Tax Convention with MaltaSenate Consideration of Treaty Document 111-1
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[Senate Treaty Document 111-1] [From the U.S. Government Printing Office] 111th Congress 1st Session SENATE Treaty Doc. 111-1 _______________________________________________________________________ TAX CONVENTION WITH MALTA __________ MESSAGE from THEPRESIDENTOFTHEUNITEDSTATES transmitting CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF MALTA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED ON AUGUST 8, 2008, AT VALLETTA January 15, 2009.--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, January 15, 2009. 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 Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, signed on August 8, 2008, at Valletta (the ``proposed Convention''). I also transmit for the information of the Senate the report of the Department of State, which includes an Overview of the proposed Convention. The proposed Convention provides for reduced withholding rates on cross-border payments of dividends, interest, royalties, and other income. The proposed Convention contains a restrictive provision designed to prevent ``treaty shopping,'' which is the inappropriate use of a tax treaty by third-country residents. The proposed Convention also provides for the exchange of information between the competent authorities to facilitate the administration of each country's tax laws. I recommend that the Senate give early and favorable consideration to the proposed Convention and give its advice and consent to ratification. George W. Bush. LETTER OF SUBMITTAL ---------- Department of State, Washington, DC, January 2, 2009. The President, The White House. The President: I have the honor to submit to you the Convention Between the Government of the United States of America and the Government of Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on August 8, 2008, at Valletta (the ``proposed Convention''). I recommend that the proposed Convention be transmitted to the Senate for its advice and consent to ratification. The proposed Convention provides for reduced withholding rates on cross-border dividend payments, and the elimination of withholding on cross-border dividend payments to pension funds. It provides for withholding at a 10 percent rate on interest, royalties, and other income. The proposed Convention contains a comprehensive provision designed to prevent ``treaty shopping,'' which is the inappropriate use of a tax treaty by third-country residents. The treaty shopping protections in the proposed Convention are more restrictive than those in any other U.S. tax treaty to address certain unique features of Malta's tax system. The proposed Treaty also provides for the exchange of information between the competent authorities to facilitate the administration of each country's tax laws. United States concerns with respect to the inappropriate use of the tax treaty by third-country residents and inadequate information exchange by Malta prompted the United States to terminate the previous 1980 U.S.-Malta tax treaty, effective January 1, 1997. The new proposed Convention satisfactorily addresses both concerns. An Overview of key provisions of the proposed Convention is enclosed with this report. The proposed Convention was negotiated in recognition of the importance of the United States' economic relations with Malta. The Department of the Treasury and the Department of State cooperated in the negotiation of the proposed Convention, and the Department of the Treasury joins the Department of State in recommending that the proposed Convention be transmitted to the Senate as soon as possible for its advice and consent to ratification. Respectfully submitted, Condoleezza Rice. Enclosures: As stated. Key Provisions of the Proposed U.S.-Malta Income Tax Convention The attached income tax convention with Malta (the proposed Treaty) generally follows the 2006 U.S. Model Income Tax Convention (the U.S. Model). Due to certain unique features of Malta's tax system, however, some deviation from the U.S. Model was necessary. There is no income tax treaty currently in force between the United States and Malta. The previous U.S.-Malta tax treaty was terminated by the United States in 1996 due to changes to Maltese tax law that allowed Maltese-resident companies wholly owned by persons not resident in Malta to be wholly exempt from Maltese tax on U.S.-source income, creating a strong incentive for ``treaty shopping,'' which is the inappropriate use of a treaty by third-country residents. A secondary area of concern for the United States was that Malta was unable to obtain and exchange tax information held by financial institutions. Negotiation of the proposed Treaty with Malta focused heavily on addressing both of those concerns. The proposed Treaty includes comprehensive treaty shopping protections. It is important to note that Malta's domestic tax law has changed considerably since termination of the previous treaty in 1996. However additional treaty shopping protections were necessary since Maltese law does not impose withholding taxes on cross-border payments, and provides for a low effective tax rate on income earned by foreign-owned corporations. These features increase the incentive for third- country investors to invest through Malta to access benefits of Malta's tax treaties. As a result, the anti-treaty-shopping provision in the proposed Treaty is significantly more restrictive than the equivalent provision in the U.S. Model. The proposed Treaty also provides for the exchange between the tax authorities of each country of information relevant to carrying out the provisions of the agreement or the domestic tax laws of either country. The proposed Treaty allows the United States to obtain information (including information from financial institutions) from Malta whether or not Malta needs the information for its own tax purposes. In response to U.S. requests during the negotiation process, Malta changed its domestic law to allow the exchange of bank information. The withholding tax rates on dividends are consistent with those contained in the U.S. Model. The proposed Treaty provides for a withholding rate of 15 percent on cross-border portfolio dividend payments, and five percent on dividends when the beneficial owner of the dividend is a company that directly owns at least 10 percent of the stock of the company paying the dividend. The proposed Treaty provides for an exemption from withholding on dividends paid by a company resident in one of the countries to a pension fund that is resident in the other country. Although the U.S. Model eliminates source-country withholding tax on most payments of interest, royalties, or other income, exemption from withholding was not appropriate in this case in light of Malta's unique tax system. The proposed Treaty therefore provides for withholding at a rate of 10 percent on interest, royalties, and other income. The proposed Treaty will enter into force on the date of 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 the second month next following the date on which the proposed Treaty 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 proposed Treaty enters into force.