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1 All references to the treaty between the United States and France are to the Convention Between the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,

signed at Paris on August 31, 1994.

109TH CONGRESS EXEC. REPT.

2d Session " ! SENATE 109–9

PROTOCOL AMENDING THE INCOME TAX CONVENTION

WITH FRANCE (TREATY DOC. 109–4)

MARCH 27, 2006.—Ordered to be printed

Mr. LUGAR, from the Committee on Foreign Relations,

submitted the following

REPORT

[To accompany Treaty Doc. 109–4]

The Committee on Foreign Relations, to which was referred the

Protocol Amending the Convention Between the United States of

America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with

Respect to Taxes on Income, signed at Washington on December 8,

2004, having considered the same, reports favorably thereon and

recommends that the Senate give its advice and consent to ratification thereof, as set forth in this report and the accompanying resolution of ratification.

CONTENTS

Page

I. Purpose ........................................................................................................... 1

II. Background .................................................................................................... 2

III. Summary ........................................................................................................ 2

IV. Entry Into Force ............................................................................................ 3

V. Committee Action .......................................................................................... 3

VI. Committee Comments ................................................................................... 3

VII. Budget Impact ................................................................................................ 6

VIII. Explanation of Proposed Protocol ................................................................. 7

IX. Text of Resolution of Advice and Consent to Ratification .......................... 7

I. PURPOSE

The principal purposes of the existing income tax treaty between

the United States and France1 and the proposed protocol amending

the treaty are to reduce or eliminate double taxation of income

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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 existing treaty and proposed protocol also are intended to continue to promote close economic cooperation between

the two countries and to eliminate possible barriers to trade and

investment caused by overlapping taxing jurisdictions of the two

countries.

II. BACKGROUND

The proposed protocol was signed at Washington on December 8,

2004. The proposed protocol would amend the U.S.-France income

tax treaty, which was signed at Paris on August 31, 1994.

The proposed protocol was transmitted to the Senate for advice

and consent to its ratification on September 28, 2005 (see Treaty

Doc. 109-4). The Committee on Foreign Relations held a public

hearing on the proposed protocol on February 2, 2006.

III. SUMMARY

The proposed protocol amends six articles of the existing treaty.

The treaty is broadly similar to other U.S. income tax treaties, the

1996 U.S. model income tax treaty (the ‘‘U.S. model’’), and the 1992

model income tax treaty of the Organization for Economic Cooperation and Development, as updated (the ‘‘OECD model’’), with some

substantive deviations from these treaties and models.

The proposed protocol would revise Article 4 (Resident) of the

current treaty to clarify the meaning of ‘‘resident’’ in certain cases

and address the treatment of cross-border investments made

through partnerships and other similar forms of entity.

The proposed protocol would amend Article 10 (Dividends) of the

existing treaty by expanding the class of shareholders eligible for

the treaty’s 15-percent rate of U.S. withholding tax on dividends

from real estate investment trusts (‘‘REITs’’). The provisions of the

proposed protocol in this regard are similar to those included in

other recent U.S. income tax treaties and protocols.

The proposed protocol replaces Article 18 (Pensions) of the current treaty, and provides rules for the taxation of pensions and social security benefits. The proposed protocol also makes changes to

Article 19 (Public Remuneration) of the current treaty in coordination with the changes made to Article 18 (Pensions). Under the proposed protocol, the taxation of pensions paid by a treaty country (or

political subdivision or local authority) for services rendered to

such country (or political subdivision or local authority) is governed

by the provisions of Article 18, regardless of whether the services

are rendered in connection with a governmental function or a business carried on by such country. In addition, the proposed protocol

would make technical conforming changes to Article 24 (Relief

From Double Taxation) of the existing treaty, to reflect the changes

that would be made by the proposed protocol to Article 18 (Pensions) and Article 19 (Public Remuneration) of the treaty, as described above.

The proposed protocol expands the ‘‘saving clause’’ provision in

Article 29 (Miscellaneous Provisions) of the existing treaty to allow

the United States to tax former long-term residents whose termiVerDate 11-MAY-2000 10:16 Mar 28, 2006 Jkt 025358 PO 00000 Frm 00002 Fmt 6659 Sfmt 6602 FRANC2.TXT SFRELA2 PsN: SFRELA2
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2The transcript of this hearing (‘‘Tax Treaties,’’ February 2, 2006, S. Hrg. 109–308) has been

printed and is available at http://www.gpoaccess.gov/congress/senate/foreignrelations/index.html.

nation of residency has as one of its principal purposes the avoidance of tax. This provision allows the United States to apply

amendments made in 1996 to the special tax rules under section

877 of the Internal Revenue Code.

IV. ENTRY INTO FORCE

The proposed protocol will enter into force upon the exchange of

instruments of ratification. The effective dates of the protocol’s provisions, however, vary.

The proposed protocol will have effect with respect to taxes withheld at source for amounts paid or credited on or after the first day

of the second month next following the date on which the proposed

protocol enters into force. With respect to other taxes, the proposed

protocol will have effect for taxable periods beginning on or after

the first of January in the year following the date on which the

proposed protocol enters into force.

Additionally, a special effective date would apply with respect to

the provisions of Article I (Resident) of the proposed protocol dealing with fiscally transparent entities, making these provisions generally retroactive to the effective date of the existing treaty. Under

this special rule, these provisions, except to the extent that they

treat a fonds commun de placement as a partnership for purposes

of U.S. tax benefits under the treaty, would have effect with respect to taxes withheld at source for amounts paid or credited on

or after February 1, 1996. For other taxes, these provisions would

have effect for taxable years beginning on or after January 1, 1996.

V. COMMITTEE ACTION

The Committee on Foreign Relations held a public hearing on the

proposed protocol with France (Treaty Doc. 109–4) on February 2,

2006. The hearing was chaired by Senator Lugar.2 The committee

considered the proposed protocol at its business meeting on March

14, 2006, and ordered the proposed protocol with France favorably

reported by voice vote, with a quorum present and without objection.

VI. COMMITTEE COMMENTS

On balance, the Committee on Foreign Relations believes that

the proposed protocol with France is in the interest of the United

States and urges that the Senate act promptly to give advice and

consent to ratification. The committee has taken note of certain

issues raised by the proposed protocol and believes that the following comments may be useful to Treasury Department officials

in providing guidance on these matters should they arise in the

course of future treaty negotiations.

A. EXPATRIATION TO AVOID TAX BY FORMER U.S. CITIZENS

AND LONG-TERM RESIDENTS

There is a potential conflict between the special expatriation tax

regime of U.S. internal law and the proposed treaty. Under U.S.

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law, former U.S. citizens or long-term residents who relinquish

U.S. citizenship or terminate U.S. residency may be subject to a

special set of income, estate, and gift tax rules for the 10-year period following such loss of status. These rules mainly have the effect of expanding the scope of income and wealth transfers that are

subject to taxation by the United States, such that the individual

is subject to U.S. tax on a somewhat broader basis than other nonresident aliens, but still on a narrower basis than a current U.S.

citizen or resident.

The saving clause of the proposed protocol applies to former U.S.

citizens and long-term residents whose loss of citizenship or termination of residency status had as one of its principal purposes the

avoidance of U.S. tax. The saving clause states that the determination is made according to the laws of the country of which the person was a citizen or long-term resident.

Under U.S. law, the subjective ‘‘principal purposes of tax avoidance’’ formulation in determining whether the special tax regime

may apply to individuals who expatriate was made obsolete by the

American Jobs Creation Act of 2004 (AJCA) (Section 804 of P.L.

108–357). AJCA replaced the subjective determinations of taxavoidance purpose with objective rules for determining the applicability of the special tax regime.

Prior to AJCA, for purposes of determining the applicability of

the regime, an individual who relinquished citizenship or terminated residency was generally treated as having done so with a

principal purpose of tax avoidance if the individual’s average Federal income tax liability or net worth exceeded certain monetary

thresholds. However, the law allowed for subjective determinations

of tax-avoidance purpose based on the relevant facts and circumstances. Certain categories of individuals, including a very limited class of dual residents or citizens, could avoid being deemed

to have a tax avoidance purpose for relinquishing citizenship or terminating residency by submitting a ruling request to the IRS for

a determination as to whether the relinquishment of citizenship or

termination of residency had as one of its principal purposes the

avoidance of U.S. income, estate or gift taxes.

AJCA eliminated these subjective determinations of tax-avoidance purpose and replaced them with objective rules. Under the regime as amended by AJCA, a former citizen or former long-term

resident is subject to the special income, estate, and gift tax rules

for expatriates unless the individual: (1) establishes that his or her

average annual net income tax liability for the five preceding years

does not exceed $124,000 (adjusted for inflation after 2004) and his

or her net worth is less than $2 million, or alternatively satisfies

limited, objective exceptions for dual citizens and minors who have

had no substantial contact with the United States; and (2) certifies

under penalties of perjury that he or she has complied with all

Federal tax obligations for the preceding five years and provides

such evidence of compliance as the Treasury Secretary may require. Thus, as a result of AJCA, the application of the expatriation

tax regime no longer turns on determinations of whether a person

had a principal purpose of tax avoidance, as it often did prior to

AJCA.

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The Treasury Department’s Technical Explanation notes that

under the proposed protocol, the determination of whether there

was a principal purpose of tax avoidance with respect to former

citizens or long-term residents of the United States is made under

the laws of the United States. The Technical Explanation further

states that the new objective tests ‘‘represent the administrative

means by which the United States determines whether a taxpayer

has a tax avoidance purpose.’’ Thus, although the proposed protocol

employs the now-obsolete concept of a tax-avoidance purpose, the

Technical Explanation maintains that this language should be understood as fully preserving U.S. taxing jurisdiction under the expatriation tax rules in their current form.

Committee Conclusions

The committee is concerned that the proposed protocol contains

outdated language with respect to determination of whether individuals who relinquished U.S. citizenship or terminated U.S. residency did so with a ‘‘principal purpose of tax avoidance.’’ The committee believes that bilateral tax treaties should reflect current

U.S. domestic tax law.

The committee recognizes that the proposed protocol was largely

completed before AJCA was enacted, and therefore that incorporation of the AJCA’s objective tests into the protocol would have required significant renegotiation. Further, the committee understands that, as noted in the Technical Explanation, since the ‘‘principal purpose of tax avoidance’’ determination is made under U.S.

law, such determination will be made according to the objective criteria contained in the AJCA.

Under these circumstances, the committee is satisfied that,

under the proposed protocol, the ‘‘principal purpose of tax avoidance’’ determination in the saving clause will be made by applying

the objective criteria enacted in the AJCA. However, the committee

expects that future treaties and protocols will remove the ‘‘principal

purpose of tax avoidance’’ language, and simply provide that former

citizens or long-term residents of the United States will be taxed

in accordance with the laws of the United States.

B. U.S. MODEL INCOME TAX TREATY

It has been longstanding practice for the Treasury Department

to maintain, and update as necessary, a model income tax treaty

that reflects the current policies of the United States pertaining to

income tax treaties. The U.S. policies on income tax treaties are

contained in the U.S. model. Some of the purposes of the U.S.

model are explained by the Treasury Department in its Technical

Explanation of the U.S. model:

[T]he Model is not intended to represent an ideal United

States income tax treaty. Rather, a principal function of

the Model is to facilitate negotiations by helping the negotiators identify differences between income tax policies in

the two countries. In this regard, the Model can be especially valuable with respect to the many countries that are

conversant with the OECD Model. . . . Another purpose of

the Model and the Technical Explanation is to provide a

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3Treasury Department, Technical Explanation of the United States Model Income Tax Convention, at 3 (September 20, 1996). 4Testimony of Patricia Brown, Deputy International Tax Counsel, United States Department

of the Treasury, before the Senate Committee on Foreign Relations on Pending Income Tax

Agreements, February 2, 2006.

basic explanation of U.S. treaty policy for all interested

parties, regardless of whether they are prospective treaty

partners.3

U.S. model tax treaties provide a framework for U.S. treaty policy. These models provide helpful information to taxpayers, the

Congress, and foreign governments as to U.S. policies on often complicated treaty matters. For purposes of clarity and transparency in

this area, the U.S. model tax treaties should reflect the most current positions on U.S. treaty policy. Periodically updating the U.S.

model tax treaties to reflect changes, revisions, developments, and

the viewpoints of Congress with regard to U.S. treaty policy would

ensure that the model treaties remain meaningful and relevant.

With assistance from the staff of the Joint Committee on Taxation, the Senate Committee on Foreign Relations reviews tax treaties negotiated and signed by the Treasury Department before advice and consent to ratification by the full Senate is considered.

The U.S. model is important as part of this review process because

it helps the Senate determine the administration’s most recent

treaty policy and understand the reasons for diverging from the

U.S. model in a particular tax treaty. To the extent that a particular tax treaty adheres to the U.S. model, transparency of the

policies encompassed in the tax treaty is increased and the risk of

technical flaws and unintended consequences resulting from the

tax treaty is reduced.

Committee Conclusions

The committee recognizes that tax treaties often diverge from the

U.S. model due to, among other things, the unique characteristics

of the legal and tax systems of treaty partners, the outcome of negotiations with treaty partners, and recent developments in U.S.

treaty policy. However, even without taking into account the central features of tax treaties that predictably diverge from the U.S.

model (e.g., withholding rates, limitation on benefits, exchange of

information), the technical provisions of recent U.S. tax treaties

have increasingly diverged from the U.S. model. The important

purposes served by the U.S. model tax treaty are undermined if

that model does not accurately reflect current U.S. positions. The

committee notes with approval the intention of the Treasury Department to update the U.S. model treaty 4 and strongly encourages the Treasury Department to complete the update soon. In the

process of revising the U.S. model, the committee expects the

Treasury Department to consult with the committee generally, and

specifically regarding the potential implications for U.S. trade and

revenue of the policies and provisions reflected in the new model.

VII. BUDGET IMPACT

The committee has been informed by the staff of the Joint Committee on Taxation that it has assessed the likely impact of the

proposed protocol to the income tax treaty between the United

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States and France. The Joint Committee staff estimates that the

proposed protocol will cause a negligible change in Federal budget

receipts during the fiscal year 2006–2015 period.

VIII. EXPLANATION OF PROPOSED PROTOCOL

A detailed, article-by-article explanation of the proposed protocol

between the United States and France can be found in the pamphlet of the Joint Committee on Taxation entitled Explanation of

Proposed Protocol to the Income Tax Treaty Between the United

States and France (JCX–2–06), January 26, 2006.

IX. TEXT OF RESOLUTION OF ADVICE AND CONSENT TO RATIFICATION

Resolved (two-thirds of the Senators present concurring therein),

That the Senate advise and consent to the ratification of the Protocol Amending the Convention Between the United States of

America and France for the Avoidance of Double Taxation and the

Prevention of Fiscal Evasion with Respect to Taxes on Income of

August 31, 1994, signed at Washington on December 8, 2004 (Treaty Doc. 109–4).

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