Tax Convention with IcelandSenate Consideration of Treaty Document 110-17
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[Senate Treaty Document 110-17] [From the U.S. Government Printing Office] 110th Congress 2d Session SENATE Treaty Doc. 110-17 _______________________________________________________________________ TAX CONVENTION WITH ICELAND __________ MESSAGE from THEPRESIDENTOFTHEUNITEDSTATES transmitting CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF ICELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, AND ACCOMPANYING PROTOCOL, SIGNED ON OCTOBER 23, 2007, AT WASHINGTON, D.C. May 6, 2008.--Treaty 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, May 6, 2008. 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 Iceland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and accompanying Protocol, signed on October 23, 2007, at Washington, D.C. (the ``proposed Treaty''). The proposed Treaty would replace the existing income tax Convention with Iceland that was concluded in 1975 (the ``existing Treaty''). Also transmitted for the information of the Senate is the report of the Department of State with respect to the proposed Treaty. The proposed Treaty contains a comprehensive provision designed to prevent so-called treaty shopping. The existing Treaty contains no such protections, resulting in substantial abuse of the existing Treaty's provisions by third-country investors. The proposed Treaty also reflects changes to U.S. and Icelandic law and tax treaty policy since 1975. I recommend that the Senate give early and favorable consideration to the proposed Treaty and give its advice and consent to ratification. George W. Bush. LETTER OF SUBMITTAL ---------- The Secretary of State, Washington, February 29, 2008. 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 Iceland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and accompanying Protocol, signed on October 23, 2007, at Washington (the ``proposed Treaty''). The proposed Treaty will replace the existing income tax Convention which was concluded in 1975 (the ``existing Treaty''). The proposed Treaty contains a comprehensive provision designed to prevent so-called treaty shopping. The existing Treaty contains no such protections, resulting in substantial abuse of the existing Treaty's provisions by third-country investors. As with the existing Treaty, the proposed Treaty eliminates or significantly reduces withholding taxes on certain cross-border payments of dividends, interest, and royalties. Ratification of the proposed Treaty would recognize the importance of the United States' economic relations with Iceland. The Department of the Treasury and the Department of State cooperated in the negotiation of the proposed Treaty. It has the full approval of both Departments. Respectfully submitted. Condoleezza Rice. Enclosure: Key Provisions of the U.S.-Iceland Income Tax Convention and Protocol. Key Provisions of the U.S.-Iceland Income Tax Convention and Protocol The attached Convention and accompanying Protocol with Iceland (the ``proposed Treaty'') would replace the existing Convention, concluded in 1975 (the ``existing Treaty''). Although the proposed Treaty would bring our tax treaty relations with Iceland 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 proposed Treaty, these differences reflect particular aspects of Icelandic law and treaty policy, the interaction of U.S. and Icelandic law, and U.S.-Icelandic economic relations. The most important change from the existing Treaty is the addition of a comprehensive provision to address ``treaty shopping,'' which is the inappropriate use of a tax treaty by third-country residents. The existing Treaty does not contain treaty shopping protections and, as a result, has been abused by third-country investors in recent years. The proposed Treaty generally provides for withholding rates on investment income that are the same as or lower than those in the existing Treaty. Like the existing Treaty, the proposed Treaty provides for reduced source-country taxation of cross-border dividends. In addition, the proposed Treaty would eliminate source-country withholding tax on cross-border dividend payments to pension funds. As with the existing Treaty, the proposed Treaty generally would eliminate source- country withholding tax on cross-border interest payments. While the existing Treaty eliminates source-country withholding taxes on all cross-border payments of royalties, the proposed Treaty would allow the country in which certain cross-border trademark royalties arise to impose a withholding tax of up to five percent. The proposed Treaty provides, in addition, for the exchange between the tax authorities of each country of information relevant to carrying out the provisions of the Treaty or the domestic tax laws of either country. The proposed Treaty allows the United States to obtain information (including information from financial institutions) from Iceland whether or not Iceland needs the information for its own tax purposes. The proposed Treaty also reflects changes to U.S. and Icelandic law since 1975. For example, the proposed Treaty 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 proposed Treaty also makes various other changes to modernize our treaty relationship with Iceland and brings it into closer conformity with current U.S. tax treaty policy. The Parties shall notify each other in writing, through diplomatic channels, when their respective applicable procedures for ratification have been satisfied. The proposed Treaty will enter into force on the date of the later of the notifications. It will have effect, with respect to taxes withheld at source, on income derived on or after the first day of January of the calendar year next following entry 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 proposed Treaty enters into force. The existing Treaty will, with respect to any tax, cease to have effect as of the date on which this proposed Treaty has effect with respect to such tax. However, where any person would be entitled to greater benefits under the existing Treaty, the existing Treaty, at the election of the person, shall continue to have effect in its entirety with respect to such person for a period of twelve months from the date the provisions of the proposed Treaty are effective.