[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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