Protocol Amending Tax Convention with GermanySenate Consideration of Treaty Document 109-20
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[Senate Treaty Document 109-20] [From the U.S. Government Publishing Office] 109th Congress 2d Session SENATE Treaty Doc. 109-20 _______________________________________________________________________ PROTOCOL AMENDING TAX CONVENTION WITH GERMANY __________ MESSAGE from THE PRESIDENT OF THE UNITED STATES transmitting 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, SIGNED ON AUGUST 29, 1989, SIGNED AT BERLIN JUNE 1, 2006 (THE ``PROTOCOL''), ALONG WITH A RELATED JOINT DECLARATION [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] September 29, 2006.--Protocol was read the first time, and together with the accompanying papers, referred to the Committee on Foreign Relations and order to be printed for the use of the Senate ------- U.S. GOVERNMENT PRINTING OFFICE 49-112 *(Star Print) WASHINGTON : 2006 LETTER OF TRANSMITTAL ---------- The White House, September 29, 2006. To the Senate of the United States: I transmit herewith, for Senate advice and consent to ratification, a 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, Signed on August 29, 1989, signed at Berlin June 1, 2006 (the ``Protocol''), along with a related Joint Declaration. Also transmitted for the information of the Senate is the report of the Department of State with respect to the Protocol. The Protocol eliminates the withholding tax on certain cross-border dividend payments. Like a number of recent U.S. tax agreements, the proposed Protocol provides for the elimination of the withholding tax on dividends arising from certain direct investments and cross-border dividend payments to pension funds. The Protocol also provides for mandatory arbitration of certain cases before the competent authorities. This provision is the first of its kind in a U.S. tax treaty. In addition, the Protocol also modernizes the Convention to bring it into closer conformity with current U.S. tax-treaty policy, including strengthening the treaty's provisons preventing so-called treaty shopping. I recommend that the Senate give early and favorable consideration to the Protocol, along with the Joint Declaration and give it advice and consent to ratification. George W. Bush. LETTER OF SUBMITTAL ---------- Department of State, Washington, August 2, 2006. 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, a 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, Signed on 29th August 1989, signed at Berlin June 1, 2006 (the ``Protocol''), along with a related Joint Declaration. The Protocol eliminates the withholding tax on certain cross-border dividend payments. Like a number of recent U.S. tax agreements, the Protocol provides for the elimination of the withholding tax on dividends arising from certain direct investments and cross-border dividend payments to pension funds. The Protocol also provides for mandatory arbitration of certain cases before the competent authorities. This provision is the first of its kind in a U.S. tax treaty. In addition, the Protocol modernizes the Convention to bring into closer conformity with current U.S. tax-treaty policy, including strengthening the treaty's provisions preventing so-called treaty shopping. The Protocol was concluded in recognition of the importance of the United States' economic relations with Germany. The Department of the Treasury and the Department of State cooperated in the negotiation of the Protocol. It has the full approval of both Departments. Respectfully submitted. Condoleezza Rice. Enclosures. Key Provisions of the U.S.-Germany Income Tax Protocol The Protocol to the income tax Convention with Germany was negotiated to bring the current Convention, concluded in 1989, into closer conformity with current U.S. tax treaty policy. There are, as with all bilateral tax conventions, some variations from these norms. In the Protocol, these differences reflect particular aspects of German law and treaty policy, the interaction of U.S. and German law, and U.S.-German economic relations. The most important aspect of the Protocol relates to the taxation of cross-border dividend payments. Under the Protocol, most dividends paid by a subsidiary in one country to its parent in the other country will be exempt from withholding tax in the subsidiary's home country, rather than being subject to the current treaty's maximum withholding tax rate for direct dividends of five percent. The proposed Protocol also provides for a withholding rate of zero on cross-border dividend payments to pension funds. Eliminating withholding taxes on cross-border direct dividends and cross-border dividend payments to pension funds is consistent with an overall view that investment income should be taxed by the country of residence, not the country of source. The Protocol also provides for mandatory arbitration of certain cases before the competent authorities. The arbitration provided for in the Protocol is at the taxpayer's election with respect to competent authority cases that cannot be resolved within a specified period, generally two years from the commencement of the case. The determination of an arbitration board constitutes a resolution by mutual agreement under the Convention and is binding on both countries, unless the taxpayer does not accept the determination. This provision is the first of its kind in a U.S. tax treaty and will be well received by the business community. In addition, the Protocol also updates the current treaty's treatment of pensions. It removes barriers to the flow of personal services between the United States and Germany that could otherwise result from discontinuities in the laws of the two countries regarding the deductibility of pension contributions. The Protocol also strengthens the treaty's provisions preventing so-called treaty shopping, which is the inappropriate use of a tax treaty by third-country residents. Moreover, the Protocol updates the current treaty to reflect U.S. and German legislative changes since 1989. For example, the Protocol updates the ``saving clause'' to provide that former citizens or long-term residents of the United States may, for the period of ten years following the loss of such status, be taxed in accordance with the laws of the United States. The Protocol also modernizes our treaty relationship and brings it into closer conformity with current U.S. tax treaty policy by making technical changes to the article dealing with the elimination of double taxation and by eliminating the article dealing with the taxation of independent personal services. The proposed Protocol will enter into force upon the exchange of instruments of ratification. It will have effect, with respect to taxes withheld at source, for amounts paid or credited on or after the first day of January of the year upon which the Protocol enters into force and, with respect to other taxes, for taxable years beginning on or after the first day of January next following the date upon which the Protocol enters into force. However, where any person would be entitled to greater benefits under the Convention as unmodified by the Protocol, the Convention as unmodified, at the election of the person, continues to have effect in its entirety with respect to such person for a period of twelve-months from the date the provisions of the Protocol are effective. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]