59–119 

114TH CONGRESS EXEC. REPT. " ! SENATE 2d Session 114–5 

PROTOCOL AMENDING THE 

TAX CONVENTION WITH JAPAN 

FEBRUARY 8, 2016.—Ordered to be printed 

Mr. CORKER, from the Committee on Foreign Relations, 

submitted the following 

R E P O R T 

[To accompany Treaty Doc. 114–1] 

The Committee on Foreign Relations, to which was referred the 

Protocol Amending the Convention between the United States of 

America and the Government of Japan for the Avoidance of Double 

Taxation and the Prevention of Fiscal Evasion with Respect to 

Taxes on Income and a related agreement entered into by an exchange of notes (together with the ‘‘proposed protocol’’), both signed 

on January 24, 2013, at Washington, together with correcting notes 

exchanged March 9 and March 29, 2013 (Treaty Doc. 114–1), having considered the same, reports favorably thereon with a declaration and conditions, as indicated in the resolution of advice and 

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

CONTENTS 

Page 

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

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

III. Major Provisions ............................................................................................ 2 

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

V. Implementing Legislation ............................................................................. 3 

VI. Committee Action .......................................................................................... 3 

VII. Committee Comments ................................................................................... 3 

VIII. Text of Resolution of Advice and Consent to Ratification .......................... 4 

IX. Annex 1.—Technical Explanation ................................................................ 9 

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 Japan. Many of the provisions in the proposed protocol 

are intended to bring the existing Convention in closer conformity 

with the U.S. Model, accounting for particular aspects of Japanese 


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law and its interaction with U.S. laws. The proposed Protocol provides an exemption from source-country withholding tax on all 

cross-border payments of interest largely in conformity with the 

U.S. Model Treaty and expands the category of cross-border dividends that are eligible for an exemption from source-country withholding, including modifying the ownership requirement for exemption. The proposed protocol would amend provisions of the existing 

Convention governing the taxation of capital gains to allow for taxation of gains from the sale of real property and real property interests by the State where such property is located in comformity 

with the Foreign Investment in Real Property Tax Act. The proposed protocol also incorporates into the existing Convention provisions that allow the revenue authorities of a Convention party to 

request assistance on revenue collection from the other party. 

The Protocol contains provisions to ensure the exchange of information between tax authorities in both countries, consistent with 

both the U.S. Model, international standards, and U.S. law. 

II. BACKGROUND

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

in force, which was concluded in 2003 (Convention between The 

Government of The United States Of America and The Government 

of Japan for the Avoidance of Double Taxation and the Prevention 

of Fiscal Evasion with respect to Taxes on Income, signed at Washington D.C. on 6 November, 2003). The proposed Protocol was negotiated to bring U.S.-Japan tax treaty relations into closer conformity with each country’s current tax treaty policies. For example, the proposed Protocol also includes updated exchange of information articles and a mandatory binding arbitration provision to 

resolve disputes between the revenue authorities of the United 

States and Japan. 

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 April 13, 2015, which is included at Annex 1 to this 

report. In addition, the staff of the Joint Committee on Taxation 

prepared an analysis of the Protocol, JCX-136-15 (October 29, 

2015), 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. 

ASSISTANCE IN COLLECTION OF TAXES

The proposed protocol incorporates into the existing Convention 

provisions that enable a party’s revenue authority to make a limited number of requests for assistance of the other party’s revenue 

authority in the collection of taxes, related costs, interest, and penalties. Requests for assistance are also limited by certain conditions 

depending on whether the revenue claim is against a company or 

an individual. 

EXCHANGE OF INFORMATION

Consistent with the U.S. Model and international standards, the 

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change tax information that is foreseeably relevant to carrying out 

the provisions of the existing Convention as amended by the proposed protocol. The proposed Protocol allows the United States to 

obtain information (including from financial institutions) from 

Japan regardless of whether Japan needs the information for its 

own tax purposes. 

MANDATORY ARBITRATION

The Protocol incorporates mandatory, binding arbitration for certain cases where the competent authorities of the United States 

and Japan have been unable to reach a resolution after a reasonable period of time. A mandatory and binding arbitration procedure 

is not included in the U.S. Model treaty, but has recently been included in the U.S. income tax treaties with Belgium, Canada, Germany, France, Switzerland, and Spain. 

IV. ENTRY INTO FORCE

The proposed Protocol shall enter into force upon exchange of instruments of ratification. The proposed protocol will have effect, 

with respect to taxes withheld at source, for amounts paid or credited on or after the first day of the third month next following the 

date of entry into force of the proposed protocol, and with respect 

to other taxes, for taxable years beginning on or after the first day 

of January next following the date of entry into force of the proposed protocol. Special rules apply for the entry into force of the 

mandatory binding arbitration provisions. 

V. IMPLEMENTING LEGISLATION

As is the case generally with income tax treaties, the Protocol is 

self-executing and does not require implementing legislation for the 

United States. 

VI. COMMITTEE ACTION

The committee held a public hearing on the Convention on October 29, 2015. Testimony was received from Robert Stack, Deputy 

Assistant Secretary (International Tax Affairs) at the U.S. Department of the Treasury and Thomas Barthold, Chief of Staff of the 

Joint Committee on Taxation. A transcript of the hearing is included in Annex 2 of Executive Report 114–1. 

On November 10, 2015, the committee considered the Protocol 

and ordered it favorably reported by voice vote, with a quorum 

present and without objection. 

VII. COMMITTEE COMMENTS

The Committee on Foreign Relations believes that the Protocol 

will stimulate increased trade and investment, reduce tax evasion, 

and promote closer co-operation between the United States and 

Japan. 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. 


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A. INFORMATION EXCHANGE

The Protocol would replace the existing Conventions tax information exchange provisions with updated rules that are consistent 

with current U.S. tax treaty practice. The provision wuould allow 

the tax authorities of each country to exchange information relevant to carrying out the provisions of the Convention or the domestic tax laws of either country. It would also enable the United 

States to obtain information (including from financial institutions) 

from Japan whether or not Japan needs the information for its own 

tax purposes. 

After careful examination of this Protocol, as well as witness testimony and responses to questions for the record, the committee believes that the exchange of information provisions will substantially aid in the full and fair enforcement of United States tax laws. 

According to witness testimony, the ‘‘foreseeably relevant’’ standard 

used in the Protocol does not represent a lower threshold than the 

standard found in earlier U.S. tax treaties. Witnesses also testified 

that the ‘‘foreseeably relevant’’ standard has been extensively defined in internationally agreed guidance. The committee is also of 

the view that the Protocol provides adequate provisions to ensure 

that any information exchanged pursuant to the Convention is 

treated confidentially. In particular, the Committee notes the provisions under new Article 26 as proposed by the Protocol, that require information received under an information request by a Party 

be treated as secret and disclosed only to persons or authorities involved in the administration and enforcement of the tax laws and 

be used only for such purposes. In sum, the committee believes 

these provisions on information exchange are important to the administration of U.S. tax laws and the Protocol provides adequate 

protection against the misuse of information exchanged pursuant to 

the Convention. 

B. DECLARATION ON THE SELF-EXECUTING

NATURE OF THE CONVENTION

The committee has included one declaration in the recommended 

resolution of advice and consent. The declaration states that the 

Convention is self-executing, as is the case generally with income 

tax treaties. Prior to the 110th Congress, the committee generally 

included such statements in the committee’s report, but in light of 

the Supreme Court decision in Medellin v. Texas 128 S. Ct. 1346 

(2008), the committee determined that a clear statement in the 

Resolution is warranted. A further discussion of the committee’s 

views on this matter can be found in Section VIII of Executive Report 110–12. 

VIII. TEXT OF RESOLUTION OF ADVICE AND

CONSENT TO RATIFICATION

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

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION 

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

America and the Government of Japan for the Avoidance of Double 

Taxation and the Prevention of Fiscal Evasion with Respect to 


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Taxes on Income and a related agreement entered into by an exchange of notes (together with the ‘‘proposed protocol’’), both signed 

on January 24, 2013, at Washington, together with correcting notes 

exchanged March 9 and March 29, 2013 (the ‘‘Protocol’’) (Treaty 

Doc. 114–1), subject to the declaration of section 2 and the conditions of section 3. 

SECTION 2. DECLARATION 

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

to the following declaration: 

The Convention is self-executing. 

SECTION 3. CONDITIONS 

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

to the following conditions: 

(1) Not later than 2 years after the Protocol enters into force 

and prior to the first arbitration conducted pursuant to the 

binding arbitration mechanism provided for in the Protocol, the 

Secretary of the Treasury shall transmit to the Committees on 

Finance and Foreign Relations of the Senate and the Joint 

Committee on Taxation the text of the rules of procedure applicable to arbitration panels, including conflict of interest rules 

to be applied to members of the arbitration panel. 

(2)(A) Not later than 60 days after a determination has been 

reached by an arbitration panel in the tenth arbitration proceeding conducted pursuant to the Protocol or any of the treaties described in subparagraph (B), the Secretary of the Treasury shall prepare and submit to the Joint Committee on Taxation and the Committee on Finance of the Senate, subject to 

laws relating to taxpayer confidentiality, a detailed report regarding the operation and application of the arbitration mechanism contained in the Protocol and such treaties. The report 

shall include the following information: 

(i) For the Protocol and each such treaty, the aggregate 

number of cases pending on the respective dates of entry 

into force of the Protocol and each treaty, including the following information: 

(I) The number of such cases by treaty article or articles at issue. 

(II) The number of such cases that have been resolved by the competent authorities through a mutual 

agreement as of the date of the report. 

(III) The number of such cases for which arbitration 

proceedings have commenced as of the date of the report. 

(ii) A list of every case presented to the competent authorities after the entry into force of the Protocol and each 

such treaty, including the following information regarding 

each case: 

(I) The commencement date of the case for purposes 

of determining when arbitration is available. 

(II) Whether the adjustment triggering the case, if 

any, was made by the United States or the relevant 

treaty partner. 

(III) Which treaty the case relates to. 


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(IV) The treaty article or articles at issue in the 

case. 

(V) The date the case was resolved by the competent 

authorities through a mutual agreement, if so resolved. 

(VI) The date on which an arbitration proceeding 

commenced, if an arbitration proceeding commenced. 

(VII) The date on which a determination was 

reached by the arbitration panel, if a determination 

was reached, and an indication as to whether the 

panel found in favor of the United States or the relevant treaty partner. 

(iii) With respect to each dispute submitted to arbitration and for which a determination was reached by the arbitration panel pursuant to the Protocol or any such treaty, the following information: 

(I) In the case of a dispute submitted under the Protocol, an indication as to whether the presenter of the 

case to the competent authority of a Contracting State 

submitted a Position Paper for consideration by the 

arbitration panel. 

(II) An indication as to whether the determination of 

the arbitration panel was accepted by each concerned 

person. 

(III) The amount of income, expense, or taxation at 

issue in the case as determined by reference to the filings that were sufficient to set the commencement 

date of the case for purposes of determining when arbitration is available. 

(IV) The proposed resolutions (income, expense, or 

taxation) submitted by each competent authority to 

the arbitration panel. 

(B) The treaties referred to in subparagraph (A) are— 

(i) the 2006 Protocol Amending the Convention between 

the United States of America and the Federal Republic of 

Germany for the Avoidance of Double Taxation and the 

Prevention of Fiscal Evasion with Respect to Taxes on In 

come and Capital and to Certain Other Taxes, done at 

Berlin June 1, 2006 (Treaty Doc. 109–20) (the ‘‘2006 German Protocol’’); 

(ii) the Convention between the Government of the 

United States of America and the Government of the Kingdom of Belgium for the Avoidance of Double Taxation and 

the Prevention of Fiscal Evasion with Respect to Taxes on 

Income, and accompanying protocol, done at Brussels July 

9, 1970 (the ‘‘Belgium Convention’’) (Treaty Doc. 110–3); 

(iii) the Protocol Amending the Convention between the 

United States of America and Canada with Respect to 

Taxes on Income and on Capital, signed at Washington 

September 26, 1980 (the ‘‘2007 Canada Protocol’’) (Treaty 

Doc. 110–15); or 

(iv) the Protocol Amending the Convention between the 

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spect to Taxes on Income and Capital, signed at Paris August 31, 1994 (the ‘‘2009 France Protocol’’) (Treaty Doc. 

111–4). 

(3) The Secretary of the Treasury shall prepare and submit 

the detailed report required under paragraph (2) on March 1 

of the year following the year in which the first report is submitted to the Joint Committee on Taxation and the Committee 

on Finance of the Senate, and on an annual basis thereafter 

for a period of five years. In each such report, disputes that 

were resolved, either by a mutual agreement between the relevant competent authorities or by a determination of an arbitration panel, and noted as such in prior reports may be omitted. 

(4) The reporting requirements referred to in paragraphs (2) 

and (3) supersede the reporting requirements contained in 

paragraphs (2) and (3) of section 3 of the resolution of advice 

and consent to ratification of the 2009 France Protocol, approved by the Senate on December 3, 2009. 


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IX. ANNEX 1.—TECHNICAL EXPLANATION

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE

PROTOCOL SIGNED AT WASHINGTON ON JANUARY 14, 2013 AMENDING

THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED

STATES OF AMERICA AND THE GOVERNMENT OF JAPAN FOR THE

AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL

EVASION WITH RESPECT TO TAXES ON INCOME AND THE PROTOCOL, 

WHICH FORMS AN INTEGRAL PART OF THE CONVENTION, SIGNED AT

WASHINGTON ON NOVEMBER 6, 2003

This is a Technical Explanation of the Protocol signed at Washington on January 24, 2013, and the related Exchange of Notes 

(hereinafter the ‘‘Protocol’’ and ‘‘Exchange of Notes’’ respectively), 

amending the Convention between the Government of the United 

States of America and the Government of Japan for the avoidance 

of double taxation and the prevention of fiscal evasion with respect 

to taxes on income, signed at Washington on November 6, 2003 

(hereinafter the ‘‘existing Convention’’), the Protocol, which forms 

an integral part of the existing Convention, signed at Washington 

on November 6, 2003 (hereinafter the ‘‘Protocol of 2003’’), and the 

agreement effectuated by an Exchange of Notes on November 6, 

2003 (hereinafter the ‘‘Notes of 2003). The existing Convention, as 

amended by the Protocol of 2003 and the Protocol, is referred to as 

‘‘the Convention.’’ 

Negotiations took into account the U.S. Department of the Treasury’s current tax treaty policy and the Treasury Department’s 

Model Income Tax Convention, published on November 15, 2006 

(the ‘‘U.S. Model’’). Negotiations also took into account the Model 

Tax Convention on Income and on Capital, published by the 

Organisation for Economic Cooperation and Development (the 

‘‘OECD Model’’), and recent tax treaties concluded by both countries. 

This Technical Explanation is an official guide to the Protocol 

and Exchange of Notes. It explains policies behind particular provisions, as well as understandings reached during the negotiations 

with respect to the interpretation and application of the Protocol 

and the Exchange of Notes. 

References to the existing Convention are intended to put various 

provisions of the Protocol into context. The Technical Explanation 

does not, however, provide a complete comparison between the provisions of the existing Convention and the amendments made by 

the Protocol and Exchange of Notes. The Technical Explanation is 

not intended to provide a complete guide to the existing Convention 

as amended by the Protocol and Exchange of Notes. To the extent 

that the existing Convention has not been amended by the Protocol 

and Exchange of Notes, the technical explanation of the existing 

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nation. References in this Technical Explanation to ‘‘he’’ or ‘‘his’’ 

should be read to mean ‘‘he or she’’ or ‘‘his or her.’’ References to 

the ‘‘Code’’ are to the Internal Revenue Code of 1986, as amended.2 

ARTICLE I

Article I of the Protocol revises paragraph 5 of Article 1 of the 

existing Convention by deleting references to Article 20 of the existing Convention, which has been deleted by Article VII of the Protocol. 

ARTICLE II

Article II of the Protocol replaces paragraph 4 of Article 4 of the 

existing Convention. Revised paragraph 4 provides that if by reason of paragraph 1, a person other than an individual is a resident 

of both Contracting States, such dual resident may not claim any 

benefit accorded to residents of a Contracting State by the Convention. The person may, however, claim any benefits that are not limited to residents, such as those provided by paragraph 1 of Article 

24. Thus, for example, pursuant to Article 24, a State cannot impose discriminatory taxation on a dual resident company.Regardless of the outcome under this paragraph, a dual resident company also may be treated as a resident of a Contracting 

State for purposes other than that of obtaining benefits under the 

Convention. For example, if a dual resident company pays a dividend to a resident of Japan, the U.S. paying agent would withhold 

on that dividend at the appropriate treaty rate (assuming the 

payee is otherwise entitled to treaty benefits) because reduced 

withholding is a benefit enjoyed by the resident of Japan, not by 

the dual resident company. The dual resident company that paid 

the dividend would, for this purpose, be treated as a resident of the 

United States under the Convention. In addition, information relating to dual resident companies can be exchanged under the Convention because, by its terms, Article 26 is not limited to residents 

of the Contracting States. 

ARTICLE III

Article III of the Protocol amends Article 10 of the existing Convention. Article 10 sets forth rules for taxation of cross-border dividend payments. 

Paragraph 1 

Paragraph 1 makes two amendments to subparagraph 3(a) of Article 10 of the existing Convention, which sets forth the ownership 

and holding period requirements that companies must satisfy in 

order to qualify for an exemption from withholding on certain dividends. Pursuant to the existing Convention, in order to qualify for 

the exemption from dividend withholding, the company receiving 

the dividend is required to own, directly or indirectly through one 

or more residents of either Contracting State, more than 50 percent 

of the voting stock of the company paying the dividends for the period of twelve months ending on the date on which entitlement to 

the dividend is determined (additional requirements also apply, 

such as beneficial ownership and qualification of certain limitation 


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on benefits provisions). Paragraph 1 replaces ‘‘more than 50 percent’’ with ‘‘at least 50 percent.’’ Accordingly, a company receiving 

a dividend and owning directly or indirectly through residents of either Contracting State, 50 percent or more of the company paying 

the dividend would become eligible for the exemption from withholding at source, assuming that all other requirements have been 

satisfied.In addition to modifying the required ownership threshold 

for entitlement to the exemption from dividend withholding, paragraph 1 of Article III also shortens the twelve-month holding period 

requirement to six months. 

Paragraph 2 

Paragraph 2 of Article III amends paragraph 9 of Article 10 of 

the existing Convention. The amendments delete references to 

paragraph 2 of Article 13 of the existing Convention to conform to 

changes to that Article made in Article V of the Protocol. 

ARTICLE IV

Article IV of the Protocol replaces Article 11 of the existing Convention. Article 11 sets forth rules for taxation of cross-border interest payments. 

Paragraph 1 of New Article 11 

Paragraph 1 of new Article 11 generally grants to the residence 

State the exclusive right to tax interest beneficially owned by its 

residents and arising in the other Contracting State. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined under the domestic law of the source 

State. The beneficial owner of the interest for purposes of Article 

11 is the person to which the income is attributable under the laws 

of the source State. Thus, if interest arising in a Contracting State 

is received by a nominee or agent that is a resident of the other 

State on behalf of a person that is not a resident of that other 

State, the interest is not entitled to the benefits of Article 11. However, interest received by a nominee on behalf of a resident of that 

other State would be entitled to benefits. These limitations are confirmed by paragraph 9 of the OECD Commentary to Article 11. 

Special rules apply to interest derived through fiscally transparent entities for purposes of determining the beneficial owner of 

the interest. In such cases, residence State principles shall be used 

to determine who derives the interest, to assure that the interest 

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. 

For example, assume that FCo, a company that is a resident of 

Japan, owns a 50 percent interest in FP, a partnership that is organized in Japan. FP receives interest arising in the United States. 

Japan views FP as fiscally transparent under its domestic law, and 

taxes FCo currently on its distributive share of the income of FP 

and determines the character and source of the income received 

through FP in the hands of FCo as if such income were realized 

directly by FCo. In this case, FCo is treated as deriving 50 percent 

of the interest received by FP that arises in the United States 

under paragraph 6 of Article 4 of the existing Convention. The 


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same result would be reached even if the tax laws of the United 

States would treat FP differently (e.g., if FP were not treated as 

fiscally transparent in the United States), or if FP were organized 

in a third state, as long as FP were still treated as fiscally transparent under the laws of Japan. 

While residence State principles control who is treated as deriving the interest, source State principles of beneficial ownership 

apply to determine whether the person who derives the interest, or 

another resident of the other Contracting State, is the beneficial 

owner of the interest. If the person who derives the interest under 

paragraph 6 of Article 4 of the existing Convention would not be 

treated as a nominee, agent, custodian, conduit, etc. under the 

source State’s principles for determining beneficial ownership, that 

person will be treated as the beneficial owner of the interest for 

purposes of the Convention. In the example above, FCo is required 

to satisfy the beneficial ownership principles of the United States 

with respect to the interest it derives. If under the beneficial ownership principles of the United States, FCo is found not to be the 

beneficial owner of the interest, FCo will not be entitled to the benefits of Article 11 with respect to such interest. If FCo is found to 

be a nominee, agent, custodian, or conduit for a person who is a 

resident of the other Contracting State, that person may be entitled 

to benefits with respect to the interest. 

Paragraph 2 of New Article 11 

Paragraph 2 of new Article 11 provides anti-abuse exceptions to 

the source-country exemption in paragraph 1 for two classes of interest payments. 

The first class of interest dealt with in subparagraph 2(a) is socalled ‘‘contingent interest.’’ Such interest is defined in subparagraph 2(a) as any interest arising in a Contracting State 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 

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, or any other interest similar to such interest arising in a Contracting State. Any such interest may be 

taxed in that Contracting State according to the laws of that State. 

If the beneficial owner is a resident of the other Contracting State, 

however, the gross amount of the interest may be taxed at a rate 

not exceeding 10 percent. With respect to interest arising in the 

United States, subparagraph 2(a) refers to contingent interest of a 

type that does not qualify as portfolio interest under U.S. domestic 

law as defined in Code section 871(h)(4). The exceptions of section 

871(h)(4)(c) will be applicable. 

The second class of interest is dealt with in subparagraph 2(b). 

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 


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tax avoidance created by differences in the timing of taxable and 

economic income produced by these interests. 

Subparagraph 2(b) of new Article 11 is analogous to subparagraph 2(c) of the U.S. Model, although the provision in new Article 

11 is drafted to apply bilaterally. Thus, for example, paragraph 2(b) 

of new Article 11 does not refer to the long-term Federal rate used 

to determine the amount of an excess inclusion, but rather to ‘‘the 

return on comparable debt instruments as specified by the domestic law of that Contracting State.’’ Nevertheless, for U.S. tax purposes, the withholding tax imposed ‘‘to the extent that the amount 

of interest paid exceeds the return on comparable debt instruments 

as specified by the domestic law of that Contracting State’’ is the 

withholding tax that would be imposed upon an excess inclusion 

with respect to a residual interest in a REMIC under section 

860G(b). 

Paragraph 3 of New Article 11 

Paragraph 3 of new Article 11 provides a source rule that is identical to the interest source rule in paragraph 7 of the existing Convention. Interest generally is considered to arise in a Contracting 

State when paid by a resident of that Contracting State. Special 

rules are provided where the interest is borne by a permanent establishment of the person paying the interest. In such a case, if the 

permanent establishment is situated in a Contracting State, then 

the interest shall be deemed to arise in that Contracting State; and 

if the permanent establishment is situated in a state other than 

one of the Contracting States, then the interest shall not be 

deemed to arise in either Contracting State. While interest borne 

by a permanent establishment that is situated in a state other 

than one of the Contracting States thus will not be eligible for the 

benefits of the Convention, it may be eligible for the benefits of the 

tax treaty, if any, between the state in which the permanent establishment is situated and the Contracting State of which the beneficial owner of the interest is a resident. 

For purposes of paragraph 3 of new Article 11, interest is considered to be borne by a permanent establishment if it is allocable to 

the taxable income of that permanent establishment. If the actual 

amount of interest on the books of a U.S. branch of a resident of 

Japan exceeds the amount of interest allocated to the branch under 

Treas. Reg. section 1.882-5, the amount of such excess will not be 

considered U.S. source interest for purposes of this Article. 

Paragraph 4 of New Article 11 

Paragraph 4 of new Article 11 provides a definition of the term 

‘‘interest’’ for purposes of the Article that is identical to that provided in paragraph 5 of Article 11 of the existing Convention. The 

term ‘‘interest’’ as used in Article 11 is defined in paragraph 4 to 

include, inter alia, income from debt claims of every kind, whether 

or not secured by a mortgage and whether or not carrying a right 

to participate in the debtor’s profits. The term does not, however, 

include amounts that are treated as dividends under Article 10. 

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, 


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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 OID 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 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 nonperiodic payment.’’ 

Paragraph 5 of New Article 11 

Paragraph 5 of new Article 11 is identical in substance to paragraph 6 of Article 11 of the existing Convention. Paragraph 5 of 

new Article 11 provides an exception to paragraphs 1 and 2 of new 

Article 11 where the beneficial owner of the interest carries on 

business through a permanent establishment in the Contracting 

State in which the interest arises and the interest is attributable 

to that permanent establishment. In such cases, the applicable provisions of Article 7 of the existing Convention will apply. 

The provisions of paragraph 4 of the Protocol of 2003 apply to income described in this paragraph. For example, interest income 

that is attributable to a permanent establishment and that accrues 

during the existence of the permanent establishment, but is received after the permanent establishment no longer exists, remains 

taxable under the provisions of Article 7 of the existing Convention, 

and not under this Article. 

Paragraph 6 of New Article 11 

Paragraph 6 of new Article 11 is identical to paragraph 8 of Article 11 of the existing Convention. Paragraph 6 of new Article 11 

provides that, in cases involving special relationships between persons, Article 11 applies only to that portion of the total interest 

payments between those persons that would have been made absent such special relationships (i.e., an arm’s-length interest payment). The term ‘‘special relationship’’ is not defined in the Convention. In applying this paragraph, the United States considers the 

term to include the relationships described in Article 9 of the existing Convention, which in turn correspond to the definition of ‘‘control’’ for purposes of section 482 of the Code. This is consistent with 

paragraph 33 of the Commentary to Article 11 of the OECD Model. 

Paragraph 6 of new Article 11 also provides that any amount of 

interest paid in excess of the amount that would be been paid absent a special relationship may be taxable in the Contracting State 

in which it arises at a rate not to exceed 5 percent. This rule is 


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similar to rules provided in paragraph 4 of Article 12 and paragraph 3 of Article 21 of the existing Convention, which provide that 

any amount paid in excess of the amount that would have been 

paid absent a special relationship may be taxable in the Contracting State in which they arise at a rate not to exceed 5 percent. 

The Convention’s treatment of such excess amounts is consistent 

in most circumstances with the results under the U.S. Model and 

U.S. domestic law and practice. Absent the specific rule in the Convention, in most cases the United States would treat such excess 

amounts as a dividend or as a contribution to capital, depending 

on the relationship between the parties, and tax such amounts accordingly. Under the Convention, a maximum 5 percent withholding tax rate generally applies to dividends where the beneficial 

owner is a company owning directly or indirectly at least 10 percent of the voting stock of the company paying the dividends. In 

Japan, the general practice in the context of investment income 

such as interest, dividends, or other income is to impose withholding taxes on the amount in excess of the arm’s-length amount 

at the domestic rate. Thus, for example, if a Japanese company 

makes an interest payment to its non-Japanese parent company, 

and Japan determines that the amount of the interest payment exceeded an arm’s-length amount, Japan will deny a deduction for 

the excess amount and treat the excess amount as an interest payment subject to the appropriate withholding rate applicable to interest paid by Japanese companies under its domestic law, which 

is generally 20 percent. Under the Convention, such excess 

amounts instead are subject to a maximum 5 percent rate of withholding taxes. 

Paragraph 6 of new Article 11 does not address cases where, 

owing to a special relationship between the payer and the beneficial owner, or between both of them and some other person, the 

amount of the interest is less than an arm’s-length amount. In 

those cases a transaction may be characterized to reflect its substance and interest may be imputed consistent with the definition 

of interest in paragraph 4 of new Article 11. Consistent with Article 9 of the existing Convention, the United States would apply section 482 or 7872 of the Code to determine the amount of imputed 

interest in those cases. 

Paragraph 7 of New Article 11 

Paragraph 7 of new Article 11 is identical to paragraph 11 of Article 11 of the existing Convention. Paragraph 7 of new Article 11 

provides that a resident of a Contracting State shall not be considered the beneficial owner of interest in certain ‘‘back-to-back’’ loan 

arrangements. The benefits of Article 11 therefore are not available 

with respect to such interest. This rule is similar to rules dealing 

with interest, royalties, and other income in paragraph 11 of Article 10, paragraph 5 of Article 12, and paragraph 4 of Article 21 of 

the existing Convention. These limited ‘‘anti-conduit’’ rules and 

their interaction with U.S. domestic law are discussed in the technical explanation of paragraph 11 of Article 10 of the existing Convention. 

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est in respect of a debt-claim if such debt-claim would not have 

been established unless a person that is not entitled to the same 

or more favorable treaty benefits and that is not a resident of either Contracting State held an equivalent debt-claim against the 

resident. The operation of this rule can be illustrated in the following examples: 

Example 1. A, a U.S. resident, holds a debt-claim against X, a 

Japanese company, that entitles A to interest of 10x each year. B, 

a resident of a third country that does not have a tax treaty with 

Japan, owns a debt-claim against A that entitles B to interest of 

10x each year and otherwise has terms that are equivalent to the 

terms of the debt-claim held by A. A would not have established 

its debt-claim against X if B did not hold a debt-claim against A. 

X pays interest of 10x to A, which pays interest of 10x to B. Under 

paragraph 11, A will not be considered the beneficial owner of the 

interest from X, and therefore is not entitled to treaty benefits with 

respect to the interest from X. 

Example 2. The facts are the same as the facts of Example 1, except that, instead of owning a debt-claim against A, B holds preferred stock in A that entitles B to 10x each year to the extent of 

A’s earnings in that year. A pays dividends of 10x to B. Paragraph 

11 does not apply to deny treaty benefits to A with respect to the 

interest from X. 

No inference is intended as to the result of Example 2 in cases 

of interest arising in the United States under U.S. domestic antiabuse rules (e.g., the anti-conduit rules and other anti-abuse rules 

referred to in the Technical Explanation of paragraph 11 of Article 

10 of the existing Convention). 

Relation to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of interest, the saving clause of subparagraph 4(a) of Article 

1 of the existing Convention permits the United States to tax its 

residents and citizens, subject to the special foreign tax credit rules 

of paragraph 3 of Article 23 of the existing Convention, as if the 

Convention had not come into force. 

The benefits of this Article are also subject to the provisions of 

Article 22 of the existing Convention. Thus, if a resident of Japan 

is the beneficial owner of interest paid by a U.S. corporation, the 

resident must qualify for treaty benefits under at least one of the 

tests of Article 22 in order to receive the benefits of this Article. 

ARTICLE V

Article V of the Protocol makes amendments to Article 13 of the 

existing Convention. 

Paragraph 1 

Paragraph 1 of Article V replaces paragraph 2 of Article 13 of the 

existing Convention with a new paragraph 2. This paragraph defines the term ‘‘real property situated in the other Contracting 

State.’’ Subparagraph (a) of new paragraph 2 provides that the 

term includes real property referred to in Article 6 (i.e., an interest 

in the real property itself). Subparagraph (b) provides that when 

‘‘the other Contracting State’’ referenced in paragraph 1 of Article 


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13 of the existing Convention is Japan, the term includes shares 

or interests in a company, partnership or trust deriving the value 

of its property directly or indirectly principally from real property 

in Article 6 and situated in Japan. Subparagraph (c) provides that 

when ‘‘the other Contracting State’’ referenced in paragraph 1 of 

Article 13 of the existing Convention is the United States, the term 

includes a ‘‘United States real property interest.’’ 

Under section 897(c) of the Code, the term ‘‘United States real 

property interest’’ includes shares in a U.S. corporation that owns 

sufficient U.S. real property interests to satisfy an asset-ratio test 

on certain testing dates. The term also includes certain foreign corporations that have elected to be treated as U.S. corporations for 

this purpose. See section 897(i) of the Code. In addition, any distribution made by a U.S. real estate investment trust or certain 

U.S. regulated investment companies is taxable under paragraph 1 

of Article 13 of the existing Convention (rather than under Article 

10 (Dividends) of the existing Convention) to the extent that it is 

attributable to gains derived from the alienation of U.S. real property interests. See section 897(h) of the Code. 

Paragraph 2 

Paragraph 2 of Article V replaces paragraph 4 of Article 13 of the 

existing Convention. The only change is to delete references to 

paragraph 2 of Article 13 of the existing Convention that are no 

longer necessary.Article VI 

Article VI of the Protocol restates Article 15 of the existing Convention. The restatement was necessary in order to provide an opportunity to correct an error in the Japanese language text of the 

existing Convention. 

Paragraph 3 of the Exchange of Notes contains two understandings between the Contracting States regarding the interpretation of Article 15 of the Convention. First, it is understood that if 

a resident of a Contracting State does not serve as a member of 

a board of directors of a company, Article 15 of the Convention 

shall not apply to his remuneration, regardless of his title or position. Second, it is understood that where a member of the board of 

directors of a company also has other functions (for example, as ordinary employee, advisory, or consultant) with the company, Article 

15 of the Convention does not apply to remuneration paid to such 

person on account of such other functions. 

ARTICLE VII

Article VII of the Protocol deletes Article 20 of the existing Convention, which provides certain benefits for residents of one Contracting State who are temporarily present in the other Contracting State for the purpose of teaching or conducting research. 

This change is intended to bring the existing Convention into closer 

conformity with the current tax treaty policies of both the United 

States and Japan. Paragraph 5 of Article XV of the Protocol ensures that individuals who are receiving benefits under Article 20 

at the time the Protocol enters into force will continue to be entitled to such benefits until such time as they would have ceased to 

be entitled to the benefits if the Protocol had not entered into force. 


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ARTICLE VIII

Article VIII of the Protocol modifies subparagraph 5(b)(i) of Article 22 of the Convention. This subparagraph defines the term ‘‘recognized stock exchange’’ in the case of Japan for purposes of applying Article 22. The amendment in Article VIII replaces the reference to ‘‘the Securities and Exchange Law’’ with the legislation’s 

current name, ‘‘the Financial Instruments and Exchange Law.’’ 

ARTICLE IX

Article IX of the Protocol replaces paragraph 1 of Article 23 of 

the existing Convention in order to bring the Convention into conformity with Japan’s current statutory rules for providing relief 

from double taxation.New Subparagraph 1(a) of Article 23 

Japan agrees, in new subparagraph 1(a) of Article 23, to allow 

to its residents, subject to its relevant domestic laws, a credit 

against Japanese tax for U.S. taxes paid in accordance with the 

provisions of the Convention. For this purpose, the U.S. taxes covered by new subparagraph 1(b) of Article 23 and paragraph 2 of Article 2 of the existing Convention are within the definition of 

‘‘United States tax.’’ The amount of credit, however, shall not exceed that part of the Japanese tax which is appropriate to that income. 

The last sentence of new subparagraph 1(a) provides a resourcing rule for income covered by this subparagraph. This provision is intended to ensure that a Japanese resident can obtain a 

Japanese foreign tax credit for U.S. taxes paid when the Convention assigns to the United States primary taxing rights over an 

item of income. The last sentence provides that, if the Convention 

allows the United States to tax an item of income beneficially 

owned by a resident of Japan, that income will be deemed to arise 

from sources in the United States for Japanese foreign tax credit 

purposes. However, paragraph 3 of Article 23 of the existing Convention provides special rules regarding relief of double taxation 

where a resident of Japan is a U.S. citizen, a former U.S. citizen, 

or a former U.S. long-term resident and is subject to tax in the 

United States solely by reason of the provisions of paragraph 4 of 

Article 1 of the existing Convention. 

New Subparagraph 1(b) of Article 23 

Under new subparagraph 1(b) of Article 23, Japan agrees to exclude from the basis upon which the Japanese tax is imposed certain dividends paid by a company which is a resident of the United 

States to a company resident in Japan. This benefit is subject to 

the provisions, other than the provisions with regard to share ownership requirements, of Japan’s domestic law regarding the exclusion of dividends from the basis upon which the Japanese tax is 

imposed. In order for subparagraph 1(b) to apply to exclude a dividend from Japanese tax, the Japanese company receiving the dividend must have owned at least 10 percent of the total shares 

issued by the U.S. company paying the dividend for a period of at 

least six months immediately before the day when the obligation 

to pay the dividends is confirmed. 


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ARTICLE X

Article X of the Protocol makes non-substantive amendments to 

Article 24 of the existing Convention in order to conform to changes 

made to Article 11 dealing with the taxation of interest. 

Paragraph 1 

Paragraph 1 of Article X amends paragraph 3 of Article 24 of the 

existing Convention by deleting the words ‘‘paragraph 8 of Article 

11’’ and replacing them with the words ‘‘paragraph 6 of Article 11’’. 

Paragraph 2 

Paragraph 2 of Article X amends paragraph 5 of Article 24 of the 

existing Convention by deleting the words ‘‘or paragraph 10 of Article 11’’. 

ARTICLE XI

Article XI of the Protocol adds new paragraphs 5 through 7 to 

Article 25 of the existing Convention, which deals with the mutual 

agreement procedure. In particular, Article XI of the Protocol incorporates into Article 25 rules that provide for mandatory binding arbitration to resolve certain cases that the competent authorities of 

the Contracting States have been unable to resolve after negotiating for a reasonable amount of time. 

The mandatory binding arbitration provision is an extension of 

(as opposed to an alternative to) the interaction between the competent authorities as provided in the mutual agreement procedure. 

Accordingly, only cases that have first been negotiated by the competent authorities pursuant to Article 25 shall be eligible for arbitration. Any case for which the competent authorities have undertaken negotiation pursuant to either paragraph 1 or paragraph 3 

of Article 25 shall be eligible for arbitration, subject to the provisions of subparagraph 6(c) of Article 25. 

New Paragraph 5 of Article 25 

New paragraph 5 of Article 25 provides that a case shall be resolved through mandatory binding arbitration when (i) a person 

has presented a case to the appropriate competent authority under 

paragraph 1 of Article 24 on the basis that the actions of one or 

both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of the Convention, (ii) 

the competent authorities have been unable to reach an agreement 

to resolve the case, and (iii) the conditions specified in this paragraph and in new paragraphs 6 and 7 are satisfied. 

New subparagraph 14(a) of the Protocol of 2003 as amended by 

Article XIV of the Protocol provides that for purposes of applying 

new paragraph 5 of Article 25, taxation shall be considered to have 

resulted from ‘‘the actions of one or both of the Contracting States’’ 

as soon as tax has been paid, assessed or otherwise determined (for 

example, a notification of correction, determination or deficiency of 

a tax liability has been issued), or in cases where the taxpayer is 

officially notified by the tax authorities that they intend to tax him 

on a certain element of income (for example, a notice of proposed 

adjustment has been issued). 


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Paragraph 4 of the Exchange of Notes clarifies that the fact that 

tax collection procedures may have been suspended shall not affect 

a determination that taxation not in accordance with the provisions 

of the Convention has resulted from the actions of one or both Contracting States. 

New subparagraphs 5(a) and 5(b) of Article 25 set forth two additional conditions that must be satisfied before a case may be resolved through arbitration. Subparagraph 5(a) provides that the 

presenter of the case to a competent authority must submit a written request to that competent authority for a resolution of the case 

through arbitration. Subparagraph 5(b) requires that all concerned 

persons (as defined in new paragraph 7(a) of Article 25) and their 

authorized representatives or agents agree in writing not to disclose to any other person, except other concerned persons, any information received during the course of the arbitration proceeding 

from either Contracting State or from the arbitration panel, other 

than the determination of the panel. New subparagraphs 7(c) and 

7(d) of Article 25 (discussed below) provide that the requirements 

of subparagraphs 5(a) and 5(b) of Article 25 must be satisfied prior 

to the beginning of the arbitration proceeding. 

A confidentiality agreement may be executed by any concerned 

person that has the legal authority to bind any other concerned 

person on the matter. For example, a parent corporation with the 

legal authority to bind its subsidiary with respect to confidentiality 

may execute a comprehensive confidentiality agreement on its own 

behalf and that of its subsidiary. 

New Paragraph 6 of Article 25 

New paragraph 6 of Article 25 sets forth parameters according 

to which a case shall not be submitted to arbitration. Under subparagraph 6(a), an unresolved case shall not be submitted to arbitration if a decision on such case has already been rendered by a 

court or administrative tribunal of either Contracting State. Under 

subparagraph 6(b), an unresolved case shall not be submitted to arbitration if the competent authorities have mutually agreed before 

the date on which arbitration proceedings would otherwise have 

begun that the case is not suitable for determination by arbitration. In such cases, the competent authorities must notify the presenter of the case of such mutual agreement no later than two 

years after the case’s commencement date (as defined in new subparagraph 7(b), described below). Subparagraph 6(c) provides that 

arbitration shall not be available for cases that are before the competent authorities only by virtue of the final sentence of paragraph 

3 of Article 25, which provides that the competent authorities ‘‘may 

also consult together for the elimination of double taxation in cases 

not provided for in the Convention.’’ 

New Paragraph 7 of Article 25 

New paragraph 7 of Article 25 sets forth additional rules and 

definitions to be used in applying the arbitration provisions. Subparagraph 7(a) defines the term ‘‘concerned person’’ as the person 

that brought the case to competent authority for consideration 

under Article 25 and all other persons, if any, whose tax liability 

to either Contracting State may be directly affected by a mutual 


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agreement arising from that consideration. For example, a concerned person would include a U.S. corporation that brings a transfer pricing case with respect to a transaction entered into with its 

subsidiary in Japan for resolution to the U.S. competent authority, 

as well as the subsidiary, which may seek a correlative adjustment 

as a result of the resolution of the case. 

Subparagraph 7(b) defines the term ‘‘commencement date’’ as the 

earliest date on which the information necessary to undertake substantive consideration for a mutual agreement has been received by 

the competent authorities of both Contracting States. The competent authority of the United States will be considered to have received the information necessary to undertake substantive consideration for a mutual agreement on the date that it has received the 

information that must be submitted pursuant to Rev Proc. 2006-54, 

2006-2 C.B. 1035, § 4.05 (or any applicable successor procedures). 

The competent authority of Japan will be considered to have received the information necessary to undertake substantive consideration for a mutual agreement on the date it has received the information that must be submitted pursuant to its published procedures for requesting competent authority assistance (or any applicable successor procedures). 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. 

Subparagraph 7(c) provides that, other than for cases described 

in subparagraph 7(d), an arbitration proceeding shall begin on the 

later of two dates: (i) two years from the commencement date of the 

case (unless both competent authorities have previously agreed to 

a different date and have notified the presenter of the case of such 

agreement), and (ii) the earliest date upon which the requirements 

of subparagraphs 5(a) and 5(b) have been satisfied (i.e., the presenter of the case has submitted a written request for resolution 

of the case through arbitration, and all concerned persons and their 

authorized representatives or agents have entered into a confidentiality agreement and the agreements have been received by both 

competent authorities). Clause (i) of this subparagraph permits the 

competent authorities to mutually agree to a different commencement date. This could be the case, for instance, if the negotiation 

of a case between the competent authorities were nearing completion and could be expected to be resolved in an additional short period of time, and the competent authorities mutually agreed that, 

if given additional time, they could resolve the case, thus avoiding 

the need for an arbitration proceeding. As another example, if a 

large number of cases would otherwise have the same commencement date, clause (i) would allow the competent authorities to 

agree to different commencement dates (including accelerating a 

commencement date) to avoid having multiple arbitration proceedings take place at the same time. Clause (i) requires the competent authorities to notify the presenter of the case of any such 

agreements to a different commencement date. 

Subparagraph 7(d) governs the start date of arbitration with respect to a case that is the subject of a request for an advanced pricing arrangement, the terms of which the competent authorities 


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have not been able to agree. In such cases, an arbitration proceeding shall begin on the later of two dates: i) six months after 

an official notification has been issued by the tax authority of either Contracting State of a correction of, or an intent to adjust, the 

pricing of a transaction or transfer covered by a request for an advance pricing arrangement regarding a concerned person, unless 

the competent authorities of both Contracting States have agreed 

to a different date and notified the presenter of the case of such 

agreement; and (ii) the earliest date upon which the requirements 

of subparagraphs 5(a) and 5(b) are satisfied (i.e., the presenter of 

the case has submitted a written request for resolution of the case 

through arbitration, and all concerned persons and their authorized 

representatives or agents have entered into a confidentiality agreement and the agreements have been received by both competent 

authorities). However, subparagraph 7(d) specifies that in no event 

shall the arbitration proceeding begin any earlier than two years 

after the date on which the information necessary to undertake 

substantive consideration for a mutual agreement on the advance 

pricing arrangement has been received by the competent authorities of both Contracting States. 

Subparagraph 7(e) addresses implementation of the determination of the arbitration panel. As is the case with any resolution 

reached pursuant to the mutual agreement procedure, the presenter of the case is not required to accept the resolution. Subparagraph 7(e) provides that if the presenter of the case accepts the determination of the arbitration panel, such determination shall constitute a resolution by mutual agreement under Article 25 of the 

entire case and thus shall be binding on the Contracting States. If 

timely accepted by the presenter of the case, the determination of 

the arbitration panel shall be implemented even if such implementation otherwise would be barred by the statute of limitations or 

by some other procedural limitation. Subparagraph 7(e), however, 

does not prevent the application of domestic-law procedural limitations that give effect to the agreement (e.g., a domestic law requirement that the taxpayer file a return reflecting the agreement within one year of the date of the agreement). 

Subparagraph 7(f) provides that for purposes of an arbitration 

proceeding under new paragraphs 5, 6 and 7 of Article 25, the 

members of the arbitration panel and their staff shall be considered ‘‘persons or authorities’’ to whom information may be disclosed 

under Article 26 of the Convention. (See paragraph 2 of new Article 

26.) 

Subparagraph 7(g) sets forth the confidentiality obligations of the 

competent authorities regarding an arbitration proceeding. Subparagraph 7(g) provides that no information relating to an arbitration proceeding (including the arbitration panel’s determination) 

may be disclosed by the competent authorities, except as permitted 

by this Convention and the domestic laws of the Contracting 

States. In addition, all material prepared in the course of, or relating to, an arbitration proceeding shall be considered to be information exchanged between the Contracting States pursuant to Article 

26. 

Subparagraph 7(h) provides that the competent authorities shall 

ensure that members of the arbitration panel and their staff agree 


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in written statements not to disclose any information relating to an 

arbitration proceeding (including the arbitration panel’s determination), and to abide by and be subject to the confidentiality and nondisclosure provisions of Article 26 and the applicable domestic laws 

of the Contracting States. In the event those provisions conflict, the 

most restrictive condition shall apply. These statements from the 

members of the arbitration panel shall also include acceptance of 

their appointment to the arbitration panel. The final sentence of 

subparagraph 7(h) makes clear that notwithstanding the provisions 

of subparagraph 7(h), the members of the arbitration panel or their 

staff shall disclose the determination of the arbitration panel to the 

competent authorities of both Contracting States. 

Subparagraph 7(i) sets forth a non-exhaustive list of items related to the time periods and procedures related to conducting an 

arbitration proceeding that the competent authorities of the Contracting States must agree to in order to ensure the effective and 

timely implementation of the provisions of new paragraphs 5, 6 

and 7 of Article 25. Such agreement must be consistent with the 

provisions of the Convention, and shall take the form of published 

guidance before the date on which the first arbitration proceeding 

commences. Subparagraph 7(i) lists the following items for which 

the competent authorities shall agree on time frames and procedures: 

i) notifying the presenter of the case of any agreements pursuant to subparagraph 7(c)(i) or 7(d)(i) to modify the date on 

which an arbitration proceeding could begin; 

ii) the appropriate application of arbitration in the context of 

an advanced pricing arrangement, including rules concerning 

the date on which an arbitration proceeding shall begin for 

such cases; 

iii) obtaining the statements of each concerned person, authorized representative or agent, and member of the arbitration panel (including their staff) as required in subparagraphs 

5(b) and 7(h), in which each such person agrees not to disclose 

to any other person any information received during the course 

of the arbitration proceeding from the competent authority of 

either Contracting State or the arbitration panel, other than 

disclosure of the determination of such panel to the competent 

authorities of both Contracting States; 

iv) the appointment of the members of the arbitration panel; 

v) the submission of proposed resolutions, position papers, 

and reply submissions by the competent authorities to the arbitration panel; 

vi) the submission by the presenter of the case of a paper 

setting forth the presenter’s views and analysis of the case for 

consideration by the arbitration panel; 

vii) the delivery by the arbitration panel of its determination 

to the competent authorities; 

viii) the acceptance or rejection by the presenter of the case 

of the determination of the arbitration panel; and 

ix) the adoption by the arbitration panel of any additional 

procedures necessary for the conduct of its business. 

Subparagraph 7(i) authorizes the competent authorities to agree 

in writing to such other rules and procedures as may be necessary 


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for the effective and timely implementation of the provisions of new 

paragraphs 5, 6 and 7. Consistent with this authority, the competent authorities may also agree on rules necessary to implement 

the provisions of new paragraph 14 of the Protocol of 2003 as 

amended by Article XIV of the Protocol (discussed below).For the 

effective date for new paragraphs 5, 6, and 7 of Article 25, see 

paragraph 3 of Article XV of the Protocol (discussed below). 

ARTICLE XII

Article XII of the Protocol replaces Article 26 of the existing Convention. This Article provides for the exchange of information between the competent authorities of the Contracting States. While 

mutual agreement procedures are addressed in Article 25, exchanges of information for purposes of the mutual agreement procedures are governed by new Article 26. 

Paragraph 1 of New Article 26 

The obligation to obtain and provide information to the other 

Contracting State is set out in paragraph 1. The information to be 

exchanged is that which is foreseeably relevant for carrying out the 

provisions of the Convention or the domestic laws of either Contracting State concerning taxes of every kind applied at the national level. This language incorporates the standard of the OECD 

Model. The Contracting States intend for the phrase ‘‘is foreseeably 

relevant’’ to be interpreted to permit the exchange of information 

that ‘‘may be relevant’’ for purposes of section 7602 of the Code, 

which authorizes the IRS to examine ‘‘any books, papers, records, 

or other data which may be relevant or material.’’ (Emphasis 

added.). In United States v. Arthur Young & Co., 465 U.S. 805, 814 

(1984), the Supreme Court stated that the language ‘‘may be’’ reflects Congress’s express intention to allow the IRS to obtain ‘‘items 

of even potential relevance to an ongoing investigation, without reference to its admissibility.’’ (Emphasis in original.) However, the 

language ‘‘may be’’ would not support a request in which a Contracting State (the requesting State) simply asked for information 

regarding all bank accounts maintained by residents of the requesting State in the other Contracting State (the requested State). 

Thus, the language of paragraph 1 is intended to provide for exchange of information in tax matters to the widest extent possible, 

while clarifying that Contracting States are not at liberty to engage 

in ‘‘fishing expeditions’’ or otherwise to request information that is 

unlikely to be relevant to the tax affairs of a given taxpayer. 

Consistent with the OECD Model, a request for information does 

not constitute a ‘‘fishing expedition’’ solely because it does not provide the name or address (or both) of the taxpayer under examination or investigation. In cases where the requesting State does not 

provide the name or address (or both) of the taxpayer under examination or investigation, the requesting State must provide other 

information sufficient to identify the taxpayer. Similarly, paragraph 1 does not necessarily require the request to include the 

name or address of the person believed to be in possession of the 

information. 

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wise) or several taxpayers (whether identified by name or otherwise). Where a Contracting State undertakes an investigation into 

an ascertainable group or category of persons in accordance with 

its laws, any request related to the investigation will typically 

serve the objective of carrying out the domestic tax laws of the requesting State and thus will comply with the requirements of paragraph 1, provided it meets the standard of ‘‘foreseeable relevance.’’ 

In such cases, the requesting State should provide, supported by a 

clear factual basis, a detailed description of the group or category 

of persons and of the specific facts and circumstances that have led 

to the request, as well as an explanation of the applicable law and 

why there is reason to believe that the taxpayers in the group or 

category of persons for whom information is requested have been 

non-compliant with that law supported by a clear factual basis. The 

requesting State should further show that the requested information would assist in determining compliance by the taxpayers in 

the group or category of persons. 

Exchange of information with respect to each State’s domestic 

law is authorized to the extent that taxation under domestic law 

is not contrary to the Convention. Thus, for example, information 

may be exchanged even if the transaction to which the information 

relates is a purely domestic transaction in the requesting State 

and, therefore, the exchange is not made to carry out the provisions 

of the Convention. An example of such a case is provided in the 

subparagraph 8(b) of the OECD Commentary to Article 26: A company resident in one Contracting State and a company resident in 

the other Contracting State transact business between themselves 

through a third-country resident company. Neither Contracting 

State has a treaty with the third state. To enforce their internal 

laws with respect to transactions of their residents with the thirdcountry company (because there is no relevant treaty in force), the 

Contracting States may exchange information regarding the prices 

that their residents paid in their transactions with the third-country resident. 

The information that may be exchanged relates to information as 

is foreseeably relevant for carrying out the provisions of the Convention or the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, 

the taxes covered by the Convention. Thus, the competent authorities may request and provide information for cases under examination or criminal investigation, in collection, on appeals, or under 

prosecution. 

The taxes covered by the Convention for purposes of this Article 

constitute a broader category of taxes than those referred to in Article 2 of the Convention. Exchange of information is authorized 

with respect to taxes of every kind imposed by a Contracting State 

at the national level. Accordingly, information may be exchanged 

with respect to U.S. estate and gift taxes, excise taxes or, with respect to Japan, nationally imposed value added taxes. 

Information exchange is not restricted by paragraph 1 of Article 

1. Accordingly, information may be requested and provided under 

this Article with respect to persons who are not residents of either 

Contracting State. For example, if a third-country resident has a 

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ment engages in transactions with a U.S. enterprise, the United 

States could request information with respect to that permanent 

establishment, even though the third-country resident is not a resident of either Contracting State. Similarly, if a third-country resident maintains a bank account in Japan, and the Internal Revenue 

Service has reason to believe that funds in that account should 

have been reported for U.S. tax purposes but have not been so reported, the Internal Revenue Service can request information from 

Japan with respect to that person’s account, even though that person is not the taxpayer under examination. 

Although the term ‘‘United States’’ does not encompass U.S. possessions or territories for most purposes of the Convention, section 

7651 of the Code authorizes the Internal Revenue Service to utilize 

the provisions of the Code to obtain information from the U.S. possessions or territories pursuant to a proper request made under Article 26. If necessary to obtain requested information, the Internal 

Revenue Service could issue and enforce an administrative summons to the taxpayer, a tax authority (or a government agency in 

a U.S. possession or territory), or a third party located in a U.S. 

possession or territory. 

The final sentence of paragraph 1 provides that the requesting 

State may specify the form in which information is to be provided 

(e.g., authenticated copies of original documents (including books, 

papers, statements, records, accounts, and writings)). The intention 

is to ensure that the information may be introduced as evidence in 

the judicial proceedings of the requesting State. The requested 

State shall, if possible, provide the information in the form requested to the same extent that it could obtain information in that 

form under its own laws and administrative practices with respect 

to its own taxes. 

Paragraph 2 of New Article 26 

Paragraph 2 provides assurances that any information exchanged will be treated as secret, subject to the same disclosure 

constraints as information obtained under the laws of the requesting State. The confidentiality rules cover competent authority letters, including the letter requesting information. At the same time, 

it is understood that the requested State can disclose the minimum 

information contained in a competent authority letter (but not the 

letter itself) necessary for the requested State to be able to obtain 

or provide the requested information to the requesting State, without frustrating the efforts of the requesting State. If, however, 

court proceedings or the like under the domestic laws of the requested State necessitate the disclosure of the competent authority 

letter itself, the competent authority of the requested State may 

disclose such a letter unless the requesting State otherwise specifies. 

Information received may be disclosed only to persons or authorities, including courts and administrative bodies, involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, 

the taxes referred to in paragraph 1 or the oversight of such functions. The information must be used by these persons in connection 

with the specified functions. Information may also be disclosed to 


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legislative bodies, such as the tax-writing committees of the U.S. 

Congress and the U.S. Government Accountability Office, engaged 

in the oversight of the preceding activities. Information received by 

these bodies must be for use in the performance of their role in 

overseeing the administration of U.S. tax laws. Information received may be disclosed in public court proceedings or in judicial 

decisions. 

In situations in which the requested State determines that the 

requesting State does not comply with its duties regarding the confidentiality of the information exchanged under this Article, the requested State may suspend assistance under this Article until such 

time as proper assurance is given by the requesting State that 

those duties will indeed be respected. If necessary, the competent 

authorities may enter into specific arrangements or memoranda of 

understanding regarding the confidentiality of the information exchanged under this Article. 

Paragraph 3 of New Article 26 

Paragraph 3 provides that the obligations undertaken in paragraphs 1 and 2 to exchange information do not require a Contracting State to carry out administrative measures that are at 

variance with the laws or administrative practice of either State. 

Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of either State, 

or to disclose trade secrets or other information, the disclosure of 

which would be contrary to public policy. Finally, paragraph 3 

clarifies that no obligation is imposed to obtain or provide information relating to certain confidential communications between a client and an attorney, solicitor, or other admitted legal representative. 

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 requesting State should govern a request for information. Thus, the requested State 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 an information request from 

the other Contracting State, the requested State is not precluded 

from providing such information, and may, at its discretion, do so 

subject to the limitations of its internal law. 

Paragraph 4 of New Article 26 

Paragraph 4 provides that when information is requested by a 

Contracting State in accordance with this Article, the requested 

State is obligated to obtain the requested information as if the tax 

in question were the tax of the requested State, even if that State 

has no direct tax interest in the case to which the request relates. 

In the absence of such a paragraph, some taxpayers have argued 

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ing information from a bank or fiduciary that the Contracting State 

does not need for its own tax purposes. This paragraph clarifies 

that paragraph 3 does not impose such a restriction and that a 

Contracting State is not limited to providing only the information 

that it already has in its own files. 

Paragraph 5 of New Article 26 

Paragraph 5 provides that a Contracting State may not decline 

to provide information because that information is held by banks, 

other financial institutions, nominees or persons acting in an agency or fiduciary capacity or because the information relates to ownership interests in a person. Thus, paragraph 5 would effectively 

prevent a Contracting State from relying on paragraph 3 to argue 

that its domestic bank secrecy laws (or similar legislation relating 

to disclosure of financial information by financial institutions or 

intermediaries) override its obligation to provide information under 

paragraph 1. This paragraph also requires the disclosure of information regarding the beneficial owner of an interest in a person, 

such as the identity of a beneficial owner of bearer shares. 

Subparagraphs 3(a) and (b) do not permit the requested State to 

decline a request where paragraph 4 or 5 applies. Paragraph 5 

would apply, for instance, in situations in which the requested 

State’s inability to obtain the information was specifically related 

to the fact that the requested information was believed to be held 

by a bank or other financial institution. Thus, the application of 

paragraph 5 includes situations in which the tax authorities’ information-gathering powers with respect to information held by banks 

and other financial institutions are subject to different requirements than those that are generally applicable with respect to information held by persons other than banks or other financial institutions. This would, for example, be the case where the tax authorities can only exercise their information-gathering powers with 

respect to information held by banks and other financial institutions in instances where specific information regarding the taxpayer under examination or investigation is available. This would 

also be the case where, for example, the use of information-gathering measures with respect to information held by banks and 

other financial institutions requires a higher probability that the 

information requested is held by the person believed to be in possession of the requested information than the degree of probability 

required for the use of information-gathering measures with respect to information believed to be held by persons other than 

banks or financial institutions. 

Paragraph 10 of the Exchange of Notes clarifies that new Article 

26 shall have effect from the date of entry into force of the Protocol 

without regard to the taxable year to which the matter relates, provided all of the conditions and requirements of the Article are satisfied. Thus, for example, the competent authority may seek information under new Article 26 with respect to a taxable year prior 

to the entry into force of the Protocol. 

ARTICLE XIII

Article XIII of the Protocol replaces Article 27 of the existing 

Convention with a new Article 27. New Article 27 provides rules 


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under which the United States and Japan will lend each other assistance in the collection of certain revenue claims, as defined in 

paragraph 1 of the new Article 27. 

Paragraph 1 of New Article 27 

Paragraph 1 provides that subject to the conditions set forth in 

new Article 27, the Contracting States shall lend assistance to each 

other in the collection of ‘‘revenue claims,’’ defined to be taxes (insofar as the taxation is not contrary to the Convention or any other 

agreement to which the United States and Japan are parties), together with interest, costs of collection, additions to such taxes, and 

civil or administrative penalties related to such taxes. Paragraph 

5 of the Exchange of Notes sets forth the understanding of the Contracting States that the obligation to lend assistance shall be satisfied in cases where the State from which assistance is requested 

(the requested State) had made reasonable efforts to lend assistance, but was unsuccessful in collecting the revenue claim on behalf of the State requesting assistance (the applicant State). 

Collection assistance is not limited by the provisions of paragraph 1 of Article 1 of the Convention. Accordingly, assistance may 

be requested and provided under new Article 27 regarding revenue 

claims in respect of persons who are not residents of either Contracting State, provided that all of the requirements of the Article 

are satisfied. For example, new Article 27 would permit the United 

States to request assistance from Japan regarding the collection of 

a finally determined revenue claim against an individual who is a 

resident of a third country, has assets in Japan, provided services 

in the United States, and filed a fraudulent U.S. tax return. 

Paragraph 2 of New Article 27 

Paragraph 2 limits the scope of revenue claims for which collection assistance may be sought pursuant to new Article 27. Subparagraph 2(a) limits the scope of revenue claims in respect of companies, and subparagraph 2(b) limits the scope of revenue claims 

in respect of individuals. 

The benefits afforded under new Article 27 are not intended to 

provide a means to bypass or circumvent the application of the mutual agreement procedure as set forth in Article 25 of the Convention. Consistent with this policy, subparagraph 2(a) provides that 

collection assistance will be available only for the following revenue 

claims in respect of a company: (i) revenue claims the determination of which are not eligible to be resolved by mutual agreement 

procedure pursuant to Article 25; (ii) revenue claims the determination of which have been mutually agreed upon pursuant to Article 25; or (iii) revenue claims with respect to the determination 

of which the company has terminated the mutual agreement procedure are eligible for collection assistance. 

Subparagraph 2(b) describes those revenue claims against individuals which are eligible for collection assistance. A Contracting 

State may request collection assistance with respect to a revenue 

claim against an individual who is a national of that State (or a 

national of a third state) without limitation other than limitations 

imposed by the other paragraphs of new Article 27. However, in 

the case of revenue claims against an individual who is a national 


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of the requested State, collection assistance shall be provided only 

for revenue claims with respect to which the individual or a person 

acting on behalf of the individual (i) has filed a fraudulent tax return or a fraudulent claim for refund; (ii) has willfully failed to file 

a tax return with the intention of evading taxes; or (iii) has transferred assets into the requested State to avoid collection of the revenue claim. 

Paragraph 3 of New Article 27 

Paragraph 3, which is equivalent to Article 27 of the existing 

Convention, applies notwithstanding the limitations of paragraph 

2. Paragraph 3 provides for assistance in collection of taxes to the 

extent necessary to ensure that treaty benefits are enjoyed only by 

persons entitled to those benefits under the terms of the Convention, provided that the requested State agrees with such determination of improper granting of treaty benefits. For example, if 

the payer of a U.S.-source portfolio dividend receives a Form W8BEN or other appropriate documentation from the payee, the 

withholding agent is generally permitted to withhold at the reduced portfolio dividend rate of 15 percent. If, however, it is subsequently discovered that the payee is merely acting as a nominee on 

behalf of a third-country resident, paragraph 3 of new Article 27 

would require Japan to withhold and remit to the United States 

the additional tax that should have been collected by the U.S. withholding agent. 

Paragraph 4 of New Article 27 

Paragraph 4 provides that new Article 27 shall apply only to revenue claims in respect of the taxes covered by Article 2 and certain 

additional taxes. 

In the case of Japan, the additional taxes with respect to which 

collection assistance may be requested are the consumption tax, 

the inheritance tax, and the gift tax. Paragraph 6 of the Exchange 

of Notes clarifies that the term ‘‘consumption tax’’ means only the 

consumption tax imposed at the national level by Japan, and does 

not include any consumption tax imposed by a local authority of 

Japan. 

In the case of the United States, the additional taxes with respect to which collection assistance may be requested are the Federal estate and gift taxes, the Federal excise tax on insurance policies issued by foreign insurers, the Federal excise taxes imposed 

with respect to private foundations, and the Federal taxes related 

to employment and self-employment. Paragraph 7 of the Exchange 

of Notes clarifies that the term ‘‘Federal excise tax on insurance 

policies issued by foreign insurers’’ means taxes imposed pursuant 

to Section 4371 through 4374 of the Internal Revenue Code. Paragraph 8 of the Exchange of Notes clarifies that the term ‘‘Federal 

excise tax imposed with respect to private foundations’’ means 

taxes imposed pursuant to sections 4940 through 4948 of the Code. 

Paragraph 9 of the Exchange of Notes clarifies that the term ‘‘Federal taxes related to employment and self-employment’’ means 

taxes imposed pursuant to Chapter 2 and Chapters 21 through 23A 

of the Internal Revenue Code. 


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Paragraph 5 of New Article 27 

Paragraph 5 requires the applicant State to certify that the revenue claim for which collection assistance is sought has been ‘‘finally determined.’’ For purposes of paragraph 5, a revenue claim 

has been finally determined when the applicant State has the right 

under its internal law to collect the revenue claim and all administrative and judicial rights of the taxpayer to restrain collection in 

the applicant State have lapsed or been exhausted. 

New paragraph 15 of the Protocol of 2003 as amended by paragraph 3 of Article XIV provides that for the purposes of evaluating 

the final determination of a U.S. revenue claim for which the 

United States may request assistance pursuant to Article 27, the 

existence of administrative or judicial rights available to the taxpayer in connection with the finally determined revenue claim that 

arise after collection actions have begun, such as collection due 

process rights (CDP) and collection appeals rights (CAP), shall not 

be interpreted by Japan to mean that such revenue claim is not finally determined under U.S. principles. New paragraph 15 of the 

2003 Protocol does not limit a taxpayer’s access to CDP or CAP 

rights with respect to collection by the United States of a U.S. revenue claim, including revenue claims for which the United States 

has requested collection assistance from Japan. 

In the case of Japan, new paragraph 15 of the Protocol of 2003 

provides that the right to take action pursuant to Article 36 of the 

Administrative Case Litigation Act (Law No. 139 of 1962) of Japan 

shall not be interpreted by the United States to mean that such 

revenue claim is not finally determined under Japanese principles. 

Paragraph 6 of New Article 27 

Paragraph 6 of new Article 27 provides that when an application 

for assistance by the applicant State has been accepted for collection by the requested State pursuant to the provisions of Article 27, 

the revenue claim of the applicant State shall be treated, to the extent necessary for collection under the laws of the requested State, 

as assessed under the laws of the requested State as of the time 

the application is received, and shall be collected by the requested 

State as though such revenue claim were the requested State’s own 

revenue claim in accordance with the laws applicable to the collection of the requested State’s own revenue claims. 

Paragraph 7 of New Article 27 

Paragraph 7 of new Article 27 provides that notwithstanding the 

provisions of paragraph 6, acts of collection carried out by the requested State in pursuance of an application for assistance, which, 

according to the laws of the applicant State, would have the effect 

of suspending or interrupting the period of limitation on the collection of a revenue claim in the applicant State if carried out by the 

applicant State, shall also have this effect with respect to the revenue claim under the laws of the applicant State. For example, assume that in the pursuance of an application for assistance, the 

competent authority of the requested State had reached an agreement with the taxpayer to enter into a plan under which the revenue claim would be paid over time in a series of installments. If 

under the administrative practices of the applicant State, the use 


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of an installment agreement would have the effect of extending the 

applicant State’s statute of limitations for collection, then by virtue 

of this paragraph 7, the conclusion of an installment agreement between the taxpayer and the requested State shall have the effect 

of extending the statute of limitations in the applicant State. Paragraph 7 obligates the requested State to inform the applicant State 

about such acts. 

Paragraph 8 of New Article 27 

Paragraph 8 of new Article 27 provides that the time limits of 

the requested State, i.e., time limitations beyond which a revenue 

claim cannot be enforced or collected, shall not apply to a revenue 

claim in respect of which the applicant State has made a request 

under this Article. Only the time limits of the applicant State are 

applicable. Thus, as long as a revenue claim can still be enforced 

or collected in the applicant State, the requested State may not 

refuse to pursue a request based on its own time limits. Paragraph 

8 applies notwithstanding paragraph 6 of new Article 27, which requires the requested State to generally treat the revenue claim of 

the applicant State as its own revenue claim. 

Paragraph 8 also provides that the rules of the requested State 

giving its own revenue claims priority over the claims of other 

creditors shall not apply to a revenue claim in respect of which a 

request for assistance has been made under new Article 27. Such 

rules are often included in domestic laws to ensure that tax authorities can collect taxes to the fullest possible extent. 

The words ‘‘by reason of its nature as such’’ found at the end of 

the paragraph indicate that the time limits and priority rules of 

the requested State to which the paragraph applies are only those 

that are specific to unpaid taxes. Thus, the paragraph does not prevent the application of general rules concerning time limits or priority that would apply to all debts (e.g., rules giving priority to a 

claim by reason of that claim having arisen or having been registered before another claim). 

Paragraph 9 of New Article 27 

Paragraph 9 of new Article 27 provides that nothing in Article 

27 shall be construed as creating in the requested State any rights 

of administrative or judicial review of the applicant State’s finally 

determined revenue claim. Thus, when an application for collection 

assistance has been accepted, the substantive validity of the applicant State’s revenue claim cannot be challenged in an action in the 

requested State, irrespective of any such rights that may be available under the laws of either Contracting State. 

Paragraph 10 of New Article 27 

Paragraph 10 of new Article 27 provides that if, at any time 

pending execution of an application for assistance under Article 27, 

the applicant State loses the right under its domestic law to collect 

the revenue claim or otherwise terminates collection, the competent 

authority of the applicant State shall promptly withdraw the application for assistance in collection and the requested State shall 

cease all measures of collection of the revenue claim. 


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Paragraph 11 of New Article 27 

Paragraph 11 of new Article 27 provides that if, at any time 

pending execution of an application for assistance under Article 27, 

the applicant State suspends collection of the revenue claim according to the laws of the applicant State, the competent authority of 

the applicant State shall promptly notify the competent authority 

of the requested State of that fact, and the competent authority of 

the applicant State shall either suspend or withdraw its request at 

the option of the competent authority of the requested State and 

the requested State shall suspend or cease all measures of collection of the revenue claim accordingly. 

Paragraph 12 of New Article 27 

Paragraph 12 of new Article 27 provides that amounts collected 

by the requested State pursuant to this Article shall be remitted 

to the competent authority of the applicant State. 

Paragraph 13 of New Article 27 

Paragraph 13 of new Article 27 provides that unless the competent authorities of both Contracting States otherwise agree, the 

ordinary costs incurred in providing assistance in collection shall 

be borne by the requested State, and any extraordinary costs so incurred shall be borne by the applicant State. 

Paragraph 14 of New Article 27 

Paragraph 14 of new Article 27 sets forth limitations on the obligations imposed on the requested State. The requested State is at 

liberty to refuse to provide assistance in the cases referred to in the 

paragraph. However, if it does provide assistance in these cases, it 

remains within the framework of the Article and it cannot be objected that this State has failed to observe the provisions of the Article. 

In the first place, the paragraph provides that a Contracting 

State is not bound to go beyond its own internal laws and administrative practice or those of the other State in fulfilling its obligations under the Article. However, types of administrativemeasures 

authorized for the purpose of the requested State’s tax must be utilized, even though invoked solely to provide assistance in the collection of taxes owed to the requesting State. 

Paragraph 8 of this Article provides that a Contracting State’s 

time limits will not apply to a revenue claim in respect of which 

the other State has requested assistance. Subparagraph 14(a) is 

not intended to defeat that principle. Providing assistance with respect to a revenue claim after the requested State’s time limits 

have expired will not, therefore, be considered to be at variance 

with the laws and administrative practice of that or of the other 

Contracting State in cases where the time limits applicable to that 

claim have not expired in the requesting State. 

Subparagraph 14(b) includes a limitation to carrying out measures contrary to public policy. 

Paragraph 15 of New Article 27 

Paragraph 15 of new Article 27 sets forth additional limitations 

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graph 15(a), the requested State is not obliged to satisfy a request 

for assistance if the applicant State has not pursued all reasonable 

measures of collection available under its laws or administrative 

practices. Under subparagraph 15(b), the requested State may also 

reject a request for assistance for practical considerations, for instance if the costs that it would incur in collecting a revenue claim 

of the requesting State would exceed the amount of the revenue 

claim. 

Paragraph 16 of New Article 27 

Paragraph 16 of new Article 27 mandates the competent authorities of both Contracting States to reach a written agreement on the 

mode of application of the Article before any assistance shall be 

lent under the Article other than pursuant to paragraph 3. The 

written agreement shall include: 1) measures to ensure comparable 

levels of assistance to each Contracting State; 2) a limit to the 

number of applications for assistance that a Contracting State may 

make in a particular year; and 3) minimum monetary thresholds 

for a revenue claim for which assistance is sought. In addition, the 

written agreement shall also set forth procedural rules related to 

the remittance of amounts collected pursuant to the provisions of 

the Article. 

Paragraph 10 of the Exchange of Notes clarifies that new Article 

27 shall have effect from the date of entry into force of the Protocol 

without regard to the taxable year to which the revenue claim relates, provided all of the conditions and requirements of the Article 

are satisfied. Thus, for example, a Contracting State could request 

assistance under new Article 27 with respect to a revenue claim 

that arose prior to the entry into force of the Protocol. 

ARTICLE XIV

Article XIV of the Protocol makes numerous amendments to the 

Protocol of 2003. 

Paragraph 1 

Paragraph 1 of Article XIV of the Protocol makes two non-substantive changes to paragraph 1 of the Protocol of 2003. The two 

references to ‘‘United States excise tax’’ are replaced with the term 

‘‘Federal excise tax.’’ Paragraph 7 of the Exchange of Notes clarifies 

that for purposes of revised paragraph 1 of the Protocol of 2003, 

the term ‘‘Federal excise tax on insurance policies issued by foreign 

insurers’’ means taxes imposed pursuant to Section 4371 through 

4374 of the Internal Revenue Code. Paragraph 8 of the Exchange 

of Notes clarifies that for purposes of revised paragraph 1 of the 

Protocol of 2003, the term ‘‘Federal excise tax imposed with respect 

to private foundations’’ means taxes imposed pursuant to Section 

4940 through 4948 of the Internal Revenue Code. 

Paragraph 2 

Paragraph 2 of Article XIV of the Protocol deletes paragraph 9 

of the Protocol of 2003 in order to conform with changes relating 

to capital gains that Article V of the Protocol makes to Article 13 

of the Convention. 


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Paragraph 3 

Paragraph 3 of Article XIV of the Protocol adds two new paragraphs to the Protocol of 2003. New paragraph 14 of the Protocol 

of 2003 (discussed below) sets forth a number of clarifications and 

rules regarding the application of the mandatory binding arbitration provisions in new paragraphs 5, 6 and 7 of Article 25 of the 

Convention as modified by Article XI of the Protocol. New paragraph 15 of the Protocol of 2003 is discussed above in the explanation of paragraph 5 of new Article 27 of the Convention. 

New Subparagraph 14(a) of the Protocol of 2003 

New subparagraph 14(a) of the Protocol of 2003 is discussed 

above in the explanation of new paragraph 5 of Article 25 of the 

Convention as amended by Article XI of the Protocol. 

New Subparagraph 14(b) of the Protocol of 2003 

New subparagraph 14(b) of the Protocol of 2003 sets forth rules 

that the competent authorities shall follow for selecting the members of the arbitration panel. The arbitration panel shall consist of 

three individual members. The members appointed shall not be 

employees nor have been employees within the twelve-month period prior to the date on which the arbitration proceeding begins, 

of the tax administration, the Ministry of Finance or the Treasury 

Department of the Contracting State which identifies them. Each 

competent authority shall select one member of the arbitration 

panel. In the event that the competent authority of one Contracting 

State fails to select a member for the arbitration panel in the manner and within the time periods agreed by the competent authorities pursuant to new subparagraph 7(i)(iv) of Article 25 of the Convention, the competent authority of the other Contracting State 

shall select a second member. The two members of the arbitration 

panel who have been selected shall select the third member, who 

shall serve as Chair of the arbitration panel. If the two initial 

members of the arbitration panel fail to select the third member in 

the manner and within the time periods agreed by the competent 

authorities pursuant to new subparagraph 7(i)(iv) of Article 25 of 

the Convention, these members shall be dismissed, and each competent authority shall select a new member of the arbitration 

panel. The Chair shall not be a national or lawful permanent resident of either Contracting State. Furthermore, the members appointed shall not have any prior involvement with the specific matters at issue in the proceeding for which they are being considered 

as arbitrators. 

New subparagraph 14(c) of the Protocol of 2003 

New subparagraph 14(c) of the Protocol of 2003 sets forth conditions under which the arbitration process with respect to particular 

cases shall terminate. Subparagraph 14(c)(i) provides that an arbitration proceeding with respect to a case shall terminate if the 

competent authorities reach a mutual agreement to resolve the 

case. Subparagraph 14(c)(ii) provides that an arbitration proceeding with respect to a case shall terminate if the presenter of 

the case withdraws his request for arbitration. Subparagraph 

14(c)(iii) provides that an arbitration proceeding with respect to a 


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case shall terminate if a decision concerning the case is rendered 

by a court or administrative tribunal of one of the Contracting 

States during the arbitration proceeding. Subparagraph 14(c)(iv) 

provides that an arbitration proceeding with respect to a case shall 

terminate if any concerned person or their authorized representatives or agents willfully violates the written nondisclosure statement required by new subparagraph 5(b) of Article 25, and the 

competent authorities of both Contracting States agree that such 

violation should result in the termination of the arbitration proceeding. 

New Subparagraph 14(d) of the Protocol of 2003 

Subparagraph 14(d) of the Protocol of 2003 sets forth the rules 

governing the submission of proposed resolutions for consideration 

by the arbitration panel. Each competent authority shall be permitted to submit a proposed resolution addressing each adjustment 

or similar issue raised in the case. Such proposed resolution shall 

be a resolution of the entire case and shall reflect without modification all matters in the case previously agreed between the competent authorities. Such proposed resolution shall be limited to a 

disposition of specific monetary amounts (for example, of income, 

profit, gain or expense) or, where specified, the maximum rate of 

tax charged pursuant to the Convention for each adjustment or 

similar issue in the case. Each competent authority shall also be 

permitted to submit a supporting position paper for consideration 

by the arbitration panel. 

New Subparagraph 14(e) of the Protocol of 2003 

New subparagraph 14(e) of the Protocol of 2003 provides a special rule for proposed resolutions involving an initial determination 

of a threshold question (such as the existence of a permanent establishment). Subparagraph 14(e) provides that notwithstanding 

the provisions of subparagraph 14(d) of the Protocol of 2003, it is 

understood that, in the case of an arbitration proceeding concerning: (i) the tax liability of an individual with respect to whose 

State of residence the competent authorities have been unable to 

reach agreement; (ii) the taxation of the business profits of an enterprise with respect to which the competent authorities have been 

unable to reach an agreement on whether a permanent establishment exists; or (iii) such other issues the determination of which 

are contingent on resolution of similar threshold questions, the proposed resolutions and position papers may include positions regarding (i), (ii) or (iii) above, in addition to proposed resolutions limited 

to specific monetary amounts (for example, of income, profit, gain 

or expense) or, where specified, the maximum rate of tax charged 

pursuant to the Convention due as a consequence of the arbitration 

panel’s determination regarding residency, the existence of a permanent establishment or other threshold questions. The determination of the arbitration panel regarding the threshold question may 

preclude the need for a further determination regarding specific 

monetary amounts or the maximum rate of tax. 


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New Subparagraph 14(f) of the Protocol of 2003 

New subparagraph 14(f) of the Protocol of 2003 provides that 

where an arbitration proceeding concerns a case comprising multiple adjustments or issues each requiring a disposition of specific 

monetary amounts of income, profit, gain or expense or, where 

specified, the maximum rate of tax charged pursuant to the Convention, the proposed resolution may propose a separate disposition 

for each adjustment or similar issue. This flexibility permits each 

adjustment or issue to be resolved independently through the arbitration proceeding, such that the determination of the arbitration 

panel will constitute a mutual agreement of the entirety of the 

issues in the case. 

New Subparagraph 14(g) of the Protocol of 2003 

New subparagraph 14(g) of the Protocol of 2003 provides that 

each competent authority shall receive the proposed resolution and 

position paper submitted by the other competent authority, and 

shall be permitted to submit a reply submission to the arbitration 

panel. Each competent authority shall also receive the reply submission of the other competent authority. 

New Subparagraph 14(h) of the Protocol of 2003 

New subparagraph 14(h) of the Protocol of 2003 provides that the 

presenter of the case shall be permitted to submit for consideration 

by the arbitration panel a paper setting forth the presenter’s analysis and views of the case. The submission by the presenter of the 

case is not a proposed resolution that the arbitration panel could 

select in making its determination. The submission by the presenter may not include any information not provided to the competent authorities prior to the initiation of the arbitration proceeding. The competent authorities shall determine an appropriate 

time frame for submission of such paper by the presenter in order 

to ensure that the competent authorities have sufficient time to 

consider the information. 

New Subparagraph 14(i) of the Protocol of 2003 

New subparagraph 14(i) of the Protocol of 2003 provides that the 

arbitration panel shall deliver a determination in writing to the 

competent authorities. The determination reached by the arbitration panel in the arbitration proceeding shall be limited to one of 

the proposed resolution submitted by one competent authority for 

each adjustment or similar issue and any threshold questions, and 

shall not include a rationale or any other explanation of the determination. The determination of the arbitration panel shall have no 

precedential value with respect to the application of the Convention 

in any other case. 

New Subparagraph 14(j) of the Protocol of 2003 

New subparagraph 14(j) of the Protocol of 2003 provides that unless the competent authorities of both Contracting States agree to 

a longer time period, the presenter of the case shall have 45 days 

from receiving the determination of the arbitration panel to notify, 

in writing, the competent authority of the Contracting State to 

whom the case was presented, his acceptance of the determination. 


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In the event the case is pending in litigation and the presenter desires to accept the determination, each concerned person who is a 

party to the litigation must also advise, within the same time 

frame, the relevant court of its acceptance of the determination of 

the arbitration panel as the resolution by mutual agreement and 

its intention to withdraw from the consideration of the court the 

issues resolved through the proceeding. If any concerned person 

fails to so advise the relevant competent authority and relevant 

court within this time frame, the determination of the arbitration 

panel shall be considered not to have been accepted by the presenter of the case. Where the determination of the arbitration 

panel is not accepted, the case will not be eligible for any subsequent further consideration by the competent authorities. 

New Subparagraph 14(k) of the Protocol of 2003 

New subparagraph 14(k) of the Protocol of 2003 provides that the 

fees and expenses of the members of the arbitration panel, as well 

as any costs incurred in connection with the proceeding by the Contracting States, shall be borne equitably by the competent authorities. 

ARTICLE XV

This Article contains rules for bringing the Protocol into force 

and giving effect to its provisions. 

Paragraph 1 

Paragraph 1 provides for the ratification of the Protocol by both 

Contracting States according to their constitutional and statutory 

requirements. The Protocol shall enter into force on the date that 

the Contracting States exchange instruments of ratification. 

In the United States, the process leading to ratification and entry 

into force is as follows: Once a treaty has been signed by authorized representatives of the two Contracting States, the Department 

of State sends the treaty to the President who formally transmits 

it to the Senate for its advice and consent to ratification, which requires approval by two-thirds of the Senators present and voting. 

Prior to this vote, however, it generally has been the practice for 

the Senate Committee on Foreign Relations to hold hearings on the 

treaty and make a recommendation regarding its approval to the 

full Senate. Both Government and private sector witnesses may 

testify at these hearings. After the Senate gives its advice and consent to ratification of the protocol or treaty, an instrument of ratification is drafted for the President’s signature. The President’s signature completes the process in the United States. 

Paragraph 2 

The date on which a treaty enters into force is not necessarily 

the date on which its provisions take effect. Paragraph 2, therefore, 

provides rules regarding when the provisions of the Protocol will 

have effect. 

Under subparagraph 2(a), the Protocol will have effect with respect to taxes withheld at source (principally dividends, interest 

and royalties) for amounts paid or credited on or after the first day 

of the third month following the date on which the Convention enVerDate Sep 11 2014 23:42 Feb 09, 2016 Jkt 059119 PO 00000 Frm 00038 Fmt 6601 Sfmt 6601 E:\HR\OC\ER005.XXX ER005

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ters into force. For example, if instruments of ratification are exchanged on April 25 of a given year, the withholding rates specified 

in new Article 11 of the Convention would be applicable to any interest paid or credited on or after July 1 of that year. This rule allows the benefits of the withholding reductions to be put into effect 

as soon as possible, without waiting until the following calendar 

year. The two- to three-month delay is required to allow sufficient 

time for withholding agents to be informed about the change in 

withholding rates. If, after the provisions regarding taxes withheld 

at source have entered into force, a U.S. withholding agent withholds at a higher rate than that provided by the Convention (perhaps because the withholding agent was not able to re-program its 

computers before the payment was made), a beneficial owner of the 

income that is a resident of Japan may make a claim for refund 

pursuant to section 1464 of the Code. 

For all other taxes, subparagraph 2(b) specifies that the Protocol 

will have effect for any taxable period beginning on or after January 1 of the year following entry into force. 

Paragraph 3 

Paragraph 3 provides that notwithstanding the provisions of 

paragraph 2, the mandatory binding arbitration rules provided in 

new paragraphs 5, 6 and 7 of Article 25 of the Convention as 

amended by Article XI of the Protocol shall have effect with respect 

to (a) cases that are under consideration by the competent authorities as of the date on which the Protocol enters into force and (b) 

cases that come under such consideration after the date on which 

the Protocol enters into force. Thus, the mandatory binding arbitration rules may apply with respect to tax liabilities (or potential tax 

liabilities) arising before the Protocol enters into force. 

With respect to cases that are under consideration by the competent authorities as of the date on which the Protocol enters into 

force, the commencement date (defined in new paragraph 7(b) of 

Article 25) shall be the date on which the Protocol enters into force. 

As a result, cases that are open and unresolved as of the entry into 

force of the Protocol will go into binding arbitration on the later of 

two years after the entry into force of the Protocol (unless both 

competent authorities have previously agreed to a different date) 

and the earliest date upon which all the agreements required by 

new subparagraph 7(c) of Article 25 have been received by both 

competent authorities. 

Paragraph 4 

Paragraph 4 contains special rules regarding the effective dates 

of the provisions of revised Articles 26 and 27 of the Convention 

as amended by Articles XII and XIII respectively of the Protocol. 

Notwithstanding the provisions of paragraph 2 of this Article XV, 

the provisions of revised Articles 26 and 27 shall have effect from 

the date of entry into force of the Protocol, and as clarified by paragraph 10 of the Exchange of Notes, without regard to the matter 

or revenue claim to which the request relates, provided all of the 

conditions and requirements of the respective Articles are satisfied. 


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Paragraph 5 

Paragraph 5 provides that notwithstanding the entry into force 

of the Protocol, an individual who is entitled to the benefits of Article 20 of the existing Convention (relating to teachers and researchers) at the time of the entry into force of the Protocol shall continue 

to be entitled to such benefits until such time as the individual 

would have ceased to be entitled to such benefits if the Protocol 

had not entered into force. 

Paragraph 6 

Paragraph 6 provides that the Protocol shall remain in effect as 

long as the Convention remains in force. 

Æ 


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