Tax Convention with BangladeshSenate Consideration of Treaty Document 109-5
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[Senate Treaty Document 109-5] [From the U.S. Government Publishing Office] 109th Congress 1st Session SENATE Treaty Doc. 109-5 _______________________________________________________________________ TAX CONVENTION WITH BANGLADESH __________ MESSAGE from THE PRESIDENT OF THE UNITED STATES transmitting CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF BANGLADESH FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME SIGNED AT DHAKA ON SEPTEMBER 26, 2004 (THE ``CONVENTION''); WITH AN EXCHANGE OF NOTES ENCLOSED October 27, 2005.--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 49-112 WASHINGTON: 2005 LETTER OF TRANSMITTAL ---------- The White House, October 27, 2005. To the Senate of the United States: I transmit herewith for the advice and consent of the Senate to ratification a Convention Between the Government of the United States of America and the Government of Bangladesh for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income signed at Dhaka on September 26, 2004 (the ``Convention''). An exchange of notes is enclosed, and the report of the Department of State with respect to the Convention is transmitted for the information of the Senate. 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 the resolution of disputes and sets forth rules making its benefits unavailable to those who are engaged in treaty forum 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. George W. Bush. LETTER OF SUBMITTAL ---------- Department of State, Washington, DC, September 23, 2005. 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 People's Republic of Bangladesh for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Dhaka, on September 26, 2004 (``the Convention''). An exchange of notes is also enclosed for the information of the Senate. The Convention generally follows the pattern of the 1996 U.S. Model Tax Convention (``the U.S. Model'') 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. The Convention also contains rules making its benefits unavailable to persons who are engaged in treaty shopping. The Department of the Treasury and the Department of State cooperated in the negotiation of the Convention and the exchange of notes. Both Departments have given their full approval. Respectfully submitted. Condoleezza Rice. Enclosures: 1. Key Provisions of the U.S.-Bangladesh Income Tax Convention. 2. Proposed message to the Senate. Key Provisions of the U.S.-Bangladesh Income Tax Convention The proposed Income Tax Convention with Bangladesh generally follows the pattern of the U.S. Model treaty. Although there are certain deviations from the Model, similar to those found in many recent U.S. tax treaties with developing countries, the Convention overall tends to provide for less source-country taxation than in many U.S. tax treaties with developing countries. With respect to income from business activities, Article 7 of the 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. tax 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 Convention, income from the operation of ships and aircraft in international traffic, and from the rental or maintenance 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 rental or maintenance of containers used in international traffic is likewise exempt from source-country taxation under the Convention. With respect to withholding rates on investment income, the proposed rates are generally lower than those in some recent U.S. tax treaties with non-OECD countries. Article 10 of the Convention provides that dividends from direct investments are subject to tax by the source country at a maximum rate of ten percent. The ownership threshold for direct investment is ten percent, in order to facilitate direct investment. Other dividends are generally taxable at a maximum rate of 15 percent. Under Article 12, royalties may be taxed by the source country at a maximum rate of ten percent. Under Article 11 of the Convention, most interest may be taxed by the source country at a maximum rate of ten percent. However, interest income received by a financial institution (including an insurance company), and interest paid with respect to the sale on credit of industrial, commercial or scientific equipment or other merchandise, may be taxed at a maximum rate of five percent. Interest derived by a Contracting State, and interest on obligations guaranteed or ensured by a Contracting State, shall be exempt from taxation by the source country. The reduced withholding rates described 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. Article 13 of the Convention provides for the taxation of capital gains and 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. Articles 15, 16 and 18 of the Convention address the taxation of income from the performance of personal services, which is essentially the same as thatunder recent U.S. tax treaties with other developing countries, although these provisions grant taxing rights to the host country with respect to such income that is broader than in the U.S. Model. Article 17 of the Convention contains significant anti- treaty shopping rules, making its benefits unavailable to persons engaged in treaty shopping. Articles 25 and 26 contain rules necessary for administering the treaty and domestic tax laws, including rules for the resolution of disputes under the Convention.and for the exchange of information. 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. The Convention is subject to ratification. In accordance with the provisions of Article 28, it will enter into force upon the exchange of instruments of ratification. With respect to taxes withheld at source, it will take effect for amounts paid or credited on or after the first day of the second month following the date on which the Convention comes into force; with respect to other taxes, the Convention will take effect for taxable periods (in the case of the United States) or for income years (in the case of Bangladesh) beginning on or after the first day of January next following the date on which the Convention enters into force. Pursuant to Article 29, the Convention will remain in force until terminated by one of the Contracting States. Article 29 also provides that either State may terminate the Convention at any time after five years from the date it enters into force, by giving 6 months prior notice through diplomatic channels. This Convention will be the first such Convention between the United States of America and the People's Republic of Bangladesh. In 1981, the Senate gave its advice and consent to a convention between the two countries that was signed in 1980, subject to understandings relating to income from the operation of ships in international traffic and to the operation of the provision relating to exchange of information for tax purposes. The 1980 convention never entered into force because of intervening changes in U.S. domestic tax law. The concerns expressed by the Senate in the understandings to the 1980 convention have been addressed in the current Convention.