U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1

69–112

" ! SENATE 106TH CONGRESS

1st Session

TREATY DOC.

1999

106–11

TAX CONVENTION WITH ITALY

MESSAGE

FROM

THE PRESIDENT OF THE UNITED STATES

TRANSMITTING

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED

STATES OF AMERICA AND THE GOVERNMENT OF THE ITALIAN

REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION WITH

RESPECT TO TAXES ON INCOME AND THE PREVENTION OF

FRAUD OR FISCAL EVASION, SIGNED AT WASHINGTON ON AUGUST 25, 1999, TOGETHER WITH A PROTOCOL

SEPTEMBER 21, 1999.—Convention was read the first time, and together

with the accompanying papers, referred to the Committee on Foreign

Relations and ordered to be printed for the use of the Senate

(III)

LETTER OF TRANSMITTAL

THE WHITE HOUSE, September 21, 1999.

To the Senate of the United States:

I transmit herewith for Senate advice and consent to ratification

the Convention Between the Government of the United States of

America and the Government of the Italian Republic for the Avoidance of Double Taxation with Respect to Taxes on Income and the

Prevention of Fraud or Fiscal Evasion, signed at Washington on

August 25, 1999, together with a Protocol. Also transmitted are an

exchange of notes with a Memorandum of Understanding and the

report of the Department of State concerning the Convention.

This Convention, which is similar to tax treaties between the

United States and other developed nations, provides maximum

rates of tax to be applied to various types of income and protection

from double taxation of income. The Convention also provides for

resolution of disputes and sets forth rules making its benefits unavailable to residents that are engaged in treaty-shopping or certain abusive transactions.

I recommend that the Senate give early and favorable consideration to this Convention and that the Senate give its advice and

consent to ratification.

WILLIAM J. CLINTON.

(V)

LETTER OF SUBMITTAL

DEPARTMENT OF STATE, Washington, DC, September 7, 1999.

The PRESIDENT,

The White House.

THE PRESIDENT: I have the honor to submit to you, with a view

to its transmission to the Senate for advice and consent to ratification, the Convention Between the Government of the United States

of America and the Government of the Italian Republic for the

Avoidance of Double Taxation with Respect to Taxes on Income and

the Prevention of Fraud or Fiscal Evasion, signed at Washington,

DC, on August 25, 1999 (‘‘the Convention’’), together with a Protocol. Also enclosed for the information of the Senate is an exchange of notes with an attached Memorandum of Understanding.

This Convention would replace the current convention between

the United States of America and the Government of the Republic

of Italy signed at Rome on April 17, 1984. This proposed Convention generally follows the pattern of the U.S. Model Tax Treaty

while incorporating some features of the OECD Model Tax Treaty.

The proposed Convention provides for maximum rates of tax to be

applied to various types of income, protection from double taxation

of income, and exchange of information. It also contains rules making its benefits unavailable to persons that are engaged in treaty

shopping and new provisions denying benefits in the case of certain

abusive transactions. Like other U.S. tax conventions, this Convention provides rules specifying when income that arises in one of the

countries and is attributable to residents of the other country may

be taxed by the country in which the income arises (the ‘‘source’’

country).

The withholding rates on investment income under the proposed

Convention are generally lower than those in the present Convention. Pursuant to Article 10, dividends from direct investments are

subject to withholding tax by the source country at a rate of five

percent. The threshold criterion for direct investment is 25 percent.

Other dividends are generally taxable at 15 percent. Under Article

12, royalties arising in one Contracting State and owned by a resident of the other Contracting State are generally subject to tax in

both countries, except that royalties for copyrights of literary, artistic or scientific work are exempt from a source-country taxation.

The rate of tax by the source country on royalties arising in that

State and paid to a resident of the other State may not exceed five

percent in the case of royalties for the use of, or the right to use,

computer software or industrial, commercial, or scientific equipment; and eight percent in all other cases.
VI

Under Article 11 of the proposed Convention, interest arising in

one Contracting State and earned by a resident of the other Contracting State may generally be taxed in both countries. The rate

of tax by the source country on interest owned by a resident of the

other State is generally limited to 10 percent, although certain

classes of interest are exempt from source-country taxation.

The reduced withholding rates described above do not apply if

the beneficial owner of the income is a resident of one Contracting

State who carries on business in the other Contracting State in

which the income arises and, in the case of business profits, the income is attributable to a permanent establishment or, in the case

of independent personal services, a fixed base in that other State.

If the income is attributable to a permanent establishment, it will

be taxed as business profits, and, if the income is attributable to

a fixed base, it will be taxed as independent personal services.

The maximum rates of withholding tax described in the preceding paragraphs are subject to the standard anti-abuse rules for

certain classes of investment income found in other U.S. tax treaties and agreements.

The taxation of capital gains, described in Article 13 of the proposed Convention, follows the format of the existing treaty. Gains

derived from the sale of real property (immovable property) and

from real property interests may be taxed in the State in which the

property is located. Likewise, gains from the sale of personal property pertaining to a fixed base or forming part of a permanent establishment situated in a Contracting State may be taxed in that

State. As in the existing treaty, but unlike the U.S. Model Treaty,

gains from the alienation of ships and aircraft rented on a bareboat

basis and attributable to a permanent establishment situated in a

Contracting State may be taxed in that State if the rental profits

were not incidental to other profits from the international operation of ships or aircraft. All other gains, including gains from the

alienation of containers, gains from the alienation of ships and aircraft rented on a full basis, gains from the alienation of ships and

aircraft rented on a bareboat basis if the rental profits were incidental to other profits from the international operation of ships or

aircraft, and gains from the sale of stock in a corporation, are taxable only in the State of residence of the seller. These rules serve

to minimize possible double taxation that could otherwise arise.

Article 7 of the proposed Convention generally follows the standard rules for taxation by one country of the business profits of a

resident of the other. The non-residence 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. As do

all recent U.S. treaties, this Convention preserves the right of the

United States to impose its branch taxes in addition to the basic

corporate tax on a branch’s business.

Consistent with the U.S. Model, Article 8 of the proposed Convention permits only the country of residence to tax profits from

the international operation of ships or aircraft and, as explained in

the Protocol, income from the use, maintenance or rental of containers used in international traffic. As further explained in the

Protocol, this reciprocal exemption extends to income from the rental on a full basis of ships and aircraft and, if the rental income is
VII

incidental to income from the operation of ships and aircraft in

international traffic, to income from the rental on a bareboat basis

of ships and aircraft. As under the existing treaty, but unlike the

U.S. Model Treaty, income from the rental of ships and aircraft on

a bareboat basis that is not incidental to the operation of ships or

aircraft by the lessor and that is attributable to a permanent establishment situated in a Contracting State may be taxed in that

State.

The taxation of income from the performance of personal services

under Articles 14 through 17 of the new Convention generally follows U.S. standard treaty policy.

The proposed Convention also contains rules necessary for its administration, including rules for the resolution of disputes under

the Convention (Article 25) and for exchange of information (Article

26). Article 25 of the proposed Convention includes a provision authorizing the use of arbitration to settle disputes in certain cases,

but such provision will not be effective until the Contracting States

exchange diplomatic notes providing for such procedures.

The Convention would permit the General Accounting Office and

the tax-writing committees of Congress to obtain access to certain

tax information exchanged under the Convention for use in their

oversight of the administration of U.S. tax laws.

Comprehensive anti-treaty-shopping rules making the Convention’s benefits unavailable to persons engaged in treaty-shopping

are contained in Article 2 of the Protocol to the proposed Convention. These provisions are similar to those found in the U.S. Model

Treaty and all recent U.S. tax treaties and are more comprehensive

than those found in the existing treaty with Italy. In addition, the

proposed Convention contains new provisions in Articles 10–12 and

22 aimed at preventing abuse with respect to specific transactions.

Under these new provisions, a person otherwise entitled to treaty

benefits will be denied those benefit if the main purpose, or one of

the main purposes, of the creation or assignment of the rights giving rise to the income was to take advantage of the treaty.

This Conventionis subject to ratification. In accordance with the

provisions of Article 28, it will enter into force upon the exchange

of instruments of ratification. The proposed Convention 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 the date on which the Convention comes into force; with respect to other taxes, the Convention will take effect for taxable periods beginning on or after the first day of January next following

the date on which the Convention enters into force.

The proposed Convention will remain in force indefinitely unless

terminated by one of the Contracting States, pursuant to Article

29. That Article provides that, at any time after five years after the

date on which the proposed Convention enters into force, either

State may terminate the Convention by giving at least six months’

prior notice through diplomatic channels.

The Protocol is an integral part of the proposed Convention. In

addition to containing the limitation on benefits provisons described above, the Protocol clarifies and suppluments the proposed

Convention.
VIII

In addition to the proposed Convention with its Protocol, an exchange of notes, with an attached Memorandum of Understanding,

relates to Article 25 (Mutual Agreement Procedure) and concerns

the future implementation of arbitration procedures to resolve tax

disputes. These notes with the attached memorandum are submitted for the information of the Senate.

A technical memoradum explaining in detail the provisions of the

Convention will be prepared by the Department of the Treasury

and will be submitted separately to the Senate Committee on Foreign Relations.

The Department of the Treasury and the Department of State cooperated in the negotiation of the Convention. It has the full approval of both Departments.

Respectfully submitted,

STROBE TALBOTT.
(1)
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