TAXATION CONVENTION WITH THAILANDSenate Consideration of Treaty Document 105-2
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[Senate Treaty Document 105-2] [From the U.S. Government Printing Office] 105th Congress Treaty Doc. SENATE 1st Session 105-2 _______________________________________________________________________ TAXATION CONVENTION WITH THAILAND __________ MESSAGE from THE PRESIDENT OF THE UNITED STATES transmitting THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE KINGDOM OF THAILAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT BANGKOK, NOVEMBER 26, 1996 January 28, 1997.--Convention 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, January 28, 1997. To the Senate of the United States: I transmit herewith for Senate advice and consent to ratification the Convention Between the Government of the United States of America and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Bangkok, November 26, 1996. An enclosed exchange of notes, transmitted for the information of the Senate, provides clarification with respect to the application of the Convention in specified cases. Also transmitted is the report of the Department of State concerning the Convention. This Convention, which is similar to other tax treaties between the United States and developing nations, provides maximum rates of tax to be applied to various types of income and protection from double taxation of income. The Convention also provides for the exchange of information to prevent fiscal evasion and sets forth standard rules to limit the benefits of the Convention to persons that are not engaged in treaty shopping. I recommend that the Senate give early and favorable consideration to this Convention and give its advice and consent to ratification. William J. Clinton. LETTER OF SUBMITTAL ---------- Department of State, Washington, January 10, 1997. The White House. The President, 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 Convention Between the Government of the United States of America and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Bangkok on November 26, 1996 (``the Convention''). Also provided for the information of the Senate is a related exchange of notes. This Convention will be the first Convention between the United States of America and the Kingdom of Thailand for the avoidance of double taxation with respect to taxes on income. This Convention follows the pattern of the U.S. model treaty with deviations found in many recent U.S. conventions with other developing countries. It provides for 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 Convention to persons that are not engaged in treaty shopping. Like other U.S. tax conventions, this Convention provides rules specifying when income that arises in one of the contracting countries (the ``source country'') and is attributable to residents of the other contracting country (the ``country of residence'') may be taxed by the source country. The Convention 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. While the withholding rates on dividend and royalty income are generally higher than those in the U.S. model treaty and in many recent conventions with OECD countries, they are generally lower than those in many recent Thai treaties. Pursuant to Article 10, dividends from direct investments are subject to tax by the source country at a rate of ten percent. The threshold criterion for direct investment is ten percent, consistent with other modern U.S. treaties in order to facilitate direct investment. Other dividends are generally taxable at 15 percent. In general, under Article 11, interest derived and beneficially owned by a resident of either Contracting State may be taxed in both States. However, if the beneficial owner of the interest is not a resident of the source country, the tax levied by the source country is limited to 15 percent in most cases. Interest paid by any financial institution and interest earned on trade credits are subject to a ten-percent tax by the source country. In addition, interest earned on government debt, including government-guaranteed debt, is exempt from tax by the source country. Under Article 12, royalties derived and beneficially owned by a resident of a Contracting State are subject to a five- percent tax by the source country if they are copyright royalties (including software), an eight-percent tax if they arise from the right to use equipment, and a 15-percent tax if they pertain to patents and trademarks. These rates of taxation on royalty and interest income do not apply, however, if the beneficial owner of the income is not a resident of, but carries on business in the source country and the income is attributable to a permanent establishment in the source country. In that situation, the income is to be considered either business profit or income from independent personal services. Like other U.S. tax treaties and agreements, this Convention provides the standard anti-abuse rules for certain classes of investment income at Articles 11 and 12. The taxation of capital gains, described in Article 13 of the Convention, does not follow the general pattern of recent U.S. tax treaties. Under the proposed Convention, as in a few other U.S. tax treaties, gains may be taxed by both Contracting States under the provisions of their domestic laws. Notwithstanding that provision, however, gains from the alienation of ships, aircraft, or containers used or operated by an enterprise of a Contracting State in international traffic or movable property pertaining to the use or operation of such ships, aircraft, or containers are taxable only in the Contracting State in which the enterprise is located. Article 7 of the proposed Convention 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 generally limited to cases in which the profits are attributable to a permanent establishment located in that country. The proposed Convention, however, grants rights to tax business profits that generally are somewhat broader than those found in the U.S. and OECD model treaties. As do all recent U.S. treaties, Article 14 of this Convention preserves the right of the United States to impose its branch profits tax in addition to the basic corporate tax on a branch's business. The proposed Convention, at Article 7, also 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. Consistent with U.S. treaty policy, Article 8 of the new Convention permits only the country of residence to tax profits from international carriage by airplanes. This reciprocal exemption also extends to income from the rental of aircraft if the rental income is incidental to income from the operation of the aircraft in international traffic. However, income from the international operation of ships (including rentals that are incidental to such operations) is taxed at one-half the tax rate otherwise applicable. Income from the use or rental of containers that is incidental to the operation of ships or aircraft in international traffic is treated the same as the income from the operation of the ships or aircraft (i.e., it is exempt if it is incidental to aircraft operations and taxed at half of the rate otherwise applicable if incidental to the operations of ships). This deviation from the preferred U.S. position regarding the taxation of shipping profits, which is suggested as an option in the U.N. model treaty, was necessary to accommodate Thailand's long-standing policy on this issue. The United States and Thailand have agreed to exchange notes under which, if Thailand grants any other country more- favorable treatment on income from the operation of ships in international traffic, negotiations will be reopened to extend such favorable treatment to the United States. Other income from the rental of ships or aircraft and from the use or rental of containers is treated as business profits. The taxation of income from the performance of personal services under Article 15 of the proposed Convention is similar to that under some U.S. treaties with developing countries but grants a taxing right to the source country with respect to such income that is broader than that in either the U.S. or OECD model treaties. Article 18 of the proposed Convention contains significant anti-treaty-shopping rules making the Convention's benefits unavailable to persons engaged in treaty shopping. The proposed Convention also contains the standard rules necessary for administering the Convention, including rules for the resolution of disputes under the Convention (Article 27). The information-exchange provisions of the proposed Convention (Article 28) make clear that Thailand is obligated to provide U.S. tax officials such information as is necessary to carry out the provisions of the Convention. Under this provision, Thailand will provide tax information in a manner consistent with U.S. policy, including bank information, to the United States whenever there is a ``Thai tax interest'' in the case. While Thailand may not provide information under this Convention where there is no ``Thai tax interest,'' U.S. tax authorities will be given access to information in criminal cases, including tax fraud, regardless of whether there is a ``Thai tax interest,'' under the provisions of the existing Mutual Legal Assistance Treaty between the United States of America and the Kingdom of Thailand. Thus, the United States will be able to obtain information in criminal, but not civil, cases where there is no ``Thai tax interest.'' The proposed Convention contains an unusual termination provision designed to deal with the ``tax interest'' problem. The proposed Convention provides that Thailand generally is required to treat a U.S. tax interest as a ``Thai tax interest'' in all cases, including both civil and criminal tax proceedings. However, this general provision will not be in effect until the United States receives from Thailand a diplomatic note indicating that Thailand is both prepared and able to implement this provision, which will not be possible until Thai law is changed. If the United States has not received such a diplomatic note by June 30 of the fifth year following entry into force of the Convention, the entire Convention will terminate on January 1 of the sixth year following its entry into force (Article 31, Paragraph 2). The Convention would permit the General Accounting Office and the tax-writing committees of Congress to obtain access to certain tax information exchanged under the Convention for use in their oversight of the administration of U.S. tax laws and treaties (Article 28). This Convention is subject to ratification. In accordance with Article 30, it will enter into force upon the exchange of instruments of ratification with respect to taxes withheld by the source country and will have effect for payments made or credited on or after the first day of the sixth month following entry into force; with respect to other taxes, it will take effect for taxable years beginning on or after the first day of January following the date on which the Convention enters into force. If the proposed Convention does not terminate on January 1 of the sixth year following its entry into force, it will remain in force indefinitely. After five years from the date the proposed Convention enters into force, either State may terminate the Convention pursuant to Article 31 by giving at least six months of prior notice through diplomatic channels. Diplomatic notes exchanged between the parties accompany the Convention and provide clarification with respect to the application of the Convention in specified cases. A technical memorandum explaining in detail the provisions of the Convention 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 Convention. It has the full approval of both Departments. Respectfully submitted, Warren Christopher. Enclosures as stated.