Statement before Senate Foreign Relations Committee on Dutch and Barbados treaties: September 24, 2004.
Good morning. I am Judith P. Zelisko, Vice President-Tax for Brunswick Corporation. I am appearing today as President of Tax Executives Institute, whose 5,400 members work for 2,800 of the largest companies in North America and Europe. TEI appreciates the opportunity to present its views today on the proposed protocols now under consideration by this Committee.
Tax Executives Institute was established in 1944 to serve the professional needs of in-house tax practitioners. Today, the Institute has 53 chapters in the United States, Canada, and Europe. Our 5,400 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe; they are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. Hence, TEI represents the business community as a whole, and our members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily basis. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.
The majority of TEI's members work for multinational companies with substantial international operations and sales. Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the various tax laws relating to the operation of business enterprises. Consequently, TEI members have a special interest in 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 (the "Dutch Protocol")--which was signed on March 8, 2004--and the Second Protocol Amending the Convention Between the United States of America and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the "Barbados Protocol")--which was signed on July 14, 2004.
The Dutch Protocol
A fundamental purpose of America's 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, and, hence, may impede economic growth. Compared with more recent tax treaties, the current treaty between the United States and the Netherlands is antiquated and obstructs the free flow of trade between the two countries.
The Dutch Protocol eliminates barriers to trade and investment between the two countries, curtails abusive use of the treaty, and promotes improved cooperation in international enforcement of the tax laws of both countries. Prompt ratification of the Dutch Protocol will promote closer ties with a major trading partner, encourage growth of the U.S. economy and jobs, and enhance international tax enforcement efforts. Indeed, the Dutch Protocol modernizes the Limitation on Benefits article to ensure the treaty serves its intended purpose, while preventing treaty shopping and abuses that result in revenue losses to the U.S. Treasury.
In reviewing the Dutch Protocol, the Senate should consider the following:
* The Netherlands is an extremely important trading partner to the United States. The New Dutch Protocol will promote the growth of trade and investment between our two countries and thus benefit both economies.
* Consistent with other relevant treaties, the Dutch Protocol will permit 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, permitting its reinvestment in the United States, and thereby aiding the U.S. domestic economy and potentially raising domestic employment.
* Similarly, the Dutch Protocol's elimination of the withholding tax on subsidiary-parent dividends paid to Dutch companies and the branch profits tax for Dutch companies directly engaged in business in the United States will encourage increased foreign investment in the United States.
* The Dutch 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 will aid enforcement efforts in both countries against tax shelters or other abusive transactions.
* The Dutch 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 Dutch 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 provide their U.S. citizen employees who transfer overseas, for example, on temporary assignment, with the same pension benefits as their U.S.-based colleagues.
Because the protocol substantially improves the operation of the income tax treaty between the United States and the Netherlands, Tax Executives Institute urges the Committee to approve the new agreement and seek its ratification this year.
The Barbados Protocol
The Barbados Protocol is designed to bring the current U.S.-Barbados treaty in line with U.S. policy and put adequate safeguards in place to prevent inappropriate use of the treaty.
To accomplish these objectives, the Barbados Protocol expands the existing Limitation on Benefits article to ensure that the treaty is used only by bona fide residents of the two countries and to modernize the treaty's anti-treaty shopping provision. According to the U.S. Department of Treasury, the more restrictive terms are necessary to address concerns about the unintended use of the U.S.-Barbados treaty by U.S. companies that purport to migrate their corporate structures off-shore. The Treasury Department believes that the Barbados Protocol will ensure that the U.S.-Barbados treaty operates to address double taxation, but cannot be used to eliminate taxation altogether.
The Barbados Protocol also contains an amendment to the Exchange of Information article of the existing treaty. To prevent fraud or tax evasion, competent authorities will be permitted to obtain and provide information obtained by financial institutions, nominees, or persons acting in an agency or fiduciary capacity. An exception is provided, however, for communications subject to the attorney-client privilege.
Although TEI has reservations about expanding the Limitations on Benefits provision to the U.S. treaty network without thorough analysis, on balance we agree that ratification of the Barbados Protocol is in the best interest of the country and the business community. (1)
Tax Executives Institute commends the Committee on Foreign Relations for holding this public hearing. TEI looks forward to working with the Committee to reduce the risk of double taxation and improve tax administration.
(1) Last year, Congress identified Barbados as a county whose income tax treaty with the United States did not qualify as a "comprehensive" treaty, thereby disqualifying dividends from a Barbados corporation for the more favorable 15-percent tax rate established in the Jobs and Growth Tax Relief Act of 2003. With ratification of the Barbados Protocol, TEI believes that any defect in the U.S.-Barbados treaty will be cured and the Treasury Department and IRS should move swiftly to remove the country from the list of non-qualifying countries published in Notice 2003-69, 2003-42 I.R.B. 851.
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|Date:||Sep 1, 2004|
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