69–119 

110TH CONGRESS EXEC. REPT. " ! SENATE 2d Session 110–15 

PROTOCOL AMENDING 1980 TAX 

CONVENTION WITH CANADA 

SEPTEMBER 11, 2008.—Ordered to be printed 

Mr. DODD, from the Committee on Foreign Relations, 

submitted the following 

R E P O R T 

[To accompany Treaty Doc. 110–15] 

The Committee on Foreign Relations, to which was referred the 

Protocol Amending the Convention between the United States of 

America and Canada with Respect to Taxes on Income and on Capital done at Washington on September 26, 1980, as amended by the 

Protocols done on June 14, 1983, March 28, 1984, March 17, 1995, 

and July 29, 1997, signed on September 21, 2007, at Chelsea (the 

‘‘Protocol’’) (Treaty Doc. 110–15), having considered the same, reports favorably thereon with one declaration and one condition, 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 ............................................................................................ 6 

V. Implementing Legislation ............................................................................. 6 

VI. Committee Action .......................................................................................... 6 

VII. Committee Recommendation and Comments .............................................. 7 

VIII. Resolution of Advice and Consent to Ratification ....................................... 10 

IX. Annex I.—Technical Explanation ................................................................. 13 

X. Annex II.—Treaty Hearing of July 10, 2008 ............................................... 89 

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 Canada. Principally, the Protocol would amend the existing tax treaty with Canada (the ‘‘Treaty’’) in order to eliminate 

withholding taxes on cross-border interest payments, coordinate 

2 

1The 1980 Canadian Tax Treaty has been amended by protocols done on June 14, 1983 (Treaty Doc. 98–7), March 28, 1984 (Treaty Doc. 98–22), March 17, 1995 (Treaty Doc. 104–4), and 

July 29, 1997 (Treaty Doc. 105–29). 2The arbitration mechanism in the Canada Protocol is most like the mechanism found in the 

Germany Tax Treaty, Treaty Doc. 109–20, which is similarly limited in its application to certain 

articles of the treaty. 3 Referring to the arbitration method first introduced in the 1970 Collective Bargaining 

Agreement (CBA) of Major League Baseball and expanded in the 1973 CBA to include player 

salaries. 4 A taxpayer is referred to as a ‘‘concerned person’’ in the treaty. 

the tax treatment of contributions to, and other benefits of, pension 

funds for cross-border workers, and provide for mandatory arbitration of certain cases before the competent authorities of both countries. 

II. BACKGROUND

The United States has a tax treaty with Canada that is currently 

in force, which was concluded in 1980. This Protocol is the fifth 

protocol to the 1980 Treaty; it has been the subject of negotiations 

for approximately ten years.1 The Protocol was negotiated to address specific issues that have arisen in our tax treaty relations 

and changes in each country’s domestic law and tax treaty 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 July 10, 2008, which is reprinted in Annex I. In addition, the staff of the Joint Committee on Taxation prepared an 

analysis of the Protocol, Document JCX–57–08 (July 8, 2008), 

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. 

1. Arbitration 

Among the most important features of this new Protocol with 

Canada is a binding arbitration provision that would apply when 

the Canadian and U.S. competent authorities are unable to resolve 

a case in a timely fashion under the Mutual Agreement Procedure 

in the current tax treaty with Canada. See Article 21. This type of 

provision is a relatively recent innovation and has only been included in two other U.S. bilateral income tax treaties, both of 

which were approved by the Senate last year: a tax protocol with 

Germany and a tax treaty with Belgium.2 The arbitration procedure is sometimes referred to as ‘‘last best offer’’ arbitration or 

‘‘baseball arbitration’’ 3 because each of the competent authorities 

proposes one and only one figure for settlement and the arbitration 

board must select one of those figures as the award. The arbitration decision is binding on both countries if the decision is accepted 

by the taxpayer. The taxpayer,4 however, has the right to reject the 

decision and access, for example, the relevant country’s court system. See Article 21(7)(e). 

2. Interest 

The Protocol would eliminate withholding taxes on certain crossborder interest payments. See Article 6. This provision comes into 

effect with respect to interest paid to unrelated parties on the first 

3 

day of January of the year in which the proposed Protocol enters 

into force. The zero rate for interest paid to related persons would 

be phased in over a three-year period. See Article 27(3)(d). 

3. Dual-Resident Corporations 

The Protocol would address the issue of so-called ‘‘dual-resident 

corporations.’’ It provides that if such a company is created under 

the laws in force in one treaty country but not under the laws in 

force in the other treaty country, the company is deemed to be a 

resident only of the first treaty country. See Article 2(1). If that 

rule is inapplicable, the Protocol generally provides that the competent authorities of the United States and Canada shall endeavor 

to reach agreement on the treatment of such companies for purposes of the treaty. In the absence of such agreement, the company 

is not considered to be a resident of either treaty country for purposes of its claiming any benefits under the treaty. 

4. Permanent Establishment 

In general, U.S. bilateral tax treaties attempt to ensure that a 

person or entity is not subject to undue and overly burdensome taxation in instances in which the taxpayer has minimal contacts with 

the taxing jurisdiction. This is accomplished in the Treaty through 

provisions under which the United States and Canada agree not to 

tax business income derived from sources within either country by 

residents of the other country unless the business activities in the 

taxing country are substantial enough to constitute a permanent 

establishment. See Article VII(1) of the Treaty. A permanent establishment is generally defined as ‘‘a fixed place of business through 

which the business of a resident of a Contracting State is wholly 

or partly carried on.’’ See Article V(1) of the Canada Tax Treaty. 

Examples include a place of management, an office, branch, or factory. See Article V(2). 

The Protocol, however, would amend Article V of the existing 

treaty with Canada and effectively expand the definition of a permanent establishment in a way that would affect enterprises that 

provide services. See Article 3. Specifically, an enterprise of one 

country would be deemed to have a permanent establishment in 

the other country if either (a) services are performed by an individual who is present in the other country for at least 183 days 

during any 12-month period and more than 50 percent of the enterprise’s gross active business revenues during that time is income 

derived from those services or (b) the services are provided in the 

other country for at least 183 days during any 12-month period 

with respect to the same or a connected project for customers who 

are residents of that country or who have a permanent establishment there for which the services are provided. See Article 3(2). 

Thus, an enterprise that met either of these criteria would be 

deemed to have a permanent establishment in the treaty partner 

country, even if it did not have a fixed place of business in that 

country, and attributable business profits would be subject to tax 

by that country. 

As noted in relation to the Bulgaria Convention in Executive Report 110–16, the United States has included similar provisions in 

some of its tax treaties with developing nations, but this would be 

the first time that such a provision would be included in a tax treaVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00003 Fmt 6659 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
4 

5The provision effectively reverses the result of the Canadian Federal Court of Appeal decision in The Queen v. Dudney, 99 DTC 147 (T.C.C.C.), aff’d, 2000 DTC 6169 (F.C.A.), in which 

a U.S. independent contractor was held not to have a Canadian ‘‘fixed base’’ (which the court 

recognized to have substantially the same meaning as ‘‘permanent establishment’’), even though 

the contractor spent substantial time at his customer’s premises during the course of two consecutive calendar years. 

ty with a developed nation. The provision addresses an issue that 

has been the subject of litigation in Canada, and has the effect of 

reversing a case that effectively limited Canada’s taxing authority’s 

interpretation of ‘‘permanent establishment.’’5

This special rule presents a number of administrative and compliance challenges. For example, a number of the terms used in 

this rule, such as what constitutes ‘‘presence’’ or a ‘‘connected 

project’’ are ambiguous and require further clarification. In addition, when combined with Article XV of the Treaty, as amended by 

Article 10(2) of the Protocol, additional complexities arise. Article 

XV(1) of the Treaty, with certain exceptions, sets forth a general 

rule that if an employee who is a resident of one treaty country 

(the ‘‘residence country’’) is working in the other treaty country (the 

‘‘employment country’’), his or her salaries, wages, and other remuneration derived from the exercise of employment in that country 

may be taxed by that country (the employment country). Notwithstanding this general rule, Article XV(2) of the treaty provides that 

the remuneration derived by the employee from the exercise of employment in the employment country shall be taxed only by the residence country (and not the employment country) if (1) the employee’s remuneration does not exceed $10,000; or (2) the employee is 

present in the employment country for 183 days or less in any 12- 

month period commencing or ending in the taxable year concerned; 

the remuneration is not paid by, or on behalf of, a person who is 

a resident of the employment country; and the remuneration is not 

‘‘borne’’ by a permanent establishment in the employment country. 

It is this final requirement (that the remuneration must not be 

‘‘borne’’ by a permanent establishment that the employer has in the 

employment country), which interacts with the special rule in Article 3(2) of the Protocol in a way that is likely to create problems 

for some taxpayers. 

In other words, the salaries, wages, and other remuneration derived by an employee performing services through a permanent establishment arising under Article 3(2) of the Protocol would be subject, under Article XV of the Treaty to being taxed by the employment country, even if the other requirements of the exception in 

Article XV(2) had been met. Thus, the interaction of these two provisions increases the complexities associated with the special rule. 

For example, such a scenario would mean that an employer and 

the relevant employees would need to fulfill several tax-related obligations, including obtaining tax identification numbers and providing for the withholding of income taxes and other taxes as appropriate that would cover the period beginning on the first day 

such services were performed by such employee during the affected 

year, despite the fact that they may not know whether the enterprise will be deemed to have a permanent establishment under the 

treaty until perhaps 6 months into the relevant 12-month period, 

and will therefore be subject to various taxes, including employment taxes, by the employment country reaching back to the beginning of the relevant 12-month period. 

5 

Another aspect of the rule that would appear to be difficult to 

manage is that the 12-month period is not tied to a fiscal or calendar year. Also, it is necessary to determine whether customers 

in the employment country are residents or have a permanent establishment in that country. Some of the issues that may arise result from the fact that an enterprise with a deemed permanent establishment in another country that is not an actual fixed base is 

unlikely to have the infrastructure in that other country to do the 

things necessary to comply with the rules of the provision. For example, such an enterprise is unlikely to keep in the employment 

country a full set of financial records, or records tracking employees’ activities there. 

The committee asked the Treasury Department a number of 

questions regarding this provision in an attempt to gain greater insight about its operation. These questions and answers can be 

found in Annex II. 

Fiscally Transparent and Hybrid Entities 

Article 2(2) of the Protocol would amend Article IV of the existing 

treaty to include a new paragraph 6 and 7, setting forth specific 

rules for the treatment of certain income, profit, or gain derived 

through or paid by fiscally transparent entities. The new paragraph 6 would set forth a ‘‘positive’’ rule, which identifies scenarios 

in which ‘‘income, profit or gain shall be considered to be derived 

by a person who is a resident of a Contracting State.’’ The new 

paragraph 7 would set forth a ‘‘negative’’ rule intended to prevent 

the use of such entities to claim the benefits where the investors 

are not subject to tax on the income in their state of residence. In 

particular, paragraph 7 is aimed largely at curtailing the use of 

certain legal entity structures that include hybrid fiscally transparent entities, which, when combined with the selective use of 

debt and equity, may facilitate the allowance of either (1) duplicated interest deductions in the United States and Canada, or (2) 

a single, internally generated, interest deduction in one country 

without offsetting interest income in the other country. As noted by 

the Joint Committee on Taxation in its explanation of the Protocol, 

commentators have raised a question as to whether subparagraph 

7(b) is too broad, because it could prevent legitimate business 

structures that are not engaging in potentially abusive transactions 

from taking advantage of benefits that would otherwise be available to them under the treaty. 

The Treasury Department, in response to questions from the 

committee, noted as follows regarding subparagraph 7(b): 

Subparagraph 7(b) essentially denies benefits in cases in which the residence country treats a payment differently than the source country and 

other conditions are met. The rule is broader than an analogous rule in 

Treasury regulations issued pursuant to section 894 of the Internal Revenue Code. The Treasury Department is aware that the scope of subparagraph 7(b) is potentially overbroad, especially in the case of non-deductible 

payments. The Treasury Department has been discussing, and will continue 

to discuss with Canada, whether to address this issue. The Treasury Department does not contemplate incorporating such a rule in future tax treaties. 

Additional questions were asked by the committee of the Treasury Department regarding this provision. These questions and answers can be found in Annex II. 

6 

Pensions and Annuities 

The Protocol would amend Article XVIII of the existing treaty, 

mainly to address certain individual retirement accounts and crossborder pension contributions and benefits accruals. Many of the 

new rules are similar to those found in the U.S. Model Tax Treaty, 

but several reflect the uniquely large cross-border flow of personal 

services between Canada and the United States, including a large 

number of cross-border commuters. These rules are intended to remove barriers to the flow of personal services between the two 

countries that could otherwise result from discontinuities under the 

laws of each country regarding the deductibility of pension contributions and the taxation of a pension plan’s earnings and accretions in value. In addition, the Protocol would add a new provision 

to address the source of certain annuity or life insurance payments 

made by branches of insurance companies. 

Limitation on Benefits 

The Protocol would replace the Limitation on Benefits article in 

the existing treaty (Article XXIX A) with a new article that reflects 

the anti-treaty shopping provisions included in the U.S. Model 

treaty and more recent U.S. income tax treaties. The rules in the 

existing treaty are not reciprocal and can only be applied by the 

United States. The new rules are stronger and reciprocal. 

Exchange of Information 

The Protocol would replace Article XXVII of the existing treaty, 

which deals with the exchange of tax information, with an article 

on the same subject that is similar to what appears in the 2006 

U.S. Model Tax Treaty. The new rules generally provide that the 

two competent authorities will exchange such information as may 

be relevant in carrying out the provisions of the domestic laws of 

the United States and Canada concerning taxes to which the treaty 

applies, to the extent the taxation under those laws is not contrary 

to the treaty. 

IV. ENTRY INTO FORCE

The United States and Canada shall notify each other in writing 

through diplomatic channels when their respective applicable procedures for the entry into force of this Protocol have been satisfied. 

This Protocol shall enter into force on the date of the later of these 

notifications. The various provisions of this Protocol will have effect 

as described in paragraphs 2 and 3 of Article 27. 

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 Protocol on July 10, 

2008. Testimony was received from Mr. Michael Mundaca, Deputy 

Assistant Secretary (International), Office of Tax Policy, U.S. Department of the Treasury and Ms. Emily S. McMahon, Deputy 

7 

Chief of Staff to the Joint Committee on Taxation. A transcript of 

this hearing can be found in Annex II. 

On July 29, 2008, the committee considered the Protocol and ordered it favorably reported by voice vote, with a quorum present 

and without objection. 

VII. COMMITTEE RECOMMENDATION AND COMMENTS

The Committee on Foreign Relations believes that the Protocol 

will stimulate increased trade and investment, substantially deny 

treaty-shoppers the benefits of this tax treaty, and promote closer 

co-operation between the United States and Canada. 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. SPECIAL PERMANENT ESTABLISHMENT RULE FOR SERVICES

As discussed in Section III, the Protocol includes a special rule 

that would effectively expand the standard definition of a permanent establishment in a way that affects enterprises that provide 

services. This provision also appears in the Tax Convention with 

Bulgaria that is before the Senate, and presents a number of serious administrative and compliance challenges to service enterprises 

that may be subject to the rule. 

The Treasury Department has made clear in testimony before 

the committee that the inclusion of this provision in the Convention and the Tax Protocol with Canada ‘‘does not reflect a change 

in U.S. tax treaty policy, and inclusion of such a provision in the 

U.S. Model is not being considered.’’ The committee welcomes this 

statement and urges the Treasury Department to avoid including 

such a provision in future tax treaties, but particularly in treaties 

with developed nations for which there is no articulated rationale 

for its inclusion. 

In addition, the Treasury Department indicated that there have 

been ongoing discussions with Canada ‘‘regarding the interpretation and application of the new rule concerning the taxation of 

services’’ and that ‘‘additional guidance with respect to the services 

rule included in both the proposed Protocol with Canada and the 

Convention with Bulgaria is needed to provide more certainty to 

taxpayers.’’ In the committee’s view, such discussions are crucial, 

particularly given the significant cross-border trade with Canada 

and the impact that such an unwieldy rule can have on businesses 

operating in both countries. The committee urges the Treasury Department to produce guidance on the rule’s application, including 

ways in which enterprises might approach their compliance, as 

soon as is feasible and to keep the committee posted on its 

progress. 

B. ARBITRATION

Report on Arbitration 

The committee recognizes the potential value that the binding 

arbitration mechanism contained in the Protocol has with respect 

to the effective implementation and enforcement of the Tax Treaty 

with Canada and commends the Department’s work in its development. Under the current treaty, disputes between the competent 

8 

authorities have gone unresolved for extended periods of time, burdening taxpayers and encumbering capital that could be put to 

more productive use. Delays in resolving disputes can also have the 

consequence of slowing payments by taxpayers, thereby depriving 

the U.S. Treasury of revenue. The inclusion of such a provision is, 

however, a new development in tax treaties and thus, the committee has included a reporting requirement in the resolution of 

advice and consent that is intended to help the committee determine whether the mechanism is functioning as anticipated and 

hoped. 

The report required by the Resolution of advice and consent has 

two parts. The first part requires the Secretary of the Treasury to 

transmit to this committee, the Committee on Finance, and the 

Joint Committee on Taxation the texts of the rules of procedure 

that are ultimately developed and applicable to the arbitration 

boards established pursuant to the Canada, Germany, and Belgium 

tax treaties, including conflict of interest rules to be applied to 

members of the arbitration board. The second part requires specific 

data on the arbitrations conducted pursuant to the Canada, Germany, and Belgium tax treaties. This information, which will be 

provided by the Secretary of the Treasury on an annual basis for 

a total of six years, is designed to help the committee evaluate the 

operation of the mandatory arbitration mechanism set forth in the 

three tax treaties. Because this data is potentially subject to U.S. 

law that provides for the confidentiality of taxpayer returns and return information, the Resolution requires the report containing this 

data to be provided only to the Committee on Finance and to the 

Joint Committee on Taxation. The Resolution is itself intended to 

constitute a written request for taxpayer information in accordance 

with the requirements of 26 U.S.C. § 6103(f)(1), but as a matter of 

practice, the Treasury Department should advise the chairman of 

the Committee on Finance and the chairman of the Joint Committee on Taxation when the reporting requirement is initially triggered (60 days after a determination has been reached by an arbitration board in the tenth arbitration proceeding conducted pursuant to either this Protocol, the 2006 German Protocol, or the Belgium Convention) so that the chairmen can formalize the request 

in writing, in order to comply with taxpayer disclosure law. It is 

the committee’s expectation that the report will help to inform the 

Joint Committee on Taxation’s analysis of the operation of the arbitration mechanism, and that the analysis will then be shared with 

this committee in a manner consistent with U.S. taxpayer confidentiality law. 

Should this committee determine that it has a need to view the 

data contained in the report itself, it may avail itself of the statutory mechanism under 26 U.S.C. § 6103(f)(3). It should also be understood that the committee and the Joint Committee on Taxation 

may request further information, beyond that included in the report, if it is needed to evaluate the arbitration mechanism. 

Comments on Arbitration for the Future 

The committee made a number of comments regarding issues 

that might be addressed in future arbitration provisions by the 

Treasury Department in the committee’s Executive Report on the 

Protocol Amending the Tax Convention with Germany, which are 

9 

6 See Exec. Rept. 110–5 at pp. 7–9. 

equally relevant to the arbitration mechanism in this Protocol.6 In 

particular, the committee offered specific comments regarding 1) 

Taxpayer Input; 2) Treaty Interpretation; and 3) the Selection of 

Arbiters. 

In response to committee questions regarding why these comments were not reflected in this Protocol, the Treasury Department 

testified that the arbitration provision in the Protocol with Canada 

had already been negotiated at the time the committee provided its 

comments to the Department and thus, it was not possible to take 

them into account in this Protocol. The Treasury Department further indicated that ‘‘the committee’s concerns have been and will 

continue to be considered in any arbitration negotiations the Treasury Department conducts.’’ The committee expects that the next 

treaty with a mandatory arbitration mechanism will address the 

committee’s comments and concerns. 

C. FISCALLY TRANSPARENT AND HYBRID ENTITY PROVISIONS

As noted in Section III above, Article 2(2) of the Protocol would 

amend Article IV of the existing treaty to include a new paragraph 

6 and 7, setting forth specific rules for the treatment of certain income, profit, or gain derived through or paid by fiscally transparent 

entities. The new paragraph 7 is intended to prevent the use of fiscally transparent entities to claim the benefits when the investors 

are not subject to tax on the income in their state of residence. As 

discussed above and described at length in questions for the record 

included in Annex II, the scope of paragraph 7(b) is potentially 

overbroad, especially in the case of non-deductible payments, so 

that in some circumstances a legitimate business structure that is 

not engaging in potentially abusive transactions would be prevented from taking advantage of benefits that should be available 

to them under the treaty. The Treasury Department noted in testimony before the committee that it ‘‘has been discussing, and will 

continue to discuss with Canada, whether to address this issue. 

The Treasury Department does not contemplate incorporating such 

a rule in future tax treaties.’’ The committee welcomes this statement and urges the Treasury Department to address this issue 

with Canada as soon as possible. 

D. DUAL-RESIDENT CORPORATIONS

As noted in Section III above, the Protocol would address the 

issue of so-called ‘‘dual-resident corporations’’ by providing that if 

such a company is created under the laws in force in one treaty 

country but not under the laws in force in the other treaty country, 

the company is deemed to be a resident only of the first treaty 

country. See Article 2(1). If that rule is inapplicable, the Protocol 

generally provides that the competent authorities of the United 

States and Canada shall endeavor to reach agreement on the treatment of such companies for purposes of the treaty. In the absence 

of such agreement, the company is not considered to be a resident 

of either treaty country for purposes of its claiming any benefits 

under the treaty. 

The committee recognizes that the new rule is likely to be helpful 

in addressing abuse of the existing treaty by certain companies. 

10 

Nevertheless, the rule appears to have some drawbacks. For example, application of the dual-residency rule in the Protocol would not 

be equitable with respect to a corporation that was organized under 

the laws of the United States many years ago and has long since 

ceased to have significant contacts with the United States, but instead is managed and controlled in Canada. In response to questions from the committee on this point, the Treasury Department 

noted that it ‘‘[i]t has been a longstanding treaty policy of the 

United States to place significant weight on the place of incorporation when addressing questions of dual corporate residence. However, we have included in other agreements, for example in our 

agreement with the United Kingdom and the proposed Bulgaria 

and Iceland agreements, provisions directing the Competent Authorities to endeavor to determine for treaty purposes the residence 

of dual resident corporations.’’ The committee supports the Treasury Department’s efforts to cut down on treaty abuse, but recommends that when including such a rule in future, the Competent 

Authorities be afforded the discretion to override a strict application of the rule when the result would be inequitable. 

E. RESOLUTION

The committee has included in the resolutions of advice and consent one condition, which is a report on the arbitration mechanism 

in the Protocol and in the Belgium and German Tax treaties, which 

is discussed above, and one declaration, which is the same for each 

treaty and is discussed below. 

Declaration 

The committee has included a proposed declaration, which states 

that the Protocol is self-executing, as is the case generally with income tax treaties. The committee has in the past included such a 

statement in the committee’s report, but in light of the recent Supreme Court decision, Medellı ́n v. Texas, 128 S. Ct. 1346 (2008), 

the committee has 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. 

VIII. 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 AND A CONDITION 

The Senate advises and consents to the ratification of the Protocol Amending the Convention between the United States of 

America and Canada with Respect to Taxes on Income and on Capital done at Washington on September 26, 1980, as Amended by 

the Protocols done on June 14, 1983, March 28, 1984, March 17, 

1995, and July 29, 1997, signed on September 21, 2007, at Chelsea 

(the ‘‘Protocol’’) (Treaty Doc. 110–15), subject to the declaration of 

section 2 and the condition of section 3. 

SECTION 2. DECLARATION 

The advice and consent of the Senate under section 1 is subject 

to the following declaration: 

This Convention is self-executing. 

11 

SECTION 3. CONDITION 

The advice and consent of the Senate under section 1 is subject 

to the following condition: 

Report. 

1. Not later than two years from the date on which this Protocol 

enters into force and prior to the first arbitration conducted pursuant to the binding arbitration mechanism provided for in this Protocol, the Secretary of Treasury shall transmit the text of the rules 

of procedure applicable to arbitration boards, including conflict of 

interest rules to be applied to members of the arbitration board, to 

the committees on Finance and Foreign Relations of the Senate 

and the Joint Committee on Taxation. 

The Secretary of Treasury shall also, prior to the first arbitration 

conducted pursuant to the binding arbitration mechanism provided 

for in 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 (the ‘‘2006 German Protocol’’) (Treaty Doc. 109– 

20) and 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 (the ‘‘Belgium Convention’’) (Treaty Doc. 110–3), transmit the 

text of the rules of procedure applicable to the first arbitration 

board agreed to under each treaty to the committees on Finance 

and Foreign Relations of the Senate and the Joint Committee on 

Taxation. 

2. 60 days after a determination has been reached by an arbitration board in the tenth arbitration proceeding conducted pursuant 

to either this Protocol, the 2006 German Protocol, or the Belgium 

Convention, the Secretary of Treasury shall prepare and submit a 

detailed report to the Joint Committee on Taxation and the Committee on Finance of the Senate, subject to law relating to taxpayer 

confidentiality, regarding the operation and application of the arbitration mechanism contained in the aforementioned treaties. The 

report shall include the following information: 

I. The aggregate number, for each treaty, of cases pending 

on the respective dates of entry into force of this Protocol, the 

2006 German Protocol, or the Belgium Convention, along with 

the following additional information regarding these cases: 

a. The number of such cases by treaty article(s) at issue; 

b. The number of such cases that have been resolved by 

the competent authorities through a mutual agreement as 

of the date of the report; and 

c. 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 this Protocol, the 2006 German 

Protocol, or the Belgium Convention, with the following information regarding each and every case: 

a. The commencement date of the case for purposes of 

determining when arbitration is available; 

12 

b. Whether the adjustment triggering the case, if any, 

was made by the United States or the relevant treaty partner and which competent authority initiated the case; 

c. Which treaty the case relates to; 

d. The treaty article(s) at issue in the case; 

e. The date the case was resolved by the competent authorities through a mutual agreement, if so resolved; 

f. The date on which an arbitration proceeding commenced, if an arbitration proceeding commenced; and 

g. The date on which a determination was reached by 

the arbitration board, if a determination was reached, and 

an indication as to whether the board 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 

board pursuant to this Protocol, the 2006 German Protocol, or 

the Belgium Convention, the following information shall be included: 

a. An indication as to whether the determination of the 

arbitration board was accepted by each concerned person; 

b. 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; 

and 

c. The proposed resolutions (income, expense, or taxation) submitted by each competent authority to the arbitration board. 

3. The Secretary of Treasury shall, in addition, prepare and submit the detailed report described in 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 board, and noted as such in 

prior reports may be omitted. 

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IX. ANNEX I.—TECHNICAL EXPLANATION

TECHNICAL EXPLANATION OF THE PROTOCOL DONE AT CHELSEA ON

SEPTEMBER 21, 2007 AMENDING THE CONVENTION BETWEEN THE

UNITED STATES OF AMERICA AND CANADA WITH RESPECT TO TAXES

ON INCOME AND ON CAPITAL DONE AT WASHINGTON ON SEPTEMBER

26, 1980, AS AMENDED BY THE PROTOCOLS DONE ON JUNE 14, 1983, 

MARCH 28, 1994, MARCH 17, 1995, AND JULY 29, 1997

INTRODUCTION

This is a Technical Explanation of the Protocol signed at Chelsea 

on September 21, 2007 (the ‘‘Protocol’’), amending the Convention 

between the United States of America and Canada with Respect to 

Taxes on Income and on Capital done at Washington on September 

26, 1980, as amended by the Protocols done on June 14, 1983, 

March 28, 1994, March 17, 1995, and July 29, 1997 (the ‘‘existing 

Convention’’). The existing Convention as modified by the Protocol 

shall be referred to as the ‘‘Convention.’’ 

Negotiation of the Protocol took into account the U.S. Treasury 

Department’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. 

The Technical Explanation is an official United States guide to 

the Protocol. The Government of Canada has reviewed this document and subscribes to its contents. In the view of both governments, this document accurately reflects the policies behind particular Protocol provisions, as well as understandings reached with 

respect to the application and interpretation of the Protocol and the 

Convention. 

References made 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. The Technical Explanation is not intended to provide a complete guide to the existing Convention as 

amended by the Protocol. To the extent that the existing Convention has not been amended by the Protocol, the prior technical explanations of the Convention remain the official explanations. 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. 

On the date of signing of the Protocol, the United States and 

Canada exchanged two sets of diplomatic notes. Each of these notes 

sets forth provisions and understandings related to the Protocol 

and the Convention, and comprises an integral part of the overall 

agreement between the United States and Canada. The first note, 

the ‘‘Arbitration Note,’’ relates to the implementation of new paragraphs 6 and 7 of Article XXVI (Mutual Agreement Procedure), 

which provide for binding arbitration of certain disputes between 

the competent authorities. The second note, the ‘‘General Note,’’ reVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00013 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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lates more generally to issues of interpretation or application of 

various provisions of the Protocol. 

ARTICLE 1

Article 1 of the Protocol adds subparagraph 1(k) to Article III 

(General Definitions) to address the definition of ‘‘national’’ of a 

Contracting State as used in the Convention. The Contracting 

States recognize that Canadian tax law does not draw distinctions 

based on nationality as such. Nevertheless, at the request of the 

United States, the definition was added and contains references to 

both citizenship and nationality. The definition includes any individual possessing the citizenship or nationality of a Contracting 

State and any legal person, partnership or association whose status 

is determined by reference to the laws in force in a Contracting 

State. The existing Convention contains one reference to the term 

‘‘national’’ in paragraph 1 of Article XXVI (Mutual Agreement Procedure). The Protocol adds another reference in paragraph 1 of Article XXV (Non-Discrimination) to ensure that nationals of the 

United States are covered by the non-discrimination provisions of 

the Convention. The definition added by the Protocol is consistent 

with the definition provided in other U.S. tax treaties. 

The General Note provides that for purposes of paragraph 2 of 

Article III, as regards the application at any time of the Convention, any term not defined in the Convention shall, unless the context otherwise requires or the competent authorities otherwise 

agree to a common meaning pursuant to Article XXVI (Mutual 

Agreement Procedure), have the meaning which it has at that time 

under the law of that State for the purposes of the taxes to which 

the Convention apply, any meaning under the applicable tax laws 

of that State prevailing over a meaning given to the term under 

other laws of that State. 

ARTICLE 2

Article 2 of the Protocol replaces paragraph 3 of Article IV (Residence) of the existing Convention to address the treatment of socalled dual resident companies. Article 2 of the Protocol also adds 

new paragraphs 6 and 7 to Article IV to determine whether income 

is considered to be derived by a resident of a Contracting State 

when such income is derived through a fiscally transparent entity. 

Paragraph 3 of Article IV—Dual resident companies 

Paragraph 3, which addresses companies that are otherwise considered resident in each of the Contracting States, is replaced. The 

provisions of paragraph 3, and the date upon which these provisions are effective, are consistent with an understanding reached 

between the United States and Canada on September 18, 2000, to 

clarify the residence of a company under the Convention when the 

company has engaged in a so-called corporate ‘‘continuance’’ transaction. The paragraph applies only where, by reason of the rules 

set forth in paragraph 1 of Article IV (Residence), a company is a 

resident of both Contracting States. 

Subparagraph 3(a) provides a rule to address the situation when 

a company is a resident of both Contracting States but is created 

under the laws in force in only one of the Contracting States. In 

15 

such a case, the rule provides that the company is a resident only 

of the Contracting State under which it is created. For example, if 

a company is incorporated in the United States but the company 

is also otherwise considered a resident of Canada because the company is managed in Canada, subparagraph 3(a) provides that the 

company shall be considered a resident only of the United States 

for purposes of the Convention. Subparagraph 3(a) is intended to 

operate in a manner similar to the first sentence of former paragraph 3. However, subparagraph 3(a) clarifies that such a company 

must be considered created in only one of the Contracting States 

to fall within the scope of subparagraph 3(a). In some cases, a company may engage in a corporate continuance transaction and retain 

its charter in the Contracting State from which it continued, while 

also being considered as created in the State to which the company 

continued. In such cases, the provisions of subparagraph 3(a) shall 

not apply because the company would be considered created in both 

of the Contracting States. 

Subparagraph 3(b) addresses all cases involving a dual resident 

company that are not addressed in subparagraph 3(a). Thus, subparagraph 3(b) applies to continuance transactions occurring between the Contracting States if, as a result, a company otherwise 

would be considered created under the laws of each Contracting 

State, e.g., because the corporation retained its charter in the first 

State. Subparagraph 3(b) would also address so-called serial continuance transactions where, for example, a company continues 

from one of the Contracting States to a third country and then continues into the other Contracting State without having ceased to be 

treated as resident in the first Contracting State. 

Subparagraph 3(b) provides that if a company is considered to be 

a resident of both Contracting States, and the residence of such 

company is not resolved by subparagraph 3(a), then the competent 

authorities of the Contracting States shall endeavor to settle the 

question of residency by a mutual agreement procedure and determine the mode of application of the Convention to such company. 

Subparagraph 3(b) also provides that in the absence of such agreement, the company shall not be considered a resident of either Contracting State for purposes of claiming any benefits under the Convention. 

Paragraphs 6 and 7 of Article IV—income, profit, or gain derived 

through fiscally transparent entities 

New paragraphs 6 and 7 are added to Article IV to provide specific rules for the treatment of amounts of income, profit or gain derived through or paid by fiscally transparent entities such as partnerships and certain trusts. Fiscally transparent entities, as explained more fully below, are in general entities the income of 

which is taxed at the beneficiary, member, or participant level. Entities that are subject to tax, but with respect to which tax may be 

relieved under an integrated system, are not considered fiscally 

transparent entities. Entities that are fiscally transparent for U.S. 

tax purposes include partnerships, common investment trusts 

under section 584, grantor trusts, and business entities such as a 

limited liability company (‘‘LLC’’) that is treated as a partnership 

or is disregarded as an entity separate from its owner for U.S. tax 

16 

purposes. Entities falling within this description in Canada are (except to the extent the law provides otherwise) partnerships and 

what are known as ‘‘bare’’ trusts. 

United States tax law also considers a corporation that has made 

a valid election to be taxed under Subchapter S of Chapter 1 of the 

Internal Revenue Code (an ‘‘S corporation’’) to be fiscally transparent within the meaning explained below. Thus, if a U.S. resident derives income from Canada through an S corporation, the 

U.S. resident will under new paragraph 6 be considered for purposes of the Convention as the person who derived the income. Exceptionally, because Canada will ordinarily accept that an S corporation is itself resident in the United States for purposes of the 

Convention, Canada will allow benefits under the Convention to 

the S corporation in its own right. In a reverse case, however—that 

is, where the S corporation is owned by a resident of Canada and 

has U. S.-source income, profits or gains—the Canadian resident 

will not be considered as deriving the income by virtue of subparagraph 7 (a) as Canada does not see the S corporation as fiscally 

transparent. 

Under both paragraph 6 and paragraph 7, it is relevant whether 

the treatment of an amount of income, profit or gain derived by a 

person through an entity under the tax law of the residence State 

is ‘‘the same as its treatment would be if that amount had been derived directly.’’ For purposes of paragraphs 6 and 7, whether the 

treatment of an amount derived by a person through an entity 

under the tax law of the residence State is the same as its treatment would be if that amount had been derived directly by that 

person shall be determined in accordance with the principles set 

forth in Code section 894 and the regulations under that section 

concerning whether an entity will be treated as fiscally transparent 

with respect to an item of income received by the entity. Treas. 

Reg. section 1.894–1(d)(3)(iii) provides that an entity will be fiscally 

transparent under the laws of an interest holder’s jurisdiction with 

respect to an item of income to the extent that the laws of that jurisdiction require the interest holder resident in that jurisdiction to 

separately take into account on a current basis the interest holder’s 

respective share of the item of income paid to the entity, whether 

or not distributed to the interest holder, and the character and 

source of the item in the hands of the interest holder are determined as if such item were realized directly from the source from 

which realized by the entity. Although Canada does not have analogous provisions in its domestic law, it is anticipated that principles comparable to those described above will apply. 

Paragraph 6 

Under paragraph 6, an amount of income, profit or gain is considered to be derived by a resident of a Contracting State (residence State) if 1) the amount is derived by that person through an 

entity (other than an entity that is a resident of the other Contracting State (source State), and 2) by reason of that entity being 

considered fiscally transparent under the laws of the residence 

State, the treatment of the amount under the tax law of the residence State is the same as its treatment would be if that amount 

17 

had been derived directly by that person. These two requirements 

are set forth in subparagraphs 6(a) and 6(b), respectively. 

For example, if a U.S. resident owns a French entity that earns 

Canadian-source dividends and the entity is considered fiscally 

transparent under U.S. tax law, the U.S. resident is considered to 

derive the Canadian-source dividends for purposes of Article IV 

(and thus, the dividends are considered as being ‘‘paid to’’ the resident) because the U.S. resident is considered under the tax law of 

the United States to have derived the dividend through the French 

entity and, because the entity is treated as fiscally transparent 

under U.S. tax law, the treatment of the income under U.S. tax law 

is the same as its treatment would be if that amount had been derived directly by the U.S. resident. This result obtains even if the 

French entity is viewed differently under the tax laws of Canada 

or of France (i.e., the French entity is treated under Canadian law 

or under French tax law as not fiscally transparent). 

Similarly, if a Canadian resident derives U. S.-source income, 

profit or gain through an entity created under Canadian law that 

is considered a partnership for Canadian tax purposes but a corporation for U.S. tax purposes, U. S.-source income, profit or gain 

derived through such entity by the Canadian resident will be considered to be derived by the Canadian resident in considering the 

application of the Convention. 

Application of paragraph 6 and related treaty provisions by Canada 

In determining the entitlement of a resident of the United States 

to the benefits of the Convention, Canada shall apply the Convention within its own legal framework. 

For example, assume that from the perspective of Canadian law 

an amount of income is seen as being paid from a source in Canada 

to USLLC, an entity that is entirely owned by U.S. persons and is 

fiscally transparent for U.S. tax purposes, but that Canada considers a corporation and, thus, under Canadian law, a taxpayer in 

its own right. Since USLLC is not itself taxable in the United 

States, it is not considered to be a U.S. resident under the Convention; but for new paragraph 6 Canada would not apply the Convention in taxing the income. 

If new paragraph 6 applies in respect of an amount of income, 

profit or gain, such amount is considered as having been derived 

by one or more U.S. resident shareholders of USLLC, and Canada 

shall grant benefits of the Convention to the payment to USLLC 

and eliminate or reduce Canadian tax as provided in the Convention. The effect of the rule is to suppress Canadian taxation of 

USLLC to give effect to the benefits available under the Convention to the U.S. residents in respect of the particular amount of income, profit or gain. 

However, for Canadian tax purposes, USLLC remains the only 

‘‘visible’’ taxpayer in relation to this amount. In other words, the 

Canadian tax treatment of this taxpayer (USLLC) is modified because of the entitlement of its U.S. resident shareholders to benefits under the Convention, but this does not alter USLLC’s status 

under Canadian law. Canada does not, for example, treat USLLC 

as though it did not exist, substituting the shareholders for it in 

the role of taxpayer under Canada’s system. 

18 

Some of the implications of this are as follows. First, Canada will 

not require the shareholders of USLLC to file Canadian tax returns 

in respect of income that benefits from new paragraph 6. Instead, 

USLLC itself will file a Canadian tax return in which it will claim 

the benefit of the paragraph and supply any documentation required to support the claim. (The Canada Revenue Agency will supply additional practical guidance in this regard, including instructions for seeking to establish entitlement to Convention benefits in 

advance of payment.) Second, as is explained in greater detail 

below, if the income in question is business profits, it will be necessary to determine whether the income was earned through a permanent establishment in Canada. This determination will be based 

on the presence and activities in Canada of USLLC itself, not of its 

shareholders acting in their own right. 

Determination of the existence of a permanent establishment from 

the business activities of a fiscally transparent entity 

New paragraph 6 applies not only in respect of amounts of dividends, interest and royalties, but also profit (business income), 

gains and other income. It may thus be relevant in cases where a 

resident of one Contracting State carries on business in the other 

State through an entity that has a different characterization in 

each of the two Contracting States. 

Application of new paragraph 6 and the provisions of Article V 

(Permanent Establishment) by CanadaAssume, for instance, that a 

resident of the United States is part owner of a U.S. limited liability company (USLLC) that is treated in the United States as a fiscally transparent entity, but in Canada as a corporation. Assume 

one of the other two shareholders of USLLC is resident in a country that does not have a tax treaty with Canada and that the remaining shareholder is resident in a country with which Canada 

does have a tax treaty, but that the treaty does not include a provision analogous to paragraph 6. 

Assume further that USLLC carries on business in Canada, but 

does not do so through a permanent establishment there. (Note 

that from the Canadian perspective, the presence or absence of a 

permanent establishment is evaluated with respect to USLLC only, 

which Canada sees as a potentially taxable entity in its own right.) 

Regarding Canada’s application of the provisions of the Convention, 

the portion of USLLC’s profits that belongs to the U.S. resident 

shareholder will not be taxable in Canada, provided that the U.S. 

resident meets the Convention’s limitation on benefits provisions. 

Under paragraph 6, that portion is seen as having been derived by 

the U.S. resident shareholder, who is entitled to rely on Article VII 

(Business Profits). The balance of USLLC’s profits will, however, 

remain taxable in Canada. Since USLLC is not itself resident in 

the United States for purposes of the Convention, in respect of that 

portion of its profits that is not considered to have been derived by 

a U.S. resident (or a resident of another country whose treaty with 

Canada includes a rule comparable to paragraph 6) it is not relevant whether or not it has a permanent establishment in Canada. 

Another example would be the situation where a USLLC that is 

wholly owned by a resident of the U.S. carries on business in Canada through a permanent establishment. If the USLLC is fiscally 

19 

transparent for U.S. tax purposes (and therefore, the conditions for 

the application of paragraph 6 are satisfied) then the USLLC’s 

profits will be treated as having been derived by its U.S. resident 

owner inclusive of all attributes of that income (e.g., such as having 

been earned through a permanent establishment). However, since 

the USLLC remains the only ‘‘visible’’ taxpayer for Canadian tax 

purposes, it is the USLLC, and not the U.S. shareholder, that is 

subject to tax on the profits that are attributable to the permanent 

establishment. 

Application of new paragraph 6 and the provisions of Article V 

(Permanent Establishment) by the United States 

It should be noted that in the situation where a person is considered to derive income through an entity, the United States looks 

in addition to such person’s activities in order to determine whether he has a permanent establishment. Assume that a Canadian 

resident and a resident in a country that does not have a tax treaty 

with the United States are owners of CanLP. Assume further that 

Can LP is an entity that is considered fiscally transparent for Canadian tax purposes but is not considered fiscally transparent for 

U.S. tax purposes, and that CanLP carries on business in the 

United States. If CanLP carries on the business through a permanent establishment, that permanent establishment may be attributed to the partners. Moreover, in determining whether there is a 

permanent establishment, the activities of both the entity and its 

partners will be considered. If CanLP does not carry on the business through a permanent establishment, the Canadian resident, 

who derives income through the partnership, may claim the benefits of Article VII (Business Profits) of the Convention with respect 

to such income, assuming that the income is not otherwise attributable to a permanent establishment of the partner. In any case, 

the third country partner cannot claim the benefits of Article VII 

of the Convention between the United States and Canada. 

Paragraph 7 

Paragraph 7 addresses situations where an item of income, profit 

or gain is considered not to be paid to or derived by a person who 

is a resident of a Contracting State. The paragraph is divided into 

two subparagraphs. 

Under subparagraph 7(a), an amount of income, profit or gain is 

considered not to be paid to or derived by a person who is a resident of a Contracting State (the residence State) if (1) the other 

Contracting State (the source State) views the person as deriving 

the amount through an entity that is not a resident of the residence State, and (2) by reason of the entity not being treated as 

fiscally transparent under the laws of the residence State, the 

treatment of the amount under the tax law of the residence State 

is not the same as its treatment would be if that amount had been 

derived directly by the person. 

For example, assume USCo, a company resident in the United 

States, is a part owner of CanLP, an entity that is considered fiscally transparent for Canadian tax purposes, but is not considered 

fiscally transparent for U.S. tax purposes. CanLP receives a dividend from a Canadian company in which it owns stock. Under CaVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00019 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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nadian tax law USCo is viewed as deriving a Canadian-source dividend through CanLP. For U.S. tax purposes, CanLP, and not 

USCo, is viewed as deriving the dividend. Because the treatment 

of the dividend under U.S. tax law in this case is not the same as 

the treatment under U.S. law if USCo derived the dividend directly, subparagraph 7(a) provides that USCo will not be considered as having derived the dividend. The result would be the same 

if CanLP were a third-country entity that was viewed by the 

United States as not fiscally transparent, but was viewed by Canada as fiscally transparent. Similarly, income from U.S. sources received by an entity organized under the laws of the United States 

that is treated for Canadian tax purposes as a corporation and is 

owned by shareholders who are residents of Canada is not considered derived by the shareholders of that U.S. entity even if, under 

U.S. tax law, the entity is treated as fiscally transparent. 

Subparagraph 7(b) provides that an amount of income, profit or 

gain is not considered to be paid to or derived by a person who is 

a resident of a Contracting State (the residence State) where the 

person is considered under the tax law of the other Contracting 

State (the source State) to have received the amount from an entity 

that is a resident of that other State (the source State), but by reason of the entity being treated as fiscally transparent under the 

laws of the Contracting State of which the person is resident (the 

residence State), the treatment of such amount under the tax law 

of that State (the residence State) is not the same as the treatment 

would be if that entity were not treated as fiscally transparent 

under the laws of that State (the residence State). 

That is, under subparagraph 7(b), an amount of income, profit or 

gain is not considered to be paid to or derived by a resident of a 

Contracting State (the residence State) if: (1) the other Contracting 

State (the source State) views such person as receiving the amount 

from an entity resident in the source State; (2) the entity is viewed 

as fiscally transparent under the laws of the residence State; and 

(3) by reason of the entity being treated as fiscally transparent 

under the laws of the residence State, the treatment of the amount 

received by that person under the tax law of the residence State 

is not the same as its treatment would be if the entity were not 

treated as fiscally transparent under the laws of the residence 

State. 

For example, assume that USCo, a company resident in the 

United States is the sole owner of CanCo, an entity that is considered under Canadian tax law to be a corporation that is resident 

in Canada but is considered under U.S. tax law to be disregarded 

as an entity separate from its owner. Assume further that USCo 

is considered under Canadian tax law to have received a dividend 

from CanCo. 

In such a case, Canada, the source State, views USCo as receiving income (i.e., a dividend) from a corporation that is a resident 

of Canada (CanCo), CanCo is viewed as fiscally transparent under 

the laws of the United States, the residence State, and by reason 

of CanCo being disregarded under U.S. tax law, the treatment 

under U.S. tax law of the payment is not the same as its treatment 

would be if the entity were regarded as a corporation under U.S. 

tax law. That is, the payment is disregarded for U.S. tax purposes, 

21 

whereas if U.S. tax law regarded CanCo as a corporation, the payment would be treated as a dividend. Therefore, subparagraph 7(b) 

would apply to provide that the income is not considered to be paid 

to or derived by USCo. 

The same result obtains if, in the above example, USCo is considered under Canadian tax law to have received an interest or royalty payment (instead of a dividend) from CanCo. Under U.S. law, 

because CanCo is disregarded as an entity separate from its owner, 

the payment is disregarded, whereas if CanCo were treated as not 

fiscally transparent, the payment would be treated as interest or 

a royalty, as the case may be. Therefore, subparagraph 7(b) would 

apply to provide that such amount is not considered to be paid to 

or derived by USCo. 

The application of subparagraph 7(b) differs if, in the above example, USCo (as well as other persons) are owners of CanCo, a Canadian entity that is considered under Canadian tax law to be a 

corporation that is resident in Canada but is considered under U.S. 

tax law to be a partnership (as opposed to being disregarded). Assume that USCo is considered under Canadian tax law to have received a dividend from CanCo. Such payment is viewed under Canadian tax law as a dividend, but under U.S. tax law is viewed as 

a partnership distribution. In such a case, Canada views USCo as 

receiving income (i.e., a dividend) from an entity that is a resident 

of Canada (CanCo), CanCo is viewed as fiscally transparent under 

the laws of the United States, the residence State, and by reason 

of CanCo being treated as a partnership under U.S. tax law, the 

treatment under U.S. tax law of the payment (as a partnership distribution) is not the same as the treatment would be if CanCo were 

not fiscally transparent under U.S. tax law (as a dividend). As a 

result, subparagraph 7(b) would apply to provide that such amount 

is not considered paid to or derived by the U.S. resident. 

As another example, assume that CanCo, a company resident in 

Canada, is the owner of USLP, an entity that is considered under 

U.S. tax law (by virtue of an election) to be a corporation resident 

in the United States, but that is considered under Canadian tax 

law to be a branch of CanCo. Assume further that CanCo is considered under U.S. tax law to have received a dividend from USLP. 

In this case, the United States views CanCo as receiving income 

(i.e., a dividend) from an entity that is resident in the United 

States (USLP), but by reason of USLP being a branch under Canadian tax law, the treatment under Canadian tax law of the payment is not the same as its treatment would be if USLP were a 

company under Canadian tax law. That is, the payment is treated 

as a branch remittance for Canadian tax purposes, whereas if Canadian tax law regarded USLP as a corporation, the payment 

would be treated as a dividend. Therefore, subparagraph 7(b) 

would apply to provide that the income is not considered to be paid 

to or derived by CanCo. The same result would obtain in the case 

of interest or royalties paid by USLP to CanCo. 

Paragraphs 6 and 7 apply to determine whether an amount is 

considered to be derived by (or paid to) a person who is a resident 

of Canada or the United States. If, as a result of paragraph 7, a 

person is not considered to have derived or received an amount of 

income, profit or gain, that person shall not be entitled to the beneVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00021 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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fits of the Convention with respect to such amount. Additionally, 

for purposes of application of the Convention by the United States, 

the treatment of such payments under Code section 894(c) and the 

regulations thereunder would not be relevant. 

New paragraphs 6 and 7 are not an exception to the saving 

clause of paragraph 2 of Article XXIX (Miscellaneous Rules). Accordingly, subparagraph 7(b) does not prevent a Contracting State 

from taxing an entity that is treated as a resident of that State 

under its tax law. For example, if a U.S. partnership with members 

who are residents of Canada elects to be taxed as a corporation for 

U.S. tax purposes, the United States will tax that partnership on 

its worldwide income on a net basis, even if Canada views the partnership as fiscally transparent. 

Interaction of paragraphs 6 and 7 with the determination of ‘‘beneficial ownership’’ 

With respect to payments of income, profits or gain arising in a 

Contracting State and derived directly by a resident of the other 

Contracting State (and not through a fiscally transparent entity), 

the term ‘‘beneficial owner’’ is defined under the internal law of the 

country imposing tax (i.e., the source State). Thus, if the payment 

arising in a Contracting State is derived by a resident of the other 

State who under the laws of the first-mentioned State is determined to be a nominee or agent acting on behalf of a person that 

is not a resident of that other State, the payment will not be entitled to the benefits of the Convention. However, payments arising 

in a Contracting State and derived by a nominee on behalf of a 

resident of that other State would be entitled to benefits. These 

limitations are confirmed by paragraph 12 of the Commentary to 

Article 10 of the OECD Model. 

Special rules apply in the case of income, profits or gains derived 

through a fiscally transparent entity, as described in new paragraph 6 of Article IV. Residence State principles determine who derives the income, profits or gains, to assure that the income, profits 

or gains for which the source State grants benefits of the Convention will be taken into account for tax purposes by a resident of the 

residence State. Source country principles of beneficial ownership 

apply to determine whether the person who derives the income, 

profits or gains, or another resident of the other Contracting State, 

is the beneficial owner of the income, profits or gains. The source 

State may conclude that the person who derives the income, profits 

or gains in the residence State is a mere nominee, agent, conduit, 

etc., for a third country resident and deny benefits of the Convention. If the person who derives the income, profits or gains under 

paragraph 6 of Article IV would not be treated under the source 

State’s principles for determining beneficial ownership as a nominee, agent, custodian, conduit, etc., that person will be treated as 

the beneficial owner of the income, profits or gains for purposes of 

the Convention. 

Assume, for instance, that interest arising in the United States 

is paid to CanLP, an entity established in Canada which is treated 

as fiscally transparent for Canadian tax purposes but is treated as 

a company for U.S. tax purposes. CanCo, a company incorporated 

in Canada, is the sole interest holder in CanLP. Paragraph 6 of ArVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00022 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
23 

ticle IV provides that CanCo derives the interest. However, if 

under the laws of the United States regarding payments to nominees, agents, custodians and conduits, CanCo is found be a nominee, agent, custodian or conduit for a person who is not a resident 

of Canada, CanCo will not be considered the beneficial owner of the 

interest and will not be entitled to the benefits of Article XI with 

respect to such interest. The payment may be entitled to benefits, 

however, if CanCo is found to be a nominee, agent, custodian or 

conduit for a person who is a resident of Canada. 

With respect to Canadian-source income, profit or gains, beneficial ownership is to be determined under Canadian law. For example, assume that LLC, an entity that is treated as fiscally transparent for U.S. tax purposes, but as a corporation for Canadian tax 

purposes, is owned by USCo, a U.S. resident company. LLC receives Canadian-source income. The question of the beneficial ownership of the income received by LLC is determined under Canadian law. If LLC is considered the beneficial owner of the income 

under Canadian law, paragraph 6 shall apply to extend benefits of 

the Convention to the income received by LLC to the extent that 

the Canadian-source income is derived by U.S. resident members 

of LLC. 

ARTICLE 3

Article 3 of the Protocol amends Article V (Permanent Establishment) of the Convention. Paragraph 1 of Article 3 of the Protocol 

adds a reference in Paragraph 6 of Article IV to new paragraph 9 

of Article V. Paragraph 2 of Article 3 of the Protocol sets forth new 

paragraphs 9 and 10 of Article V. 

Paragraph 9 of Article V 

New paragraph 9 provides a special rule (subject to the provisions of paragraph 3) for an enterprise of a Contracting State that 

provides services in the other Contracting State, but that does not 

have a permanent establishment by virtue of the preceding paragraphs of the Article. If (and only if) such an enterprise meets either of two tests as provided in subparagraphs 9(a) and 9(b), the 

enterprise will be deemed to provide those services through a permanent establishment in the other State. 

The first test as provided in subparagraph 9(a) has two parts. 

First, the services must be performed in the other State by an individual who is present in that other State for a period or periods 

aggregating 183 days or more in any twelve-month period. Second, 

during that period or periods, more than 50 percent of the gross active business revenues of the enterprise (including revenue from active business activities unrelated to the provision of services) must 

consist of income derived from the services performed in that State 

by that individual. If the enterprise meets both of these tests, the 

enterprise will be deemed to provide the services through a permanent establishment. This test is employed to determine whether an 

enterprise is deemed to have a permanent establishment by virtue 

of the presence of a single individual (i.e., a natural person). 

For the purposes of subparagraph 9(a), the term ‘‘gross active 

business revenues’’ shall mean the gross revenues attributable to 

active business activities that the enterprise has charged or should 

24 

charge for its active business activities, regardless of when the actual billing will occur or of domestic law rules concerning when 

such revenues should be taken into account for tax purposes. Such 

active business activities are not restricted to the activities related 

to the provision of services. However, the term does not include income from passive investment activities. 

As an example of the application of subparagraph 9(a), assume 

that Mr. X, an individual resident in the United States, is one of 

the two shareholders and employees of USCo, a company resident 

in the United States that provides engineering services. During the 

12-month period beginning December 20 of Year 1 and ending December 19 of Year 2, Mr. X is present in Canada for periods totaling 190 days, and during those periods, 70 percent of all of the 

gross active business revenues of USCo attributable to business activities are derived from the services that Mr. X performs in Canada. Because both of the criteria of subparagraph 9(a) are satisfied, 

USCo will be deemed to have a permanent establishment in Canada by virtue of that subparagraph. 

The second test as provided in subparagraph 9(b) provides that 

an enterprise will have a permanent establishment if the services 

are provided in the other State for an aggregate of 183 days or 

more in any twelve-month period with respect to the same or connected projects for customers who either are residents of the other 

State or maintain a permanent establishment in the other State 

with respect to which the services are provided. The various conditions that have to be satisfied in order for subparagraph 9(b) to 

have application are described in detail below. 

In addition to meeting the 183-day threshold, the services must 

be provided for customers who either are residents of the other 

State or maintain a permanent establishment in that State. The intent of this requirement is to reinforce the concept that unless 

there is a customer in the other State, such enterprise will not be 

deemed as participating sufficiently in the economic life of that 

other State to warrant being deemed to have a permanent establishment. 

Assume for example, that CanCo, a Canadian company, wishes 

to acquire USCo, a company in the United States. In preparation 

for the acquisition, CanCo hires Canlaw, a Canadian law firm, to 

conduct a due diligence evaluation of USCo’s legal and financial 

standing in the United States. Canlaw sends a staff attorney to the 

United States to perform the due diligence analysis of USCo. That 

attorney is present and working in the United States for greater 

than 183 days. If the remuneration paid to Canlaw for the attorney’s services does not constitute more than 50 percent of Canlaw’s 

gross active business revenues for the period during which the attorney is present in the United States, Canlaw will not be deemed 

to provide the services through a permanent establishment in the 

United States by virtue of subparagraph 9(a). Additionally, because 

the services are being provided for a customer (CanCo) who neither 

is a resident of the United States nor maintains a permanent establishment in the United States to which the services are provided, Canlaw will also not have a permanent establishment in the 

United States by virtue of subparagraph 9(b). 

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Paragraph 9 applies only to the provision of services, and only 

to services provided by an enterprise to third parties. Thus, the 

provision does not have the effect of deeming an enterprise to have 

a permanent establishment merely because services are provided to 

that enterprise. Paragraph 9 only applies to services that are performed or provided by an enterprise of a Contracting State within 

the other Contracting State. It is therefore not sufficient that the 

relevant services be merely furnished to a resident of the other 

Contracting State. Where, for example, an enterprise provides customer support or other services by telephone or computer to customers located in the other State, those would not be covered by 

paragraph 9 because they are not performed or provided by that 

enterprise within the other State. Another example would be that 

of an architect who is hired to design blueprints for the construction of a building in the other State. As part of completing the 

project, the architect must make site visits to that other State, and 

his days of presence there would be counted for purposes of determining whether the 183-day threshold is satisfied. However, the 

days that the architect spends working on the blueprint in his 

home office shall not count for purposes of the 183-day threshold, 

because the architect is not performing or providing those services 

within the other State. 

For purposes of determining whether the time threshold has 

been met, subparagraph 9(b) permits the aggregation of services 

that are provided with respect to connected projects. Paragraph 2 

of the General Note provides that for purposes of subparagraph 

9(b), projects shall be considered to be connected if they constitute 

a coherent whole, commercially and geographically. The determination of whether projects are connected should be determined from 

the point of view of the enterprise (not that of the customer), and 

will depend on the facts and circumstances of each case. In determining the existence of commercial coherence, factors that would 

be relevant include: 1) whether the projects would, in the absence 

of tax planning considerations, have been concluded pursuant to a 

single contract; 2) whether the nature of the work involved under 

different projects is the same; and 3) whether the same individuals 

are providing the services under the different projects. Whether the 

work provided is covered by one or multiple contracts may be relevant, but not determinative, in finding that projects are commercially coherent. 

The aggregation rule addresses, for example, potentially abusive 

situations in which work has been artificially divided into separate 

components in order to avoid meeting the 183-day threshold. Assume for example, that a technology consultant has been hired to 

install a new computer system for a company in the other country. 

The work will take ten months to complete. However, the consultant purports to divide the work into two five-month projects with 

the intention of circumventing the rule in subparagraph 9(b). In 

such case, even if the two projects were considered separate, they 

will be considered to be commercially coherent. Accordingly, subject 

to the additional requirement of geographic coherence, the two 

projects could be considered to be connected, and could therefore be 

aggregated for purposes of subparagraph 9(b). In contrast, assume 

that the technology consultant is contracted to install a particular 

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computer system for a company, and is also hired by that same 

company, pursuant to a separate contract, to train its employees on 

the use of another computer software that is unrelated to the first 

system. In this second case, even though the contracts are both 

concluded between the same two parties, there is no commercial coherence to the two projects, and the time spent fulfilling the two 

contracts may not be aggregated for purposes of subparagraph 9(b). 

Another example of projects that do not have commercial coherence 

would be the case of a law firm which, as one project provides tax 

advice to a customer from one portion of its staff, and as another 

project provides trade advice from another portion of its staff, both 

to the same customer. 

Additionally, projects, in order to be considered connected, must 

also constitute a geographic whole. An example of projects that lack 

geographic coherence would be a case in which a consultant is 

hired to execute separate auditing projects at different branches of 

a bank located in different cities pursuant to a single contract. In 

such an example, while the consultant’s projects are commercially 

coherent, they are not geographically coherent and accordingly the 

services provided in the various branches shall not be aggregated 

for purposes of applying subparagraph 9(b). The services provided 

in each branch should be considered separately for purposes of subparagraph 9(b). 

The method of counting days for purposes of subparagraph 9(a) 

differs slightly from the method for subparagraph 9(b). Subparagraph 9(a) refers to days in which an individual is present in the 

other country. Accordingly, physical presence during a day is sufficient. In contrast, subparagraph 9(b) refers to days during which 

services are provided by the enterprise in the other country. Accordingly, non-working days such as weekends or holidays would 

not count for purposes of subparagraph 9(b), as long as no services 

are actually being provided while in the other country on those 

days. For the purposes of both subparagraphs, even if the enterprise sends many individuals simultaneously to the other country 

to provide services, their collective presence during one calendar 

day will count for only one day of the enterprise’s presence in the 

other country. For instance, if an enterprise sends 20 employees to 

the other country to provide services to a client in the other country for 10 days, the enterprise will be considered present in the 

other country only for 10 days, not 200 days (20 employees x 10 

days). 

By deeming the enterprise to provide services through a permanent establishment in the other Contracting State, paragraph 9 allows the application of Article VII (Business Profits), and accordingly, the taxation of the services shall be on a net-basis. Such taxation is also limited to the profits attributable to the activities carried on in performing the relevant services. It will be important to 

ensure that only the profits properly attributable to the functions 

performed and risks assumed by provision of the services will be 

attributed to the deemed permanent establishment. 

In addition to new paragraph 9, Article 3 of the Protocol amends 

paragraph 6 of Article V of the Convention to include a reference 

to paragraph 9. Therefore, in no case will paragraph 9 apply to 

deem services to be provided through a permanent establishment 

27 

if the services are limited to those mentioned in paragraph 6 

which, if performed through a fixed place of business, would not 

make the fixed place of business a permanent establishment under 

the provisions of that paragraph. 

The competent authorities are encouraged to consider adopting 

rules to reduce the potential for excess withholding or estimated 

tax payments with respect to employee wages that may result from 

the application of this paragraph. Further, because paragraph 6 of 

Article V applies notwithstanding paragraph 9, days spent on preparatory or auxiliary activities shall not be taken into account for 

purposes of applying subparagraph 9(b). 

Paragraph 10 of Article V 

Paragraph 2 of Article 3 of the Protocol also sets forth new paragraph 10 of Article V. The provisions of new paragraph 10 are identical to paragraph 9 of Article V as it existed prior to the Protocol. 

New paragraph 10 provides that the provisions of Article V shall 

be applied in determining whether any person has a permanent establishment in any State. 

ARTICLE 4

Article 4 of the Protocol replaces paragraph 2 of Article VII (Business Profits). 

New paragraph 2 provides that where a resident of either Canada or the United States carries on (or has carried on) business in 

the other Contracting State through a permanent establishment in 

that other State, both Canada and the United States shall attribute to permanent establishments in their respective states 

those business profits which the permanent establishment might be 

expected to make if it were a distinct and separate person engaged 

in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident and with 

any other person related to the resident. The term ‘‘related to the 

resident’’ is to be interpreted in accordance with paragraph 2 of Article IX (Related Persons). The reference to other related persons 

is intended to make clear that the test of paragraph 2 is not restricted to independence between a permanent establishment and 

a home office. 

New paragraph 2 is substantially similar to paragraph 2 as it existed before the Protocol. However, in addition to the reference to 

a resident of a Contracting State who ‘‘carries on’’ business in the 

other Contracting State, the Protocol incorporates into the Convention the rule of Code section 864(c)(6) by adding ‘‘or has carried on’’ 

to address circumstances where, as a result of timing, income may 

be attributable to a permanent establishment that no longer exists 

in one of the Contracting States. In such cases, the income is properly within the scope of Article VII. Conforming changes are also 

made in the Protocol to Articles X (Dividends), XI (Interest), and 

XII (Royalties) of the Convention where Article VII would apply. As 

is explained in paragraph 5 of the General Note, these revisions to 

the Convention are only intended to clarify the application of the 

existing provisions of the Convention. 

28 

The following example illustrates the application of paragraph 2. 

Assume a company that is a resident of Canada and that maintains a permanent establishment in the United States winds up the 

permanent establishment’s business and sells the permanent establishment’s inventory and assets to a U.S. buyer at the end of year 

1 in exchange for an installment obligation payable in full at the 

end of year 3. Despite the fact that the company has no permanent 

establishment in the United States in year 3, the United States 

may tax the deferred income payment recognized by the company 

in year 3. 

The ‘‘attributable to’’ concept of paragraph 2 provides an alternative to the analogous but somewhat different ‘‘effectively connected’’ concept in Code section 864(c). Depending on the circumstances, the amount of income ‘‘attributable to’’ a permanent 

establishment under Article VII may be greater or less than the 

amount of income that would be treated as ‘‘effectively connected’’ 

to a U.S. trade or business under Code section 864. In particular, 

in the case of financial institutions, the use of internal dealings to 

allocate income within an enterprise may produce results under Article VII that are significantly different than the results under the 

effectively connected income rules. For example, income from interbranch notional principal contracts may be taken into account 

under Article VII, notwithstanding that such transactions may be 

ignored for purposes of U.S. domestic law. A taxpayer may use the 

treaty to reduce its taxable income, but may not use both treaty 

and Code rules where doing so would thwart the intent of either 

set of rules. See Rev. Rul. 84–17, 1984–1 C.B. 308. 

The profits attributable to a permanent establishment may be 

from sources within or without a Contracting State. However, as 

stated in the General Note, the business profits attributable to a 

permanent establishment include only those profits derived from 

the assets used, risks assumed, and activities performed by the 

permanent establishment. 

The language of paragraph 2, when combined with paragraph 3 

dealing with the allowance of deductions for expenses incurred for 

the purposes of earning the profits, incorporates the arm’s length 

standard for purposes of determining the profits attributable to a 

permanent establishment. The United States and Canada generally 

interpret the arm’s length standard in a manner consistent with 

the OECD Transfer Pricing Guidelines. 

Paragraph 9 of the General Note confirms that the arm’s length 

method of paragraphs 2 and 3 consists of applying the OECD 

Transfer Pricing Guidelines, but taking into account the different 

economic and legal circumstances of a single legal entity (as opposed to separate but associated enterprises). Thus, any of the 

methods used in the Transfer Pricing Guidelines, including profits 

methods, may be used as appropriate and in accordance with the 

Transfer Pricing Guidelines. However, the use of the Transfer Pricing Guidelines applies only for purposes of attributing profits within the legal entity. It does not create legal obligations or other tax 

consequences that would result from transactions having independent legal significance. Thus, the Contracting States agree that 

the notional payments used to compute the profits that are attributable to a permanent establishment will not be taxed as if they 

29 

were actual payments for purposes of other taxing provisions of the 

Convention, for example, for purposes of taxing a notional royalty 

under Article XII (Royalties). 

One example of the different circumstances of a single legal entity is that an entity that operates through branches rather than 

separate subsidiaries generally will have lower capital requirements because all of the assets of the entity are available to support all of the entity’s liabilities (with some exceptions attributable 

to local regulatory restrictions). This is the reason that most commercial banks and some insurance companies operate through 

branches rather than subsidiaries. The benefit that comes from 

such lower capital costs must be allocated among the branches in 

an appropriate manner. This issue does not arise in the case of an 

enterprise that operates through separate entities, since each entity will have to be separately capitalized or will have to compensate 

another entity for providing capital (usually through a guarantee). 

Under U.S. domestic regulations, internal ‘‘transactions’’ generally are not recognized because they do not have legal significance. In contrast, the rule provided by the General Note is that 

such internal dealings may be used to attribute income to a permanent establishment in cases where the dealings accurately reflect 

the allocation of risk within the enterprise. One example is that of 

global trading in securities. In many cases, banks use internal 

swap transactions to transfer risk from one branch to a central location where traders have the expertise to manage that particular 

type of risk. Under paragraph 2 as set forth in the Protocol, such 

a bank may also use such swap transactions as a means of attributing income between the branches, if use of that method is the 

‘‘best method’’ within the meaning of regulation section 1.482–1(c). 

The books of a branch will not be respected, however, when the results are inconsistent with a functional analysis. So, for example, 

income from a transaction that is booked in a particular branch (or 

home office) will not be treated as attributable to that location if 

the sales and risk management functions that generate the income 

are performed in another location. 

The understanding in the General Note also affects the interpretation of paragraph 3 of Article VII. Paragraph 3 provides that in 

determining the business profits of a permanent establishment, deductions shall be allowed for the expenses incurred for the purposes of the permanent establishment, ensuring that business profits will be taxed on a net basis. This rule is not limited to expenses 

incurred exclusively for the purposes of the permanent establishment, but includes expenses incurred for the purposes of the enterprise as a whole, or that part of the enterprise that includes the 

permanent establishment. Deductions are to be allowed regardless 

of which accounting unit of the enterprise books the expenses, so 

long as they are incurred for the purposes of the permanent establishment. For example, a portion of the interest expense recorded 

on the books of the home office in one State may be deducted by 

a permanent establishment in the other. The amount of the expense that must be allowed as a deduction is determined by applying the arm’s length principle. 

As noted above, paragraph 9 of the General Note provides that 

the OECD Transfer Pricing Guidelines apply, by analogy, in deterVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00029 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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mining the profits attributable to a permanent establishment. Accordingly, a permanent establishment may deduct payments made 

to its head office or another branch in compensation for services 

performed for the benefit of the branch. The method to be used in 

calculating that amount will depend on the terms of the arrangements between the branches and head office. For example, the enterprise could have a policy, expressed in writing, under which 

each business unit could use the services of lawyers employed by 

the head office. At the end of each year, the costs of employing the 

lawyers would be charged to each business unit according to the 

amount of services used by that business unit during the year. 

Since this has the characteristics of a cost-sharing arrangement 

and the allocation of costs is based on the benefits received by each 

business unit, such a cost allocation would be an acceptable means 

of determining a permanent establishment’s deduction for legal expenses. Alternatively, the head office could agree to employ lawyers 

at its own risk, and to charge an arm’s length price for legal services performed for a particular business unit. If the lawyers were 

under-utilized, and the ‘‘fees’’ received from the business units were 

less than the cost of employing the lawyers, then the head office 

would bear the excess cost. If the ‘‘fees’’ exceeded the cost of employing the lawyers, then the head office would keep the excess to 

compensate it for assuming the risk of employing the lawyers. If 

the enterprise acted in accordance with this agreement, this method would be an acceptable alternative method for calculating a permanent establishment’s deduction for legal expenses. 

The General Note also makes clear that a permanent establishment cannot be funded entirely with debt, but must have sufficient 

capital to carry on its activities as if it were a distinct and separate 

enterprise. To the extent that the permanent establishment has not 

been attributed capital for profit attribution purposes, a Contracting State may attribute such capital to the permanent establishment, in accordance with the arm’s length principle, and deny 

an interest deduction to the extent necessary to reflect that capital 

attribution. The method prescribed by U.S. domestic law for making this attribution is found in Treas. Reg. section 1.882–5. Both 

section 1.882–5 and the method prescribed in the General Note 

start from the premise that all of the capital of the enterprise supports all of the assets and risks of the enterprise, and therefore the 

entire capital of the enterprise must be allocated to its various 

businesses and offices. 

However, section 1.882–5 does not take into account the fact that 

some assets create more risk for the enterprise than do other assets. An independent enterprise would need less capital to support 

a perfectly-hedged U.S. Treasury security than it would need to 

support an equity security or other asset with significant market 

and/or credit risk. Accordingly, in some cases section 1.882–5 would 

require a taxpayer to allocate more capital to the United States, 

and therefore would reduce the taxpayer’s interest deduction more, 

than is appropriate. To address these cases, the General Note allows a taxpayer to apply a more flexible approach that takes into 

account the relative risk of its assets in the various jurisdictions in 

which it does business. In particular, in the case of financial institutions other than insurance companies, the amount of capital atVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00030 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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tributable to a permanent establishment is determined by allocating the institution’s total equity between its various offices on 

the basis of the proportion of the financial institution’s risk-weighted assets attributable to each of them. This recognizes the fact that 

financial institutions are in many cases required to risk-weight 

their assets for regulatory purposes and, in other cases, will do so 

for business reasons even if not required to do so by regulators. 

However, risk-weighting is more complicated than the method prescribed by section 1.882–5. Accordingly, to ease this administrative 

burden, taxpayers may choose to apply the principles of Treas. Reg. 

section 1.882–5(c) to determine the amount of capital allocable to 

its U.S. permanent establishment, in lieu of determining its allocable capital under the risk-weighted capital allocation method provided by the General Note, even if it has otherwise chosen the principles of Article VII rather than the effectively connected income 

rules of U.S. domestic law. It is understood that this election is not 

binding for purposes of Canadian taxation unless the result is in 

accordance with the arm’s length principle. 

As noted in the Convention, nothing in paragraph 3 requires a 

Contracting State to allow the deduction of any expenditure which, 

by reason of its nature, is not generally allowed as a deduction 

under the tax laws in that State. 

ARTICLE 5

Article 5 makes a number of amendments to Article X (Dividends) of the existing Convention. As with other benefits of the 

Convention, the benefits of Article X are available to a resident of 

a Contracting State only if that resident is entitled to those benefits under the provisions of Article XXIX A (Limitation on Benefits). 

See the Technical Explanation for new paragraphs 6 and 7 of Article IV (Residence) for discussion regarding the interaction between domestic law concepts of beneficial ownership and the treaty 

rules to determine when a person is considered to derive an item 

of income for purposes of obtaining benefits of the Convention such 

as withholding rate reductions. 

Paragraph 1 

Paragraph 1 of Article 5 of the Protocol replaces subparagraph 

2(a) of Article X of the Convention. In general, paragraph 2 limits 

the amount of tax that may be imposed on dividends by the Contracting State in which the company paying the dividends is resident if the beneficial owner of the dividends is a resident of the 

other Contracting State. Subparagraph 2(a) limits the rate to 5 percent of the gross amount of the dividends if the beneficial owner 

is a company that owns 10 percent or more of the voting stock of 

the company paying the dividends. 

The Protocol adds a parenthetical to address the determination 

of the requisite ownership set forth in subparagraph 2(a) when the 

beneficial owner of dividends receives the dividends through an entity that is considered fiscally transparent in the beneficial owner’s 

Contracting State. The added parenthetical stipulates that voting 

stock in a company paying the dividends that is indirectly held 

through an entity that is considered fiscally transparent in the beneficial owner’s Contracting State is taken into account, provided 

32 

the entity is not a resident of the other Contracting State. The 

United States views the new parenthetical as merely a clarification. 

For example, assume USCo, a U.S. corporation, directly owns 2 

percent of the voting stock of CanCo, a Canadian company that is 

considered a corporation in the United States and Canada. Further, assume that USCo owns 18 percent of the interests in LLC, 

an entity that in turn owns 50 percent of the voting stock of 

CanCo. CanCo pays a dividend to each of its shareholders. Provided that LLC is fiscally transparent in the United States and not 

considered a resident of Canada, USCo’s 9 percent ownership in 

CanCo through LLC (50 percent x 18 percent) is taken into account 

in determining whether USCo meets the 10 percent ownership 

threshold set forth in subparagraph 2(a). In this example, USCo 

may aggregate its voting stock interests in CanCo that it owns directly and through LLC to determine if it satisfies the ownership 

requirement of subparagraph 2(a). Accordingly, USCo will be entitled to the 5 percent rate of withholding on dividends paid with respect to both its voting stock held through LLC and its voting stock 

held directly. Alternatively, if, for example, all of the shareholders 

of LLC were natural persons, the 5 percent rate would not apply. 

Paragraph 2 

Paragraph 2 of Article 5 of the Protocol replaces the definition 

of the term ‘‘dividends’’ provided in paragraph 3 of Article X of the 

Convention. The new definition conforms to the U.S. Model formulation. Paragraph 3 defines the term dividends broadly and flexibly. The definition is intended to cover all arrangements that yield 

a return on an equity investment in a corporation as determined 

under the tax law of the source State, as well as arrangements that 

might be developed in the future. 

The term dividends includes income from shares, or other corporate rights that are not treated as debt under the law of the 

source State, that participate in the profits of the company. The 

term also includes income that is subjected to the same tax treatment as income from shares by the law of the source State. Thus, 

for example, a constructive dividend that results from a non-arm’s 

length transaction between a corporation and a related party is a 

dividend. In the case of the United States the term ‘‘dividend’’ includes amounts treated as a dividend under U.S. law upon the sale 

or redemption of shares or upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 92–85, 1992–2 C.B. 69 (sale of foreign 

subsidiary’s stock to U.S. sister company is a deemed dividend to 

extent of the subsidiary’s and sister company’s earnings and profits). Further, a distribution from a U.S. publicly traded limited 

partnership that is taxed as a corporation under U.S. law is a dividend for purposes of Article X. However, a distribution by a limited 

liability company is not considered by the United States to be a 

dividend for purposes of Article X, provided the limited liability 

company is not characterized as an association taxable as a corporation under U.S. law. 

Paragraph 3 of the General Note states that distributions from 

Canadian income trusts and royalty trusts that are treated as dividends as a result of changes to Canada’s taxation of income and 

33 

royalty trusts enacted in 2007 (S.C. 2007, c. 29) shall be treated as 

dividends for the purposes of Article X. 

Additionally, a payment denominated as interest that is made by 

a thinly capitalized corporation may be treated as a dividend to the 

extent that the debt is recharacterized as equity under the laws of 

the source State. At the time the Protocol was signed, interest payments subject to Canada’s thin-capitalization rules were not recharacterized as dividends. 

Paragraph 3 

Paragraph 3 of Article 5 of the Protocol replaces paragraph 4 of 

Article X. New paragraph 4 is substantially similar to paragraph 

4 as it existed prior to the Protocol. New paragraph 4, however, 

adds clarifying language consistent with the changes made in Articles 4, 6, and 7 of the Protocol with respect to income attributable 

to a permanent establishment that has ceased to exist. Paragraph 

4 provides that the limitations of paragraph 2 do not apply if the 

beneficial owner of the dividends carries on or has carried on business in the State in which the company paying the dividends is a 

resident through a permanent establishment situated there, and 

the stockholding in respect of which the dividends are paid is effectively connected to such permanent establishment. In such a case, 

the dividends are taxable pursuant to the provisions of Article VII 

(Business Profits). Thus, dividends paid in respect of holdings forming part of the assets of a permanent establishment or which are 

otherwise effectively connected to such permanent establishment 

will be taxed on a net basis using the rates and rules of taxation 

generally applicable to residents of the State in which the permanent establishment is situated. 

To conform with Article 9 of the Protocol, which deletes Article 

XIV (Independent Personal Services) of the Convention, paragraph 

4 of Article 5 of the Protocol also amends paragraph 5 of Article 

X by omitting the reference to a ‘‘fixed base.’’ 

Paragraph 4 

To conform with Article 9 of the Protocol, which deletes Article 

XIV (Independent Personal Services) of the Convention, paragraph 

4 of Article 5 of the Protocol amends paragraph 5 of Article X by 

omitting the reference to a ‘‘fixed base.’’ 

Paragraph 5 

Paragraph 5 of Article 5 of the Protocol replaces subparagraph 

7(c) of Article X of the existing Convention. Consistent with current 

U.S. tax treaty policy, new subparagraph 7(c) provides rules that 

expand the application of subparagraph 2(b) for the treatment of 

dividends paid by a Real Estate Investment Trust (REIT). New 

subparagraph 7(c) maintains the rule of the existing Convention 

that dividends paid by a REIT are not eligible for the 5 percent 

maximum rate of withholding tax of subparagraph 2(a), and provides that the 15 percent maximum rate of withholding tax of subparagraph 2(b) applies to dividends paid by REITs only if one of 

three conditions is met. 

First, the dividend will qualify for the 15 percent maximum rate 

if the beneficial owner of the dividend is an individual holding an 

34 

interest of not more than 10 percent in the REIT. For this purpose, 

subparagraph 7(c) also provides that where an estate or testamentary trust acquired its interest in a REIT as a consequence of 

the death of an individual, the estate or trust will be treated as an 

individual for the five-year period following the death. Thus, dividends paid to an estate or testamentary trust in respect of a holding of less than a 10 percent interest in the REIT also will be entitled to the 15 percent rate of withholding, but only for up to five 

years after the death. 

Second, the dividend will qualify for the 15 percent maximum 

rate if it is paid with respect to a class of stock that is publicly 

traded and the beneficial owner of the dividend is a person holding 

an interest of not more than 5 percent of any class of the REIT’s 

stock. 

Third, the dividend will qualify for the 15 percent maximum rate 

if the beneficial owner of the dividend holds an interest in the 

REIT of 10 percent or less and the REIT is ‘‘diversified.’’ A REIT 

is diversified if the gross value of no single interest in real property 

held by the REIT exceeds 10 percent of the gross value of the 

REIT’s total interest in real property. For purposes of this diversification test, foreclosure property is not considered an interest in 

real property, and a REIT holding a partnership interest is treated 

as owning its proportionate share of any interest in real property 

held by the partnership. 

A resident of Canada directly holding U.S. real property would 

pay U.S. tax either at a 30 percent rate of withholding tax on the 

gross income or at graduated rates on the net income. By placing 

the real property in a REIT, the investor absent a special rule 

could transform real estate income into dividend income, taxable at 

the rates provided in Article X, significantly reducing the U.S. tax 

that otherwise would be imposed. Subparagraph 7(c) prevents this 

result and thereby avoids a disparity between the taxation of direct 

real estate investments and real estate investments made through 

REIT conduits. In the cases in which subparagraph 7(c) allows a 

dividend from a REIT to be eligible for the 15 percent maximum 

rate of withholding tax, the holding in the REIT is not considered 

the equivalent of a direct holding in the underlying real property. 

Article 6 

Article 6 of the Protocol replaces Article XI (Interest) of the existing Convention. Article XI specifies the taxing jurisdictions over interest income of the States of source and residence and defines the 

terms necessary to apply Article XI. As with other benefits of the 

Convention, the benefits of Article XI are available to a resident of 

a Contracting State only if that resident is entitled to those benefits under the provisions of Article XXIX A (Limitation on Benefits). 

Paragraph 1 of Article XI 

New paragraph 1 generally grants to the residence State the exclusive right to tax interest beneficially owned by its residents and 

arising in the other Contracting State. See the Technical Explanation for new paragraphs 6 and 7 of Article IV (Residence) for discussion regarding the interaction between domestic law concepts of 

beneficial ownership and the treaty rules to determine when a perVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00034 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
35 

son is considered to derive an item of income for purposes of obtaining benefits under the Convention such as withholding rate reductions. 

Subparagraph 3(d) of Article 27 of the Protocol provides an additional rule regarding the application of paragraph 1 during the first 

two years that end after the Protocol’s entry into force. This rule 

is described in detail in the Technical Explanation to Article 27. 

Paragraph 2 of Article XI 

Paragraph 2 of new Article XI is substantially identical to paragraph 4 of Article XI of the existing Convention. 

Paragraph 2 defines the term ‘‘interest’’ as used in Article XI to 

include, inter alia, income from debt claims of every kind, whether 

or not secured by a mortgage. Interest that is paid or accrued subject to a contingency is within the ambit of Article XI. This includes 

income from a debt obligation carrying the right to participate in 

profits. The term does not, however, include amounts that are 

treated as dividends under Article X (Dividends). 

The term ‘‘interest’’ also includes amounts subject to the same 

tax treatment as income from money lent under the law of the 

State in which the income arises. Thus, for purposes of the Convention, amounts that the United States will treat as interest include 

(i) the difference between the issue price and the stated redemption 

price at maturity of a debt instrument (i.e., original issue discount 

(OID)), which may be wholly or partially realized on the disposition 

of a debt instrument (section 1273), (ii) amounts that are imputed 

interest on a deferred sales contract (section 483), (iii) amounts 

treated as interest or OID under the stripped bond rules (section 

1286), (iv) amounts treated as original issue discount under the 

below-market interest rate rules (section 7872), (v) a partner’s distributive share of a partnership’s interest income (section 702), (vi) 

the interest portion of periodic payments made under a ‘‘finance 

lease’’ or similar contractual arrangement that in substance is a 

borrowing by the nominal lessee to finance the acquisition of property, (vii) amounts included in the income of a holder of a residual 

interest in a real estate mortgage investment conduit (REMIC) 

(section 860E), because these amounts generally are subject to the 

same taxation treatment as interest under U.S. tax law, and (viii) 

interest with respect to notional principal contracts that are recharacterized as loans because of a ‘‘substantial non-periodic payment.’’ 

Paragraph 3 is in all material respects the same as paragraph 

5 of Article XI of the existing Convention. New paragraph 3 adds 

clarifying language consistent with the changes made in Articles 4, 

5, and 7 of the Protocol with respect to income attributable to a 

permanent establishment that has ceased to exist. Also, consistent 

with the changes described in Article 9 of the Protocol, discussed 

below, paragraph 3 does not contain references to the performance 

of independent personal services through a fixed base. 

Paragraph 3 provides an exception to the exclusive residence taxation rule of paragraph 1 in cases where the beneficial owner of the 

interest carries on business through a permanent establishment in 

the State of source and the interest is effectively connected to that 

permanent establishment. In such cases the provisions of Article 

36 

VII (Business Profits) will apply and the source State will retain 

the right to impose tax on such interest income. 

Paragraph 4 of Article XI 

Paragraph 4 is in all material respects the same as paragraph 

6 of Article XI of the existing Convention. The only difference is 

that, consistent with the changes described below with respect to 

Article 9 of the Protocol, paragraph 4 does not contain references 

to a fixed base. 

Paragraph 4 establishes the source of interest for purposes of Article XI. Interest is considered to arise in a Contracting State if the 

payer is that State, or a political subdivision, local authority, or 

resident of that State. However, in cases where the person paying 

the interest, whether a resident of a Contracting State or of a third 

State, has in a State other than that of which he is a resident a 

permanent establishment in connection with which the indebtedness on which the interest was paid was incurred, and such interest is borne by the permanent establishment, then such interest is 

deemed to arise in the State in which the permanent establishment 

is situated and not in the State of the payer’s residence. Furthermore, pursuant to paragraphs 1 and 4, and Article XXII (Other Income), Canadian tax will not be imposed on interest paid to a U.S. 

resident by a company resident in Canada if the indebtedness is incurred in connection with, and the interest is borne by, a permanent establishment of the company situated in a third State. For 

the purposes of this Article, ‘‘borne by’’ means allowable as a deduction in computing taxable income. 

Paragraph 5 of Article XI 

Paragraph 5 is identical to paragraph 7 of Article XI of the existing Convention. 

Paragraph 5 provides that in cases involving special relationships between the payer and the beneficial owner of interest income or between both of them and some other person, Article XI 

applies only to that portion of the total interest payments that 

would have been made absent such special relationships (i.e., an 

arm’s-length interest payment). Any excess amount of interest paid 

remains taxable according to the laws of the United States and 

Canada, respectively, with due regard to the other provisions of the 

Convention. 

New paragraph 6 provides anti-abuse exceptions to exclusive residence State taxation in paragraph 1 for two classes of interest 

payments. 

The first class of interest, dealt with in subparagraphs 6(a) and 

6(b), is so-called ‘‘contingent interest.’’ With respect to interest arising in the United States, subparagraph 6(a) refers to contingent interest of a type that does not qualify as portfolio interest under 

U.S. domestic law. The cross-reference to the U.S. definition of contingent interest, which is found in Code section 871(h)(4), is intended to ensure that the exceptions of Code section 871 (h)(4)(C) 

will apply. With respect to Canada, such interest is defined in subparagraph 6(b) as any interest arising in Canada that is determined by reference to the receipts, sales, income, profits or other 

cash flow of the debtor or a related person, to any change in the 

37 

value of any property of the debtor or a related person or to any 

dividend, partnership distribution or similar payment made by the 

debtor or a related person.1 Any such interest may be taxed in 

Canada according to the laws of Canada. 

Under subparagraph 6(a) or 6(b), if the beneficial owner is a resident of the other Contracting State, the gross amount of the ‘‘contingent interest’’ may be taxed at a rate not exceeding 15 percent. 

The second class of interest is dealt with in subparagraph 6(c). 

This exception is consistent with the policy of Code sections 

860E(e) and 860G(b) that excess inclusions with respect to a real 

estate mortgage investment conduit (REMIC) should bear full U.S. 

tax in all cases. Without a full tax at source, foreign purchasers of 

residual interests would have a competitive advantage over U.S. 

purchasers at the time these interests are initially offered. Also, 

absent this rule, the U.S. fisc would suffer a revenue loss with respect to mortgages held in a REMIC because of opportunities for 

tax avoidance created by differences in the timing of taxable and 

economic income produced by these interests. 

Therefore, subparagraph 6(c) provides a bilateral provision that 

interest that is an excess inclusion with respect to a residual interest in a REMIC may be taxed by each State in accordance with its 

domestic law. While the provision is written reciprocally, at the 

time the Protocol was signed, the provision had no application in 

respect of Canadian-source interest, as Canada did not have 

REMICs. 

Paragraph 7 of Article XI 

Paragraph 7 is in all material respects the same as paragraph 

8 of Article XI of the existing Convention. The only difference is 

that, consistent with the changes made in Article 9 of the Protocol, 

paragraph 7 removes the references to a fixed base. 

Paragraph 7 restricts the right of a Contracting State to impose 

tax on interest paid by a resident of the other Contracting State. 

The first State may not impose any tax on such interest except insofar as the interest is paid to a resident of that State or arises 

in that State or the debt claim in respect of which the interest is 

paid is effectively connected with a permanent establishment situated in that State. 

1 New subparagraph 6(b) of Article XI erroneously refers to a 

‘‘similar payment made by the debtor to a related person.’’ The correct formulation, which the Contracting States agree to apply, is 

‘‘similar payment made by the debtor or a related person.’’ 

Relationship to other Articles 

Notwithstanding the foregoing limitations on source State taxation of interest, the saving clause of paragraph 2 of Article XXIX 

(Miscellaneous Rules) permits the United States to tax its residents 

and citizens, subject to the special foreign tax credit rules of paragraph 5 of Article XXIV (Elimination of Double Taxation), as if the 

Convention had not come into force. 

ARTICLE 7

Article 7 of the Protocol amends Article XII (Royalties) of the existing Convention. As with other benefits of the Convention, the 

38 

benefits of Article XII are available to a resident of a Contracting 

State only if that resident is entitled to those benefits under the 

provisions of Article XXIX A (Limitation on Benefits). 

See the Technical Explanation for new paragraphs 6 and 7 of Article IV (Residence) for discussion regarding the interaction between domestic law concepts of beneficial ownership and the treaty 

rules to determine when a person is considered to derive an item 

of income for purposes of obtaining benefits of the Convention such 

as withholding rate reductions. 

Paragraph 1 

Paragraph 1 of Article 7 of the Protocol replaces paragraph 5 of 

Article XII of the Convention. In all material respects, new paragraph 5 is the same as paragraph 5 of Article XII of the existing 

Convention. However, new paragraph 5 adds clarifying language 

consistent with the changes made in Articles 4, 5, and 6 of the Protocol with respect to income attributable to a permanent establishment that has ceased to exist. To conform with Article 9 of the Protocol, which deletes Article XIV (Independent Personal Services) of 

the Convention, paragraph 1 of Article 7 of the Protocol also 

amends paragraph 5 of Article XII by omitting the reference to a 

‘‘fixed base.’’ 

New paragraph 5 provides that the 10 percent limitation on tax 

in the source State provided by paragraph 2, and the exemption in 

the source State for certain royalties provided by paragraph 3, do 

not apply if the beneficial owner of the royalties carries on or has 

carried on business in the source State through a permanent establishment and the right or property in respect of which the royalties 

are paid is attributable to such permanent establishment. In such 

case, the royalty income would be taxable by the source State 

under the provisions of Article VII (Business Profits). 

Paragraph 2 

Paragraph 2 of Article 7 of the Protocol sets forth a new subparagraph 6(a) of Article XII that is in all material respects the same 

as subparagraph 6(a) of Article XII of the existing Convention. The 

only difference is that, consistent with the changes made in Article 

9 of the Protocol, new subparagraph 6(a) omits references to a 

‘‘fixed base.’’ 

Paragraph 3 

Paragraph 3 of Article 7 of Protocol amends paragraph 8 of Article XII of the Convention to remove references to a ‘‘fixed base.’’ In 

addition, paragraph 8 of the General Note confirms the intent of 

the Contracting States that the reference in subparagraph 3(c) of 

Article XII of the Convention to information provided in connection 

with a franchise agreement generally refers only to information 

that governs or otherwise deals with the operation (whether by the 

payer or by another person) of the franchise, and not to other information concerning industrial, commercial or scientific experience 

that is held for resale or license. 

39 

ARTICLE 8

Paragraph 1 

Paragraph 1 of Article 8 of the Protocol replaces paragraph 2 of 

Article XIII (Gains) of the existing Convention. Consistent with Article 9 of the Protocol, new paragraph 2 does not contain any reference to property pertaining to a fixed base or to the performance 

of independent personal services. 

New paragraph 2 of Article XIII provides that the Contracting 

State in which a resident of the other Contracting State has or had 

a permanent establishment may tax gains from the alienation of 

personal property constituting business property if such gains are 

attributable to such permanent establishment. Unlike paragraph 1 

of Article VII (Business Profits), paragraph 2 limits the right of the 

source State to tax such gains to a twelve-month period following 

the termination of the permanent establishment. 

Paragraph 2 

Paragraph 2 of Article 8 of the Protocol replaces paragraph 5 of 

Article XIII of the existing Convention. In general, new paragraph 

5 provides an exception to the general rule stated in paragraph 4 

that gains from the alienation of any property, other than property 

referred to in paragraphs 1, 2, and 3, shall be taxable only in the 

Contracting State of which the alienator is a resident. Paragraph 

5 provides that a Contracting State may, according to its domestic 

law, impose tax on gains derived by an individual who is a resident 

of the other Contracting State if such individual was a resident of 

the first-mentioned State for 120 months (whether or not consecutive) during any period of 20 consecutive years preceding the alienation of the property, and was a resident of that State at any time 

during the 10-year period immediately preceding the alienation of 

the property. Further, the property (or property received in substitution in a tax-free transaction in the first-mentioned State) must 

have been owned by the individual at the time he ceased to be a 

resident of the first-mentioned State and must not have been property that the individual was treated as having alienated by reason 

of ceasing to be a resident of the first-mentioned State and becoming a resident of the other Contracting State. 

The provisions of new paragraph 5 are substantially similar to 

paragraph 5 of Article XIII of the existing Convention. However, 

the Protocol adds a new requirement to paragraph 5 that the property not be ‘‘a property that the individual was treated as having 

alienated by reason of ceasing to be a resident of the first-mentioned State and becoming a resident of the other Contracting 

State.’’ This new requirement reflects the fact that the main purpose of paragraph 5—ensuring that gains that accrue while an individual is resident in a Contracting State remain taxable for the 

stated time after the individual has moved to the other State—is 

met if that pre-departure gain is taxed in the first State immediately before the individual’s emigration. This rule applies whether or not the individual makes the election provided by paragraph 

7 of Article XIII, as amended, which is described below. 

40 

Paragraph 3 

Paragraph 3 of Article 8 of the Protocol replaces paragraph 7 of 

Article XIII. 

The purpose of paragraph 7, in both its former and revised form, 

is to provide a rule to coordinate U.S. and Canadian taxation of 

gains in the case of a timing mismatch. Such a mismatch may 

occur, for example, where a Canadian resident is deemed, for Canadian tax purposes, to recognize capital gain upon emigrating from 

Canada to the United States, or in the case of a gift that Canada 

deems to be an income producing event for its tax purposes but 

with respect to which the United States defers taxation while assigning the donor’s basis to the donee. The former paragraph 7 resolved the timing mismatch of taxable events by allowing the individual to elect to be liable to tax in the deferring Contracting State 

as if he had sold and repurchased the property for an amount equal 

to its fair market value at a time immediately prior to the deemed 

alienation. 

The election under former paragraph 7 was not available to certain non-U.S. citizens subject to tax in Canada by virtue of a 

deemed alienation because such individuals could not elect to be 

liable to tax in the United States. To address this problem, the Protocol replaces the election provided in former paragraph 7, with an 

election by the taxpayer to be treated by a Contracting State as 

having sold and repurchased the property for its fair market value 

immediately before the taxable event in the other Contracting 

State. The election in new paragraph 7 therefore will be available 

to any individual who emigrates from Canada to the United States, 

without regard to whether the person is a U.S. citizen immediately 

before ceasing to be a resident of Canada. If the individual is not 

subject to U.S. tax at that time, the effect of the election will be 

to give the individual an adjusted basis for U.S. tax purposes equal 

to the fair market value of the property as of the date of the 

deemed alienation in Canada, with the result that only post-emigration gain will be subject to U.S. tax when there is an actual 

alienation. If the Canadian resident is also a U.S. citizen at the 

time of his emigration from Canada, then the provisions of new 

paragraph 7 would allow the U.S. citizen to accelerate the tax 

under U.S. tax law and allow tax credits to be used to avoid double 

taxation. This would also be the case if the person, while not a U.S. 

citizen, would otherwise be subject to taxation in the United States 

on a disposition of the property. 

In the case of Canadian taxation of appreciated property given 

as a gift, absent paragraph 7, the donor could be subject to tax in 

Canada upon making the gift, and the donee may be subject to tax 

in the United States upon a later disposition of the property on all 

or a portion of the same gain in the property without the availability of any foreign tax credit for the tax paid to Canada. Under 

new paragraph 7, the election will be available to any individual 

who pays taxes in Canada on a gain arising from the individual’s 

gifting of a property, without regard to whether the person is a 

U.S. taxpayer at the time of the gift. The effect of the election in 

such case will be to give the donee an adjusted basis for U.S. tax 

purposes equal to the fair market value as of the date of the gift. 

If the donor is a U.S. taxpayer, the effect of the election will be the 

41 

realization of gain or loss for U.S. purposes immediately before the 

gift. The acceleration of the U.S. tax liability by reason of the election in such case enables the donor to utilize foreign tax credits 

and avoid double taxation with respect to the disposition of the 

property. 

Generally, the rule does not apply in the case of death. Note, 

however, that Article XXIX B (Taxes Imposed by Reason of Death) 

of the Convention provides rules that coordinate the income tax 

that Canada imposes by reason of death with the U.S. estate tax. 

If in one Contracting State there are losses and gains from 

deemed alienations of different properties, then paragraph 7 must 

be applied consistently in the other Contracting State within the 

taxable period with respect to all such properties. Paragraph 7 only 

applies, however, if the deemed alienations of the properties result 

in a net gain. 

Taxpayers may make the election provided by new paragraph 7 

only with respect to property that is subject to a Contracting 

State’s deemed disposition rules and with respect to which gain on 

a deemed alienation is recognized for that Contracting State’s tax 

purposes in the taxable year of the deemed alienation. At the time 

the Protocol was signed, the following were the main types of property that were excluded from the deemed disposition rules in the 

case of individuals (including trusts) who cease to be residents of 

Canada: real property situated in Canada; interests and rights in 

respect of pensions; life insurance policies (other than segregated 

fund (investment) policies); rights in respect of annuities; interests 

in testamentary trusts, unless acquired for consideration; employee 

stock options; property used in a business carried on through a permanent establishment in Canada (including intangibles and inventory); interests in most Canadian personal trusts; Canadian resource property; and timber resource property. 

Paragraph 4 

Consistent with the provisions of Article 9 of the Protocol, paragraph 4 of Article 8 of the Protocol amends subparagraph 9(c) of 

Article XIII of the existing Convention to remove the words ‘‘or pertained to a fixed base.’’ 

Relationship to other Articles 

The changes to Article XIII set forth in paragraph 3 were announced in a press release issued by the Treasury Department on 

September 18, 2000. Consistent with that press release, subparagraph 3(e) of Article 27 of the Protocol provides that the changes, 

jointly effectuated by paragraphs 2 and 3, will be generally effective for alienations of property that occur after September 17, 2000. 

ARTICLE 9

To conform with the current U.S. and OECD Model Conventions, 

Article 9 of the Protocol deletes Article XIV (Independent Personal 

Services) of the Convention. The subsequent articles of the Convention are not renumbered. Paragraph 4 of the General Note elaborates that current tax treaty practice omits separate articles for 

independent personal services because a determination of the existence of a fixed base is qualitatively the same as the determination 

42 

of the existence of a permanent establishment. Accordingly, the 

taxation of income from independent personal services is adequately governed by the provisions of Articles V (Permanent Establishment) and VII (Business Profits). 

ARTICLE 10

Article 10 of the Protocol renames Article XV of the Convention 

as ‘‘Income from Employment’’ to conform with the current U.S. 

and OECD Model Conventions, and replaces paragraphs 1 and 2 of 

that renamed article consistent with the OECD Model Convention. 

Paragraph 1 

New paragraph 1 of Article XV provides that, in general, salaries, wages, and other remuneration derived by a resident of a Contracting State in respect of an employment are taxable only in that 

State unless the employment is exercised in the other Contracting 

State. If the employment is exercised in the other Contracting 

State, the entire remuneration derived therefrom may be taxed in 

that other State, subject to the provisions of paragraph 2. 

New paragraph 1 of Article XV does not contain a reference to 

‘‘similar’’ remuneration. This change was intended to clarify that 

Article XV applies to any form of compensation for employment, including payments in kind. This interpretation is consistent with 

paragraph 2.1 of the Commentary to Article 15 (Income from Employment) of the OECD Model and the Technical Explanation of 

the 2006 U.S. Model. 

Paragraph 2 

New paragraph 2 of Article XV provides two limitations on the 

right of a source State to tax remuneration for services rendered 

in that State. New paragraph 2 is divided into two subparagraphs 

that each sets forth a rule which, notwithstanding any contrary result due to the application of paragraph 1 of Article XV, prevents 

the source State from taxing income from employment in that 

State. 

First, subparagraph 2(a) provides a safe harbor rule that the remuneration may not be taxed in the source State if such remuneration is $10,000 or less in the currency of the source State. This rule 

is identical to the rule in subparagraph 2(a) of Article XV of the 

existing Convention. It is understood that, consistent with the prior 

rule, the safe harbor will apply on a calendar-year basis. 

Second, if the remuneration is not exempt from tax in the source 

State by virtue of subparagraph 2(a), subparagraph 2(b) provides 

an additional rule that the source State may not tax remuneration 

for services rendered in that State if the recipient is present in the 

source State for a period (or periods) that does not exceed in the 

aggregate 183 days in any twelve-month period commencing or 

ending in the fiscal year concerned, and the remuneration is not 

paid by or on behalf of a person who is a resident of that other 

State or borne by a permanent establishment in that other State. 

For purposes of this article, ‘‘borne by’’ means allowable as a deduction in computing taxable income. 

Assume, for example, that Mr. X, an individual resident in Canada, is an employee of the Canadian permanent establishment of 

43 

USCo, a U.S. company. Mr. X is sent to the United States to perform services and is present in the United States for less than 183 

days. Mr. X receives more than $10,000 (U.S.) in the calendar 

year(s) in question. The remuneration paid to Mr. X for such services is not exempt from U.S. tax under paragraph 1, because his 

employer, USCo, is a resident of the United States and pays his remuneration. If instead Mr. X received less than $10,000 (U.S.), 

such earnings would be exempt from tax in the United States, because in all cases where an employee earns less than $10,000 in 

the currency of the source State, such earnings are exempt from 

tax in the source State. 

As another example, assume Ms. Y, an individual resident in the 

United States is employed by USCo, a U.S. company. Ms. Y is sent 

to Canada to provide services in the Canadian permanent establishment of USCo. Ms. Y is present in Canada for less than 183 

days. Ms. Y receives more than $10,000 (Canadian) in the calendar 

year(s) in question. USCo charges the Canadian permanent establishment for Ms. Y’s remuneration, which the permanent establishment takes as a deduction in computing its taxable income. The remuneration paid to Ms. Y for such services is not exempt from Canadian tax under paragraph 1, because her remuneration is borne 

by the Canadian permanent establishment. 

New subparagraph 2(b) refers to remuneration that is paid by or 

on behalf of a ‘‘person’’ who is a resident of the other Contracting 

State, as opposed to an ‘‘employer.’’ This change is intended only 

to clarify that both the United States and Canada understand that 

in certain abusive cases, substance over form principles may be applied to recharacterize an employment relationship, as prescribed 

in paragraph 8 of the Commentary to Article 15 (Income from Employment) of the OECD Model. Subparagraph 2(b) is intended to 

have the same meaning as the analogous provisions in the U.S. 

and OECD Models. 

Paragraph 6 of the General Note 

Paragraph 6 of the General Note contains special rules regarding 

employee stock options. There are no similar rules in the U.S. 

Model or the OECD Model, although the issue is discussed in detail 

in paragraph 12 of the Commentary to Article 15 (Income from 

Employment) of the OECD Model. 

The General Note sets forth principles that apply for purposes of 

applying Article XV and Article XXIV (Elimination of Double Taxation) to income of an individual in connection with the exercise or 

other disposal (including a deemed exercise or disposal) of an option that was granted to the individual as an employee of a corporation or mutual fund trust to acquire shares or units (‘‘securities’’) of the employer in respect of services rendered or to be rendered by such individual, or in connection with the disposal (including a deemed disposal) of a security acquired under such an option. 

For this purpose, the term ‘‘employer’’ is considered to include any 

entity related to the service recipient. The reference to a disposal 

(or deemed disposal) reflects the fact that under Canadian law and 

under certain provisions of U.S. law, income or gain attributable to 

the granting or exercising of the option may, in some cases, not be 

recognized until disposition of the securities. 

44 

Subparagraph 6(a) of the General Note provides a specific rule 

to address situations where, under the domestic law of the Contracting States, an employee would be taxable by both Contracting 

States in respect of the income in connection with the exercise or 

disposal of the option. The rule provides an allocation of taxing 

rights where (1) an employee has been granted a stock option in 

the course of employment in one of the Contracting States, and (2) 

his principal place of employment has been situated in one or both 

of the Contracting States during the period between grant and exercise (or disposal) of the option. In this situation, each Contracting 

State may tax as Contracting State of source only that proportion 

of the income that relates to the period or periods between the 

grant and the exercise (or disposal) of the option during which the 

individual’s principal place of employment was situated in that 

Contracting State. The proportion attributable to a Contracting 

State is determined by multiplying the income by a fraction, the 

numerator of which is the number of days between the grant and 

exercise (or disposal) of the option during which the employee’s 

principal place of employment was situated in that Contracting 

State and the denominator of which is the total number of days between grant and exercise (or disposal) of the option that the employee was employed by the employer. 

If the individual is a resident of one of the Contracting States at 

the time he exercises the option, that Contracting State will have 

the right, as the State of residence, to tax all of the income under 

the first sentence of paragraph 1 of Article XV. However, to the extent that the employee renders his employment in the other Contracting State for some period of time between the date of the grant 

of the option and the date of the exercise (or disposal) of the option, 

the proportion of the income that is allocated to the other Contracting State under subparagraph 6(a) of the General Note will, 

subject to paragraph 2, be taxable by that other State under the 

second sentence of paragraph 1 of Article XV of the Convention. 

For this purpose, the tests of paragraph 2 of Article XV are applied 

to the year or years in which the relevant services were performed 

in the other Contracting State (and not to the year in which the 

option is exercised or disposed). To the extent the same income is 

subject to taxation in both Contracting States after application of 

Article XV, double taxation will be alleviated under the rules of Article XXIV (Elimination of Double Taxation). 

Subparagraph 6(b) of the General Note provides that notwithstanding subparagraph 6(a), if the competent authorities of both 

Contracting States agree that the terms of the option were such 

that the grant of the option is appropriately treated as transfer of 

ownership of the securities (e.g., because the options were in-themoney or not subject to a substantial vesting period), then they 

may agree to attribute income accordingly. 

ARTICLE 11

Consistent with Article 9 and paragraph 1 of Article 10 of the 

Protocol, paragraphs 1, 2, and 3 of Article 11 of the Protocol revise 

paragraphs 1, 2, and 4 of Article XVI (Artistes and Athletes) of the 

existing Convention by deleting references to former Article XIV 

(Independent Personal Services) of the Convention and deleting 

45 

and replacing other language in acknowledgement of the renaming 

of Article XV (Income from Employment). 

ARTICLE 12

Article 12 of the Protocol deletes Article XVII (Withholding of 

Taxes in Respect of Personal Services) from the Convention. However, the subsequent Articles are not renumbered. 

ARTICLE 13

Article 13 of the Protocol replaces paragraphs 3, 4, and 7 and 

adds paragraphs 8 through 17 to Article XVIII (Pensions and Annuities) of the Convention. 

Paragraph 1—Roth IRAs 

Paragraph 1 of Article 13 of the Protocol separates the provisions 

of paragraph 3 of Article XVIII into two subparagraphs. Subparagraph 3(a) contains the existing definition of the term ‘‘pensions,’’ 

while subparagraph 3(b) adds a new rule to address the treatment 

of Roth IRAs or similar plan (as described below). 

Subparagraph 3(a) of Article XVIII provides that the term ‘‘pensions’’ for purposes of the Convention includes any payment under 

a superannuation, pension, or other retirement arrangement, 

Armed-Forces retirement pay, war veterans pensions and allowances, and amounts paid under a sickness, accident, or disability 

plan, but does not include payments under an income-averaging 

annuity contract (which are subject to Article XXII (Other Income)) 

or social security benefits, including social security benefits in respect of government services (which are subject to paragraph 5 of 

Article XVIII). Thus, the term ‘‘pensions’’ includes pensions paid by 

private employers (including pre-tax and Roth 401(k) arrangements) as well as any pension paid in respect of government services. Further, the definition of ‘‘pensions’’ includes, for example, 

payments from individual retirement accounts (IRAs) in the United 

States and from registered retirement savings plans (RRSPs) and 

registered retirement income funds (RRIFs) in Canada. 

Subparagraph 3(b) of Article XVIII provides that the term ‘‘pensions’’ generally includes a Roth IRA, within the meaning of Code 

section 408A (or a similar plan described below). Consequently, 

under paragraph 1 of Article XVIII, distributions from a Roth IRA 

to a resident of Canada generally continue to be exempt from Canadian tax to the extent they would have been exempt from U.S. 

tax if paid to a resident of the United States. In addition, residents 

of Canada generally may make an election under paragraph 7 of 

Article XVIII to defer any taxation in Canada with respect to income accrued in a Roth IRA but not distributed by the Roth IRA, 

until such time as and to the extent that a distribution is made 

from the Roth IRA or any plan substituted therefore. Because distributions will be exempt from Canadian tax to the extent they 

would have been exempt from U.S. tax if paid to a resident of the 

United States, the effect of these rules is that, in most cases, no 

portion of the Roth IRA will be subject to taxation in Canada. 

However, subparagraph 3(b) also provides that if an individual 

who is a resident of Canada makes contributions to his or her Roth 

IRA while a resident of Canada, other than rollover contributions 

46 

from another Roth IRA (or a similar plan described below), the 

Roth IRA will cease to be considered a pension at that time with 

respect to contributions and accretions from such time and accretions from such time will be subject to tax in Canada in the year 

of accrual. Thus, the Roth IRA will in effect be bifurcated into a 

‘‘frozen’’ pension that continues to be subject to the rules of Article 

XVIII and a savings account that is not subject to the rules of Article XVIII. It is understood by the Contracting States that, following 

a rollover contribution from a Roth 401(k) arrangement to a Roth 

IRA, the Roth IRA will continue to be treated as a pension subject 

to the rules of Article XVIII. 

Assume, for example, that Mr. X moves to Canada on July 1, 

2008. Mr. X has a Roth IRA with a balance of 1,100 on July 1, 

2008. Mr. X elects under paragraph 7 of Article XVIII to defer any 

taxation in Canada with respect to income accrued in his Roth IRA 

while he is a resident of Canada. Mr. X makes no additional contributions to his Roth IRA until July 1, 2010, when he makes an 

after-tax contribution of 100. There are accretions of 20 during the 

period July 1, 2008 through June 30, 2010, which are not taxed in 

Canada by reason of the election under paragraph 7 of Article 

XVIII. There are additional accretions of 50 during the period July 

1, 2010 through June 30, 2015, which are subject to tax in Canada 

in the year of accrual. On July 1, 2015, while Mr. X is still a resident of Canada, Mr. X receives a lump-sum distribution of 1,270 

from his Roth IRA. The 1,120 that was in the Roth IRA on June 

30, 2010 is treated as a distribution from a pension plan that, pursuant to paragraph 1 of Article XVIII, is exempt from tax in Canada provided it would be exempt from tax in the United States 

under the Internal Revenue Code if paid to a resident of the United 

States. The remaining 150 comprises the after-tax contribution of 

100 in 2010 and accretions of 50 that were subject to Canadian tax 

in the year of accrual. 

The rules of new subparagraph 3(b) of Article XVIII also will 

apply to any plan or arrangement created pursuant to legislation 

enacted by either Contracting State after September 21, 2007 (the 

date of signature of the Protocol) that the competent authorities 

agree is similar to a Roth IRA. 

Source of payments under life insurance and annuity contracts 

Paragraph 1 of Article 13 also replaces paragraph 4 of Article 

XVIII. Subparagraph 4(a) contains the existing definition of annuity, while subparagraph 4(b) adds a source rule to address the 

treatment of certain payments by branches of insurance companies. 

Subparagraph 4(a) provides that, for purposes of the Convention, 

the term ‘‘annuity’’ means a stated sum paid periodically at stated 

times during life or during a specified number of years, under an 

obligation to make the payments in return for adequate and full 

consideration other than services rendered. The term does not include a payment that is not periodic or any annuity the cost of 

which was deductible for tax purposes in the Contracting State 

where the annuity was acquired. Items excluded from the definition of ‘‘annuity’’ and not dealt with under another Article of the 

Convention are subject to the rules of Article XXII (Other Income). 

Under the existing Convention, payments under life insurance 

and annuity contracts to a resident of Canada by a Canadian 

47 

branch of a U.S. insurance company are subject to either a 15-percent withholding tax under subparagraph 2(b) of Article XVIII or, 

unless dealt with under another Article of the Convention, an unreduced 30-percent withholding tax under paragraph 1 of Article 

XXII, depending on whether the payments constitute annuities 

within the meaning of paragraph 4 of Article XVIII. 

On July 12, 2004, the Internal Revenue Service issued Revenue 

Ruling 2004–75, 2004–2 C.B. 109, which provides in relevant part 

that annuity payments under, and withdrawals of cash value from, 

life insurance or annuity contracts issued by a foreign branch of a 

U.S. life insurance company are U.S.-source income that, when 

paid to a nonresident alien individual, is generally subject to a 30- 

percent withholding tax under Code sections 871(a) and 1441. Revenue Ruling 2004–97, 2004–2 C.B. 516, provided that Revenue Ruling 2004–75 would not be applied to payments that were made before January 1, 2005, provided that such payments were made pursuant to binding life insurance or annuity contracts issued on or 

before July 12, 2004. 

Under new subparagraph 4(b) of Article XVIII, an annuity or 

other amount paid in respect of a life insurance or annuity contract 

(including a withdrawal in respect of the cash value thereof), will 

generally be deemed to arise in the Contracting State where the 

person paying the annuity or other amount (the ‘‘payer’’) is resident. However, if the payer, whether a resident of a Contracting 

State or not, has a permanent establishment in a Contracting State 

other than a Contracting State in which the payer is a resident, 

the payment will be deemed to arise in the Contracting State in 

which the permanent establishment is situated if both of the following requirements are satisfied: (i) the obligation giving rise to 

the annuity or other amount must have been incurred in connection with the permanent establishment, and (ii) the annuity or 

other amount must be borne by the permanent establishment. 

When these requirements are satisfied, payments by a Canadian 

branch of a U.S. insurance company will be deemed to arise in 

Canada. 

Paragraph 2 

Paragraph 2 of Article 13 of the Protocol replaces paragraph 7 

of Article XVIII of the existing Convention. Paragraph 7 continues 

to provide a rule with respect to the taxation of a natural person 

on income accrued in a pension or employee benefit plan in the 

other Contracting State. Thus, paragraph 7 applies where an individual is a citizen or resident of a Contracting State and is a beneficiary of a trust, company, organization, or other arrangement that 

is a resident of the other Contracting State, where such trust, company, organization, or other arrangement is generally exempt from 

income taxation in that other State, and is operated exclusively to 

provide pension, or employee benefits. In such cases, the beneficiary may elect to defer taxation in his State of residence on income accrued in the plan until it is distributed from the plan (or 

from another plan in that other Contracting State to which the income is transferred pursuant to the domestic law of that other Contracting State). 

48 

Paragraph 2 of Article 13 of the Protocol makes two changes to 

paragraph 7 of Article XVIII of the existing Convention. The first 

change is that the phrase ‘‘pension, retirement or employee benefits’’ is changed to ‘‘pension or employee benefits’’ solely to reflect 

the fact that in certain cases, discussed above, Roth IRAs will not 

be treated as pensions for purposes of Article XVIII. The second 

change is that ‘‘under’’ is changed to ‘‘subject to’’ to make it clear 

that an election to defer taxation with respect to undistributed income accrued in a plan may be made whether or not the competent 

authority of the first-mentioned State has prescribed rules for making an election. For the U.S. rules, see Revenue Procedure 2002– 

23, 2002–1 C.B. 744. As of the date the Protocol was signed, the 

competent authority of Canada had not prescribed rules. 

Paragraph 3 

Paragraph 3 of Article 13 of the Protocol adds paragraphs 8 

through 17 to Article XVIII to deal with cross-border pension contributions. These paragraphs are intended to remove barriers to 

the flow of personal services between the Contracting States that 

could otherwise result from discontinuities in the laws of the Contracting States regarding the deductibility of pension contributions. 

Such discontinuities may arise where a country allows deductions 

or exclusions to its residents for contributions, made by them or on 

their behalf, to resident pension plans, but does not allow deductions or exclusions for payments made to plans resident in another 

country, even if the structure and legal requirements of such plans 

in the two countries are similar. 

There is no comparable set of rules in the OECD Model, although 

the issue is discussed in detail in the Commentary to Article 18 

(Pensions). The 2006 U.S. Model deals with this issue in paragraphs 2 through 4 of Article 18 (Pension Funds). 

Workers on short-term assignments in the other Contracting State 

Paragraphs 8 and 9 of Article XVIII address the case of a shortterm assignment where an individual who is participating in a 

‘‘qualifying retirement plan’’ (as defined in paragraph 15 of Article 

XVIII) in one Contracting State (the ‘‘home State’’) performs services as an employee for a limited period of time in the other Contracting State (the ‘‘host State’’). If certain requirements are satisfied, contributions made to, or benefits accrued under, the plan by 

or on behalf of the individual will be deductible or excludible in 

computing the individual’s income in the host State. In addition, 

contributions made to the plan by the individual’s employer will be 

allowed as a deduction in computing the employer’s profits in the 

host State. 

In order for paragraph 8 to apply, the remuneration that the individual receives with respect to the services performed in the host 

State must be taxable in the host State. This means, for example, 

that where the United States is the host State, paragraph 8 would 

not apply if the remuneration that the individual receives with respect to the services performed in the United States is exempt from 

taxation in the United States under Code section 893. 

The individual also must have been participating in the plan, or 

in another similar plan for which the plan was substituted, immeVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00048 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
49 

diately before he began performing services in the host State. The 

rule regarding a successor plan would apply if, for example, the 

employer has been acquired by another corporation that replaces 

the existing plan with its own plan, transferring membership in 

the old plan over into the new plan. 

In addition, the individual must not have been a resident (as determined under Article IV (Residence)) of the host State immediately before he began performing services in the host State. It is 

irrelevant for purposes of paragraph 8 whether the individual becomes a resident of the host State while he performs services there. 

A citizen of the United States who has been a resident of Canada 

may be entitled to benefits under paragraph 8 if (a) he performs 

services in the United States for a limited period of time and (b) 

he was a resident of Canada immediately before he began performing such services. 

Benefits are available under paragraph 8 only for so long as the 

individual has not performed services in the host State for the 

same employer (or a related employer) for more than 60 of the 120 

months preceding the individual’s current taxable year. The purpose of this rule is to limit the period of time for which the host 

State will be required to provide benefits for contributions to a plan 

from which it is unlikely to be able to tax the distributions. If the 

individual continues to perform services in the host State beyond 

this time limit, he is expected to become a participant in a plan in 

the host State. Canada’s domestic law provides preferential tax 

treatment for employer contributions to foreign pension plans in respect of services rendered in Canada by short-term residents, but 

such treatment ceases once the individual has been resident in 

Canada for at least 60 of the preceding 72 months. 

The contributions and benefits must be attributable to services 

performed by the individual in the host State, and must be made 

or accrued during the period in which the individual performs 

those services. This rule prevents individuals who render services 

in the host State for a very short period of time from making disproportionately large contributions to home State plans in order to 

offset the tax liability associated with the income earned in the 

host State. In the case where the United States is the host State, 

contributions will be deemed to have been made on the last day of 

the preceding taxable year if the payment is on account of such 

taxable year and is treated under U.S. law as a contribution made 

on the last day of the preceding taxable year. 

If an individual receives benefits in the host State with respect 

to contributions to a plan in the home State, the services to which 

the contributions relate may not be taken into account for purposes 

of determining the individual’s entitlement to benefits under any 

trust, company, organization, or other arrangement that is a resident of the host State, generally exempt from income taxation in 

that State and operated to provide pension or retirement benefits. 

The purpose of this rule is to prevent double benefits for contributions to both a home State plan and a host State plan with respect 

to the same services. Thus, for example, an individual who is working temporarily in the United States and making contributions to 

a qualifying retirement plan in Canada with respect to services 

performed in the United States may not make contributions to an 

50 

individual retirement account (within the meaning of Code section 

40 8(a)) in the United States with respect to the same services. 

Paragraph 8 states that it applies only to the extent that the contributions or benefits would qualify for tax relief in the home State 

if the individual were a resident of and performed services in that 

State. Thus, benefits would be limited in the same fashion as if the 

individual continued to be a resident of the home State. However, 

paragraph 9 provides that if the host State is the United States 

and the individual is a citizen of the United States, the benefits 

granted to the individual under paragraph 8 may not exceed the 

benefits that would be allowed by the United States to its residents 

for contributions to, or benefits otherwise accrued under, a generally corresponding pension or retirement plan established in and 

recognized for tax purposes by the United States. Thus, the lower 

of the two limits applies. This rule ensures that U.S. citizens working temporarily in the United States and participating in a Canadian plan will not get more favorable U.S. tax treatment than U.S. 

citizens participating in a U.S. plan. 

Where the United States is the home State, the amount of contributions that may be excluded from the employee’s income under 

paragraph 8 for Canadian purposes is limited to the U.S. dollar 

amount specified in Code section 415 or the U.S. dollar amount 

specified in Code section 402(g)(1) to the extent contributions are 

made from the employee’s compensation. For this purpose, the dollar limit specified in Code section 402(g)(1) means the amount applicable under Code section 402(g)(1) (including the age 50 catchup amount in Code section 402(g)(1)(C)) or, if applicable, the parallel dollar limit applicable under Code section 457(e)(15) plus the 

age 50 catch-up amount under Code section 414(v)(2)(B)(i) for a 

Code section 457(g) trust. 

Where Canada is the home State, the amount of contributions 

that may be excluded from the employee’s income under paragraph 

8 for U.S. purposes is subject to the limitations specified in subsections 146(5), 147(8), 147.1(8) and (9) and 147.2(1) and (4) of the 

Income Tax Act and paragraph 8503(4)(a) of the Income Tax Regulations, as applicable. If the employee is a citizen of the United 

States, then the amount of contributions that may be excluded is 

the lesser of the amounts determined under the limitations specified in the previous sentence and the amounts specified in the previous paragraph. 

The provisions described above provide benefits to employees. 

Paragraph 8 also provides that contributions made to the home 

State plan by an individual’s employer will be allowed as a deduction in computing the employer’s profits in the host State, even 

though such a deduction might not be allowable under the domestic 

law of the host State. This rule applies whether the employer is a 

resident of the host State or a permanent establishment that the 

employer has in the host State. The rule also applies to contributions by a person related to the individual’s employer, such as contributions by a parent corporation for its subsidiary, that are treated under the law of the host State as contributions by the individual’s employer. For example, if an individual who is participating 

in a qualifying retirement plan in Canada performs services for a 

limited period of time in the United States for a U.S. subsidiary of 

51 

a Canadian company, a contribution to the Canadian plan by the 

parent company in Canada that is treated under U.S. law as a contribution by the U.S. subsidiary would be covered by the rule. 

The amount of the allowable deduction is to be determined under 

the laws of the home State. Thus, where the United States is the 

home State, the amount of the deduction that is allowable in Canada will be subject to the limitations of Code section 404 (including 

the Code section 401(a)(17) and 415 limitations). Where Canada is 

the home State, the amount of the deduction that is allowable in 

the United States is subject to the limitations specified in subsections 147(8), 147.1(8) and (9) and 147.2(1) of the Income Tax 

Act, as applicable. 

Cross-border commuters 

Paragraphs 10, 11, and 12 of Article XVIII address the case of 

a commuter who is a resident of one Contracting State (the ‘‘residence State’’) and performs services as an employee in the other 

Contracting State (the ‘‘services State’’) and is a member of a 

‘‘qualifying retirement plan’’ (as defined in paragraph 15 of Article 

XVIII) in the services State. If certain requirements are satisfied, 

contributions made to, or benefits accrued under, the qualifying retirement plan by or on behalf of the individual will be deductible 

or excludible in computing the individual’s income in the residence 

State. 

In order for paragraph 10 to apply, the individual must perform 

services as an employee in the services State the remuneration 

from which is taxable in the services State and is borne by either 

an employer who is a resident of the services State or by a permanent establishment that the employer has in the services State. 

The contributions and benefits must be attributable to those services and must be made or accrued during the period in which the 

individual performs those services. In the case where the United 

States is the residence State, contributions will be deemed to have 

been made on the last day of the preceding taxable year if the payment is on account of such taxable year and is treated under U.S. 

law as a contribution made on the last day of the preceding taxable 

year. 

Paragraph 10 states that it applies only to the extent that the 

contributions or benefits qualify for tax relief in the services State. 

Thus, the benefits granted in the residence State are available only 

to the extent that the contributions or benefits accrued qualify for 

relief in the services State. Where the United States is the services 

State, the amount of contributions that may be excluded under 

paragraph 10 is the U.S. dollar amount specified in Code section 

415 or the U.S. dollar amount specified in Code section 402(g)(1) 

(as defined above) to the extent contributions are made from the 

employee’s compensation. Where Canada is the services State, the 

amount of contributions that may be excluded from the employee’s 

income under paragraph 10 is subject to the limitations specified 

in subsections 146(5), 147(8), 147.1(8) and (9) and 147.2(1) and (4) 

of the Income Tax Act and paragraph 8503(4)(a) of the Income Tax 

Regulations, as applicable. 

However, paragraphs 11 and 12 further provide that the benefits 

granted under paragraph 10 by the residence State may not exceed 

52 

certain benefits that would be allowable under the domestic law of 

the residence State. 

Paragraph 11 provides that where Canada is the residence State, 

the amount of contributions otherwise allowable as a deduction 

under paragraph 10 may not exceed the individual’s deduction 

limit for contributions to registered retirement savings plans 

(RRSPs) remaining after taking into account the amount of contributions to RRSPs deducted by the individual under the law of 

Canada for the year. The amount deducted by the individual under 

paragraph 10 will be taken into account in computing the individual’s deduction limit for subsequent taxation years for contributions to RRSPs. This rule prevents double benefits for contributions 

to both an RRSP and a qualifying retirement plan in the United 

States with respect to the same services. 

Paragraph 12 provides that if the United States is the residence 

State, the benefits granted to an individual under paragraph 10 

may not exceed the benefits that would be allowed by the United 

States to its residents for contributions to, or benefits otherwise accrued under, a generally corresponding pension or retirement plan 

established in and recognized for tax purposes by the United 

States. For purposes of determining an individual’s eligibility to 

participate in and receive tax benefits with respect to a pension or 

retirement plan or other retirement arrangement in the United 

States, contributions made to, or benefits accrued under, a qualifying retirement plan in Canada by or on behalf of the individual 

are treated as contributions or benefits under a generally corresponding pension or retirement plan established in and recognized for tax purposes by the United States. Thus, for example, the 

qualifying retirement plan in Canada would be taken into account 

for purposes of determining whether the individual is an ‘‘active 

participant’’ within the meaning of Code section 21 9(g)(5), with the 

result that the individual’s ability to make deductible contributions 

to an individual retirement account in the United States would be 

limited. 

Paragraph 10 does not address employer deductions because the 

employer is located in the services State and is already eligible for 

deductions under the domestic law of the services State. 

U.S. citizens resident in Canada 

Paragraphs 13 and 14 of Article XVIII address the special case 

of a U.S. citizen who is a resident of Canada (as determined under 

Article IV (Residence)) and who performs services as an employee 

in Canada and participates in a qualifying retirement plan (as defined in paragraph 15 of Article XVIII) in Canada. If certain requirements are satisfied, contributions made to, or benefits accrued 

under, a qualifying retirement plan in Canada by or on behalf of 

the U.S. citizen will be deductible or excludible in computing his 

or her taxable income in the United States. These provisions are 

generally consistent with paragraph 4 of Article 18 of the U.S. 

Model treaty. 

In order for paragraph 13 to apply, the U.S. citizen must perform 

services as an employee in Canada the remuneration from which 

is taxable in Canada and is borne by an employer who is a resident 

of Canada or by a permanent establishment that the employer has 

53 

in Canada. The contributions and benefits must be attributable to 

those services and must be made or accrued during the period in 

which the U.S. citizen performs those services. Contributions will 

be deemed to have been made on the last day of the preceding taxable year if the payment is on account of such taxable year and is 

treated under U.S. law as a contribution made on the last day of 

the preceding taxable year. 

Paragraph 13 states that it applies only to the extent the contributions or benefits qualify for tax relief in Canada. However, 

paragraph 14 provides that the benefits granted under paragraph 

13 may not exceed the benefits that would be allowed by the 

United States to its residents for contributions to, or benefits otherwise accrued under, a generally corresponding pension or retirement plan established in and recognized for tax purposes by the 

United States. Thus, the lower of the two limits applies. This rule 

ensures that a U.S. citizen living and working in Canada does not 

receive better U.S. treatment than a U.S. citizen living and working in the United States. The amount of contributions that may be 

excluded from the employee’s income under paragraph 13 is the 

U.S. dollar amount specified in Code section 415 or the U.S. dollar 

amount specified in Code section 402(g)(1) (as defined above) to the 

extent contributions are made from the employee’s compensation. 

In addition, pursuant to Code section 91 1(d)(6), an individual may 

not claim benefits under paragraph 13 with respect to services the 

remuneration for which is excluded from the individual’s gross income under Code section 911(a). 

For purposes of determining the individual’s eligibility to participate in and receive tax benefits with respect to a pension or retirement plan or other retirement arrangement established in and recognized for tax purposes by the United States, contributions made 

to, or benefits accrued under, a qualifying retirement plan in Canada by or on behalf of the individual are treated as contributions 

or benefits under a generally corresponding pension or retirement 

plan established in and recognized for tax purposes by the United 

States. Thus, for example, the qualifying retirement plan in Canada would be taken into account for purposes of determining 

whether the individual is an ‘‘active participant’’ within the meaning of Code section 21 9(g)(5), with the result that the individual’s 

ability to make deductible contributions to an individual retirement 

account in the United States would be limited. 

Paragraph 13 does not address employer deductions because the 

employer is located in Canada and is already eligible for deductions 

under the domestic law of Canada. 

Definition of ‘‘qualifying retirement plan’’ 

Paragraph 15 of Article XVIII provides that for purposes of paragraphs 8 through 14, a ‘‘qualifying retirement plan’’ in a Contracting State is a trust, company, organization, or other arrangement that (a) is a resident of that State, generally exempt from income taxation in that State and operated primarily to provide pension or retirement benefits; (b) is not an individual arrangement in 

respect of which the individual’s employer has no involvement; and 

(c) the competent authority of the other Contracting State agrees 

generally corresponds to a pension or retirement plan established 

54 

in and recognized for tax purposes in that State. Thus, U.S. individual retirement accounts (IRAs) and Canadian registered retirement savings plans (RRSPs) are not treated as qualifying retirement plans unless addressed in paragraph 10 of the General Note 

(as discussed below). In addition, a Canadian retirement compensation arrangement (RCA) is not a qualifying retirement plan because it is not considered to be generally exempt from income taxation in Canada. 

Paragraph 10 of the General Note provides that the types of Canadian plans that constitute qualifying retirement plans for purposes of paragraph 15 include the following and any identical or 

substantially similar plan that is established pursuant to legislation introduced after the date of signature of the Protocol (September 21, 2007): registered pension plans under section 147.1 of 

the Income Tax Act, registered retirement savings plans under section 146 that are part of a group arrangement described in subsection 204.2(1.32), deferred profit sharing plans under section 147, 

and any registered retirement savings plan under section 146, or 

registered retirement income fund under section 146.3, that is 

funded exclusively by rollover contributions from one or more of the 

preceding plans. 

Paragraph 10 of the General Note also provides that the types 

of U.S. plans that constitute qualifying retirement plans for purposes of paragraph 15 include the following and any identical or 

substantially similar plan that is established pursuant to legislation introduced after the date of signature of the Protocol (September 21, 2007): qualified plans under Code section 401(a) (including Code section 401(k) arrangements), individual retirement plans 

that are part of a simplified employee pension plan that satisfies 

Code section 408(k), Code section 408(p) simple retirement accounts, Code section 403(a) qualified annuity plans, Code section 

403(b) plans, Code section 457(g) trusts providing benefits under 

Code section 457(b) plans, the Thrift Savings Fund (Code section 

7701(j)), and any individual retirement account under Code section 

408(a) that is funded exclusively by rollover contributions from one 

or more of the preceding plans. 

If a particular plan in one Contracting State is of a type specified 

in paragraph 10 of the General Note with respect to paragraph 15 

of Article XVIII, it will not be necessary for taxpayers to obtain a 

determination from the competent authority of the other Contracting State that the plan generally corresponds to a pension or 

retirement plan established in and recognized for tax purposes in 

that State. A taxpayer who believes a particular plan in one Contracting State that is not described in paragraph 10 of the General 

Note nevertheless satisfies the requirements of paragraph 15 may 

request a determination from the competent authority of the other 

Contracting State that the plan generally corresponds to a pension 

or retirement plan established in and recognized for tax purposes 

in that State. In the case of the United States, such a determination must be requested under Revenue Procedure 2006–54, 2006– 

49 I.R.B. 655 (or any applicable analogous provision). In the case 

of Canada, the current version of Information Circular 71–17 provides guidance on obtaining assistance from the Canadian competent authority. 

55 

Source rule 

Paragraph 16 of Article XVIII provides that a distribution from 

a pension or retirement plan that is reasonably attributable to a 

contribution or benefit for which a benefit was allowed pursuant to 

paragraph 8, 10, or 13 of Article XVIII will be deemed to arise in 

the Contracting State in which the plan is established. This ensures that the Contracting State in which the plan is established 

will have the right to tax the gross amount of the distribution 

under subparagraph 2(a) of Article XVIII, even if a portion of the 

services to which the distribution relates were not performed in 

such Contracting State. 

Partnerships 

Paragraph 17 of Article XVIII provides that paragraphs 8 

through 16 of Article XVIII apply, with such modifications as the 

circumstances require, as though the relationship between a partnership that carries on a business, and an individual who is a 

member of the partnership, were that of employer and employee. 

This rule is needed because paragraphs 8, 10, and 13, by their 

terms, apply only with respect to contributions made to, or benefits 

accrued under, qualifying retirement plans by or on behalf of individuals who perform services as an employee. Thus, benefits are 

not available with respect to retirement plans for self-employed individuals, who may be deemed under U.S. law to be employees for 

certain pension purposes. Paragraph 17 ensures that partners participating in a plan established by their partnership may be eligible 

for the benefits provided by paragraphs 8, 10, and 13. 

Relationship to other Articles 

Paragraphs 8, 10, and 13 of Article XVIII are not subject to the 

saving clause of paragraph 2 of Article XXIX (Miscellaneous Rules) 

by reason of the exception in subparagraph 3(a) of Article XXIX. 

ARTICLE 14

Consistent with Articles 9 and 10 of the Protocol, Article 14 of 

the Protocol amends Article XIX (Government Service) of the Convention by deleting the reference to ‘‘Article XIV (Independent Personal Services)’’ and replacing such reference with the reference to 

‘‘Article VII (Business Profits)’’ and by reflecting the new name of 

Article XV (Income from Employment). 

ARTICLE 15

Article 15 of the Protocol replaces Article XX (Students) of the 

Convention. Article XX provides rules for host-country taxation of 

visiting students and business trainees. Persons who meet the tests 

of Article XX will be exempt from tax in the State that they are 

visiting with respect to designated classes of income. Several conditions must be satisfied in order for an individual to be entitled to 

the benefits of this Article. 

First, the visitor must have been, either at the time of his arrival 

in the host State or immediately before, a resident of the other 

Contracting State. 

56 

Second, the purpose of the visit must be the full-time education 

or training of the visitor. Thus, if the visitor comes principally to 

work in the host State but also is a part-time student, he would 

not be entitled to the benefits of this Article, even with respect to 

any payments he may receive from abroad for his maintenance or 

education, and regardless of whether or not he is in a degree program. Whether a student is to be considered full-time will be determined by the rules of the educational institution at which he is 

studying. 

The host State exemption in Article XX applies to payments received by the student or business trainee for the purpose of his 

maintenance, education or training that arise outside the host 

State. A payment will be considered to arise outside the host State 

if the payer is located outside the host State. Thus, if an employer 

from one of the Contracting States sends an employee to the other 

Contracting State for full-time training, the payments the trainee 

receives from abroad from his employer for his maintenance or 

training while he is present in the host State will be exempt from 

tax in the host State. Where appropriate, substance prevails over 

form in determining the identity of the payer. Thus, for example, 

payments made directly or indirectly by a U.S. person with whom 

the visitor is training, but which have been routed through a 

source outside the United States (e.g., a foreign subsidiary), are not 

treated as arising outside the United States for this purpose. 

In the case of an apprentice or business trainee, the benefits of 

Article XX will extend only for a period of one year from the time 

that the individual first arrives in the host country for the purpose 

of the individual’s training. If, however, an apprentice or trainee 

remains in the host country for a second year, thus losing the benefits of the Arti-cle, he would not retroactively lose the benefits of 

the Article for the first year. 

Relationship to other Articles 

The saving clause of paragraph 2 of Article XXIX (Miscellaneous 

Rules) does not apply to Article XX with respect to an individual 

who neither is a citizen of the host State nor has been admitted 

for permanent residence there. The saving clause, however, does 

apply with respect to citizens and permanent residents of the host 

State. Thus, a U.S. citizen who is a resident of Canada and who 

visits the United States as a full-time student at an accredited university will not be exempt from U.S. tax on remittances from 

abroad that otherwise constitute U.S. taxable income. However, an 

individual who is not a U.S. citizen, and who visits the United 

States as a student and remains long enough to become a resident 

under U.S. law, but does not become a permanent resident (i.e., 

does not acquire a green card), will be entitled to the full benefits 

of the Article. 

ARTICLE 16

Article 16 of the Protocol revises Article XXI (Exempt Organizations) of the existing Convention. 

57 

Paragraph 1 

Paragraph 1 amends Article XXI by renumbering paragraphs 4, 

5, and 6 as 5, 6, and 7, respectively. 

Paragraph 2 

Paragraph 2 replaces paragraphs 1 through 3 of Article XXI with 

four new paragraphs. In general, the provisions of former paragraphs 1 through 3 have been retained. 

New paragraph 1 provides that a religious, scientific, literary, 

educational, or charitable organization resident in a Contracting 

State shall be exempt from tax on income arising in the other Contracting State but only to the extent that such income is exempt 

from taxation in the Contracting State in which the organization 

is resident. 

New paragraph 2 retains the provisions of former subparagraph 

2(a), and provides that a trust, company, organization, or other arrangement that is resident in a Contracting State and operated exclusively to administer or provide pension, retirement or employee 

benefits or benefits for the self-employed under one or more funds 

or plans established to provide pension or retirement benefits or 

other employee benefits is exempt from taxation on dividend and 

interest income arising in the other Contracting State in a taxable 

year, if the income of such organization or other arrangement is 

generally exempt from taxation for that year in the Contracting 

State in which it is resident. 

New paragraph 3 replaces and expands the scope of former subparagraph 2(b) Former subparagraph 2(b) provided that, subject to 

the provisions of paragraph 3 (new paragraph 4), a trust, company, 

organization or other arrangement that was a resident of a Contracting State, generally exempt from income taxation in that State 

and operated exclusively to earn income for the benefit of one or 

more organizations described in subparagraph 2(a) (new paragraph 

2) was exempt from taxation on dividend and interest income arising in the other Contracting State in a taxable year. The Internal 

Revenue Service concluded in private letter rulings (PLR 

200111027 and PLR 200111037) that a pooled investment fund 

that included as investors one or more organizations described in 

paragraph 1 could not qualify for benefits under former subparagraph 2(b). New paragraph 3 now allows organizations described in 

paragraph 1 to invest in pooled funds with trusts, companies, organizations, or other arrangements described in new paragraph 2. 

Former subparagraph 2(b) did not exempt income earned by a 

trust, company or other arrangement for the benefit of religious, 

scientific, literary, educational or charitable organizations exempt 

from tax under paragraph 1. Therefore, the Protocol expands the 

scope of paragraph 3 to include such income. 

As noted above with respect to Article X (Dividends), paragraph 

3 of the General Note explains that distributions from Canadian income trusts and royalty trusts that are treated as dividends as a 

result of changes to Canada’s law regarding taxation of income and 

royalty trusts shall be treated as dividends for the purposes of Article X. Accordingly, such distributions will also be entitled to the 

benefits of Article XXI. 

58 

New paragraph 4 replaces paragraph 3 and provides that the exemptions provided by paragraphs 1, 2, 3 do not apply with respect 

to the income of a trust, company, organization or other arrangement from carrying on a trade or business or from a related person, 

other than a person referred to in paragraph 1, 2 or 3. The term 

‘‘related person’’ is not necessarily defined by paragraph 2 of Article 

IX (Related Person). 

ARTICLE 17

Article 17 of the Protocol amends Article XXII (Other Income) of 

the Convention by adding a new paragraph 4. Article XXII generally assigns taxing jurisdiction over income not dealt with in the 

other articles (Articles VI through XXI) of the Convention. 

New paragraph 4 provides a specific rule for residence State taxation of compensation derived in respect of a guarantee of indebtedness. New paragraph 4 provides that compensation derived by a 

resident of a Contracting State in respect of the provision of a 

guarantee of indebtedness shall be taxable only in that State, unless the compensation is business profits attributable to a permanent establishment situated in the other Contracting State, in 

which case the provisions of Article VII (Business Profits) shall 

apply. The clarification that Article VII shall apply when the compensation is considered business profits was included at the request of the United States. Compensation paid to a financial services entity to provide a guarantee in the ordinary course of its business of providing such guarantees to customers constitutes business profits dealt with under the provisions of Article VII. However, provision of guarantees with respect to debt of related parties 

is ordinarily not an independent economic undertaking that would 

generate business profits, and thus compensation in respect of such 

related-party guarantees is, in most cases, covered by Article XXII. 

ARTICLE 18

Article 18 of the Protocol amends paragraph 2 of Article XXIII 

(Capital) of the Convention by deleting language contained in that 

paragraph consistent with the changes made by Article 9 of the 

Protocol. 

ARTICLE 19

Article 19 of the Protocol deletes subparagraph 2(b) of Article 

XXIV (Elimination of Double Taxation) of the Convention and replaces it with a new subparagraph. 

New subparagraph 2(b) allows a Canadian company receiving a 

dividend from a U.S. resident company of which it owns at least 

10 percent of the voting stock, a credit against Canadian income 

tax of the appropriate amount of income tax paid or accrued to the 

United States by the dividend paying company with respect to the 

profits out of which the dividends are paid. The third Protocol to 

the Convention, signed March 17, 1995, had amended subparagraph (b) to allow a Canadian company to deduct in computing its 

Canadian taxable income any dividend received by it out of the exempt surplus of a foreign affiliate which is a resident of the United 

States. This change is consistent with current Canadian tax treaty 

59 

practice: it does not indicate any present intention to change Canada’s ‘‘exempt surplus’’ rules, and those rules remain in effect. 

ARTICLE 20

Article 20 of the Protocol revises Article XXV (Non-Discrimination) of the existing Convention to bring that Article into closer 

conformity to U.S. tax treaty policy. 

Paragraphs 1 and 2 

Paragraph 1 replaces paragraph 1 of Article XXV of the existing 

Convention. New paragraph 1 provides that a national of one Contracting State may not be subject to taxation or connected requirements in the other Contracting State that are more burdensome 

than the taxes and connected requirements imposed upon a national of that other State in the same circumstances. The OECD 

Model would prohibit taxation that is ‘‘other than or more burdensome’’ than that imposed on U.S. persons. Paragraph 1 omits the 

words ‘‘other than or’’ because the only relevant question under 

this provision should be whether the requirement imposed on a national of the other Contracting State is more burdensome. A requirement may be different from the requirements imposed on U.S. 

nationals without being more burdensome. 

The term ‘‘national’’ in relation to a Contracting State is defined 

in subparagraph 1(k) of Article III (General Definitions). The term 

includes both individuals and juridical persons. A national of a 

Contracting State is afforded protection under this paragraph even 

if the national is not a resident of either Contracting State. Thus, 

a U.S. citizen who is resident in a third country is entitled, under 

this paragraph, to the same treatment in Canada as a national of 

Canada in the same or similar circumstances (i.e., one who is resident in a third State). 

Whether or not the two persons are both taxable on worldwide 

income is a significant circumstance for this purpose. For this reason, paragraph 1 specifically refers to taxation or any requirement 

connected therewith, particularly with respect to taxation on worldwide income, as relevant circumstances. This language means that 

the United States is not obliged to apply the same taxing regime 

to a national of Canada who is not resident in the United States 

as it applies to a U.S. national who is not resident in the United 

States. U.S. citizens who are not resident in the United States but 

who are, nevertheless, subject to U.S. tax on their worldwide income are not in the same circumstances with respect to U.S. taxation as citizens of Canada who are not U.S. residents. Thus, for 

example, Article XXV would not entitle a national of Canada residing in a third country to taxation at graduated rates on U. S.- 

source dividends or other investment income that applies to a U.S. 

citizen residing in the same third country. 

Because of the increased coverage of paragraph 1 with respect to 

the treatment of nationals wherever they are resident, paragraph 

2 of this Article no longer has application, and therefore has been 

omitted. 

60 

Paragraph 3 

Paragraph 3 makes changes to renumbered paragraph 3 of Article XXV in order to conform with Article 10 of the Protocol by deleting the reference to ‘‘Article XV (Dependent Personal Services)’’ and 

replacing it with a reference to ‘‘Article XV (Income from Employment).’’ 

ARTICLE 21

Paragraph 1 of Article 21 of the Protocol replaces paragraph 6 

of Article XXVI (Mutual Agreement Procedure) of the Convention 

with new paragraphs 6 and 7. New paragraphs 6 and 7 provide a 

mandatory binding arbitration proceeding (Arbitration Proceeding). 

The Arbitration Note details 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 through negotiation 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 (i) involves the application of one or more 

Articles that the competent authorities have agreed in an exchange 

of notes shall be the subject of arbitration and is not a case that 

the competent authorities agree before the date on which an Arbitration Proceeding would otherwise have begun, is not suitable for 

determination by arbitration; or (ii) is a case that the competent 

authorities agree is suitable for determination by arbitration. 

Third, all concerned persons and their authorized representatives 

agree, according to the provisions of 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. 

The United States and Canada have agreed in the Arbitration 

Note to submit cases regarding the application of one or more of 

the following Articles to mandatory binding arbitration under the 

provisions of paragraphs 6 and 7 of Article XXVI: IV (Residence), 

but only insofar as it relates to the residence of a natural person, 

V (Permanent Establishment), VII (Business Profits), IX (Related 

Persons), and XII (Royalties) (but only (i) insofar as Article XII 

might apply in transactions involving related persons to whom Article IX might apply, or (ii) to an allocation of amounts between 

royalties that are taxable under paragraph 2 thereof and royalties 

that are exempt under paragraph 3 thereof). The competent authorities may, however, agree, before the date on which an Arbitration Proceeding would otherwise have begun, that a particular case 

is not suitable for arbitration. 

61 

New paragraph 7 provides six subparagraphs that detail the general 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 XXVI (Mutual Agreement Procedure) 

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 Canadian subsidiary for resolution to the U.S. competent authority, but 

also the Canadian 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 the case (unless the 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 the information necessary to undertake 

substantive consideration for a mutual agreement has been received by both competent authorities. 

Paragraph 16 of the Arbitration Note 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. In the case of the United States, this information is (i) the information that must be submitted to the U.S. competent authority under Section 4.05 of Rev. Proc. 2006–54, 2006– 

49 I.R.B. 1035 (or any applicable successor publication), and (ii) for 

cases initially submitted as a request for an Advance Pricing 

Agreement, the information that must be submitted to the Internal 

Revenue Service under Rev. Proc. 2006–9, 2006–2 I.R.B. 278 (or 

any applicable successor publication). In the case of Canada, this 

information is the information required to be submitted to the Canadian competent authority under Information Circular 7 1–17 (or 

any applicable successor publication). The information shall not be 

considered received until both competent authorities have received 

copies of all materials submitted to either Contracting State by the 

concerned person(s) in connection with the mutual agreement procedure. It is understood that confirmation of the ‘‘information necessary to undertake substantive consideration for a mutual agreement’’ is envisioned to ordinarily occur within 30 days after the 

necessary information is provided to the competent authority. 

The Arbitration Note also provides for several procedural rules 

once an Arbitration Proceeding under paragraph 6 of Article XXVI 

(’’Proceeding’’) has commenced, but the competent authorities may 

modify or supplement these rules as necessary. In addition, the arbitration board may adopt any procedures necessary for the conduct of its business, provided the procedures are not inconsistent 

with any provision of Article XXVI of the Convention. 

62 

Paragraph 5 of the Arbitration Note provides that each Contracting State has 60 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 board. 

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 board. It is agreed that this third member 

ordinarily should not be a citizen of either of the Contracting 

States. 

In the event that any members of the board are not appointed 

(including as a result of the failure of the two members appointed 

by the Contracting States to agree on a third member) by the requisite date, the remaining members are appointed by the highest 

ranking member of the Secretariat at the Centre for Tax Policy and 

Administration of the Organisation for Economic Co-operation and 

Development (OECD) who is not a citizen of either Contracting 

State, by written notice to both Contracting States within 60 days 

of the date of such failure. 

Paragraph 7 of the Arbitration Note establishes deadlines for 

submission of materials by the Contracting States to the arbitration board. 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 board to the other Contracting State on the date the 

later of the submissions is submitted to the board. Each of the Contracting States may submit a Reply Submission to the board 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 board. 

Additional information may be supplied to the arbitration board by 

a Contracting State only at the request of the arbitration board. 

The board will providecopies of any such requested information, 

along with the board’s request, to the other Contracting State on 

the date the request is made or the response is received. 

All communication with the board is to be in writing between the 

chair of the board and the designated competent authorities with 

the exception of communication regarding logistical matters. 

In making its determination, the arbitration board will apply the 

following authorities as necessary: (i) the provisions of the Convention, (ii) any agreed commentaries or explanation of the Contracting States concerning the Convention as amended, (iii) the 

laws of the Contracting States to the extent they are not inconsistent with each other, and (iv) any OECD Commentary, Guidelines or Reports regarding relevant analogous portions of the 

OECD Model Tax Convention. 

The arbitration board 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. The determination shall 

provide a determination regarding only the amount of income, exVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00062 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
63 

pense or tax reportable to the Contracting States. The determination has no precedential value and consequently the rationale behind a board’s determination would not be beneficial and shall not 

be provided by the board. 

Paragraph 11 of the Arbitration Note provides that, unless any 

concerned person does not accept the decision of the arbitration 

board, the determination of the board constitutes a resolution by 

mutual agreement under Article XXVI and, consequently, is binding on both Contracting States. Each concerned person must, within 30 days of receiving the determination from the competent authority to which the case was first presented, advise that competent authority whether the person accepts the determination. 

The failure to advise the competent authority within the requisite 

time is considered a rejection of the determination. If a determination is rejected, the case cannot be the subject of a subsequent 

MAP procedure on the same issue(s) determined by the panel, including a subsequent Arbitration Proceeding. After the commencement of an Arbitration Proceeding but before a decision of the 

board has been accepted by all concerned persons, the competent 

authorities may reach a mutual agreement to resolve the case and 

terminate the Proceeding. 

For purposes of the Arbitration Proceeding, the members of the 

arbitration board and their staffs shall be considered ‘‘persons or 

authorities’’ to whom information may be disclosed under Article 

XXVII (Exchange of Information). The Arbitration Note 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 board’s determination may be disclosed by members of the arbitration board 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 board 

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 XXVII of the Convention and 

the applicable domestic laws of the Contracting States, with the 

most restrictive of the provisions applying. 

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. 

In general, fees and expenses are borne equally by the Contracting States, including the cost of translation services. However, 

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 that initiated the Mutual Agreement Procedure. 

The fees and expenses of members of the board 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). All 

other costs are to be borne by the Contracting State that incurs 

them. Since arbitration of MAP cases is intended to assist taxpayers in resolving a governmental difference of opinion regarding 

64 

the taxation of their income, and is merely an extension of the competent authority process, no fees will be chargeable to a taxpayer 

in connection with arbitration. 

ARTICLE 22

Article 22 of the Protocol amends Article XXVI A (Assistance in 

Collection) of the existing Convention. Article XXVI A sets forth 

provisions under which the United States and Canada have agreed 

to assist each other in the collection of taxes. 

Paragraph 1 

Paragraph 1 replaces subparagraph 8(a) of Article XXVI A. In 

general, new subparagraph 8(a) provides the circumstances under 

which no assistance is to be given under the Article for a claim in 

respect of an individual taxpayer. New subparagraph 8(a) contains 

language that is in substance the same as subparagraph 8(a) of Article XXVI A of the existing Convention. However, the revised subparagraph also provides that no assistance in collection is to be 

given for a revenue claim from a taxable period that ended before 

November 9, 1995 in respect of an individual taxpayer, if the taxpayer became a citizen of the requested State at any time before 

November 9, 1995 and is such a citizen at the time the applicant 

State applies for collection of the claim. 

The additional language is intended to avoid the potentially discriminating application of former subparagraph 8(a) as applied to 

persons who were not citizens of the requested State in the taxable 

period to which a particular collection request related, but who became citizens of the requested State at a time prior to the entry 

into force of Article XXVI A as set forth in the third protocol signed 

March 17, 1995. New subparagraph 8(a) addresses this situation by 

treating the citizenship of a person in the requested State at anytime prior to November 9, 1995 as comparable to citizenship in the 

requested State during the period for which the claim for assistance relates if 1) the person is a citizen of the requested state at 

the time of the request for assistance in collection, and 2) the request relates to a taxable period ending prior to November 9, 1995. 

As is provided in subparagraph 3(g) of Article 27, this change will 

have effect for revenue claims finally determined after November 

9, 1985, the effective date of the adoption of collection assistance 

in the third protocol signed March 17, 1995. 

Paragraph 2 

Paragraph 2 replaces paragraph 9 of Article XXVI A of the Convention. Under paragraph 1 of Article XXVI A, each Contracting 

State generally agrees to lend assistance and support to the other 

in the collection of revenue claims. The term ‘‘revenue claim’’ is defined in paragraph 1 to include all taxes referred to in paragraph 

9 of the Article, as well as interest, costs, additions to such taxes, 

and civil penalties. New paragraph 9 provides that, notwithstanding the provisions of Article II (Taxes Covered) of the Convention, Article XXVI A shall apply to all categories of taxes collected, 

and to contributions to social security and employment insurance 

premiums levied, by or on behalf of the Government of a Contracting State. Prior to the Protocol, paragraph 9 did not contain 

65 

a specific reference to contributions to social security and employment insurance premiums. Although the prior language covered 

U.S. federal social security and unemployment taxes, the language 

did not cover Canada’s social security (e.g., Canada Pension Plan) 

and employment insurance programs, contributions to which are 

not considered taxes under Canadian law and therefore would not 

otherwise have come within the scope of the paragraph. 

ARTICLE 23

Article 23 of the Protocol replaces Article XXVII (Exchange of Information) of the Convention. 

Paragraph 1 of Article XXVI 

New paragraph 1 of Article XXVII is substantially the same as 

paragraph 1 of Article XXVII of the existing Convention. Paragraph 

1 authorizes the competent authorities to exchange information as 

may be relevant for carrying out the provisions of the Convention 

or the domestic laws of Canada and the United States concerning 

taxes covered by the Convention, insofar as the taxation under 

those domestic laws is not contrary to the Convention. New paragraph 1 changes the phrase ‘‘is relevant’’ to ‘‘may be relevant’’ to 

clarify that the language incorporates the standard in Code section 

7602 which authorizes the Internal Revenue Service 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 Internal Revenue Service 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, or even all accounts maintained by its residents 

with respect to a particular bank. 

The authority to exchange information granted by paragraph 1 

is not restricted by Article I (Personal Scope), and thus need not 

relate solely to persons otherwise covered by the Convention. 

Under paragraph 1, information may be exchanged for use in all 

phases of the taxation process including assessment, collection, enforcement or the determination of appeals. Thus, the competent authorities may request and provide information for cases under examination or criminal investigation, in collection, on appeals, or 

under prosecution. 

Any information received by a Contracting State pursuant to the 

Convention is to be treated as secret in the same manner as information obtained under the tax laws of that State. Such information 

shall be disclosed only to persons or authorities, including courts 

and administrative bodies, involved in the assessment or collection 

of, the administration and enforcement in respect of, or the determination of appeals in relation to, the taxes covered by the Convention and the information may be used by such persons only for 

such purposes. (In accordance with paragraph 4, for the purposes 

of this Article the Convention applies to a broader range of taxes 

66 

than those covered specifically by Article II (Taxes Covered)). Although the information received by persons described in paragraph 

1 is to be treated as secret, it may be disclosed by such persons in 

public court proceedings or in judicial decisions. 

Paragraph 1 also permits, however, a Contracting State to provide information received from the other Contracting State to its 

states, provinces, or local authorities, if it relates to a tax imposed 

by that state, province, or local authority that is substantially similar to a national-level tax covered under Article II (Taxes Covered). 

This provision does not authorize a Contracting State to request information on behalf of a state, province, or local authority. Paragraph 1 also authorizes the competent authorities to release information to any arbitration panel that may be established under the 

provisions of new paragraph 6 of Article XXVI (Mutual Agreement 

Procedure). Any information provided to a state, province, or local 

authority or to an arbitration panel is subject to the same use and 

disclosure provisions as is information received by the national 

Governments and used for their purposes. 

The provisions of paragraph 1 authorize the U.S. competent authority to continue to allow legislative bodies, such as the tax-writing committees of Congress and the Government Accountability Office to examine tax return information received from Canada when 

such bodies or offices are engaged in overseeing the administration 

of U.S. tax laws or a study of the administration of U.S. tax laws 

pursuant to a directive of Congress. However, the secrecy requirements of paragraph 1 must be met. 

It is contemplated that Article XXVII will be utilized by the competent authorities to exchange information upon request, routinely, 

and spontaneously. 

Paragraph 2 of Article XXVI 

New paragraph 2 conforms with the corresponding U.S. and 

OECD Model provisions. The substance of the second sentence of 

former paragraph 2 is found in new paragraph 6 of the Article, discussed below. 

Paragraph 2 provides that if a Contracting State requests information in accordance with Article XXVII, the other Contracting 

State shall use its information gathering measures to obtain the requested information. The instruction to the requested State to ‘‘use 

its information gathering measures’’ to obtain the requested information communicates the same instruction to the requested State 

as the language of former paragraph 2 that stated that the requested State shall obtain the information ‘‘in the same way as if 

its own taxation was involved.’’ Paragraph 2 makes clear that the 

obligation to provide information is limited by the provisions of 

paragraph 3, but that such limitations shall not be construed to 

permit a Contracting State to decline to obtain and supply information because it has no domestic tax interest in such information. 

In the absence of such a paragraph, some taxpayers have argued 

that subparagraph 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 

67 

Contracting State is not limited to providing only the information 

that it already has in its own files. 

Paragraph 3 of Article XXVI 

New paragraph 3 is substantively the same as paragraph 3 of 

Article XXVII of the existing Convention. Paragraph 3 provides 

that the provisions of paragraphs 1 and 2 do not impose on Canada 

or the United States the obligation to carry out administrative 

measures at variance with the laws and administrative practice of 

either State; to supply information which is not obtainable under 

the laws or in the normal course of the administration of either 

State; or to supply information which would disclose any trade, 

business, industrial, commercial, or professional secret or trade 

process, or 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. 

As discussed with respect to paragraph 2, in no case shall the 

limitations in paragraph 3 be construed to permit a Contracting 

State to decline to obtain information and supply information because it has no domestic tax interest in such information. 

Paragraph 4 of Article XXVI 

The language of new paragraph 4 is substantially similar to 

former paragraph 4. New paragraph 4, however, consistent with 

new paragraph 1, discussed above, replaces the words ‘‘is relevant’’ 

with ‘‘may be relevant’’ in subparagraph 4(b). 

Paragraph 4 provides that, for the purposes of Article XXVII, the 

Convention applies to all taxes imposed by a Contracting State, 

and to other taxes to which any other provision of the Convention 

applies, but only to the extent that the information may be relevant for the purposes of the application of that provision. 

Article XXVII does not apply to taxes imposed by political subdivisions or local authorities of the Contracting States. Paragraph 

4 is designed to ensure that information exchange will extend to 

taxes of every kind (including, for example, estate, gift, excise, and 

value added taxes) at the national level in the United States and 

Canada. 

68 

Paragraph 5 of Article XXVI 

New paragraph 5 conforms with the corresponding U.S. and 

OECD Model provisions. Paragraph 5 provides that a Contracting 

State may not decline to provide information because that information is held by a financial institution, nominee or person 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. 

Paragraph 6 of Article XXVI 

The substance of new paragraph 6 is similar to the second sentence of paragraph 2 of Article XXVII of the existing Convention. 

New paragraph 6 adopts the language of paragraph 6 of Article 26 

(Exchange of Information and Administrative Assistance) of the 

U.S. Model. New paragraph 6 provides that the requesting State 

may specify the form in which information is to be provided (e.g., 

depositions of witnesses and authenticated copies of original documents). 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. 

Paragraph 7 of Article XXVI 

New paragraph 7 is consistent with paragraph 8 of Article 26 

(Exchange of Information and Administrative Assistance) of the 

U.S. Model. Paragraph 7 provides that the requested State shall 

allow representatives of the requesting State to enter the requested 

State to interview individuals and examine books and records with 

the consent of the persons subject to examination. Paragraph 7 was 

intended to reinforce that the administrations can conduct consensual tax examinations abroad, and was not intended to limit travel 

or supersede any arrangements or procedures the competent authorities may have previously had in place regarding travel for tax 

administration purposes. 

Paragraph 13 of General Note 

As is explained in paragraph 13 of the General Note, the United 

States and Canada understand and agree that the standards and 

practices described in Article XXVII of the Convention are to be in 

no respect less effective than those described in the Model Agreement on Exchange of Information on Tax Matters developed by the 

OECD Global Forum Working Group on Effective Exchange of Information. 

69 

ARTICLE 24

Article 24 amends Article XXIX (Miscellaneous Rules) of the Convention. Paragraph 1 

Paragraph 1 replaces paragraph 2 of Article XXIX of the existing 

Convention. New paragraph 2 is divided into two subparagraphs. 

In general, subparagraph 2(a) provides a ‘‘saving clause’’ pursuant 

to which the United States and Canada may each tax its residents, 

as determined under Article IV (Residence), and the United States 

may tax its citizens and companies, including those electing to be 

treated as domestic corporations (e.g. under Code section 1504(d)), 

as if there were no convention between the United States and Canada with respect to taxes on income and capital. Subparagraph 2(a) 

contains language that generally corresponds to former paragraph 

2, but omits certain language pertaining to former citizens, which 

are addressed in new subparagraph 2(b). 

New subparagraph 2(b) generally corresponds to the provisions of 

former paragraph 2 addressing former citizens of the United 

States. However, new subparagraph 2(b) also includes a reference 

to former long-term residents of the United States. This addition, 

as well as other changes in subparagraph 2(b), brings the Convention in conformity with the U.S. taxation of former citizens and 

long-term residents under Code section 877. 

Similar to subparagraph 2(a), new subparagraph 2(b) operates as 

a ‘‘saving clause’’ and provides that notwithstanding the other provisions of the Convention, a former citizen or former long-term resident of the United States, may, for a period of ten years following 

the loss of such status, be taxed in accordance with the laws of the 

United States with respect to income from sources within the 

United States (including income deemed under the domestic law of 

the United States to arise from such sources). 

Paragraphs 11 and 12 of the General Note provide definitions 

based on Code section 877 that are relevant to the application of 

paragraph 2 of Article XXIX. Paragraph 11 of the General Note 

provides that the term ‘‘long-term resident’’ means any individual 

who is a lawful permanent resident of the United States in eight 

or more taxable years during the preceding 15 taxable years. In determining whether the eight-year threshold is met, one does not 

count any year in which the individual is treated as a resident of 

Canada under this Convention (or as a resident of any country 

other than the United States under the provisions of any other 

U.S. tax treaty), and the individual does not waive the benefits of 

such treaty applicable to residents of the other country. This understanding is consistent with how this provision is generally interpreted in U.S. tax treaties. 

Paragraph 12 of the General Note provides that the phrase ‘‘income deemed under the domestic law of the United States to arise 

from such sources’’ as used in new subparagraph 2(b) includes 

gains from the sale or exchange of stock of a U.S. company or debt 

obligations of a U.S. person, the United States, a State, or a political subdivision thereof, or the District of Columbia, gains from 

property (other than stock or debt obligations) located in the 

United States, and, in certain cases, income or gain derived from 

the sale of stock of a non-U.S. company or a disposition of property 

70 

contributed to such non-U.S. company where such company would 

be a controlled foreign corporation with respect to the individual if 

such person had continued to be a U.S. person. In addition, an individual who exchanges property that gives rise or would give rise 

to U.S.-source income for property that gives rise to foreign-source 

income will be treated as if he had sold the property that would 

give rise to U.S.-source income for its fair market value, and any 

consequent gain shall be deemed to be income from sources within 

the United States. 

Paragraph 2 

Paragraph 2 replaces subparagraph 3(a) of Article XXIX of the 

existing Convention. Paragraph 3 provides that, notwithstanding 

paragraph 2 of Article XXIX, the United States and Canada must 

respect specified provisions of the Convention in regard to certain 

persons, including residents and citizens. Therefore, subparagraph 

3(a) lists certain paragraphs and Articles of the Convention that 

represent exceptions to the ‘‘saving clause’’ in all situations. New 

subparagraph 3(a) is substantially similar to former subparagraph 

3(a), but now contains a reference to paragraphs 8, 10, and 13 of 

Article XVIII (Pensions and Annuities) to reflect the changes made 

to that article in paragraph 3 of Article 13 of the Protocol. 

ARTICLE 25

Article 25 of the Protocol replaces Article XXIX A (Limitation on 

Benefits) of the existing Convention, which was added to the Convention by the Protocol done on March 17, 1995. Article XXIX A addresses the problem of ‘‘treaty shopping’’ by residents of third 

States by requiring, in most cases, that the person seeking benefits 

not only be a U.S. resident or Canadian resident but also satisfy 

other tests. For example, a resident of a third State might establish 

an entity resident in Canada for the purpose of deriving income 

from the United States and claiming U.S. treaty benefits with respect to that income. Article XXIX A limits the benefits granted by 

the United States or Canada under the Convention to those persons whose residence in the other Contracting State is not considered to have been motivated by the existence of the Convention. As 

replaced by the Protocol, new Article XXIX A is reciprocal, and 

many of the changes to the former paragraphs of Article XXIX A 

are made to effectuate this reciprocal application. 

Absent Article XXIX A, an entity resident in one of the Contracting States would be entitled to benefits under the Convention, 

unless it were denied such benefits as a result of limitations under 

domestic law (e.g., business purpose, substance-over-form, step 

transaction, or conduit principles or other anti-avoidance rules) applicable to a particular transaction or arrangement. As noted below 

in the explanation of paragraph 7, general anti-abuse provisions of 

this sort apply in conjunction with the Convention in both the 

United States and Canada. In the case of the United States, such 

anti-abuse provisions complement the explicit anti-treaty-shopping 

rules of Article XXIX A. While the anti-treaty-shopping rules determine whether a person has a sufficient nexus to Canada to be entitled to benefits under the Convention, the anti-abuse provisions 

under U.S. domestic law determine whether a particular transVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00070 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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action should be recast in accordance with the substance of the 

transaction. 

Paragraph 1 of Article XXIX A 

New paragraph 1 of Article XXIX A provides that, for the purposes of the application of the Convention, a ‘‘qualifying person’’ 

shall be entitled to all of the benefits of the Convention and, except 

as provided in paragraphs 3, 4, and 6, a person that is not a qualifying person shall not be entitled to any benefits of the Convention. 

Paragraph 2 of Article XXIX A 

New paragraph 2 lists a number of characteristics any one of 

which will make a United States or Canadian resident a qualifying 

person. The ‘‘look-through’’ principles introduced by the Protocol 

(e.g. paragraph 6 of Article IV (Residence)) are to be applied in conjunction with Article XXIX A. Accordingly, the provisions of Article 

IV shall determine the person who derives an item of income, and 

the objective tests of Article XXIX A shall be applied to that person 

to determine whether benefits shall be granted. The rules are essentially mechanical tests and are discussed below. 

Individuals and governmental entities 

Under new paragraph 2, the first two categories of qualifying 

persons are (1) natural persons resident in the United States or 

Canada (as listed in subparagraph 2(a)), and (2) the Contracting 

States, political subdivisions or local authorities thereof, and any 

agency or instrumentality of such Government, political subdivision 

or local authority (as listed in subparagraph 2(b)). Persons falling 

into these two categories are unlikely to be used, as the beneficial 

owner of income, to derive benefits under the Convention on behalf 

of a third-country person. If such a person receives income as a 

nominee on behalf of a third-country resident, benefits will be denied with respect to those items of income under the articles of the 

Convention that would otherwise grant the benefit, because of the 

requirements in those articles that the beneficial owner of the income be a resident of a Contracting State. 

Publicly traded entities 

Under new subparagraph 2(c), a company or trust resident in a 

Contracting State is a qualifying person if the company’s principal 

class of shares, and any disproportionate class of shares, or the 

trust’s units, or disproportionate interest in a trust, are primarily 

and regularly traded on one or more recognized stock exchanges. 

The term ‘‘recognized stock exchange’’ is defined in subparagraph 

5(f) of the Article to mean, in the United States, the NASDAQ System and any stock exchange registered as a national securities exchange with the Securities and Exchange Commission, and, in Canada, any Canadian stock exchanges that are ‘‘prescribed stock exchanges’’ or ‘‘designated stock exchanges’’ under the Income Tax 

Act. These are, at the time of signature of the Protocol, the Montreal Stock Exchange, the Toronto Stock Exchange, and Tiers 1 and 

2 of the TSX Venture Exchange. Additional exchanges may be 

added to the list of recognized exchanges by exchange of notes beVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
72 

tween the Contracting States or by agreement between the competent authorities. 

If a company has only one class of shares, it is only necessary 

to consider whether the shares of that class meet the relevant trading requirements. If the company has more than one class of 

shares, it is necessary as an initial matter to determine which class 

or classes constitute the ‘‘principal class of shares.’’ The term ‘‘principal class of shares’’ is defined in subparagraph 5(e) of the Article 

to mean the ordinary or common shares of the company representing the majority of the aggregate voting power and value of 

the company. If the company does not have a class of ordinary or 

common shares representing the majority of the aggregate voting 

power and value of the company, then the ‘‘principal class of 

shares’’ is that class or any combination of classes of shares that 

represents, in the aggregate, a majority of the voting power and 

value of the company. Although in a particular case involving a 

company with several classes of shares it is conceivable that more 

than one group of classes could be identified that account for more 

than 50% of the voting power and value of the shares of the company, it is only necessary for one such group to satisfy the requirements of this subparagraph in order for the company to be entitled 

to benefits. Benefits would not be denied to the company even if 

a second, non-qualifying, group of shares with more than half of 

the company’s voting power and value could be identified. 

A company whose principal class of shares is regularly traded on 

a recognized stock exchange will nevertheless not qualify for benefits under subparagraph 2(c) if it has a disproportionate class of 

shares that is not regularly traded on a recognized stock exchange. 

The term ‘‘disproportionate class of shares’’ is defined in subparagraph 5(b) of the Article. A company has a disproportionate class 

of shares if it has outstanding a class of shares which is subject to 

terms or other arrangements that entitle the holder to a larger portion of the company’s income, profit, or gain in the other Contracting State than that to which the holder would be entitled in 

the absence of such terms or arrangements. Thus, for example, a 

company has a disproportionate class of shares if it has outstanding a class of ‘‘tracking stock’’ that pays dividends based upon 

a formula that approximates the company’s return on its assets 

employed in the United States. Similar principles apply to determine whether or not there are disproportionate interests in a trust. 

The following example illustrates the application of subparagraph 5(b). 

Example. OCo is a corporation resident in Canada. OCo has two 

classes of shares: Common and Preferred. The Common shares are 

listed and regularly traded on a designated stock exchange in Canada. The Preferred shares have no voting rights and are entitled 

to receive dividends equal in amount to interest payments that 

OCo receives from unrelated borrowers in the United States. The 

Preferred shares are owned entirely by a single investor that is a 

resident of a country with which the United States does not have 

a tax treaty. The Common shares account for more than 50 percent 

of the value of OCo and for 100 percent of the voting power. Because the owner of the Preferred shares is entitled to receive payments corresponding to the U.S.-source interest income earned by 

73 

OCo, the Preferred shares are a disproportionate class of shares. 

Because the Preferred shares are not primarily and regularly traded on a recognized stock exchange, OCo will not qualify for benefits 

under subparagraph 2(c). 

The term ‘‘regularly traded’’ is not defined in the Convention. In 

accordance with paragraph 2 of Article III (General Definitions) 

and paragraph 1 of the General Note, this term will be defined by 

reference to the domestic tax laws of the State from which benefits 

of the Convention are sought, generally the source State. In the 

case of the United States, this term is understood to have the 

meaning it has under Treas. Reg. section 1.884–5(d)(4)(i)(B), relating to the branch tax provisions of the Code, as may be amended 

from time to time. Under these regulations, a class of shares is considered to be ‘‘regularly traded’’ if two requirements are met: trades 

in the class of shares are made in more than de minimis quantities 

on at least 60 days during the taxable year, and the aggregate 

number of shares in the class traded during the year is at least 10 

percent of the average number of shares outstanding during the 

year. Sections 1. 884–5(d)(4)(i)(A), (ii) and (iii) will not be taken 

into account for purposes of defining the term ‘‘regularly traded’’ 

under the Convention. 

The regularly-traded requirement can be met by trading on one 

or more recognized stock exchanges. Therefore, trading may be aggregated for purposes of this requirement. Thus, a U.S. company 

could satisfy the regularly traded requirement through trading, in 

whole or in part, on a recognized stock exchange located in Canada. 

Authorized but unissued shares are not considered for purposes of 

this test. 

The term ‘‘primarily traded’’ is not defined in the Convention. In 

accordance with paragraph 2 of Article III (General Definitions) 

and paragraph 1 of the General Note, this term will have the 

meaning it has under the laws of the State concerning the taxes 

to which the Convention applies, generally the source State. In the 

case of the United States, this term is understood to have the 

meaning it has under Treas. Reg. section 1.884–5(d)(3), as may be 

amended from time to time, relating to the branch tax provisions 

of the Code. Accordingly, stock of a corporation is ‘‘primarily traded’’ if the number of shares in the company’s principal class of 

shares that are traded during the taxable year on all recognized 

stock exchanges exceeds the number of shares in the company’s 

principal class of shares that are traded during that year on all 

other established securities markets. 

Subject to the adoption by Canada of other definitions, the U.S. 

interpretation of ‘‘regularly traded’’ and ‘‘primarily traded’’ will be 

considered to apply, with such modifications as circumstances require, under the Convention for purposes of Canadian taxation. 

Subsidiaries of publicly traded entities 

Certain companies owned by publicly traded corporations also 

may be qualifying persons. Under subparagraph 2(d), a company 

resident in the United States or Canada will be a qualifying person, even if not publicly traded, if more than 50 percent of the vote 

and value of its shares, and more than 50 percent of the vote and 

value of each disproportionate class of shares, is owned (directly or 

74 

indirectly) by five or fewer persons that are qualifying persons 

under subparagraph 2(c). In addition, each company in the chain 

of ownership must be a qualifying person. Thus, for example, a 

company that is a resident of Canada, all the shares of which are 

owned by another company that is a resident of Canada, would 

qualify for benefits of the Convention if the principal class of 

shares (and any disproportionate classes of shares) of the parent 

company are regularly and primarily traded on a recognized stock 

exchange. However, such a subsidiary would not qualify for benefits under subparagraph 2(d) if the publicly traded parent company 

were a resident of a third state, for example, and not a resident 

of the United States or Canada. Furthermore, if a parent company 

qualifying for benefits under subparagraph 2(c) indirectly owned 

the bottom-tier company through a chain of subsidiaries, each subsidiary in the chain, as an intermediate owner, must be a qualifying person in order for the bottom-tier subsidiary to meet the test 

in subparagraph 2(d). 

Subparagraph 2(d) provides that a subsidiary can take into account ownership by as many as five companies, each of which 

qualifies for benefits under subparagraph 2(c) to determine if the 

subsidiary qualifies for benefits under subparagraph 2(d). For example, a Canadian company that is not publicly traded but that is 

owned, one-third each, by three companies, two of which are Canadian resident corporations whose principal classes of shares are primarily and regularly traded on a recognized stock exchange, will 

qualify under subparagraph 2(d). 

By applying the principles introduced by the Protocol (e.g. paragraph 6 of Article IV) in the context of this rule, one ‘‘looks 

through’’ entities in the chain of ownership that are viewed as fiscally transparent under the domestic laws of the State of residence 

(other than entities that are resident in the State of source). 

The 50-percent test under subparagraph 2(d) applies only to 

shares other than ‘‘debt substitute shares.’’ The term ‘‘debt substitute shares’’ is defined in subparagraph 5(a) to mean shares defined in paragraph (e) of the definition in the Canadian Income Tax 

Act of ‘‘term preferred shares’’ (see subsection 248(1) of the Income 

Tax Act), which relates to certain shares received in debt-restructuring arrangements undertaken by reason of financial difficulty or 

insolvency. Subparagraph 5(a) also provides that the competent authorities may agree to treat other types of shares as debt substitute 

shares. 

Ownership/base erosion test 

Subparagraph 2(e) provides a two-part test under which certain 

other entities may be qualifying persons, based on ownership and 

lack of ‘‘base erosion.’’ A company resident in the United States or 

Canada will satisfy the first of these tests if 50 percent or more of 

the vote and value of its shares and 50 percent or more of the vote 

and value of each disproportionate class of shares, in both cases not 

including debt substitute shares, is not owned, directly or indirectly, by persons other than qualifying persons. Similarly, a trust 

resident in the United States or Canada will satisfy this first test 

if 50 percent or more of its beneficial interests, and 50 percent or 

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75 

directly, by persons other than qualifying persons. The wording of 

these tests is intended to make clear that, for example, if a Canadian company is more than 50 percent owned, either directly or indirectly (including cumulative indirect ownership through a chain 

of entities), by a U.S. resident corporation that is, itself, wholly 

owned by a third-country resident other than a qualifying person, 

the Canadian company would not pass the ownership test. This is 

because more than 50 percent of its shares is owned indirectly by 

a person (the third-country resident) that is not a qualifying person. 

It is understood by the Contracting States that in determining 

whether a company satisfies the ownership test described in subparagraph 2(e)(i), a company, 50 percent of more of the aggregate 

vote and value of the shares of which and 50 percent or more of 

the vote and value of each disproportionate class of shares (in neither case including debt substitute shares) of which is owned, directly or indirectly, by a company described in subparagraph 2(c) 

will satisfy the ownership test of subparagraph 2(e)(i). In such case, 

no further analysis of the ownership of the company described in 

subparagraph 2(c) is required. Similarly, in determining whether a 

trust satisfies the ownership test described in subparagraph 

2(e)(ii), a trust, 50 percent or more of the beneficial interest in 

which and 50 percent or more of each disproportionate interest in 

which, is owned, directly or indirectly, by a trust described in subparagraph (2)(c) will satisfy the ownership test of subparagraph 

(2)(e)(ii), and no further analysis of the ownership of the trust described in subparagraph 2(c) is required. 

The second test of subparagraph 2(e) is the so-called ‘‘base erosion’’ test. A company or trust that passes the ownership test must 

also pass this test to be a qualifying person under this subparagraph. This test requires that the amount of expenses that are paid 

or payable by the entity in question, directly or indirectly, to persons that are not qualifying persons, and that are deductible from 

gross income (with both deductibility and gross income as determined under the tax laws of the State of residence of the company 

or trust), be less than 50 percent of the gross income of the company or trust. This test is applied for the fiscal period immediately 

preceding the period for which the qualifying person test is being 

applied. If it is the first fiscal period of the person, the test is applied for the current period. 

The ownership/base erosion test recognizes that the benefits of 

the Convention can be enjoyed indirectly not only by equity holders 

of an entity, but also by that entity’s obligees, such as lenders, 

licensors, service providers, insurers and reinsurers, and others. 

For example, a third-country resident could license technology to a 

Canadian-owned Canadian corporation to be sub-licensed to a U.S. 

resident. The U.S.-source royalty income of the Canadian corporation would be exempt from U.S. withholding tax under Article XII 

(Royalties) of the Convention. While the Canadian corporation 

would be subject to Canadian corporation income tax, its taxable 

income could be reduced to near zero as a result of the deductible 

royalties paid to the third-country resident. If, under a convention 

between Canada and the third country, those royalties were either 

exempt from Canadian tax or subject to tax at a low rate, the U.S. 

76 

treaty benefit with respect to the U.S.-source royalty income would 

have flowed to the third-country resident at little or no tax cost, 

with no reciprocal benefit to the United States from the third country. The ownership/base erosion test therefore requires both that 

qualifying persons substantially own the entity and that the entity’s tax base is not substantially eroded by payments (directly or 

indirectly) to nonqualifying persons. 

For purposes of this subparagraph 2(e) and other provisions of 

this Article, the term ‘‘shares’’ includes, in the case of a mutual insurance company, any certificate or contract entitling the holder to 

voting power in the corporation. This is consistent with the interpretation of similar limitation on benefits provisions in other U.S. 

treaties. In Canada, the principles that are reflected in subsection 

256(8.1) of the Income Tax Act will be applied, in effect treating 

memberships, policies or other interests in a corporation incorporated without share capital as representing an appropriate number of shares. 

The look-through principles introduced by the Protocol (e.g. new 

paragraph 6 of Article IV) are to be taken into account when applying the ownership and base erosion provisions of Article XXIX A. 

Therefore, one ‘‘looks through’’ an entity that is viewed as fiscally 

transparent under the domestic laws of the residence State (other 

than entities that are resident in the source State) when applying 

the ownership/base erosion test. Assume, for example, that USCo, 

a company incorporated in the United States, wishes to obtain 

treaty benefits by virtue of the ownership and base erosion rule. 

USCo is owned by USLLC, an entity that is treated as fiscally 

transparent in the United States. USLLC in turn is wholly owned 

in equal shares by 10 individuals who are residents of the United 

States. Because the United States views USLLC as fiscally transparent, the 10 U.S. individuals shall be regarded as the owners of 

USCo for purposes of the ownership test. Accordingly, USCo would 

satisfy the ownership requirement of the ownership/base erosion 

test. However, if USLLC were instead owned in equal shares by 

four U.S. individuals and six individuals who are not residents of 

either the United States or Canada, USCo would not satisfy the 

ownership requirement. Similarly, for purposes of the base erosion 

test, deductible payments made to USLLC will be treated as made 

to USLLC’s owners. 

Other qualifying persons 

Under new subparagraph 2(f), an estate resident in the United 

States or Canada is a qualifying person entitled to the benefits of 

the Convention. 

New subparagraphs 2(g) and 2(h) specify the circumstances 

under which certain types of not-for-profit organizations will be 

qualifying persons. Subparagraph 2(g) provides that a not-for-profit 

organization that is resident in the United States or Canada is a 

qualifying person, and thus entitled to benefits, if more than half 

of the beneficiaries, members, or participants in the organization 

are qualifying persons. The term ‘‘not-for-profit organization’’ of a 

Contracting State is defined in subparagraph 5(d) of the Article to 

mean an entity created or established in that State that is generally exempt from income taxation in that State by reason of its 

77 

not-for-profit status. The term includes charities, private foundations, trade unions, trade associations, and similar organizations. 

New subparagraph 2(h) specifies that certain trusts, companies, 

organizations, or other arrangements described in paragraph 2 of 

Article XXI (Exempt Organizations) are qualifying persons. To be 

a qualifying person, the trust, company, organization or other arrangement must be established for the purpose of providing pension, retirement, or employee benefits primarily to individuals who 

are (or were, within any of the five preceding years) qualifying persons. A trust, company, organization, or other arrangement will be 

considered to be established for the purpose of providing benefits 

primarily to such persons if more than 50 percent of its beneficiaries, members, or participants are such persons. Thus, for example, a Canadian Registered Retirement Savings Plan (’’RRSP’’) 

of a former resident of Canada who is working temporarily outside 

of Canada would continue to be a qualifying person during the period of the individual’s absence from Canada or for five years, 

whichever is shorter. A Canadian pension fund established to provide benefits to persons employed by a company would be a qualifying person only if most of the beneficiaries of the fund are (or 

were within the five preceding years) individual residents of Canada or residents or citizens of the United States. 

New subparagraph 2(i) specifies that certain trusts, companies, 

organizations, or other arrangements described in paragraph 3 of 

Article XXI (Exempt Organizations) are qualifying persons. To be 

a qualifying person, the beneficiaries of a trust, company, organization or other arrangement must be described in subparagraph 2(g) 

or 2(h). 

The provisions of paragraph 2 are self-executing, unlike the provisions of paragraph 6, discussed below. The tax authorities may, 

of course, on review, determine that the taxpayer has improperly 

interpreted the paragraph and is not entitled to the benefits 

claimed. 

Paragraph 3 of Article XXIX A 

Paragraph 3 provides an alternative rule, under which a United 

States or Canadian resident that is not a qualifying person under 

paragraph 2 may claim benefits with respect to those items of income that are connected with the active conduct of a trade or business in its State of residence. 

This is the so-called ‘‘active trade or business’’ test. Unlike the 

tests of paragraph 2, the active trade or business test looks not 

solely at the characteristics of the person deriving the income, but 

also at the nature of the person’s activity and the connection between the income and that activity. Under the active trade or business test, a resident of a Contracting State deriving an item of income from the other Contracting State is entitled to benefits with 

respect to that income if that person (or a person related to that 

person under the principles of Code section 482, or in the case of 

Canada, section 251 of the Income Tax Act) is engaged in an active 

trade or business in the State where it is resident, the income in 

question is derived in connection with, or is incidental to, that 

trade or business, and the size of the active trade or business in 

the residence State is substantial relative to the activity in the 

78 

other State that gives rise to the income for which benefits are 

sought. Further details on the application of the substantiality requirement are provided below. 

Income that is derived in connection with, or is incidental to, the 

business of making or managing investments will not qualify for 

benefits under this provision, unless those investment activities are 

carried on with customers in the ordinary course of the business 

of a bank, insurance company, registered securities dealer, or deposit-taking financial institution. 

Income is considered derived ‘‘in connection’’ with an active trade 

or business if, for example, the income-generating activity in the 

State is ‘‘upstream,’’ ‘‘downstream,’’ or parallel to that conducted in 

the other Contracting State. Thus, for example, if the U.S. activity 

of a Canadian resident company consisted of selling the output of 

a Canadian manufacturer or providing inputs to the manufacturing 

process, or of manufacturing or selling in the United States the 

same sorts of products that were being sold by the Canadian trade 

or business in Canada, the income generated by that activity would 

be treated as earned in connection with the Canadian trade or 

business. Income is considered ‘‘incidental’’ to a trade or business 

if, for example, it arises from the short-term investment of working 

capital of the resident in securities issued by persons in the State 

of source. 

An item of income may be considered to be earned in connection 

with or to be incidental to an active trade or business in the United 

States or Canada even though the resident claiming the benefits 

derives the income directly or indirectly through one or more other 

persons that are residents of the other Contracting State. Thus, for 

example, a Canadian resident could claim benefits with respect to 

an item of income earned by a U.S. operating subsidiary but derived by the Canadian resident indirectly through a wholly-owned 

U.S. holding company interposed between it and the operating subsidiary. This language would also permit a resident to derive income from the other Contracting State through one or more residents of that other State that it does not wholly own. For example, 

a Canadian partnership in which three unrelated Canadian companies each hold a one-third interest could form a wholly-owned U.S. 

holding company with a U.S. operating subsidiary. The ‘‘directly or 

indirectly’’ language would allow otherwise unavailable treaty benefits to be claimed with respect to income derived by the three Canadian partners through the U.S. holding company, even if the 

partners were not considered to be related to the U.S. holding company under the principles of Code section 482. 

As described above, income that is derived in connection with, or 

is incidental to, an active trade or business in a Contracting State, 

must pass the substantiality requirement to qualify for benefits 

under the Convention. The trade or business must be substantial 

in relation to the activity in the other Contracting State that gave 

rise to the income in respect of which benefits under the Convention are being claimed. To be considered substantial, it is not necessary that the trade or business be as large as the income-generating activity. The trade or business cannot, however, in terms of 

income, assets, or other similar measures, represent only a very 

small percentage of the size of the activity in the other State. 

79 

The substantiality requirement is intended to prevent treaty 

shopping. For example, a third-country resident may want to acquire a U.S. company that manufactures television sets for worldwide markets; however, since its country of residence has no tax 

treaty with the United States, any dividends generated by the investment would be subject to a U.S. withholding tax of 30 percent. 

Absent a substantiality test, the investor could establish a Canadian corporation that would operate a small outlet in Canada to 

sell a few of the television sets manufactured by the U.S. company 

and earn a very small amount of income. That Canadian corporation could then acquire the U.S. manufacturer with capital provided by the third-country resident and produce a very large number of sets for sale in several countries, generating a much larger 

amount of income. It might attempt to argue that the U.S.-source 

income is generated from business activities in the United States 

related to the television sales activity of the Canadian parent and 

that the dividend income should be subject to U.S. tax at the 5 percent rate provided by Article X (Dividends) of the Convention. However, the substantiality test would not be met in this example, so 

the dividends would remain subject to withholding in the United 

States at a rate of 30 percent. 

It is expected that if a person qualifies for benefits under one of 

the tests of paragraph 2, no inquiry will be made into qualification 

for benefits under paragraph 3. Upon satisfaction of any of the 

tests of paragraph 2, any income derived by the beneficial owner 

from the other Contracting State is entitled to treaty benefits. 

Under paragraph 3, however, the test is applied separately to each 

item of income. 

Paragraph 4 of Article XXIX A 

Paragraph 4 provides a limited ‘‘derivative benefits’’ test that entitles a company that is a resident of the United States or Canada 

to the benefits of Articles X (Dividends), XI (Interest), and XII 

(Royalties), even if the company is not a qualifying person and does 

not satisfy the active trade or business test of paragraph 3. In general, a derivative benefits test entitles the resident of a Contracting 

State to treaty benefits if the owner of the resident would have 

been entitled to the same benefit had the income in question been 

earned directly by that owner. To qualify under this paragraph, the 

company must satisfy both the ownership test in subparagraph 4(a) 

and the base erosion test of subparagraph 4(b). 

Under subparagraph 4(a), the derivative benefits ownership test 

requires that the company’s shares representing more than 90 percent of the aggregate vote and value of all of the shares of the company, and at least 50 percent of the vote and value of any disproportionate class of shares, in neither case including debt substitute shares, be owned directly or indirectly by persons each of 

whom is either (i) a qualifying person or (ii) another person that 

satisfies each of three tests. The three tests of subparagraph 4(a) 

that must be satisfied by these other persons are as follows: 

First, the other person must be a resident of a third State 

with which the Contracting State that is granting benefits has 

a comprehensive income tax convention. The other person must 

be entitled to all of the benefits under that convention. Thus, 

80 

if the person fails to satisfy the limitation on benefits tests, if 

any, of that convention, no benefits would be granted under 

this paragraph. Qualification for benefits under an active trade 

or business test does not suffice for these purposes, because 

that test grants benefits only for certain items of income, not 

for all purposes of the convention. 

Second, the other person must be a person that would qualify for benefits with respect to the item of income for which 

benefits are sought under one or more of the tests of paragraph 

2 or 3 of Article XXIX A, if the person were a resident of the 

Contracting State that is not providing benefits for the item of 

income and, for purposes of paragraph 3, the business were 

carried on in that State. For example, a person resident in a 

third country would be deemed to be a person that would qualify under the publicly-traded test of paragraph 2 of Article 

XXIX A if the principal class of its shares were primarily and 

regularly traded on a stock exchange recognized either under 

the Convention between the United States and Canada or 

under the treaty between the Contracting State granting benefits and the third country. Similarly, a company resident in a 

third country would be deemed to satisfy the ownership/base 

erosion test of paragraph 2 under this hypothetical analysis if, 

for example, it were wholly owned by an individual resident in 

that third country and the company’s tax base were not substantially eroded by payments (directly or indirectly) to nonqualifying persons. 

The third requirement is that the rate of tax on the item of 

income in respect of which benefits are sought must be at least 

as low under the convention between the person’s country of 

residence and the Contracting State granting benefits as it is 

under the Convention. 

Subparagraph 4(b) sets forth the base erosion test. This test requires that the amount of expenses that are paid or payable by the 

company in question, directly or indirectly, to persons that are not 

qualifying persons under the Convention, and that are deductible 

from gross income (with both deductibility and gross income as determined under the tax laws of the State of residence of the company), be less than 50 percent of the gross income of the company. 

This test is applied for the fiscal period immediately preceding the 

period for which the test is being applied. If it is the first fiscal period of the person, the test is applied for the current period. This 

test is qualitatively the same as the base erosion test of subparagraph 2(e). 

Paragraph 5 of Article XXIX AParagraph 5 defines certain terms 

used in the Article. These terms were identified and discussed in 

connection with new paragraph 2, above. 

Paragraph 6 of Article XXIX A 

Paragraph 6 provides that when a resident of a Contracting 

State derives income from the other Contracting State and is not 

entitled to the benefits of the Convention under other provisions of 

the Article, benefits may, nevertheless be granted at the discretion 

of the competent authority of the other Contracting State. This deVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00080 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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termination can be made with respect to all benefits under the 

Convention or on an item by item basis. In making a determination 

under this paragraph, the competent authority will take into account all relevant facts and circumstances relating to the person 

requesting the benefits. In particular, the competent authority will 

consider the history, structure, ownership (including ultimate beneficial ownership), and operations of the person. In addition, the 

competent authority is to consider (1) whether the creation and existence of the person did not have as a principal purpose obtaining 

treaty benefits that would not otherwise be available to the person, 

and (2) whether it would not be appropriate, in view of the purpose 

of the Article, to deny benefits. If the competent authority of the 

other Contracting State determines that either of these two standards is satisfied, benefits shall be granted. 

For purposes of implementing new paragraph 6, a taxpayer will 

be permitted to present his case to the competent authority for an 

advance determination based on a full disclosure of all pertinent information. The taxpayer will not be required to wait until it has 

been determined that benefits are denied under one of the other 

provisions of the Article. It also is expected that, if and when the 

competent authority determines that benefits are to be allowed, 

they will be allowed retroactively to the time of entry into force of 

the relevant provision of the Convention or the establishment of 

the structure in question, whichever is later (assuming that the 

taxpayer also qualifies under the relevant facts for the earlier period). 

Paragraph 7 of Article XXIX A 

New paragraph 7 is in substance similar to paragraph 7 of Article XXIX A of the existing Convention and clarifies the application 

of general anti-abuse provisions. New paragraph 7 provides that 

paragraphs 1 through 6 of Article XXIX A shall not be construed 

as limiting in any manner the right of a Contracting State to deny 

benefits under the Convention where it can reasonably be concluded that to do otherwise would result in an abuse of the provisions of the Convention. This provision permits a Contracting State 

to rely on general anti-avoidance rules to counter arrangements involving treaty shopping through the other Contracting State. 

Thus, Canada may apply its domestic law rules to counter abusive arrangements involving ‘‘treaty shopping’’ through the United 

States, and the United States may apply its substance-over-form 

and anti-conduit rules, for example, in relation to Canadian residents. This principle is recognized by the OECD in the Commentaries to its Model Tax Convention on Income and on Capital, 

and the United States and Canada agree that it is inherent in the 

Convention. The statement of this principle explicitly in the Protocol is not intended to suggest that the principle is not also inherent in other tax conventions concluded by the United States or 

Canada. 

ARTICLE 26

Article 26 of the Protocol replaces paragraphs 1 and 5 of Article 

XXIX B (Taxes Imposed by Reason of Death) of the Convention. In 

82 

addition, paragraph 7 of the General Note provides certain clarifications for purposes of paragraphs 6 and 7 of Article XXIX B. 

Paragraph 1 

Paragraph 1 of Article XXIX B of the existing Convention generally addresses the situation where a resident of a Contracting 

State passes property by reason of the individual’s death to an organization referred to in paragraph 1 of Article XXI (Exempt Organizations) of the Convention. The paragraph provided that the tax 

consequences in a Contracting State arising out of the passing of 

the property shall apply as if the organization were a resident of 

that State. 

The Protocol replaces paragraph 1, and the changes set forth in 

new paragraph 1 are intended to specifically address questions that 

have arisen about the application of former paragraph 1 where 

property of an individual who is a resident of Canada passes by 

reason of the individual’s death to a charitable organization in the 

United States that is not a ‘‘registered charity’’ under Canadian 

law. Under one view, paragraph 1 of Article XXIX B requires Canada to treat the passing of the property as a contribution to a ‘‘registered charity’’ and thus to allow all of the same deductions for 

Canadian tax purposes as if the U.S. charity had been a ‘‘registered 

charity’’ under Canadian law. Under another view, paragraph 6 of 

Article XXI (Exempt Organizations) of the Convention continues to 

limit the amount of the income tax charitable deduction in Canada 

to the individual’s income arising in the United States. The 

changes set forth in new paragraph 1 are intended to provide relief 

from the Canadian tax on gain deemed recognized by reason of 

death that would otherwise give rise to Canadian tax when the individual passes the property to a charitable organization in the 

United States, but, for purposes of the separate Canadian income 

tax, do not eliminate the limitation under paragraph 6 of Article 

XXI on the amount of the deduction in Canada for the charitable 

donation to the individual’s income arising in the United States. 

As revised, paragraph 1 is divided into two subparagraphs. New 

subparagraph 1(a) applies where property of an individual who is 

a resident of the United States passes by reason of the individual’s 

death to a qualifying exempt organization that is a resident of Canada. In such case, the tax consequences in the United States arising from the passing of such property apply as if the organization 

were a resident of the United States. A bequest by a U.S. citizen 

or U.S. resident (as defined for estate tax purposes under the Code) 

to an exempt organization generally is deductible for U.S. federal 

estate tax purposes under Code section 2055, without regard to 

whether the organization is a U.S. corporation. Thus, generally, the 

individual’s estate will be entitled to a charitable deduction for 

Federal estate tax purposes equal to the value of the property 

transferred to the organization. Generally, the effect is that no Federal estate tax will be imposed on the value of the property. 

New subparagraph 1(b) applies where property of an individual 

who is a resident of Canada passes by reason of the individual’s 

death to a qualifying exempt organization that is a resident of the 

United States. In such case, for purposes of the Canadian capital 

gains tax imposed at death, the tax consequences arising out of the 

83 

passing of the property shall apply as if the individual disposed of 

the property for proceeds equal to an amount elected on behalf of 

the individual. For this purpose, the amount elected shall be no 

less than the individual’s cost of the property as determined for 

purposes of Canadian tax, and no greater than the fair market 

value of the property. The manner in which the individual’s representative shall make this election shall be specified by the competent authority of Canada. Generally, in the event of a full exercise of the election under new subparagraph 1(b), no capital gains 

tax will be imposed in Canada by reason of the death with regard 

to that property. 

New paragraph 1 does not address the situation in which a resident of one Contracting State bequeaths property with a situs in 

the other Contracting State to a qualifying exempt organization in 

the Contracting State of the decedent’s residence. In such a situation, the other Contracting State may impose tax by reason of 

death, for example, if the property is real property situated in that 

State. 

Paragraph 2 

Paragraph 2 of Article 26 of the Protocol replaces paragraph 5 

of Article XXIX B of the existing Convention. The provisions of new 

paragraph 5 relate to the operation of Canadian law. Because Canadian law requires both spouses to have been Canadian residents 

in order to be eligible for the rollover, these provisions are intended 

to provide deferral (’’rollover’’) of the Canadian tax at death for certain transfers to a surviving spouse and to permit the Canadian 

competent authority to allow such deferral for certain transfers to 

a trust. For example, they would enable the competent authority 

to treat a trust that is a qualified domestic trust for U.S. estate tax 

purposes as a Canadian spousal trust as well for purposes of certain provisions of Canadian tax law and of the Convention. These 

provisions do not affect U.S. domestic law regarding qualified domestic trusts. Nor do they affect the status of U.S. resident individuals for any other purpose. 

New paragraph 5 adds a reference to subsection 70(5.2) of the 

Canadian Income Tax Act. This change is needed because the rollover in respect of certain kinds of property is provided in that subsection. Further, new paragraph 5 adds a clause ‘‘and with respect 

to such property’’ near the end of the second sentence to make it 

clear that the trust is treated as a resident of Canada only with 

respect to its Canadian property. 

For example, assume that a U.S. decedent with a Canadian 

spouse sets up a qualified domestic trust holding U.S. and Canadian real property, and that the decedent’s executor elects, for Federal estate tax purposes, to treat the entire trust as qualifying for 

the Federal estate tax marital deduction. Under Canadian law, because the decedent is not a Canadian resident, Canada would impose capital gains tax on the deemed disposition of the Canadian 

real property immediately before death. In order to defer the Canadian tax that might otherwise be imposed by reason of the decedent’s death, under new paragraph 5 of Article XXIX B, the competent authority of Canada shall, at the request of the trustee, 

treat the trust as a Canadian spousal trust with respect to the CaVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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nadian real property. The effect of such treatment is to defer the 

tax on the deemed distribution of the Canadian real property until 

an appropriate triggering event such as the death of the surviving 

spouse. 

Paragraph 7 of the General Note 

In addition to the foregoing, paragraph 7 of the General Note 

provides certain clarifications for purposes of paragraphs 6 and 7 

of Article XXIX B. These clarifications ensure that tax credits will 

be available in cases where there are inconsistencies in the way the 

two Contracting States view the income and the property. 

Subparagraph 7(a) of the General Note applies where an individual who immediately before death was a resident of Canada 

held at the time of death a share or option in respect of a share 

that constitutes property situated in the United States for the purposes of Article XXIX B and that Canada views as giving rise to 

employment income (for example, a share or option granted by an 

employer). The United States imposes estate tax on the share or 

option in respect of a share, while Canada imposes income tax on 

income from employment. Subparagraph 7(a) provides that for purposes of clause 6(a)(ii) of Article XXIX B, any employment income 

in respect of the share or option constitutes income from property 

situated in the United States. This provision ensures that the estate tax paid on the share or option in the United States will be 

allowable as a deduction from the Canadian income tax. 

Subparagraph 7(b) of the General Note applies where an individual who immediately before death was a resident of Canada 

held at the time of death a registered retirement savings plan 

(RRSP) or other entity that is a resident of Canada and that is described in subparagraph 1(b) of Article IV (Residence) and such 

RRSP or other entity held property situated in the United States 

for the purposes of Article XXIX B. The United States would impose estate tax on the value of the property held by the RRSP or 

other entity (to the extent such property is subject to Federal estate tax), while Canada would impose income tax on a deemed distribution of the property in the RRSP or other entity. Subparagraph 7(b) provides that any income out of or under the entity in 

respect of the property is, for the purpose of subparagraph 6(a)(ii) 

of Article XXIX B, income from property situated in the United 

States. This provision ensures that the estate tax paid on the underlying property in the United States (if any) will be allowable as 

a deduction from the Canadian income tax. 

Subparagraph 7(c) of the General Note applies where an individual who immediately before death was a resident or citizen of 

the United States held at the time of death an RRSP or other entity that is a resident of Canada and that is described in subparagraph 1(b) of Article IV (Residence). The United States would impose estate tax on the value of the property held by the RRSP or 

other entity, while Canada would impose income tax on a deemed 

distribution of the property in the RRSP or other entity. Subparagraph 7(c) provides that for the purpose of paragraph 7 of Article 

XXIX B, the tax imposed in Canada is imposed in respect of property situated in Canada. This provision ensures that the Canadian 

income tax will be allowable as a credit against the U.S. estate tax. 

85 

ARTICLE 27

Article 27 of the Protocol provides the entry into force and effective date of the provisions of the Protocol. 

Paragraph 1 

Paragraph 1 provides generally that the Protocol is subject to 

ratification in accordance with the applicable procedures in the 

United States and Canada. Further, the Contracting States shall 

notify each other by written notification, through diplomatic channels, when their respective applicable procedures have been satisfied. 

Paragraph 2 

The first sentence of paragraph 2 generally provides that the 

Protocol shall enter into force on the date of the later of the notifications referred to in paragraph 1, or January 1, 2008, whichever 

is later. The relevant date is the date on the second of these notification documents, and not the date on which the second notification is provided to the other Contracting State. The January 1, 

2008 date is intended to ensure that the provisions of the Protocol 

will generally not be effective before that date. 

Subparagraph 2(a) provides that the provisions of the Protocol 

shall have effect in respect of taxes withheld at source, for amounts 

paid or credited on or after the first day of the second month that 

begins after the date on which the Protocol enters into force. Further, subparagraph 2(b) provides that the Protocol shall have effect 

in respect of other taxes, for taxable years that begin after (or, if 

the later of the notifications referred to in paragraph 1 is dated in 

2007, taxable years that begin in and after) the calendar year in 

which the Protocol enters into force. These provisions are generally 

consistent with the formulation in the U.S. Model treaty, with the 

exception that a parenthetical was added in subparagraph 2(b) to 

address the contingency that the written notifications provided pursuant to paragraph 1 may occur in the 2007 calendar year. Further, subparagraph 3(d) of Article 27 of the Protocol contains special provisions with respect to the taxation of cross-border interest 

payments that have effect for the first two calendar years that end 

after the date the Protocol enters into force. Therefore, during this 

period, cross-border interest payments are not subject to the effective date provisions of subparagraph 2(a). 

Paragraph 3 

Paragraph 3 sets forth exceptions to the general effective date 

rules set forth in paragraph 2 of Article 27 of the Protocol. 

Dual corporate residence tie-breaker 

Subparagraph 3(a) of Article 27 of the Protocol provides that 

paragraph 1 of Article 2 of the Protocol relating to Article IV (Residence) shall have effect with respect to corporate continuations effected after September 17, 2000. This date corresponds to a press 

release issued on September 18, 2000 in which the United States 

and Canada identified certain issues with respect to these transactions and stated their intention to negotiate a protocol that, if apVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00085 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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proved, would address the issues effective as of the date of the 

press release. 

Certain payments through fiscally transparent entities 

Subparagraph 3(b) of Article 27 of the Protocol provides that new 

paragraph 7 of Article IV (Residence) set forth in paragraph 2 of 

Article 2 of the Protocol shall have effect as of the first day of the 

third calendar year that ends after the Protocol enters into force. 

Permanent establishment from the provision of services 

Subparagraph 3(c) of Article 27 of the Protocol sets forth the effective date for the provisions of Article 3 of the Protocol, pertaining to Article V (Permanent Establishment) of the Convention. 

The provisions pertaining to Article V shall have effect as of the 

third taxable year that ends after the Protocol enters into force, but 

in no event shall it apply to include, in the determination of whether an enterprise is deemed to provide services through a permanent 

establishment under paragraph 9 of Article V of the Convention, 

any days of presence, services rendered, or gross active business 

revenues that occur or arise prior to January 1, 2010. Therefore, 

the provision will apply beginning no earlier than January 1, 2010 

and shall not apply with regard to any presence, services or related 

revenues that occur or arise prior to that date. 

Withholding rates on cross-border interest payments 

Subparagraph 3(d) of Article 27 of the Protocol sets forth special 

effective date rules pertaining to Article 6 of the Protocol relating 

to Article XI (Interest) of the Convention. Article 6 of the Protocol 

sets forth a new Article XI of the Convention that provides for exclusive residence State taxation regardless of the relationship between the payer and the beneficial owner of the interest. Subparagraph 3(d), however, phases in the application of paragraph 1 of 

Article XI during the first two calendar years that end after the 

date the Protocol enters into force. During that period, paragraph 

1 of Article XI of the Convention permits source State taxation of 

interest if the payer and the beneficial owner are related or deemed 

to be related by reason of paragraph 2 of Article IX (Related Persons) of the Convention (’’related party interest’’), and the interest 

would not otherwise be exempt under the provisions of paragraph 

3 of Article XI as it read prior to the Protocol. However, subparagraph 3(d) also provides that the source State taxation on such related party interest is limited to 7 percent in the first calendar year 

that ends after entry into force of the Protocol and 4 percent in the 

second calendar year that ends after entry into force of the Protocol. 

Subparagraph 3(d) makes clear that the provisions of the Protocol with respect to exclusive residence based taxation of interest 

when the payer and the beneficial owner are not related or deemed 

related (’’unrelated party interest’’) applies for interest paid or credited during the first two calendar years that end after entry into 

force of the Protocol. 

The withholding rate reductions for related party interest and 

exemptions for unrelated party interest will likely apply retroactively. For example, if the Protocol enters into force on June 30, 

87 

2008, paragraph 1 of Article XI, as it reads under subparagraph 

3(d) of Article 27, will have the following effect during the first two 

calendar years. First, unrelated party interest that is paid or credited on or after January 1, 2008 will be exempt from taxation in 

the source State. Second, related party interest paid or credited on 

or after January 1, 2008 and before January 1, 2009, will be subject to source State taxation but at a rate not to exceed 7 percent 

of the gross amount of the interest. Third, related party interest 

paid or credited on or after January 1, 2009 and before January 1, 

2010, will be subject to source State taxation but at a rate not to 

exceed 4 percent of the gross amount of the interest. Finally, all 

interest paid or credited after January 1, 2010, will be subject to 

the regular rules of Article XI without regard to subparagraph 3(d) 

of Article 27. 

Further, the provisions of subparagraph 3(d) ensure that even 

with respect to circumstances where the payer and the beneficial 

owner are related or deemed related under the provisions of paragraph 2 of Article IX, the source State taxation of such cross-border 

interest shall be no greater than the taxation of such interest prior 

to the Protocol. 

Gains 

Subparagraph 3(e) of Article 27 of the Protocol provides the effective date for paragraphs 2 and 3 of Article 8 of this Protocol, which 

relate to the changes made to paragraphs 5 and 7 of Article XIII 

(Gains) of the Convention. The changes set forth in those paragraphs shall have effect with respect to alienations of property that 

occur (including, for greater certainty, those that are deemed under 

the law of a Contracting State to occur) after September 17, 2000. 

This date corresponds to the press release issued on September 18, 

2000 which announced the intention of the United States and Canada to negotiate a protocol that, if approved, would incorporate the 

changes set forth in these paragraphs to coordinate the tax treatment of an emigrant’s gains in the United States and Canada. 

Arbitration 

Subparagraph 3(f) of Article 27 of the Protocol pertains to Article 

21 of the Protocol which implements the new arbitration provisions. An arbitration proceeding will generally begin two years 

after the date on which the competent authorities of the Contracting States began consideration of a case. Subparagraph 3(f), 

however, makes clear that the arbitration provisions shall apply to 

cases that are already under consideration by the competent authorities when the Protocol enters into force, and in such cases, for 

purposes of applying the arbitration provisions, the commencement 

date shall be the date the Protocol enters into force. Further, the 

provisions of Article 21 of the Protocol shall be effective for cases 

that come into consideration by the competent authorities after the 

date that the Protocol enters into force. In order to avoid the potential for a large number of MAP cases becoming subject to arbitration immediately upon the expiration of two years from entry into 

force, the competent authorities are encouraged to develop and implement procedures for arbitration by January 1, 2009, and begin 

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ventory (and meeting the agreed criteria) prior to two years from 

entry into force. 

Assistance in collection 

Subparagraph 3(g) of Article 27 of the Protocol pertains to the 

date when the changes set forth in Article 22 of the Protocol, relating to assistance in collection of taxes, shall have effect. Consistent 

with the third protocol that entered into force on November 9, 

1995, and which had effect for requests for assistance on claims finally determined after November 9, 1985, the provisions of Article 

22 of the Protocol shall have effect for revenue claims finally determined by an applicant State after November 9, 1985. 

89 

X. ANNEX II.—TREATY HEARING OF JULY 10, 2008 

TREATIES 

Thursday, July 10, 2008 

U.S. SENATE

COMMITTEE ON FOREIGN RELATIONS

Washington, D.C. 

The committee met, pursuant to notice, at 2:45 p.m., in Room 

SD-419, Dirksen Senate Office Building, Hon. Robert Menendez, 

presiding. 

Present: Senators Menendez [presiding] and Lugar. 

OPENING STATEMENT OF HON. ROBERT MENENDEZ, U.S. 

SENATOR FROM NEW JERSEY 

Senator MENENDEZ. This hearing of the Committee on Foreign 

Relations will now come to order. 

Today, the committee meets to consider 12 treaties, many of 

which represent years of work that have culminated in the international frameworks we will discuss today. The topics vary widely—tax, the environment, telecommunications—and all are important issues for which international coordination is crucial. We have 

an ambitious agenda today, so I will keep my statement brief. 

Two of the environmental treaties that we are considering today 

build on existing treaties to which the United States is already a 

party and has benefited from over the years. The London dumping 

protocol represents the culmination of a thorough and intensive effort to update and improve the 1972 London Convention. The landbased sources protocol builds on the 1983 Convention for the Protection and Development of the Marine Environment of the Wider 

Caribbean Region, also known as the Cartagena Convention. 

The third treaty, the anti-fouling convention, stands on its own, 

but it was negotiated at and relies on the International Maritime 

Organization, to which the United States is an active member. 

The next set of treaties are tax treaties. A basic objective of our 

bilateral income tax treaties, as their full title implies, is to prevent 

double taxation of income. In many cases, both the country where 

a company is headquartered and the company (sic) where a company earns its income tax a company’s earnings with the result 

that the same dollars are taxed twice. 

Tax treaties tend to allocate the right to certain income to the 

residence country rather than the source country or at least to 

limit source country taxation with the ultimate goal of minimizing 

the tax burden for the taxpayer. But in many ways, this is just the 

tip of the iceberg in terms of what tax treaties help the United 

States to accomplish. 

Tax treaties can, one, reduce tax barriers to cross-border trade 

and investment; two, provide, if well drafted, clarity and greater 

certainty to taxpayers who are attempting to assess their potential 

90 

liability to tax in foreign jurisdictions in which they are doing business or working; and, three, ensure that U.S. taxpayers are not 

being subject to discriminatory taxes in foreign jurisdictions. 

And last, but not least, tax treaties facilitate U.S. Government 

efforts to prevent tax evasion through important, but often overlooked provisions that provide for the exchange of information between tax authorities. 

The United States is a party to 58 income tax treaties covering 

66 countries. If we ratify the treaty with Bulgaria, along with the 

2008 protocol, we will be adding yet another country to that impressive record. Today, we are considering four tax treaties with 

three different countries—Canada, Iceland, and Bulgaria. All are 

important instruments. 

It is worth noting that the Canadian protocol we consider today 

has been in negotiations for over a decade. We do a tremendous 

amount of cross-border trade with Canada, and Canada is our leading merchandise export destination. It is easy to understand why 

this protocol is of such importance. 

Perhaps the most important aspect of the Canada protocol is the 

binding arbitration mechanism that Treasury has negotiated. The 

first U.S. tax agreement to include a binding arbitration provision 

was the U.S.-Germany income tax treaty, which the committee considered and voted to approve last year. 

Many U.S. entities have been caught up in unresolved disputes 

between the tax authorities of both countries when interpreting 

and applying the convention. This arbitration mechanism will afford those entities some relief through final decisions made by an 

arbitration board. 

Now, I and other members have raised questions about this 

mechanism regarding how it might be improved. But I recognize 

this is a valuable addition to the U.S.-Canada tax treaty. 

The new treaty with Iceland would replace an older treaty from 

1975. The most important aspect of this treaty is the addition of 

a strong limitation on benefits provision, which will, if ratified, 

limit abuse of our treaty with Iceland by nonresidents. 

The other two treaties are with Hungary and Poland. Consequently, these three countries present an attractive opportunity 

for treaty shopping, and it is certainly good to see that Treasury 

has worked to close this loophole. And I hope to see new treaties 

with Hungary and Poland that also include strong limitation on 

benefit provisions. 

The new treaty with Bulgaria, along with the 2008 protocol, 

would be the first income tax treaty between the United States and 

Bulgaria. The treaty is designed to reduce tax barriers to cross-border investment, provide for better exchange of tax information, and 

facilitate cross-border tax administration more generally. 

Finally, the last set of treaties are the ITU treaties, which was 

founded in 1865, barely 10 years after the first public message over 

a telegraph was sent between Washington and Baltimore. Back 

then, the organization was called the International Telegraph 

Union. Today, some 140 years later, the fundamental objectives of 

the organization remain basically unchanged. It is the leading 

international organization in the world for information and commuVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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nication technologies, based in Geneva, and its membership includes 191 countries. 

Three of these treaties under consideration today amend the constituent documents that define the ITU and its day-to-day functioning, its constitution, and its convention. These amendments 

have three main objectives—to facilitate private sector involvement 

in the organization, to improve the ITU’s working methods and 

flexibility as an organization in order to respond to rapidly changing technology and membership needs, and, three, to promote 

greater fiscal stability and transparency. 

The remaining two ITU treaties under consideration are revisions to the radio regulations, which are instruments negotiated 

under the auspices of the ITU. These treaties are technical instruments that address international spectrum allocations and radio 

regulations in many different services, including broadcasting, satellite sound broadcasting, mobile satellite services, and space services. 

We are pleased to have a distinguished panel of witnesses, who 

will help us understand the treaties before us. Let me, on behalf 

of the committee, welcome Ambassador Balton from the Department of State, the Deputy Assistant Secretary for Oceans and Fisheries who will be testifying on the environmental treaties. 

For the tax treaties, we have two witnesses. Let me welcome Mr. 

Michael Mundaca from the Department of Treasury, the Deputy 

Assistant Secretary in the Office of Tax Policy. And Ms. Emily 

McMahon, who is the Deputy Chief of Staff for the Joint Committee on Taxation. 

And finally, let me welcome Mr. Richard Beaird, the Senior Deputy U.S. Coordinator for International Communications and Information Policy at the Department of State, who will testify on the 

ITU treaties. 

With that, let me recognize the distinguished Ranking Member 

of the committee, Senator Lugar, for his opening statement. 

STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR 

FROM INDIANA 

Senator LUGAR. Well, thank you very much, Mr. Chairman, and 

I join you in welcoming our distinguished witnesses, who will help 

us examine the diverse group of treaties you have described. 

The Senate has an important role under the Constitution in the 

treaty-making process. And this committee’s work is central to the 

exercise of that role. 

The treaties before the committee today address several issues in 

which cooperation between the United States and other governments can advance the interests of all parties. In the economic 

realm, the tax treaties with Bulgaria, Canada, and Iceland will bolster our economic relationships with countries that are already 

close trade and investment partners. 

As the United States considers how to create jobs and maintain 

economic growth, it is important that we try to eliminate impediments that prevent our companies from fully accessing international markets. We should work to ensure that the companies 

pay their fair share of taxes while not being unfairly taxed twice 

on the same revenue. 

92 

Tax treaties are intended to prevent double taxation so that companies are not inhibited from doing business overseas. Now they 

also strengthen the United States Government’s ability to enforce 

existing laws by enhancing our efforts to gather and compare information in cooperation with foreign governments. As the United 

States moves to keep the economy growing and to increase the 

United States employment, international tax policies that promote 

foreign direct investment in the United States are critically important. 

The three environmental treaties before us provide frameworks 

for cooperation to address a variety of threats to the health of our 

oceans. These agreements seek to combat pollution of the oceans 

from multiple sources, including the dumping of waste into ocean 

waters, the leaching of protective coatings applied to the hulls of 

ships, and the runoff of wastewater and agricultural pollutants. 

Such pollution harms our ability to make productive use of ocean 

resources and threatens public health. 

With respect to telecommunications, the agreements before us 

are part of the ongoing efforts of the United States to advance cooperation in the management and use of the radio spectrum under 

the auspices of the International Telecommunications Union. Reliable telecommunications capabilities play a critical role in economic 

activity and growth, and we have an interest in facilitating productive cooperation in this area. 

Today’s group of treaties places a number of important issues on 

the committee’s plate. Several of these agreements are quite detailed and will require the committee’s careful study and analysis. 

I appreciate the opportunity to discuss these treaties and look forward to the testimony of our witnesses today. 

And I thank you, Mr. Chairman, for conducting the hearing. 

Senator MENENDEZ. Thank you. Thank you, Senator Lugar. 

With that, we will start the testimony of the witnesses. We ask 

that you keep your statements to about 5 minutes. Your entire 

statement will be included in the record, and this will give us some 

time for some questions and answers. 

And if you would start, Ambassador Balton, in the order that I 

introduced you and move down the line? Thank you. 

STATEMENT OF HON. DAVID A. BALTON, DEPUTY ASSISTANT 

SECRETARY FOR OCEANS AND FISHERIES, BUREAU OF 

OCEANS, ENVIRONMENTAL, AND SCIENTIFIC AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, D.C. 

Ambassador BALTON. Thank you very much, Mr. Chairman, 

members of the committee. 

I am pleased to testify in support of the three treaties designed 

to protect the oceans. The three treaties address different aspects 

of marine pollution. We commend the committee for taking advantage of this opportunity to consider them together. Ratification of 

these treaties will allow the United States to reinforce its leadership role on oceans at the international level. 

Two of these treaties require implementing legislation. The administration has, in both cases, forwarded to Congress draft legislation for this purpose. We believe that Senate advice and consent 

to these treaties would spur both houses to enact such legislation. 

93 

Please allow me to highlight a few key elements of each treaty. 

First, the convention on anti-fouling systems. This treaty prohibits 

the use and application of certain paint-like coatings on a ship’s 

hull. Some of these coatings, while effective in preventing the attachment of barnacles and similar creatures, have significant adverse environmental side effects. 

In particular, those coatings that contain organotin biocides can 

harm oysters and other valuable marine resources when those 

biocides leach into the water. U.S. law already prohibits use of 

such anti-foulants on most vessels in the United States. The 

United States canceled the last registration of organotin paint in 

19—I am sorry—in 2005. 

To implement the convention fully, the administration has proposed new legislation that would, among other things, broaden existing requirements to cover all U.S. ships as well as foreign ships 

entering U.S. ports and certain other waters. The anti-fouling coatings industry in the United States supports the standards in the 

convention and the proposed implementing legislation. 

This treaty will enter into force this September. Thirty states 

representing more than 49 percent of the world’s shipping tonnage 

have already adhered to it. As a party, the United States could participate fully in the international implementation of the convention, 

especially in the review and adoption of possible proposals to control other anti-fouling systems. 

The second treaty is a protocol to the Cartagena Convention, 

which concerns environmental protection and sustainable development in the Caribbean region. The United States ratified the convention in 1984. The protocol before the Senate today is actually 

the third protocol to this convention. The United States is already 

a party to the other two, which deal with oil spills and specially 

protected areas and wildlife. 

This third protocol addresses pollution of the marine environment from land-based sources and activities. Improving control 

over these sources of pollution, which account for an estimated 70 

to 90 percent of all marine pollution, will help protect coral reefs 

and other sensitive coastal habitats, recreation, tourism, and public 

health. 

Among other things, the protocol sets forth specific effluent limitations for domestic wastewater. The United States already meets 

or exceeds these standards in all respects. 

The United States signed the protocol in 1999. Four states have 

ratified it so far. We believe U.S. ratification would spur others to 

follow suit. The protocol will enter into force when nine nations 

have adhered to it. Although the protocol applies only to the wider 

Caribbean region, it is the first regional agreement to establish effluent standards of this kind and may well serve as a model for 

other regions. 

The third treaty is the 1996 London protocol, which regulates 

dumping of harmful wastes and other matter into the sea. The protocol updates the original London convention to which the United 

States has been a party since 1975. Although the convention and 

the protocol share many features, the protocol will protect the marine environment more effectively. 

94 

Where the convention generally prohibits the dumping of specifically listed substances, the protocol generally prohibits the dumping of all substances except those that are specifically listed. The 

list of substances that may be permitted for dumping can be 

amended in light of new information and technologies. Indeed, the 

list was already amended once to facilitate certain initiatives to sequester carbon dioxide below the sea floor. 

The United States would join the treaty as amended. And as a 

party, the United States would best be able to influence possible 

further changes to this list as well as fully participate in all issues 

arising under the protocol. 

The United States signed this protocol in 1998. It entered into 

force in 2006. Currently, it has 35 parties. U.S. ratification would 

not require significant changes for the United States. However, the 

administration has submitted proposed implementing legislation in 

the form of several amendments to the Ocean Dumping Act to 

bring U.S. law fully into conformity with the requirements of the 

protocol. 

Thank you very much for this opportunity to convey the support 

of the administration for these vital treaties. I would be happy to 

answer any questions. 

[The prepared statement of Ambassador Balton follows:] 

PREPARED STATEMENT OF AMBASSADOR DAVID A. BALTON

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE: I am pleased to testify today 

in support of the Senate’s provision of advice and consent to three treaties designed 

to protect the oceans. The three treaties address different aspects of marine pollution in distinct and vital ways. One controls toxic side effects of certain substances 

used on hulls to prevent attachment of barnacles and other unwanted organisms. 

Another reduces land-based sources of marine pollution in the Wider Caribbean Region. The third updates and improves an existing treaty on ocean dumping. 

As you know, the administration supported Senate action on each of these treaties 

in its February 2007 letter to Chairman Biden setting out its treaty priorities for 

the 110th Congress. Although the treaties are not legally or institutionally connected, we commend the committee for taking advantage of this opportunity to consider them together in an effort to send a strong message about the urgent need 

to protect the world’s oceans. 

The three treaties before you are: the International Convention on the Control of 

Harmful Anti-Fouling Systems on Ships, or the ‘‘AFS Convention,’’ transmitted to 

the Senate on January 22, 2008; the Protocol Concerning Pollution from Land-Based 

Sources and Activities, or the ‘‘LBS Protocol’’ to the Convention for the Protection 

and Development of the Marine Environment of the Wider Caribbean Region, or the 

‘‘Cartagena Convention,’’ transmitted to the Senate on February 16, 2007; and the 

1996 Protocol to the Convention on the Prevention of Marine Pollution by Dumping 

of Wastes and Other Matter, or the ‘‘London Protocol,’’ transmitted to the Senate 

on September 4, 2007. 

Prompt action to facilitate ratification of these treaties will allow the United 

States to reinforce and maintain its leadership role on oceans issues at the international and regional levels. Ratification would enhance our ability to work with 

other States to promote effective implementation of these treaties. As a Party to 

these treaties, the United States would be able to participate fully in meetings of 

States Parties aimed at implementation of these treaties and, thereby, more directly 

affect the implementation and interpretation of these treaties. Further, after the 

United States ratifies a treaty, other nations are more likely to ratify as well, resulting in greater overall protection of the oceans from marine pollution. 

The United States participated actively in the negotiation of each of these treaties. Our technical expertise and drafting skills significantly influenced the final 

language of each instrument. Throughout these processes, affected U.S. stakeholders 

provided meaningful input. We believe that ratification of all three treaties enjoys 

widespread support among these stakeholders and should not be contentious. 

95 

Two of the three treaties—the London Protocol and the AFS Convention—require 

implementing legislation prior to ratification. As discussed in more detail below, the 

administration has in both cases developed and forwarded to Congress draft legislation for this purpose. We believe that early action by the Senate to provide advice 

and consent would spur both Houses to enact such legislation. 

The transmittal packages for these treaties detail the provisions under each regime. I would, however, like to highlight a few key elements in this testimony. 

ANTI-FOULING SYSTEMS CONVENTION

I would like to first address the AFS Convention, which was adopted at the International Maritime Organization (IMO) in London and aims to protect the marine 

environment and human health from the negative effects of certain anti-fouling systems. 

Anti-fouling systems are mainly paint-like coatings used on a ship’s hull to prevent attachment of barnacles and other unwanted organisms that slow down ships. 

Some anti-fouling systems may adversely affect the marine environment through 

leaching of biocides into the water. In particular, anti-fouling systems containing 

organotin biocides can cause adverse reproductive effects and shell deformities in 

marine animals, including economically important species of oysters. 

A Party to the AFS Convention must prohibit use and application of organotinbased anti-fouling systems on ships flying its flag or operating under its authority, 

as well as ships entering its ports, shipyards, or offshore terminals. A survey and 

certification system, which the Coast Guard would implement domestically for the 

United States, serves to verify that a ship is in compliance. Domestic law would govern violations of the certificate system and resulting sanctions. The Convention contains standard language on the treatment of vessels entitled to sovereign immunity. 

While the treaty is currently limited to prohibitions on organotin-based systems, 

Annex 1 sets forth procedures for evaluating proposals to add controls on other 

harmful anti-fouling systems, after the IMO’s Marine Environment Protection Committee has completed a comprehensive risk and benefits analysis. As described in 

the proposed declaration for Article 16 in the administration’s transmittal package, 

a Party may choose to require its express consent prior to being bound by any 

amendment to Annex 1. The administration recommends that the United States exercise this option. 

The Organotin Anti-Fouling Paint Control Act of 1988 (OAPCA), 33 U.S.C.A. 

§§ 2401–2410, restricts the release rate of organotin from anti-fouling systems and 

prohibits use of such systems on most vessels in the United States under 25 meters 

in length. The last organotin anti-fouling paint registration was cancelled in December 2005. The proposed implementing legislation forwarded to Congress would prohibit the use of organotin anti-fouling systems on U.S. ships and foreign ships entering U.S. ports and certain other waters. This prohibition would result in greater 

protection of the marine environment in near-coastal waters of the United States, 

and apply the same standards for anti-fouling systems on U.S. vessels and foreign 

vessels entering U.S. ports. The anti-fouling coatings industry has consistently supported the standards in the AFS Convention and the proposed implementing legislation. Most international shipping interests have already switched to alternative 

anti-fouling systems that do not contain organotin. 

The AFS Convention will enter into force on September 17, 2008. Thirty States 

have ratified or otherwise accepted the Convention, including Panama, Japan, Mexico and Spain, representing more than 49% of the world’s shipping tonnage. It would 

be highly desirable for the United States to be a Party to the Convention when it 

enters into force, or soon thereafter, so that we can participate fully in the international implementation of the Convention, especially the review of proposals to 

control other anti-fouling systems. Ratification of the treaty by the United States 

would more generally demonstrate our continued environmental leadership in this 

area and our support for more environmentally friendly anti-fouling technologies. 

LAND-BASED SOURCES PROTOCOL

The second treaty I would like to address is a Protocol to the Cartagena Convention, a regional seas agreement negotiated under the auspices of the United Nations 

Environment Program. The Cartagena Convention, which the United States ratified 

in 1984, is a framework agreement that sets out general obligations to protect the 

marine environment of the Wider Caribbean Region, an area encompassing the Gulf 

of Mexico, Straits of Florida, Caribbean Sea, and the immediately adjacent areas of 

the Atlantic Ocean within 200-nautical miles of shore. This region is of particular 

importance to the United States, as waste from other nations combined with the circulation patterns in this area could result in increased pollution in U.S. waters. 

96 

The LBS Protocol is in fact one of three subsidiary agreements to the Cartagena 

Convention. The United States is already a Party to the other two agreements: the 

Protocol Concerning Co-operation in Combating Oil Spills in the Wider Caribbean 

Region, and the Protocol Concerning Specially Protected Areas and Wildlife. Together, these agreements offer significant protection to marine and coastal resources 

in this crucial region. 

In negotiating the LBS Protocol, the United States sought to create requirements 

for other nations bordering this region that would, in effect, bring them up to U.S. 

standards with respect to controlling land-based sources of marine pollution. As a 

result of the success of this strategy, U.S. ratification of this instrument would not 

require new implementing legislation. 

It is estimated that 70 to 90 percent of pollution entering the marine environment 

worldwide emanates from land-based sources and activities. Land-based sources of 

pollution endanger public health, degrade coral reefs and other sensitive coastal 

habitats, undermine fisheries resources, and negatively affect regional economies, 

recreation, and tourism. 

The LBS Protocol elaborates on the obligation set forth in Article 7 of the 

Cartagena Convention to ‘‘take all appropriate measures to prevent, reduce and control pollution of the Convention area caused by coastal disposal or by discharges 

emanating from rivers, estuaries, coastal establishments, outfall structures, or any 

other sources on their territories.’’ 

Among the principal land-based sources of marine pollution in the Wider Caribbean Region are domestic wastewater and agricultural non-point source runoff. Specific effluent limitations for domestic wastewater and a requirement to develop 

plans for the prevention, reduction and control of agricultural non-point sources of 

pollution are contained in the legally binding annexes III and IV. Annex I sets forth 

a list of additional pollutants for Parties to take into account. The Protocol envisions 

that additional annexes will be developed to address these pollutants, and Annex 

II sets out factors to be considered by the Parties in developing such annexes. While 

these original four annexes apply to all Protocol Parties, a Party to the Protocol may 

choose to require its express consent prior to being bound by any additional annexes 

that may be adopted in the future. As described in the proposed declaration under 

Article XVII of the transmittal package, the administration recommends that the 

United States exercise this option. 

While having significant beneficial impacts in a region of specific interest to the 

United States, the Protocol is also expected to have an impact even beyond the 

Wider Caribbean Region, as it is the first regional agreement to establish effluent 

standards to protect the marine environment. It therefore serves as a model for 

other regions that are also seeking to address this urgent problem. 

The United States signed the LBS Protocol in October 1999. It is not yet in force, 

as only four of the nine necessary ratifications for entry into force have been received—from France, Panama, Saint Lucia, and Trinidad and Tobago. 

However, given the strong leadership role played by the United States in the negotiation of the Protocol, U.S. ratification would provide strong encouragement to 

other States to become contracting parties. Indeed, several States in the region have 

indicated that they would be more likely to join following U.S. ratification. 

LONDON PROTOCOL

The third treaty before you is the 1996 London Protocol, a treaty designed to protect the world’s oceans from the dumping of harmful wastes and other matter. The 

Protocol regulates deliberate disposal at sea of wastes or other matter from vessels, 

aircraft, platforms, or man-made structures at sea. The Protocol also bans incineration at sea of all wastes or other matter. It represents the culmination of a thorough and intensive effort to update the 1972 London Convention, to which the 

United States has been a Party since 1975. The Protocol is a free-standing treaty 

that is intended eventually to replace the London Convention. 

Although the Protocol and the London Convention share many features, the Protocol will protect the marine environment more effectively. The Protocol moves from 

a structure of listing substances that may not be dumped to a ‘‘reverse list’’ approach, which generally prohibits ocean dumping of all wastes or other matter, except for a few specified wastes in Annex 1. When considering whether to allow the 

dumping of a waste or other matter listed in Annex 1, a Party must follow detailed 

environmental assessment criteria found in Annex 2, which provide a complete 

waste management strategy, including consideration of alternatives to ocean disposal. 

A few types of activities are not considered dumping under the Protocol. These 

include placement of matter, such as research devices or artificial reefs, for a purVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00096 Fmt 6602 Sfmt 6621 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
97 

pose other than mere disposal, provided that such placement is not contrary to the 

aims of the Protocol. Activities related to oil and gas exploration are excluded from 

the definition of dumping. Further, there are exceptions for ‘‘force majeure’’ and 

emergency situations. The Protocol contains standard language on the sovereign immunity of ships. 

The Protocol, like the Convention, requires a Party to use a permit process to regulate dumping activities within areas subject to national jurisdiction, on vessels 

loaded in its territory and on vessels flying its flag. Permits are issued and violations are addressed domestically. 

The list of substances on Annex 1 that currently may be considered for dumping 

is meant to be a dynamic list that can be amended when necessary as new information and technologies develop. For example, an amendment, which the U.S. supported, was adopted in November 2006 to add carbon dioxide streams from carbon 

dioxide capture processes for sequestration, to allow for the possibility of sequestration in sub-seabed geological formations. The United States would join the treaty 

as amended. As a party, of course, the United States would be able to have a say 

in the addition of other substances to this list, thereby protecting its interests in 

determining how and when the ocean may be used for dumping. 

The administration’s transmittal package proposes one declaration and one understanding to be deposited along with the instrument of ratification. The declaration 

in Article 3 stems from a suggestion of the United States during the negotiations 

that at the time of ratification, a State may declare that its consent is required before it may be subject to binding arbitration about the interpretation or application 

of the general principles in Article 3.1 or 3.2 on precaution and polluter pays. The 

administration proposes making such a declaration for the United States. 

With respect to Article 10, the administration proposes an understanding making 

clear that disputes regarding the interpretation or application of the Protocol with 

respect to sovereign immune vessels are not subject to Article 16 dispute settlement 

procedures. 

The United States signed the Protocol on March 31, 1998. It entered into force 

on March 24, 2006, having met the 26-State requirement. It currently has 35 Parties. The IMO serves as the Secretariat for both the Convention and the Protocol. 

Now that the London Protocol has entered into force, it is highly desirable for the 

United States to join. The United States supported the updating and improvements 

of the Convention that the Protocol reflects. Further, it is important for the United 

States to maintain its current leadership role in this area and to ensure our participation in the development of policies and procedures under the Protocol. 

The administration has transmitted to Congress a legislative proposal to implement the London Protocol in the form of amendments to the Ocean Dumping Act. 

While ratification of the Protocol would not require significant changes to the U.S. 

ocean dumping program as it currently operates, some changes to the Ocean Dumping Act would be needed. For example, it has long been U.S. practice not to authorize incineration at sea or dumping of low-level radioactive wastes. The proposed 

amendments to the Ocean Dumping Act would explicitly reflect those prohibitions. 

CONCLUSION

United States’ ratification of the treaties before you today would advance our national interest and would promote our leadership on the prevention of marine pollution. These treaties are widely supported and not contentious in our view. 

Thank you, Mr. Chairman and members of the committee for this opportunity to 

convey the support of the administration for this effort. I urge that the committee 

give prompt and favorable consideration to these treaties. I would be happy to answer any questions. 

Senator MENENDEZ. Thank you. 

Mr. Mundaca? 

STATEMENT OF MICHAEL MUNDACA, DEPUTY ASSISTANT SECRETARY (INTERNATIONAL), OFFICE OF TAX POLICY, DEPARTMENT OF THE TREASURY, WASHINGTON, D.C. 

Mr. MUNDACA. Mr. Chairman, ranking member Lugar, I appreciate the opportunity to appear today to recommend on behalf of 

the administration favorable action on three tax treaties. We appreciate the committee’s interest in these treaties and in the tax 

treaty network generally. 

98 

One of the primary functions of tax treaties is to provide certainty to taxpayers regarding whether their cross-border activities 

will subject them to tax in another country. Another primary function is to relieve double taxation, including through the reduction 

of withholding tax rates. 

Tax treaties also provide a mechanism for dealing with tax treaty 

disputes, most often regarding double taxation. To resolve disputes, 

designated officials of the two governments, known as the competent authorities, consult and endeavor to reach agreement. 

In addition, tax treaties include provisions related to tax administration, including information exchange, which is a priority for 

the United States. In fact, the inclusion of appropriate information 

exchange provisions is one of the few tax treaty matters we regard 

as non-negotiable. 

The treaties before the committee today with Canada, Iceland, 

and Bulgaria would further the goals of our tax treaty program, 

and we urge the committee and the Senate to take prompt and favorable action on these agreements, which I will now describe very 

briefly. 

The proposed protocol with Canada is the fifth protocol to the 

current convention. The most significant provisions in this protocol 

relate to the taxation of cross-border interest, the treatment of income derived from fiscally transparent entities, the taxation of 

services, and mandatory binding arbitration. 

More specifically, the proposed protocol eliminates withholding 

taxes on cross-border interest, which has been a priority for the 

U.S. business community and the U.S. Treasury Department for a 

number of years, and represents a substantial improvement over 

the current convention, which generally provides for a 10 percent 

withholding tax rate. 

In addition, the proposed protocol provides for mandatory binding arbitration of certain cases not able to be resolved by the competent authorities. The U.S. competent authority has a good track 

record in resolving disputes. Even in the most cooperative bilateral 

relationships, however, there will be instances in which the competent authorities will not be able to reach a timely and satisfactory result. 

The mandatory binding arbitration provision included in the protocol with Canada was negotiated contemporaneously with and is 

very similar to a provision in our tax treaties with Germany and 

Belgium, which this committee and the Senate considered last 

year. We look forward to continuing to work with this committee 

to make arbitration an effective tool in promoting fair and expeditious resolution of tax treaty disputes. 

The committee’s comments made with respect to the German and 

Belgian arbitration provisions have been very helpful and will inform future negotiations of arbitration provisions. 

Finally, the proposed protocol with Canada would allow taxation 

of income from certain provisions of services not subject to source 

country tax under the current convention. This rule is broader than 

the rule in the U.S. model treaty but was key to achieving an overall agreement that we believe is in the best interests of the U.S. 

taxpayers and the United States. 

99 

The proposed convention with Iceland would replace the current 

convention concluded in 1975. The most important change from the 

current convention is the addition of a limitation on benefits provision. The current convention does not contain anti-treaty shopping 

provisions and, as a result, has been abused by third country investors. 

The proposed convention generally provides for withholding tax 

rates on investment income that are the same as or lower than 

those in the current convention. However, while the current convention eliminates withholding tax on cross-border payments of 

royalties, the proposed convention would allow withholding tax of 

5 percent on certain trademark royalty payments. Inclusion of this 

provision was key to achieving an overall agreement. 

The proposed convention with Bulgaria will be the first tax treaty between our two countries. Under the proposed convention, withholding taxes on dividend payments can be imposed at a maximum 

rate of 10 percent, lowered to 5 percent in the case of a dividend 

paid to a company that directly holds at least 10 percent of the 

company paying the dividend. 

The proposed convention generally limits withholding taxes on 

cross-border interest and cross-border royalty payments to 5 percent. And the proposed convention includes a rule, similar to the 

rule in the proposed protocol with Canada, allowing source country 

taxation of income from services in certain cases. 

Mr. Chairman and ranking member Lugar, let me conclude by 

thanking you for the opportunity to appear before the committee to 

discuss these three tax agreements. We thank the committee members and staff for devoting the time and attention to the review of 

these new agreements, and we are grateful for the assistance and 

cooperation of the staff on the Joint Committee on Taxation. 

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

Senate to take prompt and favorable action on the agreements before you, and I would be happy to answer any questions you might 

have. 

[The prepared statement of Mr. Mundaca follows:] 

PREPARED STATEMENT OF MICHAEL MANDACA

Mr. Chairman, ranking member Lugar, and distinguished members of the committee, I appreciate the opportunity to appear today to recommend, on behalf of the 

administration, favorable action on three tax treaties pending before this committee. 

We appreciate the committee’s interest in these treaties and in the U.S. tax treaty 

network overall. 

This administration is committed to eliminating barriers to cross-border trade and 

investment, and tax treaties are the primary means for eliminating tax barriers to 

such trade and investment. Tax treaties provide greater certainty to taxpayers regarding their potential liability to tax in foreign jurisdictions; they allocate taxing 

rights between the two jurisdictions and include other provisions that reduce the 

risk of double taxation, including provisions that reduce gross-basis withholding 

taxes; and they ensure that taxpayers are not subject to discriminatory taxation in 

the foreign jurisdiction. 

This administration is also committed to preventing tax evasion, and our tax treaties play an important role in this area as well. A key element of U.S. tax treaties 

is exchange of information between tax authorities. Under tax treaties, one country 

may request from the other such information as may be relevant for the proper administration of the first country’s tax laws. Because access to information from other 

countries is critically important to the full and fair enforcement of U.S. tax laws, 

information exchange is a top priority for the United States in its tax treaty program. 

100 

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 

by the treaty; in these cases, negotiation of a revised treaty may be very beneficial. 

In other cases, developments in one or both countries, or international developments 

more generally, may make is desirable to revisit a treaty to prevent exploitation of 

treaty provisions and eliminate unintended and inappropriate consequences in the 

application of the treaty; in these cases, it may be expedient to modify the agreement. Both in setting our overall negotiation priorities and in negotiating individual 

treaties, our focus is on ensuring that our tax treaty network fulfills its goals of facilitating cross border trade and investment and preventing fiscal evasion. 

The treaties before the committee today with Canada, Iceland, and Bulgaria serve 

to further the goals of our tax treaty network. The treaties with Canada and Iceland 

would modify existing tax treaty relationships. The tax treaty with Bulgaria would 

be the first between our two countries. We urge the committee and the Senate to 

take prompt and favorable action on all of these agreements. 

Before discussing the pending treaties in more detail, I would like to address 

some more general tax treaty matters, to provide background for the committee’s 

and the Senate’s consideration of the pending tax treaties. 

PURPOSES AND BENEFITS OF TAX TREATIES

Tax treaties set out clear ground rules that govern tax matters relating to trade 

and investment between the two countries. 

One of the primary functions of tax treaties is to provide certainty to taxpayers 

regarding the threshold question with respect to international taxation: whether a 

taxpayer’s cross-border activities will subject it to taxation by two or more countries. 

Tax treaties answer this question by establishing the minimum level of economic 

activity that must be engaged in within a country by a resident of the other 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 is relief of double taxation. Tax treaties protect taxpayers from potential double taxation primarily through the allocation of taxing 

rights between the two countries. This allocation takes several forms. First, the 

treaty has a mechanism for resolving the issue of residence in the case of a taxpayer 

that otherwise would be considered to be a resident of both countries. Second, with 

respect to each category of income, the treaty assigns the primary right to tax to 

one country, usually (but not always) the country in which the income arises (the 

‘‘source’’ country), and the residual right to tax to the other country, usually (but 

not always) the country of residence of the taxpayer (the ‘‘residence’’ country). Third, 

the treaty provides rules for determining which country will be treated as the source 

country for each category of income. Finally, the 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. 

In addition to reducing potential double taxation, tax treaties also reduce potential ‘‘excessive’’ taxation by reducing withholding taxes that are imposed at source. 

Under U.S. law, payments to non-U.S. persons of dividends and royalties as well 

as certain payments of interest are subject to withholding tax equal to 30 percent 

of the gross amount paid. Most of our trading partners impose similar levels of withholding tax on these types of income. This tax is imposed on a gross, rather than 

net, amount. Because the withholding tax does not take into account expenses incurred in generating the income, the taxpayer that bears the burden of withholding 

tax frequently will be subject to an effective rate of tax that is significantly higher 

than the tax rate that would be applicable to net income in either the source or residence country. The taxpayer may be viewed, therefore, as suffering excessive taxation. Tax treaties alleviate this burden by setting maximum levels for the withholding tax that the treaty partners may impose on these types of income or by providing for exclusive residence-country taxation of such income through the elimination of source-country withholding tax. Because of the excessive taxation that 

withholding taxes can represent, the United States seeks to include in tax treaties 

provisions that substantially reduce or eliminate source-country withholding taxes. 

As a complement to these substantive rules regarding allocation of taxing rights, 

tax treaties provide a mechanism for dealing with disputes between the countries 

regarding the treaties, including questions regarding the proper application of the 

treaties that arise after the treaty enters into force. To resolve disputes, designated 

101 

tax authorities of the two governments—known as the ‘‘competent authorities’’ in 

tax treaty parlance—are 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. That function has been delegated to the Deputy Commissioner (International) of the Large and Mid-Size Business 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 non-discrimination provisions of tax treaties are specifically tailored to tax 

matters and, therefore, are the most effective means of addressing potential discrimination in the tax context. The relevant tax treaty provisions explicitly prohibit 

types of discriminatory measures that once were common in some tax systems. At 

the same time, tax treaties clarify the manner in which possible discrimination is 

to be tested in the tax context. 

In addition to these core provisions, tax treaties include provisions dealing with 

more specialized situations, such as rules coordinating the pension rules of the tax 

systems of the two countries or addressing the treatment of Social Security benefits 

and alimony and child-support payments in the cross-border context. These provisions are becoming increasingly important as more individuals move between countries or otherwise are engaged in cross-border activities. While these matters may 

not involve substantial tax revenue from the perspective of the two governments, 

rules providing clear and appropriate treatment are very important to the affected 

taxpayers. 

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

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

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

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

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

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

to taxpayer information. Because access to information from other countries is critically important to the full and fair enforcement of the U.S. tax laws, information 

exchange is a priority for the United States in its tax treaty program. If a country 

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

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

exchange provisions is one of the treaty matters that we consider non-negotiable. 

TAX TREATY NEGOTIATING PRIORITIES AND PROCESS

The United States has a network of 58 income tax treaties covering 66 countries. 

This network covers the vast majority of foreign trade and investment of U.S. businesses and investors. In establishing our negotiating priorities, our primary objective is the conclusion of tax treaties that will provide the greatest benefit to the 

United States and to U.S. taxpayers. We communicate regularly with the U.S. business community and the Internal Revenue Service, seeking input regarding the 

areas in which treaty network expansion and improvement efforts should be focused 

and seeking information regarding practical problems encountered under particular 

treaties and particular tax regimes. 

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

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

process exacting and time consuming. 

Numerous features of a country’s particular tax legislation and its interaction 

with U.S. domestic tax rules must be considered in negotiating a treaty or protocol. 

Examples include whether the country eliminates double taxation through an exemption system or a credit system, the country’s treatment of partnerships and 

other transparent entities, and how the country taxes contributions to pension 

funds, earnings of the funds, and distributions from the funds. 

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

tax legislation but also in its tax treaty positions. These choices differ significantly 

from country to country, with substantial variation even across countries that seem 

to have quite similar economic profiles. A treaty negotiation must take into account 

all of these aspects of the particular treaty partner’s tax system and treaty policies 

to arrive at an agreement that accomplishes the United States’ tax treaty objectives. 

102 

Obtaining the agreement of our treaty partners on provisions of importance to the 

United States sometimes requires concessions on our part. Similarly, the other country sometimes must make concessions to obtain our agreement on matters that are 

critical to it. Each treaty that we present to the Senate represents not only the best 

deal that we believe can be achieved with the particular country, but also constitutes an agreement that we believe is in the best interests of the United States. 

In some situations, the right result may be no tax treaty at all. Prospective treaty 

partners must evidence a clear understanding of what their obligations would be 

under the treaty, especially those with respect to information exchange, and must 

demonstrate that they would be able to fulfill those obligations. Sometimes a tax 

treaty may not be appropriate because a potential treaty partner is unable to do 

so. 

In other cases, a tax treaty may be inappropriate because the potential treaty 

partner is not willing to agree to particular treaty provisions that are needed to address real tax problems that have been identified by U.S. businesses operating there 

or because the potential treaty partner insists on provisions the United States will 

not agree to, such as providing a U.S. tax credit for investment in the foreign country (so-called ‘‘tax sparing’’). With other countries there simply may not be the type 

of cross-border tax issues that are best resolved by treaty. For example, if a country 

does not impose significant income taxes, there is little possibility of double taxation 

of cross-border income, and an agreement that is focused on the exchange of tax information (‘‘tax information exchange agreements’’ or TIEAs) may be the most appropriate agreement. 

A high priority for improving our overall treaty network is continued focus on prevention of ‘‘treaty shopping.’’ The U.S. commitment to including comprehensive limitation on benefits provisions is one of the keys to improving our overall treaty network. Our tax treaties are intended to provide benefits to residents of the United 

States and residents of the particular treaty partner on a reciprocal basis. The reductions in source-country taxes agreed to in a particular treaty mean that U.S. persons pay less tax to that country on income from their investments there and residents of that country pay less U.S. tax on income from their investments in the 

United States. Those reductions and benefits are not intended to flow to residents 

of a third country. If third-country residents are able to exploit one of our tax treaties to secure reductions in U.S. tax, such as through the use of an entity resident 

in a treaty country that merely holds passive U.S. assets, the benefits would flow 

only in one direction as third-country residents would enjoy U.S. tax reductions for 

their U.S. investments, but U.S. residents would not enjoy reciprocal tax reductions 

for their investments in that third country. Moreover, such third-country residents 

may be securing benefits that are not appropriate in the context of the interaction 

between their home country’s tax systems and policies and those of the United 

States. This use of tax treaties is not consistent with the balance of the deal negotiated in the underlying tax treaty. Preventing this exploitation of our tax treaties 

is critical to ensuring that the third country will sit down at the table with us to 

negotiate on a reciprocal basis, so we can secure for U.S. persons the benefits of reductions in source-country tax on their investments in that country. 

CONSIDERATION OF ARBITRATION

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

investment environment unless the treaty is effectively implemented by the tax administrations of the two countries. Under our tax treaties, when a U.S. taxpayer becomes concerned about implementation of the treaty, the taxpayer can bring the 

matter to the U.S. competent authority who will seek to resolve the matter with the 

competent authority of the treaty partner. The competent authorities will 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 will be instances in 

which the competent authorities will not be able to reach a timely and satisfactory 

resolution. Moreover, as the number and complexity of cross-border transactions increases, so does 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 resolve disputes promptly, including the possible use of arbitration 

in the competent authority mutual agreement process. 

The first U.S. tax agreement that contemplated arbitration was the U.S.-Germany 

income tax treaty signed in 1989. Tax treaties with several other countries, including Canada, Mexico, and the Netherlands, incorporate authority for establishing voluntary binding arbitration procedures based on the provision in the prior U.S.-GerVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00102 Fmt 6602 Sfmt 6621 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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many treaty. Although we believe that the presence of these voluntary arbitration 

provisions may have provided some limited assistance in reaching mutual agreements, it has become clear that the ability to enter into voluntary arbitration does 

not provide sufficient incentive to resolve problem cases in a timely fashion. 

Over the past few years, we have carefully considered and studied various types 

of mandatory arbitration procedures that could be 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 process. 

Based on our review of the U.S. experience with arbitration in other areas of the 

law, the success of other countries with arbitration in the tax area, and the overwhelming support of the business community, we concluded that mandatory binding 

arbitration as the final step in the competent authority process can be an effective 

and appropriate tool to facilitate mutual agreement under U.S. tax treaties. 

One of the treaties before the committee, the Protocol with Canada, includes a 

type of mandatory arbitration provision negotiated contemporaneously with, and 

very similar to, a provision in our current, recently ratified treaties with Germany 

and Belgium, which this committee and the Senate considered last year. 

In the typical competent authority mutual agreement process, a U.S. taxpayer 

presents its problem 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 Canadian protocol, as in 

the similar provisions that are now part of our treaties with Germany and Belgium, 

if the competent authorities cannot resolve the issue within two years, the competent authorities must present the issue to an arbitration board for resolution, unless both competent authorities agree that the case is not suitable for arbitration. 

The arbitration board must resolve the issue by choosing the position of one of the 

competent authorities. That position is adopted as the agreement of the competent 

authorities and is treated like any other mutual agreement (i.e., one that has been 

negotiated by the competent authorities) under the treaty. 

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 expectation that these arbitration provisions will be rarely utilized, but that their presence will encourage the competent 

authorities to take approaches to their negotiations that result in mutually agreed 

conclusions in the first instance. 

The arbitration process proposed in the agreement with Canada, consistent with 

the German and Belgian provisions, is mandatory and binding with respect to the 

competent authorities. However, consistent with the negotiation process under the 

mutual agreement procedure, 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. 

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 Belgium and Germany, as well as the performance of the provision in the agreement 

with Canada, if ratified. 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. The committee’s comments made with respect to the German and 

Belgian arbitration provisions have been very helpful and will inform future negotiations of arbitration provisions. 

DISCUSSION OF PROPOSED TREATIES

I now would like to discuss in more detail the three treaties that have been transmitted for the Senate’s consideration. We have submitted a Technical Explanation 

of each treaty that contains detailed discussions of the provisions of each treaty. 

These Technical Explanations serve as an official guide to each treaty. The Technical Explanation to the Protocol with Canada was reviewed by Canada, and Canada subscribes to its contents, as will be confirmed by a press release from the Canadian Ministry of Finance. 

104 

Canada 

The proposed Protocol with Canada was signed in Chelsea on September 21, 2007, 

and is the fifth protocol of amendment to the current Convention negotiated in 1980 

and amended by prior protocols in 1983, 1984, 1995, and 1997. The most significant 

provisions in this treaty relate to the taxation of cross-border interest, the treatment 

of income derived through fiscally transparent entities, the taxation of certain provisions of services, and the adoption of mandatory arbitration to facilitate the resolution of disputes between the U.S. and Canadian revenue authorities. The proposed 

Protocol also makes a number of changes to reflect changes in U.S. and Canadian 

law, and to bring the current Convention into closer conformity with current U.S. 

tax treaty policy. 

The proposed Protocol eliminates withholding taxes on cross-border interest payments. The elimination of withholding taxes on all cross-border interest payments 

between the United States and Canada has been a top tax treaty priority for both 

the business community and the Treasury Department for many years. The proposed Protocol represents a substantial improvement over the current Convention, 

which generally provides for a source-country withholding tax rate of 10 percent. 

This provision would be effective for interest paid to unrelated parties on the first 

day of January of the year in which the proposed Protocol enters into force, and it 

would be phased in for interest paid to related persons over a three-year period. 

Consistent with U.S. tax treaty policy, the proposed Protocol also provides exceptions to the elimination of source-country taxation with respect to contingent interest and payments from a U.S. real estate mortgage investment conduit. 

The proposed Protocol also would provide that a U.S. person is generally eligible 

to claim the benefits of the treaty when such person derives income through an entity that is considered by the United States to be fiscally transparent (e.g., a partnership) unless the entity is a Canadian entity and is not treated by Canada as fiscally 

transparent. The proposed Protocol in addition contains anti-abuse provisions intended to address certain situations involving the use of these entities to obtain 

treaty benefits inappropriately. 

The current Convention generally limits the taxation by one country of the business profits of a resident of the other country. The source country’s right to tax such 

profits is generally limited to cases in which the profits are attributable to a permanent establishment located in that country. The proposed Protocol would add provisions related to the taxation of permanent establishments. Most importantly, the 

proposed Protocol includes a special rule allowing source-country taxation of income 

from certain provisions of services not otherwise considered to be provided through 

a permanent establishment. This rule is broader than the permanent establishment 

rule in the U.S. Model tax treaty but was key to achieving an overall agreement 

that we believe is in the best interests of the United States and U.S. taxpayers. 

As previously noted, the proposed Protocol provides for mandatory arbitration of 

certain cases that have not been resolved by the competent authority within a specified period, generally two years from the commencement of the case. Under the proposed Protocol, the arbitration process may be used to reach an agreement with respect to certain issues relating to residence, permanent establishment, business 

profits, related persons, and royalties. The arbitration board must deliver a determination within six months of the appointment of the chair of the arbitration board, 

and the determination must either be the proposed resolution submitted by the 

United States or the proposed resolution submitted by Canada. The board’s determination has no precedential value and the board shall not provide a rationale for 

its determination. 

The proposed Protocol also makes a number of other modifications to the current 

Convention to reflect changes to U.S. law and current U.S. tax treaty policy. For 

example, the proposed Protocol updates the current Convention’s treatment of pensions for cross-border workers to remove barriers to the flow of personal services between the United States and Canada that could otherwise result from discontinuities in the laws of the two countries regarding the tax treatment of pensions. In 

addition, the proposed Protocol updates the current Convention’s limitation on benefits provisions so that they apply on a reciprocal basis. The proposed Protocol also 

addresses the treatment of companies that engages in corporate ‘‘continuance’’ 

transactions and revises the current Convention’s rules regarding the residence of 

so-called dual resident companies. 

The proposed Protocol provides that the United States and Canada shall notify 

each other in writing, through diplomatic channels, when their respective applicable 

procedures for ratification have been satisfied. The proposed Protocol will enter into 

force upon the date of the later of the required notifications. For taxes withheld at 

source, it will generally have effect for amounts paid or credited on or after the first 

day of the second month that begins after the date the proposed Protocol enters into 

105 

force, although certain provisions with respect to interest may have earlier effect. 

With respect to other taxes, the proposed Protocol will generally have effect for taxable years that begin after the calendar year in which the proposed Protocol enters 

into force. Certain provisions will be phased in or have a delayed effective date. Provisions regarding corporate continuance transactions will apply retroactively, consistent with prior Treasury Department public statements. 

Iceland 

The proposed Convention and accompanying Protocol with Iceland was signed in 

Washington, D.C., on October 23, 2007. It would replace the current Convention, 

concluded in 1975. The most important change from the current Convention is the 

addition of a limitation on benefits provision. The proposed Convention also makes 

changes to some of the withholding tax rates provided in the current Convention. 

In addition, the proposed Convention makes a number of changes to reflect changes 

in U.S. and Icelandic law, and to conform to current U.S. tax treaty policy. 

As just noted, the proposed Convention contains a comprehensive limitation on 

benefits provision, generally following the current U.S. Model income tax treaty. The 

current Convention does not contain treaty shopping protections and, as a 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. 

The proposed Convention generally provides for withholding rates on investment 

income that are the same as or lower than those in the current Convention. Like 

the current Convention, the proposed Convention provides for reduced source-country taxation of cross-border dividends. In addition, the proposed Convention would 

eliminate source-country withholding tax on cross-border dividend payments to pension funds. As with the current Convention, the proposed Convention generally 

would eliminate source-country withholding tax on cross-border interest payments. 

However, while the current Convention eliminates source-country withholding taxes 

on all cross-border payments of royalties, the proposed Convention would allow the 

country in which certain cross-border trademark royalties arise to impose a withholding tax of up to 5 percent. Inclusion of this provision was key to achieving an 

overall agreement that we believe is in the best interests of the United States and 

U.S. taxpayers. 

In addition, the proposed Convention provides for the exchange between the tax 

authorities of each country of information relevant to carrying out the provisions of 

the agreement or the domestic tax laws of either country. 

The proposed Convention provides that the United States and Iceland shall notify 

each other in writing, through diplomatic channels, when their respective applicable 

procedures for ratification have been satisfied. The proposed Convention will enter 

into force on the date of the later of the required notifications. It will have effect, 

with respect to taxes withheld at source, for amounts paid or credited on or after 

the first day of January of the calendar year following entry into force, and with 

respect to other taxes, for taxable years beginning on or after the first day of January following the date upon which the proposed Convention enters into force. The 

current Convention will, with respect to any tax, cease to have effect as of the date 

on which this proposed Convention has effect with respect to such tax. However, 

where any person would be entitled to greater benefits under the current Convention, at the election of the person, the current Convention shall continue to have 

effect in its entirety with respect to such person for a period of 12 months from the 

date the provisions of the proposed Convention are effective. 

Bulgaria 

The proposed income tax Convention and accompanying Protocol with Bulgaria 

signed in Washington, D.C., on February 23, 2007, and the subsequent Protocol with 

Bulgaria signed in Sofia, on February 26, 2008, together would represent the first 

income tax treaty between the United States and Bulgaria. The proposed Convention is generally consistent with the current U.S. Model income tax treaty and with 

treaties that the United States has with other countries. 

Under the proposed Convention, withholding taxes on cross-border portfolio dividend payments may be imposed by the source state at a maximum rate of 10 percent. When the beneficial owner of a cross-border dividend is a company that directly owns at least 10 percent of the stock of the company paying the dividend, 

withholding tax may be imposed at a maximum rate of 5 percent. The proposed 

Convention also provides for a withholding rate of zero on cross-border dividend 

payments to pension funds. 

The proposed Convention generally limits withholding taxes on cross-border interest payments to a maximum rate of 5 percent. No withholding tax on a cross-border 

interest payment is generally permitted, however, when the interest is beneficially 

106 

owned by, or guaranteed by, the government or the central bank of the other country (or any institution owned by that country), a pension fund resident in the other 

country, or a financial institution (including a bank or an insurance company) resident in the other country.The proposed Convention provides that withholding taxes 

on cross-border royalty payments are limited to a maximum rate of 5 percent. 

The proposed Convention also incorporates rules provided in the U.S. Model tax 

treaty for certain classes of investment income. For example, dividends paid by entities such as U.S. regulated investment companies and real estate investment trusts, 

are subject to special rules to prevent the use of these entities to transform what 

is otherwise higher-taxed income into lower-taxed income. 

The proposed Convention limits the taxation by one country of the business profits of a resident of the other country. The source country’s right to tax such profits 

is generally limited to cases in which the profits are attributable to a permanent 

establishment located in that country. The proposed Convention includes a rule, 

similar to a rule in the proposed Protocol with Canada, allowing source-country taxation of income from certain provisions of services. The proposed Convention also 

provides that certain employees or agents that maintain a stock of goods from which 

the agent regularly fills orders on behalf of the principal, and conduct additional activities contributing to the conclusion of sales, may result in a permanent establishment. 

Consistent with current U.S. tax treaty policy, the proposed Convention includes 

a comprehensive limitation on benefits article, which is designed to deny treaty 

shoppers the benefits of the Convention. The proposed Convention provides for nondiscriminatory treatment by one country to residents and nationals of the other 

country. In addition, the proposed Convention provides for the exchange between 

the tax authorities of each country of information relevant to carrying out the provisions of the agreement or the domestic tax laws of either country. This will facilitate 

the enforcement of U.S. domestic tax rules. 

The proposed Convention provides that the United States and Bulgaria shall notify each other, through diplomatic channels, when their respective applicable procedures for ratification have been satisfied. 

The proposed Convention will enter into force upon the date of receipt of the later 

of the required notifications. It will have effect, with respect to taxes withheld at 

source, for amounts paid or credited on or after the first day of January in the year 

following the date upon which the proposed Convention enters into force and, with 

respect to other taxes, for taxable years beginning on or after the first day of January in the year following the date upon which the proposed Convention enters into 

force. 

TREATY PROGRAM PRIORITIES

A key continuing priority for the Treasury Department is updating the few remaining U.S. tax treaties that provide for low withholding tax rates but do not include the limitation on benefits provisions needed to protect against the possibility 

of treaty shopping. Accordingly, we currently are in ongoing discussions with both 

Poland and Hungary regarding the inclusion of anti-treaty shopping provisions. 

In addition, we continue to maintain a very active calendar of tax treaty negotiations. We recently initialed a new tax treaty with Malta. We also are currently negotiating with France and New Zealand, and expect to announce soon the opening of 

other negotiations. 

We also have undertaken exploratory discussions with several countries in Asia 

and South America that we hope will lead to productive negotiations later in 2008 

or in 2009. 

CONCLUSION

Mr. Chairman and ranking member Lugar, let me conclude by thanking you for 

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

committee’s continuing interest in the tax treaty program, and we thank the members and staff for devoting time and attention to the review of these new agreements. We are also grateful for the assistance and cooperation of the staff of the 

Joint Committee on Taxation. 

On behalf of the administration, we urge the committee to take prompt and favorable action on the agreements before you today. I would be happy to respond to any 

question you may have. 

Senator MENENDEZ. Thank you. 

Ms. McMahon? 

107 

STATEMENT OF EMILY S. MCMAHON, DEPUTY CHIEF OF 

STAFF, JOINT COMMITTEE ON TAXATION, UNITED STATES 

CONGRESS, WASHINGTON, D.C. 

Ms. MCMAHON. Thank you, Mr. Chairman. 

I appreciate the opportunity to present the testimony of the staff 

of the Joint Committee on Taxation concerning the proposed protocol with Canada and the proposed treaties with Iceland and Bulgaria. 

As we have in the past, the Joint Committee staff has prepared 

pamphlets concerning the proposed protocol and the treaties. These 

provide detailed descriptions of their provisions and comparisons 

with the U.S. model treaty and with other recent U.S. income tax 

treaties. Therefore, in my time today, I am going to focus just on 

a few of the more significant features of the proposed agreements. 

First, with respect to Canada, as has been mentioned, the proposed protocol would modify an existing treaty with Canada that 

was signed in 1980. Most of the provisions are intended to bring 

the treaty more in line with other recent U.S. treaties, but there 

are at least four provisions that merit particular attention. 

The first is that the proposed protocol would reduce the rate of 

withholding tax on interest payments from 10 percent under the 

existing treaty to zero in most cases. The existing treaty with Canada is only—is one of only a handful of U.S. treaties that currently 

permit withholding on interest payments. So the proposed protocol 

would bring the Canadian treaty in line with most other U.S. treaties and with the model. 

The protocol does not, however, provide for a zero rate of withholding on dividends paid by a subsidiary to a corporate parent, 

and that is a distinction from several of the more recent—a number 

of the more recent treaties with major trading partners. 

Second, the proposed protocol, as has been mentioned, would replace the voluntary arbitration procedures of the present treaty 

with a mandatory binding arbitration procedure for resolving disputes between the competent authorities. The U.S. model also does 

not include a mandatory arbitration procedure, but a similar provision does appear in the recent treaties with Belgium and Germany. 

We understand that there are a significant number of competent 

authority cases now pending between the United States and Canada and that, historically, a substantial number of these cases simply have not been resolved. The mandatory arbitration procedure 

is intended to ensure that tax disputes between the two countries 

are resolved effectively and within a limited time period. In fact, 

the mere existence of the procedure is expected to encourage the 

competent authorities to settle cases promptly in order to avoid arbitration. 

However, it will take time to determine whether the procedure 

is effective or whether there may be unexpected problems. At this 

point, it is still too early to assess the effect of the mandatory arbitration provisions in the treaties with Germany and Belgium, and 

therefore, the committee may wish to understand how the Treasury 

Department intends to monitor the effectiveness of the arbitration 

procedures in all three of these treaties and the extent to which future treaties are expected to include similar procedures. 

108 

Third, the proposed protocol would add some new rules regarding 

the circumstances in which income earned through or paid by fiscally transparent entities will be entitled to treaty benefits. In 

many respects, those rules are consistent with existing U.S. internal tax rules. However, they also include some more restrictive 

rules that are designed to address so-called double-dip financing 

structures under which U.S. and Canadian taxpayers have used 

fiscally transparent hybrid entities to produce income that effectively escapes tax in both countries. 

And finally, the proposed protocol adds a special rule under 

which income from services performed by an enterprise of one 

country in the other country can be taxed in the recipient country 

even if the service provider does not otherwise have a permanent 

establishment in that country. A similar provision appears in several existing U.S. treaties with developing countries and in the proposed treaty with Bulgaria, but this is the first time that such a 

provision has been proposed with a developed country. 

There are a number of unresolved questions regarding the administration of this provision, and the committee may wish to understand whether discussion is going on between the U.S. and Canada to resolve these questions, especially in light of the substantial 

flow of cross-border services between the two countries. 

With respect to Iceland, the proposed treaty would replace an existing treaty signed in 1975. And in most respects, the proposed 

new treaty is consistent with the U.S. model and other recent U.S. 

treaties. But as indicated earlier, its most significant feature is the 

inclusion of a comprehensive modern limitation on benefits provision that will prevent the inappropriate use of the treaty by third 

country residents, a practice known as treaty shopping. 

The present treaty with Iceland is one of three treaties, the others being Hungary and Poland, that are especially—present especially attractive opportunities for treaty shopping. And the fact that 

the new treaty with Iceland includes a comprehensive limitation on 

benefits provision will eliminate one of those major opportunities. 

And finally, with respect to Bulgaria, the proposed treaty would 

be the first treaty with that country, the first income tax treaty 

with that country. It is generally consistent with the provisions of 

the U.S. model and with other recent treaties with developing 

countries. 

A somewhat unusual feature is that it does permit a 5 percent 

withholding rate on interest and dividends, but that is consistent 

with an EU directive that Bulgaria is eligible for for a transitional 

period in respect to payments to other EU countries, and Bulgaria 

has agreed to reconsider that rate in 2014 in connection with the 

expiration of that transitional period. 

And finally, as mentioned earlier, the Bulgaria treaty does have 

the same services provision that appears in the Canadian treaty. 

But that is not so unusual in this case, given that this is a treaty 

with a developing country. 

As I mentioned earlier, all of these provisions and issues are discussed in more detail in the Joint Committee pamphlets, and I 

would be happy to answer any questions that the committee may 

have either now or in the future. 

Thank you. 

109 

1This document may be cited as follows: Joint Committee on Taxation, Testimony of the Staff 

of the Joint Committee on Taxation Before the Senate Committee on Foreign Relations Hearing 

on the Proposed Protocol to the Income Tax Treaty with Canada and the Proposed Tax Treaties 

with Iceland and Bulgaria (JCX-60-08), July 10, 2008. This publication can also be found at 

www.jct.gov. 2 Joint Committee on Taxation, Explanation of Proposed Protocol to the Income Tax Treaty 

Between the United States and Canada (JCX-57-08), July 8, 2008; Joint Committee on Taxation, 

Explanation of Proposed Income Tax Treaty Between the United States and Iceland (JCX-58- 

08), July 8, 2008; Joint Committee on Taxation, Explanation of Proposed Income Tax Treaty Between the United States and Bulgaria (JCX-59-08), July 8, 2008. 3For a comparison of the 2006 U.S. model income tax treaty with its 1996 predecessor, see 

Joint Committee on Taxation, Comparison of the United States Model Income Tax Convention 

of September 15, 1996 with the United States Model Income Tax Convention of November 15, 

2006 (JCX-27-07), May 8, 2007. 

[The prepared statement of Ms. McMahon follows:] 

PREPARED STATEMENT OF EMILY S. MCMAHON

My name is Emily S. McMahon. I am Deputy Chief of Staff of the Joint Committee on Taxation. It is my pleasure to present today the testimony of the staff 

of the Joint Committee on Taxation concerning the proposed protocol to the income 

tax treaty with Canada and the proposed income tax treaties with Iceland and Bulgaria.1

OVERVIEW

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

proposed protocol and treaties. The pamphlets provide detailed descriptions of the 

proposed protocol and treaties, including comparisons with the United States Model 

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

by the Treasury Department, and with other recent U.S. income tax treaties.2 The 

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

protocol and treaties. We consulted with the Treasury Department and with the 

staff of your committee in analyzing the proposed protocol and treaties and in preparing the pamphlets. 

The principal purposes of the protocol and each treaty are to reduce or eliminate 

double taxation of income earned by residents of either the United States or the 

treaty country from sources within the other country and to prevent avoidance or 

evasion of the taxes of the two countries. The proposed protocol and each treaty also 

are intended to promote close economic cooperation between the United States and 

the respective treaty country and to eliminate possible barriers to trade and investment caused by the overlapping taxing jurisdictions of the United States and the 

treaty country. 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 proposed protocol with Canada would make several modifications to an existing income tax treaty that was signed in 1980. The U.S.-Canada income tax treaty 

has been modified by four previous protocols, in 1983, 1984, 1995, and 1997. The 

proposed income tax treaty with Iceland, together with a contemporaneously signed 

protocol, would replace an existing treaty signed in 1975. The proposed income tax 

treaty with Bulgaria, together with the proposed 2007 and 2008 protocols, would be 

the first income tax treaty between the United States and Bulgaria. 

My testimony today will highlight some of the significant features of the proposed 

protocol and treaties and certain issues that they raise. 

U.S. Model treaty 

In November 2006, the Treasury Department released the present U.S. Model 

treaty.3 As a general matter, the U.S. model tax treaties are intended to provide 

a framework for U.S. tax treaty policy and a starting point for negotiations with our 

treaty partners. These models provide helpful information to taxpayers, the Congress, and foreign governments as to U.S. policies on tax treaty matters. Periodical 

updates to reflect new developments and congressional views with regard to particular issues of U.S. tax treaty policy ensure that the model treaties remain meaningful and relevant. 

The present U.S. Model treaty incorporates the key developments in U.S. income 

tax treaty policy that are reflected in recent U.S. income tax treaties. The proposed 

protocol and treaties that are the subject of this hearing are generally consistent 

with the provisions found in the U.S. Model treaty. However, there are some significant differences from the U.S. Model treaty that I will discuss. 

110 

4Department 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. 

Limitation-on-benefits provisions 

One important area in which the proposed protocol and treaties are generally consistent with the U.S. Model treaty is the inclusion in all three proposed instruments 

of a comprehensive limitation-on-benefits provision. These limitation-on-benefits 

provisions generally are intended to make it more difficult for residents of countries 

other than the United States and the treaty partner to benefit inappropriately from 

the treaty. 

When a resident of one country derives income from another country, the internal 

tax rules of the two countries may cause that income to be taxed in both countries. 

One purpose of a bilateral income tax treaty is to allocate taxing rights for crossborder income and thereby to prevent double taxation of residents of the treaty 

countries. Although a bilateral income tax treaty is intended to apply only to residents of the two treaty countries, residents of third countries may attempt to benefit 

from a treaty by engaging in a practice known as ‘‘treaty shopping.’’ Treaty shopping 

may involve directing an investment in one treaty country through an entity organized in the other treaty country or engaging in income-stripping transactions with 

a treaty-country resident. Limitation-on-benefits provisions are intended to deny 

treaty benefits in certain cases of treaty shopping. 

The proposed treaty with Iceland contains a detailed limitation-on-benefits provision (Article 21) that reflects the anti-treaty-shopping provisions included in the 

U.S. Model treaty and more recent U.S. income tax treaties. In contrast, the present 

treaty between the United States and Iceland is one of only eight remaining U.S. 

income tax treaties that do not include any limitation-on-benefits rules. Three of 

those eight treaties, including the treaties with Iceland, Hungary, and Poland, provide for a complete exemption from withholding on interest payments from one treaty country to the other treaty country. Consequently, those three treaties present 

particularly attractive opportunities for treaty-shopping. In fact, a November 2007 

report prepared by the Treasury Department at the request of the U.S. Congress 

suggests that the income tax treaties with Hungary and Iceland have increasingly 

been used for treaty-shopping purposes in recent years as the United States adopted 

modern limitation-on-benefits provisions in its other treaties.4 The proposed treaty 

with Iceland, including its modern limitation-on-benefits rules, would thus eliminate 

a significant treaty-shopping opportunity. Nevertheless, the Committee may wish to 

inquire of the Treasury Department regarding its plans to address the remaining 

U.S. income tax treaties that do not include limitation-on-benefits provisions, and 

in particular the treaties with Hungary and Poland. 

The proposed protocol with Canada replaces Article XXIX A (Limitation on Benefits) of the present treaty with a new article that reflects the anti-treaty-shopping 

provisions included in the U.S. Model treaty and more recent U.S. income tax treaties. Unlike the rules in the present treaty (which may be applied only by the 

United States), the new rules are reciprocal and are intended to prevent the indirect 

use of the treaty by persons who are not entitled to its benefits by reason of residence in Canada or the United States. 

The proposed treaty with Bulgaria also contains a detailed limitation-on-benefits 

provision similar to that of the U.S. Model treaty to prevent the inappropriate use 

of the treaty by third-country residents (Article 21). 

‘‘Zero-rate’’ dividend provisions 

Another significant similarity between the U.S. Model treaty and the proposed 

protocol and treaties is the lack of a ‘‘zero-rate’’ of withholding tax on certain intercompany dividends. Until 2003, no U.S. income tax treaty provided for a complete 

exemption from dividend withholding tax, and the U.S. Model treaty and the 2005 

Model Convention on Income and Capital of the Organisation for Economic Co-operation and Development (‘‘OECD’’) do not provide an exemption. By contrast, many 

bilateral income tax treaties of other countries eliminate withholding taxes on direct 

dividends between treaty countries, and the European Union (‘‘EU’’) Parent-Subsidiary Directive repeals withholding taxes on intra-EU direct dividends (determined by reference to a 15-percent ownership threshold in 2007). 

Moreover, the recent U.S. income tax treaties and protocols with Australia, Japan, 

Mexico, the Netherlands, Sweden, the United Kingdom, Germany, Belgium, Denmark, and Finland include zero-rate dividend provisions. Eligibility for this zero 

rate generally is contingent on meeting an 80-percent ownership threshold and certain additional requirements. The Senate ratified those treaties and protocols in 

111 

2003 (Australia, Mexico, and the United Kingdom), 2004 (Japan and the Netherlands), 2006 (Sweden), and 2007 (Germany, Belgium, Denmark, and Finland). On 

the other hand, neither the recent protocol with France nor the recent treaties with 

Bangladesh and Sri Lanka include an exemption from dividend withholding. 

In general, the dividend articles of the proposed protocol and treaties provide a 

maximum source-country withholding tax rate of 15 percent (10 percent under the 

proposed treaty with Bulgaria) and a reduced five-percent maximum rate for dividends received by a company owning at least 10 percent of the dividend-paying company. A zero rate of withholding is generally available under the proposed protocol 

and treaties for dividends received by a pension fund. The proposed protocol and 

treaties also include special rules for dividends received from U.S. regulated investment companies and real estate investment trusts. These special rules generally are 

similar to provisions included in other recent U.S. treaties and protocols. 

In previous testimony before the Committee, the Treasury Department has indicated that zero-rate dividend provisions should be allowed only under treaties that 

have restrictive limitation-on-benefits rules and that provide comprehensive information exchange. Even in those treaties, according to previous Treasury Department statements, dividend withholding tax should be eliminated only based on an 

evaluation of the overall balance of benefits under the treaty. The Committee may 

wish to consider what overall balance of considerations prompted the Treasury Department not to seek a zero-rate provision in the proposed protocol and treaties, all 

of which have comprehensive limitation-on-benefits and information-exchange provisions. 

Mandatory and binding arbitration provision in proposed protocol with Canada 

One important feature of the proposed protocol with Canada is the replacement 

of the voluntary arbitration procedure of Article XXVI (Mutual Agreement Procedure) of the present treaty with a mandatory arbitration procedure that is sometimes referred to as ‘‘last best offer’’ arbitration. Under this procedure, each of the 

competent authorities proposes one and only one figure for settlement of a dispute, 

and the arbitrator must select one of those figures as the award. The last best offer 

approach is intended to induce the competent authorities to moderate their positions, including before arbitration proceedings would commence, and thus to increase the possibility of a negotiated settlement. Under the proposed protocol, unless 

a taxpayer or other ‘‘concerned person’’ (in general, a person whose tax liability is 

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

The U.S. Model treaty does not include a mandatory arbitration procedure. However, the use of mandatory and binding arbitration in tax disputes between countries is not a novel concept. A provision similar to the provision in the proposed protocol with Canada does appear in the protocol with Germany and the treaty with 

Belgium, both ratified by the Senate in 2007. Also in 2007, the OECD Committee 

on Fiscal Affairs adopted proposed changes to its model treaty and commentary that 

incorporate a mandatory and binding arbitration procedure, some elements of which 

are generally similar to those of the proposed protocol. The OECD has announced 

that it will be adopting those changes in final form shortly. In addition, the EU has 

adopted certain mandatory and binding arbitration procedures that are applicable 

to transfer pricing disputes between members of the EU. 

Judging from the actions taken by the OECD and the EU, unresolved competent 

authority proceedings appear to be a multinational occurrence. As a general matter, 

it is beneficial to resolve tax disputes effectively and efficiently. The new arbitration 

procedures included in the proposed protocol are intended to ensure that the mutual 

agreement procedures occur pursuant to a schedule and that all cases are resolved 

within a limited time period. 

We understand that there are a significant number of competent authority cases 

pending between the United States and Canada, and that, historically, a substantial 

number of double taxation cases have not been satisfactorily resolved by the U.S. 

and Canadian competent authorities. The Treasury Department does not release 

statistics that reflect competent authority activities by individual treaty partners. 

While many expect that the proposed mandatory and binding arbitration procedures 

will be successful in resolving recurring issues and will encourage the competent authorities to settle cases without resort to arbitration, it will take time to ascertain 

if these procedures are effective or if unexpected problems arise. 

Meanwhile, the Treasury Department or other trading partners may seek to negotiate treaty provisions with current or future treaty partners that are similar, in 

whole or in part, to the arbitration procedures of the proposed treaty and protocol. 

It is still too early to assess the effect of the addition of mandatory arbitration provisions to the Germany and Belgium treaties on the competent authority processes 

112 

5These articles are: Article IV (Residence), but only to the extent the case relates to the residence of natural persons; Article V (Permanent Establishment); Article VII (Business Profits); 

Article IX (Related Persons); and Article XII (Royalties), but only to the extent the case relates 

(1) to the application of Article XII to transactions involving related persons, or (2) to an allocation of amounts between taxable and non-taxable royalties. 

with respect to those countries. Therefore, the Committee may wish to better understand how the Treasury Department intends to monitor the competent authority 

function, as well as arbitration developments with respect to other countries, to determine the overall effects of the new arbitration procedures on the mutual agreement process. The Committee may wish to consider what information is needed to 

measure whether the proposed arbitration procedures result in more efficient case 

resolution, both before and during arbitration, and whether they enhance the quality of the outcome of the competent authority cases. In addition, the Committee may 

wish to inquire as to whether and under what circumstances the Treasury Department intends to pursue similar provisions in other treaties. 

The Committee may also wish to consider certain specific features of the arbitration procedures included in the proposed protocol. For example, the mandatory arbitration procedure is available under the proposed protocol only with respect to certain articles specified by the treaty partners in diplomatic notes accompanying the 

protocol.5 The Committee may wish to inquire about the basis for selection of those 

particular articles and the implications of excluding the others. Other points that 

the Committee may wish to clarify include the extent to which decisions of the arbitration board will be taken into account in subsequent competent authority cases 

involving the same taxpayer, the same issue and substantially similar facts, and the 

application of the mandatory arbitration procedures to competent authority cases already pending on the date on which the proposed protocol enters into force. 

Other provisions of the proposed protocol with Canada 

The proposed protocol modifies a number of the provisions in the existing treaty. 

The rules of the proposed protocol generally are similar to rules of recent U.S. income tax treaties, the U.S. Model treaty, and the 2005 Model Convention on Income 

and on Capital of the Organisation for Economic Cooperation and Development (the 

‘‘OECD Model treaty’’). However, the existing treaty, as amended by the proposed 

protocol, contains certain substantive deviations from these treaties and models. 

The proposed protocol amends Article IV (Residence) of the existing treaty specifically to address companies that are residents of both treaty countries. The proposed 

protocol provides that if such a dual-resident company is created under the laws in 

force in a treaty country but not under the laws in force in the other treaty country, 

the company is deemed to be a resident only of the first treaty country. If that rule 

does not apply (for example, because a company created in one country is continued 

in the other country in accordance with its corporate law), the competent authorities 

of the treaty countries must endeavor to settle the question of residency by mutual 

agreement and determine the mode of application of the treaty to the company. In 

the absence of such an agreement, the company is not considered to be a resident 

of either treaty country for purposes of claiming any benefits under the treaty. 

The proposed protocol also amends Article IV of the existing treaty to provide specific rules regarding the circumstances in which amounts of income, profit, or gain 

are deemed to be derived through or paid by fiscally transparent entities. In general, an amount of income, profit, or gain is considered to be derived by a resident 

of a treaty country if (1) that person is considered under the taxation law of that 

country to have derived the amount through an entity, other than an entity that 

is a resident of the other treaty country, and (2) by reason of that entity being treated as fiscally transparent under the laws of the first treaty country, the treatment 

of the amount under the taxation law of that country is the same as its treatment 

would be if that amount had been derived directly by that person. Notwithstanding 

the general rule, an amount of income, profit, or gain is considered not to be paid 

to or derived by a person who is a resident of a treaty country if (1) that person 

is considered under the taxation law of the other treaty country as deriving the 

amount through an entity that is not a resident of the first treaty country, but (2) 

by reason of the entity not being treated as fiscally transparent under the laws of 

that treaty country, the treatment of the amount under the taxation law of that 

country is not the same as its treatment would be if that amount had been derived 

directly by the person. These rules are consistent with present U.S. tax rules. 

The proposed protocol provides an additional rule applicable in the area of fiscally 

transparent entities that is new to the U.S. tax treaty network. Under this new 

rule, an amount of income, profit, or gain is not considered to be paid to or derived 

by a person who is a resident of a treaty country if (1) the person is considered 

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under the tax law of the other treaty country to have received the amount from an 

entity resident in the other treaty country, but (2) by reason of the entity being 

treated as fiscally transparent under the laws of the first treaty country, the treatment of the amount received by that person under the tax law of that country is 

not the same as its treatment would be if the entity were treated as not fiscally 

transparent under the laws of that country. Thus, treaty benefits may not be 

claimed with respect to such payments. There is some uncertainty with regard to 

how this rule applies to deductible payments made by hybrid partnerships, and the 

Committee may wish to inquire about this point. 

The proposed protocol amends Article V of the existing treaty to add a special rule 

under which services performed by an enterprise of a treaty country in the other 

treaty country may give rise to a permanent establishment in the other country if 

the enterprise exceeds certain levels of presence in the other country and if certain 

other conditions are met. The special rule applies if the enterprise does not have 

a permanent establishment in the other country by virtue of any of the customary 

treaty standards. A similar provision appears in several existing U.S. tax treaties 

with developing countries (and in the proposed treaty with Bulgaria), but this is the 

first time such a provision has been proposed with a developed country. If certain 

additional conditions are met, the provision would subject individual employees to 

taxation as well. There are several unresolved questions regarding the administration of this provision. The Committee may wish to inquire whether active discussion 

is occurring between the United States and Canada on these matters, and whether 

these questions will be resolved before the protocol becomes effective. 

The proposed protocol applies the treaty partners’ interpretation of the arm’slength standard in a manner consistent with the OECD Transfer Pricing Guidelines 

to the attribution of profits to a permanent establishment under Article VII, taking 

into account the different economic and legal circumstances of a single legal entity. 

Under the proposed protocol, the business profits to be attributed to a permanent 

establishment include only the profits derived from the assets used, risks assumed, 

and activities performed by the permanent establishment. The proposed protocol 

also amends Article VII of the existing treaty to clarify that income may be attributable to a permanent establishment that no longer exists in one of the treaty countries. In addition, the proposed protocol provides that income derived from independent personal services (i.e., income from the performance of professional services 

and of other activities of an independent character) is included within the meaning 

of the term ‘‘business profits.’’ Accordingly, the treatment of such income is governed 

by Article VII rather than by present treaty Article XIV (Independent Personal 

Services), which the proposed protocol deletes. These new rules are similar to provisions included in other recent U.S. treaties and protocols, including the U.S Model 

treaty. 

The proposed protocol modifies Article X (Dividends) of the present treaty to reflect more closely the dividend provisions included in the U.S. Model treaty and recent U.S. income tax treaties. The modifications include a revised definition of the 

term ‘‘dividends’’ and an updated special rule that applies to dividends paid by U.S. 

REITs. 

The proposed protocol replaces Article XI (Interest) of the present treaty with a 

new article that generally provides for exclusive residence-country taxation of interest. Limited exceptions permit source-country taxation of interest if the beneficial 

owner of the interest carries on, or has carried on, business through a permanent 

establishment in the source country and the debt-claim in respect of which the interest is paid is effectively connected with that permanent establishment. Two antiabuse provisions relating to contingent interest payments and residual interests in 

real estate mortgage investment conduits also permit source-country taxation of interest. Special rules apply to cases involving a non-arm’s-length interest charge between a payer and a beneficial owner that have a special relationship. 

The proposed protocol conforms Article XII (Royalties) to the proposed elimination 

of Article XIV (Independent Personal Services) and clarifies the treatment of income 

attributable to a permanent establishment that has ceased to exist. 

The proposed protocol modifies Article XIII (Gains) of the present treaty in two 

principal respects. First, the proposed protocol narrows the emigration exception to 

the Article’s rule providing for exclusive residence-country taxation of gains from the 

alienation of property in cases other than those specifically enumerated in Article 

XIII. The proposed protocol provides that this exception will not apply if the property was treated as alienated immediately before an individual’s emigration. Second, 

the proposed protocol provides a revised election intended to coordinate U.S. and 

Canadian taxation of gains in the case of timing mismatches. 

The proposed protocol conforms Article XV (Dependent Personal Services) of the 

present treaty to the U.S. and OECD Model treaties, as well as to the proposed 

114 

elimination of Article XIV (Independent Personal Services), and broadens the definition of ‘‘remuneration. In addition, the proposed protocol changes the rules with respect to calculating the number of days an individual is present in the other treaty 

country for purposes of determining if a resident of one treaty country may be taxed 

by the other treaty country. The proposed protocol also contains provisions intended 

to eliminate potential abuses through the use of intermediary employers. The diplomatic notes exchanged in connection with the proposed protocol set forth new rules 

for allocating income from the exercise or disposal of an option between the two 

treaty countries. 

The proposed protocol modifies some of the existing treaty rules of Article XVIII 

of the present treaty (Pensions and Annuities), mostly to address Roth individual 

retirement accounts, and adds several new provisions that address cross-border pension contributions and benefits accruals. Many of the new rules are similar to those 

found in the U.S. Model treaty, but several reflect the uniquely large cross-border 

flow of personal services between Canada and the United States, including the large 

number of cross-border commuters. These rules are intended to remove barriers to 

the flow of personal services between the two countries that could otherwise result 

from discontinuities under the laws of each country regarding the deductibility of 

pension contributions and the taxation of a pension plan’s earnings and accretions 

in value. In addition, the proposed protocol adds a new provision to address the 

source of certain annuity or life insurance payments made by branches of insurance 

companies. 

The proposed protocol replaces Article XX (Students) of the present treaty with 

a new article that generally corresponds to the treatment provided under the 

present treaty. The proposed protocol adds a one-year limitation on the exemption 

from income tax in the host country in the case of apprentices and business trainees. The proposed protocol modifies Article XXI (Exempt Organizations). The new 

rules are intended to permit charitable-type organizations to invest indirectly and 

to pool their investments with pension-type organizations. 

The proposed protocol adds a new paragraph to Article XXII (Other Income) of 

the treaty for guarantee fees. The new paragraph provides that compensation derived by a resident of a contracting state in respect of a guarantee of indebtedness 

shall be taxable only in that state, unless the compensation is business profits attributable to a permanent establishment in the other contracting state, in which 

case Article VII (Business Profits) shall apply. 

The proposed protocol changes the obligations of Canada under Article XXIV 

(Elimination of Double Taxation) of the treaty with respect to dividends received by 

a Canadian company from a U.S. resident company. Under the proposed protocol, 

a Canadian company receiving a dividend from a U.S. resident company of which 

it owns at least 10 percent of the voting stock, is allowed a credit against Canadian 

income tax for the appropriate amount of income tax paid or accrued to the United 

States by the dividend paying company with respect to the profits out of which the 

dividends are paid. 

The proposed protocol revises the general rules of Article XXV (Non-Discrimination) of the present treaty to bring those rules into closer conformity with the U.S. 

Model treaty and recent U.S. income tax treaties. The proposed protocol generally 

prohibits a treaty country from discriminating against nationals of the other treaty 

country by imposing on those nationals more burdensome taxation than it imposes 

or may impose on its own nationals in the same circumstances. 

The proposed protocol modifies Article XXVI A (Assistance in Collection) of the 

present treaty to further limit, in a narrow class of cases, one treaty country’s obligation to assist the other treaty country in collecting taxes. The modifications also 

explicitly provide that the assistance-in-collection provisions apply to contributions 

to social security and employment insurance premiums levied by or on behalf of the 

government of a treaty country. 

The proposed protocol replaces Article XXVII (Exchange of Information) of the 

present treaty with rules similar to those in the U.S. model treaty. The proposed 

rules generally provide that the two competent authorities will exchange such information as may be relevant in carrying out the provisions of the domestic laws of 

the United States and Canada concerning taxes to which the treaty applies to the 

extent the taxation under those laws is not contrary to the treaty. 

The proposed protocol amends the saving clause in Article XXIX (Miscellaneous 

Rules) to bring the treaty generally in conformity with the U.S. taxation of former 

citizens and former long-term residents under section 877 of the Code. The proposed 

protocol provides that notwithstanding the other provisions of the treaty, a former 

citizen or former long-term resident of the United States, may, for a period of ten 

years following the loss of such status, be taxed in accordance with the laws of the 

115 

United States with respect to income from sources within the United States (including income deemed under the domestic law of the United States to arise from such 

sources). Section 877 is applicable to individuals who relinquish their U.S. citizenship or cease to be a lawful permanent resident prior to June 17, 2008. 

For any individual who relinquishes U.S. citizenship or ceases to be a lawful permanent resident of the United States on or after June 17, 2008, a new set of rules 

applies. In general, to the extent those rules impose U.S. tax on an individual after 

the individual expatriates, they require or deem the individual to waive any rights 

to claim a reduction in U.S. tax under a U.S. tax treaty and any other rights under 

a U.S. tax treaty that would preclude the assessment or collection of tax imposed 

by the new rules. 

The proposed protocol replaces Article XXIX B (Taxes Imposed by Reason of 

Death) of the present treaty with a new article that generally addresses certain concerns regarding the application of Canadian tax rules and regarding the availability 

of tax credits or deductions when the United States and Canada impose tax on the 

same items of income or property. 

Article 27 of the proposed protocol provides for the entry into force of the proposed 

protocol. The provisions of the proposed protocol are generally effective on a prospective basis. However, the provisions with respect to dual-residence tie breakers (Article 2 of the proposed protocol) and an emigrant’s gain (Article 8 of the proposed protocol) are effective retroactive to September 17, 2000. In certain situations, the reduction of interest withholding rates is also retroactive, with the initial phase-in 

rate applicable for the year in which the proposed protocol becomes effective. Also, 

the provisions for assistance in the collection of taxes are retroactively effective to 

revenue claims that have been definitively determined after November 9, 1985. 

With respect to certain payments through fiscally transparent entities and the 

new provisions regarding permanent establishments, the proposed protocol is effective as of the first day of the third year that ends after the proposed protocol enters 

into force. Special rules apply for determining when to start counting (1) days 

present, (2) services rendered, and (3) gross active business revenues for purposes 

of the permanent establishment provision. With respect to the arbitration provisions, the proposed protocol clarifies that a competent authority matter currently in 

progress will be deemed to have started on the date on which the proposed protocol 

enters into force. 

Iceland 

The proposed treaty replaces the existing treaty that was signed in 1975. The 

rules of the proposed treaty generally are similar to rules of recent U.S. income tax 

treaties, the U.S Model treaty, and the OECD Model treaty. However, the proposed 

treaty contains certain substantive deviations from these treaties and models. 

The proposed treaty contains provisions under which each country generally 

agrees not to tax business income derived from sources within that country by residents of the other country unless the business activities in the taxing country are 

substantial enough to constitute a permanent establishment (Article 7). Similarly, 

the proposed treaty contains certain exemptions under which residents of one country performing personal services in the other country will not be required to pay 

tax in the other country unless their contact with the other country exceeds specified minimums (Articles 7, 14, and 16). The proposed treaty also provides that pensions and other similar remuneration paid to a resident of one country may be taxed 

only by that country, and only at such time and to the extent that a pension distribution is made (Article 17). 

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

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

the proposed treaty. The proposed treaty provides that, subject to certain rules and 

exceptions, interest and most types of royalties derived by a resident of either country from sources within the other country may be taxed only by the residence country (Articles 11 and 12). Notwithstanding this general rule, the source country may 

impose tax on certain royalties in an amount not to exceed five percent of such royalties. 

In situations in which the country of source retains the right under the proposed 

treaty to tax income derived by residents of the other country, the proposed treaty 

generally provides for relief from the potential double taxation through the allowance by the country of residence of a tax credit for foreign taxes paid to the other 

country (Article 22). 

The proposed treaty contains the standard provision (the ‘‘saving clause’’) included 

in U.S. tax treaties pursuant to which each country retains the right to tax its resiVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00115 Fmt 6602 Sfmt 6621 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
116 

dents and citizens as if the treaty had not come into effect (Article 1). In addition, 

the proposed treaty contains the standard provision that the treaty may not be applied to deny any taxpayer any benefits to which the taxpayer would be entitled 

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

countries (Article 1). 

The proposed treaty (Article 19) generally provides that students, business trainees, and researchers visiting the other treaty country are exempt from host country 

taxation on certain types of payments received. 

The proposed treaty includes the standard provision (Article 20) that assigns taxing jurisdiction over income not addressed in the other articles of the proposed treaty. In general, such income is taxable solely by the residence country. The proposed 

treaty provides authority for the two countries to resolve disputes (Article 24) and 

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

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

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

The proposed treaty allows taxpayers to temporarily continue to claim benefits 

under the present treaty for up to an additional year if they would have been entitled to greater benefits under the present treaty. In addition, a teacher entitled to 

benefits under the present treaty at the time the proposed treaty enters into force 

will continue to be entitled to the benefits available under the present treaty for as 

long as such individual would have been entitled to the previously existing benefits. 

Bulgaria 

The United States and Bulgaria do not have an income tax treaty currently in 

force. The rules of the proposed treaty and protocols generally are similar to various 

rules of recent U.S. income tax treaties, the U.S. Model treaty, the OECD Model 

treaty, and the 1980 United Nations Model Double Taxation Convention between 

Developed and Developing Countries, as amended January 11, 2001 (‘‘the U.N. 

Model treaty’’). However, the proposed treaty, as amended by the proposed 2007 and 

2008 protocols, also contains certain substantive deviations from these treaties and 

models. 

The proposed treaty contains provisions under which each country generally 

agrees not to tax business income derived from sources within that country by residents of the other country unless the business activities in the taxing country are 

substantial enough to constitute a permanent establishment (Article 5). The proposed treaty includes a special rule under which services performed by an enterprise 

of a treaty country in the other treaty country may give rise to a permanent establishment in the other country if the enterprise’s activities in the other country occur 

for a certain number days and if certain other conditions are met. The special rule 

applies if the enterprise does not have a permanent establishment in the other 

country by virtue of any of the customary treaty standards. 

The proposed treaty provides that dividends, interest, royalties, and certain capital gains derived by a resident of either country from sources within the other country generally may be taxed by both countries (Articles 10, 11, 12, and 13); however, 

the rate of tax that the source country may impose on a resident of the other country on dividends, interest, and royalties may be limited by the proposed treaty (Articles 10, 11, and 12). Withholding tax on dividends is limited to 10 percent in most 

cases and is limited to five percent for dividends received by a company owning at 

least 10 percent of the dividend-paying company. A zero rate of withholding tax generally applies to dividends received by pension funds. In general, withholding tax 

on interest and royalties is limited to five percent under the proposed treaty. Under 

the proposed 2007 protocol, the treaty countries agree to reconsider source-country 

taxation of interest and royalties arising in Bulgaria and beneficially owned by a 

resident of the United States, at a time that is consistent with the December 31, 

2014 conclusion of the transition period under a European Union Council Directive 

applicable to interest and royalties deemed to arise in Bulgaria and beneficially 

owned by a resident of the European Union. 

In situations in which the country of source retains the right under the proposed 

treaty to tax income derived by residents of the other country, the proposed treaty 

generally provides for relief from the potential double taxation, in the case of residents of the United States, through the allowance of a credit for foreign taxes paid 

to Bulgaria, and, in the case of residents of Bulgaria, through a combination of credits and exemptions (Article 22). 

The proposed treaty contains the standard provision (the ‘‘saving clause’’) included 

in U.S. tax treaties pursuant to which each country retains the right to tax its residents and citizens as if the treaty had not come into effect (Article 1). In addition, 

the proposed treaty contains the standard provision providing that the treaty may 

117 

not be applied to deny any taxpayer any benefits the taxpayer would be entitled 

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

countries (Article 1). 

The proposed treaty includes the standard provision (Article 20) that assigns taxing jurisdiction over income not addressed in the other articles of the proposed treaty. In general, such income is taxable solely by the residence country. The proposed 

treaty provides authority for the two countries to exchange information (Article 25) 

in order to carry out the provisions of the proposed treaty. The proposed treaty also 

contains a detailed limitation-on-benefits provision to prevent the inappropriate use 

of the treaty by third-country residents (Article 21). 

ConclusionThese provisions and issues are all discussed in more detail in the Joint 

Committee staff pamphlets on the proposed protocol and treaties. I am happy to 

answer any questions that the Committee may have at this time or in the future. 

Senator MENENDEZ. Thank you. 

Mr. Beaird? 

STATEMENT OF RICHARD C. BEAIRD, SENIOR DEPUTY U.S. COORDINATOR FOR INTERNATIONAL COMMUNICATIONS AND 

INFORMATION POLICY, BUREAU FOR ECONOMIC, ENERGY, 

AND BUSINESS AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, D.C. 

Mr. BEAIRD. Thank you, Mr. Chairman. 

Mr. Chairman, ranking member Lugar, I am pleased to be here 

to testify in support of the five telecommunications treaties before 

you this afternoon and to urge the Senate’s advice and consent to 

ratification by the President. 

These treaties flow from the work of the International Telecommunications Union, the United Nations (U.N.) specialized agency for telecommunication matters. Ratification of these treaties will 

advance the interests of U.S. businesses, consumers, and the 

United States Government. These treaties have enabled U.S. businesses to secure valuable radio spectrum and allowed them to offer 

innovative products and services to U.S. and foreign markets. 

They have also protected U.S. Government spectrum interests 

and ensured that critical Government programs, ranging from the 

International Space Station to essential equipment for weather 

sensing and forecasting, can operate without interference. Furthermore, these treaties have ensured that first responders can more 

quickly and effectively coordinate their response to natural disasters and other emergencies. 

These treaties have also helped make the ITU a more transparent, nimble, and accountable international organization that 

better serves the interests of its member states. As a result of these 

treaties—as a result, these treaties are strongly supported by U.S. 

businesses and by the Government, subject to the declarations and 

reservations outlined in each of the treaty packages. 

In fact, a broad range of representatives from U.S. businesses 

and Government agencies were involved at every step in establishing and pursuing our negotiating objectives for these treaties. 

By becoming a party to these five ITU instruments, we will convey 

to the other members of the union our commitment to these important decisions and our continuing strong support for the mission of 

the ITU. 

Mr. Chairman, I would like to identify some of the highlights of 

the ITU treaties, which fall into two main categories corresponding 

to the world radiocommunication conferences and the pleniVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00117 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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potentiary conferences. The first category involves amendments to 

the radio regulations, which are treaties governing the use of the 

radio frequency spectrum and the geostationary and non-geostationary satellite orbits. 

At the 1992 World Administrative Radio Conference, the United 

States was successful in obtaining additional spectrum for Voice of 

America, spectrum allocation for low-Earth orbit satellite systems, 

frequency allocation for digital audio radio service, and additional 

spectrum for NASA projects such as the lunar and Martian missions. 

At the 1995 World Radiocommunication Conference, the United 

States achieved new spectrum allocation for mobile satellite systems and a new allocation for non-geostationary fixed satellite services for broadband Internet. 

The second category of treaties are proposed amendments to the 

ITU constitution and convention, which are the result of ITU plenipotentiary conferences which are the principal administrative and 

policy conferences of the ITU. 

In 1998, the United States hosted the first plenipotentiary conference since it hosted the conference in 1947. The United States 

achieved several objectives at this conference including enhanced 

status of public and private companies participating in ITU activities, added provisions in the constitution to convene world radio 

conferences every 2 to 3 years to meet the challenges of a dynamic 

telecom environment, improved ITU’s accountability through 

changes in the budget process. 

At the 2002 Plenipotentiary Conference in Marrakesh, Morocco, 

that conference adopted the following. The conference developed a 

financial plan to balance the ITU budget and reduce expenditures 

by 10 percent. The conference allowed private companies to become 

observers at ITU council meetings, and it changed the structure of 

the Radio Regulations Board to make it more effective. 

At the 2006 Plenipotentiary Conference held in Antalya, Turkey, 

the United States achieved the following results. The conference 

enhanced ITU budgetary process requiring ITU carry out annual 

review of income and expenditures. It lengthened the dates between ITU’s established conferences so as to hold down costs. It enhanced member state oversight of ITU financial and administrative 

activities. It promoted budgetary transparency, and it preserved 

the private sector role within the ITU. 

Mr. Chairman, this completes my summary of the treaties. Telecommunications is growing at an incredible pace, and U.S. companies are introducing new services here and abroad on a steady 

basis. The United States Government stands ready to move forward as rapidly as possible to bring the benefits of international 

telecommunications to our citizens. 

It was my pleasure and honor to present this testimony. I recommend that the Senate act favorably on these treaties. This concludes my oral statement, and I have submitted a more comprehensive account in my written statement and ask that it be entered 

into the record. 

Mr. Chairman, I stand ready to answer any questions that the 

committee may have. Thank you. 

[The prepared statement of Mr. Beaird follows:] 

119 

PREPARED STATEMENT OF RICHARD C. BEAIRD

Chairman Menendez, ranking member Hagel, members of the subcommittee, I am 

pleased to be here to testify in support of the five telecommunications treaties before 

you this morning, and to urge the Senate’s advice and consent to ratification by the 

President. These treaties flow from the work of the International Telecommunication Union (ITU), the United Nations’ (UN) specialized agency for telecommunication matters. They are contained in the Final Acts of: 

• The ITU World Administrative Radio Conference—1992 

• The ITU World Radiocommunication Conference—1995 

• The ITU Plenipotentiary Conference—1998 

• The ITU Plenipotentiary Conference—2002 

• The ITU Plenipotentiary Conference—2006 

Ratification of these treaties will advance the interests of U.S. businesses, consumers and the U.S. Government. These treaties have enabled U.S. businesses to 

secure valuable radio spectrum and allowed them to offer innovative products and 

services to U.S. and foreign markets. They also have protected U.S. Government 

spectrum interests and ensured that critical government programs ranging from the 

International Space Station to essential equipment for weather sensing and forecasting can operate without interference. Furthermore, these treaties have ensured 

that first responders can more quickly and effectively coordinate their response to 

natural disasters and other emergencies. These treaties also have helped make the 

ITU a more transparent, nimble and accountable international organization that 

better serves the interests of its Member States. 

As a result, these treaties are strongly supported by U.S. businesses and by the 

U.S. Government, subject to the declarations and reservations outlined in each of 

the treaty packages. In fact, a very broad range of representatives from U.S. businesses, and government agencies were involved at every step in establishing and 

pursuing U.S. negotiating objectives for these treaties. By becoming a party to these 

five ITU instruments, we will convey to the other members of the Union our commitment to these important decisions and our continuing strong support for the mission of the ITU. 

Before I summarize what each of the treaties does, it might be helpful for me to 

quickly share with you some background about the ITU and how the United States 

organizes its participation in the negotiations that led to these treaties. 

The International Telecommunication Union was formed in 1865 when European 

countries saw the need to work together to facilitate telegraphic communications 

across their borders. Today, the ITU is involved in every phase of global telecommunications, working to maintain international cooperation among its 191 Member States for management of global spectrum use, and the adoption of international 

telecommunication standards, and to foster the expansion of telecommunication systems and services in developing countries. ITU’s purposes and activities are governed by several international instruments, including the Constitution, the Convention, and the Administrative Regulations. 

The organization is unusual among UN agencies in that its membership also includes 715 Sector Members (86 of which are from the United States) and 164 Associates, representing companies and organizations with an interest in telecommunications. This feature is particularly vital to U.S. interests, in view of our reliance 

on the private sector for the provision of telecommunications networks and services 

on both the national and international levels, and in view of the dependence of 

many U.S. companies on effective communications to support their multinational operations. 

As a result of the 1992 Plenipotentiary Conference, the ITU was reorganized to 

give it greater flexibility to adapt to today’s increasingly complex, interactive, and 

competitive environment. Consequently, the Union is organized into three Sectors, 

corresponding to its three main areas of activity: (1) Telecommunication Standardization (ITU-T); (2) Radiocommunication (ITU-R); and (3) Telecommunication Development (ITU-D). The reorganization also introduced a regular cycle of conferences 

to help the Union rapidly respond to new technological advances. 

The Union’s three sectors represent an extremely diverse comm unity, ranging 

from regulators to users, manufacturers to service providers, as well as consumers. 

In one form or another, international telecommunications involve every government 

agency and touch most aspects of A merican business and the public in general. 

Hence, the work of the ITU is of great importance and interest to the United States. 

The Union convenes Plenipotentiary Conferences to set the Union’s general policies, which often are reflected in amendments to the ITU Constitution and ConvenVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00119 Fmt 6602 Sfmt 6621 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
120 

tion, and World Radiocommunication Conferences (WRCs) to revise international 

Radio Regulations. Three of the treaties before the Committee are the result of the 

Union’s top policy making body, the Plenipotentiary Conference, and the remaining 

two treaties are the result of WRCs. 

The Department of State’s responsibility is to coordinate U.S. participation in the 

activities of the U nion. This includes the presentation of U.S. proposals to the ITU 

and its member countries, development of strategies and positions relating to conference issues, and assembly of well-qualified delegations from both the public and 

private sector to carry out the complex and often technical negotiations. For these 

five treaties which amend the ITU Constitution and Convention, and the Radio Regulations, the Department is assisted in the detailed preparations for the ITU conferences by the Federal Communications Commission (FCC) and the National Telecommunications and Information Administration (NTIA) in the Department of Commerce. The FCC regulates all non-Federal use of the radio spectrum and all interstate telecommunications as well as all international communications that originate 

or terminate in the United States. The NTIA manages Federal use of the radio spectrum and is the President’s principal adviser on telecommunications and information policy issues, representing the Executive Branch in both domestic and international telecommunications and information policy activities. 

One important advantage of this extensive national effort is that it ensures the 

United States is well prepared to negotiate at the conferences. Moreover, private 

groups and individuals have the opportunity to express their views at each stage 

of the process, from initial conception of ideas to the eventual adoption of the national regulations. 

I will now give a summary of the treaties that fall into two main categories, corresponding to the W RCs and the Plenipotentiary Conferences. 

The first category involves amendments to the Radio Regulations which are treaties governing the use of the radio-frequency spectrum and the geostationary and 

non-geostationary satellite orbits. At the 1992 World Administrative Radio Conference (WARC), the United States was successful in obtaining a considerable 

amount of additional spectrum to relieve frequency congestion in the existing broadcasting bands used by Voice of America. Allocation for Low Earth Orbit (LEO) satellite systems to enable voice-grade telephony and data was one of the most difficult 

and complex debates during WARC-92 and one of the highest U.S. priorities and 

achievements. The conference essentially adopted the U.S. allocation proposal. The 

United States also secured a Satellite Digital Audio Radio 

Service frequency allocation. In support of NASA’s communication needs, the U 

nited States obtained additional spectrum for such programs as the International 

Space Station, lunar and Mars missions, and NASA’s next-generation robotic deep 

space exploration programs. 

At the 1995 World Radiocommunication Conference (W RC), the United States 

achieved a new spectrum allocation that would permit global deployment of new satellite technologies, specifically, Mobile Satellite Systems. This allocation was critical 

to the future operation of LEO satellite systems, which are used for expanding communications and observation networks. WRC-95 also acted favorably on the U.S. 

spectrum proposal for non-geostationary fixed satellites. This new technology paved 

the way for U.S. industry to provide satellite based global broadband Internet to remote regions. All these achievements are reflected in the proposed amendments to 

the Radio Regulations for which we are seeking advice and consent. 

The second category of treaties are proposed amendments to the ITU Constitution 

and Convention which are the result of ITU Plenipotentiary Conferences, which are 

the principal administrative and policy conferences of the ITU. In 1998, the United 

States hosted its first Plenipotentiary Conference since 1947. The United States 

achieved several objectives at this Conference, including enhancing the status of 

public and private companies that participate in ITU activities, adding a provision 

in the Constitution to convene W RCs every two to three years to meet the challenges of a dynamic telecom environment, and improving the ITU’s accountability 

through changes in the budget process. All of these changes improved the function 

of the ITU and strengthened the role of the private sector within the ITU. 

The 2002 Plenipotentiary Conference in Marrakesh, Morocco, adopted several 

amendments supported by the U nited States to improve management, functioning 

and finances of the ITU. Because of ITU’s serious budget shortfalls, the United 

States led in the effort to develop a financial plan that balanced the ITU budget 

and reduced 10% of program expenditures. One of the U.S. proposed amendments 

allows private companies to be represented as observers at ITU Council meetings. 

A nother broadened the field of potential candidates to the ITU’s Radio Regulation 

Board (RRB). These and other amendments approved by the 2002 Plenipotentiary 

121 

Conference have made it easier for the ITU to respond to changes in the telecom 

munications environment. 

The 2006 Plenipotentiary Conference held in Antalya, Turkey, adopted new provisions to enhance the ITU budgetary process by requiring that the ITU Council carry 

out an annual review of income and expenditures and by advancing the deadline 

for budget contributions. The Conference also adopted another fiscally responsible 

measure by lengthening the dates between ITU’s established Conferences and Assemblies so as to hold down costs. The United States achieved many of its objectives 

at this Conference, including enhancing Member State oversight of ITU financial 

and administrative activities, promoting budgetary transparency, and preserving 

the role of the private sector in the ITU. 

Mr. Chairman, this completes my summary of the treaties. Telecommunication is 

growing at an incredible pace and U.S. companies are introducing new services here 

and abroad on a steady basis. They are looking for a quick response from the U.S. 

Government as they conduct business in this fast-moving world. The United States 

understands that the ITU must encourage rapid progress in telecommunications; 

the ITU must be a partner in progress and a catalyst to technological innovation. 

The United States Government stands ready to move forward as rapidly as possible 

to bring the benefits of international telecommunications to our citizens. 

Mr. Chairman, it was my pleasure and honor to present this testimony, and to 

discuss the International Telecommunication Union. In conclusion, I recommend 

that the Senate act favorably on these treaties. I stand ready to answer any questions that the committee may have. 

Senator MENENDEZ. Thank you. 

All of your statements will be fully included in the record, and 

we will start with 10-minute rounds since I see there is massive 

interest here. I think you and I, Senator Lugar, might cover the 

waterfront. 

So let me start off. I have questions for all of you, but within my 

10 minutes, let us see how far we can go. 

Mr. Mundaca, with reference to the Canada protocol, that includes a provision that would broaden the current definition of permanent establishment or what is often referred to as the 183-day 

rule. I read it a couple of times, and maybe you can help me. The— 

I am sure businesses would like some help as well. 

If a U.S. service enterprise doesn’t have a fixed place of business 

in Canada, it may still be deemed to have a permanent establishment if it meets one of two tests. I won’t read them because I am 

sure you are fully, intimately familiar with them. But a great many 

businesses have raised concerns with us about this provision, suggesting that particularly in relationship to Canada, it will be very 

hard for them to administrate. 

Now I understand we have included such a provision in other 

treaties with developing nations, and in fact, the Bulgaria treaty 

includes such a provision. But as noted in Ms. McMahon’s testimony, this is the first time such a provision has been included in 

a tax treaty with a developed nation like Canada. 

Can you talk a little bit about this provision, explain why you 

think it works, and why was it included in this protocol? And we 

will start there, and I have a few other questions in this regard. 

Mr. MUNDACA. Thank you, Senator. 

We do—I should begin by saying we do understand the concerns 

with administering this provision. We have already begun discussions with Canada in the context of both in coming to an agreement on the technical explanation of the treaty that goes into a little bit more detail on what the provision provides, and we will continue those discussions to try to provide some further guidance to 

make this easier to administer. 

122 

As you note, this is not a new provision. It has been in treaties 

in the past, but never with a developed country and never with a 

country with whom we have such a great cross-border trade and 

services. And again, we do understand that we will need to provide 

more guidance so that companies know if they do trip the 183-day 

rule. 

Some of the complexities of this that we know we need to address 

are with respect to whether projects are connected, when you have 

to count together certain periods of time in which you are providing 

services to see if you reach the 183 day. There also are some issues 

with determining when it is that you cross this threshold and if 

you will cross it in a year, if you haven’t planned on doing that. 

If, for example, the project takes longer than you might have 

thought and you wind up providing services in excess of 183 day, 

you may not have had the proper withholding mechanisms, estimated tax payments in place. We do understand those—those complexities. 

As you may know, this is an issue that is not just between ourselves and Canada. The OECD, the 30 larger economies in the 

world have been wrestling with this issue as well. There are many 

countries who do feel that this provision is appropriate, that if 

someone does provide services in excess of 6 months in a 12-month 

period that they should be subject to tax even if they don’t trip the 

fixed-base rule that is standard in our treaties. 

That is not our view. That is not our treaty policy. We do not intend to extend this beyond those cases in which another country 

has offered a package of benefits with respect to this provision that 

we feel makes this in the best interest of the U.S. 

Senator MENENDEZ. Well, you answered my next question, 

whether this was a change in policy. And I am glad to hear that 

it is not. 

But let me go back to the challenge, the test that is devised here 

presents a number of challenges. For one thing, the sheer amount 

of effort and resources that would presumably have to be spent on 

keeping track of one’s employees, its customers, its revenue stream 

from each country. It is pretty daunting. 

In addition, what is the 12-month period? It is not necessarily 

tied to a fiscal year. And so, that a business would have to keep 

continuous records in order to determine if during any consecutive 

12-month period—it is like a revolving 12-month period—they had 

crossed the line. 

And Joint Tax, I think, has raised concerns regarding how this 

provision interacts with amendments made under the protocols of 

Article 15 of the treaty in relation to the treatment of employees. 

So have you thought about these challenges as we move forward? 

Mr. MUNDACA. We have, and we have been in discussions with 

Canada regarding how best to address them. We also welcome 

input from your committee or from the business community about 

the best ways to make this administerable for all of us. As you 

mentioned, this is a rolling 12-month period. It is not tied to a fiscal year. It will require record keeping. 

One of the issues we think we need to address that could provide 

some clarity around these issues is, again, what the definition is 

of the connected projects for which you do have to aggregate periVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00122 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
123 

ods. So I think a clear definition of that will provide some relief to 

taxpayers so they do know when they can cut off counting days 

with respect to a particular provision of services. 

I should also note that some other variants of this provision, one 

that the OECD is considering is broader than we have provided 

here. They do not have the restriction we have in our provision regarding the geographic coherence. That is, if you are not providing 

services in one place, our rule doesn’t apply. THE OECD rule is 

broader in that extent. 

So we have tried to build in some safeguards for overbreadth, but 

we do recognize that we do have more work to do. There is a delayed effective date on this. We will work this year and next year 

to provide further guidance on this. 

Senator MENENDEZ. One last thing, I will just stick with you for 

one more concern. And I hope you take this concern back to the department seriously because I think the committee had it in its report. I raised it in the last meeting that I chaired on the question 

of some other treaties that we had. I want to talk about the arbitration mechanism that appears in the Canada protocol. 

In the last hearing where your colleague, Mr. Harrington, was 

here, a concern about the fact that the arbitration mechanism in 

both the Germany and Belgium treaties did not provide for direct 

taxpayer input to the arbitration board during an arbitration proceeding. Now this—notwithstanding raising those issues in those 

treaties, this is not changed in the Canada protocol. The mechanism still does not provide for direct taxpayer input to an arbitration board during an arbitration proceeding. 

And I know that the committee report on both of those previous 

treaties raised other issues, including concerns regarding treaty interpretation and the selection of arbitrators, but, you know, I 

haven’t seen the department be responsive. And I hope you can address—can we expect to see some of these concerns that have been 

raised dealt with in future track’s treaties with similar arbitration 

mechanisms because if not, speaking as one Senator, I will have 

difficulties in being as supportive as I have been to date. 

Mr. MUNDACA. We understand, and we appreciate your past support, and we understand the concerns. They were not taken onboard with respect to the Canada provision, as you point out. Not 

because we didn’t regard them as valid or important, but simply 

because that had been agreed to before we got the input with respect to Germany and Belgium. Those provisions, all of them were 

negotiated approximately the same time, and we had locked down 

that issue with Canada. 

But we do take those concerns seriously. They will be reflected 

in future arbitration provisions. We will certainly raise them with 

treaty partners we talk to about this provision. Again, it is a negotiation. What their reaction will be to the issues you raised with 

respect to taxpayer input, precedential value of decisions, the authorities for the arbitration board to consider, and the choice of the 

arbiters, please know we will raise all those issues with people we 

negotiate with in the future. 

Senator MENENDEZ. All right. Ambassador Balton, let me just 

take one or two questions with you in the time I have remaining. 

124 

Did the U.S. industry groups that are affected by these environmental treaties that we are considering before the committee today 

participate in the negotiations? And to the extent that they did, did 

they support the treaties, and have they voiced any specific concerns? 

Ambassador BALTON. Let me take each of the treaties separately. 

Senator MENENDEZ. Yes, if you could put your microphone on? 

Ambassador BALTON. Thank you, Senator. Let me take you to 

those treaties separately on that question. 

With respect to the London protocol, the American Association of 

Ports and Harbors was involved in the negotiations of this, and indeed, this group attends the meetings of both the London convention and now the London protocol regularly. 

The U.S. industry group that is most affected or would be most 

affected by U.S. ratification is actually our dredging industry. And 

the U.S. industry association in this field, the Dredging Contractors of America, have indicated that they are fully aware of the 

protocol and support its objectives. 

With respect to the anti-foulants convention, here, the U.S. antifouling paint industry favors this convention. Why? Because it promotes a single regulatory program for all countries. That will likely 

increase the use of environmentally friendly anti-foulants that 

they, the U.S. industry, have developed. U.S. shipyards are also interested in the single international standard because it provides a 

more level playing field as between them and shipyards in other 

countries. 

And finally, the U.S. ship owners and operators, what they most 

want is an effective set of anti-fouling systems that do not increase 

their costs. They have already moved on, away from the antifoulants that are prohibited under the convention to use the environmentally friendly anti-foulants that are permitted for use, both 

under the convention and U.S. law. So they support our moving 

forward, too. 

Finally, with respect to the LBS protocol, the land-based sources 

protocol, I should start by saying that our entire approach to the 

negotiation of this treaty was to create a set of environmental 

standards that the United States was already meeting or exceeding. The idea was to bring our neighbors in the Caribbean region, 

most of whom are developing countries, up to or at least close to 

U.S. standards. 

And because of this approach, which was successful, U.S. industry was not directly involved in the negotiations. U.S. ratification 

of this treaty will not have a significant bearing on their activities. 

We have not heard and are not aware of any opposition to U.S. 

ratification from dischargers, agricultural interests, or other similar U.S. industry stakeholders. 

We fully expect that a wide variety of other U.S. industries who 

will stand to benefit from stronger environmental protection of the 

oceans support ratification of the protocol. Here, I am thinking of 

the U.S. fishing industry, the U.S. tourism industry, among others. 

Finally, I would note that U.S. negotiators of this protocol did 

consult throughout the negotiations with officials from the U.S. 

States and territories that border this region. Those include Texas, 

125 

Louisiana, Mississippi, Alabama, Florida, as well as the Commonwealth of Puerto Rico and the territory of the Virgin Islands. 

Senator MENENDEZ. So all of the industries that did participate 

with you, they are, as I hear your answer, supportive and raise no 

concerns? 

Ambassador BALTON. That is a fair summary, sir. 

Senator MENENDEZ. Thank you very much. 

Senator Lugar? 

Senator LUGAR. Thank you, Mr. Chairman. 

Mr. Beaird, I would like to just query this point about this particular timing for the ITU treaties. My understanding is that revisions to the ITU radio regulations were concluded in 1992 and 

1995, respectively. They were submitted to the Senate for advice 

and consent in 2002 and 2004. 

Now why did nearly a decade elapse before the executive branch 

sought Senate advice and consent on these instruments? And given 

the significant passage of time and the vast changes in the telecommunications sector and innovating period, why does the administration consider important that the Senate act upon these instruments now? 

Mr. BEAIRD. Thank you very much, Senator Lugar. 

We are quite aware of the time lapse that has occurred between 

the final acts of the treaty—these final acts of these conferences 

and the present submission for advice and consent. We are reviewing that process within the department. We are aware that oftentimes priorities within the department do not elevate telecommunications treaties to the position that, in some cases, we would prefer 

in the Economic and Energy Bureau, but we are talking with colleagues about that to remedy the situation. 

Secondly, Mr. Chairman—Senator Lugar and Mr. Chairman, the 

implementation of these final acts do take place within the Administrative Procedures Act of the FCC and the National Telecommunications and Information Administration. As such, we rely 

upon them to tell us the timing of the implementation of the final 

act. So we work closely with those agencies to make sure that no 

one is disadvantaged. 

However, we also—and thirdly, we also are having conversations 

with the staff of your committee to assess how we can best move 

forward so that we can shorten the length of time between the final 

acts and their submission for advice and consent. 

Senator LUGAR. I appreciate that response, and you have been 

very candid that sometimes, as you say, the priorities within the 

department have not elevated this perhaps in such a timely way. 

This is, I suppose, one of the problems with the treaties, all of them 

that we are discussing today. These are of vast significance to 

American business, to those who are innovating an American society. 

And yet at the same time, they do not have frequently the currency of warfare or threatened international conflagrations and so 

forth, even though the amount of money involved—the jobs and so 

forth—are vast and not really recognized. That is why I pursued 

this because in telecommunications, as you would testify and would 

know more about it than I would, the amount of innovation, extraordinary changes in this period of time really would tax the 

126 

abilities of everyone who was trying to get their arms around the 

problem and bring about equity, fairness, accessibility, all the 

things that telecommunications people are interested in. 

This leads me to sort of the second question. To what extent the 

new treaties lead to more private industry participation with the 

ITU? In other words, are you informed in a timely way by people 

who are on the frontiers, figuring out new ways of communicating 

so that the regulations with which you are entrusted not only are 

enforced, but there is some relevance to what you are enforcing as 

compared to what is actually occurring in the world? 

Mr. BEAIRD. Senator Lugar, we made, as a fundamental purpose 

of the 1998 Plenipotentiary in Minneapolis, the goal to enhance the 

role of the private sector in the ITU, and we think we have accomplished that in a number of areas. 

First of all, we have given an opportunity to participate in leadership positions in the ITU, to chair committees at conferences that 

they—the conferences that have a bearing upon the future of their 

businesses and an opportunity for them to have an input into the 

innovative process of the ITU to bring these new services to the 

marketplace. 

Secondly, we have given them a wider opportunity to participate 

in actual meetings of the ITU as in the sense that they are now 

observers at the council meetings of the ITU, the governing board 

of the ITU. 

Our assessment is that if you look at the U.N. system as a whole, 

we believe that we have achieved a balance between the intergovernmental organization that the ITU is and the need to bring to 

that organization a private sector participation and leadership. We 

think we have set the bar very high for the U.N. system, but we 

are also continuing to review the situation in the ITU, to make 

sure that other opportunities, as appropriate, can be given to the 

private sector. 

Senator LUGAR. Are the companies and the industries involved 

supportive of these treaties? If they were sitting at the table with 

you, would they be testifying enthusiastically or strongly, or how 

would you characterize their feelings? 

Mr. BEAIRD. Well, I am confident, having spent many years 

working very closely with them, that they would be very supportive 

of these treaties. They would only underscore your comment as to 

the need to get them up here quicker than we have, and we are 

also consulting with industry on that point. 

Senator LUGAR. Thank you. 

Mr. Mundaca, let me just explore for a moment this term treaty 

shopping, which arises whenever we have one of these treaties, and 

the fact that the new Iceland treaty closes a much-exploited loophole. Now, what was the loophole? Describe why the problems of 

the Iceland situation were difficult and why Americans should be 

concerned about that? 

Mr. MUNDACA. Thank you, Senator. 

The concern is that when we negotiate treaties, we negotiate 

them based on reciprocal benefits provided by, for example, Iceland 

to our residents and for us to provide benefits to Iceland residents. 

Through treaty shopping, through various techniques, residents of 

third countries can access those benefits. 

127 

So, for example, we saw in the case of Iceland, and we are seeing 

it with respect to Hungary as well, is that third country residents 

set up corporations or other entities in those jurisdictions. Those 

entities then derive interest payments, for example, from the 

United States. They claim zero withholding on that, and that income is not subject to tax in the jurisdiction, either Iceland or Hungary, and the owners are able to access the U.S. treaty, achieve 

zero withholding, not pay tax in the other jurisdiction, and get the 

benefits of the treaty when, in fact, they should not. 

The inclusion of limitation on benefits provisions prevents that. 

We have other mechanisms to go after some of these structures, 

some of the anti-concurrent rules that we have, et cetera. But limitation on benefits provisions are the best way to prevent the treaties by being accessed by third country residents. 

We saw huge debt flows. We delivered a report to Congress at 

the end of 2007 that reported on some of these issues. And again, 

although they are not some of our leading trading partners, both 

Iceland and Hungary were within the top 10 of recipients of interest payments out of the U.S. And again, we think primarily because of these loopholes in the treaties. 

Senator LUGAR. Well, how, as a practical matter, do you identify 

these third countries? For example, is Iceland under the treaty responsible for saying the people taking advantage of this treaty are 

our citizens, they are Icelanders. In other words, there are no 

Swedes or Norwegians or what have you? 

Mr. MUNDACA. Right. 

Senator LUGAR. Or front companies. In other words, an Iceland 

representative, but really behind it is the capital flow coming in 

from somewhere else, taking advantage of the namesake on the 

door there. 

Mr. MUNDACA. And that is the issue is under the current treaty, 

there is no such obligation to determine who the owners are of 

these entities in order to grant that entity benefit. So the Icelandic 

entity can be owned by just about anybody in the world and claim 

benefits under our treaty. With the inclusion of the limitation on 

benefits provision, that would end. And it would have to be reporting and proving of the owners of the companies before they could 

claim benefits. 

Senator LUGAR. So you are relying on the reporting system and 

the integrity of the country that we are dealing with. 

Now how does the information sharing business work in this 

case? In other words, how deeply can we probe down in the weeds 

as to who is doing what in what country? To what extent are there 

privacy issues involved in these probes? 

Mr. MUNDACA. There are privacy issues, and the privacy issues 

with respect to confidentiality are dealt with in the treaty. So there 

is no chance of the information that is gained in exchange being 

used inappropriately or being released. On the other hand, in the 

Iceland treaty, there is full exchange of information. There is no 

hiding behind bank secrecy laws or other laws of either the U.S. 

or Iceland to shield from the ownership information that is required. 

Also, because we do require that information be provided in order 

for U.S. withholding agents, for example, to grant the lower withVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00127 Fmt 6602 Sfmt 6602 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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holding, we don’t have to necessarily go out and get that information. That has to be provided to us in order for the lower withholding rate to apply. 

Senator LUGAR. But the U.S. could send auditors to Iceland and 

sort of go through the books? 

Mr. MUNDACA. Yes, that is right. Under the treaty, that sort of 

investigation is permitted. 

Senator LUGAR. Thank you very much. 

Thank you, Mr. Chairman. 

Senator MENENDEZ. Thank you, Senator Lugar. 

I just have another—we will do another round if necessary. I just 

have a few more questions that I would like to get on the record. 

Ambassador Balton, with reference to the reverse list approach 

taken in the London dumping protocol, which is an improvement 

of the 1972 London Convention to which the U.S. is now a party, 

why is it that we consider it an improvement? 

And secondly, while I understand that it is more restrictive, are 

we worried that we may find and identify other items, like carbon 

sequestration, as something that we think should be dumped and 

then find ourselves engaged in a very lengthy negotiation to amend 

the treaty? 

Ambassador BALTON. Thank you, Senator. 

We do agree that the reverse list approach represented by the 

protocol is better than the sort of black list approach of the convention to which we are now bound. It is simpler and more effective, 

in our view, and we do not foresee conflicts between the approach 

of the protocol and the U.S. pollution dumping program as it 

stands. 

The list on the protocol, the white list, already includes a broad 

range of substances that may be considered for dumping. And this 

list reflects more than 35 years of worldwide experience in determining which substances may cause harm to the marine environment if dumped. 

To the extent that another substance not previously considered 

may need to be added in the future, the London protocol parties 

have already shown their agility in responding to new and emerging technologies. They, in fact, amended the list once already precisely on the topic you raised, Senator. The list now includes carbon dioxide streams for purposes of sub seabed geological sequestration. 

The U.S., though not a party to the protocol, supported this 

amendment very much. The process was quick. It took less than a 

year from start to finish. 

There are other protections under the protocol as well. I note 

that there are a variety of activities that are not defined as dumping for purposes of the protocol. These include disposal into the sea 

of substances derived from normal operations of vessels and other 

craft, placement of substances in the sea for purposes other than 

mere disposal. 

The protocol also does not cover disposal or storage of substances 

arising from or related to the exploration, exploitation, or processing of offshore oil, gas, or other resources. And finally, the protocol gives parties significant flexibility to dump substances in 

emergency or force majeure situations. 

129 

I raise these because for all these reasons, we believe that the 

reverse list approach does not constrain the legitimate needs of the 

United States or other nations on this range of issues of ocean disposal and waste management. 

Senator MENENDEZ. And one last question on the protocol. What 

if we find an emergent situation in which something that is prohibited needs to be dumped? Is there some mechanism that deals with 

that? 

Ambassador BALTON. Yes, sir. Article 8 of the protocol is a good 

example of the sophistication of this treaty in providing flexibility. 

There are two different situations it allows for. 

First, it allows a party to issue a permit and thus create an exception to the protocol’s general rules on dumping in situations of 

emergencies posing an unacceptable threat to human health, safety, or the marine environment when there is no other feasible alternative. This provision, the emergency permit, is actually broader 

than the one of the original convention to which we are now bound. 

And then there is the second provision as well, which is replicated from the original convention. It contains a provision for situations of force majeure caused by weather or other immediate 

threats to human life or the marine environment where there is no 

other alternative. In these situations, dumping or incineration at 

sea may proceed even without the permit, although a party should 

conduct these things in a manner so as to minimize harm to 

human or marine life. 

So, in light of these provisions, once again we believe the protocol 

provides the necessary flexibility we would need as a party. 

Senator MENENDEZ. Thank you. 

Mr. Mundaca, one last question. I am going back to the protocol 

with London. What sorts of disputes do you think are most likely 

to be arbitrated through the mandatory arbitration mechanism provided for in the protocol? And will that mandatory arbitration provision be applicable to disputes that have already arisen? How do 

you see this working? 

Mr. MUNDACA. Based on the experience we have of the pending 

cases, I would guess—and it is just a guess—is that transfer pricing disputes would be the ones that will proceed to arbitration. 

Those are the ones that we have seen, in our experience, are the 

most difficult at this point to come to an agreement with in a timely manner. 

And therefore, I would expect, looking at the types of cases that 

are currently pending, that those are the ones that would likely be 

the predominant cases that are moving to arbitration. 

Regarding the coverage of current cases, they are covered. The 

2-year trigger for a case moving out of the negotiation phase of the 

competent authority process to the arbitration phase, the trigger 

date will be the entry into force of the treaty, and then 2 years 

after that, pending cases can move into arbitration. 

We are working with Canada on a mechanism for identifying 

cases that are currently beyond the 2-year mark that could be 

moved into arbitration more quickly. And we hope over the next 

months to get that process in place so that the taxpayers don’t 

have to wait the full 2 years that they have already had a case in 

competent authority that has been unable to be resolved. 

130 

Senator MENENDEZ. All right. Thank you. 

Mr. Beaird, one question for you—two questions. One is one of 

our key concerns in negotiating radio regulations is the ability to 

obtain the high-frequency bands necessary to broadcast Voice of 

America throughout the world. In instances where the United 

States has not obtained enough of the spectrum to meet its needs, 

it has entered reservations stating that it will take appropriate actions to maintain broadcasting. 

When other countries accuse the United States of causing harmful interference and attempt to jam our broadcasts, what is our response, and how does the ITU manage these situations? 

Mr. BEAIRD. Thank you very much, Mr. Chairman. 

In instances in which this has occurred, and it has occurred certainly in the last 30 years and in more than one instance, the 

United States complains to the ITU in a filing indicating the signal’s origin and its strength and the extent of time and time and 

duration of the interference. That complaint is then referred to the 

Radio Regulations Board, which makes a finding. 

We have a situation currently where we have filed a complaint 

against a country neighboring to us, and the board has found that 

the origin of the signal was, in fact, from that country and has 

asked, pursuant to the radio regulations, that the harmful interference be resolved through the cooperation of the two countries. 

Now that is an approach that is undertaken by the ITU. The ITU 

is not an adjudicative body. It can only recommend a solution or 

a resolution of the harmful interference. But the United States always, when it occurs, registers the complaint to make it known to 

the ITU that there is such an interference occurring. 

Senator MENENDEZ. So it is not a binding determination? 

Mr. BEAIRD. That is correct. 

Senator MENENDEZ. All right. And one last question. The ITU 

was not in the best financial shape a few years ago, and I am wondering have the amendments to the budget process improved the 

situation, and what are the current challenges the entity faces in 

this area? 

Mr. BEAIRD. Thank you, Mr. Chairman. 

We believe we have made great progress at the ITU. In 2002, at 

the plenipotentiary in Marrakesh, for the first time we had a resolution adopted that called for a balanced budget at the ITU. It resulted in some—and we also indicated we wanted at least 10 percent cuts in the expenditures of the union. 

There were follow-up actions. Staff levels were reduced, new software introduced, budget transparency brought about. And in 2007, 

at the ITU council, which adopts its budget, I am pleased to report 

that a balanced budget was adopted at that council. 

We believe we have made great improvements at the ITU, but 

it is an ongoing task for us and the other member states and the 

sector members—that is, say, the private sector—to monitor the financial situation of the union. But we believe, at this time, the 

union is in far better financial shape than it was certainly in 2002. 

Senator MENENDEZ. Thank you. 

Senator Lugar? 

Senator LUGAR. Mr. Balton, you have touched upon this, but amplify a bit more about the land-based sources protocol. Because this 

131 

protocol, as you pointed out, was concluded in 1999, which is 9 

years or so ago. And so, there is a track record by this time of what 

kind of pollution may have been abated in the Caribbean to some 

extent. But can you give us sort of a mind’s eye map? 

How many States are a part of that protocol now, and how would 

you characterize the pollution situation? What is under control and 

what is not under control due to non-adherents or non-membership? 

Ambassador BALTON. Thank you, Senator. 

I am sorry to say that as we sit here today only four nations 

have ratified the protocol. It is not yet in force. It requires a minimum of nine to enter into force. The four that have— 

Senator LUGAR. This is after 9 years, only 4 states? I see. 

Ambassador BALTON. The four that are are France, which does 

have territories in—other parts of France in the area, Panama, St. 

Lucia, Trinidad and Tobago. My supposition, Senator, is that a 

number of other countries of the region are waiting for the United 

States. 

Senator LUGAR. I see. 

Ambassador BALTON. We were among the driving forces behind 

the protocol. We are one of the few developed countries in the region. We are a leader, and we have not yet ratified. 

Some of that is due to other priorities. We are sorry it took as 

long as it has to get the protocol to the Senate. We are, nevertheless, hopeful that the protocol can go through, and we can become 

a party and encourage other countries in the region to become 

party and to bring their environmental standards up to those of the 

United States in this area. 

The situation is not good overall. The problems of marine pollution in the Caribbean region are very real. Effluents of many 

sorts—agricultural runoff, domestic wastewater, other types of pollutants from land-based activities—are causing real harm. And we 

believe the protocol, once it is in force, can serve as a vehicle to 

find collective solutions to a region that we, in fact, share with 

many countries. 

So that is our hope, and that is the reason we are seeking Senate 

advice and consent. 

Senator LUGAR. Well, I appreciate your candor, and I appreciate 

even more your bringing the treaty to this point and, likewise, the 

Chairman holding the hearing. One of the dilemmas, and we 

touched upon this a little bit with the ITU situation, is that these 

affairs have been rumbling out there for many, many years. And 

I think you make a very good point that the rest of the world, in 

some cases, waits upon the United States to offer leadership. Or to 

the contrary, if we don’t, others say, well, why should we care? 

Now, still in the conservation mode that so many Americans, I 

would hope a majority, are in with concerns that are addressed by 

this, and I think that is shared by other countries. It is interesting 

that France would be one of the four, clearly not a place of residence in the Caribbean, although interests in the various countries, 

as you say. But in terms of the actual citizens of that area, this 

is really significant. 

But this is not a time to complain why was there no priority. It 

is a time to celebrate the fact that we finally have come to the 

132 

table, have a session of this variety attended at least by two members of the committee who are deeply interested in what is going 

on here, as well as a good number of citizens who have come to 

hear what you had to say today and to see whether progress was 

going to occur. So I appreciate that. 

Let me just raise one more question with regard to the tax treaties. And I will ask you again, Mr. Mundaca, I am just—I am curious, for instance, why some people in the business community that 

I have heard from are very appreciative of the Canadian treaty in 

particular. They think this really has very substantial significance. 

Now, in part, I can understand this from a parochial standpoint. 

My State of Indiana has—is just seventh, I have found, in terms 

of trade between Indiana and Canada. But even then we are exporting about $10 billion worth of goods and services from Indiana 

to Canada. We are importing $6 billion. So we are producing a balance of trade of $4 billion in one State with barely 2.5 percent of 

the population of the country. 

So this is a very significant treaty in terms of income for people 

in Canada and Indiana, for that matter. So I can understand why 

they would be interested in it. But they are saying beyond that apparently there were the questions that we were just discussing before of this binding arbitration is especially significant, maybe because there are so many elements of trade. Maybe it is so many 

more deals or sophisticated questions or entities that come into 

this. 

I am wondering whether that has been the case as you have 

found it from testimony around the country, that because really of 

our trading relationship with Canada, a sizable amount, that this 

is not necessarily overwhelming, but at the same time it could be. 

The number of cases stacking up that are unresolved, justice denied for years. So that then there gets to be a good bit of indecision 

about the tax code. 

Back here in the Congress, we change the tax code, or we don’t 

really change it. But meanwhile, all these cases are out there. 

What is the caseload, just out of curiosity? And is this one reason 

why there is such business support for this particular treaty? 

Mr. MUNDACA. I think that is exactly right that the level of trade 

we have with Canada, the nearness of Canada and, therefore, the 

opportunities for many taxpayers—not just large multi-nationals, 

but small businesses and individuals to engage in cross-border activity with Canada—has led to many more tax disputes than we 

see with other countries. And there has developed a backlog of 

cases with Canada people are eager to see resolved on a more timely basis. 

And we are very optimistic this mechanism will speed to resolution through the negotiation process pending cases, and if they 

can’t be settled in that—in that phase, then moved to arbitration 

so the taxpayers get the certainty that they deserve. 

Oftentimes, taxpayers, although they always mind paying taxes, 

they really mind paying taxes twice. And what they really do want 

is certainty about where their tax needs to go and have the other 

country respect that determination, and that is what we hope that 

this mechanism will provide in this context. 

133 

There are probably more pending cases between the U.S. and 

Canada than we have with any other jurisdiction at this point. We 

get complaints about the timeliness of the resolution of those disputes, and again, we are very optimistic this mechanism can speed 

those along. 

Senator LUGAR. Now from the standpoint outside of the business 

community of taxpayers in both countries, what confidence do taxpayers have generally that these businesses finally are paying 

taxes properly, either in Canada or the United States? Do you note 

a good bit of evasion through all this delay or maybe through a 

lack of definition to begin with? 

Mr. MUNDACA. Actually, from what we have seen, at least with 

respect to Canada, it mostly goes the other way. Is that companies 

are concerned that they have a tax liability with respect to the 

same income stream to both Canada and the United States due to 

the lack of resolution of some of these large pending cases. 

So at least in my experience, I have not seen cases where the 

issue is that neither country is seeing the income and, therefore, 

it goes untaxed. The issue we see more are cases in which taxpayers come forward, and there are clear double tax cases that 

need to be resolved. 

Senator LUGAR. Thank you very much. 

Thank you, Mr. Chairman. 

Senator MENENDEZ. Thank you, Senator Lugar. 

Let me thank you all for your testimony and the hard work you 

put into treaties over many years. I specifically want to thank Avril 

Haines from the committee staff, who has done a tremendous service preparing the materials for this hearing and making them understandable to some of us who are not intricately engaged in this 

work. 

The record will remain open for 1 day so that committee members may submit additional questions to the witnesses, and we ask 

the witnesses to respond expeditiously to these questions. 

And seeing no other member seeking recognition, the hearing is 

adjourned. 

[Whereupon, at 4:00 p.m., the hearing was adjourned.] 

(135) 

A P P E N D I X 

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO DEPUTY

ASSISTANT SECRETARY MICHAEL MUNDACA BY SENATOR JOSEPH R. BIDEN, JR. 

Question. The President’s Letter of Transmittal for the proposed Iceland Tax 

Treaty notes that because the existing treaty with Iceland from 1975 does not contain a Limitation on Benefits (‘‘LOB’’) provision, which is intended to prevent socalled treaty shopping, there has been ‘‘substantial abuse of the existing Treaty’s 

provisions by third country investors.’’ See Treaty Doc. 110–17 at III. Please describe the evidence upon which this statement is based. 

Answer. A Treasury Department report to Congress, ‘‘Earning Stripping, Transfer 

Pricing and U.S. Income Tax Treaties,’’ released in November 2007 (2007 Treasury 

Report), describes abuses of the U.S. tax treaty network by third-country investors, 

particularly through inappropriate reductions in withholding tax. The 2007 Treasury Report presented data, gathered from U.S. tax returns, on deductible payments 

such as interest made by U.S. companies to related foreign companies located in 

treaty jurisdictions. The data suggested that tax treaties that have no LOB provision and a zero rate of withholding tax on deductible payments, such as our treaties 

with Iceland and Hungary, had begun to be abused by third-country investors. In 

particular, the 2007 Treasury Report notes that while in 1996 almost no U.S.-source 

interest was paid by foreign-controlled U.S. companies to related parties in Iceland 

and Hungary, payments of such interest had increased by 2004 to over $2 billion. 

In addition, publicly available information indicates that many of those related parties were ultimately owned by corporations from third countries. This evidence 

strongly suggests the existence of treaty abuse by third-country residents. 

Question. Please explain how the LOB provision will be enforced against thirdcountry investors that attempt to benefit from the treaty’s provisions, should the 

new treaty be ratified. In addition, please describe specific enforcement challenges, 

if any, that the United States has faced in the past when attempting to enforce LOB 

provisions in other tax treaties. 

Answer. The Internal Revenue Service has a multi-pronged approach to enforcing 

compliance with treaty LOB provisions. 

With respect to payments of amounts subject to withholding, such as interest, royalties, and dividends, U.S. withholding agents (e.g., banks, brokers) are obligated to 

obtain, from each foreign payee, documentation on which the withholding agents 

can rely to treat a payment as made to a foreign person entitled to a reduced rate 

of withholding tax under the treaty. Absent such documentation, withholding at 30 

percent is required. More specifically, foreign taxpayers who derive and beneficially 

own the payment must complete a Form W-8BEN (Certificate of Foreign Status of 

Beneficial Owner for U.S. Tax Withholding) to claim a reduced rate of withholding 

tax. Part II of the W-8BEN is entitled ‘‘Claim of Tax Treaty Benefits.’’ On line 9 

the beneficial owner must identify its country of residence and, if the person is not 

an individual, represent that it meets the LOB article of the relevant treaty. 

With respect to claiming treaty benefits other than withholding tax reductions, 

such as a claim that a taxpayer does not have a permanent establishment in the 

United States, the taxpayer must file Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) attached to a Form 1120-F (U.S. Income Tax 

Return of a Foreign Corporation) or Form 1040 NR (U.S. Nonresident Alien Income 

Tax Return). Line 4 of Form 8833 requires the taxpayer to identify the LOB provision that the taxpayer relies upon to be eligible to take the treaty-based return position. 

In addition, the Internal Revenue Service audits LOB compliance as part of its 

general assessment of whether a foreign taxpayer is eligible to claim treaty benefits. 

The Treasury Department understands that the IRS’ audit experience indicates that 

136 

LOB issues most often arise in the context of audits of U.S. corporations that makes 

payments of interest, dividends, or royalties to related foreign persons. 

In the end, however, the simple inclusion of a LOB article in a treaty may by 

itself be largely responsible for limiting treaty shopping. The 2007 Treasury Report 

provides evidence that the mere inclusion of a comprehensive LOB provision is a 

deterrent against treaty shopping. 

Question. As set forth in Article 27(3) of the proposed treaty with Iceland, an unusual year-long transition period is provided for investors that are entitled to greater benefits under the 1975 treaty than the new treaty, during which they can elect 

to continue to benefit from the application of the 1975 treaty, rather than have the 

new treaty’s provisions applied to them. Why was this provision included? How does 

this provision benefit the United States? Is this provision one that might be included in future treaties? 

Answer. The transition rule coordinating the entry into force of the proposed Iceland treaty and the termination of benefits of the 1975 treaty is not an uncommon 

practice when an existing treaty is being replaced by a new agreement or is being 

amended by a new protocol. For instance, similar provisions were included in the 

U.S.-Belgium tax treaty (signed November 27, 2006), the U.S.-Germany protocol 

(signed June 1, 2006), the U.S.-U.K. tax treaty (signed July 24, 2001), and the U.S.- 

Denmark tax treaty (signed August 19, 1999). In order to reach agreement in 2007 

with Iceland regarding inclusion of a LOB provision, we agreed to this election. 

Question. U.S. income tax treaties with Hungary and Poland provide an exemption from withholding on cross-border interest payments and, as in the case of the 

1975 tax treaty with Iceland, these treaties do not include an LOB provision. Is the 

Treasury Department negotiating protocols with Hungary and Poland in order to 

rectify the omission of an LOB provision? If not, why not? If so, please describe the 

status of those negotiations. 

Answer. Updating the agreements with Hungary and Poland is a key part of the 

Treasury Department’s effort to protect the U.S. tax treaty network from abuse. The 

Treasury Department has had two rounds of negotiations with Hungary already in 

2008 with the aim of concluding a new agreement as soon as possible. The next 

round of negotiations is scheduled for September 2008, and an additional round is 

also scheduled, if necessary, for December 2008. 

As shown in the 2007 Treasury Report, it does not appear that the U.S.-Poland 

tax treaty has yet been extensively exploited by third-country residents. Nevertheless, the Treasury Department has had preliminary discussions with Poland and anticipates continuing those discussions in 2008 with the goal of commencing negotiations to conclude a new agreement to update the 1976 agreement. The United States 

places a very high priority on bringing the proposed treaty with Iceland into force 

and on concluding as soon as possible negotiations with Hungary and Poland. 

Beyond renegotiating the treaties with Hungary and Poland, the Treasury Department reviews the current U.S. tax-treaty network on a continuing basis to identify deficiencies in existing agreements and areas where more beneficial terms for 

the United States and U.S. taxpayers could be negotiated. As part of this process, 

anti-treaty-shopping provisions are given special scrutiny to ensure that they are 

functioning appropriately. Those treaties with LOB provisions that are out of date 

or need strengthening are given higher priority in the Treasury Department’s plan 

for negotiations. 

Question. The proposed treaty with Iceland includes special anti-abuse rules intended to deny benefits in certain circumstances in which an Icelandic-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 Iceland. Similar 

anti-abuse rules are included in other recent treaties, including the proposed Convention with Bulgaria. The U.S. Model Tax Treaty, however, does not include rules 

addressing so-called ‘‘triangular arrangements.’’ Why? Is this a provision that might 

be added to the U.S. Model Tax Treaty? 

Answer. The Treasury Department’s current policy is to incorporate the so-called 

‘‘triangular rule’’ into tax treaties in which the treaty partner exempts from tax certain foreign source income such that a tax treaty may be used inappropriately in 

conjunction with certain branch structures to exempt fully from tax certain U.S.- 

source payments. The Treasury Department is considering whether it is appropriate 

to include such a rule in the next update of the U.S. Model tax treaty. 

Question. The Committee on Taxation of Business Entities of the New York City 

Bar has written to the Committee on Foreign Relations in reference to the so-called 

‘‘derivative benefits’’’ test contained in, for example, Article 21(3) of the LOB proviVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00136 Fmt 6601 Sfmt 6621 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
137 

sion in the proposed treaty with Iceland. In particular, the Bar’s Committee on Taxation of Business Entities has stated that they ‘‘believe that there is a need for guidance in determining the scope of the dividend payment relief under such derivative 

provisions, due to the uncertainties involved in calculating the relevant stock ownership.’’ Has the Office of Tax Policy considered whether it would be useful to publish 

guidance on this topic? 

Answer. The New York City Bar Association’s Committee on Taxation of Business 

Entities, in its May 2008 report (the NYCBA Report), suggests that there is need 

for guidance clarifying how ownership is calculated for purposes of the derivativebenefits rule in our recent tax treaties. The Office of Tax Policy recognizes the importance of providing published guidance with respect to income tax treaties generally, and is currently considering this and other recommendations made by the 

NYCBA Report. 

Question. Under the U.S. Model Tax Treaty child support payments paid to a resident of a treaty country is exempt from tax in either country. The proposed treaty 

with Iceland, however, makes no mention of the tax treatment of child support payments. Why is that? 

Answer. The absence of a special rule governing the taxation of child support payments in the proposed Iceland treaty means that the taxation of such payments 

would be governed by Article 20 (Other Income), which assigns the exclusive right 

to tax to the country of residence of the recipient. During the course of the negotiations, the Treasury Department learned that under Iceland’s domestic law, most 

child support payments are not subject to tax. Accordingly, leaving the treatment 

of child support payments to Article 20 (Other Income) achieves a tax result very 

similar to the result under the U.S. Model rule; that is, the residence country will 

have the exclusive right to tax child support, but such payments are in most cases 

exempt from tax under the domestic laws of both the United States and Iceland. 

Question. Why doesn’t the proposed treaty with Iceland address the tax treatment 

of cross-border pension contributions? 

Answer. The proposed treaty with Iceland does not address the tax treatment of 

cross-border pension contributions primarily for two reasons. First, the U.S. Model 

pension funds provision provides for deductibility in one State of contributions to a 

pension fund of the other State only where the pension fund ‘‘generally corresponds’’ 

to a pension fund in the first state. The provision is, therefore, only appropriate if 

the two countries have pension systems that are similar. During the course of negotiations, it became clear that Iceland and the United States have very different pension systems. As a result, the provision was not appropriate to include in the proposed treaty. Second, Iceland had limited flexibility in changing by tax treaty its 

rules for taxing pensions, because those rules are technically under Iceland’s pension law, not its tax law. 

Question. Like the U.S. Model Tax Treaty, the Iceland Treaty provides that pension distributions owned by a resident of a contracting country are taxable in the 

recipient’s country of residence. The U.S. Model Tax treaty, however, contains an 

exception to this provision under which a pension beneficiary’s country of residence 

must exempt from tax a pension amount or other similar remuneration that would 

be exempt from tax in the other contracting country where the pension fund is established, as if the beneficiary had been a resident of that other country. Why 

doesn’t the proposed treaty with Iceland contain such an exception? 

Answer. Like other departures from the U.S. Model, the omission in the U.S.-Iceland tax treaty of the exemption from tax for pension benefits that would be exempt 

from tax in the source country was the result of the negotiation process. Moreover, 

Iceland had limited flexibility in changing by tax treaty its rules for taxing pensions, 

because those rules are technically under Iceland’s pension law, not its tax law. 

Question. The U.S. Model Tax Treaty allows recipients of ‘‘income, gains, or profits’’ from an entity that is fiscally transparent under the tax laws of the recipient’s 

residence to enjoy the same treaty benefits on that income as they would have if 

the ‘‘income, gains, or profits’’ had been received by them directly, so long as the 

income coming to them through the entity is treated no differently by their resident 

country than it would have been had it been received directly by them. The provision in the Iceland Treaty for fiscally transparent entities closely parallels the provision in the U.S. Model Tax Treaty. Yet, rather than referring to such entities as 

‘‘fiscally transparent,’’ the Iceland Treaty refers instead to entities that are either 

‘‘a partnership, trust, or estate.’’ See Article 1(6). Treasury’s Technical Explanation 

makes clear that this is intended to include U.S. limited liability companies 

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poses, including LLCs with only one member. Although the meaning appears to be 

equivalent, why wasn’t the phrase ‘‘fiscally transparent’’ used in Article 1(6)? 

Answer. Paragraph 6 of Article 1 of the proposed treaty with Iceland does not use 

the U.S. Model’s phrase ‘‘fiscally transparent’’ because that term does not have 

meaning under the domestic law of Iceland. During the course of the negotiations, 

the Treasury Department obtained agreement in principle with Iceland over the intent and application of paragraph 6 of Article 1. Accordingly, the Treasury Department believes that the rule will be interpreted and applied by Iceland consistent 

with the language in the U.S. Model Tax Treaty. 

Question. The Convention Between the United States and the Republic of Bulgaria for the avoidance of Double Taxation and the Prevention of Fiscal Evasion 

With Respect to Taxes on Income, with accompanying Protocol, was signed on February 23, 2007. Before transmitting this treaty to the Senate, however, a Protocol 

amending the 2007 treaty was negotiated with Bulgaria. This Protocol was signed 

on February 26, 2008 and only after its completion, did the Executive Branch transmit the original treaty to the Senate for advice and consent. Why was the 2008 Protocol needed? What changed between February 2007 and February 2008 to necessitate amending the 2007 treaty? What is the most important correction made by 

the 2008 Protocol to the underlying treaty? 

Answer. The 2008 Protocol made certain technical corrections to the 2007 Convention and accompanying Protocol, and addressed features of the Bulgarian tax system 

and treaty network that could result in a Bulgarian tax exemption for U.S. source 

income attributable to offshore branches of the Bulgarian company receiving the 

U.S. source income. To address the potential ‘‘double exemption’’ issue, the proposed 

2008 Protocol would add a so-called ‘‘triangular rule’’ to the LOB provision of the 

proposed treaty, which is the most important addition to be made by the 2008 Protocol. 

Question. Under the Bulgaria Convention, with limited exceptions, the withholding tax on cross-border royalty and interest payments would be imposed at a 

maximum rate of five percent. Under the accompanying protocol, the United States 

and Bulgaria are to reconsider source-taxation of interest and royalties arising in 

Bulgaria and beneficially owned by a resident of the United States, at a time that 

is ‘‘consistent with the conclusion of the transition period’’ under a European Union 

Council Directive applicable to interest and royalties deemed to arise in Bulgaria 

and beneficially owned by a resident of the European Union. The conclusion of the 

transition period is due to occur on December 31, 2014. Please explain the reason 

for including this commitment to reconsider source-taxation of interest and royalties 

arising in Bulgaria and beneficially owned by a resident of the United States. Is it 

fair to say that when you consult, you expect to negotiate an amendment to the Bulgaria Convention that would further reduce the maximum rate of withholding that 

can be imposed on cross-border interest and royalties arising in Bulgaria and beneficially owned by a resident of the United States? 

Answer. At the conclusion of the transition period under the European Union 

Council Directive, Bulgaria is expected to adopt rates of withholding on cross-border 

interest and royalties for residents of European Union member states that are lower 

than the rate provided for in the proposed treaty. The provision of the 2007 Protocol 

is intended to memorialize the understanding between Bulgaria and the United 

States that the United States will have the opportunity at the conclusion of the 

transition period to negotiate a further protocol to the proposed treaty with Bulgaria 

that could reduce the maximum rate of withholding that may be imposed on crossborder interest and royalties arising in Bulgaria. 

Question. Both the Bulgaria Convention and the Canada Protocol include a special 

rule that broadens the typical definition of a ‘‘Permanent Establishment’’ such that 

a service enterprise may still be deemed to have a Permanent Establishment in a 

treaty country, even if it does not have a fixed place of business in that country (the 

‘‘services country’’). See Article 5(8) of the Bulgaria Convention and Article 3(2) of 

the Canada Protocol. 

A number of the terms used in this rule are somewhat ambiguous and although 

the Technical Explanations for the Bulgaria Convention and the Canadian Protocol 

help to resolve some of that ambiguity, there is still work to be done. Please describe 

the steps you are taking with Canada, Bulgaria, and internally to further clarify the 

application and operation of this provision, including the specific terms you are focused on clarifying. In particular, is work being done to further clarify what constitutes ‘‘presen[ce]’’ in the services country and what constitutes a ‘‘connected 

project’’? What about the ‘‘provision of services’’? Is this term, for example, intended 

139 

to include preparatory work or the collection of data from an office in one country 

in order to provide services in the other country? 

Question. In preparing the agreed Technical Explanation of the proposed Protocol 

with Canada, the Treasury Department had many discussions with Canada regarding the interpretation and application of the new rule concerning the taxation of 

services. 

Answer. If the proposed Protocol is approved by the Senate, the Treasury Department will continue these discussions with Canada. The Treasury Department’s discussions with Canada to date have encompassed the interpretation of a number of 

terms, including ‘‘presen[ce]’’ in the services country, what constitutes ′′connected 

projects,′′ and the meaning of ‘‘provision of services.’’ For example, the Technical Explanation to the proposed Protocol clarifies that paragraph 6 of Article V (Permanent Establishment) of the existing U.S.-Canada treaty applies notwithstanding the 

new rule for taxation of services. Paragraph 6 identifies activities with respect to 

which a fixed place of business will not give rise to a permanent establishment, 

which includes activities that have a preparatory or auxiliary character. Accordingly, days spent on preparatory or auxiliary activities shall not be taken into account for purposes of applying the services rule described in subparagraph 9(b) of 

Article V. 

The Treasury Department recognizes that additional guidance with respect to the 

services rule included in both the proposed Canada Protocol and the Bulgaria Convention is needed to provide more certainty to taxpayers, and we welcome further 

input regarding application of the rule. 

Question. Article 14(1) of the Bulgaria Convention, with certain exceptions, sets 

forth a general rule that if an employee who is a resident of one treaty country (the 

‘‘residence country’’) is working in the other treaty country (the ‘‘employment country’’), his or her salaries, wages, and other remuneration derived from the exercise 

of employment in that country may be taxed by that country—i.e., the employment 

country. Notwithstanding this general rule, Article 14(2) of the treaty provides that 

the remuneration derived by the employee from the exercise of employment in the 

employment country shall be taxed only by the residence country (and not the employment country) if 1) the employee is present in the employment country for 183 

days or less in any 12-month period commencing or ending in the taxable year concerned; 2) the remuneration is paid by, or on behalf of, an employer who is not a 

resident of the employment country; and 3) the remuneration is not ‘‘borne’’ by a 

permanent establishment that the employer has in the employment country. The 

Canada Protocol has a variation of this provision in Article 10(2), which amends Article XV of the Canada Tax Treaty. In both treaties, the final requirement (i.e., that 

the remuneration is not ‘‘borne’’ by a permanent establishment that the employer 

has in the employment country), interacts with the special rule expanding the definition of a permanent establishment in a potentially problematic way. 

For example, in the case of the Bulgaria Convention, it appears that the salaries, 

wages, and other remuneration derived by an employee performing services through 

a permanent establishment arising under Article 5(8) of the treaty would be subject 

under Article 14 to being taxed by the employment country, even if the other requirements of the test in Article 14(2) had been met (i.e., the employee had been 

present in the employment country for less than 183 days during any 12-month period commencing or ending in the taxable year concerned and the employee’s remuneration was paid by an employer who is a resident of the other country). Is this 

correct? If so, the interaction of these two provisions would increase the complexities 

associated with the special rule contained in Article 5(8). For example, such a scenario would mean that an employer and the relevant employees would need to fulfill 

several tax-related obligations, including obtaining tax identification numbers and 

providing for the withholding of income taxes and other taxes as appropriate that 

would cover the period beginning on the first day such services were performed by 

such employee during the affected year. Please explain how the Department intends 

to address the problems presented by this result for taxpayers that may not know 

whether they will be deemed to have a permanent establishment under the treaty 

until perhaps 6 months into the relevant 12-month period, and will therefore be 

subject to various taxes, including employment taxes, by the services country reaching back to the beginning of the relevant 12-month period. 

Answer. It is correct that a permanent establishment arising under Article 5(8) 

of the proposed Bulgaria Convention is a permanent establishment for purposes of 

Article 14 of the Convention, and therefore the salaries, wages, and other remuneration of an employee borne by a permanent establishment of the employer arising 

under Article 5(8) of the treaty would be subject under Article 14 to being taxed 

140 

by the source country, even if the other requirements of the test in Article 14(2) had 

been met. 

The Treasury Department recognizes that the rule for taxation of services in the 

proposed Canada Protocol raises compliance and administrative concerns for companies and their employees. The Treasury Department and Internal Revenue Service 

have met with a number of U.S. taxpayers, including professional services firms, to 

discuss the interpretation and application of this rule, focusing on administrative 

issues. The Treasury Department has discussed with Canada and, if the proposed 

Protocol is approved by the Senate, will continue to discuss with Canada, possible 

methods of easing the administrative burden on businesses associated with complying with this new rule, the effective date of which is delayed until the third taxable year ending after the proposed Protocol enters into force. The Technical Explanation to the proposed Canada Protocol, the contents of which the Government of 

Canada has subscribed to, provides that ‘‘[t]he competent authorities are encouraged 

to consider adopting rules to reduce the potential for excess withholding or estimated tax payments with respect to employee wages that may result from the application of [the services rule].’’ 

Question. A version of this special rule appears in the 2008 OECD draft update 

to the OECD Model Tax Convention as an alternative services permanent establishment provision. There are, however, a few differences in language between the 

OECD rule and the one used in the Bulgaria Convention and the Canada Protocol. 

In particular, the OECD language clarifies that services performed by an individual 

on behalf of an enterprise may be considered as performed by that enterprise only 

if the enterprise supervises, directs, or controls the manner in which the services 

are performed by the individual. The language in the text of the Bulgaria Convention and the Canada Protocol are silent on this point, apparently leaving open the 

question of whether, and if so, under what circumstances, the use of a subcontractor 

might give rise to a permanent establishment of a general contractor. Is it Treasury’s view that services performed by an individual on behalf of an enterprise may 

be considered as performed by that enterprise only if the enterprise supervises, directs, or controls the manner in which the services are performed by the individual? 

Does Canada share this view? Does Bulgaria? 

Answer. For a number of years, the OECD has debated whether to include an alternative rule for the taxation of services in the OECD Model or its Commentary. 

The 2008 Update to the OECD Model, released on July 18, 2008, includes a version 

of the services rule as an alternative in the Model Commentary. The language of 

the OECD provision does not match in all respects the language of provision included in the proposed Bulgaria Convention and the Canada Protocol. For example, 

the language of the Bulgarian and Canadian provision requires that the services be 

provided ‘‘for customers who are either residents of that other State or who maintain a permanent establishment in that other State.’’ That language regarding the 

provision of services to customers is not included in the OECD provision, and thus 

the issue of whether the use of a subcontractor might give rise to a permanent establishment is especially important in applying the OECD provision. If the Senate 

approves the proposed the Bulgaria Convention and Canada Protocol, the Treasury 

Department will continue to discuss with Bulgaria and Canada the interpretation 

and application of the version of the rule for taxation of services included in our 

agreements. 

Question. One aspect of the rule in both the Bulgaria Convention and the Canada 

Protocol that would appear to be difficult to manage is the fact that the 12-month 

period isn’t tied to a fiscal year. Is this something you considered and rejected during the course of negotiations? Is this something that might be considered in the 

future, should you include this special rule in future treaties? 

Answer. The rule for taxation of services in the proposed agreements with Bulgaria and Canada refers to an aggregate of 183 days or more in ‘‘any 12-month period’’ as opposed to, for example, 183 days or more in a fiscal or calendar year. The 

reference to ‘‘any 12-month period’’ addresses potential situations in which, for example, work has been artificially divided into two separate fiscal years in order to 

avoid meeting the 183-day threshold. For instance, a taxpayer could circumvent a 

threshold based on 183 days in a fiscal year by providing services in the other state 

for the last five months of one fiscal year and the first five months of the following 

fiscal year. 

The Treasury Department recognizes the administrative and compliance concerns 

of companies and their employees regarding the rule’s reference to ‘‘any 12-month 

period.’’ If the proposed agreements with Bulgaria and Canada are approved by the 

Senate, the Treasury Department will continue to discuss the interpretation and apVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00140 Fmt 6601 Sfmt 6621 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
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plication of this rule with Bulgaria and Canada in the context of exploring ways to 

alleviate administrative and compliance burdens. 

The inclusion of a rule for taxation of services in the proposed agreements with 

Bulgaria and Canada does not reflect a change in U.S. tax treaty policy, and inclusion of such a provision in the U.S. Model is not being considered. However, it is 

a provision that the Treasury Department will consider in the context of negotiating 

a particular agreement in exchange for significant concessions in other areas, and 

the inclusion of such a provision in the proposed agreements with Bulgaria and 

Canada was a key element to achieving overall agreements that provide benefits to 

the United States and to U.S. taxpayers. At the same time, the Treasury Department recognizes the concerns raised by the Joint Committee on Taxation’s ‘‘Explanation of Proposed Protocol to the Income Tax Treaty between the United States 

and Canada’’ about the appropriateness of including a services rule in a tax treaty 

with a developed country. 

In the context of negotiating a particular agreement in the future, the Treasury 

Department may consider referring to an alternative 12-month period. The Treasury 

Department welcomes input concerning this issue. 

Question. Mandatory arbitration was included in the Protocol with Canada, but 

not in the treaty with Iceland or Bulgaria. Please explain why. In negotiating future 

treaties, what are the factors considered by Treasury when deciding whether or not 

to include binding arbitration in a new tax treaty or in an amendment to an existing 

tax treaty? Are you currently negotiating mandatory arbitration mechanisms with 

other countries? If so, which countries? 

Answer. The Treasury Department believes that mandatory binding arbitration, 

as an extension of the competent authority process, is an effective tool to strengthen 

the Mutual Agreement Procedure in the U.S. treaty network as a whole. Even in 

the best competent authority relationships, there are, on occasion, difficult treaty interpretation questions and disputes that arise. The Treasury Department believes 

that the arbitration mechanism included in the proposed agreement with Canada 

will help resolve cases in a timely manner and enhance the working relationship 

of the competent authorities. 

The Treasury Department has been discussing mandatory binding arbitration in 

general terms with our treaty partners, and intends to continue to raise inclusion 

of a mandatory binding arbitration provision with our treaty partners in future negotiations. The Treasury Department welcomes further input from the committee 

concerning the factors that should be taken into account when considering whether 

to include an arbitration provision in the context of the negotiation of a particular 

agreement, as well as ways that the arbitration provision in future agreements 

might be improved or varied. 

Question. When considering the mandatory arbitration provisions in the Belgium 

and Germany tax treaties, which were approved by the Senate last year, the committee focused on, among other things, the selection of fair, objective, and independent arbiters. In answer to a question for the record regarding your process for 

selecting arbiters, it was noted that the Treasury Department ‘‘expect[s] to have further discussions with our treaty partners concerning the [selection of arbiters], with 

a view toward achieving the best balance of the concerns expressed and providing 

to taxpayers an efficient and effective resolution of their double taxation.’’ Please describe the status of such discussions with Belgium and Germany. Does the Department expect to have discussions with Canada on this topic as well? Specifically, 

what work has been done to ensure that the United States and all three treaty partners will select fair, objective, and independent arbiters for service on arbitration 

boards constituted by the mechanisms provided in these treaties? 

Answer. The U.S. competent authority has formally begun discussions with Belgium and Germany on a number of procedural matters to ensure the effective implementation of the arbitration provision, including regarding the qualifications for arbiters, especially those qualifications required to ensure that arbiters are sufficiently 

independent. In those discussions, the U.S. competent authority has expressed the 

concerns raised by the committee in its considerations of the Belgian and German 

agreements regarding the selection of Government employees as arbiters. We hope 

that similar discussions with Canada begin soon. While we do not yet have formal 

agreements with any of these treaty partners, they understand and agree with the 

need for fair, objective, and independent arbitration boards. 

Question. The Canada Protocol, as in the case of the Belgium and Germany tax 

treaties, does not identify the procedural rules that will be used by arbitration 

boards constituted in accordance with the mandatory arbitration provision included 

in each treaty. In answer to a question for the record on this topic in relation to 

142 

the Belgium and Germany tax treaties, the Treasury Department noted that ‘‘after 

studying the details of the [procedural] rules commonly used in commercial arbitration, we concluded that most of these rules relate to evidentiary procedures not relevant to the simplified arbitration format proposed in the agreements with Belgium 

and Germany, primarily because the decision of the arbitration board is to be based 

upon a record rather than a presentation of evidence.’’ Has the Treasury Department had discussions with Canada, Belgium, and Germany regarding what procedural rules would be appropriate for the arbitration format provided for in these 

treaties? In particular, has there been any discussion regarding conflict of interest 

rules that might apply to arbiters? 

Answer. The U.S. competent authority has formally begun discussions with Belgium and Germany, and informally with Canada, on a number of procedural matters to ensure the effective implementation of the arbitration provision. The objective of these discussions is to have the procedures in place with respect to Belgium 

and Germany no later than December 31, 2008. As part of the discussions with Belgium and Germany, the U.S. competent authority has also begun discussing the 

need for conflict-of-interest rules to govern arbiters. For example, the U.S. competent authority has discussed whether safeguards might be built into the necessary 

procurement arrangements between the United States and the arbiter. While the 

U.S. competent authority does not yet have formal agreements with any of these 

treaty partners, they understand and agree with the need for fair, objective, and 

independent arbitration boards. 

Question. The committee Report on the Germany and Belgium treaties raised certain concerns regarding the mandatory arbitration mechanism, including concerns 

regarding treaty interpretation and the selection of arbiters. Other Members have 

indicated related concerns regarding these provisions. None of these are addressed 

in the Canada Protocol arbitration provision, but presumably that is because the 

Canada Protocol was already negotiated when these concerns were raised. Can you, 

however, confirm that these concerns will be considered and addressed in future tax 

treaties with similar arbitration mechanisms? 

Answer. The arbitration provision in the proposed Protocol with Canada was already negotiated at the time the Senate considered the agreements with Germany 

and Belgium in 2007. It is for this reason that the concerns expressed by the committee on the agreements with Germany and Belgium are not reflected in the proposed Canada Protocol. 

The Treasury Department greatly appreciates the input received from the committee on several aspects of the German and Belgian arbitration provisions, and 

similarly with the Canadian Protocol. The committee’s concerns have been and will 

continue to be considered in any arbitration negotiations the Treasury Department 

conducts. 

Question. The exchange of notes between the United States and Canada that accompanies the Canada Protocol includes many of the details that would govern the 

binding arbitration mechanism to be included in the treaty. Among other things, the 

notes make clear that the arbitration mechanism would only apply to certain articles in the treaty, which are listed, unless otherwise agreed to by the parties. 

How were the articles to which arbitration applies, selected? 

Answer. The Treasury Department believes that mandatory binding arbitration, 

as an extension of the competent authority process, is an effective tool to strengthen 

the Mutual Agreement Procedure in the U.S. treaty network as a whole. However, 

the scope of an arbitration provision in a particular agreement is a matter that 

must be negotiated with the treaty partner. Some countries may be willing to cover 

only specific articles in the treaty. It should be noted that while the mandatory 

binding arbitration provision in the proposed Canada Protocol is limited to certain 

articles, other issues are eligible for arbitration if the competent authorities agree 

that the particular case is suitable for arbitration. 

Question. Why isn’t Article 3 (Definitions) among the articles included in this list? 

Answer. Article III of the existing Canada treaty provides definitions and general 

rules of interpretation for the treaty. Paragraph 1 of Article III defines a number 

of terms for purposes of the treaty. Certain other terms are defined in other articles 

of the treaty. Paragraph 2 of Article III provides that, in the case of a term not defined in the treaty, the domestic tax law of the Contracting State applying the treaty shall control, unless the context in which the term is used requires a definition 

independent of domestic tax law or the competent authorities reach agreement on 

a meaning. 

143 

To the extent that an issue concerning the definition of a term is part of a case 

regarding the application of one or more articles explicitly within the scope of the 

mandatory arbitration provision, such definitional issue will be considered during 

the arbitration process. 

Question. If a dispute focuses on a term that is defined in Article 3 and appears 

in another Article that is within the scope of the arbitration mechanism, would such 

a dispute be subject to arbitration under the Protocol? 

Answer. To the extent that an issue concerning the definition of a term defined 

in Article III is part of a case regarding the application of one or more articles explicitly within the scope of the mandatory arbitration provision, such definitional 

issue will be considered during the arbitration process 

Question. Article 2(1) of the proposed Canada Protocol addresses the issue of socalled ‘‘dual-resident corporations.’’ It provides that if such a company is created 

under the laws in force in a treaty country but not under the laws in force in the 

other treaty country, the company is deemed to be a resident only of the first treaty 

country. Have you considered whether this rule is equitable, for example, in circumstances in which a corporation was organized under the laws of the United 

States many years ago and has long since ceased to have significant contacts with 

the United States, but instead is managed and controlled in Canada? Have you considered whether it might be appropriate to provide discretion to the Competent Authorities in such a case to determine, for example, that the company is in fact a 

resident of Canada? 

Answer. To address abuses of the existing treaty by U.S. companies continuing 

into Canada, the proposed Protocol replaces the existing treaty’s rule for resolving 

dual-residency conflicts for corporations with an updated rule that is similar to the 

rule in the U.S. Model. It has been a longstanding treaty policy of the United States 

to place significant weight on the place of incorporation when addressing questions 

of dual corporate residence. However, we have included in other agreements, for example in our agreement with the United Kingdom and the proposed Bulgaria and 

Iceland agreements, provisions directing the Competent Authorities to endeavor to 

determine for treaty purposes the residence of dual resident corporations. 

Question. Article 2(2) of the Canada Protocol would amend Article IV of the Canada Tax Treaty to include a new paragraph 6 and 7, setting forth specific rules for 

the treatment of certain income, profit, or gain derived through or paid by fiscally 

transparent entities. The new paragraph 6 would set forth a ‘‘positive’’ rule, which 

identifies scenarios in which ‘‘income, profit or gain shall be considered to be derived 

by a person who is a resident of a Contracting State.’’ The new paragraph 7 would 

set forth a ‘‘negative’’ rule intended to prevent the use of such entities to claim the 

benefits where the investors are not subject to tax on the income in their state of 

residence. In particular, paragraph 7 is aimed largely at curtailing the use of certain 

legal entity structures that include hybrid fiscally transparent entities, which, when 

combined with the selective use of debt and equity, may facilitate the allowance of 

either 1) duplicated interest deductions in the United States and Canada, or 2) a 

single, internally generated, interest deduction in one country without offsetting interest income in the other country. As noted by the Joint Committee on Taxation 

in its explanation of the Canada Protocol, commentators have raised a question as 

to whether subparagraph 7(b) is too broad, because it could prevent legitimate business structures that are not engaging in potentially abusive transactions from taking advantage of benefits that would otherwise be available to them under the treaty. Please explain whether you agree or disagree with the assertion that subparagraph 7(b) is overbroad. If so, has there been any discussion regarding what might 

be done to improve the situation? In addition, does the Treasury Department expect 

to include such a rule in future tax treaties? If so, has the Treasury Department 

considered alternate versions that might provide for a narrower exception from the 

rule in paragraph 6? 

Answer. Subparagraph 7(b) essentially denies benefits in cases in which the residence country treats a payment differently than the source country and other conditions are met. The rule is broader than an analogous rule in Treasury regulations 

issued pursuant to section 894 of the Internal Revenue Code. The Treasury Department is aware that the scope of subparagraph 7(b) is potentially overbroad, especially in the case of non-deductible payments. The Treasury Department has been 

discussing, and will continue to discuss with Canada, whether to address this issue. 

The Treasury Department does not contemplate incorporating such a rule in future 

tax treaties. 

144 

1 Under section 707(a) and Treas. Reg. section 1.707–1(a), if a partner engages in a transaction with a partnership other than in the capacity as a member of the partnership, the transaction is, in general, considered as occurring between the partnership and one who is not a partner. See Rev. Rul. 73–301, 1973–2 C.B. 215. 

Question. The Treasury Department’s Technical Explanation provides several examples of the application of subparagraph 7(b) to certain legal entity structures. 

But, the Technical Explanation does not provide an example of a payment made by 

a U.S. domestic reverse hybrid entity that is treated as a partnership for Canadian 

tax purposes to one of its owners. Although the partnership example in the Technical Explanation should apply reciprocally to a payment treated as a dividend for 

U.S. tax purposes and a partnership distribution for Canadian tax purposes, the 

Technical Explanation does not state so explicitly. Can you confirm that this is the 

case? 

In addition, the Technical Explanation does not include examples relating to a deductible interest (or royalty) payment from a hybrid partnership entity to one of its 

owners. In the case of such a payment from a Canadian hybrid partnership entity, 

the U.S. recipient of the payment would generally treat it as a payment of interest 

(or royalties) for U.S. tax purposes.1 One might expect that subparagraph 7(b) would 

not apply in this case because the fiscal transparency of the partnership would generally not be relevant for residence-country tax purposes, but there is no discussion 

of this case in the Technical Explanation. Can you confirm that this is a reasonable 

reading of subparagraph 7(b)? Also, please clarify whether subparagraph 7(b) applies with respect to deductible payments by a domestic reverse hybrid partnership 

entity to one of its Canadian owners. 

Answer. Page 10 of the agreed Technical Explanation provides an example of the 

application of subparagraph 7(b): 

[Assume] in the above example, USCo (as well as other persons) are owners of CanCo, a Canadian entity that is considered under Canadian tax law 

to be a corporation that is resident in Canada but is considered under U.S. 

tax law to be a partnership (as opposed to being disregarded). Assume that 

USCo is considered under Canadian tax law to have received a dividend 

from CanCo. Such payment is viewed under Canadian tax law as a dividend, but under U.S. tax law is viewed as a partnership distribution. In 

such a case, Canada views USCo as receiving income (i.e., a dividend) from 

an entity that is a resident of Canada (CanCo), CanCo is viewed as fiscally 

transparent under the laws of the United States, the residence State, and 

by reason of CanCo being treated as a partnership under U.S. tax law, the 

treatment under U.S. tax law of the payment (as a partnership distribution) 

is not the same as the treatment would be if CanCo were not fiscally transparent under U.S. tax law (as a dividend). As a result, subparagraph 7(b) 

would apply to provide that such amount is not considered paid to or derived by the U.S. resident. 

The provisions of subparagraph 7(b) apply reciprocally. Assume, for example, that 

CanCo (as well as other persons) are owners of USCo, a U.S entity that is considered under U.S. tax law to be a corporation resident in the United States, but is 

considered under Canadian tax law to be a partnership (a so-called ‘‘domestic reverse hybrid’’). Assume that CanCo is considered under U.S. tax law to have received a dividend from USCo. Such payment is viewed under U.S. tax law as a dividend, but under Canadian tax law is viewed as a partnership distribution. In such 

a case, the United States views CanCo as receiving income (i.e., a dividend) from 

an entity that is a resident of the United States (USCo), USCo is viewed as fiscally 

transparent under the laws of Canada, the residence State, and by reason of USCo 

being treated as a partnership under Canadian tax law, the treatment under Canadian tax law of the payment (as a partnership distribution) is not the same as the 

treatment would be if USCo were not fiscally transparent under Canadian tax law 

(as a dividend). As a result, subparagraph 7(b) would apply to provide that such 

amount is not considered paid to or derived by the Canadian resident. 

As noted in the agreed Technical Explanation: ‘‘Paragraphs 6 and 7 apply to determine whether an amount is considered to be derived by (or paid to) a person who 

is a resident of Canada or the United States. If, as a result of paragraph 7, a person 

is not considered to have derived or received an amount of income, profit or gain, 

that person shall not be entitled to the benefits of the Convention with respect to 

such amount. Additionally, for purposes of application of the Convention by the 

United States, the treatment of such payments under Code section 894(c) and the 

regulations thereunder would not be relevant.’’ Thus, subparagraph 7(b) applies 

145 

with respect to deductible payments by a domestic reverse hybrid to its Canadian 

owners. 

Although not specifically addressed in the Technical Explanation, the Treasury 

Department and Canada agree that subparagraph 7(b) does not apply to deny benefits to interest and royalty payments by an entity that is treated as a partnership 

by one country and a corporation by the other if the treatment of such amount by 

the country of the person deriving the income would be the same if such amount 

had been derived directly by such person (interest or royalties). 

Question. Does the Treasury Department intend to formally share its Technical 

Explanation regarding the Bulgaria and Iceland Treaties with each country, as a 

courtesy? 

Answer. As a courtesy, the Treasury Department has sent copies of its Technical 

Explanation to each country. Unlike the Technical Explanation to the proposed Canada Protocol, however, the Technical Explanations to the proposed Bulgaria and Iceland Conventions have not been reviewed by or subscribed to by the relevant country. 

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO DEPUTY

ASSISTANT SECRETARY MICHAEL MUNDACA BY SENATOR RICHARD G. LUGAR

Question. Please give an overview of current cases that have not been resolved 

and the anticipated case load that would be addressed by the Arbitration Provision 

in the Protocol with Canada, including number of cases, length of time unresolved, 

and country of origin breakdowns. 

Answer. There are currently 192 active cases with Canada. Of those, approximately 90 percent are transfer-pricing cases, with the remainder involving interpretive issues, such as residency and permanent-establishment determinations. The 

Canadian tax authorities initiated the adjustment in 85 percent of the cases caused 

by a transfer pricing adjustment. 

Fifty-three of the 192 total cases have been unresolved for over two years. Of 

those 53 cases, the ‘‘oldest’’ case is 2,289 days old and the ‘‘youngest’’ case is 762 

days old. Four of the 53 cases involve interpretive issues, the oldest of which is 

1,657 days and the youngest of which is 1085 days. 

We should note that different countries track their outstanding competent authority cases differently. For example, concepts such as the definition of a case may vary 

by country. Thus, we have observed that where a treaty partner has aggregate information regarding its case load with the United States the numbers sometimes 

notably diverge from the numbers used by the United States. 

Question. Traditionally, tax treaties agreements have been seen as facilitating 

cross-border trade and investment of multinational businesses. However, increasing 

globalization also affects small businesses. Is the current model for U.S. Tax Treaties clear, understandable and usable for smaller businesses? Give examples of how 

small business can take advantage of these treaties. 

Answer. The current U.S. Model Tax Treaty and Technical Explanation are available on the Treasury Department website. The Treaty and especially the Technical 

Explanation are drafted to be as clear and understandable as possible, but we recognize that technical international tax rules and issues may appear opaque to many 

taxpayers. IRS publications, especially Publication 901 on Tax Treaties, provide 

international tax guidance in less technical terms and may be more accessible to 

individuals who do not have significant tax experience. 

We further recognize that in our increasingly global economy, small businesses 

and individuals may, and perhaps must, address cross-border tax issues. Because 

our tax treaties provide generally uniform and clear rules regarding such important 

issues as withholding tax rates and tax jurisdictional thresholds, we think they can 

be especially useful to small businesses and individuals, who may not have access 

to multi-national advisors or foreign tax advice. More specifically, tax treaties generally allow U.S. businesses to engage in trade in goods and services of greater 

value and duration with foreign clients without incurring foreign taxes than would 

be the case in the absence of treaties. Treaties may also facilitate access to foreign 

skilled workers and researchers, and to foreign capital via reduced withholding 

rates. 

We welcome further input from the committee regarding how best to serve small 

businesses in this regard. 

146 

Question. Please describe the current U.S. position on reciprocal elimination of 

withholding taxes on cross-border dividends paid between a subsidiary and its parent company. Has there been a change in the U.S. policy position? 

Answer. The policy of the Treasury Department continues to be that the elimination of source-country taxation of dividends should be considered only on a caseby-case basis. Such a provision is not part of the U.S. Model because we do not believe that it is appropriate to include in every treaty. We must consider the interaction of our tax system with our treaty partner’s, as well as the overall balance 

of the treaty before deciding whether inclusion is appropriate. 

147 

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO SENIOR

DEPUTY U.S. COORDINATOR RICHARD BEAIRD BY SENATOR JOSEPH R. BIDEN, JR. 

Question. Please provide a list of recent accomplishments of the International 

Telecommunications Union (‘‘ITU’’) that have had a significant impact on U.S. interests, with a particular focus on national security, public diplomacy, and economic 

interests. 

Answer. In terms of National Security, the ITU has been a leader in the development of Standards for Emergency Telecommunications (and related standards for 

Telecommunications for Disaster Relief). This is important because emerging telecommunications networks are based on fundamentally different switching technologies from the legacy Public Switched Telecommunications Networks. 

In terms of public diplomacy, the ITU Development (D) Sector has made one of 

its primary goals developing a ‘‘cybersecurity best practices’’ report for use by the 

developing world. The U.S. has a leadership role in this effort. The draft report on 

cybersecurity best practices has been well received by developing nations, and already constitutes a success story at the ITU for both the U.S. (which developed the 

basic materials), and the institution. 

In terms of economic interest, the 2007 World Radiocommunication Conference 

(WRC-07) addressed some 30 agenda items related to almost all terrestrial and 

space radio services and applications. These included future generations of mobile 

telephony, aeronautical telemetry and telecommand systems, satellite services including meteorological applications, maritime distress and safety signals, digital 

broadcasting, and the use of radio in the prediction and detection of natural disasters. 

Question. Please provide a list of current and future priorities of the ITU that are 

of importance to the United States. 

Answer. The United States supports the ITU’s approach of focusing on the theme 

of convergence in providing a range of services over a single network. As legacy telecommunication systems transition to Internet Protocol-based platforms that support 

expanded information and communication technologies (ICTs), the U.S. believes it 

is necessary to examine the potential of ICTs to address significant global issues. 

One such issue is ICT and its effect on the environment. 

The U.S. also supports the ITU’s efforts to coordinate the needs of developing and 

developed countries to expand Digital Inclusion. The ITU is also urging Regional 

Groups to fully collaborate to identify the necessary spectrum for International Mobile Telecommunications (IMT), which will allow use of advanced broadband mobile 

technology on a global basis. In October 2007, at the World Radiocommunication Assembly, the ITU added a WiMAX-derived technology to the IMT-2000 set of global 

standards. This paves the way for the world-wide deployment of voice, data and 

multimedia services to stationary and mobile devices, at higher speeds and across 

wider areas. 

Question. Many of the amendments made to the ITU Constitution and the ITU 

Convention that are now under consideration (Treaty Docs. 108–5, 109–11, and 110– 

16), are designed to facilitate private sector participation in the work of the ITU. 

Please describe how the increased private sector participation has changed the dynamic at the ITU. 

Answer. There are a number of trends in ITU participation since the year 2000 

that have changed the landscape in the ITU. Since 2000, the private sector has 

shown increased interest in participating in ITU activities (as ITU Sector Members) 

and in partnering with the ITU in order to interface with relevant governmental 

decision-makers (and other potential partners) that are involved in addressing the 

constantly changing and evolving telecommunication environment. The increased 

participation of ITU Sector Members has assisted the ITU in developing innovative 

agendas to encourage access to Information and Communication Technologies (ICTs) 

in developing countries. It has also provided Sector Members with new business opportunities. 

Question. Does more need to be done to facilitate private sector participation? 

Answer. We continue to look for ways to make the ITU a more attractive forum 

for private sector participation. At the last Plenipotentiary Conference in Antalya, 

the U.S. was successful in keeping the Conference from increasing the minimum 

contribution for Sector Members. We believe that maintenance of the current levels 

of contribution will encourage private sector participation in the ITU. We are encouraged that major corporations have recently broadened their participation in the 

ITU. 

148 

Question. At what point does private sector participation become concerning? 

What are the challenges that the ITU faces in balancing Member States’ rights with 

the involvement of the private sector? 

Answer. Private sector participation in the ITU’s activities is crucial to the future 

success of the ITU. More participation per se by the private sector is never a threat. 

However, if changes were made in the ITU’s procedural rules that resulted in Sector 

Members gaining control over the ITU’s processes, such changes would be a concern 

because they could prevent Member States from exercising their appropriate role as 

guardians of the public interest and national security. No such changes are currently envisioned. 

Question. One of the most important aspects of the 1998 amendments to the Constitution and the Convention was a clarification of the roles of Member States of 

the ITU and private sector participants in the ITU, which include ‘‘Sector Members’’ 

and ‘‘Associates.’’ 

Answer. Please provide information on the role and importance of Sector Members 

within the ITU. 

Answer. Sector Members have an important role to play in all three ITU Sectors, 

but their participation relative to that of Member States varies from Sector to Sector. In the ITU-T, since national networks have been privatized, Member States 

generally no longer engage in technical work (with some exceptions where there are 

national interests at stake, such as priority of communications in times of national 

disasters and emergencies, or identity management). Consequently, Sector Members 

are largely responsible for preparing technical contributions for telecommunications 

standards. In the ITU-R, both Sector Members and Member States have major 

stakes in obtaining and protecting radio spectrum. In the ITU-D, with some notable 

exceptions, the private sector has historically been much less involved. This may be 

because the business case for assisting developing countries is much less obvious 

than the need to obtain spectrum for a new service (in ITU-R), or to establish an 

international standard for telecommunications equipment (in ITU-T). 

Question. Why did the United States decide not to authorize the direct application 

procedures that were added to Article 19 of the Convention in an effort to streamline the application process for Sector Members? 

Answer. The U.S. has chosen to maintain minimal oversight over which U.S. entities are allowed to apply for ITU membership for a number of reasons. One is that 

the U.S., which has more Sector Members than any other country, wants to be kept 

informed about what U.S. entities are participating in the ITU. Another is that the 

U.S. may incur some de facto responsibilities as a result of a U.S. company becoming an ITU member. For example, the ITU turns to the U.S. to assist in seeking 

payment from a U.S. entity when that U.S. entity does not meet its ITU obligations, 

such as failure to pay its contributory share. 

Question. Please provide information on the role and importance of Associates, including their role in ITU study groups. 

Answer. Associates are entitled to attend and participate in a specific Study 

Group or Groups, whereas Sector Members are entitled to attend and participate 

in all the Study Groups in a given Sector. Associates play an important role in the 

ITU standards development process. Creation of an Associate category has increased 

private sector participation in the ITU and brought into the ITU process entities 

with specialized expertise in particular fields of telecommunications. The private 

sector has benefited from the Associate category because it has allowed entities that 

have expertise in a particular telecommunications subject to participate in that part 

of the work of the ITU that is of interest to them, at a lower rate than they would 

have to pay to as Sector Members. 

Question. Is there any overlap between Sector Members and Associates? 

Answer. Sector Membership entitles a private sector member to attend all the 

Study Groups in a Sector. An Associate can only participate in the specific Study 

Group(s) for which it is an Associate. If an entity is a Sector Member, it would make 

no sense for it also to be an Associate in the same sector. 

We are aware that several entities have chosen to be a Sector Member in one Sector but an Associate in another Sector. 

Question. How many U.S. Sector Members and U.S. Associates participate in the 

ITU’s work? Is there a list that is publicly available? 

Answer. Yes. 

There is a publicly available list of Sector Members on the ITU’s website at— 

149 

www.itu.int/cgi-bin/htsh/mm/scripts/mm.list?_search=sec&_languageid=1 

And Associates at— 

www.itu.int/cgi-bin/htsh/mm/scripts/mm.list?_search=associates&_languageid=1 

There are currently 568 Sector Members and 153 Associate Members listed, in addition to 191 Member States. 

Question. The 1998 amendments to Article 28 of the Constitution provide that the 

Secretary General should notify the Member States of the provisional values of contributory units before the beginning of the Plenipotentiary Conference and that 

Member States, in turn, should determine their final choice of contributory unit, 

their allocation level, before the end of the Conference. The United States unsuccessfully opposed the change in the time allowed for Member States to notify the 

Secretary General of their final allocation level, arguing that it needed more time 

for Congressional input. Has this change in the time-line for contributions created 

any problems for the United States? 

Answer. The time-line has not created any problems for the U.S. 

Question. There has been considerable discussion relating to the role that the ITU 

should play in governing the Internet. The Report of the U. S. Delegation to the 

Plenipotentiary Conference of the International Telecommunications Union in Marrakesh (2002) stated that ‘‘while Member States have become significantly more interested in the issues related to Internet governance, the U.S. successfully worked 

to ensure that three ITU resolutions concerning management of the Internet reaffirmed private sector leadership in this area and limited the ITU involvement to 

its core competencies.’’ See pg. 2. The Report of the United States Delegation to the 

Plenipotentiary Conference of the International Telecommunication Union in Antalya, Turkey (2006) indicated that the role of the ITU in internet governance was 

discussed and was affirmed insofar as it related to cyber security, consistent with 

the existing mandate of the ITU. See pg. 16. 

What is the role that the ITU currently plays in Internet governance? Which ITU 

bodies are most involved in this work? 

Answer. The Administration believes that the term ‘‘Internet governance’’ covers 

a wide range of public policy-related issues and serves as a ‘‘catch-all’’ for a multitude of topics related to the Internet including spam, e-commerce, e-literacy, universal connectivity, management of the domain name and addressing system (DNS), 

etc. Given the breadth of topics potentially encompassed under the rubric of ‘‘Internet governance,’’ the Administration believes that no single venue can appropriately 

address the subject in its entirety. As a general matter and consistent with its mandate, the ITU has a role with respect to the telecommunications infrastructure over 

which the Internet operates. All three ITU Sectors (ITU-D, ITU-R, and ITU-T) are 

involved in this work. 

While the Administration recognizes that the current private-sector led system for 

management of the Internet is working, we continue to encourage an ongoing dialogue with all stakeholders around the world in the various entities (including the 

ITU) that are involved in various aspects of the Internet (pursuant to their expertise, core competencies, and governing agreements), as a way to facilitate discussion 

and to advance our shared interest in the ongoing robustness and dynamism of the 

Internet. 

Question. Going forward, what role should the ITU play in Internet governance? 

Have public statements been made, which reflect the Administration’s position on 

this question? If so, where? 

Answer. The advancement and proliferation of the Internet is dependent upon the 

continued interworking of the underlying telecommunication infrastructure that the 

ITU has historically addressed. The Administration supports continuation of this 

work, as well as the ITU’s technical involvement in Internet Protocol-based networks through its membership-driven study group process on issues such as spam, 

cybersecurity, etc., to the extent such work is consistent with the historical core 

competencies of the ITU. We do not support an expanded scope for the ITU into 

other issues related to ‘‘Internet governance’’ and we have strived to ensure that 

ITU work programs are not duplicative of work ongoing in other international and 

intergovernmental institutions. This view is routinely conveyed in written contributions to ITU as well as speeches and testimony of senior Administration officials. 

Question. The Report of the United States Delegation to the Plenipotentiary Conference of the International Telecommunication Union in Antalya, Turkey (2006) indicated that ‘‘the ITU Council should establish a working group to consider the 

range of issues associated with the participation of all relevant stakeholders in the 

150 

activities of the Union related to [World Summit on the Information Society].’’ See 

pg. 16. The World Summit on the Information Society (WSIS) is focused on ensuring 

that the benefits of the Internet are accessible to everyone. Did the ITU Council establish a working group, as envisioned in the 2006 Report? If so, what were the recommendations of this group? 

Answer. On November 24, 2006 at an extraordinary session, the ITU Council created the Council Working Group on the Study on the Participation of All Relevant 

Stakeholders in ITU Activities Related to the WSIS (WG-WSIS), as called for in 

Resolution 141of the Plenipotentiary Conference in Antalya, Turkey. The group, 

which will present a final report to the 2009 session of Council, has met four times 

thus far and is scheduled to meet again September 29–30, 2008 in Geneva. The upcoming meeting will review the results of questionnaires developed by the Working 

Group to seek input of ITU Member States as well as entities that were accredited 

to the WSIS regarding the effectiveness of existing mechanisms for participation in 

the ITU. 

Question. Please explain to what extent the Executive Branch regards the ITU instruments under consideration to be self-executing. 

Answer. The ITU instruments under consideration are not of their own force intended to be judicially enforceable. Implementation by the United States is authorized by the Communications Act of 1934, 47 U.S.C. § 151, et seq., as amended, and 

by the National Telecommunications and Information Administration Organization 

Act, 47 U.S.C. § 901 et seq., as amended. No new U.S. legislation is needed to implement these amendments. 

Question. The 1998 amendments to the Constitution increased the number of 

members of the Radio Regulations Board (RRB) from nine to not more than 12 or 

a number corresponding to six percent of the total number of Member States, whichever is greater. See Article 14 of the Constitution. Article 9 of the Constitution of 

the ITU provides that each Member State may propose only one candidate to the 

RRB. What is the current make-up of the RRB? How does this amendment to Article 14 affect, if at all, the United States’ chance of having its candidate elected to 

the RRB? 

Answer. The RRB is currently comprised of representatives from twelve countries. 

They are the USA (Chair for 2008), Cameroon, Canada, France, India, Kyrgyzstan, 

Lithuania, Malaysia, Morocco, Nigeria, Pakistan and Poland. The RRB members 

perform their duties independently and on a part-time basis, normally meeting up 

to four times a year in Geneva, and are elected at the Plenipotentiary Conference. 

The twelve candidates receiving the most votes at the Plenipotentiary Conference 

are elected to the RRB. Under such rules, the chances of a country having its candidate elected are increased as the size of the Board increases. 

Question. The 2006 amendments to the Convention included the deletion of a provision in the Convention that gave the representative of each Member State of the 

Council the right to attend, as an observer, all meetings of the ITU Sectors. See Article 4(7) of the Convention (SUP 58). Moreover, the Convention was amended to 

clarify that Sector Members may attend (and not merely be represented at) meetings of the Council, its committees, and its working groups, subject to certain conditions. See Article 4(9ter). Please explain why each of these amendments were made 

and whether the United States supported these amendments. 

Answer. A practical difficulty preceding the 2006 amendments was the status of 

observer Member States attending ITU Council meetings. The specific issue was 

whether such observer Member States could participate at committees and working 

groups of Council. This issue consumed significant energy, particularly in that vocal 

observer Member States sought entrance to committee meetings and working groups 

of the Council that some Member States already represented on the Council thought 

were not authorized. The United States’ view was that, subject to the rules in force, 

all participants at Council meetings and working groups should be afforded the opportunity to make their views known. In the view of the United States, affording 

participants at lower level meetings the opportunity to generally voice their views 

is the best method of achieving a consensus on the eventual outcomes. Accordingly 

the U.S. supported the amendments in question. 

151 

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO SENIOR

DEPUTY U.S. COORDINATOR RICHARD BEAIRD BY SENATOR RICHARD LUGAR

Questions Relating to Treaty Docs. 108–5, 109–11, and 110–16 Generally 

Question. What is the current status of the amendments to the ITU Constitution 

and Convention contained in these documents? 

In the case of each set of amendments, how many ITU Member States have ratified or acceded to the amendments, and how many have not done so? 

Answer. All of the amendments are in force for those ITU Member States that 

have deposited their instrument of ratification, acceptance or approval of the 

amendments with the ITU. 

Treaty Doc Number 

Total ITU Member States 

Member States 

that have ratified, acceded 

or approved 

Member States 

that have not 

ratified, acceded or approved 

108–5 .......................................................................... 189 81 108 

109–11 ........................................................................ 189 63 126 

110–16 ........................................................................ 191 8 183 

Question. To the extent that the amendments have entered into force for some 

ITU Member States, and not for others, what rules govern when an issue addressed 

by the amendments arises? 

Answer. As the ITU Constitution and Convention and their amending instruments are silent on this question, customary rules of international law govern the 

ITU legal relations between ITU Member States that are parties to such amendments and those that are not. Pursuant to those customary rules, as between any 

two such Member States, only the amendments to the ITU Constitution and Convention to which both states are parties apply to their mutual relations. For the 

United States, this is the ITU Constitution and Convention, as amended in 1992 

and 1994. 

Question. Is the United States currently enjoying rights provided for in these 

amendments even though it has not yet ratified them? If so, please indicate what 

rights the United States is enjoying and on what legal basis it is enjoying them? 

Answer. In general terms, we believe that the various amendments to the Constitution and Convention, many of which have been voluntarily implemented by 

Member States that have not yet ratified them, have improved the management, 

functioning and finances of the ITU so as to make the ITU a more transparent, nimble and accountable organization that better serves the interests of its Member 

States, including the United States. 

Question. Is the United States currently complying with obligations of ITU Member States provided for in these amendments even though it has not yet ratified 

them? If so, please indicate what such obligations the United States is currently 

complying with and on what legal basis it is doing so? 

Answer. As indicated in the public testimony and in our response to General 

Question 1c above, many of the amendments to the ITU Constitution and Convention that are pending for Senate advice and consent to ratification concern the management, functioning and finances of the ITU. The United States has voluntarily 

supported implementation of these amendments, even though it has not yet ratified 

them. For example, in 1998 and 2006, the ITU Plenipotentiary Conferences adopted 

amendments to the ITU Constitution to require Member States to announce their 

class of contribution by particular deadlines so that the ITU could develop a realistic 

budget. The United States has voluntarily sought to adhere to those deadlines in 

order to improve the management and finances of the ITU, even though it is not 

yet required to do so. 

Question. Are U.S. private sector entities currently able to enjoy rights with respect to participation in the ITU provided for in these amendments even though the 

United States has not ratified them? If so, please indicate on what legal basis such 

entities are able to enjoy such rights? 

Answer. We believe that the U.S. private sector has gained significant benefits 

from these amendments, in terms of its participation in the ITU. The 1998 ITU 

152 

Plenipotentiary Conference adopted amendments to enhance the status of ITU Sector Members, including recognition that Sector Members may provide chairs and 

vice chairs at sector assemblies and meetings and at World Telecommunication Development Conferences and establishing a new category of ITU Associate that can 

participate in the work of a particular ITU Study Group. The 2002 and 2006 ITU 

Plenipotentiary Conference adopted amendments to allow private ITU Sector Members may attend meetings of the ITU Council, its committees and working groups 

under certain conditions. All of these amendments have enhanced the ability of the 

private sector to participate in the work of the ITU. The legal basis for that participation is the various ITU amendments that have entered into force, even though 

the United States has not yet ratified those amendments. Thus, U.S. private sector 

entities are able to enjoy these benefits even though the U.S. has not yet ratified 

the amendments. 

Question. Does the Administration believe it is sound policy for the ITU to amend 

its governing rules every four years? What impact does this practice have on the 

stability of the ITU’s activities and the legal certainty of the rules governing them? 

Answer. The ITU reviews its governing rules every four years. The governing 

rules are changed only when necessary, on the basis of consensus. This practice provides for a flexible organization with the ability to adapt to emergent technologies 

and yet offers stability to the multiplicity of ITU Member States and ITU Sector 

Members. While various amendments are made to the ITU Constitution and Convention as part of this process, those amendments do not fundamentally change the 

basic structure of the ITU. Hence, the technical changes to the ITU governing rules 

do not disrupt the stability of the ITU’s activities and the legal certainty of the rules 

governing those activities. 

Question. The United States made a number of declarations and reservations to 

the instruments contained in these documents at the time it signed the Final Acts 

of the relevant Plenipotentiary Conferences, and is seeking advice and consent to 

those declarations and reservations. Please indicate whether and when the Executive Branch consulted with the Senate prior to making these declarations and reservations? 

Answer. While the Executive Branch did not formally consult with the Senate 

prior to making these declarations and reservations, the Executive Branch sought 

in its declarations and reservations to preserve the prerogatives of the Senate in 

providing advice and consent to ratification of these instruments amending the Constitution and Convention. In particular, the Executive Branch made clear in each 

case that it reserved the right of the United States to make additional declarations 

and reservations to each instrument at the time of deposit of its instrument of ratification of the amendments with the ITU, so as to preserve the right of the Senate 

to provide additional declarations and reservations at the time of advice and consent 

to ratification. Also, because certain provisions of the 1992/1994 ITU Constitution 

provide for implied consent to be bound by revisions of the Administrative (Radio) 

Regulations adopted either before or after amendments to the ITU Constitution and 

Convention have been adopted, the Executive Branch has also included specific declarations in each instance specifying that the United States has not consented to 

be bound by those revisions without specific notification to the ITU of the United 

States’ consent to be bound. These declarations and reservations will be found at 

Treaty Doc. 110–16, at X–XI; Treaty Doc. 109–11, at 8–9; and Treaty Doc. 108–5, 

at X. Further, the declarations and reservations in these instruments are consistent 

with those made in earlier instruments to which the Senate has previously given 

its advice and consent. See Treaty Doc. 104–34, at IX. 

Questions Relating to Treaty Doc. 108–5 

Question. The transmittal package for Treaty Doc. 108–5 describes amendments 

relating to the Rules of Procedure of Conferences and Meetings of the ITU as follows: 

The 1998 Conference adopted amendments to the Convention that removed 

the Rules of Procedure of Conferences and Meetings of the ITU, with the exception of provisions relating to reservations and the right to vote, from the Convention and transferred them to a separate legal instrument. (See Convention, 

Article 32B, SUP 341–467.) This separate legal instrument entered into force 

on January 1, 2000, for those Member States that, as of that date, had submitted their instrument of ratification, acceptance, approval or accession to the 

1998 Amendments. It will enter into force for all other Member States, including the United States, on the date on which they deposit their instruments of 

ratification, acceptance, approval or accession to the 1998 Amendments. Unless 

153 

otherwise agreed to by a plenipotentiary conference, amendments to this separate legal instrument shall enter into force on the date of signature of the Final 

Acts of the plenipotentiary conference at which they are adopted. (See Rules of 

Procedure of Conferences and Other Meetings of the International Telecommunication Union, 25.) 

What was the source of the Rules of Procedure that governed the United 

States participation in the 2002 and 2006 ITU Plenipotentiary Conferences? 

Answer. Prior to 1998, the Rules of Procedure for ITU Conferences and other 

meetings were contained in Article 32 (## 340406, 410–444, 447–467) of the 1992/ 

1994 ITU Convention, which entered into force for the United States on October 26, 

1997. As noted above above, the relations of an ITU member state that has not ratified, acceded or approved later amendments (such as the United States) with an 

ITU member state that has ratified, acceded or approved the later amendments is 

governed by the earlier version of the ITU Constitution and Convention to which 

both ITU Member States are parties, without the amendments. Hence, for the 

United States, the Rules of Procedure found in the 1992/1994 version of the ITU 

Convention governed United States participation at the 2002 and 2006 ITU Plenipotentiary Conferences. 

Question. Was the source of these rules different than that of the Rules of Procedure that governed the participation of ITU Member States that ratified the 1998 

Amendments prior to January 1, 2000? 

Answer. Yes. The ITU Rules of Procedure are now found in a separate legal instrument entitled ‘‘General Rules of Conferences, Assemblies and Meetings of the 

Union.’’ Since these rules, however, originated in Article 32 of the 1992/1994 ITU 

Convention and were extracted from the 1992/1994 Convention to form the separate 

legal instrument, the substance of the rules, in large part, is the same as that found 

in Article 32 of the 1992/1994 ITU Convention. 

Question. To date, have any changes been made to the Rules of Procedure contained in the ‘‘separate legal instrument’’ provided for in these amendments? 

Answer. Yes, minor amendments. 

Question. If so, is United States participation in ITU meetings currently governed 

by such changes even though it has not yet ratified the amendments providing for 

the ‘‘separate legal instrument’’? 

Answer. No. 

Question. If so, what is the legal basis for the application of such changes to the 

United States? 

Answer. See answers above. 

Question. To the extent that different Rules of Procedure have applied to different 

ITU Member States at ITU meetings subsequent to the entry into force for some 

states of these amendments, how were matters addressed in the case of conflicts between the varying sets of rules? 

Answer. To our knowledge, no such conflicts have arisen. If they did, they should 

be resolved as indicated in General Question 1b above and Question 1a immediately 

above. 

Question. Amendments to Article 20 of the ITU Convention provide for the establishment of Business Study Groups which may adopt certain questions and recommendations without the formal consultation of ITU Member States. 

Please provide a list of topics on which Business Study Groups have adopted questions or recommendations without formal consultation with ITU Member States. 

Answer. Article 20 of the Convention provides for the ‘‘Conduct of Business of 

Study Groups.’’ Pursuant to Article 20 (in particular, paragraph CV 246–A and 246– 

D), Member States have established procedures for both study Questions and Recommendations to be adopted without formal consultation of the Member States 

where there is no doubt that the Questions and Recommendations involved lack policy or regulatory implications. In the ITU Telecommunication Standardization Sector, Questions may be adopted at Study Group meetings where there is consensus 

(see WTSA Resolution 1, Section 7.2.2). Recommendations may also be adopted 

without formal Member State consultation pursuant to the streamlined process set 

forth in ITU-T Recommendation A.8. 

Twenty-two Questions were adopted during the 2004–2008 period without formal 

Member State consultation. 

In the ITU Telecommunication Standardization Sector, most Recommendations 

are highly technical and do not involve regulatory or policy issues, and are therefore 

154 

approved under the streamlined process, i.e., by the Member States and Sector 

Members present at the Study Group meeting without further formal consultation 

of all Member States. In the period from 2004–2008, there were 840 ITU-T Recommendations approved using this process; a list of these can be provided if requested. It is estimated that this constitutes over 90% of the ITU-T’s recommendations during this period. However, even in these cases, Member States may call for 

a formal Member State consultation process where they believe policy or regulatory 

issues are involved. 

Question. Please indicate whether there have been any disputes within the ITU 

over whether particular questions or recommendations required formal consultation 

with ITU Member States under these amendments and how any such disputes were 

resolved. 

Answer. The process adopted by Member States for approval of Questions without 

formal Member State consultation is set forth in WTSA Resolution 1 at Section 7.2. 

It permits study groups to approve Questions if there is consensus of those present 

(including Member States) at the meeting (Section 7.2.2). However, if there is no 

consensus, a formal Member State consultation process may be initiated (Section 

7.2.3). It has never been necessary to apply this formal consultation process. 

From time to time the issue of whether a given Recommendation should be approved according to the streamlined approval process or by formal consultation with 

Member States has arisen. If there is no consensus at the study group meeting at 

which the issue arises, ITU-T Recommendation A.8, Section 8.1.1 calls for Member 

States present to decide the issue by majority vote, but it has never been necessary 

to apply this voting procedure. 

Question. The transmittal package for Treaty Doc. 108–5 (1998 Plenipotentiary 

Conference) indicates that the United States unsuccessfully sought an amendment 

to Article 33 of the ITU Convention that would have eliminated the requirement 

that interest be paid on arrears to the ITU. 

Is the United States currently in arrears to the ITU? 

Answer. The U.S. has paid all the assessed contributions except for the 2008 assessment of Swiss francs (CHF) 9,540,000 ($9,376,321). Because of a funding shortfall in the Contributions to International Organizations (CIO) account, U.S. payments to ITU, along with eight other organizations, became partially deferred in FY 

2006. The assessed contribution to ITU for calendar year 2008 will be paid from two 

different fiscal years: thirty percent from FY08 funds and seventy percent from 

FY09 funds. 

Question. Has the United States been in arrears to the ITU at any point in the 

past? Please indicate the amounts and dates of any such arrears. 

Answer. Yes, the 1997 assessment for ITU was short by CHF 1,419,594. 

($1,394,932) 

Question. Has the ITU sought to invoke Article 33 to collect interest payments 

from the United States? If so, please indicate the amounts and dates of any such 

efforts. 

Answer. Yes, per article 33 outstanding amounts bear interest from the beginning 

of the fourth month of the financial year (April 1) at 3% then at 6% from the beginning of the seventh month (July 1.) As a result, the U.S. has been invoiced as follows: 

1996 CHF 155,158 ($152,480) interest on arrears 

1997 CHF 1,483,476 ($1,457,585) shortfall on 1997 assessment and interest on arrears 

1998 CHF 88,050 ($86,538) interest on arrears 

1999 CHF 92,971 ($91,394) interest on arrears 

2000 CHF 98,475 ($96,808) interest on arrears 

2001 CHF 104,301 ($102,536) interest on arrears 

2002 CHF 100,202 ($98,507) interest on arrears 

2003 CHF 37,587 ($36,948) interest on arrears 

2004 CHF 310,672 ($305,328) interest on arrears 

2005 CHF 173,293 ($170,299) interest on arrears 

2006 CHF 456,286 ($448,403) interest on arrears 

2007 CHF 321,180 ($315,601) interest on arrears 

The current balance for interest on arrears as of January 2008 is CHF 1,369,380 ($1,345,728). 

155 

Question. Has the United States made any payments of interest on arrears to the 

ITU? If so, please indicate the dates and amounts of any such interest payments. 

Answer. Yes, CHF 602,837 ($592,402) on November 14, 2002 to partially pay the 

accumulated interest on arrears owed. 

Question. The transmittal package for Treaty Doc. 108–5 states that ‘‘for domestic 

policy reasons’’ the United States will require U.S. private Sector Members to continue to apply for ITU Sector Membership using procedures requiring the direct involvement of the U.S. Government, rather than through alternative procedures providing for direct applications through the ITU. 

Please explain the domestic policy reasons for this decision. 

Answer. The U.S. has chosen to maintain minimal oversight over which U.S. entities are allowed to apply for ITU membership for a number of reasons. One is that 

the U.S., which has more Sector Members than any other country, wants to be kept 

informed about what U.S. entities are participating in the ITU. Another is that the 

U.S. may incur some de facto responsibilities as a result of a U.S. company becoming an ITU member. For example, the ITU turns to the U.S. to assist in seeking 

payment from a U.S. entity when that U.S. entity does not meet its ITU obligations, 

such as failure to pay its contributory share. 

Please give an assessment of how the direct application procedures have worked 

in practice for those states that have utilized them, and of the impact on the work 

of the ITU of the participation of Sector Members admitted through such procedures. 

Answer. Although other Member States do not disclose the benefits of their direct 

application procedures, for the U.S., the application process has worked very well. 

The endorsement process is not complicated for either the U.S. or for the ITU. This 

is evident in the large number of public and private companies that have joined the 

ITU (568 Sector Members, of which 86 are from the U.S., and 153 Associate members). 

Questions Related to Treaty Doc. 109–11 

Question. Please indicate how much money the ITU is expected to save on an annual basis as a result of the amendments to Article 4 of the Convention with regard 

to the payment of travel expenses of Member State representatives in connection 

with meetings of the ITU Council. Please also indicate how much money the ITU 

currently spends on such expenses on an annual basis. 

Answer. Using today’s conversion rate of U.S. Dollar to Swiss Franc (CHF) ($1 

US = .97 CHF), the expected savings on travel expenses for the sixteen ITU Member 

States that are developed countries (at an average cost of $3,931) equals $62,896 

per ITU council meeting. The ITU Council meets annually. Hence, the expected savings on daily subsistence allowance expenses for the sixteen ITU Member States 

that are developed countries (at $491/day over an average of 10 days), equals 

$78,560 per Council session. This results in a total savings of $141,456. 

The ITU’s annual travel expenditures between 2002 and 2007 amount to approximately $2.2 million ($ 3.3 million including fellowships). 

Questions Related to Treaty Doc. 110–16 

Question. As described in the transmittal package, amendments to Article 5 of the 

ITU Convention contained in 110–16 provide for the ITU Secretary General and 

other specified ITU officials to participate in ITU meetings ‘‘in an advisory, vice consultative, capacity.’’ Please explain the distinction between these two capacities and 

the significance of this change. 

Question. The distinction between the two terms relates to the core role that is 

desired of the Secretary General in the ITU. Each sector of the ITU (ITU-R, ITUT and ITU-D) has an advisory group whose output is available for consideration by 

the Member States. Prior to the Antalya Plenipotentiary Conference, the term ‘‘consultative,’’ as applied to the Secretary-General’s participation, was deemed to give 

the Secretary General too strong a role in the conduct of what is fundamentally an 

inter-governmental organization. The ITU Member States did not regard the Secretary-General as properly being on a par with the Member States. Accordingly, the 

Antalya Plenipotentiary Conference made clear that the Secretary-General and 

other ITU officials provide advice to the Member States but Member States need 

not consult them. 

156 

Questions Related to Treaty Docs. 107–17 and 108–28 

Question. The revisions to the ITU radio regulations contained in Treaty Docs. 

107–17 and 108–28 were concluded in 1992 and 1995, respectively. 

Is the United States already implementing or acting in accordance with these revisions? If so, please indicate the authorities on which the Executive Branch has relied in order to do so. 

Answer. In the exercise of their statutory and regulatory authority, the Federal 

Communications Commission (FCC) and the National Telecommunications and Information Administration (NTIA) have generally been able to implement revisions 

to the Radio Regulations through notice and comment rulemaking under the Administrative Procedure Act (APA). Both the FCC and NTIA have broad authority over 

their respective spheres of telecommunication regulation, the FCC for non-governmental telecommunications and the NTIA for governmental telecommunications. 

The FCC’s basic authority is found in 47 U.S.C. §§ 152(a), 301 and 303. The NTIA 

exercises delegated Presidential authority over all governmental telecommunications 

found in 47 U.S.C. 305 under Reorganization Plan No. 1 of 1977 and E.O.12046, as 

set forth in 47 U.S.C. 902(b). 47 U.S.C. 303(r) specifically authorizes the FCC to 

make rules and regulations, not inconsistent with law, necessary to carry out the 

provisions of any international radio or wire communications treaty or convention 

to which the United States is or may hereafter become a party. 47 U.S.C. 

902(b)(2)(A) & (K) authorize the NTIA to assign frequencies and establish policies 

concerning spectrum use by radio stations belonging to the U.S. Pursuant to this 

law, NTIA implements amendments to the ITU instruments regarding telecommunications spectrum for governmental stations. 

Question. Given the significant changes in telecommunications sector in the intervening period since the adoption of these revisions, please explain why these revisions remain relevant and why the Administration considers their ratification to be 

important. 

Answer. We are making an earnest effort to bring the United States up-do-date 

with all ITU instruments because we believe, among other things, that this would 

continue to support the United States’ strong presence in the ITU, which hopefully 

will assist in furthering the USG’s telecommunications goals within that organization. It is important that the United States not be seen as picking and choosing ITU 

Final Acts to ratify since it would send a signal internationally that the U.S. has 

moved away from its historical practice of managing international telecom and spectrum policy. Further, these earlier revisions provide the foundation for more recent 

amendments to the radio regulations, and thus it is important for the United States 

to ratify them in a comprehensive fashion. 

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO DEPUTY

ASSISTANT SECRETARY DAVID A. BALTON BY SENATOR JOSEPH R. BIDEN, JR. 

Question. How will joining these three environmental treaties (The Anti-Fouling 

Convention, the London Dumping Protocol, and the Land-Based Sources Protocol) 

benefit the United States? Why should the Senate act on them now? 

Answer. Prompt action to facilitate ratification of these treaties will allow the 

United States to reinforce and maintain its leadership role on oceans issues at the 

international and regional levels. Ratification would enhance our ability to work 

with other States to promote effective implementation of these treaties. As a Party 

to these treaties, the United States would be able to participate fully in meetings 

of States Parties and, thereby, more directly affect the implementation and interpretation of these treaties. Further, after the United States ratifies a treaty, other nations are more likely to ratify as well, resulting in greater overall protection of the 

oceans from marine pollution. 

With respect to the Anti-Fouling Systems Convention, the United States has an 

obvious interest in protecting its marine environment and ecosystems from the 

harmful effects of anti-fouling systems, particularly hazardous leaching of organotin 

in our ports and other waters. U.S. ratification and enactment of the proposed implementing legislation will together require foreign vessels entering U.S. ports and 

certain other waters to stop using harmful anti-foulants containing organotins. 

Since the United States already has significant existing prohibitions against 

organotin use, this will help create a ‘‘level playing field’’ on this issue. Ratification 

would also allow the United States to participate in decisions on inclusion of other 

harmful anti-fouling systems in the future. 

The Caribbean region covered by the Land-Based Sources Protocol is of crucial importance, as pollution of these waters directly affects the United States. For this 

157 

reason, the United States strongly advocated the development of the Land-Based 

Sources Protocol. Ratification by the United States is likely to spur other governments in the region to also become Party. This would lead to an overall improvement of the marine environment in this neighboring region, resulting in improved 

protection of human health and marine resources, as well as a stronger regional 

economy and tourism industry. 

The London Protocol is increasingly replacing the London Convention as the primary international regime for addressing ocean dumping. It is therefore crucial that 

the United States be able to fully participate in this forum to advance and protect 

key U.S. interests such as protection of the marine environment and proper regulation of legitimate uses of the oceans for disposal purposes. 

Question. What has been the impact of the Cartagena Convention and the two 

Cartagena Protocols that we’ve joined regarding oil spills and specially protected 

areas and wildlife? Do you have any concerns about their operation thus far? Have 

these instruments been effectively implemented? 

Answer. The Cartagena Convention (the Convention for the Protection and Development of the Marine Environment of the Wider Caribbean Region) serves as an 

umbrella agreement for addressing marine environmental protection in the Caribbean Region. Twenty-three nations in the Caribbean participate in this regime and 

overall the United States has been very satisfied with how the Cartagena Convention and its Protocols have been implemented. 

The Protocol Concerning Cooperation in Combating Oils Spills has been very successful in strengthening oil spill preparedness and response capacity of the nations 

and territories of the region, and in facilitating co-operation and mutual assistance 

to prevent and control major oil spill incidents. The United States helps support a 

regional oil spill training and response center in Curacao, and has detailed a U.S. 

Coast Guard officer to this facility to provide technical assistance. 

The Protocol Concerning Specially Protected Areas and Wildlife—the SPAW Protocol—has served as an important vehicle for promoting greater awareness of the 

threats to marine species in the region. The Protocol has made significant progress 

in helping Caribbean nations and territories better protect marine mammals, and 

has developed guidelines to help members evaluate and designate marine protected 

areas. 

Question. The Land-Based Sources Protocol calls for international cooperation and 

assistance relating to land-based sources of maritime pollution. Does the United 

States already provide such assistance to nations in the Caribbean region? Would 

we be expected to provide additional assistance as a Party to the Protocol? 

Answer. The United States already provides substantial assistance to nations in 

the Caribbean region for environmental programs, including for control of landbased sources of marine pollution. Much of our assistance to the region in this area 

is through in-kind services and the provision of technical expertise. 

The United States provides technical advice on marine environmental protection 

to the Caribbean through USAID, the Department of Agriculture, NOAA and EPA. 

In addition, the United States is a principal contributor to the United Nation’s Caribbean Environment Program (CEP), which supports marine environmental protection activities in the region. In recent years we have provided approximately 

$400,000 in annual support to the CEP’s Caribbean Trust Fund, and an additional 

$50,000 or so for the CEP’s work on land-based sources of marine pollution. 

As a party to the Land-Based Sources Protocol, we would not incur any new funding obligations. Financing is done on a voluntary basis. 

We nevertheless hope that entry into force of the Protocol may spur international 

donors to provide greater assistance to nations of the Caribbean to address these 

issues. 

Question. Do you have any concerns regarding other countries that could join the 

Land-Based Sources Protocol, meeting the standards set forth in the Protocol and 

particularly Annex III of that Protocol? 

Answer. The Land-Based Sources Protocol was negotiated with the aim of helping 

other countries in the region improve their domestic standards. We are aware that 

some of these countries face challenges in this regard, and are hopeful that the 

Land-Based Sources Protocol will provide a mechanism for them to raise their 

standards. 

Question. Article 15 of the London Dumping Protocol states that ‘‘[i]n accordance 

with the principles of international law regarding State responsibility for damage 

to the environment of other States or to any other area of the environment, the Contracting Parties undertake to develop procedures regarding liability arising from the 

158 

dumping or incineration at sea of wastes or other matter.’’ Have these procedures 

been developed since the Protocol entered into force? If so, please provide a copy for 

the committee’s information. If not, please describe their status and indicate whether the United States is involved in the process of their development. Does the 

United States have any concerns regarding their development? 

Answer. Article 15 liability procedures have not been developed under the London 

Protocol. Indeed, the second Meeting of Contracting Parties held in November 2007 

agreed not to embark on the development of liability procedures under Article 15 

at this stage. It is worth noting that the London Convention contains a similar provision in Article X regarding the development of liability procedures, but that no 

such procedures have ever been developed. 

Article 15, like Article X of the London Convention, describes a process for consideration of this issue rather than mandating a specific outcome. Were this process 

to move forward, which it has not yet done, the United States would participate as 

fully as possible so as to advance and protect U.S. interests. 

Question. Have there been any proposals to amend Annex I of the London Dumping Protocol since the addition of carbon dioxide streams from carbon dioxide capture processes for sequestration? If so, please provide information on such proposals, 

including the U.S. position on any such proposals. 

Answer. We are unaware of any current proposals to amend Annex I. 

Question. Article 26 of the London Dumping Protocol allows non-parties to the 

1972 London Convention to declare, when ratifying the Protocol, that they require 

up to five years to comply with specified Protocol provisions. Have any such declarations been made thus far? 

Answer. No Article 26 declarations have been made. 

Question. The Anti-Fouling Convention uses the venue of the International Maritime Organization’s Marine Environmental Protection Committee to review proposals to amend Annex 1 to the Convention. Does the United States have a seat 

on the Marine Environmental Protection Committee? If so, is it a permanent seat? 

Answer. Pursuant to Article 37 of the Convention on the International Maritime 

Organization, the Marine Environment Protection Committee shall consist of all the 

Members. The United States became a Member of the International Maritime Organization in 1950 and plays a strong and active role in this committee. 

Question. The Letter of Submittal for the Anti-Fouling Convention indicates that 

Article 5 will be implemented through existing provisions of the Solid Waste Disposal Act and the Clean Water Act. Please specify which provisions of these two acts 

will be relied upon to implement Article 5. See Treaty Doc. 110–13, Letter of Submittal at VII. 

Answer. Article 5 of the Anti-Fouling Systems Convention addresses collection, 

handling, treatment and disposal of wastes associated with the application and removal of anti-fouling systems. Certain wastes generated during application and removal of anti-fouling paints may be considered hazardous wastes, due to their solvent and/or active ingredient content. Hazardous wastes are subject to Solid Waste 

Disposal Act (SWDA) requirements, including those addressing generation, transport, treatment, storage, and disposal (see SWDA §§ 3002, 3003, 3004). In addition 

§ 301(a) of the Clean Water Act (CWA) regulates the discharge of pollutants into waters of the United States. Discharges from industrial facilities such as shipyards and 

dry-docks may be subject to permitting under CWA § 402, and those permits would 

establish technology-based effluent limits for discharges of pollutants from such facilities, and where necessary, any more stringent limits needed to achieve applicable 

water quality standards adopted by States or EPA under CWA § 303. 

Question. Is it correct that the use of TBT as an anti-fouling coating on ships has 

already been phased out in the United States? When was the last FIFRA registration for TBT use on a ship cancelled? 

Answer. The cancellation of the last FIFRA registration for a TBT antifouling 

coating product for hulls of ships and boats became effective on December 1, 2005. 

This is the date after which the registrant could no longer legally sell or distribute 

the product except as permitted in a limited existing stocks provision. The registrant was allowed until December 31, 2005 to sell any existing stocks of its product (produced before 12/1/05). Stocks in the hands of users may be used until exhausted. The functional shelf-life of this material is also limited, so significant use 

of the products at this time seems unlikely. 

159 

Section 13 of the proposed implementing legislation does allow continued use of 

TBT antifouling product on sonar domes and in conductivity sensors in oceanographic instruments. 

Question. Where in the world are TBT-based anti-fouling systems still being produced and used? 

Answer. It is our understanding that TBT-based systems are still produced in 

Asia, particularly Southeast Asia and Korea, although the extent has not been determined. In the past, there were a small number of U.S.-based companies that 

marketed TBT paint for export to the Caribbean, reportedly for use on pleasure 

craft. This practice may continue today on a small scale. A U.S. registration is not 

a requirement for export. 

The European Union has already implemented restrictions for vessels bearing 

TBT on their hulls. The major cruise lines and many shippers have switched to nonTBT alternatives. Likely consumers of TBT paints would probably include owner/ 

operators of vessels traveling within Asia where restrictions do not exist. 

Question. Do any of these three environmental treaties (The Anti-Fouling Convention, the London Dumping Protocol, and the Land-Based Sources Protocol) provide 

for mandatory technology transfers? 

Answer. No, there are no provisions in these treaties mandating technology transfer. 

Question. Do any of these three environmental treaties (The Anti-Fouling Convention, the London Dumping Protocol, and the Land-Based Sources Protocol) provide 

a private right of action in U.S. courts for individuals claiming a violation of any 

of these treaties? 

Answer. No. 

RESPONSES TO ADDITIONAL QUESTIONS FOR THE RECORD SUBMITTED TO DEPUTY

ASSISTANT SECRETARY DAVID A. BALTON BY SENATOR RICHARD G. LUGAR

Relating to Multiple Treaties 

Question. Article 3(2) of the Convention on anti-fouling systems and Article 10(4) 

of the marine dumping protocol each exempt from the respective instruments’ application certain categories of state vessels, but these provisions define differently the 

categories of vessels covered by the exemptions. Is there any difference in scope between the two exemptions? If so, please explain the difference and the rationale for 

it. 

Answer. The London Protocol Article 10.4 language was taken from Article VII(4) 

of the 1972 London Convention. The Anti-Fouling Systems Convention Article 3.2 

language was modeled after Article 3(3) of the International Convention on the Prevention of Pollution from Ships, 1973, and Article 236 of the United Nations Convention on the Law of the Sea. The language in these provisions effectively excludes 

the same vessels from coverage by the treaties. (It should be noted that the London 

Protocol also includes a reference to aircraft, which is explained by the fact that it 

covers aircraft within the scope of its obligations, while the Anti-Fouling Systems 

Convention does not.) 

Relating to Treaty Doc. 110–13 (Anti-Fouling) 

Question. Article 11 of the Convention refers to guidelines to be developed by the 

International Maritime Organization for the inspection of ships for the purpose of 

determining whether they are in compliance with the Convention. 

a. Have such guidelines been developed? If so, please provide a copy of the 

guidelines. 

b. If such guidelines have not yet been developed, please describe the status 

of the process for developing them and indicate when the guidelines are expected to be finalized. 

c. Please indicate whether ship owners and operators have had or will have 

the opportunity to participate in the development of these guidelines, and describe the process allowing for such participation. 

Answer. Article 11 guidelines under the Anti-Fouling Systems Convention have 

been developed in the form of MEPC.102(48) (see Attachment 1), MEPC.104(49) (see 

Attachment 2) and MEPC.105(49) (see Attachment 3). Additionally, work continues 

at the International Maritime Organization (IMO) to integrate this guidance into 

160 

the more general Survey Guidelines under the Harmonized System of Survey and 

Certification (A.948(23)) and the Procedures for Port State Control (A.787(19), as 

amended), which are presently under consideration for revision. Enhancements to 

the existing guidelines are likely to result from this ongoing work, within the next 

two to three years. 

Ship owner and operator representatives have been, and continue to be, very active in the development of these guidelines. They participate at the relevant IMO 

Committee and Sub-committee meetings, both as members of national delegations 

and as members of non-governmental organization observer delegations such as 

International Chamber of Shipping, International Shipping Federation, and 

INTERTANKO. Further, they have made, and continue to make, their perspectives 

known to the United States delegation. They can do this on an ad hoc basis and 

via the Shipping Coordination Committee, in preparation for the relevant IMO 

meetings. The Shipping Coordination Committee is a public forum whose meetings 

are conducted as recorded proceedings, under the cognizance of the Department of 

State. 

Question. The transmittal package for the Convention indicates that the Coast 

Guard has adequate existing authorities to compensate any meritorious claims with 

respect to undue delay or detention of ships raised pursuant to Article 13. 

a. Please identify the authorities on which the Coast Guard would rely to address such cases. 

b. Please indicate what standard would be used to determine the amount of 

damages in such cases, and the potential extent of damages that could arise. 

Answer. The Coast Guard has existing authorities, such as the Suits in Admiralty 

Act and the Military Claims Act, which provide compensation mechanisms for meritorious claims of this nature. In the case where liability is found, the amount of 

damages would be subject to proof by the claimant of the type of damages payable 

in a civil action in admiralty if a private person had caused the same kind of injury. 

Damages might involve fixed costs like crew wages, dockage fees, and indemnification or contribution for losses to cargo interests for which the carrier would be responsible. 

Relating to Treaty Doc. 110–5 (Marine-Dumping) 

Question. Article 8(1) provides a force majeure exception to the protocol’s prohibitions which applies, inter alia, in cases of a ‘‘real threat to vessels, aircraft, platforms or other man-made structures at sea.’’ What is the meaning of the word ‘‘real’’ 

as used in this context? Does it have a substantive effect on the scope of the force 

majeure exception? 

Answer. The force majeure exception under the London Protocol closely parallels 

the one found in London Convention Article V(1). It is intended to cover threats of 

an immediate nature to the safety of human life or of vessels, aircraft, platforms, 

or other man-made structures at sea. The term ‘‘real,’’ which also is used in the London Convention provision, should be interpreted in the sense of ‘‘actual’’ and ‘‘imminent.’’ Article 8(1) may be invoked only if dumping appears to be the only way of 

averting the threat and if there is every probability that the damage consequent 

upon such dumping will be less than would otherwise occur. 

Question. Article 11 specifies that no later than two years after the protocol’s 

entry into force, the Meeting of Contracting Parties shall establish procedures and 

mechanisms to assess and promote compliance with the protocol. 

a. Have such procedures and mechanisms been finalized? If so, please provide 

a copy of the procedures and mechanisms. If not, please indicate the status of 

efforts to establish them. 

b. What rules apply to the adoption of such procedures and mechanisms by 

the parties to the protocol? Must such procedures and mechanisms be adopted 

by consensus, or may they be adopted over the objection of one or more parties? 

c. What legal effect will these procedures and mechanisms have for parties 

to the protocol? Will parties be legally obligated to comply with them? 

Answer. The rules and procedures on compliance mandated by Article 11 of the 

London Protocol were adopted at the 2nd Meeting of Contracting Parties in November 2007 (LC 29/17 Annex 7, see Attachment 4). They were adopted by consensus. 

The compliance procedures create a facilitative process that will not lead to binding consequences for Parties. 

Question. Article 12 provides for parties to the protocol to engage in regional efforts consistent with the protocol to reduce and, where practicable, eliminate polluVerDate Aug 31 2005 14:37 Sep 15, 2008 Jkt 000000 PO 00000 Frm 00160 Fmt 6621 Sfmt 6621 H:\DOCS\EXEC~1.REP\EX110-15.TXT sfrela2 PsN: MIKEB
161 

tion caused by dumping or incineration at sea of wastes or other matter. Are any 

such efforts currently underway or anticipated with respect to regions of which the 

United States is a part? If so, please indicate the status and objectives of such efforts. 

Answer. For more than thirty years, the U.S. has been a leader in the control of 

marine pollution from ocean disposal, and our technical experts are in high demand 

for advising other nations on managing their dredging programs and other ocean 

disposal activities. The United States has been an active participant in regional cooperation activities to improve management of ocean dumping, especially within the 

Western Hemisphere. In recent years, U.S. technical experts from EPA and the 

Army Corps have participated in regional workshops on ocean disposal in Ecuador, 

China, and Bahrain. We engaged with countries in the wider Caribbean to encourage them to join the London Convention and Protocol through UNEP’s Caribbean 

Environment Programme. We are also an active member of the South Pacific Regional Environment Programme, and leader within that organization on preventing 

marine pollution from ocean dumping in the Pacific. 

U.S. technical experts played a leading role in the London Convention/Protocol 

Scientific Group in developing ‘‘Waste Assessment Guidance’’ for evaluating various 

types of material for ocean disposal. This year EPA is providing the London Convention/Protocol Secretariat at the IMO with $80,000 to develop guidance for developing 

countries on dredged material management, and to promote training and capacity 

building in ocean dumping regulation. Over the next two years, we plan to contribute additional funds to this effort with a focus on Latin America and the Caribbean. Should we become Party to the London Protocol, we would expect to continue 

our leadership role in promoting cooperation and providing technical assistance on 

ocean dumping. 

Question. Article 15 provides for parties to the protocol to develop procedures regarding liability arising from the dumping or incineration at sea of wastes or other 

matter. 

a. What is the status of efforts to develop such procedures? 

b. What rules apply to the adoption of such procedures by the parties to the 

protocol? Must such procedures be adopted by consensus, or may they be adopted over the objection of one or more parties? 

c. What legal effect will such procedures have for parties to the protocol? Will 

parties be legally obligated to comply with them? 

Answer. Article 15 liability procedures have not been developed under the London 

Protocol. Indeed, the second Meeting of Contracting Parties held in November 2007 

agreed not to embark on the development of liability procedures under Article 15 

at this stage. It is worth noting that the London Convention contains a similar provision in Article X regarding the development of liability procedures, but that no 

such procedures have ever been developed. The rules of procedure of the Protocol 

apply to adoption of all decisions and contain provisions on voting. 

Article 15, like Article X of the London Convention, describes a process for consideration of this issue rather than mandating a specific outcome. Were this process 

to become active and were it to lead to the development of new legally binding obligations, there is nothing in the treaty that would authorize the automatic imposition of such obligations on Parties. A further instrument would be required and, 

were the United States to be interested in joining, it would need to obtain appropriate authority prior to becoming bound by any such obligations. 

Question. Please explain why the Administration believes that the procedures in 

Article 16 for the resolution of disputes are appropriate to this protocol. 

Answer. Article 16 and Annex 3 of the London Protocol set forth the process for 

settling any disputes that may arise. In the first instance, Parties are to resolve any 

such dispute through negotiation, mediation, conciliation or other peaceful means of 

their choice. If no resolution is reached, the dispute shall, at the request of any 

Party, be settled by arbitration, using procedures contained in Annex 3, unless the 

Parties to the dispute agree on a different mechanism. The Annex 3 arbitration procedures are identical to a proposed amendment to the London Convention that the 

U.S. ratified in the 1980’s, but which never entered into force. 

Given our experience under our environmental treaties, compliance issues are unlikely to be of a bilateral nature such that these kinds of procedures would be relevant. Rather, compliance issues have tended to be treated under multilateral, consultative compliance procedures. Nevertheless, the existence of the procedure may 

promote compliance by other Parties, which is an important U.S. objective. 

162 

Question. Please indicate what additional costs the International Maritime Organization is expected to incur in connection with the performance of Secretariat duties provided for in Article 19. Please also indicate what portion of any such additional costs will be assessed to the United States as an IMO member. 

Answer. London Convention and London Protocol meetings are held jointly, and 

the programs and activities performed by the Secretariat in support of the London 

Protocol are effectively the same as those performed in support of the Convention. 

In 1996 the IMO Council agreed that the Secretariat would accept the functions assigned by the Protocol ‘‘on the understanding that additional functions shall not result in additional costs to the Organization.’’ It is not possible to separate out the 

Secretariat’s costs for supporting the Protocol from what it costs to support the Convention, but it would be no more than any additional costs incurred by additional 

Parties joining the Convention. The United States will bear no additional costs than 

it would as merely a Convention Party, since our IMO assessment is based on flagstate member ship tonnage. 

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169 


an8-1.eps
170 


an8-2.eps
171 


an8-3.eps
172 


an8-4.eps
173 


an8-5.eps
174 


an8-6.eps
175 


an8-7.eps
176 


AN9-1.eps
177 


AN9-2.eps
178 


AN9-3.eps
179 


AN9-4.eps
180 


AN9-5.eps
181 


AN9-6.eps
182 


AN9-7.eps
183 


AN9-8.eps
184 


AN9-9.eps
185 


AN9-10.eps
186 


AN9-11.eps
187 


AN9-12.eps
188 


AN9-13.eps
189 


AN9-14.eps
190 


AN9-15.eps
191 


AN9-16.eps
192 


AN9-17.eps
193 


AN9-18.eps
194 


AN9-19.eps
195 


AN9-20.eps
196 


AN9-21.eps
197 


AN9-22.eps
198 


an10-1.eps
199 


an10-2.eps
200 


an10-3.eps
201 


an10-4.eps
202 


an10-5.eps
203 


an10-6.eps
204 

Æ 


an10-7.eps