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[Senate Executive Report 113-7]
[From the U.S. Government Publishing Office]

113th Congress                                              Exec. Rept.
                                 SENATE
 2nd Session                                                      113-7

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

 
           PROTOCOL AMENDING TAX CONVENTION WITH SWITZERLAND

                                _______
                                

                 April 29, 2014.--Ordered to be printed

                                _______
                                

         Mr. Menendez, from the Committee on Foreign Relations,
                        submitted the following

                                 REPORT

                    [To accompany Treaty Doc. 112-1]

    The Committee on Foreign Relations, to which was referred 
the Protocol Amending the Convention between the United States 
of America and the Swiss Confederation for the Avoidance of 
Double Taxation With Respect to Taxes on Income, signed at 
Washington on October 2, 1996, signed on September 23, 2009, at 
Washington, as corrected by an exchange of notes effected 
November 16, 2010, together with a related agreement effected 
by an exchange of notes on September 23, 2009 (Treaty Doc. 112-
1) (collectively, the ``Protocol''), having considered the 
same, reports favorably thereon with one declaration and 
conditions related to reporting on mandatory arbitration, as 
indicated in the resolution of advice and consent, and 
recommends that the Senate give its advice and consent to 
ratification thereof, as set forth in this report and the 
accompanying resolution of advice and consent.

                                CONTENTS

                                                                   Page

  I. Purpose..........................................................1
 II. Background.......................................................2
III. Major Provisions.................................................2
 IV. Entry Into Force.................................................3
  V. Implementing Legislation.........................................3
 VI. Committee Action.................................................3
VII. Committee Comments...............................................3
VIII.Text of Resolution of Advice and Consent to Ratification.........6

 IX. Annex 1.--Technical Explanation..................................9
  X. Annex 2.--Transcript of Hearing of February 26, 2014............21

                               I. Purpose

    The purpose of the Protocol, along with the underlying 
treaty, is to promote and facilitate trade and investment 
between the United States and Switzerland, and to bring the 
existing treaty with Switzerland (the ``Treaty'') into 
conformity with current U.S. tax treaty policy. Principally, 
the Protocol will modernize the existing Treaty's rules 
governing exchange of information; provide for the 
establishment of a mandatory arbitration rule to facilitate 
resolution of disputes between the U.S. and Swiss revenue 
authorities about the Treaty's application to particular 
taxpayers; and provide an exemption from source country 
withholding tax on dividends paid to individual retirement 
accounts.

                             II. Background

    The United States has a tax treaty with Switzerland that is 
currently in force, which was concluded in 1996 along with a 
separate protocol to the treaty concluded on the same day 
(``1996 Protocol''). The proposed Protocol was negotiated to 
modernize our relationship with Switzerland in this area and to 
update the current treaty to better reflect current U.S. and 
Swiss domestic tax policy.

                         III. Major Provisions

    A detailed article-by-article analysis of the Protocol may 
be found in the Technical Explanation Published by the 
Department of the Treasury on June 7, 2011, which is included 
in Annex 1. In addition, the staff of the Joint Committee on 
Taxation prepared an analysis of the Protocol, JCX-31-11 (May 
20, 2011), which was of great assistance to the committee in 
reviewing the Protocol. A summary of the key provisions of the 
Protocol is set forth below.
    The Protocol is primarily intended to update the existing 
Swiss Convention to conform to current U.S. and Swiss tax 
treaty policy. It provides an exemption from source country 
withholding tax on dividends paid to individual retirement 
accounts; provides for the establishment of a mandatory 
arbitration rule to facilitate resolution of disputes between 
the U.S. and Swiss revenue authorities about the Treaty's 
application to particular taxpayers; and modernizes the 
existing Convention's rules governing exchange of information.

                     INDIVIDUAL RETIREMENT ACCOUNTS

    The Protocol updates the provisions of the existing 
Convention, as requested by Switzerland, to provide an 
exemption from source country withholding tax on dividends paid 
to individual retirement accounts.

                         MANDATORY ARBITRATION

    The Protocol incorporates mandatory, binding arbitration in 
certain cases that the competent authorities of the United 
States and Switzerland have been unable to resolve after a 
reasonable period of time under the mutual agreement procedure. 
The procedures include: (1) the opportunity for taxpayer 
participation by providing information directly to the arbitral 
panel through position papers; and (2) a prohibition against 
either state appointing an employee of its tax administration 
as a member of the arbitration panel.

                        EXCHANGE OF INFORMATION

    The Protocol would replace the existing Treaty's tax 
information exchange provisions (contained in Article 26) with 
updated rules that are consistent with current U.S. tax treaty 
practice. The Protocol provides that the tax authorities of the 
two countries shall exchange information relevant to carrying 
out the provisions of the Convention or the domestic tax laws 
of either country. This includes information that would 
otherwise be protected by the bank secrecy laws of either 
country. This broadens the Treaty's existing information 
sharing provisions, which provide for information sharing only 
where necessary for the prevention of income tax fraud or 
similar activities. The Protocol also enables the United States 
to obtain information (including from financial institutions) 
from Switzerland whether or not Switzerland needs the 
information for its own tax purposes.

                          IV. Entry Into Force

    The proposed Protocol will enter into force between the 
United States and Switzerland on the date of the later note in 
an exchange of diplomatic notes in which the Parties notify 
each other that their respective applicable procedures for 
ratification have been satisfied. The various provisions of 
this Protocol shall have effect as described in paragraph 2 of 
Article V of the Protocol.

                      V. Implementing Legislation

    As is the case generally with income tax treaties, the 
Protocol is self-executing and does not require implementing 
legislation for the United States.

                          VI. Committee Action

    The committee held a public hearing on the Convention on 
February 26, 2014. Testimony was received from Robert Stack, 
Deputy Assistant Secretary (International Tax Affairs) at the 
U.S. Department of the Treasury, Thomas Barthold, Chief of 
Staff of the Joint Committee on Taxation, William Reinsch, 
President of the National Foreign Trade Council, Paul Nolan, 
Vice President, Tax for McCormick & Company, Inc., and Nancy 
McLernon, President & CEO of the Organization for International 
Investment. A transcript of the hearing is included in Annex 2 
of this report.
    On April 1, 2014, the committee considered the Protocol and 
ordered it favorably reported by voice vote, with a quorum 
present and without objection.

                        VII. Committee Comments

    The Committee on Foreign Relations believes that the 
Protocol will stimulate increased trade and investment, 
strengthen provisions regarding the exchange of tax 
information, and promote closer co-operation between the United 
States and Switzerland. The committee therefore urges the 
Senate to act promptly to give advice and consent to 
ratification of the Protocol, as set forth in this report and 
the accompanying resolution of advice and consent.

                        A. MANDATORY ARBITRATION

    The arbitration provision in the Protocol is largely 
consistent with the arbitration provisions included in recent 
treaties negotiated with Canada, Germany, Belgium, and France. 
It includes the modifications that were made first to the 
French treaty provisions to reflect concerns expressed by the 
Senate during its approval of the other treaties. 
Significantly, the provision in the Protocol includes: (1) the 
opportunity for taxpayer participation by providing information 
directly to the arbitral panel through position papers; and (2) 
a prohibition against either state appointing an employee of 
its tax administration as a member of the panel.

                       B. EXCHANGE OF INFORMATION

    The Protocol would replace the existing Treaty's tax 
information exchange provisions with updated rules that are 
consistent with current U.S. tax treaty practice. The Protocol 
would allow the tax authorities of each country to exchange 
information relevant to carrying out the provisions of the 
Treaty or the domestic tax laws of either country, including 
information that would otherwise be protected by the bank 
secrecy laws of either country. It would also enable the United 
States to obtain information (including from financial 
institutions) from Switzerland whether or not Switzerland needs 
the information for its own tax purposes.
    The committee takes note of the difficulties faced in 2008-
2009 by the Internal Revenue Service and the Department of 
Justice in obtaining information needed to enforce U.S. tax 
laws against U.S. persons who utilized the services of UBS AG, 
a multinational bank based in Switzerland. The committee 
expects that the proposed Protocol--including in particular the 
express provisions making clear that a country's bank secrecy 
laws cannot prevent the exchange of tax information requested 
pursuant to the treaty--should put the government of 
Switzerland in a position to prevent recurrence of such an 
incident in the future.
    The committee takes note of Article 4 of the Protocol which 
sets forth information that should be provided to the requested 
State by the requesting State when making a request for 
information under the Treaty. It is the committee's 
understanding based upon the testimony and Technical 
Explanation provided by the Department of the Treasury that, 
while this paragraph contains important procedural requirements 
that are intended to ensure that ``fishing expeditions'' do not 
occur, the provisions of this paragraph will be interpreted by 
the United States and Switzerland to permit the widest possible 
exchange of information and not to frustrate effective exchange 
of information. In particular, the committee understands that 
with respect to the requirement that a request must include 
``information sufficient to identify the person under 
examination or investigation,'' it is mutually understood by 
the United States and Switzerland that there can be 
circumstances in which there is information sufficient to 
identify the person under examination or investigation even 
though the requesting State cannot provide the person's name.

      C. DECLARATION ON THE SELF-EXECUTING NATURE OF THE PROTOCOL

    The committee has included one declaration in the 
recommended resolution of advice and consent. The declaration 
states that the Protocol is self-executing, as is the case 
generally with income tax treaties. Prior to the 110th 
Congress, the committee generally included such statements in 
the committee's report, but in light of the Supreme Court 
decision in Medellin v. Texas, 128 S. Ct. 1346 (2008), the 
committee determined that a clear statement in the Resolution 
is warranted. A further discussion of the committee's views on 
this matter can be found in Section VIII of Executive Report 
110-12.

      D. CONDITIONS RELATED TO REPORTING ON MANDATORY ARBITRATION

    The committee has included conditions in the recommended 
resolution of advice and consent. These types of conditions 
have been included in prior resolutions of advice and consent 
for tax treaties that provide for mandatory arbitration.
    Specifically, not later than 2 years after the Protocol 
enters into force and prior to the first arbitration conducted 
pursuant to the binding arbitration mechanism provided for in 
the Protocol, the Secretary of the Treasury is required to 
transmit to the Committees on Finance and Foreign Relations of 
the Senate and the Joint Committee on Taxation the text of the 
rules of procedure applicable to arbitration panels, including 
conflict of interest rules to be applied to members of the 
arbitration panel.
    In addition, not later than 60 days after a determination 
has been reached by an arbitration panel in the tenth 
arbitration proceeding conducted pursuant to the Protocol or 
any similar treaties specifically identified, the Secretary of 
the Treasury must submit to the Joint Committee on Taxation and 
the Committee on Finance of the Senate a detailed report 
regarding the operation and application of the arbitration 
mechanism contained in the Protocol and such treaties. The 
Secretary of the Treasury is further required to submit this 
type of report on March 1 of the year following the year in 
which the first report is submitted, and on an annual basis 
thereafter for a period of five years. Finally, the section 
clarifies that these reporting requirements supersede the 
reporting requirements contained in paragraphs (2) and (3) of 
section 3 of the resolution of advice and consent to 
ratification of the 2009 France Protocol, approved by the 
Senate on December 3, 2009.

           E. AGREEMENTS RELATING TO REQUESTS FOR INFORMATION

    In connection with efforts to obtain from Switzerland 
information relevant to U.S. investigations of alleged tax 
fraud committed by account holders of UBS AG, in 2009 and 2010 
the United States and Switzerland entered into two agreements 
pursuant to the U.S.-Switzerland Tax Treaty.
    In particular, on August 19, 2009, the two governments 
signed an Agreement Between the United States of America and 
the Swiss Confederation on the request for information from the 
Internal Revenue Service of the United States of America 
regarding UBS AG, a corporation established under the laws of 
the Swiss Confederation. On March 31, 2010, the two governments 
signed a separate protocol amending the August 19, 2009 
agreement.
    The committee supports the objective of these agreements to 
facilitate the exchange of information between Switzerland and 
the United States in support of U.S. efforts to investigate and 
prosecute alleged tax fraud by account holder of UBS AG.
    The committee notes its concern, however, about one 
provision of the March 31, 2010 protocol. Paragraph 4 of that 
protocol provides that ``For the purposes of processing the 
Treaty Request, this Agreement and its Annex shall prevail over 
the existing Tax Treaty, its Protocol, and the Mutual Agreement 
in case of conflicting provisions.''
    Some could interpret the March 31, 2010, protocol's 
language indicating that the August 19, 2009, agreement ``shall 
prevail'' over the existing U.S.-Switzerland tax treaty to mean 
that the agreement has the effect of amending the tax treaty. 
The U.S.-Switzerland tax treaty is a treaty concluded with the 
advice and consent of the Senate. Amendments to treaties are 
themselves ordinarily subject to the advice and consent of the 
Senate. The executive branch has not sought the Senate's advice 
and consent to either the August 19, 2009 agreement or the 
March 31, 2010 protocol. The executive branch has assured the 
committee that the two governments did not intend this language 
to have any effect on the obligations of the United States 
under the U.S.-Switzerland tax treaty.
    In order to avoid any similar confusion in the future, the 
committee expects that the executive branch will refrain from 
the use of similar language in any future agreements relating 
to requests for information under tax treaties unless it 
intends to seek the Senate's advice and consent for such 
agreements.

     VIII. Text of Resolution of Advice and Consent to Ratification

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

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION

    The Senate advises and consents to the ratification of the 
Protocol Amending the Convention between the United States of 
America and the Swiss Confederation for the Avoidance of Double 
Taxation With Respect to Taxes on Income, signed at Washington 
October 2, 1996, signed September 23, 2009, at Washington, with 
a related agreement effected by an exchange of notes September 
23, 2009, as corrected by an exchange of notes effected 
November 16, 2010 (the ``Protocol'') (Treaty Doc. 112-1), 
subject to the declaration of section 2.

SECTION 2. DECLARATION

    The advice and consent of the Senate under section 1 is 
subject to the following declaration:
          The Protocol is self-executing.

SECTION 3. CONDITIONS

    The advice and consent of the Senate under section 1 is 
subject to the following conditions:
          (1) Not later than 2 years after the Protocol enters 
        into force and prior to the first arbitration conducted 
        pursuant to the binding arbitration mechanism provided 
        for in the Protocol, the Secretary of the Treasury 
        shall transmit to the Committees on Finance and Foreign 
        Relations of the Senate and the Joint Committee on 
        Taxation the text of the rules of procedure applicable 
        to arbitration panels, including conflict of interest 
        rules to be applied to members of the arbitration 
        panel.
          (2)(A) Not later than 60 days after a determination 
        has been reached by an arbitration panel in the tenth 
        arbitration proceeding conducted pursuant to the 
        Protocol or any of the treaties described in 
        subparagraph (B), the Secretary of the Treasury shall 
        prepare and submit to the Joint Committee on Taxation 
        and the Committee on Finance of the Senate, subject to 
        laws relating to taxpayer confidentiality, a detailed 
        report regarding the operation and application of the 
        arbitration mechanism contained in the Protocol and 
        such treaties. The report shall include the following 
        information:
                  (i) For the Protocol and each such treaty, 
                the aggregate number of cases pending on the 
                respective dates of entry into force of the 
                Protocol and each treaty, including the 
                following information:
                          (I) The number of such cases by 
                        treaty article or articles at issue.
                          (II) The number of such cases that 
                        have been resolved by the competent 
                        authorities through a mutual agreement 
                        as of the date of the report.
                          (III) The number of such cases for 
                        which arbitration proceedings have 
                        commenced as of the date of the report.
                  (ii) A list of every case presented to the 
                competent authorities after the entry into 
                force of the Protocol and each such treaty, 
                including the following information regarding 
                each case:
                          (I) The commencement date of the case 
                        for purposes of determining when 
                        arbitration is available.
                          (II) Whether the adjustment 
                        triggering the case, if any, was made 
                        by the United States or the relevant 
                        treaty partner.
                          (III) Which treaty the case relates 
                        to.
                          (IV) The treaty article or articles 
                        at issue in the case.
                          (V) The date the case was resolved by 
                        the competent authorities through a 
                        mutual agreement, if so resolved.
                          (VI) The date on which an arbitration 
                        proceeding commenced, if an arbitration 
                        proceeding commenced.
                          (VII) The date on which a 
                        determination was reached by the 
                        arbitration panel, if a determination 
                        was reached, and an indication as to 
                        whether the panel found in favor of the 
                        United States or the relevant treaty 
                        partner.
                  (iii) With respect to each dispute submitted 
                to arbitration and for which a determination 
                was reached by the arbitration panel pursuant 
                to the Protocol or any such treaty, the 
                following information:
                          (I) In the case of a dispute 
                        submitted under the Protocol, an 
                        indication as to whether the presenter 
                        of the case to the competent authority 
                        of a Contracting State submitted a 
                        Position Paper for consideration by the 
                        arbitration panel.
                          (II) An indication as to whether the 
                        determination of the arbitration panel 
                        was accepted by each concerned person.
                          (III) The amount of income, expense, 
                        or taxation at issue in the case as 
                        determined by reference to the filings 
                        that were sufficient to set the 
                        commencement date of the case for 
                        purposes of determining when 
                        arbitration is available.
                          (IV) The proposed resolutions 
                        (income, expense, or taxation) 
                        submitted by each competent authority 
                        to the arbitration panel.
          (B) The treaties referred to in subparagraph (A) 
        are--
                  (i) the 2006 Protocol Amending the Convention 
                between the United States of America and the 
                Federal Republic of Germany for the Avoidance 
                of Double Taxation and the Prevention of Fiscal 
                Evasion with Respect to Taxes on Income and 
                Capital and to Certain Other Taxes, done at 
                Berlin June 1, 2006 (Treaty Doc. 109-20) (the 
                ``2006 German Protocol'');
                  (ii) the Convention between the Government of 
                the United States of America and the Government 
                of the Kingdom of Belgium for the Avoidance of 
                Double Taxation and the Prevention of Fiscal 
                Evasion with Respect to Taxes on Income, and 
                accompanying protocol, done at Brussels July 9, 
                1970 (the ``Belgium Convention'') (Treaty Doc. 
                110-3);
                  (iii) the Protocol Amending the Convention 
                between the United States of America and Canada 
                with Respect to Taxes on Income and on Capital, 
                signed at Washington September 26, 1980 (the 
                ``2007 Canada Protocol'') (Treaty Doc. 110-15); 
                or
                  (iv) the Protocol Amending the Convention 
                between the Government of the United States of 
                America and the Government of the French 
                Republic for the Avoidance of Double Taxation 
                and the Prevention of Fiscal Evasion with 
                Respect to Taxes on Income and Capital, signed 
                at Paris August 31, 1994 (the ``2009 France 
                Protocol'') (Treaty Doc. 111-4).
          (3) The Secretary of the Treasury shall prepare and 
        submit the detailed report required under paragraph (2) 
        on March 1 of the year following the year in which the 
        first report is submitted to the Joint Committee on 
        Taxation and the Committee on Finance of the Senate, 
        and on an annual basis thereafter for a period of five 
        years. In each such report, disputes that were 
        resolved, either by a mutual agreement between the 
        relevant competent authorities or by a determination of 
        an arbitration panel, and noted as such in prior 
        reports may be omitted.
                  (4) The reporting requirements referred to in 
                paragraphs (2) and (3) supersede the reporting 
                requirements contained in paragraphs (2) and 
                (3) of section 3 of the resolution of advice 
                and consent to ratification of the 2009 France 
                Protocol, approved by the Senate on December 3, 
                2009.

                  IX. Annex 1.--Technical Explanation

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL SIGNED 
AT WASHINGTON ON SEPTEMBER 23, 2009 AMENDING THE CONVENTION BETWEEN THE 
UNITED STATES OF AMERICA AND THE SWISS CONFEDERATION FOR THE AVOIDANCE 
OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO 
TAXES ON INCOME, SIGNED AT WASHINGTON ON OCTOBER 2, 1996, AS AMENDED BY 
                 THE PROTOCOL SIGNED ON OCTOBER 2, 1996

    This is a Technical Explanation of the Protocol signed at 
Washington on September 23, 2009 and the related Exchange of 
Notes (hereinafter the ``Protocol'' and ``Exchange of Notes'' 
respectively), amending the Convention between the United 
States of America and the Swiss Confederation for the avoidance 
of double taxation and the prevention of fiscal evasion with 
respect to taxes on income, signed at Washington on October 2, 
1996 as amended by the Protocol also signed on October 2, 1996 
(together, the ``existing Convention'').
    Negotiations took into account the U.S. Department of the 
Treasury's current tax treaty policy and the Treasury 
Department's Model Income Tax Convention, published on November 
15, 2006 (the ``U.S. Model''). Negotiations also took into 
account the Model Tax Convention on Income and on Capital, 
published by the Organisation for Economic Cooperation and 
Development (the ``OECD Model''), and recent tax treaties 
concluded by both countries.
    This Technical Explanation is an official guide to the 
Protocol and Exchange of Notes. It explains policies behind 
particular provisions, as well as understandings reached during 
the negotiations with respect to the interpretation and 
application of the Protocol and the Exchange of Notes.
    References to the existing Convention are intended to put 
various provisions of the Protocol into context. The Technical 
Explanation does not, however, provide a complete comparison 
between the provisions of the existing Convention and the 
amendments made by the Protocol and Exchange of Notes. The 
Technical Explanation is not intended to provide a complete 
guide to the existing Convention as amended by the Protocol and 
Exchange of Notes. To the extent that the existing Convention 
has not been amended by the Protocol and Exchange of Notes, the 
technical explanation of the Convention signed at Washington on 
October 2, 1996 and the Protocol signed on also signed on 
October 2, 1996 remains the official explanation. References in 
this Technical Explanation to ``he'' or ``his'' should be read 
to mean ``he or she'' or ``his or her.'' References to the 
``Code'' are to the Internal Revenue Code of 1986, as amended.
    The Exchange of Notes relates to the implementation of new 
paragraphs 6 and 7 of Article 25 (Mutual Agreement Procedure), 
which provide for binding arbitration of certain disputes 
between the competent authorities.

                               ARTICLE 1

    Article 1 of the Protocol revises Article 10 (Dividends) of 
the existing Convention by restating paragraph 3. New paragraph 
3 provides that dividends paid by a company resident in a 
Contracting State shall be exempt from tax in that State if the 
dividends are paid to and beneficially owned by a pension or 
other retirement arrangement which is a resident of the other 
Contracting State, or an individual retirement savings plan set 
up in and owned by a resident of the other Contracting State, 
and the competent authorities of the Contracting States agree 
that the pension or retirement arrangement, or the individual 
retirement savings plan, in a Contracting State generally 
corresponds to a pension or other retirement arrangement, or to 
an individual retirement savings plan, recognized for tax 
purposes in the other Contracting State.
    The exemption from tax provided in new paragraph 3 shall 
not apply if the pension or retirement arrangement or the 
individual retirement savings plan receiving the dividend 
controls the company paying the dividend. Additionally, in 
order to qualify for the benefits of new paragraph 3, a pension 
or retirement arrangement or individual retirement savings plan 
must satisfy the requirements of paragraph 2 of Article 22 
(Limitation on Benefits).

                               ARTICLE 2

    Article 2 of the Protocol replaces paragraph 6 of Article 
25 (Mutual Agreement Procedure) of the existing Convention with 
new paragraphs 6 and 7. New paragraphs 6 and 7 provide a 
mandatory binding arbitration proceeding. Paragraph 1 of the 
Exchange of Notes provides that binding arbitration will be 
used to determine the application of the Convention in respect 
of any case where the competent authorities have endeavored but 
are unable to reach an agreement under Article 25 regarding 
such application (the competent authorities may, however, agree 
that the particular case is not suitable for determination by 
arbitration. Paragraph 1 of the Exchange of Notes provides 
additional rules and procedures that apply to a case considered 
under the arbitration provisions.
    New paragraph 6 provides that a case shall be resolved 
through arbitration when the competent authorities have 
endeavored but are unable to reach a complete agreement 
regarding a case and the following three conditions are 
satisfied. First, tax returns have been filed with at least one 
of the Contracting States with respect to the taxable years at 
issue in the case. Second, the case is not a case that the 
competent authorities agree before the date on which 
arbitration proceedings would otherwise have begun, is not 
suitable for determination by arbitration. Third, all concerned 
persons and their authorized representatives agree, according 
to the provisions of new subparagraph (7)(d), not to disclose 
to any other person any information received during the course 
of the arbitration proceeding from either Contracting State or 
the arbitration board, other than the determination of the 
board (confidentiality agreement). The confidentiality 
agreement may also be executed by any concerned person that has 
the legal authority to bind any other concerned person on the 
matter. For example, a parent corporation with the legal 
authority to bind its subsidiary with respect to 
confidentiality may execute a comprehensive confidentiality 
agreement on its own behalf and that of its subsidiary.
    New paragraph 6 provides that an unresolved case shall not 
be submitted to arbitration if a decision on such case has 
already been rendered by a court or administrative tribunal of 
either Contracting State.
    New paragraph 7 provides additional rules and definitions 
to be used in applying the arbitration provisions. Subparagraph 
(7)(a) provides that the term ``concerned person'' means the 
person that brought the case to competent authority for 
consideration under Article 25 and includes all other persons, 
if any, whose tax liability to either Contracting State may be 
directly affected by a mutual agreement arising from that 
consideration. For example, a concerned person does not only 
include a U.S. corporation that brings a transfer pricing case 
with respect to a transaction entered into with its Swiss 
subsidiary for resolution to the U.S. competent authority, but 
also the Swiss subsidiary, which may have a correlative 
adjustment as a result of the resolution of the case.
    Subparagraph (7)(c) provides that an arbitration proceeding 
begins on the later of two dates: two years from the 
commencement date of that case (unless both competent 
authorities have previously agreed to a different date), or the 
earliest date upon which all concerned persons have entered 
into a confidentiality agreement and the agreements have been 
received by both competent authorities. The commencement date 
of the case is defined by subparagraph (7)(b) as the earliest 
date on which the information necessary to undertake 
substantive consideration for a mutual agreement has been 
received by both competent authorities.
    Subparagraph (1)(c) of the Exchange of Notes provides that 
notwithstanding the initiation of an arbitration proceeding, 
the competent authorities may reach a mutual agreement to 
resolve the case and terminate the arbitration proceeding. 
Correspondingly, a concerned person may withdraw its request 
for the competent authorities to engage in the Mutual Agreement 
Procedure and thereby terminate the arbitration proceeding at 
any time.
    Subparagraph (1)(p) of the Exchange of Notes provides that 
each competent authority will confirm in writing to the other 
competent authority and to the concerned persons the date of 
its receipt of the information necessary to undertake 
substantive consideration for a mutual agreement. Such 
information will be submitted to the competent authorities 
under relevant internal rules and procedures of each of the 
Contracting States. The information will not be considered 
received until both competent authorities have received copies 
of all materials submitted to either Contracting State by 
concerned persons in connection with the mutual agreement 
procedure.
    The Exchange of Notes provides several procedural rules 
once an arbitration proceeding under paragraph 6 of Article 25 
has commenced, but the competent authorities may complete these 
rules as necessary. In addition, as provided in subparagraph 
(1)(f) of the Exchange of Notes, the arbitration panel may 
adopt any procedures necessary for the conduct of its business, 
provided the procedures are not inconsistent with any provision 
of Article 25 or of the Exchange of Notes.
    Subparagraph (1)(e) of the Exchange of Notes provides that 
each Contracting State has 90 days from the date on which the 
arbitration proceeding begins to send a written communication 
to the other Contracting State appointing one member of the 
arbitration panel. The members of the arbitration panel shall 
not be employees of the tax administration which appoints them. 
Within 60 days of the date the second of such communications is 
sent, these two board members will appoint a third member to 
serve as the chair of the panel. The competent authorities will 
develop a non-exclusive list of individuals familiar in 
international tax matters who may potentially serve as the 
chair of the panel, but in any case, the chair can not be a 
citizen or resident of either Contracting State. In the event 
that the two members appointed by the Contracting States fail 
to agree on the third member by the requisite date, these 
members will be dismissed and each Contracting State will 
appoint a new member of the panel within 30 days of the 
dismissal of the original members.
    Subparagraph (1)(g) of the Exchange of Notes establishes 
deadlines for submission of materials by the Contracting States 
to the arbitration panel. Each competent authority has 60 days 
from the date of appointment of the chair to submit a Proposed 
Resolution describing the proposed disposition of the specific 
monetary amounts of income, expense or taxation at issue in the 
case, and a supporting Position Paper. Copies of each State's 
submissions are to be provided by the panel to the other 
Contracting State on the date on which the later of the 
submissions is submitted to the panel. Each of the Contracting 
States may submit a Reply Submission to the panel within 120 
days of the appointment of the chair to address points raised 
in the other State's Proposed Resolution or Position Paper. If 
one Contracting State fails to submit a Proposed Resolution 
within the requisite time, the Proposed Resolution of the other 
Contracting State is deemed to be the determination of the 
arbitration panel in the case and the arbitration proceeding 
will be terminated. Additional information may be supplied to 
the arbitration panel by a Contracting State only at the 
panel's request. The panel will provide copies of any such 
requested information, along with the panel's request, to the 
other Contracting State on the date on which the request or 
response is submitted. All communication from the Contracting 
States to the panel, and vice versa, is to be in writing 
between the chair of the panel and the designated competent 
authorities with the exception of communication regarding 
logistical matters.
    Subparagraph (1)(h) of the Exchange of Notes provides that 
the presenter of the case to the competent authority of a 
Contracting State may submit a Position Paper to the panel for 
consideration by the panel. The Position Paper must be 
submitted within 90 days of the appointment of the chair, and 
the panel will provide copies of the Position Paper to the 
Contracting States on the date on which the later of the 
submissions of the Contracting States is submitted to the 
panel.
    Subparagraph (1)(i) of the Exchange of Notes provides that 
the arbitration panel must deliver a determination in writing 
to the Contracting States within six months of the appointment 
of the chair. The determination must be one of the two Proposed 
Resolutions submitted by the Contracting States. Subparagraph 
(1)(b) of the Exchange of Notes provides that the determination 
may only provide a determination regarding the amount of 
income, expense or tax reportable to the Contracting States. 
The determination has no precedential value, and consequently 
the rationale behind a panel's determination would not be 
beneficial and may not be provided by the panel.
    Subparagraphs (1)(j) and (1)(k) of the Exchange of Notes 
provide that unless any concerned person does not accept the 
decision of the arbitration panel, the determination of the 
panel constitutes a resolution by mutual agreement under 
Article 25 and, consequently, is binding on both Contracting 
States. Within 30 days of receiving the determination from the 
competent authority to which the case was first presented, each 
concerned person must advise that competent authority whether 
the person accepts the determination. In addition, if the case 
is in litigation, each concerned person who is a party to the 
litigation must also advise, within the same time frame, the 
court of its acceptance of the arbitration determination, and 
withdraw from the litigation the issues resolved by the 
arbitration proceeding. If any concerned person fails to advise 
the competent authority and relevant court within the requisite 
time, such failure is considered a rejection of the 
determination. If a determination is rejected, the case cannot 
be the subject of a subsequent arbitration proceeding.
    For purposes of the arbitration proceeding, the members of 
the arbitration panel and their staffs shall be considered 
``persons or authorities'' to whom information may be disclosed 
under Article 26 (Exchange of Information). Subparagraph (1)(n) 
of the Exchange of Notes provides that all materials prepared 
in the course of, or relating to the arbitration proceeding are 
considered information exchanged between the Contracting 
States. No information relating to the arbitration proceeding 
or the panel's determination may be disclosed by members of the 
arbitration panel or their staffs or by either competent 
authority, except as permitted by the Convention and the 
domestic laws of the Contracting States. Members of the 
arbitration panel and their staffs must agree in statements 
sent to each of the Contracting States in confirmation of their 
appointment to the arbitration board to abide by and be subject 
to the confidentiality and nondisclosure provisions of Article 
26 of the Convention and the applicable domestic laws of the 
Contracting States, with the most restrictive of the provisions 
applying.
    Subparagraph (1)(m) of the Exchange of Notes provides that 
the applicable domestic law of the Contracting States 
determines the treatment of any interest or penalties 
associated with a competent authority agreement achieved 
through arbitration.
    Subparagraph (1)(l) of the Exchange of Notes provides that 
any meetings of the arbitration panel shall be in facilities 
provided by the Contracting State whose competent authority 
initiated the mutual agreement proceedings in the case. 
Subparagraph (1)(o) of the Exchange of Notes provides that fees 
and expenses are borne equally by the Contracting States, 
including the cost of translation services. In general, the 
fees of members of the arbitration panel will be set at the 
fixed amount of $2,000 per day or the equivalent amount in 
Swiss francs. The expenses of members of the panel will be set 
in accordance with the International Centre for Settlement of 
Investment Disputes (ICSID) Schedule of Fees for arbitrators 
(in effect on the date on which the arbitration board 
proceedings begin). The competent authorities may amend the set 
fees and expenses of members of the board. Meeting facilities, 
related resources, financial management, other logistical 
support, and general and administrative coordination of the 
arbitration proceeding will be provided, at its own cost, by 
the Contracting State whose competent authority initiated the 
mutual agreement proceedings. All other costs are to be borne 
by the Contracting State that incurs them.

                               ARTICLE 3

    Article 3 of the Protocol replaces Article 26 (Exchange of 
Information) of the existing Convention. This Article provides 
for the exchange of information and administrative assistance 
between the competent authorities of the Contracting States.

Paragraph 1 of Article 26

    The obligation to obtain and provide information to the 
other Contracting State is set out in new Paragraph 1. The 
information to be exchanged is that which may be relevant for 
carrying out the provisions of the Convention or the domestic 
laws of the United States or of Switzerland concerning taxes 
covered by the Convention, insofar as the taxation thereunder 
is not contrary to the Convention. This language incorporates 
the standard in 26 U.S.C. Section 7602 which authorizes the IRS 
to examine ``any books, papers, records, or other data which 
may be relevant or material.'' (emphasis added) In United 
States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the 
Supreme Court stated that the language ``may be'' reflects 
Congress's express intention to allow the IRS to obtain ``items 
of even potential relevance to an ongoing investigation, 
without reference to its admissibility.'' (emphasis in 
original) However, the language ``may be'' would not support a 
request in which a Contracting State simply asked for 
information regarding all bank accounts maintained by residents 
of that Contracting State in the other Contracting State.
    Exchange of information with respect to each State's 
domestic law is authorized to the extent that taxation under 
domestic law is not contrary to the Convention. Thus, for 
example, information may be exchanged with respect to a covered 
tax, even if the transaction to which the information relates 
is a purely domestic transaction in the requesting State and, 
therefore, the exchange is not made to carry out the 
Convention. An example of such a case is provided in the OECD 
Commentary: a company resident in one Contracting State and a 
company resident in the other Contracting State transact 
business between themselves through a third-country resident 
company. Neither Contracting State has a treaty with the third 
State. To enforce their internal laws with respect to 
transactions of their residents with the third-country company 
(since there is no relevant treaty in force), the Contracting 
States may exchange information regarding the prices that their 
residents paid in their transactions with the third-country 
resident.
    New paragraph 1 clarifies that information may be exchanged 
that relates to the administration or enforcement of the taxes 
covered by the Convention. Thus, the competent authorities may 
request and provide information for cases under examination or 
criminal investigation, in collection, on appeals, or under 
prosecution.
    Information exchange is not restricted by paragraph 1 of 
Article 1 (General Scope). Accordingly, information may be 
requested and provided under this Article with respect to 
persons who are not residents of either Contracting State. For 
example, if a third-country resident has a permanent 
establishment in Switzerland, and that permanent establishment 
engages in transactions with a U.S. enterprise, the United 
States could request information with respect to that permanent 
establishment, even though the thirdcountry resident is not a 
resident of either Contracting State. Similarly, if a third-
country resident maintains a bank account in Switzerland, and 
the Internal Revenue Service has reason to believe that funds 
in that account should have been reported for U.S. tax purposes 
but have not been so reported, information can be requested 
from Switzerland with respect to that person's account, even 
though that person is not the taxpayer under examination.
    The obligation to exchange information under paragraph 1 
does not limit a Contracting State's ability to employ 
unilateral procedures otherwise available under its domestic 
law to obtain, or to require the disclosure of, information 
from a taxpayer or third party. Thus, the Protocol does not 
prevent or restrict the United States' information gathering 
authority or enforcement measures provided under its domestic 
law.
    Although the term ``United States'' does not encompass U.S. 
possessions for most purposes of the Convention, Section 7651 
of the Code authorizes the Internal Revenue Service to utilize 
the provisions of the Internal Revenue Code to obtain 
information from the U.S. possessions pursuant to a proper 
request made under Article 26. If necessary to obtain requested 
information, the Internal Revenue Service could issue and 
enforce an administrative summons to the taxpayer, a tax 
authority (or a government agency in a U.S. possession), or a 
third party located in a U.S. possession.

Paragraph 2 of Article 26

    New paragraph 2 provides assurances that any information 
exchanged will be treated as secret, subject to the same 
disclosure constraints as information obtained under the laws 
of the requesting State. Information received may be disclosed 
only to persons, including courts and administrative bodies, 
involved in the assessment, collection, or administration of, 
the enforcement or prosecution in respect of, or the 
determination of the of appeals in relation to, the taxes 
covered by the Convention. The information must be used by 
these persons in connection with the specified functions. 
Information may also be disclosed to legislative bodies, such 
as the tax-writing committees of Congress and the Government 
Accountability Office, engaged in the oversight of the 
preceding activities. Information received by these bodies must 
be for use in the performance of their role in overseeing the 
administration of U.S. tax laws. Information received may be 
disclosed in public court proceedings or in judicial decisions.
    New paragraph 2 also provides that information received by 
a Contracting State may be used for other purposes when such 
information may be used for such other purpose under the laws 
of both States, and the competent authority of the requested 
State has authorized such use. This provision is derived from 
the OECD Model Commentary, which explains that Contracting 
States may add this provision to broaden the purposes for which 
they may use information exchanged to allow other non-tax law 
enforcement agencies and judicial authorities on certain high 
priority matters (e.g., to combat money laundering, corruption, 
or terrorism financing). To ensure that the laws of both States 
would allow the information to be used for such other purpose, 
the Contracting States will only seek consent under this 
provision to the extent that the non-tax use is allowed under 
the provisions of the Mutual Legal Assistance Treaty between 
the United States and Switzerland which entered into force on 
January 23, 1977 (or as it may be amended or replaced in the 
future).

Paragraph 3 of Article 26

    New paragraph 3 provides that the obligations undertaken in 
paragraphs 1 and 2 to exchange information do not require a 
Contracting State to carry out administrative measures that are 
at variance with the laws or administrative practice of either 
State. Nor is a Contracting State required to supply 
information not obtainable under the laws or administrative 
practice of either State, or to disclose trade secrets or other 
information, the disclosure of which would be contrary to 
public policy.
    Thus, a requesting State may be denied information from the 
other State if the information would be obtained pursuant to 
procedures or measures that are broader than those available in 
the requesting State. However, the statute of limitations of 
the Contracting State making the request for information should 
govern a request for information. Thus, the Contracting State 
of which the request is made should attempt to obtain the 
information even if its own statute of limitations has passed. 
In many cases, relevant information will still exist in the 
business records of the taxpayer or a third party, even though 
it is no longer required to be kept for domestic tax purposes.
    While paragraph 3 states conditions under which a 
Contracting State is not obligated to comply with a request 
from the other Contracting State for information, the requested 
State is not precluded from providing such information, and 
may, at its discretion, do so subject to the limitations of its 
internal law.

Paragraph 4 of Article 26

    New paragraph 4 provides that when information is requested 
by a Contracting State in accordance with this Article, the 
other Contracting State is obligated to obtain the requested 
information as if the tax in question were the tax of the 
requested State, even if that State has no direct tax interest 
in the case to which the request relates. In the absence of 
such a paragraph, some taxpayers have argued that paragraph 
3(a) prevents a Contracting State from requesting information 
from a bank or fiduciary that the Contracting State does not 
need for its own tax purposes. This paragraph clarifies that 
paragraph 3 does not impose such a restriction and that a 
Contracting State is not limited to providing only the 
information that it already has in its own files.

Paragraph 5 of Article 26

    New paragraph 5 provides that a Contracting State may not 
decline to provide information because that information is held 
by financial institutions, nominees or persons acting in an 
agency or fiduciary capacity. Thus, paragraph 5 would 
effectively prevent a Contracting State from relying on 
paragraph 3 to argue that its domestic bank secrecy laws (or 
similar legislation relating to disclosure of financial 
information by financial institutions or intermediaries) 
override its obligation to provide information under paragraph 
1. This paragraph also requires the disclosure of information 
regarding the beneficial owner of an interest in a person, such 
as the identity of a beneficial owner of bearer shares. 
Paragraph 5 further provides that the requested State has the 
power to meet its obligations under Article 26, and paragraph 5 
in particular, even though it may not have such powers for 
purposes of enforcing its own tax laws.
    Paragraph 2 of the Exchange of Notes provides that the 
Contracting States understand that there may be instances when 
paragraph 3 of Article 26 may be invoked to decline a request 
to supply information that is held by a person described in 
paragraph 5 of the Article. Such refusal must be based, 
however, on reasons unrelated to that person's status as a 
bank, financial institution, agent, fiduciary or nominee, or 
the fact that the information relates to ownership interests. 
For example, a Contracting State may decline to provide 
information relating to confidential communications between 
attorneys and their clients that are protected from disclosure 
under that State's domestic law.

Treaty effective dates and termination in relation to exchange of 
        information

    Article 5 of the Protocol sets forth rules governing the 
effective dates of the provisions of Articles 3 and 4 of the 
Protocol. The competent authorities are obligated to exchange 
information described in new paragraph 5 of Article 26 if that 
information relates to any date beginning on or after September 
23, 2009, the date on which the Protocol was signed 
notwithstanding the provisions of the existing Convention. In 
all other cases of application of new Article 26, the competent 
authorities are obligated to exchange information that relates 
to taxable periods beginning on or after January 1 of the year 
following the date of signature of the Protocol.
    A tax administration may also seek information with respect 
to a year for which a treaty was in force after the treaty has 
been terminated. In such a case the ability of the other tax 
administration to act is limited. The treaty no longer provides 
authority for the tax administrations to exchange confidential 
information. They may only exchange information pursuant to 
domestic law or other international agreement or arrangement.

                               ARTICLE 4

    Article 4 of the Protocol replaces paragraph 10 of the 
Protocol to the existing Convention. New Protocol paragraph 10 
provides greater detail regarding how the provisions of revised 
Article 26 (Exchange of Information) will be applied.
    New Protocol paragraph (10)(a) lists the information that 
should be provided to the requested State by the requesting 
State when making a request for information under paragraph 26 
of the Convention. Clause (i) of paragraph (10)(a) provides 
that a request must contain information sufficient to identify 
the person under examination or investigation. In a typical 
case, information sufficient to identify the person under 
examination or investigation would include a name, and to the 
extent known, an address, account number or similar identifying 
information. It is mutually understood that there can be 
circumstances in which there is information sufficient to 
identify the person under examination or investigation even 
though the requesting State cannot provide a name.
    Clause (ii) of paragraph (10)(a) provides that a request 
for information must contain the period of time for which the 
information is requested. Clause (iii) of paragraph (10)(a) 
provides that a request for information must contain a 
statement of the information sought, including its nature and 
the form in which the requesting State wishes to receive the 
information from the requested State. Clause (iv) of paragraph 
(10)(a) provides that a request for information must contain a 
statement of the tax purpose for which the information is 
sought. Clause (v) of paragraph (10)(a) provides that the 
request must include the name and, to the extent known, the 
address of any person believed to be in possession of the 
requested information.
    New Protocol paragraph (10)(b) provides confirmation of the 
extent to which information is to be exchanged pursuant to new 
paragraph 1 of Article 26. The purposes of referring to 
information that may be relevant is to provide for exchange of 
information to the widest extent possible. This standard 
nevertheless does not allow the Contracting States to engage in 
so-called ``fishing expeditions'' or to request information 
that is unlikely to be relevant to the tax affairs of a given 
taxpayer. For example, the language ``may be'' would not 
support a request in which a Contracting State simply asked for 
information regarding all bank accounts maintained by residents 
of that Contracting State in the other Contracting State. New 
Protocol paragraph (10)(b) further confirms that the provisions 
of new Protocol paragraph (10)(a) are to be interpreted in 
order not to frustrate effective exchange of information.
    New Protocol paragraph (10)(c) provides that the requesting 
State may specify the form in which information is to be 
provided (e.g., authenticated copies of original documents 
(including books, papers, statements, records, accounts and 
writings)). The intention is to ensure that the information may 
be introduced as evidence in the judicial proceedings of the 
requesting State. The requested State should, if possible, 
provide the information in the form requested to the same 
extent that it can obtain information in that form under its 
own laws and administrative practices with respect to its own 
taxes.
    New Protocol paragraph (10)(d) confirms that Article 26 of 
the Convention does not restrict the possible methods for 
exchanging information, but also does not commit either 
Contracting State to exchange information on an automatic or 
spontaneous basis. The Contracting States expect to provide 
information to one another necessary for carrying out the 
provisions of the Convention.
    New Protocol paragraph (10)(e) provides clarification 
regarding the application of paragraph (3)(a) of revised 
Article 26, which provides that in no case shall the provisions 
of paragraphs 1 and 2 be construed so as to impose on a 
Contracting State the obligation to carry out administrative 
measures at variance with the laws and administrative practice 
of that or the other Contracting State. The Contracting States 
understand that the administrative procedural rules regarding a 
taxpayer's rights (such as the right to be notified or the 
right to an appeal) provided for in the requested State remain 
applicable before information is exchanged with the requesting 
State. Notification procedures should not, however, be applied 
in a manner that, in the particular circumstances of the 
request, would frustrate the efforts of the requesting State. 
The Contracting States further understand that such rules are 
intended to provide the taxpayer a fair procedure and are not 
to prevent or unduly delay the exchange of information process.

                               ARTICLE 5

    Article 5 of the Protocol contains the rules for bringing 
the Protocol into force and giving effect to its provisions.

Paragraph 1

    Paragraph 1 provides for the ratification of the Protocol 
by both Contracting States according to their constitutional 
and statutory requirements. Instruments of ratification shall 
be exchanged as soon as possible.
    In the United States, the process leading to ratification 
and entry into force is as follows: Once a treaty has been 
signed by authorized representatives of the two Contracting 
States, the Department of State sends the treaty to the 
President who formally transmits it to the Senate for its 
advice and consent to ratification, which requires approval by 
two-thirds of the Senators present and voting. Prior to this 
vote, however, it generally has been the practice for the 
Senate Committee on Foreign Relations to hold hearings on the 
treaty and make a recommendation regarding its approval to the 
full Senate. Both Government and private sector witnesses may 
testify at these hearings. After the Senate gives its advice 
and consent to ratification of the protocol or treaty, an 
instrument of ratification is drafted for the President's 
signature. The President's signature completes the process in 
the United States.

Paragraph 2

    Paragraph 2 provides that the Convention will enter into 
force upon the exchange of instruments of ratification. The 
date on which a treaty enters into force is not necessarily the 
date on which its provisions take effect. Paragraph 2, 
therefore, also contains rules that determine when the 
provisions of the treaty will have effect.
    Under paragraph 2(a), the Convention will have effect with 
respect to taxes withheld at source (principally dividends, 
interest and royalties) for amounts paid or credited on or 
after the first day of January of the year following the entry 
into force of the Protocol. For example, if instruments of 
ratification are exchanged on October 25 of a given year, the 
withholding rates specified in paragraph 3 of Article 10 
(Dividends) would be applicable to any dividends paid or 
credited on or after January 1 of the following year. If for 
some reason a withholding agent withholds at a higher rate than 
that provided by the Convention (perhaps because it was not 
able to re-program its computers before the payment is made), a 
beneficial owner of the income that is a resident of the other 
Contracting State may make a claim for refund pursuant to 
section 1464 of the Code.
    Paragraph (2)(b) provides rules for the effective dates of 
Articles 3 and 4 of the Protocol. Those Articles shall have 
application for requests made on or after the date of entry 
into force of the Protocol. Clause (i) provides that 
information described in paragraph 5 of revised Article 26 
(Exchange of Information) shall be exchanged upon request if 
such information relates to any date beginning on or after 
September 23, 2009, the date of signature of the Protocol. 
Clause (ii) provides that in all other cases, information shall 
be exchanged pursuant to Articles 3 and 4 if the information 
relates to taxable periods beginning on or after January 1, 
2010.
    Paragraph (2)(c) sets forth a specific effective date for 
purposes of the binding arbitration provisions of new 
paragraphs 6 and 7 of revised Article 25 (Mutual Agreement 
Procedure) (Article 2 of the Protocol). Paragraph (2)(c) 
provides new paragraphs 6 and 7 of revised Article 25 is 
effective for cases (i) that are under consideration by the 
competent authorities as of the date on which the Protocol 
enters into force, and (ii) cases that come under such 
consideration after the Protocol enters into force. In 
addition, paragraph (2)(c) provides that the commencement date 
for cases that are under consideration by the competent 
authorities as of the date on which the Protocol enters into 
force is the date the Protocol enters into force. As a result, 
cases that are open and unresolved as of the entry into force 
of the Protocol will go into binding arbitration on the later 
of two years after the entry into force of the Protocol (unless 
both competent authorities have previously agreed to a 
different date) and the earliest date upon which the agreement 
required by new paragraph (6)(d) of revised Article 25 has been 
received by both competent authorities.
        X. Annex 2.--Transcript of Hearing of February 26, 2014

                                TREATIES

                              ----------                              

                      WEDNESDAY, FEBRUARY 26, 2014

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:31 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Benjamin L. 
Cardin presiding.
    Present: Senators Cardin and Barrasso.

         OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, 
                   U.S. SENATOR FROM MARYLAND

    Senator Cardin. Good morning and welcome to the Senate 
Foreign Relations Committee hearing dealing with treaties that 
are currently pending before the United States Senate.
    I want to thank Senator Menendez and Senator Corker for 
allowing Senator Barrasso and I to conduct this hearing. It is 
a very important area, the Senate consideration of treaties 
under the Constitution.
    So today we will consider five treaties that are before the 
Senate, a tax treaty with Hungary, a tax treaty with Chile, an 
amendment of a tax treaty with Switzerland, an amendment of a 
tax treaty with Luxembourg, and the Convention on Mutual 
Administration Assistance on Tax Matters.
    The primary purpose of tax treaties is to avoid double 
taxation so that U.S. companies can do business overseas and 
not be discriminated against, and foreign companies can do 
business in the United States.
    The second primary function is to aid enforcement of our 
respective tax laws to combat tax evasion and corruption.
    Now, there are many other side benefits in addition to 
avoiding double taxation and assisting in proper tax 
administration. The side benefits of tax treaties are open 
markets. It is a clear signal of our willingness to do business 
in other countries. It removes barriers to trade. And it also 
encourages new countries to join 
our treaty network, making it easier for us to do international 
business.
    Specifically, the five treaties that are before us, 
Hungary, this tax treaty was completed in 2010, and it prevents 
treaty shopping by using uniform rules to determine the 
applicable laws. Chile represents over a decade of negotiations 
and the completion of a tax treaty.
    I note that if the Chilean treaty is ratified it would be 
the third Latin American country that we will have a tax treaty 
with. This is a region in our hemisphere that is critically 
important to the United States. So moving forward with tax 
treaties in our hemisphere is a matter of high priority.
    And Switzerland and Luxembourg, these are amendments to 
treaties that were negotiated 3 years ago. They basically deal 
with the exchange of information. I do point out the timing of 
the Switzerland one is particularly relevant, in that the 
initial interest in modifying the treaty with Switzerland came 
out of a hearing in 2008, the Permanent Subcommittee on 
Investigation dealing with greater access for U.S. tax 
collectors on information from Switzerland. That has been the 
main reason for the amendments to the existing tax treaty with 
Switzerland. The same thing is true with Luxembourg, as far as 
access to information.
    The convention similarly allows for the free exchange of 
information to assist in tax administration. It has 60 
signatures.
    Let me just make one final comment before yielding to 
Senator Barrasso. In three of these matters--Hungary, 
Luxembourg, and Switzerland--this is deja vu for me. I chaired 
a hearing on these three tax treaties in 2011, so these are not 
new to our committee.
    They cleared our committee, were reported out, but we were 
not able to get them considered on the floor of the United 
States Senate.
    I do welcome today's hearing, because it allows us to have 
an update on the three treaties we had previous hearings on, in 
addition to making a record on the other two treaties.
    The difference between this hearing and the one in 2011, is 
in 2011, we only had administration witnesses. Today, we will 
also have witnesses from the private sector, which I think is 
also very helpful for us to establish a full record as to the 
need for the Senate to consider these tax treaties.
    And I do hope that we will act promptly in the committee 
and also on the floor of the United States Senate, so that we 
can carry out one of our most important responsibilities, and 
that is the ratification of treaties entered into by the United 
States.
    With that, let me yield to Senator Barrasso.

           OPENING STATEMENT OF HON. JOHN BARRASSO, 
                   U.S. SENATOR FROM WYOMING

    Senator Barrasso. Thank you very much, Mr. Chairman.
    I appreciate all of the witnesses being here today to talk 
about these five international tax treaties.
    The United States has entered into numerous tax treaties 
with foreign countries to address double taxation. The treaties 
also attempt to prevent tax avoidance, tax evasion, through the 
exchange of sensitive tax-related information.
    As we examine these treaties, it is important that we make 
sure that measures are in place to protect U.S. taxpayer 
information.
    So I look forward to the hearing today, Mr. Chairman, and 
learning more about how the United States can benefit from 
these agreements.
    Thank you, Mr. Chairman.
    Senator Cardin. We do have a statement from Credit Suisse 
that, without objection, will be made part of our record.
    I know we are still waiting for Mr. Stack, but we will 
start with Mr. Barthold, the chief of staff of the Joint 
Committee on Taxation, a familiar face in the United States 
Senate. We normally see you in a different committee setting, 
but it is nice to see you in the Senate Foreign Relations 
Committee.
    Mr. Barthold, we will start with your testimony.

    STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT 
             COMMITTEE ON TAXATION, WASHINGTON, DC

    Mr. Barthold. Thank you very much, Chairman Cardin and 
Senator Barrasso. My name is Thomas A. Barthold. I am the chief 
of staff of the Joint Committee on Taxation, and it is my 
pleasure to present the testimony of the staff of the Joint 
Committee today concerning the proposed income tax treaties 
with Hungary and Chile, and the proposed tax protocols with 
Luxembourg and Sweden, and the proposed protocol amending the 
Multilateral Mutual Administrative Assistance Treaty.
    The Joint Committee, as is our custom, has prepared 
pamphlets covering the proposed treaties and protocols, 
providing detailed descriptions of the protocols and treaties, 
making comparisons to the U.S. Model Income Tax Treaty, where 
appropriate. In addition, our pamphlets have provided a 
detailed discussion of issues raised by the proposed treaties 
and protocols.
    My testimony today will highlight three issues related to 
the agreements before you today. I will focus on the limitation 
on benefits provisions in the treaties with Chile and Hungary, 
the general issues related to exchange of information, and the 
expansion of the Mutual Administrative Assistance agreement.
    Regarding limitation on benefits provisions, like the U.S. 
Model, the proposed treaties with Chile and Hungary include 
extensive limitation on benefit rules. I note that this is a 
really important development in the case of Hungary, because 
the present treaty between the United States and Hungary is one 
of only seven U.S. income tax treaties that does not presently 
include any limitation on benefit rules.
    Now, while the limitation on benefits rules in the proposed 
treaties with Chile and Hungary are similar to the rules in 
other recent treaties and similar to those in the U.S. Model, 
they are not identical. And I will highlight two particular 
differences.
    First, there are provisions in the Hungary treaty related 
to what are called derivative benefits. This is like other 
recent treaties in that there are rules that are generally 
intended to allow a treaty country company to receive treaty 
benefits for an item of income if that company's owners reside 
in a country that is in the same trading bloc as the treaty 
country--Hungary, in this case--and would have been entitled to 
the same benefits for that income had those owners derived the 
income directly. In essence, this is a broadened sense of the 
notion of resident, for purposes of this tax treaty. The Chile 
treaty, on the other hand, like the U.S. Model treaty, does not 
include a derivative benefits rule.
    Both the proposed treaties with Chile and Hungary include 
special rules intended to allow treaty country benefits for a 
resident of a treaty country that functions as a headquarters 
company. Again, this is a broadened notion of the idea of 
resident for purposes of these treaties. While U.S. income tax 
treaties in force with Austria, Australia, Belgium, the 
Netherlands, and Switzerland include similar rules for 
headquarters companies, the United States model treaty does not 
include these rules.
    An increasingly important area of treaties, as the chairman 
noted, has been provisions related to the exchange of 
information, and I would like to highlight three points related 
to the treaties and protocols that are before you today.
    One type of information exchange known as automatic 
exchange of information or routine exchange of information 
occurs when the treaty countries identify categories of 
information that are consistently relevant to the tax 
administration of the receiving treaty country and the 
countries agree to share such information on an ongoing basis. 
The United States, for example, is annually providing over 2\1/
2\ million items of information about U.S. source income by 
residents of treaty countries in a number of different treaty 
relationships today.
    In 2012, the Treasury finalized some regulations that 
expand information reporting by United States financial 
institutions on interest paid to nonresident aliens. Now, 
presently, we only routinely share that information with 
Canada. This is potentially a substantial expansion of the 
amount of information that we might be willing to share on an 
automatic basis, and I think that gives rise to questions 
related to what the Treasury hopes to achieve, if they, in 
fact, hope to achieve expanded sharing of this information. Do 
they have the administrative capability to expand the exchange 
of information that might be sought under the treaties that are 
before you today?
    And more generally, since there have been issues related to 
how automatic information is exchanged--the requirements, the 
details--perhaps the committee might request some guidance from 
the Treasury related to the United States experience under 
present practice, and what they see as possible impediments to 
greater use of automatic exchanges and perhaps ideas also for 
improving those exchanges.
    Now the second area of information exchange is referred to 
as specific requests for information. Specific exchange is an 
exchange that occurs when one treaty country provides 
information to the other country in response to a specific 
request by the latter country for information that is relevant 
to an ongoing investigation of a particular tax matter.
    Now, a problem that has arisen, and this has been a 
recurring issue with potential exchanges with Switzerland, has 
been that some treaty countries have declined to exchange 
information in response to specific requests intended to 
identify classes of persons. In the United States, an example 
of this is the John Doe summons for information. So the 
committee might be interested in the Treasury's views with 
respect to the agreements with Hungary, Chile, Luxembourg, and 
Sweden, as to whether the required exchange of information in 
response to specific requests will allow exchanges that are 
comparable to our John Doe summons.
    The final point on exchange of information is there has 
been specific criticism by other countries of the United States 
regarding our standards for ``know your customer rules'' for 
financial institutions--are they in sync with foreign 
practice?--and the extent to which we can or cannot provide 
information on beneficial ownership of business entities in the 
United States.
    Do these issues, do these areas of controversy, limit, 
perhaps, the Treasury's ability to make effective use of the 
reciprocal exchange agreements that are in place in these and 
other treaties?
    Permit me to take a last moment just to highlight what I 
think is perhaps the most important aspect of the expansion of 
the Mutual Administrative Assistance agreement. This agreement 
opens membership in that Convention to states that are neither 
OECD nor Council of Europe members.
    On one hand, the inclusive standard for permitting nations 
to participate has opened this Convention to a number of 
significant trade partners of the United States. On the other 
hand, it requires the United States to initiate an exchange of 
information program with jurisdictions with which we have not 
previously entered into any bilateral relationship.
    So to the extent that there may be jurisdictions with whom 
the United States has no exchange of information program, a 
relevant question would be the extent to which we are able to 
satisfy ourselves that each jurisdiction is in fact an 
appropriate partner for exchange of information, and also, 
given the potential expansive nature of the number of countries 
included, whether it will be a manageable project for the 
Treasury Department to handle expanded information 
requirements.
    A number of other issues are addressed in more detail in 
the Joint Committee pamphlets that I referenced earlier. I am 
happy to answer any questions that the committee may have at 
this time or in the future.
    Thank you very much.
    [The prepared statement of Mr. Barthold follows:]

                Prepared Statement of Thomas A. Barthold

    My name is Thomas A. Barthold. I am Chief of Staff of the Joint 
Committee on Taxation. It is my pleasure to present the testimony of 
the staff of the Joint Committee on Taxation today concerning the 
proposed income tax treaties with Hungary and Chile, the proposed tax 
protocols with Luxembourg and Switzerland, and the proposed protocol 
amending the Multilateral Mutual Administrative Assistance Ttreaty.\1\
                                overview
    As in the past, the Joint Committee staff has prepared pamphlets 
covering the proposed treaties and protocols.\2\ The pamphlets provide 
detailed descriptions of the proposed treaties and protocols, 
including, in the case of the income tax treaties and protocols, 
comparisons with the United States Model Income Tax Convention of 
November 15, 2006 (``U.S. Model treaty''), which reflects preferred 
U.S. tax treaty policy, and with other recent U.S. tax treaties. The 
pamphlets also provide detailed discussions of issues raised by the 
proposed treaties and protocols. We consulted with the Treasury 
Department and with the staff of your committee in analyzing the 
proposed treaties and protocols and in preparing the pamphlets.
    The principal purposes of the proposed income tax treaties and 
protocols are to reduce or eliminate double taxation of income earned 
by residents of either country from sources within the other country 
and to prevent avoidance or evasion of the taxes of the two countries. 
The proposed income tax treaties and protocols also are intended to 
promote close economic cooperation between the treaty countries and to 
eliminate possible barriers to trade and investment caused by 
overlapping taxing jurisdictions of the treaty countries. As in other 
U.S. income tax treaties, these objectives principally are achieved 
through each country's agreement to limit, in certain specified 
situations, its right to tax income derived from its territory by 
residents of the other country.
    The principal purpose of the multilateral mutual assistance treaty 
is to promote increased cooperation in tax administration and 
enforcement among the parties to the treaty.
    The proposed treaty with Hungary would replace an existing income 
tax treaty signed in 1979. The proposed protocol with Luxembourg would 
amend an existing tax treaty that was signed in 1996. The proposed 
protocol with Switzerland would amend an existing tax treaty and 
previous protocol that were both signed in 1996. The proposed treaty 
with Chile is the first income tax treaty with that nation. The last 
proposed protocol under consideration by your committee amends the 
multilateral mutual administrative assistance in tax matters agreement 
that the United States ratified in 1991.
    As a general matter, the U.S. Model treaty provides a framework for 
U.S. income tax treaty policy and a starting point for income tax 
treaty negotiations with our treaty partners. Income tax treaties that 
the United States has negotiated since 2006 in large part follow the 
U.S. Model treaty. The proposed income tax treaties and protocols that 
are the subject of this hearing are, accordingly, generally consistent 
with the provisions found in the U.S. Model treaty. There are, however, 
some key differences from the U.S. Model treaty that I will discuss.
    My testimony today will highlight three issues related to the 
agreements being considered by your committee, the limitation-on-
benefits provisions in the treaties with Chile and Hungary, exchange of 
information, and the expansion of the mutual administrative assistance 
agreement.
  limitation-on-benefits provisions in treaties with chile and hungary
In general
    Like the U.S. Model treaty, the proposed treaties with Chile and 
Hungary include extensive limitation-on-benefits rules (Chile, Article 
24; Hungary, Article 22). Limitation-on-benefits provisions are 
intended to prevent third-country residents from benefiting 
inappropriately from a treaty that generally grants benefits only to 
residents of the two treaty countries. This practice is commonly 
referred to as ``treaty shopping.'' A company may engage in treaty 
shopping by, for example, organizing a related treaty-country resident 
company that has no substantial presence in the treaty country. The 
third-country company may arrange, among other transactions, to have 
the related treaty-country company remove, or strip, income from the 
treaty country in a manner that reduces the overall tax burden on that 
income. Limitation-on-benefits rules may prevent these and other 
transactions by requiring that an individual or a company seeking 
treaty benefits have significant connections to a treaty country as a 
condition of eligibility for benefits.
    The present treaty between the United States and Hungary is one of 
only seven U.S. income tax treaties that do not include any limitation-
on-benefits rules.\3\ Two of those seven treaties, including the 
treaties with Hungary and Poland, include provisions providing for 
complete exemption from withholding on interest payments from one 
treaty country to the other treaty country that may present attractive 
opportunities for treaty shopping.\4\ For example, a November 2007 
report prepared by the Treasury Department at the request of the U.S. 
Congress suggests that the income tax treaty with Hungary has 
increasingly been used for treaty-shopping purposes as the United 
States adopted modern limitation-on-benefits provisions in its other 
treaties. In 2004, U.S. corporations that were at least 25-percent 
foreign owned made $1.2 billion in interest payments to related parties 
in Hungary, the seventh-largest amount of interest paid to related 
parties in any single country.\5\ With its inclusion of modern 
limitation-on-benefits rules, the proposed treaty with Hungary 
represents a significant opportunity to mitigate treaty shopping. 
Nevertheless, your committee may wish to inquire of the Treasury 
Department as to its plans to address the remaining U.S. income tax 
treaties that do not include limitation-on-benefits provisions.
Contrasts with the U.S. Model treaty
    Although the limitation-on-benefits rules in the proposed treaties 
with Chile and Hungary are similar to the rules in other recent and 
proposed U.S. income tax treaties and protocols and in the U.S. Model 
treaty, they are not identical, and your committee may wish to inquire 
about certain differences. In particular, your committee may wish to 
examine the rules for publicly traded companies, derivative benefits, 
and certain triangular arrangements. Your committee also may wish to 
ask the Treasury Department about the special limitation-on-benefits 
rules applicable to headquarters companies.
            Publicly traded companies
    Under the proposed treaties with Chile and Hungary, a publicly 
traded company that is a resident of a treaty country is eligible for 
all the benefits of the proposed treaty if it satisfies a regular 
trading test, which requires that the company's principal class of 
shares is primarily traded on a recognized stock exchange, and also 
satisfies either a management and control test or a primary trading 
test.
    The primary trading test in the proposed treaty with Hungary 
requires that a company's principal class of shares be primarily traded 
on a recognized stock exchange located in the treaty country of which 
the company is a resident or, in the case of a Hungarian company, on a 
recognized stock exchange in another European Union (``EU'') or 
European Free Trade Association (``EFTA'') country, or in the case of a 
U.S. company, in another North American Free Trade Agreement country. A 
similar primary trading test was included in the recent protocols with 
France and New Zealand.
    The primary trading test in the proposed treaty with Chile follows 
the U.S. Model treaty, requiring the trading to occur on a stock 
exchange in the treaty country of which the relevant company is a 
resident; trading on a stock exchange in another country may not be 
used to satisfy the test.
    As in the U.S. Model treaty, in both the proposed Chile treaty and 
the proposed Hungary treaty a recognized stock exchange includes 
certain exchanges specified in the treaty as well as any other stock 
exchange agreed upon by the competent authorities of the treaty 
countries. Your committee may wish to explore the rationale underlying 
the identification of recognized stock exchanges for purposes of 
limitations of benefits, and the criteria the Treasury Department 
considers when negotiating over the definition of a recognized stock 
exchange.
            Derivative benefits
    Like other recent treaties, the proposed treaty with Hungary 
includes derivative benefits rules that are generally intended to allow 
a treaty-country company to receive treaty benefits for an item of 
income if the company's owners (referred to in the proposed treaty as 
equivalent beneficiaries) reside in a country that is in the same 
trading bloc as the treaty country and would have been entitled to the 
same benefits for the income had those owners derived the income 
directly. The derivative benefits rules may grant treaty benefits to a 
treaty-country resident company in circumstances in which the company 
would not qualify for treaty benefits under any of the other 
limitation-on-benefits provisions. The Chile treaty, like the U.S. 
Model treaty does not include derivative benefits rules.
            Triangular arrangements
    The proposed treaties with Chile and Hungary include special 
antiabuse rules intended to deny treaty benefits in certain 
circumstances in which a Chilean or Hungarian resident company earns 
U.S.-source income attributable to a third-country permanent 
establishment and is subject to little or no tax in the third 
jurisdiction and (as applicable) Chile or Hungary. A rule on triangular 
arrangements is not included in the U.S. Model treaty, but similar 
antiabuse rules are included in other recent treaties and protocols.
            Headquarters companies
    The proposed treaties with Chile and Hungary include special rules 
intended to allow treaty-country benefits for a resident of a treaty 
country that functions as a headquarters company and that satisfies 
certain requirements intended to ensure that the headquarters company 
performs substantial supervisory and administrative functions for a 
group of companies: among other requirements, (1) that the group of 
companies is genuinely multinational; (2) that the headquarters company 
is subject to the same income tax rules in its country of residence as 
would apply to a company engaged in the active conduct of a trade or 
business in that country; and (3) that the headquarters company has 
independent authority in carrying out its supervisory and 
administrative functions.
    While U.S. income tax treaties in force with Austria, Australia, 
Belgium, the Netherlands, and Switzerland include similar rules for 
headquarters companies, the U.S. Model treaty does not include these 
rules.
                        exchange of information
    Tax treaties establish the scope of information that can be 
exchanged between treaty countries. Exchange of information provisions 
first appeared in the late 1930s,\6\ and are now included in all double 
tax conventions to which the United States is a party. A broad 
international consensus has coalesced around the issue of bank 
transparency for tax purposes and strengthened in recent years, in part 
due to events involving one of Switzerland's largest banks, UBS AG, the 
global financial crisis, and the general increase in globalization. 
Greater attention to all means of restoring integrity and stability to 
financial institutions has led to greater efforts to reconcile the 
conflicts between jurisdictions, particularly between jurisdictions 
with strict bank secrecy and those seeking information to enforce their 
own tax laws.\7\ As a result, the committee may wish to inquire as to 
whether the U.S. Model treaty published in 2006 remains the appropriate 
standard by which to measure an effective exchange of information 
program.
    Although the United States has long had bilateral income tax 
treaties in force with Hungary, Luxembourg, and Switzerland, the United 
States has engaged in relatively limited exchange of information under 
these tax treaties. With Luxembourg and Switzerland, the limitations 
stem from strict bank secrecy rules in those jurisdictions. The 
proposed protocols with Luxembourg and Switzerland are a response to 
that history as well as part of the international trend in exchange of 
information.
    The pamphlets prepared by the Joint Committee staff provide 
detailed overviews of the information exchange articles of the proposed 
income tax treaties with Chile and Hungary and the proposed protocols 
with Luxembourg and Switzerland. They also describe the extent to which 
those articles differ from the U.S. Model treaty's rules on information 
exchange. I note that since we published our May 20, 2011, pamphlets 
describing the agreements with Hungary, Luxembourg, and Switzerland, 
additional information about exchange of information involving those 
countries has become available, and similar analysis is available about 
information exchange with Chile.
    In June 2011, the Organisation for Economic Cooperation and 
Development (``OECD'') published reports of Phase I Peer Reviews of 
Hungary and Switzerland, as well as a report on its Combined Phase I 
and Phase II Peer Review of the United States.\8\ The OECD published a 
report of its Phase I Peer Review of Chile in April 2012. The OECD 
published a report of its Phase I Peer Review of Luxembourg in 
September 2011 and a report of its Phase II Peer Review in July 2013. 
Table 3 of the appendix of the recently published Joint Committee 
explanation of the proposed protocol amending the mutual administrative 
assistance agreement provides a summary of the status and outcomes of 
the OECD peer reviews as of February 6, 2014.\9\
    Here I wish to highlight first those issues related to the 
effectiveness of information exchange under income tax treaties that 
are common to both the proposed treaties and proposed protocols under 
consideration today, and second, issues specific to the proposed 
protocols with Luxembourg and Switzerland.
Effectiveness of U.S. information exchange agreements in general
    The Joint Committee staff's pamphlets describe in detail several 
practical issues related to information exchange under income tax 
treaties. I will briefly note three issues: the usefulness of automatic 
exchange of information, the ability of the United States to provide 
information about beneficial ownership of foreign-owned entities, and, 
finally, the limitations on specific requests for information.
            Automatic exchange of information
    The OECD standards do not require exchange other than upon specific 
requests for information, although the language permits the treaty 
countries to agree to provide for other exchange mechanisms. The OECD, 
in its commentary to the exchange of information provisions in the OECD 
Model treaty, specifies that the treaty ``allows'' the competent 
authorities to exchange information in any of three ways that treaty 
countries have traditionally operated\10\--routine, spontaneous,\11\ or 
specific exchanges.\12\
    The committee may wish to explore issues related to ``routine 
exchange of information.'' In this type of exchange, also referred to 
as ``automatic exchange of information.'' the treaty countries identify 
categories of information that are consistently relevant to the tax 
administration of the receiving treaty country and agree to share such 
information on an ongoing basis, without the need for a specific 
request. The type of information, when it will be provided, and how 
frequently it will be provided are determined by the respective 
Competent Authorities after consultation. Once an agreement is reached, 
the information is automatically provided. The United States, for 
example, annual provides over 2.5 million items of information about 
U.S.-source income received by residents of treaty countries to those 
treaty partners.
    The committee may wish to inquire about the (1) the extent to which 
the United States presently engages in automatic exchange of taxpayer-
specific information, (2) practical hurdles to greater use of automatic 
exchange, and (3) whether it anticipates significant changes in that 
practice with the ratification of the documents presently before the 
committee.
    The committee may also wish to inquire about regulations finalized 
in 2012 that expand information reporting by U.S. financial 
institutions on interest paid to nonresident aliens. In support of 
those regulations, the Preamble states ``requiring routine reporting to 
the IRS of all U.S. bank deposit interest paid to any nonresidential 
alien individual will further strengthen the United States exchange of 
information program consistent with adequate provisions for 
reciprocity, usability and confidentiality in respect of this 
information.''\13\ Such reporting was not previously required, except 
with respect to payments to residents of Canada.\14\ The IRS has 
published a list of the countries whose residents are subject to the 
reporting requirements, and a list of countries with respect to which 
the reported information will be automatically exchanged. The first 
list includes 78 countries. The second list includes only one, 
Canada.\15\
    In the past, there have been concerns that information received 
pursuant to automatic exchanges under bilateral and multilateral 
agreements was not in a usable form. The OECD has developed standards 
for the electronic format of such exchanges, to enhance their utility 
to tax administration.\16\ Despite these efforts to standardize the 
information exchanged and improve its usefulness, there remain numerous 
shortcomings, both practical and legal, in the routine exchange of 
information. Chief among them is the lack of taxpayer identification 
numbers (``TINs'') in the information provided under the exchange, 
despite the recommendation of the OECD that member States provide such 
information.\17\ The committee may wish in inquire about the United 
State's experience, impediments to greater use of automatic exchanges, 
and preferences for improving such exchanges.
            Ability of United States to provide beneficial ownership 
                    information
    The United States has come under increasing pressure to eliminate 
policies that provide foreign persons with the ability to shelter 
income. The criticism has focused on disparities between the U.S. 
standards and foreign standards governing ``know-your-customer'' rules 
for financial institutions and the maintenance of information on 
beneficial ownership. With respect to the latter, U.S. norms have been 
criticized in recent years.\18\ The committee may wish to explore the 
extent to which either the existing U.S. know-your-customer rules or 
the corporate formation and ownership standards prevent the United 
States from providing information about beneficial ownership on a 
reciprocal basis with its treaty countries. The committee may also 
consider whether there are steps to take that would help refute the 
perception that the United States permits states to operate as tax 
havens and that would help the United States better respond to 
information requests from treaty countries who suspect that their own 
citizens and residents may be engaging in illegal activities through 
U.S. corporations and limited liability companies.\19\
            Specific requests for information
    The committee may wish to inquire as to the extent to which a 
request that a treaty country provide information in response to a John 
Doe summons\20\ is a specific request within the meaning of the Article 
26, and whether protracted litigation similar to that which occurred in 
the UBS litigation\21\ can be avoided or shortened.
    ``Specific'' exchange, is an exchange which occurs when one treaty 
country provides information to the other treaty country in response to 
a specific request by the latter country for information that is 
relevant to an ongoing investigation of a particular tax matter. One 
problem with specific exchange has been that some treaty countries have 
declined to exchange information in response to specific requests 
intended to identify limited classes of persons.\22\ Your committee may 
wish to seek assurances that, under the proposed treaties with Hungary 
and Chile and the proposed protocols with Luxembourg and Switzerland, 
treaty countries are required to exchange information in response to 
specific requests that are comparable to John Doe summonses under 
domestic law.\23\ As discussed below, this has been a recurring issue 
with exchanges with Switzerland.
    To the extent that there were perceived deficiencies in the former 
information exchange relationships with Luxembourg and Switzerland, to 
the extent that the United States may have little recent practical 
experience in cooperating with Chile or Hungary on tax matters, and to 
the extent that OECD peer reviews have concluded that impediments to 
effective information exchange exist in Chile, Hungary, Luxembourg, or 
Switzerland, your committee may wish to seek reassurances that any 
obstacles to effective information exchange have been eliminated.\24\
Information exchange with Luxembourg and Switzerland
            Switzerland
    The exchange of information article in the 1951 U.S.-Swiss treaty 
was limited to ``prevention of fraud or the like.'' Under the treaty, 
Switzerland applied a principle of dual criminality, requiring that the 
purpose for which the information was sought also be a valid purpose 
under local law. Because ``fraud or the like'' was limited to nontax 
crimes in Switzerland, information on civil or criminal tax cases was 
not available. The provision was substantially revised for the present 
treaty, signed in 1996, and accompanied by a contemporaneous protocol 
that elaborated on the terms used in the exchange of information 
article. That 1996 protocol was intended to broaden the circumstances 
under which tax authorities could exchange information to include tax 
fraud or fraudulent conduct, both civil and criminal. It provided a 
definition at paragraph 10 of ``tax fraud'' to mean ``fraudulent 
conduct that causes or is intended to cause an illegal and substantial 
reduction in the amount of tax paid to a contracting state.'' In 
practice, exchange apparently remained limited, leading the competent 
authorities to negotiate a subsequent memorandum of understanding that 
included numerous examples of the facts upon which a treaty country may 
base its suspicions of fraud to support a request to exchange 
information.\25\
    In March 2009, the Swiss Federal Council withdrew its reservation 
regarding Article 26 (Exchange of Information) of the OECD Model 
treaty, thus apparently adopting the OECD standards on administrative 
assistance in tax matters.\26\ It simultaneously announced key elements 
that it would require as conditions to be met in any new agreements. 
The Swiss conditions established by the Federal Council limited 
administrative assistance to individual cases and only in response to a 
specific and justified request. Although Switzerland is considered by 
the OECD to be a jurisdiction that has fully committed to the 
transparency standards of the OECD, the OECD report on Phase I of its 
peer review of Switzerland states that the Swiss authorities' initial 
insistence on imposing identification requirements as a predicate for 
exchange of information were inconsistent with the international 
standards and that additional actions would be needed to permit the 
review process to proceed to Phase II. Those actions include bringing a 
significant number of its agreements into line with the standard and 
taking action to confirm that all new agreements are interpreted in 
line with the standard.
    The proposed protocol, by replacing Article 26 (Exchange of 
Information and Administrative Assistance) of the present treaty and 
amending paragraph 10 of the 1996 protocol, closely adheres to the 
principles announced by Switzerland. It also conforms to the standards, 
if not the language, of the exchange of information provisions in the 
U.S. Model treaty in many respects. As a result, the proposed protocol 
may facilitate greater exchange of information than has occurred in the 
past, chiefly by eliminating the present treaty requirement that the 
requesting treaty country establish tax fraud or fraudulent conduct or 
the like as a basis for exchange of information and providing that 
domestic bank secrecy laws and lack of a domestic interest in the 
requested information are not possible grounds for refusing to provide 
requested information. Lack of proof of fraud, lack of a domestic 
interest in the information requested, and Swiss bank secrecy laws were 
cited by Swiss authorities in declining to exchange information. The 
proposed protocol attempts to ensure that subsequent changes in 
domestic law cannot be relied upon to prevent access to the information 
by including in the proposed protocol a self-executing statement that 
the competent authorities are empowered to obtain access to the 
information notwithstanding any domestic legislation to the contrary.
    Nevertheless, there are several areas in which questions about the 
extent to which the exchange of information article in the proposed 
protocol may prove effective are warranted. The proposed revisions to 
paragraph 10 of the 1996 protocol reflect complete adoption of the 
first element listed above in the Swiss negotiating position, 
``limitation of administrative assistance to individual cases and thus 
no fishing expeditions.'' The limitation poses issues regarding (1) the 
extent to which the Swiss will continue to reject requests that do not 
name the taxpayer as a result of the requirement that a taxpayer be 
``typically'' identified by name, and (2) the standard of relevance to 
be applied to requests for information, in light of the caveat against 
``fishing expeditions.'' In addition, the appropriate interpretation of 
the scope of purposes for which exchanged information may be used may 
be unnecessarily limited by comments in the Technical Explanation. In 
particular, although paragraph 2 of Article 26 (Exchange of 
Information), as modified by the proposed protocol, generally prohibits 
persons who receive information exchanged under the article from using 
the information for purposes other than those related to the 
administration, assessment, or collection of taxes covered by the 
treaty, the paragraph also allows the information to be used for other 
purposes so long as the laws of both the United States and Switzerland 
permit that use and the competent authority of the requested country 
consents to that use. The Technical Explanation, however, states that 
one treaty country (for example, the United States) will seek the other 
treaty country's (for example, Switzerland's) consent under this 
expanded use provision only to the extent that use is allowed under the 
provisions of the U.S.-Switzerland Mutual Legal Assistance Treaty that 
entered into force in 1977.
            Luxembourg
    The proposed protocol with Luxembourg, by replacing Article 28 
(Exchange of Information and Administrative Assistance) of the 1996 
treaty, is consistent with both the OECD and U.S. Model treaties. There 
are several areas in which questions are warranted about the extent to 
which the new article as revised in the proposed protocol may prove 
effective. These questions arise not from the language in the proposed 
protocol itself but from the mutual understandings reflected in 
diplomatic notes exchanged at the time the protocol was signed. 
Potential areas of concern are found in statements in the diplomatic 
notes concerning (1) the obligation to ensure tax authority access to 
information about beneficial ownership of juridical entities and 
financial institutions, other than publicly traded entities, to the 
extent that such information is of a type that is within the possession 
or control of someone within the territorial jurisdiction, (2) the 
requirement that all requests must provide the identity of the person 
under investigation, (3) the standard of relevance to be applied in 
stating a purpose for which the information is sought, and (4) the 
requirement that requests include a representation that all other means 
of obtaining the information have been attempted, except to the extent 
that to do so would cause disproportionate difficulties.
    Moreover, the OECD's Phase II peer review of Luxembourg's 
implementation of transparency and information exchange standards 
concluded that Luxembourg is noncompliant with OECD standards. Your 
committee may wish to inquire into the effect that Luxembourg's failure 
to comply with OECD standards in implementing exchange of information 
may have on its exchange relationship with the United States.
        expansion of mutual administrative assistance agreement
    One of the most significant changes to the multilateral convention 
made by the proposed protocol is the opening of membership in the 
convention to states that are neither OECD nor Council of Europe 
members. In the most recently available list of signatories, dated 
December 23, 2013, there are a number of countries who are not members 
of G20,\27\ the OECD or the Council of Europe: Colombia, Costa Rica, 
Ghana, Guatemala, and Tunisia. All members of G20 are among the 
signatories. Those members of G20 who are not also members of either 
the OECD or Council of Europe include Argentina, Brazil, India, 
Indonesia, Saudi Arabia and South Africa. Thus, on the one hand, the 
inclusive standard for permitting nations to participate has opened the 
multilateral convention to a number of significant trade partners of 
the United States. On the other hand, it requires the United States to 
initiate an exchange of information program with jurisdictions with 
which it has not previously entered into a bilateral relationship. 
Among the signatories that have neither a tax treaty nor a TIEA with 
the United States are Albania, Andorra, Croatia, Ghana, Nigeria, Saudi 
Arabia, and Singapore.
    The extent to which any of those states are jurisdictions with 
which the United States has previously participated in an exchange of 
information program and whether the program has operated satisfactorily 
are areas in which the committee may wish to inquire. To the extent 
that they are jurisdictions with whom the United States has no exchange 
of information program under a bilateral agreement, the committee may 
wish to inquire about the extent to which the United States has been 
able to satisfy itself that each jurisdiction is an appropriate partner 
for exchange of information. The committee may also wish to inquire 
whether the 
expanded exchange of information requirements will be manageable.
    The committee may also wish to inquire about the circumstances 
under which the United States would object to accession by a nonmember 
state, as contemplated under the procedures for securing the unanimous 
consent of the governing body of the treaty before the agreement may 
enter into effect with respect to that nonmember state. For example, in 
explaining its general standards for considering entry into a bilateral 
agreement with a jurisdiction, Treasury has stated, ``. . . prior to 
entering into an information exchange agreement with another 
jurisdiction, the Treasury Department and the IRS closely review the 
foreign jurisdiction's legal framework for maintaining the 
confidentiality of taxpayer information. In order to conclude an 
information exchange agreement with another country, the Treasury 
Department and the IRS must be satisfied that the foreign jurisdiction 
has the necessary legal safeguards in place to protect exchanged 
information and that adequate penalties apply to any breach of that 
confidentiality.''\28\
                               conclusion
    The matters that I have described in this testimony are addressed 
in more detail in the Joint Committee staff pamphlets on the proposed 
treaties and protocols. I am happy to answer any questions that your 
committee may have at this time or in the future.

----------------
End Notes

    \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 Treaties with Chile and Hungary, the Proposed Tax 
Protocols with Luxembourg and Switzerland, and the Proposed Protocol 
Amending the Multilateral Convention on Mutual Administrative 
Assistance in Tax Matters'' (JCX-11-14), February 26, 2014. This 
publication can also be found at http://www.jct.gov.
    \2\Joint Committee on Taxation, ``Explanation of Proposed Income 
Tax Treaty Between the United States and Hungary'' (JCX-32-11), May 20, 
2011; Joint Committee on Taxation, ``Explanation of Proposed Protocol 
to the Income Tax Treaty Between the United States and Luxembourg'' 
(JCX-30-11), May 20, 2011; Joint Committee on Taxation, ``Explanation 
of Proposed Protocol to the Income Tax Treaty Between the United States 
and Switzerland'' (JCX-31-11), May 20, 2011; Joint Committee on 
Taxation, ``Explanation of Proposed Protocol Amending the Multilateral 
Convention on Mutual Administrative Assistance in Tax Matters'' (JCX-9-
14), February 21, 2014; Joint Committee on Taxation, ``Explanation of 
Proposed Income Tax Treaty Between the United States and Chile'' (JCX-
10-14), February 24, 2014. The pamphlets describing the proposed treaty 
with Hungary and the proposed protocols with Luxembourg and Switzerland 
were prepared in connection with a Committee on Foreign Relations 
hearing held on June 7, 2011.
    \3\The other income tax treaties without limitation-on-benefits 
rules are the ones with Greece (1953), Pakistan (1959), the Philippines 
(1982), Poland (1976), Romania (1976), and the U.S.S.R (1976). The 
United States and Poland signed a new income tax treaty on February 13, 
2013, that includes comprehensive limitation-on-benefits rules, but 
that treaty has not yet been transmitted to the Senate for 
consideration for ratification (and therefore has not yet taken 
effect). Following the dissolution of the U.S.S.R., the income tax 
treaty with the U.S.S.R. applies to the countries of Armenia, 
Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikstan, 
Turkmenistan, and Uzbekistan.
    \4\The income tax treaty with Greece also provides for complete 
exemption from withholding on interest, although it contains 
restrictions that limit the availability of the exemption, such that a 
Greek company receiving interest from a U.S. company does not qualify 
for the exemption if it controls, directly or indirectly, more than 50 
percent of the U.S. company.
    \5\Department of the Treasury, ``Report to the Congress on Earnings 
Stripping, Transfer Pricing and U.S. Income Tax Treaties'' (Nov. 28, 
2007). The report states that, as of 2004, it does not appear that the 
U.S.-Poland income tax treaty has been extensively exploited by third-
country residents. Although the report also focused on Iceland to the 
same extent as Hungary, a 2007 Income Tax Convention with Iceland that 
includes a modern limitation-on-benefits provision has since taken 
effect.
    \6\Article XV of the U.S.-Sweden Double Tax Convention, signed on 
March 23, 1939.
    \7\See, Joint Committee on Taxation, ``Description of Revenue 
Provisions Contained in the President's Fiscal Year 2010 Budget 
Proposal; Part Three: Provisions Related to the Taxation of Cross-
Border Income and Investment'' (JCS-4-09), September 2009. Section VI 
of that pamphlet provides an overview of the international efforts to 
address these issues.
    \8\Phase I reviews evaluate the quality of a country's legal and 
regulatory framework for information exchange, and Phase II reviews 
assess the practical implementation of that framework.
    \9\See Joint Committee on Taxation, ``Explanation of Proposed 
Protocol to the Multilateral Convention on Mutual Administrative 
Assistance in Tax Matters'' (JCX-9-14), February 21, 2014, p. 32.
    \10\OECD, Commentary on the Model Treaty Article 26, par. 9 as 
revised in OECD, ``Update to Article 26 of the OECD Model Tax 
Convention and Its Commentary,'' (July 12, 2012), available at http://
www.oecd.org/ctp/exchange-of-tax-information/120718_Article%2026-
ENG_no% 
20cover%20%282%29.pdf
    \11\A ``spontaneous exchange of information'' occurs when one 
treaty country who is in possession of an item of information that it 
determines may interest the other treaty country for purposes of its 
tax administration spontaneously transmits the information to its 
treaty country through their respective competent authorities.
    \12\A ``specific exchange'' is a formal request by one contracting 
state for information that is relevant to an ongoing investigation of a 
particular tax matter. These cases are generally taxpayer specific. 
Those familiar with the case prepare a request that explains the 
background of the tax case and the need for the information and submit 
it to the Competent Authority in their country. If he determines that 
it is an appropriate use of the treaty authority, he forwards it to his 
counterpart.
    \13\Preamble to Treas. Reg. sec. 1.6049-4(b)(5). T.D. 9584, April 
12, 2012.
    \14\Treas. Reg. sec. 1.6049-4(b)(5).
    \15\Rev. Proc. 2012-24 2012 I.R.B. Lexis 242 (April 17, 2012).
    \16\See OECD, Committee on Fiscal Affairs, ``Manual on the 
Implementation of Exchange of Information Provisions for Tax Purposes, 
Module 3'' (January 23, 2006) (``OECD Exchange Manual'').
    \17\OECD Exchange Manual refers to a recommendation dating to 1997, 
``Recommendation on the use of Tax Identification Numbers in an 
International Context'' C(97)29/FINAL (1997).
    \18\Financial Action Task Force, IMF, 11Summary of the Third Mutual 
Evaluation Report on Anti-Money Laundering and Combating the Financing 
of Terrorism United States of America, pp. 10-11'' (June 23, 2006); 
Government Accountability Office, ``Company Formations: Minimal 
Ownership Information Is Collected and Available,'' a report to the 
Permanent Subcommittee on Investigations, Committee on Homeland 
Security and Governmental Affairs, U.S. Senate GAO-06-376 (April 2006); 
Government Accountability Office, ``Suspicious Banking Activities: 
Possible Money Laundering by US Corporations Formed for Russian 
Entities,'' GAO-01-120 (October 31, 2006).
    \19\E.g., the ``Incorporation Transparency and Law Enforcement 
Assistance Act,'' S. 569, 111th Congress (2009), would require States 
to obtain and periodically update beneficial ownership information from 
persons who seek to form a corporation or limited liability company.
    \20\When the existence of a possibly noncompliant taxpayer is known 
but not his identity, as in the case of holders of offshore bank 
accounts or investors in particular abusive transactions, the IRS is 
able to issue a summons to learn the identity of the taxpayer, but must 
first meet greater statutory requirements, to guard against fishing 
expeditions. Prior to issuance of the summons intended to learn the 
identity of unnamed ``John Does,'' the United States must seek judicial 
review in an ex parte proceeding. In its application and supporting 
documents, the United States must establish that the information sought 
pertains to an ascertainable group of persons, that there is a 
reasonable basis to believe that taxes have been avoided, and that the 
information is not otherwise available.
    \21\See, United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.), 
enforcing a ``John Doe summons'' which requested the identities of U.S. 
persons believed to have accounts at UBS in Switzerland. On August 19, 
2009, the United States and UBS announced an agreement (approved by the 
Swiss Parliament on June 17, 2010) under which UBS provided the 
requested information.
    \22\For example, a petition to enforce a John Doe summons served by 
the United States on UBS, AG was filed on February 21, 2009, 
accompanied by an affidavit of Barry B. Shott, the U.S. competent 
authority for the United States-Switzerland income tax treaty. 
Paragraph 16 of that affidavit notes that Switzerland had traditionally 
taken the position that a specific request must identify the taxpayer. 
See United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.). On August 
19, 2009, after extensive negotiations between the Swiss and U.S. 
governments, the United States and UBS announced that UBS had agreed to 
provide information on over 4,000 U.S. persons with accounts at UBS.
    \23\Under a John Doe summons, the U.S. Internal Revenue Service 
(``IRS'') asks for information to identify unnamed ``John Doe'' 
taxpayers. The IRS may issue a John Doe summons only with judicial 
approval, and judicial approval is given only if there is a reasonable 
basis to believe that taxes have been avoided and that the information 
sought pertains to an ascertainable group of taxpayers and is not 
otherwise available.
    \24\Certain OECD conclusions about information exchange with 
Luxembourg and Switzerland are noted below. The OECD peer reviews of 
Chile and Hungary found that although those jurisdictions generally are 
compliant with OECD standards, each country had certain deficiencies 
preventing fully effective information exchange.
    \25\``Mutual Agreement of January 23, 2003, Regarding the 
Administration of Article 26 (Exchange of Information) of the Swiss-
U.S. Tax Convention of October 2, 1996,'' reprinted at paragraph 9106, 
``Tax Treaties,'' (CCH 2005).
    \26\See ``Switzerland to adopt OECD standard on administrative 
assistance in fiscal matters,'' Federal Department of Finance, FDF 
(March 13, 2009), available at http://www.efd.admin.ch/dokumentation/
medieninformationen/00467/index.html?lang=en&msg-id=25863 (last 
accessed March 1, 2011).
    \27\G20, or the Group of Twenty, is a forum for international 
economic cooperation among the member countries and the European Union. 
The leaders of the members meet annually, while finance and banking 
regulators meet more frequently throughout the year. They work closely 
with a number of international organizations, including the OECD.
    \28\Preamble to Treas. Reg. 1.6049-4(b)(5). T.D. 9584, April 12, 
2012.

    Senator Cardin. Thank you for your testimony.
    Mr. Stack, we understand you were delayed because of a 
lockdown near the White House, so we certainly understand that 
and look forward to hearing your testimony.
    It is the practice of this committee that the written 
statements of all of our witnesses, without objection, will be 
made part of our record.

   STATEMENT OF ROBERT STACK, DEPUTY ASSISTANT SECRETARY FOR 
    INTERNATIONAL TAX AFFAIRS, DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Mr. Stack. Thank you, Mr. Chairman Cardin, Ranking Member 
Barrasso. And again, I do apologize for our lateness, and I 
appreciate your understanding.
    I appreciate the opportunity to appear before you today to 
recommend favorable action on five tax agreements that are 
pending before this committee. As Senator Cardin has already 
indicated, the written statement will be made part of the 
record.
    The proposed agreements before the committee today with 
Chile, Hungary, Luxembourg, and Switzerland, as well as the 
protocol to the Convention on Mutual Administrative Assistance 
in Tax Matters, which I will refer to today as the Multilateral 
Convention, serve to further the goals of our tax treaty 
network, in particular the goals of increased transparency and 
relief from double taxation.
    Because my written statement and the technical explanations 
written by the Treasury Department provide detailed 
explanations of the provisions of the agreements, I would like 
to describe briefly only the most noteworthy aspects of each of 
these agreements.
    Chile, the proposed income tax convention with Chile, if 
approved by the Senate and the Chilean legislature, would only 
be the second income tax convention in force in South America, 
a region into which the Treasury Department has long sought to 
expand the U.S. treaty network.
    Because all tax conventions are the product of a 
negotiation, the proposed convention with Chile contains a 
number of variations from the U.S. Model practice, many of 
which are typically seen in U.S. tax treaties with developing 
countries. Other provisions reflect particular aspects of the 
Chilean tax system and treaty policy, which I am happy to 
discuss in further detail.
    The proposed income tax convention with Hungary was 
negotiated to bring the current convention, signed in 1979, 
into closer conformity with current U.S. tax treaty policy. 
Most importantly, the proposed convention contains a 
comprehensive limitation on benefits provision designed to 
prevent third-party investors from inappropriately taking 
advantage of the treaty, a practice known as treaty shopping. 
The current convention does not contain a limitation on 
benefits article, and as result, has been abused by third 
country investors in recent years.
    For this reason, revising the current convention has been a 
top tax treaty priority for the Department.
    The proposed protocol with Luxembourg replaces the limited 
information exchange provisions of the existing tax convention 
with Luxembourg with updated rules that are consistent with 
current U.S. tax treaty practice and the standards for exchange 
of information developed by the OECD. The proposed protocol 
allows the 
tax authorities of each country to exchange information that is 
foreseeably relevant to carrying out the provisions of the 
agreement or the domestic laws of either country. The proposed 
protocol would allow the United States to obtain information 
from Luxembourg, whether or not Luxembourg needs the 
information for its own tax purposes, and provides that 
requests for information cannot be declined solely because the 
information is held by a bank or another financial institution.
    The proposed protocol with Switzerland replaces the limited 
information exchange provisions of the existing tax convention 
with Switzerland with updated rules, which are substantively 
the same as those contained in the proposed protocol with 
Luxembourg, which I just described. The Treasury Department is 
hopeful that the proposed protocol with Switzerland, if 
approved by the Senate, will greatly improve the collaboration 
between the United States and Swiss revenue authorities to 
exchange information to enforce tax laws.
    The proposed protocol with Switzerland also updates the 
provisions of the existing convention with respect to the 
mutual agreement procedure by incorporating mandatory binding 
arbitration of certain disputes that the tax authorities have 
been unable to resolve after a reasonable period of time.
    The arbitration provision in the proposed protocol with 
Switzerland is similar to the arbitration provisions in the 
U.S. tax treaties with Germany, Belgium, Canada, and France, 
which have been approved by the Senate in recent years, and 
also includes the provisions that we have in the French 
agreement that were specifically indicated by this committee 
would be helpful addition to our arbitration provisions.
    The proposed protocol to the Multilateral Convention, if 
approved by the Senate, would establish several new information 
exchange relationships for the United States, which would 
enhance the IRS's ability to fight tax evasion, but would also 
bring the exchange provisions in the Multilateral Convention up 
to modern standards.
    The existing Multilateral Convention is open for signature 
by countries that are members of either the OECD or the Council 
of Europe. The proposed protocol amends the Multilateral 
Convention to allow any country to become a signatory provided 
all the other signatories are satisfied that such country has a 
sufficient legal framework to ensure that information exchanged 
pursuant to the agreement will be kept confidential.
    Although the existing convention contains broad provisions 
for the exchange of information, it predates the current 
internationally agreed standards of information. Thus, the 
obligations contained in the existing convention are subject to 
certain domestic law limitations that could impede full 
exchange of information.
    In particular, the existing convention does not require the 
provision of bank information on request, nor does it override 
so-called domestic tax interest requirements. Those are 
requirements that the supplying country itself have a tax 
interest in the information being sought by the requesting 
party, and the more modern agreements delete those 
requirements.
    In contrast, the current internationally agreed standards 
on transparency and exchange of information provide for full 
exchange of information on request in all tax matters without 
regard to domestic tax interest requirement or bank secrecy 
laws.
    The proposed protocol amends the existing convention in 
order to bring it into conformity with these internationally 
agreed standards, which are also reflected in the OECD's Model 
Tax Convention on Income and Capital and the U.S. Model Income 
Tax Convention.
    In addition, the proposed protocol brings the 
confidentiality rules of the existing convention regarding 
exchanged information, and the limitations regarding the use of 
such information, in conformity with the United States and OECD 
models.
    Consistent with the international recognition of the need 
for maximum transparency in tax matters, all five agreements 
before you today contain updated provisions for the full 
exchange of information between the tax authorities that are 
consistent with U.S. and international standards.
    I would like to take the opportunity to assure the 
committee that as part of the Treasury Department's efforts to 
increase transparency in tax matters, we place a high priority 
on ensuring that information exchanged pursuant to an 
international tax agreement will not be misused by our treaty 
partners. The United States will only exchange tax information 
with a country if we are satisfied that the country has 
adequate confidentiality laws that will protect the information 
we provide.
    Let me repeat our appreciation for the committee's interest 
in these agreements. We are also grateful for the assistance 
and cooperation of the staffs of the committee and of the Joint 
Committee on Taxation. And I would like to recognize the 
tireless work of our Treasury team.
    We urge the committee and Senate to take prompt and 
favorable action on all of these agreements, and we would be 
happy to answer any questions you have.
    [The prepared statement of Mr. Stack follows:]

                 Prepared Statement of Robert B. Stack

    Chairman Cardin, Ranking Member Barrasso, and distinguished members 
of the committee, I appreciate the opportunity to appear today to 
recommend, on behalf of the administration, favorable action on five 
tax treaties pending before this committee. We appreciate the 
committee's interest in these treaties and in the U.S. tax treaty 
network overall.
    This administration is committed to eliminating barriers to cross-
border trade and investment, and tax treaties are one of the primary 
means for eliminating such tax barriers. Tax treaties provide greater 
certainty to businesses and individuals regarding their potential 
liability to tax in foreign jurisdictions, and they allocate taxing 
rights between jurisdictions to reduce the risk of double taxation. Tax 
treaties also ensure that businesses and individuals are not subject to 
discriminatory taxation in foreign jurisdictions.
    A tax treaty reflects a balance of benefits that is agreed to when 
the treaty is negotiated. In some cases, changes in law or policy in 
one or both of the treaty partners make the partners more willing to 
increase the benefits beyond those provided in an existing treaty; in 
these cases, revisions to a treaty may be very beneficial. In other 
cases, developments in one or both countries, or international 
developments more generally, may make it desirable to revisit an 
existing treaty to prevent improper exploitation of treaty provisions 
and eliminate unintended and inappropriate consequences in the 
application of the treaty. In yet other cases, the United States seeks 
to establish new income tax treaties with countries in which there is 
significant U.S. direct investment, and with respect to which U.S. 
companies are experiencing double taxation that is not otherwise 
relieved by domestic law remedies, such as the U.S. foreign tax credit. 
Both in setting our overall negotiation priorities and in negotiating 
individual treaties, our focus is on ensuring that our tax treaty 
network fulfills its goals of facilitating-cross border trade and 
investment and preventing tax evasion.
    Additionally, our tax treaties have long played an important role 
in helping to prevent tax evasion. A key element of U.S. tax treaties 
is exchange of information between tax authorities. Under tax treaties, 
one country may request from the other such information that is 
foreseeably relevant for the proper administration of the first 
country's tax laws. Because access to information from other countries 
is critically important to the full and fair enforcement of U.S. tax 
laws, information exchange has long been a top priority for the United 
States in its tax treaty program. I would like to emphasize to the 
committee that as we establish exchange of information relationships, 
the administration places a high priority on ensuring that any 
information exchanged will be strictly protected by our treaty 
partners. The United States will only exchange tax information with a 
country if we are satisfied that the county will protect the 
information we have provided.
    The proposed tax treaties before the committee today are with 
Chile, Hungary, Luxembourg, and Switzerland, in addition to the 
proposed protocol to the Convention on Mutual Administrative Assistance 
in Tax Matters (the ``Multilateral Convention''), and each serves to 
further the goals of our tax treaty network. The proposed tax treaty 
with Chile would be the first tax treaty between the United States and 
Chile, which the U.S. business community has been calling for. The 
proposed tax treaty with Hungary would replace an existing treaty the 
revision of which has been a top tax treaty priority for the Treasury 
Department. It contains a comprehensive ``limitation on benefits'' 
article designed to address possible abusive treaty shopping. The 
proposed protocols with Luxembourg and Switzerland modify existing tax 
treaty relationships. The proposed protocol to the Multilateral 
Convention brings the Multilateral Convention, to which the United 
States is a party, into conformity with the current international 
standards for exchanges of information between tax authorities to 
combat tax evasion. We urge the committee and the Senate to take prompt 
and favorable action on all of these agreements.
    Before talking about the proposed treaties in more detail, I would 
like to discuss some general tax treaty matters.
                 purposes and benefits of tax treaties
    Tax treaties set out clear ground rules that govern tax matters 
relating to trade and investment between two countries. One of the 
primary functions of tax treaties is to provide certainty to businesses 
and individual taxpayers regarding a threshold question with respect to 
international taxation: whether a taxpayer's cross-border activities 
will subject it to taxation by more than one country. Tax treaties 
answer this question by establishing the minimum level of economic 
activity that must be conducted within a country by a resident of the 
other country before the first country may tax any resulting business 
profits. In general terms, tax treaties provide that if branch 
operations in a foreign country have sufficient substance and 
continuity, the country where those activities occur will have primary 
(but not exclusive) jurisdiction to tax. In other cases, where the 
operations in the foreign country are relatively minor, the home 
country retains the sole jurisdiction to tax.
    Another primary function of tax treaties is relief of double 
taxation. Tax treaties protect businesses and individual taxpayers from 
potential double taxation primarily through the allocation of taxing 
rights between the two countries. This allocation takes several forms. 
First, because residence is relevant to jurisdiction to tax, a tax 
treaty has a mechanism for resolving the issue of residence in the case 
of a taxpayer that otherwise would be considered to be a resident of 
both countries. Second, with respect to each category of income, a tax 
treaty assigns primary taxing rights to one country, usually (but not 
always) the country in which the income arises (the ``source'' 
country), and the residual right to tax to the other country, usually 
(but not always) the country of residence of the taxpayer (the 
``residence'' country). Third, a tax treaty provides rules for 
determining the country of source for each category of income. Fourth, 
a tax treaty establishes the obligation of the residence country to 
eliminate double taxation that otherwise would arise from the exercise 
of concurrent taxing jurisdiction by the two countries. Finally, a tax 
treaty provides for resolution of disputes between jurisdictions with 
the goal of avoiding double taxation.
    In addition to reducing potential double taxation, tax treaties 
also reduce potential ``excessive'' taxation by reducing withholding 
taxes that are imposed at source. Under U.S. law, payments to non-U.S. 
persons of dividends and royalties as well as certain payments of 
interest are subject to withholding tax equal to 30 percent of the 
gross amount paid. Most of our trading partners impose similar levels 
of withholding tax on these types of income. This tax is imposed on a 
gross, rather than net, amount. Because the withholding tax does not 
take into account expenses incurred in generating the income, the 
taxpayer that bears the burden of the withholding tax frequently will 
be subject to an effective rate of tax that is significantly higher 
than the tax rate that would be applicable to net income in either the 
source or residence country. Tax treaties alleviate this burden by 
setting maximum levels for the withholding tax that the source country 
may impose on these types of income or by providing for exclusive 
residence-country taxation of such income through the elimination of 
source-country withholding tax.
    As a complement to these substantive rules regarding allocation of 
taxing rights, tax treaties provide a mechanism for dealing with 
disputes between countries regarding the proper application of a 
treaty. To resolve treaty disputes, designated tax authorities of the 
two governments--known as the ``competent authorities'' in tax treaty 
parlance--are required to consult and to endeavor to reach agreement. 
Under many such agreements, the competent authorities agree to allocate 
a taxpayer's income between the two taxing jurisdictions on a 
consistent basis, thereby preventing the double taxation that might 
otherwise result. The U.S. competent authority under our tax treaties 
is the Secretary of the Treasury or his delegate. The Secretary of the 
Treasury has delegated this function to the Deputy Commissioner 
(International) of the Large Business and International Division of the 
Internal Revenue Service.
    Tax treaties also include provisions intended to ensure that cross-
border investors do not suffer discrimination in the application of the 
tax laws of the other country. This is similar to a basic investor 
protection provided in other types of agreements, but the 
nondiscrimination provisions of tax treaties are specifically tailored 
to tax matters and, therefore, are the most effective means of 
addressing potential discrimination in the tax context. The relevant 
tax treaty provisions explicitly prohibit types of discriminatory 
measures that once were common in some tax systems and clarify the 
manner in which possible discrimination is to be tested in the tax 
context.
    In addition to these core provisions, tax treaties include 
provisions dealing with more specialized situations, such as rules 
addressing and coordinating the taxation of pensions, social security 
benefits, and alimony and child-support payments in the cross-border 
context (the Social Security Administration separately negotiates and 
administers bilateral totalization agreements). These provisions are 
becoming increasingly important as more individuals move between 
countries or otherwise are engaged in cross-border activities. While 
these matters may not involve substantial tax revenue from the 
perspective of the two governments, rules providing clear and 
appropriate treatment are very important to the affected taxpayers.
           ensuring safeguards against abuse of tax treaties
    A high priority for improving our overall treaty network is 
continued focus on prevention of ``treaty shopping.'' The U.S. 
commitment to including comprehensive ``limitation on benefits'' 
provisions is one of the keys to improving our overall treaty network. 
Our tax treaties are intended to provide benefits to residents of the 
United States and residents of the particular treaty partner on a 
reciprocal basis. The reductions in source-country taxes agreed to in a 
particular treaty mean that U.S. persons pay less tax to that country 
on income from their investments there, and residents of that country 
pay less U.S. tax on income from their investments in the United 
States. Those reductions and benefits are not intended to flow to 
residents of a third country. If third-country residents are able to 
exploit one of our tax treaties to secure reductions in U.S. tax, such 
as through the use of an entity resident in a treaty country that 
merely holds passive U.S. assets, the benefits would flow only in one 
direction. That is, 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 countries' tax systems and policies and those of the 
United States. This use of tax treaties is not consistent with the 
balance of the deal negotiated in the underlying tax treaty. Preventing 
this exploitation of our tax treaties is critical to ensuring that the 
third country will sit down at the table with us to negotiate on a 
reciprocal basis so we can secure for U.S. persons the benefits of 
reductions in source-country tax on their investments in that country. 
Effective antitreaty shopping rules also ensure that the benefits of a 
U.S. tax treaty are not enjoyed by residents of countries with which 
the United States does not have a bilateral tax treaty because that 
country imposes little or no tax, and thus the potential of unrelieved 
double taxation is low.
    In this regard, the proposed tax treaty with Hungary that is before 
the committee today includes a comprehensive limitation on benefits 
provision and represents a major step forward in protecting the U.S. 
tax treaty network from abuse. As was discussed in the Treasury 
Department's 2007 Report to the Congress on Earnings Stripping, 
Transfer Pricing and U.S. Income Tax Treaties, the existing income tax 
treaty with Hungary, signed in 1979, is one of three U.S. tax treaties 
that, as of 2007, provided an exemption from source-country withholding 
on interest payments but contained no protections against treaty 
shopping. The other two agreements in this category were the 1975 tax 
treaty with Iceland and the 1974 tax treaty with Poland. The revision 
of these three agreements has been a top priority for the Treasury 
Department's treaty program, and we have made significant progress. In 
2007, we signed a new tax treaty with Iceland which entered into force 
in 2008. Like the proposed tax treaty with Hungary, the U.S.-Iceland 
tax treaty contains a comprehensive limitation on benefits provision. 
In addition, United States and Poland signed a new tax treaty in 
February 2013 that similarly contains a comprehensive limitation on 
benefits provision. The administration hopes to transmit the new tax 
treaty with Poland to the Senate for its advice and consent soon. These 
achievements demonstrate that the Treasury Department has been 
effective in addressing concerns about treaty shopping through 
bilateral negotiations and amendment of our existing tax treaties.
                      consideration of arbitration
    Tax treaties cannot provide a stable investment environment unless 
the respective tax administrations of the two countries effectively 
implement the treaty. Under our tax treaties, when a U.S. taxpayer 
becomes concerned about implementation of the treaty, the taxpayer can 
bring the matter to the U.S. competent authority who will seek to 
resolve the matter with the competent authority of the treaty partner. 
The competent authorities are expected to work cooperatively to resolve 
genuine disputes as to the appropriate application of the treaty.
    The U.S. competent authority has a good track record in resolving 
disputes. Even in the most cooperative bilateral relationships, 
however, there may be instances in which the competent authorities will 
not be able to reach timely and satisfactory resolutions. Moreover, as 
the number and complexity of cross-border transactions increases, so do 
the number and complexity of cross-border tax disputes. Accordingly, we 
have considered ways to equip the U.S. competent authority with 
additional tools to assist in resolving disputes promptly, including 
the possible use of arbitration in the competent authority mutual 
agreement process.
    The first U.S. tax agreement that contemplated arbitration was the 
U.S.-Germany income tax treaty signed in 1989 and entered into force in 
1991. Tax treaties with some other countries, including Mexico and the 
Netherlands, incorporate authority for establishing voluntary binding 
arbitration procedures based on the provision in the prior U.S.-Germany 
treaty (although these provisions, which require an exchange of 
diplomatic notes to enter into force, have not been implemented). 
Although we believe that the presence of such voluntary arbitration 
provisions may have provided some limited incentive to reaching more 
expeditious mutual agreements, it has become clear that merely 
providing the ability to enter into voluntary arbitration is not nearly 
as effective as providing for mandatory arbitration, under certain 
circumstances, within the treaty itself.
    Over the past few years, we have carefully considered and studied 
various types of mandatory arbitration procedures that could be 
included in our treaties and used as part of the competent authority 
mutual agreement process. In particular, we examined the experience of 
countries that adopted mandatory binding arbitration provisions with 
respect to tax matters. Many of them report that the prospect of 
impending mandatory arbitration creates a significant incentive to 
compromise before commencement of the arbitration process. Based on our 
review of the merits of arbitration in other areas of the law, the 
success of other countries with arbitration in the tax area, and the 
overwhelming support of the business community, we concluded that 
mandatory binding arbitration as the final step in the competent 
authority process can be an effective and appropriate tool to 
facilitate mutual agreement under U.S. tax treaties.
    One of the treaties before the committee, the proposed protocol 
with Switzerland, includes a type of mandatory arbitration provision. 
This provision, in general terms, is similar to arbitration provisions 
in several of our recent protocols to amend treaties (Canada, Germany, 
Belgium, and France) that have been approved by the committee and the 
Senate over the last several years.
    In the typical competent authority mutual agreement process, a U.S. 
taxpayer presents its case to the U.S. competent authority and 
participates in formulating the position the U.S. competent authority 
will take in discussions with the treaty partner. Under the arbitration 
provision proposed in the Switzerland protocol, as in the similar 
provisions that are now part of our treaties with Canada, Germany, 
Belgium, and France, if the competent authorities cannot resolve the 
issue within 2 years, the competent authorities must present the issue 
to an arbitration board for resolution, unless both competent 
authorities agree that the case is not suitable for arbitration. The 
arbitration board must resolve the issue by choosing the position of 
one of the competent authorities. That position is adopted as the 
agreement of the competent authorities.
    The arbitration process in the proposed protocol with Switzerland 
is mandatory and binding with respect to the competent authorities. 
However, consistent with the negotiation process under the mutual 
agreement procedure generally, the taxpayer can terminate the 
arbitration at any time by withdrawing its request for competent 
authority assistance. Moreover, the taxpayer retains the right to 
litigate the matter (in the United States or the treaty partner) in 
lieu of accepting the result of the arbitration, just as it would be 
entitled to litigate in lieu of accepting the result of a negotiation 
under the mutual agreement procedure.
    The arbitration rule in the proposed protocol with Switzerland is 
very similar to the arbitration rule in the tax treaty with France but 
differs slightly from the arbitration rules in the agreements with 
Canada, Germany, and Belgium. This is because, in negotiating the 
arbitration rule in the tax treaty with France, we took into account 
concerns expressed by this committee over certain aspects of the 
arbitration rules negotiated earlier with Canada, Germany and Belgium. 
Accordingly, the proposed arbitration rule with Switzerland, like the 
provision with France, differs from its earlier predecessors in three 
key respects, consistent with the committee's comment in its report on 
the Canada protocol. First, the proposed protocol with Switzerland 
allows the taxpayer who presented the original case that is subjected 
to arbitration to submit its views on the case for consideration by the 
arbitration panel. Second, the rule in the proposed Switzerland 
protocol disallows a competent authority from appointing an employee 
from its own tax administration to the arbitration board. Finally, the 
rule in the proposed Switzerland protocol does not prescribe a 
hierarchy of legal authorities that the arbitration panel must use in 
making its decision, thus ensuring that customary international law 
rules on treaty interpretation will apply.
    Because the arbitration board can only choose between the positions 
of each competent authority, the expectation is that the differences 
between the positions of the competent authorities will tend to narrow 
as the case moves closer to arbitration. In fact, if the arbitration 
provision is successful, difficult issues will be resolved without 
resort to arbitration. Thus, it is our objective that these arbitration 
provisions will rarely be utilized, but their presence will motivate 
the competent authorities to approach negotiations in ways that result 
in mutually agreeable conclusions without invoking the arbitration 
process.
    We are hopeful that our desired objectives for arbitration are 
being realized, even though we are still in the early stages in our 
experience with arbitration and at this time cannot report definitively 
on the effects of arbitration on our tax treaty relationships. Our 
observation is that, where mandatory arbitration has been included in 
the treaty, the competent authorities are negotiating with greater 
intent to reach principled and timely resolution of disputes. 
Therefore, under the mandatory arbitration provision, double taxation 
is being effectively eliminated in a more expeditious manner.
    Arbitration is a growing and developing field, and there are many 
forms of arbitration from which to choose. We intend to continue to 
study other arbitration provisions and to monitor the performance of 
the provisions in the agreements with Canada, Belgium, Germany, and 
France, as well as the performance of the provision in the agreement 
with Switzerland, if ratified. The Internal Revenue Service has 
published the administrative procedures necessary to implement the 
arbitration rules with Germany, Belgium, France, and Canada. The 
administration looks forward to updating the committee on the 
arbitration process, in particular through the reports that are called 
for in the committee's reports on the 2007 protocol to the Canada tax 
treaty.
    In addition to the proposed protocol with Switzerland, we have 
concluded protocols to bilateral tax treaties with Spain and Japan that 
also incorporate mandatory binding arbitration. The administration 
hopes to transmit those new agreements to the Senate for its advice and 
consent soon. We look forward to continuing to work with the committee 
to make arbitration an effective tool in promoting the fair and 
expeditious resolution of treaty disputes.
           combating tax evasion and improving transparency 
                  through full exchange of information
    As noted above, effective information exchange to combat tax 
evasion and ensure full and fair enforcement of the tax laws has long 
been a top priority for the United States. A key provision found in all 
modern U.S. tax treaties is a rule that obligates the competent 
authorities of the two countries to obtain and exchange information 
that is foreseeably relevant to tax administration. In recent years 
there has been a global recognition of the need to strive for greater 
transparency and for full exchange of information between revenue 
authorities to combat tax evasion, and the United States has taken a 
leading role in this movement.
    The proposed protocols amending the bilateral tax treaties with 
Switzerland and Luxembourg and the Multilateral Convention that are 
before the committee today are intended to facilitate the exchange of 
information to prevent tax evasion and enhance transparency. These 
proposed protocols incorporate the current international standards for 
exchange of information, which require countries to obtain and exchange 
information for both civil and criminal matters, and which require the 
tax authorities to obtain and exchange information that is held by a 
bank or other financial institution.
    The international standards on transparency and exchange of 
information for tax purposes are now virtually universally accepted in 
the global community. Indeed, all jurisdictions surveyed by the Global 
Forum on Transparency and Exchange of Information for Tax Purposes (the 
Global Forum) are now committed to implementing these standards. The 
Global Forum, now the largest international tax group in the world with 
121 member jurisdictions and 12 observers, promotes exchange of 
information through a robust and comprehensive monitoring and peer 
review process by evaluating the compliance of jurisdictions with the 
international standards of transparency.
    Initiated by the Organization for Economic Cooperation and 
Development (OECD), the Global Forum has been a driving force behind 
the acceptance and implementation of the international standards. The 
United States actively participates in the Global Forum. Treasury's 
Office of Tax Policy, the Office of General Counsel, and IRS Chief 
Counsel and Large Business and International Division have devoted 
substantial resources over the past 2 years both to the peer review of 
the U.S. rules and procedures and to our role as members of the 
Steering Group and Peer Review Group of the Forum. Since the Global 
Forum was reorganized in 2009, 124 peer reviews have been completed and 
published, and more than 1,500 agreements that provide for the exchange 
of tax information in accordance with the international standards have 
been signed throughout the world. Roughly 80 percent of the agreements 
which have been signed as of December 2012 are in force.
    In addition, the G20 has, for the past several years, stressed the 
importance of quickly implementing the international standards for 
transparency and exchange of information. It also requested proposals 
to make it easier for developing countries to secure the benefits of 
the new cooperative tax environment, including a multilateral approach 
for the exchange of information.
    Against the backdrop of the Global Forum and the G20 process, the 
proposed Protocol to the Multilateral Convention was adopted on May 27, 
2010. The Multilateral Convention is an instrument that obligates its 
signatories to exchange information for tax purposes. However, because 
it was concluded in 1988, some of its provisions are now out of date 
and do not conform to the current international standards for 
transparency and exchange of information. In addition, the 1998 
Convention is open only to member countries of either the Council of 
Europe or the OECD. The proposed Protocol to the Multilateral 
Convention conforms the existing agreement to the current international 
standards for exchange of information, and opens the agreement for 
signature and ratification by any country, provided that the Parties 
have provided unanimous consent. This important agreement is therefore 
a centerpiece to the global effort to improve transparency and foster 
full exchange of information between tax authorities.
      ensuring the protection and confidentiality of information 
                   exchanged with our treaty partners
    As we modernize existing exchange of information relationships and 
establish new relationships, the administration is also strongly 
committed to ensuring that information that we provide our treaty 
partners will be strictly protected and treated as confidential. One of 
the critical principles under today's existing international standards 
for information exchange upon request is that the country receiving 
information must ensure that exchanged information is kept confidential 
and only used for legitimate tax administration purposes. Consistent 
with this standard, the United States will not enter into an 
information exchange agreement unless the Treasury Department and the 
IRS are satisfied that the foreign government has strict 
confidentiality protections. Specifically, prior to entering into an 
information exchange agreement with another jurisdiction, the Treasury 
Department and the IRS closely review the foreign jurisdiction's legal 
framework for maintaining the confidentiality of taxpayer information. 
Before entering into an agreement, the Treasury Department and the IRS 
must be satisfied that the foreign jurisdiction has the necessary legal 
safeguards in place to protect exchanged information and that adequate 
penalties apply to any breach of that confidentiality.
    Even if an information exchange agreement is in effect, the IRS 
will not exchange information with a country if the IRS determines that 
the country is not complying with its obligations under the agreement 
to protect the confidentiality of information and to use the 
information solely for collecting and enforcing taxes covered by the 
agreement. The IRS also will not exchange any return information with a 
country that does not impose tax on the income being reported, because 
the information could not be used for the enforcement of taxes laws 
within that country.
    With respect to the Multilateral Convention, a Coordinating Body, 
on which the United States sits, has been established for the express 
purpose of evaluating the domestic legal framework of countries that 
request to join the agreement to ensure that new parties will provide 
confidential treatment to information received under the agreement. 
Countries that do not have sufficient domestic laws or legal framework 
to guarantee the confidentiality of taxpayer information are not 
permitted to sign the proposed protocol to the Multilateral Convention.
             tax treaty negotiating priorities and process
    The United States has a network of 60 income tax treaties covering 
68 countries. This network covers the vast majority of foreign trade 
and investment of U.S. businesses and investors. In establishing our 
negotiating priorities, our primary objective is the conclusion of tax 
treaties that will provide the greatest benefit to the United States 
and to U.S. taxpayers. We communicate regularly with the U.S. business 
community and the Internal Revenue Service to seek input regarding the 
areas on which we should focus our treaty network expansion and improve 
efforts, as well as regarding practical problems encountered under 
particular treaties or particular tax regimes.
    Numerous features of a country's particular tax legislation and its 
interaction with U.S. domestic tax rules are considered in negotiating 
a tax treaty. Examples include whether the country eliminates double 
taxation through an exemption system or credit system, the country's 
treatment of partnerships and other transparent entities, and how the 
country taxes contributions to, earnings of, and distributions from 
pension funds.
    Moreover, a country's fundamental tax policy choices are reflected 
not only in its tax laws, but also in its tax treaty positions. These 
choices differ significantly from country to country with substantial 
variation even across countries that seem to have quite similar 
economic profiles. A tax treaty negotiation must take into account all 
of these aspects of the particular treaty partner's tax system and 
treaty policies to arrive at an agreement that accomplishes the United 
States tax treaty objectives.
    Obtaining the agreement of our tax treaty partners on provisions of 
importance to the United States sometimes requires concessions on our 
part. Similarly, the other country sometimes must make concessions to 
obtain our agreement on matters that are critical to it. Each tax 
treaty that is presented to the Senate represents not only the best 
deal that we believe can be achieved with the particular country, but 
also constitutes an agreement that we believe is in the best interests 
of the United States.
    In the Treasury Department's bilateral dealing with countries 
around the world, we commonly conclude that the right result may be no 
tax treaty at all. With certain countries there simply may not be the 
type of cross-border tax issues that are best resolved by treaty. For 
example, if a country does not impose significant income taxes, there 
is little possibility of unresolved double taxation of cross-border 
income, given the fact that the United States provides foreign tax 
credits to its residents regardless of the existence of an income tax 
treaty. Under such circumstances, it would not be appropriate to enter 
into a bilateral tax treaty, because doing so would result in a 
unilateral concession of taxing rights by the United States. When 
instances of unrelieved double taxation cannot be identified with 
respect to a country, an agreement that focuses exclusively on the 
exchange of tax information (so-called ``tax information exchange 
agreements'' or ``TIEAs'') may be the more fitting agreement to 
conclude.
    Prospective treaty partners must evidence a clear understanding of 
what their obligations would be under the treaty, especially those with 
respect to information exchange, and must demonstrate that they would 
be able to fulfill those obligations. Sometimes a tax treaty may not be 
appropriate because a potential treaty partner is unable to do so.
    In other cases, a tax treaty may be inappropriate because the 
potential treaty partner is not willing to agree to particular treaty 
provisions that are needed to address real tax problems that have been 
identified by U.S. businesses operating there. If the potential treaty 
partner is unwilling to provide meaningful benefits in a tax treaty, 
investors would find no relief, and accordingly there would be no merit 
to entering into such an agreement. The Treasury Department would not 
conclude a tax treaty that did not provide meaningful benefits to U.S. 
investors or which could be construed by potential treaty partners as 
an indication that we would settle for a tax treaty with inferior 
terms.
                 expanding the u.s. tax treaty network
    While much of the Treasury Department's tax treaty negotiations 
involve modernizing existing agreements with key trading partners to 
close loopholes or improve the level of benefits to U.S. investors, we 
also engage with countries such as Chile to negotiate new tax treaties. 
The Treasury Department actively pursues opportunities to establish new 
tax treaty relationships with countries in which U.S. businesses 
encounter unrelieved double taxation with respect to their investments. 
The Treasury Department is aware of the keen interest of both the 
business community and the Senate to conclude income tax treaties with 
South American countries that provide meaningful benefits to cross-
border investors. If approved by the Senate and the Chilean Congress, 
the tax treaty with Chile would be the second U.S. tax treaty in force 
in South America: therefore, the proposed tax treaty with Chile 
represents a significant inroad into the South American region. In 
addition, the Treasury Department is engaged in bilateral tax treaty 
negotiations with Colombia.
    The Treasury Department is also developing new tax treaty 
relationships in other regions of the world. For example, we have held 
several rounds of negotiations with Vietnam, a country that U.S. 
businesses have listed as a priority because they have experienced 
unrelieved double taxation. We hope to conclude a tax treaty, which 
would be the first agreement of its kind between the United States and 
Vietnam, in the near future.
                    discussion of proposed treaties
    I now would like to discuss the five tax treaties that have been 
transmitted for the Senate's consideration. The five treaties are 
generally consistent with modern U.S. tax treaty practice as reflected 
in the Treasury Department's 2006 U.S. Model Income Tax Convention. As 
with all bilateral tax treaties, the treaties contain some minor 
variations that reflect particular aspects of the treaty policies and 
partner countries' domestic laws and economic relations with the United 
States. We have submitted a Technical Explanation of each treaty that 
contains detailed discussions of the provisions of each treaty. These 
Technical Explanations serve as the Treasury Department's official 
explanation of each tax treaty.
Chile
    The proposed Chile tax treaty is generally consistent with U.S. tax 
treaty policy as reflected in the United States Model Income Tax 
Convention of November 15, 2006 (the ``U.S. Model''). There are, as 
with all bilateral tax treaties, some variations from these norms. In 
the proposed treaty, these variations from the U.S. Model reflect 
particular aspects of the Chilean tax system and treaty policy, the 
interaction of U.S. and Chilean law, and U.S.-Chile economic relations.
    The proposed treaty provides for reduced source-country taxation of 
dividends distributed by a company resident in one country to a 
resident of the other country. The proposed treaty generally allows for 
taxation at source of 5 percent on direct dividends (i.e., where a 10-
percent ownership threshold is met) and 15 percent on all other 
dividends. Additionally, the proposed treaty provides for an exemption 
from withholding tax on certain cross-border dividend payments to 
pension funds. In recognition of unique aspects of Chile's domestic tax 
system, the withholding rate reductions on dividend payments from Chile 
will generally not apply to Chile unless Chile makes certain 
modifications to its corporate tax system in the future.
    Consistent with the U.S. Model, the proposed treaty contains 
special rules for dividends paid by U.S. regulated investment companies 
and real estate investment trusts to prevent the use of structures 
designed to inappropriately avoid U.S. tax.
    The proposed treaty provides a limit of 4 percent on source-country 
withholding taxes on cross-border interest payments to banks, insurance 
companies and certain other financial enterprises. For the first 5 
years following entry into force, the proposed treaty provides a limit 
of 15 percent on all other cross-border interest payments. After the 
initial 5-year period, the 15-percent limit is reduced to 10 percent 
for all other cross-border interest payments. In addition, consistent 
with the U.S. Model, source-country tax may be imposed on certain 
contingent interest and payments from a U.S. real estate mortgage 
investment conduit. The proposed treaty also permits the United States 
to impose its branch-level interest tax according to the applicable 
withholding rate reductions for cross-border interest payments.
    The proposed treaty provides a limit of 2 percent on source-country 
withholding taxes on cross-border royalty payments that constitute a 
rental payment for the use of industrial, commercial or scientific 
equipment, and a limit of 10 percent on all other cross-border royalty 
payments.
    The taxation of capital gains under the proposed treaty generally 
follows the format of the U.S. Model, with some departures in 
recognition of unique aspects of Chile's domestic tax system. Similar 
to the U.S. Model, gains derived from the sale of real property and 
real property interests may be taxed by the country in which the 
property is located. Likewise, gains from the sale of personal property 
forming part of a permanent establishment situated in a country may be 
taxed in that country. Gains from the alienation of shares or other 
rights or interests in a company may either be taxed at a maximum rate 
of 16 percent by the country in which the company is a resident, or in 
certain circumstances in accordance with that country's domestic law. 
However, the proposed treaty recognizes a unique aspect of Chile's 
domestic law and provides that these gains shall be taxable only in the 
country of residence of the seller if Chile makes certain modifications 
to its corporate tax system in the future. Certain other gains from the 
alienation of shares of a company are taxable only in the country of 
residence of the seller, such as gains derived by a pension fund. 
Furthermore, gains from the alienation of ships, boats, aircraft and 
containers used in international traffic, as well as gains from the 
alienation of any property not specifically addressed by the proposed 
treaty's article on capital gains, are taxable only in the country of 
residence of the seller.
    The proposed treaty permits source-country taxation of business 
profits only if the business profits are attributable to a permanent 
establishment located in that country. The proposed treaty generally 
defines a ``permanent establishment'' in a way consistent with the U.S. 
Model. One Model departure that is also found in a number of other U.S. 
tax treaties with developing countries, deems an enterprise to have a 
permanent establishment in a country if the enterprise has performed 
services in that country for at least 183 days in a 12-month period.
    The proposed treaty preserves the U.S. right to impose its branch 
profits tax on U.S. branches of Chilean corporations. The proposed 
treaty also accommodates a provision of U.S. domestic law providing 
that income earned during the life of the permanent establishment, but 
deferred and not received until after the permanent establishment no 
longer exists, is still attributed to the permanent establishment.
    The proposed treaty provides that an individual resident in one 
country and performing services in the other country will become 
taxable in the other country only if the individual has a fixed place 
of business (a so-called ``fixed base''). The proposed treaty generally 
defines ``fixed base'' in a way consistent with the U.S. Model, with a 
departure also found in a number of U.S. tax treaties with developing 
countries which deems an individual to have a fixed base if he has 
performed services in that country for at least 183 days in the taxable 
year concerned.
    The rules for the taxation of income from employment under the 
proposed treaty are similar to those under the U.S. Model. The general 
rule is that employment income may be taxed in the country where the 
employment is exercised unless three conditions constituting a safe 
harbor are satisfied.
    The proposed treaty permits both the residence country and source 
country to tax pension payments, although the source country's taxation 
right is limited to 15 percent of the gross amount of the pension. 
Consistent with current U.S. tax treaty policy, the proposed treaty 
permits the deductibility of certain cross-border contributions to 
pension plans. Also consistent with current U.S. tax treaty policy, the 
proposed treaty provides for exclusive source-country taxation of 
social security payments.
    The proposed treaty contains a comprehensive ``limitation on 
benefits'' article designed to address ``treaty shopping,'' which is 
the inappropriate use of a tax treaty by residents of a third country. 
The limitation on benefits article is consistent with current U.S. tax 
treaty policy, although it contains a special rule for so-called 
``headquarters companies'' that is also found in a number of other U.S. 
tax treaties.
    The proposed treaty incorporates rules that provide that a former 
citizen or long-term resident of the United States may, for the period 
of 10 years following the loss of such status, be taxed in accordance 
with the laws of the United States. The proposed treaty also 
coordinates the U.S. and Chilean tax rules to address the ``mark-to-
market'' provisions enacted by the United States in 2007, which apply 
to individuals who relinquish U.S. citizenship or terminate long-term 
residency.
    Consistent with the OECD and U.S. Models, the proposed treaty 
provides for the exchange between the competent authorities of each 
country of information that is foreseeably relevant to carrying out the 
provisions of the proposed treaty or enforcing the domestic tax laws of 
either country. The proposed treaty allows the United States to obtain 
information from Chile, including from Chilean financial institutions, 
regardless of whether Chile needs the information for its own tax 
purposes.
    The proposed treaty will enter into force when the United States 
and Chile have notified each other that they have completed all of the 
necessary procedures required for entry into force. With respect to 
taxes withheld at source, the treaty will have effect for amounts paid 
or credited on or after the first day of the second month following the 
date of entry into force. With respect to other taxes, the treaty will 
have effect for taxable years beginning on or after the first day of 
January next following the date of entry into force.
Hungary
    The proposed tax treaty and related agreement, which will be 
effected by exchange of notes with Hungary, were negotiated to bring 
tax treaty relations based on the existing tax treaty into closer 
conformity with current U.S. tax treaty policy. Entering into a new 
agreement has been a top tax treaty priority for the Treasury 
Department because the existing tax treaty with Hungary, signed in 
1979, does not contain treaty shopping protections and, as a result, 
has been used inappropriately by third-country investors in recent 
years.
    The proposed treaty contains a comprehensive ``limitation on 
benefits'' article designed to address treaty shopping. Similar to the 
provision included in all recent U.S. tax treaties with countries that 
are members of the European Union, the new limitation on benefits 
article includes a provision granting so-called ``derivative 
benefits.'' The new limitation on benefits article also contains a 
special rule for so-called ``headquarters companies'' that is also 
found in a number of other U.S. tax treaties.
    The proposed treaty incorporates updated rules providing that a 
former citizen or long-term resident of the United States may, for the 
period of 10 years following the loss of such status, be taxed in 
accordance with the laws of the United States. The proposed treaty also 
coordinates the U.S. and Hungarian tax rules to address the ``mark-to-
market'' provisions the United States enacted in 2007, which apply to 
individuals who relinquish U.S. citizenship or terminate long-term 
residency.
    The withholding rates on investment income in the proposed treaty 
are the same as or lower than those in the current treaty. The proposed 
treaty provides for reduced source-country taxation of dividends 
distributed by a company resident in one country to a resident of the 
other country. The proposed treaty generally allows for taxation at 
source of 5 percent on direct dividends (i.e., where a 10-percent 
ownership threshold is met) and 15 percent on all other dividends. 
Additionally, the proposed treaty provides for an exemption from 
withholding tax on certain cross-border dividend payments to pension 
funds.
    The proposed treaty updates the treatment of dividends paid by U.S. 
Regulated Investment Companies and Real Estate Investment Trusts to 
prevent the use of structures designed to inappropriately avoid U.S. 
tax.
    Consistent with the existing treaty, the proposed treaty generally 
eliminates source-country withholding taxes on cross-border interest 
and royalty payments. However, consistent with current U.S. tax treaty 
policy, source-country tax may be imposed on certain contingent 
interest and payments from a U.S. real estate mortgage investment 
conduit.
    The taxation of capital gains under the proposed treaty generally 
follows the format of the U.S. Model. Gains derived from the sale of 
real property and real property interests may be taxed by the State in 
which the property is located. Likewise, gains from the sale of 
personal property forming part of a permanent establishment situated in 
a country may be taxed in that country. All other gains, including 
gains from the alienation of ships, boats, aircraft and containers used 
in international traffic, as well as gains from the sale of stock in a 
corporation, are taxable only in the country of residence of the 
seller.
    The proposed treaty, like several recent U.S. tax treaties, 
provides that the OECD Transfer Pricing Guidelines apply by analogy in 
determining the amount of business profits of a resident of the other 
country. The source country's right to tax such profits is generally 
limited to cases in which the profits are attributable to a permanent 
establishment located in that country. The proposed treaty preserves 
the U.S. right to impose its branch profits tax on U.S. branches of 
Hungarian corporations. The proposed treaty also accommodates a 
provision of U.S. domestic law providing that income earned during the 
life of the permanent establishment, but deferred and not received 
until after the permanent establishment no longer exists, is still 
attributed to the permanent establishment.
    The proposed treaty would change the rules currently applied under 
the existing treaty regarding the taxation of independent personal 
services. Under the proposed treaty, an enterprise performing services 
in the other country will become taxable in the other country only if 
the enterprise has a fixed place of business in that country.
    The rules for the taxation of income from employment under the 
proposed treaty are similar to those under the U.S. Model. The general 
rule is that employment income may be taxed in the country where the 
employment is exercised unless three conditions constituting a safe 
harbor are satisfied.
    The proposed treaty preserves the current treaty's rules that allow 
for exclusive residence-country taxation of pensions, and, consistent 
with current U.S. tax treaty policy, provides for exclusive source-
country taxation of social security payments.
    Consistent with the OECD and U.S. Models, the proposed treaty 
provides for the exchange between the tax authorities of each country 
of information relevant to carrying out the provisions of the proposed 
treaty or the domestic tax laws of either country. The proposed treaty 
allows the United States to obtain information (including from 
financial institutions) from Hungary whether or not Hungary needs the 
information for its own tax purposes.
    The proposed treaty would enter into force on the date of the 
exchange of instruments of ratification. With respect to taxes withheld 
at source, the treaty will have effect for amounts paid or credited on 
or after the first day of the second month following the date of entry 
into force. With respect to other taxes, the treaty will have effect 
for taxable years beginning on or after the first day of January next 
following the date of entry into force. The existing treaty will, with 
respect to any tax, cease to have effect as of the date on which the 
proposed treaty has effect with respect to such tax.
Luxembourg
    The proposed protocol to amend the existing tax treaty with 
Luxembourg and the related agreement effected by exchange of notes were 
negotiated to bring the existing Convention, signed in 1996, into 
closer conformity with current U.S. tax treaty policy regarding 
exchange of information.
    The proposed protocol replaces the existing treaty's information 
exchange provisions with updated rules that are consistent with current 
U.S. tax treaty practice and the current international standards for 
exchange of information. The proposed protocol allows the tax 
authorities of each country to exchange information foreseeably 
relevant to carrying out the provisions of the agreement or the 
domestic tax laws of either country. Among other things, the proposed 
protocol would allow the United States to obtain information from 
Luxembourg whether or not Luxembourg needs the information for its own 
tax purposes. In addition, the proposed protocol provides that requests 
for information cannot be declined solely because the information is 
held by a bank or other financial institution.
    The proposed related agreement effected by exchange of notes sets 
forth agreed understandings between the parties regarding the updated 
provisions on tax information exchange. The agreed understandings 
include obligations on the United States and Luxembourg to ensure that 
their respective competent authorities have the authority to obtain and 
provide, upon request, information held by banks and other financial 
institutions and information regarding ownership of certain entities. 
The agreed understandings also provide that information shall be 
exchanged without regard to whether the conduct being investigated 
would be a crime under the laws of the requested country.
    The proposed protocol would enter into force once both the United 
States and Luxembourg have notified each other that their respective 
applicable procedures for ratification have been satisfied. It would 
have effect with respect to requests made on or after the date of entry 
into force with regard to tax years beginning on or after January 1, 
2009. The related agreement effected by exchange of notes would enter 
into force on the date of entry into force of the proposed protocol and 
would become an integral part of the proposed protocol on that date.
Switzerland
    The proposed protocol to amend the existing tax treaty with 
Switzerland and related agreement effected by exchange of notes were 
negotiated to bring the existing treaty, signed in 1996, into closer 
conformity with current U.S. tax treaty policy regarding exchange of 
information. There are, as with all bilateral tax conventions, some 
variations from these norms. In the proposed protocol, these minor 
differences reflect particular aspects of Swiss law and treaty policy, 
and they generally follow the OECD standard for exchange of 
information.
    The proposed protocol replaces the existing treaty's information 
exchange provisions with updated rules that are consistent with current 
U.S. tax treaty practice and the current international standards for 
exchange of information. The proposed protocol allows the tax 
authorities of each country to exchange information that may be 
relevant to carrying out the provisions of the agreement or the 
domestic tax laws of either country, including information that would 
otherwise be protected by the bank secrecy laws of either country. The 
proposed protocol would allow the United States to obtain information 
from Switzerland whether or not Switzerland needs the information for 
its own tax purposes, and provides that requests for information cannot 
be declined solely because the information is held by a bank or other 
financial institution.
    The proposed protocol amends a paragraph of the existing protocol 
to the existing treaty by incorporating procedural rules to govern 
requests for information and an agreement between the United States and 
Switzerland that such procedural rules are to be interpreted in order 
not to frustrate effective exchange of information.
    The proposed protocol and related agreement effected by exchange of 
notes update the provisions of the existing treaty with respect to the 
mutual agreement procedure by incorporating mandatory arbitration of 
certain cases that the competent authorities of the United States and 
Switzerland have been unable to resolve after a reasonable period of 
time.
    Finally, the proposed protocol updates the provisions of the 
existing treaty to provide that individual retirement accounts are 
eligible for the benefits afforded a pension under the existing treaty.
    The proposed protocol would enter into force when the United States 
and Switzerland exchange instruments of ratification. The proposed 
protocol would have effect, with respect to taxes withheld at source, 
for amounts paid or credited on or after the first day of January of 
the year following entry into force. With respect to information 
exchange, the proposed protocol would have effect with respect to 
requests for bank information that relate to any date beginning on or 
after the date the proposed protocol is signed. With respect to all 
other cases, the proposed protocol would have effect with respect to 
requests for information that relates to taxable periods beginning on 
or after the first day of January next following the date of signature. 
The mandatory arbitration provision would have effect with respect both 
to cases that are under consideration by the competent authorities as 
of the date on which the proposed protocol enters into force and to 
cases that come under consideration after that date.
Protocol to the Multilateral Convention
    On January 25, 1988, the OECD and the Council of Europe jointly 
opened for signature the Multilateral Convention, which the United 
States signed in 1989 and entered into force for the United States in 
1995. The proposed protocol to the Multilateral Convention was 
negotiated to bring the Multilateral Convention into conformity with 
current international standards regarding exchange of information for 
tax purposes.
    Although the Multilateral Convention contains broad provisions for 
the exchange of information, it predates the current internationally 
agreed standards on exchange of information. Thus, the obligations 
contained in the Multilateral Convention are subject to certain 
domestic law limitations that could impede full exchange of 
information. In particular, the Multilateral Convention does not 
require the exchange of bank information on request, nor does it 
override domestic tax interest requirements. In contrast, the current 
internationally agreed standards on transparency and exchange of 
information provide for full exchange of information upon request in 
all tax matters without regard to a domestic tax interest requirement 
or bank secrecy laws. The proposed protocol amends the Multilateral 
Convention in order to bring it into conformity with these 
internationally agreed standards, which are also reflected in the 
OECD's Model Tax Convention on Income and Capital and the U.S. Model 
tax treaty. In addition, the proposed protocol brings the 
confidentiality rules of the Multilateral Convention regarding 
exchanged information and the limitations regarding the use of such 
information into conformity with the OECD and U.S. Models.
    The Multilateral Convention specifies information the applicant 
country is to provide the requested country when making a request. In 
some situations, the name of the person under examination is not known 
to the applicant country, but there is other information sufficient to 
identify the person. The proposed protocol amends the Multilateral 
Convention by providing that a request for assistance is adequate even 
if the name of the person(s) under examination is not known, provided 
that the request contains sufficient information to identify the person 
or ascertainable group or category of persons.
    The original Multilateral Convention was open for signature and 
ratification only by countries which are members of the Council of 
Europe, the OECD, or both. The proposed protocol amends the 
Multilateral Convention by allowing any country to become a party 
thereto. However, countries which are not members of the OECD or of the 
Council of Europe may only become a party to the amended Convention 
subject to unanimous consent of the parties to the amended Convention.
    The Multilateral Convention as amended by the proposed protocol 
entered into force on June 1, 2011, for countries that signed and 
ratified it prior to that date. For countries that ratify subsequent to 
that date, the Multilateral Convention as amended by the proposed 
protocol will enter into force on the first day of the month following 
the expiration of a period of three months after the date of deposit of 
the instrument of ratification with one of the Depositaries.
    Any Member State of the Council of Europe or of the OECD that is 
not yet a party to the Multilateral Convention will become a party to 
the Multilateral Convention as amended by the proposed protocol upon 
ratification of the Convention as amended by the proposed protocol by 
that Member State, unless it explicitly expresses the will to adhere 
exclusively to the unamended Convention. Any country that is not a 
member of the OECD or the Council of Europe that subsequently becomes a 
party to the Convention as amended by the proposed protocol shall be a 
party to the Convention as amended by the proposed protocol.
    The amendments shall have effect for administrative assistance 
related to taxable periods beginning on or after January 1 of the year 
following the year in which the Convention as amended by the proposed 
protocol, entered into force in respect of a party. Where there is no 
taxable period, the amendments shall have effect for administrative 
assistance related to charges to tax arising on or after January 1 of 
the year following the year in which the Convention as amended by the 
proposed protocol entered into force in respect of a party. Any two or 
more parties may mutually agree that the Convention as amended by the 
proposed protocol may have effect for administrative assistance related 
to earlier taxable periods or charges to tax. However, for criminal tax 
matters, the proposed protocol provides that the Convention as amended 
by the proposed protocol shall have effect for any earlier taxable 
period or charge to tax from the date of entry into force in respect of 
a party. A party may nevertheless take a reservation according to which 
the provisions of the Convention as amended by the proposed protocol 
would have effect for administrative assistance related to criminal tax 
matters, only as related to taxable periods beginning from the third 
year prior to the year in which the Convention as amended by the 
proposed protocol entered into force in respect of that party. The 
administration is not recommending that the United States take such a 
reservation [because?...].
                       treaty program priorities
    In addition to our work described above to expand the U.S. tax 
treaty network, the Treasury Department also maintains an active 
negotiating calendar aimed at modernizing existing tax treaties with 
many of our key trading partners. In this regard, our recent efforts 
have borne much fruit. In 2013, we concluded protocols with Spain and 
Japan that make extensive changes to our bilateral tax treaties with 
those countries. Revising the Spain treaty has been a top priority of 
U.S. businesses, because the existing treaty does not reflect the 
current tax treaty practices of either Spain or the United States. The 
new Japan protocol makes several key amendments to the existing tax 
treaty, including an exemption from source country withholding of all 
payments of interest, mandatory binding arbitration provisions, and 
rules that will allow the United States to request assistance from the 
Japanese revenue authorities in the collection of U.S. taxes.
    Another key continuing priority for the Treasury Department is 
updating the few remaining U.S. tax treaties that provide for 
significant withholding tax reductions but do not include the 
limitation on benefits provisions needed to protect against treaty 
shopping. I am pleased to report that in this regard we have made 
significant progress. In addition to the proposed tax treaty with 
Hungary, we have also concluded negotiations of new tax treaties with 
Poland, Norway, and Romania, all of which contain comprehensive 
limitation on benefits provisions. We signed the new treaty with Poland 
on February 15, 2013, and we hope to transmit it to the Senate for its 
advice and consent soon. We are preparing the new Norway and Romania 
treaties for signature in the near future.
    Concluding agreements that provide for the full exchange of 
information, including information held by banks and other financial 
institutions, is another key priority of the Treasury Department. In 
this regard, we are in active negotiations with Austria to make a 
number of key amendments to the existing bilateral tax treaty to 
including modern provisions for full exchange of information.
                               conclusion
    Mr. Chairman and Ranking Member Barrasso, let me conclude by 
thanking you for the opportunity to appear before the committee to 
discuss the administration's efforts with respect to the five 
agreements under consideration. We appreciate the committee's 
continuing interest in the tax treaty program, and we thank the members 
and staff for devoting time and attention to the review of these new 
agreements. We are also grateful for the assistance and cooperation of 
the staff of the Joint Committee on Taxation.
    On behalf of the administration, we urge the committee to take 
prompt and favorable action on the agreements before you today. I would 
be happy to respond to any question you may have.

    Senator Cardin. Thank you for your testimony, and thank you 
for your work, and we do appreciate the work of your people and 
your agencies in negotiating these agreements.
    I want to ask the first question related to Mr. Barthold's 
point to Mr. Stack, and that is the Multilateral Convention 
opens up dramatically the number of countries, potential 
countries, that we will be exchanging information with. As you 
point out, it is very clear that we need to make sure that 
those countries can protect the privacy of information that is 
being made available.
    Knowing how international agreements are negotiated and the 
politics involved, the United States will normally play a lead 
role in determining whether a country would be permitted to 
join the convention. Treasury has a lot of work to do. This is 
an important protection of privacy information. Many countries 
do not have the type of reputation and stability that would 
give us comfort that that information would be kept 
confidential.
    How would you plan to move forward and would you be able to 
assure the American people that any country that we do business 
with under the Multilateral Convention indeed does have 
adequate protections for the information that is being shared?
    Mr. Stack. Thank you, Senator.
    Consistent with our other information exchange 
arrangements, the Multilateral Convention, I would suggest, has 
three aspects to ensuring the confidentiality and appropriate 
use of the information.
    First, before a country is permitted to become a signatory 
to the Multilateral Convention, the parties to the convention 
consist of a coordinating body that examines the laws and 
practices of the jurisdiction in order to be sure that it is 
able to enter into and fulfill its obligations under the 
Multilateral Convention.
    Senator Cardin. Can you give us examples of countries that 
are not in the OECD and not in the Council of Europe that are 
signatories or likely to become signatories?
    Mr. Stack. Yes, if you give me a moment, I can. Singapore 
would be one.
    Senator Cardin. Others?
    Mr. Stack. I have a list here. Among signatories that 
neither a treaty nor a--Albania, Andorra, Croatia, Ghana, 
Nigeria, Saudi Arabia, and Singapore.
    Senator Cardin. So you have already made those judgments 
that those countries have adequate protocols in place to 
protect privacy?
    Mr. Stack. Yes, Senator.
    I should say, Senator, in the Multilateral Convention where 
the United States plays a lead role in the coordinating body, 
it is the coordinating body of the OECD that makes the 
determination that these members can become signatories to the 
Convention.
    Senator Cardin. But we are talking about U.S. entities and 
our information.
    Mr. Stack. Yes.
    Senator Cardin. So you have a responsibility to assure us 
that the privacy protocols are adequate in the countries that 
are signatories.
    Mr. Stack. Yes.
    Senator Cardin. And you have that assurance to us?
    Mr. Stack. Yes, Senator. The other two ways we do it is, 
once they become a signatory, they are required to participate 
and abide by the confidentiality rules. But also, quite 
importantly, the IRS, on an ongoing basis, through the office 
of competent authority, monitors the experience with these 
jurisdictions, so that if there is ever word or we learn that 
there has a been a breach of this confidentiality, the IRS 
does, and has in the past, held the exchanges of information 
pending resolution of any issue that we hear arises with 
respect to a foreign jurisdiction.
    Senator Cardin. How frequently does that occur?
    Mr. Stack. I know from talking to the IRS that that has 
occurred a variety of times over the past several years. It is 
generally not public, but it does arise from time to time.
    Senator Cardin. My only reason for asking this is that, 
obviously, we want to make sure that if a country is admitted 
to this Convention, that it has the protocols in place.
    Obviously, disputes arise, and we have to have enforcement, 
if problems develop. But we want to make the first cut right, 
and that is not enter into the Convention with those countries 
that do not have protocols to protect privacy.
    Let me raise a second question, if I might, and that is, in 
two cases, we are amending treaties that, as I understand it, 
really protects us more, particularly in regards to Hungary, 
because there are no exceptions now. And we are narrowing the 
exception category, so they cannot treaty shop. In two, we are 
setting up new treaties.
    Can you just give me some concrete examples of how these 
treaties help American entities? The more specific you can be 
as related to doing either business in another country or 
complying with our tax laws, how do these treaties help us?
    Mr. Stack. Sure. You know, I began this discussion by just 
mentioning that the treaty issues begin to arise when a company 
begins to conduct business in two jurisdictions, a typical 
cross-border, which, as we all know, is growing.
    Senator Cardin. Do we have specific companies that are 
concerned that we do not have today treaties in the two 
countries that are moving forward? Is that preventing them from 
doing business? Or hurting them from advancing?
    Mr. Stack. Certainly, in the absence of, let us take Chile 
where it is a brand-new treaty, companies would be subject to 
double taxation, if we do not have the treaty. And indeed, one 
of our criteria for entering into a double tax treaty 
negotiation is that we see, and companies demonstrate to us, 
that there is unrelieved double taxation going on between us 
and that country.
    And so the treaty sets the rules of the road. So the first 
thing it does is it helps companies understand, well, under 
what circumstances when I do business in that other country 
will my presence be such that I will be subject to tax in that 
jurisdiction? And those are called our permanent establishment 
rules.
    The second thing it does is it can moderate, via the 
treaty, certain withholding taxes. You may know that very 
typically, when one company does business in another country, 
interest, dividends, and royalties that it receives back are 
often subject to withholding taxes as high as 30 percent. And 
what the treaties do, is they typically moderate those 
withholding amounts, so that they can reallocate the tax 
between source and residence and reduce the incidence of double 
taxation.
    Third, there are specific provisions that once the two 
treaty parties come together, once the two treaty partners 
decide on the allocation of income in the treaty, there are 
also provisions that say, oh, and everything we talked about in 
this treaty will get some kind of relief from double taxation 
through a foreign tax credit.
    But most importantly for our companies, they are very 
interested in what we call the mutual agreement procedures in 
our treaties. That is to say, once the treaty is ratified, if a 
dispute arises between that company and let us say that 
country, there is a procedure under the treaty to help get 
resolution of that dispute between the competent authorities.
    And this might be a time to add that in the Swiss protocol, 
for example, under certain circumstances, we are adding in a 
binding arbitration provision into the mutual agreement to 
provide further possibilities of settling cases and further 
incentives for these countries to settle cases.
    Senator Cardin. One final question, and then I will yield 
to Senator Barrasso, we had our share of differences with 
Switzerland on sharing information. With the ratification of 
this treaty, how far will it go to resolve those types of 
disagreements?
    Mr. Stack. I think, Senator, it goes very far, because it 
brings the United States and Switzerland up to the 
international standard on exchange of information. And in 
February 2011, Switzerland put out a statement to the effect 
that they recognize these international standards as applying 
to their treaty exchange relationships.
    So we are optimistic about the advances with Switzerland.
    Senator Cardin. Thank you. Thank you very much.
    Senator Barrasso.
    Senator Barrasso. Thank you, Mr. Chairman.
    Mr. Stack, maybe from just a little different angle, I am 
concerned about foreign governments publicly disclosing 
sensitive personal information of U.S. taxpayers, or using that 
information for unauthorized purposes. I am just kind of 
curious about what penalties would be for unauthorized 
disclosure by a foreign government of U.S. taxpayer 
information. Are there penalties there? How does that all work?
    Mr. Stack. Sure, Senator. The first thing I want to point 
out, and sometimes this information exchange business gets very 
confusing, but in both automatic exchange and in information 
exchange upon request, the foreign government is requesting 
information about its citizens or residents in the United 
States in connection with a tax matter that arises in its 
jurisdiction. That does not mean there are not situations in 
which there is a U.S. person.
    Because these are international agreements, when we hear of 
any kind of a breach--once we have these agreements in place, 
the IRS works with these countries to understand their systems, 
processes, and procedures. And in the event those systems, 
processes, and procedures were to break down and there would be 
a release, our recourse is to hold further provision of 
information pending resolution of that. Because these are 
foreign governments and foreign countries, it is not so much a 
question as, let us say, a penalty under one of our statutes as 
it is the international relations.
    Senator Barrasso. In the unlikely event that this happens, 
is the U.S. taxpayer notified about the leak and the 
unauthorized use of the information? Is that something you are 
aware of?
    Mr. Stack. Not that I am aware of, Senator.
    Senator Barrasso. Do you know how many of these 
unauthorized public disclosures maybe have been made by foreign 
governments recently or in a recent time period?
    Mr. Stack. I would say, in my preparatory conversations 
with IRS, that there have been several, but maybe going back 
over several years.
    But let me make a point about this. All these disclosures 
may not be what we typically think of as the malevolent, 
unauthorized disclosure. It could be a case that there is some 
kind of accident or leak. It could be a case that a court case 
in the foreign jurisdiction has already hinted that information 
that is collected in this process should or could be made 
public.
    So, in both categories, any time there is a situation in 
which information can get out to the public, the IRS pays 
attention, contacts the country, has a discussion, and does not 
move forward until it is convinced that the situation has been 
resolved.
    Senator Barrasso. To move to a little bit different topic, 
we seem to have a patchwork of international agreements dealing 
with the sharing of tax information. We currently have 65 
ratified bilateral treaties, tax treaties. In addition, we 
enter into tax information exchange agreements with other 
foreign countries. The United States has started to enter into 
numerous intergovernmental agreements under the Foreign Account 
Tax Compliance Act.
    So I am just wondering whether you can talk a little about 
the differences in the scope of information and in the process 
of receiving information exchanged under, say, a tax treaty and 
then the tax information exchange agreement and 
intergovernmental agreements, just how that all works, if you 
would not mind?
    Mr. Stack. I appreciate the question, Senator.
    First, it is a good time to explain that we only enter into 
double tax treaties--double tax treaties contain their own tax 
information sharing provision, typically in article 26. And we 
only enter into those agreements when there is unrelieved 
double taxation between us and the other jurisdiction, because 
we are typically, A, willing to give up some of our taxing 
rights; they give up some of their taxing rights. And we are 
really trying to relieve double taxation.
    When we negotiate a double tax agreement, as I mentioned, 
inside that agreement is also one of these tax information 
exchange agreements.
    In many other cases, where we do not have a double tax 
treaty, because there is no unrelieved double taxation, we 
simply enter in a stand-alone tax information exchange 
agreement.
    And so we go around the world with jurisdictions where we 
would like to have those kinds of agreements, which, again, are 
modeled on the treaty and provide for information exchange upon 
request. One jurisdiction is doing an audit and it comes to us 
to get information, and various other kinds of information 
exchange.
    The intergovernmental agreements are a narrower subset, I 
would say, because we have entered into the intergovernmental 
agreements in order to facilitate the enforcement of FATCA, the 
Foreign Account Tax Compliance Act. In those agreements, if I 
can take a minute to just give you the two flavors, we have two 
types of these IGAs.
    In the first type of IGA, the financial institutions in the 
jurisdiction, rather than giving information directly to the 
IRS--I am sorry, let me back up.
    The first kind of IGA is what we call nonreciprocal. And 
what nonreciprocal means is we are going to receive information 
about the U.S. accountholders in the foreign financial 
institutions in that jurisdiction, but we are not going to give 
that jurisdiction back any U.S. information.
    We need the IGA because, under the laws of some foreign 
jurisdictions, their financial institutions may not have been 
permitted to give information to a third party like the IRS. 
And so the IGA, in the nonreciprocal case, takes care of that 
situation. And we receive the information for FATCA compliance.
    We also have what is called a reciprocal intergovernmental 
agreement. And under the reciprocal intergovernmental 
agreement, I think there is one important thing to understand. 
We only enter into a reciprocal where we are going to give 
information if we have a preexisting double tax agreement or 
TIEA already in place with the country, so we have already done 
our homework to understand that we are going to exchange 
information with them. That could apply to people or 
signatories under the Multilateral Convention.
    And then we only give the other jurisdiction what we 
collect from financial institutions in this country about their 
residents.
    So double tax treaty is very broad, including TIEA; TIEA 
where we do not do a double tax treaty; IGA is to enforce 
FATCA.
    Senator Barrasso. Just two more questions, Mr. Chairman.
    There have been some concerns raised that the exchange of 
information provisions in these tax treaties could possibly 
lead to fishing expeditions that could undermine the privacy 
rights of Americans. Could you talk a little bit about how the 
exchange of information request process works? How the 
government decides whether to make a request for exchange, just 
a little bit of an overview on that?
    Mr. Stack. Yes, Senator.
    So for here, I would break this down into--this puts us 
back into the category of what we call information exchange on 
request. That is a situation in which another jurisdiction asks 
the IRS to get information for it because it is ``foreseeably 
relevant'' or may be relevant to an actual ongoing tax audit or 
investigation in that country.
    When the IRS receives that request, it is very important 
that it understand, and will often have contact back with the 
foreign government, to understand that there is an ongoing 
audit, there are specific issues being looked at, and, indeed, 
that it is not a fishing expedition on which the OECD is kind 
of giving guidance for when you know there is a specific audit 
of a particular person or group of persons and crossing the 
line into a fishing expedition. If the IRS office in charge of 
this determines that there is a fishing expedition, they will 
simply decline to honor the request for information.
    Senator Barrasso. Obviously, there is a great deal of 
information that can be shared between foreign governments 
about an individual's tax information. The United States 
currently has international tax treaties with Venezuela, with 
Russia, with China, and I just want to make sure that there are 
safeguards in place. Maybe you can describe some of those to 
assure that we as a Government are not sharing information with 
other foreign governments that may use this information in ways 
that we would never want it to be used--human rights violations 
against their own people or against U.S. taxpayers.
    Mr. Stack. Senator, first, I will say we are not currently 
sharing information with Venezuela. No. 2, let me talk a little 
bit about the China and Russia issues or any other country in 
connection with the FATCA IGA, because that is the most recent 
work we have been doing.
    So before we determine that we will do a reciprocal 
exchange, we are going through a process of consultation with 
the State Department and Justice Department to ask very 
narrowly, very specifically, about our Government's experience 
with confidentiality and use for intended purposes with these 
other countries.
    This tax area is not the first situation in which we share 
information with other countries.
    Second, however, in all of our IGAs that we are doing FATCA 
with, we will not exchange information until the IRS actually 
does an on-the-ground visit with these jurisdictions to look at 
their systems, procedures, and policies, to be sure that the 
information will be kept confidential, and, indeed, that they 
have sanctions in place in the event that they violate it.
    And only once we become comfortable after kicking the tires 
will we proceed under FATCA and the IGAs to the automatic 
exchange of information with countries like that.
    Senator Barrasso. Thank you.
    Thank you, Mr. Chairman.
    Senator Cardin. I just want to clarify one point from 
Senator Barrasso's questioning, and that is, you indicated 
earlier that these requests, generally, are for information 
about an entity that is located in the country that is 
requesting the information, about their activities in our 
country.
    But is it not also applicable to U.S. entities that we 
would have to make information available to other countries?
    Mr. Stack. It depends. The paradigmatic case is their 
resident who might have some assets in this country.
    Senator Cardin. I understand that.
    Mr. Stack. In the business context, I think it can be much 
broader. For example, their parent company might have a 
subsidiary in this country, so, yes, it is our country's 
taxpayer, but the foreign government might think that that 
subsidiary has information about the tax liability of its 
parent company back in the home jurisdiction.
    So, in that circumstance, the IRS would be----
    Senator Cardin. Could not it be a U.S. parent company with 
operations in another country, that they want information about 
the U.S. company?
    Mr. Stack. Yes, it could be, Senator.
    Senator Cardin. I just want to make sure that we have that 
clear.
    Mr. Stack. Right.
    Senator Cardin. That is not the typical case.
    Mr. Stack. Right.
    Senator Cardin. So we are talking about U.S. entities 
where--we have a responsibility to protect privacy of all our 
information.
    Mr. Stack. Yes.
    Senator Cardin. But when we are dealing with a U.S. entity, 
to me, it is a much higher standard.
    Mr. Stack. Yes, Senator. I agree.
    Senator Cardin. Thank you both very much.
    Mr. Barthold, I hope you do not mind that we did not ask 
you any questions, but we know how to find you whenever we need 
to. [Laughter.]
    Mr. Barthold. Call whenever, Mr. Chairman.
    Senator Cardin. Thank you.
    Thank you both very much for your testimony. Appreciate it.
    We will now move to our second panel, which is the private 
sector panel. We welcome Mr. William Reinsch, president of the 
National Foreign Trade Council; Mr. Paul Nolan, the vice 
president, tax, McCormick & Company, one of the great Maryland 
companies, and I am personally pleased to have Mr. Nolan here; 
and Ms. Nancy McLernon, president and CEO of the Organization 
for International Investments.
    Mr. Reinsch, we will start with you. You may proceed as you 
wish. Your entire statement will be made part of our record, as 
is the case with the other two witnesses.

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

    Mr. Reinsch. Thank you, Senator. It is a pleasure to be 
back at the committee again after having been here some years 
ago.
    The National Foreign Trade Council is pleased to recommend 
ratification of the treaties and protocols that you are 
considering today. We appreciate the chairman's actions in 
scheduling the hearing, and we strongly urge the committee to 
reaffirm the United States historic opposition to double 
taxation by giving its full support as soon as possible to the 
pending treaties and protocols.
    The NFTC, organized in 1914 and celebrating its centennial 
this year--that is the end of the commercial--is an association 
of some 250 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. We seek 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 our continuing ability 
to contribute the U.S. economy that they be free from excessive 
foreign taxes or double taxation, an impediment to the flow of 
capital that can serve as barriers to full participation in the 
international marketplace.
    Foreign trade is fundamental to U.S. economic growth. 
Ninety-five percent of the world's consumers are outside the 
United States. Tax treaties are a crucial component of the 
framework that is necessary to allow that growth.
    This is why the NFTC has long supported the expansion and 
strengthening of the U.S. tax treaty network, and why we 
recommend ratification of the items before you today.
    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 any 
opposition to the agreements based on the presence or absence 
of a single provision.
    No process as complex as the negotiation of a full-scale 
tax treaty will be able to produce an agreement that will 
completely satisfy every possible constituency, and no such 
results should be expected.
    Tax 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 and provide nondiscriminatory 
treatment for U.S. traders and investors, as compared to those 
of other countries.
    I want to emphasize how important treaties are in creating, 
implementing, and preserving an international consensus on the 
desirability of avoiding double taxation. The tax laws 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 cannot enjoy the reduced foreign 
withholding rates offered by a tax treaty, noncredible high 
levels of foreign withholding tax leave them at a competitive 
disadvantage relative to traders and investors from other 
countries. 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, treaty policy should prevent 
multiple or excessive levels of foreign tax on cross-border 
investments, particularly if their foreign 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 also follow 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 avoids 
double taxation on cross-border transactions.
    The Swiss and Luxembourg protocols that are before the 
committee today update agreements between the United States and 
these countries that were signed many years ago.
    The Hungary tax treaty replaces the previous treaty, which 
was signed in 1979. The Chilean tax treaty is the first 
bilateral tax treaty between the United States and Chile. The 
Multilateral Convention has been signed by 61 countries.
    The protocols improve conventions that have stimulated 
increased investment, greater transparency, and a stronger 
economic relationship between our countries. The Swiss and 
Luxembourg treaties strengthen the information exchange 
provisions to alleviate concerns that U.S. taxpayer information 
was not accessible by the IRS.
    We are pleased that the Swiss protocol provides for 
mandatory arbitration. 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 all 
five of these treaties and protocols.
    The NFTC supports the provision in the Swiss protocol that 
expands the prohibition on source-country taxation on dividends 
beneficially owned by pension or other retirement arrangements 
resident in the other treaty country.
    Under the Swiss protocol, the prohibition on source-country 
taxation also applies to dividends that are beneficially owned 
by an individual retirement savings plan set up in and owned by 
a resident of the other treaty country, so long as the 
competent authorities agree that the individual retirement 
savings plan generally corresponds to an individual retirement 
savings plan recognized in the other treaty country for tax 
purposes.
    The treaty with Chile signed in 2010 would be our first 
with that country, and its ratification would present an 
important milestone lowering tax barriers to U.S. companies 
operating in Latin America where, as you know, we so far have 
few such agreements.
    The Swiss and Luxembourg treaty protocols would, among 
other measures, update the current information exchange 
provisions with those countries to override their bank secrecy 
laws. The Swiss protocol would also unable the U.S. Government 
to collect tax revenues from hidden offshore accounts of U.S. 
tax evaders while specifically protecting against fishing 
expeditions by either country.
    The Multilateral Convention was amended at the request of 
the G20 to align it to the international standard on exchange 
of information. The Convention is a multilateral agreement 
designed to facilitate international cooperation among tax 
authorities to improve their ability to tackle tax evasion and 
avoid avoidance, and to ensure full implementation of national 
tax laws while respecting the fundamental rights of taxpayers.
    Additionally, important safeguards included in the Hungary 
tax treaty prevent treaty shopping, which you have already 
discussed with Mr. Stack a few minutes ago.
    The Swiss protocol provides for mandatory arbitration of 
certain cases that cannot be resolved by the competent 
authorities within a specified period of time. Following the 
arbitration provisions already adopted in the Canadian, German, 
Belgium, and French treaties, the arbitration provision 
included in the Swiss protocol will help to resolve cases where 
the competent authorities are unable to reach agreement.
    NFTC member countries use tax treaty arbitration as a tool 
to strengthen and not replace the existing treaty dispute 
resolution procedures conducted by the competent authorities. 
Although the existing procedures work well to resolve most of 
the disputes that arise in cases involving Switzerland and the 
United States, the inclusion of the arbitration provisions will 
expedite the resolution disputes in all competent authority 
cases.
    The Swiss protocol has already been ratified by 
Switzerland, and its approval is essential in resolving 
hundreds of long-running U.S. tax investigations.
    Finally, Mr. Chairman, let me express our gratitude to you 
and to members of the committee for 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, which have 
enabled this hearing to be held at this time.
    We urge the committee to proceed with ratification of these 
agreements as expeditiously as possible. Thank you.
    [The prepared statement of Mr. Reinsch follows:]

                Prepared Statement of 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, and we 
strongly urge the committee to reaffirm the United States historic 
opposition to double taxation by giving its full support as soon as 
possible to the pending tax treaty protocol agreements with 
Switzerland, and Luxembourg, the tax treaties with Hungary and Chile, 
and the OECD Multilateral Convention on Mutual Administrative 
Assistance in Tax Matters.
    The NFTC, organized in 1914, is an association of some 250 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 we seek 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. Ninety-five percent of the world's consumers are 
outside of the United States. Tax treaties are a crucial component of 
the framework that is necessary to allow that growth and balanced 
competition.
    This is why the NFTC has long supported the expansion and 
strengthening of the U.S. tax treaty network and why we recommend 
ratification of the items before you today.
                 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 any opposition to the 
agreements based on the presence or absence of a single provision. No 
process as complex as the negotiation of a full-scale tax treaty will 
be able to produce an agreement that will completely satisfy every 
possible constituency, and no such result should be expected. Tax 
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 an appropriate level of 
acceptability in comparison with the preferred U.S. position and 
expressed goals of the business community.
    The NFTC 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 tax laws 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 cannot enjoy the reduced foreign 
withholding rates offered by a tax treaty, noncreditable high levels of 
foreign withholding tax leave them at a competitive disadvantage 
relative to traders and investors from other countries that do enjoy 
the treaty benefits of reduced withholding taxes. 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, treaty policy should prevent multiple or excessive 
levels of foreign tax on cross-border investments, particularly if 
their foreign 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 avoids double taxation on cross-
border transactions.
    The NFTC also wishes to reaffirm 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. Doing so enables improvements in the treaty network to enter 
into effect as quickly as possible.
                    agreements before the committee
    The Swiss and Luxembourg protocols that are before the committee 
today update agreements between the United States and these countries 
that were signed many years ago. The Hungary tax treaty replaces the 
previous treaty which was signed in 1979. The Chilean tax treaty is the 
first bilateral tax treaty between the United States and Chile. The 
OECD Multilateral Convention has been signed by 61 countries. The 
protocols improve conventions that have stimulated increased 
investment, greater transparency, and a stronger economic relationship 
between our countries. The Swiss and Luxembourg treaties strengthen the 
information exchange provisions to alleviate concerns that U.S. 
taxpayer information was not accessible by the Internal Revenue 
Service. We are pleased that the Swiss protocol provides for mandatory 
arbitration. 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 all five of these tax treaties and 
protocols.
    The NFTC supports the provision in the Swiss protocol that expands 
the prohibition on source-country taxation of dividends beneficially 
owned by pension or other retirement arrangements resident in the other 
treaty country. Under the Swiss protocol, the prohibition on source-
country taxation also applies to dividends that are beneficially owned 
by an individual retirement savings plan set up in, and owned by a 
resident of, the other treaty country, so long as the competent 
authorities agree that the individual retirement savings plan generally 
corresponds to an individual retirement savings plan recognized in the 
other treaty country for tax purposes.
    The proposed tax treaty with Chile, signed in 2010, would be our 
first with that country, and its ratification would represent an 
important milestone in lowering tax barriers to U.S. companies 
operating in Latin America, where we have few such agreements. The 
proposed treaty would lower withholding taxes on a bilateral basis and 
protect the interests of U.S. taxpayers in that country.
    The Swiss and Luxembourg treaty protocols, both signed in 2009, 
would among other measures update the current information exchange 
provisions with those countries to override their bank secrecy laws. 
The Swiss protocol would also enable the U.S. Government to collect 
U.S. tax revenues from hidden offshore accounts of U.S. tax evaders, 
while specifically protecting against ``fishing expeditions'' by either 
country.
    The OECD Multilateral Convention was amended at the request of the 
G20 to align it to the international standard on exchange of 
information. The Convention is a multilateral agreement designed to 
facilitate international cooperation among tax authorities to improve 
their ability to tackle tax evasion and avoidance and to ensure full 
implementation of national tax laws, while respecting the fundamental 
rights of taxpayers.
    Additionally, important safeguards included in the Hungary tax 
treaty prevent ``treaty shopping.'' In order to qualify for the reduced 
rates specified by the treaties, companies must meet certain 
requirements so that foreigners whose governments have not negotiated a 
tax treaty with Hungary or the United States cannot free-ride on this 
treaty. Similarly, provisions in the sections on dividends, interest, 
and royalties prevent arrangements by which a U.S. company is used as a 
conduit to do the same. Extensive provisions in the treaties are 
intended to ensure that the benefits of the treaty accrue only to those 
for which they are intended.
    The Swiss protocol provides for mandatory arbitration of certain 
cases that cannot be resolved by the competent authorities within a 
specified period of time. Following the arbitration provisions already 
adopted in the Canadian, German, Belgian and French tax treaties, the 
arbitration provision included in the Swiss protocol will help to 
resolve cases where the competent authorities are unable to reach 
agreement. NFTC member companies view tax treaty arbitration as a tool 
to strengthen, not replace, the existing treaty dispute resolution 
procedures conducted by the competent authorities. Although the 
existing mutual agreement procedures work well to resolve most of the 
disputes that arise in cases involving Switzerland and the United 
States, the inclusion of the arbitration provisions in the Swiss tax 
protocol will expedite the resolution of disputes in all competent 
authority cases. The Swiss protocol has been ratified by Switzerland, 
and its approval is essential to resolving hundreds of long-running 
U.S. tax investigations.
                             in conclusion
    Finally, the NFTC is grateful to the chairman and the members of 
the committee for 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 which 
have enabled this hearing to be held at this time.
    We urge the committee to proceed with ratification of these 
important agreements as expeditiously as possible.

    Senator Cardin. Thank you very much for your testimony.
    Mr. Nolan.

   STATEMENT OF PAUL NOLAN, VICE PRESIDENT, TAX, McCORMICK & 
                   COMPANY, INC., SPARKS, MD

    Mr. Nolan. Good morning, Mr. Chairman, and thank you for 
that warm welcome. Good morning also Ranking Member Barrasso. I 
appreciate the opportunity to speak today and the invitation to 
be here. McCormick does not often testify in Washington, and it 
is a great opportunity to be here on an important topic such as 
this.
    A little bit of background on McCormick. We know that the 
chairman knows, but just for the rest of the committee, we are 
a $4 billion company and we are growing. We manufacture, 
market, and distribute spices, flavors, condiments, and 
seasoning mixes in retail outlets, to food manufacturers, and 
to food companies around the world. We sell into about 125 
countries currently.
    Approximately 45 percent of our sales are to customers 
outside the United States, and that number is growing each 
year. We employ over 10,000 employees and approximately 2,000 
of those are in Maryland.
    Our heritage is Baltimore. We started on the Inner Harbor. 
A gentleman by the name of Willoughby McCormick started selling 
root beer mix in 1889, right at the harbor. And we have grown 
into the global enterprise that we are today.
    We now have our global headquarters in Hunt Valley, MD, and 
we have most of our manufacturing for the United States there. 
And of the finished goods that we sell in the United States, 
more than 90 percent is manufactured somewhere in the United 
States.
    In 2014, we are celebrating our 125th year with the theme 
of ``A Flavor of Together.''
    We have grown through innovation. We have grown through a 
clear focus on employee engagement and product quality.
    I am here today to testify in favor of the ratification of 
the treaties and protocols that are the subject of the hearing.
    First of all, why do multinationals care about treaties? 
The question arose with the prior panel. There are three clear 
reasons that we identify when considering treaties.
    First and foremost, tax treaties provide clear thresholds 
and triggers for taxation. In a jurisdiction where there is a 
tax, and this was covered by the prior panel I think pretty 
clearly, circumstances going into a country where there is not 
a treaty is effectively domestic tax law in that country for 
the U.S. company entering that jurisdiction. And whether the 
company is given equal treatment or is at a competitive 
disadvantage under domestic tax is an open question. A treaty 
provides rules of the road with respect to that, and a level 
playing field.
    Secondly, the mutual agreement procedure, it provides for 
principle-based government-to-government resolution of the 
double tax issues that arise under the treaty. And we find 
those to be very important, and I will address later the 
modifications that are happening and the significance of that. 
This process is the tool for assuring no double taxation due to 
differences.
    In the absence of a MAP procedure, a global U.S.-based 
multinational has limited resources in that circumstance to 
address the double taxation. And again, political interference 
and parochial circumstances can get in the way.
    Finally, the third reason, principal reason, is the 
withholding structures with respect to intellectual property 
and interest payments. Capital crosses boarders from the United 
States, and it can be in the form of debt, it can be in the 
form of intellectual property. We want to make sure that the 
royalties are treated fairly.
    In addition to those three benefits, there are two 
significant benefits to the U.S. economy that we can see as 
well. First, trade and outbound investment from the United 
States itself--headquarters activities in the United States 
spurs greater job growth and also helps the suppliers grow 
while the headquarters companies grow here. That means more 
Federal, State, and local revenues, in addition to the jobs 
that it creates, and it also just basically supports the 
economy.
    Also, the lower trade restrictions that occur under a tax 
treaty help with fundamental trade.
    And full disclosure, we are a member of the NFTC, a proud 
member of the NFTC, on the board. And we associate ourselves 
with their testimony.
    The support for free trade is very important to the vibrant 
growth of the U.S.-based multinationals.
    But secondly, also treaties provide for a great environment 
for inbound investment as well.
    Non-U.S. investors have a better environment for investing 
in terms of making sure that their capital is protected and 
that they have rules of the road that are safe. So royalties 
paid back to foreign parents for intellectual property, 
dividends, et cetera, there are also clear rules of the road.
    Just a few more observations about treaties, the exchange 
of information provisions, there has been some discussion about 

that. We think they strike a careful balance. There is never 
going 
to be a perfect world for that sort of information exchange. 
However, we think that the U.S. Treasury and the IRS, with 
their processes and procedures, is pretty safe, and that should 
preclude fishing expeditions.
    Also, if you take notice of events outside the United 
States, in terms of tax developments, the rules of the road 
that the United States has through these treaties is good 
protection for U.S. companies as opposed to what can emerge 
outside of those rules. And so a lot of times these days, U.S. 
companies, not McCormick, are targets of these non-U.S. 
governments, so it is better to have rules than not have rules.
    The broad network of tax treaties provides fair framework 
and reduced rates of withholding taxes, and then also 
limitation on benefits prevents treaty shopping, which, if you 
are a scrupulous taxpayer, you do not necessarily like 
unscrupulous taxpayers abusing the rules.
    The mutual agreement procedures, a significant point to 
make on that are the improvements in our treaties past 
generation of treaties with the baseball arbitration. The mere 
fact that two countries may need to submit their disagreement 
to an arbitrator who can make a final judgment is a great 
incentive for two countries to reach resolution without the 
need for actual arbitration. We support the expansion of 
baseball arbitration, and it is in one of these protocols.
    Finally, my last thought before I say ``thank you for your 
time'' is that tax reform is on the horizon, and we are 
supportive of broad-based tax reform. But before it happens, as 
a residence-based country with residence-based worldwide 
taxation, it is more in the United States interest to have a 
better treaty network to prevent double taxation, particularly 
as other jurisdictions lower their rates, because there is more 
for the United States to pick up.
    So the bottom line is, many of these countries, in a world 
gone territorial, they are very much about source taxation. We 
are about residence taxation. Our current treaty network 
protects the U.S. fisc in this environment in a very unique 
way, and a more important way every day.
    So, Mr. Chairman, I know you have seen some of these 
treaties before and it is deja vu for you. We know you are a 
supporter, and we are preaching to the choir, but we want to 
completely support these treaties and advocate for their 
further action. Thank you.
    [The prepared statement of Mr. Nolan follows:]

                  Prepared Statement of Paul B. Nolan

    Good morning Mr. Chairman, Ranking Member Barrasso, and members of 
the committee. Thank you for the opportunity to testify at today's 
hearing. My name is Paul Nolan and I am the Vice President, Tax, at 
McCormick & Company, Inc.
    McCormick & Company, Incorporated, is a global leader in flavor 
with $4 billion in annual sales. McCormick manufactures, markets and 
distributes spices, seasoning mixes, condiments and other flavorful 
products to the entire food industry--retail outlets, food 
manufacturers, and foodservice businesses--in more than 125 countries 
and territories. Approximately 45 percent of our sales are to customers 
located outside the United States and that number is growing each year.
    We employ more than 10,000 people in locations around the world, 
including approximately 2,000 in Maryland, where our company began at 
the foot of the Baltimore Harbor, 1889, and where our company has its 
global headquarters and most of its U.S. manufacturing and research and 
development. In 2014, we are celebrating our 125th year under the theme 
of ``The Flavor of Together.''
    Since Willoughby M. McCormick founded the company selling root beer 
extract in 1889, McCormick has demonstrated a strong commitment to the 
communities in which it operates. Innovation in flavor and a clear 
focus on employee engagement and product quality has allowed McCormick 
to grow its business globally and become the flavor leader it is today.
    I am here today to testify in favor of the ratification of the two 
treaties and the three protocols amending three other treaties that are 
the subject of this hearing.
    Mr Chairman, Ranking Member Barrasso, and members of this 
committee, tax treaties benefit the U.S. economy and U.S.-based 
multinational companies (MNCs) that are globally engaged, such as 
McCormick, in three ways.
    First, tax treaties provide clear thresholds and triggers for 
foreign taxation of global American companies' income generated from 
trading with foreign customers. Bilateral tax treaties allow global 
American companies to invest and compete abroad for foreign customers 
through: (i) greater certainty regarding future income tax costs and 
(ii) equal treatment among other non-U.S. competitors because there is 
no competitive disadvantage arising from higher local taxation of U.S. 
companies' investment vs. foreign business investment in the treaty 
country.
    Second, Mutual Agreement Procedures (MAP) are a critically 
important tool to facilitate resolution of income tax disputes between 
governments. Tax treaties provide the two governments who are disputing 
the income tax liability of a single company to enter into a principle-
based government-to-government negotiation that can resolve the 
disputed income tax liability. This process assures no double-taxation 
due to differences in taxation principles between countries.
    In the absence of MAP procedures, globally engaged U.S. companies 
would have limited recourse in resolving tax issues on their own. In 
some countries, tax authorities or judiciaries can be hostile to U.S. 
investors in particular, or all foreign investors in general, subject 
to political interference, or motivated by domestic budget pressures.
    As a result, foreign tax authorities operating without tax treaties 
might levy duplicative capital gains and withholding taxes on U.S. 
company investments unsupported by international tax policy norms. Tax 
treaties bring with them OECD principles on proper attribution of 
profits, rules on permanent establishment, and other broadly accepted 
principles.
    Third, tax treaties provide for mutually agreed reduced rates of 
withholding taxes on royalty payments for U.S.-owned intellectual 
property and interest payments paid with respect to U.S. debt. Without 
tax treaties in force, U.S. companies pay higher taxes on the same 
types of business transactions as foreign MNCs with broader and more 
effective treaty networks. By avoiding higher or additional layers of 
income tax, tax treaties also increase the net return to U.S.-owned 
intellectual property which increases the incentive to develop and own 
intellectual property in the United States.
    As you well know, Mr Chairman and Ranking Member Barrasso, 
expanding the network of tax treaties benefits the U.S. economy. Tax 
treaties improve the environment for international trade and outbound 
investment, with major benefits to U.S. companies, workers, consumers, 
and taxpayers.
    The headquarters activity generated by globally engaged U.S. 
companies' investments abroad spurs greater job growth here at home and 
along their supply chains. This increases federal, state, and local tax 
revenues that are sustainable only in an environment which continues to 
support free trade in goods and services.
    Increased restrictions on trade will disadvantage consumers by 
reducing consumer choice, increasing prices, and favoring local 
producers, which makes globally engaged American companies less able to 
compete in the provision of goods and services to consumers around the 
world. Reduced foreign tax burdens on royalties paid to the United 
States increases the incentive for investment in intangible property in 
the United States by increasing the expected return of U.S.-owned 
intellectual property. This results in more investment in intellectual 
property in the United States.
    Tax treaties also improve the environment for inbound investment 
that benefits both consumers and taxpayers. U.S. affiliates of foreign 
MNCs pay royalties to their foreign parent companies for the use of the 
foreign-owned intellectual property in the United States. Tax treaties 
enhance the environment for certainty in business planning and 
potentially reducing U.S. tax costs on inbound investments. This 
results in increased investment in the United States, with associated 
benefits for employment, tax revenue, and consumer choice.
    ``Exchange of Information'' provisions provide appropriate and 
limited tools to reduce tax evasion by U.S. businesses and individuals 
while precluding the use of these provisions for ``fishing 
expeditions'' on the part of foreign or U.S. tax authorities without 
evidence of such evasion.
    In conclusion, we support as broad a network of tax treaties as 
possible that reduce rates of withholding taxes and nonresident capital 
gains taxes. We support ``limitation on benefits'' provisions 
consistent with the latest model U.S. tax treaty. They prevent ``treaty 
shopping.'' Unilateral application of ``generally antiavoidance rules 
(GAAR) should be avoided as they are arbitrary in their application and 
often result in double-taxation.
    In the recent past, some of the government-to-government 
negotiations that are intended to resolve double-taxation for taxpayers 
have become bogged down when one party or the other refuses to work the 
differences over the amount of income to be taxed in each jurisdiction.
    So-called ``baseball'' arbitration is a solution to this problem of 
deadlocked negotiations between competent authorities. Baseball 
arbitration requires each country seeking to tax the same income to 
submit a ``last best offer.'' The arbitrator then selects one of the 
offers to resolve the dispute. While it is rarely invoked, it does 
provide an incentive for two disputing jurisdictions to come to a 
timely agreement that avoids double-taxation. Baseball arbitration does 
not create nowhere income--it ensures that a taxpayer is not subjected 
to double taxation.
    Thank you once again for the opportunity to testify and I would be 
happy to answer any questions.

    Senator Cardin. Thank you very much, Mr. Nolan, for your 
testimony.
    Ms. McLernon.

 STATEMENT OF NANCY McLERNON, PRESIDENT AND CEO, ORGANIZATION 
          FOR INTERNATIONAL INVESTMENT, WASHINGTON, DC

    Ms. McLernon. Good morning, Chairman Cardin and Ranking 
Member Barrasso and distinguished members of the committee. I 
thank you for the opportunity to testify this morning, and I 
applaud your leadership in holding this hearing.
    I am here to talk about the flip side of most of what has 
been discussed this morning, sort of the opposite side of the 
investment coin, if you will.
    I am president and CEO of the Organization for 
International Investment, and OFII is a business association 
exclusively comprised of U.S. subsidiaries of foreign 
companies. Our mission is to ensure that the United States 
remains the most attractive location for foreign investment.
    OFII strongly supports our Nation's tax treaty network. 
These bilateral agreements provide a reliable tax environment 
for companies doing business in several jurisdictions, much of 
which we have already talked about this morning. Tax treaties 
prevent double taxation and provide important information-
sharing between governments to ensure appropriate taxes are 
paid.
    Although many focus on how tax treaties impact homegrown 
companies like McCormick, they are also extremely important in 
promoting a competitive environment for foreign investment in 
the United States.
    Foreign investment is a catalyst for economic growth that 
fuels American manufacturing, innovation, trade, and overall 
job creation. U.S. subsidiaries employ 5.6 million workers in 
the United States, including 17 percent of the U.S. 
manufacturing workforce, and account for 6.3 percent of private 
sector GDP. In Maryland, U.S. subsidiaries employ over 105,000, 
and in Wyoming, over 8,400.
    In a recent study, we found that insourcing companies, 
which is how we refer to them, outperformed the private sector 
average across a number of key economic indicators over the 
past decade.
    For example, U.S. subsidiaries increased U.S. R&D funding 
at double the rate, and their contributions to U.S. GDP 
increased by over 25 percent, nearly double the private 
sector's 14 percent increase.
    However, competition to attract and retain global 
investment has never been stronger. Over the last decade, the 
United States has seen its share of global investment 
dramatically decline from roughly 37 percent in 2000 to just 
over 17 percent in 2012. This is why it is critically important 
for the United States to implement policies that make us more 
attractive for global companies to invest and generate jobs 
here.
    Tax treaties, while not as prominent as bilateral trade 
agreements, play an essential role in encouraging greater 
foreign investment in the U.S. economy.
    Let me explain it pretty simply. We talked about it 
somewhat. So when companies operate in multiple tax 
jurisdictions, situations can occur when two countries both try 
to tax a single item of earned income that moves across 
borders. One country may tax the income because the corporation 
is a resident of that country, while the other country may tax 
the income because the activity generating the income occurred 
within its borders. This double taxation can be a clear barrier 
to foreign investment.
    Tax treaties help ensure that businesses are not taxed 
twice on the same income while accounting for concerns of tax 
avoidance. This is done in part by reducing or eliminating 
withholding taxes on cross-border income flows between 
affiliated companies. By ensuring that common business expenses 
like royalty and interest payments are not subject to double 
taxation, tax treaties allow insourcing companies to invest 
more in the very business activities that drive economic growth 
in the United States.
    In addition, tax treaties promote information-sharing 
between governments and lay the foundation for cooperative 
efforts between tax authorities to better administer and 
enforce tax laws. This, too, creates a more conducive 
environment for foreign investment, as it provides a company 
with greater certainty on the application of tax rules.
    In these and other ways, tax treaties play a significant 
role in providing certainty to cross-border businesses while 
advancing economic interests of the United States
    Likewise, the pending bilateral treaties and protocols 
before this committee today contain proinvestment measures and 
will help coordinate and enforce tax administration with 
important economic partners.
    The protocols with Switzerland and Luxembourg modernize 
outdated information exchange capabilities between nations, 
which is critical for resolving cross-border investigations, 
protecting the integrity and fairness of the global tax system, 
and improving the legal and regulatory climates for 
multinational firms.
    This will provide greater certainty to companies based in 
countries that rank as the sixth- and seventh-largest investors 
into the United States. That certainty will benefit not only 
the companies, but their American employees.
    Switzerland- and Luxembourg-based companies have infused 
billions of dollars and hired tens of thousands of U.S. workers 
for decades. For example, Zurich Insurance Group recently 
celebrated 100 years in the State of Illinois. And Nestle USA 
has been an insourcing company for over 110 years. Swiss-based 
firms alone in the United States provide jobs for over 446,000 
Americans.
    Hungarian-based companies are also significant investors in 
the U.S. market with cumulative investment totaling over $20 
billion. Hungary ranked in the top 10 investing countries for 
the United States.
    The second proposed treaty with Chile would be an important 
milestone as only the second tax treaty with a South American 
country. By reducing withholding taxes, this treaty can 
encourage greater investment from an important economic ally.
    The failure of the Senate to ratify many of these 
agreements in the past few years has slowed the progress on tax 
treaties with other countries and sends a message to the 
international community that the United States may not be 
committed to maintaining these important adjuncts to 
international commerce.
    The proposed treaties we are discussing today are not the 
only tax treaties that have been signed and are awaiting Senate 
ratification. Last year, the United States signed tax treaties 
or protocols with Japan, Poland, and Spain. In addition to 
that, the United States is negotiating with the U.K. and 
Vietnam.
    The lingering ratification process also scares away 
potential new investors from firms based in those treaty 
countries.
    In closing, bilateral tax treaties and protocols encourage 
the flow of cross-border investment and economic activity. The 
United States needs to restore life back into our tax treaty 
network. It needs to send a message around the world that the 
United States takes these treaties seriously and wants to 
encourage greater levels of foreign investment in the United 
States.
    Approving the protocols with Switzerland and Luxembourg and 
the conventions with Chile and Hungary will accomplish these 
goals.
    Thank you and I look forward to any questions.
    [The prepared statement of Ms. McLernon follows:]

                Prepared Statement of Nancy L. McLernon

                              introduction
    Good morning. Senator Cardin, Ranking Member Barrasso, and 
distinguished members of the committee, I thank you for the opportunity 
to testify this morning. I applaud your leadership in holding this 
hearing on tax treaties.
    My name is Nancy McLernon and I am President and CEO of the 
Organization for International Investment (OFII). OFII is a business 
association exclusively comprised of U.S. subsidiaries of foreign 
companies. Our mission is to ensure that the United States remains the 
most attractive location for global investment. As such, we advocate 
for nondiscriminatory treatment in U.S. law and regulation for these 
firms and the millions of Americans they employ.
                                overview
    OFII and its member companies strongly support expansion and 
updating of our Nation's tax treaty network. These bilateral agreements 
provide a reliable tax environment for companies doing business in 
several jurisdictions. Tax treaties prevent double taxation and provide 
important sharing of information between governments to ensure 
appropriate taxes are paid. Although many proponents focus on how tax 
treaties impact home-grown companies, they are also extremely important 
in promoting a competitive environment for foreign investment in the 
United States.
          foreign direct investment important to u.s. economy
    Foreign direct investment is a catalyst for economic growth that 
fuels American manufacturing, innovation, trade, and overall job 
creation.
    U.S. subsidiaries employ 5.6 million workers in the United States, 
including 17 percent of the U.S. manufacturing workforce, and account 
for 6.3 percent of private sector GDP. In addition, these companies 
engage in high levels of research and development, make extensive 
capital investments in new facilities and equipment, and produce a 
large share of U.S. exports to markets abroad. In a recent study, we 
found that insourcing companies outperformed the private sector average 
across a number of key economic indicators over the past decade. For 
example, U.S. subsidiaries increased research and development funding 
at double the rate and their contributions to U.S. GDP increased by 
over 25 percent, nearly double the private sector's 14-percent 
increase.
    In every state and every industry sector, U.S. subsidiaries of 
global companies are important players in providing high-quality jobs 
and much-needed investment. Recent examples include: Denmark-based Novo 
Nordisk's $225 million redevelopment project and new headquarters 
opening in New Jersey; Sweden-based Electrolux's announcement to add 
650 jobs at their plant in Tennessee within the next few years; 
British-based Balfour Beatty's new office in Baltimore and over 
$1.9 billion spent on construction projects in the State of Maryland; 
and Belgium-based Solvay's Soda Ash plant expansion in Wyoming to 
increase production by 12 percent.
    As a business community, these insourcing companies generate 
precisely the types of high-value jobs and economic activities 
policymakers are working to bring to their states.
    However, competition to attract and retain global investment has 
never been stronger, providing companies with an unprecedented array of 
options when looking to expand into new markets around the world. Over 
the last decade, the United States has seen its share of global 
investment dramatically decline, from roughly 37 percent in 2000 to 
just over 17 percent in 2012. This is why it is critically important 
for the United States to implement policies that make the United States 
more attractive for global companies to invest.
      tax treaties encourage increased foreign direct investment 
                          in the united states
    Tax treaties, while not as prominent as bilateral trade agreements, 
play an essential role in encouraging greater foreign direct investment 
in the U.S. economy. This can be seen by the growth in investment flows 
from our treaty partners. For example, since the Protocol to the French 
Income Tax Treaty was ratified at the end of 2009, we have seen a 144-
percent increase in FDI flows from France. In fact, French investment 
increased sevenfold between 2011 and 2012, reaching nearly $22 billion.
    The reason for this is simple. When companies operate in multiple 
tax jurisdictions, situations can occur where two countries both try to 
tax a single item of earned income that moves across borders. One 
country may tax the income because the corporation is a resident in 
that country, while the other country may tax the income because the 
activity generating the income occurred within its borders. This double 
taxation can be a clear barrier to foreign direct investment.
    Tax treaties help ensure that businesses are not taxed twice on the 
same income while accounting for concerns of tax avoidance. This is 
done, in part, by reducing or eliminating withholding taxes on cross 
border income flows between affiliated companies. By ensuring that 
common business expenses like royalty and interest payments are not 
subject to double taxation, tax treaties allow insourcing companies to 
invest more in the very business activities that drive economic growth, 
like expanding operations, purchasing new equipment, hiring more U.S. 
workers, and selling trademarked or licensed goods.
    In addition, tax treaties promote information-sharing between 
governments and lay the foundation for cooperative efforts between tax 
authorities to better administer and enforce tax laws. This too creates 
a more conducive environment for foreign direct investment as it 
provides companies with greater certainty on the application of tax 
rules.
    In these and other ways, the U.S. network of more than 60 bilateral 
income tax treaties plays a significant role in providing certainty to 
cross-border businesses while advancing the economic interests of the 
United States in the global economy.
    Likewise, the pending bilateral treaties and protocols before the 
committee today contain pro-investment measures and will help 
coordinate and enforce tax administration with important economic 
partners.
Specifics on Pending Protocols & Tax Treaties: Switzerland, Luxembourg, 
        Hungary & Chile
    The protocols with Switzerland and Luxembourg modernize outdated 
information exchange capabilities between nations, which is critical to 
resolving cross-border investigations, protecting the integrity and 
fairness of the global tax system and improving the legal and 
regulatory climates for multinational firms. This will provide greater 
certainty to companies based in countries that rank as the sixth- and 
seventh-largest investors into the United States in developing their 
near- and medium-term investment plans. That certainty will benefit not 
only the companies, but their employees and the communities in which 
they are located as well.
    Switzerland and Luxembourg based companies have infused billions of 
dollars and hired thousands of United States workers for decades. For 
example, Zurich Insurance Group recently celebrated 100 years in the 
State of Illinois and Nestle USA has been an insourcing company for 
over 110 years. Overall, foreign direct investment from Switzerland and 
Luxembourg stands at $204 billion and $202 billion respectively through 
the end of 2012. Swiss-based firms alone provide 446,300 American jobs. 
Collectively, these countries account for nearly 9 percent of all 
direct jobs from global investment in the United States.
    Hungarian-based companies are also significant investors in the 
U.S. market, with cumulative investment totaling over $20 billion. 
Hungary ranked in the top 10 investing countries for the United States 
for 2012.
    The proposed treaty with Chile would be an important milestone as 
only the second tax treaty with a South American country. By reducing 
withholding taxes, this treaty could encourage greater investment from 
an important economic ally as well as providing greater protection to 
U.S. companies operating in that market.
Prompt Consideration Sends an Important Signal to the Business 
        Community and Trading Partners and Gives U.S. Negotiators 
        Greater Credibility
    It is important to note that failure to act on these agreements in 
an expeditious manner has a number of negative consequences. The 
failure of the Senate to ratify many of these agreements in the past 
few years has slowed the progress on tax treaties with other countries 
and sends a message to the international community that the United 
States is not committed to maintaining these important adjuncts to 
international commerce.
    The proposed treaties we are discussing today are not the only tax 
treaties that have been signed and are awaiting Senate ratification. 
Last year, the United States signed tax treaties or protocols with 
Japan, Poland, and Spain. In addition to that, the United States is 
negotiating with the United Kingdom and Vietnam. These are significant 
markets for the United States, considering that British and Japanese 
companies have invested $795 billion combined in the United States, 
making them the top two investing countries by cumulative stock.
    The lingering ratification process also scares away potential new 
investment from firms, based in proposed treaty countries, which are 
evaluating investment locations around the world and making long-term 
strategic plans. It is difficult for these businesses to commit to U.S. 
investments unless they are confident a treaty will promptly come into 
force.
                               conclusion
    In closing, bilateral tax treaties and protocols encourage the flow 
of cross-border investment and economic activity.
    The United States needs to restore life back into our tax treaty 
network. It needs to send a message to our negotiating partners and 
businesses around the world that the United States takes these treaties 
seriously and wants to encourage greater levels of foreign direct 
investment and the jobs it generates.
    Approving the protocols with Switzerland and Luxembourg and the 
Conventions with Chile and Hungary will accomplish these important 
goals.

    Senator Cardin. Well, let me thank all three of you for 
your testimony. As I indicated in my opening comments, the 
hearing we held in 2011 did not include a private sector panel, 
so we very much appreciate having the private sector 
represented here.
    Mr. Nolan, I thought the point that you made about tax 
reform, and the fact that the United States is based upon 
resident rather than based upon territory, is a very valid 
point as to whether tax treaties are mutually beneficial to 
both countries. There is a direct interest in the United States 
on getting information about our residents' activities and 
other countries. That may not be true with some of the other 
partners that we have.
    And I noticed that Senator Barrasso and I both are strong 
supporters of trying to move forward with lower corporate tax 
rates. The fact is that we do have high corporate tax rates, 
and, therefore, there can be complications on us having 
compliance with our laws that require information from other 
countries.
    So I think the point that you raised there is a very valid 
point, and I appreciate you bringing that to our attention.
    The question I have for you and for the others, you talked 
about having proper tax administration, having rules that you 
can understand, and confidence in the procedures that are in 
these tax agreements and treaties. You heard the first panel. 
You heard the concerns that we have, particularly with the 
Multilateral Convention, that there are countries that we are 
going to be entrusting information to, that some do not have a 
long track record of protecting sensitive information.
    How confident are you, that your company or the companies 
that you represent, about these protocols being ratified and 
protecting information that may be made available by the United 
States to the four treaty countries that are involved or the 
signatories to the Multilateral Convention?
    Mr. Nolan. Senator, that is an excellent question, and I 
can only speak for myself and actually hypothetically, because 
I have not seen this yet, but it would be the exact 
circumstance that you described in your question to Assistant 
Secretary Bob Stack, which was U.S. multinational with a non-
U.S. affiliate in one of these countries, and suppose that 
information was requested.
    My perspective is, first, that we have a subsidiary in that 
country, and it is being audited already, or it is already 
being looked at. So a lot of time, you are already subject to 
the rules with respect to confidentiality and disclosure, which 
are not what we are used to in the U.S. rules. Rules of 
privilege and other attorney work product things that we take 
for granted here in the United States may not even exist in 
that jurisdiction. So we may already with that subsidiary have 
to disclose a fair amount of information about that subsidiary.
    And a lot of times there will be information about the 
overall business model that will implicate the U.S. parent in 
that disclosure. And in order to comply with the law there, and 
to reach a successful resolution, there may be substantial 
disclosures already.
    This would be over and above that. And there certainly 
could be risks here, and I do not know how you could just say 
there would not be, but I think in a circumstance like this you 
would have to look to the procedure and to your home country, 
to the United States, to make sure that they are looking out 
for your interests as a U.S. parent company in that country.
    So that is why I welcome this kind of engagement, because 
absent that, I do not know that I have a way to bring the 
Treasury or the IRS to the table with me in a nontreaty country 
when they are looking at my subsidiary.
    Remember, the fact pattern here was this is someone who is 
not already part of a bilateral treaty, not part of a TIA. This 
is someone coming in through the OECD, the window, in effect. 
Well, without the Treasury at that window protecting me, I am 
up against the local jurisdiction, the local revenue 
authorities, and whatever they might demand.
    So is it perfect? No, but it could actually be better than 
the fact pattern you have without that type of information 
exchange, because now the Treasury is involved, and the IRS is 
involved somehow in reviewing what they are seeing.
    Senator Cardin. Mr. Reinsch, how do you feel about the 
companies that you represent and protection of privacy?
    Mr. Reinsch. I think most of them, if not all of them, will 
agree with Paul. We recognize there is always a level of risk. 
We are comfortable with the risk in this case, and we think the 
procedures that Mr. Stack described to mitigate that are fine.
    The thing that I would add is the advantage of a 
multilateral convention in any context is that it is a good way 
of essentially raising the bar for everybody to bring people 
along whose standards and practices may not be up to what we 
would like to see in the beginning. But by making them part of 
an international process and exposing them to the higher 
standards of the other members and allowing organizations like 
the U.S. Treasury and counterpart institutions in other 
governments to work with them, and have the high standard of 
expectations of those countries, you bring them up to the 
standards that we are talking about.
    And I really think that is the only way you can do that. If 
you keep them outside the multilateral framework, you make it 
much harder.
    So for us, the Convention is an important development, and 
we welcome it.
    Senator Cardin. Ms. McLernon, you raised a point that I 
wanted to follow up on, and that is the slow pace of U.S. 
ratification of tax treaties has already had an impact. It has 
had an impact on further treaty negotiations, getting more 
countries involved in more uniform treatment of taxpayers and 
protocols, as well as investment here in the United States. Can 
you just elaborate a little bit more about what the signal has 
been here from the action or inaction in the Senate?
    Ms. McLernon. Yes, as I mentioned, the United States really 
has lost precipitously the amount of global share of cross-
border investment. The United States is still the top location, 
but we have lost a lot of share.
    Part of that is because of the rapid increase of emerging 
markets. So the United States has to be able to have an impact 
on the things that we can control. Tax treaties become a very 
powerful competitive advantage that we have, because it ensures 
companies that they are going to be dealt with fairly.
    My organization is devoted toward ensuring that foreign-
based companies are dealt with on a level playing field and, as 
such, promote investment and job creation in the United States.
    But lack of movement on tax treaties make our trading 
partners concerned about how they will be treated once they are 
here. And it is not just true for the countries that are 
involved in the pending agreements we have before us today. It 
hurts our hand when we go and try to negotiate with other 
countries.
    I know that many of my companies, and some that are 
probably at NFTC, are very interested in a tax treaty with 
Brazil. There could be other countries that we do not have 
treaties with that do not feel that it is worth time and effort 
if the United States is not going to move on some of these 
treaties.
    So we talk a lot about trade agreements, and tax treaties 
do not often get the same limelight, but they are an important 
fact. And even just ensuring that policies follow our tax 
treaties is almost a full-time job for my organization, because 
sometimes at the State level, policies do not follow our tax 
treaties.
    So with the absence of tax treaties, it is going to be even 
harder and make it less competitive for us to attract.
    Senator Cardin. The one treaty here that is completely new 
is Chile. As has been pointed out, we do not have a lot of tax 
treaties in South America. I think you pointed out this is the 
second, if it is ratified by the Senate.
    Is there potential for significant progress with bilateral 
treaties in South America?
    Ms. McLernon. Well, I think it certainly would be an area 
that we would want to focus on. I think, in general, both trade 
agreements and tax treaties with folks down south can make us a 
more attractive location, not only for foreign investment to 
come here, but as an export platform for other places around 
the world.
    Foreign companies in the United States already produce 
about 20 percent of our U.S. exports, but we hear from many 
that they do not choose the United States for a variety of 
reasons, one of which is because they are concerned about our 
international agreements, and is the United States falling 
behind other countries in pursuing these international 
agreements. Many of them would like to produce here to sell to 
markets outside of the United States, which I think, certainly, 
we would agree is desirable, but this lack of engaging with the 
global economy can hurt us.
    Senator Cardin. Senator Barrasso.
    Senator Barrasso. Thank you, Mr. Chairman.
    Mr. Chairman, our colleague, Senator Lamar Alexander, often 
says, ``Find the good and praise it.'' And I would like to note 
that Mr. Stack is still here, and he is paying attention. And 
so frequently, Mr. Chairman, the administration--and this goes 
for both parties--comes, testifies, and leaves without paying 
attention, without listening, without hearing what the others 
have to say.
    So I just appreciate your staying, and I think that sets a 
very good example for others, from this and other 
administrations.
    So thank you, Mr. Chairman, to that.
    I wanted to point out The Economist this past week had an 
article called, ``Company headquarters: Here, there and 
everywhere.'' It may be applicable. It said, ``Why some 
businesses choose multiple corporate citizenships.''
    They talk about Fiat, an Italian company for the last 115 
years, the board recently voted to move their parent legal 
domicile to the Netherlands, the tax residence to Britain, and 
the stock market listing to New York City, so I mean, the 
challenges are going to continue to come into the future.
    Just think about that and how the treaties play a role, the 
international community plays a role.
    I wanted to ask you, Mr. Reinsch, specifically about this 
treaty with Hungary. It contains a ``limitation of benefits'' 
provision. It is intended, I understand to fix a loophole that 
was in the existing treaty that made Hungary a target for what 
they call treaty shopping.
    Could you just please provide some examples of how third 
parties outside perhaps the United States and Hungary use that 
current treaty with Hungary to engage in treaty shopping? Are 
you familiar with this?
    Mr. Reinsch. I cannot.
    Senator Barrasso. OK.
    Mr. Reinsch. I will, for the record.
    [The written answer from Mr. Reinsch to Senator Barrasso's 
question follows:]

    If a foreign investor from a country with which the United States 
does not have an income tax treaty wishes to invest in the United 
States by, for instance, purchasing shares in and or making a loan to a 
U.S. company, that foreign investor will be subject to our statutory 
withholding rates of 30 percent on the U.S. source dividends and most 
interest that it receives.
    The foreign investor could instead choose to establish a Hungarian 
company through which he would route his U.S. investments. The effect 
would be that the U.S. source dividends and interest would enjoy the 
reduced U.S. withholding provided in the U.S. Hungary tax treaty.
    A typical limitation on benefits rule would deny benefits to a 
Hungarian company that was owned by third-country investors and did not 
have an active business in Hungary. Holding companies are often 
established by third-country investors to take advantage of better tax 
treaty benefits in countries without limitation on benefit provisions.
    The existing Hungary tax treaty does not have any limitation on 
benefits, and thus there is no protection against this type of treaty 
shopping abuse by third-country investors.
    The limitation on benefits provision in the pending U.S.-Hungarian 
tax treaty limits the benefits to real American and Hungarian 
investors. This provision would ensure that the treaty benefits are 
being realized by those companies to which they were intended, which 
protects the competitive position of U.S. companies doing business in 
Hungary.

    Senator Barrasso. We appreciate that.
    Wondering about the arbitration in the Swiss protocol, if I 
could talk to you about that a little bit. The proposed Swiss 
protocol includes mandatory binding arbitration when the United 
States and Switzerland are unable to resolve disagreements. It 
appears to be consistent with other arbitration provisions in 
international tax treaties with Canada, with Germany, Belgium, 
France. Do you know if there has been any successful 
arbitration conducted under those treaties or other treaties?
    Mr. Reinsch. I think what we have generally found is what 
Mr. Nolan alluded to, which is that the presence of the 
provision is an incentive for the competent authorities to 
reach agreement so it does not have to be employed.
    Whether there actually has been a successful arbitration, I 
do not know. The reason we are for it is the reason I just 
stated. It is the 2 years that matters, because there is a 
tendency sometimes in these cases--we had this problem with the 
Canadians, before the provision was included in that treaty--
for negotiations to drag on for years and years, and these 
cases were never resolved.
    If you put in the deadline through the arbitration 
provision, it is the incentive to conclude these cases in a 
timely fashion.
    Senator Barrasso. OK. Maybe for all three of you, and I can 
start with you, Ms. McLernon, from a business perspective, what 
is the impact of the Senate not ratifying the international tax 
treaties that are currently being discussed today?
    Ms. McLernon. Well, as I mentioned, it is not just the 
treaties that we are talking about now. It is potential updates 
and new treaties. So I think it is going to make the United 
States fall even further behind in being competitive in a very 
competitive global economy.
    And I know that many of my companies that have been in the 
United States for decades and longer would see this as a step 
backward.
    Senator Barrasso. Mr. Nolan.
    Mr. Nolan. Yes, if I may echo that, these treaties do not 
happen overnight. They are negotiated by representatives from 
the U.S. Government and the other government over a long period 
of time. And then, of course, under the Constitution, we have 
the ratification procedure.
    Treaties always seem important but not urgent, and that is 
really a challenge. Well, I think the delay here is making 
these treaties in particular important and urgent. And I think 
that the whole treaty pipeline that Nancy alluded to is 
becoming important and urgent for the reasons that she said.
    It is basically a question of global reputation, global 
ability to deliver on what we promise as a sovereign.
    And then also, the world is changing. I have alluded to it 
a couple times. There are activities happening in the OECD. 
Governments are acting on their own because of concern 
regarding revenue collection and multinationals with multiple 
headquarters, et cetera. The NGOs have stirred up a real 
political imperative out there amongst other countries.
    It is better for the United States to work within the 
framework it has with these countries and ratify and have a 
strong treaty network going forward.
    Senator Barrasso. Mr. Reinsch.
    Mr. Reinsch. I would echo both of those comments.
    One, the world is not standing still. Other people are 
going ahead. And if we are not, we steadily lose ground simply 
by standing in the same place.
    In addition, as Paul pointed out, these things are a 
process, and they take a long time to negotiate. They take a 
long time to work out. When they come up here, they take an 
even longer time.
    Several things happen. One, the signal is sent to the 
Treasury Department that these things are not moving along. Mr. 
Stack can speak better than I can to others that are in the 
pipeline right now, which are not going to go forward until 
they see that the Senate is prepared to act on these, because 
there is not much point in presenting even more treaties. As 
the chairman pointed out, these have been around since 2011. If 
these do not move, why send up three or four more? And the 
result is that everything then begins to back up.
    We do an annual survey of our members, the results of which 
we provide only to the Treasury Department, on where our 
members would like to see negotiations go forward, either with 
a new protocol or a treaty with a country where there is none. 
Brazil is, by the way, these days regularly at the top of the 
list.
    But it is a long list. And we will have 15, 20 countries 
where various of our members would like to see some improvement 
in the bilateral tax relationship, either by an update, because 
some of these treaties are quite old when commerce was very 
different, or with countries that we do not have a treaty with 
now, but have substantial trade with.
    All of that begins to slow down and grind to a halt pending 
Senate action on what is there right now.
    Senator Barrasso. Thank you.
    Thank you, Mr. Chairman.
    Senator Cardin. Well, let me thank all three of our 
witnesses here and just make this observation, and that is I 
will certainly take back the message of the urgency that you 
have expressed to Senator Menendez and Senator Corker, the 
chair and ranking member of our committee, and also talk to 
Senator Reid and Senator McConnell, who have more to do with 
how the scheduling is done on the floor of the United States 
Senate.
    There are a lot of treaties that are pending in the United 
States Senate, in addition to tax treaties. Some are more 
controversial than others, but any ratification process needs 
to be done in a thorough way, and it takes time before the 
United States Senate can schedule a vote. And of course, we 
have an extraordinary hurdle that needs to be passed as far as 
the number of votes to ratify a treaty.
    So I would just urge you, individually and through your 
organizations, to stress the urgency of action here to the 
political leadership here in the United States Senate.
    And I will do my share, and I now Senator Barrasso will be 
talking to his leadership, to see whether we can find an 
opportunity first to take these issues up in our committee, but 
then also to find floor time to consider tax treaties in this 
Congress. The calendar will move quickly, but we need your help 
in pointing out how important these treaties are. I thought 
your testimonies were particularly useful, the first panel, we 
went through a lot of the technical parts. But the second, the 
practical impact of failure to ratify backs up other potential 
treaties from being completed. And when companies have options, 
they go where they feel that they know what the rules are.
    Obviously, they would like to be in the United States, but 
there are other factors that can sway investment decisions, as 
you pointed out. So I very much appreciate those observations.
    The committee record will remain open until Friday for 
members to pose questions for the record.
    Senator Cardin. If you are the recipient of those types of 
questions, we would ask if you could respond as quickly as 
possible, we would appreciate that, because we need to get that 
completed before we could schedule committee action on these 
treaties.
    So we will relay the message to the leadership of our 
committee.
    And with that, the committee will stand adjourned. Thank 
you all.
    [Whereupon, at 11:55 a.m, the hearing was adjourned.]
                              ----------                              

              Additional Material Submitted for the Record

               Prepared Statement of Credit Suisse Group 
                Submitted by Senator Benjamin L. Cardin

    Chairman Menendez, Ranking Member Corker, and members of the 
committee, Credit Suisse appreciates the opportunity to comment on the 
2009 Protocol to the Convention between the United States of America 
and the Swiss Confederation for the Avoidance of Double Taxation With 
Respect to Taxes on Income, and to urge swift approval of the 2009 
Protocol by the committee.
    The 2009 Protocol would eliminate barriers to resolving numerous, 
long-running criminal tax investigations involving much of the Swiss 
banking industry. Resolution of these cases would enable the U.S. 
Government to collect substantial U.S. tax revenues, based on the 
exchange of information related to offshore accounts of U.S. taxpayers 
who may have misused Swiss privacy laws. At the same time, the 2009 
Protocol will continue to balance in an appropriate manner the personal 
privacy interests of U.S. and Swiss citizens.
    The Protocol was signed in September 2009 and previously approved 
by the committee in July 2011. It has since awaited action by the U.S. 
Senate for more than 2 years, and we strongly endorse its swift 
approval by the committee and by the full Senate.
             credit suisse has been a leader in promoting 
                    transparency of tax information
    Founded in 1856, Credit Suisse is a leading global private banking 
and wealth management firm based in Switzerland. Credit Suisse employs 
approximately 9,000 people in 19 U.S. locations and manages over $1.4 
trillion in assets. Our shares are listed on both the New York Stock 
Exchange and the leading Swiss stock exchange. Our wealth management 
business serves over 2 million clients around the world through 330 
offices in 42 countries.
    Credit Suisse fully supports the U.S. Government's efforts to 
combat U.S. tax evasion. Credit Suisse has been a leader among Swiss 
banks in working with government authorities to fully address the 
problem of U.S. taxpayers evading taxes through the misuse of 
undeclared Swiss bank accounts. In 2008, when the Senate Homeland 
Security and Government Affairs Committee's Permanent Subcommittee on 
Investigations issued a report on how UBS and other Swiss banks' 
offshore practices helped U.S. clients seeking to evade taxes through 
offshore accounts, Credit Suisse responded faster than any other bank 
in Switzerland. Credit Suisse swiftly imposed a block on transfers of 
undeclared U.S.-owned accounts from UBS. Credit Suisse rigorously 
examined all of its accounts in order to identify those held by U.S. 
taxpayers and to ensure that they were in compliance with all relevant 
U.S. laws and regulations. Credit Suisse has also continued to 
cooperate with U.S. law enforcement authorities in their investigation 
of U.S. taxpayers with undeclared accounts and, regrettably, individual 
bankers who may have violated firm policies and historical Swiss 
banking practices.
    We have made full compliance with U.S. tax laws a top priority. 
Consistent with that priority, we have adopted robust reforms, 
including the following: Since 2008, we have adjusted our internal 
compliance and monitoring systems to enable us to monitor all types of 
accounts for evidence of direct or indirect U.S. ownership. Credit 
Suisse no longer accepts accounts in its Swiss bank of U.S. residents, 
other than in tightly defined circumstances. For nonresident U.S. 
taxpayers living abroad, Credit Suisse not only notifies all identified 
U.S. accountholders of their U.S. tax filing obligations, but also 
requires them to consent to disclosure of their identity and account 
information to the IRS in order to continue banking with Credit Suisse. 
Our company policies also now prohibit inflows of funds from Swiss 
banks of U.S. account holders who have failed to disclose their tax 
status to the IRS.
    the treaties before the committee, including the 2009 protocol, 
          are critical to u.s. bilateral trade and investment
    The world's network of bilateral and multilateral tax treaties, 
including the U.S. network of over 60 tax treaties, plays a critical 
role in fostering global trade, investment, job creation, and economic 
growth. The U.S. tax treaty network, including the 1996 U.S.-Swiss Tax 
Treaty which would be updated by the 2009 Protocol, enhances the 
ability of U.S. businesses to compete abroad.
    Tax treaties work by reducing cross-border taxation on a reciprocal 
basis. For example, the U.S.-Swiss Tax Treaty reduces or eliminates 
withholding taxes that Switzerland would otherwise impose on income 
earned by U.S. investors from Swiss securities. The treaty also 
restricts Switzerland's ability to tax income earned by U.S. businesses 
from activities in Switzerland that fall short of a specific threshold, 
set forth in the treaty (the ``permanent establishment'' threshold). In 
return, the United States provides similar benefits for Swiss 
businesses and individuals, thereby fostering bilateral trade and 
investment.
    The information exchange provisions of modern tax treaties allow 
the two countries' tax administrators to discuss and to resolve 
specific cases where their businesses or citizens could otherwise face 
taxation of the same income in both countries (i.e., international 
double taxation). This dispute resolution process would not be possible 
without the two governments being able to share taxpayer information. 
As discussed below, information exchange provisions also help the two 
countries investigate and, where necessary, prosecute suspected cases 
of tax evasion.
    Most of the technical provisions included in modern U.S. tax 
treaties is the product of years of dialogue among committee members, 
the Joint Committee on Taxation, the Treasury Department, and 
interested stakeholders in the United States and abroad. The 2009 
Protocol is no different in this regard, and we welcome this ongoing 
dialogue. In part because this process has been so cooperative, tax 
treaties have long enjoyed broad bipartisan support in Congress and 
within the taxpayer community, including the many U.S. businesses and 
individuals who rely on U.S. tax treaties to reduce the risk of 
international double taxation.
    Credit Suisse strongly supports the ratification of each of the 
treaties before the committee today because it views tax treaties as 
key to promoting economic growth and free trade by reducing barriers to 
trade and investment on a reciprocal basis.
  adoption of the 2009 protocol to the u.s.-switzerland tax treaty is 
needed to enable the improved bilateral exchange of information and tax 
                              transparency
    The 2009 Protocol makes several key improvements to the current 
1996 U.S.-Swiss Tax Treaty, which would remain in force, subject to 
amendment by the Protocol.
    First and foremost, approval of the 2009 Protocol is essential to 
resolving several long-running U.S. tax investigations involving Swiss 
banks on a basis most favorable to the United States. The Protocol 
would eliminate the requirement, found in the 1996 U.S.-Swiss Tax 
Treaty, that a request for information from the U.S. Government to the 
Swiss Government describe conduct of a U.S. taxpayer amounting to ``tax 
fraud or the like'' under Swiss law, and that the request be 
``necessary for carrying out the provisions'' of the tax treaty. This 
strict language has repeatedly prevented U.S. law enforcement from 
obtaining the information it needs to investigate U.S. tax evasion 
through the use of undeclared Swiss bank accounts.
    The 2009 Protocol would rectify this situation by permitting the 
exchange of ``such information as may be relevant for carrying out the 
provisions'' of the treaty or for the administration of U.S. domestic 
law, even when such information would not be sought by Switzerland for 
its own tax administration purposes. The Protocol thus ensures that 
subsequent amendments to Swiss domestic law would not prevent the U.S. 
Government from obtaining from Swiss banks the same type of tax 
information the U.S. Government obtains every year from U.S. banks. 
Only by eliminating outdated barriers to U.S.-Swiss information 
exchange can the ongoing U.S. tax investigation into Swiss banks be 
completed. Credit Suisse supports these changes, which will allow Swiss 
banks to close this chapter and move forward under a more transparent 
regime that satisfactorily guards against future U.S. tax evasion.
    Once it enters into force, the 2009 Protocol will allow the U.S. 
Government to obtain from Switzerland as much information as it can 
obtain currently from any other U.S. trading partner--and, in fact, 
more because of the Protocol's retroactive effective date to September 
2009. This change should serve as a formidable deterrence against tax 
evasion while, in the meantime, bringing a substantial recovery of tax 
revenue to the U.S. Treasury. Although Credit Suisse is prepared to 
provide the historical information about U.S. account holders currently 
being requested by the U.S. authorities, it cannot do so under existing 
Swiss law until the United States adopts the 2009 Protocol--in effect 
agreeing to receive the information that U.S. law enforcement has 
requested, and that Credit Suisse is willing to provide.
       the 2009 protocol incorporates strong privacy protections
    In implementing these necessary changes to the existing tax treaty, 
the Protocol takes a balanced approach of permitting relevant tax data 
to be collected while ensuring the confidentiality of that data. In 
substance, the 2009 Protocol affords the same privacy protections to 
U.S. citizens that they would have in the United States. Consistent 
with current Swiss law, the Protocol strictly prohibits the 
unauthorized use or disclosure of requested information. Each treaty 
partner may use the obtained information only for tax administration 
purposes and may disclose it only to persons or authorities (such as 
courts) involved in administering U.S. and Swiss tax laws. The Protocol 
specifies criteria that must be met for a request to be honored and 
explicitly bars ``fishing expeditions'' by either country. The 2009 
Protocol thus allows the U.S. to combat offshore tax evasion while 
continuing to safeguard personal privacy.
           switzerland has already ratified the 2009 protocol
    The 2009 Protocol required significant and difficult changes to be 
made to Swiss law, and the United States and its taxpayers would be the 
greatest beneficiaries of those changes. Yet while the Swiss Parliament 
approved the 2009 Protocol on June 18, 2010, the U.S. Senate has failed 
to provide its advice and consent. We believe this inconsistency can 
and should be rectified by swift action on the part of the U.S. Senate.
                               conclusion
    Historically, the Senate has approved tax treaties on a bipartisan 
basis, routinely allowing for ratification of the treaties by unanimous 
consent. For all the reasons detailed above, this committee unanimously 
approved the Protocol in July 2011. However, because the Senate as a 
whole was not able to act upon it before the end of the 112th Congress, 
this committee must act again to reapprove the Protocol. Credit Suisse 
strongly urges the committee to do so.
                                 ______
                                 

              Response of William A. Reinsch to Question 
                  Submitted by Senator Robert Menendez

    Question. Your membership is clearly interested in making the 
United States more competitive in the global marketplace. How would the 
ratification of these treaties advance that goal?

    Answer. In order for American companies to be competitive globally, 
tax and trade barriers should be eliminated. The tax treaties currently 
pending before the Senate Foreign Relations Committee will reduce tax 
barriers to companies by eliminating double taxation and provide 
certainty through clearer definitions and a more robust dispute 
resolution provision. The withholding rate changes in interest, 
dividends, and royalties alleviate double taxation, while the clear 
definition of business profits and permanent establishments provide the 
certainty business needs. The mandatory arbitration provision included 
in the Swiss treaty will help resolve cases more quickly by providing a 
backstop to the Competent Authority negotiations and will prevent long 
drawn out cases that cost companies millions of dollars that could be 
put to a more productive use in their businesses.
                                 ______
                                 

                 Responses of Paul Nolan to Questions 
                  Submitted by Senator Robert Menendez

    Question. Could you elaborate further on the importance of these 
pending treaties, or income tax treaties in general, to your business? 
In what ways would they help?

    Answer. We identified in our testimony three specific benefits of 
tax treaties to the U.S. companies that engage in global business, (i) 
clear thresholds and ``triggers'' of taxation, (ii) the Mutual 
Agreement Procedure (or ``MAP'' as it is commonly called) and (iii) 
reduced rates of withholding tax on source-based income (i.e, the 
treaty partner's tax on income derived in the treaty partner's 
jurisdiction) from licenses to use U.S.-owned intellectual property or 
U.S. capital (i.e., loans), i.e., royalties and interest.
    We, like other U.S. multinational businesses, see all three of 
these benefits as a consequence of our treaty network. The treaties and 
protocols that were the subject of the hearing represent a portion of 
the ``pipeline'' of treaty updates and new treaties that the U.S. 
Treasury, as the delegate of the executive branch's constitutional 
authority, has been negotiating on behalf of the United States.
    To elaborate further on the importance of these treaties, we see 
the treaty network as an evolving and growing system that serves as a 
foundation for cross-border tax rules, with amendments to existing 
treaties to improve and ``modernize'' them and with new countries being 
brought into the treaty network. The continuation of this evolution and 
growth is important. As a followup response to provide elaboration that 
we hope will be helpful to the chairman and the Senate Foreign 
Relations Committee in its deliberation of these treaties and 
protocols, we would make the following points.
    First, the main importance of these treaties and protocols at this 
particular time is to demonstrate that the U.S. ratification process 
continues to work as designed, with the due deliberation of ``advice 
and consent'' as provided under the Constitution by the U.S. Senate and 
subsequent ratification and coming into force. For U.S. companies, a 
series of treaties or protocols with a status of ``pending 
ratification'' through successive Congresses raises concern regarding 
whether the treaty network will cease to evolve and grow.
    Given the current environment regarding global taxation, with so-
called ``BEPS (base erosion and profit shifting) Initiative'' occurring 
under the direction of the G20 and with many U.S. trading partner 
countries adopting new rules to address perceived tax abuse, the value 
of the treaty network as a bedrock system of bilateral principles and 
understanding between the United States and each of its treaty partners 
becomes even more important so that U.S. businesses can plan, invest, 
and grow with relative certainty.
    Second, ratification of these treaties sends a signal to other 
sovereign states that we continue to value the bilateral approach and 
will continue to amend where appropriate and to enter into treaties 
with new partners as appropriate. U.S. companies will benefit from such 
a signal because other sovereigns will need to be cognizant of the 
range of current U.S. tax treaty norms for purposes of amendment of 
existing treaty or purposes of entering into a first tax treaty with 
the United States. The support of these treaty norms could serve to 
prevent approaches to taxation that harm or place U.S. companies at a 
disadvantage.
    Third, modernization of treaties through protocols or new treaties, 
bring about consistency in treatment of fundamental issues that assist 
U.S. companies that seek to comply fully with the applicable rules. 
Specifically, ``limitation of benefits'' and information-sharing 
provisions modernize treaties to provide avenues to address tax abuses 
in which compliant U.S. companies do not engage. For a U.S. company 
that follows the rules, tax abuse by so-called ``treaty shopping,'' or 
other abuses that an exchange of information can provide tax 
authorities with the tools to address, not only can create a 
competitive disadvantage but can also create undue reputational harm 
due to public perceptions of wide-spread tax abuse in all cross-border 
business activity.

    Question. Has a delay in the ratification of the treaties affected 
your business

    Answer. In our view, the answer to this question is ``yes.''
    A simple example is the treaty with Chile, without which any U.S. 
company engaging in business must analyze Chilean domestic tax law 
without any of the protections or benefits that a treaty would bring, 
i.e., reduced withholding rates, clear mutual agreement procedures, 
residency rules, etc. The treaty with Chile would be the U.S.'s second 
tax treaty with South America. U.S. companies have extensive business 
and growth opportunities in South America. A series of treaties in 
South America would benefit U.S. businesses and support the creation of 
U.S. jobs in the United States for U.S. headquartered companies.
    In terms of treaty protocols that amend treaties to incorporate the 
latest limitations on benefits or information exchange provisions, 
delay means that those who benefit from the status quo that the 
protocols would impact can continue to engage in tax abuse with 
impunity. As described above, this delay hurts tax compliant U.S. 
businesses.
    Finally, as we testified before the committee, the ratification of 
tax treaties can often seem ``important but not urgent'' as the other 
foreign policy priorities arise with an urgency driven by crisis and 
events in foreign affairs and U.S. diplomacy.
    In our view, these treaties are ``important and urgent'' for this 
Congress to ratify for the reasons provided in our testimony and the 
elaboration provided above.
                                 ______
                                 

                Responses of Robert Stack to Questions 
                  Submitted by Senator Robert Menendez

    Question. The existing treaty with Hungary is one of only seven 
U.S. income tax treaties that do not include any limitation-on-benefits 
rules, thereby necessitating this new protocol. Similarly, the new 
treaty with Poland, which addresses limitation-on-benefits, may be 
transmitted to the Senate in the near future.

  What are the Treasury Department's priorities in 
        renegotiating other treaties to better incorporate current 
        practice on limitation-on-benefits or other major provisions?

    Answer. The Treasury Department's efforts to protect the U.S. tax 
treaty network from abuse have focused primarily on those tax treaties 
that contain a complete exemption from withholding taxes at source for 
deductible payments and also lack any antitreaty shopping protections. 
Three tax treaties fall into this category: the tax treaties with 
Iceland, Hungary, and Poland that were signed in 1975, 1979, and 1974 
respectively. The revision of these three agreements has been a top 
priority for the Treasury Department's treaty program, and we have made 
significant progress. In 2007, we signed a new tax treaty with Iceland, 
which entered into force in 2008. Like the proposed tax treaty with 
Hungary, the new U.S.-Iceland tax treaty contains a comprehensive 
limitation on benefits provision. In addition, the United States and 
Poland signed a new tax treaty in February 2013, which similarly 
contains a comprehensive limitation on benefits provision. The 
administration hopes to transmit the new tax treaty with Poland to the 
Senate for its advice and consent soon.
    With the conclusion of new tax treaties with Iceland, Hungary, and 
Poland, the Treasury Department is actively seeking to revise other 
existing tax treaties that provide for positive, but reduced rates of 
withholding on deductible payments, and therefore also present 
opportunities for base erosion and treaty shopping, although not to the 
extent of the Iceland, Hungary, and Poland tax treaties. For example, 
we are in the process of concluding negotiations of new tax treaties 
that would replace the existing tax treaties with Norway and Romania, 
which were signed in 1971 and 1973 respectively. The administration 
hopes to sign these two new treaties and transmit them to the Senate 
for its advice and consent in the near future.

    Question. Please describe the confidentiality protections that are 
built into the agreements before us and what steps the U.S. Government 
takes to ensure that private information is not disclosed to the wrong 
parties. How do the treaties ensure that our treaty partners do not 
engage in ``fishing expeditions?''

    Answer. Confidentiality protections for information are central to 
establishing and maintaining an exchange relationship under a tax 
agreement. Provisions requiring such protection are included in all 
five tax treaties being considered by the Senate. Additionally, the 
United States has the authority, consistent with international law, not 
to exchange information in cases where a treaty partner does not 
protect the confidentiality of the information as required by the 
treaties.
    Specifically, the four proposed bilateral tax treaties, as well as 
the proposed Protocol to the Multilateral Convention, before the Senate 
provide that information that is exchanged pursuant to such agreements 
shall be treated as secret in the same manner as information obtained 
under the domestic laws of the State that received the information and 
shall be disclosed only to persons or authorities (including courts and 
administrative bodies) concerned with the assessment, collection or 
administration of, the enforcement or prosecution in respect of or the 
determination of appeals in relation to, taxes, or the oversight or 
supervision of such functions. A State may disclose the information 
received in public court proceedings or in judicial decisions. When 
negotiating a bilateral agreement, the Treasury Department, including 
the Internal Revenue Service (IRS), evaluates key aspects of the 
domestic law of the other country, including domestic laws that provide 
for the confidentiality of information exchanged pursuant to an 
international agreement. The Treasury Department will agree to conclude 
a bilateral tax treaty or tax information exchange agreement only if it 
is satisfied that the other country's confidentiality laws are 
sufficiently robust.
    The Multilateral Convention contains the above described provisions 
concerning protecting the strict confidentiality of information that is 
exchanged. The Convention has established a Coordinating Body comprised 
of all countries that are Parties to the Multilateral Convention, the 
primary purpose of which is to evaluate requests by new non-OECD and 
non-Council of Europe countries to become parties to the Convention. 
The Coordinating Body closely evaluates the domestic laws of each such 
potential party to ensure that it has a sufficient legal framework to 
ensure the confidentiality of information that would be exchanged 
pursuant to the Convention. Requests from countries that are not 
members of the OECD or the Council of Europe to join the Multilateral 
Convention must be approved by unanimous consent of the Coordinating 
Body, which reviews the legal framework of each potential party to 
ensure the confidentiality of information that is exchanged pursuant to 
the Convention. If any member of the Coordinating Body, including the 
United States, is not satisfied with the legal framework of a country 
regarding confidentiality, that country will not be permitted to join 
the Multilateral Convention.
    If an exchange of information partner, either under a bilateral tax 
treaty, the Multilateral Convention, or a tax information exchange 
agreement (TIEA), were to breach the relevant agreement's 
confidentiality provisions, which are central provisions reflecting a 
bedrock principle of these agreements, the United States would have the 
ability, consistent with international law, to not exchange information 
with that state pending resolution of the matter. The provisions in the 
proposed treaties are similar to those in Article 26 of the updated 
OECD Model Tax Convention. This international law principle is 
reflected in the 2012 OECD Update to Article 26 of the OECD Model Tax 
Convention and its Commentary, which was approved by the OECD Council 
(including the United States) on July 17, 2012, and which provides: 
``In situations in which the requested State determines that the 
requesting State does not comply with its duties regarding the 
confidentiality of the information exchanged under this Article, the 
requested State may suspend assistance under this Article until such 
time as proper assurance is given by the requesting State that those 
duties will indeed by respected.''
    Finally, the text of the five treaties provides that the 
information be for such information as ``may be relevant'' or that is 
``foreseeably relevant.'' This language is intended to provide for 
exchange of information in tax matters to the widest possible extent 
and, at the same time, to clarify that the Parties are not at liberty 
to engage in ``fishing expeditions.'' The text of these treaties 
contains similar language to that in the OECD Model Tax Convention. The 
Commentary to the OECD Model Tax Convention was revised with the 
approval of the OECD Council (including the United States) on July 17, 
2012, to provide clear guidance regarding what constitutes a valid 
request for information under the OECD Model income tax treaty. The 
Commentary provides that a tax treaty ``does not obligate the requested 
State to provide information in response to requests that are `fishing 
expeditions,' i.e., speculative requests that have no apparent nexus to 
an open inquiry or investigation.'' Similarly, the Explanatory Report 
to the Multilateral Convention, which was approved by the OECD's 
Committee on Fiscal Affairs (including by the U.S. representative on 
that Committee) provides that ``The standard of ``foreseeable 
relevance'' in the Multilateral Convention is intended to provide for 
exchange of information in tax matters to the widest possible extent 
and, at the same time, to clarify that the Parties are not at liberty 
to engage in `fishing expeditions'. . .'' This interpretation is 
universally accepted, and thus we do not have concerns that our treaty 
partners will engage in fishing expeditions. In the event that the IRS 
received a request for information that rose to the level of a fishing 
expedition, there would be no obligation to provide assistance, because 
the request would not be within the scope of requests permitted under 
the treaties.

    Question. From the standpoint of information exchange, the Swiss 
and Luxembourg protocols are very important, because we know that banks 
in those two countries have been used by some in the United States to 
evade their tax obligations. The new protocols will enhance the ability 
of U.S. authorities to investigate and prosecute tax criminals that 
have used banks in those countries. From a privacy standpoint, the U.S. 
Government is required to keep any information obtained confidential 
and use it only for legitimate purposes.

  Do we have serious concerns about Switzerland and Luxembourg 
        making unauthorized or inappropriate use of U.S. taxpayer 
        information?

    Answer. The proposed Protocol to the Luxembourg tax treaty requires 
any information exchanged pursuant to the tax treaty to be used for tax 
administration purposes only. The terms of the proposed Protocol with 
Switzerland are consistent with those of the proposed Luxembourg 
Protocol, although it also permits the use of information that has been 
exchanged pursuant to the agreement to be used for nontax purposes, but 
only if the revenue authority of the country providing the information 
provides written consent. The Treasury Department Technical Explanation 
of the proposed Protocol with Switzerland provides that the competent 
authorities will only provide such written consent if the information 
could have been exchanged pursuant to the treaty on mutual legal 
assistance between the United States and Switzerland. We are confident 
that these tax treaty provisions with both Switzerland and Luxembourg 
adequately protect the confidentiality of exchanged information, and we 
do not have concerns that either country will use information exchanged 
with the United States in an inappropriate manner.
                                 ______
                                 

                Response of Nancy McLernon to Question 
                  Submitted by Senator Robert Menendez

    Question. Your organization represents the U.S. operations of many 
global companies. Could you elaborate further on how these treaties 
will help your members? For instance, will these treaties lead to 
additional insourcing or investment in the United States, and if so, in 
what ways?

    Answer. Bilateral tax treaties provide a reliable tax environment 
for companies doing business in several jurisdictions and help ensure 
that common business expenses are not subject to double taxation. This 
provides companies with greater certainty on the application of tax 
rules, and allows insourcing companies to invest more in the very 
business activities that drive economic growth, like expanding 
operations, purchasing new equipment, hiring more U.S. workers, and 
selling trademarked or licensed goods. The positive impact these 
agreements have on investment flows can be seen by the growth in 
investment from our treaty partners. For example, since the Protocol to 
the French Income Tax Treaty was ratified at the end of 2009, we have 
seen a 144-percent increase in FDI flows from France.
    As the Senate considers these agreements, it is important to keep 
in mind that global companies have an increasingly wide array of 
options when looking to invest, expand, or establish new operations 
around the globe, especially with the growth of emerging markets. Over 
the last decade, the United States has seen its share of global 
investment dramatically decline, from roughly 37 percent in 2000 to 
just over 17 percent in 2012. This is why it is critically important 
for the United States to implement policies that make the United States 
more attractive for global companies to invest, and implementing the 
outstanding tax treaties will do just that. As such, the Organization 
for International Investment and its member companies strongly support 
expansion and updating of our Nation's tax treaty network.
                                 ______
                                 

                Responses of Robert Stack to Questions 
                Submitted by Senator Benjamin L. Cardin

    Question. Three of the agreements being considered by the committee 
were voted out of committee during the last Congress and are back for 
reapproval. This has caused a delay in getting these agreements into 
force.

  What effect does not ratifying these treaties have on the 
        United States ability to negotiate tax treaties in the future 
        and in influencing the development of tax treaties worldwide, 
        for example through the OECD?

    Answer. The Treasury Department urges the Senate to provide its 
advice and consent to the five tax treaties as soon as possible. Both 
our existing and potential new treaty partners, as well as key 
policymaking multilateral institutions such as the OECD have noted with 
concern the Senate's recent inaction regarding approval of tax 
treaties. The Senate's resumption of the tax treaty approval process 
would be a critical component of the U.S. Government's collective 
desire to advance modern tax treaty policies that promote transparency 
and the economic interests of the United States. The harm to U.S. 
interests of failing to ratify these treaties in an expeditious manner 
was aptly summarized in the testimony of Ms. Nancy L. McLernon, 
president and CEO of the Organization for International Investment:

      ``It is important to note that failure to act on these agreements 
in an expeditious manner has a number of negative consequences. The 
failure of the Senate to ratify many of these agreements in the past 
few years has slowed the progress on tax treaties with other countries 
and sends a message to the international community that the United 
States is not committed to maintaining these important adjuncts to 
international commerce.
      ``The proposed treaties we are discussing today are not the only 
tax treaties that have been signed and are awaiting Senate 
ratification. Last year, the United States signed tax treaties or 
protocols with Japan, Poland, and Spain. In addition to that, the 
United States is negotiating with the United Kingdom and Vietnam. These 
are significant markets for the United States, considering that British 
and Japanese companies have invested $795 billion combined in the 
United States, making them the top two investing countries by 
cumulative stock.
      ``The lingering ratification process also scares away potential 
new investment from firms, based in proposed treaty countries, which 
are evaluating investment locations around the world and making long-
term strategic plans. It is difficult for these businesses to commit to 
U.S. investments unless they are confident a treaty will promptly come 
into force.''

    Question. The treaty with Chile, if ratified, will be only the 
second in-force U.S. income tax treaty with a South American country. 
How significant are cross-border investment flows between the United 
States and Chile? In your view, what role does the Chile treaty play in 
continuing to expand our treaty network in this region?

    Answer. If approved by the Senate, the proposed Chile tax treaty 
would be only the second U.S. tax treaty in force with a South American 
country. Chile is a major destination for foreign direct investment 
(FDI) in the region, receiving $20.1 billion in FDI inflows in 2013, 
according to Commerce Department data sources. The United States is the 
second-largest source of FDI into Chile, accounting for an average of 
10 percent of Chile's FDI inflows over the past 5 years.
    The U.S. business community has long urged the Treasury Department 
and the Senate to expand the U.S. tax treaty network in South America 
to address unrelieved double taxation faced by U.S. investments in the 
region. The proposed tax treaty with Chile, if approved by the Senate 
and brought into force, would represent a significant step in this 
effort. In addition, the Treasury Department is in active tax treaty 
negotiations with Colombia, which we hope to conclude soon. The 
Treasury Department hopes that the conclusion of the Chile tax treaty 
and our opening of tax treaty negotiations with Colombia will lead to 
more tax treaty discussions with key trading partners in the South 
American region, such as Brazil and Argentina.

    Question. The Protocol to the OECD Convention provides for 
spontaneous exchange of information and simultaneous tax examinations 
with other signatory countries. Over 60 countries have signed the 
Convention so far, and the number can be expected to grow. Although 
many of these countries are existing tax treaty partners, the 
Convention may eventually include countries with which it would not be 
in our interest to exchange information.

  What protections does the Protocol have to ensure that the 
        United States will not be required to provide information to 
        such countries?

    Answer. The Treasury Department urges the Senate to provide its 
advice and consent to the proposed Protocol to the OECD Convention as 
soon as possible. The new information exchange relationships that the 
proposed Protocol would establish for the United States would be an 
effective tool for the IRS to use to counter tax evasion. Requests from 
countries that are not in the OECD or the Council of Europe to join the 
Multilateral Convention must be approved by unanimous consent of the 
Coordinating Body, which reviews the legal framework of each potential 
party to ensure the confidentiality of information that is exchanged 
pursuant to the Convention. If any member of the Coordinating Body, 
including the United States, is not satisfied with the legal framework 
of a country regarding confidentiality, that country will not be 
permitted to sign the Multilateral Convention.
    In case, after joining the Convention, a State was not providing 
satisfactory protection of information as required by the Convention, 
which is a bedrock principle of the Convention, then the United States 
would have the ability, consistent with international law, not to 
exchange information with that State pending resolution of the matter. 
This international legal principle is reflected in the Revised 
Explanatory Report to the Convention on Mutual Administrative 
Assistance in Tax Matters, as Amended by the Protocol, approved in 2010 
by the OECD Committee on Fiscal Affairs, with the concurrence of the 
United States representative on that Committee. It provides: ``However, 
consistent with international law, in situations where the requested 
State determines that the applicant State does not comply with its 
duties regarding the confidentiality of the information exchanged under 
the Convention, the requested State may suspend assistance under the 
Convention until such time as proper assurance is given by the 
applicant State that those duties will indeed be respected.''
    Further, Article 21 in the proposed Protocol, which is before the 
Senate, further contains a ``public policy'' (ordre public) exception 
for compliance.

``Article 21 - Protection of persons and limits to the obligation to 
provide assistance
          ``1. Nothing in this Convention shall affect the rights and 
        safeguards secured to persons by the laws or administrative 
        practice of the requested State.
          ``2. Except in the case of Article 14, the provisions of this 
        Convention shall not be construed so as to impose on the 
        requested State the obligation:
                  ``a. to carry out measures at variance with its own 
                laws or administrative practice or the laws or 
                administrative practice of the applicant State;
                  ``b. to carry out measures which would be contrary to 
                public policy (ordre public);''

    The Explanatory Report to the amendments to the OECD Convention on 
``public policy,'' provides some helpful guidance and helps to 
illuminate what the parties were thinking. In particular, it provides 
that:

      ``It has been felt necessary also in subparagraph d to prescribe 
a limitation with regard to information which concerns the vital 
interests of the State itself. To this end, it is stipulated that 
Contracting States do not have to supply information the disclosure of 
which would be contrary to public policy (ordre public). However, this 
limitation should only become relevant in extreme cases. For instance, 
such a case could arise if a tax investigation in the applicant State 
were motivated by political, racial, or religious persecution. The 
limitation may also be invoked where the information constitutes a 
state secret, for instance sensitive information held by secret 
services the disclosure of which would be contrary to the vital 
interests of the 30 requested State. Thus, issues of public policy 
(ordre public) should rarely arise in the framework of the 
Convention.''

    Thus, concerns over certain behavior of the other party if contrary 
to U.S. public policy, could support not sharing information with them.
    Finally, note that parties to the Multilateral Convention have the 
right to participate in an information on request relationship, subject 
to the normal restrictions that apply in that context (e.g., the 
foreseeably relevant standard). The proposed Protocol, however, does 
not guarantee a country that we will enter into a spontaneous or 
reciprocal automatic exchange relationship.
                                 ______
                                 

                Responses of Robert Stack to Questions 
                     Submitted by Senator Rand Paul

    Question #1. Under what authority was the IGA to implement FATCA 
created, and where in the FATCA legislation was reciprocity by U.S. 
financial institutions authorized?

    Answer. The United States relies, among other things, on the 
following authorities to enter into and implement the IGAs: Article II 
of the United States Constitution; 22 U.S.C. Section 2656; and Internal 
Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle 
F, Chapter 61, Subchapter A, Part III, Subpart B (Information 
Concerning Transactions with Other Persons).

    Question #2. Where does the Department of the Treasury have 
authority under FATCA to waive the 30 percent withholding sanctions in 
exchange for reciprocity?

    Answer. The IGAs do not waive the 30 percent FATCA withholding tax 
in exchange for reciprocity. Instead, the IGAs generally provide that 
the FATCA withholding tax will not apply to financial institutions and 
certain other entities located in the IGA jurisdiction (``FATCA partner 
jurisdiction'') in circumstances where either (i) the terms of the IGA 
provide that the IRS will receive reporting on the United States 
accounts maintained by the financial institution or (ii) the entity 
otherwise poses a low risk of being used by U.S. persons for tax 
evasion. The Treasury Department has ample authority under section 1471 
of the Internal Revenue Code to issue regulations that waive the FATCA 
withholding tax in these circumstances. Specifically, section 
1471(b)(2) authorizes the Secretary of the Treasury to treat certain 
classes of financial institutions as ``deemed compliant'' with FATCA's 
requirements, and therefore as exempt from FATCA withholding, when (i) 
the Secretary determines that the application of FATCA with respect to 
the class is not necessary to carry out the purposes of FATCA or (ii) 
the institution complies with any procedures prescribed by the 
Secretary to ensure that it does not maintain United States accounts 
and complies with any prescribed procedures regarding accounts held by 
other foreign financial institutions. In addition, section 1471(f)(4) 
authorizes the Secretary to exempt from FATCA withholding any payment 
where the beneficial owner is a member of a class of persons that poses 
a low risk of tax evasion (referred to as exempt beneficial owners). 
See also section 1474(f), which provides authority to prescribe 
regulations or other guidance that may be necessary or appropriate to 
carry out the purposes of, and prevent the avoidance of FATCA.

    Question #3. Does the Department of the Treasury intend to 
interpret the income tax treaties before the Senate as the legal 
authority to force U.S. financial institutions to comply with the 
bilateral agreements to implement FATCA?

    Answer. U.S. financial institutions are not forced to comply with 
the bilateral agreements to implement FATCA. The United States 
Government must comply with its bilateral agreements, such as an IGA. 
As noted below, in answer to Questions 4 and 5, financial institutions 
already have statutory and regulatory obligations to report certain 
U.S.-source income information about nonresident accounts to the IRS, 
which exist independent of the IGAs. These obligations are not 
dependent on any interpretation of the tax treaties currently before 
the Senate. The reciprocal IGAs only obligate the IRS to exchange with 
a FATCA partner jurisdiction account information that the IRS already 
collects with respect to the tax residents of the FATCA partner 
country.

    Question #4. Where specifically in the treaties does the United 
States agree to mandate U.S. financial institutions to collect and 
report account information on a blanket basis (as opposed to requests 
to ``exchange'' tax data on individuals)?

    Answer. The U.S. treaties under consideration by the Senate do not 
mandate U.S. financial institutions to collect and report any account 
information on a blanket basis. Rather, under existing provisions of 
the Internal Revenue Code and the regulations thereunder, withholding 
agents, including U.S. financial institutions, have the obligation to 
report to the IRS information on certain amounts of U.S. source income 
paid to non-U.S. persons, as described in more detail in the response 
to question 5, below.
    The United States has authority to exchange the information that it 
collects from financial institutions with other jurisdictions under the 
tax information exchange provisions of most of its tax treaties, which 
receive Senate advice and consent to ratification, as well as pursuant 
to the bilateral agreements relating to the exchange of tax information 
(referred to as tax information exchange agreements, or TIEAs). The 
United States only enters into reciprocal IGAs with jurisdictions with 
which we already have a tax treaty or TIEA, and all reciprocal IGAs 
provide that any information provided by the IRS will be exchanged 
pursuant to that preexisting agreement.

    Question #5. Do you believe the Department of the Treasury already 
has sufficient statutory authority to issue regulations requiring U.S. 
financial institutions to collect and report the information described 
in the Inter Governmental Agreement to Implement FATCA; and if so, 
please cite and provide relevant text of the statues conferring such 
authority.

    Answer. The information that the United States would agree to 
exchange under the reciprocal version of the IGA differs in scope from 
the information that foreign governments would agree to provide to the 
IRS. In fact, the information specified to be exchanged by the IRS 
under the IGA is limited to the U.S.-source income information that 
U.S. financial institutions are required under existing regulations to 
report to the IRS about nonresident accounts.
    The reciprocal IGAs require the United States to collect and report 
the following with respect to financial accounts held by a resident of 
the IGA partner jurisdiction and maintained by a U.S. financial 
institution in the United States or by the U.S. branch of a foreign 
financial institution:
          1. Identifying information for the account holder, including 
        name, address, foreign taxpayer identifying number, and account 
        number;
          2. The gross amount of interest paid on an account that is a 
        depository account held by an individual, provided that more 
        than $10 of interest is paid to such account in any given 
        calendar year;
          3. The gross amount of U.S. source dividends paid or credited 
        to the account;
          4. The gross amount of other U.S. source income paid or 
        credited to the account, to the extent such income is subject 
        to reporting under chapter 3 of subtitle A or chapter 61 of 
        subtitle F of the U.S. Internal Revenue Code.
    All of the foregoing information is already required to be reported 
under existing statutory or regulatory provisions for nonresident 
accounts maintained in the United States. Financial institutions are 
required to collect information from nonresident alien account holders 
to establish the status of the account holder as a non-U.S. person 
under section 6049. This information is generally collected on a Form 
W-8BEN, which includes the name, address, country of tax residence of 
the account holder, and foreign taxpayer identifying number, if any. In 
addition, under sections 871(a) and 881(a), foreign persons are subject 
to a 30-percent tax on certain payments of U.S. source income, which 
includes, among other things, interest, dividends, and other similar 
types of investment income, unless the beneficial owner of the payment 
is entitled to a reduced rate of, or exemption from, withholding tax 
under domestic law, including an income tax treaty. This tax is 
collected by U.S. withholding agents (including financial institutions) 
under section 1441. Section 1461 and the regulations thereunder require 
withholding agents to report to the IRS any payments that are subject 
to withholding tax under section 1441, even if the tax is reduced or 
eliminated by another statutory provision or an income tax treaty. 
These amounts would include items 3 and 4 described above (U.S. source 
dividends, and other ``amounts subject to reporting under chapter 3 of 
subtitle A'').
    With respect to amounts described in item 2 above, bank deposit 
interest paid to nonresidents that is not effectively connected with 
the conduct of business within the United States is generally exempt 
from the section 1441 withholding tax. However, there is separate 
statutory authority that allows the reporting of such interest. Section 
6049(a) provides generally that every person who makes a payment of 
bank deposit interest aggregating $10 or more to any other person 
shall, unless an exception applies, report such payment to the IRS in 
accordance with the forms and regulations as prescribed by the 
Secretary of the Treasury. Section 6049(b)(2)(B)(ii) provides that the 
term ``interest,'' for purposes of application of section 6049(a), does 
not include, except to the extent otherwise provided in regulations, 
any amount described in section 6049(b)(5), which applies to certain 
payments of interest on deposits made to nonresident aliens and foreign 
corporations that are not effectively connected with the conduct of 
business within the United States. Sections 6049(b)(2)(B) and (b)(5) 
thus provide express authority for Treasury and the IRS to issue 
regulations requiring the reporting of bank deposit interest paid to 
nonresidents. The regulations issued pursuant to this authority at Reg. 
1.6049-5 and -8 require reporting with respect to amounts described in 
item 2, above.
                                 ______
                                 

             Responses of Thomas A. Barthold to Questions 
                  Submitted by Senator Robert Menendez

                                 ______
                                 

             Responses of Thomas A. Barthold to Questions 
                Submitted by Senator Benjamin L. Cardin

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