Tax Convention with VenezuelaSenate Consideration of Treaty Document 106-3
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[Senate Treaty Document 106-3] [From the U.S. Government Publishing Office] ----------------------------------------------------------------------- 106th Congress Treaty Doc. 1st Session SENATE 106-3 _______________________________________________________________________ TAX CONVENTION WITH VENEZUELA __________ 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 REPUBLIC OF VENEZUELA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL, SIGNED AT CARACAS ON JANUARY 25, 1999 June 29, 1999.--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. ------- U.S. GOVERNMENT PRINTING OFFICE 69-118 WASHINGTON : 1999 LETTER OF TRANSMITTAL ---------- The White House, June 29, 1999. 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 Republic of Venezuela for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, together with a Protocol, signed at Caracas on January 25, 1999. Also transmitted is the report of the Department of State concerning the Convention. This Convention, which is similar to tax treaties between the United States and other 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 resolution of disputes an sets forth rules making its benefits unavailable to residents that are engaged in treaty shopping. I recommend that the Senate give early and favorable consideration to this Convention and that the Senate give its advice and consent to ratification. William J. Clinton. LETTER OF SUBMITTAL ---------- Department of State, Washington, DC. 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 Convention Between the Government of the United States of America and the Government of the Republic of Venezuela for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, together with a Protocol, signed at Caracas on January 25, 1999 (``the Convention''). This Convention will be the first such Convention between the United States of America and the Republic of Venezuela. This Convention generally follows the pattern of the 1996 U.S. Model Tax Convention while incorporating some provisions found in recent tax treaties between the United States and developing nations. It provides for maximum rates of tax to be applied to various types of income, protection from double taxation of income, and exchange of information, and it contains rules making its benefits unavailable to persons who are engaged in treaty shopping. The proposed withholding rates, while in some respects higher than those in the U.S. Model, are the same as those in other U.S. treaties with developing countries and other Venezuela tax treaties. Also, the withholding rates reflect Venezuela's territorial system of taxation and the objective of establishing an adequate single level of tax on cross-border investment income. Like other U.S. tax conventions, this Convention provides rules specifying when income that arises in one of the countries and is attributable to residents of the other country may be taxed by the country in which the income arises (the ``source'' country). Pursuant to Article 10, dividends from direct investments are subject to tax by the source country at a maximum rate of five percent. The ownership threshold for direct investment is ten percent, consistent with other modern U.S. tax treaties, in order to facilitate direct investment. Other dividends are generally taxable at 15 percent. Under Article 12, royalties for the use of industrial, commercial, or scientific equipment derived and beneficially owned by a resident of a Contracting State are subject to tax at a maximum rate of five percent by the source country; all other royalties are subject to tax at a maximum rate of ten percent. Under Article 11 of the proposed Convention, most interest arising in one Contracting State and owned by a resident of the other Contracting State is subject to taxation by the source country at a maximum rate of ten percent. However, interest income received by a financial institution (including an insurance company) is subject to tax at a maximum rate of 4.95 percent, and interest earned on government debt and debt guaranteed by government agencies is exempt from taxation by the source country. The reduced withholding rates described above do not apply if the beneficial owner of the income is a resident of one Contracting State who carries on business in the other Contracting State and the income is attributable to a permanent establishment or fixed base situated in that other State. If the income is attributable to a permanent establishment, it will be taxed as business profits, and, if the income is attributable to a fixed base, it will be taxed as a payment for independent personal services. The maximum rates of withholding tax described in the preceding paragraphs are subject to the standard anti-abuse rules for certain classes of investment income found in other U.S. tax treaties and agreements. The taxation of capital gains described in Article 13 of the Convention follows the format of the U.S. Model. Gains and income derived from the sale of real property and from real property interests may be taxed by the State in which the property is located. Likewise, gains or income from the sale of personal property, if attributable to a fixed base or permanent establishment situated in a Contracting State, may be taxed in that State. All other gains, including gains from the sale of ships, aircraft and containers, and gains from the sale of stock in a corporation, are taxable only in the State of residence of the seller. 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 source country's right to tax such profits is generally limited to cases in which the profits are attributable to a permanent establishment located in that country. As do all recent U.S. treaties, this Convention preserves the right of the United States to impose its branch taxes in addition to the basic corporate tax on a branch's business. Under Article 8 of the proposed Convention, income from the operation of ships and aircraft in international traffic and from the use, maintenance or rental of containers used in international traffic is taxed in a manner consistent with the U.S. Model. Article 8 permits only the country of residence to tax profits from the international operation of ships or aircraft, including profits from the rental of ships and aircraft when the ship or aircraft is operated by the lessee in international traffic, or when the rental activity is incidental to the operation of ships or aircraft by the lessor. All income from the use, maintenance or rental of containers used in international traffic is likewise exempt from source- country taxation under the proposed Convention. The taxation of income from the performance of personal services under Articles 14 through 16 of the New Convention is essentially the same as that under recent U.S. treaties with some developing countries but grants a taxing right to the host country with respect to such income that is broader than in the OECD or U.S. Model treaties. Article 17 of the proposed Convention contains significant anti-treaty-shopping rules making its benefits unavailable to persons engaged in treaty-shopping. Rules necessary for administration, including rules for the resolution of disputes under the Convention and for exchange of information, are contained in Articles 26 and 27. 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. This Convention is subject to ratification. In accordance with the provisions of Article 29, it will enter into force when the Governments notify each other through diplomatic channels that their constitutional requirements for entry into force have been met. It will have effect for payments made or credit on or after the first day of January following entry into force with respect to taxes withheld by the source country; with respect to other taxes, the Convention will take effect for taxable periods beginning on or after the first day of January following the date on which the Convention enters into force. The proposed convention will remain in force indefinitely unless terminated by one of the Contracting States, pursuant to Article 30. At any time after five years from the date on which the Convention enters into force, either Contracting State may terminate the Convention as of the end of a calendar year by giving notice of the termination through diplomatic channels at least six months prior to the end of that calendar year. A Protocol accompanies and forms an integral part of the Convention. 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, Madeline Albright.