[Senate Executive Report 116-3]
[From the U.S. Government Publishing Office]
116th Congress } { Exec. Rept.
SENATE
1st Session } { 116-3
======================================================================
PROTOCOL AMENDING THE
TAX CONVENTION WITH JAPAN
_______
July 10, 2019.--Ordered to be printed
_______
Mr. Risch, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 114-1]
The Committee on Foreign Relations, to which was referred
the Protocol Amending the Convention between the United States
of America and the Government of Japan for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and a related agreement entered into
by an exchange of notes (together with the ``proposed
Protocol''), both signed on January 24, 2013, at Washington,
together with correcting notes exchanged March 9 and March 29,
2013 (Treaty Doc. 114-1), having considered the same, reports
favorably thereon with a declaration and conditions, 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...............................................3
VIII.Text of Resolution of Advice and Consent to Ratification.........5
IX. Annex 1.--Technical Explanation..................................8
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 Japan. Many of the provisions in
the proposed Protocol are intended to bring the existing
Convention in closer conformity with the 2006 U.S. Model,
accounting for particular aspects of Japanese law and its
interaction with U.S. laws. The proposed Protocol provides an
exemption from source-country withholding tax on all cross-
border payments of interest largely in conformity with theU.S.
Model Treaty and expands the category of cross-border dividends
that are eligible for an exemption from source-country
withholding, including modifying the ownership requirement for
exemption. The proposed Protocol would amend provisions of the
existing Convention governing the taxation of capital gains to
allow for taxation of gains from the sale of real property and
real property interests by the State where such property is
located in conformity with the Foreign Investment in Real
Property Tax Act. The proposed Protocol also incorporates into
the existing Convention provisions that allow the revenue
authorities of a Convention party to request assistance on
revenue collection from the other party.
The Protocol contains provisions to ensure the exchange of
information between tax authorities in both countries,
consistent with both the U.S. Model, international standards,
and U.S. law.
II. Background
The United States has a tax treaty with Japan that is
currently in force, which was concluded in 2003 (Convention
between the Government of The United States Of America and the
Government of Japan for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with respect to Taxes on
Income, signed at Washington D.C. on 6 November, 2003). The
proposed Protocol was negotiated to bring U.S.-Japan tax treaty
relations into closer conformity with each country's current
tax treaty policies. For example, the proposed Protocol also
includes updated exchange of information articles and a
mandatory binding arbitration provision to resolve disputes
between the revenue authorities of the United States and Japan.
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 April 13, 2015, which is included
at Annex 1 to this report. In addition, the staff of the Joint
Committee on Taxation prepared an analysis of the Protocol,
JCX-136-15 (October 29, 2015), 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.
ASSISTANCE IN COLLECTION OF TAXES
The proposed Protocol incorporates into the existing
Convention provisions that enable a party's revenue authority
to make a limited number of requests for assistance of the
other party's revenue authority in the collection of taxes,
related costs, interest, and penalties. Requests for assistance
are also limited by certain conditions depending on whether the
revenue claim is against a company or an individual.
EXCHANGE OF INFORMATION
Consistent with the U.S. Model and international standards,
the proposed Protocol provides authority for the two countries
to exchange tax information that is foreseeably relevant to
carrying out the provisions of the existing Convention as
amended by the proposed Protocol. The proposed Protocol allows
the United States to obtain information (including from
financial institutions) from Japan regardless of whether Japan
needs the information for its own tax purposes.
MANDATORY ARBITRATION
The Protocol incorporates mandatory, binding arbitration
for certain cases where the competent authorities of the United
States and Japan have been unable to resolve after a reasonable
period of time. A mandatory and binding arbitration procedure
was not included in the 2006 U.S. Model treaty, but has
recently been included in the U.S. income tax treaties with
Belgium, Canada, Germany, France, Switzerland, and Spain.
IV. ENTRY INTO FORCE
The proposed Protocol shall enter into force upon exchange
of instruments of ratification. The proposed Protocol will have
effect, with respect to taxes withheld at source, for amounts
paid or credited on or after the first day of the third month
next following the date of entry into force of the proposed
Protocol, and with respect to other taxes, for taxable years
beginning on or after the first day of January next following
the date of entry into force of the proposed Protocol. Special
rules apply for the entry into force of the mandatory binding
arbitration provisions.
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 Protocol in the
114th Congress. 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. The committee
considered the Protocol and reported it favorably in the 114th
Congress on November 10, 2015.
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. 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, reduce
tax evasion, and promote closer co-operation between the United
States and Japan. 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. INFORMATION EXCHANGE
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 provision
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. It would
also enable the United States to obtain information (including
from financial institutions) from Japan whether or not Japan
needs the information for its own tax purposes.
After careful examination of this Protocol, as well as
witness testimony and responses to questions for the record
(from the hearing held on October 29, 2015, as referenced in
part ``VI Committee Action'' of this report), the committee
believes that the exchange of information provisions will
substantially aid in the full and fair enforcement of United
States tax laws. According to witness testimony, the
``foreseeably relevant'' standard used in the Protocol does not
represent a lower threshold than the standard found in earlier
U.S. tax treaties. Witnesses also testified that the
``foreseeably relevant'' standard has been extensively defined
in internationally agreed guidance. The committee is also of
the view that the Protocol provides adequate provisions to
ensure that any information exchanged pursuant to the
Convention is treated confidentially. In particular, the
Committee notes the provisions under new Article 26 as proposed
by the Protocol, that re quire information received under an
information request by a Party be treated as secret and
disclosed only to persons or authorities involved in the
administration and enforcement of the tax laws and be used only
for such purposes. In sum, the committee believes these
provisions on information exchange are important to the
administration of U.S. tax laws and the Protocol provides
adequate protection against the misuse of information exchanged
pursuant to the Convention.
B. DECLARATION ON THE SELF-EXECUTING NATURE
OF THE CONVENTION
The committee has included one declaration in the
recommended resolution of advice and consent. The declaration
states that the Convention 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 United States of
America and the Government of Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and a related agreement entered into by an
exchange of notes, both signed at Washington on January 24,
2013, as corrected by an exchange of notes on March 9 and 29,
2013 (the ``Protocol'') (Treaty Doc. 114-1), subject to the
declaration of section 2 and the conditions of section 3.
SECTION 2. DECLARATION
The advice and consent of the Senate under section 1 is
subject to the following declaration:
The Convention 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 In come 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 July9,
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 JANUARY 14, 2013 AMENDING THE CONVENTION BETWEEN THE
GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF JAPAN
FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL
EVASION WITH RESPECT TO TAXES ON INCOME AND THE PROTOCOL, WHICH FORMS
AN INTEGRAL PART OF THE CONVENTION, SIGNED AT WASHINGTON ON NOVEMBER 6,
2003
This is a Technical Explanation of the Protocol signed at
Washington on January 24, 2013, and the related Exchange of
Notes (hereinafter the ``Protocol'' and ``Exchange of Notes''
respectively), amending the Convention between the Government
of the United States of America and the Government of Japan for
the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income, signed at Washington
on November 6, 2003 (hereinafter the ``existing Convention''),
the Protocol, which forms an integral part of the existing
Convention, signed at Washington on November 6, 2003
(hereinafter the ``Protocol of 2003''), and the agreement
effectuated by an Exchange of Notes on November 6, 2003
(hereinafter the ``Notes of 2003). The existing Convention, as
amended by the Protocol of 2003 and the Protocol, is referred
to as ``the 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 existing Convention and the
Protocol of 2003 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.2
ARTICLE I
Article I of the Protocol revises paragraph 5 of Article 1
of the existing Convention by deleting references to Article 20
of the existing Convention, which has been deleted by Article
VII of the Protocol.
ARTICLE II
Article II of the Protocol replaces paragraph 4 of Article
4 of the existing Convention. Revised paragraph 4 provides that
if by reason of paragraph 1, a person other than an individual
is a resident of both Contracting States, such dual resident
may not claim any benefit accorded to residents of a
Contracting State by the Convention. The person may, however,
claim any benefits that are not limited to residents, such as
those provided by paragraph 1 of Article 24. Thus, for example,
pursuant to Article 24, a State cannot impose discriminatory
taxation on a dual resident company.Regardless of the outcome
under this paragraph, a dual resident company also may be
treated as a resident of a Contracting State for purposes other
than that of obtaining benefits under the Convention. For
example, if a dual resident company pays a dividend to a
resident of Japan, the U.S. paying agent would withhold on that
dividend at the appropriate treaty rate (assuming the payee is
otherwise entitled to treaty benefits) because reduced
withholding is a benefit enjoyed by the resident of Japan, not
by the dual resident company. The dual resident company that
paid the dividend would, for this purpose, be treated as a
resident of the United States under the Convention. In
addition, information relating to dual resident companies can
be exchanged under the Convention because, by its terms,
Article 26 is not limited to residents of the Contracting
States.
ARTICLE III
Article III of the Protocol amends Article 10 of the
existing Convention. Article 10 sets forth rules for taxation
of cross-border dividend payments.
Paragraph 1
Paragraph 1 makes two amendments to subparagraph 3(a) of
Article 10 of the existing Convention, which sets forth the
ownership and holding period requirements that companies must
satisfy in order to qualify for an exemption from withholding
on certain dividends. Pursuant to the existing Convention, in
order to qualify for the exemption from dividend withholding,
the company receiving the dividend is required to own, directly
or indirectly through one or more residents of either
Contracting State, more than 50 percent of the voting stock of
the company paying the dividends for the period of twelve
months ending on the date on which entitlement to the dividend
is determined (additional requirements also apply, such as
beneficial ownership and qualification of certain limitation on
benefits provisions). Paragraph 1 replaces ``more than 50
percent'' with ``at least 50 percent.'' Accordingly, a company
receiving a dividend and owning directly or indirectly through
residents of either Contracting State, 50 percent or more of
the company paying the dividend would become eligible for the
exemption from withholding at source, assuming that all other
requirements have been satisfied.In addition to modifying the
required ownership threshold for entitlement to the exemption
from dividend withholding, paragraph 1 of Article III also
shortens the twelve-month holding period requirement to six
months.
Paragraph 2
Paragraph 2 of Article III amends paragraph 9 of Article 10
of the existing Convention. The amendments delete references to
paragraph 2 of Article 13 of the existing Convention to conform
to changes to that Article made in Article V of the Protocol.
ARTICLE IV
Article IV of the Protocol replaces Article 11 of the
existing Convention. Article 11 sets forth rules for taxation
of cross-border interest payments.
Paragraph 1 of New Article 11
Paragraph 1 of new Article 11 generally grants to the
residence State the exclusive right to tax interest
beneficially owned by its residents and arising in the other
Contracting State.
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined under the domestic law
of the source State. The beneficial owner of the interest for
purposes of Article 11 is the person to which the income is
attributable under the laws of the source State. Thus, if
interest arising in a Contracting State is received by a
nominee or agent that is a resident of the other State on
behalf of a person that is not a resident of that other State,
the interest is not entitled to the benefits of Article 11.
However, interest received by a nominee on behalf of a resident
of that other State would be entitled to benefits. These
limitations are confirmed by paragraph 9 of the OECD Commentary
to Article 11.
Special rules apply to interest derived through fiscally
transparent entities for purposes of determining the beneficial
owner of the interest. In such cases, residence State
principles shall be used to determine who derives the interest,
to assure that the interest for which the source State grants
benefits of the Convention will be taken into account for tax
purposes by a resident of the residence State.
For example, assume that FCo, a company that is a resident
of Japan, owns a 50 percent interest in FP, a partnership that
is organized in Japan. FP receives interest arising in the
United States. Japan views FP as fiscally transparent under its
domestic law, and taxes FCo currently on its distributive share
of the income of FP and determines the character and source of
the income received through FP in the hands of FCo as if such
income were realized directly by FCo. In this case, FCo is
treated as deriving 50 percent of the interest received by FP
that arises in the United States under paragraph 6 of Article 4
of the existing Convention. The same result would be reached
even if the tax laws of the United States would treat FP
differently (e.g., if FP were not treated as fiscally
transparent in the United States), or if FP were organized in a
third state, as long as FP were still treated as fiscally
transparent under the laws of Japan.
While residence State principles control who is treated as
deriving the interest, source State principles of beneficial
ownership apply to determine whether the person who derives the
interest, or another resident of the other Contracting State,
is the beneficial owner of the interest. If the person who
derives the interest under paragraph 6 of Article 4 of the
existing Convention would not be treated as a nominee, agent,
custodian, conduit, etc. under the source State's principles
for determining beneficial ownership, that person will be
treated as the beneficial owner of the interest for purposes of
the Convention. In the example above, FCo is required to
satisfy the beneficial ownership principles of the United
States with respect to the interest it derives. If under the
beneficial ownership principles of the United States, FCo is
found not to be the beneficial owner of the interest, FCo will
not be entitled to the benefits of Article 11 with respect to
such interest. If FCo is found to be a nominee, agent,
custodian, or conduit for a person who is a resident of the
other Contracting State, that person may be entitled to
benefits with respect to the interest.
Paragraph 2 of New Article 11
Paragraph 2 of new Article 11 provides anti-abuse
exceptions to the source-country exemption in paragraph 1 for
two classes of interest payments.
The first class of interest dealt with in subparagraph 2(a)
is so-called ``contingent interest.'' Such interest is defined
in subparagraph 2(a) as any interest arising in a Contracting
State that is determined by reference to the receipts, sales,
income, profits or other cash flow of the debtor or a related
person, to any change in the value of any property of the
debtor or a related person or to any dividend, partnership
distribution or similar payment made by the debtor or a related
person, or any other interest similar to such interest arising
in a Contracting State. Any such interest may be taxed in that
Contracting State according to the laws of that State. If the
beneficial owner is a resident of the other Contracting State,
however, the gross amount of the interest may be taxed at a
rate not exceeding 10 percent. With respect to interest arising
in the United States, subparagraph 2(a) refers to contingent
interest of a type that does not qualify as portfolio interest
under U.S. domestic law as defined in Code section 871(h)(4).
The exceptions of section 871(h)(4)(c) will be applicable.
The second class of interest is dealt with in subparagraph
2(b). This exception is consistent with the policy of Code
sections 860E(e) and 860G(b) that excess inclusions with
respect to a real estate mortgage investment conduit (REMIC)
should bear full U.S. tax in all cases. Without a full tax at
source, foreign purchasers of residual interests would have a
competitive advantage over U.S. purchasers at the time these
interests are initially offered. Also, absent this rule, the
U.S. fisc would suffer a revenue loss with respect to mortgages
held in a REMIC because of opportunities for tax avoidance
created by differences in the timing of taxable and economic
income produced by these interests.
Subparagraph 2(b) of new Article 11 is analogous to
subparagraph 2(c) of the U.S. Model, although the provision in
new Article 11 is drafted to apply bilaterally. Thus, for
example, paragraph 2(b) of new Article 11 does not refer to the
long-term Federal rate used to determine the amount of an
excess inclusion, but rather to ``the return on comparable debt
instruments as specified by the domestic law of that
Contracting State.'' Nevertheless, for U.S. tax purposes, the
withholding tax imposed ``to the extent that the amount of
interest paid exceeds the return on comparable debt instruments
as specified by the domestic law of that Contracting State'' is
the withholding tax that would be imposed upon an excess
inclusion with respect to a residual interest in a REMIC under
section 860G(b).
Paragraph 3 of New Article 11
Paragraph 3 of new Article 11 provides a source rule that
is identical to the interest source rule in paragraph 7 of the
existing Convention. Interest generally is considered to arise
in a Contracting State when paid by a resident of that
Contracting State. Special rules are provided where the
interest is borne by a permanent establishment of the person
paying the interest. In such a case, if the permanent
establishment is situated in a Contracting State, then the
interest shall be deemed to arise in that Contracting State;
and if the permanent establishment is situated in a state other
than one of the Contracting States, then the interest shall not
be deemed to arise in either Contracting State. While interest
borne by a permanent establishment that is situated in a state
other than one of the Contracting States thus will not be
eligible for the benefits of the Convention, it may be eligible
for the benefits of the tax treaty, if any, between the state
in which the permanent establishment is situated and the
Contracting State of which the beneficial owner of the interest
is a resident.
For purposes of paragraph 3 of new Article 11, interest is
considered to be borne by a permanent establishment if it is
allocable to the taxable income of that permanent
establishment. If the actual amount of interest on the books of
a U.S. branch of a resident of Japan exceeds the amount of
interest allocated to the branch under Treas. Reg. section
1.882-5, the amount of such excess will not be considered U.S.
source interest for purposes of this Article.
Paragraph 4 of New Article 11
Paragraph 4 of new Article 11 provides a definition of the
term ``interest'' for purposes of the Article that is identical
to that provided in paragraph 5 of Article 11 of the existing
Convention. The term ``interest'' as used in Article 11 is
defined in paragraph 4 to include, inter alia, income from debt
claims of every kind, whether or not secured by a mortgage and
whether or not carrying a right to participate in the debtor's
profits. The term does not, however, include amounts that are
treated as dividends under Article 10.
The term interest also includes amounts subject to the same
tax treatment as income from money lent under the law of the
State in which the income arises. Thus, for purposes of the
Convention, amounts that the United States will treat as
interest include (i) the difference between the issue price and
the stated redemption price at maturity of a debt instrument
(i.e., original issue discount (``OID'')), which may be wholly
or partially realized on the disposition of a debt instrument
(section 1273), (ii) amounts that are imputed interest on a
deferred sales contract (section 483), (iii) amounts treated as
interest or OID under the stripped bond rules (section 1286),
(iv) amounts treated as OID under the below-market interest
rate rules (section 7872), (v) a partner's distributive share
of a partnership's interest income (section 702), (vi) the
interest portion of periodic payments made under a ``finance
lease'' or similar contractual arrangement that in substance is
a borrowing by the nominal lessee to finance the acquisition of
property, (vii) amounts included in the income of a holder of a
residual interest in a REMIC (section 860E), because these
amounts generally are subject to the same taxation treatment as
interest under U.S. tax law, and (viii) interest with respect
to notional principal contracts that are recharacterized as
loans because of a ``substantial non-periodic payment.''
Paragraph 5 of New Article 11
Paragraph 5 of new Article 11 is identical in substance to
paragraph 6 of Article 11 of the existing Convention. Paragraph
5 of new Article 11 provides an exception to paragraphs 1 and 2
of new Article 11 where the beneficial owner of the interest
carries on business through a permanent establishment in the
Contracting State in which the interest arises and the interest
is attributable to that permanent establishment. In such cases,
the applicable provisions of Article 7 of the existing
Convention will apply.
The provisions of paragraph 4 of the Protocol of 2003 apply
to income described in this paragraph. For example, interest
income that is attributable to a permanent establishment and
that accrues during the existence of the permanent
establishment, but is received after the permanent
establishment no longer exists, remains taxable under the
provisions of Article 7 of the existing Convention, and not
under this Article.
Paragraph 6 of New Article 11
Paragraph 6 of new Article 11 is identical to paragraph 8
of Article 11 of the existing Convention. Paragraph 6 of new
Article 11 provides that, in cases involving special
relationships between persons, Article 11 applies only to that
portion of the total interest payments between those persons
that would have been made absent such special relationships
(i.e., an arm's-length interest payment). The term ``special
relationship'' is not defined in the Convention. In applying
this paragraph, the United States considers the term to include
the relationships described in Article 9 of the existing
Convention, which in turn correspond to the definition of
``control'' for purposes of section 482 of the Code. This is
consistent with paragraph 33 of the Commentary to Article 11 of
the OECD Model.
Paragraph 6 of new Article 11 also provides that any amount
of interest paid in excess of the amount that would be been
paid absent a special relationship may be taxable in the
Contracting State in which it arises at a rate not to exceed 5
percent. This rule is similar to rules provided in paragraph 4
of Article 12 and paragraph 3 of Article 21 of the existing
Convention, which provide that any amount paid in excess of the
amount that would have been paid absent a special relationship
may be taxable in the Contracting State in which they arise at
a rate not to exceed 5 percent.
The Convention's treatment of such excess amounts is
consistent in most circumstances with the results under the
U.S. Model and U.S. domestic law and practice. Absent the
specific rule in the Convention, in most cases the United
States would treat such excess amounts as a dividend or as a
contribution to capital, depending on the relationship between
the parties, and tax such amounts accordingly. Under the
Convention, a maximum 5 percent withholding tax rate generally
applies to dividends where the beneficial owner is a company
owning directly or indirectly at least 10 percent of the voting
stock of the company paying the dividends. In Japan, the
general practice in the context of investment income such as
interest, dividends, or other income is to impose withholding
taxes on the amount in excess of the arm's-length amount at the
domestic rate. Thus, for example, if a Japanese company makes
an interest payment to its non-Japanese parent company, and
Japan determines that the amount of the interest payment
exceeded an arm's-length amount, Japan will deny a deduction
for the excess amount and treat the excess amount as an
interest payment subject to the appropriate withholding rate
applicable to interest paid by Japanese companies under its
domestic law, which is generally 20 percent. Under the
Convention, such excess amounts instead are subject to a
maximum 5 percent rate of withholding taxes.
Paragraph 6 of new Article 11 does not address cases where,
owing to a special relationship between the payer and the
beneficial owner, or between both of them and some other
person, the amount of the interest is less than an arm's-length
amount. In those cases a transaction may be characterized to
reflect its substance and interest may be imputed consistent
with the definition of interest in paragraph 4 of new Article
11. Consistent with Article 9 of the existing Convention, the
United States would apply section 482 or 7872 of the Code to
determine the amount of imputed interest in those cases.
Paragraph 7 of New Article 11
Paragraph 7 of new Article 11 is identical to paragraph 11
of Article 11 of the existing Convention. Paragraph 7 of new
Article 11 provides that a resident of a Contracting State
shall not be considered the beneficial owner of interest in
certain ``back-to-back'' loan arrangements. The benefits of
Article 11 therefore are not available with respect to such
interest. This rule is similar to rules dealing with interest,
royalties, and other income in paragraph 11 of Article 10,
paragraph 5 of Article 12, and paragraph 4 of Article 21 of the
existing Convention. These limited ``anti-conduit'' rules and
their interaction with U.S. domestic law are discussed in the
technical explanation of paragraph 11 of Article 10 of the
existing Convention.
Paragraph 7 of new Article 11 provides that a resident of a
Contracting State shall not be considered the beneficial owner
of interest in respect of a debt-claim if such debt-claim would
not have been established unless a person that is not entitled
to the same or more favorable treaty benefits and that is not a
resident of either Contracting State held an equivalent debt-
claim against the resident. The operation of this rule can be
illustrated in the following examples:
Example 1. A, a U.S. resident, holds a debt-claim against
X, a Japanese company, that entitles A to interest of 10x each
year. B, a resident of a third country that does not have a tax
treaty with Japan, owns a debt-claim against A that entitles B
to interest of 10x each year and otherwise has terms that are
equivalent to the terms of the debt-claim held by A. A would
not have established its debt-claim against X if B did not hold
a debt-claim against A. X pays interest of 10x to A, which pays
interest of 10x to B. Under paragraph 11, A will not be
considered the beneficial owner of the interest from X, and
therefore is not entitled to treaty benefits with respect to
the interest from X.
Example 2. The facts are the same as the facts of Example
1, except that, instead of owning a debt-claim against A, B
holds preferred stock in A that entitles B to 10x each year to
the extent of A's earnings in that year. A pays dividends of
10x to B. Paragraph 11 does not apply to deny treaty benefits
to A with respect to the interest from X.
No inference is intended as to the result of Example 2 in
cases of interest arising in the United States under U.S.
domestic anti-abuse rules (e.g., the anti-conduit rules and
other anti-abuse rules referred to in the Technical Explanation
of paragraph 11 of Article 10 of the existing Convention).
Relation to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of interest, the saving clause of subparagraph 4(a) of
Article 1 of the existing Convention permits the United States
to tax its residents and citizens, subject to the special
foreign tax credit rules of paragraph 3 of Article 23 of the
existing Convention, as if the Convention had not come into
force.
The benefits of this Article are also subject to the
provisions of Article 22 of the existing Convention. Thus, if a
resident of Japan is the beneficial owner of interest paid by a
U.S. corporation, the resident must qualify for treaty benefits
under at least one of the tests of Article 22 in order to
receive the benefits of this Article.
ARTICLE V
Article V of the Protocol makes amendments to Article 13 of
the existing Convention.
Paragraph 1
Paragraph 1 of Article V replaces paragraph 2 of Article 13
of the existing Convention with a new paragraph 2. This
paragraph defines the term ``real property situated in the
other Contracting State.'' Subparagraph (a) of new paragraph 2
provides that the term includes real property referred to in
Article 6 (i.e., an interest in the real property itself).
Subparagraph (b) provides that when ``the other Contracting
State'' referenced in paragraph 1 of Article 13 of the existing
Convention is Japan, the term includes shares or interests in a
company, partnership or trust deriving the value of its
property directly or indirectly principally from real property
in Article 6 and situated in Japan. Subparagraph (c) provides
that when ``the other Contracting State'' referenced in
paragraph 1 of Article 13 of the existing Convention is the
United States, the term includes a ``United States real
property interest.''
Under section 897(c) of the Code, the term ``United States
real property interest'' includes shares in a U.S. corporation
that owns sufficient U.S. real property interests to satisfy an
asset-ratio test on certain testing dates. The term also
includes certain foreign corporations that have elected to be
treated as U.S. corporations for this purpose. See section
897(i) of the Code. In addition, any distribution made by a
U.S. real estate investment trust or certain U.S. regulated
investment companies is taxable under paragraph 1 of Article 13
of the existing Convention (rather than under Article 10
(Dividends) of the existing Convention) to the extent that it
is attributable to gains derived from the alienation of U.S.
real property interests. See section 897(h) of the Code.
Paragraph 2
Paragraph 2 of Article V replaces paragraph 4 of Article 13
of the existing Convention. The only change is to delete
references to paragraph 2 of Article 13 of the existing
Convention that are no longer necessary.Article VI
Article VI of the Protocol restates Article 15 of the
existing Convention. The restatement was necessary in order to
provide an opportunity to correct an error in the Japanese
language text of the existing Convention.
Paragraph 3 of the Exchange of Notes contains two
understandings between the Contracting States regarding the
interpretation of Article 15 of the Convention. First, it is
understood that if a resident of a Contracting State does not
serve as a member of a board of directors of a company, Article
15 of the Convention shall not apply to his remuneration,
regardless of his title or position. Second, it is understood
that where a member of the board of directors of a company also
has other functions (for example, as ordinary employee,
advisory, or consultant) with the company, Article 15 of the
Convention does not apply to remuneration paid to such person
on account of such other functions.
ARTICLE VII
Article VII of the Protocol deletes Article 20 of the
existing Convention, which provides certain benefits for
residents of one Contracting State who are temporarily present
in the other Contracting State for the purpose of teaching or
conducting research. This change is intended to bring the
existing Convention into closer conformity with the current tax
treaty policies of both the United States and Japan. Paragraph
5 of Article XV of the Protocol ensures that individuals who
are receiving benefits under Article 20 at the time the
Protocol enters into force will continue to be entitled to such
benefits until such time as they would have ceased to be
entitled to the benefits if the Protocol had not entered into
force.
ARTICLE VIII
Article VIII of the Protocol modifies subparagraph 5(b)(i)
of Article 22 of the Convention. This subparagraph defines the
term ``recognized stock exchange'' in the case of Japan for
purposes of applying Article 22. The amendment in Article VIII
replaces the reference to ``the Securities and Exchange Law''
with the legislation's current name, ``the Financial
Instruments and Exchange Law.''
ARTICLE IX
Article IX of the Protocol replaces paragraph 1 of Article
23 of the existing Convention in order to bring the Convention
into conformity with Japan's current statutory rules for
providing relief from double taxation.New Subparagraph 1(a) of
Article 23
Japan agrees, in new subparagraph 1(a) of Article 23, to
allow to its residents, subject to its relevant domestic laws,
a credit against Japanese tax for U.S. taxes paid in accordance
with the provisions of the Convention. For this purpose, the
U.S. taxes covered by new subparagraph 1(b) of Article 23 and
paragraph 2 of Article 2 of the existing Convention are within
the definition of ``United States tax.'' The amount of credit,
however, shall not exceed that part of the Japanese tax which
is appropriate to that income.
The last sentence of new subparagraph 1(a) provides a re-
sourcing rule for income covered by this subparagraph. This
provision is intended to ensure that a Japanese resident can
obtain a Japanese foreign tax credit for U.S. taxes paid when
the Convention assigns to the United States primary taxing
rights over an item of income. The last sentence provides that,
if the Convention allows the United States to tax an item of
income beneficially owned by a resident of Japan, that income
will be deemed to arise from sources in the United States for
Japanese foreign tax credit purposes. However, paragraph 3 of
Article 23 of the existing Convention provides special rules
regarding relief of double taxation where a resident of Japan
is a U.S. citizen, a former U.S. citizen, or a former U.S.
long-term resident and is subject to tax in the United States
solely by reason of the provisions of paragraph 4 of Article 1
of the existing Convention.
New Subparagraph 1(b) of Article 23
Under new subparagraph 1(b) of Article 23, Japan agrees to
exclude from the basis upon which the Japanese tax is imposed
certain dividends paid by a company which is a resident of the
United States to a company resident in Japan. This benefit is
subject to the provisions, other than the provisions with
regard to share ownership requirements, of Japan's domestic law
regarding the exclusion of dividends from the basis upon which
the Japanese tax is imposed. In order for subparagraph 1(b) to
apply to exclude a dividend from Japanese tax, the Japanese
company receiving the dividend must have owned at least 10
percent of the total shares issued by the U.S. company paying
the dividend for a period of at least six months immediately
before the day when the obligation to pay the dividends is
confirmed.
ARTICLE X
Article X of the Protocol makes non-substantive amendments
to Article 24 of the existing Convention in order to conform to
changes made to Article 11 dealing with the taxation of
interest.
Paragraph 1
Paragraph 1 of Article X amends paragraph 3 of Article 24
of the existing Convention by deleting the words ``paragraph 8
of Article 11'' and replacing them with the words ``paragraph 6
of Article 11''.
Paragraph 2
Paragraph 2 of Article X amends paragraph 5 of Article 24
of the existing Convention by deleting the words ``or paragraph
10 of Article 11''.
ARTICLE XI
Article XI of the Protocol adds new paragraphs 5 through 7
to Article 25 of the existing Convention, which deals with the
mutual agreement procedure. In particular, Article XI of the
Protocol incorporates into Article 25 rules that provide for
mandatory binding arbitration to resolve certain cases that the
competent authorities of the Contracting States have been
unable to resolve after negotiating for a reasonable amount of
time.
The mandatory binding arbitration provision is an extension
of (as opposed to an alternative to) the interaction between
the competent authorities as provided in the mutual agreement
procedure. Accordingly, only cases that have first been
negotiated by the competent authorities pursuant to Article 25
shall be eligible for arbitration. Any case for which the
competent authorities have undertaken negotiation pursuant to
either paragraph 1 or paragraph 3 of Article 25 shall be
eligible for arbitration, subject to the provisions of
subparagraph 6(c) of Article 25.
New Paragraph 5 of Article 25
New paragraph 5 of Article 25 provides that a case shall be
resolved through mandatory binding arbitration when (i) a
person has presented a case to the appropriate competent
authority under paragraph 1 of Article 24 on the basis that the
actions of one or both of the Contracting States have resulted
for that person in taxation not in accordance with the
provisions of the Convention, (ii) the competent authorities
have been unable to reach an agreement to resolve the case, and
(iii) the conditions specified in this paragraph and in new
paragraphs 6 and 7 are satisfied.
New subparagraph 14(a) of the Protocol of 2003 as amended
by Article XIV of the Protocol provides that for purposes of
applying new paragraph 5 of Article 25, taxation shall be
considered to have resulted from ``the actions of one or both
of the Contracting States'' as soon as tax has been paid,
assessed or otherwise determined (for example, a notification
of correction, determination or deficiency of a tax liability
has been issued), or in cases where the taxpayer is officially
notified by the tax authorities that they intend to tax him on
a certain element of income (for example, a notice of proposed
adjustment has been issued).
Paragraph 4 of the Exchange of Notes clarifies that the
fact that tax collection procedures may have been suspended
shall not affect a determination that taxation not in
accordance with the provisions of the Convention has resulted
from the actions of one or both Contracting States.
New subparagraphs 5(a) and 5(b) of Article 25 set forth two
additional conditions that must be satisfied before a case may
be resolved through arbitration. Subparagraph 5(a) provides
that the presenter of the case to a competent authority must
submit a written request to that competent authority for a
resolution of the case through arbitration. Subparagraph 5(b)
requires that all concerned persons (as defined in new
paragraph 7(a) of Article 25) and their authorized
representatives or agents agree in writing not to disclose to
any other person, except other concerned persons, any
information received during the course of the arbitration
proceeding from either Contracting State or from the
arbitration panel, other than the determination of the panel.
New subparagraphs 7(c) and 7(d) of Article 25 (discussed below)
provide that the requirements of subparagraphs 5(a) and 5(b) of
Article 25 must be satisfied prior to the beginning of the
arbitration proceeding.
A confidentiality agreement may 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 of Article 25
New paragraph 6 of Article 25 sets forth parameters
according to which a case shall not be submitted to
arbitration. Under subparagraph 6(a), 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. Under subparagraph 6(b), an
unresolved case shall not be submitted to arbitration if the
competent authorities have mutually agreed before the date on
which arbitration proceedings would otherwise have begun that
the case is not suitable for determination by arbitration. In
such cases, the competent authorities must notify the presenter
of the case of such mutual agreement no later than two years
after the case's commencement date (as defined in new
subparagraph 7(b), described below). Subparagraph 6(c) provides
that arbitration shall not be available for cases that are
before the competent authorities only by virtue of the final
sentence of paragraph 3 of Article 25, which provides that the
competent authorities ``may also consult together for the
elimination of double taxation in cases not provided for in the
Convention.''
New Paragraph 7 of Article 25
New paragraph 7 of Article 25 sets forth additional rules
and definitions to be used in applying the arbitration
provisions. Subparagraph 7(a) defines the term ``concerned
person'' as the person that brought the case to competent
authority for consideration under Article 25 and 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 would
include a U.S. corporation that brings a transfer pricing case
with respect to a transaction entered into with its subsidiary
in Japan for resolution to the U.S. competent authority, as
well as the subsidiary, which may seek a correlative adjustment
as a result of the resolution of the case.
Subparagraph 7(b) defines the term ``commencement date'' as
the earliest date on which the information necessary to
undertake substantive consideration for a mutual agreement has
been received by the competent authorities of both Contracting
States. The competent authority of the United States will be
considered to have received the information necessary to
undertake substantive consideration for a mutual agreement on
the date that it has received the information that must be
submitted pursuant to Rev Proc. 2006-54, 2006-2 C.B. 1035,
Sec. 4.05 (or any applicable successor procedures). The
competent authority of Japan will be considered to have
received the information necessary to undertake substantive
consideration for a mutual agreement on the date it has
received the information that must be submitted pursuant to its
published procedures for requesting competent authority
assistance (or any applicable successor procedures). The
information shall not be considered received until both
competent authorities have received copies of all materials
submitted to either Contracting State by the concerned
person(s) in connection with the mutual agreement procedure.
Subparagraph 7(c) provides that, other than for cases
described in subparagraph 7(d), an arbitration proceeding shall
begin on the later of two dates: (i) two years from the
commencement date of the case (unless both competent
authorities have previously agreed to a different date and have
notified the presenter of the case of such agreement), and (ii)
the earliest date upon which the requirements of subparagraphs
5(a) and 5(b) have been satisfied (i.e., the presenter of the
case has submitted a written request for resolution of the case
through arbitration, and all concerned persons and their
authorized representatives or agents have entered into a
confidentiality agreement and the agreements have been received
by both competent authorities). Clause (i) of this subparagraph
permits the competent authorities to mutually agree to a
different commencement date. This could be the case, for
instance, if the negotiation of a case between the competent
authorities were nearing completion and could be expected to be
resolved in an additional short period of time, and the
competent authorities mutually agreed that, if given additional
time, they could resolve the case, thus avoiding the need for
an arbitration proceeding. As another example, if a large
number of cases would otherwise have the same commencement
date, clause (i) would allow the competent authorities to agree
to different commencement dates (including accelerating a
commencement date) to avoid having multiple arbitration
proceedings take place at the same time. Clause (i) requires
the competent authorities to notify the presenter of the case
of any such agreements to a different commencement date.
Subparagraph 7(d) governs the start date of arbitration
with respect to a case that is the subject of a request for an
advanced pricing arrangement, the terms of which the competent
authorities have not been able to agree. In such cases, an
arbitration proceeding shall begin on the later of two dates:
i) six months after an official notification has been issued by
the tax authority of either Contracting State of a correction
of, or an intent to adjust, the pricing of a transaction or
transfer covered by a request for an advance pricing
arrangement regarding a concerned person, unless the competent
authorities of both Contracting States have agreed to a
different date and notified the presenter of the case of such
agreement; and (ii) the earliest date upon which the
requirements of subparagraphs 5(a) and 5(b) are satisfied
(i.e., the presenter of the case has submitted a written
request for resolution of the case through arbitration, and all
concerned persons and their authorized representatives or
agents have entered into a confidentiality agreement and the
agreements have been received by both competent authorities).
However, subparagraph 7(d) specifies that in no event shall the
arbitration proceeding begin any earlier than two years after
the date on which the information necessary to undertake
substantive consideration for a mutual agreement on the advance
pricing arrangement has been received by the competent
authorities of both Contracting States.
Subparagraph 7(e) addresses implementation of the
determination of the arbitration panel. As is the case with any
resolution reached pursuant to the mutual agreement procedure,
the presenter of the case is not required to accept the
resolution. Subparagraph 7(e) provides that if the presenter of
the case accepts the determination of the arbitration panel,
such determination shall constitute a resolution by mutual
agreement under Article 25 of the entire case and thus shall be
binding on the Contracting States. If timely accepted by the
presenter of the case, the determination of the arbitration
panel shall be implemented even if such implementation
otherwise would be barred by the statute of limitations or by
some other procedural limitation. Subparagraph 7(e), however,
does not prevent the application of domestic-law procedural
limitations that give effect to the agreement (e.g., a domestic
law requirement that the taxpayer file a return reflecting the
agreement within one year of the date of the agreement).
Subparagraph 7(f) provides that for purposes of an
arbitration proceeding under new paragraphs 5, 6 and 7 of
Article 25, the members of the arbitration panel and their
staff shall be considered ``persons or authorities'' to whom
information may be disclosed under Article 26 of the
Convention. (See paragraph 2 of new Article 26.)
Subparagraph 7(g) sets forth the confidentiality
obligations of the competent authorities regarding an
arbitration proceeding. Subparagraph 7(g) provides that no
information relating to an arbitration proceeding (including
the arbitration panel's determination) may be disclosed by the
competent authorities, except as permitted by this Convention
and the domestic laws of the Contracting States. In addition,
all material prepared in the course of, or relating to, an
arbitration proceeding shall be considered to be information
exchanged between the Contracting States pursuant to Article
26.
Subparagraph 7(h) provides that the competent authorities
shall ensure that members of the arbitration panel and their
staff agree in written statements not to disclose any
information relating to an arbitration proceeding (including
the arbitration panel's determination), and to abide by and be
subject to the confidentiality and nondisclosure provisions of
Article 26 and the applicable domestic laws of the Contracting
States. In the event those provisions conflict, the most
restrictive condition shall apply. These statements from the
members of the arbitration panel shall also include acceptance
of their appointment to the arbitration panel. The final
sentence of subparagraph 7(h) makes clear that notwithstanding
the provisions of subparagraph 7(h), the members of the
arbitration panel or their staff shall disclose the
determination of the arbitration panel to the competent
authorities of both Contracting States.
Subparagraph 7(i) sets forth a non-exhaustive list of items
related to the time periods and procedures related to
conducting an arbitration proceeding that the competent
authorities of the Contracting States must agree to in order to
ensure the effective and timely implementation of the
provisions of new paragraphs 5, 6 and 7 of Article 25. Such
agreement must be consistent with the provisions of the
Convention, and shall take the form of published guidance
before the date on which the first arbitration proceeding
commences. Subparagraph 7(i) lists the following items for
which the competent authorities shall agree on time frames and
procedures:
i) notifying the presenter of the case of any
agreements pursuant to subparagraph 7(c)(i) or 7(d)(i)
to modify the date on which an arbitration proceeding
could begin;
ii) the appropriate application of arbitration in the
context of an advanced pricing arrangement, including
rules concerning the date on which an arbitration
proceeding shall begin for such cases;
iii) obtaining the statements of each concerned
person, authorized representative or agent, and member
of the arbitration panel (including their staff) as
required in subparagraphs 5(b) and 7(h), in which each
such person agrees not to disclose to any other person
any information received during the course of the
arbitration proceeding from the competent authority of
either Contracting State or the arbitration panel,
other than disclosure of the determination of such
panel to the competent authorities of both Contracting
States;
iv) the appointment of the members of the arbitration
panel;
v) the submission of proposed resolutions, position
papers, and reply submissions by the competent
authorities to the arbitration panel;
vi) the submission by the presenter of the case of a
paper setting forth the presenter's views and analysis
of the case for consideration by the arbitration panel;
vii) the delivery by the arbitration panel of its
determination to the competent authorities;
viii) the acceptance or rejection by the presenter of
the case of the determination of the arbitration panel;
and
ix) the adoption by the arbitration panel of any
additional procedures necessary for the conduct of its
business.
Subparagraph 7(i) authorizes the competent authorities to
agree in writing to such other rules and procedures as may be
necessary for the effective and timely implementation of the
provisions of new paragraphs 5, 6 and 7. Consistent with this
authority, the competent authorities may also agree on rules
necessary to implement the provisions of new paragraph 14 of
the Protocol of 2003 as amended by Article XIV of the Protocol
(discussed below).For the effective date for new paragraphs 5,
6, and 7 of Article 25, see paragraph 3 of Article XV of the
Protocol (discussed below).
ARTICLE XII
Article XII of the Protocol replaces Article 26 of the
existing Convention. This Article provides for the exchange of
information between the competent authorities of the
Contracting States. While mutual agreement procedures are
addressed in Article 25, exchanges of information for purposes
of the mutual agreement procedures are governed by new Article
26.
Paragraph 1 of New Article 26
The obligation to obtain and provide information to the
other Contracting State is set out in 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 either Contracting State concerning taxes
of every kind applied at the national level. This language
incorporates the standard of the OECD Model. The Contracting
States intend for the phrase ``is foreseeably relevant'' to be
interpreted to permit the exchange of information that ``may be
relevant'' for purposes of section 7602 of the Code, 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 (the
requesting State) simply asked for information regarding all
bank accounts maintained by residents of the requesting State
in the other Contracting State (the requested State). Thus, the
language of paragraph 1 is intended to provide for exchange of
information in tax matters to the widest extent possible, while
clarifying that Contracting States are not at liberty to engage
in ``fishing expeditions'' or otherwise to request information
that is unlikely to be relevant to the tax affairs of a given
taxpayer.
Consistent with the OECD Model, a request for information
does not constitute a ``fishing expedition'' solely because it
does not provide the name or address (or both) of the taxpayer
under examination or investigation. In cases where the
requesting State does not provide the name or address (or both)
of the taxpayer under examination or investigation, the
requesting State must provide other information sufficient to
identify the taxpayer. Similarly, paragraph 1 does not
necessarily require the request to include the name or address
of the person believed to be in possession of the information.
The standard of ``foreseeable relevance'' can be met in
cases dealing with either one taxpayer (whether identified by
name or otherwise) or several taxpayers (whether identified by
name or otherwise). Where a Contracting State undertakes an
investigation into an ascertainable group or category of
persons in accordance with its laws, any request related to the
investigation will typically serve the objective of carrying
out the domestic tax laws of the requesting State and thus will
comply with the requirements of paragraph 1, provided it meets
the standard of ``foreseeable relevance.'' In such cases, the
requesting State should provide, supported by a clear factual
basis, a detailed description of the group or category of
persons and of the specific facts and circumstances that have
led to the request, as well as an explanation of the applicable
law and why there is reason to believe that the taxpayers in
the group or category of persons for whom information is
requested have been non-compliant with that law supported by a
clear factual basis. The requesting State should further show
that the requested information would assist in determining
compliance by the taxpayers in the group or category of
persons.
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 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 provisions of the
Convention. An example of such a case is provided in the
subparagraph 8(b) of the OECD Commentary to Article 26: 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 (because 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 information that may be exchanged relates to
information as is foreseeably relevant for carrying out the
provisions of the Convention or the assessment or collection
of, the enforcement or prosecution in respect of, or the
determination of appeals in relation to, 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.
The taxes covered by the Convention for purposes of this
Article constitute a broader category of taxes than those
referred to in Article 2 of the Convention. 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 Japan,
nationally imposed value added taxes.
Information exchange is not restricted by paragraph 1 of
Article 1. 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 Japan 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 Japan, 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, the
Internal Revenue Service can request information from Japan
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 or territories for most purposes of the Convention,
section 7651 of the Code authorizes the Internal Revenue
Service to utilize the provisions of the Code to obtain
information from the U.S. possessions or territories 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 territory), or a third party located in a U.S.
possession or territory.
The final sentence of paragraph 1 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 shall,
if possible, provide the information in the form requested to
the same extent that it could obtain information in that form
under its own laws and administrative practices with respect to
its own taxes.
Paragraph 2 of New Article 26
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. The confidentiality rules cover
competent authority letters, including the letter requesting
information. At the same time, it is understood that the
requested State can disclose the minimum information contained
in a competent authority letter (but not the letter itself)
necessary for the requested State to be able to obtain or
provide the requested information to the requesting State,
without frustrating the efforts of the requesting State. If,
however, court proceedings or the like under the domestic laws
of the requested State necessitate the disclosure of the
competent authority letter itself, the competent authority of
the requested State may disclose such a letter unless the
requesting State otherwise specifies.
Information received may be disclosed only to persons or
authorities, 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 or the oversight of such functions. 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 the
U.S. Congress and the U.S. 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.
In situations in which the requested State determines that
the requesting State does not comply with its duties regarding
the confidentiality of the information exchanged under this
Article, the requested State may suspend assistance under this
Article until such time as proper assurance is given by the
requesting State that those duties will indeed be respected. If
necessary, the competent authorities may enter into specific
arrangements or memoranda of understanding regarding the
confidentiality of the information exchanged under this
Article.
Paragraph 3 of New Article 26
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. Finally, paragraph 3 clarifies that no
obligation is imposed to obtain or provide information relating
to certain confidential communications between a client and an
attorney, solicitor, or other admitted legal representative.
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 requesting State should govern a request for information.
Thus, the requested State 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 an
information request from the other Contracting State, 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 New Article 26
Paragraph 4 provides that when information is requested by
a Contracting State in accordance with this Article, the
requested 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 subparagraph
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 New Article 26
Paragraph 5 provides that a Contracting State may not
decline to provide information because that information is held
by banks, other financial institutions, nominees or persons
acting in an agency or fiduciary capacity or because the
information relates to ownership interests in a person. 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.
Subparagraphs 3(a) and (b) do not permit the requested
State to decline a request where paragraph 4 or 5 applies.
Paragraph 5 would apply, for instance, in situations in which
the requested State's inability to obtain the information was
specifically related to the fact that the requested information
was believed to be held by a bank or other financial
institution. Thus, the application of paragraph 5 includes
situations in which the tax authorities' information-gathering
powers with respect to information held by banks and other
financial institutions are subject to different requirements
than those that are generally applicable with respect to
information held by persons other than banks or other financial
institutions. This would, for example, be the case where the
tax authorities can only exercise their information-gathering
powers with respect to information held by banks and other
financial institutions in instances where specific information
regarding the taxpayer under examination or investigation is
available. This would also be the case where, for example, the
use of information-gathering measures with respect to
information held by banks and other financial institutions
requires a higher probability that the information requested is
held by the person believed to be in possession of the
requested information than the degree of probability required
for the use of information-gathering measures with respect to
information believed to be held by persons other than banks or
financial institutions.
Paragraph 10 of the Exchange of Notes clarifies that new
Article 26 shall have effect from the date of entry into force
of the Protocol without regard to the taxable year to which the
matter relates, provided all of the conditions and requirements
of the Article are satisfied. Thus, for example, the competent
authority may seek information under new Article 26 with
respect to a taxable year prior to the entry into force of the
Protocol.
ARTICLE XIII
Article XIII of the Protocol replaces Article 27 of the
existing Convention with a new Article 27. New Article 27
provides rules under which the United States and Japan will
lend each other assistance in the collection of certain revenue
claims, as defined in paragraph 1 of the new Article 27.
Paragraph 1 of New Article 27
Paragraph 1 provides that subject to the conditions set
forth in new Article 27, the Contracting States shall lend
assistance to each other in the collection of ``revenue
claims,'' defined to be taxes (insofar as the taxation is not
contrary to the Convention or any other agreement to which the
United States and Japan are parties), together with interest,
costs of collection, additions to such taxes, and civil or
administrative penalties related to such taxes. Paragraph 5 of
the Exchange of Notes sets forth the understanding of the
Contracting States that the obligation to lend assistance shall
be satisfied in cases where the State from which assistance is
requested (the requested State) had made reasonable efforts to
lend assistance, but was unsuccessful in collecting the revenue
claim on behalf of the State requesting assistance (the
applicant State).
Collection assistance is not limited by the provisions of
paragraph 1 of Article 1 of the Convention. Accordingly,
assistance may be requested and provided under new Article 27
regarding revenue claims in respect of persons who are not
residents of either Contracting State, provided that all of the
requirements of the Article are satisfied. For example, new
Article 27 would permit the United States to request assistance
from Japan regarding the collection of a finally determined
revenue claim against an individual who is a resident of a
third country, has assets in Japan, provided services in the
United States, and filed a fraudulent U.S. tax return.
Paragraph 2 of New Article 27
Paragraph 2 limits the scope of revenue claims for which
collection assistance may be sought pursuant to new Article 27.
Subparagraph 2(a) limits the scope of revenue claims in respect
of companies, and subparagraph 2(b) limits the scope of revenue
claims in respect of individuals.
The benefits afforded under new Article 27 are not intended
to provide a means to bypass or circumvent the application of
the mutual agreement procedure as set forth in Article 25 of
the Convention. Consistent with this policy, subparagraph 2(a)
provides that collection assistance will be available only for
the following revenue claims in respect of a company: (i)
revenue claims the determination of which are not eligible to
be resolved by mutual agreement procedure pursuant to Article
25; (ii) revenue claims the determination of which have been
mutually agreed upon pursuant to Article 25; or (iii) revenue
claims with respect to the determination of which the company
has terminated the mutual agreement procedure are eligible for
collection assistance.
Subparagraph 2(b) describes those revenue claims against
individuals which are eligible for collection assistance. A
Contracting State may request collection assistance with
respect to a revenue claim against an individual who is a
national of that State (or a national of a third state) without
limitation other than limitations imposed by the other
paragraphs of new Article 27. However, in the case of revenue
claims against an individual who is a national of the requested
State, collection assistance shall be provided only for revenue
claims with respect to which the individual or a person acting
on behalf of the individual (i) has filed a fraudulent tax
return or a fraudulent claim for refund; (ii) has willfully
failed to file a tax return with the intention of evading
taxes; or (iii) has transferred assets into the requested State
to avoid collection of the revenue claim.
Paragraph 3 of New Article 27
Paragraph 3, which is equivalent to Article 27 of the
existing Convention, applies notwithstanding the limitations of
paragraph 2. Paragraph 3 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, provided that the requested State
agrees with such determination of improper granting of treaty
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
generally permitted to withhold at the reduced portfolio
dividend rate of 15 percent. If, however, it is subsequently
discovered that the payee is merely acting as a nominee on
behalf of a third-country resident, paragraph 3 of new Article
27 would require Japan to withhold and remit to the United
States the additional tax that should have been collected by
the U.S. withholding agent.
Paragraph 4 of New Article 27
Paragraph 4 provides that new Article 27 shall apply only
to revenue claims in respect of the taxes covered by Article 2
and certain additional taxes.
In the case of Japan, the additional taxes with respect to
which collection assistance may be requested are the
consumption tax, the inheritance tax, and the gift tax.
Paragraph 6 of the Exchange of Notes clarifies that the term
``consumption tax'' means only the consumption tax imposed at
the national level by Japan, and does not include any
consumption tax imposed by a local authority of Japan.
In the case of the United States, the additional taxes with
respect to which collection assistance may be requested are the
Federal estate and gift taxes, the Federal excise tax on
insurance policies issued by foreign insurers, the Federal
excise taxes imposed with respect to private foundations, and
the Federal taxes related to employment and self-employment.
Paragraph 7 of the Exchange of Notes clarifies that the term
``Federal excise tax on insurance policies issued by foreign
insurers'' means taxes imposed pursuant to Section 4371 through
4374 of the Internal Revenue Code. Paragraph 8 of the Exchange
of Notes clarifies that the term ``Federal excise tax imposed
with respect to private foundations'' means taxes imposed
pursuant to sections 4940 through 4948 of the Code. Paragraph 9
of the Exchange of Notes clarifies that the term ``Federal
taxes related to employment and self-employment'' means taxes
imposed pursuant to Chapter 2 and Chapters 21 through 23A of
the Internal Revenue Code.
Paragraph 5 of New Article 27
Paragraph 5 requires the applicant State to certify that
the revenue claim for which collection assistance is sought has
been ``finally determined.'' For purposes of paragraph 5, a
revenue claim has been finally determined when the applicant
State has the right under its internal law to collect the
revenue claim and all administrative and judicial rights of the
taxpayer to restrain collection in the applicant State have
lapsed or been exhausted.
New paragraph 15 of the Protocol of 2003 as amended by
paragraph 3 of Article XIV provides that for the purposes of
evaluating the final determination of a U.S. revenue claim for
which the United States may request assistance pursuant to
Article 27, the existence of administrative or judicial rights
available to the taxpayer in connection with the finally
determined revenue claim that arise after collection actions
have begun, such as collection due process rights (CDP) and
collection appeals rights (CAP), shall not be interpreted by
Japan to mean that such revenue claim is not finally determined
under U.S. principles. New paragraph 15 of the 2003 Protocol
does not limit a taxpayer's access to CDP or CAP rights with
respect to collection by the United States of a U.S. revenue
claim, including revenue claims for which the United States has
requested collection assistance from Japan.
In the case of Japan, new paragraph 15 of the Protocol of
2003 provides that the right to take action pursuant to Article
36 of the Administrative Case Litigation Act (Law No. 139 of
1962) of Japan shall not be interpreted by the United States to
mean that such revenue claim is not finally determined under
Japanese principles.
Paragraph 6 of New Article 27
Paragraph 6 of new Article 27 provides that when an
application for assistance by the applicant State has been
accepted for collection by the requested State pursuant to the
provisions of Article 27, the revenue claim of the applicant
State shall be treated, to the extent necessary for collection
under the laws of the requested State, as assessed under the
laws of the requested State as of the time the application is
received, and shall be collected by the requested State as
though such revenue claim were the requested State's own
revenue claim in accordance with the laws applicable to the
collection of the requested State's own revenue claims.
Paragraph 7 of New Article 27
Paragraph 7 of new Article 27 provides that notwithstanding
the provisions of paragraph 6, acts of collection carried out
by the requested State in pursuance of an application for
assistance, which, according to the laws of the applicant
State, would have the effect of suspending or interrupting the
period of limitation on the collection of a revenue claim in
the applicant State if carried out by the applicant State,
shall also have this effect with respect to the revenue claim
under the laws of the applicant State. For example, assume that
in the pursuance of an application for assistance, the
competent authority of the requested State had reached an
agreement with the taxpayer to enter into a plan under which
the revenue claim would be paid over time in a series of
installments. If under the administrative practices of the
applicant State, the use of an installment agreement would have
the effect of extending the applicant State's statute of
limitations for collection, then by virtue of this paragraph 7,
the conclusion of an installment agreement between the taxpayer
and the requested State shall have the effect of extending the
statute of limitations in the applicant State. Paragraph 7
obligates the requested State to inform the applicant State
about such acts.
Paragraph 8 of New Article 27
Paragraph 8 of new Article 27 provides that the time limits
of the requested State, i.e., time limitations beyond which a
revenue claim cannot be enforced or collected, shall not apply
to a revenue claim in respect of which the applicant State has
made a request under this Article. Only the time limits of the
applicant State are applicable. Thus, as long as a revenue
claim can still be enforced or collected in the applicant
State, the requested State may not refuse to pursue a request
based on its own time limits. Paragraph 8 applies
notwithstanding paragraph 6 of new Article 27, which requires
the requested State to generally treat the revenue claim of the
applicant State as its own revenue claim.
Paragraph 8 also provides that the rules of the requested
State giving its own revenue claims priority over the claims of
other creditors shall not apply to a revenue claim in respect
of which a request for assistance has been made under new
Article 27. Such rules are often included in domestic laws to
ensure that tax authorities can collect taxes to the fullest
possible extent.
The words ``by reason of its nature as such'' found at the
end of the paragraph indicate that the time limits and priority
rules of the requested State to which the paragraph applies are
only those that are specific to unpaid taxes. Thus, the
paragraph does not prevent the application of general rules
concerning time limits or priority that would apply to all
debts (e.g., rules giving priority to a claim by reason of that
claim having arisen or having been registered before another
claim).
Paragraph 9 of New Article 27
Paragraph 9 of new Article 27 provides that nothing in
Article 27 shall be construed as creating in the requested
State any rights of administrative or judicial review of the
applicant State's finally determined revenue claim. Thus, when
an application for collection assistance has been accepted, the
substantive validity of the applicant State's revenue claim
cannot be challenged in an action in the requested State,
irrespective of any such rights that may be available under the
laws of either Contracting State.
Paragraph 10 of New Article 27
Paragraph 10 of new Article 27 provides that if, at any
time pending execution of an application for assistance under
Article 27, the applicant State loses the right under its
domestic law to collect the revenue claim or otherwise
terminates collection, the competent authority of the applicant
State shall promptly withdraw the application for assistance in
collection and the requested State shall cease all measures of
collection of the revenue claim.
Paragraph 11 of New Article 27
Paragraph 11 of new Article 27 provides that if, at any
time pending execution of an application for assistance under
Article 27, the applicant State suspends collection of the
revenue claim according to the laws of the applicant State, the
competent authority of the applicant State shall promptly
notify the competent authority of the requested State of that
fact, and the competent authority of the applicant State shall
either suspend or withdraw its request at the option of the
competent authority of the requested State and the requested
State shall suspend or cease all measures of collection of the
revenue claim accordingly.
Paragraph 12 of New Article 27
Paragraph 12 of new Article 27 provides that amounts
collected by the requested State pursuant to this Article shall
be remitted to the competent authority of the applicant State.
Paragraph 13 of New Article 27
Paragraph 13 of new Article 27 provides that unless the
competent authorities of both Contracting States otherwise
agree, the ordinary costs incurred in providing assistance in
collection shall be borne by the requested State, and any
extraordinary costs so incurred shall be borne by the applicant
State.
Paragraph 14 of New Article 27
Paragraph 14 of new Article 27 sets forth limitations on
the obligations imposed on the requested State. The requested
State is at liberty to refuse to provide assistance in the
cases referred to in the paragraph. However, if it does provide
assistance in these cases, it remains within the framework of
the Article and it cannot be objected that this State has
failed to observe the provisions of the Article.
In the first place, the paragraph provides that a
Contracting State is not bound to go beyond its own internal
laws and administrative practice or those of the other State in
fulfilling its obligations under the Article. However, types of
administrativemeasures authorized for the purpose of the
requested State's tax must be utilized, even though invoked
solely to provide assistance in the collection of taxes owed to
the requesting State.
Paragraph 8 of this Article provides that a Contracting
State's time limits will not apply to a revenue claim in
respect of which the other State has requested assistance.
Subparagraph 14(a) is not intended to defeat that principle.
Providing assistance with respect to a revenue claim after the
requested State's time limits have expired will not, therefore,
be considered to be at variance with the laws and
administrative practice of that or of the other Contracting
State in cases where the time limits applicable to that claim
have not expired in the requesting State.
Subparagraph 14(b) includes a limitation to carrying out
measures contrary to public policy.
Paragraph 15 of New Article 27
Paragraph 15 of new Article 27 sets forth additional
limitations on the obligations imposed on the requested State.
Under subparagraph 15(a), the requested State is not obliged to
satisfy a request for assistance if the applicant State has not
pursued all reasonable measures of collection available under
its laws or administrative practices. Under subparagraph 15(b),
the requested State may also reject a request for assistance
for practical considerations, for instance if the costs that it
would incur in collecting a revenue claim of the requesting
State would exceed the amount of the revenue claim.
Paragraph 16 of New Article 27
Paragraph 16 of new Article 27 mandates the competent
authorities of both Contracting States to reach a written
agreement on the mode of application of the Article before any
assistance shall be lent under the Article other than pursuant
to paragraph 3. The written agreement shall include: 1)
measures to ensure comparable levels of assistance to each
Contracting State; 2) a limit to the number of applications for
assistance that a Contracting State may make in a particular
year; and 3) minimum monetary thresholds for a revenue claim
for which assistance is sought. In addition, the written
agreement shall also set forth procedural rules related to the
remittance of amounts collected pursuant to the provisions of
the Article.
Paragraph 10 of the Exchange of Notes clarifies that new
Article 27 shall have effect from the date of entry into force
of the Protocol without regard to the taxable year to which the
revenue claim relates, provided all of the conditions and
requirements of the Article are satisfied. Thus, for example, a
Contracting State could request assistance under new Article 27
with respect to a revenue claim that arose prior to the entry
into force of the Protocol.
ARTICLE XIV
Article XIV of the Protocol makes numerous amendments to
the Protocol of 2003.
Paragraph 1
Paragraph 1 of Article XIV of the Protocol makes two non-
substantive changes to paragraph 1 of the Protocol of 2003. The
two references to ``United States excise tax'' are replaced
with the term ``Federal excise tax.'' Paragraph 7 of the
Exchange of Notes clarifies that for purposes of revised
paragraph 1 of the Protocol of 2003, the term ``Federal excise
tax on insurance policies issued by foreign insurers'' means
taxes imposed pursuant to Section 4371 through 4374 of the
Internal Revenue Code. Paragraph 8 of the Exchange of Notes
clarifies that for purposes of revised paragraph 1 of the
Protocol of 2003, the term ``Federal excise tax imposed with
respect to private foundations'' means taxes imposed pursuant
to Section 4940 through 4948 of the Internal Revenue Code.
Paragraph 2
Paragraph 2 of Article XIV of the Protocol deletes
paragraph 9 of the Protocol of 2003 in order to conform with
changes relating to capital gains that Article V of the
Protocol makes to Article 13 of the Convention.
Paragraph 3
Paragraph 3 of Article XIV of the Protocol adds two new
paragraphs to the Protocol of 2003. New paragraph 14 of the
Protocol of 2003 (discussed below) sets forth a number of
clarifications and rules regarding the application of the
mandatory binding arbitration provisions in new paragraphs 5, 6
and 7 of Article 25 of the Convention as modified by Article XI
of the Protocol. New paragraph 15 of the Protocol of 2003 is
discussed above in the explanation of paragraph 5 of new
Article 27 of the Convention.
New Subparagraph 14(a) of the Protocol of 2003
New subparagraph 14(a) of the Protocol of 2003 is discussed
above in the explanation of new paragraph 5 of Article 25 of
the Convention as amended by Article XI of the Protocol.
New Subparagraph 14(b) of the Protocol of 2003
New subparagraph 14(b) of the Protocol of 2003 sets forth
rules that the competent authorities shall follow for selecting
the members of the arbitration panel. The arbitration panel
shall consist of three individual members. The members
appointed shall not be employees nor have been employees within
the twelve-month period prior to the date on which the
arbitration proceeding begins, of the tax administration, the
Ministry of Finance or the Treasury Department of the
Contracting State which identifies them. Each competent
authority shall select one member of the arbitration panel. In
the event that the competent authority of one Contracting State
fails to select a member for the arbitration panel in the
manner and within the time periods agreed by the competent
authorities pursuant to new subparagraph 7(i)(iv) of Article 25
of the Convention, the competent authority of the other
Contracting State shall select a second member. The two members
of the arbitration panel who have been selected shall select
the third member, who shall serve as Chair of the arbitration
panel. If the two initial members of the arbitration panel fail
to select the third member in the manner and within the time
periods agreed by the competent authorities pursuant to new
subparagraph 7(i)(iv) of Article 25 of the Convention, these
members shall be dismissed, and each competent authority shall
select a new member of the arbitration panel. The Chair shall
not be a national or lawful permanent resident of either
Contracting State. Furthermore, the members appointed shall not
have any prior involvement with the specific matters at issue
in the proceeding for which they are being considered as
arbitrators.
New subparagraph 14(c) of the Protocol of 2003
New subparagraph 14(c) of the Protocol of 2003 sets forth
conditions under which the arbitration process with respect to
particular cases shall terminate. Subparagraph 14(c)(i)
provides that an arbitration proceeding with respect to a case
shall terminate if the competent authorities reach a mutual
agreement to resolve the case. Subparagraph 14(c)(ii) provides
that an arbitration proceeding with respect to a case shall
terminate if the presenter of the case withdraws his request
for arbitration. Subparagraph 14(c)(iii) provides that an
arbitration proceeding with respect to a case shall terminate
if a decision concerning the case is rendered by a court or
administrative tribunal of one of the Contracting States during
the arbitration proceeding. Subparagraph 14(c)(iv) provides
that an arbitration proceeding with respect to a case shall
terminate if any concerned person or their authorized
representatives or agents willfully violates the written
nondisclosure statement required by new subparagraph 5(b) of
Article 25, and the competent authorities of both Contracting
States agree that such violation should result in the
termination of the arbitration proceeding.
New Subparagraph 14(d) of the Protocol of 2003
Subparagraph 14(d) of the Protocol of 2003 sets forth the
rules governing the submission of proposed resolutions for
consideration by the arbitration panel. Each competent
authority shall be permitted to submit a proposed resolution
addressing each adjustment or similar issue raised in the case.
Such proposed resolution shall be a resolution of the entire
case and shall reflect without modification all matters in the
case previously agreed between the competent authorities. Such
proposed resolution shall be limited to a disposition of
specific monetary amounts (for example, of income, profit, gain
or expense) or, where specified, the maximum rate of tax
charged pursuant to the Convention for each adjustment or
similar issue in the case. Each competent authority shall also
be permitted to submit a supporting position paper for
consideration by the arbitration panel.
New Subparagraph 14(e) of the Protocol of 2003
New subparagraph 14(e) of the Protocol of 2003 provides a
special rule for proposed resolutions involving an initial
determination of a threshold question (such as the existence of
a permanent establishment). Subparagraph 14(e) provides that
notwithstanding the provisions of subparagraph 14(d) of the
Protocol of 2003, it is understood that, in the case of an
arbitration proceeding concerning: (i) the tax liability of an
individual with respect to whose State of residence the
competent authorities have been unable to reach agreement; (ii)
the taxation of the business profits of an enterprise with
respect to which the competent authorities have been unable to
reach an agreement on whether a permanent establishment exists;
or (iii) such other issues the determination of which are
contingent on resolution of similar threshold questions, the
proposed resolutions and position papers may include positions
regarding (i), (ii) or (iii) above, in addition to proposed
resolutions limited to specific monetary amounts (for example,
of income, profit, gain or expense) or, where specified, the
maximum rate of tax charged pursuant to the Convention due as a
consequence of the arbitration panel's determination regarding
residency, the existence of a permanent establishment or other
threshold questions. The determination of the arbitration panel
regarding the threshold question may preclude the need for a
further determination regarding specific monetary amounts or
the maximum rate of tax.
New Subparagraph 14(f) of the Protocol of 2003
New subparagraph 14(f) of the Protocol of 2003 provides
that where an arbitration proceeding concerns a case comprising
multiple adjustments or issues each requiring a disposition of
specific monetary amounts of income, profit, gain or expense
or, where specified, the maximum rate of tax charged pursuant
to the Convention, the proposed resolution may propose a
separate disposition for each adjustment or similar issue. This
flexibility permits each adjustment or issue to be resolved
independently through the arbitration proceeding, such that the
determination of the arbitration panel will constitute a mutual
agreement of the entirety of the issues in the case.
New Subparagraph 14(g) of the Protocol of 2003
New subparagraph 14(g) of the Protocol of 2003 provides
that each competent authority shall receive the proposed
resolution and position paper submitted by the other competent
authority, and shall be permitted to submit a reply submission
to the arbitration panel. Each competent authority shall also
receive the reply submission of the other competent authority.
New Subparagraph 14(h) of the Protocol of 2003
New subparagraph 14(h) of the Protocol of 2003 provides
that the presenter of the case shall be permitted to submit for
consideration by the arbitration panel a paper setting forth
the presenter's analysis and views of the case. The submission
by the presenter of the case is not a proposed resolution that
the arbitration panel could select in making its determination.
The submission by the presenter may not include any information
not provided to the competent authorities prior to the
initiation of the arbitration proceeding. The competent
authorities shall determine an appropriate time frame for
submission of such paper by the presenter in order to ensure
that the competent authorities have sufficient time to consider
the information.
New Subparagraph 14(i) of the Protocol of 2003
New subparagraph 14(i) of the Protocol of 2003 provides
that the arbitration panel shall deliver a determination in
writing to the competent authorities. The determination reached
by the arbitration panel in the arbitration proceeding shall be
limited to one of the proposed resolution submitted by one
competent authority for each adjustment or similar issue and
any threshold questions, and shall not include a rationale or
any other explanation of the determination. The determination
of the arbitration panel shall have no precedential value with
respect to the application of the Convention in any other case.
New Subparagraph 14(j) of the Protocol of 2003
New subparagraph 14(j) of the Protocol of 2003 provides
that unless the competent authorities of both Contracting
States agree to a longer time period, the presenter of the case
shall have 45 days from receiving the determination of the
arbitration panel to notify, in writing, the competent
authority of the Contracting State to whom the case was
presented, his acceptance of the determination. In the event
the case is pending in litigation and the presenter desires to
accept the determination, each concerned person who is a party
to the litigation must also advise, within the same time frame,
the relevant court of its acceptance of the determination of
the arbitration panel as the resolution by mutual agreement and
its intention to withdraw from the consideration of the court
the issues resolved through the proceeding. If any concerned
person fails to so advise the relevant competent authority and
relevant court within this time frame, the determination of the
arbitration panel shall be considered not to have been accepted
by the presenter of the case. Where the determination of the
arbitration panel is not accepted, the case will not be
eligible for any subsequent further consideration by the
competent authorities.
New Subparagraph 14(k) of the Protocol of 2003
New subparagraph 14(k) of the Protocol of 2003 provides
that the fees and expenses of the members of the arbitration
panel, as well as any costs incurred in connection with the
proceeding by the Contracting States, shall be borne equitably
by the competent authorities.
ARTICLE XV
This Article contains 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. The Protocol shall enter into force
on the date that the Contracting States exchange instruments of
ratification.
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
The date on which a treaty enters into force is not
necessarily the date on which its provisions take effect.
Paragraph 2, therefore, provides rules regarding when the
provisions of the Protocol will have effect.
Under subparagraph 2(a), the Protocol 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 the third month following the date on
which the Convention enters into force. For example, if
instruments of ratification are exchanged on April 25 of a
given year, the withholding rates specified in new Article 11
of the Convention would be applicable to any interest paid or
credited on or after July 1 of that year. This rule allows the
benefits of the withholding reductions to be put into effect as
soon as possible, without waiting until the following calendar
year. The two- to three-month delay is required to allow
sufficient time for withholding agents to be informed about the
change in withholding rates. If, after the provisions regarding
taxes withheld at source have entered into force, a U.S.
withholding agent withholds at a higher rate than that provided
by the Convention (perhaps because the withholding agent was
not able to re-program its computers before the payment was
made), a beneficial owner of the income that is a resident of
Japan may make a claim for refund pursuant to section 1464 of
the Code.
For all other taxes, subparagraph 2(b) specifies that the
Protocol will have effect for any taxable period beginning on
or after January 1 of the year following entry into force.
Paragraph 3
Paragraph 3 provides that notwithstanding the provisions of
paragraph 2, the mandatory binding arbitration rules provided
in new paragraphs 5, 6 and 7 of Article 25 of the Convention as
amended by Article XI of the Protocol shall have effect with
respect to (a) cases that are under consideration by the
competent authorities as of the date on which the Protocol
enters into force and (b) cases that come under such
consideration after the date on which the Protocol enters into
force. Thus, the mandatory binding arbitration rules may apply
with respect to tax liabilities (or potential tax liabilities)
arising before the Protocol enters into force.
With respect to cases that are under consideration by the
competent authorities as of the date on which the Protocol
enters into force, the commencement date (defined in new
paragraph 7(b) of Article 25) shall be the date on which 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 all the agreements required by new
subparagraph 7(c) of Article 25 have been received by both
competent authorities.
Paragraph 4
Paragraph 4 contains special rules regarding the effective
dates of the provisions of revised Articles 26 and 27 of the
Convention as amended by Articles XII and XIII respectively of
the Protocol. Notwithstanding the provisions of paragraph 2 of
this Article XV, the provisions of revised Articles 26 and 27
shall have effect from the date of entry into force of the
Protocol, and as clarified by paragraph 10 of the Exchange of
Notes, without regard to the matter or revenue claim to which
the request relates, provided all of the conditions and
requirements of the respective Articles are satisfied.
Paragraph 5
Paragraph 5 provides that notwithstanding the entry into
force of the Protocol, an individual who is entitled to the
benefits of Article 20 of the existing Convention (relating to
teachers and researchers) at the time of the entry into force
of the Protocol shall continue to be entitled to such benefits
until such time as the individual would have ceased to be
entitled to such benefits if the Protocol had not entered into
force.
Paragraph 6
Paragraph 6 provides that the Protocol shall remain in
effect as long as the Convention remains in force.
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