[Senate Executive Report 112-1]
[From the U.S. Government Publishing Office]
112th Congress Exec. Rept.
SENATE
1st Session 112-1
======================================================================
PROTOCOL AMENDING TAX CONVENTION WITH SWITZERLAND
_______
August 30 (legislative day, August 2), 2011.--Ordered to be printed
_______
Mr. Kerry, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 112-1]
The Committee on Foreign Relations, to which was referred
the Protocol Amending the Convention between the United States
of America and the Swiss Confederation for the Avoidance of
Double Taxation With Respect to Taxes on Income, Signed at
Washington on October 2, 1996, signed on September 23, 2009, at
Washington, as corrected by an exchange of notes effected
November 16, 2010, together with a related agreement effected
by an exchange of notes on September 23, 2009 (Treaty Doc. 112-
1) (collectively, the ``Protocol''), having considered the
same, reports favorably thereon with one declaration, as
indicated in the resolution of advice and consent, and
recommends that the Senate give its advice and consent to
ratification thereof, as set forth in this report and the
accompanying resolution of advice and consent.
CONTENTS
Page
I. Purpose..........................................................2
II. Background.......................................................2
III. Major Provisions.................................................2
IV. Entry Into Force.................................................3
V. Implementing Legislation.........................................3
VI. Committee Action.................................................3
VII. Committee Comments...............................................4
VIII Text of Resolution of Advice and Consent to Ratification.........6
IX. Annex 1.--Technical Explanation..................................7
X. Annex 2.--Transcript of Hearing of June 7, 2011.................19
I. Purpose
The purpose of the Protocol, along with the underlying
treaty, is to promote and facilitate trade and investment
between the United States and Switzerland, and to bring the
existing treaty with Switzerland (the ``Treaty'') into
conformity with current U.S. tax treaty policy. Principally,
the Protocol will modernize the existing Treaty's rules
governing exchange of information; provide for the
establishment of a mandatory arbitration rule to facilitate
resolution of disputes between the U.S. and Swiss revenue
authorities about the Treaty's application to particular
taxpayers; and provide an exemption from source country
withholding tax on dividends paid to individual retirement
accounts.
II. Background
The United States has a tax treaty with Switzerland that is
currently in force, which was concluded in 1996 along with a
separate protocol to the treaty concluded on the same day
(``1996 Protocol''). The proposed Protocol was negotiated to
modernize our relationship with Switzerland in this area and to
update the current treaty to better reflect current U.S. and
Swiss domestic tax policy.
III. Major Provisions
A detailed article-by-article analysis of the Protocol may
be found in the Technical Explanation Published by the
Department of the Treasury on June 7, 2011, which is included
in Annex 2. In addition, the staff of the Joint Committee on
Taxation prepared an analysis of the Protocol, JCX-31-11 (May
20, 2011), which was of great assistance to the committee in
reviewing the Protocol. A summary of the key provisions of the
Protocol is set forth below.
The Protocol is primarily intended to update the existing
Swiss Convention to conform to current U.S. and Swiss tax
treaty policy. It provides an exemption from source country
withholding tax on dividends paid to individual retirement
accounts; provides for the establishment of a mandatory
arbitration rule to facilitate resolution of disputes between
the U.S. and Swiss revenue authorities about the treaty's
application to particular taxpayers; and modernizes the
existing Convention's rules governing exchange of information.
INDIVIDUAL RETIREMENT ACCOUNTS
The Protocol updates the provisions of the existing
Convention, as requested by Switzerland, to provide an
exemption from source country withholding tax on dividends paid
to individual retirement accounts.
MANDATORY ARBITRATION
The Protocol incorporates mandatory, binding arbitration in
certain cases that the competent authorities of the United
States and Switzerland have been unable to resolve after a
reasonable period of time under the mutual agreement procedure.
The procedures include (1) the opportunity for taxpayer
participation by providing information directly to the arbitral
panel through position papers; and (2) a prohibition against
either state appointing an employee of its tax administration
as a member of the arbitration panel.
EXCHANGE OF INFORMATION
The Protocol would replace the existing Treaty's tax
information exchange provisions (contained in Article 26) with
updated rules that are consistent with current U.S. tax treaty
practice. The Protocol provides the tax authorities of to the
two countries shall exchange information relevant to carrying
out the provisions of the Convention or the domestic tax laws
of either country. This includes information that would
otherwise be protected by the bank secrecy laws of either
country. This broadens the Treaty's existing information
sharing provisions, which provide for information sharing only
where necessary for the prevention of income tax fraud or
similar activities. The Protocol also enables the United States
to obtain information (including from financial institutions)
from Switzerland whether or not Switzerland needs the
information for its own tax purposes.
IV. Entry Into Force
The proposed Protocol will enter into force between the
United States and Switzerland on the date of the later note in
an exchange of diplomatic notes in which the Parties notify
each other that their respective applicable procedures for
ratification have been satisfied. The various provisions of
this Protocol shall have effect as described in paragraph 2 of
Article V of the Protocol.
V. Implementing Legislation
As is the case generally with income tax treaties, the
Protocol is self-executing and does not require implementing
legislation for the United States.
VI. Committee Action
The committee held a public hearing on the Convention on
June 7, 2011. Testimony was received from Manal Corwin, Deputy
Assistant Secretary (International Tax Affairs) at the Treasury
Department, and Thomas Barthold, Chief of Staff of the Joint
Committee on Taxation. A transcript of the hearing is included
in Annex 2.
On July 26, 2011, the committee considered the Protocol and
ordered it favorably reported by voice vote, with a quorum
present and without objection.
VII. Committee Comments
The Committee on Foreign Relations believes that the
Protocol will stimulate increased trade and investment,
strengthen provisions regarding the exchange of tax
information, and promote closer co-operation between the United
States and Switzerland. The committee therefore urges the
Senate to act promptly to give advice and consent to
ratification of the Protocol, as set forth in this report and
the accompanying resolution of advice and consent.
A. MANDATORY ARBITRATION
The arbitration provision in the Protocol is largely
consistent with the arbitration provisions included in recent
treaties negotiated with Canada, Germany, Belgium, and France.
It includes the modifications which were made first to the
French treaty provisions to reflect concerns expressed by the
Senate during its approval of the other treaties.
Significantly, the provision in the Protocol includes (1) the
opportunity for taxpayer participation by providing information
directly to the arbitral panel through position papers; and (2)
a prohibition against either state appointing an employee of
its tax administration as a member of the panel.
B. EXCHANGE OF INFORMATION
The Protocol would replace the existing Treaty's tax
information exchange provisions with updated rules that are
consistent with current U.S. tax treaty practice. The Protocol
would allow the tax authorities of each country to exchange
information relevant to carrying out the provisions of the
Treaty or the domestic tax laws of either country, including
information that would otherwise be protected by the bank
secrecy laws of either country. It would also enable the United
States to obtain information (including from financial
institutions) from Switzerland whether or not Switzerland needs
the information for its own tax purposes.
The committee takes note of the difficulties faced in 2008-
2009 by the Internal Revenue Service and the Department of
Justice in obtaining information needed to enforce U.S. tax
laws against U.S. persons who utilized the services of UBS AG,
a multinational bank based in Switzerland. The committee
expects that the proposed Protocol--including in particular the
express provisions making clear that a country's bank secrecy
laws cannot prevent the exchange of tax information requested
pursuant to the treaty--should put the government of
Switzerland in a position to prevent recurrence of such an
incident in the future.
The committee takes note of Article 4 of the Protocol which
sets forth information that should be provided to the requested
State by the requesting State when making a request for
information under the Treaty. It is the committee's
understanding based upon the testimony and Technical
Explanation provided by the Department of the Treasury that,
while this paragraph contains important procedural requirements
that are intended to ensure that ``fishing expeditions'' do not
occur, the provisions of this paragraph will be interpreted by
the United States and Switzerland to permit the widest possible
exchange of information and not to frustrate effective exchange
of information. In particular, the committee understands that
with respect to the requirement that a request must include
``information sufficient to identify the person under
examination or investigation,'' it is mutually understood by
the United States and Switzerland that there can be
circumstances in which there is information sufficient to
identify the person under examination or investigation even
though the requesting State cannot provide the person's name.
C. DECLARATION ON THE SELF-EXECUTING
NATURE OF THE PROTOCOL
The committee has included one declaration in the
recommended resolution of advice and consent. The declaration
states that the Protocol is self-executing, as is the case
generally with income tax treaties. Prior to the 110th
Congress, the committee generally included such statements in
the committee's report, but in light of the Supreme Court
decision in Medellin v. Texas, 128 S. Ct. 1346 (2008), the
committee determined that a clear statement in the Resolution
is warranted. A further discussion of the committee's views on
this matter can be found in Section VIII of Executive Report
110-12.
D. AGREEMENTS RELATING TO REQUESTS FOR INFORMATION
In connection with efforts to obtain from Switzerland
information relevant to U.S. investigations of alleged tax
fraud committed by account holders of UBS AG, in 2009 and 2010
the United States and Switzerland entered into two agreements
pursuant to the U.S.-Switzerland Tax Treaty.
In particular, on August 19, 2009, the two governments
signed an Agreement Between the United States of America and
the Swiss Confederation on the request for information from the
Internal Revenue Service of the United States of America
regarding UBS AG, a corporation established under the laws of
the Swiss Confederation. On March 31, 2010, the two governments
signed a separate protocol amending the August 19, 2009
agreement.
The committee supports the objective of these agreements to
facilitate the exchange of information between Switzerland and
the United States in support of U.S. efforts to investigate and
prosecute alleged tax fraud by account holder of UBS AG.
The committee notes its concern, however, about one
provision of the March 31, 2010 protocol. Paragraph 4 of that
protocol provides that ``For the purposes of processing the
Treaty Request, this Agreement and its Annex shall prevail over
the existing Tax Treaty, its Protocol and the Mutual Agreement
in case of conflicting provisions.''
Some could interpret the March 31, 2010, protocol's
language indicating that the August 19, 2009 agreement ``shall
prevail'' over the existing U.S.-Switzerland tax treaty to mean
that the agreement has the effect of amending the tax treaty.
The U.S.-Switzerland tax treaty is a treaty concluded with the
advice and consent of the Senate. Amendments to treaties are
themselves ordinarily subject to the advice and consent of the
Senate. The executive branch has not sought the Senate's advice
and consent to either the August 19, 2009 agreement or the
March 31, 2010 protocol. The executive branch has assured the
committee that the two governments did not intend this language
to have any effect on the obligations of the United States
under the U.S.-Switzerland tax treaty.
In order to avoid any similar confusion in the future, the
committee expects that the executive branch will refrain from
the use of similar language in any future agreements relating
to requests for information under tax treaties unless it
intends to seek the Senate's advice and consent for such
agreements.
VIII. Text of Resolution of Advice and Consent to Ratification
Resolved (two-thirds of the Senators present concurring
therein),
SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION
The Senate advises and consents to the ratification of the
Protocol Amending the Convention between the United States of
America and the Swiss Confederation for the Avoidance of Double
Taxation With Respect to Taxes on Income, Signed at Washington
on October 2, 1996, signed on September 23, 2009, at
Washington, as corrected by an exchange of notes effected
November 16, 2010, together with a related agreement effected
by an exchange of notes on September 23, 2009 (the
``Protocol'') (Treaty Doc. 112-1), subject to the declaration
of section 2.
SECTION 2. DECLARATION
The advice and consent of the Senate under section 1 is
subject to the following declaration:
The Protocol is self-executing.
IX. Annex 1.--Technical Explanation
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL SIGNED
AT WASHINGTON ON SEPTEMBER 23, 2009 AMENDING THE CONVENTION BETWEEN THE
UNITED STATES OF AMERICA AND THE SWISS CONFEDERATION FOR THE AVOIDANCE
OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO
TAXES ON INCOME, SIGNED AT WASHINGTON ON OCTOBER 2, 1996, AS AMENDED BY
THE PROTOCOL SIGNED ON OCTOBER 2, 1996
This is a Technical Explanation of the Protocol signed at
Washington on September 23, 2009 and the related Exchange of
Notes (hereinafter the ``Protocol'' and ``Exchange of Notes''
respectively), amending the Convention between the United
States of America and the Swiss Confederation for the avoidance
of double taxation and the prevention of fiscal evasion with
respect to taxes on income, signed at Washington on October 2,
1996 as amended by the Protocol also signed on October 2, 1996
(together, the ``existing Convention'').
Negotiations took into account the U.S. Department of the
Treasury's current tax treaty policy and the Treasury
Department's Model Income Tax Convention, published on November
15, 2006 (the ``U.S. Model''). Negotiations also took into
account the Model Tax Convention on Income and on Capital,
published by the Organisation for Economic Cooperation and
Development (the ``OECD Model''), and recent tax treaties
concluded by both countries.
This Technical Explanation is an official guide to the
Protocol and Exchange of Notes. It explains policies behind
particular provisions, as well as understandings reached during
the negotiations with respect to the interpretation and
application of the Protocol and the Exchange of Notes.
References to the existing Convention are intended to put
various provisions of the Protocol into context. The Technical
Explanation does not, however, provide a complete comparison
between the provisions of the existing Convention and the
amendments made by the Protocol and Exchange of Notes. The
Technical Explanation is not intended to provide a complete
guide to the existing Convention as amended by the Protocol and
Exchange of Notes. To the extent that the existing Convention
has not been amended by the Protocol and Exchange of Notes, the
technical explanation of the Convention signed at Washington on
October 2, 1996 and the Protocol signed on also signed on
October 2, 1996 remains the official explanation. References in
this Technical Explanation to ``he'' or ``his'' should be read
to mean ``he or she'' or ``his or her.'' References to the
``Code'' are to the Internal Revenue Code of 1986, as amended.
The Exchange of Notes relates to the implementation of new
paragraphs 6 and 7 of Article 25 (Mutual Agreement Procedure),
which provide for binding arbitration of certain disputes
between the competent authorities.
ARTICLE 1
Article 1 of the Protocol revises Article 10 (Dividends) of
the existing Convention by restating paragraph 3. New paragraph
3 provides that dividends paid by a company resident in a
Contracting State shall be exempt from tax in that State if the
dividends are paid to and beneficially owned by a pension or
other retirement arrangement which is a resident of the other
Contracting State, or an individual retirement savings plan set
up in and owned by a resident of the other Contracting State,
and the competent authorities of the Contracting States agree
that the pension or retirement arrangement, or the individual
retirement savings plan, in a Contracting State generally
corresponds to a pension or other retirement arrangement, or to
an individual retirement savings plan, recognized for tax
purposes in the other Contracting State.
The exemption from tax provided in new paragraph 3 shall
not apply if the pension or retirement arrangement or the
individual retirement savings plan receiving the dividend
controls the company paying the dividend. Additionally, in
order to qualify for the benefits of new paragraph 3, a pension
or retirement arrangement or individual retirement savings plan
must satisfy the requirements of paragraph 2 of Article 22
(Limitation on Benefits).
ARTICLE 2
Article 2 of the Protocol replaces paragraph 6 of Article
25 (Mutual Agreement Procedure) of the existing Convention with
new paragraphs 6 and 7. New paragraphs 6 and 7 provide a
mandatory binding arbitration proceeding. Paragraph 1 of the
Exchange of Notes provides that binding arbitration will be
used to determine the application of the Convention in respect
of any case where the competent authorities have endeavored but
are unable to reach an agreement under Article 25 regarding
such application (the competent authorities may, however, agree
that the particular case is not suitable for determination by
arbitration. Paragraph 1 of the Exchange of Notes provides
additional rules and procedures that apply to a case considered
under the arbitration provisions.
New paragraph 6 provides that a case shall be resolved
through arbitration when the competent authorities have
endeavored but are unable to reach a complete agreement
regarding a case and the following three conditions are
satisfied. First, tax returns have been filed with at least one
of the Contracting States with respect to the taxable years at
issue in the case. Second, the case is not a case that the
competent authorities agree before the date on which
arbitration proceedings would otherwise have begun, is not
suitable for determination by arbitration. Third, all concerned
persons and their authorized representatives agree, according
to the provisions of new subparagraph 7(d), not to disclose to
any other person any information received during the course of
the arbitration proceeding from either Contracting State or the
arbitration board, other than the determination of the board
(confidentiality agreement). The confidentiality agreement may
also be executed by any concerned person that has the legal
authority to bind any other concerned person on the matter. For
example, a parent corporation with the legal authority to bind
its subsidiary with respect to confidentiality may execute a
comprehensive confidentiality agreement on its own behalf and
that of its subsidiary.
New paragraph 6 provides that an unresolved case shall not
be submitted to arbitration if a decision on such case has
already been rendered by a court or administrative tribunal of
either Contracting State.
New paragraph 7 provides additional rules and definitions
to be used in applying the arbitration provisions. Subparagraph
7(a) provides that the term ``concerned person'' means the
person that brought the case to competent authority for
consideration under Article 25 and includes all other persons,
if any, whose tax liability to either Contracting State may be
directly affected by a mutual agreement arising from that
consideration. For example, a concerned person does not only
include a U.S. corporation that brings a transfer pricing case
with respect to a transaction entered into with its Swiss
subsidiary for resolution to the U.S. competent authority, but
also the Swiss subsidiary, which may have a correlative
adjustment as a result of the resolution of the case.
Subparagraph 7(c) provides that an arbitration proceeding
begins on the later of two dates: two years from the
commencement date of that case (unless both competent
authorities have previously agreed to a different date), or the
earliest date upon which all concerned persons have entered
into a confidentiality agreement and the agreements have been
received by both competent authorities. The commencement date
of the case is defined by subparagraph 7(b) as the earliest
date on which the information necessary to undertake
substantive consideration for a mutual agreement has been
received by both competent authorities.
Subparagraph 1(c) of the Exchange of Notes provides that
notwithstanding the initiation of an arbitration proceeding,
the competent authorities may reach a mutual agreement to
resolve the case and terminate the arbitration proceeding.
Correspondingly, a concerned person may withdraw its request
for the competent authorities to engage in the Mutual Agreement
Procedure and thereby terminate the arbitration proceeding at
any time.
Subparagraph 1(p) of the Exchange of Notes provides that
each competent authority will confirm in writing to the other
competent authority and to the concerned persons the date of
its receipt of the information necessary to undertake
substantive consideration for a mutual agreement. Such
information will be submitted to the competent authorities
under relevant internal rules and procedures of each of the
Contracting States. The information will not be considered
received until both competent authorities have received copies
of all materials submitted to either Contracting State by
concerned persons in connection with the mutual agreement
procedure.
The Exchange of Notes provides several procedural rules
once an arbitration proceeding under paragraph 6 of Article 25
has commenced, but the competent authorities may complete these
rules as necessary. In addition, as provided in subparagraph
1(f) of the Exchange of Notes, the arbitration panel may adopt
any procedures necessary for the conduct of its business,
provided the procedures are not inconsistent with any provision
of Article 25 or of the Exchange of Notes.
Subparagraph 1(e) of the Exchange of Notes provides that
each Contracting State has 90 days from the date on which the
arbitration proceeding begins to send a written communication
to the other Contracting State appointing one member of the
arbitration panel. The members of the arbitration panel shall
not be employees of the tax administration which appoints them.
Within 60 days of the date the second of such communications is
sent, these two board members will appoint a third member to
serve as the chair of the panel. The competent authorities will
develop a non-exclusive list of individuals familiar in
international tax matters who may potentially serve as the
chair of the panel, but in any case, the chair can not be a
citizen or resident of either Contracting State. In the event
that the two members appointed by the Contracting States fail
to agree on the third member by the requisite date, these
members will be dismissed and each Contracting State will
appoint a new member of the panel within 30 days of the
dismissal of the original members.
Subparagraph 1(g) of the Exchange of Notes establishes
deadlines for submission of materials by the Contracting States
to the arbitration panel. Each competent authority has 60 days
from the date of appointment of the chair to submit a Proposed
Resolution describing the proposed disposition of the specific
monetary amounts of income, expense or taxation at issue in the
case, and a supporting Position Paper. Copies of each State's
submissions are to be provided by the panel to the other
Contracting State on the date on which the later of the
submissions is submitted to the panel. Each of the Contracting
States may submit a Reply Submission to the panel within 120
days of the appointment of the chair to address points raised
in the other State's Proposed Resolution or Position Paper. If
one Contracting State fails to submit a Proposed Resolution
within the requisite time, the Proposed Resolution of the other
Contracting State is deemed to be the determination of the
arbitration panel in the case and the arbitration proceeding
will be terminated. Additional information may be supplied to
the arbitration panel by a Contracting State only at the
panel's request. The panel will provide copies of any such
requested information, along with the panel's request, to the
other Contracting State on the date on which the request or
response is submitted. All communication from the Contracting
States to the panel, and vice versa, is to be in writing
between the chair of the panel and the designated competent
authorities with the exception of communication regarding
logistical matters.
Subparagraph 1(h) of the Exchange of Notes provides that
the presenter of the case to the competent authority of a
Contracting State may submit a Position Paper to the panel for
consideration by the panel. The Position Paper must be
submitted within 90 days of the appointment of the chair, and
the panel will provide copies of the Position Paper to the
Contracting States on the date on which the later of the
submissions of the Contracting States is submitted to the
panel. Subparagraph 1(i) of the Exchange of Notes provides that
the arbitration panel must deliver a determination in writing
to the Contracting States within six months of the appointment
of the chair. The determination must be one of the two Proposed
Resolutions submitted by the Contracting States. Subparagraph
1(b) of the Exchange of Notes provides that the determination
may only provide a determination regarding the amount of
income, expense or tax reportable to the Contracting States.
The determination has no precedential value, and consequently
the rationale behind a panel's determination would not be
beneficial and may not be provided by the panel.
Subparagraphs 1(j) and 1(k) of the Exchange of Notes
provide that unless any concerned person does not accept the
decision of the arbitration panel, the determination of the
panel constitutes a resolution by mutual agreement under
Article 25 and, consequently, is binding on both Contracting
States. Within 30 days of receiving the determination from the
competent authority to which the case was first presented, each
concerned person must advise that competent authority whether
the person accepts the determination. In addition, if the case
is in litigation, each concerned person who is a party to the
litigation must also advise, within the same time frame, the
court of its acceptance of the arbitration determination, and
withdraw from the litigation the issues resolved by the
arbitration proceeding. If any concerned person fails to advise
the competent authority and relevant court within the requisite
time, such failure is considered a rejection of the
determination. If a determination is rejected, the case cannot
be the subject of a subsequent arbitration proceeding.
For purposes of the arbitration proceeding, the members of
the arbitration panel and their staffs shall be considered
``persons or authorities'' to whom information may be disclosed
under Article 26 (Exchange of Information). Subparagraph 1(n)
of the Exchange of Notes provides that all materials prepared
in the course of, or relating to the arbitration proceeding are
considered information exchanged between the Contracting
States. No information relating to the arbitration proceeding
or the panel's determination may be disclosed by members of the
arbitration panel or their staffs or by either competent
authority, except as permitted by the Convention and the
domestic laws of the Contracting States. Members of the
arbitration panel and their staffs must agree in statements
sent to each of the Contracting States in confirmation of their
appointment to the arbitration board to abide by and be subject
to the confidentiality and nondisclosure provisions of Article
26 of the Convention and the applicable domestic laws of the
Contracting States, with the most restrictive of the provisions
applying.
Subparagraph 1(m) of the Exchange of Notes provides that
the applicable domestic law of the Contracting States
determines the treatment of any interest or penalties
associated with a competent authority agreement achieved
through arbitration.
Subparagraph 1(l) of the Exchange of Notes provides that
any meetings of the arbitration panel shall be in facilities
provided by the Contracting State whose competent authority
initiated the mutual agreement proceedings in the case.
Subparagraph 1(o) of the Exchange of Notes provides that fees
and expenses are borne equally by the Contracting States,
including the cost of translation services. In general, the
fees of members of the arbitration panel will be set at the
fixed amount of $2,000 per day or the equivalent amount in
Swiss francs. The expenses of members of the panel will be set
in accordance with the International Centre for Settlement of
Investment Disputes (ICSID) Schedule of Fees for arbitrators
(in effect on the date on which the arbitration board
proceedings begin). The competent authorities may amend the set
fees and expenses of members of the board. Meeting facilities,
related resources, financial management, other logistical
support, and general and administrative coordination of the
arbitration proceeding will be provided, at its own cost, by
the Contracting State whose competent authority initiated the
mutual agreement proceedings. All other costs are to be borne
by the Contracting State that incurs them.
ARTICLE 3
Article 3 of the Protocol replaces Article 26 (Exchange of
Information) of the existing Convention. This Article provides
for the exchange of information and administrative assistance
between the competent authorities of the Contracting States.
Paragraph 1 of Article 26
The obligation to obtain and provide information to the
other Contracting State is set out in new Paragraph 1. The
information to be exchanged is that which may be relevant for
carrying out the provisions of the Convention or the domestic
laws of the United States or of Switzerland concerning taxes
covered by the Convention, insofar as the taxation thereunder
is not contrary to the Convention. This language incorporates
the standard in 26 U.S.C. Section 7602 which authorizes the IRS
to examine ``any books, papers, records, or other data which
may be relevant or material.'' (emphasis added) In United
States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the
Supreme Court stated that the language ``may be'' reflects
Congress's express intention to allow the IRS to obtain ``items
of even potential relevance to an ongoing investigation,
without reference to its admissibility.'' (emphasis in
original) However, the language ``may be'' would not support a
request in which a Contracting State simply asked for
information regarding all bank accounts maintained by residents
of that Contracting State in the other Contracting State.
Exchange of information with respect to each State's
domestic law is authorized to the extent that taxation under
domestic law is not contrary to the Convention. Thus, for
example, information may be exchanged with respect to a covered
tax, even if the transaction to which the information relates
is a purely domestic transaction in the requesting State and,
therefore, the exchange is not made to carry out the
Convention. An example of such a case is provided in the OECD
Commentary: a company resident in one Contracting State and a
company resident in the other Contracting State transact
business between themselves through a third-country resident
company. Neither Contracting State has a treaty with the third
State. To enforce their internal laws with respect to
transactions of their residents with the third-country company
(since there is no relevant treaty in force), the Contracting
States may exchange information regarding the prices that their
residents paid in their transactions with the third-country
resident.
New paragraph 1 clarifies that information may be exchanged
that relates to the administration or enforcement of the taxes
covered by the Convention. Thus, the competent authorities may
request and provide information for cases under examination or
criminal investigation, in collection, on appeals, or under
prosecution.
Information exchange is not restricted by paragraph 1 of
Article 1 (General Scope). Accordingly, information may be
requested and provided under this Article with respect to
persons who are not residents of either Contracting State. For
example, if a third-country resident has a permanent
establishment in Switzerland, and that permanent establishment
engages in transactions with a U.S. enterprise, the United
States could request information with respect to that permanent
establishment, even though the third-country resident is not a
resident of either Contracting State. Similarly, if a third-
country resident maintains a bank account in Switzerland, and
the Internal Revenue Service has reason to believe that funds
in that account should have been reported for U.S. tax purposes
but have not been so reported, information can be requested
from Switzerland with respect to that person's account, even
though that person is not the taxpayer under examination.
The obligation to exchange information under paragraph 1
does not limit a Contracting State's ability to employ
unilateral procedures otherwise available under its domestic
law to obtain, or to require the disclosure of, information
from a taxpayer or third party. Thus, the Protocol does not
prevent or restrict the United States' information gathering
authority or enforcement measures provided under its domestic
law.
Although the term ``United States'' does not encompass U.S.
possessions for most purposes of the Convention, Section 7651
of the Code authorizes the Internal Revenue Service to utilize
the provisions of the Internal Revenue Code to obtain
information from the U.S. possessions pursuant to a proper
request made under Article 26. If necessary to obtain requested
information, the Internal Revenue Service could issue and
enforce an administrative summons to the taxpayer, a tax
authority (or a government agency in a U.S. possession), or a
third party located in a U.S. possession.
Paragraph 2 of Article 26
New paragraph 2 provides assurances that any information
exchanged will be treated as secret, subject to the same
disclosure constraints as information obtained under the laws
of the requesting State. Information received may be disclosed
only to persons, including courts and administrative bodies,
involved in the assessment, collection, or administration of,
the enforcement or prosecution in respect of, or the
determination of the of appeals in relation to, the taxes
covered by the Convention. The information must be used by
these persons in connection with the specified functions.
Information may also be disclosed to legislative bodies, such
as the tax-writing committees of Congress and the Government
Accountability Office, engaged in the oversight of the
preceding activities. Information received by these bodies must
be for use in the performance of their role in overseeing the
administration of U.S. tax laws. Information received may be
disclosed in public court proceedings or in judicial decisions.
New paragraph 2 also provides that information received by
a Contracting State may be used for other purposes when such
information may be used for such other purpose under the laws
of both States, and the competent authority of the requested
State has authorized such use. This provision is derived from
the OECD Model Commentary, which explains that Contracting
States may add this provision to broaden the purposes for which
they may use information exchanged to allow other non-tax law
enforcement agencies and judicial authorities on certain high
priority matters (e.g., to combat money laundering, corruption,
or terrorism financing). To ensure that the laws of both States
would allow the information to be used for such other purpose,
the Contracting States will only seek consent under this
provision to the extent that the non-tax use is allowed under
the provisions of the Mutual Legal Assistance Treaty between
the United States and Switzerland which entered into force on
January 23, 1977 (or as it may be amended or replaced in the
future).
Paragraph 3 of Article 26
New paragraph 3 provides that the obligations undertaken in
paragraphs 1 and 2 to exchange information do not require a
Contracting State to carry out administrative measures that are
at variance with the laws or administrative practice of either
State. Nor is a Contracting State required to supply
information not obtainable under the laws or administrative
practice of either State, or to disclose trade secrets or other
information, the disclosure of which would be contrary to
public policy.
Thus, a requesting State may be denied information from the
other State if the information would be obtained pursuant to
procedures or measures that are broader than those available in
the requesting State. However, the statute of limitations of
the Contracting State making the request for information should
govern a request for information. Thus, the Contracting State
of which the request is made should attempt to obtain the
information even if its own statute of limitations has passed.
In many cases, relevant information will still exist in the
business records of the taxpayer or a third party, even though
it is no longer required to be kept for domestic tax purposes.
While paragraph 3 states conditions under which a
Contracting State is not obligated to comply with a request
from the other Contracting State for information, the requested
State is not precluded from providing such information, and
may, at its discretion, do so subject to the limitations of its
internal law.
Paragraph 4 of Article 26
New paragraph 4 provides that when information is requested
by a Contracting State in accordance with this Article, the
other Contracting State is obligated to obtain the requested
information as if the tax in question were the tax of the
requested State, even if that State has no direct tax interest
in the case to which the request relates. In the absence of
such a paragraph, some taxpayers have argued that paragraph
3(a) prevents a Contracting State from requesting information
from a bank or fiduciary that the Contracting State does not
need for its own tax purposes. This paragraph clarifies that
paragraph 3 does not impose such a restriction and that a
Contracting State is not limited to providing only the
information that it already has in its own files.
Paragraph 5 of Article 26
New paragraph 5 provides that a Contracting State may not
decline to provide information because that information is held
by financial institutions, nominees or persons acting in an
agency or fiduciary capacity. Thus, paragraph 5 would
effectively prevent a Contracting State from relying on
paragraph 3 to argue that its domestic bank secrecy laws (or
similar legislation relating to disclosure of financial
information by financial institutions or intermediaries)
override its obligation to provide information under paragraph
1. This paragraph also requires the disclosure of information
regarding the beneficial owner of an interest in a person, such
as the identity of a beneficial owner of bearer shares.
Paragraph 5 further provides that the requested State has the
power to meet its obligations under Article 26, and paragraph 5
in particular, even though it may not have such powers for
purposes of enforcing its own tax laws.
Paragraph 2 of the Exchange of Notes provides that the
Contracting States understand that there may be instances when
paragraph 3 of Article 26 may be invoked to decline a request
to supply information that is held by a person described in
paragraph 5 of the Article. Such refusal must be based,
however, on reasons unrelated to that person's status as a
bank, financial institution, agent, fiduciary or nominee, or
the fact that the information relates to ownership interests.
For example, a Contracting State may decline to provide
information relating to confidential communications between
attorneys and their clients that are protected from disclosure
under that State's domestic law.
Treaty effective dates and termination in relation to exchange of
information
Article 5 of the Protocol sets forth rules governing the
effective dates of the provisions of Articles 3 and 4 of the
Protocol. The competent authorities are obligated to exchange
information described in new paragraph 5 of Article 26 if that
information relates to any date beginning on or after September
23, 2009, the date on which the Protocol was signed
notwithstanding the provisions of the existing Convention. In
all other cases of application of new Article 26, the competent
authorities are obligated to exchange information that relates
to taxable periods beginning on or after January 1 of the year
following the date of signature of the Protocol.
A tax administration may also seek information with respect
to a year for which a treaty was in force after the treaty has
been terminated. In such a case the ability of the other tax
administration to act is limited. The treaty no longer provides
authority for the tax administrations to exchange confidential
information. They may only exchange information pursuant to
domestic law or other international agreement or arrangement.
ARTICLE 4
Article 4 of the Protocol replaces paragraph 10 of the
Protocol to the existing Convention. New Protocol paragraph 10
provides greater detail regarding how the provisions of revised
Article 26 (Exchange of Information) will be applied.
New Protocol paragraph 10(a) lists the information that
should be provided to the requested State by the requesting
State when making a request for information under paragraph 26
of the Convention. Clause (i) of paragraph 10(a) provides that
a request must contain information sufficient to identify the
person under examination or investigation. In a typical case,
information sufficient to identify the person under examination
or investigation would include a name, and to the extent known,
an address, account number or similar identifying information.
It is mutually understood that there can be circumstances in
which there is information sufficient to identify the person
under examination or investigation even though the requesting
State cannot provide a name.
Clause (ii) of paragraph 10(a) provides that a request for
information must contain the period of time for which the
information is requested. Clause (iii) of paragraph 10(a)
provides that a request for information must contain a
statement of the information sought, including its nature and
the form in which the requesting State wishes to receive the
information from the requested State. Clause (iv) of paragraph
10(a) provides that a request for information must contain a
statement of the tax purpose for which the information is
sought. Clause (v) of paragraph 10(a) provides that the request
must include the name and, to the extent known, the address of
any person believed to be in possession of the requested
information.
New Protocol paragraph 10(b) provides confirmation of the
extent to which information is to be exchanged pursuant to new
paragraph 1 of Article 26. The purposes of referring to
information that may be relevant is to provide for exchange of
information to the widest extent possible. This standard
nevertheless does not allow the Contracting States to engage in
so-called ``fishing expeditions'' or to request information
that is unlikely to be relevant to the tax affairs of a given
taxpayer. For example, the language ``may be'' would not
support a request in which a Contracting State simply asked for
information regarding all bank accounts maintained by residents
of that Contracting State in the other Contracting State. New
Protocol paragraph 10(b) further confirms that the provisions
of new Protocol paragraph 10(a) are to be interpreted in order
not to frustrate effective exchange of information.
New Protocol paragraph 10(c) provides that the requesting
State may specify the form in which information is to be
provided (e.g., authenticated copies of original documents
(including books, papers, statements, records, accounts and
writings)). The intention is to ensure that the information may
be introduced as evidence in the judicial proceedings of the
requesting State. The requested State should, if possible,
provide the information in the form requested to the same
extent that it can obtain information in that form under its
own laws and administrative practices with respect to its own
taxes.
New Protocol paragraph 10(d) confirms that Article 26 of
the Convention does not restrict the possible methods for
exchanging information, but also does not commit either
Contracting State to exchange information on an automatic or
spontaneous basis. The Contracting States expect to provide
information to one another necessary for carrying out the
provisions of the Convention.
New Protocol paragraph 10(e) provides clarification
regarding the application of paragraph 3(a) of revised Article
26, which provides that in no case shall the provisions of
paragraphs 1 and 2 be construed so as to impose on a
Contracting State the obligation to carry out administrative
measures at variance with the laws and administrative practice
of that or the other Contracting State. The Contracting States
understand that the administrative procedural rules regarding a
taxpayer's rights (such as the right to be notified or the
right to an appeal) provided for in the requested State remain
applicable before information is exchanged with the requesting
State. Notification procedures should not, however, be applied
in a manner that, in the particular circumstances of the
request, would frustrate the efforts of the requesting State.
The Contracting States further understand that such rules are
intended to provide the taxpayer a fair procedure and are not
to prevent or unduly delay the exchange of information process.
ARTICLE 5
Article 5 of the Protocol contains the rules for bringing
the Protocol into force and giving effect to its provisions.
Paragraph 1
Paragraph 1 provides for the ratification of the Protocol
by both Contracting States according to their constitutional
and statutory requirements. Instruments of ratification shall
be exchanged as soon as possible.
In the United States, the process leading to ratification
and entry into force is as follows: Once a treaty has been
signed by authorized representatives of the two Contracting
States, the Department of State sends the treaty to the
President who formally transmits it to the Senate for its
advice and consent to ratification, which requires approval by
two-thirds of the Senators present and voting. Prior to this
vote, however, it generally has been the practice for the
Senate Committee on Foreign Relations to hold hearings on the
treaty and make a recommendation regarding its approval to the
full Senate. Both Government and private sector witnesses may
testify at these hearings. After the Senate gives its advice
and consent to ratification of the protocol or treaty, an
instrument of ratification is drafted for the President's
signature. The President's signature completes the process in
the United States.
Paragraph 2
Paragraph 2 provides that the Convention will enter into
force upon the exchange of instruments of ratification. The
date on which a treaty enters into force is not necessarily the
date on which its provisions take effect. Paragraph 2,
therefore, also contains rules that determine when the
provisions of the treaty will have effect.
Under paragraph 2(a), the Convention will have effect with
respect to taxes withheld at source (principally dividends,
interest and royalties) for amounts paid or credited on or
after the first day of January of the year following the entry
into force of the Protocol. For example, if instruments of
ratification are exchanged on October 25 of a given year, the
withholding rates specified in paragraph 3 of Article 10
(Dividends) would be applicable to any dividends paid or
credited on or after January 1 of the following year. If for
some reason a withholding agent withholds at a higher rate than
that provided by the Convention (perhaps because it was not
able to re-program its computers before the payment is made), a
beneficial owner of the income that is a resident of the other
Contracting State may make a claim for refund pursuant to
section 1464 of the Code.
Paragraph 2(b) provides rules for the effective dates of
Articles 3 and 4 of the Protocol. Those Articles shall have
application for requests made on or after the date of entry
into force of the Protocol. Clause (i) provides that
information described in paragraph 5 of revised Article 26
(Exchange of Information) shall be exchanged upon request if
such information relates to any date beginning on or after
September 23, 2009, the date of signature of the Protocol.
Clause (ii) provides that in all other cases, information shall
be exchanged pursuant to Articles 3 and 4 if the information
relates to taxable periods beginning on or after January 1,
2010.
Paragraph 2(c) sets forth a specific effective date for
purposes of the binding arbitration provisions of new
paragraphs 6 and 7 of revised Article 25 (Mutual Agreement
Procedure) (Article 2 of the Protocol). Paragraph 2(c) provides
new paragraphs 6 and 7 of revised Article 25 is effective for
cases (i) that are under consideration by the competent
authorities as of the date on which the Protocol enters into
force, and (ii) cases that come under such consideration after
the Protocol enters into force. In addition, paragraph 2(c)
provides that the commencement date for cases that are under
consideration by the competent authorities as of the date on
which the Protocol enters into force is the date the Protocol
enters into force. As a result, cases that are open and
unresolved as of the entry into force of the Protocol will go
into binding arbitration on the later of two years after the
entry into force of the Protocol (unless both competent
authorities have previously agreed to a different date) and the
earliest date upon which the agreement required by new
paragraph 6(d) of revised Article 25 has been received by both
competent authorities.
X. Annex 2.--Transcript of Hearing of June 7, 2011
TREATIES
----------
TUESDAY, JUNE 7, 2011
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 2:30 p.m., in
room SD-419, Dirksen Senate Office Building, Hon. Benjamin L.
Cardin, presiding.
Present: Senators Cardin, Udall, and Lee.
OPENING STATEMENT OF HON. BENJAMIN L. CARDIN,
U.S. SENATOR FROM MARYLAND
Senator Cardin. The Senate Foreign Relations Committee will
come to order. I want to thank Senator Kerry for allowing me to
chair this hearing.
We will be examining five treaties that have been brought
to the Senate's attention, for their consent. This hearing of
the Senate Foreign Relations Committee will examine these five
treaties that are currently pending before the United States
Senate: a new treaty with Hungary, two protocols that amend our
existing tax treaties with Switzerland and Luxembourg, a treaty
with Bermuda regarding mutual legal assistance in criminal
matters, and a bilateral investment treaty with Rwanda.
Today, we will have witnesses from the Treasury Department,
the Joint Committee on Taxation, the Justice Department, and
the State Department to testify on these treaties. It's my
understanding that Deborah McCarthy, the Principal Deputy
Assistant Secretary, Bureau of Economics, Energy and Business
Affairs of the Department of State, is caught in a situation at
the State Department in which there are foreign guests that are
being--so her attendance here will be delayed. We understand
she will be here, so we will begin the hearing and give her a
chance to comment once she arrives, and we'll hold our
questions as it relates to the State Department until she's
here.
As we will hear shortly, these treaties are designed to
help America from an economic perspective; a law enforcement
perspective; in the case of the tax treaties, both of these
perspectives.
The Mutual Legal Assistance Treaty with Bermuda will help
solidify our working relationship with Bermuda on criminal
matters by providing an international law framework for
cooperation that has already been taking place. Bermuda has
been a good partner on counternarcotics and money-laundering
matters. And I look forward to hearing from the Deputy
Assistant Attorney General Swartz from the Justice Department
and Assistant Legal Adviser Johnson from the State Department
as to how these treaties will make that partnership stronger.
The bilateral investment treaty with Rwanda is one this
committee knows very well. Senator Kaufman chaired a hearing on
the treaty last November. On December 14, 2010, shortly before
Congress adjourned, the committee reported the treaty out
favorably to the full Senate for its advice and consent.
Obviously, there was not enough time remaining in the 111th
Congress to consider that treaty for ratification. And I am
pleased that the chairman has scheduled that for hearing today,
so that we cannot promptly on that treaty.
Ms. McCarthy, welcome.
So I'd like to thank Deputy Assistant Secretary of State
McCarthy for testifying today so that we can--update us on the
investments in Rwanda and explain why this treaty is good for
both countries.
I should add that this morning Senator Coons chaired a
hearing for the President's nominee to serve as Ambassador to
Rwanda, and later this week Secretary of State Clinton will be
attending the AGOA Forum in Zimbabwe. So now it's a good time
to talk about Rwanda and about investments in sub-Sahara Africa
more broadly, and how trade, when paired with responsible
investment policy, is a useful tool available to us in helping
raise a country's economic growth, institutional capacity, and
even its human rights standards.
The three tax treaties that we will examine today are
important in several aspects. Our tax treaties, generally, are
intended to prevent double taxation, so that U.S. companies are
not necessarily inhibited from doing business overseas, and
foreign companies are not inhibited from doing business here in
the United States. So they are part of a broader effort to
create a better economic climate between our countries,
something I believe we all agree on and will be interested to
see how these treaties advance those goals.
At the same time, our tax treaties also have an important
provision designed to help both the United States and our
treaty partners enforce our respective tax laws, and combat tax
evasion and corruption, and make sure that everyone pays the
taxes they owe.
Many will recall the controversy surrounding the
investigation of UBS, a Swiss bank, and the difficulties our
authorities had in obtaining information from their Swiss
counterparts because of Swiss bank secrecy laws. The specific
matter was resolved, but it took a long time and effort to get
there.
The changes that are contained in the protocol would
provide a more permanent solution for future cases involving
Switzerland. This is good for both countries. It is my
understanding the Swiss Parliament has already approved this
treaty.
The protocol with Luxembourg, another country with bank
secrecy laws, is very similar and is designed to have a similar
effect on future cooperation between the two countries. And the
tax treaty with Hungary contains important provisions that are
designed to help prevent certain types of tax avoidance that
have been a problem with Hungary in the past.
I look forward to hearing from Deputy Assistant of Treasury
Corwin and the Chief of Staff of the Joint Committee on
Taxation Barthold to explain how these important provisions
work and why it's important to the United States that we ratify
them quickly.
So we will begin. We have one panel, in the interest of
time, so we'll hear from each one of you, and then we'll have a
chance to question on all five of the treaties and will be a
little bit more generous on time.
Senator Lee, if you need more time in order to question,
because we have five treaties--I'm also willing to recognize
you whenever you need to be recognized, so please let us know.
With that in mind, let me just remind our witnesses that
your entire statements will be made part of the record. You may
proceed as you wish.
And we'll start with Ms. Corwin.
STATEMENT OF MANAL CORWIN, DEPUTY ASSISTANT SECRETARY
(INTERNATIONAL TAX AFFAIRS), DEPARTMENT OF TREASURY,
WASHINGTON, DC
Ms. Corwin. Thank you, Senator Cardin, Senator Lee. I
appreciate the opportunity to appear before you today to
recommend on behalf of the administration favorable action on
three tax agreements that are pending before this committee.
This administration is committed to eliminating barriers to
cross-border trade and investment, and preventing offshore tax
evasion. Tax treaties play a vital role in supporting both of
these objectives.
Tax treaties facilitate cross-border investment and provide
greater certainty to taxpayers regarding their potential tax
liability in foreign jurisdictions. They do so by allocating
taxing rights between jurisdictions, minimizing incidences of
double taxation, and ensuring that U.S. taxpayers are not
subject to discriminatory taxation.
Tax treaties also play an important role in preventing tax
evasion. A key element of U.S. tax treaties is exchange of
information between tax authorities. Because access to
information from other countries is critically important to the
full and fair enforcement of U.S. tax laws, information
exchange is a top priority for the U.S. tax treaty program.
The agreements before the committee today with Hungary,
Luxembourg, and Switzerland serve to further our tax treaty
program goals of facilitating cross-border trade and
investment, increasing transparency, and preventing fiscal
evasion. In particular, consistent with the international
recognition of the need for maximum transparency in tax
matters, all three agreements contain updated provisions for
the full exchange of information between tax authorities that
are consistent with international and U.S. standards.
In addition, the proposed agreement with Hungary contains
comprehensive provisions that will protect the agreement from
abuse by third-country investors.
Finally, the proposed agreement with Switzerland provides,
in certain circumstances, for the use of mandatory, binding
arbitration to resolve disputes between the United States and
Swiss revenue authorities.
Because my written statement and the official Treasury
technical explanations provide detailed explanations of the
provisions in each of these agreements, I will describe very
briefly only the most significant features of the agreements
before you today.
The proposed income tax treaty and accompanying exchange of
notes with Hungary were negotiated to bring the current treaty,
signed in 1979, into closer conformity with current U.S. tax
treaty policy. Most importantly, the proposed treaty includes a
new comprehensive limitation on benefits article designed to
address so-called treaty shopping, which is the inappropriate
use of tax treaties by residents of a third country.
The current treaty does not contain such treaty-shopping
protections and, as a result, has been used inappropriately by
third-country investors in recent years. For this reason,
revising the current treaty has been a top tax treaty priority
for the Treasury Department.
In addition, consistent with several recent United States
treaties, the proposed treaty with Hungary provides that the
transfer pricing guidelines established by the Organization for
Economic Cooperation and Development, the OECD, which are
consistent with United States transfer pricing standards, apply
by analogy in determining the amount of business profits
attributable to a permanent establishment in a treaty country.
The proposed treaty also follows the U.S. model approach
regarding the taxation of payments to individuals, including
income from personal services and employment, pensions, and
Social Security.
Finally, consistent with the OECD and United States model
treaties, the proposed treaty with Hungary provides for the
full exchange between the tax authorities of each country of
information relevant to carrying out the provisions of the
proposed treaty or the domestic laws of either country.
The proposed protocol with Luxembourg is the first protocol
amending the current tax treaty with Luxembourg signed in 1996.
The most significant feature of this protocol is the
replacement of the limited information-exchange provisions of
the existing tax treaty with updated rules that are consistent
with current international standards for exchange of
information developed by the OECD and adopted by the United
States.
In particular, the proposed protocol allows the tax
authorities of each country to exchange information that is
foreseeably relevant to carrying out the provisions of the
agreement or the domestic tax laws of either country. In
addition, the proposed protocol would allow the United States
to obtain information from Luxembourg, whether or not
Luxembourg needs the information for its own domestic tax
purposes, and provides that requests for information cannot be
declined solely because the information is held by a bank or
other financial institution.
Finally, the proposed protocol with Switzerland is the
second protocol amending the current income tax treaty with
Switzerland signed in 1996. The most significant provisions of
this protocol relate to information exchange and the adoption
of mandatory arbitration to facilitate the resolution of
disputes.
Specifically, like the protocol with Luxembourg, the
protocol with Switzerland replaces the limited information
exchange provisions in the current treaty with updated rules
that are consistent with current international standards for
information exchange and United States tax treaty practice.
In this regard, the new protocol does not limit exchange of
information, only as is necessary for purposes of carrying out
the provisions of the treaty, or for the prevention of tax
fraud, or the like. Rather, as with the Luxembourg protocol,
the treaty also allows for exchange of information that may be
relevant for carrying out the domestic laws of each party to
the agreement.
As with the Luxembourg treaty, such information must be
exchanged even in the absence of a domestic law interest in the
country providing the information and cannot be protected by
domestic bank secrecy rules.
The Treasury Department believes that the updated
information-exchange provisions in the proposed protocol with
Switzerland will greatly improve the collaboration between the
United States and Swiss revenue authorities in exchanging
information to enforce tax laws.
The proposed protocol with Switzerland also provides for
mandatory binding arbitration of certain cases that the
competent authorities of the United States and Switzerland have
been unable to resolve after a reasonable period of time. The
arbitration provision in the proposed protocol with Switzerland
is similar to the arbitration provisions in current United
States tax treaties with Germany, Belgium, Canada, and France,
which this committee and the Senate have approved in the past
few years.
Let me conclude by thanking you for the opportunity to
appear before the committee to discuss the administration's
efforts with respect to the three agreements under
consideration. We thank the committee members and staff for
devoting time and attention to the review of these agreements,
and we are grateful for the assistance and cooperation of the
staff of the Joint Committee on Taxation.
Finally, I would like to acknowledge and express my
appreciation for the work done on the proposed treaties by the
teams at Treasury, the Internal Revenue Service, and the State
Department.
On behalf of the administration, we urge the committee and
the Senate to take prompt and favorable action on all three
agreements before you today.
I'd be happy to answer any questions you may have.
[The prepared statement of Ms. Corwin follows:]
Prepared Statement of Manal Corwin
Chairman Kerry, Ranking Member Lugar, and distinguished members of
the committee, I appreciate the opportunity to appear today to
recommend, on behalf of the administration, favorable action on three
tax treaties pending before this committee. We appreciate the
committee's interest in these treaties and in the U.S. tax treaty
network overall.
This administration is committed to eliminating barriers to cross-
border trade and investment, and tax treaties are one of the primary
means for eliminating such tax barriers. Tax treaties provide greater
certainty to taxpayers regarding their potential liability to tax in
foreign jurisdictions, and they allocate taxing rights between
jurisdictions to reduce the risk of double taxation. Tax treaties also
ensure that taxpayers are not subject to discriminatory taxation in
foreign jurisdictions.
This administration is also committed to preventing tax evasion,
and our tax treaties play an important role in this area as well. A key
element of U.S. tax treaties is exchange of information between tax
authorities. Under tax treaties, one country may request from the other
such information as may be relevant for the proper administration of
the first country's tax laws. Because access to information from
other countries is critically important to the full and fair
enforcement of U.S. tax laws, information exchange is a top priority
for the United States in its tax treaty program. Moreover, the United
States has been a leader in the development of new international
standards for greater transparency through full exchange of tax
information.
A tax treaty reflects a balance of benefits that is agreed to when
the treaty is negotiated. In some cases, changes in law or policy in
one or both of the treaty partners make the partners more willing to
increase the benefits beyond those provided in an existing treaty; in
these cases, negotiation of revisions to a treaty may be very
beneficial. In other cases, developments in one or both countries, or
international developments more generally, may make it desirable to
revisit an existing treaty to prevent improper exploitation of treaty
provisions and eliminate unintended and inappropriate consequences in
the application of the treaty. Both in setting our overall negotiation
priorities and in negotiating individual treaties, our focus is on
ensuring that our tax treaty network fulfills its goals of facilitating
cross-border trade and investment and preventing fiscal evasion.
The tax treaties before the committee today with Hungary,
Luxembourg, and Switzerland, serve to further the goals of our tax
treaty network. The tax treaty with Hungary would replace an existing
treaty the revision of which has been a top tax treaty priority for the
Treasury Department. The protocols with Luxembourg and Switzerland
modify existing tax treaty relationships. We urge the committee and the
Senate to take prompt and favorable action on all of these agreements.
Before talking about the pending treaties in more detail, I would
like to discuss some more general tax treaty matters.
Purposes and Benefits of Tax Treaties
Tax treaties set out clear ground rules that govern tax matters
relating to trade and investment between the two countries. One of the
primary functions of tax treaties is to provide certainty to taxpayers
regarding a threshold question with respect to international taxation:
whether a taxpayer's cross-border activities will subject it to
taxation by two or more countries. Tax treaties answer this question by
establishing the minimum level of economic activity that must be
conducted within a country by a resident of the other country before
the first country may tax any resulting business profits. In general
terms, tax treaties provide that if branch operations in a foreign
country have sufficient substance and continuity, the country where
those activities occur will have primary (but not exclusive)
jurisdiction to tax. In other cases, where the operations in the
foreign country are relatively minor, the home country retains the sole
jurisdiction to tax.
Another primary function of tax treaties is relief of double
taxation. Tax treaties protect taxpayers from potential double taxation
primarily through the allocation of taxing rights between the two
countries. This allocation takes several forms. First, because
residence is relevant to jurisdiction to tax, a treaty has a mechanism
for resolving the issue of residence in the case of a taxpayer that
otherwise would be considered to be a resident of both countries.
Second, with respect to each category of income, a treaty assigns
primary taxing rights to one country, usually (but not always) the
country in which the income arises (the ``source'' country), and the
residual right to tax to the other country, usually (but not always)
the country of residence of the taxpayer (the ``residence'' country).
Third, a treaty provides rules for determining the country of source
for each category of income. Fourth, a treaty establishes the
obligation of the residence country to eliminate double taxation that
otherwise would arise from the exercise of concurrent taxing
jurisdiction by the two countries. Finally, a treaty provides for
resolution of disputes between jurisdictions in a manner that avoids
double taxation.
In addition to reducing potential double taxation, tax treaties
also reduce potential ``excessive'' taxation by reducing withholding
taxes that are imposed at source. Under U.S. law, payments to non-U.S.
persons of dividends and royalties as well as certain payments of
interest are subject to withholding tax equal to 30 percent of the
gross amount paid. Most of our trading partners impose similar levels
of withholding tax on these types of income. This tax is imposed on a
gross, rather than net, amount. Because the withholding tax does not
take into account expenses incurred in generating the income, the
taxpayer that bears the burden of withholding tax frequently will be
subject to an effective rate of tax that is significantly higher than
the tax rate that would be applicable to net income in either the
source or residence country. Tax treaties alleviate this burden by
setting maximum levels for the withholding tax that the treaty partners
may impose on these types of income or by providing for exclusive
residence-country taxation of such income through the elimination of
source-country withholding tax. As a complement to these substantive
rules regarding allocation of taxing rights, tax treaties provide a
mechanism for dealing with disputes between countries regarding the
proper application of a treaty. To resolve treaty disputes, designated
tax authorities of the two governments--known as the ``competent
authorities'' in tax treaty parlance--are required to consult and to
endeavor to reach agreement. Under many such agreements, the competent
authorities agree to allocate a taxpayer's income between the two
taxing jurisdictions on a consistent basis, thereby preventing the
double taxation that might otherwise result. The U.S. competent
authority under our tax treaties is the Secretary of the Treasury or
his delegate. The Secretary of the Treasury has delegated this function
to the Deputy Commissioner (International) of the Large Business and
International Division of the Internal Revenue Service.
Tax treaties also include provisions intended to ensure that cross-
border investors do not suffer discrimination in the application of the
tax laws of the other country. This is similar to a basic investor
protection provided in other types of agreements, but the
nondiscrimination provisions of tax treaties are specifically tailored
to tax matters and, therefore, are the most effective means of
addressing potential discrimination in the tax context. The relevant
tax treaty provisions explicitly prohibit types of discriminatory
measures that once were common in some tax systems, and clarify the
manner in which possible discrimination is to be tested in the tax
context.
In addition to these core provisions, tax treaties include
provisions dealing with more specialized situations, such as rules
addressing and coordinating the taxation of pensions, Social Security
benefits, and alimony and child-support payments in the cross-border
context (the Social Security Administration separately negotiates and
administers bilateral totalization agreements). These provisions are
becoming increasingly important as more individuals move between
countries or otherwise are engaged in cross-border activities. While
these matters may not involve substantial tax revenue from the
perspective of the two governments, rules providing clear and
appropriate treatment are very important to the affected taxpayers.
Tax treaties also include provisions related to tax administration.
A key element of U.S. tax treaties is the provision addressing the
exchange of information between the tax authorities. Under tax
treaties, the competent authority of one country may request from the
other competent authority such information as may be relevant for the
proper administration of the first country's tax laws (the information
provided pursuant to the request is subject to the strict
confidentiality protections that apply to taxpayer information).
Because access to information from other countries is critically
important to the full and fair enforcement of U.S. tax laws,
information exchange is a priority for the United States in its tax
treaty program. If a country has bank secrecy rules that would operate
to prevent or seriously inhibit the appropriate exchange of information
under a tax treaty, we will not enter into a new tax treaty
relationship with that country. Indeed, the need for appropriate
information exchange provisions is one of the treaty matters that we
consider nonnegotiable.
tax treaty negotiating priorities and process
The United States has a network of 60 income tax treaties covering
68 countries. This network covers the vast majority of foreign trade
and investment of U.S. businesses and investors. In establishing our
negotiating priorities, our primary objective is the conclusion of tax
treaties that will provide the greatest benefit to the United States
and to U.S. taxpayers. We communicate regularly with the U.S. business
community and the Internal Revenue Service, seeking their input
regarding the areas on which we should focus our treaty network
expansion and improvement efforts and regarding practical problems
encountered under particular treaties or particular tax regimes.
The primary constraint on the size of our tax treaty network may be
the complexity of the negotiations themselves. Ensuring that the
various functions to be performed by tax treaties are all properly
taken into account makes the negotiation process exacting and time
consuming.
Numerous features of a country's particular tax legislation and its
interaction with U.S. domestic tax rules are considered in negotiating
a tax treaty. Examples include whether the country eliminates double
taxation through an exemption system or a credit system, the country's
treatment of partnerships and other transparent entities, and how the
country taxes contributions to, earnings of, and distributions from
pension funds.
Moreover, a country's fundamental tax policy choices are reflected
not only in its tax legislation but also in its tax treaty positions.
These choices differ significantly from country to country, with
substantial variation even across countries that seem to have quite
similar economic profiles. A treaty negotiation must take into account
all of these aspects of the particular treaty partner's tax system and
treaty policies to arrive at an agreement that accomplishes the United
States tax treaty objectives.
Obtaining the agreement of our treaty partners on provisions of
importance to the United States sometimes requires concessions on our
part. Similarly, the other country sometimes must make concessions to
obtain our agreement on matters that are critical to it. Each tax
treaty that is presented to the Senate represents not only the best
deal that we believe can be achieved with the particular country, but
also constitutes an agreement that we believe is in the best interests
of the United States.
In some situations, the right result may be no tax treaty at all.
Prospective treaty partners must evidence a clear understanding of what
their obligations would be under the treaty, especially those with
respect to information exchange, and must demonstrate that they would
be able to fulfill those obligations. Sometimes a tax treaty may not be
appropriate because a potential treaty partner is unable to do so.
In other cases, a tax treaty may be inappropriate because the
potential treaty partner is not willing to agree to particular treaty
provisions that are needed to address real tax problems that have been
identified by U.S. businesses operating there. If the potential treaty
partner is unwilling to provide meaningful benefits in a tax treaty,
investors would find no relief, and accordingly there would be no merit
to entering into such an agreement. The Treasury Department would not
negotiate a tax treaty that did not provide meaningful benefits to U.S.
investors or which could be construed by potential treaty partners as
an indication that we would settle for a tax treaty with inferior
terms.
Sometimes a potential treaty partner insists on provisions to which
the United States will not agree, such as providing a U.S. tax credit
for investment in the foreign country (so-called ``tax sparing''). With
other countries there simply may not be the type of cross-border tax
issues that are best resolved by treaty. For example, if a country does
not impose significant income taxes, there is little possibility of
double taxation of cross-border income, and an agreement that focuses
exclusively on the exchange of tax information (so-called ``tax
information exchange agreements'' or ``TIEAs'') may be the more
appropriate agreement.
ensuring safeguards against abuse of tax treaties
A high priority for improving our overall treaty network is
continued focus on prevention of ``treaty shopping.'' The U.S.
commitment to including comprehensive ``limitation on benefits''
provisions is one of the keys to improving our overall treaty network.
Our tax treaties are intended to provide benefits to residents of the
United States and residents of the particular treaty partner on a
reciprocal basis. The reductions in source-country taxes agreed to in a
particular treaty mean that U.S. persons pay less tax to that country
on income from their investments there and residents of that country
pay less U.S. tax on income from their investments in the United
States. Those reductions and benefits are not intended to flow to
residents of a third country. If third-country residents are able to
exploit one of our tax treaties to secure reductions in U.S. tax, such
as through the use of an entity resident in a treaty country that
merely holds passive U.S. assets, the benefits would flow only in one
direction, as third-country residents would enjoy U.S. tax reductions
for their U.S. investments, but U.S. residents would not enjoy
reciprocal tax reductions for their investments in that third country.
Moreover, such third-country residents may be securing benefits that
are not appropriate in the context of the interaction between their
home country's tax systems and policies and those of the United States.
This use of tax treaties is not consistent with the balance of the deal
negotiated in the underlying tax treaty. Preventing this exploitation
of our tax treaties is critical to ensuring that the third country will
sit down at the table with us to negotiate on a reciprocal basis, so we
can secure for U.S. persons the benefits of reductions in source-
country tax on their investments in that country. Effective antitreaty
shopping rules also ensure that the benefits of a U.S. tax treaty are
not enjoyed by residents of countries with which the United States does
not have a bilateral tax treaty because that country imposes little or
no tax, and thus the potential of unrelieved double taxation is low.
In this regard, the proposed tax treaty with Hungary that is before
the committee today includes a comprehensive limitation on benefits
provision and represents a major step forward in protecting the U.S.
tax treaty network from abuse. As was discussed in the Treasury
Department's 2007 Report to the Congress on Earnings Stripping,
Transfer Pricing and U.S. Income Tax Treaties, the existing income tax
treaty with Hungary, which was signed in 1979, is one of three U.S. tax
treaties that, as of 2007, provided an exemption from source-country
withholding on interest payments, but contained no protections against
treaty shopping. The other two agreements in this category were the
1975 tax treaty with Iceland and the 1974 tax treaty with Poland. The
revision of these three agreements has been a top priority for the
Treasury Department's treaty program, and we have made significant
progress. In 2007, we signed a new tax treaty with Iceland which
entered into force in 2008. Like the proposed tax treaty with Hungary,
the U.S.-Iceland tax treaty contains a comprehensive limitation on
benefits provision. In addition, the Treasury Department has recently
concluded negotiations of a new income tax treaty with Poland, which
the administration hopes to sign and transmit to the Senate for its
advice and consent soon. These achievements demonstrate that the
Treasury Department has been effective in addressing concerns about
treaty shopping through bilateral negotiations and amendment of our
existing tax treaties.
combating tax evasion and improving transparency
through full exchange of information
As noted above, effective information exchange to combat tax
evasion and ensure full and fair enforcement of the law is a top
priority for the United States. The United States has been a leader in
developing and promoting global adoption of the international standards
for information exchange. A key element of U.S. income tax treaties is
to provide for the exchange of information between tax authorities
where the economic relationship between two countries is such that an
income tax treaty is appropriate. Where an income tax treaty is not
appropriate, information exchange can be secured through a tax
information exchange agreement (a ``TIEA'') which contains provisions
exclusively on sharing of tax information. For example, the
administration was pleased to sign last November a TIEA with Panama
that follows international standards, and which entered into force this
past April.
The proposed protocols with Switzerland and Luxembourg that are
before the committee today revise the existing tax treaties with
Switzerland and Luxembourg to ensure full exchange of information to
prevent tax evasion and enhance transparency. These protocols
incorporate the current international standards for exchange of
information, which require countries to obtain and exchange information
for both civil and criminal matters, and which require the tax
authorities to obtain and exchange information that is held by a bank
or other financial institution.
consideration of arbitration
Tax treaties cannot facilitate cross-border investment and provide
a more stable investment environment unless the treaty is effectively
implemented by the respective tax administrations of the two countries.
Under our tax treaties, when a U.S. taxpayer becomes concerned about
implementation of the treaty, the taxpayer can bring the matter to the
U.S. competent authority who will seek to resolve the matter with the
competent authority of the treaty partner. The competent authorities
are expected to work cooperatively to resolve genuine disputes as to
the appropriate application of the treaty.
The U.S. competent authority has a good track record in resolving
disputes. Even in the most cooperative bilateral relationships,
however, there may be instances in which the competent authorities will
not be able to reach a timely and satisfactory resolution. Moreover, as
the number and complexity of cross-border transactions increases, so do
the number and complexity of cross-border tax disputes. Accordingly, we
have considered ways to equip the U.S. competent authority with
additional tools to assist in resolving disputes promptly, including
the possible use of arbitration in the competent authority mutual
agreement process.
The first U.S. tax agreement that contemplated arbitration was the
U.S.-Germany income tax treaty signed in 1989. Tax treaties with some
other countries, including Mexico and the Netherlands, incorporate
authority for establishing voluntary binding arbitration procedures
based on the provision in the prior U.S.-Germany treaty (although these
provisions have not been implemented). Although we believe that the
presence of such voluntary arbitration provisions may have provided
some limited incentive to reaching more expeditious mutual agreements,
it has become clear that providing the mere ability to enter into
voluntary arbitration is not nearly as effective as providing for
mandatory arbitration, under certain circumstances, within the treaty
itself.
Over the past few years, we have carefully considered and studied
various types of mandatory arbitration procedures that could be
included in our treaties and used as part of the competent authority
mutual agreement process. In particular, we examined the experience of
countries that adopted mandatory binding arbitration provisions with
respect to tax matters. Many of them report that the prospect of
impending mandatory arbitration creates a significant incentive to
compromise before commencement of the arbitration process. Based on our
review of the U.S. experience with arbitration in other areas of the
law, the success of other countries with arbitration in the tax area,
and the overwhelming support of the business community, we concluded
that mandatory binding arbitration as the final step in the competent
authority process can be an effective and appropriate tool to
facilitate mutual agreement under U.S. tax treaties.
One of the treaties before the committee, the proposed protocol
with Switzerland, includes a type of mandatory arbitration provision
that in general terms is similar to arbitration provisions in several
of our recent treaties (Canada, Germany, Belgium and France) that have
been approved by the committee and the Senate over the last 5 years.
In the typical competent authority mutual agreement process, a U.S.
taxpayer presents its case to the U.S. competent authority and
participates in formulating the position the U.S. competent authority
will take in discussions with the treaty partner. Under the arbitration
provision proposed in the Switzerland protocol, as in the similar
provisions that are now part of our treaties with Canada, Germany,
Belgium, and France, if the competent authorities cannot resolve the
issue within 2 years, the competent authorities must present the issue
to an arbitration board for resolution, unless both competent
authorities agree that the case is not suitable for arbitration. The
arbitration board must resolve the issue by choosing the position of
one of the competent authorities. That position is adopted as the
agreement of the competent authorities and is treated like any other
mutual agreement (i.e., one that has been negotiated by the competent
authorities) under the treaty.
The arbitration process proposed in the agreement with Switzerland
is mandatory and binding with respect to the competent authorities.
However, consistent with the negotiation process under the mutual
agreement procedure generally, the taxpayer can terminate the
arbitration at any time by withdrawing its request for competent
authority assistance. Moreover, the taxpayer retains the right to
litigate the matter (in the United States or the treaty partner) in
lieu of accepting the result of the arbitration, just as it would be
entitled to litigate in lieu of accepting the result of a negotiation
under the mutual agreement procedure.
The arbitration rule in the proposed protocol with Switzerland is
very similar to the arbitration rule in the protocol with France, but
differs slightly from the arbitration rules in the agreements with
Canada, Germany, and Belgium. This is because in negotiating the
arbitration rule in the protocol with France, we took into account
concerns expressed by this committee over certain aspects of the
arbitration rules negotiated earlier with Canada, Germany, and Belgium.
Accordingly, the proposed arbitration rule with Switzerland, like the
provision with France, differs from its earlier predecessors in three
key respects. First, consistent with the committee's comment in its
report on the Canada protocol that future arbitration rules should
provide a mechanism for taxpayer input in the arbitration process, the
proposed rules with Switzerland allow the taxpayers who presented the
original case that is subjected to arbitration to submit a position
paper directly to the arbitration panel. Second, the rule in the
proposed Switzerland protocol disallows a competent authority from
appointing an employee from its own tax administration to the
arbitration board. Finally, the rule in the proposed Switzerland
Protocol does not prescribe a hierarchy of legal authorities that the
arbitration panel must use in making its decision. Thus, customary
international law rules on treaty interpretation will apply. Currently,
we are discussing the possible inclusion of a similar arbitration
provision with a number of our other key tax treaty partners.
Because the arbitration board can only choose between the positions
of each competent authority, the expectation is that the differences
between the positions of the competent authorities will tend to narrow
as the case moves closer to arbitration. In fact, if the arbitration
provision is successful, difficult issues will be resolved without
resort to arbitration. Thus, it is our objective that these arbitration
provisions will be rarely utilized, but that their presence will
encourage the competent authorities to take approaches to their
negotiations that result in mutually agreeable conclusions without
invoking the arbitration process.
It is still very early in our experience with arbitration, and at
this time we cannot report definitively on the effects of arbitration
on our tax treaty relationships. However, we are hopeful that our
desired objectives for arbitration are being realized. Our sense is
that, where mandatory arbitration has been included in the treaty, the
competent authorities are negotiating with more intention to reach
principled and timely resolution of disputes, and thus, effectively
eliminating double taxation and in a more expeditious manner.
Arbitration is a growing and developing field, and there are many
forms of arbitration from which to choose. We intend to continue to
study other arbitration provisions and to monitor the performance of
the provisions in the agreements with Canada, Belgium, Germany, and
France, as well as the performance of the provision in the agreement
with Switzerland, if ratified. The Internal Revenue Service has
published the administrative procedures necessary to implement the
arbitration rules with Germany, Belgium, and Canada. It is possible
that one or more tax disputes with Canada will be submitted for
resolution by arbitration, and the administration looks forward to
updating the committee on the arbitration process, in particular
through the reports that are called for in the committee's reports on
2007 protocol to the Canada tax treaty. We look forward to continuing
to work with the committee to make arbitration an effective tool in
promoting the fair and expeditious resolution of treaty disputes.
discussion of proposed treaties
I now would like to discuss the three tax treaties that have been
transmitted for the Senate's consideration. The three treaties are
generally consistent with modern U.S. tax treaty practice as reflected
in the Treasury Department's 2006 U.S. Model Income Tax Convention. As
with all bilateral tax conventions, the treaties contain some minor
variations that reflect particular aspects of the treaty policies and
domestic laws of the partner countries as well as their economic
relations with the United States. We have submitted a Technical
Explanation of each treaty that contains detailed discussions of the
provisions of each treaty. These Technical Explanations serve as the
Treasury Department's official explanation of each tax treaty.
Hungary
The proposed income tax Convention and related agreement effected
by exchange of notes with Hungary were negotiated to bring tax treaty
relations based on the current Convention, signed in 1979, into closer
conformity with current U.S. tax treaty policy. The proposed Convention
contains a comprehensive ``Limitation on Benefits'' article designed to
address treaty shopping. The current Convention does not contain treaty
shopping protections and, as a result, has been used inappropriately by
third-country investors in recent years. For this reason, as stated
above, entering into a revised Convention has been a top tax treaty
priority for the Treasury Department. The new Limitation on Benefits
article includes a provision granting so-called ``derivative benefits''
similar to the provision included in all recent U.S. tax treaties with
countries that are members of the European Union. The new Limitation on
Benefits article also contains a special rule for so-called
``headquarters companies'' that is identical to what the Treasury has
agreed to with a number of other tax treaty partners.
The proposed Convention incorporates updated rules that provide
that a former citizen or long-term resident of the United States may,
for the period of 10 years following the loss of such status, be taxed
in accordance with the laws of the United States. The proposed treaty
also coordinates the U.S. and Hungarian tax rules to address the
``mark-to-market'' provisions enacted by the United States in 2007
that apply to individuals who relinquish U.S. citizenship or terminate
long-term residency.
The withholding rates on investment income in the proposed
Convention are the same as or lower than those in the current treaty.
The proposed Convention provides for reduced source-country taxation of
dividends distributed by a company resident in one Contracting State to
a resident of the other Contracting State. The proposed Convention
generally allows for taxation at source of 5 percent on direct
dividends (i.e., where a 10-percent ownership threshold is met) and 15
percent on all other dividends. Additionally, the proposed Convention
provides for an exemption from withholding tax on certain cross-border
dividend payments to pension funds.
The proposed Convention updates the treatment of dividends paid by
U.S. Regulated Investment Companies (RICs) and Real Estate Investment
Trusts (REITs) to prevent the use of structures designed to
inappropriately avoid U.S. tax.
Consistent with the current treaty, the proposed Convention
generally eliminates source-country withholding taxes on cross-border
interest and royalty payments. However, consistent with current U.S.
tax treaty policy, source-country tax may be imposed on certain
contingent interest and payments from a U.S. real estate mortgage
investment conduit.
The taxation of capital gains under the proposed Convention
generally follows the format of the U.S. Model. Gains derived from the
sale of real property and from real property interests may be taxed by
the State in which the property is located. Likewise, gains from the
sale of personal property forming part of a permanent establishment
situated in a Contracting State may be taxed in that State. All other
gains, including gains from the alienation of ships, boats, aircraft
and containers used in international traffic and gains from the sale of
stock in a corporation, are taxable only in the State of residence of
the seller.
The proposed Convention, like several recent tax treaties, provides
that the OECD Transfer Pricing Guidelines apply by analogy in
determining the amount of business profits of a resident of the other
country. The source country's right to tax such profits is generally
limited to cases in which the profits are attributable to a permanent
establishment located in that country. The proposed Convention
generally defines a ``permanent establishment'' in a way that grants
rights to tax business profits that are consistent with those found in
the U.S. Model.
The proposed Convention preserves the U.S. right to impose its
branch profits tax on U.S. branches of Hungarian corporations. The
proposed Convention also accommodates a provision of U.S. domestic law
that attributes to a permanent establishment income that is earned
during the life of the permanent establishment, but is deferred, and
not received until after the permanent establishment no longer exists.
The proposed Convention would change the rules currently applied
under the existing Convention regarding the taxation of independent
personal services. Under the proposed treaty an enterprise performing
services in the other country will become taxable in the other country
only if the enterprise has a fixed place of business in that country.
The rules for the taxation of income from employment under the
proposed Convention are generally similar to those under the U.S.
Model. The general rule is that employment income may be taxed in the
State where the employment is exercised unless three conditions
constituting a safe harbor are satisfied.
The proposed Convention preserves the current Convention's rules
that allow for exclusive residence-country taxation of pensions, and
consistent with current U.S. tax treaty policy, provides for exclusive
source-country taxation of Social Security payments.
Consistent with the OECD standard, the proposed Convention provides
for the exchange between the tax authorities of each country of
information relevant to carrying out the provisions of the proposed
Convention or the domestic tax laws of either country. The proposed
Convention allows the United States to obtain information (including
from financial institutions) from Hungary whether or not Hungary needs
the information for its own tax purposes.
The proposed Convention would enter into force on the date of the
exchange of instruments of ratification. It would 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 of
entry into force, and with respect to other taxes, for taxable years
beginning on or after the first day of January next following the date
of entry into force. The current Convention will, with respect to any
tax, cease to have effect as of the date on which this proposed
Convention has effect with respect to such tax.
Luxembourg
The proposed protocol to amend the income tax Convention with
Luxembourg and the related agreement effected by exchange of notes were
negotiated to bring the existing Convention, signed in 1996, into
closer conformity with current U.S. tax treaty policy regarding
exchange of information.
The proposed protocol replaces the existing Convention's tax
information exchange provisions with updated rules that are consistent
with current U.S. tax treaty practice and the standards for exchange of
information developed by the OECD. The proposed protocol allows the tax
authorities of each country to exchange information that is foreseeably
relevant to carrying out the provisions of the agreement or the
domestic tax laws of either country. Among other things, the proposed
protocol would allow the United States to obtain information from
Luxembourg whether or not Luxembourg needs the information for its own
tax purposes, and provides that requests for information cannot be
declined solely because the information is held by a bank or other
financial institution. The proposed related agreement effected by
exchange of notes sets forth agreed understandings between the parties
regarding the updated provisions on tax information exchange, and
includes obligations on the United States and Luxembourg to ensure that
their respective competent authorities have the authority to obtain and
provide upon request information held by banks and other financial
institutions and information regarding ownership of certain entities;
and information shall be exchanged without regard to whether the
conduct being investigated would be a crime under the laws of the
requested State.
The proposed protocol would enter into force once both the United
States and Luxembourg have notified each other that their respective
applicable procedures for ratification have been satisfied. It would
have effect with respect to requests made on or after the date of entry
into force with regard to tax years beginning on or after January 1,
2009. The related agreement effected by exchange of notes would enter
into force on the date of entry into force of the proposed protocol and
would become an integral part of the Convention on that date.
Switzerland
The proposed protocol to amend the income tax convention with the
Swiss Confederation and related agreement effected by exchange of notes
were negotiated to bring the existing Convention, signed in 1996, into
closer conformity with current U.S. tax treaty policy regarding
exchange of information. There are, as with all bilateral tax
conventions, some variations from these norms. In the proposed
protocol, these minor differences reflect particular aspects of Swiss
law and treaty policy, and generally follow the OECD standard for
exchange of information.
The proposed protocol replaces the existing Convention's tax
information exchange provisions with updated rules that are consistent
with current U.S. tax treaty practice and the standards for exchange of
information developed by the OECD. The proposed protocol allows the tax
authorities of each country to exchange information that may be
relevant to carrying out the provisions of the agreement or the
domestic tax laws of either country, including information that would
otherwise be protected by the bank secrecy laws of either country. The
proposed protocol would allow the United States to obtain information
from Switzerland whether or not Switzerland needs the information for
its own tax purposes, and provides that requests for information cannot
be declined solely because the information is held by a bank or other
financial institution. The proposed protocol amends a paragraph of the
existing protocol to the existing Convention by incorporating
procedural rules to govern requests for information and an agreement by
the United States and Switzerland that such procedural rules are to be
interpreted in order not to frustrate effective exchange of
information.
The proposed protocol and related agreement effected by exchange of
notes update the provisions of the existing Convention with respect to
the mutual agreement procedure by incorporating mandatory arbitration
of certain cases that the competent authorities of the United States
and the Swiss Confederation have been unable to resolve after a
reasonable period of time.
Finally, the proposed protocol updates the provisions of the
existing Convention to provide that individual retirement accounts are
eligible for the benefits afforded a pension under the existing
Convention.
The proposed protocol would enter into force when the United States
and the Swiss Confederation exchange instruments of ratification. The
proposed protocol would have effect, with respect to taxes withheld at
source, for amounts paid or credited on or after the first day of
January of the year following entry into force. With respect to tax
information exchange, the proposed protocol would have effect with
respect to requests for bank information that relates to any date
beginning on or after the date the proposed protocol is signed and,
with respect to all other cases, would have effect with respect to
requests for information that relates to taxable periods beginning on
or after the first day of January next following the date of signature.
The mandatory arbitration provision would have effect with respect both
to cases that are under consideration by the competent authorities as
of the date on which the protocol enters into force and to cases that
come under consideration after that date.
treaty program priorities
A key continuing priority for the Treasury Department is updating
the few remaining U.S. tax treaties that provide for significant
withholding tax reductions but do not include the limitation on
benefits provisions needed to protect against the possibility of treaty
shopping. As mentioned above, I am pleased to report that in this
regard we have made significant progress. Most notably, in June 2010 we
concluded the negotiation of a new tax treaty with Poland. The new
Poland treaty, which we hope to sign soon, will contain a comprehensive
limitation on benefits provision that will ensure that only residents
of the United State and Poland enjoy the benefits of the treaty.
Concluding agreements that provide for the full exchange of
information, including information held by banks and other financial
institutions, is another key priority of the Treasury Department. The
past couple of years have been a period of fundamental change in
transparency, as many secrecy jurisdictions announced their intentions
to comply with the international standard of full information exchange
during this time. With the revisions to the Switzerland and Luxembourg
tax treaties completed, in the near future we hope to commence or renew
tax treaty negotiations with a number of our other trading partners
with bank secrecy rules once those countries have eliminated all
domestic law impediments to full exchange of information.
Beyond the two chief priorities of curbing treaty shopping and
expanding exchange of information relationships, the Treasury
Department continues to maintain a very active calendar of tax treaty
negotiations. In our efforts to establish new tax treaty relationships,
in February 2010 we signed a tax treaty with Chile, which the
administration hopes to transmit to the Senate for its consideration in
the near term. If approved by the Senate the Chile tax treaty would be
especially noteworthy because it would be only the second U.S. tax
treaty in force with a South American country. We have also opened tax
treaty negotiations with Vietnam. Additionally, we are in the process
of discussing ways to update existing tax treaties with many of our
treaty partners including the United Kingdom and Spain.
conclusion
Mr. Chairman and Ranking Member Lugar, let me conclude by thanking
you for the opportunity to appear before the committee to discuss the
administration's efforts with respect to the three agreements under
consideration. We appreciate the committee's continuing interest in the
tax treaty program, and we thank the members and staff for devoting
time and attention to the review of these new agreements. We are also
grateful for the assistance and cooperation of the staff of the Joint
Committee on Taxation.
On behalf of the administration, we urge the committee to take
prompt and favorable action on the agreements before you today. I would
be happy to respond to any question you may have.
Senator Cardin. Thank you very much.
We will now hear from Mr. Barthold, the Chief of Staff of
the Joint Committee on Taxation.
STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION, WASHINGTON, DC
Mr. Barthold. Thank you, Mr. Chairman and Senator Lee. My
name is Thomas Barthold. I'm the Chief of Staff of the Joint
Committee on Taxation, and it's my pleasure to present the
testimony of the staff of the joint committee concerning the
proposed treaty with Hungary and the proposed tax protocols
with Luxembourg and Switzerland.
The joint committee staff has prepared detailed pamphlets
covering the treaty and protocols. The pamphlets provide
descriptions of these agreements, including comparisons with
the United States model tax treaty and with other recent U.S.
tax treaties approved by the Senate. Those pamphlets are JCX-
30-11 describing the Swiss protocol, JCX-31 describing the
Luxembourg protocol, and JCX-32 describing the Hungary treaty.
I'll use my time to highlight several points that the joint
committee staff thinks is important. First, with respect to the
Hungary treaty, the Hungary treaty, with respect to treatment
of many of the provisions--including the payments of dividends,
interest, and royalties--generally follows the U.S. model. And,
as Ms. Corwin pointed out, of particular note, the proposed
treaty with Hungary includes the extensive limitation on
benefits rules of the U.S. model. Limitation on benefits
provisions are intended to prevent third-country residents from
benefiting inappropriately from a treaty that generally is
granting benefits only to residents of the two treaty
countries, a practice that is commonly referred to as treaty
shopping.
The present treaty between the United States and Hungary is
one of only seven United States income tax treaties that do not
include any limitation on benefits provisions. And two of those
seven treaties, including the current treaties with Hungary and
Poland, include provisions providing for complete exemption of
withholding on interest payments from one treaty country to the
other, a situation that may present very attractive
opportunities for treaty shopping. So with the inclusion of the
modern limitation on benefits rules, the proposed treaty with
Hungary represents a significant opportunity to mitigate treaty
shopping.
The two protocols before the committee today are largely
about the exchange of information provisions of those existing
treaties. There has been and continues to be multicountry
concern regarding tax avoidance through offshore accounts, and
it is tax treaties that establish the scope of information that
can be exchanged between treaty countries. The proposed
protocols are an attempt to improve the exchange of information
in this regard.
The proposed Swiss protocol may facilitate much greater
exchange of information than has occurred in the past, chiefly
by eliminating the present treaty's requirements that the
requesting treaty country first establish tax fraud or
fraudulent conduct as a basis for the exchange of information,
and providing that domestic bank secrecy laws and a lack of
domestic interest in the requested information may be possible
grounds for refusing to provide the requested information.
While the changes are made, to make changes in those
requirements, the joint committee staff notes that the protocol
permits ``limitation of administrative assistance to individual
cases and, thus, no fishing expeditions.'' I think this
limitation poses some questions for the committee and for the
Senate regarding individual cases, the extent to which the
Swiss may continue to reject requests that do not name the
taxpayer as a result of the requirement in the treaty that a
taxpayer be ``typically'' identified by name may be of some
concern in terms of the applicability of the revised exchange
in information agreement.
In addition, what is to be the standard of relevance to be
applied to requests for information in light of the caveat
against ``fishing expeditions.''
The proposed protocol with Luxembourg is consistent with
both the OECD and United States model treaties. However, the
joint committee staff does see some potential areas of concern
in the statements in the diplomatic notes accompanying this
agreement. Regarding the obligation to ensure that tax
authority access to information regarding beneficial ownership
of certain entities, to the extent the information is of a type
within the possession or control of someone within that
territory's jurisdiction, one might ask if this potentially
imposes a new burden on the United States. Also, the proposed
Luxembourg protocol contains a requirement that all requests
must provide the identity of the person under investigation.
Again, I think this raises a concern similar to that that I
noted a moment ago with respect to the Swiss protocol.
A third question, there's a standard of relevance issue to
be raised in terms of what is the stated purpose for which
information may be sought.
And last, there is a requirement that any requests include
a representation that all other means of obtaining that
information have been attempted, except to the extent that to
do so would cause disproportionate difficulties. Does such a
requirement impose a limit or retard the ability of the United
States to obtain necessary information?
That concludes my oral comments. I'd be pleased to answer
any questions that the committee might have. And I do thank the
Treasury for their cooperation and understanding in
interpreting these treaty documents.
Thank you.
[The prepared statement of Mr. Barthold follows:]
Prepared Statement of the Staff of the Joint Committee on Taxation
Presented by Thomas A. Barthold\1\
My name is Thomas A. Barthold. I am Chief of Staff of the Joint
Committee on Taxation. It is my pleasure to present the testimony of
the staff of the Joint Committee on Taxation today concerning the
proposed income tax treaty with Hungary and the proposed tax protocols
with Luxembourg and Switzerland.
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\1\This document may be cited as follows: ``Joint Committee on
Taxation, Testimony of the Staff of the Joint Committee on Taxation
Before the Senate Committee on Foreign Relations Hearing on the
Proposed Tax Treaty with Hungary and the Proposed Tax Protocols with
Luxembourg and Switerland'' (JCX-35-11), June 7, 2011. This publication
can also be found at http://www.jct.gov/.
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overview
As in the past, the Joint Committee staff has prepared pamphlets
covering the proposed treaty and protocols. The pamphlets provide
detailed descriptions of the proposed treaty and protocols, including
comparisons with the United States Model Income Tax Convention of
November 15, 2006 (``U.S. Model treaty''), which reflects preferred
U.S. tax treaty policy, and with other recent U.S. tax treaties.\2\ The
pamphlets also provide detailed discussions of issues raised by the
proposed treaty and protocols. We consulted with the Treasury
Department and with the staff of your committee in analyzing the
proposed treaty and protocols and in preparing the pamphlets.
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\2\Joint Committee on Taxation, ``Explanation of Proposed Income
Tax Treaty Between the United States and Hungary'' (JCX-32-11), May 20,
2011; Joint Committee on Taxation, ``Explanation of Proposed Protocol
to the Income Tax Treaty Between the United States and Luxembourg''
(JCX-30-11), May 20, 2011; Joint Committee on Taxation, ``Explanation
of Proposed Protocol to the Income Tax Treaty Between the United States
and Switzerland (JCX-31-1 1), May 20, 2011.
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The principal purposes of the treaty and protocols 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 and
protocols also are intended to promote close economic cooperation
between the treaty countries and to eliminate possible barriers to
trade and investment caused by overlapping taxing jurisdictions of the
treaty countries. As in other U.S. tax treaties, these objectives
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.
The proposed treaty with Hungary would replace an existing income
tax treaty signed in 1979. The proposed protocol with Luxembourg would
amend an existing tax treaty that was signed in 1996. The proposed
protocol with Switzerland would amend an existing tax treaty and
previous protocol that were both signed in 1996.
My testimony today will highlight some of the key features of the
proposed treaty and protocols and certain issues that those agreements
raise.
u.s. model treaty
As a general matter, U.S. model tax treaties provide a framework
for U.S. tax treaty policy and a starting point for tax treaty
negotiations with our treaty partners. These models provide helpful
information to taxpayers, the Congress, and foreign governments about
U.S. policies on tax treaty matters. The present U.S. Model treaty
incorporates important developments in U.S. income tax treaty policy
that had been reflected in U.S. income tax treaties signed in the years
immediately preceding the Model's publication in 2006. Treaties that
the United States has negotiated since 2006 in large part follow the
U.S. Model treaty. The proposed treaty and protocols that are the
subject of this hearing are, accordingly, generally consistent with the
provisions found in the U.S. Model treaty. There are, however, some key
differences from the U.S. Model treaty that I will discuss.
hungary: limitation-on-benefits provisions
In general
Like the U.S. Model treaty, the proposed treaty with Hungary
includes extensive limitation-on-benefits rules (Article 22).
Limitation-on-benefits provisions are intended to prevent third-country
residents from benefiting inappropriately from a treaty that generally
grants benefits only to residents of the two treaty countries. This
practice is commonly referred to as ``treaty shopping.'' A company may
engage in treaty shopping by, for example, organizing a related treaty-
country resident company that has no substantial presence in the treaty
country. The third-country company may arrange, among other
transactions, to have the related treaty-country company remove, or
strip, income from the treaty country in a manner that reduces the
overall tax burden on that income. Limitation-on-benefits rules may
prevent these and other transactions by requiring that an individual or
a company seeking treaty benefits have significant connections to a
treaty country as a condition of eligibility for benefits.
The present treaty between the United States and Hungary is one of
only seven U.S. income tax treaties that do not include any limitation-
on-benefits rules.\3\ Two of those seven treaties, including the
treaties with Hungary and Poland, include provisions providing for
complete exemption from withholding on interest payments from one
treaty country to the other treaty country that may present attractive
opportunities for treaty shopping.\4\ For example, a November 2007
report prepared by the Treasury Department at the request of the U.S.
Congress suggests that the income tax treaty with Hungary has
increasingly been used for treaty-shopping purposes as the United
States adopted modern limitation-on-benefits provisions in its other
treaties. In 2004, U.S. corporations that were at least 25-percent
foreign owned made $1.2 billion in interest payments to related parties
in Hungary, the seventh-largest amount of interest paid to related
parties in any single country.\5\ With its inclusion of modern
limitation-on-benefits rules, the proposed treaty represents a
significant opportunity to mitigate treaty shopping. Nevertheless, the
committee may wish to inquire of the Treasury Department as to its
plans to address the remaining U.S. income tax treaties that do not
include limitation-on-benefits provisions.
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\3\The other income tax treaties without limitation-on-benefits
rules are the ones with Greece (1953), Pakistan (1959), the Philippines
(1982), Poland (1976), Romania (1976), and the U.S.S.R (1976).
Following the dissolution of the U.S.S.R., the income tax treaty with
the U.S.S.R. applies to the countries of Armenia, Azerbaijan, Belarus,
Georgia, Kyrgyzstan, Moldova, Tajikstan, Turkmenistan, and Uzbekistan.
\4\The income tax treaty with Greece also provides for complete
exemption from withholding on interest, although it contains
restrictions that limit the availability of the exemption, such that a
Greek company receiving interest from a U.S. company does not qualify
for the exemption if it controls, directly or indirectly, more than 50
percent of the U.S. company.
\5\Department of the Treasury, ``Report to the Congress on Earnings
Stripping, Transfer Pricing and U.S. Income Tax Treaties'' (Nov. 28,
2007). The report states that, as of 2004, it does not appear that the
U.S.-Poland income tax treaty has been extensively exploited by third-
country residents. Although the report also focused on Iceland to the
same extent as Hungary, a 2007 Income Tax Convention with Iceland that
includes a modern limitation-on-benefits provision has since taken
effect.
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Deviations from the U.S. Model treaty
Although the limitation-on-benefits rules in the proposed treaty
are similar to the rules in other recent and proposed U.S. income tax
treaties and protocols and in the U.S. Model treaty, they are not
identical, and the committee may wish to inquire about certain
differences. In particular, the committee may wish to examine the rules
for publicly traded companies, derivative benefits, and certain
triangular arrangements. The committee also may wish to ask the
Treasury Department about the special limitation-on-benefits rules
applicable to headquarters companies.
Publicly traded companies
A company that is a resident of a treaty country is eligible for
all the benefits of the proposed treaty if it satisfies a regular
trading test and either a management and control test or a primary
trading test. The primary trading test requires that a company's
principal class of shares be primarily traded on a recognized stock
exchange located in the treaty country of which the company is a
resident or, in the case of a Hungarian company, on a recognized stock
exchange in another European Union (``EU'') or European Free Trade
Association (``EFTA'') country, or in the case of a U.S. company, in
another North American Free Trade Agreement country. Although the list
of recognized stock exchanges in EU and EFTA countries had some
differences, a similar primary trading test was included in the recent
protocols with France and New Zealand. Under the U.S. Model treaty, the
required trading must occur on a stock exchange in the treaty country
of which the relevant company is a resident; trading on a stock
exchange in another country may not be used to satisfy the test.
Derivative benefits
Like other recent treaties, the proposed treaty includes derivative
benefits rules that are generally intended to allow a treaty-country
company to receive treaty benefits for an item of income if the
company's owners (referred to in the proposed treaty as equivalent
beneficiaries) reside in a country that is in the same trading bloc as
the treaty country and would have been entitled to the same benefits
for the income had those owners derived the income directly. The
derivative benefits rules may grant treaty benefits to a treaty-country
resident company in circumstances in which the company would not
qualify for treaty benefits under any of the other limitation-on-
benefits provisions. The U.S. Model treaty does not include derivative
benefits rules.
Triangular arrangements
The proposed treaty includes special antiabuse rules intended to
deny treaty benefits in certain circumstances in which a Hungarian
resident company earns U.S.-source income attributable to a third-
country permanent establishment and is subject to little or no tax in
the third jurisdiction and Hungary. A rule on triangular arrangements
is not included in the U.S. Model treaty, but similar antiabuse rules
are included in other recent treaties and protocols.
Headquarters companies
The proposed treaty includes special rules intended to allow treaty
country benefits for a resident of a treaty country that functions as a
headquarters company and that satisfies certain requirements intended
to ensure that the headquarters company performs substantial
supervisory and administrative functions for a group of companies: (1)
that the group of companies is genuinely multinational; (2) that the
headquarters company is subject to the same income tax rules in its
country of residence as would apply to a company engaged in the active
conduct of a trade or business in that country; and (3) that the
headquarters company has independent authority in carrying out its
supervisory and administrative functions. While U.S. income tax
treaties in force with Austria, Australia, Belgium, the Netherlands,
and Switzerland include similar rules for headquarters companies, the
U.S. Model treaty does not include these rules.
exchange of information
Tax treaties establish the scope of information that can be
exchanged between treaty countries. Exchange of information provisions
first appeared in the late 1930s,\6\ and are now included in all double
tax conventions to which the United States is a party. A broad
international consensus has coalesced around the issue of bank
transparency for tax purposes and strengthened in recent years, in part
due to events involving one of Switzerland's largest banks, UBS AG, the
global financial crisis, and the general increase in globalization. As
part of their efforts to restore integrity and stability to financial
institutions, the United States and other G20 jurisdictions have made
significant efforts to modernize and standardize the ways in which
jurisdictions provide administrative assistance under the network of
tax treaties.
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\6\Article XV of the U.S.-Sweden Double Tax Convention, signed on
March 23, 1939.
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Although the United States has long had bilateral income tax
treaties in force with Hungary, Luxembourg, and Switzerland, the United
States has engaged in relatively limited exchange of information under
these tax treaties. With Luxembourg and Switzerland, the limitations
stem from strict bank secrecy rules in those jurisdictions. The
proposed protocols are a response to that history as well as part of
the international trend in exchange of information.
The pamphlets prepared by the Joint Committee staff provide
detailed overviews of the information exchange articles of the proposed
treaty and the two proposed protocols. They also describe the extent to
which they differ from the U.S. Model treaty. I note that since the
publication of those pamphlets on May 20, 2011, additional information
about the exchange of information programs of Hungary, Switzerland, and
the United States has become available. On June 1, 2011, the
Organization for Economic Cooperation and Development (``OECD'')
published reports of Phase I Peer Reviews of Hungary and Switzerland,
as well as a report on its Combined Phase I and Phase 11 Peer Review of
the United States.
Here I wish to highlight first those issues related to the
effectiveness of information exchange under income tax treaties that
are common to both the proposed treaty and proposed protocols under
consideration today, and second, the issues specific to the proposed
protocols with Luxembourg and Switzerland.
Effectiveness of U.S. information exchange agreements in general
The Joint Committee staff's pamphlets describe in detail several
practical issues related to information exchange under income tax
treaties. I will briefly note three issues: the usefulness of automatic
exchange of information, the extent to which the United States
maintains and can produce information about beneficial ownership of
certain foreign-owned entities, and, finally, whether there is
consensus as to the standard for determining whether a request for
specific exchange of information is sufficiently specific to require
response by a treaty country.\7\
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\7\A third method of information exchange is spontaneous exchange,
which occurs when one treaty country determines that information in its
possession may be relevant to the other treaty country's tax
administration and thus transmits the information to the other country.
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Automatic information exchange
The extent to which automatic information exchange occurs and how
it is used by the recipients is not clear. Such exchanges occur when
the parties to a tax treaty typically enter into a memorandum of
understanding to share on a regular basis information that is deemed to
be consistently relevant to the tax administration of the other treaty
country; the treaty countries are not required to specifically request
this information from one another. The United States, for example,
annually provides over 2.5 million items of information about U.S.-
source income received by residents of treaty countries to those treaty
partners. Problems identified in the use of automatic exchange of
information under tax treaties have included the lack of timeliness in
providing information; differences in the tax reporting periods used by
treaty countries; the recipient country difficulty in translating text
on forms; and the large volume of information included in such
exchanges.
In publishing regulations earlier this year to expand information
reporting on payments to nonresident aliens, the Secretary of Treasury
noted the improvement of the United States exchange of information
program as a beneficial outcome of implementing such regulations. In
the preamble to those regulations, the Secretary stated that
``requiring routine reporting to the IRS of all U.S. bank deposit
interest paid to any nonresidential alien individual will further
strengthen the United States exchange of information program consistent
with adequate provisions for reciprocity, usability, and
confidentiality in respect of this information.''\8\ The regulations in
question would require U.S. financial institutions to report on
interest paid to any nonresident aliens, not only residents of Canada
as currently required.\9\ The committee may wish to inquire about those
recently proposed regulations and the extent to which expanded
regulations would strengthen exchange of information under the pending
protocol, as well as any additional attendant burdens that may arise as
a result of these regulations.\10\ The committee may also wish to
explore the usability of the information exchanged with Canada under
present regulations, and its relationship to the exchange of
information program with Canada.
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\8\Prop. Treas. Reg. sec. 1.6049-4, 76 Fed. Reg. 1105 (January 7,
2011).
\9\Treas. Reg. sec. I.6049-4(b)(5).
\10\The IRS and Treasury Department have requested written and
electronic comments on the proposed regulations. A public hearing at
which oral comments were presented was held on May 18. 2011.
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Second, the United States has been criticized for Federal and State
rules that may facilitate attempts by foreign persons to evade their
home-country tax laws. In the past, there have been claims that the
U.S. ``know-your-customer'' rules for financial institutions are less
strict than other countries in their requirements for the determination
of beneficial owners of financial accounts. A second criticism has been
that the entity formation laws of some U.S. States make it difficult
for government officials to ascertain the identities of owners of
entities. The OECD report on the United States exchange of information
program notes that, despite an otherwise robust regulatory framework
and broad powers of the Federal authorities to gather information
responsive to treaty requests for exchange of information, the gaps in
beneficial ownership information on certain entities remains
troublesome. The specific example noted in the report is that of a
limited liability company owned by a single foreign person. Your
committee may wish to ask about the extent to which it may be
appropriate to consider policy changes to ensure that the United States
is able to respond effectively to information requests from its treaty
partners.
Specific exchange
A second method of exchange is known as the ``specific'' exchange,
which occurs when one treaty country provides information to the other
treaty country in response to a specific request by the latter country
for information that is relevant to an ongoing investigation of a
particular tax matter. One problem with specific exchange has been that
some treaty countries have declined to exchange information in response
to specific requests intended to identify limited classes of
persons.\11\ Your committee may wish to seek assurances that, under the
proposed treaty with Hungary and the proposed protocols with Luxembourg
and Switzerland, treaty countries are required to exchange information
in response to specific requests that are comparable to John Doe
summonses under domestic law.\12\ As discussed below, this has been a
recurring issue with exchanges with Switzerland.
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\11\For example, a petition to enforce a John Doe summons served by
the United States on UBS. AG was filed on February 21, 2009,
accompanied by an affidavit of Barry B. Shott, the U.S. competent
authority for the United States-Switzerland income tax treaty.
Paragraph 16 of that affidavit notes that Switzerland had traditionally
taken the position that a specific request must identify the taxpayer.
See United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.). On August
19, 2009, after extensive negotiations between the Swiss and U.S.
Governments, the United States and UBS announced that UBS had agreed to
provide information on over 4,000 U.S. persons with accounts at UBS.
\12\Under a John Doe summons, the U.S. Internal Revenue Service
(``IRS'') asks for information to identify unnamed ``John Doe''
taxpayers. The IRS may issue a John Doe summons only with judicial
approval, and judicial approval is given only if there is a reasonable
basis to believe that taxes have been avoided and that the information
sought pertains to an ascertainable group of taxpayers and is not
otherwise available.
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To the extent that there were perceived deficiencies in the former
information exchange relationship with Luxembourg and Switzerland, and
to the extent that the United States may have little recent practical
experience in cooperating with Hungary on tax matters, your committee
may wish to seek reassurances that any obstacles to effective
information exchange have been eliminated. With respect to Hungary, we
note that the OECD report on Phase I of the peer review determined that
many of the elements required to determine that a jurisdiction is in
compliance with international standards are not in place, and cited as
a factor for that determination the numerous ambiguities in Hungary's
domestic laws concerning the recordkeeping obligations applicable to
different types of entities, the scope of confidentiality afforded
business secrets, and the authority of Hungarian officials to gain
access to information. All of these factors pose potential impediments
to effective exchange of information.
Information exchange with Luxembourg and Switzerland
Switzerland
The exchange of information article in the 1951 U.S.-Swiss treaty
was limited to ``prevention of fraud or the like.'' Under the treaty,
Switzerland applied a principle of dual criminality, requiring that the
purpose for which the information was sought also be a valid purpose
under local law. Because ``fraud or the like'' was limited to nontax
crimes in Switzerland, information on civil or criminal tax cases was
not available. The provision was substantially revised for the present
treaty, signed in 1996, and accompanied by a contemporaneous protocol
that elaborated on the terms used in the exchange of information
article. That 1996 Protocol was intended to broaden the circumstances
under which tax authorities could exchange information to include tax
fraud or fraudulent conduct, both civil and criminal. It provided a
definition at paragraph 10 of ``tax fraud'' to mean ``fraudulent
conduct that causes or is intended to cause an illegal and substantial
reduction in the amount of tax paid to a contracting state.'' In
practice, exchange apparently remained limited, leading the competent
authorities to negotiate a subsequent memorandum of understanding that
included numerous examples of the facts upon which a treaty country may
base its suspicions of fraud to support a request to exchange
information.\13\
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\13\``Mutual Agreement of January 23, 2003, Regarding the
Administration of Article 26 (Exchange of Information) of the Swiss-
U.S. Tax Convention of October 2, 1996,'' reprinted at paragraph 9106,
Tax Treaties, (CCH 2005).
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In March 2009, the Swiss Federal Council withdrew its reservation
regarding Article 26 (Exchange of Information) of the OECD Model
treaty, thus apparently adopting the OECD standards on administrative
assistance in tax matters.\14\ It simultaneously announced key elements
that it would require as conditions to be met in any new agreements.
The Swiss conditions established by the Federal Council limited
administrative assistance to individual cases and only in response to a
specific and justified request. Although Switzerland is considered by
the OECD to be a jurisdiction that has fully committed to the
transparency standards of the OECD, the recently published OECD report
on Phase I of its peer review of Switzerland states that the Swiss
authorities' initial insistence on imposing identification requirements
as a predicate for exchange of information were inconsistent with the
international standards and that additional actions would be needed to
permit the review process to proceed to Phase II. Those actions include
bringing a significant number of its agreements into line with the
standard and taking action to confirm that all new agreements are
interpreted in line with the standard.
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\14\See ``Switzerland to adopt OECD standard on administrative
assistance in fiscal matters,'' Federal Department of Finance, FDF
(March 13, 2009), available at http://www.efd.admin.ch/dokumentation/
medieninformationen/00467/index.html?lang=en&msg-id=25863 (last
accessed March 1, 2011).
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The proposed protocol, by replacing Article 26 (Exchange of
Information and Administrative Assistance) of the present treaty and
amending paragraph 10 of the 1996 Protocol, closely adheres to the
principles announced by Switzerland. It also conforms to the standards,
if not the language, of the exchange of information provisions in the
U.S. Model treaty in many respects. As a result, the proposed protocol
may facilitate greater exchange of information than has occurred in the
past, chiefly by eliminating the present treaty requirement that the
requesting treaty country establish tax fraud or fraudulent conduct or
the like as a basis for exchange of information and providing that
domestic bank secrecy laws and lack of a domestic interest in the
requested information are not possible grounds for refusing to provide
requested information. Lack of proof of fraud, lack of a domestic
interest in the information requested, and Swiss bank secrecy laws were
cited by Swiss authorities in declining to exchange information. The
proposed protocol attempts to ensure that subsequent changes in
domestic law cannot be relied upon to prevent access to the information
by including in the proposed protocol a self-executing statement that
the competent authorities are empowered to obtain access to the
information notwithstanding any domestic legislation to the contrary.
Nevertheless, there are several areas in which questions about the
extent to which the exchange of information article in the proposed
protocol may prove effective are warranted. The proposed revisions to
paragraph 10 of the 1996 Protocol reflect complete adoption of the
first element listed above in the Swiss negotiating position,
``limitation of administrative assistance to individual cases and thus
no fishing expeditions.'' The limitation poses issues regarding (1) the
extent to which the Swiss will continue to reject requests that do not
name the taxpayer as a result of the requirement that a taxpayer be
``typically'' identified by name, and (2) the standard of relevance to
be applied to requests for information, in light of the caveat against
``fishing expeditions.'' In addition, the appropriate interpretation of
the scope of purposes for which exchanged information may be used may
be unnecessarily limited by comments in the Technical Explanation. One
such concern is the extent to which the agreement that information may
be used for purposes beyond the purposes identified in paragraph 1 of
Article 26, is consistent with the comment in the Technical Explanation
that such authority will only be exercised if consistent with the
Mutual Legal Assistance Agreements.
Luxembourg
The proposed protocol with Luxembourg, by replacing Article 28
(Exchange of Information and Administrative Assistance) of the 1996
treaty, is consistent with both the OECD and U.S. Model treaties. There
are several areas in which questions are warranted about the extent to
which the new article as revised in the proposed protocol may prove
effective. These questions arise not from the language in the proposed
protocol itself but from the mutual understandings reflected in
diplomatic notes exchanged at the time the protocol was signed.
Potential areas of concern are found in statements in the diplomatic
notes concerning (I) the obligation to ensure tax authority access to
information about beneficial ownership of juridical entities and
financial institutions, other than publicly traded entities, to the
extent that such information is of a type that is within the possession
or control of someone within the territorial jurisdiction, (2) the
requirement that all requests must provide the identity of the person
under investigation, (3) the standard of relevance to be applied in
stating a purpose for which the information is sought, and (4) the
requirement that requests include a representation that all other means
of obtaining the information have been attempted, except to the extent
that to do so would cause disproportionate difficulties.
article-by-article summaries
The Joint Committee staff's pamphlets provide detailed article-by-
article explanations of the proposed treaty and the two proposed
protocols. Below is a summary of significant features of each
agreement.
Hungary
Like other U.S. tax treaties, the proposed treaty with Hungary
includes rules that limit each country's right, in specified
situations, 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 certain 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 also provides that pensions
and other similar remuneration paid to a resident of one country may be
taxed only by that country and only at the time and to the extent that
a pension distribution is made (Article 17).
The proposed treaty provides that dividends and certain gains
derived by a resident of one country from sources within the other
country generally may be taxed by both countries (Articles 10 and 13);
however, the rate of tax that the source country may impose on a
resident of the other country on dividends may be limited by the
proposed treaty. Generally, source-country taxation of dividends is
limited to 15 percent of the gross amount of the dividends paid to
residents of the other treaty country. A lower rate of 5 percent
applies if the beneficial owner of the dividends is a company that owns
directly at least 10 percent of the voting stock of the dividend-paying
company.
The proposed treaty provides that, subject to certain rules and
exceptions, interest and most types of royalties derived by a resident
of one country from sources within the other country may be taxed only
by the residence country (Articles 11 and 12). Notwithstanding this
general rule, the source country may impose tax on certain interest in
an amount not to exceed 15 percent of the gross amount of such
interest.
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 to which 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 (Articles 19 and 20) generally provides that
students, business trainees, teachers, professors, and researchers
visiting the other treaty country are exempt from host country taxation
on certain types of payments received.
The proposed treaty provides authority for the two countries to
resolve disputes (Article 25) and exchange information (Article 26) in
order to carry out the provisions of the proposed treaty.
The proposed treaty also contains a detailed limitation-on-benefits
provision that reflects the anti-treaty-shopping provisions included in
the United States Model Income Tax Convention of November 15, 2006 (the
``U.S. Model treaty'') and more recent U.S. income tax treaties. The
new rules are intended to prevent the inappropriate use of the treaty
by third-country residents. (Article 22).
The provisions of the proposed treaty will have effect generally on
or after the first day of January following the date that the proposed
treaty enters into force. However, with respect to withholding taxes
(principally dividends, interest, and royalties), the proposed treaty
has effect for amounts paid or credited on or after the first day of
the second month following the date on which the proposed treaty enters
into force.
Luxembourg
Article of the proposed protocol with Luxembourg replaces Article
28 (Exchange of Information) of the present treaty with rules that
conform closely to the U.S. Model treaty. The proposed rules generally
provide that the two competent authorities will exchange such
information as may be foreseeably relevant in carrying out the
provisions of the domestic laws of the United States and Luxembourg
concerning taxes imposed at a national level, to the extent the
taxation under those laws is not contrary to the treaty.
Article II of the proposed protocol provides that the proposed
protocol will enter into force upon the exchange of instruments of
ratification, and it sets forth rules for when the provisions of the
proposed protocol will take effect.
Switzerland
The proposed protocol with Switzerland amends Article 10
(Dividends) of the present treaty to expand the prohibition on source-
country taxation of dividends beneficially owned by pension or other
retirement arrangements resident in the other treaty country. Under the
proposed protocol, the prohibition on source-country taxation also
applies to dividends that are beneficially owned by an individual
retirement savings plan set up in, and owned by a resident of the other
treaty country, so long as the competent authorities agree that the
individual retirement savings plan generally corresponds to an
individual retirement savings plan recognized in the other treaty
country for tax purposes. The prohibition on source-country taxation is
not available if the beneficial owner controls the company paying the
dividend.
The proposed protocol changes the voluntary arbitration procedure
of Article 25 (Mutual Agreement Procedure) of the present treaty to a
mandatory arbitration procedure that is sometimes referred to as ``last
best offer'' arbitration, in which each of the competent authorities
proposes one and only one figure for settlement, and the arbitrator
must select one of those figures as the award. Under the proposed
protocol, unless a taxpayer or other ``concerned person'' (in general,
a person whose tax liability is affected by the arbitration
determination) does not accept the arbitration determination, it is
binding on the treaty countries with respect to the case. A mandatory
and binding arbitration procedure is included in the U.S. treaties with
Belgium, Canada, France, and Germany.
Mutual administrative assistance is modernized under the proposed
protocol. The proposed protocol replaces Article 26 (Exchange of
Information) of the present treaty and paragraph 10 of the 1996
Protocol with rules that conform generally to the OECD standards. The
proposed rules generally provide that. in response to specific
requests. the two competent authorities will exchange such information
as may be relevant in carrying out the provisions of the domestic laws
of the United States and Switzerland concerning taxes covered by the
treaty, to the extent the taxation under those laws is not contrary to
the treaty.
Article 5 of the proposed protocol provides that the proposed
protocol will enter into force upon the exchange of instruments of
ratification, and it sets forth rules for when the provisions of the
proposed protocol will take effect.
conclusion
These provisions and issues are all discussed in more detail in the
Joint Committee staff pamphlets on the proposed treaty and protocols. I
am happy to answer any questions that your committee may have at this
time or in the future.
Senator Cardin. Thank you very much for your testimony.
We'll now hear from Bruce Swartz, the Deputy Assistant
Attorney General at the Department of Justice.
STATEMENT OF HON. BRUCE SWARTZ, DEPUTY ASSISTANT ATTORNEY
GENERAL, DEPARTMENT OF JUSTICE, WASHINGTON, DC
Mr. Swartz. Mr. Chairman, Senator Lee, members of the
committee, thank you for this opportunity to present the views
of the United States Department of Justice on the U.S.-Bermuda
Mutual Legal Assistance Treaty.
I would like to highlight this afternoon five ways in which
this treaty not only solidifies, Mr. Chairman, as you note, the
relationship with Bermuda on law enforcement matters but
advances the Department of Justice's and the United States
Government's international law enforcement priorities.
First, of course, this treaty creates a binding legal
obligation to provide mutual legal assistance, replacing a
collegial and good relationship with one that now has a treaty
basis.
Second, the treaty provides for assistance in a wide range
of criminal justice matters. As the committee knows, the treaty
provides that assistance shall be granted in connection ``with
the investigation, prosecution, and prevention of criminal
offenses for which the maximum penalty is deprivation of
liberty for at least one year'' as measured by the laws of the
party seeking assistance. This means that the treaty will
ensure that we are not spending time in either of our
jurisdictions on claims or cases that are not of significance,
but, at the same time, also ensures that we will be able to
deal with cases in a wide range of criminal offenses, from
terrorism to organized crime, narcotics trafficking, money
laundering, fraud, tax offenses, intellectual-property crimes,
and environmental offenses.
Third, the treaty also makes clear that assistance will be
available through proceedings by the Securities and Exchange
Commission, when those proceedings are incidental to or
connected with pending criminal investigations and proceedings,
which of course is important for our financial crime
investigations.
Fourth, the treaty also provides for a broad range of
different types of cooperation in criminal matters, including
taking the testimony or statements of persons; providing
documents, records, and other types of evidence; transferring
persons in custody for testimony or other purposes; conducting
searches and seizures; assisting in proceedings relating to the
forfeiture of assets; and any other form of assistance not
inconsistent with the laws of the party granting the
assistance.
Fifth and finally, the treaty with Bermuda also pierces
bank secrecy and provides a mechanism for addressing legal and
policy issues, such as confidentiality, inadmissibility
requirements for evidence, and custodial transfer of witnesses.
Significantly, the Bermuda Mutual Legal Assistance Treaty
also provides a framework for cooperation in the tracing,
seizure, and forfeiture of criminally derived assets.
In conclusion, we appreciate the committee's support for
our efforts over the years to strengthen and enlarge the
framework of treaties of assistance in combating international
crime. We at the Department of Justice view mutual legal
assistance treaties as particularly useful tools in this
regard. Accordingly, we join with our colleagues at the
Department of State in urging the prompt and favorable
consideration of the Mutual Legal Assistance Treaty with
Bermuda.
I'll be pleased to answer any questions the committee may
have. Thank you.
[The prepared statement of Mr. Swartz follows:]
Prepared Statement of Bruce Swartz
Mr. Chairman and members of the committee, I am pleased to appear
before you today to present the views of the Department of Justice on
the Mutual Legal Assistance Treaty (Treaty or MLAT) signed by the
United States and Bermuda. The treaty, jointly negotiated by the
Departments of State and Justice, reflects the international law
enforcement priorities of the Department of Justice. Accordingly, we
join the Department of State in urging the committee to report
favorably to the Senate and recommend its advice and consent to
ratification of the treaty.
I realize that the committee has become acquainted with the
significant benefits MLATs provide to the international law enforcement
community since the first such treaty came into force in 1977. Nearly
35 years later, we now have MLATs in force with over 60 countries.
Moreover, the transmittal package for the MLAT with Bermuda provides a
detailed article-by-article analysis of the treaty, which I will not
attempt to repeat here. Rather, I would like to highlight how the MLAT
with Bermuda reflects our international law enforcement priorities.
The MLAT, signed on January 12, 2009, is the first such treaty
between the United States and Bermuda and is the culmination of a
lengthy negotiation first begun in June 2000. Upon entry into force,
the MLAT will significantly enhance the existing mutual assistance
relationship with Bermuda, currently characterized by collegial but
discretionary cooperation based upon the exchange of letters of
request. For example, the MLAT will establish a direct channel of
communication between designated Central Authorities. The Central
Authority for each party will be its Attorney General, or a person
designated by the Attorney General. In the United States, the authority
to handle the duties of the Central Authority has been delegated to the
Office of International Affairs in the Criminal Division of the
Department of Justice. In addition, replacing the current practice of
discretionary cooperation, the treaty will establish a binding, legal
obligation to provide assistance ``in connection with the
investigation, prosecution, and prevention of criminal offenses for
which the maximum penalty is deprivation of liberty for at least one
year, and in proceedings related to criminal matters.'' Limiting
applicability to offenses punishable by at least 1 year's imprisonment,
as measured by the penalty provisions in the party seeking the
assistance, makes clear that the treaty is to be used for requests
relating to serious offenses, while still providing for assistance in a
wide spectrum of criminal matters, including terrorism, organized
crime, narcotics trafficking, money laundering, fraud, tax offenses,
intellectual property crimes and environmental offenses. For requests
relating to investigations of multiple offenses, assistance will also
be available for ``lesser included offenses,'' provided at least one of
the offenses under investigation is punishable by at least 1 year's
imprisonment. Article 21 of the treaty further clarifies that
assistance would be available for proceedings by the Securities and
Exchange Commission when those proceedings are incidental to or
connected with pending criminal investigations and proceedings.
The treaty with Bermuda also provides for a broad range of
different types of cooperation in criminal matters, including taking
the testimony or statements of persons; providing documents, records,
and other articles of evidence; locating or identifying persons or
items; serving documents; transferring persons in custody for testimony
or other purposes; conducting searches and seizures; assisting in
proceedings related to the forfeiture of assets, restitution, and the
collection of criminal fines; and any other form of assistance not
inconsistent with the laws of the party granting the assistance.
As with our other MLATs, the treaty with Bermuda also pierces bank
secrecy and provides a mechanism for addressing legal and policy issues
such as confidentiality, admissibility requirements for evidence,
allocation of costs, confrontation of witnesses at foreign depositions,
and custodial transfer of witnesses. Significantly, the Bermuda MLAT
provides a framework for cooperation in the tracing, seizure, and
forfeiture of criminally derived assets.
Finally, despite the many benefits offered by the treaty with
Bermuda, we realize that MLATs in themselves are not the solution to
all aspects of law enforcement cooperation. Their success depends on
our ability to implement them effectively, combining comprehensive and
updated legal provisions with the competence and political will of our
treaty partners. Our recognition of the importance of effective treaty
implementation led to the development of a standard consultation clause
for our MLATs, included in the treaty with Bermuda, to ensure that we
will have regular dialogues with our treaty partners on the handling of
our cases.
conclusion
We appreciate the committee's support for our efforts over the
years to strengthen and enlarge the framework of treaties that assist
us in combating international crime. We at the Department of Justice
view mutual legal assistance treaties as particularly useful tools in
this regard. In addition, as our network of international law
enforcement treaties has grown in recent years, we have focused
increasing efforts on implementing our existing treaties, with a view
to making them as effective as possible in the investigation and
prosecution of our most serious crimes, including those related to
terrorism. We join our colleagues from the Department of State in
urging the prompt and favorable consideration of the Mutual Legal
Assistance Treaty with Bermuda. I will be pleased to respond to any
questions the committee may have.
Senator Cardin. Thank you very much, Mr. Swartz.
We'll now hear from Cliff Johnson, the Assistant Legal
Advisor for Law Enforcement and Intelligence in the Department
of State.
STATEMENT OF CLIFTON M. JOHNSON, ASSISTANT LEGAL ADVISER FOR
LAW ENFORCEMENT AND INTELLIGENCE, DEPARTMENT OF STATE,
WASHINGTON, DC
Mr. Johnson. Thank you, Mr. Chairman, members of the
committee.
I'm pleased to appear before you today, along with the
Department of Justice, to testify in support of the Mutual
Legal Assistance Treaty signed by the United States and Bermuda
in January of 2009. If approved by the Senate and brought into
force, this treaty will be an important step in advancing law-
enforcement cooperation with Bermuda. Bermuda has been a
longstanding partner in United States law enforcement efforts
off our Eastern Shores, in particular in investigating and
prosecuting financial crimes. However, as Mr. Swartz pointed
out, our current relationship is based solely on informal
cooperation. Entering into force of this Mutual Legal
Assistance Treaty would formalize this relationship and create
a binding legal obligation on Bermuda and the United States to
provide the assistance covered by the treaty.
As criminal activity grows increasingly transnational,
mutual legal assistance treaties are essential tools in the
effort to combat serious crimes across borders, including drug
trafficking, money laundering, violent crimes, and terrorist
activity. The United States has mutual legal assistance
treaties covering many of Bermuda's neighbors in the nearby
Caribbean region, including Bahamas, Anguilla, the British
Virgin Islands, and the Turks and Caicos Islands, and, in
general, with over 60 countries across the globe.
If the Senate provides its advice and consent to
ratification, this treaty will fill a gap in the legal
framework for international law enforcement cooperation in this
region.
The treaty is one of a series of modern mutual legal
assistance treaties negotiated by the United States since the
1980s and contains all the essential provisions of such
treaties that the United States seeks. If approved, it would
create a legal obligation for Bermuda to provide assistance
``in connection with the investigation, prosecution, and
prevention of criminal offenses,'' with a few limited
exceptions. This obligation would extend to proceedings related
to criminal matters, such as forfeiture proceedings, as well as
proceedings of the Securities and Exchange Commission when
ancillary to pending criminal investigations or prosecutions.
The treaty itself also serves to create an additional legal
obligation to provide assistance related to criminal tax
offenses, including those not covered by the two existing tax
agreements we have with Bermuda. The treaty also includes
important provisions on freezing and forfeiting assets or
property that may be the proceeds or instrumentalities of
crime, as well as the authorization for asset sharing.
I would note that unlike a number of our other mutual legal
assistance treaties covering overseas territories of the United
Kingdom, which have been concluded by the United Kingdom on
their behalf, this treaty was concluded directly with the
Government of Bermuda. Prior to signature, the United States
obtained from the United Kingdom a copy of its entrustment
letter to Bermuda, granting Bermuda the authority to sign and
conclude this treaty. Engaging directly with the Government of
Bermuda on the treaty and its implementation will enhance its
effectiveness and facilitate the execution of requests.
It's our understanding that Bermuda has completed the
internal legal requirements for entry into force of this
treaty. It's, therefore, important that the United States is in
a position to bring this treaty into force as soon as possible.
We can then begin to benefit from the many tools it provides to
enhance our law-enforcement cooperation with Bermuda.
We join our colleagues at the Department of Justice and the
Department of Homeland Security in our appreciation of your and
your staff's consideration of this treaty, which will bolster
our efforts at home and abroad to combat transnational crime.
I will be happy to answer any questions the committee may
have. Thank you.
[The prepared statement of Mr. Johnson follows:]
Prepared Statement of Clifton M. Johnson
Mr. Chairman and members of the committee, I am pleased to appear
before you today along with the Department of Justice to testify in
support of the Mutual Legal Assistance Treaty signed by the United
States and Bermuda in Hamilton on January 12, 2009. If approved by the
Senate and brought into force, this treaty will be an important step in
advancing law enforcement cooperation with Bermuda. Bermuda has been a
longstanding partner in United States law enforcement efforts off our
Eastern Shores, in particular in investigating and prosecuting
financial crimes. However, our current relationship is based solely on
informal cooperation. Entry into force of this Mutual Legal Assistance
Treaty would formalize this relationship and create a binding legal
obligation on Bermuda and the United States to provide assistance
covered by the treaty. As criminal activity grows increasingly
transnational, mutual legal assistance treaties are essential tools in
the effort to combat serious crimes that cross borders, including drug
trafficking, money laundering, violent crime and terrorist activity.
The United States has mutual legal assistance treaties covering many of
Bermuda's neighbors in the nearby Caribbean region, including the
Bahamas, Anguilla, the British Virgin Islands and the Turks and Caicos
Islands, and in general with over 60 countries across the globe. If the
Senate provides its advice and consent to ratification, this treaty
will fill a gap in the legal framework for international law
enforcement cooperation in this region.
The treaty is one of a series of modern mutual legal assistance
treaties negotiated by the United States since the 1980s and contains
all the essential provisions of such treaties that the United States
seeks. If approved, it would create a legal obligation for Bermuda to
provide assistance ``in connection with the investigation, prosecution,
and prevention of criminal offenses,'' with a few limited exceptions.
This obligation would extend to proceedings related to criminal
matters, such as forfeiture proceedings, as well as proceedings of the
Securities and Exchange Commission when ancillary to pending criminal
investigations or prosecutions. While the preamble to the treaty
reaffirms the determination of the parties to share information in
matters involving the investigation and prosecution of criminal tax
offenses pursuant to either the 1988 Tax Information Exchange Agreement
between the United States and United Kingdom, on behalf of Bermuda, or
the limited 1986 bilateral tax treaty between the United States and the
United Kingdom, on behalf of Bermuda, the treaty itself also serves to
create an additional legal obligation to provide assistance related to
criminal tax offenses, including those not covered by the two existing
tax agreements.
The treaty further creates a direct law enforcement channel of
communication on requests for assistance under the treaty through the
designation of a ``Central Authority'' for each party. It includes
important provisions on freezing and forfeiting assets or property that
may be the proceeds or instrumentalities of crime, as well as
authorization for asset-sharing. The one relatively uncommon provision
of the treaty is the ``Treaty as First Resort'' article. It provides
that, before a party seeks to enforce a compulsory measure requiring an
action to be performed in the other party relating to a matter for
which assistance is available under the treaty (such as production of
bank records), the party must first attempt in good faith to obtain the
desired assistance under the treaty. The Requesting Party can fulfill
such obligation under the treaty either by making a formal request or
by engaging in consultations to assess whether a request under the
treaty would be successful.
I would also note that, unlike a number of other mutual legal
assistance treaties covering overseas territories of the United
Kingdom, which have been concluded by the United Kingdom on their
behalf, this treaty was concluded directly with the Government of
Bermuda. Prior to signature, the United States obtained from the United
Kingdom a copy of its entrustment letter to Bermuda, granting Bermuda
authority to sign and conclude the treaty. Engaging directly with the
Government of Bermuda on the treaty and its implementation will enhance
its effectiveness and facilitate the execution of requests.
We understand that Bermuda has completed the internal legal
requirements for entry into force of this treaty. It is, therefore,
important that the United States be in a position to bring this treaty
into force as soon as possible. We can then benefit from the many tools
it provides to enhance our law enforcement cooperation with Bermuda. We
join our colleagues at the Department of Justice and the Department of
Homeland Security in our appreciation of your consideration of this
treaty, which will bolster our efforts at home and abroad to combat
transnational crime. I will be happy to answer any questions the
committee may have.
Senator Cardin. Thank you very much for your testimony.
We'll now hear from Deborah McCarthy, Principal Deputy
Assistant Secretary, Bureau of Economics, Energy and Business
Affairs, Department of State.
STATEMENT OF DEBORAH A. McCARTHY, PRINCIPAL DEPUTY ASSISTANT
SECRETARY, BUREAU OF ECONOMIC, ENERGY AND BUSINESS AFFAIRS,
DEPARTMENT OF STATE, WASHINGTON, DC
Ms. McCarthy. Thank you. Mr. Chairman, Senator Lee, thank
you for the opportunity to testify before the Foreign Relations
Committee as the administration seeks advice and consent of the
Senate to ratification of the United States-Rwanda Bilateral
Investment Treaty.
Foreign investment is an important source of economic
growth in the United States and around the globe. It improves
productivity, provides good jobs, and spurs healthy
competition. Secretary of State Clinton, in her remarks at the
OECD on May 26, referred to an important international
consensus about development, that ``while aid is essential, aid
alone is not enough; that to help people reach their full
potential, we must also promote sustainable and inclusive
economic growth.''
We want to use the full range of tools at our disposal to
promote these objectives, such as promoting corporate social
responsibility through the OECD guidelines for multinational
enterprises, international efforts to combat bribery of foreign
public officials, and tools such as bilateral investment
agreements to promote improved investment climates.
Since the inception of U.S. BIT negotiations in the early
1980s, the United States has pursued BITs with the objective of
protecting U.S. investment abroad; encouraging the adoption of
open, transparent, and nondiscriminatory investment policies;
and supporting the development of international legal standards
consistent with these objectives, all of which assists
developing countries to create welcoming investment climates.
We already have five BITs in force with countries in sub-
Saharan Africa. We hope the Rwanda BIT will become the sixth.
At the 2009 AGOA Forum, Secretary Clinton and U.S. Trade
Representative Kirk launched negotiations with Mauritius. At
that time and at the AGOA Forum in 2010, the Secretary
expressed our interest in exploring new investment treaties in
Africa that advance our objectives at the bilateral or regional
level. Later this week, Secretary Clinton and U.S. Trade
Representative Kirk will attend the AGOA Forum in Lusaka,
Zambia, where they will underscore our commitment to economic
partnership with Africa.
The United States chose to negotiate a BIT with Rwanda in
part based on its strong economic reform program, which has
helped to rebuild the Rwandan economy since the 1994 genocide.
As one indicator of Rwanda's efforts, the World Bank recognized
that country as the world's top business climate reformer in
2009, a first for a sub-Saharan African country, and the second
most improved in 2010.
Foreign investors are increasingly giving Rwanda serious
consideration as a destination for investment. According to our
Embassy, U.S.-led investment in Rwanda is poised to grow in the
coming years. These investments could increase access to
energy, significantly for Rwandans and their regional
neighbors; increase access to financing for small and medium-
sized enterprises; and contribute to improved food security.
The Department of State and the Office of the U.S. Trade
Representative co-led the negotiations of this treaty with the
participation of the Departments of Commerce, Treasury, and
other U.S. Government agencies. The treaty contains high
standard, core investor protections and provides investors with
the opportunity to resolve investment disputes with host
governments through international arbitration.
Once in force, the treaty would reinforce the Rwandan
Government's efforts to reform its economy and promote a strong
business climate. It would set a very positive example in the
region. And it would protect the rights of the United States
investors in Rwanda.
The administration thanks the committee for its
consideration of the treaty, and we urge you to report it
favorably to the full Senate for action.
I'd be happy to answer any questions that you may have.
[The prepared statement of Ms. McCarthy follows:]
Prepared Statement of Deborah A. McCarthy
Mr. Chairman, thank you for the opportunity to testify before the
Foreign Relations Committee as the administration seeks advice and
consent of the Senate to ratification of the United States-Rwanda
Bilateral Investment Treaty (BIT).
investment and development objectives
Foreign investment is an important source of economic growth in the
United States and around the globe. It improves productivity, provides
good jobs, and spurs healthy competition. Foreign investment is also a
platform for U.S. exports. Over one-fifth of U.S. goods exports were
shipped to foreign subsidiaries of U.S. firms in 2008 (latest data
available). Approximately 27 percent of all U.S. exports are derived
from foreign direct investment either in the United States or abroad.
Foreign firms invested in the United States employ over 5.5 million
Americans with a payroll of over $400 billion.
Foreign investment can also be a powerful tool for economic
development abroad. Overseas development assistance, while valuable and
important, cannot match the power, velocity, and impact of private
capital--an essential factor for countries to move forward
economically.
As Secretary of State Clinton has said, we believe that investment
and trade are powerful tools to spread development and opportunity deep
within societies. In her remarks at the Organization for Economic
Cooperation and Development (OECD) on May 26, Secretary Clinton
referred to an important consensus about development--that ``while aid
is essential, aid alone is not enough; that to help people reach their
full potential, we must also promote sustainable and inclusive economic
growth. . . . '' President Obama's 2010 Presidential Policy Directive
on Development focuses U.S. development efforts on broad-based economic
growth, democratic governance, game-changing innovations, and
sustainable systems for meeting basic human needs. We want to use the
full range of tools at our disposal to promote rules of the road in
support of these objectives. This includes our work promoting corporate
social responsibility through the OECD Guidelines on Multinational
Enterprises, international efforts to combat the bribery of foreign
public officials, and tools such as BITs to promote improved investment
climates.
Since the inception of U.S. BIT negotiations in the early 1980s,
successive U.S. administrations have negotiated BITs with the objective
of protecting U.S. investment abroad, encouraging the adoption of open,
transparent, and nondiscriminatory investment policies, supporting the
development of international legal standards consistent with these
objectives, and assisting developing countries in creating a welcoming
investment climate. U.S. BITs build on the principles contained in
earlier U.S. treaties of Friendship, Commerce, and Navigation. The
United States presently is a party to BITs with 40 countries.
BITs also support trade linkages. For example, BITs enhance our
objectives on the African Growth and Opportunity Act (AGOA) by
establishing a legal framework for U.S. investors in Africa--investors
that may seek to export AGOA-eligible products back to the U.S. market.
This is the type of synergy that can maximize the effectiveness of our
policy frameworks. It also reflects our interest in looking to non-
assistance-based policy tools to advance the development objectives of
our foreign partners. Later this week, Secretary Clinton and U.S. Trade
Representative Kirk will attend the AGOA Forum in Lusaka, Zambia, June
8-10, where they will underscore our commitment to economic partnership
with Africa.
We already have five BITs in force with countries in sub-Saharan
Africa.\1\ We hope the Rwanda BIT will become the sixth. At the 2009
AGOA Forum in Nairobi, Secretary Clinton and U.S. Trade Representative
Kirk launched BIT negotiations with Mauritius. At that time and at the
AGOA Forum in 2010, Secretary Clinton expressed our interest in
exploring new opportunities to pursue investment treaties in Africa
that advance our objectives at the bilateral or regional level.
---------------------------------------------------------------------------
\1\The other U.S. BITs with sub-Saharan African countries are with:
Cameroon, the Democratic Republic of Congo, Mozambique, the Republic of
Congo, and Senegal.
---------------------------------------------------------------------------
the u.s.-rwanda investment treaty
The United States chose to negotiate a BIT with Rwanda in part
based on its strong economic reform program, which has helped to
rebuild the Rwandan economy since the 1994 genocide. The Rwandan
Government has opened its economy, improved its business climate, and
embraced trade and investment as a means to boost economic development
and help alleviate poverty.
The World Bank recognized Rwanda as the world's top business
climate reformer in 2009--a first for a sub-Saharan African country--
and the second most improved in 2010. Rwanda is the fourth-ranked sub-
Saharan African country listed in that report.
Rwanda also maintains a consistent policy of combating corruption.
Over the last 2 years Rwanda improved its rankings in Transparency
International's ``Corruption Perception Index'' from 102 in 2008 to 66
in 2010, giving Rwanda the highest ranking of any country in East
Africa.
As the result of these reforms, foreign investors are increasingly
giving Rwanda serious consideration as a destination for investment.
According to our Embassy, U.S.-led investment in Rwanda is poised to
increase in the coming years. These investments could increase access
to energy significantly for Rwandans and their regional neighbors,
increase access to financing for small- and medium-sized enterprises,
contribute to improved food security, and provide low-cost ``green''
housing for middle-income Rwandans. U.S. investment has the potential
to change Rwanda's economic landscape and play a significant role in
assisting the Rwandan Government's efforts to become a regional
economic hub. The BIT with Rwanda, once in force, would reinforce the
Rwandan Government's efforts to further reform its economy and promote
a strong business climate. It would set a very positive example in the
region. It will also protect the rights of U.S. investors in Rwanda.
The Department of State and the Office of the U.S. Trade
Representative coled the negotiation of this treaty, with the
participation of the Departments of Commerce, the Treasury, and other
U.S. Government agencies. The treaty, which was signed on February 19,
2008, contains a set of core investor protections, which include:
National treatment and most-favored-nation treatment for the
full life cycle of investment, including in the establishment,
acquisition, operation, management, and ultimate disposition of
an investment;
The free transfer of investment-related funds;
Prompt, adequate, and effective compensation in the event of
an expropriation;
A minimum standard of treatment grounded in customary
international law;
Freedom of investment from specified performance
requirements;
Prohibitions on nationality-based restrictions for the
hiring of senior managers; and
Provisions on transparency in publication of investment-
related laws, regulations, and other measures, and the
opportunity, to the extent possible, for interested parties to
comment on such proposed measures.
The treaty also provides investors with the opportunity to resolve
investment disputes with a host government through international
arbitration.
This investment treaty is based on the 2004 U.S. model BIT, which,
compared to earlier BITs, includes a number of provisions designed to
improve the operation of the treaty. These developments include greater
details on key provisions, and procedures designed to eliminate
frivolous claims and to enhance efficiency, transparency, and public
participation in the arbitration process. The treaty contains
provisions in which the two governments recognize that it would be
inappropriate to encourage investment by weakening or reducing the
protections afforded in domestic environmental and labor laws. Under
the model, each party may take limited exceptions to the core
obligations related to national treatment, most-favored-nation
treatment, performance requirements, and senior management and boards
of directors. In this area, Rwanda has taken only a few, narrow
exceptions; the treaty thus sends a powerful signal about Rwanda's
openness to foreign investment.
In sum, this treaty will complement Rwanda's reform efforts, help
Rwanda attract more foreign investment that is vital to economic
prosperity, and deepen our economic relationship with an important
partner in Africa.
In conclusion, the administration wishes to thank the committee for
its consideration of the treaty and we urge you to report it favorably
to the full Senate for action. I would be happy to answer any questions
you may have.
Senator Cardin. Well, let me thank all five of you for your
testimony, and we appreciate it very much.
I'm going to start on the treaties concerning Switzerland
and Luxembourg and Hungary, and then we'll get over to the
other two agreements.
And let me start with Ms. Corwin. Mr. Barthold points out
in his statement and in his testimony that our current
relationship with Hungary, Luxembourg, and Switzerland has
allowed us a relatively limited exchange of information, so
that, clearly, moving forward with these agreements are in our
national interests, in order to get greater access to
information.
Having said that, Mr. Barthold raises three, I think, very
important points as to whether these agreements adequately deal
with potential problems that may develop between our country
and the other country, and that is the limitation on automatic
exchange of information, the requirements to be specific in
your identification, and the standard of having exhausted other
remedies before you use the remedies that are available under
the international agreement.
Can you respond to those three points?
Ms. Corwin. Thank you, Senator. I'd be happy to.
With regard to what we've achieved in the new agreements,
in particular with the protocols with Switzerland and
Luxembourg, we view them as great improvement with respect to
the current information-exchange standards that we have in our
current treaties with those countries. In particular, some of
the problems that we saw with respect to the Swiss treaty
related to the narrowness of the scope of the information-
exchange provision in the current treaties, and, in particular,
the current treaties provide for exchange of information only
with respect to circumstances where you're trying to establish
fraud or fraud and the like.
Our new protocols have improved information exchange in a
number of ways, including by broadening that standard, so we
now have the ability to, on request, get information with
regard to any issue that was necessary to enforce our domestic
tax laws.
In addition, as with all of our information-exchange
provisions, they provide for the ability to have automatic
exchange--they don't prohibit that--but, essentially, only
require information on request. So there's no limitation within
the current treaties on automatic exchange.
With respect to the issue of specificity, there was a lack
of clarity in the existing treaties with regard to that, and I
think in the current protocols has been addressed. In
particular, the terms of the treaty itself make clear, both in
the case of Luxembourg and Switzerland, that the name of a
taxpayer is not necessary in every case to honor an information
request. And the use of the--I think as my colleague pointed
out, the use of the ``typically'' language within the Swiss
treaty, in particular, is not viewed as a hindrance to that
interpretation but rather as an illustration that where
information is available, it's in the interest of both
countries to have that and provide that information when making
a request. But if the information is not available, in the case
of a name, that a request for information is still possible
under this new protocol.
That understanding of the Swiss treaty, in particular, as
well as the Luxembourg treaty, was achieved. And we went
through, in the negotiations, great lengths to ensure a meeting
of the minds on that issue and the specificity of a particular
request. And we're satisfied that we had a mutual understanding
regarding that point.
I think, in this regard, also Switzerland has recently
issued statements indicating its intent to interpret all of its
treaties, including the provisions with the United States,
consistently with the international standard and the mutual
understanding that we have with Switzerland, as well as the
terms of the agreement itself, in a manner that would not
require the name of an individual.
And so we feel that the treaties have addressed a number of
the concerns and, as modified, should alleviate a lot of--and
improve our information-exchange relationship with both
Switzerland and Luxembourg.
Senator Cardin. Did you want to comment further about the
need to exhaust other methods first?
Ms. Corwin. On the need to exhaust other methods, that is a
consistent international standard. The procedural rules within
the information-exchange provision in a treaty are intended to
protect both the requester of information and the requested
from unnecessary administered burden. And the ultimate goal is
to exchange as much information as possible.
The standard requires exhaustion of internal remedies, so
as to not put undue burden on the requested jurisdiction. It is
commonly understood, in the OECD model and the international
standard, it's not to be interpreted in a manner to frustrate
information exchange.
Senator Cardin. But we are dealing with Switzerland.
Ms. Corwin. And I think in acknowledgement of that, the
commentary to the OECD language talks about the fact that all
of these procedural rules should be interpreted in a manner not
to frustrate the intent of exchanging as much information as
possible. In the case of Switzerland, we put that right into
the legal document, and there's a mutual understanding that
that is the way we intend to----
Senator Cardin. Could you point out the differences between
Luxembourg and Switzerland's agreement, as it relates to the
exchange of information?
Ms. Corwin. The two protocols are, actually, substantively
the same. Both, as I said, change the current scope of exchange
of information in the current agreements, which was narrow and
limited to circumstances in order to meet the objectives of the
treaty or to deal with fraud or fraud and the like. So both
protocols expand that scope to include exchange of information
that may be relevant, or is foreseeably relevant to addressing
domestic law issues.
In addition, both treaties override existing domestic bank
secrecy rules. So under the prior agreements, a country could
not respond to--or Switzerland or Luxembourg would not respond
to a request because of domestic bank secrecy rules. Under the
current agreements, we explicitly provide that information must
be exchanged notwithstanding any existing domestic bank
secrecy. So if the information is held by a bank or financial
institution, it's still required to be exchanged. And, finally,
both agreements explicitly say that information must be
exchanged even absent a domestic law interest in the country
that's providing the information.
Senator Cardin. Do you believe any additional negotiations
are needed with Switzerland, so that we are confident that they
will interpret this agreement and apply it consistent with our
understandings?
Ms. Corwin. We do not believe any additional negotiations
are necessary with Switzerland. As I said, we were very
cognizant of the circumstances that led to UBS and the
environment. When we negotiated this protocol with Switzerland,
we went to great lengths to establish and memorialize our
mutual understanding of how these information-exchange
provisions would be interpreted and in a manner consistent with
the international standard. And recently, as I said,
Switzerland has announced its intent to interpret the
information-exchange provisions in its treaties in a manner
that is not only consistent with the mutual understanding
reached with the United States but the international standard.
And that gives us comfort that we ended up with a meeting of
the minds that gets to the right place.
Senator Cardin. Mr. Barthold, would like to respond at all
to the response by Ms. Corwin?
Mr. Barthold. I think Ms. Corwin pointed out a number of
the important advancements. The questions that my staff
colleagues and I raised were really about how it will work out
in practice. I believe that that was the thrust of your
question. Ms. Corwin said that they're generally satisfied.
They think they've pushed substantially. She did note important
changes, in terms of overriding bank secrecy laws. Also in the
one agreement, there is a provision that essentially overrides
domestic law that would make a subsequent change precluding
requested information.
So I think Ms. Corwin does point out some important
advances.
Some of our staff concerns relate to Swiss statements of
need to flesh out details. Of course, that's always true about
any sort of agreement, in terms of how things work in practice.
Somewhat recently, and since we prepared our description
and discussion for your committee, the OECD peer review panels
have released an initial phase-one report on Switzerland. The
report noted significant improvement in existing agreements was
needed and that they should take action to ensure that all
agreements will be interpreted consistently with international
norms. Ms. Corwin said that she believes that that is the case.
The report criticized the Swiss authority's initial
interpretation of agreements as including specific
identification requirements. Again, Ms. Corwin had addressed
that issue.
Senator Cardin. Thank you.
The press has reported that Switzerland is likely to
conclude new agreements with Germany and the U.K. in the near
future. Under these agreements, the Swiss Government would
require Swiss banks to withhold or remit tax from payments of
interest and perhaps other forms of investment income owned by
residents of Germany and the U.K. who have Swiss bank accounts.
Should the United States consider negotiating a similar
agreement with Switzerland and other foreign banking centers?
Ms. Corwin.
Ms. Corwin. We don't think that the United States should
consider such agreements. My understanding of the proposed
agreements with Germany and the U.K. is that what they are
offering is--or what Switzerland is offering is to impose a
final withholding tax on accounts of German residents or U.K.
residents, as the case may be, in place of identifying those
residents to the U.K. Government and the German Government. So
it is a collection system in place of a reporting regime, an
information-reporting regime.
That doesn't allow the U.K. Government or the German
Government to necessarily reconcile whether the collection of
this final withholding tax is consistent with what tax might
actually be due with respect to the individual on whom the tax
is collected.
From the U.S.'s perspective, we think information exchange
is the more appropriate means for making sure that we combat
offshore tax evasion, and we don't want to give up our ability
to assess the tax due on our own residents to another
jurisdiction and be comfortable that that tax would be
collected appropriately.
Senator Cardin. So if these agreements are ratified by the
Senate, are you saying that we will get enough information
about income generated by accounts owned by Americans in just
the general exchange of information, which will adequately
allow us to audit to make sure the taxes have been paid on that
income, similar to the information reports we receive from U.S.
banks?
Ms. Corwin. Thank you, Senator.
I think if these agreements are ratified, it will allow us
to make requests of the relevant jurisdictions.
Senator Cardin. That was my concern. If you're making a
request on specific information, you don't know the
information.
Ms. Corwin. Right.
Senator Cardin. It seems to me what the German and the
Brits are doing, they're saying, I'd rather have money in the
bank than trying to figure out who have accounts.
Ms. Corwin. Right, right. And they're depending on
Switzerland to impose the right amount of tax on those----
Senator Cardin. But wouldn't that also be negotiated, if we
negotiate with the Swiss?
Ms. Corwin. Well, certainly, I don't believe that as part
of the agreements or the negotiations between Switzerland and
then Germany and the U.K., it includes information exchange.
The United States has recently enacted the Foreign Account Tax
Compliance Act, which would require all foreign institutions,
financial institutions, to report directly to the IRS
information about U.S. bank accounts in their jurisdictions.
That, right now, is providing us with the direct information
that we will need direct from financial institutions on an
automatic basis from these accounts.
We have said in the context of implementing, because
Treasury is now in the position of writing the regulations, to
implement that law that we are willing to speak with foreign
governments, including Switzerland, to cooperate as to how we
can implement those provisions, which is to require reporting
on all U.S. accounts to the IRS, implement them in cooperation
with the foreign governments and leverage off of our existing
treaty relationships, including the proposed protocols that are
before you today, to allow the government to facilitate that
reporting.
But what we're not willing to do is give up information
reporting in exchange for a flat tax, where we have no way to
audit whether, in fact, the individuals who have their accounts
there are paying the right amount or, in fact, that Switzerland
is doing what it should be doing to collect the tax.
Senator Cardin. I'm not sure I follow that argument. You
say, on one hand, that the banks are required to give you that
information under current law, so it seems to me you're getting
information reports currently from the banks. This is a
government arrangement in which they are required with specific
requests to supply information to the United States. I assume
that's where we have at least some indication that someone is
not paying their taxes. But if we don't know about the account
and we are not getting adequate information, then we're losing
the tax revenue.
So I'm not sure I follow you, from the point of view of the
interests of the U.S. taxpayer, and tremendous concern here in
Congress that offshore income is properly reported here in the
United States, that we wouldn't be better off negotiating
receiving the funds, without compromising our requirements for
international banks to supply the information directly to the
IRS.
Ms. Corwin. Thank you, Senator. I think the administration
absolutely shares your concern and Congress' concerns about
offshore tax evasion. And we view these tools as complementary
in achieving the most compliance that we can get.
The act, the Foreign Account Tax Compliance Act that I
referenced, is not effective until January 2001, 2013. So while
it is current law, it is not yet operable and requires a lot of
pieces to go into play before we're getting full reporting.
That information reporting, in conjunction with our ability to
make requests of a government to provide us additional
information, when we suspect or have concerns about a
particular scheme, or maybe the facilitation of evasion, is
going to, I think, provide us with sufficient tools to go after
what has become a significant issue of offshore tax evasion.
Senator Cardin. Mr. Barthold, any comments you want to
make?
Mr. Barthold. Well, perhaps, Senator, just to help clarify,
the agreements that you noted between Switzerland and the
United Kingdom, remember, this is in lieu of Swiss
participation in the E.U. savings directive. And while not
expert on the savings directive, I believe, at this stage, it
only relates to interest.
I believe the point that Ms. Corwin was making, in terms of
information reporting, is that Congress has enacted the Foreign
Account Tax Compliance Act that will provide information
reports on, essentially, flows into financial accounts,
reflecting interest, dividend, and gain. And combining that
information with the ability to make specific requests, when
based on that information you might think that a taxpayer is
underpaying, I believe she's saying that the administration
thinks that would dominate a flat withholding tax, particularly
since I think the rates of withholding that the European
agreements are talking about may be at least moderately below
the highest rates of tax in the European countries and the
highest rates of tax in the United States.
Senator Cardin. Thank you.
Ms. Corwin, you note that in the arbitration provisions,
that they're similar in Switzerland and Luxembourg. Can you
tell us the differences?
Ms. Corwin. Well, the arbitration provision is in
Switzerland only. We've included arbitration in Switzerland and
it is----
Senator Cardin. I meant you said it's similar--I misstated
the question--similar to other agreements that we've entered
into. How is it different?
Ms. Corwin. It is identical to the arbitration provision we
have in the French protocol, which this committee approved in
2009. The provisions in both the French protocol and this
proposed Swiss protocol differ from the agreements or the
arbitration provisions we have with Belgium, Canada, and
Germany, in response to very useful comments we received from
this committee when those treaties were being approved.
And, in particular, I think there are three significant
differences that I can point to that come from the suggestions
of this committee. First, in response to concerns about the
taxpayer in an arbitration proceeding having the ability to
participate in the arbitration proceeding, we have added, we've
included in the proposed Swiss protocol, as well as the French
protocol, a provision that allows a taxpayer to submit a
position paper to the arbitration panel, reflecting their views
on the issues before the arbitration panel.
Second, in response to concerns about maintaining the
independence of the members of the arbitration panel, we, in
the Swiss protocol as well as the French protocol, prohibit or
put a prohibition on employees of the tax administrations of
either government serving as members of the arbitration panel.
And then finally, in response to concerns about following
international norms for legal interpretation for treaty
interpretation, we removed what had been a hierarchy of laws
for treaty interpretation that existed in the prior treaties.
They are no longer in these treaties.
Senator Cardin. Thank you.
In regards to Hungary, for one moment, can you tell us the
current status of action of the Hungary Government in modifying
its domestic laws that would permit it to adequately implement
its exchange of information and limitation on benefit
obligations that are in the treaty?
Ms. Corwin. Sure. On Hungary, with respect to information
exchange, we've had a very good information-exchange
relationship with Hungary, even under the existing treaty that
had the older information-exchange language. So we've never had
problems with scope or question, and there are no additional
steps that Hungary needs to take domestically to continue that
information-exchange relationship under the new, more modern
information-exchange language in the treaty.
Similarly, with respect to the limitation on benefits
provision, there are no domestic law changes that need to be
made in order for the treaty-shopping protections provided for
in the limitation on benefits provision to kick in.
Senator Cardin. There have been some questions raised in
regards to the Hungary treaty as to whether the provision of
limitation of benefits are sufficient to deter the treaty-
shopping concerns that you've raised. I've read your testimony,
and you repeated it today, that you're confident that the
provisions here are adequate.
Ms. Corwin. Yes, we are. We have included our model LOB--
limitation on benefits--provision to prevent treaty shopping.
It is the tightest antitreaty shopping provision in the world.
It's recognized as such. And we are confident that the
limitations there that look to ownership and limit benefits
based on ownership as well as activity are sufficient to combat
any treaty-shopping concerns that we might have had with
Hungary before this revision.
Senator Cardin. Well, thank you very much. I want to give
you all a break for a moment and turn to Mr. Swartz. You've
been very patient, the three of you. I appreciate that very
much. Normally, we would have had two panels, but we didn't
know how the Senate would be operating today, so in an effort
to make sure we got through all the treaties today, we did this
as one panel.
Mr. Swartz, you point out in your testimony and your
statements that the treaty with Bermuda also pierces bank
secrecy and provides a mechanism for us getting the information
we need. There have been some mutual legal assistance treaties
that contain provisions related directly to sharing bank
records or other financial information. Why wasn't a similar
provision included in the U.S.-Bermuda MLAT?
Mr. Swartz. Thank you, Mr. Chairman. With regard to that
particular issue, the committee may be referring to the
relatively new provision that appears, for instance, in our
E.U.-U.S. Mutual Legal Assistance Treaty, the identification of
bank records provision. That was a provision that was drafted
and adopted in the context of the E.U. negotiations after the
Bermuda Mutual Legal Assistance Treaty was well underway.
Under that provision, it's possible for the requesting
party to seek information as to whether an account exists in
the requested country, or in the case of the E.U., one of the
requested member states. But, thereafter, the request, if there
is an identification of an account, must be followed up through
a standard mutual legal assistance treaty.
As I said, that's a new provision that came after the bulk
of the negotiations were concluded with regard to Bermuda.
And with regard to Bermuda, our record of cooperation has
been very good. We believe that the record we have on the
production of records, including bank records, is such that we
are confident that the provisions included in this mutual legal
assistance treaty, which do require cooperation on the
production of records, will suffice to ensure that we obtain
the records we need for our financial investigations and other
investigations.
Senator Cardin. Some other MLATs also allow for urgent,
non-written form requests to be made. It's my understanding
that in Bermuda, it must be in written form. Any reason why
that provision was not included in this agreement?
Mr. Swartz. Mr. Chairman, while it is true that the Mutual
Legal Assistance Treaty does require requests in written form,
it was the judgment of the negotiators that it sufficed that,
in this case, with regard to Bermuda, we would be able to
obtain expeditious responses to our requests and also provide
such responses to Bermuda's requests, particularly because we
have a practice already established that will continue, we
believe, under the treaty of being able to convey those
requests through email or through fax. And we believe that that
availability does mean that our requests can be speedily
transmitted and responded to.
Senator Cardin. So was this, basically, a decision made by
U.S. negotiators, that it was not necessary, knowing how we can
quickly get faxes and e-mails sent? Is that fair enough to say,
or not?
Mr. Johnson. Senator, if I can help on that one?
Senator Cardin. Sure.
Mr. Johnson. Our negotiators initially did try to get
language that provided for nonwritten requests to be made.
Bermuda resisted that because they wanted to make sure that the
requests were clear and in a more formal way.
But in the negotiations, it also became clear that they
accepted that such request could be made by fax or by email. So
the real issue they were concerned about was not finding a fast
means to make a request, but really just taking oral requests
off the table. And, in fact, my understanding is that our
informal practice with them has, in fact, been to use email and
faxes to make those requests. So we're confident that we've got
the means in place that we can make urgent requests of them in
a way that will be effective.
Mr. Swartz. Mr. Chairman, if I might add, in fact, while it
is an advantage to be able to make oral requests, in practice,
it's very rare that we do so. Instead, we do use the
instrumentalities of fax or email.
Senator Cardin. My main concern is just, in urgent matters,
that it's not delayed. And with modern communication, it seems
to me that can probably be handled.
I'm more concerned about bank records. Mr. Johnson, do have
any comments on the bank records issue?
Mr. Johnson. Again, not specifically on the bank issue.
But, again, our sense is that by having an accepted practice
and understanding between our two countries that we can use
email and faxes and other modern means to make requests very
quickly. The difference between being able to do an oral
request or being able to use one of these other very rapid
means, we think, is not consequential.
Senator Cardin. There've been some issues raised about the
adequacy of Bermuda law with respect to forfeitures of proceeds
and instrumentalities of criminal offenses. Are you satisfied
that Bermuda law is adequate to comply with their commitments
under this treaty?
Mr. Swartz. Mr. Chairman, we are. Of course, the
development of forfeiture law is an important and progressive
matter. We've seen a number of changes over the course of the
years, including here in the United States.
But the Mutual Legal Assistance Treaty in Article 17 does
obligate Bermuda to provide assistance to the United States in
proceedings relating to forfeiture of proceeds and
instrumentalities of crime, to the extent permitted by the law
of Bermuda.
And we've had experience, in this regard, with Bermuda.
We've had two examples of successful requests for restraint and
forfeiture of assets. Both instances were a success and we were
able to obtain the funds.
As a general matter, assistance is available under the laws
of Bermuda, and I do think that's important to stress, with
regard to freezing, seizing, and restraining assets, including
for matters relating to terrorism and terrorism financing.
In particular, the attorney general of Bermuda can enforce
all foreign confiscation and forfeiture orders. But it should
be noted that forfeiture assistance is not limited to what is
permitted under Bermuda's domestic law. With regard to a U.S.
order, Bermuda cannot forfeit a specific instrumentality of
nondrug offenses, because that power doesn't exist
domestically.
But again, that's limited to instrumentalities in nondrug
offense cases. Our experience with Bermuda has, in fact,
focused oftentimes on drug offenses but does not go to the
broader power to seize or confiscate assets as opposed to
instrumentalities.
Senator Cardin. Thank you.
Let me just ask the general question, and any one of you
can respond to it.
In the Bermuda agreement, there's a provision that is not
unfamiliar to us, where Bermuda can deny cooperation in capital
cases. We understand, I understand that, so I'm not being
critical of that provision being included in there.
I would like to get your view as to what impact that has on
law enforcement here, on these treaties, when we have criminal
offenses that have occurred that are subject to capital
punishment in the United States. Are we hindered as a result of
that or is there a way in which we are able to cooperate under
this treaty, even in those cases?
Mr. Swartz. Mr. Chairman, we believe and we hope we still
would be able to cooperate.
Bermuda indicated, and has advised the United States, that
it reserves the right to deny assistance in capital cases where
the sentence includes a possible death penalty, relying on
the--contrary to the important public policy provision of
Article 3 of the convention.
While the United States does not agree with that
interpretation of Article 3, nonetheless, we believe that we
will be able to resolve in these matters--we hope we will be
able to resolve these matters on a case-by-case basis, as we
have done with regard to other jurisdictions.
In fact, we have that experience with other countries that
have put similar interpretations on the mutual legal assistance
responsibilities, and we've been able to work out arrangements
in a number of cases that allow us to obtain evidence or
discuss whether the evidence is significant enough to go
forward with some kind of further steps being taken.
Senator Cardin. Mr. Johnson.
Mr. Johnson. Yes, Senator, if I could just add to that, one
of the reasons this treaty took as long it did to negotiate and
conclude is because it was important to us to make sure that
there wasn't an express restriction on assistance in capital
cases in the treaty itself. So what we, ultimately, worked out
with Bermuda was language in the treaty itself that was silent
on the issue but enabled them, in appropriate cases, to rely on
the language that Mr. Swartz related to you. And that way we
think that helps maintain the principle that's important to us,
that such cooperation should be available, irrespective of the
kind of case.
And we think this has also borne out with some other
countries, where even with similar concerns about cooperation
in capital cases, they have, for example, been able to provide
assistance to the nonpenalty phase of a trial or another party
investigation.
So it's our hope that with Bermuda, as well, by having the
treaty not include an express prohibition, that we will be
able, on a case-by-case basis, to work out with them assistance
in appropriate cases.
Senator Cardin. But they do hold the right under this
treaty to deny cooperation where the United States criminal
justice system is seeking capital punishment?
Mr. Johnson. Senator, they hold the right under the treaty
to not provide assistance in cases that are contrary to public
policy or their essential interests, and they have told us that
they interpret that to allow them, in death penalty cases, to
exercise that.
But again, that doesn't mean that it's automatically
precluded in all cases.
Senator Cardin. I understand that. I just wanted to make it
clear that they would not be a violation of the treaty. We
understand their interpretation, that if there was a case
pending here that we needed their help, where, clearly, the
prosecutors were seeking the death penalty, Bermuda could
decide not to cooperate under this treaty.
Mr. Swartz. If I could say, Mr. Chairman, importantly, the
treaty would require, since this would be a denial under
Article 3 of the treaty, that first there had to be
consultations with the United States, before that denial could
go forward.
And I think that's an important aspect of the negotiation
that Mr. Johnson mentioned. Rather than having an explicit
provision, this is one of a set of conditions under which
assistance may be denied after consultation, and, among other
things, that there must be consideration as to whether
assistance can be given, subject to such conditions as the
requested country deems necessary.
And our experience in that regard has been that we
oftentimes can find appropriate assurances to allow evidence to
be produced, at least for initial assessment of the importance
of evidence in the case overall.
Senator Cardin. So we do have some track records with other
countries with similar provisions?
Mr. Swartz. Yes, Mr. Chairman, we do.
Senator Cardin. It might be useful just for you to share
that information with our committee, so that we know how, in
practice, this operates.
As I said, in introducing this line of questioning, I
certainly understand why Bermuda insisted upon this type of
provision. I think, though, it would be useful for us to
understand the challenges that are placed in law enforcement
because of the inconsistencies of the United States with the
international community on penalties. And I think that would be
helpful for us to have that information in this committee.
Mr. Swartz. Thank you. We'd be glad to supply that.
Senator Cardin. Ms. McCarthy, you have the easiest job
here, since this agreement was previously approved by this
committee.
As I said in my opening, we approved it too late in the
111th Congress for action. We approved it in mid-December, and,
of course, Congress adjourned at the end of the month, sine
die. Have there been any significant changes in our investment
relationship with Rwanda since last November when you gave
testimony on this treaty?
Ms. McCarthy. Thank you, Mr. Chairman.
What we have seen since last November is an increase in
United States investment in Rwanda, and I can give you a few
examples.
We have a company called Contour-Global; it has announced
that it's going to invest $325 million in methane gas
extraction, and they have invested over $125 million of that
amount. Also, in February of this year, we have Hilton Hotels;
it's is going to open up a major hotel in Kigali. And, also,
Marriott Hotels is going in to facilitate the country's growing
hospitality industry.
So I would say that, given this pattern of increased
investment, that it is important that the protections be
afforded for them. So we are seeing increased interest on
behalf of U.S. investors.
Senator Cardin. I thank you for that. You also mentioned
the fact that the United States is exploring other bilateral
investment treaties in Africa. I believe you mentioned one
other country. I think we have five current bilateral
investment treaties in Africa. Can you just share with us other
countries that the United States has shown interest in
negotiating treaties?
Ms. McCarthy. Certainly. We are, obviously, looking not
only within Africa, but also beyond. I mean, we're engaging in
negotiations with a number of countries--China, Georgia, India,
Mauritius, and Pakistan. And in recent years, within Africa,
we've held exploratory discussions with Ghana, Gabon, and
Nigeria.
As you probably know, we have, currently, five BITs in
force that have been there for a while. So the discussions are
ongoing.
Senator Cardin. Thank you.
I've been told by the staff that I should ask the question
of whether the administration still supports the Senate
ratification of the Rwanda treaty, since it was held over from
the last Congress. So, for the record?
Ms. McCarthy. We certainly do.
Senator Cardin. Thank you.
I think that completes the questioning. We might have some
additional questions for the record. As you know, the record
remains open for 24 hours, so you get a break. That's a pretty
fast turnaround time for this committee.
But I do appreciate your patience with the committee and
thank you very much for your testimony today.
The committee will stand adjourned. Thank you.
[Whereupon, at 3:38 p.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Response of Principal Deputy Assistant Secretary Deborah A. McCarthy to
Questions Submitted by Senators John F. Kerry and Richard G. Lugar
Question. In connection with the committee's consideration of the
Rwanda BIT during the 111th Congress, the Department of State witness
answered a series of questions concerning the treaty. (The hearing
transcript and questions for the record are reproduced in Annex II of
Senate Foreign Relations Committee Executive Report 111-3.) Please
confirm that the answers provided by the Department's witness remain
accurate today, and provide updated responses as necessary.
Answer. As set out below, we would like to provide updated
information on reported U.S. investment activity in Rwanda. Other than
these updates, the answers provided by the Department's witness in the
111th Congress remain accurate.
In 2009, the stock of U.S. foreign direct investment in Rwanda was
$1 million (according to the Bureau of Economic Analysis). However,
several U.S. investments in Rwanda have been announced or have
progressed since 2009. An updated list of examples follows.
U.S. firm ContourGlobal announced in 2009 that it reached
agreement with the Government of Rwanda to invest in methane
gas extraction and power generation in Rwanda. The company has
invested more than $125 million already, and the amount of
total intended investment has increased to over $400 million.
In May, the company announced that the Multilateral Investment
Guarantee Agency issued an investment guarantee supporting this
project.
In February of this year, Hilton Hotels announced plans to
open a $30 million four-star hotel in Kigali, according to the
Rwanda Development Board. Also this year, Marriott Hotels
announced that it would open a new five-star, $60 million hotel
facility in the country.
In the finance sector, Urwego Opportunity Bank, a
partnership of three American NGOs, has invested more than $3.5
million and improved access to financing for Rwandan consumers
and businesses.
Rwanda Trading Company has invested more than $2.5 million
to become one of the largest exporters of Rwandan coffee.
Sorwathe, a U.S. tea company that has invested in Rwanda
since 1978, opened a new $2 million tea factory in the country
in 2009.
Starbucks Coffee opened a ``Farmer Support Center'' in
Kigali in 2009, the first such investment by the company in
Africa.
MANA Foods has invested more than $1 million to renovate and
expand facilities to produce therapeutic supplemental food in
Rwanda, helping tens of thousands of children lacking proper
nutrition.
We understand from our Embassy in Kigali that a number of other
U.S. firms are considering Rwanda as a potential investment
destination, particularly in hydropower and other ``green'' energy
projects, financial services, agriculture, and mining.
______
Responses of Deputy Assistant Secretary Manal Corwin to Questions
Submitted by Senator John F. Kerry
Question. Under the proposed protocol with Switzerland, are treaty
countries required to exchange information in response to specific
requests that are comparable to ``John Doe'' summonses under U.S.
domestic law?
Answer. The language in the proposed protocol with Switzerland
regarding the exchange of tax information was intentionally drafted to
be identical in substance to Article 26 of the Organization for
Economic Cooperation and Development (OECD) Model Tax Convention on
Income and on Capital (``OECD Model Tax Convention''), as well as the
relevant text of the OECD Model Agreement on Exchange of Information
for Tax Matters (``OCED Model TIEA''), which provide for exchange of
information in a broad range of circumstances where it is foreseeably
relevant to the administration or enforcement of either treaty
partner's tax laws. In the case of specific requests for information,
Commentary to the OECD Model TIEA states that a request for information
triggering the obligations to exchange information does not necessarily
have to include the name of the accountholder under investigation.
Similarly, by its terms, the proposed protocol with Switzerland
contemplates that a name is not required with respect to every request.
As part of our negotiations with Switzerland, we confirmed that
Switzerland concurs that the language in the proposed protocol
regarding exchange of information was drafted to reflect the OECD
standards, and that therefore that language's interpretation should be
consistent with OECD standards for information exchange.
Question. The Department's Technical Explanation concerning
paragraph 2 of Article 26 of the proposed protocol with Switzerland
states that the United States and Switzerland will not request consent
to use information obtained under the treaty for purposes beyond the
purposes identified in paragraph 1 of Article 26 (i.e., for nontax
purposes) except in circumstances where such use would be consistent
with the Mutual Legal Assistance Agreement in force between the two
countries. Please explain the rationale for this limitation on the
scope of paragraph 2 of Article 26.
Answer. Article 26 of the current income tax treaty in force limits
the use of information obtained under the treaty to specific purposes,
i.e., assessment, collection or administration of, the enforcement or
prosecution in respect of, or the determination of appeals in relations
to, the taxes covered by the Convention.'' Nevertheless, granting the
ability for authorities to use information exchanged pursuant to a
request under an income tax treaty for another purpose is appropriate
policy as an efficiency matter where the information could have been
obtained for that purpose under another agreement between the United
States and the treaty partner and the competent authority of the
requested state authorizes such use. For instance, if a requesting
country that received information pursuant to a tax treaty request
could have obtained the same information pursuant to a request under a
Mutual Legal Assistance Treaty (MLAT) to be used for other, nontax,
purposes and if the requested state has no objection to the use of that
information for those other purposes, there is no reason for that
country to have to make a redundant request. However, this policy is
appropriate only to the extent that such other agreements separately
exist and grant the legal authority to make a request for such
information, as in the case of the MLAT with Switzerland.
Question. The diplomatic notes exchanged with Luxembourg require
that the requesting country must pursue ``all means available in its
own territory to obtain the information, except those that would give
rise to disproportionate difficulties'' before resorting to treaty
procedures. Does the Department have any concerns that Luxembourg may
assert an overly narrow view of this requirement, with a view to
frustrating the exchange of information under the treaty?
Answer. We do not have such concerns. This language is consistent
with the language of the international standard for tax information
exchange established by the OECD Model TIEA. The Commentary to the OECD
Model TIEA explains that the country requesting information should only
contemplate such a request if it has ``no convenient'' means to obtain
the information within its own jurisdiction, or it should explain that
the available means to obtain the information within its own territory
would pose disproportionate difficulties. Furthermore, the Commentary
to the OECD Model TIEA makes clear that the OECD standard is intended
to ensure that obtaining the information should be easier for the
requested state than for the requesting state. Luxembourg and the
United States intentionally drafted the treaty language in question to
reflect the OECD model TIEA language.
Question. Under the proposed protocol with Luxembourg, are treaty
countries required to exchange information in response to specific
requests that are comparable to ``John Doe'' summonses under U.S.
domestic law?
Answer. The language in the proposed protocol with Luxembourg
regarding the exchange of tax information was intentionally drafted to
be identical in substance to Article 26 of the OECD Model Tax
Convention and the relevant text of the OECD Model TIEA, which provides
for exchange of information in a broad range of circumstances where it
is foreseeably relevant to the administration or enforcement of either
treaty partner's tax laws. In the case of specific requests for
information, the Commentary to the OECD Model TIEA states that a
request for information triggering the obligations to exchange
information does not necessarily have to include the name of the
accountholder under investigation. As part of our negotiations with
Luxembourg, we confirmed that Luxembourg concurs that the language in
the proposed protocol on information exchange was drafted to reflect
the OECD standards and that therefore that language's interpretation
should be consistent with OECD standards for information exchange.
Question. The proposed protocol with Luxembourg limits the
information-exchange obligations to information that is foreseeably
relevant for carrying out the provisions of the treaty or the domestic
tax laws of the two treaty countries.
Is the requested treaty country permitted to evaluate the
relevance of a request independently of the apparent conclusion
by the treaty country that the information is relevant to
carrying out its domestic tax laws?
If so, does the Department have any concerns that Luxembourg
may assert an overly narrow view of this requirement, with a
view to frustrating the exchange of information under the
treaty?
Answer. The Commentary to the OECD Model Tax Convention states that
the standard of foreseeable relevance should be interpreted to provide
for exchange of information to the widest possible extent. The terms of
the agreement related to the protocol that would become an integral
part of the Convention with Luxembourg, if ratified and in force,
specifies what information must be provided to demonstrate the
foreseeable relevance of the information to the request. For example, a
requesting state has an obligation to provide an explanation of the tax
purpose for which the information is sought. As long as the required
information is provided, the requesting state does not otherwise need
to prove that the information requested is, in fact, relevant. As part
of our negotiations with Luxembourg, we confirmed that Luxembourg
concurs that the language in the proposed protocol and related
agreement regarding exchange of information was drafted to reflect the
OECD standards, and that therefore that language's interpretation
should be consistent with OECD standards for information exchange.
Question. Under the proposed treaty with Hungary, a company that is
a resident of a treaty country is eligible for all the benefits of the
treaty if it satisfies a regular trading test and either a management
and control test or a primary trading test. Under the U.S. Model
treaty, to satisfy the ``primary trading'' test, the required trading
must occur on a stock exchange in the treaty country of which the
relevant company is a resident; trading on a stock exchange in another
country may not be used to satisfy the test. However, under the
proposed treaty, the primary trading test is broader, also allowing
benefits, in the case of a Hungarian company, on a recognized stock
exchange in another European Union or European Free Trade Association
country, or in the case of a U.S. company, in another North American
Free Trade Agreement country.
Why was the primary trading test set forth in the U.S. Model
treaty not used in the proposed treaty with Hungary?
A similarly broad primary trading test was included in the
recent tax protocols concluded with France and New Zealand.
Given this, is a change to the U.S. Model tax treaty warranted?
Answer. Although the U.S. Model Tax Convention serves as a starting
place for negotiations, the terms of each individual treaty must be
negotiated with the treaty partner. As a result, individual limitation
on benefits and other provisions may vary from one treaty to another in
order to take into account the specific circumstances of the treaty
partner.
The overall purpose of the limitation on benefits provisions set
forth in the U.S. Model is to provide objective tests that will
determine if a resident of one of the treaty partners has a sufficient
economic nexus to its country of residence to warrant receiving treaty
benefits. One of the objective tests provides benefits to companies
that are primarily traded on a recognized stock exchange in their
country of residence. However, in certain cases the U.S. Model rule may
not provide the appropriate scope. For instance, if the stock exchanges
in the treaty partner are limited, companies resident in that country
may seek to trade their shares on larger, third-country exchanges. This
business decision should not necessarily result in a denial of treaty
benefits. During the tax treaty negotiations, Hungary requested that
certain third-country exchanges be included in the primary trading test
in order to reflect that Hungarian companies may be traded more heavily
on larger regional exchanges outside of Hungary. By restricting
benefits to companies primarily trading on regional exchanges, the
primary trading test in the proposed treaty with Hungary maintains
strong protection against treaty-shopping, but reflects the fact that
Hungary's stock market is not a regional center.
While the primary trading test in the proposed tax treaty with
Hungary and a number of other tax treaties recently concluded by the
United States deviate from the analogous rule in the U.S. Model, this
does not mean that changes to the U.S. Model in this regard are
warranted. The policy set forth in the U.S. Model should remain the
starting point for tax treaty negotiations, and variations from the
Model should be evaluated on a case-by-case basis.
Question. Like other recent treaties, the proposed treaty with
Hungary includes derivative benefits rules that are generally intended
to allow a treaty-country company to receive treaty benefits for an
item of income if the company's owners reside in a country that is in
the same trading bloc as the treaty country and would have been
entitled to the same benefits for the income had those owners derived
the income directly. The U.S. Model treaty, however, does not include
derivative benefits rules.
Why were derivative benefits rules included in the proposed
treaty?
Given that derivative benefits rules have also been included
in other recent treaties concluded by the United States, is a
change to the U.S. Model tax treaty warranted?
Answer. Although a derivative benefits rule is not included in the
U.S. Model limitation on benefits article, such rules are typically
included in agreements with treaty partners that are part of a closely
tied regional economic community, such as the European Union or NAFTA.
In such circumstances, it is common for corporate residents of a third
country within the same economic community to invest in the United
States through a subsidiary within the treaty country with no treaty-
shopping motivation, or to form joint ventures that include
participants from many countries within a trading area. However,
because we frequently negotiate treaties with countries that are not
part of such an economic community, it would not be appropriate to
include such a provision in the U.S. Model.
Question. The proposed treaty with Hungary includes so-called
``triangular arrangements'' antiabuse rules intended to deny treaty
benefits in certain circumstances in which a Hungarian resident company
earns U.S.-source income attributable to a third-country permanent
establishment and is subject to little or no tax in the third
jurisdiction and Hungary. A rule on triangular arrangements is not
included in the U.S. Model treaty.
Why was a ``triangular arrangements'' rule included in the
proposed treaty?
Given that similar provisions have also been included in
other recent treaties concluded by the United States, is a
change to the U.S. Model tax treaty warranted?
Answer. The so-called ``triangular rule'' is intended to prevent
abuses of the tax treaty through structures that use a permanent
establishment in a third country to avoid taxes in both treaty
jurisdictions. Because the potential for such abuses is higher in tax
treaties with countries that apply an exemption system, the Treasury
Department historically sought to include triangular rules only when
the treaty partner applied an exemption system, either under its
treaties or in its domestic law. However, for the past several years
the Treasury Department has sought to include a triangular rule as a
general practice in all of its tax treaties. The Treasury Department
plans to incorporate the triangular provision into the U.S. Model in
the future.
Question. The proposed treaty with Hungary includes special rules
intended to allow treaty country benefits for a resident of a treaty
country that functions as a headquarters company and that satisfies
certain requirements intended to ensure that the headquarters company
performs substantial supervisory and administrative functions for a
group of companies. The U.S. Model treaty does not include these rules.
Why were headquarters company rules included in the proposed
treaty?
Given that similar provisions have also been included in
other recent treaties concluded by the United States, is a
change to the U.S. Model tax treaty warranted?
Answer. A headquarters company rule is only appropriate where a
treaty partner can demonstrate that failing to include such a rule
would inappropriately prevent a substantial number of companies that
have sufficient nexus with the treaty partner from obtaining
appropriate treaty benefits. Because we frequently negotiate treaties
with countries that do not have a significant number of true
headquarters companies, it would not be appropriate to include such a
provision in the U.S. Model.
In the case of Hungary, it is common in the European Union for
groups of corporations spanning several countries to centralize
management in a single headquarters company. Hungary was concerned that
certain existing Hungarian headquarters companies would fail to qualify
for benefits without such a rule. As a result, the proposed treaty with
Hungary includes a provision designed to grant treaty benefits only to
companies providing overall supervision and administration of a
multinational group, and not engaging in tax avoidance activities. The
headquarters company rule in the proposed treaty is identical to the
rule we have agreed to in certain other treaties in the past.
Question. Under the proposed treaty with Hungary, are treaty
countries required to exchange information in response to specific
requests that are comparable to ``John Doe'' summonses under U.S.
domestic law?
Answer. Hungary has been a cooperative information exchange partner
under the existing treaty relationship, and Treasury expects that this
cooperative relationship will continue under the proposed treaty. The
language in the proposed treaty with Hungary regarding the exchange of
tax information was intentionally drafted to be identical in substance
to Article 26 of the OECD Model Tax Convention, as well as the relevant
text of the OECD Model TIEA, which provides for exchange of information
in a broad range of circumstances where it is foreseeably relevant to
the administration or enforcement of either treaty partner's tax laws.
In the case of specific requests for information, the Commentary to the
OECD Model TIEA states that a request for information triggering the
obligations to exchange information does not necessarily have to
include the name of the accountholder under investigation. As part of
our negotiations with Hungary, we confirmed that Hungary concurs that
the language in the proposed treaty regarding exchange of information
was drafted to reflect the OECD standards and that therefore, that
language's interpretation should be consistent with OECD standards for
information exchange.
Question. In recent years, there has been concern that
multinational corporations are using tax treaties to avoid U.S. income
taxes. It my understanding that the Treasury Department does not
believe legislation which limits treaty benefits is necessary. Can you
explain why the Department believes that legislation is not necessary
and what actions the Department has taken to prevent tax treaties from
being exploited in an effort to avoid U.S. income taxes?
Answer. While the Treasury Department shares the concern that U.S.
tax treaties must be adequately protected from treaty shopping abuses,
it is our view that the issue should be addressed through bilateral
negotiations, not a unilateral treaty override. Overriding treaties
unilaterally would strain our existing tax treaty relationships and
would jeopardize our ability to achieve U.S. objectives in future tax
treaty negotiation and to object to treaty overrides by other
countries. Treasury has made significant progress addressing this issue
through bilateral negotiations. The proposed tax treaty with Hungary
includes a comprehensive limitation on benefits provision and
represents a major step forward in protecting the U.S. tax treaty
network from abuse. As was discussed in the Treasury Department's 2007
Report to the Congress on Earnings Stripping, Transfer Pricing and U.S.
Income Tax Treaties, the existing income tax treaty with Hungary, which
was signed in 1979, is one of three U.S. tax treaties that, as of 2007,
provided an exemption from source-country withholding on interest
payments, but contained no protections against treaty shopping. The
other two agreements in this category were the 1975 tax treaty with
Iceland and the 1974 tax treaty with Poland. The revision of these
three agreements has been a top priority for the Treasury Department's
treaty program, and we have made significant progress. In 2007, we
signed a new tax treaty with Iceland which entered into force in 2008.
Like the proposed tax treaty with Hungary, the U.S.-Iceland tax treaty
contains a comprehensive limitation on benefits provision. In addition,
the Treasury Department has recently concluded negotiation of a new
income tax treaty with Poland, which the administration hopes to sign
and transmit to the Senate for its advice and consent in the near
future. Based on these experiences, we believe that addressing concerns
about treaty shopping is best done through bilateral negotiations and
amendment of our existing tax treaties.
______
Responses of Bruce Swartz to Questions Submitted
by Senator Benjamin L. Cardin
Question. In response to a question during your June 7, 2011,
testimony concerning whether the United States would be hindered in its
acquisition of evidence in capital punishment cases due to Bermuda's
position that it may deny assistance under the ``essential interests''
or ``important public policy'' provisions of article 3 of the Bermuda
MLAT, you indicated that the United States has a track record of
resolving such issues with other MLAT partner countries that take a
similar position on capital punishment. Please describe that ``track
record'' in more detail.
Answer. Bermuda abolished the death penalty in December 1999 and,
during negotiations over the Mutual Legal Assistance Treaty, sought the
ability to deny assistance in all such cases. At the same time, the
United States sought to ensure that the treaty preserved the ability of
the United States to request and obtain assistance, on a case-by-case
basis, even where the possible sentence for one of the offenses under
investigation included the death penalty. Ultimately, no express
restriction was included in the treaty, but Bermuda advised the United
States that it intends to interpret article 3, paragraph 1a of the
treaty to give Bermuda the right to deny assistance in cases involving
capital punishment. Although the United States made clear in
negotiations its view that assistance should be possible in such cases,
the United States indicated to Bermuda that it understood Bermuda's
intention.
The provision of the treaty that is in question is a standard
clause found in most mutual legal assistance treaties and states the
following: ``The Central Authority of the Requested Party may deny
assistance if . . . the Requested Party is of the opinion that the
request, if granted, would impair its sovereignty, security, or other
essential interests or would be contrary to important public policy.''
Prior to denying assistance in a specific case upon these grounds,
Bermuda first must consult with the United States, as required by
article 3, paragraph 2, of the treaty. As a result of such
consultations, the United States is hopeful that it still will be
possible to obtain all necessary and relevant assistance from Bermudan
authorities.
The death penalty issue is not unique to Bermuda. A number of
countries in Europe and other parts of the world have raised similar
concerns about providing mutual legal assistance to the United States
in cases potentially involving the death penalty. In fact, the issue
specifically arose during the negotiation of the mutual legal
assistance treaty with Australia. At the time of signing, Australia and
the United States exchanged diplomatic notes setting forth the
understanding of the parties that the term ``essential interests'' in
article 3 of the Australia treaty would be interpreted to include
certain limitations on assistance set forth in Australian domestic law,
which includes a discretionary limitation on providing assistance in
death penalty cases. See Treaty with Australia on Mutual Assistance in
Criminal Matters (1997), S. Treaty Doc. 105-27, at p. VI.
If a foreign authority raises a concern about the possibility of
the death penalty when responding to a request for mutual legal
assistance, the United States engages in consultations with the foreign
authority in an attempt to resolve that concern and obtain all
necessary and relevant assistance in aid of the United States
investigation. For example, foreign authorities may agree that it is
premature to deny a request on death penalty grounds in the early
stages of an investigation simply because the investigation's initial
scope potentially includes offenses carrying the death penalty. In
addition, in some cases, as part of the consultation process, foreign
authorities have been willing to provide the United States a
``preview'' of the requested evidence so that a determination can be
made as to its true relevance and value to the United States
investigation. If the evidence is determined to have little or no value
to the United States investigation, the matter simply is closed. On the
other hand, if the evidence is determined to have substantial value or
the foreign authority will not provide a preview of the evidence to
make this determination, the United States will discuss the possibility
of accepting the evidence under negotiated conditions. In general,
these conditions have included assurances (1) not to introduce the
evidence in the actual penalty phase of a death penalty case; (2) to
use the requested information only for investigatory purposes, with the
understanding that it will not be introduced as evidence in any legal
proceeding; or (3) not to impose the death penalty (or, if it is
imposed, not to carry it out) in the particular case at issue. The
third category of conditions has been undertaken very rarely and, to
our knowledge, only in cases in which it was unlikely that the death
penalty would have been sought in any event. In a small number of
cases, it has not been possible to negotiate conditions acceptable both
to the United States and to the foreign authority, with the result that
the United States was unable to obtain the requested assistance.
However, in most cases the United States has been successful in
resolving any concerns about the death penalty and obtaining the
requested assistance in the manner described above. Based upon this
track record, the United States is hopeful that it will be possible to
request and obtain assistance under the mutual legal assistance treaty
with Bermuda on a case-by-case basis, even where the possible sentence
for one of the offenses under investigation includes the death penalty.