[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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \6\Article XV of the U.S.-Sweden Double Tax Convention, signed on 
March 23, 1939.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.