99–115 

112TH CONGRESS EXEC. REPT. " ! SENATE 1st Session 112–1 

PROTOCOL AMENDING TAX CONVENTION WITH 

SWITZERLAND 

AUGUST 30 (legislative day, AUGUST 2), 2011.—Ordered to be printed 

Mr. KERRY, from the Committee on Foreign Relations, 

submitted the following 

R E P O R T 

[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, 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 .......................... 5 

IX. Annex 1.—Technical Explanation ................................................................ 7 

X. Annex 2.—Transcript of Hearing of June 7, 2011 ...................................... 19 

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 

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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 2. 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 ProVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00002 Fmt 6659 Sfmt 6602 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
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tocol provides the tax authorities of to 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 June 

7, 2011. Testimony was received from Manal Corwin, Deputy 

Assistant Secretary (International Tax Affairs) at the Treasury 

Department, and Thomas Barthold, Chief of Staff of the Joint Committee on Taxation. A transcript of the hearing is included in 

Annex 2. 

On July 26, 2011, 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 which 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 

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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 

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views on this matter can be found in Section VIII of Executive Report 110-12. 

D. 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 

on October 2, 1996, signed on September 23, 2009, at Washington, 

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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 (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. 

(7) 

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), 

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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 

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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 

10 

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 appointVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00010 Fmt 6601 Sfmt 6601 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
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ment 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 

12 

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. 

13 

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 

14 

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 

15 

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. 

16 

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. 

17 

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. 

18 

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. 

(19) 

X. ANNEX 2.—TRANSCRIPT OF HEARING OF JUNE 7, 2011 

TREATIES 

TUESDAY, JUNE 7, 2011 

U.S. SENATE, 

COMMITTEE ON FOREIGN RELATIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 2:30 p.m., in room 

SD–419, Dirksen Senate Office Building, Hon. Benjamin L. Cardin, 

presiding. 

Present: Senators Cardin, Udall, and Lee. 

OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, 

U.S. SENATOR FROM MARYLAND 

Senator CARDIN. The Senate Foreign Relations Committee will 

come to order. I want to thank Senator Kerry for allowing me to 

chair this hearing. 

We will be examining five treaties that have been brought to the 

Senate’s attention, for their consent. This hearing of the Senate 

Foreign Relations Committee will examine these five treaties that 

are currently pending before the United States Senate: a new treaty with Hungary, two protocols that amend our existing tax treaties with Switzerland and Luxembourg, a treaty with Bermuda regarding mutual legal assistance in criminal matters, and a bilateral investment treaty with Rwanda. 

Today, we will have witnesses from the Treasury Department, 

the Joint Committee on Taxation, the Justice Department, and the 

State Department to testify on these treaties. It’s my understanding that Deborah McCarthy, the Principal Deputy Assistant 

Secretary, Bureau of Economics, Energy and Business Affairs of 

the Department of State, is caught in a situation at the State Department in which there are foreign guests that are being—so her 

attendance here will be delayed. We understand she will be here, 

so we will begin the hearing and give her a chance to comment 

once she arrives, and we’ll hold our questions as it relates to the 

State Department until she’s here. 

As we will hear shortly, these treaties are designed to help 

America from an economic perspective; a law enforcement perspective; in the case of the tax treaties, both of these perspectives. 

The Mutual Legal Assistance Treaty with Bermuda will help solidify our working relationship with Bermuda on criminal matters 

20 

by providing an international law framework for cooperation that 

has already been taking place. Bermuda has been a good partner 

on counternarcotics and money-laundering matters. And I look forward to hearing from the Deputy Assistant Attorney General 

Swartz from the Justice Department and Assistant Legal Adviser 

Johnson from the State Department as to how these treaties will 

make that partnership stronger. 

The bilateral investment treaty with Rwanda is one this committee knows very well. Senator Kaufman chaired a hearing on the 

treaty last November. On December 14, 2010, shortly before Congress adjourned, the committee reported the treaty out favorably to 

the full Senate for its advice and consent. Obviously, there was not 

enough time remaining in the 111th Congress to consider that treaty for ratification. And I am pleased that the chairman has scheduled that for hearing today, so that we cannot promptly on that 

treaty. 

Ms. McCarthy, welcome. 

So I’d like to thank Deputy Assistant Secretary of State McCarthy for testifying today so that we can—update us on the investments in Rwanda and explain why this treaty is good for both 

countries. 

I should add that this morning Senator Coons chaired a hearing 

for the President’s nominee to serve as Ambassador to Rwanda, 

and later this week Secretary of State Clinton will be attending the 

AGOA Forum in Zimbabwe. So now it’s a good time to talk about 

Rwanda and about investments in sub-Sahara Africa more broadly, 

and how trade, when paired with responsible investment policy, is 

a useful tool available to us in helping raise a country’s economic 

growth, institutional capacity, and even its human rights standards. 

The three tax treaties that we will examine today are important 

in several aspects. Our tax treaties, generally, are intended to prevent double taxation, so that U.S. companies are not necessarily inhibited from doing business overseas, and foreign companies are 

not inhibited from doing business here in the United States. So 

they are part of a broader effort to create a better economic climate 

between our countries, something I believe we all agree on and will 

be interested to see how these treaties advance those goals. 

At the same time, our tax treaties also have an important provision designed to help both the United States and our treaty partners enforce our respective tax laws, and combat tax evasion and 

corruption, and make sure that everyone pays the taxes they owe. 

Many will recall the controversy surrounding the investigation of 

UBS, a Swiss bank, and the difficulties our authorities had in obtaining information from their Swiss counterparts because of Swiss 

bank secrecy laws. The specific matter was resolved, but it took a 

long time and effort to get there. 

The changes that are contained in the protocol would provide a 

more permanent solution for future cases involving Switzerland. 

This is good for both countries. It is my understanding the Swiss 

Parliament has already approved this treaty. 

The protocol with Luxembourg, another country with bank secrecy laws, is very similar and is designed to have a similar effect 

on future cooperation between the two countries. And the tax treaVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00020 Fmt 6601 Sfmt 6601 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
21 

ty with Hungary contains important provisions that are designed 

to help prevent certain types of tax avoidance that have been a 

problem with Hungary in the past. 

I look forward to hearing from Deputy Assistant of Treasury 

Corwin and the Chief of Staff of the Joint Committee on Taxation 

Barthold to explain how these important provisions work and why 

it’s important to the United States that we ratify them quickly. 

So we will begin. We have one panel, in the interest of time, so 

we’ll hear from each one of you, and then we’ll have a chance to 

question on all five of the treaties and will be a little bit more generous on time. 

Senator Lee, if you need more time in order to question, because 

we have five treaties—I’m also willing to recognize you whenever 

you need to be recognized, so please let us know. 

With that in mind, let me just remind our witnesses that your 

entire statements will be made part of the record. You may proceed 

as you wish. 

And we’ll start with Ms. Corwin. 

STATEMENT OF MANAL CORWIN, DEPUTY ASSISTANT SECRETARY (INTERNATIONAL TAX AFFAIRS), DEPARTMENT OF 

TREASURY, WASHINGTON, DC 

Ms. CORWIN. Thank you, Senator Cardin, Senator Lee. I appreciate the opportunity to appear before you today to recommend on 

behalf of the administration favorable action on three tax agreements that are pending before this committee. 

This administration is committed to eliminating barriers to crossborder trade and investment, and preventing offshore tax evasion. 

Tax treaties play a vital role in supporting both of these objectives. 

Tax treaties facilitate cross-border investment and provide greater certainty to taxpayers regarding their potential tax liability in 

foreign jurisdictions. They do so by allocating taxing rights between 

jurisdictions, minimizing incidences of double taxation, and ensuring that U.S. taxpayers are not subject to discriminatory taxation. 

Tax treaties also play an important role in preventing tax evasion. A key element of U.S. tax treaties is exchange of information 

between tax authorities. Because access to information from other 

countries is critically important to the full and fair enforcement of 

U.S. tax laws, information exchange is a top priority for the U.S. 

tax treaty program. 

The agreements before the committee today with Hungary, Luxembourg, and Switzerland serve to further our tax treaty program 

goals of facilitating cross-border trade and investment, increasing 

transparency, and preventing fiscal evasion. In particular, consistent with the international recognition of the need for maximum 

transparency in tax matters, all three agreements contain updated 

provisions for the full exchange of information between tax authorities that are consistent with international and U.S. standards. 

In addition, the proposed agreement with Hungary contains comprehensive provisions that will protect the agreement from abuse 

by third-country investors. 

Finally, the proposed agreement with Switzerland provides, in 

certain circumstances, for the use of mandatory, binding arbitraVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00021 Fmt 6601 Sfmt 6601 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
22 

tion to resolve disputes between the United States and Swiss revenue authorities. 

Because my written statement and the official Treasury technical 

explanations provide detailed explanations of the provisions in each 

of these agreements, I will describe very briefly only the most significant features of the agreements before you today. 

The proposed income tax treaty and accompanying exchange of 

notes with Hungary were negotiated to bring the current treaty, 

signed in 1979, into closer conformity with current U.S. tax treaty 

policy. Most importantly, the proposed treaty includes a new comprehensive limitation on benefits article designed to address socalled treaty shopping, which is the inappropriate use of tax treaties by residents of a third country. 

The current treaty does not contain such treaty-shopping protections and, as a result, has been used inappropriately by third-country investors in recent years. For this reason, revising the current 

treaty has been a top tax treaty priority for the Treasury Department. 

In addition, consistent with several recent United States treaties, 

the proposed treaty with Hungary provides that the transfer pricing guidelines established by the Organization for Economic Cooperation and Development, the OECD, which are consistent with 

United States transfer pricing standards, apply by analogy in determining the amount of business profits attributable to a permanent establishment in a treaty country. 

The proposed treaty also follows the U.S. model approach regarding the taxation of payments to individuals, including income from 

personal services and employment, pensions, and Social Security. 

Finally, consistent with the OECD and United States model treaties, the proposed treaty with Hungary provides for the full exchange between the tax authorities of each country of information 

relevant to carrying out the provisions of the proposed treaty or the 

domestic laws of either country. 

The proposed protocol with Luxembourg is the first protocol 

amending the current tax treaty with Luxembourg signed in 1996. 

The most significant feature of this protocol is the replacement of 

the limited information-exchange provisions of the existing tax 

treaty with updated rules that are consistent with current international standards for exchange of information developed by the 

OECD and adopted by the United States. 

In particular, 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 tax 

laws of either country. In addition, the proposed protocol would 

allow the United States to obtain information from Luxembourg, 

whether or not Luxembourg needs the information for its own domestic tax purposes, and provides that requests for information 

cannot be declined solely because the information is held by a bank 

or other financial institution. 

Finally, the proposed protocol with Switzerland is the second protocol amending the current income tax treaty with Switzerland 

signed in 1996. The most significant provisions of this protocol relate to information exchange and the adoption of mandatory arbitration to facilitate the resolution of disputes. 

23 

Specifically, like the protocol with Luxembourg, the protocol with 

Switzerland replaces the limited information exchange provisions 

in the current treaty with updated rules that are consistent with 

current international standards for information exchange and 

United States tax treaty practice. 

In this regard, the new protocol does not limit exchange of information, only as is necessary for purposes of carrying out the provisions of the treaty, or for the prevention of tax fraud, or the like. 

Rather, as with the Luxembourg protocol, the treaty also allows for 

exchange of information that may be relevant for carrying out the 

domestic laws of each party to the agreement. 

As with the Luxembourg treaty, such information must be exchanged even in the absence of a domestic law interest in the country providing the information and cannot be protected by domestic 

bank secrecy rules. 

The Treasury Department believes that the updated informationexchange provisions in the proposed protocol with Switzerland will 

greatly improve the collaboration between the United States and 

Swiss revenue authorities in exchanging information to enforce tax 

laws. 

The proposed protocol with Switzerland also provides for mandatory binding 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. The arbitration provision 

in the proposed protocol with Switzerland is similar to the arbitration provisions in current United States tax treaties with Germany, 

Belgium, Canada, and France, which this committee and the Senate have approved in the past few years. 

Let me conclude by thanking you for the opportunity to appear 

before the committee to discuss the administration’s efforts with respect to the three agreements under consideration. We thank the 

committee members and staff for devoting time and attention to 

the review of these agreements, and we are grateful for the assistance and cooperation of the staff of the Joint Committee on Taxation. 

Finally, I would like to acknowledge and express my appreciation 

for the work done on the proposed treaties by the teams at Treasury, the Internal Revenue Service, and the State Department. 

On behalf of the administration, we urge the committee and the 

Senate to take prompt and favorable action on all three agreements 

before you today. 

I’d be happy to answer any questions you may have. 

[The prepared statement of Ms. Corwin follows:] 

PREPARED STATEMENT OF MANAL CORWIN

Chairman Kerry, Ranking Member Lugar, and distinguished members of the committee, I appreciate the opportunity to appear today to recommend, on behalf of the 

administration, favorable action on three 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 taxpayers 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 taxpayers are not subject to discriminatory taxation in foreign jurisdictions. 

24 

This administration is also committed to preventing tax evasion, and our tax treaties play an important role in this area as well. 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 as may be 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 is a top priority for the United States in its tax treaty 

program. Moreover, the United States has been a leader in the development of new 

international standards for greater transparency through full exchange of tax 

information. 

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, negotiation of 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. 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 fiscal evasion. 

The tax treaties before the committee today with Hungary, Luxembourg, and 

Switzerland, serve to further the goals of our tax treaty network. The tax treaty 

with Hungary would replace an existing treaty the revision of which has been a top 

tax treaty priority for the Treasury Department. The protocols with Luxembourg 

and Switzerland modify existing tax treaty relationships. We urge the committee 

and the Senate to take prompt and favorable action on all of these agreements. 

Before talking about the pending treaties in more detail, I would like to discuss 

some more 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 the two countries. One of the primary functions of tax treaties is to provide certainty to taxpayers regarding a threshold question with respect 

to international taxation: whether a taxpayer’s cross-border activities will subject it 

to taxation by two or more countries. 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 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 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 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 treaty provides rules for 

determining the country of source for each category of income. Fourth, a 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 treaty provides for resolution of disputes between jurisdictions 

in a manner that avoids 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 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 

25 

withholding tax that the treaty partners 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. 

Tax treaties also include provisions related to tax administration. A key element 

of U.S. tax treaties is the provision addressing the exchange of information between 

the tax authorities. Under tax treaties, the competent authority of one country may 

request from the other competent authority such information as may be relevant for 

the proper administration of the first country’s tax laws (the information provided 

pursuant to the request is subject to the strict confidentiality protections that apply 

to taxpayer information). Because access to information from other countries is critically important to the full and fair enforcement of U.S. tax laws, information exchange is a priority for the United States in its tax treaty program. If a country 

has bank secrecy rules that would operate to prevent or seriously inhibit the appropriate exchange of information under a tax treaty, we will not enter into a new tax 

treaty relationship with that country. Indeed, the need for appropriate information 

exchange provisions is one of the treaty matters that we consider nonnegotiable. 

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, seeking their input regarding 

the areas on which we should focus our treaty network expansion and improvement 

efforts and regarding practical problems encountered under particular treaties or 

particular tax regimes. 

The primary constraint on the size of our tax treaty network may be the complexity of the negotiations themselves. Ensuring that the various functions to be 

performed by tax treaties are all properly taken into account makes the negotiation 

process exacting and time consuming. 

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 a 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. 

26 

Moreover, a country’s fundamental tax policy choices are reflected not only in its 

tax legislation 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 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 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 some situations, the right result may be no tax treaty at all. 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 negotiate 

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. 

Sometimes a potential treaty partner insists on provisions to which the United 

States will not agree, such as providing a U.S. tax credit for investment in the foreign country (so-called ‘‘tax sparing’’). With other 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 

double taxation of cross-border income, and an agreement that focuses exclusively 

on the exchange of tax information (so-called ‘‘tax information exchange agreements’’ or ‘‘TIEAs’’) may be the more appropriate agreement. 

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, 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 country’s 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 

27 

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, which was 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, the Treasury 

Department has recently concluded negotiations of a new income tax treaty with 

Poland, which the administration hopes to sign and transmit 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. 

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 law is a top priority for the United States. The 

United States has been a leader in developing and promoting global adoption of the 

international standards for information exchange. A key element of U.S. income tax 

treaties is to provide for the exchange of information between tax authorities where 

the economic relationship between two countries is such that an income tax treaty 

is appropriate. Where an income tax treaty is not appropriate, information exchange 

can be secured through a tax information exchange agreement (a ‘‘TIEA’’) which 

contains provisions exclusively on sharing of tax information. For example, the administration was pleased to sign last November a TIEA with Panama that follows 

international standards, and which entered into force this past April. 

The proposed protocols with Switzerland and Luxembourg that are before the 

committee today revise the existing tax treaties with Switzerland and Luxembourg 

to ensure full exchange of information to prevent tax evasion and enhance transparency. These 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. 

CONSIDERATION OF ARBITRATION

Tax treaties cannot facilitate cross-border investment and provide a more stable 

investment environment unless the treaty is effectively implemented by the respective tax administrations of the two countries. 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 a timely and satisfactory 

resolution. 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. 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 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 providing the mere 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 

28 

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 U.S. experience with 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 that in general terms is similar 

to arbitration provisions in several of our recent treaties (Canada, Germany, Belgium and France) that have been approved by the committee and the Senate over 

the last 5 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 and is treated like any other mutual agreement (i.e., one 

that has been negotiated by the competent authorities) under the treaty. 

The arbitration process proposed in the agreement 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 protocol 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 protocol 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. First, consistent with the committee’s 

comment in its report on the Canada protocol that future arbitration rules should 

provide a mechanism for taxpayer input in the arbitration process, the proposed 

rules with Switzerland allow the taxpayers who presented the original case that is 

subjected to arbitration to submit a position paper directly to 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, customary international law rules on treaty interpretation will apply. 

Currently, we are discussing the possible inclusion of a similar arbitration provision 

with a number of our other key tax treaty partners. 

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 be rarely utilized, but that their presence will encourage the competent 

authorities to take approaches to their negotiations that result in mutually agreeable conclusions without invoking the arbitration process. 

It is still very early in our experience with arbitration, and at this time we cannot 

report definitively on the effects of arbitration on our tax treaty relationships. However, we are hopeful that our desired objectives for arbitration are being realized. 

Our sense is that, where mandatory arbitration has been included in the treaty, the 

competent authorities are negotiating with more intention to reach principled and 

29 

timely resolution of disputes, and thus, effectively eliminating double taxation and 

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, and Canada. It is possible that one or more tax disputes 

with Canada will be submitted for resolution by arbitration, and 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 2007 protocol 

to the Canada tax treaty. 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. 

DISCUSSION OF PROPOSED TREATIES

I now would like to discuss the three tax treaties that have been transmitted for 

the Senate’s consideration. The three 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 conventions, the treaties contain 

some minor variations that reflect particular aspects of the treaty policies and domestic laws of the partner countries as well as their 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. 

Hungary 

The proposed income tax Convention and related agreement effected by exchange 

of notes with Hungary were negotiated to bring tax treaty relations based on the 

current Convention, signed in 1979, into closer conformity with current U.S. tax 

treaty policy. The proposed Convention contains a comprehensive ‘‘Limitation on 

Benefits’’ article designed to address treaty shopping. The current Convention does 

not contain treaty shopping protections and, as a result, has been used inappropriately by third-country investors in recent years. For this reason, as stated above, 

entering into a revised Convention has been a top tax treaty priority for the Treasury Department. The new Limitation on Benefits article includes a provision granting so-called ‘‘derivative benefits’’ similar to the provision included in all recent U.S. 

tax treaties with countries that are members of the European Union. The new Limitation on Benefits article also contains a special rule for so-called ‘‘headquarters 

companies’’ that is identical to what the Treasury has agreed to with a number of 

other tax treaty partners. 

The proposed Convention incorporates updated rules that provide that a former 

citizen or long-term resident of the United States may, for the period of 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 enacted by the United States in 2007 

that apply to individuals who relinquish U.S. citizenship or terminate long-term 

residency. 

The withholding rates on investment income in the proposed Convention are the 

same as or lower than those in the current treaty. The proposed Convention provides for reduced source-country taxation of dividends distributed by a company 

resident in one Contracting State to a resident of the other Contracting State. The 

proposed Convention generally allows for taxation at source of 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 Convention provides for an exemption 

from withholding tax on certain cross-border dividend payments to pension funds. 

The proposed Convention updates the treatment of dividends paid by U.S. Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) to 

prevent the use of structures designed to inappropriately avoid U.S. tax. 

Consistent with the current treaty, the proposed Convention 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 Convention generally follows the 

format of the U.S. Model. Gains derived from the sale of real property and from real 

property interests may be taxed by the State in which the property is located. LikeVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00029 Fmt 6601 Sfmt 6621 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
30 

wise, gains from the sale of personal property forming part of a permanent establishment situated in a Contracting State may be taxed in that State. All other gains, 

including gains from the alienation of ships, boats, aircraft and containers used in 

international traffic and gains from the sale of stock in a corporation, are taxable 

only in the State of residence of the seller. 

The proposed Convention, like several recent 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 Convention generally defines 

a ‘‘permanent establishment’’ in a way that grants rights to tax business profits that 

are consistent with those found in the U.S. Model. 

The proposed Convention preserves the U.S. right to impose its branch profits tax 

on U.S. branches of Hungarian corporations. The proposed Convention also accommodates a provision of U.S. domestic law that attributes to a permanent establishment income that is earned during the life of the permanent establishment, but is 

deferred, and not received until after the permanent establishment no longer exists. 

The proposed Convention would change the rules currently applied under the existing Convention 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 Convention are generally similar to those under the U.S. Model. The general rule is that 

employment income may be taxed in the State where the employment is exercised 

unless three conditions constituting a safe harbor are satisfied. 

The proposed Convention preserves the current Convention’s rules that allow for 

exclusive residence-country taxation of pensions, and consistent with current U.S. 

tax treaty policy, provides for exclusive source-country taxation of Social Security 

payments. 

Consistent with the OECD standard, the proposed Convention provides for the 

exchange between the tax authorities of each country of information relevant to 

carrying out the provisions of the proposed Convention or the domestic tax laws of 

either country. The proposed Convention allows the United States to obtain information (including from financial institutions) from Hungary whether or not Hungary 

needs the information for its own tax purposes. 

The proposed Convention would enter into force on the date of the exchange of 

instruments of ratification. It would have effect, with respect to taxes withheld at 

source, for amounts paid or credited on or after the first day of the second month 

next following the date of entry into force, and with respect to other taxes, for taxable years beginning on or after the first day of January next following the date 

of entry into force. The current Convention will, with respect to any tax, cease to 

have effect as of the date on which this proposed Convention has effect with respect 

to such tax. 

Luxembourg 

The proposed protocol to amend the income tax Convention 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 Convention’s tax information exchange 

provisions 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 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, and 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, and includes 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; and information shall be exchanged without regard to whether the conduct being investigated would be a crime under the laws of the requested State. 

31 

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 Convention on that date. 

Switzerland 

The proposed protocol to amend the income tax convention with the Swiss Confederation and 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. 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 

generally follow the OECD standard for exchange of information. 

The proposed protocol replaces the existing Convention’s tax information exchange 

provisions 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 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 Convention by incorporating procedural rules to govern requests 

for information and an agreement by 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 Convention with respect to the mutual agreement procedure by incorporating mandatory arbitration of certain cases that the competent 

authorities of the United States and the Swiss Confederation have been unable to 

resolve after a reasonable period of time. 

Finally, the proposed protocol updates the provisions of the existing Convention 

to provide that individual retirement accounts are eligible for the benefits afforded 

a pension under the existing Convention. 

The proposed protocol would enter into force when the United States and the 

Swiss Confederation 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 tax information exchange, the proposed protocol would have effect 

with respect to requests for bank information that relates to any date beginning on 

or after the date the proposed protocol is signed and, with respect to all other cases, 

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 protocol enters into force and to cases that come under consideration after 

that date. 

TREATY PROGRAM PRIORITIES

A 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 the 

possibility of treaty shopping. As mentioned above, I am pleased to report that in 

this regard we have made significant progress. Most notably, in June 2010 we concluded the negotiation of a new tax treaty with Poland. The new Poland treaty, 

which we hope to sign soon, will contain a comprehensive limitation on benefits provision that will ensure that only residents of the United State and Poland enjoy the 

benefits of the treaty. 

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. The past couple of years have been a period of 

fundamental change in transparency, as many secrecy jurisdictions announced their 

intentions to comply with the international standard of full information exchange 

32 

during this time. With the revisions to the Switzerland and Luxembourg tax treaties 

completed, in the near future we hope to commence or renew tax treaty negotiations 

with a number of our other trading partners with bank secrecy rules once those 

countries have eliminated all domestic law impediments to full exchange of information. 

Beyond the two chief priorities of curbing treaty shopping and expanding exchange of information relationships, the Treasury Department continues to maintain a very active calendar of tax treaty negotiations. In our efforts to establish new 

tax treaty relationships, in February 2010 we signed a tax treaty with Chile, which 

the administration hopes to transmit to the Senate for its consideration in the near 

term. If approved by the Senate the Chile tax treaty would be especially noteworthy 

because it would be only the second U.S. tax treaty in force with a South American 

country. We have also opened tax treaty negotiations with Vietnam. Additionally, 

we are in the process of discussing ways to update existing tax treaties with many 

of our treaty partners including the United Kingdom and Spain. 

CONCLUSION

Mr. Chairman and Ranking Member Lugar, let me conclude by thanking you for 

the opportunity to appear before the committee to discuss the administration’s 

efforts with respect to the three 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 very much. 

We will now hear from Mr. Barthold, the Chief of Staff of the 

Joint Committee on Taxation. 

STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, 

JOINT COMMITTEE ON TAXATION, WASHINGTON, DC 

Mr. BARTHOLD. Thank you, Mr. Chairman and Senator Lee. My 

name is Thomas Barthold. I’m the Chief of Staff of the Joint Committee on Taxation, and it’s my pleasure to present the testimony 

of the staff of the joint committee concerning the proposed treaty 

with Hungary and the proposed tax protocols with Luxembourg 

and Switzerland. 

The joint committee staff has prepared detailed pamphlets covering the treaty and protocols. The pamphlets provide descriptions 

of these agreements, including comparisons with the United States 

model tax treaty and with other recent U.S. tax treaties approved 

by the Senate. Those pamphlets are JCX–30–11 describing the 

Swiss protocol, JCX–31 describing the Luxembourg protocol, and 

JCX–32 describing the Hungary treaty. 

I’ll use my time to highlight several points that the joint committee staff thinks is important. First, with respect to the Hungary 

treaty, the Hungary treaty, with respect to treatment of many of 

the provisions—including the payments of dividends, interest, and 

royalties—generally follows the U.S. model. And, as Ms. Corwin 

pointed out, of particular note, the proposed treaty with Hungary 

includes the extensive limitation on benefits rules of the U.S. 

model. Limitation on benefits provisions are intended to prevent 

third-country residents from benefiting inappropriately from a treaty that generally is granting benefits only to residents of the two 

treaty countries, a practice that is commonly referred to as treaty 

shopping. 

33 

The present treaty between the United States and Hungary is 

one of only seven United States income tax treaties that do not include any limitation on benefits provisions. And two of those seven 

treaties, including the current treaties with Hungary and Poland, 

include provisions providing for complete exemption of withholding 

on interest payments from one treaty country to the other, a situation that may present very attractive opportunities for treaty shopping. So with the inclusion of the modern limitation on benefits 

rules, the proposed treaty with Hungary represents a significant 

opportunity to mitigate treaty shopping. 

The two protocols before the committee today are largely about 

the exchange of information provisions of those existing treaties. 

There has been and continues to be multicountry concern regarding 

tax avoidance through offshore accounts, and it is tax treaties that 

establish the scope of information that can be exchanged between 

treaty countries. The proposed protocols are an attempt to improve 

the exchange of information in this regard. 

The proposed Swiss protocol may facilitate much greater exchange of information than has occurred in the past, chiefly by 

eliminating the present treaty’s requirements that the requesting 

treaty country first establish tax fraud or fraudulent conduct as a 

basis for the exchange of information, and providing that domestic 

bank secrecy laws and a lack of domestic interest in the requested 

information may be possible grounds for refusing to provide the requested information. 

While the changes are made, to make changes in those requirements, the joint committee staff notes that the protocol permits 

‘‘limitation of administrative assistance to individual cases and, 

thus, no fishing expeditions.’’ I think this limitation poses some 

questions for the committee and for the Senate regarding individual cases, the extent to which the Swiss may continue to reject 

requests that do not name the taxpayer as a result of the requirement in the treaty that a taxpayer be ‘‘typically’’ identified by name 

may be of some concern in terms of the applicability of the revised 

exchange in information agreement. 

In addition, what is to be the standard of relevance to be applied 

to requests for information in light of the caveat against ‘‘fishing 

expeditions.’’ 

The proposed protocol with Luxembourg is consistent with both 

the OECD and United States model treaties. However, the joint 

committee staff does see some potential areas of concern in the 

statements in the diplomatic notes accompanying this agreement. 

Regarding the obligation to ensure that tax authority access to information regarding beneficial ownership of certain entities, to the 

extent the information is of a type within the possession or control 

of someone within that territory’s jurisdiction, one might ask if this 

potentially imposes a new burden on the United States. Also, the 

proposed Luxembourg protocol contains a requirement that all requests must provide the identity of the person under investigation. 

Again, I think this raises a concern similar to that that I noted a 

moment ago with respect to the Swiss protocol. 

A third question, there’s a standard of relevance issue to be 

raised in terms of what is the stated purpose for which information 

may be sought. 

34 

1This 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 Treaty with Hungary and the Proposed Tax Protocols with Luxembourg 

and Switerland’’ (JCX–35–11), June 7, 2011. 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–31–1 1), May 

20, 2011. 

And last, there is a requirement that any requests include a representation that all other means of obtaining that information have 

been attempted, except to the extent that to do so would cause disproportionate difficulties. Does such a requirement impose a limit 

or retard the ability of the United States to obtain necessary information? 

That concludes my oral comments. I’d be pleased to answer any 

questions that the committee might have. And I do thank the 

Treasury for their cooperation and understanding in interpreting 

these treaty documents. 

Thank you. 

[The prepared statement of Mr. Barthold follows:] 

PREPARED STATEMENT OF THE STAFF OF THE JOINT COMMITTEE ON TAXATION

PRESENTED BY THOMAS A. BARTHOLD 1

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 treaty with Hungary 

and the proposed tax protocols with Luxembourg and Switzerland. 

OVERVIEW

As in the past, the Joint Committee staff has prepared pamphlets covering the 

proposed treaty and protocols. The pamphlets provide detailed descriptions of the 

proposed treaty and protocols, including 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.2 The 

pamphlets also provide detailed discussions of issues raised by the proposed treaty 

and protocols. We consulted with the Treasury Department and with the staff of 

your committee in analyzing the proposed treaty and protocols and in preparing the 

pamphlets. 

The principal purposes of the treaty 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 treaty 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. 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 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. 

My testimony today will highlight some of the key features of the proposed treaty 

and protocols and certain issues that those agreements raise. 

U.S. MODEL TREATY

As a general matter, U.S. model tax treaties provide a framework for U.S. tax 

treaty policy and a starting point for tax treaty negotiations with our treaty partners. These models provide helpful information to taxpayers, the Congress, and foreign governments about U.S. policies on tax treaty matters. The present U.S. Model 

treaty incorporates important developments in U.S. income tax treaty policy that 

35 

3The 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). 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. 4The 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. 5Department 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. 

had been reflected in U.S. income tax treaties signed in the years immediately preceding the Model’s publication in 2006. Treaties that the United States has negotiated since 2006 in large part follow the U.S. Model treaty. The proposed treaty 

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. 

HUNGARY: LIMITATION-ON-BENEFITS PROVISIONS

In general 

Like the U.S. Model treaty, the proposed treaty with Hungary includes extensive 

limitation-on-benefits rules (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 represents a significant opportunity to mitigate treaty shopping. Nevertheless, the 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. 

Deviations from the U.S. Model treaty 

Although the limitation-on-benefits rules in the proposed treaty 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 the committee may wish to inquire 

about certain differences. In particular, the committee may wish to examine the 

rules for publicly traded companies, derivative benefits, and certain triangular arrangements. The committee also may wish to ask the Treasury Department about 

the special limitation-on-benefits rules applicable to headquarters companies. 

Publicly traded companies 

A 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 and either a management 

and control test or a primary trading test. The primary trading test requires that 

36 

6 Article XV of the U.S.-Sweden Double Tax Convention, signed on March 23, 1939. 

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. 

Although the list of recognized stock exchanges in EU and EFTA countries had 

some differences, a similar primary trading test was included in the recent protocols 

with France and New Zealand. Under the U.S. Model treaty, the required trading 

must 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. 

Derivative benefits 

Like other recent treaties, the proposed treaty 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 U.S. Model treaty does not include derivative benefits rules. 

Triangular arrangements 

The proposed treaty includes special antiabuse rules intended to deny treaty benefits in certain circumstances in which a 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 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 treaty includes 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: (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. As part of their efforts to restore 

integrity and stability to financial institutions, the United States and other G20 

jurisdictions have made significant efforts to modernize and standardize the ways 

in which jurisdictions provide administrative assistance under the network of tax 

treaties. 

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 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 treaty and the two proposed 

37 

7 A third method of information exchange is spontaneous exchange, which occurs when one 

treaty country determines that information in its possession may be relevant to the other treaty 

country’s tax administration and thus transmits the information to the other country. 8Prop. Treas. Reg. sec. 1.6049–4, 76 Fed. Reg. 1105 (January 7, 2011). 

9Treas. Reg. sec. I.6049–4(b)(5). 

10The IRS and Treasury Department have requested written and electronic comments on the 

proposed regulations. A public hearing at which oral comments were presented was held on May 

18. 2011. 

protocols. They also describe the extent to which they differ from the U.S. Model 

treaty. I note that since the publication of those pamphlets on May 20, 2011, additional information about the exchange of information programs of Hungary, Switzerland, and the United States has become available. On June 1, 2011, the Organization 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 11 Peer Review of the United States. 

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 

treaty and proposed protocols under consideration today, and second, the 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 extent to which the 

United States maintains and can produce information about beneficial ownership of 

certain foreign-owned entities, and, finally, whether there is consensus as to the 

standard for determining whether a request for specific exchange of information is 

sufficiently specific to require response by a treaty country.7

Automatic information exchange 

The extent to which automatic information exchange occurs and how it is used 

by the recipients is not clear. Such exchanges occur when the parties to a tax treaty 

typically enter into a memorandum of understanding to share on a regular basis information that is deemed to be consistently relevant to the tax administration of the 

other treaty country; the treaty countries are not required to specifically request 

this information from one another. The United States, for example, annually provides over 2.5 million items of information about U.S.-source income received by 

residents of treaty countries to those treaty partners. Problems identified in the use 

of automatic exchange of information under tax treaties have included the lack of 

timeliness in providing information; differences in the tax reporting periods used by 

treaty countries; the recipient country difficulty in translating text on forms; and 

the large volume of information included in such exchanges. 

In publishing regulations earlier this year to expand information reporting on 

payments to nonresident aliens, the Secretary of Treasury noted the improvement 

of the United States exchange of information program as a beneficial outcome of implementing such regulations. In the preamble to those regulations, the Secretary 

stated that ‘‘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.’’ 8 The regulations in 

question would require U.S. financial institutions to report on interest paid to any 

nonresident aliens, not only residents of Canada as currently required.9 The committee may wish to inquire about those recently proposed regulations and the extent 

to which expanded regulations would strengthen exchange of information under the 

pending protocol, as well as any additional attendant burdens that may arise as a 

result of these regulations.10 The committee may also wish to explore the usability 

of the information exchanged with Canada under present regulations, and its relationship to the exchange of information program with Canada. 

Second, the United States has been criticized for Federal and State rules that 

may facilitate attempts by foreign persons to evade their home-country tax laws. In 

the past, there have been claims that the U.S. ‘‘know-your-customer’’ rules for financial institutions are less strict than other countries in their requirements for the determination of beneficial owners of financial accounts. A second criticism has been 

that the entity formation laws of some U.S. States make it difficult for government 

officials to ascertain the identities of owners of entities. The OECD report on the 

United States exchange of information program notes that, despite an otherwise robust regulatory framework and broad powers of the Federal authorities to gather 

information responsive to treaty requests for exchange of information, the gaps in 

38 

11For 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. 12 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. 13 ‘‘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). 

beneficial ownership information on certain entities remains troublesome. The specific example noted in the report is that of a limited liability company owned by a 

single foreign person. Your committee may wish to ask about the extent to which 

it may be appropriate to consider policy changes to ensure that the United States 

is able to respond effectively to information requests from its treaty partners. 

Specific exchange 

A second method of exchange is known as the ‘‘specific’’ 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.11

Your committee may wish to seek assurances that, under the proposed treaty with 

Hungary 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.12 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 relationship with Luxembourg and Switzerland, and to the extent that the 

United States may have little recent practical experience in cooperating with Hungary on tax matters, your committee may wish to seek reassurances that any obstacles to effective information exchange have been eliminated. With respect to Hungary, we note that the OECD report on Phase I of the peer review determined that 

many of the elements required to determine that a jurisdiction is in compliance with 

international standards are not in place, and cited as a factor for that determination 

the numerous ambiguities in Hungary’s domestic laws concerning the recordkeeping 

obligations applicable to different types of entities, the scope of confidentiality afforded business secrets, and the authority of Hungarian officials to gain access to 

information. All of these factors pose potential impediments to effective exchange of 

information. 

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.13

In March 2009, the Swiss Federal Council withdrew its reservation regarding Article 26 (Exchange of Information) of the OECD Model treaty, thus apparently 

39 

14See ‘‘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). 

adopting the OECD standards on administrative assistance in tax matters.14 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 recently published 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. One such concern is the extent to 

which the agreement that information may be used for purposes beyond the purposes identified in paragraph 1 of Article 26, is consistent with the comment in the 

Technical Explanation that such authority will only be exercised if consistent with 

the Mutual Legal Assistance Agreements. 

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 (I) 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 

40 

the information have been attempted, except to the extent that to do so would cause 

disproportionate difficulties. 

ARTICLE-BY-ARTICLE SUMMARIES

The Joint Committee staff’s pamphlets provide detailed article-by-article explanations of the proposed treaty and the two proposed protocols. Below is a summary 

of significant features of each agreement. 

Hungary 

Like other U.S. tax treaties, the proposed treaty with Hungary includes rules that 

limit each country’s right, in specified situations, 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 certain 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 14 and 16). The 

proposed treaty also provides that pensions and other similar remuneration paid to 

a resident of one country may be taxed only by that country and only at the time 

and to the extent that a pension distribution is made (Article 17). 

The proposed treaty provides that dividends and certain gains derived by a resident of one country from sources within the other country generally may be taxed 

by both countries (Articles 10 and 13); however, the rate of tax that the source country may impose on a resident of the other country on dividends may be limited by 

the proposed treaty. Generally, source-country taxation of dividends is limited to 15 

percent of the gross amount of the dividends paid to residents of the other treaty 

country. A lower rate of 5 percent applies if the beneficial owner of the dividends 

is a company that owns directly at least 10 percent of the voting stock of the dividend-paying company. 

The proposed treaty provides that, subject to certain rules and exceptions, interest 

and most types of royalties derived by a resident of one country from sources within 

the other country may be taxed only by the residence country (Articles 11 and 12). 

Notwithstanding this general rule, the source country may impose tax on certain interest in an amount not to exceed 15 percent of the gross amount of such interest. 

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 23). 

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 to which the taxpayer would be 

entitled under the domestic law of a country or under any other agreement between 

the two countries (Article 1). 

The proposed treaty (Articles 19 and 20) generally provides that students, business trainees, teachers, professors, and researchers visiting the other treaty country 

are exempt from host country taxation on certain types of payments received. 

The proposed treaty provides authority for the two countries to resolve disputes 

(Article 25) and exchange information (Article 26) in order to carry out the provisions of the proposed treaty. 

The proposed treaty also contains a detailed limitation-on-benefits provision that 

reflects the anti-treaty-shopping provisions included in the United States Model 

Income Tax Convention of November 15, 2006 (the ‘‘U.S. Model treaty’’) and more 

recent U.S. income tax treaties. The new rules are intended to prevent the inappropriate use of the treaty by third-country residents. (Article 22). 

The provisions of the proposed treaty will have effect generally on or after the 

first day of January following the date that the proposed treaty enters into force. 

However, with respect to withholding taxes (principally dividends, interest, and royalties), the proposed treaty has effect 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. 

41 

Luxembourg 

Article of the proposed protocol with Luxembourg replaces Article 28 (Exchange 

of Information) of the present treaty with rules that conform closely to the U.S. 

Model treaty. The proposed rules generally provide that the two competent authorities will exchange such information as may be foreseeably relevant in carrying out 

the provisions of the domestic laws of the United States and Luxembourg concerning taxes imposed at a national level, to the extent the taxation under those 

laws is not contrary to the treaty. 

Article II of the proposed protocol provides that the proposed protocol will enter 

into force upon the exchange of instruments of ratification, and it sets forth rules 

for when the provisions of the proposed protocol will take effect. 

Switzerland 

The proposed protocol with Switzerland amends Article 10 (Dividends) of the 

present treaty to expand the prohibition on source-country taxation of dividends 

beneficially owned by pension or other retirement arrangements resident in the 

other treaty country. Under the proposed 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 prohibition on source-country 

taxation is not available if the beneficial owner controls the company paying the 

dividend. 

The proposed protocol changes the voluntary arbitration procedure of Article 25 

(Mutual Agreement Procedure) of the present treaty to a mandatory arbitration procedure that is sometimes referred to as ‘‘last best offer’’ arbitration, in which each 

of the competent authorities proposes one and only one figure for settlement, and 

the arbitrator must select one of those figures as the award. Under the proposed 

protocol, unless a taxpayer or other ‘‘concerned person’’ (in general, a person whose 

tax liability is affected by the arbitration determination) does not accept the arbitration determination, it is binding on the treaty countries with respect to the case. 

A mandatory and binding arbitration procedure is included in the U.S. treaties with 

Belgium, Canada, France, and Germany. 

Mutual administrative assistance is modernized under the proposed protocol. The 

proposed protocol replaces Article 26 (Exchange of Information) of the present treaty 

and paragraph 10 of the 1996 Protocol with rules that conform generally to the 

OECD standards. The proposed rules generally provide that. in response to specific 

requests. the two competent authorities will exchange such information as may be 

relevant in carrying out the provisions of the domestic laws of the United States 

and Switzerland concerning taxes covered by the treaty, to the extent the taxation 

under those laws is not contrary to the treaty. 

Article 5 of the proposed protocol provides that the proposed protocol will enter 

into force upon the exchange of instruments of ratification, and it sets forth rules 

for when the provisions of the proposed protocol will take effect. 

CONCLUSION

These provisions and issues are all discussed in more detail in the Joint Committee staff pamphlets on the proposed treaty and protocols. I am happy to answer 

any questions that your committee may have at this time or in the future. 

Senator CARDIN. Thank you very much for your testimony. 

We’ll now hear from Bruce Swartz, the Deputy Assistant Attorney General at the Department of Justice. 

STATEMENT OF HON. BRUCE SWARTZ, DEPUTY ASSISTANT 

ATTORNEY GENERAL, DEPARTMENT OF JUSTICE, WASHINGTON, DC 

Mr. SWARTZ. Mr. Chairman, Senator Lee, members of the committee, thank you for this opportunity to present the views of the 

United States Department of Justice on the U.S.-Bermuda Mutual 

Legal Assistance Treaty. 

I would like to highlight this afternoon five ways in which this 

treaty not only solidifies, Mr. Chairman, as you note, the relationVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00041 Fmt 6601 Sfmt 6602 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
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ship with Bermuda on law enforcement matters but advances the 

Department of Justice’s and the United States Government’s international law enforcement priorities. 

First, of course, this treaty creates a binding legal obligation to 

provide mutual legal assistance, replacing a collegial and good relationship with one that now has a treaty basis. 

Second, the treaty provides for assistance in a wide range of 

criminal justice matters. As the committee knows, the treaty provides that assistance shall be granted in connection ‘‘with the investigation, prosecution, and prevention of criminal offenses for 

which the maximum penalty is deprivation of liberty for at least 

one year’’ as measured by the laws of the party seeking assistance. 

This means that the treaty will ensure that we are not spending 

time in either of our jurisdictions on claims or cases that are not 

of significance, but, at the same time, also ensures that we will be 

able to deal with cases in a wide range of criminal offenses, from 

terrorism to organized crime, narcotics trafficking, money laundering, fraud, tax offenses, intellectual-property crimes, and environmental offenses. 

Third, the treaty also makes clear that assistance will be available through proceedings by the Securities and Exchange Commission, when those proceedings are incidental to or connected with 

pending criminal investigations and proceedings, which of course is 

important for our financial crime investigations. 

Fourth, the treaty also provides for a broad range of different 

types of cooperation in criminal matters, including taking the testimony or statements of persons; providing documents, records, and 

other types of evidence; transferring persons in custody for testimony or other purposes; conducting searches and seizures; assisting in proceedings relating to the forfeiture of assets; and any other 

form of assistance not inconsistent with the laws of the party 

granting the assistance. 

Fifth and finally, the treaty with Bermuda also pierces bank secrecy and provides a mechanism for addressing legal and policy 

issues, such as confidentiality, inadmissibility requirements for evidence, and custodial transfer of witnesses. 

Significantly, the Bermuda Mutual Legal Assistance Treaty also 

provides a framework for cooperation in the tracing, seizure, and 

forfeiture of criminally derived assets. 

In conclusion, we appreciate the committee’s support for our efforts over the years to strengthen and enlarge the framework of 

treaties of assistance in combating international crime. We at the 

Department of Justice view mutual legal assistance treaties as particularly useful tools in this regard. Accordingly, we join with our 

colleagues at the Department of State in urging the prompt and favorable consideration of the Mutual Legal Assistance Treaty with 

Bermuda. 

I’ll be pleased to answer any questions the committee may have. 

Thank you. 

[The prepared statement of Mr. Swartz follows:] 

PREPARED STATEMENT OF BRUCE SWARTZ

Mr. Chairman and members of the committee, I am pleased to appear before you 

today to present the views of the Department of Justice on the Mutual Legal Assistance Treaty (Treaty or MLAT) signed by the United States and Bermuda. The 

43 

treaty, jointly negotiated by the Departments of State and Justice, reflects the international law enforcement priorities of the Department of Justice. Accordingly, we 

join the Department of State in urging the committee to report favorably to the Senate and recommend its advice and consent to ratification of the treaty. 

I realize that the committee has become acquainted with the significant benefits 

MLATs provide to the international law enforcement community since the first such 

treaty came into force in 1977. Nearly 35 years later, we now have MLATs in force 

with over 60 countries. Moreover, the transmittal package for the MLAT with Bermuda provides a detailed article-by-article analysis of the treaty, which I will not 

attempt to repeat here. Rather, I would like to highlight how the MLAT with Bermuda reflects our international law enforcement priorities. 

The MLAT, signed on January 12, 2009, is the first such treaty between the 

United States and Bermuda and is the culmination of a lengthy negotiation first 

begun in June 2000. Upon entry into force, the MLAT will significantly enhance the 

existing mutual assistance relationship with Bermuda, currently characterized by 

collegial but discretionary cooperation based upon the exchange of letters of request. 

For example, the MLAT will establish a direct channel of communication between 

designated Central Authorities. The Central Authority for each party will be its 

Attorney General, or a person designated by the Attorney General. In the United 

States, the authority to handle the duties of the Central Authority has been delegated to the Office of International Affairs in the Criminal Division of the Department of Justice. In addition, replacing the current practice of discretionary cooperation, the treaty will establish a binding, legal obligation to provide assistance ‘‘in 

connection with the investigation, prosecution, and prevention of criminal offenses 

for which the maximum penalty is deprivation of liberty for at least one year, and 

in proceedings related to criminal matters.’’ Limiting applicability to offenses punishable by at least 1 year’s imprisonment, as measured by the penalty provisions 

in the party seeking the assistance, makes clear that the treaty is to be used for 

requests relating to serious offenses, while still providing for assistance in a wide 

spectrum of criminal matters, including terrorism, organized crime, narcotics trafficking, money laundering, fraud, tax offenses, intellectual property crimes and environmental offenses. For requests relating to investigations of multiple offenses, assistance will also be available for ‘‘lesser included offenses,’’ provided at least one 

of the offenses under investigation is punishable by at least 1 year’s imprisonment. 

Article 21 of the treaty further clarifies that assistance would be available for proceedings by the Securities and Exchange Commission when those proceedings are 

incidental to or connected with pending criminal investigations and proceedings. 

The treaty with Bermuda also provides for a broad range of different types of 

cooperation in criminal matters, including taking the testimony or statements of 

persons; providing documents, records, and other articles of evidence; locating or 

identifying persons or items; serving documents; transferring persons in custody for 

testimony or other purposes; conducting searches and seizures; assisting in proceedings related to the forfeiture of assets, restitution, and the collection of criminal 

fines; and any other form of assistance not inconsistent with the laws of the party 

granting the assistance. 

As with our other MLATs, the treaty with Bermuda also pierces bank secrecy and 

provides a mechanism for addressing legal and policy issues such as confidentiality, 

admissibility requirements for evidence, allocation of costs, confrontation of witnesses at foreign depositions, and custodial transfer of witnesses. Significantly, the 

Bermuda MLAT provides a framework for cooperation in the tracing, seizure, and 

forfeiture of criminally derived assets. 

Finally, despite the many benefits offered by the treaty with Bermuda, we realize 

that MLATs in themselves are not the solution to all aspects of law enforcement 

cooperation. Their success depends on our ability to implement them effectively, 

combining comprehensive and updated legal provisions with the competence and political will of our treaty partners. Our recognition of the importance of effective 

treaty implementation led to the development of a standard consultation clause for 

our MLATs, included in the treaty with Bermuda, to ensure that we will have regular dialogues with our treaty partners on the handling of our cases. 

CONCLUSION

We appreciate the committee’s support for our efforts over the years to strengthen 

and enlarge the framework of treaties that assist us in combating international 

crime. We at the Department of Justice view mutual legal assistance treaties as 

particularly useful tools in this regard. In addition, as our network of international 

law enforcement treaties has grown in recent years, we have focused increasing 

efforts on implementing our existing treaties, with a view to making them as effecVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00043 Fmt 6601 Sfmt 6621 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
44 

tive as possible in the investigation and prosecution of our most serious crimes, including those related to terrorism. We join our colleagues from the Department of 

State in urging the prompt and favorable consideration of the Mutual Legal Assistance Treaty with Bermuda. I will be pleased to respond to any questions the committee may have. 

Senator CARDIN. Thank you very much, Mr. Swartz. 

We’ll now hear from Cliff Johnson, the Assistant Legal Advisor 

for Law Enforcement and Intelligence in the Department of State. 

STATEMENT OF CLIFTON M. JOHNSON, ASSISTANT LEGAL 

ADVISER FOR LAW ENFORCEMENT AND INTELLIGENCE, 

DEPARTMENT OF STATE, WASHINGTON, DC 

Mr. JOHNSON. Thank you, Mr. Chairman, members of the committee. 

I’m pleased to appear before you today, along with the Department of Justice, to testify in support of the Mutual Legal Assistance Treaty signed by the United States and Bermuda in January 

of 2009. If approved by the Senate and brought into force, this treaty will be an important step in advancing law-enforcement cooperation with Bermuda. Bermuda has been a longstanding partner in 

United States law enforcement efforts off our Eastern Shores, in 

particular in investigating and prosecuting financial crimes. However, as Mr. Swartz pointed out, our current relationship is based 

solely on informal cooperation. Entering into force of this Mutual 

Legal Assistance Treaty would formalize this relationship and create a binding legal obligation on Bermuda and the United States 

to provide the assistance covered by the treaty. 

As criminal activity grows increasingly transnational, mutual 

legal assistance treaties are essential tools in the effort to combat 

serious crimes across borders, including drug trafficking, money 

laundering, violent crimes, and terrorist activity. The United States 

has mutual legal assistance treaties covering many of Bermuda’s 

neighbors in the nearby Caribbean region, including Bahamas, Anguilla, the British Virgin Islands, and the Turks and Caicos Islands, and, in general, with over 60 countries across the globe. 

If the Senate provides its advice and consent to ratification, this 

treaty will fill a gap in the legal framework for international law 

enforcement cooperation in this region. 

The treaty is one of a series of modern mutual legal assistance 

treaties negotiated by the United States since the 1980s and contains all the essential provisions of such treaties that the United 

States seeks. If approved, it would create a legal obligation for Bermuda to provide assistance ‘‘in connection with the investigation, 

prosecution, and prevention of criminal offenses,’’ with a few limited exceptions. This obligation would extend to proceedings related 

to criminal matters, such as forfeiture proceedings, as well as proceedings of the Securities and Exchange Commission when ancillary to pending criminal investigations or prosecutions. 

The treaty itself also serves to create an additional legal obligation to provide assistance related to criminal tax offenses, including 

those not covered by the two existing tax agreements we have with 

Bermuda. The treaty also includes important provisions on freezing 

and forfeiting assets or property that may be the proceeds or instrumentalities of crime, as well as the authorization for asset 

sharing. 

45 

I would note that unlike a number of our other mutual legal assistance treaties covering overseas territories of the United Kingdom, which have been concluded by the United Kingdom on their 

behalf, this treaty was concluded directly with the Government of 

Bermuda. Prior to signature, the United States obtained from the 

United Kingdom a copy of its entrustment letter to Bermuda, 

granting Bermuda the authority to sign and conclude this treaty. 

Engaging directly with the Government of Bermuda on the treaty 

and its implementation will enhance its effectiveness and facilitate 

the execution of requests. 

It’s our understanding that Bermuda has completed the internal 

legal requirements for entry into force of this treaty. It’s, therefore, 

important that the United States is in a position to bring this treaty into force as soon as possible. We can then begin to benefit from 

the many tools it provides to enhance our law-enforcement cooperation with Bermuda. 

We join our colleagues at the Department of Justice and the Department of Homeland Security in our appreciation of your and 

your staff’s consideration of this treaty, which will bolster our efforts at home and abroad to combat transnational crime. 

I will be happy to answer any questions the committee may have. 

Thank you. 

[The prepared statement of Mr. Johnson follows:] 

PREPARED STATEMENT OF CLIFTON M. JOHNSON

Mr. Chairman and members of the committee, I am pleased to appear before you 

today along with the Department of Justice to testify in support of the Mutual Legal 

Assistance Treaty signed by the United States and Bermuda in Hamilton on January 12, 2009. If approved by the Senate and brought into force, this treaty will be 

an important step in advancing law enforcement cooperation with Bermuda. Bermuda has been a longstanding partner in United States law enforcement efforts off 

our Eastern Shores, in particular in investigating and prosecuting financial crimes. 

However, our current relationship is based solely on informal cooperation. Entry 

into force of this Mutual Legal Assistance Treaty would formalize this relationship 

and create a binding legal obligation on Bermuda and the United States to provide 

assistance covered by the treaty. As criminal activity grows increasingly 

transnational, mutual legal assistance treaties are essential tools in the effort to 

combat serious crimes that cross borders, including drug trafficking, money laundering, violent crime and terrorist activity. The United States has mutual legal 

assistance treaties covering many of Bermuda’s neighbors in the nearby Caribbean 

region, including the Bahamas, Anguilla, the British Virgin Islands and the Turks 

and Caicos Islands, and in general with over 60 countries across the globe. If the 

Senate provides its advice and consent to ratification, this treaty will fill a gap in 

the legal framework for international law enforcement cooperation in this region. 

The treaty is one of a series of modern mutual legal assistance treaties negotiated 

by the United States since the 1980s and contains all the essential provisions of 

such treaties that the United States seeks. If approved, it would create a legal obligation for Bermuda to provide assistance ‘‘in connection with the investigation, prosecution, and prevention of criminal offenses,’’ with a few limited exceptions. This 

obligation would extend to proceedings related to criminal matters, such as forfeiture proceedings, as well as proceedings of the Securities and Exchange Commission when ancillary to pending criminal investigations or prosecutions. While the 

preamble to the treaty reaffirms the determination of the parties to share information in matters involving the investigation and prosecution of criminal tax offenses 

pursuant to either the 1988 Tax Information Exchange Agreement between the 

United States and United Kingdom, on behalf of Bermuda, or the limited 1986 bilateral tax treaty between the United States and the United Kingdom, on behalf of 

Bermuda, the treaty itself also serves to create an additional legal obligation to provide assistance related to criminal tax offenses, including those not covered by the 

two existing tax agreements. 

46 

The treaty further creates a direct law enforcement channel of communication on 

requests for assistance under the treaty through the designation of a ‘‘Central 

Authority’’ for each party. It includes important provisions on freezing and forfeiting 

assets or property that may be the proceeds or instrumentalities of crime, as well 

as authorization for asset-sharing. The one relatively uncommon provision of the 

treaty is the ‘‘Treaty as First Resort’’ article. It provides that, before a party seeks 

to enforce a compulsory measure requiring an action to be performed in the other 

party relating to a matter for which assistance is available under the treaty (such 

as production of bank records), the party must first attempt in good faith to obtain 

the desired assistance under the treaty. The Requesting Party can fulfill such obligation under the treaty either by making a formal request or by engaging in consultations to assess whether a request under the treaty would be successful. 

I would also note that, unlike a number of other mutual legal assistance treaties 

covering overseas territories of the United Kingdom, which have been concluded by 

the United Kingdom on their behalf, this treaty was concluded directly with the 

Government of Bermuda. Prior to signature, the United States obtained from the 

United Kingdom a copy of its entrustment letter to Bermuda, granting Bermuda 

authority to sign and conclude the treaty. Engaging directly with the Government 

of Bermuda on the treaty and its implementation will enhance its effectiveness and 

facilitate the execution of requests. 

We understand that Bermuda has completed the internal legal requirements for 

entry into force of this treaty. It is, therefore, important that the United States be 

in a position to bring this treaty into force as soon as possible. We can then benefit 

from the many tools it provides to enhance our law enforcement cooperation with 

Bermuda. We join our colleagues at the Department of Justice and the Department 

of Homeland Security in our appreciation of your consideration of this treaty, which 

will bolster our efforts at home and abroad to combat transnational crime. I will be 

happy to answer any questions the committee may have. 

Senator CARDIN. Thank you very much for your testimony. 

We’ll now hear from Deborah McCarthy, Principal Deputy Assistant Secretary, Bureau of Economics, Energy and Business Affairs, 

Department of State. 

STATEMENT OF DEBORAH A. MCCARTHY, PRINCIPAL DEPUTY 

ASSISTANT SECRETARY, BUREAU OF ECONOMIC, ENERGY 

AND BUSINESS AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, DC 

Ms. MCCARTHY. Thank you. Mr. Chairman, Senator Lee, thank 

you for the opportunity to testify before the Foreign Relations Committee as the administration seeks advice and consent of the Senate to ratification of the United States-Rwanda Bilateral Investment Treaty. 

Foreign investment is an important source of economic growth in 

the United States and around the globe. It improves productivity, 

provides good jobs, and spurs healthy competition. Secretary of 

State Clinton, in her remarks at the OECD on May 26, referred to 

an important international consensus about development, that 

‘‘while aid is essential, aid alone is not enough; that to help people 

reach their full potential, we must also promote sustainable and inclusive economic growth.’’ 

We want to use the full range of tools at our disposal to promote 

these objectives, such as promoting corporate social responsibility 

through the OECD guidelines for multinational enterprises, international efforts to combat bribery of foreign public officials, and 

tools such as bilateral investment agreements to promote improved 

investment climates. 

Since the inception of U.S. BIT negotiations in the early 1980s, 

the United States has pursued BITs with the objective of protecting 

U.S. investment abroad; encouraging the adoption of open, transVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00046 Fmt 6601 Sfmt 6602 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
47 

parent, and nondiscriminatory investment policies; and supporting 

the development of international legal standards consistent with 

these objectives, all of which assists developing countries to create 

welcoming investment climates. 

We already have five BITs in force with countries in sub-Saharan 

Africa. We hope the Rwanda BIT will become the sixth. At the 

2009 AGOA Forum, Secretary Clinton and U.S. Trade Representative Kirk launched negotiations with Mauritius. At that time and 

at the AGOA Forum in 2010, the Secretary expressed our interest 

in exploring new investment treaties in Africa that advance our objectives at the bilateral or regional level. Later this week, Secretary 

Clinton and U.S. Trade Representative Kirk will attend the AGOA 

Forum in Lusaka, Zambia, where they will underscore our commitment to economic partnership with Africa. 

The United States chose to negotiate a BIT with Rwanda in part 

based on its strong economic reform program, which has helped to 

rebuild the Rwandan economy since the 1994 genocide. As one indicator of Rwanda’s efforts, the World Bank recognized that country 

as the world’s top business climate reformer in 2009, a first for a 

sub-Saharan African country, and the second most improved in 

2010. 

Foreign investors are increasingly giving Rwanda serious consideration as a destination for investment. According to our Embassy, 

U.S.-led investment in Rwanda is poised to grow in the coming 

years. These investments could increase access to energy, significantly for Rwandans and their regional neighbors; increase access 

to financing for small and medium-sized enterprises; and contribute to improved food security. 

The Department of State and the Office of the U.S. Trade Representative co-led the negotiations of this treaty with the participation of the Departments of Commerce, Treasury, and other U.S. 

Government agencies. The treaty contains high standard, core investor protections and provides investors with the opportunity to 

resolve investment disputes with host governments through international arbitration. 

Once in force, the treaty would reinforce the Rwandan Government’s efforts to reform its economy and promote a strong business 

climate. It would set a very positive example in the region. And it 

would protect the rights of the United States investors in Rwanda. 

The administration thanks the committee for its consideration of 

the treaty, and we urge you to report it favorably to the full Senate 

for action. 

I’d be happy to answer any questions that you may have. 

[The prepared statement of Ms. McCarthy follows:] 

PREPARED STATEMENT OF DEBORAH A. MCCARTHY

Mr. Chairman, thank you for the opportunity to testify before the Foreign Relations Committee as the administration seeks advice and consent of the Senate to 

ratification of the United States-Rwanda Bilateral Investment Treaty (BIT). 

INVESTMENT AND DEVELOPMENT OBJECTIVES

Foreign investment is an important source of economic growth in the United 

States and around the globe. It improves productivity, provides good jobs, and spurs 

healthy competition. Foreign investment is also a platform for U.S. exports. Over 

one-fifth of U.S. goods exports were shipped to foreign subsidiaries of U.S. firms in 

2008 (latest data available). Approximately 27 percent of all U.S. exports are deVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00047 Fmt 6601 Sfmt 6621 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
48 

1The other U.S. BITs with sub-Saharan African countries are with: Cameroon, the Democratic 

Republic of Congo, Mozambique, the Republic of Congo, and Senegal. 

rived from foreign direct investment either in the United States or abroad. Foreign 

firms invested in the United States employ over 5.5 million Americans with a payroll of over $400 billion. 

Foreign investment can also be a powerful tool for economic development abroad. 

Overseas development assistance, while valuable and important, cannot match the 

power, velocity, and impact of private capital—an essential factor for countries to 

move forward economically. 

As Secretary of State Clinton has said, we believe that investment and trade are 

powerful tools to spread development and opportunity deep within societies. In her 

remarks at the Organization for Economic Cooperation and Development (OECD) on 

May 26, Secretary Clinton referred to an important consensus about development— 

that ‘‘while aid is essential, aid alone is not enough; that to help people reach their 

full potential, we must also promote sustainable and inclusive economic growth. . . . 

’’ President Obama’s 2010 Presidential Policy Directive on Development focuses U.S. 

development efforts on broad-based economic growth, democratic governance, gamechanging innovations, and sustainable systems for meeting basic human needs. We 

want to use the full range of tools at our disposal to promote rules of the road in 

support of these objectives. This includes our work promoting corporate social responsibility through the OECD Guidelines on Multinational Enterprises, international efforts to combat the bribery of foreign public officials, and tools such as 

BITs to promote improved investment climates. 

Since the inception of U.S. BIT negotiations in the early 1980s, successive U.S. 

administrations have negotiated BITs with the objective of protecting U.S. investment abroad, encouraging the adoption of open, transparent, and nondiscriminatory 

investment policies, supporting the development of international legal standards 

consistent with these objectives, and assisting developing countries in creating a 

welcoming investment climate. U.S. BITs build on the principles contained in earlier 

U.S. treaties of Friendship, Commerce, and Navigation. The United States presently 

is a party to BITs with 40 countries. 

BITs also support trade linkages. For example, BITs enhance our objectives on the 

African Growth and Opportunity Act (AGOA) by establishing a legal framework for 

U.S. investors in Africa—investors that may seek to export AGOA-eligible products 

back to the U.S. market. This is the type of synergy that can maximize the effectiveness of our policy frameworks. It also reflects our interest in looking to non-assistance-based policy tools to advance the development objectives of our foreign partners. Later this week, Secretary Clinton and U.S. Trade Representative Kirk will 

attend the AGOA Forum in Lusaka, Zambia, June 8–10, where they will underscore 

our commitment to economic partnership with Africa. 

We already have five BITs in force with countries in sub-Saharan Africa.1 We 

hope the Rwanda BIT will become the sixth. At the 2009 AGOA Forum in Nairobi, 

Secretary Clinton and U.S. Trade Representative Kirk launched BIT negotiations 

with Mauritius. At that time and at the AGOA Forum in 2010, Secretary Clinton 

expressed our interest in exploring new opportunities to pursue investment treaties 

in Africa that advance our objectives at the bilateral or regional level. 

THE U.S.-RWANDA INVESTMENT TREATY

The United States chose to negotiate a BIT with Rwanda in part based on its 

strong economic reform program, which has helped to rebuild the Rwandan economy 

since the 1994 genocide. The Rwandan Government has opened its economy, improved its business climate, and embraced trade and investment as a means to boost 

economic development and help alleviate poverty. 

The World Bank recognized Rwanda as the world’s top business climate reformer 

in 2009—a first for a sub-Saharan African country—and the second most improved 

in 2010. Rwanda is the fourth-ranked sub-Saharan African country listed in that 

report. 

Rwanda also maintains a consistent policy of combating corruption. Over the last 

2 years Rwanda improved its rankings in Transparency International’s ‘‘Corruption 

Perception Index’’ from 102 in 2008 to 66 in 2010, giving Rwanda the highest ranking of any country in East Africa. 

As the result of these reforms, foreign investors are increasingly giving Rwanda 

serious consideration as a destination for investment. According to our Embassy, 

U.S.-led investment in Rwanda is poised to increase in the coming years. These investments could increase access to energy significantly for Rwandans and their regional neighbors, increase access to financing for small- and medium-sized enterVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00048 Fmt 6601 Sfmt 6621 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
49 

prises, contribute to improved food security, and provide low-cost ‘‘green’’ housing 

for middle-income Rwandans. U.S. investment has the potential to change Rwanda’s 

economic landscape and play a significant role in assisting the Rwandan Government’s efforts to become a regional economic hub. The BIT with Rwanda, once in 

force, would reinforce the Rwandan Government’s efforts to further reform its economy and promote a strong business climate. It would set a very positive example 

in the region. It will also protect the rights of U.S. investors in Rwanda. 

The Department of State and the Office of the U.S. Trade Representative coled 

the negotiation of this treaty, with the participation of the Departments of Commerce, the Treasury, and other U.S. Government agencies. The treaty, which was 

signed on February 19, 2008, contains a set of core investor protections, which include: 

• National treatment and most-favored-nation treatment for the full life cycle of 

investment, including in the establishment, acquisition, operation, management, 

and ultimate disposition of an investment; 

• The free transfer of investment-related funds; 

• Prompt, adequate, and effective compensation in the event of an expropriation; 

• A minimum standard of treatment grounded in customary international law; 

• Freedom of investment from specified performance requirements; 

• Prohibitions on nationality-based restrictions for the hiring of senior managers; 

and 

• Provisions on transparency in publication of investment-related laws, regulations, and other measures, and the opportunity, to the extent possible, for interested parties to comment on such proposed measures. 

The treaty also provides investors with the opportunity to resolve investment disputes with a host government through international arbitration. 

This investment treaty is based on the 2004 U.S. model BIT, which, compared to 

earlier BITs, includes a number of provisions designed to improve the operation of 

the treaty. These developments include greater details on key provisions, and procedures designed to eliminate frivolous claims and to enhance efficiency, transparency, 

and public participation in the arbitration process. The treaty contains provisions 

in which the two governments recognize that it would be inappropriate to encourage 

investment by weakening or reducing the protections afforded in domestic environmental and labor laws. Under the model, each party may take limited exceptions 

to the core obligations related to national treatment, most-favored-nation treatment, 

performance requirements, and senior management and boards of directors. In this 

area, Rwanda has taken only a few, narrow exceptions; the treaty thus sends a powerful signal about Rwanda’s openness to foreign investment. 

In sum, this treaty will complement Rwanda’s reform efforts, help Rwanda attract 

more foreign investment that is vital to economic prosperity, and deepen our economic relationship with an important partner in Africa. 

In conclusion, the administration wishes to thank the committee for its consideration of the treaty and we urge you to report it favorably to the full Senate for action. I would be happy to answer any questions you may have. 

Senator CARDIN. Well, let me thank all five of you for your testimony, and we appreciate it very much. 

I’m going to start on the treaties concerning Switzerland and 

Luxembourg and Hungary, and then we’ll get over to the other two 

agreements. 

And let me start with Ms. Corwin. Mr. Barthold points out in his 

statement and in his testimony that our current relationship with 

Hungary, Luxembourg, and Switzerland has allowed us a relatively 

limited exchange of information, so that, clearly, moving forward 

with these agreements are in our national interests, in order to get 

greater access to information. 

Having said that, Mr. Barthold raises three, I think, very important points as to whether these agreements adequately deal with 

potential problems that may develop between our country and the 

other country, and that is the limitation on automatic exchange of 

information, the requirements to be specific in your identification, 

and the standard of having exhausted other remedies before you 

50 

use the remedies that are available under the international agreement. 

Can you respond to those three points? 

Ms. CORWIN. Thank you, Senator. I’d be happy to. 

With regard to what we’ve achieved in the new agreements, in 

particular with the protocols with Switzerland and Luxembourg, 

we view them as great improvement with respect to the current information-exchange standards that we have in our current treaties 

with those countries. In particular, some of the problems that we 

saw with respect to the Swiss treaty related to the narrowness of 

the scope of the information-exchange provision in the current treaties, and, in particular, the current treaties provide for exchange of 

information only with respect to circumstances where you’re trying 

to establish fraud or fraud and the like. 

Our new protocols have improved information exchange in a 

number of ways, including by broadening that standard, so we now 

have the ability to, on request, get information with regard to any 

issue that was necessary to enforce our domestic tax laws. 

In addition, as with all of our information-exchange provisions, 

they provide for the ability to have automatic exchange—they don’t 

prohibit that—but, essentially, only require information on request. 

So there’s no limitation within the current treaties on automatic 

exchange. 

With respect to the issue of specificity, there was a lack of clarity 

in the existing treaties with regard to that, and I think in the current protocols has been addressed. In particular, the terms of the 

treaty itself make clear, both in the case of Luxembourg and Switzerland, that the name of a taxpayer is not necessary in every case 

to honor an information request. And the use of the—I think as my 

colleague pointed out, the use of the ‘‘typically’’ language within the 

Swiss treaty, in particular, is not viewed as a hindrance to that interpretation but rather as an illustration that where information is 

available, it’s in the interest of both countries to have that and provide that information when making a request. But if the information is not available, in the case of a name, that a request for information is still possible under this new protocol. 

That understanding of the Swiss treaty, in particular, as well as 

the Luxembourg treaty, was achieved. And we went through, in the 

negotiations, great lengths to ensure a meeting of the minds on 

that issue and the specificity of a particular request. And we’re satisfied that we had a mutual understanding regarding that point. 

I think, in this regard, also Switzerland has recently issued 

statements indicating its intent to interpret all of its treaties, including the provisions with the United States, consistently with the 

international standard and the mutual understanding that we have 

with Switzerland, as well as the terms of the agreement itself, in 

a manner that would not require the name of an individual. 

And so we feel that the treaties have addressed a number of the 

concerns and, as modified, should alleviate a lot of—and improve 

our information-exchange relationship with both Switzerland and 

Luxembourg. 

Senator CARDIN. Did you want to comment further about the 

need to exhaust other methods first? 

51 

Ms. CORWIN. On the need to exhaust other methods, that is a 

consistent international standard. The procedural rules within the 

information-exchange provision in a treaty are intended to protect 

both the requester of information and the requested from unnecessary administered burden. And the ultimate goal is to exchange as 

much information as possible. 

The standard requires exhaustion of internal remedies, so as to 

not put undue burden on the requested jurisdiction. It is commonly 

understood, in the OECD model and the international standard, it’s 

not to be interpreted in a manner to frustrate information exchange. 

Senator CARDIN. But we are dealing with Switzerland. 

Ms. CORWIN. And I think in acknowledgement of that, the commentary to the OECD language talks about the fact that all of 

these procedural rules should be interpreted in a manner not to 

frustrate the intent of exchanging as much information as possible. 

In the case of Switzerland, we put that right into the legal document, and there’s a mutual understanding that that is the way we 

intend to—— 

Senator CARDIN. Could you point out the differences between 

Luxembourg and Switzerland’s agreement, as it relates to the exchange of information? 

Ms. CORWIN. The two protocols are, actually, substantively the 

same. Both, as I said, change the current scope of exchange of information in the current agreements, which was narrow and limited to circumstances in order to meet the objectives of the treaty 

or to deal with fraud or fraud and the like. So both protocols expand that scope to include exchange of information that may be relevant, or is foreseeably relevant to addressing domestic law issues. 

In addition, both treaties override existing domestic bank secrecy 

rules. So under the prior agreements, a country could not respond 

to—or Switzerland or Luxembourg would not respond to a request 

because of domestic bank secrecy rules. Under the current agreements, we explicitly provide that information must be exchanged 

notwithstanding any existing domestic bank secrecy. So if the information is held by a bank or financial institution, it’s still required 

to be exchanged. And, finally, both agreements explicitly say that 

information must be exchanged even absent a domestic law interest in the country that’s providing the information. 

Senator CARDIN. Do you believe any additional negotiations are 

needed with Switzerland, so that we are confident that they will 

interpret this agreement and apply it consistent with our understandings? 

Ms. CORWIN. We do not believe any additional negotiations are 

necessary with Switzerland. As I said, we were very cognizant of 

the circumstances that led to UBS and the environment. When we 

negotiated this protocol with Switzerland, we went to great lengths 

to establish and memorialize our mutual understanding of how 

these information-exchange provisions would be interpreted and in 

a manner consistent with the international standard. And recently, 

as I said, Switzerland has announced its intent to interpret the information-exchange provisions in its treaties in a manner that is 

not only consistent with the mutual understanding reached with 

the United States but the international standard. And that gives 

52 

us comfort that we ended up with a meeting of the minds that gets 

to the right place. 

Senator CARDIN. Mr. Barthold, would like to respond at all to the 

response by Ms. Corwin? 

Mr. BARTHOLD. I think Ms. Corwin pointed out a number of the 

important advancements. The questions that my staff colleagues 

and I raised were really about how it will work out in practice. I 

believe that that was the thrust of your question. Ms. Corwin said 

that they’re generally satisfied. They think they’ve pushed substantially. She did note important changes, in terms of overriding bank 

secrecy laws. Also in the one agreement, there is a provision that 

essentially overrides domestic law that would make a subsequent 

change precluding requested information. 

So I think Ms. Corwin does point out some important advances. 

Some of our staff concerns relate to Swiss statements of need to 

flesh out details. Of course, that’s always true about any sort of 

agreement, in terms of how things work in practice. 

Somewhat recently, and since we prepared our description and 

discussion for your committee, the OECD peer review panels have 

released an initial phase-one report on Switzerland. The report 

noted significant improvement in existing agreements was needed 

and that they should take action to ensure that all agreements will 

be interpreted consistently with international norms. Ms. Corwin 

said that she believes that that is the case. 

The report criticized the Swiss authority’s initial interpretation 

of agreements as including specific identification requirements. 

Again, Ms. Corwin had addressed that issue. 

Senator CARDIN. Thank you. 

The press has reported that Switzerland is likely to conclude new 

agreements with Germany and the U.K. in the near future. Under 

these agreements, the Swiss Government would require Swiss 

banks to withhold or remit tax from payments of interest and perhaps other forms of investment income owned by residents of Germany and the U.K. who have Swiss bank accounts. Should the 

United States consider negotiating a similar agreement with Switzerland and other foreign banking centers? 

Ms. Corwin. 

Ms. CORWIN. We don’t think that the United States should consider such agreements. My understanding of the proposed agreements with Germany and the U.K. is that what they are offering 

is—or what Switzerland is offering is to impose a final withholding 

tax on accounts of German residents or U.K. residents, as the case 

may be, in place of identifying those residents to the U.K. Government and the German Government. So it is a collection system in 

place of a reporting regime, an information-reporting regime. 

That doesn’t allow the U.K. Government or the German Government to necessarily reconcile whether the collection of this final 

withholding tax is consistent with what tax might actually be due 

with respect to the individual on whom the tax is collected. 

From the U.S.’s perspective, we think information exchange is 

the more appropriate means for making sure that we combat offshore tax evasion, and we don’t want to give up our ability to assess the tax due on our own residents to another jurisdiction and 

be comfortable that that tax would be collected appropriately. 

53 

Senator CARDIN. So if these agreements are ratified by the Senate, are you saying that we will get enough information about income generated by accounts owned by Americans in just the general exchange of information, which will adequately allow us to 

audit to make sure the taxes have been paid on that income, similar to the information reports we receive from U.S. banks? 

Ms. CORWIN. Thank you, Senator. 

I think if these agreements are ratified, it will allow us to make 

requests of the relevant jurisdictions. 

Senator CARDIN. That was my concern. If you’re making a request on specific information, you don’t know the information. 

Ms. CORWIN. Right. 

Senator CARDIN. It seems to me what the German and the Brits 

are doing, they’re saying, I’d rather have money in the bank than 

trying to figure out who have accounts. 

Ms. CORWIN. Right, right. And they’re depending on Switzerland 

to impose the right amount of tax on those—— 

Senator CARDIN. But wouldn’t that also be negotiated, if we negotiate with the Swiss? 

Ms. CORWIN. Well, certainly, I don’t believe that as part of the 

agreements or the negotiations between Switzerland and then Germany and the U.K., it includes information exchange. The United 

States has recently enacted the Foreign Account Tax Compliance 

Act, which would require all foreign institutions, financial institutions, to report directly to the IRS information about U.S. bank accounts in their jurisdictions. That, right now, is providing us with 

the direct information that we will need direct from financial institutions on an automatic basis from these accounts. 

We have said in the context of implementing, because Treasury 

is now in the position of writing the regulations, to implement that 

law that we are willing to speak with foreign governments, including Switzerland, to cooperate as to how we can implement those 

provisions, which is to require reporting on all U.S. accounts to the 

IRS, implement them in cooperation with the foreign governments 

and leverage off of our existing treaty relationships, including the 

proposed protocols that are before you today, to allow the government to facilitate that reporting. 

But what we’re not willing to do is give up information reporting 

in exchange for a flat tax, where we have no way to audit whether, 

in fact, the individuals who have their accounts there are paying 

the right amount or, in fact, that Switzerland is doing what it 

should be doing to collect the tax. 

Senator CARDIN. I’m not sure I follow that argument. You say, 

on one hand, that the banks are required to give you that information under current law, so it seems to me you’re getting information reports currently from the banks. This is a government arrangement in which they are required with specific requests to supply information to the United States. I assume that’s where we 

have at least some indication that someone is not paying their 

taxes. But if we don’t know about the account and we are not getting adequate information, then we’re losing the tax revenue. 

So I’m not sure I follow you, from the point of view of the interests of the U.S. taxpayer, and tremendous concern here in Congress that offshore income is properly reported here in the United 

54 

States, that we wouldn’t be better off negotiating receiving the 

funds, without compromising our requirements for international 

banks to supply the information directly to the IRS. 

Ms. CORWIN. Thank you, Senator. I think the administration absolutely shares your concern and Congress’ concerns about offshore 

tax evasion. And we view these tools as complementary in achieving the most compliance that we can get. 

The act, the Foreign Account Tax Compliance Act that I referenced, is not effective until January 2001, 2013. So while it is 

current law, it is not yet operable and requires a lot of pieces to 

go into play before we’re getting full reporting. That information reporting, in conjunction with our ability to make requests of a government to provide us additional information, when we suspect or 

have concerns about a particular scheme, or maybe the facilitation 

of evasion, is going to, I think, provide us with sufficient tools to 

go after what has become a significant issue of offshore tax evasion. 

Senator CARDIN. Mr. Barthold, any comments you want to make? 

Mr. BARTHOLD. Well, perhaps, Senator, just to help clarify, the 

agreements that you noted between Switzerland and the United 

Kingdom, remember, this is in lieu of Swiss participation in the 

E.U. savings directive. And while not expert on the savings directive, I believe, at this stage, it only relates to interest. 

I believe the point that Ms. Corwin was making, in terms of information reporting, is that Congress has enacted the Foreign Account Tax Compliance Act that will provide information reports on, 

essentially, flows into financial accounts, reflecting interest, dividend, and gain. And combining that information with the ability to 

make specific requests, when based on that information you might 

think that a taxpayer is underpaying, I believe she’s saying that 

the administration thinks that would dominate a flat withholding 

tax, particularly since I think the rates of withholding that the European agreements are talking about may be at least moderately 

below the highest rates of tax in the European countries and the 

highest rates of tax in the United States. 

Senator CARDIN. Thank you. 

Ms. Corwin, you note that in the arbitration provisions, that 

they’re similar in Switzerland and Luxembourg. Can you tell us the 

differences? 

Ms. CORWIN. Well, the arbitration provision is in Switzerland 

only. We’ve included arbitration in Switzerland and it is—— 

Senator CARDIN. I meant you said it’s similar—I misstated the 

question—similar to other agreements that we’ve entered into. How 

is it different? 

Ms. CORWIN. It is identical to the arbitration provision we have 

in the French protocol, which this committee approved in 2009. The 

provisions in both the French protocol and this proposed Swiss protocol differ from the agreements or the arbitration provisions we 

have with Belgium, Canada, and Germany, in response to very useful comments we received from this committee when those treaties 

were being approved. 

And, in particular, I think there are three significant differences 

that I can point to that come from the suggestions of this committee. First, in response to concerns about the taxpayer in an arbitration proceeding having the ability to participate in the arbitraVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00054 Fmt 6601 Sfmt 6602 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
55 

tion proceeding, we have added, we’ve included in the proposed 

Swiss protocol, as well as the French protocol, a provision that allows a taxpayer to submit a position paper to the arbitration panel, 

reflecting their views on the issues before the arbitration panel. 

Second, in response to concerns about maintaining the independence of the members of the arbitration panel, we, in the Swiss protocol as well as the French protocol, prohibit or put a prohibition 

on employees of the tax administrations of either government serving as members of the arbitration panel. 

And then finally, in response to concerns about following international norms for legal interpretation for treaty interpretation, we 

removed what had been a hierarchy of laws for treaty interpretation that existed in the prior treaties. They are no longer in these 

treaties. 

Senator CARDIN. Thank you. 

In regards to Hungary, for one moment, can you tell us the current status of action of the Hungary Government in modifying its 

domestic laws that would permit it to adequately implement its exchange of information and limitation on benefit obligations that are 

in the treaty? 

Ms. CORWIN. Sure. On Hungary, with respect to information exchange, we’ve had a very good information-exchange relationship 

with Hungary, even under the existing treaty that had the older 

information-exchange language. So we’ve never had problems with 

scope or question, and there are no additional steps that Hungary 

needs to take domestically to continue that information-exchange 

relationship under the new, more modern information-exchange 

language in the treaty. 

Similarly, with respect to the limitation on benefits provision, 

there are no domestic law changes that need to be made in order 

for the treaty-shopping protections provided for in the limitation on 

benefits provision to kick in. 

Senator CARDIN. There have been some questions raised in regards to the Hungary treaty as to whether the provision of limitation of benefits are sufficient to deter the treaty-shopping concerns 

that you’ve raised. I’ve read your testimony, and you repeated it 

today, that you’re confident that the provisions here are adequate. 

Ms. CORWIN. Yes, we are. We have included our model LOB— 

limitation on benefits—provision to prevent treaty shopping. It is 

the tightest antitreaty shopping provision in the world. It’s recognized as such. And we are confident that the limitations there that 

look to ownership and limit benefits based on ownership as well as 

activity are sufficient to combat any treaty-shopping concerns that 

we might have had with Hungary before this revision. 

Senator CARDIN. Well, thank you very much. I want to give you 

all a break for a moment and turn to Mr. Swartz. You’ve been very 

patient, the three of you. I appreciate that very much. Normally, 

we would have had two panels, but we didn’t know how the Senate 

would be operating today, so in an effort to make sure we got 

through all the treaties today, we did this as one panel. 

Mr. Swartz, you point out in your testimony and your statements 

that the treaty with Bermuda also pierces bank secrecy and provides a mechanism for us getting the information we need. There 

have been some mutual legal assistance treaties that contain proviVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00055 Fmt 6601 Sfmt 6602 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
56 

sions related directly to sharing bank records or other financial information. Why wasn’t a similar provision included in the U.S.-Bermuda MLAT? 

Mr. SWARTZ. Thank you, Mr. Chairman. With regard to that particular issue, the committee may be referring to the relatively new 

provision that appears, for instance, in our E.U.–U.S. Mutual Legal 

Assistance Treaty, the identification of bank records provision. 

That was a provision that was drafted and adopted in the context 

of the E.U. negotiations after the Bermuda Mutual Legal Assistance Treaty was well underway. 

Under that provision, it’s possible for the requesting party to 

seek information as to whether an account exists in the requested 

country, or in the case of the E.U., one of the requested member 

states. But, thereafter, the request, if there is an identification of 

an account, must be followed up through a standard mutual legal 

assistance treaty. 

As I said, that’s a new provision that came after the bulk of the 

negotiations were concluded with regard to Bermuda. 

And with regard to Bermuda, our record of cooperation has been 

very good. We believe that the record we have on the production 

of records, including bank records, is such that we are confident 

that the provisions included in this mutual legal assistance treaty, 

which do require cooperation on the production of records, will suffice to ensure that we obtain the records we need for our financial 

investigations and other investigations. 

Senator CARDIN. Some other MLATs also allow for urgent, nonwritten form requests to be made. It’s my understanding that in 

Bermuda, it must be in written form. Any reason why that provision was not included in this agreement? 

Mr. SWARTZ. Mr. Chairman, while it is true that the Mutual 

Legal Assistance Treaty does require requests in written form, it 

was the judgment of the negotiators that it sufficed that, in this 

case, with regard to Bermuda, we would be able to obtain expeditious responses to our requests and also provide such responses to 

Bermuda’s requests, particularly because we have a practice already established that will continue, we believe, under the treaty 

of being able to convey those requests through email or through 

fax. And we believe that that availability does mean that our requests can be speedily transmitted and responded to. 

Senator CARDIN. So was this, basically, a decision made by U.S. 

negotiators, that it was not necessary, knowing how we can quickly 

get faxes and e-mails sent? Is that fair enough to say, or not? 

Mr. JOHNSON. Senator, if I can help on that one? 

Senator CARDIN. Sure. 

Mr. JOHNSON. Our negotiators initially did try to get language 

that provided for nonwritten requests to be made. Bermuda resisted that because they wanted to make sure that the requests 

were clear and in a more formal way. 

But in the negotiations, it also became clear that they accepted 

that such request could be made by fax or by email. So the real 

issue they were concerned about was not finding a fast means to 

make a request, but really just taking oral requests off the table. 

And, in fact, my understanding is that our informal practice with 

them has, in fact, been to use email and faxes to make those reVerDate Nov 24 2008 10:06 Aug 30, 2011 Jkt 066165 PO 00000 Frm 00056 Fmt 6601 Sfmt 6602 E:\TREATY DOC. 112-1, SWITZERLAND\TD112-1.TXT MIKEB
57 

quests. So we’re confident that we’ve got the means in place that 

we can make urgent requests of them in a way that will be effective. 

Mr. SWARTZ. Mr. Chairman, if I might add, in fact, while it is 

an advantage to be able to make oral requests, in practice, it’s very 

rare that we do so. Instead, we do use the instrumentalities of fax 

or email. 

Senator CARDIN. My main concern is just, in urgent matters, that 

it’s not delayed. And with modern communication, it seems to me 

that can probably be handled. 

I’m more concerned about bank records. Mr. Johnson, do have 

any comments on the bank records issue? 

Mr. JOHNSON. Again, not specifically on the bank issue. But, 

again, our sense is that by having an accepted practice and understanding between our two countries that we can use email and 

faxes and other modern means to make requests very quickly. The 

difference between being able to do an oral request or being able 

to use one of these other very rapid means, we think, is not consequential. 

Senator CARDIN. There’ve been some issues raised about the adequacy of Bermuda law with respect to forfeitures of proceeds and 

instrumentalities of criminal offenses. Are you satisfied that Bermuda law is adequate to comply with their commitments under 

this treaty? 

Mr. SWARTZ. Mr. Chairman, we are. Of course, the development 

of forfeiture law is an important and progressive matter. We’ve 

seen a number of changes over the course of the years, including 

here in the United States. 

But the Mutual Legal Assistance Treaty in Article 17 does obligate Bermuda to provide assistance to the United States in proceedings relating to forfeiture of proceeds and instrumentalities of 

crime, to the extent permitted by the law of Bermuda. 

And we’ve had experience, in this regard, with Bermuda. We’ve 

had two examples of successful requests for restraint and forfeiture 

of assets. Both instances were a success and we were able to obtain 

the funds. 

As a general matter, assistance is available under the laws of 

Bermuda, and I do think that’s important to stress, with regard to 

freezing, seizing, and restraining assets, including for matters relating to terrorism and terrorism financing. 

In particular, the attorney general of Bermuda can enforce all 

foreign confiscation and forfeiture orders. But it should be noted 

that forfeiture assistance is not limited to what is permitted under 

Bermuda’s domestic law. With regard to a U.S. order, Bermuda 

cannot forfeit a specific instrumentality of nondrug offenses, because that power doesn’t exist domestically. 

But again, that’s limited to instrumentalities in nondrug offense 

cases. Our experience with Bermuda has, in fact, focused oftentimes on drug offenses but does not go to the broader power to 

seize or confiscate assets as opposed to instrumentalities. 

Senator CARDIN. Thank you. 

Let me just ask the general question, and any one of you can respond to it. 

58 

In the Bermuda agreement, there’s a provision that is not unfamiliar to us, where Bermuda can deny cooperation in capital cases. 

We understand, I understand that, so I’m not being critical of that 

provision being included in there. 

I would like to get your view as to what impact that has on law 

enforcement here, on these treaties, when we have criminal offenses that have occurred that are subject to capital punishment in 

the United States. Are we hindered as a result of that or is there 

a way in which we are able to cooperate under this treaty, even in 

those cases? 

Mr. SWARTZ. Mr. Chairman, we believe and we hope we still 

would be able to cooperate. 

Bermuda indicated, and has advised the United States, that it 

reserves the right to deny assistance in capital cases where the 

sentence includes a possible death penalty, relying on the—contrary to the important public policy provision of Article 3 of the 

convention. 

While the United States does not agree with that interpretation 

of Article 3, nonetheless, we believe that we will be able to resolve 

in these matters—we hope we will be able to resolve these matters 

on a case-by-case basis, as we have done with regard to other jurisdictions. 

In fact, we have that experience with other countries that have 

put similar interpretations on the mutual legal assistance responsibilities, and we’ve been able to work out arrangements in a number of cases that allow us to obtain evidence or discuss whether the 

evidence is significant enough to go forward with some kind of further steps being taken. 

Senator CARDIN. Mr. Johnson. 

Mr. JOHNSON. Yes, Senator, if I could just add to that, one of the 

reasons this treaty took as long it did to negotiate and conclude is 

because it was important to us to make sure that there wasn’t an 

express restriction on assistance in capital cases in the treaty itself. 

So what we, ultimately, worked out with Bermuda was language 

in the treaty itself that was silent on the issue but enabled them, 

in appropriate cases, to rely on the language that Mr. Swartz related to you. And that way we think that helps maintain the principle that’s important to us, that such cooperation should be available, irrespective of the kind of case. 

And we think this has also borne out with some other countries, 

where even with similar concerns about cooperation in capital 

cases, they have, for example, been able to provide assistance to 

the nonpenalty phase of a trial or another party investigation. 

So it’s our hope that with Bermuda, as well, by having the treaty 

not include an express prohibition, that we will be able, on a caseby-case basis, to work out with them assistance in appropriate 

cases. 

Senator CARDIN. But they do hold the right under this treaty to 

deny cooperation where the United States criminal justice system 

is seeking capital punishment? 

Mr. JOHNSON. Senator, they hold the right under the treaty to 

not provide assistance in cases that are contrary to public policy or 

their essential interests, and they have told us that they interpret 

that to allow them, in death penalty cases, to exercise that. 

59 

But again, that doesn’t mean that it’s automatically precluded in 

all cases. 

Senator CARDIN. I understand that. I just wanted to make it 

clear that they would not be a violation of the treaty. We understand their interpretation, that if there was a case pending here 

that we needed their help, where, clearly, the prosecutors were 

seeking the death penalty, Bermuda could decide not to cooperate 

under this treaty. 

Mr. SWARTZ. If I could say, Mr. Chairman, importantly, the treaty would require, since this would be a denial under Article 3 of 

the treaty, that first there had to be consultations with the United 

States, before that denial could go forward. 

And I think that’s an important aspect of the negotiation that 

Mr. Johnson mentioned. Rather than having an explicit provision, 

this is one of a set of conditions under which assistance may be denied after consultation, and, among other things, that there must 

be consideration as to whether assistance can be given, subject to 

such conditions as the requested country deems necessary. 

And our experience in that regard has been that we oftentimes 

can find appropriate assurances to allow evidence to be produced, 

at least for initial assessment of the importance of evidence in the 

case overall. 

Senator CARDIN. So we do have some track records with other 

countries with similar provisions? 

Mr. SWARTZ. Yes, Mr. Chairman, we do. 

Senator CARDIN. It might be useful just for you to share that information with our committee, so that we know how, in practice, 

this operates. 

As I said, in introducing this line of questioning, I certainly understand why Bermuda insisted upon this type of provision. I 

think, though, it would be useful for us to understand the challenges that are placed in law enforcement because of the inconsistencies of the United States with the international community on 

penalties. And I think that would be helpful for us to have that information in this committee. 

Mr. SWARTZ. Thank you. We’d be glad to supply that. 

Senator CARDIN. Ms. McCarthy, you have the easiest job here, 

since this agreement was previously approved by this committee. 

As I said in my opening, we approved it too late in the 111th 

Congress for action. We approved it in mid-December, and, of 

course, Congress adjourned at the end of the month, sine die. Have 

there been any significant changes in our investment relationship 

with Rwanda since last November when you gave testimony on this 

treaty? 

Ms. MCCARTHY. Thank you, Mr. Chairman. 

What we have seen since last November is an increase in United 

States investment in Rwanda, and I can give you a few examples. 

We have a company called Contour-Global; it has announced that 

it’s going to invest $325 million in methane gas extraction, and 

they have invested over $125 million of that amount. Also, in February of this year, we have Hilton Hotels; it’s is going to open up 

a major hotel in Kigali. And, also, Marriott Hotels is going in to 

facilitate the country’s growing hospitality industry. 

60 

So I would say that, given this pattern of increased investment, 

that it is important that the protections be afforded for them. So 

we are seeing increased interest on behalf of U.S. investors. 

Senator CARDIN. I thank you for that. You also mentioned the 

fact that the United States is exploring other bilateral investment 

treaties in Africa. I believe you mentioned one other country. I 

think we have five current bilateral investment treaties in Africa. 

Can you just share with us other countries that the United States 

has shown interest in negotiating treaties? 

Ms. MCCARTHY. Certainly. We are, obviously, looking not only 

within Africa, but also beyond. I mean, we’re engaging in negotiations with a number of countries—China, Georgia, India, Mauritius, and Pakistan. And in recent years, within Africa, we’ve held 

exploratory discussions with Ghana, Gabon, and Nigeria. 

As you probably know, we have, currently, five BITs in force that 

have been there for a while. So the discussions are ongoing. 

Senator CARDIN. Thank you. 

I’ve been told by the staff that I should ask the question of 

whether the administration still supports the Senate ratification of 

the Rwanda treaty, since it was held over from the last Congress. 

So, for the record? 

Ms. MCCARTHY. We certainly do. 

Senator CARDIN. Thank you. 

I think that completes the questioning. We might have some additional questions for the record. As you know, the record remains 

open for 24 hours, so you get a break. That’s a pretty fast turnaround time for this committee. 

But I do appreciate your patience with the committee and thank 

you very much for your testimony today. 

The committee will stand adjourned. Thank you. 

[Whereupon, at 3:38 p.m., the hearing was adjourned.] 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

RESPONSE OF PRINCIPAL DEPUTY ASSISTANT SECRETARY DEBORAH A. MCCARTHY TO

QUESTIONS SUBMITTED BY SENATORS JOHN F. KERRY AND RICHARD G. LUGAR

Question. In connection with the committee’s consideration of the Rwanda BIT 

during the 111th Congress, the Department of State witness answered a series of 

questions concerning the treaty. (The hearing transcript and questions for the 

record are reproduced in Annex II of Senate Foreign Relations Committee Executive 

Report 111–3.) Please confirm that the answers provided by the Department’s witness remain accurate today, and provide updated responses as necessary. 

Answer. As set out below, we would like to provide updated information on reported U.S. investment activity in Rwanda. Other than these updates, the answers 

provided by the Department’s witness in the 111th Congress remain accurate. 

In 2009, the stock of U.S. foreign direct investment in Rwanda was $1 million (according to the Bureau of Economic Analysis). However, several U.S. investments in 

Rwanda have been announced or have progressed since 2009. An updated list of examples follows. 

• U.S. firm ContourGlobal announced in 2009 that it reached agreement with the 

Government of Rwanda to invest in methane gas extraction and power generation in Rwanda. The company has invested more than $125 million already, and 

the amount of total intended investment has increased to over $400 million. In 

May, the company announced that the Multilateral Investment Guarantee 

Agency issued an investment guarantee supporting this project. 

• In February of this year, Hilton Hotels announced plans to open a $30 million 

four-star hotel in Kigali, according to the Rwanda Development Board. Also this 

61 

year, Marriott Hotels announced that it would open a new five-star, $60 million 

hotel facility in the country. • In the finance sector, Urwego Opportunity Bank, a partnership of three American NGOs, has invested more than $3.5 million and improved access to financing for Rwandan consumers and businesses. • Rwanda Trading Company has invested more than $2.5 million to become one 

of the largest exporters of Rwandan coffee. • Sorwathe, a U.S. tea company that has invested in Rwanda since 1978, opened 

a new $2 million tea factory in the country in 2009. • Starbucks Coffee opened a ‘‘Farmer Support Center’’ in Kigali in 2009, the first 

such investment by the company in Africa. • MANA Foods has invested more than $1 million to renovate and expand facilities to produce therapeutic supplemental food in Rwanda, helping tens of thousands of children lacking proper nutrition. 

We understand from our Embassy in Kigali that a number of other U.S. firms are 

considering Rwanda as a potential investment destination, particularly in hydropower and other ‘‘green’’ energy projects, financial services, agriculture, and mining. 

RESPONSES OF DEPUTY ASSISTANT SECRETARY MANAL CORWIN TO QUESTIONS

SUBMITTED BY SENATOR JOHN F. KERRY

Question. Under the proposed protocol with Switzerland, are treaty countries required to exchange information in response to specific requests that are comparable 

to ‘‘John Doe’’ summonses under U.S. domestic law? 

Answer. The language in the proposed protocol with Switzerland regarding the exchange of tax information was intentionally drafted to be identical in substance to 

Article 26 of the Organization for Economic Cooperation and Development (OECD) 

Model Tax Convention on Income and on Capital (‘‘OECD Model Tax Convention’’), 

as well as the relevant text of the OECD Model Agreement on Exchange of Information for Tax Matters (‘‘OCED Model TIEA’’), which provide for exchange of information in a broad range of circumstances where it is foreseeably relevant to the administration or enforcement of either treaty partner’s tax laws. In the case of specific 

requests for information, Commentary to the OECD Model TIEA states that a request for information triggering the obligations to exchange information does not 

necessarily have to include the name of the accountholder under investigation. Similarly, by its terms, the proposed protocol with Switzerland contemplates that a 

name is not required with respect to every request. As part of our negotiations with 

Switzerland, we confirmed that Switzerland concurs that the language in the proposed protocol regarding exchange of information was drafted to reflect the OECD 

standards, and that therefore that language’s interpretation should be consistent 

with OECD standards for information exchange. 

Question. The Department’s Technical Explanation concerning paragraph 2 of 

Article 26 of the proposed protocol with Switzerland states that the United States 

and Switzerland will not request consent to use information obtained under the 

treaty for purposes beyond the purposes identified in paragraph 1 of Article 26 (i.e., 

for nontax purposes) except in circumstances where such use would be consistent 

with the Mutual Legal Assistance Agreement in force between the two countries. 

Please explain the rationale for this limitation on the scope of paragraph 2 of Article 

26. 

Answer. Article 26 of the current income tax treaty in force limits the use of information obtained under the treaty to specific purposes, i.e., assessment, collection or 

administration of, the enforcement or prosecution in respect of, or the determination 

of appeals in relations to, the taxes covered by the Convention.’’ Nevertheless, granting the ability for authorities to use information exchanged pursuant to a request 

under an income tax treaty for another purpose is appropriate policy as an efficiency 

matter where the information could have been obtained for that purpose under another agreement between the United States and the treaty partner and the competent authority of the requested state authorizes such use. For instance, if a requesting country that received information pursuant to a tax treaty request could 

have obtained the same information pursuant to a request under a Mutual Legal 

Assistance Treaty (MLAT) to be used for other, nontax, purposes and if the requested state has no objection to the use of that information for those other purposes, there is no reason for that country to have to make a redundant request. 

However, this policy is appropriate only to the extent that such other agreements 

separately exist and grant the legal authority to make a request for such information, as in the case of the MLAT with Switzerland. 

62 

Question. The diplomatic notes exchanged with Luxembourg require that the requesting country must pursue ‘‘all means available in its own territory to obtain the 

information, except those that would give rise to disproportionate difficulties’’ before 

resorting to treaty procedures. Does the Department have any concerns that Luxembourg may assert an overly narrow view of this requirement, with a view to frustrating the exchange of information under the treaty? 

Answer. We do not have such concerns. This language is consistent with the language of the international standard for tax information exchange established by the 

OECD Model TIEA. The Commentary to the OECD Model TIEA explains that the 

country requesting information should only contemplate such a request if it has ‘‘no 

convenient’’ means to obtain the information within its own jurisdiction, or it should 

explain that the available means to obtain the information within its own territory 

would pose disproportionate difficulties. Furthermore, the Commentary to the 

OECD Model TIEA makes clear that the OECD standard is intended to ensure that 

obtaining the information should be easier for the requested state than for the requesting state. Luxembourg and the United States intentionally drafted the treaty 

language in question to reflect the OECD model TIEA language. 

Question. Under the proposed protocol with Luxembourg, are treaty countries required to exchange information in response to specific requests that are comparable 

to ‘‘John Doe’’ summonses under U.S. domestic law? 

Answer. The language in the proposed protocol with Luxembourg regarding the 

exchange of tax information was intentionally drafted to be identical in substance 

to Article 26 of the OECD Model Tax Convention and the relevant text of the OECD 

Model TIEA, which provides for exchange of information in a broad range of circumstances where it is foreseeably relevant to the administration or enforcement of 

either treaty partner’s tax laws. In the case of specific requests for information, the 

Commentary to the OECD Model TIEA states that a request for information triggering the obligations to exchange information does not necessarily have to include 

the name of the accountholder under investigation. As part of our negotiations with 

Luxembourg, we confirmed that Luxembourg concurs that the language in the proposed protocol on information exchange was drafted to reflect the OECD standards 

and that therefore that language’s interpretation should be consistent with OECD 

standards for information exchange. 

Question. The proposed protocol with Luxembourg limits the informationexchange obligations to information that is foreseeably relevant for carrying out the 

provisions of the treaty or the domestic tax laws of the two treaty countries. 

• Is the requested treaty country permitted to evaluate the relevance of a request 

independently of the apparent conclusion by the treaty country that the information is relevant to carrying out its domestic tax laws? 

• If so, does the Department have any concerns that Luxembourg may assert an 

overly narrow view of this requirement, with a view to frustrating the exchange 

of information under the treaty? 

Answer. The Commentary to the OECD Model Tax Convention states that the 

standard of foreseeable relevance should be interpreted to provide for exchange of 

information to the widest possible extent. The terms of the agreement related to the 

protocol that would become an integral part of the Convention with Luxembourg, 

if ratified and in force, specifies what information must be provided to demonstrate 

the foreseeable relevance of the information to the request. For example, a requesting state has an obligation to provide an explanation of the tax purpose for which 

the information is sought. As long as the required information is provided, the requesting state does not otherwise need to prove that the information requested is, 

in fact, relevant. As part of our negotiations with Luxembourg, we confirmed that 

Luxembourg concurs that the language in the proposed protocol and related agreement regarding exchange of information was drafted to reflect the OECD standards, 

and that therefore that language’s interpretation should be consistent with OECD 

standards for information exchange. 

Question. Under the proposed treaty with Hungary, a company that is a resident 

of a treaty country is eligible for all the benefits of the treaty if it satisfies a regular 

trading test and either a management and control test or a primary trading test. 

Under the U.S. Model treaty, to satisfy the ‘‘primary trading’’ test, the required 

trading must 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. However, under the proposed treaty, the primary trading 

test is broader, also allowing benefits, in the case of a Hungarian company, on a 

recognized stock exchange in another European Union or European Free Trade 

63 

Association country, or in the case of a U.S. company, in another North American 

Free Trade Agreement country. 

• Why was the primary trading test set forth in the U.S. Model treaty not used 

in the proposed treaty with Hungary? 

• A similarly broad primary trading test was included in the recent tax protocols 

concluded with France and New Zealand. Given this, is a change to the U.S. 

Model tax treaty warranted? 

Answer. Although the U.S. Model Tax Convention serves as a starting place for 

negotiations, the terms of each individual treaty must be negotiated with the treaty 

partner. As a result, individual limitation on benefits and other provisions may vary 

from one treaty to another in order to take into account the specific circumstances 

of the treaty partner. 

The overall purpose of the limitation on benefits provisions set forth in the U.S. 

Model is to provide objective tests that will determine if a resident of one of the 

treaty partners has a sufficient economic nexus to its country of residence to warrant receiving treaty benefits. One of the objective tests provides benefits to companies that are primarily traded on a recognized stock exchange in their country of 

residence. However, in certain cases the U.S. Model rule may not provide the appropriate scope. For instance, if the stock exchanges in the treaty partner are limited, 

companies resident in that country may seek to trade their shares on larger, thirdcountry exchanges. This business decision should not necessarily result in a denial 

of treaty benefits. During the tax treaty negotiations, Hungary requested that certain third-country exchanges be included in the primary trading test in order to reflect that Hungarian companies may be traded more heavily on larger regional exchanges outside of Hungary. By restricting benefits to companies primarily trading 

on regional exchanges, the primary trading test in the proposed treaty with Hungary maintains strong protection against treaty-shopping, but reflects the fact that 

Hungary’s stock market is not a regional center. 

While the primary trading test in the proposed tax treaty with Hungary and a 

number of other tax treaties recently concluded by the United States deviate from 

the analogous rule in the U.S. Model, this does not mean that changes to the U.S. 

Model in this regard are warranted. The policy set forth in the U.S. Model should 

remain the starting point for tax treaty negotiations, and variations from the Model 

should be evaluated on a case-by-case basis. 

Question. 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 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 U.S. Model treaty, however, does not include derivative benefits 

rules. 

• Why were derivative benefits rules included in the proposed treaty? 

• Given that derivative benefits rules have also been included in other recent 

treaties concluded by the United States, is a change to the U.S. Model tax 

treaty warranted? 

Answer. Although a derivative benefits rule is not included in the U.S. Model limitation on benefits article, such rules are typically included in agreements with 

treaty partners that are part of a closely tied regional economic community, such 

as the European Union or NAFTA. In such circumstances, it is common for corporate residents of a third country within the same economic community to invest 

in the United States through a subsidiary within the treaty country with no treatyshopping motivation, or to form joint ventures that include participants from many 

countries within a trading area. However, because we frequently negotiate treaties 

with countries that are not part of such an economic community, it would not be 

appropriate to include such a provision in the U.S. Model. 

Question. The proposed treaty with Hungary includes so-called ‘‘triangular arrangements’’ antiabuse rules intended to deny treaty benefits in certain circumstances in which a 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 Hungary. A rule on triangular arrangements is 

not included in the U.S. Model treaty. 

• Why was a ‘‘triangular arrangements’’ rule included in the proposed treaty? 

• Given that similar provisions have also been included in other recent treaties 

concluded by the United States, is a change to the U.S. Model tax treaty 

warranted? 

64 

Answer. The so-called ‘‘triangular rule’’ is intended to prevent abuses of the tax 

treaty through structures that use a permanent establishment in a third country 

to avoid taxes in both treaty jurisdictions. Because the potential for such abuses is 

higher in tax treaties with countries that apply an exemption system, the Treasury 

Department historically sought to include triangular rules only when the treaty 

partner applied an exemption system, either under its treaties or in its domestic 

law. However, for the past several years the Treasury Department has sought to 

include a triangular rule as a general practice in all of its tax treaties. The Treasury 

Department plans to incorporate the triangular provision into the U.S. Model in the 

future. 

Question. The proposed treaty with Hungary includes 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. The U.S. Model treaty does not include these 

rules. 

• Why were headquarters company rules included in the proposed treaty? 

• Given that similar provisions have also been included in other recent treaties 

concluded by the United States, is a change to the U.S. Model tax treaty warranted? 

Answer. A headquarters company rule is only appropriate where a treaty partner 

can demonstrate that failing to include such a rule would inappropriately prevent 

a substantial number of companies that have sufficient nexus with the treaty partner from obtaining appropriate treaty benefits. Because we frequently negotiate 

treaties with countries that do not have a significant number of true headquarters 

companies, it would not be appropriate to include such a provision in the U.S. 

Model. 

In the case of Hungary, it is common in the European Union for groups of 

corporations spanning several countries to centralize management in a single headquarters company. Hungary was concerned that certain existing Hungarian headquarters companies would fail to qualify for benefits without such a rule. As a result, the proposed treaty with Hungary includes a provision designed to grant treaty 

benefits only to companies providing overall supervision and administration of a 

multinational group, and not engaging in tax avoidance activities. The headquarters 

company rule in the proposed treaty is identical to the rule we have agreed to in 

certain other treaties in the past. 

Question. Under the proposed treaty with Hungary, are treaty countries required 

to exchange information in response to specific requests that are comparable to 

‘‘John Doe’’ summonses under U.S. domestic law? 

Answer. Hungary has been a cooperative information exchange partner under the 

existing treaty relationship, and Treasury expects that this cooperative relationship 

will continue under the proposed treaty. The language in the proposed treaty with 

Hungary regarding the exchange of tax information was intentionally drafted to be 

identical in substance to Article 26 of the OECD Model Tax Convention, as well as 

the relevant text of the OECD Model TIEA, which provides for exchange of information in a broad range of circumstances where it is foreseeably relevant to the administration or enforcement of either treaty partner’s tax laws. In the case of specific 

requests for information, the Commentary to the OECD Model TIEA states that a 

request for information triggering the obligations to exchange information does not 

necessarily have to include the name of the accountholder under investigation. As 

part of our negotiations with Hungary, we confirmed that Hungary concurs that the 

language in the proposed treaty regarding exchange of information was drafted to 

reflect the OECD standards and that therefore, that language’s interpretation 

should be consistent with OECD standards for information exchange. 

Question. In recent years, there has been concern that multinational corporations 

are using tax treaties to avoid U.S. income taxes. It my understanding that the 

Treasury Department does not believe legislation which limits treaty benefits is necessary. Can you explain why the Department believes that legislation is not necessary and what actions the Department has taken to prevent tax treaties from 

being exploited in an effort to avoid U.S. income taxes? 

Answer. While the Treasury Department shares the concern that U.S. tax treaties 

must be adequately protected from treaty shopping abuses, it is our view that the 

issue should be addressed through bilateral negotiations, not a unilateral treaty 

override. Overriding treaties unilaterally would strain our existing tax treaty relationships and would jeopardize our ability to achieve U.S. objectives in future tax 

65 

treaty negotiation and to object to treaty overrides by other countries. Treasury has 

made significant progress addressing this issue through bilateral negotiations. The 

proposed tax treaty with Hungary 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, which was 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, the Treasury Department has recently concluded negotiation of a new income 

tax treaty with Poland, which the administration hopes to sign and transmit to the 

Senate for its advice and consent in the near future. Based on these experiences, 

we believe that addressing concerns about treaty shopping is best done through bilateral negotiations and amendment of our existing tax treaties. 

RESPONSES OF BRUCE SWARTZ TO QUESTIONS SUBMITTED

BY SENATOR BENJAMIN L. CARDIN

Question. In response to a question during your June 7, 2011, testimony concerning whether the United States would be hindered in its acquisition of evidence 

in capital punishment cases due to Bermuda’s position that it may deny assistance 

under the ‘‘essential interests’’ or ‘‘important public policy’’ provisions of article 3 of 

the Bermuda MLAT, you indicated that the United States has a track record of resolving such issues with other MLAT partner countries that take a similar position 

on capital punishment. Please describe that ‘‘track record’’ in more detail. 

Answer. Bermuda abolished the death penalty in December 1999 and, during 

negotiations over the Mutual Legal Assistance Treaty, sought the ability to deny 

assistance in all such cases. At the same time, the United States sought to ensure 

that the treaty preserved the ability of the United States to request and obtain assistance, on a case-by-case basis, even where the possible sentence for one of the 

offenses under investigation included the death penalty. Ultimately, no express 

restriction was included in the treaty, but Bermuda advised the United States that 

it intends to interpret article 3, paragraph 1a of the treaty to give Bermuda the 

right to deny assistance in cases involving capital punishment. Although the United 

States made clear in negotiations its view that assistance should be possible in such 

cases, the United States indicated to Bermuda that it understood Bermuda’s 

intention. 

The provision of the treaty that is in question is a standard clause found in most 

mutual legal assistance treaties and states the following: ‘‘The Central Authority of 

the Requested Party may deny assistance if . . . the Requested Party is of the opinion that the request, if granted, would impair its sovereignty, security, or other essential interests or would be contrary to important public policy.’’ 

Prior to denying assistance in a specific case upon these grounds, Bermuda first 

must consult with the United States, as required by article 3, paragraph 2, of the 

treaty. As a result of such consultations, the United States is hopeful that it still 

will be possible to obtain all necessary and relevant assistance from Bermudan 

authorities. 

The death penalty issue is not unique to Bermuda. A number of countries in 

Europe and other parts of the world have raised similar concerns about providing 

mutual legal assistance to the United States in cases potentially involving the death 

penalty. In fact, the issue specifically arose during the negotiation of the mutual 

legal assistance treaty with Australia. At the time of signing, Australia and the 

United States exchanged diplomatic notes setting forth the understanding of the 

parties that the term ‘‘essential interests’’ in article 3 of the Australia treaty would 

be interpreted to include certain limitations on assistance set forth in Australian domestic law, which includes a discretionary limitation on providing assistance in 

death penalty cases. See Treaty with Australia on Mutual Assistance in Criminal 

Matters (1997), S. Treaty Doc. 105–27, at p. VI. 

If a foreign authority raises a concern about the possibility of the death penalty 

when responding to a request for mutual legal assistance, the United States engages 

in consultations with the foreign authority in an attempt to resolve that concern and 

66 

obtain all necessary and relevant assistance in aid of the United States investigation. For example, foreign authorities may agree that it is premature to deny a request on death penalty grounds in the early stages of an investigation simply because the investigation’s initial scope potentially includes offenses carrying the 

death penalty. In addition, in some cases, as part of the consultation process, foreign 

authorities have been willing to provide the United States a ‘‘preview’’ of the requested evidence so that a determination can be made as to its true relevance and 

value to the United States investigation. If the evidence is determined to have little 

or no value to the United States investigation, the matter simply is closed. On the 

other hand, if the evidence is determined to have substantial value or the foreign 

authority will not provide a preview of the evidence to make this determination, the 

United States will discuss the possibility of accepting the evidence under negotiated 

conditions. In general, these conditions have included assurances (1) not to introduce the evidence in the actual penalty phase of a death penalty case; (2) to use 

the requested information only for investigatory purposes, with the understanding 

that it will not be introduced as evidence in any legal proceeding; or (3) not to impose the death penalty (or, if it is imposed, not to carry it out) in the particular 

case at issue. The third category of conditions has been undertaken very rarely and, 

to our knowledge, only in cases in which it was unlikely that the death penalty 

would have been sought in any event. In a small number of cases, it has not been 

possible to negotiate conditions acceptable both to the United States and to the foreign authority, with the result that the United States was unable to obtain the requested assistance. However, in most cases the United States has been successful 

in resolving any concerns about the death penalty and obtaining the requested assistance in the manner described above. Based upon this track record, the United 

States is hopeful that it will be possible to request and obtain assistance under the 

mutual legal assistance treaty with Bermuda on a case-by-case basis, even where 

the possible sentence for one of the offenses under investigation includes the death 

penalty. 

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