Text - Treaty Document: Senate Consideration of Treaty Document 111-7All Information (Except Treaty Text)

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[Senate Treaty Document 111-7]
[From the U.S. Government Printing Office]


111th Congress                                              Treaty Doc.
SENATE
2d Session                                                 111-7
_______________________________________________________________________

                                     

 
                      TAX CONVENTION WITH HUNGARY

                               __________

                                MESSAGE

                                  from

                  THE PRESIDENT OF THE UNITED STATES

                              transmitting

 CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND 
 THE GOVERNMENT OF THE REPUBLIC OF HUNGARY FOR THE AVOIDANCE OF DOUBLE 
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON 
    INCOME, SIGNED ON FEBRUARY 4, 2010, AT BUDAPEST (THE ``PROPOSED 
CONVENTION'') AND A RELATED AGREEMENT EFFECTED BY AN EXCHANGE OF NOTES 
                          ON FEBRUARY 4, 2010




 November 15, 2010.--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,
                                                 November 15, 2010.
To the Senate of the United States:
    I transmit herewith, for the advice and consent of the 
Senate to its ratification, the Convention between the 
Government of the United States of America and the Government 
of the Republic of Hungary for the Avoidance of Double Taxation 
and the Prevention of Fiscal Evasion with Respect to Taxes on 
Income, signed on February 4, 2010, at Budapest (the ``proposed 
Convention'') and a related agreement effected by an exchange 
of notes on February 4, 2010. I also transmit for the 
information of the Senate the report of the Department of 
State, which includes an Overview of the proposed Convention 
and related agreement.
    The proposed Convention and related agreement were 
negotiated to bring U.S.-Hungary tax treaty relations into 
closer conformity with current U.S. tax treaty policies. For 
example, the proposed Convention contains comprehensive 
provisions designed to address ``treaty shopping,'' which is 
the inappropriate use of a tax treaty by residents of a third 
country. The existing Convention with Hungary, signed in 1979, 
does not contain treaty shopping protections and, as a result, 
has been abused by third-country investors in recent years. For 
this reason, concluding the proposed Convention has been a top 
priority for the Department of the Treasury's tax treaty 
program.
    I recommend that the Senate give early and favorable 
consideration to the proposed Convention and related agreement 
and give its advice and consent to their ratification.
                                                      Barack Obama.
                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                    Washington, September 17, 2010.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to their 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 
Hungary for the Avoidance of Double Taxation and the Prevention 
of Fiscal Evasion with Respect to Taxes on Income, signed on 
February 4, 2010, at Budapest together with a related agreement 
effected by exchange of notes on February 4, 2010. The proposed 
Convention and related agreement were negotiated to bring U.S.-
Hungary tax treaty relations into closer conformity with 
current U.S. tax treaty policies. For example, the proposed 
Convention contains comprehensive provisions designed to 
address ``treaty shopping,'' which is the inappropriate use of 
a tax treaty by residents of a third country. The existing 
Convention with Hungary signed in 1979 (Convention between the 
Government of the United States of America and the Government 
of the Hungarian People's Republic for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income, signed at Washington, February 12, 1979) does 
not contain treaty shopping protections and, as a result, has 
been abused by third-country investors in recent years. For 
this reason, concluding the proposed new Convention has been a 
top priority for the Department of the Treasury's tax treaty 
program. An overview of key provisions of the proposed 
Convention and related agreement are enclosed with this report.
    The proposed Convention is self-executing. I recommend that 
the proposed Convention and related agreement be transmitted to 
the Senate for its advice and consent to ratification. The 
Department of the Treasury and the Department of State 
cooperated in the negotiation of the proposed Convention and 
related agreement, and the Department of the Treasury joins the 
Department of State in recommending that the proposed 
Convention and related agreement be transmitted to the Senate 
as soon as possible for its advice and consent to ratification.
            Respectfully submitted,
                                            Hillary Rodham Clinton.
    Enclosures: As stated.

                                OVERVIEW

    The proposed income tax Convention with Hungary signed on 
February 4, 2010 and the related agreement effected by exchange 
of notes on the same day were negotiated to bring U.S.-Hungary 
tax treaty relations into closer conformity with current U.S. 
tax treaty policy. There are, as with all bilateral tax 
treaties, some variations from these norms. In the proposed 
Convention and related agreement, these differences reflect 
particular aspects of Hungarian law and treaty policy, the 
interaction of U.S. and Hungarian law, and U.S.-Hungarian 
economic relations.

Anti-abuse provisions

    The proposed Convention and the related agreement contain 
comprehensive ``Limitation on Benefits'' provisions designed to 
address ``treaty shopping,'' which is the inappropriate use of 
a tax treaty by residents of a third country. The existing 
Convention (the Convention between the Government of the United 
States of America and the Government of the Hungarian People's 
Republic for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income, 
signed at Washington, February 12, 1979), does not contain 
treaty shopping protections, and, as a result, has been abused 
by third-country investors in recent years. For this reason, 
replacing the existing Convention with a Convention containing 
comprehensive ``Limitation on Benefits'' provisions has been a 
top tax treaty priority for the Treasury Department. The new 
``Limitation on Benefits'' provisions include a provision 
granting so-called ``derivative benefits'' similar to the 
provision included in all recent U.S. tax treaties with 
countries that are members of the European Union. The new 
``Limitation on Benefits'' provisions also contain a special 
rule of so-called ``headquarters companies'' that is identical 
to what the Treasury Department has agreed to with a number of 
other tax treaty partners.
    The proposed Convention incorporates updated rules that 
provide that a former citizen or long-term resident 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 convention also coordinates the 
U.S. and Hungarian tax rules to address the ``mark-to-market'' 
provision enacted by the United States in 2007 that apply to 
individuals who relinquish U.S. citizenship to terminate long-
term residency.

Taxation of investment income

    The withholding rates on investment income in the proposed 
Convention are the same as or lower than those in the existing 
Convention. The proposed Convention provides for reduced 
source-country taxation of dividends distributed by a company 
resident in one Contracting State to a resident of the other 
Contracting State. The proposed Convention generally allows for 
taxation at source of five percent on direct dividends (i.e., 
where a 10-percent ownership threshold is met) and 15 percent 
on all other dividends. Additionally, the proposed Convention 
provides for an exemption from withholding tax on certain 
cross-border dividend payments to pension funds.
    The proposed Convention updates the treatment of dividends 
paid by U.S. Regulated Investment Companies (RICs) and Real 
Estate Investment Trusts (REITs) to prevent the use of 
structures designed to inappropriately avoid U.S. tax.
    Consistent with the existing Convention, the proposed 
Convention generally eliminates source-country withholding 
taxes on cross-border interest and royalty payments. However, 
consistent with existing U.S. tax treaty policy, source-country 
tax may be imposed on certain contingent interest and payments 
from a U.S. real estate mortgage investment conduit.
    The taxation of capital gains under the proposed Convention 
generally follows the format of the current U.S. Model Income 
Tax Convention. Gains 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 from the sale of 
personal property forming part of a permanent establishment 
situated in a Contracting State may be taxed in that State. All 
other gains, including gains from the alienation of ships, 
boats, aircraft and containers used in international traffic 
and gains from the sale of stock in a corporation, are taxable 
only in the State of residence of the seller.

Taxation of business income

    The proposed Convention and related agreement, like several 
recent treaties, provide that the OECD Transfer Pricing 
Guidelines apply by analogy in determining the amount of 
business profits of a resident of the other country. 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. The proposed Convention 
generally defines a ``permanent establishment'' in a way that 
grants rights to tax business profits that are consistent with 
those found in the current U.S. Model income tax treaty.
    The proposed Convention preserves the U.S. right to impose 
its branch profits tax on U.S. branches of Hungarian 
corporations. The proposed Convention also accommodates a 
provision of U.S. domestic law that attributes to a permanent 
establishment income that is earned during the life of the 
permanent establishment, but is deferred, and not received 
until after the permanent establishment no longer exists.

Taxation of personal services income

    The proposed Convention would change the rules currently 
applied pursuant to the existing Convention regarding the 
taxation of independent personal services. Under the proposed 
Convention, an enterprise performing services in the other 
country will become taxable in the other country only if the 
enterprise has a fixed place of business.
    The rules for the taxation of income from employment under 
the proposed Convention are generally similar to those under 
the current U.S. Model Income Tax Convention. The general rule 
is that employment income may be taxed in the State where the 
employment is exercised unless three conditions constituting a 
safe harbor are satisfied.

Pensions

    The proposed Convention preserves the existing Convention's 
rules that allow for exclusive residence-country taxation of 
pensions, and consistent with current U.S. tax treaty policy, 
provides for exclusive source-country taxation of social 
security payments.

Exchange of information

    The proposed Convention provides for the full exchange of 
information between the competent authorities to facilitate the 
administration of each country's tax laws. It generally follows 
the current U.S. Model Income Tax Convention and the 
Organization for Economic Cooperation and Development standards 
for exchange of tax information. Accordingly, the proposed 
Convention allows the United States to obtain information 
(including from financial institutions) from Hungary whether or 
not Hungary needs the information for its own tax purposes.

Entry into force

    The proposed Convention would enter into force on the date 
of an exchange of instruments of ratification. It would 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 of entry into force of the proposed 
Convention, and with respect to other taxes, for taxable years 
beginning on or after the first day of January next following 
the date of entry into force of the proposed Convention. The 
related agreement effected by exchange of notes would enter 
into force on the date of entry into force of the proposed 
Convention.

Effect on the existing convention

    The existing Convention would, with respect to any tax, 
cease to have effect as of the date on which this proposed 
Convention has effect with respect to such tax. However, where 
any person would be entitled to greater benefits under the 
existing Convention, the existing Convention, at the election 
of the person, would continue to have effect in its entirety 
with respect to such person until either the date of entry into 
force of the proposed Convention or December 31, 2010, 
whichever is later. Additionally, individuals who benefit from 
the Articles on Students and Trainees and on Teachers under the 
existing Convention would continue to be entitled to such 
benefits as if the existing Convention remained in force.