[Senate Executive Report 109-9]
[From the U.S. Government Publishing Office]



109th Congress                                              Exec. Rept.
                                 SENATE
 2d Session                                                       109-9

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



 
 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).

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