Pending tax treaties and protocols.

On January 12, 1995, Tax Executives Institute urged the Senate Foreign Relations Committee to recommend ratification of seven pending tax treaties and protocols. The Institute's comments are reprinted below. (Similar comments were filed with the 103d Congress last summer.) TEI's comments were prepared under the aegis of its International Tax Committee, whose chair is Philip J. Bergquist of Apple Computer, Inc.

Last year President Clinton forwarded several tax treaties and protocols to the Senate for ratification in respect of the following trading partners of the United States: Canada, France, Kazakhstan, Mexico, Portugal, Sweden, and Ukraine. The 103d Congress adjourned, however, without taking up the treaties and protocols. Because of the importance of the treaties to multinational corporations, Tax Executives Institute urges the Committee on Foreign Relations to schedule a hearing on the treaties and protocols as soon as possible and to recommend ratification by the full Senate. In our view, the primary beneficiaries of the treaties will be - not foreign multinational corporations - but U.S. corporations operating abroad that need a level playing field to compete effectively in the global marketplace.

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 5,000 members represent more than 2,500 of the leading corporations in the United States and Canada. A substantial number of TEI members work for companies that engage in international trade and hence will be affected by the seven treaties and protocols now pending before the Senate.

The U.S. tax treaty network is an important part of the country's framework for international trade. Bilateral treaties play a critical role in bringing certainty to the global marketplace and safeguarding multinational businesses from the threat of double taxation. TEI has long been concerned that arbitrary tax rules restrict the ability of U.S.-based companies to compete effectively abroad and deter foreign investment in the United States. In a perfect world, tax rules would not drive business decisions, but the world is far from perfect. Thus, tax rules can - and do - affect the decisions of multinational corporations, and the affected governments must respond accordingly.

In our view, the country's economic interests are best served when the international "playing field" is as level as possible. This goal can be advanced by removing tax barriers that impede the flow of goods across borders. Indeed, TEI believes that the principal function of income tax treaties is to facilitate international trade and investment by removing - or preventing the erection of - tax barriers to the free international exchange of goods and services and the unfettered international movement of capital and persons. Well-crafted tax treaties can enhance the competitiveness of U.S. businesses abroad and foster a favorable investment climate in the United States for foreign businesses and investors, thereby creating substantial economic opportunities for all Americans.

TEI believes that the seven treaties and protocols now under consideration mark an important step in reducing the economic barriers that impede trade. Although the Institute may take issue with particular provisions of certain of the treaties and protocols, TEI strongly believes ratification is in the best interest of the business community and the country in general.

Lowering the withholding rates on interest, dividends, and royalties - which these treaties will effect - will reduce the influence of tax considerations on decisions regarding the capital structures of multinational companies. The treaties should also stem controversies in respect of the debt-versus-equity characterization of hybrid instruments.

Given the composition of our membership, TEI is particularly interested in the expeditious ratification of the Canadian protocol. Trade with Canada - the United States' number one trading partner - is particularly important to U.S. businesses, and the U.S. and Canadian members of the Institute have first-hand knowledge of the need for the protocol. TEI cautions, moreover, that care should be exercised in preparing the technical explanation to ensure that the salutary reduction in the withholding tax on royalties is not so circumscribed that the core purpose of the protocol is undermined.

In conclusion, TEI strongly recommends that the Senate Foreign Relations Committee hold hearings on the treaties and protocols as soon as possible and that the Committee - and the Senate as a whole - approve the seven treaties and protocols.

Tax Executives Institute appreciates this opportunity to provide its views on the pending tax treaties and protocols. If you have any questions, please do not hesitate to call either me at [phone] or Timothy J. McCormally of the Institute's professional staff at [phone].