 (Miscellaneous Provisions) of the
existing treaty to allow the United States to tax former long-
term residents whose termination of residency has as one of its
principal purposes the avoidance of tax. This provision allows
the United States to apply amendments made in 1996 to the
special tax rules under section 877 of the Internal Revenue
Code.
IV. Entry Into Force
The proposed protocol will enter into force upon the
exchange of instruments of ratification. The effective dates of
the protocol's provisions, however, vary.
The proposed protocol will have effect with respect to
taxes withheld at source for amounts paid or credited on or
after the first day of the second month next following the date
on which the proposed protocol enters into force. With respect
to other taxes, the proposed protocol will have effect for
taxable periods beginning on or after the first of January in
the year following the date on which the proposed protocol
enters into force.
Additionally, a special effective date would apply with
respect to the provisions of Article I (Resident) of the
proposed protocol dealing with fiscally transparent entities,
making these provisions generally retroactive to the effective
date of the existing treaty. Under this special rule, these
provisions, except to the extent that they treat a fonds commun
de placement as a partnership for purposes of U.S. tax benefits
under the treaty, would have effect with respect to taxes
withheld at source for amounts paid or credited on or after
February 1, 1996. For other taxes, these provisions would have
effect for taxable years beginning on or after January 1, 1996.
V. Committee Action
The Committee on Foreign Relations held a public hearing on
the proposed protocol with France (Treaty Doc. 109-4) 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.
A. 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
treaty. 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 protocol 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 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.
B. U.S. MODEL INCOME TAX TREATY
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.\3\
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\3\ 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, exchange of
information), the technical provisions of recent U.S. tax
treaties have increasingly diverged from 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. The committee notes with approval the intention
of the Treasury Department to update the U.S. model treaty \4\
and strongly encourages the Treasury Department to complete the
update soon. 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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\4\ Testimony of Patricia Brown, Deputy International Tax Counsel,
United States Department of the Treasury, before the Senate Committee
on Foreign Relations on Pending Income Tax Agreements, February 2,
2006.
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VII. Budget Impact
The committee has been informed by the staff of the Joint
Committee on Taxation that it has assessed the likely impact of
the proposed protocol to the income 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 Income Tax Treaty
Between the United States and France (JCX-2-06), 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 France for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income of August 31, 1994, signed at
Washington on December 8, 2004 (Treaty Doc. 109-4).