TAXATION AGREEMENT WITH TURKEYSenate Consideration of Treaty Document 104-30
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- Agreement Between the Government of the United States of America and the Government of the Republic of Turkey, for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Together with a Related Protocol, signed at Washington on March 28, 1996.
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[Senate Treaty Document 104-30] [From the U.S. Government Publishing Office] 104th Congress Treaty Doc. SENATE 2d Session 104-30 _______________________________________________________________________ TAXATION AGREEMENT WITH TURKEY __________ MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC OF TURKEY, FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, TOGETHER WITH A RELATED PROTOCOL, SIGNED AT WASHINGTON ON MARCH 28, 1996 September 4, 1996.--Agreement was read the first time and, together with the accompanying papers, referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate LETTER OF TRANSMITTAL ---------- The White House, September 3, 1996. To the Senate of the United States: I transmit herewith for Senate advice and consent to ratification the Agreement Between the Government of the United States of America and the Government of the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, together with a related Protocol, signed at Washington March 28, 1996. Also transmitted for the information of the Senate is the report of the Department of State with respect to the Agreement. This Agreement, which is similar to tax treaties between the United States and other OECD nations, provides maximum rates of tax to be applied to various types of income, protection from double taxation of income, exchange of information to prevent fiscal evasion, and standard rules to limit the benefits of the Agreement to persons that are not engaged in treaty shopping. I recommend that the Senate give early and favorable consideration to this Agreement and related Protocol and give its advice and consent to ratification. William J. Clinton. LETTER OF SUBMITTAL ---------- Department of State, Washington, July 30, 1996. The President, The White House. The President: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, the Agreement Between the Government of the United States of America and the Government of the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, together with a related Protocol, signed at Washington March 28, 1996 (``the Agreement''). This Agreement is the first bilateral income tax convention between the United States and Turkey, the only OECD partner country with which the United States does not have a tax treaty. It is, thus, an important extension of the U.S. network of tax treaties. Since the maximum rates of taxation it specifies are lower than those currently applied to some types of income earned by foreign investors in Turkey, the Agreement will remove a disincentive to U.S. investment in that nation. This Agreement is similar to the tax treaties between the United States and other OECD nations. It provides maximum rates of tax to be applied to various types of income, protection from double taxation of income, exchange of information to prevent fiscal evasion, and standard rules to limit the benefits of the Agreement to persons that are not engaged in treaty shopping. Like other U.S. tax conventions, this Agreement provides rules specifying when income that arises in one of the countries and is derived by residents of the other country may be taxed by the country in which the income arises (the ``source'' country). The Agreement establishes maximum rates of tax that may be imposed by the source country on specified categories of income, including dividends, interest, and royalties, to residents of the other country. These rates are somewhat higher than those found in most U.S. treaties with OECD countries. Dividends may be subject to tax by the source country at a maximum rate of 20 percent, except when the dividends are paid to a corporation that owns at least 10 percent of the payor, in which case the maximum rate is 15 percent. The general rate of tax on interest by the source country under the Agreement is 15 percent, but interest on a loan granted by a financial institution may be taxed at a maximum rate of 10 percent. Interest received, guaranteed, or insured by the government of either the United States or Turkey or paid to the central bank of either State is exempt from withholding by the source country. Royalties are generally subject to tax by the source country at a maximum rate of 10 percent. Payments for the use of industrial, commercial or scientific equipment are treated as royalties but are subject to tax at a maximum rate of five percent at source. Like other U.S. tax treaties and agreements, this Agreement provides the standard anti-abuse rules for certain classes of investment income. For example, Turkish residents cannot, by investing in a tax-favored real estate investment trust, obtain tax treatment more favorable than they would have obtained by investing in the underlying real property directly. Similar rules prevent a Turkish resident's using a U.S. regulated investment company to reduce artificially the U.S. tax on the income generated by investments held by that company. The taxation of capital gains under the Agreement is essentially the same as under most recent U.S. tax treaties. In general, except for real property and business property, the country of the seller's residence is given the exclusive right to tax capital gains. A limited exception to this general rule relates to the alienation of corporate shares. Under the exemption, one Contracting State may, in accordance with its law, tax a resident of the other State on the gain from the alienation of shares issued by a corporation that is a resident of the first Contracting State if (i) the shares are not quoted on a stock exchange in the first Contracting State; (ii) the shares are alienated to a resident of that State; and (iii) the seller held the securities for one year or less. (Current U.S. law does not impose tax on a foreign person on the disposal of shares in a U.S. corporation.) The Agreement generally follows the standard rules for taxation by one country of the business profits of a resident of the other. The non-residence country's right to tax such profits is limited to cases in which the profits are attributable to a permanent establishment located in that country. The Agreement accommodates a provision of the 1986 Tax Reform Act 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. As do all recent U.S. treaties, the Agreement preserves the right of each country to impose its branch profits tax in addition to the basic corporate tax on the branch's business profits. Additionally, the United States has also preserved its right to impose its branch-level interest tax. Consistent with U.S. treaty policy, the Agreement permits only the country of residence to tax profits from international carriage by ships or airplanes and income from the use or rental of containers. In a departure from this policy, however, the reciprocal exemption does not extend to income from the non-incidental rental of ships or aircraft. Such income is treated as royalties and is, therefore, generally subject to a maximum tax by the source country of five percent. The taxation of income from the performance of personal services under the Agreement differs in some respects from the standard U.S. treaty policy. For example, a 183-day test applies in addition to the standard fixed-base test to determine the host-country's right to tax income from independent personal services. Thus, even if there is no fixed base, the ``host'' Contracting State may tax the income from the services performed in that State by an individual who is present there for more than 183 days in a twelve-month period. The Agreement provides for host-country exemption of visiting teachers if the visit does not exceed two years and if the remuneration arises outside the host country. This Agreement contains standard rules making its benefits unavailable to persons engaged in treaty shopping. It also contains the standard rules necessary for administering the Agreement, including rules for the resolution of disputes under the Agreement and for exchange of information. The Agreement authorizes the General Accounting Office and the Tax-Writing Committees of Congress to obtain access to certain tax information exchanged under the Agreement for use in their oversight of the administration of U.S. tax laws and treaties. This Agreement is subject to ratification. It will enter into force upon the exchange of instruments of ratification and will have effect with respect to taxes withheld by the source country for payments made or credited on or after the first day of January following entry into force and in other cases for taxable years beginning on or after that date. This Agreement will remain in force indefinitely unless terminated by one of the Contracting States. Either State may terminate the Agreement after five years from its entry into force by giving at least six months prior notice through diplomatic channels. A Protocol accompanies and forms an integral part of the Agreement and provides clarification with respect to the application of the Agreement in specified cases. For example, the Protocol defines certain technical tax terms used in the Agreement by reference to particular provisions of the Internal Revenue Code. A technical memorandum explaining in detail the provisions of the Agreement will be prepared by the Department of the Treasury and will be submitted separately to the Senate Committee on Foreign Relations. The Department of the Treasury and the Department of State cooperated in the negotiation of the Agreement. It has the full approval of both Departments. Respectfully submitted, Warren Christopher.