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116th Congress     }                              {        Exec. Rept.
                                 SENATE
 1st Session       }                              {           116-2

======================================================================



 
                   PROTOCOL AMENDING TAX CONVENTION 
                            WITH SWITZERLAND

                                _______
                                

                  July 10, 2019.--Ordered to be printed

                                _______
                                

          Mr. Risch, 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...............................................4
VIII.Text of Resolution of Advice and Consent to Ratification.........8

 IX. Annex 1.--Technical Explanation.................................11

                               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 has held three public hearings on the 
Protocol. The transcript for the committee hearing held in the 
112th Congress on June 7, 2011, can be found in Annex 2, pages 
19-66 of Exec. Rept. 112-1. The committee heard testimony from 
Manal Corwin, Deputy Assistant Secretary, International Tax 
Affairs, Department of the Treasury, Washington, D.C. and 
Thomas A. Barthold, Chief of Staff, Joint Committee on 
Taxation, Washington, D.C.
    The transcript for the committee hearing held in the 113th 
Congress on February 26, 2014 can be found in Annex 2, pages 
21-95, in Exec. Rept. 113-7. The committee heard testimony from 
Thomas A. Barthold, Chief of Staff, Joint Committee on 
Taxation; Robert B. Stack, Deputy Assistant Secretary for 
International Tax Affairs, Department of the Treasury; William 
A. Reinsch, President, National Foreign Trade Council, 
Washington, D.C.; Paul Nolan, Vice President, Tax, McCormick 
and Company, Inc., Sparks, MD; and Nancy McLernon, President 
and CEO, Organization for International Investment, Washington, 
D.C.
    The transcript for the committee hearing held in the 114th 
Congress on October 29, 2015 can be found in Annex 2, pages 23-
69, in Exec. Rept. 114 1. The committee heard testimony from 
Robert B. Stack, Deputy Assistant Secretary for International 
Tax Affairs at the Department of the Treasury, Washington, 
D.C., and from Thomas A. Barthold, Chief of Staff, Joint 
Committee on Taxation, Washington, D.C.
    In addition, in the 116th Congress, the committee hosted a 
staff briefing from Department of the Treasury and Department 
of State officials with Senate Foreign Relations, Finance and 
Joint Tax Committee staff on June 11, 2019.
    The committee has considered the Protocol and reported it 
favorably in three prior congresses; in the 112th Congress on 
July 26, 2011; in the 113th Congress on April 1, 2014; and in 
the 114th Congress on November 10, 2015. On June 25, 2019, the 
committee considered the Protocol and ordered it favorably 
reported, 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 cooperation 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, France, 
Spain and Japan. 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 to 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 two 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 third-country 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.

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