TEI comments on Dutch treaty protocol: July 8, 2004.

On July 8, 2004, TEI President Raymond G. Rossi sent the following letter to Senator Richard G. Lugar, Chairman of the Senate Foreign Relations Committee, concerning the ratification of the proposed protocol amending the income tax treaty with the Netherlands. The letter was prepared under the aegis of TEI's International Tax Committee, whose chair is Bruce R. Maggin of IBM Corporation. Materially contributing to the development of the letter were John K. DeShong of Edison Mission Energy and Janice L. Lucchesi of Akzo Nobel Inc.

On March 8, 2004, the United States and the Netherlands signed a protocol (the "New Protocol") to the Convention Between the United States of America and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, revising the existing, 12-year old agreement. On behalf of Tax Executives Institute, I submit the following comments on the New Protocol, which TEI urges the Senate to ratify this year before adjournment.

Background

Tax Executives Institute is the preeminent association of business tax executives. The Institute's 5,400 professionals manage the tax affairs of 2,800 of the leading companies in Canada, the United States, and Europe and must contend daily with the planning and compliance aspects of business tax laws in the United States as well as in other jurisdictions. TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling and retailing, real estate, transportation, financial services, telecommunications, and natural resources.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government.

The New Protocol

A fundamental purpose of bilateral income tax treaties is to eliminate double taxation of income earned by residents of either country from sources within the other country. Double taxation constitutes a significant burden on international trade and investment. Compared with more recent tax treaties between the United States and other trading partners such as the United Kingdom, Japan, Mexico, and Australia, the current treaty between the United States and the Netherlands ("Old Treaty") is antiquated and obstructs the free flow of trade between the two countries. In other words, the Old Treaty does not reflect recent important advancements in U.S. tax treaty policy. Specifically, the New Protocol eliminates barriers to trade and investment between the two countries, resolves uncertainties under the Old Treaty, curtails abusive use of the treaty, and promotes improved cooperation in international enforcement of the tax laws of both countries. Prompt ratification of the New Protocol will promote closer ties with a longstanding ally and major trading partner, encourage growth of the U.S. economy and jobs, and enhance international tax enforcement efforts.

In considering the New Protocol, the Senate should consider the following:

* The Netherlands is one of the most important trading partners to the United States. The New Protocol will promote the growth of trade and investment between our two countries to the benefit of both economies.

* The New Protocol will continue the trend in recent U.S. tax treaties of allowing the repatriation of earnings from a foreign subsidiary to the U.S. parent without a withholding tax on the dividends. This will encourage repatriation of offshore earnings by U.S. multinationals, bringing cash home for investment in the United States, thereby aiding the U.S. domestic economy and potentially raising domestic employment.

* Similarly, the elimination of the withholding tax on subsidiary-parent dividends paid to Dutch companies is one of several features in the New Protocol that will encourage increased foreign investment in the United States. This increased "inbound" investment will likewise aid the U.S. domestic economy and potentially raise domestic employment.

* The elimination by the New Protocol of the branch profits tax for Dutch companies directly engaged in business in the United States will encourage further "inbound" investment by Dutch companies in the U.S. economy.

* Because of its broad network of income tax treaties, the Netherlands is an attractive place for European multinationals to establish international holding subsidiaries. The New Protocol modernizes the Limitation on Benefits article to ensure the treaty serves its intended purpose of preventing treaty shopping, preventing abuses that result in revenue losses to the U.S. Treasury.

* The New Protocol will provide the Internal Revenue Service with improved measures for the exchange of information between U.S. and Dutch tax authorities and assistance in the collection of taxes. This should result in better enforcement efforts by the U.S. and Dutch tax authorities against tax shelters or other abusive transactions.

* The New Protocol will enhance the ability of the tax authorities to minimize double taxation by better defining and expanding the scope of the procedures for reaching mutual agreement on such matters and paving the way for the potential use of international arbitration procedures.

* The New Protocol will modernize the cross border treatment of pension funding and benefits by coordinating the two countries' rules so that nationals of each country can transfer between affiliated companies without jeopardizing the status of their retirement benefits. This will encourage investment by Dutch companies in the United States, as well as enable U.S. companies to more easily provide jobs for U.S. citizens overseas.

* The New Treaty will promote the relationship between the United States and the Netherlands at a time when improved international relations with traditional U.S. trading partners is singularly important.

Conclusion

Because the New Protocol substantially improves the operation of the income tax treaty between the United States of America and the Government of the Kingdom of the Netherlands, and given its importance to so many commercial interests and to the economies of both countries, Tax Executives Institute urges the Senate to ratify the agreement this year.

Any questions about the Institute's views should be directed to either Timothy J. McCormally, TEI Executive Director, or Fred F. Murray, the Institute's General Counsel and Director of Tax Affairs, at 202.638.5601.