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114th Congress    }                                {       Exec. Rept.
                                 SENATE
 2d Session       }                                {          114-1

======================================================================
 
                   PROTOCOL AMENDING TAX CONVENTION 
                            WITH SWITZERLAND

                                _______
                                

                February 9, 2016.--Ordered to be printed

                                _______
                                

          Mr. Corker, from the Committee on Foreign Relations,
                        submitted the following

                                 REPORT

                    [To accompany Treaty Doc. 112-1]

    The Committee on Foreign Relations, to which was referred 
the Protocol Amending the Convention between the United States 
of America and the Swiss Confederation for the Avoidance of 
Double Taxation With Respect to Taxes on Income, signed at 
Washington on October 2, 1996, signed on September 23, 2009, at 
Washington, as corrected by an exchange of notes effected 
November 16, 2010, and a related agreement effected by an 
exchange of notes on September 23, 2009 (Treaty Doc. 112-1) 
(collectively, the ``Protocol''), having considered the same, 
reports favorably thereon with one declaration and conditions 
related to reporting on mandatory arbitration, 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.........7

 IX. Annex 1.--Technical Explanation.................................11
  X. Annex 2.--Transcript of Hearing of October 29, 2015.............23

                               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 Switzerland, and to bring the 
existing treaty with Switzerland (the ``Treaty'') into 
conformity with current U.S. tax treaty policy. Principally, 
the Protocol will modernize the existing Treaty's rules 
governing exchange of information; provide for the 
establishment of a mandatory arbitration rule to facilitate 
resolution of disputes between the U.S. and Swiss revenue 
authorities about the Treaty's application to particular 
taxpayers; and provide an exemption from source country 
withholding tax on dividends paid to individual retirement 
accounts.

                             II. Background

    The United States has a tax treaty with Switzerland that is 
currently in force, which was concluded in 1996 along with a 
separate protocol to the treaty concluded on the same day 
(``1996 Protocol''). The proposed Protocol was negotiated to 
modernize our relationship with Switzerland in this area and to 
update the current treaty to better reflect current U.S. and 
Swiss domestic tax policy.

                         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 June 7, 2011, which is included 
in Annex 1. In addition, the staff of the Joint Committee on 
Taxation prepared an analysis of the Protocol, JCX-31-11 (May 
20, 2011), 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.
    The Protocol is primarily intended to update the existing 
Swiss Convention to conform to current U.S. and Swiss tax 
treaty policy. It provides an exemption from source country 
withholding tax on dividends paid to individual retirement 
accounts; provides for the establishment of a mandatory 
arbitration rule to facilitate resolution of disputes between 
the U.S. and Swiss revenue authorities about the Treaty's 
application to particular taxpayers; and modernizes the 
existing Convention's rules governing exchange of information.

                     INDIVIDUAL RETIREMENT ACCOUNTS

    The Protocol updates the provisions of the existing 
Convention, as requested by Switzerland, to provide an 
exemption from source country withholding tax on dividends paid 
to individual retirement accounts.

                         MANDATORY ARBITRATION

    The Protocol incorporates mandatory, binding arbitration in 
certain cases that the competent authorities of the United 
States and Switzerland have been unable to resolve after a 
reasonable period of time under the mutual agreement procedure. 
The procedures include: (1) the opportunity for taxpayer 
participation by providing information directly to the arbitral 
panel through position papers; and (2) a prohibition against 
either state appointing an employee of its tax administration 
as a member of the arbitration panel.

                        EXCHANGE OF INFORMATION

    The Protocol would replace the existing Treaty's tax 
information exchange provisions (contained in Article 26) with 
updated rules that are consistent with current U.S. tax treaty 
practice. The Protocol provides that the tax authorities of the 
two countries shall exchange information relevant to carrying 
out the provisions of the Convention or the domestic tax laws 
of either country. This broadens the Treaty's existing 
information sharing provisions, which provides for information 
sharing only where necessary for the prevention of income tax 
fraud or similar activities but in a manner consistent with 
long-standing U.S. tax laws. The Protocol also enables the 
United States to obtain information (including from financial 
institutions) from Switzerland whether or not Switzerland needs 
the information for its own tax purposes.

                          IV. Entry Into Force

    The proposed Protocol will enter into force between the 
United States and Switzerland on the date of the later note in 
an exchange of diplomatic notes in which the Parties notify 
each other that their respective applicable procedures for 
ratification have been satisfied. The various provisions of 
this Protocol shall have effect as described in paragraph 2 of 
Article V of the Protocol.

                      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 Convention on 
October 29, 2015. Testimony was received from Robert Stack, 
Deputy Assistant Secretary (International Tax Affairs) at the 
U.S. Department of the Treasury and Thomas Barthold, Chief of 
Staff of the Joint Committee on Taxation. A transcript of the 
hearing is included in Annex 2 of this report. On November 10, 
2015, the committee considered the Protocol and ordered it 
favorably reported by voice vote, with a quorum present and 
without objection.
    In the 112th Congress, on July 26, 2011, the committee 
considered the Protocol and ordered it favorably reported by 
voice vote, with a quorum present and without objection.
    In the 113th Congress, on April 1, 2014, the committee 
again considered the Protocol and ordered it favorably reported 
by voice vote, 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, 
strengthen provisions regarding the exchange of tax 
information, and promote closer co-operation between the United 
States and Switzerland. 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. MANDATORY ARBITRATION

    The arbitration provision in the Protocol is largely 
consistent with the arbitration provisions included in recent 
treaties negotiated with Canada, Germany, Belgium, and France. 
It includes the modifications that were made first to the 
French treaty provisions to reflect concerns expressed by the 
Senate during its approval of the other treaties. 
Significantly, the provision in the Protocol includes: (1) the 
opportunity for taxpayer participation by providing information 
directly to the arbitral panel through position papers; and (2) 
a prohibition against either state appointing an employee of 
its tax administration as a member of the panel.

                       B. EXCHANGE OF INFORMATION

    All tax treaties provide a process for the exchange of 
information between the two Competent Authorities who have the 
responsibility of enforcing national tax laws. If issues arise 
regarding a taxpayer failing to pay owed taxes that may be 
subject to taxation, the Competent Authority may formally 
request information and assistance from the other Competent 
Authority.
    The Internal Revenue Services, designated the U.S. 
Competent Authority, must under the IRS Manual, exhaust all 
reasonable attempts to secure the information regarding the 
taxpayer's accounts before making an exchange of information 
request of the foreign competent authority. The Joint Committee 
on Taxation publishes an annual report with the total number of 
tax treaty disclosures. The latest report, dated June 5, 2015, 
indicated 2557 disclosures of tax-payer specific returns or 
return information made to a foreign competent authority under 
either a tax treaty or a tax information exchange agreement in 
the previous calendar year.
    The committee notes that an exchange of information 
undertaken pursuant to a tax treaty is a tightly controlled 
process. U.S.government officials engaging in an exchange of 
information with a foreign Competent Authority are required to 
safeguard U.S. taxpayer information under the taxpayer 
confidentiality provisions of 26 U.S.C. 6103. The U.S. 
``Competent Authority'' is authorized to decline an information 
request from a foreign government if the U.S. official has 
reason to believe the information will be disclosed in an 
unauthorized manner, misused for purposes other than legitimate 
tax collection, or otherwise used or disclosed for a purpose 
other than the legitimate enforcement of tax laws. The U.S. 
Competent Authority has declined requests the engage in 
information exchange when the Competent Authority had reason to 
believe the information would be used inappropriately or 
disclosed in an unauthorized manner.
    Furthermore, the committee notes that U.S. taxpayers are 
further protected under the IRS Manual and long-standing tax 
treaty practice by the fact that a foreign Competent Authority 
is obligated to exhaust all reasonable efforts to secure the 
information and must present a credible case for the need for 
the information before a treaty request will be honored by the 
U.S. Government.
    The Protocol would replace the existing Treaty's tax 
information exchange provisions with updated rules that are 
consistent with current U.S. tax treaty practice. The Protocol 
would allow the tax authorities of each country to exchange 
information relevant to carrying out the provisions of the 
Treaty or the domestic tax laws of either country, including 
information that would otherwise be protected by the bank 
secrecy laws of either country. It would also enable the United 
States to obtain information (including from financial 
institutions) from Switzerland whether or not Switzerland needs 
the information for its own tax purposes.
    With respect to the issue of exchange of information under 
the treaty, the committee notes that the new standard under the 
Protocol for when Treasury can seek information in a tax 
inquiry under the exchange of information provisions in the 
treaty is in fact the existing standard under the U.S. tax law 
that has been in effect since 1954. The relevant federal 
statute (26 U.S.C. Sec. 7602(a)(1)) authorizes the IRS, for the 
purpose of examining a tax return or determining a person's tax 
liability, ``to examine any books, papers, records, or other 
data which may be relevant or material to such inquiry.''
    This ``may be relevant'' standard has been repeatedly 
upheld by the U.S. Supreme Court. See e.g., United States v. 
Arthur Young & Co., 465 U.S. 805 (1984). A version of this 
standard has been part of the model U.S. Tax Treaty since 1996, 
and prior versions of the U.S. Model Tax Treaty were 
consistently interpreted as establishing the same standard. 
Since 1999, the Senate has approved at least fourteen other tax 
treaties specifically providing for the exchange of information 
that is or may be relevant for carrying out the treaty or the 
domestic tax laws of the parties.
    The existing U.S.-Swiss tax treaty (which is proposed to be 
amended) is the only treaty that requires an establishment of 
tax fraud before Switzerland would hand over any information on 
U.S. accountholders with Swiss bank accounts. No other U.S. tax 
treaty uses this standard.
    The committee further notes that the exchange of 
information provisions under tax treaties only permit the 
exchange of information that is foreseeably relevant to the 
collection of taxes. The treaties do not permit what has been 
mistakenly characterized as ``bulk collection of the private 
financial information of all U.S. citizens living abroad.'' The 
type of information that would be covered under the information 
exchange standard has been described by the Supreme Court in 
the domestic context as ``critical to the investigative and 
enforcement functions of the IRS.'' See United States v. 
Powell, 379 U.S. 48 (1964).
    The proposed threshold under the U.S.-Switzerland Protocol 
would apply the same statutory standard to U.S. citizens with 
bank accounts abroad as already applies to U.S. citizens with 
bank accounts in the United States.
    The committee takes note of the difficulties faced in 2008-
2009 by the Internal Revenue Service and the Department of 
Justice in obtaining information needed to enforce U.S. tax 
laws against U.S. persons who utilized the services of UBS AG, 
a multinational bank based in Switzerland. The committee 
expects that the proposed Protocol--including in particular the 
express provisions making clear that a country's bank secrecy 
laws cannot prevent the exchange of tax information which may 
be relevant to the enforcement of the tax laws and requested 
pursuant to the treaty--should put the government of 
Switzerland in a position to prevent recurrence of such an 
incident in the future.
    The committee takes note of Article 4 of the Protocol which 
sets forth information that should be provided to the requested 
State by the requesting State when making a request for 
information under the Treaty. It is the committee's 
understanding based upon the testimony and Technical 
Explanation provided by the Department of the Treasury that, 
while this paragraph contains important procedural requirements 
that are intended to ensure that ``fishing expeditions'' do not 
occur, the provisions of this paragraph will be interpreted by 
the United States and Switzerland to permit the widest possible 
exchange of information and not to frustrate effective exchange 
of information. In particular, the committee understands that 
with respect to the requirement that a request must include 
``information sufficient to identify the person under 
examination or investigation,'' it is mutually understood by 
the United States and Switzerland that there can be 
circumstances in which there is information sufficient to 
identify the person under examination or investigation even 
though the requesting State cannot provide the person's name.

      C. DECLARATION ON THE SELF-EXECUTING NATURE OF THE PROTOCOL

    The committee has included one declaration in the 
recommended resolution of advice and consent. The declaration 
states that the Protocol 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.

      D. CONDITIONS RELATED TO REPORTING ON MANDATORY ARBITRATION

    The committee has included conditions in the recommended 
resolution of advice and consent. These types of conditions 
have been included in prior resolutions of advice and consent 
for tax treaties that provide for mandatory arbitration.
    Specifically, 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 is required to 
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.
    In addition, 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 similar treaties specifically identified, the Secretary of 
the Treasury must submit to the Joint Committee on Taxation and 
the Committee on Finance of the Senate a detailed report 
regarding the operation and application of the arbitration 
mechanism contained in the Protocol and such treaties. The 
Secretary of the Treasury is further required to submit this 
type of report on March 1 of the year following the year in 
which the first report is submitted, and on an annual basis 
thereafter for a period of five years. Finally, the section 
clarifies that these reporting requirements 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.

           E. AGREEMENTS RELATING TO REQUESTS FOR INFORMATION

    In connection with efforts to obtain from Switzerland 
information relevant to U.S. investigations of alleged tax 
fraud committed by account holders of UBS AG, in 2009 and 2010 
the United States and Switzerland entered into two agreements 
pursuant to the U.S. Switzerland Tax Treaty.
    In particular, on August 19, 2009, the two governments 
signed an Agreement Between the United States of America and 
the Swiss Confederation on the request for information from the 
Internal Revenue Service of the United States of America 
regarding UBS AG, a corporation established under the laws of 
the Swiss Confederation. On March 31, 2010, the two governments 
signed a separate protocol amending the August 19, 2009 
agreement.
    The committee supports the objective of these agreements to 
facilitate the exchange of information between Switzerland and 
the United States in support of U.S. efforts to investigate and 
prosecute alleged tax fraud by account holder of UBS AG.
    The committee notes its concern, however, about one 
provision of the March 31, 2010 protocol. Paragraph 4 of that 
protocol provides that ``For the purposes of processing the 
Treaty Request, this Agreement and its Annex shall prevail over 
the existing Tax Treaty, its Protocol, and the Mutual Agreement 
in case of conflicting provisions.''
    Some could interpret the March 31, 2010, protocol's 
language indicating that the August 19, 2009, agreement ``shall 
prevail'' over the existing U.S.-Switzerland tax treaty to mean 
that the agreement has the effect of amending the tax treaty. 
The U.S.-Switzerland tax treaty is a treaty concluded with the 
advice and consent of the Senate. Amendments to treaties are 
themselves ordinarily subject to the advice and consent of the 
Senate. The executive branch has not sought the Senate's advice 
and consent to either the August 19, 2009 agreement or the 
March 31, 2010 protocol. The executive branch has assured the 
committee that the two governments did not intend this language 
to have any effect on the obligations of the United States 
under the U.S.-Switzerland tax treaty.
    In order to avoid any similar confusion in the future, the 
committee expects that the executive branch will refrain from 
the use of similar language in any future agreements relating 
to requests for information under tax treaties unless it 
intends to seek the Senate's advice and consent for such 
agreements.

                  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 Swiss Confederation for the Avoidance of Double 
Taxation With Respect to Taxes on Income, signed at Washington 
October 2, 1996, signed September 23, 2009, at Washington, with 
a related agreement effected by an exchange of notes September 
23, 2009, as corrected by an exchange of notes effected 
November 16, 2010 (the ``Protocol'') (Treaty Doc. 112-1), 
subject to the declaration of section 2.

SECTION 2. DECLARATION

    The advice and consent of the Senate under section 1 is 
subject to the following declaration:
          The Protocol 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 Income 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 July 9, 
                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 SEPTEMBER 23, 2009 AMENDING THE CONVENTION BETWEEN THE 
UNITED STATES OF AMERICA AND THE SWISS CONFEDERATION FOR THE AVOIDANCE 
OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO 
TAXES ON INCOME, SIGNED AT WASHINGTON ON OCTOBER 2, 1996, AS AMENDED BY 
                 THE PROTOCOL SIGNED ON OCTOBER 2, 1996

    This is a Technical Explanation of the Protocol signed at 
Washington on September 23, 2009 and the related Exchange of 
Notes (hereinafter the ``Protocol'' and ``Exchange of Notes'' 
respectively), amending the Convention between the United 
States of America and the Swiss Confederation for the avoidance 
of double taxation and the prevention of fiscal evasion with 
respect to taxes on income, signed at Washington on October 2, 
1996 as amended by the Protocol also signed on October 2, 1996 
(together, the ``existing 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 Convention signed at Washington on 
October 2, 1996 and the Protocol signed on also signed on 
October 2, 1996 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.
    The Exchange of Notes relates to the implementation of new 
paragraphs 6 and 7 of Article 25 (Mutual Agreement Procedure), 
which provide for binding arbitration of certain disputes 
between the competent authorities.

                               ARTICLE 1

    Article 1 of the Protocol revises Article 10 (Dividends) of 
the existing Convention by restating paragraph 3. New paragraph 
3 provides that dividends paid by a company resident in a 
Contracting State shall be exempt from tax in that State if the 
dividends are paid to and beneficially owned by a pension or 
other retirement arrangement which is a resident of the other 
Contracting State, or an individual retirement savings plan set 
up in and owned by a resident of the other Contracting State, 
and the competent authorities of the Contracting States agree 
that the pension or retirement arrangement, or the individual 
retirement savings plan, in a Contracting State generally 
corresponds to a pension or other retirement arrangement, or to 
an individual retirement savings plan, recognized for tax 
purposes in the other Contracting State.
    The exemption from tax provided in new paragraph 3 shall 
not apply if the pension or retirement arrangement or the 
individual retirement savings plan receiving the dividend 
controls the company paying the dividend. Additionally, in 
order to qualify for the benefits of new paragraph 3, a pension 
or retirement arrangement or individual retirement savings plan 
must satisfy the requirements of paragraph 2 of Article 22 
(Limitation on Benefits).

                               ARTICLE 2

    Article 2 of the Protocol replaces paragraph 6 of Article 
25 (Mutual Agreement Procedure) of the existing Convention with 
new paragraphs 6 and 7. New paragraphs 6 and 7 provide a 
mandatory binding arbitration proceeding. Paragraph 1 of the 
Exchange of Notes provides that binding arbitration will be 
used to determine the application of the Convention in respect 
of any case where the competent authorities have endeavored but 
are unable to reach an agreement under Article 25 regarding 
such application (the competent authorities may, however, agree 
that the particular case is not suitable for determination by 
arbitration. Paragraph 1 of the Exchange of Notes provides 
additional rules and procedures that apply to a case considered 
under the arbitration provisions.
    New paragraph 6 provides that a case shall be resolved 
through arbitration when the competent authorities have 
endeavored but are unable to reach a complete agreement 
regarding a case and the following three conditions are 
satisfied. First, tax returns have been filed with at least one 
of the Contracting States with respect to the taxable years at 
issue in the case. Second, the case is not a case that the 
competent authorities agree before the date on which 
arbitration proceedings would otherwise have begun, is not 
suitable for determination by arbitration. Third, all concerned 
persons and their authorized representatives agree, according 
to the provisions of new subparagraph (7)(d), not to disclose 
to any other person any information received during the course 
of the arbitration proceeding from either Contracting State or 
the arbitration board, other than the determination of the 
board (confidentiality agreement). The confidentiality 
agreement may also 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 provides that 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.
    New paragraph 7 provides additional rules and definitions 
to be used in applying the arbitration provisions. Subparagraph 
(7)(a) provides that the term ``concerned person'' means the 
person that brought the case to competent authority for 
consideration under Article 25 and includes 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 does not only 
include a U.S. corporation that brings a transfer pricing case 
with respect to a transaction entered into with its Swiss 
subsidiary for resolution to the U.S. competent authority, but 
also the Swiss subsidiary, which may have a correlative 
adjustment as a result of the resolution of the case.
    Subparagraph (7)(c) provides that an arbitration proceeding 
begins on the later of two dates: two years from the 
commencement date of that case (unless both competent 
authorities have previously agreed to a different date), or the 
earliest date upon which all concerned persons have entered 
into a confidentiality agreement and the agreements have been 
received by both competent authorities. The commencement date 
of the case is defined by subparagraph (7)(b) as the earliest 
date on which the information necessary to undertake 
substantive consideration for a mutual agreement has been 
received by both competent authorities.
    Subparagraph (1)(c) of the Exchange of Notes provides that 
notwithstanding the initiation of an arbitration proceeding, 
the competent authorities may reach a mutual agreement to 
resolve the case and terminate the arbitration proceeding. 
Correspondingly, a concerned person may withdraw its request 
for the competent authorities to engage in the Mutual Agreement 
Procedure and thereby terminate the arbitration proceeding at 
any time.Subparagraph (1)(p) of the Exchange of Notes provides 
that each competent authority will confirm in writing to the 
other competent authority and to the concerned persons the date 
of its receipt of the information necessary to undertake 
substantive consideration for a mutual agreement. Such 
information will be submitted to the competent authorities 
under relevant internal rules and procedures of each of the 
Contracting States. The information will not be considered 
received until both competent authorities have received copies 
of all materials submitted to either Contracting State by 
concerned persons in connection with the mutual agreement 
procedure.
    The Exchange of Notes provides several procedural rules 
once an arbitration proceeding under paragraph 6 of Article 25 
has commenced, but the competent authorities may complete these 
rules as necessary. In addition, as provided in subparagraph 
(1)(f) of the Exchange of Notes, the arbitration panel may 
adopt any procedures necessary for the conduct of its business, 
provided the procedures are not inconsistent with any provision 
of Article 25 or of the Exchange of Notes.
    Subparagraph (1)(e) of the Exchange of Notes provides that 
each Contracting State has 90 days from the date on which the 
arbitration proceeding begins to send a written communication 
to the other Contracting State appointing one member of the 
arbitration panel. The members of the arbitration panel shall 
not be employees of the tax administration which appoints them. 
Within 60 days of the date the second of such communications is 
sent, these two board members will appoint a third member to 
serve as the chair of the panel. The competent authorities will 
develop a non-exclusive list of individuals familiar in 
international tax matters who may potentially serve as the 
chair of the panel, but in any case, the chair can not be a 
citizen or resident of either Contracting State. In the event 
that the two members appointed by the Contracting States fail 
to agree on the third member by the requisite date, these 
members will be dismissed and each Contracting State will 
appoint a new member of the panel within 30 days of the 
dismissal of the original members.
    Subparagraph (1)(g) of the Exchange of Notes establishes 
deadlines for submission of materials by the Contracting States 
to the arbitration panel. Each competent authority has 60 days 
from the date of appointment of the chair to submit a Proposed 
Resolution describing the proposed disposition of the specific 
monetary amounts of income, expense or taxation at issue in the 
case, and a supporting Position Paper. Copies of each State's 
submissions are to be provided by the panel to the other 
Contracting State on the date on which the later of the 
submissions is submitted to the panel. Each of the Contracting 
States may submit a Reply Submission to the panel within 120 
days of the appointment of the chair to address points raised 
in the other State's Proposed Resolution or Position Paper. If 
one Contracting State fails to submit a Proposed Resolution 
within the requisite time, the Proposed Resolution of the other 
Contracting State is deemed to be the determination of the 
arbitration panel in the case and the arbitration proceeding 
will be terminated. Additional information may be supplied to 
the arbitration panel by a Contracting State only at the 
panel's request. The panel will provide copies of any such 
requested information, along with the panel's request, to the 
other Contracting State on the date on which the request or 
response is submitted. All communication from the Contracting 
States to the panel, and vice versa, is to be in writing 
between the chair of the panel and the designated competent 
authorities with the exception of communication regarding 
logistical matters.
    Subparagraph (1)(h) of the Exchange of Notes provides that 
the presenter of the case to the competent authority of a 
Contracting State may submit a Position Paper to the panel for 
consideration by the panel. The Position Paper must be 
submitted within 90 days of the appointment of the chair, and 
the panel will provide copies of the Position Paper to the 
Contracting States on the date on which the later of the 
submissions of the Contracting States is submitted to the 
panel.
    Subparagraph (1)(i) of the Exchange of Notes provides that 
the arbitration panel must deliver a determination in writing 
to the Contracting States within six months of the appointment 
of the chair. The determination must be one of the two Proposed 
Resolutions submitted by the Contracting States. Subparagraph 
(1)(b) of the Exchange of Notes provides that the determination 
may only provide a determination regarding the amount of 
income, expense or tax reportable to the Contracting States. 
The determination has no precedential value, and consequently 
the rationale behind a panel's determination would not be 
beneficial and may not be provided by the panel.
    Subparagraphs (1)(j) and (1)(k) of the Exchange of Notes 
provide that unless any concerned person does not accept the 
decision of the arbitration panel, the determination of the 
panel constitutes a resolution by mutual agreement under 
Article 25 and, consequently, is binding on both Contracting 
States. Within 30 days of receiving the determination from the 
competent authority to which the case was first presented, each 
concerned person must advise that competent authority whether 
the person accepts the determination. In addition, if the case 
is in litigation, each concerned person who is a party to the 
litigation must also advise, within the same time frame, the 
court of its acceptance of the arbitration determination, and 
withdraw from the litigation the issues resolved by the 
arbitration proceeding. If any concerned person fails to advise 
the competent authority and relevant court within the requisite 
time, such failure is considered a rejection of the 
determination. If a determination is rejected, the case cannot 
be the subject of a subsequent arbitration proceeding.
    For purposes of the arbitration proceeding, the members of 
the arbitration panel and their staffs shall be considered 
``persons or authorities'' to whom information may be disclosed 
under Article 26 (Exchange of Information). Subparagraph (1)(n) 
of the Exchange of Notes provides that all materials prepared 
in the course of, or relating to the arbitration proceeding are 
considered information exchanged between the Contracting 
States. No information relating to the arbitration proceeding 
or the panel's determination may be disclosed by members of the 
arbitration panel or their staffs or by either competent 
authority, except as permitted by the Convention and the 
domestic laws of the Contracting States. Members of the 
arbitration panel and their staffs must agree in statements 
sent to each of the Contracting States in confirmation of their 
appointment to the arbitration board to abide by and be subject 
to the confidentiality and nondisclosure provisions of Article 
26 of the Convention and the applicable domestic laws of the 
Contracting States, with the most restrictive of the provisions 
applying.Subparagraph (1)(m) of the Exchange of Notes provides 
that the applicable domestic law of the Contracting States 
determines the treatment of any interest or penalties 
associated with a competent authority agreement achieved 
through arbitration.
    Subparagraph (1)(l) of the Exchange of Notes provides that 
any meetings of the arbitration panel shall be in facilities 
provided by the Contracting State whose competent authority 
initiated the mutual agreement proceedings in the case. 
Subparagraph (1)(o) of the Exchange of Notes provides that fees 
and expenses are borne equally by the Contracting States, 
including the cost of translation services. In general, the 
fees of members of the arbitration panel will be set at the 
fixed amount of $2,000 per day or the equivalent amount in 
Swiss francs. The expenses of members of the panel will be set 
in accordance with the International Centre for Settlement of 
Investment Disputes (ICSID) Schedule of Fees for arbitrators 
(in effect on the date on which the arbitration board 
proceedings begin). The competent authorities may amend the set 
fees and expenses of members of the board. Meeting facilities, 
related resources, financial management, other logistical 
support, and general and administrative coordination of the 
arbitration proceeding will be provided, at its own cost, by 
the Contracting State whose competent authority initiated the 
mutual agreement proceedings. All other costs are to be borne 
by the Contracting State that incurs them.

                               ARTICLE 3

    Article 3 of the Protocol replaces Article 26 (Exchange of 
Information) of the existing Convention. This Article provides 
for the exchange of information and administrative assistance 
between the competent authorities of the Contracting States.
Paragraph 1 of Article 26
    The obligation to obtain and provide information to the 
other Contracting State is set out in new Paragraph 1. The 
information to be exchanged is that which may be relevant for 
carrying out the provisions of the Convention or the domestic 
laws of the United States or of Switzerland concerning taxes 
covered by the Convention, insofar as the taxation thereunder 
is not contrary to the Convention. This language incorporates 
the standard in 26 U.S.C. Section 7602 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 simply asked for 
information regarding all bank accounts maintained by residents 
of that Contracting State in the other Contracting State.
    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 with respect to a covered 
tax, 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 
Convention. An example of such a case is provided in the OECD 
Commentary: 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 
(since 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.
    New paragraph 1 clarifies that information may be exchanged 
that relates to the administration or enforcement of 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.
    Information exchange is not restricted by paragraph 1 of 
Article 1 (General Scope). 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 Switzerland, 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 thirdcountry resident is not a 
resident of either Contracting State. Similarly, if a third-
country resident maintains a bank account in Switzerland, 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, information can be requested 
from Switzerland with respect to that person's account, even 
though that person is not the taxpayer under examination.
    The obligation to exchange information under paragraph 1 
does not limit a Contracting State's ability to employ 
unilateral procedures otherwise available under its domestic 
law to obtain, or to require the disclosure of, information 
from a taxpayer or third party. Thus, the Protocol does not 
prevent or restrict the United States' information gathering 
authority or enforcement measures provided under its domestic 
law.
    Although the term ``United States'' does not encompass U.S. 
possessions for most purposes of the Convention, Section 7651 
of the Code authorizes the Internal Revenue Service to utilize 
the provisions of the Internal Revenue Code to obtain 
information from the U.S. possessions 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 a 
third party located in a U.S. possession.
Paragraph 2 of Article 26
    New 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. Information received may be disclosed 
only to persons, including courts and administrative bodies, 
involved in the assessment, collection, or administration of, 
the enforcement or prosecution in respect of, or the 
determination of the of appeals in relation to, the taxes 
covered by the Convention. 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 Congress and the 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.
    New paragraph 2 also provides that information received by 
a Contracting State may be used for other purposes when such 
information may be used for such other purpose under the laws 
of both States, and the competent authority of the requested 
State has authorized such use. This provision is derived from 
the OECD Model Commentary, which explains that Contracting 
States may add this provision to broaden the purposes for which 
they may use information exchanged to allow other non-tax law 
enforcement agencies and judicial authorities on certain high 
priority matters (e.g., to combat money laundering, corruption, 
or terrorism financing). To ensure that the laws of both States 
would allow the information to be used for such other purpose, 
the Contracting States will only seek consent under this 
provision to the extent that the non-tax use is allowed under 
the provisions of the Mutual Legal Assistance Treaty between 
the United States and Switzerland which entered into force on 
January 23, 1977 (or as it may be amended or replaced in the 
future).
Paragraph 3 of Article 26
    New 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.
    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 Contracting State making the request for information should 
govern a request for information. Thus, the Contracting State 
of which the request is made 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 a request 
from the other Contracting State for information, 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 Article 26
    New paragraph 4 provides that when information is requested 
by a Contracting State in accordance with this Article, the 
other Contracting 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 paragraph 
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 Article 26
    New paragraph 5 provides that a Contracting State may not 
decline to provide information because that information is held 
by financial institutions, nominees or persons acting in an 
agency or fiduciary capacity. 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. 
Paragraph 5 further provides that the requested State has the 
power to meet its obligations under Article 26, and paragraph 5 
in particular, even though it may not have such powers for 
purposes of enforcing its own tax laws.
    Paragraph 2 of the Exchange of Notes provides that the 
Contracting States understand that there may be instances when 
paragraph 3 of Article 26 may be invoked to decline a request 
to supply information that is held by a person described in 
paragraph 5 of the Article. Such refusal must be based, 
however, on reasons unrelated to that person's status as a 
bank, financial institution, agent, fiduciary or nominee, or 
the fact that the information relates to ownership interests. 
For example, a Contracting State may decline to provide 
information relating to confidential communications between 
attorneys and their clients that are protected from disclosure 
under that State's domestic law.
Treaty effective dates and termination in relation to exchange of 
        information
    Article 5 of the Protocol sets forth rules governing the 
effective dates of the provisions of Articles 3 and 4 of the 
Protocol. The competent authorities are obligated to exchange 
information described in new paragraph 5 of Article 26 if that 
information relates to any date beginning on or after September 
23, 2009, the date on which the Protocol was signed 
notwithstanding the provisions of the existing Convention. In 
all other cases of application of new Article 26, the competent 
authorities are obligated to exchange information that relates 
to taxable periods beginning on or after January 1 of the year 
following the date of signature of the Protocol.
    A tax administration may also seek information with respect 
to a year for which a treaty was in force after the treaty has 
been terminated. In such a case the ability of the other tax 
administration to act is limited. The treaty no longer provides 
authority for the tax administrations to exchange confidential 
information. They may only exchange information pursuant to 
domestic law or other international agreement or arrangement.

                               ARTICLE 4

    Article 4 of the Protocol replaces paragraph 10 of the 
Protocol to the existing Convention. New Protocol paragraph 10 
provides greater detail regarding how the provisions of revised 
Article 26 (Exchange of Information) will be applied.
    New Protocol paragraph (10)(a) lists the information that 
should be provided to the requested State by the requesting 
State when making a request for information under paragraph 26 
of the Convention. Clause (i) of paragraph (10)(a) provides 
that a request must contain information sufficient to identify 
the person under examination or investigation. In a typical 
case, information sufficient to identify the person under 
examination or investigation would include a name, and to the 
extent known, an address, account number or similar identifying 
information. It is mutually understood that there can be 
circumstances in which there is information sufficient to 
identify the person under examination or investigation even 
though the requesting State cannot provide a name.
    Clause (ii) of paragraph (10)(a) provides that a request 
for information must contain the period of time for which the 
information is requested. Clause (iii) of paragraph (10)(a) 
provides that a request for information must contain a 
statement of the information sought, including its nature and 
the form in which the requesting State wishes to receive the 
information from the requested State. Clause (iv) of paragraph 
(10)(a) provides that a request for information must contain a 
statement of the tax purpose for which the information is 
sought. Clause (v) of paragraph (10)(a) provides that the 
request must include the name and, to the extent known, the 
address of any person believed to be in possession of the 
requested information.
    New Protocol paragraph (10)(b) provides confirmation of the 
extent to which information is to be exchanged pursuant to new 
paragraph 1 of Article 26. The purposes of referring to 
information that may be relevant is to provide for exchange of 
information to the widest extent possible. This standard 
nevertheless does not allow the Contracting States to engage in 
so-called ``fishing expeditions'' or to request information 
that is unlikely to be relevant to the tax affairs of a given 
taxpayer. For example, the language ``may be'' would not 
support a request in which a Contracting State simply asked for 
information regarding all bank accounts maintained by residents 
of that Contracting State in the other Contracting State. New 
Protocol paragraph (10)(b) further confirms that the provisions 
of new Protocol paragraph (10)(a) are to be interpreted in 
order not to frustrate effective exchange of information.
    New Protocol paragraph (10)(c) 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 should, if possible, 
provide the information in the form requested to the same 
extent that it can obtain information in that form under its 
own laws and administrative practices with respect to its own 
taxes.
    New Protocol paragraph (10)(d) confirms that Article 26 of 
the Convention does not restrict the possible methods for 
exchanging information, but also does not commit either 
Contracting State to exchange information on an automatic or 
spontaneous basis. The Contracting States expect to provide 
information to one another necessary for carrying out the 
provisions of the Convention.
    New Protocol paragraph (10)(e) provides clarification 
regarding the application of paragraph (3)(a) of revised 
Article 26, which provides that in no case shall the provisions 
of paragraphs 1 and 2 be construed so as to impose on a 
Contracting State the obligation to carry out administrative 
measures at variance with the laws and administrative practice 
of that or the other Contracting State. The Contracting States 
understand that the administrative procedural rules regarding a 
taxpayer's rights (such as the right to be notified or the 
right to an appeal) provided for in the requested State remain 
applicable before information is exchanged with the requesting 
State. Notification procedures should not, however, be applied 
in a manner that, in the particular circumstances of the 
request, would frustrate the efforts of the requesting State. 
The Contracting States further understand that such rules are 
intended to provide the taxpayer a fair procedure and are not 
to prevent or unduly delay the exchange of information process.

                               ARTICLE 5

    Article 5 of the Protocol contains the 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. Instruments of ratification shall 
be exchanged as soon as possible.
    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
    Paragraph 2 provides that the Convention will enter into 
force upon the exchange of instruments of ratification. The 
date on which a treaty enters into force is not necessarily the 
date on which its provisions take effect. Paragraph 2, 
therefore, also contains rules that determine when the 
provisions of the treaty will have effect.
    Under paragraph 2(a), the Convention 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 January of the year following the entry 
into force of the Protocol. For example, if instruments of 
ratification are exchanged on October 25 of a given year, the 
withholding rates specified in paragraph 3 of Article 10 
(Dividends) would be applicable to any dividends paid or 
credited on or after January 1 of the following year. If for 
some reason a withholding agent withholds at a higher rate than 
that provided by the Convention (perhaps because it was not 
able to re-program its computers before the payment is made), a 
beneficial owner of the income that is a resident of the other 
Contracting State may make a claim for refund pursuant to 
section 1464 of the Code.
    Paragraph (2)(b) provides rules for the effective dates of 
Articles 3 and 4 of the Protocol. Those Articles shall have 
application for requests made on or after the date of entry 
into force of the Protocol. Clause (i) provides that 
information described in paragraph 5 of revised Article 26 
(Exchange of Information) shall be exchanged upon request if 
such information relates to any date beginning on or after 
September 23, 2009, the date of signature of the Protocol. 
Clause (ii) provides that in all other cases, information shall 
be exchanged pursuant to Articles 3 and 4 if the information 
relates to taxable periods beginning on or after January 1, 
2010.
    Paragraph (2)(c) sets forth a specific effective date for 
purposes of the binding arbitration provisions of new 
paragraphs 6 and 7 of revised Article 25 (Mutual Agreement 
Procedure) (Article 2 of the Protocol). Paragraph (2)(c) 
provides new paragraphs 6 and 7 of revised Article 25 is 
effective for cases (i) that are under consideration by the 
competent authorities as of the date on which the Protocol 
enters into force, and (ii) cases that come under such 
consideration after the Protocol enters into force. In 
addition, paragraph (2)(c) provides that the commencement date 
for cases that are under consideration by the competent 
authorities as of the date on which the Protocol enters into 
force is the date 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 the agreement 
required by new paragraph (6)(d) of revised Article 25 has been 
received by both competent authorities.

         X. Annex 2.--Transcript of Hearing of October 29, 2015





                                TREATIES

                              ----------                              


                       THURSDAY, OCTOBER 29, 2015

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:17 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Johnny 
Isakson presiding.
    Present: Senators Isakson, Gardner, Menendez, and Murphy.

           OPENING STATEMENT OF HON. JOHNNY ISAKSON, 
                   U.S. SENATOR FROM GEORGIA

    Senator Isakson. The Senate Foreign Relations Committee is 
called to order.
    To begin with, I would like to ask unanimous consent that 
we introduce three letters into the record at this hearing. One 
is from a number of companies in the United States of America 
in favor of the tax treaties. One is from the Business 
Roundtable and other executive organizations. And one is from 
the Ambassadors and Embassy organizations of the countries 
affected by the treaties.
    So without objection, that will be entered into the record.

[Editor's note.--The three letters submitted for the record can 
be found in the ``Additional Material Submitted for the 
Record'' section at the end of this hearing.]

    Senator Isakson. I want to thank our witnesses for being 
here today and Senator Menendez for being here today. This is 
an important hearing for a lot of American businesses. It means 
more business for the United States, and it means predictable 
regulation in terms of many foreign businesses and 
opportunities overseas.
    We are going to consider eight tax treaties, several of 
which this committee has considered in the past. The importance 
of tax treaties to American businesses and individuals is 
underappreciated and not widely understood, including, I will 
admit, by myself until I was asked to chair this hearing and 
got into the details of it.
    For any business, one of the greatest disincentives to 
expand and take advantage of new opportunities is uncertainty. 
For governments, ensuring a favorable business climate 
environment by minimizing uncertainty is one of the most 
important things we can do to help U.S. businesses grow.
    The United States uses a worldwide tax system that taxes 
the income of a U.S. citizen, resident, or corporation, whether 
the income is earned in the United States or in a foreign 
country. A worldwide system of taxation would often result in 
double taxation if not for tax treaties.
    Tax treaties ensure certainty by establishing rules on what 
foreign income may be taxed by the country in which it is 
earned, and how much tax may be withheld in foreign income. Tax 
treaties benefit the United States businesses and citizens in a 
number of ways by facilitating trade, foreign investment, and 
by preventing double taxation. They provide U.S. investors with 
greater certainty about the tax burden by ensuring the treaties 
are equally and fairly overseen, and by allowing them to invest 
and compete abroad with a thorough knowledge of how the 
regulations in that country will work.
    Tax treaties strengthen the ability of United States 
business to explore many new opportunities abroad by 
establishing a predictable framework for new taxation to be 
structured.
    Further, tax treaties provide tools to help resolve tax 
disputes between the United States and other countries. Without 
those tools, United States investors would have limited ability 
to resolve these problems on their own.
    It is not just businesses that benefit from tax treaties, 
as they also impose reasonable limits on the amount of tax 
other countries may levy or can impose or withhold on a U.S. 
person who might live or work overseas.
    Tax treaties also help ensure the United States maintains 
an appropriate tax base by preventing tax fraud.
    In previous Congresses, this committee has responded with 
similar treaties and conventions and protocols with Chile, 
Hungary, Luxembourg, Poland, Spain, Switzerland, and the OECD 
Mutual Assistance Protocol. Today, we will, for the first time, 
hear about an update to the new treaty with Japan.
    It is time to move these treaties forward to the full 
Senate and for a full vote in the Senate as reasonably and 
early as possible.
    With that statement read, I will turn it over to the 
ranking member for any comment he may have.

            OPENING STATEMENT OF HON. BOB MENENDEZ, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Menendez. Thank you, Mr. Chairman. As someone who 
has sat and chaired some of these in the past, I can tell you 
that we are in for a scintillating hearing. [Laughter.]
    Gentlemen, I know you are going to make it so.
    Let me say, however, we are discussing eight important 
treaties pending before the committee, a new protocol to the 
existing tax treaty between the United States and Japan, which 
brings the treaty into line with our modern tax relationships, 
as well as seven other treaties and protocols the committee has 
considered over the past few years.
    As I think most members are aware, this committee has 
expended significant effort in recent years to obtain Senate 
confirmation of pending income tax treaties and protocols. In 
February of last year, Senator Cardin chaired a hearing, 
together with Senator Barrasso, on five income tax treaties and 
protocols with Switzerland, Hungary, Luxembourg, Chile, and the 
OECD multilateral. And I chaired hearing a few months later on 
the Spain and Poland treaties. The committee approved all seven 
previous treaties last Congress.
    Today, we continue our consideration of tax treaties with 
the Japan protocol, which was transmitted to the Senate in 
April.
    We have important and accelerating trade relationships with 
Japan. Being the largest and third-largest economies in the 
world, together our countries account for nearly one-third of 
global GDP. The United States has consistently been the largest 
source of foreign direct investment in Japan, and Japan is 
similarly one of the top investors in the U.S. economy.
    American and Japanese businesses employ hundreds of 
thousands of people in both countries. As our trade and 
investment links continue to deepen, it behooves us to simplify 
the tax administration between our countries and ensure that an 
outdated tax treaty does not stand in the way of continued 
cross-border investment.
    Traditionally, tax treaties have enjoyed strong bipartisan 
support, and I continue to urge my colleagues in the Senate to 
ratify these crucial components of U.S. trade and tax policy.
    And I look forward to the hearing, Mr. Chairman.
    Senator Isakson. Thank you, Senator Menendez.
    We are very fortunate to have two very distinguished 
witnesses to testify today. First, Mr. Robert Stack, the Deputy 
Assistant Secretary for the International Tax Affairs, 
Department of the United States Treasury; second, Mr. Thomas A. 
Barthold, Chief of Staff, Joint Committee on Taxation and, I 
might add, a significant adviser to the Finance Committee, 
where I benefited from his advice on many occasions.
    So we welcome your testimony today, and we will start with 
Mr. Stack first.

 STATEMENT OF ROBERT B. STACK, DEPUTY ASSISTANT SECRETARY FOR 
    INTERNATIONAL TAX AFFAIRS, DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Mr. Stack. Thank you, Senator.
    Chairman Isakson, Ranking Member Menendez, and 
distinguished members of the committee, I appreciate the 
opportunity to appear today to recommend on behalf of the 
administration favorable action on eight tax treaties pending 
before this committee. The proposed agreements before the 
committee today with Chile, Hungary, Japan, Luxembourg, Poland, 
Spain, and Switzerland, as well as the proposed Protocol to the 
Convention on Mutual Administrative Assistance in Tax Matters, 
which I will refer to today as the multilateral convention, 
serve to further the goals of our tax treaty network, in 
particular, the goals of increased transparency, relief from 
double taxation, and protecting U.S. tax treaties from abuse.
    It has now been over 5 years since the Senate provided its 
advice and consent to a tax treaty. This prolonged and 
unprecedented delay in approving tax treaties is inconsistent 
with the Senate's long history of bipartisan support for these 
agreements.
    It denies U.S. businesses important protections against 
double taxation. It denies our law enforcement community the 
tools they need to fight tax evasion. It jeopardizes U.S. 
leadership on issues of transparency in tax matters and causes 
other countries to question the United States' commitment to 
tax treaties.
    I would like to take the opportunity at the outset to 
briefly address a concern that has been expressed by some in 
the Senate about these proposed tax treaties. As I understand 
it, the claim is that these agreements adopt a new and 
unacceptably low standard for exchanging information that 
departs from the prior U.S. policy of exchanging information 
only in cases of suspicion of tax fraud.
    To the contrary, the standard in the pending treaties that 
permits exchange of information that may be relevant or is 
foreseeably relevant is not new. In fact, it has been the U.S. 
model standard since 1996 and has subsequently been endorsed as 
the international standard for information exchange under our 
tax treaties.
    Of the 57 United States income tax treaties in force, all 
of which were approved by the Senate, only one, our existing 
treaty with Switzerland, refers to exchanging information only 
in cases of tax fraud or the like. This standard allowed 
Switzerland to become a haven for tax cheats. That is why that 
treaty must be updated.
    Moreover, the foreseeably relevant standard has safeguards 
that prevent so-called fishing expeditions and ensures that 
information is kept confidential.
    Because my written statement and the Treasury technical 
explanations describe in detail the provisions of the eight 
agreements pending before this committee, I would like to 
highlight only the most noteworthy aspects of each agreement. I 
would like to start with the proposed protocol to the 
multilateral convention.
    If approved by the Senate, this agreement would establish 
several new information exchange relationships for the United 
States, which would enhance the IRS's ability to fight tax 
evasion. The proposed protocol amends the multilateral 
convention, which in its existing form is open to signature 
only by countries which are members of either the OECD or the 
Council of Europe, to allow any country to become a signatory, 
provided that all other signatories are satisfied that such a 
country has a sufficient legal framework to ensure that 
information exchanged pursuant to the agreement will be kept 
confidential.
    The proposed protocols amending the United States tax 
treaties with Luxembourg and Switzerland replace the limited 
information exchange provisions of the existing tax treaties 
with updated rules that are consistent with the international 
standard.
    The Treasury Department is hopeful that the proposed 
protocols with Luxembourg and Switzerland, if approved by the 
Senate, will greatly improve the collaboration between the IRS 
and the revenue authorities of Luxembourg and Switzerland in 
tax law enforcement matters.
    The proposed income tax treaty with Chile, if approved by 
the Senate, would be only the second United States income tax 
treaty enforced in South America, a region into which the 
Treasury Department has long sought to expand the U.S. tax 
treaty network.
    The most important feature of the proposed tax treaties 
with Hungary and Poland, which would both replace existing tax 
treaties with those countries, is that each agreement contains 
a comprehensive limitation on benefits article, which is 
designed to prevent third country investors from 
inappropriately taking advantage of the treaty, a practice 
known as treaty shopping. Data from United States corporate tax 
returns show that the existing tax treaties with Hungary and 
Poland, which do not have limitations on benefit provisions, 
are facilitating treaty shopping. And for this reason, 
replacing them with new agreements has been a top treaty 
priority for the Treasury Department.
    The proposed protocols amending the U.S. tax treaties with 
Japan and Spain significantly reduce source taxation of cross-
border payments of income and gains. In addition, the proposed 
protocols adopt mandatory binding arbitration as a means of 
resolving certain disputes between the tax authorities.
    The proposed protocol with Switzerland also contains a 
mandatory binding arbitration provision.
    Another noteworthy feature of the proposed protocol with 
Japan is its adoption of rules that obligate the tax 
authorities to provide limited assistance to each other in the 
collection of taxes. While as a general matter, it is not the 
policy of the Treasury Department to include such assistance in 
collection provisions in U.S. treaties, we concluded after 
consultation with the IRS that entering into such an agreement 
with Japan would produce a net revenue benefit to the United 
States.
    Let me repeat our appreciation for the committee's interest 
in these agreements. We are also grateful for the assistance 
and cooperation of the staffs of this committee and of the 
Joint Committee on Taxation, as well as the tireless work of 
the Treasury staff.
    We urge the committee and Senate to take prompt and 
favorable action on all eight agreements, and I would be happy 
to answer any questions you may have. Thank you.
    [The prepared statement of Mr. Stack follows:]

                 Prepared Statement of Robert B. Stack

    Chairman Isakson, Ranking Member Menendez, and distinguished 
members of the committee, I appreciate the opportunity to appear today 
to recommend, on behalf of the administration, favorable action on 
eight tax treaties pending before this committee.
    This administration is committed to eliminating barriers to cross-
border trade and investment, and tax treaties are one of the primary 
means for eliminating such tax barriers. Tax treaties provide greater 
certainty to taxpayers regarding their potential liability for tax in 
foreign jurisdictions, and they allocate taxing rights between 
jurisdictions to reduce the risk of double taxation. Tax treaties also 
ensure that taxpayers are not subject to discriminatory taxation in 
foreign jurisdictions.
    Additionally, this administration is committed to preventing tax 
evasion, and our tax treaties play an important role in this area. A 
key element of U.S. tax treaties is exchange of information between tax 
authorities. Under tax treaties, one country may request from the other 
such information that is foreseeably relevant for the proper 
administration of the first country's tax laws. Because access to 
information from other countries is critically important to the full 
and fair enforcement of U.S. tax laws, information exchange is a top 
priority for the United States in its tax treaty program. I would like 
to emphasize to the committee that as we establish exchange of 
information relationships, the administration places a high priority on 
ensuring that our treaty partners not misuse the information exchanged. 
The United States will only exchange tax information with a country if 
we are satisfied that the county has adequate confidentiality laws that 
will protect the information we have provided.
    A tax treaty reflects a balance of benefits that is agreed to when 
the treaty is negotiated. In some cases, changes in law or policy in 
one or both of the treaty partners make the partners more willing to 
increase the benefits beyond those provided in an existing treaty; in 
these cases, revisions to a treaty may be very beneficial. In other 
cases, developments in one or both countries, or international 
developments more generally, may make it desirable to revisit an 
existing treaty to prevent improper exploitation of treaty provisions 
and eliminate unintended and inappropriate consequences in the 
application of the treaty. In yet other cases, the United States seeks 
to establish new income tax treaties with countries in which there is 
significant U.S. direct investment, and with respect to which U.S. 
companies are experiencing double taxation that is not otherwise 
relieved by domestic law remedies, such as the U.S. foreign tax credit. 
Both in setting our overall negotiation priorities and in negotiating 
individual treaties, our focus is on ensuring that our tax treaty 
network fulfills its goals of facilitating cross-border trade and 
investment and preventing tax evasion.
    It has now been over 5 years since the full Senate last gave its 
advice and consent to a tax treaty. This prolonged delay is 
inconsistent with the Senate's long history of bipartisan support for 
timely consideration and approval of tax treaties, and it is damaging 
to important U.S. interests. It denies U.S. businesses important 
protections against double taxation. It denies our law enforcement 
community the tools they need to fight tax evasion. It jeopardizes U.S. 
leadership on issues of transparency. It causes other countries to 
question our reliability as a treaty partner and makes it harder to 
gain cooperation in other matters important to the United States.
    The administration urges the Senate to act swiftly to approve the 
pending tax treaties and protocols with Switzerland, Luxembourg, 
Hungary, Chile, Spain, Poland, and Japan, as well as the protocol 
amending the Multilateral Convention on Mutual Administrative 
Assistance in Tax Matters. Each proposed treaty serves to further the 
goals of our tax treaty network, and in particular, the goals of 
providing meaningful tax benefits to cross-border investors as well as 
protecting U.S. tax treaties from abuse.
    The proposed tax treaty with Chile would be the first tax treaty 
between the United States and Chile. The proposed tax treaties with 
Hungary and Poland would replace existing treaties the revisions of 
which have been a top tax treaty priority for the Treasury Department. 
The proposed protocols with Japan, Luxembourg, Spain, and Switzerland 
modify existing tax treaty relationships. The proposed protocol to the 
Multilateral Convention brings the Multilateral Convention, which the 
United States signed in 1989, into conformity with current 
international standards for full exchange of information between tax 
authorities to combat tax evasion.
    Before talking about the proposed treaties in more detail, I would 
like to discuss some general tax treaty matters.
                 purposes and benefits of tax treaties
    Tax treaties set out clear ground rules that govern tax matters 
relating to trade and investment between two countries. One of the 
primary functions of tax treaties is to provide certainty to taxpayers 
regarding a threshold question with respect to international taxation: 
whether a taxpayer's cross-border activities will subject it to 
taxation by two or more countries. Tax treaties answer this question by 
establishing the minimum level of economic activity that must be 
conducted within a country by a resident of the other country before 
the first country may tax any resulting business profits. In general 
terms, tax treaties provide that if branch operations in a foreign 
country have sufficient substance and continuity, the country where 
those activities occur will have primary (but not exclusive) 
jurisdiction to tax. In other cases, where the operations in the 
foreign country are relatively minor, the home country retains the sole 
jurisdiction to tax.
    Another primary function of tax treaties is relief from double 
taxation. Tax treaties protect taxpayers from potential double taxation 
primarily through the allocation of taxing rights between the two 
countries. This allocation takes several forms. First, because 
residence is relevant to jurisdiction to tax, a tax treaty includes a 
mechanism for resolving the issue of residence in the case of a 
taxpayer that otherwise would be considered to be a resident of both 
countries. Second, with respect to each category of income, a tax 
treaty assigns primary taxing rights to one country, usually (but not 
always) the country in which the income arises (the ``source'' 
country), and the residual right to tax to the other country, usually 
(but not always) the country of residence of the taxpayer (the 
``residence'' country). Third, a tax treaty provides rules for 
determining the country of source for each category of income. Fourth, 
a tax treaty establishes the obligation of the residence country to 
eliminate double taxation that otherwise would arise from the exercise 
of concurrent taxing jurisdiction by the two countries. Finally, a tax 
treaty provides for resolution of disputes between jurisdictions in a 
manner that avoids double taxation.
    As a complement to these substantive rules regarding the allocation 
of taxing rights, tax treaties provide a mechanism for dealing with 
disputes between countries regarding the proper application of a 
treaty. To resolve such disputes, designated tax authorities of the two 
governments--known as the ``competent authorities'' in tax treaty 
parlance--are required to consult and endeavor to reach agreement. 
Under many such agreements, the competent authorities agree to allocate 
a taxpayer's income between the two taxing jurisdictions on a 
consistent basis, thereby preventing the double taxation that might 
otherwise result. The U.S. competent authority is the Secretary of the 
Treasury, who has delegated this function to the Deputy Commissioner 
(International) of the Large Business and International Division of the 
Internal Revenue Service (IRS).
    Another key element of U.S. tax treaties is the exchange of 
information between tax authorities. Under tax treaties, one country 
may request from the other such information that is foreseeably 
relevant for the proper administration of the first country's tax laws. 
Some have suggested that this standard is ambiguous and that it 
represents a lower threshold than the standard in earlier U.S. tax 
treaties. This is not the case. For at least 50 years, bilateral income 
tax treaties have permitted revenue authorities to exchange information 
for tax administration purposes. Moreover, this standard has been 
extensively defined in internationally agreed guidance to which no 
country has expressed a dissenting opinion to date.
    Because access to information from other countries is critically 
important to the full and fair enforcement of U.S. tax laws, 
information exchange is a top priority for the United States in its tax 
treaty program. As we establish exchange of information relationships, 
the administration places a high priority on ensuring that the 
exchanged information will not be misused by our treaty partners. The 
United States will not exchange tax information with a country unless 
it has adequate confidentiality laws that will protect the information 
we have provided, and it has demonstrated the foreseeable relevance of 
the requested information to a tax matter.
    Tax treaties also include provisions intended to ensure that cross-
border investors do not suffer discrimination in the application of the 
tax laws of the other country. This is similar to a basic investor 
protection provided in other types of agreements, but the 
nondiscrimination provisions of tax treaties are specifically tailored 
to tax matters and, therefore, are the most effective means of 
addressing potential discrimination in the tax context. The relevant 
tax treaty provisions explicitly prohibit the types of discriminatory 
measures that once were common in some tax systems and clarify the 
manner in which possible discrimination is to be evaluated in the tax 
context.
    In addition to these core provisions, tax treaties include 
provisions dealing with more specialized situations, such as rules 
addressing and coordinating the taxation of pensions, Social Security 
benefits, alimony, and child-support payments in the cross-border 
context. (The Social Security Administration separately negotiates and 
administers bilateral totalization agreements.) These provisions are 
becoming increasingly important as more individuals move between 
countries or otherwise engage in cross-border activities. While these 
matters may not involve substantial tax revenue from the perspective of 
the two governments, rules providing clear and appropriate treatment 
are very important to the affected taxpayers.
             tax treaty negotiating priorities and process
    The United States has a network of 57 comprehensive income tax 
treaties covering 66 countries. This network covers the vast majority 
of foreign trade and investment of U.S. businesses and investors. In 
establishing our negotiating priorities, our primary objective is the 
conclusion of tax treaties that will provide the greatest benefit to 
the United States and to U.S. taxpayers. We regularly seek input from 
the U.S. business community and the IRS regarding the areas on which we 
should develop our treaty network, and any practical problems 
encountered under particular treaties or particular tax regimes.
    Numerous features of a country's tax legislation and its 
interaction with U.S. domestic tax rules are considered in negotiating 
a tax treaty. Examples include whether the country eliminates double 
taxation through an exemption system or credit system, the country's 
treatment of partnerships and other transparent entities, and how the 
country taxes contributions to, earnings of, and distributions from 
pension funds.
    Moreover, a country's fundamental tax policy choices are reflected 
not only in its tax laws, but also in its tax treaty policy positions. 
These choices differ significantly from country to country with 
substantial variation even across countries that seem to have quite 
similar economic profiles. A tax treaty negotiation must take into 
account all of these aspects of the treaty partner's tax system and 
treaty policies to arrive at an agreement that accomplishes the United 
States tax treaty objectives.
    Obtaining the agreement of our tax treaty partners on provisions of 
importance to the United States sometimes requires concessions on our 
part. Similarly, the other country sometimes must make concessions to 
obtain our agreement on matters that are critical to it. Each tax 
treaty that is presented to the Senate represents not only the best 
deal that we believe can be achieved with the particular country, but 
also constitutes an agreement that we believe is in the best interests 
of the United States.
    It is not uncommon for the Treasury Department to conclude that the 
right result may be no tax treaty at all. With certain countries there 
simply may not be the type of cross-border tax issues that are best 
resolved by a treaty. For example, if a country does not impose 
significant income taxes, or imposes tax on a strictly territorial 
basis (that is, it exempts not only dividend income but all foreign 
source income from taxation by reason of its foreign source), there is 
little possibility of unresolved double taxation of cross-border 
income, given the fact that the United States provides foreign tax 
credits to its citizens and residents regardless of the existence of an 
income tax treaty. Under such a circumstance, it would not be 
appropriate to enter into a comprehensive tax treaty with that 
particular country because doing so would result in a unilateral 
concession of taxing rights by the United States. Absent instances of 
unrelieved double taxation, a bilateral agreement that focuses 
exclusively on the exchange of tax information (often referred to as a 
``tax information exchange agreement'' or ``TIEA'') may be appropriate.
    In other cases, a tax treaty may be inappropriate because the 
potential treaty partner is not willing to agree to rules that address 
tax issues U.S. businesses operating there have identified. If the 
potential treaty partner is unwilling to provide meaningful benefits in 
a tax treaty, such a treaty would provide little or no relief from 
double taxation to U.S. investors, and accordingly there would be no 
merit to entering into such an agreement. The Treasury Department will 
not conclude a tax treaty that does not provide meaningful benefits to 
U.S. investors or which may be construed by potential treaty partners 
as an indication that we would settle for a tax treaty with inferior 
terms.
           combating tax evasion and improving transparency 
                  through full exchange of information
    As noted above, effective information exchange to combat tax 
evasion and ensure full and fair enforcement of the tax laws is a top 
priority for the United States. A key provision found in all modern 
U.S. tax treaties is a rule that obligates the competent authorities of 
the two countries to obtain and exchange information that is 
foreseeably relevant to tax administration in the requesting country. 
In recent years there has been a global recognition of the need to 
strive for greater transparency and for full exchange of information 
between revenue authorities to combat tax evasion. The United States 
has taken a leading role in this movement.
    The proposed protocols amending the bilateral tax treaties with 
Switzerland and Luxembourg and the Multilateral Convention that are 
before the committee today are intended to ensure full exchange of 
information to prevent tax evasion and enhance transparency. These 
proposed protocols incorporate the modern international standards for 
exchange of information, which require countries to obtain and exchange 
information for both civil and criminal matters, and which require the 
tax authorities to obtain and exchange information held by banks or 
other financial institutions.
    The international standards on transparency and exchange of 
information for tax purposes are now virtually universally accepted in 
the global community. Indeed, all jurisdictions surveyed by the Global 
Forum on Transparency and Exchange of Information for Tax Purposes (the 
Global Forum) are now committed to implementing these standards. The 
Global Forum, now the largest international tax group in the world with 
126 member jurisdictions (and 15 observing members), endorses exchange 
of information. The Global Forum uses a robust and comprehensive 
monitoring and peer review process by evaluating the compliance of 
jurisdictions with the international standards of transparency.
    Initiated by the Organization for Economic Cooperation and 
Development (OECD), the Global Forum has been a driving force behind 
the acceptance and implementation of international standards. The 
United States actively participates in the Global Forum. Treasury's 
Offices of Tax Policy and General Counsel, and IRS's Office of Chief 
Counsel and its Large Business and International Division have devoted 
substantial resources over the past 2 years both to the peer review of 
U.S. rules and procedures and to our role as members of the Steering 
Group and Peer Review Group of the Forum.
    In addition, the G20 has, for the past several years, stressed the 
importance of quickly implementing the international standards for 
transparency and exchange of information. It has also requested 
proposals to make it easier for developing countries to secure the 
benefits of the new cooperative tax environment, including a 
multilateral approach for the exchange of information.
    Against the backdrop of the Global Forum and the G20 process, the 
proposed Protocol to the Multilateral Convention was opened for 
signature on May 27, 2010. The Multilateral Convention is an instrument 
that permits its signatories to exchange information for tax purposes. 
However, because it was signed in 1989, its provisions are out of date 
in many respects and do not conform to current international standards 
for transparency and exchange of information. In addition, prior to its 
amendment by the proposed protocol, the Multilateral Convention was 
open for accession only to member countries of either the Council of 
Europe or the OECD. The proposed protocol to the Multilateral 
Convention conforms the existing agreement to the current international 
standards for exchange of information, and opens the agreement for 
signature by any country, provided that the Parties have provided 
unanimous consent. This important agreement is therefore a centerpiece 
to the global effort to improve transparency and foster full exchange 
of information between tax authorities.
      ensuring the protection and confidentiality of information 
                   exchanged with our treaty partners
    As we modernize existing exchange of information relationships and 
establish new relationships, the administration is also strongly 
committed to ensuring that information that we provide our treaty 
partners will not be misused and will be strictly protected and treated 
as confidential. One of the critical principles under today's existing 
international standards for information exchange upon request is that 
the country receiving information must ensure that exchanged 
information is kept confidential and only used for legitimate tax 
administration purposes. Consistent with this standard, the United 
States will not enter into an information exchange agreement unless the 
Treasury Department and the IRS are satisfied that the foreign 
government has strict confidentiality protections. Specifically, prior 
to entering into an information exchange agreement with another 
jurisdiction, the Treasury Department and the IRS closely review the 
foreign jurisdiction's legal framework for maintaining the 
confidentiality of taxpayer information. Before entering into an 
agreement, the Treasury Department and the IRS must be satisfied that 
the foreign jurisdiction has the necessary legal safeguards in place to 
protect exchanged information.
    Even if an information exchange agreement is in effect, the IRS 
will not exchange information with a country if the IRS determines that 
the country is not complying with its obligations under the agreement 
to protect the confidentiality of information and to use the 
information solely for collecting and enforcing taxes covered by the 
agreement.
    With respect to the Multilateral Convention, a Coordinating Body, 
on which the United States sits, was established under the terms of the 
Multilateral Convention for the express purpose of evaluating the 
domestic laws of countries that request to sign the agreement to ensure 
that new signatories will provide confidential treatment to information 
received under the agreement. In many cases, potential signatory 
countries have statutory confidentiality laws that cover information 
exchanged pursuant to an international agreement. In other cases, the 
potential signatory country has agreed to adopt as law the 
confidentiality provisions that are found in the Multilateral 
Convention itself. Countries that do not have sufficient domestic laws 
or the legal framework to guarantee the confidentiality of taxpayer 
information are not permitted to sign the proposed protocol to the 
Multilateral Convention.
           ensuring safeguards against abuse of tax treaties
    A high priority for improving our overall treaty network is a 
continued focus on prevention of ``treaty shopping.'' The U.S. 
commitment to including comprehensive Limitation on Benefits articles 
is a key element to limiting treaty benefits to residents of the United 
States and residents of the particular treaty partner on a reciprocal 
basis. Tax treaty benefits are not intended for residents of a third 
country. If third country residents are able to exploit one of our tax 
treaties to secure reductions in U.S. tax, such as through the use of 
an entity resident in a treaty country that merely holds passive U.S. 
assets, the benefits would flow only in one direction. That is, third 
country residents would enjoy U.S. tax reductions for their U.S. 
investments, but U.S. residents would not enjoy reciprocal tax 
reductions for their investments in that third country. Moreover, such 
third country residents may be securing benefits that are not 
appropriate in the context of the interaction between their home 
countries' tax systems and policies and those of the United States. 
This use of tax treaties is not consistent with the balance of the 
agreement negotiated in the underlying tax treaty. Preventing this 
exploitation of our tax treaties is critical to ensuring that the third 
country will sit down at the table with us to negotiate on a reciprocal 
basis so we can secure for U.S. persons the benefits of reductions in 
source-country tax on their investments in that country. Effective 
antitreaty shopping rules also ensure that the benefits of a U.S. tax 
treaty do not accrue to residents of countries with which the United 
States does not have a bilateral tax treaty because that country 
imposes little or no tax, and thus the potential of unrelieved double 
taxation is low.
    In this regard, the proposed tax treaties with Poland and Hungary 
before the committee today include comprehensive limitation on benefits 
provisions and represent a major step forward in protecting the U.S. 
tax treaty network from abuse. These achievements demonstrate the 
Treasury Department has been effective in addressing concerns about 
treaty shopping through bilateral negotiations and amendments of our 
existing tax treaties. We hope the Senate will provide its advice and 
consent to the new tax treaties with Poland and Hungary, as well as the 
other tax treaties currently pending before the Senate, as soon as 
possible.
                      consideration of arbitration
    A tax treaty cannot provide a stable investment environment unless 
the tax administrations of the two countries implement the treaty 
effectively. Under the mutual agreement procedure article, a U.S. 
taxpayer concerned with a treaty partner's application of a treaty can 
bring the matter to the U.S. competent authority to resolve the matter 
with the competent authority of the treaty partner. The competent 
authorities are expected to work cooperatively to resolve the dispute.
    The U.S. competent authority has a good track record in resolving 
disputes. Even in the most cooperative bilateral relationships, 
however, there may be instances in which the competent authorities will 
not be able to reach timely and satisfactory resolutions. Moreover, as 
the number and complexity of cross-border transactions increase, so do 
the number and complexity of cross-border tax disputes. Accordingly, we 
have considered ways to equip the U.S. competent authority with 
additional tools to assist in resolving disputes promptly, including 
through arbitration.
    As it developed the arbitration provisions for the tax treaties 
with Canada, Germany and Belgium, the Treasury Department carefully 
considered and studied various types of arbitration procedures that 
could be included in our treaties and used as part of the competent 
authority mutual agreement process. Based on our review of the merits 
of arbitration in other areas of the law, the success of other 
countries with arbitration in the tax area, and the overwhelming 
support of the business community, we concluded that mandatory binding 
arbitration as the final step in the competent authority process can be 
an effective and appropriate tool to facilitate mutual agreement under 
U.S. tax treaties.
    Three of the treaties before the committee (the proposed protocols 
with Switzerland, Spain, and Japan) include mandatory arbitration 
provisions. In general, these provisions are substantially similar to 
arbitration provisions in several of our recent treaties (Canada, 
Germany, Belgium, and France) that the Senate has approved over the 
last several years.
    In the typical competent authority mutual agreement process, a U.S. 
taxpayer presents its case to the U.S. competent authority and 
participates in formulating the position the U.S. competent authority 
will take in discussions with the treaty partner. Under the arbitration 
provision in the proposed protocols with Switzerland, Spain, and Japan, 
as in the similar provisions that are now part of our treaties with 
Canada, Germany, Belgium, and France, if the competent authorities 
cannot resolve the issue within 2 years, the competent authorities must 
present the issue to an arbitration board for resolution, unless both 
competent authorities agree the case is not suitable for arbitration. 
The arbitration board must resolve the issue by choosing the position 
of one of the competent authorities. That position is adopted as the 
agreement of the competent authorities and is treated like any other 
mutual agreement under the treaty (i.e., one that has been negotiated 
by the competent authorities).
    The arbitration process in each of these proposed protocols is 
mandatory and binding with respect to the competent authorities. 
However, consistent with the negotiation process under the mutual 
agreement procedure generally, the taxpayer can terminate the 
arbitration at any time by withdrawing its request for competent 
authority assistance. Moreover, the taxpayer retains the right to 
litigate the matter (in the United States or the treaty partner) in 
lieu of accepting the result of the arbitration, just as it would be 
entitled to litigate in lieu of accepting the result of a negotiation 
under the mutual agreement procedure.
    In negotiating the arbitration provisions in the proposed protocols 
with Switzerland, Spain, and Japan, we took into account, as we did 
when we negotiated the arbitration provision in the 2009 protocol to 
the France tax treaty, concerns this committee expressed in its report 
on the 2007 protocol to the U.S.-Canada treaty over certain aspects of 
the arbitration rules in our treaties with Canada, Germany, and 
Belgium. Accordingly, the proposed arbitration rule in each of these 
treaties differs from the provision in the treaties with Canada, 
Germany, and Belgium in three key respects. First, the proposed rule 
allows the taxpayer who presented the original case that is subjected 
to arbitration to submit its views on the case for consideration by the 
arbitration panel. Second, the proposed rule prohibits a competent 
authority from appointing an employee from its own tax administration 
to the arbitration board. Finally, the proposed rule does not prescribe 
a hierarchy of legal authorities that the arbitration panel must use in 
making its decision, thus ensuring that customary international law 
rules on treaty interpretation will apply.
    Because the arbitration board can only choose between the positions 
of each competent authority, the expectation is that the differences 
between the positions of the competent authorities will tend to narrow 
as the case moves closer to arbitration. In fact, if the arbitration 
provision is successful, difficult issues will be resolved without 
resorting to arbitration. Thus, it is our objective that these 
arbitration provisions will rarely be utilized, but their presence will 
motivate the competent authorities to approach negotiations in ways 
that result in mutually agreeable conclusions without invoking the 
arbitration process.
    We are hopeful that our desired objectives for arbitration are 
being realized, even though we are still in the early stages in our 
experience with arbitration and at this time cannot report definitively 
on the effects of arbitration on our tax treaty relationships. Our 
observation is that, where mandatory arbitration has been included in a 
treaty, the competent authorities are negotiating with greater intent 
to reach principled and timely resolution of disputes. Therefore, under 
the mandatory arbitration provision, double taxation is being 
effectively eliminated in a timely and more expeditious manner.
                   assistance in collection of taxes
    Among the important modifications to the existing tax treaty with 
Japan that are made in the proposed protocol amending the tax treaty 
with that country is the introduction of provisions obligating the tax 
authorities of the United States and Japan to provide to each other 
limited assistance in the collection of taxes. While the inclusion of 
assistance in collection provisions has been part of the international 
norm of tax treaty policy (both the OECD and United Nations Model Tax 
Conventions contain such provisions), this has not been a policy that 
the Treasury Department has followed as a general matter, largely 
because of our concerns that such treaty obligations could lead to a 
disproportionate amount of additional burden on the IRS without the 
commensurate benefit to the U.S. fisc. For this reason, only five U.S. 
tax treaties in force contain assistance in collection provisions, 
including our treaties with Canada, Denmark, France, Netherlands, and 
Sweden.
    The Treasury Department's general policy with respect to collection 
assistance remains unchanged, and we will continue to decline the many 
requests from other countries to include these provisions in tax 
treaties when we do not have reason to believe that doing so would 
yield net benefits to the fisc. We will continue to examine requests 
for collection assistance on a case-by-case basis, and will commit to 
such treaty provisions if, based on a thorough consultation with the 
IRS, we conclude that establishing collection assistance obligations 
with a particular country would on balance enhance the collection of 
U.S. taxes. The proposed protocol with Japan is an example of one such 
case.
    It is noteworthy that, in line with our continued concern that any 
obligations to assist a treaty partner in the collection of taxes must 
not lead to a disproportionate burden on the IRS, the proposed protocol 
with Japan contains a number of protections to ensure that the U.S. and 
Japanese tax authorities will provide such assistance in a limited and 
balanced manner. First, the protocol mandates the U.S. and Japanese tax 
authorities to arrive at a mutual understanding on a limit to the 
number of applications for assistance that either country may make in 
any given year. In addition, the two revenue authorities must mutually 
establish a minimum monetary threshold for applications, in order to 
prevent either country from seeking assistance in the collection of 
revenue claims that represent negligible amounts of taxes owed.
    As is explained in the following paragraphs, the scope of the 
collection assistance provisions in the proposed protocol with Japan 
differs in significant ways from the five collection assistance 
provisions we have in force with our other treaty partners. The 
Treasury Department firmly believes that these adjustments to the scope 
permitted in the prior treaties are both justified and appropriate.
    First, the proposed protocol permits a country to request 
assistance in the collection of a revenue claim that that country has 
against an individual citizen of the other country. Thus, Japan would 
be able to request, in certain cases, assistance from the IRS in the 
collection of a Japanese revenue claim against a U.S. citizen. However, 
the scope of such requests is limited only to situations in which the 
citizen has either, filed a fraudulent tax return (or a fraudulent 
claim for refund), willfully failed to file a tax return in an attempt 
to evade taxes, or has transferred assets to the other country to avoid 
collection of the revenue claim.
    Second, the proposed protocol permits a country to request 
assistance in the collection of a revenue claim that it has against a 
company resident in the other country. Just as is the case for 
collection against citizens, we have agreed to limitations with Japan 
on the scope of permissible collection assistance of companies resident 
in the other country. As a general matter, we do not want to allow the 
collection assistance provisions to be used as an end run against the 
dispute resolution provisions in the tax treaty. Therefore, under the 
proposed protocol, the tax authority of Japan may only request 
assistance from the IRS on the collection of a Japanese revenue claim 
against a company incorporated in the United States if the authority 
has exhausted all applicable dispute resolution mechanisms with respect 
to the particular revenue claim.
                 expanding the u.s. tax treaty network
    While much of the Treasury Department's tax treaty negotiations 
involve modernizing existing agreements with key trading partners to 
close loopholes or improve the level of benefits to U.S. investors, we 
also engage countries such as Chile to negotiate new tax treaties. The 
Treasury Department actively pursues opportunities to establish new tax 
treaty relationships with countries in which U.S. businesses encounter 
unrelieved double taxation with respect to their investments. The 
Treasury Department is aware of the keen interest of both the business 
community and the Senate to conclude income tax treaties that provide 
meaningful benefits to cross-border investors with South American 
countries. If approved by the Senate and the Chilean Congress, the tax 
treaty with Chile would be the second U.S. tax treaty in force in South 
America. Thus, the proposed tax treaty with Chile represents a 
significant inroad into the South American region.
    The Treasury Department is also developing new tax treaty 
relationships in other regions of the world. For example, on July 7 of 
this year, the administration signed a new tax treaty with Vietnam, a 
country that U.S. businesses have listed as a priority because they 
have experienced significant unrelieved double taxation. We hope to 
transmit the new tax treaty with Vietnam soon for its advice and 
consent. This treaty, if approved by the Senate, would be the first 
agreement of its kind between the United States and Vietnam.
                    discussion of proposed treaties
    I would now like to discuss the eight tax treaties that have been 
transmitted for the Senate's consideration. The treaties are generally 
consistent with modern U.S. tax treaty policy as reflected in the 
Treasury Department's 2006 U.S. Model Income Tax Convention. As with 
all bilateral tax treaties, the treaties contain minor variations that 
reflect particular aspects of the treaty policies and domestic tax laws 
of the foreign countries, and their economic relations with the United 
States. We have submitted a Technical Explanation for each treaty that 
contains detailed discussions of the provisions of each treaty. These 
Technical Explanations serve as the Treasury Department's official 
explanation of each tax treaty.
Chile
    The proposed Chile tax treaty is generally consistent with U.S. tax 
treaty policy as reflected in the 2006 U.S. Model. There are, as with 
all bilateral tax treaties, some variations from these norms. In the 
proposed treaty, these variations from the U.S. Model reflect 
particular aspects of the Chilean tax system and treaty policy, the 
interaction of U.S. and Chilean law, and U.S.-Chile economic relations.
    The proposed treaty provides for reduced source-country taxation of 
dividends distributed by a company resident of one country to a 
resident of the other country. The proposed treaty generally allows for 
taxation by the source country of 5 percent on direct dividends (i.e., 
where a 10-percent ownership threshold is met) and 15 percent on all 
other dividends. Additionally, the proposed treaty provides for an 
exemption from withholding tax on certain cross-border dividend 
payments to pension funds. In recognition of unique aspects of Chile's 
domestic tax system, the withholding rate reductions on dividend 
payments from Chile will generally not apply to Chile unless Chile 
makes certain modifications to its corporate tax system in the future.
    Consistent with the U.S. Model, the proposed treaty contains 
special rules for dividends paid by U.S. regulated investment companies 
and real estate investment trusts to prevent their usage to 
inappropriately avoid U.S. tax.
    The proposed treaty provides a limit of 4 percent on source-country 
withholding taxes on cross-border interest payments to banks, insurance 
companies, and certain other financial enterprises. For the first 5 
years following entry into force, the proposed treaty provides a limit 
of 15 percent on all other cross-border interest payments. After the 
initial 5-year period, the 15-percent limit is reduced to 10 percent 
for all other cross-border interest payments. In addition, consistent 
with the U.S. Model, source-country tax may be imposed on certain 
contingent interest and payments from a U.S. real estate mortgage 
investment conduit. The proposed treaty also permits the United States 
to impose its branch-level interest tax according to the applicable 
withholding rate reductions for cross-border interest payments.
    The proposed treaty provides a limit of 2 percent on source-country 
withholding taxes on cross-border royalty payments that constitute a 
rental payment for the use of industrial, commercial or scientific 
equipment, and a limit of 10 percent on all other cross-border royalty 
payments.
    The taxation of capital gains under the proposed treaty generally 
follows the format of the U.S. Model, with some departures in 
recognition of unique aspects of Chile's domestic tax system. Similar 
to the U.S. Model, gains derived from the sale of real property and 
real property interests may be taxed by the country in which the 
property is located. Likewise, gains from the sale of personal property 
forming part of a permanent establishment situated in a country may be 
taxed in that country. Gains from the alienation of shares or other 
rights or interests in a company may either be taxed at a maximum rate 
of 16 percent by the country in which the company is a resident, or in 
certain circumstances in accordance with that country's domestic law. 
However, the proposed treaty recognizes a unique aspect of Chile's 
domestic law and provides that these gains shall be taxable only in the 
country of residence of the seller if Chile makes certain modifications 
to its corporate tax system in the future. Certain other gains from the 
alienation of shares of a company are taxable only in the country of 
residence of the seller, such as gains derived by a pension fund. 
Furthermore, gains from the alienation of ships, boats, aircraft, and 
containers used in international traffic, as well as gains from the 
alienation of any property not specifically addressed by the proposed 
treaty's article on capital gains, are taxable only in the country of 
residence of the seller.
    The proposed treaty permits source-country taxation of business 
profits only if the business profits are attributable to a permanent 
establishment located in that country. The proposed treaty generally 
defines a ``permanent establishment'' in a way consistent with the U.S. 
Model. One departure from the U.S. Model, but found in a number of 
other U.S. tax treaties with developing countries, is a provision that 
deems an enterprise to have a permanent establishment in a country if 
the enterprise has performed services in that country exceeding 183 
days in a 12-month period.
    The proposed treaty preserves the U.S. right to impose its branch 
profits tax on U.S. branches of Chilean corporations. The proposed 
treaty also accommodates a provision of U.S. domestic law providing 
that income earned during the life of the permanent establishment, but 
deferred and not received until after the permanent establishment no 
longer exists, is still attributed to the permanent establishment.
    The proposed treaty provides that an individual resident in one 
country and performing services in the other country will become 
taxable in the other country only if the individual has a fixed place 
of business (a so-called ``fixed base''). The proposed treaty generally 
defines ``fixed base'' in a way consistent with the U.S. Model, with a 
departure found in a number of U.S. tax treaties with developing 
countries which deems an individual to have a fixed base if he or she 
has performed services in that country for at least 183 days in the 
taxable year concerned.
    The rules for the taxation of income from employment under the 
proposed treaty are similar to those under the U.S. Model. The general 
rule is that employment income may be taxed in the country where the 
employment is exercised unless three conditions constituting a safe 
harbor are satisfied.
    The proposed treaty permits both the residence country and source 
country to tax pension payments, although the source country's taxation 
right is limited to 15 percent of the gross amount of the pension. 
Consistent with current U.S. tax treaty policy, the proposed treaty 
permits the deductibility of certain cross-border contributions to 
pension plans. Also consistent with current U.S. tax treaty policy, the 
proposed treaty provides for exclusive source-country taxation of 
Social Security payments.
    The proposed treaty contains a comprehensive ``limitation-on-
benefits'' article designed to address ``treaty shopping,'' which is 
the inappropriate use of a tax treaty by residents of a third country. 
The limitation-on-benefits article is consistent with current U.S. tax 
treaty policy, although it contains a special rule for so-called 
``headquarters companies'' that is also found in a number of other U.S. 
tax treaties.
    The proposed treaty incorporates rules providing that a former 
citizen or long-term resident of the United States may, for the period 
of 10 years following the loss of such status, be taxed in accordance 
with the laws of the United States. The proposed treaty also 
coordinates the U.S. and Chilean tax rules to address the ``mark-to-
market'' provisions enacted by the United States in 2007, which apply 
to individuals who relinquish U.S. citizenship or terminate long-term 
residency.
    Consistent with the OECD and U.S. Models, the proposed treaty 
provides for the exchange between the competent authorities of each 
country of information that is foreseeably relevant to carrying out the 
provisions of the proposed treaty or enforcing the domestic tax laws of 
either country. The proposed treaty allows the United States to obtain 
information from Chile, including from Chilean financial institutions, 
regardless of whether Chile needs the information for its own tax 
purposes.
    The proposed treaty will enter into force when the United States 
and Chile have notified each other that they have completed all of the 
necessary procedures required for entry into force. With respect to 
taxes withheld at source, the treaty will have effect for amounts paid 
or credited on or after the first day of the second month following the 
date of entry into force. With respect to other taxes, the treaty will 
have effect for taxable years beginning on or after the first day of 
January next following the date of entry into force.
Hungary
    The proposed tax treaty and related agreement, which will be 
effected by exchange of notes with Hungary, were negotiated to bring 
the existing tax treaty into closer conformity with modern U.S. tax 
treaty policy. Entering into a new agreement has been a top tax treaty 
priority for the Treasury Department because the existing tax treaty 
with Hungary, signed in 1979, does not contain the necessary treaty 
shopping protections and, as a result, is currently being used 
inappropriately by third country investors to gain access to U.S. 
treaty benefits.
    The proposed treaty contains a comprehensive Limitation on Benefits 
article designed to address this problem. Similar to the provision 
included in all recent U.S. tax treaties with member countries of the 
European Union, the new Limitation on Benefits article includes a 
provision granting so-called ``derivative benefits.'' The article also 
contains a special rule for so-called ``headquarters companies'' found 
in a number of other U.S. tax treaties.
    The proposed treaty incorporates updated rules providing that a 
former citizen or long-term resident of the United States may, for the 
period of 10 years following the loss of such status, be taxed in 
accordance with the laws of the United States. The proposed treaty also 
coordinates the U.S. and Hungarian tax rules with the ``mark-to-
market'' U.S. domestic tax laws enacted in 2007, which apply to 
individuals who relinquish U.S. citizenship or terminate long-term 
residency.
    The withholding rates on investment income in the proposed treaty 
are the same as, or lower than, those in the current treaty. The 
proposed treaty provides for reduced source-country taxation of 
dividends distributed by a company resident of one country to a 
resident of the other country. The proposed treaty generally allows for 
taxation by the source country of 5 percent on direct dividends (i.e., 
where a 10-percent ownership threshold is met) and 15 percent on all 
other dividends. Additionally, the proposed treaty provides for an 
exemption from withholding tax on certain cross-border dividend 
payments to pension funds.
    The proposed treaty updates the treatment of dividends paid by U.S. 
regulated investment companies and real estate investment trusts to 
prevent their usage to inappropriately avoid U.S. tax.
    Consistent with the existing treaty, the proposed treaty generally 
eliminates source-country withholding taxes on cross-border interest 
and royalty payments. However, consistent with current U.S. tax treaty 
policy, source-country tax may be imposed on certain contingent 
interest and payments from a U.S. real estate mortgage investment 
conduit.
    The taxation of capital gains under the proposed treaty generally 
follows the format of the U.S. Model. Gains derived from the sale of 
real property and real property interests may be taxed by the State in 
which the property is located. Likewise, gains from the sale of 
personal property forming part of a permanent establishment situated in 
a country may be taxed in that country. All other gains, including 
gains from the alienation of ships, boats, aircraft, and containers 
used in international traffic, as well as gains from the sale of stock 
in a corporation, are taxable only in the country of residence of the 
seller.
    The proposed treaty, like several recent U.S. tax treaties, 
provides that the OECD Transfer Pricing Guidelines apply by analogy in 
determining the amount of business profits of a resident of the other 
country. The source country's right to tax such profits is generally 
limited to cases in which the profits are attributable to a permanent 
establishment located in that country. The proposed treaty preserves 
the U.S. right to impose its branch profits tax on U.S. branches of 
Hungarian corporations. The proposed treaty will also accommodate a 
provision of U.S. domestic law providing that income earned during the 
life of the permanent establishment, but deferred and not received 
until after the permanent establishment no longer exists, is still 
attributed to the permanent establishment.
    The proposed treaty would change the rules currently applied under 
the existing treaty regarding the taxation of independent personal 
services. Furthermore, an enterprise performing services in the other 
country will be taxable in the other country only if the enterprise has 
a fixed place of business in that country.
    The rules for the taxation of income from employment under the 
proposed treaty are similar to those under the U.S. Model. The general 
rule is that employment income may be taxed in the country where the 
employment is exercised unless three conditions constituting a safe 
harbor are satisfied.
    The proposed treaty preserves the current treaty's rules that allow 
for exclusive residence-country taxation of pensions, and, consistent 
with current U.S. tax treaty policy, provides for exclusive source-
country taxation of Social Security payments.
    Consistent with the OECD and U.S. Models, the proposed treaty with 
Hungary provides for the exchange between the tax authorities of each 
country of information relevant to carrying out the provisions of the 
proposed treaty or the domestic tax laws of either country. The 
proposed treaty allows the United States to obtain information 
(including from financial institutions) from Hungary whether or not 
Hungary needs the information for its own tax purposes.
    The proposed treaty would enter into force on the date of the 
exchange of instruments of ratification. With respect to taxes withheld 
at source, the treaty will have effect for amounts paid or credited on, 
or after, the first day of the second month following the date of entry 
into force. With respect to other taxes, the treaty will have effect 
for taxable years beginning on or after the first day of January next 
following the date of entry into force. The existing treaty will, with 
respect to any tax, cease to have effect as of the date on which the 
proposed treaty has effect with respect to such tax.
Japan
    The proposed protocol to amend the existing tax treaty with Japan 
and an agreement effected by exchange of notes were negotiated to make 
a number of key amendments to the existing tax treaty with Japan 
concluded in 2003. Many of the provisions in the proposed protocol are 
intended to bring the existing tax treaty into closer conformity with 
current U.S. tax treaty policy as reflected in the U.S. Model. The 
provisions also reflect particular aspects of Japanese law and tax 
treaty policy, the interaction of U.S. law with Japanese law, and U.S.-
Japan economic relations.
    The proposed protocol brings the existing treaty's taxation of 
cross-border interest payments largely into conformity with the U.S. 
Model by broadening the existing treaty's limited exemptions from 
source-country withholding to cover all payments of interest. However, 
contingent interest may be subject to source-country withholding tax at 
a rate of 10 percent, and full source-country tax may be imposed on 
payments from a U.S. real estate mortgage investment conduit.
    The proposed protocol with Japan expands the category of cross-
border dividends that are eligible for an exemption from source-country 
withholding. Under the existing treaty, such dividends are exempt from 
source-country withholding if the company that beneficially owns the 
dividends has owned, for a period of at least 12 months ending on the 
date on which the entitlement to the dividends is determined, greater 
than 50 percent of the voting stock of the company paying the dividends 
(and only if additional requirements are satisfied). The proposed 
protocol slightly lowers the ownership requirement for the exemption 
from source-country withholding to 50 percent or more of the voting 
stock of the company paying the dividends, and reduces the holding 
period requirement to 6 months.
    The proposed protocol amends the provisions of the existing 
Convention governing the taxation of capital gains to allow for 
taxation of gains from the sale of real property and from real property 
interests by the State in which the property is located. Accordingly, 
under the proposed protocol, the United States may fully apply the 
Foreign Investment in Real Property Tax Act.
    The proposed protocol updates the provisions of the existing 
Convention with respect to the mutual agreement procedure by 
incorporating mandatory arbitration of certain cases that the competent 
authorities of the United States and Japan are unable to resolve after 
a reasonable period of time. These provisions are similar to the 
mandatory arbitration provisions recently introduced into a number of 
other U.S. bilateral tax treaties.
    As previously discussed, above, the proposed protocol incorporates 
into the existing Convention provisions that enable the revenue 
authority of a country to request assistance from the revenue authority 
of the other country in the collection of taxes and related costs, 
interest and penalties.
    Consistent with the U.S. Model and the international standard for 
tax information exchange, the proposed protocol provides for the 
exchange between the revenue authorities of both countries of 
information foreseeably relevant to carrying out the provisions of the 
existing Convention (as modified by the proposed protocol) or the 
domestic tax laws of either country. The proposed protocol allows the 
United States to obtain information (including from financial 
institutions) from Japan whether or not Japan needs the information for 
its own tax purposes.
    The proposed protocol will 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, 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. Special rules apply for the entry into force of 
the mandatory binding arbitration provisions.
Luxembourg
    The proposed protocol to amend the existing tax treaty with 
Luxembourg and the related agreement effected by exchange of notes were 
negotiated to bring the existing treaty, signed in 1996, into closer 
conformity with current U.S. tax treaty policy regarding exchange of 
information.
    The proposed protocol replaces the existing treaty's information 
exchange provisions with updated rules that are consistent with current 
U.S. tax treaty practice and the current international standards for 
exchange of information. The proposed protocol allows the tax 
authorities of each country to exchange information foreseeably 
relevant to carrying out the provisions of the agreement or the 
domestic tax laws of either country. Among other things, the proposed 
protocol would allow the United States to obtain information from 
Luxembourg authorities whether or not Luxembourg needs the information 
for its own tax purposes. In addition, the proposed protocol provides 
that requests for information cannot be declined solely because the 
information is held by a bank or other financial institution.
    The proposed related agreement effected by exchange of notes sets 
forth agreed understandings between the countries regarding the updated 
provisions on tax information exchange. The agreed understandings 
include obligations on the United States and Luxembourg to ensure that 
their respective competent authorities have the authority to obtain and 
provide, upon request, information held by banks and other financial 
institutions and information regarding ownership of certain entities. 
The understandings also provide that information shall be exchanged 
without regard to whether the conduct being investigated would be a 
crime under the laws of the country from which the information has been 
requested.
    The proposed protocol would enter into force once both the United 
States and Luxembourg have notified each other that their respective 
applicable procedures for ratification have been satisfied. It would 
have effect with respect to requests made on or after the date of entry 
into force with regard to tax years beginning on or after January 1, 
2009. The related agreement effected by exchange of notes would enter 
into force on the date of entry into force of the proposed protocol and 
would become an integral part of the proposed protocol on that date.
Poland
    The proposed tax treaty with Poland was negotiated to bring the 
current treaty, concluded in 1974, into closer conformity with current 
U.S. tax treaty policy as reflected in the U.S. Model. There are, as 
with all bilateral tax treaties, some variations from these norms. In 
the proposed treaty, these differences reflect particular aspects of 
Polish law and treaty policy, the interaction of U.S. and Polish law, 
and U.S.-Poland economic relations.
    The proposed treaty contains a comprehensive Limitation on Benefits 
article designed to address ``treaty shopping.'' The existing tax 
treaty with Poland does not contain treaty shopping protections and, 
for this reason, revising the existing treaty has been a top priority 
for the Treasury Department's tax treaty program. Beyond the standard 
provisions, the new article includes a provision granting ``derivative 
benefits'' similar to the provision included in all recent U.S. tax 
treaties with member countries of the European Union. The article also 
contains a special rule for ``headquarters companies'' identical to 
with the rule in a number of other U.S. tax treaties.
    The proposed treaty incorporates updated rules that provide that a 
former citizen or former long-term resident of the United States may, 
for the period of 10 years following the loss of such status, be taxed 
in accordance with the laws of the United States. The proposed treaty 
also coordinates the U.S. and Polish tax rules to address the ``mark-
to-market'' provisions enacted by the United States in 2007 that apply 
to individuals who relinquish U.S. citizenship or terminate long-term 
residency.
    The withholding rates on investment income in the proposed treaty 
are in most cases the same as or lower than those in the current 
treaty. The proposed treaty provides for reduced source-country 
taxation of dividends distributed by a company resident in one country 
to a resident of the other country. The treaty will generally allow for 
taxation by the source country of 5 percent on direct dividends (i.e., 
where a 10-percent ownership threshold is met) and 15 percent on all 
other dividends. Additionally, the treaty will provide for an exemption 
from withholding tax on certain cross-border dividend payments to 
pension funds.
    The proposed treaty updates the treatment of dividends paid by U.S. 
regulated investment companies and U.S. real estate investment trusts 
to prevent their usage to inappropriately avoid U.S. tax.
    The proposed treaty provides for an exemption from source-country 
taxation for the following classes of interest: interest that is either 
paid by or paid to governments (including central banks); interest paid 
in respect of a loan made to or provided, guaranteed or insured by a 
government, statutory body or export financing agency; certain interest 
paid to a pension fund, interest paid to a bank or an insurance 
company; and interest paid to certain other financial enterprises that 
are unrelated to the payer of the interest. The proposed treaty 
provides for a limit of 5 percent on source-country withholding taxes 
on all other cross-border interest payments. In addition, consistent 
with the U.S. Model, source-country tax may be imposed on certain 
contingent interest and payments from a U.S. real estate mortgage 
investment conduit.
    The proposed treaty provides a limit of 5 percent on source-country 
withholding taxes on cross-border payments of royalties. The definition 
of the term ``royalty'' in the proposed treaty includes payments of any 
kind received as a consideration for the use of, or the right to use 
any industrial, commercial or scientific equipment.
    The taxation of capital gains under the proposed treaty generally 
follows the U.S. Model. Gains derived from the sale of real property 
and from real property interests may be taxed by the country in which 
the property is located. Likewise, gains from the sale of personal 
property forming part of a permanent establishment situated in either 
the United States or Poland may be taxed in that country. All other 
gains, including gains from the alienation of ships, aircraft, and 
containers used in international traffic and gains from the sale of 
stock in a corporation, are taxable only in the country of residence of 
the seller.
    Consistent with U.S. tax treaty policy, the proposed treaty employs 
the so-called ``Approved OECD Approach'' for attributing profits to a 
permanent establishment. The source country's right to tax such profits 
is generally limited to cases in which the profits are attributable to 
a permanent establishment located in that country. The proposed treaty 
defines a ``permanent establishment'' in a way that grants rights to 
tax business profits that are consistent with those found in the U.S. 
Model.
    The proposed treaty preserves the U.S. right to impose its branch 
profits tax on U.S. branches of Polish corporations. The proposed 
treaty also accommodates a provision of U.S. domestic law that 
attributes to a permanent establishment income that is earned during 
the life of the permanent establishment, but is deferred and not 
received until after the permanent establishment no longer exists.
    Under the proposed treaty an enterprise performing services in the 
other country will become taxable in the other country only if the 
enterprise has a fixed place of business.
    The rules for the taxation of income from employment under the 
proposed treaty are consistent with the U.S. Model. The general rule is 
that employment income may be taxed in the country where the employment 
is exercised unless the conditions constituting a safe harbor are 
satisfied.
    The proposed treaty contains rules regarding the taxation of 
pensions, Social Security payments, annuities, alimony, and child 
support that are generally consistent with the U.S. Model. Further, 
pensions and annuities are taxable only in the country of residence of 
the beneficiary. In addition, the treaty provides for exclusive source-
country taxation of Social Security payments. Payments of alimony and 
child support are exempt from tax in both countries. Consistent with 
the U.S. Model and the international standard for tax information 
exchange, the proposed treaty provides for the exchange between the tax 
authorities of each country of information that is foreseeably relevant 
to carrying out the provisions of the proposed treaty or the domestic 
tax laws of either country. The proposed treaty allows the United 
States to obtain such foreseeably relevant information (including from 
financial institutions) from Poland whether or not Poland needs the 
information for its own tax purposes.
    The proposed treaty will enter into force when both the United 
States and Poland have notified each other that they have completed all 
of the necessary procedures required for entry into force. The proposed 
treaty will have effect, with respect to taxes withheld at source, for 
amounts paid or credited on or after the first day of the second month 
next following the date of entry into force, 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. The current treaty will, 
with respect to any tax, cease to have effect as of the date on which 
this proposed treaty has effect with respect to such tax.
    The proposed treaty provides that an individual who was entitled to 
the benefits under the provisions for teachers, students and trainees, 
or government functions of the existing treaty at the time of entry 
into force of the proposed treaty shall continue to be entitled to such 
benefits until such time as the individual would cease to be entitled 
to such benefits if the existing treaty remained in force.
Spain
    The proposed protocol with Spain and an accompanying memorandum of 
understanding and exchange of notes make a number of key amendments to 
the existing tax treaty with Spain, concluded in 1990. Many of the 
provisions in the proposed protocol are intended to bring the existing 
treaty into closer conformity with the U.S. Model. The provisions in 
the proposed protocol also reflect particular aspects of Spanish law 
and tax treaty policy and U.S.-Spain economic relations. Modernizing 
the existing treaty has been a high tax treaty priority for the 
business communities in both the United States and Spain.
    The proposed protocol brings the existing tax treaty's rules for 
taxing payments of cross-border dividends into conformity with a number 
of recent U.S. tax treaties with major trading partners. The proposed 
protocol provides for an exemption from source-country withholding on 
certain direct dividends (i.e., dividends beneficially owned by a 
company that has owned, for a period of at least 12 months prior to the 
date on which the entitlement to the dividends is determined, at least 
80 percent of the voting stock of the company paying the dividends), as 
well as dividends beneficially owned by certain pension funds. With 
respect to other dividends, consistent with the U.S. Model, the 
proposed protocol limits to 5 percent the rate of source-country 
withholding permitted on cross-border dividends beneficially owned by a 
company that owns at least 10 percent of the voting stock of the 
company paying the dividends, and limits to 15 percent the rate of 
source-country withholding permitted on all other dividends. The 
proposed protocol permits the imposition of source-country withholding 
on branch profits in a manner consistent with the U.S. Model.
    The proposed protocol brings the existing tax treaty's rules for 
taxation of cross-border interest payments largely into conformity with 
the U.S. Model by exempting such interest from source-country taxation. 
However, interest that is contingent interest may be subject to source-
country withholding tax at a rate of 10 percent (in contrast to 15 
percent under the U.S. Model). Consistent with the U.S. Model, full 
source-country tax may be imposed on payments from a U.S. real estate 
mortgage investment conduit.
    The proposed protocol exempts from source-country withholding 
cross-border payments of royalties and capital gains in a manner 
consistent with the U.S. Model.
    The proposed protocol updates the provisions of the existing treaty 
with respect to the mutual agreement procedure by requiring mandatory 
binding arbitration of certain cases that the competent authorities of 
the United States and Spain are unable to resolve after a reasonable 
period of time. The arbitration provisions in the proposed protocol are 
similar to other mandatory arbitration provisions that were recently 
incorporated into a number of other U.S. bilateral tax treaties.
    The proposed protocol replaces the limitation-on-benefits 
provisions in the existing tax treaty with updated rules similar to 
those found in recent U.S. tax treaties with countries in the European 
Union.
    Consistent with the U.S. Model and the international standard for 
tax information exchange, the proposed protocol provides for the 
exchange between the tax authorities of each country of information 
that is foreseeably relevant to carrying out the provisions of the tax 
treaty or the domestic tax laws of either country. The proposed 
protocol allows the United States to obtain such foreseeably relevant 
information (including from financial institutions) from Spain 
regardless of whether Spain needs the information for its own tax 
purposes.
    The proposed protocol will enter into force 3 months after both 
countries have notified each other that they have completed all 
required internal procedures for entry into force. The proposed 
protocol will have effect, with respect to taxes withheld at source, 
for amounts paid or credited on or after the date on which the proposed 
protocol enters into force, and with respect to other taxes, for 
taxable years beginning on or after the date on which the proposed 
protocol enters into force. Special rules apply for the entry into 
force of the mandatory binding arbitration provisions.
Switzerland
    The proposed protocol to amend the existing tax treaty with 
Switzerland and related agreement effected by exchange of notes were 
negotiated to bring the existing treaty, signed in 1996, into closer 
conformity with current U.S. tax treaty policy regarding exchange of 
information. There are, as with all bilateral tax conventions, some 
variations from these norms. In the proposed protocol, these minor 
differences reflect particular aspects of Swiss law and treaty policy, 
and they generally follow the OECD standard for exchange of 
information.
    The proposed protocol replaces the existing treaty's information 
exchange provisions with updated rules that are consistent with current 
U.S. tax treaty practice and the current international standards for 
exchange of information. The proposed protocol will also allow the tax 
authorities of each country to exchange information that may be 
relevant to carrying out the provisions of the agreement or the 
domestic tax laws of either country, including information that would 
otherwise be protected by the bank secrecy laws of either country. In 
addition, it will allow the United States to obtain information from 
Switzerland whether or not Switzerland needs the information for its 
own tax purposes, and provides that requests for information cannot be 
declined solely because the information is held by a bank or other 
financial institution.
    The proposed protocol amends a paragraph of the existing protocol 
to the existing treaty by incorporating procedural rules to govern 
requests for information and an agreement between the United States and 
Switzerland that such procedural rules are to be interpreted in order 
not to frustrate effective exchange of information.
    The proposed protocol and related agreement effected by exchange of 
notes update the provisions of the existing treaty with respect to the 
mutual agreement procedure by incorporating mandatory arbitration of 
certain cases that the competent authorities of the United States and 
Switzerland are unable to resolve after a reasonable period of time.
    Finally, the proposed protocol updates the provisions of the 
existing treaty to provide that individual retirement accounts are 
eligible for the benefits afforded to pensions under the existing 
treaty.
    The proposed protocol would enter into force when the United States 
and Switzerland exchange instruments of ratification. The proposed 
protocol would have effect, with respect to taxes withheld at source, 
for amounts paid or credited on or after the first day of January of 
the year following entry into force. With respect to information 
exchange, the proposed protocol would have effect with respect to 
requests for bank information that relate to any date beginning on or 
after the date the proposed protocol is signed. With respect to all 
other cases, the proposed protocol would have effect with respect to 
requests for information that relates to taxable periods beginning on 
or after the first day of January next following the date of signature. 
The mandatory arbitration provision would have effect with respect both 
to cases that are under consideration by the competent authorities as 
of the date on which the proposed protocol enters into force and to 
cases that come under consideration after that date.
Protocol to the Multilateral Convention
    On January 25, 1988, the OECD and the Council of Europe jointly 
opened for signature the Multilateral Convention, which the United 
States signed in 1989. The proposed protocol to the Multilateral 
Convention was negotiated to bring the Multilateral Convention into 
conformity with current international standards regarding exchange of 
information for tax purposes.
    Although the Multilateral Convention contains broad provisions for 
the exchange of information, it predates the current internationally 
agreed standards on exchange of information. Thus, the obligations 
contained in the Multilateral Convention are subject to certain 
domestic law limitations that could impede full exchange of 
information. In particular, the Multilateral Convention does not 
require the exchange of bank information on request, nor does it 
override domestic tax interest requirements. In contrast, the current 
internationally agreed standards on transparency and exchange of 
information provide for full exchange of information upon request in 
all tax matters without regard to a domestic tax interest requirement 
or bank secrecy laws. The protocol amends the Multilateral Convention 
in order to bring it into conformity with these international 
standards, which are also reflected in the U.S. Model and OECD Model 
tax treaties.
    The Multilateral Convention specifies information the applicant 
country is to provide the requested country when making a request. In 
some situations, the name of the person under examination is not known 
to the applicant country, but there is other information sufficient to 
identify the person. The proposed protocol amends the Multilateral 
Convention by providing that a request for assistance is adequate even 
if the name of the person(s) under examination is not known, provided 
that the request contains sufficient information to identify the person 
or ascertainable group or category of persons.
    Prior to amendment, the Multilateral Convention was open for 
signature only by countries that were members of the Council of Europe, 
the OECD, or both. The proposed protocol amends the Multilateral 
Convention by allowing any country to become a party thereto. However, 
countries that are not members of the OECD or of the Council of Europe 
are only invited to become a party to the amended Convention subject to 
unanimous consent of the parties to the amended Convention.
    The Multilateral Convention as amended by the proposed protocol 
entered into force on June 1, 2011, for countries that signed and 
ratified it prior to that date. For countries that sign subsequent to 
that date, the Multilateral Convention as amended by the proposed 
protocol will enter into force on the first day of the month following 
the expiration of a period of 3 months after the date of deposit of the 
instrument of ratification with one of the Depositaries.
    Any Member State of the Council of Europe or of the OECD that is 
not yet a party to the Multilateral Convention will become a party to 
the Multilateral Convention as amended by the proposed protocol upon 
ratification of the Convention as amended by the proposed protocol by 
that Member State, unless it explicitly expresses the will to adhere 
exclusively to the unamended Convention. Any country that is not a 
member of the OECD or the Council of Europe that subsequently becomes a 
signatory to the Convention as amended by the proposed protocol shall 
be a party to the Convention as amended by the proposed protocol.
    The amendments shall have effect for administrative assistance 
related to taxable periods beginning on or after January 1 of the year 
following the year in which the Convention as amended by the proposed 
protocol, entered into force in respect of a party. Where there is no 
taxable period, the amendments shall have effect for administrative 
assistance related to charges to tax arising on or after January 1 of 
the year following the year in which the Convention as amended by the 
proposed protocol entered into force in respect of a party. Any two or 
more parties may mutually agree that the Convention as amended by the 
proposed protocol may have effect for administrative assistance related 
to earlier taxable periods or charges to tax. However, for criminal tax 
matters, the proposed protocol provides that the Convention as amended 
by the proposed protocol shall have effect for any earlier taxable 
period or charge to tax from the date of entry into force in respect of 
a party. A signatory country may nevertheless lodge a reservation 
according to which the provisions of the Convention as amended by the 
proposed protocol would have effect for administrative assistance 
related to criminal tax matters, only as related to taxable periods 
beginning from the third year prior to the year in which the Convention 
as amended by the proposed protocol entered into force in respect of 
that party.
                               conclusion
    Chairman Isakson and Ranking Member Menendez, let me conclude by 
thanking you for the opportunity to appear before the committee to 
discuss the administration's efforts with respect to the eight treaties 
under consideration. We appreciate the committee's continuing interest 
in the tax treaty program, and we thank the members and staff for 
devoting time and attention to the review of these new treaties. We are 
also grateful for the assistance and cooperation of the staff of the 
Joint Committee on Taxation.
    On behalf of the administration, we urge the committee to take 
prompt and favorable action on the agreements before you today. That 
concludes my testimony, and I would be happy to answer any questions.

    Senator Isakson. Thank you, Mr. Stack.
    Mr. Barthold.

    STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT 
             COMMITTEE ON TAXATION, WASHINGTON, DC

    Mr. Barthold. Thank you, Mr. Chairman.
    The Joint Committee staff, led by my colleague, Kristine 
Roth, has prepared pamphlets covering each of the proposed 
treaties and protocols. These pamphlets provide detailed 
descriptions of the treaties and protocols, and include 
comparisons with U.S. model and other recent U.S. treaties, as 
well as providing discussion of issues raised by the proposed 
agreements.
    There are many proposed agreements before your committee 
today. I will highlight only a few issues presented by these 
agreements, with some emphasis on the most recent protocol with 
Japan.
    Let me note first, though, that treaties and protocols are 
negotiated in the context of the tax laws of the two countries 
involved in the negotiation. We understand that there have been 
potentially noteworthy changes in the income tax laws of Chile, 
Poland, and Spain since the Foreign Relations Committee last 
considered the proposed agreements with those countries in 
2014.
    In particular, in Chile, the corporate shareholder income 
tax, which is fully integrated, has been the subject of reform 
legislation scheduled to take effect in 2017. And under this 
reform, a shareholder of a Chilean corporation who is a 
resident of a country with which Chile does not have an income 
tax treaty, would be credited with 65 percent rather than 100 
percent of the corporate tax paid.
    We also understand that the Government of Spain has enacted 
legislation that, among other things, reduces its corporate tax 
rate and modifies its depreciation rules, and that the 
Government of Poland has enacted changes to the individual 
income tax and corporate income tax.
    The committee may wish to inquire of my colleagues from the 
Treasury Department if they believe that these current proposed 
agreements appropriately accommodate these internal law 
developments in these other countries.
    The principal purposes of income tax treaties are to reduce 
or eliminate double taxation of income, and to prevent 
avoidance or evasion of taxes between the two countries. These 
objectives are primarily achieved through countries agreeing to 
limit, in certain situations, its right to tax income derived 
from its territory by residents of the other country and 
providing procedures to resolve disputes.
    The proposed protocol with Japan broadens the scope of 
companies eligible for a zero withholding tax rate on parent 
subsidiary dividends provided under the existing treaty. The 
proposed protocol with Spain would bring to 13 the number of 
U.S. income tax treaties that provide such a zero rate on 
direct dividends. The U.S. model treaty does not provide a zero 
rate on direct dividends. In previous testimony before the 
committee, the Treasury Department has stated that the dividend 
withholding tax should only be eliminated on the basis of an 
overall balance of benefits, and only in situations where 
treaties have restrictive limitations on benefit rules and 
provide comprehensive information exchange.
    I observe that every recent U.S. income tax treaty or 
protocol has included restrictive limitation-on-benefits 
provisions and comprehensive income information exchange 
provisions. Therefore, the committee may wish to inquire 
whether there are particular considerations the Treasury 
Department will now take into account in deciding whether to 
negotiate for zero-rate direct-dividend provisions in future 
income tax treaties or protocols, and whether the new U.S. 
model treaty that is being developed by the Treasury Department 
will eliminate withholding tax on direct dividends.
    The proposed protocol with Japan also provides for, as 
noted by Mr. Stack, mandatory and binding arbitration in mutual 
agreement procedure cases pending before the competent 
authorities that have been without resolution for 2 years or 
more. The protocols amending the Swiss and Spanish treaties 
also include similar provisions.
    While similar to arbitration procedures adopted in some 
recent income tax treaties, the Japanese protocol presents some 
significant differences. First, it does not require the 
presenter of the case to have filed a return with each of the 
two jurisdictions. It also may expedite the schedule on which 
the taxpayer who seeks a bilateral advanced pricing agreement 
may have it resolved by binding arbitration related to that 
advanced pricing agreement. And the proposed protocol also 
departs from the U.S. model treaty general rules limiting 
participation of a taxpayer in any mutual agreement proceedings 
by allowing that taxpayer who presents a case to submit a 
position paper directly to the arbitration panel.
    The committee may wish to consider the extent to which the 
inclusion of mandatory arbitration rules and the particular 
features of the Japanese protocol now represent United States 
policy regarding mandatory binding arbitration. In particular, 
you may wish to inquire about the criteria on which the 
Treasury Department determines whether to include such 
provisions, the appropriate scope of issues eligible for 
determination by binding arbitration, the absence of 
precedential value, and the role of the taxpayer in an 
arbitration proceeding.
    Lastly, the pending protocol with Japan also expands the 
mutual collection assistance available under the Japan treaty 
to include taxes not otherwise covered by the treaty and to 
permit collection assistance against one's own nationals on 
behalf of the other jurisdiction in cases of fraudulent conduct 
by the citizen.
    This provision aggregates what is known as the revenue 
rule, a common law doctrine against providing collection 
assistance to which the United States has generally adhered. 
The changes to the scope of collection assistance are similar 
to those of only five other countries, but there is no 
comparable provision in the U.S. model treaty, and the United 
States has expressly reserved with respect to a similar 
provision that is included in the OECD multilateral treaty, 
which is also pending before this committee.
    The protocol's article requires the competent authorities 
to negotiate limitations to the extent of which assistance will 
be sought or provided in order to ensure that the 
administrative burden is not unfairly imposed on the 
jurisdiction.
    The committee may want to, again, explore the basis for 
agreeing to this departure from general policy and the criteria 
applied in so doing. And in addition to any concerns that there 
might be about preserving the sovereignty of the United States 
and the rights of its taxpayers, the risk of increased 
administrative burden should also be considered.
    This concludes my testimony. I would be pleased to answer 
any questions that the members might have.
    [The prepared statement of Mr. Barthold follows:]

              Prepared Statement of Thomas A. Barthold\1\

    My name is Thomas A. Barthold. I am Chief of Staff of the Joint 
Committee on Taxation. It is my pleasure to present the testimony of 
the staff of the Joint Committee on Taxation today concerning the 
proposed income tax treaties with Chile, Hungary, and Poland, the 
proposed tax protocols with Japan, Luxembourg, Spain and Switzerland, 
and the proposed protocol amending the multilateral mutual 
administrative assistance treaty.
                                overview
    The Joint Committee staff has prepared pamphlets covering each of 
the proposed treaties and protocols.\2\ The pamphlets provide detailed 
descriptions of the proposed treaties and protocols, including, in the 
case of the income tax treaties and protocols, comparisons with the 
United States Model Income Tax Convention of November 15, 2006 (``U.S. 
Model treaty''), which reflects preferred U.S. tax treaty policy, and 
with other recent U.S. tax treaties. The pamphlets also provide 
detailed discussions of issues raised by the proposed treaties and 
protocols. We consulted with the Treasury Department and with the staff 
of your committee in analyzing the proposed treaties and protocols and 
in preparing the pamphlets.
    The principal purposes of the proposed income tax treaties and 
protocols are to reduce or eliminate double taxation of income earned 
by residents of either country from sources within the other country 
and to prevent avoidance or evasion of the taxes of the two countries. 
The proposed income tax treaties and protocols also are intended to 
promote close economic cooperation between the treaty countries and to 
eliminate possible barriers to trade and investment caused by 
overlapping taxing jurisdictions of the treaty countries. As in other 
U.S. income tax treaties, these objectives principally are achieved 
through each country's agreement to limit, in certain specified 
situations, its right to tax income derived from its territory by 
residents of the other country.
    The principal purpose of the multilateral mutual assistance treaty 
is to promote increased cooperation in tax administration and 
enforcement among the parties to the treaty.
    The proposed protocol with Japan amends an existing treaty, last 
amended by a protocol signed November 6, 2003. The proposed protocol 
with Spain would amend an existing tax treaty signed on February 22, 
1990, and its protocol. The proposed treaty with Poland would replace 
an existing income tax treaty signed on October 8, 1974. The proposed 
treaty with Hungary would replace an existing income tax treaty signed 
in 1979. The proposed protocol with Luxembourg would amend an existing 
tax treaty that was signed in 1996. The proposed protocol with 
Switzerland would amend an existing tax treaty and previous protocol 
that were both signed in 1996. The proposed treaty with Chile is the 
first income tax treaty with that nation. The last proposed protocol 
under consideration by your committee amends the multilateral mutual 
administrative assistance in tax matters agreement that the United 
States ratified in 1991.
    My testimony today will first provide an article-by-article summary 
of the principal features of the proposed protocol with Japan. My 
testimony will also address the extent to which the U.S. Model treaty 
continues to represent U.S. tax policy, as reflected in the issues 
related to benefits conferred under the various agreements pending with 
your committee and issues related to mutual administrative assistance. 
With respect to the former, these issues include the limitation-on-
benefits provisions in the treaties with Spain, Chile, and Hungary; 
zero-withholding for parent-subsidiary dividends in Spain, Japan; and 
the commitment included in the proposed protocol with Spain to 
negotiate toward an agreement between Puerto Rico and Spain. With 
respect to the latter, the issues are the exchange of information 
modernization included in all of the agreements, including the 
expansion of the multilateral mutual administrative assistance 
agreement; the mandatory arbitration provisions of the protocols with 
Switzerland, Spain, and Japan; and the expanded collection assistance 
agreed upon with Japan.
       article-by-article summary of proposed protocol with japan
    The proposed protocol with Japan includes the following significant 
changes to the existing treaty.
    Article II provides that companies that are resident in both Japan 
and the United States (dual resident companies) will not be considered 
resident of either jurisdiction for purposes of the treaty. As a 
result, the treaty benefits available to such companies are limited to 
those that are available to nonresidents.
    Article III reduces the thresholds for exemption from source-
country taxation of dividends from subsidiaries resident in one country 
to a parent corporation resident in the other treaty country. Under the 
proposed protocol, ownership of 50 percent or more, rather than 
ownership of more than 50 percent, qualifies. Article III also reduces 
the required holding period for elimination of source-country taxation 
on such dividends to the 6-month period ending on the date on which 
entitlement to the dividends is determined. Both the ownership standard 
and the holding period thresholds depart from recent U.S. tax treaties 
that provided zero-rate withholding contingent upon a 12-month holding 
period and 80-percent ownership.
    Article IV replaces Article 11 of the existing treaty, regarding 
taxation of cross-border interest payments (interest payments arising 
in one treaty country to residents of the other treaty country). First, 
the proposed protocol brings the tax treatment of cross-border interest 
payments into closer alignment with the rules described in the U.S. 
Model treaty and exempts such interest from source-country taxation. 
The interest remains subject to tax in the residence country. Antiabuse 
provisions are also provided that permit source-country taxation, 
notwithstanding the above rule, for contingent interest payments and 
payments with respect to ownership in entities used for securitization 
of real estate mortgages.
    Article V revises the definition of real property in Article 13 of 
the existing treaty to conform more closely to the U.S. Model treaty.
    Article VII repeals Article 20 of the existing treaty, which 
provides certain benefits to researchers and teachers from one 
jurisdiction when they are temporarily present in the other 
jurisdiction, consistent with modern treaty policy of both the United 
States and Japan. A conforming change is made by Article I to paragraph 
5 of Article 1 of the existing treaty.
    Article IX revises the rules regarding foreign tax credits to 
conform to changes in Japanese statutory rules for relief from double 
taxation. The changes reflect the recent adoption of a participation 
exemption system in Japan.
    Article X revises the nondiscrimination rules of Article 24 of the 
existing treaty to reflect the changes to Article 11, as summarized 
above.
    Article XI provides mandatory and binding arbitration in mutual 
agreement procedure cases pending before the competent authorities 
without resolution for 2 years or more. The provision is similar in 
scope and process to that found in recent treaties and in the proposed 
protocol with Spain that is also pending before the committee. The new 
article includes procedures to ensure confidentiality of taxpayer 
information and the mutual agreement process are included, as well as 
rules for the selection of members of the arbitration panel to avoid 
conflicts of interest. The taxpayer is permitted an opportunity to 
participate in the proceeding in the form of a presentation of views 
and reasoning. Each competent authority is permitted to provide views, 
reasoning and its proposed solution to each issue. The panel must reach 
a determination that selects the proposed solution of one of the 
competent authorities. That determination is not accorded precedential 
value and does not include a rationale or other reasoning.
    The article prescribes standards similar but not identical to those 
found in recent treaties with Belgium, France, Germany, and Canada, and 
is a departure from the U.S. Model treaty. First, it does not require 
the presenter of the case to have filed a return with each of the two 
jurisdictions. It also may expedite the schedule on which a taxpayer 
who seeks a bilateral advanced pricing agreement may contest a proposed 
adjustment that is related to the subject of the pending request for a 
pricing agreement, thus compelling arbitration if the competent 
authorities do not reach agreement on the bilateral advanced pricing 
agreement. The proposed article also departs from the U.S. Model treaty 
general rules limiting participation of the taxpayer in any mutual 
agreement proceedings by allowing the taxpayer who presents a case to 
submit a position paper directly to the arbitration panel.
    Article XII of the proposed protocol modernizes the exchange of 
information provisions of Article 26. The revised exchange of 
information provisions conform to modern standards similar to those in 
the U.S. Model treaty and the OECD Model treaty. Unlike the U.S. Model 
treaty, the proposed protocol includes a specific provision that the 
obligation to exchange information does not override domestic law 
privilege that attaches to confidential communications.
    Article XIII expands the mutual collection assistance available 
under Article 27 to include taxes not otherwise covered by the treaty, 
and to permit collection assistance against one's own nationals on 
behalf of the other jurisdiction in cases of fraudulent conduct by the 
citizen. The provision abrogates the Revenue Rule, a common law 
doctrine against providing collection assistance to which the United 
States has generally adhered. The changes to the scope of collection 
assistance are similar to those in treaties with only five other 
countries: France, Netherlands, Sweden, Canada, and Denmark. There is 
no comparable provision in the U.S. Model treaty, and the United States 
expressly reserved with respect to a similar provision that is included 
in the OECD Multilateral treaty that is also pending before this 
committee. The article requires the competent authorities to negotiate 
limitations on the extent to which such assistance will be sought or 
provided, in order to assure that administrative burden is not unfairly 
imposed on either jurisdiction.
    Article XIV amends the 2003 Protocol to provide rules for the 
implementation of both arbitration and collection provisions, as well 
as conforming changes.
          the extent to which the u.s. model treaty continues 
                       to reflect u.s. tax policy
    The most recent U.S. Model treaty was published in 2006. A number 
of U.S. income tax treaties and protocols to earlier treaties have 
entered into force since then. Significant deviations from the U.S. 
Model treaty have, understandably, proliferated. This proliferation can 
be expected to continue as the U.S. State Department and Treasury 
Department negotiate new income tax treaties and protocols. Earlier 
this year, the Treasury Department proposed several revisions and 
additions to the U.S. Model and announced its goal of completing its 
revision of the U.S. Model treaty this year.\3\ The following 
discussion identifies areas in which the pending protocols differ from 
the current U.S. Model treaty. First, I address those issues related to 
benefits conferred under the various agreements pending with your 
committee, and second, the issues related to mutual administrative 
assistance, specifically exchange of information and mutual collection 
assistance.
A. Issues Related to the Benefits Provided to Relieve Double Taxation
            Attribution of profits in treaty with Poland
    In the proposed treaty with Poland, Article 7 (Business Profits) is 
the first United States treaty to adopt rules for the taxation by a 
treaty country of the business profits of an enterprise located in the 
other treaty country that is based on the language of Article 7 
(Business Profits) of the OECD Model treaty. Although the language used 
in the OECD Model treaty differs from the U.S. Model treaty, the policy 
toward, and implementation of, the business profits article under the 
two models are substantively similar. The committee may wish to ask the 
Treasury Department whether the use of the OECD Model treaty Article 7 
in the Polish treaty represents a change in U.S. income tax treaty 
policy. One area in which the U.S. Model treaty and that of the OECD 
differ is the inclusion of an antiabuse measure. The U.S. Model treaty, 
paragraph 7, and the proposed treaty, paragraph 5, include an antiabuse 
provision treating income or gain attributable to a permanent 
establishment as taxable in the treaty country where the permanent 
establishment is located, even if the payment is deferred until after 
such permanent establishment has ceased to exist. The OECD Model treaty 
does not include a similar provision and the United States reserved the 
right to amend Article 7 to provide for taxation of income or gain even 
if payments are deferred until after the permanent establishment has 
ceased to exist.\4\ The committee may wish to ask the Treasury 
Department if they believe this provision is adequate to prevent the 
avoidance of tax on income attributable to a permanent establishment 
when that permanent establishment is no longer in existence.
            Limitation-on-benefits provisions in treaties with Hungary, 
                    Chile, Poland, and Spain
    Like the U.S. Model treaty, the proposed revisions to the treaties 
with Chile, Hungary, Poland, and Spain include extensive limitation-on-
benefits rules (Chile, Article 24; Hungary, Article 22; Poland, Article 
22; Spain, Article IX of the proposed protocol, amending Article 17 of 
the existing treaty) that are intended to prevent third-country 
residents from benefiting inappropriately from a treaty that generally 
grants benefits only to residents of the two treaty countries. This 
practice is commonly referred to as ``treaty shopping.'' With the 
inclusion of modern limitation-on-benefits rules, the proposed treaties 
with Hungary and Poland represent a significant opportunity to mitigate 
treaty shopping. The present treaties with Hungary and Poland are two 
of only seven U.S. income tax treaties that do not include any 
limitation-on-benefits rules.\5\ The lack of any limitation-on-benefits 
rules in combination with provisions for complete exemption from 
withholding on interest payments from one treaty country to the other 
treaty country present attractive opportunities for treaty shopping.\6\ 
For example, a November 2007 report prepared by the Treasury Department 
at the request of Congress suggests that the income tax treaty with 
Hungary has increasingly been used for treaty-shopping purposes as the 
United States adopted modern limitation-on-benefits provisions in its 
other treaties. In 2004, U.S. corporations that were at least 25-
percent foreign owned made $1.2 billion in interest payments to related 
parties in Hungary, the seventh-largest amount of interest paid to 
related parties in any single country.\7\
    Earlier this year, a possible revision of Article 22 (Limitation on 
Benefits) of the U.S. Model treaty was published for public comment. 
Although the limitation-on-benefits rules in the proposed treaties with 
Chile, Hungary, Poland, and Spain are similar to the rules in other 
recent and proposed U.S. income tax treaties and protocols and in the 
U.S. Model treaty, they are not uniform. Your committee may wish to 
inquire about certain differences among these agreements, the 
underlying rationale for the differences and the extent to which they 
align with the policies in the U.S. Model treaty or its proposed 
revision. The principal differences from the U.S. Model treaty are the 
inclusion of the headquarters company category of qualified person, the 
derivative benefits rule, and the antiabuse rule for triangular 
arrangements, and with respect to Spain, the standard for exercise of 
competent authority discretion to grant treaty benefits to persons or 
with respect to income not otherwise eligible.
    As in the U.S. Model treaty, in the pending protocols, a recognized 
stock exchange includes certain exchanges specified in the treaty as 
well as any other stock exchange agreed upon by the competent 
authorities of the treaty countries. Your committee may wish to explore 
the rationale underlying the identification of recognized stock 
exchanges for purposes of limitations of benefits, and the criteria the 
Treasury Department considers when negotiating over the definition of a 
recognized stock exchange.
    The derivative benefits rules may grant treaty benefits to a 
treaty-country resident company in circumstances in which the company 
itself would not qualify for treaty benefits under any of the other 
limitation-on-benefits provisions. Like other recent treaties, 
including those with Canada and Iceland as well as several European 
treaty countries, the proposed treaties with Poland, Spain, and Hungary 
include a derivative benefits rule. Under the derivative benefits rule, 
a treaty-country company receives treaty benefits for an item of income 
if the company's owners (referred to in the proposed treaty as 
equivalent beneficiaries) reside in a country that is in the same 
trading bloc as the treaty country and would have been entitled to the 
same benefits for the income had those owners derived the income 
directly. The definition of equivalent beneficiary differs in the 
proposed agreements. With respect to Spain, a party whose ownership 
interest is held indirectly is not an equivalent beneficiary unless the 
intermediate owner also qualifies as an equivalent beneficiary, similar 
to the rule in the proposed revision to the U.S. Model treaty. The 
Chile treaty, like the existing U.S. Model treaty, does not include 
derivative benefits rules.
    The proposed treaties with Chile and Hungary include special 
antiabuse rules intended to deny treaty benefits in certain 
circumstances in which a Chilean or Hungarian resident company earns 
U.S.-source income attributable to a third-country permanent 
establishment and is subject to little or no tax in the third 
jurisdiction and (as applicable) Chile or Hungary. A rule on triangular 
arrangements is not included in the U.S. Model treaty, but similar 
antiabuse rules are included in other recent treaties and protocols.
    With respect to the headquarters company rule, the committee may 
wish to explore the rationale for granting benefits to an entity that 
is not otherwise eligible for benefits. The proposed treaties with 
Chile and Hungary and the proposed protocols with Spain and Poland 
allow full treaty benefits for an entity that functions as a 
headquarters company, but does not satisfy the other categories of 
persons entitled to full treaty benefits. In doing so, they conform to 
U.S. income tax treaties in force with Austria, Australia, Belgium, the 
Netherlands, and Switzerland but not the U.S. Model treaty. The 
conditions for qualifying as a headquarters company include 
requirements intended to ensure that the headquarters company performs 
substantial supervisory and administrative functions for a group of 
companies, including its multinational nature, that the headquarters 
company is subject to the same income tax rules in its country of 
residence as would apply to a company engaged in the active conduct of 
a trade or business in that country; and that the headquarters company 
has independent authority in carrying out its supervisory and 
administrative functions.
    Finally, the committee may wish to inquire whether it is 
appropriate to grant discretion to competent authorities to extend 
treaty benefits to persons not otherwise entitled to such benefits, 
and, if so, the standard for exercise of any such authority. As in the 
U.S. Model and other recently negotiated treaties with modern 
limitations on benefits articles, the proposed treaty with Poland 
includes a grant of discretion to the competent authority to extend 
otherwise unavailable treaty benefits to a party that is not otherwise 
entitled to treaty benefits if the competent authority determines that 
the organization or operation of the person claiming benefits did not 
have as a principal purpose the obtaining of treaty benefits. By 
contrast, the proposed protocol with Spain requires that the competent 
authority evaluate the extent to which the resident of the other 
country met any of the criteria under other provisions in the article, 
without regard to motivation.
    The committee may wish to inquire of the Treasury Department about 
the alternative formulations of the standard for discretion to extend 
tax treaty benefits that have been proposed as part of Action Plan on 
Base Erosion and Profit Shifting, undertaken by the Organisation for 
Economic Co-operation and Development (``OECD'') at the request of the 
G20.\8\
            Mandatory arbitration in treaties with Japan, Spain, and 
                    Switzerland
    In addition to the proposed protocol with Japan, the protocols 
amending the Swiss and Spanish treaties also include revisions to the 
mutual agreement procedures to require competent authorities to resort 
to binding arbitration if unable to reach a resolution within a 
specified period of time. Although tax treaties traditionally have not 
included a mechanism to ensure resolution of disputes, the addition of 
mandatory procedures for binding arbitration as part of the mutual 
agreement procedures has become increasingly frequent in recent years. 
The U.S. tax treaties currently in effect with Belgium, Germany, 
France, and Canada include such provisions. Mandatory binding 
arbitration is provided upon request of the taxpayer in paragraph 5 of 
Article 25 (Mutual Agreement Procedure) of the OECD Model treaty. 
Following its 2-year study on base erosion and profit shifting, the 
OECD concluded that the inclusion of mandatory binding arbitration is 
necessary to achieve the goal of the mutual agreement procedures, which 
generally encourage, but do not require, dispute resolution by the 
competent authorities.\9\
    In considering the proposed protocols, the committee may wish to 
consider the extent to which the inclusion of mandatory arbitration 
rules and the particular features of the arbitration provisions in the 
proposed protocols now represent the United States policy regarding 
mandatory binding arbitration. In particular, the committee may wish to 
inquire about the criteria on which the Treasury Department determines 
whether to include such provisions in a particular treaty, the 
appropriate scope of issues eligible for determination by binding 
arbitration, the absence of precedential value of arbitration 
determinations, the role of the taxpayer in an arbitration proceeding 
and how to ensure adequate oversight of the use of mandatory 
arbitration.
    Regardless of whether the Treasury Department expects mandatory 
arbitration to become a standard feature in all future U.S. tax 
treaties, the committee may wish to inquire about the experience to 
date in the four treaties with such provisions currently in effect, and 
whether the Treasury Department intends to develop and publish a 
standardized set of arbitration principles and procedures for inclusion 
in a revision to the U.S. Model treaty.
            Zero-withholding on parent-subsidiary dividends in treaties 
                    with Spain and Japan
    When certain conditions are satisfied, the proposed protocol with 
Spain eliminates withholding tax on dividends paid by a company that is 
resident in one treaty country to a company that is a resident of the 
other treaty country and that owns at least 80 percent of the stock of 
the dividend-paying company (often referred to as ``direct 
dividends''). The elimination of withholding tax on direct dividends is 
intended to reduce the tax barriers to direct investment between the 
two treaty countries. The proposed protocol with Japan broadens the 
scope of companies eligible for zero-withholding under the existing 
treaty by reducing the ownership and holding period thresholds for 
eliminating of withholding on dividends.
    Until 2003, no U.S. income tax treaty provided for a complete 
exemption from dividend withholding tax, and the U.S. Model treaty does 
not provide an exemption. By contrast, many bilateral income tax 
treaties of other countries eliminate withholding taxes on direct 
dividends between treaty countries, and the European Union (``EU'') 
Parent-Subsidiary Directive repeals withholding taxes on intra-EU 
direct dividends. Recent U.S. income tax treaties and protocols with 
Australia, Japan, Mexico, the Netherlands, Sweden, the United Kingdom, 
Belgium, Denmark, Finland, Germany, France, and New Zealand include 
zero-rate provisions. The Senate ratified those treaties and protocols 
in 2003 (Australia, Mexico, United Kingdom), 2004 (Japan, Netherlands), 
2006 (Sweden), 2007 (Belgium, Denmark, Finland, and Germany), 2009 
(France), and 2010 (New Zealand). The proposed protocol with Spain 
therefore would bring to 13 the number of U.S. income tax treaties that 
provide a zero rate for direct dividends.
    Because zero-rate provisions are a relatively recent but now 
prominent development in U.S. income tax treaty practice, the committee 
may wish to consider possible costs and benefits of zero-rate 
provisions such as revenue considerations and diminishing of barriers 
to cross-border investment; the Treasury Department's criteria for 
determining when a zero-rate provision is appropriate; and certain 
specific features of zero-rate provisions such as ownership thresholds, 
holding-period requirements, the treatment of indirect ownership, and 
heightened limitation-on-benefits requirements. These issues have been 
described in detail in connection with the committee's previous 
consideration of proposed income tax treaties and protocols that have 
included zero-rate provisions.\10\
    Although zero-rate provisions for direct dividends have become a 
common feature of U.S. income tax treaties signed in the last decade, 
the U.S. Model treaty does not provide a zero rate for direct 
dividends. In previous testimony before the committee, the Treasury 
Department has indicated that zero-rate provisions should be allowed 
only under treaties that have restrictive limitation-on-benefits rules 
and that provide comprehensive information exchange. Even in those 
treaties, according to previous Treasury Department statements, 
dividend withholding tax should be eliminated only on the basis of an 
evaluation of the overall balance of benefits under the treaty. Every 
recent U.S. income tax treaty or protocol has included restrictive 
limitation-on-benefits provisions and comprehensive information 
exchange provisions. The committee therefore may wish to inquire into 
whether there are other particular considerations that the Treasury 
Department will now take into account in deciding whether to negotiate 
for zero-rate direct dividend provisions in future income tax treaties 
and protocols. The committee also may wish to ask whether any new U.S 
model income tax treaty might eliminate withholding tax on direct 
dividends and, if it would not so provide, why it would not.
            Developments in substantive foreign tax laws of Chile, 
                    Poland, and Spain
    Based on our own research and on assistance from foreign law 
specialists of the Global Legal Research Center of the Library of 
Congress' Law Library, we understand that there have been potentially 
noteworthy changes in the income tax laws of Chile, Poland, and Spain 
since the Foreign Relations Committee last considered the proposed 
agreements with those countries in 2014.
    In Chile, the corporate-shareholder income tax, which is fully 
integrated by means of a shareholder-level credit for corporate tax 
paid on distributed profits, has been the subject of reform legislation 
scheduled to take effect in 2017. Under this reform, a shareholder of a 
Chilean corporation who is a resident of a country with which Chile 
does not have an income tax treaty will be credited with 65 percent, 
rather than 100 percent, of corporate tax paid on distributed profits. 
We understand that the Government of Spain has also enacted legislation 
that, among other things, reduces the corporate tax rate and modifies 
depreciation rules. Finally, we understand that the Government of 
Poland has enacted changes to the individual income tax and corporate 
income tax.
    The committee may wish to inquire whether the Treasury Department 
believes that the proposed agreements appropriately accommodate these 
internal law developments.
B. Administrative Assistance Issues
            Mutual collection assistance with Japan
    The proposed protocol with Japan departs from the U.S. Model 
Article 26 (Exchange of Information and Administrative Assistance) in 
providing for assistance in the collection of revenue claims of the 
other contracting state beyond those amounts required to ensure that 
treaty benefits are respected and limited to those entitled to them 
under the terms of the treaty. The committee may wish to explore the 
basis for agreeing to this departure from general U.S. policy and the 
criteria applied in determining to do so. For example, the committee 
may seek assurances as to the nature of safeguards protecting the 
rights of persons whose U.S. tax debts may be subject to collection in 
Japan and the extent to which persons with Japanese tax debts can be 
assumed to have had adequate opportunities for review of the merits of 
the underlying claim may also warrant inquiry.
    The infrequency of such provisions is consistent with the revenue 
rule doctrine, which can be traced to the centuries-long tradition 
based on Lord Mansfield's statement, ``For no country ever takes notice 
of the revenue laws of another.''\11\ Although its vitality and scope 
have been questioned, most recently in Pasquantino v. United 
States,\12\ the doctrine remains a cornerstone of all common law 
jurisdictions, as well as many others. In determining whether to honor 
a judgment of a foreign court, U.S. courts generally do not accord 
comity to tax or penal judgments of a foreign court.\13\
    In addition to the concerns about preserving the sovereignty of the 
United States and the rights of its taxpayers, the risk of increased 
administrative burden may also be considered. The agreement includes 
requirements that the authorities reach agreement to limit the volume 
of such requests and share costs of the program.
            Exchange of information issues in all pending protocols
    Tax treaties establish the scope of information that can be 
exchanged between treaty countries. Exchange of information provisions 
first appeared in the late 1930s,\14\ and are now included in all 
double tax conventions to which the United States is a party. A broad 
international consensus has coalesced around the issue of bank 
transparency for tax purposes and strengthened in recent years, in part 
due to events involving one of Switzerland's largest banks, UBS AG, the 
global financial crisis, and the general increase in globalization. 
Greater attention to all means of restoring integrity and stability to 
financial institutions has led to greater efforts to reconcile the 
conflicts between jurisdictions, particularly between jurisdictions 
with strict bank secrecy and those seeking information to enforce their 
own tax laws.\15\ As a result, the committee may wish to inquire as to 
whether the U.S. Model treaty published in 2006 remains the appropriate 
standard by which to measure an effective exchange of information 
program.
    Although the United States has long had bilateral income tax 
treaties in force with Hungary, Luxembourg, and Switzerland, the United 
States has engaged in relatively limited exchange of information under 
these tax treaties. With Luxembourg and Switzerland, the limitations 
stem from strict bank secrecy rules in those jurisdictions. The 
proposed protocols with Luxembourg and Switzerland are a response to 
that history as well as part of the international trend in exchange of 
information.
    The pamphlets prepared by the Joint Committee staff provide 
detailed overviews of the information exchange articles in each of the 
pending protocols. They also describe the extent to which those 
articles differ from the U.S. Model treaty's rules on information 
exchange. The pamphlets published on May 20, 2011, describing the 
agreements with Hungary, Luxembourg, and Switzerland included detail 
about several practical issues relating to information exchange under 
income tax treaties. We addressed those issues in testimony with 
respect to those agreements and others in 2014. Since then, additional 
developments relevant to exchange of information with Luxembourg and 
Switzerland have occurred.
    Here I wish to highlight first those issues related to the 
effectiveness of information exchange under income tax treaties that 
are common to all of the pending protocols under consideration today, 
and second, issues specific to the proposed protocols with Luxembourg 
and Switzerland and recent developments.
            Effectiveness of U.S. information exchange agreements in 
                    general
    Today, I will briefly note three issues: automatic exchange of 
information, the ability of the United States to provide information 
about beneficial ownership of foreign-owned entities, and the 
limitations on specific requests for information.
    The committee may wish to explore issues related to ``routine 
exchange of information.'' In this type of exchange, also referred to 
as ``automatic exchange of information,'' the treaty countries identify 
categories of information that are consistently relevant to the tax 
administration of the receiving treaty country and agree to share such 
information on an ongoing basis, without the need for a specific 
request. The type of information, when it will be provided, and how 
frequently it will be provided are determined by the respective 
Competent Authorities after consultation. In particular, the committee 
may wish to inquire about (1) the extent to which the United States 
presently engages in automatic exchange of taxpayer-specific 
information, (2) practical hurdles to greater use of automatic 
exchange, and (3) whether it anticipates significant changes in that 
practice with the ratification of the documents presently before the 
committee.
    The inability of the United States to provide information about 
beneficial ownership of entities formed in the United States has been 
criticized in the past and led to pressure to eliminate policies that 
provide foreign persons with the ability to shelter income.\16\ Because 
the information obtained through information exchange relationships 
with other jurisdictions has been central to recent successful IRS 
enforcement efforts against offshore tax evasion, the Treasury 
Department has included in its budgets for fiscal years 2015 and 2016 a 
proposal to address the perceived shortcoming by requiring certain 
financial institutions to report the account balance (including, in the 
case of a cash value insurance contract or annuity contract, the cash 
value or surrender value) for all financial accounts maintained at a 
U.S. office and held by foreign persons.\17\ The committee may wish to 
explore the extent to which either the existing U.S. know-your-customer 
rules or the corporate formation and ownership standards prevent the 
United States from providing information about beneficial ownership on 
a reciprocal basis with its treaty countries. The committee may also 
consider whether there are steps to take that would help refute the 
perception that the United States permits States to operate as tax 
havens and that would help the United States better respond to 
information requests from treaty countries who suspect that their own 
citizens and residents may be engaging in illegal activities through 
U.S. corporations and limited liability companies.\18\
    The committee may wish to inquire as to the extent to which a 
request that a treaty country provide information in response to a John 
Doe summons\19\ is a specific request within the meaning of the Article 
26, and whether protracted litigation similar to that which occurred in 
the UBS litigation\20\ can be avoided or shortened. A ``specific'' 
request refers to an exchange which occurs when one treaty country 
provides information to the other treaty country in response to a 
specific request by the latter country for information that is relevant 
to an ongoing investigation of a particular tax matter. One problem 
with specific exchange has been that some treaty countries have 
declined to exchange information in response to specific requests 
intended to identify limited classes of persons.\21\ Your committee may 
wish to seek assurances that, under the proposed treaties and 
protocols, treaty countries are required to exchange information in 
response to specific requests that are comparable to John Doe summonses 
under domestic law.\22\
            Information exchange with Luxembourg and Switzerland
    The existing treaties with Luxembourg and Switzerland include 
exchange of information articles that do not comply with the U.S. Model 
treaty, the terms of U.S. tax treaties currently in force, or the 
international norms on transparency. To date, neither jurisdiction has 
achieved a satisfactory rating under the peer review process of the 
Global Forum on Transparency and Exchange of Information, the 
international body organized within the OECD to conduct its work on 
exchange of information standards (``Global Forum''). The peer review 
is conducted in two phases: Phase I evaluates the legal and regulatory 
aspects of exchange, that is, whether or not the domestic law and 
administrative structures exist in a jurisdiction to enable it to 
exchange information. In Phase II, the peer review evaluates the actual 
practice of exchange of information.\23\ Both jurisdictions have made 
progress in addressing the deficiencies, according to the Global Forum, 
but neither has yet been rated to be compliant or largely compliant.
            Switzerland
    The exchange of information article in the 1951 U.S.-Swiss treaty 
was limited to ``prevention of fraud or the like.'' Under the treaty, 
Switzerland applied a principle of dual criminality, requiring that the 
purpose for which the information was sought also be a valid purpose 
under local law. Because ``fraud or the like'' was limited to nontax 
crimes in Switzerland, information on civil or criminal tax cases was 
not available. The provision was substantially revised for the present 
treaty, signed in 1996, and accompanied by a contemporaneous protocol 
that elaborated on the terms used in the exchange of information 
article. That 1996 Protocol was intended to broaden the circumstances 
under which tax authorities could exchange information to include tax 
fraud or fraudulent conduct, both civil and criminal. It provided a 
definition at paragraph 10 of ``tax fraud'' to mean ``fraudulent 
conduct that causes or is intended to cause an illegal and substantial 
reduction in the amount of tax paid to a contracting state.'' In 
practice, exchange apparently remained limited, leading the competent 
authorities to negotiate a subsequent memorandum of understanding that 
included numerous examples of the facts upon which a treaty country may 
base its suspicions of fraud to support a request to exchange 
information.\24\
    The proposed protocol, by replacing Article 26 (Exchange of 
Information and Administrative Assistance) of the present treaty and 
amending paragraph 10 of the 1996 Protocol, closely adheres to the 
principles announced by Switzerland. It also conforms to the standards, 
if not the language, of the exchange of information provisions in the 
U.S. Model treaty in many respects. As a result, the proposed protocol 
may facilitate greater exchange of information than has occurred in the 
past, chiefly by eliminating the present treaty requirement that the 
requesting treaty country establish tax fraud or fraudulent conduct or 
the like as a basis for exchange of information and providing that 
domestic bank secrecy laws and lack of a domestic interest in the 
requested information are not possible grounds for refusing to provide 
requested information. Lack of proof of fraud, lack of a domestic 
interest in the information requested, and Swiss bank secrecy laws were 
cited by Swiss authorities in declining to exchange information. The 
proposed protocol attempts to ensure that subsequent changes in 
domestic law cannot be relied upon to prevent access to the information 
by including in the proposed protocol a self-executing statement that 
the competent authorities are empowered to obtain access to the 
information notwithstanding any domestic legislation to the contrary.
    Nevertheless, there are several areas in which questions about the 
extent to which the exchange of information article in the proposed 
protocol may prove effective are warranted. The proposed revisions to 
paragraph 10 of the 1996 Protocol reflect complete adoption of the 
first element listed above in the Swiss negotiating position, 
``limitation of administrative assistance to individual cases and thus 
no fishing expeditions.'' The limitation poses issues regarding (1) the 
extent to which the Swiss will continue to reject requests that do not 
name the taxpayer as a result of the requirement that a taxpayer be 
``typically'' identified by name, and (2) the standard of relevance to 
be applied to requests for information, in light of the caveat against 
``fishing expeditions.'' In addition, the appropriate interpretation of 
the scope of purposes for which exchanged information may be used may 
be unnecessarily limited by comments in the Technical Explanation. In 
particular, although paragraph 2 of Article 26 (Exchange of 
Information), as modified by the proposed protocol, generally prohibits 
persons who receive information exchanged under the article from using 
the information for purposes other than those related to the 
administration, assessment, or collection of taxes covered by the 
treaty, the paragraph also allows the information to be used for other 
purposes so long as the laws of both the United States and Switzerland 
permit that use and the competent authority of the requested country 
consents to that use. The Technical Explanation, however, states that 
one treaty country (for example, the United States) will seek the other 
treaty country's (for example, Switzerland's) consent under this 
expanded use provision only to the extent that use is allowed under the 
provisions of the U.S.-Switzerland Mutual Legal Assistance Treaty that 
entered into force in 1977.
    The extent to which Swiss commitment to transparency in practice is 
consistent with international norms remains the subject of inquiry by 
the Global Forum, despite the apparent adoption of the OECD standards 
on administrative assistance in tax matters in 2009,\25\ when it 
simultaneously announced key elements that it would require as 
conditions to be met in any new agreements. The Swiss conditions 
established by the Federal Council limited administrative assistance to 
individual cases and only in response to a specific and justified 
request. Although Switzerland is considered by the OECD to be a 
jurisdiction that has fully committed to the transparency standards of 
the OECD, the OECD report on Phase I of its peer review of Switzerland 
states that the Swiss authorities' initial insistence on imposing 
identification requirements as a predicate for exchange of information 
was inconsistent with the international standards and that additional 
actions would be needed to permit the review process to proceed to 
Phase II. Those actions include bringing a significant number of its 
agreements into line with the standards and taking action to confirm 
that all new agreements are interpreted in line with the standard. On 
October 1, 2015, the Global Forum launched the Phase II peer review of 
Switzerland, signaling that the actions taken by Switzerland to improve 
its transparency with respect to tax matters since the Phase I report 
have satisfied the Global Forum.
    According to advice we received from foreign law specialists at the 
Global Legal Research Center of the Library of Congress' Law Library, 
the actions taken by the Swiss since the initial unfavorable Phase I 
peer review include its agreement to the international standards on 
automatic exchange, expansion of its information exchange network, 
amendment of existing agreements to conform to the international 
transparency norms, and revision of domestic law to ensure the ability 
of tax authorities to comply with the exchange of information 
obligations and safeguards required in its bilateral and multilateral 
agreements. A report of the recently launched Phase II peer review is 
expected in 2016.
            Luxembourg
    The proposed protocol with Luxembourg, by replacing Article 28 
(Exchange of Information and Administrative Assistance) of the 1996 
treaty, is consistent with both the OECD and U.S. Model treaties. There 
are several areas in which questions are warranted about the extent to 
which the new article as revised in the proposed protocol may prove 
effective. These questions arise not from the language in the proposed 
protocol itself but from the mutual understandings reflected in 
diplomatic notes exchanged at the time the protocol was signed. 
Potential areas of concern are found in statements in the diplomatic 
notes concerning (1) the obligation to ensure tax authority access to 
information about beneficial ownership of juridical entities and 
financial institutions, other than publicly traded entities, to the 
extent that such information is of a type that is within the possession 
or control of someone within the territorial jurisdiction, (2) the 
requirement that all requests must provide the identity of the person 
under investigation, (3) the standard of relevance to be applied in 
stating a purpose for which the information is sought, and (4) the 
requirement that requests include a representation that all other means 
of obtaining the information have been attempted, except to the extent 
that to do so would cause disproportionate difficulties.
    The Global Forum's Phase II peer review of Luxembourg's 
implementation of transparency and information exchange standards 
reported in 2013 that Luxembourg was noncompliant with OECD standards. 
Based on the research assistance from foreign law specialists of the 
Global Legal Research Center of the Library of Congress' Law Library, 
we understand that Luxembourg has undertaken significant action to 
address the deficiencies identified in the earlier peer review report. 
These measures include ratification of the OECD Multilateral agreement 
that is pending before this committee, implementation of various 
directives of the European Union, and enactment of legislation in 2014 
explicitly intended to remedy a number of criticisms of the Global 
Forum report.\26\ It has also ratified a number of bilateral agreements 
that include exchange of information provisions that comply with the 
international norms. Based on these measures, the Global Forum agreed 
to conduct a supplementary peer review, which was launched on January 
16, 2015. The results of that review are not yet known.
            Expansion of the OECD Multilateral mutual administrative 
                    assistance agreement
    One of the most significant changes to the multilateral convention 
made by the proposed protocol is the opening of membership in the 
convention to states that are neither OECD nor Council of Europe 
members. The signatories include a number of countries who are not 
members of G20,\27\ the OECD or the Council of Europe: Colombia, Costa 
Rica, Ghana, Guatemala, and Tunisia. All members of G20 are among the 
signatories. Those members of G20 who are not also members of either 
the OECD or Council of Europe include Argentina, Brazil, India, 
Indonesia, Saudi Arabia, and South Africa. Thus, on the one hand, the 
inclusive standard for permitting nations to participate has opened the 
multilateral convention to a number of significant trade partners of 
the United States. On the other hand, it requires the United States to 
initiate an exchange of information program with jurisdictions with 
which it has not previously entered into a bilateral relationship. 
Among the signatories that have neither a tax treaty nor a TIEA with 
the United States are Albania, Andorra, Croatia, Ghana, Nigeria, Saudi 
Arabia, and Singapore.
    The extent to which any of those states are jurisdictions with 
which the United States has previously participated in an exchange of 
information program and whether the program has operated satisfactorily 
are areas in which the committee may wish to inquire. To the extent 
that they are jurisdictions with whom the United States has no exchange 
of information program under a bilateral agreement, the committee may 
wish to inquire about the extent to which the United States has been 
able to satisfy itself that each jurisdiction is an appropriate partner 
for exchange of information. The committee may also wish to inquire 
whether the expanded exchange of information requirements will be 
manageable.
    The committee may also wish to inquire about the circumstances 
under which the United States would object to accession by a nonmember 
state, as contemplated under the procedures for securing the unanimous 
consent of the governing body of the treaty before the agreement may 
enter into effect with respect to that nonmember state. For example, in 
explaining its general standards for considering entry into a bilateral 
agreement with a jurisdiction, Treasury has stated, `` . . . prior to 
entering into an information exchange agreement with another 
jurisdiction, the Treasury Department and the IRS closely review the 
foreign jurisdiction's legal framework for maintaining the 
confidentiality of taxpayer information. In order to conclude an 
information exchange agreement with another country, the Treasury 
Department and the IRS must be satisfied that the foreign jurisdiction 
has the necessary legal safeguards in place to protect exchanged 
information and that adequate penalties apply to any breach of that 
confidentiality.''\28\
                               conclusion
    The matters that I have described in this testimony are addressed 
in more detail in the Joint Committee staff pamphlets on the proposed 
treaties and protocols. I am happy to answer any questions that your 
committee may have at this time or in the future.

----------------
Notes

    \1\This document may be cited as follows: Joint Committee on 
Taxation, ``Testimony of the Staff of the Joint Committee on Taxation 
Before the Senate Committee on Foreign Relations Hearing on the 
Proposed Tax Treaties with Chile, Hungary, and Poland the Proposed Tax 
Protocols with Luxembourg, Switzerland, Spain, and Japan, and the 
Proposed Protocol Amending the Multilateral Convention on Mutual 
Administrative Assistance in Tax Matters'' (JCX-137-15), October 29, 
2015. This document is available on the Internet at http://www.jct.gov.
    \2\Joint Committee on Taxation, ``Explanation of Proposed Protocol 
Amending the Income Tax Treaty Between the United States and Japan'' 
(JCX-XX-15), October XX, 2015; Joint Committee on Taxation, 
``Explanation of Proposed Income Tax Treaty Between the United States 
and Hungary'' (JCX-32-11), May 20, 2011; Joint Committee on Taxation, 
``Explanation of Proposed Protocol to the Income Tax Treaty Between the 
United States and Luxembourg'' (JCX-30-11), May 20, 2011; Joint 
Committee on Taxation, ``Explanation of Proposed Protocol to the Income 
Tax Treaty Between the United States and Switzerland'' (JCX-31-11), May 
20, 2011; Joint Committee on Taxation, ``Explanation of Proposed 
Protocol Amending the Multilateral Convention on Mutual Administrative 
Assistance in Tax Matters'' (JCX-9-14), February 21, 2014; Joint 
Committee on Taxation, ``Explanation of Proposed Income Tax Treaty 
Between the United States and Chile'' (JCX-10-14), February 24, 2014. 
Joint Committee on Taxation, ``Explanation of Proposed Income Tax 
Treaty Between the United States and Poland'' (JCX-68-14), June 17, 
2014; and Joint Committee on Taxation, ``Explanation of Proposed 
Protocol to the Income Tax Treaty Between the United States and Spain'' 
(JCX-67-14), June 17, 2014. The pamphlets describing the proposed 
treaty with Hungary and the proposed protocols with Luxembourg and 
Switzerland were prepared in connection with a Committee on Foreign 
Relations hearing held on June 7, 2011. The pamphlet describing the 
proposed treaty with Chile was prepared in connection with the hearing 
of the Committee on February 26, 2014. The pamphlets describing the 
proposed treaty with Poland and the proposed protocol with Spain were 
prepared in connection with the hearing on June 19, 2014.
    \3\Full text of the proposed rules published on May 20, 2015, at 
the Resource Center, Department of Treasury, available at http://
www.treasury.gov/resource-center/tax-policy/treaties/Pages/
international.aspx.
    \4\See Commentaries to the OECD Model treaty, paragraph 79.
    \5\The other income tax treaties without limitation-on-benefits 
rules are the ones with Greece (1953), Pakistan (1959), the Philippines 
(1982), Romania (1976), and the U.S.S.R (1976). Following the 
dissolution of the U.S.S.R., the income tax treaty with the U.S.S.R. 
applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, 
Kyrgyzstan, Moldova, Tajikstan, Turkmenistan, and Uzbekistan.
    \6\The income tax treaty with Greece also provides for complete 
exemption from withholding on interest, although it contains 
restrictions that limit the availability of the exemption, such that a 
Greek company receiving interest from a U.S. company does not qualify 
for the exemption if it controls, directly or indirectly, more than 50 
percent of the U.S. company.
    \7\Department of the Treasury, ``Report to the Congress on Earnings 
Stripping, Transfer Pricing and U.S. Income Tax Treaties'' (Nov. 28, 
2007). The report states that, as of 2004, it does not appear that the 
U.S.-Poland income tax treaty has been extensively exploited by third-
country residents. Although the report also focused on Iceland to the 
same extent as Hungary, a 2007 Income Tax Convention with Iceland that 
includes a modern limitation-on-benefits provision has since taken 
effect.
    \8\OECD, ``Preventing the Granting of Treaty Benefits in 
Inappropriate Circumstances Action 6-2015 Final Report,'' (October 5, 
2015), available at http://www.oecd-ilibrary.org/taxation/preventing-
the-granting-of-treaty-benefits-in-inappropriate-circumstances-action-
6-2015-final-report_9789264241695-en.
    \9\OECD, ``Making Dispute Resolution Mechanisms More Effective, 
Action 14-2015 Final Report, OECD/G20 Base Erosion and Profit-Shifting 
Project,'' OECD Publishing, Paris.
    \10\See, for example, Joint Committee on Taxation, ``Explanation of 
Proposed Protocol to the Income Tax Treaty Between the United States 
and Germany'' (JCX-47-07), July 13, 2007, pp. 82-84.
    \11\Holman v. Johnson, 98 The English Reporter 1120 (King's Bench 
1775), cited in AG of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 
268 F.3d 103, cert. denied, 537 U.S. 1000 (2002).
    \12\544 U.S. 349; 125 S. Ct. 1766; 161 L. Ed. 2d 619 (2005).
    \13\``Restatement (Third) of the Foreign Relations Law of the 
United States,'' secs. 483 (1987), stating ``Courts in the United 
States are not required to recognize or to enforce judgments for the 
collection of taxes, fines, or penalties rendered by the courts of 
other states.'' The principle is permissive, not a requirement.
    \14\Article XV of the U.S.-Sweden Double Tax Convention, signed on 
March 23, 1939.
    \15\See, Joint Committee on Taxation, ``Description of Revenue 
Provisions Contained in the President's Fiscal Year 2010 Budget 
Proposal; Part Three: Provisions Related to the Taxation of Cross-
Border Income and Investment'' (JCS-4-09), September 2009. Section VI 
of that pamphlet provides an overview of the international efforts to 
address these issues.
    \16\Financial Action Task Force, IMF, ``Summary of the Third Mutual 
Evaluation Report on Anti-Money Laundering and Combating the Financing 
of Terrorism United States of America,'' pp. 10-11 (June 23, 2006); 
Government Accountability Office, ``Company Formations: Minimal 
Ownership Information Is Collected and Available,'' a report to the 
Permanent Subcommittee on Investigations, Committee on Homeland 
Security and Governmental Affairs, U.S. Senate GAO-06-376 (April 2006); 
Government Accountability Office, ``Suspicious Banking Activities: 
Possible Money Laundering by U.S. Corporations Formed for Russian 
Entities,'' GAO-01-120 (October 31, 2006).
    \17\A description and analysis of the complete proposal can be 
found in Joint Committee on Taxation, ``Description of Certain Revenue 
Provisions Contained in the President's Fiscal Year 2015 Budget 
Proposal'' (JCS-2-14), December 2014, at pages 184-190. See also Joint 
Committee on Taxation, ``Description of Certain Revenue Provisions 
Contained in the President's Fiscal Year 2016 Budget Proposal'' (JCS-2-
15), September 2015, at page 248.
    \18\E.g., the ``Incorporation Transparency and Law Enforcement 
Assistance Act,'' S. 569, 111th Congress (2009), would require States 
to obtain and periodically update beneficial ownership information from 
persons who seek to form a corporation or limited liability company.
    \19\When the existence of a possibly noncompliant taxpayer is known 
but not his identity, as in the case of holders of offshore bank 
accounts or investors in particular abusive transactions, the IRS is 
able to issue a summons to learn the identity of the taxpayer, but must 
first meet greater statutory requirements, to guard against fishing 
expeditions. Prior to issuance of the summons intended to learn the 
identity of unnamed ``John Does,'' the United States must seek judicial 
review in an ex parte proceeding. In its application and supporting 
documents, the United States must establish that the information sought 
pertains to an ascertainable group of persons, that there is a 
reasonable basis to believe that taxes have been avoided, and that the 
information is not otherwise available.
    \20\See, United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.), 
enforcing a ``John Doe summons'' which requested the identities of U.S. 
persons believed to have accounts at UBS in Switzerland. On August 19, 
2009, the United States and UBS announced an agreement (approved by the 
Swiss Parliament on June 17, 2010) under which UBS provided the 
requested information.
    \21\For example, a petition to enforce a John Doe summons served by 
the United States on UBS, AG was filed on February 21, 2009, 
accompanied by an affidavit of Barry B. Shott, the U.S. competent 
authority for the United States-Switzerland income tax treaty. 
Paragraph 16 of that affidavit notes that Switzerland had traditionally 
taken the position that a specific request must identify the taxpayer. 
See United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.). On August 
19, 2009, after extensive negotiations between the Swiss and U.S. 
Governments, the United States and UBS announced that UBS had agreed to 
provide information on over 4,000 U.S. persons with accounts at UBS.
    \22\Under a John Doe summons, the U.S. Internal Revenue Service 
(``IRS'') asks for information to identify unnamed ``John Doe'' 
taxpayers. The IRS may issue a John Doe summons only with judicial 
approval, and judicial approval is given only if there is a reasonable 
basis to believe that taxes have been avoided and that the information 
sought pertains to an ascertainable group of taxpayers and is not 
otherwise available.
    \23\Certain OECD conclusions about information exchange with 
Luxembourg and Switzerland are noted below. The OECD peer reviews of 
Chile and Hungary found that although those jurisdictions generally are 
compliant with OECD standards, each country had certain deficiencies 
preventing fully effective information exchange.
    \24\``Mutual Agreement of January 23, 2003, Regarding the 
Administration of Article 26 (Exchange of Information) of the Swiss-
U.S. Tax Convention of October 2, 1996,'' reprinted at paragraph 9106, 
``Tax Treaties,'' (CCH 2005).
    \25\See ``Switzerland to adopt OECD standard on administrative 
assistance in fiscal matters,'' Federal Department of Finance, FDF 
(March 13, 2009), available at http://www.efd.admin.ch/dokumentation/
medieninformationen/00467/index.html?lang=en&msg-id=25863 (last 
accessed March 1, 2011).
    \26\Law of November 25, 2014: New applicable procedure with respect 
to exchange of information on request, amending the Law of March 31, 
2010.
    \27\G20, or the Group of Twenty, is a forum for international 
economic cooperation among the member countries and the European Union. 
The leaders of the members meet annually, while finance and banking 
regulators meet more frequently throughout the year. They work closely 
with a number of international organizations, including the OECD.
    \28\Preamble to Treas. Reg. 1.6049-4(b)(5). T.D. 9584, April 12, 
2012.

    Senator Isakson. Thank you, and thanks to both of you for 
your testimony today.
    Mr. Stack, are there any provisions in the treaties being 
considered today that would override current U.S. domestic tax 
laws requiring protection of taxpayer information? Or are these 
treaties consistent with U.S. domestic law?
    Mr. Stack. Senator, these treaties are consistent with U.S. 
domestic law and do not override U.S. domestic law in 
connection with the treatment of confidential information.
    Senator Isakson. I think I heard you in your testimony 
refer to the perception of Swiss bank accounts being a safe 
haven in the past. Was that a perception or was that true? And 
does, in fact, the treaty limit that being a safe haven so 
there is more transparency on deposits in Switzerland?
    Mr. Stack. Well, let me answer this way, Senator. In a 
report from this committee, when the Swiss treaty was reported 
out, the committee took note of the difficulties faced in 2008 
and 2009 by the IRS and the Department of Justice in obtaining 
information needed to enforce U.S. tax laws against U.S. 
persons who utilized the services of UBS AG back then, a 
multinational bank based in Switzerland.
    What we expect, and this, again, was reported by the Senate 
committee, expect that the proposed protocol, including in 
particular the express provision making clear that a country's 
bank secrecy laws cannot prevent the exchange of tax 
information requested pursuant to a treaty, should put the 
Government of Switzerland in a position to prevent recurrence 
of such an incident in the future.
    So without directly saying whether it was a haven or not, 
we had a difficulty. The difficulty was the old treaty required 
a showing of fraud, or the like, before the Swiss would give us 
information. The new treaty to which they have agreed says the 
United States just needs to demonstrate that the information 
sought is foreseeably relevant to a tax investigation. The 
Swiss treaty says ``may be relevant.'' And that is going to 
make it easier for us to hunt down tax cheats that might be 
hiding assets in Switzerland.
    Senator Isakson. That would be a consistent standard with 
domestic U.S. law, if it was a domestic case. Is that not 
right?
    Mr. Stack. Yes, Senator. The treaty standard is actually 
taken from our statutory standard in section 7602, which 
authorizes the IRS to inspect books and records that ``may be 
relevant to a tax inquiry.'' So the standard that is in the 
treaty and the standard that is in our statutes are 
coterminous.
    Senator Isakson. I would assume, when you refer to limited 
cooperation in the Japan treaty and others in terms of the 
collection of taxes, that that is a step forward in collecting 
taxes that might be owed to the United States.
    Mr. Stack. It is, Senator. It is. I would add that we are 
very careful before we agree to enter into mutual assistance 
and collection in our treaties, simply because we do not want 
to put a disproportionate burden on the IRS to be spending more 
effort collecting taxes for the other jurisdiction than the 
other jurisdiction might be helping us collect. So we do a very 
careful balancing.
    So while we are happy to have this in our Japan treaty, I 
would not say that this will necessarily become the standard, 
since we weigh it on a case-by-case basis.
    But, yes, you are correct. It will assist us in this case 
in collecting taxes from people in Japan who owe the U.S. 
taxes.
    Senator Isakson. As I understand it, the tax rate on tax 
treaty participants in Chile is 27 percent, and the tax rate in 
Chile on nonparticipants in a tax treaty is 35 percent. Is that 
correct? I have been told that is correct.
    Mr. Stack. I would just say, I mean, there are different 
flows that might have different rates. I would just say that, 
under the treaty, we are reducing all of the withholding rates 
on payments out of Chile that otherwise might have applied in 
the absence of the treaty, although because they have a unique 
corporate tax system, we have given them some more time to be 
able to collect a withholding tax on shareholders on dividends 
out of Chile.
    But generally speaking, the treaty participants get a 
reduced rate, a better rate than nontreaty participants 
investing in a country.
    Senator Isakson. Assuming my numbers are correct at 35 
percent and 27 percent, an American company competing in Chile 
and earning money from a country that does not have a treaty 
with Chile would be at an 8 percent disadvantage competing in 
the country. Would that not be correct?
    Mr. Stack. Yes. If the point is that if we do not have our 
Chilean treaty, our companies can be at a disadvantage with 
companies that do have a treaty with Chile, that would be 
correct, yes.
    Senator Isakson. That is what I am trying to get into the 
record.
    Mr. Stack. Thank you.
    Senator Isakson. Mr. Barthold, one of the stated goals of 
entering into a tax treaty is to prevent tax avoidance and tax 
evasion. A primary tool used to prevent tax avoidance is the 
exchange of information between countries and revenue 
authorities.
    The United States has used exchange of information for 
decades in its tax treaties. Is that correct?
    Mr. Barthold. Yes, it is, Mr. Chairman.
    Senator Isakson. That has resulted in better collection. Is 
that correct?
    Mr. Barthold. The Internal Revenue Service believes that it 
has aided in their collection of liabilities that are owed, 
sir, yes.
    Senator Isakson. Can you tell us, for the record, the 
assurances that the information of domestic U.S. taxpayers, how 
they are protected in these treaties, in terms of the privacy 
information they would otherwise have protected in the United 
States?
    Mr. Barthold. The treaties do not grant access to taxpayer 
records that are beyond what is provided in U.S. law. Under 
code section 6103, there is strict protection on the ability of 
anyone to access taxpayer information, except for tax 
administration purposes. That is mainly within the Internal 
Revenue Service.
    As part of their treaty process, and Mr. Stack can address 
this further, before there is any exchange of information, the 
Treasury and the Internal Revenue Service assure themselves 
that there are comparable rights or that disclosures are not 
permitted that are beyond what is permitted under U.S. domestic 
law.
    Senator Isakson. Are there any penalties for unauthorized 
release of private information by any of these treaties? I 
mean, a country that accidentally or intentionally released 
private information, is there a penalty within the treaty 
provided for that? Or is there an enforcement mechanism to give 
them a motivation to be sure they do not do that?
    Mr. Barthold. I am not sure. There are not penalties on 
countries, per se. There is potentially penalty on our side, on 
the United States person, if we are party to an unauthorized 
disclosure. So Mr. Stack might be at risk.
    Senator Isakson. Okay. So I understand breaking the treaty 
is probably the penalty you have. If you break the treaty, you 
can always dissolve the treaty. Is that correct?
    Mr. Barthold. You could abrogate the treaty. That would be 
the basis for the administration to abrogate.
    Senator Isakson. That is the ultimate enforcement 
mechanism, because these treaties are mutually beneficial to 
the countries.
    Mr. Barthold. That is the idea behind the treaty.
    Senator Isakson. Thank you both for your testimony.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    When you said Mr. Stack is at risk, you meant that the 
Treasury Department would be at risk?
    Mr. Barthold. It can actually be specific individuals, 
Senator Menendez.
    Senator Menendez. Okay.
    Mr. Stack, you have to watch out here.
    First of all, I want to thank you, Mr. Stack, and your 
colleagues at Treasury for the immense work that has gone into 
negotiating these treaties and preparing them for 
consideration. For most of this, this is the second round that 
we have been at this. I know that when I was chairman, I wanted 
to push these through. Chairman Corker has also expressed a 
great deal of interest in trying to break the logjam here. I 
hope we can work with him to achieve that.
    Mr. Barthold, to you and your colleagues, thanks for your 
analysis and the questions that you posed in the pamphlets that 
you provided to the staff, which were incredibly helpful. I saw 
them, and I think they are incredibly helpful in addressing the 
treaties.
    So just a few questions. I really want to develop a record 
here for when we have a debate on the floor to be able to refer 
to it, because, from my knowledge, this is largely being 
impeded by one or two colleagues who have somewhat of a 
different view.
    To both of you, since Japan is really the only new treaty 
that we will be considering before the committee, could you 
highlight any notable departures, if there are any, from the 
United States model or any unique aspects of the Japan treaty 
that we should be aware of?
    Mr. Barthold. I noted a couple directly in my oral 
testimony, Senator Menendez, and Mr. Stack partially addressed 
both of those.
    One was the mutual assistance. I mean, it is not provided 
for. It is somewhat unusual. And as I noted, its position in 
the Japan treaty is somewhat at odds with the reservation that 
the United States has taken with respect to the OECD 
multilateral mutual assistance treaty.
    The other, I think, most notable departure from what we 
have been doing recently, and, of course, from the model, is 
the mandatory and binding arbitration. So it is not part of our 
model. It might be part of a new model treaty that the Treasury 
is developing.
    But I also noted that within this protocol there are 
slightly different provisions of how it will operate than in 
the four operative mandatory and binding arbitration provisions 
that we have.
    One item of note is the ability of the taxpayer involved to 
participate in the arbitration by submitting a position paper 
directly to the panel.
    Senator Menendez. Mr. Stack, your observations? And could 
you address yourself to the utility of the mandatory 
arbitration procedures that we have in this?
    Mr. Stack. Yes, Senator.
    Mandatory arbitration has garnered the support, mandatory 
binding arbitration, of many countries around the world as part 
of the work we just finished at the OECD in connection with 
base erosion and profit-shifting. Many, many countries are 
hoping to move forward in including provisions on mandatory 
binding arbitration in treaties going forward.
    Why? Well, I think the reigning view is that it is a 
tremendous help to resolving cases if both of the competent 
authorities know that, at the end of the day, their distinct 
positions will be presented to a neutral arbitrator.
    You may, or may not, be aware that we use a particular type 
of arbitration in our tax treaties, which is sometimes called 
baseball arbitration or last best offer. What that means is 
that the arbitrator must choose only between the positions 
given by the two countries with respect to the tax issue before 
it. The feeling is that this helps the tax administration move 
toward a more reasonable position because they know that, at 
the end of the day, the arbitrator is bound to choose only one 
of the two government positions.
    It is also the hope with arbitration that when the entire 
tax administration of a country is aware that, at the end of 
the day, some neutral party is going to decide which country 
has the better claim to the income, that this could improve 
administration throughout the governments that we deal with.
    So the goal of an arbitration provision is often said not 
to have an arbitration but to simply help the system more 
easily resolve cases as we go through the process.
    Senator Menendez. I can see that. When I was mayor and 
negotiating with police and fire unions, we had a very similar 
process. It brought people to a much more reasonable offer, 
because they wanted to be closer to the offer that the 
arbitrator would choose at the end of the day.
    Mr. Barthold, let me ask you, with reference to my 
understanding that these treaties, in essence, the reason that 
we pursue them is in large part to lower the tax burden of U.S. 
companies or firms operating abroad. Could you give us a sense 
of how this does that?
    Mr. Barthold. There are a number of different ways. 
Countries impose withholding taxes on cross-border 
distributions, such as the point I noted on the zero rate on a 
distribution of a dividend from a subsidiary to a parent, which 
is provided anew at a zero rate under the Spanish treaty, and 
the eligible companies have been expanded for the zero rate 
under the Japanese treaty.
    The default in American law is a 30 percent withholding 
rate on a payment out of the United States. Other countries 
have comparable rates on payments out of their countries into 
the United States. So in the treaties, we mutually agreed to 
lower those rates.
    While such taxes might be creditable under the different 
tax systems of those countries, sometimes tax credits are not 
always currently available because of foreign tax credit 
limitations. So you have a direct effect of lowering the tax 
rate on earnings by U.S. enterprises that are earned abroad 
when they are paid back in that situation.
    Some other situations that arise are that it is possible 
that the income tax base of a foreign country is somewhat 
different than the income tax base in the United States. And so 
it might be the perception of both countries' tax 
administrators that there is some part of income that is earned 
that they get to tax. That is the clear case of double 
taxation, and a primary purpose of the treaties is to try to 
lay out a number of specific instances where, no, this is 
yours, and this is mine, so that you eliminate clear cases of 
double taxation.
    Senator Menendez. Mr. Chairman, I have a question or two 
left, but I am happy to wait for the next round.
    Senator Isakson. Go ahead.
    Senator Menendez. Okay.
    Mr. Stack, my understanding is that Treasury typically 
prioritizes the negotiation of new tax treaties partially based 
on where U.S. individuals and businesses stand to see the most 
benefit from reducing, for example, double taxation. What kind 
of support is there in the business community for ratification 
of these treaties?
    Mr. Stack. There is extraordinary support. I think in the 
opening you mentioned some letters coming in from business 
groups. And in our prior hearings, Senator, as you may recall, 
the National Foreign Trade Council and the Organization for 
International Investment came here and testified.
    So we have felt nothing but very strong support from the 
business community, because they would very much like the 
benefits that Mr. Barthold mentioned in terms of cross-border 
investment.
    Senator Menendez. And then two final sets of questions. One 
is, I understand the Spain protocol includes a provision that 
requires the United States and Spain to begin negotiations 
within 6 months from the protocol entering into force to 
conclude an agreement to avoid double taxation on investments 
between Puerto Rico and Spain. Given that Puerto Rico 
administers its own tax system but cannot enter into treaties, 
how is Treasury planning to work with its Spanish counterparts 
to extend the benefits of the protocol to Puerto Rico?
    Mr. Stack. Thank you, Senator. Just for the record, 
paragraph 3 of the protocol commits the contracting states to 
initiate discussions as soon as possible but no later than 6 
months after the entry into force of the 2013 protocol 
regarding the conclusion of an appropriate agreement to avoid 
double taxation on investments between Puerto Rico and Spain. I 
believe, as we discussed in prior hearings, the United States 
actually has reached out and worked with both Puerto Rico and 
Spain in advance of that deadline, since obviously the treaty 
has not yet entered into force.
    The concept of how to handle the double tax issues between 
Puerto Rico and Spain raises complex legal and political 
questions. In our involvement to date, we are seeking to see if 
the agreement referenced in the protocol could be somehow 
handled by both Spain and Puerto Rico via a statutory approach 
where, for example, Puerto Rico could lessen withholding taxes 
on investments in Spain, and vice versa. This is an analogy to 
the process undertaken by Guam.
    We will return to this issue in full once the agreement is 
in force and with respect to the discussions we started and 
continue them as well.
    Senator Menendez. Finally, one of, if not the biggest 
hurdle that I understand some of my colleagues have in 
supporting this, is something that the chairman started off 
with you, and that is the question of information exchange and 
privacy, and other issues which in part you touched upon.
    I just want you, for the record, to talk about how 
standards on information exchange in these treaties have 
changed from previous treaties. Does the ``may be relevant'' 
standard in the treaties before us today represent a new 
standard not used in previous tax treaties? And in your view, 
is there any reason why people who have a foreign bank account 
should be treated any differently from a U.S. citizen who has a 
bank account in the United States?
    Mr. Stack. Thank you, Senator.
    As I mentioned in my opening statement, this is not a new 
standard. What has happened over time is sometimes it has been 
labeled ``such information as is relevant,'' ``as may be 
relevant.'' Over time, the OECD has adopted a phrase 
``foreseeably relevant,'' which is what we tend to see in our 
current treaties.
    Each of these standards really are about a simple idea, 
which is that when another country is asking us for tax 
information, they must demonstrate that there is a link between 
the information sought and some actual tax investigation of a 
taxpayer, so that we can avoid what is called a fishing 
expedition where people can just come in and say give me all 
the information possible about this or that.
    The confusion in this space I think has been caused by the 
fact that Switzerland alone, out of 57 treaties, has a standard 
that said one country can only get information from the other 
if there is a demonstration of fraud or the like, a much higher 
standard before a tax authority could investigate assets of 
others abroad.
    But as I mentioned in the opening, the ``may be relevant,'' 
``foreseeably relevant'' has been in our model since 1996. The 
Senate has already ratified 14 treaties, I am told, since 1999 
with a version of this standard in the treaty.
    In terms of the bank accounts, I would just say that there 
is no reason to treat someone with a foreign bank account, 
different from someone with a U.S. bank account when it comes 
to the ability of a tax authority to find out whether the 
person has been evading taxes. These information exchange 
provisions put people with foreign bank accounts on an equal 
footing with U.S. citizens who have bank accounts here in the 
United States.
    As I just mentioned earlier, under the code, the IRS has 
authority to seek information that ``may be relevant or 
material.'' The treaties before the committee today permit the 
IRS to request information that is foreseeably relevant, even 
if there is a variation in the phrasing.
    So in the tax treaty context, this standard and these 
provisions are critical to ensure that taxpayers cannot avoid 
their obligations by the simple device of shifting accounts 
overseas and getting better treatment than their U.S. resident 
counterparts.
    Senator Menendez. Thank you very much.
    Senator Isakson. In light of the question originally asked 
by Senator Menendez, I will add to my unanimous consent record 
that the unanimous consent for the three letters that I 
introduced, one of those letters was from 77 United States 
companies, from Coca-Cola and Pepsi-Cola to Baxter and 
Caterpillar and everybody else in between, in favor of these 
treaties.
    Senator Menendez. Is Coca-Cola from Georgia?
    Senator Isakson. Yes, they are a small bottling company in 
Georgia. Pepsi-Cola, their competitor, is on here, too, so we 
have competitors on there just alike.
    Secondly, I want to echo the compliments Senator Menendez 
made to you all on the information you supplied to the 
committee and the staff, and tell you that when we go into 
binding arbitration as a country, I am glad we have two people 
like you all on our side of the table and not on the other 
side. So thank you for your service to the country, and we will 
do everything we can to expedite the consideration of the 
treaties.
    If there are no further comments or questions, the hearing 
stands adjourned.
    [Whereupon, at 2:55 p.m., the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


     Response of Robert Stack and Thomas A. Barthold to a Question 
                   Submitted by Senator Cory Gardner

    In 2014 testimony before this committee describing the purposes and 
benefits of tax treaties, Deputy Assistant Secretary of the Treasury 
for International Tax Affairs Robert Stack said that one purpose of tax 
treaties is to ``reduce potential `excessive' taxation by reducing 
withholding taxes that are imposed at the source,'' which ensures that 
a taxpayer is not ``subject to an effective rate of tax that is 
significantly higher than the tax rate that would apply to net income 
in either the source or residence country.'' In fact, the 2006 U.S. 
Model Income Tax Convention specifies a zero rate of withholding tax on 
interest payments as the standard goal.
    The current U.S.-Poland tax treaty, signed in 1974, has a zero rate 
of withholding tax on interest payments. In his 2014 testimony, Deputy 
Assistant Secretary Stack stated this treaty was one of three U.S. tax 
treaties, along with the Hungary treaty, that ``provided an exemption 
from source-country withholding on interest payments but contained no 
protections against treaty shopping.'' Treasury testified this year 
that the updated Poland and Hungary income tax treaties would now 
include comprehensive limitation-on-benefits provisions to avoid treaty 
shopping, ``represent[ing] a major step forward in protecting the U.S. 
tax treaty network from abuse.''
    Our existing tax treaties with Poland and Hungary both have zero-
rate withholding on interest payments, and the proposed new tax treaty 
with Hungary maintains that zero rate. The updated U.S.-Poland tax 
treaty, however, would actually increase the rate of withholding tax on 
interest to 5 percent.

  Why, given that both treaties now have comprehensive 
        limitation-of-benefits provisions that ``represent a major step 
        forward'' in abuse protection, did the United States maintain a 
        zero rate in the treaty with Hungary but not in the treaty with 
        Poland?

    Answer. The tax treaty policy of the United States is generally to 
assign the exclusive taxation right on cross-border payments of 
interest to the country of residence of the payee of the interest. 
Poland has expressed that its current policy is to maintain a level of 
taxation at source on cross-border payments of interest. The proposed 
income tax treaty, as is the case with every bilateral tax treaty, 
therefore represents a negotiated overall package that both countries 
concluded was mutually acceptable.
    It should be noted that in the process of the negotiations the 
Treasury Department was able to secure a fairly low rate of withholding 
on interest (5 percent). In addition, the proposed treaty provides that 
interest paid: (1) by or to a governmental body; (2) in respect of a 
loan that is guaranteed or insured by a governmental body; (3) to a 
pension fund; or (4) to a bank, insurance company or other financial 
institution that is unrelated to the payor of the interest; shall 
nevertheless be exempt from withholding at source. The proposed income 
tax treaty with Hungary does not contain a positive rate of withholding 
on cross-border payments of interest because doing so is not the 
current tax treaty policy of either the United States or Hungary.
                                 ______
                                 
                                                      July 1, 2015.
Chairman Bob Corker,
Senate Foreign Relations Committee,
Dirksen Senate Office Building,
Washington, DC.
    Dear Senator Corker The bilateral income tax treaties and protocols 
pending before the Senate Foreign Relations Committee are important to 
U.S. economic growth and U.S. trade and tax policy. For over eighty 
years, income tax treaties have played a critical role in fostering 
U.S. bilateral trade and investment and protecting U.S. businesses, 
large and small, from double taxation of the income they earn from 
selling goods and services in foreign markets.
    We ask for your support for these treaties and protocols and also 
ask for expeditious action on them by both the Senate Foreign Relations 
Committee and the Senate.
    Sincerely.

ABB Incorporated
AbbVie Pharmaceuticals
Adobe
Akzo Nobel Incorporated
Amazon.com
Applied Materials
Baxter International Inc.
Bayer Corporation
BASF Corporation
Bechtel Corporation
BHP Billiton
Braskem America, Inc.
British American Tobacco
BP plc
Caterpillar Incorporated
Chevron Corporation
Chrysler Corporation
CIGNA International
Cisco Systems
Coca-Cola Company
ConocoPhillips, Inc.
Daiichi Sankyo Inc.
Dassault Systemes
DHL North America
DSM North America
eBay, Inc.
E.I.du Pont de Nemours & Co.
ExxonMobil Corporation
Fluor Corporation
Ford Motor Company
General Electric Company
Google, Inc.
Halliburton Company
Hanesbrands Inc.
Hercules Group
Hewlett-Packard Company
Honda
Iberdrola USA
International Business Machines Corporation
Johnson & Johnson
Magna International, Inc.
Mars Incorporated
McCormick & Company, Inc.
Microsoft Corporation
Michelin North America
Nestle
North American Stainless
Novartis Corporation
Occidental Petroleum
Oracle Corporation
Panasonic Corporation North America
Pepsi-Cola Corporation
Pernod Ricard USA
Pfizer International Inc.
Procter & Gamble
Prudential Financial Inc. RELXGroup
Ridgewood Group International, Ltd.
Siemens Corporation
SSAB Americas
Sony Corporation of America
Solvay America, Inc.
Swiss Re Americas
Syngenta
Thomson Reuters
Toyota
Tupperware
Tyco International
UCB Inc.
Umicore USA Inc.
United Parcel Service, Inc.
United Technologies
Visa, Inc.
Vodafone Group plc
Walmart Stores, Inc.
Zurich North America

                                 
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