[Senate Executive Report 116-2]
[From the U.S. Government Publishing Office]
116th Congress } { Exec. Rept.
SENATE
1st Session } { 116-2
======================================================================
PROTOCOL AMENDING TAX CONVENTION
WITH SWITZERLAND
_______
July 10, 2019.--Ordered to be printed
_______
Mr. Risch, 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, and 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 and conditions
related to reporting on mandatory arbitration, 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.................................................3
V. Implementing Legislation.........................................3
VI. Committee Action.................................................3
VII. Committee Comments...............................................4
VIII.Text of Resolution of Advice and Consent to Ratification.........8
IX. Annex 1.--Technical Explanation.................................11
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 1. 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 that the tax authorities of the
two countries shall exchange information relevant to carrying
out the provisions of the Convention or the domestic tax laws
of either country. This broadens the Treaty's existing
information sharing provisions, which provides for information
sharing only where necessary for the prevention of income tax
fraud or similar activities but in a manner consistent with
long-standing U.S. tax laws. 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 has held three public hearings on the
Protocol. The transcript for the committee hearing held in the
112th Congress on June 7, 2011, can be found in Annex 2, pages
19-66 of Exec. Rept. 112-1. The committee heard testimony from
Manal Corwin, Deputy Assistant Secretary, International Tax
Affairs, Department of the Treasury, Washington, D.C. and
Thomas A. Barthold, Chief of Staff, Joint Committee on
Taxation, Washington, D.C.
The transcript for the committee hearing held in the 113th
Congress on February 26, 2014 can be found in Annex 2, pages
21-95, in Exec. Rept. 113-7. The committee heard testimony from
Thomas A. Barthold, Chief of Staff, Joint Committee on
Taxation; Robert B. Stack, Deputy Assistant Secretary for
International Tax Affairs, Department of the Treasury; William
A. Reinsch, President, National Foreign Trade Council,
Washington, D.C.; Paul Nolan, Vice President, Tax, McCormick
and Company, Inc., Sparks, MD; and Nancy McLernon, President
and CEO, Organization for International Investment, Washington,
D.C.
The transcript for the committee hearing held in the 114th
Congress on October 29, 2015 can be found in Annex 2, pages 23-
69, in Exec. Rept. 114 1. The committee heard testimony from
Robert B. Stack, Deputy Assistant Secretary for International
Tax Affairs at the Department of the Treasury, Washington,
D.C., and from Thomas A. Barthold, Chief of Staff, Joint
Committee on Taxation, Washington, D.C.
In addition, in the 116th Congress, the committee hosted a
staff briefing from Department of the Treasury and Department
of State officials with Senate Foreign Relations, Finance and
Joint Tax Committee staff on June 11, 2019.
The committee has considered the Protocol and reported it
favorably in three prior congresses; in the 112th Congress on
July 26, 2011; in the 113th Congress on April 1, 2014; and in
the 114th Congress on November 10, 2015. On June 25, 2019, the
committee considered the Protocol and ordered it favorably
reported, 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 cooperation 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, France,
Spain and Japan. It includes the modifications that 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
All tax treaties provide a process for the exchange of
information between the two Competent Authorities who have the
responsibility of enforcing national tax laws. If issues arise
regarding a taxpayer failing to pay owed taxes that may be
subject to taxation, the Competent Authority may formally
request information and assistance from the other Competent
Authority.
The Internal Revenue Services, designated the U.S.
Competent Authority, must under the IRS Manual, exhaust all
reasonable attempts to secure the information regarding the
taxpayer's accounts before making an exchange of information
request of the foreign competent authority. The Joint Committee
on Taxation publishes an annual report with the total number of
tax treaty disclosures. The latest report, dated June 5, 2015,
indicated 2557 disclosures of tax-payer specific returns or
return information made to a foreign competent authority under
either a tax treaty or a tax information exchange agreement in
the previous calendar year.
The committee notes that an exchange of information
undertaken pursuant to a tax treaty is a tightly controlled
process. U.S. government officials engaging in an exchange of
information with a foreign Competent Authority are required to
safeguard U.S. taxpayer information under the taxpayer
confidentiality provisions of 26 U.S.C. 6103. The U.S.
``Competent Authority'' is authorized to decline an information
request from a foreign government if the U.S. official has
reason to believe the information will be disclosed in an
unauthorized manner, misused for purposes other than legitimate
tax collection, or otherwise used or disclosed for a purpose
other than the legitimate enforcement of tax laws. The U.S.
Competent Authority has declined requests to engage in
information exchange when the Competent Authority had reason to
believe the information would be used inappropriately or
disclosed in an unauthorized manner.
Furthermore, the committee notes that U.S. taxpayers are
further protected under the IRS Manual and long-standing tax
treaty practice by the fact that a foreign Competent Authority
is obligated to exhaust all reasonable efforts to secure the
information and must present a credible case for the need for
the information before a treaty request will be honored by the
U.S. Government.
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.
With respect to the issue of exchange of information under
the treaty, the committee notes that the new standard under the
Protocol for when Treasury can seek information in a tax
inquiry under the exchange of information provisions in the
treaty is in fact the existing standard under the U.S. tax law
that has been in effect since 1954. The relevant federal
statute (26 U.S.C. Sec. 7602(a)(1)) authorizes the IRS, for the
purpose of examining a tax return or determining a person's tax
liability, ``to examine any books, papers, records, or other
data which may be relevant or material to such inquiry.''
This ``may be relevant'' standard has been repeatedly
upheld by the U.S. Supreme Court. See e.g., United States v.
Arthur Young & Co., 465 U.S. 805 (1984). A version of this
standard has been part of the model U.S. Tax Treaty since 1996,
and prior versions of the U.S. Model Tax Treaty were
consistently interpreted as establishing the same standard.
Since 1999, the Senate has approved at least fourteen other tax
treaties specifically providing for the exchange of information
that is or may be relevant for carrying out the treaty or the
domestic tax laws of the parties.
The existing U.S.-Swiss tax treaty (which is proposed to be
amended) is the only treaty that requires an establishment of
tax fraud before Switzerland would hand over any information on
U.S. accountholders with Swiss bank accounts. No other U.S. tax
treaty uses this standard.
The committee further notes that the exchange of
information provisions under tax treaties only permit the
exchange of information that is foreseeably relevant to the
collection of taxes. The treaties do not permit what has been
mistakenly characterized as ``bulk collection of the private
financial information of all U.S. citizens living abroad.'' The
type of information that would be covered under the information
exchange standard has been described by the Supreme Court in
the domestic context as ``critical to the investigative and
enforcement functions of the IRS.'' See United States v.
Powell, 379 U.S. 48 (1964).
The proposed threshold under the U.S.-Switzerland Protocol
would apply the same statutory standard to U.S. citizens with
bank accounts abroad as already applies to U.S. citizens with
bank accounts in the United States.
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 which may
be relevant to the enforcement of the tax laws and 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. CONDITIONS RELATED TO REPORTING ON
MANDATORY ARBITRATION
The committee has included conditions in the recommended
resolution of advice and consent. These types of conditions
have been included in prior resolutions of advice and consent
for tax treaties that provide for mandatory arbitration.
Specifically, not later than two years after the Protocol
enters into force and prior to the first arbitration conducted
pursuant to the binding arbitration mechanism provided for in
the Protocol, the Secretary of the Treasury is required to
transmit to the Committees on Finance and Foreign Relations of
the Senate and the Joint Committee on Taxation the text of the
rules of procedure applicable to arbitration panels, including
conflict of interest rules to be applied to members of the
arbitration panel.
In addition, not later than 60 days after a determination
has been reached by an arbitration panel in the tenth
arbitration proceeding conducted pursuant to the Protocol or
any similar treaties specifically identified, the Secretary of
the Treasury must submit to the Joint Committee on Taxation and
the Committee on Finance of the Senate a detailed report
regarding the operation and application of the arbitration
mechanism contained in the Protocol and such treaties. The
Secretary of the Treasury is further required to submit this
type of report on March 1 of the year following the year in
which the first report is submitted, and on an annual basis
thereafter for a period of five years. Finally, the section
clarifies that these reporting requirements supersede the
reporting requirements contained in paragraphs (2) and (3) of
section 3 of the resolution of advice and consent to
ratification of the 2009 France Protocol, approved by the
Senate on December 3, 2009.
E. 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
October 2, 1996, signed September 23, 2009, at Washington, with
a related agreement effected by an exchange of notes September
23, 2009, as corrected by an exchange of notes effected
November 16, 2010 (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.
SECTION 3. CONDITIONS
The advice and consent of the Senate under section 1 is
subject to the following conditions:
(1) Not later than 2 years after the Protocol enters
into force and prior to the first arbitration conducted
pursuant to the binding arbitration mechanism provided
for in the Protocol, the Secretary of the Treasury
shall transmit to the Committees on Finance and Foreign
Relations of the Senate and the Joint Committee on
Taxation the text of the rules of procedure applicable
to arbitration panels, including conflict of interest
rules to be applied to members of the arbitration
panel.
(2)(A) Not later than 60 days after a determination
has been reached by an arbitration panel in the tenth
arbitration proceeding conducted pursuant to the
Protocol or any of the treaties described in
subparagraph (B), the Secretary of the Treasury shall
prepare and submit to the Joint Committee on Taxation
and the Committee on Finance of the Senate, subject to
laws relating to taxpayer confidentiality, a detailed
report regarding the operation and application of the
arbitration mechanism contained in the Protocol and
such treaties. The report shall include the following
information:
(i) For the Protocol and each such treaty,
the aggregate number of cases pending on the
respective dates of entry into force of the
Protocol and each treaty, including the
following information:
(I) The number of such cases by
treaty article or articles at issue.
(II) The number of such cases that
have been resolved by the competent
authorities through a mutual agreement
as of the date of the report.
(III) The number of such cases for
which arbitration proceedings have
commenced as of the date of the report.
(ii) A list of every case presented to the
competent authorities after the entry into
force of the Protocol and each such treaty,
including the following information regarding
each case:
(I) The commencement date of the case
for purposes of determining when
arbitration is available.
(II) Whether the adjustment
triggering the case, if any, was made
by the United States or the relevant
treaty partner.
(III) Which treaty the case relates
to.
(IV) The treaty article or articles
at issue in the case.
(V) The date the case was resolved by
the competent authorities through a
mutual agreement, if so resolved.
(VI) The date on which an arbitration
proceeding commenced, if an arbitration
proceeding commenced.
(VII) The date on which a
determination was reached by the
arbitration panel, if a determination
was reached, and an indication as to
whether the panel found in favor of the
United States or the relevant treaty
partner.
(iii) With respect to each dispute submitted
to arbitration and for which a determination
was reached by the arbitration panel pursuant
to the Protocol or any such treaty, the
following information:
(I) In the case of a dispute
submitted under the Protocol, an
indication as to whether the presenter
of the case to the competent authority
of a Contracting State submitted a
Position Paper for consideration by the
arbitration panel.
(II) An indication as to whether the
determination of the arbitration panel
was accepted by each concerned person.
(III) The amount of income, expense,
or taxation at issue in the case as
determined by reference to the filings
that were sufficient to set the
commencement date of the case for
purposes of determining when
arbitration is available.
(IV) The proposed resolutions
(income, expense, or taxation)
submitted by each competent authority
to the arbitration panel.
(B) The treaties referred to in subparagraph (A)
are--
(i) the 2006 Protocol Amending the Convention
between the United States of America and the
Federal Republic of Germany for the Avoidance
of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and
Capital and to Certain Other Taxes, done at
Berlin June 1, 2006 (Treaty Doc. 109-20) (the
``2006 German Protocol'');
(ii) the Convention between the Government of
the United States of America and the Government
of the Kingdom of Belgium for the Avoidance of
Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, and
accompanying protocol, done at Brussels July 9,
1970 (the ``Belgium Convention'') (Treaty Doc.
110-3);
(iii) the Protocol Amending the Convention
between the United States of America and Canada
with Respect to Taxes on Income and on Capital,
signed at Washington September 26, 1980 (the
``2007 Canada Protocol'') (Treaty Doc. 110-15);
or
(iv) the Protocol Amending the Convention
between the Government of the United States of
America and the Government of the French
Republic for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and Capital, signed
at Paris August 31, 1994 (the ``2009 France
Protocol'') (Treaty Doc. 111-4).
(3) The Secretary of the Treasury shall prepare and
submit the detailed report required under paragraph (2)
on March 1 of the year following the year in which the
first report is submitted to the Joint Committee on
Taxation and the Committee on Finance of the Senate,
and on an annual basis thereafter for a period of five
years. In each such report, disputes that were
resolved, either by a mutual agreement between the
relevant competent authorities or by a determination of
an arbitration panel, and noted as such in prior
reports may be omitted.
(4) The reporting requirements referred to in
paragraphs (2) and (3) supersede the reporting
requirements contained in paragraphs (2) and (3) of
section 3 of the resolution of advice and consent to
ratification of the 2009 France Protocol, approved by
the Senate on December 3, 2009.
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.
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