[Senate Executive Report 108-11]
[From the U.S. Government Publishing Office]
108th Congress Exec. Rpt.
SENATE
2d Session 108-11
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TAXATION CONVENTION AND PROTOCOL WITH THE GOVERNMENT OF SRI LANKA
_______
March 18, 2004.--Ordered to be printed
Filed under authority of the order of the Senate of March 12, 2004.
_______
Mr. Lugar, from the Committee on Foreign Relations,
submitted the following
R E P O R T
[To accompany Treaty Docs. 99-10 and 108-9]
The Committee on Foreign Relations, to which was referred
the Convention between the Government of the United States of
America and the Government of the Democratic Socialist Republic
of Sri Lanka for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income,
signed at Colombo on March 14, 1985, and the Protocol amending
the Convention, together with an Exchange of Notes, signed at
Washington on September 20, 2002, having considered the same,
reports favorably thereon and recommends that the Senate give
its advice and consent to ratification thereof, as set forth in
this report and the accompanying resolution of ratification.
CONTENTS
Page
I. Purpose..........................................................1
II. Background.......................................................2
III. Summary..........................................................2
IV. Entry Into Force and Termination.................................3
V. Committee Action.................................................4
VI. Committee Comments...............................................4
VII. Budget Impact...................................................13
VIII.Explanation of Proposed Treaty..................................13
IX. Resolution of Ratification......................................13
I. Purpose
The principal purposes of the proposed income tax treaty
between the United States and Sri Lanka 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 treaty also is intended to continue to promote
close economic cooperation between the two countries and to
eliminate possible barriers to trade and investment caused by
overlapping taxing jurisdictions of the two countries.
II. Background
The proposed treaty between the United States and Sri Lanka
was signed at Colombo on March 14, 1985 but has not entered
into force. The proposed treaty was not acted on by the Senate
at the time because changes made to U.S. international tax
rules by the Tax Reform Act of 1986 necessitated some
modifications to the agreement. The proposed protocol to amend
that treaty was signed at Washington on September 20, 2002. The
United States and Sri Lanka exchanged notes on the same day to
provide clarification with respect to the application of the
proposed treaty. Unless otherwise specified, the proposed
treaty, the proposed protocol, and the notes are hereinafter
referred to collectively as the ``proposed treaty.''
The Convention was sent to the Senate for advice and
consent to its ratification on October 2, 1985 (see Treaty Doc.
99-10). The proposed protocol was sent to the Senate for advice
and consent to its ratification on October 28, 2003 (see Treaty
Doc. 108-9). The Committee on Foreign Relations held a public
hearing on the proposed treaty on February 25, 2004.
III. Summary
The proposed treaty is similar to other recent U.S. income
tax treaties, the 1996 U.S. model income tax treaty (``U.S.
model''), the 1992 model income tax treaty of the Organization
for Economic Cooperation and Development, as updated (``OECD
model''), and the 1980 United Nations Model Double Taxation
Convention Between Developed and Developing Countries, as
amended in 2001 (``U.N. model''). However, the proposed treaty
contains certain substantive deviations from these treaties and
models.
As in other U.S. tax treaties, the purposes of the treaty
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.
For example, the proposed treaty contains provisions under
which each country generally agrees not to tax business income
derived from sources within that country by residents of the
other country unless the business activities in the taxing
country are substantial enough to constitute a permanent
establishment (Article 7). Similarly, the proposed treaty
contains ``commercial visitor'' exemptions under which
residents of one country performing personal services in the
other country will not be required to pay tax in the other
country unless their contact with the other country exceeds
specified minimums (Articles 15, 16, and 18). The proposed
treaty provides that dividends, interest, royalties, and
certain capital gains derived by a resident of either country
from sources within the other country generally may be taxed by
both countries (Articles 10, 11, 12, and 13); however, the rate
of tax that the source country may impose on a resident of the
other country on dividends, interest, and royalties may be
limited or eliminated by the proposed treaty (Articles 10, 11,
and 12).
In situations in which the country of source retains the
right under the proposed treaty to tax income derived by
residents of the other country, the proposed treaty generally
provides for relief from the potential double taxation through
the allowance by the country of residence of a tax credit for
certain foreign taxes paid to the other country (Article 24).
The proposed treaty contains the standard provision (the
``saving clause'') included in U.S. tax treaties pursuant to
which each country retains the right to tax its residents and
citizens as if the treaty had not come into effect (Article 1).
In addition, the proposed treaty contains the standard
provision providing that the treaty may not be applied to deny
any taxpayer any benefits the taxpayer would be entitled to
under the domestic law of a country or under any other
agreement between the two countries (Article 1).
The proposed treaty also contains a detailed limitation-on-
benefits provision to prevent the inappropriate use of the
treaty by third-country residents (Article 23).
IV. Entry Into Force and Termination
A. ENTRY INTO FORCE
The proposed treaty will enter into force upon the exchange
of instruments of ratification. With respect to each country,
the proposed treaty will be effective with respect to taxes
withheld at source for amounts paid or credited on or after the
first day of the second month following the date on which the
proposed treaty enters into force. With respect to other taxes,
the proposed treaty will be effective for taxable periods
beginning on or after the first day of January of the year in
which the proposed treaty enters into force.
The Technical Explanation states that the provisions of
Article 26 (Mutual Agreement Procedure) and Article 27
(Exchange of Information) of the proposed treaty will have
effect from the date of entry into force of the proposed
treaty, without regard to the taxable or chargeable period to
which the matter relates.
B. TERMINATION
The proposed treaty will remain in force until terminated
by either country. Either country may terminate the proposed
treaty, after the expiration of a period of five years from the
date of its entry into force, by giving six months prior
written notice of termination to the other country through
diplomatic channels. In such case, with respect to each
country, a termination is effective with respect to taxes
withheld at source for amounts paid or credited on or after the
first day of January next following the expiration of the six-
month notice period. With respect to other taxes, a termination
is effective for taxable periods beginning on or after the
first day of January next following the expiration of the six-
month notice period.
V. Committee Action
The Committee on Foreign Relations held a public hearing on
the proposed treaty with Sri Lanka on February 25, 2004. The
hearing was chaired by Senator Lugar.\1\ The committee
considered the proposed treaty on March 4, 2004, and ordered
the proposed treaty with Sri Lanka favorably reported by a vote
of 19 in favor and 0 against. Ayes: Senators Lugar, Hagel,
Chafee, Allen, Brownback, Enzi, Voinovich, Alexander, Coleman,
Sununu, Biden, Sarbanes, Dodd, Kerry, Feingold, Boxer, Nelson,
Rockefeller, and Corzine.
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\1\ The transcript of this hearing will be forthcoming as a
separate committee print.
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VI. Committee Comments
On balance, the Committee on Foreign Relations believes
that the proposed treaty with Sri Lanka is in the interest of
the United States and urges that the Senate act promptly to
give advice and consent to ratification. The committee has
taken note of certain issues raised by the proposed treaty and
believes that the following comments may be useful to the
Treasury Department officials in providing guidance on these
matters should they arise in the course of future treaty
negotiations.
A. STABILITY OF SRI LANKAN LAW
In the past, the Treasury Department has maintained that a
country's political situation should be a factor in determining
whether to build stronger economic ties with that country. As
the Treasury Department explained in a letter to the Senate
Foreign Relations Committee:
A country's political situation is a factor that is
considered in determining whether to build stronger
economic ties with that country. When consideration of
this and other factors leads to a policy of building
stronger economic ties with a particular country, a tax
treaty becomes a logical part of that policy. One of a
treaty's main purposes is to foster the competitiveness
of U.S. firms that enter the treaty partner's market
place. As long as it is U.S. policy to encourage U.S.
firms to compete in these market places, it is in the
interest of the United States to enter tax treaties.
Moreover, in countries where an unstable political
climate may result in rapid and unforeseen changes in
economic and fiscal policy, a tax treaty can be
especially valuable to U.S. companies, as the tax
treaty may restrain the government from taking actions
that would adversely impact U.S. firms, and provide a
forum to air grievances that otherwise would be
unavailable.\2\
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\2\ Letter dated July 5, 1995 from the Department of the Treasury
to the Senate Foreign Relations Committee, as quoted in the Report of
the Senate Foreign Relations Committee on the Income Tax Convention
with Ukraine, Exec. Rept. 104-5, August 10, 1995.
Background of Political Developments in Sri Lanka
The government of Sri Lanka is a constitutional democracy.
For approximately the past 20 years, the country has
experienced periods of significant conflict involving a
separatist group that has been declared by the United States to
be a terrorist organization. In recent years, the Norwegian
government has facilitated a peace process designed to resolve
this conflict. In November 2003, while the Sri Lankan prime
minister was in Washington seeking support for the peace
process, the Sri Lankan president removed three cabinet
ministers, suspended parliament, and imposed martial law. In
February 2004, the Sri Lankan president dissolved parliament
and set April 2, 2004 for the next general election. The State
Department has recently stated that Sri Lanka is currently
experiencing a ``domestic political crisis.'' \3\
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\3\ Press Statement by Adam Ereli, Deputy Spokesman, United States
Department of State, Sri Lanka: Deputy Secretary Armitage's Meeting
with Minister for Economic Reform, Science, And Technology Milinda
Moragoda, December 29, 2003.
Issues
Several issues arise in the consideration of a tax treaty
with a government that is experiencing political instability.
One issue is that it may be difficult to identify correctly the
other country's competent authority in situations where there
are competing claims as to who is authorized to exercise
legislative, executive, or judicial authority. Another issue is
the extent to which any political instability also causes
uncertainty as to the precise nature of the substantive law of
that country. These uncertainties may make it difficult to
administer the treaty.
A more specific issue arises in the context of the
exchange-of-information provisions of the proposed treaty
(Article 27). The exchange-of-information provision requires
that information that is exchanged shall be treated as secret
by the receiving country in the same manner as information
obtained under its local laws and may only be disclosed to
persons involved in the assessment, collection, or
administration of taxes covered by the provision. Several
concerns may arise with respect to the utilization of this
provision with a government that is experiencing political
instability. First, it may be more difficult to assess whether
confidentiality will be respected when the information is
initially exchanged. Second, it may be more difficult to assess
the possibility that inappropriate use will be made in the
future of the exchanged information. Third, the country
receiving the information could weaken (or potentially
eliminate) the confidentiality protections under its local
laws, which would concomitantly weaken or eliminate those
protections for exchanged information. However, these issues
involving exchange of information may be dealt with by the
United States competent authority in administering the
provisions of the proposed treaty.
Committee Conclusions
The committee has considered the political situation in Sri
Lanka and its implications for the proposed treaty. The
committee recognizes the benefits this treaty would provide to
U.S. taxpayers and the positive effect the treaty could have on
the Sri Lankan economic environment. On balance, the committee
believes that it is appropriate to proceed with the
consideration of this proposed treaty and recommends its
ratification.
B. DEVELOPING COUNTRY CONCESSIONS
The proposed treaty contains a number of developing country
concessions, some of which are found in other U.S. income tax
treaties with developing countries. The most significant of
these concessions are listed below.
Definition of Permanent Establishment
The proposed treaty departs from the U.S. model treaty by
providing for relatively broad source-basis taxation. In
particular, the proposed treaty's permanent establishment
article permits the country in which business activities are
performed to tax these activities in a broader range of
circumstances than would be permitted under the U.S. model.
For example, under the proposed treaty, a building site, a
construction or assembly project, or an installation or
drilling rig or ship used for the exploration of natural
resources constitutes a permanent establishment if such
project, or activity relating to such installation, rig, or
ship, as the case may be, continues for more than 183 days. The
U.S. model uses a threshold of 12 months. The proposed treaty
also provides that the furnishing of services (e.g., consulting
services) by an enterprise through employees or other personnel
engaged for such purpose constitutes a permanent establishment
if the activity continues within the country for an aggregate
of more than 183 days in any 12-month period. The U.S. model
provides that these activities give rise to a permanent
establishment only if conducted through a fixed place of
business or by a dependent agent.
In addition, the proposed treaty provides that, except in
the case of reinsurance, an insurance enterprise of one treaty
country will be deemed to have a permanent establishment in the
other treaty country if it collects premiums or insures risks
situated in the other treaty country through a person other
than an independent agent. The proposed treaty also provides
that if the activities of an agent are devoted wholly or almost
wholly on behalf of an enterprise, and the transactions between
the enterprise and the agent do not conform to arm's-length
conditions, then the agent may cause the enterprise to have a
permanent establishment in the country in which the agent's
activities are performed. In addition, the proposed treaty
provides that if a dependent agent maintains in one treaty
country a stock of goods or merchandise from which the agent
regularly fills orders or makes deliveries on behalf of an
enterprise of the other treaty country, and additional
activities conducted in the source country on behalf of the
enterprise have contributed to the conclusion of the sale of
such goods or merchandise, then the enterprise is deemed to
have a permanent establishment in the source country. These
provisions all expand source-basis taxation beyond what is
provided in the U.S. model.
Source Basis Taxation
Additional concessions to source basis taxation in the
proposed treaty include a maximum rate of source country tax on
dividends (15 percent) that is higher than that provided in the
U.S. model treaty; and broader source country taxation of
personal services income (especially directors' fees) and
income of artistes and athletes than that allowed by the U.S.
model treaty.
Taxation of Business Profits
Unlike the U.S. model, the proposed treaty does not permit
a permanent establishment to deduct payments that it makes to
the head office, or any other office, of the enterprise that
includes the permanent establishment if such payments
constitute: (1) royalties, fees or other similar payments in
return for the use of patents, know-how or other rights; (2)
commissions or other charges for specific services performed or
for management; or (3) interest on loans to the permanent
establishment. Similarly, such payments made to the permanent
establishment by the head office or other office of the
enterprise that includes the permanent establishment are not
taken into account in determining the taxable business profits
of the permanent establishment.
Other Concessions to Source-Basis Taxation
In several instances, the proposed treaty allows higher
rates of source-country tax than the U.S. model allows. The
proposed treaty allows a maximum rate of source-country tax of
15 percent on dividends, which is consistent with the U.S.
model, but it does not reduce this maximum rate to five percent
in cases in which the shareholder owns at least 10 percent of
the voting stock of the dividend-paying company, as the U.S.
model does. The proposed treaty also allows source-country
taxation of interest at a maximum rate of 10 percent, whereas
the U.S. model generally does not permit source-country
taxation of interest. Similarly, the proposed treaty allows
source-country taxation of royalties at a maximum rate of 10
percent and certain equipment rentals at a maximum rate of five
percent, whereas the U.S. model generally does not permit
source-country taxation of such royalties and rental fees. The
proposed treaty also allows the source country a non-exclusive
right to tax ``other income'' (i.e., income not specifically
dealt with in other provisions of the treaty), whereas the U.S.
model provides for exclusive residence-based taxation of such
income.
In addition, the proposed treaty permits source-country
taxation of income derived by a resident of the other treaty
country from the performance of independent personal services
if the resident is present in the source country for a total of
more than 183 days during any 12-month period, even if such
income is not attributable to a fixed base or permanent
establishment, as the U.S. model would require.
Grants
The proposed treaty includes a provision providing
favorable treatment for grants received by a U.S. resident
company from the government of Sri Lanka for purposes of
investment promotion and economic development in Sri Lanka. The
provision provides for the exclusion from income and from
earnings and profits for U.S. tax purposes of a cash grant or
similar payment by the government of Sri Lanka to a U.S.
resident in respect of a wholly owned enterprise in Sri Lanka,
or to a company resident in Sri Lanka that is wholly owned by a
U.S. resident. No similar provision is found in the U.S. model
treaty, nor is any similar provision included in any U.S.
bilateral tax treaty other than the U.S.-Israel treaty.
Issues
One purpose of the proposed treaty is to reduce tax
barriers to direct investment by U.S. firms in Sri Lanka. The
practical effect of the developing-country concessions could be
greater Sri Lankan taxation (or less U.S. taxation) of
activities of U.S. firms in Sri Lanka than would be the case
under the rules of either the U.S. or OECD model treaties.
There is a risk that the inclusion of these developing
country concessions in the proposed treaty could result in
additional pressure on the United States to include them in
future treaties negotiated with developing countries. However,
these precedents already exist in the UN model treaty, and a
number of existing U.S. income tax treaties with developing
countries already include similar concessions. Such concessions
arguably are necessary in order to obtain treaties with
developing countries. Tax treaties with developing countries
can be in the interest of the United States because they
provide developing country tax relief for U.S. investors and a
clearer framework within which the taxation of U.S. investors
will take place.
Committee Conclusions
The committee is concerned that developing country
concessions not be viewed as the starting point for future
negotiations with developing countries. It must be clearly
recognized that several of the rules of the proposed treaty
represent substantial concessions by the United States, and
that such concessions must be met with substantial concessions
by the treaty partner. Thus, future negotiations with
developing countries should not assume, for example, that the
definition of permanent establishment provided in this treaty
will necessarily be available in every case; rather, such a
definition will be only adopted in the context of an agreement
that satisfactorily addresses the concerns of the United
States.
C. EDUCATION AND TRAINING
Under the proposed treaty, U.S. taxpayers who are visiting
Sri Lanka and individuals who immediately prior to visiting the
United States were resident in Sri Lanka will be exempt from
income tax in the host country on certain payments received if
the purpose of their visit is to engage in full-time education
or to engage in full-time training. The exempt payments are
limited to those payments the individual may receive for his or
her maintenance, education or training as long as such payments
are from sources outside the host country. In the case of an
individual engaged primarily in training or education, but who
is an employee of a person resident in his or her home country
or who is participating in a program of the government of the
host country or of an international organization, a different
exemption applies. Such an individual is exempt from host
country tax on up to $6,000 of personal service income. The
exemption from income tax in the host country applies only for
a period of one year or less.
Issues
Full-time students and persons engaged in full-time
training
The proposed treaty generally has the effect of exempting
payments received for the maintenance, education, and training
of full-time students and persons engaged in full-time training
as a visitor from the United States to Sri Lanka or as a
visitor from Sri Lanka to the United States from the income tax
of both the United States and Sri Lanka. This conforms to the
U.S. model with respect to students and generally conforms to
the OECD model provisions with respect to students and
trainees.
This provision generally would have the effect of reducing
the cost of such education and training received by visitors.
This may encourage individuals in both countries to consider
study abroad in the other country. Such cross-border visits by
students and trainees may foster the advancement of knowledge
and redound to the benefit of residents of both countries.
The proposed treaty applies a different standard when the
visiting individual is an employee of a person in his or her
home country or participates in a program sponsored by the
government of the host country or of an international
organization. For such an individual, exemption is not provided
for payments from outside the host country for maintenance,
education, and training; rather, such an individual may exempt,
for the period of one year, up to $6,000 in personal services
income from tax in the host country. In this regard the
proposed treaty departs from the U.S. and OECD model treaties.
The U.S. model limits exemptions for payments of maintenance,
education, and training for one year in the case of business
trainees but does not provide any exemption related to personal
services income. The OECD model does not limit the duration of
exemption for payments for maintenance, education, and training
for business trainees and does not provide any exemption
related to personal services income.
Depending upon the costs of maintenance, education, and
training, the dollar value of the exemption to non-employee
visitors may be greater than the dollar value of the exemption
for employee (or program participant) visitors. By potentially
subjecting such payments for maintenance, education, and
training as well as all personal services income received to
host country income tax in the case of visits by employees or
program participants engaged in visits of greater than one year
in duration, the cost for such cross-border visitors of
engaging in education or training programs of longer duration
would be increased. It could be argued that the training or
education of an employee relates primarily to specific job
skills of value to the individual or the individual's employer
rather than enhancing general knowledge and cross-border
understanding, as may be the case in the education or training
of a non-employee visitor. This could provide a rationale for
providing more open-ended treaty benefits in the case of non-
employee students and trainees as opposed to employees.
However, if employment provides the underlying rationale for
disparate treaty benefits, it may be questioned as to why
training requiring one year or less is preferred to training
that requires a longer visit to the host country. As such, the
proposed treaty would favor certain types of training
arrangements over others. Further, if employment provides the
underlying rationale for disparate treaty benefits, why
participants in a host country or international organization
sponsored program of education or training would be treated
like employees is less easily discerned.
Teachers and professors
The proposed treaty is consistent with the U.S. model in
which no such exemption would be provided for the remuneration
of visiting teachers, professors, or academic researchers.
While this is the position of the U.S. model, an exemption for
visiting teachers and professors has been included in many
bilateral tax treaties. Of the more than 50 bilateral income
tax treaties in force, 30 include provisions exempting from
host country taxation the income of a visiting individual
engaged in teaching or research at an educational institution,
and an additional 10 treaties provide a more limited exemption
from taxation in the host county for a visiting individual
engaged in research. Four of the most recently ratified income
tax treaties and the proposed treaty with Japan include such a
provision.
The effect of such exemptions for the remuneration of
visiting teachers, professors, and academic researchers
generally is to make such cross-border visits more attractive
financially. Increasing the financial reward may serve to
encourage cross-border visits by academics. Such cross-border
visits by academics for teaching and research may foster the
advancement of knowledge and redound to the benefit of
residents of both countries. On the other hand, such an
exemption from income tax may be seen as unfair when compared
to persons engaged in other occupations whose occupation or
employment may cause them to relocate temporarily abroad. Such
exemptions for remuneration of teachers, professors, and
academic researchers could be said to violate the principle of
horizontal equity by treating otherwise similarly economically
situated taxpayers differently.
Committee Conclusions
The committee notes that the special rules for certain
students and trainees differ from the U.S. and OECD model
treaties. The committee also notes that while the treatment of
visiting teachers and professors under the proposed treaty is
consistent with the U.S. model, it is inconsistent with other
U.S. tax treaties in force.\4\ The committee encourages the
Treasury Department to develop criteria for determining under
what circumstances the inclusion of these special provisions is
appropriate and to consult with the committee regarding these
criteria.
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\4\ The treaties with Italy, Slovenia, and Venezuela, each
considered in 1999, the treaty with the United Kingdom, considered in
2003, and the proposed treaty with Japan contain provisions exempting
the remuneration of visiting teachers and professors from host country
income taxation. The treaties with Denmark, Estonia, Latvia, and
Lithuania, also considered in 1999, did not contain such an exemption,
but did contain a more limited exemption for visiting researchers. The
protocols with Australia and Mexico, ratified in 2003, did not include
such exemptions.
D. DISCLOSURE OF INFORMATION IN CONNECTION WITH OVERSIGHT OF THE TAX
SYSTEM
The proposed treaty provides that the two competent
authorities will exchange such information as is necessary to
carry out the provisions of the proposed treaty or of the
domestic laws of the two countries concerning all national
taxes insofar as the taxation thereunder is not contrary to the
proposed treaty, as well as to prevent fiscal evasion. Any
information exchanged under the proposed treaty is treated as
secret in the same manner as information obtained under the
domestic laws of the country receiving the information.
The exchanged information may be disclosed only to persons
or authorities (including courts and administrative bodies)
involved in the assessment, collection, or administration of,
the enforcement or prosecution in respect of, or the
determination of appeals in relation to, the taxes to which the
proposed treaty applies. Such persons or authorities must use
the information for such purposes only. Exchanged information
may be disclosed in public court proceedings or in judicial
decisions.
Unlike the U.S. model and unlike virtually all recent U.S.
tax treaties, the proposed treaty does not include a specific
reference to disclosure of exchanged information to persons or
authorities engaged in the oversight of the tax system (e.g.,
the tax-writing committees of Congress and the General
Accounting Office). This lacuna could present a serious
impediment to legislative branch oversight of the operation of
the proposed treaty. The Treasury Department explained this
omission as follows:
The matter of access of information in connection
with oversight by the GAO and certain Congressional
committees was discussed during the course of the
negotiations, and it was agreed with Sri Lanka that the
language included in the provision allowed the
necessary disclosures. Therefore, a specific reference
to oversight was not considered necessary.
Nevertheless, an outstanding clarifying this issue
might be helpful in order to eliminate any doubt.\5\
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\5\ Testimony of Barbara M. Angus, International Tax Counsel,
United States Department of the Treasury, before the Senate Committee
on Foreign Relations on Pending Income Tax Agreements, February 25,
2004.
Committee Conclusions
The committee proposes an understanding as part of the
resolution of ratification to make clear that information
exchanged under the treaty may be disclosed to appropriate
congressional committees and the General Accounting Office.
Although the negotiating history of the treaty indicates that
this issue was discussed in the negotiations and that Sri Lanka
agreed that Article 27 permitted such disclosure, the committee
believes it useful to add this understanding in order to ensure
that there is no doubt on this matter. The committee has not
defined the term ``appropriate congressional committees.'' The
committee intends that it be given a broad reading and apply to
any committees that, under applicable U.S. law or regulation,
are authorized to have access to tax information in connection
with their role in overseeing the administration of U.S. tax
law.
E. U.S. MODEL TAX TREATY DIVERGENCE
It has been longstanding practice for the Treasury
Department to maintain, and update as necessary, a model income
tax treaty that reflects the current policies of the United
States pertaining to income tax treaties. The current U.S.
policies on income tax treaties are contained in the U.S.
model. Some of the purposes of the U.S. model are explained by
the Treasury Department in its Technical Explanation of the
U.S. model:
[T]he Model is not intended to represent an ideal
United States income tax treaty. Rather, a principal
function of the Model is to facilitate negotiations by
helping the negotiators identify differences between
income tax policies in the two countries. In this
regard, the Model can be especially valuable with
respect to the many countries that are conversant with
the OECD Model. . . . Another purpose of the Model and
the Technical Explanation is to provide a basic
explanation of U.S. treaty policy for all interested
parties, regardless of whether they are prospective
treaty partners.
U.S. model tax treaties provide a framework for U.S. treaty
policy. These models provide helpful information to taxpayers,
the Congress, and foreign governments as to U.S. policies on
often complicated treaty matters. For purposes of clarity and
transparency in this area, the U.S. model tax treaties should
reflect the most current positions on U.S. treaty policy.
Periodically updating the U.S. model tax treaties to reflect
changes, revisions, developments, and the viewpoints of
Congress with regard to U.S. treaty policy would ensure that
the model treaties remain meaningful and relevant.
With assistance from the staff of the Joint Committee on
Taxation, the Senate Committee on Foreign Relations reviews tax
treaties negotiated and signed by the Treasury Department
before advice and consent to ratification by the full Senate is
considered. The U.S. model is important as part of this review
process because it helps the Senate determine the
Administration's most recent treaty policy and understand the
reasons for diverging from the U.S. model in a particular tax
treaty. To the extent that a particular tax treaty adheres to
the U.S. model, transparency of the policies encompassed in the
tax treaty is increased and the risk of technical flaws and
unintended consequences resulting from the tax treaty is
reduced.
Committee Conclusions
The committee recognizes that tax treaties often diverge
from the U.S. model due to, among other things, the unique
characteristics of the legal and tax systems of treaty
partners, the outcome of negotiations with treaty partners, and
recent developments in U.S. treaty policy. However, even
without taking into account the central features of tax
treaties that predictably diverge from the U.S. model (e.g.,
withholding rates, limitation on benefits), the technical
provisions of recent U.S. tax treaties have diverged
substantively from the U.S. model with increasing frequency.
The proposed treaty continues this apparent pattern, which may
be indicative of a growing obsolescence of the U.S. model. The
important purposes served by the U.S. model tax treaty are
undermined if that model does not accurately reflect current
U.S. positions and the committee notes with approval the
intention of the Treasury Department to update the U.S. model
treaty and strongly encourages the Treasury Department to
complete the update in the coming year.\6\ In the process of
revising the U.S. model, the committee expects the Treasury
Department to consult with the committee generally, and
specifically regarding the potential implications for U.S.
trade and revenue of the policies and provisions reflected in
the new model.
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\6\ Testimony of Barbara M. Angus, International Tax Counsel,
United States Department of the Treasury, before the Senate Committee
on Foreign Relations on Pending Income Tax Agreements, February 25,
2004.
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VII. Budget Impact
The committee has been informed by the staff of the Joint
Committee on Taxation that the withholding tax changes and
other provisions of the proposed treaty are estimated to cause
a negligible change in Federal budget receipts during the
fiscal year 2004-2013 budget period, based solely on the amount
and type of historical income flows between Sri Lanka and the
United States.
VIII. Explanation of Proposed Treaty
A detailed, article-by-article explanation of the proposed
income tax treaty between the United States and Sri Lanka can
be found in the pamphlet of the Joint Committee on Taxation
entitled Explanation of Proposed Income Tax Treaty Between the
United States and Sri Lanka (JCS-2-04), February 19, 2004.
IX. Resolution of Ratification
Resolved (two-thirds of the Senators present concurring
therein), That the Senate advise and consent to the
ratification of the Convention between the Government of the
United States of America and the Government of the Democratic
Socialist Republic of Sri Lanka for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income, signed at Colombo on March 14, 1985 (Treaty
Doc. 99-10), and the Protocol amending the Convention, together
with an Exchange of Notes, signed at Washington on September
20, 2002 (Treaty Doc. 108-9), subject to the understanding that
the authorities to which information may be disclosed under
Article 27 include appropriate congressional committees and the
General Accounting Office.