[Senate Executive Report 113-7]
[From the U.S. Government Publishing Office]
113th Congress Exec. Rept.
SENATE
2nd Session 113-7
======================================================================
PROTOCOL AMENDING TAX CONVENTION WITH SWITZERLAND
_______
April 29, 2014.--Ordered to be printed
_______
Mr. Menendez, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 112-1]
The Committee on Foreign Relations, to which was referred
the Protocol Amending the Convention between the United States
of America and the Swiss Confederation for the Avoidance of
Double Taxation With Respect to Taxes on Income, signed at
Washington on October 2, 1996, signed on September 23, 2009, at
Washington, as corrected by an exchange of notes effected
November 16, 2010, together with a related agreement effected
by an exchange of notes on September 23, 2009 (Treaty Doc. 112-
1) (collectively, the ``Protocol''), having considered the
same, reports favorably thereon with one declaration and
conditions related to reporting on mandatory arbitration, as
indicated in the resolution of advice and consent, and
recommends that the Senate give its advice and consent to
ratification thereof, as set forth in this report and the
accompanying resolution of advice and consent.
CONTENTS
Page
I. Purpose..........................................................1
II. Background.......................................................2
III. Major Provisions.................................................2
IV. Entry Into Force.................................................3
V. Implementing Legislation.........................................3
VI. Committee Action.................................................3
VII. Committee Comments...............................................3
VIII.Text of Resolution of Advice and Consent to Ratification.........6
IX. Annex 1.--Technical Explanation..................................9
X. Annex 2.--Transcript of Hearing of February 26, 2014............21
I. Purpose
The purpose of the Protocol, along with the underlying
treaty, is to promote and facilitate trade and investment
between the United States and Switzerland, and to bring the
existing treaty with Switzerland (the ``Treaty'') into
conformity with current U.S. tax treaty policy. Principally,
the Protocol will modernize the existing Treaty's rules
governing exchange of information; provide for the
establishment of a mandatory arbitration rule to facilitate
resolution of disputes between the U.S. and Swiss revenue
authorities about the Treaty's application to particular
taxpayers; and provide an exemption from source country
withholding tax on dividends paid to individual retirement
accounts.
II. Background
The United States has a tax treaty with Switzerland that is
currently in force, which was concluded in 1996 along with a
separate protocol to the treaty concluded on the same day
(``1996 Protocol''). The proposed Protocol was negotiated to
modernize our relationship with Switzerland in this area and to
update the current treaty to better reflect current U.S. and
Swiss domestic tax policy.
III. Major Provisions
A detailed article-by-article analysis of the Protocol may
be found in the Technical Explanation Published by the
Department of the Treasury on June 7, 2011, which is included
in Annex 1. In addition, the staff of the Joint Committee on
Taxation prepared an analysis of the Protocol, JCX-31-11 (May
20, 2011), which was of great assistance to the committee in
reviewing the Protocol. A summary of the key provisions of the
Protocol is set forth below.
The Protocol is primarily intended to update the existing
Swiss Convention to conform to current U.S. and Swiss tax
treaty policy. It provides an exemption from source country
withholding tax on dividends paid to individual retirement
accounts; provides for the establishment of a mandatory
arbitration rule to facilitate resolution of disputes between
the U.S. and Swiss revenue authorities about the Treaty's
application to particular taxpayers; and modernizes the
existing Convention's rules governing exchange of information.
INDIVIDUAL RETIREMENT ACCOUNTS
The Protocol updates the provisions of the existing
Convention, as requested by Switzerland, to provide an
exemption from source country withholding tax on dividends paid
to individual retirement accounts.
MANDATORY ARBITRATION
The Protocol incorporates mandatory, binding arbitration in
certain cases that the competent authorities of the United
States and Switzerland have been unable to resolve after a
reasonable period of time under the mutual agreement procedure.
The procedures include: (1) the opportunity for taxpayer
participation by providing information directly to the arbitral
panel through position papers; and (2) a prohibition against
either state appointing an employee of its tax administration
as a member of the arbitration panel.
EXCHANGE OF INFORMATION
The Protocol would replace the existing Treaty's tax
information exchange provisions (contained in Article 26) with
updated rules that are consistent with current U.S. tax treaty
practice. The Protocol provides that the tax authorities of the
two countries shall exchange information relevant to carrying
out the provisions of the Convention or the domestic tax laws
of either country. This includes information that would
otherwise be protected by the bank secrecy laws of either
country. This broadens the Treaty's existing information
sharing provisions, which provide for information sharing only
where necessary for the prevention of income tax fraud or
similar activities. The Protocol also enables the United States
to obtain information (including from financial institutions)
from Switzerland whether or not Switzerland needs the
information for its own tax purposes.
IV. Entry Into Force
The proposed Protocol will enter into force between the
United States and Switzerland on the date of the later note in
an exchange of diplomatic notes in which the Parties notify
each other that their respective applicable procedures for
ratification have been satisfied. The various provisions of
this Protocol shall have effect as described in paragraph 2 of
Article V of the Protocol.
V. Implementing Legislation
As is the case generally with income tax treaties, the
Protocol is self-executing and does not require implementing
legislation for the United States.
VI. Committee Action
The committee held a public hearing on the Convention on
February 26, 2014. Testimony was received from Robert Stack,
Deputy Assistant Secretary (International Tax Affairs) at the
U.S. Department of the Treasury, Thomas Barthold, Chief of
Staff of the Joint Committee on Taxation, William Reinsch,
President of the National Foreign Trade Council, Paul Nolan,
Vice President, Tax for McCormick & Company, Inc., and Nancy
McLernon, President & CEO of the Organization for International
Investment. A transcript of the hearing is included in Annex 2
of this report.
On April 1, 2014, the committee considered the Protocol and
ordered it favorably reported by voice vote, with a quorum
present and without objection.
VII. Committee Comments
The Committee on Foreign Relations believes that the
Protocol will stimulate increased trade and investment,
strengthen provisions regarding the exchange of tax
information, and promote closer co-operation between the United
States and Switzerland. The committee therefore urges the
Senate to act promptly to give advice and consent to
ratification of the Protocol, as set forth in this report and
the accompanying resolution of advice and consent.
A. MANDATORY ARBITRATION
The arbitration provision in the Protocol is largely
consistent with the arbitration provisions included in recent
treaties negotiated with Canada, Germany, Belgium, and France.
It includes the modifications that were made first to the
French treaty provisions to reflect concerns expressed by the
Senate during its approval of the other treaties.
Significantly, the provision in the Protocol includes: (1) the
opportunity for taxpayer participation by providing information
directly to the arbitral panel through position papers; and (2)
a prohibition against either state appointing an employee of
its tax administration as a member of the panel.
B. EXCHANGE OF INFORMATION
The Protocol would replace the existing Treaty's tax
information exchange provisions with updated rules that are
consistent with current U.S. tax treaty practice. The Protocol
would allow the tax authorities of each country to exchange
information relevant to carrying out the provisions of the
Treaty or the domestic tax laws of either country, including
information that would otherwise be protected by the bank
secrecy laws of either country. It would also enable the United
States to obtain information (including from financial
institutions) from Switzerland whether or not Switzerland needs
the information for its own tax purposes.
The committee takes note of the difficulties faced in 2008-
2009 by the Internal Revenue Service and the Department of
Justice in obtaining information needed to enforce U.S. tax
laws against U.S. persons who utilized the services of UBS AG,
a multinational bank based in Switzerland. The committee
expects that the proposed Protocol--including in particular the
express provisions making clear that a country's bank secrecy
laws cannot prevent the exchange of tax information requested
pursuant to the treaty--should put the government of
Switzerland in a position to prevent recurrence of such an
incident in the future.
The committee takes note of Article 4 of the Protocol which
sets forth information that should be provided to the requested
State by the requesting State when making a request for
information under the Treaty. It is the committee's
understanding based upon the testimony and Technical
Explanation provided by the Department of the Treasury that,
while this paragraph contains important procedural requirements
that are intended to ensure that ``fishing expeditions'' do not
occur, the provisions of this paragraph will be interpreted by
the United States and Switzerland to permit the widest possible
exchange of information and not to frustrate effective exchange
of information. In particular, the committee understands that
with respect to the requirement that a request must include
``information sufficient to identify the person under
examination or investigation,'' it is mutually understood by
the United States and Switzerland that there can be
circumstances in which there is information sufficient to
identify the person under examination or investigation even
though the requesting State cannot provide the person's name.
C. DECLARATION ON THE SELF-EXECUTING NATURE OF THE PROTOCOL
The committee has included one declaration in the
recommended resolution of advice and consent. The declaration
states that the Protocol is self-executing, as is the case
generally with income tax treaties. Prior to the 110th
Congress, the committee generally included such statements in
the committee's report, but in light of the Supreme Court
decision in Medellin v. Texas, 128 S. Ct. 1346 (2008), the
committee determined that a clear statement in the Resolution
is warranted. A further discussion of the committee's views on
this matter can be found in Section VIII of Executive Report
110-12.
D. CONDITIONS RELATED TO REPORTING ON MANDATORY ARBITRATION
The committee has included conditions in the recommended
resolution of advice and consent. These types of conditions
have been included in prior resolutions of advice and consent
for tax treaties that provide for mandatory arbitration.
Specifically, not later than 2 years after the Protocol
enters into force and prior to the first arbitration conducted
pursuant to the binding arbitration mechanism provided for in
the Protocol, the Secretary of the Treasury is required to
transmit to the Committees on Finance and Foreign Relations of
the Senate and the Joint Committee on Taxation the text of the
rules of procedure applicable to arbitration panels, including
conflict of interest rules to be applied to members of the
arbitration panel.
In addition, not later than 60 days after a determination
has been reached by an arbitration panel in the tenth
arbitration proceeding conducted pursuant to the Protocol or
any similar treaties specifically identified, the Secretary of
the Treasury must submit to the Joint Committee on Taxation and
the Committee on Finance of the Senate a detailed report
regarding the operation and application of the arbitration
mechanism contained in the Protocol and such treaties. The
Secretary of the Treasury is further required to submit this
type of report on March 1 of the year following the year in
which the first report is submitted, and on an annual basis
thereafter for a period of five years. Finally, the section
clarifies that these reporting requirements supersede the
reporting requirements contained in paragraphs (2) and (3) of
section 3 of the resolution of advice and consent to
ratification of the 2009 France Protocol, approved by the
Senate on December 3, 2009.
E. AGREEMENTS RELATING TO REQUESTS FOR INFORMATION
In connection with efforts to obtain from Switzerland
information relevant to U.S. investigations of alleged tax
fraud committed by account holders of UBS AG, in 2009 and 2010
the United States and Switzerland entered into two agreements
pursuant to the U.S.-Switzerland Tax Treaty.
In particular, on August 19, 2009, the two governments
signed an Agreement Between the United States of America and
the Swiss Confederation on the request for information from the
Internal Revenue Service of the United States of America
regarding UBS AG, a corporation established under the laws of
the Swiss Confederation. On March 31, 2010, the two governments
signed a separate protocol amending the August 19, 2009
agreement.
The committee supports the objective of these agreements to
facilitate the exchange of information between Switzerland and
the United States in support of U.S. efforts to investigate and
prosecute alleged tax fraud by account holder of UBS AG.
The committee notes its concern, however, about one
provision of the March 31, 2010 protocol. Paragraph 4 of that
protocol provides that ``For the purposes of processing the
Treaty Request, this Agreement and its Annex shall prevail over
the existing Tax Treaty, its Protocol, and the Mutual Agreement
in case of conflicting provisions.''
Some could interpret the March 31, 2010, protocol's
language indicating that the August 19, 2009, agreement ``shall
prevail'' over the existing U.S.-Switzerland tax treaty to mean
that the agreement has the effect of amending the tax treaty.
The U.S.-Switzerland tax treaty is a treaty concluded with the
advice and consent of the Senate. Amendments to treaties are
themselves ordinarily subject to the advice and consent of the
Senate. The executive branch has not sought the Senate's advice
and consent to either the August 19, 2009 agreement or the
March 31, 2010 protocol. The executive branch has assured the
committee that the two governments did not intend this language
to have any effect on the obligations of the United States
under the U.S.-Switzerland tax treaty.
In order to avoid any similar confusion in the future, the
committee expects that the executive branch will refrain from
the use of similar language in any future agreements relating
to requests for information under tax treaties unless it
intends to seek the Senate's advice and consent for such
agreements.
VIII. Text of Resolution of Advice and Consent to Ratification
Resolved (two-thirds of the Senators present concurring
therein),
SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION
The Senate advises and consents to the ratification of the
Protocol Amending the Convention between the United States of
America and the Swiss Confederation for the Avoidance of Double
Taxation With Respect to Taxes on Income, signed at Washington
October 2, 1996, signed September 23, 2009, at Washington, with
a related agreement effected by an exchange of notes September
23, 2009, as corrected by an exchange of notes effected
November 16, 2010 (the ``Protocol'') (Treaty Doc. 112-1),
subject to the declaration of section 2.
SECTION 2. DECLARATION
The advice and consent of the Senate under section 1 is
subject to the following declaration:
The Protocol is self-executing.
SECTION 3. CONDITIONS
The advice and consent of the Senate under section 1 is
subject to the following conditions:
(1) Not later than 2 years after the Protocol enters
into force and prior to the first arbitration conducted
pursuant to the binding arbitration mechanism provided
for in the Protocol, the Secretary of the Treasury
shall transmit to the Committees on Finance and Foreign
Relations of the Senate and the Joint Committee on
Taxation the text of the rules of procedure applicable
to arbitration panels, including conflict of interest
rules to be applied to members of the arbitration
panel.
(2)(A) Not later than 60 days after a determination
has been reached by an arbitration panel in the tenth
arbitration proceeding conducted pursuant to the
Protocol or any of the treaties described in
subparagraph (B), the Secretary of the Treasury shall
prepare and submit to the Joint Committee on Taxation
and the Committee on Finance of the Senate, subject to
laws relating to taxpayer confidentiality, a detailed
report regarding the operation and application of the
arbitration mechanism contained in the Protocol and
such treaties. The report shall include the following
information:
(i) For the Protocol and each such treaty,
the aggregate number of cases pending on the
respective dates of entry into force of the
Protocol and each treaty, including the
following information:
(I) The number of such cases by
treaty article or articles at issue.
(II) The number of such cases that
have been resolved by the competent
authorities through a mutual agreement
as of the date of the report.
(III) The number of such cases for
which arbitration proceedings have
commenced as of the date of the report.
(ii) A list of every case presented to the
competent authorities after the entry into
force of the Protocol and each such treaty,
including the following information regarding
each case:
(I) The commencement date of the case
for purposes of determining when
arbitration is available.
(II) Whether the adjustment
triggering the case, if any, was made
by the United States or the relevant
treaty partner.
(III) Which treaty the case relates
to.
(IV) The treaty article or articles
at issue in the case.
(V) The date the case was resolved by
the competent authorities through a
mutual agreement, if so resolved.
(VI) The date on which an arbitration
proceeding commenced, if an arbitration
proceeding commenced.
(VII) The date on which a
determination was reached by the
arbitration panel, if a determination
was reached, and an indication as to
whether the panel found in favor of the
United States or the relevant treaty
partner.
(iii) With respect to each dispute submitted
to arbitration and for which a determination
was reached by the arbitration panel pursuant
to the Protocol or any such treaty, the
following information:
(I) In the case of a dispute
submitted under the Protocol, an
indication as to whether the presenter
of the case to the competent authority
of a Contracting State submitted a
Position Paper for consideration by the
arbitration panel.
(II) An indication as to whether the
determination of the arbitration panel
was accepted by each concerned person.
(III) The amount of income, expense,
or taxation at issue in the case as
determined by reference to the filings
that were sufficient to set the
commencement date of the case for
purposes of determining when
arbitration is available.
(IV) The proposed resolutions
(income, expense, or taxation)
submitted by each competent authority
to the arbitration panel.
(B) The treaties referred to in subparagraph (A)
are--
(i) the 2006 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, done at
Berlin June 1, 2006 (Treaty Doc. 109-20) (the
``2006 German Protocol'');
(ii) the Convention between the Government of
the United States of America and the Government
of the Kingdom of Belgium for the Avoidance of
Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, and
accompanying protocol, done at Brussels July 9,
1970 (the ``Belgium Convention'') (Treaty Doc.
110-3);
(iii) the Protocol Amending the Convention
between the United States of America and Canada
with Respect to Taxes on Income and on Capital,
signed at Washington September 26, 1980 (the
``2007 Canada Protocol'') (Treaty Doc. 110-15);
or
(iv) the Protocol Amending the Convention
between the Government of the United States of
America and the Government of the French
Republic for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and Capital, signed
at Paris August 31, 1994 (the ``2009 France
Protocol'') (Treaty Doc. 111-4).
(3) The Secretary of the Treasury shall prepare and
submit the detailed report required under paragraph (2)
on March 1 of the year following the year in which the
first report is submitted to the Joint Committee on
Taxation and the Committee on Finance of the Senate,
and on an annual basis thereafter for a period of five
years. In each such report, disputes that were
resolved, either by a mutual agreement between the
relevant competent authorities or by a determination of
an arbitration panel, and noted as such in prior
reports may be omitted.
(4) The reporting requirements referred to in
paragraphs (2) and (3) supersede the reporting
requirements contained in paragraphs (2) and
(3) of section 3 of the resolution of advice
and consent to ratification of the 2009 France
Protocol, approved by the Senate on December 3,
2009.
IX. Annex 1.--Technical Explanation
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL SIGNED
AT WASHINGTON ON SEPTEMBER 23, 2009 AMENDING THE CONVENTION BETWEEN THE
UNITED STATES OF AMERICA AND THE SWISS CONFEDERATION FOR THE AVOIDANCE
OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO
TAXES ON INCOME, SIGNED AT WASHINGTON ON OCTOBER 2, 1996, AS AMENDED BY
THE PROTOCOL SIGNED ON OCTOBER 2, 1996
This is a Technical Explanation of the Protocol signed at
Washington on September 23, 2009 and the related Exchange of
Notes (hereinafter the ``Protocol'' and ``Exchange of Notes''
respectively), amending the Convention between the United
States of America and the Swiss Confederation for the avoidance
of double taxation and the prevention of fiscal evasion with
respect to taxes on income, signed at Washington on October 2,
1996 as amended by the Protocol also signed on October 2, 1996
(together, the ``existing Convention'').
Negotiations took into account the U.S. Department of the
Treasury's current tax treaty policy and the Treasury
Department's Model Income Tax Convention, published on November
15, 2006 (the ``U.S. Model''). Negotiations also took into
account the Model Tax Convention on Income and on Capital,
published by the Organisation for Economic Cooperation and
Development (the ``OECD Model''), and recent tax treaties
concluded by both countries.
This Technical Explanation is an official guide to the
Protocol and Exchange of Notes. It explains policies behind
particular provisions, as well as understandings reached during
the negotiations with respect to the interpretation and
application of the Protocol and the Exchange of Notes.
References to the existing Convention are intended to put
various provisions of the Protocol into context. The Technical
Explanation does not, however, provide a complete comparison
between the provisions of the existing Convention and the
amendments made by the Protocol and Exchange of Notes. The
Technical Explanation is not intended to provide a complete
guide to the existing Convention as amended by the Protocol and
Exchange of Notes. To the extent that the existing Convention
has not been amended by the Protocol and Exchange of Notes, the
technical explanation of the Convention signed at Washington on
October 2, 1996 and the Protocol signed on also signed on
October 2, 1996 remains the official explanation. References in
this Technical Explanation to ``he'' or ``his'' should be read
to mean ``he or she'' or ``his or her.'' References to the
``Code'' are to the Internal Revenue Code of 1986, as amended.
The Exchange of Notes relates to the implementation of new
paragraphs 6 and 7 of Article 25 (Mutual Agreement Procedure),
which provide for binding arbitration of certain disputes
between the competent authorities.
ARTICLE 1
Article 1 of the Protocol revises Article 10 (Dividends) of
the existing Convention by restating paragraph 3. New paragraph
3 provides that dividends paid by a company resident in a
Contracting State shall be exempt from tax in that State if the
dividends are paid to and beneficially owned by a pension or
other retirement arrangement which is a resident of the other
Contracting State, or an individual retirement savings plan set
up in and owned by a resident of the other Contracting State,
and the competent authorities of the Contracting States agree
that the pension or retirement arrangement, or the individual
retirement savings plan, in a Contracting State generally
corresponds to a pension or other retirement arrangement, or to
an individual retirement savings plan, recognized for tax
purposes in the other Contracting State.
The exemption from tax provided in new paragraph 3 shall
not apply if the pension or retirement arrangement or the
individual retirement savings plan receiving the dividend
controls the company paying the dividend. Additionally, in
order to qualify for the benefits of new paragraph 3, a pension
or retirement arrangement or individual retirement savings plan
must satisfy the requirements of paragraph 2 of Article 22
(Limitation on Benefits).
ARTICLE 2
Article 2 of the Protocol replaces paragraph 6 of Article
25 (Mutual Agreement Procedure) of the existing Convention with
new paragraphs 6 and 7. New paragraphs 6 and 7 provide a
mandatory binding arbitration proceeding. Paragraph 1 of the
Exchange of Notes provides that binding arbitration will be
used to determine the application of the Convention in respect
of any case where the competent authorities have endeavored but
are unable to reach an agreement under Article 25 regarding
such application (the competent authorities may, however, agree
that the particular case is not suitable for determination by
arbitration. Paragraph 1 of the Exchange of Notes provides
additional rules and procedures that apply to a case considered
under the arbitration provisions.
New paragraph 6 provides that a case shall be resolved
through arbitration when the competent authorities have
endeavored but are unable to reach a complete agreement
regarding a case and the following three conditions are
satisfied. First, tax returns have been filed with at least one
of the Contracting States with respect to the taxable years at
issue in the case. Second, the case is not a case that the
competent authorities agree before the date on which
arbitration proceedings would otherwise have begun, is not
suitable for determination by arbitration. Third, all concerned
persons and their authorized representatives agree, according
to the provisions of new subparagraph (7)(d), not to disclose
to any other person any information received during the course
of the arbitration proceeding from either Contracting State or
the arbitration board, other than the determination of the
board (confidentiality agreement). The confidentiality
agreement may also be executed by any concerned person that has
the legal authority to bind any other concerned person on the
matter. For example, a parent corporation with the legal
authority to bind its subsidiary with respect to
confidentiality may execute a comprehensive confidentiality
agreement on its own behalf and that of its subsidiary.
New paragraph 6 provides that an unresolved case shall not
be submitted to arbitration if a decision on such case has
already been rendered by a court or administrative tribunal of
either Contracting State.
New paragraph 7 provides additional rules and definitions
to be used in applying the arbitration provisions. Subparagraph
(7)(a) provides that the term ``concerned person'' means the
person that brought the case to competent authority for
consideration under Article 25 and includes all other persons,
if any, whose tax liability to either Contracting State may be
directly affected by a mutual agreement arising from that
consideration. For example, a concerned person does not only
include a U.S. corporation that brings a transfer pricing case
with respect to a transaction entered into with its Swiss
subsidiary for resolution to the U.S. competent authority, but
also the Swiss subsidiary, which may have a correlative
adjustment as a result of the resolution of the case.
Subparagraph (7)(c) provides that an arbitration proceeding
begins on the later of two dates: two years from the
commencement date of that case (unless both competent
authorities have previously agreed to a different date), or the
earliest date upon which all concerned persons have entered
into a confidentiality agreement and the agreements have been
received by both competent authorities. The commencement date
of the case is defined by subparagraph (7)(b) as the earliest
date on which the information necessary to undertake
substantive consideration for a mutual agreement has been
received by both competent authorities.
Subparagraph (1)(c) of the Exchange of Notes provides that
notwithstanding the initiation of an arbitration proceeding,
the competent authorities may reach a mutual agreement to
resolve the case and terminate the arbitration proceeding.
Correspondingly, a concerned person may withdraw its request
for the competent authorities to engage in the Mutual Agreement
Procedure and thereby terminate the arbitration proceeding at
any time.
Subparagraph (1)(p) of the Exchange of Notes provides that
each competent authority will confirm in writing to the other
competent authority and to the concerned persons the date of
its receipt of the information necessary to undertake
substantive consideration for a mutual agreement. Such
information will be submitted to the competent authorities
under relevant internal rules and procedures of each of the
Contracting States. The information will not be considered
received until both competent authorities have received copies
of all materials submitted to either Contracting State by
concerned persons in connection with the mutual agreement
procedure.
The Exchange of Notes provides several procedural rules
once an arbitration proceeding under paragraph 6 of Article 25
has commenced, but the competent authorities may complete these
rules as necessary. In addition, as provided in subparagraph
(1)(f) of the Exchange of Notes, the arbitration panel may
adopt any procedures necessary for the conduct of its business,
provided the procedures are not inconsistent with any provision
of Article 25 or of the Exchange of Notes.
Subparagraph (1)(e) of the Exchange of Notes provides that
each Contracting State has 90 days from the date on which the
arbitration proceeding begins to send a written communication
to the other Contracting State appointing one member of the
arbitration panel. The members of the arbitration panel shall
not be employees of the tax administration which appoints them.
Within 60 days of the date the second of such communications is
sent, these two board members will appoint a third member to
serve as the chair of the panel. The competent authorities will
develop a non-exclusive list of individuals familiar in
international tax matters who may potentially serve as the
chair of the panel, but in any case, the chair can not be a
citizen or resident of either Contracting State. In the event
that the two members appointed by the Contracting States fail
to agree on the third member by the requisite date, these
members will be dismissed and each Contracting State will
appoint a new member of the panel within 30 days of the
dismissal of the original members.
Subparagraph (1)(g) of the Exchange of Notes establishes
deadlines for submission of materials by the Contracting States
to the arbitration panel. Each competent authority has 60 days
from the date of appointment of the chair to submit a Proposed
Resolution describing the proposed disposition of the specific
monetary amounts of income, expense or taxation at issue in the
case, and a supporting Position Paper. Copies of each State's
submissions are to be provided by the panel to the other
Contracting State on the date on which the later of the
submissions is submitted to the panel. Each of the Contracting
States may submit a Reply Submission to the panel within 120
days of the appointment of the chair to address points raised
in the other State's Proposed Resolution or Position Paper. If
one Contracting State fails to submit a Proposed Resolution
within the requisite time, the Proposed Resolution of the other
Contracting State is deemed to be the determination of the
arbitration panel in the case and the arbitration proceeding
will be terminated. Additional information may be supplied to
the arbitration panel by a Contracting State only at the
panel's request. The panel will provide copies of any such
requested information, along with the panel's request, to the
other Contracting State on the date on which the request or
response is submitted. All communication from the Contracting
States to the panel, and vice versa, is to be in writing
between the chair of the panel and the designated competent
authorities with the exception of communication regarding
logistical matters.
Subparagraph (1)(h) of the Exchange of Notes provides that
the presenter of the case to the competent authority of a
Contracting State may submit a Position Paper to the panel for
consideration by the panel. The Position Paper must be
submitted within 90 days of the appointment of the chair, and
the panel will provide copies of the Position Paper to the
Contracting States on the date on which the later of the
submissions of the Contracting States is submitted to the
panel.
Subparagraph (1)(i) of the Exchange of Notes provides that
the arbitration panel must deliver a determination in writing
to the Contracting States within six months of the appointment
of the chair. The determination must be one of the two Proposed
Resolutions submitted by the Contracting States. Subparagraph
(1)(b) of the Exchange of Notes provides that the determination
may only provide a determination regarding the amount of
income, expense or tax reportable to the Contracting States.
The determination has no precedential value, and consequently
the rationale behind a panel's determination would not be
beneficial and may not be provided by the panel.
Subparagraphs (1)(j) and (1)(k) of the Exchange of Notes
provide that unless any concerned person does not accept the
decision of the arbitration panel, the determination of the
panel constitutes a resolution by mutual agreement under
Article 25 and, consequently, is binding on both Contracting
States. Within 30 days of receiving the determination from the
competent authority to which the case was first presented, each
concerned person must advise that competent authority whether
the person accepts the determination. In addition, if the case
is in litigation, each concerned person who is a party to the
litigation must also advise, within the same time frame, the
court of its acceptance of the arbitration determination, and
withdraw from the litigation the issues resolved by the
arbitration proceeding. If any concerned person fails to advise
the competent authority and relevant court within the requisite
time, such failure is considered a rejection of the
determination. If a determination is rejected, the case cannot
be the subject of a subsequent arbitration proceeding.
For purposes of the arbitration proceeding, the members of
the arbitration panel and their staffs shall be considered
``persons or authorities'' to whom information may be disclosed
under Article 26 (Exchange of Information). Subparagraph (1)(n)
of the Exchange of Notes provides that all materials prepared
in the course of, or relating to the arbitration proceeding are
considered information exchanged between the Contracting
States. No information relating to the arbitration proceeding
or the panel's determination may be disclosed by members of the
arbitration panel or their staffs or by either competent
authority, except as permitted by the Convention and the
domestic laws of the Contracting States. Members of the
arbitration panel and their staffs must agree in statements
sent to each of the Contracting States in confirmation of their
appointment to the arbitration board to abide by and be subject
to the confidentiality and nondisclosure provisions of Article
26 of the Convention and the applicable domestic laws of the
Contracting States, with the most restrictive of the provisions
applying.
Subparagraph (1)(m) of the Exchange of Notes provides that
the applicable domestic law of the Contracting States
determines the treatment of any interest or penalties
associated with a competent authority agreement achieved
through arbitration.
Subparagraph (1)(l) of the Exchange of Notes provides that
any meetings of the arbitration panel shall be in facilities
provided by the Contracting State whose competent authority
initiated the mutual agreement proceedings in the case.
Subparagraph (1)(o) of the Exchange of Notes provides that fees
and expenses are borne equally by the Contracting States,
including the cost of translation services. In general, the
fees of members of the arbitration panel will be set at the
fixed amount of $2,000 per day or the equivalent amount in
Swiss francs. The expenses of members of the panel will be set
in accordance with the International Centre for Settlement of
Investment Disputes (ICSID) Schedule of Fees for arbitrators
(in effect on the date on which the arbitration board
proceedings begin). The competent authorities may amend the set
fees and expenses of members of the board. Meeting facilities,
related resources, financial management, other logistical
support, and general and administrative coordination of the
arbitration proceeding will be provided, at its own cost, by
the Contracting State whose competent authority initiated the
mutual agreement proceedings. All other costs are to be borne
by the Contracting State that incurs them.
ARTICLE 3
Article 3 of the Protocol replaces Article 26 (Exchange of
Information) of the existing Convention. This Article provides
for the exchange of information and administrative assistance
between the competent authorities of the Contracting States.
Paragraph 1 of Article 26
The obligation to obtain and provide information to the
other Contracting State is set out in new Paragraph 1. The
information to be exchanged is that which may be relevant for
carrying out the provisions of the Convention or the domestic
laws of the United States or of Switzerland concerning taxes
covered by the Convention, insofar as the taxation thereunder
is not contrary to the Convention. This language incorporates
the standard in 26 U.S.C. Section 7602 which authorizes the IRS
to examine ``any books, papers, records, or other data which
may be relevant or material.'' (emphasis added) In United
States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the
Supreme Court stated that the language ``may be'' reflects
Congress's express intention to allow the IRS to obtain ``items
of even potential relevance to an ongoing investigation,
without reference to its admissibility.'' (emphasis in
original) However, the language ``may be'' would not support a
request in which a Contracting State simply asked for
information regarding all bank accounts maintained by residents
of that Contracting State in the other Contracting State.
Exchange of information with respect to each State's
domestic law is authorized to the extent that taxation under
domestic law is not contrary to the Convention. Thus, for
example, information may be exchanged with respect to a covered
tax, even if the transaction to which the information relates
is a purely domestic transaction in the requesting State and,
therefore, the exchange is not made to carry out the
Convention. An example of such a case is provided in the OECD
Commentary: a company resident in one Contracting State and a
company resident in the other Contracting State transact
business between themselves through a third-country resident
company. Neither Contracting State has a treaty with the third
State. To enforce their internal laws with respect to
transactions of their residents with the third-country company
(since there is no relevant treaty in force), the Contracting
States may exchange information regarding the prices that their
residents paid in their transactions with the third-country
resident.
New paragraph 1 clarifies that information may be exchanged
that relates to the administration or enforcement of the taxes
covered by the Convention. Thus, the competent authorities may
request and provide information for cases under examination or
criminal investigation, in collection, on appeals, or under
prosecution.
Information exchange is not restricted by paragraph 1 of
Article 1 (General Scope). Accordingly, information may be
requested and provided under this Article with respect to
persons who are not residents of either Contracting State. For
example, if a third-country resident has a permanent
establishment in Switzerland, and that permanent establishment
engages in transactions with a U.S. enterprise, the United
States could request information with respect to that permanent
establishment, even though the thirdcountry resident is not a
resident of either Contracting State. Similarly, if a third-
country resident maintains a bank account in Switzerland, and
the Internal Revenue Service has reason to believe that funds
in that account should have been reported for U.S. tax purposes
but have not been so reported, information can be requested
from Switzerland with respect to that person's account, even
though that person is not the taxpayer under examination.
The obligation to exchange information under paragraph 1
does not limit a Contracting State's ability to employ
unilateral procedures otherwise available under its domestic
law to obtain, or to require the disclosure of, information
from a taxpayer or third party. Thus, the Protocol does not
prevent or restrict the United States' information gathering
authority or enforcement measures provided under its domestic
law.
Although the term ``United States'' does not encompass U.S.
possessions for most purposes of the Convention, Section 7651
of the Code authorizes the Internal Revenue Service to utilize
the provisions of the Internal Revenue Code to obtain
information from the U.S. possessions pursuant to a proper
request made under Article 26. If necessary to obtain requested
information, the Internal Revenue Service could issue and
enforce an administrative summons to the taxpayer, a tax
authority (or a government agency in a U.S. possession), or a
third party located in a U.S. possession.
Paragraph 2 of Article 26
New paragraph 2 provides assurances that any information
exchanged will be treated as secret, subject to the same
disclosure constraints as information obtained under the laws
of the requesting State. Information received may be disclosed
only to persons, including courts and administrative bodies,
involved in the assessment, collection, or administration of,
the enforcement or prosecution in respect of, or the
determination of the of appeals in relation to, the taxes
covered by the Convention. The information must be used by
these persons in connection with the specified functions.
Information may also be disclosed to legislative bodies, such
as the tax-writing committees of Congress and the Government
Accountability Office, engaged in the oversight of the
preceding activities. Information received by these bodies must
be for use in the performance of their role in overseeing the
administration of U.S. tax laws. Information received may be
disclosed in public court proceedings or in judicial decisions.
New paragraph 2 also provides that information received by
a Contracting State may be used for other purposes when such
information may be used for such other purpose under the laws
of both States, and the competent authority of the requested
State has authorized such use. This provision is derived from
the OECD Model Commentary, which explains that Contracting
States may add this provision to broaden the purposes for which
they may use information exchanged to allow other non-tax law
enforcement agencies and judicial authorities on certain high
priority matters (e.g., to combat money laundering, corruption,
or terrorism financing). To ensure that the laws of both States
would allow the information to be used for such other purpose,
the Contracting States will only seek consent under this
provision to the extent that the non-tax use is allowed under
the provisions of the Mutual Legal Assistance Treaty between
the United States and Switzerland which entered into force on
January 23, 1977 (or as it may be amended or replaced in the
future).
Paragraph 3 of Article 26
New paragraph 3 provides that the obligations undertaken in
paragraphs 1 and 2 to exchange information do not require a
Contracting State to carry out administrative measures that are
at variance with the laws or administrative practice of either
State. Nor is a Contracting State required to supply
information not obtainable under the laws or administrative
practice of either State, or to disclose trade secrets or other
information, the disclosure of which would be contrary to
public policy.
Thus, a requesting State may be denied information from the
other State if the information would be obtained pursuant to
procedures or measures that are broader than those available in
the requesting State. However, the statute of limitations of
the Contracting State making the request for information should
govern a request for information. Thus, the Contracting State
of which the request is made should attempt to obtain the
information even if its own statute of limitations has passed.
In many cases, relevant information will still exist in the
business records of the taxpayer or a third party, even though
it is no longer required to be kept for domestic tax purposes.
While paragraph 3 states conditions under which a
Contracting State is not obligated to comply with a request
from the other Contracting State for information, the requested
State is not precluded from providing such information, and
may, at its discretion, do so subject to the limitations of its
internal law.
Paragraph 4 of Article 26
New paragraph 4 provides that when information is requested
by a Contracting State in accordance with this Article, the
other Contracting State is obligated to obtain the requested
information as if the tax in question were the tax of the
requested State, even if that State has no direct tax interest
in the case to which the request relates. In the absence of
such a paragraph, some taxpayers have argued that paragraph
3(a) prevents a Contracting State from requesting information
from a bank or fiduciary that the Contracting State does not
need for its own tax purposes. This paragraph clarifies that
paragraph 3 does not impose such a restriction and that a
Contracting State is not limited to providing only the
information that it already has in its own files.
Paragraph 5 of Article 26
New paragraph 5 provides that a Contracting State may not
decline to provide information because that information is held
by financial institutions, nominees or persons acting in an
agency or fiduciary capacity. Thus, paragraph 5 would
effectively prevent a Contracting State from relying on
paragraph 3 to argue that its domestic bank secrecy laws (or
similar legislation relating to disclosure of financial
information by financial institutions or intermediaries)
override its obligation to provide information under paragraph
1. This paragraph also requires the disclosure of information
regarding the beneficial owner of an interest in a person, such
as the identity of a beneficial owner of bearer shares.
Paragraph 5 further provides that the requested State has the
power to meet its obligations under Article 26, and paragraph 5
in particular, even though it may not have such powers for
purposes of enforcing its own tax laws.
Paragraph 2 of the Exchange of Notes provides that the
Contracting States understand that there may be instances when
paragraph 3 of Article 26 may be invoked to decline a request
to supply information that is held by a person described in
paragraph 5 of the Article. Such refusal must be based,
however, on reasons unrelated to that person's status as a
bank, financial institution, agent, fiduciary or nominee, or
the fact that the information relates to ownership interests.
For example, a Contracting State may decline to provide
information relating to confidential communications between
attorneys and their clients that are protected from disclosure
under that State's domestic law.
Treaty effective dates and termination in relation to exchange of
information
Article 5 of the Protocol sets forth rules governing the
effective dates of the provisions of Articles 3 and 4 of the
Protocol. The competent authorities are obligated to exchange
information described in new paragraph 5 of Article 26 if that
information relates to any date beginning on or after September
23, 2009, the date on which the Protocol was signed
notwithstanding the provisions of the existing Convention. In
all other cases of application of new Article 26, the competent
authorities are obligated to exchange information that relates
to taxable periods beginning on or after January 1 of the year
following the date of signature of the Protocol.
A tax administration may also seek information with respect
to a year for which a treaty was in force after the treaty has
been terminated. In such a case the ability of the other tax
administration to act is limited. The treaty no longer provides
authority for the tax administrations to exchange confidential
information. They may only exchange information pursuant to
domestic law or other international agreement or arrangement.
ARTICLE 4
Article 4 of the Protocol replaces paragraph 10 of the
Protocol to the existing Convention. New Protocol paragraph 10
provides greater detail regarding how the provisions of revised
Article 26 (Exchange of Information) will be applied.
New Protocol paragraph (10)(a) lists the information that
should be provided to the requested State by the requesting
State when making a request for information under paragraph 26
of the Convention. Clause (i) of paragraph (10)(a) provides
that a request must contain information sufficient to identify
the person under examination or investigation. In a typical
case, information sufficient to identify the person under
examination or investigation would include a name, and to the
extent known, an address, account number or similar identifying
information. It is mutually understood that there can be
circumstances in which there is information sufficient to
identify the person under examination or investigation even
though the requesting State cannot provide a name.
Clause (ii) of paragraph (10)(a) provides that a request
for information must contain the period of time for which the
information is requested. Clause (iii) of paragraph (10)(a)
provides that a request for information must contain a
statement of the information sought, including its nature and
the form in which the requesting State wishes to receive the
information from the requested State. Clause (iv) of paragraph
(10)(a) provides that a request for information must contain a
statement of the tax purpose for which the information is
sought. Clause (v) of paragraph (10)(a) provides that the
request must include the name and, to the extent known, the
address of any person believed to be in possession of the
requested information.
New Protocol paragraph (10)(b) provides confirmation of the
extent to which information is to be exchanged pursuant to new
paragraph 1 of Article 26. The purposes of referring to
information that may be relevant is to provide for exchange of
information to the widest extent possible. This standard
nevertheless does not allow the Contracting States to engage in
so-called ``fishing expeditions'' or to request information
that is unlikely to be relevant to the tax affairs of a given
taxpayer. For example, the language ``may be'' would not
support a request in which a Contracting State simply asked for
information regarding all bank accounts maintained by residents
of that Contracting State in the other Contracting State. New
Protocol paragraph (10)(b) further confirms that the provisions
of new Protocol paragraph (10)(a) are to be interpreted in
order not to frustrate effective exchange of information.
New Protocol paragraph (10)(c) provides that the requesting
State may specify the form in which information is to be
provided (e.g., authenticated copies of original documents
(including books, papers, statements, records, accounts and
writings)). The intention is to ensure that the information may
be introduced as evidence in the judicial proceedings of the
requesting State. The requested State should, if possible,
provide the information in the form requested to the same
extent that it can obtain information in that form under its
own laws and administrative practices with respect to its own
taxes.
New Protocol paragraph (10)(d) confirms that Article 26 of
the Convention does not restrict the possible methods for
exchanging information, but also does not commit either
Contracting State to exchange information on an automatic or
spontaneous basis. The Contracting States expect to provide
information to one another necessary for carrying out the
provisions of the Convention.
New Protocol paragraph (10)(e) provides clarification
regarding the application of paragraph (3)(a) of revised
Article 26, which provides that in no case shall the provisions
of paragraphs 1 and 2 be construed so as to impose on a
Contracting State the obligation to carry out administrative
measures at variance with the laws and administrative practice
of that or the other Contracting State. The Contracting States
understand that the administrative procedural rules regarding a
taxpayer's rights (such as the right to be notified or the
right to an appeal) provided for in the requested State remain
applicable before information is exchanged with the requesting
State. Notification procedures should not, however, be applied
in a manner that, in the particular circumstances of the
request, would frustrate the efforts of the requesting State.
The Contracting States further understand that such rules are
intended to provide the taxpayer a fair procedure and are not
to prevent or unduly delay the exchange of information process.
ARTICLE 5
Article 5 of the Protocol contains the rules for bringing
the Protocol into force and giving effect to its provisions.
Paragraph 1
Paragraph 1 provides for the ratification of the Protocol
by both Contracting States according to their constitutional
and statutory requirements. Instruments of ratification shall
be exchanged as soon as possible.
In the United States, the process leading to ratification
and entry into force is as follows: Once a treaty has been
signed by authorized representatives of the two Contracting
States, the Department of State sends the treaty to the
President who formally transmits it to the Senate for its
advice and consent to ratification, which requires approval by
two-thirds of the Senators present and voting. Prior to this
vote, however, it generally has been the practice for the
Senate Committee on Foreign Relations to hold hearings on the
treaty and make a recommendation regarding its approval to the
full Senate. Both Government and private sector witnesses may
testify at these hearings. After the Senate gives its advice
and consent to ratification of the protocol or treaty, an
instrument of ratification is drafted for the President's
signature. The President's signature completes the process in
the United States.
Paragraph 2
Paragraph 2 provides that the Convention will enter into
force upon the exchange of instruments of ratification. The
date on which a treaty enters into force is not necessarily the
date on which its provisions take effect. Paragraph 2,
therefore, also contains rules that determine when the
provisions of the treaty will have effect.
Under paragraph 2(a), the Convention will have effect with
respect to taxes withheld at source (principally dividends,
interest and royalties) for amounts paid or credited on or
after the first day of January of the year following the entry
into force of the Protocol. For example, if instruments of
ratification are exchanged on October 25 of a given year, the
withholding rates specified in paragraph 3 of Article 10
(Dividends) would be applicable to any dividends paid or
credited on or after January 1 of the following year. If for
some reason a withholding agent withholds at a higher rate than
that provided by the Convention (perhaps because it was not
able to re-program its computers before the payment is made), a
beneficial owner of the income that is a resident of the other
Contracting State may make a claim for refund pursuant to
section 1464 of the Code.
Paragraph (2)(b) provides rules for the effective dates of
Articles 3 and 4 of the Protocol. Those Articles shall have
application for requests made on or after the date of entry
into force of the Protocol. Clause (i) provides that
information described in paragraph 5 of revised Article 26
(Exchange of Information) shall be exchanged upon request if
such information relates to any date beginning on or after
September 23, 2009, the date of signature of the Protocol.
Clause (ii) provides that in all other cases, information shall
be exchanged pursuant to Articles 3 and 4 if the information
relates to taxable periods beginning on or after January 1,
2010.
Paragraph (2)(c) sets forth a specific effective date for
purposes of the binding arbitration provisions of new
paragraphs 6 and 7 of revised Article 25 (Mutual Agreement
Procedure) (Article 2 of the Protocol). Paragraph (2)(c)
provides new paragraphs 6 and 7 of revised Article 25 is
effective for cases (i) that are under consideration by the
competent authorities as of the date on which the Protocol
enters into force, and (ii) cases that come under such
consideration after the Protocol enters into force. In
addition, paragraph (2)(c) provides that the commencement date
for cases that are under consideration by the competent
authorities as of the date on which the Protocol enters into
force is the date the Protocol enters into force. As a result,
cases that are open and unresolved as of the entry into force
of the Protocol will go into binding arbitration on the later
of two years after the entry into force of the Protocol (unless
both competent authorities have previously agreed to a
different date) and the earliest date upon which the agreement
required by new paragraph (6)(d) of revised Article 25 has been
received by both competent authorities.
X. Annex 2.--Transcript of Hearing of February 26, 2014
TREATIES
----------
WEDNESDAY, FEBRUARY 26, 2014
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 10:31 a.m., in
room SD-419, Dirksen Senate Office Building, Hon. Benjamin L.
Cardin presiding.
Present: Senators Cardin and Barrasso.
OPENING STATEMENT OF HON. BENJAMIN L. CARDIN,
U.S. SENATOR FROM MARYLAND
Senator Cardin. Good morning and welcome to the Senate
Foreign Relations Committee hearing dealing with treaties that
are currently pending before the United States Senate.
I want to thank Senator Menendez and Senator Corker for
allowing Senator Barrasso and I to conduct this hearing. It is
a very important area, the Senate consideration of treaties
under the Constitution.
So today we will consider five treaties that are before the
Senate, a tax treaty with Hungary, a tax treaty with Chile, an
amendment of a tax treaty with Switzerland, an amendment of a
tax treaty with Luxembourg, and the Convention on Mutual
Administration Assistance on Tax Matters.
The primary purpose of tax treaties is to avoid double
taxation so that U.S. companies can do business overseas and
not be discriminated against, and foreign companies can do
business in the United States.
The second primary function is to aid enforcement of our
respective tax laws to combat tax evasion and corruption.
Now, there are many other side benefits in addition to
avoiding double taxation and assisting in proper tax
administration. The side benefits of tax treaties are open
markets. It is a clear signal of our willingness to do business
in other countries. It removes barriers to trade. And it also
encourages new countries to join
our treaty network, making it easier for us to do international
business.
Specifically, the five treaties that are before us,
Hungary, this tax treaty was completed in 2010, and it prevents
treaty shopping by using uniform rules to determine the
applicable laws. Chile represents over a decade of negotiations
and the completion of a tax treaty.
I note that if the Chilean treaty is ratified it would be
the third Latin American country that we will have a tax treaty
with. This is a region in our hemisphere that is critically
important to the United States. So moving forward with tax
treaties in our hemisphere is a matter of high priority.
And Switzerland and Luxembourg, these are amendments to
treaties that were negotiated 3 years ago. They basically deal
with the exchange of information. I do point out the timing of
the Switzerland one is particularly relevant, in that the
initial interest in modifying the treaty with Switzerland came
out of a hearing in 2008, the Permanent Subcommittee on
Investigation dealing with greater access for U.S. tax
collectors on information from Switzerland. That has been the
main reason for the amendments to the existing tax treaty with
Switzerland. The same thing is true with Luxembourg, as far as
access to information.
The convention similarly allows for the free exchange of
information to assist in tax administration. It has 60
signatures.
Let me just make one final comment before yielding to
Senator Barrasso. In three of these matters--Hungary,
Luxembourg, and Switzerland--this is deja vu for me. I chaired
a hearing on these three tax treaties in 2011, so these are not
new to our committee.
They cleared our committee, were reported out, but we were
not able to get them considered on the floor of the United
States Senate.
I do welcome today's hearing, because it allows us to have
an update on the three treaties we had previous hearings on, in
addition to making a record on the other two treaties.
The difference between this hearing and the one in 2011, is
in 2011, we only had administration witnesses. Today, we will
also have witnesses from the private sector, which I think is
also very helpful for us to establish a full record as to the
need for the Senate to consider these tax treaties.
And I do hope that we will act promptly in the committee
and also on the floor of the United States Senate, so that we
can carry out one of our most important responsibilities, and
that is the ratification of treaties entered into by the United
States.
With that, let me yield to Senator Barrasso.
OPENING STATEMENT OF HON. JOHN BARRASSO,
U.S. SENATOR FROM WYOMING
Senator Barrasso. Thank you very much, Mr. Chairman.
I appreciate all of the witnesses being here today to talk
about these five international tax treaties.
The United States has entered into numerous tax treaties
with foreign countries to address double taxation. The treaties
also attempt to prevent tax avoidance, tax evasion, through the
exchange of sensitive tax-related information.
As we examine these treaties, it is important that we make
sure that measures are in place to protect U.S. taxpayer
information.
So I look forward to the hearing today, Mr. Chairman, and
learning more about how the United States can benefit from
these agreements.
Thank you, Mr. Chairman.
Senator Cardin. We do have a statement from Credit Suisse
that, without objection, will be made part of our record.
I know we are still waiting for Mr. Stack, but we will
start with Mr. Barthold, the chief of staff of the Joint
Committee on Taxation, a familiar face in the United States
Senate. We normally see you in a different committee setting,
but it is nice to see you in the Senate Foreign Relations
Committee.
Mr. Barthold, we will start with your testimony.
STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION, WASHINGTON, DC
Mr. Barthold. Thank you very much, Chairman Cardin and
Senator Barrasso. My name is Thomas A. Barthold. I am the chief
of staff of the Joint Committee on Taxation, and it is my
pleasure to present the testimony of the staff of the Joint
Committee today concerning the proposed income tax treaties
with Hungary and Chile, and the proposed tax protocols with
Luxembourg and Sweden, and the proposed protocol amending the
Multilateral Mutual Administrative Assistance Treaty.
The Joint Committee, as is our custom, has prepared
pamphlets covering the proposed treaties and protocols,
providing detailed descriptions of the protocols and treaties,
making comparisons to the U.S. Model Income Tax Treaty, where
appropriate. In addition, our pamphlets have provided a
detailed discussion of issues raised by the proposed treaties
and protocols.
My testimony today will highlight three issues related to
the agreements before you today. I will focus on the limitation
on benefits provisions in the treaties with Chile and Hungary,
the general issues related to exchange of information, and the
expansion of the Mutual Administrative Assistance agreement.
Regarding limitation on benefits provisions, like the U.S.
Model, the proposed treaties with Chile and Hungary include
extensive limitation on benefit rules. I note that this is a
really important development in the case of Hungary, because
the present treaty between the United States and Hungary is one
of only seven U.S. income tax treaties that does not presently
include any limitation on benefit rules.
Now, while the limitation on benefits rules in the proposed
treaties with Chile and Hungary are similar to the rules in
other recent treaties and similar to those in the U.S. Model,
they are not identical. And I will highlight two particular
differences.
First, there are provisions in the Hungary treaty related
to what are called derivative benefits. This is like other
recent treaties in that there are rules that are generally
intended to allow a treaty country company to receive treaty
benefits for an item of income if that company's owners reside
in a country that is in the same trading bloc as the treaty
country--Hungary, in this case--and would have been entitled to
the same benefits for that income had those owners derived the
income directly. In essence, this is a broadened sense of the
notion of resident, for purposes of this tax treaty. The Chile
treaty, on the other hand, like the U.S. Model treaty, does not
include a derivative benefits rule.
Both the proposed treaties with Chile and Hungary include
special rules intended to allow treaty country benefits for a
resident of a treaty country that functions as a headquarters
company. Again, this is a broadened notion of the idea of
resident for purposes of these treaties. While U.S. income tax
treaties in force with Austria, Australia, Belgium, the
Netherlands, and Switzerland include similar rules for
headquarters companies, the United States model treaty does not
include these rules.
An increasingly important area of treaties, as the chairman
noted, has been provisions related to the exchange of
information, and I would like to highlight three points related
to the treaties and protocols that are before you today.
One type of information exchange known as automatic
exchange of information or routine exchange of information
occurs when the treaty countries identify categories of
information that are consistently relevant to the tax
administration of the receiving treaty country and the
countries agree to share such information on an ongoing basis.
The United States, for example, is annually providing over 2\1/
2\ million items of information about U.S. source income by
residents of treaty countries in a number of different treaty
relationships today.
In 2012, the Treasury finalized some regulations that
expand information reporting by United States financial
institutions on interest paid to nonresident aliens. Now,
presently, we only routinely share that information with
Canada. This is potentially a substantial expansion of the
amount of information that we might be willing to share on an
automatic basis, and I think that gives rise to questions
related to what the Treasury hopes to achieve, if they, in
fact, hope to achieve expanded sharing of this information. Do
they have the administrative capability to expand the exchange
of information that might be sought under the treaties that are
before you today?
And more generally, since there have been issues related to
how automatic information is exchanged--the requirements, the
details--perhaps the committee might request some guidance from
the Treasury related to the United States experience under
present practice, and what they see as possible impediments to
greater use of automatic exchanges and perhaps ideas also for
improving those exchanges.
Now the second area of information exchange is referred to
as specific requests for information. Specific exchange is an
exchange that occurs when one treaty country provides
information to the other country in response to a specific
request by the latter country for information that is relevant
to an ongoing investigation of a particular tax matter.
Now, a problem that has arisen, and this has been a
recurring issue with potential exchanges with Switzerland, has
been that some treaty countries have declined to exchange
information in response to specific requests intended to
identify classes of persons. In the United States, an example
of this is the John Doe summons for information. So the
committee might be interested in the Treasury's views with
respect to the agreements with Hungary, Chile, Luxembourg, and
Sweden, as to whether the required exchange of information in
response to specific requests will allow exchanges that are
comparable to our John Doe summons.
The final point on exchange of information is there has
been specific criticism by other countries of the United States
regarding our standards for ``know your customer rules'' for
financial institutions--are they in sync with foreign
practice?--and the extent to which we can or cannot provide
information on beneficial ownership of business entities in the
United States.
Do these issues, do these areas of controversy, limit,
perhaps, the Treasury's ability to make effective use of the
reciprocal exchange agreements that are in place in these and
other treaties?
Permit me to take a last moment just to highlight what I
think is perhaps the most important aspect of the expansion of
the Mutual Administrative Assistance agreement. This agreement
opens membership in that Convention to states that are neither
OECD nor Council of Europe members.
On one hand, the inclusive standard for permitting nations
to participate has opened this Convention to a number of
significant trade partners of the United States. On the other
hand, it requires the United States to initiate an exchange of
information program with jurisdictions with which we have not
previously entered into any bilateral relationship.
So to the extent that there may be jurisdictions with whom
the United States has no exchange of information program, a
relevant question would be the extent to which we are able to
satisfy ourselves that each jurisdiction is in fact an
appropriate partner for exchange of information, and also,
given the potential expansive nature of the number of countries
included, whether it will be a manageable project for the
Treasury Department to handle expanded information
requirements.
A number of other issues are addressed in more detail in
the Joint Committee pamphlets that I referenced earlier. I am
happy to answer any questions that the committee may have at
this time or in the future.
Thank you very much.
[The prepared statement of Mr. Barthold follows:]
Prepared Statement of Thomas A. Barthold
My name is Thomas A. Barthold. I am Chief of Staff of the Joint
Committee on Taxation. It is my pleasure to present the testimony of
the staff of the Joint Committee on Taxation today concerning the
proposed income tax treaties with Hungary and Chile, the proposed tax
protocols with Luxembourg and Switzerland, and the proposed protocol
amending the Multilateral Mutual Administrative Assistance Ttreaty.\1\
overview
As in the past, the Joint Committee staff has prepared pamphlets
covering the proposed treaties and protocols.\2\ The pamphlets provide
detailed descriptions of the proposed treaties and protocols,
including, in the case of the income tax treaties and protocols,
comparisons with the United States Model Income Tax Convention of
November 15, 2006 (``U.S. Model treaty''), which reflects preferred
U.S. tax treaty policy, and with other recent U.S. tax treaties. The
pamphlets also provide detailed discussions of issues raised by the
proposed treaties and protocols. We consulted with the Treasury
Department and with the staff of your committee in analyzing the
proposed treaties and protocols and in preparing the pamphlets.
The principal purposes of the proposed income tax treaties and
protocols are to reduce or eliminate double taxation of income earned
by residents of either country from sources within the other country
and to prevent avoidance or evasion of the taxes of the two countries.
The proposed income tax treaties and protocols also are intended to
promote close economic cooperation between the treaty countries and to
eliminate possible barriers to trade and investment caused by
overlapping taxing jurisdictions of the treaty countries. As in other
U.S. income tax treaties, these objectives principally are achieved
through each country's agreement to limit, in certain specified
situations, its right to tax income derived from its territory by
residents of the other country.
The principal purpose of the multilateral mutual assistance treaty
is to promote increased cooperation in tax administration and
enforcement among the parties to the treaty.
The proposed treaty with Hungary would replace an existing income
tax treaty signed in 1979. The proposed protocol with Luxembourg would
amend an existing tax treaty that was signed in 1996. The proposed
protocol with Switzerland would amend an existing tax treaty and
previous protocol that were both signed in 1996. The proposed treaty
with Chile is the first income tax treaty with that nation. The last
proposed protocol under consideration by your committee amends the
multilateral mutual administrative assistance in tax matters agreement
that the United States ratified in 1991.
As a general matter, the U.S. Model treaty provides a framework for
U.S. income tax treaty policy and a starting point for income tax
treaty negotiations with our treaty partners. Income tax treaties that
the United States has negotiated since 2006 in large part follow the
U.S. Model treaty. The proposed income tax treaties and protocols that
are the subject of this hearing are, accordingly, generally consistent
with the provisions found in the U.S. Model treaty. There are, however,
some key differences from the U.S. Model treaty that I will discuss.
My testimony today will highlight three issues related to the
agreements being considered by your committee, the limitation-on-
benefits provisions in the treaties with Chile and Hungary, exchange of
information, and the expansion of the mutual administrative assistance
agreement.
limitation-on-benefits provisions in treaties with chile and hungary
In general
Like the U.S. Model treaty, the proposed treaties with Chile and
Hungary include extensive limitation-on-benefits rules (Chile, Article
24; Hungary, Article 22). Limitation-on-benefits provisions are
intended to prevent third-country residents from benefiting
inappropriately from a treaty that generally grants benefits only to
residents of the two treaty countries. This practice is commonly
referred to as ``treaty shopping.'' A company may engage in treaty
shopping by, for example, organizing a related treaty-country resident
company that has no substantial presence in the treaty country. The
third-country company may arrange, among other transactions, to have
the related treaty-country company remove, or strip, income from the
treaty country in a manner that reduces the overall tax burden on that
income. Limitation-on-benefits rules may prevent these and other
transactions by requiring that an individual or a company seeking
treaty benefits have significant connections to a treaty country as a
condition of eligibility for benefits.
The present treaty between the United States and Hungary is one of
only seven U.S. income tax treaties that do not include any limitation-
on-benefits rules.\3\ Two of those seven treaties, including the
treaties with Hungary and Poland, include provisions providing for
complete exemption from withholding on interest payments from one
treaty country to the other treaty country that may present attractive
opportunities for treaty shopping.\4\ For example, a November 2007
report prepared by the Treasury Department at the request of the U.S.
Congress suggests that the income tax treaty with Hungary has
increasingly been used for treaty-shopping purposes as the United
States adopted modern limitation-on-benefits provisions in its other
treaties. In 2004, U.S. corporations that were at least 25-percent
foreign owned made $1.2 billion in interest payments to related parties
in Hungary, the seventh-largest amount of interest paid to related
parties in any single country.\5\ With its inclusion of modern
limitation-on-benefits rules, the proposed treaty with Hungary
represents a significant opportunity to mitigate treaty shopping.
Nevertheless, your committee may wish to inquire of the Treasury
Department as to its plans to address the remaining U.S. income tax
treaties that do not include limitation-on-benefits provisions.
Contrasts with the U.S. Model treaty
Although the limitation-on-benefits rules in the proposed treaties
with Chile and Hungary are similar to the rules in other recent and
proposed U.S. income tax treaties and protocols and in the U.S. Model
treaty, they are not identical, and your committee may wish to inquire
about certain differences. In particular, your committee may wish to
examine the rules for publicly traded companies, derivative benefits,
and certain triangular arrangements. Your committee also may wish to
ask the Treasury Department about the special limitation-on-benefits
rules applicable to headquarters companies.
Publicly traded companies
Under the proposed treaties with Chile and Hungary, a publicly
traded company that is a resident of a treaty country is eligible for
all the benefits of the proposed treaty if it satisfies a regular
trading test, which requires that the company's principal class of
shares is primarily traded on a recognized stock exchange, and also
satisfies either a management and control test or a primary trading
test.
The primary trading test in the proposed treaty with Hungary
requires that a company's principal class of shares be primarily traded
on a recognized stock exchange located in the treaty country of which
the company is a resident or, in the case of a Hungarian company, on a
recognized stock exchange in another European Union (``EU'') or
European Free Trade Association (``EFTA'') country, or in the case of a
U.S. company, in another North American Free Trade Agreement country. A
similar primary trading test was included in the recent protocols with
France and New Zealand.
The primary trading test in the proposed treaty with Chile follows
the U.S. Model treaty, requiring the trading to occur on a stock
exchange in the treaty country of which the relevant company is a
resident; trading on a stock exchange in another country may not be
used to satisfy the test.
As in the U.S. Model treaty, in both the proposed Chile treaty and
the proposed Hungary treaty a recognized stock exchange includes
certain exchanges specified in the treaty as well as any other stock
exchange agreed upon by the competent authorities of the treaty
countries. Your committee may wish to explore the rationale underlying
the identification of recognized stock exchanges for purposes of
limitations of benefits, and the criteria the Treasury Department
considers when negotiating over the definition of a recognized stock
exchange.
Derivative benefits
Like other recent treaties, the proposed treaty with Hungary
includes derivative benefits rules that are generally intended to allow
a treaty-country company to receive treaty benefits for an item of
income if the company's owners (referred to in the proposed treaty as
equivalent beneficiaries) reside in a country that is in the same
trading bloc as the treaty country and would have been entitled to the
same benefits for the income had those owners derived the income
directly. The derivative benefits rules may grant treaty benefits to a
treaty-country resident company in circumstances in which the company
would not qualify for treaty benefits under any of the other
limitation-on-benefits provisions. The Chile treaty, like the U.S.
Model treaty does not include derivative benefits rules.
Triangular arrangements
The proposed treaties with Chile and Hungary include special
antiabuse rules intended to deny treaty benefits in certain
circumstances in which a Chilean or Hungarian resident company earns
U.S.-source income attributable to a third-country permanent
establishment and is subject to little or no tax in the third
jurisdiction and (as applicable) Chile or Hungary. A rule on triangular
arrangements is not included in the U.S. Model treaty, but similar
antiabuse rules are included in other recent treaties and protocols.
Headquarters companies
The proposed treaties with Chile and Hungary include special rules
intended to allow treaty-country benefits for a resident of a treaty
country that functions as a headquarters company and that satisfies
certain requirements intended to ensure that the headquarters company
performs substantial supervisory and administrative functions for a
group of companies: among other requirements, (1) that the group of
companies is genuinely multinational; (2) that the headquarters company
is subject to the same income tax rules in its country of residence as
would apply to a company engaged in the active conduct of a trade or
business in that country; and (3) that the headquarters company has
independent authority in carrying out its supervisory and
administrative functions.
While U.S. income tax treaties in force with Austria, Australia,
Belgium, the Netherlands, and Switzerland include similar rules for
headquarters companies, the U.S. Model treaty does not include these
rules.
exchange of information
Tax treaties establish the scope of information that can be
exchanged between treaty countries. Exchange of information provisions
first appeared in the late 1930s,\6\ and are now included in all double
tax conventions to which the United States is a party. A broad
international consensus has coalesced around the issue of bank
transparency for tax purposes and strengthened in recent years, in part
due to events involving one of Switzerland's largest banks, UBS AG, the
global financial crisis, and the general increase in globalization.
Greater attention to all means of restoring integrity and stability to
financial institutions has led to greater efforts to reconcile the
conflicts between jurisdictions, particularly between jurisdictions
with strict bank secrecy and those seeking information to enforce their
own tax laws.\7\ As a result, the committee may wish to inquire as to
whether the U.S. Model treaty published in 2006 remains the appropriate
standard by which to measure an effective exchange of information
program.
Although the United States has long had bilateral income tax
treaties in force with Hungary, Luxembourg, and Switzerland, the United
States has engaged in relatively limited exchange of information under
these tax treaties. With Luxembourg and Switzerland, the limitations
stem from strict bank secrecy rules in those jurisdictions. The
proposed protocols with Luxembourg and Switzerland are a response to
that history as well as part of the international trend in exchange of
information.
The pamphlets prepared by the Joint Committee staff provide
detailed overviews of the information exchange articles of the proposed
income tax treaties with Chile and Hungary and the proposed protocols
with Luxembourg and Switzerland. They also describe the extent to which
those articles differ from the U.S. Model treaty's rules on information
exchange. I note that since we published our May 20, 2011, pamphlets
describing the agreements with Hungary, Luxembourg, and Switzerland,
additional information about exchange of information involving those
countries has become available, and similar analysis is available about
information exchange with Chile.
In June 2011, the Organisation for Economic Cooperation and
Development (``OECD'') published reports of Phase I Peer Reviews of
Hungary and Switzerland, as well as a report on its Combined Phase I
and Phase II Peer Review of the United States.\8\ The OECD published a
report of its Phase I Peer Review of Chile in April 2012. The OECD
published a report of its Phase I Peer Review of Luxembourg in
September 2011 and a report of its Phase II Peer Review in July 2013.
Table 3 of the appendix of the recently published Joint Committee
explanation of the proposed protocol amending the mutual administrative
assistance agreement provides a summary of the status and outcomes of
the OECD peer reviews as of February 6, 2014.\9\
Here I wish to highlight first those issues related to the
effectiveness of information exchange under income tax treaties that
are common to both the proposed treaties and proposed protocols under
consideration today, and second, issues specific to the proposed
protocols with Luxembourg and Switzerland.
Effectiveness of U.S. information exchange agreements in general
The Joint Committee staff's pamphlets describe in detail several
practical issues related to information exchange under income tax
treaties. I will briefly note three issues: the usefulness of automatic
exchange of information, the ability of the United States to provide
information about beneficial ownership of foreign-owned entities, and,
finally, the limitations on specific requests for information.
Automatic exchange of information
The OECD standards do not require exchange other than upon specific
requests for information, although the language permits the treaty
countries to agree to provide for other exchange mechanisms. The OECD,
in its commentary to the exchange of information provisions in the OECD
Model treaty, specifies that the treaty ``allows'' the competent
authorities to exchange information in any of three ways that treaty
countries have traditionally operated\10\--routine, spontaneous,\11\ or
specific exchanges.\12\
The committee may wish to explore issues related to ``routine
exchange of information.'' In this type of exchange, also referred to
as ``automatic exchange of information.'' the treaty countries identify
categories of information that are consistently relevant to the tax
administration of the receiving treaty country and agree to share such
information on an ongoing basis, without the need for a specific
request. The type of information, when it will be provided, and how
frequently it will be provided are determined by the respective
Competent Authorities after consultation. Once an agreement is reached,
the information is automatically provided. The United States, for
example, annual provides over 2.5 million items of information about
U.S.-source income received by residents of treaty countries to those
treaty partners.
The committee may wish to inquire about the (1) the extent to which
the United States presently engages in automatic exchange of taxpayer-
specific information, (2) practical hurdles to greater use of automatic
exchange, and (3) whether it anticipates significant changes in that
practice with the ratification of the documents presently before the
committee.
The committee may also wish to inquire about regulations finalized
in 2012 that expand information reporting by U.S. financial
institutions on interest paid to nonresident aliens. In support of
those regulations, the Preamble states ``requiring routine reporting to
the IRS of all U.S. bank deposit interest paid to any nonresidential
alien individual will further strengthen the United States exchange of
information program consistent with adequate provisions for
reciprocity, usability and confidentiality in respect of this
information.''\13\ Such reporting was not previously required, except
with respect to payments to residents of Canada.\14\ The IRS has
published a list of the countries whose residents are subject to the
reporting requirements, and a list of countries with respect to which
the reported information will be automatically exchanged. The first
list includes 78 countries. The second list includes only one,
Canada.\15\
In the past, there have been concerns that information received
pursuant to automatic exchanges under bilateral and multilateral
agreements was not in a usable form. The OECD has developed standards
for the electronic format of such exchanges, to enhance their utility
to tax administration.\16\ Despite these efforts to standardize the
information exchanged and improve its usefulness, there remain numerous
shortcomings, both practical and legal, in the routine exchange of
information. Chief among them is the lack of taxpayer identification
numbers (``TINs'') in the information provided under the exchange,
despite the recommendation of the OECD that member States provide such
information.\17\ The committee may wish in inquire about the United
State's experience, impediments to greater use of automatic exchanges,
and preferences for improving such exchanges.
Ability of United States to provide beneficial ownership
information
The United States has come under increasing pressure to eliminate
policies that provide foreign persons with the ability to shelter
income. The criticism has focused on disparities between the U.S.
standards and foreign standards governing ``know-your-customer'' rules
for financial institutions and the maintenance of information on
beneficial ownership. With respect to the latter, U.S. norms have been
criticized in recent years.\18\ The committee may wish to explore the
extent to which either the existing U.S. know-your-customer rules or
the corporate formation and ownership standards prevent the United
States from providing information about beneficial ownership on a
reciprocal basis with its treaty countries. The committee may also
consider whether there are steps to take that would help refute the
perception that the United States permits states to operate as tax
havens and that would help the United States better respond to
information requests from treaty countries who suspect that their own
citizens and residents may be engaging in illegal activities through
U.S. corporations and limited liability companies.\19\
Specific requests for information
The committee may wish to inquire as to the extent to which a
request that a treaty country provide information in response to a John
Doe summons\20\ is a specific request within the meaning of the Article
26, and whether protracted litigation similar to that which occurred in
the UBS litigation\21\ can be avoided or shortened.
``Specific'' exchange, is an exchange which occurs when one treaty
country provides information to the other treaty country in response to
a specific request by the latter country for information that is
relevant to an ongoing investigation of a particular tax matter. One
problem with specific exchange has been that some treaty countries have
declined to exchange information in response to specific requests
intended to identify limited classes of persons.\22\ Your committee may
wish to seek assurances that, under the proposed treaties with Hungary
and Chile and the proposed protocols with Luxembourg and Switzerland,
treaty countries are required to exchange information in response to
specific requests that are comparable to John Doe summonses under
domestic law.\23\ As discussed below, this has been a recurring issue
with exchanges with Switzerland.
To the extent that there were perceived deficiencies in the former
information exchange relationships with Luxembourg and Switzerland, to
the extent that the United States may have little recent practical
experience in cooperating with Chile or Hungary on tax matters, and to
the extent that OECD peer reviews have concluded that impediments to
effective information exchange exist in Chile, Hungary, Luxembourg, or
Switzerland, your committee may wish to seek reassurances that any
obstacles to effective information exchange have been eliminated.\24\
Information exchange with Luxembourg and Switzerland
Switzerland
The exchange of information article in the 1951 U.S.-Swiss treaty
was limited to ``prevention of fraud or the like.'' Under the treaty,
Switzerland applied a principle of dual criminality, requiring that the
purpose for which the information was sought also be a valid purpose
under local law. Because ``fraud or the like'' was limited to nontax
crimes in Switzerland, information on civil or criminal tax cases was
not available. The provision was substantially revised for the present
treaty, signed in 1996, and accompanied by a contemporaneous protocol
that elaborated on the terms used in the exchange of information
article. That 1996 protocol was intended to broaden the circumstances
under which tax authorities could exchange information to include tax
fraud or fraudulent conduct, both civil and criminal. It provided a
definition at paragraph 10 of ``tax fraud'' to mean ``fraudulent
conduct that causes or is intended to cause an illegal and substantial
reduction in the amount of tax paid to a contracting state.'' In
practice, exchange apparently remained limited, leading the competent
authorities to negotiate a subsequent memorandum of understanding that
included numerous examples of the facts upon which a treaty country may
base its suspicions of fraud to support a request to exchange
information.\25\
In March 2009, the Swiss Federal Council withdrew its reservation
regarding Article 26 (Exchange of Information) of the OECD Model
treaty, thus apparently adopting the OECD standards on administrative
assistance in tax matters.\26\ It simultaneously announced key elements
that it would require as conditions to be met in any new agreements.
The Swiss conditions established by the Federal Council limited
administrative assistance to individual cases and only in response to a
specific and justified request. Although Switzerland is considered by
the OECD to be a jurisdiction that has fully committed to the
transparency standards of the OECD, the OECD report on Phase I of its
peer review of Switzerland states that the Swiss authorities' initial
insistence on imposing identification requirements as a predicate for
exchange of information were inconsistent with the international
standards and that additional actions would be needed to permit the
review process to proceed to Phase II. Those actions include bringing a
significant number of its agreements into line with the standard and
taking action to confirm that all new agreements are interpreted in
line with the standard.
The proposed protocol, by replacing Article 26 (Exchange of
Information and Administrative Assistance) of the present treaty and
amending paragraph 10 of the 1996 protocol, closely adheres to the
principles announced by Switzerland. It also conforms to the standards,
if not the language, of the exchange of information provisions in the
U.S. Model treaty in many respects. As a result, the proposed protocol
may facilitate greater exchange of information than has occurred in the
past, chiefly by eliminating the present treaty requirement that the
requesting treaty country establish tax fraud or fraudulent conduct or
the like as a basis for exchange of information and providing that
domestic bank secrecy laws and lack of a domestic interest in the
requested information are not possible grounds for refusing to provide
requested information. Lack of proof of fraud, lack of a domestic
interest in the information requested, and Swiss bank secrecy laws were
cited by Swiss authorities in declining to exchange information. The
proposed protocol attempts to ensure that subsequent changes in
domestic law cannot be relied upon to prevent access to the information
by including in the proposed protocol a self-executing statement that
the competent authorities are empowered to obtain access to the
information notwithstanding any domestic legislation to the contrary.
Nevertheless, there are several areas in which questions about the
extent to which the exchange of information article in the proposed
protocol may prove effective are warranted. The proposed revisions to
paragraph 10 of the 1996 protocol reflect complete adoption of the
first element listed above in the Swiss negotiating position,
``limitation of administrative assistance to individual cases and thus
no fishing expeditions.'' The limitation poses issues regarding (1) the
extent to which the Swiss will continue to reject requests that do not
name the taxpayer as a result of the requirement that a taxpayer be
``typically'' identified by name, and (2) the standard of relevance to
be applied to requests for information, in light of the caveat against
``fishing expeditions.'' In addition, the appropriate interpretation of
the scope of purposes for which exchanged information may be used may
be unnecessarily limited by comments in the Technical Explanation. In
particular, although paragraph 2 of Article 26 (Exchange of
Information), as modified by the proposed protocol, generally prohibits
persons who receive information exchanged under the article from using
the information for purposes other than those related to the
administration, assessment, or collection of taxes covered by the
treaty, the paragraph also allows the information to be used for other
purposes so long as the laws of both the United States and Switzerland
permit that use and the competent authority of the requested country
consents to that use. The Technical Explanation, however, states that
one treaty country (for example, the United States) will seek the other
treaty country's (for example, Switzerland's) consent under this
expanded use provision only to the extent that use is allowed under the
provisions of the U.S.-Switzerland Mutual Legal Assistance Treaty that
entered into force in 1977.
Luxembourg
The proposed protocol with Luxembourg, by replacing Article 28
(Exchange of Information and Administrative Assistance) of the 1996
treaty, is consistent with both the OECD and U.S. Model treaties. There
are several areas in which questions are warranted about the extent to
which the new article as revised in the proposed protocol may prove
effective. These questions arise not from the language in the proposed
protocol itself but from the mutual understandings reflected in
diplomatic notes exchanged at the time the protocol was signed.
Potential areas of concern are found in statements in the diplomatic
notes concerning (1) the obligation to ensure tax authority access to
information about beneficial ownership of juridical entities and
financial institutions, other than publicly traded entities, to the
extent that such information is of a type that is within the possession
or control of someone within the territorial jurisdiction, (2) the
requirement that all requests must provide the identity of the person
under investigation, (3) the standard of relevance to be applied in
stating a purpose for which the information is sought, and (4) the
requirement that requests include a representation that all other means
of obtaining the information have been attempted, except to the extent
that to do so would cause disproportionate difficulties.
Moreover, the OECD's Phase II peer review of Luxembourg's
implementation of transparency and information exchange standards
concluded that Luxembourg is noncompliant with OECD standards. Your
committee may wish to inquire into the effect that Luxembourg's failure
to comply with OECD standards in implementing exchange of information
may have on its exchange relationship with the United States.
expansion of mutual administrative assistance agreement
One of the most significant changes to the multilateral convention
made by the proposed protocol is the opening of membership in the
convention to states that are neither OECD nor Council of Europe
members. In the most recently available list of signatories, dated
December 23, 2013, there are a number of countries who are not members
of G20,\27\ the OECD or the Council of Europe: Colombia, Costa Rica,
Ghana, Guatemala, and Tunisia. All members of G20 are among the
signatories. Those members of G20 who are not also members of either
the OECD or Council of Europe include Argentina, Brazil, India,
Indonesia, Saudi Arabia and South Africa. Thus, on the one hand, the
inclusive standard for permitting nations to participate has opened the
multilateral convention to a number of significant trade partners of
the United States. On the other hand, it requires the United States to
initiate an exchange of information program with jurisdictions with
which it has not previously entered into a bilateral relationship.
Among the signatories that have neither a tax treaty nor a TIEA with
the United States are Albania, Andorra, Croatia, Ghana, Nigeria, Saudi
Arabia, and Singapore.
The extent to which any of those states are jurisdictions with
which the United States has previously participated in an exchange of
information program and whether the program has operated satisfactorily
are areas in which the committee may wish to inquire. To the extent
that they are jurisdictions with whom the United States has no exchange
of information program under a bilateral agreement, the committee may
wish to inquire about the extent to which the United States has been
able to satisfy itself that each jurisdiction is an appropriate partner
for exchange of information. The committee may also wish to inquire
whether the
expanded exchange of information requirements will be manageable.
The committee may also wish to inquire about the circumstances
under which the United States would object to accession by a nonmember
state, as contemplated under the procedures for securing the unanimous
consent of the governing body of the treaty before the agreement may
enter into effect with respect to that nonmember state. For example, in
explaining its general standards for considering entry into a bilateral
agreement with a jurisdiction, Treasury has stated, ``. . . prior to
entering into an information exchange agreement with another
jurisdiction, the Treasury Department and the IRS closely review the
foreign jurisdiction's legal framework for maintaining the
confidentiality of taxpayer information. In order to conclude an
information exchange agreement with another country, the Treasury
Department and the IRS must be satisfied that the foreign jurisdiction
has the necessary legal safeguards in place to protect exchanged
information and that adequate penalties apply to any breach of that
confidentiality.''\28\
conclusion
The matters that I have described in this testimony are addressed
in more detail in the Joint Committee staff pamphlets on the proposed
treaties and protocols. I am happy to answer any questions that your
committee may have at this time or in the future.
----------------
End Notes
\1\This document may be cited as follows: Joint Committee on
Taxation, ``Testimony of the Staff of the Joint Committee on Taxation
Before the Senate Committee on Foreign Relations Hearing on the
Proposed Tax Treaties with Chile and Hungary, the Proposed Tax
Protocols with Luxembourg and Switzerland, and the Proposed Protocol
Amending the Multilateral Convention on Mutual Administrative
Assistance in Tax Matters'' (JCX-11-14), February 26, 2014. This
publication can also be found at http://www.jct.gov.
\2\Joint Committee on Taxation, ``Explanation of Proposed Income
Tax Treaty Between the United States and Hungary'' (JCX-32-11), May 20,
2011; Joint Committee on Taxation, ``Explanation of Proposed Protocol
to the Income Tax Treaty Between the United States and Luxembourg''
(JCX-30-11), May 20, 2011; Joint Committee on Taxation, ``Explanation
of Proposed Protocol to the Income Tax Treaty Between the United States
and Switzerland'' (JCX-31-11), May 20, 2011; Joint Committee on
Taxation, ``Explanation of Proposed Protocol Amending the Multilateral
Convention on Mutual Administrative Assistance in Tax Matters'' (JCX-9-
14), February 21, 2014; Joint Committee on Taxation, ``Explanation of
Proposed Income Tax Treaty Between the United States and Chile'' (JCX-
10-14), February 24, 2014. The pamphlets describing the proposed treaty
with Hungary and the proposed protocols with Luxembourg and Switzerland
were prepared in connection with a Committee on Foreign Relations
hearing held on June 7, 2011.
\3\The other income tax treaties without limitation-on-benefits
rules are the ones with Greece (1953), Pakistan (1959), the Philippines
(1982), Poland (1976), Romania (1976), and the U.S.S.R (1976). The
United States and Poland signed a new income tax treaty on February 13,
2013, that includes comprehensive limitation-on-benefits rules, but
that treaty has not yet been transmitted to the Senate for
consideration for ratification (and therefore has not yet taken
effect). Following the dissolution of the U.S.S.R., the income tax
treaty with the U.S.S.R. applies to the countries of Armenia,
Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikstan,
Turkmenistan, and Uzbekistan.
\4\The income tax treaty with Greece also provides for complete
exemption from withholding on interest, although it contains
restrictions that limit the availability of the exemption, such that a
Greek company receiving interest from a U.S. company does not qualify
for the exemption if it controls, directly or indirectly, more than 50
percent of the U.S. company.
\5\Department of the Treasury, ``Report to the Congress on Earnings
Stripping, Transfer Pricing and U.S. Income Tax Treaties'' (Nov. 28,
2007). The report states that, as of 2004, it does not appear that the
U.S.-Poland income tax treaty has been extensively exploited by third-
country residents. Although the report also focused on Iceland to the
same extent as Hungary, a 2007 Income Tax Convention with Iceland that
includes a modern limitation-on-benefits provision has since taken
effect.
\6\Article XV of the U.S.-Sweden Double Tax Convention, signed on
March 23, 1939.
\7\See, Joint Committee on Taxation, ``Description of Revenue
Provisions Contained in the President's Fiscal Year 2010 Budget
Proposal; Part Three: Provisions Related to the Taxation of Cross-
Border Income and Investment'' (JCS-4-09), September 2009. Section VI
of that pamphlet provides an overview of the international efforts to
address these issues.
\8\Phase I reviews evaluate the quality of a country's legal and
regulatory framework for information exchange, and Phase II reviews
assess the practical implementation of that framework.
\9\See Joint Committee on Taxation, ``Explanation of Proposed
Protocol to the Multilateral Convention on Mutual Administrative
Assistance in Tax Matters'' (JCX-9-14), February 21, 2014, p. 32.
\10\OECD, Commentary on the Model Treaty Article 26, par. 9 as
revised in OECD, ``Update to Article 26 of the OECD Model Tax
Convention and Its Commentary,'' (July 12, 2012), available at http://
www.oecd.org/ctp/exchange-of-tax-information/120718_Article%2026-
ENG_no%
20cover%20%282%29.pdf
\11\A ``spontaneous exchange of information'' occurs when one
treaty country who is in possession of an item of information that it
determines may interest the other treaty country for purposes of its
tax administration spontaneously transmits the information to its
treaty country through their respective competent authorities.
\12\A ``specific exchange'' is a formal request by one contracting
state for information that is relevant to an ongoing investigation of a
particular tax matter. These cases are generally taxpayer specific.
Those familiar with the case prepare a request that explains the
background of the tax case and the need for the information and submit
it to the Competent Authority in their country. If he determines that
it is an appropriate use of the treaty authority, he forwards it to his
counterpart.
\13\Preamble to Treas. Reg. sec. 1.6049-4(b)(5). T.D. 9584, April
12, 2012.
\14\Treas. Reg. sec. 1.6049-4(b)(5).
\15\Rev. Proc. 2012-24 2012 I.R.B. Lexis 242 (April 17, 2012).
\16\See OECD, Committee on Fiscal Affairs, ``Manual on the
Implementation of Exchange of Information Provisions for Tax Purposes,
Module 3'' (January 23, 2006) (``OECD Exchange Manual'').
\17\OECD Exchange Manual refers to a recommendation dating to 1997,
``Recommendation on the use of Tax Identification Numbers in an
International Context'' C(97)29/FINAL (1997).
\18\Financial Action Task Force, IMF, 11Summary of the Third Mutual
Evaluation Report on Anti-Money Laundering and Combating the Financing
of Terrorism United States of America, pp. 10-11'' (June 23, 2006);
Government Accountability Office, ``Company Formations: Minimal
Ownership Information Is Collected and Available,'' a report to the
Permanent Subcommittee on Investigations, Committee on Homeland
Security and Governmental Affairs, U.S. Senate GAO-06-376 (April 2006);
Government Accountability Office, ``Suspicious Banking Activities:
Possible Money Laundering by US Corporations Formed for Russian
Entities,'' GAO-01-120 (October 31, 2006).
\19\E.g., the ``Incorporation Transparency and Law Enforcement
Assistance Act,'' S. 569, 111th Congress (2009), would require States
to obtain and periodically update beneficial ownership information from
persons who seek to form a corporation or limited liability company.
\20\When the existence of a possibly noncompliant taxpayer is known
but not his identity, as in the case of holders of offshore bank
accounts or investors in particular abusive transactions, the IRS is
able to issue a summons to learn the identity of the taxpayer, but must
first meet greater statutory requirements, to guard against fishing
expeditions. Prior to issuance of the summons intended to learn the
identity of unnamed ``John Does,'' the United States must seek judicial
review in an ex parte proceeding. In its application and supporting
documents, the United States must establish that the information sought
pertains to an ascertainable group of persons, that there is a
reasonable basis to believe that taxes have been avoided, and that the
information is not otherwise available.
\21\See, United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.),
enforcing a ``John Doe summons'' which requested the identities of U.S.
persons believed to have accounts at UBS in Switzerland. On August 19,
2009, the United States and UBS announced an agreement (approved by the
Swiss Parliament on June 17, 2010) under which UBS provided the
requested information.
\22\For example, a petition to enforce a John Doe summons served by
the United States on UBS, AG was filed on February 21, 2009,
accompanied by an affidavit of Barry B. Shott, the U.S. competent
authority for the United States-Switzerland income tax treaty.
Paragraph 16 of that affidavit notes that Switzerland had traditionally
taken the position that a specific request must identify the taxpayer.
See United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.). On August
19, 2009, after extensive negotiations between the Swiss and U.S.
governments, the United States and UBS announced that UBS had agreed to
provide information on over 4,000 U.S. persons with accounts at UBS.
\23\Under a John Doe summons, the U.S. Internal Revenue Service
(``IRS'') asks for information to identify unnamed ``John Doe''
taxpayers. The IRS may issue a John Doe summons only with judicial
approval, and judicial approval is given only if there is a reasonable
basis to believe that taxes have been avoided and that the information
sought pertains to an ascertainable group of taxpayers and is not
otherwise available.
\24\Certain OECD conclusions about information exchange with
Luxembourg and Switzerland are noted below. The OECD peer reviews of
Chile and Hungary found that although those jurisdictions generally are
compliant with OECD standards, each country had certain deficiencies
preventing fully effective information exchange.
\25\``Mutual Agreement of January 23, 2003, Regarding the
Administration of Article 26 (Exchange of Information) of the Swiss-
U.S. Tax Convention of October 2, 1996,'' reprinted at paragraph 9106,
``Tax Treaties,'' (CCH 2005).
\26\See ``Switzerland to adopt OECD standard on administrative
assistance in fiscal matters,'' Federal Department of Finance, FDF
(March 13, 2009), available at http://www.efd.admin.ch/dokumentation/
medieninformationen/00467/index.html?lang=en&msg-id=25863 (last
accessed March 1, 2011).
\27\G20, or the Group of Twenty, is a forum for international
economic cooperation among the member countries and the European Union.
The leaders of the members meet annually, while finance and banking
regulators meet more frequently throughout the year. They work closely
with a number of international organizations, including the OECD.
\28\Preamble to Treas. Reg. 1.6049-4(b)(5). T.D. 9584, April 12,
2012.
Senator Cardin. Thank you for your testimony.
Mr. Stack, we understand you were delayed because of a
lockdown near the White House, so we certainly understand that
and look forward to hearing your testimony.
It is the practice of this committee that the written
statements of all of our witnesses, without objection, will be
made part of our record.
STATEMENT OF ROBERT STACK, DEPUTY ASSISTANT SECRETARY FOR
INTERNATIONAL TAX AFFAIRS, DEPARTMENT OF THE TREASURY,
WASHINGTON, DC
Mr. Stack. Thank you, Mr. Chairman Cardin, Ranking Member
Barrasso. And again, I do apologize for our lateness, and I
appreciate your understanding.
I appreciate the opportunity to appear before you today to
recommend favorable action on five tax agreements that are
pending before this committee. As Senator Cardin has already
indicated, the written statement will be made part of the
record.
The proposed agreements before the committee today with
Chile, Hungary, Luxembourg, and Switzerland, as well as the
protocol to the Convention on Mutual Administrative Assistance
in Tax Matters, which I will refer to today as the Multilateral
Convention, serve to further the goals of our tax treaty
network, in particular the goals of increased transparency and
relief from double taxation.
Because my written statement and the technical explanations
written by the Treasury Department provide detailed
explanations of the provisions of the agreements, I would like
to describe briefly only the most noteworthy aspects of each of
these agreements.
Chile, the proposed income tax convention with Chile, if
approved by the Senate and the Chilean legislature, would only
be the second income tax convention in force in South America,
a region into which the Treasury Department has long sought to
expand the U.S. treaty network.
Because all tax conventions are the product of a
negotiation, the proposed convention with Chile contains a
number of variations from the U.S. Model practice, many of
which are typically seen in U.S. tax treaties with developing
countries. Other provisions reflect particular aspects of the
Chilean tax system and treaty policy, which I am happy to
discuss in further detail.
The proposed income tax convention with Hungary was
negotiated to bring the current convention, signed in 1979,
into closer conformity with current U.S. tax treaty policy.
Most importantly, the proposed convention contains a
comprehensive limitation on benefits provision designed to
prevent third-party investors from inappropriately taking
advantage of the treaty, a practice known as treaty shopping.
The current convention does not contain a limitation on
benefits article, and as result, has been abused by third
country investors in recent years.
For this reason, revising the current convention has been a
top tax treaty priority for the Department.
The proposed protocol with Luxembourg replaces the limited
information exchange provisions of the existing tax convention
with Luxembourg with updated rules that are consistent with
current U.S. tax treaty practice and the standards for exchange
of information developed by the OECD. The proposed protocol
allows the
tax authorities of each country to exchange information that is
foreseeably relevant to carrying out the provisions of the
agreement or the domestic laws of either country. The proposed
protocol would allow the United States to obtain information
from Luxembourg, whether or not Luxembourg needs the
information for its own tax purposes, and provides that
requests for information cannot be declined solely because the
information is held by a bank or another financial institution.
The proposed protocol with Switzerland replaces the limited
information exchange provisions of the existing tax convention
with Switzerland with updated rules, which are substantively
the same as those contained in the proposed protocol with
Luxembourg, which I just described. The Treasury Department is
hopeful that the proposed protocol with Switzerland, if
approved by the Senate, will greatly improve the collaboration
between the United States and Swiss revenue authorities to
exchange information to enforce tax laws.
The proposed protocol with Switzerland also updates the
provisions of the existing convention with respect to the
mutual agreement procedure by incorporating mandatory binding
arbitration of certain disputes that the tax authorities have
been unable to resolve after a reasonable period of time.
The arbitration provision in the proposed protocol with
Switzerland is similar to the arbitration provisions in the
U.S. tax treaties with Germany, Belgium, Canada, and France,
which have been approved by the Senate in recent years, and
also includes the provisions that we have in the French
agreement that were specifically indicated by this committee
would be helpful addition to our arbitration provisions.
The proposed protocol to the Multilateral Convention, if
approved by the Senate, would establish several new information
exchange relationships for the United States, which would
enhance the IRS's ability to fight tax evasion, but would also
bring the exchange provisions in the Multilateral Convention up
to modern standards.
The existing Multilateral Convention is open for signature
by countries that are members of either the OECD or the Council
of Europe. The proposed protocol amends the Multilateral
Convention to allow any country to become a signatory provided
all the other signatories are satisfied that such country has a
sufficient legal framework to ensure that information exchanged
pursuant to the agreement will be kept confidential.
Although the existing convention contains broad provisions
for the exchange of information, it predates the current
internationally agreed standards of information. Thus, the
obligations contained in the existing convention are subject to
certain domestic law limitations that could impede full
exchange of information.
In particular, the existing convention does not require the
provision of bank information on request, nor does it override
so-called domestic tax interest requirements. Those are
requirements that the supplying country itself have a tax
interest in the information being sought by the requesting
party, and the more modern agreements delete those
requirements.
In contrast, the current internationally agreed standards
on transparency and exchange of information provide for full
exchange of information on request in all tax matters without
regard to domestic tax interest requirement or bank secrecy
laws.
The proposed protocol amends the existing convention in
order to bring it into conformity with these internationally
agreed standards, which are also reflected in the OECD's Model
Tax Convention on Income and Capital and the U.S. Model Income
Tax Convention.
In addition, the proposed protocol brings the
confidentiality rules of the existing convention regarding
exchanged information, and the limitations regarding the use of
such information, in conformity with the United States and OECD
models.
Consistent with the international recognition of the need
for maximum transparency in tax matters, all five agreements
before you today contain updated provisions for the full
exchange of information between the tax authorities that are
consistent with U.S. and international standards.
I would like to take the opportunity to assure the
committee that as part of the Treasury Department's efforts to
increase transparency in tax matters, we place a high priority
on ensuring that information exchanged pursuant to an
international tax agreement will not be misused by our treaty
partners. The United States will only exchange tax information
with a country if we are satisfied that the country has
adequate confidentiality laws that will protect the information
we provide.
Let me repeat our appreciation for the committee's interest
in these agreements. We are also grateful for the assistance
and cooperation of the staffs of the committee and of the Joint
Committee on Taxation. And I would like to recognize the
tireless work of our Treasury team.
We urge the committee and Senate to take prompt and
favorable action on all of these agreements, and we would be
happy to answer any questions you have.
[The prepared statement of Mr. Stack follows:]
Prepared Statement of Robert B. Stack
Chairman Cardin, Ranking Member Barrasso, and distinguished members
of the committee, I appreciate the opportunity to appear today to
recommend, on behalf of the administration, favorable action on five
tax treaties pending before this committee. We appreciate the
committee's interest in these treaties and in the U.S. tax treaty
network overall.
This administration is committed to eliminating barriers to cross-
border trade and investment, and tax treaties are one of the primary
means for eliminating such tax barriers. Tax treaties provide greater
certainty to businesses and individuals regarding their potential
liability to tax in foreign jurisdictions, and they allocate taxing
rights between jurisdictions to reduce the risk of double taxation. Tax
treaties also ensure that businesses and individuals are not subject to
discriminatory taxation in foreign jurisdictions.
A tax treaty reflects a balance of benefits that is agreed to when
the treaty is negotiated. In some cases, changes in law or policy in
one or both of the treaty partners make the partners more willing to
increase the benefits beyond those provided in an existing treaty; in
these cases, revisions to a treaty may be very beneficial. In other
cases, developments in one or both countries, or international
developments more generally, may make it desirable to revisit an
existing treaty to prevent improper exploitation of treaty provisions
and eliminate unintended and inappropriate consequences in the
application of the treaty. In yet other cases, the United States seeks
to establish new income tax treaties with countries in which there is
significant U.S. direct investment, and with respect to which U.S.
companies are experiencing double taxation that is not otherwise
relieved by domestic law remedies, such as the U.S. foreign tax credit.
Both in setting our overall negotiation priorities and in negotiating
individual treaties, our focus is on ensuring that our tax treaty
network fulfills its goals of facilitating-cross border trade and
investment and preventing tax evasion.
Additionally, our tax treaties have long played an important role
in helping to prevent tax evasion. A key element of U.S. tax treaties
is exchange of information between tax authorities. Under tax treaties,
one country may request from the other such information that is
foreseeably relevant for the proper administration of the first
country's tax laws. Because access to information from other countries
is critically important to the full and fair enforcement of U.S. tax
laws, information exchange has long been a top priority for the United
States in its tax treaty program. I would like to emphasize to the
committee that as we establish exchange of information relationships,
the administration places a high priority on ensuring that any
information exchanged will be strictly protected by our treaty
partners. The United States will only exchange tax information with a
country if we are satisfied that the county will protect the
information we have provided.
The proposed tax treaties before the committee today are with
Chile, Hungary, Luxembourg, and Switzerland, in addition to the
proposed protocol to the Convention on Mutual Administrative Assistance
in Tax Matters (the ``Multilateral Convention''), and each serves to
further the goals of our tax treaty network. The proposed tax treaty
with Chile would be the first tax treaty between the United States and
Chile, which the U.S. business community has been calling for. The
proposed tax treaty with Hungary would replace an existing treaty the
revision of which has been a top tax treaty priority for the Treasury
Department. It contains a comprehensive ``limitation on benefits''
article designed to address possible abusive treaty shopping. The
proposed protocols with Luxembourg and Switzerland modify existing tax
treaty relationships. The proposed protocol to the Multilateral
Convention brings the Multilateral Convention, to which the United
States is a party, into conformity with the current international
standards for exchanges of information between tax authorities to
combat tax evasion. We urge the committee and the Senate to take prompt
and favorable action on all of these agreements.
Before talking about the proposed treaties in more detail, I would
like to discuss some general tax treaty matters.
purposes and benefits of tax treaties
Tax treaties set out clear ground rules that govern tax matters
relating to trade and investment between two countries. One of the
primary functions of tax treaties is to provide certainty to businesses
and individual taxpayers regarding a threshold question with respect to
international taxation: whether a taxpayer's cross-border activities
will subject it to taxation by more than one country. Tax treaties
answer this question by establishing the minimum level of economic
activity that must be conducted within a country by a resident of the
other country before the first country may tax any resulting business
profits. In general terms, tax treaties provide that if branch
operations in a foreign country have sufficient substance and
continuity, the country where those activities occur will have primary
(but not exclusive) jurisdiction to tax. In other cases, where the
operations in the foreign country are relatively minor, the home
country retains the sole jurisdiction to tax.
Another primary function of tax treaties is relief of double
taxation. Tax treaties protect businesses and individual taxpayers from
potential double taxation primarily through the allocation of taxing
rights between the two countries. This allocation takes several forms.
First, because residence is relevant to jurisdiction to tax, a tax
treaty has a mechanism for resolving the issue of residence in the case
of a taxpayer that otherwise would be considered to be a resident of
both countries. Second, with respect to each category of income, a tax
treaty assigns primary taxing rights to one country, usually (but not
always) the country in which the income arises (the ``source''
country), and the residual right to tax to the other country, usually
(but not always) the country of residence of the taxpayer (the
``residence'' country). Third, a tax treaty provides rules for
determining the country of source for each category of income. Fourth,
a tax treaty establishes the obligation of the residence country to
eliminate double taxation that otherwise would arise from the exercise
of concurrent taxing jurisdiction by the two countries. Finally, a tax
treaty provides for resolution of disputes between jurisdictions with
the goal of avoiding double taxation.
In addition to reducing potential double taxation, tax treaties
also reduce potential ``excessive'' taxation by reducing withholding
taxes that are imposed at source. Under U.S. law, payments to non-U.S.
persons of dividends and royalties as well as certain payments of
interest are subject to withholding tax equal to 30 percent of the
gross amount paid. Most of our trading partners impose similar levels
of withholding tax on these types of income. This tax is imposed on a
gross, rather than net, amount. Because the withholding tax does not
take into account expenses incurred in generating the income, the
taxpayer that bears the burden of the withholding tax frequently will
be subject to an effective rate of tax that is significantly higher
than the tax rate that would be applicable to net income in either the
source or residence country. Tax treaties alleviate this burden by
setting maximum levels for the withholding tax that the source country
may impose on these types of income or by providing for exclusive
residence-country taxation of such income through the elimination of
source-country withholding tax.
As a complement to these substantive rules regarding allocation of
taxing rights, tax treaties provide a mechanism for dealing with
disputes between countries regarding the proper application of a
treaty. To resolve treaty disputes, designated tax authorities of the
two governments--known as the ``competent authorities'' in tax treaty
parlance--are required to consult and to endeavor to reach agreement.
Under many such agreements, the competent authorities agree to allocate
a taxpayer's income between the two taxing jurisdictions on a
consistent basis, thereby preventing the double taxation that might
otherwise result. The U.S. competent authority under our tax treaties
is the Secretary of the Treasury or his delegate. The Secretary of the
Treasury has delegated this function to the Deputy Commissioner
(International) of the Large Business and International Division of the
Internal Revenue Service.
Tax treaties also include provisions intended to ensure that cross-
border investors do not suffer discrimination in the application of the
tax laws of the other country. This is similar to a basic investor
protection provided in other types of agreements, but the
nondiscrimination provisions of tax treaties are specifically tailored
to tax matters and, therefore, are the most effective means of
addressing potential discrimination in the tax context. The relevant
tax treaty provisions explicitly prohibit types of discriminatory
measures that once were common in some tax systems and clarify the
manner in which possible discrimination is to be tested in the tax
context.
In addition to these core provisions, tax treaties include
provisions dealing with more specialized situations, such as rules
addressing and coordinating the taxation of pensions, social security
benefits, and alimony and child-support payments in the cross-border
context (the Social Security Administration separately negotiates and
administers bilateral totalization agreements). These provisions are
becoming increasingly important as more individuals move between
countries or otherwise are engaged in cross-border activities. While
these matters may not involve substantial tax revenue from the
perspective of the two governments, rules providing clear and
appropriate treatment are very important to the affected taxpayers.
ensuring safeguards against abuse of tax treaties
A high priority for improving our overall treaty network is
continued focus on prevention of ``treaty shopping.'' The U.S.
commitment to including comprehensive ``limitation on benefits''
provisions is one of the keys to improving our overall treaty network.
Our tax treaties are intended to provide benefits to residents of the
United States and residents of the particular treaty partner on a
reciprocal basis. The reductions in source-country taxes agreed to in a
particular treaty mean that U.S. persons pay less tax to that country
on income from their investments there, and residents of that country
pay less U.S. tax on income from their investments in the United
States. Those reductions and benefits are not intended to flow to
residents of a third country. If third-country residents are able to
exploit one of our tax treaties to secure reductions in U.S. tax, such
as through the use of an entity resident in a treaty country that
merely holds passive U.S. assets, the benefits would flow only in one
direction. That is, as third-country residents would enjoy U.S. tax
reductions for their U.S. investments, but U.S. residents would not
enjoy reciprocal tax reductions for their investments in that third
country. Moreover, such third-country residents may be securing
benefits that are not appropriate in the context of the interaction
between their home countries' tax systems and policies and those of the
United States. This use of tax treaties is not consistent with the
balance of the deal negotiated in the underlying tax treaty. Preventing
this exploitation of our tax treaties is critical to ensuring that the
third country will sit down at the table with us to negotiate on a
reciprocal basis so we can secure for U.S. persons the benefits of
reductions in source-country tax on their investments in that country.
Effective antitreaty shopping rules also ensure that the benefits of a
U.S. tax treaty are not enjoyed by residents of countries with which
the United States does not have a bilateral tax treaty because that
country imposes little or no tax, and thus the potential of unrelieved
double taxation is low.
In this regard, the proposed tax treaty with Hungary that is before
the committee today includes a comprehensive limitation on benefits
provision and represents a major step forward in protecting the U.S.
tax treaty network from abuse. As was discussed in the Treasury
Department's 2007 Report to the Congress on Earnings Stripping,
Transfer Pricing and U.S. Income Tax Treaties, the existing income tax
treaty with Hungary, signed in 1979, is one of three U.S. tax treaties
that, as of 2007, provided an exemption from source-country withholding
on interest payments but contained no protections against treaty
shopping. The other two agreements in this category were the 1975 tax
treaty with Iceland and the 1974 tax treaty with Poland. The revision
of these three agreements has been a top priority for the Treasury
Department's treaty program, and we have made significant progress. In
2007, we signed a new tax treaty with Iceland which entered into force
in 2008. Like the proposed tax treaty with Hungary, the U.S.-Iceland
tax treaty contains a comprehensive limitation on benefits provision.
In addition, United States and Poland signed a new tax treaty in
February 2013 that similarly contains a comprehensive limitation on
benefits provision. The administration hopes to transmit the new tax
treaty with Poland to the Senate for its advice and consent soon. These
achievements demonstrate that the Treasury Department has been
effective in addressing concerns about treaty shopping through
bilateral negotiations and amendment of our existing tax treaties.
consideration of arbitration
Tax treaties cannot provide a stable investment environment unless
the respective tax administrations of the two countries effectively
implement the treaty. Under our tax treaties, when a U.S. taxpayer
becomes concerned about implementation of the treaty, the taxpayer can
bring the matter to the U.S. competent authority who will seek to
resolve the matter with the competent authority of the treaty partner.
The competent authorities are expected to work cooperatively to resolve
genuine disputes as to the appropriate application of the treaty.
The U.S. competent authority has a good track record in resolving
disputes. Even in the most cooperative bilateral relationships,
however, there may be instances in which the competent authorities will
not be able to reach timely and satisfactory resolutions. Moreover, as
the number and complexity of cross-border transactions increases, so do
the number and complexity of cross-border tax disputes. Accordingly, we
have considered ways to equip the U.S. competent authority with
additional tools to assist in resolving disputes promptly, including
the possible use of arbitration in the competent authority mutual
agreement process.
The first U.S. tax agreement that contemplated arbitration was the
U.S.-Germany income tax treaty signed in 1989 and entered into force in
1991. Tax treaties with some other countries, including Mexico and the
Netherlands, incorporate authority for establishing voluntary binding
arbitration procedures based on the provision in the prior U.S.-Germany
treaty (although these provisions, which require an exchange of
diplomatic notes to enter into force, have not been implemented).
Although we believe that the presence of such voluntary arbitration
provisions may have provided some limited incentive to reaching more
expeditious mutual agreements, it has become clear that merely
providing the ability to enter into voluntary arbitration is not nearly
as effective as providing for mandatory arbitration, under certain
circumstances, within the treaty itself.
Over the past few years, we have carefully considered and studied
various types of mandatory arbitration procedures that could be
included in our treaties and used as part of the competent authority
mutual agreement process. In particular, we examined the experience of
countries that adopted mandatory binding arbitration provisions with
respect to tax matters. Many of them report that the prospect of
impending mandatory arbitration creates a significant incentive to
compromise before commencement of the arbitration process. Based on our
review of the merits of arbitration in other areas of the law, the
success of other countries with arbitration in the tax area, and the
overwhelming support of the business community, we concluded that
mandatory binding arbitration as the final step in the competent
authority process can be an effective and appropriate tool to
facilitate mutual agreement under U.S. tax treaties.
One of the treaties before the committee, the proposed protocol
with Switzerland, includes a type of mandatory arbitration provision.
This provision, in general terms, is similar to arbitration provisions
in several of our recent protocols to amend treaties (Canada, Germany,
Belgium, and France) that have been approved by the committee and the
Senate over the last several years.
In the typical competent authority mutual agreement process, a U.S.
taxpayer presents its case to the U.S. competent authority and
participates in formulating the position the U.S. competent authority
will take in discussions with the treaty partner. Under the arbitration
provision proposed in the Switzerland protocol, as in the similar
provisions that are now part of our treaties with Canada, Germany,
Belgium, and France, if the competent authorities cannot resolve the
issue within 2 years, the competent authorities must present the issue
to an arbitration board for resolution, unless both competent
authorities agree that the case is not suitable for arbitration. The
arbitration board must resolve the issue by choosing the position of
one of the competent authorities. That position is adopted as the
agreement of the competent authorities.
The arbitration process in the proposed protocol with Switzerland
is mandatory and binding with respect to the competent authorities.
However, consistent with the negotiation process under the mutual
agreement procedure generally, the taxpayer can terminate the
arbitration at any time by withdrawing its request for competent
authority assistance. Moreover, the taxpayer retains the right to
litigate the matter (in the United States or the treaty partner) in
lieu of accepting the result of the arbitration, just as it would be
entitled to litigate in lieu of accepting the result of a negotiation
under the mutual agreement procedure.
The arbitration rule in the proposed protocol with Switzerland is
very similar to the arbitration rule in the tax treaty with France but
differs slightly from the arbitration rules in the agreements with
Canada, Germany, and Belgium. This is because, in negotiating the
arbitration rule in the tax treaty with France, we took into account
concerns expressed by this committee over certain aspects of the
arbitration rules negotiated earlier with Canada, Germany and Belgium.
Accordingly, the proposed arbitration rule with Switzerland, like the
provision with France, differs from its earlier predecessors in three
key respects, consistent with the committee's comment in its report on
the Canada protocol. First, the proposed protocol with Switzerland
allows the taxpayer who presented the original case that is subjected
to arbitration to submit its views on the case for consideration by the
arbitration panel. Second, the rule in the proposed Switzerland
protocol disallows a competent authority from appointing an employee
from its own tax administration to the arbitration board. Finally, the
rule in the proposed Switzerland protocol does not prescribe a
hierarchy of legal authorities that the arbitration panel must use in
making its decision, thus ensuring that customary international law
rules on treaty interpretation will apply.
Because the arbitration board can only choose between the positions
of each competent authority, the expectation is that the differences
between the positions of the competent authorities will tend to narrow
as the case moves closer to arbitration. In fact, if the arbitration
provision is successful, difficult issues will be resolved without
resort to arbitration. Thus, it is our objective that these arbitration
provisions will rarely be utilized, but their presence will motivate
the competent authorities to approach negotiations in ways that result
in mutually agreeable conclusions without invoking the arbitration
process.
We are hopeful that our desired objectives for arbitration are
being realized, even though we are still in the early stages in our
experience with arbitration and at this time cannot report definitively
on the effects of arbitration on our tax treaty relationships. Our
observation is that, where mandatory arbitration has been included in
the treaty, the competent authorities are negotiating with greater
intent to reach principled and timely resolution of disputes.
Therefore, under the mandatory arbitration provision, double taxation
is being effectively eliminated in a more expeditious manner.
Arbitration is a growing and developing field, and there are many
forms of arbitration from which to choose. We intend to continue to
study other arbitration provisions and to monitor the performance of
the provisions in the agreements with Canada, Belgium, Germany, and
France, as well as the performance of the provision in the agreement
with Switzerland, if ratified. The Internal Revenue Service has
published the administrative procedures necessary to implement the
arbitration rules with Germany, Belgium, France, and Canada. The
administration looks forward to updating the committee on the
arbitration process, in particular through the reports that are called
for in the committee's reports on the 2007 protocol to the Canada tax
treaty.
In addition to the proposed protocol with Switzerland, we have
concluded protocols to bilateral tax treaties with Spain and Japan that
also incorporate mandatory binding arbitration. The administration
hopes to transmit those new agreements to the Senate for its advice and
consent soon. We look forward to continuing to work with the committee
to make arbitration an effective tool in promoting the fair and
expeditious resolution of treaty disputes.
combating tax evasion and improving transparency
through full exchange of information
As noted above, effective information exchange to combat tax
evasion and ensure full and fair enforcement of the tax laws has long
been a top priority for the United States. A key provision found in all
modern U.S. tax treaties is a rule that obligates the competent
authorities of the two countries to obtain and exchange information
that is foreseeably relevant to tax administration. In recent years
there has been a global recognition of the need to strive for greater
transparency and for full exchange of information between revenue
authorities to combat tax evasion, and the United States has taken a
leading role in this movement.
The proposed protocols amending the bilateral tax treaties with
Switzerland and Luxembourg and the Multilateral Convention that are
before the committee today are intended to facilitate the exchange of
information to prevent tax evasion and enhance transparency. These
proposed protocols incorporate the current international standards for
exchange of information, which require countries to obtain and exchange
information for both civil and criminal matters, and which require the
tax authorities to obtain and exchange information that is held by a
bank or other financial institution.
The international standards on transparency and exchange of
information for tax purposes are now virtually universally accepted in
the global community. Indeed, all jurisdictions surveyed by the Global
Forum on Transparency and Exchange of Information for Tax Purposes (the
Global Forum) are now committed to implementing these standards. The
Global Forum, now the largest international tax group in the world with
121 member jurisdictions and 12 observers, promotes exchange of
information through a robust and comprehensive monitoring and peer
review process by evaluating the compliance of jurisdictions with the
international standards of transparency.
Initiated by the Organization for Economic Cooperation and
Development (OECD), the Global Forum has been a driving force behind
the acceptance and implementation of the international standards. The
United States actively participates in the Global Forum. Treasury's
Office of Tax Policy, the Office of General Counsel, and IRS Chief
Counsel and Large Business and International Division have devoted
substantial resources over the past 2 years both to the peer review of
the U.S. rules and procedures and to our role as members of the
Steering Group and Peer Review Group of the Forum. Since the Global
Forum was reorganized in 2009, 124 peer reviews have been completed and
published, and more than 1,500 agreements that provide for the exchange
of tax information in accordance with the international standards have
been signed throughout the world. Roughly 80 percent of the agreements
which have been signed as of December 2012 are in force.
In addition, the G20 has, for the past several years, stressed the
importance of quickly implementing the international standards for
transparency and exchange of information. It also requested proposals
to make it easier for developing countries to secure the benefits of
the new cooperative tax environment, including a multilateral approach
for the exchange of information.
Against the backdrop of the Global Forum and the G20 process, the
proposed Protocol to the Multilateral Convention was adopted on May 27,
2010. The Multilateral Convention is an instrument that obligates its
signatories to exchange information for tax purposes. However, because
it was concluded in 1988, some of its provisions are now out of date
and do not conform to the current international standards for
transparency and exchange of information. In addition, the 1998
Convention is open only to member countries of either the Council of
Europe or the OECD. The proposed Protocol to the Multilateral
Convention conforms the existing agreement to the current international
standards for exchange of information, and opens the agreement for
signature and ratification by any country, provided that the Parties
have provided unanimous consent. This important agreement is therefore
a centerpiece to the global effort to improve transparency and foster
full exchange of information between tax authorities.
ensuring the protection and confidentiality of information
exchanged with our treaty partners
As we modernize existing exchange of information relationships and
establish new relationships, the administration is also strongly
committed to ensuring that information that we provide our treaty
partners will be strictly protected and treated as confidential. One of
the critical principles under today's existing international standards
for information exchange upon request is that the country receiving
information must ensure that exchanged information is kept confidential
and only used for legitimate tax administration purposes. Consistent
with this standard, the United States will not enter into an
information exchange agreement unless the Treasury Department and the
IRS are satisfied that the foreign government has strict
confidentiality protections. Specifically, prior to entering into an
information exchange agreement with another jurisdiction, the Treasury
Department and the IRS closely review the foreign jurisdiction's legal
framework for maintaining the confidentiality of taxpayer information.
Before entering into an agreement, the Treasury Department and the IRS
must be satisfied that the foreign jurisdiction has the necessary legal
safeguards in place to protect exchanged information and that adequate
penalties apply to any breach of that confidentiality.
Even if an information exchange agreement is in effect, the IRS
will not exchange information with a country if the IRS determines that
the country is not complying with its obligations under the agreement
to protect the confidentiality of information and to use the
information solely for collecting and enforcing taxes covered by the
agreement. The IRS also will not exchange any return information with a
country that does not impose tax on the income being reported, because
the information could not be used for the enforcement of taxes laws
within that country.
With respect to the Multilateral Convention, a Coordinating Body,
on which the United States sits, has been established for the express
purpose of evaluating the domestic legal framework of countries that
request to join the agreement to ensure that new parties will provide
confidential treatment to information received under the agreement.
Countries that do not have sufficient domestic laws or legal framework
to guarantee the confidentiality of taxpayer information are not
permitted to sign the proposed protocol to the Multilateral Convention.
tax treaty negotiating priorities and process
The United States has a network of 60 income tax treaties covering
68 countries. This network covers the vast majority of foreign trade
and investment of U.S. businesses and investors. In establishing our
negotiating priorities, our primary objective is the conclusion of tax
treaties that will provide the greatest benefit to the United States
and to U.S. taxpayers. We communicate regularly with the U.S. business
community and the Internal Revenue Service to seek input regarding the
areas on which we should focus our treaty network expansion and improve
efforts, as well as regarding practical problems encountered under
particular treaties or particular tax regimes.
Numerous features of a country's particular tax legislation and its
interaction with U.S. domestic tax rules are considered in negotiating
a tax treaty. Examples include whether the country eliminates double
taxation through an exemption system or credit system, the country's
treatment of partnerships and other transparent entities, and how the
country taxes contributions to, earnings of, and distributions from
pension funds.
Moreover, a country's fundamental tax policy choices are reflected
not only in its tax laws, but also in its tax treaty positions. These
choices differ significantly from country to country with substantial
variation even across countries that seem to have quite similar
economic profiles. A tax treaty negotiation must take into account all
of these aspects of the particular treaty partner's tax system and
treaty policies to arrive at an agreement that accomplishes the United
States tax treaty objectives.
Obtaining the agreement of our tax treaty partners on provisions of
importance to the United States sometimes requires concessions on our
part. Similarly, the other country sometimes must make concessions to
obtain our agreement on matters that are critical to it. Each tax
treaty that is presented to the Senate represents not only the best
deal that we believe can be achieved with the particular country, but
also constitutes an agreement that we believe is in the best interests
of the United States.
In the Treasury Department's bilateral dealing with countries
around the world, we commonly conclude that the right result may be no
tax treaty at all. With certain countries there simply may not be the
type of cross-border tax issues that are best resolved by treaty. For
example, if a country does not impose significant income taxes, there
is little possibility of unresolved double taxation of cross-border
income, given the fact that the United States provides foreign tax
credits to its residents regardless of the existence of an income tax
treaty. Under such circumstances, it would not be appropriate to enter
into a bilateral tax treaty, because doing so would result in a
unilateral concession of taxing rights by the United States. When
instances of unrelieved double taxation cannot be identified with
respect to a country, an agreement that focuses exclusively on the
exchange of tax information (so-called ``tax information exchange
agreements'' or ``TIEAs'') may be the more fitting agreement to
conclude.
Prospective treaty partners must evidence a clear understanding of
what their obligations would be under the treaty, especially those with
respect to information exchange, and must demonstrate that they would
be able to fulfill those obligations. Sometimes a tax treaty may not be
appropriate because a potential treaty partner is unable to do so.
In other cases, a tax treaty may be inappropriate because the
potential treaty partner is not willing to agree to particular treaty
provisions that are needed to address real tax problems that have been
identified by U.S. businesses operating there. If the potential treaty
partner is unwilling to provide meaningful benefits in a tax treaty,
investors would find no relief, and accordingly there would be no merit
to entering into such an agreement. The Treasury Department would not
conclude a tax treaty that did not provide meaningful benefits to U.S.
investors or which could be construed by potential treaty partners as
an indication that we would settle for a tax treaty with inferior
terms.
expanding the u.s. tax treaty network
While much of the Treasury Department's tax treaty negotiations
involve modernizing existing agreements with key trading partners to
close loopholes or improve the level of benefits to U.S. investors, we
also engage with countries such as Chile to negotiate new tax treaties.
The Treasury Department actively pursues opportunities to establish new
tax treaty relationships with countries in which U.S. businesses
encounter unrelieved double taxation with respect to their investments.
The Treasury Department is aware of the keen interest of both the
business community and the Senate to conclude income tax treaties with
South American countries that provide meaningful benefits to cross-
border investors. If approved by the Senate and the Chilean Congress,
the tax treaty with Chile would be the second U.S. tax treaty in force
in South America: therefore, the proposed tax treaty with Chile
represents a significant inroad into the South American region. In
addition, the Treasury Department is engaged in bilateral tax treaty
negotiations with Colombia.
The Treasury Department is also developing new tax treaty
relationships in other regions of the world. For example, we have held
several rounds of negotiations with Vietnam, a country that U.S.
businesses have listed as a priority because they have experienced
unrelieved double taxation. We hope to conclude a tax treaty, which
would be the first agreement of its kind between the United States and
Vietnam, in the near future.
discussion of proposed treaties
I now would like to discuss the five tax treaties that have been
transmitted for the Senate's consideration. The five treaties are
generally consistent with modern U.S. tax treaty practice as reflected
in the Treasury Department's 2006 U.S. Model Income Tax Convention. As
with all bilateral tax treaties, the treaties contain some minor
variations that reflect particular aspects of the treaty policies and
partner countries' domestic laws and economic relations with the United
States. We have submitted a Technical Explanation of each treaty that
contains detailed discussions of the provisions of each treaty. These
Technical Explanations serve as the Treasury Department's official
explanation of each tax treaty.
Chile
The proposed Chile tax treaty is generally consistent with U.S. tax
treaty policy as reflected in the United States Model Income Tax
Convention of November 15, 2006 (the ``U.S. Model''). There are, as
with all bilateral tax treaties, some variations from these norms. In
the proposed treaty, these variations from the U.S. Model reflect
particular aspects of the Chilean tax system and treaty policy, the
interaction of U.S. and Chilean law, and U.S.-Chile economic relations.
The proposed treaty provides for reduced source-country taxation of
dividends distributed by a company resident in one country to a
resident of the other country. The proposed treaty generally allows for
taxation at source of 5 percent on direct dividends (i.e., where a 10-
percent ownership threshold is met) and 15 percent on all other
dividends. Additionally, the proposed treaty provides for an exemption
from withholding tax on certain cross-border dividend payments to
pension funds. In recognition of unique aspects of Chile's domestic tax
system, the withholding rate reductions on dividend payments from Chile
will generally not apply to Chile unless Chile makes certain
modifications to its corporate tax system in the future.
Consistent with the U.S. Model, the proposed treaty contains
special rules for dividends paid by U.S. regulated investment companies
and real estate investment trusts to prevent the use of structures
designed to inappropriately avoid U.S. tax.
The proposed treaty provides a limit of 4 percent on source-country
withholding taxes on cross-border interest payments to banks, insurance
companies and certain other financial enterprises. For the first 5
years following entry into force, the proposed treaty provides a limit
of 15 percent on all other cross-border interest payments. After the
initial 5-year period, the 15-percent limit is reduced to 10 percent
for all other cross-border interest payments. In addition, consistent
with the U.S. Model, source-country tax may be imposed on certain
contingent interest and payments from a U.S. real estate mortgage
investment conduit. The proposed treaty also permits the United States
to impose its branch-level interest tax according to the applicable
withholding rate reductions for cross-border interest payments.
The proposed treaty provides a limit of 2 percent on source-country
withholding taxes on cross-border royalty payments that constitute a
rental payment for the use of industrial, commercial or scientific
equipment, and a limit of 10 percent on all other cross-border royalty
payments.
The taxation of capital gains under the proposed treaty generally
follows the format of the U.S. Model, with some departures in
recognition of unique aspects of Chile's domestic tax system. Similar
to the U.S. Model, gains derived from the sale of real property and
real property interests may be taxed by the country in which the
property is located. Likewise, gains from the sale of personal property
forming part of a permanent establishment situated in a country may be
taxed in that country. Gains from the alienation of shares or other
rights or interests in a company may either be taxed at a maximum rate
of 16 percent by the country in which the company is a resident, or in
certain circumstances in accordance with that country's domestic law.
However, the proposed treaty recognizes a unique aspect of Chile's
domestic law and provides that these gains shall be taxable only in the
country of residence of the seller if Chile makes certain modifications
to its corporate tax system in the future. Certain other gains from the
alienation of shares of a company are taxable only in the country of
residence of the seller, such as gains derived by a pension fund.
Furthermore, gains from the alienation of ships, boats, aircraft and
containers used in international traffic, as well as gains from the
alienation of any property not specifically addressed by the proposed
treaty's article on capital gains, are taxable only in the country of
residence of the seller.
The proposed treaty permits source-country taxation of business
profits only if the business profits are attributable to a permanent
establishment located in that country. The proposed treaty generally
defines a ``permanent establishment'' in a way consistent with the U.S.
Model. One Model departure that is also found in a number of other U.S.
tax treaties with developing countries, deems an enterprise to have a
permanent establishment in a country if the enterprise has performed
services in that country for at least 183 days in a 12-month period.
The proposed treaty preserves the U.S. right to impose its branch
profits tax on U.S. branches of Chilean corporations. The proposed
treaty also accommodates a provision of U.S. domestic law providing
that income earned during the life of the permanent establishment, but
deferred and not received until after the permanent establishment no
longer exists, is still attributed to the permanent establishment.
The proposed treaty provides that an individual resident in one
country and performing services in the other country will become
taxable in the other country only if the individual has a fixed place
of business (a so-called ``fixed base''). The proposed treaty generally
defines ``fixed base'' in a way consistent with the U.S. Model, with a
departure also found in a number of U.S. tax treaties with developing
countries which deems an individual to have a fixed base if he has
performed services in that country for at least 183 days in the taxable
year concerned.
The rules for the taxation of income from employment under the
proposed treaty are similar to those under the U.S. Model. The general
rule is that employment income may be taxed in the country where the
employment is exercised unless three conditions constituting a safe
harbor are satisfied.
The proposed treaty permits both the residence country and source
country to tax pension payments, although the source country's taxation
right is limited to 15 percent of the gross amount of the pension.
Consistent with current U.S. tax treaty policy, the proposed treaty
permits the deductibility of certain cross-border contributions to
pension plans. Also consistent with current U.S. tax treaty policy, the
proposed treaty provides for exclusive source-country taxation of
social security payments.
The proposed treaty contains a comprehensive ``limitation on
benefits'' article designed to address ``treaty shopping,'' which is
the inappropriate use of a tax treaty by residents of a third country.
The limitation on benefits article is consistent with current U.S. tax
treaty policy, although it contains a special rule for so-called
``headquarters companies'' that is also found in a number of other U.S.
tax treaties.
The proposed treaty incorporates rules that provide that a former
citizen or long-term resident of the United States may, for the period
of 10 years following the loss of such status, be taxed in accordance
with the laws of the United States. The proposed treaty also
coordinates the U.S. and Chilean tax rules to address the ``mark-to-
market'' provisions enacted by the United States in 2007, which apply
to individuals who relinquish U.S. citizenship or terminate long-term
residency.
Consistent with the OECD and U.S. Models, the proposed treaty
provides for the exchange between the competent authorities of each
country of information that is foreseeably relevant to carrying out the
provisions of the proposed treaty or enforcing the domestic tax laws of
either country. The proposed treaty allows the United States to obtain
information from Chile, including from Chilean financial institutions,
regardless of whether Chile needs the information for its own tax
purposes.
The proposed treaty will enter into force when the United States
and Chile have notified each other that they have completed all of the
necessary procedures required for entry into force. With respect to
taxes withheld at source, the treaty will have effect for amounts paid
or credited on or after the first day of the second month following the
date of entry into force. With respect to other taxes, the treaty will
have effect for taxable years beginning on or after the first day of
January next following the date of entry into force.
Hungary
The proposed tax treaty and related agreement, which will be
effected by exchange of notes with Hungary, were negotiated to bring
tax treaty relations based on the existing tax treaty into closer
conformity with current U.S. tax treaty policy. Entering into a new
agreement has been a top tax treaty priority for the Treasury
Department because the existing tax treaty with Hungary, signed in
1979, does not contain treaty shopping protections and, as a result,
has been used inappropriately by third-country investors in recent
years.
The proposed treaty contains a comprehensive ``limitation on
benefits'' article designed to address treaty shopping. 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
article includes a provision granting so-called ``derivative
benefits.'' The new limitation on benefits article also contains a
special rule for so-called ``headquarters companies'' that is also
found in a number of other U.S. tax treaties.
The proposed treaty incorporates updated rules providing that a
former citizen or long-term resident of the United States may, for the
period of 10 years following the loss of such status, be taxed in
accordance with the laws of the United States. The proposed treaty also
coordinates the U.S. and Hungarian tax rules to address the ``mark-to-
market'' provisions the United States enacted in 2007, which apply to
individuals who relinquish U.S. citizenship or terminate long-term
residency.
The withholding rates on investment income in the proposed treaty
are the same as or lower than those in the current treaty. The proposed
treaty provides for reduced source-country taxation of dividends
distributed by a company resident in one country to a resident of the
other country. The proposed treaty generally allows for taxation at
source of 5 percent on direct dividends (i.e., where a 10-percent
ownership threshold is met) and 15 percent on all other dividends.
Additionally, the proposed treaty provides for an exemption from
withholding tax on certain cross-border dividend payments to pension
funds.
The proposed treaty updates the treatment of dividends paid by U.S.
Regulated Investment Companies and Real Estate Investment Trusts to
prevent the use of structures designed to inappropriately avoid U.S.
tax.
Consistent with the existing treaty, the proposed treaty generally
eliminates source-country withholding taxes on cross-border interest
and royalty payments. However, consistent with current 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 treaty generally
follows the format of the U.S. Model. Gains derived from the sale of
real property and 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 country may be taxed in that country. All other gains, including
gains from the alienation of ships, boats, aircraft and containers used
in international traffic, as well as gains from the sale of stock in a
corporation, are taxable only in the country of residence of the
seller.
The proposed treaty, like several recent U.S. tax treaties,
provides 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 treaty preserves
the U.S. right to impose its branch profits tax on U.S. branches of
Hungarian corporations. The proposed treaty also accommodates a
provision of U.S. domestic law providing that income earned during the
life of the permanent establishment, but deferred and not received
until after the permanent establishment no longer exists, is still
attributed to the permanent establishment.
The proposed treaty would change the rules currently applied under
the existing treaty regarding the taxation of independent personal
services. Under the proposed treaty, 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 in that country.
The rules for the taxation of income from employment under the
proposed treaty are similar to those under the U.S. Model. The general
rule is that employment income may be taxed in the country where the
employment is exercised unless three conditions constituting a safe
harbor are satisfied.
The proposed treaty preserves the current treaty'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.
Consistent with the OECD and U.S. Models, the proposed treaty
provides for the exchange between the tax authorities of each country
of information relevant to carrying out the provisions of the proposed
treaty or the domestic tax laws of either country. The proposed treaty
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.
The proposed treaty would enter into force on the date of the
exchange of instruments of ratification. With respect to taxes withheld
at source, the treaty will have effect for amounts paid or credited on
or after the first day of the second month following the date of entry
into force. With respect to other taxes, the treaty will have effect
for taxable years beginning on or after the first day of January next
following the date of entry into force. The existing treaty will, with
respect to any tax, cease to have effect as of the date on which the
proposed treaty has effect with respect to such tax.
Luxembourg
The proposed protocol to amend the existing tax treaty with
Luxembourg and the related agreement effected by exchange of notes were
negotiated to bring the existing Convention, signed in 1996, into
closer conformity with current U.S. tax treaty policy regarding
exchange of information.
The proposed protocol replaces the existing treaty's information
exchange provisions with updated rules that are consistent with current
U.S. tax treaty practice and the current international standards for
exchange of information. The proposed protocol allows the tax
authorities of each country to exchange information foreseeably
relevant to carrying out the provisions of the agreement or the
domestic tax laws of either country. Among other things, the proposed
protocol would allow the United States to obtain information from
Luxembourg whether or not Luxembourg needs the information for its own
tax purposes. In addition, the proposed protocol provides that requests
for information cannot be declined solely because the information is
held by a bank or other financial institution.
The proposed related agreement effected by exchange of notes sets
forth agreed understandings between the parties regarding the updated
provisions on tax information exchange. The agreed understandings
include obligations on the United States and Luxembourg to ensure that
their respective competent authorities have the authority to obtain and
provide, upon request, information held by banks and other financial
institutions and information regarding ownership of certain entities.
The agreed understandings also provide that information shall be
exchanged without regard to whether the conduct being investigated
would be a crime under the laws of the requested country.
The proposed protocol would enter into force once both the United
States and Luxembourg have notified each other that their respective
applicable procedures for ratification have been satisfied. It would
have effect with respect to requests made on or after the date of entry
into force with regard to tax years beginning on or after January 1,
2009. The related agreement effected by exchange of notes would enter
into force on the date of entry into force of the proposed protocol and
would become an integral part of the proposed protocol on that date.
Switzerland
The proposed protocol to amend the existing tax treaty with
Switzerland and related agreement effected by exchange of notes were
negotiated to bring the existing treaty, signed in 1996, into closer
conformity with current U.S. tax treaty policy regarding exchange of
information. There are, as with all bilateral tax conventions, some
variations from these norms. In the proposed protocol, these minor
differences reflect particular aspects of Swiss law and treaty policy,
and they generally follow the OECD standard for exchange of
information.
The proposed protocol replaces the existing treaty's information
exchange provisions with updated rules that are consistent with current
U.S. tax treaty practice and the current international standards for
exchange of information. The proposed protocol allows the tax
authorities of each country to exchange information that may be
relevant to carrying out the provisions of the agreement or the
domestic tax laws of either country, including information that would
otherwise be protected by the bank secrecy laws of either country. The
proposed protocol would allow the United States to obtain information
from Switzerland whether or not Switzerland needs the information for
its own tax purposes, and provides that requests for information cannot
be declined solely because the information is held by a bank or other
financial institution.
The proposed protocol amends a paragraph of the existing protocol
to the existing treaty by incorporating procedural rules to govern
requests for information and an agreement between the United States and
Switzerland that such procedural rules are to be interpreted in order
not to frustrate effective exchange of information.
The proposed protocol and related agreement effected by exchange of
notes update the provisions of the existing treaty with respect to the
mutual agreement procedure by incorporating mandatory arbitration of
certain cases that the competent authorities of the United States and
Switzerland have been unable to resolve after a reasonable period of
time.
Finally, the proposed protocol updates the provisions of the
existing treaty to provide that individual retirement accounts are
eligible for the benefits afforded a pension under the existing treaty.
The proposed protocol would enter into force when the United States
and Switzerland exchange instruments of ratification. The proposed
protocol would 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 following entry into force. With respect to information
exchange, the proposed protocol would have effect with respect to
requests for bank information that relate to any date beginning on or
after the date the proposed protocol is signed. With respect to all
other cases, the proposed protocol would have effect with respect to
requests for information that relates to taxable periods beginning on
or after the first day of January next following the date of signature.
The mandatory arbitration provision would have effect with respect both
to cases that are under consideration by the competent authorities as
of the date on which the proposed protocol enters into force and to
cases that come under consideration after that date.
Protocol to the Multilateral Convention
On January 25, 1988, the OECD and the Council of Europe jointly
opened for signature the Multilateral Convention, which the United
States signed in 1989 and entered into force for the United States in
1995. The proposed protocol to the Multilateral Convention was
negotiated to bring the Multilateral Convention into conformity with
current international standards regarding exchange of information for
tax purposes.
Although the Multilateral Convention contains broad provisions for
the exchange of information, it predates the current internationally
agreed standards on exchange of information. Thus, the obligations
contained in the Multilateral Convention are subject to certain
domestic law limitations that could impede full exchange of
information. In particular, the Multilateral Convention does not
require the exchange of bank information on request, nor does it
override domestic tax interest requirements. In contrast, the current
internationally agreed standards on transparency and exchange of
information provide for full exchange of information upon request in
all tax matters without regard to a domestic tax interest requirement
or bank secrecy laws. The proposed protocol amends the Multilateral
Convention in order to bring it into conformity with these
internationally agreed standards, which are also reflected in the
OECD's Model Tax Convention on Income and Capital and the U.S. Model
tax treaty. In addition, the proposed protocol brings the
confidentiality rules of the Multilateral Convention regarding
exchanged information and the limitations regarding the use of such
information into conformity with the OECD and U.S. Models.
The Multilateral Convention specifies information the applicant
country is to provide the requested country when making a request. In
some situations, the name of the person under examination is not known
to the applicant country, but there is other information sufficient to
identify the person. The proposed protocol amends the Multilateral
Convention by providing that a request for assistance is adequate even
if the name of the person(s) under examination is not known, provided
that the request contains sufficient information to identify the person
or ascertainable group or category of persons.
The original Multilateral Convention was open for signature and
ratification only by countries which are members of the Council of
Europe, the OECD, or both. The proposed protocol amends the
Multilateral Convention by allowing any country to become a party
thereto. However, countries which are not members of the OECD or of the
Council of Europe may only become a party to the amended Convention
subject to unanimous consent of the parties to the amended Convention.
The Multilateral Convention as amended by the proposed protocol
entered into force on June 1, 2011, for countries that signed and
ratified it prior to that date. For countries that ratify subsequent to
that date, the Multilateral Convention as amended by the proposed
protocol will enter into force on the first day of the month following
the expiration of a period of three months after the date of deposit of
the instrument of ratification with one of the Depositaries.
Any Member State of the Council of Europe or of the OECD that is
not yet a party to the Multilateral Convention will become a party to
the Multilateral Convention as amended by the proposed protocol upon
ratification of the Convention as amended by the proposed protocol by
that Member State, unless it explicitly expresses the will to adhere
exclusively to the unamended Convention. Any country that is not a
member of the OECD or the Council of Europe that subsequently becomes a
party to the Convention as amended by the proposed protocol shall be a
party to the Convention as amended by the proposed protocol.
The amendments shall have effect for administrative assistance
related to taxable periods beginning on or after January 1 of the year
following the year in which the Convention as amended by the proposed
protocol, entered into force in respect of a party. Where there is no
taxable period, the amendments shall have effect for administrative
assistance related to charges to tax arising on or after January 1 of
the year following the year in which the Convention as amended by the
proposed protocol entered into force in respect of a party. Any two or
more parties may mutually agree that the Convention as amended by the
proposed protocol may have effect for administrative assistance related
to earlier taxable periods or charges to tax. However, for criminal tax
matters, the proposed protocol provides that the Convention as amended
by the proposed protocol shall have effect for any earlier taxable
period or charge to tax from the date of entry into force in respect of
a party. A party may nevertheless take a reservation according to which
the provisions of the Convention as amended by the proposed protocol
would have effect for administrative assistance related to criminal tax
matters, only as related to taxable periods beginning from the third
year prior to the year in which the Convention as amended by the
proposed protocol entered into force in respect of that party. The
administration is not recommending that the United States take such a
reservation [because?...].
treaty program priorities
In addition to our work described above to expand the U.S. tax
treaty network, the Treasury Department also maintains an active
negotiating calendar aimed at modernizing existing tax treaties with
many of our key trading partners. In this regard, our recent efforts
have borne much fruit. In 2013, we concluded protocols with Spain and
Japan that make extensive changes to our bilateral tax treaties with
those countries. Revising the Spain treaty has been a top priority of
U.S. businesses, because the existing treaty does not reflect the
current tax treaty practices of either Spain or the United States. The
new Japan protocol makes several key amendments to the existing tax
treaty, including an exemption from source country withholding of all
payments of interest, mandatory binding arbitration provisions, and
rules that will allow the United States to request assistance from the
Japanese revenue authorities in the collection of U.S. taxes.
Another key continuing priority for the Treasury Department is
updating the few remaining U.S. tax treaties that provide for
significant withholding tax reductions but do not include the
limitation on benefits provisions needed to protect against treaty
shopping. I am pleased to report that in this regard we have made
significant progress. In addition to the proposed tax treaty with
Hungary, we have also concluded negotiations of new tax treaties with
Poland, Norway, and Romania, all of which contain comprehensive
limitation on benefits provisions. We signed the new treaty with Poland
on February 15, 2013, and we hope to transmit it to the Senate for its
advice and consent soon. We are preparing the new Norway and Romania
treaties for signature in the near future.
Concluding agreements that provide for the full exchange of
information, including information held by banks and other financial
institutions, is another key priority of the Treasury Department. In
this regard, we are in active negotiations with Austria to make a
number of key amendments to the existing bilateral tax treaty to
including modern provisions for full exchange of information.
conclusion
Mr. Chairman and Ranking Member Barrasso, let me conclude by
thanking you for the opportunity to appear before the committee to
discuss the administration's efforts with respect to the five
agreements under consideration. We appreciate the committee's
continuing interest in the tax treaty program, and we thank the members
and staff for devoting time and attention to the review of these new
agreements. We are also grateful for the assistance and cooperation of
the staff of the Joint Committee on Taxation.
On behalf of the administration, we urge the committee to take
prompt and favorable action on the agreements before you today. I would
be happy to respond to any question you may have.
Senator Cardin. Thank you for your testimony, and thank you
for your work, and we do appreciate the work of your people and
your agencies in negotiating these agreements.
I want to ask the first question related to Mr. Barthold's
point to Mr. Stack, and that is the Multilateral Convention
opens up dramatically the number of countries, potential
countries, that we will be exchanging information with. As you
point out, it is very clear that we need to make sure that
those countries can protect the privacy of information that is
being made available.
Knowing how international agreements are negotiated and the
politics involved, the United States will normally play a lead
role in determining whether a country would be permitted to
join the convention. Treasury has a lot of work to do. This is
an important protection of privacy information. Many countries
do not have the type of reputation and stability that would
give us comfort that that information would be kept
confidential.
How would you plan to move forward and would you be able to
assure the American people that any country that we do business
with under the Multilateral Convention indeed does have
adequate protections for the information that is being shared?
Mr. Stack. Thank you, Senator.
Consistent with our other information exchange
arrangements, the Multilateral Convention, I would suggest, has
three aspects to ensuring the confidentiality and appropriate
use of the information.
First, before a country is permitted to become a signatory
to the Multilateral Convention, the parties to the convention
consist of a coordinating body that examines the laws and
practices of the jurisdiction in order to be sure that it is
able to enter into and fulfill its obligations under the
Multilateral Convention.
Senator Cardin. Can you give us examples of countries that
are not in the OECD and not in the Council of Europe that are
signatories or likely to become signatories?
Mr. Stack. Yes, if you give me a moment, I can. Singapore
would be one.
Senator Cardin. Others?
Mr. Stack. I have a list here. Among signatories that
neither a treaty nor a--Albania, Andorra, Croatia, Ghana,
Nigeria, Saudi Arabia, and Singapore.
Senator Cardin. So you have already made those judgments
that those countries have adequate protocols in place to
protect privacy?
Mr. Stack. Yes, Senator.
I should say, Senator, in the Multilateral Convention where
the United States plays a lead role in the coordinating body,
it is the coordinating body of the OECD that makes the
determination that these members can become signatories to the
Convention.
Senator Cardin. But we are talking about U.S. entities and
our information.
Mr. Stack. Yes.
Senator Cardin. So you have a responsibility to assure us
that the privacy protocols are adequate in the countries that
are signatories.
Mr. Stack. Yes.
Senator Cardin. And you have that assurance to us?
Mr. Stack. Yes, Senator. The other two ways we do it is,
once they become a signatory, they are required to participate
and abide by the confidentiality rules. But also, quite
importantly, the IRS, on an ongoing basis, through the office
of competent authority, monitors the experience with these
jurisdictions, so that if there is ever word or we learn that
there has a been a breach of this confidentiality, the IRS
does, and has in the past, held the exchanges of information
pending resolution of any issue that we hear arises with
respect to a foreign jurisdiction.
Senator Cardin. How frequently does that occur?
Mr. Stack. I know from talking to the IRS that that has
occurred a variety of times over the past several years. It is
generally not public, but it does arise from time to time.
Senator Cardin. My only reason for asking this is that,
obviously, we want to make sure that if a country is admitted
to this Convention, that it has the protocols in place.
Obviously, disputes arise, and we have to have enforcement,
if problems develop. But we want to make the first cut right,
and that is not enter into the Convention with those countries
that do not have protocols to protect privacy.
Let me raise a second question, if I might, and that is, in
two cases, we are amending treaties that, as I understand it,
really protects us more, particularly in regards to Hungary,
because there are no exceptions now. And we are narrowing the
exception category, so they cannot treaty shop. In two, we are
setting up new treaties.
Can you just give me some concrete examples of how these
treaties help American entities? The more specific you can be
as related to doing either business in another country or
complying with our tax laws, how do these treaties help us?
Mr. Stack. Sure. You know, I began this discussion by just
mentioning that the treaty issues begin to arise when a company
begins to conduct business in two jurisdictions, a typical
cross-border, which, as we all know, is growing.
Senator Cardin. Do we have specific companies that are
concerned that we do not have today treaties in the two
countries that are moving forward? Is that preventing them from
doing business? Or hurting them from advancing?
Mr. Stack. Certainly, in the absence of, let us take Chile
where it is a brand-new treaty, companies would be subject to
double taxation, if we do not have the treaty. And indeed, one
of our criteria for entering into a double tax treaty
negotiation is that we see, and companies demonstrate to us,
that there is unrelieved double taxation going on between us
and that country.
And so the treaty sets the rules of the road. So the first
thing it does is it helps companies understand, well, under
what circumstances when I do business in that other country
will my presence be such that I will be subject to tax in that
jurisdiction? And those are called our permanent establishment
rules.
The second thing it does is it can moderate, via the
treaty, certain withholding taxes. You may know that very
typically, when one company does business in another country,
interest, dividends, and royalties that it receives back are
often subject to withholding taxes as high as 30 percent. And
what the treaties do, is they typically moderate those
withholding amounts, so that they can reallocate the tax
between source and residence and reduce the incidence of double
taxation.
Third, there are specific provisions that once the two
treaty parties come together, once the two treaty partners
decide on the allocation of income in the treaty, there are
also provisions that say, oh, and everything we talked about in
this treaty will get some kind of relief from double taxation
through a foreign tax credit.
But most importantly for our companies, they are very
interested in what we call the mutual agreement procedures in
our treaties. That is to say, once the treaty is ratified, if a
dispute arises between that company and let us say that
country, there is a procedure under the treaty to help get
resolution of that dispute between the competent authorities.
And this might be a time to add that in the Swiss protocol,
for example, under certain circumstances, we are adding in a
binding arbitration provision into the mutual agreement to
provide further possibilities of settling cases and further
incentives for these countries to settle cases.
Senator Cardin. One final question, and then I will yield
to Senator Barrasso, we had our share of differences with
Switzerland on sharing information. With the ratification of
this treaty, how far will it go to resolve those types of
disagreements?
Mr. Stack. I think, Senator, it goes very far, because it
brings the United States and Switzerland up to the
international standard on exchange of information. And in
February 2011, Switzerland put out a statement to the effect
that they recognize these international standards as applying
to their treaty exchange relationships.
So we are optimistic about the advances with Switzerland.
Senator Cardin. Thank you. Thank you very much.
Senator Barrasso.
Senator Barrasso. Thank you, Mr. Chairman.
Mr. Stack, maybe from just a little different angle, I am
concerned about foreign governments publicly disclosing
sensitive personal information of U.S. taxpayers, or using that
information for unauthorized purposes. I am just kind of
curious about what penalties would be for unauthorized
disclosure by a foreign government of U.S. taxpayer
information. Are there penalties there? How does that all work?
Mr. Stack. Sure, Senator. The first thing I want to point
out, and sometimes this information exchange business gets very
confusing, but in both automatic exchange and in information
exchange upon request, the foreign government is requesting
information about its citizens or residents in the United
States in connection with a tax matter that arises in its
jurisdiction. That does not mean there are not situations in
which there is a U.S. person.
Because these are international agreements, when we hear of
any kind of a breach--once we have these agreements in place,
the IRS works with these countries to understand their systems,
processes, and procedures. And in the event those systems,
processes, and procedures were to break down and there would be
a release, our recourse is to hold further provision of
information pending resolution of that. Because these are
foreign governments and foreign countries, it is not so much a
question as, let us say, a penalty under one of our statutes as
it is the international relations.
Senator Barrasso. In the unlikely event that this happens,
is the U.S. taxpayer notified about the leak and the
unauthorized use of the information? Is that something you are
aware of?
Mr. Stack. Not that I am aware of, Senator.
Senator Barrasso. Do you know how many of these
unauthorized public disclosures maybe have been made by foreign
governments recently or in a recent time period?
Mr. Stack. I would say, in my preparatory conversations
with IRS, that there have been several, but maybe going back
over several years.
But let me make a point about this. All these disclosures
may not be what we typically think of as the malevolent,
unauthorized disclosure. It could be a case that there is some
kind of accident or leak. It could be a case that a court case
in the foreign jurisdiction has already hinted that information
that is collected in this process should or could be made
public.
So, in both categories, any time there is a situation in
which information can get out to the public, the IRS pays
attention, contacts the country, has a discussion, and does not
move forward until it is convinced that the situation has been
resolved.
Senator Barrasso. To move to a little bit different topic,
we seem to have a patchwork of international agreements dealing
with the sharing of tax information. We currently have 65
ratified bilateral treaties, tax treaties. In addition, we
enter into tax information exchange agreements with other
foreign countries. The United States has started to enter into
numerous intergovernmental agreements under the Foreign Account
Tax Compliance Act.
So I am just wondering whether you can talk a little about
the differences in the scope of information and in the process
of receiving information exchanged under, say, a tax treaty and
then the tax information exchange agreement and
intergovernmental agreements, just how that all works, if you
would not mind?
Mr. Stack. I appreciate the question, Senator.
First, it is a good time to explain that we only enter into
double tax treaties--double tax treaties contain their own tax
information sharing provision, typically in article 26. And we
only enter into those agreements when there is unrelieved
double taxation between us and the other jurisdiction, because
we are typically, A, willing to give up some of our taxing
rights; they give up some of their taxing rights. And we are
really trying to relieve double taxation.
When we negotiate a double tax agreement, as I mentioned,
inside that agreement is also one of these tax information
exchange agreements.
In many other cases, where we do not have a double tax
treaty, because there is no unrelieved double taxation, we
simply enter in a stand-alone tax information exchange
agreement.
And so we go around the world with jurisdictions where we
would like to have those kinds of agreements, which, again, are
modeled on the treaty and provide for information exchange upon
request. One jurisdiction is doing an audit and it comes to us
to get information, and various other kinds of information
exchange.
The intergovernmental agreements are a narrower subset, I
would say, because we have entered into the intergovernmental
agreements in order to facilitate the enforcement of FATCA, the
Foreign Account Tax Compliance Act. In those agreements, if I
can take a minute to just give you the two flavors, we have two
types of these IGAs.
In the first type of IGA, the financial institutions in the
jurisdiction, rather than giving information directly to the
IRS--I am sorry, let me back up.
The first kind of IGA is what we call nonreciprocal. And
what nonreciprocal means is we are going to receive information
about the U.S. accountholders in the foreign financial
institutions in that jurisdiction, but we are not going to give
that jurisdiction back any U.S. information.
We need the IGA because, under the laws of some foreign
jurisdictions, their financial institutions may not have been
permitted to give information to a third party like the IRS.
And so the IGA, in the nonreciprocal case, takes care of that
situation. And we receive the information for FATCA compliance.
We also have what is called a reciprocal intergovernmental
agreement. And under the reciprocal intergovernmental
agreement, I think there is one important thing to understand.
We only enter into a reciprocal where we are going to give
information if we have a preexisting double tax agreement or
TIEA already in place with the country, so we have already done
our homework to understand that we are going to exchange
information with them. That could apply to people or
signatories under the Multilateral Convention.
And then we only give the other jurisdiction what we
collect from financial institutions in this country about their
residents.
So double tax treaty is very broad, including TIEA; TIEA
where we do not do a double tax treaty; IGA is to enforce
FATCA.
Senator Barrasso. Just two more questions, Mr. Chairman.
There have been some concerns raised that the exchange of
information provisions in these tax treaties could possibly
lead to fishing expeditions that could undermine the privacy
rights of Americans. Could you talk a little bit about how the
exchange of information request process works? How the
government decides whether to make a request for exchange, just
a little bit of an overview on that?
Mr. Stack. Yes, Senator.
So for here, I would break this down into--this puts us
back into the category of what we call information exchange on
request. That is a situation in which another jurisdiction asks
the IRS to get information for it because it is ``foreseeably
relevant'' or may be relevant to an actual ongoing tax audit or
investigation in that country.
When the IRS receives that request, it is very important
that it understand, and will often have contact back with the
foreign government, to understand that there is an ongoing
audit, there are specific issues being looked at, and, indeed,
that it is not a fishing expedition on which the OECD is kind
of giving guidance for when you know there is a specific audit
of a particular person or group of persons and crossing the
line into a fishing expedition. If the IRS office in charge of
this determines that there is a fishing expedition, they will
simply decline to honor the request for information.
Senator Barrasso. Obviously, there is a great deal of
information that can be shared between foreign governments
about an individual's tax information. The United States
currently has international tax treaties with Venezuela, with
Russia, with China, and I just want to make sure that there are
safeguards in place. Maybe you can describe some of those to
assure that we as a Government are not sharing information with
other foreign governments that may use this information in ways
that we would never want it to be used--human rights violations
against their own people or against U.S. taxpayers.
Mr. Stack. Senator, first, I will say we are not currently
sharing information with Venezuela. No. 2, let me talk a little
bit about the China and Russia issues or any other country in
connection with the FATCA IGA, because that is the most recent
work we have been doing.
So before we determine that we will do a reciprocal
exchange, we are going through a process of consultation with
the State Department and Justice Department to ask very
narrowly, very specifically, about our Government's experience
with confidentiality and use for intended purposes with these
other countries.
This tax area is not the first situation in which we share
information with other countries.
Second, however, in all of our IGAs that we are doing FATCA
with, we will not exchange information until the IRS actually
does an on-the-ground visit with these jurisdictions to look at
their systems, procedures, and policies, to be sure that the
information will be kept confidential, and, indeed, that they
have sanctions in place in the event that they violate it.
And only once we become comfortable after kicking the tires
will we proceed under FATCA and the IGAs to the automatic
exchange of information with countries like that.
Senator Barrasso. Thank you.
Thank you, Mr. Chairman.
Senator Cardin. I just want to clarify one point from
Senator Barrasso's questioning, and that is, you indicated
earlier that these requests, generally, are for information
about an entity that is located in the country that is
requesting the information, about their activities in our
country.
But is it not also applicable to U.S. entities that we
would have to make information available to other countries?
Mr. Stack. It depends. The paradigmatic case is their
resident who might have some assets in this country.
Senator Cardin. I understand that.
Mr. Stack. In the business context, I think it can be much
broader. For example, their parent company might have a
subsidiary in this country, so, yes, it is our country's
taxpayer, but the foreign government might think that that
subsidiary has information about the tax liability of its
parent company back in the home jurisdiction.
So, in that circumstance, the IRS would be----
Senator Cardin. Could not it be a U.S. parent company with
operations in another country, that they want information about
the U.S. company?
Mr. Stack. Yes, it could be, Senator.
Senator Cardin. I just want to make sure that we have that
clear.
Mr. Stack. Right.
Senator Cardin. That is not the typical case.
Mr. Stack. Right.
Senator Cardin. So we are talking about U.S. entities
where--we have a responsibility to protect privacy of all our
information.
Mr. Stack. Yes.
Senator Cardin. But when we are dealing with a U.S. entity,
to me, it is a much higher standard.
Mr. Stack. Yes, Senator. I agree.
Senator Cardin. Thank you both very much.
Mr. Barthold, I hope you do not mind that we did not ask
you any questions, but we know how to find you whenever we need
to. [Laughter.]
Mr. Barthold. Call whenever, Mr. Chairman.
Senator Cardin. Thank you.
Thank you both very much for your testimony. Appreciate it.
We will now move to our second panel, which is the private
sector panel. We welcome Mr. William Reinsch, president of the
National Foreign Trade Council; Mr. Paul Nolan, the vice
president, tax, McCormick & Company, one of the great Maryland
companies, and I am personally pleased to have Mr. Nolan here;
and Ms. Nancy McLernon, president and CEO of the Organization
for International Investments.
Mr. Reinsch, we will start with you. You may proceed as you
wish. Your entire statement will be made part of our record, as
is the case with the other two witnesses.
STATEMENT OF WILLIAM A. REINSCH, PRESIDENT, NATIONAL FOREIGN
TRADE COUNCIL, WASHINGTON, DC
Mr. Reinsch. Thank you, Senator. It is a pleasure to be
back at the committee again after having been here some years
ago.
The National Foreign Trade Council is pleased to recommend
ratification of the treaties and protocols that you are
considering today. We appreciate the chairman's actions in
scheduling the hearing, and we strongly urge the committee to
reaffirm the United States historic opposition to double
taxation by giving its full support as soon as possible to the
pending treaties and protocols.
The NFTC, organized in 1914 and celebrating its centennial
this year--that is the end of the commercial--is an association
of some 250 U.S. business enterprises engaged in all aspects of
international trade and investment. Our membership covers the
full spectrum of industrial, commercial, financial, and service
activities. We seek to foster an environment in which U.S.
companies can be dynamic and effective competitors in the
international business arena.
To achieve this goal, American businesses must be able to
participate fully in business activities throughout the world
through the export of goods, services, technology, and
entertainment, and through direct investment in facilities
abroad.
As global competition grows ever more intense, it is vital
to the health of U.S. enterprises and to our continuing ability
to contribute the U.S. economy that they be free from excessive
foreign taxes or double taxation, an impediment to the flow of
capital that can serve as barriers to full participation in the
international marketplace.
Foreign trade is fundamental to U.S. economic growth.
Ninety-five percent of the world's consumers are outside the
United States. Tax treaties are a crucial component of the
framework that is necessary to allow that growth.
This is why the NFTC has long supported the expansion and
strengthening of the U.S. tax treaty network, and why we
recommend ratification of the items before you today.
While we are not aware of any opposition to the treaties
under consideration, the NFTC, as it has done in the past, as a
general cautionary note, urges the committee to reject any
opposition to the agreements based on the presence or absence
of a single provision.
No process as complex as the negotiation of a full-scale
tax treaty will be able to produce an agreement that will
completely satisfy every possible constituency, and no such
results should be expected.
Tax treaty relationships arise from difficult and sometimes
delicate negotiations aimed at resolving conflicts between the
tax laws and policies of the negotiating countries. The
resulting compromises always reflect a series of concessions by
both countries from their preferred positions.
Recognizing this, but also cognizant of the vital role tax
treaties play in creating a level playing field for enterprises
engaged in international commerce, the NFTC believes that
treaties should be evaluated on the basis of their overall
effect.
In other words, agreements should be judged on whether they
encourage international flows of trade and investment between
the United States and the other country. An agreement that
meets this standard will provide the guidance enterprises need
in planning for the future and provide nondiscriminatory
treatment for U.S. traders and investors, as compared to those
of other countries.
I want to emphasize how important treaties are in creating,
implementing, and preserving an international consensus on the
desirability of avoiding double taxation. The tax laws of most
countries impose withholding taxes, frequently at high rates,
on payments of dividends, interest, and royalties to
foreigners. And treaties are the mechanism by which these taxes
are lowered on a bilateral basis.
If U.S. enterprises cannot enjoy the reduced foreign
withholding rates offered by a tax treaty, noncredible high
levels of foreign withholding tax leave them at a competitive
disadvantage relative to traders and investors from other
countries. Tax treaties serve to prevent this barrier to U.S.
participation in international commerce.
If U.S. businesses are going to maintain a competitive
position around the world, treaty policy should prevent
multiple or excessive levels of foreign tax on cross-border
investments, particularly if their foreign competitors already
enjoy that advantage.
The United States has lagged behind other developed
countries in eliminating this withholding tax and leveling the
playing field for cross-border investment. The European Union
eliminated the tax on intra-EU parent-subsidiary dividends over
a decade ago, and dozens of bilateral treaties between foreign
countries also follow that route. The majority of OECD
countries now have bilateral treaties in place that provide for
a zero rate on parent-subsidiary dividends.
Tax treaties also provide other features that are vital to
the competitive position of U.S. businesses. For example, by
prescribing internationally agreed thresholds for the
imposition of taxation by foreign countries on inbound
investment, and by requiring foreign tax laws to be applied in
a nondiscriminatory manner to U.S. enterprises, treaties offer
a significant measure of certainty to potential investors.
Another extremely important benefit which is available
exclusively under tax treaties is the mutual agreement
procedure. This bilateral administrative mechanism avoids
double taxation on cross-border transactions.
The Swiss and Luxembourg protocols that are before the
committee today update agreements between the United States and
these countries that were signed many years ago.
The Hungary tax treaty replaces the previous treaty, which
was signed in 1979. The Chilean tax treaty is the first
bilateral tax treaty between the United States and Chile. The
Multilateral Convention has been signed by 61 countries.
The protocols improve conventions that have stimulated
increased investment, greater transparency, and a stronger
economic relationship between our countries. The Swiss and
Luxembourg treaties strengthen the information exchange
provisions to alleviate concerns that U.S. taxpayer information
was not accessible by the IRS.
We are pleased that the Swiss protocol provides for
mandatory arbitration. We thank the committee for its prior
support of this evolution in U.S. tax treaty policy, and we
strongly urge you to continue that support by approving all
five of these treaties and protocols.
The NFTC supports the provision in the Swiss protocol that
expands the prohibition on source-country taxation on dividends
beneficially owned by pension or other retirement arrangements
resident in the other treaty country.
Under the Swiss protocol, the prohibition on source-country
taxation also applies to dividends that are beneficially owned
by an individual retirement savings plan set up in and owned by
a resident of the other treaty country, so long as the
competent authorities agree that the individual retirement
savings plan generally corresponds to an individual retirement
savings plan recognized in the other treaty country for tax
purposes.
The treaty with Chile signed in 2010 would be our first
with that country, and its ratification would present an
important milestone lowering tax barriers to U.S. companies
operating in Latin America where, as you know, we so far have
few such agreements.
The Swiss and Luxembourg treaty protocols would, among
other measures, update the current information exchange
provisions with those countries to override their bank secrecy
laws. The Swiss protocol would also unable the U.S. Government
to collect tax revenues from hidden offshore accounts of U.S.
tax evaders while specifically protecting against fishing
expeditions by either country.
The Multilateral Convention was amended at the request of
the G20 to align it to the international standard on exchange
of information. The Convention is a multilateral agreement
designed to facilitate international cooperation among tax
authorities to improve their ability to tackle tax evasion and
avoid avoidance, and to ensure full implementation of national
tax laws while respecting the fundamental rights of taxpayers.
Additionally, important safeguards included in the Hungary
tax treaty prevent treaty shopping, which you have already
discussed with Mr. Stack a few minutes ago.
The Swiss protocol provides for mandatory arbitration of
certain cases that cannot be resolved by the competent
authorities within a specified period of time. Following the
arbitration provisions already adopted in the Canadian, German,
Belgium, and French treaties, the arbitration provision
included in the Swiss protocol will help to resolve cases where
the competent authorities are unable to reach agreement.
NFTC member countries use tax treaty arbitration as a tool
to strengthen and not replace the existing treaty dispute
resolution procedures conducted by the competent authorities.
Although the existing procedures work well to resolve most of
the disputes that arise in cases involving Switzerland and the
United States, the inclusion of the arbitration provisions will
expedite the resolution disputes in all competent authority
cases.
The Swiss protocol has already been ratified by
Switzerland, and its approval is essential in resolving
hundreds of long-running U.S. tax investigations.
Finally, Mr. Chairman, let me express our gratitude to you
and to members of the committee for giving international
economic relations prominence in the committee's agenda,
particularly when the demands upon the committee's time are so
pressing. We would also like to express our appreciation for
the efforts of both majority and minority staff, which have
enabled this hearing to be held at this time.
We urge the committee to proceed with ratification of these
agreements as expeditiously as possible. Thank you.
[The prepared statement of Mr. Reinsch follows:]
Prepared Statement of William A. Reinsch
Mr. Chairman and members of the committee, the National Foreign
Trade Council (NFTC) is pleased to recommend ratification of the
treaties and protocols under consideration by the committee today. We
appreciate the chairman's actions in scheduling this hearing, and we
strongly urge the committee to reaffirm the United States historic
opposition to double taxation by giving its full support as soon as
possible to the pending tax treaty protocol agreements with
Switzerland, and Luxembourg, the tax treaties with Hungary and Chile,
and the OECD Multilateral Convention on Mutual Administrative
Assistance in Tax Matters.
The NFTC, organized in 1914, is an association of some 250 U.S.
business enterprises engaged in all aspects of international trade and
investment. Our membership covers the full spectrum of industrial,
commercial, financial, and service activities, and we seek to foster an
environment in which U.S. companies can be dynamic and effective
competitors in the international business arena. To achieve this goal,
American businesses must be able to participate fully in business
activities throughout the world through the export of goods, services,
technology, and entertainment, and through direct investment in
facilities abroad. As global competition grows ever more intense, it is
vital to the health of U.S. enterprises and to their continuing ability
to contribute to the U.S. economy that they be free from excessive
foreign taxes or double taxation and impediments to the flow of capital
that can serve as barriers to full participation in the international
marketplace. Foreign trade is fundamental to the economic growth of
U.S. companies. Ninety-five percent of the world's consumers are
outside of the United States. Tax treaties are a crucial component of
the framework that is necessary to allow that growth and balanced
competition.
This is why the NFTC has long supported the expansion and
strengthening of the U.S. tax treaty network and why we recommend
ratification of the items before you today.
general comments on tax treaty policy
While we are not aware of any opposition to the treaties under
consideration, the NFTC, as it has done in the past as a general
cautionary note, urges the committee to reject any opposition to the
agreements based on the presence or absence of a single provision. No
process as complex as the negotiation of a full-scale tax treaty will
be able to produce an agreement that will completely satisfy every
possible constituency, and no such result should be expected. Tax
treaty relationships arise from difficult and sometimes delicate
negotiations aimed at resolving conflicts between the tax laws and
policies of the negotiating countries. The resulting compromises always
reflect a series of concessions by both countries from their preferred
positions. Recognizing this, but also cognizant of the vital role tax
treaties play in creating a level playing field for enterprises engaged
in international commerce, the NFTC believes that treaties should be
evaluated on the basis of their overall effect. In other words,
agreements should be judged on whether they encourage international
flows of trade and investment between the United States and the other
country. An agreement that meets this standard will provide the
guidance enterprises need in planning for the future, provide
nondiscriminatory treatment for U.S. traders and investors as compared
to those of other countries, and meet an appropriate level of
acceptability in comparison with the preferred U.S. position and
expressed goals of the business community.
The NFTC wishes to emphasize how important treaties are in
creating, implementing, and preserving an international consensus on
the desirability of avoiding double taxation, particularly with respect
to transactions between related entities. The tax laws of most
countries impose withholding taxes, frequently at high rates, on
payments of dividends, interest, and royalties to foreigners, and
treaties are the mechanism by which these taxes are lowered on a
bilateral basis. If U.S. enterprises cannot enjoy the reduced foreign
withholding rates offered by a tax treaty, noncreditable high levels of
foreign withholding tax leave them at a competitive disadvantage
relative to traders and investors from other countries that do enjoy
the treaty benefits of reduced withholding taxes. Tax treaties serve to
prevent this barrier to U.S. participation in international commerce.
If U.S. businesses are going to maintain a competitive position
around the world, treaty policy should prevent multiple or excessive
levels of foreign tax on cross-border investments, particularly if
their foreign competitors already enjoy that advantage. The United
States has lagged behind other developed countries in eliminating this
withholding tax and leveling the playing field for cross-border
investment. The European Union (EU) eliminated the tax on intra-EU,
parent-subsidiary dividends over a decade ago, and dozens of bilateral
treaties between foreign countries have also followed that route. The
majority of OECD countries now have bilateral treaties in place that
provide for a zero rate on parent-subsidiary dividends.
Tax treaties also provide other features that are vital to the
competitive position of U.S. businesses. For example, by prescribing
internationally agreed thresholds for the imposition of taxation by
foreign countries on inbound investment, and by requiring foreign tax
laws to be applied in a nondiscriminatory manner to U.S. enterprises,
treaties offer a significant measure of certainty to potential
investors. Another extremely important benefit which is available
exclusively under tax treaties is the mutual agreement procedure. This
bilateral administrative mechanism avoids double taxation on cross-
border transactions.
The NFTC also wishes to reaffirm its support for the existing
procedure by which Treasury consults on a regular basis with this
committee, the tax-writing committees, and the appropriate
congressional staffs concerning tax treaty issues and negotiations and
the interaction between treaties and developing tax legislation. We
encourage all participants in such consultations to give them a high
priority. Doing so enables improvements in the treaty network to enter
into effect as quickly as possible.
agreements before the committee
The Swiss and Luxembourg protocols that are before the committee
today update agreements between the United States and these countries
that were signed many years ago. The Hungary tax treaty replaces the
previous treaty which was signed in 1979. The Chilean tax treaty is the
first bilateral tax treaty between the United States and Chile. The
OECD Multilateral Convention has been signed by 61 countries. The
protocols improve conventions that have stimulated increased
investment, greater transparency, and a stronger economic relationship
between our countries. The Swiss and Luxembourg treaties strengthen the
information exchange provisions to alleviate concerns that U.S.
taxpayer information was not accessible by the Internal Revenue
Service. We are pleased that the Swiss protocol provides for mandatory
arbitration. We thank the committee for its prior support of this
evolution in U.S. tax treaty policy, and we strongly urge you to
continue that support by approving all five of these tax treaties and
protocols.
The NFTC supports the provision in the Swiss protocol that expands
the prohibition on source-country taxation of dividends beneficially
owned by pension or other retirement arrangements resident in the other
treaty country. Under the Swiss protocol, the prohibition on source-
country taxation also applies to dividends that are beneficially owned
by an individual retirement savings plan set up in, and owned by a
resident of, the other treaty country, so long as the competent
authorities agree that the individual retirement savings plan generally
corresponds to an individual retirement savings plan recognized in the
other treaty country for tax purposes.
The proposed tax treaty with Chile, signed in 2010, would be our
first with that country, and its ratification would represent an
important milestone in lowering tax barriers to U.S. companies
operating in Latin America, where we have few such agreements. The
proposed treaty would lower withholding taxes on a bilateral basis and
protect the interests of U.S. taxpayers in that country.
The Swiss and Luxembourg treaty protocols, both signed in 2009,
would among other measures update the current information exchange
provisions with those countries to override their bank secrecy laws.
The Swiss protocol would also enable the U.S. Government to collect
U.S. tax revenues from hidden offshore accounts of U.S. tax evaders,
while specifically protecting against ``fishing expeditions'' by either
country.
The OECD Multilateral Convention was amended at the request of the
G20 to align it to the international standard on exchange of
information. The Convention is a multilateral agreement designed to
facilitate international cooperation among tax authorities to improve
their ability to tackle tax evasion and avoidance and to ensure full
implementation of national tax laws, while respecting the fundamental
rights of taxpayers.
Additionally, important safeguards included in the Hungary tax
treaty prevent ``treaty shopping.'' In order to qualify for the reduced
rates specified by the treaties, companies must meet certain
requirements so that foreigners whose governments have not negotiated a
tax treaty with Hungary or the United States cannot free-ride on this
treaty. Similarly, provisions in the sections on dividends, interest,
and royalties prevent arrangements by which a U.S. company is used as a
conduit to do the same. Extensive provisions in the treaties are
intended to ensure that the benefits of the treaty accrue only to those
for which they are intended.
The Swiss protocol provides for mandatory arbitration of certain
cases that cannot be resolved by the competent authorities within a
specified period of time. Following the arbitration provisions already
adopted in the Canadian, German, Belgian and French tax treaties, the
arbitration provision included in the Swiss protocol will help to
resolve cases where the competent authorities are unable to reach
agreement. NFTC member companies view tax treaty arbitration as a tool
to strengthen, not replace, the existing treaty dispute resolution
procedures conducted by the competent authorities. Although the
existing mutual agreement procedures work well to resolve most of the
disputes that arise in cases involving Switzerland and the United
States, the inclusion of the arbitration provisions in the Swiss tax
protocol will expedite the resolution of disputes in all competent
authority cases. The Swiss protocol has been ratified by Switzerland,
and its approval is essential to resolving hundreds of long-running
U.S. tax investigations.
in conclusion
Finally, the NFTC is grateful to the chairman and the members of
the committee for giving international economic relations prominence in
the committee's agenda, particularly when the demands upon the
committee's time are so pressing. We would also like to express our
appreciation for the efforts of both majority and minority staff which
have enabled this hearing to be held at this time.
We urge the committee to proceed with ratification of these
important agreements as expeditiously as possible.
Senator Cardin. Thank you very much for your testimony.
Mr. Nolan.
STATEMENT OF PAUL NOLAN, VICE PRESIDENT, TAX, McCORMICK &
COMPANY, INC., SPARKS, MD
Mr. Nolan. Good morning, Mr. Chairman, and thank you for
that warm welcome. Good morning also Ranking Member Barrasso. I
appreciate the opportunity to speak today and the invitation to
be here. McCormick does not often testify in Washington, and it
is a great opportunity to be here on an important topic such as
this.
A little bit of background on McCormick. We know that the
chairman knows, but just for the rest of the committee, we are
a $4 billion company and we are growing. We manufacture,
market, and distribute spices, flavors, condiments, and
seasoning mixes in retail outlets, to food manufacturers, and
to food companies around the world. We sell into about 125
countries currently.
Approximately 45 percent of our sales are to customers
outside the United States, and that number is growing each
year. We employ over 10,000 employees and approximately 2,000
of those are in Maryland.
Our heritage is Baltimore. We started on the Inner Harbor.
A gentleman by the name of Willoughby McCormick started selling
root beer mix in 1889, right at the harbor. And we have grown
into the global enterprise that we are today.
We now have our global headquarters in Hunt Valley, MD, and
we have most of our manufacturing for the United States there.
And of the finished goods that we sell in the United States,
more than 90 percent is manufactured somewhere in the United
States.
In 2014, we are celebrating our 125th year with the theme
of ``A Flavor of Together.''
We have grown through innovation. We have grown through a
clear focus on employee engagement and product quality.
I am here today to testify in favor of the ratification of
the treaties and protocols that are the subject of the hearing.
First of all, why do multinationals care about treaties?
The question arose with the prior panel. There are three clear
reasons that we identify when considering treaties.
First and foremost, tax treaties provide clear thresholds
and triggers for taxation. In a jurisdiction where there is a
tax, and this was covered by the prior panel I think pretty
clearly, circumstances going into a country where there is not
a treaty is effectively domestic tax law in that country for
the U.S. company entering that jurisdiction. And whether the
company is given equal treatment or is at a competitive
disadvantage under domestic tax is an open question. A treaty
provides rules of the road with respect to that, and a level
playing field.
Secondly, the mutual agreement procedure, it provides for
principle-based government-to-government resolution of the
double tax issues that arise under the treaty. And we find
those to be very important, and I will address later the
modifications that are happening and the significance of that.
This process is the tool for assuring no double taxation due to
differences.
In the absence of a MAP procedure, a global U.S.-based
multinational has limited resources in that circumstance to
address the double taxation. And again, political interference
and parochial circumstances can get in the way.
Finally, the third reason, principal reason, is the
withholding structures with respect to intellectual property
and interest payments. Capital crosses boarders from the United
States, and it can be in the form of debt, it can be in the
form of intellectual property. We want to make sure that the
royalties are treated fairly.
In addition to those three benefits, there are two
significant benefits to the U.S. economy that we can see as
well. First, trade and outbound investment from the United
States itself--headquarters activities in the United States
spurs greater job growth and also helps the suppliers grow
while the headquarters companies grow here. That means more
Federal, State, and local revenues, in addition to the jobs
that it creates, and it also just basically supports the
economy.
Also, the lower trade restrictions that occur under a tax
treaty help with fundamental trade.
And full disclosure, we are a member of the NFTC, a proud
member of the NFTC, on the board. And we associate ourselves
with their testimony.
The support for free trade is very important to the vibrant
growth of the U.S.-based multinationals.
But secondly, also treaties provide for a great environment
for inbound investment as well.
Non-U.S. investors have a better environment for investing
in terms of making sure that their capital is protected and
that they have rules of the road that are safe. So royalties
paid back to foreign parents for intellectual property,
dividends, et cetera, there are also clear rules of the road.
Just a few more observations about treaties, the exchange
of information provisions, there has been some discussion about
that. We think they strike a careful balance. There is never
going
to be a perfect world for that sort of information exchange.
However, we think that the U.S. Treasury and the IRS, with
their processes and procedures, is pretty safe, and that should
preclude fishing expeditions.
Also, if you take notice of events outside the United
States, in terms of tax developments, the rules of the road
that the United States has through these treaties is good
protection for U.S. companies as opposed to what can emerge
outside of those rules. And so a lot of times these days, U.S.
companies, not McCormick, are targets of these non-U.S.
governments, so it is better to have rules than not have rules.
The broad network of tax treaties provides fair framework
and reduced rates of withholding taxes, and then also
limitation on benefits prevents treaty shopping, which, if you
are a scrupulous taxpayer, you do not necessarily like
unscrupulous taxpayers abusing the rules.
The mutual agreement procedures, a significant point to
make on that are the improvements in our treaties past
generation of treaties with the baseball arbitration. The mere
fact that two countries may need to submit their disagreement
to an arbitrator who can make a final judgment is a great
incentive for two countries to reach resolution without the
need for actual arbitration. We support the expansion of
baseball arbitration, and it is in one of these protocols.
Finally, my last thought before I say ``thank you for your
time'' is that tax reform is on the horizon, and we are
supportive of broad-based tax reform. But before it happens, as
a residence-based country with residence-based worldwide
taxation, it is more in the United States interest to have a
better treaty network to prevent double taxation, particularly
as other jurisdictions lower their rates, because there is more
for the United States to pick up.
So the bottom line is, many of these countries, in a world
gone territorial, they are very much about source taxation. We
are about residence taxation. Our current treaty network
protects the U.S. fisc in this environment in a very unique
way, and a more important way every day.
So, Mr. Chairman, I know you have seen some of these
treaties before and it is deja vu for you. We know you are a
supporter, and we are preaching to the choir, but we want to
completely support these treaties and advocate for their
further action. Thank you.
[The prepared statement of Mr. Nolan follows:]
Prepared Statement of Paul B. Nolan
Good morning Mr. Chairman, Ranking Member Barrasso, and members of
the committee. Thank you for the opportunity to testify at today's
hearing. My name is Paul Nolan and I am the Vice President, Tax, at
McCormick & Company, Inc.
McCormick & Company, Incorporated, is a global leader in flavor
with $4 billion in annual sales. McCormick manufactures, markets and
distributes spices, seasoning mixes, condiments and other flavorful
products to the entire food industry--retail outlets, food
manufacturers, and foodservice businesses--in more than 125 countries
and territories. Approximately 45 percent of our sales are to customers
located outside the United States and that number is growing each year.
We employ more than 10,000 people in locations around the world,
including approximately 2,000 in Maryland, where our company began at
the foot of the Baltimore Harbor, 1889, and where our company has its
global headquarters and most of its U.S. manufacturing and research and
development. In 2014, we are celebrating our 125th year under the theme
of ``The Flavor of Together.''
Since Willoughby M. McCormick founded the company selling root beer
extract in 1889, McCormick has demonstrated a strong commitment to the
communities in which it operates. Innovation in flavor and a clear
focus on employee engagement and product quality has allowed McCormick
to grow its business globally and become the flavor leader it is today.
I am here today to testify in favor of the ratification of the two
treaties and the three protocols amending three other treaties that are
the subject of this hearing.
Mr Chairman, Ranking Member Barrasso, and members of this
committee, tax treaties benefit the U.S. economy and U.S.-based
multinational companies (MNCs) that are globally engaged, such as
McCormick, in three ways.
First, tax treaties provide clear thresholds and triggers for
foreign taxation of global American companies' income generated from
trading with foreign customers. Bilateral tax treaties allow global
American companies to invest and compete abroad for foreign customers
through: (i) greater certainty regarding future income tax costs and
(ii) equal treatment among other non-U.S. competitors because there is
no competitive disadvantage arising from higher local taxation of U.S.
companies' investment vs. foreign business investment in the treaty
country.
Second, Mutual Agreement Procedures (MAP) are a critically
important tool to facilitate resolution of income tax disputes between
governments. Tax treaties provide the two governments who are disputing
the income tax liability of a single company to enter into a principle-
based government-to-government negotiation that can resolve the
disputed income tax liability. This process assures no double-taxation
due to differences in taxation principles between countries.
In the absence of MAP procedures, globally engaged U.S. companies
would have limited recourse in resolving tax issues on their own. In
some countries, tax authorities or judiciaries can be hostile to U.S.
investors in particular, or all foreign investors in general, subject
to political interference, or motivated by domestic budget pressures.
As a result, foreign tax authorities operating without tax treaties
might levy duplicative capital gains and withholding taxes on U.S.
company investments unsupported by international tax policy norms. Tax
treaties bring with them OECD principles on proper attribution of
profits, rules on permanent establishment, and other broadly accepted
principles.
Third, tax treaties provide for mutually agreed reduced rates of
withholding taxes on royalty payments for U.S.-owned intellectual
property and interest payments paid with respect to U.S. debt. Without
tax treaties in force, U.S. companies pay higher taxes on the same
types of business transactions as foreign MNCs with broader and more
effective treaty networks. By avoiding higher or additional layers of
income tax, tax treaties also increase the net return to U.S.-owned
intellectual property which increases the incentive to develop and own
intellectual property in the United States.
As you well know, Mr Chairman and Ranking Member Barrasso,
expanding the network of tax treaties benefits the U.S. economy. Tax
treaties improve the environment for international trade and outbound
investment, with major benefits to U.S. companies, workers, consumers,
and taxpayers.
The headquarters activity generated by globally engaged U.S.
companies' investments abroad spurs greater job growth here at home and
along their supply chains. This increases federal, state, and local tax
revenues that are sustainable only in an environment which continues to
support free trade in goods and services.
Increased restrictions on trade will disadvantage consumers by
reducing consumer choice, increasing prices, and favoring local
producers, which makes globally engaged American companies less able to
compete in the provision of goods and services to consumers around the
world. Reduced foreign tax burdens on royalties paid to the United
States increases the incentive for investment in intangible property in
the United States by increasing the expected return of U.S.-owned
intellectual property. This results in more investment in intellectual
property in the United States.
Tax treaties also improve the environment for inbound investment
that benefits both consumers and taxpayers. U.S. affiliates of foreign
MNCs pay royalties to their foreign parent companies for the use of the
foreign-owned intellectual property in the United States. Tax treaties
enhance the environment for certainty in business planning and
potentially reducing U.S. tax costs on inbound investments. This
results in increased investment in the United States, with associated
benefits for employment, tax revenue, and consumer choice.
``Exchange of Information'' provisions provide appropriate and
limited tools to reduce tax evasion by U.S. businesses and individuals
while precluding the use of these provisions for ``fishing
expeditions'' on the part of foreign or U.S. tax authorities without
evidence of such evasion.
In conclusion, we support as broad a network of tax treaties as
possible that reduce rates of withholding taxes and nonresident capital
gains taxes. We support ``limitation on benefits'' provisions
consistent with the latest model U.S. tax treaty. They prevent ``treaty
shopping.'' Unilateral application of ``generally antiavoidance rules
(GAAR) should be avoided as they are arbitrary in their application and
often result in double-taxation.
In the recent past, some of the government-to-government
negotiations that are intended to resolve double-taxation for taxpayers
have become bogged down when one party or the other refuses to work the
differences over the amount of income to be taxed in each jurisdiction.
So-called ``baseball'' arbitration is a solution to this problem of
deadlocked negotiations between competent authorities. Baseball
arbitration requires each country seeking to tax the same income to
submit a ``last best offer.'' The arbitrator then selects one of the
offers to resolve the dispute. While it is rarely invoked, it does
provide an incentive for two disputing jurisdictions to come to a
timely agreement that avoids double-taxation. Baseball arbitration does
not create nowhere income--it ensures that a taxpayer is not subjected
to double taxation.
Thank you once again for the opportunity to testify and I would be
happy to answer any questions.
Senator Cardin. Thank you very much, Mr. Nolan, for your
testimony.
Ms. McLernon.
STATEMENT OF NANCY McLERNON, PRESIDENT AND CEO, ORGANIZATION
FOR INTERNATIONAL INVESTMENT, WASHINGTON, DC
Ms. McLernon. Good morning, Chairman Cardin and Ranking
Member Barrasso and distinguished members of the committee. I
thank you for the opportunity to testify this morning, and I
applaud your leadership in holding this hearing.
I am here to talk about the flip side of most of what has
been discussed this morning, sort of the opposite side of the
investment coin, if you will.
I am president and CEO of the Organization for
International Investment, and OFII is a business association
exclusively comprised of U.S. subsidiaries of foreign
companies. Our mission is to ensure that the United States
remains the most attractive location for foreign investment.
OFII strongly supports our Nation's tax treaty network.
These bilateral agreements provide a reliable tax environment
for companies doing business in several jurisdictions, much of
which we have already talked about this morning. Tax treaties
prevent double taxation and provide important information-
sharing between governments to ensure appropriate taxes are
paid.
Although many focus on how tax treaties impact homegrown
companies like McCormick, they are also extremely important in
promoting a competitive environment for foreign investment in
the United States.
Foreign investment is a catalyst for economic growth that
fuels American manufacturing, innovation, trade, and overall
job creation. U.S. subsidiaries employ 5.6 million workers in
the United States, including 17 percent of the U.S.
manufacturing workforce, and account for 6.3 percent of private
sector GDP. In Maryland, U.S. subsidiaries employ over 105,000,
and in Wyoming, over 8,400.
In a recent study, we found that insourcing companies,
which is how we refer to them, outperformed the private sector
average across a number of key economic indicators over the
past decade.
For example, U.S. subsidiaries increased U.S. R&D funding
at double the rate, and their contributions to U.S. GDP
increased by over 25 percent, nearly double the private
sector's 14 percent increase.
However, competition to attract and retain global
investment has never been stronger. Over the last decade, the
United States has seen its share of global investment
dramatically decline from roughly 37 percent in 2000 to just
over 17 percent in 2012. This is why it is critically important
for the United States to implement policies that make us more
attractive for global companies to invest and generate jobs
here.
Tax treaties, while not as prominent as bilateral trade
agreements, play an essential role in encouraging greater
foreign investment in the U.S. economy.
Let me explain it pretty simply. We talked about it
somewhat. So when companies operate in multiple tax
jurisdictions, situations can occur when two countries both try
to tax a single item of earned income that moves across
borders. One country may tax the income because the corporation
is a resident of that country, while the other country may tax
the income because the activity generating the income occurred
within its borders. This double taxation can be a clear barrier
to foreign investment.
Tax treaties help ensure that businesses are not taxed
twice on the same income while accounting for concerns of tax
avoidance. This is done in part by reducing or eliminating
withholding taxes on cross-border income flows between
affiliated companies. By ensuring that common business expenses
like royalty and interest payments are not subject to double
taxation, tax treaties allow insourcing companies to invest
more in the very business activities that drive economic growth
in the United States.
In addition, tax treaties promote information-sharing
between governments and lay the foundation for cooperative
efforts between tax authorities to better administer and
enforce tax laws. This, too, creates a more conducive
environment for foreign investment, as it provides a company
with greater certainty on the application of tax rules.
In these and other ways, tax treaties play a significant
role in providing certainty to cross-border businesses while
advancing economic interests of the United States
Likewise, the pending bilateral treaties and protocols
before this committee today contain proinvestment measures and
will help coordinate and enforce tax administration with
important economic partners.
The protocols with Switzerland and Luxembourg modernize
outdated information exchange capabilities between nations,
which is critical for resolving cross-border investigations,
protecting the integrity and fairness of the global tax system,
and improving the legal and regulatory climates for
multinational firms.
This will provide greater certainty to companies based in
countries that rank as the sixth- and seventh-largest investors
into the United States. That certainty will benefit not only
the companies, but their American employees.
Switzerland- and Luxembourg-based companies have infused
billions of dollars and hired tens of thousands of U.S. workers
for decades. For example, Zurich Insurance Group recently
celebrated 100 years in the State of Illinois. And Nestle USA
has been an insourcing company for over 110 years. Swiss-based
firms alone in the United States provide jobs for over 446,000
Americans.
Hungarian-based companies are also significant investors in
the U.S. market with cumulative investment totaling over $20
billion. Hungary ranked in the top 10 investing countries for
the United States.
The second proposed treaty with Chile would be an important
milestone as only the second tax treaty with a South American
country. By reducing withholding taxes, this treaty can
encourage greater investment from an important economic ally.
The failure of the Senate to ratify many of these
agreements in the past few years has slowed the progress on tax
treaties with other countries and sends a message to the
international community that the United States may not be
committed to maintaining these important adjuncts to
international commerce.
The proposed treaties we are discussing today are not the
only tax treaties that have been signed and are awaiting Senate
ratification. Last year, the United States signed tax treaties
or protocols with Japan, Poland, and Spain. In addition to
that, the United States is negotiating with the U.K. and
Vietnam.
The lingering ratification process also scares away
potential new investors from firms based in those treaty
countries.
In closing, bilateral tax treaties and protocols encourage
the flow of cross-border investment and economic activity. The
United States needs to restore life back into our tax treaty
network. It needs to send a message around the world that the
United States takes these treaties seriously and wants to
encourage greater levels of foreign investment in the United
States.
Approving the protocols with Switzerland and Luxembourg and
the conventions with Chile and Hungary will accomplish these
goals.
Thank you and I look forward to any questions.
[The prepared statement of Ms. McLernon follows:]
Prepared Statement of Nancy L. McLernon
introduction
Good morning. Senator Cardin, Ranking Member Barrasso, and
distinguished members of the committee, I thank you for the opportunity
to testify this morning. I applaud your leadership in holding this
hearing on tax treaties.
My name is Nancy McLernon and I am President and CEO of the
Organization for International Investment (OFII). OFII is a business
association exclusively comprised of U.S. subsidiaries of foreign
companies. Our mission is to ensure that the United States remains the
most attractive location for global investment. As such, we advocate
for nondiscriminatory treatment in U.S. law and regulation for these
firms and the millions of Americans they employ.
overview
OFII and its member companies strongly support expansion and
updating of our Nation's tax treaty network. These bilateral agreements
provide a reliable tax environment for companies doing business in
several jurisdictions. Tax treaties prevent double taxation and provide
important sharing of information between governments to ensure
appropriate taxes are paid. Although many proponents focus on how tax
treaties impact home-grown companies, they are also extremely important
in promoting a competitive environment for foreign investment in the
United States.
foreign direct investment important to u.s. economy
Foreign direct investment is a catalyst for economic growth that
fuels American manufacturing, innovation, trade, and overall job
creation.
U.S. subsidiaries employ 5.6 million workers in the United States,
including 17 percent of the U.S. manufacturing workforce, and account
for 6.3 percent of private sector GDP. In addition, these companies
engage in high levels of research and development, make extensive
capital investments in new facilities and equipment, and produce a
large share of U.S. exports to markets abroad. In a recent study, we
found that insourcing companies outperformed the private sector average
across a number of key economic indicators over the past decade. For
example, U.S. subsidiaries increased research and development funding
at double the rate and their contributions to U.S. GDP increased by
over 25 percent, nearly double the private sector's 14-percent
increase.
In every state and every industry sector, U.S. subsidiaries of
global companies are important players in providing high-quality jobs
and much-needed investment. Recent examples include: Denmark-based Novo
Nordisk's $225 million redevelopment project and new headquarters
opening in New Jersey; Sweden-based Electrolux's announcement to add
650 jobs at their plant in Tennessee within the next few years;
British-based Balfour Beatty's new office in Baltimore and over
$1.9 billion spent on construction projects in the State of Maryland;
and Belgium-based Solvay's Soda Ash plant expansion in Wyoming to
increase production by 12 percent.
As a business community, these insourcing companies generate
precisely the types of high-value jobs and economic activities
policymakers are working to bring to their states.
However, competition to attract and retain global investment has
never been stronger, providing companies with an unprecedented array of
options when looking to expand into new markets around the world. Over
the last decade, the United States has seen its share of global
investment dramatically decline, from roughly 37 percent in 2000 to
just over 17 percent in 2012. This is why it is critically important
for the United States to implement policies that make the United States
more attractive for global companies to invest.
tax treaties encourage increased foreign direct investment
in the united states
Tax treaties, while not as prominent as bilateral trade agreements,
play an essential role in encouraging greater foreign direct investment
in the U.S. economy. This can be seen by the growth in investment flows
from our treaty partners. For example, since the Protocol to the French
Income Tax Treaty was ratified at the end of 2009, we have seen a 144-
percent increase in FDI flows from France. In fact, French investment
increased sevenfold between 2011 and 2012, reaching nearly $22 billion.
The reason for this is simple. When companies operate in multiple
tax jurisdictions, situations can occur where two countries both try to
tax a single item of earned income that moves across borders. One
country may tax the income because the corporation is a resident in
that country, while the other country may tax the income because the
activity generating the income occurred within its borders. This double
taxation can be a clear barrier to foreign direct investment.
Tax treaties help ensure that businesses are not taxed twice on the
same income while accounting for concerns of tax avoidance. This is
done, in part, by reducing or eliminating withholding taxes on cross
border income flows between affiliated companies. By ensuring that
common business expenses like royalty and interest payments are not
subject to double taxation, tax treaties allow insourcing companies to
invest more in the very business activities that drive economic growth,
like expanding operations, purchasing new equipment, hiring more U.S.
workers, and selling trademarked or licensed goods.
In addition, tax treaties promote information-sharing between
governments and lay the foundation for cooperative efforts between tax
authorities to better administer and enforce tax laws. This too creates
a more conducive environment for foreign direct investment as it
provides companies with greater certainty on the application of tax
rules.
In these and other ways, the U.S. network of more than 60 bilateral
income tax treaties plays a significant role in providing certainty to
cross-border businesses while advancing the economic interests of the
United States in the global economy.
Likewise, the pending bilateral treaties and protocols before the
committee today contain pro-investment measures and will help
coordinate and enforce tax administration with important economic
partners.
Specifics on Pending Protocols & Tax Treaties: Switzerland, Luxembourg,
Hungary & Chile
The protocols with Switzerland and Luxembourg modernize outdated
information exchange capabilities between nations, which is critical to
resolving cross-border investigations, protecting the integrity and
fairness of the global tax system and improving the legal and
regulatory climates for multinational firms. This will provide greater
certainty to companies based in countries that rank as the sixth- and
seventh-largest investors into the United States in developing their
near- and medium-term investment plans. That certainty will benefit not
only the companies, but their employees and the communities in which
they are located as well.
Switzerland and Luxembourg based companies have infused billions of
dollars and hired thousands of United States workers for decades. For
example, Zurich Insurance Group recently celebrated 100 years in the
State of Illinois and Nestle USA has been an insourcing company for
over 110 years. Overall, foreign direct investment from Switzerland and
Luxembourg stands at $204 billion and $202 billion respectively through
the end of 2012. Swiss-based firms alone provide 446,300 American jobs.
Collectively, these countries account for nearly 9 percent of all
direct jobs from global investment in the United States.
Hungarian-based companies are also significant investors in the
U.S. market, with cumulative investment totaling over $20 billion.
Hungary ranked in the top 10 investing countries for the United States
for 2012.
The proposed treaty with Chile would be an important milestone as
only the second tax treaty with a South American country. By reducing
withholding taxes, this treaty could encourage greater investment from
an important economic ally as well as providing greater protection to
U.S. companies operating in that market.
Prompt Consideration Sends an Important Signal to the Business
Community and Trading Partners and Gives U.S. Negotiators
Greater Credibility
It is important to note that failure to act on these agreements in
an expeditious manner has a number of negative consequences. The
failure of the Senate to ratify many of these agreements in the past
few years has slowed the progress on tax treaties with other countries
and sends a message to the international community that the United
States is not committed to maintaining these important adjuncts to
international commerce.
The proposed treaties we are discussing today are not the only tax
treaties that have been signed and are awaiting Senate ratification.
Last year, the United States signed tax treaties or protocols with
Japan, Poland, and Spain. In addition to that, the United States is
negotiating with the United Kingdom and Vietnam. These are significant
markets for the United States, considering that British and Japanese
companies have invested $795 billion combined in the United States,
making them the top two investing countries by cumulative stock.
The lingering ratification process also scares away potential new
investment from firms, based in proposed treaty countries, which are
evaluating investment locations around the world and making long-term
strategic plans. It is difficult for these businesses to commit to U.S.
investments unless they are confident a treaty will promptly come into
force.
conclusion
In closing, bilateral tax treaties and protocols encourage the flow
of cross-border investment and economic activity.
The United States needs to restore life back into our tax treaty
network. It needs to send a message to our negotiating partners and
businesses around the world that the United States takes these treaties
seriously and wants to encourage greater levels of foreign direct
investment and the jobs it generates.
Approving the protocols with Switzerland and Luxembourg and the
Conventions with Chile and Hungary will accomplish these important
goals.
Senator Cardin. Well, let me thank all three of you for
your testimony. As I indicated in my opening comments, the
hearing we held in 2011 did not include a private sector panel,
so we very much appreciate having the private sector
represented here.
Mr. Nolan, I thought the point that you made about tax
reform, and the fact that the United States is based upon
resident rather than based upon territory, is a very valid
point as to whether tax treaties are mutually beneficial to
both countries. There is a direct interest in the United States
on getting information about our residents' activities and
other countries. That may not be true with some of the other
partners that we have.
And I noticed that Senator Barrasso and I both are strong
supporters of trying to move forward with lower corporate tax
rates. The fact is that we do have high corporate tax rates,
and, therefore, there can be complications on us having
compliance with our laws that require information from other
countries.
So I think the point that you raised there is a very valid
point, and I appreciate you bringing that to our attention.
The question I have for you and for the others, you talked
about having proper tax administration, having rules that you
can understand, and confidence in the procedures that are in
these tax agreements and treaties. You heard the first panel.
You heard the concerns that we have, particularly with the
Multilateral Convention, that there are countries that we are
going to be entrusting information to, that some do not have a
long track record of protecting sensitive information.
How confident are you, that your company or the companies
that you represent, about these protocols being ratified and
protecting information that may be made available by the United
States to the four treaty countries that are involved or the
signatories to the Multilateral Convention?
Mr. Nolan. Senator, that is an excellent question, and I
can only speak for myself and actually hypothetically, because
I have not seen this yet, but it would be the exact
circumstance that you described in your question to Assistant
Secretary Bob Stack, which was U.S. multinational with a non-
U.S. affiliate in one of these countries, and suppose that
information was requested.
My perspective is, first, that we have a subsidiary in that
country, and it is being audited already, or it is already
being looked at. So a lot of time, you are already subject to
the rules with respect to confidentiality and disclosure, which
are not what we are used to in the U.S. rules. Rules of
privilege and other attorney work product things that we take
for granted here in the United States may not even exist in
that jurisdiction. So we may already with that subsidiary have
to disclose a fair amount of information about that subsidiary.
And a lot of times there will be information about the
overall business model that will implicate the U.S. parent in
that disclosure. And in order to comply with the law there, and
to reach a successful resolution, there may be substantial
disclosures already.
This would be over and above that. And there certainly
could be risks here, and I do not know how you could just say
there would not be, but I think in a circumstance like this you
would have to look to the procedure and to your home country,
to the United States, to make sure that they are looking out
for your interests as a U.S. parent company in that country.
So that is why I welcome this kind of engagement, because
absent that, I do not know that I have a way to bring the
Treasury or the IRS to the table with me in a nontreaty country
when they are looking at my subsidiary.
Remember, the fact pattern here was this is someone who is
not already part of a bilateral treaty, not part of a TIA. This
is someone coming in through the OECD, the window, in effect.
Well, without the Treasury at that window protecting me, I am
up against the local jurisdiction, the local revenue
authorities, and whatever they might demand.
So is it perfect? No, but it could actually be better than
the fact pattern you have without that type of information
exchange, because now the Treasury is involved, and the IRS is
involved somehow in reviewing what they are seeing.
Senator Cardin. Mr. Reinsch, how do you feel about the
companies that you represent and protection of privacy?
Mr. Reinsch. I think most of them, if not all of them, will
agree with Paul. We recognize there is always a level of risk.
We are comfortable with the risk in this case, and we think the
procedures that Mr. Stack described to mitigate that are fine.
The thing that I would add is the advantage of a
multilateral convention in any context is that it is a good way
of essentially raising the bar for everybody to bring people
along whose standards and practices may not be up to what we
would like to see in the beginning. But by making them part of
an international process and exposing them to the higher
standards of the other members and allowing organizations like
the U.S. Treasury and counterpart institutions in other
governments to work with them, and have the high standard of
expectations of those countries, you bring them up to the
standards that we are talking about.
And I really think that is the only way you can do that. If
you keep them outside the multilateral framework, you make it
much harder.
So for us, the Convention is an important development, and
we welcome it.
Senator Cardin. Ms. McLernon, you raised a point that I
wanted to follow up on, and that is the slow pace of U.S.
ratification of tax treaties has already had an impact. It has
had an impact on further treaty negotiations, getting more
countries involved in more uniform treatment of taxpayers and
protocols, as well as investment here in the United States. Can
you just elaborate a little bit more about what the signal has
been here from the action or inaction in the Senate?
Ms. McLernon. Yes, as I mentioned, the United States really
has lost precipitously the amount of global share of cross-
border investment. The United States is still the top location,
but we have lost a lot of share.
Part of that is because of the rapid increase of emerging
markets. So the United States has to be able to have an impact
on the things that we can control. Tax treaties become a very
powerful competitive advantage that we have, because it ensures
companies that they are going to be dealt with fairly.
My organization is devoted toward ensuring that foreign-
based companies are dealt with on a level playing field and, as
such, promote investment and job creation in the United States.
But lack of movement on tax treaties make our trading
partners concerned about how they will be treated once they are
here. And it is not just true for the countries that are
involved in the pending agreements we have before us today. It
hurts our hand when we go and try to negotiate with other
countries.
I know that many of my companies, and some that are
probably at NFTC, are very interested in a tax treaty with
Brazil. There could be other countries that we do not have
treaties with that do not feel that it is worth time and effort
if the United States is not going to move on some of these
treaties.
So we talk a lot about trade agreements, and tax treaties
do not often get the same limelight, but they are an important
fact. And even just ensuring that policies follow our tax
treaties is almost a full-time job for my organization, because
sometimes at the State level, policies do not follow our tax
treaties.
So with the absence of tax treaties, it is going to be even
harder and make it less competitive for us to attract.
Senator Cardin. The one treaty here that is completely new
is Chile. As has been pointed out, we do not have a lot of tax
treaties in South America. I think you pointed out this is the
second, if it is ratified by the Senate.
Is there potential for significant progress with bilateral
treaties in South America?
Ms. McLernon. Well, I think it certainly would be an area
that we would want to focus on. I think, in general, both trade
agreements and tax treaties with folks down south can make us a
more attractive location, not only for foreign investment to
come here, but as an export platform for other places around
the world.
Foreign companies in the United States already produce
about 20 percent of our U.S. exports, but we hear from many
that they do not choose the United States for a variety of
reasons, one of which is because they are concerned about our
international agreements, and is the United States falling
behind other countries in pursuing these international
agreements. Many of them would like to produce here to sell to
markets outside of the United States, which I think, certainly,
we would agree is desirable, but this lack of engaging with the
global economy can hurt us.
Senator Cardin. Senator Barrasso.
Senator Barrasso. Thank you, Mr. Chairman.
Mr. Chairman, our colleague, Senator Lamar Alexander, often
says, ``Find the good and praise it.'' And I would like to note
that Mr. Stack is still here, and he is paying attention. And
so frequently, Mr. Chairman, the administration--and this goes
for both parties--comes, testifies, and leaves without paying
attention, without listening, without hearing what the others
have to say.
So I just appreciate your staying, and I think that sets a
very good example for others, from this and other
administrations.
So thank you, Mr. Chairman, to that.
I wanted to point out The Economist this past week had an
article called, ``Company headquarters: Here, there and
everywhere.'' It may be applicable. It said, ``Why some
businesses choose multiple corporate citizenships.''
They talk about Fiat, an Italian company for the last 115
years, the board recently voted to move their parent legal
domicile to the Netherlands, the tax residence to Britain, and
the stock market listing to New York City, so I mean, the
challenges are going to continue to come into the future.
Just think about that and how the treaties play a role, the
international community plays a role.
I wanted to ask you, Mr. Reinsch, specifically about this
treaty with Hungary. It contains a ``limitation of benefits''
provision. It is intended, I understand to fix a loophole that
was in the existing treaty that made Hungary a target for what
they call treaty shopping.
Could you just please provide some examples of how third
parties outside perhaps the United States and Hungary use that
current treaty with Hungary to engage in treaty shopping? Are
you familiar with this?
Mr. Reinsch. I cannot.
Senator Barrasso. OK.
Mr. Reinsch. I will, for the record.
[The written answer from Mr. Reinsch to Senator Barrasso's
question follows:]
If a foreign investor from a country with which the United States
does not have an income tax treaty wishes to invest in the United
States by, for instance, purchasing shares in and or making a loan to a
U.S. company, that foreign investor will be subject to our statutory
withholding rates of 30 percent on the U.S. source dividends and most
interest that it receives.
The foreign investor could instead choose to establish a Hungarian
company through which he would route his U.S. investments. The effect
would be that the U.S. source dividends and interest would enjoy the
reduced U.S. withholding provided in the U.S. Hungary tax treaty.
A typical limitation on benefits rule would deny benefits to a
Hungarian company that was owned by third-country investors and did not
have an active business in Hungary. Holding companies are often
established by third-country investors to take advantage of better tax
treaty benefits in countries without limitation on benefit provisions.
The existing Hungary tax treaty does not have any limitation on
benefits, and thus there is no protection against this type of treaty
shopping abuse by third-country investors.
The limitation on benefits provision in the pending U.S.-Hungarian
tax treaty limits the benefits to real American and Hungarian
investors. This provision would ensure that the treaty benefits are
being realized by those companies to which they were intended, which
protects the competitive position of U.S. companies doing business in
Hungary.
Senator Barrasso. We appreciate that.
Wondering about the arbitration in the Swiss protocol, if I
could talk to you about that a little bit. The proposed Swiss
protocol includes mandatory binding arbitration when the United
States and Switzerland are unable to resolve disagreements. It
appears to be consistent with other arbitration provisions in
international tax treaties with Canada, with Germany, Belgium,
France. Do you know if there has been any successful
arbitration conducted under those treaties or other treaties?
Mr. Reinsch. I think what we have generally found is what
Mr. Nolan alluded to, which is that the presence of the
provision is an incentive for the competent authorities to
reach agreement so it does not have to be employed.
Whether there actually has been a successful arbitration, I
do not know. The reason we are for it is the reason I just
stated. It is the 2 years that matters, because there is a
tendency sometimes in these cases--we had this problem with the
Canadians, before the provision was included in that treaty--
for negotiations to drag on for years and years, and these
cases were never resolved.
If you put in the deadline through the arbitration
provision, it is the incentive to conclude these cases in a
timely fashion.
Senator Barrasso. OK. Maybe for all three of you, and I can
start with you, Ms. McLernon, from a business perspective, what
is the impact of the Senate not ratifying the international tax
treaties that are currently being discussed today?
Ms. McLernon. Well, as I mentioned, it is not just the
treaties that we are talking about now. It is potential updates
and new treaties. So I think it is going to make the United
States fall even further behind in being competitive in a very
competitive global economy.
And I know that many of my companies that have been in the
United States for decades and longer would see this as a step
backward.
Senator Barrasso. Mr. Nolan.
Mr. Nolan. Yes, if I may echo that, these treaties do not
happen overnight. They are negotiated by representatives from
the U.S. Government and the other government over a long period
of time. And then, of course, under the Constitution, we have
the ratification procedure.
Treaties always seem important but not urgent, and that is
really a challenge. Well, I think the delay here is making
these treaties in particular important and urgent. And I think
that the whole treaty pipeline that Nancy alluded to is
becoming important and urgent for the reasons that she said.
It is basically a question of global reputation, global
ability to deliver on what we promise as a sovereign.
And then also, the world is changing. I have alluded to it
a couple times. There are activities happening in the OECD.
Governments are acting on their own because of concern
regarding revenue collection and multinationals with multiple
headquarters, et cetera. The NGOs have stirred up a real
political imperative out there amongst other countries.
It is better for the United States to work within the
framework it has with these countries and ratify and have a
strong treaty network going forward.
Senator Barrasso. Mr. Reinsch.
Mr. Reinsch. I would echo both of those comments.
One, the world is not standing still. Other people are
going ahead. And if we are not, we steadily lose ground simply
by standing in the same place.
In addition, as Paul pointed out, these things are a
process, and they take a long time to negotiate. They take a
long time to work out. When they come up here, they take an
even longer time.
Several things happen. One, the signal is sent to the
Treasury Department that these things are not moving along. Mr.
Stack can speak better than I can to others that are in the
pipeline right now, which are not going to go forward until
they see that the Senate is prepared to act on these, because
there is not much point in presenting even more treaties. As
the chairman pointed out, these have been around since 2011. If
these do not move, why send up three or four more? And the
result is that everything then begins to back up.
We do an annual survey of our members, the results of which
we provide only to the Treasury Department, on where our
members would like to see negotiations go forward, either with
a new protocol or a treaty with a country where there is none.
Brazil is, by the way, these days regularly at the top of the
list.
But it is a long list. And we will have 15, 20 countries
where various of our members would like to see some improvement
in the bilateral tax relationship, either by an update, because
some of these treaties are quite old when commerce was very
different, or with countries that we do not have a treaty with
now, but have substantial trade with.
All of that begins to slow down and grind to a halt pending
Senate action on what is there right now.
Senator Barrasso. Thank you.
Thank you, Mr. Chairman.
Senator Cardin. Well, let me thank all three of our
witnesses here and just make this observation, and that is I
will certainly take back the message of the urgency that you
have expressed to Senator Menendez and Senator Corker, the
chair and ranking member of our committee, and also talk to
Senator Reid and Senator McConnell, who have more to do with
how the scheduling is done on the floor of the United States
Senate.
There are a lot of treaties that are pending in the United
States Senate, in addition to tax treaties. Some are more
controversial than others, but any ratification process needs
to be done in a thorough way, and it takes time before the
United States Senate can schedule a vote. And of course, we
have an extraordinary hurdle that needs to be passed as far as
the number of votes to ratify a treaty.
So I would just urge you, individually and through your
organizations, to stress the urgency of action here to the
political leadership here in the United States Senate.
And I will do my share, and I now Senator Barrasso will be
talking to his leadership, to see whether we can find an
opportunity first to take these issues up in our committee, but
then also to find floor time to consider tax treaties in this
Congress. The calendar will move quickly, but we need your help
in pointing out how important these treaties are. I thought
your testimonies were particularly useful, the first panel, we
went through a lot of the technical parts. But the second, the
practical impact of failure to ratify backs up other potential
treaties from being completed. And when companies have options,
they go where they feel that they know what the rules are.
Obviously, they would like to be in the United States, but
there are other factors that can sway investment decisions, as
you pointed out. So I very much appreciate those observations.
The committee record will remain open until Friday for
members to pose questions for the record.
Senator Cardin. If you are the recipient of those types of
questions, we would ask if you could respond as quickly as
possible, we would appreciate that, because we need to get that
completed before we could schedule committee action on these
treaties.
So we will relay the message to the leadership of our
committee.
And with that, the committee will stand adjourned. Thank
you all.
[Whereupon, at 11:55 a.m, the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Prepared Statement of Credit Suisse Group
Submitted by Senator Benjamin L. Cardin
Chairman Menendez, Ranking Member Corker, and members of the
committee, Credit Suisse appreciates the opportunity to comment on the
2009 Protocol to the Convention between the United States of America
and the Swiss Confederation for the Avoidance of Double Taxation With
Respect to Taxes on Income, and to urge swift approval of the 2009
Protocol by the committee.
The 2009 Protocol would eliminate barriers to resolving numerous,
long-running criminal tax investigations involving much of the Swiss
banking industry. Resolution of these cases would enable the U.S.
Government to collect substantial U.S. tax revenues, based on the
exchange of information related to offshore accounts of U.S. taxpayers
who may have misused Swiss privacy laws. At the same time, the 2009
Protocol will continue to balance in an appropriate manner the personal
privacy interests of U.S. and Swiss citizens.
The Protocol was signed in September 2009 and previously approved
by the committee in July 2011. It has since awaited action by the U.S.
Senate for more than 2 years, and we strongly endorse its swift
approval by the committee and by the full Senate.
credit suisse has been a leader in promoting
transparency of tax information
Founded in 1856, Credit Suisse is a leading global private banking
and wealth management firm based in Switzerland. Credit Suisse employs
approximately 9,000 people in 19 U.S. locations and manages over $1.4
trillion in assets. Our shares are listed on both the New York Stock
Exchange and the leading Swiss stock exchange. Our wealth management
business serves over 2 million clients around the world through 330
offices in 42 countries.
Credit Suisse fully supports the U.S. Government's efforts to
combat U.S. tax evasion. Credit Suisse has been a leader among Swiss
banks in working with government authorities to fully address the
problem of U.S. taxpayers evading taxes through the misuse of
undeclared Swiss bank accounts. In 2008, when the Senate Homeland
Security and Government Affairs Committee's Permanent Subcommittee on
Investigations issued a report on how UBS and other Swiss banks'
offshore practices helped U.S. clients seeking to evade taxes through
offshore accounts, Credit Suisse responded faster than any other bank
in Switzerland. Credit Suisse swiftly imposed a block on transfers of
undeclared U.S.-owned accounts from UBS. Credit Suisse rigorously
examined all of its accounts in order to identify those held by U.S.
taxpayers and to ensure that they were in compliance with all relevant
U.S. laws and regulations. Credit Suisse has also continued to
cooperate with U.S. law enforcement authorities in their investigation
of U.S. taxpayers with undeclared accounts and, regrettably, individual
bankers who may have violated firm policies and historical Swiss
banking practices.
We have made full compliance with U.S. tax laws a top priority.
Consistent with that priority, we have adopted robust reforms,
including the following: Since 2008, we have adjusted our internal
compliance and monitoring systems to enable us to monitor all types of
accounts for evidence of direct or indirect U.S. ownership. Credit
Suisse no longer accepts accounts in its Swiss bank of U.S. residents,
other than in tightly defined circumstances. For nonresident U.S.
taxpayers living abroad, Credit Suisse not only notifies all identified
U.S. accountholders of their U.S. tax filing obligations, but also
requires them to consent to disclosure of their identity and account
information to the IRS in order to continue banking with Credit Suisse.
Our company policies also now prohibit inflows of funds from Swiss
banks of U.S. account holders who have failed to disclose their tax
status to the IRS.
the treaties before the committee, including the 2009 protocol,
are critical to u.s. bilateral trade and investment
The world's network of bilateral and multilateral tax treaties,
including the U.S. network of over 60 tax treaties, plays a critical
role in fostering global trade, investment, job creation, and economic
growth. The U.S. tax treaty network, including the 1996 U.S.-Swiss Tax
Treaty which would be updated by the 2009 Protocol, enhances the
ability of U.S. businesses to compete abroad.
Tax treaties work by reducing cross-border taxation on a reciprocal
basis. For example, the U.S.-Swiss Tax Treaty reduces or eliminates
withholding taxes that Switzerland would otherwise impose on income
earned by U.S. investors from Swiss securities. The treaty also
restricts Switzerland's ability to tax income earned by U.S. businesses
from activities in Switzerland that fall short of a specific threshold,
set forth in the treaty (the ``permanent establishment'' threshold). In
return, the United States provides similar benefits for Swiss
businesses and individuals, thereby fostering bilateral trade and
investment.
The information exchange provisions of modern tax treaties allow
the two countries' tax administrators to discuss and to resolve
specific cases where their businesses or citizens could otherwise face
taxation of the same income in both countries (i.e., international
double taxation). This dispute resolution process would not be possible
without the two governments being able to share taxpayer information.
As discussed below, information exchange provisions also help the two
countries investigate and, where necessary, prosecute suspected cases
of tax evasion.
Most of the technical provisions included in modern U.S. tax
treaties is the product of years of dialogue among committee members,
the Joint Committee on Taxation, the Treasury Department, and
interested stakeholders in the United States and abroad. The 2009
Protocol is no different in this regard, and we welcome this ongoing
dialogue. In part because this process has been so cooperative, tax
treaties have long enjoyed broad bipartisan support in Congress and
within the taxpayer community, including the many U.S. businesses and
individuals who rely on U.S. tax treaties to reduce the risk of
international double taxation.
Credit Suisse strongly supports the ratification of each of the
treaties before the committee today because it views tax treaties as
key to promoting economic growth and free trade by reducing barriers to
trade and investment on a reciprocal basis.
adoption of the 2009 protocol to the u.s.-switzerland tax treaty is
needed to enable the improved bilateral exchange of information and tax
transparency
The 2009 Protocol makes several key improvements to the current
1996 U.S.-Swiss Tax Treaty, which would remain in force, subject to
amendment by the Protocol.
First and foremost, approval of the 2009 Protocol is essential to
resolving several long-running U.S. tax investigations involving Swiss
banks on a basis most favorable to the United States. The Protocol
would eliminate the requirement, found in the 1996 U.S.-Swiss Tax
Treaty, that a request for information from the U.S. Government to the
Swiss Government describe conduct of a U.S. taxpayer amounting to ``tax
fraud or the like'' under Swiss law, and that the request be
``necessary for carrying out the provisions'' of the tax treaty. This
strict language has repeatedly prevented U.S. law enforcement from
obtaining the information it needs to investigate U.S. tax evasion
through the use of undeclared Swiss bank accounts.
The 2009 Protocol would rectify this situation by permitting the
exchange of ``such information as may be relevant for carrying out the
provisions'' of the treaty or for the administration of U.S. domestic
law, even when such information would not be sought by Switzerland for
its own tax administration purposes. The Protocol thus ensures that
subsequent amendments to Swiss domestic law would not prevent the U.S.
Government from obtaining from Swiss banks the same type of tax
information the U.S. Government obtains every year from U.S. banks.
Only by eliminating outdated barriers to U.S.-Swiss information
exchange can the ongoing U.S. tax investigation into Swiss banks be
completed. Credit Suisse supports these changes, which will allow Swiss
banks to close this chapter and move forward under a more transparent
regime that satisfactorily guards against future U.S. tax evasion.
Once it enters into force, the 2009 Protocol will allow the U.S.
Government to obtain from Switzerland as much information as it can
obtain currently from any other U.S. trading partner--and, in fact,
more because of the Protocol's retroactive effective date to September
2009. This change should serve as a formidable deterrence against tax
evasion while, in the meantime, bringing a substantial recovery of tax
revenue to the U.S. Treasury. Although Credit Suisse is prepared to
provide the historical information about U.S. account holders currently
being requested by the U.S. authorities, it cannot do so under existing
Swiss law until the United States adopts the 2009 Protocol--in effect
agreeing to receive the information that U.S. law enforcement has
requested, and that Credit Suisse is willing to provide.
the 2009 protocol incorporates strong privacy protections
In implementing these necessary changes to the existing tax treaty,
the Protocol takes a balanced approach of permitting relevant tax data
to be collected while ensuring the confidentiality of that data. In
substance, the 2009 Protocol affords the same privacy protections to
U.S. citizens that they would have in the United States. Consistent
with current Swiss law, the Protocol strictly prohibits the
unauthorized use or disclosure of requested information. Each treaty
partner may use the obtained information only for tax administration
purposes and may disclose it only to persons or authorities (such as
courts) involved in administering U.S. and Swiss tax laws. The Protocol
specifies criteria that must be met for a request to be honored and
explicitly bars ``fishing expeditions'' by either country. The 2009
Protocol thus allows the U.S. to combat offshore tax evasion while
continuing to safeguard personal privacy.
switzerland has already ratified the 2009 protocol
The 2009 Protocol required significant and difficult changes to be
made to Swiss law, and the United States and its taxpayers would be the
greatest beneficiaries of those changes. Yet while the Swiss Parliament
approved the 2009 Protocol on June 18, 2010, the U.S. Senate has failed
to provide its advice and consent. We believe this inconsistency can
and should be rectified by swift action on the part of the U.S. Senate.
conclusion
Historically, the Senate has approved tax treaties on a bipartisan
basis, routinely allowing for ratification of the treaties by unanimous
consent. For all the reasons detailed above, this committee unanimously
approved the Protocol in July 2011. However, because the Senate as a
whole was not able to act upon it before the end of the 112th Congress,
this committee must act again to reapprove the Protocol. Credit Suisse
strongly urges the committee to do so.
______
Response of William A. Reinsch to Question
Submitted by Senator Robert Menendez
Question. Your membership is clearly interested in making the
United States more competitive in the global marketplace. How would the
ratification of these treaties advance that goal?
Answer. In order for American companies to be competitive globally,
tax and trade barriers should be eliminated. The tax treaties currently
pending before the Senate Foreign Relations Committee will reduce tax
barriers to companies by eliminating double taxation and provide
certainty through clearer definitions and a more robust dispute
resolution provision. The withholding rate changes in interest,
dividends, and royalties alleviate double taxation, while the clear
definition of business profits and permanent establishments provide the
certainty business needs. The mandatory arbitration provision included
in the Swiss treaty will help resolve cases more quickly by providing a
backstop to the Competent Authority negotiations and will prevent long
drawn out cases that cost companies millions of dollars that could be
put to a more productive use in their businesses.
______
Responses of Paul Nolan to Questions
Submitted by Senator Robert Menendez
Question. Could you elaborate further on the importance of these
pending treaties, or income tax treaties in general, to your business?
In what ways would they help?
Answer. We identified in our testimony three specific benefits of
tax treaties to the U.S. companies that engage in global business, (i)
clear thresholds and ``triggers'' of taxation, (ii) the Mutual
Agreement Procedure (or ``MAP'' as it is commonly called) and (iii)
reduced rates of withholding tax on source-based income (i.e, the
treaty partner's tax on income derived in the treaty partner's
jurisdiction) from licenses to use U.S.-owned intellectual property or
U.S. capital (i.e., loans), i.e., royalties and interest.
We, like other U.S. multinational businesses, see all three of
these benefits as a consequence of our treaty network. The treaties and
protocols that were the subject of the hearing represent a portion of
the ``pipeline'' of treaty updates and new treaties that the U.S.
Treasury, as the delegate of the executive branch's constitutional
authority, has been negotiating on behalf of the United States.
To elaborate further on the importance of these treaties, we see
the treaty network as an evolving and growing system that serves as a
foundation for cross-border tax rules, with amendments to existing
treaties to improve and ``modernize'' them and with new countries being
brought into the treaty network. The continuation of this evolution and
growth is important. As a followup response to provide elaboration that
we hope will be helpful to the chairman and the Senate Foreign
Relations Committee in its deliberation of these treaties and
protocols, we would make the following points.
First, the main importance of these treaties and protocols at this
particular time is to demonstrate that the U.S. ratification process
continues to work as designed, with the due deliberation of ``advice
and consent'' as provided under the Constitution by the U.S. Senate and
subsequent ratification and coming into force. For U.S. companies, a
series of treaties or protocols with a status of ``pending
ratification'' through successive Congresses raises concern regarding
whether the treaty network will cease to evolve and grow.
Given the current environment regarding global taxation, with so-
called ``BEPS (base erosion and profit shifting) Initiative'' occurring
under the direction of the G20 and with many U.S. trading partner
countries adopting new rules to address perceived tax abuse, the value
of the treaty network as a bedrock system of bilateral principles and
understanding between the United States and each of its treaty partners
becomes even more important so that U.S. businesses can plan, invest,
and grow with relative certainty.
Second, ratification of these treaties sends a signal to other
sovereign states that we continue to value the bilateral approach and
will continue to amend where appropriate and to enter into treaties
with new partners as appropriate. U.S. companies will benefit from such
a signal because other sovereigns will need to be cognizant of the
range of current U.S. tax treaty norms for purposes of amendment of
existing treaty or purposes of entering into a first tax treaty with
the United States. The support of these treaty norms could serve to
prevent approaches to taxation that harm or place U.S. companies at a
disadvantage.
Third, modernization of treaties through protocols or new treaties,
bring about consistency in treatment of fundamental issues that assist
U.S. companies that seek to comply fully with the applicable rules.
Specifically, ``limitation of benefits'' and information-sharing
provisions modernize treaties to provide avenues to address tax abuses
in which compliant U.S. companies do not engage. For a U.S. company
that follows the rules, tax abuse by so-called ``treaty shopping,'' or
other abuses that an exchange of information can provide tax
authorities with the tools to address, not only can create a
competitive disadvantage but can also create undue reputational harm
due to public perceptions of wide-spread tax abuse in all cross-border
business activity.
Question. Has a delay in the ratification of the treaties affected
your business
Answer. In our view, the answer to this question is ``yes.''
A simple example is the treaty with Chile, without which any U.S.
company engaging in business must analyze Chilean domestic tax law
without any of the protections or benefits that a treaty would bring,
i.e., reduced withholding rates, clear mutual agreement procedures,
residency rules, etc. The treaty with Chile would be the U.S.'s second
tax treaty with South America. U.S. companies have extensive business
and growth opportunities in South America. A series of treaties in
South America would benefit U.S. businesses and support the creation of
U.S. jobs in the United States for U.S. headquartered companies.
In terms of treaty protocols that amend treaties to incorporate the
latest limitations on benefits or information exchange provisions,
delay means that those who benefit from the status quo that the
protocols would impact can continue to engage in tax abuse with
impunity. As described above, this delay hurts tax compliant U.S.
businesses.
Finally, as we testified before the committee, the ratification of
tax treaties can often seem ``important but not urgent'' as the other
foreign policy priorities arise with an urgency driven by crisis and
events in foreign affairs and U.S. diplomacy.
In our view, these treaties are ``important and urgent'' for this
Congress to ratify for the reasons provided in our testimony and the
elaboration provided above.
______
Responses of Robert Stack to Questions
Submitted by Senator Robert Menendez
Question. The existing treaty with Hungary is one of only seven
U.S. income tax treaties that do not include any limitation-on-benefits
rules, thereby necessitating this new protocol. Similarly, the new
treaty with Poland, which addresses limitation-on-benefits, may be
transmitted to the Senate in the near future.
What are the Treasury Department's priorities in
renegotiating other treaties to better incorporate current
practice on limitation-on-benefits or other major provisions?
Answer. The Treasury Department's efforts to protect the U.S. tax
treaty network from abuse have focused primarily on those tax treaties
that contain a complete exemption from withholding taxes at source for
deductible payments and also lack any antitreaty shopping protections.
Three tax treaties fall into this category: the tax treaties with
Iceland, Hungary, and Poland that were signed in 1975, 1979, and 1974
respectively. The revision of these three agreements has been a top
priority for the Treasury Department's treaty program, and we have made
significant progress. In 2007, we signed a new tax treaty with Iceland,
which entered into force in 2008. Like the proposed tax treaty with
Hungary, the new U.S.-Iceland tax treaty contains a comprehensive
limitation on benefits provision. In addition, the United States and
Poland signed a new tax treaty in February 2013, which similarly
contains a comprehensive limitation on benefits provision. The
administration hopes to transmit the new tax treaty with Poland to the
Senate for its advice and consent soon.
With the conclusion of new tax treaties with Iceland, Hungary, and
Poland, the Treasury Department is actively seeking to revise other
existing tax treaties that provide for positive, but reduced rates of
withholding on deductible payments, and therefore also present
opportunities for base erosion and treaty shopping, although not to the
extent of the Iceland, Hungary, and Poland tax treaties. For example,
we are in the process of concluding negotiations of new tax treaties
that would replace the existing tax treaties with Norway and Romania,
which were signed in 1971 and 1973 respectively. The administration
hopes to sign these two new treaties and transmit them to the Senate
for its advice and consent in the near future.
Question. Please describe the confidentiality protections that are
built into the agreements before us and what steps the U.S. Government
takes to ensure that private information is not disclosed to the wrong
parties. How do the treaties ensure that our treaty partners do not
engage in ``fishing expeditions?''
Answer. Confidentiality protections for information are central to
establishing and maintaining an exchange relationship under a tax
agreement. Provisions requiring such protection are included in all
five tax treaties being considered by the Senate. Additionally, the
United States has the authority, consistent with international law, not
to exchange information in cases where a treaty partner does not
protect the confidentiality of the information as required by the
treaties.
Specifically, the four proposed bilateral tax treaties, as well as
the proposed Protocol to the Multilateral Convention, before the Senate
provide that information that is exchanged pursuant to such agreements
shall be treated as secret in the same manner as information obtained
under the domestic laws of the State that received the information and
shall be disclosed only to persons or authorities (including courts and
administrative bodies) concerned with the assessment, collection or
administration of, the enforcement or prosecution in respect of or the
determination of appeals in relation to, taxes, or the oversight or
supervision of such functions. A State may disclose the information
received in public court proceedings or in judicial decisions. When
negotiating a bilateral agreement, the Treasury Department, including
the Internal Revenue Service (IRS), evaluates key aspects of the
domestic law of the other country, including domestic laws that provide
for the confidentiality of information exchanged pursuant to an
international agreement. The Treasury Department will agree to conclude
a bilateral tax treaty or tax information exchange agreement only if it
is satisfied that the other country's confidentiality laws are
sufficiently robust.
The Multilateral Convention contains the above described provisions
concerning protecting the strict confidentiality of information that is
exchanged. The Convention has established a Coordinating Body comprised
of all countries that are Parties to the Multilateral Convention, the
primary purpose of which is to evaluate requests by new non-OECD and
non-Council of Europe countries to become parties to the Convention.
The Coordinating Body closely evaluates the domestic laws of each such
potential party to ensure that it has a sufficient legal framework to
ensure the confidentiality of information that would be exchanged
pursuant to the Convention. Requests from countries that are not
members of the OECD or the Council of Europe to join the Multilateral
Convention must be approved by unanimous consent of the Coordinating
Body, which reviews the legal framework of each potential party to
ensure the confidentiality of information that is exchanged pursuant to
the Convention. If any member of the Coordinating Body, including the
United States, is not satisfied with the legal framework of a country
regarding confidentiality, that country will not be permitted to join
the Multilateral Convention.
If an exchange of information partner, either under a bilateral tax
treaty, the Multilateral Convention, or a tax information exchange
agreement (TIEA), were to breach the relevant agreement's
confidentiality provisions, which are central provisions reflecting a
bedrock principle of these agreements, the United States would have the
ability, consistent with international law, to not exchange information
with that state pending resolution of the matter. The provisions in the
proposed treaties are similar to those in Article 26 of the updated
OECD Model Tax Convention. This international law principle is
reflected in the 2012 OECD Update to Article 26 of the OECD Model Tax
Convention and its Commentary, which was approved by the OECD Council
(including the United States) on July 17, 2012, and which provides:
``In situations in which the requested State determines that the
requesting State does not comply with its duties regarding the
confidentiality of the information exchanged under this Article, the
requested State may suspend assistance under this Article until such
time as proper assurance is given by the requesting State that those
duties will indeed by respected.''
Finally, the text of the five treaties provides that the
information be for such information as ``may be relevant'' or that is
``foreseeably relevant.'' This language is intended to provide for
exchange of information in tax matters to the widest possible extent
and, at the same time, to clarify that the Parties are not at liberty
to engage in ``fishing expeditions.'' The text of these treaties
contains similar language to that in the OECD Model Tax Convention. The
Commentary to the OECD Model Tax Convention was revised with the
approval of the OECD Council (including the United States) on July 17,
2012, to provide clear guidance regarding what constitutes a valid
request for information under the OECD Model income tax treaty. The
Commentary provides that a tax treaty ``does not obligate the requested
State to provide information in response to requests that are `fishing
expeditions,' i.e., speculative requests that have no apparent nexus to
an open inquiry or investigation.'' Similarly, the Explanatory Report
to the Multilateral Convention, which was approved by the OECD's
Committee on Fiscal Affairs (including by the U.S. representative on
that Committee) provides that ``The standard of ``foreseeable
relevance'' in the Multilateral Convention is intended to provide for
exchange of information in tax matters to the widest possible extent
and, at the same time, to clarify that the Parties are not at liberty
to engage in `fishing expeditions'. . .'' This interpretation is
universally accepted, and thus we do not have concerns that our treaty
partners will engage in fishing expeditions. In the event that the IRS
received a request for information that rose to the level of a fishing
expedition, there would be no obligation to provide assistance, because
the request would not be within the scope of requests permitted under
the treaties.
Question. From the standpoint of information exchange, the Swiss
and Luxembourg protocols are very important, because we know that banks
in those two countries have been used by some in the United States to
evade their tax obligations. The new protocols will enhance the ability
of U.S. authorities to investigate and prosecute tax criminals that
have used banks in those countries. From a privacy standpoint, the U.S.
Government is required to keep any information obtained confidential
and use it only for legitimate purposes.
Do we have serious concerns about Switzerland and Luxembourg
making unauthorized or inappropriate use of U.S. taxpayer
information?
Answer. The proposed Protocol to the Luxembourg tax treaty requires
any information exchanged pursuant to the tax treaty to be used for tax
administration purposes only. The terms of the proposed Protocol with
Switzerland are consistent with those of the proposed Luxembourg
Protocol, although it also permits the use of information that has been
exchanged pursuant to the agreement to be used for nontax purposes, but
only if the revenue authority of the country providing the information
provides written consent. The Treasury Department Technical Explanation
of the proposed Protocol with Switzerland provides that the competent
authorities will only provide such written consent if the information
could have been exchanged pursuant to the treaty on mutual legal
assistance between the United States and Switzerland. We are confident
that these tax treaty provisions with both Switzerland and Luxembourg
adequately protect the confidentiality of exchanged information, and we
do not have concerns that either country will use information exchanged
with the United States in an inappropriate manner.
______
Response of Nancy McLernon to Question
Submitted by Senator Robert Menendez
Question. Your organization represents the U.S. operations of many
global companies. Could you elaborate further on how these treaties
will help your members? For instance, will these treaties lead to
additional insourcing or investment in the United States, and if so, in
what ways?
Answer. Bilateral tax treaties provide a reliable tax environment
for companies doing business in several jurisdictions and help ensure
that common business expenses are not subject to double taxation. This
provides companies with greater certainty on the application of tax
rules, and allows insourcing companies to invest more in the very
business activities that drive economic growth, like expanding
operations, purchasing new equipment, hiring more U.S. workers, and
selling trademarked or licensed goods. The positive impact these
agreements have on investment flows can be seen by the growth in
investment from our treaty partners. For example, since the Protocol to
the French Income Tax Treaty was ratified at the end of 2009, we have
seen a 144-percent increase in FDI flows from France.
As the Senate considers these agreements, it is important to keep
in mind that global companies have an increasingly wide array of
options when looking to invest, expand, or establish new operations
around the globe, especially with the growth of emerging markets. Over
the last decade, the United States has seen its share of global
investment dramatically decline, from roughly 37 percent in 2000 to
just over 17 percent in 2012. This is why it is critically important
for the United States to implement policies that make the United States
more attractive for global companies to invest, and implementing the
outstanding tax treaties will do just that. As such, the Organization
for International Investment and its member companies strongly support
expansion and updating of our Nation's tax treaty network.
______
Responses of Robert Stack to Questions
Submitted by Senator Benjamin L. Cardin
Question. Three of the agreements being considered by the committee
were voted out of committee during the last Congress and are back for
reapproval. This has caused a delay in getting these agreements into
force.
What effect does not ratifying these treaties have on the
United States ability to negotiate tax treaties in the future
and in influencing the development of tax treaties worldwide,
for example through the OECD?
Answer. The Treasury Department urges the Senate to provide its
advice and consent to the five tax treaties as soon as possible. Both
our existing and potential new treaty partners, as well as key
policymaking multilateral institutions such as the OECD have noted with
concern the Senate's recent inaction regarding approval of tax
treaties. The Senate's resumption of the tax treaty approval process
would be a critical component of the U.S. Government's collective
desire to advance modern tax treaty policies that promote transparency
and the economic interests of the United States. The harm to U.S.
interests of failing to ratify these treaties in an expeditious manner
was aptly summarized in the testimony of Ms. Nancy L. McLernon,
president and CEO of the Organization for International Investment:
``It is important to note that failure to act on these agreements
in an expeditious manner has a number of negative consequences. The
failure of the Senate to ratify many of these agreements in the past
few years has slowed the progress on tax treaties with other countries
and sends a message to the international community that the United
States is not committed to maintaining these important adjuncts to
international commerce.
``The proposed treaties we are discussing today are not the only
tax treaties that have been signed and are awaiting Senate
ratification. Last year, the United States signed tax treaties or
protocols with Japan, Poland, and Spain. In addition to that, the
United States is negotiating with the United Kingdom and Vietnam. These
are significant markets for the United States, considering that British
and Japanese companies have invested $795 billion combined in the
United States, making them the top two investing countries by
cumulative stock.
``The lingering ratification process also scares away potential
new investment from firms, based in proposed treaty countries, which
are evaluating investment locations around the world and making long-
term strategic plans. It is difficult for these businesses to commit to
U.S. investments unless they are confident a treaty will promptly come
into force.''
Question. The treaty with Chile, if ratified, will be only the
second in-force U.S. income tax treaty with a South American country.
How significant are cross-border investment flows between the United
States and Chile? In your view, what role does the Chile treaty play in
continuing to expand our treaty network in this region?
Answer. If approved by the Senate, the proposed Chile tax treaty
would be only the second U.S. tax treaty in force with a South American
country. Chile is a major destination for foreign direct investment
(FDI) in the region, receiving $20.1 billion in FDI inflows in 2013,
according to Commerce Department data sources. The United States is the
second-largest source of FDI into Chile, accounting for an average of
10 percent of Chile's FDI inflows over the past 5 years.
The U.S. business community has long urged the Treasury Department
and the Senate to expand the U.S. tax treaty network in South America
to address unrelieved double taxation faced by U.S. investments in the
region. The proposed tax treaty with Chile, if approved by the Senate
and brought into force, would represent a significant step in this
effort. In addition, the Treasury Department is in active tax treaty
negotiations with Colombia, which we hope to conclude soon. The
Treasury Department hopes that the conclusion of the Chile tax treaty
and our opening of tax treaty negotiations with Colombia will lead to
more tax treaty discussions with key trading partners in the South
American region, such as Brazil and Argentina.
Question. The Protocol to the OECD Convention provides for
spontaneous exchange of information and simultaneous tax examinations
with other signatory countries. Over 60 countries have signed the
Convention so far, and the number can be expected to grow. Although
many of these countries are existing tax treaty partners, the
Convention may eventually include countries with which it would not be
in our interest to exchange information.
What protections does the Protocol have to ensure that the
United States will not be required to provide information to
such countries?
Answer. The Treasury Department urges the Senate to provide its
advice and consent to the proposed Protocol to the OECD Convention as
soon as possible. The new information exchange relationships that the
proposed Protocol would establish for the United States would be an
effective tool for the IRS to use to counter tax evasion. Requests from
countries that are not in the OECD or the Council of Europe to join the
Multilateral Convention must be approved by unanimous consent of the
Coordinating Body, which reviews the legal framework of each potential
party to ensure the confidentiality of information that is exchanged
pursuant to the Convention. If any member of the Coordinating Body,
including the United States, is not satisfied with the legal framework
of a country regarding confidentiality, that country will not be
permitted to sign the Multilateral Convention.
In case, after joining the Convention, a State was not providing
satisfactory protection of information as required by the Convention,
which is a bedrock principle of the Convention, then the United States
would have the ability, consistent with international law, not to
exchange information with that State pending resolution of the matter.
This international legal principle is reflected in the Revised
Explanatory Report to the Convention on Mutual Administrative
Assistance in Tax Matters, as Amended by the Protocol, approved in 2010
by the OECD Committee on Fiscal Affairs, with the concurrence of the
United States representative on that Committee. It provides: ``However,
consistent with international law, in situations where the requested
State determines that the applicant State does not comply with its
duties regarding the confidentiality of the information exchanged under
the Convention, the requested State may suspend assistance under the
Convention until such time as proper assurance is given by the
applicant State that those duties will indeed be respected.''
Further, Article 21 in the proposed Protocol, which is before the
Senate, further contains a ``public policy'' (ordre public) exception
for compliance.
``Article 21 - Protection of persons and limits to the obligation to
provide assistance
``1. Nothing in this Convention shall affect the rights and
safeguards secured to persons by the laws or administrative
practice of the requested State.
``2. Except in the case of Article 14, the provisions of this
Convention shall not be construed so as to impose on the
requested State the obligation:
``a. to carry out measures at variance with its own
laws or administrative practice or the laws or
administrative practice of the applicant State;
``b. to carry out measures which would be contrary to
public policy (ordre public);''
The Explanatory Report to the amendments to the OECD Convention on
``public policy,'' provides some helpful guidance and helps to
illuminate what the parties were thinking. In particular, it provides
that:
``It has been felt necessary also in subparagraph d to prescribe
a limitation with regard to information which concerns the vital
interests of the State itself. To this end, it is stipulated that
Contracting States do not have to supply information the disclosure of
which would be contrary to public policy (ordre public). However, this
limitation should only become relevant in extreme cases. For instance,
such a case could arise if a tax investigation in the applicant State
were motivated by political, racial, or religious persecution. The
limitation may also be invoked where the information constitutes a
state secret, for instance sensitive information held by secret
services the disclosure of which would be contrary to the vital
interests of the 30 requested State. Thus, issues of public policy
(ordre public) should rarely arise in the framework of the
Convention.''
Thus, concerns over certain behavior of the other party if contrary
to U.S. public policy, could support not sharing information with them.
Finally, note that parties to the Multilateral Convention have the
right to participate in an information on request relationship, subject
to the normal restrictions that apply in that context (e.g., the
foreseeably relevant standard). The proposed Protocol, however, does
not guarantee a country that we will enter into a spontaneous or
reciprocal automatic exchange relationship.
______
Responses of Robert Stack to Questions
Submitted by Senator Rand Paul
Question #1. Under what authority was the IGA to implement FATCA
created, and where in the FATCA legislation was reciprocity by U.S.
financial institutions authorized?
Answer. The United States relies, among other things, on the
following authorities to enter into and implement the IGAs: Article II
of the United States Constitution; 22 U.S.C. Section 2656; and Internal
Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle
F, Chapter 61, Subchapter A, Part III, Subpart B (Information
Concerning Transactions with Other Persons).
Question #2. Where does the Department of the Treasury have
authority under FATCA to waive the 30 percent withholding sanctions in
exchange for reciprocity?
Answer. The IGAs do not waive the 30 percent FATCA withholding tax
in exchange for reciprocity. Instead, the IGAs generally provide that
the FATCA withholding tax will not apply to financial institutions and
certain other entities located in the IGA jurisdiction (``FATCA partner
jurisdiction'') in circumstances where either (i) the terms of the IGA
provide that the IRS will receive reporting on the United States
accounts maintained by the financial institution or (ii) the entity
otherwise poses a low risk of being used by U.S. persons for tax
evasion. The Treasury Department has ample authority under section 1471
of the Internal Revenue Code to issue regulations that waive the FATCA
withholding tax in these circumstances. Specifically, section
1471(b)(2) authorizes the Secretary of the Treasury to treat certain
classes of financial institutions as ``deemed compliant'' with FATCA's
requirements, and therefore as exempt from FATCA withholding, when (i)
the Secretary determines that the application of FATCA with respect to
the class is not necessary to carry out the purposes of FATCA or (ii)
the institution complies with any procedures prescribed by the
Secretary to ensure that it does not maintain United States accounts
and complies with any prescribed procedures regarding accounts held by
other foreign financial institutions. In addition, section 1471(f)(4)
authorizes the Secretary to exempt from FATCA withholding any payment
where the beneficial owner is a member of a class of persons that poses
a low risk of tax evasion (referred to as exempt beneficial owners).
See also section 1474(f), which provides authority to prescribe
regulations or other guidance that may be necessary or appropriate to
carry out the purposes of, and prevent the avoidance of FATCA.
Question #3. Does the Department of the Treasury intend to
interpret the income tax treaties before the Senate as the legal
authority to force U.S. financial institutions to comply with the
bilateral agreements to implement FATCA?
Answer. U.S. financial institutions are not forced to comply with
the bilateral agreements to implement FATCA. The United States
Government must comply with its bilateral agreements, such as an IGA.
As noted below, in answer to Questions 4 and 5, financial institutions
already have statutory and regulatory obligations to report certain
U.S.-source income information about nonresident accounts to the IRS,
which exist independent of the IGAs. These obligations are not
dependent on any interpretation of the tax treaties currently before
the Senate. The reciprocal IGAs only obligate the IRS to exchange with
a FATCA partner jurisdiction account information that the IRS already
collects with respect to the tax residents of the FATCA partner
country.
Question #4. Where specifically in the treaties does the United
States agree to mandate U.S. financial institutions to collect and
report account information on a blanket basis (as opposed to requests
to ``exchange'' tax data on individuals)?
Answer. The U.S. treaties under consideration by the Senate do not
mandate U.S. financial institutions to collect and report any account
information on a blanket basis. Rather, under existing provisions of
the Internal Revenue Code and the regulations thereunder, withholding
agents, including U.S. financial institutions, have the obligation to
report to the IRS information on certain amounts of U.S. source income
paid to non-U.S. persons, as described in more detail in the response
to question 5, below.
The United States has authority to exchange the information that it
collects from financial institutions with other jurisdictions under the
tax information exchange provisions of most of its tax treaties, which
receive Senate advice and consent to ratification, as well as pursuant
to the bilateral agreements relating to the exchange of tax information
(referred to as tax information exchange agreements, or TIEAs). The
United States only enters into reciprocal IGAs with jurisdictions with
which we already have a tax treaty or TIEA, and all reciprocal IGAs
provide that any information provided by the IRS will be exchanged
pursuant to that preexisting agreement.
Question #5. Do you believe the Department of the Treasury already
has sufficient statutory authority to issue regulations requiring U.S.
financial institutions to collect and report the information described
in the Inter Governmental Agreement to Implement FATCA; and if so,
please cite and provide relevant text of the statues conferring such
authority.
Answer. The information that the United States would agree to
exchange under the reciprocal version of the IGA differs in scope from
the information that foreign governments would agree to provide to the
IRS. In fact, the information specified to be exchanged by the IRS
under the IGA is limited to the U.S.-source income information that
U.S. financial institutions are required under existing regulations to
report to the IRS about nonresident accounts.
The reciprocal IGAs require the United States to collect and report
the following with respect to financial accounts held by a resident of
the IGA partner jurisdiction and maintained by a U.S. financial
institution in the United States or by the U.S. branch of a foreign
financial institution:
1. Identifying information for the account holder, including
name, address, foreign taxpayer identifying number, and account
number;
2. The gross amount of interest paid on an account that is a
depository account held by an individual, provided that more
than $10 of interest is paid to such account in any given
calendar year;
3. The gross amount of U.S. source dividends paid or credited
to the account;
4. The gross amount of other U.S. source income paid or
credited to the account, to the extent such income is subject
to reporting under chapter 3 of subtitle A or chapter 61 of
subtitle F of the U.S. Internal Revenue Code.
All of the foregoing information is already required to be reported
under existing statutory or regulatory provisions for nonresident
accounts maintained in the United States. Financial institutions are
required to collect information from nonresident alien account holders
to establish the status of the account holder as a non-U.S. person
under section 6049. This information is generally collected on a Form
W-8BEN, which includes the name, address, country of tax residence of
the account holder, and foreign taxpayer identifying number, if any. In
addition, under sections 871(a) and 881(a), foreign persons are subject
to a 30-percent tax on certain payments of U.S. source income, which
includes, among other things, interest, dividends, and other similar
types of investment income, unless the beneficial owner of the payment
is entitled to a reduced rate of, or exemption from, withholding tax
under domestic law, including an income tax treaty. This tax is
collected by U.S. withholding agents (including financial institutions)
under section 1441. Section 1461 and the regulations thereunder require
withholding agents to report to the IRS any payments that are subject
to withholding tax under section 1441, even if the tax is reduced or
eliminated by another statutory provision or an income tax treaty.
These amounts would include items 3 and 4 described above (U.S. source
dividends, and other ``amounts subject to reporting under chapter 3 of
subtitle A'').
With respect to amounts described in item 2 above, bank deposit
interest paid to nonresidents that is not effectively connected with
the conduct of business within the United States is generally exempt
from the section 1441 withholding tax. However, there is separate
statutory authority that allows the reporting of such interest. Section
6049(a) provides generally that every person who makes a payment of
bank deposit interest aggregating $10 or more to any other person
shall, unless an exception applies, report such payment to the IRS in
accordance with the forms and regulations as prescribed by the
Secretary of the Treasury. Section 6049(b)(2)(B)(ii) provides that the
term ``interest,'' for purposes of application of section 6049(a), does
not include, except to the extent otherwise provided in regulations,
any amount described in section 6049(b)(5), which applies to certain
payments of interest on deposits made to nonresident aliens and foreign
corporations that are not effectively connected with the conduct of
business within the United States. Sections 6049(b)(2)(B) and (b)(5)
thus provide express authority for Treasury and the IRS to issue
regulations requiring the reporting of bank deposit interest paid to
nonresidents. The regulations issued pursuant to this authority at Reg.
1.6049-5 and -8 require reporting with respect to amounts described in
item 2, above.
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Responses of Thomas A. Barthold to Questions
Submitted by Senator Robert Menendez
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Responses of Thomas A. Barthold to Questions
Submitted by Senator Benjamin L. Cardin