Current income tax treaty developments.The past year was an exciting one in the foreign relations Foreign relations may refer to:
A principal can, for example, ratify something that has been done on his or her behalf by another individual who assumed the authority to act in the capacity of an agent. .
U.S. tax treaty negotiators were very busy in 1996, as five new agreements and two protocols were signed. In addition, a new agreement was recently signed with South Africa South Africa, Afrikaans Suid-Afrika, officially Republic of South Africa, republic (2005 est. pop. 44,344,000), 471,442 sq mi (1,221,037 sq km), S Africa. , and a new agreement with Ireland is expected to be completed soon.
Three of the treaties (with Austria, Luxembourg and Switzerland) replace older, outdated out·dat·ed
old-fashioned or obsolete
Adj. 1. agreements; the other two (with Thailand and Turkey) are first-ever treaties with those developing countries. The new treaty with South Africa returns that country to the U.S. treaty network, from which it had been banished since 1987. While all six agreements generally follow the Organization for Economic Cooperation and Development Organization for Economic Cooperation and Development (OECD), international organization that came into being in 1961. It superseded the Organization for European Economic Cooperation, which had been founded in 1948 to coordinate the Marshall Plan for European (OECD OECD: see Organization for Economic Cooperation and Development. ) and U.S. models, important differences will be detailed in Part II of this article.
The new treaties with Austria, Luxembourg and Turkey were supposed to be considered by the Senate Foreign Relations Committee (SFRC SFRC Senate Foreign Relations Committee
SFRC Steel Fiber Reinforced Concrete
SFRC School of Forest Resources and Conservation
SFRC Short Form Research Contract ) at a hearing in September 1996; the hearing was postponed and not rescheduled before the end of the 104th Congress. The SFPC SFPC Société Française de Pharmacie Clinique
SFPC Structural Firefighters Protective Clothing
SFPC Sustainable Forest Products Certification
SFPC Southern Florida Presidents Council of Motorcycle Clubs and Organizations is expected to hold a hearing in the first half of 1997 to consider these treaties, as well as the new treaties with Switzerland and Thailand. Treasury hopes to have the Technical Explanation completed in time to allow the South African agreement to be considered at the hearing. The Senate also approved the treaty and protocol with Kazakstan, which had been delayed more than two years, due to bank secrecy Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to protect personal information about their customers, through the use of numbered bank accounts or otherwise. issues.
The Senate also approved the protocol with Indonesia, reducing the withholding Withholding
Any tax that is taken directly out of an individual's wages or other income before he or she receives the funds.
In other words, these funds are "withheld" from your wages. rates on dividends, interest and royalties. The protocol with the Netherlands, also approved, phases out the 1948 Netherlands treaty that continued to apply to the Netherlands Antilles Netherlands Antilles, island group, an autonomous part of the Netherlands (2005 est. pop. 220,000), 371 sq mi (961 sq km), West Indies. Formerly known as the Dutch West Indies and Netherlands West Indies, they are divided into two groups. .
Treaties and Protocols
Taking Effect in 1996(1)
* Canada Protocol to 1980 treaty signed Mar. 17, 1995; approved by the Senate Aug. 11, 1995; entered into force Nov. 9, 1995; except with respect to death tax provisions, it is generally effective for payments and years beginning after Dec. 31, 1995.
* France New treaty replacing 1967 treaty signed Aug. 31, 1994; approved by the Senate Aug. 11, 1995; entered into force Dec. 30, 1995. Reduced withholding rates effective for payments after Jan. 31, 1996; otherwise effective for years beginning in 1996.
* Portugal First-ever treaty and protocol signed Sept. 6, 1994; approved by the Senate Aug. 11, 1995; entered into force Dec. 18, 1995, effective for payments and years beginning after Dec. 31, 1995.
* Sweden New treaty replacing 1939 agreement signed Sept. 1, 1994; approved by the Senate Aug. 11, 1995; entered into force Oct. 26, 1995, effective for payments and years beginning after Dec. 31, 1995 (for the Swedish capital tax, the treaty is effective for taxes assessed beg in 1997).
Treaties and Protocols Ratified rat·i·fy
tr.v. rat·i·fied, rat·i·fy·ing, rat·i·fies
To approve and give formal sanction to; confirm. See Synonyms at approve. in 1996
* Indonesia Protocol to 1988 treaty signed July 24, 1996; approved by the Senate Sept. 28, 1996; entered into force Dec. 23, 1996. Reduced withholding rates effective for payments after Jan. 31, 1997.
* Kazakstan First-ever treaty and protocol signed Oct. 24, 1993; approved by the Senate Sept. 28, 1996; entered into force Dec. 30, 1996. Reduced withholding rates effective for payments after Jan. 31, 1997; otherwise effective retroactively ret·ro·ac·tive
Influencing or applying to a period prior to enactment: a retroactive pay increase.
[French rétroactif, from Latin for years beginning in 1996. For payments or periods prior to those dates, the treaty with the former U.S.S.R. applies.
* Netherlands Antilles Protocol to 1948 Netherlands treaty as extended to the Netherlands Antilles signed Oct. 10, 1995; approved by the Senate Sept. 28, 1996; entered into force and effective Dec. 30, 1996. The protocol phases out the remaining applicable provisions of the 1948 treaty, except that interest on debt instruments backing Eurobonds issued by Netherlands Antilles subsidiaries of US. companies before Oct. 15, 1984 will continue to be exempt.
Treaties Approved in
1996, But Not Yet in Force
* Ukraine First-ever treaty and protocol signed Mar. 4, 1994; approved by the Senate Aug. 11, 1995. Bank secrecy problems continue to delay entry into force.
Treaties and Protocols Signed in
1996, Awaiting Senate Ratification
* Austria New treaty replacing 1956 agreement signed May 31, 1996. Was to be considered at the postponed SFRC hearing originally scheduled for Sept. 11, 1996.
* Luxembourg New treaty replacing 1962 agreement signed Apr. 13, 1996. Was to be considered at the postponed SFRC hearing originally scheduled for Sept. 11, 1996.
* South Africa New treaty signed Feb. 18, 1997. There has been no income tax treaty in force between the U.S. and South Africa since July 1, 1987, when the 1946 agreement was terminated in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.
As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with the Anti-apartheid Act.
* Switzerland New treaty replacing 1951 agreement signed Oct. 2, 1996.
* Thailand New treaty signed Nov. 26, 1996, replacing an unratified 1965 agreement.
* Turkey First-ever treaty signed Mar. 28, 1996. Was to be considered at the postponed SFPC hearing originally scheduled for Sept. 11, 1996.
of Termination Given
* Aruba The U.S. notified the Netherlands on Sept. 15, 1995 of its intent to terminate the 1948 treaty as extended to Aruba, effective Jan. 1, 1997.
* Azerbaijan According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. Treasury officials, notice has been provided to the State Department that the treaties entered into by the former U.S.S.R, have not been approved by the Azerbaijan Republic; thus, they are not effective.
* Malta The US. notified Malta on Nov. 16, 1995 of its intent to terminate the 1980 treaty, effective Jan. 1, 1997.
Treaties in Force -- Highlights
* Canada Withholding rates
* Dividends: For dividends paid after 1996 to a corporation owning at least 10% of the payer's voting stock Voting stock
The shares in a corporation that entitle the shareholder to vote.
Stock for which the holder has the right to vote in the election of directors, in the appointment of auditors, or in other matters brought up at the , the rate is 5%.(2) For payments in 1996, the rate was 6%.(3) The rate is 15% in all other cases,(4) including on dividends paid by a U.S. regulated investment company Regulated investment company
An investment company allowed to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders so that it is taxed only at the personal level, and double taxation is avoided. (RIC RIC Rhode Island College
RIC Rehabilitation Institute of Chicago
RIC Regulated Investment Company
RIC Royal Irish Constabulary
RIC Reuters Instrument Code
RIC Roman Imperial Coinage
RIC Resources Inventory Committee
RIC Rapid Intervention Crew ) or real estate investment trust (REIT REIT
See: Real Estate Investment Trust
See real estate investment trust (REIT). ), except that dividends paid by a REIT to a person other than an individual who beneficially owns less than 10% of the REIT are taxed at the U.S. nontreaty rate.(5) Dividends from a Canadian Canadian (kənā`dēən), river, 906 mi (1,458 km) long, rising in NE New Mexico. and flowing E across N Texas and central Oklahoma into the Arkansas River in E Oklahoma. nonresident-owned investment corporation (NRO NRO
See not reoffered (NRO). ), paid to a U.S. resident who beneficially own at least 10% of the NRO's stock, are taxed at 10%.(6) For years after 1996, the branch profits tax profits tax n → impuesto sobre los beneficios
profits tax n (Brit) → impôt m sur les bénéfices
profits tax profit (Brit rate is also reduced, from 5% to 6%.(7)
* Indonesia Withholding rates
* Dividends: The rate is reduced from 15% to 10% on dividends paid to a corporation owning directly at least 25% of the payer's voting stock. 8 The 10% rate also applies for branch profits tax purposes.(9)
* Interest: The rate is reduced from 15% to 10%.(10) Certain governmental agencies qualify for a source-tax exemption, including the government of either country (including political subdivisions and local authorities thereof), the Central Bank of either country or financial institutions owned or controlled by the government of either country.(11)
* Royalties: The rate is reduced from 15% to 10%.(12)
* Kazakstan Withholding rates
* Dividends: The rate is 5% on dividends paid to a corporation owning directly at least 10% of the payer's voting stock, unless the payer is a RIC or REIT.(13) This rate also applies for branch profits tax purposes.(14) The rate is 15% in other cases (including dividends paid by a RIC); however, dividends paid by a REIT are taxed at the nontreaty rate.(15)
* Interest: The rate is generally 10%.(16) There is no withholding on interest (1) paid or beneficially owned by either government or any agreed-on political subdivision or local authority thereof or (2) on a loan of at least three years made, guaranteed or insured by a government export credit agency Export Credit Agency
An agency established by a country to finance its nation's goods, investment, and services, often offers political risk insurance. .(17)
A 10% excess interest tax is permitted on certain Kazakstan residents conducting business in the US.(18)
If Kazakstan agrees to a lower rate of withholding in a treaty with any other member of the OECD, both Kazakstan and the US. agree to promptly amend the treaty to apply that lower rate.(19) However, such a reduction will be subject to the usual ratification procedures.(20)
The US. may tax an excess inclusion with respect to a real estate mortgage investment conduit Real Estate Mortgage Investment Conduit (REMIC)
A pass-through tax entity that can hold mortgages secured by any type of real property and can issue multiple classes of ownership interests to investors in the form of pass-through certificates, bonds, or other legal forms. at the nontreaty rate.(21)
* Royalties: The rate is 10% on payments of any kind for the use of (or the right to use) any copyright of a literary, artistic or scientific work (including computer software programs, videocassettes, and cinematograph cin·e·mat·o·graph
n. Chiefly British
1. A movie camera or projector.
2. A movie theater.
[French cinématographe : Greek k films md tapes for radio and television broadcasting; any patent, trademark, design or model, plan, secret formula or process or other like right or property; or information concerning industrial, commercial, or scientific experience (i.e., know-how)).(22)
Payments for the use of (or the right to use) industrial, commercial or scientific equipment are also generally subject to the 10% rate; however, taxpayers may elect to be taxed on such payments on a net basis, as if attributable to a permanent establishment (PE).(23)
* Residence: With respect to income derived by a partnership, trust or estate, residence is determined in accordance with the residence of the person liable to tax with respect to such income. A dual resident company is not automatically treated as a resident of the country under whose laws it was created; if the competent authorities cannot mutually agree on residence, the company will be treated as a resident of neither country.(24)
* PE: A PE is defined to include a building site or construction, installation or assembly project or supervisory services connected therewith there·with
1. With that, this, or it.
2. In addition to that.
3. Archaic Immediately thereafter.
Adv. 1. , or an installation or drilling rig or ship used for the exploration or exploitation of natural resources Exploitation of natural resources is an essential condition of the human existence.
This refers primarily to food production, but minerals, timber, and a whole raft of other entities from the natural environment also have been extracted. , but only if the site, project or rig lasts or such services continue for more than 12 months.(25) According to die Treasury Technical Explanation,(26) although the inclusion of supervisory services cliffers from the U.S. and OECD models, the commentary to paragraph 3 of Art. 5 of the OECD model points out that activities of planning and supervision, as well as activities of subcontractors, are taken into account in determine whether the general contractor A general contractor is an organization or individual that contracts with another organization or individual (the owner) for the construction of a building, road or any other execution of work or facility. has a PE.
The furnishing of services (including consultancy services) by residents through employees or other personnel engaged by the residents for such purposes constitutes a PE if such services last for more than 12 months.(27) Time spent for the same or a connected project will be aggregated. According to the Treasury Technical Expectation,28 the preferred U.S. treaty policy is that such services do not give rise to a PE unless performed through a fixed place of business or by a dependent agent. However, the U.S. has agreed to similar provisions in other treaties with developing countries.(29)
* Business profits: Like several other U.S. treaties with developing countries and the U.N. model, sales of goods or merchandise or other business activities carried on by a resident of one contracting state (CS) in the other CS are not taxable in the latter unless the resident carries on (or has carried on) a business in the other CS via a PE. However, the CS in which the PE is located may also tax the business profits, other than those derived by the PE that are (1) derived from sales of goods or merchandise in that CS of the same kind as those sold through the PE and (2) from the resident's other business activities there if the activities are the same kind as those performed in the PE.(30)
Example: X Corporation, a U.S. domestic corporation, has a branch in Kazakstan through which it sells gizmos. The branch constitutes a PE; thus, X's business profits attributable to the branch will be subject to tax in Kazakstan. However, if X also sells gizmos directly to customers in Kazakstan, profits from those sales will also be taxed there, despite the fact that those profits were not attributable to the PE.
A PE cannot deduct de·duct
v. de·duct·ed, de·duct·ing, de·ducts
1. To take away (a quantity) from another; subtract.
2. To derive by deduction; deduce.
v.intr. royalties, fees, commissions or service fees paid to its head office.(31) According to the Treasury Technical Explanation,32 this provision clarifies that there should be no profit element in intracompany in·tra·com·pa·ny
Occurring within or between the branches of a company: an intracompany network. transfers; however, the PE may deduct such items when made as reimbursement Reimbursement
Payment made to someone for out-of-pocket expenses has incurred. to the home office for actual expenses.
* Income from real property: Income derived by a resident of one CS from real property located in the other CS may be taxed by the latter.(33) "Real property" includes any interest owned or held in tenancy A situation that arises when one individual conveys real property to another individual by way of a lease. The relation of an individual to the land he or she holds that designates the extent of that person's estate in real property. by any individual or legal entity in land, unsevered products of land and fixtures built on that land (e.g., buildings, structures, etc.) and other property considered real property under the law of the CS in which the property is situated.(34)
* Gains: A CS may tax gains from the alienation alienation, in property laws: see tenure.
In the social sciences context, the state of feeling estranged or separated from one's milieu, work, products of work, or self. of stock, participations or other rights in the capital of a company or other legal person (whether or not a resident of the CS), the property of which consists principally of real property situated in the CS, or from the alienation of an interest in a partnership, trust or estate (whether or not a resident of the CS) to the extent attributable to real property located in the CS.(35)
* Independent personal services personal services n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. These can include the talents of an artist, an actor, a writer, or professional services. and income from employment: The treaty does not contain separate provisions dealing with the income of entertainers, athletes or teachers; thus, the income of such individuals is taxed under Art. 14 (Independent Personal Services) or 15 (Income from Employment).
* Limitation on benefits: Benefits under the treaty are allowed only to a resident of a CS that is (1) an individual; (2) a person engaged in the active conduct of a trade or business in the other CS (other than the business of making or managing investments, unless carried on by a bank or insurance company), and the income derived from the other CS is in connection with (or incidental Contingent upon or pertaining to something that is more important; that which is necessary, appertaining to, or depending upon another known as the principal.
Under Workers' Compensation statutes, a risk is deemed incidental to employment when it is related to whatever a to) that business; (3) a company (or wholly owned subsidiary Wholly Owned Subsidiary
A subsidiary whose parent company owns 100% of its common stock.
In other words, the parent company owns the company outright and there are no minority owners. of a company) whose shares are substantially and regularly traded on a recognized securities exchange in the CS in which the company is a resident; (4) a tax-exempt not-for-profit Not-for-profit
An organization established for charitable, humanitarian, or educational purposes that is exempt from some taxes and in which no one in profits or losses. organization, if more than half of the beneficiaries, members or participants are entitled en·ti·tle
tr.v. en·ti·tled, en·ti·tling, en·ti·tles
1. To give a name or title to.
2. To furnish with a right or claim to something: to benefits; or (5) a person who meets both a 5,0% ownership and a 50% base erosion test.(36) A resident of one CS that does not otherwise qualify for treaty benefits may request that the competent authority of the other CS it such benefits.(37)
* Relief from double taxation: The treaty provides for the prevention of double taxation through a credit system. If the U.S. amends AMENDS. A satisfaction, given by a wrong doer to the party injured for a wrong committed. 1 Lilly's Reg. 81.
2. By statute 24 Geo. II. c. 44, in England, and by similar statutes in some of the United States, justices of the peace, upon being notified of an its laws or agrees to a provision in an income tax treaty with another country to allow tax-sparing credits, the parties with promptly amend the convention to include a tax-sparing credit provision.(38)
The second part of this article, in the next issue, will discuss the more important features of the treaties with Austria, Luxembourg, South Africa, Switzerland, Thailand and Turkey, all of which are awaiting Senate ratification.
(1) For more information, see Dichter, "Tax Clinic: Tax Treaty Developments," 27 The Tax Adviser 144 (March 1996).
(2)Art. X(2)(a), Convention Between the United States of America UNITED STATES OF AMERICA. The name of this country. The United States, now thirty-one in number, are Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, and Canada with Respect to Taxes on Income and on Capital (hereinafter here·in·af·ter
In a following part of this document, statement, or book.
Formal or law from this point on in this document, matter, or case
Adv. 1. , "Canada Treaty"), as amended a·mend
v. a·mend·ed, a·mend·ing, a·mends
1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive.
2. by Protocol Amending the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital Signed at Washington on September 26, 1980, as amended by the Protocols Signed on June 14, 1983 and March 28, 1984 (hereinafter, "Canada Protocol"), Arts. 5(1) and 21(2)(a).
(3) Canada Treaty Art. X(2)(b).
(4) Canada Protocol Art. 21(2)(a)(ii).
(5) Canada Treaty Art. X(7)(a), as amended by Canada Protocol Art. 5(2).
(6) Canada Treaty Art. X(7)(b) and (c), as amended by Canada Protocol Art. 5(2).
(7) Canada Treaty Art. X(6); Canada Protocol Art. 21(2)(b).
(8) Art. 11 (2) (a), Convention Between the Government of the United States of America and the Government of the Republic of Indonesia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion EVASION. A subtle device to set aside the truth, or escape the punishment of the law; as if a man should tempt another to strike him first, in order that he might have an opportunity of returning the blow with impunity. with Respect to Taxes on Income (hereinafter, "Indonesia Treaty") with a Related Protocol and Exchange of Notes Signed at Jakarta on the 11 th day of July, 1988 (hereinafter, "Indonesia Protocol"), Art. I (1).
(9) Indonesia Treaty Art. 11(4), as amended by Indonesia Protocol Art. 1(2).
(10) Indonesia Treaty Art. 12(2), as amended by Indonesia Protocol Art. 2.
(11) Indonesia Treaty Art. 12(3), as amended by Indonesia Protocol Art. 2.
(12) Indonesia Treaty Art. 13(2), as amended by Indonesia Protocol Art. 3.
(13) Art. 10(2)(a), Convention Between the Government of the Republic of Kazakstan and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (hereinafter, "Kazakstan Treaty"), as amended by the Protocol and the Two Related Exchanges of Notes Signed at Almaty on Oct. 24, 1993 (hereinafter, "Kazakstan Protocol"), [paragraph] 32(a).
(14) Kazakstan Treaty Art. 10(5); Kazakstan Protocol [paragraph] 2(b).
(15) Kazakstan Treaty Art. 10(2)(b); Kazakstan Protocol [paragraph] 2(a).
(16) Kazakstan Treaty Art. 11(2).
(17) Kazakstan Treary Art. 11 3); Kazakstan Protocol [paragraph] 3(b).
(18) Kazakstan Protocol [paragraph] 3(d).
(19) Kazakstan Protocol [paragraph] 3(a); Memorandum of Understanding A Memorandum of Understanding (MoU) is a legal document describing a bilateral or multilateral agreement between parties. It expresses a convergence of will between the parties, indicating an intended common line of action and may not imply a legal commitment. with Respect to Certain Provisions of the Convention Between the Government of the Republic of Kazakstan and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Signed at Almaty on Oct. 24, 1993, [paragraph] 4.
(20) Memorandum of Understanding, id., at [paragraph] 4.
(21) Kazakstan Protocol [paragraph] 3(c).
(22) Kazakstan Treaty Art. 12(2) and (3)(b).
(23) Kazakstan Treaty Art. 12(2) and (3)(b).
(24) Kazakstan Treaty Art. 4(1)(b) and (3).
(25) Kazakstan Treaty, Art. 5(3)(a); Kazakstan Protocol [paragraph] 1.
(26) Treasury Technical Explanation of the Convention and Protocol Between the Government of the United States of America and the Government of the Republic of Kazakstan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Signed at Almaty on Oct. 24, 1993 (hereinafter, "Treasury Technical Explanation"), re: Art. 5.
(27) Kazakstan Treaty Art. 5(3)(b).
(28) Treasury Technical Explanation re: Art. 5.
(29) See, e.g., the U.S. treaties with the Czech Republic Czech Republic, Czech Česká Republika (2005 est. pop. 10,241,000), republic, 29,677 sq mi (78,864 sq km), central Europe. It is bordered by Slovakia on the east, Austria on the south, Germany on the west, and Poland on the north. , Art. 5(3)(b); India, Art. 5(2)(1); Indonesia, Art. 5(2)(j); and the Slovak Republic, Art. 5(3)(b), all of which provide a shorter threshold than 12 months.
(30) Kazakstan Treaty Art. 6(1).
(31) Kazakstan Treaty Art. 6(3).
(32) Treasury Technical Explanation re: Art. 6.
(33) Kazakstan Treaty Art. 9(1)
(34) Kazakstan Treaty Art. 9(2).
(35) Kazakstan Treaty Art. 13(2).
(36) Kazakstan Treary Art. 21(1); to pass the ownership test, under Kazakstan Treaty Art. 21(1)(e), at least 50% of the person must be beneficially owned (directly or indirectly) by U.S. citizens or other persons entitled to treary benefits; to pass the base erosion test, no more than 50% of the person's gross income must be used (directly or indirectly) to meet liabilities to persons who are not U.S. citizens or persons not entitled to treaty benefits.
(37) Kazakstan Treaty Art. 21(2).
(38) Kazakstan Protocol [paragraph] 8(d).
* The SFRC expects to hold a hearing in the first half of 1997 to consider the treaties with Austria, Luxenbourg, Switzerland, Thailand, Turkey and possibly, South Africa.
* The new treaties with Austria, Luxembourg, South Africa Switzerland, Thailand and Turkey generally follow the OECD and U.S. models.
* The treaty with South Africa returns that country to the U.S. treaty network, from which it had been banished since 1987.