[Senate Executive Report 113-6]
[From the U.S. Government Publishing Office]
113th Congress Exec. Rept.
SENATE
2nd Session 113-6
======================================================================
PROTOCOL AMENDING TAX CONVENTION WITH LUXEMBOURG
_______
April 29, 2014.--Ordered to be printed
_______
Mr. Menendez, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 111-8]
The Committee on Foreign Relations, to which was referred
the Protocol Amending the Convention between the Government of
the United States of America and the Government of the Grand
Duchy of Luxembourg for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on
Income and Capital, signed on May 20, 2009 at Luxembourg and a
related agreement effected by the exchange of notes also signed
on May 20, 2009 (the ``Protocol'') (Treaty Doc. 111-8), 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..........................................................1
II. Background.......................................................2
III. Major Provisions.................................................2
IV. Entry Into Force.................................................2
V. Implementing Legislation.........................................3
VI. Committee Action.................................................3
VII. Committee Comments...............................................3
VIII.Text of Resolution of Advice and Consent to Ratification.........4
IX. Annex 1.--Technical Explanation..................................5
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 Luxembourg, and to bring the
existing treaty with Luxembourg into conformity with current
U.S. tax treaty policy. Principally, the Protocol would amend
the existing tax treaty with Luxembourg (the ``Treaty'') in
order to bring the exchange of tax information provisions into
conformity with current U.S. tax policy.
II. Background
The United States has a tax treaty with Luxembourg that is
currently in force, which was concluded in 1996. The Protocol
was negotiated to modernize our relationship with Luxembourg in
this area and to update the 1996 treaty to better reflect
current U.S. and Luxembourg 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 1 of this report. In addition, the staff of the Joint
Committee on Taxation prepared an analysis of the Protocol,
JCX-30-11 (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 intended to bring the existing Luxembourg
treaty into conformity with current U.S. tax treaty policy
regarding exchange of information. Through amendments to
Article 28 of the Luxembourg Convention, the Protocol replaces
the existing Convention's tax information exchange provisions
with updated rules that are consistent with current U.S. tax
treaty practice. See U.S. Model Income Tax Convention Article
26. The protocol allows the tax authorities of each country to
exchange information relevant to carrying out the provisions of
the Convention or the domestic tax laws of either country,
including information that would otherwise be protected by the
bank secrecy laws of either country.
It also enables the United States to obtain information
(including from financial institutions) from Luxembourg whether
or not Luxembourg needs the information for its own tax
purposes, including information that would otherwise be
protected by the bank secrecy laws of either country. The
proposed related agreement sets forth understandings between
the parties regarding the updated provisions on tax information
exchange, including that: (1) the United States and Luxembourg
will ensure that their competent authorities have the authority
to obtain and provide upon request information held by
financial institutions and information regarding ownership of
certain entities; and (2) information shall be exchanged
without regard to whether the conduct being investigated would
be a crime under the laws of the requested State.
IV. Entry Into Force
The proposed Protocol will enter into force between the
United States and Luxembourg 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 II 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
February 26, 2014. Testimony was received from Robert Stack,
Deputy Assistant Secretary (International Tax Affairs) at the
U.S. Department of the Treasury, Thomas Barthold, Chief of
Staff of the Joint Committee on Taxation, William Reinsch,
President of the National Foreign Trade Council, Paul Nolan,
Vice President, Tax for McCormick & Company, Inc., and Nancy
McLernon, President & CEO of the Organization for International
Investment. A transcript of the hearing is included in Annex 2
of Executive Report 113-??.
On April 1, 2014, 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 Luxembourg. 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. EXCHANGE OF INFORMATION
The Protocol would replace the existing Convention'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
Convention 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 Luxembourg whether or not Luxembourg needs
the information for its own tax purposes.
The committee takes note of Paragraph 3 of the Exchange of
Notes, which sets forth information that should be provided to
the requested State by the requesting State when making a
request for information. 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 Luxembourg in order not to frustrate effective
exchange of information. In particular, the committee
understands that with respect to the requirement set forth in
subparagraph 3(a) of the Exchange of Notes that a request must
include the identity of the person under examination or
investigation, the requesting state is not required in all
instances to provide the name of the person, but will be
permitted to provide other information sufficient to identify
the person.
B. 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.
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 Government of the
United States of America and the Government of the Grand Duchy
of Luxembourg for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital, signed at Luxembourg May 20, 2009, with a related
agreement effected by exchange of notes May 20, 2009 (the
``Protocol'') (Treaty Doc. 111-8), 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 Convention is self-executing.
IX. Annex 1.--Technical Explanation
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL SIGNED
AT LUXEMBOURG ON MAY 20, 2010 AMENDING THE CONVENTION BETWEEN THE
GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE
GRAND DUCHY OF LUXEMBOURG FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON
CAPITAL, SIGNED AT LUXEMBOURG ON APRIL 3, 1996
This is a Technical Explanation of the Protocol signed at
Luxembourg on May 20, 2010 (the ``Protocol''), and the related
Exchange of Notes (``Exchange of Notes'') amending the
Convention between the Government of the United States of
America and the Government of the Grand Duchy of Luxembourg for
the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income, signed at Luxembourg
on April 3, 1996 (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 Organization 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.
References to the existing Convention are intended to put
various provisions of the Protocol into context. This 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. This
Technical Explanation is not intended to provide a complete
guide to the Convention as amended by the Protocol and Exchange
of Notes. To the extent that the Convention has not been
amended by the Protocol and Exchange of Notes, the technical
explanation of the Convention 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.''
ARTICLE I
Article I of the Protocol replaces Article 28 (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 28
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 is foreseeably
relevant for carrying out the provisions of the Convention or
the domestic laws of the United States or Luxembourg concerning
taxes of every kind applied at the national level, to the
extent that the taxation thereunder is not contrary to the
Convention. This language incorporates the standard of the OECD
Model, which is intended to provide for exchange of information
in tax matters to the widest possible extent and, at the same
time, to clarify that Contracting States are not at liberty to
engage in ``fishing expeditions'' or to request information
that is unlikely to be relevant to the tax affairs of a given
taxpayer.
This standard is to be interpreted consistently with 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
admissibility.'' (emphasis in original). However, the standard
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 tax law is authorized to the extent that taxation
under domestic tax 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
Contracting 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.
The taxes covered for purposes of this Article constitute a
broader category of taxes than those referred to in Article 2
(Taxes Covered). Exchange of information is authorized with
respect to taxes of every kind imposed by a Contracting State
at the national level. Accordingly, information may be
exchanged with respect to U.S. estate and gift taxes, excise
taxes or, with respect to Luxembourg, value added taxes.
Information exchange is not restricted by 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 Luxembourg,
which 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 Luxembourg,
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 Luxembourg with respect to that person's
account, even though that person is not the taxpayer under
examination.
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 3 of the Exchange of Notes lists the information
that should be provided to the requested State by the
requesting State when making a request for information under
Article 28 to demonstrate the foreseeable relevance of the
information. While this paragraph contains important procedural
requirements that are intended to ensure that ``fishing
expeditions'' do not occur, the provisions of this paragraph
must be interpreted liberally in order not to frustrate
effective exchange of information.
Subparagraph 3)a) of the Exchange of Notes provides that a
request must include the identity of the person under
examination or investigation. In a typical case, the identity
of the person under examination or investigation would include
a name, and to the extent known, an address, account number, or
similar identifying information. There can, however, 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. For example,
this requirement may be satisfied by supplying an account
number or similar identifying information.
Subparagraph 3)b) of the Exchange of Notes 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. Subparagraph 3)c) of the Exchange of Notes
provides that a request for information must contain a
statement of the tax purpose for which the information is
sought. Subparagraph 3)d) of the Exchange of Notes provides
that a request must also include the grounds for believing that
the information requested is held in the requested State or is
in the possession or control of a person within the
jurisdiction of the requested State. Subparagraph 3)e) of the
Exchange of Notes provides that, to the extent known, the name
and address of any person believed to be in possession of the
requested information must also be provided. Subparagraph 3)f)
provides that a requesting State must also provide a statement
that the request is in conformity with the laws of the
requesting State, that if the requested information was within
the jurisdiction of the requesting State it would be able to
obtain the information, and that it is in conformity with the
Convention. Subparagraph 3)g) of the Exchange of notes provides
that the requesting State has pursued all means available in
its own territory to obtain the information except those that
would give rise to disproportionate difficulties.
Paragraph 2 of Article 28
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 appeals in relation to, the taxes referred to
in paragraph 1. 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.
Paragraph 3 of Article 28
New paragraph 3 provides that the obligations undertaken in
paragraph 1 and 2 to exchange information do not require a
Contracting State to carry out administrative measures that are
at variance with the laws and administrative practice of either
State. Nor is a Contracting State required to supply
information not obtainable under the laws or in the normal
course of the administratiion 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 28
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 new paragraph 4, 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 1 of the Exchange of Notes also provides that the
requested State shall exchange such information regardless of
whether the conduct being investigated would constitute a crime
under the laws of the requested State if it had occurred in the
territory of the requested State.
Paragraph 5 of Article 28
New paragraph 5 provides that a Contracting State may not
decline to provide information solely 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 2)a) of the Exchange of Notes provides that each
Contracting State shall ensure that its competent authority has
the authority to obtain and exchange upon request information
held by financial institutions, nominees, or persons acting in
an agency or fiduciary capacity, including nominees and
trustees. Paragraph 2)b) of the Exchange of Notes provides that
each Contracting State shall also ensure that its competent
authority has the authority to obtain and provide upon request
information regarding the ownership of companies, partnerships,
trusts, foundations, and other persons, including information
regarding settlers, trustees, and beneficiaries. A Contracting
State is not obligated to provide information that is neither
held by its authorities (which for this purpose includes
government agencies, political subdivisions and local
authorities) nor in the possession or control of persons who
are within it territorial jurisdiction, nor is it obligated to
provide ownership information with respect to publicly traded
companies or public collective investment funds or schemes
unless such information can be obtained without giving rise to
disproportionate difficulties.
Paragraph 6 of Article 28
New paragraph 6 provides that the requesting State may
specify the form in which information is to be provided (e.g.,
depositions of witnesses and authenticated copies of original
documents). 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.
Paragraph 7 of Article 28
New paragraph 7 provides for assistance in collection of
taxes to the extent necessary to ensure that treaty benefits
are enjoyed only by persons entitled to those benefits under
the terms of the Convention. Under paragraph 7, a Contracting
State will endeavor to collect on behalf of the other State
only those amounts necessary to ensure that any exemption or
reduced rate of tax at source granted under the Convention by
that other State is not enjoyed by persons not entitled to
those benefits. For example, if the payer of a U.S.-source
portfolio dividend receives a Form W-8BEN or other appropriate
documentation from the payee, the withholding agent is
permitted to withhold at the portfolio dividend rate of 15
percent. If, however, the addressee is merely acting as a
nominee on behalf of a third country resident, paragraph 7
would obligate Luxembourg to withhold and remit to the United
States the additional tax that should have been collected by
the U.S. withholding agent.
This paragraph also makes clear that the Contracting State
asked to collect the tax is not obligated, in the process of
providing collection assistance, to carry out administrative
measures that would be contrary to its sovereignty, security or
public policy.
Treaty effective dates and termination in relation to exchange of
information
Article II of the Protocol sets forth rules governing the
effective dates of the provisions of Article I of the Protocol.
Once the Protocol is in force, the competent authority may seek
information under the Convention, as amended by the Protocol,
with respect to a year beginning on or after January 1, 2009.
With respect to earlier years, the provisions of Article 28 of
the Convention prior to amendment by the Protocol and Exchange
of Notes shall apply.
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 II
Article II of the Protocol contains the rules for bringing
the Protocol into force and giving effect to its provisions.
Paragraph 1
Paragraph 1 provides that the Protocol is subject to
ratification in accordance with the applicable procedures of
the United States and Luxembourg. Further, the Contracting
Stats shall notify each other by written notification, through
diplomatic channels, when their respective applicable
procedures have been satisfied. In the United States, the
process leading to ratification and entry into force is as
follows: Once a protocol or treaty has been signed by
authorized representatives of the two Contracting States, the
Department of State sends the protocol or 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 of the Senate Committee on Foreign Relations to hold
hearings on the protocol or 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 Protocol will enter into
force on the date of the later of the notifications referred to
in paragraph 1. Once the Protocol is in force, the competent
authority may seek information under Article 26 as amended by
the Protocol with respect to a year beginning on or after
January 1, 2009.