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[Senate Hearing 109-308]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 109-308
 
                              TAX TREATIES

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 2, 2006

                               __________

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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page
Barthold, Thomas A., Acting Chief of Staff, Joint Committee on 
  Taxation, Washington, DC.......................................    15
    Prepared statement...........................................    20

Brown, Patricia, Deputy International Tax Counsel, Office of the 
  International Tax Counsel, Department of the Treasury, 
  Washington, DC.................................................     3
    Prepared statement...........................................     6

Lugar, Hon. Richard G., Chairman, U.S. Senator from Indiana......     1

Reinsch, Hon. William A., President, National Foreign Trade 
  Council, Washington, DC........................................    24
    Prepared statement...........................................    27

                                 (iii)

  

                              TAX TREATIES

                              ----------                              

                       Thursday, February 2, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m. in Room 
SD-419, Dirksen Senate Office Building, Hon. Richard G. Lugar, 
chairman of the committee, presiding.
    Present: Senator Lugar.

          OPENING STATEMENT OF HON. RICHARD G. LUGAR,
                   U.S. SENATOR FROM INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    It's a pleasure to welcome our witnesses and our 
distinguished guests to the Foreign Relations Committee hearing 
on a tax treaty with Bangladesh, protocols amending the 
existing tax treaties with France, and a protocol amending the 
existing tax treaty with Sweden.
    As chairman of the Senate Foreign Relations Committee, I'm 
committed to moving tax treaties as expeditiously as possible. 
I would point out, during the last Congress, the Committee and 
the full Senate approved tax agreements with Mexico, Australia, 
the United Kingdom, Japan, Sri Lanka, the Netherlands, and 
Barbados. I encourage the administration to continue its 
successful pursuit of treaties that strengthen the American 
economy by helping our businesses access foreign markets and by 
providing incentives for foreign companies to create more jobs 
in the United States.
    The agreements before us today will bolster the economic 
relationships between the United States and countries that are 
already close trade and investment partners. As the United 
States considers how to create jobs and to maintain economic 
growth, it's important that we try to eliminate impediments 
that prevent our companies from fully accessing international 
markets. These impediments may come in the form of regulatory 
barriers, taxes, tariffs, and unfair treatment. In the case of 
taxes, we should work to ensure that companies pay their fair 
share without being unfairly taxed twice on the same revenue. 
Tax treaties are intended to prevent double taxation so that 
companies are not inhibited from doing business overseas. As 
the United States moves to keep the economy growing and to 
increase United States employment, international tax policies 
that promote foreign direct investment in the United States are 
critically important.
    Our first agreement is a new tax treaty with Bangladesh, 
which was signed on September 26th, 2004. The investment 
banking firm Goldman Sachs recently cited Bangladesh in its 
list of developing countries that have the greatest potential 
to achieve long-term economic success. The United States is 
currently the largest source of foreign investment in 
Bangladesh, with $1.4 billion in fixed direct investment. 
American companies export about $290 million of products to 
Bangladesh each year.
    Our next agreements are protocols with France. One protocol 
amends provisions of the existing income-tax treaty signed in 
1994. The other protocol amends provisions of the existing 
estate-tax treaty signed in 1978. The United States is France's 
largest trading partner outside the European Union. France is 
one of our longest standing tax-treaty partners. We have had 
such treaties in place with the French for more than 65 years. 
The protocols before us contain provisions regarding treatment 
of pensions, application of estate taxes, marital-tax 
exclusions and deductions. These tax provisions are important 
to the numerous American nationals living and working in 
France, as well as French nationals living and working here. A 
key provision in the income-tax protocol clarifies taxation of 
partnerships.
    Our final agreement is a protocol amending the existing 
treaty with Sweden. The original treaty was signed in 1994, and 
this protocol was finalized last September. The total amount of 
Swedish investment in the United States has quadrupled over the 
last decade, to $28.5 billion at the end of 2004. This is about 
15 percent of Sweden's direct investments abroad. With $34 
billion invested in Sweden, the United States is the largest 
source of foreign direct investment in that country. The most 
important aspect of the protocol before us deals with the 
taxation of cross-border dividend payments. This protocol is 
one of a few recent U.S. tax agreements to provide an 
elimination of withholding tax on dividends arising from 
certain direct investments. It will reduce tax-related barriers 
to trade and investment flows between the United States and 
Sweden, promoting even stronger economic ties between our 
nations.
    We are joined today by a distinguished panel of witnesses 
who will help us evaluate the treaties and protocols before us. 
From the Treasury Department, we welcome Ms. Patricia Brown, 
the Deputy International Tax Counsel and the lead negotiator of 
the treaties. We also welcome Mr. Tom Barthold, Acting Chief of 
Staff of the Joint Committee on Taxation. Finally, we welcome 
Mr. Bill Reinsch, the President of the National Foreign Trade 
Council. The committee looks forward to the insights and 
analysis of our expert witnesses.
    I will ask you to testify in the order that I introduced 
you--namely, Ms. Brown, then Mr. Barthold and Mr. Reinsch.
    Let me say, at the outset, that your prepared statements 
will be placed in the record in full, so you need not ask for 
permission that that happen; it will occur.
    You may proceed in any way that you wish, by reading the 
full statement, or by summarizing. We are not in a hurry. We've 
come to hear you today and to gain your insights. And then I 
will raise questions, and if other members of the committee 
join me, they may have questions, likewise, in due course.
    It's a pleasure to have you before us. And would you please 
proceed, Ms. Brown?

STATEMENT OF PATRICIA BROWN, DEPUTY INTERNATIONAL TAX COUNSEL, 
  OFFICE OF THE INTERNATIONAL TAX COUNSEL, DEPARTMENT OF THE 
                   TREASURY, WASHINGTON, D.C.

    Ms. Brown. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear here today to recommend, on behalf of the 
administration, favorable action on the four tax agreements 
that you have described and that are pending before the 
committee.
    We appreciate the committee's interest in these agreements, 
as demonstrated by the scheduling of this hearing and of the 
other hearings that you mentioned over the past few years.
    In 2004, Mr. Chairman, you wrote that ``Tax treaties are 
part of the basic infrastructure of the global marketplace.'' 
It is hard to imagine how that marketplace would operate 
without the international network of 2,000 bilateral tax 
treaties. They have established a stable framework for 
international trade and investment to flourish. The success of 
this framework is evidenced by the fact that countless cross-
border transactions take place every year, with only a 
relatively few disputes regarding the allocation of tax 
revenues between governments. Many of these transactions 
involve individuals who benefit particularly from the rules 
regarding income from employment, the tax treatment of cross-
border pension contributions and distributions, and, of course, 
estate-tax treaties.
    Just like our physical infrastructure, our tax-treaty 
network requires constant attention. Countries introduce new 
preferential taxing regimes or tighter anti-abuse rules. They 
may introduce bank secrecy, or abolish it, or they may enter 
into an agreement with another country that is more 
advantageous than the agreement they have with the United 
States. Any of these situations may create an opportunity or a 
risk that needs to be addressed by a new or revised agreement.
    To take advantage of these opportunities, we must be 
creative, flexible, and efficient. More and more, we are 
concluding short protocols in order to update an agreement 
without calling into question every one of its provisions. Of 
course, this committee's willingness to consider these 
agreements quickly has been crucial. It can change the entire 
tone and pace of a treaty negotiation when the other side 
discovers that an advantageous change can be approved and 
implemented within the course of a year, or if they realize 
that some other country will do it if they don't.
    Three of the four agreements that are before you today are 
updates of this sort. The fourth, the full treaty with 
Bangladesh, is an updated version of a 1980 treaty that was 
approved by the Senate but never entered into force. The 
administration believes that these agreements with Bangladesh, 
France, and Sweden will serve to further the goals of our tax-
treaty network, and we urge the committee and the Senate to 
take prompt and favorable action on all of these agreements.
    In establishing our negotiating priorities, our primary 
objective is the conclusion of tax treaties or protocols that 
will provide the greatest economic benefit to the United States 
and to U.S. taxpayers. We communicate regularly with the U.S. 
business community, seeking input regarding the areas in which 
treaty network expansion and improvement efforts should be 
focused and information regarding practical problems 
encountered by U.S. business.
    Our treaty network of 57 bilateral income-tax treaties 
covers the vast majority of U.S. foreign trade and investment. 
Because the coverage of our treaty network is already quite 
comprehensive, it frequently will make more sense, as an 
economic matter, for the United States to negotiate an update 
to an existing agreement rather than to negotiate a full treaty 
with a new treaty partner. Such a full agreement will require 
the potential treaty partner to grapple with many of the 
complexities of U.S. domestic and international tax rules and 
how it interacts with its own domestic law and policies. In 
some situations, the right result may be no tax treaty at all, 
or may be a substantially curtailed form of tax agreement. With 
some countries, a tax treaty may not be appropriate, because of 
the possibility of abuse. With other countries, there simply 
may not be the type of cross-border tax issues that are best 
resolved by treaty.
    In all cases, the treaty that we present to the Senate 
represent not only the best deal that we believe we can achieve 
with the particular country, but also constitute an agreement 
that we believe is in the best interest of the United States.
    In that context, I would like to provide a short update on 
the Treasury Department's position with respect to withholding 
taxes on intercompany dividends.
    In earlier testimony before this committee, Treasury 
Department representatives have discussed the decision, first 
made in connection with the negotiation of the U.K. treaty in 
2001, to eliminate this withholding tax. The position of the 
Treasury Department has been, and continues to be, that the 
decision is made independently with respect to every treaty 
negotiation. We agree to the provision only if the agreement 
includes limitation on benefits and information-exchange 
provisions that meet the highest standards, and if the overall 
balance of the agreement is appropriate.
    Since we first adopted this new policy, a number of treaty 
relationships have changed for the better. Suddenly there was 
some leverage to achieve goals that had seemed out of reach. 
Thus, even though the policy is only 5 years old, we have been 
able, in one or more treaties, to strengthen our position on 
treaty shopping, to improve information exchange provisions, to 
reduce withholding taxes on interest on royalties, and to 
eliminate withholding taxes and dividends paid to pension 
funds. The reductions we have achieved in our own treaties are 
influencing the negotiation of agreements between other 
countries. In fact, just this morning a new U.K./Japan tax 
treaty was signed in London that adopts many of the provisions 
that were in the U.S./Japan treaty that was approved by this 
committee a few years ago. We believe that these significant 
achievements demonstrate that the current policy is having very 
positive effects on U.S. businesses and their subsidiaries, and 
will continue to do so in the foreseeable future.
    I now would like to discuss the four agreements that are 
pending before the Senate. We have submitted technical 
explanations of each agreement that contain detailed 
discussions of the provisions of each treaty and protocol.
    The proposed protocol with Sweden amends the income-tax 
treaty that was signed in 1994. As you said, the most 
significant provision is the elimination of the source-country 
withholding tax on most intercompany dividends and on dividends 
paid to pension funds. The provision dealing with intercompany 
dividends was very important to Sweden, because it had 
unilaterally eliminated its withholding tax on such dividends 
in the 1990s, after the United States insisted that it could 
not do so bilaterally. If we had failed to provide a reciprocal 
benefit for Swedish companies now that U.S. treaty policy has 
changed, it would have jeopardized the current exemption from 
Swedish withholding taxes that benefits U.S. companies now.
    We also took this opportunity to add anti-inversion 
provisions to the limitation on benefits provisions of the 
treaty. Including the provision in a mainstream agreement such 
as this establishes a precedent that will be very useful in 
other treaty negotiations, and, in fact, has already helped us 
to secure similar provisions in protocols we're negotiating 
today.
    The protocol also provides an effective grandfathering rule 
for Swedish employees of the U.S. Embassy in Stockholm and 
Consulate in Gothenburg who were inadvertently disadvantaged by 
changes made in the 1994 treaty.
    The proposed income-tax protocol with France amends the 
1994 income-tax treaty. The primary impetus for the negotiation 
of this protocol was to deal with the treatment of investments 
through partnerships located in the United States, France, or 
third countries. The United States and France have very 
different provisions dealing with partnerships. And so, the 
result of this protocol is to allow France to tax its own 
partnerships, but to give benefits to U.S. investors who invest 
through partnerships in the U.S. or third countries.
    It also modifies the provisions of the treaty dealing with 
pensions and pension contributions in order to reflect the fact 
that we have very different systems in the two countries and to 
achieve parity, given those two fundamentally different pension 
systems. The French pension system relies almost entirely on 
the state social security system. Since the 1994 treaty 
provided disparate treatment for private pensions and social 
security distributions, there were significant differences in 
taxing rights between the two countries.
    The proposed protocol provides for taxation in the country 
of source with respect to both, and also provides for 
consistent treatment for cross-border contributions to French 
social security and U.S. private pension plans.
    The proposed estate-tax protocol amends the estate- and 
gift-tax treaty between the United States and France to take 
into account the changes that were made in U.S. domestic 
estate-tax rules in 1988. France, along with several other 
countries, objected to this change. Although we did not agree 
that the 1988 change was discriminatory, we did agree to enter 
into protocols with certain treaty partners to provide some 
limited relief with respect to non-citizen spouses of U.S. 
citizens. The United States' willingness to enter into the 
proposed protocol was a significant factor in France's 
ratification of the current U.S./France income-tax treaty, 
which was signed in 1994.
    The proposed treaty with Bangladesh would be the first 
agreement between the United States and Bangladesh. The 
proposed treaty is consistent with other U.S. treaties with 
developing countries. The maximum rates of source-country 
withholding taxes on investment income are generally equal to, 
or lower than, the maximum rates provided in other U.S. 
treaties with developing countries.
    The rules regarding taxation of business profits are 
generally consistent with the provisions of the U.S. model, as 
modified in our treaties with other developing countries. In 
particular, we were able to get Bangladesh to agree to U.S. 
model rules with respect to the treatment of income from 
shipping and aircraft and containers. And this was an issue 
that was raised by the Senate in connection with the earlier 
treaty that was not approved.
    Turning now to the future, we continue to maintain a very 
active calendar of tax-treaty negotiations. We are in ongoing 
negotiations with Canada, Chile, Germany, Hungary, Iceland, 
Korea, and Norway. We also have substantially completed work on 
agreements with Denmark and Finland, and look forward to their 
conclusion. In addition, we are beginning negotiations with 
Bulgaria.
    We, of course, will continue work on updating the few 
remaining U.S. treaties that provide opportunities for treaty 
shopping. We have also had informal exploratory discussions 
with several countries in Asia, and we hope these will lead to 
productive negotiations in the near future.
    With respect to the U.S. model, we expect to forward a 
draft text to the staffs of the Senate Foreign Relations 
Committee and Joint Committee on Taxation within the next 
month. We look forward to working with them on this project.
    Let me conclude by again thanking the committee for its 
continuing interest in the treaty program, and the members and 
the staff for devoting time and attention to the review of 
these new agreements. We greatly appreciate the assistance and 
cooperation of the staffs of this committee and of the joint 
committee in the tax-treaty process. We urge the committee to 
take prompt and favorable action on the agreements before you 
today.
    I will, of course, be happy to answer any questions.

    [The prepared statement of Ms. Brown follows:]

                Prepared Statement of Patricia A. Brown

    Mr. Chairman and distinguished Members of the Committee, I 
appreciate the opportunity to appear today at this hearing to 
recommend, on behalf of the Administration, favorable action on four 
tax agreements that are pending before this Committee. We appreciate 
the Committee's interest in these agreements and in the U.S. tax treaty 
network, as demonstrated by the scheduling of this hearing.
    As you expressed so well, Mr. Chairman, tax treaties are ``part of 
the basic infrastructure of the global marketplace''. The international 
network of over 2000 bilateral tax treaties has established a stable 
framework that allows international trade and investment to flourish. 
The success of this framework is evidenced by the fact that countless 
cross-border transactions, from investments in a few shares of a 
foreign company by an individual to multi-billion dollar purchases of 
operating companies in a foreign country, take place each year, with 
only a relatively few disputes regarding the allocation of tax revenues 
between governments. Individuals, too, benefit from the rules regarding 
allocation of investment income, but also from the rules regarding 
income from employment, the tax treatment of cross-border pension 
contributions and distributions, and, of course, the estate tax rules.
    Just like our physical infrastructure, our tax treaty network 
requires constant attention. Countries introduce new preferential 
taxing regimes, or tighter anti-abuse rules; they may introduce bank 
secrecy or abolish it; or they may enter into an agreement with another 
country that is more advantageous than the agreement they have with the 
United States. Any of these situations may create an opportunity or a 
risk that needs to be addressed by a new or revised agreement. We must 
be creative and flexible in how we approach issues to find solutions to 
particular problems that are consistent with our overall goals. We are 
also becoming more efficient, concluding short protocols in order to 
update an agreement without calling into question every one of its 
provisions. Of course, this committee's willingness to consider these 
agreements quickly has been a tremendous help in this regard. It can 
change the entire tone (and pace) of a treaty negotiation when the 
other side discovers that an advantageous change can be approved and 
implemented within the space of a year.
    Three of the four agreements that are before you now are updates to 
relatively recent agreements. The fourth, the full treaty with 
Bangladesh, is an updated version of a 1980 treaty that never entered 
into force because of Senate concerns about several provisions. The 
Administration believes that these agreements with Bangladesh, France 
and Sweden will serve to further the goals of our tax treaty network. 
We urge the committee and the Senate to take prompt and favorable 
action on all of these agreements.

                 PURPOSES AND BENEFITS OF TAX TREATIES

    Tax treaties provide benefits to both taxpayers and governments by 
setting out clear ground rules that will govern tax matters relating to 
trade and investment between the two countries. A tax treaty is 
intended to mesh the tax systems of the two countries in such a way 
that there is little potential for dispute regarding the amount of tax 
that should be paid to each country. The goal is to ensure that 
taxpayers do not end up caught in the middle between two governments, 
each of which claims taxing jurisdiction over the same income. A treaty 
with clear rules addressing the most likely areas of disagreement 
minimizes the time the two governments (and taxpayers) spend in 
resolving individual disputes.
    One of the primary functions of tax treaties is to provide 
certainty to taxpayers regarding the threshold question with respect to 
international taxation: whether the taxpayer's cross-border activities 
will subject it to taxation by two or more countries. Treaties answer 
this question by establishing the minimum level of economic activity 
that must be engaged in 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 the 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 its residents.
    Tax treaties protect taxpayers from potential double taxation 
through the allocation of taxing rights between the two countries. This 
allocation takes several forms. First, the 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, the treaty assigns the 
``primary'' right to tax 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. Third, the treaty 
provides rules for determining which country will be treated as the 
source country for each category of income. Finally, the treaty 
provides rules limiting the amount of tax that the source country can 
impose on each category of income and 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.
    As a complement to these substantive rules regarding allocation of 
taxing rights, tax treaties provide a mechanism for dealing with 
disputes or questions of application that arise after the treaty enters 
into force. In such cases, designated tax authorities of the two 
governments--known as the ``competent authorities'' in tax treaty 
parlance--are to consult and reach an agreement under which the 
taxpayer's income is allocated 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. That function has been delegated to 
the Director, International (LMSB) of the Internal Revenue Service.
    In addition to reducing potential double taxation, treaties also 
reduce potential ``excessive'' taxation by reducing withholding taxes 
that are imposed at source. Under U.S. domestic 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. The taxpayer may be viewed, therefore, as 
suffering ``excessive'' taxation. Tax treaties alleviate this burden by 
setting maximum levels for the 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. Because of the excessive taxation that 
withholding taxes can represent, the United States seeks to include in 
tax treaties provisions that substantially reduce or eliminate source-
country withholding taxes.
    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 non-
discrimination 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 provide guidance about what ``national treatment'' means in 
the tax context by explicitly prohibiting types of discriminatory 
measures that once were common in some tax systems. At the same time, 
tax treaties clarify the manner in which possible discrimination is to 
be tested in the tax context. Particular rules are needed here, for 
example, to reflect the fact that foreign persons that are subject to 
tax in the host country only on certain income may not be in the same 
position as domestic taxpayers that may be subject to tax in such 
country on all their income.
    In addition to these core provisions, tax treaties include 
provisions dealing with more specialized situations, such as rules 
coordinating the pension rules of the tax systems of the two countries 
or addressing the treatment of Social Security benefits and alimony and 
child support payments in the cross-border context. These provisions 
are becoming increasingly important as the number of individuals who 
move between countries or otherwise are engaged in cross-border 
activities increases. 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 
individual taxpayers who are affected.
    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 country's tax laws; the requested 
information will be provided subject to strict protections on the 
confidentiality of taxpayer information. Because access to information 
from other countries is critically important to the full and fair 
enforcement of the 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 
conclude a treaty with that country. Indeed, the need for appropriate 
information exchange provisions is one of the treaty matters that we 
consider non-negotiable.

             TAX TREATY NEGOTIATING PRIORITIES AND PROCESS

    In establishing our negotiating priorities, our primary objective 
is the conclusion of tax treaties or protocols that will provide the 
greatest economic benefit to the United States and to U.S. taxpayers. 
We communicate regularly with the U.S. business community, seeking 
input regarding the areas in which treaty network expansion and 
improvement efforts should be focused and information regarding 
practical problems encountered by U.S. businesses with respect to the 
application of particular treaties and the application of the tax 
regimes of particular countries.
    The United States has a network of 57 bilateral income tax treaties 
covering 65 countries. This network includes all 29 of our fellow 
members of the OECD. It also covers the vast majority of foreign trade 
and investment of U.S. businesses. Because the coverage of our treaty 
network is already quite comprehensive, it frequently will make more 
sense, as an economic matter, for the United States to negotiate an 
update to an existing agreement, rather than to negotiate a full treaty 
with a new treaty partner. Such a full agreement will require the 
potential treaty partner to grapple with many of the complexities of 
U.S. domestic and international tax rules and U.S. tax treaty policy, 
and how it interacts with its own domestic law and policies. Thus, the 
primary constraint on the size of our tax treaty network may be the 
complexity of the negotiations themselves. The various functions 
performed by tax treaties and most particularly the need to mesh the 
particular tax systems of the two treaty partners, make the negotiation 
process exacting and time-consuming.
    A country's tax policy reflects the sovereign choices made by that 
country. Numerous features of the treaty partner's particular tax 
legislation and its interaction with U.S. domestic tax rules must be 
considered in negotiating an appropriate 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 
pension funds, earnings of the funds, and distributions from the funds. 
A treaty negotiation must take into account all of these and many other 
aspects of the particular treaty partner's tax system in order to 
arrive at an agreement that accomplishes the United States' tax treaty 
objectives.
    A country's fundamental tax policy choices are reflected not only 
in its tax legislation but also in its tax treaty positions. The 
choices in this regard can and do differ significantly from country to 
country, with substantial variation even across countries that seem to 
have quite similar economic profiles. A treaty negotiation also must 
reconcile differences between the particular treaty partner's preferred 
treaty positions and those of the United States.
    Obtaining the agreement of our treaty partners on provisions of 
importance to the United States sometimes requires other concessions on 
our part. Similarly, the other country sometimes must make concessions 
to obtain our agreement on matters that are critical to it. In most 
cases, the process of give-and-take produces a document that is the 
best tax treaty that is possible with that other country. In other 
cases, we may reach a point where it is clear that it will not be 
possible to reach an acceptable agreement. In those cases, we simply 
stop negotiating with the understanding that negotiations might restart 
if circumstances change. Each treaty that we present to the Senate 
represents not only the best deal that we believe we can achieve 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 or 
may be a substantially curtailed form of tax agreement. With some 
countries a tax treaty may not be appropriate because of the 
possibility of abuse. With other countries there simply may not be the 
type of cross-border tax issues that are best resolved by treaty. For 
example, with a country that does not impose significant income taxes, 
where there is little possibility of the double taxation of income in 
the cross-border context that tax treaties are designed to address, an 
agreement that is focused on the exchange of tax information may be 
most valuable. Alternatively, a bifurcated approach may be appropriate 
in situations where a country has a special preferential tax regime for 
certain parts of the economy that is different from the tax rules 
generally applicable to the country's residents. In those cases, the 
residents benefiting from the preferential regime do not face potential 
double taxation and so should not be entitled to the reductions in U.S. 
withholding taxes accorded by a tax treaty, while a full treaty 
relationship might be useful and appropriate in order to avoid double 
taxation in the case of the residents who do not receive the benefit of 
the preferential regime.
    Prospective treaty partners must evidence a clear understanding of 
what their obligations would be under the treaty, including 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 in order to address real tax problems that have been 
identified by U.S. businesses operating there.
    The U.S. commitment to including comprehensive limitation of 
benefits provisions designed to prevent ``treaty shopping'' in all of 
our tax treaties 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, 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. 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 that we can secure for U.S. persons the benefits of 
reductions in source-country tax on their investments in that country.
update on the treasury department's position on inter-company dividends
    In earlier testimony before this committee, Treasury Department 
representatives have discussed the decision, first made in connection 
with the negotiation of the treaty with the United Kingdom in 2001, to 
eliminate the source-country withholding tax on certain inter-company 
dividends. The position of the Treasury Department has been, and 
continues to be, that this decision is made independently with respect 
to every treaty negotiation. The United States will agree to the 
provision only if the agreement includes limitation on benefits and 
information exchange provisions that meet the highest standards, and if 
the overall balance of the agreement is appropriate.
    Since we first expressed our willingness to eliminate the source-
country withholding tax on inter-company dividends, a number of treaty 
relationships that had been at best stagnant and at worst problematic 
have changed for the better. Suddenly, there was some leverage to 
achieve goals that had seemed out of reach for one reason or another. 
Thus, although the new policy has been in place for only about five 
years, it has enabled us to achieve the following goals in one or more 
treaties:

   Strengthening our provisions to prevent treaty shopping, 
        including the introduction of rules that prevent the use of tax 
        treaties after a corporate inversion transaction;

   Significantly improving information exchange provisions, 
        allowing access to information even when the treaty partner 
        does not need the information for its own tax purposes;

   Reducing withholding taxes on interest and royalties to 
        levels lower than those to which those treaty partners had ever 
        previously agreed;

   Eliminating withholding taxes on dividends paid to pension 
        funds, a tax that otherwise would inevitably lead to double 
        taxation; and

   Protecting U.S. companies against the retaliatory re-
        imposition of withholding taxes on inter-company dividends.

    The reductions we have achieved in our own treaties also are 
influencing the negotiation of agreements between other countries. U.S. 
companies benefit from those agreements as well, as many of them have 
subsidiaries that may benefit if similar reductions in rates are 
adopted under a new U.K.-Japan treaty, for example.
    We believe that these significant achievements demonstrate that the 
current policy is having very positive effects and will continue to do 
so in the foreseeable future.

           DISCUSSION OF PROPOSED NEW TREATIES AND PROTOCOLS

    I now would like to discuss the four agreements that have been 
transmitted for the Senate's consideration. We have submitted Technical 
Explanations of each agreement that contain detailed discussions of the 
provisions of each treaty and protocol. These Technical Explanations 
serve as an official guide to each agreement.
    The proposed Protocol amends the income tax treaty between the 
United States and Sweden that was signed in 1994. The most significant 
provisions in the Protocol relate to the treatment of dividends and 
limitation on benefits. The Protocol also rectifies a mistake that was 
made in the 1994 treaty that caused a great deal of hardship for a 
number of former employees of the U.S. government. It also makes a 
number of necessary updates to the treaty.
    Like a number of recent agreements, the Protocol will eliminate the 
source-country withholding tax on most inter-company dividends and on 
dividends paid to pension funds. The provision dealing with inter-
company dividends was very important to Sweden, because it had 
unilaterally eliminated its withholding tax on inter-company dividends. 
The legislative history to that domestic law change makes it clear that 
the main beneficiaries of that change were expected to be U.S. 
companies. In fact, it refers specifically to assurances given to the 
Swedish negotiators that the United States would not agree to eliminate 
the withholding tax on inter-company dividends in any bilateral 
agreement with any country. Now that U.S. policy has changed, failure 
to provide a reciprocal benefit for Swedish companies would have 
jeopardized the exemption from Swedish withholding tax that currently 
benefits U.S. companies. We believe that securing that protection, as 
well as eliminating the withholding tax on dividends paid to pension 
funds, is a sufficient quid pro quo.
    Nevertheless, we also took this opportunity to add anti-inversion 
provisions to the limitation on benefits provisions of the treaty. The 
new provision represents a somewhat simplified version of a similar 
provision introduced in the recent protocol with the Netherlands. 
Although we have no reason to believe that Sweden would be an 
attractive destination for an inverted U.S. corporation, including the 
provision in a mainstream agreement such as this helps to establish a 
precedent that will be extremely useful in other treaty negotiations.
    The Protocol also resolves a long-standing problem regarding the 
taxation of local employees of the Embassy in Stockholm and consulate 
in Gothenburg. The Protocol provides a grandfather rule to eliminate 
the unintended consequences resulting from a change made by the 1994 
U.S.-Sweden income tax treaty regarding the taxation of local employees 
(or former employees) of the Embassy in Stockholm and consulate in 
Gothenburg. To rectify this problem, the Protocol provides that Sweden 
may not tax a pension under the U.S. Civil Service Retirement Pension 
Plan paid by the United States to employees of the U.S. embassy in 
Stockholm or the U.S. consulate general in Gothenburg if the individual 
was hired prior to 1978.
    Other provisions in the Protocol reflect changes in U.S. domestic 
law or are intended to bring it into closer conformity with current 
U.S. treaty practice. For example, the current treaty preserves the 
U.S. right to tax former citizens whose loss of citizenship had, as one 
of its principal purposes, the avoidance of tax. The proposed Protocol 
updates this provision to reflect legislative changes since 1994. In 
order to reflect 1996 changes to the Internal Revenue Code, the 
Protocol provides that a former citizen or long-term resident of the 
United States may, for the period of ten years following the loss of 
such status, be taxed in accordance with the laws of the United States.
    United States and Sweden will notify each other through the 
diplomatic channel, accompanied by an instrument of ratification, when 
their respective requirements for entry into force have been completed. 
The proposed Protocol will enter into force on the thirtieth day after 
the later of the notifications. It will have effect, with respect to 
taxes withheld at source, on or after the first day of the second month 
next following the date upon which the Protocol enters into force. With 
respect to other taxes, it will have effect for taxable years beginning 
on or after the first day of January next following the date upon which 
the Protocol enters into force.

                       FRENCH INCOME TAX PROTOCOL

    The proposed income tax protocol amends the 1994 income tax treaty 
between the United States and France, which entered into force in 1995.
    The primary impetus for the negotiation of the income tax Protocol 
was to clarify the treatment of investments made in France by U.S. 
investors through partnerships located in the United States, France, or 
third countries. Because France taxes French partnerships on their 
worldwide income, and does not treat them as fiscally transparent, the 
Protocol confirms that France maintains taxing rights with respect to 
French partnerships. However, the Protocol provides that French treaty 
benefits will apply to U.S. residents who invest through U.S. 
partnerships or partnerships located in certain third countries. These 
partnership provisions will eliminate uncertainty and provide 
significant benefits to U.S. investors.
    The income tax Protocol also reforms the treatment of certain 
French investment vehicles, which would have been entitled to U.S. 
treaty benefits under the 1994 treaty. Under the revised provision, a 
``fonds commun de placement'' will not itself qualify for U.S. treaty 
benefits, but holders of interests in such an investment vehicle may 
qualify for treaty benefits if they are residents of France or of a 
third country that has an appropriate tax treaty with the United 
States.
    The income tax Protocol modifies the provisions of the treaty 
dealing with pensions and pension contributions in order to achieve 
parity given the two countries' fundamentally different pension 
systems. The French pension system relies almost entirely on the state 
social security system with much more limited use of private pension 
arrangements such as employer plans and individual plans. The 
provisions in the 1994 treaty that treated private pension payments and 
social security payments differently are replaced in the proposed 
Protocol with provisions that treat the two systems the same. Under the 
proposed Protocol, the country of source is assigned taxing rights with 
respect to both state social security payments and private pension 
payments. The proposed Protocol also includes a provision that allows 
U.S. persons to deduct voluntary contributions to the French social 
security system to the same extent that contributions to a U.S. plan 
would be deductible, which is comparable to the provision in the 1994 
treaty that allows French residents deductions for contributions to 
U.S. private pension plans.
    The proposed Protocol makes other changes to the 1994 treaty to 
reflect more closely current U.S. treaty policy. The proposed Protocol 
updates the treatment of dividends paid by U.S. REITs to reflect a 
change in approach adopted in 1997, which is intended to prevent the 
use of structures designed to avoid U.S. withholding taxes on outbound 
dividends while providing appropriate benefits to portfolio investors 
in REITs. The proposed Protocol also extends the provision in the 1994 
treaty preserving U.S. taxing rights with respect to certain former 
citizens to cover certain former long-term residents in order to 
reflect 1996 changes to the Internal Revenue Code.
    Each state will notify the other when it has completed the 
necessary steps to bring the proposed Protocol into force. The Protocol 
will enter into force upon the receipt of the later of those two 
notices. In general, it 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 following the date on which the Protocol enters 
into force and, with respect to other taxes, for taxable periods 
beginning on or after the first day of January following entry into 
force. However, because the rules benefiting U.S. residents investing 
through partnerships are intended to ensure that the treaty provides 
results that are consistent with the intent of the negotiators of the 
1995 treaty, those changes will be applicable as of the effective dates 
of the 1994 treaty.

                       FRENCH ESTATE TAX PROTOCOL

    The proposed estate tax Protocol amends the estate and gift tax 
treaty between the United States and France, which was signed in 1978 
and entered into force in 1980.
    In 1988, U.S. estate tax law was changed to tax currently transfers 
of property to non-citizen surviving spouses. France, along with 
several other countries with which the United States has estate tax 
treaties, objected to this change.
    Although the U.S. rejected claims by estate tax treaty partners 
that the 1988 change violated treaty nondiscrimination clauses, we 
indicated our willingness to amend our estate tax treaties with certain 
treaty partners to provide relief to surviving non-citizen spouses in 
appropriate cases. Accordingly, the proposed Protocol eases the impact 
of the 1988 provisions upon certain estates of limited value. Pursuant 
to the Protocol, transfers of non-community property from a French 
domiciliary to a spouse who is not a United States citizen that may be 
taxed by the United States solely on the basis of situs under the 
treaty can be included in the tax base only to the extent that the 
value of the property, after applicable deductions, exceeds 50 percent 
of the value of all property that may be taxed by the United States.
    In addition to the allowance of the marital exclusion, the Protocol 
also provides for a limited elective estate tax marital deduction 
which, if elected, waives the right to any available marital deduction 
that would be allowed under United States domestic law. The election is 
available only where the spouses satisfy certain domiciliary and 
citizenship requirements and only to ``qualifying property'' 
(generally, property that passes to the surviving spouse and that would 
have qualified for the marital deduction if the surviving spouse had 
been a United States citizen). The amount of the deduction is equal to 
the lesser of the value of the qualifying property or the ``applicable 
exclusion amount'' (generally, the amount which the unified credit 
shelters from estate tax) for the year of the decedent's death.
    The United States, in a 1995 protocol to the U.S.-Canada income tax 
treaty and a 1998 protocol to the U.S.-Germany estate tax treaty, 
provided similar relief to certain estates of limited value involving 
Canadians and Germans. The United States' willingness to enter into the 
proposed Protocol was a significant factor in France's ratification of 
the current U.S.-France income tax treaty, which was signed in 1994.
    The proposed Protocol also provides a pro rata unified credit to 
the estate of a French domiciliary for purposes of computing the U.S. 
estate tax. Under this provision, a French domiciliary is allowed a 
credit against U.S. estate tax ranging from the amount ordinarily 
allowed to the estate of a nonresident under the Code ($13,000) to the 
amount of credit allowed to the estate of a U.S. citizen under the Code 
($555,800 in 2004 and 2005), based on the extent to which the assets of 
the estate are situated in the United States (with either amount 
reduced to the extent of any credit previously allowed with respect to 
lifetime gifts). Congress anticipated the negotiation of such pro rata 
unified credits in Internal Revenue Code section 2102(c)(3)(A), and a 
similar credit was included in the 1995 U.S.-Canada income tax protocol 
and the 1998 German estate tax treaty protocol.
    The proposed Protocol also modernizes the provisions dealing with 
the elimination of double taxation. In determining the French tax, if 
the transferor was a French domiciliary at the time of the transfer, 
France may tax any property which may also be taxed by the United 
States, but must allow a deduction from that tax in an amount equal to 
the United States tax paid upon such transfer.
    If the transferor is a domiciliary or citizen of the United States 
and a transfer of property is subject to situs taxation by France, the 
United States must allow a credit equal to the amount of tax imposed by 
France with respect to such property. If the transferor is a United 
States citizen (or former citizen or long-term resident who lost such 
status with a principal purpose of tax avoidance) but a French 
domiciliary, the United States must allow a credit for the amount of 
tax imposed by France (after allowance for the deduction from French 
tax referred to in the first paragraph) with respect to such property. 
All of the credits allowed under the Protocol are limited to the tax 
imposed (and actually paid) on the property for which the credit is 
claimed.
    The proposed estate tax Protocol also makes other changes to the 
Convention to reflect more closely current U.S. treaty policy. For 
example, the proposed Protocol extends the United States' ability to 
tax former citizens and long-term residents to conform with 1996 
legislative changes to the Internal Revenue Code. The proposed Protocol 
also defines the term ``real property'' in a manner consistent with the 
definition provided in Treas. Reg. Sec. 1.897-1(b) and our income tax 
treaties. The proposed Protocol adds a rule that allows source state 
taxation of stock in real property holding companies.
    Each state will notify the other when it has completed the 
necessary steps to bring the proposed estate tax Protocol into force. 
The Protocol will enter into force upon the receipt of the later of 
those two notices. Although the proposed Protocol generally will be 
effective with respect to gifts made and deaths occurring after the 
exchange of instruments of ratification, the relief provided with 
respect to surviving non-citizen spouses and the pro rata unified 
credit will be effective with respect to gifts made and deaths 
occurring after November 10, 1988 (the effective date of the 1988 
legislative changes). Claims for refund asserting the benefits of the 
proposed Protocol that otherwise would be barred by the statute of 
limitations must be made within one year of entry of the Protocol, 
however, and all claims for retroactive relief are subject to the rules 
regarding the United States' ability to tax former citizens and long-
term residents.
    The negotiators believed that retrospective relief was not 
inappropriate, given the fact that the 1988 legislative changes were 
the impetus for negotiation of the proposed Protocol and negotiations 
commenced soon after the enactment of those changes. The United States 
agreed to similar retrospective relief in the 1995 U.S.-Canada income 
tax treaty protocol and the 1998 U.S.-Germany estate tax treaty 
protocol.

                               BANGLADESH

    The United States does not currently have an income tax treaty with 
Bangladesh. The proposed income tax treaty with Bangladesh was signed 
in Dhaka September 26, 2004.
    The proposed treaty generally follows the pattern of the U.S. model 
treaty, while incorporating some provisions found in other U.S. 
treaties with developing countries. The maximum rates of source-country 
withholding taxes on investment income provided in the proposed treaty 
are generally equal to or lower than the maximum rates provided in 
other U.S. treaties with developing countries (and some developed 
countries).
    The proposed treaty generally provides a maximum source-country 
withholding tax rate on dividends of 15 percent. Direct investment 
dividends are subject to taxation at source at a 10-percent rate. The 
proposed treaty requires a 10-percent ownership threshold for 
application of the 10-percent tax rate.
    The proposed treaty provides for a 10 percent rate of tax at source 
on most interest payments. However, interest received by any financial 
institution (including an insurance company) and interest earned on 
trade credits are subject to a 5 percent rate of tax at source. In 
addition, interest derived by the Governments of the Contracting States 
and instrumentalities of those Governments, as well as debt guaranteed 
by government agencies (e.g., the U.S. Export-Import Bank) is exempt 
from tax at source.
    The proposed treaty provides that royalties are subject to a 10 
percent tax at source. Consistent with the U.S. and OECD Model 
treaties, income from the rental of tangible personal property is not 
treated as a royalty, but as business profits, thus eliminating any 
withholding tax at source.
    The standard U.S. anti-abuse rules are provided for certain classes 
of investment income. For example, dividends paid by non-taxable 
conduit entities, such as U.S. RICs and REITs, are subject to special 
rules to prevent the use of these entities to transform what is 
otherwise high-taxed income into lower-taxed income.
    The proposed treaty follows the standard rules for taxation by the 
source country of the business profits of a resident of the other 
country. The source country's right to tax such profits is generally 
limited to cases in which the profits are attributable to a permanent 
establishment located in that country. The proposed treaty, however, 
defines a ``permanent establishment'' in a way that grants rights to 
tax business profits that are somewhat broader than those found in the 
U.S. and OECD Models. However, these rules are quite similar to rules 
found in our tax treaties with other developing countries.
    In the case of shipping and aircraft, the proposed Convention, 
consistent with current U.S. treaty policy, provides for exclusive 
residence-country taxation of profits from the international operation 
of ships or aircraft. Like the U.S. model, only the country of 
residence may tax profits from the rental or maintenance of containers 
used in international traffic.
    The proposed treaty provides rules that are similar to the U.S. 
model with respect to the taxation of income from the performance of 
personal services. However, like some other U.S. treaties with 
developing countries, the proposed treaty grants a taxing right to the 
host country with respect to some classes of personal services income 
that is broader in a few respects than in the OECD or U.S. model.
    The proposed treaty contains a comprehensive limitation on benefits 
article, which provides detailed rules designed to deny ``treaty 
shoppers'' the benefits of the treaty. These rules are comparable to 
the rules contained in the U.S. model and recent U.S. treaties.
    The proposed treaty also sets out the manner in which each country 
will relieve double taxation. Both the United States and Bangladesh 
will provide such relief through the foreign tax credit mechanism. The 
proposed Convention does not include a ``tax sparing credit,'' since 
such credits are contrary to U.S. treaty policy. At Bangladesh's 
request, the exchange of notes provides that, if the United States 
alters its policy regarding the granting of tax sparing credits or 
provides for such credits in another treaty, negotiations will be 
reopened with a view to concluding a protocol that would offer similar 
benefits to Bangladesh.
    The proposed treaty provides for non-discriminatory treatment 
(i.e., national treatment) by one country to residents and nationals of 
the other. Also included in the proposed treaty are rules necessary for 
administering the treaty, including rules for the resolution of 
disputes under the treaty.
    The proposed treaty includes an exchange of information provision 
that generally follows the U.S. model. Under these provisions, 
Bangladesh will provide U.S. tax officials such information as is 
relevant to carry out the provisions of the treaty and the domestic tax 
laws of the United States.
    The proposed Convention is subject to ratification. It will enter 
into force upon the exchange of instruments of ratification. It will 
have effect, with respect to taxes withheld at the source, for amounts 
paid or credited on or after the first day of the second month 
following entry into force. In other cases the Convention will have 
effect with respect to taxable periods beginning on or after the first 
day of January following the date on which the Convention enters into 
force.

                       TREATY PROGRAM PRIORITIES

    We continue to maintain a very active calendar of tax treaty 
negotiations. We currently are in ongoing negotiations with Canada, 
Chile, Germany, Hungary, Iceland, Korea and Norway. In addition, we are 
beginning negotiations with Bulgaria. We also have substantially 
completed work on agreements with Denmark and Finland and look forward 
to their conclusion.
    A key continuing priority is updating the few remaining U.S. tax 
treaties that provide for low withholding tax rates but do not include 
the limitation on benefits provisions needed to protect against the 
possibility of treaty shopping. We have also had informal exploratory 
discussions with several countries in Asia; we hope that those 
discussions will lead to productive negotiations later in 2006 or in 
2007.
    Work on the U.S. model was well advanced last year but was delayed 
due to other commitments. However, we expect to forward a draft text to 
the staffs of the Senate Foreign Relations Committee and Joint 
Committee on Taxation within the next month. We look forward to working 
with them on this project.

                               CONCLUSION

    Let me conclude by again thanking the committee for its continuing 
interest in the tax treaty program, and the members and staff for 
devoting time and attention to the review of these new agreements. We 
greatly appreciate the assistance and cooperation of the staffs of this 
committee and of the Joint Committee on Taxation in the tax treaty 
process.
    We urge the committee to take prompt and favorable action on the 
agreements before you today.

    The Chairman. Well, thank you very much, Ms. Brown. We 
appreciate your testimony; and likewise, your mention of the 
close cooperation between you and your staff and the staff on 
both sides of the aisle of this committee and the promise of 
more work to come. The Department of the Treasury has an active 
agenda in this vital endeavor. We appreciate your testimony.
    I'd like to call now upon Mr. Barthold for his testimony.

 STATEMENT OF THOMAS A. BARTHOLD, ACTING CHIEF OF STAFF, JOINT 
            COMMITTEE ON TAXATION, WASHINGTON, D.C.

    Mr. Barthold. Thank you, Mr. Chairman.
    It is my pleasure to present the testimony of the staff of 
the joint committee today concerning the proposed income-tax 
protocol with Sweden, the proposed income- and estate-tax 
protocols with France, and the proposed income-tax treaty with 
Bangladesh. As in the past, the joint committee staff has 
prepared background pamphlets covering the proposed treaty and 
protocols, providing detailed descriptions of their provisions 
and including comparisons with the 1996 U.S. model income-tax 
treaty, which generally reflects U.S. tax-treaty policy. Also, 
we make comparisons with other recent U.S. treaties which have 
come before the committee, and provide some detailed discussion 
of issues raised by the proposed treaty and the protocols. In 
this endeavor, we have consulted with the Treasury Department 
and the staff of your committee in analyzing the proposed 
treaty and protocols in preparation of this background 
material.
    As Ms. Brown noted, the proposed income-tax protocol with 
Sweden is an amendment to an existing treaty signed in 1994. 
Likewise, the proposed protocols with France update the 
existing agreements, while the proposed income-tax treaty with 
Bangladesh represents a new treaty relationship for the United 
States. I will try to highlight some of the key features of the 
protocols and the treaty, and certain issues that they may 
raise.
    Let me start with Sweden. The proposed protocol modifies 
several provisions of the existing treaty to conform it to new 
U.S. domestic tax laws and to make it similar to more recent 
U.S. income-tax treaties and the U.S. model. For example, the 
proposed protocol expands the saving-clause provision of the 
existing treaty to allow the United States to tax certain 
former citizens and long-term residents under the special 
expatriation tax regime of U.S. internal law, as amended in 
1996 and amended again in 2004. The proposed protocol also 
updates the existing treaty to include rules in recent U.S. tax 
treaties related to fiscally transparent entities.
    As Ms. Brown noted, perhaps the Swedish protocol is most 
noteworthy, because it would eliminate the withholding tax on 
dividends paid by one corporation to another corporation that 
owns at least 80 percent of the stock in the dividend-paying 
corporation, often referred to as ``direct dividends,'' 
provided that certain conditions are met. The elimination of 
the withholding tax under these circumstances is intended to 
reduce further the tax barriers to direct investment between 
Sweden and the United States. Under the present treaty, these 
dividends may be taxed by the source country at a maximum rate 
of 5 percent in the United States, but not Sweden, as Ms. Brown 
noted. We impose this tax as a matter of internal law. Thus, 
the principal and immediate effect of this provision would be 
to exempt dividends from U.S. subsidiaries paid to Swedish 
parent companies from U.S. withholding tax.
    Now, also as Ms. Brown noted, until 2003 no U.S. treaty 
provided for complete exemption from withholding tax under 
these circumstances. And neither the U.S. nor OECD model 
treaties currently provides for such an exemption. However, it 
is not uncommon to see zero withholding rates on dividends 
among the tax treaties of other developed Western economies. 
And, as you well know, in 2003 and 2004 the Senate ratified 
U.S. treaties and protocols containing zero rate provisions 
with the United Kingdom, Australia, Mexico, Japan, and the 
Netherlands.
    Because the zero rate provisions have become a trend in 
recent tax-treaty practice, and apparently Treasury Department 
policy, the committee may wish to inquire of the Treasury 
Department if it believes that a zero rate is generally 
beneficial. In previous testimony, and again today, the 
Treasury Department has indicated that zero-rate provisions 
should be limited to treaties with the strongest limitation on 
benefits and information exchange provisions. In light of the 
Treasury Department's intention to update the model treaty, the 
committee may wish to inquire whether it might be appropriate 
to include a zero-withholding rate on dividends, coupled with 
strong provisions on limitation on benefits and information 
exchange, as part of a revised U.S. model treaty and as a guide 
of future treaty policy of the United States.
    The Treasury Department has also indicated that the package 
of zero rate withholding, limitation on benefits and 
information exchange must be assessed in light of the overall 
balance of the treaty. The committee may wish to inquire what 
considerations on the overall balance would lead to a departure 
from the package of a zero rate, limitation on benefits, and 
information exchange.
    If such a package of provisions does represent the current 
preferred Treasury Department policy, the committee may also 
wish to inquire whether such a package was considered as a part 
of the negotiations with France in the just-concluded income-
tax protocol.
    It is also worth noting that the zero rate generally would 
apply with respect to dividends received by tax-exempt pension 
funds, similar to provisions in other recent treaties.
    The proposed protocol replaces the limitation-on-benefits 
article of the current treaty with a new article that reflects 
the anti-treaty-shopping provisions included in the U.S. model 
and most of the more recent U.S. income-tax treaties. For 
example, the proposed protocol provides for tests for publicly-
traded companies, ownership and base erosion, derivative 
benefits, and active business. The proposed protocol also 
provides a new special anti-abuse rule to address the use of 
certain triangular branch structures to earn certain types of 
U.S. income.
    Unlike the U.S. model, but like the recent protocol 
amending the Netherlands income-tax treaty, the publicly-
traded-company test in the proposed protocol includes a set of 
requirements which were referred to in the Netherlands protocol 
as ``the substantial-presence test'' to determine whether a 
company's public trading or management is adequately connected 
to its residence in a treaty company. This provision demands 
nexus between the taxpayer and the residence country. Under the 
proposed protocol, a company that is resident in Sweden or the 
United States is entitled to all treaty benefits if the 
principal class of its shares, and any disproportionate class 
of shares, is regularly traded on one or more recognized stock 
exchanges and, in addition, the company meets either a public-
trading-connection test or a management-and-control test. The 
public-trading-connection test is met if the company's 
principal class of shares is primarily traded within the 
economic area of the company. The management-and-control test 
is met if the company's primary place of management and control 
is in the treaty country where it is resident.
    The intent of this provision is to prevent certain 
companies from qualifying for treaty benefits if their nexus to 
their residence country is not sufficiently strong. The 
provision reflects a significant tightening of the public-
trading test in this regard. The committee may wish to ask 
whether this tighter public-trading test is likely to be 
included in future treaties, as opposed to the traditional 
looser test.
    It is also worth noting that, unlike most recent treaty 
instruments, including the Netherlands protocol, the proposed 
protocol does not require that the public company be listed in 
a treaty country. Consequently, the test under the proposed 
treaty is based primarily on a regional nexus. The committee 
may wish to ask whether this regional focus is appropriate in 
light of the anti-treaty-shopping purpose of the basic 
provision, and whether such a focus would remain viable if the 
political climate in Europe were to shift in favor of 
decreasing the scope of European integration.
    The last provision in the proposed protocol with Sweden 
that I would like to note is somewhat anomalous for a tax 
treaty. The proposed protocol amends the existing treaty to 
include a special new rule related to Swedish tax on U.S. 
Government pensions paid to certain Swedish citizens and 
residents. The provision bars Sweden from imposing tax on such 
pensions paid to former employees who were hired prior to 1978 
to work for the U.S. Embassy in Stockholm or the U.S. Consulate 
General in Gothenburg. These employee salaries and, therefore, 
their future benefits, were reduced because the U.S./Sweden in 
force at the time exempted their salaries from Swedish tax. As 
Ms. Brown noted, when the treaty was renegotiated in 1994, 
Sweden was permitted to tax such pensions, which were not 
increased by the United States, notwithstanding the previous 
decrease in the value of their benefits. The committee may wish 
to satisfy itself regarding the necessity of a treaty provision 
solely affecting Swedish taxation of Swedish individuals.
    With respect to France, there is both a proposed income-tax 
protocol and an estate- and gift-tax protocol. The proposed 
income-tax protocol with France would make several 
modifications and updates to the existing treaty. The proposed 
protocol would amend the dividends provision 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, referred to as REITs. The 
provision of the proposed protocol in this regard is similar to 
those included in other recent U.S. income-tax treaties and 
protocols.
    The proposed protocol replaces the pension rules of the 
current treaty and provides new rules for the taxation of 
pensions and Social Security benefits. These new pension rules 
are similar to those in recent U.S. tax treaties with both the 
United Kingdom and the Netherlands.
    The proposed protocol amends the residence rules of the 
current treaty in a manner intended to address certain 
ambiguities in the tax treatment of cross-border investments 
through partnerships and similar entities. Ambiguities have 
arisen in particular circumstances, in part, because of the 
different rules governing the taxation of partnerships under 
French and U.S. internal law.
    The proposed protocol expands the saving-clause provision 
of the existing treaty to allow the United States to tax its 
former long-term residents whose termination of residency had, 
as one of its principal purposes, the avoidance of tax. The 
existing treaty only applies to former citizens. The extension 
of this provision to long-term residents allows the United 
States to apply amendments that were made to internal law in 
1996 to the special tax regime for expatriates under section 
877 of the Internal Revenue Code. The proposed protocol, 
however, does not update the saving-clause provision to reflect 
the more recent changes made to the special expatriation rules 
of the American Jobs Creation Act of 2004. The American Jobs 
Creation Act eliminated subjective determinations of tax-
avoidance purpose and replaced them with objective rules for 
determining the applicability of the special tax regime for 
expatriates.
    Thus, in three of the four treaty instruments before the 
committee today, the two French protocols and the proposed 
Bangladesh treaty, the saving clause uses the obsolete 
``principal purposes of tax-avoidance'' formulation in 
determining whether this special tax regime may apply to 
individuals who expatriate, even though the subjective 
determinations of tax-avoidance purpose under prior law were 
recently eliminated by the American Jobs Creation Act.
    The Treasury Department technical explanations note that 
under these instruments the determination of whether there is a 
principal purpose of tax avoidance is made under the laws of 
the United States. The technical explanations further state 
that this language would include, ``the irrebuttable 
presumptions based on average annual net income tax liability 
and net worth under section 877,'' and that new objective 
tests, ``represent the administrative means by which the United 
States determines whether a taxpayer has a tax-avoidance 
purpose.''
    Thus, although the provisions employ the now-obsolete 
concept of tax-avoidance purpose, the Treasury Department 
maintains that this language should be understood, under these 
proposed protocols and treaties, as fully preserving U.S. 
taxing jurisdiction under the expatriation tax rules in their 
current form, as amended by the American Jobs Creation Act. The 
committee may wish to satisfy itself that the language included 
in the proposed protocol allows the United States to exercise 
its full taxing jurisdiction with respect to former citizens 
and long-term residents.
    The proposed estate, inheritance, and gift-tax protocol 
with France would make several updates and other modifications 
to the existing treaty, primarily to reflect changes in U.S. 
law made in 1988. Among the other updates to the treaties, the 
proposed protocol would add a saving clause which would protect 
the right of the United States to apply its estate- and gift-
tax rules to U.S. citizens, as well as to certain former U.S. 
citizens and long-term residents. The present treaty does not 
have a such a provision. And, as I just noted above, this 
saving clause was not updated to reflect the changes made to 
the special expatriation tax regime by the American Jobs 
Creation Act.
    The proposed protocol also would provide a pro-rata unified 
credit to the estate of an individual domiciled in France, 
other than a U.S. citizen, for purposes of computing the U.S. 
estate tax due. An estate eligible for this provision would be 
entitled to a proportion of the full, generally applicable 
credit based on a ratio of the value of the estate's U.S.-
situated assets to the value of its worldwide assets.
    In addition, the proposed protocol would provide a limited 
U.S. estate tax marital deduction in cases in which the 
surviving spouse is not a citizen. This provision would apply 
in the case of certain small estates.
    The proposed protocol also would apply new limits to the 
situs-based taxation of certain interspousal transfers of 
noncommunity property. These changes are generally consistent 
with changes made in other U.S. treaties in this area, such as 
the treaties with Canada and Germany.
    Lastly, the proposed income-tax treaty with Bangladesh, as 
Ms. Brown noted, represents a brand new treaty relationship for 
the United States. The proposed treaty with Bangladesh is 
similar to the U.S. model in many ways, but it also includes 
certain departures from the U.S. model.
    In particular, the proposed treaty permits higher rates of 
source-country withholding tax on interest, royalties, and 
certain dividends than are provided for in the U.S. model. The 
proposed treaty also is broader than the U.S. model in 
circumstances in which the activities of a resident of one 
country give rise to a permanent establishment in the other 
country. Thus, in giving a wider scope to permitted source-
country taxation, the proposed treaty is similar to other 
treaties negotiated with developing countries, but the 
committee may wish to consider whether these concessions are 
appropriate in the case of Bangladesh.
    Lastly, let me note that, as your committee is fully aware, 
the Joint Committee staff over the past several years has 
emphasized what we have perceived as a need to update the 
Treasury's model tax treaty. And so, we're extremely grateful 
and excited that Treasury says that they will be forwarding a 
draft within a month. We look forward to working with your 
staff and Ms. Brown and her colleagues on a new model, which we 
see as important in providing guidance to your committee and 
the Senate in analyzing the course of U.S. treaty policy.
    I am happy to answer any questions that you or other 
committee members may have. And this concludes my formal 
testimony.

    [The prepared statement of Mr. Barthold follows:]

                Prepared Statement of Thomas A. Barthold

    My name is Tom Barthold. I am the Acting Chief of Staff of the 
Joint Committee on Taxation. It is my pleasure to present the testimony 
of the staff of the Joint Committee today concerning the proposed 
income tax protocol with Sweden, the proposed income and estate and 
gift tax protocols with France, and the proposed income tax treaty with 
Bangladesh.\1\
---------------------------------------------------------------------------
    \1\ This document may be cited as follows: Joint Committee on 
Taxation, Testimony of the Staff of the Joint Committee on Taxation 
Before the Senate Committee on Foreign Relations Hearing on the 
Proposed Tax Protocols with Sweden and France and the Proposed Tax 
Treaty with Bangladesh (JCX-08-06), February 2, 2006.
---------------------------------------------------------------------------
                                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 1996 U.S. model income tax treaty (the ``U.S. 
model''), which generally reflects preferred U.S. tax treaty policy, 
and with other recent U.S. tax treaties. The pamphlets also provide 
detailed discussions of issues raised by the proposed 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 proposed income tax protocol with Sweden would amend an 
existing treaty signed in 1994. The proposed income tax protocol with 
France would amend an existing tax treaty that was signed in 1994. The 
proposed estate tax protocol with France would amend an existing treaty 
that was signed in 1978. The proposed income tax treaty with Bangladesh 
represents a new tax treaty relationship for the United States. A 
proposed treaty with Bangladesh was signed in 1980 but never went into 
force. My testimony today will highlight some of the key features of 
the proposed protocols and treaty and certain issues that they raise.

                                 SWEDEN

Updates to Existing Treaty
    The proposed protocol modifies several provisions in the existing 
treaty to conform it to new U.S. domestic tax laws, and to make it 
similar to more recent U.S. income tax treaties and the U.S. model. For 
example, the proposed protocol expands the ``saving clause'' provision 
of the existing treaty to allow the United States to tax certain former 
citizens and long-term residents under the special expatriation tax 
regime of U.S. internal law, as amended in 1996 and 2004. The proposed 
protocol also updates the existing treaty to include the rules in 
recent U.S. treaties related to fiscally transparent entities.

New ``zero-rate'' Dividend Provision
    The proposed protocol also would eliminate withholding tax on 
dividends paid by one corporation to another corporation that owns at 
least 80 percent of the stock of the dividend-paying corporation (often 
referred to as ``direct dividends''), provided that certain conditions 
are met. The elimination of withholding tax under these circumstances 
is intended to reduce further the tax barriers to direct investment 
between the two countries.
    Under the present treaty, these dividends may be taxed by the 
source country at a maximum rate of five percent, a tax that the United 
States, but not Sweden, imposes as a matter of internal law. Thus, the 
principal immediate effect of this provision would be to exempt 
dividends that U.S. subsidiaries pay to Swedish parent companies from 
U.S. withholding tax. With respect to dividends paid by Swedish 
subsidiaries to U.S. parent companies, the effect of this provision 
would be to provide greater certainty as to the continued availability 
of a zero rate of Swedish withholding tax, regardless of how Swedish 
domestic law might change in this regard.
    Until 2003, no U.S. treaty provided for a complete exemption from 
withholding tax under these circumstances, and the U.S. and OECD models 
currently do not provide for such an exemption. However, many bilateral 
tax treaties to which the United States is not a party eliminate 
withholding taxes under similar circumstances, and the same result has 
been achieved within the European Union under its ``Parent-Subsidiary 
Directive.'' Moreover, in 2003 and 2004, the Senate ratified U.S. 
treaties and protocols containing zero-rate provisions with the United 
Kingdom, Australia, Mexico, Japan, and the Netherlands. These 
provisions are similar to the provision in the proposed protocol, 
although the treaty with Japan allows a lower ownership threshold 
(i.e., more than 50 percent, as opposed to at least 80 percent) than do 
the other provisions, among other differences.
    Because zero-rate provisions have become a trend in U.S. tax treaty 
practice, the Committee may wish to examine the Treasury Department's 
criteria for determining the circumstances under which a zero-rate 
provision may be appropriate. In previous testimony before the 
Committee, the Treasury Department has indicated that zero-rate 
provisions should be limited to treaties that have the strongest 
limitation-on-benefits and information-exchange provisions, where 
appropriate in light of the overall balance of the treaty. The 
Committee may wish to ask what ``overall balance'' considerations might 
prompt the Treasury Department not to seek a zero-rate provision in a 
treaty that has limitation-on-benefits and information-exchange 
provisions meeting the highest standards. The Committee also may wish 
to examine some of the specific design features of the provisions, such 
as ownership thresholds, holding period requirements, the treatment of 
indirect ownership, and heightened limitation-on-benefits requirements, 
as discussed in detail in our pamphlet.
    It is also worth noting that a zero rate generally would apply with 
respect to dividends received by tax-exempt pension funds, similar to 
provisions in other recent treaties.

Anti-Treaty-Shopping Provision
    The proposed protocol replaces the limitation-on-benefits article 
of the current treaty with a new article that reflects the anti-treaty-
shopping provisions included in the U.S. model and most of the more 
recent U.S. income tax treaties. For example, the proposed protocol 
provides for tests for publicly traded companies, ownership and base 
erosion, derivative benefits, and active business.
    The proposed protocol also provides a new, special anti-abuse rule 
to address the use of certain triangular branch structures to earn 
certain types of U.S. income. Under this rule, certain payments of 
interest, royalties, or insurance premiums from a U.S. payor to a 
permanent establishment of a Swedish resident in a third country may be 
subject to U.S. withholding tax if Sweden does not tax such income and 
the third country only taxes it lightly. The proposed protocol limits 
such U.S. withholding tax to 15 percent in the case of interest or 
royalties.
    Unlike the U.S. model, but like the recent protocol amending the 
Netherlands income tax treaty, the publicly traded company test in the 
proposed protocol includes a set of requirements, referred to in the 
Netherlands protocol as the ``substantial presence'' test, to determine 
whether a company's public trading or management is adequately 
connected to its residence in a treaty country. Under the proposed 
protocol, a company that is a resident of Sweden or the United States 
is entitled to all treaty benefits if the principal class of its 
shares, and any disproportionate class of shares, is regularly traded 
on one or more recognized stock exchanges, and, in addition, the 
company meets either a public trading connection test or a management 
and control test. The public trading connection test is met if the 
company's principal class of shares is primarily traded (1) on a 
recognized stock exchange in the treaty country in which the company is 
resident, (2) in the case of a company resident in the United States, 
on a recognized stock exchange located in a third country that is a 
party to the North American Free Trade Agreement (``NAFTA''), or (3) in 
the case of a company resident in Sweden, on a recognized stock 
exchange located in the European Economic Area (``EEA''), the EU, or in 
Switzerland. The management and control test is met if the company's 
primary place of management and control is in the treaty country where 
it is a resident.
    The intent of this provision generally is to prevent certain 
companies from qualifying for treaty benefits if their nexus to their 
residence country is not sufficiently strong. The provision reflects a 
significant tightening of the public trading test in this regard. The 
Committee may wish to ask whether this tighter public trading test is 
likely to be included in future treaties, as opposed to the 
traditional, looser test.
    It is also worth noting that, unlike most recent treaty 
instruments, including the Netherlands protocol, the proposed protocol 
does not require that the public company be listed in a treaty country. 
Consequently, the test under the proposed treaty is based primarily 
upon regional nexus. The Committee may wish to ask whether this 
regional focus is appropriate in the light of the anti-treaty-shopping 
purpose of this provision, and whether such a focus would remain viable 
if the political climate in Europe were to shift in favor of decreasing 
the scope of European integration.

Taxation of Certain U.S. Government Pensions
    The proposed protocol amends the existing treaty to include a 
special new rule related to Swedish tax on U.S. government pensions 
paid to certain Swedish citizens and residents. The provision bars 
Sweden from imposing tax on such pensions paid to former employees who 
were hired prior to 1978 to work for the U.S. Embassy in Stockholm or 
the U.S. consulate general in Gothenberg. These employees' salaries, 
and, therefore, their future pensions, were reduced because the U.S.-
Sweden treaty in force at that time exempted their salaries from 
Swedish tax. When the treaty was renegotiated in 1994, Sweden was 
permitted to tax such pensions, which were not increased by the United 
States, notwithstanding the previous decrease. The Committee may wish 
to satisfy itself regarding the necessity of a treaty provision solely 
affecting the Swedish taxation of Swedish individuals.

                                 FRANCE

Income Tax Protocol
    The proposed income tax protocol with France would make several 
modifications and updates to the existing treaty. The proposed protocol 
would amend the dividends provision 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 the pension rules of the current 
treaty and provides new rules for the taxation of pensions and social 
security benefits. The new pension rules are similar to those in recent 
U.S. tax treaties with both the United Kingdom and the Netherlands.
    The proposed protocol amends the residence rules of the current 
treaty in a manner intended to address certain ambiguities in the tax 
treatment of cross-border investments through partnerships and similar 
entities. Ambiguities have arisen in particular circumstances in part 
because of the different rules governing the taxation of partnerships 
under French and U.S. internal law.
    The proposed protocol expands the ``saving clause'' provision of 
the existing treaty to allow the United States to tax former long-term 
residents whose termination of residency has as one of its principal 
purposes the avoidance of tax. The existing treaty only applies to 
former citizens. The extension of this provision to long-term residents 
allows the United States to apply amendments made in 1996 to the 
special tax regime for expatriates under section 877 of the Code. The 
proposed protocol does not, however, update the saving clause provision 
to reflect more recent changes made to the special expatriation rules 
by the American Jobs Creation Act of 2004 (``AJCA''). AJCA eliminated 
subjective determinations of tax-avoidance purpose and replaced them 
with objective rules for determining the applicability of the special 
tax regime for expatriates.
    In three of the four treaty instruments before the Committee today 
(the two proposed French protocols and the proposed Bangladesh treaty), 
the saving clause uses the obsolete ``principal purposes of tax 
avoidance'' formulation in determining whether the special tax regime 
may apply to individuals who expatriate, even though the subjective 
determinations of tax-avoidance purpose under prior law were recently 
eliminated. Treasury Department technical explanations note that under 
these instruments, the determination of whether there was a principal 
purpose of tax avoidance is made under the laws of the United States. 
The technical explanations further state that this language would 
include ``the irrebuttable presumptions based on average annual net 
income tax liability and net worth under section 877,'' and 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 provisions employ the now-obsolete 
concept of a tax-avoidance purpose, the Treasury Department maintains 
that this language should be understood as fully preserving U.S. taxing 
jurisdiction under the expatriation tax rules in their current form. 
The Committee may wish to satisfy itself that the language included in 
the proposed protocol allows the United States to exercise its full 
taxing jurisdiction with respect to former citizens and long-term 
residents.

Estate Tax Protocol
    The proposed estate, inheritance, and gift tax protocol with France 
would make several updates and other modifications to the existing 
treaty. The principal purpose of the treaty is to reduce or eliminate 
double taxation in connection with estate, inheritance, and gift taxes. 
One of the general principles of the treaty is that the country in 
which a donor or decedent was domiciled may tax the estate or gifts of 
that individual on a worldwide basis, but must credit tax paid to the 
other country with respect to certain types of property located in such 
other country.
    Among other updates to the treaty, the proposed protocol would add 
a saving clause, which would protect the right of the United States to 
apply its estate and gift tax rules to U.S. citizens, as well as to 
certain former U.S. citizens and long-term residents. (As noted above, 
this saving clause was not updated to reflect changes made to the 
special expatriation tax regime under U.S. law in 2004.) The proposed 
protocol also would provide a pro rata unified credit to the estate of 
an individual domiciled in France (other than a U.S. citizen) for 
purposes of computing the U.S. estate tax due. An estate eligible for 
this provision would be entitled to a portion of the full, generally 
applicable credit, based on the ratio of the value of the estate's 
U.S.-situated assets to the value of its worldwide assets.
    In addition, the proposed protocol would provide a limited U.S. 
estate tax marital deduction in cases in which the surviving spouse is 
not a U.S. citizen. This provision would apply in the case of certain 
small estates. The proposed protocol also would add new limits to the 
situs-based taxation of certain interspousal transfers of noncommunity 
property. These changes are generally consistent with those made in 
other recent U.S. treaties in this area (e.g., in treaties with Canada 
and Germany).

                               BANGLADESH

    The proposed income tax treaty with Bangladesh represents a new 
treaty relationship for the United States. A proposed income tax treaty 
was signed in 1980 but never entered into force.
    The proposed treaty with Bangladesh is similar to the U.S. model 
treaty in many ways, but it also includes certain departures from the 
U.S. model. In particular, the proposed treaty permits higher rates of 
source-country withholding tax on interest, royalties, and certain 
dividends than are provided for in the U.S. model. The proposed treaty 
also is broader than the U.S. model in its circumstances in which the 
activities of a resident of one treaty country give rise to a permanent 
establishment in the other country. In giving wider scope to permitted 
source-country taxation, the proposed treaty is similar to other 
treaties negotiated with developing countries. The Committee may wish 
to consider whether this concession is appropriate in the case of 
Bangladesh.

                     UPDATING THE U.S. MODEL TREATY

    As a general matter, U.S. model tax treaties provide a framework 
for U.S. tax treaty policy. These models provide helpful information to 
taxpayers, the Congress, and foreign governments as to U.S. policies on 
tax treaty matters. Periodically updating the U.S. model tax treaties 
to reflect changes, revisions, developments, and the viewpoints of 
Congress with regard to U.S. tax treaty policy ensures that the model 
treaties remain meaningful and relevant. The current U.S. model income 
tax treaty was last updated in 1996. As we mentioned in the treaty 
hearings in 2003 and 2004, the Joint Committee staff believes that this 
model is becoming obsolete and is in need of an update. The Treasury 
Department stated at a hearing in 2004 that it was updating the model. 
The Committee may wish to inquire as to the current status of this 
project.
    I would be happy to answer any questions that the committee may 
have at this time or in the future.

    The Chairman. Well, thank you very much, Mr. Barthold, for 
your very careful analysis of each of the provisions. And that 
testimony is tremendously valuable for everyone to consider. 
We'll get into it further with questions and maybe comments 
from the panel members.

   STATEMENT OF HON. WILLIAM A. REINSCH, PRESIDENT, NATIONAL 
             FOREIGN TRADE COUNCIL, WASHINGTON, DC

    But first I want to call upon Mr. Reinsch. It's good to 
have you again before us this morning. Will you please proceed 
with your testimony?
    Mr. Reinsch. Thank you, Mr. Chairman. It's a pleasure to be 
back.
    I'm here on behalf of the National Foreign Trade Council to 
recommend ratification of the treaty and protocols that are 
before the committee today. The committee has graciously taken 
our advice, at least on tax matters, in the past, and we hope 
that you'll do so again this time.
    If U.S. businesses are going to maintain a competitive 
position around the world, we need a treaty policy that 
protects them from multiple or excessive levels of foreign tax 
on cross-border investments, particularly if their competitors 
already enjoy that advantage. The United States has lagged 
behind other developed countries in eliminating this 
withholding tax and leveling the playing field for cross-border 
investment. The European Union eliminated the tax on intra-EU 
parent-subsidiary dividends over a decade ago, and dozens of 
bilateral treaties between foreign countries have followed that 
route. The majority of OECD countries now have bilateral 
treaties in place that provide for zero rate on parent-
subsidiary dividends, so we're particularly pleased to note the 
additional progress on the treaty and protocols that are before 
you today.
    Tax treaties also provide other features that are vital to 
the competitive position of U.S. businesses. For example, by 
prescribing internationally-agreed thresholds for the 
imposition of taxation by foreign countries on inbound 
investment, and by requiring foreign tax laws to be applied in 
a nondiscriminatory manner to U.S. enterprises, treaties offer 
a significant measure of certainty to potential investors.
    Another extremely important benefit, which is available 
exclusively under tax treaties, is the mutual-agreement 
procedure. This bilateral administrative mechanism provides 
another opportunity for the avoidance of double taxation on 
cross-border transactions.
    The Swedish protocol that is before the committee today 
updates an existing agreement between Sweden and the United 
States signed over a decade ago. The protocol improves a 
convention that has stimulated increased investment, greater 
transparency, and a stronger economic relationship between our 
two countries. The NFTC commends Treasury for its determination 
to facilitate increased trade and investment through this 
protocol and the other agreements under consideration.
    We have for years urged adjustment of U.S. treaty policies 
to allow for a zero withholding rate on related-entity 
dividends, and we commend the Treasury for making further 
progress in its protocol with Sweden. This agreement continues 
the important contribution toward improving the economic 
competitiveness of U.S. companies achieved in prior agreements 
with the Netherlands, Japan, the United Kingdom, Australia, and 
Mexico. We thank the committee for its prior support of this 
evolution in U.S. tax-treaty policy, and we strongly urge you 
to continue that support by approving the Swedish protocol.
    The existence of a withholding tax on cross-border parent-
subsidiary dividends, even at the 5 percent rate previously 
typical in U.S. treaties, has served as a tariff-like 
impediment to cross-border investment flows. Without a zero 
rate, the combination of the underlying corporate tax and the 
withholding tax on the dividend will often leave parent 
companies with an excess of foreign tax credits. Because these 
excesses are unusable, the result is a lower return from a 
cross-border investment than a comparable domestic investment. 
Tax treaties are designed to prevent this distortion in the 
investment decision making process by reducing multiple 
taxation of profits within a corporate group, and they serve to 
prevent the hurdle to U.S. participation in international 
commerce. Eliminating the withholding tax on cross-border 
dividends means that U.S. companies with stakes in Swedish 
companies will now be able to meet their foreign competitors on 
a level playing field.
    Another notable inclusion is the zero-withholding rate on 
dividends paid to pension funds, which should attract 
investment from those funds into U.S. stocks. Also reflected is 
modern U.S. tax-treaty policy regarding when U.S. withholding 
rates will apply to dividends paid by regulated investment 
companies and real estate investment trusts, as well as recent 
U.S. law changes aimed at preserving taxing jurisdiction over 
certain individuals who terminate their long-term residence 
within the United States.
    The French protocols that are before the committee today 
represent updates and improvements to existing agreements. 
These protocols will enhance an already flourishing economic 
relationship between our two countries. Included in the updated 
agreements are current U.S. tax-treaty policies regarding 
hybrid entities and the application of reduced withholding tax 
rates for dividends paid by RICs and REITs.
    Another notable inclusion in the French protocols 
recognizes reciprocal pension and retirement benefits for 
individuals of either country, eliminating double taxation on 
contribution of payments paid by, or for, an individual to a 
pension or retirement plan, reducing the burden on individuals 
working for foreign subsidiaries of companies in either 
country.
    The tax treaty with Bangladesh represents a new tax-treaty 
relationship for the United States. The agreement is a 
significant step forward in the U.S. economic relationship with 
Bangladesh. As a modernizing nation, Bangladesh is in a 
developmental phase which gives rise to opportunities for 
American business because of the projects and the economic 
development that an expanding infrastructure will allow. 
Without a similar tax arrangement, U.S. companies that are 
interested in investing in, or trading with, Bangladesh are at 
a competitive disadvantage.
    While the Bangladesh treaty does not go as far as other 
agreements--for example, in eliminating withholding taxes for 
dividends, interest, and royalties--it represents an important 
starting point in a growing economic relationship with 
Bangladesh. The treaty reflects current U.S. tax-treaty policy 
for agreements with developing nations, and it includes 
appropriate measures to prevent treaty shopping. The NFT 
strongly supports action to create the competitive balance 
afforded to U.S. enterprises by this tax treaty.
    While we are not aware of any opposition to the treaties 
under consideration, the NFTC, as it has done in the past as a 
general cautionary note, urges the committee to reject 
opposition to the agreements based on the presence or absence 
of a single provision. No process that is as laden with 
competing considerations as the negotiation of a full-scale tax 
treaty between sovereign states will be able to produce an 
agreement that will completely satisfy every possible 
constituency. And no such result should be expected. Agreements 
should be judged on whether they encourage international flows 
of trade and investment between the United States and the other 
country. An agreement that meets this standard will provide the 
guidance enterprises need in planning for the future, provide 
nondiscriminatory treatment for U.S. traders and investors, as 
compared to those of other countries, and meet a minimum level 
of acceptability in comparison with the preferred U.S. position 
and expressed goals of the business community.
    The NFTC strongly supports the efforts of the Internal 
Revenue Service and the Treasury to promote continuing 
international consensus on the appropriate transfer pricing 
standards, as well as innovative procedures for implementing 
that consensus. We applaud the continuing growth of the advance 
pricing agreement program, which is designed to achieve 
agreement between taxpayers and revenue authorities on the 
proper pricing methodology to be used before disputes arise. We 
commend the ongoing efforts of the IRS to refine and improve 
the operation of the competent authority process under treaties 
to make it a more efficient and reliable means of avoiding 
double taxation.
    We also want to reiterate our support for the existing 
procedure by which Treasury consults on a regular basis with 
this committee, the tax-writing committees, and the appropriate 
congressional staffs concerning tax-treaty issues and 
negotiations, and the interaction between treaties and 
developing tax legislation. We encourage all participants in 
such consultations to give them a high priority.
    We particularly commend this committee, and you, 
personally, Mr. Chairman, for scheduling tax-treaty hearings 
quickly after receiving the agreements from the executive 
branch. Doing so enables improvements in the treaty network to 
enter into effect as quickly as possible, and it's much 
appreciated by our members.
    We would also like to reaffirm our view, frequently voiced 
in the past--this is a message more for the Finance Committee 
than the Foreign Relations Committee, but, nevertheless--that 
Congress should avoid occasions of overriding, in subsequent 
domestic legislation, the U.S. tax-treaty commitments approved 
by your committee. We believe that consultation, negotiation, 
and mutual agreement upon changes, rather than unilateral 
legislative abrogation of treaty commitments, better supports 
the mutual goals of treaty partners.
    Finally, Mr. Chairman, the NFTC is grateful to you and to 
the members of the committee for your continuing commitment to 
give international economic relations prominence in the 
committee's agenda, particularly when the demands upon your 
time are so pressing.
    We would also like to express our appreciation for the 
efforts of both majority and minority staff in arranging for 
this hearing to be scheduled and held at this time.
    Thank you very much.

    [The prepared statement of Mr. Reinsch follows:]

             Prepared Statement of Hon. William A. Reinsch

    Mr. Chairman and members of the committee: The National Foreign 
Trade Council (NFTC) is pleased to recommend ratification of the 
treaties and protocols under consideration by the committee today. We 
appreciate the Chairman's actions in scheduling this hearing so early 
in the year, and we strongly urge the committee to reaffirm the United 
States' historic opposition to double taxation by giving its full 
support to the pending Bangladesh Tax Treaty and the Protocols with 
Sweden and France.
    The NFTC, organized in 1914, is an association of some 300 U.S. 
business enterprises engaged in all aspects of international trade and 
investment. Our membership covers the full spectrum of industrial, 
commercial, financial, and service activities, and the NFTC therefore 
seeks to foster an environment in which U.S. companies can be dynamic 
and effective competitors in the international business arena. To 
achieve this goal, American businesses must be able to participate 
fully in business activities throughout the world, through the export 
of goods, services, technology, and entertainment, and through direct 
investment in facilities abroad. As global competition grows ever more 
intense, it is vital to the health of U.S. enterprises and to their 
continuing ability to contribute to the U.S. economy that they be free 
from excessive foreign taxes or double taxation and impediments to the 
flow of capital that can serve as barriers to full participation in the 
international marketplace. Foreign trade is fundamental to the economic 
growth of U.S. companies. Tax treaties are a crucial component of the 
framework that is necessary to allow that growth and to balanced 
competition.
    This is why the NFTC has long supported the expansion and 
strengthening of the U.S. tax treaty network and why we are here today 
to recommend ratification of the Tax Treaty with Bangladesh and the 
Protocols with Sweden and France.

         TAX TREATIES AND THEIR IMPORTANCE TO THE UNITED STATES

    Tax treaties are bilateral agreements between the United States and 
foreign countries that serve to harmonize the tax systems of the two 
countries with respect to persons involved in cross-border investment 
and trade. Tax treaties eliminate this double taxation by allocating 
taxing jurisdiction over the income between the two countries. In the 
absence of tax treaties, income from international transactions or 
investments may be subject to double taxation, first by the country 
where the income arises and again by the country of the recipient's 
residence.
    In addition, the tax systems of most countries impose withholding 
taxes, frequently at high rates, on payments of dividends, interest, 
and royalties to foreigners, and treaties are the mechanism by which 
these taxes are lowered on a bilateral basis. If U.S. enterprises 
earning such income abroad cannot enjoy the reduced foreign withholding 
rates offered by a tax treaty, they are liable to suffer excessive and 
noncreditable levels of foreign tax and to be at a competitive 
disadvantage relative to traders and investors from other countries 
that do have such benefits. Tax treaties serve to prevent this barrier 
to U.S. participation in international commerce.
    If U.S. businesses are going to maintain a competitive position 
around the world, we need a treaty policy that protects them from 
multiple or excessive levels of foreign tax on cross border 
investments, particularly if their competitors already enjoy that 
advantage. The United States has lagged behind other developed 
countries in eliminating this withholding tax and leveling the playing 
field for cross-border investment. The European Union (EU) eliminated 
the tax on intra-EU, parent-subsidiary dividends over a decade ago and 
dozens of bilateral treaties between foreign countries have also 
followed that route. The majority of OECD countries now have bilateral 
treaties in place that provide for a zero rate on parent-subsidiary 
dividends.
    Tax treaties also provide other features that are vital to the 
competitive position of U.S. businesses. For example, by prescribing 
internationally agreed thresholds for the imposition of taxation by 
foreign countries on inbound investment, and by requiring foreign tax 
laws to be applied in a nondiscriminatory manner to U.S. enterprises, 
treaties offer a significant measure of certainty to potential 
investors. Another extremely important benefit which is available 
exclusively under tax treaties is the mutual agreement procedure. This 
bilateral administrative mechanism provides another opportunity for the 
avoidance of double taxation on cross-border transactions.
    Taxpayers are not the only beneficiaries of tax treaties. Treaties 
protect the legitimate enforcement interests of the United States by 
providing for the administration of U.S. tax laws and the 
implementation of U.S. treaty policy. The article that provides for the 
exchange of information between tax authorities is an excellent example 
of the benefits that result from an expanded tax treaty network. 
Treaties also offer the possibility of administrative assistance in the 
collection of taxes between the relevant tax authorities.
    A framework for the resolution of disputes with respect to 
overlapping claims by the respective governments is also provided for 
in tax treaties. In particular, the practices of the Competent 
Authorities under the treaties have led to agreements, known as 
``Advance Pricing Agreements'' or ``APAs,'' through which tax 
authorities of the United States and other countries have been able to 
avoid costly and unproductive proceedings over appropriate transfer 
prices for the trade in goods and services between related entities. 
APAs, which are agreements jointly entered into between one or more 
countries and particular taxpayers, have become common and increasingly 
popular procedures for countries and taxpayers to settle their transfer 
pricing issues in advance of dispute. The clear trend is that treaties 
are becoming an increasingly important tool used by tax authorities and 
taxpayers alike in striving for fairer and more efficient application 
of the tax laws.

                    AGREEMENTS BEFORE THE COMMITTEE

    The Swedish Protocol that is before the committee today updates an 
existing agreement between Sweden and the United States signed over a 
decade ago. The protocol improves a convention that has stimulated 
increased investment, greater transparency, and a stronger economic 
relationship between our two countries. The NFTC commends Treasury for 
its determination to facilitate increased trade and investment through 
this protocol and the other agreements under consideration.
    The NFTC has for years urged adjustment of U.S. treaty policies to 
allow for a zero withholding rate on related-entity dividends, and we 
praise the Treasury for making further progress in this protocol with 
Sweden. This agreement continues the important contribution toward 
improving the economic competitiveness of U.S. companies achieved in 
prior agreements with the Netherlands, Japan, the United Kingdom, 
Australia, and Mexico. We thank the committee for its prior support of 
this evolution in U.S. tax treaty policy and we strongly urge you to 
continue that support by approving the Swedish Protocol.
    The existence of a withholding tax on cross-border, parent-
subsidiary dividends, even at the five percent rate previously typical 
in U.S. treaties, has served as a tariff-like impediment to cross-
border investment flows. Without a zero rate, the combination of the 
underlying corporate tax and the withholding tax on the dividend will 
often leave parent companies with an excess of foreign tax credits. 
Because these excesses are unusable, the result is a lower return from 
a cross-border investment than a comparable domestic investment. Tax 
treaties are designed to prevent this distortion in the investment 
decision-making process by reducing multiple taxation of profits within 
a corporate group, and they serve to prevent the hurdle to U.S. 
participation in international commerce. Eliminating the withholding 
tax on cross-border dividends means that U.S. companies with stakes in 
Swedish companies will now be able to meet their foreign competitors on 
a level playing field.
    Another notable inclusion is a zero withholding rate on dividends 
paid to pension funds which should attract investment from those funds 
into U.S. stocks. Also reflected is modern U.S. tax treaty policy 
regarding when reduced U.S. withholding rates will apply to dividends 
paid by Regulated Investment Companies (RICs) and Real Estate 
Investment Trusts (REITs), as well as recent U.S. law changes aimed at 
preserving taxing jurisdiction over certain individuals who terminate 
their long-term residence within the United States.
    Additionally, important safeguards are included in the Swedish 
Protocol to prevent treaty shopping. For example, in order to qualify 
for the lowered rates specified by the agreement, companies must meet 
certain requirements so that foreigners whose governments have not 
negotiated a tax treaty with Sweden or the U.S. cannot free-ride on 
this treaty. Provisions in the protocol are intended to ensure that its 
benefits accrue only to those for which they are intended.
    The French Protocols that are before the committee today represent 
updates and improvements to existing agreements. These protocols will 
enhance an already flourishing economic relationship between our two 
countries. Included in the updated agreements are current U.S. tax 
treaty policies regarding hybrid entities and the application of 
reduced withholding tax rates for dividends paid by RICs and REITs. 
Another notable inclusion in the French Protocols recognizes reciprocal 
pension and retirement benefits for individuals of either country 
eliminating double taxation on contributions and payments paid by or 
for an individual to a pension or retirement plan, reducing the burden 
on individuals working for foreign subsidiaries of companies in either 
country.
    Including REITs in the French Convention will stimulate foreign 
direct investment into the U.S. and provide greater incentives for 
French foreign nationals to keep that income in the U.S. Such measures 
are integral to fostering an atmosphere conducive to the investment 
needs of both foreign nationals and U.S. businesses, specifically in 
the financial services industry.
    The tax treaty with Bangladesh represents a new tax treaty 
relationship for the United States. The agreement is a significant step 
forward in the U.S. economic relationship with Bangladesh. As a 
modernizing nation, Bangladesh is in a developmental phase, which gives 
rise to opportunities for American business because of the projects and 
the economic development that an expanding infrastructure will allow. 
Without a similar tax arrangement, U.S. companies that are interested 
in investing in or trading with Bangladesh are at a competitive 
disadvantage.
    While the Bangladesh Treaty does not go as far as other agreements 
(e.g., in eliminating withholding taxes for dividends, interest, and 
royalties), it represents an important starting point in a growing 
economic relationship with Bangladesh. The Bangladesh Treaty reflects 
current U.S. tax treaty policy for agreements with developing nations, 
and it includes appropriate measures to prevent treaty shopping. The 
NFTC strongly supports action to create the competitive balance 
afforded to U.S. enterprises by this tax treaty.

                 GENERAL COMMENTS ON TAX TREATY POLICY

    While we are not aware of any opposition to the treaties under 
consideration, the NFTC as it has done in the past as a general 
cautionary note, urges the committee to reject opposition to the 
agreements based on the presence or absence of a single provision. No 
process that is as laden with competing considerations as the 
negotiation of a full-scale tax treaty between sovereign states will be 
able to produce an agreement that will completely satisfy every 
possible constituency, and no such result should be expected. Virtually 
all treaty relationships arise from difficult and sometimes delicate 
negotiations aimed at resolving conflicts between the tax laws and 
policies of the negotiating countries. The resulting compromises always 
reflect a series of concessions by both countries from their preferred 
positions. Recognizing this, but also cognizant of the vital role tax 
treaties play in creating a level playing field for enterprises engaged 
in international commerce, the NFTC believes that treaties should be 
evaluated on the basis of their overall effect. In other words, 
agreements should be judged on whether they encourage international 
flows of trade and investment between the United States and the other 
country. An agreement that meets this standard will provide the 
guidance enterprises need in planning for the future, provide 
nondiscriminatory treatment for U.S. traders and investors as compared 
to those of other countries, and meet a minimum level of acceptability 
in comparison with the preferred U.S. position and expressed goals of 
the business community.
    Mechanical comparisons of a particular treaty's provisions with the 
U.S. model or with treaties with other countries do not provide an 
appropriate basis for analyzing a treaty's value. U.S. negotiators are 
to be applauded for achieving agreements that reflect current U.S. tax 
treaty policy and the views expressed by the U.S. business community.
    The NFTC also wishes to emphasize how important treaties are in 
creating, implementing, and preserving an international consensus on 
the desirability of avoiding double taxation, particularly with respect 
to transactions between related entities. The United States, together 
with many of its treaty partners, has worked long and hard through the 
OECD and other fora to promote acceptance of the arm's length standard 
for pricing transactions between related parties. The worldwide 
acceptance of this standard, which is reflected in the intricate treaty 
network covering the United States and dozens of other countries, is a 
tribute to governments' commitment to prevent conflicting income 
measurements from leading to double taxation and resulting distortions 
and barriers for international trade. Treaties are a crucial element in 
achieving this goal because they contain an expression of both 
governments' commitment to the arm's length standard and provide the 
only available bilateral mechanism, the competent authority procedure, 
to resolve any disputes about the application of the standard in 
practice.
    We recognize that determination of the appropriate arm's length 
transfer price for the exchange of goods and services between related 
entities is sometimes a complex task that can lead to good faith 
disagreements between well-intentioned parties. Nevertheless, the 
points of international agreement on the governing principles far 
outnumber any points of disagreement. Indeed, after decades of close 
examination, governments around the world agree that the arm's length 
principle is the best available standard for determining the 
appropriate transfer price because of both its economic neutrality and 
its ability to be applied by taxpayers and revenue authorities alike by 
reference to verifiable data.
    The NFTC strongly supports the efforts of the Internal Revenue 
Service and the Treasury to promote continuing international consensus 
on the appropriate transfer pricing standards, as well as innovative 
procedures for implementing that consensus. We applaud the continued 
growth of the APA program, which is designed to achieve agreement 
between taxpayers and revenue authorities on the proper pricing 
methodology to be used, before disputes arise. We commend the ongoing 
efforts of the IRS to refine and improve the operation of the competent 
authority process under treaties to make it a more efficient and 
reliable means of avoiding double taxation.
    The NFTC also wishes to reiterate its support for the existing 
procedure by which Treasury consults on a regular basis with this 
committee, the tax-writing committees, and the appropriate 
congressional staffs concerning tax treaty issues and negotiations and 
the interaction between treaties and developing tax legislation. We 
encourage all participants in such consultations to give them a high 
priority. We also commend this committee for scheduling tax treaty 
hearings quickly after receiving the agreements from the executive 
branch. Doing so enables improvements in the treaty network to enter 
into effect as quickly as possible.
    We would also like to reaffirm our view, frequently voiced in the 
past, that Congress should avoid occasions of overriding in subsequent 
domestic legislation the U.S. tax treaty commitments approved by this 
committee. We believe that consultation, negotiation, and mutual 
agreement upon changes, rather than unilateral legislative abrogation 
of treaty commitments, better supports the mutual goals of treaty 
partners.

                             IN CONCLUSION

    Finally, the NFTC is grateful to the Chairman and the members of 
the committee for their continuing commitment to giving international 
economic relations prominence in the committee's agenda, particularly 
when the demands upon the committee's time are so pressing. We would 
also like to express our appreciation for the efforts of both majority 
and minority staff in arranging for this hearing to be scheduled and 
held at this time.
    We commend the committee for its commitment to proceed with 
ratification of these important agreements as expeditiously as 
possible.

    The Chairman. Thank you very much, Mr. Reinsch. We 
appreciate the compliments to our staff for their work on this. 
I take it as a point of pride that this committee and its 
subcommittees held more meetings than any other committee in 
the Senate last year, and it's largely because our country has 
a very active foreign policy. We have conflicts in many areas. 
We're seeking peace in many areas. But the considerations 
before us today are extremely important, as are many functions 
that the committee performs. And this means that our staffs 
have to work especially diligently to prepare for the hearings, 
to do a responsible job, as they will do once again with this 
hearing today. So, I thank you for your thoughts.
    Now, let me begin the questioning with you, Ms. Brown. I'm 
excited, by the fact that you mentioned the new U.S. model 
treaty. And Mr. Barthold has commented on his enthusiasm about 
that, too. I want to ask both you about that treaty. Can you 
give us any preview of what is likely to be included, what we 
might anticipate? I know that, obviously, it's still under 
consideration. You may not wish to reveal everything that is 
going to occur, but can you give us some format for the future?
    Ms. Brown. Yes, of course, Mr. Chairman.
    I'm afraid it's not going to be nearly as exciting as Mr. 
Barthold is anticipating.
    The Chairman. Oh, that's too bad.
    Ms. Brown. I think that we should see the model treaty as 
really an evolution. We--because, in 1996--well, it was done in 
1996, and, since then, we have done a number of treaties where 
we've refined the language; we've made some mistakes, and we've 
figured out how to fix them; and we've had some changes in 
policies, such as the rules on RICs and REITs. And so, what 
we're really trying to do is have a document that reflects all 
those changes in policy, which you've seen, and gets the 
drafting right, to have the best drafting that we've developed 
over the course of the last 10 years.
    We would not expect to have the zero-withholding rate on 
dividends as part of that treaty, because it's not a provision 
that we think we could have with every country. In fact, I 
think probably only a handful of countries are really going to 
adopt that, going forward. So, we don't think that that is 
appropriate. We will have updated limitation-on-benefits 
provisions.
    And an issue that the Joint Committee has raised, and the 
Senate Foreign Relations Committee has raised, is our treatment 
of students and teachers in a number of treaties. I have to say 
that that issue, we've been a little haphazard in the past. 
There are a couple of provisions. As long as the other country 
asks for something we've done before, we've agreed to it 
without really thinking about creating differences between 
different categories. And so, that's an issue that is 
particularly a Foreign Relations issue. It's the question of 
how to encourage cross-border cultural exchange. And we'd like 
to have the views of the committee staffs and the committee on 
that issue.
    The Chairman. Well, I'm pleased that the student and 
scholar issue is going to be a part of your consideration. We 
look forward, obviously, to progress on that, because, you're 
correct, this has been the subject in many forums--more 
recently, immigration and visas and all the problems of 
homeland defense and so forth. And the table that you occupy 
has been filled with scholars from our universities, as well as 
officials from our government. We're making headway there, and 
the tax implications are often important, and have been long 
before 9/11 and the crisis that occurred then.
    You and Mr. Barthold have touched upon the zero-
withholding-rate treaties and the criteria that may be involved 
there. I suppose, as you enter the model treaty, there may be 
even further explication of the reasons why certain tax regimes 
in certain countries are worthy of that kind of consideration, 
as opposed to others. Can you make any further comment about 
that?
    Ms. Brown. We have applied the zero rate in a number of 
different circumstances. Sometimes the treaty partner has a 
foreign tax-credit system, sometimes it has a dividend-
exemption system. And so, it's not the particular taxing 
regime, as long as we think that the other country has a robust 
regime. Certainly if there's a country that does not impose 
much tax at all, we may not enter into a treaty at all with 
that country, but certainly they would not be a candidate for a 
zero-withholding rate on dividends.
    What we're interested in is protecting that provision. Mr. 
Barthold asks whether we would be interested in having zero 
across-the-board with all countries, and I think the answer is 
that in an ideal world, we would. The U.S. receives more in the 
way of dividends than it pays. And so, just as with respect to 
interest, that would probably be the preferred approach. The 
question really is, How do we get from where we are now, which 
is having it in a handful of treaties, to that ideal situation? 
And so, we think that we're going to have to continue to have 
limitations in order to prevent residents of third countries 
from getting the benefit of that provision without giving the 
same benefit to our companies. Because the point really is, as 
Mr. Reinsch will say, to make sure that our companies benefit 
from the zero-withholding rate, and not just the residents of 
third countries.
    The Chairman. I thank you for that comment. And I know that 
will probably arise again as we take a look at the model tax 
treaty and the provisions that you make that pertain to this.
    You discussed in your testimony that tax treaties provide 
settlement mechanisms. Just for the record, can you give us an 
example of a recent dispute that was resolved, and how the 
existence of a treaty, any one of those that you have recently 
formulated, led to a resolution of that dispute?
    Ms. Brown. Mr. Chairman, we always like to resolve things 
before they get to the level of a dispute, so maybe I'll 
mention a few areas.
    Of course, most of the disputes that we're talking about 
relate to specific taxpayer matters. They're transfer pricing 
matters where the competent authority may resolve dozens, maybe 
hundreds, of those cases every year. Mostly transfer pricing. 
Sometimes something as simple as whether an individual is a 
resident of the United States or the United Kingdom, which has 
ramifications throughout the treaty for that individual.
    We also have the ability to reach agreements on matters of 
general application. And so, in the past few years, recently, 
we reached an agreement on the definition of what an 
``investment bank'' is, since there's an--with Japan--there's 
an exemption in that treaty for withholding--for interest 
withholding on payments received by banks and investment banks. 
And reaching an agreement with Japan on that was very important 
for our financial-services industry. We have also reached 
general agreements on what pension funds and insurance 
companies that do pension business in the United Kingdom will 
qualify for the exemption from withholding taxes on dividends 
paid to pension funds. And so, we deal with the small issues 
and the big issues.
    But one of the things that our competent authority tells us 
is that with respect to truly large cases--and there are some 
that are in the paper--even our best treaty relationships can 
be improved. And so, we are looking at ways to improve the 
dispute settlement resolution mechanism, and you may hear more 
about that in the future.
    The Chairman. Well, I thank you for that explanation. You 
know, obviously one of the purposes of your work, and our 
hearing, is to bring greater fairness to American taxpayers; 
likewise, reciprocally, taxpayers of other countries. But 
frequently when the Congress or the Treasury Department or 
others meet, why, taxpayers may fear that their lives are 
jeopardy, that there are consequences. We're attempting to 
bring some fairness to the process as advocates for American 
taxpayers, whether they be individuals or businesses, vis-a-vis 
other countries that might, at least in our judgment, have 
unfair burdens. And through the mechanisms of treaties, the 
ways in which the nations deal with each other can mitigate the 
severity of those situations. So, we appreciate your 
explanation--I think it's a good one--that sometimes you have 
hundreds of cases. Only a very few may arise, sometimes with 
questions of status, of the residence, of who is where and what 
legal standing they have in countries involved.
    Now, let me ask, on the Swedish situation--you've touched 
upon this, and Mr. Barthold has, some more--that there was 
unintended taxation of local employees of the United States 
Embassy and the Consulate in Sweden. As Mr. Barthold has 
pointed out, this pertains primarily to Swedish individuals, 
citizens of Sweden. Can you offer further background on the 
equities of this, why we became involved in it--and what the 
resolution has been?
    Ms. Brown. Thank you, Mr. Chairman. Yes, it is an unusual 
situation. The issue was brought to our attention by the 
ambassador, our ambassador to Sweden.
    The Chairman. How long ago did that occur?
    Ms. Brown. About 2002--actually, maybe as early as 2001.
    The Chairman. But pertaining to people who had histories 
way back from----
    Ms. Brown. That is----
    The Chairman (continuing). ----we've learned.
    Ms. Brown. That is exactly right. It took some time for the 
issue to really become clear to the embassy staff. And they 
felt very strongly that this was an issue where people who had 
spent their entire careers working for the U.S. Government were 
really being treated unfairly, and, in some cases, losing 
houses because they couldn't afford to pay them, because of the 
reduced pension. And this was clearly not what was intended in 
1995. So, it was a case where we really needed to find a 
solution.
    We did talk to the State Department about potentially 
increasing the pensions. They said that was impossible. We 
talked, for several years, with the Swedish Government about 
making an exception. Their view was that if they made an 
exception for these people, they would be asked to make 
exceptions for numbers of classes of people. And so, the view 
was that since this was a problem that was created by the 
treaty, it should be resolved through the treaty. And it is a 
little unusual, although one of the few articles that actually 
does deal with the taxation by the other government, of 
residents of that country, is the government-services article. 
So, it's not that unusual in the context of that provision.
    The Chairman. Well, I thank you for that additional 
explanation, and I would estimate that all of this may pertain 
to a relatively small number of individuals in the population 
of Sweden; still, it would be good news to Swedes that there is 
sensitivity on the part of their government, and our 
government, to the situation of these employees, who have been 
helpful to American interests, but, likewise, reciprocally, to 
Swedish interests over the course of time.
    Let me ask about the treaty with Sri Lanka, which we passed 
in the last Congress. Bangladesh is sometimes also considered, 
as countries are described, as a developing country. Can you 
point out any key differences between the Sri Lanka treaty that 
we passed last year and the Bangladesh treaty before us today? 
And are there likely to be current negotiations with other 
developing countries? Is that a trend, at least in the work in 
your shop?
    Ms. Brown. Thank you, Mr. Chairman.
    The Sri Lanka treaty and the Bangladesh treaty are actually 
fairly similar, not surprisingly. We began negotiating them 
about the same time, quite a long time ago. I would say that 
the Bangladesh treaty has slightly lower rates on investment 
income. This is something that developing countries really have 
to decide for themselves. They have a dilemma. They want to 
attract investment, so they want the rates to be low enough to 
attract investment, but if they make them too low, then their 
own population may say, ``Why are you treating the foreign 
companies better than our companies?'' And so, we can reach 
appropriate resolutions at different rates with different 
countries. But I would say that the Bangladesh treaty is a 
little more favorable to businesses than the Sri Lanka treaty, 
but not in a significant way. They're both fairly mainstream 
developing-country treaties.
    With respect to other developing countries, we have had 
some informal talks, and I think the one that perhaps I'm most 
hopeful about is Vietnam. But those are very preliminary talks, 
and--but if things to go well, we may be talking to them later, 
in 2006 or 2007.
    The Chairman. Maybe a forecast of another hearing down the 
road.
    Now, finally, on a practical level, how will the new 
protocols with France affect citizens currently living--that 
is, U.S. citizens--currently living and working in France? And, 
likewise, how will they affect French nationals working here? 
In terms of day-to-day examples or the rudimentary situations 
for these persons, how will they be affected?
    Ms. Brown. Well, I think for--the easier case, perhaps, is 
the French nationals who are living here. And that's partly 
because of these disparities that I described earlier. Since 
1995, U.S. citizens who are working in France have been given a 
deduction by France for contributions that they make to their 
U.S. pension funds, or that their employer makes----
    The Chairman. So, that's been very clear to them there.
    Ms. Brown  (continuing). ----And so, they've had that 
advantage, going back 10 years. Whereas, French persons living 
in the United States who don't have private pension plans have 
not gotten the same benefit with respect to voluntary 
contributions that they make into the French social-security 
system. Such people would make those contributions to ensure 
that the benefits that they eventually get are maintained at a 
high level. And so, really what this does is achieve parity for 
the benefit we've been getting for the last 10 years.
    I think the other significant benefit for U.S. people 
living in France would be that, if they are married to a French 
citizen, they won't see their estate disappear quite as quickly 
under the new estate-tax protocol, that the French spouse will 
be able to inherit some property without being subject to U.S. 
estate tax on that. And so, I think that's a peace-of-mind 
benefit for those people, that will be important.
    The Chairman. Just a point of curiosity. Are French estate 
taxes comparable to ours? How would they be measured?
    Ms. Brown. I think they're actually higher.
    The Chairman. Higher.
    Ms. Brown. And they provide fewer exemptions, overall. The 
French did agree, in this protocol, to provide for U.S. persons 
the same exemptions that they provide to French nationals. And 
so, there is parity there, but the exemptions are generally 
less generous than in the United States. And, of course, in 
France you can provide artwork to pay your estate taxes----
    The Chairman. I see. Well, that's an interesting footnote 
for the record.
    Let me ask Mr. Barthold the same initial question I asked 
Ms. Brown. The Joint Committee has taken a look at this model 
treaty drafting coming along. Are there specific provisions 
that you would suggest in the new model? We've touched a little 
bit upon this zero-withholding-rate business as something that 
may be considered, one way or another. But can you explore that 
a little bit, in terms of some forecasts of what might occur, 
or a wish list of what you wish would occur?
    Mr. Barthold. Well, Mr. Chairman, I can't offer a forecast. 
The model is for the Treasury to develop. And, as I said, I 
know we've been accused by some of harping on the model, but we 
view it as an important guidepost for your committee in 
assessing how we're developing our treaty relationships. But 
also, at a technical level, of course, it provides recommended 
treaty language, and puts it out there so that people can 
comment on it, so that people can explore whether it helps 
achieve the results that we are trying to achieve in these 
treaty relationships. And so, the points that Ms. Brown raised 
about updating to reflect the RIC/REIT changes, coverage of the 
issue that we raised today about the disparate treatment in the 
three proposed protocols and proposed treaty before you today 
with respect to the expatriation of citizens and long-term 
residents. So, putting out common language is very helpful, in 
terms of updating.
    Now, the broader issue that we did raise, and of which you 
have inquired, the zero rate, is if we view this as U.S. 
policy, going forward, we might want to lay that out, in part, 
for your committee's guidance and for people to understand. And 
the context in which we raised the issue, is that, as part of 
the zero-rate provisions that the Treasury has negotiated over 
the last 5 years, as Ms. Brown noted, they have seen, as an 
important component of this, very strong or increased strength 
of limitation-on-benefit provisions and exchange-of-information 
provisions. If that is Treasury's policy, going forward, we 
think that there would be some benefit to your committee and to 
the public at large, to lay that out. We understand, of course, 
that in negotiations you do not expect to see everything in the 
U.S. model adopted as the result of a negotiation and brought 
before the committee and the Senate for ratification. But it 
does tell us a direction that we'd like to go, and also 
provides some guidance to investors and the business community. 
Looking ahead, it gives them a sense of, ``How might the U.S. 
Government be trying to update treaties with a country in which 
I plan to make an investment? And what might this mean for my 
investment?'' That is why we think the model, and updating the 
model, is an important thing to consider. I do reiterate our 
enthusiasm in working with your committee staff and the 
Treasury Department in an update of the model.
    The Chairman. Well, I think that is a good explanation. And 
this model does offer Senators and staff a criteria that 
obviously is important to American businesses, and taxpayers 
have some idea of--in the best of circumstances. Now, I think, 
Ms. Brown, you used the term ``some countries have a robust tax 
regime,'' others have a lot of missing pieces. So, if you have 
a model out there, you, I suppose, have to make some 
measurement of the reciprocity or some comparability of 
circumstances, and that is, I think, what you have said, what I 
perceive to be the situation. But it's very useful to have the 
model there that, in the event that other countries 
reciprocally take seriously the drafting of tax legislation, 
the collection of taxes, and so forth, as we do, then we offer 
comparable regimes.
    Just let me ask, for sake of curiosity, Mr. Barthold, are 
there any specific provisions in the agreements before us 
today, albeit a limited number, which you think ought to be 
consistently included, or, for that matter, excluded from 
treaties with similarly situated countries? Are there any new 
features or things that you would like to highlight further in 
the treaties we're discussing today?
    Mr. Barthold. Thank you, Mr. Chairman.
    We did highlight in our written materials and in my 
testimony, changes in provisions that we think are potentially 
very important for the committee: strengthened--as I noted a 
couple of times, strengthened limitation on benefit provisions, 
a new look at public trading, substantial presence, and 
tightening the notion of nexus between the taxpayer and the 
residence country. I think it is fair to say our staff viewed 
those all as very positive moves, adding more clarity, and, at 
least conceptually--of course, they have not been tested in 
practice yet, but at least conceptually--adding more strength 
to the result that the Treasury Department is trying to 
achieve.
    Those would be some main things I would highlight.
    The Chairman. As I listened to your testimony, I jotted 
down the substantial-presence situation, which is certainly 
logical, this nexus of the taxpayer with the country. And 
clearly that is emphasized in what we're considering today. 
These are principles that have application that I presume will 
reemerge in the model treaty, but might be worthy underlining 
today.
    Many recent tax treaties matters strengthen the so-called 
``anti-treaty-shopping provisions.'' Do you believe the anti-
treaty-shopping provisions, for example, as in the Swedish 
protocol we're talking about today, are effective in preventing 
companies or persons not intended to receive these treaty 
benefits from taking unfair advantage of the situation?
    Mr. Barthold. Well, Mr. Chairman, we should note the 
provisions in the Swedish protocol before us today are quite 
similar also to those provisions of the Netherlands protocol of 
a year ago. And so, we might want to think of those two as sort 
of a package reflecting some new attempts to lay out these 
limitations and anti-treaty-shopping provisions. So, since it 
is brand new, we clearly cannot assess the effectiveness, but I 
think it is certainly clear to say that by placing this 
emphasis on nexus, and some of the increased exchange of 
information that goes along with it, that conceptually a 
stronger provision has been included in these two instances. 
But, as with everything new, it is too soon to tell.
    The Chairman. Yes. But these are two significant treaties. 
The Netherlands, as we all observed last year, was a very large 
treaty. Our investments and trade with the Netherlands are very 
significant. And Sweden, likewise. We've illustrated today the 
amount of investment and trade we currently have.
    Mr. Barthold, you've noted in your testimony and your 
discussion that the tax-avoidance test in the past maybe has 
been supplanted by a new test, which appears in the American 
Jobs Creation Act. The Treasury Department has explained that 
the language for the old test can be interpreted to be 
consistent with the new test. But I gather from your testimony 
you're not totally satisfied with that explanation. Can you 
illuminate considerations that we ought to have as we proceed 
down that trail?
    Mr. Barthold. Well, the Joint Committee staff's degree of 
dissatisfaction expressed is relative only because we like 
perfection in everything, even if we are not always able to 
achieve it. We agree with the Treasury--that the Treasury's 
interpretation in the language of the proposed French income-
tax protocol, the French estate-, gift-, and inheritance-tax 
protocol, and the proposed Bangladesh treaty, is a reasonable 
interpretation. However, I think we do have to say that in the 
Swedish protocol, Treasury has provided better and more precise 
language in the sense that it more clearly adapts or fits with 
the direction that the Congress took in the expatriation 
provisions of section 877 in the American Jobs Creation Act. 
So, in that sense, for future treaties--and we would hope that 
your committee agrees--I am sure the intent of the Treasury 
would be to follow language such as that developed in the 
Swedish protocol.
    The Chairman. Ms. Brown, is that likely to be your intent, 
or that of your cohorts at Treasury?
    Ms. Brown. Thank you, Mr. Chairman.
    Yes, certainly we intend to do that in future treaties. And 
we would have done it in these other three agreements. 
Bangladesh was actually signed before the legislation was 
changed. The French protocols were signed after, but had gone 
through all the approval processes, and to go back at that 
point to try to change it, I think, would have slowed things 
down. They had been in the works for some time.
    No doubt that, hopefully, we'll be talking to the French 
about other improvements, and in that context, we may bring 
this up again.
    The Chairman. Very well.
    Let me begin to question Mr. Reinsch by observing his 
comment that I think each of the other panelists reflects. Even 
if a person or a business has some objection to some specific 
provision of the work we're looking at today, it would be 
unwise to reject the whole affair on the basis of that. As Mr. 
Barthold said, we're seeking perfection, and may not have quite 
achieved that in each provision, but, on the whole, as we take 
a look at these instruments, they appear to be substantial 
advances. And I want to ask you, Mr. Reinsch, for the record, 
can you, having taken a look at these specific agreements 
today, cite any benefits that you can see to American business 
and investment in the respective jurisdictions we're talking 
about?
    Mr. Reinsch. Thank you, Mr. Chairman.
    We believe, with respect to these particular treaties and 
protocols, the benefits, while there are some specific ones--
and I'll mention one or two--the largest benefit is the 
continued harmonization, if you will, of tax systems, and, in 
particular, the continued march, as we see it, toward a zero-
withholding status in a number of other countries. While the 
practical applications of that, in the Swedish case, are not 
great, because the Swedes have already done that unilaterally, 
we think adding that principle to this treaty will facilitate 
our ability to do that with respect to some other countries, 
particularly in the EU, where we've not yet achieved that goal. 
So, it's building blocks, if you will, for a stronger 
foundation.
    With respect to the French, we particularly noted a number 
of the pension provisions which we think will produce the kind 
of parity, if you will, amongst their nationals here, and ours 
there, that Ms. Brown alluded to. We think this is important 
because our companies see this as an issue we--you and I have 
discussed in other fora, I believe, Mr. Chairman--the 
increasing movement of personnel all over the world. It's a 
topic in the Dohar Round of multilateral trade negotiations. 
It's a subject of congressional debate right now. We would like 
to see that movement facilitated.
    We view the movement of personnel as a little bit like 
movement of capital, an opportunity for companies to deploy 
their resources most efficiently. To the extent that people 
would, for example, lose pension benefits or be in an adverse 
tax position if they moved, we would like to see those 
differences eliminated. And to the extent this treaty does that 
with respect to France, we think that's a good thing. I don't 
think it's a measurable benefit in the short term, but we 
think, in the long term, it will facilitate the movement of 
people, particularly senior people, around the world. And 
that's good.
    With respect to the Bangladesh treaty, I would simply say 
that we applaud the Treasury entering into tax treaties with 
developing countries. It encourages them to develop robust tax 
systems, which is in all of our interest.
    The Chairman. Well, thank you very much for those specific 
thoughts about these treaties, as well as their potential 
general application.
    Let me just ask you the same question I've asked the other 
panelists. As we move toward the model treaty, what additional 
advice and counsel do you have, for the public record, of what 
we ought to be hoping for?
    Mr. Reinsch. Well, first let me say--Ms. Brown can speak 
for her side--we feel we have a very good relationship with the 
Treasury Department right now, and we have not hesitated to 
supply that kind of advice frequently in the past, and we will 
continue to do so.
    I think the issue that I would touch on is the same one 
that you have raised in your prior questions to the other 
witnesses, Mr. Chairman, and that's the zero-withholding issue. 
As a matter of principle, we support the expansion of that 
concept globally, and would like to see it in all the treaties. 
That said, we, nonetheless, support the Bangladesh treaty, even 
though it doesn't get there. And we certainly sympathize with 
Ms. Brown's and the Treasury Department's situation in not 
wanting to do that in certain situations, depending, among 
other things, on how robust the other party's tax system is. 
So, we don't fall on our sword on this issue, but if the 
question is, What would we like to see in the model treaty?--
yes, we would like to see that in the model treaty.
    The Chairman. You have mentioned the communication you have 
with Treasury. You're able to communicate on behalf of American 
business and individual taxpayers. Please share your own 
experience of how robust those tax systems are, or your 
findings, as practical businesspeople.
    Mr. Reinsch. We are, Mr. Chairman. In particular, we've 
been very pleased with our relationship with Ms. Brown and with 
the Treasury. With respect to how to focus the negotiations, 
going forward, every year we survey our tax committee members, 
asking them what countries they're particularly interested in, 
and, with respect to those countries, what issues they're 
particularly interested in. And we regularly supply that 
information to the Treasury. We are pleased that the Treasury 
makes a good-faith effort to pursue our recommendations. They 
don't always succeed. Canada has been at the top of our list 
for a long time, and they're not there yet, but we appreciate 
the effort, nonetheless, and we would like to reinforce that. 
And we intend to keep on providing that kind of advice. And I 
think there's been a healthy dialogue. The Treasury has not 
been shy about telling us when they don't agree with us, and I 
think we've had a good exchange of views. We learn from them, 
just as I hope they learn from us.
    The Chairman. In addition to Canadian friends, what other 
countries would you recommend as worthy of special attention, 
presently?
    Mr. Reinsch. Well, the other big one for us is Brazil, but 
we're not having a lot of luck in that respect.
    The Chairman. I see. What seems to be the dilemma?
    Mr. Reinsch. I have to defer to Ms. Brown on the dilemma.
    The Chairman. Oh, I see.
    Mr. Reinsch. I think the dilemma's at their end, not at our 
end.
    The Chairman. But, anyway, you're recommending Brazil, and 
that was really the gist of my question, as you try to take a 
look at additional trading partners with which we might make 
significant headway. And so, that may require some negotiation 
with Brazilians so that their system is as ``robust,'' to use 
that expression, as should be required.
    Mr. Reinsch, what particular concerns would your members 
like to raise? We've talked about the new tax treaty and the 
zero-withholding situation, so obviously that is something 
that's important. Please comment, generally, on effective or 
ineffective provisions as they pertain to treaties that you 
have looked at or advice that you're presently giving to 
Treasury.
    Mr. Reinsch. I think with respect to tax treaties, Mr. 
Chairman, we really rest on the zero-withholding issue. That's 
the single-most important thing to us, and we've already 
discussed that in detail here. So, I won't harp on it.
    Many of the provisions, of course, have to do with 
enforcement and adjudication issues, and we welcome what the 
Treasury is doing. We believe in strong enforcement. We don't 
really take positions on that.
    Otherwise, in general, to the extent that you can, in 
specific cases, as in the French case, address pension issues 
where there is no parity, we support that, but I think that's 
hard to articulate as a general principle, because it really is 
specific to whatever country we're negotiating with at the 
time.
    The Chairman. Let me just ask any of the three of you, or 
all, as the case may be. The tax treaties and protocols we're 
discussing today are important, in terms of equity for 
individuals and businesses, but, at least from the standpoint 
of our committee, they are also important in terms of our 
overall public diplomacy. Public diplomacy is often mentioned 
in other contexts, but it appears to me that we have an 
example, as a practical effect, because of the tens of 
thousands, maybe even more, who are affected, really, in their 
everyday lives and in their business transactions. And the 
impression that other countries, I hope, gain from this 
discussion, as well as from the practical work which you're 
describing, is that our country does work for fairness and for 
equity with every country all over the world that has similar 
objectives.
    I'm just curious whether you see what you're doing in that 
context and would even offer more illumination as to how 
America's role in the world, and the perceptions of our 
country, are enhanced by these treaties.
    Ms. Brown, would you make a comment on that?
    Ms. Brown. Thank you, Mr. Chairman.
    It is an interesting question. We--and one of the things 
that we haven't talked about here, because we're looking at 
bilateral treaties, is some of the multilateral efforts we do. 
And the United States actually has a fairly small tax-treaty 
network. And, in part, that's because our tax system is so 
complex that negotiating these agreements takes a lot of time. 
But we participate, through the Organization for Economic 
Cooperation and Development and also the U.N., in outreach to 
developing countries through a global forum the OECD holds each 
year on tax treaties, developing tax-treaty policy, and also I 
participate in the U.N.'s group on international cooperation. 
And I think that those efforts, in particular, help to 
demonstrate this fairness. And we are open to developing 
countries negotiating treaties with us when they're ready. And 
I think we make that clear.
    So, I think it is an important aspect of our tax treaty--of 
American diplomacy that we do these agreements. Not every 
country is going to be able to do one. Sometimes systems are 
just very different, and it's not going to be possible to reach 
a conclusion. That's certainly true with Brazil. Brazil has, 
certainly, a robust tax system. There's no question. It's maybe 
a little too robust. They're not willing to give up--make some 
concessions that we would like. And so, that's really the 
problem there. But we would like to increase our ties with 
Latin America. We think this is an important aspect of that. 
We'd like to increase our ties with Asian countries. And so, it 
is part, a big part, of our international diplomacy.
    The Chairman. Do either of you have a comment on that 
question? Mr. Barthold?
    Mr. Barthold. Mr. Chairman, I personally am not a 
significant world traveler, and so in terms of public 
diplomacy, it is more likely that your committee members and 
staff would hear the feedback, because you are constantly 
dealing with representatives of foreign governments and with 
our embassy personnel reporting on our relations. And so, you 
and your staff would actually have a much better sense of that 
than I. Ms. Brown, of course, engages in these negotiations; 
and so, gets some direct feedback in the NFTC. Their members 
are on the ground abroad; and so, they would also have a sense. 
But my committee staff do not really get that direct sense----
    The Chairman. Well, the Joint Committee, in other words, is 
really examining more of the quality of the documents and its 
consistency with American law and practice.
    Mr. Barthold (continuing). ----That's a fair assessment.
    The Chairman. Mr. Reinsch, do you have any thoughts about 
this?
    Mr. Reinsch. Only, Mr. Chairman, that these things don't 
make the front page, as some of our other public-diplomacy 
efforts do, as you well know. But, from our perspective, 
they're very important. Most large companies, which are our 
members, devote a substantial amount of their internal 
resources to tax issues and tax policy, both, trying to, as you 
might imagine, minimize taxation in every jurisdiction. And 
taxes are an important consideration when one goes into or 
expands or contracts one's enterprise somewhere else. So, how 
these things work out are very important to our companies and 
also to their employees in other countries.
    You haven't asked about relative benefit. And I think the 
answer to the unasked question is, these things are not 
supposed to produce enormous benefit to us, and not to the 
other party; they're designed to create parity and to equalize 
the situation. But I think it's clear, in the case of these 
treaties, as well as some of the others that I've testified on, 
that there are very clear benefits for some of the foreign 
corporations, in doing business here. And I can tell you, from 
my conversations with them--some of whom, by the way, have 
American subsidiaries that are our members--that the 
willingness of the United States to undertake these kinds of 
negotiations and eliminate these inequities is very much 
appreciated. As I said, it's not a front-page issue, and it 
doesn't make the TV news, but, in corporate circles, these 
documents and agreements are very important, and the network 
that we are creating is a much appreciated one.
    The Chairman. Well, I appreciate that testimony. I would 
just say, anecdotally, I had an experience the other evening at 
the beginning of the Cezanne in Provence exhibition, which is a 
remarkable exhibition in our National Gallery. The French 
Ambassador was present, but so were tens of citizens of Aix en 
Provence, where the exhibit will be going, and other persons 
from France who were really instrumental in this being the 
opening of something which is a centennial for Cezanne's birth 
and that great body of artwork. But the sponsor of the 
situation, the leading sponsor, was DaimlerChrysler. This 
reflects the numbers of persons who were there who travel 
regularly, almost commute to Germany and back to various parts 
of the United States where Americans are employed. This 
illustrates how complex business is, and how important that it 
be expedited well, and with fairness. The volume of contacts, 
just business-wise, that assembled in that room to begin the 
exhibition indicated how small the world is, in one respect, 
and how intertwined we are in all the complexities that we're 
talking about today. That probably undergirded the investments 
in that exhibit, the actual acquisition of all the artwork. 
Some thoughts that have been given about artwork as it enters 
into taxation and so forth. So, as I say, this simply was an 
anecdotal experience, but it struck home, again, a part of what 
we're discussing today, and its illustrated importance.
    Now, let me just, indicate that Americans want to make 
certain that our tax code is fair. You've mentioned, Ms. Brown, 
that it also is complex. One of the problems that you face--and 
you've just touched upon this today--as you visit with other 
countries and they're confronted--usually not the first time; 
they have experts who are aware of what Americans are doing, 
our tax debates--but this is not easy to get your arms around 
to see what reciprocally might be of advantage or what things 
might be worked out. It may seem such a daunting task that, for 
a while, you may not make great headway. But I admire your 
ability to explain this to others. We may or may not simplify 
the tax code, ever, as the Congress moves. And the criticism is 
that we have added additional pages, usually, in most sessions, 
which is of discomfiture to some persons everywhere. We're 
talking about something here that is complex, and yet has to be 
made relatively simple so there is a perception on the part of 
Americans that special advantage is not being given to foreign 
nationals. On the other hand, as Mr. Reinsch has expressed, 
we're not talking, today, about the United States coming out 
well ahead of almost everybody we have negotiated with. Rather, 
it has been a question of how we can balance--whether it's the 
robust quality or the fairness or the coverage or the 
comprehensive nature--these instruments to bring about 
something which is important.
    I would just observe that usually our hearings--and this is 
no exception--on these subjects are covered by a few stalwarts 
of the press, but not by many. The number of stories arising 
from the Japanese and the Netherlands treaties and others that 
were considered in recent times have been relatively small, in 
terms of American comprehension, except for a few professionals 
and a number of companies that have been involved. But I would 
say that's not always the case abroad as people from our staffs 
collect the stories that will occur from this hearing. I 
suspect, in Sweden and in France and in Bangladesh, we would be 
surprised with the interest. This is why I discussed the 
public-diplomacy aspect. This may seem dry as dust to most 
American observers and readers, but not so with situations 
where the United States of America, its Treasury Department, 
the Joint Committee, its businesses are all involved in an open 
discussion of things which are very important to the growth of 
those economies and their intersection with ours.
    So, I appreciate the fact that you have taken time and 
care. The testimony you've offered, I think, is excellent. And 
you've been so forthcoming in your responses to our questions. 
If any of you have further testimony, why, proceed.
    And, otherwise, we will bring the hearing to an 
adjournment. Are there any further questions or answers?
    [No response.]
    The Chairman. Well, we thank you all, and the hearing is 
adjourned.

    [Whereupon, at 11:05 a.m., the hearing was adjourned.]

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